1999 Annual Report
BERWYN INCOME FUND
a series of THE BERWYN FUNDS
February 10, 2000
Dear Berwyn Income Fund Shareholder:
The annual total return to Berwyn Income Fund (BIF) shareholders was a
positive 0.83 percent for 1999 versus a loss of 4.57 percent in 1998. In an
environment hostile to fixed income investments, BIF suffered a moderate
drop in net asset value, yet continued to provide a strong stream of income.
The net asset value per share declined from $10.72 on December 31, 1998 to
$10.00 on December 31, 1999 while, during the year, shareholders received
distributions totaling $0.82 from net investment income. As discussed in the
third quarter letter to shareholders, it was deemed in the long-term
interests of BIF shareholders to forego paying a year-end capital gains
distribution rather than restructure the investment portfolio for this
purpose.
Reviewing our benchmark indices, the total annual return for the Salomon
Smith Barney Broad Investment Grade Bond Index (SBBIG) was negative 0.83
percent, for the High Yield Composite Index (SBHYC) the total return was
1.24 percent and for the Lipper Income Fund Index it was 4.43 percent.
As evidenced by the performance of the SBBIG and of long-term Treasury
Bonds, which declined 12.6 percent during the year, 1999 was indeed an
adverse environment for bond investors. The primary reason has been the
uncertain outlook for inflation. The economy has been undergoing a powerful
expansion which has persisted for a record length of time. Unemployment has
reached record lows. Overall, commodity prices have turned upward. The
concern is that the Federal Reserve will be required to repeatedly raise
interest rates if the countervailing forces of increasing productivity and
international competition prove inadequate to contain inflation.
Also afflicting bonds in 1999 was the negative sentiment of investors, who
have increasingly come to favor growth and momentum style investments while
disregarding more defensive alternatives. Conditioned by the long bull
market in blue chip stocks and the recent surge in Internet and technology,
investors do not seem mindful of the risks inherent in stock investing.
Presently, investors are willing to pay unprecedentedly high price-to-
earnings ratios (P/E's) for common stocks as represented by the major
averages. There appears to be a lack of appreciation for the safety and high
real interest rates available on Treasury bonds and investment-grade
corporate bonds.
The negative sentiment towards bonds pervaded the high yield market as well.
In fact, high yield mutual funds experienced net outflows in the second half
of the year. During
the year, the default rate on high yield bonds expanded to levels not seen
since 1991, a year of recession. The high default rate resulted from
aggressive debt issuance in recent years and the intensely competitive
business environment. It may be that the default rate peaked in the third
quarter. While there were no defaults in the high yield bond portion of the
portfolio, BIF was not totally immune, as it experienced one dividend
suspension in the cumulative preferred stock of LSB Industries. This
security constituted only 0.43 percent of the total portfolio at the time of
the dividend suspension.
Underlying the performance of the Lipper Income Fund Index is the strong
performance of large cap, high technology stocks such as Microsoft and Cisco.
The stocks in this category are selling at exceedingly elevated P/E's and
their names appear repeatedly in the largest, highest profile mutual funds.
Actually, the majority of common stocks on the New York Stock Exchange and
the S&P 500 closed at lower prices in 1999. The stock portion of BIF is not
represented in this high growth/high P/E's category, which we consider to
have serious potential for losses. The stock portion of BIF consists
primarily of small, out-of-favor companies selling at low P/E's, with a
strong representation in high dividend-paying real estate investment trusts
and utilities.
The composition of BIF's investments by asset class as of December 31, 1999
is as follows:
<TABLE>
<S> <C>
Dividend-paying Common Stocks 26.91%
Corporate Bonds 33.32
Convertible Bonds 23.03
Convertible Preferred Stock 11.85
Preferred Stocks 4.89
</TABLE>
The weighted average maturity of the bonds in the portfolio is 11.1 years.
The duration of the bonds is 6.2 years. The credit quality of the bonds,
constituting 56.35 percent of the portfolio, is as follows: investment
grade, 26.20 percent; rated less than investment grade, 18.26 percent; and,
unrated, 11.89 percent.
