<PAGE> 1
February 15, 1999
Dear Fellow Micro-Cap Limited Shareholder,
Following the poorest quarter for micro-cap stocks since 1974, our fourth
quarter was outstanding, up an astounding 41.6%. This quarterly performance
trounced each of our benchmarks, more than recovering the loss of the prior
quarter. For the quarter, we ranked 3rd of 72 micro-cap funds according to
Morningstar. It feels particularly gratifying to have recovered from the
"twenty year storm" of the September quarter in just three months. While we
slightly underperformed our market benchmark in the prior quarter, we made
up for it in spades in the December quarter.
The table below presents our December quarter, one year, and life-to-date
financial results according to the formula required by the SEC.
<TABLE>
<CAPTION>
Dec. Qtr. Life-to-Date
10/1/98 6/30/98 to
to 12/31/98 12/31/98
----------- ------------
<S> <C> <C>
Micro-Cap Limited Portfolio 41.6% 7.6%
Lipper Small-Cap Stock Funds* 19.4% (6.3)%
Russell 2000 (small growth stocks)* 16.3% (7.1)%
CRSP Cap-Based Portfolio 9 Index* 19.4% (8.3)%
</TABLE>
*The Lipper Small Cap Stock Funds is an index of small-cap 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 9
Index is an unmanaged index of 928 micro-cap companies compiled by the
Center for Research in Security Prices, with dividends reinvested. Past
performance does not guarantee future returns.
MICRO-CAP LIMITED 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 Micro-Cap Limited Portfolio
and the CRSP Cap-Based Portfolio 9 Index. As of 12/31/98 the $10,000 had
grown to $10,760 in the Bridgeway Micro-Cap Limited Portfolio and $9,167
in the CRSP Cap-Based Portfolio 9 Index.
Detailed Explanation of Quarterly Performance--The Movers and the Shakers
Translation: Our technology stocks carried the day.
Our December quarter performance was helped tremendously by our increased
focus on technology stocks, representing 34.8% of net assets, which is a
higher percentage than normal. We also had a
<PAGE> 2
sprinkling of dynamic performers in other industries. Eight of the 61
stocks we owned during the quarter gained more than 50%:
<TABLE>
<CAPTION>
Rank Description Industry % Gain
---- ----------- -------- -------
<S> <C> <C> <C> <C>
1 Alpha Industries Electronics/Electric 216.5%
2 Children's Place Stores Inc. Retail Stores 151.3%
3 Pegasus Systems, Inc. Services 109.8%
4 Neomagic Corp. Data Processing-Hardware 92.4%
5 THQ, Inc. Leisure-Amusement 60.0%
6 Fuisz Technologies, Ltd. Drugs-Generic and OTC 59.4%
7 EMPI Inc. Medical Equipment/Supplies 56.3%
8 Ansys Inc. Data Proc.--Software and Services 51.7%
</TABLE>
After a horrible 1997, Alpha Industries, a manufacturer of integrated
circuits, got things back on track in 1998. It took Wall Street a while to
figure this out, however, and the stock price caught up with the
fundamental company health in the fourth quarter. This company has
significant cash flow and almost no debt. I wish it had been repurchasing
its own shares at the time we purchased it for our portfolio.
Pegasus Systems is one of a handful of our companies that caught the
Internet wave of recent months. This company enables people to make hotel
reservations over the Internet. Pegasus systems has a very strong growth
rate and is also considerably profitable.
Story Stock Follow-up--Of Fish Oil and Web Sites - or - On Again off Again
You may remember the roller-coaster ride I described last quarter with
Zapata, an oil exploration firm, turned fish oil firm, turned (maybe)
Internet firm. On the first day of trading, we bought shares under $10;
later we sold over a third of our holding at $18, only to watch the stock
collapse to below $8 following an announcement that it decided not to enter
the Internet business. We bought the company for the fish oil, not Internet
acquisitions, but the fish oil business suffered a downturn in the third
quarter just as micro-cap stocks were plunging. The company announced in
December that it had changed its mind again, and that it would pursue its
Internet company acquisition strategy. When the stock price spiked on this
news, we sold the remaining two-thirds of our original holdings at almost
14. I'm glad to be out of this one. It's currently trading under 10 again.
Top Ten Holdings
The following list will give you a flavor for the diversity and level of
concentration of our Portfolio. We rarely put more than 4% of Portfolio net
assets in any one company. Comparing the top five appreciated holdings
above with our top ten holdings below, you can see that we occasionally
become more concentrated in a position which has doubled or tripled. Due to
my commitment to diversification, I have trimmed several of our top ten
holdings since the quarter end.
