July 29, 1997
Dear Fellow Ultra-Small Company Shareholder,
Translation: The June quarter was great. On the strength of this quarter,
so was the fiscal year. Our three year performance through August 15 is
fantastic. I'm very happy.
Performance for our third fiscal year ending June 30, 1997 was again very
strong! The Ultra-Small Company Portfolio was up 26.0%, roughly twice the
average small company fund. Our Portfolio ranked 89th of 431 small-company
funds (21st highest percentile) for this period, according to Morningstar.
This is even more impressive within the current (and we believe short-term)
context of the stock market favoring large companies. Compared to other
funds investing in smaller companies, we look particularly sharp: Of 26
funds with average market capitalization below $150 million, the Ultra-
Small Company Portfolio ranked #1 over the last year.
I have mentioned previously that three years is about the shortest
significant period to judge investment performance. Even this doesn't take
you through a full "market cycle," but it's better than following the
daily, weekly, and annual performance charts. Since we just celebrated our
third birthday on August 5 (yes, we had balloons and cake), I thought you
would want to know what Morningstar has to say. Partially on the strength
of a very good July/August not included in the numbers below, we have a
calendar year-to-date return of 31.9%. In Morningstar's "small cap value"
universe of funds, we ranked 7th percentile in 1995, 14th percentile in
1996, and 2nd percentile in 1997 calendar year-to-date. Overall, this
consistency has earned us a first percentile ranking for the full three
year period through August 15. I attribute this consistency to the
diversity of our portfolio, the success of our models, the talent and
dedication of our employees, and our commitment to close the portfolio at
half the level of any previous fund.
In summary, I am extremely pleased with both recent and three year results.
The graph below presents the growth of $10,000 invested in our portfolio on
our inception date compared with two benchmarks. Our initial shareholders
have now passed the "doubling" milestone. The table on the following page
presents our performance according to the formula required by the SEC.
Performance Summary
Your portfolio was up 23.7% during the June quarter, trouncing all our
comparison benchmarks. For the fiscal year ending June 30, we were up
26.0%, also trouncing our performance benchmarks. The following table
presents the details:
June Qtr. 1 Year Life-to-Date
3/31/97 6/30/96 8/5/94 to
to 6/30/97 to 6/30/97 6/30/97**
Ultra-Small Company Portfolio 23.7% 26.0% 29.6%
Lipper Small Cap Stock Funds* 16.8% 13.5% 23.1%
Russell 2000 (small growth stocks)* 16.2% 16.3% 20.1%
*The Lipper Small Cap Stock Funds is an index of small company funds
compiled by Lipper Analytical Services, Inc. The Russell 2000 is an
unmanaged index of small stocks, with dividends reinvested. Past
performance does not guarantee future returns.
** Life-to-date returns are annualized; the June quarter period is not
annualized.
Detailed Explanation of Performance
Translation: Eighteen of our companies were way up in the quarter; one was
down. This combination fueled our 23.7% rise.
Since over 90% of our fiscal year return came in the June quarter, I will
focus on this three month period. Eighteen of our companies increased by
at least 50% during the fiscal year. The highest performer was Maverick
Tube, a producer of pipe for the oil and gas industry--up a whopping 111%
in just three months. After oil prices rose significantly last year,
drilling activity is picking up and companies are drilling to greater
depths. These trends have increased both volume shipments and prices
charged. Because of the high operating leverage of this industry (small
changes in revenues can lead to much greater changes in earnings), profits
took off and Wall Street took notice. Maverick has actually given us a
200% gain since we bought it in May, 1996.
Our #2 performer, Reliability Inc., an electronics test equipment
manufacturer, is a great example of an undiscovered stock with a great
business that went nowhere until the last quarter. The only problem with
some of these great, small, undiscovered companies is that they can stay
great, small, and undiscovered a long time, which means the stock price
remains flat too. When we bought this company in the fall of 1995, not a
single analyst covered the stock. The stock price actually declined
significantly as the stock market rose in 1996--we kept buying more. The
stock price finally exploded in the June quarter.
The rest of the list below shows significant diversification in our
portfolio. Oil and gas and electronics remain significant industries in
our portfolio (12% and 9%, respectively); they certainly helped our
performance in the June quarter. There are also some sleepy industries.
Notice Dixie Yarns, a small textile firm in a mature industry. Hardly high
tech. I hope that such companies give us some downside cushion in the next
technology swoon. One final stock which I'll point out on this list is
China Resources Development (up 60%), our "story stock" last quarter.
Ultra-Small Company "Movers and Shakers" for the June Quarter
Rank Company Industry Total Return
1 Maverick Tube Corp. Oil & Gas Services 111.3%
2 Reliability Inc. Electronics 85.1%
3 Semtech Corporation Electronics 80.2%
4 American Technical Ceramics Corp. Electronics 73.1%
5 Amrion Inc. Retail Stores 71.0%
6 UTI Energy Corp. Oil & Gas 70.6%
7 Engineered Support Systems Inc. Electronics 70.5%
8 U.S. Home & Garden Inc. Machinery 63.6%
9 Nam Tai Electronics Inc. Electronics 62.2%
10 Freds Inc. Retail Stores 62.2%
11 Dixie Yarns Inc. Textiles 60.8%
12 China Resources Development Inc. Rubber / Fabricating 60.0%
13 Moviephone Inc. Leisure-Amusement 58.4%
14 Trans World Entertainment Corp. Retail Stores 53.3%
15 American Coin Merchandising Inc. Leisure-Amusement 52.6%
16 RCM Technologies Inc. Services 51.8%
17 McFarland Energy Inc. Oil & Gas 51.0%
18 Inotek Technologies Corp. Machinery 50.0%
How Bad Can It Get?
Translation: There really is a lot of risk in individual companies this
size. That's why it's important to own a good number of them.
Occasionally we invest in a real loser. In the last quarter the ratio of
winners to losers was 18 to 1, however, a great combination.
Much more remarkable to me than eighteen stocks up 50+% is the fact that
only one stock declined by this amount. Fortunately, this stock represented
less than 0.1% of net assets at the beginning of the quarter. Eighteen up
and one down is a powerful combination. OK, let's peek under the covers of
an ultra-small stock that really didn't make it. We first bought Graphix
Zone in August of last year at $3 5/8. After three years of losses, it
looked like a turnaround candidate. Not quite. This company develops and
distributes interactive computer software. As recently as March the
company had been acquiring the assets of an interactive music publisher.
On April 10 the company introduced a new management team. They announced
plans to reduce employees from 70 to 45, terminate certain development
efforts, and divest "non-core" business interests. Hmmm, I wonder if that
includes the assets purchased the month before. We sold at an average
price of $2.0, a 45% drop. Well, it did get worse. On April 18,
management was negotiating with preferred shareholders--not a good sign.
On June 16, the company no longer met the listing requirements of NASDAQ
and was delisted. I just looked up the current stock price, which is five
cents. Yes, things can get worse.
Disclaimer
Translation: The following is a reminder from the friendly folks at your
fund who worry about liability. It's risky to purchase directly stocks
listed or discussed here, because it's always possible our position may
have changed by the time you receive this correspondence. However, I do
commit that I won't talk favorably in the media about a stock I am
concurrently selling from the Portfolio.
The views expressed here are exclusively those of Fund management. They
are not meant as investment advice. Any favorable (or unfavorable)
description of a holding applies only as of the quarter end, June 30, 1997;
security positions can and do change thereafter. For example, buying a
security you see highlighted in this report seems to me like a formula for
underperforming the Portfolio itself.
Industry Concentration
Translation: Our largest industry concentrations are oil and gas (12%) and
data processing software and service (12%), so I don't consider that we're
adding to risk by making large bets on individual industries. We're just
trying to pick one good company at a time.
Ultra-small companies as an asset class are more volatile than the market
for larger stocks. We avoid increasing risk further through concentration
in too few companies, and we try to dampen some of the downside risk
through our statistical stock picking models. Our largest holding is
typically less than 3% of net assets, and we generally avoid industry or
region concentration risk. The following are the top five industries
represented in the portfolio: 1) data processing software and services -
12.3%, 2) oil and gas - 12.1%, 3) data processing hardware - 10.6%, 4)
electronics / electrics - 9.4%, and 5) retail stores - 8.3%.
Is Closing the Portfolio to New Investors Good or Bad for Performance?
Translation: As a portfolio manager and shareholder, I think this was a
slam dunk good decision. We'll see if our performance continues to bear
this out.
