Dear Shareholder,
The last fiscal year was very much a year of transition. The
names of the Fund and the investment manager were changed,
the manager then become part of Millennium Bank, a full-
service bank that began operations on October 26, 1998, and
the Global Equity Portfolio shrank from $26 mn to $3 mn as
the result of a major shift from the Equity Portfolio to the
Global Income Portfolio. The main part of this shift was made
at the end of 1997/early 1998, because of the uncertain
economic environment that followed the collapse of the Asian
markets in 1997.
The year started with Asia in the midst of a crisis that seemed
to have the potential to spin out of control. Concern that the
crisis would spread to Hong Kong and China resulted in
extremely nervous markets. There was some relief in the first
half of the calendar year, but conditions deteriorated rapidly
over the summer when Russia was forced to default. What
followed was a panic liquidation that centered on concern
about Latin America.
The Asian markets actually held up relatively well at this time.
Equity prices around the world fell sharply, while government
bonds rallied strongly - at least in the case of the major
developed economies. Emerging market debt was also hit
hard, leading to a dramatic widening out of spreads against the
governments. The spreads on corporate bonds and even
Agencies, also widened out significantly at that time. The
wholesale selling that occurred had little basis in fundamentals
and provided the first clue that something out of the ordinary
was happening.
What seems to have happened was that hedge funds were
forced to liquidate positions. As liquidity dried up in some of
their larger positions, they sold out other holdings to meet
margin calls and to reduce overall exposure. Initially, it did
not seem that hedge funds were large enough to exert that
much negative pressure. However, news of the collapse of
Long-term Capital Management (LTCM) revealed the extent
of the iceberg that lay beneath the surface.
At times like this, when there is widespread fear and many
predications of disaster, it is doubly important to have reliable
forecasts of underlying economic and market conditions. Our
indicators remained positive throughout, and actually
improved even further in some instances. Earnings were
clearly hurt by the slowdown in many areas of the world, but
inflation and interest rates continued to fall. Bonds yields led
the way down, but then short rates also eased.
The Penn Street Fund
The large cap, growth stocks with high P/E's continued to
dominate the market, along with soaring internet stocks with
no earnings at all. The top 50 stocks in the Standard & Poor's
500 Index have accounted for the main price appreciation, and
also for the exceptionally high price-earnings ratio. This was
an environment in which a value approach was bound to
underperform. Equity prices were obviously hurt by the crises
in Asia, and Russia, even though the Portfolios had no
positions in any of the countries involved. The main event,
however, was a substantial withdrawal from the Equity
Portfolio at the end of 1997/early 1998, and switch into the
Income Portfolio.
The Equity Portfolio went from $26 mn at the end of 1997
fiscal year to $3 mn at the end of this fiscal year. The extent
and timing of the main exchange was bound to be highly
disruptive and incurred high transactions costs. Fortunately,
there are benefits for shareholders going forward in that the
Portfolio was able to eliminate all existing capital gains, while
retaining significant losses, thereby improving the tax outlook
for shareholders in the future.
The value of the Global Equity Portfolio fell 3.1% in the
fiscal year to end October 1998, but was recovering well from
the weakness over the summer and has continued to recover
since. The Morgan Stanley Capital International World Index
(MSCIWI) was up 15.26% over the same period, but, as
discussed before, this is not really an appropriate index for
comparison with the Portfolio which adopts a more flexible
approach and pays more attention to controlling risk. The
Morningstar World Equity Index is probably a more
appropriate index for comparison. That index was up 1.8% for
the year to October 1998. As it was, all of the relative
weakness in the Portfolio occurred at the start of the year.
From mid-January on, the Portfolio stayed in line with the
MSCIWI. Shareholders are now well positioned to deal with
the uncertain, but relatively positive, environment that we
anticipate.
Bond markets did not perform that well early in 1998, and we
used price weakness, when the long government bond yield
rose above 6%, to extend maturity in the Income Portfolio.
Such opportunities were important, since the Portfolio grew
significantly as the result of transfers from the Equity
Portfolio. The Portfolio made steady progress over the year,
displaying very low volatility. For most of the year the
Portfolio outperformed the Salomon Brothers World Bond
Index, but slipped behind when the yen rallied strongly at the
end of the summer. Yen bonds by that time yielded less than
1% and did not offer value. The Portfolio ended the year up
9.15%, falling between the Salomon Brother World Bond
Index and the Morningstar International Bond Index.
