GREENSPRING FUND,
INCORPORATED
<LOGO>
THIRD QUARTER REPORT
SEPTEMBER 30, 1998
This report is authorized for distribution
only to shareholders who have received a
copy of the official Prospectus of the
Greenspring Fund, Incorporated.
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October 1998
Dear Shareholders:
Finding the appropriate words to describe my feelings about what has happened to
the Greenspring Fund during the third quarter of 1998 is very difficult.
Various emotional crosscurrents ebb and flow every day as I examine the
performance of the portfolio and the overall markets. These emotions run from
an incredulous disbelief of the Greenspring Fund's inability to perform better
during a period of significant market weakness, to shock and dismay that so
many securities in the portfolio, despite strong operating fundamentals, have
declined in price from valuations that were quite cheap several months ago to
levels that are now ridiculously low. Then, when I take a minute and step back
from the intense, gut-wrenching turbulence of the recent market, I am filled
with strong optimism that the current market turmoil is presenting an
opportunity that should benefit long term investors who are willing to ride
out this storm.
Since the Greenspring Fund?s inception in July of 1983, our investment
philosophy has performed best relative to our competition during periods of
market weakness. During the market downturn from mid-1983 to 1984, the Crash in
1987, and the setbacks in 1990 and 1994, the Greenspring Fund experienced
weakness, but markedly less than the vast majority of other mutual funds with a
similar investment style. So, for the Fund to experience a decline from its
peak in April to current levels that is similar, and in some cases greater, in
magnitude to that of other mutual funds that specialize in small-cap and
special situations securities is incredibly distressing. Our pain is not only
emotional in that we know the Fund?s performance has not met the expectations of
our shareholders, but also financial, in that the assets of all the Greenspring
Fund's officers, directors, and employees have declined along with those of our
shareholders due to our significant personal holdings in the Greenspring Fund.
We are working diligently to position the portfolio in the best way to recover
from this recent downturn. Moreover, we are as determined and focused as ever
to provide the kind of investment management that our shareholders have come
to expect and deserve from us.
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The recent global market turmoil has roiled markets far removed from the initial
trouble spots. The increased globalization of the world economy, an idea that
has received a great deal of attention during recent years, has proven to have
far-reaching effects not only in ways that benefit world economies during good
times, but also in increased stress to all markets during difficult times.
Historically, the Greenspring Fund has not ventured significantly and/or
directly into the international markets, preferring to stay with the domestic
markets, the dynamics of which we better understand. As the problems in the
emerging markets began to unfold during 1997, we combed the securities in the
portfolio to ensure that our exposure to those markets was minimal. In fact,
from an operational perspective, the weakness in the troubled regions of the
world has directly affected the companies in our portfolio only slightly.
However, we failed to anticipate that the repercussions from the global
turbulence would have such a significant effect on the supply and demand factors
in the markets for so many of our securities.
In a general sense, the principal reason for the weakness in many of the
securities in the Greenspring Fund, as well as the market overall, is the need
for liquidity by many institutional investors, such as hedge funds and other
sophisticated investors. These investors made significant and complicated
investments in the emerging markets that, for the most part, declined
precipitously as the Far East and Russian markets imploded over the past year.
As a result, these investors' sophisticated "bets" went bad, and they were met
with margin calls and/or redemptions. Unable to sell many of their foreign
securities due to decimated prices and the absence of buyers, these investors
had no choice but to sell other securities in their portfolios, regardless of
the underlying fundamentals of the securities. This "forced" selling put
downward pressure on a wide variety of U.S.-based securities, including stocks,
high yield bonds, mortgage-backed securities, and convertible bonds. The common
feature of these holdings was that they provided needed liquidity for investors
who were "forced" to sell. The fundamental value of the securities often
played absolutely no role in the sell decision. These investors were simply
selling "whatever they could at whatever the price" in order to raise the cash
needed to meet untimely margin calls and redemptions. This "forced" selling has
continued, and in some cases has become more severe, since the end of the third
quarter. As this letter is being written in early October, most major indices
have declined sharply from the end of the third quarter. An example of the
severity of this decline is the approximate 17% drop in the NASDAQ Composite
Index over five trading days early in October. Declines from 1998 peaks now
range from 17% for the Dow Jones Industrial Average to more than 36% for the
Russell 2000. Unfortunately, the Greenspring Fund has not avoided these
downward pressures.