Not long ago I read an article which studied the performance of small-cap
funds after closing to investors. The research was not conclusive, but it
seemed to indicate that these funds typically didn't perform as well after
closing. My own opinion is that these funds probably closed only after
they had already gotten more money in than they could wisely invest. I
believe our closing at such a low level will actually help our performance.
Here are the advantages: 1) By trading smaller "blocks" of company stocks,
we won't unfavorably move the price (or at least not as much as if we
didn't close) when buying and selling shares. 2) A given amount of a
winning company's stock makes a bigger impact on the "bottom line." 3) By
closing at a smaller size, we avoid "size creep," or the need to invest in
larger companies which would move us away from our ultra-small charter. 4)
In a downturn, portfolio shareholders are less likely to panic and sell out
(increasing costs for the remaining shareholders), since they won't be able
to buy back in later. 5) Certain costs associated with state registration
and processing new accounts decline. 6) It is easier to sell stocks which
have gotten too large and reinvest the proceeds in ultra-small stocks again
when you don't have large new inflows to invest. This was a problem for us
in January and again in May before we closed the Portfolio to new investors
(not that you could see it in the performance).
On the other side of the ledger, 1) the expense ratio could be higher since
some costs are spread over a smaller base of assets; however, I believe the
cost savings in item five above largely offsets this. 2) Due to an IRS
rule and a mutual fund accounting quirk, shareholders in a taxable account
in an actively managed fund with a quickly growing asset base get a lower
taxable distribution at the end of the year (assuming they were
shareholders for the full year). This really is nice, because it can add a
couple of percentage points to your after-tax return in a bull market. 3)
More (new) money can be invested in the best ideas; however, I think you
can always sell something you don't like so well to buy something new.
Altogether, I believe one key to success in small cap investing is closing
a fund too early rather than too late. Funds that open up again to new
shareholders frequently say they have good opportunities to put more money
to work. While this may be true, what happens in a different part of the
investment cycle? Let's say the small-cap sector goes up 50% and it's much
harder to find good deals; does the mutual fund company return some of the
money to shareholders? Not likely. The adviser's management fee is
usually tied directly to assets under management, and there is a large
potential conflict of interest here. Interestingly, we do two things to
counteract this conflict of interest at Bridgeway. First, two of our
portfolios have performance based management fees. If too much money
causes these portfolios to underperform, our management fee plummets along
with performance. In the Ultra-Small Company Portfolio, the Portfolio
compensates the Adviser for closing the portfolio at a very low level. I
believe this has worked strongly to the benefit of shareholders, and I
believe some of our recent excellent performance (in June and July)
testifies to this.
Now that Ultra-Small Company is Closed, Will We Start Ultra-Small II?
Translation: No.
We have committed to do no new offering which competes with this portfolio
for our best ultra-small stock ideas. However, we have started an index
fund on the ultra-small concept. The Bridgeway Ultra-Small Index Portfolio
invests passively in a representative sample of the 2600 stocks which make
up the ultra-small universe on the exchanges and NASDAQ's National Market
System. We're not trying to beat the ultra-small market return with this
new portfolio, we're just trying to match it. And we'll do our trading in
such a way as to make sure we're not competing with your Ultra-Small
Company Portfolio. Someday, I would also like to have a micro-cap fund
which invests in companies just bigger than ultra-small. However, my
(your) board of directors doesn't want me to get spread too thinly, so we
won't do this until we have enough well-trained backup staff to support
another actively managed portfolio.
I Hate High Expenses--or More with Less
Translation: We're very serious about reducing our costs. This quarter we
have completed efforts to reduce the "custodian" bank expense and to
eliminate the IRA trustee fee for IRA accounts.
In my last shareholder letter I committed to telling you for several
quarters what we were doing to get our Portfolio costs down. Our target is
1.25% of net assets when net assets reach $50 million. Annual expenses are
currently 2.0% (without waiving fees or reimbursing expenses). Last
quarter I highlighted our decision to discontinue all marketing and
advertising. This quarter I'd like to write about two new efforts. We
conducted a nationwide search for a new custodian to reduce the portfolio
expense associated with holding securities in "safekeeping," a federal
mutual fund requirement. We found two firms we thought could do a good
job, but in the end our current custodian met the lowest cost provider's
bid. This should reduce the custodian cost for Ultra-Small Company
Portfolio about 50% in the next year (less in our other portfolios).
I'm just as excited about another development. We are changing the trustee
for our IRA accounts. The current cost to IRA shareholders for this
service is $20 per year. Some shareholders had suggested eliminating the
fee for larger accounts, as some other mutual fund families do. I opposed
this idea, however. Why should the smaller accounts pay their full way
while the wealthier accounts get a free ride? So we looked hard at how to
get the cost down for everyone. I am pleased to report that we have been
successful. We have reduced the cost and the Adviser has agreed to make up
the difference in its entirety, so that the 1997 IRA trustee fee will be
$0. Obviously, it's costing the Adviser something, but we wanted to send a
signal we are very serious about our low cost efforts. We delayed sending
out the 1996 bill until we could make this announcement. So, if your
Bridgeway account is for an IRA, your invoice for 1996 (hopefully the last
ever) should arrive soon. If you already paid your 1997 fee, we'll be
crediting your account later this year.
Achilles Heel
I am pleased with our investment performance, our progress on cost
reduction, and parts of our customer service. The one area I can't say I'm
satisfied with is the timeliness of our confirmations and quarterly account
statements--so if this has been an inconvenience to you, my apologies. In
retrospect, we should have hired the new staff below six months earlier, a
mistake for which I take full responsibility. I expect it to be another
two months before you see the fruits of our efforts to improve our record.
Next to the graph of investment performance in our conference room is now a
graph of the timeliness of our net asset value reporting each day and the
percentage of confirmations mailed within 48 hours. Our recent performance
in this area has not been acceptable.
Biggest Mistake
Translation: We (the Adviser) made a mistake. We admit it. We own it.
We eat it.
First, a bit of philosophy. . . As a shareholder, you are an owner of the
Fund. As the manager appointed by your Board of Directors to manage the
Fund, I am your "hired hand." I prefer to think of myself as a steward of
your assets which you entrusted to the Fund. So, as my boss, I think you
are entitled to know the bad things that happen as well as the good.
The worst thing that happened at the Fund over the last year was that
Bridgeway staff made an error calculating the dividend distribution in
December, 1996, resulting in too low a dividend. We are in the process of
petitioning the IRS to make the remaining distribution this fall. There
are penalties and interest to the IRS (approximately $19,800) which the
Adviser, not the Portfolio, not you - the shareholder - will pay. This
mistake will not happen again.
New Folks at Bridgeway
Translation: I enjoy working with each of the people that make up
Bridgeway's staff. Really, I can't believe anyone's paying me to have this
much fun. Let me introduce three new people.
As our assets have gone up more than five-fold in the last year, we have
hired some new people at Bridgeway. I'm impressed with the caliber of each
one of these employees and am just as impressed by the strength we gain
through diversity. Each new employee individually has a different strength
or skill they bring with them. Dianne has been with us on a temporary
basis while she took off a semester from one of the toughest liberal arts
colleges in the country. She's mentally sharp, learns quickly, and has a
bright, positive, and contagious attitude. She has been helping with a
number of different projects, including some accounting, some new software,
and also qualifying companies for our Social Responsibility Portfolio.
By the time Kim was 21, she'd been an entrepreneur, a landlord, a stock
broker's assistant, and a part-time mechanic; not to mention a full time
finance major at Texas A&M University. Kim's a potential powerhouse here,
and she's helping me compile the myriad of data to run our models.
Cheryl is a native Houstonian with a couple of "grown" kids and a tall
handsome grandson. She is working with our fund and shareholder accounting
while pursuing a bachelor's degree at the University of Houston. She
differentiated herself from over 90 other applicants by her experience,
long term employment for one previous company, and her accounting
knowledge.
Conclusion
We have passed several milestones very important to Bridgeway within the
last year. I want to thank each one of you who has demonstrated unusual
trust by investing in and with a young company. Thank you for helping
provide a living for myself and for each of us at Bridgeway. As steward of
your money, I hope and pray to earn your continued trust and to never take
it for granted.
I trust you celebrate with us the Fiscal Year 1997 results. As always, I
appreciate your feedback. We keep a bulletin board of shareholder comments
and suggestions and we take them very seriously. Please keep your ideas
coming.
