August 3, 1998
Filing Desk
U.S. Securities and Exchange Commission
450 Fifth St., N.W.
Washington, D.C. 20549
RE: Bridgeway Fund, Inc.
40 Act Reg. No. 811-8200
33 Act File No. 33-72416
Post-Effective Amendment No. 9
Dear Ms Williams,
Pursuant to the requirements of the Securities Act of 1933
(the "33Act") and the Investment Company Act of 1940, more
specifically the registration requirements and Rule 485
(b) of the 33 Act, and EDGAR requirements, we are herewith
filing electronically post-effective amendment number 9 to
Form N-1A. A courtesy "red-lined" paper copy of the
filing.
The post effective amendment incorporates the Fund
financials for our fiscal year ended June 30, 1998.
To acknowledge receipt of this filing, please time stamp
and return to me the enclosed copy of this letter in the
envelope provided.
Sincerely yours,
John Montgomery
President
<PAGE>
File No. 33-72416
As filed with the Securities and Exchange Commission on
August 31, 1998
==========================================================
=============
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __
Post-Effective Amendment No. 9
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940
Amendment No. 9
BRIDGEWAY FUND, INC.
(Exact name of Registrant as Specified in Charter)
5615 Kirby Drive, Suite 518, Houston, Texas 77005-2448
(Address of Principal Executive Office)
(713) 661-3500
(Registrant's Telephone Number, Including Area Code)
JOHN N.R. MONTGOMERY, PRESIDENT
Bridgeway Capital Management, Inc.
5615 Kirby Drive, Suite 518, Houston, Texas 77005-2448
(Name and Address of Agent for Service)
Approximate Date of Proposed Offering: As soon as
practical after the effective date of this Registration
Statement under the Securities Act of 1933.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT
OF 1933
Pursuant to Section 24(f) of the Investment Company Act of
1940 and Rule 24f-2 thereunder, the Registrant hereby
declares that an indefinite number of its shares of
beneficial interest is being registered by this
Registration Statement.
==========================================================
==============
It is proposed that this filing will become effective
[ X] on October 31, 1998 pursuant to paragraph (b)
==========================================================
==============
The Registrant hereby amends this Registration Statement
on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further
amendment which specifically states that this Registration
Statement thereafter becomes effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this
Registration Statement shall become effective on such date
as the Commission, acting pursuant to said Section 8(a),
may determine.
If appropriate, check the following box: [ ] This post
effective amendment designates a new effective date for a
previously filed PEA.
Page 1 of _____pages
Exhibit Index Page _____
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY (closed)
ULTRA-SMALL INDEX
MICRO-CAP LIMITED
AGGRESSIVE GROWTH
SOCIAL RESPONSIBILITY
ULTRA-LARGE 35 INDEX
PROSPECTUS October 31, 1998
BRIDGEWAY CAPITAL MANAGEMENT, INC.
INVESTMENT ADVISER
5615 KIRBY DRIVE, SUITE 518
HOUSTON, TX 77005-2448
713 661-3265
800-661-3550
[LOGO GRAPHIC OMITTED]
B R I D G E W A Y
<PAGE>
TABLE OF CONTENTS
[C] [S]
Table of Fees and
Expenses...............................................2
Risk Factors...........................................3
Investment Objectives and Policies.....................8
Disclaimers............................................13
Redemption Reimbursement Fees..........................13
Principal Investment Restrictions......................13
Management of the Fund.................................14
Code of Ethics.........................................17
Distribution of Fund Shares............................17
How to Purchase Shares.................................17
Net Asset Value........................................18
How to Redeem Shares...................................18
Dividends and Tax Status...............................20
Performance Information................................20
General Information....................................21
PROSPECTUS October 31, 1998
BRIDGEWAY
FUND, INC.
Bridgeway Fund, Inc. (the "Fund") is a no-load,
diversified, open-end management investment company
commonly referred to as a mutual fund. The Fund is
organized as a series fund and currently has six
portfolios, Bridgeway Ultra-Small Company Portfolio,
Bridgeway Ultra-Small Index Portfolio, Bridgeway Micro-Cap
Limited Portfolio, Bridgeway Aggressive Growth Portfolio,
Bridgeway Social Responsibility Portfolio and Bridgeway
Ultra-Large 35 Index Portfolio. All six have an investment
objective of providing total return (capital appreciation
and current income), but the first four primarily target
capital appreciation. All are intended as long-term
investments. THE FUND STRONGLY DISCOURAGES SHORT-TERM
TRADING OF ITS SHARES. The Aggressive Growth Portfolio
uses more aggressive investment techniques, while the
Ultra-Small Company, Ultra-Small Index and Micro-Cap
Limited Portfolios exhibit higher than average short-term
volatility. There can be no assurance that the Portfolios
will achieve their investment objectives. These Portfolios
will pursue their objectives by investing primarily in a
diversified portfolio of common stocks. The Aggressive
Growth and Social Responsibility Portfolios may use
leverage (borrowing or derivatives), may hedge risk with
short sales, and may use other investment techniques. See:
"Risk Factors" (page 3) and _Summary of Investment
Techniques Used_ (page 12). Shares of each portfolio are
sold at their net asset value without a sales charge, and
there are no distribution charges paid by the Fund.
This prospectus concisely sets forth the information about
the Fund that a prospective investor should seek to learn
before investing. Investors are advised to read this
prospectus and retain it for future reference. A Statement
of Additional Information, dated October 31, 1998 has been
filed with the Securities and Exchange Commission and is
available without any charge by writing or calling the
Fund at the address or phone number listed on the back
cover. The Statement of Additional Information is
incorporated into this prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF FEES AND EXPENSES
(for each portfolio)
ULTRA- ULTRA- MICRO- AGGRESSIVE
SOCIAL ULTRA-
SMALL SMALL CAP GROWTH
RESPON- LARGE
COMPANY INDEX LIMITED
SIBILITY 35INDEX
SHAREHOLDER TRANSACTION EXPENSES:
- --------------------------------------------------------
--------------
--------------------------------------------------------
<S> <C> <C> <C> <C>
<C> <C>
Maximum Sales Charge
Imposed on Purchase None None None None
None None
Maximum Sales Charge
Imposed on Reinvested
Distributions None None None None
None None
Deferred Sales Charge None None None None
None None
Redemption Fees None None None None
None None
Redemption Reimbursement
in Down Markets# None 2.0% None None
None 2.0%
</TABLE>
# See Redemption Reimbursement Fee on page 13.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS):
----------------------------------------------------------
-------------
<S> <C> <C> <C> <C>
<C> <C>
Management Fees
(after waivers)* 1.15% 0.00% 0.90% 0.72%
0.00% 0.00%
12b-1 Fees 0.00% 0.00% 0.00% 0.00%
0.00% 0.00%
Other Expenses (after
reimbursements
and waivers)** 0.52% 0.75% 1.00% 1.28%
1.50% 0.15%
Total Fund Operating
Expenses (after
reimbursements
and waivers) ** 1.67% 0.75% 1.90% 2.00%
1.50% 0.15%
</TABLE>
*Management fees for the fiscal year ending June 30, 1998
before waivers were 0.20% for the Social Responsibility
Portfolio. Due to the performance fee adjustment feature
contained in the advisory contract, the management fee may
be as low as 0.2% or as high as 1.6% for the Aggressive
Growth and Social Responsibility Portfolios. The
management fee for the Ultra-Small Company Portfolio and
the base fee for the Micro-Cap Limited Portfolio is a
constant 0.9% except that the fee or base fee for these
two portfolios during the period that the portfolios' net
assets range from $27.5 to $55 million will be a flat
$495,000 annually, subject to a maximum rate of 1.49%. The
management fee will be a constant 0.5% for the Ultra-Small
Index Portfolio and 0.08% for the Ultra-Large 35 Index
Portfolio. (See Management of the Fund, page 14.)
**Other expenses for the fiscal year ending June 30, 1998
before reimbursements and waivers were 0.52% for Ultra-
Small Company, 1.24% for Ultra Small Index, 1.28% for
Aggressive Growth, 3.61% for Social Responsibility and
9.65% for Ultra Large 35 Index. Other expenses for the
Micro-Cap Limited Portfolios are estimated as they are new
as of the date of this prospectus. The Adviser has
undertaken to reimburse the fund for any operating
expenses over 2.0% for Ultra-Small Company and Aggressive
Growth, 1.9% for the Micro-Cap Limited, 1.5% for Social
Responsibility, 0.75% for Ultra-Small Index and 0.15% for
Ultra-Large 35 Index through at least June 30, 1999.
Total fund operating expenses before reimbursements and
waivers during fiscal year 1998 were 1.74%, 3.81%, and
9.73% of average net assets for the Ultra-Small Index,
Social Responsibility, and Ultra-Large Index Portfolios,
respectively.
Example: You would pay the following expenses on a $1,000
investment assuming, (1) expenses after reimbursement at
the 6/30/98 rate of 2.0% for the Ultra-Small Company and
Aggressive Growth Portfolios, 1.5% for the Social
Responsibility Portfolio, 0.75% for the Ultra-Small Index
Portfolio, 0.15% for the Ultra-Large 35 Index Portfolio,
and the initial rate of 1.9% for the Micro-Cap Limited
Portfolio, (2) a 5% annual return and (3) redemption at
the end of each time period not in a major market decline
(see Redemption Reimbursement Fee on page 13):
<TABLE>
<CAPTION>
ULTRA-SMALL COMPANY MICRO-CAP SOCIAL ULTRA-
SMALL ULTRA-LARGE
& AGGRESSIVE GROWTH LIMITED RESPONSIBILITY INDEX
35 INDEX
<C> <C> <C> <C>
<C>
1 Year $20 1 Year $19 1 Year $15 1 Year
$8 1 Year $2
3 Years $62 3 Years $61 3 Years $47 3 Years
$23 3 Years $5
5 Years $106 5 Years $105 5 Years $80 5 Years
$40 5 Years $8
10 Years $229 10 Years $228 10 Years $175 10 Years
$90 10 Years $19
</TABLE>
<PAGE>
The amounts listed in this example should not be
considered as representative of future expenses, and
actual expenses may be greater or less than those
indicated. Moreover, while the example assumes a 5%
return, the Fund's actual performance will vary and may
result in an actual return greater or less than 5%. The
foregoing table is to assist
you in understanding the various direct and indirect costs
and expenses that an investor in the Fund would bear.
Direct redemptions by mail (up to four per year) incur no
charges, but wire redemptions will incur a $15 charge to
offset bank charges and administrative expense.
Redemptions on any day when the S&P 500 Index has declined
more than 5% in the previous 5 trading sessions may incur
a 2% redemption fee (Bridgeway Ultra-Small Index and
Ultra-Large 35 Index Portfolios only) which accrues to the
Portfolio.
RISK FACTORS
The Ultra-Small Company and Ultra-Small Index Portfolios
invest a majority of total assets in the common stock of
very small companies. "Very small companies" are those
with market capitalization the size of the smallest 10% of
those listed on the New York Stock Exchange (those with
$124 million market capitalization or less as of 6/30/98).
However, the majority of stocks in these Portfolios are
listed on NASDAQ rather than the New York Stock Exchange.
The market price of very small company shares may exhibit
greater volatility than large company shares.
The Adviser believes no other mutual funds are committed
to investing long-term in companies this small. While
ultra-small companies have historically had a higher
average annual return than large stocks over the long term
(25 years and more), they have also had commensurately
higher volatility. Therefore, shareholders of this
portfolio are exposed to above-average short-term risk.
On the downside, companies this small may have limited
resources for expanding or surviving in a newly
competitive environment, may lack depth of management, may
have a limited product line, may lack market "muscle," and
may be more sensitive to economic downturns. On the
upside, such companies may be more maneuverable in the
marketplace, less bureaucratic, may respond quicker to
changing market forces, may see a successful product add
more to "the bottom line" in percentage terms, and when
they survive an economic downturn, may "bounce back"
faster.
While the Adviser attempts to limit some of the downside
volatility, inherent in this asset class in the Ultra-
Small Company Portfolio (only), shareholders of both
ultra-small company portfolios should expect significantly
higher short-term price volatility than that experienced
by shareholders of most other funds. The Adviser believes
these Portfolios are more appropriate as a long term
investment (at least 5 years, but ideally 10 years or
more) for shareholders who can accommodate short-term
price volatility, or as a diversifier to a portfolio
consisting primarily of larger stocks. They are not
appropriate investments for short-term investors or those
trying to time the market. (See "Frequent Trading of Fund
Shares" on page 20.)
The Micro-Cap Limited Portfolio invests a majority of
total assets in the common stock of micro-cap companies.
"Micro-cap companies" are defined here as those with
market capitalization the size of the second smallest 10%
of those listed on the New York Stock Exchange. As of
June 30, 1998 these were companies (including those on the
American Exchange and NASDAQ) with market capitalization
between $124 and $252 million. The market price of micro-
cap company shares may exhibit much greater volatility
than large company shares.
On the downside, companies this small may have limited
resources for expanding or surviving in a newly
competitive environment, may lack depth of management, may
have a limited product line, may lack market "muscle," and
may be more sensitive to economic downturns. On the
upside, such companies may be more maneuverable in the
marketplace, less bureaucratic, may respond quicker to
changing market forces, may see a successful product add
<PAGE>
<TABLE>
BRIDGEWAY FUND, INC. FINANCIAL HIGHLIGHTS
[For a share outstanding throughout the period]
Ultra-Small Company
Aggressive Growth
Portfolio
Portfolio
Year Year Year 8/5/94* Year
Year Year 8/5/94*
Ended Ended Ended to Ended
Ended Ended to
6/30/98 6/30/97 6/30/96 6/30/95
6/30/98 6/30/97 6/30/96 6/30/95
<S> <C> <C> <C> <C> <C>
<C> <C> <C>
PER SHARE DATA
Net Asset Value
Beginning of period $20.62 $16.68 $11.35 $10.33
$18.79 $16.66 $11.71 $9.89
Income (Loss) from investment
Operations
New investment income (loss) (0.34) (0.24) (0.21) (0.04)
(0.30) (0.24) (0.18) (0.02)
New realized and unrealized gain 4.03 4.50 6.03 1.07
3.46 3.43 5.22 1.84
Total from investment operations 3.69 4.26 5.82 1.03
3.16 3.19 5.04 1.82
Less distributions to shareholders
Net investment income 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00
Net realized gains (1.79) (0.32) (0.49) (0.01)
(1.63) (1.06) (0.09) 0.00
Total distributions (1.79) (0.32) (0.49) (0.01)
(1.63) (1.06) (0.09) 0.00
New asset value, end of period $22.52 $20.62 $16.68 $11.35
$20.32 $18.79 $16.66 $11.71
TOTAL RETURN [1] 18.4% 26.0% 52.4% 10.5%
18.1% 19.9% 43.3% 19.5%
RATIOS & SUPPLEMENTAL
DATA
Net assets,end of period (in 000s) $46,257 $30,070 $4,558 $668
$6,852 $3,420 $1,502 $276
Ratio to average net assets: [2]
Expenses after waivers and
reimbursements 1.67% 1.67% 1.97% 1.68%
2.00% 2.00% 1.97% 1.86%
Expenses before waivers and
reimbursements 1.67% 1.87% 3.07% 8.34%
2.00% 2.77% 5.73% 16.15%
New investment income (loss)
After waivers and reimbursements (1.42%) (1.37%) (1.47%) (0.65%)
(1.50%) (1.40%) (1.26%) (0.30%)
Commission Cost/Share $0.0082 $0.0097
$0.0100 $0.0135
Portfolio Turnover Rate [2] 103.4% 56.2% 155.9% 103.6%
132.3% 138.9% 167.7% 139.9%
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* August 5, 1994 was commencement of operations
See accompanying notes to financial statements.
The data set forth above has been audited by
PricewaterhouseCoopers LLP, Independent Accountants, and
the their report is included in the Annual Report to
shareholders which annual reports are included in the
Statement of Additional Information. For further
information about the performance of the fund, refer to
the financial statements caption of the Statement of
Additional Information.
</TABLE>
<PAGE>
<TABLE>
Social Responsibility Ultra-
Small Index Ultra-Large 35
Portfolio
Portfolio Index Portfolio
Year Year Year 8/5/94*
7/31/97** 7/31/97**
Ended Ended Ended to
to to
6/30/98 6/30/97 6/30/96 6/30/95
6/30/98 6/30/98
<S> <C> <C> <C> <C>
<C> <C>
PER SHARE DATA
Net Asset Value
Beginning of period $16.21 $14.68 $11.61 $9.85
$5.00 $5.00
Income (Loss) from investment
Operations
New investment income (loss) 0.00 0.03 (0.02) 0.07
(0.02) 0.07
New realized and unrealized gain 5.57 2.31 3.11 1.70
0.71 1.03
Total from investment operations 5.57 2.34 3.09 1.77
0.69 1.10
Less distributions to shareholders
Net investment income (0.01) 0.00 (0.02) (0.01)
0.00 0.00
Net realized gains (0.63) (0.81) 0.00 0.00
0.00 0.00
Total distributions (0.64) (0.81) (0.02) (0.01)
0.00 0.00
New asset value, end of period $21.14 $16.21 $14.68 $11.61
$5.69 $6.10
TOTAL RETURN [1] 35.3% 16.9% 26.6% 18.9%
13.8% 22.0%
RATIOS & SUPPLEMENTAL
DATA
Net assets,end of period (in 000s) $1,473 $638 $361 $64
$1,529 $386
Ratio to average net assets: [2]
Expenses after waivers and
reimbursements 1.50% 1.50% 1.48% 1.46%
0.75% 0.15%
Expenses before waivers and
reimbursements 3.81% 5.81% 16.80% 72.83%
1.74% 9.73%
New investment income (loss)
After waivers and reimbursements 0.02% 0.24% (0.17%) 0.90%
(0.38%) 1.47%
Commission Cost/Share $0.0252 $0.0090
$0.0091 $0.0110
Portfolio Turnover Rate [2] 37.8% 35.5% 83.8% 71.7%
61.7% 64.3%
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* August 5, 1994 was commencement of operations.
** July 31, 1997 was commencement of operations.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
more to "the bottom line" in percentage terms, and when
they survive an economic downturn, may "bounce back"
faster.
While the Adviser attempts to limit some of the downside
volatility inherent in this asset class in the Micro-Cap
Limited Portfolio, shareholders should expect
significantly higher short-term price volatility than that
experienced by shareholders of most other funds. The
Adviser believes this Portfolio is more appropriate as a
long term investment (at least 5 years, but ideally 10
years or more) for shareholders who can accommodate short-
term price volatility, or as a Diversifier to a portfolio
consisting primarily of larger stocks. It is not an
appropriate investment for short-term investors or those
trying to time the market. (See "Frequent Trading of Fund
Shares" on page 20.)
The Aggressive Growth and the Social Responsibility
Portfolios may 1) borrow money from banks up to 50% of the
net assets of the respective portfolios, and 2) purchase
and sell futures and options on stock, index, interest
rate and currency instruments, among others (see below for
more details). Using borrowed funds for investment
purposes is called "leveraging" and increases the risk of
loss or gain in the value of the Fund's assets and the net
asset value of its shares. The Ultra-Large 35 Index
Portfolio may likewise borrow from banks, but only for the
purpose of making short-sales "against the box" (short-
sales of securities owned). This would happen only in the
event a redemption would otherwise cause a distribution of
capital gains. The Aggressive Growth Portfolio's higher
turnover (more frequent trading) will expose it to
increased cost and risk.
The Aggressive Growth Portfolio may also purchase
warrants, invest up to 5% of its assets in the securities
of new issues or "unseasoned issues" which have been in
operation less than three years, engage in short-term
trading, invest up to 10% of its assets in foreign
securities and American Depository Receipts (ADRs) listed
on American exchanges, invest any amount less than 25% of
its portfolio in a single security, invest up to 5% of
portfolio assets in a closed-end investment company, lend
portfolio securities and engage in short sale transactions
either against the box or by shorting securities of other
issuers. The Social Responsibility Portfolio may purchase
the same type of securities and utilize the same
investment techniques, except that it will only enter into
short sale transactions against the box, will not invest
in closed- end investment companies, and will not lend
portfolio securities. Please see "Summary of Investment
Techniques Used" on page 12 for more details on the Ultra-
Small Company, Ultra-Small Index, and Micro-Cap Limited
Portfolios. These investment techniques may subject an
investor to greater than average risks and costs.
Foreign securities may be affected by the strength of
foreign currencies relative to the U.S. dollar, or by
political or economic developments in foreign countries.
Consequently, they may be more volatile than U.S.
securities. Short sale transactions, while limited to 20%
of total assets and fully collateralized, also represent
potentially higher risk for Aggressive Growth
shareholders, since the maximum gain is 100% of the
initial collateralized amount, but there is no theoretical
maximum loss. The Aggressive Growth portfolio will
maintain cash reserves ("100% coverage") equal to the
market value of any short positions for which it does not
already own shares. These cash reserves may be invested
in money market or short term Treasury securities held by
the Fund's custodian or broker or both. Shareholders of
the Aggressive Growth, Ultra-Small Index, Micro-Cap
Limited, and Ultra-Large 35 Index Portfolios could also
bear higher risk through the lending of securities. If
the borrowing broker failed to perform, the Portfolio
might experience delays in recovering its assets (even
though fully collateralized); the Portfolio would bear the
risk of loss from any interim change in securities price.
Collateral for securities lent will be invested in money
market or
<PAGE>
short-term Treasury securities.
Although Bridgeway Capital Management, Inc. (hereinafter
referred to by name, as the "Manager" or the "Adviser"),
believes that the investment techniques it employs to
manage risk in the Aggressive Growth and Social
Responsibility Portfolios will further the Portfolios'
investment objectives and reduce losses that might
otherwise occur during a time of general decline in stock
prices, no assurance can be given that these investment
techniques will achieve this result. The hedging
techniques used here would reduce losses during a time of
general stock market decline, if the Fund had previously
sold futures or bought puts on stock indices or entered
into short
positions in individual securities offsetting some portion
of the market risk. Thus, these Portfolios are
appropriate investments only for investors who understand
the investment practices to be employed by the Adviser and
are able to accept the potential risks. The Adviser
manages no other registered investment company.
The Adviser intends to buy and sell futures, calls, and/or
puts in the Aggressive Growth and Social Responsibility
Portfolios to increase or decrease portfolio exposure to
stock market, interest rate, and currency market risk as
indicated by statistical models of risk. (The Fund will
not sell "uncovered" calls.) The Adviser will use these
instruments to attempt to maintain a more constant level
of risk as measured by certain statistical indicators. In
addition to the use of futures and options as described
above, the Aggressive Growth Portfolio may buy or sell any
financial or commodity futures, calls, or puts listed on
the major exchanges (CBOT, CME, COMEX, IMM, IOM, KCBT, MA,
NYSCE, NYCTE, NYFE, or NYME), for purposes of
diversification of risk to the extent that the aggregate
initial margins and premiums required to establish such
nonhedging positions do not exceed 5% of its total net
assets. Examples of such financial or commodity
instruments include the Bond Buyer Municipal Index,
British Pounds, crude oil, gold, and wheat among others.
Options and futures can be volatile investments and may
not perform as expected. Potential risks associated with
options and futures include 1) leverage risk (these
instruments are designed to produce substantial value
change relative to the amount invested, thus magnifying
the risk of loss as well as potential gains), 2)
dependence on the Adviser's ability to correctly predict
market movement, 3) imperfect correlation between the
price of options and futures contracts and the underlying
securities being hedged, 4) the possibility of trading
halts in options and futures, 5) the possible need to
defer closing out certain hedged positions to avoid
adverse tax consequences, and 6) increased complexity of
futures and options, requiring a higher level of training
for the portfolio manager and support personnel.
The Adviser's goal in the Aggressive Growth and Social
Responsibility Portfolios is to manage these various risks
through diversification and hedging strategies to achieve
a reasonable return at a total risk equal to or less than
that of the stock market (as measured by certain
statistical measures over periods of three years or more).
(Hereinafter, "stock market" will mean stock market as
represented by the Standard & Poor's Composite Stock 500
Index with dividends reinvested.) No assurance can be
given that these investment techniques will achieve the
objectives of higher return or equal risk.
A Portfolio's possible need to sell securities to cover
redemptions could, at times, force it to dispose of
positions on a disadvantageous basis. This is especially
true for the Ultra-Small Index, Micro-Cap Limited and
Aggressive Growth Portfolios.
The Ultra-Large 35 Index Portfolio invests on a roughly
equal dollar weighting in the 35 large capitalization
stocks which comprise the Bridgeway Ultra-Large 35 Index.
(See "Investment Objectives and Policies" on page 8 for a
description of the Index.) While large companies tend to
exhibit less short-term price volatility than small
stocks, historically they have
<PAGE>
not recovered as fast from a market decline.
Consequently, the Ultra-Large 35 Index Portfolio may
result in higher long term inflation risk (the risk that
the portfolio value will not keep up with inflation) than
the ultra-small portfolios.
INVESTMENT OBJECTIVES AND POLICIES
Bridgeway Fund, Inc. ("the Fund") is a no-load,
diversified open-end investment company or "mutual fund."
The Fund is organized as a "series" fund and has six
investment portfolios, the Bridgeway Ultra-Small Company
Portfolio, the Bridgeway Ultra-Small Index Portfolio, the
Bridgeway Micro-Cap Limited Portfolio, the Bridgeway
Aggressive Growth Portfolio, the Bridgeway Social
Responsibility Portfolio and the Bridgeway Ultra-Large 35
Index Portfolio.
The Ultra-Small Company and Ultra-Small Index Portfolios
seek to provide total return (primarily capital
appreciation) by investing at least 80% of total portfolio
assets in very small companies. The Ultra-Small Company
Portfolio is actively managed, while the Ultra-Small Index
Portfolio invests passively in companies which comprise
the CRSP Cap-Based Portfolio 10 Index. (This index is more
fully described in the following paragraph.) For the
purpose of measuring the 80% requirement, "very small
company" will mean companies with market capitalizations
less than the upper limit of the smallest 10% of the New
York Stock Exchange (NYSE). As of June 30, 1998 this
upper limit is represented by companies of less than $124
million market capitalization, but will fluctuate with
market prices. When investing or reinvesting portfolio
funds, the investment adviser will not purchase the
securities of companies larger than this limit unless at
least 80% of the portfolio funds invested after such
purchase would be invested in very small companies. The
Ultra-Small Company and Ultra-Small Index Portfolios may
invest up to 5% of its assets in the securities of
"unseasoned issuers" which have been in operation less
than three years. The Ultra-Small Company Portfolio may
also invest up to 10% of its assets in foreign securities
and ADRs listed on American exchanges. The annual
portfolio turnover rate should normally be less than 150%
for the Ultra-Small Company Portfolio and less than 30%
for the Ultra-Small Index Portfolio, but the Index
Portfolio may be higher during the first two years of
operations as assets build significantly.
At a shareholder meeting on October 15, 1996, the Ultra-
Small Company Portfolio shareholders voted 1) to close the
Ultra-Small Company Portfolio to new investors any time
net assets exceed $27.5 million, 2) to allow these
shareholders to invest an additional amount equal to their
previous net contributions for an extended period (now
determined to be through June 30, 1998), and 3) to allow
employees, directors, and participants in the pension plan
of the Adviser or of the Fund to purchase any unsubscribed
shares in item 2 or shares redeemed in the Portfolio.
Restricting the number of shares outstanding will keep
Portfolio assets small and will help to ensure that the
Portfolio may remain actively invested in very small
companies which the investment Adviser believes offer good
investment opportunities. See "Security
Selection Process" for more details of the security
selection process.
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. This Index is comprised of all common stocks
listed on the New York and American Stock Exchanges, and
the Nasdaq National Market (excluding unit investment
trusts, closed-end funds, real estate investment trusts,
americus trusts, foreign stocks, and American Depository
Receipts) which are the size (market capitalization) of
stocks in the smallest 10% of the New York Stock Exchange.
No other index or passively managed
<PAGE>
mutual fund is based on an index of companies this small.
Similar to other index funds, the actual return of this
portfolio will likely underperform the Index by an amount
equal to the Portfolio expenses and transaction costs.
The Adviser seeks to minimize this difference or "tracking
error" by carefully managing costs, reimbursing expenses
over 0.75% annually if necessary, keeping portfolio
turnover to a minimum, strongly discouraging market timers
and short term traders from investing in the portfolio,
and by the redemption fees outlined under "Redemption
Reimbursement Fees" on page 13. Because of the higher
expense ratio, higher transaction costs, and investments
in only a representative sample of index companies, the
tracking error of this Portfolio will likely be
significantly greater than that of the Ultra-Large 35
Index Portfolio. Several percentage points above or below
the CRSP Index would not be unusual during a given
quarter. (The performance of the Ultra-Small Index
Portfolio exceeded that of the index by 3.4% in its first
fiscal year ended June 30, 1998.) This component of
"tracking error" should decline as the number of stocks
held by the Portfolio grows.
The Adviser will consider market capitalization,
industry/sector representation and certain economic
factors (such as price to earnings ratios) when choosing
companies to add to the Portfolio. As a passively managed
Portfolio, the Adviser will generally consider selling a
security in four circumstances only. First, the Adviser
will consider selling the highest capitalization companies
in the Ultra-Small Index Portfolio when necessary to keep
the average market capitalization of the Portfolio equal
to that of the CRSP Cap-Based Portfolio 10 Index. Second,
the Adviser may sell Portfolio securities to realize a
capital loss (offsetting a portion of portfolio gains)
when this is possible at a price equal to or higher than
the midpoint between the quoted bid and ask securities
prices. Thus, the Adviser may engage in "tax management"
of this Portfolio, when it appears to be without detriment
to shareholders of non-taxable accounts. This practice
will increase the portfolio turnover. Third, the Adviser
may sell a security which is delisted or no longer meets
the listing requirements of the New York Stock Exchange,
American Stock Exchange, or NASDAQ National Market. Thus,
the Adviser may sell a company which is no longer in the
CRSP Index, or which it expects to be deleted from the
CRSP Index. Fourth, the Adviser may sell securities to
raise cash for redemptions. The Adviser aggressively
employs trading techniques to minimize or eliminate the
cost and disruption to the Portfolio of any selling
activity, although it may not be successful in this regard
in all market environments. The Adviser also strongly
discourages shareholders from market timing and panic
selling in a declining market, thus minimizing the need to
sell portfolio securities to meet redemptions.
The Micro-Cap Limited Portfolio seeks to provide total
return (primarily capital appreciation) by investing at
least 80% of total portfolio assets in micro-cap
companies. For this purpose, "micro-cap companies" means
companies with market capitalization the size of the
second smallest 10% of those listed on the New York Stock
Exchange. As of June 30, 1998, these were companies
(including also those on the American Exchange and NASDAQ)
with market capitalization between $124 and $252 million.
