GREENSPRING FUND,
INCORPORATED
<LOGO>
THIRD QUARTER REPORT
SEPTEMBER 30, 1999
This report is authorized for distribution
only to shareholders who have received a
copy of the official Prospectus of the
Greenspring Fund, Incorporated.
October 1999
Dear Shareholders:
As this letter is being written, the stock market is in the throes of a
correction. Major market averages, such as the Dow Jones Industrial Average
and the Standard & Poor's 500, have declined 10% or more from their recent
peaks. On both the New York Stock Exchange and the NASDAQ market, the
majority of stocks now show negative performance for the year. The correction
has battered and bruised many investors, including large cap and small cap,
value and growth-oriented investors. Well-known and widely owned stocks such as
Coca-Cola, AT&T, Gillette, Hershey Foods, and Hewlett-Packard have
declined 25% or more from their highs. Many other excellent companies have
also come down in price significantly.
During this recent decline, the Greenspring Fund has held up better than most
of the averages, as it typically has during past market corrections in our
16-year history. This strong relative performance, coming on the heels of
strong absolute performance with substantial gains during the previous
quarter, is further indication that the Fund is back on track from the
disappointing period experienced during the second half of 1998 and early 1999.
A major reason the Greenspring Fund has fared better than most during this
difficult period for investors is the success of many of our fixed-income
investments (bonds). This success is especially noteworthy because 1999 has
been a very difficult year for most fixed-income investors. For example, the
30-year U.S. Government bond is down more than 10% so far this year on a total
return basis. Special situation bonds have always been an important part of
Greenspring Fund's investment success. The ability of these bonds to provide
stability to the Fund during uncertain times is one of their strengths.
An attractive characteristic about "undervalued" bonds is that, even if they
stay unappreciated and unnoticed by the investment community, at some point
they will mature or be redeemed by the issuing company, and the bondholder
will have achieved his expected gain. This is in contrast to purchasing an
undervalued stock which, even if it has excellent fundamentals, may stay
undervalued for a long time and not make money for an investor if too few
other investors share tht same sense of value.
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In particular, convertible bonds have been very strong performers for the
Greenspring Fund so far this year. Convertible bonds ("converts") are bonds
that the holder, at his option, may convert into common stock of the issuing
company, at a fixed ratio. The converts we have purchased share many of the
following characteristics: (1) Due to a decline in the stock price of the
issuing company, the value of the convertible bond that is derived from the
ability to convert the bond into common stock is no longer the main reason
for owning the bond. This disconnect with the underlying common stock is
sometimes referred to as the convert being "busted." (2) The yield-to-
maturity on the bond is higher than that available on other bonds with
similar credit ratings, and is often even higher than other bonds issued by
the same company. (3) The convertible bond has a relatively short maturity,
usually within the next 3 - 4 years, meaning that the investment will not
subject the portfolio to significant interest rate-driven volatility.
The market's inefficiency with regard to converts of this type is due to
several market dynamics. If a company disappoints the investment community
and its common stock decreases in value, the convertible bond will also
decline. With many of the converts we have purchased, the issuing company
had been a fast growing company that has recently suffered growing pains.
The resulting decline in the company's share price is often a sharp and
dramatic one. Holders of the convertible bonds at that point can be classified
into two groups: (1) investors who had purchased the converts because
they were bullish on a company's prospects and decided to purchase the
convert as a way of receiving a higher current income than would be received
by buying the common stock (although sacrificing some of the upside potential
of the common stock), and (2) convertible arbitrageurs whose investment
strategy is to buy the convertible bonds, while simultaneously shorting
common stock against their position, thus attempting to "lock-in" a spread--
a strategy that works better if the common stock declines. Once the
common stock declines, both classes of holders often become sellers of their
converts, but for different reasons. The traditional buyer of the converts
may have grown disenchanted with the company's prospects or, even if he
still likes the prospects, realizes that the convertible bond no longer has
significant value if converted into the fixed ratio of common shares
(which does not change). The convertible arbitrageur, often sensing that
the next move in the common stock may be up, will reverse his position, buying
back the common stock that he has sold short, while at the same time selling
the convertible bonds. Consequently, in these situations there is quite a
bit of selling pressure on the converts, which frequently pushes the price
down to very attractive levels.
