<PAGE>
SEMI-ANNUAL REPORT
June 30, 1998
Dear Shareholder:
Sequoia Funds second quarter and year-to-date results are shown
below with comparable results for the leading market indexes:
Sequoia Dow Jones Standard &
To June 30, 1998 Fund Industrials Poor's 500
3 months 8.0% 2.1% 3.3%
6 months 28.6% 14.1% 17.7%
Our first half results can only be described as pleasing but
unsustainable. While our portfolio companies in general continue
to post strong business results, over the past several quarters
the stocks had significantly outperformed the companies and we
have repeatedly warned that we were borrowing from future
performance. In mid-July, we began to repay this debt. As we
write, Sequoia is up 16.9% compared to year-to-date returns on
the Dow and the S&P of 8.0% and 11.1%, respectively. We hasten
to add that our present rate of gain still feels too good to be
true and is beyond our expectations for any full year.
The recent stock market gyrations reflect the effects of
diminishing earnings expectations on lofty stock valuation levels
that left no margin of safety or room for error. As more and
more companies have fallen short of exuberant and ultimately
unachievable earnings estimates, and as the full impact of Asian
economic woes on American companies has become clearer, there has
been a widespread reduction in overall valuations.
There has been the predictable cacophony of speculation and
commentary about the significance of this "correction," but we
would point out that the broad market averages have merely
returned to about their February levels, where we felt they were
overvalued at the time. That said, with many individual stocks
and specific market segments down substantially more than the
averages, we are now more optimistic about finding new
opportunities to invest in companies with the characteristics we
like. As Warren Buffett said in the 1997 Berkshire Hathaway
annual report, "only those who will be net sellers of equities in
the near future should be happy at seeing stocks rise.
Prospective purchasers should much prefer sinking prices."
Furthermore, it is important to keep in mind that through
Sequoia, you own positions in companies with a history of using
surplus capital to repurchase their own shares in the open
market. The economic benefits from their share repurchases grow
as prices fall by increasing our proportional ownership by a
greater amount than when prices are higher.
<PAGE>
The business fundamentals and prospects for our portfolio
companies remain strong. The meteoric year-to-date stock market
performance of Berkshire Hathaway, our largest holding, had been
so strong - up over 80% year-to-date at its high in June -- that
we were alarmed that its market price was becoming irrationally
decoupled from the company's intrinsic value. However, the
combination of the recent moderation in Berkshires market price
and Berkshires pending General Re acquisition, its largest
acquisition ever and one that should be accretive to earnings and
intrinsic value, has closed some of this value gap.
Freddie Mac is enjoying a very strong year. The current market
environment is very favorable for both of the Freddie Mac's
businesses, mortgage insurance and mortgage investment. With
mortgage rates around 7%, robust home purchase and refinance
markets could cause 1998 mortgage originations to top the
previous record of $1 trillion set in 1993. In addition, steady
recent appreciation in house prices has driven the company's loan
losses down to the lowest levels in several years.
While Progressive Corporation posted an impressive 30% increase
in operating income per share in the second quarter, the company
also experienced a marked slowdown in year-over-year growth in
net premiums written from 28% in the first quarter to 13% in the
second quarter. The slowdown in premium growth, which caused the
company's stock price to decline sharply, was entirely in the
company's non-standard insurance book, which actually declined.
The standard book, which now accounts for one third of
Progressive's revenues, continues to show good growth. We expect
the mature non-standard book to continue to be weak, perhaps for
an extended period, as a migration of capital into the private
passenger auto insurance business intensifies competition in this
segment. If industry conditions deteriorate significantly as a
result of this heightened competition, we would expect
Progressives growth to slow further, but we remain confident that
the company's disciplined underwriting culture will enable it to
maintain strong underwriting profits.
Fifth Third Bancorp continues to deliver exceptional results,
driven by strong fee-based revenues, an extraordinarily low
expense ratio and disciplined acquisitions that are quickly
accretive to earnings. The company has a continuing appetite for
acquisitions and, with one of the highest price/earnings ratios
in the banking industry, its acquisition currency remains strong.
