Annual Report of
The Berwyn Fund
February 1, 1999
Dear Berwyn Fund Investor:
In 1998 The Berwyn Fund (TBF) experienced a very disappointing loss of
18.9 percent compared to a gain of 26.0 percent in 1997. TBF's net
asset value per share fell from $22.01 to $16.96. The year-end share
price reflects a capital gains distribution of $0.85 made on December
22, 1998.
The Fund's performance was particularly frustrating in light of the
returns recorded by senior market indices. For the year, the Dow
Jones Industrial Average (DJIA) and Standard and Poor's 500 (S&P 500)
rose 18.1 percent and 28.6 percent, respectively. However, one-half
of the S&P 500's price gain can be attributed to just 11 of the 500
stocks in the Index. On the NASDAQ, 1,690 stocks advanced while 3,351
declined. In fact, individual stock performance appeared to have less
to do with corporate profitability and more to do with market
capitalization. In contrast to the S&P 500's performance, the Russell
2000 (mid and small capitalization stocks) fell 2.6 percent and the
Micro Cap 50 fell 21.0 percent during 1998 as shown in the chart
below.
The nadir for the Fund's performance was October 8th when the share
price bottomed at $15.24. This bottom occurred in the midst of a
major selling panic which was heightened by the looming insolvency of
the Long Term Capital Management Hedge Fund. We believe that this
selling panic fully discounted any near term recession and the Fund
should experience dramatic returns from the October low in the months
to come.
The unprecedented performance of large-cap stocks continues to
surprise and ever astonish seasoned professional investors. Since
Alan Greenspan, Chairman of the Federal Reserve Board, uttered his
famous "irrational exuberance" characterization of the stock market in
December, 1996, the S&P 500 has risen an additional 60 percent in
spite of lackluster corporate earnings growth. As of this writing the
DJIA and S&P 500 are trading at 24.1 and 33.6 times their past 12
month earnings, respectively, compared to an historical average of 14
to 15.
In contrast to the higher price-to-earnings (P/E) ratios placed upon
larger-cap stocks, investors have temporarily reduced the valuations
placed upon small-cap stocks. This was the principal reason for TBF's
underperformance last year. At year-end many of the stocks in the
portfolio were selling below ten times trailing earnings and several
were selling under seven times trailing earnings. Rather than
contracting, as we had erroneously predicted in our 1998 semi-annual
report, the disparity in valuations between large and small-cap stocks
widened during the second half of the year. In our opinion, there is
no financial rationale for this disparity in price-to-earnings ratios
and further reductions in small-cap P/E's seem unlikely. In the
absence of a major recession, corporate share repurchases, takeovers
by larger companies and bargain hunting by value investors should
result in an increase in small-cap valuations.
At year-end the Fund's largest positions were concentrated in metals
and mining, machinery manufacturing, computers, precision instruments,
oil and gas exploration and oil refining. Continued growth in the
U.S. economy coupled with a stabilization of the 1998 decline in
underdeveloped foreign economies would be positive for the portfolio.
The following chart compares TBF with the Russell 2000 Index (Index)
on a total return basis. With the exception of last year, the Fund
has shown a good correlation with the Index, which represents two-
thirds of the broad market. We believe the underperformance of TBF in
1998 compared to the Index to be a function of the following:
? although the Index is comprised of mid and small-cap stocks,
its performance is market capitalization weighted emphasizing
the larger stocks in its universe;
? the Index may have a heavier weighting in the high technology
and healthcare sectors than TBF, both of which did well in
1998; and
? the Index appeared to have a large turnover in its composition
during the year as poorer performing stocks were dropped from
the Index and new stocks added.
In 1998 the assets of the Fund decreased to $62.9 million. Operations
continue to run efficiently with a low expense ratio of 1.20 percent.
Portfolio turnover was 19 percent. A low turnover rate is
instrumental in controlling realized gains and annual taxable income
to our shareholders.
The management of your Fund will continue to make value oriented
investment decisions during these heady and unprecedented times. We
appreciate your support and look forward to restoring an upward trend
in 1999.
