THE BERWYN FUND, INC.
Shareholders Services
c/o PFPC Inc.
P. O. Box 8987
Wilmington, DE 19899
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
This Statement of Additional Information ("SAI") is not a
Prospectus. It is a document that relates to the Prospectus of The
Berwyn Fund, Inc. (the "Fund") April 30, 1998 and contains additional
information regarding the Fund. This SAI should be read in
conjunction with the Prospectus. A Prospectus may be obtained by
writing to the Fund at the above address.
TABLE OF CONTENTS
Investment Policies and Risk
Factors...............................................................
...................... 2
Investment
Restrictions..........................................................
................................................ 3
Investment Advisory
Arrangements..........................................................
.............................. 4
Expense
Limitation............................................................
.................................................... 5
Directors and
Officers..............................................................
.............................................. 6
Ownership of the
Fund..................................................................
......................................... 7
Portfolio Transactions and Brokerage
Commissions...........................................................
.... 8
Computation of Net Asset
Value.................................................................
........................... 9
Share
Purchases.............................................................
........................................................ 9
Distributor...........................................................
.................................................................. 10
Redemption of
Shares................................................................
............................................ 10
Calculation of Performance
Data..................................................................
.......................... 10
General
Information...........................................................
.................................................... 11
Financial
Statements............................................................
................................................... 12
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INVESTMENT POLICIES AND RISK FACTORS
(See also "Investment Objective, Policies and Risk Factors" in the
Prospectus.)
The Fund is a no-load, non-diversified, open-end management
investment company that seeks long-term (i.e., greater than one year)
capital appreciation by investing in common stocks and fixed income
securities. Current income is a secondary consideration.
Under normal market conditions, the Fund invests at least 80%
of the value of its net assets in common stocks. The Fund invests in
common stocks that The Killen Group, Inc. (the "Adviser") considers
to be selling at undervalued prices. These stocks are ones selling
substantially below their book value or at a low valuation to present
earnings or are stocks of companies, judged by the Adviser, to have
above average growth prospects and to be selling at a small premium
to book value or at modest valuation to their present earnings level.
The investment approach of the Fund may be deemed "contrarian"
in that it may lead the Fund to select stocks not recommended by
other investment advisers or brokerage firms.
While the portfolio of the Fund emphasizes common stocks, the
Fund may also invest up to 20% of the value of its net assets in
fixed income securities. The fixed income securities in which the
Fund invests are corporate bonds and preferred stocks. The Fund
selects fixed income securities that have a potential for capital
appreciation.
There are no restrictions on the Adviser as to the investment
rating a fixed income corporate debt security must have in order to
be purchased. The Fund may purchase fixed income corporate debt
securities in any investment grade rating listed by Standard & Poor's
Ratings Group ("Standard & Poor's") and Moody's Investors Service.
Inc. ("Moody's). (See Appendices A and B for Standard & Poor's and
Moody's definitions of Bond ratings.) This means that the Fund may
invest up to 20% of the value of its net assets in high yield high
risk corporate debt securities that are commonly referred to as "junk
bonds". These are corporate debt securities that are rated lower
than BBB by Standard & Poor's and Baa by Moody's. These securities
have a low rating due to the fact that the issuers of the securities
are not considered as creditworthy as the issuers of investment grade
bonds. There is the risk that the issuer of a lower rated security
may default in the payment of interest and principal. On the whole,
these lower rated securities are considered speculative investments.
As of December 31, 1997, 0.50% of the Fund's net assets were
invested in lower rated corporate debt securities.
The Fund will normally invest in common stocks and fixed
income securities, but it may at times, for temporary defensive
purposes, invest all or a portion of its assets in no load money
market funds, savings accounts and certificates of deposit of
domestic banks with assets in excess of $1,000,000, commercial paper
with the highest investment grade rating (i.e., A-l and
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P-1, as defined in Standard & Poor's and Moody's Commercial Paper
Ratings, respectively), repurchase agreements, and U.S. treasury
bills, treasury notes and treasury bonds, or cash.
Investment by the Fund in a no-load money market fund will
result in the Fund paying a management fee on the money invested in
such fund in addition to the operating expenses of the Fund.