Sincerely,
John Montgomery
<PAGE>
July 29, 1997
Dear Fellow Aggressive Growth Shareholder,
After two quarters of underperforming our market benchmarks, the
Aggressive Growth Portfolio returned to its winning ways in the June
quarter. The Portfolio gained 20.1% in the quarter, handily beating
the market and peer group indicators. For the entire fiscal year, the
Portfolio was up 19.9%, beating our peer group of capital appreciation
funds and the Russell 2000 Index of small stocks. The Portfolio
ranked #20 of 119 aggressive growth funds for the fiscal year
according to Morningstar. However, the largest U.S. companies
represented by the S&P 500 Index lead most other indicators for the
fiscal year, including our portfolio.
Performance Summary
The table on the next page presents our quarter, fiscal year, and
life-to-date financial results according to the formula required by
the SEC. The graph below shows we have done quite well for the full
period since inception. I would like to highlight two trends from
this graph. First, we have been in a wonderful bull market. The S&P
500 Index has averaged a 29% return for the last three years. This is
almost three times the long-term historical average, and I don't
expect this to continue unabated. We are overdue for a true market
correction (the market really does go both up and down). However, we
subscribe to a "buy and hold" strategy and strongly discourage trying
to time the market. We believe the stock market is still an excellent
place for long term investments; but please--don't put any money here
you might need in the next couple of years. With this caveat, I'll
say that my wife and my own IRA money is still fully invested in the
three actively managed Bridgeway portfolios and we have no plans to
change this over the next decade.
The second dynamic trend from the graph below is the wide divergence
between the returns of large and small companies. The S&P 500 (large
stock index) has beaten the Russell 2000 (small stock index) by 37
percentage points for the full life of our Portfolio. Much of this
was during the last twelve months when the S&P beat the Russell 2000
by 18.4%. In fact, there have been only five calendar years over the
last seven decades in which large stocks have outperformed small ones
by this amount. I wouldn't normally expect our Portfolio to do as
well in this environment since we invest in all size companies and our
models have favored small stocks recently.
Your portfolio was up 20.1% during the June quarter, beating all our
comparison benchmarks. For the fiscal year ending June 30, we were up
19.9%, beating two of our three benchmarks. The following table presents
the details:
June Qtr. 1 Year Life-to-Date
3/31/97 6/30/96 8/5/94 to
to 6/30/97 to6/30/97 6/30/97**
Aggressive Growth Portfolio 20.1% 19.9% 28.2%
S&P 500 Index (large companies)* 17.2% 34.7% 28.6%
Russell 2000 (small growth companies)* 16.2% 16.3% 20.1%
Lipper Capital Appreciation Funds* 13.6% 14.3% 20.0%
*The Russell 2000 and S&P 500 are unmanaged indexes of large and small
companies, respectively, with dividends reinvested. The Lipper Capital
Appreciation Funds reflect the aggregate record of more aggressive domestic
growth mutual funds as reported by Lipper Analytical Services, Inc. Past
performance does not guarantee future returns.
** Life-to-date returns are annualized; quarterly returns are not
annualized.
Detailed Explanation of Performance
Translation: Ten of our companies were way up in the quarter; none were
down by this amount. This combination fueled our 20% rise.
Since practically all of our fiscal year return came in the June quarter, I
will focus on this three month period. Ten of our companies increased by
at least 50% during the quarter. Unfortunately, none of these were our
core holdings, such as drove our performance last year. Each of these were
among our smaller diversifying positions and together represented just 18%
of net assets at the end of the quarter. Nevertheless, these little
powerhouses really helped fuel our performance. Four of the ten were in
the electronics industry. The highest performer was Teledata
Communications, an Israeli telecommunications supplier for both developed
and developing nations--up 92% in just three months. After declining sales
in 1994 and a loss for 1995, the company really got back on track over the
last year. March quarter sales more than doubled and profits were up even
more on the strength of new product acceptance.
The second highest performing stock was Plexus Corporation, a contract
provider of design, manufacturing and testing services, up 89%. This
company is a good example of what one of our "multi-factor" models can pick
up on very early in a growth company--good growth, valuation, and technical
characteristics that made Plexus an early buy before posting a tremendous
quarterly gain. The company sports a below-industry level of debt.
However, as a contract provider, it has high operating leverage, meaning
that modest increases in revenues can lead to much larger percentage
increases in earnings.
Much more remarkable to me than ten stocks up 50+% is the fact that not a
single one declined by this amount. In fact, the largest decline (-13%) of
any stock held at quarter end was Bell Microproducts, a semiconductor
product distributor. The company announced a sales slowdown and earnings
reversal at the quarter end. Here's the full list of our quarterly
"movers and shakers":
Aggressive Growth "Movers and Shakers" for the June Quarter
Rank Company Industry Total Return
1 Teledata Communications Telecommunications 92.3%
2 Plexus Corporation Electronics/Electric 89.2%
3 Reliability Inc. Electronics/Electric 85.1%
4 Creative Technology Ltd. Data Processing Hardware 83.8%
5 JPM Company Electronics/Electric 84.1%
6 Semtech Corporation Electronics/Electric 80.2%
7 Staffmark Inc. Services 73.7%
8 Dataworks Corp. Data Processing Software 52.9%
9 Superior Telecom Inc. Telecommunications 51.8%
10 McFarland Energy Oil & Gas 51.0%
Disclaimer
Translation: The following is a reminder from the friendly folks at your
fund who worry about liability. It's risky to purchase directly stocks
listed or discussed here, because it's always possible our position may
have changed by the time you receive this correspondence. However, I do
commit that I won't talk favorably in the media about a stock I am
concurrently selling from the Portfolio.
The views expressed here are exclusively those of Fund management. They
are not meant as investment advice. Any favorable (or unfavorable)
description of a holding applies only as of the quarter end, June 30, 1997;
security positions can and do change thereafter. For example, buying a
security you see highlighted in this report seems to me like a formula for
underperforming the Portfolio itself.
Industry Concentration
Translation: While we do invest more portfolio money (5% to 10% of the
total portfolio) in some individual companies, the overall portfolio is
well diversified by industry and region. In addition to seeking above
market returns, we are also continually managing portfolio risk.
No industry made up as much as 12% of our portfolio at quarter end. While
I'm always concerned with diversification, this figure indicates stronger
than normal diversification for the Aggressive Growth Portfolio. We are
just trying to pick one good company at a time. The following are the top
five industries represented in the portfolio: 1) data processing software
and services - 11.4%, 2) retail stores - 11.1%, 3) services - 9.9%, 4)
telecommunication - 9.2%, and 5) food - 7.8%.
This overall industry diversification may mask another portfolio
characteristic: our willingness to concentrate assets in what I call "core
holdings." Three companies represented more than 5% of net assets at
quarter end: TJX Companies (8.6%), Airborne Freight (5.8%), and Smithfield
Foods (5.8%). The portfolio held 46 companies at fiscal year end with 44%
of net assets in the top ten holdings.
I Hate High Expenses--or More with Less
Translation: We're very serious about reducing our costs. This quarter we
have completed efforts to reduce the "custodian" bank expense and to
eliminate the IRA trustee fee for IRA accounts.
In my last shareholder letter I committed to telling you for several
quarters what we were doing to get our Portfolio costs down. Annual
expenses are currently 2.0% (slightly more before waiving a portion of
management fees). Last quarter I highlighted our decision to discontinue
all marketing and advertising. This quarter I'd like to write about two
new efforts. We conducted a nationwide search for a new custodian to
reduce the portfolio expense associated with holding securities in
"safekeeping," a federal mutual fund requirement. We found two firms we
thought could do a good job, but in the end our current custodian met the
lowest cost provider's bid. This should reduce the custodian cost
significantly in Fiscal Year 1998.
I'm just as excited about another development. We are changing the trustee
for our IRA accounts. The current cost to IRA shareholders for this
service is $20 per year. Some shareholders had suggested eliminating the
fee for larger accounts, as some other mutual fund families do. I opposed
this idea, however. Why should the smaller accounts pay their full way
while the wealthier accounts get a free ride? So we looked hard at how to
get the cost down for everyone. I am pleased to report that we have been
successful. We have reduced the cost, and the Adviser has agreed to take
make up the difference in its entirety, so that the 1997 IRA trustee fee
will be $0. Obviously, it's costing the Adviser something, but we wanted
to send a signal we are very serious about our low cost efforts. We
delayed sending out the 1996 bill until we could make this announcement.
So, if your Bridgeway account is for an IRA, your invoice for 1996
(hopefully the last ever) should arrive soon. If you already paid your
1997 fee, we'll be crediting your account later this year.
Achilles Heel
I am pleased with our investment performance, our progress on cost
reduction, and parts of our customer service. The one area I can't say I'm
satisfied with is the timeliness of our confirmations and quarterly account
statements--so if this has been an inconvenience to you, my apologies. In
retrospect, we should have hired the new staff below six months earlier, a
mistake for which I take full responsibility. I expect it to be another
two months before you see the fruits of our efforts to improve our record.