Going into the new fiscal year, the Portfolio is holding no
Japanese bonds. This is an extreme position, but we find little
value in Japanese bonds yielding close to 1%, or less,
particularly since the economy is likely to recover next year.
As conditions are expected to change as the year progresses,
the Advisor will continue to pay close attention to economic
developments, particularly as they affect the inflation outlook.
Market Outlook
There has been, and still is, a concern that the world is moving
into a massive deflation, at which point the world's central
banks become powerless to operate monetary policy to
stimulate demand. The implication of this is that the world
will suffer a major depression that will crush asset values.
Some commentators believe that the world has already
stepped over this line, and that it is already too late to take
remedial action.
A deflationary contraction that gets out of control is clearly a
matter of concern, and recent events in Japan provide a
sobering insight into how this might work. In Japan, interest
rates have hit rock bottom, but without stimulating demand.
Instead, demand has continued to fall, resulting in a disastrous
economic performance over the past year. Unlike the Great
Depression of the 1930's in the United States, this has been
more like a slow-motion train wreck - what might be called
the Grinding Deterioration.
However, this did not happen without help from the
government. Early in 1997, the economy was showing signs of
recovery, but was hit by an increase in the sales tax, and in
other taxes. It is easy to see in retrospect that this was not a
clever move, but even at the time it was clear the recovery was
still, fragile and needed encouragement. The government's
reaction was just about the worst thing it could have done.
The rest of the world has many more chances to head off
disaster before getting into the hole that Japan dug for itself. It
is not really deflation that is bad for stocks, but the causes of
that deflation. There have been a number of instances where
prices have fallen but stock prices have risen. Falling
commodity prices, for example, hurt commodity producers,
but they also lower costs for producer who use them and will
act like a tax cut for consumers faced with lower prices. What
hurts an economy, and stocks, is a collapse of the credit
system.
What happened in the 1930's, was a very sudden and dramatic
collapse of the banks and other financial institutions which
brought about a huge credit contraction, and economic
collapse. The deflation at the time was as much a symptom of
these conditions as collapsing stock prices. In Japan,
confidence has eroded away, reducing the demand for credit
and making lenders paranoid. Propping up the banks may be
necessary to preserve the financial infrastructure, but it will
not solve the problem. The only solution is to get demand up
and running. A sharp devaluation would help, but the yen has
recently strengthened against the dollar. That leaves domestic
demand to get the job done, and this is getting a boost, but will
need more.
The rest of the world has responded to the signs of slowing
activity by cutting interest rates. The Federal Reserve took the
lead in September and led rates down. For a while it looked as
if the continental European countries, in particular those
entering the new Euro currency alignment, would not join in.
The UK is a special case; outside the Euro and with an
extremely weak economy. At least the Monetary Committee
has finally woken up to the dangers of recession and is now
firmly set on a path to lower interest rates.
The Bundesbank and the Bank of France resisted all talk of
lower rates into December, and opinion was virtually
unanimous that nothing would happen until the new European
Central Bank (ECB) took over monetary policy for all
participating members in the new year. This still allowed for
other Euro members to ease monetary policy, by bringing
interest rates down to the core rate of 3.30% in Germany and
France.
At the last minute, however, the Euro countries got together
under the ECB umbrella, and agreed to cut rates to 3% in early
December. The one holdout was Italy which wished to retain a
small margin ahead of the final setting of rates in the Euro,
and kept the rate at 3.5%. The Bank of Italy did finally cut the
official lending rate to 3% late in December, with no loss of
confidence in the lira. For some countries, such as Ireland,
getting into line has meant cutting rates substantially.
The advantage of this move, at this time and in this way was
that it helped depoliticize the decision making process. It
would have been difficult for the ECB to cut rates quickly in
the New Year without fearing a lose of confidence, after the
Bundesbank had held out steadfastly against such a move.
Duisenberg, who had earlier declared himself to be set dead
against cutting rates, was ecstatic about the move afterwards.
Another encouraging sign is the fact that the Bundesbank has
proposed that the government cut taxes - a reversal from the
usual demands for further fiscal restraint.
The move to lower rates encourages us to believe that the
world economy will recover next year. Our forecasting models
are indicating some further economic weakness extending into
the first quarter of 1999. However, by the second quarter there
are clear signs of recovery. This shows up in the US and other
major economies for both production and company profits.
