N-CSRS 1 a2152608zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-08200 --------------------------------------------- BRIDGEWAY FUNDS, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 5615 Kirby Drive, Suite 518 Houston, Texas 77005-2448 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) John N.R. Montgomery, President Bridgeway Capital Management, Inc. 5615 Kirby Drive, Suite 518 Houston, Texas 77005-2448 ------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (713) 661-3500 ---------------------------- Date of fiscal year end: June 30 -------------------------- Date of reporting period: December 31, 2004 ------------------------------------- Item 1 - Reports to Stockholders The following is a copy of the report to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). [BRIDGEWAY FUNDS LOGO] AGGRESSIVE INVESTORS 1 FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 [GRAPHIC] NEW HIGH 12/28/04 $ 55.11 INTERIM LOW 3/11/03 $ 28.81 OLD HIGH 9/1/00 $ 54.83*
* ADJUSTED FOR DIVIDENDS Dear Fellow Aggressive Investors 1 Fund Shareholder, Our Fund appreciated 17.96% in the December quarter compared to 9.23% for our primary benchmark, the S&P 500 Index and 10.46% for our peer benchmark, the Lipper Capital Appreciation Funds Index. It was a very strong quarter. On the strength of the December quarter, our calendar year Fund return was 12.21%, beating both our primary market benchmark (up 10.88%) and our peer benchmark (up 11.31%). It was another VERY strong year for small stocks, however, and we underperformed the Russell 2000 Index (up 18.33%). This represents the sixth year in a row--three bull market years and three bear market years--that we have outperformed our primary market benchmark and our peer benchmark. I am very proud of Bridgeway's record of consistency with this Fund. The table below presents our December quarter, one-year, five-year, ten-year and life-to-date financial results according to the formula required by the SEC. See page 2 for a graph of performance since inception.
DEC. QTR. 1 YEAR 5 YEAR 10 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 1/1/00 TO 1/1/95 TO 8/5/94 TO 12/31/04 12/31/04 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------------------------------------- AGGRESSIVE INVESTORS 1 FUND 17.96% 12.21% 7.40% 22.28% 22.30% S&P 500 Index (large companies) 9.23% 10.88% -2.30% 12.05% 11.73% Russell 2000 (small companies) 14.09% 18.33% 6.61% 11.54% 11.40% Lipper Capital Appreciation Funds 10.46% 11.31% -4.07% 9.43% 9.36%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN STOCK MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS WHILE THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, THAT MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. THE LIPPER CAPITAL APPRECIATION FUNDS INDEX REFLECTS THE AGGREGATE RECORD OF MORE AGGRESSIVE DOMESTIC GROWTH MUTUAL FUNDS, AS REPORTED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. According to data from Lipper, Inc. at the end of December, the Aggressive Investors 1 Fund ranked 155th of 421 capital appreciation funds for the last twelve months, 26th of 255 over the last five years and 1st of 82 over the last ten years. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. SHAREHOLDER LETTER [CHART] GROWTH OF $10,000 INVESTED IN AGGRESSIVE INVESTORS 1 FUND AND INDEXES FROM 8/5/94 (INCEPTION) TO 12/31/04
DATE BRIDGEWAY AGGRESSIVE INVESTORS 1 FUND S&P 500 INDEX RUSSELL 2000 INDEX LIPPER CAPITAL APPRECIATION FUNDS 8/94 10000 10000 10000 10000 9/94 10520 10172 10515 10453 12/94 10877 10170 10320 10305 3/95 10891 11157 10797 11023 6/95 11953 12219 11809 12055 9/95 12963 13187 12975 13243 12/95 13824 13978 13256 13560 3/96 15397 14728 13933 14307 6/96 17123 15387 14630 14938 9/96 17894 15859 14679 15300 12/96 18275 17179 15443 15588 3/97 17106 17643 14644 14884 6/97 20538 20717 17018 17172 9/97 24189 22266 19551 19155 12/97 21614 22903 18896 18701 3/98 24979 26091 20797 21092 6/98 24251 26950 19827 21448 9/98 18606 24275 15833 18370 12/98 25782 29435 18415 22438 3/99 28119 30900 17416 23516 6/99 32345 33075 20125 25798 9/99 33588 31013 18852 24774 12/99 56878 35628 22330 31227 3/00 64095 36445 23911 34038 6/00 68921 35477 23008 30746 9/00 76644 35133 23262 31255 12/00 64602 32384 21655 27190 3/01 56339 28545 20246 23311 6/01 62444 30215 23139 25171 9/01 49282 25781 18329 19847 12/01 57366 28536 22193 22862 3/02 57486 28614 23078 22658 6/02 54359 24781 21150 19410 9/02 46676 20499 16624 16363 12/02 47034 22229 17647 17379 3/03 46334 21529 16855 17020 6/03 59466 24843 20803 19648 9/03 65004 25501 22691 20511 12/03 72419 28606 25987 22793 3/04 73268 29090 27614 23466 6/04 73595 29591 27744 23650 9/04 68890 29036 26951 22968 12/04 81263 31717 30750 25370
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. CUMULATIVE PERFORMANCE TRANSLATION: Assuming that you have both reinvested all dividends and not redeemed any shares, the value of your account just returned to an all-time high. The value of the Fund is its price per share adjusted for dividends. While the Fund will continue to fluctuate in value, hitting an "all-time high" is something to celebrate. At the end of December, the S&P 500 Index was still 14.6% below its all-time previous high established on March 2000, so our Fund got there more quickly. I am pleased that we provided some "cushion" against the pain in each calendar year of the bear market, and then recovered more quickly in both of the two years since then. This is a good lesson in the value of holding through a bear market and avoiding panic and the urge to sell when things look bad. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles. These include: saving, avoiding most kinds of debt, diversifying (and periodically rebalancing) your portfolio, setting aside an emergency fund, and choosing well managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - match the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast . . . 2 Let's look at the statistics purely from a market perspective. Over the 10 years through December 31, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. In conclusion, what IS remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, some investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and based on more than seven decades of history, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction, we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. 3 Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and the December quarter was pretty bad for "growth"-oriented stocks, building on a very bad year and continuing a five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years, based on data from Morningstar: [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. Any shift toward growth stocks would probably benefit this Fund; a shift toward large stocks would probably be neutral, since we have exposure to all size companies. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT WORKED WELL TRANSLATION: Our Fund had reasonable representation in some of the market's better performing industries, such as steel, Internet stocks, and utilities. Overall, our models came through for us in the last quarter with a handful of strong winners. Our list of best performers highlights some of the market's sweet spots. It also demonstrates the diversity of the Fund. Our top stock is from a very mature industry (steel), while the next two are faster-growing technology companies. The sixth-best performer, Marvell Technology, is a semiconductor company - an industry that was, in general, in the basement for the year. Marvell offers a nice reminder that it's possible to make money with a star performer even when the industry itself is a dog. Across the Fund's portfolio, nine stocks gained more than 30% in the December quarter.
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 AK Steel Holding Corp Iron/Steel 59.4% 2 Autodesk Inc Software 56.1% 3 Apple Computer Inc Computers 51.1% 4 Coldwater Creek Inc Retail 46.4% 5 Digital River Inc Internet 39.7% 6 Marvell Technology Group Ltd. Semiconductors 35.7% 7 Texas Utilities Corp Electric 34.7% 8 Cognizant Tech. Solutions Corp Computers 32.2% 9 Tenneco Automotive Inc Auto Parts & Equipment 31.6%
The top percentage gainer for the quarter was AK Steel Holding Corporation, which manufactures carbon steel products for the automotive industry (more than 30% of its sales come from General Motors and Ford), as well as for the construction industry and other manufacturers. Thanks in large part to the boom in China, demand for steel and steel-related products has been high, and AK Steel has demonstrated good "pricing power" - a company's ability to pass the higher costs of its raw materials onto its customers. In October, the company reported a third straight quarterly profit, driven by both higher volume and higher sales. In addition, the company said that it expected operating profit for the December 2004 quarter to be even higher than they had been in the September quarter. If December turns out to have conformed to those expectations, 2004 will be AK Steel's first profitable year in four years. 4 What I really find interesting about this stock is how the price behaved at the time of our purchase. We initially bought a position equal to 1% of the Fund in October. A couple of days later, concerns about the world demand for steel sent the stock down almost 10%. Was this an indication that we had made a mistake and should sell? Or was it time to buy more? The discipline of our modeling and investment-management process really helped out here. Our model still rated the stock a buy, and with even more favorable valuations, we ended up doubling the size of our position to 2% of the Fund on the price decline. A few days later the company reported excellent earnings and the price recovered nicely over just a one week period, giving us an attractive short-term unrealized gain. Thus far, our model has correctly predicted the direction of AK Steel's stock price, and we ended the quarter with a net 59.4% gain. Apple Computer also performed well for us during the quarter. A well known computer and electronics manufacturer, Apple Computer makes the very popular iPod digital music player, as well as the iMac and PowerCube personal computers. The stock has done well over the last quarter on surging sales of iPods and the growth of the digital music-player industry. In the holiday season just ended, major retailers like Amazon.com (the biggest Internet retailer), and Best Buy Company (the largest electronics retailer) ran out of or ran short of some popular iPod models. By some estimates Apple could sell 4 million iPods in the December quarter, compared with just over 700,000 in the previous holiday season. We initially bought shares early in October, and watched our total position gain 51.1% through the end of December. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT DIDN'T WORK I'm pleased to say that no stocks declined by more than 30% over the past quarter. The biggest decliner, Lone Star Technologies, Inc., was down 26.6% for the quarter (we sold our position). If this company sounds familiar, it may be because I profiled it last quarter, when it was the top-performing stock. Lone Star, a tube and steel supplier to the oil and automotive industries, had reported record revenues and net income in its July earnings release, the second consecutive quarter of positive operating earnings. In its October earnings release, the company reported yet another quarter of record revenues, but noted that a recent 20% jump in the cost of raw materials had hurt profitability, with the result that earnings were lower than analysts had expected. Investors rushed to ditch the stock, and we unwound our position later in the quarter for a 26.6% loss. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE--WHAT WORKED WELL TRANSLATION: To a certain extent, the December quarter really carried the year, so the good news for the quarter and the year are largely the same. Over the course of the calendar year, 16 companies in the Fund's portfolio gained more than 30%.
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 Autodesk Inc Software 88.4% 2 Digital River Inc Internet 88.3% 3 Texas Utilities Corp Electric 75.2% 4 Research In Motion Ltd Computers 74.5% 5 AK Steel Holding Corp Iron/Steel 59.4% 6 Coldwater Creek Inc Retail 58.0% 7 XTO Energy Inc Oil & Gas 56.3% 8 Apple Computer Inc Computers 51.1% 9 Urban Outfitters Inc Retail 50.8% 10 Patina Oil & Gas Corp Oil & Gas 46.6% 11 Marvell Technology Group Ltd. Semiconductors 45.4% 12 Tesoro Petroleum Corp Oil & Gas 40.9% 13 Tenneco Automotive Inc Auto Parts & Equipment 36.8% 14 Carpenter Technology Iron/Steel 34.6% 15 Eastman Chemical Co Chemicals 31.1% 16 eBay Inc Internet 31.1%
5 Autodesk was a winner for both the quarter and the year, and I profiled the company in our September quarterly letter. The company produces sophisticated computer software for graphics-heavy applications - its products are used by architects, surveyors, designers, and engineers, among others - and it has continued to increase both revenues and profits. The stock hit a 52-week high in the last week of the year and was the top performer in the S&P 500, with a gain of more than nearly 210%. Our position in Autodesk, which we initially established in the second quarter, was up 88.4% in 2004. Energy stocks were something of a bright spot for us over the past twelve months, with Oil & Gas companies taking three of the top slots in the Fund's portfolio. Of these, the best performer was XTO Energy, whose oil and gas producing properties are concentrated in the western states, including New Mexico, Texas, Oklahoma, and Wyoming. This company ground out its impressive results the old-fashioned way -- through operating performance: XTO's September quarter was its seventh straight quarter of record revenues, and its second quarter of record-breaking operating earnings per share. Even though earnings over the past several quarters were lower than analysts had expected, investors apparently voted to hold and buy more. We've owned our position since early 2003, and over the past year it gained 56.3%. Apple Computer Inc., a top performer for the quarter, also shows up on our list of the year's best-performing stocks. And in fact, for the year, the company's stock was the second-best performer in the S&P 500. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE--WHAT DIDN'T WORK TRANSLATION: Only six stocks in the Fund's portfolio lost more than 30% in 2004, but a couple of them lost a lot more. This is a list I'd prefer to forget.
RANK DESCRIPTION INDUSTRY % LOSS -------------------------------------------------------------------------------- 1 Omnivision Technologies Inc Semiconductors -54.1% 2 Nortel Networks Corp Telecommunications -52.5% 3 Gevity HR Inc Commercial Services -34.8% 4 ImClone Systems Inc. Pharmaceuticals -34.5% 5 Career Education Corp Commercial Services -32.9% 6 AU Optronics Corp - ADR Electronics -31.2%
I've written about most of the names on this list over the past three quarters, including Omnivision Technologies, (the biggest loser of the year). As of the end of December, we no longer hold any of the six stocks on this list, having moved on to what I hope will be greener investment pastures. TOP TEN HOLDINGS At quarter end, Technology comprised our largest sector representation at 21.7% of net assets, followed by Basic Materials at 20.2% and Communications at 15.8%. Our top ten holdings represented 46.2% of net assets.
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS -------------------------------------------------------------------------------- 1 Apple Computer Inc Computers 6.8% 2 Research In Motion Ltd Computers 6.1% 3 Eastman Chemical Co Chemicals 6.0% 4 Lyondell Chemical Co Chemicals 5.1% 5 Western Wireless Corp Telecommunications 4.9% 6 Autodesk Inc Software 4.4% 7 American Eagle Outfitters Inc Retail 3.3% 8 Digital River Inc Internet 3.3% 9 Carpenter Technology Iron/Steel 3.2% 10 Texas Utilities Corp Electric 3.1% -------------------------------------------------------------------------------- 46.2%
6 INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004 As of December 2004, we are quite "heavy" on metals (basic materials) and "light" on financial and consumer non-cyclical stocks.
AGGRESSIVE INVESTORS 1 FUND S&P 500 INDEX DIFFERENCE ----------------------------------------------------------------------------------- Basic Materials 20.3% 2.9% 17.4% Communications 15.9% 11.3% 4.6% Consumer, Cyclical 13.9% 9.9% 4.0% Consumer, Non-cyclical 7.0% 21.2% -14.2% Energy 10.3% 7.2% 3.1% Financial 1.1% 20.6% -19.5% Industrial 6.5% 11.6% -5.1% Technology 21.9% 12.4% 9.5% Utilities 3.1% 2.9% 0.2% ----------------------------------------------------------------------------------- TOTAL 100.0% 100.0% 0.0%
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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in the small companies within this multi-cap fund generally carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05). CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 7 DISCLOSURE of FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY AGGRESSIVE INVESTORS 1 FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 -------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,104.19 $ 8.26 Hypothetical Fund Return $ 1,000.00 $ 1,017.36 $ 7.92
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.56% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 8 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 99.3% AEROSPACE/DEFENSE - 1.3% United Industrial Corp 125,000 $ 4,842,500 AGRICULTURE - 1.1% Bunge Ltd 71,000 4,047,710 AUTO MANUFACTURERS - 4.0% Ford Motor Co 618,400 9,053,376 General Motors Corp 140,800 5,640,448 -------------- 14,693,824 AUTO PARTS & EQUIPMENT - 0.6% Tenneco Automotive Inc* 134,200 2,313,608 CHEMICALS - 11.1% Eastman Chemical Co 378,100 21,827,713 Lyondell Chemical Co 649,800 18,792,216 -------------- 40,619,929 COMMERCIAL SERVICES - 1.0% Korn/Ferry International* 170,000 3,527,500 COMPUTERS - 15.6% Apple Computer Inc* 385,400 24,819,760 Cognizant Technology Solutions Corp* 203,100 8,597,223 Network Appliance Inc* 31,300 1,039,786 Research In Motion Ltd, ADR* 271,900 22,409,998 -------------- 56,866,767 DISTRIBUTION / WHOLESALE - 0.0%^ SED International Holdings Inc * 2 0 DIVERSIFIED FINANCIAL SERVICES - 1.0% E*TRADE Financial Corp* 250,000 3,737,500 ELECTRIC - 3.1% Texas Utilities Corp 174,800 11,285,088 FOREST PRODUCTS & PAPER - 3.0% MeadWestvaco Corp 328,400 11,129,476 INTERNET - 6.4% Digital River Inc* 286,200 11,908,782 eBay Inc* 70,000 8,139,600 Yahoo! Inc* 91,900 3,462,792 -------------- 23,511,174 IRON/STEEL - 6.1% AK Steel Holding Corp* 721,000 10,432,870 Carpenter Technology Corp 200,000 11,692,000 -------------- 22,124,870 OIL & GAS - 10.2% Chesapeake Energy Corp 306,000 5,049,000 ConocoPhillips 41,500 3,603,445 Occidental Petroleum Corp 71,700 4,184,412 Southwestern Energy Co* 132,500 6,716,425 Tesoro Petroleum Corp* 219,800 7,002,828 Transocean Inc* 2,900 122,931 Valero Energy Corp 112,300 $ 5,098,420 XTO Energy Inc 155,832 5,513,336 -------------- 37,290,797 PHARMACEUTICALS - 4.9% Bristol-Myers Squibb Co 306,400 7,849,968 Eon Labs Inc* 150,900 4,074,300 Kos Pharmaceuticals Inc* 157,300 5,920,772 -------------- 17,845,040 RETAIL - 9.2% Aeropostale Inc* 115,300 3,393,279 American Eagle Outfitters Inc 256,000 12,057,600 Coldwater Creek Inc* 158,150 4,882,091 J.C. Penney Co Inc Holding 124,800 5,166,720 Pacific Sunwear Of California Inc* 31,040 690,950 Urban Outfitters Inc* 166,400 7,388,160 -------------- 33,578,800 SEMICONDUCTORS - 1.8% Marvell Technology Group Ltd* 190,700 6,764,129 SOFTWARE - 4.4% Autodesk Inc 419,600 15,923,820 TELECOMMUNICATIONS - 9.4% BellSouth Corp 141,100 3,921,169 SBC Communications Inc 352,600 9,086,502 Verizon Communications Inc 88,600 3,589,186 Western Wireless Corp* 605,700 17,747,010 -------------- 34,343,867 TRANSPORTATION - 5.1% Arkansas Best Corp 87,200 3,914,408 Kirby Corp* 10 444 Norfolk Southern Corp 157,500 5,699,925 OMI Corp 536,800 9,045,080 -------------- 18,659,857 -------------- TOTAL COMMON STOCKS (Cost $278,658,066) 363,106,256 -------------- PURCHASED CALL OPTIONS - 0.0%^ Research In Motion Ltd, January $90.00* 325 29,250 Research In Motion Ltd, February $90.00* 250 70,000 -------------- TOTAL PURCHASED CALL OPTIONS (Cost $327,236) 99,250 -------------- MONEY MARKET MUTUAL FUNDS - 0.2% First American Treasury Obligations Fund - Class S 608,434 608,434 -------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $608,434) 608,434 -------------- TOTAL INVESTMENTS - 99.5% (Cost $279,593,736) 363,813,940 Other Assets In Excess of Liabilities - 0.5% 1,849,191 -------------- NET ASSETS - 100.0% $ 365,663,131 ==============
* NON-INCOME PRODUCING SECURITY ^ LESS THAN 0.05% OF NET ASSETS ADR - AMERICAN DEPOSITARY RECEIPT SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $279,593,736) $ 363,813,940 Receivable for investments sold 3,339,119 Receivable for fund shares sold 388,099 Dividends receivable 370,278 Interest receivable 7,188 Prepaid expenses 21,666 Variation margin 150 ------------------------------------------------------------------------------------------------------------- Total assets 367,940,440 ------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 349,608 Payable for investments purchased 1,162,126 Accrued investment adviser fee 689,520 Accrued administration fee 25,567 Accrued directors fee 4,126 Other payables 46,362 ------------------------------------------------------------------------------------------------------------- Total liabilities 2,277,309 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 365,663,131 ============================================================================================================= NET ASSETS REPRESENT: Paid-in capital $ 282,852,241 Accumulated net investment loss (1,049,080) Accumulated net realized loss on investments (360,234) Net unrealized appreciation of investments 84,220,204 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 365,663,131 ============================================================================================================= Shares of common stock outstanding of $.001 par value, 15,000,000 shares authorized 6,699,921 ------------------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 54.58 =============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT of OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 1,453,314 Interest 70,331 -------------------------------------------------------------------------------------------- Total investment income 1,523,645 EXPENSES: Investment advisory fees 2,274,712 Administration fees 82,594 Accounting fees 25,111 Transfer agent fees 113,494 Audit fees 15,704 Tax fees 1,830 Custody fees 13,336 Legal fees 16,743 Blue sky fees 8,492 Directors fees 7,016 Registration fees 188 Miscellaneous 13,505 -------------------------------------------------------------------------------------------- Total expenses 2,572,725 NET INVESTMENT LOSS (1,049,080) -------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investment securities 21,611,020 Net realized gain on options 177,412 Net realized gain on futures contracts 204,580 Net change in unrealized appreciation / depreciation on investments 12,266,938 -------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 34,259,950 -------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 33,210,870 ============================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 -------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (1,049,080) $ (4,292,320) Net realized gain on investment securities 21,611,020 56,699,765 Net realized gain (loss) on options 177,412 (129,169) Net realized gain on futures contracts 204,580 - Net change in unrealized appreciation / depreciation on investments 12,266,938 15,092,323 -------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 33,210,870 67,370,599 -------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 13,314,271 65,313,080 Cost of shares redeemed (34,546,191) (60,374,899) -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from share transactions (21,231,920) 4,938,181 -------------------------------------------------------------------------------------------------------------- Net increase in net assets 11,978,950 72,308,780 NET ASSETS: Beginning of period 353,684,181 281,375,401 -------------------------------------------------------------------------------------------------------------- End of period ** $ 365,663,131 $ 353,684,181 ============================================================================================================== SHARES ISSUED & REDEEMED: Issued 276,339 1,401,613 Redeemed (732,342) (1,291,117) -------------------------------------------------------------------------------------------------------------- Net increase (decrease) (456,003) 110,496 Outstanding at beginning of period 7,155,924 7,045,428 -------------------------------------------------------------------------------------------------------------- Outstanding at end of period 6,699,921 7,155,924 ============================================================================================================== * Unaudited ** Including accumulated net investment loss of: $ (1,049,080) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEARS ENDED JUNE 30, 2004** 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 49.43 $ 39.94 $ 36.51 $ 41.94 $ 48.99 $ 26.02 ---------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment loss^ (0.15) (0.58) (0.27) (0.34) (0.42) (0.60) Net realized and unrealized gain (loss) 5.30 10.07 3.70 (5.09) (4.21) 27.86 ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 5.15 9.49 3.43 (5.43) (4.63) 27.26 ---------------------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net realized gain 0.00 0.00 0.00 0.00 (2.42) (4.29) ---------------------------------------------------------------------------------------------------------------------------------- Total distributions 0.00 0.00 0.00 0.00 (2.42) (4.29) ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 54.58 $ 49.43 $ 39.94 $ 36.51 $ 41.94 $ 48.99 ================================================================================================================================== TOTAL RETURN 10.42%# 23.76% 9.40% (12.95%) (9.40%) 113.08%+ RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 365,663 $ 353,684 $ 281,375 $ 276,876 $ 257,396 $ 44,902 Ratios to average net assets: Expenses after waivers and reimbursements 1.56%* 1.74% 1.90% 1.81% 1.80% 2.00% Expenses before waivers and reimbursements 1.56%* 1.74% 1.90% 1.81% 1.80% 2.01% Net investment loss after waivers and reimbursements (0.63%)* (1.24%) (0.81%) (0.89%) (0.95%) (1.52%) Portfolio turnover rate 76.6% 150.7% 138.0% 154.0% 109.6% 156.9%
* ANNUALIZED ** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES to FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 15,000,000 shares have been classified into the Aggressive Investors 1 Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Aggressive Investors 1 Fund seeks to exceed the stock market total return (primarily through capital appreciation) at a level of total risk roughly equal to that of the stock market over longer periods of time (three years or more). Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Aggressive Investors 1 Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the 14 Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option that the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option that the Fund has written is assigned, the amount of the premium originally 15 received reduces the cost of the security that the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. All options purchased by the Fund were listed on exchanges and considered liquid positions with readily available market quotes. As of December 31, 2004, the Fund held $99,250 in purchased call options. COVERED CALL OPTIONS AND SECURED PUTS The fund may write call options on a covered basis, that is, the Fund will own the underlying security, or the Fund may write secured puts. The principal reason for writing covered calls and secured puts on a security is to attempt to realize income, through the receipt of premiums. The option writer has, in return for the premium, given up the opportunity for profit from a substantial price increase in the underlying security so long as the obligation as a writer continues, but has retained the risk of loss should the price of the security decline. All options were listed on exchanges and considered liquid positions with readily available market quotes. A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE AGGRESSIVE 1 FUND FOLLOWS:
WRITTEN PUT OPTIONS CONTRACTS PREMIUMS --------------------------------------------------------------------- Outstanding, June 30, 2004 - - Positions Opened 834 $ 601,824 Exercised - - Expired - - Closed (834) (601,824) Split - - Outstanding, December 31, 2004 - - Market Value, December 31, 2004 - -
INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the following annual rates: 0.90% of the first $250 million of the Fund's average daily net assets, 0.875% of the next $250 million and 0.85% of any excess over $500 million. The Performance Adjustment equals 4.67% times the difference in cumulative total return between the Fund and the Standard and Poor's 500 Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of +0.70% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. On September 15, 2004, the Securities and Exchange Commision ("SEC") announced that it accepted a settlement offer to an administrative proceeding against the Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the Investment Advisers Act of 1940, dealing with the calculation of performance-based fees of the Fund. Rule 205-2 requires the performance rate to be applied to the average of net assets over the performance period (a five-year rolling period for this Fund) rather than average daily net assets as was done previously. Because the assets were generally increasing over time and the Fund had beaten its market benchmark over most time periods, the Fund overpaid advisory fees in the amount of $3,989,346. The Adviser will repay this amount, plus interest, to current and previous shareholders of the Fund after SEC approval of a proposed repayment plan. In addition, current shareholders must approve new contracts between the Fund and the Adviser at an upcoming shareholder meeting. Both the Fund and Adviser have taken steps necessary to strengthen the compliance program. 16 The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 2.00% of the value of its average net assets for the six months ended December 31, 2004. There were no reimbursements to the Fund for the six months ended December 31, 2004. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to Aggressive Investors 1 Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $247,423,526 and $266,735,392, respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 91,216,394 Gross unrealized (depreciation) (6,996,190) -------------------------------------------------------------------------------- Net unrealized appreciation on investments $ 84,220,204 ================================================================================ Cost of investments $ 279,593,736 ================================================================================
As of June 30, 2004, the Fund had capital loss carryovers of $6,321,216 and $15,884,934 available to offset capital gains to the extent provided in regulations, which will expire on June 30, 2010 and 2011, respectively. The Fund used $38,202,155 of capital loss carryovers for the year ended June 30, 2004 to offset net realized gains for federal income tax purposes. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Accumulated capital losses (22,206,150)
The temporary differences between book and tax are primarily due to wash sales and post October losses. 17 Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 18 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 45% of the Fund. 19 [BRIDGEWAY FUNDS LOGO] AGGRESSIVE INVESTORS 2 FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Aggressive Investors 2 Fund Shareholder, Our Fund appreciated 19.17% in the December quarter, compared with 9.23% for the S&P 500 Index and 10.46% for our peer benchmark, the Lipper Capital Appreciation Funds Index. It was a very strong quarter. On the strength of the December quarter, our calendar-year Fund return was 16.23%, beating both our primary market benchmark (up 10.88%) and our peer benchmark (up 11.31%). Though our Fund has only been in existence for three full calendar years - two bear-market years and one bull-market year - it has outperformed both its primary market benchmark and its peer group in every one of those years. I am very pleased with this record of consistency. However, 2004 was another very strong year for small stocks, and we lagged the Russell 2000 Index, which gained 18.33% for the period. The table below presents our December quarter, one-year, and life-to-date financial results as per SEC requirements. See below for a graph of performance since inception.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 10/31/03 TO 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------- AGGRESSIVE INVESTORS 2 FUND 19.17% 16.23% 11.48% S&P 500 Index (large companies)(1) 9.23% 10.88% 6.13% Russell 2000 (small companies)(1) 14.09% 18.33% 15.66% Lipper Capital Appreciation Funds(2) 10.46% 11.31% 6.58%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. (1) THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN STOCK MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS, WHILE THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX THAT MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. (2) THE LIPPER CAPITAL APPRECIATION FUNDS INDEX REFLECTS THE AGGREGATE RECORD OF MORE AGGRESSIVE DOMESTIC GROWTH MUTUAL FUNDS, AS REPORTED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. According to data from Lipper, Inc. at the end of December, the Aggressive Investors 2 Fund ranked 77th of 421 capital appreciation funds for the last twelve months. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. [CHART] GROWTH OF $10,000 INVESTED IN AGGRESSIVE INVESTORS 2 FUND AND INDEXES FROM 8/5/94 (INCEPTION) TO 12/31/04
BRIDGEWAY AGGRESSIVE INVESTORS 2 FUND S&P 500 INDEX RUSSELL 2000 INDEX LIPPER CAPITAL APPRECIATION FUNDS 10/01 10000 10000 10000 10000 12/01 10410 10862 11440 11027 3/02 10380 10891 11896 10929 6/02 10250 9432 10903 9363 9/02 8330 7803 8569 7892 12/02 8430 8461 9097 8383 3/03 7870 8195 8688 8210 6/03 10280 9456 10724 9477 9/03 11020 9706 11697 9894 12/03 12140 10888 13396 10994 3/04 12500 11072 14234 11319 6/04 12750 11263 14302 11408 9/04 11840 11052 13893 11078 12/04 14110 12072 15851 12237
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER CUMULATIVE PERFORMANCE TRANSLATION: Assuming that you have not redeemed any shares, the value of your account just returned to an all-time high. The value of the Fund is its price per share adjusted for dividends. Given the Fund's relatively short track record, hitting an "all-time high" may not quite be cause for fireworks, but it does beat all available alternatives. And it's important to remember that the first year and a half of this Fund's existence coincided with a severe bear market. This is not to excuse performance; as noted above, we're pretty pleased. Rather, it highlights the value of holding through a bear market and avoiding panic and the urge to sell when things look bad. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles. These include: saving, avoiding most kinds of debt, diversifying (and periodically rebalancing) your portfolio, setting aside an emergency fund, and choosing well-managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - match the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast . . . Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. In conclusion, what IS remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, some investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the 2 tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and based on more than seven decades of history, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks, building on a very bad five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years ended 12/31/04, based on data from Morningstar: [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: Our Fund had reasonable representation in some of the market's better performing industries, such as steel, Internet stocks, and utilities. Overall, our models came through for us in the last quarter with a handful of strong winners. Our list of best performers highlights some of the market's sweet spots. It also demonstrates the diversity of the Fund. Our top stock is from a very mature industry (steel), while the next two are faster-growing technology companies. The seventh-best performer, Marvell Technology, is a semiconductor company - an industry that was "in the basement" for the year. Marvell offers a nice reminder that it's possible to make money with a star performer even when the industry itself is a dog. Across the Fund's portfolio, 10 stocks gained more than 30% in the December quarter. 3
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 AK Steel Holding Corp. Iron/Steel 57.5% 2 Autodesk Inc. Software 56.1% 3 Apple Computer Inc. Computers 51.2% 4 NS Group Inc. Metal Fabrication/Hardware 47.3% 5 Coldwater Creek Inc. Retail 41.9% 6 Digital River Inc. Internet 39.7% 7 Marvell Technol. Grp. Ltd. Semiconductors 35.7% 8 Texas Utilities Corp. Electric 34.7% 9 Cognizant Tech. Solutions Computers 32.7% 10 Ceradyne Inc. Misc. Manufacturers 30.3%
The top percentage gainer for the quarter was AK Steel Holding Corporation, which manufactures carbon steel products for the automotive industry (more than 30% of its sales come from General Motors and Ford), as well as for the construction industry and other manufacturers. Thanks in large part to the boom in China, demand for steel and steel-related products has been high, and AK Steel has demonstrated good "pricing power" - a company's ability to pass the higher costs of its raw materials onto its customers. In October, the company reported a third straight quarterly profit, driven by both higher volume and higher sales. In addition, the company said that it expected operating profit for the December 2004 quarter to be even higher than they had been in the September quarter. If December turns out to have conformed to those expectations, 2004 will be AK Steel's first profitable year in four years. What I really find interesting about this stock is how the price behaved at the time of our purchase. We initially bought a position equal to 1% of the Fund in October. A couple of days later, concerns about the world demand for steel sent the stock down almost 10%. Was this an indication that we had made a mistake and should sell? Or was it time to buy more? The discipline of our modeling and investment-management process really helped out here. Our model still rated the stock a buy, and with even more favorable valuations, we ended up doubling the size of our position to 2% of the Fund on the price decline. A few days later the company reported excellent earnings and the price recovered nicely over just a one week period, giving us an attractive short-term unrealized gain. Thus far, our model has correctly predicted the direction of AK Steel's stock price, and we ended the quarter with a net 57.5% gain. Apple Computer also performed well for us during the quarter. A well-known computer and electronics manufacturer, Apple Computer makes the very popular iPod digital music player, as well as the iMac and PowerCube personal computers. The stock has done well over the last quarter on surging sales of iPods and the growth of the digital music-player industry. In the holiday season just ended, major retailers like Amazon.com (the biggest Internet retailer), and Best Buy Company (the largest electronics retailer) ran out of or ran short of some popular iPod models. By some estimates Apple could sell 4 million iPods in the December quarter, compared with just over 700,000 in the previous holiday season. We initially bought shares early in October, and watched our total position gain 51.2% through the end of December. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK I'm pleased to say that no stocks declined by more than 30% over the past quarter. The biggest decliner, Lone Star Technologies, Inc., was down 25.1% for the quarter (we sold our position). If this company sounds familiar, it may be because I profiled it last quarter, when it was the top-performing stock. Lone Star, a tube and steel supplier to the oil and automotive industries, had reported record revenues and net income in its July earnings release, the second consecutive quarter of positive operating earnings. In its October earnings release, the company reported yet another quarter of record revenues, but noted that a recent 20% jump in the cost of raw materials had hurt profitability, with the result that earnings were lower than analysts had expected. Investors rushed to ditch the stock, and we unwound our position later in the quarter for a 25.1% loss. 4 DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: For the calendar year, nineteen companies appreciated at least 30%, with five stocks making it into triple-digit territory. Given the strength of the fourth quarter, it's not surprising that some of the winners for the year have that quarter to thank for their place on the list. However, some of 2004's best performers simply opened well and just kept climbing.
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 Ceradyne Inc Miscellaneous Manufacturing 152.0% 2 General Maritime Corp Industrial 126.5% 3 Research In Motion Ltd Technology 111.9% 4 Autodesk Inc Software 111.7% 5 Urban Outfitters Inc Retail 109.5% 6 Texas Utilities Corp Electric 75.3% 7 Tesoro Petroleum Corp Oil & Gas 71.4% 8 AK Steel Holding Corp Iron/Steel 57.5% 9 Digital River Inc Internet 56.3% 10 Apple Computer Inc Computers 51.2% 11 j2 Global Communications Inc Internet 47.9% 12 NS Group Inc Metal Fabricate/Hardware 47.3% 13 Marvell Technology Group Ltd. Semiconductors 46.8% 14 Coldwater Creek Inc Retail 41.9% 15 Korn/Ferry International Commercial Services 40.6% 16 Carpenter Technology Iron/Steel 38.2% 17 Patina Oil & Gas Corp Oil & Gas 32.1% 18 eBay Inc Internet 31.2% 19 Eastman Chemical Co Chemicals 30.9%
Ceradyne, the year's best performer, was one of the steady marchers. The company makes a variety of sophisticated ceramic products that are used in medical and industrial applications. What fueled the stock this year, though, were Ceradyne's defense-related products, including ceramic plates used to protect Humvees and other military vehicles. With U.S. soldiers busy in Iraq, Afghanistan, and elsewhere, the company had a lot of business; earnings for the first quarter were up 181% over the same period in 2003, and the pattern persisted for the rest of the year, with the stock price moving right alongside. Number five on the list, Urban Outfitters, was also a steady gainer for the year. The good news started with the release of the company's results from the fiscal fourth quarter of 2003 (ended January 31). The upscale retailer of trendy women's clothing and home furnishings had doubled its net income in that quarter, thanks to strong revenue growth, and the stock began to climb. Despite the spring rollout of a spectacularly offensive series of products - the company logged 250,000 angry email responses to one refrigerator-magnet alone - Urban Outfitters continued to prosper; in the third quarter, the company boosted earnings by 88% over the same period in the previous year, on strong increases in same-store sales. By contrast, Autodesk, fourth on the list and a member of the triple-digit club, has the fourth quarter to thank for its results. The company makes software for graphics-heavy applications - its products are used by architects, surveyors, designers, and engineers, among others - and it has continued to increase both revenues and profits. The stock hit a 52-week high in the last week of the year, and was the top performer in the S&P 500 Index, with a gain of nearly 210%. Our position in Autodesk was up by close to 112% for the year. Apple Computer and AK Steel - both of which positions earned a "mere" 50-odd% for the year - were also big fourth-quarter plays. Thanks in large part to the boom in China, demand for steel and steel-related products has been high, and AK Steel has been able to pass along the higher costs of its raw materials to its customers. But what really prompted the stock to take off was the news, in October, that the company was reporting a third straight quarterly profit, and expected operating profits for the December quarter to be even higher. Meanwhile, Apple surged in the final quarter of the year thanks to 5 high holiday-season demand for its popular iPod digital-music player. Major retailers like Amazon.com (the biggest Internet retailer) and Best Buy Co. (the largest retailer of electronics) ran out of or ran short of some particularly desirable iPod models. By some estimates, Apple looks to have sold 4 million iPods in the December quarter, compared with just 700,000 in the 2003 holiday season. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: Nine stocks in our portfolio lost more than 30% for the year, with two - painfully - losing more than half their value. Like happy families - at least, according to the Russian writer Anton Checkov - happy stocks are all alike; it's almost always a story of improving earnings. But unhappy stocks often fail in their own unique ways, and that was certainly true for 2004.
RANK DESCRIPTION INDUSTRY % LOSS -------------------------------------------------------------------------------- 1 Carrier Access Corp Telecommunications -53.3% 2 Nortel Networks Corp Telecommunications -52.5% 3 Gevity HR Inc Commercial Services -44.9% 4 Omnivision Technologies Inc Semiconductors -39.8% 5 America West Holdings Corp Airlines -39.3% 6 Komag Inc Computers -38.0% 7 Eon Labs Inc Consumer, Non-cyclical -37.7% 8 Encore Wire Corp Electrical Comp. & Equip. -34.6% 9 ImClone Systems Inc. Pharmaceuticals -34.3%
For example, sometimes it's the sector and sometimes it just isn't. Take America West Holdings, our fifth-worst performer for the year. The airline operates low-cost flights with primary hubs in Phoenix and Las Vegas. Unfortunately, airlines in general had a miserable year, hammered by a combination of high fuel costs and overcapacity (particularly in markets such as....Phoenix and Las Vegas), as well as by lingering problems stemming from 2003's SARS epidemic and the now ever-present fear of terrorism. But while the sector's woes do get credit for some of America West's 39.3% loss to our Fund, it should also be said that the company was not well placed to ride a downdraft. In particular, it had failed to protect itself sufficiently against the possibility - which this past year made real - of rising fuel prices, and it had few options for distinguishing itself among the fleet of low-cost carriers serving its primary markets. The stock paid the price for these planning errors. ImClone Systems, last on the list (meaning it dropped by "only" 34.3%) was also in an industry that got hit hard in 2004. But this is to a large extent a story of a stock's failing in spite of itself. ImClone makes the colon-cancer drug Erbitux, and sales were strong in the first quarter. They were strong in the second quarter as well - at more than $71 million, strong enough to quadruple revenues over the same period in 2003, strong enough to propel the company to its second consecutive quarter of profitability, strong enough to produce earnings of 29 cents per share, compared with a loss of 47 cents per share a year earlier. But they weren't strong enough. "Guidance" from the company had led investors to expect sales of upwards of $80 million for the quarter, and the stock dropped 19% on the disappointment. It fell again when one widely followed analyst pointed out that the company's royalty payments - for patents it had purchased in developing Erbitux - would skyrocket if the drug, as expected, was approved by the FDA for treating additional forms of cancer. And it fell again in November, when ImClone announced its third-quarter results. Yes, the company had increased revenues by some 300% over the previous year. But Erbitux sales were $3 million shy of the figure that analysts had been projecting, and so the stock tumbled, ultimately costing us a hefty loss in our position. TOP TEN HOLDINGS As of the end of the year, our largest sector-weighting was in Technology, at 20.8% of net assets, followed by Basic Materials at 19.3% and Communications at 17.5%. All in all, our top 10 holdings represented 44.5% of net assets. 6
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS -------------------------------------------------------------------------------- 1 Apple Computer Inc Computer 6.6% 2 Research In Motion Ltd Technology 5.9% 3 Eastman Chemical Co Chemicals 5.7% 4 Western Wireless Corp Telecommunications 5.0% 5 Lyondell Chemical Co Chemicals 4.9% 6 Autodesk Inc Software 4.2% 7 American Eagle Outfitters Retail 3.2% 8 Carpenter Technology Iron/Steel 3.0% 9 Texas Utilities Corp Electric 3.0% 10 MeadWestvaco Corp Forest Products & Paper 3.0% -------------------------------------------------------------------------------- 44.5%
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004 As of December 2004, we are "heavy" on metals (basic materials) and "light" on financial and consumer non-cyclical stocks.