Next to the graph of investment performance in our conference room is now a
graph of the timeliness of our net asset value reporting each day and the
percentage of confirmations mailed within 48 hours. Our recent performance
in this area has not been acceptable.
Biggest Mistake
Translation: We (the Adviser) made a mistake. We admit it. We own it.
We eat it.
First, a bit of philosophy. . . As a shareholder, you are an owner of the
Fund. As the manager appointed by your Board of Directors to manage the
Fund, I am your "hired hand." I prefer to think of myself as a steward of
your assets which you entrusted to the Fund. So, as my boss, I think you
are entitled to know the bad things that happen as well as the good.
The worst thing that happened at the Fund over the last year was that
Bridgeway staff made an error calculating the dividend distribution in
December, 1996, resulting in too low a dividend. We are in the process of
petitioning the IRS to make the remaining distribution this fall. There
are penalties and interest to the IRS (approximately $6,200) which the
Adviser, not the Portfolio, not you - the shareholder - will pay. This
mistake will not happen again.
New Folks at Bridgeway
Translation: I enjoy working with each of the people that make up
Bridgeway's staff. Really, I can't believe anyone's paying me to have this
much fun. Let me introduce three new people.
As our Fund assets have gone up more than five-fold in the last year, we
have hired some new people at Bridgeway. I'm impressed with the caliber of
each one of these employees and am just as impressed by the strength we
gain through diversity. Each new employee individually has a different
strength or skill they bring with them. Dianne has been with us on a
temporary basis while she took off a semester from one of the toughest
liberal arts colleges in the country. She's mentally sharp, learns
quickly, and has a bright, positive, and contagious attitude. She has been
helping with a number of different projects, including some accounting,
some new software, and also qualifying companies for our Social
Responsibility Portfolio.
By the time Kim was 21, she'd been an entrepreneur, a landlord, a stock
broker's assistant, and a part-time mechanic; not to mention a full time
finance major at Texas A&M University. Kim's a potential powerhouse here,
and she's helping me compile the myriad of data to run our models.
Cheryl is a native Houstonian with a couple of "grown" kids and a tall
handsome grandson. She is working with our fund and shareholder accounting
while pursuing a bachelor's degree at the University of Houston. She
differentiated herself from over 90 other applicants by her experience,
long term employment for one previous company, and her accounting
knowledge.
Conclusion
We have passed several milestones very important to Bridgeway within the
last year. I want to thank each one of you who has demonstrated unusual
trust by investing in and with a young company. Thank you for helping
provide a living for myself and for each of us at Bridgeway. As steward of
your money, I hope and pray to earn your continued trust and to never take
it for granted.
I trust you celebrate with us the Fiscal Year 1997 results. As always, I
appreciate your feedback. We keep a bulletin board of shareholder comments
and suggestions and we take them very seriously. Please keep your ideas
coming.
Sincerely,
John Montgomery
<PAGE>
July 29, 1997
Dear Fellow Social Responsibility Shareholder,
Our performance in the June quarter and 1997 Fiscal Year was very good in
absolute terms--up 10.9% and 16.9%, respectively. However, we lagged our
primary market benchmarks in both periods as indicated by the table and
graph below. The Social Responsibility Portfolio ranked 15th of 24
socially responsible equity funds according to the Social Investment Forum
over the last year.
Performance Summary
The following table presents SEC standardized performance for the March
quarter, one year, and life-to-date**:
June Qtr. 1 Year Life-to-Date
3/31/97 6/30/96 8/5/94 to
to 6/30/97 to 3/31/97 6/30/97**
Social Responsibility Portfolio 10.9% 16.9% 21.5%
S&P 500 Index (large stocks)* 17.2% 34.7% 28.6%
Lipper Growth and Income Funds* 14.8% 28.9% 22.7%
*The S&P 500 is an unmanaged index of large stocks, with dividends
reinvested. The Lipper Growth Funds reflect the aggregate record of
domestic growth mutual funds as reported by Lipper Analytical Services,
Inc. Past performance does not guarantee future returns.
** Life-to-date returns are annualized; quarterly returns are not
annualized.
Explanation of Performance
The largest stocks of the S&P 500 walked away from the rest of the market
over the last quarter and fiscal year. With the notable exception of our
pharmaceutical companies, our portfolio has concentrated primarily in the
next tier of more "mid-cap" stocks, and this has hurt our performance
relative to the S&P 500 Index. In addition, with the all-time valuations
of large company stocks, we have held a higher percentage of cash in the
last quarter, and this also hurt our relative performance. With the
addition of Diane and Kim (see below) to help qualify more stocks outside
the Council on Economic Priorities database, we expect to be more fully
invested in the current quarter.
The highest performing stock during the June quarter was Pfizer, up 42%.
This company benefited from the tremendous runup of very large, "blue chip"
stocks.
Largest Positions
The following are our largest ten portfolio positions on June 30, 1997
% of Net
Company Assets Industry
The Gap, Inc. 5.2% Retail Stores
Fuller (HB) 4.4% Chemicals
Student Loan Marketing 4.4% Finance
MBNA Corp 4.3% Banking
Sofamor/Danek Group 4.2% Medical equipment/Supplies
Safeway Stores 4.1% Retail Stores
Coca-Cola Company 3.7% Beverages
Great Atlantic & Pacific 3.6% Retail Stores
Medtronic, Inc. 3.6% Medical equipment/Supplies
Cinncinatti Bell 3.6% Telecommunications
41.0%
NIKE
We received several phone calls from shareholders and potential
shareholders concerned about poor publicity over the last year concerning
Nike, the shoe manufacturer. The company has come under major criticism
for workplace conditions and especially low wages in their plants located
in developing nations. In responding to these allegations, the company
commissioned Andrew Young, past U.S. ambassador to the United Nations, to
review company policies and practices in these plants. Based on our review
of Young's report and a report by a human rights group, we believe there
have been some major incidents of abuse in plants of Nike's subcontractors,
that there is no maliciousness on Nike's part, that the company has taken
some specific measures for improvement, but that neither Nike's level of
disclosure, wages, nor actions taken are exemplary, as we would desire of
our companies.
Therefore, we are selling the holding from our portfolio for three reasons:
1) The company has fallen from the top fifth to the second fifth of our
social ranking. 2) Nike receives a "C" from the Council on Economic
Priorities for it's (lack of) disclosure. 3) We tend to side more with
Nike's critics rather than the company.
Disclaimer
Translation: The following is a reminder from the friendly folks at your
fund who worry about liability. It's risky to purchase directly stocks
listed or discussed here, because it's always possible our position may
have changed by the time you receive this correspondence. However, I do
commit that I won't talk favorably in the media about a stock I am
concurrently selling from the Portfolio.
The views expressed here are exclusively those of Fund management. They
are not meant as investment advice. Any favorable (or unfavorable)
description of a holding applies only as of the quarter end, June 30, 1997;
security positions can and do change thereafter. For example, buying a
security you see highlighted in this report seems to me like a formula for
underperforming the Portfolio itself.
New Folks at Bridgeway
As our total Fund assets have gone up more than five-fold in the last year,
we have hired some new people at Bridgeway. I'm impressed with the caliber
of each one of these employees and am just as impressed by the strength we
gain through diversity. Each new employee individually has a different
strength or skill they bring with them. Dianne has been with us on a
temporary basis while she took off a semester from one of the toughest
liberal arts colleges in the country. She's mentally sharp, learns
quickly, and has a bright, positive, and contagious attitude. She has been
helping with a number of different projects, including some accounting,
some new software, and also qualifying companies for our Social
Responsibility Portfolio.
By the time Kim was 21, she'd been an entrepreneur, a landlord, a stock
broker's assistant, and a part-time mechanic; not to mention a full time
finance major at Texas A&M University. Kim's a potential powerhouse here,
and she's helping me compile the myriad of data to run our models.
Cheryl is a native Houstonian with a couple of "grown" kids and a tall
handsome grandson. She is working with our fund and shareholder accounting
while pursuing a bachelor's degree at the University of Houston. She
differentiated herself from over 90 other applicants by her experience,
long term employment for one previous company, and her accounting
knowledge.
Conclusion
As always, I appreciate your feedback. We keep a bulletin board of
shareholder comments and suggestions and we take them very seriously.
Please keep your ideas coming.
Sincerely,
John Montgomery
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Ultra-Small Company,
Aggressive Growth and Social Responsibility Portfolios:
We have audited the accompanying statement of assets and liabilities,
including the schedule of portfolio investments, of Bridgeway Fund, Inc.