In the investment world, inefficiency is another word for opportunity, and
recently there have been plenty of opportunities in this sector. A strong
attraction of these holdings is that there are several ways to make money in
them. Usually, the worst case is that the holder will receive an attractive
total return on the bonds if held to maturity. As mentioned earlier, this
return is often significantly better than other bonds of companies with
similar credit profiles. Alternatively, the underlying common stock
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significantly, thus making the convertible bond's conversion feature
worth enough to lift the price of the convert along with the common stock.
Furthermore, many convertible bonds have "change-of-control puts" -- features
that allow holders of the converts to force the company to repurchase their
bonds, usually at par, in the event of a takeover of the issuing company.
Such an event can result in a windfall to bondholders, such as in the case
of Data Processing Resources' convertible bonds, a holding in the Greenspring
Fund earlier in the year, when the bonds went from the low $70's to near
par ($100) after it was announced that the company was to be sold to
Compuware.
During the last several weeks, we have raised the cash levels in the Fund by
reducing the common stock holdings. With the recent rise in interest rates
and the jitters caused by memories of the difficult Octobers of the past, as
well as some nervousness concerning fund flows related to investors' actions
prior to "Y2K", we thought it prudent to build our cash reserves so that we
may be in a better position to take advantage of future buying opportunities.
Two investment themes that we discussed in a prior quarterly letter were
information technology companies and natural gas transmission companies. As
far as information technology services are concerned, we remain very
optimistic about the long-range prospects for these companies. We have
increasingly focused our research efforts on vertically integrated companies
that specialize in individual industry sectors. The uncertainty regarding
the timing of the rebound in the general IT services companies has
increased and, consequently, we have temporarily exited some of them, but
with the intention of returning when their near-term prospects appear more
clear. However, we continue to comfortably hold the convertible bonds of
Metamor Worldwide and Personnel Group of America, both of which have
excellent yields and strong balance sheets.
The natural gas distribution companies are also still of great interest
to us. After being strong performers during the spring and summer months,
their stock prices have slipped recently. The fundamentals remain solid in
this area and we anticipate that we will continue to build our exposure to
these stocks. Additionally, the stability of their utility-like operations
and strong dividends have helped these stocks perform very well during past
periods of stock market difficulties. The industry consolidation that was
prevalent earlier in the year has slowed, but we expect mergers to pick
up again during the coming months. In fact, subsequent to the end of the
quarter, MCN Energy, a natural gas distributor in Michigan whose shares we
have been purchasing recently, announced that it will be acquired by DTE
Energy at a premium of more than 60% over its previous day's close.
The investment performances of the NASDAQ and other major market averages
have been held up by the astounding returns of a handful of stocks, many of
which are Internet-related companies that continue to defy the laws of
gravity. We caution all of our shareholders against getting caught up in
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what we believe is a very dangerous speculative bubble. Such investments,
though surprisingly successful in some cases, are more akin to winning at
the slot machines because the house is temporarily giving away free tokens.
Even Steve Ballmer, the President of Microsoft, recently stated
that he believed that technology stocks were absurdly overvalued. In our
opinion, it is just a matter of time before many of these stocks come
crashing down to more realistic levels.
We feel that the Greenspring Fund is well positioned for the next several
months. We continue to hold many companies whose stocks have declined in
this correction, although their finances and business prospects are extremely
strong. Our research staff is also monitoring many other high quality
companies that may become available at attractive prices before this market
correction ends. As we highlighted at the beginning of the letter, many high
quality companies have come down sharply in value, and have stayed down,
unlike in the recent past when they tended to bounce right back. We believe
this could lay the groundwork for buying some quality companies that
usually sell at market premiums at more reasonable prices. With higher cash
levels and a large number of fixed income investments that can be sold to
raise additional cash, we are prepared to take advantage of opportunities as
they arise. In the meantime, our special situation bonds are continuing to
provide stability and attractive total returns to the Greenspring Fund. We
expect to continue to withstand this current market turmoil better than most
and remain poised to take advantage of impending opportunities.
