<PAGE> 1
February 15, 1999
Dear Bridgeway Ultra-Small Index Portfolio Shareholder,
We beat a number of small-cap benchmarks in 1998 and closely matched the
performance of the CRSP Cap-Based Portfolio 10 Index in each of the last two
quarters. That's about the most I can say for the calendar year. We ended the
year down 1.8%. It was a roller coaster ride that I hope we don't repeat any
time soon.
Warning: this report is a bit long. If you just want to skim it, try reading the
"translation" paragraphs.
The following table presents SEC standardized performance for the last year and
since inception on July 31, 1997. The graph below presents our quarterly
performance since inception compared to these two benchmarks.
<TABLE>
<CAPTION>
1 Year Life-to-Date
1/1/98 7/31/97 to
to 12/31/98 12/31/98**
----------- ------------
<S> <C> <C>
Ultra-Small Index Portfolio (1.8)% (1.6)%
CRSP Cap-Based Portfolio 10 Index* (11.1)% (3.8)%
Russell 2000 Index* (2.6)% 2.5%
</TABLE>
* The CRSP Cap-Based Portfolio 10 Index is an unmanaged index of 2707 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
those of the CRSP Index and the Bridgeway Portfolio. Past performance does not
guarantee future returns.
** Life-to-Date returns are annualized.
ULTRA-SMALL INDEX GRAPH INFORMATION:
Title: Growth of $10,000 Invested in various Funds and Indexes from 7/31/97 to
12/31/98
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 13/31/98
the $10,000 had grown to $9,780 in the Bridgeway Ultra-Small Index Portfolio,
$10,352 in the Russell 2000 Index and $9,466 in the CRSP Cap-based Portfolio
10 Index.
Explanation of Performances
Translation: The smaller they were, the harder they fell in 1998. We did well
when compared to the other funds investing in ultra-small stocks, but still
ended the year with a small negative return.
<PAGE> 2
Our portfolio came very close to matching the performance of the CRSP Cap-Based
Portfolio 10 Index during the correction of the September quarter (-23.0%) and
the recovery in the December quarter (+11.4%). Since inception almost a year and
a half ago, the Portfolio is down a cumulative 2.2%, and we are 21% off our peak
price in May of 1998. The market environment of the last year has not been kind
to ultra-small stocks. Investors have left ultra-small stocks for the perceived
safety and liquidity of ultra-large ones. In doing so, they are ignoring a
relative value of ultra-small stocks in this current market. By our
calculations, ultra-small companies are selling at less than half the cost of
ultra-large stocks. While ultra-small companies are statistically more volatile
and prone to falling farther in a downturn, one could argue that due to current
prices, they might be a safer investment than large stocks in this environment.
The industries that helped our Portfolio the most in the last year were computer
software, retail stores, and services. The ones which suffered the most were
energy and manufacturing. Far more than any factor, however, the performance of
various equity investments was aligned with company size. Although in the long
term, the correlation between size and performance has favored small companies,
over the last year, the reverse has been true.
The following table presents some dramatic data that you likely won't see again
in your lifetime. (I don't make many specific market predictions; this is one.)
Column (A) represents the ten "deciles" of the Center for Research in Security
Prices (CRSP) indexes. CRSP tracks ten "baskets" or portfolios of stock market
data according to company size. The size cutoffs correspond to ten equal
groupings of companies on the New York Stock Exchange, sorted by size as
measured by market capitalization (or dollars worth of stock for a company).
There are many more publicly traded ultra-small (decile 10) companies, but there
are many more dollars in the largest (decile 1) companies. Column (B) indicates
the largest company size in each group. Column (C) has the number of companies
in that group. While there are about 186 New York Stock Exchange companies in
each decile, there are many, many more NASDAQ companies which are ultra-small.
Column (D) presents the 1998 (market capitalization-weighted) total return for
the companies by decile. For example, the average return (as weighted by dollars
in the stock market) of the 2,707 ultra-small (decile 10) companies in 1998 was
a decline of 11.1%.