(comprising, respectively, the Ultra-Small Company, Aggressive Growth, and
Social Responsibility Portfolios) as of June 30, 1997, the related statement
of operations for the year then ended, and the statement of changes in net
assets and the financial highlights for the year ended June 30 1997 and for
the period from August 5, 1994 (commencement of operations) to June 30, 1995.
These financial statements and financial highlights are the responsibility of
the management of Bridgeway Fund, Inc. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting Bridgeway Fund, Inc. as of June 30,
1997, the results of their operations for the year then ended, and the changes
in their net assets and the financial highlights for the year ended June 30,
1997 and 1996 and for the period from August 5, 1994 (commencement of
operations) to June 30, 1995, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Houston, Texas
August 29, 1997
<PAGE>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Common Stocks- 89.7%
Airlines- 10.3%
AMR Corporation * # 1,100 $100,100
Atlantic Coast Airlines, Inc. * 2,300 30,044
Continental Airlines (Class B) * 400 24,700
154,844
Banking- 0.6%
Grove Bank 300 9,075
Data Processing/Hardware- 14.9%
IKOS System, Inc. * 500 10,563
Jabil Circuit, Inc. * 2,000 24,500
Citation Computer Systems, Inc. * 1,000 18,500
Equitrac Corporation * 1,500 14,063
General Automation, Inc. * 17,000 46,750
Sun Microsystems, Inc. * 1,480 87,136
Bell Microproducts, Inc. * 1,400 10,675
Zoom Telephonics, Inc. * 850 12,325
224,512
Software- 1.1%
Symix Systems, Inc. * 1,000 15,750
Electronics/Electric- 11%
C-Cube Microsystems, Inc. * 400 13,200
Sigmatron International, Inc. * 1,000 11,000
Aseco Corporation * 700 6,913
Nanometrics, Inc. * 2,000 12,000
Veeco Instruments, Inc. * 1,100 15,538
Raychem Corporation 750 53,907
Advanced Semiconducor Materials Int'l * 1,900 20,662
Reliability, Inc. * 1,400 8,925
Siliconix, Inc. * 1,100 23,650
165,795
Graphic Arts- 0.9%
Gibson Greeting, Inc. * 1,000 13,750
Household Products- 1.2%
Iona Appliances, Inc. * 2,800 18,564
Sports / Outdoor equip.- 1.3%
SCP Pool Corporation * 1,100 19,800
Industry Shares Value
Company
Machinery- 8.1%
JLG Industries 940 $69,795
Chart Industries 1000 14,125
Gleason Corporation 950 37,050
120,970
Medical Equipment/Supplies- 2.3%
Bioradiations Labs, Inc. (Class A) * 938 33,650
Mutual Funds- 0.8%
New Germany Fund * 550 6,944
Spain Fund 400 4,750
11,694
Oil & Gas- 9.8%
Comstock Resources, Inc. * 4900 49,919
Louisiana Land & Exploration Co. 1300 74,913
McFarland Energy, Inc. * 2400 21,600
146,432
Retail Stores- 18.3%
Tuesday Morning Corporation * 1200 16,050
Carson Pirie Scott & Company * 1000 26,750
TJX Companies, Inc. * # 3800 128,250
Damark International, Inc. * 1700 23,800
CompUSA, Inc. * # 1280 43,680
One Price Clothing Store, Inc. * 4400 24,200
Nutrition for Life Int'l, Inc. * 800 12,000
274,730
Securities Industry- 2%
Advest Group, Inc. * 1500 15,375
JB Oxford Holdings, Inc. * 5300 15,238
30,613
Steel/Iron- 1.1%
Northwest Pipe Company * 1000 17,000
Metals (Titanium)- 4.1%
Oregon Metallurgical Corporation * 2100 61,950
Services- 1.9%
Team Rental Group, Inc. * 2000 28,000
Total Common Stocks (Identified Cost $1,216,057) $1,347,129
<PAGE>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Options - 2.1%
Air Transport- 1%
AMR Corp. 1/97 Calls @70 200 $4,675
AMR Corp. 1/97 Calls @75 400 10,246
14,921
Retail Stores- 1.1%
TJX 10/96 Calls * 600 8,250
CompUSA, Inc. 11/96 Calls @25 800 8,200
16,450
31,371
Money Market Funds- 6.2%
SEI Daily Income Trust Prime Obligations 30,931 30,931
Starburst Money Market Fund 30,931 30,931
Lehman Bros. Prime Money Market Class A 31,868 31,868
93,730
Total Short-term investments (Identified Cost $93,730) 93,730
Total Investments (Identified Cost $1,344,087)- 98% ** 1,472,230
Other Assets and Liabilities-Net: 2% 30,255
Total Net Assets-100% $1,502,485
* Non-income producing security as no dividends were paid during
the period from July 1, 1995 to June 30, 1996.
** The aggregate identified cost on a tax basis is $1,344,087. Gross
unrealized appreciation and depreciation were $201,429 and $73,286,
respectively, or net unrealized appreciation of $128,143.
# The portfolio owns a call option on this security.
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Common Stock- 74.4%
Air Transport- 7.6%
AMR Corporation * 300 $27,300
Banking- 2.5%
Bank of Boston 45 2,228
MBNA Corporation 240 6,840
9,068
Beverages- 2.5%
Pepsico, Inc. 250 8,875
Data Processing- 5.6%
Compaq Computers * 190 9,334
Digital Equipment Corporation * 245 11,056
20,390
Drugs-Generic and OTC- 10.5%
Merck & Company 195 12,602
Pfizer, Inc. 155 11,063
Schering Plough 229 14,371
38,036
Education- 3.3%
TRO Learning, Inc. * 735 11,944
Electronics/Electric- 10%
Maytag Corporation 16 338
Sony Corporation 110 7,273
Spectrum Controls, Inc. * 2,500 12,188
Zytec Corporation * 900 16,313
36,112
Food- 0.2%
Ben & Jerry's Homemade, Inc. * 50 850
Graphic Arts- 1%
Healthy Planet Products, Inc. * 525 3,577
Health Care Facilities- 3.6%
Alliance Imaging, Inc. * 1,200 6,000
Pacificare Health Systems * 107 7,062
13,062
Leather & Shoes- 4.8%
Nike, Inc. (Class B) 170 17,468
Medical Equipment/Supplies- 10.5%
Johnson & Johnson 230 11,385
Medtronics, Inc. 278 15,568
<PAGE>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Medical Equipment/Supplies (continued)
Sofamor/Danek Group * 400 $11,100
38,053
Paper / Products- 0.4%
Champion International 30 1,253
Retail Stores- 3.8%
Safeway Stores * 412 13,596
Specialty Instruments- 3.2%
Hewlett-Packard Corp. 116 11,557
Telecommunications- 3.5%
Cincinnati Bell * 240 12,510
Utilities-Electric- 1.4%
Hawaiian Electric 70 2,485
New England Electric Systems 75 2,723
5,208
Total Common Stocks (Identified Cost $222,993) 268,859
Short-term Investments- 25.6%
Money Market Funds- 25.6%
SEI Daily Income Trust Prime Obligations 12,325 12,325
Starburst Money Market Fund 12,325 12,325
Strong Money Market, Inc. 55,000 55,000
Lehman Bros. Prime Money Market Class A 12,699 12,699
92,349
Total Short-term Investments (Identified Cost $92,349) 92,349
Total Investments (Identified Cost $315,342)- 100% ** 361,208
Other Assets and Liabilities-Net: (248)
Total Net Assets-100% $360,960
* Non-income producing security as no dividends were paid during
the period from July 1, 1995 to June 30, 1996.
** The aggregate identified cost on a tax basis is $315,342. Gross
unrealized appreciation and depreciation were $55,062 and $9,196,
respectively, or net unrealized appreciation of $45,866.
