BRANDYWINE BLUE FUND, INC.
MANAGED BY FRIESS ASSOCIATES, INC.
QUARTERLY REPORT
DECEMBER 31, 1997
DEAR FELLOW SHAREHOLDERS:
To paraphrase Mark Twain, the rumors of our sale have been greatly exaggerated.
Friess Associates and the Brandywine Funds have NOT been sold.
Now that Legg Mason finalized its purchase of Brandywine Asset Management -- an
unrelated investment firm also doing business in Wilmington, Delaware -- the
erroneous reports of our being acquired will hopefully stop. We're still here!
Your current larger-than-normal cash position, 71 percent as we go to press
today, is better understood by reading the enclosed December 29, 1997 New York
Times article by Robert A. Johnson and viewing the chart that shows the lofty
levels of market valuations relative to the U.S. Gross Domestic Product over
time. The graph reflects new offerings as well as rising PE ratios.
The final quarter of '97 was affected significantly by poor reception of
disappointing earnings in the technology sector. The Pacific Stock Exchange
Index and the H&Q Technology Index declined 15.8 percent and 14 percent. Your
Fund finished ahead of these, declining 11.8 percent.
TECH INDECES VS. S&P 500
Performance 9/30/97 to 12/31/97
PACIFIC STOCK EXCHANGE -15.8%
H&Q TECH -14%
MORGAN STANLEY HIGH TECH -13.6%
NASDAQ IND. -11.2%
S&P 500*<F1> 2.9%
*<F1>TOTAL RETURN
We exit the year up 19.3 percent, out-performing the Nasdaq Industrials which
rose 10 percent, while the S&P 500 turned in 33 percent as investors "fled to
quality" in response to Asian turmoil.
As more data became available, it became evident to us that the "Asian flu"
could have wider ramifications than originally thought. Extra scrutiny was
applied to each of your holdings to see how it would fare if some of the more
damaging scenarios materialized.
We feel many stocks are vulnerable directly or indirectly to a slowdown in the
Pacific Rim, but some stocks will stand to benefit.
Hertz CEO, Frank Olsen, told us last week that auto acquisition, which accounts
for 30 percent of Hertz's costs, will be lower because of more competitive
Asian-made cars brought about by the yen's weakening -- from 120 to 133 to the
dollar in the last two months.
The CEO of a major U.S. chemical company told us, on the other hand, that Asian
resin plants running at 40 percent of capacity will now gear up and flood U.S.
markets in a drive to acquire dollars. Asia's devalued currencies may make U.S.
customers more likely to purchase Asian supplies, potentially pressuring the
U.S. chemical producers' prices.
The debacle in Asian currencies as well as weakening currencies around the world
also makes it more difficult for U.S. companies to export product. Many Asian
customers of U.S. companies are unable to secure financing for purchases of U.S.
products. A U.S.-based, highly respected memory company just pre-released a
surprise loss for the December quarter citing this financing issue as a major
reason.
The investment community has not yet calculated these impacts. Lowered earnings
estimates will be the norm in the immediate months ahead. We also have not seen
the last write-off due to currency or receivable losses -- more lay ahead.
There is a widening credit crunch in Asia, and Korean interest rates are
excessively high and rising. Already more than 500 Seoul-based companies went
bankrupt in the first five days of 1998, and the IMF is revising its bailout
forecast upward.
The 1.7 percent decline in the Dow Jones Industrials and the 13.7 percent drop
in the Nasdaq Industrials from October 13 to the end of the year discounts some
of these new realities. Current buyers believe the stock market has over
discounted these developments, but we do not agree when we examine the situation
on a company-by-company basis.
Your research team has its "shopping list" poised and ready for re-entry when
the time comes, but we will only participate in the expected rallies that
typically follow the cessation of year-end selling pressures if the fundamentals
and price earnings ratios of the individual company warrant putting your money
---------- -------
at risk.
The companies we'll seek for you must meet the criteria our strategy stipulates,
as illustrated by William O'Neil & Co.'s analysis which shows your companies'
earnings growing 53 percent for the last 12 months compared to just 15 percent
for the companies comprising the S&P 500. For the latest quarter, your companies
earnings growth is at 47 percent while those of the S&P 500 are at just 17
percent.
COMPANY GROWTH
AVERAGE INCREASE
LATEST 12 MOS. EARNINGS
YOUR COMPANIES 53%
S&P 500 15%
AVERAGE INCREASE
LATEST QUARTERLY EARNINGS
YOUR COMPANIES 47%
S&P 500 17%
All S&P figures are unweighted.
Analysis by Williams O'Neil & Co., Inc.
January 2, 1998
Your largest percentage gainer during the quarter was Clarke Adams' Best Buy
Co., up 49 percent. John Ragard picked US Airways Group and MacFrugal's
Bargains, which rose 44 percent and 39 percent. A.J. Berk's pick, Citrix
Systems, showed a 33 percent gain for the quarter, and David Harrington isolated
Royal Carribean Cruises which climbed 22 percent.
