BRANDYWINE FUND, INC.
MANAGED BY FRIESS ASSOCIATES, INC. ANNUAL REPORT SEPTEMBER 30, 1998
DEAR FELLOW SHAREHOLDERS:
Ugly. Unadulterated ugliness. We know of no better way to describe the
market environment in the recently completed September quarter.
Successfully repositioning your portfolio at the beginning of this year out
of Asian and emerging market-exposed companies has dodged many bullets. The
incoming fire is now coming from another direction. Hedge funds dumped billions
of dollars of their equities in recent weeks to cover bad, heavily leveraged
bets on interest-rate and foreign-currency movements. Stocks plummeted
regardless of individual company fundamentals.
The $11.2 billion pulled from stock mutual funds in August is the first
outflow since September 1990. Fortune magazine's September cover heralds The
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Crash of '98. More people now compare this year to the Crash of '87.
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The average S&P 500 stock is down 28 percent from 52-week highs this year;
38 percent is the comparable 1987 number. The average NYSE stock this year
declined 36 percent versus 39 percent in '87. It gets worse. The average Nasdaq
stock declined 46 percent from 52-week highs. Guess what the comparable decline
was in '87? Forty-four percent.
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Venerable Merrill Lynch sank from $107 to below $38. Bankers Trust went from
a high of $120 to $50, J.P. Morgan was down to $72 from a high of $135, and
Citicorp fell from $181 to $80, all in the last three months. We cite these even
though they weren't in your Fund simply to reflect that the popularly quoted
indices don't always fully reflect the total reality.
Nearly three-quarters of Nasdaq stocks, more than half of the NYSE, and
almost 40 percent of S&P stocks were down by more than 30 percent from 52-week
highs. A full one-fourth of S&P 500 stocks are down 50 percent or more in the
last 12 months. The really bad news is that your Fund did not escape this
pummeling. It is down 27.7 percent for the past 12 months, impacted by the 18.9
percent decline of the September quarter. This retrenchment affected your five
and ten year results as well which show 58.9 percent and 353 percent gains,
annualized at 9.7 percent and 16.3 percent.
The following charts better reflect your year-by-year progress, adjusted to
December year ends to make easier comparisons to the indices. Note that when the
Nasdaq Industrials and the Russell 2000 outperform the S&P 500, your performance
swiftly outpaces the S&P 500 as well.
YEARLY PERFORMANCE
FOR THE PERIOD 12-31-85 THROUGH 9-30-98
TIME PERIOD YOUR FUND NASAQ IND. RUSSELL 2000 S&P 500
1986 16.41 5.80 N/A 18.70
1987 2.64 -2.97 N/A 5.22
1988 17.62 11.80 22.38 16.57
1989 32.94 18.22 14.21 31.65
1990 0.62 -9.36 -21.46 -3.14
1991 49.21 64.75 43.68 30.48
1992 15.66 8.37 16.36 7.64
1993 22.54 11.16 17.00 10.05
1994 0.02 -6.46 -3.18 1.27
1995 35.75 27.97 26.21 37.53
1996 24.92 15.03 14.76 22.99
1997 12.02 10.04 20.52 33.34
1998 -15.89 -15.50 -16.80 5.96
Global overcapacity creates competitive devaluations and global deflation.
Ford and GM price cuts, for example, are the first in years.
The recent meeting of finance ministers and central bank heads of the Group
of Seven provided no solutions. A Marshall Plan-type effort may eventually be
necessary to return the world from its recent painful deflationary downturn to
future prosperity.
Former Treasury Secretary Nick Brady, who was instrumental in the successful
Mexican peso bailout, is calling on the Fed to lower rates by an additional full
percentage point. New York Federal Reserve President William McDonough confirms
in a speech to international bankers that". . . we are in the most serious
financial crisis since WW II, [with] a propensity to get worse rather than
better."
In a speech to the National Association of Business Economics on October 7,
Federal Reserve Chairman Alan Greenspan warned of a possible credit crunch. He
noted tightening of bank lending, consumer unwillingness to invest in Real
Estate Investment Trusts and lower-grade bonds, as well as expectations for a
slowing economy in '99.
Newly risk-averse investors began shunning commercial-mortgage-backed
securities in recent weeks, causing the October 5 bankruptcy filing of Criimi
Mae, the largest buyer of bonds backed by commercial mortgages. The biggest
creditors to the $2.8 billion asset REIT are Merrill Lynch, Deutsche Bank, and
Citicorp.
The Fed-coordinated bailout of the now-infamous Long Term Capital Management
hedge fund was required, said Greenspan in testimony to Congress, to avoid "the
seizing of markets," stating their collapse". . . could have . . . impaired the
economies of many nations, including our own." Greenspan also added, "I will
forecast . . . that there will be many more (LTCM's) . . . running into a very
large number, in the hundreds."
Insights like this into what ultimately became a $3.6 billion rescue do not
bode well for other hedge funds and money-center banks squeezed by derivatives
guesses that blew up when interest rates and foreign currencies moved in the
wrong direction. The yen yesterday swung dramatically from 124 to 112 against
the dollar -- all in a single day.
Fifteen of the largest Wall Street players including Merrill Lynch, Goldman
Sachs, Morgan Stanley Dean Witter and J.P. Morgan were encouraged by the Fed to
save the LTCM hedge fund. They were the brokers that loaned billions to LTCM to
attract its investment in risky derivatives products the brokers sell. Lehman
Brothers, as one of the fifteen, has seen its stock fall 70 percent because of
its exposure to hedge funds and emerging-market bonds.
With a few notable exceptions, all of your companies continue to demonstrate
strong earnings fundamentals. Their price weakness is more influenced by fears
about emerging-market issues, Japanese banking woes, over-leveraged hedge funds,
and other external factors unrelated to our bottom-up approach.
According to William O'Neil & Co., your companies' earnings increase for the
last 12 months are 62 percent versus just 13 percent for the S&P 500. And, for
the last quarter, the earnings are 123 percent compared to 12 percent.
COMPANY GROWTH
YOUR COMPANIES S&P 500
AVERAGE INCREASE
LATEST 12 MOS. EARNINGS 62% 13%
AVERAGE INCREASE LATEST
QUARTERLY EARNINGS 123% 12%
ALL S&P FIGURES ARE UNWEIGHTED. ANALYSIS BY WILLIAM O'NEIL & CO., INC.
SEPTEMBER 25, 1998.
Some of these solid companies did perform well during the quarter. David
Harrington's picks of Xircom and Mips Technologies rose 59 percent and 42
percent, while Andy Graves isolated Bebe Stores which climbed 38 percent. A.J.
Berk chose Access Health and Decrane Aircraft Holdings which rose 24 percent
apiece.
Remember the March quarter when many companies roared ahead independent of
their fundamentals? As we discussed earlier, that experience provides a model
that inspires our confidence. Eventually, these companies did react to the
fundamental analysis of your team. Of the stocks we sold, more than 75 percent
eventually declined from those prices, and a quarter of them by 40 to 90
percent.
This is because their earnings did indeed deteriorate and some quite
dramatically. You can imagine our chagrin when the press characterizes this as
"selling at the trough" simply because these stocks at first went up for while.
It is core to the Friess Associates investment strategy that it is the
earning power of a company that influences the price of its stock. That is
evident now that we have the perspective of eight months from those January
sales, rather than two.
Now that we are in a period where the market forces on the external front
are dramatically negative, for the reasons we mentioned above, we sense the
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similarity to what happened in March. Stocks went up then for reasons often
unrelated to their fundamental outlook. Now when many of them are going down,
individual company fundamentals are again being ignored. In both instances
outside forces drove stocks more than individual company fundamentals.
Vaunted Blue Chips such as Coca-Cola and Gillette, which we highlighted in
recent letters to you as examples of overpriced, slow-growing companies we don't
own, now experience dramatic stock-price losses.
Coke announced that weakness in Asia and Latin America will force profits
down in the September and December quarters. Since peaking in July, Coke shares
dropped 27 percent, wiping out more than $50 billion of its market value.
Gillette is closing 14 factories and laying off 10 percent of its work force.
Gillette "shaved" off 36 percent of its share price since its high early in the
September quarter.
When the market is driven by individual company earnings, our strategy
shines. When the market is driven by external macro issues, anything can happen.
