Reg. ICA No. 811-9004
File No. 33-90522
As filed with the Securities and Exchange Commission on February 26, 1999
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Post-Effective Amendment No. 2
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
-------------------------------------------------------------------------------
Post-Effective Amendment No. 2
AVALON CAPITAL, INC.
-------------------------------------------------------------------------------
Exact Name of Registrant as Specified in Charter
34 CHAMBERS STREET, PRINCETON, NEW JERSEY 08542
-------------------------------------------------------------------------------
Address of Principal Executive Offices (Number, Street, City, State,
Zip Code)
(609) 683-3916
-------------------------------------------------------------------------------
Registrant's Telephone Number, including Area Code
THOMAS R. WESTLE, ESQ., SPITZER & FELDMAN P.C., 405 PARK AVENUE,
NEW YORK, NY 10022
- - - -------------------------------------------------------------------------------
Name and Address (Number, Street, City, State, Zip Code)
of Agent for Service
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT
- - - -------------------------------------------------------------------------------
Approximate Date of Proposed Public Offering
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection
with a dividend reinvestment plan, check the following box. |X|
It is proposed that this filing will become effective (check
appropriate box)
|_| when declared effective pursuant to section 8(c)
|X| immediately upon filing pursuant to paragraph (b)
|_| on (date) pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a)
|_| on (date) pursuant to paragraph (a) in accordance with Rule 486
under the Securities Act of 1933.
If appropriate, check the following box:
|_| this [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration
statement].
-1-
<PAGE>
CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in the form of
Prospectus of the responses to the Items in Part A and location in the form of
Prospectus and the Statement of Additional Information of the responses to the
Items in Part B of Form N-2).
ITEM NUMBER
FORM N-2,
PART A PROSPECTUS CAPTION
------ ------------------
1 Front Cover Page
2 Inside Front and Outside Back
Cover Page
3 Prospectus Summary; Summary
of the Company's Expenses
4 Not Applicable
5 Plan of Distribution
6 Not Applicable
7 The Company and its
Objectives, Policies and Risks
8 The Company and its
Objectives, Policies and Risks
9 Management of the Company
10 Capital Stock of the Company;
Automatic Dividend
Reinvestment and Cash
Purchase Plan; Taxes
11 Not Applicable
12 Not Applicable
13 Table of Contents of the
Statement of Additional
Information
-2-
<PAGE>
ITEM NUMBER
FORM N-2, STATEMENT OF ADDITIONAL
PART B PROSPECTUS CAPTION INFORMATION CAPTION
------ ------------------ -------------------
14 * Cover Page
15 * Cover Page
16 * Not Applicable
17 * THE COMPANY AND ITS
OBJECTIVES, POLICIES AND
RISKS
18 * Management
19 * General Information
20 * Investment Adviser and
Investment Advisory
Agreement
21 * Portfolio Transactions and
Brokerage; Allocation of
Investments
22 * Tax Matters
23 * Financial Statements
PART C
------
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this Registration
Statement.
-3-
<PAGE>
PROSPECTUS
AVALON CAPITAL, INC.
-----------
Avalon Capital, Inc. (the "Company") is a non-diversified closed-end
management investment company. The Company's primary investment objective is
long-term capital appreciation. The Company will seek to achieve its objective
by investing in a portfolio of securities that possess fundamental investment
value and may be purchased at a reasonable cost. There is no assurance that the
Company will achieve its objectives. See "The Company and its Objectives,
Policies, and Risks."
Hutner Capital Management, Inc. ("Hutner Capital Management") is the
Company's investment adviser. The address of the Company and Hutner Capital
Management is 34 Chambers Street, Princeton, New Jersey 08542, and its telephone
number is (609) 683-3916. American Data Services, Inc. ("ADS") is the Company's
administrator. The address of ADS is The Hauppauge Corporate Center, 150 Motor
Parkway, Hauppauge, New York 11788, and its telephone number is (516) 951-0500.
The Company has 3 million shares of its common stock available for
trading on the NASDAQ Bulletin Board. The Company's symbol for its common stock
is "MIST." The Company's market value per share of common stock on February 18,
1999 was $17.875 per share.
To provide additional shareholder liquidity, the Company has adopted
a fundamental policy that requires it to make an annual repurchase offer to
purchase a specified percentage of the company's outstanding shares at the
then-current net asset value. The annual repurchase offer occurs in February of
each year. The Company may also, at its sole discretion, offer to sell
additional shares of its common stock on a quarterly basis. See "Repurchase
Offers."
-----------
The Prospectus sets forth concisely information about the Company
that a prospective investor ought to know before investing. Investors are
advised to read this Prospectus carefully and retain it for future reference. A
Statement of Additional Information about the Company has been filed with the
Securities and Exchange Commission and is available, without charge, upon
writing or calling ADS at the above location. The Statement of Additional
Information has been incorporated by reference into this Prospectus. The table
of contents of the Statement of Additional Information appears on page 28 of
this Prospectus.
-----------
INVESTORS SHOULD BE AWARE THAT SHARES OF A CLOSED-END EQUITY FUND
FREQUENTLY TEND TO TRADE AT A DISCOUNT. ACCORDINGLY, AN INVESTOR WHO PURCHASES
THE COMMON STOCK OF THE COMPANY MAY EXPERIENCE A RISK OF LOSS TO CAPITAL.
The date of this Prospectus and the Statement of Additional Information is March
1, 1999.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-1-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY..................... Avalon Capital, Inc. (the "Company") is a
non-diversified closed-end management
investment company. See "The Company and its
Objectives, Policies and Risks."
INVESTMENT OBJECTIVES........... The Company will seek to achieve its objectives
by investing in a portfolio of securities that
possess fundamental investment value and may be
purchased at a reasonable cost (the "Business
Valuation Approach"). In applying the Business
Valuation Approach, the investment adviser
will: (1) view each investment as a business;
(2) think independently; (3) emphasize high
returns; (4) seek sustained business
excellence; (5) seek businesses that consider
shareholder interests; (6) seek to pay a
reasonable price; and (7) invest for the long
term. See "The Company and its Objectives,
Policies and Risks."
INVESTMENT ADVISER.............. Hutner Capital Management, Inc. ("Hutner
Capital Management" or the "investment
adviser") will act as the Company's investment
adviser. The Company will pay Hutner Capital
Management a monthly fee at an annual rate of
one (1%) percent of the average weekly net
assets of the Company. This fee is higher than
that paid by many other investment companies.
Hutner Capital Management was founded in 1995.
ADMINISTRATOR................... American Data Services, Inc. ("ADS") serves as
the Company's administrator. The Company pays
ADS a monthly fee equal to the greater of an
annual rate of .10% of the average weekly net
assets of the Company or $52,800 per year. See
"MANAGEMENT OF THE COMPANY."
DISTRIBUTIONS................... The Company's policy is to distribute to its
shareholders all of its net investment income
and net realized capital gains, if any, for
each year. All distributions to shareholders
whose shares are registered in their own names
or whose shares are held in the name of a
broker or nominee are automatically reinvested
in additional shares of the Company, unless
they elect to receive cash. See "TAXES" and
"AUTOMATIC DIVIDEND REINVESTMENT PLAN".
-2-
<PAGE>
REPURCHASE OF SHARES.............Beginning as of February, 1996 and each
February thereafter, the Company makes an
annual repurchase offer to purchase a specified
percentage of the Company's outstanding shares
at the then-current net asset value. As of the
date of this prospectus, all such annual
repurchase offers have been set at five (5%)
percent of the Company's outstanding shares at
the then-current net asset value per share;
however, the Company, in its sole discretion,
repurchased an additional two (2%) percent of
the shares outstanding in 1997 pursuant to the
terms of the repurchase offer. The percentage
is established annually at the sole discretion
of the Board of Directors. The Company may
also, at its sole discretion, offer to sell
additional shares on a quarterly basis. See
"REPURCHASE OFFERS".
LISTING..........................The Company's shares of common stock may be
traded on the NASDAQ Bulletin Board. The
Company's symbol is "MIST."
SPECIAL RISK CONSIDERATIONS
An investment in the Company's common stock cannot be considered a
complete investment program. Because the Company's investment portfolio will be
non-diversified, the shares may be subject to greater risk than the shares of a
closed-end investment company whose portfolio is diversified.
Shares of a closed-end equity fund frequently tend to trade at a
discount. Accordingly, an investor who purchases the common stock of the Company
may have a risk of loss to capital.
The Articles of Incorporation of the Company include certain
"anti-takeover" provisions requiring the approval of three-quarters of the
outstanding voting stock for certain transactions. In addition, the Articles of
Incorporation provide that the Board of Directors is to consist of three classes
of directors, one class to be elected each year. These provisions and others in
the Articles of Incorporation could have the effect of depriving stockholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging third parties from seeking to gain control in a tender offer,
proxy contest or similar transaction. See "THE COMPANY AND ITS OBJECTIVES,
POLICIES AND RISKS" and "CAPITAL STOCK OF THE COMPANY".
SUMMARY OF THE COMPANY'S EXPENSES
The expense summary below was developed to help you make your
investment decisions. You should consider this expense information along with
other important information in this Prospectus, including the Company's
investment objective.
-3-
<PAGE>
A. SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) None
Dividend Reinvestment Fee None
Cash Purchase Plan Fee (as a percentage of amount reinvested)* 5%
B. ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO
COMMON STOCK)
Advisory Fees..................................................... 1.00%
Administration Fees............................................... .31%
Other Expenses.................................................... .80%
------
Total Annual Expenses............................................. 2.11%
======
C. EXAMPLE:
The purpose of the following table is to assist you in understanding
the various costs and expenses that an investor in the Company would bear
directly or indirectly. You would pay the following expenses on a $1,000
investment in the Company, assuming a five (5%) percent annual return:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$21 $66 $113 $244
A. SHAREHOLDER TRANSACTION EXPENSES represent charges paid when you
purchase shares of the Company.
B. ANNUAL EXPENSES are based on the Company's expenses for the
fiscal year ended August 31, 1998.
C. THE EXAMPLE OF EXPENSES is a hypothetical example that
illustrates the expenses associated with a $1,000 investment in the Company over
periods of one and three (3) years, based on the estimated expenses in the above
table and an assumed annual rate of return of five (5%) percent. THE FIVE (5%)
PERCENT RETURN AND EXPENSES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
- - - --------
* The Cash Purchase Plan Fee has a $3.00 maximum with a $1.00 termination fee.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The following table presents per share financial information which
has been derived from the Fund's financial statements audited and reported on by
Deloitte & Touche, LLP, the Fund's independent accountants. The "REPORT OF
INDEPENDENT ACCOUNTANTS" and financial statements included in the Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1998 are
incorporated by reference in this Prospectus. The Fund's Annual Report, which
contains additional unaudited performance information, is available without
charge upon request.
SELECTED DATA FOR A SHARE OUTSTANDING DURING THE PERIOD
<TABLE>
<CAPTION>
FOR THE YEAR ENDED NOVEMBER 20,
AUGUST 31, 1995* THROUGH
1998 1997 AUGUST 31, 1996
---- ---- ---------------
<S> <C> <C> <C>
Beginning net asset value per share 13.35 $10.51 $10.00
Net investment loss (0.19) (0.09) -
Net realized and unrealized gain on securities 1.82 2.93 0.60
Distribution from net investment income - - (0.04)
Offering cost - - (0.05)
--- --- ------
Ending net asset value per share $14.98 $13.35 $10.51
====== ====== ======
Ending market value per share $15.63 $13.75 $10.88
====== ====== ======
Ratios to average net assets:
Expenses 2.11% 2.22% 3.14%**
Total return:
Based upon net asset value 12.21% 27.02% 5.48%
Based upon market value 13.67% 26.38% 9.18%
Portfolio turnover rate 7.00% 8.89% 0.00%
Net assets at end of period (000's omitted) $13,299 $12,269 $10,180
<FN>
* Commencement of operations
** Annualized
</FN>
</TABLE>
-5-
<PAGE>
THE COMPANY AND ITS OBJECTIVES, POLICIES AND RISKS
THE COMPANY
The Company is registered as a closed-end, non-diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and was incorporated on March 14, 1995
under the laws of the State of Maryland. The Company's 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 reasonable cost. No assurance can be given that the
Company's investment objective will be achieved.
INVESTMENT OBJECTIVES AND POLICIES
The Company's primary investment objective is long-term capital
appreciation. The Company will seek to achieve its objectives by investing in a
portfolio of securities that possess fundamental investment value and may be
purchased at a reasonable cost (the "Business Valuation Approach").
In applying the Business Valuation Approach, the investment adviser
will follow these investment principles:
- VIEW EACH INVESTMENT AS A BUSINESS. In selecting securities, the
investment adviser views common stock and other equity securities as units of
ownership of a business as a going concern. Consistent with this view, the
investment adviser will focus on businesses which he believes will generate high
returns. In evaluating the potential future returns of a business, the
investment adviser will, in general, give little weight to current market
perceptions. Rather the investment adviser will consider such factors relating
to a company as financial statements, profitability, return on equity, cash
flow, asset values and the investment adviser's perception of management's
expertise.