We are willing to underperform the market for a few months if we can insulate
you from higher- than-normal risks. It's better to forego an opportunity than to
lose money. We will see exciting opportunities in the months and years ahead;
it's important we have the money to take advantage of them.
The many of you who blessed us with your greeting cards served an important
purpose. As we enjoyed the pictures of your families and read your notes of
encouragement, it became easier for us to make the decision when we asked
ourselves, "Would we buy this XYZ stock we now own for you today at these
prices?"
Many of our Friess Associates' families participate with a large part of their
savings. This made decisions easier than some abstract notion of "what percent
cash should we be holding?"
Foster began this letter to you from his laptop computer while airborne to
Tokyo, Seoul, Taipei and Hong Kong. The five-person entourage making the trip
enjoys the inclusion of Ambassador Richard McCormack, Under Secretary of State
for Economic Affairs for President Bush and the Ambassador to the Organization
of American States serving President Reagan during the Latin American debt
crisis.
Foster will be meeting with top level business, banking and government officials
including the Premier of Taiwan to assess relevance of the crisis there to your
holdings.
Reagan's National Security Advisor, Richard Allen, who helped rescue the current
Korean President from a firing squad in 1980, also helped set up very top level
contacts for your fact-finding team. Here are some of the concerns Foster's
emails and faxes to us indicate:
o There is a very strong likelihood the Mainland Chinese will devalue
their currency again and that the Hong Kong peg to the dollar will be changed.
This would exacerbate further the downward-spiraling currencies.
o Japan will undergo another massive round of bankruptcies in the next
60 to 90 days, putting pressure on the already bottom-probing Nikkei and cause
additional weakness in the yen. Retail sales plummeted in December and
confidence is razor thin.
o The banking system in Japan is a mess and this will be made more
evident in the weeks ahead.
o Mainland China in recent weeks dropped interbank rates from 7.9
percent to 1.7 percent, indicating significant internal weaknesses caused by
their high debt and non-performing loans.
o There is growing recognition of a global overcapacity in many
industries. One-third of China's industries are said to be glutted with
inventory including VCRs, bicycles, refrigerators, and black and white TVs. Too
much money drove uneconomic projects. This is now coming home to roost. Office
space vacancy rates are believed to be 32 percent in China.
Ambassador McCormack's concerns that "the U.S. will be hit by a flood of
excellent products sold in devalued currencies and American manufacturers will
have to sacrifice profits to hold on to markets in the U.S. and around the
world" were reinforced universally so far during Foster's trip.
We already see evidence of strength in companies whose earnings' prospects are
enhanced by cheaper imports. As we sort out the significance of these very major
developments of recent weeks, we are evaluating each stock individually to
isolate the best companies for your portfolio.
Statistics validate your long-term investment success through a philosophy that
emphasizes individual stock selection of companies growing rapidly at reasonable
price earnings ratios and that are intensively researched to discover the
strength of underlying fund-amentals that others have not yet fully appreciated.
Your five year return of 153 percent, 20.4 percent annualized, compared to just
68 percent for the Nasdaq Industrials illustrates the success of this strategy.
Since inception, January 10, 1991, your Fund is up an average of 22 percent each
year, 301 percent cumulatively, compared to the 270 percent climb in the S&P 500
and a 210 percent rise in the Nasdaq Industrials.
SINCE INCEPTION
January 10, 1991
IBD*<F2> 155.1%
NASDAQ IND. 210.1%
LIPPER GROWTH*<F2> 235.2%
RUSSELL 2000 242.6%
S&P 500*<F2> 270.3%
YOUR FUND*<F2> 300.9%
*<F2>TOTAL RETURN
IBD = Investor's Business Daily Mutual Fund Index
Subsequent to the August 25th Forbes article that listed the Brandywine Funds
family as the Number One performing fund family for the last ten years of those
with more than $1 billion entrusted to them, another article appeared. This one,
in the newly launched Bloomberg magazine, detailed the pain suffered by those of
us investing in the more dynamic sector of the market -- in the midcap and
smaller cap companies -- since the summer of 1996.
Since July 15, 1996 until December 31, 1997 the S&P grew 58.6 percent while the
Nasdaq Industrials struggled to a 24.2 percent increase.
Your Fund rose 45 percent during that period, surpassing the ten funds mentioned
in the Bloomberg article. The worst performer mentioned dropped 20 percent. The
author, after describing the nosebleed price earnings ratios attendant to the
other funds went on to say, "That's what separates Foster Friess from other
momentum players -- he can't stomach high PEs."
Your investment strategy that emphasizes lower PEs has proven itself time and
time again over the model most "momentum investors" embrace. Sure, we miss the
Home Depots and WalMarts, but the attention to modest price earnings ratios
rather than "growth at any price" continues to serve us well over the long-term.
We are grateful for the confidence and support in our strategy as reflected by
net inflows of $46 million into your Fund this quarter. Our Friess Associates
family and personal savings in the Fund totals over $15 million, which keeps us
fervently committed to generating healthy returns in '98 and beyond for all of
us. Everyone at Friess Associates wishes you a happy and prosperous New Year!