Very truly yours,
Robert E. Killen
Kevin M. Ryan
President
Secretary-Treasurer
Long Term Fund Performance* (12/31/98)
(Average Annual Compounded Return)
Fund 1 year 5 years
10 years
TBF -18.90% 7.65% 10.01%
*Past performance is not a guarantee of future results.
Note:
Returns for The Berwyn Fund are net of all expenses, advisory fees and
commission charges and include the reinvestment of dividends (total
return). All index returns listed herein also include the
reinvestment of dividends (total return).
THE BERWYN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION
The Berwyn Fund, Inc. (the "Fund"), is registered under the Investment
Company Act of 1940, as amended, as a nondiversified open-end
management company and incorporated under the laws of the Commonwealth
of Pennsylvania. The Fund's primary investment objective is long-term
capital appreciation. For redemptions of capital shares of the Fund
held less than one year, the Fund charges a redemption fee of 1% of
the net asset value of the capital shares being redeemed.
NOTE 2 - ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management of the Fund to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
Security Valuation: Securities listed on a national securities
exchange are valued at the last quoted sales price. Securities not
traded on the valuation date and securities not listed are valued at
the last quoted bid price. Short-term investments are valued at
amortized cost which approximates market value. The value of other
assets and securities for which no quotations are readily available is
determined in good faith at fair value using methods determined by the
Board of Directors.
Federal Income Taxes: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income
and otherwise comply with the provisions of the Internal Revenue Code
of 1986, as amended. Accordingly, no provision for Federal income tax
is required in the financial statements.
Securities Transactions and Investment Income: Securities
transactions are accounted for on the date the securities are
purchased or sold. Costs used in determining realized gains and
losses on sales of investment securities are those of specific
securities sold. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded as
earned.
Distributions to Shareholders: The Fund distributes annually all of
its net investment income and any net realized capital gains. The
amounts of distributions from net investment income and net realized
capital gains are determined in accordance with Federal income tax
regulations, which may differ from those amounts determined under
generally accepted accounting principles. These book/tax differences
are either temporary or permanent in nature. To the extent these
differences are permanent, they are adjusted to reflect their tax
treatment in the period the differences arise.
Accordingly, $122,129 and $257,165 have been reclassified from
undistributed net investment loss to accumulated net realized capital
gains and paid in capital, respectively, relating to the net
investment loss for the year ended December 31, 1998.
Repurchase Agreements: The Fund invested in repurchase agreements
secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by the Fund's custodian
bank until maturity of each repurchase agreement. Provisions of the
agreement require that the market value of the collateral be
sufficient to cover principal and interest in the event of default;
however, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be
subject to legal proceedings.
NOTE 3 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY
TRANSACTIONS
Under the terms of the investment advisory agreement, the Fund has
agreed to pay The Killen Group, Inc. (the "Investment Adviser") an
investment advisory fee at an annual rate of 1% of the Fund's average
daily net assets. The Investment Adviser and the Directors and
Officers of the Investment Adviser, and the Directors and Officers of
the Fund, together with their families, owned 344,533 shares of the
Fund at December 1998. Certain Directors and Officers of the Fund are
also Directors and Officers of the Investment Adviser
During the year ended December 31, 1998, the Fund paid $109,726 in
commissions to Berwyn Financial Services, a brokerage company
affiliated with the Investment Adviser, to execute certain portfolio
transactions.
NOTE 4 - SECURITY TRANSACTIONS
During the year, the Fund made purchases of $15,578,081 and sales of
$37,157,395 of investment securities other than U.S. Government
securities and temporary cash investments.
Cost of securities owned at December 31, 1998 and the net realized
gains or losses on securities sold for the period then ended for
Federal income tax purposes were not materially different from amounts
reported for financial reporting purposes.
At December 31, 1998, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $8,001,391 of
which $20,108,928 related to appreciated securities and $12,107,537
related to depreciated securities.
The Berwyn Fund, Inc.
Annual Shareholders Meeting
The Fund's Annual Meeting of Shareholders was held on March 27, 1998.