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Common Stock- 86.8%
Air Transport- 0.9%
Atlantic Coast Airlines * 3,100 $40,490
Aircraft Manf./Components- 0.3%
Petrol Helicopters, Inc. 1,000 16,000
Auto Parts- 0.7%
Deflecta-Shield Corp. * 4,900 31,238
Automobiles- 0.8%
Collins Industries, Inc. * 7,500 37,500
Banking- 5.3%
Cascade Bancorp * 1,000 20,250
Dime Financial Corporation 4,900 74,725
Franklin Bank National Assoc. 115 1,208
Grove Bank 300 9,075
Home Port Bancorp, Inc. 3,000 39,000
Metropolitan Bancorp * 6,200 83,700
Peoples Bank Of Indianapolis 500 14,875
242,833
Beverages- 0.8%
Cable Car Beverage Corp. * 19,800 35,888
Broadcasting- 0.8%
All American Communications, Inc. 3,500 35,000
Building- 2%
Engle Homes, Inc * 2,500 20,625
Zaring Homes, Inc. * 5,000 68,750
89,375
Coatings, Paint,Varnishes- 0.5%
Southwall Technologies, Inc. * 3,200 24,000
Data Processing- 11.9%
Bell Microproducts, Inc. * 7,300 55,662
Cognitronics Corporation * 3,000 15,000
Citation Computer Systems, Inc. * 4,800 88,800
Equitrac Corporation * 1,000 9,375
General Automation, Inc. * 22,000 60,500
International MicroComputer Software Co. * 2,800 24,850
Qlogic Corporation * 2,100 21,000
STB Systems, Inc. * 9,500 162,688
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Data Processing (continued)
Symix Systems, Inc. * 5,900 $92,925
Xata Corporation * 1,000 10,375
541,175
Drugs-Generic and OTC- 2.4%
Embrex, Inc. * 13,500 89,438
Procyte Corporation * 5,800 20,662
110,100
Education- 0.9%
TRO Learning, Inc. * 2,600 42,250
Electronics/Electric- 9.4%
Aseco Corporation * 2,690 26,563
Circuit Systems, Inc. * 2,200 13,750
Diagnostic/Retrieval Systems, Inc. * 4,500 49,500
Jaco Electronics, Inc. * 1,000 10,125
Nanometrics, Inc. * 1,000 6,000
Polk Audio, Inc. * 2,500 36,563
Reliability, Inc. * 8,000 51,000
Sigmatron Intlernational, Inc. * 2,300 25,300
Semtech Corporation * 4,900 44,100
Spectrum Control, Inc. * 3,000 14,625
Super Vision Int'l., Inc. * 5,500 48,813
Tylan General, Inc. * 2,100 27,825
Zytec Corporation * 4,200 76,125
430,289
Finance- 0.7%
American Physicians Services Grp. * 1,900 18,288
TFC Enterprises, Inc. * 5,800 13,775
32,063
Food- 1%
Armanino Foods Distinction * 11,000 16,500
Fresh America Corporation * 2,000 27,250
43,750
Food Serving- 0.1%
Family Steak House, Inc. * 6,200 4,263
Health Care Facilities- 1.7%
Caretenders Health Corp. * 2,800 21,000
Alliance Imaging, Inc. * 3,000 15,000
SMT Health Services, Inc. * 4,900 41,650
77,650
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO, Continued
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Hotels/Motels/Inns- 0.1%
Buckhead America Corp. * 1,000 $6,380
Insurance- 1.6%
Home State Holdings, Inc. * 1,000 8,375
MCM Corporation 4,000 22,000
Omni Insurance Group * 1,000 8,500
Unico American Corp. 4,500 32,625
71,500
Jewelry, Silverware, Watches- 0.3%
Barry's Jewelers, Inc. * 4,000 14,000
Leisure-Amusement- 5.5%
E R O, Inc. * 2,800 17,500
Funco, Inc. * 11,000 94,875
Play By Play Toys & Novelties * 1,500 21,375
SCP Pool Corporation * 5,000 90,000
PTI Holding, Inc. * 3,400 26,775
250,525
Machinery- 2.6%
Chart Industries, Inc. 4,200 59,325
Farr Company * 1,000 13,250
PPT Vision, Inc. * 1,500 18,563
Venturian Corporation * 2,000 25,500
116,638
Manufacturing/Distr.- 0.3%
Unit Instruments, Inc. * 1,000 13,875
Medical Equipment/Supplies- 3.7%
AFP Imagining Corporation * 3,000 4,312
Biosource International, Inc. * 3,300 29,803
Fischer Imaging Corporation * 2,000 24,000
I-Flow Corporation * 6,000 30,000
Medical Resources, Inc. * 6,300 55,913
Microtek Medical, Inc. * 1,800 27,000
171,028
Mining- 0.7%
Alta Gold * 9,000 32,063
Oil & Gas- 11%
Astrotech International Corp. * 2,000 11,250
Bellwether Exploration Co. * 7,700 46,200
Comstock Resources, Inc. * 9,500 96,781
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO, Continued
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Oil & Gas (continued)
American Oilfield Divers * 7,300 $65,700
Maverick Tube Corp. * 6,600 77,550
McFarland Energy, Inc. * 5,700 51,300
Maynard Oil Company * 1,500 12,375
Callon Petroleum Company * 3,100 38,750
Petroleum Development Corp. * 25,500 70,125
UTI Energy Corporation * 1,800 20,925
Tatham Offshore, Inc. * 12,000 10,500
501,456
Pollution Control- 0.6%
American Eco Corporation * 3,000 25,500
Retail Stores- 7.4%
Gantos, Inc. * 20,800 118,300
Calloways Nursery * 7,000 6,125
Jim Hjelms Private Collections * 4,500 11,812
Nutrition For Life International * 2,580 38,700
Tuesday Morning Corporation * 4,300 57,513
Village Super Market, Inc. * 400 3,400
One Price Clothing Stores * 18,400 101,200
337,050
Securities- 3.7%
Advest Group, Inc. * 3,100 31,775
JB Oxford Holdings, Inc. * 14,200 40,825
M. H. Myerson & Company * 9,600 36,600
Southwest Securities Group 5,000 58,125
167,325
Services- 2.5%
Advanced Marketing Services, Inc. * 5,600 72,100
RCM Technologies, Inc. * 4,500 40,500
112,600
Specialty Instruments- 0.6%
Laser Industries Ltd. * 1,700 26,350
Steel / Iron- 1.4%
Northwest Pipe Company * 3,800 64,600
Telecommunications- 3.7%
EMCEE Broadcast Products * 7,500 58,125
Microlog Corporation * 1,000 9,500
Spectran Corporation * 4,200 81,900
World Access, Inc. * 2,000 19,000
168,525
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO, Continued
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1996
Industry Shares Value
Company
Textiles- 0.9%
Farrah, Inc. * 5,900 $43,515
Total Common Stocks (Identified Cost $3,637,359) 3,956,794
Short-term Investments- 2.7%
Money Market Funds- 2.7%
SEI Daily Income Trust Prime Obligations 40,623 40,623
Starburst Money Market Fund 40,623 40,623
Lehman Bros. Prime Money Market Class A 41,853 41,853
123,099
Total Short-term Investments (Identified Cost $123,099) 123,099
Total Investments (Identified Cost $3,760,458)- 89.5% ** 4,079,893
Other Assets and Liabilities-Net: 10.5% 477,698
Total Net Assets-100% $4,557,591
* Non-income producing security as no dividends were paid during
the period from July 1, 1995 to June 30, 1996.
** The aggregate identified cost on a tax basis is $3,760,458. Gross
unrealized appreciation and depreciation were $498,416 and $178,981,
respectively, or net unrealized appreciation of $319,435.