Since mid-'96, U.S. stock performance has been dominated by big "safe" Blue
Chips, allowing the S&P 500 to outpace the more dynamic companies of the Russell
2000. That trend actually intensified in recent weeks as small stocks were
crushed in uncertainty while the crowd hid out in the Ciscos, Dells, Microsofts,
and other one-time market leaders.
These now enter their own painful phase. Cisco nevertheless is still ahead
from where we sold it in January despite its $70 to $41 decline. This business
gives us plenty of opportunities to be humbled. A poor sale. A great company.
Your stocks fly when the general market rebounds as reflected by the moves
in various holdings you own during the two-week rebound off the August 31 bottom
- -- many were up 15 percent or more in just two short weeks. Business Objects SA
and SPR, Inc. were up more than 50 percent, Xircom rose 48 percent, and Borders
Group climbed 43 percent. Quiksilver, Rational Software, Concord EFS, Inc. and
Dime Bancorp, Inc. all climbed more than 30 percent.
Declining earnings expectations have been your research team's primary
concern all this year. Late in 1997, we repositioned out of a heavy weighting in
semiconductor and oil-service companies. These two groups then enjoyed short-
lived gains of 22 percent and 19 percent immediately after you sold them before
falling 42 percent and 53 percent to new lows in late August.
Glimpses of a silver lining exist, however, as the current turmoil forces
market participants back to the basics: evaluating stocks one-by-one, examining
earnings prospects and carefully considering PE ratios to discern opportunities
for gains.
Huge government surpluses, estimated by some as much as $150 billion for
1999, give room to cut taxes or to increase government expenditures in order to
stimulate the economy. A weaker dollar helps some U.S. companies. IMF funding
will proceed. There is massive bipartisan support to shore up Brazil and the
negativity of impeachment will dissipate as Congressmen now return home.
Our company-by-company research method remains on track. Your companies have
posted the numbers as reflected in the aforementioned O'Neil analysis, but
individual performance doesn't carry much weight in the current environment.
That cannot be the case forever.
We're thankful that the Friess Associates' 34-year strategy has a proven
track record, the wisdom of which has been borne out over time in up and down
markets. We'll stick to buying reasonably priced, rapidly growing companies
that, perhaps most importantly in this unforgiving environment, will not
disappoint the analyst community's earnings expectations.
We will continue to allow cash levels to rise and fall to reflect the
balance of our ability to isolate profitable investments and our need to get out
of those that are faltering.
When the upswing begins we'll be positioned in the companies that have
historically done well in recoveries and are now undervalued based on genuine
growth prospects, not wishful thinking.
We thank you for your continued confidence and patience in this approach,
which right now must be as frustrating for you as it is for all of your
teammates here. We remain committed to our strategy just as you do with $35
million of our own pension money invested in the Funds, as well as all of my
personal equity investments.
We are optimistic that the way to win is to stick with the strategy that
after suffering in past down markets has then prospered in the up markets that
follow.
We experienced significant outflow of dollars from the Fund simply because
we allowed cash levels to rise when we felt it important to sell many stocks in
addition to the semiconductor and oil services companies we already mentioned
and could not find prudent replacements.
Therefore, we are particularly grateful for you and your appreciation for
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our research process and your long-term commitment to the strategy we employ.
Thanks.
God Bless!
/s/ Foster Friess
Foster Friess
President
FELLOW SHAREHOLDER . . .
How can you defend a country you neither fully understand nor appreciate?
For fellow shareholder John Lenczowski, the reply to this question was long in
gestation.
His answer is the Institute of World Politics -- a graduate school of
statecraft, national security, the historic principles of American political
philosophy, and moral leadership in Washington, D.C. The Institute is unique in
American academia: its curriculum is dedicated to molding leaders who will
defend our country and civilization. The program attracts students from
business, journalism, foreign embassies, and the U.S. government, including
officials from the CIA and the State and Defense Departments.
"The idea was to create a graduate school that recognized the rarity and
preciousness of American liberal democracy and to educate leaders to defend the
political order -- politically, economically, morally, psychologically, and
militarily," John explains.
The not-for-profit Institute was established in late 1990 on three $5,000
grants. Starting with a first year budget of only $83,000, Lenczowski considers
the Institute's success to be nothing short of a miracle.
Today, the Institute teaches over 150 students a year. Its permanent
headquarters are strategically located just blocks from the White House,
offering certificate programs in national security policy, intelligence, and
comparative politics. The Institute will soon be offering a master's degree.
Lenczowski believes people will be encouraged to know that positive work in
support of a morally ordered liberty actively goes on in Washington. Perhaps the
reason for this is, "The people involved at the Institute, the board members,
faculty, and staff, are united in a belief that America still is a depository of
eternal truths and principles which make for a successful civilization where
people can realize their God-given potential."
A foreign affairs expert, Lenczowski served as principal advisor on Soviet
Affairs to President Reagan from 1983 to 1987. He shared his thoughts on the
economic difficulties in Russia, which he believes have several causes: lack of
genuine private-property rights, including shareholder rights; the absence of
rule of law; and the pervasiveness of corruption and Mafia influence (which are
a legacy of the "moral Chernobyl" Russia suffered under communism).
Dr. Lenczowski attributes the most recent turmoil, however, to the global
deflation that severely harmed Russia's commodities-based economy. With gold,
oil, and agricultural prices plummeting, the recent market crash and ruble
devaluation were inevitable. He feels that unless the Fed injects more liquidity
into the international system, deflation will make dollar debtors around the
world incapable of meeting their obligations and force them into bankruptcy.
Dr. Lenczowski's focus outside of work is on his family. He and his wife,
Susan, have two children, Katie and Christian, and are involved with their
sports and other activities. They all often hike together in the mountains near
the Washington area. John also enjoys playing the piano. Hanging on his office
door at the State Department was this quotation from Shakespeare's Merchant of
Venice: "The man that hath no music in himself, Nor is not mov'd with concord of
sweet sounds, Is fit for treasons, stratagems, and spoils . . . Let no such man
be trusted."
- Adam Rieger
JACK . . .
You might remember our featuring Jack Fraser back in December 1995 as a key
broker at C.S. First Boston who helped us in our number one obligation of
growing your hard-earned assets. He knew our strategy so well and would suggest
only those companies that met our strict criteria for investment.
After working with Jack closely for many years, Foster and Bill decided to
bring him on board in 1996 as a researcher and newest management team member.
"Jack's contribution as an analyst from the sell-side was invaluable to us,"
Bill D'Alonzo comments, "and his experience in that environment brings a
perspective we thought would be helpful."
That has certainly proven to be true. Jack's role encompasses both the
research and the client liaison effort, giving him a unique ability to track
successful companies as well as describe those companies to our clients and
shareholders in performance review meetings.
Another task on Jack's plate is furthering our client communications. Jack
understands that "keeping in close contact with those depending on us to help
them reach their financial goals is a sure way to maintain a solid focus on
meeting their needs through an effective implementation of our strategy."
We are working with some of our largest and longest-term clients to
determine what they would most like to see us concentrate on when meeting with
them. "This feedback is central to the evolution of the client liaison effort,"
Jack explains.
This focus is making a difference. After a presentation Jack made to one of
our clients, we received a letter praising Jack's skills. "Every person I spoke
with rated your presentation by far the best of our meeting. You painted a
picture of the challenges the Brandywine team faced during late 1997 and early
1998 which allowed them to really understand the events of this period. I can
tell you that your frank commentary took a room full of doubters and turned them
into believers. Many of them commented that they now felt confident they could
successfully answer their clients' questions about the fund. Those comments tell
me that the time you and your firm invested to make the trip will pay off very
quickly. Thank you."
With an MBA in Finance from Ohio State and his six years at C.S. First
Boston, Jack has a discriminating knowledge of the industry which benefits our
shareholders and clients as well as the entire Friess Associates team. He works
closely with the researchers, collaborating on various purchase and sale ideas,
and he shares inputs with the trading desk, acting as a sounding board for any
new organizational ideas that surface.
Jack and his wife Mae have four children and live in the Chadds Ford,
Pennsylvania home they just finished building about a year ago. They enjoy
traveling together as a family, and always make it out to our Jackson office for
some winter-time skiing and summer-time hiking. You'll also find Jack on the
links, on the tennis court, or the soccer field, playing the sports he so
enjoys.
- Rebecca Buswell
Mike and Michael . . .
