BRANDYWINE BLUE FUND, INC.
MANAGED BY FRIESS ASSOCIATES, INC. QUARTERLY REPORT DECEMBER 31, 1998
DEAR FELLOW SHAREHOLDERS:
Your Fund grew more than 50 percent since October 8 through yesterday's close.
But before we get too carried away, we want to acknowledge the shellacking
many stocks experienced in the first week of October, which dampened an
otherwise astounding December quarter. Despite that week, your Fund returned
18.9 percent this quarter.
Early October's steep sell-off impacted your Fund. Financial stocks were hit
particularly hard, as the market for asset-backed securities seized on the heels
of the Long Term Capital and Crimii Mae debacles. Restricted access to capital
cast doubt on the ability of some companies to fund growth during a crisis.
Holdings such as Capital One, Metris Companies, Dime Bancorp and others --
which had been growing earnings by as much as 50 percent -- were sharply
affected. Your research team exited companies unable to fund growth through this
credit crunch since no asset-backed security market participants could project
when the situation would stabilize. In retrospect, it would have been better to
keep some of those stocks as they recovered in step with improvement in the
asset-backed market.
Thank you for your long-term view recognizing that liquidity-driven markets
eventually end, allowing individual-company fundamentals to determine stock
prices in the long run. Your tremendous rebound of 45.8 percent since the
October 8 low to year end demonstrates that point dramatically. Thanks to a
revived interest in fundamentals, our process yielded strong results as you can
see below:
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BRANDYWINE BLUE FUND PERCENTAGE RETURNS
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Since
December Year 5 Inception OCTOBER 8
Quarter 1998 Years 1-10-91 TO DATE
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Brandywine Blue Fund 18.9 -1.0 97.0 296.9 51.9
(14.5 Ann.)(18.9 Ann.)
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Your relative annual performance reflects the frustrations we encountered in
two isolated periods in 1998: our elevated cash position during several weeks in
the March quarter and the events of the first week of the December quarter
discussed above.
Much of Corporate America continues to deliver the disappointing earnings that
we first identified a year ago. Coca-Cola, Union Carbide, Rohm & Haas, Starwood
Lodging, 3M, Boeing and many other notable companies have warned the investment
community that they won't live up to analyst expectations. In fact, the same
analysts who last January predicted earnings for the average S&P 500 company
would grow by 10, 13, 15 and 19 percent in each of 1998's quarters now expect
earnings to be up a mere 1 percent for the year.
The market seems to have a more realistic outlook as 1999 begins. Seventy-
three percent of the chief executive officers that are members of the American
Business Conference say profits will be the same or lower this year. Now, more
than any time in 1998, it is important to pick stocks with strong fundamentals
based on real earnings performance, not hollow hopes and dreams.
Our process continues to lead us to modestly-priced companies delivering new
technology solutions that foster the Internet's growth, allowing sustained
pricing flexibility in an increasingly deflationary environment. Companies such
as Sun Microsystems, 3Com, and EMC Corp., selected by David Harrington, are
providing innovative solutions that enable continued improvement in data and
image transfer and storage in our newly networked world. During the quarter,
these companies rose 30, 44 and 37 percent.
Some other big gainers for you this quarter were Sterling Commerce, John
Raagard's pick, up 63 percent and Amdocs Ltd., selected by Tripp Rudisill which
jumped 51 percent. A.J. Berk's CSG Systems rose 43 percent and Andy Graves chose
Brinker International which climbed 30 percent.
The double-digit gains in the S&P 500 and the Nasdaq Composite in 1998 came
despite weak earnings realities and incredible price-to-earnings multiples. The
gains were also narrow, as investors preferred well-known names to companies
with strong growth but more reasonable price earnings ratios.
Looking ahead, your companies, by contrast, reflect solid fundamentals with
earnings forecast to grow 38 percent over the next year compared to just 4
percent for the S&P 500 and 18 percent for the S&P MidCap stocks.
EARNINGS GROWTH
YOUR
COMPANIES S&P 500 S&P MIDCAP
--------- ------- ----------
FORECAST INCREASE IN EARNINGS
PER SHARE 1999 VS 1998 38% 4% 18%
ALL FIGURES ARE DOLLAR WEIGHTED. ANALYSIS BY BASELINE. DECEMBER 31, 1998.
Half the S&P 500 index's 26.7 percent 1998 gain can be attributed to its 10
biggest contributors: Microsoft, Wal-Mart, Lucent, Intel, Cisco, Dell, IBM,
Pfizer, Merck and GE. That group, which climbed 83.4 percent, has an average
1999 growth rate of 21 percent and a price-to-earnings ratio of 41.
The 20 most-capitalized companies in the Nasdaq Composite were up 105 percent
in 1998, while the 5,000-plus remaining Nasdaq stocks gained less than 8
percent. In fact, a study by Wilshire Associates found that were it not for the
250 most-capitalized companies in U.S. equity markets, U.S. stocks would have
lost value in 1998.
