BRANDYWINE BLUE 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.
Repositioning your Fund 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 Crash of '98. More people now compare this year to the Crash of
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'87.
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 26.5 percent for the past 12 months, impacted by the 19.9 percent
decline of the September quarter. This retrenchment affected your five year and
inception (January 10, 1991) results as well which show 66.3 percent and 234
percent gains, annualized at 10.7 percent and 16.9 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 1-10-91 THROUGH 9-30-98
NASDAQ IND. RUSSELL 2000 S&P 500 YOUR FUND
1991 69.9 48.9 36.9 40.1
1992 8.4 16.4 7.6 13.1
1993 11.2 17 10.1 27.2
1994 -6.5 -3.2 1.3 2.3
1995 28 26.2 37.5 32.4
1996 22.7 14.8 23 23.2
1997 10 20.5 33.3 19.3
1998 -15.5 -16.8 6.0 -16.7
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 of 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 last week 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 35 percent versus just 13 percent for the S&P 500. And, for
the last quarter, the earnings grew 64 percent compared to 12 percent.
COMPANY GROWTH
YOUR COMPANIES S&P 500
AVERAGE INCREASE LATEST 12 MOS. EARNINGS 35% 13%
AVERAGE INCREASE LATEST QUARTERLY EARNINGS 64% 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 pick of Mips Technologies rose 42 percent, while A.J. Berk chose
Gemstar and Access Health which rose 26 percent and 19 percent.
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; 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 a
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.
Now that we are in a period where 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. Comp USA was up 55
percent. Borders Group climbed 43 percent, and Rational Software rose 34
percent. Concord EFS, Inc. increased 32 percent while Tech Data, Ascend
Communications and HBO & Co. all climbed more than 25 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 our
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research process and your long-term commitment to the strategy we employ.
Thanks.
God Bless!
/S/ Foster Friess
Foster Friess
President
October 13, 1998
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 $.20 per
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share on October 26, 1998. Your account will reflect reinvestment of this payout
on October 27. A very slight estimate of $.02 in long-term capital gains, at the
20 percent rate, and $.11 in short-term ordinary income will be distributed.
FELLOW SHAREHOLDER . . .
How can you defend a country you neither fully understand nor appreciate? For
fellow shareholder in your sister Brandywine Fund 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 $27, they
jumped 42 percent and added $5 million to your portfolio.
- Margaret Barton
ALL IS NOT ROSES . . .
It's not pretty. This quarter is one we'd like to forget. With 15 stocks
tumbling more than $2 million, and 29 others dropping back more than $1 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 $4.3 million. Xylan lost $3.5
million after management indicated the September quarter would be more difficult
than in the past and also because rumors were confirmed that Alcatel, 20 percent
of Xylan's revenues, was about to make an acquisition which would hurt its
relationship with Xylan. Suiza Foods' $3.3 million drop was primarily caused by
concerns over third quarter results being impacted by higher butterfat costs.
When analysts downgraded their sales estimates because of the 20 percent
decline in average selling prices of PCs, Office Depot slipped $3.2 million.
Jones Apparel Group gave up $2.9 million, mainly due to a decline in career
sales in department stores, and Borders Group fell $2.8 million following fears
that on-line book sellers, like Amazon.com, would hurt business.
Other big droppers were US Airways, Conseco, Fruit-of-the-Loom, The Learning
Co. and Accustaff. Of these names, you still hold only Borders Group, which
remains a solid holding for you, up 24 percent since purchase.
Through the market's recent rugged terrain, a few stocks managed to shine.
Apple Computer soared $3.7 million, while EMC Corp. grew $2.8 million. Lucent
Technologies rose $1.3 million.
HIGHLIGHTS . . .
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 beat analysts' expectations in the last two quarters, with $.38 in
March and $.50 in June, exceeding estimates by more than 50 percent both
quarters.
Purchased in March, your shares are up 42 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.
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 11, your shares have already climbed to $66 from under
$62.
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 31 percent since purchase in March '97, your shares sell today at $29.
TOP TEN . . .