Shareholders re-elected Anthony N. Carrelli, Denis P. Conlon, Robert
E. Killen, Kevin M. Ryan, and William H. Vonier as Directors, approved
the renewal of the Investment Advisory Agreement between the Fund and
The Killen Group, Inc., and ratified the appointment of Price
Waterhouse LLP, which effective July 1, 1998 became
PricewaterhouseCoopers LLP, as the Fund's independent accountants.
The resulting vote count for each proposal is indicated below.
1. Election of Directors:
Robert E. Killen Anthony N. Carrelli Denis P. Conlon
Kevin M. Ryan William H. Vonier
For: 2,439,755 2,441,547 2,441,547 2,441,547 2,441,547
Withheld: 24,023 22,231 22,231 22,231 22,231
Abstain:
2. Approval of the Investment Advisory Agreement with The Killen
Group, Inc.:
For: 2,405,968
Against: 27,529
Abstain: 30,279
3. Ratification of appointment of Price Waterhouse LLP as the Fund's
independent accountants:
For: 2,428,719
Against: 12,388
Abstain: 22,669
Special 1998 Tax Information (Unaudited)
This information for the fiscal year ended December 31, 1998, is
included pursuant to provisions of the Internal Revenue Code.
The fund distributed $3,020,287 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year ended
December 31, 1998, all of which is designated as a 20% rate gain
distribution.
THE BERWYN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
Assets:
Investments in Securities, at Value
(Cost $54,704,407) (Note 2) $62,705,798
Receivables:
Dividends 16,820
Interest 4,441
Receivable for Securities Sold 539,903
Total Assets 63,266,962
Liabilities:
Payable to Custodian 240,440
Payable for Investment Securities Purchased 11,149
Investment Advisory Fee Payable 105,192
Accrued Expenses 48,569
Total Liabilities 405,350
Net Assets: (1)
Applicable to 3,707,507 Shares Outstanding of
Common Stock, $1.00 Par Value
(Authorized 20,000,000 Shares) $62,861,612
Net Asset Value and Offering Price Per Share
($62,861,612/3,707,507 Shares Outstanding) $ 16.96
Minimum Redemption Price Per Share (Note 1) $ 16.79
(1) On December 31, 1998 Net Assets consisted of the following:
Common Stock, Par Value $1.00 Per Share $ 3,707,507
Paid-in Capital 51,043,322
Net Unrealized Appreciation of Investment Securities 8,001,391
Accumulated Undistributed Realized Gain 109,392
$62,861,612
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
Investment Income:
Dividends $593,686
Interest 38,761
Total Investment Income 632,447
Expenses:
Investment Advisory Fee (Note 3) 843,125
Transfer Agent Fees 38,180
Custodian Fees 19,025
Professional Fees 37,467
Registration Fees 22,525
Directors' Fees 3,272
Printing Expenses 26,031
Office Expenses 10,495
Insurance 5,443
Taxes (Other than Income Taxes) 6,178
Total Expenses 1,011,741
Net Investment Loss (379,294)
Realized and Unrealized Gain on Investments:
Net Realized Gain from Sales of Investment Securities 3,217,798
Net Change in Unrealized Appreciation on
Investment Securities (18,672,695)
Net Realized and Unrealized Loss on Investments (15,454,897)
Net Change in Net Assets Resulting from Operations $(15,834,191)
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
12/31/98 12/31/97
Increase in Net Assets from Investment Activities:
Net Investment Loss $ (379,294) $ (14,587)
Net Realized Gain from Sales of Investment Securities 3,217,798 11,157,767
Change in Unrealized Appreciation of
Investment Securities (18,672,695) 9,906,025
Net Increase in Net Assets Resulting
from Operations (15,834,191) 21,049,205