I would like to highlight several facts from the first four columns. First,
stock prices of the vast majority of U.S. companies declined significantly in
1998. Second, all else being equal, the smaller the company, the worse the
decline. Third, the difference in return from some of the largest companies to
some of the smallest is 46.1% (+35.0% minus -11.1), which is the largest
calendar year difference on record in over 73 years. This one factor probably
has more to do with explaining returns in 1998 than any other factor, including
sector of the economy, skill of a portfolio manager, or luck.
For mutual funds investing in ultra-small stocks, the divergence may actually be
worse than the table presents. If column (D) data were presented as a simple
average (each company carries the same weight, the way you normally calculate an
average), the picture would be much worse. You only have a hint of this from the
table. (Unfortunately, I don't have this data on a "simple average" or equally
weighted basis from CRSP. However, I do have it for the smallest 200 companies
of the Russell 2000 Index. The simple average of these 200 companies, the
majority of which are ultra-small companies, is a decline of 57%.) I doubt you
will ever again see an annual divergence in returns this great in favor of large
companies.
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
CRSP Max. Size by 1998 Index Avg. Fund Avg. Fund
Indexes Capitalization # Co's Return # of Funds Return Underperf.
------- -------------- ------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
(by decile) ($Million)
10 109 2,655 (11.1)% 14 (21.2)% (10.1)%
9 225 832 (3.5)% 53 (7.2)% (3.7)%
8 404 535 (1.5)% 88 (5.6)% (4.1)%
7 573 444 (1.7)% 151 (3.4)% (1.8)%
6 787 358 (0.4)% 169 (1.8)% (1.4)%
5 1,136 317 1.6% 214 1.9% 0.2%
4 2,195 283 4.7% 224 7.5% 2.8%
3 4,191 252 8.7% 288 7.9% (0.8)%
2 9,768 223 12.9% 369 12.5% (0.3)%
1 317,682 223 35.0% 1,831 23.2% (11.8)%
------ ------
Total 6,122 3,401
</TABLE>
-2-
<PAGE> 3
Column (E) presents the number of domestic equity mutual funds (data from
Morningstar, 12/98) for which the median market capitalization falls in a
particular decile. This data excludes all Bridgeway portfolios. Thus, there were
just 14 non-Bridgeway funds which were invested primarily in ultra-small stocks
at the end of the calendar year and had a full one-year return. (Five of these
14 funds were simply different share classes of the same fund, so there were
only 9 distinct non-Bridgeway funds in this group.) Column (F) presents the
average return of the funds in each decile. Column (G) presents the difference
between the average fund by decile and the corresponding index return.
I'd like to highlight several more facts from the last three columns. First,
there are many more large company mutual funds than small company ones. (Even
most mutual funds which call themselves "small-cap" are invested in the
mid-range of deciles four through seven.) Second, your passively managed,
low-cost, tax-efficient Portfolio beat every other mutual fund invested in
ultra-small stocks in 1998. Third, it's interesting to note the most dramatic
underperformance at "the ends," both the first and tenth deciles. I believe that
the primary reason for the poor fund performance in the tenth decile partially
concerns the mathematics of calculating the averages. (A more "apples to apples"
comparison including some accounting for equal weighting of companies would be
more favorable to the funds.) The first decile average fund underperformance is
more puzzling. I know of no reason why these funds should underperform by such a
dramatic amount. Both of Bridgeway's portfolios in this group (Bridgeway
Ultra-Large 35 Index and Bridgeway Social Responsibility) did outperform the
index.
Not presented in the table is one other tidbit of data I will share. The average
mutual fund underperformed its correlating index by 6.6% in 1998. This is a very
large margin. Remember, this data point is reasonably adjusted for company size.