AGGRESSIVE S&P 500 INVESTORS 2 FUND INDEX DIFFERENCE ----------------------------------------------------------------------------- Basic Materials 19.7% 2.9% 16.8% Communications 17.8% 11.3% 6.5% Consumer, Cyclical 13.5% 9.9% 3.6% Consumer, Non-cyclical 7.8% 21.2% -13.4% Energy 9.5% 7.2% 2.3% Financial 1.0% 20.6% -19.6% Industrial 6.4% 11.6% -5.2% Technology 21.2% 12.4% 8.8% Utilities 3.1% 2.9% 0.2% ----------------------------------------------------------------------------- Total 100.0% 100.0% 0.0%
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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in the small companies within this multi-cap fund generally carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05). CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 7 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY AGGRESSIVE INVESTORS 2 FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ------------------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,106.67 $ 7.23 Hypothetical Fund Return $ 1,000.00 $ 1,018.34 $ 6.93
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.36% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 8 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 98.7% AGRICULTURE - 1.1% Bunge Ltd 22,300 $ 1,271,323 AUTO MANUFACTURERS - 3.3% Ford Motor Co 150,830 2,208,151 General Motors Corp 45,160 1,809,110 -------------- 4,017,261 CHEMICALS 10.6% Eastman Chemical Co 118,200 6,823,686 Lyondell Chemical Co 205,200 5,934,384 -------------- 12,758,070 COMMERCIAL SERVICES - 2.9% Korn/Ferry International* 165,000 3,423,750 COMPUTERS - 14.8% Apple Computer Inc* 123,600 7,959,840 Cognizant Technology Solutions* 63,600 2,692,188 Research In Motion Ltd, ADR* 86,100 7,096,362 -------------- 17,748,390 DISTRIBUTION/WHOLESALE - 1.0% Wesco International Inc* 39,000 1,155,960 DIVERSIFIED FINANANCIAL SERVICES - 1.0% E*TRADE Financial Corp* 79,200 1,184,040 ELECTRIC - 3.0% Texas Utilities Corp 56,000 3,615,360 FOREST PRODUCTS & PAPER - 3.0% MeadWestvaco Corp 105,500 3,575,395 INTERNET - 8.2% Digital River Inc* 85,500 3,557,655 eBay Inc* 23,700 2,755,836 j2 Global Communications Inc* 70,200 2,421,900 Yahoo! Inc* 28,600 1,077,648 -------------- 9,813,039 IRON/STEEL - 5.8% AK Steel Holding Corp* 225,600 3,264,432 Carpenter Technology Corp 62,400 3,647,904 -------------- 6,912,336 METAL FABRICATE/HARDWARE - 1.3% NS Group Inc* 55,800 1,551,240 MISCELLANEOUS MANUFACTURING - 1.0% Ceradyne Inc* 21,750 1,244,317 OIL & GAS - 8.6% Chesapeake Energy Corp 85,060 1,403,490 ConocoPhillips 13,000 1,128,790 Occidental Petroleum Corp 22,300 1,301,428 Southwestern Energy Co* 64,300 3,259,367 Tesoro Petroleum Corp* 50,800 1,618,488 Valero Energy Corp 35,200 1,598,080 -------------- 10,309,643 OIL & GAS SERVICES - 0.8% Carbo Ceramics Inc 14,200 979,800 PHARMACEUTICALS - 3.8% Bristol-Myers Squibb Co 115,400 $ 2,956,548 Kos Pharmaceuticals Inc* 42,100 1,584,644 -------------- 4,541,192 RETAIL - 9.0% Aeropostale Inc* 36,400 1,071,252 American Eagle Outfitters Inc 80,300 3,782,130 Coldwater Creek Inc* 49,300 1,521,891 J.C. Penney Co Inc Holding 39,500 1,635,300 Urban Outfitters Inc* 63,000 2,797,200 -------------- 10,807,773 SEMICONDUCTORS - 1.9% Marvell Technology Group Ltd* 63,400 2,248,798 SOFTWARE - 4.2% Autodesk Inc 133,800 5,077,710 TELECOMMUNICATIONS - 9.4% BellSouth Corp 44,300 1,231,097 SBC Communications Inc 113,200 2,917,164 Verizon Communications Inc 28,400 1,150,484 Western Wireless Corp* 203,700 5,968,410 -------------- 11,267,155 TRANSPORTATION - 4.0% Arkansas Best Corp 27,400 1,229,986 General Maritime Corp* 15,200 607,240 Norfolk Southern Corp 49,500 1,791,405 OMI Corp 68,000 1,145,800 -------------- 4,774,431 TOTAL COMMON STOCKS (Cost $89,116,235) 118,276,983 -------------- PURCHASED CALL OPTIONS -0.0%^ Research In Motion Ltd, January $90.00* 100 9,000 Research In Motion Ltd, February $90.00* 80 22,400 -------------- TOTAL PURCHASED CALL OPTIONS (Cost $102,710) 31,400 -------------- MONEY MARKET MUTUAL FUNDS - 0.3% First American Treasury Obligations Fund - Class S 420,903 420,903 -------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $420,903) 420,903 -------------- TOTAL INVESTMENTS - 99.0% (Cost $89,639,848) 118,729,286 Other Assets In Excess of Liabilities - 1.0% 1,159,007 -------------- NET ASSETS - 100.0% $ 119,888,293 ==============
* NON-INCOME PRODUCING SECURITY ^ LESS THAN 0.05% OF NET ASSETS ADR - AMERICAN DEPOSITARY RECEIPT SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $89,639,848) $ 118,729,286 Receivable for investments sold 1,510,964 Receivable for fund shares sold 398,860 Dividends receivable 106,669 Interest receivable 2,691 Prepaid expenses 34,180 ------------------------------------------------------------------------------------------------------------- Total assets 120,782,650 ------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 662,563 Accrued investment adviser fee 153,903 Accrued administration fee 4,815 Accrued directors fee 1,838 Other payables 71,238 ------------------------------------------------------------------------------------------------------------- Total liabilities 894,357 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 119,888,293 ============================================================================================================= NET ASSETS REPRESENT: Paid-in capital $ 99,758,353 Accumulated net investment loss (304,022) Accumulated net realized loss on investments (8,655,476) Net unrealized appreciation of investments 29,089,438 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 119,888,293 ============================================================================================================= Shares of common stock outstanding of $.001 par value, 130,000,000 shares authorized 8,499,326 ------------------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 14.11 =============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 386,345 Interest 18,969 ----------------------------------------------------------------------------------------------- Total investment income 405,314 EXPENSES: Investment advisory fees 568,007 Administration fees 26,038 Accounting fees 25,071 Transfer agent fees 60,926 Audit fees 9,444 Tax fees 1,830 Custody fees 4,026 Legal fees 3,294 Directors fees 2,196 Registration fees 3,478 Miscellaneous 5,026 ----------------------------------------------------------------------------------------------- Total expenses 709,336 NET INVESTMENT LOSS (304,022) ----------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (5,938,725) Net realized gain on options 85,275 Net change in unrealized appreciation / depreciation on investments 16,807,326 ----------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 10,953,876 ----------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 10,649,854 ===============================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 ------------------------------------------------------------------------------------------------------------------ OPERATIONS: Net investment loss $ (304,022) $ (717,485) Net realized gain (loss) on investment securities (5,938,725) 220,963 Net realized gain (loss) on options 85,275 (7,919) Net change in unrealized appreciation / depreciation on investments 16,807,326 8,327,048 ------------------------------------------------------------------------------------------------------------------ Net increase in net assets from operations 10,649,854 7,822,607 ------------------------------------------------------------------------------------------------------------------ SHARE TRANSACTIONS: Proceeds from sale of shares 30,049,266 127,023,905 Cost of shares redeemed (31,205,899) (46,558,653) ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets from share transactions (1,156,633) 80,465,252 ------------------------------------------------------------------------------------------------------------------ Net increase in net assets 9,493,221 88,287,859 NET ASSETS: Beginning of period 110,395,072 22,107,213 ------------------------------------------------------------------------------------------------------------------ End of period ** $ 119,888,293 $ 110,395,072 ================================================================================================================== SHARES ISSUED & REDEEMED: Issued 2,422,462 10,496,946 Redeemed (2,581,346) (3,990,245) ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) (158,884) 6,506,701 Outstanding at beginning of period 8,658,210 2,151,509 ------------------------------------------------------------------------------------------------------------------ Outstanding at end of period 8,499,326 8,658,210 ================================================================================================================== * Unaudited ** Including accumulated net investment loss of: $ (304,022) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED PERIOD FROM DECEMBER 31, FOR THE YEAR ENDED JUNE 30, OCTOBER 31, 2001 TO 2004*** 2004 2003 JUNE 30, 2002** ------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 12.75 $ 10.28 $ 10.25 $ 10.00 ------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment loss^ (0.04) (0.09) (0.09) (0.08) Net realized and unrealized gain 1.40 2.56 0.12 0.33 ------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.36 2.47 0.03 0.25 ------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 14.11 $ 12.75 $ 10.28 $ 10.25 =============================================================================================================================== TOTAL RETURN 10.67%# 24.03% 0.29% 2.50%#+ RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 119,888 $ 110,395 $ 22,107 $ 11,448 Ratios to average net assets: Expenses after waivers and reimbursements 1.36%* 1.58% 1.90% 1.90%* Expenses before waivers and reimbursements 1.36%* 1.58% 1.90% 1.98%* Net investment loss after waivers and reimbursements (0.58%)* (1.13%) (1.05%) (1.24%)* Portfolio turnover rate 75.3% 151.5% 143.2% 68.0%*
* ANNUALIZED ** COMMENCED OPERATIONS ON OCTOBER 31, 2001. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 130,000,000 shares have been classified into the Aggressive Investors 2 Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Aggressive Investors 2 Fund seeks to exceed the stock market total return (primarily through capital appreciation) at a level of total risk roughly equal to that of the stock market over longer periods of time (three years or more). Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Aggressive Investors 2 Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no 14 securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option that the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option that the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security that the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent 15 of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. All options purchased by the Fund were listed on exchanges and considered liquid positions with readily available market quotes. As of December 31, 2004, the Fund held $31,400 in purchased call options. COVERED CALL OPTIONS AND SECURED PUTS The fund may write call options on a covered basis, that is, the Fund will own the underlying security, or the Fund may write secured puts. The principal reason for writing covered calls and secured puts on a security is to attempt to realize income, through the receipt of premiums. The option writer has, in return for the premium, given up the opportunity for profit from a substantial price increase in the underlying security so long as the obligation as a writer continues, but has retained the risk of loss should the price of the security decline. All options were listed on exchanges and considered liquid positions with readily available market quotes. A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE AGGRESSIVE 2 FUND FOLLOWS:
WRITTEN PUT OPTIONS CONTRACTS PREMIUMS ------------------------------------------------------------------ Outstanding, June 30, 2004 - - Positions Opened 300 $ 191,316 Exercised - - Expired - - Closed (300) (191,316) Split - - ------------------------------------------------------------------ Outstanding, December 31, 2004 - - Market Value, December 31, 2004 - -
INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the following annual rates: 0.90% of the first $250 million of the Fund's average daily net assets, 0.875% of the next $250 million and 0.85% of any excess over $500 million. The Performance Adjustment equals 4.67% times the difference in cumulative total return between the Fund and the Standard and Poor's 500 Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of +0.70% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. On September 15, 2004, the Securities and Exchange Commision ("SEC") announced that it accepted a settlement offer to an administrative proceeding against the Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the Investment Advisers Act of 1940, dealing with the calculation of performance-based fees of the Fund. Rule 205-2 requires the performance rate to be applied to the average of net assets over the performance period (a five-year rolling period for this Fund) rather than average daily net assets as was done previously. Because the assets were generally increasing over time and the Fund had beaten its market benchmark over most time periods, the Fund overpaid advisory fees in the amount of $110,365. The Adviser will repay this amount, plus interest, to current and previous shareholders of the Fund after SEC approval of a proposed repayment plan. In addition, current shareholders must approve new contracts between the Fund and the Adviser at an upcoming shareholder meeting. Both the Fund and Adviser have taken steps necessary to strengthen the compliance program. 16 The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 1.90% of the value of its average net assets for the six months ended December 31, 2004. There were no reimbursements to the Fund for the six months ended December 31, 2004. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Aggressive Investors 2 Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $77,329,149 and $77,606,351, respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 29,851,959 Gross unrealized (depreciation) (767,955) -------------------------------------------------------------- Net unrealized appreciation on investments $ 29,084,004 ============================================================== Cost of investments $ 89,645,282 ==============================================================
The difference between book and tax net unrealized appreciation is wash sale loss deferrals. As of June 30, 2004, the Fund had a capital loss carryover of $1,948,412 available to offset capital gains to the extent provided in regulations, which will expire on June 30, 2011. The Fund used $271,259 of capital loss carryovers for the year ended June 30, 2004 to offset net realized gains for federal income tax purposes. The Fund has deferred to its fiscal year ending June 30, 2005, $848,180 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Accumulated capital losses (1,948,412) Unrealized appreciation 12,276,678 Cumulative Effect of other timing differences (848,180)
The temporary differences between book and tax are primarily due to wash sales and post October losses. 17 Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 18 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 42% of the Fund. 19 [BRIDGEWAY FUNDS LOGO] ULTRA-SMALL COMPANY FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Ultra-Small Company Shareholder, Our Fund was up 21.13% in the December quarter vs. 14.09% return for the Russell 2000 Index, 13.28% for our peer group, the Lipper Small-Cap Stock Funds Index, and 16.35% for our primary benchmark, the CRSP Cap-Based Portfolio 10 Index. The table below presents the December quarter, one-year, five-year, ten-year and life-to-date performance of our Fund and benchmarks, and following that is a graph of performance since inception and a new, SEC-mandated breakdown of sector representation in the Fund.
DEC. QTR. 1 YEAR 5 YEAR 10 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 1/1/00 TO 1/1/95 TO 8/5/94 TO 12/31/04 12/31/04 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------------------------------------- ULTRA-SMALL COMPANY FUND 21.13% 23.33% 27.69% 26.35% 24.87% Lipper Small-Cap Stock Funds(1) 13.28% 17.00% 1.94% 10.34% 10.65% Russell 2000 (small companies)(2) 14.09% 18.33% 6.61% 11.54% 11.40% CRSP Cap-Based Port. 10 Index(3) 16.35% 18.69% 20.49% 18.24% 17.35%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. (1) THE LIPPER SMALL-CAP STOCK FUNDS IS AN INDEX OF SMALL-COMPANY FUNDS COMPILED BY LIPPER, INC. (2) THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, WHICH MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. (3) THE CRSP CAP-BASED PORTFOLIO 10 INDEX IS AN UNMANAGED INDEX OF 1,682 OF THE SMALLEST PUBLICLY TRADED U.S. STOCKS (WITH DIVIDENDS REINVESTED), AS REPORTED BY THE CENTER FOR RESEARCH ON SECURITY PRICES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. For the calendar year 2004, our Fund was up 23.33% vs. 18.33% for the Russell 2000 Index, 17.00% for the Lipper Small-Cap Stock Funds Index, and 18.69% for the CRSP Cap-Based Portfolio 10 Index. According to data from Lipper, Inc., for the period ended December 31, 2004, the Ultra-Small Company Fund ranked 7th of 72 micro-cap funds for the last twelve months, 1st of 43 over the last five years and 1st of 8 for ten years. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. [CHART] GROWTH OF $10,000 INVESTED IN ULTRA-SMALL COMPANY FUND AND INDEXES FROM 8/5/94 (INCEPTION) TO 12/31/04
BRIDGEWAY ULTRA-SMALL COMPANY FUND LIPPER SMALL CO. FUNDS RUSSELL 2000 INDEX CRSP CAP-BASED PORTFOLIO 10 INDEX 8/94 10000 10000 10000 10000 9/94 10214 10735 10515 10525 12/94 9724 10720 10320 9892 3/95 10249 11322 10797 10799 6/95 11047 12371 11809 11860 9/95 12673 13917 12975 13390 12/95 13598 14110 13256 12881 3/96 14718 14906 13933 13972 6/96 16838 16089 14630 15302 9/96 16435 16292 14679 14968 12/96 17642 16136 15443 15081 3/97 17148 14617 14644 15033 6/97 21212 17102 17018 16437 9/97 28094 19710 19551 19813 12/97 24345 18560 18896 18387 3/98 28048 20549 20797 20660 6/98 25081 19756 19827 19328 9/98 18256 15529 15833 14684 12/98 21153 18401 18415 16263 3/99 19067 17532 17416 15880 6/99 21455 20135 20125 18205 9/99 22089 19689 18852 17713 12/99 29701 26045 22330 20811 3/00 33716 28960 23911 24482 6/00 31068 27236 23008 22410 9/00 34003 28153 23262 22571 12/00 31111 24329 21655 18102 3/01 34651 20670 20246 20099 6/01 38838 23722 23139 22718 9/01 36104 18449 18329 19408 12/01 41690 22061 22193 24659 3/02 44796 22252 23078 26431 6/02 45458 20156 21150 24882 9/02 38047 16365 16624 20356 12/02 43348 17339 17647 23264 3/03 44606 16567 16855 23202 6/03 60028 20001 20803 31816 9/03 70163 21531 22691 37767 12/03 81741 24504 25987 44533 3/04 85002 25730 27614 48762 6/04 84569 26163 27744 47410 9/04 83227 25309 26951 45428 12/04 100815 28670 30750 52857
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
SECTOR % OF STOCKS ------------------------------------------------- Basic Materials 4.0% Communications 9.0% Consumer, Cyclical 26.2% Consumer, Non-cyclical 21.1% Energy 13.2% Financial 7.4% Industrial 13.5% Technology 5.4% Utilities 0.2% ------------------------------------------------- Total 100.0%
PERFORMANCE SUMMARY TRANSLATION: The early part of the year was lackluster, and by the end of the third quarter our Fund's net asset value was just barely above its level at the beginning of 2004. However, an extremely powerful fourth quarter propelled us ahead, allowing us to finish the year with more than a 23% gain (beating both our benchmarks and our peer group) and offering a good lesson in the value of avoiding panic and the urge to sell when things look less than great. It's important to remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well managed, low-cost funds whose investment objectives -anything from very aggressive growth to ultra-low-risk income - match with the time horizons of the investments you're making. Which is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY TRANSLATION: While the overall market chugged along in a (surprisingly?) average fashion, small stocks continued their remarkable run. Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year for the broad U.S. market. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not exactly. In 2004, the S&P 500 Index of large stocks returned 10.88% -- a figure remarkably close to the 10.4% that the market has returned, on average, every year since 1925. From a returns-perspective, therefore, 2004 was about as average as it gets. Furthermore, though standard financial commentaries throughout the year often described a market lurching dramatically between struggle and triumph, the fact is that the market in 2004 was much LESS volatile than it has been, on average, over the past 10 years. In truth, the only really remarkable thing about the market this past year has been the continued dominance of smaller stocks - good news for shareholders of our Fund. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stock bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance. 2 On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer models have no such concerns, and they are pointing pretty strongly to a shift toward larger stocks. Indeed, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look like bargains. At Bridgeway, we don't put much effort into trying to guess the market's direction, but we do put a lot of faith in our models. So for that reason, I believe it's likely that the tide will turn back in favor of large stocks at some point in the next couple of years. For shareholders of this Fund, that might be another reminder of the importance of diversification. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: After the less-than-inspiring returns of the first nine months of the year, it was great to see some of the companies in our Fund really surge in the fourth quarter, often on the back of surprisingly strong growth in both sales and earnings per share. Thirty-five stocks gained at least 30% in the December quarter, with four turning in triple-digit gains. Interestingly, three of the four (and more than half of the 30%-plus list) were companies that provide goods and/or services to individuals, suggesting that the U.S. consumer is not yet tapped out, despite having so nobly carried the economy for so long. Communications companies also performed well - as a sector, they were the strongest performer of the quarter, after having turning in fairly weak results earlier in the year.
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 Innodata Isogen Inc Software 115.7% 2 Monarch Casino & Resort Inc Lodging 112.6% 3 Criticare Systems Inc Healthcare-Products 102.3% 4 Metropolitan Health Networks Inc Healthcare-Services 102.1% 5 AirGate PCS Inc Telecommunications 81.6% 6 Parlux Fragrances Inc Cosmetics/Personal Care 72.9% 7 EZCORP Inc Retail 67.5% 8 Denny's Corp Retail 66.7% 9 Image Sensing Systems Inc Electronics 61.8% 10 Toreador Resources Corp Oil&Gas 61.6% 11 Titan International Inc Auto Parts & Equipment 57.3% 12 I-many Inc Internet 56.8% 13 Cantel Medical Corp Healthcare-Products 55.9% 14 Aldila Inc Leisure Time 54.9% 15 INVESTools Inc Software 51.8% 16 Ark Restaurants Corp Retail 50.5% 17 Unify Corp Software 50.0% 18 Lancer Corp Machinery-Diversified 48.9% 19 Hansen Natural Corp Beverages 47.8% 20 Continucare Corp Healthcare-Services 47.4% 21 Park-Ohio Holdings Corp Misc. Manufacturing 44.7% 22 American Retirement Corp Healthcare-Services 44.4% 23 Hollywood Media Corp Internet 43.1% 24 Olympic Steel Inc Iron/Steel 42.1% 25 SFBC International Inc Commercial Services 41.2% 26 Collectors Universe Inc Commercial Services 39.9% 27 Building Materials Holding Corp Distribution/Wholesale 39.1% 28 LeCroy Corp Electronics 39.1% 29 Comtech Telecommunications Corp Telecommunications 38.8% 30 Deckers Outdoor Corp Apparel 38.2%
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RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 31 First Cash Financial Services Inc Retail 33.4% 32 Central European Distr. Corp Distribution/Wholesale 32.2% 33 Moldflow Corp Software 31.6% 34 Badger Meter Inc Electronics 31.2% 35 E*TRADE Financial Corp Diversified Finan Svcs. 30.9%
Of the triple-digit club, three of the four members simply posted extraordinary growth in the third quarter, propelling the stock price into temporary orbit over the next few months. Monarch Casino & Resort Inc, for example, which operates the Atlantis Casino Resort in Reno, saw its third-quarter earnings grow by 50% over the previous year's quarter, thanks to significant increases in casino, hotel, food, and beverage revenues. Then there's Innodata Isogen Inc, a New Jersey-based "information management" company that makes software that - among other things - helps libraries digitize their collections, helps intelligence organizations improve their analysis of potential security threats, and helps technology companies create documentation for their products that can be customized to accommodate various countries' legal and regulatory requirements. Innodata Isogen Inc's revenues for the first three quarters of the year showed a 56% jump over the same period in 2003, but it was the third quarter's 42% increase that really pushed the stock forward. And Metropolitan Health Networks Inc, which provides healthcare services to about 25,000 members in central and south Florida, announced a 213% rise in third-quarter net income. (It didn't hurt that in November, the company - which had previously been traded Over the Counter - was listed on the American Stock Exchange, where executives of the company rang the opening bell.) DETAILED EXPLANATION OF QUARTERLY PERFORMANCE--WHAT DIDN'T WORK TRANSLATION: Our fund had a terrific fourth quarter, gaining - in just three months - about double what the S&P 500 Index typically gains in a year. But that doesn't mean we didn't make any bad bets, and one stock lost more than 30% for the period.
RANK DESCRIPTION INDUSTRY % LOSS -------------------------------------------------------------------------------- 1 SupportSoft Inc Internet -35.8%
SupportSoft Inc, of Redwood City, CA, makes software that essentially checks for problems in primary software applications - like those associated with performing customer-service functions - and fixes the problems. Unfortunately, in early October the company reported results for its September quarter, which included the fact that revenues were down 9% from the same period in the previous year. The stock lost roughly half its value (though it then regained some ground), and attorneys rushed to file class-action lawsuits. We sold this stock in October. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED TRANSLATION: It was a good year. Thirty-five stocks in the Fund's portfolio gained more than 50%, and nearly half of them gained more than 100%. As in the fourth quarter, consumer-oriented stocks were heavily represented on our list of best bets - they make up about half the list below - but old-school industrial companies (a trucking firm, a maker of scientific instruments) also made a strong showing.
RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 1 Advocat Inc Healthcare Services 190.8% 2 Navarre Corp Distribution/Wholesale 180.4% 3 Parlux Fragrances Inc Cosmetics/Personal Care 148.4% 4 Onyx Acceptance Corp Diversified Finan Serv 133.3% 5 Taser International Inc Electronics 129.6% 6 Somanetics Corp Healthcare-Products 128.3% 7 Cantel Medical Corp Healthcare-Products 127.7% 8 Innodata Corp Software 124.8%
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RANK DESCRIPTION INDUSTRY % GAIN -------------------------------------------------------------------------------- 9 Ventiv Health Inc Advertising 122.1% 10 Building Material Holding Corp Distribution/Wholesale 116.6% 11 Monarch Casino & Resort Inc Lodging 115.6% 12 Metropolitan Health Networks Inc Healthcare Services 103.4% 13 Deckers Outdoor Corp Apparel 102.9% 14 Hurco Companies Inc Machinery-Diversified 102.5% 15 SFBC International Inc Commercial Services 100.0% 16 SMTEK International Inc Electronics 90.1% 17 Denny's Corp Retail 87.6% 18 AirGate PCS Inc Telecommunications 85.3% 19 Nash Finch Co Food 75.6% 20 Image Sensing Systems Inc Electronics 71.0% 21 Hansen Natural Corp Beverages 68.1% 22 Collectors Universe Commercial Services 63.3% 23 INVESTools Inc Software 63.2% 24 Petroleum Development Corp Oil & Gas 62.7% 25 Titan International Inc Auto Parts & Equipment 61.8% 26 Toreador Resources Corp Oil & Gas 61.6% 27 Hawaiian Holdings Inc Airlines 58.2% 28 First Cash Financial Services Inc Retail 56.3% 29 Park-Ohio Holdings Corp Misc. Manufacturer 55.9% 30 Ark Restaurants Corp Retail 55.8% 31 Dynamex Inc Transportation 54.4% 32 Layne Christensen Co Engineering & Construction 53.5% 33 Books-A-Million Inc Retail 53.5% 34 Lancer Corp Machinery-Diversified 53.2% 35 I-many Inc Internet 50.5%
Ironically, the best performer of the year made the top of the list not by doing particularly well, but by doing considerably better than it had in the past. Advocat, Inc., a Tennessee firm that provides long-term care to patients in nursing homes - lost $1.53 per share in the second quarter of 2003, so this year's second-quarter gain of 36 cents per share was cause for real celebration. The stock-price party continued with the announcement of third-quarter results, showing a loss that had narrowed by 90% since the same period last year. Seventh-best performer Cantel Medical Corp. was in something of a similar boat. Its stock shot up by 55% in the fourth quarter alone, on the back of a 73% jump in earnings, year over year, for the fiscal quarter ended October 31. However, to some extent that earnings growth was deceptive; the company does a lot of business with Canada, and the SARS epidemic of 2003 had prevented sales reps from visiting hospitals in the Toronto area. (This is particularly ironic since Cantel Medical Corp.'s products focus on preventing and controlling the spread of infection.) As a result, earnings for 2003 were unusually weak, making the 2004 comparisons very easy. Nevertheless, the company had also benefited from a restructuring of its sales force and expectations of yet more business in Canada, thanks to the Canadian government's plan to increase healthcare spending. Meanwhile, third-best performer Parlux Fragrances Inc. finished the year smelling like roses after one quarter and then another showed impressive gains. The Ft. Lauderdale company makes and markets colognes and other personal products, often under celebrity names that it licenses (most recent to hit the shelves: "Paris Hilton," the perfume). But while it may be easy to poke fun at the products, it's difficult to laugh at the numbers: In early November the company announced that earnings for its second fiscal quarter were up 70% over the same period last year - and that was after doubling profits in the fourth fiscal quarter of the year. 5 DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: The only good thing that can be said about the following list of losers is that it's short: just three companies in the Fund lost more than 50% for the year.
RANK DESCRIPTION INDUSTRY % LOSS -------------------------------------------------------------------------------- 1 Network Engines Inc Internet -57.3% 2 Evolving Systems Inc Software -54.7% 3 SupportSoft Inc Internet -52.5%
SupportSoft Inc. and Network Engines Inc. may both be classified as internet companies, but the drops in their stock prices didn't follow any particular pattern. Network Engines Inc., which makes products that allow software vendors to provide network security and data-storage, saw its stock drift down by more than 75% in the six months between February and August, following the company's announcement that a renegotiation of one of its distribution agreements was going to take a bite out of the first quarter's operating margins. The stock recouped some of its losses, particularly in the fourth quarter of 2004, but not enough. We sold this stock in June. Like Network Engines Inc., SupportSoft Inc. was having a poor if undramatic year. The company makes software that monitors primary software programs - like those used to support customer-serve efforts - and fixes any problems that arise. But in the early fall, instead of turning north, the stock abruptly lost a further 35% of its value on news that revenues for the September quarter were down 9% from the levels of the previous year. Attorneys rushed to file class-action suits, and the stock closed the year down 52%. We sold the stock in October. TOP TEN HOLDINGS At quarter end, Consumer, Cyclical stocks comprised our largest sector representation at 26.0% of net assets, followed by Consumer, Non-cyclical at 20.9% of net assets and Industrial stocks at 13.3%. Here are the top ten holdings at the end of December:
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ------------------------------------------------------------------------------------- 1 Deckers Outdoor Corp Apparel 5.4% 2 SFBC International Inc Commercial Services 4.4% 3 Park-Ohio Holdings Corp Miscellaneous Manufacturing 3.9% 4 Petroleum Development Corp Oil & Gas 3.3% 5 Navarre Corp Distribution/Wholesale 2.8% 6 America Service Group Inc Healthcare Services 2.8% 7 Olympic Steel Inc Iron/Steel 2.5% 8 Ventiv Health Inc Advertising 2.5% 9 AirGate PCS Inc Telecommunications 2.4% 10 Giant Industries Inc Oil & Gas 2.4% ------------------------------------------------------------------------------------- 32.4%
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. These views are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above-average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in the small companies within this multi-cap fund generally carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. 6 BEFORE INVESTING YOU SHOULD CAREFULLY THE FUND'S INVESTMENT OBJECTIVE, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05). CONCLUSION As always, we appreciate your feedback. We've gotten quite a bit of positive feedback from shareholders recently, both about our performance and some of our policies in light of recent industry scandals. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 7 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY ULTRA-SMALL COMPANY FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 -------------------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,192.11 $ 6.25 Hypothetical Fund Return $ 1,000.00 $ 1,019.50 $ 5.76
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.13% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 8 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 99.0% ADVERTISING - 2.5% Ventiv Health Inc* 141,800 $ 2,881,376 AEROSPACE/DEFENSE - 0.2% Spacehab Inc* 103,400 220,242 APPAREL - 6.2% Ashworth Inc* 83,000 903,870 Deckers Outdoor Corp*+ 136,000 6,390,640 -------------- 7,294,510 AUTO PARTS & EQUIPMENT - 1.5% R&B Inc* 8,900 222,411 Titan International Inc 99,000 1,494,900 -------------- 1,717,311 BANKS - 4.8% Bank of the Ozarks Inc 57,600 1,960,128 Cascade Financial Corp 6,324 118,891 Guaranty Federal Bancshares Inc 13,000 312,728 Northrim BanCorp Inc 4,800 112,800 Pinnacle Financial Partners Inc* 25,000 565,525 Pointe Financial Corp 3,100 126,325 Vineyard National Bancorp Co 42,000 1,380,120 Wilshire Bancorp Inc* 64,200 1,061,868 -------------- 5,638,385 BEVERAGES - 2.3% Hansen Natural Corp* 72,501 2,639,761 BUILDING MATERIALS - 0.2% Juno Lighting Inc 6,000 252,000 CHEMICALS - 1.1% American Vanguard Corp+ 21,000 772,380 Balchen Corp 7,800 270,582 ICO Inc* 68,300 210,364 -------------- 1,253,326 COMMERCIAL SERVICES - 5.3% Collectors Universe Inc* 25,930 528,713 Discovery Partners International Inc* 63,000 299,250 Learning Care Group Inc* 33,000 106,920 SFBC International Inc * 130,849 5,168,536 Total Logistics Inc* 2,108 56,830 -------------- 6,160,249 COMPUTERS - 0.6% Innodata Isogen Inc* 68,500 674,040 COSMETICS/PERSONAL CARE - 1.3% Parlux Fragrances Inc* 69,600 1,564,608 DISTRIBUTION/WHOLESALE - 7.4% Building Materials Holding Corp 57,000 2,182,530 Central European Distribution Corp* 88,950 2,627,583 Huttig Building Products Inc* 62,000 647,900 Navarre Corp * 185,984 3,273,318 -------------- 8,731,331 DIVERSIFIED FINANCIAL SERVICES - 0.1% E*TRADE Financial Corp* 4,585 $ 68,546 ELECTRICAL COMPONENTS & EQUIPMENT - 0.8% Insteel Industries Inc* 54,300 980,712 ELECTRONICS - 3.7% Badger Meter Inc 11,000 329,450 Image Sensing Systems Inc* 26,900 457,004 Labarge Inc* 94,100 1,195,070 LeCroy Corp* 50,000 1,167,000 Lowrance Electronics Inc 28,600 900,871 SMTEK International Inc* 21,324 300,668 -------------- 4,350,063 ENGINEERING & CONSTRUCTION - 0.4% Layne Christensen Co* 24,300 441,045 FOOD - 1.7% Nash Finch Co 51,981 1,962,803 GAS - 0.2% Chesapeake Utilities Corp 7,700 205,590 HEALTHCARE PRODUCTS - 2.4% Atrion Corp 8,400 380,058 Cantel Medical Corp* 14,300 535,106 Criticare Systems Inc* 68,300 244,514 Del Global Technologies Corp* 1,408 0 Quinton Cardiology Systems Inc* 115,600 1,220,736 Somanetics Corp* 28,000 431,480 -------------- 2,811,894 HEALTHCARE SERVICES - 4.2% Advocat, Inc* 53,200 263,340 America Service Group Inc* 121,050 3,240,509 American Retirement Corp* 22,000 259,380 Continucare Corp* 89,600 225,792 Five Star Quality Care Inc* 45,000 381,150 InterDent, Inc 1 0 Metro Health Networks Inc* 190,000 537,700 -------------- 4,907,871 HOME BUILDERS - 0.4% Cavalier Homes Inc* 84,100 495,349 INSURANCE - 1.8% Brooke Corp 8,500 205,360 Fidelity National Financial Inc 2,338 106,776 Navigators Group Inc* 18,000 541,980 Penn-America Group Inc 84,100 1,269,910 -------------- 2,124,026 INTERNET - 2.0% Corillian Corp* 172,857 850,456 Hollywood Media Corp* 161,900 785,215 IBasis Inc*+ 285,500 702,330 -------------- 2,338,001 IRON/STEEL - 2.9% Great Northern Iron ORE Properties 3,800 444,600 Olympic Steel Inc* 110,400 2,926,704 -------------- 3,371,304
9
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- LEISURE TIME - 1.1% Aldila Inc 79,100 $ 1,225,259 LODGING - 1.0% Monarch Casino & Resort Inc* 30,000 1,216,500 MACHINERY-DIVERSIFIED - 1.3% Benthos Inc* 22,000 375,540 Hurco Companies Inc* 40,000 660,000 Lancer Corp* 8,200 137,350 Paragon Technologies Inc* 12,000 118,800 Twin Disc Inc 7,700 196,735 -------------- 1,488,425 METAL FABRICATE/HARDWARE - 0.7% Webco Industries Inc* 76,500 823,905 MISCELLANEOUS MANUFACTURING - 4.2% Atlantis Plastics Inc* 18,600 331,080 Park-Ohio Holdings Corp* 178,900 4,633,510 -------------- 4,964,590 OFFICE FURNISHINGS - 0.1% CompX International Inc 6,000 99,180 OIL & GAS - 13.0% CREDO Petroleum Corp* 7,400 104,710 Edge Petroleum Corp* 122,114 1,780,422 Giant Industries Inc* 105,700 2,802,107 Goodrich Petroleum Corp* 132,800 2,152,688 Mission Resources Corp* 290,000 1,693,600 Petroleum Development Corp* 100,600 3,880,142 Toreador Resources Corp* 77,958 1,729,888 Vaalco Energy Inc* 297,500 1,154,300 -------------- 15,297,857 PHARMACEUTICALS - 3.8% Matrixx Initiatives Inc* 225,884 2,617,996 National Medical Health Card Systems Inc* 81,750 1,888,507 -------------- 4,506,503 RETAIL - 7.6% America's Car Mart Inc* 11,300 429,400 Ark Restaurants Corp 4,517 177,066 Books-A-Million Inc 37,900 364,598 Collegiate Pacific Inc 80,000 1,106,400 Cosi Inc* 59,800 361,790 Cost-U-Less Inc* 114,850 803,950 Denny's Corp* 320,000 1,440,000 EZCORP Inc* 54,406 838,396 First Cash Financial Services Inc* 77,250 2,063,348 National Vison Inc* 56,000 417,200 The Pantry Inc* 21,200 637,908 Zones Inc* 49,000 324,870 -------------- 8,964,926 SAVINGS & LOANS - 0.6% Beverly Hills Bancorp Inc 37,800 381,780 NewMil Bancorp Inc 4,800 150,240 Pacific Premier Bancorp Inc* 15,000 198,900 -------------- 730,920 SEMICONDUCTORS - 1.6% ADE Corp* 101,100 $ 1,892,592 SOFTWARE - 3.1% Altiris Inc* 24,000 850,320 AMICAS Inc 62,231 276,928 INVESTools Inc* 220,000 748,000 Mind CTI Ltd 69,285 403,239 Moldflow Corp * 33,500 532,650 Phoenix Technologies Ltd* 99,000 817,740 Unify Corp* 101,837 61,102 -------------- 3,689,979 TELECOMMUNICATIONS - 4.5% AirGate PCS Inc* 78,800 2,805,280 Comtech Telecommunications Corp* 32,850 1,235,489 Network Equipment Tech Inc* 120,200 1,180,364 Stratos International Inc* 16,745 73,511 -------------- 5,294,644 TEXTILES - 0.6% Hallwood Group Inc* 6,900 734,850 TRANSPORTATION - 1.8% Air T Inc 19,700 357,929 Dynamex Inc* 94,400 1,749,232 -------------- 2,107,161 TOTAL COMMON STOCKS (Cost $69,184,560) 116,121,634 -------------- MONEY MARKET MUTUAL FUNDS - 0.8% First American Treasury Obligations Fund - Class S 964,830 964,830 -------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $964,830) 964,830 -------------- TOTAL INVESTMENTS - 99.8% (Cost $70,149,390) 117,086,464 Other Assets In Excess of Liabilities - 0.2% 261,609 -------------- NET ASSETS - 100.0% $ 117,348,073 ==============
* NON-INCOME PRODUCING SECURITY + THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31, 2004 TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $7,811,230 AT DECEMBER 31, 2004 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31,2004 (UNAUDITED) ASSETS: Investments at value (cost - $70,149,390) $ 117,086,464 Receivable for investments sold 306,638 Receivable for fund shares sold 70,324 Dividends receivable 23,758 Interest receivable 23,780 Prepaid expenses 12,525 ----------------------------------------------------------------------------------------------------------- Total assets 117,523,489 ----------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 12,693 Accrued investment adviser fee 86,559 Accrued administration fee 39,729 Accrued directors fee 1,135 Other payables 35,300 ----------------------------------------------------------------------------------------------------------- Total liabilities 175,416 ----------------------------------------------------------------------------------------------------------- NET ASSETS $ 117,348,073 =========================================================================================================== NET ASSETS REPRESENT: Paid-in capital $ 66,417,008 Accumulated net investment loss (327,812) Accumulated net realized gain on investments 4,321,803 Net unrealized appreciation of investments 46,937,074 ----------------------------------------------------------------------------------------------------------- Net Assets $ 117,348,073 =========================================================================================================== Shares of common stock outstanding of $.001 par value,5,000,000 shares authorized 2,954,101 ----------------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 39.72 ===========================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31,2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 113,477 Interest 32,299 Securities lending 101,317 ----------------------------------------------------------------------------------------------------------- Total investment income 247,093 ----------------------------------------------------------------------------------------------------------- EXPENSES: Investment advisory fees 456,918 Administration fees 25,384 Accounting fees 26,352 Transfer agent fees 27,255 Audit fees 6,993 Tax fees 2,013 Custody fees 8,735 Legal fees 9,111 Directors fees 2,013 Registration fees 188 Reports to shareholders 1,600 Miscellaneous 8,343 ----------------------------------------------------------------------------------------------------------- Total expenses 574,905 ----------------------------------------------------------------------------------------------------------- NET INVESTMENT LOSS (327,812) ----------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investment securities 9,249,841 Net change in unrealized appreciation / depreciation on investments 10,107,934 ----------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 19,357,775 ----------------------------------------------------------------------------------------------------------- Net Increase in Net Assets Resulting from Operations $ 19,029,963 ===========================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 ----------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (327,812) $ (816,119) Net realized gain on investment securities 9,249,841 28,241,288 Net change in unrealized appreciation / depreciation on investments 10,107,934 3,806,027 ----------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 19,029,963 31,231,196 ----------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net realized gain (22,040,000) (12,258,703) ----------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (22,040,000) (12,258,703) ----------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 868,667 1,106,614 Reinvestment of distributions 21,593,554 12,016,891 Cost of shares redeemed (3,337,103) (8,312,596) ----------------------------------------------------------------------------------------------------------------------- Net increase in net assets from share transactions 19,125,118 4,810,909 ----------------------------------------------------------------------------------------------------------------------- Net increase in net assets 16,115,081 23,783,402 NET ASSETS: Beginning of period 101,232,992 77,449,590 ----------------------------------------------------------------------------------------------------------------------- End of period ** $ 117,348,073 $ 101,232,992 ======================================================================================================================= SHARES ISSUED & REDEEMED: Issued 22,046 27,516 Distributions reinvested 543,644 300,646 Redeemed (82,703) (209,082) ----------------------------------------------------------------------------------------------------------------------- Net increase 482,987 119,080 Outstanding at beginning of period 2,471,114 2,352,034 ----------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 2,954,101 2,471,114 ======================================================================================================================= * Unaudited ** Including accumulated net investment loss of: $ (327,812) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEAR ENDED JUNE 30, 2004** 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 40.97 $ 32.93 $ 28.83 $ 26.99 $ 21.59 $ 14.91 ---------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.13) (0.33) (0.21) (0.14) (0.22) (0.26) Net realized and unrealized gain 8.00 13.66 7.99 4.43 5.62 6.94 ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 7.87 13.33 7.78 4.29 5.40 6.68 ---------------------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net realized gain (9.12) (5.29) (3.68) (2.45) 0.00 0.00 ---------------------------------------------------------------------------------------------------------------------------------- Total distributions (9.12) (5.29) (3.68) (2.45) 0.00 0.00 ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 39.72 $ 40.97 $ 32.93 $ 28.83 $ 26.99 $ 21.59 ================================================================================================================================== TOTAL RETURN 19.21%# 40.88% 32.00% 17.04% 25.01% 44.80% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 117,348 $101,233 $ 77,450 $ 60,809 $ 51,764 $ 41,959 Ratios to average net assets: Expenses after waivers and reimbursements 1.13%* 1.15% 1.29% 1.26% 1.61% 1.85% Expenses before waivers and reimbursements 1.13%* 1.15% 1.29% 1.26% 1.61% 1.85% Net investment loss after waivers and reimbursements (0.65%)* (0.84%) (0.82%) (0.53%) (0.93%) (1.36%) Portfolio turnover rate 38.1% 71.1% 56.1% 120.6% 57.0% 65.4%
* ANNUALIZED ** UNAUDITED # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 5,000,000 shares have been classified into the Ultra-Small Company Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Ultra-Small Compnay Fund seeks to provide a long-term total return of capital, primarily throught capital appreciation. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Ultra-Small Company Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had securities on loan valued at $7,811,230 and received U.S. Treasury securities with a value of $7,842,244 as collateral. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. 15 USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 16 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is computed daily and paid monthly. The Fund pays a flat 0.9% annual management fee of average daily net assets, computed daily and payable monthly, except that while the 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%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 2.00% of the value of its average net assets for the six months ended December 31, 2004. There were no reimbursements to the Fund for the six months ended December 31, 2004. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. The transactions are reviewed quarterly by Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount paid attributable to the Ultra-Small Company Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $37,289,769 and $39,052,826, respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 48,047,869 Gross unrealized (depreciation) (1,185,191) --------------------------------------------------------- Net unrealized appreciation on investments $ 46,862,678 ========================================================= Cost of investments $ 70,223,786 =========================================================
The difference between book and tax net unrealized appreciation is wash sale loss deferrals. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 2,156,231 Accumulated capital gains 15,071,322 Unrealized appreciation 36,713,549
The temporary differences between book and tax are primarily due to wash sales and post October losses. As of June 30, 2004, the tax character of the distributions paid were:
YEAR ENDED YEAR ENDED JUNE 30, 2004 JUNE 30, 2003 ----------------------------------------------------------- Ordinary income $ 1,778,425 $ - Long-term capital gains 11,659,278 7,812,988
17 The Fund incurred a net loss from investment operations and made no distributions from net investment income during the year. However, distributions of net realized short-term capital gains are, for federal income tax purposes, taxable as ordinary income to shareholders. During the year ended June 30, 2004, the Fund paid a long-term capital gain of $4.214 per share to shareholders of record. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 18 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 11% of the Fund. 19 [BRIDGEWAY FUNDS LOGO] ULTRA-SMALL COMPANY MARKET FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Ultra-Small Company Market Fund Shareholder, Our Fund was up 15.93% in the December quarter of 2004. This compares to a 14.09% return for the Russell 2000 Index, 13.28% for our peer benchmark, the Lipper Small-Cap Stock Funds Index, and 16.35% for our primary benchmark, the CRSP Cap-Based Portfolio 10 Index. Results were strong on an absolute basis, but mixed on a relative basis. For the twelve months through December, the Fund was up 20.12%, beating each of our performance benchmarks. The table below presents our December quarter, one-year, five-year, and life-to-date financial results according to the formula required by the SEC.
