GREENSPRING FUND,
INCORPORATED
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FIRST QUARTER REPORT
MARCH 31, 1999
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 1999
Dear Shareholders:
The stock market's performance during the first quarter of 1999 was very
similar to its performance during the last several months of 1998. Strength
in the large, well-recognized growth companies overshadowed the performance
of just about every other sector, with the exception of the Internet stocks,
whose performance continued to elude any rational analysis. During the
quarter, the market's narrowness became even more exaggerated as more and
more investors flooded into the handful of stocks that were "working."
This flood continued with little regard for these stocks' valuations relative
to underlying fundamentals. For most of the quarter, "value" and small-cap
investors continued to underperform on a relative basis. Greenspring Fund
was no exception; the Fund's performance for the quarter was a negative 5.71%.
Beginning in the middle of April, however, positive momentum has swung toward
value stocks, helping the prices of value-oriented mutual funds, including
the Greenspring Fund.
This period of relative underperformance for both value and small-cap investors
during the last several years has been difficult to explain and very painful
to endure. Investment philosophies that had seemingly stood the test of time
as low-risk and conservative started to be labeled as risky and speculative.
The perception of fabled value organizations such as Michael Price's Mutual
Series funds, the Windsor Fund, and Marty Whitman's Third Avenue funds went
from one of investment legends to pariahs in the "new era of investing."
With this euphoria in the "new era of investing", the valuation gaps between
large and small-cap stocks, as well as value and growth stocks, have grown to
historically wide levels. This phenomenon is depicted in the accompanying
charts. These relative valuation gaps had been at very high levels for months,
but were stretched even further during the first quarter of 1999.
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Growth vs. Value
Cycles of Performance: Returns for Rolling Twelve Month Periods
December 1976 - March 1999
Chart
Period Difference
12/31/76 -21.09
03/31/77 -21.04
06/30/77 -20.92
09/30/77 -13.24
12/31/77 -9.25
03/31/78 -7.68
06/30/78 1.87
09/30/78 -3.49
12/31/78 0.62
03/31/79 2.29
06/30/79 -7.73
09/30/79 -6.84
12/31/79 -5.44
03/31/80 0.79
06/30/80 1.73
09/30/80 9.67
12/31/80 15.81
03/31/81 8.38
06/30/81 2.30
09/30/81 -4.45
12/31/81 -9.83
03/31/82 -9.20
06/30/82 -2.05
09/30/82 -0.03
12/31/82 0.99
03/31/83 4.97
06/30/83 3.90
09/30/83 -7.00
12/31/83 -12.65
03/31/84 -16.07
06/30/84 -13.26
09/30/84 -11.41
12/31/84 -8.19
03/31/85 -1.03
06/30/85 -4.79
09/30/85 -2.96
12/31/85 3.63
03/31/86 2.10
06/30/86 7.58
09/30/86 -4.35
12/31/86 -7.17
03/31/87 -0.76
06/30/87 -5.04
09/30/87 11.33
12/31/87 2.82
03/31/88 -7.29
06/30/88 -7.88
09/30/88 -9.04
12/31/88 -9.72
03/31/89 -4.02
06/30/89 -2.37
09/30/89 4.37
12/31/89 10.27
03/31/90 10.24
06/30/90 17.44
09/30/90 8.21
12/31/90 7.05
03/31/91 12.69
06/30/91 3.10
09/30/91 8.45
12/31/91 15.81
03/31/92 3.29
06/30/92 -0.47
09/30/92 0.47
12/31/92 -5.46
03/31/93 -9.96
06/30/93 -10.20
09/30/93 -18.95
12/31/93 -16.92
03/31/94 -7.23
06/30/94 -3.36
09/30/94 6.36
12/31/94 3.77
03/30/95 5.74
06/30/95 9.42
09/30/95 4.00
12/31/95 1.14
03/31/96 -1.72
06/30/96 2.46
09/30/96 3.41
12/31/96 1.97
03/31/97 6.38
06/30/97 7.42
09/30/97 2.25
12/31/97 6.54
03/31/98 10.76
06/30/98 9.77
09/30/98 18.36
12/31/98 27.49
03/31/99 24.96
Source: S&P Barra Growth, S&P Barra Value, Analysis by T. Rowe Price
Associates, Inc.