Distributions to Shareholders:
From Net Realized Gain from Sales
of Securities (3,020,287) (11,109,169)
Total Distributions (3,020,287) (11,109,169)
Capital Share Transactions (1):
Net Proceeds from Sales of Shares 10,881,238 16,907,676
Cost of Shares Redeemed (32,474,603) (31,163,748)
Distributions Reinvested 2,903,515 10,666,006
Net Increase (Decrease) in Net Assets from
Capital Share Transactions (18,689,850) (3,590,066)
Total Increase (Decrease) in Net Assets (37,544,328) 6,349,970
Net Assets:
Beginning of Year 100,405,940 94,055,970
End of Year (Including Undistributed
Net Investment Income of $0
and $0, respectively) $ 62,861,612 $100,405,940
(1) Capital Shares Issued and Redeemed:
Shares Sold 516,002 723,336
Shares Redeemed (1,549,296) (1,435,061)
Shares Reinvested 179,673 497,018
(853,621) (214,707)
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
Net Asset Value, Beginning of Year $22.01 $19.69 $19.43 $17.55 $17.67
_______ _______ _______ _______ _______
Income from Investment Operations:
Net Investment Income (Loss) (0.09) 0.00 (0.02) 0.00 0.02
Net Realized and Unrealized Gains
(Losses) on Securities (4.11) 5.06 2.78 3.34 0.65
_______ _______ _______ _______ _______
Total from Investment Operations (4.20) 5.06 2.76 3.34 0.67
_______ _______ _______ _______ _______
Less Distributions:
Dividends from Net Investment Income 0.00 0.00 0.00 (0.01) (0.01)
Distributions from Net Realized Gains (0.85) (2.74) (2.50) (1.45) (0.78)
_______ _______ _______ _______ _______
Total Distributions (0.85) (2.74) (2.50) (1.46) (0.79)
_______ _______ _______ _______ _______
Net Asset Value, End of Year $16.96 $22.01 $19.69 $19.43 $17.55
Total Return (18.90%) 26.05% 14.35% 19.18% 3.90%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $62,862 $100,406 $94,056 $97,234 $63,522
Ratio of Expenses to Average Net Assets 1.20% 1.20% 1.21% 1.23% 1.33%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.45%) (0.02%) (0.10%) 0.04% 0.11%
Portfolio Turnover Rate 19% 26% 32% 32% 24%
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF INVESTMENTS
DECEMBER 31, 1998
Number of
Shares COMMON STOCKS -
99.2% Value*
AEROSPACE / DEFENSE -
3.3%
67,166 Ducommun Inc. + $ 927,730
69,201 Whittaker Corp. + 1,167,767
2,095,497
AIRLINES -
2.4%
34,300 Alaska Air Group, Inc. + 1,517,775
ALCOHOLIC BEVERAGE -
1.9%
144,141 Todhunter International Corp. + 1,171,145
AUTOMOTIVE AND TRUCK PARTS -
1.1%
252,334 National Standard Co. + 725,460
BANKING - 4.4%
74,720 BSB Bancorp Inc. 2,419,060
28,500 Lawrence Savings Bank 365,165
2,784,225
CHEMICALS -
0.1%
4,000 Carbide Graphite + 59,000
COMMERCIAL PRINTING -
3.3%
86,167 Courier Corp. 2,046,466
COMPUTER & PERIPHERALS -
6.1%
261,855 Data I/O Corp. + 450,076
54,950 Inacom Corp. + 817,381
191,000 Plaintree Systems + 89,541
173,002 Printronix, Inc. + 2,486,904
3,843,902
DIVERSIFIED MANUFACTURING - 3.9%
4,985 Griffon Corp. + 52,965
82,404 Lindberg Corp. 741,636
57,908 Robbins & Myers, Inc. 1,281,214
40,000 Synalloy Corp. 355,000
2,430,815
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF INVESTMENTS (Continued)
Number of
Shares COMMON STOCKS
(Continued) Value*
ELECTRONICS INTEGRATED -
3.8%
371,417 Scan-Optics $1,427,653
69,100 Trans-Lux Corp. 630,537
117,100 Wells-Gardner Electronics 314,706
2,372,896
FOOD PROCESSING & DISTRIBUTION -
1.8%
91,701 Orange Co. 607,519
58,000 Chiquita Brands International 554,625
1,162,144
FOREST & PAPER PRODUCTS -
4.2%
38,200 Greif Brothers Corp. 1,112,575