Three new groups joined your top ten this quarter -- Apparel & Shoe
Retailers came in at number six, Distribution to the number seven spot, and
Medical & Related stands at number nine. Holdings in Communications,
Transportation & Related, Textiles/Apparel Manufacturing, and Food/Restaurants
categories dropped from the top ten.
All of the Medical & Related companies you held in June were sold during the
quarter, but were replaced by Amgen, Biogen and Genzyme. Together these three
companies have grown more than $650,000. Your other new medical products company
is Arterial Vascular Engineering, bringing this category to 5.3 percent of the
portfolio, up from 3.1 percent last quarter.
Your Networking category moved up to number two this quarter at 12.0 percent,
up from 5.8 percent at the number eight spot in June. You purchased 3Com Corp.,
and added to your Ascend Communications and FORE Systems positions.
Growth occurred in the Computers category, which was 8.7 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 15.1
percent, was the $2 million addition and subsequent $3.7 million growth in Apple
Computer. New purchases of Sun Microsystems, Compaq Computer, and Gateway 2000
further increased this group.
TOP TEN INDUSTRY GROUPS
Computers 15.1%
Networking 12.0%
Financial/Business Services 10.6%
Specialty Retailing 9.7%
Computer & Related 8.7%
Apparel & Shoe Retailers 6.0%
Distribution 5.8%
Machinery & Miscellaneous Manufacturing 5.4%
Medical & Related 5.3%
Software 5.0%
All Others 14.0%
Cash 2.4%
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!
(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 BLUE 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 Blue 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 seven years in the period then ended and for the period from January 10,
1991 (commencement of operations) to September 30, 1991, 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
BRANDYWINE BLUE FUND, INC.
STATEMENT OF NET ASSETS
September 30, 1998
QUOTED
MARKET
SHARES COST VALUE
--------- ------ ----------
COMMON STOCKS -- 97.6%(A)<F2>
APPAREL & SHOE RETAILERS - 6.0%
58,000 Abercrombie & Fitch Co.*<F1> $ 2,790,346 $ 2,552,000
270,900 Gap, Inc. 15,615,665 14,289,975
278,200 TJX Companies, Inc. 6,774,496 4,955,577
------------ -----------
25,180,507 21,797,552
THIS SECTOR IS 13.4% BELOW YOUR FUND'S COST.
COMMUNICATIONS - 3.3%
61,100 ADC Telecommunications, Inc.*<F1> 1,748,268 1,290,737
68,000 Nokia Corp. "A" ADR*<F1> 5,510,203 5,333,784
132,500 Tellabs, Inc.*<F1> 5,354,844 5,275,223
------------ -----------
12,613,315 11,899,744
THIS SECTOR IS 5.7% BELOW YOUR FUND'S COST.
COMPUTERS - 15.1%
449,100 Apple Computer, Inc.*<F1> 12,101,142 17,121,937
588,700 Compaq Computer Corp. 19,508,015 18,617,638
71,000 Gateway 2000, Inc.*<F1> 3,836,833 3,700,875
314,200 Sun Microsystems, Inc.*<F1> 15,686,531 15,651,245
------------ -----------
51,132,521 55,091,695
THIS SECTOR IS 7.7% ABOVE YOUR FUND'S COST.
COMPUTER & RELATED - 8.7%
125,500 Amdocs Limited*<F1> 1,379,442 1,419,781
162,600 Computer Sciences Corp. 8,700,060 8,861,700
69,000 CSG Systems International, Inc.*<F1> 3,108,690 3,053,250
225,000 EMC Corp. (Mass.)*<F1> 9,067,247 12,867,300
217,100 Seagate Technology, Inc.*<F1> 5,006,238 5,441,177
------------ -----------
27,261,677 31,643,208
THIS SECTOR IS 16.1% ABOVE YOUR FUND'S COST.
DEPARTMENT STORES - 0.6%
104,200 Saks Inc.*<F1> 3,785,753 2,338,040
THIS SECTOR IS 38.2% BELOW YOUR FUND'S COST.
DISTRIBUTION - 5.8%
44,600 AmeriSource Health Corp.*<F1> 2,412,485 2,427,935
308,600 CompUSA Inc.*<F1> 5,782,443 5,342,792
129,600 Tandy Corp. 7,317,475 6,933,600
128,700 Tech Data Corp.*<F1> 5,717,726 6,443,108
------------ -----------
21,230,129 21,147,435
THIS SECTOR IS 0.4% BELOW YOUR FUND'S COST.