Large-Cap vs. Small-Cap
Cycle of Performance: Returns for Rolling Twelve Month Periods
December 1979 - December 1998
Chart
Period Difference
12/31/79 -24.65
03/31/80 -0.63
06/30/80 -3.07
09/30/80 -11.58
12/31/80 -6.16
03/31/81 -32.27
06/30/81 -28.05
09/30/81 -2.60
12/31/81 -6.94
03/31/82 1.63
06/30/82 7.38
09/30/82 1.14
12/31/82 -3.54
03/31/83 -17.82
06/30/83 -36.49
09/30/83 -25.67
12/31/83 -6.62
03/31/84 6.23
06/30/84 12.69
09/30/84 13.04
12/31/84 13.57
03/31/85 5.71
06/30/85 10.36
09/30/85 5.23
12/31/85 1.11
03/31/86 6.53
06/30/86 2.85
09/30/86 9.68
12/31/86 12.79
03/31/87 10.92
06/30/87 16.10
09/30/87 13.96
12/31/87 14.00
03/31/88 4.45
06/30/88 -0.71
09/30/88 -1.54
12/31/88 -8.08
03/31/89 5.11
06/30/89 7.79
09/30/89 11.36
12/31/89 15.25
03/31/90 13.60
06/30/90 13.35
09/30/90 17.85
12/31/90 16.34
03/31/91 7.59
06/30/91 6.16
09/30/91 -13.82
12/31/91 -15.50
03/31/92 -9.97
06/30/92 -1.07
09/30/92 2.07
12/31/92 -10.74
03/31/93 0.36
06/30/93 -12.38
09/30/93 -20.16
12/31/93 -8.92
03/31/94 -9.56
06/30/94 -3.06
09/30/94 1.01
12/31/94 3.13
03/31/95 10.08
06/30/95 5.96
09/30/95 6.31
12/31/95 8.99
03/31/96 3.00
06/30/96 2.16
09/30/96 7.20
12/31/96 6.58
03/31/97 14.67
06/30/97 18.33
09/30/97 7.30
12/31/97 11.00
03/31/98 6.09
06/30/98 13.71
09/30/98 28.07
12/31/98 31.13
Source: S&P 500 Index, Russell 2000, Analysis by T. Rowe Price Associates, Inc.
Many people ask, "when will these valuations revert to more historical levels?"
It is hard to point to specific catalysts that would trigger a return to
normalcy and there is no mathematical certainty or law of nature that ensures
these extreme valuations will revert to the mean. However, we are strong
believers that these valuation gaps will narrow. History has shown that "new
eras of investing" have always been met with the same fate; we think this time
will be no different. We don't know what factors will redirect the pendulum
back in the other direction, but once it starts moving, it has a long way to
swing!
In recent weeks, several factors point towards a possible pendulum swing that
has positive ramifications for value investing. Between April 6th and April
20th, the S&P/Barra Growth Index fell 7.3%, while the S&P/Barra Value Index
rose 4.2%. Another factor supporting the resurgence of small-cap and value
investing comes from the Sage of Omaha, Warren Buffett, who many consider to
be the greatest investor of our time. In the period of a week, Mr. Buffett
made two 13-D filings with the SEC indicating that he had purchased more than
5% of two different real estate investment trusts (REITs), both of which
would be classified as small-cap and value. These purchases are important
because REITs are a favorite sector of many value investors and the stock
prices have been beaten down during the last year. Mr. Buffet's announcements
have helped to improve sentiment toward this long-lagging area. More
specifically to the Greenspring Fund, Mr. Buffet's second filing was on
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Town and Country Trust, a long-term holding of the Fund.