When the Fund invests in securities issued by the U. S.
Government, the Government is not required to provide financial
support to the Fund.
The Fund may invest in real estate investment trusts ("REITs").
These are companies that invest their capital in real estate, long and
short term mortgages and construction loans. These companies normally
do not pay Federal income tax but distribute their income to their
shareholders who become liable for the tax. The Fund invests in REITs
that generate income and have a potential for capital appreciation.
There are risks in investing in REITs. The property owned by a REIT
could decrease in value and the mortgages and loans held by a REIT
could become worthless. The Adviser, however, monitors the investment
environment and the Fund's investments as means of lessening risks.
As of December 31, 1997, none of the Fund's net assets were invested
in REITs.
Repurchase agreements are defined as agreements wherein a
seller of a security agrees with the Fund at the time of sale to
repurchase the security from the Fund at a mutually agreed upon time
and price. The Fund intends to enter into repurchase agreements only
with established banking institutions that deal in treasury bills and
notes. The Fund intends to invest mostly in overnight repurchase
agreements. The Fund will only invest up to 5% of its net assets in
repurchase agreements. In the event of the bankruptcy of the seller
of a repurchase agreement or the failure of a seller to repurchase the
underlying security as agreed upon, the Fund could experience losses
that include: a possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights
thereto; a possible loss of all or part of the income; and the Fund
will incur additional expenses enforcing its rights. As of December
31, 1997, the Fund had 2.0% of its assets invested in repurchase
agreements.
INVESTMENT RESTRICTIONS
In addition to the two restrictions listed in the discussion of
"Investment Objective, Policies and Risk Factors" in the Prospectus,
the Fund will not:
(1) purchase more than 10% of the outstanding voting
securities of a single issuer;
(2) invest more than 25% of the value of its total assets in
any one industry;
(3) lend money, provided that for purposes of this
restriction, the acquisition of publicly distributed corporate
bonds, and investment in U.S. government obligations, short-
term commercial paper, certificates of deposit and repurchase
agreements shall not be deemed to be making of a loan;
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(4) buy or sell real estate, real estate mortgage loans,
commodities, commodity futures contracts, puts, calls and
straddles;
(5) underwrite securities of other issuers, except as the Fund
may be deemed to be an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in connection with the
purchase and sale of portfolio securities in accordance with
its objectives and policies;
(6) make short sales or purchase securities on margin;
(7) borrow money, except that the Fund may borrow up to 5% of
the value of its total assets at the time of such borrowing
from banks for temporary or emergency purposes (the proceeds of
such loans will not be used for investment or to purchase
securities, but will be used to pay expenses);
(8) invest for the purposes of exercising control or
management;
(9) invest in restricted securities (securities that must be
registered under the 1933 Act before they may be offered and
sold to the public);
(10) participate in a joint investment account; and
(11) issue senior securities.
These investment restrictions may not be changed without
approval by vote of a majority of the Fund's outstanding voting
securities. Under the Investment Company Act of 1940, as amended (the
"1940 Act") such approval requires the affirmative vote at a meeting
of shareholders of the lesser of (a) more than 50% of the Fund's
outstanding shares, or (b) at least 67% of shares present or
represented at the meeting, provided that the holders of more than 50%
of the Fund's outstanding shares are present in person or represented
by proxy.
The Fund has also adopted certain investment restrictions that
are not fundamental. These restrictions are that (i) the Fund will
not invest in real estate limited partnerships or in oil, gas or other
mineral leases, and (ii) the Fund's investments in warrants will not
exceed 5% of the Fund's net assets. Restrictions that are not
fundamental may be changed by a vote of the majority of the Board of
Directors. But if any of these non-fundamental restrictions are
changed, the Fund will give shareholders at least 60 days' written
notice.
INVESTMENT ADVISORY ARRANGEMENTS
(See also "Management of the Fund" in the Prospectus)
The Killen Group, Inc. is the investment adviser (the
"Adviser") to the Fund. Robert E. Killen is Chairman, Chief Executive
Officer ("CEO") and sole shareholder of the Adviser.
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Edward A. Killen II is Vice President and Secretary of the Adviser.