When you grow up as the only hearing person in your family, it seems natural
that your adult career might center around working with the deaf. That's the
case for Mike Bove. With two deaf parents and a deaf sister, Mike's first
language is American Sign Language (ASL). This makes Mike's role in the Delaware
Friess research office -- working closely with Michael Friess, deaf from a bout
with spinal meningitis as a seven-month-old infant -- an ideal career choice.
Together, they serve as technical analysts, reporting the latest performance
information on every stock we own to its respective researcher. Often a chart
will signal an underlying fundamental issue that our researchers need to jump
on. They cover all Friess Associates' holdings, including your Fund's, and
provide recent charts and newsworthy items affecting the companies to all on the
research team.
Before joining Friess Associates in December 1994, Michael's analytical
studies at Arizona State University in economics and financial analysis led him
to technical analysis, which he found challenging and motivating. He learned the
skills to design various tools which he and Mike use to make buy recommendations
based both on technicals and fundamentals. These systems also help determine the
right time to sell a particular holding. "I need to use tools that will automate
my work as much as possible," Michael explains, "and the systems we've created
do just that."
Mike's affinity for the market developed as he managed his own portfolio. He
was a successful mutual fund investor for 10 years before joining Friess
Associates, and was spending more and more time tweaking his portfolio just
prior to coming on board. Mike reflects, "I served as Michael's interpreter for
four years, and when the opportunity arose to become a full-time teammate here,
working collectively as a technical analyst team, I was honored." Mike's
interpreted for Dole, Kemp, Clinton, and Gore, as well as for court proceedings
and theatre interpretations. This, coupled with his interest in investing, made
Mike a real complement to Michael's efforts.
Senior researcher Carl Gates commends their work. "Perusing the entire
spectrum of all Friess Associates' holdings might seem a daunting task, since
there are upwards of 250 companies to follow, but Mike and Michael have it
covered well. They have a system which enables them to pool many sources of
information together to help researchers look into all possible developments,"
Carl continues. "And, their input about what stocks we might want to think about
buying and selling is invaluable. They are the eagle eyes, so to speak, and keep
us apprised of information pertinent to our investment decisions."
Outside the office, each can be found conversing in ASL, but their similar
interests end there. Mike's likely to be spending time with his wife Hansa and
their two children, enjoying music, photography, and traveling. Michael also
likes to travel, especially by helicopter, which he pilots himself! He is FAA
certified and is one of the only, if not the only, deaf helicopter pilot in the
U.S. If Michael's not in the air, he'll be in the water, scuba diving and
windsurfing.
- Rebecca Buswell
GROWING YOUR FUND . . .
Step aboard a modern ocean-going sailboat and you won't find the teak and
brass work of an earlier era. Instead, computer screens, electronic instruments,
and a sleek deck swept clear of all ornamentation distinguish contemporary
racers from their predecessors. Similarly, today's corporation relies on
computers and telecommunications to maneuver through the difficult waters of the
business world.
The addition of radar and global positioning satellites to today's racer has
only reinforced the importance of an experienced and imaginative crew. Today's
crew has better tools to realize its goals, yet success or failure still depends
on combined judgment and effort. In the same way, the automation and
computerization of the modern corporation make the skills and cooperation of its
employees even more critical if it is to edge out its competitors.
Each quarter we like to feature an employee at one of the companies in your
Fund's portfolio. This quarter, we introduce you to a member of the crew helping
to turn Apple Computer around. Tom Boger is the worldwide product manager for
the new iMac computer which Apple just released on August 15. The iMac, which
offers plug-in and go access to the Internet, is Apple's hottest new product in
years.
Tom's job includes identifying customers' needs and specifying the
requirements for a new product. He stands at the crossroads of product
development, engineering, marketing, and advertising and has to pinch himself to
believe where he is because he shares a passion with many Apple employees. "I
don't love the Mac because I work at Apple, I work at Apple because I love the
Mac," Tom confides.
Back in high school in Woodstown, New Jersey, Tom got his first Macintosh,
Apple's ground-breaking easy-to-use computer. This Mac led to a consuming hobby
and four years of being an Apple student rep at Penn State, teaching other
students about Apple's products. After graduating with a degree in Philosophy,
he started in sales with the company, focusing on schools in the Philadelphia
area and later universities in the Northeast before moving to California four
and a half years ago.
Apple has gone through some tough years but is now re-inventing itself. Tom
says it has the feel of a Silicon Valley start-up with projects moving at light
speed. Professionally, Tom's biggest challenge is keeping up with the pace
required, and personally his biggest challenge is finding enough time to spend
with his wife, Connie, doing the things they enjoy together -- jogging, skiing,
and taking trips to the beach and the wine country.
When we asked Tom what he wanted to say about the iMac, he first mentioned
its speed, style, and simplicity, but then he said there is a bigger message
that transcends the product. "Apple has gone back to being who we are, willing
to eschew conventional wisdom and to be a trend setter. iMac is a great product,
but it is the harbinger of even greater things to come."
Since researcher Andy Graves purchased your Apple shares in March at $28,
they jumped 37 percent and added $61 million to your portfolio.
- Margaret Barton
ON THE CUTTING EDGE . . .
NEW TOOL TO FIGHT BREAST CANCER
ImageCheckerTM from R2 Technologies of Los Altos, California is part of a new
generation of medical technology that will use computer databases to improve
human diagnosis. With ImageCheckerTM, once a radiologist finishes reading a
standard mammogram, the X-ray film is slipped into a scanner where it is
converted into digital computer data. Specialized software, based on
radiologists' interpretations of thousands of mammograms, rechecks the image for
signs of cancer. A clinical study of this technology showed that it can help
doctors find one additional cancer in 10 without calling for additional
biopsies.
GET A CHARGE OUT OF READING
NuvoMedia is one of several companies introducing an electronic "book."
Featuring a high-contrast screen, full-text search, and sound playback, the
RocketBook will ship this year for less than $500. People on the go can simply
download a book, encrypted for copyright protection, from a publisher's Internet
site. Users gain convenience, publishers save on printing costs, and books can
stay "in print" forever. Looking further into the future, MIT's Media Lab is
working on electronic ink which actually contains circuitry and can be printed
on paper. Someday you may be able to recharge the paper pages of your newspaper
with new content. How's that for recycling!
THIS CARTON SWEETENS THE JUICE
Fine wine improves with time. The same might be true of grapefruit juice.
Cornell University food scientists have developed a carton which takes the
bitterness out of the juice. A paper carton is lined with a cellulose polymer
impregnated with naringinase, an enzyme. The coating breaks down the two
ingredients responsible for the tartness of grapefruit juice: naringin, a
natural component of citrus fruits, and limonin acid, a byproduct of
pasteurization. The cellulose absorbs the limonin, while the enzyme "detarts"
the naringin. In just a few days, the packaged juice tastes sweeter than the
fresh-squeezed kind even though the sugar content in the juice remains the same.
THE WORLD'S LARGEST ATLAS
The most comprehensive world atlas anywhere is available to anyone with access
to the Internet. www.microsoft.com/TerraServer has 5 terabytes of uncompressed
satellite and aerial images of urban areas -- compressed to a terabyte of
database data. A terabyte, which is a trillion bytes, is nearly a billion pages
of text -- 4 million books. A terabyte holds 250 full-length movies. It is a lot
of data. In fact, TerraServer has more data in it than all the HTML pages on the
Internet. And, it grows by 10,000 pages per month. Microsoft created the site
with the cooperation of the U.S. Geological Survey and the Russian Space Agency
to demonstrate the power of its Windows platform to put vast quantities of
multimedia data onto the Internet, while offering researchers a wonderful
resource and you the fun of finding your neighborhood and printing out the
aerial photo.
HIGHLIGHTS. . .
APPAREL & SHOES
When quarterly earnings come in at nearly seven times the amount of last year
($.27 vs. $.04) and analysts predict them to triple for the next two quarters,
it's not hard to see the company's doing something right. Such is the case for
ANNTAYLOR STORES CORP., an upscale women's clothing retailer operating more than
320 stores in the U.S.
A recent visit to a San Francisco area store by our research team confirmed why
revenues and earnings have been so solid. The store manager told us that the
amount a typical customer spends on her purchases has been 20-25 percent greater
than last year. We also observed that there was very little on sale, less than 5
percent of the racks held sale items, indicating to us that there was little
excess inventory in key items.
AnnTaylor's merchandise is improving to better suit its target customer --
career-oriented women aged 25 to 55 often in professional or managerial
positions. Your company offers more suits, mix-and-match pieces, and key basic
items. And, the season's hottest colors of grey, black and brown are staples in
the stores.