Johnson & Johnson has been challenged to offset the revenue and
profit loss stemming from the company's significant decline in
market share in the stent business. However, several of Johnson
& Johnson's largest drugs continue to generate strong growth
which we expect will continue to drive future earnings. There
2
<PAGE>
are also opportunities to bolster earnings growth with continued
overhead reductions.
As Harley Davidson celebrates its 95th anniversary, the market
for 650cc+ motorcycles continues to grow at double digit rates.
Harley's parts and accessories business is enjoying a very strong
year, driven in part by the company's 95th anniversary
celebration. The recent startup of its new manufacturing
facility went smoothly and will enable the company to continue to
boost motorcycle output to meet the strong demand.
Thus far, US Bancorp's integration of the former First Bank
System and US Bancorp appears to be proceeding smoothly, with no
apparent problems of the type that have plagued other bank
acquisitions, including Wells Fargo's acquisition of First
Interstate. If the integration process continues as planned,
this acquisition should be accretive to earnings and intrinsic
value. The company has demonstrated its skill in identifying
attractive acquisitions and effectively integrating them, and we
would not be surprised or displeased to see US Bancorp make
additional large acquisitions in the future.
We are proud of the number of fellow shareholders who have been
investors in Sequoia for a great many years. We have been
through many unsettled markets together. In this period of
higher market volatility, we are regularly reminded that our
predictive ability regarding short term market moves is close to
zero. However, our predictive ability with regard to the
business results of our portfolio companies is much stronger, and
we continue to have a high degree of confidence in these
companies. History has shown that the key determinant of our
long term investment results is the fundamental prospects of the
specific businesses we own. We will continue to monitor your
investments with this focus.
Sincerely,
/s/ Richard T. Cunniff
/s/ William J. Ruane
/s/ R.D. Goldfarb
/s/ Carley Cunniff
August 11, 1998
3
<PAGE>
SEQUOIA FUND, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $ 10,000
With Income Dividends Reinvested and Capital Gains
Distributions Accepted in Shares
The table below covers the period from July 15, 1970 (the date
Fund shares were first offered to the public) to June 30, 1998.
This period was one of widely fluctuating common stock prices.
The results shown should not be considered as a representation of
the dividend income or capital gain or loss which may be realized
from an investment made in the Fund today.
Value of Value of Value of
Initial Cumulative Cumulative Total
$10,000 Capital Reinvested Value of
PERIOD ENDED: Investment Distributions Dividends Shares
- ------------ ---------- ------------- ---------- --------
July 15, 1970 $ 10,000 $0 $0 $10,000
May 31, 1971 11,750 0 184 11,934
May 31, 1972 12,350 706 451 13,507
May 31, 1973 9,540 1,118 584 11,242
May 31, 1974 7,530 1,696 787 10,013
May 31, 1975 9,490 2,137 1,698 13,325
May 31, 1976 12,030 2,709 2,654 17,393
May 31, 1977 15,400 3,468 3,958 22,826
Dec. 31, 1977 18,420 4,617 5,020 28,057
Dec. 31, 1978 22,270 5,872 6,629 34,771
Dec. 31, 1979 24,300 6,481 8,180 38,961
Dec. 31, 1980 25,040 8,848 10,006 43,894
Dec. 31, 1981 27,170 13,140 13,019 53,329
Dec. 31, 1982 31,960 18,450 19,510 69,920
Dec. 31, 1983 37,110 24,919 26,986 89,015
Dec. 31, 1984 39,260 33,627 32,594 105,481
Dec. 31, 1985 44,010 49,611 41,354 134,975
Dec. 31, 1986 39,290 71,954 41,783 153,027
Dec. 31, 1987 38,430 76,911 49,020 164,361
Dec. 31, 1988 38,810 87,760 55,946 182,516
Dec. 31, 1989 46,860 112,979 73,614 233,453
Dec. 31, 1990 41,940 110,013 72,633 224,586
Dec. 31, 1991 53,310 160,835 100,281 314,426
Dec. 31, 1992 56,660 174,775 112,428 343,863
Dec. 31, 1993 54,840 213,397 112,682 380,919
Dec. 31, 1994 55,590 220,943 117,100 393,633
Dec. 31, 1995 78,130 311,266 167,129 556,525
Dec. 31, 1996 88,440 397,099 191,967 677,506
Dec. 31, 1997 125,630 570,917 273,653 970,200
June 30, 1998 161,550 734,311 351,896 1,247,757
4
<PAGE>
The total amount capital gains distributions accepted in shares
was $212,934, the total amount of dividends reinvested was
$81,635.
