<PAGE> 1
February 13, 1999
Dear Fellow Ultra-Small Company Shareholder,
Overall Summary
The quarter that ended December 31, 1998 was very strong, up 15.9%. This
performance beat the index of most similarly sized companies by 4.5%, so I am
pleased with the quarter. However, it was not enough to fully recover from the
second and third quarter declines. We ended the calendar year down 13.1%, two
percentage points worse than our primary (CRSP 10) index benchmark. I never like
to underperform our benchmark; 1998 is the first calendar year when the
Ultra-Small Company Portfolio has done so. It is also the only Bridgeway
portfolio to underperform the index of most similarly sized companies in 1998.
We have done well over the four and a half-year period since inception, and I am
upbeat about the coming five years. We still haven't seen what this portfolio
can do in a year of small company dominance.
Joanna's warning: As most of you know, John is a "quant," or one who uses
quantitative models to manage investments. If you love endless details about
intricacies and vagaries of stock trading, suppositions of values and analytical
projection (and John Montgomery is one of the best at this), you will devour
some of the following sections. But if you don't...be forewarned...read the
"translation" paragraphs, as you skip to page 8.
Quarterly Performance
Translation: It was a very good quarter.
After the worst quarter since inception, the quarter ended December 31, was our
third best - up 15.9%, beating the CRSP Index of ultra-small companies by 4.5%.
It wasn't nearly enough to bring us back to our April peak, but we made good
headway. In fact, as the figure in the upper right hand corner of this page
portrays, we're 42% of the way back to our previous peak - in just 2.8 months.
We reached our last peak on April 22, 1998 at a net asset value per share
(adjusted for dividends) of $20.58. We hit an interim low (also adjusted for
dividends) on October 8 at $10.42. We ended the calendar year at $14.70, which
is 42% of the way back to the peak after 2.8 months. I will continue to track
our progress in the following quarters until we reach our previous peak. Of
course, I can't guarantee when or if this will happen. As discussed in the paper
"Surviving an Ultra-Small Bear Market" which you received last quarter, it has
taken an average of 15.4 months for ultra-small stocks (as an asset class) to
return to their previous peak based on the ten "corrections" since the Great
Depression. Half of the time it has taken six months or less. I hope we are on
target to achieve a new peak net asset value within the current calendar year.
We'll see if the market and our stock picking models cooperate.
While we beat the CRSP index of most similarly sized companies, we beat neither
the Russell 2000 Index nor the Lipper index of small-company mutual funds.
During the quarter, company size was the single best determinant of performance,
with the largest companies performing the best. Since most small-company mutual
funds invest in companies much larger than we do, our ultra-small focus was a
disadvantage this quarter (and this year). Of the 16 non-Bridgeway mutual funds
with a median market capitalization (company size) in the 10th decile
(ultra-small), the average quarterly return was 9.1%, or 6.8% less than ours.
The table on page 2 presents our quarter, one year, and life-to-date financial
results according to the formula required by the SEC. The graph on page 2
presents our quarterly performance since inception compared to the average of
other small-cap mutual funds, the Russell 2000 small-cap index, and the CRSP
index of ultra-small companies.
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2
<TABLE>
<CAPTION>
Dec. Qtr. One Year Life-to-Date
10/1/98 1/1/98 8/5/94 to
to 12/31/98 to 12/31/98 12/31/98**
----------- ----------- ------------
<S> <C> <C> <C>
Ultra-Small Company Portfolio 15.9% (13.1)% 18.5%
Lipper Small-Cap Stock Funds* 19.4% (0.1)% 17.3%
Russell 2000 (small growth stocks)* 16.3% (2.6)% 14.8%
CRSP Cap-Based Portfolio 10 Index* 11.4% (11.1)% 11.8%
</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 2,655 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 December quarter period is not
annualized.
ULTRA-SMALL COMPANY GRAPH INFORMATION:
Title: Growth of $10,000 Invested in various Funds and Indexes from 8/5/94
to 12/31/98
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 12/31/98 the $10,000 had grown to
$21,153 in the Bridgeway Ultra-Small Company Portfolio, $20,218 in the
Lipper Small Company Growth Funds, $18,393 in the Russell 2000 Index and
$16,483 in the CRSP Cap-based Portfolio 10 Index.
Explanation of Quarterly Performance: The Movers and the Shakers
Translation: Nineteen of our stocks rocketed during the quarter, most bouncing
back on good news and a recovering market. Six of these caught the stock market
Internet boom (mania?) of the December quarter.