DEC. QTR. 1 YEAR 5 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 1/1/00 TO 7/31/97 TO 12/31/04 12/31/04 12/31/04 12/31/04 --------------------------------------------------------------------------------------------------- ULTRA-SMALL COMPANY MARKET FUND 15.93% 20.12% 23.06% 18.97% CRSP Cap-Based Portfolio 10 Index (1) 16.35% 18.69% 20.49% 17.02% Lipper Small-Cap Stock Funds Index (2) 13.28% 17.00% 1.94% 7.21% Russell 2000 Index (3) 14.09% 18.33% 6.61% 7.64%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. (1)THE CRSP CAP-BASED PORTFOLIO 10 INDEX IS AN UNMANAGED INDEX OF 1,682 OF THE SMALLEST PUBLICLY TRADED U.S. STOCKS (WITH DIVIDENDS REINVESTED), AS REPORTED BY THE CENTER FOR RESEARCH ON SECURITY PRICES. (2)THE LIPPER SMALL-CAP STOCK FUNDS IS AN INDEX OF SMALL-COMPANY FUNDS COMPILED BY LIPPER, INC. (3)THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, WHICH MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. According to data from Lipper, Inc., the Ultra-Small Company Market Fund ranked 31st of 72 micro-cap funds for the calendar year and 5th of 43 over the last five years and 4th out of 30 since inception. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. SHAREHOLDER LETTER [CHART] GROWTH OF $10,000 INVESTED IN ULTRA-SMALL COMPANY MARKET FUND AND INDEXES FROM 7/31/97 (INCEPTION) TO 12/31/04
BRIDGEWAY ULTRA-SMALL COMPANY MARKET FUND CRSP CAP-BASED PORTFOLIO 10 INDEX RUSSELL 2000 INDEX LIPPER SMALL-CAP STOCK FUNDS 7/97 10000 10000 10000 10000 9/97 11280 12028 10978 11525 12/97 9960 11162 10610 10852 3/98 11720 12542 11677 12016 6/98 11380 11734 11133 11552 9/98 8780 8914 8890 9080 12/98 9780 9873 10340 10760 3/99 9160 9641 9779 10252 6/99 9920 11052 11300 11774 9/99 10300 10753 10585 11513 12/99 12860 12634 12538 15229 3/00 14140 14863 13426 16934 6/00 13240 13605 12918 15926 9/00 14440 13702 13061 16462 12/00 12946 10989 12159 14226 3/01 13228 12202 11368 12087 6/01 14537 13791 12992 13871 9/01 13611 11783 10291 10788 12/01 16051 14970 12461 12900 3/02 17805 16046 12958 13011 6/02 17543 15106 11875 11786 9/02 15023 12358 9334 9569 12/02 16837 14123 9909 10139 3/03 16918 14085 9464 9687 6/03 22141 19315 11680 11695 9/03 25670 22928 12741 12590 12/03 30211 27035 14591 14328 3/04 32941 29603 15504 15045 6/04 32638 28782 15578 15298 9/04 31303 27579 15133 14799 12/04 36290 32089 17265 16764
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
SECTOR % OF STOCKS ------------------------------------------------ Basic Materials 3.0% Communications 10.9% Consumer, Cyclical 13.0% Consumer, Non-cyclical 24.6% Energy 3.2% Financial 18.9% Industrial 14.7% Technology 10.8% Utilities 0.9% ------------------------------------------------ TOTAL 100.0%
PERFORMANCE SUMMARY TRANSLATION: Overall, this has been a very strong period for small stocks, and since our Fund specializes in the smallest of the small, that has been good news. The size-related tailwind, though, couldn't keep us from an unpleasant 4%-plus loss in the third quarter of the year, but a strong comeback in the last three months of the year more than made up for the loss, and allowed us to finish out 2004 with nearly a 16% gain. The losses of the third quarter weren't catastrophic by any means, but that doesn't mean they made us happy. However, the pattern of this six-month period - losses followed by gains - offers almost a textbook lesson in the value of avoiding panic and the urge to sell when things look less than great. Hypothetically, a shareholder who had sold after the third quarter would (depending on what he had subsequently done with that money) have ended the year considerably worse off than the shareholder who had stuck it out through the downturn and then captured all the upside of the next three months. It's important to remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. 2 YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. Well, but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade's. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. In conclusion, what is remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run (meaning over more than a single day), nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - outperformance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance, which would be good news for shareholders of this Fund. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer models have no such concerns, and they are pointing pretty strongly to a shift toward larger stocks. Indeed, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look like bargains. At Bridgeway, we don't put much effort into trying to guess the market's direction, but we do put a lot of faith in our models. So for that reason, I believe it's likely that the tide will turn back in favor of large stocks at some point in the next couple of years. 3 Of course, company-size is hardly the only investment variable. "Style," too, plays a significant role, and the market during the December quarter was modestly tilted toward the "value" end of the spectrum, following on a year that was definitely tilted in that direction, and a five-year period that was really, REALLY tilted. The following table shows the performance, over the past one, three, and five years, of various fund categories, based on data from Morningstar: [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Bridgeway's models are at last suggesting a shift toward growth stocks, though not as strongly as they indicate a shift toward large stocks. When will these shifts occur? That we can't say. And though it may be tempting to try to "time" the shift - betting on its occurring at such-and-such a point, and switching investment strategies in an effort to capture the market's change of direction - we really would recommend against this. Of all the "foolproof systems" that investors have developed over the centuries to beat the market, "market timing" has generally been one of the least successful. In an upcoming shareholder letter, we'll discuss some of the theories of market timing and some of the reasons why they have so rarely paid off. But for now, we'd simply suggest that you revisit your original investment plan, make any changes to your portfolio necessary to bring it in line with that plan, and sit tight. In many parts of the country, locals are fond of remarking that if you don't like the weather, you should just wait five minutes. Absent a little hyperbole, the same is true of the market. DETAILED EXPLANATION OF SIX MONTHS PERFORMANCE--WHAT WORKED TRANSLATION: The bias toward small stocks certainly helped our Fund over this six-month period: Fifty-one of the stocks in our portfolio appreciated by more than 50%, and 9 (18% of the 50%-plus list) earned returns in the triple digits.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------------------------------------ 1 Monarch Casino & Resort Inc Lodging 187.6% 2 Essex Corp Telecommunications 150.3% 3 Sirius Satellite Radio Inc Media 148.4% 4 ATP Oil & Gas Corp Oil & Gas 142.2% 5 Zones Inc Retail 133.5% 6 Park-Ohio Holdings Corp Miscellaneous Manufacturer 118.7% 7 Comtech Telecommunications Corp Telecommunications 111.8% 8 Parlux Fragrances Inc Cosmetics/Personal Care 105.3% 9 Virage Logic Corp Semiconductors 104.3% 10 Mannatech Inc Pharmaceuticals 98.3% 11 Introgen Therapeutics Inc Pharmaceuticals 98.1% 12 EndWave Corp Telecommunications 96.8% 13 AirGate PCS Inc Telecommunications 95.9% 14 Spartan Stores Inc Food 95.6%
4
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------------------------------------ 15 Five Star Quality Care Inc Healthcare Services 92.5% 16 Third Wave Technologies Inc Biotechnology 91.5% 17 Napster Inc Internet 91.5% 18 Novamed Eyecare Inc Healthcare-Services 90.7% 19 Lifecore Biomedical Inc Healthcare-Products 83.4% 20 Greenbrier Cos Inc Trucking & Leasing 77.7% 21 Rigel Pharmaceuticals Inc Pharmaceuticals 71.9% 22 Cantel Medical Corp Healthcare-Products 69.9% 23 Material Sciences Corp Iron/Steel 68.9% 24 Onyx Acceptance Corp Diversified Finan Serv 68.7% 25 Ubiquitel Inc Telecommunications 68.7% 26 Jupitermedia Corp Internet 67.9% 27 Famous Dave's Of America Inc Retail 65.5% 28 Vineyard National Bancorp Co Banks 64.8% 29 Caliper Life Sciences Inc Healthcare-Products 61.9% 30 Bankrate Inc Commercial Services 61.8% 31 @ Road Inc Internet 61.3% 32 Digi International Inc Software 60.4% 33 Ceradyne Inc Miscellaneous Manufacturer 59.9% 34 Deckers Outdoor Corp Apparel 59.3% 35 Clean Harbors Inc Environmental Control 59.1% 36 Northfield Laboratories Inc Biotechnology 58.1% 37 Collectors Universe Inc Commercial Services 56.8% 38 Westmoreland Coal Co Coal 56.6% 39 Sirenza Microdevices Inc Telecommunications 56.5% 40 Books-A-Million Inc Retail 56.3% 41 Washington Savings Bank Savings & Loans 55.0% 42 MarketWatch.com Inc Internet 53.5% 43 Dialysis Corp Of America Healthcare-Services 52.8% 44 Argon St Inc Aerospace/Defense 52.5% 45 Merge Technologies Inc Healthcare-Products 52.1% 46 Roanoke Electric Steel Corp Iron/Steel 52.0% 47 HMS Holdings Corp Commercial Services 51.1% 48 SI International Inc Computers 50.9% 49 Nanometrics Inc Semiconductors 50.6% 50 Aladdin Knowledge Systems Internet 50.5% 51 The Andersons Inc Agriculture 50.1%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Of the triple-digit club, several members really caught fire in the fourth quarter. This is a pattern we've seen in many stocks this year, usually as a result of companies' announcing strong third-quarter results, and that was certainly the case with Monarch Casino & Resort Inc., which operates the Atlantis Casino Resort in Reno, and saw its third-quarter earnings grow by 50% over the previous year, thanks to significant increases in casino, hotel, food, and beverage revenues. Parlux Fragrances Inc. also owed its success to impressive quarterly performance. The Ft. Lauderdale company makes and markets colognes and personal products, often under celebrity names that it licenses (most recent to hit the shelves: "Paris Hilton," the perfume). But while it may be easy to poke fun at the products, it's difficult to laugh at the numbers: In early November the company announced that earnings for its second fiscal quarter were up 70% over the same period in 5 the previous year - and that was after doubling profits in the fourth fiscal quarter of the year. Smelling success, investors bid up the stock to a 105.3% gain for the second half of 2004. And then there's Sirius Satellite Radio Inc., which is not an earnings story at all. In fact, in the third quarter, the company lost 14 cents per share, compared with a loss of 11 cents per share in the third quarter of last year. So why did the stock appreciate by more than 148% in the second half? Credit "shock-jock" disk-jockey Howard Stern, who in October made a highly publicized move from broadcast radio to Sirius' line-up, giving Sirius' stock a significant shot in the arm. The stock got another hefty boost a month later, when Mel Karmazin, a cost-cutting specialist and former president of Viacom, Inc., joined Sirius as CEO. The two hires raised the company's profile and elevated it, in the eyes of many investors, well above the status of its former competitor. DETAILED EXPLANATION OF SIX MONTHS PERFORMANCE--WHAT DIDN'T WORK Translation: As noted above, even a remarkably strong market for small stocks can't prevent small-stock losses, particularly when companies just plain mess up - which was the case with several of the 13 stocks in the Fund that lost more than 50% in the six months ending December 31, 2004.
RANK DESCRIPTION INDUSTRY % LOSS ------------------------------------------------------------------------------------------------------------ 1 Trump Hotels & Casino Resorts Inc Lodging -84.5% 2 Intermet Corp Metal Fabricate/Hardware -79.1% 3 Maxim Pharmaceuticals Inc Biotechnology -69.2% 4 Netopia Inc Internet -61.1% 5 Three-Five Systems Inc Semiconductors -60.9% 6 Urologix Inc Healthcare-Products -58.1% 7 Brillian Corp Semiconductors -57.2% 8 MGP Ingredients Inc Food -55.3% 9 Ap Pharma Inc Pharmaceuticals -55.1% 10 Applica Inc Home Furnishings -51.1% 11 Intelligroup Inc Computers -51.1% 12 Extended Systems Inc Computers -50.8% 13 ATA Holdings Corp Airlines -50.1%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. If many of the stocks on our winners' list were beneficiaries of a "fourth-quarter effect," making their most impressive gains in the last three months of the year, Maxim Pharmaceuticals Inc. was...the reverse. In September, the stock dropped by 46% on news that clinical trials of the company's cancer drug indicated that the drug did not in fact improve survival rates in patients with advanced cancer. Additional test results - with similar findings - were announced in December, provoking another crash in the share price. Even a plan to slash costs by laying off 50% of the company's work force failed to lift the stock, and it didn't help that among the departing employees were Maxim Pharmaceuticals Inc.'s CFO and Chief Scientific Officer. Given the pain, it's not surprising that we lost more than 69% on our position in the second half of the year. Brillian Corp. was also a fourth-quarter loser. The company makes technology used in high-end display applications, such as binoculars and high-definition television sets. Hopes were riding high earlier in the year when the company announced that a major U.S. retailer - later identified as Sears - had agreed to sell Brillian Corp. large-screen TVs, expected to ship just in time for football season. But in September, Sears bailed on the plan when Brillian Corp.'s was unable to provide the TVs in time, thanks to a failure on the part of JDS Uniphase to deliver necessary components. Brillian's Corp.'s stock lost more than 76% in the two months following Sears' bailout, though it later recovered enough to cost us "just" 57.2% in the second half. Then again, there were straight "bad numbers" stories, like Applica Inc. Based in Miramar, FL, the company makes small household appliances, such as coffee-makers. But Applica Inc. brewed up nothing but trouble for investors this year, as 6 each quarter presented yet another earnings disappointment. (In the third quarter, for example, the company produced a loss of 41 cents per share, compared with a profit of 20 cents per share in 2003.) To be fair, some of that loss is a function of moves that may ultimately benefit the company, such as the sale of one of its divisions and the sale of its manufacturing facility in China. But any such benefits didn't show up in time to prevent our Fund from taking more than a 51% loss on our Applica Inc. position. 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. These views are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above-average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in small companies generally carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 7 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you incur two types of costs: (1) transaction costs (such as the 2% fee on redemption of Fund shares made within 6 months of purchase or if the S&P 500 Index without dividends reinvested has declined more than 5% cumulatively over the previous five trading days) and (2) ongoing costs including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY ULTRA-SMALL COMPANY MARKET FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 -------------------------------------------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,111.92 $ 3.62 Hypothetical Fund Return $ 1,000.00 $ 1,021.77 $ 3.47
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.68% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 8 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- COMMON STOCKS - 95.5% ADVERTISING - 0.7% Traffix Inc 248,700 $ 1,579,245 Ventiv Health Inc* 198,300 4,029,456 -------------- 5,608,701 AEROSPACE/DEFENSE - 0.8% Argon St Inc* 137,600 4,877,920 Arotech Corp*+ 703,000 1,138,860 CPI Aerostructures Inc* 38,100 436,245 EDO Corp 3,700 117,475 Titan Corp* 2,832 45,878 -------------- 6,616,378 AGRICULTURE - 0.3% The Andersons Inc 101,181 2,580,115 AIRLINES - 0.3% Hawaiian Holdings Inc* 19,000 129,770 MAIR Holdings Inc* 116,414 1,071,009 Midwest Air Group Inc* 300,000 873,000 -------------- 2,073,779 APPAREL - 1.8% Ashworth Inc* 135,807 1,478,938 Deckers Outdoor Corp*+ 146,100 6,865,239 Haggar Corp 100,450 2,358,465 Hartmarx Corp* 199,200 1,547,784 Lakeland Industries Inc* 26,200 531,598 Rocky Shoes & Boots Inc* 11,064 328,601 Tandy Brands Accessories Inc 65,009 963,433 -------------- 14,074,058 AUTO PARTS & EQUIPMENT - 0.8% Noble International Ltd 77,400 1,578,186 R&B Inc* 38,157 953,543 Tenneco Automotive Inc* 73,000 1,258,520 Titan International Inc 144,000 2,174,400 Transpro Inc* 127,700 778,970 -------------- 6,743,619 BANKS - 10.2% ABC Bancorp 61,500 1,291,500 Abigail Adams National Bancorp 22,200 429,068 Banc Corp* 36,700 302,408 Bancorp Rhode Island Inc 65,200 2,575,400 Bank of America Corp 59,718 2,806,149 Bank of the Ozarks Inc 40,800 1,388,424 Banknorth Group Inc 17,793 651,224 BB&T Corp 1,300 54,665 BNCCORP Inc 50,310 835,146 Bryn Mawr Bank Corp 22,560 496,094 Capital Bank Corp 61,200 1,123,632 Capital Corp of the West 52,900 2,486,353 Capital Crossing Bank* 87,600 2,688,444 Cardinal Financial Corp* 120,500 1,343,575 Cascade Bancorp 900 18,198 Cascade Financial Corp 59,373 1,116,212 Cass Information Systems Inc 40,837 1,427,253 Center Financial Corp 135,600 2,714,712 Central Bancorp Inc 30,000 840,300 City National Corp 579 40,906 CoBiz Inc 900 $ 18,270 Columbia Bancorp 27,725 947,918 Columbia Bancorp / OR 24,310 475,747 Commercial Bankshares Inc 10,937 421,074 Fidelity Southern Corp 57,476 1,092,044 First Mariner Bancorp Inc* 116,678 2,048,866 First Mutual Bancshares Inc 16,335 413,602 FirstBank Corp 2,709 76,665 FNB Corp 15,788 301,077 FNB Financial Services Corp 35,375 806,550 First Place Financial Corp 14,388 322,147 First State Bancorp 8,500 312,460 Fulton Financial Corp 99,332 2,315,429 Glacier Bancorp Inc 778 26,483 Greater Community Bancorp 4,478 73,529 Guaranty Federal Bancshares Inc 62,556 1,504,847 Heritage Commerce Corp* 15,000 285,300 Lakeland Financial Corp 25,200 1,000,440 Macatawa Bank Corp 59,595 1,924,323 MB Financial Inc 47,818 2,015,529 Mercantile Bank Corp 35,883 1,417,379 Merchants Bancshares Inc 25,000 725,000 Midsouth Bancorp Inc 44,837 1,210,599 MidWestOne Financial Group Inc 77,412 1,622,556 North Valley Bancorp 17,100 332,253 Northrim BanCorp Inc 81,878 1,924,133 NSD Bancorp Inc 4,800 174,240 Oak Hill Financial Inc 54,373 2,109,129 PAB Bankshares Inc 70,000 917,700 Pelican Financial Inc* 75,000 499,500 Pinnacle Financial Partners Inc* 127,700 2,888,702 PrivateBancorp Inc 37,200 1,198,956 Prosperity Bancshares Inc 800 23,368 Redwood Empire Bancorp 26,265 777,444 South Financial Group Inc 72,457 2,357,026 Southern Community Financial Corp 48,065 497,473 Southside Bancshares Inc 46,856 1,070,660 Southwest Bancorp Inc 36,678 897,877 State Financial Services Corp 65,400 1,968,540 Summit Bancshares Inc 4,809 180,337 Susquehanna Bancshares Inc 52,158 1,301,342 Umpqua Holdings Corp 100,288 2,528,260 UnionBanCal Corp 10,606 683,875 United Security Bancshares 29,296 719,217 Vail Banks Inc 78,000 1,014,000 Valley Bancorp* 12,700 542,163 Vineyard National Bancorp Co 91,940 3,021,148 Virginia Commerce Bancorp* 74,975 2,123,292 Western Sierra Bancorp* 64,744 2,483,256 Wilshire Bancorp Inc* 234,944 3,885,974 Yardville National Bancorp 6,200 212,412 -------------- 82,319,774 BEVERAGES - 0.2% Green Mountain Coffee Roasters Inc* 56,300 1,413,130 Peet's Coffee & Tea Inc* 17,400 460,578 Redhook Ale Brewery Inc* 23,000 80,753 -------------- 1,954,461
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- BIOTECHNOLOGY - 3.6% Aksys Ltd*+ 54,800 $ 304,688 Aphton Corp* 77,800 241,958 Arqule Inc* 387,489 2,243,561 Avant Immunotherapeutics Inc* 82,415 165,654 Curis Inc* 151,153 789,019 Embrex Inc* 146,024 1,934,818 Encysive Pharmaceuticals Inc* 330,900 3,285,837 Gene Logic Inc* 61,899 227,788 Genetronics Biomedical Corp* 337,800 1,330,932 GenVec Inc* 321,393 523,871 Harvard Biosciences Inc* 33,300 154,179 Illumina Inc* 52,843 500,952 Immunogen Inc* 95,600 845,104 Keryx Biopharmaceuticals Inc* 57,647 666,976 Lifecell Corp* 299,250 3,058,355 Maxim Pharmaceuticals Inc*+ 108,700 328,274 Nanogen Inc* 448,811 3,303,249 Northfield Laboratories Inc* 11,700 263,835 Orchid BioSciences Inc* 307,974 3,541,701 Oscient Pharmaceuticals Corp* 164,500 600,425 Oxigene Inc* 107,200 589,600 Regeneration T echnologies Inc* 34,186 358,269 Sangamo Biosciences Inc* 112,300 673,800 Seattle Genetics Inc* 115,055 751,309 Sonus Pharmaceuticals Inc* 96,900 341,088 Stratagene Corp* 53,513 414,726 Third Wave Technologies Inc* 136,400 1,173,040 -------------- 28,613,008 BUILDING MATERIALS - 0.2% Aaon Inc* 787 12,647 Comfort Systems USA Inc* 43,900 337,152 Craftmade International Inc 54,778 1,080,277 -------------- 1,430,076 CHEMICALS - 1.1% Aceto Corp 104,964 1,998,514 American Vanguard Corp+ 57,000 2,096,460 Balchem Corp 53,800 1,866,322 Landec Corp* 116,500 796,860 Lesco Inc* 107,400 1,384,386 NewMarket Corp* 29,200 581,080 -------------- 8,723,622 COAL - 0.2% Westmoreland Coal Co* 39,500 1,203,170 COMMERCIAL SERVICES - 3.8% ACE Cash Express Inc* 94,000 2,788,040 Bankrate Inc* 144,800 2,005,480 Cadmus Communications Corp 67,446 863,309 Carriage Services Inc* 134,500 664,430 Cenveo Inc* 2,500 7,750 Collectors Universe Inc* 14,700 299,733 Cornell Cos Inc* 120,900 $ 1,835,262 Discovery Partners International Inc* 363,534 1,726,786 Exponent Inc* 73,762 2,027,717 FTI Consulting Inc* 4,050 85,333 Geo Group Inc* 101,400 2,695,212 Healthcare Services Group Inc 23,700 493,908 HMS Holdings Corp* 114,500 1,029,355 Hudson Highland Group Inc* 16,295 469,296 Kendle International Inc* 22,390 197,032 Medical Staffing Network Holdings Inc* 29,900 244,881 Medifast Inc* 37,900 133,408 Multi-Color Corp* 59,136 1,062,083 National Research Corp* 40,300 650,845 NCO Group Inc* 39,131 1,011,536 Opinion Research Corp* 17,400 116,406 Perceptron Inc* 119,274 870,700 Princeton Review Inc* 10,261 63,105 Providence Services Corp* 52,992 1,111,242 RCM Technologies Inc* 173,319 871,968 Rent-Way Inc* 94,300 755,343 Rock of Ages Corp 8,900 64,970 SFBC International Inc* 86,070 3,399,765 SM&A* 153,850 1,312,494 Source Interlink Cos Inc* 145,432 1,931,337 -------------- 30,788,726 COMPUTERS - 4.4% AMX Corp* 13,700 225,639 Ansoft Corp* 50,300 1,016,060 BindView Development Corp* 254,500 1,107,075 Brooktrout Inc* 143,225 1,720,132 Ciber Inc* 2,498 24,081 Cyberguard Corp* 103,200 650,160 Dataram Corp* 82,533 524,910 Delphax Technologies Inc* 26,950 106,452 Dynamics Research Corp* 80,900 1,442,447 Extended Systems Inc* 301,000 740,460 Immersion Corp* 20,226 147,447 Inforte Corp* 171,700 1,352,996 Innodata Isogen Inc* 156,450 1,539,468 Intervoice-Brite Inc* 257,500 3,437,625 Maxwell Technologies Inc* 72,600 736,164 Merge Technologies Inc* 59,200 1,317,200 Mobility Electronics Inc* 49,800 427,284 Nuance Communications Inc* 169,600 702,144 Overland Storage Inc* 6,800 113,492 Pomeroy IT Solutions Inc* 99,600 1,514,916 Printronix Inc* 69,800 1,250,118 Rimage Corp* 120,069 1,928,308 SI International Inc* 76,700 2,359,292 Sigma Designs Inc* 210,660 2,092,696 Stratasys Inc* 87,050 2,921,398 TechTeam Global Inc* 141,770 1,441,801 Tier Technologies Inc* 166,600 1,541,050 Transact Technologies Inc* 136,050 2,906,028 Tripos Inc* 19,443 103,631 Xanser Corp* 151,200 423,360 -------------- 35,813,834
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- COSMETICS/PERSONAL CARE - 1.1% Chattem Inc* 5,800 $ 191,980 Parlux Fragrances Inc* 381,363 8,573,040 -------------- 8,765,020 DISTRIBUTION/WHOLESALE - 1.8% Advanced Marketing Services Inc 24,425 245,715 Brightpoint Inc* 138,375 2,703,848 Central European Distribution Corp* 69,750 2,060,415 Huttig Building Products Inc* 31,800 332,310 Navarre Corp* 521,700 9,181,920 -------------- 14,524,208 DIVERSIFIED FINANANCIAL SERVICE - 1.3% Asta Funding Inc 62,100 1,666,764 BKF Capital Group Inc 52,200 1,978,380 Consumer Portfolio Services Inc* 332,800 1,620,736 Education Lending Group Inc* 8,300 128,733 Maxcor Financial Group Inc 110,300 977,258 Nicholas Financial Inc 6,800 97,369 Onyx Acceptance Corp 63,525 1,776,159 Sanders Morris Harris Group Inc 85,509 1,522,915 United PanAm Financial Corp* 53,100 1,012,086 The Washtenaw Group Inc* 22,100 34,034 -------------- 10,814,434 ELECTRIC - 0.3% Green Mountain Power Corp 51,100 1,473,213 Unitil Corp 24,000 679,200 -------------- 2,152,413 ELECTRICAL COMPONENTS & EQUIPMENT - 0.9% Active Power Inc* 462,309 2,126,621 American Semiconductor Corp* 125,100 1,862,739 Capstone Turbine Corp* 658,700 1,205,421 The Lamson & Sessions Co* 203,600 1,852,760 Nortech Systems Inc* 1,400 7,895 TII Network Technologies Inc* 143,700 219,861 -------------- 7,275,297 ELECTRONICS - 5.0% Advanced Photonix Inc - Class A* 156,350 284,557 Axsys Technologies Inc* 61,200 1,075,896 Badger Meter Inc 84,400 2,527,780 Bonso Electronic International Inc 40,971 216,696 Fargo Electronics Inc* 33,550 502,881 Faro Technologies Inc* 84,500 2,634,710 Frequency Electronics Inc 41,100 610,335 LeCroy Corp* 107,500 2,509,050 Lowrance Electronics Inc 57,900 1,823,792 Measurement Specialties Inc* 99,800 2,540,908 Merix Corp* 146,447 1,687,069 Metrologic Instruments Inc* 105,000 2,231,250 OI Corp* 35,200 334,752 Sonic Solutions Inc* 107,700 2,416,788 Spectrum Control Inc* 69,300 503,118 SRS Labs Inc* 50,800 $ 317,551 Sypris Solutions Inc 12,800 195,968 Taser International Inc*+ 574,000 18,132,660 -------------- 40,545,761 ENERGY - ALTERNATE SOURCES - 0.2% Electric City Corp* 317,900 391,017 Evergreen Solar Inc* 178,400 779,608 -------------- 1,170,625 ENGINEERING & CONSTRUCTION - 0.9% Bluegreen Corp* 104,300 2,068,269 Keith Cos Inc* 47,500 826,025 Layne Christensen Co* 161,900 2,938,485 Michael Baker Corp* 51,700 1,013,320 Perini Corp* 5,500 91,795 -------------- 6,937,894 ENTERTAINMENT - 0.6% Canterbury Park Holdings Corp* 59,400 1,202,850 Gaylord Entertainment Co* 44,852 1,862,704 Image Entertainment Inc 114,740 681,556 Nevada Gold & Casinos Inc* 96,000 1,171,200 -------------- 4,918,310 ENVIRONMENTAL CONTROL - 0.7% Clean Harbors Inc* 157,947 2,381,841 Darling International Inc* 379,200 1,653,312 Waste Industries USA Inc 130,900 1,623,160 -------------- 5,658,313 FOOD - 0.9% Imperial Sugar Co* 79,016 1,505,255 M&F Worldwide Corp* 40,300 548,886 MGP Ingredients Inc 42,504 367,235 Monterey Gourmet Foods Inc* 230,800 780,104 Rocky Mountain Chocolate Factory Inc 42,240 618,816 Spartan Stores Inc* 343,650 2,285,272 Village Super Market Inc - Class A 12,300 450,426 Zapata Corp* 10,900 652,910 -------------- 7,208,904 FOREST PRODUCTS & PAPER - 0.1% Pope & Talbot Inc 56,200 961,582 GAS - 0.3% Chesapeake Utilities Corp 48,700 1,300,290 EnergySouth Inc 44,250 1,240,770 -------------- 2,541,060 HAND/MACHINE TOOLS - 0.1% Starrett (L.S.) Co - Class A 29,200 601,520 HEALTHCARE PRODUCTS - 5.7% Abaxis Inc* 169,700 2,458,953 Abiomed Inc*+ 189,902 2,932,087 Arrhythmia Research Technology Inc* 37,000 780,330 Atrion Corp 39,148 1,771,251 Bruker BioSciences Corp* 13,237 53,345 Caliper Life Sciences Inc* 68,000 512,040 Candela Corp* 118,035 1,340,878 Cantel Medical Corp* 54,800 2,050,616
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- HEALTHCARE PRODUCTS (CONTINUED) Cardiotech International Inc* 201,100 $ 593,245 Compex Technologies Inc* 181,040 845,457 Criticare Systems Inc* 252,650 904,487 Encore Medical Corp* 111,400 756,406 Endocardial Solutions Inc* 208,400 2,438,280 Endologix Inc* 80,000 546,400 Enpath Medical Inc* 24,700 266,760 Implant Sciences Corp* 85,100 829,725 LCA-Vision Inc 241,297 5,643,937 Lifecore Biomedical Inc* 217,646 2,450,694 Medical Action Industries Inc* 40,000 788,000 Merit Medical Systems Inc* 17,500 267,400 Microvision Inc* 109,444 766,108 NMT Medical Inc* 52,600 260,370 Orthologic Corp* 2,000 12,500 Orthovita Inc* 115,800 485,202 PhotoMedex Inc* 188,200 508,140 Quidel Corp* 397,600 2,019,808 Quinton Cardiology Systems Inc* 253,500 2,676,960 Rita Medical Systems Inc* 224,222 867,739 Somanetics Corp* 234,200 3,609,022 Spectranetics Corp* 159,500 896,549 SRI/Surgical Express Inc* 28,800 142,848 Tutogen Medical Inc* 248,200 627,946 Urologix Inc* 187,000 1,209,890 Utah Medical Products Inc 49,900 1,121,253 Vital Images Inc* 125,936 2,109,428 Zila Inc* 73,500 314,580 -------------- 45,858,634 HEALTHCARE SERVICES - 2.4% Air Methods Corp* 120,655 1,037,633 Almost Family Inc* 5,800 83,810 Amedisys Inc* 171,100 5,541,929 America Service Group Inc* 109,500 2,931,315 Amsurg Corp* 1,200 35,448 Bio-Imaging Technologies Inc* 77,400 424,152 Bio-Reference Laboratories Inc* 135,600 2,359,440 Chronimed Inc* 60,400 394,412 Dialysis Corp of America* 18,600 454,398 Five Star Quality Care Inc* 34,000 287,980 Horizon Health Corp* 56,300 1,569,644 Medcath Corp* 50,020 1,232,493 Novamed Eyecare Inc* 64,300 423,094 Option Care Inc 4,875 83,801 Psychiatric Solutions Inc* 52,300 1,912,088 Radiologix Inc* 129,000 567,600 -------------- 19,339,237 HOLDING COMPANIES-DIVERSIFIED - 0.0%^ Resources American Inc 1,298 42,185 HOME BUILDERS - 0.1% Hovnanian Enterprises Inc - Class A* 822 40,705 Meritage Homes Corp* 900 101,430 Nobility Homes Inc 11,300 263,290 Orleans Homebuilders Inc* 24,400 484,340 Technical Olympic USA Inc 1,125 28,552 -------------- 918,317 HOME FURNISHINGS - 0.6% Cobra Electronics Corp* 33,700 $ 273,307 Flexsteel Industries Inc 34,730 612,950 Koss Corp 4,138 77,587 The Rowe Cos* 26,800 138,556 Salton Inc* 171,900 972,954 Stanley Furniture Co Inc 44,300 1,991,285 Universal Electronics Inc* 23,500 413,600 -------------- 4,480,239 HOUSEHOLD PRODUCTS/WARES - 0.2% CNS Inc 105,050 1,318,377 Nashua Corp* 38,600 438,496 -------------- 1,756,873 HOUSEWARES - 0.3% Enesco Group Inc* 120,000 969,600 Lifetime Hoan Corp 70,480 1,120,632 -------------- 2,090,232 INSURANCE - 1.7% American Independence Corp* 45,135 659,422 Brooke Corp 10,800 260,928 Ceres Group Inc* 354,900 1,831,284 Donegal Group Inc 104,302 2,391,645 Fidelity National Financial Inc 45,941 2,098,125 FPIC Insurance Group Inc* 3,200 113,216 Investors Title Co 56,432 2,077,262 Meadowbrook Insurance Group Inc* 370,400 1,848,296 Merchants Group Inc 3,400 81,600 Penn-America Group Inc 37,010 558,851 PMA Capital Corp - Class A* 65,390 676,785 SCPIE Holdings Inc* 18,200 180,180 Vesta Insurance Group Inc 345,200 1,270,336 -------------- 14,047,930 INTERNET - 4.3% Aladdin Knowledge Systems Ltd* 101,295 2,507,051 Ask Jeeves Inc* 227,500 6,085,625 @ Road Inc* 79,964 552,551 Blue Coat Systems Inc* 55,300 1,029,133 Captiva Software Corp* 232,000 2,366,400 Corillian Corp* 474,800 2,336,016 Digitas Inc* 134,521 1,284,675 drugstore.com Inc* 23,200 78,880 E-Loan Inc* 258,310 873,088 ePlus Inc* 100,800 1,190,448 FindWhat.com* 52,700 934,371 Harris Interactive Inc* 70,300 555,370 Ibasis Inc*+ 186,500 458,790 I-many Inc* 523,200 784,800 Jupitermedia Corp* 164,000 3,899,920 LookSmart Ltd* 799,626 1,751,181 Marketwatch.com Inc* 211,705 3,810,690 Online Resources Corp* 158,500 1,207,770 Quotesmith.com Inc* 30,400 151,605 Selectica Inc* 94,035 336,645 Sina Corp* 33,900 1,086,834 TheStreet.com Inc* 167,000 681,360 United Online Inc* 14,029 161,754 Valueclick Inc* 38,914 518,724 -------------- 34,643,681
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- IRON/STEEL - 1.3% Great Northern Iron Ore Properties 15,100 $ 1,766,700 Material Sciences Corp* 33,500 602,665 Olympic Steel Inc* 40,300 1,068,353 Oregon Steel Mills Inc* 170,000 3,449,300 Roanoke Electric Steel Corp 90,000 1,860,390 Steel Technologies Inc 50,816 1,397,948 -------------- 10,145,356 LEISURE TIME - 0.4% Aldila Inc 58,479 905,840 Ambassadors International Inc 77,600 1,220,648 Johnson Outdoors Inc* 60,250 1,211,025 -------------- 3,337,513 LODGING - 0.7% Lodgian Inc* 43,000 528,900 Monarch Casino & Resort Inc* 82,400 3,341,320 Suburban Lodges of America Inc* 40400 0 Wyndham International Inc - Class A* 1,490,000 1,773,100 -------------- 5,643,320 MACHINERY-DIVERSIFIED - 1.0% Gehl Co* 110,100 2,570,835 Hurco Cos Inc* 219,934 3,628,911 Paul Mueller Co 15,000 451,605 Twin Disc Inc 68,200 1,742,510 -------------- 8,393,861 MEDIA - 0.7% Pegasus Communications Corp*+ 76,600 719,274 Point.360* 61,200 221,605 Sirius Satellite Radio Inc* 582,300 4,454,595 -------------- 5,395,474 METAL FABRICATE/HARDWARE - 0.9% Hawk Corp* 17,400 150,336 Ladish Co Inc* 64,700 743,403 Metals USA Inc* 220,500 4,090,275 Northwest Pipe Co* 75,600 1,886,220 Webco Industries Inc* 3,800 40,926 -------------- 6,911,160 MINING - 0.5% Brush Engineered Materials Inc* 153,100 2,832,350 Kinross Gold Corp* 22,353 157,365 Vista Gold Corp* 161,500 613,700 -------------- 3,603,415 MISCELLANEOUS MANUFACTURING - 1.8% Ceradyne Inc* 81,750 4,676,917 EnPro Industries Inc* 13,600 402,152 EXX Inc - Class A* 19,800 32,472 Flanders Corp* 270,542 2,597,203 Park-Ohio Holdings Corp* 235,715 6,105,018 Raven Industries Inc 35,600 758,636 Summa Industries Inc 14,450 143,344 -------------- 14,715,742 OFFICE/BUSINESS EQUIPMENT - 0.2% TRM Corp* 75,750 $ 1,790,730 OIL & GAS - 2.6% Adams Resources & Energy Inc 5,600 98,784 ATP Oil & Gas Corp* 199,400 3,704,852 Brigham Exploration Co* 198,600 1,787,400 Castle Energy Corp 7,650 95,541 Clayton Williams Energy Inc* 41,500 950,350 Edge Petroleum Corp* 197,750 2,883,195 Giant Industries Inc* 133,800 3,547,038 Harvest Natural Resources Inc* 95,900 1,656,193 Magnum Hunter Resources Inc 200 0 Meridian Resource Corp* 404,000 2,444,200 Petrocorp* 6,100 0 Petroleum Development Corp* 74,400 2,869,608 Remington Oil & Gas Corp* 1,400 38,150 Royale Energy Inc* 93,856 674,825 -------------- 20,750,136 OIL & GAS SERVICES - 0.2% Lufkin Industries Inc 47,871 1,910,436 PACKAGING & CONTAINERS - 0.1% AEP Industries Inc* 58,800 872,004 PHARMACEUTICALS - 5.1% Alteon Inc* 41,900 54,889 Anika Therapeutics Inc* 131,400 1,202,310 Ap Pharma Inc* 134,600 222,090 Bradley Pharmaceuticals Inc* 2,100 40,740 Collagenex Pharmaceuticals Inc* 120,724 886,114 D&K Healthcare Resources Inc 46,730 377,578 Dendreon Corp* 62,575 674,558 Dov Pharmaceuticals Inc* 158,400 2,859,120 Eli Lilly & Co 34,669 1,967,466 Emisphere Technologies Inc* 144,800 586,440 First Horizon Pharmaceutical Corp* 279,200 6,390,888 Guilford Pharmaceuticals Inc* 133,769 662,156 HealthExtras Inc* 21,900 356,970 Heska Corp* 95,700 111,873 Hi-Tech Pharmacal Co Inc* 112,476 2,074,057 Hollis-Eden Pharmaceuticals Inc* 49,739 468,541 Insmed Inc* 126,400 277,954 Integrated Biopharma Inc* 100,100 690,690 Intrabiotics Pharmaceuticals Inc* 112,300 458,184 Introgen Therapeutics Inc*+ 109,175 923,620 Ista Pharmaceuticals Inc* 101,400 1,026,168 La Jolla Pharmaceuticals Co* 522,100 871,907 Mannatech Inc 90,680 1,726,547 Matrixx Initiatives Inc* 90,300 1,046,577 Nastech Pharmaceutical Co* 146,600 1,772,394 National Medical Health Cardinal Systems Inc* 103,408 2,388,828 Neogen Corp* 69,281 1,569,215 Nutraceutical International Corp* 107,139 1,651,012