/s/ Bill D'Alonzo
Bill D'Alonzo
Vice President
January 13, 1998
HIGHLIGHTS ...
DEPARTMENT STORES
A consumer-dependent company flourishes when it knows its customer well.
Discount retailer FAMILY DOLLAR STORES, INC., with more than 2,600 discount
stores in 38 states from Maine to Florida and South Dakota to New Mexico,
understands its customers needs and meets them.
Your company offers apparel, health and beauty products, automotive supplies,
and housewares in its small neighborhood stores near its low-middle-income
customers. The right price is the number one consideration for its average
customer, and Family Dollar provides that, resulting in increased same store
sales and earnings growth.
The August quarter showed earnings rise 31 percent from $.13 to $.17, and
revenues grew 16 percent.
Nearly debt-free, Family Dollar is the least leveraged of any major retailer in
the country. According to George Mahoney, General Counsel, your company plans an
additional 250 stores in fiscal '98 which reflects a 9 percent increase from
fiscal '97.
A re-merchandising effort emphasizing the new every-day low price strategy,
helped fuel increased business. Family Dollar also remodeled and refurbished its
top stores, making them even more productive.
Your shares are now nearly double the $15 purchase price of last December
selling at $29.
LEISURE & ENTERTAINMENT
"Let's take a boat to Bermuda" . . . those lyrics were written many years ago,
but cruising has never been more popular. ROYAL CARIBBEAN CRUISES LTD. operates
16 ships which can accommodate over 30,000 passengers with three more ships on
order.
Your company operates Celebrity Cruises and Royal Caribbean International with
100 destinations to such places as Alaska, the Caribbean, Europe, the Far East,
Hawaii, Mexico, Scandinavia, and Bermuda.
Positioned at the upper end of the volume market and the lower end of the
premium market, Royal Caribbean attracts its customers by offering a week-long
cruise vacation at relatively lower costs. Your company is also building larger
"super-ships" to attract passengers.
In the recent September quarter, net income increased 43 percent to $76 million,
versus $53 million in 1996, and revenues increased 67 percent to a record $613
million, compared to $366 million for the same period in 1996. These increases
were driven primarily by higher capacity, resulting from the merger with
Celebrity Cruises in July, but occupancy levels were also improved.
The management of Royal Caribbean and Mark Silverman, Assistant Treasurer, are
delighted that the company will be a sponsor of the Super Bowl, reaching a
worldwide television audience estimated at 200 million. That's a lot of people
who may wish "to get away from it all."
Your shares are up 30 percent, rising from $41 to $53, since purchase in
September.
OIL/GAS FIELD SERVICES
After more than a decade of ineffective management and poor returns to the
shareholders, MCDERMOTT INTERNATIONAL is undergoing a dramatic turnaround led by
new management. The proof is in the positive earnings surprises in the past two
quarters.
In the September and June quarters, earnings were $.32 and $.21 versus a loss
for those quarters in '96. Yet your company is still widely misunderstood by
most of Wall Street.
CEO Roger Tetrault is returning the company to its core businesses and tying
every manager's compensation to his ability to generate net income and cash,
with the clear opportunity to share in the rewards of superior performance.
The company is selling off unrelated businesses to improve the balance sheet and
is replacing low margin contracts with more profitable deals.
McDermott's largest business, designing, fabricating, and installing large
offshore drilling platforms and pipelines, is benefiting from recent
technological breakthroughs which have led to discoveries of oil deep beneath
the world's ocean floors under thousands of feet of water.
Only a small handful of companies worldwide are capable of building these
complex structures under these difficult conditions, and the demand is rising.
Your shares are $37 today, up 27 percent from $29 since original purchase in
May.
SPECIALTY RETAILING
If you're unsure of what the latest cellular technology, digital videodisks, and
audio equipment feature, make your purchase at BEST BUY CO. and they can tell
you.
With more than 270 stores in 32 states, your company serves over 44 percent of
the U.S. population with their home electronics and appliances purchases.
In a recent conversation with CFO Alan Lenzmier, we learned that through real-
time information management systems, Best Buy turns over its computer
inventories more than 11 times a year.
Your company sells over 30 percent of its computer systems at under $1,000
apiece, and is preparing to introduce 200 MHz and 233 MHz systems. These new
computers can drive higher margin software, and at that price, will likely
encourage increased sales and new customers.
In the recent November quarter, earnings exploded to $.57 compared with a loss
last year.
Purchased in August at $16, your shares have shot up 125 percent to $37.
FELLOW SHAREHOLDER . . .
We count some amazingly dynamic people among your Brandywine and Brandywine
Blue shareholder family, and William E. Simon, President Nixon and Ford's
Treasury Secretary, is no exception. With 45 super successful career years under
his belt, there are not many facets of American business, public affairs, and
government which Mr. Simon's life hasn't touched.
Mr. Simon leads the John M. Olin Foundation which was established to preserve
the principles of political and economic liberty. The Foundation concentrates on
various areas of study including Constitutional law, the moral foundations of a
free society, and the relationship between religion and free institutions. Some
specific subjects which interest the Foundation are tax and regulatory policy,
foreign policy, and the effectiveness of government programs.