We had 19 stocks which appreciated 50% or more during the year and only one that
declined by 50+%. Altogether, this resulted in our third best quarter since
inception. The large gainers were:
<TABLE>
<CAPTION>
Rank Description Industry % Gain
---- ----------- -------- ------
<S> <C> <C> <C> <C>
1 Creative Computers Inc.* Retail Stores* 285%
2 Unify Corp.* Data Processing--software* 200%
3 J. B. Oxford Holdings* Securities* 164%
4 Gentner Communications Electronics/Electric 100%
5 MySoftware Co.* Data Processing--software* 96%
6 Innotrac Corp. Services 88%
7 Noodle Kidoodle Leisure-Amusement 86%
8 TTI Team Telecom Int'l Telecommunications 84%
</TABLE>
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3
<TABLE>
<S> <C>
9 Restrac Corp.* Data Processing--software* 76%
10 Microdyne Corp. Telecommunications 76%
11 Applix Inc.* Data Processing--software* 71%
12 Power Integrations Inc. Electronics/Electric 69%
13 Tecnomatrix Technologies Inc. Building 68%
14 Corsair Communications Inc. Telecommunications 63%
15 Rich Coast Inc. Securities 60%
16 Funco Inc. Leisure-Amusement 56%
17 D&K Wholesale Drug, Inc. Drugs-Generic and OTC 51%
18 Roadhouse Grill Inc. Food Serving 50%
19 Styling Technology Corp. Cosmetics & Toiletries 50%
</TABLE>
Six of these stocks (those with an asterisk), including four of the top five,
were beneficiaries of the tremendous runup in stocks related to the Internet.
Creative Computers, a computer retailer turned electronic auction house, is
covered in detail below as our "story stock." Every description I find of
Unify's business sounds like it was written by an electrical engineer. The most
concise one is, "We help customers deliver their application initiatives." OK.
JB Oxford is a California brokerage firm, which you may remember lost
considerable money for our portfolio in 1996. (This is the firm which was
invaded by federal agents issuing search warrants. The company was sold to new
management in 1997, and we added significantly to our holdings when it traded
under a dollar in early 1998.) They have one of the earliest on-line brokerage
systems in the industry, which might make them an attractive takeover target.
MySoftware Company is a software firm whose product is a bit easier to
understand. Bridgeway has owned two of their small-company mailing programs.
They also have software to create web pages. Restrac helps companies organize
their entire hiring effort over the Internet. Applix is another company you need
an advanced engineering degree to understand. (Actually, I have an advanced
engineering degree and I think it's a bit confusing, but my models don't.) Two
things are remarkable about these six companies. One is the breadth of their
underlying businesses which they now conduct over the Internet. The second is
the fact that I didn't buy a single one of these as an Internet company per se.
Each one has discovered the Internet as a powerful tool.
Except for the four software firms, this list reflects the diversity of our
portfolio, which held 154 stocks at quarter end. The entire list of companies is
found at the front of our semi-annual financial statements following page 9.
The only company which declined more than 50% is PacificAmerica Money Centers, a
real estate lending company. After deteriorating business fundamentals in
mid-1998, the firm received a takeover proposal for $10/share. The company never
traded above $7 5/8 on this news, but in retrospect this would have been a good
time to exit with a loss. The deal fell through when the acquiring firm learned
the extent to which business fundamentals had deteriorated. The company traded
at just 44 cents at the end of the quarter. Wall Street doesn't think it will
survive. PacificAmerica cost us about 0.6% in performance during the quarter.
Explanation of Annual Performance: Extreme Large/Small Company Divergence or
Fishing from the Wrong Pool
Translation: If you've read my previous letters, you are now familiar with, and
undoubtedly tired of, this theme. I am. While ultra-small companies have
significantly outperformed over the long-term, large companies can dominate for
shorter periods. However, large companies have never dominated to the degree
that they have over the last five years, especially 1998. This trend explains
our recent performance relative to the large company indexes, and even other
"small-company" mutual funds. Although our Portfolio outperformed even the large
company indexes in 1995, 1996, and 1997, we were overwhelmed in 1998 as
performance of large companies pounded that of small ones. It is not the
environment within which this Portfolio shines. Although I oppose trying to time
the market, one could easily say we were fishing from the wrong pool in 1998.
The following table presents some dramatic data, which 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
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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 2,655
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 or skill of a portfolio manager.