The five sectors of the economy with the largest representation at year end
were:
<TABLE>
<S> <C>
Industrial Basic Materials 24.68%
Consumer Cyclicals 15.35
Consumer Staples 13.83
Energy 12.97
Capital Goods 10.21
</TABLE>
BIF's ten largest holdings at year end are listed below:
<TABLE>
<S> <C> <C>
Company Security Percent
Dixie Group 7.00% due 5/15/12 4.33
Cyprus Amax 7.375% due 5/15/07 3.94
Trans Lux 7.50% due 12/1/06 3.78
Impala Platinum common stock 3.69
Callon Petroleum preferred stock 3.61
Dairy Mart 10.25% due 3/15/04 3.61
Chase Manhattan 7.125% due 2/1/07 3.40
Ford 6.375% due 11/5/08 3.26
IMC Global 7.30% due 1/15/28 3.20
Drug Emporium 7.75% due 10/1/14 3.02
</TABLE>
At year end, the total net assets in BIF were $57.3MM. The expense ratio was
0.83 percent.
In the past two years, a very narrow segment of the financial markets, namely
the high growth technology and Internet areas, has performed extraordinarily
well, while most other securities, which are perceived to have limited growth
prospects or are more defensive in nature, have languished. This preference
for growth began with meaningful fundamental developments in our domestic and
world economies, but it appears to have reached such an extreme as to have
created huge excesses and imbalances in the financial markets. It is our
belief that for investors seeking income and the potential for capital gains
with little downside risk, these imbalances have created opportunity.
BIF's portfolio includes representation in a number of these neglected areas.
In addition to providing BIF shareholders with a strong stream of income,
there exists the potential for significant capital gains. We think that the
portfolio will provide investors a relatively safe haven in the event of a
significant stock market correction.
Even though the strong economy is exerting pressure towards higher interest
rates in the near term, corporate bonds still seem attractively priced.
Inflation appears tame for the time being, and real interest rates are
historically high. Given the potential for an economic slowdown and/or a
significant stock market correction, we think it is appropriate to expand the
proportion of investment-grade corporate bonds in the portfolio in coming
months. The duration of the bond portfolio has been shortened given the
potential for higher inflation. High yield bonds have the potential for
ratings upgrades as the cyclically-oriented companies recover.
Convertible preferred stocks in economically sensitive industries have the
ability to rally as the global economic recovery progresses. These
industries include energy, metal, paper and other industrial materials. This
process is already underway. For example, last year Cyprus Amax preferred
stock rallied in response to the takeover offer from Phelps Dodge as copper
prices rose and the industry consolidated.
The real estate investment trusts (REITs) in the portfolio have an average
dividend yield of approximately 10 percent. REITs have disappointed
investors in recent years, as they have not been able to raise capital
externally to grow their companies by acquisition. Barring a severe economic
downturn, the attractive dividend yields seem secure. In addition, many
REITs are selling at discounts to their liquidation value. These features
could attract investors in the face of a broad market correction.
In past reports, we have discussed how BIF's portfolio is positioned to
benefit from a global economic recovery. This is still the case. It appears
we are only in the early phase of this trend and should realize ongoing
benefits.
Sincerely,
/S/ Edward A. Killen /S/ Robert E. Killen
Edward A. Killen Robert E. Killen
Portfolio Manager President
Long Term Fund Performance*
(12/31/99)
Average Annual Compounded
Return)
Fund 1 year 5 year 10 year
BIF 0.83% 8.51% 10.05%
BIF's SEC yield as of
12/31/99: 8.92%
*Past performance is not a guarantee of future results.