When I calculated this number for the ten largest mutual funds (those with the
most assets), I was surprised to find that they underperformed as a group by
7.2%. While I could wax on about how we performed better than the vast majority
of funds after accounting for company size, I would also have to point out we
closed out 1998 with a negative return. When you end the year with less money
than you started, it's a bit hard to celebrate. I hope the ultra-small market
will be kinder in 1999!
Portfolio Advantages
Translation: We had a slightly negative return in 1998. So let's review some of
the reasons for investing in ultra-small stocks: the long-term record for
ultra-small stocks, low expenses, low trading costs, tax efficiency, and other
advantages of passive management.
Since we didn't "make" money in 1998 (I put this in quotes, because you never
know whether you've made money or not until you actually sell), perhaps this
would be a good time to repeat the short-list from our annual report:
1. The ultra-small asset class has an average annual return of 13.4% over the
last seven decades. This compares to 11.9% for small stocks and 10.5% 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 effect at 5.4% per
year. Personally, I think this is an overstatement, 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 companies, which is
an investing trend known as "cap-creep" or "style drift."
-3-
<PAGE> 4
6. This portfolio is not dependent on my skills alone. I have two other
employees who can also implement our trading strategies.
7. There is no other index fund in this asset class. Bridgeway Ultra-Small
Company Portfolio is the only actively managed fund that is convincingly
committed to this asset class, and it is closed to new investors.
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 (anticipate our purchase and buy before we buy, resulting in
a higher price for us). We believe front running has measurably hurt the
performance of the Russell 2000 Index, in addition to the funds that follow it.
9. We don't have to sell a company because it becomes too small.
10. We can "harvest" losses (sell depreciated stock for tax purposes) 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 in a bold statement on page 1 of our prospectus. The board of directors
reserves the authority to activate a redemption reimbursement fee (accruing to
the Portfolio) on exiting shareholders if they redeem in a down market. We are
joining an operational electronic network, FundServ Networking Level III, to
attain the ability to decline any trades by short-term traders or market-timers.
14. There is no backlog of existing capital gains on the books from a
decade-long bull market. In fact, we have harvested a net loss equal to 13% of
our net asset value to offset future gains.
15. I estimate (but can't guarantee) that the asset base of this fund will more
than double each year for the next five years. If this happens, any taxable
dividends we would have to distribute would be diluted by future shareholders.
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 or asset class applies only as of the calendar year
end, December, 1998; security positions can and do change thereafter.
They Say "The Small-Cap Effect is Dead"
Translation: There are some interesting arguments, which I don't buy, stating
that the historical dominance of small stocks relative to large ones is either
over or was never really there. My favorite one is that the historical dominance
is due to a few isolated, great small-cap years. Take these out and small
companies haven't really outperformed. I find this as amusing as proposing that
the Denver Broncos aren't really a world class football team because their
performance is primarily due to just a few players. Bench Elway, Davis, and
Sharpe, and most teams in the league could beat them. Possibly so, but so what?
If you "take out" the three best small-cap years, the "small-cap effect" goes
away. I find this fact interesting but draw different conclusions. It is the
statistical nature of ultra-small stocks to have bursts of outperformance. To
me, the risk of being out of the asset class altogether is very high, assuming
you want any exposure to the different risk/return characteristics of this asset
class. As a contrarian, I don't want to lessen my exposure to small-cap stocks,
especially just after the longest period of time in which large-cap stocks have
outperformed.
As large company dominance lingers on, I see more and more articles claiming
that small companies no longer outperform, or that they once did but times have
changed, or that they never did but we just didn't know how to
-4-
<PAGE> 5
measure performance accurately. These opinions are only normal since we have
just finished the best five-year period of large company dominance in the last
73 years. If we had just finished the best five years of small company
dominance, the articles might report that small companies on average result not
in just a couple of percentage points/year in more return, but two to three
times the annual return. I believe neither extreme paints a full picture.
Smaller companies entail more short-term volatility. (No one disputes this.)