No adjustment has been made for any taxes payable by shareholders
on capital gain distributions and dividends reinvested in shares.
5
<PAGE>
SEQUOIA FUND, INC.
Statement of Investments
June 30, 1998 (Unaudited)
COMMON STOCKS (85.39%)
Value
Shares Cost (Note 1)
- ------ ---- --------
BANK HOLDING COMPANIES (14.30%)
6,195,062 Fifth Third Bancorp $ 92,528,221 $390,288,906
336,600 Mercantile Bankshares
Corporation 3,466,775 11,717,888
595,700 National Commerce Bancorp 7,386,688 24,944,937
4,307,100 U.S. Bancorp 54,308,892 185,205,300
199,500 Wells Fargo & Company 48,013,302 73,615,500
------------ --------------
205,703,878 685,772,531
------------ --------------
CONSUMER PRODUCTS (.12%)
338,300 Sturm, Ruger & Company, Inc. 361,250 5,666,525
------------ --------------
FINANCIAL SERVICES (34.25%)
20,975 Berkshire Hathaway Inc.* 165,474,042 1,642,447,375
------------ --------------
INSURANCE (12.90%)
4,387,800 Progressive Corporation-Ohio+ 149,704,402 618,679,800
------------ --------------
MANUFACTURING - MOTORCYCLES (4.01%)
4,967,400 Harley Davidson, Inc. 66,538,262 192,486,750
------------ --------------
OFFICE SUPPLIES AND BUSINESS FORMS (0.15%)
300,700 Wallace Computer
Services, Inc. 8,065,197 7,141,625
------------ --------------
PERSONAL CREDIT (1.90%)
1,835,100 Household International, Inc. 23,042,977 91,296,225
------------ --------------
PHARMACEUTICALS (4.23%)
2,752,300 Johnson & Johnson 55,152,035 202,982,125
------------ --------------
SERVICES (12.90%)
13,134,600 Freddie Mac 54,238,085 618,147,112
------------ --------------
Miscellaneous Securities
(.63%) 28,474,846 30,024,850
------------ --------------
6
<PAGE>
TOTAL COMMON STOCKS $ 756,754,974 $4,094,644,918
-------------- --------------
7
<PAGE>
SEQUOIA FUND, INC.
Statement of Investments
June 30, 1998 (Unaudited)
(continued)
Principal Value
Amount Cost (Note 1)
--------- ---- -------
U.S. GOVERNMENT OBLIGATIONS (14.61%)
$ 36,000,000 U.S. Treasury Bills due
7/2/98 through 8/13/98 $ 35,855,817 $ 35,855,817
316,000,000 U.S. Treasury Notes,
5 7/8% due 8/31/99 316,879,708 317,333,125
221,000,000 U.S. Treasury Notes,
5 5/8% due 12/31/99 221,482,074 221,414,375
126,000,000 U.S. Treasury Notes,
5 5/8% due 4/30/2000 126,181,515 126,275,625
------------ ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 700,399,114 700,878,942
------------ ------------
TOTAL INVESTMENTS (100%)++ $1,457,154,088 $4,795,523,860
============== ==============
++ The cost for federal income tax purposes is identical.
* Non-income producing.
+ Refer to Note 6.
8
<PAGE>
SEQUOIA FUND, INC.