For mutual funds investing in ultra-small stocks, the divergence is actually
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
which comprise the Russell 2000 Index. The simple average of these 200
companies, the majority of which are ultra-small companies, is a decline of 57%.
Given how I pick companies for the Bridgeway Ultra-Small Company Portfolio (one
company at a time), one could argue that a simple average index is a better
benchmark for comparison. 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.
------- -------------- ------ ---------- ---------- --------- ----------
(by decile) ($Million)
<S> <C> <C> <C> <C> <C> <C>
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>
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
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"small-cap" are invested in the mid-range of deciles four through seven.)
Second, while we didn't beat the performance of either our CRSP Index or the
average small-company fund, we did much better than the average fund invested in
ultra-small stocks. 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 concerns
the mathematics of calculating the averages. (I believe a more "apples to
apples" comparison including some accounting for equal weighting of companies
would be more favorable to the funds.) The first decile 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 the relevant size 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 closer to our size index than
the vast majority of funds, I'm afraid I'll just have to conclude this section
with the following statements: We underperformed our index by two percentage
points in 1998. I'm not happy about it. I will strive to do better in 1999.
Explanation of Annual Performance: Value Orientation Didn't Help in this Bear
Market
Typically, stocks with a value orientation (those priced cheaply on the basis of
some measure of underlying valuation) don't fall as far in a market downturn as
growth stocks (those with revenues and earnings growing at a high rate). Our
Portfolio is strongly in the value camp. This orientation didn't help in 1998.
The average return of the 20 "value" funds with market capitalizations less than
$250 million (micro-cap and below) was -1.5%. Value funds returned -11.5%. In
addition to very small company size, our value orientation was also a big drag
to performance in 1998.
Top Ten Holdings
The table below presents our top ten holdings, which reflect significant
diversity across industries. With the exception of Creative Computers,
highlighted below, our assets are fairly broadly spread among the 155 portfolio
holdings. We trimmed this position during the quarter to bring it closer in line
with our 3% target maximum.
<TABLE>
<CAPTION>
Rank Description Industry Assets
---- ----------- -------- ------
<S> <C> <C> <C>
1 Creative Computers, Inc. Retail Stores--Internet 4.0%
2 Catherine Stores Corp. Retail Stores 3.1%
3 D&K Wholesale Drug, Inc. Drugs-Generic and OTC 2.9%
4 Pilgrim America Capital Corp Finance 2.6%
5 Home Products Int'l Inc. Housewares 2.6%
6 Invision Technologies, Inc. Aluminum & Products 2.3%
7 Int'l Management Assoc. Data Processing Software 2.0%
8 Misonix, Inc Pollution Control 1.9%
9 Barringer Technologies, Inc. Machinery 1.8%
10 Performance Technologies Data Processing Hardware 1.7%
</TABLE>
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
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few players. Bench Elway, Davis, and Sharpe, and most teams in the league could
beat them. Possibly so, but so what?
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 measure
performance accurately. These opinions are only normal since we have just
finished the best five-year period of large company dominance. 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 most ludicrous of the "small-cap effect is dead" arguments state that the
long-term outperformance of smaller companies is due to a few select years or a
relatively short period of time. If you "take out" the three best small-cap
years or the best small-cap period, the "small-cap effect" goes away. I find
these facts interesting but draw different conclusions. It is the statistical
nature of ultra-small stocks to have bursts of outperformance. (Our own
significant four year performance can be tied closely to just three wonderful
quarters in which small companies did outperform large ones.) 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. 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> <C>
1 50%
4 53%
10 69%
20 86%
30 97%
35 100%
</TABLE>
The data from this table is 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.
Story Stock--The Wild Ride on the Internet
Translation: I rarely override my models. Here's one of the rare times I did. It
has worked out well so far, but the story's not over yet. This stock is not
representative of the full spectrum our portfolio owns. On the other hand, it's
not the only Internet stock we own.
Creative Computers is one of our "back door" Internet stocks. We bought this
computer retailer in February at a price of about 12. Our model liked the core
business: selling computers through 19 stores. The model also (probably) picked
up on the success of the company's new strategy of selling
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computers over the Internet. This strategy worked well enough that the company
decided to close all but one of the company stores to focus on selling computers
by computer. What our model didn't know about was an "ancillary" subsidiary
started in December 1997. This subsidiary, Ubid, buys overstocked computers from
manufacturers and sells them by auction over the Internet. In the first month,
the company had sales of $157,000. In the next (first full) March quarter of
1998, sales grew to $2.1 million. In the June quarter they exploded to $6.7
million. In the September quarter they grew a "mere" two-fold to $15.1 million.
