GREENSPRING FUND, INCORPORATED
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FIRST QUARTER REPORT
MARCH 31, 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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April 1998
Dear Shareholders:
During the first quarter of 1998, the stock market surged. Market pundits
attribute the rise in stock prices to a diminution of fears that the woes of
the Far East would spread around the globe, as well as the continuation of
the "Goldilocks" economy in the U.S., with a "just right" combination
of low inflation, interest rates, and unemployment. While large capitalization
securities led the way with the strongest returns, just about all investment
styles performed well during the quarter. The Greenspring Fund also generated
strong positive absolute performance by gaining 4.5%, although this gain was
less robust than the major indices.
In a quarterly letter written two years ago, we explained the Greenspring
Fund's rationale for heavily weighting the portfolio with securities of the
banking industry. Since then, the Fund's interest in this area has not
diminished and the banking industry remains our largest investment
sector. This overweighting has greatly benefitted the Fund during the last
several years, as performance of these securities has been strong and steady.
Given our continued emphasis in this area and the recent announcements of the
proposed mega-mergers of Citicorp/Travelers, NationsBank/BankAmerica and Banc
One/First Chicago, we thought it was timely to provide an update on our
investment thesis concerning the financial services industry.
The investment rationale we articulated two years ago was that the banking
industry provided excellent investment opportunities for several reasons.
First, valuations were very reasonable relative to the overall market, having
only partially recovered from the decimation the stocks experienced in the early
1990's. Secondly, the economy had improved steadily over the prior
several years resulting in sharp improvement in the asset quality of banks' loan
portfolios. Consequently, nonperforming loans and additions to associated
loan loss reserves were decreasing industry-wide, which directly increased
earnings. Thirdly, banking was an area that was rapidly consolidating. Every
bank in which the Fund had invested had the potential to be acquired, at a
premium price, by a larger company intent upon building its franchise.
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At that time, most of the Fund's banking investments fell into one of
two categories: "small banks and thrifts" or "regional banks." Most of the
investments in small banks and thrifts shared several common characteristics.
Most importantly, these investments were in strongly capitalized
companies that could use their excess capital for stock repurchases, increased
dividends, or wise acquisitions. In addition, many of the thrifts we purchased
had recently converted from mutual to stock ownership, while many of the banks
had undergone some kind of corporate development, such as an initial or
secondary stock offering. Due to the proliferation of small banks and thrifts
and the relative paucity of industry analysts, the investment community did
not follow the stocks of these companies very effectively, resulting in some
bargain investments for those willing to do the necessary independent research.
In most cases, the Greenspring Fund purchased banks and thrifts
that sold at meaningful valuation discounts to their peers, for no
justifiable reasons. In addition, most had a strong deposit franchise that
made them attractive merger candidates to larger thrifts or regional banks.
As with the small bank and thrift investments, the rationale for purchasing
medium-sized regional banks also shared many of the same attributes. Often,
these banks had been participants in the consolidation of the banking industry
as buyers of smaller financial institutions. The resulting economies of scale
helped to bolster their earnings while improving their regional franchises.
Some investments were in banks that had "turned the corner" on past asset
problems and were solidly on the road to recovery, although investors had not
fully recognized this progress. The combination of excess capital and
tremendous free cash flow allowed these companies to aggressively repurchase
their stock in the open market, which helped to limit the downside risk in the
investments, as well as increasing earnings per share. The stocks also traded
at modest multiples of earnings relative to the overall market. Finally,
most regional banks were potential targets of the fast-growing super-regionals
such as NationsBank, First Union and Bank One.
Although the Greenspring Fund's interest in the financial services sector
has evolved as the industry changed during the last several years, banking
remains a favorite investment area for us. Strong performance by banking
securities has attracted an increased amount of investors' dollars.
This has resulted in escalating valuations relative to the market, as well as
more effective coverage in the industry, and a decreasing number of attractive
bargains. For the most part, the fundamentals that attracted us to this area
several years ago remain intact. Banks and thrifts are even more strongly
capitalized today than they had been and still generate a substantial amount
of free cash flow, giving them the ability to continue to repurchase shares
of their own stock. However, since these stocks now sell at significantly
higher price-earnings and price-to-book value ratios, stock repurchases are
no longer as beneficial as they used to be. In addition, banks no longer get
the incremental boost to earnings that they did during the early-to mid-1990's
when additions to loan loss reserves were shrinking compared to prior years.
Today, nonperforming assets are stable at extremely low levels and associated
loan loss reserves are more than sufficient. These conditions are very
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healthy, but allow little room for improvement.