ELECTRONICS - 0.1%
16,700 Mettler-Toledo International Inc.*<F1> 334,000 359,050
THIS SECTOR IS 7.5% ABOVE YOUR FUND'S COST.
FINANCIAL/BUSINESS SERVICES - 10.6%
104,700 Capital One Financial Corp. 5,621,894 10,836,450
165,000 Concord EFS, Inc.*<F1> 3,623,125 4,259,145
25,000 First American Financial Corp. 800,720 800,000
147,100 Household International, Inc. 6,402,896 5,516,250
50,000 NOVA Corp./Georgia*<F1> 1,500,000 1,534,400
186,100 Providian Financial Corp. 13,782,641 15,783,699
------------ -----------
31,731,276 38,729,944
THIS SECTOR IS 22.1% ABOVE YOUR FUND'S COST.
FOOD/RESTAURANTS - 1.6%
133,700 Brinker International, Inc.*<F1> 3,172,475 2,506,875
55,000 CKE Restaurants, Inc. 1,988,070 1,636,250
40,000 U.S. Foodservice, Inc.*<F1> 1,646,300 1,665,000
------------ -----------
6,806,845 5,808,125
THIS SECTOR IS 14.7% BELOW YOUR FUND'S COST.
HOME/OFFICE & RELATED - 1.0%
16,800 Maytag Corp. 535,833 802,200
96,000 Mohawk Industries, Inc.*<F1> 2,712,950 2,628,000
------------ -----------
3,248,783 3,430,200
THIS SECTOR IS 5.6% ABOVE YOUR FUND'S COST.
INSURANCE - 0.7%
40,400 Allmerica Financial Corp. 2,683,659 2,408,850
THIS SECTOR IS 10.2% BELOW YOUR FUND'S COST.
LEISURE & ENTERTAINMENT - 1.3%
100,400 Gemstar International
Group Limited*<F1> 3,684,687 4,656,050
THIS SECTOR IS 26.4% ABOVE YOUR FUND'S COST.
MACHINERY & MISCELLANEOUS MANUFACTURING - 5.4%
167,600 Ogden Corp. 4,649,366 4,766,209
270,600 Tyco International Ltd. 15,155,104 14,950,650
------------ -----------
19,804,470 19,716,859
THIS SECTOR IS 0.4% BELOW YOUR FUND'S COST.
MEDICAL & RELATED - 5.3%
80,000 Amgen Inc.*<F1> 5,939,656 6,045,040
83,400 Arterial Vascular Engineering, Inc.*<F1> 3,592,804 3,085,800
136,800 Biogen, Inc.*<F1> 8,430,632 9,003,218
30,000 Genzyme Corp.*<F1> 1,048,242 1,083,750
------------ -----------
19,011,334 19,217,808
THIS SECTOR IS 1.1% ABOVE YOUR FUND'S COST.
NETWORKING - 12.0%
637,200 3Com Corp.*<F1> 18,429,312 19,156,144
452,200 Ascend Communications, Inc.*<F1> 17,404,039 20,575,100
235,600 FORE Systems, Inc.*<F1> 4,423,783 3,916,850
------------ -----------
40,257,134 43,648,094
THIS SECTOR IS 8.4% ABOVE YOUR FUND'S COST.
PHARMACEUTICALS - 3.3%
266,300 Mylan Laboratories Inc. 6,838,180 7,855,850
83,200 Watson Pharmaceuticals Inc.*<F1> 3,662,420 4,222,400
------------ -----------
10,500,600 12,078,250
THIS SECTOR IS 15.0% ABOVE YOUR FUND'S COST.
SOFTWARE - 5.0%
64,800 Citrix Systems, Inc.*<F1> 3,286,556 4,600,800
15,300 Electronic Arts Inc.*<F1> 687,068 671,287
256,600 HBO & Co. 7,364,186 7,409,325
100,000 Rational Software Corp.*<F1> 1,576,210 1,681,300
143,200 Sterling Software, Inc.*<F1> 2,438,292 3,947,022
------------ -----------
15,352,312 18,309,734
THIS SECTOR IS 19.3% ABOVE YOUR FUND'S COST.