Both Robert E. Killen II and Edward A. Killen are Directors of the
Adviser and Robert E. Killen is a Director of the Fund. In addition,
Robert E. Killen is President of the Fund. He is the person primarily
responsible for the day-to-day management of the Fund's portfolio. He
has been managing the portfolio since May 4, 1984.
The Adviser provides the Fund with investment management
services. Under the Contract between the Fund and the Adviser (the
"Contract"), the Adviser provides the Fund with advice and
recommendations with respect to investments, investment policies, the
purchase and sale of securities and the management of the Fund's
resources. The Adviser also provides the Fund with office space and
with personnel to administer the daily operations of the Fund. These
individuals prepare and maintain the accounts, books and records of
the Fund, calculate the net asset value per share daily each day the
New York Stock Exchange is open, prepare and file all the documents
required of the Fund under Federal and state laws and prepare all
shareholder reports. In addition, the Adviser pays all expenses
associated with the promotion of the Fund.
The Contract provides that it will continue in effect from year
to year if continuation is specifically approved annually by a vote of
a majority of the outstanding voting securities of the Fund.
Continuance of the Contract must also be approved annually by the
Board of Directors including a majority of Directors who are not
parties to the Contract or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such
approval. The Fund may terminate the Contract on sixty days written
notice to the Adviser without payment of any penalty, provided such
termination is approved by the Board of Directors or by a majority of
the outstanding voting securities. The Adviser may terminate the
Contract by notifying the Fund in writing at least sixty days before
the date of the annual shareholder meeting that continuation of the
Contract is not desired. The Contract will be automatically and
immediately terminated in the event of its assignment by the Adviser.
As compensation for its investment management services to the
Fund, the Adviser receives monthly compensation at the annual rate of
1% of the average daily net assets of the Fund. The fee is computed
daily by multiplying the net assets for a day by 1% and dividing the
result by 365. At the end of the month, the daily fees are added and
the resulting amount paid to the Adviser.
The Fund paid the Adviser $947,901 in fees in 1997, $976,110 in
1996, and $787,039 in 1995.
EXPENSE LIMITATION
Under the Contract, the Adviser's fee is to be reduced
in any fiscal year by any amount necessary to prevent Fund
expenses and liabilities (excluding taxes, interest, brokerage
commissions and extraordinary expenses, determined by the Fund
or the Adviser, but inclusive of the Adviser's fee) from
exceeding 2% of the average daily net assets of the Fund. In
any month that the Fund's expenses and liabilities exceed 2%,
the
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Adviser's fee will be reduced so that expenses and liabilities
will be 2%. Although the Fund expects to maintain expenses
within 2% of its average daily net assets, the Adviser will not
be responsible for additional expenses exceeding its advisory
fee. During any period when the net assets of the Fund exceed
$100 million, as the net assets did as of December 31, 1997,
the expense limitation is 1.5%. The Fund has not experienced
the expense limitation since 1985. In 1997, the Fund's ratio
of expenses to average net assets was 1.20%.
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and
their principal occupations for the past five years are set
forth below:
Name, Age, Position
and Address Principal Occupation for the Past Five
Years
*Robert E. Killen (57) Director of Westmoreland Coal Co. (a
mining company) since
President & Director July 1996. Director and Shareholder,
Berwyn Financial Services
1199 Lancaster Avenue Corp., a financial services company
(registered as a broker-dealer
Berwyn, Pennsylvania with the Securities and Exchange
Commission ("SEC") since
December, 1993 and a member of the
National Association of
Securities Dealers, Inc. (the "NASD")
since July, 1994) since
October, 1991. President and Director
of Berwyn Income Fund,
Inc. (a registered investment company
managed by the Adviser)
since December 1986. Chairman , CEO
and Sole Shareholder of
the Adviser (an investment advisory
firm) since April 1996.
President, Treasurer, Director and Sole
Shareholder of the Adviser
from September 1982 to March 1996.
Denis P. Conlon (50) Director of Berwyn Income Fund, Inc.,
since June 1992.
Director President and CEO of CRC Industrial (a
worldwide
1282 Farm Road manufacturer) since September 1996. Vice President,
Corporate
Berwyn, Pennsylvania Development, Berwind Corporation
(diversified manufacturing and financial company) from
1990 to September 1996.