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- PHARMACEUTICALS (CONTINUED) Nuvelo Inc* 136,104 $ 1,340,624 Orphan Medical Inc* 132,279 1,186,543 Pain Therapeutics Inc* 114,000 821,940 Penwest Pharmaceuticals Co* 28,000 334,880 Pharmacyclics Inc* 207,300 2,170,431 Rigel Pharmaceuticals Inc* 35,566 868,522 Vivus Inc* 234,337 1,042,800 -------------- 41,104,626 REAL ESTATE - 0.8% California Coastal Communities Inc* 109,900 2,637,600 Consolidated - Tomoka Land Co 43,800 1,883,400 United Capital Corp* 47,900 1,084,935 Wellsford Real Properties Inc* 60,100 866,642 Wilshire Enterprises Inc* 27,300 177,450 -------------- 6,650,027 RETAIL - 4.4% AC Moore Arts & Crafts Inc* 7,400 213,194 America's Car Mart Inc* 74,700 2,838,600 Ark Restaurants Inc 17,250 676,200 Blair Corp 32,200 1,148,252 The Bombay Co Inc* 81,900 452,907 Books-A-Millions Inc 191,906 1,846,136 Buffalo Wild Wings Inc 28,600 995,566 Christopher & Banks Corp 1,350 24,907 Collegiate Pacific Inc 25,000 345,750 Cosi Inc* 36,547 221,109 Dave & Buster's Inc* 143,600 2,900,720 Famous Dave's Of America Inc* 158,800 2,018,507 Finlay Enterprises Inc* 89,500 1,771,205 First Cash Financial Services Inc* 116,250 3,105,037 Friendly's Ice Cream Corp* 97,900 822,360 Frisch's Restaurants Inc 47,800 1,139,074 GTSI Corp* 117,235 1,232,140 Hastings Entertainment Inc* 125,400 1,038,312 JOS A Bank Clothiers Inc* 40,125 1,135,538 Luby's Inc* 252,700 1,895,250 Movie Gallery Inc 6,975 133,013 National Vision Inc* 88,600 660,070 PC Mall Inc* 89,993 2,014,043 The Pantry Inc* 3,300 99,297 Rush Enterprises Inc - Class A* 43,600 707,628 Rush Enterprises Inc - Class B* 43,600 754,716 The Sportsman's Guide Inc* 110,600 2,488,500 Total Entertainment Rest Corp* 122,581 1,461,165 Trans World Entertainment Corp* 70,300 876,641 Zones Inc* 60,000 397,800 -------------- 35,413,637 SAVINGS & LOANS - 4.0% Berkshire Hills Bancorp Inc 34,800 1,292,820 Beverly Hills Bancorp Inc 82,822 836,502 BostonFed Bancorp Inc 400 18,108 Carver Bancorp Inc 107,000 2,135,720 Centrue Financial Corp 26,000 $ 733,460 Citizens First Financial Corp 5,400 175,338 Cooperative Bankshares Inc 1,400 37,814 Fidelity Bancorp Inc 46,080 1,161,216 First Defiance Financial Corp 27,800 791,466 First Federal Bankshares Inc 86,320 1,238,688 First Pactrust Bancorp Inc 53,800 1,471,430 FirstBank NW Corp 21,492 610,588 HMN Financial Inc 55,300 1,775,130 Harrington West Financial Group Inc 88,320 1,581,814 Heritage Financial Corp 6,100 134,932 Horizon Financial Corp 65,300 1,343,874 Itla Capital Corp* 400 23,516 LSB Corp 76,350 1,414,002 Lincoln Bancorp 14,800 285,477 MASSBANK Corp 23,936 896,403 MutualFirst Financial Inc 6,715 163,510 Mystic Financial Inc 37,178 1,530,246 NewAlliance Bancshares Inc 67,028 1,025,528 NewMil Bancorp Inc 45,600 1,427,280 North Central Bancshares Inc 19,650 814,492 Northeast Bancorp 4,700 107,160 Provident Financial Holdings Inc 54,849 1,582,394 Pulaski Financial Corp 75,462 1,546,971 PVF Capital Corp 75,720 1,044,936 Rainer Pacific Financial Group Inc 26,100 467,190 Riverview Bancorp Inc 25,800 571,728 Sovereign Bancorp Inc 1 23 Sterling Financial Corp* 804 31,565 Synergy Financial Group Inc 21,400 287,616 Teche Holding Co 11,400 436,050 Timberland Bancorp Inc 19,800 452,430 Union Community Bancorp 44,600 832,236 Washington Savings Bank 95,850 1,528,807 -------------- 31,808,460 SEMICONDUCTORS - 2.3% ADE Corp* 130,000 2,433,600 Advanced Power Technology Inc* 206,500 1,598,310 Aetrium Inc* 116,900 458,248 All American Semiconductor Inc* 13,200 78,144 Alliance Semiconductor Corp* 40,140 148,518 Anadigics Inc* 333,401 1,250,254 Brilliant Corp* 34,825 120,146 Catalyst Semiconductor Inc* 93,173 512,451 Ceva Inc* 157,696 1,436,137 Diodes Inc* 42,150 953,854 Electroglas Inc* 59,498 282,615 FSI International Inc* 77,408 361,495 HI/FN Inc* 28,300 260,926 IXYS Corp* 2,700 27,864 Kopin Corp* 92,100 356,427 LogicVision Inc* 41,500 121,595 Monolithic System Technology Inc* 57,789 360,025 Nanometrics Inc* 44,800 722,131 PLX Technology Inc* 261,500 2,719,600 Ramtron International Corp* 40,200 160,800 Richardson Electronics Ltd 67,545 716,652
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INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- Rudolph Technologies Inc* 56,464 $ 969,487 Supertex Inc* 304 6,597 Therma-Wave Inc* 160,300 554,638 Virage Logic Corp* 50,897 945,157 White Electronic Designs Corp* 171,400 1,084,962 -------------- 18,640,633 SOFTWARE - 3.7% Allscripts Healthcare Soutions Inc* 94,453 1,007,813 American Software Inc 25,238 152,185 Aspen Technology Inc* 58,800 365,148 Authentidate Holding Corp* 63,000 389,970 CAM Commerce Solutions Inc* 93,900 1,592,638 Captaris Inc* 310,700 1,603,212 Computer Programs & Systems Inc 16,547 383,063 Concord Communications, Inc* 39,000 432,120 Concur Technologies Inc* 112,900 1,005,939 Digi International Inc* 112,936 1,941,370 DocuCorp International Inc* 161,800 1,537,100 Document Sciences Corp* 8,788 42,806 Embarcadero Technologies Inc* 56,500 531,665 Evolving Systems Inc* 275,900 1,238,791 Intervideo Inc* 17,700 234,171 INVESTools Inc* 22,700 77,180 MetaSolv Inc* 399,900 1,059,735 Mind CTI Ltd 351,310 2,044,624 Moldflow Corp* 163,600 2,601,240 MSC Software Corp* 42,200 441,834 Napster Inc* 208,000 1,955,200 Pervasive Software Inc* 174,800 847,780 Phoenix Technologies Ltd* 28,905 238,755 PLATO Learning Inc* 100,533 748,971 QAD Inc 49,150 438,418 Quality Systems Inc* 23,000 1,375,400 Staktek Holdings Inc* 60,190 279,282 TradeStation Group Inc* 245,974 1,726,737 Vastera Inc* 73,550 193,437 Viewpoint Corp* 199,884 619,640 Witness Systems Inc* 138,850 2,424,321 -------------- 29,530,545 TELECOMMUNICATIONS - 4.4% AirGate PCS Inc* 57,300 2,039,880 Anaren Inc* 31,800 412,128 Avici Systems Inc* 115,900 1,048,895 Aware Inc* 373,800 1,812,930 Boston Communications Group Inc* 350,945 3,242,732 CalAmp Corp* 293,700 2,625,678 Comarco Inc* 12,100 104,060 Communications Systems Inc 7,000 84,070 Comtech Telecommunications Corp* 4,700 176,767 CoSine Communications Inc* 17,360 48,261 Crossroads Systems Inc* 331,700 484,614 Ditech Communications Corp* 191,670 2,865,466 EndWave Corp* 103,842 1,812,043 Essex Corp* 11,800 238,950 Forgent Networks Inc* 15,119 32,203 Glenayre Technologies Inc* 541,400 1,180,252 Globecomm Systems Inc* 68,500 $ 435,660 Hickory Tech Corp 26,530 283,606 Lightbridge Inc* 40,500 244,620 MRV Communications Inc* 9,900 36,333 Network Equipment Technologies Inc* 36,000 353,520 NMS Communications Corp* 92,600 584,306 Optical Cable Corp* 89,225 507,512 Paradyne Networks Corp* 373,900 1,342,301 Performance Technologies Inc* 148,850 1,384,305 Radyne Comstream Corp* 88,100 658,107 SafeNet Inc* 27,100 995,654 SBA Communications Corp* 11,100 103,008 Sirenza Microdevices Inc* 193,400 1,268,704 Spectralink Corp 82,400 1,168,432 Stratos International Inc 212,779 934,100 Telular Corp* 80,000 680,800 Ubiquitel Inc* 618,000 4,400,160 Verlink Corp* 73,955 200,418 Vyyo Inc* 12,031 103,587 Warwick Valley Telephone Co 5,400 121,662 WJ Communications Inc* 505,100 1,737,544 XETA Technologies Inc* 25,200 90,619 -------------- 35,843,887 TEXTILES - 0.3% Angelica Corp 46,000 1,244,300 Culp Inc* 148,400 1,006,152 Quaker Fabric Corp 24,235 135,716 -------------- 2,386,168 TOYS/GAMES/HOBBIES - 0.2% Department 56 Inc* 73,900 1,230,435 RC2 Corp* 15,700 511,820 -------------- 1,742,255 TRANSPORTATION - 1.5% Celadon Group Inc* 113,900 2,534,275 Dynamex Inc* 148,600 2,753,558 Forward Air Corp* 300 13,410 HUB Group Inc - Class A* 72,300 3,775,506 Marten Transport Ltd* 112,066 2,547,260 Patriot Transportation Holdings Inc* 16,400 737,820 -------------- 12,361,829 TRUCKING & LEASING - 0.3% Greenbrier Cos Inc 77,800 2,633,530 WATER - 0.2% Artesian Resources Corp - Class A 14,850 417,582 Middlesex Water Co 28,088 531,987 Pennichuck Corp 3,466 90,463 York Water Co 40,200 780,282 -------------- 1,820,314 TOTAL COMMON STOCKS (Cost $423,695,443) 769,201,048 --------------
15
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------- EXCHANGE TRADED FUNDS- 3.3% iShares Russell 2000 Index Fund 104,600 $ 13,545,700 iShares Russell 2000 Value Index Fund 67,809 13,066,794 -------------- TOTAL EXCHANGE TRADED FUNDS (Cost $18,710,159) 26,612,494 -------------- MONEY MARKET MUTUAL FUNDS - 1.2% First American Treasury Obligations Fund - Class S 9,885,435 9,885,435 -------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $9,885,435) 9,885,435 -------------- TOTAL INVESTMENTS - 100.0% (Cost $452,291,037) 805,698,977 Assets In Excess of Other Liabilities - 0.0%^ 251,059 -------------- NET ASSETS - 100.0% $ 805,950,036 ==============
* NON-INCOME PRODUCING SECURITY ^ LESS THAN 0.05% OF NET ASSETS + THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31, 2004 TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $33,899,952 AT DECEMBER 31, 2004 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 16 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $452,291,037) $ 805,698,977 Receivable for investments sold 1,596,694 Receivable for fund shares sold 1,279,737 Dividends receivable 247,867 Interest receivable 23,269 Receivable from securities lending 151,653 Prepaid expenses 55,694 --------------------------------------------------------------------------------------------------- Total assets 809,053,891 --------------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 431,414 Payable for investments purchased 2,219,630 Accrued investment adviser fee 297,351 Accrued administration fee 85,135 Accrued directors fee 8,862 Other payables 61,463 --------------------------------------------------------------------------------------------------- Total liabilities 3,103,855 --------------------------------------------------------------------------------------------------- NET ASSETS $ 805,950,036 =================================================================================================== NET ASSETS REPRESENT: Paid-in capital $ 461,707,091 Undistributed net investment income 107,360 Accumulated net realized loss on investments (9,272,355) Net unrealized appreciation of investments 353,407,940 --------------------------------------------------------------------------------------------------- NET ASSETS $ 805,950,036 =================================================================================================== Shares of common stock outstanding of $.001 par value, 100,000,000 shares authorized 45,364,443 --------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 17.77 ===================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 2,277,266 Interest 64,871 Securities lending 699,860 --------------------------------------------------------------------------------------------------- Total investment income 3,041,997 --------------------------------------------------------------------------------------------------- EXPENSES: Investment advisory fees 1,839,365 Administration fees 183,937 Accounting fees 35,464 Transfer agent fees 108,610 Audit fees 94,799 Tax fees 2,013 Custody fees 58,360 Legal fees 38,844 Blue sky fees 45,418 Directors fees 16,230 Registration fees 11,938 Interest on outstanding loan payable 38,423 Miscellaneous 66,194 --------------------------------------------------------------------------------------------------- Total expenses before advisory fees waived 2,539,595 Less investment advisory fees waived (36,171) --------------------------------------------------------------------------------------------------- Net expenses 2,503,424 NET INVESTMENT INCOME 538,573 --------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (9,137,950) Net realized loss on futures contracts (315) Net change in unrealized appreciation / deprecitation on investments 81,513,490 --------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 72,375,225 --------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 72,913,798 ===================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 --------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 538,573 $ 808,120 Net realized gain (loss) on investment securities (9,137,950) 7,562,069 Net realized gain (loss) on futures contracts (315) 2,436,990 Net change in unrealized appreciation / depreciation on investments 81,513,490 218,092,749 Net change in unrealized appreciation on futures 0 752,593 --------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 72,913,798 229,652,521 --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net investment income (1,225,018) 0 From net realized gain (6,669,718) (2,130,005) --------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (7,894,736) (2,130,005) --------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 77,187,157 481,488,578 Reinvestment of distributions 7,133,428 1,980,857 Cost of shares redeemed (net of redemption fees of $116,117 and $809,313 for the period indicated) (160,137,903) (206,285,112) --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from share transactions (75,817,318) 277,184,323 --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets (10,798,256) 504,706,839 NET ASSETS: Beginning of period 816,748,292 312,041,453 --------------------------------------------------------------------------------------------------------------------- End of period ** $ 805,950,036 $ 816,748,292 ===================================================================================================================== SHARES ISSUED & REDEEMED: Issued 4,900,971 35,892,678 Distributions reinvested 403,018 131,969 Redeemed (10,535,587) (13,839,493) --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (5,231,598) 22,185,154 Outstanding at beginning of period 50,596,041 28,410,887 --------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 45,364,443 50,596,041 ===================================================================================================================== * Unaudited ** Including undistributed net investment income of: $ 107,360 $ 793,805
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEAR ENDED JUNE 30, 2004** 2004 2003 2002 2001 2000 -------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 16.14 $ 10.98 $ 8.70 $ 7.22 $ 6.62 $ 4.96 -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income (loss)^ 0.01 0.02 (0.03) 0.00 0.05 0.03 Net realized and unrealized gain 1.80 5.16 2.31 1.49 0.59 1.63 -------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.81 5.18 2.28 1.49 0.64 1.66 -------------------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net investment income (0.03) 0.00 0.00 (0.01) (0.04) 0.00 Net realized gain (0.15) (0.04) 0.00 0.00 0.00 0.00 -------------------------------------------------------------------------------------------------------------------------------- Total distributions (0.18) (0.04) 0.00 (0.01) (0.04) 0.00 -------------------------------------------------------------------------------------------------------------------------------- Paid-in-capital from redemption fees 0.00 0.02 0.00 0.00 0.00 0.00 -------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 17.77 $ 16.14 $ 10.98 $ 8.70 $ 7.22 $ 6.62 ================================================================================================================================ TOTAL RETURN 11.19%#+ 47.41% 26.21% + 20.70% + 9.80% + 33.50% + RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 805,950 $ 816,748 $ 312,041 $ 68,824 $ 9,078 $ 2,386 Ratios to average net assets: Expenses after waivers and reimbursements 0.68%* 0.67% 0.75% 0.75% 0.75% 0.75% Expenses before waivers and reimbursements 0.69%* 0.67% 0.85% 1.01% 1.61% 1.94% Net investment income (loss) after waivers and reimbursements 0.15%* 0.11% (0.14%) (0.05%) 0.77% 0.53% Portfolio turnover rate 6.5% 19.4% 17.7% 55.8% 215.0% 39.5%
* ANNUALIZED ** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 20 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 100,000,000 shares have been classified into the Ultra-Small Company Market Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Ultra-Small Company Market Fund seeks to provide a long-term total return of capital, primarily through capital appreciation. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Ultra-Small Company Market Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price (NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had securities on loan valued at $33,899,952 and received U.S. Treasury securities with a value of $34,346,419 as collateral. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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. 21 RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. Fees provided for under the Rule 12b-1 plan of a particular class of the fund are charged to the operations of such class. All other expenses are allocated among the classes on relative net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004, there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase tranaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, trustees, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is computed daily and paid monthly. 22 The Fund pays a flat 0.5% annual management fee, computed daily and payable monthly subject to a maximum expense ratio of 0.75%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.75% of the value of its average net assets for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived fees of $36,171. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Ultra-Small Company Market Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of long-term investment securities other than U.S. government securities and cash equivalents were $47,777,650 and $138,923,613 respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 363,232,484 Gross unrealized (depreciation) (9,932,829) -------------------------------------------------------------- Net unrealized appreciation on investments $ 353,299,655 ============================================================== Cost of investments $ 452,399,322 ==============================================================
The difference between book and tax net unrealized appreciation is wash sale loss deferrals. The Fund used $1,248,680 of capital loss carryovers for the year ended June 30, 2004 to offset net realized gains for federal income tax purposes. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 793,805 Accumulated capital gains 6,666,382 Unrealized appreciation 271,764,012
The temporary differences between book and tax are primarily due to wash sales. As of June 30, 2004, the tax character of the distributions paid were:
YEAR ENDED YEAR ENDED JUNE 30, 2004 JUNE 30, 2003 ------------------------------------------------------------- Ordinary income $ - $ - Long-term capital gains 710,875 -
Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 23 6. LINE OF CREDIT: The Fund has established a line of credit agreement ("LOC") with U.S. Bank, N.A. (the "Bank" or "Lender") which matures on June 1, 2005 and is renewable annually at the Bank's option, to be used for temporary or emergency purposes, primarily for financing redemption payments. Any and all advances under this Facility would be for a maximum of fifteen (15) business days and are at the sole discretion of the Lender based on the merits of the specific transaction. Advances under the Facility are limited to the lesser of $36,750,000 or 33 1/3% of the Fund's net assets. Borrowings under the line of credit bear interest based on the Lender's Prime Rate. Principal is due fifteen days after each advance and at the Maturity. Interest is payable monthly in arrears. The minimum advance is $1,000. As of December 31, 2004, the Fund had a zero balance with its secured line of credit. During the six months ended December 31, 2004, the average borrowing was $1,815,408 with an average rate on borrowings of 4.37%. 7. REDEMPTION FEES: Shares of Ultra Small Company Market Fund held for less than six months are subject to a redemption fee of 2.00%, based on the redeemed share's market value. Redemption fees are paid directly to the Fund. 8. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 24 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge , upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 64% of the Fund. 25 This Page Intentionally Left Blank This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] MICRO-CAP LIMITED FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Micro-Cap Limited Shareholder, The Fund was up 15.57% in the December quarter, compared to the 16.50% return for our primary benchmark, the CRSP Cap-Based Portfolio 9 Index, 13.28% for our peer benchmark, the Lipper Small-Cap Stock Index, and 14.09% for the Russell 2000 Index of small companies. It was a strong quarter in absolute terms, but somewhat mixed on a relative basis. For the twelve months through December, the Fund was up 9.46%. This was the first calendar year since inception that our Fund did not beat both it's peer benchmark and the Russell 2000 Index. The table below presents our December quarter, one-year, five-year, and life-to-date financial results according to the formula required by the SEC.
DEC. QTR 1 YEAR 5 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 1/1/00 TO 6/30/98 TO 12/31/04 12/31/04 12/31/04 12/31/04 ---------------------------------------------------------------------------------------------------------- MICRO-CAP LIMITED FUND 15.57% 9.46% 16.04% 20.62% CRSP Cap-Based Portfolio 9 Index (1) 16.50% 15.11% 12.32% 12.86% Lipper Small-Cap Stock Funds (2) 13.28% 17.00% 1.94% 5.89% Russell 2000 Index (small stocks) (3) 14.09% 18.33% 6.61% 6.98%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. (1) THE CRSP CAP-BASED PORTFOLIO 9 INDEX IS AN UNMANAGED INDEX OF 627 MICRO-CAP COMPANIES COMPILED BY THE CENTER FOR RESEARCH IN SECURITY PRICES, WITH DIVIDENDS REINVESTED. (2) THE LIPPER SMALL CAP STOCK FUNDS IS AN INDEX OF SMALL-CAP FUNDS COMPILED BY LIPPER, INC. (3) THE RUSSELL 2000 INDEX IS AN UNMANAGED, MARKET VALUE WEIGHTED INDEX, WHICH MEASURES PERFORMANCE OF THE 2,000 COMPANIES THAT ARE BETWEEN THE 1,000TH AND 3,000TH LARGEST IN THE MARKET WITH DIVIDENDS REINVESTED. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. According to data from Lipper, Inc., the Micro-Cap Limited Fund ranked 58th of 72 micro-cap funds for the past twelve months, and 15th of 43 such funds over the past five years, and 5th of 42 funds since inception. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. The following graph presents our financial performance by quarter since inception. GROWTH OF $10,000 INVESTED IN MIRCO-CAP LIMITED FUND AND INDEXES FROM 6/30/98 (INCEPTION) TO 12/31/04 [CHART]
BRIDGEWAY MICRO-CAP LIMITED FUND LIPPER SMALL-CAP STOCK FUNDS RUSSELL 2000 INDEX CRSP CAP-BASED PORTFOLIO 9 INDEX 6/98 10000 10000 10000 10000 9/98 7600 7860 7985 7633 12/98 10760 9314 9288 9068 3/99 9400 8874 8784 8601 6/99 12760 10192 10150 10232 9/99 12320 9966 9508 10026 12/99 16091 13183 11262 12289 3/00 16279 14659 12060 14227 6/00 16426 13786 11604 12798 9/00 18285 14251 11732 13142 12/00 17060 12315 10922 10592 3/01 17370 10463 10211 10839 6/01 21951 12008 11670 13407 9/01 18454 9338 9244 10765 12/01 22213 11167 11193 13955 3/02 23097 11263 11639 14418 6/02 23726 10202 10667 13545 9/02 18813 8283 8384 10245 12/02 18523 8777 8901 11329 3/03 18318 8386 8501 11004 6/03 23946 10124 10492 14446 9/03 27349 10898 11444 16382 12/03 30928 12403 13106 19087 3/04 30236 13024 13927 20103 6/04 29765 13243 13993 20069 9/04 29295 12811 13593 18859 12/04 33854 14512 15509 21971
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER PERFORMANCE SUMMARY TRANSLATION: Returns for the first three quarters of the year were weak, and by the end of the third quarter the Fund's net asset value had dropped by more than 5%. However, a very strong fourth quarter more than made up for the loss, allowing the Fund to finish up the year with better than a 9% gain. After the first three (slightly) negative return quarters in calendar 2004, it was nice to enjoy the strong returns of the December quarter. The first three quarters of red ink offers a good lesson in the value of avoiding panic and the urge to sell when things look less than great. It's important to remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - match with the time horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY TRANSLATION: While the overall market chugged along in a (surprisingly?) average fashion, small stocks continued their remarkable run. Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year for the broad U.S. market. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not exactly . . . In 2004, the S&P 500 Index of large stocks returned 10.88% - a figure remarkably close to the 10.4% that the market has returned, on average, every year since 1925. From the perspective of returns, therefore, 2004 was about as average as it gets. Furthermore, though standard financial commentaries throughout the year often described a market lurching dramatically between struggle and triumph, the fact is that the market in 2004 was much LESS volatile than it has been, on average, over the past 10 years. In truth, the only really remarkable thing about the market this past year has been the continued dominance of smaller stocks - good news for shareholders of our Fund. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stock bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but the computer models of our Aggressive Investors funds have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction, rather we're just trying to find one good (in this case, micro-cap) stock 2 at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. If this happens, my job will be to seek to outperform our index by enough to offset this disadvantage, something we've done a good job of since inception, but not in the last year. At any rate, it's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: After the less-than-inspiring returns of the first nine months of the year, it was great to see some of the companies in our Fund really surge in the fourth quarter, often on the back of surprisingly strong growth financial fundamentals, such as sales and earnings. Fully half of our top gainers for the quarter were companies that provide goods and/or services to individuals, suggesting that the U.S. consumer is not yet tapped out, despite having so nobly carried the economy for so long. Communications companies also performed well. As a sector, they were the strongest performer of the quarter, after turning in distinctly lackluster results earlier in the year. However, though sector-analysis can be both interesting and useful, it's by no means the final word. For proof, look below at the list of the Fund's worst performers for the year, both of which were also in the communications industry. EIGHTEEN OF OUR STOCKS GAINED AT LEAST 30% IN THE QUARTER:
RANK DESCRIPTION INDUSTRY % GAIN ---------------------------------------------------------------------------------------- 1 US Unwired Inc Telecommunications 79.1% 2 Bluegreen Corp Entertainment 77.4% 3 EZCORP Inc Retail 77.1% 4 Illumina Inc Biotechnology 60.4% 5 Cantel Medical Corp Healthcare-Products 55.9% 6 Ubiquitel Inc Telecommunications 53.8% 7 NS Group Inc Metal Fabricate/Hardware 52.3% 8 Jakks Pacific Inc Toys/Games/Hobbies 42.4% 9 Greenbrier Cos Inc Trucking & Leasing 41.0% 10 RPC Inc Oil & Gas Services 40.5% 11 Digital River Inc Internet 39.7% 12 Comtech Telecommunications Telecommunications 38.8% 13 HUB Group Inc Transportation 38.5% 14 LCA-Vision Inc Healthcare-Products 36.0% 15 Steiner Leisure LTD Commercial Services 33.6% 16 Building Materials Holding Corp Distribution/Wholesale 33.0% 17 Trizetto Group Internet 32.4% 18 Ambassadors Group Inc Leisure Time 31.9%
EZCORP, Inc., a chain of pawn shops and "payday loan" providers based in Austin, TX, was a surprisingly good member of the team. The company's stock had suffered during the early part of the year, thanks to disappointing financial results, but it jumped by 19% in November when EZCORP announced numbers for its fourth fiscal quarter, indicating that earnings had grown by 66% since the same period in 2003. If EZCORP's profits are based on folks' needing a little extra cash to tide them over, the next company makes it's money at the other end of the spectrum, from people with a bit more money looking for a vacation home. Bluegreen, headquartered in Boca Raton, is primarily in the timeshare business, offering clients "time" at any one of 35 resorts, mostly in the southeastern United States. Between 1999 and 2003 the company's timeshare sales doubled, and it also saw solid growth in interest income (from financing the purchases of timeshares) and sales of land to people who want to build homes in Bluegreen's resort locations. The stock really took off in the fourth quarter of this year, however, when the company paid down a chunk of debt and announced record sales and operating revenues. 3 DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: Our Fund had a very good fourth quarter, gaining in just three months roughly 50% more than the S&P 500 Index has typically gained in an entire year. That doesn't mean we didn't make some bad bets, but only one stock lost more than 30% for the period.
RANK DESCRIPTION INDUSTRY % LOSS 1 SupportSoft Inc Internet -34.7%
SupportSoft, of Redwood City, CA, makes software that essentially checks for problems in primary software applications, like those associated with performing customer-service functions. It then fixes the problems. Unfortunately, in early October the company reported results for its September quarter, which included the fact that revenues were down 9% from the same period in the previous year. The stock lost roughly half its value (though it then regained some ground), and attorneys rushed to file class-action lawsuits. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: What worked well in 2004 was the fourth quarter, so to a large extent, the "good news" stocks of the quarter show up on the "good news" list for the year. For the year, ten stocks gained more than 50%.
RANK DESCRIPTION INDUSTRY % GAIN ---------------------------------------------------------------------------------------- 1 Cantel Medical Corp Healthcare-Products 131.1% 2 NS Group Inc Metal Fabricate/Hardware 97.7% 3 Digital River Inc Internet 88.3% 4 US Unwired Inc Telecommunications 83.6% 5 RPC Inc Oil & Gas Services 73.4% 6 Bluegreen Corp Entertainment 68.3% 7 Ubiquitel Inc Telecommunications 64.6% 8 Petroleum Development Corp Oil & Gas 62.7% 9 EZCORP Inc Retail 58.1% 10 HUB Group Inc Transportation 51.1%
We couldn't wrap up the year without talking briefly about Cantel Medical, which turned in a spectacular triple-digit gain over the past 12 months. Nearly half of that appreciation was in the fourth quarter, when Cantel's stock shot up by 55% on the back of a 73% increase in earnings, year over year, for the fiscal quarter ended October 31. To some extent, Cantel's earnings growth is deceptive; the company does a lot of business with Canada, and the SARS epidemic of 2003 had prevented sales reps from visiting hospitals in the Toronto area. (This is particularly ironic since Cantel's products focus on preventing and controlling the spread of infection.) As a result, earnings for 2003 were unusually weak, making the 2004 comparisons something of a lay-up. Nevertheless, the company has also benefited from a restructuring of its sales force and expectations of yet more business in Canada, thanks to the Canadian government's plan to increase healthcare spending. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: We only had two serious dogs in the Fund this year, but they barked awfully loud, losing more than 50% each. Both are telecommunications companies, an industry which appreciated 15% for the year. This is proof once again that dogs can show up in even solid sectors. 4 We had two stocks that declined by more than 50% in 2004.
RANK DESCRIPTION INDUSTRY % LOSS ---------------------------------------------------------------------------------------- 1 Carrier Access Corp Telecommunications -52.1% 2 Talk America Holdings Inc Telecommunications -52.0%
Carrier Access, the louder of the dogs (by a slender margin) was in part a victim of its own success: After a stunning 2003, when the stock appreciated by an astonishing 3,000% (yes, you read that right), the company saw its stock price drop by more than 50% in July, as consolidation among wireless-phone companies - to which Carrier Access sells equipment - prompted Carrier to warn of sharply reduced sales in the second half of the year. The stock dropped again in September, this time by a "mere" 18%, on further warnings of a revenue shortfall, and wasn't helped by the departure, in November, of the company's CFO. Talk America, by contrast, sells "bundled" phone service (local plus long-distance). Between March and September, the stock lost about half its value, thanks to an FCC ruling that cost the company its previously bargain-priced access to phone lines owned by former "Baby Bells" such as Verizon and BellSouth. In November the stock jumped by 17% on bright expectations for the fourth quarter, but that gain came as a drop in the bucket, and we closed out the year with a painful 52% loss in our position. TOP TEN HOLDINGS Our top ten holdings comprised 38.2% of the Fund's net assets at the end of December, with only one company comprising more than 5%:
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ---------------------------------------------------------------------------------------- 1 United Industrial Corp Aerospace/Defense 5.5% 2 NS Group Inc Metal Fabricate/Hardware 4.1% 3 Comtech Telecommunications Telecommunications 4.1% 4 ASV Inc Auto Manufacturers 4.1% 5 Steiner Leisure LTD Commercial Services 3.8% 6 Bluegreen Corp Entertainment 3.7% 7 Metals USA Inc Metal Fabricate/Hardware 3.5% 8 j2 Global Communications Inc Internet 3.3% 9 Middleby Corp Machinery-Diversified 3.1% 10 Digital River Inc Internet 3.0% ---------------------------------------------------------------------------------------- 38.2%
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004 At quarter end, Industrials comprised our largest sector representation at 24.6% of all stocks, followed by Consumer, Cyclical at 17.7% and Communications at 16.5%. The following full table fulfills a new disclosure requirement of the SEC.