During this anxiety-filled period, the financial markets have also experienced
a "flight to quality." In the bond market, investors throughout the world have
flocked to U.S. Treasury securities as a "safe haven." In addition, many
foreign investors who temporarily fled their stock markets have opted instead to
purchase U.S. blue-chip stocks. This interest in U.S. blue-chip stocks was also
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supported by U.S. investors who shunned small cap stocks for most of 1998,
opting instead for the liquidity and perceived "safety" of these blue-chip
securities, regardless of their relative valuations. This flight to quality
caused additional problems for many hedge funds and other highly sophisticated
institutional investors. Many of these firms utilize an investment strategy
that attempts to lock in a spread between two similar types of securities. For
example, such an investor might buy a bond of a foreign country that is yielding
more than a U.S. Treasury bond. At the same time the investor may sell short a
U.S. Treasury security, attempting to lock in the yield differential. The
expected success of such a strategy may be supported by sophisticated
mathematical computer models used for predicting the expected price movements of
the securities in question based upon historical price movements of the
securities in different market conditions. The incremental yield that such
investors are attempting to lock up is often quite small, so these investors
typically attempt to bolster their returns by significantly leveraging their
portfolios. When the markets act differently than anticipated, as in recent
months when U.S. Treasury securities have far exceeded the performance of other
fixed income assets, these leveraged bets can result in sharp losses. This
scenario has plagued many hedge funds and caused the near collapse of the
star-studded hedge fund, Long Term Capital Management. Unfortunately, these
kinds of problems have resulted in additional short-term selling of all types of
question.
So where do we go from here? The most successful investors have always
maintained that an occasional market drubbing like the one in recent months is a
positive occurrence in the long run. Not only does this severe sell-off
eliminate some froth from the market, but it also presents a terrific
opportunity to upgrade one's portfolio. As long term investors, this is where
we see opportunities for the Greenspring Fund. We believe many excellent values
across all market capitalizations are or soon will be available in the market.
Stocks and bonds that have previously been overpriced and/or slightly
undervalued may now be sharply undervalued. As discussed earlier, much of the
selling done during recent months has been for reasons having nothing to do with
the underlying fundamentals of the companies in question, but more with fear,
uncertainty, and a need for liquidity. Consequently, many stocks are trading
50-60% below their 52-week highs, yet have produced strong earnings and still
have a promising profit outlook. Similarly, in the fixed income market,
opportunities abound. The prices of many bonds have declined significantly for
reasons relating more directly to the supply and demand characteristics of the
markets than the perceived ability of the company in question to pay its
interest and principal payments according to schedule. We believe our
bottom-up, research intensive style will be able to take advantage of this tough
market environment. Many opportunities exist to uncover undervalued and
misperceived equity and fixed income securities to complement our core holdings
in the portfolio. Many of these core holdings, we believe, have been oversold
due to the irrationality of "forced" sellers, whose sell decisions have not been
based on actual company fundamentals.
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Consequently, we will continue to manage the Greenspring Fund for the long run.
In the short run, it is very frustrating that the current trading value of many
of our securities greatly understates our estimates of their true values. As
opportunities are discovered, we will purchase new undervalued stocks and bonds.
We will also continue to trim or sell existing holdings, if we become less
confident in their near-term prospects or believe that we should swap out of a
current holding into another security with greater promise and/or less near-term
risk. We may also hold the cash from such sales until some of the volatility
subsides. Currently, the Fund contains some incredible values, a fact
supported, in many cases, by the high levels of buying by informed insiders and
significant company buy-back plans that are in place. In our business, the
securities in the portfolio are marked to market every day; however, on any
given day the market value of a security does not necessarily reflect a
company's true long term value. The recent weakness in the Greenspring Fund has
been painful to endure in the short run, but in the long run the Fund may be the
better for it. Many companies in which we are invested are taking advantage
of the current situation either by purchasing significant amounts of their
stock at current levels or by pursuing acquisitions of other companies that
may now be available at considerably lower prices than several months ago.
Although these companies are not pleased with what has happened to their stock
prices, they believe that by seizing the opportunity created by the current
turmoil they will become even stronger companies when the dust settles. We feel
the same way about the Greenspring Fund. Although the pain in the short run has
been intense, we strongly believe that it is temporary and that, after
weathering the storm, when investors are once again making investment decisions
based upon rational investment analysis and research, the strong values of many
of the securities in the marketplace will be better reflected in the quoted
stock prices. In the meantime, we are working hard to ensure that the Fund is
positioned well for what in the near term could continue to be turbulent times;
however, we will take advantage of opportunities to purchase outstanding
investments as they become available.
We thank all of our shareholders for their loyalty during this difficult period.