*Anthony N. Carrelli (49) Director of Berwyn Income Fund, Inc.
since December 1996.
Director Vice President of the Adviser since
August 1986.
1189 Lancaster Avenue
Berwyn, Pennsylvania
Deborah D. Dorsi (42) Director of Berwyn Income Fund, Inc.,
since April 1998.
Director Retired Technology Industry Executive
since 1994. Director
2801 Stanbridge Street Worldwide Customer Support, Kulicke &
Soffa Industries, Inc.
Norristown, Pennsylvania (Semi-Conductor Equipment Manufacturer)
from 1993-1994.
Corporate Account Manager for Kulicke &
Soffa Industries, Inc.
prior to 1993.
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*Kevin M. Ryan (50) President, Treasurer, Director and
Shareholder of Berwyn
Secretary-Treasurer Financial Services Corp. (registered as
a broker-dealer with the
and Director the SEC since December, 1993 and a
member of the NASD since
1199 Lancaster Avenue July, 1995) since October 1991.
Registered Principal with
Berwyn Pennsylvania Securities America, Inc. (a broker-
dealer) from March 1993 to
August 1994. Secretary and Treasurer
of Berwyn Income Fund,
Inc. since 1986. Director of Berwyn
Income Fund, Inc. from
December 1986 to January 1995. Counsel
to the Adviser since
September 1985.
*Robert E. Killen, Anthony N. Carrelli and Kevin M. Ryan are
"interested persons" of the Fund, as defined in the 1940 Act (the
"Interested Directors"). Robert E. Killen is Chairman, CEO and sole
shareholder of the Adviser. He is also a Director and owner of 1/3 of
the outstanding shares of Berwyn Financial Services Corp., a broker-
dealer. Anthony N. Carrelli is a Vice President of the Adviser.
Kevin M. Ryan is legal counsel to the Adviser and he is an Officer,
Director and the Owner of 1/3 of the outstanding shares of Berwyn
Financial Services Corp. In addition, Robert E. Killen and Kevin M.
Ryan are brothers-in-law. Berwyn Financial Services Corp. serves as
the distributor for the Fund's shares in certain jurisdictions. (See
"Portfolio Transactions and Brokerage Commissions" and "Distributor"
for further information on Berwyn Financial.)
Mr. Conlon and Ms. Dorsi are the Directors of the Fund who are not
"interested persons" of the Fund as defined in the 1940 Act (the
"Independent Directors") and are paid a fee of $400 for each Board or
Committee meeting attended and are reimbursed by the Fund for any
travel expenses. If a Board and Committee meeting are held on the
same date, the Independent Directors receive only one fee. Mr. Conlon
and Ms. Dorsi also serve as Independent Directors of Berwyn Income
Fund, Inc. (another registered investment company managed by the
Adviser). The Fund has not adopted a pension or retirement plan or
any other plan that would afford benefits to its Directors. Ms. Dorsi
was elected to the Board in April 1998 by vote of the Board of
Directors. She replaces William H. Vonier who served on the Board
from June 1992 until April 1998. In 1997, the Fund paid aggregate
compensation of $1600 to Mr. Conlon and Mr. Vonier each and the total
compensation from the Fund Complex was $3200 for Mr. Conlon and $3200
for Mr. Vonier. Officers of the Fund are not paid compensation by the
Fund or the Fund Complex for their work as Officers and no fees are
paid by the Fund or the Fund Complex to Interested Directors for the
performance of their duties. (See "Management of the Fund" in the
Prospectus for a discussion of management responsibilities of the
Board and Officers.)
OWNERSHIP OF THE FUND
As of March 31, 1998, there were 4,387,703 shares of the Fund
outstanding. Charles Schwab & Co., 101 Montgomery Street, San
Francisco, CA was the record owner of 20% of the outstanding shares.
National Financial Services Corp., One World Financial Center, 200
Liberty
Street, New York, NY was the record owner of 8% of the outstanding
shares. The records of the Fund do not indicate that any individual
owned more than 5% of the outstanding shares of the.