When investing or reinvesting portfolio funds, the
investment adviser will not purchase the securities of
companies larger than this upper limit ($252 million as of
recently) unless at least 80% of the portfolio funds
invested after such purchase would be invested in micro-
cap companies. The Portfolio will not generally invest in
ultra-small companies (those the size of the smallest 10%
of the New York Stock Exchange), as Bridgeway Ultra-Small
Company Portfolio will have the right of first refusal to
buy these companies.
<PAGE
The Micro-Cap Portfolio may invest up to 5% of its assets
in the securities of "unseasoned issuers" which have been
in operation less than three years. The Portfolio may
also invest up to 10% of its assets in foreign securities
and ADRs listed on American exchanges. The annual
portfolio turnover rate should normally be less than 150%.
Bridgeway Micro-Cap Limited Portfolio will close to new
investors when net assets reach $27.5 million and will
only reopen if net assets decline below this level. The
portfolio will close to all investments whenever net
assets exceed $55 million.
The Aggressive Growth Portfolio seeks to exceed the stock
market total return (primarily capital appreciation but
also income) at a level of total risk roughly equal to
that of the stock market over longer periods of time
(three years or more). While the portfolio may hold some
higher dividend paying stocks, it is expected that the
Portfolio will normally have a dividend yield of less than
the stock market as a whole. Thus, investors seeking
income as a major portion of total return should not
invest in this portfolio. There can, of course, be no
assurance that the objective of total return or level of
risk will be realized. This Portfolio may use bank debt
primarily for leverage. Therefore, full consideration
should be given to the risks inherent in the investment
techniques that the Adviser may use as outlined in _Risk
Factors._ Normally, the Portfolio will invest in common
stocks at a level equal to at least 100% of its net
assets. Portfolio exposure to market risk will vary over
time. Using hedging strategies, the Portfolio exposure to
market risk may be negatively correlated to the market, or
may be as high as 150% of the market as measured by the
estimated portfolio beta. "Negative correlation to the
market" means that if the market goes up, the value of the
portfolio goes down. A portfolio beta of 150% means that
a 1% increase (decrease) in the stock market should result
in a 1.5% increase (decrease) in the portfolio. These
hedging strategies are intended to maintain a more
constant level of total risk. For example, if the
investment adviser feels the portfolio is exposed to an
unusually high probability of general stock market
decline, it might sell stock
index futures to offset this risk.
The portfolio turnover rate (buying and selling frequency)
will likely be higher than 100% but no more than 500%,
which is higher than most aggressive growth funds. A 500%
portfolio turnover is equivalent to the sale and
repurchase of all of the securities in the portfolio five
times during the year. Consequently, the Portfolio may
incur higher than average trading costs and may incur
higher shareholder taxes for non-tax deferred accounts.
In summary, this Portfolio seeks to exceed the stock
market total return at a level of total risk roughly equal
to the stock market over longer periods of time. Due to
the possibility of a decline in total value, this
Portfolio is not an appropriate investment for short term
investors or those who cannot assume the inherent risks.
See "Security Selection Process" for more details of the
security selection process. No form of fundamental or
technical analysis, including that employed by the
Adviser, has been proven conclusively to provide a risk
adjusted excess rate of return on a consistent basis.
The Social Responsibility Portfolio seeks to exceed the
stock market total return (primarily capital appreciation
but also income) at a level of total risk roughly equal to
or less than that of the stock market over longer periods
of time (three years or more) by investing in companies
with social criteria generally in line with those of its
shareholders as determined by survey. Each shareholder is
entitled and encouraged to participate in this survey by
submitting a survey form when opening a new account or
anytime thereafter by requesting a new form from the Fund.
The Adviser presently ranks about 650 companies according
to the following criteria measured by the Council of
Economic Priorities ("CEP"): the company's environmental
<PAGE>
record, charitable giving record, advancement of
minorities in the workforce, community outreach, family
benefits, workplace issues, animal testing and disclosure
of information. With the exception of military contracts
and animal testing, "more" is understood to mean "better."
The CEP is a New York City based not-for-profit public
interest research organization that has conducted research
in the field of corporate social responsibility for more
than two decades.
After determining shareholder weights (proportional to the
number of Portfolio shares owned) of each of these
criteria, the Adviser ranks each of these companies.
Thus, the rankings should proportionally reflect the
weightings of each surveyed shareholder, and could
consequently change over time. The Fund invests at least
65% of its total assets in the companies in the top fifth
of the ranking and at least 95% of its common stock
investments in the companies contained in the top half of
the ranking. The Adviser monitors CEP company ratings
quarterly, or as they become available. The social
criteria may change in the future as a result of the
majority vote of the Fund's Board of Directors, or as more
or different information is made available to the Adviser.
The Adviser currently supplements CEP research with its
own research on other companies using the same 10 social
criteria. The Adviser excludes or sells companies from the
portfolio which a majority of surveyed shareholders choose
to exclude. As of the date of this prospectus, the
Adviser excludes companies in the tobacco and defense
industries. This Portfolio may use bank debt for leverage
and index futures and stock and index options to hedge
market risk. Using hedging strategies, the Portfolio's
exposure to market risk may be as low as 50% of the
market, or as high as 150% of the market as measured by
the estimated portfolio beta. A portfolio beta of 150%
means that a 1% increase (decrease) in the stock market
should result in a 1.5% increase (decrease) in the
portfolio. While somewhat highter in the first two years
of operations, the turnover rate of this portfolio should
normally be 50% or less on an annual basis in the future.
In summary, this Portfolio seeks to exceed the stock
market total return, at a level of total risk roughly
equal to or less than the stock market over longer periods
of time, by investing in companies with social criteria
generally in line with those of its shareholders. There
can be no assurance that any of the Portfolio's objectives
will be realized. No form of fundamental or technical
analysis, including that employed by the Adviser, has been
proven conclusively to provide a risk adjusted excess rate
of return on a consistent basis. Therefore, full
consideration should be given to the risks inherent in the
investment techniques that the Adviser may use as outlined
in "Risk Factors." See "Security Selection Process" for
more details of the security selection
process.
The Ultra-Large 35 Index Portfolio (hereinafter the
"Portfolio") seeks to meet the total return of the
Bridgeway Ultra-Large 35 Index while minimizing the
distribution of capital gains and minimizing costs. This
proprietary index (hereinafter the "Index") is comprised
of the 35 largest U.S. domestic equities as of June 27,
1997, after excluding a tobacco company and ensuring
reasonable industry diversification. (See the list of
companies in the following paragraph.) Consequently, this
diversified Portfolio will invest in securities of
companies larger (on average) than any other index mutual
fund available as of this prospectus date. Future changes
in the Index will be made with a view toward distributing
no capital gains (first priority) and maintaining very
large company size (second priority). Low turnover is
essential to minimize the tax burden associated with
capital gains in taxable accounts. While composition of
the Index is the absolute, sole responsibility of
Bridgeway Capital Management, Inc., any potential changes
would be preceded by an informal (but not necessarily
statistically significant) survey of Portfolio
shareholders. A
<PAGE>
company will be completely removed from the Index if both
(a) it is no longer one of the largest 35 U.S. companies
(as described above) and (b) if it would not create a
capital gain. If a company is no longer one of the 35
largest U.S. companies, but has appreciated in price, it
will remain as a "dormant company" in both the Index and
the Portfolio. New Portfolio inflows will not be invested
in a dormant company; a dormant company's representation
in the Index will decline over time. New net Portfolio
inflows are invested in such a way as to maintain a
roughly equal dollar weighting of the 35 "active" (not
"dormant") companies in the Index. Composition of this
Index is thus maintained with taxable shareholders in
mind.
The following 35 companies comprise the Bridgeway Ultra-
Large 35 Index as of July 1997. General Electric, Coca
Cola, Microsoft, Exxon, Merck, Intel, Proctor & Gamble,
International Business Machines, Johnson & Johnson,
Bristol Myers Squibb, Pfizer, Wal Mart Stores, American
International Group, DuPont E.I. DeNemours, AT&T, Pepsico,
Citicorp, Hewlett Packard, SBC Communications, Mobil, Walt
Disney, Gillette, Chevron, Nationsbank, Bankamerica,
Fannie Mae, Ford, Motorola, Cisco, GTE, Oracle, General
Motors, McDonalds, Bell Atlantic and Worldcom.
Similar to other index funds, the actual return of this
portfolio will likely underperform the Bridgeway Ultra-
Large 35 Index by an amount equal to the Portfolio
expenses and transaction costs. The adviser seeks to
minimize this difference or "tracking error" by carefully
managing costs, reimbursing expenses over 0.15% annually
if necessary, keeping Portfolio turnover and transaction
expenses to a minimum, strongly discouraging market timers
and short term traders from investing in the Portfolio,
and by the redemption fee outlined under "Redemption
Reimbursement Fee" (page 13). As a result of index
recomposition and some redemptions, the turnover for this
Portfolio should be less than 5% annually.
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENT TECHNIQUES USED:
ULTRA- ULTRA- MICRO- AGGRESSIVE
SOCIAL ULTRA-
SMALL SMALL CAP GROWTH
RESPON- LARGE
COMPANY INDEX LIMITED
SIBILITY 35INDEX
<S> <C> <C> <C> <C>
<C> <C>
Borrowing (leveraging) No No No Yes
Yes **
Hedging No No No Yes
Yes No
Options (stock index) No No No Yes
Yes No
Futures (stock index) * * * Yes
Yes No
Options (other) No No No Yes
No No
Futures (other) No No No Yes
No No
Short-sales No No No Yes
No No
Warrants No No No Yes
Yes No
Foreign companies/
ADRs Yes No Yes Yes
Yes No
Closed-end
investment companies No No No Yes
No No
Lending securities No Yes Yes Yes
No Yes
New issues/Unseasoned
companies Yes Yes Yes Yes
No No
High turnover Yes No Yes Yes
No No
Short-term trading Yes No Yes Yes
No No
</TABLE>
* THE ULTRA-SMALL COMPANY, ULTRA-SMALL INDEX AND MICRO-CAP
LIMITED PORTFOLIOS MAY ONLY TAKE TEMPORARY, LONG STOCK
INDEX FUTURES POSITIONS TO OFFSET THE EFFECT OF CASH HELD
FOR FUTURE INVESTING OR FOR POTENTIAL REDEMPTIONS. NO MORE
THAN 35% OF PORTFOLIO NET ASSETS WILL BE AT RISK IN THIS
LIMITED USE OF STOCK INDEX FUTURES.
** THE ULTRA-LARGE 35 INDEX PORTFOLIO WILL ONLY BORROW ON
A TEMPORARY BASIS FOR THE PURPOSE OF SELLING SHORT
"AGAINST THE BOX".
<PAGE>
SECURITY SELECTION PROCESS
In determining which securities to purchase for the
actively managed portfolios, the Adviser reviews potential
companies that meet its market capitalization, earnings
history, liquidity and other fundamental and technical
criteria and then analyzes this grouping from an industry
perspective. Because different industries have varying
risk and growth characteristics depending on prevailing
economic and market conditions, valuation considerations
vary. The Adviser invests in no tobacco companies. It is
expected that all or substantially all (more than 95%), of
the equity securities held by the Fund will trade on the
New
York and American Stock Exchanges, and NASDAQ.
The equity securities in which the Fund will invest
consist of common stocks, although the Fund reserves the
right to purchase securities having characteristics of
common stocks, such as convertible preferred stocks,
convertible debt securities or warrants, if such
securities are deemed to be significantly undervalued and
their purchase is appropriate in furtherance of each
Portfolio's objective as determined by the Adviser. The
rating of any convertible preferred stocks, convertible
debt, or other debt securities held by the Fund will be in
the highest three levels of "investment-grade," that is,
rated A or better by either Moody's Investors Service,
Inc. or Standard & Poor's Corporation, or, if unrated,
judged to be of equivalent quality as determined by the
Adviser. The Fund may also invest in the following debt
securities: 1) those which are direct obligations of the
U.S. Treasury (e.g. Treasury bonds or bills), 2) those
supported by the full faith and credit of the United
States (e.g. "GNMA" certificates) and 3) those supported
by the right of the issuer to borrow from the U.S.
Treasury (e.g. "FNMA" securities).
It is expected that short-term money market securities
would normally represent less than 10% of the Fund's total
assets. However, in the event future economic or
financial conditions adversely affect equity securities of
the type described above, the Fund may take a temporary,
defensive investment position and invest all or part of
its assets in such short-term money market securities.
These short-term instruments include securities issued or
guaranteed by the U.S. Government and agencies thereof.
DISCLAIMERS--CENTER FOR RESEARCH IN
SECURITY PRICES
Bridgeway Ultra-Small Index Portfolio is not sponsored,
sold, promoted, or endorsed by University of Chicago's
Center for Research in Securities Prices (CRSP), the
organization which created and maintains the CRSP Cap-
Based Portfolio 10 Index. CRSP makes no representation or
warranty, express or implied, about the advisability of
investing in securities generally, or in any Bridgeway
Fund portfolio specifically. CRSP has no obligation or
liability with respect to the Fund portfolio or its
shareholders.
REDEMPTION REIMBURSEMENT FEE
In order to minimize transaction costs and the negative
tax consequences (for taxable accounts) of high turnover,
the Board of Directors may impose a 2% redemption
reimbursement fee for index portfolio shareholders who
redeem in a down market. Specifically, this fee may be
imposed any time the S&P 500 Index (without dividends) has
declined more than 5% over the previous 5 trading days.
The adviser believes this redemption reimbursement fee
will discourage potential shareholders who would engage in
panic selling which increases transaction costs and
capital gains distributions.
PRINCIPAL INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restric-
<PAGE>
tions which are fundamental policies that cannot be
changed without the approval of a majority of the Fund's
outstanding voting securities (as defined in the
Investment Company Act of 1940, referred to as the "1940
Act").
Each Portfolio's investment objective is such a
fundamental policy. In addition, as a matter of
fundamental policy, (1)at least 75% of each portfolio's
total assets are limited in respect of any one issuer to
an amount not greater in value than 5% of the value of the
total assets of the portfolio and to not more than 10% of
the outstanding voting securities of such issuer and (2)
no portfolio may borrow money except from banks for
temporary or emergency purposes in amounts not exceeding
10% of the Fund's net assets. However, the Aggressive
Growth and Social Responsibility Portfolios may borrow
money for investment purposes up to 50% of net assets
prior to such borrowing as described earlier.
Additional information about the Fund's fundamental
policies and other investment restrictions is contained in
the Statement of Additional Information.
In addition, the Fund's operating policies preclude it
from making certain investments if thereafter more than
10% of the value of its net assets would be so invested.
The investments included in this 10% are (1) those which
are restricted, i.e. those which cannot freely be sold for
legal reasons (which the Fund does not expect to own); and
(2) investments for which market quotations are not
readily available (which the Fund does not expect to own).
MANAGEMENT OF THE FUND
The Fund's Board of Directors decides on matters of
general policy and reviews the activities of the Fund's
Adviser, and the Fund's officers conduct and supervise its
daily business operations. Bridgeway Capital Management,
Inc. (the "Adviser"), 5615 Kirby Drive, Suite 518,
Houston, Texas 77005-2448, acts as the investment adviser
to the Fund, subject to the control of the Fund's Board of
Directors. The Adviser is a Texas corporation that was
organized in 1993 to act as the Fund's investment adviser.
The Adviser is controlled by its President John N. R.
Montgomery and his family. From 1985 to 1992 Mr.
Montgomery gained extensive experience managing his own
investment portfolio utilizing the techniques that he uses
in managing the Portfolios of the Fund. Mr. Montgomery is
solely responsible for managing the assets of the Funds
and selecting the securities that each Portfolio will
purchase and sell, although he will be assisted by other
employees who will provide him with research assistance.
He has earned graduate degrees from both the Massachusetts
Institute of Technology and Harvard Graduate School of
Business Administration. Mr. Montgomery has been a
research engineer/project manager at the Massachusetts
Institute of Technology, has served as an executive with
transportation agencies in North Carolina and Texas, and
founded Bridgeway Capital Management, Inc. in
July, 1993.
The Adviser is responsible for the investment and
reinvestment of the Fund's assets, provides the Fund with
executive and other personnel, office space and other
facilities and administrative services, and supervises the
Fund's daily business affairs. It formulates and
implements a continuous investment program for the Fund,
consistent with the investment objectives, policies and
restrictions of each of its Portfolios. Under the
Management Contract with the Adviser, the Ultra-Small
Company and Micro-Cap Limited Portfolios pay the Adviser a
flat 0.9% annual management fee, the Ultra-Small Index
Portfolio pays a flat 0.5% annual fee, and the Ultra-Large
35 Index Portfolio pays a 0.08% annual fee, computed daily
and payable monthly. However, the fee for the Ultra-Small
Company and Micro-Cap Limited Portfolios during the period
that the net assets range from $27.5 to $55 million will
be paid as if the Portfolios had $55 million
<PAGE>
GRAPH:
AGGRESSIVE GROWTH & SOCIAL RESPONSIBILITY PORTFOLIO
SAMPLE TOTAL MANAGEMENT FEES
(BASED ON RELATIVE FUND PERFORMANCE)
FUND PERFORMANCE TOTAL MANAGEMENT
RELATIVE TO S&P 500 FEE
21.0% 1.60%
18.0% 1.60%
15.0% 1.60%
12.0% 1.46%
9.0% 1.32%
6.0% 1.18%
3.0% 1.04%
2.0% .90%
0.0% .90%
-2.0% .90%
-3.0% .76%
-6.0% .62%
-9.0% .48%
-12.0% .34%
-15.0% .20%
-18.0% .20%
-21.0% .20%
MICRO-CAP LIMITED PORTFOLIO
SAMPLE TOTAL MANAGEMENT FEES*
(BASED ON RELATIVE FUND PERFORMANCE)
FUND PERFORMANCE TOTAL MANAGEMENT
RELATIVE TO CRSP INDEX FEE
35.00% 1.60%
30.00% 1.60%
25.00% 1.60%
20.00% 1.46%
15.00% 1.32%
10.00% 1.18%
5.00% 1.04%
2.00% 0.90%
0.00% 0.90%
-2.00% 0.90%
-5.00% 0.76%
-10.00% 0.62%
-15.00% 0.48%
-20.00% 0.34%
-25.00% 0.20%
-30.00% 0.20%
-35.00% 0.20%
<PAGE>
under management (that is $55 million times .009 equals
$495,000), subject to a maximum 1.49% annual rate. In
addition, the total expense ratio of each of these two
Portfolios is subject to a 1.9% maximum cap. The Ultra-
Small Company and Micro-Cap Limited Portfolio fees are
higher than the fee paid by most investment companies to
their Adviser, but lower than the average of new "micro-
cap" funds. The board of directors has determined that
this fee structure is appropriate for these "very small-
cap" and "micro-cap" funds and their "ultra-small" and
"micro-cap" charters.
The Aggressive Growth, Social Responsibility and Micro-Cap
Limited Portfolios of the Fund pay the Adviser a base
annual management fee, computed daily and payable monthly
of 0.90% of the Fund's average daily net assets (also
higher than that paid by most investment companies). The
Aggressive Growth and Social Responsibility Portfolio base
fees will be adjusted upwards or downwards by 4.67% of the
difference between the investment performance of each
Portfolio and the investment performance of the Standard &
Poor's Composite 500 Stock Index (hereinafter, the
"Index") over a five year rolling period of time. The
Micro-Cap Limited Portfolio base fee will be adjusted
upward or downward by 2.80% of the difference between the
investment performance of the Portfolio and the investment
performance of the CRSP Cap-Based Portfolio 9 Index of
similar size companies. No performance fee adjustment
will be made when the performance difference is less than
or equal to 2%. The performance adjustment rate will
range from -.7% to +.7%. Thus, depending on portfolio
performance, the Aggressive Growth, Social Responsibility
and Micro-Cap Limited Portfolios could pay a total annual
advisory fee as low as 0.2% (among the lowest in the
industry) or as high as 1.6% (among the highest in the
industry). In accordance with the graph and table on page
15, a Portfolio could pay a higher fee when both the
Portfolio's performance and the corresponding index
performance are negative (e.g. if the Fund performance
were -10%, but the corresponding index performance were -
13%); also the Fund could pay a lower fee when both
performances were positive (e.g. if the Fund performance
was +10% but the corresponding index performance was
+13%).
Since the Fund does not have a five year operating
history, the performance rate adjustment will be
calculated as follows during the remainder of the initial
five year period of operations through September 30, 1999.
From June 30, 1994 through Sept. 30, 1999, the performance
rate adjustment fee will be calculated based upon a
comparison of the investment performance of each Portfolio
and the Index over the number of quarters that have
elapsed since the Fund began operations. (The performance
rate adjustment fee will not apply to the Micro-Cap
Limited Portfolio until July 1, 1999.) Each time the
performance adjustment fee is calculated, it will cover a
longer time span, until it can cover a running five year
period as intended. In the meantime, the early months of
the transition period will have a disproportionate effect
on the performance adjustment of the fee. From July 1,
1997 to June 30, 1998, the Social Responsibility, Ultra-
Small Index and Ultra-Large 35 Index Portfolios waived
management fees of $1,950, $5,382 and $106.
In addition to the fees payable to the Adviser, the Fund
is responsible for its operating expenses, which include
such items as interest, taxes, legal and audit expenses,
and custodian and shareholder servicing agent fees. See
Statement of Additional Information for more information
as to the Fund's Board of Directors, Officers, the Adviser
and the Fund's operating expenses.
In placing orders for the Fund's portfolio transactions,
the Adviser's policy is to seek "best execution", i.e.
prompt and efficient execution at the most
<PAGE>
favorable price. In seeking to achieve this combination,
the Adviser evaluates factors such as the overall quality
and reliability of dealers and services they provide,
including general execution capability, reliability,
operational capacity and financial condition.
CODE OF ETHICS
Both the Fund and the Adviser subscribe to a mission
statement which places integrity above every other
business goal. The Fund portfolio manager is encouraged
to invest in shares of the Fund and is not allowed to
invest in shares of equity securities which the Fund might
also potentially own. Other employees, officers, and
directors of the Fund and the Adviser are also encouraged
to own shares of the Fund and may only trade shares of
equity securities within very stringent guidelines
contained in the Code of Ethics. Neither the Fund nor the
Adviser takes part in directed brokerage arrangements,
pays soft dollar commissions or has a brokerage
relationship with any affiliated organization. Copies of
the mission statement and Code of Ethics may be obtained
from the Fund. Any shareholder or potential shareholder
who feels a policy, action, or investment of the Fund or
Adviser does or may compromise the highest standards of
integrity is encouraged to call the Fund President
directly at 800-661-3550.
DISTRIBUTION OF FUND SHARES
Except for the Ultra-Small Company Portfolio, shares of
the other Fund portfolios are offered at their net asset
value without a sales charge as an investment vehicle for
individuals, institutions, fiduciaries and retirement
plans. The Fund reserves the right to reject any order.
The Adviser may make payments out of its capital or
profits of up to 0.25% of the average daily net assets
attributable to broker/dealers or registered
representatives including retirement plan consultants and
fund marketplaces, that provide assistance in the Fund's
efforts to distribute its shares. Such payments and any
other costs of distribution are made by the Advisor out of
its own resources. Any fee paid to fund marketplaces for
transfer agency costs (not distribution) will be paid by
the Fund itself. In accordance with Board policy, such
transfer agency cost will not exceed a rate equal to the
lesser of Bridgeway Fund's internal rate, or a rate
representative of the mutual fund industry average. Any
such distribution arrangement must be approved by a
majority of independent Fund directors. On October 15,
1996 shareholders approved a 12b-1 plan whereby the Fund
acts as its own distributor of its shares and the Adviser
pays all distribution expenses of the Fund.
HOW TO PURCHASE SHARES
New shareholders of the Fund may purchase shares on a "no-
transaction fee basis" through E*Trade (1-800-786-2575).
These purchases may be made by computer over the
"Internet," by touch tone phone or by voice response
system. For a $15 per transaction charge, they may also
be made through an E*Trade customer service
representative. These fees are subject to change without
notification by Bridgeway.
New shareholders may also purchase shares on a fee for
transaction basis through any fund marketplace that can
demonstrate a reasonably constant flow of investments.
Typical transaction fees range from $18 to $35, but do
vary and may change. Currently four fund marketplaces
have qualified under this plan: Ameritrade (1-800-669-
3900), Jack White (1-800-233-3411), Fidelity (1-800-544-
3902) and Waterhouse (1-800-934-4443).
<PAGE>
The minimum initial investment in any Fund Portfolio is
$2,000. The minimum subsequent investment is determined
by the fund marketplace. The Fund reserves the right to
reject any order.
<PAGE>
TAX SHELTERED RETIREMENT PLANS
Shares of the Fund may be purchased for various types of
retirement plans, including Individual Retirement Plans
(IRA's). For more complete information, contact the
marketplaces listed in the preceding section.
SUBSEQUENT PURCHASES BY BRIDGEWAY SHAREHOLDERS WHO
WERE OF RECORD PRIOR TO JUNE 5, 1998
Shareholders who bought shares of the actively managed
portfolios directly from the Fund before June 5, 1998, may
continue to make direct investments in any actively
managed Fund Portfolio subject to a minimum purchase of
$2,000 per portfolio and closing restrictions as outlined
elsewhere in this Prospectus. The minimum subsequent
investment is $500.
NET ASSET VALUE
The Fund's net asset value per share is determined on each
day that the New York Stock Exchange is open for trading,
as of the close of the Exchange (currently 4:00 p.m.
Eastern time). Purchase orders received or shares
tendered for redemption on a day the Exchange is open for
trading prior to the close of trading on that day will be
valued at the close of trading on that day. Application
for purchase of shares and requests for redemptions of
shares received after the close of trading on the Exchange
will be based on the net asset value as determined as of
the close of trading on the next day that the Exchange is
open. See "Redemption Reimbursement Fee" (page 13) for
important information on redemption fees for Ultra-Small
Index and Ultra-Large 35
Index Portfolios.
The net asset value per share of each Portfolio is the
value of the Portfolio's assets, less its liabilities,
divided by the number of shares of the Portfolio
outstanding. The value of the Fund's securities is
determined on the basis of the market value of such
securities. Short-term investments maturing in less than
60 days are valued at amortized cost unless the Board of
Directors determines that it does not represent a fair
value. See the Statement of Additional Information for
further information.
HOW TO REDEEM SHARES
Shareholders of fund marketplaces should contact those
marketplaces for redemption instructions. Bridgeway direct
shareholders wishing to redeem shares by telephone may do
so if appropriate information is supplied on the Account
Registration Form. You can redeem shares by calling the
Fund at 800-661-3550 (or in Houston 713-661-3265) prior to
the close of the New York Stock Exchange (currently 4:00
p.m. E.S.T.) to receive that day's price. The proceeds
may be sent by check to the address of record only or by
<PAGE>
wire transfer to your bank account of record only on the
next business day following your telephone request. Wire
transfers will incur a cost of $15 subtracted from the
proceeds.
Bridgeway direct shareholders wishing to redeem shares may
do so at any time by writing or delivering written
instructions in proper form to:Bridgeway Fund, Inc., 5615
Kirby Drive, Suite 518, Houston, TX 77005-2448.
Redemption requests by fax will not be accepted. The
signatures on written instructions to redeem shares must
be in the same name as the account shares, and must have a
medallion guarantee by a member of a national securities
exchange or a commercial bank. Most commercial banks are
now part of the medallion program, but not all. A
medallion signature guarantee is not the same as
notarization, and an acknowledgment by a notary public is
not an acceptable substitute. Additional documents may be
required from corporations or other organizations,
fiduciaries or anyone other than the shareholder of
record. Any questions concerning documents should be
directed to the Fund at 800-661-3550 (or in Houston at
713-661-3265).
The redemption request must specify the number of shares
or dollars to be redeemed and be signed by all registered
owners with signatures medallion guaranteed. The request
will not be accepted unless it contains all required
documents in proper form, as
described above. If the request is in proper form, the
shares specified will be redeemed at the net asset value
next determined after receipt of the request.
FREQUENT TRADING OF FUND SHARES
The Fund discourages frequent redemptions or using the
Fund as a short-term trading vehicle; it is intended for
long-term investors. Shareholders who make a practice of
frequent buying and selling of Fund shares may not be
permitted to make additional investments in the Fund. Two
times annually is considered frequent and includes
exchanges among portfolios.
PAYMENTS
Payment for shares redeemed normally will be made within
seven days of redemption and will be sent only to
shareholders at the record address. However, payment may
be delayed under unusual circumstances, as specified in
the 1940 Act or as determined by the Securities and
Exchange Commission. Payment may also be delayed for any
shares purchased by check for a reasonable time (not to
exceed 15 days from the purchase date) necessary to
determine that the purchase check will be honored.
Payment for redemptions above $250,000 may be made by
securities in kind.
REDEMPTION OF VERY SMALL ACCOUNTS
In order to reduce the Fund's expenses, the Board of
Directors is authorized to cause the redemption of all of
the shares of any shareholder whose account has declined
to a net asset value of less than $1,000, as a result of a
transfer or redemption, at the net asset value determined
as of the close of business on the business day preceding
the sending of proceeds of such redemption. The Fund will
give shareholders whose shares are being redeemed 60 days
prior written notice in which to purchase sufficient
shares to avoid such redemption.
<PAGE>
DIVIDENDS AND TAX STATUS
The Fund declares dividends from net investment income and
distributions from net capital gains annually and pays
such dividends and distributions, if any, after year end
or as otherwise required for compliance with Subchapter M
of the Internal Revenue Code. All dividends and
distributions in full and fractional shares of the Fund
will be reinvested based on the record date, unless the
shareholder notifies the Fund that dividends are to be
paid in cash.
The Fund expects to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies,
under which all taxable income is expected to be
distributed to shareholders. If so qualified, the Fund
will not be subject to federal income taxes on its net
investment income and capital gains, if any, realized
during any fiscal year which it distributes to its
shareholders, provided that at least 90% of its net
investment income earned in the fiscal year is
distributed. The Fund will be subject to a nondeductible
4% excise tax to the extent it does not distribute by the
end of any calendar year substantially all of its ordinary
income for that year and capital gain net income for the
one-year period ending on October 31st of that year, plus
certain other amounts. All dividends from net investment
income together with distributions of net short-term
capital gains (collectively "income dividends") will be
taxable as ordinary income to shareholders even though
paid in additional shares. Long-term capital gains
dividends will be taxable to shareholders as net long-term
capital gains, regardless of the length of time a
shareholder has owned Fund shares. Dividends and
distributions are generally taxable to shareholders in the
year in which received. However, dividends and
distributions in January of any calendar year will be
treated for tax purposes as if received in the prior
calendar year on the record date for the dividend or
distribution, if the record date was in October, November
or December. The Fund will notify each shareholder after
the close of the calendar year both of the dollar amount
and the tax status of that year's dividends and
distributions.
Gains realized from the sale of securities will be long or
short term, depending on the length of time owned by the
Fund. The Fund may be required to impose backup
withholding at a rate of 31% from income dividends and
capital gain distributions and upon payment of redemption
proceeds if a shareholder does not comply with federal
requirements relating to the furnishing and certification
of taxpayer identification numbers and reporting of
dividends.