We speak often with CFO Walter Parks, who tells us that square footage is
accelerating in double digits for the first time since '95. He also said the
company is bringing the AnnTaylor Loft concept (geared toward value-conscious
consumers) to malls and strip centers, while they were previously limited to
outlets.
BUILDING & RELATED
With favorably low interest rates, people are refinancing their mortgages and
saving hundreds of dollars each month. Much of that extra income is going toward
home remodeling projects. EAGLE HARDWARE & GARDEN, INC. benefits from this
trend.
This popular home improvement chain in the Western U.S., second only to Home
Depot, operates 32 stores in eight states -- from Colorado to Alaska. And,
according to CFO Ron Maccarone, Eagle has been much more successful recently in
finding new sites for store expansion. Plans are to open six new stores before
year-end and ten or more in '99.
Your company differentiates itself from its competitors by focusing on home
remodeling and decoration, specifically targeting women customers who prefer
Eagle's "softer environment" compared to the warehouse atmosphere at Home Depot.
With 128,000 square feet of selling space, Eagle offers more than 65,000
products. Anything you need for whatever project you want to tackle can be found
at Eagle, promising on its "More of Everything" merchandising philosophy.
Earnings were $.48 last quarter, climbing 17 percent on revenues of $308
million.
Selling today at $22, your shares are up 20 percent since purchase in March.
COMPUTERS
APPLE COMPUTER, INC. has made a financial turnaround through cost cutting and is
poised to make a strong product transition. Driving these changes is the 2nd
generation Macintosh computer, called the iMac.
Just released on August 15, iMac is opening the flood gates to more than 8
million Mac users as the first significant upgrade of the Mac. Its bold look
(many compare it to the new VW Bug), increased speed (new Apple G3 processor),
built in Internet connectivity, and ease of use that Apple is known for, are
making iMac a hot seller. Apple pre-sold 150,000 iMacs and earned the No. 1 spot
in retail computer sales for August.
Apple's on pace to release its newest operating system this fall, MacOS 8.5,
which will enable even better system performance and is equipped with new
features, including a totally rewritten search application, code-named Sherlock,
which performs both the hard drive and the Internet searches simultaneously.
In our conversations with CFO Fred Anderson, we learned that Apple has improved
working capital with $2 billion in cash and decreased days sales outstanding
(how many days worth of sales owed). Apple's inventory with distributors like
CompUSA is also down, allowing the company more control over inventory as well
as more flexibility on pricing.
Earnings have beat analysts' expectations in the last two quarters, with
earnings of $.38 in March and $.50 in June, exceeding Street estimates by more
than 50 percent both quarters.
Purchased in March, your shares are up 37 percent to $38 as of quarter end.
FINANCIAL/BUSINESS SERVICES
If you value the convenience and simplicity of paying for your groceries with a
swipe of your debit/credit card or purchasing your gas right at the pump, then
chances are you've got CONCORD EFS, INC. to thank. Concord provides most of the
machines at supermarket counters and gasoline pumps and also processes the
transactions.
And, when you charge purchases at convenience stores and other major retailers,
then it's likely Concord is providing the authorization for the transaction.
Your company also offers check verification services for many retailers, and, if
you want to make an electronic payment, Concord can do that, too.
President Ed Labry explained that a key to your company's success is that it's
set up as a bank holding company which can process its own transactions. As
such, Concord can achieve higher margins than its competitors.
He went on to tell us that Concord's revenues consist mainly of fees for sales
and rentals of ATM equipment, which is somewhat protected from economic cycles.
Revenues rose 60 percent to $91 million last quarter, driving earnings up 40
percent to $.15 from $.11.
Your shares are up 18 percent to $26 from their May purchase price of $22.
MACHINERY & MISCELLANEOUS MANUFACTURING
After eight consecutive profitable quarters and a recent record quarter in the
company's history, it makes sense to see MOTIVEPOWER INDUSTRIES, INC. in your
portfolio. The new management team in place since the end of 1996 is helping
generate these solid results for this company, which makes locomotives and
locomotive parts, including engines, alternators, and radiators.
According to Jack Pope, Chairman, management interest in owning stock is in line
with shareholder interest. This new management has moved up from owning 2
percent of Motivepower three years ago to 8 percent currently.
He went on to explain that Motivepower is the only company offering a broad
array of products to rail locomotive OEMs (Original Equipment Manufacturers) as
well as maintenance and repair services. This allows its customers to purchase
virtually everything they need from one vendor. And, Motivepower can typically
save the customer 33 percent in purchasing costs over a competing OEM.
Your company's top customers include Union Pacific, Burlington Northern, Kansas
City Southern, and TFM -- the largest rail company in Mexico. Union Pacific
uses Motivepower's turbo and traction motors exclusively.
Last quarter's record-breaker turned up earnings of $.42, up 40 percent from
$.30 last year, on revenues of $88 million.
Growing 63 percent since purchase in April '97, your shares sell today at $23.
MEDICAL & RELATED
With an FDA-approved drug for successful treatment of relapsing forms of
Multiple Sclerosis, BIOGEN, INC. continues to post strong earnings results and
exceed the Street's expectations in its product sales.
Earnings were up 58 percent in the recent June quarter, from $.26 to $.41, and
analysts predict September earnings to be $.49, rising 81 percent.
Fueling this growth is the drug Avonex, which is quickly gaining market share
since its introduction in 1996. Patients tolerate Avonex better than competing
drugs, and it is only injected once weekly compared to three times a week for
others.
CFO John Connelly explained to us recently how a study printed in the New
England Journal of Medicine was positive for your company. The study supported
the effectiveness of using interferons (like Avonex) to slow the progression of
the disease in earlier stages of MS. As a benefit not previously known, this
implies a much larger patient base than was originally believed.
He also thinks there are continued opportunities to expand Avonex sales in
Europe where sales have increased sequentially in each quarter since December
1997.
Biogen also licenses drugs it has developed for others to sell, including a
vaccine for hepatitis B. Your company does plan to market other drugs currently
in development, such as those to treat inflammation, pulmonary diseases, kidney
disease and central nervous system disorders.
Purchased just September 10, your shares have already climbed to $66 from $61.
NETWORKING
Such household computer names as IBM, Toshiba, and Hewlett-Packard look to
XIRCOM, INC. for products that will connect their portable PCs to the telephone
network, local area networks, and the Internet.
When you're dialing in to AOL, or to your office from home, Xircom's products
may just be making the connection.
Your company's newest product, a laptop PC card called RealPort, is adding some
real sizzle to the story and creating increased market share. RealPort doesn't
require a connector cable; the phone line or network line plugs directly into
the card.
We learned from CFO Steve DeGennaro that he is communicating to other investors
about manufacturing yields on RealPort being far ahead of internal plans. This
has allowed Xircom to maintain solid margins and offer its customers aggressive
pricing.
In June, earnings vaulted to $.20 from $.02 last year. Revenues were up 42
percent for the quarter.
Rising 65 percent since purchase in March, your shares sell today at $24.50.
SPECIALTY RETAILING
"Yeah, we've got that." And, chances are, with 8,000 products to choose from,
STAPLES, INC. can deliver on that advertising slogan. One of the nation's top
two office supply superstores, Staples sells virtually everything you need for
an office -- from calculators and computers to fax machines and furniture. Your
company has 740 stores in the U.S. and Canada, and others in the UK and Germany.
John Mahoney, CFO, told us that inventory management has improved. This is
particularly evident in the PC area where most of their competitors are seeing a
drag on same store sales. Declining average selling prices, mainly at the low
end with the trend toward the $1,000 PC, is the primary reason for these
lackluster results, but Staples is insulated from this problem as the company
cut back on the number of brands carried and focused more on higher-end
products.
Staples' build-to-order program also helps. Your company pleases the customer by
building the PC to the exact specifications requested while keeping its
inventory low, free from pre-built PCs that may not sell as well.
Last quarter same store sales were up 14 percent, the highest in company history
and four times better than its closest competition. Total revenues were up 39
percent, pushing earnings up 50 percent to $.12.
Rising 58 percent since purchase in March '97, your shares sell today at $29.
DISTRIBUTION UPDATE . . .
This year's distribution is just around the corner. If you're a shareholder on
October 23, 1998, you will receive an income dividend of approximately $.26 per
share on October 26, 1998. Your account will reflect reinvestment of this payout
on October 27. A very slight $.07 long-term capital gain, at the 20 percent
rate, will be distributed.