NOTE: Returns for BIF are net of all advisory and commission charges. The
investment return and the principal value of an investment in BIF will
fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
To the Trustees and
Shareholders of
Berwyn Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the statement 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 Berwyn Income
Fund (one of the portfolios constituting The Berwyn Funds, hereafter referred
to as the "Fund") at December 31, 1999, 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 accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States 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, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
February 16, 2000
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
Assets:
Investments in Securities, at Market Value $58,012,898
(Cost $69,828,597) (Note 2)
Receivables:
Interest 747,312
Dividends
70,989
Investment Securities Sold 11,130
Total Assets 58,842,329
Liabilities:
Payable to Custodian 1,445,188
Payable for Investment Securities Purchased 17,112
Accrued Expenses 14,270
Investment Advisory Fee Payable 25,141
Total Liabilities 1,501,711
Net Assets: (1)
Applicable to 5,735,576 Outstanding Shares of
Common Stock, $1.00 Par Value (Authorized
20,000,000 Shares) $57,340,618
Net Asset Value, Offering Price and Redemption
Price Per Share ($57,340,618 / 5,735,576
Outstanding Shares) $ 10.00
(1) On December 31, 1999 Net Assets consisted of the following:
Common Stock, Par Value $1.00 5,735,576
Paid-in Capital 67,290,400
Undistributed Net Investment Income 258,601
Accumulated Net Realized Capital Loss (4,128,260)
Net Unrealized Depreciation of Investment Securities (11,815,699)
$57,340,618
The accompanying notes are an integral part of these financial statements.
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
Investment Income:
Interest $3,997,410
Dividends 2,018,968
Total Investment Income $6,016,378
Expenses:
Investment Advisory Fee (Note 3) 381,528
Transfer Agent Fees 38,560
Custodian Fees 39,637
Professional Fees 55,265
Registration Fees 20,592
Directors' Fees 3,200
Printing Expenses 24,804
Office Expenses 27,643
Insurance 5,862
Taxes (Other than Income Tax) 5,418
Total Expenses 602,509
Net Investment Income 5,413,869
Realized and Unrealized Loss on Investments:
Net Realized Loss from Sales of Securities (4,613,483)
Net Change in Unrealized Appreciation/Depreciation
on Investment Securities 409,308
Net Realized and Unrealized Loss on Investments (4,204,175)
Net Increase in Net Assets Resulting from Operations $1,209,694
The accompanying notes are an integral part of these financial statements.
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
12/31/99 12/31/98
Increase (Decrease) in Net Assets
from Investment Activities:
Net Investment Income $ 5,413,869 $ 9,893,245
Net Realized Gain (Loss) from Sales of
Investment Securities (4,613,483) 1,420,002
Change in Unrealized Appreciation/Depreciation
of Investment Securities 409,308 (18,017,738)
Net Increase (Decrease) in Net Assets
Resulting from Operations 1,209,694 (6,704,491)
Distribution to Shareholders:
From Net Investment Income (5,412,933) (11,243,348)
From Net Realized Gains from Sales of Securities 0 (1,481,648)
From Capital 0 (2,062,237)
Total Distributions (5,412,933) (14,787,233)
Capital Share Transactions (1):
Net Proceeds from Sales of Shares 24,490,578 38,418,807
Cost of Shares Redeemed (70,812,243) (105,827,066)
Distributions Reinvested 4,241,952 11,699,788
Net Decrease in Net Assets from
Capital Share Transactions (42,079,713) (55,708,471)
Total Decrease in Net Assets (46,282,952) (77,200,195)
Net Assets:
Beginning of Year 103,623,570 180,823,765
End of Year $ 57,340,618 $103,623,570
(1) Capital Shares Issued and Redeemed:
Shares Sold 2,296,408 3,139,460
Shares Redeemed (6,634,203) (8,937,920)
Shares Reinvested 406,121 1,012,587
(3,931,674) (4,785,873)
The accompanying notes are an integral part of these financial statements.