They should therefore command higher average returns, or something is "out of
kilter" with the long-term risk and return pattern seen in other asset classes.
The longer-term dominance of small and especially ultra-small stocks is quite
dramatic. It doesn't happen every year, or even every five to six years (the
average historical half-cycle of small- or large-company dominance). However,
the longer-term trend is fairly pervasive as seen in the table below:
<TABLE>
<CAPTION>
Period % Ultra-Small
(years) Dominance
------- --------------
<S> <C>
1 50%
4 53%
10 69%
20 86%
30 97%
35 100%
</TABLE>
The data from this table are from the largest and smallest stocks of the CRSP
database over a 73-year period. It says, for example (see first row), that if
you take a twelve month period of time and "roll" through 73 years of data,
ultra-small stocks have outperformed large ones exactly half the time. If you
look at 4-year periods of time, it is only slightly better, 53%. But as you look
at longer and longer periods of time, the long-term dominance of ultra-small
stocks becomes clearer. Over the last 73 years, there have been no 35-year
periods in which ultra-large stocks have outperformed ultra-small ones. And when
ultra-small stocks "shine," they can really shine. While 1998 was the year of
largest dominance of ultra-large companies (+46%), there have been nine years in
which ultra-small stocks have outperformed by more than 50%. I would therefore
conclude that I wouldn't want to miss one of these years if I were an
ultra-small company investor.
The Year 2000 Computer Problem
Translation: Some computers and software (especially older versions) will not
function properly next year because of problems in reading years beginning with
"2000." At Bridgeway, we believe that our systems have very limited exposure and
are operationally ready. However, we have taken action to safeguard our
operations. In addition, we do not plan to sell portfolio companies as we try to
anticipate their readiness for the year 2000.
As January 1 of 2000 approaches, you will hear more and more stories of the
"Y2K" or year 2000 problem. Many companies are spending tremendous amounts to
correct software that reads only two digits for date fields ("99" instead of
"1999"); this can cause serious problems and software failure. Some shareholders
have asked what Bridgeway is doing about it.
We believe our own computers and software are year 2000 "compliant." There are
some advantages in being a smaller and somewhat younger firm. The network of
personal computers we rely on use major brand name components that are also
compliant. We have no mainframes or older hardware, which are more difficult to
convert to year 2000 capability. We have completed testing of our primary
software, all of which is compliant, and we will conduct final tests in March.
The Securities and Exchange Commission requires regulated investment advisors to
have a Y2K plan. An SEC representative conducted an on-site interview in October
to assess our readiness. (They don't give you a grade or make any representation
about readiness, however.) Bridgeway also has a contingency plan. We had the
opportunity in 1998 to (successfully) price our portfolio off-site on an
"emergency" basis. We have contacted all of our vendors and brokers concerning
their compliance, and I am impressed with the efforts made by these companies.
After studying their plans, I am only concerned about one vendor that supplies
the closing prices of our securities. However, we have several alternative
sources, so I am not worried.
-5-
<PAGE> 6
I believe that the two areas of greatest exposure to the Y2K problem are the
phone company and the electric company. Obviously, we are too small to have an
impact on their readiness, but we don't feel it would be a catastrophe even if
Bridgeway were without these utilities for a couple of weeks. We are considering
obtaining a backup source of electricity. Quite frankly, if there are problems
at Bridgeway, it is likely that you will have more important and immediate
problems in other parts of your life. I don't anticipate major problems in early
January 2000, but I am taking the issue very seriously.
The other side of the equation is the companies we own. Should we anticipate a
major market correction? As a passively managed index fund, and for reasons
similar to our disdain of timing the market, we will not time the market impact
of the Y2K problem. We plan to "ride it out," whether it is large or small. It
would be too easy to sell now and miss a great 1999, or sell after prices
already reflect the problem.
Conclusion
As always, I appreciate your feedback. We keep a bulletin board of
shareholder comments and suggestions which we review at our weekly staff
meeting. We take them very seriously. Please keep your ideas coming.