During this time of difficulty, we have been repositioning the Greenspring
Fund to take advantage of the many value opportunities this narrow market
has created. Now, more than any time during the last twelve months, we
are finding terrific companies at values which do not compromise or stretch
our value investing philosophy. We have increasingly emphasized companies
in the portfolio that can create value for their shareholders in all market
environments. In doing so, we have de-emphasized those companies that
cannot control their own destiny and are much more dependent upon the Wall
Street community for their success. Typically, the companies that can
capitalize on this tough market environment have strong balance sheets,
generate substantial cash flow, and have solid or market-leading industry
positions. Many of these companies have significant stock repurchase programs
in place and/or are in the process of acquiring other businesses. Although
it is hard to realize it now, in the long run, many of these companies will
have ultimately benefited from investors ignoring their prospects during this
very narrow stock market. Once the market broadens out and many of these
"cheap" companies come back into favor, their stock prices should trade even
higher than they would have otherwise, due to the value created by
management while these stocks were ignored by investors. For example, if a
company that is expected to earn $3.00 per share during the year 2000 is
able to repurchase 10% of its outstanding shares at depressed prices during
this year, it may instead earn $3.25 per share. If the company sells for
13 times earnings during 2000, its stock price may move to $42.25 instead of
$39.00 per share. Similarly, if a company is able to purchase another
company at a very attractive price due to the depressed market, thus adding
to its earning power, its stock price may, in the future, move to a higher
level than it would have otherwise.
Another benefit of this value and small-cap stock drubbing is that value
investors, such as the Greenspring Fund, are able to invest in many companies
and industry sectors that have excellent growth prospects yet historically
have sold at valuations much higher than their current levels. As a result,
investment opportunities that have heretofore been "off-limits" to value
investors are now selling for bargain-type valuations. More specifically,
the Greenspring Fund has been able to purchase shares in information
technology ("IT") services and healthcare services at prices significantly
below historical valuations.
During the first quarter, the largest purchase for the Greenspring Fund was
the securities of Metamor Worldwide - both its common stock and convertible
bonds. Metamor Worldwide is an IT services and staffing company that was
founded in 1993. Formerly known as COREStaff, the Company changed its name
to Metamor Worldwide when it sold the COREStaff commercial staffing business
in 1998. As recently as January 1999, its stock traded at $28 per share.
However, disappointments by other IT services and staffing companies, as well
as general industry uncertainty about the impact of Y2K concerns on IT
spending budgets, caused almost all of the IT services stocks to drop
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significantly in price. These price declines were rather indiscriminate and did
not differentiate between those companies with product lines that may be
negatively affected by Y2K and those, like Metamor, that operate in niches
that are relatively unaffected by these issues. The Company should earn at
least $1.40 per share during 1999, and grow at a rate of more than 25%
during the next several years; yet the stock price at the end of the quarter
was $14 per share (a P/E of 10 times for a company growing 25% a year!). The
Company has a highly respected management team, a strong balance sheet (as
indicated by the recently announced $32 million security repurchase program),
and a leading position in a very rapidly growing industry. We also
purchased the convertible bonds of Metamor Worldwide. The conversion
premium of more than 90% is large, but any upward movement in the common
stock will help the price of the bond. In addition, at the end of the
quarter, the bond had a yield to maturity of almost 12%, which is very
attractive in its own right, even if the common stock never moves up in price.
Another recent purchase by the Greenspring Fund was the common stock of
HEALTHSOUTH Corporation. This Company is the nation's largest provider of
outpatient surgery and rehabilitative healthcare services. HEALTHSOUTH
provides high-quality healthcare services at significantly lower costs than
traditional inpatient hospitals. In general, the stock prices of healthcare
providers have been depressed, as companies had to deal with new government
regulations aimed at reducing the costs of health care. In addition, several
government investigations of Medicare fraud in hospitals have chased investors
from the sector. In similar fashion to the IT services sector, valuations of
the entire sector traded down significantly and provided an interesting
opportunity for HEALTHSOUTH. The Company is a market leader and provides
its services at very low costs relative to the industry. This low cost
strategy matches directly with what the government is attempting to accomplish
with its new regulations. Despite this strong position, HEALTHSOUTH's stock
declined precipitously from $18 per share in early February to under $10
per share recently. At this price level, the stock trades at less than 10
times 1999 estimated earnings. This is for a Company that is expected to
grow earnings during the next several years at more than 15% annually. In
addition, the Company has strong financial underpinnings, a fact that was
recently underscored by the announcement of a one billion-dollar stock
repurchase plan to be executed over the next three years.