Our top ten holdings on December 31 were:
<TABLE>
<CAPTION>
Rank Description Industry % Net Assets
---- ----------- -------- -------------
<S> <C> <C> <C> <C>
1 Pegasus Systems Services 10.5%
2 Alpha Industries Electronics/Electric 7.3%
3 THQ, Inc. Leisure-Amusement 4.3%
4 Creative Computers Retail Stores 4.1%
5 Power Integrations Electronics/Electric 3.8%
6 EMPI Inc. Medical equipment/Supplies 3.2%
7 DA Consulting Group Data Proc.--Software and Services 3.2%
8 Caere Corp. Data Proc.--Software and Services 3.1%
9 Children's Place Retail Stores Retail Stores 3.0%
10 Media Arts Group Housewares 3.0%
------
Total 45.6%
</TABLE>
2
<PAGE> 3
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 or tax advice. Any favorable
(or unfavorable) description of trends or holdings applies only as of the
quarter end, December 31, 1998, unless otherwise stated; security positions
can and do change thereafter. Performance trends discussed here are
historical and may not be repeated in the future.
Myth and Fact
Translation: Recent market performance demonstrates the risk of trying to
"time the market." At Bridgeway, we subscribe to the philosophy that time
in the market is better than timing the market. (I don't know who first
said this; if you know, please write me a card.) By now you are probably
familiar with Bridgeway's "buy and hold" philosophy of owning stocks (as an
asset class) for the long term and with our disdain for trying to time the
market. The following quote (I'll call it "the myth") nearly turned by
stomach when I read it in an advertisement for one of the most popular
financial Internet sites:
With the market's recent schizophrenia - swooning one month, soaring the
next - it's become more crucial for investors to be able to stay on top of
events and use the fluctuations to their advantage.
Presumably by using this service you could bail out before the market fell,
and invest again at the bottom.
Fact: Most funds experience a high level of redemptions in a market
downturn. (Interestingly, we experienced a low redemption rate, despite the
roller coaster ride of August through December.) Shareholders who did bail
out in October missed some of the best performing weeks at the end of the
year. Academic and industry research indicate that this is not an isolated
phenomenon. A significant majority of people who time the market end up
with inferior returns. Wilshire Associates studied the gap between
portfolio returns and shareholder returns from January 1984 through August
1994 and found that investors' returns were 1.1% less than the average
11.0% return of their funds. I believe a significant part of this
underperformance is due to investors' fear and reaction to short-term news
stories.
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 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 conducted an on-site interview in October to assess our
readiness. (They don't give you a grade or make any representation
3
<PAGE> 4
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
quarter and full six-month performance. Please keep your ideas coming.
Sincerely,
/s/ JOHN MONTGOMERY
John Montgomery
4
<PAGE> 5
BRIDGEWAY FUND, INC.
MICRO-CAP LIMITED 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 - 96.7%
Air Transport - 3.0%
Amtran, Inc. * 14,300 $ 387,888
Broadcasting - 2.7%
International Fibercom * 48,000 351,000
Building - 0.8%
Hovnanian K. Enterprises * 12,000 103,500
Data Processing - Hardware - 2.6%
Neomagic Corp. * 15,400 340,725
Data Processing - Software & Services - 17.5%
ANSYS Incorporated * 20,200 222,200
Caere Corp * 29,000 406,000
DA Consulting Group * 19,000 415,625
Health Management Systems * 19,500 153,563
Information Advantage
Software * 38,500 291,156
Inso Corp. * 3,900 97,500
Merisel Inc * 34,000 80,750
Microtouch Systems * 8,500 111,563
Object Design Inc. * 8,000 53,000
SPSS Inc * 9,800 184,975
Summit Design Inc * 29,500 274,719
-----------
2,291,051
Drugs-Generic and OTC - 2.2%
Medco Research, Inc. * 11,300 293,800
Electronics/Electric - 14.7%
Alpha Industries * 26,500 954,000
Instron Corp. 2,400 41,400
Newport Corp. * 14,100 237,938
Power Integrations, Inc. * 20,100 503,756
Titan Corp. * 35,000 192,500
-----------
1,929,594
Finance - 3.0%
Pilgrim America Capital Corp * 15,600 390,000
Food - 1.2%
Zapata Corp. 12,600 154,350
Health Care Facilities - 1.9%
SunQuest Information * 17,500 247,188
Home Furnishings - 3.4%
Ladd Furniture Inc. * 12,700 205,581
Winsloew Furniture, Inc. * 9,000 238,500
-----------
444,081
Housewares - 3.0%
Media Arts Group * 27,800 390,938
Leisure-Amusement - 4.3%
THQ, Inc. * 20,250 567,000
Machinery - 0.8%
Armor Holdings Inc. * 9,500 108,656
Medical equipment/Supplies - 3.2%
EMPI Inc. * 16,800 420,000
Oil & Gas - 2.8%
Gulfmark Offshore * 23,200 $ 365,400
Retail Stores - 9.9%
Children's Place Retail
Stores, Inc. * 15,564 391,046
Creative Computers, Inc. * 17,000 539,750
Phar-Mor Inc. * 12,700 96,838
Wilsons The Leather Express * 24,500 269,500
-----------
1,297,134
Services - 12.1%
Innotrac Corp. * 11,000 199,375
Pegasus Systems * 38,300 1,378,800
-----------
1,578,175
Telecommunications - 1.3%