Under these circumstances, the near-term outlook for bonds
and equities remains favorable. Signs of a sustainable recovery
will quickly put a floor under bond yields, but should allow
equity prices to move higher. How quickly conditions turn
negative for bonds will depend on how quickly, and the extent
to which, commodity prices react to the economic recovery.
The recent pattern has been for lower earnings and lower
interest rates. The outlook, after the first quarter, will be for
the opposite. It seems likely that earnings will improve in the
second quarter, and interest rates should stop falling, and then
firm. We will need to continue monitoring developments
closely to see how long they remain positive as conditions
change.
There are also some other events to be taken into account that
fall outside the normal forecasting models. The Euro will be
introduced at the start of 1999, and people will become
increasingly aware of the Y2K potential for disruption. These
are one-off events, which make it very hard to determine the
market response. In addition, there is the impeachment
process, and how that will play out in the Senate.
The potential for escalating conflict in the middle east, the
attempt by Brazil to cut the budget deficit in the midst of a
recession and some lingering concerns over a Chinese
devaluation all contribute to an uncertain climate going into
the new year. These are at least known problems, and, as the
saying goes "better the devil you know." However, they all
contain the potential to be highly disruptive.
The Euro is seen as a long-term benefit, although there are
likely to be some short-term adjustment problems. The
greatest destructive potential comes from the Y2K problem if
major parts of the infrastructure fail to work. Most individual
companies are likely to continue to function internally.
However, this will become impossible if the national grid goes
down, or the telephone system fails etc. It could be that the
concerns are largely unfounded, in which case huge amounts
of money are being spent for no reason. Alternatively, the
potential for disruption is real and could bring the economy to
its knees. This is definitely a situation that will need to be
monitored closely.
Sincerely,
Richard T. Coghlan
President
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1998 Penn Street Fund, Inc.
COMMON STOCKS (76.7%) Shares U.S. $ Value
NORTH AMERICA (40.3%)
United States (38.5%)
Adobe Systems Inc. 2,500 $92,813
AT&T Corp. 1,200 74,738
Banc One Corp. 1,400 68,381
Boeing Co. 800 30,050
Cendant Corp. (a) 3,800 43,225
Centocor Inc. (a) 1,800 80,100
Chase Manhattan Bank 800 45,550
Compaq Co. 1,500 47,438
Corning Inc. 1,250 45,156
Engelhard Corp 2,000 42,000
Genzyme Corp. (a) 2,000 84,125
Global Marine Inc. (a) 3,400 41,862
Goodyear Tire & Rubber Co. 1,200 64,613
Hewlett Packard Co. 1,000 60,187
Johnson Controls Inc. 900 50,625
Leap Wireless International Inc.(a) 400 2,419
Motorola Inc. 700 36,400
Newmont Mining Corp. 1,622 34,467
Oracle Corp. (a) 2,000 59,125
Qualcomm Inc. (a) 1,600 89,000
Roper Industries 1,800 32,062
US Steel 2,300 53,475
1,177,811
Canada (1.8%)
Newbridge Network-ADR (a) 2,700 55,350
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - continued
October 31, 1998 Penn Street Fund, Inc.
Shares U.S. $ Value
SOUTH AMERICA (1.7%)
Brazil (1.7%)
Telebras-Sponsored ADR (a) 700 $53,134
CENTRAL AMERICA (2.4%)
Mexico (2.4%)
Telephone De Mexico 1,400 73,763
EUROPE (21.1%)
FRANCE (7.0%)
Alcatel Alsthom SA (a) 1,000 21,937
Club Mediterranee SA (a) 700 54,373
STE Nationale Elf Aquitaine (a) 1,200 69,788
Vivendi 300 68,690
214,788
Germany (4.8%)
Deutsche Lufthansa AG 1,500 32,658
Metro AG 1,000 61,688
Volkswagen AG 680 51,200
145,546
United Kingdom (9.3%)
British Petroleum-Sponsored ADR(a) 1,008 89,145
Imperial Chemical-Sponsored ADR(a) 1,500 54,281
Reuters Group PLC 4,000 40,954
Rio Tinto PLC SHS 4,000 48,857
Williams Holdings PLC 8,000 49,929
283,166
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - continued
October 31, 1998 Penn Street Fund, Inc.