The Seagram Company is another strong value stock that the Greenspring Fund
purchased during the first quarter of 1999. The Company formerly derived
most of its profits from the wine and spirits business, along with a
substantial stake in DuPont. Recently, after divesting most of its DuPont
shares, Seagram transformed itself into a company that derives most of its
value from the entertainment industry. Today, Seagram controls such valuable
entertainment assets as an 80% equity stake in Universal Studios; Polygram,
the world's largest recorded music company; and a 50% interest in
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USA Networks (the parent company of USA Networks, the Home Shopping Network,
Sci-Fi Channel, 20 UHF channels and Ticketmaster). Despite this impressive
array of properties, Seagram stock sold at a significant discount to its
entertainment peers. We were able to purchase our shares of Seagram at very
attractive prices and although our Seagram holding has already appreciated
significantly in price, we feel that there is plenty more upside in the stock.
We feel a strong sense of optimism about the prospects for Greenspring Fund's
portfolio. Many of the holdings in the portfolio are actively pursuing
strategies to better position themselves in their respective industries.
These strategies should develop into value for the shareholders irrespective
of what the stock market environment is like currently. Will the more
favorable sentiment toward value investing continue? Let's hope so! It is a
lot easier to make money for shareholders with the wind at our backs
than blowing into our faces as the last twelve months has shown us all.
Regardless, we are very excited about the prospects for many of the securities
in the Greenspring Fund's portfolio and continue to look for additional
opportunities that meet our investment philosophy and objectives.
Sincerely,
/s/Charles vK. Carlson
Charles vK. Carlson
President
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
COMMON STOCKS (53.68%)
Shares Value
Banks - Regional (3.77%)
10,000 Mercantile Bankshares Corp. $ 365,313
28,556 SunTrust Banks, Inc. 1,777,611
24,816 Union Planters Corp. 1,090,353
3,233,277
Business and Public Services (2.89%)
10,000 *Building One Services 171,875
64,400 Standard Register Company 1,911,875
4,000 *VWR Scientific Products Corp. 90,000
20,500 *Waste Industries, Inc. 307,500
2,481,250
Employment Services (1.11%)
20,000 *Alternative Resources Corp. 127,500
46,000 *Metamor Worldwide, Inc. 644,000
22,700 *NovaCare Employee Services 177,344
948,844
Energy (2.21%)
5,800 Anadarko Petroleum Corp. 218,950
8,400 Apache Corp. 218,925
5,400 Burlington Resources, Inc. 215,662
4,600 Mitchell Energy Cl. A 57,212
9,700 Mitchell Energy Cl. B 121,250
47,080 Penn Virginia Corp. 826,843
20,000 Union Pacific Resources Group, Inc. 237,500
1,896,342
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
COMMON STOCKS (CON'T)
Shares Value
Financial Services (9.56%)
223,200 AMRESCO Capital Trust $ 2,218,050
150,000 *Chastain Capital Corp. 806,250
345,375 Imperial Credit Commercial Mortgage 3,324,234
93,000 *Long Beach Financial Corp. 895,125
82,225 Resource Asset Investment Trust 966,144
8,209,803
Food Services (2.93%)
373,275 *Host Marriott Services 2,519,606
2,519,606
Healthcare (3.68%)
88,550 *HCR Manor Care 2,020,047
109,500 *Healthsouth Corp. 1,136,062
3,156,109
Instrumentation (1.96%)
157,700 *Barringer Technologies 1,044,762
122,407 *OSI Systems, Inc. 634,986
1,679,748
Insurance (4.82%)
55,000 PartnerRe Holdings, Ltd. 2,227,500
44,900 Reliastar Financial Corp. 1,913,863