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
ASSETS:
Investments in securities, at value
(cost $1,457,154,088) (Note 1) $4,795,523,860
Cash on deposit with custodian 11,977,380
Receivable for capital stock sold 2,220,884
Dividends and interest receivable 8,858,217
Other assets 30,598
--------------
Total assets 4,818,610,939
==============
LIABILITIES:
Payable for capital stock repurchased 5,213,678
Accrued expenses 4,143,777
-------------
Total liabilities 9,357,455
-------------
Net assets applicable to 29,769,168
shares of capital stock outstanding
(Note 4) $4,809,253,484
==============
Net asset value, offering price and
redemption price per share $161.55
========
See Notes to Financial Statements.
9
<PAGE>
SEQUOIA FUND, INC.
Statement of Operations
Six Months Ended June 30, 1998 (Unaudited)
INVESTMENT INCOME:
Income:
Dividends:
Unaffiliated companies $ 11,057,090
Affiliated companies (Note 6) 958,724
Interest 12,116,562
--------------
Total income 24,132,376
--------------
Expenses:
Investment advisory fee (Note 2) 20,995,260
Legal and auditing fees 60,541
Stockholder servicing agent fees 190,752
Custodian fees 41,667
Directors fees and expenses (Note 5) 76,514
Other 77,166
--------------
Total expenses 21,441,900
Less expenses reimbursed by Investment
Adviser (Note 2) 371,000
--------------
Net expenses 21,070,900
--------------
Net investment income 3,061,476
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments:
Unaffiliated companies 207,099,460
Affiliated companies (Note 6) 12,814,878
--------------
Net realized gain on investments 219,914,338
Net increase in unrealized appreciation on:
Investments 838,606,880
--------------
Net realized and unrealized gain on
investments 1,058,521,218
--------------
Increase in net assets from operations $1,061,582,694
--------------
See Notes to Financial Statements.
10
<PAGE>
SEQUOIA FUND, INC.
Statements of Changes in Net Assets
Six Months
Ended Year
6/30/97 Ended
(Unaudited) 12/31/96
----------- ----------
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 3,061,476 $ 2,366,846
Net realized gain 219,914,338 26,323,106
Net increase in unrealized
appreciation 838,606,880 1,081,383,714
--------------- --------------
Net increase in net assets from operations 1,061,582,694 1,110,073,666
Distributions to shareholders from:
Net investment income -0- ( 2,474,076)
Net realized gains (596,097) ( 26,264,675)
Capital share transactions (Note 4) 75,702,028 10,231,447
--------------- --------------
Total increase 1,136,688,625 1,091,566,362
NET ASSETS:
Beginning of period 3,672,564,859 2,580,998,497
--------------- --------------
End of period $4,809,253,484 $3,672,564,859
=============== ==============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) $1,248,157,187 $1,172,455,159
Undistributed net investment income 3,061,476 0
Undistributed net realized gains 219,665,049 346,808
Unrealized appreciation 3,338,369,772 2,499,762,892
-------------- --------------
Total Net Assets $4,809,253,484 $3,672,564,859
============== ==============
See Notes to Financial Statements.
11
<PAGE>
SEQUOIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Sequoia Fund, Inc. is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, open-end
management company. The investment objective of the Fund is
growth of capital from investments primarily in common stocks and
securities convertible into or exchangeable for common stock. The
following is a summary of significant accounting policies,
consistently followed by the Fund in the preparation of its
financial statements.
A. Valuation of investments: Investments are carried at market
value or at fair value as determined by the Board of
Directors. Securities traded on a national securities
exchange are valued at the last reported sales price on the
principal exchange on which the security is listed on the
last business day of the period; securities traded in the
over-the-counter market are valued at the last reported
sales price on the NASDAQ National Market System on the
last business day of the period; listed securities and
securities traded in the over-the-counter market for which
no sale was reported on that date are valued at the mean
between the last reported bid and asked prices; U.S.
Treasury Bills with remaining maturities of 60 days or less
are valued at their amortized cost. U.S. Treasury Bills
that when purchased have a remaining maturity in excess of
sixty days are stated at their discounted value based upon
the mean between the bid and asked discount rates until the
sixtieth day prior to maturity, at which point they are
valued at amortized cost.