Consolidation has continued at an increasingly torrid pace. "Buy or be
bought" seems to be the rallying cry, as very few banks have not engaged in some
type of merger or acquisition activity during the last several years. Today,
America has fewer than 9,200 banks, as compared with more than 14,000 banks
in 1985. Acquisitions have occurred more frequently, at higher multiples of
earnings and book value, and have included much larger companies. The median
price-to-earnings ratio of the bank acquisitions announced this year has been
23.9, compared to the median during 1995 of 16.4. Similarly, the median
price-to-book value ratio this year has been 2.7, which is sharply higher
than the 1.7 multiple paid in 1995. Despite the increased acquisition prices,
the premium over the market price of the target stocks has diminished during
the last several years. Today, many banking stocks trade at valuations that
reflect investors' expectations of an acquisition, as opposed to the banks'
underlying operating fundamentals. The average takeover premium above
the current market price has been only 10 percent this year, compared to 21
percent in 1996.
A change in the operating philosophy of many larger financial institutions
has created new investment opportunities. The "big banks" have become more
streamlined and narrowly focused in their approach to loan generation. These
banks increasingly concentrate on lines of business where they have superior
returns on investment, usually the result of special expertise or economies of
scale. Unless they can attain critical mass in an area, these banks would
rather exit a line of business and focus on what they believe to be their
"bread and butter." This development has created opportunities for companies
with the expertise to operate profitably in the niches created as banks
have de-emphasized or sold many lines of business. These "specialty finance"
companies have a wide variety of specialties, including nonconventional loan
origination, subordinated loans, small business loans, ESOP loans, the purchase
and servicing of nonperforming loans, and other nontraditional type lending.
The relative newness and, in some cases, the small size of many of these
companies and industries has contributed to very inefficient coverage by the
Wall Street community. This has created a proliferation of investment
opportunities for those willing to do their own research in a neglected or
underfollowed area, which has always been one of the Greenspring Fund's
strengths. As the specialty finance markets continue to grow and withstand
the test of time, these companies should attract a growing number of investors,
helping to increase their valuations. Meanwhile, the performance of these
investments remains driven by company-specific events, as opposed to moving
in tandem with the broad market averages.
Some of the specialty finance companies in which the Fund has invested
(Criimi Mae, Imperial Credit Commercial Mortgage, Ocwen Asset Investment)
have chosen the REIT structure in order to benefit from certain tax advantages.
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This should prove to be a very efficient capital structure that will enable
these companies to maximize the income they can pay to shareholders. The
resulting stream of high and growing dividends should help to limit the
downside risk in these securities.
Although some of these specialty finance industries are still in the
early stages of existence, consolidation has already started to occur. The
same factors driving the consolidation of the traditional banking industry
are also spurring mergers in this evolving industry. Ironically, large
banks and insurance companies, the same types of companies that helped to
spawn the growth of the specialty finance companies, are leading the charge
to purchase them. Attracted by the highly profitable returns and the ability
to acquire critical mass in a line of business, these financial
companies are buying companies that are available at prices that are more
attractive than traditional banking targets. Examples include Conseco's recent
offer to purchase Green Tree Acceptance, a specialty lender, and First Union's
decision to buy The Money Store, a non-prime home equity lender. We believe
this consolidation will continue if the stock prices of specialty finance
companies, many of which have not kept pace with the general stock market
recently, do not improve. Either way, specialty finance companies should
provide solid performance during the next several months with little dependence
on the performance of the financial markets.
Investments in the financial services industry will remain a significant
portion of the Fund's assets for the foreseeable future. It is an area we
understand very well and, historically, has been a source of very solid returns
for the Greenspring Fund. Additionally, we continue to focus on other
securities where company-specific events, not a strong market, drive the success
of the investments. We are confident that we will continue to uncover
additional investment opportunities despite the lofty level of the major stock
market averages, and we look forward to reporting on developments
in the Fund as the year progresses.
Respectfully,
/s/Charles vK. Carlson
Charles vK. Carlson
President
P.S. We would also like to report on the favorable results of the Special
Meeting of Shareholders that was held on April 6, 1998. All of the proposals
presented in the proxy statement received the necessary approvals. We thank
all Greenspring Fund shareholders for their response. The positive
vote should result in a more efficient mutual fund that has increased
flexibility to achieve its investment goals and will benefit from lower
management fees as the Fund's assets grow.