- THINK INDEPENDENTLY. The investment adviser is wary of the
irrational emotions and actions that periodically sweep through Wall Street and
thus will generally avoid popular investment ideas. The investment adviser will
base his investment decisions on the quality of a business, not its popularity.
He will attempt to identify companies that he believes have, for one reason or
another, been misappraised by the market.
- EMPHASIS ON HIGH RETURNS. Whether buying publicly traded stock or
securities of a private company, the investment adviser will be always conscious
of the Company's role as a business owner. Investment gains over the long run
are determined by the return that a business earns on its owners' capital and
-6-
<PAGE>
the price paid to become an owner. The investment adviser considers a good
measure of earning power to be a high return on equity (net profits divided by
common equity) sustained over a period of time. Thus, the investment adviser
will look for
-7-
<PAGE>
companies that consistently post a return on equity of 15-50% or more. Another
measure of profitability the investment adviser will use is the cash generated
by the business. The investment adviser will focus on businesses that do not
require significant capital expenditures.
- LOOK FOR SUSTAINED BUSINESS EXCELLENCE. Sustained business
excellence is often due to some competitive advantage that allows a business to
earn an unusually high rate of return consistently over long periods of time.
The investment adviser will focus on companies with a clear business franchise,
or competitive advantage in their market, due to factors such as industry
structure, government regulations, superior management, and favorable reputation
of services or products. In addition, these companies normally must display a
proven record of healthy earnings growth.
- INTEREST IN BUSINESSES THAT ARE RUN WITH THE SHAREHOLDERS IN MIND.
The investment adviser favors companies where management treats shareholders as
partners by, for example, providing excellent communications with owners,
employing reasonable compensation packages that don't compromise shareholders'
earnings, refraining from engaging in insider transactions to the shareholders'
detriment, maximizing shareholders' earnings through such methods as share
repurchases and generally taking consistent action to maximize the value of the
business for its owners.
- SEEK TO PAY A REASONABLE PRICE. The Company will invest in
companies where the investment adviser believes the return on the investment
will be significantly greater than the risk-free rate of return, such as that on
long- term U.S. Government bonds. The investment adviser will consider such
measures of return as the earnings yield and estimated growth rate of earnings.
- INVEST FOR THE LONG TERM. The objective of the investment adviser
in managing the Company will be to increase wealth in a manner that reduces as
much as possible the risk of permanent -- as opposed to quotational -- loss. The
investment adviser will attempt to achieve very large long-term gains through
the creation of business value. The Company will, in general, hold most
investments for at least five (5) years, unless changed circumstances dictate
the disposition of the investment. However, the Company may also take
shorter-term positions in stocks of companies in special situations such as
mergers, acquisitions, legal proceedings, spin-offs, liquidations, bankruptcies,
recapitalizations, or the like.
While there is no general limit as to types of securities which can
be purchased, most of the Company's investments are in marketable common stocks
or marketable securities convertible into common stocks. Such securities may be
traded on an exchange or in the over-the-counter market. The Company may also
purchase Restricted Securities. As used herein, the term "Restricted Securities"
means securities the transfer of which is limited by legal or contractual
restrictions. See "Restricted Securities" below, for information regarding the
Company's policies as to such purchases.
-7-
<PAGE>
TEMPORARY OR DEFENSIVE INVESTMENTS. Securities other than common
stock or securities convertible into common stock may be held from time to time,
but the Company will not normally invest in fixed income securities except for
defensive purposes or to temporarily employ uncommitted cash balances. Such
action for defensive purposes would be taken in the belief that future growth
may be at an unacceptable rate or that there is an undue risk of market decline.
While investment for defensive purposes could reduce the risk of market
declines, such a policy cannot eliminate risk or completely protect against
fluctuations in the value of the Company's assets. The amount invested for
defensive purposes and the length of time which such investments may be
maintained will depend primarily upon the investment adviser's judgment as to
market and other conditions and will not be subject to limitations. The kinds of
securities in which the Company may invest for defensive purposes would include
investment grade corporate debt securities, preferred stocks and U.S. Government
securities, or funds may be retained in cash or cash equivalents. Investment
grade corporate debt securities that are rated in the lowest category of
investment grade may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case for higher grade debt
securities. The Company does not have a policy as to whether it will retain or
dispose of a debt security whose rating drops below investment grade. Temporary
investments of uncommitted cash balances will be made in U.S. Government
securities and investment grade short-term money market instruments, and short-
term securities issued or guaranteed by banks.
FOREIGN SECURITIES. The investment adviser believes that the
Company's investment in foreign securities will be made primarily through the
purchase of the common stock of foreign companies that are traded in the United
States or the purchase of American Depository Receipts ("ADR's"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank.
Investments by the Company in the common stock of foreign companies which are
traded in the United States or in ADR's may involve considerations and risks
that are different in certain respects from an investment in securities of U.S.
companies. Such risks concerning the direct investment in foreign securities by
the Company are similar to a lesser degree to those described below. The Company
also may invest in selected foreign securities that, in the Adviser's opinion,
will enable the Company to take advantage of additional opportunities that are
consistent with its investment objective of long-term capital appreciation. No
more than twenty (20%) percent of the total assets of the Company may be
invested in foreign securities, and the Company anticipates that under normal
circumstances its investments in foreign securities will range between five (5%)
percent and ten (10%) percent of the Company's total assets. Investing in
foreign securities involves certain risks including those set forth below, which
are not typically associated with investing in domestically traded securities.
In general, the Company will only invest in foreign securities that
can be purchased and sold on foreign stock exchanges or over-the-counter
markets. Fixed commissions and other transaction costs on foreign stock
-8-
<PAGE>
exchanges are generally higher than negotiated commissions and other such costs
on United States exchanges. There is generally less governmental supervision and
regulation of foreign stock exchanges, brokers and issuers than in the United
States. In addition, foreign stock markets, with certain exceptions, are not as
developed or efficient as those in the United States. Foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
tend to be less liquid and exhibit greater price volatility.
Certain of the foreign securities in which the Company may invest
will not be registered with, nor will the issuers thereof be subject to the
reporting requirements of, the Securities and Exchange Commission. As a result,
there may be less publicly available information about a foreign company or a
foreign security than about a domestic company or a domestically traded
security. In general, foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies.
The custody of foreign securities is generally maintained abroad,
and the costs and risks involved are generally higher than the costs and risks
of maintaining custody of securities in the United States. With respect to some
foreign countries, there may exist the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could affect
United States investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the United States economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Dividends and interest payable on foreign securities may be subject
to foreign withholding taxes, thereby reducing the net amount of income
available for distribution to stockholders. Certain countries have entered into
tax treaties with the U.S. that reduce the tax on U.S. taxpayers. There is no
assurance, however, that the Company will be able to take advantage of any such
tax treaties or that the Company or its stockholders will ever be able to claim
any foreign tax credit, for U.S. income tax purposes, on account of any such
foreign income taxes. In addition, the dividends received deduction generally
will not be available to either the Company or its shareholders with respect to
dividends received from foreign corporations.
Investments in foreign securities frequently involve currencies of
foreign countries, and because the Company may hold funds in foreign currencies
pending completion of investment programs, the Company, therefore, may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations including, but not limited to, action by a foreign
government to devalue its currency. There is no guarantee that the Company or
the Adviser will correctly anticipate currency fluctuations. Accordingly, if the
Company's funds are maintained in investments denominated in foreign currencies
during periods when the value of the U.S. dollar is appreciating relative to
those foreign currencies, the Company will experience losses. The Company will
also incur service charges in connection with each currency conversion.
-9-
<PAGE>
As a non-diversified investment company, the Company has no specific
policy on diversification of assets nor is it intended that the Company will
have any such policy in the future. However, the Company has elected to be
treated as, and intends to qualify for tax treatment as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). The
Company will diversify its assets so that, at the close of each quarter of its
taxable year: (a) at least fifty (50%) percent of the total value of its assets
are represented by cash and cash items, government securities and other
securities with respect to which the Company will not invest more than five (5%)
percent of its total assets, at market value, in the securities of any one
issuer or own more than ten (10%) percent of the outstanding voting securities
of any one issuer and (b) not more than twenty-five (25%) percent of the total
value of its assets are invested in securities of any one (1) issuer or of any
two (2) or more issuers controlled by the Company which, pursuant to the
regulations under the Code, may be deemed to be engaged in the same, similar or
related trades or businesses. Changes in the market value of securities in the
Company's portfolio generally will not cause the Company to cease to qualify as
a regulated investment company unless any failure to satisfy these restrictions
exists immediately after the acquisition of any security or other property and
is wholly or partly the result of such acquisition.
The Company will observe a non-fundamental policy of not investing
for the purpose of exercising control or management, even though it may take
substantial positions in securities of small companies and in certain
circumstances this may result in the acquisition of such control. Such
circumstances could arise, for example, when existing controlling persons of an
issuer dispose of their holdings to larger groups or to the public or where an
issuer defaults to the Company on its obligations pursuant to the provisions of
a purchase agreement or instrument governing the rights of a senior security
held by the Company.
NON-FUNDAMENTAL INVESTMENT PRACTICES AND RISKS
In order to achieve its investment objectives, the Company may
engage in the following non-fundamental investment practices.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Company may
purchase covered put options to protect its portfolio holdings in an underlying
security against a decline in market value. Such hedge protection is provided
during the life of the put option since the Company, as holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the Company will reduce
any profit it might otherwise have realized in its underlying security by the
premium paid for the put option and by transaction costs, but it will retain the
ability to benefit from future increases in market value.
The Company may also purchase covered call options to hedge against
an increase in prices of securities it wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Company, as
-10-
<PAGE>
holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, the
Company will reduce any profit it might have realized had it bought the
underlying security at the time it purchased the call option by the premium paid
for the call option and by transaction costs, but it limits the loss it will
suffer if the security declines in value to such premium and transaction costs.
WRITING COVERED CALL OPTIONS ON SECURITIES. The Company may write
covered call options on optionable securities of the types in which they are
permitted to invest from time to time as determined appropriate in seeking to
attain its objective. Call options written by the Company give the holder the
right to buy the underlying securities from the Company at a stated exercise
price.
The Company will receive a premium for writing a covered call
option, which increases the Company's return in the event the option expires
unexercised or is closed out at a profit. The amount of the premium will
reflect, among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the option
and the volatility of the market price of the underlying security. By writing a
covered call option, the Company limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option.
The Company may terminate an option that it has written prior to the
option's expiration by entering into a closing purchase transaction in which an
option is purchased having the same terms as the option written. The Company
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by unrealized appreciation of the underlying security owned by the
Company.
The writing and purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The successful use of
protective puts for hedging purposes depends in part on the Adviser's ability to
predict future price fluctuations and the degree of correlation between the
options and securities markets.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the Company may lend its portfolio securities in an amount up to 331/3%
of its total assets to broker-dealers, major banks, or other recognized domestic
institutional borrowers of securities. No lending may be made to any companies
affiliated with the Company. The borrower at all times during the loan must
maintain with the lending Company cash or cash equivalent collateral equal in
value at all times to at least one hundred (100%) percent of the value of the
securities loaned. During the time portfolio securities are on loan, the
borrower pays the Company any dividends or interest paid on such
-11-
<PAGE>
securities, and the Company may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral. The Company will have the
right to regain record ownership of loaned securities to exercise beneficial
rights, such as voting rights and subscription rights. There is the risk of
failure by the borrower to return the securities involved in such transaction.
ILLIQUID SECURITIES. The Company has adopted the following
non-fundamental investment policy, which may be changed by the vote of the Board
of Directors. The Company will not invest in illiquid securities (including
restricted securities) if immediately after such investment more than fifteen
(15%) percent of the Company's total assets (taken at market value) would be
invested in such securities. This limitation may be subject to additional
restrictions imposed by jurisdictions in which the Company's shares are offered
for sale. For this purpose, illiquid securities include (a) securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) participation interests in loans that
are not subject to puts, and (c) repurchase agreements not terminable within
seven (7) days.
RESTRICTED SECURITIES. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended ("Securities Act"). Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market.
In recent years, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The Securities and Exchange Commission has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on resale to the general public. Rule 144A establishes a "safe
harbor" from the registration requirements of the Securities Act applicable to
resales of certain securities to qualified institutional buyers.
As stated above under "Illiquid Securities," the Company may invest
up to fifteen (15%) percent of its total assets in restricted securities issued
under Section 4(2) of the Securities Act, which exempts from registration
"transactions by an issuer not involving any public offering". Section 4(2)
instruments are restricted in the sense that they can only be resold through the
issuing dealer and only to institutional investors; they cannot be resold to the
general public without registration.
-12-
<PAGE>
CERTAIN RISKS ASSOCIATED WITH ILLIQUID AND RESTRICTED SECURITIES.
The sale of illiquid and restricted securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. The Company may not be able to sell certain restricted
or illiquid securities in a timely manner or the price obtainable upon resale
may not be the anticipated price, especially if adverse market conditions occur
during the interim period.
