BERWYN INCOME FUND, INC.
Shareholder 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 Income Fund, Inc. (the "Fund") dated 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..........................................................
................................................ 4
Investment Advisory
Arrangements..........................................................
............................ 5
Expense
Limitation............................................................
.................................................... 6
Directors and
Officers..............................................................
.............................................. 6
Ownership of the
Fund..................................................................
......................................... 8
Portfolio Transactions and Brokerage
Commissions...........................................................
.. 8
Computation of Net Asset
Value.................................................................
.......................... 10
Share
Purchases.............................................................
........................................................ 10
Distributor...........................................................
................................................................... 10
Redemption of
Shares................................................................
............................................ 11
Calculation of Performance
Data..................................................................
......................... 11
General
Information...........................................................
.................................................... 12
Financial
Statements............................................................
.................................................. 13
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INVESTMENT POLICIES AND RISK FACTORS
(See also "Investment Objective, Policies and Risk Factors" in the
Fund's Prospectus.)
The Fund is a no-load, diversified, open-end management
investment company. Its investment objective is to provide investors
with current income while seeking to preserve capital by taking what
the Fund considers to be reasonable risks. In pursuing its investment
objective, the Fund may also offer the potential for capital
appreciation. To achieve its objective, the Fund invests in
investment grade corporate debt securities, securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
high yield, high risk corporate debt securities (also known as "junk
bonds"), unrated corporate debt securities, and preferred and common
stocks. The Adviser determines the percentage of each category of
securities to purchase and hold based upon the prevailing economic and
market conditions. This means, that the Fund may invest up to 100% of
its net assets in high yield, high risk corporate debt securities.
Investment grade corporate debt securities are considered to be
securities rated BBB or higher by Standard & Poor's Rating Group
("S&P") or Baa or better by Moody's Investors Service, Inc.
("Moody's") and high yield securities are considered to be securities
rated lower than BBB or Baa by these services. Appendices A and B
list the definitions of the S&P and Moody's bond ratings.
The Fund may invest in fixed income securities that are not
rated. The Fund will only invest in unrated securities that have a
creditworthiness, in the opinion of the Adviser, that is equal to or
better than the creditworthiness of fixed income securities with S&P
ratings of CC or Moody's ratings of Caa.
The Fund may also purchase certain debt securities that have not
been registered with the Securities and Exchange Commission under the
Securities Act of 1933, as amended ("1933 Act") and are restricted
from sale to the general public. The Fund will purchase these
restricted securities from the issuer or qualified institutional
buyers, and will sell these restricted securities, exclusively in the
transactions that are exempt pursuant to Rule 144A under the 1933 Act.
The Fund will limit its investment in such restricted securities to
10% of the value of its net asset.
In addition to corporate debt securities, the Fund may invest in
the securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and in preferred and common stocks. The
securities of the U.S. Government in which the Fund invests are U.S.
Treasury bonds and notes. The Fund may also purchase debt securities
issued by Government agencies, such as, Export-Import Bank, or by an
instrumentality of the Government, such as the Federal National
Mortgage Association. U.S. Treasury bonds and notes are backed by the
full faith and credit of the U.S. Government. Securities issued by
Government agencies or instrumentalities may or may not be backed by
the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United
States, an investor must look principally to the agency or
instrumentality for repayment.
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The Fund invests in preferred stocks that, in the opinion of the
Adviser, are offering an above average yield in comparison to
preferred stocks of the same quality or in preferred stocks offering a
potential for capital appreciation. The Fund may also purchase
preferred stocks that are restricted securities subject to the
limitations under Rule 144A described above.
The Fund invests in common stocks that it considers to be
selling at undervalued prices. The investment approach of the Fund
may be deemed "contrarian" in its selection of common stocks due to
the fact that this approach may lead the Fund to select stocks not
recommended by other investment advisers or brokerage firms.
The Fund, however, will purchase only common stocks that pay
cash dividends and will not purchase additional common stocks when
common stocks comprise 30% of the Fund's net assets.
Aside from the investments listed above, the Fund 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 rated A-1, repurchase agreement and
Treasury bills, and may hold 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.
The Fund may invest in real estate investment trusts ("REITs")
and repurchase agreements. The Fund limits investment in REITs to 10%
of its net assets and investment in repurchase agreements to 5% of its
net assets.