Sincerely,
/s/ JOHN MONTGOMERY
John Montgomery
-6-
<PAGE> 7
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS (unaudited)
Showing percentage of total net assets
December 31, 1998
<TABLE>
<CAPTION>
Industry Company Shares Value
- -------- ------- ---------- ----------
<S> <C> <C> <C>
Common Stock - 92.6%
Aerospace - 0.4%
Aysys Technologies, Inc. * 400 $ 5,600
Air Transport - 0.6%
Cade Industries, Inc. * 2,200 4,881
World Airways, Inc. * 3,300 3,300
----------
8,181
Aluminum & Products - 0.4%
Invision Technologies, Inc. * 1,000 6,188
Arms and Ammunition - 0.9%
Allied Research Corp. * 1,600 13,200
Auto parts - 2.4%
IMPCO Technologies, Inc. * 829 10,881
R & B, Inc. * 2,300 18,831
Raytech Corp. * 1,600 4,600
----------
34,312
Automobiles - 0.6%
ASHA Corporation * 1,000 4,250
SMC Corp. * 1,100 5,088
----------
9,338
Banking - 1.4%
Community West Bank * 800 7,700
Hallmark Capital Corp. * 1,100 12,100
----------
19,800
Beverages - 0.1%
America Premium Brands * 1,000 1,875
Broadcasting - 0.4%
Enterprise Software, Inc. * 1,200 6,000
Building - 1.8%
Dominion Homes, Inc. * 1,250 13,750
Meritage Corp. * 450 5,484
Perini Corp. * 500 2,563
Ruttland Inc * 1,250 5,000
----------
26,797
Chemicals - 2.5%
Arrow-Magnolia
International, Inc. * 2,090 9,144
KMG-B Inc. * 1,100 7,700
Pure World, Inc. * 2,400 19,350
----------
36,194
Data Processing - Hardware - 3.6%
Bell Microproducts, Inc. * 650 6,013
Printronix, Inc. * 700 10,063
Prophet 21, Inc. * 1,800 19,238
Rimage Corp * 1,350 16,875
Scan-Optics, Inc. * 150 572
----------
52,761
Data Processing - Software & Services - 15.1%
ARDENT Software, Inc. * 1,400 32,200
AlphaNet Solutions, Inc. * 1,000 3,688
Applied Microsystems Corp * 1,300 5,038
Brightstar Info Tech * 1,000 7,875
CFI Proservices * 500 5,813
Catalyst International * 500 6,000
DA Consulting Group * 850 18,594
Extended Systems Inc * 1,000 5,125
Fourth Shift Corp. * 1,200 5,400
International Management &
Research Corp. * 1,100 6,463
Managed Care Solutions * 1,000 4,250
Mecon Inc. * 600 6,300
Microtest Inc. * 1,800 4,950
Microtouch Systems * 500 6,563
Object Design Inc. * 1,000 6,625
Performance Technologies, Inc.* 500 6,563
Printrak International * 700 5,163
Restrac Corp. * 1,600 10,400
SEEC Inc. * 1,100 7,081
Unify Corp. * 7,500 64,688
----------
218,779
Drugs-Generic and OTC - 0.4%
Natural Alternatives
International, Inc. * 500 5,500
Electronics/Electric - 7.6%
Cobra Electronics Corp * 1,100 5,156
Daktronics, Inc. * 500 5,938
Dataram Corp. * 600 5,700
EDO Corp. 2,700 22,613
Gradco Systems, Inc. * 3,050 8,006
Instron Corp. 400 6,900
Oyo Geospace Corp. * 400 3,450
PSC Inc * 800 7,600
Qualmark Corporation * 1,200 6,450
Richey Electronics, Inc. * 450 4,641
Vari L Company, Inc. * 1,100 8,319
Vicon Indistries, Inc. * 3,400 25,075
----------
109,848
Finance - 2.9%
ACE Cash Express, Inc. * 1,200 18,000
Capital Associates * 2,200 8,663
TFC Enterprises, Inc. * 9,700 15,763
----------
42,426
Food - 2.5%
Amcon Distributing Company * 1,700 11,794
Lucille Farms * 2,000 5,750
Monterey Pasta Company * 8,400 12,075
Rocky Mountain Chocolate * 1,200 6,300
----------
35,919
Food Serving - 1.6%
Ark Restaurants * 1,700 17,213
Roadhouse Grill, Inc. * 1,100 5,947
----------
23,160
Graphic Arts - 0.8%
Baldwin Technology
Company, Inc. * 2,000 11,250