FUNDAMENTAL AND NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In pursuing its investment objective, the Company's investment
activity is limited by certain policies and investment restrictions. The
following fundamental policies and investment restrictions have been adopted by
the Company and cannot be changed without approval by the vote of a majority of
the outstanding voting securities of the Company, as defined in the Investment
Company Act.
The Company may not:
1. Issue senior securities, except as provided in restriction number
2 below.
2. Borrow money, except that the Company may borrow from banks
(including the Company's custodian bank) and enter into reverse repurchase
agreements as a temporary defensive measure for extraordinary or emergency
purposes, and then only in amounts not exceeding ten (10%) percent of its total
assets, taken at market value, and may pledge amounts of up to twenty (20%)
percent of its total assets, taken at market value, to secure such borrowings.
For purposes of this restriction, collateral arrangements with respect to the
writing of options, futures contracts, options on futures contracts and
collateral arrangements with respect to initial and variation margin are not
deemed to be a pledge of assets, and neither such arrangements nor the purchase
and sale of options, futures or related options shall be deemed to be the
issuance of a senior security. Whenever bank borrowings and the value of the
Company's reverse repurchase agreements exceed five (5%) percent of the value of
the Company's total assets, the Company will not make any additional purchases
of securities for investment purposes.
3. Purchase the securities of any issuer if, as a result, more than
twenty-five (25%) percent of the value of the Company's total assets, taken at
market value, would be invested in the securities of issuers having their
principal business activities in the same industry. This restriction does not
apply to obligations issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities but will apply to foreign government
obligations unless the SEC permits their exclusion.
-13-
<PAGE>
4. Make loans, although the Company may (a) purchase money market
securities and enter into repurchase agreements, (b) acquire bonds, debentures,
notes and other debt securities, governmental obligations and certificates of
deposit, and (c) lend portfolio securities.
5. Purchase a security if, as a result, with respect to fifty (50%)
percent of the value of the Company's total assets, taken at market value, (i)
more than five (5%) percent of the Company's total assets, taken at market
value, would be invested in the securities of any one issuer (including
repurchase agreements with any one entity), except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities
and (ii) more than ten (10%) percent of the outstanding voting securities of any
issuer would be held by the Company.
6. Underwrite securities of other persons, except to the extent that
the Company may be deemed to be an underwriter within the meaning of the
Securities Act, in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
7. Purchase or sell real estate or interests in real estate (except
that this restriction does not preclude investments in marketable securities of
companies engaged in real estate activities).
8. Purchase or sell commodities or commodity contracts, except that
the Company may purchase and sell stock index and currency options, stock index
futures, financial futures and currency futures contracts and related options on
such futures.
The following non-fundamental policies and investment restrictions
have been adopted by the Company and cannot be changed without approval by the
vote of a majority of the Board of Directors. The Company may not:
1. Purchase any security on margin, except that the Company may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of portfolio securities. The payment by the Company of
initial or variation margin in connection with futures or related options
transactions shall not be considered the purchase of a security on margin.
2. Purchase or sell interests in oil, gas or other mineral
exploration or development programs.
REPURCHASE OFFERS
REPURCHASE OFFER POLICIES. The Company has adopted certain
repurchase policies as fundamental policies which may not be changed without the
vote of the holders of a majority of the Company's outstanding voting securities
(as determined under the 1940 Act). The Company offers to repurchase shares at
annual intervals in February of each year. The Company will establish a maximum
of fourteen (14) days prior to the deadline for repurchase requests and the
applicable repurchase date such that repurchases of shares may occur on the last
business day of February of
-14-
<PAGE>
each year. The Board of Directors is authorized to establish other policies
relating to repurchases of shares that are consistent with the 1940 Act.
REPURCHASE PROCEDURES. Shareholders are entitled to redeem shares
through the Company's annual offer to repurchase shares. Additional dates for
repurchases of shares may be established by the Board of Directors in its sole
discretion, not more frequently than once every two (2) years. Shares rendered
by shareholders on any repurchase date will be repurchased, subject to the
aggregate repurchase amounts established for any such dates, at the then current
net asset value per share. Repurchase proceeds will be repaid, in cash, within
seven (7) days after each of the Company's repurchase dates (a "Repurchase
Payment Deadline"). The Company may deduct a repurchase fee from the repurchase
proceeds equal to no more than two (2%) percent of the proceeds which is
intended to compensate the Company for expenses related to the repurchase offer.
REPURCHASE AMOUNTS. The number of shares that the Company will offer
to repurchase on any repurchase date (the "Repurchase Offer Amount") will be
determined by the Board of Directors, in its sole discretion, but will be at
least five (5%) percent and no greater than twenty-five (25%) percent, of the
total number of shares outstanding on any such date. The Board has, as of the
date of this prospectus, set the percentage for prior repurchase offers at five
(5%) percent; however, this may change prior to the date of any subsequent
repurchase offer at the sole discretion of the Board of Directors. In 1997, the
Company, at its sole discretion, repurchased an additional two (2%) percent of
the shares pursuant to the terms of the offering.
ADDITIONAL SALES OF SHARES. The Board of Directors has the right,
but not the obligation, to cause the Company to sell additional shares of its
common stock on a quarterly basis. Sales of additional shares may be made to
current shareholders and to qualified investors who are not currently
shareholders. Proceeds from the offering of additional shares may be used to
finance the Company's repurchase offer, to purchase additional portfolio
securities or to reduce the amount of borrowing or indebtedness incurred by the
Company. The purchase price for any such shares shall be the then-current net
asset value per share.
NOTICES. Notice of a discretionary repurchase offer at net asset
value will be given to each shareholder of record between twenty-one (21) and
forty-two (42) days before each repurchase request deadline. Such notice will
state the repurchase offer amount and any fees applicable to such repurchase,
the dates of the repurchase request deadline, repurchase pricing date, and
repurchase payment deadline. Shareholders will be advised of the risk of
fluctuation in the net asset value between the repurchase request deadline and
the repurchase pricing date, and the possibility that the Company may use an
earlier repurchase pricing date under certain circumstances. Procedures by which
shareholders may tender their shares, the procedures by which the Company may
repurchase such shares on a pro rata basis, and the circumstances in which the
Company may suspend or postpone a repurchase offer will be set forth in the
notice to shareholders. Procedures by which shareholders may withdraw or modify
their tenders until the repurchase request deadline will also be set forth in
the notice. Finally, the notice will set forth the net asset value of the shares
to be repurchased no more than seven (7) days before the date of notification,
-15-
<PAGE>
and the means by which shareholders may ascertain the net asset value
thereafter, as well as the market price of the shares, if any, on the date on
which the net asset value was computed, and the means to determine the market
price thereafter.
If shareholders tender more than the repurchase offer amount, the
Company may repurchase an additional amount of stock, not to exceed two(2%)
percent of the shares outstanding on the repurchase request deadline. The
Company will repurchase the shares tendered on a pro rata basis. The Company
may, however, accept all tender offers of shareholders who own less than one
hundred shares and who tender all their shares, before prorating other tender
offers, and may accept stock by lot when tendered by shareholders who tender all
their shares and who elect to have either all or none or at least a minimum
amount or none accepted, if the Company first accepts all shares tendered by
shareholders who do not so elect.
The current net asset value of the Company's shares will be computed
daily on each of the five (5) business days preceding a repurchase request
deadline. During the period from notification to shareholders of a repurchase
pricing date to the repurchase date, the Company will maintain liquid assets in
an amount to one hundred (100%) percent of the repurchase offer amount.
The Company will not suspend or postpone a repurchase offer except
pursuant to a vote of a majority of the directors, including a majority of the
directors who are not "interested persons" of the Company, as defined in the
Investment Company Act. Further, the Company will suspend or postpone a
repurchase offer only if certain regulatory requirements are met. The Company
will give shareholders notice of any such suspension or postponement, and
likewise will give notice of a renewed repurchase offer.
In compliance with the Investment Company Act requirements for
periodic repurchase offers, a majority of the Company's directors are directors
who are not interested persons of the Company and the selection and nomination
of such directors is within the discretion of those directors.
The Company may borrow to fund repurchases of shares. If the Company
must liquidate portfolio securities to purchase shares, the Company may be
required to sell portfolio securities for other than investment purposes and may
realize gains and losses.
The Company may also make offers to repurchase shares of which it is
the issuer pursuant to any other applicable rules of the SEC, in effect at the
time of the offer.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The overall management of the business and affairs of the Company is
vested in the Board of Directors. The Board of Directors approves all
significant agreements between the Company and persons or companies furnishing
-16-
<PAGE>
services to the Company, including the Company's Advisory Agreement with Hutner
Capital Management, the agreement with Star Bank, N.A. as the custodian, the
agreement with American Stock Transfer & Trust Company as the transfer and
dividend disbursing agent and the agreements with American Data Services, Inc.,
as administrator and fund accounting agent. The day-to-day operations of the
Company are delegated to the officers, subject always to the objective and
policies of the Company and to the general supervision of the Board of
Directors.
INVESTMENT ADVISER
Hutner Capital Management ("Hutner Capital"), an investment adviser
registered with the Securities and Exchange Commission, was initially
incorporated in the State of New York on February 7, 1995 and was reincorporated
in New Jersey in 1996. Hutner Capital manages private accounts for individuals,
trusts, estates, institutions and pension and profit-sharing plans totaling
approximately $60 million. Hutner Capital is located at 34 Chambers Street,
Princeton, New Jersey 08542. Daniel Hutner is the sole stockholder of Hutner
Capital and serves as the Chairman of the Board and President. Mr. Hutner also
serves as the General Partner of each of Avalon Partners, L.P.
and Hutner Special Situations Fund, L.P.
Pursuant to the Advisory Agreement, Hutner Capital provides to the
Company investment management and financial advisory services, including causing
the purchase and sale of securities in the Company's portfolio subject at all
times to the policies set forth by the Board of Directors. Under the terms of
the Advisory Agreement, Hutner Capital Management supervises all aspects of the
Company's investment operations.
Hutner Capital is paid, pursuant to the Advisory Agreement, a
monthly fee from the Company calculated at an annual rate of 1.0% of its average
weekly net assets. This fee is higher than those charged by most investment
companies. Hutner Capital may however, from time to time, voluntarily agree to
defer or waive fees or absorb some or all of the expense of the Company. To the
extent that they should do so, they may seek repayment of such deferred fees and
absorbed expenses after this practice is discontinued.
The Company's portfolio investment decisions will be provided by
Daniel Hutner. At Hutner Capital, Mr. Hutner manages both individual and
institutional portfolios specializing in common stock investments. Mr. Hutner
also serves as the General Partner of Avalon Partners, L.P. and Hutner Special
Situations Fund and is responsible for the investment management of the assets
of such funds. From 1990 to 1996, Mr. Hutner served as President of Pulsifer and
Hutner Incorporated, an investment adviser registered with the Securities and
Exchange Commission, having joined such firm in 1981. Prior to joining Pulsifer
& Hutner, Mr. Hutner was engaged in writing and editing on a wide variety of
subjects including business, economics and science for the National Geographic
Society, the Smithsonian Institution, Charles Owens and Associates, Inc.
(publisher of the MONDAY MORNING REPORT) and others. In addition, Mr. Hutner
provided research and consulting services with respect to various business and
economic issues for National Economic Research Associates, Data Resources, Inc.,
-17-
<PAGE>
and the Joint Economic Committee of Congress. Mr. Hutner graduated from
Middlebury College in 1970 with a B.A. in Economics. He also received his M.A.
in English from the University of Virginia in 1973 and his M.B.A. from New York
University in 1984.
ADMINISTRATOR, DISTRIBUTOR, TRANSFER AGENT AND DIVIDEND PAYING AGENT
American Data Services, Inc. ("ADS") serves as the administrator for
the Company pursuant to an Administration Agreement with the Company. ADS also
provides fund accounting services to the Company pursuant to the Administration
Agreement for which it receives no additional compensation. As of the date of
this prospectus, ADS acted as administrator for numerous registered investment
companies with aggregate assets of approximately $6 billion. The address of ADS
is The Hauppauge Corporate Center, 150 Motor Parkway, Hauppauge, New York 11788.
Under the Administration Agreement, ADS supervises the
administration of all aspects of the Company's operations, including the
Company's receipt of services for which the Company is obligated to pay,
provides the Company with general office facilities and provides, at the
Company's expense, the services of persons necessary to perform such
administrative and clerical functions as are needed to effectively operate the
Company. Those persons, as well as certain employees and Directors of the
Company, may be directors, officers or employees of ADS and its affiliates. For
these services and facilities, ADS receives a fee computed and paid monthly
equal to the greater of an annual rate of .10% of the average weekly net assets
of the Company or $52,800 per year.
American Stock Transfer & Trust Co. ("AST"), a registered transfer
agent, serves as the Company's transfer agent and dividend disbursing agent. AST
maintains an account for each shareholder of the Company (unless such accounts
are maintained by sub-transfer agents or processing agents) and performs other
transfer agency and related functions. For these services, AST will receive an
annual fee of $6,000 plus certain shareholder account fees. The Company will
also reimburse AST for certain expenses incurred on behalf of the Company.