About $20 million is awarded annually in grants, 60 percent going to prominent
colleges and universities such as Harvard, Yale, Stanford, Columbia, and
Georgetown, and the remainder to leading think tanks, such as The Heritage
Foundation, the Hudson Institute, and The Hoover Institution.
Mr. Simon began his professional life in 1952 starting at Union Securities,
and moving next to Weeden & Company, before joining Salomon Brothers, where he
enjoyed a highly prosperous career as head of the Government and Municipal Bond
Departments. In 1972, Mr. Simon entered government service when he was appointed
by President Nixon as Deputy Secretary of the Treasury, and then later as the
first Administrator of the Federal Energy Office. President Nixon selected him
to be the 63rd Secretary of the Treasury in 1974, a position he held until the
end of President Ford's term in 1977. That year, the Treasury Department awarded
Mr. Simon its highest honor -- the Alexander Hamilton Award.
After his government service, Mr. Simon once again took up a career in
business. Since returning, he's founded three investment companies, Wesray
Corporation, WSGP International, and most recently, in 1988, William E. Simon &
Sons. Mr. Simon has served on the boards of more than thirty well-known
corporations including Xerox, Citibank, Halliburton, and Kraft. In 1986, he was
honored by the University of Rochester when the Graduate School of Management
was re-named the William E. Simon Graduate School of Business Administration.
Mr. Simon is also a sports aficionado, having served on the U.S. Olympic
Committee for more than 30 years, during which time he's been Treasurer and
President. Six years ago, he was inducted into the U.S. Olympic Hall of Fame.
He's also been involved in the National Tennis Foundation and Hall of Fame, the
Basketball Hall of Fame, and the Women's Sports Foundation.
With a firm faith in helping the less fortunate, Mr. Simon dedicates much of
his time to serving the sick and the poor. He is a volunteer at Covenant House
and also a Eucharistic Minister to patients who are often destitute, terminally
ill, or both. Hundreds of underprivileged high school and college students are
able to further their studies because of the many scholarships Mr. Simon has
created.
We are honored to have Mr. Simon and the John M. Olin Foundation invested with
us in your sister Brandywine Fund. We enjoy playing a role in helping the
Foundation achieve its worthwhile goals.
- Rebecca Buswell
CINDY . . .
Very few can match "old-timer" Cindy Mills' track record at Friess. Only four
people in the entire firm were here before veteran Cindy, who started on April
1, 1982, bringing the Friess Associates team to five-people strong.
While attending a high school athletic event, Foster met Cindy and was so
impressed with her out-going nature and upbeat personality that he asked her to
come in for an interview. That chance meeting led to Cindy's 16-year career at
Friess Associates fulfilling a myriad of responsibilities in working to grow the
assets under management.
Cindy launched her days at Friess as the receptionist and bookkeeper. Then about
five years ago she was given the opportunity to work with senior researcher Bill
D'Alonzo as his research manager and continues to fill that role today. She
helps Bill investigate prospective companies for your portfolio by contacting
CEOs and CFOs and filtering through to him only the information that he really
needs to see.
Bill explains, "I would never get through the barrage of material I receive
through the mail, fax, phone calls, and email without Cindy's help. She makes
sure I get the most pertinent pieces of the puzzle, pitching the useless
information. Cindy is incredible with the way she keeps me organized and headed
in the right direction given my hectic schedule." Bill concludes, "There is only
one word to describe her efforts on my behalf -- awesome!"
"One of the most amazing things for me to see is the increase in our clients'
and shareholders' investments. When I started, we were managing $125 million,
and today it is nearly $14 billion," Cindy states.
"The reason we've been able to effectively handle our growth is the dynamic,
sharp group of individuals Foster and Lynn have assembled at Friess," she
continues. "These folks -- whose extensive experience in the industry range from
Morgan Guaranty Trust to J.C. Penney Financial Corp. to the DuPont Company --
carry out the same investment strategy Foster initiated more than 20 years ago
to keep your Fund on track."
Cindy's husband of 25 years, Stephen, is a senior Detective for the Child Abuse
Unit of Chester County, Pennsylvania and together they raised two sons.
Following their father's footsteps, Chad is a police officer in Fort Worth,
Texas and Stephen Jr. (a newlywed) is a police officer in Pennsylvania. "We are
fortunate to be able to get together often, which is my number one pleasure in
life."
An accomplished singer and runner, Cindy also enjoys music, exercise and
traveling which keep her occupied away from the office.
- -Rebecca Buswell
WEBSITE ON THE WAY . . .
Many of you have written in suggesting we tap the internet and launch Brandywine
Funds on the world wide web. So, we've put our computer design folks to work and
sometime in the upcoming quarter, potential and current shareholders can check
us out and pull up an application for investment with the click of a button.
Keep your eyes peeled!
DAVID . . .
In 1990, soon after Friess Associates crossed $1 billion under management, David
Harrington joined your research team, following a five-year stint at a local
financial planning firm analyzing privately-owned companies.
A native of Wilmington, David returned to Delaware after graduating from St.