This environment was not conducive to your team's fundamentals-driven
approach. Many quality holdings were unreasonably punished when broad factors
took center stage. Take Providian Financial, which fell off a# m(c)ff when the
unraveling of Long Term Capital shook equity markets late in the third quarter.
The stock dropped more than 40 percent in the brief eight days between September
30 and October 8, yet there was no change in its earnings outlook.
Less than a week later, Providian beat expectations by 5 percent, reporting a
70 percent increase in September-quarter earnings. Still, its stock price didn't
return to its September 30 level until fears had subsided on November 5.
Providian shares then soared 29 percent above their November 5 level through the
end of the year.
We are encouraged to see earnings playing a more dominant role in determining
stock prices, but there are still certain developments that give us pause.
Continued price appreciation among the S&P 500's largest stocks and frenzied
demand for Internet stocks demonstrate that a large group of investors is still
operating without regard to time-tested valuation models.
The influence these overvalued stocks are having and will have on the indexes
should not be underestimated. A Wilshire Associates analysis showed that nearly
one-fifth of the Wilshire 5000 index's 21.7 percent gain could be attributed to
Internet-driven issues -- the index includes every U.S.-headquartered publicly
traded company.
The magnitude of price gains among Internet stocks dwarfs run-ups during any
previous speculative frenzy. If AOL, for example, were to grow earnings by 50
percent a year for the next five years, it would still sell at a multiple of
more than 55 times earnings in 2004, assuming its price stayed constant. Amgen,
which played a similar starring role in the biotechnology-stock craze early in
the decade, was unable to sustainably break its year-end 1991 price level until
1995.
The biotechnology sector should serve as an important lesson to Internet-stock
investors. According to Securities Data Company, only 44 of the 101
biotechnology companies that went public in 1991 are publicly traded today.
Nevertheless, Internet speculation continues with Internet IPOs producing first-
day price gains five times greater than their biotechnology predecessors.
The outlook for the broader U.S. economy is cautious. Corporate layoffs are
accelerating as deflationary forces compel consolidation and other cost-cutting
moves. Boeing, Citicorp and Lockheed Martin are just a few examples of companies
that helped push the number of layoffs in 1998 beyond any previous year.
According to consultant Challenger, Gray & Christmas, U.S. companies cut 677,795
jobs last year, surpassing the previous high set in 1993.
The U.S. consumer remains resilient in light of low inflation and real wage
increases reaching levels not seen since 1985. Your holdings in retailers such
as Tiffany & Co. and The Gap benefited by offering the right mix of merchandise
for today's selective shoppers. These stocks were each up more than 30 percent
in the December quarter, reflecting the market's recognition of the strengths
your research team isolated earlier.
Additionally pressures are building on the Federal Reserve to reverse the
liquidity injected to avert a full financial crisis in the fall. The December
quarter's 15 percent M-2 money supply growth now compels the Fed to drain
liquidity as it did in 1998's aftermath.
Coming quarters could be impacted by political instability in Washington. As
the Clinton scandal drags into a full-blown Senate trial, whether President
Clinton is removed from office, resigns, or holds on, the number of potential
implications escalates at home and abroad.
With Congress and the White House focused on impeachment, we may react too
slowly to the deteriorating situation in Brazil or some other crisis, as IMF
action and other issues become mired in the hyper-politicized climate. This
week, Friess researcher Jon Fenn is leading a fact-finding trip to South America
that includes visits to Brazil, Argentina and Mexico. He and other teammates
will meet with key executives in the energy, telecommunications and banking
industries to get a first-hand feel for the region and establish contacts for
the future.
The deflationary environment squeezing most of the world's commodity exporters
has not spared an economically-challenged Japan. Deflation resulting from a
fast-rising yen -- making imports cheaper and exports more expensive -- may be
the final ingredient that spoils that nation's long-simmering economic stew of
deficit spending, inefficient capital markets, and sinking equity and real-
estate values.
A shock wave from Japan or South America could set off a chain reaction that
trips up U.S. markets as we saw in August when money-center banks and hedge
funds led a late-summer plunge in stock prices after Russia's devaluation. There
is no doubt other Long Term Capital Managements and Crimii Maes exist that would
roll over in this fragile environment on significant bad news.
In this mixed setting, stock selection will determine your results. We are
excited to have 20 industrious researchers working to uncover the next Dell,
Cisco Systems or The Gap. Our expanded team allows each researcher to focus on
about 12 companies, compared with as many as 25 companies a decade ago.
Your research team has been focused on isolating companies with superior
fundamentals in a difficult pricing environment for more than a year. This
experience is paying off, as reflected by your recent gains. Our process may
fall out of favor from time to time, but it is never outdated. Earnings drive
stock prices and over time your results will reflect that.
We're pleased to announce that Joe Fields, who has been a principal at Alex.
Brown Capital for five years, joins our team this month. He was a member of the
firm's operating and investment policy committees, as well as responsible for
Alex. Brown Capital's institutional business. Before Alex. Brown, Joe spent 10
successful years in senior management positions with Salomon Smith Barney.