The services provided by AST include answering customer inquiries
regarding account matters; assisting shareholders in designating and changing
various account options; aggregating and processing purchase orders and
transmitting and receiving funds for shareholder orders; transmitting, on behalf
of the Company, proxy statements, prospectuses and shareholder reports to
shareholders and tabulating proxies; processing dividend payments and providing
sub-accounting services for Company shares held beneficially; and providing such
other services as the Company or a shareholder may request.
CUSTODIAN
Star Bank, N.A., whose address is 425 Walnut Street, Cincinnati, OH
45201, is custodian for the securities and cash of the Company.
-18-
<PAGE>
EXPENSES
The Company was responsible for the expenses associated with its
offering, which were approximately $98,000, including legal and accounting fees
relating to its organization and the costs of preparing solicitation materials.
Organizational expenses are capitalized and amortized over a period of five (5)
years. In addition to the expenses to be paid to the investment adviser,
administrator, transfer agent, dividend paying agent and custodian discussed
within this prospectus, the Company will pay all other ongoing expenses,
including but not limited to legal fees, accounting fees for preparation of
financial statements and tax returns, annual audits, brokerage commissions,
transfer taxes and other clearing, settlement and transactional charges.
PLAN OF DISTRIBUTION
As described herein under "Repurchase Offers -- Additional Sales of
Shares," the Company, at the discretion of the Board of Directors, may, on a
quarterly basis, offer to sell shares of its common stock to the public at the
then current net asset value per share.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
AUTOMATIC DIVIDEND REINVESTMENT PLAN. All shareholders of the
Company will automatically become participants in the Company's Automatic
Dividend Reinvestment and Cash Purchase Plan (the "Plan") upon purchasing shares
of the Company's common stock. Participation is automatic unless a shareholder
elects to receive Company dividends and distributions in cash. Participation may
be terminated or resumed at any time upon written notice from the participant
received by AST, the Plan Agent, prior to the record date of the next dividend.
Additional information regarding the Plan may be obtained from the Company.
Dividend payments and other distributions to be made by the Company
to participants in the Plan either will be paid to the Plan Agent in cash (which
then must be used to purchase shares in the open market) or will be represented
by the delivery of shares depending upon which of the two options would be the
most favorable to participants, as hereafter determined. On each date on which
the Company determines the net asset value of the shares (a "Valuation Date"),
and which occurs not more than five (5) business days prior to a date fixed for
payment of a dividend or other distribution from the Company, the Plan Agent
will compare the determined net asset value per share with the market price per
share. For all purposes of the Plan, "market price" shall be deemed to be the
highest price bid at the close of the market by any market maker on the date
which coincides with the relevant Valuation Date, or, if no bids were made on
such date, the next preceding day on which a bid was made. If the net asset
value in any such comparison is found to be lower than said market price, the
Plan Agent will demand that the Company satisfy its obligation with respect to
any such dividend or other distribution by issuing additional shares to the
Participants in the Plan at a price per share equal to the greater of the
determined net asset value per share or ninety-five (95%) percent of the market
-19-
<PAGE>
price per share determined as of the close of business on the relevant Valuation
Date. However, if the net asset value per share (as determined above) is higher
than the market price per share, then the Plan Agent will demand that the
Company satisfy its obligation with respect to any such dividend or other
distribution by a cash payment to the Plan Agent for the account of Plan
Participants and the Plan Agent then shall use such cash payment to buy
additional shares in the "open market" for the account of the Plan participants,
provided, however, that the Plan Agent shall not purchase shares in the "open
market" at a price in excess of the net asset value as of the relevant Valuation
Date. In the event the Plan Agent is unable to complete its acquisition of
shares to be purchased in the "open market" by the end of the first trading day
following receipt of the cash payment from the Company, any remaining funds
shall be used by the Plan Agent to purchase newly issued shares of the Company's
common stock from the Company at the greater of the determined net asset value
per share or ninety-five (95%) percent of the market price per share as of the
date coinciding with or next preceding the date of the relevant Valuation Date.
CASH PURCHASE PLAN. Participants in the Plan will also have the
option of making additional cash payments to the Plan Agent, on a monthly basis,
for investment in the Company's shares. Such payments may be made in any amount
from a minimum of $50.00 to a maximum of $1,000.00 per month. The Company may,
in its discretion, waive the maximum monthly limit with respect to any
participant. At the end of each calendar month, the Plan Agent will determine
the amount of funds accumulated. Purchases made from the accumulation of
payments during any one calendar month will be made on or about the first
business day of the following month ("Investment Date"). The funds will be used
to purchase shares of the Company's common stock from the Company. If the net
asset value of the shares is lower than the market price as of the Valuation
Date which occurs not more than five (5) business days prior to the relevant
Investment Date, such shares will be newly issued shares and will be issued at a
price per share equal to the greater of the determined net asset value per share
or ninety-five (95%) percent of the market price per share. If the net asset
value per share is higher than the market price per share, then the Plan Agent
shall use such cash payments to buy additional shares in the "open market" for
the account of the Plan Participants, provided, however, that the Plan Agent
shall not purchase shares in the "open market" at a price in excess of the net
asset value as of the relevant Valuation Date. In the event that the Plan Agent
is unable to complete its acquisition of shares to be purchased in the "open
market" by the end of the Investment Date, any remaining cash payments shall be
used by the Plan Agent to purchase newly issued shares of the Company's common
stock from the Company at the greater of the determined net asset value per
share or ninety-five (95%) percent of the market price per share as of the
relevant Valuation Date. All cash payments received by the Plan Agent in
connection with the Plan will be held without earning interest. To avoid
unnecessary cash accumulations, and also to allow ample time for receipt and
processing by the Plan Agent, participants that wish to make voluntary cash
payments should send such payments to the Plan Agent in such a manner that
assures that the Plan Agent will receive and collect Federal funds by the end of
the month. This procedure will avoid unnecessary accumulations of cash and will
enable participants to realize lower brokerage commissions and to avoid
additional transaction charges. If a voluntary cash payment is not received in
time to purchase shares in any calendar month, such payment shall be invested on
the next Investment Date. A participant may withdraw a voluntary cash payment by
written notice to the Plan Agent if the notice
-20-
<PAGE>
is received by the Plan Agent at least forty-eight (48) hours before such
payment is to be invested by the Plan Agent.
AST will perform bookkeeping and other administrative functions,
such as maintaining all shareholder accounts in the Plan and furnishing written
confirmation of all transactions in the account, including information needed by
shareholders for personal and tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in noncertificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan and of record as of the record date for
determining those shareholders who are entitled to vote on any matter involving
the Company. In case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time to
time by such shareholders as representing and limited to the total number of
shares registered in the shareholder's name and held for the account of
beneficial owners who have elected to participant in the Plan.
There are no special fees or charges to participants other than
reasonable transactions fees, which shall not exceed the lesser of five (5%)
percent of the amount reinvested or three ($3.00) dollars and a termination fee
of up to one ($1.00) dollar.
With respect to purchases from voluntary cash payments, the Plan
Agent will charge three ($3.00) dollars, plus a pro rata share of the brokerage
commissions, if any. Brokerage charges for purchasing small blocks of stock for
individual accounts through the Plan are expected to be less than the usual
brokerage charges for such transactions, as the Plan Agent will be purchasing
shares for all participants in larger blocks and prorating the lower commission
rate thus applied.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax liability associated therewith.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Company reserves the right to amend or terminate the Plan as
applied to any voluntary cash payment received and any dividend or distribution
to be paid subsequent to a date specified in a notice of the change sent to all
shareholders at least ninety (90) days before such specified date. The Plan may
also be terminated on at least ninety (90) days' written notice to all
shareholders in the Plan.
RETIREMENT PLANS
The Fund, in conjunction with ADS, its administrator, has available
a form of Individual Retirement Account ("IRA") for investment. Self-employed
investors may purchase shares of the Company through tax-deductible
contributions to existing retirement plans for self-employed persons, known as
Keogh or H.R. 10 plans. Company shares may also be a suitable investment for
other types of qualified pension or profit-sharing plans which are
employer-sponsored, including deferred compensation or salary reduction plans
known as "401(k) Plans" which give participants the right to defer portions of
-21-
<PAGE>
their compensation for investment on a tax-deferred basis until distributions
are made from the plans.
The minimum initial investment for all such retirement plans is
$1,000. The minimum for all subsequent investments is $100.
Under the Code, individuals may make wholly or partly tax deductible
IRA contributions of up to $2,000 annually, depending on whether they are active
participants in an employer-sponsored retirement plan and on their income level.
However, dividends and distributions held in the account are not taxed until
withdrawn in accordance with the provisions of the Code. An individual with a
non-working spouse may establish a separate IRA for the spouse under the same
conditions and contribute a combined maximum of $4,000 annually to either or
both IRA's provided that no more than $2,000 may be contributed to the IRA of
either spouse.
Investors should be aware that they may be subject to penalties or
additional tax on contributions or withdrawals from IRAs or other retirement
plans which are not permitted by the applicable provisions of the Code, and,
prior to a withdrawal, shareholders may be required to certify their age and
awareness of such restrictions in writing. Persons desiring information
concerning investments through IRAs or other retirement plans or an application
form for an IRA should telephone the Company at (609) 683-3916 or ADS at (516)
951-0500.
NET ASSET VALUE
The net asset value per share is determined as of the close of the
last business day of the NYSE in each week, by dividing the value of the
Company's portfolio securities plus all cash and other assets (including
dividends accrued but not collected) less all liabilities (including accrued
expenses but excluding capital and surplus) by the number of shares outstanding.
In accordance with generally accepted accounting principles for investment
companies, dividend income is accrued on the ex-dividend date. The net asset
value per share will be made available for publication.
Each security will be valued on the basis of the last sale price on
the valuation date on the principal exchange on which the security is traded or
the National Association of Securities Dealers Automated Quotation National
Market System. With respect to those securities for which no trades have taken
place that day and unlisted securities for which market quotations are readily
available, the value shall be determined by taking the mean between the latest
"bid" and "asked" prices. Securities for which quotations are not readily
available and other assets will be valued at fair value as determined in good
faith by the Board of Directors. Notwithstanding the above, any short-term debt
securities with maturities of sixty (60) days or less are valued at amortized
cost.
-22-
<PAGE>
CAPITAL STOCK OF THE COMPANY
The Company is authorized to issue 100 million shares of capital
stock, par value $.001 per share ("Capital Stock"). Each share of Capital Stock
has equal voting, dividend, distribution and liquidation rights. The shares of
Capital Stock offered hereby, when issued and paid for pursuant to the terms of
this Offer, will be fully paid and non-assessable. The shares of Capital Stock
are not redeemable and have no preemptive, conversion or cumulative voting
rights.
The Company's Articles of Incorporation provide that under certain
conditions the affirmative vote of at least three-quarters of the outstanding
voting stock is required: (i) to convert the Company into an open-end company;
(ii) to approve any proposal to dissolve, merge or consolidate the Company;
(iii) to sell its assets or (iv) to effect any amendment to the Articles of
Incorporation to make the Capital Stock a redeemable security (as well as to
amend any of the foregoing provisions). In addition, the Articles of
Incorporation provide that the Board of Directors is to consist of three classes
of directors. During a three year cycle, two directors will be elected in the
first year, another two directors will be elected in the second year, and one
director will be elected in the third year. These provisions and others in the
Articles of Incorporation make it more difficult for a third party to obtain
control of the Company. A copy of the Articles of Incorporation may be obtained
from the Securities and Exchange Commission.
The Company, on a quarterly basis, may offer additional shares in
accordance with its Repurchase Offers and additional shares may be issued under
the Plan. See "Repurchase Offers" and "Automatic Dividend Reinvestment and Cash
Purchase Plan." Other offerings of shares, if made, will require approval of the
Company's Board of Directors. Any additional offering will be subject to the
requirement of the 1940 Act that shares not be sold at a price below the then
current net asset value (exclusive of underwriting discounts and commissions)
except in connection with an offering to existing shareholders or with the
consent of a majority of the Company's outstanding shares.
SPECIAL VOTING PROVISIONS
The Company has provisions in its Articles of Incorporation and
Bylaws that could have the effect of limiting the ability of other entities or
persons to acquire control of the Company, to cause it to engage in certain
transactions or to modify its structure. Commencing with the first annual
meeting of stockholders, the Board of Directors will be divided into three
classes having initial terms of one, two and three (3) years, respectively. At
the annual meeting of stockholders in each year thereafter, the term of one
class will expire and directors will be elected to serve in that class for terms
of three (3) years. This provision could delay for up to two (2) years the
replacement of a majority of the Board of Directors. A director may be removed
from office only by a vote of the holders of at least seventy-five(75%) percent
of the shares of the Company entitled to be voted on the matter.