SPECIALTY RETAILING - 9.7%
276,000 Best Buy Co., Inc.*<F1> 13,366,905 11,454,000
85,800 BJ'S Wholesale Club, Inc.*<F1> 3,307,026 3,153,150
190,000 Borders Group, Inc.*<F1> 3,414,357 4,227,500
105,300 Ethan Allen Interiors Inc. 4,036,871 3,817,125
78,300 Family Dollar Stores, Inc. 1,139,036 1,233,225
74,400 Furniture Brands International, Inc.*<F1> 2,115,076 1,450,800
55,000 Longs Drug Stores Corp. 2,224,592 2,210,340
50,000 Michaels Stores, Inc.*<F1> 1,538,905 1,275,000
224,430 Staples, Inc.*<F1> 4,717,836 6,592,631
------------ -----------
35,860,604 35,413,771
THIS SECTOR IS 1.2% BELOW YOUR FUND'S COST.
TRANSPORTATION & RELATED - 0.8%
85,000 ASA Holdings, Inc. 3,102,502 3,017,500
THIS SECTOR IS 2.7% BELOW YOUR FUND'S COST.
MISCELLANEOUS - 1.3%
216,000 Solutia Inc. 6,097,406 4,873,608
THIS SECTOR IS 20.1% BELOW YOUR FUND'S COST.
------------ -----------
Total common stocks 339,679,514 355,585,517
PRINCIPAL
AMOUNT
---------
SHORT-TERM INVESTMENTS - 1.6% (A)<F2>
VARIABLE RATE DEMAND NOTE
$ 5,749,872 Firstar Bank U.S.A., N.A. 5,749,872 5,749,872
------------ -----------
Total investments $345,429,386 361,335,389
------------
------------
Cash and receivables, less
liabilities 0.8% (A)<F2> 3,015,379
-----------
NET ASSETS $364,350,768
-----------
-----------
Net Asset Value Per Share
($0.01 par value 100,000,000 shares
authorized), offering and redemption
price ($364,350,768 / 16,467,828
shares outstanding) $22.13
------
------
*<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 BLUE FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1998
INCOME:
Dividends $ 1,780,969
Interest 7,196,840
-------------
Total income 8,977,809
-------------
EXPENSES:
Management fees 5,424,730
Administrative services 104,620
Registration fees 51,315
Custodian fees 51,096
Printing and postage fees 44,084
Professional fees 36,152
Transfer agent fees 19,164
Board of Directors fees 2,000
Other expenses 20,219
-------------
Total expenses 5,753,380
-------------
NET INVESTMENT INCOME 3,224,429
-------------
NET REALIZED LOSS ON INVESTMENTS (38,397,139)
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (114,271,399)
-------------
NET LOSS ON INVESTMENTS (152,668,538)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(149,444,109)
-------------
-------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1998 and 1997
<TABLE>
1998 1997
----- -----
<S>
OPERATIONS: <C> <C>
Net investment income (loss) $ 3,224,429 $ (2,154,984)
Net realized (loss) gain on investments (38,397,139) 97,695,857
Net (decrease) increase in unrealized appreciation on investments (114,271,399) 69,826,600
-------------- ------------
Net (decrease) increase in net assets resulting from operations (149,444,109) 165,367,473
-------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains ($5.085142 per share) (88,287,212)*<F3> --
-------------- ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (8,608,182 and 7,155,367 shares, respectively) 236,200,712 205,952,295
Net asset value of shares issued in distributions (3,001,160 and
0 shares, respectively) 81,361,466 --
Cost of shares redeemed (12,395,518 and 3,815,950 shares, respectively) (332,841,741) (105,417,172)
-------------- ------------
Net (decrease) increase in net assets derived from Fund share activities (15,279,563) 100,535,123
-------------- ------------
TOTAL (DECREASE) INCREASE (253,010,884) 265,902,596
NET ASSETS AT THE BEGINNING OF THE YEAR 617,361,652 351,459,056
-------------- ------------
NET ASSETS AT THE END OF THE YEAR
(including undistributed net investment income of $3,234,758 and $0, respectively) $ 364,350,768 $617,361,652
-------------- ------------
-------------- ------------
</TABLE>
*<F3>See Note 7.