In addition to his research insights, Joe will assist us in better serving our
shareholders and the consultant community. We hope you will give us feedback on
how we could more effectively communicate with you and fulfill your investment
needs. Please critique your Fund's website at www.brandywinefunds.com and the
message we record bi-monthly for you at 1-800-656-3017.
If you invest with us via a third party broker, bank, or financial advisor, we
would gladly add the appropriate person you deal with there to our list and also
get a better idea of those firms and individuals who are our partners in
realizing your personal investment strategy. Please let us know of your
existence, too, as the large "fund supermarkets" we participate in do not
forward your name and address to us; we always welcome the opportunity to serve
each shareholder even more effectively by putting you on a direct mailing list.
------
We're delighted that the enclosed Investor's Business Daily article heralds
our process and the companies impacting your recent performance. Since that
article, we repurchased Nokia, which has climbed 51 percent from its purchase
price.
Additionally, we're grateful that Don Phillips, president of mutual fund
tracking firm Morningstar, in late December recommended your sister Brandywine
Fund for 1999 during a USA Today interview. It is also exciting to see a top
international financial consulting firm, whose business is analyzing money
managers, commit an additional $3.9 million of its pension monies recently in
Brandywine Funds alongside the more than $30 million of our own firm's pension
assets, and all of my personal equity investments.
Thanks for giving us the opportunity to serve you and sticking with us to
benefit from the fundamentals-driven environment we now encounter. We look
forward to maintaining our positive momentum into 1999 just as much as you do.
God Bless!
/s/ Foster Friess
Foster Friess
President
January 12, 1999
FELLOW SHAREHOLDERS . . .
It's 7 A.M. Tuesday, December 22. The Saint Clare Medical Van is parked in
front of the Emmanuel Dining Room soup kitchen, one block North of Interstate 95
in Wilmington, Delaware. An anxious group of homeless men, single mothers and
recent immigrants is already forming a line outside the 35-foot mobile unit. For
the past six years, this has been one of several weekly stops for fellow
shareholder Dr. Thom Scott, who offers free medical care to those in need.
After a brief prayer with his staff, Dr. Scott opens the door to the hulking
vehicle with a smile, ready to deliver a dose of spiritual encouragement along
with his medical expertise. This is just what Dr. Scott had in mind when he
promised God he would start tending to the poor after attending a Christian
Medical and Dental Society conference in 1991.
"I've never had so much fun and enjoyment, but I've also never worked so
hard," the 72-year-old doctor says with a chuckle. He adds, "There is a great
sense of fulfillment in helping people so vulnerable and being able to carry out
the teachings of Galatians 6:2." The verse reads "Carry each other's burdens,
and in this way fulfill the law of Christ."
The medical van's success has been a lesson in faith for all involved. Dr.
Scott explained how "God provided for all of our needs from the very beginning,
even when at times we didn't have two nickels to rub together." Four foundations
bought into the idea of the mobile clinic and purchased the van. It is sustained
by St. Francis Hospital and private donations from individuals, churches and
organizations.
Each day, the staff treats approximately 26 people without medical insurance.
High blood pressure, asthma, diabetes, skin ailments and respiratory infection
are common illnesses among the transient population of the inner city. Some
patients are HIV-positive, drugs addicts or victims of gang violence. More than
30,000 patient visits have been logged since the van started making rounds in
April 1992.
"We offer care with no strings attached and minister to the entire person --
mind, body and soul," Dr. Scott says. "I've seen people be given new leases on
life."
Just recently, a fellow named Sam came to the van in dire need of sinus
surgery. As with any surgical procedure, Dr. Scott referred him to a local
surgeon. The doctor, who performed the operation pro bono, was so impressed with
Sam's attitude and enthusiasm that he offered him a job in his office.
Twenty-seven percent of the patients are children. "It was overwhelming to
find so many women and children coming to the van," Dr. Scott says. "It saddens
my heart to see little boys and girls not getting basic medical care. It's just
not right."
The care doesn't end when a patient leaves the van. On Sunday morning, Scott
and others drop by local shelters to pick people up for church. Scott and his
wife Catherine often invite patients to their home for a meal after church.
"These people were made in the image of God and they should be treated with
dignity and respect," Dr. Scott says. "I consider them good friends."
This year Dr. Scott's work and vision was replicated in six inner cities
nationwide and plans have been drawn up for three more cities in 1999. We're
grateful to have Dr. Scott invest with us in your sister fund, Brandywine.
The new vans have painted on them this message taken from 2 Kings 20:5: "I
have heard your prayers and seen your tears. I will heal you."
-Adam Rieger
JOHN . . .
New to your trading desk, but certainly not the industry, is John Walter, who
came on board in July. Three years on the desk at BT Alex Brown in Baltimore
followed trading at CS First Boston in Philadelphia for seven years. Jack
Fraser, one of Friess Associates' top management and investment leaders, worked
closely with John at First Boston and knew what a great addition he would be to
our own trading efforts.
"John's experience on the sell side helps round out the desk," Jack explains.