</TABLE>
-7-
<PAGE> 8
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS (unaudited), continued
Showing percentage of total net assets
December 31, 1998
<TABLE>
<CAPTION>
Industry Company Shares Value
- -------- ------- ---------- ----------
<S> <C> <C> <C>
Health Care Facilities - 1.2%
Advocat Inc * 1,100 $ 6,050
MIM Corp. * 1,700 5,738
Sheridan Healthcare Inc * 700 5,863
----------
17,651
Home Furnishings - 2.7%
DMI Furniture Inc * 3,400 12,325
Winsloew Furniture, Inc. * 1,000 26,500
----------
38,825
Household Products - 0.5%
Safety 1st, Inc. * 2,200 7,700
Housewares - 0.5%
Home Products
International, Inc. * 800 7,950
Jewelry, Silverware, Watches - 4.8%
Jan Bell Marketing, Inc. * 7,100 45,706
Michael Anthony Jewelers, Inc.* 4,200 13,650
Oroamerica Inc * 1,100 10,863
----------
70,219
Leather & Shoes - 1.6%
Candies, Inc * 4,131 15,491
Tandy Brands Accessories, Inc.* 500 8,375
----------
23,866
Leisure-Amusement - 2.6%
Integrity, Inc. * 2,200 8,250
Noodle Kidoodle * 1,200 11,400
PTI Holding, Inc. * 1,400 5,075
SCP Pool Corp * 123 1,860
Teardrop Golf * 1,000 5,000
Toymax International, Inc. * 1,300 6,581
----------
38,166
Machinery - 2.0%
Denali Inc. * 500 7,000
Gilden Activewear * 650 5,444
Riviera Tool * 840 3,990
Thermwood Corp. * 1,100 6,325
Total Containment * 1,000 6,938
----------
29,697
Medical equipment/Supplies - 1.1%
HPSC Inc * 600 5,850
Interpore International * 890 5,284
Medical Technologies, Inc. * 1,200 5,550
----------
16,684
Metal/Other fabricating - 0.6%
Eastern Company 370 9,389
Oil & Gas - 4.1%
Bolt Technology Corp * 1,800 11,925
Callon Petroleum Company * 375 4,359
Columbus Energy Corp * 2,090 13,846
Dawson Geophysical Company* 500 3,594
Maynard Oil Company * 100 750
Meteor Industries, Inc. * 2,900 8,700
Petrocorp, Inc. * 1,100 6,325
Petroleum Development Corp. * 3,300 10,106
----------
59,605
Pollution Control - 0.3%
Strategic Diagnostics, Inc. * 2,400 4,800
Publishing - 0.0%
American Bank Note * 500 719
Retail Stores - 7.4%
Andersons Inc * 950 10,984
Braun's Fashions Corp. * 2,400 22,800
Cache Inc. * 1,100 5,363
Calloway's Nursery, Inc. * 2,000 2,313
Catherines Stores Corp. * 2,000 21,750
Creative Computers, Inc. * 480 15,240
Jos. A. Bank Clothiers, Inc. * 1,000 8,000
Rag Shops, Inc. * 3,600 9,000
Wilsons The Leather Express * 500 5,500
World of Science * 2,000 6,750
----------
107,700
Services - 8.0%
Advanced Marketing Services, Inc. 600 11,550
American Physician Partners * 1,000 6,313
Business Resource Group * 6,100 20,588
Corrpro Companies, Inc. * 2,125 25,898
Dental Care Alliance * 500 6,000
FTI Consulting, Inc. * 500 1,688
GRC International * 2,000 12,625
ICF Kaiser International * 3,900 5,606
Insituform East, Inc. * 4,000 5,250
International Total Services * 1,000 5,000
Opinion Research * 900 4,950
The Solomon Page Group Ltd. * 2,100 3,281
Travel Ports Of America, Inc. * 2,700 7,425
----------
116,174
Steel/Iron - 0.9%
Bayou Steel Corp. * 1,000 4,125
Kentucky Electric Steel * 800 2,800
Webco Industries, Inc. * 900 5,963
----------
12,888
Telecommunications - 3.8%
Able Telcom Holding Corp. * 2,200 12,650
Bogen Communications
International, Inc. * 3,000 21,750
Comtech Telecommunications Corp. * 650 5,688
Corsair Communications * 1,100 5,500
Microdyne Corp. * 2,100 10,172