This from a subsidiary that hadn't been in existence the year before. Last
summer, Creative Computers announced plans to issue stock for 20% of Ubid
through an initial public offering (IPO) and distribute ("spin off") the
remaining 80% to Creative Computer shareholders about six months later.
The bad (?) news is that when the stock price shot up past 20, my value-oriented
model gave a sell signal. I'm a "quant" - I stick to my quantitative models. I'm
not an Internet investor who chases hot stocks. Companies with significant but
highly uncertain prospects - selling at an astronomical price with no earnings
scare me to death. So I sold, right? ...stay tuned...
People occasionally ask me if I ever break with the recommendations of my
models. I can't recall ever buying a stock that one of my models did not
recommend. The sell decision is a bit more complicated, and I can think of just
three circumstances under which I override a model recommendation. The first
case happens when the nature of what's driving a stock price changes from the
dynamics of why I bought the stock. For example, I buy a stock because my model
says it's cheap. Then it becomes a takeover candidate. If the market price has
risen to near the announced takeover price, I usually sell. I'm not a takeover
specialist, and a sure-fire way to underperform the market is to invest in
something you don't understand as well as the folks on Wall Street. The second
case is when a company announces a restatement of fundamental data. Since my
models "eat" this data, the model recommendations are useless if the data is
wrong. The third case is when there's a very compelling reason to hold the
stock, something I can measure quantitatively. This third case came into play
with Creative Computers.
On November 18, Creative Computers closed at 29.75. At this price (up 148% from
the purchase price), the risk factors on my model flashed a strong sell signal.
(The stock had grown by appreciation to represent a higher percentage of the
portfolio than I was comfortable with from a diversification and risk
viewpoint.) So I wrote out a sell ticket for the next morning market open.
On the way home I reconsidered. This stock was then in "Internet play" on Wall
Street (actually not on Wall Street; the price was being driven more by
individual short-term investors with on-line brokerage accounts all around the
country). So I thought, "Maybe before I sell, I should see how it compares to
the valuations of other Internet stocks." The initial public offering for Ubid
was to be about 14 per share, which translates into a price for Creative
Computers of about 19 (this is a slightly complex calculation I won't bore you
with). So it still seemed like a sell.
Not satisfied, I came in very early the next morning to price Ubid on the basis
of comparable Internet stocks. After a couple of hours of work before the market
opened, I calculated that Ubid was worth 80 to 200 per share, assuming other
Internet stocks are "worth" what they're trading for. (A major assumption.) At
this price, Creative Computers, Ubid's parent company, should be worth 61 to
137. I own other stocks that I think are worth two to four times their market
price, but I'm generally buying, not selling them. I tore up the sell ticket,
and decided on the "exit" strategy below. Creative Computers opened the day at
32, but closed at 26.25.
This became my exit strategy, or strategy for selling a stock that my model no
longer liked: I like selling when a lot of other people are buying. I believed
that there would likely be two times in the near future (very early and very
late December) when Creative Computer's stock price might spike. The first was
on the initial public offering, which would likely generate significant
publicity. The second was at the end of December, when institutions buy stocks
that have already appreciated to add "window dressing" to their list of
securities. So I decided to sell at least a third of our holdings on these
spikes until the stock price reflected something approaching "Internet value."
<PAGE> 8
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On the day before Thanksgiving, Creative Computers soared to 47.5. With a number
of weekend investors home on the day after Thanksgiving driving up the price, I
sold 10% of your total exposure at about 56 on Friday by trimming the Profit
Sharing Plan position. This was close enough to my target range to do some
trimming. The stock traded as low as 32 the following week. On the initial
public offering date, December 4, I sold another 10% near the open at 37.75. At
this point a very interesting thing happened.
Ubid shot up from the 15 offering price (it never actually traded below 34 on
the first day) to close at 48. At this price, I calculated that Creative
Computers should be worth 40. But short-term investors of Creative Computers
sold these shares to buy shares of Ubid on this first day of trading, driving
Ubid up and Creative Computers down. Creative Computers closed the day at 26.25,
a 36% discount to Ubid. I had expected a 15% discount, but this was eye-popping.