We are totally dedicated to providing the kind of investment management services
that our shareholders expect, and we are excited about the prosects of gaining
back what has been lost during 1998. We are looking forward to reporting on
our progress in forthcoming reports.
Respectfully,
/s/Charles vK. Carlson
Charles vK. Carlson
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
COMMON STOCKS (63.75%)
Shares Value
Banking (16.07%)
31,000 BostonFed Bancorp, Inc. $ 527,000
36,000 Chase Manhattan Corp. 1,557,000
50,000 Columbia Bancorp, Inc. 731,250
89,728 Crestar Financial Corp. 5,092,064
50,000 Dime Bancorp, Inc. 1,265,625
34,000 GA Financial, Inc. 520,625
60,940 Long Island Bancorp, Inc. 2,932,738
15,000 Mercantile Bankshares Corp. 421,875
33,000 *PFF Bancorp, Inc. 503,250
21,100 PS Financial, Inc. 243,969
67,140 Patriot Bank Corp. 839,250
16,500 Rocky Ford Financial Corp. 212,437
73,100 Staten Island Bancorp 1,315,800
28,600 Statewide Financial Corp. 507,650
57,487 *Sun Bancorp, Inc. 1,135,368
164,800 Thistle Group Holdings 1,503,800
27,516 Union Planters Corp. 1,382,679
20,692,380
Business Services (1.36%)
64,400 Standard Register Company 1,750,875
1,750,875
Construction/Engineering (1.52%)
157,000 *Walter Industries 1,952,687
1,952,687
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
COMMON STOCKS (CON'T)
Shares Value
Consumer Products/Services (4.14%)
179,066 *Bolle Inc. $ 671,497
19,900 Genesee Corporation Class B 524,863
453,200 *Host Marriott Services 4,135,450
5,331,810
Electric Power (.16%)
21,150 *Cogeneration Corporation of America 203,569
203,569
Energy Services (2.02%)
125,500 Tidewater Inc. 2,604,125
2,604,125
Financial Services (15.55%)
452,000 AMRESCO Capital Trust 4,378,750
119,375 Anthracite Capital, Inc. 1,014,688
136,950 Chastain Capital Corporation 1,472,213
68,500 *ITLA Capital Corp. 941,875
613,475 Imperial Credit Commercial Mortgage 5,981,381
284,800 *Long Beach Financial Corp. 2,634,400
210,850 Ocwen Asset Investment Corp. 1,647,266
60,200 *Ocwen Financial, Inc. 526,750
100,000 Resource Asset Investment Trust 1,425,000
20,022,323
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
COMMON STOCKS (CON'T)
Shares Value
Instrumentation (3.41%)
406,000 *!Barringer Technologies $ 3,019,625
179,900 *OSI Systems, Inc. 1,371,737
4,391,362
Insurance (5.43%)
75,000 PartnerRe Holdings, Ltd. 3,004,687
102,416 Reliastar Financial Corp. 3,994,224
6,998,911
Manufacturing (6.45%)
297,500 *Griffon Corporation 2,603,125
158,400 Rohn Industries, Inc. 306,900
193,247 *Scott Technologies Class B 2,246,496
165,000 U.S. Industries, Inc. 2,485,312
29,110 Woodward Governor Company 669,530
8,311,363
Natural Resources (1.69%)
32,500 Mitchell Energy & Development Corp. Cl. A 412,344
79,380 Penn Virginia Corp. 1,741,399
2,900 United States Lime & Minerals 21,025
2,174,768
Optical Products (1.96%)
505,844 *Lumen Technologies 2,529,220
2,529,220
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
COMMON STOCKS (CON'T)
Shares Value
Pharmaceutical (1.21%)
173,600 Pharmaceutical Marketing Services $ 1,562,400
1,562,400
Real Estate (2.78%)
165,900 *Acadia Realty Trust 995,400
168,645 The Town and Country Trust 2,582,377
3,577,777
Total Common Stocks (Cost $84,427,032) 82,103,570
PREFERRED STOCKS (7.69%)
Convertible Pfd. Stock (5.41%)
409,515 Prime Retail, Inc., 8.50% Pfd. B 6,961,755
6,961,755
Non-Convertible Pfd. Stocks (2.28%)
1,000 BankUnited Capital Trust, 10.25%, Series A 1,055,000
94,500 *RB Asset, Inc., $3.75, Series A 1,890,000
2,945,000
Total Pfd. Stocks (Cost $11,406,227) 9,906,755
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
BONDS (20.27%)
Principal
Amount Value
Convertible Bonds (12.44%)