Shares U.S. $ Value
ASIA (11.2%)
Japan (10.5%)
Bank of Tokyo-Mitsubishi, LTD 7,000 65,205
Fanuc LTD. 1,500 45,239
Japan Equity Fund (a) 4,000 27,500
Kajima Corp. 18,000 53,511
Mitsubishi Heavy Industry 10,000 38,776
Nomura Securities Co. LTD. 5,000 37,915
Pioneer Electronic 3,200 52,943
321,089
Australia (0.7%)
Pacific Dunlop Ltd. 11,399 20,517
TOTAL COMMON STOCK (Cost: $2,557,371) 2,345,164
GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS - continued
October 31, 1998 Penn Street Fund, Inc.
FIXED INCOME SECURITIES (15.0%) Principal Amt.(b) U.S. $ Value
EUROPE (0.6%)
France (0.6%)
Club Mediterranee 4.59% due 03/02/2003 225 $19,283
NORTH AMERICA (14.4%)
United States (14.4%)
Korea 8.875% due 04/15/2008 200,000 183,920
Credit Lyonnais 6.75% due 09/19/2049 300,000 256,500
440,420
TOTAL DEBT SECURITIES (Cost: $477,299 ) 459,703
SHORT-TERM INVESTMENTS (14.7%)
U.S. Treasury Bill 4.24% due 03/04/1999 200,000 197,126
Highmark Money Market Fund 251,499 251,499
TOTAL SHORT-TERM INVESTMENT (Cost $448,625) 448,625
TOTAL INVESTMENT IN SECURITIES (Cost: $3,483,295) (Notes 2
and 3) (106.4%) 3,253,492
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS-NET(-6.4%)(193,846)
TOTAL NET ASSETS (100.0%) $3,059,646
(a) non-income producing security
(b) in local currency
GLOBAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
October 31, 1998 Penn Street Fund, Inc.
FIXED INCOME SECURITIES (92.4%) Principal U.S.$ Value
Amt. (a)
NORTH AMERICA (81.5%)
United States (81.5%)
Credit Lyonnais 6.75% due 09/19/2049 800,000 $684,000
Korea Development Bond 6.50% due 11/15/2002 500,000 411,350
Republic of Korea Bond 8.75% due 04/15/2003 550,000 524,920
Republic of Italy Bond 6.875% due 09/27/2023 500,000 547,950
US Treasury Bond 5.50% due 11/15/1998 1,000,000 1,000,234
US Treasury Bond 5.00% due 02/15/1999 1,500,000 1,501,758
US Treasury Bond 8.00% due 08/15/1999 1,800,000 1,848,938
US Treasury Bond 5.50% due 03/31/2000 500,000 507,578
US Treasury Bond 5.50% due 12/31/2000 600,000 614,531
US Treasury Note 7.75% due 02/15/2001 400,000 429,500
US Treasury Note 8.00% due 05/15/2001 550,000 597,781
US Treasury Note 5.625% due 02/15/2006 1,000,000 1,070,313
US Treasury Note 7.25% due 05/15/2016 500,000 608,984
US Treasury Note 7.50% due 11/15/2016 600,000 748,781
US Treasury Note 7.50% due 11/15/2024 300,000 389,109
US Treasury Note 6.00% due 02/15/2026 1,500,000 1,637,813
US Treasury Note 6.75% due 08/15/2026 500,000 599,844
US Treasury Note 5.00% due 01/13/1999 1,000,000 1,000,781
US Treasury Note 6.375% due 05/15/1999 500,000 504,805
US Treasury Note 5.875% due 02/28/1999 1,000,000 1,004,453
YPF Corp 8.00% due 02/15/2004 350,000 325,500
16,558,923
EUROPE (10.1%)
European CC (4.6%)
Council of Europe Bond 6.75% due 05/11/2004 300,000 403,555
United Kingdom Bond 9.125% due 02/21/2001 400,000 533,952
937,507
Italy (2.8%)
International Bank Recon & Development 6.50%
due 07/30/2007 800,000,000 563,518
GLOBAL INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - continued
October 31, 1998 Penn Street Fund, Inc.
Shares/ U.S.$ Value
Principal Amt.