In just six months, the remaining 80% of Ubid shares would be distributed to
Creative Computer shareholders, and this discount would evaporate. If Ubid's
price stays constant for six months (I do expect some more upward pressure), the
projected return would be 40/26.25 = 52% (or 132% on an annualized basis). For
this kind of discount, I am willing to wait six months (at which time our gains
would be long-term). I even thought about buying more, but didn't, for very
important reasons of diversification and risk. It's always possible Ubid could
decline back to the 15 offering price (or less).
As a footnote, at the end of December Creative Computers closed at 31.75, but
Ubid had risen to 106! This implied a discount of 59%, that is, Creative
Computers was selling at a price 59% less than its underlying value based on
Ubid's price. I have never seen such a discount in my years of investing. At
106, the Ubid shares to be spun off to Creative Computer shareholders are worth
78 per share. This doesn't count the value of the remaining profitable Creative
Computer company. What's likely to happen? I think Ubid will fall and Creative
Computers will rise over the next five months. Ubid would have to fall all the
way to 34 to make Creative Computers worth only 31.75 on the date of the
spin-off. It could happen. (But it could also go to . . . could we really
imagine . . . 200?) This is the kind of situation that provides diversification
to our other holdings. Even if the stock market falls significantly in the next
five months, our Creative Computers position could rise. Likewise, the reverse
is true, but much less likely.
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 calendar year end, December,
1998; security positions can and do change thereafter.
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 two thousand problem. Many companies are spending tremendous
amounts to correct software which 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
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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.
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? For reasons similar to our disdain of timing the
market, we will not try to 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. I hope you are pleased with our recent quarter performance,
if not with our performance for the full year. Please keep your ideas coming.
Best regards,
/s/ JOHN MONTGOMERY
John Montgomery
<PAGE> 10
10
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
SCHEDULE OF PORTFOLIO INVESTMENTS (unaudited)
Showing percentage of total net assets
December 31, 1998
<TABLE>
<CAPTION>
Industry Company Shares Value
-------- ------- ------ -----
<S> <C> <C>
Common Stock - 99.5%
Aerospace - 0.4%
Aysys Technologies, Inc.* 10,250 $143,500
Air Transport - 0.5%
Cade Industries, Inc. * 48,000 106,500
Frontier Airlines * 6,000 28,875
World Airways, Inc. * 36,500 36,500
WorldCorp, Inc. * 13,800 557
---------
172,432
Aluminum & Products - 2.3%
Invision Technologies,
Inc.* 123,300 762,919
Auto parts - 1.0%
IMPCO Technologies, Inc. * 20,656 271,110
R & B, Inc. * 6,000 49,125
Raytech Corp. * 4,800 13,800
---------
334,035
Automobiles - 0.5%
ASHA Corporation * 20,000 85,000
Featherlite, Inc. * 13,500 77,625
---------
162,625
Banking - 0.5%
Avondale Financial Corp. * 4,400 68,200
Hallmark Capital Corp. * 7,800 85,800
---------
154,000
Beverages - 0.2%
Vermont Pure * 14,000 65,625
Broadcasting - 0.6%
Triathalon Broadcasting
Co.* 16,000 180,000
Building - 1.9%
Dominion Homes, Inc. * 7,200 79,200
Engle Homes Inc 8,300 127,094