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
COMMON STOCKS (61.88%)
Shares Value
Aerospace (.61%)
11,000 Lockheed Martin Corp. $ 1,237,500
1,237,500
Banking (10.90%)
18,200 *BankUnited Financial Corp. 256,507
15,000 Bay View Capital Corp. 521,250
31,000 BostonFed Bancorp, Inc. 713,000
49,400 Charter Financial, Inc. 1,704,300
18,000 Chase Manhattan Corp. 2,427,750
25,000 Columbia Bancorp, Inc. 893,750
89,728 Crestar Financial Corp. 5,305,168
50,000 Dime Bancorp, Inc. 1,503,125
34,000 GA Financial, Inc. 692,750
15,000 Mercantile Bankshares Corp. 542,813
33,000 *PFF Bancorp, Inc. 680,625
21,100 PS Financial, Inc. 296,719
53,712 Patriot Bank Corp. 980,244
16,500 Rocky Ford Financial Corp. 238,219
100,000 Staten Island Bancorp 2,050,000
28,600 Statewide Financial Corp. 657,800
54,750 *Sun Bancorp, Inc. 1,697,250
2,500 Wells Fargo & Company 828,125
21,989,395
Business Services (2.63%)
124,500 *Consolidation Capital Corp. 3,128,062
64,400 Standard Register Company 2,185,575
5,313,637
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
COMMON STOCKS (CON'T)
Shares Value
Construction (2.72%)
68,000 *Emcor Group, Inc. $ 1,462,000
26,800 *Shaw Group Inc. 668,325
157,000 *Walter Industries 3,355,875
5,486,200
Consumer Products/Services (5.22%)
179,066 *Bolle Inc. 1,163,929
310,800 *Eagle Food Centers, Inc. 1,165,500
36,600 First Brands Corporation 912,713
19,900 Genesee Corporation Class B 796,000
460,000 *Host Marriott Services 6,497,500
10,535,642
Electric Power (.19%)
25,150 *NRG Generating, Inc. 389,825
389,825
Financial Services (9.47%)
225,000 Criimi Mae Inc. 3,473,437
68,500 *ITLA Capital Corp. 1,455,625
251,300 Imperial Credit Commercial Mortgage 3,769,500
332,400 *Long Beach Financial Corp. 4,238,100
248,200 Ocwen Asset Investment Corp. 4,234,913
70,000 *Ocwen Financial, Inc. 1,942,500
19,114,075
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
COMMON STOCKS (CON'T)
Shares Value
Healthcare Products/Services (.47%)
69,700 *Mediq, Inc. $ 949,662
949,662
Instrumentation (2.77%)
347,500 *!Barringer Technologies 4,235,156
116,600 *OSI Systems, Inc. 1,355,475
5,590,631
Insurance (4.17%)
75,000 PartnerRe Holdings, Ltd. 3,684,375
102,416 Reliastar Financial Corp. 4,730,339
8,414,714
Manufacturing (7.46%)
191,247 *Figgie International 2,390,587
69,600 *Figgie International Class A 965,700
278,300 *Griffon Corporation 4,418,012
55,200 *Middleby Corp. 393,300
171,000 Rohn Industries, Inc. 953,855
165,000 U.S. Industries, Inc. 4,960,313
35,000 Woodward Governor Company 975,625
15,057,392
Media (1.72%)
100,000 *U.S. West Media Group 3,475,000
3,475,000
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
COMMON STOCKS (CON'T)
Shares Value
Natural Resources (4.30%)
32,500 Mitchell Energy & Development Corp. Cl. A $ 863,281
47,000 *Norex Industries, Inc. 857,750
98,730 Penn Virginia Corp. 2,875,511
92,500 Tidewater Inc. 4,052,656
3,900 United States Lime & Minerals 32,297
8,681,495
Optical Products (2.13%)
505,844 *Lumen Technologies 4,299,674
4,299,674
Real Estate (4.36%)
171,400 Mark Centers Trust 1,531,888
286,100 Prime Retail, Inc. 4,273,619
175,945 The Town and Country Trust 3,002,062
8,807,569
Companies in Liquidation (2.76%)
282,196 *!Atlantic Realty Trust 3,245,254
583,800 *!EQK Realty Investors 1 693,263
581,450 *!Hi Shear Industries, Inc. 1,635,328
5,573,845
Total Common Stocks (Cost $86,808,198) 124,916,256
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
PREFERRED STOCKS (3.05%)
Shares/
Principal
Amount Value
Convertible Pfd. Stock (1.40%)
117,000 Prime Retail, Inc., 8.50% Pfd. B $ 2,837,250
Total Convertible Pfd. Stock 2,837,250
Non-Convertible Pfd. Stocks (1.65%)
1,000 BankUnited Capital Trust, 10.25%, Series A 1,077,500
94,500 *River Bank America $3.75, Series A 2,244,375
Total Non-Convertible Pfd. Stocks 3,321,875
Total Pfd. Stocks (Cost $5,605,246) 6,159,125
BONDS (19.22%)
Convertible Bonds (10.43%)
$ 1,500,000 Alexander Haagen Properties, Inc.