PERFORMANCE INFORMATION
From time to time the Fund may quote its average annual
return ("standardized return") in advertisements or
promotional materials. Advertisement and promotional
materials reflecting standardized return ("performance
advertisement") will show percentage rates reflecting the
average annual change in the value of an assumed initial
investment in the Fund of $1,000 at the end of one, five
and ten year periods. If such periods have not yet
<PAGE>
elapsed, data will be given as of the end of a shorter
period corresponding to the duration of the Fund.
Standardized return assumes the reinvestment of all
dividends and capital gain distributions.
The Fund's standardized yield may be referred to in
advertising and promotional materials (all such materials
are paid for by Bridgeway Capital Management, Inc., the
Fund's Adviser). The Fund's standardized yield shows the
rate of income that it earns on its investments, expressed
as a percentage of the net asset value of Fund shares.
The Fund calculates yield by determining the interest
income it earned from its portfolio investments for a
specified thirty-day period (net of expenses), dividing
such income by the average number of Fund shares
outstanding, and expressing the result as an annualized
percentage based on the net asset value at the end of that
thirty day period. Yield accounting methods differ from
the methods used for other accounting purposes;
accordingly, the Fund's standardized yield may not equal
the dividend income actually paid to investors or the
income reported in the Fund's financial statements. Any
non-standard performance measures will be accompanied by
standard performance measures.
In addition to standardized return, performance
advertisements also may include other total return
performance data ("non-standardized return"). Non
standardized return may be quoted for the same or
different periods as those for which standardized return
is quoted and may consist of aggregate or average annual
percentage rate of return, actual year by year rates or
any combination thereof. All data included in
performance advertisements will reflect past performance
and will not necessarily be indicative of future results.
The investment return and principal value of an investment
in the Fund will fluctuate, and an investor's proceeds
upon redeeming Fund shares may be more or less than the
original cost of the shares. The Fund's annual and semi-
annual reports contain a quarterly performance graph and
discussion. Call 800-661-3550 for a free copy.
GENERAL INFORMATION
The Fund was incorporated in Maryland on October 19, 1993.
Shareholders are entitled to vote for each full share held
(and fractional votes for fractional shares) and may vote
in the election of Directors and on other matter submitted
to meetings of shareholders. It is not contemplated that
regular annual meetings of shareholders be held. No
amendment may be made to the Articles of Incorporation
without the affirmative vote of the holders of more than
50% of the Fund's outstanding shares. The holders of
shares have no pre-emtive or conversion rights. Shares
when issued are fully paid and non-assessable.
PricewaterhouseCoopers LLP serves as the independent
accountants of the Fund. Compass Bank acts as custodian
of the Fund's assets. The Fund acts as its own accounting
and shareholder servicing agent and its own distributor.
Shareholder inquiries should be directed to the Fund at
the address and telephone number indicated on the cover
page of this prospectus.
<PAGE>
BRIDGEWAY FUND, INC.
Statement of Additional Information
Dated October 31, 1998
This Statement of Additional Information is not a
prospectus, and it should be read in conjunction with the
prospectus of Bridgeway Fund,Inc. (the "Fund"), dated
October 31, 1998. A copy of the prospectus may be
obtained directly from the Fund, which acts as the
distributor of its own shares, at 5615 Kirby Drive, Suite
518, Houston, Texas 77005-2448, telephone 800-661-3550 or
in Houston 661-3265.
TABLE OF CONTENTS
Cross-
reference
to page in
Page the
Prospectus
Investment Objective and Policies 2 8
Risk Factors 2 3
Investment Restrictions 3 13
U.S. Government Securities 5 13
Foreign Securities 5 7
New Issues and Closed End Funds 5 7
Management 6 14
The Management Agreement 7 -
Portfolio Transactions and Brokerage 11 17
Net Asset Value 12 18
Redemption in Kind 12 18
Taxation 12 20
Performance Information 13 20
General Information 14 21
Financial Statements 16 -
INVESTMENT OBJECTIVE AND POLICIES
The Fund was organized as a series fund with three initial
portfolios or series: Bridgeway Ultra-Small Company
Portfolio, Bridgeway Aggressive Growth Portfolio and
Bridgeway Social Responsibility Portfolio. The Ultra-
Small Index Portfolio and the Ultra-Large 35 Index
Portfolios were added on July 20, 1997, and the Micro-Cap
Limited Portfolio was added on June 5, 1998. All of these
Portfolios have as their investment objective to provide
total return (capital appreciation and current income),
but the Ultra-Small Company, Ultra-Small Index, Micro-Cap
Limited and Aggressive Growth Portfolios focus primarily
on capital appreciation.The Portfolios' investment
policies are described in the Fund's prospectus.
The Adviser uses hedging strategies to vary the Aggressive
Growth and Social Responsibility Portfolios' exposure to
market risk. The Adviser currently measures market risk
by estimating future "betas" based on the historical betas
of individual stocks which make up the portfolio. Beta is
a measure of market risk contained within the body of
financial research called modern portfolio theory. A
portfolio beta of 150% means that a 1% increase (decrease)
in the stock market should result in a 1.5% increase
(decrease) in the portfolio.
The Adviser may use up to 5% of the Aggressive Growth
Portfolio's net assets to establish positions in
commodities futures and options, except that the aggregate
initial margins and premiums required to establish such
positions in any one commodity may not exceed 2% of net
assets. Subject to these two limiting constraints and
applicable laws, this portfolio (only) may invest in
commodity futures and options for the purpose of
diversification in line with the stated portfolio
objective.
The Ultra-Small Company, Ultra-Small Index and Micro-Cap
Limited Portfolios may take temporary, long stock index
futures positions to offset the effect of cash held for
future investing or for potential redemptions. For
example, assume the fund were 96% invested in stocks and
4% in cash, and it wanted to maintain 100% exposure to
market risk, but wanted to defer investment of this 4% to
a future date. Then the Portfolio could take a long
position in stock index futures such that the underlying
value of securities represented by the futures did not
exceed either the amount of portfolio cash or 35% of
Portfolio total assets.
RISK FACTORS
A discussion of risk for each of the Fund portfolios
appears on pages 3,6-8 of the prospectus. Because the
Ultra-Small Company, Micro-Cap Limited and Ultra-Small
Index Portfolios invest in stocks smaller than those
generally available through mutual funds, the following
gives more detailed insights into their risk and return
characteristics. These statistics are based on the
historical record of these financial instruments (asset
classes) and are not the record of the Fund itself. The
return numbers include reinvested interest and dividends,
but do not include trading or operational costs, which a
mutual fund would incur. The source of these data (which
is used here by permission) is the Center for Research in
Securities Prices (CRSP) Cap-Based Portfolios, and
Ibbotson Associates, Stocks, Bonds, Bills, and Inflation,
1998 Yearbook.
Short-term Risk
Table A below indicates that the short-term volatility of
ultra-small stocks (as represented by CRSP Cap-Based 10
Portfolio) is much higher than that exhibited by large
stocks, bonds or Treasury Bills. To a somewhat lesser
extent, the same is true of micro-cap stocks (as
represented by the CRSP Cap-Based 9 Portfolio). Investors
normally think of investments which exhibit low short-term
volatility as "safe" or "conservative" and investments
which exhibit high short-term volatility as "risky."
Because of high volatility, it would be unwise to invest
any money in ultra-small stocks or micro-cap stocks (or
even in large stocks) which an investor needs in a one
year timeframe. Thus, much more so than in other common
stock mutual funds, it would be inappropriate to invest
money which one needs in the immediate future in
Bridgeway's Ultra-Small Company, Ultra-Small Index or
Micro-Cap Limited Portfolios.
<PAGE>
Table A also indicates that over longer time periods,
investors have been compensated for higher short-term risk
with commensurately higher returns.
<TABLE>
<CAPTION>
Table A
Short-term Risk Characteristics of Various Asset Classes
(1926-1997)
<S> <C> <C> <C> <C> <C>
<C>
Govt. Corp. Large Micro-
Cap Ultra-Small
T-Bills Bonds Bonds Stocks Stocks
Stocks
Avg. Annual Return 3.7% 5.2% 5.7% 11.0% 12.7%
13.8%
Std. Deviation 3.3% 9.2% 8.8% 20.3% 33.9%
46.6%
Beta NA NA NA 1.0 1.4
1.7
Worst year decline NA -9.2% -8.1% -43.3% -58.0%
-45.2%
Worst year (1940-1996) NA -9.6% -8.1% -26.5% -30.9%
-27.8%
% of 1-year declines 0% 28% 22% 28% 29%
33%
% of 3-year declines 0% 14% 11% 13% 20%
23%
% of 5-year declines 0% 9% 4% 10% 13%
19%
</TABLE>
Long-term Risk
While most of the statistics on Table A are intuitive (an
investor generally obtains higher returns only when taking
on more risk), there are some surprising risk
characteristics of the asset classes over the longer
timeframes. Assets which appear "safe" over the short-
term are particularly vulnerable to the effects of
inflation in the long-term. Table B presents the worst
16-year cumulative inflation adjusted return for each of
these assets along with the percentage of 16-year periods
from 1926 to 1997 for which returns did not keep up with
inflation. On this basis, stocks do better than T-Bills
and bonds, but ultra-small stocks especially shine. While
ultra-small stocks have historically declined farther in a
downturn, they have also generally come back faster after
a decline. However, past performance may not be predictive
of future results. Our overall conclusion is that ultra-
small stocks may be too risky for short-term investments,
but are an excellent hedge against long-term inflation for
an investor willing to put up with the year-to-year
volatility one will inevitably experience over any 16-year
period.
<TABLE>
<CAPTION>
Table B
Long-term Risk Characteristics of Various Asset Classes
ADJUSTED FOR INFLATION (1926-1997)
<S> <C> <C> <C> <C> <C>
<C>
Govt. Corp. Large Micro-
Cap Ultra-Small
T-Bills Bonds Bonds Stocks Stocks
Stocks
Worst 16-year
period -43.9% -49.4% -46.3% -14.6% -4.5%
+10.0%
% 16-year declines 28.0% 46.0% 35.0% 1.0% 1.0%
0.0%
</TABLE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions (in
addition to those indicated in its prospectus) as
fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined
in the Investment Company Act of 1940 (the "1940 Act"), of
the Fund's outstanding voting securities. Under the 1940
Act, the vote of the holders of a majority of a Fund's
outstanding voting securities means the vote of the
holders of the lesser of (i) 67% of the shares of the Fund
represented at a meeting at which the holders of more than
50% of its outstanding shares are represented or (ii) more
than 50% of the outstanding shares.
As indicated in the following list, the Fund's portfolios
may not:
<PAGE>
1. Purchase securities on margin, except such short-
term credits as may be necessary for the clearance of
transactions.
2. Make short sales of securities or maintain a
short position if such sales or positions exceed 20% of
total assets under management.
3. Issue senior securities, except that the
Aggressive Growth and Social Responsibility Portfolios may
borrow on a secured or unsecured basis from banks up to
50% of net assets (not including the amount borrowed) for
the purchase of securities, and any Portfolio may borrow
on a secured or unsecured basis from banks up to 5% of its
total assets on an unsecured basis from banks for
temporary or emergency purposes. In addition, the Ultra-
Large 35 Index Portfolio may borrow from banks up to 50%
of net assets for the purpose of selling a security short
"against the box" on a temporary basis to avoid capital
gains distributions.
4. Invest in options or futures if the aggregate
initial margins and premiums required to establish such
non-hedging positions exceed 5% of net assets. In
addition, the Ultra-Small Company, Ultra-Small Index,
Micro-Cap Limited and Ultra-Large 35 Index Portfolios may
not invest in any options and may invest in stock market
index futures only as described in the Prospectus.
5. Invest in options or futures on individual
commodities if the aggregate initial margins and premiums
required to establish such positions exceed 2% of net
assets. In addition, only the Aggressive Growth Portfolio
may invest in any commodity options or futures.
6. Buy or sell real estate, real estate limited
partnership interests or other interest in real estate
(although it may purchase and sell securities which are
secured by real estate and securities or companies which
invest or deal in real estate.)
7. Make loans (except for purchases of publicly-
traded debt securities consistent with the Fund's
investment policies); however, the Aggressive Growth,
Ultra-Small Index, Micro-Cap Limited and Ultra-Large 35
Index Portfolios may lend its portfolio securities to
others on a fully collateralized basis.
8. Make investments for the purpose of exercising
control or management.
9. Act as underwriter (except to the extent the Fund
may be deemed to be an underwriter in connection with the
sale of securities in the Fund's investment portfolio).
(This restriction in no way prevents the Fund from acting
as distributor of its own shares pursuant to a 12b-1 Plan
adopted by shareholders on October 15, 1996.)
10. Invest 25% or more of its total assets
(calculated at the time of purchase and taken at market
value) in any one industry.
11. As to 75% of the value of its total assets,
invest more than 5% of the value of its total assets in
the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. Government, its agencies
or instrumentalities), or purchase more than 10% of all
outstanding voting securities of any one issuer.
The Fund observes the following restrictions as a matter
of operating but not fundamental policy, pursuant to
positions taken by federal and state regulatory
authorities:
The Fund may not:
12. Purchase any security if as a result the Fund
would then hold more than 10% of any class of securities
of an issuer (taking all common stock issues as a single
class, all preferred stock issues as a single class and
all debt issues as a single class).
13. Invest in securities of any issuer if, to the
knowledge of the Fund, any officer or director of the Fund
or of the Adviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such
<PAGE>
directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
14. Invest more than 5% of the value of its net
assets in warrants (included in that amount, but not to
exceed 2% of the value of the Fund's net assets, may be
warrants which are not listed on the New York or American
Stock Exchange). In addition, the Ultra-Small Company,
Ultra-Small Index, Micro-Cap Limited and Ultra-Large 35
Index Portfolios may not purchase any warrants.
15. Invest in any security if as a result the Fund
would have more than 5% of its total assets invested in
securities of companies which together with any
predecessor have been in continuous operation for fewer
than three years.
16. Invest in oil, gas or mineral related programs,
partnerships or leases.
U.S. GOVERNMENT SECURITIES
The U.S. Government securities in which the Fund may
invest include direct obligations of the U.S. Treasury,
such as Treasury bills, notes and bonds, and obligations
issued or guaranteed by U.S. Government agencies and
instrumentalities, including securities that are supported
by the full faith and credit of the United States, such as
Government National Mortgage Association ("GNMA")
certificates, securities that are supported by the right
of the issuer to borrow from the U.S. Treasury, such as
securities of the Federal Home Loan Banks, and securities
solely by the credit worthiness of the issuer,such as
Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corporation ("FHLMC") securities.
FOREIGN SECURITIES
The Fund may invest up to 10% of its assets in foreign
securities traded on Exchanges in the United States.
Foreign securities carry incremental risk associated with:
(1) currency fluctuations; (2) restrictions on, and costs
associated with, the exchange of currencies; (3) the
difficulty in obtaining or enforcing a court judgment
abroad; (4) reduced levels of publicly available
information concerning issuers; (5) restrictions on
foreign investment in other jurisdictions; (6) reduced
levels of governmental regulation of foreign securities
markets; (7) difficulties in transaction settlements and
the effect of this delay on shareholder equity; (8)
foreign withholding taxes; (9) political, economic, and
similar risks, including expropriation and
nationalization; (10) different accounting, auditing and
financial standards; (11) price volatility; and (12)
reduced liquidity in foreign markets where the securities
also trade. While some of these risks are reduced by
investing only in ADRs and foreign securities listed on
American exchanges, even these foreign securities may
carry substantial incremental risk.
NEW ISSUES AND CLOSED END FUNDS
The Fund may invest up to 5% of total assets in the
securities of "unseasoned issuers," those which together
with any predecessor have been in continuous operation for
fewer than three years. These companies have less
historical data on which to evaluate past performance, are
usually small companies, and thus may exhibit higher
volatility and risk than other issues. The Fund is not
restricted as to purchases of "new issues" which have been
in continuous operation for more than three years,
although these may also exhibit higher volatility and
risk.
The Fund may also invest up to 5% of total assets in
closed end mutual funds. These securities may sell at a
premium or discount to the net asset value of their
underlying securities. While gaining further
diversification through such investments, the Fund will
bear the additional volatility and risk that, in addition
to changes in value of the underlying securities in the
closed end funds, there may be additional increase or
decrease in price due to a change in the premium or
discount in their market prices.
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the
Fund is vested with its Board of Directors. The Board
approves all significant agreements between the Fund and
persons or companies furnishing services to it, including
the Fund's agreement with its Adviser, Custodian and
Transfer Agent. The day to day operations of the Fund are
delegated to its officers, subject to the investment
objectives and policies of the Fund and to general
supervision by the Board of Directors.
The directors and officers of the Fund and of the Adviser,
their business address and previous principal occupations
are;
<TABLE>
Position
with the Principal Occupation
Fund
<S> <C> <C>
John N.R. President President of the Fund
(since
Montgomery* and 11/22/93) and the Adviser
Director (since 7/1/93), self
employed
from 12/91 to 7/93.
Prior to that he was an
executive with
transportation
agencies in Texas and N.
Carolina
and an engineer/project
manager
at MIT.
Karen S. Gerstner Director Attorney and partner,
Dinkins Kelly Lenox
Gerstner & Lamb, LLP
Houston, Texas.
Miles Douglas Director Vice President, Wood,
Harper,III Harper, PC, a CPA firm in
Houston, Texas, since
2/1991, Senior Staff
Accountant Pannell Kerr &
Forster 1990-91, Senior
Staff Accountant, Price
Waterhouse 1986-90.
Glen Feagins Treasurer Employee of Bridgeway
Capital
Management since 1995.
Self-employed consultant
in
the mutual fund industry
from 1992 to 1995.
Vice-President/Treasurer
of
another mutual fund family
from 1987 to 1992.
Joanna Schima Secretary Employee of Bridgeway
Capital
Management since 1993.
Owner of small business
1988-1993, prior to that,
Telecommunications Manager
for American Capital
Management & Research,
Inc., Houston, Texas.
</TABLE>
*denotes directors who are "interested persons" of the
Fund under the
1940 Act.
The address of all of the Directors and Officers of the
Fund is 5615
Kirby Drive, Suite 518, Houston, Texas 77005-2448.
The fund pays fees of $500 per meeting to directors who
are not "interested persons" of the Fund. Such directors
are reimbursed for any expenses incurred in attending
meetings. During fiscal year 1998, the directors received
the following compensation:
<TABLE>
<CAPTION>
Aggregate Pension or Estimated
Annual Total
Compensation Retirement Benefits Upon
Compensation
Name from Fund Benefits Accrued Retirement
from the Fund
of Director
<S> <C> <C> <C>
<C>
Karen Gerstner $2,000 N/A N/A
$2,000/1/
Miles Douglas
Harper, III $2,000 N/A N/A
$2,000/1/
John N.R.
Montgomery $0 N/A N/A
$0
</TABLE>
/1/ The directors received this compensation in the form
of shares of
the Fund, credited to his or her account.
<PAGE>
THE MANAGEMENT AGREEMENT
Subject to the supervision of the Board of Directors,
investment advisory, management and administration
services are provided to the Ultra-Small Company,
Aggressive Growth and Social Responsibility Portfolios by
Bridgeway Capital Management, Inc., (the "Adviser")
pursuant to an Investment Management Agreement dated May
26, 1994 as amended on April 29, 1998 (the "Agreement").
A second Investment Management Agreement dated May 26,
1997 as amended on April 29, 1998 addresses the management
of the Ultra-Small Index Portfolio and the Ultra-Large 35
Index Portfolio. A third Investment Management Agreement
dated June 3, 1998 addresses the management of the new
Micro-Cap Limited Portfolio. The Adviser is a Texas
corporation organized in 1993 to act as Adviser to the
Fund and is controlled by Mr. John N. R. Montgomery and
his family.
Under both Agreements, the Adviser will provide a
continuous investment program for the Fund and make
decisions and place orders to buy, sell or hold particular
securities. The Adviser also will supervise all matters
relating to the operation of the Fund and will obtain for
it corporate officers, clerical staff, office space,
equipment and services.
As compensation for Adviser services rendered to the
Ultra-Small Index and Ultra-Large 35 Index Portfolios, and
the charges and expenses assumed and to be paid by the
adviser as described above, these Portfolios pay the
Adviser a base fee computed and payable on or about the
last market day of each month at the following annual
rate:
.5% of the value of the Ultra-Small Index Portfolio's
average daily
net assets and
.08% of the value of the Ultra-Large 35 Index
Portfolio's average
daily net assets
As compensation for its services rendered and the charges
and expenses assumed and to be paid by the Adviser as
described above, the Aggressive Growth, Social
Responsibility, Ultra-Small Company and Micro-Cap Limited
Portfolios pays the Adviser a base fee computed and
payable on or promptly after the last market day of each
month at the following annual rate:
.9% of the value of the Portfolio's average daily net
assets
during such month up to $250,000,000;
.875% of the next $250,000,000 of such assets; and
.85% of such assets over $500,000,000;
except that the fee for the Ultra-Small Company and Micro-
Cap Limited Portfolios during the period that the
Portfolio's net assets range from $27.5 million to $55
million will be paid as if the Portfolio had $55,000,000
under management (that is, $55 million times .009 equals
$495,000), subject to a maximum 1.49% annual rate.
For purposes of calculating such fee, average daily net
assets shall be computed by adding the total asset values
less liabilities of each Portfolio as computed by the
Adviser each day (during the month and dividing the
resulting total by the number of days in the month).
Expenses and fees of each Portfolio, including the
advisory fee, will be accrued daily and taken into account
in determining net asset value. For any period less than a
full month during which this agreement is in effect, the
fee shall be prorated according to the proportion which
such period bears to a full month.
The Aggressive Growth, Social Responsibility and Micro-Cap
Limited Portfolio base fee described above will be
adjusted each quarterly period (as defined below) by
adding to or subtracting from such rate, when appropriate,
the applicable performance adjustment rate percentage as
described below. The resulting advisory fee rate will
then be applied to the average daily net asset value of
the Fund for the succeeding quarterly period. The
advisory fee will be accrued daily and paid monthly.
<PAGE>
The performance adjustment rate shall vary with a
Portfolio's performance as compared to a benchmark index
and will range from -0.7% to +0.7%. The benchmark index
for the Aggressive Growth and Social Responsibility
Portfolios is the capitalization weighted Standard &
Poor's 500 Composite Stock Price Index with dividends
reinvested (hereinafter "S & P 500 Index") and for the
Micro-Cap Limited Portfolio will be the CRSP Cap-Based
Portfolio 9 Index with dividends reinvested. The
performance rate adjustment will be calculated at 4.67%
(Aggressive Growth and Social Responsibility) and at 2.8%
(Micro-Cap Limited) of the difference between the
performance of the Portfolio and that of the benchmark
index, except that there will be no performance adjustment
if the difference between the Portfolio performance and
the benchmark index performance is less than or equal to
2%. The graphs and tables in the Prospectus (see
"Management of the Fund") illustrate the relationship
between the advisory fee and the portfolio performance
relative to the benchmark index.
The performance period shall consist of the most recent
five year period ending on the last day of the quarter
(March, June, September and December) that the New York
Stock Exchange was open for trading. For example, on
February 15, 2006, the relevant five year period would be
from Friday, December 29, 2000 through Friday, December
30, 2005.
The performance of the benchmark index will be the 5 year
percentage increase (or decrease) in the S & P 500
Index/CRSP Cap-Based Portfolio 9 Index with dividends
reinvested. The Portfolio performance will be the
percentage increase (or decrease) of the portfolio net
asset value per share over the performance period and will
be calculated as the sum of: 1) the change in the
portfolio unit value during such period, 2) the unit value
of portfolio distributions from income or capital gains
(long or short term) having an ex-dividend date occurring
within the performance period and assumed to have been
reinvested at the net asset value on ex-date, and 3) the
unit value of capital gains taxes paid or accrued during
the performance period of undistributed realized capital
gains, if any. Thus, the Portfolio performance will be in
accordance with SEC standardized total return formula.
The adjustment to the base advisory fee will not be
cumulative. An increased fee will result even though the
performance of the Fund over some period of time shorter
than the performance period has been behind that of the
Index and, conversely, a reduction in the base advisory
fee will be made for a month even though the performance
of the Fund over some period of time shorter than the
performance period has been ahead of that of the Index.
As indicated above, the Fund's expenses (including the
monthly base advisory fee) will be accrued daily. The
performance adjustment for each performance fee period
will be computed monthly and accrued daily in the
subsequent monthly period and taken into account in
computing the daily net asset value of a Fund Portfolio's
share. However, the expenses in excess of any maximum
expense limitation that is assumed by the Fund's Adviser,
if any, shall not be accrued for the purpose of computing
the daily net asset value of a Fund share.
Since the Aggressive Growth and Social Responsibility
Portfolios do not have a five year operating history, the
performance rate adjustment will be calculated as follows
during the initial five year period.
From April 30, 1995 through September 30, 1999, the
performance rate adjustment fee will be calculated based
upon a comparison of the investment performance of each
Portfolio and the benchmark index over the number of
quarters that have elapsed since the Fund began operations
(August 5, 1994). Each time the performance adjustment
fee is calculated, it will cover a longer time span, until
it can cover a running five year period as intended. In
the meantime, the early months of the transition period
will have a disproportionate effect on the performance
adjustment of the fee.
Since the Micro-Cap Limited Portfolio does not have a five
year operating history, the performance rate adjustment
will be calculated as follows during the initial five year
period.
(a) From Portfolio inception through June 30, 1999,
the performance rate adjustment will not be operative.
The advisory fee payable will be the base fee only.
<PAGE>
(b) From July 1, 1999 through June 30, 2003, the
performance rate adjustment fee will be calculated based
upon a comparison of the investment performance of the
Portfolio and the benchmark index over the number of
quarters that have elapsed since June 30, 1998. Each time
the performance adjustment fee is calculated, it will
cover a longer time span, until it covers a running five
year period as intended. In the meantime, the early
months of the transition period will have a
disproportionate effect on the performance adjustment of
the fee.
During the period from July 1, 1997 through June 30, 1998
and in accordance with the management fee schedules
described above, the Adviser waived and reimbursed the
following fees from each of the Portfolios:
<TABLE>
<CAPTION>
Advisory Fee Expense Waived
Waived
Portfolio Per Contract Reimbursement Advis.Fees
Accounting Fee
<S> <C> <C> <C>
<C>
Ultra-Small
Company $495,000 ($0) ($0)
($0)
Ultra-Small
Index $5,382 ($1,926) ($5,382)
($3,386)
Aggressive
Growth $39,058 ($0) ($0)
($0)
Social
Responsibility $1,950 ($5,765) ($1,950)
($15,219)
Ultra-Large
35 Index $106 ($9,077) ($106)
($3,442)
</TABLE>
The Net Advisory Fees were paid at the end of each quarter
after the earned fee was adjusted for any expense overage
in accordance with the Adviser's undertaking to maintain
an expense ratio at or below 2.0% for Aggressive Growth
and Ultra-Small Company, 0.75% for Ultra-Small Index, 1.9%
for Micro-Cap Limited, 1.5% for Social Responsibility and
0.15% for Ultra-Large 35 Index.
In addition to the fee payable to the Adviser, the Fund is
responsible for its operating expenses, including: (1) the
charges and expenses of any custodian or depository
appointed by the Fund for the safekeeping of its cash,
securities and other property, (2) the charges and
expenses of bookkeeping personnel, auditors and
accountants, computer services and record keeping, (3) the
charges and expenses of any transfer agents and registrars
appointed by the Fund, (4) brokers' commissions and issue
and transfer taxes chargeable to the Fund in connection
with securities transactions to which the Fund is a party,
(5) all taxes and corporate fees payable by the Fund to
federal, state or other government agencies, (6) fees and
expenses involved in registering, filing, and maintaining
registrations of the Fund and of its shares with the
Securities and Exchange Commission and qualifying its
shares under state or other securities laws, including the
preparation and printing of prospectuses used for these
purposes and for shareholders of the Fund, (7) fees and
expenses involved in registering and maintaining
registrations of the Fund and of its shares with the
Securities and Exchange Commission and qualifying its
shares under state or other securities laws, including the
preparation and printing of prospectuses used for these
purposes and for shareholders of the Fund, (8) all
expenses of shareholders' and directors' meetings and of
preparing and printing reports to shareholders, (9)
charges and expenses of legal counsel for the Fund in
connection with legal matters relating to the Fund,
including without limitation, legal services rendered in
connection with the Fund's corporate existence, corporate
and financial structure and relations with its
shareholders, registrations and qualifications of
securities under federal, state and other laws, issues of
securities and expenses which the Fund has herein assumed,
(10) compensation of directors who are not interested
persons of the Adviser, (11) interest expense,
(12)insurance expense and (13) association membership
dues.
<PAGE>
The Adviser will not be liable to the Fund for any error
of judgment by the Adviser or any loss sustained by the
Fund except in the case of a breach of fiduciary duty with
respect to the receipt of compensation for services (in
which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
The Fund acts as the 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."
The Agreements were first approved by the Board of
Directors on January 17, 1994, March 19, 1997 and February
27, 1998. The continuation of the agreements was approved
on April 29, 1998 by a majority of the Directors who
neither are interested persons of the Fund nor have any
direct or indirect financial interest in the Agreement or
any other agreement related thereto ("Independent
Directors"). The current contracts continue through June
30, 1998. If not terminated, the Agreements will continue
automatically for successive annual periods, provided that
such continuance is specifically approved at least
annually (i) by a majority vote of the independent
Directors cast in person at a meeting called for the
purpose of voting on such approval and (ii) by the Board
of directors or by vote of a majority of the outstanding
voting securities of the Fund.
The Agreement is terminable by vote of the board of
directors or by the holders of a majority of the
outstanding voting securities of a Fund Portfolio at any
time without penalty, on 60 days written notice to the
Adviser. The Agreement also may be terminated by the
Adviser on 60 days written notice to the Fund. The
Agreement terminates automatically upon its assignment (as
defined in the 1940 Act).
In addition to the stringent code of ethics described on
page 17 of the prospectus, the Adviser has a unique
mission statement, which sets it
apart from others in the industry:
Our mission is to:
-oppose and alleviate the effects of genocide and
oppression,
-support Christian service,
-nurture educational causes, and
-improve the quality of urban life.
Our role in this effort is primarily, but not exclusively,
a financial one. As stewards of others' money, we strive
to:
-uphold the highest standards of integrity.
-maintain a long term risk-adjusted investment performance
record in the top 5% of investment advisers,*
-provide extraordinary service quality,
-achieve a superior (efficient) cost structure,and
Our greatest resource is people. Recognizing this, we
strive to:
-create a positive, fun, and challenging atmosphere,
-provide fair compensation commensurate with
performance,
-give regular, peer feedback,
-spend resources lavishly on hiring and training, and
-value the family.
<PAGE>
*The Adviser can not promise future performance levels,
nor do past results guarantee future returns. However,
the Adviser and the Fund have committed to clearly
communicating performance versus industry benchmarks in
each report to shareholders.
