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<PAGE> PAGE 8
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<PAGE> PAGE 11
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<PAGE> PAGE 12
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<PAGE> PAGE 14
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<PAGE> PAGE 15
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<PAGE> PAGE 17
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<PAGE> PAGE 18
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<PAGE> PAGE 22
061 000500 1000000
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<PAGE> PAGE 23
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<PAGE> PAGE 24
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<PAGE> PAGE 25
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<PAGE> PAGE 26
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SIGNATURE GLEN W. FEAGINS
TITLE TREASURER
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> BRIDGEWAY FUND ULTRA-SMALL COMPANY PORTFOLIO
<S> <C>
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<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> BRIDGEWAY FUND AGGRESSIVE GROWTH PORTFOLIO
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<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> BRIDGEWAY FUND SOCIAL RESPONSIBILITY PORTFOLIO
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 4
<NAME> BRIDGEWAY FUND ULTRA-LARGE 35 INDEX PORTFOLIO
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> BRIDGEWAY FUND ULTRA-SMALL INDEX PORTFOLIO
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> BRIDGEWAY FUND MICRO-CAP LIMITED PORTFOLIO
<S> <C>
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<PERIOD-END> JUN-30-1998
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</TABLE>
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>
To the Shareholders and
Board of Directors of
Bridgeway Fund, Inc.
In planning and performing our audit of the financial statements
of Bridgeway Fund, Inc. for the year ended June 30, 1998, we
considered its internal control, including control activities for
safeguarding securities, in order to determine our auditing
procedures for the purpose of expressing our opinion on the
financial statements and to comply with the requirements of Form
N-SAR, not to provide assurance on internal control.
The management of Bridgeway Fund, Inc. is responsible for
establishing and maintaining internal control. In fulfilling
this responsibility, estimates and judgments by management are
required to assess the expected benefits and related costs of
controls. Generally, controls that are relevant to an audit
pertain to the entity's objective of preparing financial
statements for external purposes that are fairly presented in
conformity with generally accepted accounting principles. Those
controls include the safeguarding of assets against unauthorized
acquisition, use or disposition.
Because of inherent limitations in internal control, errors or
fraud may occur and not be detected. Also, projection of any
evaluation of internal control to future periods is subject to
the risk that it may become inadequate because of changes in
conditions or that the effectiveness of the design and operation
may deteriorate.
Our consideration of internal control would not necessarily
disclose all matters in internal control that might be material
weaknesses under standards established by the American Institute
of Certified Public Accountants. A material weakness is a
condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low
level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a
timely period by employees in the normal course of performing
their assigned functions. However, we noted no matters involving
internal control and its operation, including controls for
safeguarding securities, that we consider to be material
weaknesses as defined above as of June 30, 1998.
This report is intended solely for the information and use of
management, the Board of Directors of Bridgeway Fund, Inc., and
the Securities and Exchange Commission.
Houston, Texas
August 25, 1998
<PAGE>