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR
ENDED
12/31/99 12/31/98(1) 12/31/97 12/31/96 12/31/95
Net Asset Value, Beginning of Year $10.72 $12.51 $12.31 $11.95 $10.75
_____ _____ _____ _____ _____
Income from Investment Operations:
Net Investment Income 0.91 0.90 0.77 0.76 0.73
Net Realized and Unrealized Gains
(Losses) on Securities (0.81) (1.44) 0.84 0.87 1.48
_____ _____ _____ _____ _____
Total Income from Investment
Operations 0.10 (0.54) 1.61 1.63 2.21
_____ _____ _____ _____ _____
Less Distributions:
From Net Investment Income (0.82) (0.92) (0.77) (0.80) (0.70)
From Net Realized Gains 0.00 (0.15) (0.64) (0.47) (0.31)
From Capital 0.00 (0.18) 0.00 0.00 0.00
_____ _____ _____ _____ _____
Total Distributions (0.82) (1.25) (1.41) (1.27) (1.01)
_____ _____ _____ _____ _____
Net Asset Value, End of Year $10.00 $10.72 $12.51 $12.31 $11.95
Total Return 0.83% (4.57%) 13.36% 13.99% 21.00%
Ratios/Supplemental Data:
Net Assets, End of Year (000) $57,341 $103,624 $180,823 $137,166 $119,552
Ratio of Expenses to Average Net Assets 0.77% 0.66% 0.65% 0.68% 0.73%
Ratio of Net Investment Income to
Average Net Assets 6.92% 6.27% 6.15% 6.35% 6.78%
Portfolio Turnover Rate 7% 31% 53% 38% 39%
(1) Effective January 1, 1998, the Fund began to amortize premiums and accrete
discounts to interest income over the life of the bonds. The effect of this
change in accounting principle for the year ended December 31, 1998 is to
increase per share net income by $0.04 and ratio of net investment income to
average net assets by 0.3%.
The accompanying notes are an integral part of these financial statements.
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
STATEMENT OF INVESTMENTS
DECEMBER 31, 1999
Number of
Shares
COMMON STOCKS - 27.1% Value*
BANKING - 0.4%
16,700 First Essex Bancorp, Inc. $ 237,975
COMMERCIAL PRINTING - 2.0%
43,548 Courier Corp. 1,012,491
16,500 Ennis Business Forms 127,875
1,140,366
48,851 DIVERSIFIED MANUFACTURING - 1.0%
27,900 Lindberg Corp. 372,489
Synalloy Corp. 209,250
581,739
FOREST & PAPER PRODUCTS - 0.9%
12,800 Greif Brothers Corp. 380,000
2,850,148 Repap Enterprises, Inc. 136,807
516,807
MANUFACTURED HOUSING - 0.9%
54,800 Patrick Industries, Inc. 503,475
MACHINERY MANUFACTURER - 0.6%
25,700 Hardinge, Inc. 335,705
METALS & MINING INDUSTRY - 4.4%
13,600 Cleveland-Cliffs Inc. 423,300
52,416 Impala Platinum Holdings Limited - ADR 2,119,609
2,542,909
OIL & GAS EXPLORATION & PRODUCTION - 3.3%
15,000 Berry Petroleum Co. 226,875
28,200 Laclede Gas Co. 609,825
221,511 Ranger Oil Ltd. 692,220
14,780 Sunoco, Inc. 347,330
1,876,250
The accompanying notes are an integral part of these financial
statements.
BERWYN INCOME FUND
STATEMENT OF INVESTMENTS (Continued)
Number of
Shares
COMMON STOCKS (Continued) Value*
REAL ESTATE INVESTMENT TRUST - 6.7%
16,000 First Industrial Realty Trust, Inc. $ 439,000
53,650 Hospitality Property Trust 1,022,702
37,000 Mid-America Apartment Communities, Inc. 837,124
86,200 Town & Country Trust 1,546,212
3,845,038
STEEL & STEEL PRODUCTS - 1.3%
38,158 AK Steel Holding Corp. 720,232
TEXTILE INDUSTRY - 0.5%
42,402 Dixie Group, Inc. 312,715
TRANSPORTATION INDUSTRY - 2.5%
129,400 Anangel-American Shipholding - SP ADR 735,962
48,600 Stolt-Nielsen S.A. 692,550
1,428,512
UTILITIES - 2.6%
7,000 Hawaiian Electric. 202,125
26,700 Otter Tail Power Co. 1,001,250
18,000 Sempra Energy 312,750
1,516,125
TOTAL COMMON STOCKS (Cost $16,598,240) $15,557,848
PREFERRED STOCKS - 16.6%
52,620 BANKING - 2.6%
Astoria Financial Corp. PFD B 1,499,670
28,500 FOOD PROCESSING - 1.0%
Chiquita Brands International, Inc. PFD Series A CV 555,750
INDUSTRIAL SERVICES - 0.1%
4,500 Prologis Trust 82,125
The accompanying notes are an integral part of these financial
statements.