----------
55,760
Textiles - 0.4%
The Dixie Group, Inc 700 5,688
</TABLE>
-8-
<PAGE> 9
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS (unaudited), continued
Showing percentage of total net assets
December 31, 1998
<TABLE>
<CAPTION>
Industry Company Shares Value
- -------- ------- ---------- ----------
<S> <C> <C> <C>
Transportation/Freight - 1.8%
Consolidated Delivery & Logistic * 4,800 $ 15,150
Landair Services Inc. * 600 11,250
----------
26,400
Trucking - 1.7%
Cannon Express, Inc. * 1,000 5,000
Landair Corporation * 600 4,500
Smithway Motor Xpress Corp. * 600 4,500
USA Truck, Inc. * 900 10,463
----------
24,463
Utilities-Gas - 0.3%
Delta Natural Gas * 230 4,284
----------
Total Common Stock (Identified Cost $1,291,029) $1,345,756
Short-term Investments - 0.7%
Money Market Funds - 0.7%
Expedition Money Market Fund 9,967 9,967
----------
Total Short-term Investments
(Identified Cost $9,967) $ 9,967
----------
Total Investments - 93.3% $1,355,723
(Cost 1,300,996)
Other Assets and Liabilities, net - 6.7% 97,536
----------
Total Net Assets - 100.0% $1,453,259
==========
</TABLE>
* Non-income producing security as no dividends were paid
during the period from July 1, 1998 to December 31, 1998.
** The aggregate identified cost on a tax basis is $1,300,996.
Gross unrealized appreciation and depreciation were $239,240
and $184,513, respectively, or net unrealized appreciation
of $54,727.
See accompanying notes to financial statements.
-9-
<PAGE> 10
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
As of December 31, 1998
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments at value (cost - $1,300,996) $1,355,723
Cash 107,968
Receivable for interest 116
Receivable from adviser 135
Prepaid expenses 9,288
Deferred organization costs 3,241
----------
Total assets 1,476,471
----------
LIABILITIES:
Payable for shares redeemed 2,348
Payable for investments purchased 14,488
Payable for management fee 638
Accrued expenses 5,705
----------
Total liabilities 23,179
----------
NET ASSETS ( 297,152 SHARES OUTSTANDING) $1,453,292
==========
Net asset value, offering and redemption price per share ($1,453,292 / 297,152) $4.89
==========
NET ASSETS REPRESENT:
Paid-in capital $1,602,682
Undistributed net realized loss (204,117)
Net unrealized appreciation of investments 54,727
----------
NET ASSETS $1,453,292
==========
</TABLE>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF OPERATIONS (Unaudited)
For six months ended December 31, 1998
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividends $ 261
Interest 1,060
----------
Total income 1,321
EXPENSES:
Management fees 3,035
Accounting fees 5,233
Audit fees 2,622
Custody 2,800
Amortization of organization costs 456
Legal 303
Insurance 90
Registration fees 393
Directors' fees 617
----------
Total expenses 15,549
Less fees waived (8,268)
Less expenses reimbursed (2,753)
----------
Net expenses 4,528
----------
NET INVESTMENT LOSS (3,207)
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss on investments (204,954)
Net change in unrealized appreciation 26,722
----------
Net realized gain and unrealized loss (178,232)
----------
NET INCREASE IN ASSETS RESULTING FROM OPERATIONS $ (181,439)
==========
</TABLE>
See accompanying notes to financial statements.