Respectfully,
/s/Charles vK. Carlson
Charles vK. Carlson
President
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
COMMON STOCKS (40.82%)
Shares Value
Banks - Regional (3.09%)
10,000 Bank United Corp. $ 323,750
10,000 Mercantile Bankshares Corp. 309,375
22,076 SunTrust Banks, Inc. 1,451,497
------------
2,084,622
Business and Public Services (2.63%)
41,400 *Barnett Inc. 380,362
12,000 *GP Strategies Corp. 135,000
409,500 *NovaCare Employee Services 998,156
19,600 *Waste Industries, Inc. 260,925
------------
1,774,443
Energy (2.40%)
5,800 Anadarko Petroleum Corp. 177,263
8,400 Apache Corp. 362,775
5,400 Burlington Resources, Inc. 198,450
5,300 Mitchell Energy Class A 129,519
9,700 Mitchell Energy Class B 227,950
9,730 Penn Virginia Corp. 201,897
20,000 Union Pacific Resources Group, Inc. 321,250
------------
1,619,104
Financial Services (5.71%)
124,500 AMRESCO Capital Trust 1,089,375
174,450 Imperial Credit Commercial Mortgage 1,918,950
75,925 Resource Asset Investment Trust 844,666
------------
3,852,991
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
COMMON STOCKS (CON'T)
Shares Value
Gold and Silver Mining (.71%)
10,000 Newmont Mining Corp. $ 258,750
15,000 Placer Dome Inc. 223,125
------------
481,875
Industrial Gases (.05%)
8,500 *Valley National Gases 31,875
------------
31,875
Information Technology Services (2.08%)
38,800 *Modis Professional Services Inc. 514,100
7,500 *Policy Management Systems 237,188
14,000 Shared Medical Systems 654,500
------------
1,405,788
Insurance (6.82%)
55,000 PartnerRe, Ltd. 1,911,250
44,900 Reliastar Financial Corp. 1,492,925
40,700 UnumProvident Corp. 1,198,106
------------
4,602,281
Leisure and Entertainment (1.82%)
27,000 The Seagram Company Ltd. 1,228,500
------------
1,228,500
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
COMMON STOCKS (CON'T)
Shares Value
Manufacturing (1.01%)
27,275 Woodward Governor Company $ 680,170
------------
680,170
Multi-Industry (3.90%)
126,925 U.S. Industries, Inc. 1,999,069
46,750 *Walter Industries 631,125
------------
2,630,194
Natural Gas Transmission/
Distribution (2.85%)
1,800 Chesapeake Utilities 31,050
17,000 Columbia Energy Group 941,375
5,000 CTG Resources 176,875
20,500 MCN Energy Group 352,344
8,800 NUI Corp. 217,800
6,800 Piedmont Natural Gas 206,125
------------
1,925,569
Office Products (1.90%)
36,400 Standard Register Company 855,400
20,000 United Stationers Inc. 426,250
------------
1,281,650
Retail - Specialty (2.13%)
28,500 *Payless ShoeSource 1,439,250
------------
1,439,250
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
COMMON STOCKS (CON'T)
Shares Value
Savings Institutions (2.57%)
15,000 BostonFed Bancorp, Inc. $ 225,000
45,000 Dime Bancorp, Inc. 787,500
12,500 Green Street Financial 185,156
30,000 *ITLA Capital Corp. 442,500
4,500 PFF Bancorp, Inc. 92,812
------------
1,732,968
Utilities - Electric and Gas (1.15%)
11,000 Carolina Power & Light 389,125
13,700 Constellation Energy Group 385,313
------------
774,438
------------
Total Common Stocks (Cost $24,244,453) 27,545,718
============
PREFERRED STOCK (4.82%)
233,229 Prime Retail, Inc., 8.50% Pfd. B 3,250,629
------------
Total Pfd. Stock (Cost $4,215,953) 3,250,629
============
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
BONDS (39.49%)
Principal
Amount Value
Convertible Bonds (25.50%)
$ 500,000 Cellstar Corp., 5.00%, 10/15/02 $ 360,000
1,268,000 Center Trust Inc., 7.50%, 1/15/01 1,211,732