BERWYN INCOME FUND
STATEMENT OF INVESTMENTS (Continued)
Number of
Shares
PREFERRED STOCKS (Continued) Value*
METALS & MINING INDUSTRY - 4.9%
23,400 Battle Mountain Gold Co. PFD CV $325 $ 601,088
51,200 Freeport McMoran Copper & Gold PFD A CV 0.05 SH 976,000
32,600 Freeport McMoran Copper & Gold PFD D 409,538
33,420 Hecla Mining PFD B CV 797,903
2,784,529
OIL & GAS EXPLORATION & PRODUCTION - 4.5%
60,965 Callon Petro Co. PFD A CV 2,072,810
19,300 Western Gas Resources, Inc. PFD CV 516,275
2,589,085
REAL ESTATE INVESTMENT TRUST - 1.5%
14,000 First Industrial Realty PFD A 315,000
31,100 Mid America Apt. Communities PFD A 540,363
855,363
STEEL & STEEL PRODUCTION - 2.0%
44,567 Bethlehem Steel Corp. 3.5% PFD CV 1,114,175
TOTAL PREFERRED STOCKS (Cost $13,135,856) $9,480,697
WARRANTS - 0%
6,000 IMC Global, Inc. 563
TOTAL WARRANTS (Cost $21,336) $ 563
CLOSED-END MUTUAL FUNDS - 0.2%
6,000 ASA Limited 113,625
TOTAL CLOSED-END MUTUAL FUNDS (Cost $141,734) $ 113,625
Face
Amount CORPORATE BONDS - 57.3%
AUTO & AUTOMOTIVE PARTS - 2.5%
$1,520,000 General Motors 7.40% 09/01/25 1,447,922
The accompanying notes are an integral part of these financial
statements.
BERWYN INCOME FUND
STATEMENT OF INVESTMENTS (Continued)
Face
Amount CORPORATE BONDS (Continued) Value*
BANKING - 3.4%
2,000,000 Chase Manhattan 7.125% 02/01/07 $1,951,882
20,000 Nations Bank Corp. 6.375% 02/15/08 18,654
1,970,536
CHEMICAL INDUSTRY - 3.2%
2,130,000 IMC Global Inc. 7.30% 01/15/28 1,834,399
DRUGSTORE - 3.0%
3,064,000 Drug Emporium, Inc. 7.75% CV 10/01/14 1,731,160
ELECTRONICS - 6.5%
171,000 Kent Electric 4.5% CV 09/01/04 141,503
1,389,000 Kollmorgen Corp. 8.75% CV 05/01/09 1,394,209
2,520,000 Trans-Lux Corp. 7.5% CV 12/01/06 2,167,200
3,702,912
FINANCE INDUSTRY - 5.3%
2,027,000 Ford Motor Credit Co. 6.375% 11/05/08 1,870,175
20,000 General Motors Acceptance Corp. 5.875% 01/22/03 19,125
1,250,000 XEROX Capital Trust I 8% 02/01/27 1,124,710
3,014,010
FOREST & PAPER PRODUCTS - 3.3%
630,000 Boise Cascade 7.35% 02/01/16 538,956
750,000 Georgia Pacific 7.25% 06/01/28 674,777
30,000 Georgia Pacific 7.375% 12/01/25 27,438
737,000 Stone Container Corp. 6.75% CV 02/15/07 631,978
1,873,149
INDUSTRIAL SERVICES - 1.5%
1,300,000 Omnicare Inc. 5% 12/01/07 871,000
MACHINERY MANUFACTURING - 2.1%
1,250,000 Robbins & Myers 6.5% CV 09/01/03 1,198,438
METALS & MINING - 4.3%
500,000 Campbell Resources Inc. 7.5% CV 07/20/04 176,250
2,500,000 Cyprus Amax Minerals Co. 7.375% 05/15/07 2,262,545
2,438,795
OFFICE EQUIPMENT - 0.0%
25,000 XEROX Corp. 8.125% 04/15/02 25,420
The accompanying notes are an integral part of these financial
statements.