$ 1,268,000 Centertrust Retail Properties, 7.50%, 1/15/01 $ 1,205,392
6,055,000 Corporate Express, Inc., 4.50%, 7/1/00 5,510,050
2,500,000 Emcor Group, 5.75%, 4/1/05 2,097,918
1,176,000 Kelley Oil & Gas Partners, Ltd.,
8.50%, 4/1/00 1,058,400
1,590,000 Kelley Oil & Gas Partners, Ltd.,
7.875%, 12/15/99 1,482,675
500,000 NovaCare, 5.50%, 1/15/00 427,500
700,000 +Pharmaceutical Marketing, 6.25%, 2/1/03 620,375
3,900,000 The Learning Company, 5.50%, 11/1/00 3,617,250
16,019,560
Non-Convertible Bonds (7.83%)
2,445,000 Bay View Capital Corp., 9.125%, 8/15/07 2,432,775
2,701,000 Homeland Stores, 10.00%, 8/1/03 2,397,137
1,800,000 Host Marriott Travel Plaza, 9.50%, 5/15/05 1,890,000
1,000,000 +Life Savings Bank, 13.50%, 3/15/04 1,001,250
400,000 Ocwen Financial, 11.875%, 10/1/03 400,000
1,855,000 USA Mobile, 14.00%, 11/1/04 1,966,300
10,087,462
Total Bonds (Cost $26,667,035) 26,107,022
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1998
COMPANIES IN LIQUIDATION (3.14%)
Shares/
Principal
Amount Value
275,196 *!Atlantic Realty Trust $ 2,304,766
581,450 *!Hi Shear Industries, Inc. 1,562,647
2,900,000 *Lomas Mortgage USA, Class 3 Claim 174,000
Total Companies in Liquidation
(Cost $4,519,233) 4,041,413
SHORT-TERM INVESTMENTS (4.14%)
Temporary Investment Fund, Inc. 5,335,193
Total Short-Term Investments
(Cost $5,335,193) 5,335,193
Total Investments in Securities (98.99%)
(Cost $132,354,720) 127,493,953
Other Assets Less Liabilities (1.01%) 1,290,854
Total Net Assets (100%) $128,784,807
*Non-income producing securities
+144A security, representing 1.26% of net assets
!Non-controlled affiliated issuer
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GREENSPRING FUND, INCORPORATED
PERFORMANCE SINCE INCEPTION
HOW $10,000 INVESTED ON 7/1/83 WOULD HAVE GROWN*
<CHART>
7/1/83 $10,000
12/31/83 11,223
12/31/84 12,692
12/31/85 15,238
12/31/86 17,668
12/31/87 19,304
12/31/88 22,389
12/31/89 24,762
12/31/90 23,149
12/31/91 27,626
12/31/92 32,190
12/31/93 36,906
12/31/94 37,952
12/31/95 45,082
12/31/96 55,291
12/31/97 68,532
9/30/98 54,582
*Figures include changes in principal value, reinvested dividends and capital
gains distributions. Cumulative total return represents past performance. Past
expense limitations increased the Fund's return. Investment returns and
principal value will vary and shares will be worth more or less at redemption
than at original purchase.
Average annual returns for the one, five and ten year periods ended September
30, 1998 were -19.10%, 8.24% and 9.39%, respectively. Average annual returns
for more than one year assume a compounded rate of return and are not the Fund's
year-by-year results, which fluctuated over the periods shown.
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Greenspring Fund, Incorporated
2330 West Joppa Road, Suite 110
Lutherville, MD 21093
(410) 823-5353
(800) 366-3863
DIRECTORS
Charles vK. Carlson, Chairman
William E. Carlson
David T. Fu
Michael J. Fusting
Michael T. Godack
Richard Hynson, Jr.
OFFICERS
Charles vK. Carlson
President and Chief Executive Officer
Michael T. Godack
Sr. Vice President and Chief Compliance Officer
Michael J. Fusting
Sr. Vice President and Chief Financial Officer
Elizabeth C. Agresta
Secretary and Treasurer
INVESTMENT ADVISOR
Key Equity Management Corporation
2330 West Joppa Road, Suite 108
Lutherville, MD 21093-7207
TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 576-7498
CUSTODIAN
PNC Bank
Airport Business Center
200 Stevens Drive, Suite 440
Lester, PA 19113
INDEPENDENT ACCOUNTANTS
PriceWaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, MD 21201-2304
LEGAL COUNSEL
DeMartino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, DC 20036-2492