Meritage Corp. * 12,200 148,688
Perini Corp. * 17,200 88,150
Transcoastal Marine
Services, Inc. * 64,400 191,188
WTD Industries, Inc. * 4,500 1,828
---------
636,148
Chemicals - 1.4%
Pure World, Inc. * 57,300 461,981
Cosmetics & Toiletries - 0.4%
Styling Technology Corp. * 14,500 134,125
Data Processing - Hardware - 2.7%
Bell Microproducts, Inc. * 54,650 505,513
Rimage Corp * 31,050 388,125
---------
893,638
Data Processing - Software & Services - 21.0%
ARDENT Software, Inc. * 12,500 287,500
AlphaNet Solutions, Inc. * 35,320 130,243
Applied Microsystems Corp * 24,900 96,488
Brightstar Info Tech * 55,000 433,125
CFI Proservices * 10,500 122,063
Catalyst International * 20,700 248,400
DA Consulting Group * 20,900 457,188
Data Systems Network Corp. * 8,000 11,500
Fourth Shift Corp. * 52,900 238,050
Health Management Systems * 40,000 315,000
Information Advantage
Software * 30,420 230,051
Input Software * 2,500 14,375
International Management &
Research Corp.* 111,900 657,413
International Microcomputer
Software, Inc. * 29,100 241,894
Javelin Systems * 20,000 300,000
Managed Care Solutions * 4,800 20,400
Mathsoft Inc. * 54,000 141,750
Mecon Inc. * 4,000 42,000
Merisel Inc * 79,000 187,625
MySoftware Corp. * 4,200 47,775
Oshap Technologies Ltd. 22,500 168,750
Overland Data * 35,000 249,375
Performance Technologies, Inc. * 43,200 567,000
Point of Sale Ltd * 29,000 206,625
Printrak International * 2,300 16,963
SEEC Inc. * 78,100 502,769
Simware, Inc. * 54,800 164,400
Unify Corp. * 63,500 547,688
Verity Inc * 7,800 206,700
---------
6,853,110
Drugs-Generic and OTC - 4.7%
D & K Healthcare
Resources, Inc. * 34,500 940,125
Natural Alternatives
International * 41,500 456,500
Neogen Corp. * 20,000 141,250
---------
1,537,875
Electronics/Electric - 7.3%
Daktronics, Inc. * 9,700 115,188
Dataram Corp. * 6,400 60,800
EDO Corp. 15,000 125,625
Gentner Communications Corp. * 65,000 251,875
Gradco Systems, Inc. * 123,750 324,844
IFR Systems Inc. * 4,500 20,813
Instron Corp. 600 10,350
Isomet Corp * 10,900 32,700
K-Tron International, Inc. * 15,600 288,600
Oyo Geospace Corp. * 8,100 69,863
PSC Inc * 24,600 233,700
Qualmark Corporation * 9,000 48,375
Spire Corp. * 8,750 26,250
Vari L Company, Inc. * 63,000 476,438
Vicon Industries, Inc. * 40,500 298,688
---------
2,384,109
Finance - 2.8%
Litchfield Financial Corp 2,000 38,000
Pacific America Money
Center, Inc. * 24,270 10,618
Pilgrim America Capital Corp * 34,500 862,500
---------
911,118
</TABLE>
<PAGE> 11
11
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY 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>
Food - 0.8%
Fresh Juice Company, Inc. * 99,300 $245,147
Food Serving - 1.6%
Ark Restaurants * 11,800 119,475
Denamerica Corp * 42,000 49,875
Garden Fresh Restaurant Corp. * 9,000 129,375
Roadhouse Grill, Inc. * 42,900 231,928
---------
530,653
Graphic Arts - 0.3%
Baldwin Technology
Company, Inc. * 13,100 73,688
Prime Source Corp. * 2,300 15,238
---------
88,926
Health Care Facilities - 2.5%
Advocat Inc * 32,100 176,550
Insight Health Services Corp. * 19,200 115,200
MIM Corp. * 50,500 170,438
Omega Health Systems, Inc. * 34,500 150,938
Sheridan Healthcare Inc * 24,250 203,094
---------
816,220
Home Furnishings - 2.1%
Smed International, Inc. * 21,400 137,763
TAB Products Company 13,400 78,725
Winsloew Furniture, Inc. * 17,200 455,800
---------
672,288
Hotels/Motels/Inns - 0.4%
Execustay Corp. * 9,500 123,500
Housewares - 2.6%
Home Products International Inc 84,600 840,713
Jewelry, Silverware, Watches - 2.5%
Jan Bell Marketing, Inc. * 41,300 265,869
Oroamerica Inc * 54,000 533,250