TOP TEN . . .
Three new groups joined your top ten this quarter -- Medical & Related to the
number five spot, Apparel & Shoe Retailers came in at number eight, and
Distribution stands at number ten. Holdings in Communications, Transportation &
Related, Textiles/Apparel Manufacturing, and Food/Restaurants categories dropped
from the top ten.
All but one of the Medical & Related companies you held in June were sold
during the quarter, but were replaced by Amgen, Biogen, Genzyme, and Osteotech.
Together these four companies have grown more than $11.5 million. Other new
medical products companies are ADAC Lab, Arterial Vascular, and Biomatrix,
bringing this category to 8.1 percent of the portfolio, up from 2.7 percent last
quarter.
Your Networking category moved up to number three this quarter at 10.8
percent, up from 5.9 percent at the number six spot in June. You purchased 3Com
Corp., and added to your Ascend Communications and FORE Systems positions. A $5
million gain in Xircom also helped.
Growth occurred in the Computers category, which was 9.2 percent of the
portfolio in June. We more clearly defined this sector this quarter and divided
it into two groups -- Computers, companies manufacturing PCs, and Computer &
Related, companies which make processors, hard drives, and other components for
the PC. Most significant in making the Computers group number one at 13.5
percent, was the $47 million addition and subsequent $44 million growth in Apple
Computer. New purchases of Sun Microsystems, Compaq Computer, and Gateway 2000
further increased this group.
TOP TEN INDUSTRY GROUPS
Computers 13.5%
Financial/Business Services 11.8
Networking 10.8
Computer & Related 8.7
Medical & Related 8.1
Specialty Retailing 7.5
Software 6.7
Apparel & Shoe Retailers 5.8
Machinery & Miscellaneous Manufacturing 5.1
Distribution 4.8
All Others 14.3
Cash 2.9
ALL IS NOT ROSES . . .
It's not pretty. This quarter is one we'd like to forget. With 11 stocks
tumbling more than $25 million, and 30 others dropping back more than $10
million apiece, it's not hard to see why.
The biggest disappointment was Computer Associates. Several large
multinational customers deferred some substantial purchase orders for software
and services causing your Fund's holding to fall $53 million. Jones Apparel
Group gave up $42 million, mainly due to a decline in career sales in department
stores, while Conseco lost $37 million after the Street continued to react to
concerns that Greentree Financial (acquired by Conseco) customers would
accelerate their rate of payments because of declining interest rates.
When analysts downgraded their sales estimates because of the 20 percent
decline in average selling prices of PCs, Office Depot slipped $32 million.
Northern Telecom fell a like amount when competitor Alcatel's pre-release of an
expected shortfall in third quarter earnings added to concerns about Northern
Telecom's exposure in Latin America and Asia. Computer Sciences' $30 million
drop was primarily caused by Morgan Stanley's downgrading of the stock with
concerns over '99 earnings.
Other big droppers were US Airways, Continental Airlines, Fruit-of-the-Loom,
and Xylan Corp. Of these names, you still hold only Computer Sciences.
Through the market's recent rugged terrain, a few stocks managed to shine.
Apple Computer soared $44 million, while EMC Corp. grew $28 million. Lucent
Technologies rose $21 million.
MARKET CAP . . .
The most notable shift this quarter was in your large cap category. Stocks
above $5 billion grew from 44.2 percent to 62.8 percent. New to your portfolio
are Compaq Computer, Amgen, Inc., Sun Microsystems, 3Com Corp., and Providian
Financial. You added to your positions in Tyco International, Ascend
Communications, and Apple Computer. Last quarter, Apple was one of your mid cap
companies.
The mid cap group decreased from 37.7 percent to 27.2 percent. You no longer
hold Jones Apparel Group, Continental Airlines, Tommy Hilfiger, Fruit-of-the-
Loom, Autodesk, and Integrated Health.
There was also a reduction in your small cap companies, from June's 12.6
percent to today's 7.0 percent. Unicapital Corp., Fairfield Communities,
Consolidation Capital, Mercury Interactive, CCA Prison Realty, and Terex Corp.
were each sold. These shifts stemmed not from a conscious effort to increase
market cap size, but simply a reflection of where we've found good ideas. Also,
the percentages were impacted by negative market action of smaller companies in
general.
YOUR COMPANIES' MARKET CAPITALIZATION
Large Cap 62.8%
Mid Cap 27.3
Small Cap 7.0
Cash 2.9
WALL STREET'S WILD RIDE . . .
For the first time in eight years, this quarter shows a downturn across the
board for all the indices. Trading terminals show an abundance of red. Investors
worry whether the market is still the best option for their money. Global
economies watch Wall Street every day as a barometer for how their own markets
will fare.
It's an uncertain and volatile time right now, but will we change our
strategy? No. We'll keep searching for companies that will surprise analysts
with solid earnings which can be purchased at reasonable PE ratios. As in the
past, we will let cash levels flesh out where they may as a natural evolution of
our strategy. We'll stay the course. And we thank you, our steadfast
shareholders who entrust us with the awesome responsibility of reaching your
financial goals. We are mindful of this mission each and every day (and night!)
and are determined to get you where you want to be. Thanks for your ongoing
confidence. We're in this together!
NEW FOLKS ON YOUR TEAM . . .
During the last few months, there have been some new faces at Friess
Associates, all in the Delaware office. John Walter is the most recent addition
to the trading desk, with 10 years trading experience. He came here from Alex
Brown in Baltimore, and before that, he was a trader at C.S. First Boston. In
the writing arena, Chris Aregood has come on board after nearly five years in
journalism. He wrote for the Business Section of the local Wilmington paper, The
News Journal, and The Philadelphia Business Journal. Sandy Frabizzio strengthens
the client liaison effort coming from five years at SEI Corporation where she
worked serving the clients of SEI's various mutual funds. We're excited to have
them on board. Watch for more expanded stories on each of them in upcoming
reports.
BRANDYWINE FUND, INC.
STATEMENT OF NET ASSETS
September 30, 1998
QUOTED
MARKET
SHARES COST VALUE
------- ----- ------
LONG-TERM INVESTMENTS - 97.1%(A)<F2>
COMMON STOCKS - 97.1%(A)<F2>
APPAREL & SHOE RETAILERS - 5.8%
1,545,500 Abercrombie & Fitch Co.*<F1> $ 65,487,771 $ 68,002,000
38,000 American Eagle Outfitters, Inc.*<F1> 1,498,150 1,315,750
426,300 AnnTaylor Stores Corp.*<F1> 8,923,025 8,659,432
2,813,000 Gap, Inc. 162,720,865 148,385,750
8,400 Pacific Sunwear of
California, Inc.*<F1> 184,759 186,900
2,916,700 TJX Companies, Inc. 70,345,446 51,955,177
-------------- --------------
309,160,016 278,505,009
THIS SECTOR IS 9.9% BELOW YOUR FUND'S COST.
BUILDING & RELATED - 0.5%
62,000 Comfort Systems USA, Inc.*<F1> 1,113,136 1,247,750
175,100 Dycom Industries, Inc.*<F1> 3,419,973 5,449,987
466,000 Eagle Hardware & Garden, Inc.*<F1> 8,406,123 10,106,608
59,100 Elcor Corp. 1,640,844 1,248,487
524,600 Hussmann International, Inc. 9,935,504 7,443,025
-------------- --------------
24,515,580 25,495,857
THIS SECTOR IS 4.0% ABOVE YOUR FUND'S COST.
COMMUNICATIONS - 3.4%
29,900 ADC Telecommunications, Inc.*<F1> 816,955 631,638
204,700 ADTRAN, Inc.*<F1> 5,050,317 4,349,875
35,600 IDT Corp.*<F1> 790,405 818,800
1,249,500 Nokia Corp. "A" ADR 101,213,240 98,008,281
148,400 PictureTel Corp.*<F1> 1,435,306 955,399
1,453,700 Tellabs, Inc.*<F1> 58,665,372 57,876,158
-------------- --------------
167,971,595 162,640,151
THIS SECTOR IS 3.2% BELOW YOUR FUND'S COST.
COMPUTERS - 13.5%
5,919,700 Apple Computer, Inc.*<F1> 165,061,614 225,688,562
7,582,900 Compaq Computer Corp. 254,321,272 239,809,213
510,500 Gateway 2000, Inc.*<F1> 26,932,407 26,609,812
3,094,000 Sun Microsystems, Inc.*<F1> 153,137,261 154,121,422
-------------- --------------
599,452,554 646,229,009
THIS SECTOR IS 7.8% ABOVE YOUR FUND'S COST.