Germany (2.7%)
Greece Floating Rate Note 4.00% due 2/10/2003 910,000 551,504
OTHER COUNTRIES (0.8%)
Australia (0.8%)
First Australia Prime Income Fund 28,000 157,500
TOTAL DEBT SECURITIES (Cost: $17,936,986) 18,768,952
SHORT-TERM INVESTMENTS (13.7%)
US Treasury Bills 5.06% due 12/03/1998 550,000 547,448
US Treasury Bills 3.710% due 12/24/1998 500,000 497,217
Highmark Money Market Fund 1,749,264 1,749,264
TOTAL SHORT-TERM INVESTMENTS (Cost:$2,784,165) 2,793,929
TOTAL INVESTMENT IN SECURITIES (Cost: $20,721,151) (Notes 2A
and 3) (106.1%) 21,562,881
LIABILITIES IN EXCESS OF CASH AND OTHER
ASSETS - NET (-6.1%) (1,241,875)
TOTAL NET ASSETS (100.0%) $20,321,006
(a) in local currency
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
Penn Street Fund, Inc.
Global Equity Global Income
Portfolio Portfolio
ASSETS
Investment in securities, at value
(identified cost $3,483,295 and
$20,721,151 respectively)
(Notes 1 and 2A) $3,253,492 $21,562,881
Cash (including foreign currencies) 667
Receivables:
Interest and dividends 5,511 322,593
Investment securities sold
Tax reclaims 1,643 -
Prepaid expenses 1,932 2,117
Deferred organization expenses (Note 2G) 12,464 12,533
Total assets 3,275,709 21,900,124
LIABILITIES
Payable for securities purchased 197,126 1,533,208
Accrued expenses 18,937 45,910
Total liabilities 216,063 1,579,118
NET ASSETS (Note 4) $3,059,646 $20,321,006
Shares outstanding 281,051 2,127,461
Net asset value, offering and redemption
price per Share $10.89 $9.55
At October 31, 1998, the components of net assets were as
follows:
Paid-in capital $3,942,022 $19,468,968
Undistributed net investment income 6,572
Accumulated net realized losses on
investments (652,656)
Unrealized appreciation/depreciation of investments and
translation of foreign currency denominated
assets and liabilities (229,720) 845,466
$3,059,646 $20,321,006
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
Penn Street Fund, Inc.
Global Equity Global Income
Portfolio Portfolio
INVESTMENT INCOME
INCOME
Interest $104,967 $1,085,747
Dividends 76,548 41,978
Total income 181,515 1,127,725
EXPENSES
Investment management fees (Note 5) 75,745 161,923
Distribution expenses (Note 6) 2,455 611
Shareholder servicing fees (Note 6) 20,844 43,619
Administration (Note 5),
accounting and transfer agent 32,361 68,062
Professional fees 8,541 23,316
Custody fees 7,990 4,321
Amortization of organization expenses 6,438 6,370
Directors' fees and expenses 3,674 4,667
Other operating expenses 9,159 13,196
Total expenses 167,207 326,085
Net investment income 14,308 801,640
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
Net realized gain from investments 4,908,492 456,970
Net realized gain (loss) from foreign
currency Transactions 63,641 125,609
Net change in unrealized
appreciation/depreciation of Investments (5,500,045) 199,102
Net change in unrealized appreciation/depreciation of foreign
currency denominated assets and liabilities (43,714) 5,015
Net gain (loss) on investments and foreign currency
denominated asset and liabilities (571,626) 786,696
Net increase (decrease) in net assets resulting from
operations ($557,318) $1,588,336
GLOBAL EQUITY PORTFOLIO
Statement of Changes in Net Assets
Penn Street Fund, Inc.
Year ended Year ended
October 31, 1998 October 31, 1997
OPERATIONS
Net investment income $14,308 $56,840
Net realized gain on investments and foreign
currency transactions 4,972,133 1,920,558
Net change in unrealized appreciation of
investments and foreign currency denominated
assets and liabilities (5,543,759) 1,636,759
Net increase in net assets resulting
from operations (557,318) 3,614,157
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income ($0.05 and $0.04
per share, respectively) (14,308) (103,025)
Distribution from realized gains ($0.07 and $0.84 per share,
respectively) (18,583) (1,931,165)
CAPITAL SHARE TRANSACTION
Net decrease in net assets from capital
share transactions (a) (22,405,665) (1,661,764)
Net decrease in net assets (22,995,874) (81,797)
Net assets at the beginning
of the period 26,055,520 26,137,317
Net assets at the end of the period $3,059,646 $26,055,520
(a) A summary of capital share transactions is as follows:
Year ended Year ended
October 31, 1998 October 31, 1997
Shares Value Shares Value
Shares sold 40,331 $442,792 46,525 $514,080
Shares issued in reinvestment of distributions
to shareholders 3,021 32,891 182,905 2,034,170
43,352 475,683 229,430 2,548,250
Shares redeemed (2,053,882)(22,881,348) (353,430) (4,210,014)
Net increase (decrease) (2,010,530)($22,405,665)(124,000)($1,661,764)
GLOBAL INCOME PORTFOLIO
Statement of Changes in Net Assets
Penn Street Fund, Inc.