---------
799,119
Leather & Shoes - 0.9%
Candies, Inc * 80,900 303,375
Leisure-Amusement - 2.6%
Noodle Kidoodle * 29,000 275,500
PTI Holding, Inc. * 114,400 414,700
Toymax International, Inc. 31,500 159,469
---------
849,669
Machinery - 2.4%
Barringer Technologies, Inc. * 69,900 602,888
Denali Inc. * 5,100 71,400
Gilden Activewear * 10,350 86,681
Inotek Technologies Corp. * 21,800 8,175
Western Power & Equip. Corp. * 1,500 4,875
---------
774,019
Medical equipment/Supplies - 2.7%
Dynatronics Corp. * 118,500 303,656
HPSC Inc * 3,500 34,125
I-Flow Corp. * 45,400 55,331
Interpore International * 47,000 279,063
Kewaunee Scientific Corp 4,900 54,513
Medical Technologies, Inc. 30,100 139,213
---------
865,901
Mining - 0.0%
Alta Gold Company * 9,000 13,781
Office Equipment - 0.4%
Officeland, Inc. * 51,600 114,488
Oil & Gas - 3.5%
Adams Resources &
Energy, Inc. 6,500 37,375
Bolt Technology Corp * 38,000 251,750
Callon Petroleum Company * 26,740 310,853
Castle Energy Corp 20,500 358,750
Clayton Williams Energy Inc. * 7,200 72,000
Petroleum Development Corp. * 37,500 114,844
---------
1,145,572
Pollution Control - 2.3%
American Eco Corp. * 61,300 101,528
Misonix, Inc * 107,675 632,591
---------
734,119
Retail Stores - 9.9%
Andersons Inc * 11,550 133,547
Braun's Fashions Corp. * 57,500 546,250
Catherines Stores Corp. * 92,800 1,009,200
Creative Computers, Inc. * 40,800 1,295,400
Jim Hjelms Private Collection * 9,200 28,175
Jos. A. Bank Clothiers, Inc. * 10,700 85,600
Wilsons The Leather Express * 5,300 58,300
World of Science * 17,800 60,075
---------
3,216,547
Securities - 0.3%
JB Oxford Holdings, Inc. * 42,400 76,850
Rich Coast Inc. * 35,125 35,125
---------
111,975
Services - 5.7%
4 Kids Entertainment, Inc. * 14,000 154,000
ASI Solutions * 9,600 73,200
Advanced Marketing
Services, Inc. 11,100 213,675
Corrpro Companies, Inc. * 22,125 269,648
Dental Care Alliance * 16,900 202,800
FTI Consulting, Inc. * 51,100 172,463
GRC International * 60,000 378,750
ICF Kaiser International * 14,800 21,275
International Airline Support
Group, Inc. * 21,600 99,900
Smart Choice Automotive
Group * 38,500 156,406
The Solomon Page Group Ltd. * 28,500 44,531
U-Ship * 45,000 84,375
---------
1,871,023
Steel/Iron - 0.4%
Bayou Steel Corp. * 9,800 40,425
Webco Industries, Inc. * 14,700 97,388
---------
137,813
</TABLE>
<PAGE> 12
12
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY 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>
Telecommunications - 4.0%
Comtech Telecommunications
Corp. * 15,500 $ 135,625
Corsair Communications * 34,310 171,550
Gilat Communications * 47,800 475,013
TTI Team Telecom
International Ltd. * 65,300 518,319
---------
1,300,507
Transportation - 1.4%
Railamerica Inc * 53,600 455,600
Transportation/Freight - 1.5%
Consolidated Delivery &
Logistics * 58,000 183,063
Hvide Marine, Inc. * 22,350 111,750
Landair Services Inc. * 8,200 153,750
Nitinol Medical Technologies * 14,000 52,500
---------
501,063
Landair Corporation * 4,300 32,250
PAM Transportation * 7,400 66,600
Smithway Motor Xpress Corp. * 10,200 76,500
---------
175,350
Total Common Stock (Identified Cost $37,157,350) $32,474,608
-----------
Total Investments - 99.5% $32,474,608
(Cost $37,157,350)
Other Assets and Liabilities, net - 0.5% 164,121
-----------
Total Net Assets - 100.0% $32,638,729
===========
</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 $37,157,350.
Gross unrealized appreciation and depreciation were $5,246,827
and $9,929,569, respectively, or net unrealized appreciation
of -$4,682,742.
See accompanying notes to financial statements.