"During our years together at First Boston I was always impressed by John's
ability to not only find the other side of the trades he was executing but also
by how adept he was at getting the best possible price. That experience
translates well for our shareholders and clients."
Also helpful is John's working relationships with several of the brokers he
now trades with here at Friess. Having a rapport already established with some
of our key contacts made his transition especially smooth.
Having known Friess Associates for 10 years made the decision to come on board
an easy one. John relates, "I always respected the Friess strategy and
performance, and admired every person I'd gotten to know there." That group
included all of the traders. "It's a Osmall world' in the trading business, and
I was fortunate to become friends with many folks at Friess over the years,"
John continues.
There were few firms on the buy side John would consider working for, and
Friess Associates was top on that select list. "It's rewarding now to see the
trades I execute benefiting our clients and shareholders. I was glad to give up
the mercenary style of the sell-side, where I covered more than 30 accounts. The
closer contact is a welcome change."
Away from the desk, John's favorite activities are those spent with his wife
of 10 years, Bonnie, and their three sons. They are busy keeping track of
Johnny, 7, Alex, 5, and Jake, 1. Johnny and Alex play soccer, and John likes
being their amateur coach. Were they playing football, John would consider
himself a much more proficient coach given his four years under Joe Paterno's
tutelage at Penn State where he played linebacker and tight end. John was part
of Penn State's National Championship team in 1982, and counts that as one of
his most memorable and exciting experiences. He graduated with a BS in
Engineering in 1985 and earned an MBA in 1987.
John enjoys all sports and is just now experimenting with his golf game. He'll
eagerly pack up for a fishing trip, and if there's a project to complete, John
jumps right in! He refinishes furniture and tackles any other Bob Vila-esque
task at their summer residence on the Jersey shore.
"These first six months at Friess Associates have been a great learning
experience for me with the market's volatile swings," John says. "This kind of
environment reflects how trading can be every bit as important as the research
effort, which makes my job all the more meaningful."
- Rebecca Buswel
EXTERNAL RESEARCH RESOURCE . . .
Indianapolis-based Jon Evans has been in the investment business for nearly 10
years. Before joining the Friess Associates network of outside resources in
1994, he helped run variable annuity funds at Conseco Capital Management for
more than three years, employing the same type of research strategy, seeking
accelerating growth. During his time at Heartland Capital Management, he came to
know some of the folks here at Friess, and began thinking how he could be part
of our efforts on behalf of our clients and shareholders.
"The biggest strength I'd come to recognize in the Friess strategy was
isolating inflection points (points of change) in stocks or finding a stock that
all of a sudden goes from growing 5-10 percent to upwards of 20-25 percent
before the Street catches on. Once they do," Jon continues, "positive revisions
are made and Friess' clients and shareholders reap the rewards of the subsequent
price advances." Jon enjoys being part of this effort and seeks companies where
both earnings and multiples are understated. "When the model is better
understood and they both increase, the potential for the stock's growth is huge.
It's so exciting to see that happen."
A good example of that is Family Dollar Stores, which your Fund bought at an
inflection point after the store instituted its everyday low pricing concept. No
longer reliant on the "opium" of retail -- the weekly circular detailing special
sales -- same store sales have been beating expectations for 38 straight months.
Jon also says when Family Dollar began offering more weekly consumable goods
like detergent, food items, and household supplies as well as more basic,
everyday apparel articles like shoes, customer traffic increased, and sales
accelerated.
Senior researcher David Harrington is quick to recognize Jon's stock-picking
savvy. "Jon has provided research on several big winners for us, including
Family Dollar, Rent Way, and JB Hunt Transportation. His familiarity with the
type of research we do made him an ideal candidate to add to the external
research network we've implemented. Jon is a key player in finding just the kind
of stocks we want for Brandywine Blue and every client's portfolio."
Chief among Jon's hobbies out of the office is running around after his three
little ones. With Timmy, 3, Jacob 2, and infant Will, Jon and his wife Katie
find very few moments of precious free time. When he does manage to grab a
moment or two, Jon enjoys all sports, especially football, basketball and
baseball. Jon is excited for warm weather to arrive in the spring so he can make
good use of the catcher's mask he just bought for Timmy.
Armed with a degree in Finance from Butler University, Jon is astute at
reading between the lines on a company's financial reports and picking up on
trends someone else might miss. "This kind of teamwork is integral to the
research effort," explains Bill D'Alonzo. "Everyone is eager to share their
insights with others on the team for the collective benefit of our shareholders.
We're thrilled that Jon's a part of our extended research team."
- Rebecca Buswell
ON THE CUTTING EDGE . . .
YOUR COMPUTER WILL BE LISTENING TO YOU
General Magic has a product called Portico which lets users call in to retrieve
voice and e-mail messages. A computerized voice reads the messages back. The
speech recognition software can be synchronized with a desktop computer or with
electronic devices such as the PalmPilot. Another speech recognition company,
Lernout & Hauspie, has plans to add speech recognition to its translation
software. Right now iTranslator lets a company translate the text on its website
in almost real-time to Spanish, German, and French. In the future, the company
foresees people speaking into the computer and the software will translate the
speech into text in another language. But that's still a few years away!