The Adviser is also committed to donating a majority of
its own investment advisory fee profits to charitable and
non-profit organizations. To maximize this objective, the
adviser seeks a superior cost structure. There are no
expensive perks or luxurious offices. The quantitative
investment methods used do not require a large research
staff. Employees are paid commensurate with performance
and market salary scales, but subject to the following
cap: the total compensation of the highest paid employee
can not be more than seven times that of the lowest paid
employee. These policies should also contribute to lower
Fund expense ratios as assets grow.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor undertakes that in connection with its duties
to arrange for the purchase and the sale of securities
held in the portfolio of the Fund, the Adviser shall
select such broker-dealers ("brokers") as shall, in its
judgment, achieve the policy of "best execution," i.e.,
prompt and efficient execution at the most favorable
securities price. In making such selection, the Adviser is
authorized by the Agreement to consider the reliability,
integrity and financial condition of the broker. The
Adviser is also authorized by the Agreement to consider
whether the broker provides research or statistical
information to the Fund and/or other accounts of the
Adviser.
The Advisor undertakes that the commissions paid to
brokers may be higher than another broker would have
charged if a good faith determination is made by the
Adviser that the commission is reasonable in relation to
the services provided, viewed in terms of either that
particular transaction or the Adviser's overall
responsibilities as to the accounts as to which it
exercises investment discretion and that the Adviser shall
use its judgment in relation to the value of brokerage and
research services provided and need not place or attempt
to place a specific dollar value on such services or on
the portion of commission that such determinations were in
good faith, and to show the overall reasonableness of
commission paid, the Adviser shall be prepared to show
that commissions paid (i) were for services contemplated
by the Agreement, (ii) were for products or services which
provide lawful and appropriate assistance to its decision-
making process and (iii) were within a reasonable range as
compared to the rates charged by brokers to other
institutional investors as such rates may become known
from available information.
The research services discussed above may be in written
form or through direct contact with individuals and may
include information as to particular companies and
securities as well as market, economic or institutional
areas and information assisting the Fund in the valuation
of its investments. The research which the Adviser
receives for the Fund's brokerage commissions, whether or
not useful to the Fund, may be useful to it in managing
the accounts of its other advisory clients, if any.
Similarly, the research received for the commissions of
such accounts may be useful to the Fund. In its last
fiscal year ending June 30, 1998, the Fund's Portfolios
paid brokerage commissions totaling $101,498, as follows:
<TABLE>
<S> <C>
Brokerage
Portfolio Commissions Paid
Aggressive Growth $ 9,779
Social Responsibility $ 685
Ultra-Small Company $86,883
Ultra-Small Index $ 4,071
Ultra-Large 35 Index $ 80
</TABLE>
It is the Advisor's present policy to a) conduct
essentially all of its own financial research and b) not
to pay soft dollar commissions of any kind. The Advisor
will inform the Fund Board of Directors of any changes to
this policy.
<PAGE>
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate
and is determined as of the close of trading on the New
York Stock Exchange (currently 4:00 p.m. Eastern time)
each business day that the Exchange is open for business.
The Exchange annually announces the days on which it will
not be open for trading. The most recent announcement
indicates that it will not be open on the following days:
New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. However, the Exchange
may close on days not included in that announcement.
The net asset value per share of each of the Fund's
Portfolios is computed by dividing the value of the
securities held by the Portfolio plus any cash or other
assets (including interest and dividends accrued but not
yet received) minus all liabilities (including accrued
expenses) by the total number of Portfolio shares
outstanding at such time.
Portfolio securities that are principally traded on a
national securities exchange or the National Association
of Securities Dealers Automated Quotation System
("NASDAQ") are valued at their last sale on the exchange
on which they are principally traded prior to the close of
the New York Stock Exchange or, in the absence of recorded
sales, at their current bid price (long position) or asked
price (short positions.) Other securities and assets for
which market quotations are not readily available are
valued at fair value as determined in good faith using
methods approved by the Board of Directors.
REDEMPTION IN KIND
If the Board of Directors determines that it would be
detrimental to the best interests of the remaining
shareholders of the Fund to make payment wholly in cash,
the Fund may pay the redemption price in part by a
distribution in kind of securities from the portfolio of
the Fund, in lieu of cash. The Fund has elected to be
governed by Rule 18F-1 under the 1940 Act pursuant to
which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or one percent of the
net asset value of the Fund during any 90 day period for
any one shareholder. Should redemptions by any
shareholder exceed such limitation, the Fund will have the
option of redeeming the excess in cash or in kind. If
shares are redeemed in kind, the redeeming shareholder
will incur brokerage costs in converting the assets into
cash.
TAXATION
For the current and all subsequent fiscal years, the Fund
intends to elect to be and to qualify for treatment as a
regulated investment company ("RIC") under Subchapter M of
the Internal Revenue Code (the "Code"). In each taxable
year that the Fund so qualifies, the Fund will be relieved
of federal income tax on that part of its investment
company taxable income (consisting generally of interest
and dividend income and net short term capital gains) and
net capital gains that is distributed to shareholders.
Since the Fund intends to engage in various hedging
transactions, under various provisions of the Code, the
result of such transactions may be to change the character
of recognized gains or losses, accelerate the recognition
of certain gains and losses, and defer the recognition of
certain losses.
In order to qualify for treatment as an RIC, the Fund must
distribute annually to its shareholders at least 90% of
its investment company taxable income and must meet
several additional requirements. They include (1) at
least 90% of the Fund's gross income each taxable year
must be derived from dividends, interest, payments with
respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or
other income derived with respect to its business of
investing in securities or currencies; (2) less than 30%
of the Fund's gross income each taxable year may be
derived from the sale or other disposition of securities
held for less than three months; (3) at the close of each
quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and
cash items, U.S. Government securities, securities of
other RICs and other securities, limited in respect of any
one issuer, to an amount that does not exceed 5% of the
value of the Fund, and that does not represent more than
10% of
<PAGE>
the outstanding voting securities of such issuer and (4)
at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its assets may be
invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one
issuer.
The Fund will be subject to a nondeductible 4% excise tax
to the extent it fails to distribute by the end of any
calendar year substantially all of its ordinary income for
that year and capital gain net income for the one-year
period ending on October 31st of that year, plus certain
other amounts.
Dividends and Distributions
Dividends from the Fund's investment company taxable
income (whether paid in cash or invested in additional
shares) will be taxable to shareholders as ordinary income
to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gains (whether
paid in cash or invested in additional shares) will be
taxable to shareholders as long-term capital gain,
regardless of how long they have held their Fund shares.
Dividends declared by the Fund in October, November or
December of any year and payable to shareholders of record
on a date in one of such months will be deemed to have
been paid by the Fund and received by the shareholders on
the record date if the dividends are paid by the Fund
during the following January. Accordingly, such dividends
will be taxed to shareholders for the year in which the
record date falls.
Withholding
The Fund is required to withhold 20% of all dividends,
capital gain distributions and repurchase proceeds payable
to any individuals and certain other non-corporate
shareholders who do not provide the Fund with a correct
taxpayer identification number. The Fund also is required
to withhold 31% of all dividends and capital gain
distributions paid to such shareholders who otherwise are
subject to backup withholding.
PERFORMANCE INFORMATION
Total Return
Average annual total return quotations, used in the Fund's
advertising and promotional material, for the 1,5 and 10
year periods (when available) ended on the date of the
most recent balance sheet included in the registration
statement are determined by finding the average annual
compounded rates of return over the 1, 5 and 10 year
periods that would equate the initial amount invested to
the ending redeemable value, by the following formula:
P((1 + T) raised to the power of n ) = ERV
where "P" equals hypothetical initial payment of $1,000;
"T" equals average annual total return; "n" equals the
number of years and "ERV" equals the ending redeemable
value at the end of the period of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 years
periods at the end of the 1, 5 or 10 year periods (or
fractional portion thereof).
Any disclosure will also include the length of and the
last day in the period used in computing the quotation and
a description of the method by which average total return
is calculated.
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters,
updated to the last day of the most recent quarter prior
to submission of the advertising for publication. Average
annual total return, or "T" in the formula, is computed by
finding the average annual compounded rates of return over
the period that would equate the initial amount invested
to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and
distributions.
Yield
Annualized yield quotations based on a 30-day (or one
month) period ended on the date of the most recent balance
sheet included in the Fund's registration statement, and
used in the Fund's advertising and promotional materials
are computed by dividing the net investment income per
share earned during the
<PAGE>
period by the maximum offering price per share on the last
day of the period, according to the following formula:
YIELD = 2 [((((a-b) / cd) + 1) raised to the power of
6) - 1 ]
where "a" equals dividends and interest earned during the
period; "b" equals expenses accrued for the period (net of
reimbursements); "c" equals the average daily number of
shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering
price per share on the last day of the period.
Any such disclosure will also include the length of and
the last day in the period used in computing the quotation
and a description of the method by which yield is
calculated.
Except as noted below, in determining net investment
income earned during the period ("a" in the above
formula), the Fund calculates interest earned on each debt
obligation held by it during the period by (1) computing
the obligation's yield to maturity, based on the market
value of the obligation (including actual accrued
interest) on the last business day of the period or, if
the obligation was purchased during the period, the
purchase price plus accrued interest; (2) dividing the
yield to maturity by 360 and multiplying the resulting
quotient by the market value of the obligation (including
actual accrued interest). Once interest earned is
calculated in this fashion for each debt obligation held
by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an
obligation with one or more call provisions is assumed to
be the next date on which the obligation reasonably can be
expected to be called or, if not, the maturity date.
Other Information
The Fund's performance data quoted in advertising and
other promotional materials represents past performance
and is not intended to predict or indicate future results.
The return and principal value of an investment in the
Fund will fluctuate, and an investor's redemption proceeds
may be more or less than the original investment amount.
In advertising and promotional materials, the Fund may
compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper"), Morningstar, Inc.
("Morningstar") or CDA Investment Technologies, Inc.
("CDA"); Fund rankings and other data, such as comparative
asset, expense and fee levels, published by Lipper,
Morningstar or CDA; and advertising and comparative mutual
fund data and ratings reported in independent periodicals
including, but not limited to, The Wall Street Journal,
Money, Forbes, Value Line, Business Week, Financial World
and Barron's.
GENERAL INFORMATION
The Fund, incorporated in the State of Maryland on October
19, 1993 is authorized to issue 1,000,000,000 shares of
common stock, $.001 par value (the "Common Stock").
Shares of the Fund, when issued, are fully transferable
and redeemable at the option of the Fund in certain
circumstances as described in the Fund's Prospectus under
"How to Redeem Shares." All Fund shares are equal as to
earnings, assets and voting privileges. There are no
conversion, pre-emptive or other subscription rights.
Under the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series
of common stock, with such preferences, privileges,
limitations and voting and dividend rights as the Board
may determine. Each share of each series of the Fund's
outstanding shares is entitled to share equally in
dividends and other distributions and in the net assets
belonging to that series of the Fund on liquidation.
Accordingly, in the event of liquidation, each share of
the Fund's common stock is entitled to its portion of all
of the Fund's assets after all debts and expenses have
been paid. The shares of the Fund do not have cumulative
voting rights for the election of Directors.
It is not contemplated that regular annual meetings of
shareholders will be held. There normally will be no
meetings of shareholders for the purpose of electing
directors unless and until such time as less than a
<PAGE>
majority of the directors holding office have been elected
by shareholders, at which time the directors then in
office will call a shareholders' meeting for the election
of directors. The Fund has undertaken to afford
shareholders certain rights, including the right to call a
meeting of shareholders for the purpose of voting on the
removal of one or more directors. Such removal can be
effected upon the action of two-thirds of the outstanding
shares of the Fund. The directors are required to call a
meeting of shareholders for the purpose of voting on the
question of removal of any director when requested in
writing to do so by shareholders of record of not less
than 10% of the Fund's outstanding shares. The directors
will then, if requested by the applicants, mail at the
applicants' expense the applicants' communication to all
other shareholders.
The following individuals own more than 5% of the
outstanding shares of each portfolio of the Fund as of
June 30, 1998.
<TABLE>
<CAPTION>
Percentage Ownership
Aggr. Social Ultra-Sm
Ultra-Sm Ultra-Lg Micro-Cap
Name Address Growth Respons.Company
Index Index Ltd.
<S> <C> <C> <C> <C>
<C> <C> <C>
Donaldson, Lufkin P.O. Box 2052 4.8%
32.2% 13.8% 9.3%
and Jenrette & Co. Jersey City, NJ 07303
E*Trade Securities 2400 Geng Rd.
Palo Alto, CA 94303
39.6%
Gus Gross 9202 Triola Lane
Houston, TX 77036 6.3%
Ken Kern 4444 Richmond 6.5%
Houston, TX 77027
National City Bank P.O. Box 94984
Cleveland, OH 44101 6.2%
National Financial 200 Liberty St. 11.8% 44.3% 14.6%
31.7% 63.0% 19.7%
Services New York NY 10281
National Investor 55 Water St.
Services New York, NY 10041
25.4% 22.1% 7.2%
John Silard 6916 Wilson Ln.
Bethesda, MD 20817 5.6%
Technical Risks,Inc 2020 N. Memorial 5.9%
Houston,TX 77007
William Wallace 1500 W. Kennedy Rd. 7.0%
Lake Forest, IL 60045
Total 25.3% 68.3% 19.3%
89.3% 98.9% 75.8%
All officers/directors 0.6% 1.8% 0.2%
4.4%
</TABLE>
FINANCIAL STATEMENTS
The Fund's 1998 Annual Report to Shareholders was mailed
to shareholders on August 31, 1998; it will be sent to any
other interested party upon written request to the Fund.
Part C
OTHER INFORMATION
Item 24.Financial Statements and Exhibits
(a)Financial Statements
(b)Exhibits
1. Charter of Registrant (Incorporated by reference)
2. By-laws of Registrant (Incorporated by reference)
3. Inapplicable
4. Inapplicable as By-Laws provide for no stock
certificates
5. Management Contracts
6. Inapplicable
7. Inapplicable
8. Custodian Agreement (Incorporated by reference)
9. None as Registrant will act as its own transfer agent
10. Opinion of Counsel
11. Consent of Independent Auditors
12. Inapplicable
13. Investment Representation letter from initial
Shareholders(Incorporated
by reference)
14. Inapplicable
15. 12b-1 Plan (Incorporated by reference)
16. Inapplicable
Item 25.Persons controlled by or under Common Control with
Registrant
NONE
<PAGE>
Item 26.Number of Holders of Securities
<TABLE>
(1) (2)
Number of Record
Holders
Title of Class as of June 30, 1998.
<S> <C>
Ultra-Small Portfolio 2896
Aggressive Growth Portfolio 549
Social Responsibility Portfolio 108
Ultra-Small Index Portfolio 114
Ultra-Large 35 Index Portfolio 45
Micro-cap Limited 1298
</TABLE>
Item 27. Indemnification
See Indemnification Section of By-Laws which is
incorporated here by reference. Registrant will maintain
with Rollins Executive Risk Services Directors and
Officers Errors and Omissions liability insurance covering
(among other things) amounts which Registrant may pay
pursuant to the foregoing indemnification provisions.
Item 28. Business and Other Connections of Investment
Adviser
As stated in the Prospectus and Statement of Additional
Information, the Investment Adviser was organized in 1993
and will act as an Investment Adviser to other
individuals, businesses and registered investment
companies.
Item 29. Principal Underwriters
Bridgeway Fund is the distributor of its own securities.
Item 30. Location of Accounts and Records
Accounts and Records of the Registrant are maintained at
the offices of the Registrant, its Adviser and Distributor
at 5615 Kirby Drive, Suite 518, Houston, TX 77005-2448.
Custody records are maintained at the offices of the
Registrant's Custodian Bank, Compass Bank at P.O. Box
4886, Houston, TX 77210.
Item 31. Management Services
Other than as set forth under MANAGEMENT in the Statement
of Additional Information, Registrant is not a party to
any management related service contract.
Item 32. Undertakings
Incorporated by reference.
<PAGE>
August 28, 1998
Dear Fellow Ultra-Small Company Shareholder,
Translation: The June 30, 1998 fiscal year included our best
quarter and our worst quarter of the four years we have been
operational. Overall, we beat all our benchmarks for the full
fiscal year. If you would like to read only the highlights of
this report to save time, I recommend reading only the
paragraphs which begin _Translation._ Alternatively, you
could just stop here. For others, the details follow_
I explained the reasons for our June quarter performance in a
separate letter dated July 16. This letter highlights our
performance for the full fiscal year. Attached are our
audited financial statements, including a full schedule of
investments.
Due to our poor June quarter performance, we slipped to the
45th percentile among small-cap funds for our full fiscal
year. On a trailing three-year basis, we slipped from the
first percentile to the 3rd. For the longer period, I
consider this to be stellar performance within the context of
current large-company dominance, as described below. The
table below presents our quarter, one year, and life-to-date
financial results according to the formula required by the
SEC.
<TABLE>
<S> <C> <C> <C>
June Qtr. 1 Year Life-to Date
4/1/98 7/1/97 8/5/94 to
to 6/30/98 to 6/30/98 6/30/98**
Ultra-Small Company Portfolio -10.5% 18.4% 26.6%
Lipper Small-Cap Stock Funds* -4.1% 18.1% 21.8%
Russell 2000 (small growth stocks)* -4.7% 16.5% 19.1%
CRSP Cap-Based Portfolio 10 Index* -7.7% 15.8% 18.0%
</TABLE>
*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. The CRSP Cap-Based Portfolio 10 Index
is an unmanaged index of 2,661 ultra-small companies compiled
by the Center for Research in Security Prices, with dividends
reinvested. Past performance does not guarantee future
returns.
** Life-to-date returns are annualized; the June quarter
period is not annualized.
GRAPH:
_Growth of $10,000 Invested in various Funds and Indexes from
8/5/94 to 6/30/98_
Shows the growth of $10,000 in the Bridgeway Ultra-Small
Company Portfolio, the Lipper Small Company Growth Funds, the
Russell 2000 Index and the CRSP Cap-based Portfolio 10 Index.
As of 6/30/98 the $10,000 had grown to $25,115 in the
Bridgeway Ultra-Small Company Portfolio, $21,570 in the Lipper
Small Company Growth Funds, $19,805 in the Russell 2000 Index
and $19,092 in the CRSP Cap-based Portfolio 10 Index.
Explanation of Performance: Large Company Dominance
Accelerates
Translation: The largest companies really shined in the last
four years, last year, and especially the last quarter. Along
with an extended bull market, this has been the trend over the
last four years, but it runs counter to the long-term trend of
small-stock dominance. We expect this trend to reverse, to
our Portfolio's advantage, but not necessarily in the near
term. We'll be ready whenever it happens.
Occasionally, we get calls from shareholders asking why our
calendar year-to-date returns are so much poorer than _the
market._ Usually, by _market,_ the caller means one of the
more widely reported large company indexes such as the Dow
Jones Industrial Average. The primary answer to this question
is that while large companies have given up only one-third of
their gain from June, 1997 to June, 1998, small stock averages
have given back their entire gain plus more. In some previous
shareholder letters I have presented a graph of the amount by
which the S&P 500 Index has outperformed the Russell 2000
index since our inception in 1994. Since Bridgeway Capital
Management now subscribes to CRSP's full database, I would
like to present the same kind of graph using CRSP's data about
the largest (currently 212) companies relative to the ultra-
small ones:
GRAPH:
_The Widening Gap between Ultra-Large and Ultra-Small Stocks
from 7/29/94 to 6/30/98_
This graph shows widening gap of returns of Ultra-Large stocks
vs Ultra-Small stocks. The graph shows the large stocks
appreciating much more rapidly than the small stocks. The
graph also demonstrates how the Bridgeway Ultra-Small Company
Portfolio compares to the large and small stock performance.
As of 6/30/98 the total percentage changes were 186%, 151% and
91% for the Ultra-Large Stocks, Ultra-Small Company Portfolio
and Ultra-Small Stocks, respectively
The largest companies have outperformed the smallest ones by a
whopping 95% on a cumulative basis. While the Ultra-Small
Company Portfolio kept ahead of even the large company indexes
through the end of calendar 1997, we have not been able to
overcome this continued huge discrepancy. Indeed, Bridgeway's
large-cap portfolios (Social Responsibility and Ultra-Large 35
Index) are among a small minority of funds to beat the large-
cap indexes this calendar year, and they have trounced all our
small-cap portfolios.
The Hundred Year Storm or _What Will the Future Bring?_
Translation: The good news is--if longer-term history is any
guide--eventually we will ride the small-cap wave. I would
expect (but cannot promise) that this will be the case in the
long-term, but it may continue not to be in the short-term.
As an investor with a long-term view, I am staying put and
have changed nothing about my strategy or that of our
Portfolio.
The Ultra-Small Company Portfolio celebrated its 4th birthday
earlier this month. If we look at trailing four-year time
periods over the last 72 and a half years for which I have
data, there have been only four months when ultra-small stocks
have trailed large company stocks by the current amount. On a
contrarian and valuation basis, this would appear to be a very
good time to invest in ultra-small stocks. However, the
market seems always to bring forth some surprises, and I must
also add that if the broader stock market were to correct
another, say 25%, I would expect ultra-small stocks and our
Portfolio to correct farther. However, also based on history,
I would also expect them to recover faster from a low point
than the broader market--and this is one more reason I advise
against trying to _time_ the market.
I have been an active investor since 1985. In this period I
can think of four _out of bounds_ market occurrences:
1. The market correction of October, 1987. Really, this was
just a normal _blip_ on a stock market chart. My personal
portfolio declined 38% from the peak in August to the bottom
in December (in line with the market), but I still had a
strong positive return for the full year. The most unusual
thing about this correction was the alacrity of the drop and
the alacrity with which the market came back. I didn't lose
any sleep and I didn't panic. It's the nature of the stock
market to go up and down in the short-term.
2. The extended bull market since 1990. There has been only
one other period with this long a bull market as measured by
calendar returns. This other period lasted for eight years
from the end of 1981 through 1989. As a matter of fact, if
you ignore the small drop in 1990, we have had an extended
bull market since 1981, one of the best stock market runs of
the last two centuries. We tend to forget that historically
the stock market has had a negative return in more than one in
four years.
3. Bear market for short-term bonds. I like to put money I
plan to spend in the short-term in short-term bond funds. The
total return of my short-term bond fund was actually negative
(one percent) in 1994. This probably won't happen again in my
lifetime.
4. The current large-company dominance.
Of these four market events, I can't decide if number two or
number four is more dramatic. To use a different analogy for
my view of number four, the ultra-small company _spring_ is
being wound tighter and tighter on the basis of valuation
relative to large stocks. At some point this spring has to
unwind. It will happen in one of three ways. Large company
prices could fall. Ultra-small company prices could soar. Or
ultra-small company earnings could plummet. As I look at the
health of the economy, I think some combination of the first
two is most likely.
Explanation of Performance: The Movers and the Shakers
Translation: Some of our stocks went up a lot and some went
down a lot. Fortunately, we had many more of the former.
We had 44 stocks which appreciated 50% or more during the year
and only 14 that declined by 50%. Altogether, this resulted
in a one-year total return which exceeds the average
historical return for the ultra-small company asset class.
First, the largest gainers:
<TABLE>
<S> <C> <C> <C>
Rank Description Industry Gain
1 D&K Healthcare Resources Inc. Drugs-Generic and OTC 310%
2 Trans World Entertainment Corp. Leisure-Amusement 244%
3 Dominion Homes Inc. Building 183%
4 Jan Bell Marketing Inc. Jewelry Silverware, watches 167%
5 Winsloew Furniture Inc. Home Furnishings 147%
6 Omni Insurance Group Insurance 146%
7 Kreisler Manufacturing Corp. Manufacturing 122%
8 Cholestech Corp. Medical Equipment/Supplies 115%
9 X-Ceed Inc. Services 113%
10 Calloways Nursery Inc. Retail Stores 112%
11 Landair Corp. Transportation / Freight 109%
12 Pilgrim Amer. Cap. Corp. Finance 108%
13 Baldwin Technology Co. Inc. Graphic Arts 104%
14 Continental Can Corp. Containers 97%
15 Tandy Brands Accessories Inc. Leather & Shoes 96%
16 Blonder Tongue Labs Inc. Broadcasting 95%
17 IMPCO Technologies Inc. Auto Parts 94%
18 Schottenstein Homes Inc. Building 92%
19 TFC Enterprises Inc. Finance 91%
20 Secure Computing Corp. Data Processing- Software 91%
21 KTI Inc. Pollution Control 87%
22 Catherine's Stores Inc. Retail Stores 87%
23 Telscape International Inc. Telecommunications 83%
24 American Locker Group Inc. Services 83%
25 STB Systems Inc. Data Processing-Hardware 80%
26 Intervoice Inc. Electronics/Electric 77%
27 Craftmade International Inc. Electronics/Electric 74%
28 Laser Technologies Inc. Medical Equipment/Supplies 73%
29 Total Research Corp. Services 71%
30 Xeta Corp. Telecommunications 69%
31 Bogen Communications Int'l Inc. Telecommunications 67%
32 Team America Corp. Services 67%
33 Engle Homes Inc. Building 64%
34 New Retail Concepts, Inc. Retail Stores 64%
35 T*HQ Inc. Leisure-Amusement 63%
36 Jos. A Banks Clothiers Inc. Retail Stores 62%
37 Int'l Microcomputer Software Inc. Data Processing-Software 60%
38 Platinum Technology Inc. Data Processing-Software 59%
39 Cary Int'l Inc. Services 57%
40 Grist Mill Inc. Food 56%
41 Software Artistry Inc. Data Processing-Software 53%
42 Meridian Medical Inc. Medical Equipment/Supplies 52%
43 Garden Fresh Restaurants Inc. Food Serving 52%
44 Semtech Corp. Electronics/Electric 50%
</TABLE>
Most notably absent from this list compared to last year's is
any representation by the energy sector. (Oil prices
plummeted.) Otherwise, there is good representation by
technology, healthcare, services and other broad economic
sectors. D&K Healthcare Resources, the top performing
company, nearly tripled earnings on an 18% increase in sales.
In addition to expanding the business, the company was
successful in improving purchasing cost efficiency. In the
distribution business, small improvements in efficiency can
lead to large changes in profits, as D&K demonstrated this
year. Trans World Entertainment was our second best
performing stock. This retailer was somewhat beaten down in
1997 after declining sales. The company got things back on a
strong growth track in 1998, and the stock price soared once
again.
The other side of the ledger doesn't look nearly so pretty:
<TABLE>
<S> <C> <C> <C>
Rank Description Industry Decline
1 Worldcorp, Inc. Air Transp -88%
2 Data Systems. Inc. Data Processing-Software -79%
3 Spire Corp. Electronics/Electric -72%
4 WTD Industries Inc. Building -71%
5 J.B. Oxford Holdings Securities -58%
6 World Airways, Inc. Air Transport -56%
7 I-Flow Corp. Medical Equipment/Supplies -56%
8 Transcoastal Marine Services, Inc. Building -55%
9 AFP Imaging Corp. Medical Equipment/Supplies -55%
10 Advanced Health Corp. Services -54%
11 Rich Coast Inc. Services -54%
12 Applied Microsystems, Inc. Data Processing-Software -51%
</TABLE>
Again, there are no major trends here except for some
companies which had more significant direct and indirect
exposure to Southeast Asia. Worldcorp is a classic situation
of a high-debt company which experiences bad luck and makes a
significant error. Worldcorp's primary majority holding is
World Airways (see company ranked 10), which leases airplanes
and crews internationally and had major business in Southeast
Asia. On top of this, the holding company made significant
additional purchases in the paper industry just as prices of
these products plummeted. Worldcorp has defaulted on some
debt, and the stock price has been punished accordingly. I
highlighted Triteal in my February 16 letter and Data Systems
in my July 29 letter. I think I'd rather forget about these
horror stories and look to the future. (OK, we still own a
small position in Data Systems, so I'll update you on this in
a future letter.)
Stepping back and looking at these two lists together, I'm
thankful for two things. First, diversification. I wouldn't
want too many eggs in the basket above. Second, there's a
wonderful mathematical fact about highly volatile stocks. You
can't lose more than 100%, but there is no theoretical upside
limit. One company appreciating five-fold more than makes up
for two companies which go out of business_.which brings me
back to item one, diversification. It's very important to
hold more than a handful of these stocks. We seem to have
reached a _steady state_ of roughly 160 stocks in our
Portfolio over the last year and a half. At the end of the
fiscal year we held only one stock, Winsloew Furniture, which
comprises more than 3 percent of the portfolio. We keep
trimming Winsloew to reduce risk, but it just keeps
appreciating. Our top ten holdings at the end of June
constituted just less than one-quarter of the total Portfolio
net assets.
Disclaimer
The following is a reminder from the friendly folks at your
fund who worry about liability. 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 fiscal year end, June,
1998; security positions can and do change thereafter.
Bridgeway Capital Management, Inc. Turns 5!
Last month Bridgeway Capital Management celebrated its fifth
birthday. As the first Bridgeway employee, staff presented me
with a five-year pin. Texans don't differentiate between
short _e's_ and short _i's,_ so I was actually presented with
a five-year pen.
When I was 24, I took a job in which I happened to be the
youngest person ever to have filled that position. I figured
if I just didn't die first, being the youngest guy around was
a problem that would solve itself. (Now that we have hired
some people an entire generation younger than myself, I guess
I've _arrived._) I feel the same way about Bridgeway. In the
first couple of years it seemed we just couldn't get our foot
in the door most places because, regardless of my personal
experience or that of our staff, our firm was just too young.
We're still young, but this is a problem that is taking care
of itself.
Bridgeway Portfolios rank in top 4%
The June issue of Mutual Funds Magazine named me the _Gold
Medal_ manager of the micro-cap category. We tallied the raw
fund scores for all fund families with at least two funds to
see how Bridgeway fared overall. Using Mutual Funds
Magazine's method of ranking (which limits the analysis to
funds with at least three years and compares performance to a
peer group), Bridgeway's three original funds together rank
7th of 199, or in the fourth percentile.
Employee Shareholders
I am happy to report that as of the end of our Fiscal Year,
all full-time Bridgeway employees had become shareholders of
the Ultra-Small Company Portfolio. I am particularly pleased
with this because we have no requirement for employees to do
so; each employee has made his or her own investment decision
with no pressure. I like to think that we are all _eating our
own cooking_ and that we experience the rise and fall of our
shares right along with all our non-employee shareholders.
Worst Mistake in Fiscal Year 1998
Translation: At least once a year I like to tell our
shareholders our worst mistake at Bridgeway _ well, there were
two. I try to help create an atmosphere in which people are
willing to put mistakes on the table so we can all learn from
them. It's only fair that I do this with our Board of
Directors and you, the shareholder, my ultimate boss. Our
worst two mistakes were not delivering on our commitment to
offer an Internet site and a small pricing error early in the
year.