COMPUTER & RELATED - 8.7%
260,000 Amdocs Limited*<F1> 2,750,666 2,941,380
261,000 BISYS Group, Inc.*<F1> 10,553,503 11,516,625
200,000 Cognizant Technology Solutions
Corp.*<F1> 3,204,940 3,100,000
3,299,900 Computer Sciences Corp. 177,634,142 179,844,550
400,000 CSG Systems International, Inc.*<F1> 17,632,951 17,700,000
2,245,100 EMC Corp. (Mass.)*<F1> 92,323,538 128,392,779
123,700 Intelligroup, Inc.*<F1> 2,572,171 2,102,900
2,312,000 Seagate Technology, Inc.*<F1> 54,059,831 57,945,656
165,000 SPR Inc.*<F1> 3,150,642 3,795,000
487,500 Sykes Enterprises, Inc.*<F1> 10,075,843 8,287,500
-------------- --------------
373,958,227 415,626,390
THIS SECTOR IS 11.1% ABOVE YOUR FUND'S COST.
DEPARTMENT STORES - 0.2%
497,600 Saks Inc.*<F1> 6,944,514 11,165,149
THIS SECTOR IS 60.8% ABOVE YOUR FUND'S COST.
DISTRIBUTION - 4.8%
533,700 AmeriSource Health Corp.*<F1> 28,282,853 29,053,561
151,100 Bergen Brunswig Corp. 6,647,599 7,640,069
1,762,200 CompUSA Inc.*<F1> 33,543,412 30,508,969
1,991,300 Tandy Corp. 112,282,987 106,534,550
1,150,100 Tech Data Corp.*<F1> 51,739,668 57,577,456
-------------- --------------
232,496,519 231,314,605
THIS SECTOR IS 0.5% BELOW YOUR FUND'S COST.
ELECTRONICS - 0.1%
173,600 DSP Communications, Inc.*<F1> 2,743,996 1,432,200
132,200 Laser Vision Centers, Inc.*<F1> 1,755,833 1,569,875
-------------- --------------
4,499,829 3,002,075
THIS SECTOR IS 33.3% BELOW YOUR FUND'S COST.
FINANCIAL/BUSINESS SERVICES - 11.8%
1,635,200 Capital One Financial Corp. 99,871,828 169,243,200
649,900 CMAC Investment Corp. 41,334,868 28,270,650
845,850 Concord EFS, Inc.*<F1> 18,465,209 21,833,926
1,522,900 Dime Bancorp, Inc. 45,183,433 38,549,168
125,000 First American Financial Corp. 3,996,318 4,000,000
453,700 Heller Financial, Inc.*<F1> 12,844,361 10,888,800
1,522,000 Household International, Inc. 69,264,616 57,075,000
12,129 Metris Companies Inc.*<F1> 630,160 565,515
315,800 NOVA Corp./Georgia*<F1> 9,689,489 9,691,270
2,382,700 Providian Financial Corp. 173,239,923 202,083,935
150,000 RCM Technologies, Inc.*<F1> 3,150,000 2,212,500
638,600 The Sabre Group Holdings, Inc.*<F1> 25,665,091 19,158,000
-------------- --------------
503,335,296 563,571,964
THIS SECTOR IS 12.0% ABOVE YOUR FUND'S COST.
FOOD/RESTAURANTS - 2.2%
1,056,400 Apple South, Inc. 14,740,592 11,752,450
1,708,000 Brinker International, Inc.*<F1> 39,612,099 32,025,000
495,200 Buffets, Inc.*<F1> 6,901,150 5,354,598
216,800 CEC Entertainment Inc.*<F1> 4,889,353 4,390,200
1,170,620 CKE Restaurants, Inc. 28,333,689 34,825,945
35,000 Logan's Roadhouse, Inc.*<F1> 825,625 586,250
135,200 Papa John's International, Inc.*<F1> 4,416,836 4,461,600
237,200 Ruby Tuesday, Inc. 3,881,014 3,587,650
169,800 U.S. Foodservice, Inc.*<F1> 6,998,586 7,067,925
-------------- --------------
110,598,944 104,051,618
THIS SECTOR IS 5.9% BELOW YOUR FUND'S COST.
HOME/OFFICE & RELATED - 0.7%
508,600 Maytag Corp. 15,984,173 24,285,650
369,700 Mohawk Industries, Inc.*<F1> 10,523,227 10,120,537
-------------- --------------
26,507,400 34,406,187
THIS SECTOR IS 29.8% ABOVE YOUR FUND'S COST.
INSURANCE - 0.4%
254,700 Allmerica Financial Corp. 17,581,604 15,186,487
125,800 Amerin Corp.*<F1> 3,411,184 2,374,475
-------------- --------------
20,992,788 17,560,962
THIS SECTOR IS 16.3% BELOW YOUR FUND'S COST.
LEISURE & ENTERTAINMENT - 0.8%
870,000 Gemstar International Group
Limited*<F1> 35,259,447 40,346,250
THIS SECTOR IS 14.4% ABOVE YOUR FUND'S COST.
MACHINERY & MISCELLANEOUS MANUFACTURING - 5.1%
462,750 AAR Corp. 11,490,189 9,081,469
217,600 Knoll, Inc.*<F1> 7,340,429 4,760,000
368,700 MotivePower Industries, Inc.*<F1> 5,011,762 8,618,362
751,200 Ogden Corp. 20,215,841 21,362,626
138,300 Pentair, Inc. 5,670,290 4,460,175
3,550,100 Tyco International Ltd. 200,772,316 196,143,025
-------------- --------------
250,500,827 244,425,657
THIS SECTOR IS 2.4% BELOW YOUR FUND'S COST.
MEDICAL & RELATED - 8.1%
254,200 ADAC Laboratories*<F1> 6,575,774 6,100,800
3,203,900 Amgen Inc.*<F1> 238,640,403 242,096,296
317,200 Arterial Vascular
Engineering, Inc.*<F1> 13,412,811 11,736,400
1,393,100 Biogen, Inc.*<F1> 84,775,028 91,684,090
26,800 Biomatrix, Inc.*<F1> 1,265,925 1,045,200
743,400 Genzyme Corp.*<F1> 25,857,502 26,855,325
73,500 Osteotech, Inc.*<F1> 1,767,127 1,947,750
102,300 VISX, Inc.*<F1> 6,265,702 6,854,100
-------------- --------------
378,560,272 388,319,961
THIS SECTOR IS 2.6% ABOVE YOUR FUND'S COST.
NETWORKING - 10.8%
4,353,400 3Com Corp.*<F1> 133,949,781 130,876,264
7,149,600 Ascend Communications, Inc.*<F1> 277,669,002 325,306,800
3,205,500 FORE Systems, Inc.*<F1> 58,713,990 53,291,438
298,500 Xircom, Inc.*<F1> 4,330,460 7,313,25
-------------- --------------
474,663,233 516,787,752
THIS SECTOR IS 8.9% ABOVE YOUR FUND'S COST.
OIL/GAS FIELD SERVICES - 0.7%
819,600 Anadarko Petroleum Corp. 31,557,763 32,220,935
THIS SECTOR IS 2.1% ABOVE YOUR FUND'S COST.
PHARMACEUTICALS - 3.2%
265,600 Alpharma Inc. 6,560,807 6,972,000
97,100 Kendle International Inc.*<F1> 1,447,354 3,180,025
548,400 Medicis Pharmaceutical Corp.*<F1> 22,903,311 21,730,350
3,361,800 Mylan Laboratories Inc. 89,816,597 99,173,100
409,800 Watson Pharmaceuticals Inc.*<F1> 18,516,605 20,797,350
-------------- --------------
139,244,674 151,852,825
THIS SECTOR IS 9.1% ABOVE YOUR FUND'S COST.
REAL ESTATE OPERATIONS - 0.1%
458,000 Bluegreen Corp.*<F1> 3,645,366 3,435,000
40,000 Trammell Crow Co.*<F1> 918,700 1,020,000
-------------- --------------
4,564,066 4,455,000
THIS SECTOR IS 2.4% BELOW YOUR FUND'S COST.