YOUR TELEVISION MAY BE LEAKING
Appliances such as TVs, garage door openers, and battery rechargers drain power
even when not being used. The energy loss from such devices in U.S. homes alone
adds up to billions of watts per year. Power Integrations in Sunnyvale,
California has a new chip that can cut up to 90 percent of the juice that flows
into unused equipment. The company's TinySwitch senses when cordless appliances
are inactive and shuts them down. Nokia plans to use the chips in future AC
adapters for their cell-phones. The switch could also reduce carbon dioxide
emissions.
BANDAID ADHESIVES WON'T MAKE YOU FLINCH IN THE FUTURE
Removing medical dressings that use adhesives is a particular problem for
patients with fragile skin, such as the elderly. In some cases, it even strips
off layers of skin. Scientists at Smith & Nephew Research Centre in York,
England have developed a light-switchable, pressure-sensitive adhesive that
enables a wound dressing to be removed without pain. The dressing is backed by
two layers laminated together, one opaque and the other transparent to visible
light. When the top opaque layer is peeled away, light deactivates the adhesive,
allowing the dressing to be removed painlessly.
HIGHLIGHTS . . .
APPAREL & SHOES
THE GAP is a household name bringing to mind images of classically-styled, high-
quality casual clothing for men, women, and children. It seems every mall in
this country has a Gap store, attracting fashion-conscious consumers looking for
anything from a simple pair of jeans to a stylish pair of shoes.
In addition to its Gap, GapKids, and babyGap stores, your company sells the Old
Navy and Banana Republic brand names, extending its reach to value-oriented
customers as well as those willing to pay a little more for a high-fashion look.
Currently The Gap's 2,140 stores in the U.S., Canada, the UK, Europe and Japan
are performing above Street expectations. Especially impressive are
international sales with Japan, Canada and the UK seeing more than 20 percent
increases.
The stores' success drives revenue and earnings growth. In the October quarter,
earnings were up 48 percent to $.40 from $.27 on revenue increases of 36
percent. Its unique advertisements featuring well-known performers such as
Johnny Mathis and Lena Horne, as well as those dancers "swinging" in Gap khakis
seem to be working.
Purchased for you in September, shares sell today 46 percent higher at $56.
COMPUTER & RELATED
When you open up your telephone, cable TV, or cellular phone bill, you might be
looking at a product made by AMDOCS LTD. Your company supplies billing software
to companies like Southwestern Bell, AT&T, Bell South, and Netcom to track
customer usage of their services.
Don Haharav, CFO, said that Amdocs' new software billing system landed the
company several significant new contracts recently, including France Telecom and
Rogers Cantel of Canada.
As the communications industry continues to consolidate, more companies will
have to integrate their billing systems into one platform and Amdocs is the
leader in this industry, with 80 percent of its calendar year 99 revenues
already in backlog.
Earnings were $.06 last quarter on revenues of $117 million. Analysts expect
that in the current December quarter, as Amdocs marks its first year as a
publicly traded company, earnings will be up 45 percent to $.09 from $.06 last
year.
Selling at $17, your shares purchased in September jumped 56 percent.
LEISURE & ENTERTAINMENT
How frustrating is it to come home, expecting to watch a program you'd recorded,
only to find you had not properly set your VCR? Well, thanks to Henry Yuen, CEO
of GEMSTAR INTERNATIONAL GROUP, you may never have to experience that same
frustration again. Henry launched Gemstar after he disappointingly realized that
instead of recording an important Red Sox game he taped a screen full of "snow."
Gemstar's primary product is VCR Plus+, the videorecording system dubbed "so
easy to use even the family dog could master it." VCR Plus+ is world standard
for VCR programming allowing users to record a television show simply by
entering a numeric code which is published in television program guides.
Customers love the feature-rich, user-friendly product enabling them to select a
show, enter the code, and voila, the programming is complete.
Other systems your company offers include automatic on-screen indexing and
playback of home-recorded videotapes, interactive electronic television guides,
and interactive advertising systems. Licensees RCA, Proscan, Magnavox, and Sony
incorporate Gemstar's popular technology into their own TVs, digital cable
modems and VCRs.
Last quarter revenues climbed 34 percent, driving earnings up 40 percent to
$.29.
Your shares are $57 today, up 40 percent from $41 when purchased in September.
SOFTWARE
When a company like Lucent Technologies, Hewlett Packard, or Cisco Systems
starts developing new software programs, they turn to RATIONAL SOFTWARE.
Your company makes software products for each phase of software development,
from initial analysis of what the new program should do, through detailed
design, testing, and maintenance.
Rational is one of a few companies that has the only full suite of software
development tools and customers are buying multiple sets of tools to get their
bug-free quality products to the market quickly and efficiently.
Your company's sales are driven by Fortune 1000 companies seeking to develop
web-based products to utilize the Internet. CEO Paul Levy told us recently that
custom website development work tripled from a year ago and now represents more
than 10 percent of revenues.