Year ended Year ended
October 31, 1998 October 31, 1997
OPERATIONS
Net investment income $801,640 $635,117
Net realized gain on investments and foreign
currency transactions 582,579 217,370
Net change in unrealized appreciation
of investments and foreign currency
denominated assets and liabilities 204,117 (387,862)
Net increase in net assets resulting
from operations 1,588,336 464,625
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income ($0.43 and $0.90
per share, respectively) (801,438) (1,071,807)
Distributions from realized gains ($0.30 and $0.57 per
share, respectively) (582,579) (676,413)
CAPITAL SHARE TRANSACTION
Net increase (decrease) in net assets from capital share
transactions (a) 8,705,954 (175,271)
Net increase (decrease)
in net assets 8,910,273 (1,458,866)
Net assets at the beginning
of the period 11,410,733 12,869,599
Net assets at the end of the period
(including undistributed net investment income
of $6,572 and $-0- respectively) $20,321,006 $11,410,733
(a) A summary of capital share transactions is as
follows:
Year ended Year ended
October 31, 1998 October 31, 1997
Shares Value Shares Value
Shares sold 1,321,141 $12,696,936 - $ -
Shares issued in reinvestment of distributions
to shareholders 144,949 1,384,018 180,658 1,748,229
1,466,090 14,080,954 180,658 1,748,229
Shares redeem (550,241) (5,375,000) (197,017)(1,923,500)
Net increase (decrease) 915,849 $8,705,954 (16,359) $(175,271)
GLOBAL EQUITY PORTFOLIO
Financial Highlights
For a share outstanding throughout each period Penn Street Fund, Inc.
Year ended Year ended Nov 8, 1995+ to
October 31, 1998 October 31, 1997 October 31, 1996
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $11.37 $10.82 $10.00
Net income (loss) from investment operations
Net investment income 0.05 0.02 0.05
Net realized and unrealized gain (loss) on investments
and foreign currency transactions(0.41) 1.41 0.84
Total from investment operations (0.36) 1.43 0.89
Less distributions
Distributions from
net investment income (0.05) (0.04) (0.07)
Distributions from realized gains(0.07) (0.84) -
Total distributions (0.12) (0.88) (0.07)
Net asset value, end of period $10.89 $11.37 $10.82
TOTAL RETURN (3.18%) 13.57% 8.89%*
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of period (in thousands) $3,060 $26,056 $26,137
Ratio to average net assets
Expenses 1.99% 1.71% 1.82%**
Net investment income 0.17% 0.20% 0.40%**
Portfolio turnover rate 44% 25% 42%
+ Commencement of operations
* Total return has not been annualized
**Annualized
GLOBAL INCOME PORTFOLIO
Financial Highlights
For a share outstanding throughout each period Penn Street Fund, Inc.
Year ended Year ended Nov 8, 1995+ to
October 31, 1998 October 31, 1997 October 31, 1996
PER SHARE OPERATING PERFORMANCE
Net asset value,
beginning of period $9.42 $10.48 $10.00
Net income from investment operations
Net investment income 0.43 0.47 0.50
Net realized and unrealized gain (loss) on
investments and foreign
currency transactions 0.43 (0.06) 0.26
Total from investment
operations 0.86 0.41 0.76
Less distributions
Distributions from
net investment income (0.43) (0.90) (0.28)
Distributions from
net realized gains (0.30) (0.57) -
Total distributions (0.73) (1.47) (0.28)
Net asset value,
end of period $9.55 $9.42 $10.48
TOTAL RETURN 9.15% 4.19% 7.79% *
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of period(in thousands)$20,321 $11,411 $12,870
Ratio to average net assets
Expenses 1.81% 1.72% 1.84%**
Net investment income 4.46% 5.39% 4.88%**
Portfolio turnover rate 43% 22% 29%
+ Commencement of operations
* Total return has not been annualized
**Annualized
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
Penn Street Fund, Inc.