Lawrence University in 1985 where he earned a Bachelor's degree in English. He
and his wife, Erin, were married eight years ago and have three young ones at
home, Andrew, 7, Lindsay, 5, and Ian, 2. In addition to spending time with his
family, David enjoys nearly any outdoor activity, particularly fishing, hunting,
boating, biking and golf.
David learned the nuances of many different kinds of businesses and what makes
them successful during his time researching private companies, and enjoys
leveraging that experience into the public markets. "Most of the management
issues that affect private companies are transferable to the publicly-traded
stocks," David states. "Our research strategy dictates that we remain in close
contact with the management of the companies we own to keep on target with
what's really happening there."
Fellow senior researcher Clarke Adams praises David's ability. "David
understands our strategy and goes after companies that are beating expectations,
selling at reasonable valuations, and have 'sizzle' to get investors excited
about their business. He's selected some big winners for Brandywine and
Brandywine Blue."
Several of David's holdings are tech-related, but he remains an overall
generalist as all of your researchers do. Dell Computer, Borders Group, Royal
Carribean, Compaq, Unifi, and National Semiconductor, are recent good picks of
David's, adding $23 million in gains.
"It's been great to see Friess Associates grow nearly 14-fold since I came on
board!" exclaims David. "The resources we now have, including software,
hardware, and our internal network of researchers and traders make our process
more efficient than it's ever been."
- -Rebecca Buswell
HEADING TO LAS VEGAS?
Then you might want to make your trip in mid-April when Foster will be there
among other investment gurus at the Louis Rukeyser Investment Conference. On
April 18 and 19, join Foster at the MGM Grand Garden to hear him and others in
the business -- including Rukeyser himself -- comment on the overall economic
and financial scene as well as offer individual market insights. As a Brandywine
Blue shareholder, you can attend at a discount rate. Please call (800) 892-9202
if you want more information.
GROWING YOUR FUND . . .
The dedicated employees at your companies deserve recognition for the growth of
your assets. They work hard to make their companies successful, and you benefit
from that success.
Sylvia Bellamy is a Customer Service Representative for the Hertz Corporation.
She works behind the Hertz counter at McCarran International Airport in Las
Vegas assisting travelers with their rental cars, handling problems, and making
people happy. No day is "typical" for Sylvia because each one presents new
challenges and surprises. But surely the most memorable day in Sylvia's nine
years with Hertz was the day she helped save a customer's life.
Sylvia performed lifesaving CPR techniques on a man who was having a massive
heart attack. Her quick-thinking heroics saved his life. Because of first aid
and CPR training courses at Hertz, she knew exactly what to do, but looking back
on this experience she still marvels, "You just act. All my training
automatically came back to me. It was an overwhelming experience. If I don't do
anything else in life, that will put the icing on the cake!"
Away from her job, Sylvia is the summer track and field coach for the Youth
Activities Center in Las Vegas. She attended the University of Texas, El Paso on
a track scholarship and still runs competitively. After she leaves work, she
coaches a team of youngsters ranging in age from 8 to 16. Her goal is to teach
running but she also explains, "to instill discipline at a young age is so
vital."
Sylvia has a daughter, Antoinette, 11, and a son, James, 6. She serves as Den
Mother for James' Tiger Cub Scout Troop, planning activities for twelve little
boys. Amazingly, Sylvia also plans to attend the University of Las Vegas this
year to complete her Bachelor's degree in Business Management.
We asked Sylvia why she liked working for Hertz. She immediately answered,
"Because we are #1. When you deal with us you know you are dealing with
professionals. Our customer service stands out." In fact, Sylvia has made so
many friends for Las Vegas that the Chamber of Commerce recently honored her at
a luncheon with the mayor. She just smiles and says, "I genuinely love people. I
believe if you smile, it's going to be a better day, and . . . you live longer!"
- - Margaret Barton
TOP TEN . . .
It's not surprising to see substantial shifts in your top ten this quarter given
the increased cash position you've taken, 71 percent as we write this January
12. The biggest change was in your Computers & Related stocks, falling off the
top ten with just 0.9 percent from the number two spot in September at 11.1
percent. Compaq, Dell Computer, and EMC Corp. were sold, nailing down profits of
more than $13.5 million for you since original purchase.
Also noteworthy this quarter are your Software holdings, coming in at number
seven with 2.5 percent compared to September's 12.3 percent. You sold BMC
Software, Cadence Design, Citrix Systems, Computer Associates, and Synopsys for
total gains of more than $9.5 million since purchase.
The Oil/Gas Field Services category takes the number three spot, moving from
10.5 percent to 4.8 percent as you sold Marine Drilling, Rowan Companies,
Vintage Petroleum, Nuevo Energy, BJ Services, and Cooper Cameron yielding
overall gains of 5.3 million.
Pharmaceuticals joined the top ten this quarter as your number four group with
4.4 percent, primarily fueled by a substantial position in Bristol-Myers Squibb,
which has already brought you $1.3 million in gains. Also new to your top ten
are Department Stores, Leisure & Entertainment, Distribution and Insurance,
displacing Semiconductors & Related, Transportation & Related, Communications,
and Networking.