Besides those mentioned above, other customers include Eastman Kodak, Ericsson,
Ford Motor Company, Goldman Sachs and Boeing.
Beating analysts' estimates for the second straight quarter, your company
reported earnings of $.14 in September, compared with a loss last year. Revenues
were up 26 percent.
Rising 68 percent since purchase in April, your shares now sell at $26.50.
TOP TEN . . .
Three of your four largest groups jumped up significantly during the quarter.
Computer & Related moves up from number five last quarter to number one,
Software climbed all the way from number ten to number three, and Communications
joins the Top Ten at number four.
With new position in Converse Technology, NCR Corp. and Sterling Commerce
your Computer & Related category grew from 8.7 percent to 13.8 percent. These
companies have already provided a $2.3 million boost to your portfolio. The
addition of Oracle Corp. and Saville Systems also helped push this category to
the top spot.
Software companies Electronics for Imaging, Parametric Technology, Symantec
Corp., and Check Point Software together saw gains of more than $3 million since
joining your Fund. The purchase of BMC Software also contributed to this group's
growth from 5.0 percent in September to 10.7 percent currently.
You added several new Communications companies to your portfolio, bringing
this category to 10.2 percent from 3.3 percent in September. AT&T, Century
Telephone, Frontier Corp., General Instrument, and Scientific-Atlanta together
gained $3.3 million since purchase. The addition to your Nokia holding and its
subsequent $6.5 million gain also helped.
Financial/Business Services was bumped up one slot to the number two position
with 11.3 percent from 10.6 percent in September. You added Allmerica Financial,
Bank One Corporation, The CIT Group, and Valassis Communications, filling the
void left when your large position in Capital One Financial was sold.
Completing your Top Ten is the new group Semiconductor & Related, with 3.7
percent. Advance Micro Devices, DSP Communications, Sanmina Corp., and SCI
Systems are new to your portfolio.
TOP TEN INDUSTRY GROUPS
COMPUTER & RELATED 13.8%
FINANCIAL/BUSINESS SERVICES 11.3%
SOFTWARE 10.7%
COMMUNICATIONS 10.2%
SPECIALTY RETAILING 8.5%
NETWORKING 7.5%
APPAREL & SHOES 6.4%
MACHINERY & MICSCELLANEOUS MANUFACTURING 5.5%
MEDICAL & RELATED 4.8%
SEMICONDUCTOR & RELATED 3.7%
CASH 2.4%
ALL OTHERS 15.2%
LAS VEGAS OR BUST . . .
The 7th Annual Louis Rukeyser Investment Conference will be held February 27-
28, 1999 at the MGM Grand in Las Vegas. Foster will be a guest speaker again
this year on a panel with six fellow money managers. He will be speaking on
Saturday, February 27 from 1:00-2:30 PM on the topic of "Investing for the Next
12 Months."
Additionally, this year Friess Associates will have a booth at the conference
staffed with several of the folks working for your Fund. If you are planning on
attending the Rukeyser Investment Conference, please let us know. We'd sure like
to meet any of our fellow shareholders in person!
ALL IS NOT ROSES . . .
Even in a strong quarter like this one, some stocks underperform, regardless
of underlying fundamentals or earnings prospects. There were eleven companies
that dropped more than $750,000 apiece this quarter.
Capital One Financial was your biggest disappointment, losing $5.5 million
after a sudden collapse in the asset-backed securitization market. Compaq
Computer lost $4.2 million when earnings were revised from the September
quarter. Concerns that its Radio Shack stores would have weaker sales in
November caused Tandy Corp. to drop $1.5 million.
Best Buy's $1.4 million decrease resulted initially from "recession fears" in
October. Consumer electronic companies tend to do very poorly in a recession
environment, and the stock suffered from the news. A $1.2 million decline in
Tech Data Corp. was mainly precipitated by its competitor Ingram Micro
preannouncing that it would have a bad quarter. A general economic slowdown in
the fourth quarter and fears of its continuing into 1999 signaled potential
problems for Ethan Allen which declined $1.2 million.
Apple Computer and Comp USA dropped more than $920,000 each, while Tellabs and
Gateway 2000 fell over $830,000. Household International rounds out the group,
dropping $754,000. All these companies were sold from your portfolio.
The bright spot is the gains from just your top five winning stocks more than
made up for the total losses of those eleven companies. Nokia Corp. gained $6.5
million, Providian Financial was up $5.9 million, and 3Com Corp. rose $5.8
million. Sun Microsystems and EMC Corp. each rose $5.7 million.
Ascend Communications also shone with a $5.6 million jump, and Tyco
International was up $5.2 million. The Gap saw a $4.3 million gain, Genzyme rose
$3.2 million, Biogen was up $2.7 million, and Advanced Micro Devices jumped $2.4
million. MCI WorldCom and Lucent Technologies enjoyed gains of over $2 million.
Seagate Technology, SCI Systems, Dayton Hudson, Sterling Commerce and General
Instrument each rose more than $1.5 million apiece, and 12 other companies
increased by more than $750,000.