B. Accounting for investments: Investment transactions are
accounted for on the trade date and dividend income is
recorded on the ex-dividend date. The net realized gain or
loss on security transactions is determined for accounting
and tax purposes on the specific identification basis.
C. Federal income taxes: It is the Fund's policy to comply
with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to
distribute all of its taxable income to its stockholders.
Therefore, no federal income tax provision is required.
D. Use of Estimates: 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
12
<PAGE>
of the financial statements and the reported amounts of
increases and decreases in net assets from operations
during the reporting period. Actual results could differ
from those estimates.
E. General: Dividends and distributions are recorded by the
Fund on the ex-dividend date. Interest income is accrued
as earned.
NOTE 2--INVESTMENT ADVISORY CONTRACTS AND PAYMENTS TO INTERESTED
PERSONS:
The Fund retains Ruane, Cunniff & Co., Inc., as its
investment adviser. Ruane, Cunniff & Co., Inc. (Investment
Adviser) provides the Fund with investment advice, administrative
services and facilities.
Under the terms of the Advisory Agreement, the Investment
Adviser receives a management fee equal to 1% per annum of the
Fund's average daily net asset values. This percentage will not
increase or decrease in relation to increases or decreases in the
net asset value of the Fund. Under the Advisory Agreement, the
Investment Adviser is obligated to reimburse the Fund for the
amount, if any, by which the operating expenses of the Fund
(including the management fee) in any year exceed the sum of
1-1/2% of the average daily net asset values of the Fund during
such year up to a maximum of $30,000,000, plus 1% of the average
daily net asset values in excess of $30,000,000. The expenses
incurred by the Fund exceeded the percentage limitation during
the six months ended June 30, 1998 and the Investment Adviser
reimbursed the Fund $371,000.
For the six months ended June 30, 1998, there were no amounts
accrued to interested persons, including officers and directors,
other than advisory fees of $20,995,260 and brokerage commissions
of $228,086 to Ruane, Cunniff & Co., Inc. Certain officers of
the Fund are also officers of the Investment Adviser and the
Fund's distributor. Ruane, Cunniff & Co., Inc., the Fund's
distributor, received no compensation from the Fund on the sale
of the Fund's capital shares during the six months ended June 30,
1998.
NOTE 3--PORTFOLIO TRANSACTIONS:
The aggregate cost of purchases and the proceeds from the
sales of securities, excluding U.S. government obligations, for
the six months ended June 30, 1998 were $30,733,847 and
$519,001,924,respectively. Included in proceeds of sales is
$11,070,488 representing the value of securities disposed of in
payment of a redemption in-kind resulting in a realized gain of
$9,250,245.
13
<PAGE>
At June 30, 1998 the aggregate gross unrealized appreciation
and depreciation of securities were $3,339,361,044 and $991,272,
respectively.
NOTE 4--CAPITAL STOCK:
At June 30, 1998 there were 100,000,000 shares of $.10 par
value capital stock authorized. Transactions in capital stock
for the six months ended June 30, 1998 and the year ended
December 31, 1997 were as follows:
1998 1997
--------------------- -------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Shares sold 1,254,162 $ 180,253,888 1,872,099 $ 199,979,993
Shares issued to
stockholders on
reinvestment of:
Net investment income 0 0 21,191 2,331,456
Net realized gain on
investments 3,474 547,016 188,981 23,446,469
--------- ------------ --------- ------------
1,257,636 180,800,904 2,082,271 225,757,918
Shares repurchased 721,102 105,098,876 2,034,693 215,526,471
--------- ------------ --------- ------------
Net (decrease) increase 536,534 $ 75,702,028 47,578 $ 10,231,447
========= ============ ========= ============
NOTE 5--DIRECTORS FEES AND EXPENSES:
Directors who are not deemed "interested persons" receive
fees of $6,000 per quarter and $2,500 for each meeting attended,
and are reimbursed for travel and other out-of-pocket
disbursements incurred in connection with attending directors
meetings. The total of such fees and expenses paid by the Fund to
these directors for the six months ended June 30, 1998 was
$76,514.