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1997
Ultra-Small Aggressive Social
Company Growth Responsibility
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Assets:
Investments at value * $29,405,249 $3,475,733 $629,556
Cash 1,379,012 31,622 17,789
Receivable for investments sold 10,951 89,672 0
Receivable for interest 6,084 928 911
Receivable for dividends 0 68 0
Receivable from adviser 18,859 12 40
Prepaid expenses 7,307 3,797 3,007
Deferred organization costs 9,216 9,216 9,217
Total assets 30,836,678 3,611,048 660,520
Liabilities:
Payable for investments purchased 738,317 171,843 0
Payable for management fee 3,659 254 47
Payable for organization costs 9,254 9,254 9,254
Accrued expenses 15,246 9,207 13,290
Total liabilities 766,476 190,558 22,591
Net Assets $30,070,202 $3,420,490 $637,929
Shares Outstanding 1,458,054 182,035 39,363
Net asset value, offering and redemption price
per share $20.62 $18.79 $16.21
Net Assets Represent:
Paid-in capital $24,321,986 $2,744,714 $523,669
Undistributed net realized gain/(loss) 104,441 175,520 (2,796)
Net unrealized appreciation of investment 5,643,775 500,256 117,056
Net assets $30,070,202 $3,420,490 $637,929
* Investments at cost $23,761,474 $2,975,477 $512,500
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
STATEMENT OF OPERATIONS
For the year ended June 30, 1997
Ultra-Small Aggressive Social
Company Growth Responsibility
Portfolio Portfolio Portfolio
<S> <C> <C> <C>
Investment income:
Dividends $21,508 $7,009 $2,972
Interest 22,905 7,137 4,883
Total income 44,413 14,146 7,855
Expenses:
Management fees 143,395 28,802 1,596
Accounting fees 73,009 14,857 9,811
Audit fees 10,001 7,002 7,002
Custody 16,262 3,196 632
Amortization of organization costs 4,632 4,632 4,632
Insurance 4,200 701 125
Legal 19,341 3,846 297
Registration fees 6,131 1,245 1,066
Director fees 1,102 1,099 1,099
Miscellaneous 29 30 30
Total expenses 278,102 65,410 26,290
Less fees waived (29,727) (18,126) (11,407)
Less expenses reimbursed 0 0 (8,092)
Net expenses 248,375 47,284 6,791
Net investment income (loss) (203,962) (33,138) 1,064
Net realized and unrealized gain on investments:
Net realized gain on investments 238,109 187,476 8,591
Net change in unrealized appreciation 5,324,346 372,114 71,190
Net realized and unrealized gain 5,562,455 559,590 79,781
Net increase in assets
resulting from operations: $5,358,493 $526,452 $80,845
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C> <C>
Ultra-Small Company Portfolio Year ended Year ended
Increase (decrease) in net assets: June 30, 1997 June 30, 1996 see * below
Operations:
Net investment loss ($203,962) ($23,352) ($2,117)
Net realized gain (loss) on investments 238,109 371,952 (3,571)
Net change in unrealized appreciation 5,324,346 247,576 70,908
Net increase resulting from operations 5,358,493 596,176 65,220
Distributions to shareholders:
From net investment income 0 0 (4)
From realized gains on investments (228,177) (44,243) (220)
Total distributions to shareholders (228,177) (44,243) (224)
Fund share transactions:
Proceeds from sale of shares 23,069,647 3,392,930 568,271
Reinvestment of dividends 209,831 43,592 224
Cost of shares redeemed (2,897,183) (98,400) 0
Net increase from Fund share transactions 20,382,295 3,338,122 568,495
Net increase in net assets 25,512,611 3,890,055 633,491
Net assets:
Beginning of period 4,557,591 667,536 34,045
End of period $30,070,202 $4,557,591 $667,536
Number of Fund shares:
Sold 1,341,007 217,309 55,498
Issued on dividends reinvested 12,394 3,338 22
Redeemed (168,592) (6,219) 0
Net increase 1,184,809 214,428 55,520
Outstanding at beginning of period 273,245 58,817 3,297
Outstanding at end of period 1,458,054 273,245 58,817
Aggressive Growth Portfolio
Increase (decrease) in net assets:
Operations:
Net investment loss ($33,138) ($9,319) ($465)
Net realized gain (loss) on investments 187,476 166,362 (1,720)
Net change in unrealized appreciation 372,114 95,798 32,675
Net increase resulting from operations 526,452 252,841 30,490
Distributions to shareholders:
From net investment income 0 0 0
From realized gains on investments (128,863) (4,442) (48)
Total distributions to shareholders (128,863) (4,442) (48)
Fund share transactions:
Proceeds from sale of shares 2,150,757 989,807 188,873
Reinvestment of dividends 123,538 3,894 48
Cost of shares redeemed (753,879) (15,887) 0
Net increase from Fund share transactions 1,520,416 977,814 188,921
Net increase in net assets 1,918,005 1,226,213 219,363
Net assets:
Beginning of period 1,502,485 276,272 56,909
End of period $3,420,490 $1,502,485 $276,272
Number of Fund shares:
Sold 129,254 67,496 17,837
Issued on dividends reinvested 7,362 294 5
Redeemed (44,758) (1,209) 0
Net increase 91,858 66,581 17,842
Outstanding at beginning of period 90,177 23,596 5,754
Outstanding at end of period 182,035 90,177 23,596
Social Responsibility Portfolio
Increase (decrease) in net assets:
Operations:
Net investment income (loss) $1,064 ($357) $295
Net realized gain (loss) on investments 8,591 10,228 (854)
Net change in unrealized appreciation 71,190 39,110 7,469
Net increase resulting from operations 80,845 48,981 6,910
Distributions to shareholders:
From net investment income 0 (297) (19)
From realized gains on investments (21,520) 0 0
Total distributions to shareholders (21,520) (297) (19)
Fund share transactions:
Proceeds from sale of shares 254,732 268,541 33,982
Reinvestment of dividends 21,520 297 19
Cost of shares redeemed (58,608) (20,983) (518)
Net increase from Fund share transactions 217,644 247,855 33,483
Net increase in net assets 276,969 296,539 40,374
Net assets:
Beginning of period 360,960 64,421 24,047
End of period $637,929 $360,960 $64,421
Number of Fund shares:
Sold 17,127 20,594 3,152
Issued on dividends reinvested 1,556 23 2
Redeemed (3,911) (1,577) (45)
Net increase 14,772 19,040 3,109
Outstanding at beginning of period 24,591 5,551 2,442
Outstanding at end of period 39,363 24,591 5,551
</TABLE>
* from August 5, 1994 (commencement of operations) to June 30, 1995
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
<S> <C> <C> <C>
Year ended Year ended
Ultra-Small Company Portfolio June 30, 1997 June 30, 1996 see * below
Per share data
Net asset value, beginning of period $16.68 $11.35 $10.33
Income (loss) from investment operations:
Net investment loss (0.24) (0.21) (0.04)
Net realized and unrealized gain 4.50 6.03 1.07
Total from investment operations 4.26 5.82 1.03
Less distributions to shareholders:
Net investment income 0.00 0.00 0.00
Net realized gains (0.32) (0.49) (0.01)
Total distributions (0.32) (0.49) (0.01)
Net asset value, end of period $20.62 $16.68 $11.35
Total return [1] 26.0% 52.4% 10.5%
Ratios & Supplemental Data
Net assets, end of period $30,070,202 $4,557,591 $667,536
Ratios to average net assets: [2]
Expenses net of waivers and reimbursements 1.67% 1.97% 1.68%
Expenses before waivers and reimbursements 1.87% 3.07% 8.34%
Net investment income (loss) (1.37%) (1.47%) (0.65%)
Commission Cost/Share $0.0097
Portfolio turnover rate [2] 56.2% 155.9% 103.6%
Aggressive Growth Portfolio
Per share data
Net asset value, beginning of period $16.66 $11.71 $9.89
Income (loss) from investment operations:
Net investment loss (0.24) (0.18) (0.02)
Net realized and unrealized gain 3.43 5.22 1.84
Total from investment operations 3.19 5.04 1.82
Less distributions to shareholders:
Net investment income 0.00 0.00 0.00
Net realized gains (1.06) (0.09) 0.00
Total distributions (1.06) (0.09) 0.00
Net asset value, end of period $18.79 $16.66 $11.71
Total return [1] 19.9% 43.3% 19.5%
Ratios & Supplemental Data
Net assets, end of period $3,420,490 $1,502,485 $276,272
Ratios to average net assets: [2]
Expenses net of waivers and reimbursements 2.00% 1.97% 1.86%
Expenses before waivers and reimbursements 2.77% 5.73% 16.15%
Net investment income (loss) (1.40%) (1.26%) (0.30%)
Commission Cost/Share $0.0135
Portfolio turnover rate [2] 138.9% 167.7% 139.9%
Social Responsibility Portfolio
Per share data
Net asset value, beginning of period $14.68 $11.61 $9.85
Income (loss) from investment operations:
Net investment income (loss) 0.03 (0.02) 0.07
Net realized and unrealized gain 2.31 3.11 1.70
Total from investment operations 2.34 3.09 1.77
Less distributions to shareholders:
Net investment income 0.00 (0.02) (0.01)
Net realized gains (0.81) 0.00 0.00
Total distributions (0.81) (0.02) (0.01)
Net asset value, end of period $16.21 $14.68 $11.61
Total return [1] 16.9% 26.6% 18.9%
Ratios & Supplemental Data
Net assets, end of period $637,929 $360,960 $64,421
Ratios to average net assets: [2]
Expenses net of waivers and reimbursements 1.50% 1.48% 1.46%
Expenses before waivers and reimbursements 5.81% 16.80% 72.83%
Net investment income (loss) 0.24% (0.17%) 0.90%
Commission Cost/Share $0.0090
Portfolio turnover rate [2] 35.5% 83.8% 71.7%
[1] Not annualized for the period August 5, 1994 to June 30, 1995
[2] Annualized for the period August 5, 1994 to June 30, 1995
* from August 5, 1994 (commencement of operations) to June 30, 1995
See accompanying notes to financial statements.