I am very pleased with our performance this year, and there
isn't anything about our specific stock performance I would
put in the category of _mistake_ for Fiscal 1998. Sure, I
would rather not have bought Worldcorp, but each stock in the
Portfolio was a legitimate _buy_ from one of my models, and I
feel we did a good job of staying on top of these stocks and
investigating them for _spurious data._ My reacting to poor
economic news from Southeast Asia last fall would have helped
(a bit like Monday morning quarterbacking). I do no economic
forecasting, because the record of professionals in this area
is abysmal. Also, it frees up my time to concentrate on
individual stock picking.
While I am very pleased with a number of improvements in our
administration/operations over the last year, especially the
increasing strength of our staff, I would have to point to two
non-investment mistakes. First, I committed to getting a
Bridgeway web site up and running in Fiscal Year 1998, but we
still only have the first steps_a web address
(Bridgewayfund.com) and daily posting of our Portfolio net
asset value per share. Although I fell short of my goal, we
have much more planned for this site, and I recommit to
significant progress before the end of November.
A second, and potentially more significant mistake is that we
missed accounting for a stock split at the beginning of the
Fiscal Year which cost the Adviser about $13,500 to correct.
This is one of those situations in which Murphy's Law applies.
Several things had to happen to make this error. _Missing_ a
stock split means having a company in the Portfolio issue
additional shares on a given day, but not accounting for it.
If it causes our reported net asset value to be off a penny or
more, then shareholders purchase or redeem at the wrong price
and the Adviser, Bridgeway Capital Management, must make both
the Portfolio and purchasing or redeeming shareholders
_whole._ Most mutual funds make pricing errors which you
simply don't hear about. Most certainly wouldn't let
shareholders know about one this small, they'd just buy their
way out of it - the industry practice. I want to emphasize
that we are making continual improvements at Bridgeway, and
that if we had had the current staff, current systems, or
current procedures, I believe this error would not have
occurred.
How Can We Do It Better?--Taxes
Translation: This is a new section highlighting a management
strategy Bridgeway is using to improve our overall performance
in the fund industry. One mutual fund recently incurred
capital gains for 1997, which left most shareholders with a
tax bill greater than their annual total return. While
theoretically this can happen at any mutual fund, Bridgeway
does a number of things to try to avoid it. (In 1997, an
Ultra-Small Company Portfolio shareholder in the 31% tax
bracket watched a $10,000 account grow to $11,593 after paying
$247 in taxes at year-end. This ratio of taxes to total
return is unusually lean; I would expect a shareholder to pay
a higher percentage of total return in taxes in most years.)
Before starting Bridgeway Fund in 1994, I invested primarily
in stocks and had rare occasion to invest in mutual funds.
These rare occasions included funds for the early days of my
IRA and fund recommendations for friends. One of the things I
noticed over the years was how much harder it was to pick
winning mutual funds than winning stocks. I never understood
this phenomenon until, as an industry "insider," I learned
some of the things mutual funds do to make it hard to "beat
the market." The things I learned, I have used to improve
Bridgeway funds. As a mutual fund investor, I thought you
might also appreciate my sharing these insights, possibly to
improve your own investing prowess. So, for some time, I plan
to make this a periodic feature of our shareholder letter.
The purpose of this section is not to denigrate other mutual
funds. I believe mutual funds are by far in the "cleanest"
segment of the investment community. Neither am I trying
simply to "toot our own horn" (although I will some). We
certainly make mistakes at Bridgeway and we can continue to
make improvements. But to the degree that shareholders,
boards of directors, journalists, regulators, and mutual fund
managers themselves identify our weak links, we can make the
industry and the capitalist system safer, more efficient,
productive, and humane.
In the December quarter semi-annual report I addressed several
tax and operational issues: why our method of stock picking
results in fairly high turnover; why it is generally better to
hold an actively managed portfolio such as this one in a tax-
deferred account such as an IRA; what amount of tax one might
expect to pay from capital gains in this portfolio in a
"normal" year; and the amount by which we have to "beat the
market" in order to justify our active management in a taxable
account. After the April tax season, Bridgeway fielded a
number of questions about the tax management of our fund. Our
overall philosophy is to manage tax issues in this portfolio
"on the margin." This is not a specifically "tax-managed"
portfolio such as Bridgeway's index funds. However, we do try
to justify higher taxes with even higher returns (though, of
course, we cannot promise this), and we do strive to decrease
the tax burden for shareholders in taxable accounts when it
may help, or at least is unlikely to hurt, our overall
performance. Finally, we give strong preference to current,
rather than future shareholders. (A friend of mine, quoting
Texas football coach Darrell Royal, would say, "Dance with who
brung ya.")
Earlier this year I read articles on Morningstar's web site
and in the Wall Street Journal which highlighted the tax
inefficiency of one fund in 1997. I thought it would be
instructive to explain the source of this inefficiency and let
you know what Bridgeway does to avoid these problems. "Fund
Z" (not the real name) made a capital gains distribution of
27% in a year when the fund itself was up only 7.7%. This
means that most shareholders in taxable accounts paid more in
taxes than they made during the year in the fund. Due to
quirks of IRS rules for mutual fund accounting, this situation
can happen even to a well-managed fund. (It can also happen
to an individual owning stocks if you take gains on securities
which appreciated in prior years during a year of market
decline, for example.) Nevertheless, most of the reasons for
Fund Z's capital gains distribution were unnecessary:
1. Untimely decision to reduce built-up capital gains. Fund Z
managers decided that the fund's big capital-gains exposure
was scaring away potential new investors, so they sold some
stocks with high gains and then bought them back the next day.
Current shareholders had to pay taxes on the resulting capital
gains. In addition, they paid unnecessary transaction costs.
But they received no benefits. So who did benefit? Future
shareholders might benefit if the fund does well and capital
gains distributions are lower than otherwise. Who benefits
under almost any scenario? The fund management company whose
apparent primary objective is to attract more assets. You
will never see Bridgeway make transactions for this purpose.
We are trying hard to look out for our current shareholders'
interests first.
2. Unexpected redemption. As the market declined in the
December quarter, a large market-timing Fund Z shareholder
redeemed all shares, worth about 10% of the total fund. In
order to raise cash to cover the redemption, the fund had to
sell some securities, which resulted in additional capital
gains. We do several things to avoid this situation. First,
we invite market timers not to invest in our funds. This is
stated in capital letters on the front of our prospectus. We
let shareholders know in our prospectus that frequent traders
(twice or more per year) may not be allowed back in our funds.
(Of course, no Ultra-Small Company shareholder could get back
in, since the Portfolio is closed.) In our index portfolios,
which are specifically tax-managed, shareholders who engage in
panic selling by redeeming in a down market may also incur a
2% redemption charge which accrues to the remaining
shareholders. One thing that many funds do to avoid having to
sell securities to raise cash for redemptions is to hold a
large percentage of assets in cash. We don't do this at
Bridgeway. We figure if you wanted part of your investment in
a money market account, you can find higher yields in a fund
specializing in them. So, what do I do with the rare large
redemption? Generally, I _harvest from the bottom,_ that is,
sell the current least attractive stocks according to our
investment models. We manage our holdings on a _tax lot_
basis, which means we try to sell those lots which give the
most favorable tax consequences to our taxable shareholders.
If I were managing Fund Z, I would have looked at the stocks
my models liked least, then those lots which would avoid
capital gains. In the case of the Ultra-Small Company
Portfolio, I would also look at companies which had outgrown
our ultra-small charter, since we would end up selling these
eventually anyway.
3. Two fund companies merged. The Fund Z family of funds
merged with another fund family last year, resulting in
additional capital gains. One fund had to sell appreciated
securities to comply with investment objectives of the
surviving fund, an action probably beyond the control of Fund
Z's portfolio manager. It is not likely to happen at
Bridgeway. I hold a majority of the shares of Bridgeway
Capital Management, and I am not looking to sell out, now or
in the future, to a larger company. There are some major
incompatibilities between Bridgeway and all other larger
companies I am aware of. I have worked for an organization
with over 3,000 employees and I like my current job much
better. Just like the companies we invest in, sometimes it's
great to be small. If I wake up in 20 years working for a
larger company, I would expect it to be Bridgeway.
4. Sales to satisfy the short-short rule. This is an arcane
IRS mutual fund rule which requires that no more than 30% of
gross income (for simplicity, say 30% of all capital gains)
can be from securities held less than 91 days. It is only a
problem for funds with very high turnover. Based on our stock
picking models, this rule is rarely a problem for the
Bridgeway funds. The only time it was an issue was in May,
1996 when some of our stocks nearly doubled in a two-month
timeframe and we wanted to reduce these holdings to reduce the
portfolio risk. We had to wait an extra month to avoid
creating potentially excessive _short-short_ gains.
Fortunately, this rule has been repealed by Congress and since
June 30 no longer applies to Bridgeway.
In summary, we will have some better and some worse years for
taxes, but I expect to sidestep all four of the reasons
shareholders incurred higher taxes in Fund Z.
Conclusion
As always, I appreciate your feedback. We take these seriously
and have made continuing improvements because of people who
have taken the time to write or call us. In the last year we
have made significant improvements in the timeliness of our
daily Portfolio price reporting and confirmation reporting.
We have included answers to some questions in our quarterly
reports. And we have continued to provide a high level of
personal phone support even while adding an automated "menu_
to our _800_ phone number. Please keep your ideas coming.
Best regards,
John Montgomery
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Common Stock - 95.9%
Aerospace - 1.3%
Axsys Technologies, Inc. * 31,950 $ 615,038
Air Transport - 0.3%
World Airways, Inc. * 34,500 133,688
WorldCorp, Inc. * 30,000 9,375
143,063
Aluminum & Products - 2.1%
Invision Technologies, Inc. * 123,300 955,575
Arms and Ammunition - 0.8%
Allied Research Corp.* 28,900 361,250
Auto parts - 1.7%
IMPCO Technologies, Inc.* 37,971 617,029
R & B Inc * 14,000 150,500
Raytech Corp. * 4,800 24,000
791,529
Automobiles - 1.0%
Asha Corp. * 20,000 115,000
Collins Industries, Inc 22,500 114,067
Featherlite, Inc.* 21,000 252,000
481,067
Banking - 0.8%
Avondale Financial Corp. * 11,000 191,125
Hallmark Capital Corp.* 13,600 190,400
381,525
Building - 2.7%
Dominion Homes, Inc. * 19,250 279,125
Engle Homes Inc 8,300 129,688
MI Schottenstein Homes, Inc. 2,800 60,550
Monterey Homes Corp* 8,200 149,650
Perini Corp. * 13,300 113,881
Transcoastal Marine
Services, Inc.* 81,500 491,547
WTD Industries, Inc. * 4,500 4,219
Zaring National Corp.* 4,500 39,375
1,268,035
Chemicals - 0.6%
Pure World, Inc.* 18,000 285,750
Cosmetics & Toiletries - 1.2%
Styling Technology Corp.* 24,200 556,600
Data Processing - Hardware - 4.0%
Bell Microproducts, Inc.* 10,500 83,672
Innovative Tech Systems * 122,800 744,475
Printronix, Inc. * 13,500 216,000
Prophet 21, Inc. * 10,100 147,713
Data Processing - Hardware - continued
Quality Systems, Inc. * 9,600 $
88,800
Rimage Corp * 20,700 243,225
Scan-Optics, Inc. * 61,950 325,238
Thrustmaster, Inc. * 2,000 16,000
1,865,123
Data Processing - Software - 15.5%
AlphaNet Solutions, Inc. * 40,820 464,328
Applied Microsystems Corp* 22,400 98,000
ARDENT Software, Inc.* 29,000 398,750
Data Systems Network Corp. * 6,500 11,170
EDUsoft, LTD 60,600 348,450
Expert Software, Inc.* 96,100 396,413
IQ Software Corp. * 27,500 309,375
Insigna Solutions PLC* 5,600 5,950
International Management
& Research Corp.* 102,300 1,010,213
International Microcomputer
Software, Inc.* 84,100 1,314,063
Oshap Technologies Ltd. * 22,500 150,469
Performance Technologies, Inc.* 42,700 480,375
Platinum Technology, Inc.* 36,344 1,038,076
Restrac Corp. * 4,800 23,400
SEEC Inc. * 85,900 934,163
Simware, Inc.* 47,800 174,769
7,157,964
Drugs-Generic and OTC - 2.2%
D & K Healthcare
Resources, Inc.* 39,500 849,250
Neogen Corp * 20,000 150,000
999,250
Electronics/Electric - 7.8%
Cobra Electronics Corp * 86,500 437,906
Cp Clare Corp * 3,500 33,250
Daktronics, Inc.* 8,700 90,806
EDO Corp. 12,400 117,800
Gentner Communications Corp.* 21,200 58,300
Gradco Systems, Inc.* 35,900 242,325
Intervoice, Inc.* 7,500 133,125
in Test Corp.* 16,670 100,020
Isomet Corp * 10,900 57,225
K-Tron International, Inc.* 23,600 439,550
Oyo Geospace Corp. * 7,500 206,250
PSC Inc * 33,100 299,969
Power Integrations, Inc.* 17,500 159,688
Richey Electronics, Inc.* 32,750 255,859
Spire Corp. * 30,550 110,744
Vari L Company, Inc.* 63,000 614,250
Vicon Indistries, Inc. * 32,000 252,000
3,609,067
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Finance - 3.6%
Pacific America Money
Center, Inc.* 36,410 $ 559,804
Pilgrim America Capital Corp * 44,500 1,073,563
TFC Enterprises, Inc.* 6,600 17,325
1,650,692
Food - 0.3%
Fresh Juice Company, Inc.* 44,600 117,075
Food Serving - 1.9%
Akr Restaurants Corp.* 9,500 114,000
Denamerica Corp * 25,000 73,438
Garden Fresh Restaurant Corp.* 12,800 230,400
Pollo Tropical Inc * 23,600 256,650
Roadhouse Grill, Inc.* 42,900 209,138
883,626
Graphic Arts - 0.6%
Baldwin Technology
Company, Inc.* 23,700 139,238
Prime Source Corp. * 2,300 20,700
Truevision, Inc.* 88,000 121,000
280,938
Health Care Facilities - 2.7%
Insight Health Services Corp.* 23,800 255,850
Advocat Inc * 32,100 220,688
MIM Corp. * 50,500 239,875
Omega Health Systems, Inc. * 34,500 232,875
Sheridan Healthcare Inc * 23,950 284,406
1,233,694
Home Furnishings - 5.2%
Crown Crafts, Inc. 4,500 69,188
Smed International, Inc.* 13,500 243,000
TAB Products Company 23,200 287,100
Winsloew Furniture, Inc.* 67,200 1,814,400
2,413,688
Housewares - 1.8%
Home Products
International, Inc.* 69,800 811,425
Jewelry, Silverware, Watches - 1.9%
Jan Bell Marketing, Inc.* 71,800 466,700
Oroamerica Inc * 35,000 393,750
860,450
Leather & Shoes - 1.5%
Candie's, Inc * 30,900 239,475
Lacrosse Footwear Inc 7,700 88,550
Tandy Brands Accessories, Inc.* 20,590 383,489
711,514
Leisure-Amusement - 3.7%
Funco Inc. * 26,200 370,075
Leisure-Amusement - continued
PTI Holding, Inc. * 112,000 $
742,000
SCP Pool Corp * 9,218 225,829
Saint Andres Golf Corp * 11,200 35,000
Toymax International, Inc. * 46,500 319,688
1,692,592
Machinery - 0.1%
Inotek Technologies Corp. * 21,800 19,756
Selas Corp. Of America 2,900 25,738
Western Power & Equip. Corp. * 1,500 9,000
54,494
Manufacturing/Distr. - 0.7%
Applied Science &
Technology, Inc.* 38,500 308,000
Medical equipment/Supplies - 3.2%
AFP Imagining Corp. * 8,800 7,700
Contour Medical, Inc. * 14,400 115,200
Dynatronics Corp. * 126,000 429,188
I-Flow Corp. * 14,400 25,200
ICU Medical, Inc. * 14,000 201,250
Interpore International * 47,000 246,750
Kewaunee Scientific Corp. * 2,400 27,000
Lukens Medical Corp. * 44,500 136,281
Medical Technologies, Inc.* 30,100 285,950
1,474,519
Mining - 0.0%
Alta Gold Company * 9,000 15,750
Office Equipment - 0.3%
Officeland, Inc. * 44,800 134,400
Oil & Gas - 4.5%
Adams Resources &
Energy, Inc.* 6,500 75,969
Bolt Technology Corp 34,500 314,813
Callon Petroleum Company * 19,640 281,098
Castle Engergy Corp. 22,100 430,950
Clayton Williams Energy Inc.* 4,400 45,100
Daly International, Inc.* 43,800 262,800
Dawson Geophysical Company * 21,300 404,700
Petrocorp Inc. * 6,300 51,249
Petroleum Development Corp.* 40,000 193,750
Primeenergy Corp * 1,800 13,725
2,074,154
Pollution Control - 4.8%
American Eco Corp * 61,300
398,450
Barringer Technologies, Inc.* 98,900 933,369
Misonix, Inc * 107,675 878,224
2,210,043
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Retail Stores - 3.8%
Braun's Fashions Corp. * 68,000 $ 756,500
Calloways Nursery, Inc.* 30,400 68,400
Catherines Stores Corp. * 48,800 478,850
Creative Computers, Inc.* 11,300 77,688
Damark International, Inc.* 21,200 180,200
Ezcorp, Inc. * 14,600 159,688
Jim Hjelms Private Collection * 11,800 47,200
Rose's Holdings, Inc.* 3,800 6,888
1,775,414
Securities - 0.2%
JB Oxford Holdings, Inc.* 42,400 34,450
Rich Coast Inc. * 35,125 50,492
84,942
Services - 5.6%
Advanced Health Corp * 3,700 20,350
Advanced Marketing
Services, Inc. 16,100 273,700
Alpnet, Inc. * 20,500 82,000
Cerbco, Inc. * 3,500 31,281
Corrpro Cos, Inc.* 22,125 248,906
Eco Soil Systems, Inc.* 14,000 147,000
FTI Consulting, Inc.* 73,100 1,242,700
4 Kids Entertainment, Inc.* 14,000 119,000
ICF Kaiser International, Inc. * 14,500 31,719
International Airline
Support Group, Inc.* 25,800 161,250
The 'Solomon Page Group Ltd. * 42,900 160,875
Total Research Corp. * 14,000 50,750
2,569,531
Steel / Iron - 1.5%
Bayou Steel Corp.* 9,800 63,700
Republic Engineered Steels, Inc.* 58,000 250,125
Universal Stainless & Alloy
Products, Inc.* 31,900 293,081
Webco Industries, Inc.* 11,000 104,500
711,406
Telecommunications - 2.5%
Amerilink Corp * 21,300 300,863
Comtech Telecommunications
Corp.* 11,000 79,750
Microdyne Corp.* 32,600 146,700
Spectralink Corp * 10,000 43,750
TTI Team Telecom
International Ltd.* 62,600 479,281
Xetel Corp * 23,000 100,625
1,150,969
Textiles - 0.8%
The Dixie Group, Inc. 39,100 371,450
Transportation / Freight - 2.2%
Consolidated Delivery &
Logistics * 58,000 $ 257,375
Landair Services Inc. * 25,800 767,550
1,024,925
Trucking - 0.5%
Smithway Motor Xpress Corp. * 10,000 100,000
USA Truck, Inc.* 8,900 143,513
243,513
Total Common Stock (Identified Cost $43,125,452) $ 44,330,040
Short-term Investments - 4.2%
Money Market Funds - 4.2%
Expedition Money Market Fund 663,562 663,562
Federated Money Market Prime
Obligations Fund 643,902 643,902
SEI Daily Income Trust Prime
Obligations Fund 643,755 643,755
1,951,219
Total Short-term Investments
(Identified Cost $1,951,219) $ 1,951,219
Total Investments - 100.1%
(Cost $45,076,671) $ 46,281,259
Other Assets and Liabilities, net - (0.1)% (24,564)
Total Net Assets - 100.0% $ 46,256,695
Percentages are based on total net assets.
* Non-income producing security as no dividends were paid
during the period from July 1, 1997 to June 30, 1998.
** The aggregate identified cost on a tax basis is $45,076,671.
Gross unrealized appreciation and depreciation were
$6,979,358 and $5,774,770, respectively,
or net unrealized appreciation of $1,204,588.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
<S> <C>
Assets:
Investments at value (cost - $45,076,671) $46,281,259
Cash 720,567
Receivable for investments sold 342,724
Receivable from adviser 10,608
Receivable for interest 2,412
Receivable for dividends 140
Prepaid expenses 6,437
Deferred organization costs 4,698
-----------
Total assets 47,368,845
-----------
Liabilities:
Payable for shares redeemed 14,639
Payable for investments purchased 1,053,822
Payable for management fee 1,356
Payable for organization costs 4,749
Accrued expenses 37,584
-----------
Total liabilities 1,112,150
-----------
Net assets ( 2,053,642 shares outstanding) $46,256,695
===========
Net asset value, offering and redemption price per share ($46,256,695 / 2,053,642) $22.52
===========
Net assets represent:
Paid-in capital $38,254,335
Undistributed net realized gain 6,797,772
Net unrealized appreciation of investments 1,204,588
-----------
Net assets $46,256,695
===========
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<S> <C>
Investment income:
Dividends $66,693
Interest 41,557
-----------
Total income 108,250
-----------
Expenses:
Management fees 495,000
Accounting fees 135,274
Audit fees 9,666
Custody 34,624
Amortization of organization costs 4,518
Insurance 3,938
Legal 17,900
Registration fees 15,756
Directors' fees 933
Miscellaneous 107
-----------
Total expenses 717,716
-----------
Net investment loss (609,466)
-----------
Net realized and unrealized gain on investments:
Net realized gain on investments 10,369,950
Net change in unrealized appreciation (4,439,194)
-----------
Net realized and unrealized gain 5,930,756
-----------
Net increase in assets resulting from operations $5,321,290
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
Year ended Year ended
Increase (decrease) in net assets: June 30, 1998 June 30, 1997
<S> <C> <C>
Operations:
Net investment loss ($609,466) ($203,962)
Net realized gain on investments 10,369,950 238,109
Net change in unrealized appreciation (4,439,194) 5,324,346
------------ ------------
Net increase resulting from operations 5,321,290 5,358,493
------------ ------------
Distributions to shareholders:
From net investment income 0 0
From realized gains on investments (3,065,168) (228,177)
------------ ------------
Total distributions to shareholders (3,065,168) (228,177)
Fund share transactions:
Proceeds from sale of shares 15,231,033 23,069,647
Reinvestment of dividends 3,018,349 209,831
Cost of shares redeemed (4,319,011) (2,897,183)
------------ ------------
Net increase from Fund share transactions 13,930,371 20,382,295
------------ ------------
Net increase in net assets 16,186,493 25,512,611
Net assets:
Beginning of period 30,070,202 4,557,591
------------ ------------
End of period $46,256,695 $30,070,202
=========== ===========
Number of Fund shares:
Sold 632,949 1,341,007
Issued on dividends reinvested 141,441 12,394
Redeemed (178,802) (168,592)
------------ ------------
Net increase 595,588 1,184,809
Outstanding at beginning of period 1,458,054 273,245
------------ ------------
Outstanding at end of period 2,053,642 1,458,054
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
Year ended Year ended Year ended 8/5/94* to
<S> <C> <C> <C> <C>
Per share data
Net asset value, beginning of period $20.62 $16.68 $11.35 $10.33
--------- --------- --------- ---------
Income (loss) from investment operations:
Net investment loss (0.34) (0.24) (0.21) (0.04)
Net realized and unrealized gain 4.03 4.50 6.03 1.07
--------- --------- --------- ---------
Total from investment operations 3.69 4.26 5.82 1.03
--------- --------- --------- ---------
Less distributions to shareholders:
Net investment income 0.00 0.00 0.00 0.00
Net realized gains (1.79) (0.32) (0.49) (0.01)
--------- --------- --------- ---------
Total distributions (1.79) (0.32) (0.49) (0.01)
--------- --------- --------- ---------
Net asset value, end of period $22.52 $20.62 $16.68 $11.35
========= ========= ========= =========
Total return [1] 18.4% 26.0% 52.4% 10.5%
Ratios & Supplemental Data
Net assets, end of period $46,256,695 $30,070,202 $4,557,591 $667,536
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 1.67% 1.67% 1.97% 1.68%
Expenses before waivers and reimbursements 1.67% 1.87% 3.07% 8.34%
Net investment loss after waivers and reimbursements (1.42%) (1.37%) (1.47%) (0.65%)
Portfolio turnover rate [2] 103.4% 56.2% 155.9% 103.6%
</TABLE>
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* August 5, 1994 was commencement of operations.
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
The Ultra-Small Company Portfolio was closed to new investors on
June 9, 1997 when assets reached $27.5 million and was closed to
all investors on June 30, 1998.
Bridgeway Capital Management, Inc. is the Adviser to the Fund.
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 at the time of
redemption.
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.
ULTRA-SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies
Distributions to Shareholders, continued
During the year ended June 30, 1997, the Ultra-Small Company
Portfolio did not pay sufficient dividends and distributions from
net investment income and from net capital gains generated during
the year ended June 30, 1996. The Ultra-Small Company Portfolio
has petitioned the Internal Revenue Service for permission to make
such deficient distributions. 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
$20,000. While management believes the Internal Revenue Service has
agreed in principle to the petition, the ultimate outcome of this
matter will not be determined until final agreement is reached with
the Internal Revenue Service. The Adviser has committed to pay the
interest and penalties and all other costs associated with
resolving the deficiency for the portfolio.
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.
Risks and Uncertainties
The Fund invests in stocks. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to
the level of risk associated with certain investments and the level
of uncertainty related to changes in the value of investments, it
is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the
amounts reported in the financial statements and financial
highlights.
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.
3. Management Contract:
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%.
4. 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 of the Fund 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 expense
category of the financial statements. All amounts paid for
shareholder accounting are paid to the Adviser.
Payable for organization costs is payable to the Adviser. The
receivable from the adviser at June 30, 1998 is related to a
pricing error.
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
5. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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.
6. Cost, Purchases and Sales of Investment Securities:
Investments have the same cost for tax and financial statement
purposes. Aggregate purchases and sales, other than cash
equivalents were $53,538,539 and $42,643,200 for the year ended
June 30, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Ultra-Small Company Portfolio:
We have audited the accompanying statement of assets and
liabilities, including the schedule of portfolio investments, of
the Ultra-Small Company Portfolio (one of the portfolios
constituting Bridgeway Fund, Inc.) as of June 30, 1998, the
related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of
the three years in the period then ended 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 audits.
We conducted our audits 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 and financial highlights. Our procedures
included confirmation of securities owned as of June 30, 1998, 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 audits
provide 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 the Ultra-Small Company Portfolio of
Bridgeway Fund, Inc. as of June 30, 1998, the results of its
operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the
financial highlights for each of the three years in the period
then ended and for the period from August 5, 1994 (commencement
of operations) to June 30, 1995, in conformity with generally
accepted accounting principles.
Houston, Texas
August 25, 1998
<PAGE>
August 28, 1998
Dear Fellow Ultra-Small Index Portfolio Shareholder,
Translation: This was our best fiscal year yet. OK, it was our
first and only fiscal year, but we beat all our benchmarks and
I'm quite pleased.
If you're not familiar with my _translation_ format,
understanding it may help you skim this and future letters. My
goal is to let you know in the first sentence or two how we did
and whether I'm happy about our performance or not. If you read
only one sentence of each of my letters and throw it in the
trash, I want you to know qualitatively how we did. If you want
to read just the other highlights of my letter, you can skim for
the paragraphs beginning _translation._ Of course, I'll provide
more details for those who enjoy them.
Performance Summary
Our performance during the first eleven months lagged the large
company indexes such as the Dow Jones Industrials and our own
Bridgeway Ultra-Large 35 Index. Running counter to the long-term
historical trend, large companies dominated the smaller ones for
this period across the board. We beat the CRSP Cap-Based 10
Portfolio Index of ultra-small companies by over three percentage
points and the Russell 2000 Index by over two percentage points.
The following table presents SEC standardized performance for our
first (eleven month) fiscal year, July 31, 1997 to June 30, 1998:
<TABLE>
<S> <C>
Life-to-Date
7/31/97 to
6/30/98**
Ultra-Small Index Portfolio 13.8%
CRSP Cap-Based Portfolio 10 Index* 10.4%
Russell 2000 Index* 11.5%
</TABLE>
*The CRSP Cap-Based Portfolio 10 Index is an unmanaged index of
2661 of the smallest publicly traded U.S. stocks (with dividends
reinvested) as reported by the Center for Research on Security
Prices. This is the index we are seeking to match. The Russell
2000 Index is an unmanaged index of small companies (with
dividends reinvested). This latter index is the most widely
tracked index among small company funds, but is comprised of
companies roughly 6 times larger than that of the CRSP Index and
the Bridgeway Portfolio. Past performance does not guarantee
future returns.
** Returns are not annualized.
GRAPH:
_Growth of $10,000 Invested in various Funds and Indexes from
7/31/97 to 6/30/98_
Shows the growth of $10,000 in the Bridgeway Ultra-Small Index
Portfolio, the Russell 2000 Index and the CRSP Cap-Based
Portfolio 10 Index. As of 6/30/98 the $10,000 had grown to
$11,380 in the Bridgeway Ultra-Small Index Portfolio, $11,147
in the Russell 2000 Index and $11,035 in the CRSP Cap-based
Portfolio 10 Index.
Explanation of Performance
On the strength of our September and March quarters, our new
Portfolio turned in a respectable showing, nearly matching the
historical return for ultra-small companies. The companies which
did poorest had exposure to the economic carnage in Southeast
Asia or to declining energy prices. Winning companies spanned
many industries, including software, building, jewelry,
chemicals, food, furniture, distribution, and finance. It's a
rather disparate group.
Tracking Error
Translation: In the first half of the year we underperformed the
index. In the second half we outperformed the index. As assets
grow and we have more companies in the portfolio, I expect the
portfolio to track the index more closely. Quite frankly, I
don't think the current level of _tracking error_ is a big deal,
since we've proven it is not biased in one direction or the
other.
As highlighted in the December semi-annual report, we experienced
negative tracking error (that is we underperformed our index) in
our first five months due to holding too few companies to closely
track the index. In the second half we outperformed the index,
in part due to the same problem of holding fewer stocks than I
would like, but also due to negative trading costs as discussed
below. We picked up some additional companies during the second
half of the year but also sold or thinned some in order to
_harvest losses_ as part of our tax management strategy. (See
more about this below.) We still lack the 300 companies I desire
to replicate reasonably our index on a quarterly basis, but we
did better for the full year, since we had positive tracking
error (that is, we outperformed our index) in the second half.
Negative Trading Costs
Translation: Usually you want a fund to have low turnover. This
keeps down the costs of trading and keeps down the tax bill at
the end of the year. We may have created an _anti-gravity_ fund,
insofar as we appear to be able to turn this _trading cost
problem_ on its head to our advantage. If we sell as many stocks
which have declined as those which have appreciated, there is
also no tax problem. This is a big deal, and I'm really excited.