NOTE 6--AFFILIATED COMPANIES:
Investment in portfolio companies 5% or more of whose
outstanding voting securities are held by the Fund are defined in
the Investment Company Act of 1940 as "affiliated companies."
The total value and cost of investments in affiliates at June 30,
1998 aggregated $618,679,800 and $149,704,402, respectively. The
summary of transactions for each affiliate during the period of
14
<PAGE>
their affiliation for the six months ended June 30, 1998 is
provided below:
Purchases Sales
--------- ----- Realized Dividend
Affiliate Shares Cost Shares Cost Gain Income
--------- ------ ----- ------ ---- -------- -------
Progressive Corp -
Ohio -- -- 12,200 $ 387,960 $1,344,040 $ 527,436
Wallace Computer
Service, Inc. -- -- 2,890,900 $90,767,987 $11,470,838 431,288
----------- ---------
$12,814,878 $ 958,724
=========== =========
NOTE 7-- The interim financial statements have not been examined
by the Fund's independent accountants and accordingly they do not
express an opinion thereon.
15
<PAGE>
NOTE 8--SELECTED FINANCIAL INFORMATION:
Six
Months Year Ended December 31,
Ended ------------------------
June 30
1998 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------
Per Share Operating
Performance (for a
share outstanding
throughout the period)
Net asset value,
beginning of period $125.63 $88.44 $78.13 $55.59 $54.84 56.66
------- ------ ------ ------ ------ -----
Income from investment
operations:
Net investment income 0.10 0.08 0.38 0.31 0.42 0.64
Net realized and
unrealized gains
on investments 35.84 38.10 16.41 22.62 1.41 5.39
------- ------ ------ ------ ------ -----
Total from
investment
operations 35.94 38.18 16.79 22.93 1.83 6.03
------- ------ ------ ------ ----- -----
Less distributions:
Dividends from net
investment income (0.00) (0.08) (0.38) (0.31) (0.42) (0.65)
Distributions from
net realized gains (0.02) (0.91) (6.10) (0.08) (0.66) (7.20)
-------- ------- ------ ------ ------ -----
Total distributions (0.02) (0.99) (6.48) (0.39) (1.08) (7.85)
-------- ------- ------ ------ ------ -----
Net asset value,
end of period $ 161.55 $125.63 $88.44 $78.13 $55.59 $54.84
======== ======= ====== ====== ====== ======
Total Return 28.6%+ 43.2% 21.7% 41.4% 3.3% 10.8%
16
<PAGE>
Average commission rate
paid ++ $.053 $.053 $.055 ---- --- ---
(Ratios/Supplemental data
Net assets, end
of period (in
millions) $4,809.3 $3,672.6 $2,581.0 $2,185.5 $1,548.3 $1,512.1
Ratio to average net assets:
Expenses 1.0%* 1.0% 1.0% 1.0% 1.0% 1.0%
Net investment
income 0.3%* 0.1% 0.4% 0.5% 0.8% 1.1%
Portfolio turnover
rate 27%* 8% 23% 15% 32% 24%
+ Not annualized
* Annualized
++ Required by regulations issued in 1995
17
<PAGE>
SEQUOIA
FUND, INC.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
DIRECTORS
William J. Ruane
Richard T. Cunniff
Robert D. Goldfarb
John M. Harding
Francis P. Matthews
C. William Neuhauser
Robert L. Swiggett
OFFICERS
William J. Ruane - Chairman of the Board
Richard T. Cunniff - Vice Chairman
Robert D. Goldfarb - President
Carol L. Cunniff - Executive Vice President
Joseph Quinones, Jr. - Vice President, Secretary &
Treasurer
INVESTMENT ADVISER & DISTRIBUTOR
Ruane, Cunniff & Co., Inc.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
REGISTRAR AND SHAREHOLDER
SERVICING AGENT
DST Systems, Inc.
P.O. Box 419477
Kansas City, Missouri 64141
LEGAL COUNSEL
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
This report has been prepared for the information of shareholders
of Sequoia Fund, Inc.
18
69900020.AY6