The accompanying notes to financial statements are an integral part of these
statements.
BRANDYWINE BLUE FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each period)
<TABLE>
Years Ended September 30,
1998 1997 1996 1995 1994 1993 1992 1991+<F4>
---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $35.78 $25.26 $24.37 $17.18 $19.11 $12.95 $13.09 $10.01
Income from investment operations:
Net investment income (loss) 0.19 (0.10)(1)<F5> (0.05)(1)<F5> 0.00 0.04 (0.06) (0.04) 0.03
Net realized and unrealized (loss)
gains on investments (8.75) 10.62 2.05 7.30 0.36 6.22 0.52 3.05
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations (8.56) 10.52 2.00 7.30 0.40 6.16 0.48 3.08
Less distributions:
Dividend from net investment income -- -- -- -- -- -- (0.03) --
Distributions from net realized gains (5.09) -- (1.11) (0.11) (2.33) -- (0.59) --
------ ------ ------ ------ ------ ------ ------ ------
Total from distributions (5.09) -- (1.11) (0.11) (2.33) -- (0.62) --
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $22.13 $35.78 $25.26 $24.37 $17.18 $19.11 $12.95 $13.09
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Total Investment Return (26.5%) 41.6% 8.9% 42.8% 2.8% 47.6% 4.0% 45.1*<F6>
Ratios/Supplemental Data:
Net assets, end of period (in 000's $) 364,351 617,362 351,459 164,943 29,086 6,373 4,270 3,975
Ratio of expenses (after reimbursement)
to average net assets**<F7> 1.06% 1.08% 1.13% 1.31% 1.80% 2.00% 2.00% 1.97%*<F6>
Ratio of net investment income
(loss) to average net assets***<F8> 0.6% (0.5%) (0.4%) (0.4%) (0.4%) (0.6%) (0.3%) 0.6%*<F6>
Portfolio turnover rate 299.5% 202.1% 196.9% 174.1% 220.3% 144.3% 191.9% 115.3*<F6>
</TABLE>
+<F4> For the period from January 10, 1991 (commencement of operations) to
September 30, 1991.
(1)<F5> Net investment loss per share is calculated using ending balances
prior to consideration of adjustments for permanent book and tax
differences.
*<F6> Annualized.
**<F7> Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratio would
have been 2.09% and 2.44% for the years ended September 30, 1993 and
1992, respectively, and 3.00%*<F6> for the period ended September 30,
1991.
***<F8> The ratio of net investment income (loss) prior to adviser's expense
limitation undertaking to average net assets for the years ended
September 30, 1993 and 1992 and for the period ended September 30,
1991 would have been (0.7%), (0.7%) and (0.5%)*<F61>, respectively.
The accompanying notes to financial statements are an integral part of this
statement.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of Brandywine
Blue 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 November 13, 1990. 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 $38,765,853 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
$1,242,366,009 and $1,344,721,185, 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 $ 2,510,311
Payable to Adviser for management
fees 305,757
Other liabilities 38,622
(6) SOURCES OF NET ASSETS
As of September 30, 1998, the sources of net assets were as follows:
Fund shares issued and outstanding $383,856,909
Net unrealized appreciation
on investments 15,906,003
Accumulated net realized losses (38,646,902)
Undistributed net investment income 3,234,758
---------------
$364,350,768
---------------
---------------
Aggregate net unrealized appreciation as of September 30, 1998 consisted of
the following:
Aggregate gross unrealized appreciation $ 32,761,061
Aggregate gross unrealized depreciation (16,855,058)
---------------
Net unrealized appreciation $ 15,906,003
---------------
---------------
(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% $ 11,167,864
Capital gains taxed at 28% 37,226,240
---------------
Total long-term capital gains $ 48,394,104
---------------
---------------
The percentage of ordinary income which is eligible for the corporate
dividend received deduction for the fiscal year ended September 30, 1998 was 4%.
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
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.
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.
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 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