Comtech Telecommunications
Corp. * 350 3,063
Corsair Communications * 33,600 168,000
-----------
171,063
Textiles - 1.1%
R.G. Barry Corp. * 13,500 148,500
Transportation/Freight - 2.7%
Aviall, Incorporated * 5,500 64,625
Landair Services Inc. * 15,200 285,000
-----------
349,625
Trucking - 2.5%
Arkansas Best Group * 20,000 116,875
Landair Corporation * 6,000 45,000
USA Truck, Inc. * 14,000 162,750
-----------
324,625
-----------
Total Common Stock (Identified Cost $11,071,672) $12,654,293
Short-term Investments - 1.0%
Money Market Funds - 1.0%
Expedition Money Market Fund 125,085 125,085
-----------
Total Short-term Investments
(Identified Cost $125,085) $ 125,085
-----------
Total Investments - 97.6% $12,779,378
(Cost 11,196,757)
Other Assets and Liabilities, net - 2.4% 309,669
-----------
Total Net Assets - 100.0% $13,089,047
===========
</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 $11,196,757. Gross unrealized
appreciation and depreciation were $2,544,525 and $961,904, respectively, or
net unrealized appreciation of $1,582,621.
See accompanying notes to financial statements.
5
<PAGE> 6
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES (Unaudited)
As of December 31, 1998
<TABLE>
ASSETS:
<S> <C>
Investments at value (cost - $11,196,757) $12,779,378
Cash 327,447
Receivable for investments sold 97,122
Receivable for interest 1,116
Prepaid expenses 8,099
Deferred organization costs 8,977
-----------
Total assets 13,222,139
-----------
LIABILITIES:
Payable for shares redeemed 14,702
Payable for investments purchased 90,202
Payable for management fee 10,249
Accrued expenses 17,939
-----------
Total liabilities 133,092
-----------
NET ASSETS ( 2,431,348 SHARES OUTSTANDING) $13,089,047
===========
Net asset value, offering and redemption price per share ($13,089,047 / 2,431,348) $ 5.38
===========
NET ASSETS REPRESENT:
Paid-in capital $12,284,034
Net realized loss on investments (777,608)
Net unrealized appreciation of investments 1,582,621
-----------
NET ASSETS $13,089,047
===========
</TABLE>
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
STATEMENT OF OPERATIONS (Unaudited)
For six months ended December 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 9,034
Interest 23,703
-----------
Total income 32,737
EXPENSES:
Management fees 46,936
Accounting fees 20,450
Audit fees 3,555
Custody 5,416
Amortization of organization costs 673
Legal 1,511
Insurance 464
Registration fees 1,556
Directors' fees 417
-----------
Total expenses 80,978
-----------
NET INVESTMENT LOSS (48,241)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized loss on investments (777,606)
Net change in unrealized appreciation 1,582,621
-----------
Net realized gain and unrealized loss 805,015
-----------
NET INCREASE IN ASSETS RESULTING FROM OPERATIONS $ 756,774
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 22, 1998* to
INCREASE (DECREASE) IN NET ASSETS: December 31, 1998 June 30, 1998
OPERATIONS:
<S> <C> <C>
Net investment loss $ (48,241) $ 0
Net realized loss on investments (777,606) 0
Net change in unrealized appreciation 1,582,621 0
------------ ------------
Net increase resulting from operations 756,774 0
------------ ------------
Distributions to shareholders:
From net investment income 0 0
From realized gains on investments 0 0
------------ ------------
Total distributions to shareholders 0 0
FUND SHARE TRANSACTIONS:
Proceeds from sale of shares 6,550,810 9,079,575
Reinvestment of dividends 0 0
Cost of shares redeemed (3,290,142) (7,970)
------------ ------------
Net increase from Fund share transactions 3,260,668 9,071,605
------------ ------------
Net increase in net assets 4,017,442 9,071,605
NET ASSETS:
Beginning of period 9,071,605 0
------------ ------------
End of period $ 13,089,047 $ 9,071,605
============ ============
Number of Fund shares:
Sold 1,367,318 1,815,915
Issued on dividends reinvested 0 0
Redeemed (750,291) (1,594)
------------ ------------
Net increase 617,027 1,814,321
Outstanding at beginning of period 1,814,321 0
------------ ------------
Outstanding at end of period 2,431,348 1,814,321
============ ============
</TABLE>
BRIDGEWAY FUND, INC. - MICRO-CAP LIMITED PORTFOLIO
FINANCIAL HIGHLIGHTS (Unaudited)
(for a share outstanding throughout the period)
<TABLE>
<CAPTION>
Six months ended
December 31, 1998
<S> <C>
PER SHARE DATA
Net asset value, beginning of period $ 5.00
--------------
Income (loss) from investment operations:
Net investment loss (0.02)
Net realized and unrealized gain 0.40
--------------
Total from investment operations 0.38
--------------
Less distributions to shareholders:
Net investment income 0.00
Net realized gains 0.00
--------------
Total distributions 0.00
--------------
Net asset value, end of period $ 5.38
==============
TOTAL RETURN [1] 7.6%
RATIOS & SUPPLEMENTAL DATA
Net assets, end of period $ 13,089,047
Ratios to average net assets: [2]
Expenses after waivers and reimbursements 1.55%
Expenses before waivers and reimbursements 1.55%
Net investment income (loss) after waivers and reimbursements (0.93)%
Portfolio turnover rate [2] 98.3%
</TABLE>
[1] Not annualized for periods less than a year.