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Fund. As of March 31, 1998, the Directors and Officers as a group,
owned beneficially and of record 235,223 shares of the Fund. This
amount constituted 5.4% of the outstanding shares
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Subject to policy established by the Fund's Board of Directors,
the Adviser is responsible for the Fund's portfolio decisions and the
buying and selling of the Fund's portfolio securities. In executing
such transactions, the Adviser seeks to obtain the best net results
for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities and capabilities of
the firm involved. While the Adviser generally seeks reasonably
competitive commission rates, the Adviser is authorized to pay a
broker a brokerage commission in excess of that which another broker
might have charged for effecting the same transaction, in recognition
of the value of brokerage and research services provided by the
broker.
The Adviser may select brokers who, in addition to meeting the
primary requirements of execution and price, have furnished
statistical or other factual information and services, which in the
opinion of the Board, are reasonable and necessary to the decision
making responsibilities of the Adviser for the Fund. The services
provided by these brokerage firms may also be used in dealing with the
portfolio transactions of the Adviser's other clients and not all such
services may be used by the Adviser in connection with the Fund.
Those services may include economic studies, industry studies,
security analysis or reports, sales literature of the Fund's portfolio
securities and statistical services furnished either directly to the
Fund or to the Adviser. Consideration will be given to brokers who
have assisted in the distribution of shares of the Fund. No effort is
made in any given circumstance to determine the value of these
materials or services or the amount by which they might have reduced
expenses of the Adviser.
The Board has adopted procedures under Rule 17e-1 of the 1940
Act that permit the portfolio transactions to be executed through
affiliated brokers. In 1995, 1996 and 1997, the Fund used an
affiliated broker. The affiliated broker was Berwyn Financial
Services Corp. ("BFS"). BFS is affiliated with the Fund by reason of
the fact that Officers and Directors of the Fund and the Adviser are
Officers, Directors and Shareholders of BFS. In addition, BFS serves
as the distributor for the Fund's shares in certain jurisdictions
pursuant to written agreement.
In 1997, the Fund paid a total of $115,779 in commissions to
BFS. The amount represents 50% of the total commissions paid by the
Fund in 1997. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through BFS
was 74%.
In 1996, the Fund paid a total of $187,169 in commissions to
BFS. This amount represents 62% of the total commissions paid by the
Fund in 1996. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through BFS
was 77%.
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In 1995, the Fund paid a total of $246,121 in commissions to
BFS. This amount represents 73% of the total commissions paid by the
Fund in 1995. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through BFS
was 79%
The Fund paid brokerage Commissions of $231,239 in 1997,
$303,958 in 1996, and 335,153 in 1995. The decrease in brokerage
commissions from 1996 to 1997 was due primarily to less investment in
the Fund. The level of trading done in 1996 was similar to the level
in 1995 and the amount paid in brokerage commissions was approximately
the same.
The Adviser has other advisory clients which include
individuals, trusts, pension and profit sharing funds, some of which
have similar investment objectives to the Fund. As such, there will
be times when the Investment Adviser may recommend purchases and/or
sales of the same portfolio securities for the Fund and its other
clients. In such circumstances, it will be the policy of the
Investment Adviser to allocate purchases and sales as well as expenses
incurred in the transactions among the Fund 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 could adversely affect the
ability of the Fund to obtain or dispose of the full amount of a
security which it seeks to purchase or sell or the price at which such
security can be purchased or sold.
COMPUTATION OF NET ASSET VALUE
(See also "Computation of Net Asset Value" in the Prospectus).
The net asset value per share of the Fund is determined by dividing
the total value of the Fund's investments and other assets, less any
liabilities, by the total number of outstanding shares of the Fund.
Net asset value per share is determined at the close of regular
trading on the New York Stock Exchange (the "Exchange") (ordinarily
4:00 p.m. Eastern Time) on each day that the Exchange is open and is
effective as of the time of computation.
SHARE PURCHASES
(See also "Share Purchases" in the Prospectus)
The Fund is closed to new investors. This means that only
investors who currently have accounts with the Fund may add to their
accounts or open new accounts.