TOP TEN INDUSTRY GROUPS
Specialty Retailing 8.7%
Financial/Business Services 7.1%
Oil/Gas Field Services 4.8%
Pharmaceuticals 4.4%
Department Stores 3.4%
Leisure & Entertainment 3.0%
Software 2.5%
Distribution 1.4%
Insurance 1.3%
Machinery/Construction &
Miscellaneous Manufacturing 1.3%
All Others 8.6%
Cash 53.5%
BRANDYWINE BLUE FUND, INC.
STATEMENT OF NET ASSETS
December 31, 1997
(Unaudited)
SHARES QUOTED
OR PRINCIPAL MARKET
AMOUNT COST VALUE (B)<F4>
------- ---- ---------
LONG-TERM INVESTMENTS - 46.5% (A)<F3>
COMMON STOCKS - 46.2% (A)<F3>
APPAREL & SHOES - 0.9%
58,500 Intimate Brands, Inc. $1,177,133 $1,407,685
24,700 Payless ShoeSource, Inc. 1,494,190 1,657,988
75,000 The Warnaco Group, Inc. 2,109,235 2,353,125
------------ ------------
4,780,558 5,418,798
THIS SECTOR IS 13.4% ABOVE YOUR FUND'S COST.
AUTOMOTIVE & RELATED - 0.3%
40,000 Federal-Mogul Corp. 1,140,125 1,620,000
THIS SECTOR IS 42.1% ABOVE YOUR FUND'S COST.
COMMUNICATIONS - 0.5%
110,000 DSP Communications, Inc. 1,765,621 1,320,000
33,400 ECI Telecom Ltd. 765,854 851,700
20,000 General Cable Corporation 620,000 723,760
------------ ------------
3,151,475 2,895,460
THIS SECTOR IS 8.1% BELOW YOUR FUND'S COST.
COMPUTERS & RELATED - 0.9%
39,200 American Power Conversion Corp. 1,232,738 926,100
37,500 EMC Corp. (Mass.) 458,109 1,028,925
50,000 Premiere Technologies, Inc. 1,206,250 1,381,250
15,500 Sequent Computer Systems, Inc. 420,438 310,000
40,400 Symbol Technologies, Inc. 1,759,913 1,525,100
------------ ------------
5,077,448 5,171,375
THIS SECTOR IS 1.8% BELOW YOUR FUND'S COST.
DEPARTMENT STORES - 3.4%
149,100 Family Dollar Stores, Inc. 2,061,801 4,370,568
100,000 Federated Department Stores, Inc. 4,146,238 4,306,300
53,600 Fred Meyer, Inc. 1,195,781 1,949,700
161,700 Nordstrom, Inc. 8,514,230 9,762,638
------------ ------------
15,918,050 20,389,206
THIS SECTOR IS 28.1% ABOVE YOUR FUND'S COST.
DISTRIBUTION - 1.4%
88,300 Avnet, Inc. 5,452,788 5,827,800
176,700 Boise Cascade Office Products Corp. 3,215,596 2,639,545
------------ ------------
8,668,384 8,467,345
THIS SECTOR IS 9.0% ABOVE YOUR FUND'S COST.
ELECTRONICS - 1.0%
130,000 SCI Systems, Inc. 2,316,575 5,663,190
THIS SECTOR IS 144.5% ABOVE YOUR FUND'S COST.
FABRIC/TEXTILES - 0.3%
50,000 Unifi, Inc. 1,596,750 2,034,400
THIS SECTOR IS 27.4% ABOVE YOUR FUND'S COST.
FINANCIAL/BUSINESS SERVICES - 7.1%
210,200 AccuStaff Inc. 5,551,663 4,834,600
75,000 AMRESCO, Inc. 2,163,461 2,268,750
91,500 Capital One Financial Corp. 4,241,380 4,958,202
75,300 Finova Group, Inc. 3,543,006 3,741,507
4,000 FIRSTPLUS Financial Group, Inc. 132,000 153,500
122,100 First Union Corporation (N.C.) 5,987,086 6,257,625
66,000 FIserv, Inc. 2,735,798 3,242,250
167,700 H. F. Ahmanson & Company 10,060,356 11,225,503
20,100 Herman Miller, Inc. 853,302 1,096,716
126,900 Ogden Corp. 2,627,937 3,577,057
16,200 Select Appointments Holdings ADR 307,800 295,650
------------ ------------
38,203,789 41,651,360
THIS SECTOR IS 9.0% ABOVE YOUR FUND'S COST.
FOOD/RESTAURANTS - 0.5%
50,000 CKE Restaurants, Inc. 1,988,070 2,106,250
8,200 Foodmaker, Inc. 157,830 123,517
33,100 Outback Steakhouse, Inc. 809,608 951,625
------------ ------------
2,955,508 3,181,392
THIS SECTOR IS 7.6% ABOVE YOUR FUND'S COST.