REITs 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 a means of
lessening risks. As of December 31, 1997, 5.78% of the Fund's net
assets were invested in REITs.
Repurchase agreements are defined as agreements wherein a seller
of securities 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. In the event of bankruptcy of the seller of a repurchase
agreement or the failure of the 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 the Fund seeks to enforce its rights thereto and a possible
loss of all or
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part of the income. The Fund would also incur additional expenses
enforcing its rights. As of December 31, 1997, 0.38% of the Fund's
net assets were invested in repurchase agreements.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below may not be changed
without approval by vote of a majority of the Fund's outstanding
voting securities. As used in this SAI and in the Prospectus, "a
majority of the Fund's outstanding voting securities" means the lesser
of (a) more than 50% of the Fund's outstanding shares, or (b) at least
67% of the shares present or represented at a meeting of shareholders
provided that the holders of more than 50% of the Fund's outstanding
shares are present in person or represented by proxy.
When investing its assets, the Fund will not:
(1) invest more than 5% of the value of its total assets in the
securities of any one issuer or purchase more than 10% of the
outstanding voting securities, debt or preferred stock of any
one issuer. This restriction does not apply to obligations
issued or guaranteed by the U. S. Government, its agencies or
instrumentalities;
(2) invest more than 25% of the value of its total assets in the
securities of issuers 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 the making of a loan;
(4) buy or sell real estate and real estate mortgage loans,
commodities, commodity futures contracts, puts and 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, 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 Securities Act of 1933, as amended, before
they may be offered and sold to the public, except that the
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Fund will be permitted to purchase restricted securities that
are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended);
(10) participate in a joint investment account; and
(11) issue senior securities.
The Fund has also adopted certain investment restrictions that
are not fundamental. These restrictions are that the Fund will not
invest in real estate limited partnerships, in oil, gas or other
mineral leases and any 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 Fund's Prospectus)
The Killen Group, Inc., is the investment adviser (the
"Adviser") to the Fund. Robert E. Killen is Chairman, CEO and sole
shareholder of the Adviser. He is also President and Chairman of the
Board of the Fund. Edward A. Killen is Vice President, Secretary and
a Director of the Adviser and a Director of the Fund.
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. In addition, employees of the Adviser administer the
operation of the Fund. These employees prepare and maintain the
accounts, books and records of the Fund, calculate the daily net asset
value per share 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.
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 authorized 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.
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As compensation for its investment management services to the
Fund, the Adviser will receive monthly compensation at the annual rate
of 1/2 of 1% of the average daily net assets. The fee is computed
daily by multiplying the net assets for a day by the appropriate
percentage
and dividing the result by 365. At the end of the month, the daily
fees are added and the amount paid to the Adviser.
The Fund paid the Adviser $806,435 in fees in 1997, $638,212 in
1996, and $477,283 in 1995.
EXPENSE LIMITATION
The Contract between the Fund and the Adviser provides that the
Adviser's fee will 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 expenses and liabilities exceed 2%, the 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. Once the net assets
of the Fund exceed $100 million, the expense limitation will be
reduced to 1.5%. The expense limitation has not been used since 1988.
In 1997 the Fund's expense ratio was 0.65%.
DIRECTORS AND OFFICERS
The directors and executive officers of the Fund and their ages
and principal occupations for the past five years are set forth below:
Name, Age, Position Principal Occupation for the Past Five
Years
and Address
*Robert E. Killen (56) 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
12/93 and a member of the National
Association of Securities
Dealers, Inc. (the "NASD") since 7/94),
since October 1991.
President and Director of The Berwyn
Fund, Inc. (a registered
investment company managed by the
Adviser) since February
1983. 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.
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*Anthony N. Carrelli (49) Director of The Berwyn Fund, Inc. since
January 1995. Vice
Director President of the Adviser since August
1986.
1189 Lancaster Avenue
Berwyn, Pennsylvania
*Edward A. Killen, II (46) Director, Secretary and Shareholder of
Berwyn Financial Services
Director since October 1991. Director of the
Fund since January, 1995.
1189 Lancaster Avenue Director of The Berwyn Fund, Inc. from
February 1983 to January
Berwyn, Pennsylvania 1995. Vice president, Secretary and
Director of the Adviser since
February 1983.