26,406 MAXXAM Inc. 1,515,044
2,627,619
FURNITURE MANUFACTURING - 2.2%
84,998 Ladd Furniture + 1,370,593
INDUSTRIAL EQUIPMENT -
0.9%
47,000 Airgas Inc. 420,062
128,500 Dura Products International 124,645
544,707
INSURANCE -
4.1%
8,900 Chicago Title 417,744
67,063 First American Financial Corp. 2,154,399
2,572,143
MACHINERY MANUFACTURING - 7.1%
38,700 Hardinge, Inc. 711,112
132,044 Terex Corp. + 3,771,507
4,482,619
MANUFACTURED HOUSING -
3.5%
85,200 Drew Ind. + 990,450
76,000 Kevco Inc. + 541,500
42,000 Patrick Industries 645,750
2,177,700
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF INVESTMENTS (Continued)
Number of
Shares COMMON STOCKS
(Continued) Value*
MARITIME INDUSTRY -
4.1%
143,311 Anangel-American Shipholders $ 725,512
273,605 B & H Ocean Carriers 1,060,219
260,437 BT Shipping Ltd. ADR+ 195,328
61,700 Stolt-Nielsen S.A. 609,287
2,590,346
MEDICAL PRODUCTS & SERVICES -
1.3%
345,676 Quidel Corp.+ 820,980
METALS & MINING -
8.2%
580,139 Campbell Resources, Inc. + 145,035
29,450 Cleveland Cliffs, Inc. 1,187,203
23,000 Freeport McMoran Class B 240,062
51,200 Impala Platnium-UNSPON ADR 696,289
147,200 Kaiser Aluminum + 717,600
310,110 Nord Pacific Limited ADR+ 193,819
512,350 Westmoreland Coal Co. +** 1,953,334
5,133,342
OIL & GAS EXPLORATION & PRODUCTION - 5.9%
31,000 Berry Petroleum 439,812
83,000 Callon Petroleum + 964,875
170,000 Coho Energy + 478,125
59,596 Louis Dreyfus Natural Gas + 849,243
220,864 Ranger Oil Ltd. 980,084
3,712,139
OIL REFINING -
5.7%
411,344 Frontier Oil Corp. 2,031,011
48,000 Giant Industries 450,000
30,200 Sun Co. 1,089,087
3,570,098
PRECISION INSTRUMENTS -
6.5%
150,112 Brown & Sharpe + 1,200,896
133,470 Esterline Technology Corp. + 2,902,972
4,103,868
RETAIL INDUSTRY -
1.1%
31,900 Blair Corporation 707,781
The accompanying notes are an integral part of these financial
statements.
THE BERWYN FUND, INC.
STATEMENT OF INVESTMENTS (Continued)
Number of
Shares COMMON STOCKS
(Continued) Value*
STEEL & STEEL PRODUCTS - 4.9%
91,702 AK Steel Holding Corp. $ 2,154,997
114,828 Keystone Consolidated Inc. 932,977
3,087,974
TELECOMMUNICATIONS - 3.3%
62,766 Commonwealth Telephone Enterprise + 2,063,432
TEXTILES -
4.1%
117,540 Culp, Inc. 925,627
213,049 Dixie Group, Inc. 1,651,130
2,576,757
TOTAL COMMON STOCKS (Cost $54,204,407) $62,351,423
Face
Amount CORPORATE BONDS -
0.6% Value*
$250,000 Campbell Resources 7.5% CV 07/20/04 $ 119,688
250,000 TransLux 7.5% CV 12/01/06 234,687
354,375
TOTAL CORPORATE BONDS (Cost $500,000) 354,375
TOTAL INVESTMENTS (Cost $54,704,407) - 99.8% 62,705,798
OTHER ASSETS IN EXCESS OF LIABILITIES - 0.2% 155,814
NET ASSETS - 100% $62,861,612
____________________________________
* See Note 2 to the Financial Statements
** Considered to be an affiliate under the Investment Company
Act of 1940
+ Non-Income Producing Security
ADR American Depositary Receipt
CV Convertible Security
UNSPON Unsponsored
The accompanying notes are an integral part of these financial
statements.
PricewaterhouseCoopers
Report to Independent Accountants
To the Board of Directors and Shareholders of
The Berwyn Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
The Berwyn Fund, Inc. (the "Fund") at December 31, 1998, the results
of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter
referred to as `financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits, which included confirmation of securities at December
31, 1998 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 12, 1999