HOME/OFFICE & RELATED - 0.9%
30,000 Maytag Corp. 956,844 1,119,390
180,000 Office Depot, Inc. 3,628,950 4,308,840
------------ ------------
4,585,794 5,428,230
THIS SECTOR IS 18.4% ABOVE YOUR FUND'S COST.
INSURANCE - 1.3%
175,000 Conseco, Inc. 3,817,051 7,951,650
THIS SECTOR IS 108.3% ABOVE YOUR FUND'S COST.
LEISURE & ENTERTAINMENT - 3.0%
115,400 CapStar Hotel Co. 3,995,725 3,959,720
43,100 Carnival Corporation 2,289,028 2,386,662
36,100 Hasbro, Inc. 1,221,646 1,137,150
117,100 Mattel, Inc. 4,634,709 4,361,975
60,000 Polaroid Corp. 2,662,788 2,921,280
59,000 Royal Caribbean Cruises Ltd. 2,424,452 3,145,467
------------ ------------
17,228,348 17,912,254
THIS SECTOR IS 4.0% ABOVE YOUR FUND'S COST.
MACHINERY/CONSTRUCTION & MISCELLANEOUS MANUFACTURING - 1.3%
100,000 Carpenter Technology Corp. 4,274,130 4,806,300
60,000 Kennametal Inc. 3,013,892 3,108,780
------------ ------------
7,288,022 7,915,080
THIS SECTOR IS 8.6% ABOVE YOUR FUND'S COST.
MEDICAL/DENTAL PRODUCTS & SERVICES - 1.2%
141,300 STERIS Corp. 6,874,375 6,817,725
THIS SECTOR IS 0.8% BELOW YOUR FUND'S COST.
OIL/GAS FIELD SERVICES - 4.8%
102,400 EVI, Inc. 4,792,294 5,299,200
90,000 Global Industries, Inc. 1,684,941 1,530,000
109,800 J. Ray McDermott, S.A. 2,971,108 4,721,400
157,500 McDermott International, Inc. 4,210,287 5,768,437
42,800 Ocean Energy, Inc. 2,477,304 2,110,596
77,500 Varco International, Inc. 1,083,210 1,661,445
162,200 Veritas DGC Inc. 4,943,330 6,406,900
13,500 Weatherford Enterra Inc. 519,770 590,625
------------ ------------
22,682,244 28,088,603
THIS SECTOR IS 23.8% ABOVE YOUR FUND'S COST.
PHARMACEUTICALS - 4.4%
220,600 Bristol-Myers Squibb Co. 19,502,661 20,874,275
50,000 ICN Pharmaceuticals, Inc. 2,625,316 2,440,650
30,000 Jones Medical Industries, Inc. 1,026,250 1,147,500
61,600 Mylan Laboratories Inc. 1,259,390 1,289,781
------------ ------------
24,413,617 25,752,206
THIS SECTOR IS 5.5% ABOVE YOUR FUND'S COST.
SOFTWARE - 2.5%
10,000 Broderbund Software, Inc. 287,875 256,250
116,300 Electronic Arts Inc. 2,890,218 4,397,652
94,100 Sterling Software, Inc. 2,823,611 3,858,100
167,600 Symantec Corp. 2,791,582 3,676,809
61,800 VIASOFT, Inc. 2,263,488 2,611,050
------------ ------------
11,056,774 14,799,861
THIS SECTOR IS 33.9% ABOVE YOUR FUND'S COST.
SPECIALTY RETAILING - 8.7%
303,400 Best Buy Co., Inc. 4,979,275 11,187,875
190,000 Borders Group, Inc. 3,414,357 5,949,470
25,000 Brylane, Inc. 1,150,000 1,231,250
201,300 Gap, Inc. 6,537,529 7,133,669
125,000 Lowe's Companies, Inc. 5,587,055 5,961,000
22,500 OfficeMax, Inc. 322,952 320,625
170,000 Pier 1 Imports, Inc. 3,328,634 3,846,250
50,500 Rite Aid Corp. 2,225,974 2,963,744
101,100 Safeway Inc. 6,040,725 6,394,575
81,400 Staples, Inc. 1,799,705 2,258,850
101,600 Tandy Corp. 3,368,548 3,918,001
------------ ------------
38,754,754 51,165,309
THIS SECTOR IS 32.0% ABOVE YOUR FUND'S COST.
TRANSPORTATION & RELATED - 1.2%
142,000 CNF Transportation Inc. 3,985,320 5,449,250
45,000 Hertz Corp. 1,411,758 1,811,250
------------ ------------
5,397,078 7,260,500
THIS SECTOR IS 34.5% ABOVE YOUR FUND'S COST.
MISCELLANEOUS - 0.6%
79,400 The B.F. Goodrich Company 3,285,205 3,290,177
------------ ------------
THIS SECTOR IS 0.2% ABOVE YOUR FUND'S COST.
Total common stocks 229,191,924 272,874,121
REITS - 0.3% (A)<F3>
50,000 Glenborough Realty Trust, Inc. 1,250,000 1,481,250
------------ ------------
THIS SECTOR IS 18.5% ABOVE YOUR FUND'S COST.