It won't work in all market environments, but it's working very
well so far.
We have become very good at trading ultra-small companies. In
the last six months, we have been able to buy our stocks closer
to the bid and sell them closer to the ask. Along with
incredibly low commission costs (the discount brokerage industry
has gotten ridiculously competitive), we achieved what is known
as _negative trading cost._ As long as we have some time to
execute a trade, we expect to add value through our buying and
selling of stocks. We hoped in the beginning to be able to do
this well enough to offset our 0.75% expense ratio. I am excited
to tell you I think we may even be able to do better than this.
As a result, we have now begun to engage in tax selling (see
below) and have categorized our portfolio as _tax managed._ This
has gone so well that in July we hired a full-time person to
devote just to Bridgeway trading. (This may not sound like a
large commitment, but for a small firm with previously six full-
time employees, it is a significant commitment.)
Tax Management
Translation: If turnover is no longer a problem, we can add tax
management to the list of advantages of this fund. To the degree
we successfully defer paying taxes, you get to keep more of your
returns.
_Tax selling_ means that we periodically sell some _tax lots_
(specific stock purchases) which have declined in value in order
to capture the capital loss in order to offset other capital
gains. Our goal is now to return as little as possible in the
way of taxable distributions to our shareholders. Since this
should add value (total return) to the portfolio through negative
trading costs, it should be advantageous even for shareholders in
a tax-deferred account such as an IRA. I am very excited about
this development. Combined with the fact the ultra-small
companies tend not to pay dividends, this may well, over time,
turn out to be one of the most tax efficient (and hopefully high
octane) funds in America. We'll have to see how the future bears
this out. But I can already say we distributed no taxable
dividends in our first fiscal year, and I expect to distribute
none in our second year as well.
Portfolio Advantages
Translation: What a great Portfolio! (Usually, I'm more modest
than this, but I just can't stand it.)
<PAGE>
In my last letter (February 25), I highlighted some of the
advantages of this Portfolio. Let me briefly enumerate a longer
list:
1. The ultra-small asset class has an average annual return of
13.9% over the last seven decades. This compares to 11.7% for
small stocks and 10.7% for large stocks.
2. Of course, the volatility (short-term risk) is higher too.
However, according to Ibbotson's Stocks, Bonds, Bills, and
Inflation, the additional risk is not in proportion to the
additional return in a diversified (_optimized_) portfolio. This
is the only asset class I know of where you may get a significant
_free ride,_ more so than micro-cap stocks. Ibbotson measures
this at 5.4% per year. I personally think it is overstated, but
even a couple of percent per year is a lot over time.
3. The expense ratio is 0.75%, half the actively managed small-
cap fund rate, and much less than the average micro-cap fund
rate. We think this is a good deal relative to the institutional
0.60% rate for passively managed micro-caps, since ultra-small
stocks are significantly more time intensive to trade. However,
I would expect our expense ratio to drop some as assets increase.
4. Since we don't buy or sell on news, we can be very stingy with
trading.
5. There is no _cap-creep_ or _style drift_ from swelling assets.
As most small-cap funds get swamped with cash, they invest in
bigger and bigger companies, something known as _cap-creep_ or
_style drift._ We can manage well over a billion dollars in this
fund without any style drift.
6. This portfolio is not dependent on my skills. I have two
other employees who can implement our trading strategies. If I
died tonight, nothing would change about the Portfolio
management.
7. There is no other index fund in this asset class. Bridgeway
Ultra-Small Company Portfolio is the only actively managed fund
which is convincingly committed to this asset class.
8. There are no problems associated with annual rebalancing
(changing the composition of an index), which is a significant
problem with Russell 2000 funds. We don't own all 2700
companies, so other advisers can't _front-run_ our purchases and
sells. We believe front running has measurably hurt the
performance of the Russell 2000 Index and even more so, the funds
that follow it.
9. We don't have to sell a company because it becomes too small.
10. We can _harvest_ losses to try to offset gains from takeovers
or sales of companies which outgrow our ultra-small charter.
11. We can _harvest_ capital losses without worrying about
getting out of balance with the index.
12. There is no tobacco. Who needs to be invested in a terminal
industry?
13. We court buy and hold investors. We discourage short-term
investors and traders on the cover of our prospectus in capital
letters. The board of directors reserves the authority to slap a
redemption reimbursement fee (accruing to the Portfolio) on
exiting shareholders if they redeem in a down market. We are
joining FundServ Networking Level III to attain the ability to
decline any trades by short-term traders or market-timers, and
this is backed up by strong language in the prospectus.
14. There is little backlog of existing capital gains on the
books from a decade-long bull market.
15. The asset base of this fund is more than doubling on an
annualized basis. I would expect this to continue for some years
to come. If this happens, any taxable dividends we would have to
distribute would be diluted by future shareholders, if you get in
early.
Disclaimer
The following is a reminder from the friendly folks at your fund
who worry about liability. 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 fiscal year end, June, 1998;
security positions can and do change thereafter.
Conclusion
As always, I appreciate your feedback. We take these seriously
and have made continuing improvements because of people who have
taken the time to write or call us. In the last year we have
made significant improvements in the timeliness of our daily
Portfolio price reporting. We have included answers to some
questions in our quarterly reports. And we have continued to
provide a high level of personal phone support even while adding
an automated "menu_ to our _800_ phone number. Please keep your
ideas coming.
Sincerely,
John Montgomery
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Common Stock - 98.6%
Aerospace - 0.5%
Axsys Technologies, Inc. * 400 $ 7,700
Air Transport - 0.3%
World Airways, Inc. * 1,100 4,263
Arms and Ammunition - 1.7%
Allied Research Corp.* 2,100 26,250
Auto parts - 2.4%
IMPCO Technologies, Inc.* 129 2,096
R & B, Inc.* 2,300 24,725
Raytech Corp. * 1,900 9,500
36,321
Automobiles - 1.7%
Collins Industries, Inc. 3,500 17,744
SMC Corp. * 1,100 8,663
26,407
Banking - 1.7%
Community West Bancshares * 800 10,848
Hallmark Capital Corp.* 1,100 15,400
26,248
Broadcasting - 0.9%
Enterprise Software, Inc. * 4,800 14,100
Building - 1.8%
Dominion Homes, Inc. * 1,250 18,125
Perini Corp. * 500 4,281
Transcoastal Marine
Services, Inc.* 800 4,825
27,231
Chemicals - 3.2%
Arrow-Magnolia
International, Inc.* 1,900 11,400
Pure World, Inc.* 2,400 38,100
49,500
Cosmetics & Toiletries - 0.6%
Styling Technology * 400 9,200
Data Processing - Hardware - 2.8%
Allstar Systems, Inc.* 1,900 7,600
Cerion Technologies, Inc.* 3,800 3,919
Kentek Information
Systems, Inc. 2,200 18,975
Printronix, Inc. * 700 11,200
41,694
Data Processing - Software - 13.6%
AlphaNet Solutions, Inc.* 1,430 $ 16,266
Applix Inc. * 1,700 6,481
Expert Software, Inc.* 1,900 7,838
General Automation Inc. * 5,000 2,611
International Management &
Research Corp.* 1,100 10,863
International Microcomputer 1,499 23,422
Software, Inc.*
Microtest Inc. * 1,800 8,213
Ovid Technologies, Inc. * 1,650 39,188
Prophet 21, Inc. * 1,800 26,325
Rimage Corp. * 900 10,575
SEEC Inc. * 1,000 10,875
Scan-Optics, Inc. * 1,150 6,038
Unify Corp. * 7,500 20,625
Ardent Software, Inc.* 1,400 19,250
208,570
Electronics/Electric - 6.5%
Cobra Electronics Corp. * 3,100 15,694
EDO Corp. 2,700 25,650
Gradco Systems, Inc.* 2,250 15,188
Richey Electronics, Inc.* 450 3,516
Spire Corp. * 350 1,269
Vari L Company, Inc.* 1,100 10,725
Vicon Industries, Inc. * 3,400 26,775
98,817
Finance - 4.4%
Ace Cash Express, Inc. 1,200 20,700
Capital Associates * 2,200 8,525
Pacific America Money
Center, Inc.* 860 13,223
TFC Enterprises, Inc.* 9,700 25,463
67,911
Food - 1.5%
Amcon Distributing Company * 1,700 13,388
Monterey Pasta Company * 8,400 10,238
23,626
Food Serving - 2.2%
Ark Restaurants Corp.* 1,700 20,400
Pollo Tropical, Inc.* 1,200 13,050
33,450
Graphic Arts - 1.4%
Baldwin Technology
Company, Inc.* 2,000 11,750
Truevision, Inc.* 6,500 8,938
20,688
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Health Care Facilities - 1.7%
Advocat, Inc. * 1,100 $ 7,563
Health Power, Inc. * 1,700 9,775
MIM Corp. * 1,700 8,075
25,413
Home Furnishings - 1.8%
Winsloew Furniture, Inc.* 1,000 27,000
Household Products - 1.8%
Safety 1st, Inc. * 4,100 27,675
Housewares - 0.6%
Home Products
International, Inc.* 800 9,300
Jewelry, Silverware, Watches - 4.5%
Jan Bell Marketing, Inc.* 7,100 46,150
Michael Anthony Jewelers, Inc.* 4,200 10,763
Oroamerica, Inc. * 1,100 12,375
69,288
Leather & Shoes - 3.2%
Candie's, Inc * 3,200 24,800
New Retail Concepts, Inc. * 2,300 6,900
Rocky Shoes and Boots, Inc.* 550 7,838
Tandy Brands Accessories, Inc.* 500 9,313
48,851
Leisure-Amusement - 2.1%
Integrity, Inc.* 400 1,200
PTI Holdings, Inc.* 2,900 19,213
SCP Pool Corp * 83 2,021
Toymax International, Inc.* 1,300 8,938
31,372
Machinery - 1.7%
Newcor, Inc. 1,875 16,406
Thermwood Corp . * 1,100 9,694
26,100
Medical equipment/Supplies - 2.5%
Innerdyne Inc * 7,100 18,194
Interpore International * 1,790 9,398
Medical Technologies, Inc.* 1,200 11,400
38,992
Metal / Other fabricating - 0.7%
Eastern Co 370 10,175
Mining - 0.8%
Alta Gold Company * 7,000 12,250
Oil & Gas - 6.3%
Bolt Technology Corp. 3,600 32,850
Callon Petroleum Company * 75 1,073
Oil & Gas - continued
Columbus Energy Corp. * 2,090 $ 15,283
Dailey International, Inc.* 1,200 7,200
Maynard Oil Company * 100 1,013
Meteor Industries, Inc.* 2,900 12,688
Petrocorp, Inc. * 1,100 8,948
Petroleum Development Corp.* 3,300 15,984
Southern Mineral Corp.* 250 859
95,898
Pollution Control - 1.6%
Barringer Technologies, Inc.* 800 7,550
Recycling Industries, Inc.* 1,600 9,400
Strategic Diagnostics, Inc. 2,400 7,200
24,150
Retail Stores - 6.0%
Braun's Fashions Corp. * 2,400 26,700
Calloways Nursery, Inc.* 4,000 9,000
Catherines Stores Corp. * 2,000 19,625
Creative Computers, Inc.* 1,000 6,875
DIY Home Warehouse, Inc. * 7,800 16,575
Rag Shops, Inc. * 3,600 12,825
91,600
Services - 7.9%
Advanced Marketing
Services, Inc. 600 10,200
Business Resource Group * 2,800 7,350
Corrpro Companies, Inc.* 2,125 23,906
FTI Consulting, Inc.* 800 13,600
Insituform East, Inc.* 4,000 9,000
International Airline 2,400 15,000
Support Group, Inc.*
The Solomon Page Group Ltd. * 5,000 18,750
Staff Builders, Inc. * 4,800 6,150
Travel Ports Of America, Inc.* 2,700 8,269
Wave Technology
International, Inc.* 1,600 8,900
121,125
Steel / Iron - 2.5%
Bayou Steel Corp.* 1,300 8,450
Republic Engineered Steels, Inc.* 5,300 22,856
Universal Stainless & Alloy
Products, Inc.* 700 6,431
37,737
Telecommunications - 2.9%
Amerilink Corp.* 70 989
Axiom Inc.* 2,200 6,050
Bogen Communications
International, Inc.* 3,000 22,875
Microdyne Corp.* 2,100 9,450
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Telecommunications - continued
Xetel Corp.* 280 $ 5,600
44,964
Transportation / Freight - 1.4%
Consolidated Delivery &
Logistic * 4,800 21,300
Trucking - 1.5%
Cannon Express, Inc.* 1,000 8,000
USA Truck, Inc.* 900 14,513
22,513
Total Common Stock (Identified Cost $1,479,674) $ 1,507,679
Short-term Investments - 2.8%
Money Market Funds - 2.8%
Expedition Money Market Fund 42,758 42,758
Total Short-term Investments
(Identified Cost $42,758) $ 42,758
Total Investments - 101.4%
(Cost $1,522,432) $ 1,550,437
Other Assets and Liabilities, net - (1.4)% (21,140)
Total Net Assets - 100.0% $ 1,529,297
Percentages are based on total net assets.
* Non-income producing security as no dividends were paid
during the period from July 1, 1997 to June 30, 1998.
** The aggregate identified cost on a tax basis is $1,522,432.
Gross unrealized appreciation and depreciation were
$212,298 and $184,293, respectively,
or net unrealized appreciation of $28,005.
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
Assets:
<S> <C>
Investments at value (cost - $1,522,432) $1,550,437
Receivable for investments sold 13,759
Receivable from adviser 7,717
Prepaid expenses 114
Deferred organization costs 3,698
Total assets 1,575,725
Liabilities:
Bank overdraft 37,652
Payable for management fee 78
Payable for organization costs 3,698
Accrued expenses 5,000
Total liabilities 46,428
Net assets ( 268,960 shares outstanding) $1,529,297
Net asset value, offering and redemption price per share ($1,529,297 / 268,960) $5.69
Net assets represent:
Paid-in capital $1,500,455
Undistributed net realized gain 837
Net unrealized appreciation of investments 28,005
Net assets $1,529,297
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF OPERATIONS
From commencement of operations (July 31, 1997) to June 30, 1998
<S> <C>
Investment income:
Dividends $1,649
Interest 2,385
Total income 4,034
Expenses:
Management fees 5,382
Accounting fees 3,386
Audit fees 5,000
Custody 2,230
Amortization of organization costs 828
Legal 94
Registration fees 1,246
Directors' fees 600
Total expenses 18,766
Less fees waived (8,768)
Less expenses reimbursed (1,926)
Net expenses 8,072
Net investment loss (4,038)
Net realized and unrealized gain on investments:
Net realized gain on investments 837
Net change in unrealized appreciation 28,005
Net realized gain and unrealized loss 28,842
Net increase in assets resulting from operations $24,804
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
July 31, 1997* to
Increase (decrease) in net assets: June 30, 1998
<S> <C>
Operations:
Net investment loss ($4,038)
Net realized gain on investments 837
Net change in unrealized depreciation 28,005
Net increase resulting from operations 24,804
Distributions to shareholders:
From net investment income 0
From realized gains on investments 0
Total distributions to shareholders 0
Fund share transactions:
Proceeds from sale of shares 2,955,365
Reinvestment of dividends 0
Cost of shares redeemed (1,450,872)
Net increase from Fund share transactions 1,504,493
Net increase in net assets 1,529,297
Net assets:
Beginning of period 0
End of period $1,529,297
Number of Fund shares:
Sold 534,300
Issued on dividends reinvested 0
Redeemed (265,340)
Net increase 268,960
Outstanding at beginning of period 0
Outstanding at end of period 268,960
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
July 31, 1997* to
June 30, 1998
Per share data
<S> <C>
Net asset value, beginning of period $5.00
Income (loss) from investment operations:
Net investment loss (0.02)
Net realized and unrealized gain 0.71
Total from investment operations 0.69
Less distributions to shareholders:
Net investment income 0.00
Net realized gains 0.00
Total distributions 0.00
Net asset value, end of period $5.69
Total return [1] 13.8%
Ratios & Supplemental Data
Net assets, end of period $1,529,297
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 0.75%
Expenses before waivers and reimbursements 1.74%
Net investment income (loss) after waivers and reimbur (0.38%)
Portfolio turnover rate [2] 61.7%
[1] Not annualized.
[2] Annualized.
* July 31, 1997 commencement of operations
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
Bridgeway Capital Management, Inc. is Adviser to the Fund.
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.
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.
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.
Risks and Uncertainties
The Fund invests in stocks. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to
the level of risk associated with certain investments and the level
of uncertainty related to changes in the value of investments, it
is at least reasonably possible that changes in risks in the near
term would
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies
Risks and Uncertainties, Continued
materially affect shareholders' account values and the amounts
reported in the financial statements and financial highlights.
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 Ultra-Small Index 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
reimburses the Portfolio for any commissions above one cent/share.
The Adviser expects to continue this practice until portfolio net
assets reach at least $2 million.
3. Management Contract:
The Ultra-Small Index Portfolio pays a flat 0.5% annual management
fee, computed daily and payable monthly subject to a maximum
expense ratio of 0.75%.
4. 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 of the Fund 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 expense
category of the financial statements. All amounts paid for
shareholder accounting are paid to the Adviser.
The Adviser has been voluntarily reimbursing the Ultra-Small
Index Portfolio for any operating expenses above 0.75%. To achieve
this expense level the Adviser has waived both the management fees
and accounting fees for the year ended June 30, 1998. The Adviser
expects to continue this voluntary level of reimbursement, in the
foreseeable future.
Payable for organization costs is payable to the Adviser.
5. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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.
6. 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 $2,086,845, and $608,039,
respectively for the year ended June 30, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Ultra-Small Index Portfolio:
We have audited the accompanying statement of assets and
liabilities, including the schedule of portfolio investments, of
the Ultra-Small Index Portfolio (one of the portfolios
constituting Bridgeway Fund, Inc.) as of June 30, 1998, and the
related statement of operations, statement of changes in net
assets and financial highlights for the period from July 31, 1997
(commencement of operations) to June 30, 1998. 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 and financial highlights. Our procedures
included confirmation of securities owned as of June 30, 1998, 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 the Ultra-Small Index Portfolio of
Bridgeway Fund, Inc. as of June 30, 1998, and the results of its
operations, changes in its net assets, and financial highlights
for the period from July 31, 1997 (commencement of operations) to
June 30, 1998, in conformity with generally accepted accounting
principles.
Houston, Texas
August 25, 1998
<PAGE>
August 28, 1998
Dear Fellow Aggressive Growth Shareholder,
By most performance benchmarks, this was a _ho-hum_ quarter and
year.
The good news is our Portfolio lead the Russell 2000 Index of small
companies in both the June quarter and our fiscal year ended June
30, 1998. The _value_ components of our model (our models don't
like to overpay for stocks) have pushed the portfolio more into
small stocks than the pricier large ones. This hurt our
performance in the current market environment. Consequently, we
trailed both the Dow Jones Industrial Average and the S&P 500 Index
in the quarter and fiscal year. Our Portfolio declined 2.9% in the
quarter and rose 18.1% for the fiscal year. We ranked 105th of 135
aggressive growth funds tracked by Morningstar for our fiscal year
and 10th of 84 funds for the last three years.
Performance Summary
The table below presents our June quarter, one year, and life-to-
date financial results according to the formula required by the
SEC.
The Aggressive Growth Portfolio was down 2.9% during the June
quarter, beating our small company index, but trailing both the
large company index and our peer group of Lipper Capital
Appreciation Funds. For the 12 months ended June 30, 1998 we were
up 18.1%, again beating the small company index, but trailing both
the large company index and our peer group of Lipper Capital
Appreciation Funds. The following table presents the details:
<TABLE>
<S> <C> <C> <C>
June Qtr. 1 Year Life-to-Date
4/1/98 7/1/97 8/5/94 to
to 6/30/98 to 6/30/98 6/30/98**
Aggressive Growth Portfolio -2.9% 18.1% 25.5%
S&P 500 Index (large companies)* 3.3% 30.2% 29.0%
Russell 2000 (small companies)* -4.7% 16.5% 19.1%
Lipper Capital Appreciation Funds* 0.3% 22.1% 20.5%
</TABLE>
*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.
GRAPH:
_Growth of $10,000 Invested in various Funds and Indexes from
8/5/94 to 6/30/98_
Shows the growth of $10,000 in the Bridgeway Aggressive Growth
Portfolio, the Lipper Capital Appreciation Funds, the Russell 2000
Index and the S&P 500 Index. As of 6/30/98 the $10,000 had grown
to $24,251 in the Bridgeway Aggressive Growth Portfolio, $26,998 in
the S&P 500 Index, $19,805 in the Russell 2000 Index and $20,713 in
the Lipper Capital Appreciation Funds.
Detailed Explanation of Performance
Translation: Except for the dominance of large stocks in the bull
market (see below), there were no major trends affecting our
portfolio. Details of individual stocks follow.
Our fiscal year performance was not concentrated in any one sector.
The portfolio had significant overweighting in the services, retail
store, and technology sectors. We had representatives of these
industries in both the largest gaining and largest declining stocks
(fortunately more of the former). Ten of our stocks gained 50% or
more during the fiscal year:
<TABLE>
<S> <C> <C> <C>
Rank Description Industry %Gain
1 Jackson Hewitt Inc. Services 156%
2 Medco Research,Inc. Drugs-Generic and OTC 134%
3 Standard Pacific Building 101%
4 Continental Can Co, Containers 83%
5 Best Buy Retail Stores 79%
6 Airborne Freight Air Transport 67%
7 HBO & Co. Data Processing 66%
8 Staffmark Inc. Services 63%
9 Microframe Data Processing Hardware 57%
10 Platinum Technology Data Processing Software 57%
</TABLE>
Jackson Hewitt Inc. was the second largest preparer of tax returns
until it got taken over, driving up the price very nicely. Medco
Research, an emerging pharmaceutical company, saw continued,
dramatic global commercialization of its cardiovascular medicines.
Standard Pacific is a California homebuilder that is enjoying a
booming economy and recovery from depressed price levels. The
declining list isn't as pretty, but is shorter.
<TABLE>
<S> <C> <C> <C>
Rank Description Industry % Decline
1 JB Oxford Holdings Securities -66%
2 Advanced Health Corp. Services -65%
3 Vivus Inc. Healthcare -65%
4 Quantum Corp Data Processing Hardware -51%
</TABLE>
J.B. Oxford was highlighted in our September shareholder letter.
Advanced Health Corporation provides integrated management services
to physician practices. The company had many signs of being a
great growth company, including three-digit sales increases, strong
earnings growth, postive cash flow, no debt, and $4/share of cash
in the bank. Then the company announced a dramatic turnaround in
operations and a large restructuring charge. The stock price took
a bad beating and has been trading for significantly less than the
hard cash the company has on hand.
Large Stock Dominance
Translation: The largest companies really shined in the last four
years, last year, and especially the last quarter. Along with an
extended bull market, this has been the trend over the last four
years, but it runs counter to the long-term trend of small-stock
dominance. Although the Aggressive Growth Portfolio is not
specifically a small cap portfolio, it does currently have small
company focus, which is not helpful in the current environment. We
expect this trend to reverse, to our Portfolio's advantage, but not
necessarily in the near term.
Occasionally, we get calls from shareholders asking why our
calendar year-to-date returns are so much poorer than _the market._
Usually, by _market,_ the caller means one of the more widely
reported large company indexes such as the Dow Jones Industrial
Average. The primary answer to this question is that while large
companies have given up only one-third of their gain from June,
1997 to June, 1998, small stock averages have given back their
entire gain plus more. The following graph shows the dramatic and
growing gap between large and small stock performance.
GRAPH:
_The Widening Gap between Large Stocks and Small Stocks from 8/5/94
to 6/30/98_
This graph shows the widening gap of returns of the S&P 500 Index
vs Russell 2000 Index. The graph shows the large stocks
appreciating much more rapidly than the small stocks. The graph
also demonstrates how the Bridgeway Aggressive Growth Portfolio
compares to the large and small stock performance. As of 6/30/98
the total percentage changes were 170%, 143% and 98% for the S&P
500 Index, the Aggressive Growth Portfolio and the Russell 2000
Index, respectively.
The largest companies have outperformed the smallest ones on a
cumulative basis. While the Aggressive Growth Portfolio kept ahead
of even the large company indexes through September of last year,
we have not been able to overcome this continued huge discrepancy.
Indeed, Bridgeway's large-cap portfolios (Social Responsibility and
Ultra-Large 35 Index) are among a small minority of funds to beat
the large-cap indexes this calendar year, and they have trounced
all our small-cap portfolios.
Disclaimer
The following is a reminder from the friendly folks at your fund
who worry about liability. 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, 1998; security
positions can and do change thereafter.
Bridgeway Capital Management, Inc. Turns 5!
Last month Bridgeway Capital Management celebrated its fifth
birthday. As the first Bridgeway employee, staff presented me with
a five-year pin. Texans don't differentiate between short _e's_
and short _i's,_ so I was actually presented with a five-year pen.
When I was 24, I took a job in which I happened to be the youngest
person ever to have filled that position. I figured if I just
didn't die first, being the youngest guy around was a problem that
would solve itself. (Now that we have hired some people an entire
generation younger than myself, I guess I've _arrived._) I feel
the same way about Bridgeway. In the first couple of years it
seemed we just couldn't get our foot in the door most places
because, regardless of my personal experience or that of our staff,
our firm was just too young. We're still young, but this is a
problem that is taking care of itself.
Bridgeway Portfolios rank in top 4%
The June issue of Mutual Funds Magazine named me the _Gold Medal_
manager of the micro-cap category. We tallied the raw fund scores
for all fund families with at least two funds to see how Bridgeway
fared overall. Using Mutual Funds Magazine's method of ranking
(which limits the analysis to funds with at least three years and
compares performance to a peer group), Bridgeway's three original
funds together rank 7th of 199, or in the fourth percentile.
Worst Mistake in Fiscal Year 1998
Translation: At least once a year I like to tell our shareholders
our worst mistake at Bridgeway - well, there were two. I try to
help create an atmosphere in which people are willing to put
mistakes on the table so we can all learn from them. It's only
fair that I do this with our Board of Directors and you, the
shareholder, my ultimate boss. Our worst two mistakes were not
delivering on our commitment to offer an Internet site and a small
pricing error in another one of our portfolios (not Aggressive
Growth) early in the year.
I am very pleased with our performance this year, and there isn't
anything about our specific stock performance I would put in the
category of _mistake_ for Fiscal 1998. Sure, I would rather not
have bought JB Oxford, but each stock in the Portfolio was a
legitimate _buy_ from one of my models, and I feel we did a good
job of staying on top of these stocks and investigating them for
_spurious data." My reacting to poor economic news from Southeast
Asia last fall would have helped (a bit like Monday morning
quarterbacking). I do no economic forecasting, because the record
of professionals in this area is abysmal. Also, it frees up my
time to concentrate on individual stock picking.
While I am very pleased with a number of improvements in our
administration/operations over the last year, especially the
increasing strength of our staff, I would have to point to two non-
investment mistakes. First, I committed to getting a Bridgeway web
site up and running in Fiscal Year 1998, but we still only have the
first steps_a web address (Bridgewayfund.com) and daily posting of
our Portfolio net asset values per share. Although I fell short of
my goal, we have much more planned for this site, and I recommit to
significant progress before the end of November.
A second, and potentially more significant mistake is that we
missed accounting for a stock split (not in Aggressive Growth) at
the beginning of the Fiscal Year, which cost the Adviser about
$13,500 to correct. This is one of those situations in which
Murphy's Law applies. Several things had to happen to make this
error. _Missing_ a stock split means having a company in the
Portfolio issue additional shares on a given day, but not
accounting for it. If it causes our reported net asset value to be
off a penny or more, then shareholders purchase or redeem at the
wrong price and the Adviser, Bridgeway Capital Management, must
make both the Portfolio and purchasing or redeeming shareholders
_whole._ Most mutual funds make pricing errors which you simply
don't hear about. Most certainly wouldn't let shareholders know
about one this small, they'd just buy their way out of it - the
industry practice. I want to emphasize that we are making
continual improvements at Bridgeway, and that if we had had the
current staff, current systems, or current procedures, I believe
this error would not have occurred.
How Can We Do It Better?--Taxes
Translation: This is a new section highlighting a management
strategy Bridgeway is using to improve our overall performance in
the fund industry. One mutual fund recently incurred capital gains
for 1997, which left most shareholders with a tax bill greater than
their annual total return. While theoretically this can happen at
any mutual fund, Bridgeway does a number of things to try to avoid
it. (In 1997, an Aggressive Growth Portfolio shareholder in the
31% tax bracket watched a $10,000 account grow to $11,557 after
paying $251 in taxes at year-end. This ratio of taxes to total
return is unusually lean; I would expect a shareholder to pay a
higher percentage of total return in taxes in most years.)
Before starting Bridgeway Fund in 1994, I invested primarily in
stocks and had rare occasion to invest in mutual funds. These rare
occasions included funds for the early days of my IRA and fund
recommendations for friends. One of the things I noticed over the
years was how much harder it was to pick winning mutual funds than
winning stocks. I never understood this phenomenon until, as an
industry "insider," I learned some of the things mutual funds do to
make it hard to "beat the market." The things I learned, I have
used to improve Bridgeway funds. As a mutual fund investor, I
thought you might also appreciate my sharing these insights,
possibly to improve your own investing prowess. So, from time to
time, I plan to make this a feature of our shareholder letter. The
purpose of this section is not to denigrate other mutual funds. I
believe mutual funds are by far in the "cleanest" segment of the
investment community. Neither am I trying simply to "toot our own
horn" (although I will some). We certainly make mistakes at
Bridgeway and we can continue to make improvements. But to the
degree that shareholders, boards of directors, journalists,
regulators, and mutual fund managers themselves identify our weak
links, we can make the industry and the capitalist system safer,
more efficient, productive, and humane.
After the April tax season, Bridgeway fielded a number of questions
about the tax management of our fund. Our overall philosophy is to
manage tax issues in this portfolio "on the margin." This is not a
specifically "tax-managed" portfolio such as Bridgeway's index
funds. However, we do try to minimize turnover and justify higher
taxes with even higher returns (though, of course, we cannot
promise this), and we do strive to decrease the tax burden for
shareholders in taxable accounts when it may help, or at least is
unlikely to hurt, our overall performance. Finally, we give strong
preference to current, rather than future shareholders. (A friend
of mine, quoting Texas football coach Darrell Royal, would say,
"Dance with who brung ya.")