SECTOR % OF STOCKS Basic Materials 4.3% Communications 16.5% Consumer, Cyclical 17.7% Consumer, Non-cyclical 14.8% Energy 8.2% Financial 2.9% Industrial 24.6% Technology 11.0% TOTAL 100.0%
5 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. These views are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. THE FUND IS SUBJECT TO ABOVE AVERAGE MARKET RISK (VOLATILITY) AND IS NOT AN APPROPRIATE INVESTMENT FOR SHORT-TERM INVESTORS. INVESTMENTS IN SMALL COMPANIES GENERALLY CARRY GREATER RISK THAN IS CUSTOMARILY ASSOCIATED WITH LARGER COMPANIES FOR VARIOUS REASONS SUCH AS NARROWER MARKETS, LIMITED FINANCIAL RESOURCES AND LESS LIQUID STOCK. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY MICRO-CAP LIMITED FUND
BEGINNING ENDING EXPENSEPAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 -------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,137.38 $ 9.84 Hypothetical Fund Return $ 1,000.00 $ 1,016.00 $ 9.28
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.83% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 100.0% ADVERTISING - 0.5% Ventiv Health Inc* 16,100 $ 327,152 AEROSPACE/DEFENSE - 5.5% United Industrial Corp 88,500 3,428,490 AUTO MANUFACTURERS - 4.1% ASV Inc* 53,113 2,544,113 AUTO PARTS & Equipment - 0.6% Noble International Ltd 19,500 397,605 BANKS - 0.6% Old Second Bancorp Inc 12,254 390,658 BIOTECHNOLOGY - 0.7% Illumina Inc* 42,602 403,867 COMMERCIAL SERVICES - 4.8% ACE Cash Express Inc* 21,000 622,860 Steiner Leisure Ltd* 78,050 2,332,134 -------------- 2,954,994 COMPUTERS - 1.0% Agilysys Inc 36,000 617,040 DISTRIBUTION/WHOLESALE - 2.4% Building Materials Holding Corp 39,100 1,497,139 ELECTRONICS - 3.9% II-VI Inc* 27,000 1,147,230 Itron Inc* 39,500 944,445 Molecular Devices Corp* 15,000 301,500 -------------- 2,393,175 ENTERTAINMENT - 3.8% Bluegreen Corp* 116,900 2,318,127 ENVIRONMENTAL CONTROL - 0.2% Duratek Inc* 5,200 129,532 FOOD - 0.9% Nash Finch Co 15,000 566,400 HEALTHCARE PRODUCTS - 3.9% Cantel Medical Corp* 13,400 501,428 LCA - Vision Inc 62,550 1,463,044 Lifeline Systems Inc* 17,200 443,072 -------------- 2,407,544 HEALTHCARE SERVICES - 4.2% Amedisys Inc* 52,900 1,713,431 America Service Group Inc* 21,150 566,185 Res-Care Inc* 20,300 308,966 -------------- 2,588,582 INSURANCE - 0.7% Penn-America Group Inc 26,700 403,170 INTERNET - 7.2% Digital River Inc* 44,700 $ 1,859,967 j2 Global Communications Inc* 58,900 2,032,050 Trizetto Group Inc* 60,000 570,000 -------------- 4,462,017 IRON/STEEL - 3.0% Ryerson Tull Inc 116,700 1,838,025 LEISURE TIME - 0.9% Ambassadors Group Inc 15,000 534,150 MACHINERY-DIVERSIFIED - 3.1% Middleby Corp 38,200 1,937,504 METAL FABRICATE/HARDWARE - 7.6% Metals USA Inc* 116,400 2,159,220 NS Group Inc* 92,300 2,565,940 -------------- 4,725,160 MINING - 1.3% Titanium Metals Corp* 34,000 820,760 OIL & GAS - 7.7% Giant Industries Inc* 45,000 1,192,950 Petroleum Development Corp* 25,600 987,392 Plains Exploration & Production Co* 58,774 1,528,124 Goodrich Petroleum Corp* 65,800 1,066,618 -------------- 4,775,084 OIL & GAS SERVICES - 0.5% RPC Inc 13,000 326,560 PHARMACEUTICALS - 0.4% National Medical Health Card Systems Inc* 11,100 256,421 RETAIL - 5.8% Brookstone Inc* 49,396 965,692 Denny's Corp 47,000 211,500 EZCORP Inc* 17,694 272,665 The Pantry Inc* 33,616 1,011,505 Smart & Final Inc* 40,000 575,600 Systemax Inc* 74,800 549,032 -------------- 3,585,994 SAVINGS & LOANS - 1.5% Sterling Financial Corp* 23,328 915,857 SEMICONDUCTORS - 0.8% ADE Corp* 27,800 520,416 SOFTWARE - 9.2% Quality Systems Inc* 24,200 1,447,160 SS&C Technologies Inc 86,500 1,786,225 Seachange International Inc* 91,000 1,587,040 Witness Systems Inc* 50,000 873,000 -------------- 5,693,425
8
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- TELECOMMUNICATIONS - 8.7% ACT Teleconferencing Inc* 207,287 $ 273,619 Comtech Telecommunications Corp* 68,000 2,557,480 Ubiquitel Inc* 237,000 1,687,440 US Unwired Inc* 182,300 875,040 -------------- 5,393,579 TOYS/GAMES/HOBBIES - 0.2% Jakks Pacific Inc* 4,580 101,264 TRANSPORTATION - 3.0% HUB Group Inc, Class A* 25,700 1,342,054 Nordic American Tanker Shipping Ltd 12,500 488,125 -------------- 1,830,179 TRUCKING & LEASING - 1.3% Greenbrier Companies Inc 23,500 795,475 -------------- TOTAL COMMON STOCKS (Cost $41,531,042) 61,879,458 -------------- MONEY MARKET MUTUAL FUNDS - 0.3% First American Treasury Obligations Fund - Class S 188,161 188,161 -------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $188,161) 188,161 -------------- TOTAL INVESTMENTS - 100.3% (Cost $41,719,203) 62,067,619 Liabilities in Excess of other Assets - (0.3%) (177,811) -------------- NET ASSETS - 100.0% $ 61,889,808 ==============
* Non-income producing security SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED)
ASSETS: Investments at value (cost - $41,719,203) $ 62,067,619 Receivable for fund shares sold 9,909 Dividends receivable 4,598 Interest receivable 2,649 Prepaid expenses 2,033 ------------------------------------------------------------------------------------------------------------- Total assets 62,086,808 ------------------------------------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 52 Accrued investment adviser fee 132,928 Accrued administration fee 25,555 Accrued directors fee 817 Other payables 37,648 ------------------------------------------------------------------------------------------------------------- Total liabilities 197,000 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 61,889,808 ============================================================================================================= NET ASSETS REPRESENT: Paid-in capital $ 40,115,752 Accumulated net investment loss (437,808) Accumulated net realized gain on investments 1,863,448 Net unrealized appreciation of investments 20,348,416 ------------------------------------------------------------------------------------------------------------- NET ASSETS $ 61,889,808 ============================================================================================================= Shares of common stock outstanding of $.001 par value, 10,000,000 shares authorized 6,033,553 ------------------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 10.26 =============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED)
INVESTMENT INCOME: Dividends $ 61,204 Interest 10,061 ------------------------------------------------------------------------------------------------------------- Total investment income 71,265 EXPENSES: Investment advisory fees 420,405 Administration fees 13,929 Accounting fees 25,631 Transfer agent fees 22,310 Audit fees 5,093 Tax fees 6,013 Custody fees 3,499 Legal fees 2,846 Blue sky fees 3,520 Directors fees 1,106 Miscellaneous 4,721 ------------------------------------------------------------------------------------------------------------- Total expenses 509,073 NET INVESTMENT LOSS (437,808) ------------------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investment securities 1,628,268 Net change in unrealized appreciation / depreciation on investments 6,290,618 ------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 7,918,886 ------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,481,078 =============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 ------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (437,808) $ (966,813) Net realized gain on investment securities 1,628,268 16,897,460 Net change in unrealized appreciation / depreciation on investments 6,290,618 (1,547,034) ------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 7,481,078 14,383,613 ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net realized gain (10,119,533) (5,574,303) ------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (10,119,533) (5,574,303) ------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 112,310 745,182 Reinvestment of distributions 9,801,849 5,230,736 Cost of shares redeemed (3,136,199) (13,457,002) ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from share transactions 6,777,960 (7,481,084) ------------------------------------------------------------------------------------------------------------------- Net increase in net assets 4,139,505 1,328,226 NET ASSETS: Beginning of period 57,750,303 56,422,077 ------------------------------------------------------------------------------------------------------------------- End of period ** $ 61,889,808 $ 57,750,303 =================================================================================================================== SHARES ISSUED & REDEEMED: Issued 10,786 69,944 Distributions reinvested 947,955 460,436 Redeemed (297,296) (1,185,129) ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) 661,445 (654,749) Outstanding at beginning of period 5,372,108 6,026,857 ------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 6,033,553 5,372,108 =================================================================================================================== * Unaudited ** Including accumulated net investment loss of: $ (437,808) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEAR ENDEDJUNE 30, 2004** 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.75 $ 9.36 $ 10.19 $ 9.92 $ 7.86 $ 6.38 ---------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: ---------------------------------------------------------------------------------------------------------------------------------- Net investment loss^ (0.08) (0.17) (0.11) (0.12) (0.05) (0.09) Net realized and unrealized gain 1.57 2.49 0.01 0.87 2.53 1.87 ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.49 2.32 (0.10) 0.75 2.48 1.78 ---------------------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net realized gain (1.98) (0.93) (0.73) (0.48) (0.42) (0.30) ---------------------------------------------------------------------------------------------------------------------------------- Total distributions (1.98) (0.93) (0.73) (0.48) (0.42) (0.30) ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.26 $ 10.75 $ 9.36 $ 10.19 $ 9.92 $ 7.86 ================================================================================================================================== TOTAL RETURN+ 13.74% # 24.30% 0.93% 8.09% 33.64% 28.73% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 61,890 $ 57,750 $ 56,422 $ 57,885 $ 51,451 $ 24,773 Ratios to average net assets: Expenses after waivers and reimbursements 1.83%* 1.79% 1.90% 1.90% 1.90% 1.90% Expenses before waivers and reimbursements 1.83%* 1.79% 2.13% 1.94% 2.09% 2.36% Net investment loss after waivers and reimbursements (1.57%)* (1.50%) (1.35%) (1.22%) (0.62%) (1.25%) Portfolio turnover rate 41.0% 98.2% 99.1% 124.0% 74.3% 86.7%
* ANNUALIZED ** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 10,000,000 shares have been classified into the Micro-Cap Limited Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Micro-Cap Limited Fund was offered to the public beginning June 22, 1998 in accordance with the subscription offering. Until July 1, 1998, the Fund's operations were restricted to accepting subscription funds. On July 1, 1998, the Fund began investing in micro-cap stocks and commenced other operations. The Fund closed to new investors when net assets exceeded $27.5 million on August 21, 2000, and closed to all investors on July 7, 2003. The Micro-Cap Limited Fund seeks to provide a long-term total return of capital, primarily through capital appreciation. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Micro-Cap Limited Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. 14 The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004, there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the 15 current market value of the option written. If an option that the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option that the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option that the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security that the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. All options purchased by the Fund were listed on exchanges and considered liquid positions with readily available market quotes. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the following annual rates: 0.90% of the first $250 million of the Fund's average daily net assets, 0.875% of the next $250 million and 0.85% of any excess over $500 million. However, during the quarter that the Fund's net assets range from $27,500,000 to $55,000,000 the Advisory Fee will be determined as if the Fund had $55,000,000 under management (that is, $55 million times 0.009 equals $495,000). This is limited to a maximum annualized ratio of 1.49% of the assets in the quarter the Advisory Fee is determined. The Performance Adjustment equals 2.87% times the difference in cumulative total return between the Fund and the CRSP Cap-based Portfolio 9 Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. The Performance Adjustment Rate varies from a minimum of -0.70% to a maximum of +0.70% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. On September 15, 2004, the Securities and Exchange Commision ("SEC") announced that it accepted a settlement offer to an administrative proceeding against the Adviser and John Montgomery concerning non-compliance with Rule 205-2 of the Investment Advisers Act of 1940, dealing with the calculation of performance-based fees of the Fund. Rule 205-2 requires the performance rate to be applied to the average of net assets over the performance period (a five-year rolling period for this Fund) rather than average daily net assets as was done previously. Because the assets were generally increasing over time and the Fund had beaten its market benchmark over most time periods, the Fund overpaid advisory fees in the amount of $307,989. The Adviser will repay this amount, plus interest, to current and previous shareholders of the Fund after SEC approval of a proposed repayment plan. In addition, current shareholders must approve new contracts between the Fund and the Adviser at an upcoming shareholder meeting. Both the Fund and Adviser have taken steps necessary to strengthen the compliance program. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 1.90% of the value of its average net assets for the six months ended 16 December 31, 2004. There were no reimbursements to the Fundfor thesix months ended December 31, 2004. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Micro-Cap Limited Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $22,685,058 and $26,901,428, respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 20,768,491 Gross unrealized (depreciation) (420,075) -------------------------------------------------------------- Net unrealized appreciation on investments $ 20,348,416 ============================================================== Cost of investments $ 41,719,203 ==============================================================
As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 5,138,085 Accumulated capital gains 5,216,628 Unrealized appreciation 14,057,798
The temporary differences between book and tax are primarily due to wash sales and post October losses. As of June 30, 2004, the tax character of the distributions paid were:
YEAR ENDED YEARENDED JUNE 30, 2004 JUNE 30, 2003 ------------------------------------------------------------ Ordinary income $ 1,375,981 $ - Long-term capital gains 5,054,263 3,989,955 Return on capital - 18,006
Distribuitions of net realized short-term capital gains are, for federal income tax purposes, taxable as ordinary income to shareholders. The ordinary income distributions did not qualify for the dividends received deductions of corporate shareholders. 17 During the year ended June 30, 2004, the Fund paid a long-term capital gain of $0.7309 per share to shareholders of record. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 18 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 35% of the Fund. 19 [BRIDGEWAY FUNDS LOGO] SMALL-CAP GROWTH FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Small-Cap Growth Shareholder, Our Fund had a positive return of 16.46% for the December 2004 quarter, compared to a 15.08% return for our primary market benchmark, the Russell 2000 Growth Index, and a 14.86% return of our peer benchmark, the Lipper Small-Cap Growth Index. The table below presents our performance for the December quarter and 1 year, and annualized performance since inception, followed by a graph of performance since inception as well as a new, SEC-mandated breakdown of sector representation in the Fund.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 10/31/03 TO 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------- SMALL-CAP GROWTH FUND-CLASS N 16.46% 11.59% 12.39% SMALL-CAP GROWTH FUND-CLASS R 16.50% 11.39% 12.22% Russell 2000 Growth Index 15.08% 14.31% 15.71% Lipper Small-Cap Growth Index 14.86% 10.79% 11.80%
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com THE RUSSELL 2000 GROWTH INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN THE RUSSELL 2000 INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH VALUES. THE LIPPER SMALL-CAP GROWTH INDEX IS AN INDEX OF SMALL-COMPANY, GROWTH-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. [CHART] GROWTH OF $10,000 INVESTED IN SMALL-CAP GROWTH FUND AND INDEXES FROM 10/31/03 (INCEPTION) TO 12/31/04
BRIDGEWAY BRIDGEWAY LIPPER SMALL-CAP GROWTH FUND - CLASS N SMALL-CAP GROWTH FUND - CLASS R RUSSELL 2000 INDEX SMALL-CAP GROWTH FUND INDEX 10/03 10000 10000 10000 10000 12/03 10270 10270 10372 10281 3/04 10520 10510 10951 10647 6/04 10840 10830 10961 10633 9/04 9840 9820 10302 9917 12/04 11460 11440 11856 11390
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
INDUSTRY % OF NET ASSETS ---------------------------------------------- Basic Materials 1.0% Communications 16.7% Consumer, Cyclical 24.9% Consumer, Non-cyclical 24.6% Energy 5.0% Financial 3.5% Industrial 13.5% Technology 10.8% ---------------------------------------------- TOTAL 100.0%
PERFORMANCE SUMMARY TRANSLATION: For the December quarter, both share classes of the Fund beat both the Russell 2000 Growth Index of small, growth-oriented stocks and the peer-group average. For the year, however, both share classes of the Fund underperformed the Russell 2000 Growth Index, but outperformed the peer-group average. WE ARE NOT PLEASED WITH THESE RESULTS. However, the difference in the Fund's relative performance for the quarter and the year is interesting: Clearly, we were lagging our benchmark index and our peer group fairly badly during the first nine months of the year, and then sprinted ahead in the final quarter, though not quite enough to make up for the earlier shortfall. We say this not to excuse our performance, but because it offers a good reminder of the value of sticking with investment decisions and resisting panic and the urge to sell when things look less than great. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well- managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). In conclusion, what is remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect 2 to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance - hardly what investors in a large-stock fund want to hear. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks, building on a very bad five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years ended 12/31/04, based on data from Morningstar: This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock- [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
3 market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: The Communications sector really came through for us in the fourth quarter of the year: Four stocks - three of them in Communications - appreciated by more than 50% for the period.
RANK DESCRIPTION INDUSTRY % GAIN ----------------------------------------------------------------------------------- 1 Travelzoo Inc. Internet 83.5% 2 UbiquiTel Inc. Telecommunications 78.0% 3 Essex Corp. Telecommunications 75.6% 4 Faro Technologies Inc. Electronics 53.3%
Travelzoo crawls the web looking for travel-related deals, which it passes on to readers of its newsletters and website. On April 25, the company was still a tiny Internet outfit that few people had heard of. But on April 26, the company announced its first-quarter numbers. Earnings, said Travelzoo, were up 160% over the previous year, on revenue gains of 70%. Flash forward to third-quarter results, which featured a 240% rise in earnings and a doubling of revenues. Flash again to the end of the year, at which point Travelzoo had seen its share price increase by an astonishing 1003% in 12 months. This has been a momentum-story par excellence - sometimes they really do work - and our only regret is that we didn't buy the company a lot earlier. Second-best performer UbiquiTel had a much less dramatic year, though its transition to profitability, in the third quarter, propelled the stock to a pretty impressive gain in the last three months of 2004. It didn't hurt that the company - which provides wireless phone service in the western part of the country - had boosted its subscriber-base by 32% over the third quarter of 2003. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: We're happy to say that no stocks in the Fund lost more than 50% in the December quarter. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED TRANSLATION: Thirteen stocks in the Fund gained more than 50% for the year, and five of them appreciated by more than 100%.
RANK DESCRIPTION INDUSTRY % GAIN ----------------------------------------------------------------------------------- 1 Ceradyne Inc Miscellaneous Manufacturing 125.8% 2 Urban Outfitters Inc Retail 121.7% 3 Essex Corp. Telecommunications 112.2% 4 Marine Products Corp Leisure Time 107.3% 5 Travelzoo Inc. Internet 104.7% 6 Ubiquitel Inc Telecommunications 76.3% 7 Deckers Outdoor Corp Apparel 73.3% 8 Cognizant Tech. Solutions Corp Computers 72.1% 9 Coldwater Creek Inc Retail 65.1% 10 JB Hunt Transport Services Inc Transportation 63.2% 11 Guitar Center Inc Retail 61.4% 12 Bright Horizons Family Sol. Inc Commercial Services 54.2% 13 Infospace Inc Internet 52.6%
4 Had we bought into Travelzoo just a little earlier (see section on quarterly results, above), it would almost certainly have been our top performer for the year. Still, we don't have much quarrel with a 104% return, and we're happy to highlight Ceradyne, which does head the list. Ceradyne makes a variety of sophisticated ceramic products that are used in medical and industrial applications. What fueled the stock this year, though, were Ceradyne's defense-related products, including ceramic plates used to protect Humvees and other military vehicles. With U.S. soldiers busy in Iraq, Afghanistan, and elsewhere, the company had a lot of business; earnings for the first quarter were up 181% over the same period in 2003, and that pattern persisted for the rest of the year, with the stock price marching right alongside. Interestingly, the second-best performer, Urban Outfitters, was also a steady gainer for the year. The good news started with the release of the company's results from the fiscal fourth quarter of 2003 (ended January 31). The upscale retailer of trendy women's clothing and accessories had doubled its net income in that quarter, thanks to strong revenue growth, and the stock began to climb. Despite the spring rollout of a spectacularly offensive series of products - the company logged 250,000 angry email responses to one refrigerator magnet alone - Urban Outfitters continued to prosper; in the third quarter, the company boosted earnings by 88% over the same period in the previous year, on strong increases in same-store sales. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: Semiconductors and Pharmaceuticals were two of the hardest-hit sectors in the market this year, so it's not surprising that stocks from those sectors show up on our list of biggest losers of 2004. And Corinthian Colleges may fall in the "Commercial Services" sector, according to Bloomberg, but less euphemistically, it's in the for-profit education business - a business that spent much of the year mired in scandal, with Corinthian no exception. We're relieved that only three stocks in our Fund lost more than 50% for the year.
RANK DESCRIPTION INDUSTRY % LOSS ----------------------------------------------------------------------------------- 1 aaiPharma Inc Pharmaceuticals -81.1% 2 Corinthian Colleges Inc Commercial Services -59.4% 3 Cypress Semiconductor Corp Semiconductors -58.6%
Very simply, Cypress Semiconductor went from misery to misery this year, with one earnings disappointment after another, and the stock followed suit. By the third quarter, the company was acknowledging that its problem with excess inventory had extended across all its business lines. We sold the stock in October. aaiPharma was also an extended tale of disappointing earnings. In this instance, though, the feeble numbers were compounded by the departure of first one and then another CEO, by a lawsuit stemming from a reconsidered merger, and by problems with the board of directors, which was asking questions about the company's excess inventory and accounting glitches. That's the kind of board we like, but we sure didn't like the stock this year. Fortunately this was a small diversifying position and we sold this stock in early June. Corinthian Colleges operates some 90 schools and colleges across the country. The stock essentially coasted through the first quarter, but then the lawsuits began, alleging inappropriate use of student financial-aid documents, violations of regulations relating to federal financial-aid programs, and fraud. The SEC got interested. By July, the company was warning that it earnings for both its fourth fiscal quarter and its full fiscal year would miss analyst estimates, thanks in part to publicity surrounding the litigation and SEC investigation. As it happens, the fourth quarter turned out to be less painful than the company had projected, but by that point, the damage had been done. We sold this stock in August. TOP TEN HOLDINGS At the end of the quarter, the Consumer, Cyclical sector was our largest sector weighting, at 24.9% of net assets, followed by Consumer, Non-cyclical at 24.6%, and Communications, at 16.7%. Our top ten holdings represented 24.0% of total net assets, and ten different industries. 5
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ------------------------------------------------------------------------------------- 1 Ceradyne Inc Miscellaneous Manufacturing 4.2% 2 Cognizant Tech. Solutions Corp Computers 2.8% 3 Urban Outfitters Inc Retail 2.5% 4 JB Hunt Transport Services Inc Transportation 2.5% 5 Armor Holdings Inc Aerospace/Defense 2.1% 6 CNET Networks Inc Internet 2.1% 7 Deckers Outdoor Corp Apparel 2.0% 8 Navigant Consulting Inc Commercial Services 2.0% 9 Matrixx Initiatives Inc Pharmaceuticals 1.9% 10 DaVita Inc Healthcare Services 1.9% ---------------------------------------------------------------------------------- 24.0%
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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in small companies carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY SMALL-CAP GROWTH FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ----------------------------------------------------------------------------------------------- CLASS N Actual Fund Return $ 1,000.00 $ 1,057.20 $ 4.87 Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78 CLASS R Actual Fund Return $ 1,000.00 $ 1,056.33 $ 6.16 Hypothetical Fund Return $ 1,000.00 $ 1,019.21 $ 6.05
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.94% AND 1.19% FOR CLASS N AND CLASS R, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 98.4% ADVERTISING - 0.5% Ventiv Health Inc* 12,975 $ 263,652 AEROSPACE/DEFENSE - 6.1% Armor Holdings Inc* 24,800 1,166,096 Engineered Support Systems Inc 16,900 1,000,818 Teledyne Technologies Inc* 8,000 235,440 United Defense Industries Inc* 13,100 618,975 United Industrial Corp 7,000 271,180 -------------- 3,292,509 APPAREL - 2.8% Deckers Outdoor Corp* 23,400 1,099,566 Guess ? Inc* 33,700 422,935 -------------- 1,522,501 BANKS - 3.2% Old Second Bancorp Inc 7,800 248,664 PrivateBancorp Inc 24,200 779,966 Western Sierra Bancorp* 18,450 707,650 -------------- 1,736,280 BEVERAGES - 0.9% Hansen Natural Corp* 14,100 513,381 BIOTECHNOLOGY - 3.3% Affymetrix Inc* 24,400 891,820 Arqule Inc* 19,050 110,299 Invitrogen Corp* 11,500 771,995 -------------- 1,774,114 CHEMICALS - 1.7% Eastman Chemical Co 14,000 808,220 The Mosaic Co* 8,000 130,560 -------------- 938,780 COAL - 0.3% Peabody Energy Corp 2,000 161,820 COMMERCIAL SERVICES - 7.8% Bright Horizons Family Solutions Inc* 4,400 284,944 Education Management Corp* 12,300 406,023 ITT Educational Services Inc* 13,256 630,323 Korn/Ferry International* 19,500 404,625 Manning (Greg) Auctions Inc*+ 49,600 614,048 Navigant Consulting Inc* 40,660 1,081,556 PDI Inc* 9,500 211,660 Strayer Education Inc 5,740 630,195 -------------- 4,263,374 COMPUTERS - 3.2% AMX Corp* 12,800 210,816 Cognizant Technology Solutions Corp* 36,440 1,542,505 -------------- 1,753,321 DISTRIBUTION/WHOLESALE - 0.6% Navarre Corp* 18,100 318,560 ELECTRICAL COMPONENTS & EQUIPMENT - 0.5% Artesyn Technologies Inc* 26,300 297,190 ELECTRONICS - 2.1% Faro Technologies Inc* 22,500 $ 701,550 Keithley Instruments Inc 16,300 321,110 Zygo Corp* 10,000 117,900 -------------- 1,140,560 HEALTHCARE PRODUCTS - 4.0% Advanced Neuromodulation Systems Inc* 11,600 457,736 LCA-Vision Inc 38,850 908,702 Techne Corp* 20,100 781,890 -------------- 2,148,328 HEALTHCARE SERVICES - 3.4% Amedisys Inc* 10,100 327,139 Davita Inc* 25,785 1,019,281 UnitedHealth Group Inc 5,625 495,169 -------------- 1,841,589 HOUSEHOLD PRODUCTS/WARES - 1.7% Yankee Candle Co Inc* 27,600 915,768 INTERNET - 9.8% 1-800-FLOWERS.COM Inc - Class A* 63,500 534,035 CNET Networks Inc* 100,400 1,127,492 Cybersource Corp* 34,300 245,245 Digital River Inc* 7,000 291,270 Earthlink Inc* 65,400 753,408 Infospace Inc* 2,725 129,574 LookSmart Ltd* 82,300 180,237 Macrovision Corp* 8,700 223,764 NetFlix Inc* 6,400 78,912 Sapient Corp* 42,250 334,198 Travelzoo Inc* 4,000 381,720 United Online Inc* 36,700 423,151 WebEx Communications Inc* 25,200 599,256 -------------- 5,302,262 IRON/STEEL - 1.5% Carpenter Technology Corp 8,900 520,294 Schnitzer Steel Industries Inc 9,300 315,549 -------------- 835,843 LEISURE TIME - 1.1% Marine Products Corp 22,800 595,308 MACHINERY DIVERSIFIED - 1.1% Middleby Corp 11,500 583,280 METAL FABRICATE/HARDWARE - 0.2% Timken Co 4,825 125,546 MINING - 0.4% Titanium Metals Corp* 8,800 212,432 MISCELLANEOUS MANUFACTURING - 4.8% Actuant Corp* 6,000 312,900 Ceradyne Inc* 40,100 2,294,121 -------------- 2,607,021 OFFICE FURNISHING - 1.3% HNI Corp 16,300 701,715
8
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- OIL & GAS - 1.8% Petroleum Development Corp* 10,200 $ 393,414 Southwestern Energy Co* 11,700 593,073 -------------- 986,487 OIL & GAS SERVICES - 0.5% Maverick Tube Corp* 8,700 263,610 PHARMACEUTICALS - 4.0% Eon Labs Inc* 29,000 783,000 Kos Pharmaceuticals Inc* 5,200 195,728 Matrixx Initiatives Inc* 91,200 1,057,008 Tanox Biosystems* 9,900 150,480 -------------- 2,186,216 RETAIL - 15.0% CEC Entertainment Inc* 18,000 719,460 Chico's FAS Inc* 17,700 805,881 Claire's Stores Inc 34,100 724,625 Coldwater Creek Inc* 9,400 290,178 Copart Inc* 24,300 639,576 Cosi Inc* 30,700 185,735 Cost Plus Inc* 7,900 253,827 Electronics Boutique Holdings Corp* 13,300 571,102 Guitar Center Inc* 5,680 299,279 MarineMax Inc* 8,250 245,520 O'Reilly Automotive Inc* 16,900 761,345 The Sportsman's Guide Inc* 40,100 902,250 TBC Corp* 13,300 369,740 Urban Outfitters Inc* 30,800 1,367,520 -------------- 8,136,038 SEMICONDUCTORS - 1.7% ADE Corp* 14,400 269,568 Pixelworks Inc* 48,000 544,320 PLX Technology Inc* 8,300 86,320 -------------- 900,208 SOFTWARE - 4.4% Avid Technology Inc* 4,572 282,321 IDX Systems Corp* 23,790 819,803 Novell Inc* 37,700 254,475 SS&C Technologies Inc 14,850 306,652 Transaction Systems Architects Inc* 36,200 718,570 -------------- 2,381,821 TELECOMMUNICATIONS - 5.0% Essex Corp* 18,700 378,675 Plantronics Inc 22,500 933,075 Ubiqitel Inc* 34,900 248,488 Viasat Inc* 24,400 592,188 Western Wireless Corp* 20,100 588,930 -------------- 2,741,356 TOYS/GAMES/HOBBIES - 1.2% Marvel Enterprises Inc* 31,500 645,120 TRANSPORTATION - 2.5% JB Hunt Transport Services Inc 30,250 1,356,712 -------------- TOTAL COMMON STOCKS (Cost $45,099,908) 53,442,702 -------------- TOTAL INVESTMENTS - 98.4% (Cost $45,099,908) $ 53,442,702 Other Assets In Excess of Liabilities - 1.6% 891,594 -------------- NET ASSETS - 100.0% $ 54,334,296 ==============
* NON-INCOME PRODUCING SECURITY + THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31, 2004 TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $614,048 AT DECEMBER 31, 2004 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $45,099,908) $ 53,442,702 Receivable for investments sold 120,498 Receivable for fund shares sold 1,023,384 Dividends receivable 4,716 Interest receivable 1,509 Prepaid expenses 21,669 ------------------------------------------------------------------------------------------------- Total assets 54,614,478 ------------------------------------------------------------------------------------------------- LIABILITIES: Overdraft 98,307 Payable for fund shares redeemed 90,505 Accrued investment adviser fee 22,722 Accrued administration fee 2,944 Accrued directors fee 298 Accrued distribution fee 6,534 Other payables 58,872 ------------------------------------------------------------------------------------------------- Total liabilities 280,182 ------------------------------------------------------------------------------------------------- NET ASSETS $ 54,334,296 ================================================================================================= NET ASSETS REPRESENT: Paid-in capital $ 49,605,898 Accumulated net investment loss (186,732) Accumulated net realized loss on investments (3,427,664) Net unrealized appreciation of investments 8,342,794 ------------------------------------------------------------------------------------------------- NET ASSETS $ 54,334,296 ================================================================================================= NET ASSET VALUE PER SHARE Net assets Class N $ 44,027,508 Class R $ 10,306,788 Shares of beneficial interest outstanding of $.001 par value Class N, 100,000,000 shares authorized 3,841,039 Class R, 40,000,000 shares authorized 901,190 Net asset value, offering and redemption price per share Class N $ 11.46 Class R $ 11.44
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 46,984 Interest 900 Securities lending 1,927 ------------------------------------------------------------------------------------------------- Total investment income 49,811 EXPENSES: Investment advisory fees 143,535 Administration fees 11,962 Accounting fees 27,790 Transfer agent fees 37,600 Audit fees 7,025 Tax fees 1,830 Custody fees 6,059 Legal fees 5,965 Blue sky fees 3,864 Distribution fees - Class R 11,819 Directors fees 916 Registration fees 1,974 Reports to shareholders 2,500 Miscellaneous 1,648 ------------------------------------------------------------------------------------------------- Total expenses before fees waived 264,487 Less investment advisory fees waived (27,944) ------------------------------------------------------------------------------------------------- Net expenses 236,543 ------------------------------------------------------------------------------------------------- NET INVESTMENT LOSS (186,732) ------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (2,935,667) Net change in unrealized appreciation / depreciation on investments 6,165,925 ------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 3,230,258 ------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,043,526 =================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED PERIOD ENDED DECEMBER 31, 2004* JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (186,732) $ (141,551) Net realized loss on investment securities (2,935,667) (491,997) Net change in unrealized appreciation / depreciation on investments 6,165,925 2,176,869 ------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 3,043,526 1,543,321 ------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares Class N 10,460,642 44,725,291 Class R 1,241,226 11,391,083 Cost of shares redeemed Class N (6,956,724) (8,038,046) Class R (1,834,159) (1,241,864) ------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from share transactions 2,910,985 46,836,464 ------------------------------------------------------------------------------------------------------------------------- Net increase in net assets 5,954,511 48,379,785 NET ASSETS: Beginning of period 48,379,785 0 ------------------------------------------------------------------------------------------------------------------------- End of period *** $ 54,334,296 $ 48,379,785 ========================================================================================================================= SHARES ISSUED & REDEEMED: Issued Class N 1,026,434 4,279,022 Class R 119,209 1,079,752 Redeemed Class N (686,916) (777,501) Class R (179,216) (118,555) ------------------------------------------------------------------------------------------------------------------------- Net increase 279,511 4,462,718 Outstanding at beginning of period 4,462,718 0 ------------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 4,742,229 4,462,718 ========================================================================================================================= * Unaudited ** Commenced operations on October 31, 2003 *** Including accumulated net investment loss of: $ (186,732) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED) CLASS N
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.84 $ 10.00 ------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.04) (0.05) Net realized and unrealized gain 0.66 0.89 ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.62 0.84 ------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.46 $ 10.84 ========================================================================================================================= TOTAL RETURN+# 5.72% 8.40% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 44,028 $ 37,968 Ratios to average net assets: Expenses after waivers and reimbursements* 0.94% 0.94% Expenses before waivers and reimbursements* 1.06% 1.25% Net investment loss after waivers and reimbursements* (0.73%) (0.74%) Portfolio turnover rate 16.2% 16.6%
Class R
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.83 $ 10.00 ------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.05) (0.05) Net realized and unrealized gain 0.66 0.88 ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.61 0.83 ------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.44 $ 10.83 ========================================================================================================================= TOTAL RETURN+# 5.63% 8.30% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 10,307 $ 10,412 Ratios to average net assets: Expenses after waivers and reimbursements* 1.19% 1.19% Expenses before waivers and reimbursements* 1.31% 1.44% Net investment loss after waivers and reimbursements* (0.98%) (0.99%) Portfolio turnover rate 16.2% 16.6%
* ANNUALIZED ** COMMENCED OPERATIONS ON OCTOBER 31, 2003. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 100,000,000 and 40,000,000 shares have been classified into Class N and Class R of the Small-Cap Growth Fund, respectively. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Small-Cap Growth Fund seeks to provide long-term total return of capital, primarily through capital appreciation. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Small-Cap Growth Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had securities on loan valued at $614,048 and received U.S. Treasury securities with a value of $628,027 as collateral. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 14 management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. Fees provided for under the Rule 12b-1 plan of a particular class of the fund are charged to the operations of such class. All other expenses are allocated among the classes on relative net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004, there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser. As compensation for the advisory services rendered, 15 facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the annual rate of 0.60% of the value of the Fund's average daily net assets. The Performance Adjustment equals 0.33% times the difference in cumulative total return between the Fund and the Russell 2000 Growth Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. Since the Fund does not have a five-year operating history, the Performance Adjustment Rate will be calculated as follows during the initial five-year period: (a) From inception through September 30, 2004, the Performance Adjustment Rate was inoperative thus the Advisory Fee was calculated based on the Base Advisory Fee Rate times the average daily net assets of the Fund only; (b) From September 30, 2004 through September 30, 2008, the Performance Adjustment Rate will be calculated based upon a comparison of the investment performance of the Fund and the Index over the number of quarters that have elapsed since the Fund's inception. Each time the Performance Adjustment Rate is calculated, it will cover a longer time span, until it can cover a running five-year period as intended. In the meantime, the early months of the transition period will have a disproportionate effect on the performance adjustment of the fee. The Performance Adjustment Rate varies from a minimum of -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.94% of the value of its average net assets for Class N shares and 1.19% of the value of its average net assets for Class R shares for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived fees of $27,944. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004.The amount attributable to the Small-Cap Growth Fund is disclosed in the Statement of Operations. 4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES: Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a Distribution Agreement dated January 2, 2004. The Adviser pays all costs and expenses associated with distribution of the Fund's Class N shares pursuant to a protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15, 1996. On October 22, 2003, shareholders of the seven investment portfolios of the fund then existing approved an amendment to the Rule 12b-1 plan to permit the creation of a second class of shares, Class R, that would pay distribution and service fees to the distributor up to 0.25% of average daily net assets of the Class R shares. Class R shares were subsequently created for the new Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the Large-Cap Value Fund. During the six months ended December 31, 2004 distribution fees of $11,819 were accrued to Small-Cap Growth Fund Class R shareholders. 5. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $9,893,960 and $7,752,261, respectively, for the six months ended December 31, 2004. 16 6. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, was as follows: Gross unrealized appreciation $ 10,310,637 Gross unrealized (depreciation) (1,967,843) -------------------------------------------------------------- Net unrealized appreciation on investments $ 8,342,794 ============================================================== Cost of investments $ 45,099,908 ==============================================================
The Fund has deferred to its fiscal year ending June 30, 2005, $450,542 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Cumulative Effect of other timing differences (450,542) Unrealized appreciation 2,135,414
The temporary differences between book and tax are primarily due to wash sales and post October losses. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 17 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 43% of the Fund. 18 This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] SMALL-CAP VALUE FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Small-Cap Value Shareholder, Our Fund was up 16.20% in the December 2004 quarter, compared to a 13.20% gain for our primary market benchmark, the Russell 2000 Value Index, and a 12.68% return of our peer benchmark, the Lipper Small-Cap Value Index. The table below presents our performance for the December quarter, 1 year, and annualized performance since inception, followed by a graph of performance since inception, as well as a new SEC-mandated breakdown of sector representation in the Fund.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 10/31/03 TO 12/31/04 12/31/04 12/31/04 ----------------------------------------------------------------------------------- SMALL-CAP VALUE FUND - CLASS N 16.20% 17.33% 17.32% SMALL-CAP VALUE FUND - CLASS R 16.15% 16.94% 16.99% Russell 2000 Value Index 13.20% 22.25% 26.47% Lipper Small-Cap Value Index 12.68% 20.65% 25.64%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. THE RUSSELL 2000 VALUE INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN THE RUSSELL 2000 INDEX WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED GROWTH VALUES. THE LIPPER SMALL-CAP VALUE INDEX IS AN INDEX OF SMALL-COMPANY, VALUE-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. [CHART] GROWTH OF $10,000 INVESTED IN SMALL-CAP VALUE FUND AND INDEXES FROM 10/31/03 (INCEPTION) TO 12/31/04
BRIDGEWAY BRIDGEWAY SMALL-CAP VALUE FUND - CLASS N SMALL-CAP VALUE FUND - CLASS R RUSSELL 2000 VALUE INDEX LIPPER SMALL-CAP VALUE INDEX 10/03 10000 10000 10000 10000 12/03 10270 10270 10759 10819 3/04 10620 10600 11504 11463 6/04 10460 10440 11601 11652 9/04 10370 10340 11619 11584 12/04 12050 12010 13153 13053
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
SECTOR % OF NET ASSETS -------------------------------------------- Basic Materials 5.7% Communications 9.1% Consumer, Cyclical 25.6% Consumer, Non-cyclical 9.8% Energy 11.0% Financial 10.6% Industrial 23.5% Technology 2.8% Utilities 1.9% -------------------------------------------- TOTAL 100.0%
PERFORMANCE SUMMARY TRANSLATION: For the December quarter, both share classes of the Fund beat both the Russell 2000 Value Index of small, value-oriented stocks and the peer-group average. For the year, however, both share classes of the Fund underperformed both the Russell 2000 Value Index and the peer-group average. We are NOT pleased with these results. However, the difference in the Fund's relative performance for the quarter and the year is interesting: Clearly, we were lagging our benchmark index and our peer group fairly badly during the first nine months of the year, and then sprinted ahead in the final quarter, though not quite enough to make up for the earlier shortfall. We say this not to excuse our performance, but because it offers a good reminder of the value of sticking with investment decisions and resisting panic and the urge to sell when things look less than great. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well- managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). 2 In conclusion, what is remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance - hardly what investors in a large-stock fund want to hear. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks, building on a very bad five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years ended 12/31/04, based on data from Morningstar: [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
3 This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: For the most part, the Fund's winners in the fourth quarter of 2004 were earnings stories - stocks that took off in the fourth quarter after reporting surprisingly strong results for the earlier part of the year. In all, five stocks in the Fund appreciated by more than 50% over the course of the quarter.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------- 1 UNOVA Inc Machinery-Diversified 80.0% 2 Bluegreen Corp Entertainment 78.2% 3 US Unwired Inc Telecommunications 72.9% 4 Airgate PCS Inc Telecommunications 69.6% 5 PacifiCare Health Systems Inc Healthcare Services 54.0%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.1% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Top performer UNOVA Inc. was a sterling example of the "earnings effect." Based in Everett, WA, the company offers uniquely "rugged" wireless computing devices and services that can be used in a number of applications where a desktop PC is not an option - everything from checking inventory in a warehouse to surveying property. (A separate division makes and services high-end manufacturing equipment.) For much of the year, UNOVA Inc. attracted little attention -- its stock had slowly drifted down about 35% from a peak in early 2004 - but with the release of the company's third-quarter numbers, the stock abruptly spiked up 31% on news that earnings had nearly tripled analysts' expectations. And it then continued rising, giving us an 80% gain in our position for the period. Bluegreen Corp. is in a very different business, but its stock followed a similar pattern. Headquartered in Boca Raton, Bluegreen Corp. is primarily in the timeshare business, offering clients "time" at any one of 35 resorts, mostly in the southeastern United States. Though the company's timeshare sales had doubled between 1999 and 2003, and it had also seen solid growth in both interest income (from financing the purchase of timeshares) and sales of land to people who want to build homes in Bluegreen Corp's. resort locations, the stock was stalled for much of 2004. It jumped nicely in the fourth quarter, however, when the company paid down a chunk of debt and announced record sales and operating revenues. Then there's PacifiCare Health Systems Inc., a provider of healthcare insurance to companies and individuals in various locations around the U.S. Its stock rose in the fourth quarter with news that third-quarter profits were up by 31%; the fact that the company was continuing its share-buyback program didn't hurt, either. Nor - oddly - was US Unwired Inc. particularly hurt by the flurry of class-action lawsuits brought against the company over the summer. Its announcement that earnings had increased by more than 140% in the first-half of the year (from the year earlier period) was apparently enough to quell any fears of litigation. At least, that's what we assume; the stock appreciated by 62.8% in the last six months of the year, and our position showed a nice 72.9% increase for the fourth quarter. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: The fourth quarter was strong for both small stocks and value stocks, giving our Fund something of a double-tailwind. As a result, no stocks declined by more than 50% for the period. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: Darn! If Ventiv Health Inc. and American Science & Engineering Inc. had worked just that little bit better, we would have been looking at two triple-digit gainers for the year. We really like those. Nevertheless, we'll happily take their returns, and the returns of the other 18 stocks in the Fund that appreciated by more than 50% in 2004. 4
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------- 1 Ventiv Health Inc Advertising 99.2% 2 American Science & Eng. Inc Electronics 99.1% 3 US Unwired Inc Telecommunications 81.6% 4 Stein Mart Inc Retail 77.9% 5 Trans World Entertainment Corp Retail 75.1% 6 Petroleum Development Corp Oil & Gas 73.4% 7 Airgate PCS Inc Telecommunications 73.3% 8 OMI Corp Transportation 71.3% 9 Vans Inc Apparel 69.9% 10 SMTEK International Inc Electronics 67.6% 11 United Fire & Casualty Co Insurance 67.1% 12 Commercial Metals Co Metal Fabricate/Hardware 67.0% 13 Carpenter Technology Corp Iron/Steel 65.6% 14 PacifiCare Health Systems Inc Healthcare Services 65.1% 15 Bluegreen Corp Entertainment 60.1% 16 Toll Brothers Inc Home Builders 56.7% 17 Badger Meter Inc Electronics 52.2% 18 Eagle Materials Inc Building Materials 51.7% 19 Beazer Homes USA Inc Home Builders 50.7% 20 Metal Management Inc Environmental Control 50.7%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Ventiv Health Inc. may have provided a dramatic return for the Fund, but the stock's progress for the year was anything but dramatic, just a steady climb upward. Indeed, when the company released its third-quarter results, showing that earnings for the quarter had jumped by 50% over the previous year, investors yawned, rewarding the stock with a scant 1% uptick. That's fine: the company had plenty to celebrate even if investors didn't throw a party. Compared with 2003, for example, the company's operating margin nearly doubled, and its collections efficiency - the number of days needed to collect on the typical outstanding receivable - was markedly improved. Ventiv Health Inc. provides marketing and consulting services to pharmaceutical and biotech firms, including some of the most recognizable names in the field. That may not sound exciting, but at Bridgeway, we think a 99% gain is definitely something to get excited about. Barely in second place was American Science & Engineering Inc., based in Billerica, MA. The company makes cargo-inspection equipment - a field that has gained a lot of visibility over the past few years, given our increased awareness of the need for better security. Here, too, there was little that was dramatic about the stock's performance, other than its relentless march upward over the course of the year. By contrast, it was strong fourth-quarter numbers that helped several stocks find a place on this list. US Unwired Inc., Airgate PCS Inc., Bluegreen Corp. and PacifiCare Health Systems Inc. all took honors for the quarter as well as the year, while homebuilders Toll Brothers and Beazer Homes USA Inc. all soared in the last few months of the year on the back of powerful, sometimes record-setting, quarterly numbers. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: The three stocks listed below have little in common beyond their all having declined by more than 50% over the course of the calendar year. 5
RANK DESCRIPTION INDUSTRY % LOSS ----------------------------------------------------------------------------- 1 Applica Inc Home Furnishings -58.6% 2 America West Holdings Corp Airlines -54.2% 3 Safeguard Scientifics Inc Software -50.3%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Sometimes it's the sector, and sometimes it just isn't. America West Holdings Corp., for example, is an airline, operating low-cost flights with primary hubs in Phoenix and Las Vegas. Unfortunately, airlines in general had a miserable year, hammered by a combination of high fuel costs and overcapacity (particularly in markets such as...Phoenix and Las Vegas), as well as by lingering problems stemming from 2003's SARS epidemic and the now-ever-present fear of terrorism. But while the sector's woes do get credit for some of America West's 54.2% loss to our Fund, it should also be said that the company was not well placed to ride a downdraft. In particular, it had failed to protect itself sufficiently against the possibility - which this past year made real - of rising fuel prices, and it had few options for distinguishing itself among the fleet of low-cost carriers serving its primary markets. The stock paid the price for these planning errors. We sold this stock in the 3rd quarter. On the other hand, there is Applica Inc. which makes small household appliances, such as coffee-makers. Applica Inc. brewed up nothing but trouble for investors this year, as each quarter presented yet another earnings disappointment. (In the third quarter, for example, the company produced a loss of 41 cents per share, compared with a profit of 20 cents per share in 2003.) To be fair, some of that loss is a function of moves that may ultimately benefit the company, such as the sale of one of its divisions and the sale of its manufacturing facility in China. But any such benefits didn't show up in time to prevent our Fund from taking a 58.6% loss on our Applica Inc. position. We sold this stock in the 3rd quarter. TOP TEN HOLDINGS At the end of the quarter, Consumer (Cyclical) represented our largest sector weighting, at 25.6% of net assets, followed by Industrial, at 23.5%, and Energy, at 11.0%. Our top ten holdings - listed below -- represented 19.0% of total net assets and seven different industries.