SEMICONDUCTOR & RELATED - 0.2%
458,000 Cree Research, Inc.*<F1> 8,206,173 7,099,000
THIS SECTOR IS 13.5% BELOW YOUR FUND'S COST.
SOFTWARE - 6.7%
65,300 Access Health, Inc.*<F1> 1,781,723 2,407,938
126,200 Ardent Software, Inc.*<F1> 1,584,811 1,577,500
360,000 Boole & Babbage, Inc.*<F1> 8,454,050 8,370,000
182,500 Business Objects S.A.-SP ADR*<F1> 3,160,219 2,281,250
127,100 Cerner Corp.*<F1> 3,131,739 3,407,932
908,300 Citrix Systems, Inc.*<F1> 45,229,709 64,489,300
506,400 Cognos Inc.*<F1> 13,880,050 8,482,200
808,800 Electronic Arts Inc.*<F1> 24,013,081 35,486,100
3,374,000 HBO & Co. 97,028,191 97,424,250
118,500 MAPICS, Inc.*<F1> 2,433,346 2,614,466
29,400 Pinnacle Systems, Inc.*<F1> 802,341 764,400
96,400 Platinum Technology, Inc.*<F1> 2,338,828 1,735,200
246,000 QuadraMed Corp.*<F1> 5,630,681 4,950,750
1,717,800 Rational Software Corp.*<F1> 27,553,415 28,881,371
112,500 Segue Software, Inc.*<F1> 1,961,619 1,856,250
211,600 Software AG Systems, Inc.*<F1> 5,131,996 3,597,200
1,859,800 Sterling Software, Inc.*<F1> 34,575,934 51,261,667
-------------- --------------
278,691,733 319,587,774
THIS SECTOR IS 14.7% ABOVE YOUR FUND'S COST.
SPECIALTY RETAILING - 7.5%
3,244,400 Best Buy Co., Inc.*<F1> 155,953,978 134,642,600
471,000 BJ's Wholesale Club, Inc.*<F1> 18,215,218 17,309,250
778,600 Borders Group, Inc.*<F1> 13,986,177 17,323,850
267,400 Ethan Allen Interiors Inc. 10,413,791 9,693,250
1,440,900 Family Dollar Stores, Inc. 14,375,455 22,694,175
38,100 Fingerhut Companies, Inc. 494,932 419,100
330,500 Furniture Brands
International, Inc.*<F1> 8,673,478 6,444,750
152,500 Longs Drug Stores Corp. 6,171,250 6,128,670
349,200 The Maxim Group, Inc.*<F1> 7,807,868 6,591,150
204,000 Michaels Stores, Inc.*<F1> 6,950,231 5,202,000
3,700,600 Staples, Inc.*<F1> 62,399,568 108,705,125
513,000 United Stationers, Inc.*<F1> 16,957,182 12,247,875
460,800 Zale Corp.*<F1> 12,610,138 11,808,000
-------------- --------------
335,009,266 359,209,795
THIS SECTOR IS 7.2% ABOVE YOUR FUND'S COST.
TEXTILES/APPAREL MANUFACTURING - 0.1%
30,000 Cutter & Buck Inc.*<F1> 746,126 690,000
214,900 Quiksilver, Inc.*<F1> 3,790,785 3,908,601
66,700 Tarrant Apparel Group*<F1> 1,492,888 1,617,475
-------------- --------------
6,029,799 6,216,076
THIS SECTOR IS 3.1% ABOVE YOUR FUND'S COST.
TRANSPORTATION & RELATED - 0.8%
544,900 ASA Holdings, Inc. 21,229,135 19,343,950
235,000 Atlantic Coast Airlines Holdings*<F1> 1,865,574 5,493,125
374,900 Atlas Air, Inc.*<F1> 13,344,154 10,755,131
-------------- --------------
36,438,863 35,592,206
THIS SECTOR IS 2.3% BELOW YOUR FUND'S COST.
MISCELLANEOUS - 0.9%
62,000 CSK Auto Corp.* <F1> 1,430,995 1,410,500
1,760,600 Solutia Inc. 50,015,316 39,724,418
-------------- --------------
51,446,311 41,134,918
THIS SECTOR IS 20.0% BELOW YOUR FUND'S COST.
-------------- --------------
Total common stocks 4,410,605,689 4,640,817,125
WARRANTS - 0.0% (A)<F2>
43 Sound Advice, Inc.*<F1>
Warrants, 06/14/99 0 0
-------------- --------------
Total long-term investments 4,410,605,689 4,640,817,125
PRINCIPAL
AMOUNT
- --------
SHORT-TERM INVESTMENTS - 2.0% (A)<F2>
COMMERCIAL PAPER - 1.7%
$40,000,000 Associates Corp. of North America,
due 10/01/98, discount of 5.73% 40,000,000 40,000,000
15,000,000 Citibank Capital Markets Assets,
due 10/01/98, discount of 5.78% 15,000,000 15,000,000
25,000,000 Ford Motor Credit Puerto Rico,
due 10/02/98, discount of 5.40% 24,996,250 24,996,250
-------------- --------------
Total commercial paper 79,996,250 79,996,250
VARIABLE RATE DEMAND NOTE - 0.3%
14,335,282 Firstar Bank U.S.A., N.A. 14,335,282 14,335,282
-------------- --------------
Total short-term investments 94,331,532 94,331,532
-------------- --------------
Total investments $4,504,937,221 4,735,148,657
--------------
--------------
Cash and receivables, less
liabilities 0.9% (A)<F2> 45,293,299
--------------
NET ASSETS $4,780,441,956
--------------
--------------
Net Asset Value Per Share
($0.01 par value 500,000,000 shares
authorized), offering and redemption
price ($4,780,441,956 3 183,933,458
shares outstanding) $25.99
------
------
*<F1> Non-income producing security.
(a)<F2> Percentages for the various classifications relate to net assets.
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
INCOME:
Dividends $ 20,727,172
Interest 103,573,094
---------------
Total income 124,300,266
---------------
EXPENSES:
Management fees 74,538,363
Transfer agent fees 802,556
Printing and postage expense 728,789
Custodian fees 571,264
Administrative services 444,820
Registration fees 116,898
Professional fees 47,952
Board of Directors fees 20,000
Other expenses 89,721
---------------
Total expenses 77,360,363
---------------
NET INVESTMENT INCOME 46,939,903
---------------
NET REALIZED LOSS ON INVESTMENTS (371,495,833)
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (1,950,083,412)
---------------
NET LOSS ON INVESTMENTS (2,321,579,245)
---------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($2,274,639,342)
---------------
---------------
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1998 and 1997
<TABLE>
1998 1997
----- -----
<S> <C> <C>
OPERATIONS:
Net investment income (loss) $ 46,939,903 $ (20,584,042)
Net realized (loss) gain on investments (371,495,833) 1,613,667,150
Net (decrease) increase in unrealized appreciation on investments (1,950,083,412) 981,427,330
---------------- ----------------
Net (decrease) increase in net assets resulting from operations (2,274,639,342) 2,574,510,438
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains ($7.0234273 and
$1.347376 per share, respectively) (1,544,738,561)*<F3> (250,675,102)
---------------- ----------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (47,435,909 and
57,592,561 shares, respectively) 1,551,435,565 2,068,244,776
Net asset value of shares issued in distributions
(45,515,816 and 7,103,901 shares, respectively) 1,441,485,893 233,833,825
Cost of shares redeemed (126,115,713 and 31,524,981 shares, respectively) (3,925,825,675) (1,131,490,538)
---------------- ----------------
Net (decrease) increase in net assets derived from Fund share activities (932,904,217) 1,170,588,063
---------------- ----------------
TOTAL (DECREASE) INCREASE (4,752,282,120) 3,494,423,399
---------------- ----------------
NET ASSETS AT THE BEGINNING OF THE YEAR 9,532,724,076 6,038,300,677
---------------- ----------------
NET ASSETS AT THE END OF THE YEAR
(including undistributed net investment income of $46,939,823 and $0, respectively) $ 4,780,441,956 $ 9,532,724,076
---------------- ----------------
---------------- ----------------
*<F3>See Note 7
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each year)
<TABLE>
Years Ended September 30, 1998
1998 1997 1996 1995 1994 1993 1992 1991 1992 1989
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of year $43.91 $32.83 $33.92 $24.77 $28.04 $19.36 $20.52 $15.79 $17.87 $12.89
Income from
investment operations:
Net investment income (loss) 0.21(0.07)(1)<F4>(0.08)(1)<F4>(0.10) 0.03 (0.02) 0.04 0.27 0.11 0.03
Net realized and
unrealized (losses) gains
on investments (11.11) 12.50 2.83 10.70 (0.43) 9.25 1.04 5.74 (1.48) 4.99
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations (10.90) 12.43 2.75 10.60 (0.40) 9.23 1.08 6.01 (1.37) 5.02
Less distributions:
Dividends from net
investment income -- -- -- -- -- (0.01) (0.13) (0.28) (0.03) (0.04)
Distributions from
net realized gains (7.02) (1.35) (3.84) (1.45) (2.87) (0.54) (2.11) (1.00) (0.68) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from distributions (7.02) (1.35) (3.84) (1.45) (2.87) (0.55) (2.24) (1.28) (0.71) (0.04)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year $25.99 $43.91 $32.83 $33.92 $24.77 $28.04 $19.36 $20.52 $15.79 $17.87
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Investment Return (27.7%) 39.3% 10.0% 45.5% (1.4%) 48.6% 5.9% 41.4% (7.9%) 39.0%
Ratios/Supplemental Data:
Net assets,
end of year (in 000's $) 4,780,442 9,532,724 6,038,301 4,137,484 2,240,554 1,413,253 695,128 527,808 271,856 169,745
Ratio of expenses to
average net assets 1.04% 1.04% 1.06% 1.07% 1.09% 1.08% 1.10% 1.09% 1.12% 1.13%
Ratio of net investment
income (loss) to
average net assets 0.6% (0.3%) (0.4%) (0.4%) 0.1% (0.1%) 0.2% 1.5% 0.9% 0.2%
Portfolio turnover rate 263.7% 192.4% 202.8% 193.7% 190.2% 150.4% 188.9% 187.9% 157.7% 91.0%
(1)<F4> Net investment loss per share is calculated using ending balances prior to consideration of adjustments for book and tax
differences.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
NOTES TO FINANCIAL STATMENTS
September 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of Brandywine
Fund, Inc. (the "Fund"), which is registered as a diversified, open-end
management investment company under the Investment Company Act of 1940. The
Fund was incorporated under the laws of Maryland on October 9, 1985. The
investment objective of the Fund is to produce long-term capital appreciation
principally through investing in common stocks.