The offering price of shares of the Fund is the net asset value
per share next determined after receipt by the Transfer Agent or a
broker authorized by the Fund to receive orders of the order for the
purchase of shares. There is no sales load and the value of shares
can be expected to fluctuate daily.
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DISTRIBUTOR
BFS, a broker-dealer registered with the SEC and a member of the
NASD, is the current distributor of the Fund's shares, pursuant to a
selling agreement which became effective on July 25, 1994 (the
"Selling Agreement"). Under the Selling Agreement, BFS is the non-
exclusive agent in certain jurisdictions for the Fund's continuous
offering of shares. Shares of the Fund are offered to the public at
net asset value, without the imposition of a sales load. The
jurisdictions in which BFS is the distributor are Arizona, Arkansas,
Florida, Maryland, North Dakota, Nebraska, Texas, Vermont and West
Virginia.
The Selling Agreement provides that it will continue in effect
from year to year only so long as such continuance is approved at
least annually by the Fund's Board of Directors and by the vote of a
majority of the Directors who are not parties to the agreement or
interested persons of any such party by vote cast in person at a
meeting called for the purpose of voting on such approval. The
Selling Agreement will terminate automatically in the event of its
assignment.
REDEMPTION OF SHARES
(See "Redemption of Shares" in the Prospectus).
The Fund will redeem all full and fractional shares of the Fund
upon receipt of a written request in proper form. The redemption
price is the net asset value per share next determined after receipt
of proper notice of redemption. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through
the date of redemption.
The Fund has elected to be governed by Rule 18f-1 under the 1940
Act, under which the Fund is obligated to redeem the shares of any
shareholder solely in cash up to the lesser of 1% of the net asset
value of the Fund or $250,000 during any 90-day period. Should any
shareholder's redemptions exceed this limitation, the Fund can, at its
sole option, redeem the excess in cash or in portfolio securities
selected solely by the Fund (and valued as in computing net asset
value). In these circumstances, an investor that receives and sells
such portfolio securities would probably incur a brokerage charge and
there can be no assurance that the price realized by an investor upon
the sale of such portfolio securities will not be less than the value
used in computing net asset value for the purpose of such redemptions.
CALCULATION OF PERFORMANCE DATA
The average annual total returns of the Fund for one year, five
years and ten years ended December 31, 1997 are listed below:
One Year: 26.1%
Five Years: 17.0%
Ten Years: 15.2%
- -10
The one-year performance is for the period January 1, 1997 to
December 31, 1997. The five-year period runs from January 1, 1993 to
December 31, 1997 and the ten year-period runs from January 1, l988 to
December 31, 1997. To obtain the performance listed above, the Fund
computed its average total return for each period of time. The Fund
made this calculation by first determining the total return for a
period and then using an exponential function based upon the number of
years involved to obtain an average.
The total return for a period is calculated by determining the
redeemable value of a $1,000 initial investment made at the beginning
of the period, with dividends and capital gains reinvested on the
reinvestment date, on the last day of the period and dividing the
value by $1,000. The average annual total return for the period is
calculated by taking the total return for the period and determining
the annual average by using an exponential function based upon the
number of years and any fraction thereof in the period. In addition
to an average annual total return, the Fund calculates its total
return on a calendar year basis. Listed below are the Fund's total
returns for each calendar year from 1985 - 1997:
January 1, 1985 - December 31, l985 23.6%
January 1, 1986 - December 31, l986 14.6%
January 1, 1987 - December 31, l987 2.9%
January 1, 1988 - December 31, l988 21.6%
January 1, 1989 - December 31, l989 16.5%
January 1, 1990 - December 31, 1990 -23.9%
January 1, 1991 - December 31, 1991 43.7%
January 1, 1992 - December 31, 1992 20.6%
January 1, 1993 - December 31, 1993 22.9%
January 1, 1994 - December 31, 1994 3.9%
January 1, 1995 - December 31, 1995 19.2%
January 1, 1996 - December 31, 1996 14.4%
January 1, 1997 - December 31, 1997 26.1%
The Fund calculates the total return for a calendar year by
determining the redeemable value of $1,000 investment made at the
beginning of the year with dividends and capital gains reinvested on
the reinvestment date, on last day of the year and dividing that value
by $1,000.