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ------------------------------------------------------------------------------- 1 Petroleum Development Corp Oil & Gas 2.3% 2 Badger Meter Inc Electronics 2.2% 3 Universal Forest Products Inc Building Materials 2.1% 4 Commercial Metals Co Metal Fabricate/Hardware 2.1% 5 AAR Corp Aerospace/Defense 1.8% 6 Smart & Final Inc Retail 1.8% 7 Stein Mart Inc Retail 1.8% 8 Park-Ohio Holdings Corp Miscellaneous Manufacturer 1.7% 9 MarineMax Inc Retail 1.6% 10 Maverick Tube Corp Oil & Gas Services 1.6% ------------------------------------------------------------------------------- 19.0%
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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. 6 The Fund is subject to above average market risk (volatility) and is not an appropriate investment for short-term investors. Investments in the small companies within this fund carry greater risk than is customarily associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we read them looking for ways to improve our service. Sincerely, /S/ John Montgomery John Montgomery 7 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY SMALL-CAP VALUE FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ----------------------------------------------------------------------------------------------------- CLASS N Actual Fund Return $ 1,000.00 $ 1,152.01 $ 5.09 Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78 CLASS R Actual Fund Return $ 1,000.00 $ 1,150.38 $ 6.44 Hypothetical Fund Return $ 1,000.00 $ 1,019.22 $ 6.04
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.94% AND 1.19% FOR CLASS N AND CLASS R, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 8 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ------------------------------------------------------------------------------------------- COMMON STOCKS - 99.9% ADVERTISING - 1.5% Ventiv Health Inc* 30,300 $ 615,696 AEROSPACE/DEFENSE - 1.8% AAR Corp* 56,100 764,082 AIRLINES - 1.2% Northwest Airlines Corp* 46,200 504,966 BANKS - 2.2% Community Bank System Inc 18,300 516,975 Fremont General Corp 12,400 312,232 Irwin Financial Corp 3,700 105,043 --------------- 934,250 BEVERAGES - 0.9% Constellation Brands Inc - Class A* 8,500 395,335 BUILDING MATERIALS - 3.6% Eagle Materials Inc 7,300 630,355 Universal Forest Products Inc 20,400 885,360 --------------- 1,515,715 CHEMICALS - 1.3% Lyondell Chemical Co 8,360 241,771 OM Group Inc* 8,900 288,538 --------------- 530,309 COAL - 0.9% CONSOL Energy Inc 4,000 164,200 Peabody Energy Corp 2,590 209,557 --------------- 373,757 COMMERCIAL SERVICES - 4.7% Consolidated Graphics Inc* 14,500 665,550 Korn/Ferry International* 18,400 381,800 Manning (Greg) Auctions Inc*+ 27,900 345,402 PDI Inc* 13,700 305,236 Teltech Holdings Inc* 29,500 285,855 --------------- 1,983,843 COMPUTERS - 0.3% Intervoice-Brite Inc* 10,800 144,180 DISTRIBUTION/WHOLESALE - 1.7% Huttig Building Products Inc* 29,900 312,455 Wesco International Inc* 13,000 385,320 --------------- 697,775 DIVERSIFIED FINANCIAL SERVICES - 2.5% AmeriCredit Corp* 6,100 149,145 Nelnet Inc* 13,000 350,090 Raymond James Financial Inc 17,150 531,307 --------------- 1,030,542 ELECTRIC - 0.8% Alliant Energy Corp 3,200 91,520 OGE Energy Corp 5,400 143,154 Westar Energy Inc 4,500 102,915 --------------- 337,589 ELECTRICAL COMPONENTS & EQUIPMENT - 0.2% Belden Inc 2,900 $ 67,280 ELECTRONICS - 4.1% American Science & Engineering Inc* 6,000 247,260 Badger Meter Inc 30,600 916,470 SMTEK International Inc* 32,397 456,798 TTM Technologies Inc* 6,800 80,240 --------------- 1,700,768 ENGINEERING & CONSTRUCTION - 1.1% McDermott International Inc* 25,000 459,000 ENTERTAINMENT - 1.4% Argosy Gaming Co* 5,900 275,530 Bluegreen Corp* 16,200 321,246 --------------- 596,776 ENVIRONMENTAL CONTROL - 0.6% Metal Management Inc 10,000 268,700 FOREST PRODUCTS & PAPER - 2.2% Energen Corp 7,900 465,705 Longview Fibre Co 24,900 451,686 --------------- 917,391 HEALTHCARE SERVICES - 4.1% America Service Group Inc* 17,250 461,783 Humana Inc* 13,460 399,627 PacifiCare Health Systems Inc* 9,500 536,940 Res-Care Inc* 20,300 308,966 --------------- 1,707,316 HOME BUILDERS - 8.2% Beazer Homes USA Inc 1,900 277,799 Brookfield Homes Corp 6,500 220,350 Building Materials Holding Corp 9,300 356,097 Cavalier Homes Inc* 23,600 139,004 Fleetwood Enterprise Inc* 18,300 246,318 Hovnanian Enterprises Inc - Class A* 11,820 585,326 KB Home 3,440 359,136 MDC Holdings Inc 3,740 323,286 National RV Holdings Inc* 8,200 78,966 Standard-Pacific Corp 4,600 295,044 Toll Brothers Inc* 7,800 535,158 --------------- 3,416,484 HOUSEWARES - 0.6% Toro Co 2,900 235,915 INSURANCE - 3.4% American Physicians Cap Inc* 6,700 241,334 Commerce Group Inc 4,700 286,888 Ohio Casualty Corp* 15,100 350,471 Reinsurance Group of America Inc 2,400 116,280 United Fire & Casualty Co 5,000 168,550 Vesta Insurance Group Inc 69,400 255,392 --------------- 1,418,915 INTERNET - 1.4% Sapient Corp* 74,000 585,340
9
INDUSTRY COMPANY SHARES VALUE ------------------------------------------------------------------------------------------- IRON/STEEL - 2.9% Carpenter Technology Corp 4,100 $ 239,686 Reliance Steel and Aluminum Co 17,300 674,008 Ryerson Tull Inc 18,000 283,500 --------------- 1,197,194 MACHINERY DIVERSIFIED - 1.7% Briggs & Stratton Corp 3,400 141,372 UNOVA Inc* 23,200 586,728 --------------- 728,100 MEDIA - 1.2% Thomas Nelson Inc 22,600 510,760 METAL FABRICATE/HARDWARE - 4.4% Commercial Metals Co 17,500 884,800 Maverick Tube Corp* 22,600 684,780 Metals USA Inc* 13,800 255,990 --------------- 1,825,570 MINING - 0.5% Titanium Metals Corp* 8,500 205,190 MISCELLANEOUS MANUFACTURER - 2.2% The Brink's Co 4,800 189,696 Park-Ohio Holdings Corp* 27,900 722,610 --------------- 912,306 OFFICE FURNISHING - 1.7% CompX International Inc 7,300 120,669 Steelcase Inc 42,400 586,816 --------------- 707,485 OIL & GAS - 6.7% Callon Petroleum Corp* 15,000 216,900 Giant Industries Inc* 11,100 294,261 Harvest Natural Resources Inc* 18,800 324,676 Holly Corp 9,900 275,913 Petroleum Development Corp* 25,500 983,535 Petroquest Energy Inc* 67,000 331,650 Tesoro Corp* 12,500 398,250 --------------- 2,825,185 OIL & GAS SERVICES - 1.7% Seacor Holdings Inc* 7,200 384,480 Veritas DGC Inc* 15,100 338,391 --------------- 722,871 PACKAGING & CONTAINERS - 1.4% Silgan Holdings Inc 9,700 591,312 REITS - 1.0% New Century Financial Corp 6,500 415,415 RETAIL - 10.8% 7-Eleven Inc* 5,600 $ 134,120 Cost-U-Less Inc* 45,100 315,700 Dillard's Inc - Class A 12,700 341,249 Foot Locker Inc 10,800 290,844 Luby's Inc* 37,600 282,000 MarineMax Inc* 23,100 687,456 Men's Wearhouse Inc* 3,200 102,272 The Pantry Inc* 18,900 568,701 Retail Ventures Inc* 23,700 168,270 Smart & Final Inc* 52,000 748,280 Stein Mart Inc* 43,700 745,522 Trans World Entertainment Corp* 12,900 160,863 --------------- 4,545,277 SAVINGS & LOANS - 1.6% Berkshire Hills Bancorp Inc 17,500 650,125 SEMICONDUCTORS - 1.7% ADE Corp* 8,000 149,760 Cohu Inc 7,300 135,488 PLX Technology Inc* 22,300 231,920 PMC - Sierra Inc* 18,800 211,500 --------------- 728,668 SOFTWARE - 0.7% Wind River Systems Inc. Com* 22,000 298,100 TELECOMMUNICATIONS - 5.0% Airgate PCS Inc* 7,100 252,760 Boston Communications Group Inc* 57,600 532,224 Lantronix Inc* 269,900 272,599 Sycamore Networks Inc* 107,800 437,668 USA Mobility Inc* 8,300 293,073 US Unwired Inc* 65,700 315,360 --------------- 2,103,684 TRANSPORTATION - 4.0% Arkansas Best Corp 6,000 269,340 Hub Group Inc* 8,232 429,875 Offshore Logistics Inc* 10,900 353,923 OMI Corp 37,770 636,424 --------------- 1,689,562 TOTAL COMMON STOCKS (Cost $33,934,506) 41,858,728 --------------- TOTAL INVESTMENTS - 99.9% (Cost $33,934,506) 41,858,728 Other Assets In Excess of Liabilities - 0.1% 28,402 --------------- NET ASSETS - 100.0% $ 41,887,130 ===============
* NON-INCOME PRODUCING SECURITY + THIS SECURITY OR A PORTION OF THIS SECURITY IS OUT ON LOAN AT DECEMBER 31, 2004 TOTAL LOANED SECURITIES HAD A MARKET VALUE OF $185,700 AT DECEMBER 31, 2004 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $33,934,506) $ 41,858,728 Receivable for investments sold 295,950 Receivable for fund shares sold 314,842 Dividends receivable 19,736 Interest receivable 672 Prepaid expenses 19,272 ---------------------------------------------------------------------------------------- Total assets 42,509,200 ---------------------------------------------------------------------------------------- LIABILITIES: Overdraft 68,640 Payable for fund shares redeemed 38,968 Payable for investments purchased 427,946 Accrued investment adviser fee 14,207 Accrued administration fee 2,818 Accrued directors fee 816 Accrued distribution fee 3,167 Other payables 65,508 ---------------------------------------------------------------------------------------- Total liabilities 622,070 ---------------------------------------------------------------------------------------- NET ASSETS $ 41,887,130 ======================================================================================== NET ASSETS REPRESENT: Paid-in capital $ 36,470,207 Accumulated net investment loss (76,351) Accumulated net realized loss on investments (2,430,948) Net unrealized appreciation of investments 7,924,222 ---------------------------------------------------------------------------------------- NET ASSETS $ 41,887,130 ======================================================================================== NET ASSET VALUE PER SHARE Net assets Class N $ 36,897,367 Class R $ 4,989,763 Shares of beneficial interest outstanding of $.001 par value Class N, 100,000,000 shares authorized 3,061,007 Class R, 40,000,000 shares authorized 415,374 Net asset value, offering and redemption price per share Class N $ 12.05 Class R $ 12.01
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 90,140 Interest 1,339 Securities lending 583 ------------------------------------------------------------------------------------------------ Total investment income 92,062 ------------------------------------------------------------------------------------------------ EXPENSES: Investment advisory fees 103,909 Administration fees 8,659 Accounting fees 28,659 Transfer agent fees 28,610 Audit fees 6,525 Tax fees 5,830 Custody fees 8,987 Legal fees 4,416 Blue sky fees 3,864 Distribution fees - Class R 5,661 Directors fees 1,233 Registration fees 1,410 Reports to shareholders 2,500 Miscellaneous 1,282 ------------------------------------------------------------------------------------------------ Total expenses before fees waived 211,545 Less investment advisory fees waived (43,132) ------------------------------------------------------------------------------------------------ Net expenses 168,413 ------------------------------------------------------------------------------------------------ NET INVESTMENT LOSS (76,351) ------------------------------------------------------------------------------------------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (1,429,966) Net change in unrealized appreciation / depreciation on investments 6,907,028 ------------------------------------------------------------------------------------------------ Net realized and unrealized gain on investments 5,477,062 ------------------------------------------------------------------------------------------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,400,711 ================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 STATEMENTS OF CHANGES IN NET ASSETS DECEMBER 31, 2004 (UNAUDITED)
SIX MONTHS ENDED PERIOD ENDED DECEMBER 31, 2004* JUNE 30, 2004** -------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (76,351) $ (58,240) Net realized loss on investment securities (1,429,966) (1,000,982) Net change in unrealized appreciation / depreciation on investments 6,907,028 1,017,194 -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from operations 5,400,711 (42,028) -------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares Class N 7,293,720 37,031,329 Class R 505,718 7,946,732 Cost of shares redeemed Class N (3,329,606) (8,884,162) Class R (877,073) (3,158,211) -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from share transactions 3,592,759 32,935,688 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets 8,993,470 32,893,660 NET ASSETS: Beginning of period 32,893,660 0 -------------------------------------------------------------------------------------------------------------------- End of period *** $ 41,887,130 $ 32,893,660 ==================================================================================================================== SHARES ISSUED & REDEEMED: Issued Class N 686,004 3,578,047 Class R 48,487 753,572 Redeemed Class N (320,565) (882,479) Class R (83,554) (303,131) -------------------------------------------------------------------------------------------------------------------- Net increase 330,372 3,146,009 Outstanding at beginning of period 3,146,009 0 -------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 3,476,381 3,146,009 ==================================================================================================================== * Unaudited ** Commenced operations on October 31, 2003 *** Including accumulated net investment loss of: $ (76,351) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED) CLASS N
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ----------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.46 $ 10.00 ----------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.02) (0.03) Net realized and unrealized gain 1.61 0.49 ----------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.59 0.46 ----------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 12.05 $ 10.46 ======================================================================================================================= TOTAL RETURN+# 15.20% 4.60% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 36,897 $ 28,193 Ratios to average net assets: Expenses after waivers and reimbursements* 0.94% 0.94% Expenses before waivers and reimbursements* 1.19% 1.49% Net investment loss after waivers and reimbursements* (0.41%) (0.42%) Portfolio turnover rate 30.1% 20.5%
CLASS R
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ----------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.44 $ 10.00 ----------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.03) (0.04) Net realized and unrealized gain 1.60 0.48 ----------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.57 0.44 ----------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 12.01 $ 10.44 ======================================================================================================================= TOTAL RETURN+# 15.04% 4.40% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 4,990 $ 4,701 Ratios to average net assets: Expenses after waivers and reimbursements* 1.19% 1.19% Expenses before waivers and reimbursements* 1.44% 1.64% Net investment loss after waivers and reimbursements* (0.66%) (0.67%) Portfolio turnover rate 30.1% 20.5%
* ANNUALIZED ** COMMENCED OPERATIONS ON OCTOBER 31, 2003. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 14 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 100,000,000 and 40,000,000 shares have been classified into Class N and Class R of the Small-Cap Value Fund, respectively. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Small-Cap Value Fund seeks to provide long-term total return of capital, primarily through capital appreciation. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Small-Cap Value Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had securities on loan valued at $185,700 and received U.S. Treasury securities with a value of $189,927 as collateral. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles 15 generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. Fees provided for under the Rule 12b-1 plan of a particular class of the fund are charged to the operations of such class. All other expenses are allocated among the classes on relative net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the 16 Fund pays the Adviser a total fee, which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the annual rate of 0.60% of the value of the Fund's average daily net assets. The Performance Adjustment equals 0.33% times the difference in cumulative total return between the Fund and the Russell 2000 Value Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. Since the Fund does not have a five-year operating history, the Performance Adjustment Rate will be calculated as follows during the initial five-year period: (a) From inception through September 30, 2004, the Performance Adjustment Rate was inoperative thus the Advisory Fee was calculated based on the Base Advisory Fee Rate times the average daily net assets of the Fund only; (b) From September 30, 2004 through September 30, 2008, the Performance Adjustment Rate will be calculated based upon a comparison of the investment performance of the Fund and the Index over the number of quarters that have elapsed since the Fund's inception. Each time the Performance Adjustment Rate is calculated, it will cover a longer time span, until it can cover a running five-year period as intended. In the meantime, the early months of the transition period will have a disproportionate effect on the performance adjustment of the fee. The Performance Adjustment Rate varies from a minimum of -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.94% of the value of its average net assets for Class N shares and 1.19% of the value of its average net assets for Class R shares for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived fees of $43,132. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Small-Cap Value Fund is disclosed in the Statement of Operations. 4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES: Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a Distribution Agreement dated January 2, 2004. The Adviser pays all costs and expenses associated with distribution of the Fund's Class N shares pursuant to a protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15, 1996. On October 22, 2003, shareholders of the seven investment portfolios of the fund then existing approved an amendment to the Rule 12b-1 plan to permit the creation of a second class of shares, Class R, that would pay distribution and service fees to the distributor up to 0.25% of average daily net assets. Class R shares were subsequently created for the new Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the Large-Cap Value Fund. During the six months ended December 31, 2004 distribution fees of $5,661 were accrued to Small-Cap Value Class R shareholders. 5. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $14,490,283 and $10,450,907, respectively, for the six months ended December 31, 2004. 6. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable 17 income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 8,704,519 Gross unrealized (depreciation) (780,297) ---------------------------------------------------------- Net unrealized appreciation on investments $ 7,924,222 ========================================================== Cost of investments $ 33,934,506 ==========================================================
The Fund has deferred to its fiscal year ending June 30, 2005, $1,000,982 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Accumulated capital losses (1,000,982) Unrealized appreciation 1,017,194
The temporary differences between book and tax are primarily due to post October losses. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 18 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 47% of the Fund. 19 This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] LARGE-CAP GROWTH FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Large-Cap Growth Shareholder, Our Fund had a positive return of 9.85% for the December 2004 quarter, compared to a 9.17% return for our primary market benchmark, the Russell 1000 Growth Index, and a 9.99% return of our peer benchmark, the Lipper Large-Cap Growth Index. The table below presents our performance for the December quarter and 1 year, and annualized performance since inception, followed by a graph of performance since inception as well as a new, SEC-mandated breakdown of sector representation in the Fund.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 10/31/03 TO 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------- LARGE-CAP GROWTH FUND-CLASS N 9.85% 6.77% 8.85% LARGE-CAP GROWTH FUND-CLASS R 9.77% 6.48% 8.59% Russell 1000 Growth Index 9.17% 6.30% 9.46% Lipper Large-Cap Growth Index 9.99% 7.45% 9.80%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. THE RUSSELL 1000 GROWTH INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN THE RUSSELL 1000 INDEX WITH HIGHER PRICE-TO-BOOK RATIOS AND HIGHER FORECASTED GROWTH VALUES. THE LIPPER LARGE-CAP GROWTH INDEX IS AN INDEX OF LARGE-COMPANY, GROWTH-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. [CHART] GROWTH OF $10,000 INVESTED IN LARGE-CAP GROWTH FUND AND INDEXES FROM 10/31/03 (INCEPTION) TO 12/31/04
BRIDGEWAY BRIDGEWAY LIPPER LARGE-CAP GROWTH FUND - CLASS N LARGE-CAP GROWTH FUND - CLASS R RUSSELL 1000 GROWTH INDEX LARGE-CAP GROWTH INDEX 10/03 10000 10000 10000 10000 12/03 10340 10340 10454 10380 3/04 10620 10620 10536 10506 6/04 10630 10620 10740 10606 9/04 10050 10030 10179 10140 12/04 11040 11010 11113 11153
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
SECTOR LARGE-CAP GROWTH FUND S&P 500 INDEX DIFFERENCE --------------------------------------------------------------------------------------- Basic Materials 2.1% 2.9% -0.8% Communications 29.4% 11.3% 18.1% Consumer, Cyclical 21.6% 9.9% 11.7% Consumer, Non-cyclical 21.4% 21.2% 0.2% Energy 4.0% 7.2% -3.2% Financial 5.9% 20.6% -14.7% Industrial 6.3% 11.6% -5.3% Technology 7.4% 12.4% -5.0% Utilities 1.9% 2.9% -1.0% --------------------------------------------------------------------------------------- Total 100.0% 100.0% 0.0%
PERFORMANCE SUMMARY TRANSLATION: For both the year and the December quarter, the Fund beat its primary benchmark and slightly lagged its peer-group average. We are not entirely happy with these results. However, it is worth noting that after a relatively lackluster nine months, the Fund in the fourth quarter of the year returned - in just three months - slightly more than the S&P 500 Index has typically returned over the course of a year. We say this not to excuse our performance, but because it offers a good reminder of the value of sticking with investment decisions and resisting panic and the urge to sell when things look less than great. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well- managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). In conclusion, what is remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market 2 lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance - hardly what investors in a large-stock fund want to hear. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks, building on a very bad five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years ended 12/31/04, based on data from Morningstar: This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: Despite being focused on not one but TWO out-of-favor corners of the market, our Fund was able to come up with some winners. Six of our stocks appreciated more than 30% in the December quarter.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------ 1 Autodesk Inc Software 56.1% 2 Monsanto Co Agriculture 52.5% 3 Apple Computer Inc Computers 44.7% 4 Career Education Corp Commercial Services 39.1% 5 Chico's FAS Inc Retail 33.1% 6 Coach Inc Apparel 33.0%
3 Across the range of our Funds, some of the biggest winners recently have been companies that cater to folks without a great deal of money - a chain of pawnshops and "payday loan" providers in the southwest, a company that finances the purchase of timeshares, etc. So it's interesting that two of this Fund's most impressive performers, for the quarter were retailers of women's fashion and fashion accessories that cater to a distinctly high-end clientele. Chico's FAS, for example, owns about 650 stores (some of them, a recently acquired chain, targeted specifically at a young, trendy audience). While many retailers had a disappointing holiday season, Chico's boosted sales by 41% over last year's levels, setting a new record. But that gain came on top of a 39% increase in earnings (and a nice bump to operating margins) in the third quarter, a 47% increase in sales in the second quarter, and a 52% increase in sales in the first quarter. For the right merchandise, at least, the U.S. consumer is still willing to pay up. Certainly that would seem to be the lesson from Coach, Inc., where the average handbag - fine leather, beautifully made - sells for $229, according to Forbes.com. Coach went public in a spin-off from Sara Lee in 2000, and has increased earnings by an average of 60% a year for the past five years, thanks in part to an intimate understanding of its customer base: The company spends more than $4 million a year, on average, on market research. The effort pays off: holiday sales were up by 23% over last year, allowing Coach to avoid the frantic discounting that many retailers employed in an effort to goose the cash register. And that was after a 62% gain in earnings for the quarter ended October 2, 2004. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: The fourth quarter was an exceptionally strong one for the market as a whole, and for our Fund. Only one stock declined by more than 30%. SanDisk, down 31.8%, was our one big loser for the quarter. It was actually a pretty good example of the quarter's being strong. How so? Well, the company really ran into trouble in early October, when it announced its third-quarter results. While SanDisk had more than TRIPLED earnings for the quarter, and boosted revenues by 45%, these figures fell short of analysts' expectations, and investors departed in droves, costing the stock 27% of its value all but overnight. We sold this stock in the 4th quarter. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: Our Fund definitely had an uphill battle. First, it had to fight the market's continued aversion to growth stocks (according to Morningstar, large-cap value funds outperformed large-cap growth funds by nearly 14 percentage points for the year). And if that weren't enough, it had to contend with investors' continued - and powerful - preference for small stocks, even in a value-oriented context. (Small-cap value funds beat large-cap value funds by nearly 10 percentage points, according to Morningstar.) Given the challenges, we're not terribly displeased with our results: Eleven stocks gained more than 40% for the year.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------- 1 Autodesk Inc Software 115.3% 2 eBay Inc Internet 72.3% 3 Harman International Industries Inc Home Furnishings 65.8% 4 Monsanto Co Agriculture 62.1% 5 Phelps Dodge Corp Mining 58.9% 6 Coach Inc Apparel 49.0% 7 Petsmart Inc Retail 48.8% 8 UnitedHealth Group Inc Healthcare-Services 45.4% 9 Apple Computer Inc Computers 44.7% 10 Qualcomm Inc Telecommunications 43.4% 11 Adobe Systems Inc Software 40.8%
4 Autodesk was the biggest winner for both the quarter and the year, and I profiled the company in our September quarterly letter. The company produces sophisticated computer software for graphics-heavy applications -- its products are used by architects, surveyors, designers, and engineers, among others - and it has continued to increase both revenues and profits. The stock hit a 52-week high in the last week of the year and was the top performer in the S&P 500, with a gain of nearly 210%. Our position in Autodesk, which we initially established in the second quarter, was up more than 115% in 2004. In the fourth quarter, Coach, profiled in the section above, also did very nicely for the year. Another strong performer was Apple Computer, the well known computer and electronics manufacturer. Apple makes the very popular iPod digital music player, as well as the iMac and PowerCube personal computers. The stock had performed respectably in the first nine months of the year, but it really took off in the fourth quarter, as strong iPod sales began prompting analysts to raise their earnings estimates. In the holiday season just ended, major retailers like Amazon.com (the biggest Internet retailer), and Best Buy Company (the largest electronics retailer) ran out of or ran short of some popular iPod models. By some estimates Apple could sell 4 million iPods in the December quarter, compared with just over 700,000 in the previous holiday season. We initially bought shares early in October, and watched our total position gain nearly 45% through the end of the year. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK As always, this is the list we'd prefer to forget. The only good part about it is that it's short: Just two stocks lost more than 40% for the year.
RANK DESCRIPTION INDUSTRY % LOSS ------------------------------------------------------------------------- 1 Red Hat Inc Software -43.3% 2 ImClone Systems Inc Pharmaceuticals -42.1%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Our second biggest loser of the year was ImClone Systems and, like SanDisk (profiled in the section on the fourth quarter), it is to a large extent a story of a stock's failing in spite of itself. ImClone makes the colon-cancer drug Erbitux, and sales were strong in the first quarter. They were strong in the second quarter as well - at more than $71 million, strong enough to quadruple revenues over the same period in 2003, strong enough to propel the company to its second consecutive quarter of profitability, strong enough to produce earnings of 29 cents per share, compared with a loss of 47 cents per share a year earlier. But they weren't strong enough. "Guidance" from the company had led investors to expect sales upwards of $80 million for the quarter, and the stock dropped 19%. It fell again when one widely followed analyst pointed out that the company's royalty payments - for patents it had purchased in developing Erbitux - would skyrocket if the drug, as expected, was approved by the FDA for treating additional forms of cancer. And it fell again in November when ImClone announced its third-quarter results. Yes, the company had increased revenues by some 300% over the previous year. Yes, earnings had beaten analysts' expectations by about 36%. But Erbitux sales were $3 million shy of the figure that analysts had been projecting, and so the stock tumbled, ultimately costing us a 42% loss in our position. We sold this stock in the 4th quarter. Our worst finisher, Red Hat Inc., was a very different story. The stock began to slide in July, after disappointing second-quarter numbers, and went into free-fall with the resignation of the company's CFO, the announcement that the company was "responding to questions" from the SEC, and the further announcement that the company was going to have to restate some earnings to make up for various accounting errors. The 15 class-action lawsuits didn't help, either, and we sold the position in the 4th quarter. TOP TEN HOLDINGS At quarter end, our largest sector weighting was in Communications, which represented 29.7% of net assets, followed by Consumer (Cyclical) at 21.8% and Consumer (Non-Cyclical) at 21.6%. Our top ten holdings represented 29.6% of total net assets, indicating much broader diversification than Bridgeway's more aggressively managed Aggressive Investors Funds. 5 At the end of December, top ten holdings represented seven different industries.