Earlier this year I read articles on Morningstar's web site and in
the Wall Street Journal which highlighted the tax inefficiency of
one fund in 1997. I thought it would be instructive to explain the
source of this inefficiency and let you know what Bridgeway does to
avoid these problems. "Fund Z" (not the real name) made a capital
gains distribution of 27% in a year when the fund itself was up
only 7.7%. This means that most shareholders in taxable accounts
paid more in taxes than they made during the year in the fund. Due
to quirks of IRS rules for mutual fund accounting, this situation
can happen even to a well-managed fund. (It can also happen to an
individual owning stocks if you take gains on securities which
appreciated in prior years during a year of market decline, for
example.) Nevertheless, most of the reasons for Fund Z's capital
gains distribution were unnecessary:
1. Untimely decision to reduce built-up capital gains. Fund Z
managers decided that the fund's big capital-gains exposure was
scaring away potential new investors, so they sold some stocks with
high gains and then bought them back the next day. Current
shareholders had to pay taxes on the resulting capital gains. In
addition, they paid unnecessary transaction costs. But they
received no benefits. So who did benefit? Future shareholders
might benefit if the fund does well and capital gains distributions
are lower than otherwise. Who benefits under almost any scenario?
The fund management company whose apparent primary objective is to
attract more assets. You will never see Bridgeway make
transactions for this purpose. We are trying hard to look out for
our current shareholders' interests first.
2. Unexpected redemption. As the market declined in the December
quarter, a large market-timing Fund Z shareholder redeemed all
shares, worth about 10% of the total fund. In order to raise cash
to cover the redemption, the fund had to sell some securities,
which resulted in additional capital gains. We do several things
to avoid this situation. First, we invite market timers not to
invest in our funds. This is stated in capital letters on the
front of our prospectus. We let shareholders know in our
prospectus that frequent traders (twice or more per year) may not
be allowed back in our funds. One thing that many funds do to
avoid having to sell securities to raise cash for redemptions is to
hold a large percentage of assets in cash. We only hold cash
awaiting investment or to reduce to the overall risk of the
portfolio in accordance with our investment objective (which is to
roughly match the longer-term risk characteristics of the S&P 500.)
So, what do I do with the rare large redemption? Generally, I
_harvest from the bottom,_ that is, sell the current least
attractive stocks according to our investment models. We manage
our holdings on a _tax lot_ basis, which means we try to sell those
lots which give the most favorable tax consequences to our taxable
shareholders. If I were managing Fund Z, I would have looked at
the stocks my models liked least, then those lots which would avoid
capital gains.
3. Two fund companies merged. The Fund Z family of funds merged
with another fund family last year, resulting in additional capital
gains. One fund had to sell appreciated securities to comply with
investment objectives of the surviving fund, an action probably
beyond the control of Fund Z's portfolio manager. It is not likely
to happen at Bridgeway. I hold a majority of the shares of
Bridgeway Capital Management, and I am not looking to sell out, now
or in the future, to a larger company. There are some major
incompatibilities between Bridgeway and all other larger companies
I am aware of. I have worked for an organization with over 3,000
employees and I like my current job much better. If I wake up in
20 years working for a larger company, I would expect it to be
Bridgeway.
4. Sales to satisfy the short-short rule. This is an arcane IRS
mutual fund rule which requires that no more than 30% of gross
income (for simplicity, say 30% of all capital gains) can be from
securities held less than 91 days. It is only a problem for funds
with very high turnover. Based on our stock picking models, this
rule is rarely a problem for the Bridgeway funds. The only time it
was an issue was in May, 1996 when some of our stocks nearly
doubled in a two-month timeframe and we wanted to reduce these
holdings to reduce the portfolio risk. We had to wait an extra
month to avoid creating potentially excessive _short-short_ gains.
Fortunately, this rule has been repealed by Congress and since June
30 no longer applies to Bridgeway.
In summary, we will have some better and some worse years for
taxes, but I expect to sidestep all four of the reasons
shareholders incurred higher taxes in Fund Z.
Conclusion
As always, I appreciate your feedback. We take these seriously and
have made continuing improvements because of people who have taken
the time to write or call us. In the last year we have made
significant improvements in the timeliness of our daily Portfolio
price reporting and confirmation reporting. We have included
answers to some questions in our quarterly reports. And we have
continued to provide a high level of personal phone support even
while adding an automated "menu_ to our _800_ phone number. Please
keep your ideas coming.
Sincerely,
John Montgomery
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1998
<S> <C> <C>
Industry Company Shares Value
Common Stock - 99.4%
Aerospace - 2.3%
Hexcel Corp. * 6,900 $ 157,838
Air Transport - 11.8%
Airborne Freight Corp. 16,300 569,481
Alaska Air Group, Inc.* 1,300 70,931
Amtran, Inc.* 6,700 164,988
805,400
Aluminum & Products - 3.5%
Invision Technologies, Inc.* 31,000 240,250
Beverages - 0.5%
Lion Brewery, Inc.* 9,000 34,875
Building - 6.1%
Standard-Pacific Corp. 20,100 414,563
Containers - 0.1%
Disc Graphics, Inc.* 1,400 5,950
Data Processing - Hardware 7.0%
Bell Microproducts, Inc.* 1,400 11,156
Dell Computer Corp.* 2,920 271,013
Microframe, Inc.* 29,800 100,575
Printronix, Inc. * 5,800 92,800
475,544
Data Processing - Software 13.0%
America Online, Inc.* 1,300 136,663
Ansys, Inc. * 30,300 299,213
Expert Software, Inc.* 11,500 47,438
HBO & Co. 4,600 162,150
Peoplesoft, Inc.* 1,500 70,500
Platinum Technology, Inc.* 6,345 181,229
897,193
Drugs-Generic and OTC - 7.9%
ICN Pharmaceuticals, Inc.* 2,600 118,788
Medco Research, Inc. * 16,500 419,719
538,507
Electronics/Electric - 0.2%
Power Integrations, Inc.* 1,300 11,863
Finance - 2.2%
Capital One Financial Corp. 1,200 149,025
Food - 4.4%
Zapata Corp. * 30,600 $
304,088
Home Furnishings - 0.9%
Ethan Allen Interiors, Inc. 1,300
64,838
Medical Equipment/Supplies - 3.5%
Contour Medical, Inc. * 19,700 157,600
Safeskin Corp.* 2,000 82,250
239,850
Mutual Funds - 1.3%
New Germany Fund, Inc. 4,729 88,078
Oil & Gas - 1.0%
Varco International, Inc.* 3,400 67,363
Pollution Control - 5.9%
American Eco Corp. * 6,800 44,200
Neomagic Corp. * 23,200 359,600
403,800
Retail Stores - 8.9%
Best Buy Company, Inc.* 9,800 354,025
Children's Place Retail Stores, Inc.* 6,700 65,744
Ezcorp, Inc. * 5,000 54,688
Gap, Inc. 2,200 135,163
609,620
Services - 14.7%
Accustaff, Inc.* 19,200 600,000
Advanced Health Corp. * 11,700 64,350
Cambridge Technology Partners * 3,000 163,875
Eco Soil Systems, Inc. * 5,000 52,500
Robert Half International, Inc.* 2,300 128,513
1,009,238
Steel / Iron - 0.5%
Keystone Consolidated
Industries, Inc.* 2,700 32,063
Transportation / Freight - 3.7%
Hvide Marine, Inc. * 18,850 255,653
Total Common Stock (Identified Cost $6,030,939) $ 6,805,599
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Options - 0.4%
Air Transport - 0.3%
Airborne Freight Corp.*
11/98 CALLS @ 40 25 $ 4,375
Airborne Freight Corp.*
11/98 CALLS @45 50 4,685
Airborne Freight Corp.*
8/98 CALLS @ 30 26 11,050
Airborne Freight Corp.*
8/98 CALLS @ 40 11 893
Airborne Freight Corp.*
8/98 CALLS @ 45 20 250
Airborne Freight Corp.*
8/98 CALLS @35 14 2,275
23,528
Services - 0.1%
Accustaff, Inc.*
'1/99 Calls @ 35 25 7,188
Accustaff, Inc.*
10/98 Calls @ 40 35 2,625
9,813
Total Options (Identified Cost $94,431) $
33,341
Short-term Investments - 5.3%
Money Market Funds - 5.3%
Expedition Money Market Fund 123,069 123,069
Federated Money Market Prime
Obligations Fund 119,439 119,439
Money Market Funds - continued
SEI Daily Income Trust Prime
Obligations Fund $
119,429
361,937
Total Short-term Investments
(Identified Cost $361,937) $
361,937
Total Investments - 105.1%
(Cost $6,487,3 $
7,200,877
Other Assets and Liabilities, net - (5.1)% (349,057)
Total Net Assets - 100.0% $ 6,851,820
Percentages are based on total net assets.
* Non-income producing security as no dividends were paid
during the period from July 1, 1997 to June 30, 1998.
# The portfolio owns a call option on this security.
** The aggregate identified cost on a tax basis is $6,487,307.
Gross unrealized appreciation and depreciation were
$1,167,621 and $454,051, respectively,
or net unrealized appreciation of $713,570.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - AGGRESSIVE GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
<S> <C>
Assets:
Investments at value (cost - $6,487,307) $7,200,877
Cash 44,484
Receivable for securities sold 19,950
Receivable for interest 1,332
Receivable for dividends 92
Prepaid expenses 4,269
Deferred organization costs 4,704
----------
Total assets 7,275,708
----------
Liabilities:
Payable for securities purchased 317,237
Payable for shares redeemed 80,960
Payable for management fee 80
Payable for organization costs 4,754
Accrued expenses 20,857
----------
Total liabilities 423,888
----------
Net assets ( 337,146 shares outstanding) $6,851,820
==========
Net asset value, offering and redemption price per share ($6,851,820 / 337,146) $20.32
==========
Net assets represent:
Paid-in capital $5,942,495
Undistributed net realized gain 195,755
Net unrealized appreciation of investments 713,570
----------
Net assets $6,851,820
==========
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - AGGRESSIVE GROWTH PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<S> <C>
Investment income:
Dividends $17,180
Interest 10,146
----------
Total income 27,326
Expenses:
Management fees 39,058
Accounting fees 38,151
Audit fees 6,802
Custody 5,818
Amortization of organization costs 4,507
Insurance 716
Legal 3,759
Registration fees 8,334
Directors' fees 933
Miscellaneous 108
----------
Total expenses 108,186
----------
Net investment loss (80,860)
----------
Net realized and unrealized gain on investments:
Net realized gain on investments 584,511
Net realized loss on options (27,950)
Net change in unrealized appreciation 213,313
----------
Net realized and unrealized gain 769,874
----------
Net increase in assets resulting from operations $689,014
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
Year ended Year ended
Increase (decrease) in net assets: June 30, 1998 June 30, 1997
<S> <C> <C>
Operations:
Net investment loss ($80,860) ($33,138)
Net realized gain on investments 584,511 187,476
Net realized loss on options (27,950) 0
Net change in unrealized appreciation 213,313 372,114
--------- ---------
Net increase resulting from operations 689,014 526,452
--------- ---------
Distributions to shareholders:
From net investment income 0 0
From realized gains on investments (455,880) (128,863)
--------- ---------
Total distributions to shareholders (455,880) (128,863)
Fund share transactions:
Proceeds from sale of shares 6,076,613 2,150,757
Reinvestment of dividends 451,952 123,538
Cost of shares redeemed (3,330,369) (753,879)
--------- ---------
Net increase from Fund share transactions 3,198,196 1,520,416
--------- ---------
Net increase in net assets 3,431,330 1,918,005
Net assets:
Beginning of period 3,420,490 1,502,485
--------- ---------
End of period $6,851,820 $3,420,490
========= =========
Number of Fund shares:
Sold 293,674 129,254
Issued on dividends reinvested 25,433 7,362
Redeemed (163,996) (44,758)
--------- ---------
Net increase 155,111 91,858
Outstanding at beginning of period 182,035 90,177
--------- ---------
Outstanding at end of period 337,146 182,035
--------- ---------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - AGGRESSIVE GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
Year ended Year ended Year ended 8/5/94* to
June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995
<S> <C> <C> <C> <C>
Per share data
Net asset value, beginning of period $18.79 $16.66 $11.71 $9.89
------ ------ ------ ------
Income (loss) from investment operations:
Net investment loss (0.30) (0.24) (0.18) (0.02)
Net realized and unrealized gain 3.46 3.43 5.22 1.84
------ ------ ------ ------
Total from investment operations 3.16 3.19 5.04 1.82
------ ------ ------ ------
Less distributions to shareholders:
Net investment income 0.00 0.00 0.00 0.00
Net realized gains (1.63) (1.06) (0.09) 0.00
------ ------ ------ ------
Total distributions (1.63) (1.06) (0.09) 0.00
------ ------ ------ ------
Net asset value, end of period $20.32 $18.79 $16.66 $11.71
====== ====== ====== ======
Total return [1] 18.1% 19.9% 43.3% 19.5%
Ratios & Supplemental Data
Net assets, end of period $6,851,820 $3,420,490 $1,502,485 $276,272
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 2.00% 2.00% 1.97% 1.86%
Expenses before waivers and reimbursements 2.00% 2.77% 5.73% 16.15%
Net investment loss after
waivers and reimbursements (1.50%) (1.40%) (1.26%) (0.30%)
Portfolio turnover rate [2] 132.3% 138.9% 167.7% 139.9%
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* August 5, 1994 was commencement of operations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
Bridgeway Capital Management, Inc. is the Adviser to the Fund.
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 at the time of
redemption.
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.
During the year ended June 30, 1997, the Aggressive Growth
Portfolio did not pay sufficient dividends and distributions from
net investment income and from net capital gains generated during
the year ended June 30, 1996. The Aggressive Growth Portfolio has
petitioned the Internal Revenue Service for permission to make such
deficient distributions. 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 $6,000. While
management believes the Internal Revenue Service has agreed in
principle to the petition, the ultimate outcome of this matter will
not be determined until final agreement is reached with the
Internal Revenue Service. The Adviser has committed to pay the
interest and penalties and all other costs associated with
resolving the deficiency for the portfolio.
<PAGE>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies
Distributions to Shareholders, Continued
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.
Risks and Uncertainties
The Fund provides for various investment options including stocks,
call and put options. Such investments are exposed to various
risks, such as interest rate, market and credit. Due to the risks
involved, it is at least reasonably possible that changes in risks
in the near term would materially affect shareholders' account
values and the amounts reported in the financial statements and
financial highlights. (See prospectus for additional risk
information.)
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.
3. Use of Derivative Instruments:
The Aggressive Growth Portfolio may use derivative securities such
as futures, stock options and index options. (See Prospectus for
additional information.) 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. A summary of transactions in options by the
Aggressive Growth Portfolio follows:
<TABLE>
Call Options Put Options
Number Number
of calls Cost of puts
Cost
<S> <C> <C> <C> <C>
Options outstanding June 30, 1997 24 $44,454 0 $0
Options split 12 0 0 0
Options purchased 414 134,748 73 1,060
Options expired (107) (11,108) (73) (1,060)
Options exercised (25) (3,963) 0 0
Options closed (112) (69,700) 0 0
Options outstanding June 30, 1998 206 $94,431 0 $0
Market value June 30, 1998 $33,341 $0
</TABLE>
<PAGE>
BRIDGEWAY FUND, INC.
AGGRESSIVE GROWTH PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
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 portfolio pays Bridgeway Capital Management, Inc. a fee,
computed and paid monthly based on the average daily net assets of
the portfolio for the month. Such fee is based on the following
annual rates: 0.90% of the first $250 million of the 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 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 4.67% 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%.
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 of the Fund 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 expense
category of the financial statements. All amounts paid for
shareholder accounting are paid to the Adviser.
Payable for organization costs is payable to the Adviser.
6. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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 $9,543,989 and $6,763,845,
respectively, for the year ended June 30, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Aggressive Growth Portfolio:
We have audited the accompanying statement of assets and
liabilities, including the schedule of portfolio investments, of
the Aggressive Growth Portfolio (one of the portfolios
constituting Bridgeway Fund, Inc.) as of June 30, 1998, the
related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of
the three years in the period then ended 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 audits.
We conducted our audits 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 and financial highlights. Our procedures
included confirmation of securities owned as of June 30, 1998, 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 audits
provide 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 the Aggressive Growth Portfolio of
Bridgeway Fund, Inc. as of June 30, 1998, the results of its
operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the
financial highlights for each of the three years in the period
then ended and for the period from August 5, 1994 (commencement
of operations) to June 30, 1995, in conformity with generally
accepted accounting principles.
Houston, Texas
August 25, 1998
<PAGE>
August 28, 1998
Dear Fellow Social Responsibility Shareholder,
Our Portfolio financial performance for our fourth fiscal year
was excellent. Total return for the year ended June 30, 1998 was
more than five percentage points above the S&P 500 Index, and
over twelve percentage points above the average growth and income
fund. On the strength of this year's performance we regained our
lead over the average growth and income fund and narrowed our gap
with the S&P 500. Our fund ranked second of 32 socially
responsible retail equity funds for one year performance and
seventh of 23 funds for three year performance according to
Morningstar.
Performance Summary
The following table presents SEC standardized performance for the
June quarter, one year, and life-to-date:
<TABLE>
<S> <C> <C> <C>
June Qtr. 1 Year Life-to-Date
4/1/98 7/1/97 8/5/94 to
to 6/30/98 to 6/30/98 6/30/98**
Social Responsibility Portfolio 2.9% 35.3% 24.9%
S&P 500 Index (large stocks)* 3.3% 30.2% 29.0%
Lipper Growth and Income Funds* 0.6% 23.5% 22.9%
</TABLE>
*The S&P 500 is an unmanaged index of large stocks, with
dividends reinvested. The Lipper Growth and Income Funds reflect
the aggregate record of domestic growth and income 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.
GRAPH:
_Growth of $10,000 Invested in various Funds and Indexes from
8/5/94 to 6/30/98_
Shows the growth of $10,000 in the Bridgeway Social
Responsibility Portfolio, the Lipper Growth and Income Funds,
and the S&P 500 Index.
As of 6/30/98 the $10,000 had grown to $23,819 in the
Bridgeway Social Responsibility Portfolio, $26,998 in the S&P
500 Index and $22,368 in the Lipper Growth and Income Funds.
Explanation of Financial Performance
Translation: Our strong exposure to the retail sector (22% of
net assets) and health sector (22%) both worked strongly in our
favor this year. Our focus on larger stocks and to some degree
on growth stocks helped as well.
The following table presents ten stocks which gained at least 50%
during the fiscal year:
<TABLE>
<S> <C> <C> <C>
Rank Description % Change
1 The Gap, Inc. 137% Retail Stores
2 Schering Plough Corp. 91% Drugs-Generic and OTC
3 Sofamor/Danek Group Inc. 89% Medical equipment
4 Pfizer, Inc. 82% Drugs-Generic and OTC
5 AMR Corp. 80% Air Transport
6 Safeway Inc. 76% Retail Stores
7 Ultra-Pac 64% Containers
8 Dayton Hudson Corp. 66% Retail Stores
9 Microsoft Corp. 62% Data Processing-Software
10 BankBoston Corp. 54% Banking
</TABLE>
Healthcare took the three of the top four spots in the ranking of
companies. Retail stores took three of the other spots on this
list. Together, they helped launch our performance past our
benchmarks during the fiscal year. Ultra-Pac, a company we
highlighted earlier in the fiscal year, was bought out and gave
us a hefty short-term gain of 64%.
Of course not all our stocks went up. We had a handful with very
slight declines. The one disaster was Vivus, another previously
highlighted healthcare stock. After a very promising
introduction of a new product, the company ran into production
problems and a reversal of sales growth in spite of heavy
marketing expenditures. We closed out this position with a 65%
loss. Fortunately (and by design), we held a relatively small
position of this riskier stock.
Largest Positions
Our largest ten portfolio positions on June 30, 1998 continue to
reflect some concentration in retail and healthcare:
<TABLE>
<S> <C> <C>
Company % of Net Assets Industry
The Gap, Inc. 5.3% Retail Stores
Safeskin 4.6% Medical equipment
Sofamor/Danek Group Inc. 4.6% Medical equipment
Pfizer, Inc. 4.5% Drugs-Generic and OTC
Timberland Co. 4.1% Leather & Shoes
Schering Plough Corp. 4.0% Drugs-Generic and OTC
Safeway Inc. 3.9% Retail Stores
Dayton Hudson Corp. 3.6% Retail Stores
Home Depot 3.6% Retail Stores
Microsoft Corp. 3.4% Data Processing Software
Total 41.6%
</TABLE>
The enclosed annual financial statement contains a complete
listing of all Portfolio securities by industry.
Disclaimer
The following is a reminder from the friendly folks at your fund
who worry about liability. 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, 1998;
security positions can and do change thereafter.
Bridgeway Capital Management, Inc. Turns 5!
Last month Bridgeway Capital Management celebrated its fifth
birthday. As the first Bridgeway employee, staff presented me
with a five-year pin. Texans don't differentiate between short
_e's_ and short _i's,_ so I was actually presented with a five-
year pen.
When I was 24, I took a job in which I happened to be the
youngest person ever to have filled that position. I figured if
I just didn't die first, being the youngest guy around was a
problem that would solve itself. (Now that we have hired some
people an entire generation younger than myself, I guess I've
_arrived._) I feel the same way about Bridgeway. In the first
couple of years it seemed we just couldn't get our foot in the
door most places because, regardless of my personal experience or
that of our staff, our firm was just too young. We're still
young, but this is a problem that is taking care of itself.
Bridgeway Portfolios rank in top 4%
The June issue of Mutual Funds Magazine named me the _Gold Medal_
manager of the micro-cap category. We tallied the raw fund
scores for all fund families with at least two funds to see how
Bridgeway fared overall. Using Mutual Funds Magazine's method of
ranking (which limits the analysis to funds with at least three
years and compares performance to a peer group), Bridgeway's
three original funds together rank 7th of 199, or in the fourth
percentile.
Worst Mistake in Fiscal Year 1998
Translation: At least once a year I like to tell our shareholders
our worst mistake - well, there were two. I try to help create
an atmosphere at Bridgeway in which people are willing to put
mistakes on the table so we can all learn from them. It's only
fair that I do this with our Board of Directors and you, the
shareholder, my ultimate boss. Our worst two mistakes were not
delivering on our commitment to offer an Internet site, and a
small pricing error in another one of our portfolios (not Social
Responsibility) early in the year.
I am very pleased with our performance this year and there isn't
anything about our specific stock performance I would put in the
category of _mistake_ for Fiscal 1998. Sure, I would rather not
have bought Vivus, but each stock in the Portfolio was a
legitimate _buy_ from one of my models, and I feel we did a good
job of staying on top of these stocks, investigating them for
_spurious data,_ and screening for social criteria. My reacting
to poor economic news from Southeast Asia last fall would have
helped (a bit like Monday morning quarterbacking). I do no
economic forecasting, because the record of professionals in this
area is abysmal. Also, it frees up my time to concentrate on
individual stock picking.
While I am very pleased with a number of improvements in our
administration/operations over the last year, especially the
increasing strength of our staff, I would have to point to two
non-investment mistakes. First, I committed to getting a
Bridgeway web site up and running in Fiscal Year 1998, but we
still only have the first steps_a web address (Bridgewayfund.com)
and daily posting of our Portfolio net asset values per share.
Although I fell short of my goal, we have much more planned for
this site, and I recommit to significant progress before the end
of November.
A second, and potentially more significant mistake is that we
missed accounting for a stock split (not the Social
Responsibility Portfolio) at the beginning of the Fiscal Year,
which cost the Adviser about $13,500 to correct. This is one of
those situations in which Murphy's Law applies. Several things
had to happen to make this error. _Missing_ a stock split means
having a company in the Portfolio issue additional shares on a
given day, but not accounting for it. If it causes our reported
net asset value to be off a penny or more, then shareholders
purchase or redeem at the wrong price and the Adviser, Bridgeway
Capital Management, must make both the Portfolio and purchasing
or redeeming shareholders _whole._ Most mutual funds make
pricing errors which you simply don't hear about. Most certainly
wouldn't let shareholders know about one this small, they'd just
buy their way out of it - the industry practice. I want to
emphasize that we are making continual improvements at Bridgeway,
and that if we had had the current staff, current systems, or
current procedures, I believe this error would not have occurred.
How Can We Do It Better?--Taxes
Translation: This is a new section highlighting a management
strategy Bridgeway is using to improve our overall performance in
the fund industry. One mutual fund recently incurred capital
gains for 1997, which left most shareholders with a tax bill
greater than their annual total return. While theoretically this
can happen at any mutual fund, Bridgeway does a number of things
to try to avoid it. (In 1997, a Social Responsibility Portfolio
shareholder in the 31% tax bracket watched a $10,000 account grow
to $13,447 after paying $83 in taxes at year-end. This ratio of
taxes to total return is unusually lean; I would expect a
shareholder to pay a higher percentage of total return in taxes
in most years.)
Before starting Bridgeway Fund in 1994, I invested primarily in
stocks and had rare occasion to invest in mutual funds. These
rare occasions included funds for the early days of my IRA and
fund recommendations for friends. One of the things I noticed
over the years was how much harder it was to pick winning mutual
funds than winning stocks. I never understood this phenomenon
until, as an industry "insider," I learned some of the things
mutual funds do to make it hard to "beat the market." The things
I learned, I have used to improve Bridgeway funds.
As a mutual fund investor, I thought you might also appreciate my
sharing these insights, possibly to improve your own investing
prowess. So, from time to time, I plan to make this a feature of
our shareholder letter. The purpose of this section is not to
denigrate other mutual funds. I believe mutual funds are by far
in the "cleanest" segment of the investment community. Neither
am I trying simply to "toot our own horn" (although I will some).
We certainly make mistakes at Bridgeway and we can continue to
make improvements. But to the degree that shareholders, boards
of directors, journalists, regulators, and mutual fund managers
themselves identify our weak links, we can make the industry and
the capitalist system safer, more efficient, productive, and
humane.
After the April tax season, Bridgeway fielded a number of
questions about the tax management of our fund. Our overall
philosophy is to manage tax issues in this portfolio "on the
margin." This is not a specifically "tax-managed" portfolio such
as Bridgeway's index funds. However, we do try to minimize
turnover and justify higher taxes with even higher returns
(though, of course, we cannot promise this), and we do strive to
decrease the tax burden for shareholders in taxable accounts when
it may help, or at least is unlikely to hurt, our overall
performance. Finally, we give strong preference to current,
rather than future shareholders. (A friend of mine, quoting
Texas football coach Darrell Royal, would say, "Dance with who
brung ya.")
Earlier this year I read articles on Morningstar's web site and
in the Wall Street Journal which highlighted the tax inefficiency
of one fund in 1997. I thought it would be instructive to
explain the source of this inefficiency and let you know what
Bridgeway does to avoid these problems. "Fund Z" (not the real
name) made a capital gains distribution of 27% in a year when the
fund itself was up only 7.7%. This means that most shareholders
in taxable accounts paid more in taxes than they made during the
year in the fund. Due to quirks of IRS rules for mutual fund
accounting, this situation can happen even to a well-managed
fund. (It can also happen to an individual owning stocks if you
take gains on securities which appreciated in prior years during
a year of market decline, for example.) Nevertheless, most of
the reasons for Fund Z's capital gains distribution were
unnecessary:
1. Untimely decision to reduce built-up capital gains. Fund Z
managers decided that the fund's big capital-gains exposure was
scaring away potential new investors, so they sold some stocks
with high gains and then bought them back the next day. Current
shareholders had to pay taxes on the resulting capital gains. In
addition, they paid unnecessary transaction costs. But they
received no benefits. So who did benefit? Future shareholders
might benefit if the fund does well and capital gains
distributions are lower than otherwise. Who benefits under
almost any scenario? The fund management company whose apparent
primary objective is to attract more assets. You will never see
Bridgeway make transactions for this purpose. We are trying hard
to look out for our current shareholders' interests first.
2. Unexpected redemption. As the market declined in the December
quarter, a large market-timing Fund Z shareholder redeemed all
shares, worth about 10% of the total fund. In order to raise
cash to cover the redemption, the fund had to sell some
securities, which resulted in additional capital gains. We do
several things to avoid this situation. First, we invite market
timers not to invest in our funds. This is stated in capital
letters on the front of our prospectus. We let shareholders know
in our prospectus that frequent traders (twice or more per year)
may not be allowed back in our funds. One thing that many funds
do to avoid having to sell securities to raise cash for
redemptions is to hold a large percentage of assets in cash. We
only hold cash awaiting investment or to reduce to the overall
risk of the portfolio in accordance with our investment objective
(which is to roughly match the longer-term risk characteristics
of the S&P 500.) So, what do I do with the rare large
redemption? Generally, I _harvest from the bottom,_ that is,
sell the current least attractive stocks according to our
investment models. We manage our holdings on a _tax lot_ basis,
which means we try to sell those lots which give the most
favorable tax consequences to our taxable shareholders. If I
were managing Fund Z, I would have looked at the stocks my models
liked least, then those lots which would avoid capital gains.
3. Two fund companies merged. The Fund Z family of funds merged
with another fund family last year, resulting in additional
capital gains. One fund had to sell appreciated securities to
comply with investment objectives of the surviving fund, an
action probably beyond the control of Fund Z's portfolio manager.
It is not likely to happen at Bridgeway. I hold a majority of
the shares of Bridgeway Capital Management, and I am not looking
to sell out, now or in the future, to a larger company. There
are some major incompatibilities between Bridgeway and all other
larger companies I am aware of. I have worked for an
organization with over 3,000 employees and I like my current job
much better. If I wake up in 20 years working for a larger
company, I would expect it to be Bridgeway.
4. Sales to satisfy the short-short rule. This is an arcane IRS
mutual fund rule which requires that no more than 30% of gross
income (for simplicity, say 30% of all capital gains) can be from
securities held less than 91 days. It is only a problem for
funds with very high turnover. Based on our stock picking
models, this rule is rarely a problem for the Bridgeway funds.
The only time it was an issue was in May, 1996 when some of our
stocks nearly doubled in a two-month timeframe and we wanted to
reduce these holdings to reduce the portfolio risk. We had to
wait an extra month to avoid creating potentially excessive
_short-short_ gains. Fortunately, this rule has been repealed by
congress and since June 30 no longer applies to Bridgeway.
In summary, we will have some better and some worse years for
taxes, but I expect to sidestep all four of the reasons
shareholders incurred higher taxes in Fund Z.
Conclusion
As always, I appreciate your feedback. We take these seriously
and have made continuing improvements because of people who have
taken the time to write or call us. In the last year we have
made significant improvements in the timeliness of our daily
Portfolio price reporting and confirmation reporting. We have
included answers to some questions in our quarterly reports. And
we have continued to provide a high level of personal phone
support even while adding an automated "menu_ to our _800_ phone
number. Please keep your ideas coming.