-10-
<PAGE> 11
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
<TABLE>
<CAPTION>
Six months ended July 31, 1997* to
INCREASE (DECREASE) IN NET ASSETS: December 31, 1998 June 30, 1998
OPERATIONS:
<S> <C> <C>
Net investment loss $ (3,207) $ (4,038)
Net realized gain on investments (204,954.00) 837.00
Net change in unrealized appreciation 26,722.00 28,005.00
------------- -------------
Net increase resulting from operations (181,439.00) 24,804.00
------------- -------------
Distributions to shareholders:
From net investment income 0.00 0.00
From realized gains on investments 0.00 0.00
------------- -------------
Total distributions to shareholders 0.00 0.00
FUND SHARE TRANSACTIONS:
Proceeds from sale of shares 708,400 2,955,365
Reinvestment of dividends 0 0
Cost of shares redeemed (602,966) (1,450,872)
------------- -------------
Net increase from Fund share transactions 105,434 1,504,493
------------- -------------
Net increase in net assets (76,005) 1,529,297
NET ASSETS:
Beginning of period 1,529,297 0
------------- -------------
End of period $ 1,453,292 $ 1,529,297
============= =============
Number of Fund shares:
Sold 139,099 534,300
Issued on dividends reinvested 0 0
Redeemed (110,907) (265,340)
------------- -------------
Net increase 28,192 268,960
Outstanding at beginning of period 268,960 0
------------- -------------
Outstanding at end of period 297,152 268,960
============= =============
</TABLE>
BRIDGEWAY FUND, INC. - ULTRA-SMALL INDEX PORTFOLIO
FINANCIAL HIGHLIGHTS (Unaudited)
(for a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six months ended July 31, 1997* to
December 31, 1998 June 30, 1998
<S> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $ 5.69 $ 5.00
------------- -------------
Income (loss) from investment operations:
Net investment loss (0.01) (0.02)
Net realized and unrealized gain (0.79) 0.71
------------- -------------
Total from investment operations (0.80) 0.69
------------- -------------
Less distributions to shareholders:
Net investment income 0.00 0.00
Net realized gains 0.00 0.00
------------- -------------
Total distributions 0.00 0.00
------------- -------------
Net asset value, end of period $ 4.89 $ 5.69
============= =============
TOTAL RETURN [1] (14.1)% 13.8%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period $ 1,453,292 $ 1,529,297
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 0.75% 0.75%
Expenses before waivers and reimbursements 2.56% 1.74%
Net investment income (loss) after waivers and reimburs (0.53)% (0.38)%
Portfolio turnover rate [2] 67.2% 61.7%
</TABLE>
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* July 31, 1997 commencement of operations
See accompanying notes to financial statements.
-11-
<PAGE> 12
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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
-12-
<PAGE> 13
BRIDGEWAY FUND, INC.
ULTRA-SMALL INDEX PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited), Continued
2. Significant Accounting Policies
Risks and Uncertainties, Continued
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-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 six months ended December 31, 1998. The Adviser expects to
continue this voluntary level of reimbursement, in the foreseeable
future.
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 $420,614, and $404,265, respectively for the six months
ended December 31, 1998.
-13-