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS -------------------------------------------------------------------------------------- 1 Nextel Communications Inc Telecommunications 3.6% 2 eBay Inc Internet 3.5% 3 Home Depot Inc Retail 3.4% 4 Harman International Industries Inc Home Furnishings 3.4% 5 Nordstrom Inc Retail 3.0% 6 Qualcomm Inc Telecommunications 2.9% 7 Cisco Systems Inc Telecommunications 2.5% 8 Schlumberger Ltd Oil & Gas Services 2.5% 9 Total System Services Inc Software 2.4% 10 Patterson Companies Healthcare-Products 2.4% -------------------------------------------------------------------------------------- 29.6% --------------------------------------------------------------------------------------
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. These views are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. THE FUND IS SUBJECT TO MARKET RISK (VOLATILITY) AND IS NOT AN APPROPRIATE INVESTMENT FOR SHORT-TERM INVESTORS. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we read them looking for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY LARGE-CAP GROWTH FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ----------------------------------------------------------------------------------------------- CLASS N Actual Fund Return $ 1,000.00 $ 1,038.57 $ 4.31 Hypothetical Fund Return $ 1,000.00 $ 1,020.97 $ 4.28 CLASS R Actual Fund Return $ 1,000.00 $ 1,036.72 $ 5.59 Hypothetical Fund Return $ 1,000.00 $ 1,019.71 $ 5.55
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.84% AND 1.09% FOR CLASS N AND CLASS R, RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- COMMON STOCKS - 101.0% AEROSPACE/DEFENSE - 0.3% L-3 Communications Holdings Inc 2,000 $ 146,480 AGRICULTURE - 0.4% Monsanto Co 3,800 211,090 APPAREL - 2.1% Coach Inc* 17,660 996,024 AUTO MANUFACTURERS - 0.5% Paccar Inc 3,000 241,440 BIOTECHNOLOGY - 3.9% Amgen Inc* 9,000 577,350 Biogen Idec Inc* 3,200 213,152 Genentech Inc* 19,000 1,034,360 Millennium Pharmaceuticals Inc* 3,500 42,420 -------------- 1,867,282 CHEMICALS - 1.3% Dow Chemical Co 12,770 632,243 COMMERCIAL SERVICES - 1.0% Apollo Group Inc* 4,650 375,301 Career Education Corp* 2,200 88,000 -------------- 463,301 COMPUTERS - 1.3% Apple Computer Inc* 2,000 128,800 Dell Inc* 2,500 105,350 Lexmark International Inc* 1,300 110,500 NCR Corp* 2,000 138,460 Research In Motion Ltd, ADR* 1,500 123,630 -------------- 606,740 COSMETIC/PERSONAL CARE - 1.8% Avon Products Inc 1,000 38,700 Gillette Co 18,700 837,386 -------------- 876,086 DISTRIBUTION/WHOLESALE - 0.6% Fastenal Co 5,000 307,800 DIVERSIFIED FINANCIAL SERVICES - 3.2% Franklin Resources Inc 12,200 849,730 MBNA Corp 25,520 719,409 -------------- 1,569,139 ELECTRIC UTILITIES - 1.9% Texas Utilities Corp 14,000 903,840 ELECTRICAL COMPONENTS & EQUIPMENT - 2.2% Molex Inc 34,800 1,044,000 ELECTRONICS - 0.3% Waters Corp* 2,800 131,012 ENTERTAINMENT - 1.6% International Game Technology 23,020 791,427 HEALTHCARE PRODUCTS - 5.9% Biomet Inc 6,000 $ 260,340 C.R. Bard Inc 1,800 115,164 Johnson & Johnson 2,000 126,840 Medtronic Inc 3,400 168,878 Patterson Dental Co* 26,440 1,147,232 Zimmer Holdings Inc* 13,160 1,054,379 -------------- 2,872,833 HEALTHCARE SERVICES - 2.5% Laboratory Corp of American Holdings* 1,600 79,712 United Health Group Inc 12,858 1,131,890 WellPoint Health Networks Inc* 30 3,450 -------------- 1,215,052 HOME FURNISHINGS - 3.3% Harman International Industries Inc 12,740 1,617,980 HOUSEHOLD PRODUCTS/WARES - 2.2% Fortune Brands Inc 13,520 1,043,474 Insurance - 2.7% American International Group Inc 8,400 551,628 The Progressive Corp 8,800 746,592 -------------- 1,298,220 INTERNET - 7.5% Amazon.com Inc* 12,354 547,159 eBay Inc* 14,580 1,695,362 Symantec Corp* 42,920 1,105,619 Yahoo! Inc* 7,220 272,050 -------------- 3,620,190 IRON/STEEL - 0.7% Nucor Corp 6,000 314,040 LEISURE TIME - 0.5% Harley-Davidson Inc 3,600 218,700 LODGING - 0.3% Marriott International Inc 2,500 157,450 MACHINERY - DIVERSIFIED - 0.5% Deere & Co 1,750 130,200 Rockwell Automation Inc 2,400 118,920 -------------- 249,120 MEDIA - 6.7% Clear Channel Communications Inc 24,050 805,434 Fox Entertainment Group Inc - Class A* 20,100 628,326 Univision Communications Inc - Class A* 29,400 860,538 Walt Disney Co 33,200 922,960 -------------- 3,217,258 MINING - 0.2% Phelps Dodge Corp 1,000 98,920
8
INDUSTRY COMPANY SHARES VALUE ----------------------------------------------------------------------------------------------- MISCELLANEOUS MANUFACTURING - 3.1% 3M Co 6,232 $ 511,460 Danaher Corp 14,800 849,668 General Electric Co 4,000 146,000 -------------- 1,507,128 OIL & GAS - 1.2% Burlington Resources Inc 3,600 156,600 EOG Resources Inc 2,000 142,720 Exxon Mobil Corp 2,000 102,520 XTO Energy Inc 5,300 187,514 -------------- 589,354 OIL & GAS SERVICES - 2.8% Baker Huges Inc 3,600 153,612 Schlumberger Ltd 17,700 1,185,015 -------------- 1,338,627 PHARMACEUTICALS - 3.9% Bristol-Myers Squibb Co 44,400 1,137,528 Forest Laboratories Inc* 60 2,692 Gilead Sciences Inc* 120 4,199 Pfizer Inc 28,000 752,920 -------------- 1,897,339 RETAIL - 12.8% Best Buy Co Inc 10,430 619,751 Chico's FAS Inc* 2,500 113,825 Home Depot Inc 38,960 1,665,150 Lowe's Companies Inc 10,340 595,481 McDonald's Corp 4,340 139,140 Nordstrom Inc 31,070 1,451,901 PETsMART Inc 18,850 669,740 Staples Inc 17,260 581,835 Starbucks Corp* 2,800 174,608 Walgreen Co 4,900 188,013 -------------- 6,199,444 SEMICONDUCTORS - 2.9% Freescale Semiconductor Inc* 7,121 130,741 Intel Corp 12,000 280,680 Texas Instruments Inc 39,590 974,706 -------------- 1,386,127 SOFTWARE - 3.4% Adobe Systems Inc 2,700 169,398 Autodesk Inc 7,200 273,240 BMC Software Inc* 1,136 21,130 Total System Services Inc 47,950 1,165,185 -------------- 1,628,953 TELECOMMUNICATIONS - 15.5% Avaya Inc* 48,300 830,760 Cisco Systems Inc* 61,400 1,185,020 Juniper Networks Inc* 5,700 154,983 Motorola Inc 64,500 1,109,400 Nextel Communications Inc - Class A* 58,180 1,745,400 Qualcomm Inc 33,500 1,420,400 Scientific-Atlanta Inc 32,000 1,056,320 -------------- 7,502,283 -------------- TOTAL COMMON STOCKS (Cost $43,781,234) 48,760,396 -------------- TOTAL INVESTMENTS - 101.0% (Cost $43,781,234) $ 48,760,396 Liabilities In Excess of Other Assets - (1.0%) (482,643) -------------- NET ASSETS - 100.0% $ 48,277,753 ==============
* NON-INCOME PRODUCING SECURITY ADR - AMERICAN DEPOSITARY RECEIPT SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $43,781,234) $ 48,760,396 Receivable for fund shares sold 71,931 Dividends receivable 50,936 Prepaid expenses 23,233 ------------------------------------------------------------------------------------------------- Total assets 48,906,496 ------------------------------------------------------------------------------------------------- LIABILITIES: Overdraft 510,062 Payable for fund shares redeemed 31,808 Accrued investment adviser fee 14,087 Accrued administration fee 2,348 Accrued directors fee 326 Accrued distribution fee 7,623 Other payables 62,489 ------------------------------------------------------------------------------------------------- Total liabilities 628,743 ------------------------------------------------------------------------------------------------- NET ASSETS $ 48,277,753 ================================================================================================= NET ASSETS REPRESENT: Paid-in capital $ 46,427,081 Accumulated net investment loss (49,069) Accumulated net realized loss on investments (3,079,421) Net unrealized appreciation of investments 4,979,162 ------------------------------------------------------------------------------------------------- NET ASSETS $ 48,277,753 ================================================================================================= NET ASSET VALUE PER SHARE Net assets Class N $ 37,754,860 Class R $ 10,522,893 Shares of beneficial interest outstanding of $.001 par value Class N, 100,000,000 shares authorized 3,419,348 Class R, 40,000,000 shares authorized 955,504 Net asset value, offering and redemption price per share Class N $ 11.04 Class R $ 11.01
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 165,870 Interest 398 ------------------------------------------------------------------------------------------------- Total investment income 166,268 EXPENSES: Investment advisory fees 120,164 Administration fees 12,016 Accounting fees 27,974 Transfer agent fees 42,603 Audit fees 4,525 Tax fees 4,830 Custody fees 7,523 Legal fees 6,648 Blue sky fees 3,864 Distribution fees - Class R 13,653 Directors fees 1,099 Registration fees 2,256 Reports to shareholders 3,000 Miscellaneous 3,015 ------------------------------------------------------------------------------------------------- Total expenses before fees waived 253,170 Less investment advisory fees waived (37,833) ------------------------------------------------------------------------------------------------- Net expenses 215,337 ------------------------------------------------------------------------------------------------- NET INVESTMENT LOSS (49,069) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (2,526,045) Net change in unrealized appreciation / depreciation on investments 4,130,638 ------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 1,604,593 ------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,555,524 =================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment loss $ (49,069) $ (31,395) Net realized loss on investment securities (2,526,045) (553,376) Net change in unrealized appreciation / depreciation on investments 4,130,638 848,524 ------------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 1,555,524 263,753 ------------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares Class N 4,168,562 44,636,671 Class R 400,633 13,565,852 Cost of shares redeemed Class N (7,216,722) (5,380,731) Class R (2,657,808) (1,057,981) ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from share transactions (5,305,335) 51,763,811 ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets (3,749,811) 52,027,564 NET ASSETS: Beginning of period 52,027,564 0 ------------------------------------------------------------------------------------------------------------------------- End of period *** $ 48,277,753 $ 52,027,564 ========================================================================================================================= SHARES ISSUED & REDEEMED: Issued Class N 411,354 4,236,848 Class R 39,819 1,277,545 Redeemed Class N (709,673) (519,180) Class R (260,952) (100,909) ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (519,452) 4,894,304 Outstanding at beginning of period 4,894,304 0 ------------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 4,374,852 4,894,304 ========================================================================================================================= * Unaudited ** Commenced operations on October 31, 2003. *** Including accumulated net investment loss of: $ (49,069) $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED) CLASS N
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.63 $ 10.00 ------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.01) (0.01) Net realized and unrealized gain 0.42 0.64 ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.41 0.63 ------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.04 $ 10.63 ========================================================================================================================= TOTAL RETURN+# 3.86% 6.30% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 37,755 $ 39,532 Ratios to average net assets: Expenses after waivers and reimbursements* 0.84% 0.84% Expenses before waivers and reimbursements* 1.00% 1.13% Net investment loss after waivers and reimbursements* (0.15%) (0.09%) Portfolio turnover rate 14.0% 6.7%
CLASS R
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 10.62 $ 10.00 ------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment loss^ (0.02) (0.08) Net realized and unrealized gain 0.41 0.70 ------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.39 0.62 ------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.01 $ 10.62 ========================================================================================================================= TOTAL RETURN+# 3.67% 6.20% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 10,523 $ 12,495 Ratios to average net assets: Expenses after waivers and reimbursements* 1.09% 1.09% Expenses before waivers and reimbursements* 1.25% 1.29% Net investment loss after waivers and reimbursements* (0.40%) (0.34%) Portfolio turnover rate 14.0% 6.7%
* ANNUALIZED ** COMMENCED OPERATIONS ON OCTOBER 31, 2003. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 100,000,000 and 40,000,000 shares have been classified into Class N and Class R of the Large-Cap Growth Fund, respectively. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Large-Cap Growth Fund seeks to provide long-term total return of capital, primarily through capital appreication. Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of financial statements of the Large-Cap Growth Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other ivestments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles 14 generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. Fees provided for under the Rule 12b-1 plan of a particular class of the fund are charged to the operations of such class. All other expenses are allocated among the classes on relative net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase tranaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the 15 Fund pays the Adviser a total fee which is comprised of a Base Fee and a Performance Adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the annual rate of 0.50% of the value of the Fund's average daily net assets. The Performance Adjustment equals 0.33% times the difference in cumulative total return between the Fund and the Russell 1000 Growth Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. Since the Fund does not have a five-year operating history, the Performance Adjustment Rate will be calculated as follows during the initial five-year period: (a) From inception through September 30, 2004, the Performance Adjustment Rate was inoperative thus the Advisory Fee was calculated based on the Base Advisory Fee Rate times the average daily net assets of the Fund only; b) From September 30, 2004 through September 30, 2008, the Performance Adjustment Rate will be calculated based upon a comparison of the investment performance of the Fund and the Index over the number of quarters that have elapsed since the Fund's inception. Each time the Performance Adjustment Rate is calculated, it will cover a longer time span, until it can cover a running five-year period as intended. In the meantime, the early months of the transition period will have a disproportionate effect on the performance adjustment of the fee. The Performance Adjustment Rate varies from a minimum of -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.84% of the value of its average net assets for Class N shares and 1.09% of the value of its average net assets for Class R shares for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived advisory fees of $137,833. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Large-Cap Growth Fund is disclosed in the Statement of Operations. 4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES: Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a Distribution Agreement dated January 2, 2004. The Adviser pays all costs and expenses associated with distribution of the Fund's Class N shares pursuant to a protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15, 1996. On October 22, 2003, shareholders of the seven investment portfolios of the fund then existing approved an amendment to the Rule 12b-1 plan to permit the creation of a second class of shares, Class R, that would pay distribution and service fees to the distributor up to 0.25% of average daily net assets of the Class R Shares. Class R shares were subsequently created for the new Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the Large-Cap Value Fund. During the six months ended December 31, 2004 distribution fees of $13,653 were accrued to Large-Cap Growth Class R shareholders. 5. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $6,774,140 and $11,702,119, respectively, for the six months ended December 31, 2004. 16 6. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 6,811,469 Gross unrealized (depreciation) (1,832,307) -------------------------------------------------------------- Net unrealized appreciation on investments $ 4,979,162 ============================================================== Cost of investments $ 43,781,234 ==============================================================
The Fund has deferred to its fiscal year ending June 30, 2005, $553,376 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Accumulated capital losses (553,376) Unrealized appreciation 848,524
The temporary differences between book and tax are primarily due to post October losses. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 17 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 38% of the Fund. 18 This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] LARGE-CAP VALUE FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Large-Cap Value Shareholder, Our Fund was up 11.11% for the December 2004 quarter, compared to a 10.38% gain for our primary market benchmark, the Russell 1000 Value Index, and an 8.80% return of our peer benchmark, the Lipper Large-Cap Value Index. The table below presents our performance for the December quarter, 1 year, and annualized performance since inception, followed by a graph of performance since inception as well as a new, SEC-mandated breakdown of sector representation in the Fund.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 10/31/03 TO 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------- LARGE-CAP VALUE FUND-CLASS N 11.11% 15.15% 19.96% LARGE-CAP VALUE FUND-CLASS R 11.07% 14.79% 19.65% Russell 1000 Value Index 10.38% 16.49% 21.36% Lipper Large-Cap Value Index 8.80% 12.00% 17.18%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. THE RUSSELL 1000 VALUE INDEX IS AN UNMANAGED INDEX WHICH CONSISTS OF STOCKS IN THE RUSSELL 1000 INDEX WITH LOWER PRICE-TO-BOOK RATIOS AND LOWER FORECASTED GROWTH VALUES. THE LIPPER LARGE-CAP VALUE INDEX IS AN INDEX OF LARGE-COMPANY, VALUE-ORIENTED FUNDS COMPILED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. [CHART] GROWTH OF $10,000 INVESTED IN LARGE-CAP VALUE FUND AND INDEXES FROM 10/31/03 (INCEPTION) TO 12/31/04
BRIDGEWAY BRIDGEWAY LIPPER LARGE-CAP VALUE FUND - CLASS N LARGE-CAP VALUE FUND - CLASS R RUSSELL 1000 VALUE INDEX LARGE-CAP VALUE INDEX 10/03 10000 10000 10000 10000 12/03 10740 10740 10760 10744 3/04 11310 11300 11086 11003 6/04 11110 11090 11184 11119 9/04 11130 11100 11357 11059 12/04 12367 12329 12535 12033
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004
SECTOR LARGE-CAP VALUE FUND S&P 500 INDEX DIFFERENCE ----------------------------------------------------------------------------------------------------------- Basic Materials 3.8% 2.9% 0.9% Communications 14.6% 11.3% 3.3% Consumer, Cyclical 14.2% 9.9% 4.3% Consumer, Non-cyclical 8.8% 21.2% -12.4% Energy 10.6% 7.2% 3.4% Financial 27.2% 20.6% 6.6% Industrial 10.6% 11.6% -1.0% Technology 2.3% 12.4% -10.1% Utility 7.9% 2.9% 5.0% ----------------------------------------------------------------------------------------------------------- TOTAL 100.0% 100.0% 0.0%
PERFORMANCE SUMMARY TRANSLATION: For the December quarter, both share classes of the Fund beat both the Russell 1000 Value Index of large, value-oriented stocks and the peer-group average. For the year, both share classes of the Fund beat their peer-group average but slightly lagged the Index. We are not entirely happy with these results. However, it is worth noting that after a relatively lackluster nine months, the Fund in the fourth quarter of the year returned - in just three months - slightly more than the S&P 500 Index has typically returned over the course of a year. We say this not to excuse our performance, but because it offers a good reminder of the value of sticking with investment decisions and resisting panic and the urge to sell when things look less than great. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well- managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). 2 In conclusion, what is remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work for periods of time, and statistically, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance - hardly what investors in a large-stock fund want to hear. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock (of any size) at a time. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. Of course, company size is hardly the only investment variable. "Style," too, plays a significant role, and 2004 was pretty bad for "growth"-oriented stocks, building on a very bad five-year trend. The following bar chart shows the relative performance of growth versus value oriented large stocks, over the past one, three, and five years ended 12/31/04, based on data from Morningstar: [CHART]
VALUE GROWTH 1 Year 14.05% 0.19% 3 Year 6.95% -4.35% 5 Year 4.54% -16.22%
3 This pattern of weak growth-stock performance is exactly what one would expect...during the bear-market phase of a stock-market cycle. But from a historical perspective, it's distinctly unusual for the last two years of a recovery. Our models are suggesting a shift toward growth stocks, but not as strongly as they indicate a shift toward large stocks. My conclusion from all this: make sure your portfolio is in balance with your target allocation and long term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT WORKED WELL TRANSLATION: What a difference a day makes - or, more accurately, a handful of years. Not so long ago, technology stocks, cable-TV companies and "telecoms" were situated about as firmly in the growth camp as it's possible to get. But when the tech-stock bubble burst in early 2000, and the rest of the market - particularly the growth-oriented names - followed it down, those stocks got a heaping helping of humility. Beaten down, their newly attractive valuations (based on a variety of financial measures) locate them pretty firmly on the value side of the equation, and several former high-flyers were among this Fund's best performers for the December quarter, during which six of our stocks gained more than 30%.
RANK DESCRIPTION INDUSTRY % GAIN --------------------------------------------------------------------------------- 1 Advanced Micro Devices Inc Semiconductors 69.4% 2 NCR Corp Computers 39.6% 3 Liberty Media International Inc Media 38.6% 4 AT&T Corp Telecommunications 33.1% 5 Archer-Daniels-Midland Co Food 31.4% 6 E*TRADE Financial Corp Diversified Financial Svcs 30.9%
Leading the pack, with a gain nearly twice what its nearest rival achieved, was Advanced Micro Devices, a long-beleaguered chip-maker based in Sunnyvale, CA. After treading water for much of the year, the stock began to surge in September, mostly because of perceived missteps on the part of primary rival Intel. AMD's third-quarter results further fueled the stock: Revenues were up 30% over the same period the previous year, thanks in large part to strong sales of the company's 64-bit processors. And in November the stock got another boost as rumors began circulating that PC-giant Dell Computer would join IBM, Sun Microsystems, and Hewlett-Packard in producing servers based around AMD's "Opteron" chip. AMD is still a good 50% below the peak share-price it achieved in early 2000, but after gaining more than 69% in the December quarter, it may not be a value stock for too much longer. Third-place finisher Liberty Media International is very much a new kid on the block, spun off in June from former parent company Liberty Media. It is now one of the largest (arguably THE largest, depending on how you measure) cable-TV operators outside the United States. The stock opened limp and traded down from there, but it began picking up steam around the end of the third quarter, with the announcement of a partnership with Japan's Sumitomo Corp., followed by the announcement that the stock had been added to the Nasdaq-100 Index. In sixth place, online brokerage E*TRADE Financial had spent much of the year in a holding pattern. Online brokerages have been suffering a lot, thanks in part to weak trading volume (when you don't trade, they don't make money) and pressure to cut commissions. And though E*TRADE's stock had held up better than most, it certainly wasn't setting any records. In October, however, the company released its third-quarter numbers, which easily beat analysts' estimates. And in November, E*TRADE announced that trading volume in October had climbed by 26% from September levels, which was enough to push the stock onto our Fund's list of winners for the quarter. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: Happily, there was nothing that didn't work - or, at least, nothing that lost more than 30% for the quarter. We're very happy about this. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT WORKED TRANSLATION: An insurance firm, a chip-maker, a chicken-processor, a homebuilder...the companies on the list of top performers for the year don't have a lot in common. They didn't even have their runs at the same time: While some saw their stock 4 prices take off in the fourth quarter - as was the case for much of the market - others turned in 12 months of steady upticks. Regardless, eleven stocks in our Fund gained more than 30% for the year.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------- 1 Aetna Inc Healthcare Services 53.4% 2 Amerada Hess Corp Oil & Gas 49.0% 3 NCR Corp Computers 46.5% 4 Countrywide Financial Corp Diversified Financial Svcs. 46.3% 5 DR Horton Inc Home Builders 41.1% 6 Parker Hannifin Corp Electronics 40.7% 7 Tyson Foods Inc Food 39.0% 8 Norfolk Southern Corp Transportation 36.6% 9 Occidental Petroleum Corp Oil & Gas 33.2% 10 Advanced Micro Devices Inc Semiconductors 32.7% 11 Textron Inc Misc. Manufacturers 30.9%
For both Aetna, the Hartford insurance firm, and D.R. Horton, a Fort Worth-based homebuilder, the last two months of the year were key to the return for the entire year. Both stocks had spent the previous 10 months making moderate gains followed by moderate losses, but the release of strong third-quarter numbers produced returns of more than 30%, for both stocks, in the last two months of the year. By contrast, Dayton-based computer systems company NCR began its run in mid-July, with an announcement that earnings for the second quarter - soon to be released - would double analysts' expectations. And top-place finisher Advanced Micro Devices, as noted in the section on December-quarter results, didn't do much of anything until September, whereas industrial conglomerate Textron (maker of Cessna airplanes, among other things) began moving slowly upward in May. It would be nice to find a pattern among these powerful performers - nice because patterns offer potential predictability. But in the absence of a pattern, we're glad to take the returns. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: I'm delighted to report that no stocks in the Fund's portfolio lost more than 30% for the year. TOP TEN HOLDINGS At quarter end, Financials were our biggest sector weighting, at 27.1% of net assets, followed by Communications, at 14.5%, and Consumer (Cyclical), at 14.1%. Our top ten holdings represented 25.4% of total net assets, indicating much broader diversification than is the case in Bridgeway's more aggressively managed Aggressive Investors funds. At the end of December, our top ten holdings represented ten different industries.
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ------------------------------------------------------------------------------- 1 ChevronTexaco Corp Oil & Gas 3.1% 2 Textron Inc Misc. Manufacturers 2.8% 3 Aetna Inc Healthcare Services 2.7% 4 Duke Energy Corp Electric 2.6% 5 Juniper Networks Inc Telecommunications 2.4% 6 Berkshire Hathaway Inc Insurance 2.4% 7 Phelps Dodge Corp Mining 2.4% 8 Ford Motor Co Auto Manufacturers 2.4% 9 E*TRADE Group Inc Diversified Financial Svcs. 2.3% 10 Archer-Daniels-Midland Co Food 2.3% ------------------------------------------------------------------------------- 25.4%
5 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. These views are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. THE FUND IS SUBJECT TO MARKET RISK (VOLATILITY) AND IS NOT AN APPROPRIATE INVESTMENT FOR SHORT-TERM INVESTORS. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-611-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05) CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we read them looking for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees; distribution (12b-1) fees; and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY LARGE-CAP VALUE FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ----------------------------------------------------------------------------------------------------- CLASS N Actual Fund Return $ 1,000.00 $ 1,113.15 $ 4.47 Hypothetical Fund Return $ 1,000.00 $ 1,020.97 $ 4.28 CLASS R Actual Fund Return $ 1,000.00 $ 1,111.69 $ 5.80 Hypothetical Fund Return $ 1,000.00 $ 1,019.71 $ 5.55
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIOS OF 0.84% AND 1.09% FOR CLASS N AND CLASS R, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ------------------------------------------------------------------------------------------- COMMON STOCKS - 99.6% AEROSPACE/DEFENSE - 1.4% Northrop Grumman Corp 6,800 $ 369,648 AGRICULTURE - 0.2% Bunge Ltd 1,000 57,010 AUTO MANUFACTURERS - 3.8% Ford Motor Co 41,500 607,560 General Motors Corp 9,540 382,172 --------------- 989,732 BANKS - 4.1% AmSouth Bancorp 5,000 129,500 Bank of America Corp 9,008 423,286 KeyCorp 13,000 440,700 US Bancorp 2,000 62,640 --------------- 1,056,126 BUILDING MATERIALS - 1.5% Eagle Materials Inc 133 11,485 Eagle Materials Inc - Class B 450 37,935 Vulcan Materials Co 6,300 344,043 --------------- 393,463 COMPUTERS - 0.9% NCR Corp* 3,300 228,459 DIVERSIFIED FINANCIAL SERVICES - 13.7% Bear Stearns Companies Inc 4,534 463,874 Citigroup Inc 10,040 483,727 Countrywide Financial Corp 7,778 287,864 E*TRADE Group Inc* 39,600 592,020 FHLMC 2,500 184,250 Goldman Sachs Group Inc 5,600 582,624 JP Morgan Chase & Co 10,850 423,259 Lehman Brothers Holdings Inc 2,070 181,084 Morgan Stanley & Co 6,200 344,224 --------------- 3,542,926 ELECTRIC - 6.5% American Electric Power Inc 5,500 188,870 Duke Energy Corp 26,100 661,113 Edison International 10,000 320,300 Southern Co 15,050 504,476 --------------- 1,674,759 ELECTRONICS - 0.3% Parker Hannifin Corp 1,000 75,740 FOOD - 3.0% Archer-Daniels-Midland Co 26,354 587,958 Tyson Foods Inc 10,420 191,728 --------------- 779,686 FOREST PRODUCTS & PAPER - 0.8% Georgia-Pacific Corp 5,500 206,140 GAS - 1.4% KeySpan Corp 8,300 327,435 Sempra Energy 900 33,012 --------------- 360,447 HAND/MACHINE TOOLS - 0.7% Black & Decker Corp 2,000 176,660 HEALTHCARE PRODUCTS - 1.6% Zimmer Holdings Inc* 5,000 $ 400,600 HEALTHCARE SERVICES - 3.9% Aetna Inc 5,650 704,837 WellPoint Health Networks Inc* 2,700 310,500 --------------- 1,015,337 HOME BUILDERS - 6.3% Centex Corp 7,840 467,107 DR Horton Inc 12,720 512,743 Lennar Corp 8,260 468,177 Pulte Homes Inc 2,560 163,328 --------------- 1,611,355 INSURANCE - 8.5% Allstate Corp 3,760 194,467 American International Group Inc 7,700 505,659 Berkshire Hathaway Inc* 210 616,560 Cigna Corp 2,600 212,082 Fidelity National Financial Inc 8,502 388,286 Safeco Corp 5,264 274,991 --------------- 2,192,045 INTERNET - 0.0%^ Amazon.com Inc* 120 5,315 IRON/STEEL - 0.6% United States Steel Corp 3,000 153,750 MEDIA - 3.9% Liberty Media Corp - Class A* 29,400 322,812 Liberty Media International Inc* 1,470 67,958 Time Warner Inc* 26,900 522,936 Walt Disney Co 3,000 83,400 --------------- 997,106 MINING - 2.4% Phelps Dodge Corp 6,200 613,304 MISCELLANEOUS MANUFACTURING - 4.8% Eastman Kodak Co 13,600 438,600 Eaton Corp 1,000 72,360 Textron Inc 9,700 715,860 --------------- 1,226,820 OFFICE/BUSINESS EQUIPMENT - 0.0%^ Xerox Corp* 300 5,103 OIL & GAS - 10.6% Amerada Hess Corp 4,780 393,776 Chesapeake Energy Corp 5,000 82,500 Chevron Texaco Corp 15,000 787,650 Conoco Phillips 5,800 503,614 Kerr-McGee Corp 3,000 173,370 Occidental Petroleum Corp 9,600 560,256 Unocal Corp 2,000 86,480 Valero Energy Corp 3,000 136,200 --------------- 2,723,846 PHARMACEUTICALS - 0.0%^ Bristol-Myers Squibb Co 400 10,248
8
INDUSTRY COMPANY SHARES VALUE ------------------------------------------------------------------------------------------- RETAIL - 4.0% Costco Wholesale Corp 3,000 $ 145,230 CVS Corp 5,740 258,702 Federated Department Stores 2,400 138,696 JC Penny Co Inc 3,000 124,200 Kmart Corp* 2,000 197,900 May Department Stores Co 1,000 29,400 Nordstrom Inc 3,000 140,190 --------------- 1,034,318 SAVINGS AND LOANS - 0.8% Golden West Financial Corp 3,200 196,544 SEMICONDUCTORS - 1.4% Advanced Micro Devices Inc* 16,300 358,926 TELECOMMUNICATIONS - 10.6% AT&T Corp 26,700 508,902 Corning Inc* 22,600 266,002 Juniper Networks Inc* 22,775 619,252 Lucent Technologies Inc* 107,300 403,448 SBC Communications Inc 9,400 242,238 Sprint Corp 5,000 124,250 Verizon Communications Inc 14,030 568,355 --------------- 2,732,447 TRANSPORTATION - 1.9% Burlington Northern Santa Fe Corp 2,000 94,620 FedEx Corp 2,000 196,980 Norfolk Southern Corp 5,150 186,379 --------------- 477,979 TOTAL COMMON STOCKS (Cost $22,200,841) 25,665,839 --------------- MONEY MARKET MUTUAL FUNDS - 0.0%^ First American Treasury Obligations Fund - Class S 3,084 3,084 --------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $3,084) 3,084 --------------- TOTAL INVESTMENTS - 99.6% (Cost $22,203,925) 25,668,923 Other Assets In Excess of Liabilities - 0.4% 94,836 --------------- NET ASSETS - 100.0% $ 25,763,759 ===============
* NON-INCOME PRODUCING SECURITY ^ LESS THAN 0.05% OF NET ASSETS SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $22,203,925) $ 25,668,923 Receivable for investments sold 213,391 Receivable for fund shares sold 58,121 Dividends receivable 20,905 Interest receivable 98 Prepaid expenses 17,590 ----------------------------------------------------------------------------------- Total assets 25,979,028 ----------------------------------------------------------------------------------- LIABILITIES: Payable for fund shares redeemed 11,599 Payable for investments purchased 130,661 Accrued investment adviser fee 2,306 Accrued administration fee 2,462 Accrued directors fee 781 Accrued distribution fee 2,050 Other payables 65,410 ----------------------------------------------------------------------------------- Total liabilities 215,269 ----------------------------------------------------------------------------------- NET ASSETS $ 25,763,759 =================================================================================== NET ASSETS REPRESENT: Paid-in capital $ 22,878,597 Overdistributed net investment income (3,536) Accumulated net realized loss on investments (576,300) Net unrealized appreciation of investments 3,464,998 ----------------------------------------------------------------------------------- NET ASSETS $ 25,763,759 =================================================================================== NET ASSET VALUE PER SHARE Net assets Class N $ 22,727,684 Class R $ 3,036,075 Shares of beneficial interest outstanding of $.001 par value Class N, 100,000,000 shares authorized 1,852,914 Class R, 40,000,000 shares authorized 247,684 Net asset value, offering and redemption price per share Class N $ 12.27 Class R $ 12.26
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 207,859 Interest 189 -------------------------------------------------------------------------------------------------- Total investment income 208,048 EXPENSES: Investment advisory fees 58,634 Administration fees 5,864 Accounting fees 28,471 Transfer agent fees 25,682 Audit fees 7,025 Tax fees 5,830 Custody fees 5,144 Legal fees 3,233 Blue sky fees 3,864 Distribution fees - Class R 3,753 Directors fees 1,050 Registration fees 1,034 Reports to shareholders 3,000 Miscellaneous 915 -------------------------------------------------------------------------------------------------- Total expenses before fees waived 153,499 Less investment advisory fees waived (51,241) -------------------------------------------------------------------------------------------------- Net expenses 102,258 -------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 105,790 -------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (552,674) Net change in unrealized appreciation / depreciation on investments 2,964,893 -------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 2,412,219 -------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,518,009 ==================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED PERIOD ENDED DECEMBER 31, 2004* JUNE 30, 2004** -------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 105,790 $ 85,674 Net realized loss on investment securities (552,674) (23,626) Net change in unrealized appreciation / depreciation on investments 2,964,893 500,105 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 2,518,009 562,153 -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net investment income Class N (178,133) 0 Class R (16,867) 0 -------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (195,000) 0 -------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares Class N 3,825,721 25,134,529 Class R 162,317 3,617,947 Reinvestment of distributions Class N 176,052 0 Class R 16,867 0 Cost of shares redeemed Class N (3,910,202) (5,075,457) Class R (657,969) (411,208) -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets from share transactions (387,214) 23,265,811 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets 1,935,795 23,827,964 NET ASSETS: Beginning of period 23,827,964 0 -------------------------------------------------------------------------------------------------------------------- End of period *** $ 25,763,759 $ 23,827,964 ==================================================================================================================== SHARES ISSUED & REDEEMED: Issued Class N 337,086 2,323,344 Class R 14,480 328,292 Distributions reinvested Class N 14,337 0 Class R 1,375 0 Redeemed Class N (352,620) (469,233) Class R (59,393) (37,070) -------------------------------------------------------------------------------------------------------------------- Net increase (decrease) (44,735) 2,145,333 Outstanding at beginning of period 2,145,333 0 -------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 2,100,598 2,145,333 ==================================================================================================================== * Unaudited ** Commenced operations on October 31, 2003 *** Including (over) undistributed net investment income of: $ (3,536) $ 85,674
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED) CLASS N
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ----------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 11.11 $ 10.00 ----------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income^ 0.05 0.03 Net realized and unrealized gain 1.21 1.08 ----------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.26 1.11 ----------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net investment income (0.10) 0.00 ----------------------------------------------------------------------------------------------------------------------- Total distributions (0.10) 0.00 ----------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 12.27 $ 11.11 ======================================================================================================================= TOTAL RETURN+# 11.31% 11.10% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 22,728 $ 20,598 Ratios to average net assets: Expenses after waivers and reimbursements* 0.84% 0.84% Expenses before waivers and reimbursements* 1.28% 1.52% Net investment income after waivers and reimbursements* 0.93% 0.86% Portfolio turnover rate 14.1% 11.3%
CLASS R
SIX MONTHS ENDED FOR THE PERIOD DECEMBER 31, OCTOBER 31, 2003 TO 2004*** JUNE 30, 2004** ----------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 11.09 $ 10.00 ----------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income^ 0.04 0.01 Net realized and unrealized gain 1.20 1.08 ----------------------------------------------------------------------------------------------------------------------- Total from investment operations 1.24 1.09 ----------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net investment income (0.07) 0.00 ----------------------------------------------------------------------------------------------------------------------- Total distributions (0.07) 0.00 ----------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 12.26 $ 11.09 ======================================================================================================================= TOTAL RETURN+# 11.17% 10.90% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 3,036 $ 3,230 Ratios to average net assets: Expenses after waivers and reimbursements* 1.09% 1.09% Expenses before waivers and reimbursements* 1.53% 1.74% Net investment income after waivers and reimbursements* 0.68% 0.55% Portfolio turnover rate 14.1% 11.3%
* ANNUALIZED ** COMMENCED OPERATIONS ON OCTOBER 31, 2003. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 100,000,000 and 40,000,000 shares have been classified into Class N and Class R of the Large-Cap Value Fund, respectively. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Large-Cap Value Fund seeks to provide long-term total return of capital, primarily through capital appreication and some income. Bridgeway Capital Management, Inc. (the "Adviser") is the adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of financial statements of the Large-Cap Value Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 14 management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. Fees provided for under the Rule 12b-1 plan of a particular class of the fund are charged to the operations of such class. All other expenses are allocated among the classes on relative net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004, there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, 15 which is comprised of a Base Fee and a Performance adjustment. The Base Fee equals the Base Fee Rate times the average daily net assets of the Fund. The Base Fee Rate is based on the annual rate of 0.50% of the value of the Fund's average daily net assets. The Performance Adjustment equals 0.33% times the difference in cumulative total return between the Fund and the Russell 1000 Value Index with dividends reinvested (hereinafter "Index") over a rolling five-year performance period. Since the Fund does not have a five-year operating history, the Performance Adjustment Rate will be calculated as follows during the initial five-year period: (a) From inception through September 30, 2004, the Performance Adjustment Rate was inoperative thus the Advisory Fee was calculated based on the Base Advisory Fee Rate times the average daily net assets of the Fund only; (b) From September 30, 2004 through September 30, 2008, the Performance Adjustment Rate will be calculated based upon a comparison of the investment performance of the Fund and the Index over the number of quarters that have elapsed since the Fund's inception. Each time the Performance Adjustment Rate is calculated, it will cover a longer time span, until it can cover a running five-year period as intended. In the meantime, the early months of the transition period will have a disproportionate effect on the performance adjustment of the fee. The Performance Adjustment Rate varies from a minimum of -0.05% to a maximum of +0.05% However, the Performance Adjustment Rate is zero if the difference between the cumulative Fund performance and the Index performance is less than or equal to 2%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.84% of the value of its average net assets for Class N shares and 1.09% of the value of its average net assets for Class R shares for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived Advisory fees of $51,241. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management will act as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Large-Cap Value Fund is disclosed in the Statement of Operations. 4. DISTRIBUTION AND SHAREHOLDER SERVICING FEES: Forum Fund Services, LLC acts as distributor of the Fund's shares pursuant to a Distribution Agreement dated January 2, 2004. The Adviser pays all costs and expenses associated with distribution of the Fund's Class N shares pursuant to a protective plan adopted by shareholders pursuant to Rule 12b-1 on October 15, 1996. On October 22, 2003, shareholders of the seven investment portfolios of the fund then existing approved an amendment to the Rule 12b-1 plan to permit the creation of a second class of shares, Class R, that would pay distribution and service fees to the distributor up to 0.25% of average daily net assets of the Class R Shares. Class R shares were subsequently created for the new Small-Cap Growth Fund, Small-Cap Value Fund, Large-Cap Growth Fund and the Large-Cap Value Fund. During the six months ended December 31, 2004 distribution fees of $3,753 were accrued to Large-Cap Value Class R shareholders. 5. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $3,320,525 and $3,921,640, respectively, for the six months ended December 31, 2004. 6. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment 16 companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 3,709,779 Gross unrealized (depreciation) (252,002) ---------------------------------------------------------- Net unrealized appreciation on investments $ 3,457,777 ========================================================== Cost of investments $ 22,211,146 ==========================================================
The difference between book and tax net unrealized appreciation is wash sale loss deferrals. The Fund has deferred to its fiscal year ending June 30, 2005, $16,405 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 85,867 Accumulated capital losses (16,405) Unrealized appreciation 492,884
The temporary differences between book and tax are primarily due to wash sales and post October losses. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 17 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge , upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 31% of the Fund. 18 This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] BLUE CHIP 35 INDEX FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Blue Chip 35 Index Fund Shareholder, The Fund appreciated 8.20% for the December 2004 quarter, compared with a 9.23% increase of our primary benchmark, the S&P 500 Index, and an 8.95% increase for our peer group, the Lipper Growth and Income Fund Index. On the bright side, we slightly beat Bridgeway's index of ultra-large companies, a positive result for an index fund. Overall, results were strong on an absolute basis, but mixed on a relative basis. The table below presents our December quarter, one-year, five-year and life-to-date financial results according to the formula required by the SEC.