(a) Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the issue
is traded, or if no sale is reported, the latest bid price. Securities
which are traded over-the-counter are valued at the latest bid price.
Securities for which quotations are not readily available are valued at
fair value as determined by the investment adviser under the supervision
of the Board of Directors. Short-term investments (securities with
maturities of 60 days or less) are valued at amortized cost which
approximates quoted market value. For financial reporting purposes,
investment transactions are recorded on trade date. Cost amounts, as
reported on the statement of net assets, are substantially the same for
Federal income tax purposes.
(b) Net realized gains and losses on common stock are computed on the
identified cost basis.
(c) Provision has not been made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and intends to
distribute substantially all net investment company taxable income and
net capital gains to its shareholders and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. The Fund anticipates $390,913,930 of post-October
losses, which may be used to offset capital gains in future years to the
extent provided by tax regulations.
(d) Dividend income is recorded on the ex-dividend date. Interest income is
recorded on the accrual basis.
(e) The Fund has investments in short-term variable rate demand notes, which
are unsecured instruments. The Fund may be susceptible to credit risk
with respect to these notes to the extent the issuer defaults on its
payment obligation. The Fund's policy is to monitor the creditworthiness
of the issuer and the Fund does not anticipate nonperformance by these
counterparties.
(f) Generally accepted accounting principles require that permanent
differences between income for financial reporting and tax purposes be
reclassified to capital stock.
(g) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES
The Fund has a management agreement with Friess Associates, Inc. (the
"Adviser"), with whom certain officers and directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of
the agreement, the Fund will pay the Adviser a monthly management fee at the
annual rate of one percent (1%) on the daily net assets of the Fund. Also,
the Adviser is reimbursed for administrative services rendered to the Fund by
a consultant paid by the Adviser.
(3) DISTRIBUTION TO SHAREHOLDERS
Net investment income and net realized gains, if any, are distributed to
shareholders. The Fund intends to declare a distribution of all net
investment income and net realized gains to be paid on October 27, 1998 to
shareholders of record of October 23, 1998.
(4) INVESTMENT TRANSACTIONS
For the year ended September 30, 1998, purchases and proceeds of sales of
investment securities (excluding short-term investments) were $14,911,002,149
and $17,217,894,443, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 1998, liabilities of the Fund included the following:
Payable to brokers for
investments purchased $53,080,059
Payable to Adviser for management fees 4,029,090
Payable to shareholders for redemptions 321,834
Other liabilities 196,446
(6) SOURCES OF NET ASSETS
As of September 30, 1998, the sources of net assets were as follows:
Fund shares issued and outstanding $4,884,703,286
Net unrealized appreciation
on investments 230,211,436
Accumulated net realized losses (381,412,589)
Undistributed net investment income 46,939,823
---------------
$4,780,441,956
---------------
---------------
Aggregate net unrealized appreciation as of September 30, 1998
consisted of the following:
Aggregate gross
unrealized appreciation $457,380,373
Aggregate gross unrealized
depreciation (227,168,937)
---------------
Net unrealized appreciation $230,211,436
---------------
---------------
(7) REQUIRED FEDERAL INCOME TAX DISCLOSURES (UNAUDITED)
In early 1998, shareholders received information regarding all distributions
paid to them by the Fund during the fiscal year ended September 30, 1998. The
Fund hereby designates the following amounts as long-term capital gains
distributions.
Capital gains taxed at 20% $241,506,021
Capital gains taxed at 28% 718,169,211
---------------
Total long-term capital gains $959,675,232
---------------
---------------
The percentage of ordinary income which is eligible for the corporate dividend
received deduction for the fiscal year ended September 30, 1998 was 3%.
(PRICEWATERHOUSECOOPERS LOGO) 100 EAST WISCONSIN AVENUE
SUITE 1500
MILWAUKEE, WI 53202
REPORT OF INDEPENDENT ACCOUNTANTS
October 8, 1998
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF BRANDYWINE FUND, INC.
In our opinion, the accompanying statement of net assets 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
Brandywine Fund, Inc. (the "Fund") at September 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the ten years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
LOG ON . . .
And let us know what you think! Thanks to those of you who've already tapped
into our website, but for those who haven't, please do, at
www.brandywinefunds.com. You can read about Friess Associates' investment
- ------------------------
strategy, see the articles various publications have written, access current
price information, and pull up a prospectus or the most recent quarterly report.
Another feature you might enjoy is the opportunity to ask us any question you'd
like or share with us your comments. We always appreciate hearing from you, and
we'll be sure to respond. See you in cyberland!
For those of you with just email access, remember you can also keep in touch
through [email protected]. We read incoming messages daily and will respond back
to you quickly, usually within the next day or two. And, for anyone not yet on
the Net, don't worry, we're still reachable on the telephone and through the
mail. We'll continue sending out all correspondence -- including quarterly
reports and mid-quarter mailings -- to you in hard copy.
-Lynda Campbell
BOARD OF DIRECTORS
John E. Burris
Chairman
Burris Foods, Inc.
Milford, Delaware
Foster S. Friess
President
Friess Associates, Inc.
Jackson, Wyoming
Stig Ramel
Former President
Nobel Foundation
Stockholm, Sweden
P.O. Box 4166, Greenville, DE 19807
(800) 656-3017 www.brandywinefunds.com [email protected]
Investment Adviser: FRIESS ASSOCIATES, INC.
Independent Accountants: PRICEWATERHOUSECOOPERS LLP
Custodian, Transfer Agent: FIRSTAR TRUST COMPANY
Legal Counsel: FOLEY & LARDNER
OFFICERS: Foster S. Friess, President and Treasurer; Lynda Campbell, Vice
President and Secretary; William D'Alonzo, Vice President; John Fraser, Vice
President; Carl Gates, Vice President; Andrew Graves, Vice President; David
Harrington, Vice President; John Ragard, Vice President; and Paul Robinson, Vice
President
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of Brandywine Fund unless accompanied or preceded by the
Fund's current prospectus. Past performance is not indicative of future
performance. Investment return and principal value of an investment may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
Report editor: Rebecca A. Buswell
Report Staff: Margaret Barton, Adam Rieger, Paul R. Robinson, Jennifer Weldon