Sincerely,
John Montgomery
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Common Stock - 75.2%
Air Transport - 1.7%
AMR Corp. * 300 $ 24,975
Aluminum & Products - 2.0%
Invision Technologies, Inc.* 3,800 29,450
Banking - 5.7%
Bank Boston Corp. 90 5,006
MBNA Corp. 1,125 37,195
Norwest Corp. 1,100 41,250
83,451
Chemicals - 0.2%
Solutia Inc. 100 2,869
Data Processing - Software 3.4%
Microsoft Corp. * 460 49,853
Drugs-Generic and OTC - 12.0%
Eli Lilly and Company 400 26,500
Merck & Company, Inc. 195 26,081
Pfizer, Inc. 610 66,185
Schering-Plough Corp. 638 58,457
177,223
Electronics/Electric - 2.0%
Sony Corp. 350 30,122
Finance - 5.7%
Fannie Mae 750 46,125
Student Loan SLM Holding Corp. 770 37,730
83,855
Food - 2.8%
Ben & Jerry's Homemade, Inc. * 2,150 41,656
Leather & Shoes - 4.1%
Timberland Co. * 830 59,708
Medical equipment/Supplies - 10.4%
Johnson & Johnson, Inc. 230 17,020
Safeskin Corp.* 1,660 68,268
Sofamor/Danek Group, Inc. * 780 67,519
152,807
Retail Stores - 22.3%
Whole Foods Market, Inc.* 740 44,770
Dayton Hudson Corp. 1,100 53,350
Herman Miller, Inc. 1,700 41,331
Home Depot, Inc. 630 52,369
Safeway, Inc.* 1,424 57,939
Retail Stores, continued
Gap, Inc. 1,275 78,333
328,092
Services - 3.0%
The AES Corp.* 830 43,627
Total Common Stock (Identified Cost $743,945) $ 1,107,688
Short-term Investments - 27.0%
Money Market Funds - 27.0%
Expedition Money Market Fund 67,580 67,580
Federated Money Market Prime
Obligations Fund 63,605 63,605
Federated Money Market Trust
Fund 63,605 63,605
Federated Prime Obligations
Fund 67,580 67,580
SEI Daily Income Trust Money
Market Fund 67,580 67,580
SEI Daily Income Trust Prime
Obligations Fund 63,605 67,580
397,530
Total Short-term Investments
(Identified Cost $397,530) $ 397,530
Total Investments - 102.2%
(Cost $1,141,475) $ 1,505,218
Other Assets and Liabilities, net - (2.2)% (31,995)
Total Net Assets - 100.0% $ 1,473,223
Percentages are based on total net assets.
* Non-income producing security as no dividends were paid
during the period from July 1, 1997 to June 30, 1998.
** The aggregate identified cost on a tax basis is $1,141,475.
Gross unrealized appreciation and depreciation were
$375,877 and $12,134, respectively,
or net unrealized appreciation of $363,743.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - SOCIAL RESPONSIBILITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
<S> <C>
Assets:
Investments at value (cost - $1,141,475) $1,505,218
Receivable for interest 1,624
Receivable for dividends 333
Receivable from adviser 213
Prepaid expenses 1,172
Deferred organization costs 4,697
----------
Total assets 1,513,257
----------
Liabilities:
Bank overdraft 17,061
Payable for investments purchased 14,869
Payable for organization costs 4,748
Accrued expenses 3,356
----------
Total liabilities 40,034
----------
Net assets ( 69,692 shares outstanding) $1,473,223
==========
Net asset value, offering and redemption price per share ($1,473,223 / 69,692) $21.14
==========
Net assets represent:
Paid-in capital $1,100,108
Undistributed investment income 724
Net realized gain 8,648
Net unrealized appreciation of investments 363,743
----------
Net assets $1,473,223
==========
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - SOCIAL RESPONSIBILITY PORTFOLIO
STATEMENT OF OPERATIONS
For the year ended June 30, 1998
<S> <C>
Investment income:
Dividends $4,696
Interest 10,415
----------
Total income 15,111
Expenses:
Management fees 1,950
Accounting fees 15,219
Audit fees 6,802
Custody 1,932
Amortization of organization costs 4,485
Insurance 143
Legal 1,158
Registration fees 5,100
Directors' fees 933
Miscellaneous 108
----------
Total expenses 37,830
Less fees waived (17,169)
Less expenses reimbursed (5,765)
----------
Net expenses 14,896
----------
Net investment income 215
----------
Net realized and unrealized gain on investments:
Net realized gain on investments 43,383
Net change in unrealized appreciation 246,810
----------
Net realized and unrealized gain 290,193
----------
Net increase in assets resulting from operations $290,408
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - SOCIAL RESPONSIBILITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
Year ended Year ended
Increase (decrease) in net assets: June 30, 1998 June 30, 1997
<S> <C> <C>
Operations:
Net investment income $215 $1,064
Net realized gain on investments 43,383 8,591
Net change in unrealized appreciation 246,810 71,190
---------- ----------
Net increase resulting from operations 290,408 80,845
---------- ----------
Distributions to shareholders:
From net investment income (547) 0
From realized gains on investments (30,868) (21,520)
---------- ----------
Total distributions to shareholders (31,415) (21,520)
Fund share transactions:
Proceeds from sale of shares 671,280 254,732
Reinvestment of dividends 28,882 21,520
Cost of shares redeemed (123,861) (58,608)
---------- ----------
Net increase from Fund share transactions 576,301 217,644
---------- ----------
Net increase in net assets 835,294 276,969
Net assets:
Beginning of period 637,929 360,960
---------- ----------
End of period (including undistributed investment
income of $724 and $1,075, respectively) $1,473,223 $637,929
========== ==========
Number of Fund shares:
Sold 34,827 17,127
Issued on dividends reinvested 1,681 1,556
Redeemed (6,179) (3,911)
---------- ----------
Net increase 30,329 14,772
Outstanding at beginning of period 39,363 24,591
---------- ----------
Outstanding at end of period 69,692 39,363
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - SOCIAL RESPONSIBILITY PORTFOLIO
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
Year ended Year ended Year ended 8/5/94* to
June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995
<S> <C> <C> <C> <C>
Per share data
Net asset value, beginning of period $16.21 $14.68 $11.61 $9.85
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss) 0.00 0.03 (0.02) 0.07
Net realized and unrealized gain 5.57 2.31 3.11 1.70
------ ------ ------ ------
Total from investment operations 5.57 2.34 3.09 1.77
------ ------ ------ ------
Less distributions to shareholders:
Net investment income (loss) (0.01) 0.00 (0.02) (0.01)
Net realized gains (0.63) (0.81) 0.00 0.00
------ ------ ------ ------
Total distributions (0.64) (0.81) (0.02) (0.01)
------ ------ ------ ------
Net asset value, end of period $21.14 $16.21 $14.68 $11.61
====== ====== ====== ======
Total return [1] 35.3% 16.9% 26.6% 18.9%
Ratios & Supplemental Data
Net assets, end of period $1,473,223 $637,929 $360,960 $64,421
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 1.50% 1.50% 1.48% 1.46%
Expenses before waivers and reimbursements 3.81% 5.81% 16.80% 72.83%
Net investment income (loss) after waivers and reimbur 0.02% 0.24% (0.17%) 0.90%
Portfolio turnover rate [2] 37.8% 35.5% 83.8% 71.7%
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* August 5, 1994 was commencement of operations.
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
Bridgeway Capital Management, Inc. is Adviser to the Fund.
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 at the time of
redemption.
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.
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.
<PAGE>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, Continued
Risks and Uncertainties
The Fund invests in stocks. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to
the level of risk associated with certain investments and the level
of uncertainty related to changes in the value of investments, it
is at least reasonably possible that changes in risks in the near
term would materially affect shareholders' account values and the
amounts reported in the financial statements and financial
highlights.
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
reimburses this Portfolio for any commissions above one cent/share.
The Adviser expects to continue this practice until portfolio net
assets reach at least $2 million.
3. Use of Derivative Instruments:
The Social Responsibility Portfolio may use derivative securities
such as the purchases and sales of futures and stock and index
options to hedge risk. (See Prospectus for additional
information.) 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 had no derivative transactions
during the year ended June 30, 1998.
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 Portfolio pays Bridgeway Capital Management, Inc. a fee,
computed and paid monthly based on the average daily net assets of
the 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 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 4.67% 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%.
<PAGE>
BRIDGEWAY FUND, INC.
SOCIAL RESPONSIBILITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
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 of the fund 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 expense
category of the financial statements. All amounts paid for
shareholder accounting are paid to the Adviser.
Payable for organization costs is payable to the Adviser.
The Adviser has been voluntarily reimbursing the Social
Responsibility Portfolio for any operating expenses above 1.5%
and expects to continue this voluntary level of reimbursement for
the foreseeable future. To achieve this expense level the Adviser
has waived both the management fees and accounting fees for the
year ended June 30, 1998.
6. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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 $668,841 and $288,015,
respectively for the year ended June 30, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Social Responsibility Portfolio:
We have audited the accompanying statement of assets and
liabilities, including the schedule of portfolio investments, of
the Social Responsibility Portfolio (one of the portfolios
constituting Bridgeway Fund, Inc.) as of June 30, 1998, the
related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of
the three years in the period then ended 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 audits.
We conducted our audits 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 and financial highlights. Our procedures
included confirmation of securities owned as of June 30, 1998, 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 audits
provide 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 the Social Responsibility Portfolio of
Bridgeway Fund, Inc. as of June 30, 1998, the results of its
operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the
financial highlights for each of the three years in the period
then ended and for the period from August 5, 1994 (commencement
of operations) to June 30, 1995, in conformity with generally
accepted accounting principles.
Houston, Texas
August 25, 1998
<PAGE>
August 28, 1998
Dear Ultra-Large 35 Index Portfolio Shareholder,
Aren't they just awesome! Ultra-Large U.S. stocks trounced all
the major indexes for our first fiscal year ending June 30, 1998.
Our portfolio climbed 22% calendar- and fiscal year-to-date
through June 30. We don't have comparable data for the eleven
months of our fiscal year, but for the six month calendar year-
to-date period we ranked 18th of 672 growth and income funds
according to Morningstar.
If you are new as an Ultra-Large 35 Index Portfolio shareholder,
welcome! We got quite a few recent shareholders as a result of a
feature article in Mutual Funds Magazine (August issue) and a
segment on CNBC. This portfolio has the largest capitalization
of any index fund and the lowest expense of any retail mutual
fund in America. As highlighted below, we think it is one of the
most tax efficient funds as well.
If you're not familiar with my _translation_ format,
understanding it may help you skim this and future letters. My
goal is to let you know in the first sentence or two how we did
and whether I'm happy about our performance or not. If you read
only one sentence of each of my letters and throw it in the
trash, I want you to know how we did qualitatively. If you want
to read just the other highlights of my letter, you can skim for
the paragraphs beginning _translation._ Of course, I'll provide
more details for those who enjoy them.
Performance Summary
The following table presents SEC standardized performance for the
eleven months of operations from July 31, 1997 to June 30,
1998**:
<TABLE>
<S> <C>
Life-to-Date
7/31/97 to
6/30/98**
Ultra-Large 35 Index Portfolio 22.0%
S&P 500 Index* 20.6%
Bridgeway Ultra-Large 35 Index* 22.0%
</TABLE>
*The S&P 500 Index is an unmanaged index of large companies (with
dividends reinvested). The Bridgeway Ultra-Large 35 Index is an
index comprised of some of the very largest, "blue chip" U.S.
stocks, excluding tobacco; it is compiled by the advisor to the
Portfolio. Past performance does not guarantee future returns.
** Returns are not annualized.
GRAPH:
_Growth of $10,000 Invested in various Funds and Indexes from
7/31/97 to 6/30/98_
Shows the growth of $10,000 in the Bridgeway Ultra-Large 35
Index Portfolio, the Bridgeway Ultra-Large 35 Index and the
S&P 500 Index. As of 6/30/98 the $10,000 had grown to $12,204
in the Bridgeway Ultra-Large 35 Index Portfolio, $12,200 in
the Bridgeway Ultra-Large 35 Index and $12,057 in the S&P 500
Index.
Explanation of Portfolio Performance
Translation: Pharmaceuticals were way up. Technology was down.
Overall we had a nice gain.
Pharmaceuticals took top honors for our fiscal year ending June
30. These stocks occupied the #1 (Pfizer, up 82%), #5 (Bristol
Myers Squibb, up 47%), and #13 (Merck, up 29%) spots in our
annual ranking. Telecommunications was our second best
performing industry, occupying the #3, 7, 9 and 15 spots in the
rank of annual performance.
At the other end of the spectrum, five of our companies had
negative annual returns, creating a significant drag on our
performance. Four of them were in the technology sector. These
stocks suffered from more significant exposure to problems in
Southeast Asia and from decelerating growth in computer hardware
and semiconductors. These stocks were Oracle (down 55%),
Motorola (down 35%), Intel (down 19%), and Hewlett-Packard (down
14%).
Disclaimer
The following is a reminder from the friendly folks at your fund
who worry about liability. 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 fiscal year end, June, 1998.
Portfolio Advantages
Translation: If you want low expenses, adequate diversification
among large U.S. companies, and really want to keep taxes low, we
think this portfolio will provide a good home.
I recently compiled a list of the significant advantages of this
Portfolio. I though you might be interested.
1.These are the bluest of the blue chips, which comprise the
largest capitalization domestic equity index. They have been
outstanding performers in the current market environment where
investors have flocked to the largest most liquid stocks. Long-
term they should have lower volatility than other asset classes.
2.This portfolio has the lowest expense ratio of any retail fund
in America--0.15%. You get to keep more of your return.
3.There is no tobacco. Who needs to be invested in a terminal
industry?
4.We try to do everything possible to avoid returning a capital
gain to shareholders. The construction of the index keeps fund
shareholders in mind. We don't rebalance it annually. We don't
announce the exact timing of any rebalancing, so other investors
can't _front-run_ our trades. If a company is no longer ultra-
large, we sell only lots with a tax loss; others go into a
_dormant_ category. Unlike some of the newer large-cap index
funds, we don't have to sell half our holdings when there is a
two for one stock split. We court buy and hold investors. The
board of directors reserves the authority to slap a redemption
fee (accruing to the Portfolio) on exiting shareholders if they
redeem in a down market. We are joining FundServ Networking
Level III which allows us to track marketplace trades at a
detailed level. This will increase our ability to decline trades
by short-term traders or market-timers, something which is backed
up by strong language in the prospectus. We can _harvest_
capital losses without worrying about getting out of balance with
the index. Results: we distributed no capital gains last year,
and I currently forecast none for the second year. It won't
surprise me if we have no capital gains distributions in the
first decade of our existence. I would expect (but can't
promise) to be in the top half-percent of tax efficient funds in
the long-term. We are very serious about the tax management of
this portfolio. (If you want a fund that could be slightly more
tax efficient, you might check out our Ultra-Small Index
Portfolio; it invests in tiny, however much more volatile,
companies which typically pay no dividends themselves.)
5.There is no huge backlog of existing capital gains on the books
from a decade-long bull market.
6.The tiny asset base of this fund is more than quadrupling on an
annualized basis. I would expect this to continue for some years
to come. If this happens, any taxable dividends we do have to
distribute would be diluted by future shareholders, if you get in
early.
7.Unlike the largest S&P 500 fund, we purchase no derivatives,
just stocks.
Direction of the Market, State of the Economy, Blah, Blah, Blah
Most mutual fund shareholder letters will go on and on about the
economy, market, and other things which fund management has no
control over and next to no chance of predicting. Not so here.
This is an index portfolio, and you probably already know as much
as much about the economy as I do. We spend our efforts on
managing the portfolio in a lean and efficient style, with
considerable focus on tax management.
Conclusion
As always, I appreciate your feedback. We take your comments
seriously and have made continuing improvements because of people
who have taken the time to write or call us. In the last year we
have made significant improvements in the timeliness of our daily
Portfolio price reporting. We have included answers to some
questions in our quarterly reports. And we have continued to
provide a high level of personal phone support even while adding
an automated _menu_ to our _800_ phone number. Please keep your
ideas coming.
Sincerely,
John Montgomery
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-LARGE 35 INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Common Stock - 96.5%
Automobiles - 5.9%
Ford Motor Company 268 $ 15,812
General Motors Corp. 105 7,015
22,827
Banking - 8.2%
Bankamerica Corp. 117 10,121
Citicorp 43 6,418
Nations Bank Corp. 198 15,184
31,723
Beverages - 6.4%
Coca-Cola Company 183 15,647
Pepsico, Inc. 220 9,061
24,708
Chemicals - 1.9%
Dupont E.I. De Nemours &
Company 99 7,394
Cosmetics & Toiletries - 3.1%
Gillette Company 210 11,944
Data Processing - 6.5%
Cisco Systems, Inc.* 157 14,454
International Business Machines
Corp. 92 10,563
25,017
Data Processing - 3.5%
Microsoft Corp. * 103 11,163
Oracle Corp.* 98 2,407
13,570
Drugs-Generic and OTC - 10.5%
Bristol Myers Squibb Company 92 10,574
Merck & Company, Inc. 117 15,649
Pfizer, Inc. 131 14,214
40,437
Electronics/Electric - 9.2%
General Electric Company 132 11,996
Intel Corp. 110 8,154
Motorola, Inc. 290 15,243
35,393
Finance - 2.6%
Fannie Mae 161 9,902
Food Serving - 2.7%
McDonalds Corp. 151 $
10,419
Household Products - 2.6%
The 'Procter & Gamble
Company 109
9,926
Insurance - 2.8%
American International
Group, Inc. 75 10,950
Leisure-Amusement - 2.5%
The 'Walt Disney Company 90 9,495
Medical equipment/Supplies - 2.6%
Johnson & Johnson, Inc. 138 10,212
Oil & Gas - 8.8%
Chevron Corp. 173 14,489
Exxon Corp. 139 9,921
Mobil Corp. 123 9,425
33,835
Retail Stores - 1.7%
Wal-Mart Stores, Inc. 106 6,420
Services - 0.4%
Associates First Capital 21 1,616
Specialty Instruments - 2.7%
Hewlett Packard Company 175 10,478
Telecommunications - 12.1%
AT&T Corp. 124 7,084
Bell Atlantic Corp. 342 15,604
GTE Corp. 117 6,508
SBC Communications, Inc. 218 8,720
Worldcom, Inc. * 183 8,864
46,780
Total Common Stock (Identified Cost $331,136) $
373,046
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC.
ULTRA-LARGE 35 INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS, continued
Showing percentage of total net assets
June 30, 1998
Industry Company Shares Value
<S> <C> <C>
Short-term Investments - 13.4%
Money Market Funds - 13.4%
Expedition Money Market Fund 51,613 51,613
Total Short-term Investments
(Identified Cost $51,613) $ 51,613
Total Investments - 109.9%
(Cost $382,749) $ 424,659
Other Assets and Liabilities, net - (9.9)% (38,288)
Total Net Assets - 100.0% $ 386,371
Percentages are based on total net assets.
* Non-income producing security as no dividends were paid
during the period from July 1, 1997 to June 30, 1998.
** The aggregate identified cost on a tax basis is $382,749.
Gross unrealized appreciation and depreciation were
$44,172 and $2,262, respectively,
or net unrealized appreciation of $41,910.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-LARGE 35 INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
Assets:
<S> <C>
Investments at value (cost - $382,749) $424,659
Cash 40,006
Receivable for investments sold 5,274
Receivable for dividends 138
Receivable from adviser 5,322
Prepaid expenses 114
Deferred organization costs 3,698
Total assets 479,211
Liabilities:
Payable for investments purchased 83,913
Payable for management fee 3
Payable for organization costs 3,924
Accrued expenses 5,000
Total liabilities 92,840
Net assets ( 63,367 shares outstanding) $386,371
Net asset value, offering and redemption price per share ($386,371 / 63,367) $6.10
Net assets represent:
Paid-in capital $343,405
Undistributed investment income 1,941
Net realized loss on investments (885)
Net unrealized appreciation of investments 41,910
Net assets $386,371
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-LARGE 35 INDEX PORTFOLIO
STATEMENT OF OPERATIONS
From commencement of operations (July 31, 1997) to June 30, 1998
<S> <C>
Investment income:
Dividends $1,841
Interest 298
Total income 2,139
Expenses:
Management fees 106
Accounting fees 3,442
Audit fees 5,000
Custody 1,600
Amortization of organization costs 828
Legal 12
Registration fees 1,235
Directors fees 600
Total expenses 12,823
Less fees waived (3,548)
Less expenses reimbursed (9,077)
Net expenses 198
Net investment income 1,941
Net realized and unrealized gain on investments:
Net realized loss on investments (885)
Net change in unrealized appreciation 41,910
Net realized and unrealized gain 41,025
Net increase in assets resulting from operations $42,966
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-LARGE 35 INDEX PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
July 31, 1997* to
Increase (decrease) in net assets: June 30, 1998
Operations:
<S> <C>
Net investment income $1,941
Net realized loss on investments (885)
Net change in unrealized depreciation 41,910
Net increase resulting from operations 42,966
Distributions to shareholders:
From net investment income 0
From realized gains on investments 0
Total distributions to shareholders 0
Fund share transactions:
Proceeds from sale of shares 410,146
Reinvestment of dividends 0
Cost of shares redeemed (66,741)
Net increase from Fund share transactions 343,405
Net increase in net assets 386,371
Net assets:
Beginning of period 0
End of period (including undistributed investment income o $386,371
Number of Fund shares:
Sold 75,335
Issued on dividends reinvested 0
Redeemed (11,968)
Net increase 63,367
Outstanding at beginning of period 0
Outstanding at end of period 63,367
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - ULTRA-LARGE 35 INDEX PORTFOLIO
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
July 31, 1997* to
December 31, 1997
Per share data
<S> <C>
Net asset value, beginning of period $5.00
Income (loss) from investment operations:
Net investment income 0.07
Net realized and unrealized gain 1.03
Total from investment operations 1.10
Less distributions to shareholders:
Net investment income 0.00
Net realized gains 0.00
Total distributions 0.00
Net asset value, end of period $6.10
Total return [1] 22.0%
Ratios & Supplemental Data
Net assets, end of period $386,371
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 0.15%
Expenses before waivers and reimbursements 9.73%
Net investment income after waivers and reimbursements 1.47%
Portfolio turnover rate [2] 64.3%
[1] Not annualized.
[2] Annualized.
* July 31, 1997 commencement of operations
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-LARGE 35 INDEX PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
Bridgeway Capital Management, Inc. is the Adviser to the Fund.
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.
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.
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.
Risks and Uncertainties
The Fund invests in stocks. Such investments are exposed to
various risks, such as interest rate, market and credit. Due to
the level of risk associated with certain investments and the level
of uncertainty related to
<PAGE>
BRIDGEWAY FUND, INC.
ULTRA-LARGE 35 INDEX PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies
Risks and Uncertainties, Continued
changes in the value of investments, it is at least reasonably
possible that changes in risks in the near term would materially
affect shareholders' account values and the amounts reported in the
financial statements and financial highlights.
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 Ultra-Large 35 Index 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
reimburses the Portfolio for any commissions above one cent/share.
The Adviser expects to continue this practice until portfolio net
assets reach at least $2 million.
3. Management Contract:
The Ultra-Large 35 Index Portfolio pays a flat 0.08% annual
management fee, computed daily and payable monthly, subject to a
maximum expense ratio of 0.15%.
4. 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 of the Fund 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 expense
category of the financial statements. All amounts paid for
shareholder accounting are paid to the Adviser.
The Adviser has been voluntarily reimbursing the Ultra-Large
35 Portfolio for any operating expenses above 0.15%. To achieve
this expense level the Adviser has waived both the management fees
and accounting fees for the year ended June 30, 1998. The Adviser
expects to continue this voluntary level of reimbursement, for the
foreseeable future.
Payable for organization costs is payable to the Adviser.
5. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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.
6. 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 $417,753 and $85,391, respectively
for the year ended June 30, 1998.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Ultra-Large 35 Index Portfolio:
We have audited the accompanying statement of assets and
liabilities, including the schedule of portfolio investments, of
the Ultra-Large 35 Index Portfolio (one of the portfolios
constituting Bridgeway Fund, Inc.) as of June 30, 1998, and the
related statement of operations, statement of changes in net
assets and financial highlights for the period from July 31, 1997
(commencement of operations) to June 30, 1998. 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 and financial highlights. Our procedures
included confirmation of securities owned as of June 30, 1998, 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 the Ultra-Large 35 Index Portfolio of
Bridgeway Fund, Inc. as of June 30, 1998, and the results of its
operations, changes in its net assets, and financial highlights
for the period from July 31, 1997 (commencement of operations) to
June 30, 1998, in conformity with generally accepted accounting
principles.
Houston, Texas
August 25, 1998
<PAGE> <TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
As of June 30, 1998
<S> <C>
Assets:
Cash $9,071,605
Deferred organization costs 9,650
Total assets 9,081,255
Liabilities:
Payable for organization costs 9,650
Total liabilities 9,650
Net assets ( 1,814,321 shares outstanding) $9,071,605
Net asset value, offering and redemption price per share ($9,071,605 / 1,814,321) $5.00
Net assets represent:
Paid-in capital $9,071,605
Net assets $9,071,605
</TABLE>
<TABLE>
<CAPTION>
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
June 22, 1998* to
Increase (decrease) in net assets: June 30, 1998
<S> <C>
Operations:
Net investment income $0
Net realized gain on investments 0
Net change in unrealized depreciation 0
Net increase resulting from operations 0
Distributions to shareholders:
From net investment income 0
From realized gains on investments 0
Total distributions to shareholders 0
Fund share transactions:
Proceeds from sale of shares 9,079,575
Reinvestment of dividends 0
Cost of shares redeemed (7,970)
Net increase from Fund share transactions 9,071,605
Net increase in net assets 9,071,605
Net assets:
Beginning of period 0
End of period $9,071,605
Number of Fund shares:
Sold 1,815,915
Issued on dividends reinvested 0
Redeemed (1,594)
Net increase 1,814,321
Outstanding at beginning of period 0
Outstanding at end of period 1,814,321
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BRIDGEWAY FUND, INC.
MICRO-CAP LIMITED PORTFOLIO
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 has six portfolios. The
Fund commenced operations as a regulated investment company on
August 5, 1994 with the Ultra-Small Company Portfolio, the
Aggressive Growth Portfolio and the Social Responsibility
Portfolio. On July 20, 1997, the Fund added two portfolios: the
Ultra-Small Index Portfolio and the Ultra-Large 35 Index Portfolio.
On June 5, 1998, the Fund added the Micro-Cap Limited Portfolio.
The Fund is authorized to issue 1,000,000,000 shares.
The Micro-Cap Limited Portfolio was offered to the public beginning
June 22, 1998 in accordance with the subscription offering. Until
July 1, 1998 the portfolio's operations were restricted to
accepting subscription funds. On July 1, 1998 the Portfolio began
investing in micro-cap stocks and commenced other operations. The
Portfolio will close to new investors whenever net assets are above
$27.5 million and will close to all new investments when net assets
are above $55 million.
A statement of operations and financial highlights are not
presented as the Portfolio did not commence investing activities
until subsequent to June 30, 1998.
Bridgeway Capital Management, Inc. is the Adviser to the Fund.
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.
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.
MICRO-CAP LIMITED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
2. Significant Accounting Policies, Continued
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.
3. Management Contract:
The Micro-Cap Limited 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 1.9%.
The fee is adjusted quarterly for based upon performance. The
performance adjustment rate varies with the Fund's performance as
compared to the performance of the CRSP Cap-Based Portfolio 9 Index
with dividends reinvested (hereinafter "Index" ) and ranges from -
.7% to +.7%. The performance rate adjustment is calculated at 2.8%
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%.
4. 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 of the Fund 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 all amounts paid for shareholder
accounting are paid to the Adviser and are included in the
Accounting fees expense category of the financial statements.
The Adviser has agreed to voluntarily reimburse the Portfolio
for any operating expenses above 1.9%. The Adviser expects to
continue this voluntary level of reimbursement, for the foreseeable
future.
Payable for organization costs is payable to the Adviser.
5. Custodial Agreement:
The Fund has entered into a Custodial Agreement with Compass Bank.
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.
<PAGE>
BRIDGEWAY FUND, INC.
MICRO-CAP LIMITED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS, Continued
6. Cost, Purchases and Sales of Investment Securities:
Investments have the same cost for tax and financial statement
purposes. There were no trades for the Portfolio during the
period.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bridgeway Fund, Inc.
and Shareholders of the Micro-Cap Limited Portfolio:
We have audited the accompanying statement of assets and
liabilities of the Micro-Cap Limtied Portfolio (one of the
portfolios constituting Bridgeway Fund, Inc.) as of June 30,
1998, and the related statement of changes in net assets for the
period from June 22, 1998 (date of formation) to June 30, 1998.
These financial statements are the responsibility of the
management of Bridgeway Fund, Inc. Our responsibility is to
express an opinion on these financial statements 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 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, 1998, 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 referred to above
present fairly, in all material respects, the financial position
of the Micro-Cap Limited Portfolio of Bridgeway Fund, Inc. as of
June 30, 1998, and the changes in its net assets for the period
from June 22, 1998 (date of formation) to June 30, 1998, in
conformity with generally accepted accounting principles.
Houston, Texas
August 25, 1998
<PAGE>
August 31, 1998
Bridgeway Fund, Inc.
5650 Kirby Drive, Suite 141 Re: 33-72416
Houston, TX 77005 811-8200
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the
above registered statement on Form N-1A under the Securities
Act of 1933, as amended, under which you have registered an
indefinite number of shares of beneficial interest, par value
$0.001 per share, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. In particular, this opinion
relates to the sale of shares both in the fiscal year ended
June 30, 1998 and prospectively to the shares which may be
sold during the fiscal year ending June 30, 1999 (the
"shares").
We have made such inquiry of your officers, directors and
auditors and have examined such corporate documents, records
and certificates and other documents and which questions of
law as we have deemed necessary for the purposes of this
opinion including the Maryland General Corporation Law. In
rendering this opinion we have relied as to all questions of
fact material to this opinion, upon certificates of public
officials and the statements of your officers, and have
assumed, with your approval, that the signatures on all
documents examined by us are genuine, which fact we have not
independently verified. I am a member of the bar of the State
of New York, and have not consulted Maryland counsel in
connection with this opinion.
Based upon and subject to the foregoing, we are of the opinion
that the shares were legally and validly issued, fully paid
and non-assessable, and that management fully expects to
comply with the federal and state registration requirements
regarding shares to the issued during the fiscal 1999.
We hereby consent to your including this opinion as an Exhibit
to in the forth coming filing of the Fund's Post Effective
Amendment No. 9. In giving such consent, we do not admit that
we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as<PAGE>
Page Two
Securities and Exchange Commission
September 13, 1996
amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Sincerely Yours,
James H. Ellis<PAGE>
Consent of Independent Accountants
To the Board of Directors
of Bridgeway Fund, Inc.:
We consent to the inclusion in Post-Effective Amendment No. 9 to
the Registration Statement of Bridgeway Fund, Inc. on Form N-1A
(File No. 33-72416) of our reports dated August 25, 1998 on our
audits of the financial statements and financial highlights, as
applicable for each of the Portfolios included in Bridgeway Fund,
Inc., which reports are included in the Annual Report to
Shareholders for the year ended June 30, 1998 which is included
in the Post-Effective Amendment No. 9 to the Registration
Statement. We also consent to the reference to our firm under
the captions "General Information" and "Independent Accountants"
in the Prospectus, Financial Highlights and the Statement of
Additional Information.
Houston, Texas
August 25, 1998<PAGE>