3,845,000 Corporate Express, Inc., 4.50%, 7/1/00 3,784,922
1,050,000 Dura Pharmaceuticals, 3.50%, 7/15/02 815,063
1,000,000 HEALTHSOUTH Corp., 3.25%, 4/1/03 775,625
1,500,000 Kellstrom Industries, 5.50%, 6/15/03 1,057,500
1,440,000 Kellstrom Industries, 5.75%, 10/15/02 1,051,200
2,000,000 Metamor Worldwide, 2.94%, 8/15/04 1,360,834
4,562,000 NovaCare, 5.50%, 1/15/00 4,151,420
500,000 Personnel Group of America,
5.75%, 7/1/04 358,750
900,000 Quintiles Transnational, 4.25%, 5/31/00 870,469
1,590,000 Waste Management, 4.00%, 2/1/02 1,415,100
------------
17,212,615
Non-Convertible Bonds (13.99%)
500,000 American Telecasting, 0.00%, 8/15/05 504,375
2,445,000 Bay View Capital Corp., 9.125%, 8/15/07 2,224,950
955,000 Homeland Stores, 10.00%, 8/1/03 752,063
1,917,000 Host Marriott Travel Plaza,
9.50%, 5/15/05 1,969,717
2,400,000 Sprint Spectrum, 11.00%, 8/15/06 2,682,000
1,380,000 Woolworth Corporation, 7.00%, 6/1/00 1,306,688
------------
9,439,793
------------
Total Bonds (Cost $26,869,100) 26,652,408
============
COMPANIES IN LIQUIDATION (5.37%)
581,450 *!Hi Shear Industries, Inc. 1,499,036
300,700 *Chastain Capital Corp. 2,095,518
2,900,000 $*Lomas Mortgage USA, Class 3 Claim 33,640
------------
Total Companies in Liquidation
(Cost $2,945,197) 3,628,194
============
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1999
SHORT-TERM INVESTMENTS (6.57%)
Principal
Amount Value
Commercial Paper (2.22%)
$1,500,000 General Electric Capital Services,
5.31%, 10/15/99 $ 1,500,000
------------
1,500,000
Other Short-term Investments (4.35%)
2,933,141 Temporary Investment Fund, Inc. 2,933,141
------------
2,933,141
------------
Total Short-Term Investments
(Cost $4,433,141) 4,433,141
============
Total Investments (97.07%)
(Cost $62,707,844) 65,510,090
Other Assets Less Liabilities (2.93%) 1,977,820
------------
Total Net Assets (100%) $ 67,487,910
============
*Non-income producing securities
$Illiquid, Board-valued
!Non-controlled affiliated issuer
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GREENSPRING FUND, INCORPORATED
PERFORMANCE SINCE INCEPTION
Chart
07/01/83 $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
12/31/98 57,585
09/30/99 57,207
Figures include changes in pricipal 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 total returns for the one, five and ten year periods ended
September 30, 1999 were 4.81%, 8.27% and 8.68%, 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
greenspringfund.com
DIRECTORS TRANSFER AGENT
Charles vK. Carlson, Chairman PFPC, Inc.
William E. Carlson 400 Bellevue Parkway
David T. Fu Wilmington, DE 19809
Michael J. Fusting (800) 576-7498
Michael T. Godack
Richard Hynson, Jr. ADMINISTRATOR
Corbyn Investment Management, Inc.
OFFICERS 2330 West Joppa Road, Suite 108
Charles vK. Carlson Lutherville, MD 21093
President and Chief Executive Officer
CUSTODIAN
Michael T. Godack PFPC Trust Company
Sr. Vice President and Chief Airport Business Center
Compliance Officer 200 Stevens Drive, Suite 440
Lester, PA 19113
Michael J. Fusting
Sr. Vice President and INDEPENDENT ACCOUNTANTS
Chief Financial Officer PricewaterhouseCoopers LLP
250 W. Pratt Street
Elizabeth C. Agresta Baltimore, MD 21201-2304
Secretary and Treasurer
INVESTMENT ADVISOR LEGAL COUNSEL
Key Equity Management Corporation Kirkpatrick & Lockhart LLP
2330 West Joppa Road, Suite 108 1800 Massachusetts Avenue, N.W.
Lutherville, MD 21093-7207 Washington, DC 20036-1800