4,141,363
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
COMMON STOCKS (CON'T)
Shares Value
Leisure and Entertainment (1.57%)
27,000 Seagram Co. LTD $ 1,350,000
1,350,000
Manufacturing (.79%)
27,275 Woodward Governor Company 681,875
681,875
Multi-Industry (5.50%)
173,350 *Griffon Corporation 1,191,781
126,925 U.S. Industries, Inc. 2,086,330
128,400 *Walter Industries 1,444,500
4,722,611
Real Estate (2.76%)
157,545 The Town and Country Trust 2,373,022
2,373,022
Retail - Specialty (2.17%)
40,000 *Payless ShoeSource 1,860,000
1,860,000
Savings and Loans (6.85%)
44,200 Astoria Financial Corp. 2,210,000
15,000 BostonFed Bancorp, Inc. 270,000
45,000 Dime Bancorp, Inc. 1,043,438
39,500 GA Financial, Inc. 582,625
30,000 *ITLA Capital Corp. 435,000
33,000 *PFF Bancorp, Inc. 577,500
44,550 Staten Island Bancorp 765,703
5,884,266
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
COMMON STOCKS (CON'T)
Shares/
Principal
Amount Value
Utilities - Electric and Gas (1.11%)
37,400 Baltimore Gas and Electric Company $ 949,025
949,025
Total Common Stocks (Cost $45,868,357) 46,087,141
PREFERRED STOCK (6.63%)
355,565 Prime Retail, Inc., 8.50% Pfd. B 5,689,040
Total Pfd. Stock (Cost $6,782,973) 5,689,040
BONDS (32.91%)
Convertible Bonds (20.93%)
$1,268,000 Centertrust Retail Properties,
7.50%, 1/15/01 1,181,222
5,759,000 Corporate Express, Inc., 4.50%, 7/1/00 5,183,100
2,500,000 Emcor Group, 5.75%, 4/1/05 2,166,668
1,176,000 Kelley Oil & Gas Partners, Ltd.,
8.50%, 4/1/00 399,840
1,590,000 Kelley Oil & Gas Partners, Ltd.,
7.875%, 12/15/99 544,575
2,200,000 Metamor Worldwide, 2.94%, 8/15/04 1,442,375
4,547,000 NovaCare, 5.50%, 1/15/00 3,273,840
3,900,000 The Learning Company, 5.50%, 11/1/00 3,773,250
17,964,870
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
Principal
Amount Value
Non-Convertible Bonds (11.98%)
$2,445,000 Bay View Capital Corp., 9.125%, 8/15/07 $ 2,371,650
2,177,000 Homeland Stores, 10.00%, 8/1/03 1,877,663
1,917,000 Host Marriott Travel Plaza,
9.50%, 5/15/05 2,003,265
463,000 Scott Technologies, 9.875%, 10/1/99 469,931
2,400,000 Sprint Spectrum, 11.00%, 8/15/06 2,766,000
800,000 U.S. Treasury, 6.375%, 5/15/99 801,500
10,290,009
Total Bonds (Cost $30,661,978) 28,254,879
COMPANIES IN LIQUIDATION (1.78%)
581,450 *!Hi Shear Industries, Inc. 1,489,966
2,900,000 $*Lomas Mortgage USA, Class 3 Claim 37,120
Total Companies in Liquidation
(Cost $1,308,195) 1,527,086
SHORT-TERM INVESTMENTS (4.73%)
Commercial Paper (2.33%)
2,000,000 General Electric Credit Corp.,
4.85%, 4/6/99 2,000,000
2,000,000
Other Short-Term Investments (2.40%)
2,062,079 Temporary Investment Fund, Inc. 2,062,079
2,062,079
Total Short-Term Investments
(Cost $4,062,079) 4,062,079
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GREENSPRING FUND, INCORPORATED
PORTFOLIO OF INVESTMENTS
MARCH 31, 1999
Total Investments in Securities (99.73%)
(Cost $88,683,582) $ 85,620,225
Other Assets Less Liabilities (.27%) 240,200
Total Net Assets (100%) $ 85,860,425
*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
03/31/99 54,295
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 total returns for the one, five and ten year periods ended
March 31, 1999 were -24.22%, 7.57% and 8.87%, 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 period 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
TRANSFER AGENT
PFPC Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 576-7498
ADMINISTRATOR
Corbyn Investment Management, Inc.
2330 West Joppa Road, Suite 108
Lutherville, MD 21093
CUSTODIAN
PFPC Trust Company
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