<PAGE> 13
13
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
As of December 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments at value (cost - $37,157,350) $32,474,608
Cash 330,650
Receivable from adviser 353
Receivable for interest 2,435
Prepaid expenses 16,277
Deferred organization costs 2,376
-----------
Total assets 32,826,699
-----------
LIABILITIES:
Payable for shares redeemed 101,524
Payable for investments purchased 3,447
Payable for management fee 48,484
Accrued expenses 34,515
-----------
Total liabilities 187,970
-----------
NET ASSETS ( 2,220,662 SHARES OUTSTANDING) $32,638,729
===========
Net asset value, offering and redemption price per share ($32,638,729 / 2,220,662) $ 14.70
===========
NET ASSETS REPRESENT:
Paid-in capital $37,795,913
Net realized loss on investments (474,442)
Net unrealized depreciation of investments (4,682,742)
-----------
NET ASSETS $32,638,729
===========
</TABLE>
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF OPERATIONS (Unaudited)
For the six months ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $16,763
Interest 12,062
-----------
Total income 28,825
-----------
EXPENSES:
Management fees 249,140
Accounting fees 80,843
Audit fees 9,128
Custody 15,703
Amortization of organization costs 2,322
Insurance 3,674
Legal 1,318
Registration fees 7,197
Directors' fees 617
Miscellaneous 973
-----------
Total expenses 370,915
Less fees waived (17,429)
-----------
Net expenses 353,486
-----------
NET INVESTMENT LOSS (324,661)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss on investments (1,235,555)
Net change in unrealized depreciation (5,887,330)
-----------
Net realized and unrealized loss (7,122,885)
-----------
NET DECREASE IN ASSETS RESULTING FROM OPERATIONS $(7,447,546)
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 14
14
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
<TABLE>
<CAPTION>
Six months ended Year ended
INCREASE (DECREASE) IN NET ASSETS: December 31, 1998 June 30, 1998
OPERATIONS:
<S> <C> <C>
Net investment loss $(324,661) $(609,466)
Net realized gain(loss) on investments (1,235,555) 10,369,950
Net change in unrealized depreciation (5,887,330) (4,439,194)
------------ -----------
Net increase resulting from operations (7,447,546) 5,321,290
----------- -----------
Distributions to shareholders:
From net investment income 0 0
From realized gains on investments (6,852,865) (3,065,168)
----------- -----------
Total distributions to shareholders (6,852,865) (3,065,168)
FUND SHARE TRANSACTIONS:
Proceeds from sale of shares 2,280,977 15,231,033
Reinvestment of dividends 6,787,370 3,018,349
Cost of shares redeemed (8,385,902) (4,319,011)
----------- -----------
Net increase from Fund share transactions 682,445 13,930,371
----------- -----------
Net increase(decrease) in net assets (13,617,966) 16,186,493
NET ASSETS:
Beginning of period 46,256,695 30,070,202
----------- -----------
End of period $32,638,729 $46,256,695
===========
Number of Fund shares:
Sold 154,342 632,949
Issued on dividends reinvested 554,071 141,441
Redeemed (541,393) (178,802)
----------- -----------
Net increase 167,020 595,588
Outstanding at beginning of period 2,053,642 1,458,054
----------- -----------
Outstanding at end of period 2,220,662 2,053,642
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 15
15
BRIDGEWAY FUND, INC. - ULTRA-SMALL COMPANY PORTFOLIO
FINANCIAL HIGHLIGHTS (Unaudited)
(for a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six months ended Year ended Year ended Year ended 8/5/94* to
December 31, 1998 June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value, beginning of period $22.52 $20.62 $16.68 $11.35 $10.33
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment loss (0.15) (0.34) (0.24) (0.21) (0.04)
Net realized and unrealized gain(loss) (4.11) 4.03 4.50 6.03 1.07
------ ------ ------ ------ ------
Total from investment operations (4.26) 3.69 4.26 5.82 1.03
------ ------ ------ ------ ------
Less distributions to shareholders:
Net investment income 0.00 0.00 0.00 0.00 0.00
Net realized gains (3.56) (1.79) (0.32) (0.49) (0.01)
------ ------ ------ ------ ------
Total distributions (3.56) (1.79) (0.32) (0.49) (0.01)
------ ------ ------ ------ ------
Net asset value, end of period $14.70 $22.52 $20.62 $16.68 $11.35
====== ====== ====== ====== ======
TOTAL RETURN [1] (15.8%) 18.4% 26.0% 52.4% 10.5%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period $32,638,729 $46,256,695 $30,070,202 $4,557,591 $667,536
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 2.00% 1.67% 1.67% 1.97% 1.68%
Expenses before waivers and
reimbursements 2.10% 1.67% 1.87% 3.07% 8.34%
Net investment loss after waivers and
reimbursements (1.84%) (1.42%) (1.37%) (1.47%) (0.65%)
Portfolio turnover rate [2] 78.6% 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> 16
16
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY 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.
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. It was reopened to current shareholders on November 1,
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> 17
17
BRIDGEWAY FUND, INC.
ULTRA-SMALL COMPANY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited), Continued
2. Significant Accounting Policies
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.
The Adviser has been voluntarily reimbursing the Ultra-Small Company
Portfolio for any operating expenses above 2.0% and expects to continue
this voluntary level of reimbursement for the foreseeable future. To
achieve this expense level the Adviser has waived $7,901 of the
management fee for the six months ended December 31, 1998.
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
$13,733,047 and $18,394,514 for the six months ended December 31, 1998.