(1) Organization
Penn Street Fund Inc. (formerly S.I.S. Mercator Fund Inc.)
(the "Fund"), is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company and is authorized to issue
shares in separate series. The Fund currently offers shares in
two diversified series, the Global Equity Portfolio and the
Global Income Portfolio (the "Portfolios").
The Fund was incorporated on July 6, 1995, and between that
date and November 8, 1995 the Fund had no operations other
than those relating to organizational matters and the
registration of its shares under applicable securities laws.
(2)Significant Accounting Policies
The Global Equity Portfolio's investment objective is to
achieve a high rate of return, with emphasis on capital
appreciation, by investing principally in equity securities of
companies located anywhere in the world, but predominately
in the developed countries. The Global Income Portfolio's
investment objective is to achieve a relatively stable rate of
total return with emphasis on yield, by investing principally in
fixed income securities and, to a lesser extent, in equity
securities of high quality companies located predominately in
the developed countries with, at most, very limited exposure to
less developed countries. The price of each Portfolio's shares
will fluctuate daily and there can be no assurance that the
Portfolios will be successful in achieving their stated
investment objectives.
The following is a summary of the significant accounting
policies followed by the Portfolios in the preparation of their
financial statements. These policies are in accordance with
generally accepted accounting principles.
A.Security Valuation. The securities held by the Portfolios
are valued as of the close of the New York Stock Exchange
(the "NYSE"). Listed securities are valued at the last quoted
sales price on the exchange were the security is principally
traded. Securities listed on foreign exchanges are valued at the
latest quoted market price available prior to the close of the
NYSE. Debt securities may be valued on the basis of prices
provided by a pricing service using methods approved by the
Fund's Board of Directors. Other assets and securities for
which no quotations are readily available are valued in good
faith by, or under the direction of, the Fund's Board of
Directors.
B.Currency Translation. The market values of all assets and
liabilities denominated in foreign currencies are recorded in
the financial statements after translation to the U.S. dollar
based upon the bid price of such currencies against the U.S.
dollar last quoted by a major bank or broker. The cost basis of
such assets and liabilities is determined based upon historical
exchange rates. Income and expenses are translated at average
exchange rates in effect as accrued or incurred.
The Portfolios do not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise
from sales and maturities of short-term securities, sales of
foreign currencies, currency gains or losses realized between
the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Portfolios' books,
and the U.S. dollar equivalent of the amounts actually received
or paid. Net unrealized foreign exchange gains and losses arise
from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from
changes in the exchange rate.
C.Forward Currency Contracts. The Portfolios may enter
into forward purchases or sales of foreign currencies to hedge
certain foreign currency denominated assets and liabilities
against declines in market value relative to the U.S. dollar.
Forward currency contracts are marked-to-market daily and
the change in market value is recorded by the Portfolios as an
unrealized gain or loss. When the forward currency contract is
closed, the Portfolios record a realized gain or loss equal to the
difference between the value of the forward currency contract
at the time it was opened and the value at the time it was
closed.
Investments in forward currency contracts may expose the
Portfolios to risks resulting from unanticipated movements in
foreign currency exchange rates or failure of the counterparty
to the agreement to perform in accordance with the terms of
the contract.
D. Federal Income Taxes. The Portfolios intend to comply
with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute all of their
taxable income to their shareholders. Therefore, no federal
income tax provision is required.
E. Security Transactions, Interest and Dividends. As is
common in the industry, security transactions are recorded on
the trade date. Interest income is accrued as earned. Discounts
and premiums are amortized in accordance with Federal
income tax requirements. Dividends are recorded on the ex-
dividend date.
F.Distributions to Shareholders. Distributions to
shareholders are recorded on the ex-dividend date. The
character of distributions paid to shareholders is determined
by reference to income as determined for income tax purposes,
after giving effect to temporary differences between the
financial reporting and tax basis of assets and liabilities, rather
than income as determined for financial reporting purposes.
G.Deferred Organization Expenses. All of the expenses
incurred by the Fund in connection with the organization and
the registration of the Portfolios' shares were borne equally by
each Portfolio and are being amortized to expense on a
straight-line basis over a period of five years.