Total long-term investments 230,441,924 274,355,371
SHORT-TERM INVESTMENTS - 47.3% (A)<F3>
COMMERCIAL PAPER - 46.5% (A)<F3>
$5,000,000 Ford Credit,
discount of 6.75%; due 01/02/98 4,999,063 4,999,063
5,000,000 GE Capital,
discount of 6.75%; due 01/02/98 4,999,063 4,999,063
25,000,000 John Hancock Capital,
discount of 6.73%; due 01/02/98 24,995,326 24,995,326
25,000,000 UBS Finance Inc.,
discount of 6.50%; due 01/02/98 24,995,486 24,995,486
23,000,000 American Express Credit Corp.,
discount of 6.10%; due 01/05/98 22,984,411 22,984,411
25,000,000 Salomon Smith Barney BE,
discount of 6.00%; due 01/06/98 24,979,167 24,979,167
25,000,000 Associates First Capital Corp.,
discount of 6.10%; due 01/07/98 24,975,916 24,975,916
25,000,000 Merrill Lynch BE,
dicount of 6.05%; due 01/08/98 24,970,590 24,970,590
20,000,000 Ford Credit Europe PLC,
discount of 5.97%; due 01/09/98 19,973,467 19,973,467
23,250,000 Nellie Mae,
discount of 6.00%; due 01/13/98 23,203,500 23,203,500
25,000,000 Bell Atlantic Financial BE,
discount of 6.00%; due 01/14/98 24,945,833 24,945,833
13,000,000 Chevron USA,
discount of 5.80%; due 01/15/98 12,970,678 12,970,678
10,000,000 GE Capital,
discount of 5.95%; due 01/15/98 9,976 861 9,976,861
25,000,000 Household Finance Corp.,
discount of 5.95%; due 01/16/98 24,938,021 24,938,021
------------ ------------
Total commercial paper 273,907,382 273,907,382
VARIABLE RATE DEMAND NOTES - 0.8% (A)<F3>
2,034,404 General Mills, Inc. 2,034,404 2,034,404
2,578,645 Warner-Lambert Company 2,578,645 2,578,645
298,137 Wisconsin Electric Power Company 298,137 298,137
------------ ------------
Total variable rate demand notes 4,911,186 4,911,186
------------ ------------
Total short-term investments 278,818,568 278,818,568
------------ ------------
Total investments $509,260,492 553,173,939
============
Cash and receivables, less
liabilities 6.2% (a)<F3> 36,652,261
------------
Net Assets $589,826,200
============
Net Asset Value Per Share
($0.01 par value 100,000,000
shares authorized), offering
and redemption price
($589,826,200 / 22,194,471
shares outstanding) $26.58
=======
(a)Percentages for the various classifications relate to net assets.
(b)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. Short-term
investments are valued at amortized cost which approximates quoted market
value.
ALL IS NOT ROSES . . .
Quarters like this suggest a title like "All is Not Thorns" for this feature!
Many of your holdings suffered setbacks since September as we all witnessed 34
stocks tumble more than $1 million apiece.
The biggest disappointment was Electronics for Imaging, dropping back 75
percent. A major new product, scheduled for delivery in the December and January
quarters, was found to have flaws which delayed shipping. Compaq slid 17 percent
due to fears that inventory levels were too high. Also, the increased popularity
in the less-than-$1,000 PC hurt Compaq's product mix and margin picture.
National Semiconductor retraced 26 percent following a perceived slow down in
its Asian markets. The Asian picture also influenced Texas Instruments which
fell 26 percent as the situation in the Far East affected its DRAM business.
While a very small part of TI's business overall, DRAM prices declined 30
percent in the quarter creating concerns over the outlook, which depressed the
stock.
Bay Networks fell back 29 percent due to concerns that the company would miss
earnings estimates for the December quarter, but the drop was primarily just
following suit with rest of tech for the quarter. EMC Corp. slipped 10 percent
in tandem with other technology stocks in general.
The silver lining amidst this market melodrama is that these companies were sold
before they declined more than $6 million further as of this writing on January
12. Compaq, EMC Corp., and National Semiconductor remain overall gainers for
you, bringing in $6 million, $7 million and $2 million from purchase to sale.
Despite the tumultuous environment, Best Buy rose $3.7 million, US Airways Group
rose $2.9 million, and Citrix Systems grew $1.5 million. Bristol-Myers Squibb
increased $1.4 million, Family Dollar gained $1.3 million, and you garnered $1
million from H. F. Ahmanson.
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
(800) 656-3017 P.O. Box 4166, Greenville, DE 19807 [email protected]
Investment Adviser: FRIESS ASSOCIATES, INC.
Custodian, Transfer Agent: FIRSTAR TRUST COMPANY
Independent Accountants: PRICE WATERHOUSE LLP
Legal Counsel: FOLEY & LARDNER
Officers: Foster S. Friess, President and Treasurer; Clarke Adams, Vice
- --------
President; William F. D'Alonzo, Vice President; Carl S. Gates,
Vice President; Paul R. Robinson, Vice President; and
Lynda J. Campbell, Secretary
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of Brandywine Blue 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