Denis P. Conlon (50) Director of The Berwyn Fund, Inc.,
since June 1992 President and
Director CEO of CRC Industries (a worldwide
manufacturer) since
1282 Farm Road September 1996. Vice President, Corporate Development,
Berwyn, Pennsylvania Berwind Corporation (diversified
manufacturing and financial company) from 1990 to September 1996.
Deborah D. Dorsi (42) Director of The Berwyn Fund, Inc. since
April 1998. Retired
Director Industry Executive since 1994.
Director Worldwide Customer
2801 Stanbridge Street Support, Kulick Soffa Industries, Inc.
(Semi Conductor
Norristown, Pennsylvania Equipment Manfacturer) from 1993-1994
Corporate Account
Manager for Kulick & Soffa Industries,
Inc. prior to 1993.
*Kevin M. Ryan (50) President, Treasurer, Director and
Shareholder of Berwyn
Secretary-Treasurer Financial Services Corp. since October
1991. Director of the
1199 Lancaster Avenue Fund from December 1986 to January
1995. Secretary, Treasurer
Berwyn, Pennsylvania and Director of The Berwyn Fund, Inc.,
since February 1983.
Legal Counsel to the Adviser since
September 1985.
* Robert E. Killen, Anthony N. Carrelli, Edward A. Killen II and Kevin
M. Ryan are "interested persons" of the Fund as defined in the
Investment Company Act of 1940, as amended (the "1940 Act") and Robert
E. Killen, Anthony N. Carrelli, and Edward A. Killen II are the
"Interested Directors" of the Fund. Robert E. Killen is an Officer,
Director and Sole Shareholder of the Adviser. He is also a Director
of Berwyn Financial Services Corp., a registered broker-dealer, and
owns 1/3 of its outstanding shares. Anthony N. Carrelli is a Vice
President of the Adviser. Edward A. Killen II is an Officer and
Director of the Adviser. He is also an Officer, Director and the
Owner of 1/3 of the outstanding shares of Berwyn Financial Services
Corp. Kevin M. Ryan is legal counsel to the Adviser and he is an
Officer, Director and Owner of 1/3 of the outstanding shares of Berwyn
Financial Services Corp. In addition, Robert E. Killen and Edward A.
Killen II are brothers and Kevin M. Ryan is brother-in-law to both.
Berwyn Financial Services Corp. serves as the distributor for the
Fund's shares in certain jurisdictions.
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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 for any travel expenses
by the Fund. 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 The Berwyn 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 a vote of the
Board of Directors. She replaces William H. Vonier who served as an
Independent Director on the Board from June 1992 until April 1998. In
1997, the Fund paid aggregate compensation of $1,600 to Mr. Conlon and
$1,600 to Mr. Vonier. The total compensation from the Fund Complex,
consisting of the Fund and The Berwyn Fund, Inc., was $3,200 for Mr.
Conlon and $3,200 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 the Directors that are not Independent 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 14,287,713 shares of the Fund
outstanding. Charles Schwab & Co. ("Schwab"), 101 Montgomery Street,
San Francisco, CA was the record owner of 47% of the outstanding
shares. Although Schwab is the record owner of more than 25% of the
outstanding shares of the Fund, Schwab cannot be considered to control
the Fund. Schwab holds the shares in nominee name for its customers
and does not have the power to vote the shares or to sell them.
National Financial Services Corp., One World Trade Center, 200 Liberty
Street, New York, NY was the record owner of 9% of the Fund's
outstanding shares. National Financial Services Corp. holds the
shares for its customers and does not have the power to vote the
shares or to sell them. The records of the Fund do not indicate that
any individual owns more than 5% of the Fund's outstanding shares. As
of March 31, 1998, the Directors and Officers of the Fund, as a group,
owned beneficially and of record 155,426 shares of the Fund. This
amount constitutes 1% 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 securities, the Adviser will seek 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
- -8-
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 Fund's
normal operations. 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 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 they might have reduced
expenses of the Adviser.
The Board has adopted procedures under 17e-1 of the 1940 Act
that permit portfolio transactions to be executed through affiliated
brokers. In 1995, 1996, and 1997 the Fund used an affiliated broker,
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 various jurisdictions pursuant to
a written agreement.