In addition, conversion of the Company from a closed-end to an
open-end investment company requires the affirmative vote of at least
seventy-five (75%) percent of the directors and of the holders of seventy-five
-23-
<PAGE>
(75%) percent of the shares of the Company unless approved by at least
seventy-five (75%) percent of the Continuing Directors, as defined below, in
which case a majority of the votes entitled to be cast by shareholders of the
Company will be required to approve such conversion. If the Company were to be
converted into an open-end investment company, it could be restricted in its
ability to redeem its shares (otherwise than in kind) because, in light of the
limited depth of the markets for certain securities in which the Company may
invest, there can be no assurance that the Company could realize the then market
value of the portfolio securities the Company would be required to liquidate to
meet redemption requests.
The affirmative votes of at least seventy-five (75%) percent of the
directors and the holders of at least seventy-five (75%) percent of the shares
of the Company are required to authorize any of the following transactions:
(i) merger, consolidation or share exchange of the Company with or
into any other person;
(ii) issuance or transfer by the Company (in one or a series of
transactions in any 12-month period) of any securities of the Company to any
other person or entity for cash, securities or other property (or combination
thereof) having an aggregate fair market value of $1,000,000 or more, excluding
sales of securities of the Company in connection with a public offering,
issuances of securities of the Company pursuant to a dividend reinvestment plan
adopted by the Company or pursuant to a stock dividend and issuances of
securities of the Company upon the exercise of any stock subscription rights
distributed by the Company;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Company (in one or a series of transactions in any 12-month
period) to or with any person of any assets of the Company having an aggregate
fair market value of $1,000,000 or more, except for portfolio transactions
effected by the Company in the ordinary course of its business and except with
respect to repurchases or redemptions of shares of the Corporation (transactions
within clauses (i) and (ii) and this clause (iii) each being known individually
as a "Business Combination");
(iv) any proposal as to the voluntary liquidation or dissolution of
the Company or any amendment to the Company's Articles of Incorporation to
terminate its existence; and
(v) any shareholder proposal as to specific investment decisions
made or to be made with respect to the Company's assets.
However, in the case of a Business Combination described in (i) and
(iii) above, a seventy (75%) percent shareholder vote will not be required if
the transaction is approved by a vote of at least seventy-five (75%) percent of
the Continuing Directors (as defined below). In such case, a majority of the
votes entitled to be cast by shareholders of the Company will be required to
approve such transaction. In addition, a seventy-five (75%) percent shareholder
vote will not be required with respect to a transaction described in clause (iv)
above if it is approved by a vote of at least seventy-five (75%) percent of the
-24-
<PAGE>
Continuing Directors (as defined below), in which case a majority of the votes
entitled to be cast by shareholders of the Company will be required to approve
such transaction. The Company's By-laws contain provisions the effect of which
is to prevent matters, including nominations of directors, from being considered
at shareholders' meetings where the Company has not received sufficient prior
notice of the matters.
Reference is made to the Articles of Incorporation and By-laws of
the Company, on file with the Securities and Exchange Commission, for the full
text of these provisions. See "Further Information." These provisions could have
the effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Company in a tender offer or similar transaction. In
the opinion of the Board of Directors, however, these provisions offer several
possible advantages. They may require persons seeking control of the Company to
negotiate with its management regarding the price to be paid for the shares
required to obtain such control, they promote continuity and stability and they
enhance the Company's ability to pursue long-term strategies that are consistent
with its investment objectives. The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests of
shareholders generally.
A "Continuing Director" is any member of the Board of Directors of
the Company (i) who is not a person or affiliate of a person who enters or
proposes to enter into a Business Combination with the Company (such person or
affiliate, being an "Interested Party") and (ii) who has been a member of the
Board of Directors of the Company for a period of at least 12 months (or since
the commencement of the Company's operations, if less than 12 months), or is a
successor of a Continuing Director who is unaffiliated with an Interested Party
and is recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors of the Company.
TAXES
The Company has elected to be treated as and intends to qualify
annually as a regulated investment company pursuant to the provisions of the
Code. The Company did so qualify for its previous taxable year and intends to
continue so to qualify. By so qualifying, the Company generally will not be
subject to Federal income tax to the extent that it distributes its investment
company taxable income and net capital gains in the manner required under the
Code. In addition, the Code subjects regulated investment companies to a
non-deductible four (4%) percent excise tax in each calendar year to the extent
that they do not distribute substantially all of their taxable investment income
and capital gain, generally determined on a calendar year basis and the one year
period ending October 31, of each calendar year, respectively. In order to be
taxed as a regulated investment company, the Company must meet a number of
requirements, including the requirements with respect to diversification of
assets, sources of income and distribution of income . If the Company fails to
qualify as a regulated investment company, it will be taxed at regular corporate
-25-
<PAGE>
tax rates on all its taxable income (including capital gains) without any
deduction for distributions to shareholders, and distributions to shareholders
will be taxable as ordinary dividends (even if derived from the Company's net
long-term capital gains) to the extent of the Company's current and accumulated
earnings and profits.
It is the Company's policy to distribute to shareholders all of
its investment company taxable income (net of expenses) and any net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) in accordance with the requirements imposed by the Code. Distributions
by the Company of its net investment income, and the excess, if any, of its net
short-term capital gain over its net long-term capital loss, whether received in
cash or reinvested in additional shares, will be taxable to shareholders as
ordinary income. Distributions by the Company of the excess, if any, of its net
long-term capital gain over its net short-term capital loss will be designated
as capital gain dividends and will be taxable to shareholders as long-term
capital gains, regardless of the length of time shareholders have held their
shares. Shareholders will be advised as to what portion of capital gains
dividends are to be treated as "long-term" (eligible for a twenty (20%) percent
maximum tax rate) with respect to the maximum tax rate for such gains. The
Company may, however, subject to the review of the Board of Directors, retain
the net realized long-term capital gains of the Company. In such event, it is
expected the Company will elect to have the shareholders of record at year end
be treated as receiving each shareholder's portion of the retained gains as well
as a share of the taxes paid by it.
The Company may be required to withhold for Federal income tax
("backup withholding) thirty-one (31%) percent of the distributions and the
proceeds of redemptions payable to shareholders who fail to provide a correct
taxpayer identification number or to make required certifications, or where the
Company or shareholder has been notified by the Internal Revenue Service that it
is subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code are exempt from backup withholding.
The Company may invest in securities of foreign issuers, the
income from which may be subject to withholding and other similar income taxes
imposed by a foreign country. Dividends and distributions may be subject to
state and local taxes. Dividends paid or credited to accounts maintained by
non-resident shareholders may also be subject to U.S. non-resident withholding
taxes. You should consult your tax advisor regarding specific questions as to
Federal, state and local income and withholding taxes.
-26-
<PAGE>
A statement setting forth the Federal income tax status of all
distributions made (or deemed made) during the year will be sent to shareholders
promptly after the end of each year.
OFFERS TO REPURCHASE SHARES. A shareholder who, pursuant to a
repurchase offer, tenders all shares owned or considered owned by such
shareholder will realize a taxable gain or loss depending upon the shareholder's
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are capital assets in the shareholder's hands and will be
long-term, mid-term or short- term depending upon the shareholder's holding
period for the shares. If a tendering shareholder tenders less than all shares
owned by and attributed to such shareholder (or if the Company purchases only
some of the shares tendered by a shareholder), and if the distribution to such
shareholder does not otherwise qualify as an exchange, the proceeds received
will be treated as a dividend, return of capital or capital gain depending on
the Company's earnings and profits and the shareholder's basis in the tendered
shares. There is a risk that shareholders may be considered to have received a
deemed distribution as a result of the repurchase by the Company of tendered
shares and that such distribution may be taxable as a dividend in whole or in
part.
-27-
<PAGE>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
MANAGEMENT.......................................................... 2
DIRECTORS AND OFFICERS.............................................. 2
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT................ 4
REPURCHASE OFFERS................................................... 5
PORTFOLIO TRANSACTIONS AND BROKERAGE................................ 9
ALLOCATION OF INVESTMENTS........................................... 10
TAX MATTERS......................................................... 10
GENERAL INFORMATION................................................. 16
FINANCIAL STATEMENTS................................................ 18
-----------
No dealer, salesperson or any other person has been authorized to
give information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus, and if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the selling agents. This Prospectus does not constitute an
offer to sell, or a solicitation by anyone in any jurisdiction in which such
offer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
-28-
<PAGE>
==================================================
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUMMARY...............................2
SPECIAL RISK CONSIDERATIONS......................4
SUMMARY OF THE COMPANY'S EXPENSES................5
FINANCIAL HIGHLIGHTS.............................6
THE COMPANY AND ITS OBJECTIVES,
POLICIES AND RISKS.............................7
MANAGEMENT OF THE COMPANY.......................17
PLAN OF DISTRIBUTION............................19
AUTOMATIC DIVIDEND REINVESTMENT AND
CASH PURCHASE PLANS...........................19
RETIREMENT PLANS ............21
NET ASSET VALUE.................................22
CAPITAL STOCK OF THE COMPANY....................23
TAXES...........................................25
INVESTOR INFORMATION: (516) 951-0500
INVESTMENT ADVISER
Hutner Capital Management, Inc.
34 Chambers Street
Princeton, New Jersey 08542
ADMINISTRATOR
American Data Services, Inc.
The Hauppauge Corporate Center
150 Motor Parkway
Hauppauge, New York 11788
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45201
LEGAL COUNSEL
Spitzer & Feldman P.C.
405 Park Avenue
New York, New York 10022
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1414
==================================================
AVALON CAPITAL, INC.
COMMON STOCK
___________
PROSPECTUS
___________
MARCH 1, 1999
==================================================
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION - March 1, 1999
AVALON CAPITAL, INC.
Avalon Capital, Inc. (the "Company") is a closed-end,
non-diversified management investment company. The Company's primary investment
objective is long-term capital appreciation. The Company will seek to achieve
its objectives by investing in a portfolio of securities that possess
fundamental investment value and may be purchased at a reasonable cost.
This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Company's current Prospectus, copies of
which may be obtained by writing American Data Services, Inc. at The Hauppauge
Corporate Center, 150 Motor Parkway, Hauppauge, New York 11788 or calling (516)
951-0500.
This Statement of Additional Information relates to the Company's
Prospectus which is dated March 1, 1999.
TABLE OF CONTENTS
PAGE
----
MANAGEMENT ...................................................... 2
DIRECTORS AND OFFICERS..............................................2
INVESTMENT ADVISER AND INVESTMENT ADVISORY
AGREEMENT.............................................. 4
REPURCHASE OFFERS...................................................5
PORTFOLIO TRANSACTIONS AND BROKERAGE............................... 9
ALLOCATION OF INVESTMENTS......................................... 10
TAX MATTERS ...................................................... 10
GENERAL INFORMATION............................................... 16
FINANCIAL STATEMENTS.............................................. 18
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Company
is vested with the Board of Directors. The Board of Directors approves all
significant agreements between the Company and persons or companies furnishing
services to the Company, including agreements with the investment adviser,
administrator, custodian and transfer and dividend disbursing agent. The
day-to-day operations of the Company are delegated to its officers subject
always to the investment objectives and policies of each Company and to general
supervision by the Company's Board of Directors.
DIRECTORS AND OFFICERS
The directors and officers of the Company, and their principal
occupations during the past five (5) years, are set forth below. Directors who
are "interested persons", as defined in the 1940 Act, are denoted by an
asterisk. Daniel Hutner and Nancy Hutner are related by marriage. As of February
1, 1999, the Directors and Officers of the Company as a group owned beneficially
17.4%of its outstanding shares.
*DANIEL E. HUTNER
Hutner Capital Management, Inc.
34 Chambers Street
Princeton, NJ 08542
(50)
Chairman of the Board of Directors, Chief Executive Officer and President of the
Company; President, Hutner Capital Management since February 1995; Consultant,
National Association of Investors Corp. 1995 to 1997; President, Pulsifer and
Hutner, Inc., 1990 to 1996; General Partner, Avalon Partners, L.P. since 1990;
General Partner, Hutner Special Situations Fund since 1994.
*NANCY W. HUTNER
Hutner Capital Management, Inc.
34 Chambers Street
Princeton, NJ 08542
(45)
Director of the Company; Vice President and
Treasurer of the Company; Administrator, Avalon
Partners, L.P. since 1990; Vice President, Hutner
Capital Management since 1995; Consultant,
Pulsifer and Hutner, Inc. 1983 to 1996; Assistant to
Director, Development Administration, Princeton
University, 1980-1983; Researcher, National
Geographic Society, 1976-1980.
WILLIAM ENDICOTT
6537 Broad St.
Bethesda, MD 20816
(52)
Director of the Company; Senior Advisor to the
Associate Administrator for Communications and
Public Liaison, Small Business Administration,
September 1997 to present; Director, Speakers
Bureau, Democratic National Committee, 1996 to
-2-
<PAGE>
1997, Consultant, 1994 to 1996; Director, U.S. Canoe & Kayak Team; Director,
NAIC Growth Fund, 1995 to 1997; Consultant for organizing the 1996 Olympic
Games, American Canoe Association, 1994 to 1996; Olympic Coach, U.S. National
Whitewater Canoe and Kayak Team, 1992; Head Coach 1977 to 1992; Congressional
Aide, U.S. House of Representatives, 1970 to 1982.