</TABLE>
<PAGE>
BRIDGEWAY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization:
Bridgeway Fund, Inc. (the "Fund") was organized as a Maryland corporation
on October 19, 1993, and is registered under the Investment Company Act of
1940, as amended, as a no-load, diversified, open-end management investment
company.
The Fund is organized as a series fund and had three portfolios during
fiscal year 1997: the Ultra-Small Company Portfolio, the Aggressive Growth
Portfolio and the Social Responsibility Portfolio. The Fund is authorized
to issue 1,000,000,000 shares. The Fund commenced operations as a
regulated investment company on August 5, 1994.
2. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuation
Securities are valued at the closing price for securities traded on a
principal U.S. securities exchange and on NASDAQ. Listed securities for
which no sales are reported are valued at the latest bid price in
accordance with the pricing policy established by the Fund's Board of
Directors. When current bid prices are not available, the most recently
available quoted closing or bid price is used and adjusted for changes in
the index on the exchange on which that security trades, also in accordance
with the pricing policy established by the Fund's Board of Directors.
Federal Income Taxes
It is the Fund's policy to comply with the requirements of Subchapter M of
the Internal Revenue Code applicable to regulated investment companies,
including the timely distribution of all its taxable income to its
shareholders. Therefore, no federal income tax provision has been
recorded.
Deferred Organization Costs
Deferred organization costs are amortized on a straight-line basis over
five years. The initial shareholders, prior to the prospectus being
declared effective on June 30, 1994, have agreed that if any of the initial
shares of each portfolio are redeemed during such amortization period by
any holder thereof, the redemption proceeds will be reduced by the amount
of the then unamortized organization expenses in the same ratio as the
number of shares redeemed bears to the number of total outstanding shares
held at the time of redemption.
At June 30, 1997, each portfolio had deferred organization costs in the
amount of $9,254 payable to Bridgeway Capital Management, Inc., a
shareholder.
Distributions to Shareholders
Distributions to shareholders are recorded when declared. The amount and
character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
<PAGE>
BRIDGEWAY FUND, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies
Distributions to Shareholders, Continued
During the year ended June 30, 1997, the Ultra-Small Company and the
Aggressive Growth Portfolios did not pay sufficient dividends and
distributions from met investment income and from net capital gains
generated during the year ended June 30, 1996. The Ultra-Small Company and
the Aggressive Growth Portfolios intend to petition the Internal Revenue
Service for permission to make such deficient distributions during the year
ended June 30, 1998. Taxpayers would be taxed on these distributions in
the year received. Based upon management's assessment, the interest and
penalties related to these deficient distributions are expected to be
approximately $26,000. The Adviser has committed to pay the interest and
penalties and all other costs associated with resolving the deficiency for
the portfolios. No assurance can be given as to whether the Internal
Revenue Service will accept the petition.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
12b-1 Plan
The Fund acts as distributor of its shares pursuant to a 12b-1 plan adopted
by shareholders on October 15, 1996. The cost of distributing shares of
the Fund is borne by the Adviser at no cost to the Fund; thus, there is no
"12b-1 fee."
Other
Security transactions are accounted for as of the trade date, the date the
order to buy or sell is executed. Realized gains and losses are computed
on the identified cost basis. Dividend income is recorded on the ex-
dividend date, and interest income is recorded on the accrual basis.
Assets in the Social Responsibility Portfolio are very low, and may remain
so in the immediate future. Because commission cost per trade is
unacceptably high as a percentage of assets, the Adviser reimbursed this
portfolio for any commissions above one cent/share. The Adviser expects to
continue this practice until portfolio net assets reach at least $1
million.
3. Use of Derivative Instruments:
The Aggressive Growth and Social Responsibility Portfolios may use
derivative securities as outlined more fully under "Risk Factors,"
"Investment Objective and Policies," and "Principal Investment
Restrictions," in the Prospectus. Buying calls increases a Portfolio's
exposure to the underlying security. Buying puts on a stock market index
tends to limit a Portfolio's exposure to a stock market decline. All
options purchased by the Fund were listed on exchanges and considered
liquid positions with readily available market quotes. The Social
Responsibility Portfolio purchased and sold one put during the fiscal year.
A summary of options purchased by the Aggressive Growth Portfolio follows:
<PAGE>
BRIDGEWAY FUND, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
3. Use of Derivative Instruments, Continued
Call Options Put Options
Shares
(in thousand) Cost # of Puts Cost
Options outstanding
6/30/96 20 $34,300 0 $0
Options purchased 108 $120,255 2 1,492
Options expired 0 $0 0 $0
Options exercised (5) ($5,766)
Options closed (99) ($104,335) (2) ($1,492)
Outstanding at 6/30/97 24 $44,454 0 $0
4. Management Contract:
The Fund has entered into a management contract with Bridgeway Capital
Management, Inc. (the Adviser"), a shareholder of the Fund. As
compensation for the advisory services rendered, facilities furnished, and
expenses borne by Bridgeway Capital Management, Inc., the Aggressive Growth
Portfolio and the Social Responsibility Portfolio pay Bridgeway Capital
Management, Inc. a fee, computed and paid monthly based on the average
daily net assets of each portfolio for the month. Such fee is based on the
following annual rates: 0.90% of the first $250 million of each
portfolio's average daily net assets, 0.875% of the next $250 million and
0.85% of any excess over $500 million.
The fee is adjusted quarterly for the Aggressive Growth and the Social
Responsibility Portfolios based upon performance. The performance
adjustment rate varies with the Fund's performance as compared to the
performance of the Standard & Poor's 500 Composite Stock Price Index with
dividends reinvested (hereinafter "Index" ) and ranges from -.7% to +.7%.
The performance rate adjustment is calculated at 4.76% of the difference
between the performance of the Fund and that of the Index over the trailing
five year period, except that there is no performance adjustment if the
difference between the Fund performance and the Index performance is less
than or equal to 2%. The Ultra-Small Company Portfolio pays a flat 0.9%
annual management fee, computed daily and payable monthly, except that
while the Portfolio's net assets range from $27.5 million to $55 million
the fee will be $495,000 annually subject to a maximum rate of 1.49% and a
maximum expense ratio of 2.0%.
5. Related Party Transactions:
One director of the Fund, John Montgomery, is an owner and director of the
Adviser. Under the Investment Company Act of 1940 definitions, he is
considered to be "affiliated" and "interested." Compensation of Mr.
Montgomery is borne by the Adviser rather than the Fund. The other
officers are employees of the Adviser and the portion of their compensation
attributable to fund accounting, shareholder accounting and state
registration services is paid by the Fund and is included in the Accounting
fees and Registration fees expense categories of the financial statements.
The Adviser is committed to reimburse the Fund for any operating expenses
above 2.5% of net assets during the first three years of operations. In
addition, the Adviser has been voluntarily reimbursing the Fund
for any operating expenses above 2.0%, 1.5%, and 2.0% for the Aggressive
Growth, Social
Responsibility, and Ultra-Small Company Portfolios, respectively. The
Adviser expects to continue this voluntary level of reimbursement, if
necessary, indefinitely.
<PAGE>
BRIDGEWAY FUND, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
5. Related Party Transactions, Continued
To achieve this expense level the Adviser has waived both the management
fees and accounting fees for the year ended June 30, 1997, for the Social
Responsibility Portfolio. For the Ultra-Small Company and Aggressive
Growth Portfolios, the Adviser has waived a portion of their management
fees.
6.Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank (formerly
River Oaks Trust). As compensation for services rendered by the custodian,
each portfolio pays a fee, computed and paid quarterly based on the average
month end total assets of each portfolio for the quarter plus a fee per
transaction.
7.Cost, Purchases and Sales of Investment Securities:
Investments have the same cost for tax and financial statement purposes.
Aggregate purchases and sales of investment securities, other than cash
equivalents were as follows:
Cost of Proceeds
Portfolio Purchases from Sales
Ultra-Small Company $25,936,876 $7,952,176
Aggressive Growth $4,408,732 $3,052,272
Social Responsibility $215,886 $127,859
8.Subsequent Event:
On July 20, 1997, the Fund added two new portfolios: the Ultra-Small Index
Portfolio and the Ultra-Large 35 Index Portfolio. The Ultra-Small Index
Portfolio seeks roughly to meet the total return of the University of
Chicago's Center for Research in Security Prices (CRSP) Cap-Based Portfolio
10 Index by investing in a representative sample of index companies. The
Ultra-Large 35 Index Portfolio seeks to meet the total return of the
Bridgeway Ultra-Large 35 Index while minimizing the distribution of capital
gains and minimizing costs.
<PAGE>