7.50%, 1/15/01 1,517,812
2,000,000 Bell Sports Corp., 4.25%, 11/15/00 1,695,000
9,940,000 Corporate Express, Inc., 4.50%, 7/1/00 8,946,000
2,000,000 Emcor Group, 5.75%, 4/1/05 2,017,500
1,176,000 Kelley Oil & Gas Partners, Ltd.,
8.50%, 4/1/00 1,180,410
946,000 Kelley Oil & Gas Partners, Ltd.,
7.875%, 12/15/99 1,420,025
500,000 Liberty Properties Limited Partnership,
8.00%, 7/1/01 672,500
3,900,000 The Learning Company, 5.50%, 11/1/00 3,609,938
Total Convertible Bonds 21,059,185
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
BONDS (CON'T)
Principal
Amount Value
Non-Convertible Bonds (8.66%)
$ 2,445,000 Bay View Capital Corp., 9.125%, 8/15/07 $ 2,555,025
1,500,000 B.F. Saul Real Estate Investment Trust,
11.625%, 4/1/02 1,590,694
7,050,000 CLN Holdings, First Priority, 0.00%, 5/15/01 5,591,531
1,000,000 Figgie International, 9.875%, 10/1/99 1,040,313
2,701,000 Homeland Stores, 10.00%, 8/1/03 2,518,683
1,000,000 +Life Savings Bank, 13.50%, 3/15/04 1,001,250
400,000 Ocwen Financial, 11.875%, 10/1/03 461,750
1,670,000 U.S. Shoe, 8.625%, 10/1/02 1,695,050
1,000,000 U.S. Treasury, 7.125%, 9/30/99 1,021,875
Total Non-Convertible Bonds 17,476,171
Bonds in Reorganization (.13%)
2,900,000 #Lomas Mortgage USA, Class 3 Claim 251,720
Total Bonds in Reorganization 251,720
Total Bonds (Cost $37,564,495) 38,787,076
SHORT-TERM INVESTMENTS (14.73%)
Commercial Paper (12.88%)
8,000,000 American Express Credit Corp.,
5.549%, 4/15/98 8,000,000
9,000,000 General Electric Credit Corp.,
5.557%, 4/8/98 9,000,000
9,000,000 Household Finance Corp.,
5.525%, 4/1/98 9,000,000
Total Commercial Paper 26,000,000
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1998
SHORT-TERM INVESTMENTS (CON'T)
Value
Other Short-Term Investments (1.85%)
Temporary Investment Fund, Inc. $ 3,733,757
Total Other Short-Term Investments 3,733,757
Total Short-Term Investments
(Cost $29,733,757) 29,733,757
Total Investments in Securities (98.88%)
(Cost $159,711,696) 199,596,214
Other Assets Less Liabilities (1.12%) 2,259,553
Total Net Assets (100%) $ 201,855,767
*Non-income producing securities
+144A securities, representing .50% of net assets
#Non-income producing, Board-valued illiquid security, representing
.13% 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*
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7/83 $10.000.00
12/83 11,223.00
12/84 12,691.50
12/85 15,238.00
12/86 17,127.10
12/87 19,303.70
12/88 22,389.30
12/89 24,761.70
12/90 23,149.94
12/91 27,626.00
12/92 32,190.40
12/93 36,905.90
12/94 37,951.70
12/95 45,081.70
12/96 55,291.30
12/97 68,532.40
3/98 71,644.40
*Figures include changes in principal value, reinvested dividends, and capital
gain 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 total returns for the one, five and ten year periods ended March
31, 1998 were 25.64%, 15.53% and 13.39%. 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 Office
Michael T. Godack
Sr. Vice President and Secretary
Michael J. Fusting
Vice President, Treasurer and Chief Financial Officer
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 19890
(800) 576-7498
CUSTODIAN
PNC Bank
Airport Business Center
200 Stevens Drive, Suite 440
Lester, PA 19113
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
250 W. Pratt Street
Baltimore, MD 21201
LEGAL COUNSEL
DeMartino Finkelstein Rosen & Virga
1818 N Street, N.W., Suite 400
Washington, DC 20036-2492