Annual average total return and the total returns for calendar
year are based on historical performance and are not intended as an
indication of future performance.
GENERAL INFORMATION
The Fund
The Fund is a Pennsylvania corporation organized on February 18,
1983. Since May 4, 1984, the Fund has been offering its shares for
sale to the public. The Fund has authorized capital of 20,000,000
shares of common stock of $1 par value per share. Each share has
equal
- -11-
dividend, distribution and liquidation rights. There are no
conversion or preemptive rights applicable to any shares of the Fund.
All shares issued are fully paid and non-assessable. Fund shares do
not have cumulative voting rights.
Custodian
PNC Bank, 400 Bellevue Parkway, Suite 108, Wilmington, DE 19809
is the custodian for the Fund. The custodian holds all securities and
cash owned by the Fund and collects all dividends and interest due on
the securities.
Independent Accountants
Price Waterhouse LLP, 30 South 17th Street, Philadelphia,
Pennsylvania, has been selected as the independent accountants for the
Fund by the Board of Directors. Price Waterhouse LLP performs an
annual audit of the financial statements of the Fund.
Tax Status
The Fund intends to comply with Subchapter M of the Internal
Revenue Code of 1986, as amended. (See "Dividends, Capital Gains,
Distributions and Taxes" in the Prospectus for a discussion of the tax
status of the Fund and the consequences to its shareholders.)
Litigation
The Fund is not involved in any litigation or other legal
proceedings.
FINANCIAL STATEMENTS
The Fund's audited financial statements and notes thereto for
the year ended December 31, 1997 and the unqualified report of Price
Waterhouse LLP, the Fund's Independent Accountants on such financial
statements (the "Report"), are included in the Fund's 1997 Annual
Report to Shareholders (see "Annual Report") are incorporated by
reference in this SAI. A copy of the Annual Report accompanies this
SAI and an investor may obtain a copy of the annual report by writing
to the Funds or calling (800) 992-6757. The Report follows on the
next page.
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APPENDIX A
DEFINITIONS OF STANDARD & POOR'S BOND RATINGS
Standard & Poor's Ratings Group gives ratings to bonds that
range from AAA to D. Definitions of these ratings are set forth
below. The Fund may invest in bonds with any of these ratings.
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in
small degree.
A Debt rated A has a strong capacity to pay interest and principal
although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B,
CCC, CC
Debt rated BB, B, CCC and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and
CC the highest degree to speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions.
C The rating C is reserved for income bonds on which no interest
is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in
arrears.
APPENDIX B
MOODY'S BOND RATINGS
Moody's Investor's Service, Inc. give ratings to bonds that
range from Aaa to D. Definitions of these ratings are set forth
below. The Fund may invest in bonds with any of these ratings.
Aaa - These bonds are judged to be of the best quality. They carry
the smallest degree of
investment risk. Interest payments are protected by a large
or by an exceptionally
stable margin and principal is secure.
Aa - These bonds are judged to be of high quality by all
standards. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa
securities or fluctuation of protective elements may be of
greater amplitude or there
may be other elements present which make the long-term risks
appear somewhat larger
than in Aaa securities.
A - These are bonds which possess many favorable investment
attributes and are to be
considered as upper medium grade obligations. Factors giving
security to principal and
interest are considered adequate but elements may be present
which suggest a
susceptibility to impairment sometime in the future.
Baa - These bonds are considered as medium grade obligations, i.e.,
they are neither highly
protected nor poorly secured. Such bonds lack outstanding
investment characteristics
and in fact have speculative characteristics as well.
Ba - These are bonds judged to have speculative elements; their
future cannot be considered
as well assured. Uncertainty of position characterizes bonds
in this class.
B - These bonds generally lack characteristics of the desirable
investment. Assurance of
interest and principal payments or of maintenance of other
terms of the contract over
any long period of time may be small.
Caa - These are bonds of poor standing. Such issues may be in
default or there may be
present elements of danger with respect to principal or
interest.
Ca - These bonds represent obligations which are speculative in a
high degree. Such issues
are often in default or have other market shortcomings.
C - These are the lowest rated class of bonds and issues so rated
can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