H.Use of Estimates. In preparing financial statements in
accordance with generally accepted accounting principles,
management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of
the financial statements, and revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(3)Investments
For the year ended October 31, 1998, the cost of securities
purchased and the proceeds from securities sold, excluding
short-term notes, was $3,408,128 and $21,858,910,
respectively, for the Global Equity Portfolio, and $17,401,800
and $5,874,286, respectively, for the Global Income Portfolio.
At October 31, 1998 net unrealized appreciation of investment
securities consisted of gross unrealized appreciation and gross
unrealized depreciation of $268,336 and $(498,139),
respectively, for the Global Equity Portfolio and $2,065,693
and $(1,223,903) respectively, for the Global Income
Portfolio.
On October 31, 1998 the Global Equity Portfolio had a capital
loss carry forward of $652,656 which expires in 2006.
(4)Capital Stock
At October 31, 1998, the authorized capital of the Fund
consisted of one billion shares of $.01 par value common
stock with 100 million shares designated and classified the
Global Equity Portfolio and 100 million shares designated and
classified the Global Income Portfolio.
(5)Investment Management Fee and Administration Fee
Investment Advisory Agreement. Penn Street Advisors, Inc.
("Penn Street", formerly Strategic Investment Services, Inc.)
provides investment management services to each of the
Portfolios under an Investment Advisory Agreement. Penn
Street provides the Portfolios with continuous investment
programs, a trading department, and selects brokers and
dealers to effect securities transactions. As compensation for
its services over the past year, Penn Street was paid a monthly
fee which was equal to the annual rate of 0.90% of each
Portfolio's average daily net assets. As of the start of the new
fiscal year, starting in November 1998, the management fee
paid to Penn Street has been reduced to 0.75% of each
Portfolio's average daily net assets.
Administration Agreement. Penn Street also serves as the
Administrator of the Fund under an Administration
Agreement. The services include the administration of the
Fund's business affairs, supervision of services provided by
other organizations providing services to the Fund, including
the custodian, dividend disbursing agent, legal counsel and
independent accountants, preparation of certain Fund records
and documents, record keeping and accounting services. As
compensation for these services, Penn Street is paid a monthly
fee which is equal to the annual rate of 0.25% of each
Portfolio's average daily net assets.
(6)Distribution Plans
Distribution Plan. The Portfolios have adopted Distribution
Plans pursuant to rule 12b-1 under the '40 Act, whereby each
Portfolio may make monthly payments at the annual rate of
0.25% of each Portfolio's average net assets to East Coast
Consultants, Inc. ("East Coast") for providing certain
distribution services. These services can include: promotion of
the sale of Portfolio shares, preparation of advertising and
promotional materials, payment of compensation to persons
who have been instrumental in the sale of Portfolio shares, and
for other services and materials, including the cost of printing
Fund prospectuses, reports and advertising material provided
to investors, and to defray overhead expenses of East Coast
incurred in connection with the promotion and sale of Fund
shares.
Shareholder Services Plan. The Portfolios have also adopted
Shareholder Services Plans (the "Plans") which are designed
to promote the retention of shareholder accounts. Under these
Plans, the Portfolios are authorized to pay East Coast a
monthly fee which, on an annual basis, may not exceed 0.25%
of the average net assets of each Portfolio. Payments under the
Plans would be used, among other things, to compensate
persons and/or organizations that provide services to
shareholders that are designed to encourage them to maintain
their investments in the Portfolios.
(7)Other Transactions with Affiliates
Certain officers and directors of the Fund are also officers
and/or directors of Penn Street and East Coast.
Shareholders and Board of Directors
Penn Street Fund, Inc.
Malvern, Pennsylvania
We have audited the accompanying statement of assets and
liabilities of Penn Street Fund, Inc. (comprising, respectively,
the Global Equity Portfolio and the Global Income Portfolio),
including the portfolios of investments, as of October 31,
1998, and the related statements of operations for the year then
ended, and changes in net assets and the financial highlights
for each of the two years in the period then ended. These
financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and
financial highlights based on our audits. The financial
highlights for the period November 8,1995 (commencement of
operations) to October 31, 1996 were audited by other auditors
whose report dated November 18, 1996, expressed an
unqualified opinion on the financial highlights.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements and financial highlights
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of October 31,
1998 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of the Global Equity Portfolio
and the Global Income Portfolio as of October 31, 1998, the
results of their operations for the year then ended, and the
changes in their net assets and the financial highlights for each
of the two years in the period then ended in conformity with
generally and accepted accounting principles.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
December 2, 1998