BRANDYWINE BLUE FUND, INC.
STATEMENT OF NET ASSETS
December 31, 1998
(Unaudited)
QUOTED
MARKET
SHARES COST VALUE(B)<F2>
------- ---- -------------
COMMON STOCKS - 97.6% (A)<F1>
APPAREL & SHOES - 6.4%
142,000 Gap, Inc. $ 5,231,955 $ 7,987,500
50,000 Intimate Brands, Inc. 1,538,745 1,493,750
82,500 Ross Stores, Inc. 2,792,190 3,248,438
250,000 TJX Companies, Inc. 6,525,682 7,250,000
48,100 Tommy Hilfiger Corp. 2,745,311 2,886,000
------------ ------------
18,833,883 22,865,688
THIS SECTOR IS 21.4% ABOVE YOUR FUND'S COST.
AUTOMOTIVE & RELATED - 1.6%
71,800 Federal-Mogul Corp. 4,116,477 4,272,100
21,600 SPX Corp. 1,347,174 1,447,200
------------ ------------
5,463,651 5,719,300
THIS SECTOR IS 4.7% ABOVE YOUR FUND'S COST.
COMMUNICATIONS - 10.2%
39,000 AT&T Corp. 2,270,551 2,934,750
20,800 Century Telephone Enterprises, Inc. 1,172,576 1,404,000
172,300 Frontier Corp. 5,161,099 5,858,200
162,100 General Instrument Corp. 3,966,451 5,501,350
143,700 Nokia Corp. "A" ADR 11,498,625 17,306,940
153,300 Scientific-Atlanta, Inc. 3,174,806 3,497,233
------------ ------------
27,244,108 36,502,473
THIS SECTOR IS 34.0% ABOVE YOUR FUND'S COST.
COMPUTER & RELATED - 13.8%
125,500 Amdocs Limited 1,379,442 2,149,187
25,000 Comverse Technology, Inc. 1,238,500 1,775,000
95,000 EMC Corp. (Mass.) 3,591,181 8,075,000
25,000 NCR Corp. 1,009,370 1,043,750
161,600 Oracle Corp. 7,144,562 6,969,000
23,000 Saville Systems PLC IREL-SP ADR 477,250 437,000
545,200 Seagate Technology, Inc. 14,235,429 16,492,300
100,000 Sterling Commerce, Inc. 2,758,260 4,500,000
91,900 Sun Microsystems, Inc. 4,369,328 7,868,938
------------ ------------
36,203,322 49,310,175
THIS SECTOR IS 36.2% ABOVE YOUR FUND'S COST.
FINANCIAL/BUSINESS SERVICES - 11.3%
49,400 Allmerica Financial Corp. 2,547,150 2,859,025
203,500 Bank One Corp. 10,834,658 10,391,320
75,000 The CIT Group, Inc. 2,025,000 2,385,975
75,500 Concord EFS, Inc. 2,913,082 3,199,313
47,200 First American Financial Corp. 1,435,299 1,516,300
50,000 NOVA Corp./Georgia 1,500,000 1,734,400
225,300 Providian Financial Corp. 10,487,126 16,897,500
23,800 Valassis Communications, Inc. 1,145,932 1,228,675
------------ ------------
32,888,247 40,212,508
THIS SECTOR IS 22.3% ABOVE YOUR FUND'S COST.
FOOD/RESTAURANTS - 2.6%
88,700 Brinker International, Inc. 2,079,966 2,561,212
87,400 U.S. Foodservice, Inc. 3,742,736 4,282,600
46,900 Whole Foods Market, Inc. 2,237,265 2,268,788
------------ ------------
8,059,967 9,112,600
THIS SECTOR IS 13.1% ABOVE YOUR FUND'S COST.
LEISURE & ENTERTAINMENT - 2.6%
129,600 Gemstar International Group Limited 5,290,048 7,419,600
40,000 Harley-Davidson, Inc. 1,393,142 1,895,000
------------ ------------
6,683,190 9,314,600
THIS SECTOR IS 39.4% ABOVE YOUR FUND'S COST.
MACHINERY & MISCELLANEOUS MANUFACTURING - 5.5%
32,900 The Dial Corp. 824,231 949,987
245,600 Tyco International Ltd. 13,645,656 18,527,573
11,400 Wallace Computer Services, Inc. 296,732 300,675
------------ ------------
14,766,619 19,778,235
THIS SECTOR IS 33.9% ABOVE YOUR FUND'S COST.
MEDICAL & RELATED - 4.8%
200,000 Foundation Health Systems, Inc. 2,729,592 2,387,600
207,300 Genzyme Corp. (General Division) 7,072,501 10,313,175
62,600 Humana Inc. 1,243,743 1,115,094
79,900 United Healthcare Corp. 3,636,385 3,440,734
------------ ------------
14,682,221 17,256,603
THIS SECTOR IS 17.5% ABOVE YOUR FUND'S COST.