In 1997, the Fund paid a total of $193,023 in commissions to
BFS. This figure represents 77% of the total commissions paid by the
Fund. 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 $126,520 in commissions to
BFS. This figure represents 88% of the total commissions paid by the
Fund. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through BFS
was 90%. In 1995, the Fund paid a total of $199,302 in commissions to
BFS. This figure represents 87% of the total commissions paid by the
Fund. The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through BFS
was 92%.
The Fund paid brokerage commissions of $247,987 in 1997,
$144,128 in 1996, and $229,668 in 1995. The Fund was reopened to
investors on January 21, 1997. As a result the sale of Fund shares
increased in 1997. There was more trading than in 1996 and the amount
of commissions paid increased.
The Adviser has other advisory clients which include
individuals, trusts, pension and profit sharing funds, and an
investment company, some of which have similar investment objectives
to the Fund.
As such, there will be times when the 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
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the policy of the 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 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 as of 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 Propsectus.)
The Fund's shares are offered for sale on a continuous basis.
There is no sales load. 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
for the purchase of shares. There is no sales load and the value of
shares can be expected to fluctuate daily.
The minimum initial investment is $10,000 per investor. This
investment may be divided by a single investor among different
investment accounts in the Fund that total $10,000 in the aggregate or
between accounts in the Fund and The Berwyn Fund, Inc. Subsequent
investments must be at least $250 per account. The minimum initial
investment for Individual Retirement Accounts ("IRAs") is $1,000. The
minimum is $250 for a spousal IRA. Subsequent investments in IRAs
must be at least $250. There are no minimum requirements for pension
and profit sharing plans or custodial accounts for minors.
The Fund reserves the right to reduce or waive the minimum
purchase requirements in certain cases where subsequent and continuing
purchases are contemplated.
DISTRIBUTOR
(See also "Distribution" in the Prospectus.)
BFS Corp., a broker-dealer registered with the Securities and
Exchange Commission, is the current distributor of the Fund's shares,
pursuant to a selling agreement which became effective
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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 also "Redemption of Shares" in the Fund's Prospectus.)
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
Yield
The Fund's yield for the month ended December 31, 1997 was
6.62%.
The yield was determined based upon the net investment income
per share for the period December 1 to December 31, 1997. Expenses
accrued for the period were subtracted from the interest and dividends
accrued and the remainder was divided by daily average number of
shares multiplied by maximum offering price per share. The number
then obtained was annualized.
Total Return
The average annual total return of the Fund for one year, five
years and the life of the Fund ended December 31, 1997 are listed
below:
One Year: 13.4%
Five Years: 12.6%
Ten Years: 12.9%
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The period of time for one year's performance is from January 1,
1997 to December 31, 1997. The dates for the five-year period are
January 1, 1993 to December 31, 1997 and for the ten year period are
from January 1, 1988 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 $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 that
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 the calendar years 1988, 1989, 1990,
1991, 1992, 1993, 1994, 1995, 1996 and 1997:
January 1, 1988 - December 31, 1988
l1.3%
January 1, 1989 - December 31, 1989
11.9%
January 1, 1990 - December 31, 1990
-0.13%
January 1, 1991 - December 31, 1991
23.0%
January 1, 1992 - December 31, 1992
21.7%
January 1, 1993 - December 31, 1993
16.9%
January 1, 1994 - December 31, 1994
-1.1%
January 1, 1995 - December 31, 1995
21.0%
January 1, 1996 - December 31, 1996
14.0%
January 1, 1997 - December 31, 1997
13.4%
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
Capital Structure
The Fund has authorized capital of 100,000,000 shares of common
stock of $1 par value per share. Each share has equal 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 nonassessable. Fund shares do not have
cumulative voting rights. (See "General Information" in the
Prospectus for a discussion of noncumulative voting rights.)
- -12-
Custodian
PNC Bank, 400 Bellevue Parkway, Suite 108, Wilmington, DE 19809
is the custodian of 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 will perform 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. (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"), included in the Fund's 1997 Annual Report
to Shareholders (the "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
Fund's or calling (800) 992-6757. The Report follows on the next
page.
- -13-
APPENDIX A
DEFINITIONS OF STANDARD & POOR'S BOND RATINGS
Standard & Poor's Ratings Group gives ratings to bonds that
range from AAA to D. The Fund may invest in bonds with ratings of CC
above. Definitions of these ratings are set forth below.
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 C the highest degree of
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.
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 Investors 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 ratings of Caa or
better.
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.