EDWARD ROSEN
Star Children
100 West 33rd St.
Suite 10005
New York, NY 10001
(47)
Director of the Company; President, Star Children's
Dress Company, Inc. since 1985; Vice-President
1983-1985.
DONALD SMITH
Don Smith Realty
81 North Maple Avenue
Ridgewood, NJ 07450
(52)
Director of the Company; President, Don Smith
Realty since 1971.
MICHELE SCHEDDIN
Hutner Capital Management, Inc.
34 Chambers Street
Princeton, NJ 08542
(30)
Secretary of the Company; Vice President, Hutner
Capital Management since 1996; Assistant
Portfolio Manager, Pulsifer and Hutner,
Incorporated, 1989-1996.
AS OF FEBRUARY 1, 1999, DANIEL E. HUTNER OWNED NINETY-FIVE
THOUSAND EIGHT HUNDRED ONE (95,801) SHARES (10.8%), NANCY W. HUTNER OWNED FIVE
(5) SHARES (0%), WILLIAM ENDICOTT OWNED FORTY-THREE THOUSAND SIX HUNDRED
EIGHTY-SIX (43,686) SHARES (4.9%), EDWARD ROSEN OWNED FIFTEEN THOUSAND THREE
HUNDRED SIXTY (15,360) SHARES (1.7%), DONALD SMITH OWNED ONE HUNDRED THREE (103)
SHARES (0%) AND MICHELE SCHEDDIN OWNED FIFTY-ONE (51) SHARES (0%) OF THE
COMPANY'S OUTSTANDING SHARES.
The Company pays each director who is not an "interested person"
as defined in the 1940 Act, an annual fee of $1,000 per year, together with such
Director's actual out-of-pocket expenses related to attendance at such meetings.
-3-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM COMPANY
ACCRUED AS PART ESTIMATED AND
AGGREGATE OF ANNUAL COMPLEX
NAME OF PERSON/ COMPENSATION COMPANY BENEFITS UPON PAID TO
POSITION FROM COMPANY EXPENSES RETIREMENT DIRECTORS
- - - -------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C>
DANIEL E. None None None None
HUTNER
Director
NANCY W. None None None None
HUTNER
Director
WILLIAM $1,000 None None $1,000
ENDICOTT
Director
EDWARD ROSEN $1,000 None None $1,000
Director
DONALD SMITH $1,000 None None $1,000
Director
</TABLE>
INVESTMENT ADVISER AND INVESTMENT ADVISORY
AGREEMENT
Hutner Capital Management, Inc. (the "Investment Adviser"), 34
Chambers Street, Princeton, NJ 08542, acts as the Investment Adviser to the
Company under an investment advisory agreement (the "Advisory Agreement").
Daniel Hutner owns one hundred (100%) percent of the common stock of the
Investment Adviser and therefore is a "controlling person" as defined by the
Investment Company Act of 1940, as amended.
The Advisory Agreement provides that the Investment Adviser
identify and analyze possible investments for the Company, determine the amount
and timing of such investments, and the form of investment. The Investment
Adviser has the responsibility of monitoring and reviewing the Company's
portfolio, and, on a regular basis, to recommend the ultimate disposition of
such investments. It is the Investment Adviser's responsibility to cause the
purchase and sale of securities
-4-
<PAGE>
in the Company's portfolio, subject at all times to the policies set forth by
the Company's Board of Directors.
The Investment Adviser receives a fee from the Company, payable
monthly, for the performance of its services at an annual rate of 1.0% of its
average weekly net assets. The advisory fees are higher than that paid by most
investment companies but the Board of Directors believes it to be reasonable in
light of the services the Company receives thereunder.
Under the terms of the Advisory Agreement, the Company pays all
of its expenses (other than those expenses specifically assumed by the
Investment Adviser) including the costs incurred in connection with the
maintenance of its registration under the Securities Act of 1933, as amended,
and the 1940 Act, printing of prospectuses distributed to shareholders, taxes or
governmental fees, brokerage commissions, custodial, transfer and shareholder
servicing agents, expenses of outside counsel and independent accountants,
preparation of shareholder reports, and expenses of directors and shareholder
meetings.
The Company's Advisory Agreement between the Investment Adviser
and the Company was approved initially by the Board of Directors (including the
affirmative vote of all the directors who were not parties to the Agreement or
interested persons of any such party) on August 9, 1995 and its continuance was
most recently approved on October 19, 1998. The Advisory Agreement may be
terminated without penalty on sixty (60) days' written notice by a vote of the
majority of the Company's Board of Directors or by the Investment Adviser, or by
holders of a majority of the Company's outstanding shares. The Company's
Advisory Agreement will continue from year-to-year provided it is approved, at
least annually, in the manner stipulated in the 1940 Act. This requires that the
Advisory Agreement and any renewal thereof be approved by a vote of the majority
of the Company's directors who are not parties thereto or interested persons of
any such party, cast in person at a meeting specifically called for the purpose
of voting on such approval.
REPURCHASE OFFERS
POLICY
- - - ------
The Company has adopted a fundamental policy of making a
"Repurchase Offer" once each year of not less than five (5%) percent nor more
than twenty-five (25%) percent of the Company's outstanding shares at net asset
value. Before each Repurchase Offer, the "Repurchase Offer Amount", currently
five (5%) percent of the Company's outstanding shares, shall be determined by
the Board of Directors. The Board has set the current "Repurchase Offer Amount"
at five (5%) percent of the Company's shares outstanding. The Repurchase Offer
is open for a period of at least twenty-one (21) days from the date a
"Notification" is sent to shareholders, during which the Company's net asset
value is calculated daily and may be obtained by contacting the Administrator at
(516) 951-0500. A shareholder may withdraw or modify the number of shares
tendered at any time up to the "Repurchase Request Deadline", which it is the
intention of the Company to set as the
-5-
<PAGE>
close of business on the last business day of February each calendar year. If
the scheduled day for the Repurchase Request Deadline falls on a Friday or the
weekend, then the last business day prior to the intended date will be set as
the Repurchase Request Deadline. The "Repurchase Pricing Date" is set on the day
following the Repurchase Request Deadline.
PURPOSE OF THE REPURCHASE OFFER
The Company has adopted a fundamental policy that periodic
repurchase offers are in the best interests of shareholders as a means of
providing liquidity to shareholders. As a result of the development of a
secondary market for the Company's common stock, the market price of the shares
may vary from net asset value from time to time. Such variance may be affected
by, among other factors, relative demand and supply of shares and the
performance of the Company, especially as it affects the yield on and net asset
value of the common stock.
A Repurchase Offer for shares of common stock of the Company is
designed to reduce any spread between net asset value and market price that may
otherwise develop. However, there can be no assurance that such action would
result in the Company's common stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that Repurchase Offers
generally would be beneficial to holders of the Company's common stock, the
acquisition of shares of common stock by the Company will decrease the total
assets of the Company and therefore have the likely effect of increasing the
Company's expense ratio (assuming such acquisition is not offset by the issuance
of additional shares of common stock).
NOTIFICATION
- - - ------------
Shareholders of record and each beneficial owner of the Company's
stock will receive notification containing specified information at least
twenty-one (21) days, and no more than forty-two (42) days, before the
repurchase request deadline. The information provided will include the
repurchase offer amount, the dates of the repurchase request deadline,
repurchase pricing date and repurchase payment deadline. Notification will also
include the procedures under which the Company may repurchase such shares on a
pro rata basis, and the circumstances under which the Company may suspend or
postpone the repurchase offer. The Company will provide the net asset value of
the common stock, which will be computed no more than seven (7) days before the
date of Notification and the means by which shareholders may ascertain the net
asset value thereafter.
SOURCE OF FUNDS
- - - ---------------
The Company anticipates using cash on hand to purchase shares
acquired pursuant to the Repurchase Offers. However, if there is insufficient
cash available to consummate a Repurchase Offer, the Company may be required to
liquidate portfolio securities. In this regard, the Company will maintain liquid
assets during the notification period in an amount equal to at least one hundred
-6-
<PAGE>
(100%) percent of the Repurchase Offer Amount. As a result of liquidating
portfolio securities, the Company may realize gains or losses, at a time when
the Adviser would otherwise consider it disadvantageous to do so. Furthermore,
if the Company borrows to finance the making of Repurchase Offers, interest on
such borrowing will reduce the Company's net investment income.
Repurchase Offers could also significantly reduce the asset
coverage of any borrowings below the asset coverage requirement set forth in the
1940 Act. Accordingly, in order to purchase all shares of common stock tendered,
the Company may have to repay all or part of any then outstanding borrowings to
maintain the required asset coverage. Also, the amount of shares of common stock
for which the Company makes any particular Repurchase Offer may be affected for
the reasons set forth above or in respect of other concerns related to liquidity
of the Company's portfolio.
WITHDRAWAL RIGHTS
- - - -----------------
Tenders made pursuant to the Repurchase Offer will be irrevocable
after the Repurchase Request Deadline. However, shareholders may modify the
number of shares being tendered or withdraw shares tendered at any time up to
the Repurchase Request Deadline. All shares purchased by the Company pursuant to
the Repurchase Offer will be retired by the Company.
TAX CONSEQUENCES
- - - ----------------
The following discussion is a general summary of the Federal
Income Tax consequences of a tender of shares pursuant to a Repurchase Offer.
You should consult your own tax advisor regarding the specific tax consequences,
including state and local tax consequences, of such a tender by you.
A tender of shares pursuant to a Repurchase Offer will be a
taxable transaction for Federal income tax purposes. In general, the transaction
should be treated as a sale or exchange of the shares under Section 302 of the
Internal Revenue Code of 1986 as amended (the "Code"), if the tender (i)
completely terminates the shareholder's interest in the Company, (ii) is
"substantially disproportionate" or (iii) is treated as a distribution that is
"not essentially equivalent to a dividend." A complete termination of the
shareholder's interest generally requires that the shareholder dispose of all
shares directly owned or attributed to him under Section 318 of the Code. A
repurchase will be considered "substantially disproportionate" with respect to a
shareholder if, after applying the Section 318 attribution rules, the
shareholder's percentage of ownership is reduced by more than twenty (20%)
percent and the shareholder owns less than fifty (50%) percent of the Company's
voting shares. A distribution "not essentially equivalent to a dividend"
requires that there be a "meaningful reduction" in the shareholders interest,
which should be the case if the shareholder has a minimal interest in the
Company, exercises no control over Company affairs, and suffers a reduction in
his proportionate interest.
-7-
<PAGE>
It is anticipated that tendering shareholders will qualify for
sale or exchange treatment. If the transaction is treated as a sale or exchange
for tax purposes, any gain or loss recognized will be treated as a capital gain
or loss by shareholders who hold their shares as a capital asset and as a
mid-term capital gain or loss if such shares have been held for more than one
year or a long-term capital gain or loss if such shares have been held for more
than eighteen (18) months.
If the transaction is not treated as a sale or exchange, the
amount received upon a sale of shares may consist in whole or in part of
ordinary dividend income, a return of capital or capital gain, depending on the
Company's current and accumulated earnings and profits and the shareholder's tax
basis in the shares.
Pursuant to the backup withholding requirements of the Code
("backup withholding"), the Company or its agent could be required to withhold
thirty-one (31%) percent of gross proceeds paid to a shareholder or other payee
pursuant to a Repurchase Offer if (a) it has not been provided with the
shareholder's taxpayer identification number (which, for an individual, is
usually the social security number) and certification under penalties of perjury
(i) that such number is correct and (ii) that the shareholder is not subject to
withholding as a result of failure to report all interest and dividend income or
(b) the Internal Revenue Service (IRS) or a broker notifies the Company that the
number provided is incorrect or withholding is applicable for other reasons.
Backup withholding does not apply to certain payments that are exempt from
information reporting or are made to exempt payees, such as corporations.
Foreign shareholders are required to provide the Company with a completed IRS
Form W-8 to avoid thirty-one (31%) percent withholding on payments received on a
sale or exchange. Foreign shareholders may be subject to tax withholding of
thirty (30%) percent (or a lower treaty rate) on any portion of payments
received that are deemed to constitute a dividend.
SUSPENSION AND POSTPONEMENTS OF REPURCHASE OFFERS
- - - -------------------------------------------------
The Company shall not suspend or postpone a Repurchase Offer
except by vote of a majority of the Directors (including a majority of the
disinterested Directors) and only: (1) if such purchases would impair the
Company's status as a regulated investment company under the Code; (2) for any
period during which an emergency exists as a result of which disposal by the
Company of securities owned by it is not reasonably practicable, or during which
it is not reasonably practicable for the Company fairly to determine the value
of its net asset value; or (3) for such other periods as the Commission may by
order permit for the protection of shareholders of the Company.
If the Repurchase Offer is suspended or postponed, the Company
will provide notice thereof to shareholders. If the Fund renews the Repurchase
Offer, the Company will send a new Notification to all shareholders.