[2] Annualized for periods less than a year.
* June 22, 1998 was initial offering, financial highlights are not presented
for the period June 22, 1998 to June 30, 1998 because investment
activities started July 1, 1998.
See accompanying notes to financial statements.
7
<PAGE> 8
BRIDGEWAY FUND, INC.
MICRO-CAP LIMITED 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 Micro-Cap Limited Portfolio was offered to the public beginning June
22, 1998 in accordance with the subscription offering. Until July 1, 1998
the portfolio's operations were restricted to accepting subscription
funds. On July 1, 1998 the Portfolio began investing in micro-cap stocks
and commenced other operations. The Portfolio will close to new investors
whenever net assets are above $27.5 million and will close to all new
investments when net assets are above $55 million.
Bridgeway Capital Management, Inc. is the Adviser to the Fund.
2. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuation
Securities are valued at the closing price for securities traded on a
principal U.S. securities exchange and on NASDAQ. Listed securities for
which no sales are reported are valued at the latest bid price in
accordance with the pricing policy established by the Fund's Board of
Directors. When current bid prices are not available, the most recently
available quoted closing or bid price is used and adjusted for changes in
the index on the exchange on which that security trades, also in
accordance with the pricing policy established by the Fund's Board of
Directors.
Federal Income Taxes
It is the Fund's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code applicable to regulated investment
companies, including the timely distribution of all its taxable income to
its shareholders. Therefore, no federal income tax provision has been
recorded.
Deferred Organization Costs
Deferred organization costs are amortized on a straight-line basis over
five years.
Distributions to Shareholders
Distributions to shareholders are recorded when declared. The amount and
character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
8
<PAGE> 9
BRIDGEWAY FUND, INC.
MICRO-CAP LIMITED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited), Continued
2. Significant Accounting Policies, Continued
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
12b-1 Plan
The Fund acts as distributor of its shares pursuant to a 12b-1 plan
adopted by shareholders on October 15, 1996. The cost of distributing
shares of the Fund is borne by the Adviser at no cost to the Fund; thus,
there is no "12b-1 fee."
Other
Security transactions are accounted for as of the trade date, the date
the order to buy or sell is executed. Realized gains and losses are
computed on the identified cost basis. Dividend income is recorded on the
ex-dividend date, and interest income is recorded on the accrual basis.
3. Management Contract:
The Micro-Cap Limited Portfolio pays a flat 0.9% annual management fee,
computed daily and payable monthly, except that while the Portfolio's net
assets range from $27.5 million to $55 million the fee will be $495,000
annually subject to a maximum rate of 1.49% and a maximum expense ratio
of 1.9%.
The fee is adjusted quarterly for based upon performance. The performance
adjustment rate varies with the Fund's performance as compared to the
performance of the CRSP Cap-Based Portfolio 9 Index with dividends
reinvested (hereinafter "Index" ) and ranges from -.7% to +.7%. The
performance rate adjustment is calculated at 2.8% of the difference
between the performance of the Fund and that of the Index over the
trailing five year period, except that there is no performance adjustment
if the difference between the Fund performance and the Index performance
is less than or equal to 2%.
4. Related Party Transactions:
One director of the Fund, John Montgomery, is an owner and director of
the Adviser. Under the Investment Company Act of 1940 definitions, he is
considered to be "affiliated" and "interested." Compensation of Mr.
Montgomery is borne by the Adviser rather than the Fund. The other
officers of the Fund are employees of the Adviser, and the portion of
their compensation attributable to fund accounting, shareholder
accounting and state registration services is paid by the Fund, and all
amounts paid for shareholder accounting are paid to the Adviser and are
included in the Accounting fees expense category of the financial
statements.
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
$15,849,366 and $4,000,088 for the six months ended December 31, 1998.
9