BERWYN INCOME FUND
STATEMENT OF INVESTMENTS (Continued)
Face
Amount
CORPORATE BONDS (Continued) Value*
OIL & GAS - 3.9%
1,500,000 Ashland Oil, Inc. 8.23% 02/26/07 $ 1,517,943
700,000 Gulf Canada Resources Ltd. 9.625% 07/01/05 717,500
2,235,443
OIL & GAS EXPLORATION & PRODUCTION - 2.6%
1,930,000 Swift Energy 6.25% CV 11/15/06 1,490,925
RETAIL INDUSTRY - 3.6%
2,524,000 Dairy Mart Stores 10.25% 03/15/04 2,069,680
TELECOMMUNICATIONS INDUSTRY - 1.3%
750,000 GTE 7.51% 04/01/09 754,327
TEXTILE - 4.3%
3,495,000 Dixie Group, Inc. 7% CV 05/05/12 2,485,819
TOBACCO - 2.6%
3,034,000 Standard Commercial Corp. 7.25% CV 03/31/07 1,463,905
TRANSPORTATION - 2.3%
1,330,000 Transportacion Maritima Mexicana SA 10% 11/15/06 1,073,975
1,700,000 World Airways, Inc. 8% CV 08/26/04 255,000
1,328,975
1,000,000 UTILITY - 1.6%
Consolidated Edison 6.25% 02/01/08 923,350
TOTAL CORPORATE BONDS (Cost $39,931,431) 32,860,165
TOTAL INVESTMENTS (Cost $69,828,597) - 101.2% 58,012,898
OTHER ASSETS AND LIABILITIES, NET - (1.2%) (672,280)
NET ASSETS - 100% $57,340,618
__________________________________________
* See Note 2 to the Financial Statements.
ADR American Depositary Receipt
CV Convertible Security
PFD Preferred Stock
SP Sponsored
The accompanying notes are an integral part of these financial
statements.
BERWYN INCOME FUND
A SERIES OF THE BERWYN FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - ORGANIZATION
On April 30, 1999, Berwyn Income Fund, Inc., (the "Fund") reorganized
as a separate portfolio of The Berwyn Funds, a Delaware Business Trust.
The Berwyn Funds is registered under the Investment Company Act of
1940, as amended, as an open-end management company. Berwyn Income
Fund is a portfolio series of The Berwyn Funds.
The Fund's investment objective is to provide investors with current
income while seeking to preserve capital. Certain of the Fund's
investments are in corporate debt instruments; the issuers' ability to
meet these obligations may be affected by economic developments in
their respective industries.
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 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 as of the close of
trading on the New York Stock Exchange (4:00 p.m. Eastern Time).
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 Trustees.
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 using the accrual method.
Discounts and premiums on debt securities purchased are amortized to
interest income over the lives of the respective securities.
Distributions to Shareholders: Dividends from net investment income
are paid quarterly to the shareholders. Distributions of net realized
capital gains, if any, are paid at least annually to the shareholders.
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.
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 .50% of the Fund's average
daily net assets. The Investment Adviser and the Directors and
Officers of the Investment Adviser, together with their families, owned
160,851 shares of the Fund at December 31, 1999. Certain Trustees and
Officers of the Fund are also Directors and Officers of the Investment
Adviser.
During the year ended December 31, 1999, the Fund paid $83,725 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 ended December 31, 1999, the Fund made purchases of
$5,171,768 and sales of $50,444,066 of investment securities other than
short-term securities and U.S. Government securities.
Cost of securities owned at December 31, 1999 and the net realized
gains or losses on securities sold for the year then ended for Federal
income tax purposes were not materially different from amounts reported
for financial reporting purposes.
At December 31, 1999, net unrealized depreciation for financial
reporting and Federal income tax purposes aggregated $(11,815,699) of
which $3,342,322 related to appreciated securities and $(15,158,021)
related to depreciated securities.
At December 31, 1999, the Fund had a capital loss carryforward of
approximately $4.1 million to offset capital gains realized through
December 31, 2007. Gains offset will not be distributed to
shareholders.