-8-
<PAGE>
DISCRETIONARY REPURCHASE OFFERS
- - - -------------------------------
In addition to the Company's policy of periodic repurchase
offers, the Company may make discretionary repurchase offers once every two (2)
years. Because a discretionary repurchase offer would not be made pursuant to a
fundamental policy of the Company, it would require only a vote of the
Directors. Discretionary repurchase offers must comply with several of the
requirements that apply to periodic repurchase offers. Among other requirements,
the Company must pay repurchase proceeds within twenty-one (21) days after the
repurchase request deadline, must compute net asset value daily on the five (5)
business days preceding the discretionary repurchase request deadline, and must
send notification according to applicable procedures. The Company is not
required to make discretionary repurchase offers, and there can be no assurance
that one will be conducted.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Directors, decisions
to buy and sell securities for the Company are made by the Investment Adviser.
The Investment Adviser is authorized to allocate the orders placed by it on
behalf of the Company to such unaffiliated brokers who also provide research or
statistical material, or other services to the Company or the Investment Adviser
for the Company's use. Such allocation shall be in such amounts and proportions
as the Investment Adviser shall determine and the Investment Adviser will report
on said allocations regularly to the Board of Directors indicating the
unaffiliated brokers to whom such allocations have been made and the basis
thereof. In addition, the Investment Adviser may consider sales of shares of the
Company and of any other funds advised or managed by the Investment Adviser as a
factor in the selection of unaffiliated brokers to execute portfolio
transactions for the Company, subject to the requirements of best execution.
In selecting a broker to execute each particular transaction, the
Investment Adviser will take the following into consideration: the best net
price available; the reliability, integrity and financial condition of the
broker; the size and difficulty in executing the order; and, the value of the
expected contribution of the broker to the investment performance of the Company
on a continuing basis. Accordingly, the cost of the brokerage commissions to the
Company in any transaction may be greater than that available from other brokers
if the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the Board
of Directors may determine, the Investment Adviser shall not be deemed to have
acted unlawfully or to have breached any duty solely by reason of its having
caused the Company to pay an unaffiliated broker that provides research services
to the Investment Adviser for the Company's use an amount of commission for
effecting a portfolio investment transaction in excess of the amount of
commission another broker would have charged for effecting the transaction, if
the Investment Adviser determines in good faith that such amount of commission
was reasonable in relation to the value of the research service provided by such
broker viewed in terms of either that particular transaction or the Investment
Adviser's ongoing responsibilities with respect to the Company.
-9-
<PAGE>
ALLOCATION OF INVESTMENTS
The Investment Adviser has other advisory clients which include
individuals, trusts, pension and profit sharing funds, some of which have
similar investment objectives to the Company. As such, there will be times when
the Investment Adviser may recommend purchases and/or sales of the same
portfolio securities for the Company and its other clients. In such
circumstances, it will be the policy of the Investment Adviser to allocate
purchases and sales among the Company and its other clients in a manner which
the Investment Adviser deems equitable, taking into consideration such factors
as size of account, concentration of holdings, investment objectives, tax
status, cash availability, purchase cost, holding period and other pertinent
factors relative to each account. Simultaneous transactions may have an adverse
effect upon the price or volume of a security purchased by the Company.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the Company and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Company or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning. Prospective investors should consult their own tax
advisors with respect to the tax consequences of an investment in the Company.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
- - - -----------------------------------------------
The Company has elected and intends to continue to qualify to be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The Company did so qualify for
its previous taxable year and intends to continue so to quality. As a regulated
investment company, the Company is not subject to federal income tax on the
portion of its net investment income (I.E., taxable interest, dividends and
other taxable ordinary income, net of expenses and the excess of net short-term
capital gain over net long-term capital loss) and capital gain net income (I.E.,
the excess of net long-term capital gain over net short-term capital loss) that
it distributes to shareholders, provided that it distributes at least ninety
(90%) percent of its investment company taxable income for the taxable year (the
"Distribution Requirement"), and satisfies certain other asset diversification
and source of income requirements of the Code. Distributions by the Company made
during the taxable year or, under specified circumstances, within twelve (12)
months after the close of the taxable year, will be considered distributions of
income and gains of the taxable year and can therefore satisfy the Distribution
Requirement. In determining the amount of capital gains to be distributed, any
capital loss carryover from prior years will be applied against capital gains to
reduce the amount of distributions paid. Any losses incurred in the taxable year
subsequent to October 31, may be deferred to the next taxable year and used to
reduce capital gains in the subsequent year.
-10-
<PAGE>
In addition to satisfying the Distribution Requirement, a
regulated investment company must derive at least ninety (90%) percent of its
gross income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are directly
related to the regulated investment company's principal business of investing in
stock or securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement").
In general, gain or loss recognized by the Company on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation purchased by the Company at a market
discount will be treated as ordinary income to the extent of the portion of the
market discount that accrued during the period of time the Company held the debt
obligation.
In addition to satisfying the requirements described above, the
Company must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Company's taxable year, at least fifty (50%) percent of the value of the
Company's assets must consist of cash and cash items, U.S. Government
securities, securities of other regulated investment companies, and securities
of other issuers (as to which the Company has not invested more than five (5%)
percent of the value of the Company's total assets in securities of such issuer
and as to which the Company does not hold more than ten (10%) percent of the
outstanding voting securities of such issuer), and no more than twenty-five
(25%) percent of the value of its total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Company
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security not the issuer of the option.
If for any taxable year the Company did not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) would be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions would be
taxable to the shareholders as ordinary dividends to the extent of the Company's
current and accumulated earnings and profits. Such distributions to the extent
derived from U.S. equity investments generally would be eligible for the
dividends received deduction in the case of corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
- - - --------------------------------------------
A four (4%) percent non-deductible excise tax is imposed on a
regulated investment company that fails to distribute in each calendar year an
amount equal to ninety-eight (98%) percent of ordinary taxable income for the
calendar year and ninety-eight (98%) percent of capital gain net income,
generally for the one-year period ended on October 31 of such calendar year. The
balance of such income must be distributed during the next calendar year to
avoid excise tax. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
-11-
<PAGE>
For purposes of the excise tax, a regulated investment company
shall reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year.
The Company intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Company may in certain circumstances be required
to liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
COMPANY DISTRIBUTIONS
- - - ---------------------
The Company anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes. Such dividends paid by the Company will qualify for
the seventy (70%) percent dividends received deduction for corporate
shareholders only to the extent discussed below.
The Company may either retain or distribute to shareholders its
net capital gain for each taxable year. The Company currently intends to
distribute any such amounts. If net capital gain is distributed and designated
as a capital gain dividend, it will be taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder has held its
shares or whether such gain was recognized by the Company prior to the date on
which the shareholder acquired its shares.
Conversely, if the Company elects to retain its net capital gain,
it will be taxed thereon (except to the extent of any available capital loss
carryovers) at the thirty-five (35%) percent corporate tax rate. If the Company
elects to retain its net capital gain, it is expected that the Company also will
elect to have shareholders of record on the last day of its taxable year treated
as if each received a distribution of its pro rata share of such gain, with the
result that each shareholder will be required to report its pro rata share of
such gain on its tax return as long-term capital gain, will receive a refundable
tax credit for its pro rata share of tax paid by the Company on the gain, and
will increase the tax basis for its shares by an amount equal to the deemed
distribution less the tax credit.
Ordinary income dividends paid by the Company with respect to a
taxable year may qualify for the seventy (70%) percent dividends received
deduction generally available to corporations (other than corporations such as
S corporations, which are not eligible for the deduction because of their
special characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Company from domestic
corporations for the taxable year. The dividends received deduction will be
disallowed for shareholders who do not hold their shares in the Company for at
least forty-five (45) days during the ninety (90) day period beginning
forty-five (45) days before a
-12-
<PAGE>
share in the Company becomes ex-dividend with respect to such dividend. A
dividend received by the Company will not be treated as a qualifying dividend
(1) if it has been received with respect to any share of stock that the Company
has held for less than forty-six (46) days (ninety-one (91) days in the case of
certain preferred stock) during the ninety (90) day period (one hundred eighty
(180) days in the case of such preferred stock) beginning forty-five (45) days
(ninety (90) days in the case of such preferred stock) before the share becomes
ex-dividend with respect to such dividend, excluding for this purpose certain
periods in which the Company's risk of loss with respect to the stock is
diminished; (2) to the extent that the Company is under an obligation (pursuant
to a short sale or otherwise) to make related payments with respect to positions
in substantially similar or related property; or (3) to the extent the stock on
which the dividend is paid is treated as debt-financed under the rules of Code
Section 246A. Moreover, the dividends received deduction for a corporate
shareholder may be disallowed or reduced (1) if the corporate shareholder fails
to satisfy the foregoing requirements with respect to its shares of the Company
or (2) by application of Code Section 246(b) which in general limits the
dividends received deduction to seventy (70%) percent of the shareholder's
taxable income (determined without regard to the dividends received deduction
and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of twenty-eight (28%) percent for noncorporate taxpayers and
twenty (20%) percent for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount. For
purposes of the corporate AMT, the corporate dividends-received deduction is not
itself an item of tax preference that must be added back to taxable income or is
otherwise disallowed in determining a corporation's AMTI. However, corporate
shareholders will generally be required to take the full amount of any dividend
received from the Company into account (without a dividends received deduction)
in determining its adjusted current earnings, which are used in computing an
additional corporate preference item (I.E., seventy-five (75%) percent of the
excess of a corporate taxpayer's adjusted current earnings over its AMTI
(determined without regard to this item and the AMT net operating loss
deduction)) includable in AMTI.
Distributions by the Company that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholder's tax basis in
its shares; any excess will be treated as gain from the sale of the shares, as
discussed below.
Distributions by the Company will be treated in the manner
described above regardless of whether they are paid in cash or reinvested in
additional shares of the Company. Shareholders receiving a distribution in the
form of additional shares will be treated as receiving a distribution in an
amount equal to the amount of the cash dividend that otherwise would have been
distributable (where the additional shares are purchased in the open market), or
the fair market value of the shares received, determined as of the reinvestment
date. Investors should be careful to consider the tax implications of buying
shares just prior to a distribution by the Company. Distributions by the Company
reduce the net asset value of the Company's shares. If the net asset value at
the time a
-13-
<PAGE>
shareholder purchases shares of the Company reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Company, when distributed such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder. The price of shares purchased at that time includes the amount of
the forthcoming distribution.
Ordinarily, shareholders are required to take distributions by
the Company into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year and
payable to shareholders of record on a specified date in those months will be
deemed to have been received by the shareholders (and made by the Company) on
December 31 of such calendar year if such dividends are actually paid in January
of the following year. Shareholders will be advised annually as to the U.S.
federal income tax consequences of distributions made (or deemed made) during
the year.
The Company will be required in certain cases pursuant to the
backup withholding rules to withhold and remit to the U.S. Treasury thirty-one
(31%) percent of ordinary income dividends and capital gain dividends paid to
any shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the IRS
for failure to report the receipt of interest or dividend income properly, or
(3) who has failed to certify to the Company that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Company accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Company actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, may increase, decrease, or
eliminate the amount of the Company's investment taxable to be distributed to
its shareholders as ordinary income.
Income received by the Company from sources within foreign
countries may be subject to withholding and other similar income taxes imposed
by the foreign country.
-14-
<PAGE>
SALE OF SHARES
- - - --------------
A shareholder will recognize gain or loss on the sale of shares
of the Company in an amount equal to the difference between the proceeds of the
sale and the shareholder's adjusted tax basis in the shares. All or a portion of
any loss so recognized may be disallowed if the shareholder purchases other
shares of the Company within thirty (30) days before or after the sale. In
general, any gain or loss arising from (or treated as arising from) the sale of
shares of the Company will be considered capital gain or loss and will be
long-term if the shares were held for longer than one year. However, any capital
loss arising from the sale of shares held for six (6) months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules applying to certain periods in which the holder's risk of loss with
respect to the stock is diminished (discussed above in connection with the
dividends received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of individual
taxpayers are currently taxed at a maximum rate of twenty (20%) percent (ten
(10%) percent if the taxpayer is, and would be after accounting for such gains,
subject to the fifteen (15%) percent tax bracket for ordinary income). Capital
losses in any year are deductible only to the extent of capital gains plus, in
the case of a noncorporate taxpayer, $3,000 of ordinary income ($1500 for
married individuals filing separately).
FOREIGN SHAREHOLDERS
- - - --------------------
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Company is "effectively connected" with a U.S. trade or business carried on
by such shareholder.
If the income from the Company is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of thirty (30%) percent (or lower treaty rate) upon the gross amount
of the dividend. Such a foreign shareholder would generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of the Company,
capital gain dividends and amounts retained by the Company that are designated
as undistributed capital gains.
If the income from the Company is effectively connected with a
U.S. trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the Company will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
-15-
<PAGE>
In the case of foreign noncorporate shareholders, the Company may
be required to withhold U.S. federal income tax at a rate of thirty-one (31%)
percent on distributions that are otherwise exempt from withholding tax (or
taxable at a reduced treaty rate) unless such shareholders furnish the Company
with proper notification of their foreign status.