MISCELLANEOUS - 3.1%
30,000 Blyth Industries, Inc. 1,032,891 937,500
16,000 Mohawk Industries, Inc. 450,960 673,008
51,500 Shaw Industries, Inc. 1,151,669 1,248,875
172,700 Waste Management, Inc. 7,729,909 8,052,138
------------ ------------
10,365,429 10,911,521
THIS SECTOR IS 5.3% ABOVE YOUR FUND'S COST.
NETWORKING - 7.5%
302,200 3Com Corp. 8,071,688 13,542,488
136,300 Ascend Communications, Inc. 4,863,567 8,961,725
235,600 FORE Systems, Inc. 4,423,783 4,314,543
------------ ------------
17,359,038 26,818,756
THIS SECTOR IS 54.5% ABOVE YOUR FUND'S COST.
PHARMACEUTICALS - 2.6%
44,600 AmeriSource Health Corp. 2,412,485 2,899,000
118,500 Forest Laboratories, Inc. 5,576,243 6,302,778
------------ ------------
7,988,728 9,201,778
THIS SECTOR IS 15.2% ABOVE YOUR FUND'S COST.
SEMICONDUCTOR & RELATED - 3.7%
125,800 Advanced Micro Devices, Inc. 2,759,549 3,640,400
50,000 DSP Communications, Inc. 751,650 765,650
41,700 Sanmina Corp. 2,120,197 2,606,250
103,700 SCI Systems, Inc. 4,161,237 5,988,675
------------ ------------
9,792,633 13,000,975
THIS SECTOR IS 32.8% ABOVE YOUR FUND'S COST.
SOFTWARE - 10.7%
210,100 BMC Software, Inc. 9,882,457 9,362,686
42,900 Citrix Systems, Inc. 2,085,249 4,164,003
35,600 Check Point Software
Technologies Ltd. 1,368,151 1,630,943
15,300 Electronic Arts Inc. 687,068 858,712
111,500 Electronics for Imaging, Inc. 3,062,453 4,480,962
722,600 Parametric Technology Corp. 10,398,323 11,742,250
92,200 Rational Software Corp. 1,451,410 2,443,300
118,200 Sterling Software, Inc. 1,739,917 3,198,847
12,500 Symantec Corp. 248,437 271,875
------------ ------------
30,923,465 38,153,578
THIS SECTOR IS 23.4% ABOVE YOUR FUND'S COST.
SPECIALTY RETAILING - 8.5%
85,800 BJ's Wholesale Club, Inc. 3,307,026 3,973,655
545,500 Cendant Corp. 10,695,194 10,398,867
73,500 Circuit City Stores-
Circuit City Group 3,115,329 3,670,443
203,900 Dayton Hudson Corp. 9,249,656 11,061,575
25,000 Tiffany & Co. 995,897 1,296,875
------------ ------------
27,363,102 30,401,415
THIS SECTOR IS 11.1% ABOVE YOUR FUND'S COST.
TRANSPORTATION & RELATED - 2.7%
85,000 ASA Holdings, Inc. 3,102,502 2,592,500
134,200 Gulfstream Aerospace Corp. 6,858,930 7,146,150
------------ ------------
9,961,432 9,738,650
THIS SECTOR IS 2.2% BELOW YOUR FUND'S COST.
Total common stocks 278,579,035 348,298,855
------------ ------------
SHORT-TERM INVESTMENTS - 3.0% (A)<F1>
COMMERCIAL PAPER - 1.4%
$5,000,000 American General Finance ECN,
due 01/04/99, discount of 5.42% 4,997,742 4,997,742
VARIABLE RATE DEMAND NOTES - 1.6%
5,741,264 Firstar Bank U.S.A., N.A. 5,741,264 5,741,264
------------ ------------
Total short-term investments 10,739,006 10,739,006
------------ ------------
Total investments $289,318,041 359,037,861
------------
------------
Liabilities, less cash and
receivables (0.6%) (A)<F1> (2,214,861)
------------
NET ASSETS $356,823,000
------------
------------
Net Asset Value Per Share
($0.01 par value 100,000,000
shares authorized), offering
and redemption price
($356,823,000 /13,768,991
shares outstanding) $25.91
------
------
(a)<F1> Percentages for the various classifications relate to net assets.
(b)<F2> 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.
NEW FUND DIRECTOR . . .
In December, we welcomed a fourth Director to your Fund. We're thrilled to
have Marvin N. "Skip" Schoenhals join Foster, Jack, and Stig and serve on the
Board of Directors for Brandywine Blue Fund. Skip is Chairman, President and
Chief Executive Officer of WSFS Financial Corp., in Wilmington, Delaware. Skip
joined WSFS in 1990 as President and Chief Executive Officer. He was named
Chairman in 1992. Please look for a complete story on Skip in next quarter's
report. We know you'll quickly see why we're confident he'll be a real asset to
all our fellow shareholders.
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
Marvin N. Schoenhals
Chairman
WSFS Financial Corp.
Wilmington, Delaware
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 principalvalue 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 Buswell Report Staff: Chris Aregood, Margaret Barton,
Adam Rieger, Jennifer Weldon