The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those described
herein.
EXEMPT SHAREHOLDERS
- - - -------------------
Entities that generally qualify for an exemption from Federal
income tax, such as many pension trusts, are nevertheless taxed on "unrelated
business taxable income." A tax-exempt entity's dividend income from the Company
and gain from the sale of shares in the Company or the Company's sale of
securities is not expected to constitute unrelated business income to such
tax-exempt entity unless the acquisition of the share itself is debt-financed or
the shares constitute dealer property in the hands of the tax-exempt entity.
Before investing in the Company, the trustee or investment
manager of an employee benefit plan (e.g., a pension or profit sharing
retirement plan) should consider among other things (a) whether the investment
is prudent under the Employee Retirement Income Security Act of 1974 ("ERISA"),
taking into account the needs of the plan and all of the facts and circumstances
of the investment in the Company; (b) whether the investment satisfies the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
the assets of the Trust are deemed "plan assets" under ERISA and the Department
of Labor regulations regarding the definition of "plan assets."
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
- - - ------------------------------------------------------
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies often differ from
the rules for U.S. federal income taxation described above.
-16-
<PAGE>
GENERAL INFORMATION
SHAREHOLDER AND DIRECTOR LIABILITY
- - - ----------------------------------
The Company was incorporated on March 14, 1995 in the state of
Maryland. Under Maryland law, shareholders of such a corporation are not held
personally liable for the obligations of the corporation.
The Articles of Incorporation of the Company provide that, to the
fullest extent permitted by the Maryland General Corporation Law, no director or
officer of the corporation will have any liability to the corporation or its
stockholders for damages. The corporation will indemnify and advance expenses to
its directors or officers to the fullest extent that indemnification is
permitted by Maryland General Corporation Law.
The Articles of Incorporation do not waive a director's or
officer's duty to comply with the Securities Act of 1933, as amended, or the
Investment Company Act of 1940, as amended, or any rule, regulation, or order
thereunder. Further, the Articles of Incorporation do not protect the officers
and directors against any liability to the corporation or its stockholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
VOTING RIGHTS
- - - -------------
Shares of the Company entitle the holders to one vote per share.
The shares have no preemptive or conversion rights. The dividend rights are
described in the Prospectus. When issued, shares are fully paid and
nonassessable. The shareholders have certain rights, as set forth in the Bylaws,
to call a meeting for any purpose, including the purpose of voting on removal of
one or more Directors.
Shareholders of the Company shall be entitled to receive
distributions as a class of the assets belonging to the Company. The assets of
the Company received for the issue or sale of the shares of the Company and all
income earnings and the proceeds thereof, subject only to the rights of
creditors, are specially allocated to the Company, and constitute the underlying
assets of the Company.
The Articles of Incorporation of the Company include certain
"anti-takeover" provisions that could have the effect of depriving stockholders
of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging third parties from seeking to gain control in a tender
offer, proxy contest or similar transaction. These provisions are more fully
described in the Prospectus. A copy of the Articles of Incorporation may be
obtained from the Securities and Exchange Commission.
-17-
<PAGE>
PRINCIPAL HOLDERS
As of December 31, 1998, the Adviser, on behalf of its
shareholder and investment advisory clients, owned directly or indirectly,
either beneficially or of record, approximately 83.4% or more of the outstanding
shares of the Company. The Adviser, however, disclaims beneficial ownership of
approximately 72.6% of the total shares outstanding.
ACCOUNTANTS
Deloitte & Touche LLP, New York, New York, serves as the
independent accountant of the Company. Generally, the independent accountants
will audit the financial statement and the financial highlights of the Company,
as well as provide reports to the Directors.
LEGAL COUNSEL
As of May 15, 1998, Spitzer & Feldman P.C., 405 Park Avenue, New
York, New York 10022 serves as legal counsel for the Company. Generally, legal
counsel reviews documents relating to the operations of the Company. In
addition, legal counsel will provide counsel to the Board of Directors of the
Company.
FINANCIAL STATEMENTS
Shareholders receive reports at least semi-annually showing the
Company's holdings and other information. In addition, shareholders receive
annual financial statements contained in the Annual Report to Shareholders
examined by Deloitte & Touche LLP, the Company's Independent Accountants. A copy
of the Fund's Annual Report to Shareholders will be provided upon request by
writing or calling the Fund at the address or telephone number set forth on page
1 of this Statement of Additional Information.
-18-
<PAGE>
PART C. OTHER INFORMATION
-------------------------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements.
In Part A:
Financial Highlights
In Part B:
None
In Part C:
The following financial
statements and report included
therewith are incorporated by
reference herein from the Annual
Report to Shareholders for the
year ended August 31, 1998:
(i) Schedule of Investments - August 31,
1998;
(ii) Statement of Assets and Liabilities -
August 31, 1998;
(iii) Statement of Operations - August 31,
1998;
(iv) Statements of Changes in Net Assets -
for the years ended August 31, 1997
and 1998;
(iv) Financial Highlights;
(v) Notes to Financial Statements for the
year ended August 31, 1998; and
(vi) Independent Auditor's Report of
Deloitte & Touche LLP dated October
16, 1998.
(b) Exhibits
1. Articles of Incorporation of Registrant(1)
2. By-Laws of Registrant(1)
3. Inapplicable
4. Inapplicable
- - - --------
(1) Filed with the Securities and Exchange Commission by the Registrant
as an Exhibit to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 (Reg. No. 33-90522; ICA No. 811-9004 as filed
on December 31, 1997).
-C 1-
<PAGE>
5. Automatic Dividend Reinvestment and Cash Purchase
Plan(1)
6. Inapplicable
7. Investment Advisory Agreement between the
Registrant and Hutner Capital Management, Inc.(1)
8. Inapplicable
9. Inapplicable
10. Custodian Agreement between the Registrant and
Star Bank, N.A.(1)
11. (a) Administration Agreement between the
Registrant and American Data Services,
Inc.(1)
(b) Transfer Agent Agreement between the
Registrant and American Stock Transfer &
Trust Co.(1)
12. (a) Opinion and Consent of Messrs. Battle
Fowler LLP as to the legality of the
securities being registered(1)
(b) Opinion and Consent of Venable Baetjer
and Howard as to issues relating to Maryland
law(1)
(c) Consent of Spitzer & Feldman P.C. to be named
in the Prospectus and Statement of Additional
Information(2)
13. Inapplicable
14. Consent of Deloitte & Touche LLP to the use of the
Report of Independent Accountants and to be named
in the Prospectus and Statement of Additional
Information (2)
15. Inapplicable
16. Subscription Agreement Letter from Avalon
Partners, L.P. to Registrant(1)
17. Inapplicable
18. Financial Data Schedule (1)
ITEM 25. MARKETING ARRANGEMENTS
----------------------
None.
- - - --------
(2) Filed herewith.
-C 2-
<PAGE>
ITEM 26. OTHER EXPENSES AT ISSUANCE AND DISTRIBUTION
-------------------------------------------
Not Applicable
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
-------------------------------
Title of Class; Shares Number of Record Holders
($0.001 par value) As of February 1, 1999
------------------------
AVALON CAPITAL, INC. 262
Common Stock
ITEM 29. INDEMNIFICATION
---------------
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the corporation shall have any liability to the
corporation or its Stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
(2) Any person who was or is a party or is threatened to be made a
party in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is a current or former director or officer of the Corporation,
or is or was serving while a director or officer of the Corporation at the
request of the Corporation as a director, officer, partner, trustee, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorneys' fees) actually incurred by such person in
connection with such action, suit or proceeding to the fullest extent
permissible under the Maryland General Corporation Law, the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as amended, as such
statutes are now or hereafter in force. In addition, the Corporation shall also
advance expenses to its currently acting and its former directors and officers
to the fullest extent that such advance of expenses is permitted by the Maryland
General Corporation Law, the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended. The Board of Directors may by Bylaw,
resolution or agreement make further provisions for indemnification of
directors, officers, employees and agents to the fullest extent permitted by the
Maryland General Corporation Law.
19. (3) No provision of this Article shall be effective to protect
or purport to protect any director or officer of the Corporation against any
liability to the Corporation or its security holders to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
-C 3-
<PAGE>
(4) References to the Maryland General Corporation Law in this
Article are to the law as from time to time amended. No amendment to the
Articles of Incorporation of the corporation shall affect any right of any
person under this Article based on any event, omission or proceeding prior to
such amendment.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------
None.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The accounts, books or other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained by American Data Services, Inc., The Happaugue Corporate Center, 150
Motor Roadway, Hauppauge, New York 11788. The accounts, books or other documents
required to be maintained by the Adviser are maintained by Hutner Capital
Management, Inc., 34 Chambers Street, Princeton, New Jersey 08542. The accounts,
books and other documents required to be maintained by the Custodian are
maintained by Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45201.
ITEM 32. MANAGEMENT SERVICES
-------------------
Not applicable.
ITEM 33. UNDERTAKINGS
------------
1. The Registrant undertakes to suspend the offering of shares
until the prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. The Registrant undertakes that for the purpose of determining
any liability under the 1933 Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant under Rule
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
3. The Registrant undertakes that for the purpose of determining
any liability under the Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
4. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two (2) business days
of receipt of a written or oral request, any Statement of Additional
Information.
-C 4-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement on Form N-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Princeton, and the State of New Jersey, on the 5th day of February, 1999.
AVALON CAPITAL, INC. /S/ DANIEL HUTNER
- - - -------------------- -----------------------------------------
Registrant By: Daniel Hutner, President and Director
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to its Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ DANIEL E. HUTNER Chief Executive Officer FEBRUARY 5, 1999
- - - ---------------------- and Director ------------------
Daniel E. Hutner
/S/ NANCY W. HUTNER Director and Chief FEBRUARY 5, 1999
- - - --------------------- Financial Officer ------------------
Nancy W. Hutner
/S/ WILLIAM T. ENDICOTT Director FEBRUARY 5, 1999
- - - ------------------------- ------------------
William T. Endicott
/S/ EDWARD ROSEN Director FEBRUARY 5, 1999
- - - --------------------- ------------------
Edward Rosen
/S/ DONALD SMITH Director FEBRUARY 5, 1999
- - - --------------------- ------------------
Donald Smith
-C 5-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement on Form N-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Princeton, and the State of New Jersey, on the 1st day of February, 1999.
AVALON CAPITAL, INC.
- - - ------------------------------- ------------------------------------------
Registrant By: Daniel Hutner, President and Director
- - - --------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to its Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
- - - -------------------------- Chief Executive Officer FEBRUARY , 1999
Daniel E. Hutner and Director
- - - -------------------------- Director and Chief FEBRUARY , 1999
Nancy W. Hutner Financial Officer
- - - -------------------------- Director FEBRUARY , 1999
William T. Endicott
- - - -------------------------- Director FEBRUARY , 1999
Edward Rosen
- - - -------------------------- Director FEBRUARY , 1999
Donald Smith
-C 6-
CONSENT OF SPITZER & FELDMAN P.C.
WE HEREBY CONSENT to the reference to our firm in Post-Effective Amendment
No. 2 to the Registration Statement on Form N-2 of Avalon Capital, Inc. as filed
with the Securities and Exchange Commission on February 26, 1999.
SPITZER & FELDMAN P.C.
Dated: New York, New York
February 24, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 2 to Registration
Statement No. 33-90522 on Form N-2 of Avalon Capital, Inc., of our report dated
October 16, 1998, appearing in the Statement of Additional Information, which is
included in such Registration Statement, and to the references to us under the
headings "Accountants" and "Financial Statements" also in the Statement of
Additional Information.
Deloitte & Touche LLP
New York, New York
February 25, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000942600
<NAME> AVALON CAPITAL, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 8566699
<INVESTMENTS-AT-VALUE> 13294863
<RECEIVABLES> 5264
<ASSETS-OTHER> 47491
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 13347618
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48695
<TOTAL-LIABILITIES> 48695
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8572579
<SHARES-COMMON-STOCK> 887855
<SHARES-COMMON-PRIOR> 918726
<ACCUMULATED-NII-CURRENT> (261110)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 259290
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4728164
<NET-ASSETS> 13298923
<DIVIDEND-INCOME> 121620
<INTEREST-INCOME> 10498
<OTHER-INCOME> 0
<EXPENSES-NET> 304651
<NET-INVESTMENT-INCOME> (172533)
<REALIZED-GAINS-CURRENT> 268655
<APPREC-INCREASE-CURRENT> 1451666
<NET-CHANGE-FROM-OPS> 1547788
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15411
<NUMBER-OF-SHARES-REDEEMED> 46282
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1029483
<ACCUMULATED-NII-PRIOR> (88576)
<ACCUMULATED-GAINS-PRIOR> (9365)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 147374
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 304651
<AVERAGE-NET-ASSETS> 14744381
<PER-SHARE-NAV-BEGIN> 13.35
<PER-SHARE-NII> (.19)
<PER-SHARE-GAIN-APPREC> 1.82
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.98
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