DEC. QTR 1 YEAR 5 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 1/1/00 TO 7/31/97 TO 12/31/04 12/31/04 12/31/04 12/31/04 ------------------------------------------------------------------------------------- BLUE CHIP 35 INDEX FUND 8.20% 4.79% -3.10% 6.08% S&P 500 Index (1) 9.23% 10.88% -2.30% 4.82% Bridgeway Ultra-Large 35 Index (2) 7.97% 4.29% -2.66% 6.22% Lipper Growth and Income Funds (3) 8.95% 11.72% 1.65% 4.72%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. (1) THE S&P 500 INDEX IS A BROAD-BASED, UNMANAGED MEASUREMENT OF CHANGES IN STOCK MARKET CONDITIONS BASED ON THE AVERAGE OF 500 WIDELY HELD COMMON STOCKS. (2) THE BRIDGEWAY ULTRA-LARGE 35 INDEX IS AN INDEX COMPRISED OF VERY LARGE, "BLUE CHIP" U.S. STOCKS, EXCLUDING TOBACCO; IT IS COMPILED BY THE ADVISER OF THE FUND. (3) THE LIPPER GROWTH AND INCOME FUNDS REFLECT THE AGGREGATE RECORD OF DOMESTIC GROWTH AND INCOME MUTUAL FUNDS AS REPORTED BY LIPPER, INC. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. For the full calendar year our Fund was up 4.79%, compared to a gain of 10.88% for the S&P 500 Index and a gain of 11.72% for the Lipper Growth and Income Funds Index. According to data from Lipper, Inc., our Fund ranked 1,197th of 1,248 growth and income funds for the past year, 640th of 799 such funds over the past five years and 154th of 543 since inception. In the environment of a small-cap dominated market over the last five years, our ultra-large stock fund has lagged our peer group of funds. The reverse is true for the full period since inception, however, which includes (only) two years of a large-company dominated market environment. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various categories by making comparative calculations using total returns. On the next page is a graph of the Fund's performance since inception. SHAREHOLDER LETTER [CHART] GROWTH OF $10,000 INVESTED IN BLUE CHIP 35 INDEX FUND AND INDEXES FROM 7/31/97 (INCEPTION) TO 12/31/04
BRIDGEWAY BRIDGEWAY BLUE CHIP 35 INDEX FUND S&P 500 INDEX ULTRA-LARGE 35 INDEX LIPPER GROWTH & INCOME FUNDS 7/97 10000 10000 10000 10000 9/97 9860 9957 9860 10111 12/97 10000 10242 10000 10210 3/98 11700 11667 11700 11374 6/98 12200 12051 12204 11396 9/98 11100 10855 11060 9975 12/98 13911 13163 13740 11596 3/99 15138 13817 14742 11842 6/99 15902 14790 15616 12941 9/99 15178 13868 14945 11905 12/99 18133 15932 17910 12972 3/00 18761 16297 18664 13190 6/00 17768 15864 17587 12859 9/00 17099 15710 16864 13238 12/00 15391 14481 15041 13023 3/01 13956 12764 13952 11999 6/01 14817 13511 14743 12650 9/01 12973 11528 13018 10998 12/01 13997 12760 14235 12056 3/02 14017 12795 14166 12265 6/02 12296 11081 12376 11017 9/02 10409 9167 10489 9204 12/02 11474 9940 11596 9899 3/03 11137 9627 11265 9488 6/03 12927 11109 13106 10945 9/03 13095 11403 13289 11208 12/03 14786 12791 15006 12602 3/04 14702 13008 14888 12890 6/04 14892 13232 15098 12983 9/04 14320 12984 14495 12923 12/04 15495 14183 15651 14079
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. PERFORMANCE SUMMARY IN A SMALL COMPANY DOMINATED MARKET TRANSLATION: We underperformed the S&P 500 Index for the quarter and the full calendar year ended December 31, 2004. The primary culprit for both these periods was a market environment which strongly favored small stocks and most strongly DISFAVORED the largest companies - our bread and butter. The primary culprit in lagging recent performance relative to the S&P 500 Index has been the extreme lagging of the largest companies, especially over the last one and five year periods. Calendar year 2004 presents the sixth year in a row, the longest running period over the last eight decades, that small stocks have beaten large ones. Consider this data from the Center for Research in Security Prices:
CRSP (1) SINCE 12/98 DECILE QTR YR (AVG. ANNUAL) ----------------------------------------------------- 1 7.9% 7.9% -0.7% 2 12.8% 20.2% 6.9% 3 13.5% 17.8% 8.2% 4 14.8% 18.7% 8.7% 5 12.8% 17.5% 7.6% 6 12.8% 22.0% 11.0% 7 15.3% 18.9% 9.7% 8 15.9% 21.9% 14.7% 9 16.5% 15.1% 15.9% 10 16.4% 18.7% 21.7%
(1) THE CRSP CAP-BASED PORTFOLIO INDEXES ARE UNMANAGED INDEXES OF PUBLICLY TRADED U.S. STOCKS WITH DIVIDENDS REINVESTED, GROUPED BY THE MARKET CAPITALIZATION, AS REPORTED BY THE CENTER FOR RESEARCH ON SECURITY PRICES. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The smallest companies (decile 10) beat the largest companies (decile 1) by more than 10% over the last year. Even more remarkable is the fact that decile 2 (very large) companies also beat the decile 1 (ultra-large) ones by more than twelve percentage points. On a relative basis, ultra-large companies, including the ones in our Fund, were in the doghouse over the last year. Over the last six years, the smallest companies beat the largest ones by a whopping 22+% per year. Historically, small companies have beaten large ones only half the time. While the future always looks somewhat different than the past, I do not expect small company dominance to continue unabated. 2 This is not the environment in which I would expect our Fund to shine. On an absolute basis, however, it is worth noting that in the last quarter of the calendar year, the Fund made up much of the ground it had lost earlier in 2004. This serves as a reminder of the value of sticking with investment decisions and resisting panic and the urge to sell when things look bad. Remember, though, that this "holding through the downturn" strategy works best in concert with other financial principles, such as saving, avoiding most kinds of debt, diversifying (and regularly rebalancing) your portfolio, setting aside an emergency fund, and choosing well managed, low-cost funds whose investment objectives - anything from very aggressive growth to ultra-low-risk income - matches with the time-horizons of the investments you're making. This is a fancy way of saying that the more years you can afford to wait before tapping a particular pile of money, the more risk you can afford to take with it. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast . . . Let's look at the statistics purely from a market perspective. Over the 10 years through December 31, 2004, the S&P 500 Index of large companies returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index either beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. In conclusion, what IS remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. This frees up tremendous emotional energy to spend on more important things. All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, some investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and based on more than seven decades of history, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance, which would not bode as well for this Fund. 3 On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer models of our aggressive investors funds have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so these models began finding a larger number of "attractive" large stocks than at any time we can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, I don't put much effort into trying to guess the market's direction; we just stick to the discipline of our investment process. Still, we believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan, including appropriate exposure to large stocks. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: Four companies in the Fund gained more than 20% for the year. For a passively managed Fund such as this one, one quarter is generally too short a period of time to discuss details of performance. Let me focus, rather, on the full calendar year. Of the four top gainers, two are in consumer-oriented businesses (and a third, Dell Computer, has a strong consumer angle, in that it sells its products, admittedly, technology products, to individuals). That's not really a surprise. The consumer sector in general (encompassing both consumer services and consumer goods) was a strong performer for the year. But while sector-analysis can be interesting and often valuable in explaining performance, it's far from the last word. For proof, take a look at the bottom of list, where the double-digit losers live; several of them are also in the consumer sector. Top performer McDonald's earned its spot by being a comeback kid. After giving ground again and again to rivals in the Burger Wars - and seeing its stock pay the price - McDonald's staged a turnaround beginning in August. The company announced that its second-quarter operating profit margins had risen by 6% over the previous year, thanks in part to the rollout of pricier salads. The rally strengthened in September, when McDonald's raised its annual dividend by 38% (off a level that itself represented a 70% increase from the dividend offered in 2002). And it picked up further steam in October, with the announcement that third-quarter earnings were up 42% from 2003, substantially beating analysts' estimates. Much of the credit goes to late CEO James Cantalupo, who trimmed the company's expansion plans, sold off underperforming locations, and refocused the company on improving sales and profits at its existing stores. Meanwhile, third-place finisher Dell Computer owed its place on the list almost entirely to the second half of the fourth quarter. After more than ten months of meandering around in a tight, not-very-interesting trading range, the stock jumped nearly 9% overnight, to its highest level in four years, when the company announced that increased U.S. business spending and strong growth in Europe and Asia had boosted second-quarter earnings by 27% over the previous year. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: Only one stock lost more than 20% for the year, but nearly half the stocks in the portfolio were in the red. The Fund was certainly hurt by the market's continued bias toward smaller stocks. For the year, for example, small-cap value stocks were up an average of 24%, according to Morningstar, compared with a gain of about 14% for the typical large-cap value stock. In addition, we paid a heavy price for our significant position in pharmaceuticals. At more than 10% of assets, as of December 31, 2004, pharmaceuticals represent the largest sector weighting in the portfolio - and, unfortunately, pharmaceutical companies were among the biggest losers for the year, losing an average of more than 1%. As holders of pharmaceutical companies such as Merck and Pfizer, however, we could only wish they had been down 1% for the year. Pfizer, in fact, was in a downward spiral for nearly the entire 12 months, but Merck's troubles only really began at the end of September, with the recall of arthritis drug Vioxx on concerns that it increased the risk of stroke and heart attack in habitual users. Not only did the recall cost Merck's stock some 40% of its value, it also led to investigations of the company by both the SEC and the Department of Justice, which hardly inspired investors to climb back in. A few months later, Pfizer's Celebrex - formulaically related to Vioxx - was also recalled, and Eli Lilly, while stopping short of recalling its Strattera, used in the treatment of ADHD, did announced that the drug should not be used by patients with liver damage. 4 The result of the recalls and warnings and probes has been a crisis of confidence in "big pharma," as investors wait for the next shoe to drop. Of course, the pharmaceutical sector didn't have a lock on scandal for the year. Mortgage-finance giant Fannie Mae, for example, joined the ranks of the fallen when it missed the deadline for filing its third-quarter financial results and acknowledged that it would have to restate billions of dollars worth of past years' earnings in order to recognize an estimated $9 billion in investment losses. Given the government investigations and class-action lawsuits that inevitably followed, the real surprise may be that the stock was only down about 4% for the year. And unfortunately, a company didn't have to be embroiled in scandal to make our losers' list. Coca-Cola didn't trigger any government probes or lawsuits, but the stock nevertheless hit the skids in early September when the company warned that weak sales in some of its key markets (North America, Germany) and the need for a steep increase in advertising expenditures would knock revenues and earnings in the second half of the year to levels well below analysts' estimates. It will take more than a sip of something sweet to help us swallow the resulting 15% loss. TOTAL RETURN FOR BLUE CHIP 35 INDEX FUND STOCKS FOR THE CALENDAR YEAR 2004
RANK COMPANY INDUSTRY % CHANGE ----------------------------------------------------------------------------------------- 1 McDonald's Corp Retail 25.9% 2 Exxon Mobil Corp Oil & Gas 22.5% 3 Dell Inc Computers 22.4% 4 Johnson & Johnson Healthcare Products 21.1% 5 ChevronTexaco Corp Oil & Gas 19.1% 6 Home Depot Inc Retail 18.7% 7 General Electric Co Miscellaneous Manufacturing 16.6% 8 Bank of America Corp Banks 16.2% 9 United Parcel Service Inc Transportation 16.0% 10 Verizon Communications Inc Telecommunications 13.7% 11 PepsiCo Inc Beverages 10.1% 12 Oracle Corp Software 9.2% 13 EI Du Pont de Nemours & Co Chemicals 9.2% 14 Procter & Gamble Co Cosmetics/Personal Care 8.7% 15 Time Warner Inc Media 8.4% 16 International Business Machines Corp Computers 7.3% 17 Wells Fargo & Co Banks 6.5% 18 Comcast Corp Media 4.3% 19 Berkshire Hathaway Inc Insurance 2.6% 20 SBC Communications Inc Telecommunications 1.4% 21 Citigroup Inc Diversified Financial Services -0.9% 22 Wal-Mart Stores Inc Retail -0.9% 23 American International Group Inc Insurance -1.1% 24 3M Co Miscellaneous Manufacturing -1.7% 25 Microsoft Corp Software -2.0% 26 Ford Motor Co Auto Manufacturers -4.1% 27 Fannie Mae Diversified Financial Services -4.2% 28 Hewlett-Packard Co Computers -4.4% 29 Bristol-Myers Squibb Co Pharmaceuticals -5.3% 30 Texas Instruments Inc Semiconductors -8.9% 31 Coca-Cola Co/The Beverages -15.3% 32 Cisco Systems Inc Telecommunications -15.8% 33 Merck & Co Inc Pharmaceuticals -17.7% 34 Eli Lilly & Co Pharmaceuticals -17.8%
5
RANK COMPANY INDUSTRY % CHANGE ----------------------------------------------------------------------------------------- 35 Intel Corp Semiconductors -18.7% 36 Pfizer Inc Pharmaceuticals -23.4%
NOTE: SMALL POSITIONS WITH APPRECIATION OR LOSS LESS THAN 0.01% IMPACT ON THE FUND PERFORMANCE ARE EXCLUDED FROM THE LIST OF BEST AND WORST PERFORMERS. Dormant companies(1) 1) Zimmer Holdings Inc Healthcare - Products 5.7% 2) Medco Health Solutions Pharmaceuticals -1.8%
(1) DORMANT COMPANIES ARE SMALL POSITIONS TYPICALLY ACQUIRED AS SPIN-OFFS. WE DO NOT INVEST NEW MONEY IN THEM AND WILL EITHER HOLD OR SELL THEM DEPENDING ON TAX CONSEQUENCES. RETURNS OF THESE TWO DORMANT COMPANIES AR SHOWN SEPARATELY BECAUSE THEY WERE IN THE BLUE CHIP INDEX FUND ON DECEMBER 31, 2003. BOTH WERE SOLD IN THE CALENDER YEAR 2004. SECTOR REPRESENTATION AS OF DECEMBER 31, 2004 As of December 31, 2004, relative to the S&P 500 Index, we are "heavy" on technology and somewhat "light" on financial and utility stocks. Technology stocks did well in 2004, so this is not the reason we underperformed the S&P 500 Index. The primary reason relates to company size, as discussed above. The following table presents the percentage of our Fund's stocks by sector of the economy relative to that of our primary market benchmark.
BLUE CHIP 35 INDEX FUND S&P 500 INDEX DIFFERENCE --------------------------------------------------------------------- Basic Materials 3.0% 2.9% 0.1% Communications 14.0% 11.3% 2.7% Consumer, Cyclical 11.3% 9.9% 1.4% Consumer, Non-cyclical 20.9% 21.2% -0.3% Energy 5.7% 7.2% -1.5% Financial 16.0% 20.6% -4.6% Industrial 8.6% 11.6% -3.0% Technology 20.5% 12.4% 8.1% Utilities 0.0% 2.9% -2.9% --------------------------------------------------------------------- TOTAL 100.0% 100.0% 0.0%
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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to above average market risk (volatility) and is not an appropriate investment for short-term investors. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05). CONCLUSION As always, we appreciate your feedback. We take your responses seriously and discuss them at our weekly staff meetings. Please keep your ideas coming--we continually look for ways to improve our service. Sincerely, /s/ John Montgomery John Montgomery 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY BLUE CHIP 35 INDEX FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ---------------------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,040.43 $ 0.77 Hypothetical Fund Return $ 1,000.00 $ 1,024.45 $ 0.77
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.15% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY SHARES VALUE ------------------------------------------------------------------------------------------- COMMON STOCKS - 100.1% AUTO MANUFACTURERS - 2.6% Ford Motor Co 70,282 $ 1,028,928 BANKS - 5.5% Bank of America Corp 23,628 1,110,280 Wells Fargo & Co 16,760 1,041,634 --------------- 2,151,914 BEVERAGES - 5.0% The Coca-Cola Co 21,257 884,929 PepsiCo Inc 20,405 1,065,141 --------------- 1,950,070 CHEMICALS - 3.0% El Du Pont de Nemours & Co 24,052 1,179,751 COMPUTERS - 9.4% Dell Inc* 31,844 1,341,906 Hewlett-Packard Co 57,593 1,207,725 International Business Machines Corp 11,572 1,140,768 --------------- 3,690,399 COSMETICS/PERSONAL CARE - 2.8% Procter & Gamble Co 19,736 1,087,059 DIVERSIFIED FINANCIAL SERVICES - 5.1% Citigroup Inc 23,014 1,108,815 Fannie Mae 12,338 878,589 --------------- 1,987,404 HEALTHCARE PRODUCTS - 3.1% Johnson & Johnson 19,012 1,205,741 INSURANCE - 5.5% American International Group Inc 17,591 1,155,201 Berkshire Hathaway Inc* 345 1,012,920 --------------- 2,168,121 MEDIA - 6.1% Comcast Corp, Class A* 36,748 1,222,973 Time Warner Inc* 60,789 1,181,738 --------------- 2,404,711 MISCELLANEOUS MANUFACTURING - 5.6% 3M Co 12,753 1,046,639 General Electric Co 31,928 1,165,372 --------------- 2,212,011 OIL & GAS - 5.7% ChevronTexaco Corp 21,250 1,115,837 Exxon Mobil Corp 21,727 1,113,726 --------------- 2,229,563 PHARMACEUTICALS - 10.1% Bristol-Myers Squibb Co 38,859 995,568 Eli Lilly & Co 15,280 867,140 Merck & Co Inc 38,746 1,245,296 Pfizer Inc 31,623 850,342 --------------- 3,958,346 RETAIL - 8.7% Home Depot Inc 28,415 1,214,457 McDonald's Corp 35,971 1,153,230 Wal-Mart Stores Inc 20,019 1,057,404 --------------- 3,425,091 SEMICONDUCTORS - 5.8% Intel Corp 46,733 1,093,085 Texas Instruments Inc 47,680 1,173,882 --------------- 2,266,967 SOFTWARE - 5.3% Microsoft Corp 30,340 $ 810,381 Oracle Corp* 93,148 1,277,991 --------------- 2,088,372 TELECOMMUNICATIONS - 7.8% Cisco Systems Inc* 52,174 1,006,958 SBC Communications Inc 38,994 1,004,875 Verizon Communications Inc 26,439 1,071,044 --------------- 3,082,877 TRANSPORTATION - 3.0% United Parcel Service Inc 13,703 1,171,058 TOTAL COMMON STOCKS (Cost $35,692,273) 39,288,383 --------------- MONEY MARKET MUTUAL FUNDS - 0.0%^ First American Treasury Obligations Fund - Class S 668 668 --------------- TOTAL MONEY MARKET MUTUAL FUNDS (Cost $668) 668 --------------- TOTAL INVESTMENTS - 100.1% (Cost $35,692,941) 39,289,051 Liabilities in Excess of Other Assets -(0.1%) (28,132) --------------- NET ASSETS - 100.0% $ 39,260,919 ===============
* NON-INCOME PRODUCING SECURITY ^ LESS THEN 0.05% OF NET ASSETS ALL SHARES OF SECURITIES ARE PLEDGED AS COLLATERAL FOR THE BORROWINGS UNDER THE SECURITY AGREEMENT FOR THE FUND'S LINE OF CREDIT. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $35,692,941) $ 39,289,051 Receivable for investments sold 414,330 Receivable for fund shares sold 93,264 Dividends receivable 36,768 Interest receivable 21 Receivable from investment adviser 9,002 Prepaid expenses 22,550 ------------------------------------------------------------------------------------------------------------ Total assets 39,864,986 ------------------------------------------------------------------------------------------------------------ LIABILITIES: Payable for fund shares redeemed 151,120 Loan payable to bank 406,000 Interest on loan payable to bank 589 Accrued administration fee 1,678 Accrued directors fee 654 Other payables 44,026 ------------------------------------------------------------------------------------------------------------ Total liabilities 604,067 ------------------------------------------------------------------------------------------------------------ NET ASSETS $ 39,260,919 ============================================================================================================ NET ASSETS REPRESENT: Paid-in capital $ 37,446,946 Undistributed net investment income 9,267 Accumulated net realized loss on investments (1,791,404) Net unrealized appreciation of investments 3,596,110 ------------------------------------------------------------------------------------------------------------ NET ASSETS $ 39,260,919 ============================================================================================================ Shares of common stock outstanding of $.001 par value, 130,000,000 shares authorized 5,470,450 ------------------------------------------------------------------------------------------------------------ Net asset value, offering and redemption price per share $ 7.18 ============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 9 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 450,520 Interest 748 -------------------------------------------------------------------------------------------------- Total investment income 451,268 EXPENSES: Investment advisory fees 15,041 Administration fees 9,401 Accounting fees 25,175 Transfer agent fees 23,320 Audit fees 4,463 Tax fees 5,830 Custody fees 3,853 Legal fees 2,602 Blue sky fees 8,823 Directors fees 733 Registration fees 1,128 Reports to shareholders 1,000 Interest on outstanding loan payable 1,316 Miscellaneous 2,965 -------------------------------------------------------------------------------------------------- Total expenses before waiver & reimbursements 105,650 Less investment advisory fees waived (15,041) Less expenses reimbursed by investment adviser (62,334) -------------------------------------------------------------------------------------------------- Net expenses 28,275 -------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 422,993 -------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (243,654) Net change in unrealized appreciation / depreciation on investments 1,451,671 -------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 1,208,017 -------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,631,010 ==================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 -------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 422,993 $ 381,770 Net realized loss on investment securities (243,654) (218,728) Net change in unrealized appreciation / depreciation on investments 1,451,671 2,003,255 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 1,631,010 2,166,297 -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net investment income (675,002) (169,895) -------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (675,002) (169,895) -------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 8,492,359 35,070,449 Reinvestment of distributions 650,127 164,179 Cost of shares redeemed (6,797,274) (9,034,667) -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from share transactions 2,345,212 26,199,961 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets 3,301,220 28,196,363 NET ASSETS: Beginning of period 35,959,699 7,763,336 -------------------------------------------------------------------------------------------------------------------- End of period ** $ 39,260,919 $ 35,959,699 ==================================================================================================================== SHARES ISSUED & REDEEMED: Issued 1,237,600 5,144,761 Distributions reinvested 90,295 23,589 Redeemed (978,067) (1,312,195) -------------------------------------------------------------------------------------------------------------------- Net increase 349,828 3,856,155 Outstanding at beginning of period 5,120,622 1,264,467 -------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 5,470,450 5,120,622 ==================================================================================================================== * Unaudited ** Including undistributed net investment income of: $ 9,267 $ 261,276
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEAR ENDED JUNE 30, 2004** 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 7.02 $ 6.14 $ 5.93 $ 7.23 $ 8.77 $ 7.91 ---------------------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income^ 0.08 0.10 0.09 0.09 0.09 0.08 Net realized and unrealized gain (loss) 0.20 0.83 0.21 (1.31) (1.54) 0.85 ---------------------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.28 0.93 0.30 (1.22) (1.45) 0.93 ---------------------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net investment income (0.12) (0.05) (0.09) (0.08) (0.09) (0.07) ---------------------------------------------------------------------------------------------------------------------------------- Total distributions (0.12) (0.05) (0.09) (0.08) (0.09) (0.07) ---------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 7.18 $ 7.02 $ 6.14 $ 5.93 $ 7.23 $ 8.77 ================================================================================================================================== TOTAL RETURN+ 4.04%# 15.20% 5.13% (17.01%) (16.61%) 11.74% RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 39,261 $ 35,960 $ 7,763 $ 5,532 $ 5,975 $ 7,365 Ratios to average net assets: Expenses after waivers and reimbursements 0.15%* 0.15% 0.15% 0.15% 0.15% 0.15% Expenses before waivers and reimbursements 0.56%* 0.58% 1.07% 0.93% 0.68% 0.47% Net investment income after waivers and reimbursements 2.25%* 1.64% 1.65% 1.35% 1.15% 0.98% Portfolio turnover rate 7.1% 5.3% 24.9% 40.8% 24.0% 25.9%
* ANNUALIZED ** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 130,000,000 shares have been classified into the Blue-Chip 35 Index Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Blue Chip 35 Index Fund seeks to provide a long-term total return of capital, primarily through capital appreciation but also some income. Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Blue Chip 35 Index Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. 13 USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option which the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. Buying calls increases the Fund's exposure to the underlying security to the extent of any premium paid. Buying puts on a stock market index tends to limit the Fund's exposure to a stock market decline. As of December 31, 2004, there were no outstanding options. INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future 14 claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser a total fee, which is computed and paid monthly. The Fund pays a flat 0.08% annual management fee, computed daily and payable monthly, subject to a maximum expense ratio of 0.15%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.15% of the value of its average net assets for the six months ended December 31, 2004. During the period, the Adviser reimbursed expenses of $62,334 and waived Advisory fees of $15,041. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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. BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Blue-Chip 35 Index Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Aggregate purchases and sales of investment securities, other than U.S. government securities and cash equivalents were $4,989,696 and $2,633,489, respectively, for the six months ended December 31, 2004. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 4,772,427 Gross unrealized (depreciation) (1,312,585) -------------------------------------------------------------------- Net unrealized appreciation on investments $ 3,459,842 ==================================================================== Cost of investments $ 35,829,209 ====================================================================
The difference between book and tax unrealized appreciation is wash sale loss deferrals. As of June 30, 2004, the Fund had capital loss carryovers of $885, $25,756, $106,811, $100,306, $429,064, $337,509, and $327,296 available to offset capital gains to the extent provided in regulations, which will expire on June 30, 2006, 2007, 2008, 2009, 2010, 2011, and 2012, respectively. The Fund has deferred to its fiscal year ending June 30, 2005, $70,680 of losses recognized during the period November 1, 2003 to June 30, 2004. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 261,276 Accumulated capital losses (1,327,627) Unrealized appreciation 1,995,016 Cumulative Effect of other timing differences (70,680)
15 The temporary differences between book and tax are primarily due to wash sales and post October losses. As of June 30, 2004, the tax character of the distributions paid were:
YEAR ENDED YEAR ENDED JUNE 30, 2004 JUNE 30, 2003 ----------------------------------------------------------------- Ordinary income $ 169,895 $ 85,747 Long-term capital gains - -
During the year ended June 30, 2004, the Fund paid a dividend from net investment income of $0.0531 per share to shareholders of record. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. LINE OF CREDIT: The Fund has established a line of credit agreement ("LOC") with U.S. Bank, N.A. (the "Bank" or "Lender") which matures on June 1, 2005 and is renewable annually at the Bank's option, to be used for temporary or emergency purposes, primarily for financing redemption payments. Any and all advances under this Facility would be for a maximum of fifteen (15) business days and are at the sole discretion of the Lender based on the merits of the specific transaction. Advances under the Facility are limited to the lesser of $1,650,000 or 33 1/3% of the Fund's net assets. Borrowings under the line of credit bear interest based on the Lender's Prime Rate. Principal is due fifteen days after each advance and at the Maturity. Interest is payable monthly in arrears. The minimum advance is $1,000. As of December 31, 2004, the Fund had a $406,000 balance with its secured line of credit. During the six months ended December 31, 2004, the average borrowing was $49,929 with an average rate on borrowings of 4.80%. 7. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 16 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 64% of the Fund. 17 This Page Intentionally Left Blank [BRIDGEWAY FUNDS LOGO] BALANCED FUND SEMI-ANNUAL REPORT DECEMBER 31, 2004 February 25, 2005 Dear Fellow Balanced Fund Shareholders: Our Fund appreciated 4.83% in the December quarter compared to a 0.03% return for the Bloomberg/EFFAS U.S. Government 1-3 year Total Return Bond Index, a 6.40% return for the Lipper Balanced Fund Index and a 3.35% return for the Balanced Benchmark. The results are good on an absolute basis, but mixed on a relative basis. The table below presents our December quarter, one year and life-to-date financial results according to the formula required by the SEC.
DEC. QTR. 1 YEAR LIFE-TO-DATE 10/1/04 TO 1/1/04 TO 7/1/01 TO 12/31/04 12/31/04 12/31/04 -------------------------------------------------------------------------------- Balanced Portfolio 4.83% 7.61% 5.22% Bloomberg/ EFFAS U.S. Government 1-3 year Total Return Bond Index 0.03% 0.87% 3.70% Lipper Balanced Fund Index 6.40% 8.99% 4.04% S&P 500 Index 9.23% 10.88% 1.39% Balanced Benchmark 3.35% 4.47% 2.79%
PERFORMANCE FIGURES QUOTED REPRESENT PAST PERFORMANCE AND ARE NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE FIGURES QUOTED, AND AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE, PLEASE CALL 1-800-661-3550 OR VISIT THE FUND'S WEBSITE AT www.bridgeway.com. THE LIPPER BALANCED FUNDS IS AN INDEX OF BALANCED FUNDS COMPILED BY LIPPER, INC. BALANCED BENCHMARK IS A COMBINED INDEX OF WHICH 40% REFLECTS THE S&P 500 INDEX (AN UNMANAGED INDEX OF LARGE COMPANIES WITH DIVIDENDS REINVESTED) AND 60% REFLECTS THE BLOOMBERG/EFFAS U.S. GOVERNMENT 1-3 YEAR TOTAL RETURN BOND INDEX (TRANSPARENT BENCHMARK FOR THE TOTAL RETURN OF THE 1-3 YEAR U.S. GOVERNMENT BOND MARKET). IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX OR AVERAGE. PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. PERIODS LONGER THAN ONE YEAR ARE ANNUALIZED. For the calendar year 2004 the Balanced Fund returned 7.61% compared to an 0.87% return for the Bloomberg/EFFAS U.S. Government 1-3 year Total Return Bond Index, a 8.99% return for the Lipper Balanced Fund Index and a 4.47% return for the Balanced Benchmark. According to data from Lipper, Inc., the Balanced Fund ranked 337th of 576 balanced funds for the calendar year 2004 and 73rd of 424 funds since inception. Lipper, Inc. is an independent mutual fund rating service that ranks funds in various fund categories by making comparative calculations using total returns. According to data from Morningstar, the Balanced Fund ranked 85th of 394 Conservative Allocation funds for the 12-month period ending December 31, 2004 and 39th out of 228 funds for three years. [CHART] GROWTH OF $10,000 INVESTED IN BALANCED FUNDAND INDEXES FROM 6/30/01 (INCEPTION) TO 12/31/04
BRIDGEWAY BALANCED FUND LIPPER BALANCED FUND S&P 500 INDEX BLOOMBERG/EFFAS BOND INDEX BALANCED BENCHMARK 6/01 10000 10000 10000 10000 10000 9/01 9230 9242 8532 10342 9618 12/01 9771 9841 9444 10425 10033 3/02 10083 9900 9470 10416 10038 6/02 9922 9246 8201 10671 9683 9/02 9339 8333 6784 10932 9273 12/02 9428 8789 7357 11029 9560 3/03 9397 8628 7125 11106 9514 6/03 10177 9569 8222 11195 10006 9/03 10440 9765 8440 11242 10121 12/03 11107 10541 9467 11258 10542 3/04 11453 10793 9628 11371 10673 6/04 11494 10779 9793 11252 10668 9/04 11402 10798 9610 11353 10656 12/04 11953 11489 10497 11356 11013
THE RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES A SHAREHOLDER WOULD PAY ON THE REDEMPTION OF FUND SHARES OR FUND DISTRIBUTIONS. SHAREHOLDER LETTER DETAILED EXPLANATION OF QUARTERLY PERFORMANCE TRANSLATION: We beat our "balanced" market benchmark for the year by a pretty broad margin, but lagged our peer group. Relatively speaking, this is better than it could have been, but not as good as we'd like. In evaluating the Fund's performance, it may be useful to note that we opened the Fund with the goal of capturing as much of the stock market's gains as possible while using bonds and stock derivative instruments to minimize losses. Specifically, we wanted to expose shareholders to no more than 40% of the market's "downside," to lose no more than 40% of what the broad market lost. In the three and a half years since inception we have achieved that goal (actually, we've done just a hair better), and since we at Bridgeway take risk at least as seriously as we take returns, that's something we're pretty proud of. It's a result we hope you're happy with too. To calculate this risk-ratio, we went back to the Fund's inception date. For every month since that date, we compared the Fund's performance with that of the S&P 500 Index. If the Index lost money - as it did in 16 of those months - our goal was for the Fund to lose only 40% as much. Averaged over the three and a half years that the Fund has been in existence, we have met that goal with the exact number coming in at 39.7%. At the same time - and this is something we're also pretty proud of - we have captured nearly 60% of the market's "upside." Of course, risk and reward are always a trade-off: By and large, any steps you take to minimize the risk in a portfolio also minimize the potential for gain. As our results suggest, though, the trade-off has not been even-steven over the first three and a half years of our Fund. We were able to do better in an up market than what our down market results would have suggested. In an upcoming shareholder letter, we intend to talk about risk, the various ways in which it's measured, and how we like to think about it and deal with it. But for now, we hope you're as pleased as we are with the Fund's risk record. YEAR-TO-DATE MARKET COMMENTARY: IT'S UP (MARCH), IT'S UP (JUNE), OOOPS - IT'S DOWN (SEPTEMBER), NO, IT'S REALLY UP, REALLY! (END OF YEAR). TRANSLATION: Notwithstanding news events (and the commentary of many market pundits), 2004 was a remarkably average year. The combination of rising interest rates, a declining U.S. dollar, inflation, the presidential election, war and natural disasters should have produced some extraordinary results, right? Not so fast.... Let's look at the statistics purely from a market perspective. Over the 10 years through the 31st of December, 2004, the S&P 500 Index returned an average of 12.05% per year. (I know, that sounds unbelievable, given how weak the past few years' performance has been, but the market of the mid- and late 1990s really was pretty remarkable.) That's only about one and one-half percentage points better than the Index's return for 2004. Furthermore, if we look all the way back to 1925, we see that the market has returned an average of 10.4% per year - and that's over a 79-year period that includes the Great Depression, World War II, the white-hot "go-go" market of the 1960s and the brutal bear market of the early 1970s. In about two-thirds of those years, the Index beat or lagged that 10.4% average by more than 10 percentage points. From that perspective, therefore, 2004's return of 10.88% was about as average as you can get. . . . but wasn't this a very volatile year? No. In fact, the actual variation of monthly returns in 2004 was about half of the average of the preceding decade. Throughout that 10-year period, only one year - 1995 - was less volatile. In other words, in 2004 the stock market "bounced around" a whole lot LESS than normal. In conclusion, what IS remarkable about 2004 is how average it was in terms of returns and how "tame" it was with respect to volatility. Not what you might conclude from reading standard financial commentaries, many of which described a market lurching dramatically between struggle and triumph. All that drama can be very compelling, but it doesn't necessarily lead to an accurate understanding of the market's behavior in the long run, nor does it necessarily produce sound investment decisions. For that reason, though I have four computer screens in my office, none of them runs a ticker, and I frequently go home at the end of the day without knowing whether the overall market was up or down. This frees up tremendous emotional energy to spend on more important things (including actually finding the next good stock pick). 2 All that said, the market of 2004 did exhibit some unusual characteristics, in particular the continued - and extraordinary - performance of smaller stocks. This was the sixth year in a row that small stocks beat large ones, the longest period of consecutive annual small-stock dominance in the last eight decades. What does this imply for the future? History suggests two possible responses. On the one hand, some investment strategies - such as buying small-cap stocks or value stocks or real-estate-oriented stocks - that have worked well in the recent past tend to keep working, as investors get caught up in the excitement and become increasingly confident that a given strategy is the right way to go. This is essentially a self-fulfilling prophecy: If everyone agrees that small stocks, for example, are going to keep going up, they will go up, because everyone buys them. So-called momentum investing has come in for a lot of negative publicity in the past few years, because it was investors following a momentum strategy who both fueled the tech-stocks bubble of the late '90s and early 2000 and then (when they switched strategies) caused it to collapse. The fact is, though, that a momentum strategy can work FOR PERIODS OF TIME, and based on more than seven decades of history, when small stocks have done well relative to the overall market in one year, they are more likely to do well in the next one. So we could conceivably see a record-setting seventh year in a row of small-stock dominance. Since this Fund focuses more heavily on large stocks, this would not help our performance. On the other hand, we could see the exact opposite. For investment managers, making predictions is often the surest way to get your head handed to you on a platter, but our computer stock picking models have no such concerns, and they are pointing to a shift toward larger stocks. Specifically, over the past 12 months or so our models began finding a larger number of "attractive" large stocks than at any time I can remember in about five years. This is almost certainly a function of relative valuation; i.e., based on a variety of financial measures, and thanks to the multi-year run-up in the price of small stocks, larger stocks in general are starting to look relatively attractive again. At Bridgeway, we don't put much effort into trying to guess the market's direction; we're just trying to find one good stock at a time in the actively managed portion of this Fund. Still, I believe it's likely that the tide will turn back in favor of large stocks at SOME point in the next couple of years. It's a good time (ok, any time is a good time) to make sure your own portfolio is in balance with your long-term plan. DETAILED EXPLANATION OF QUARTERLY PERFORMANCE TRANSLATION: Three stocks in our portfolio gained more than 50% in the December quarter. None declined by this amount.
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------ 1 Apple Computer Inc Computers 66.2% 2 Autodesk Inc Software 56.1% 3 Monsanto Co Agriculture 52.5%
Apple Computer was our top performer for the quarter. A well known computer and electronics manufacturer, Apple Computer makes the very popular iPod digital music player, as well as the iMac and PowerCube personal computers. The stock has done well on surging sales of iPods and the growth of the digital music-player industry. In the holiday season just ended, major retailers like Amazon.com (the biggest Internet retailer), and Best Buy Company (the largest electronics retailer) ran out of or ran short of some popular iPod models. By some estimates Apple could sell 4 million iPods in the December quarter, compared with just over 700,000 in the previous holiday season. Number Two for the quarter was Autodesk. The company produces sophisticated computer software for graphics-heavy applications -- its products are used by architects, surveyors, designers, and engineers, among others - and it has continued to increase both revenues and profits. The stock hit a 52-week high in the last week of the year, and was 2004's top performer in the S&P 500, with a gain of 210%. DETAILED EXPLANATION OF CALENDAR YEAR PERFORMANCE - WHAT WORKED WELL TRANSLATION: To a certain extent, the December quarter really carried the year, so the good news for the quarter and the year are largely the same. Over the course of the calendar year, 14 companies gained more than 40%. 3
RANK DESCRIPTION INDUSTRY % GAIN ------------------------------------------------------------------------------ 1 Autodesk Inc Software 167.8% 2 Apple Computer Inc Computers 130.5% 3 Monsanto Co Agriculture 93.0% 4 NCR Corp Computers 67.9% 5 KB Homes Home Builders 65.4% 6 Adobe Systems Inc Software 62.2% 7 Qualcomm Inc Telecommunications 57.2% 8 United States Steel Corp Iron/Steel 52.7% 9 Norfolk Southern Corp Transportation 49.6% 10 Brunswick Corp Leisure Time 49.1% 11 Aetna Inc Healthcare Services 48.1% 12 FedEx Corp Transportation 45.9% 13 Edison International Electric 43.9% 14 WW Grainger Inc Distribution/Wholesale 40.6%
Given the strength of the fourth quarter, it's not surprising that many of the companies on the list above earned their place on that list in the last three months of the year. Apple Computer and Autodesk, certainly, made the majority of their gains for the year late in 2004, as did Aetna, the Hartford, CT-based insurance firm. Aetna's stock spent the first ten months of the year essentially treading water, making moderate advances followed by moderate declines. But in November, the company released impressive third-quarter results, and the stock gained more than 30% in about eight weeks alone. But not every stock was a fourth-quarter player. For example, Dayton-based computer systems company NCR began its run in mid-July, with an announcement that earnings for the second quarter - soon to be released - would double analysts' expectations. And FedEx stock spent the entire year on an upward trek. The company profited very handsomely off the pick-up in the global economy, with shipments from Asia particularly strong. Investors loved FedEx's impressive earnings growth (up 157% in the first fiscal quarter, and 283% in the second), doubled operating margins, and acquisition of the Kinko's chain of shops providing copying and computer services. DETAILED EXPLANATION OF CALENDAR-YEAR PERFORMANCE - WHAT DIDN'T WORK TRANSLATION: The list of big losers for the year is happily short but, as always, it's painful. Five companies in the Fund's portfolio lost more than 40% of their value in 2004. Here is the list of companies that declined more than 40% last year:
RANK DESCRIPTION INDUSTRY % LESS ------------------------------------------------------------------------------ 1 Novell Inc Software -53.8% 2 Nortel Networks Corp Telecommunications -49.1% 3 QLogic Corp Semiconductors -48.0% 4 Teradyne Inc Semiconductors -42.4% 5 Watson Pharmaceuticals Inc Pharmaceuticals -40.2%
The worst performer of the year was software-vendor Novell. In theory, the company should have done well: The Linux operating system is gaining in popularity, and Novell stands to benefit. But instead, the stock headed nowhere but down, crushed by a series of quarterly results that failed to meet analysts' estimates, by software giant Microsoft's attack on the company's market share lead, and by the departure of Novell's second-highest-ranking executive. Our Fund lost more than 53% on Novell in calendar 2004, which is pretty ugly. 4 Like Novell, Teradyne turned in some appealing numbers that nevertheless lagged what analysts were expecting...and the stock went down. Meanwhile, Watson Pharmaceuticals produced almost nothing that anyone wanted to hear, at least in the first half of the year or so. Hamstrung by pricing pressures on its generic drugs, the company underperformed the estimates and the stock was soundly punished. Things picked up a bit in the second half of the year, with some excitement surrounding the company's skin-patch to treat female sexual dysfunction. However, Watson couldn't get much traction; investors were troubled by the turnover in senior management and by the company's announced intention of a fairly radical restructuring of its business model. TOP TEN HOLDINGS Here are the top ten holdings at the end of December. Please note that the option positions included here are short puts. The percentages are based on a theoretical stock position, that is, as if we owned the underlying stock. We are obligated to buy the underlying stock at a specific strike price for a specific period of time.
PERCENT OF RANK DESCRIPTION INDUSTRY NET ASSETS ------------------------------------------------------------------------------------------------------ 1 Autodesk Inc, incl January $32.5 & $30 puts Software 2.0% 2 Bristol-Myers Squibb Co, incl January $25 & $22.5 puts Pharmaceuticals 2.0% 3 CIGNA Corp, incl January $65 & $70 put Insurance 1.9% 4 SBC Communications Inc, incl January $25 & April $25 puts Telecommunications 1.8% 5 Apple Computer Inc, incl January $65, $60 & $55 puts Computers 1.8% 6 Eastman Chemical Co, incl January $55 puts Chemicals 1.7% 7 General Motors Corp, incl January $37.5 puts Auto Manufacturers 1.7% 8 Ford Motor Co, incl February $15 & March $12.5 puts Auto Manufacturers 1.6% 9 Texas Utilities, incl January $60 & $65 puts Electric 1.4% 10 Carpenter Technology Corp, incl January $50 & $55 puts Iron/Steel 1.3% ------------------------------------------------------------------------------------------------------ 17.2%
INDUSTRY SECTOR REPRESENTATION AS OF DECEMBER 31, 2004 COMMON STOCK 52.3% Basic Materials 1.4% Communications 6.9% Consumer, Cyclical 6.4% Consumer, Non-Cyclical 11.1% Energy 3.4% Financial 10.2% Industrial 5.4% Technology 6.0% Utilities 1.5% U. S. GOVERNMENT OBLIGATIONS 43.2% CORPORATE NOTES 3.5% COVERED CALL OPTIONS WRITTEN (0.5%) PUT OPTIONS WRITTEN (0.3%) MONEY MARKET FUNDS 0.9% OTHER ASSETS IN EXCESS OF LIABILITIES 0.9% -------------------------------------------------------------------- TOTAL 100.0%
5 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. These views, including those of market sectors or individual stocks, are not meant as investment advice and should not be considered predictive in nature. Any favorable (or unfavorable) description of a holding applies only as of the quarter end, December 31, 2004, unless otherwise stated. Security positions can and do change thereafter. Discussions of historical performance do not guarantee and are not indicative of future performance. The Fund is subject to market risk (volatility) and is not an appropriate investment for short-term investors. The Fund uses an option writing strategy in which the Fund may sell covered calls or secured put options. Up to 75% of Fund assets may be invested in option writing. Options are subject to special risks and may not fully protect the Fund against declines in the value of its stocks. In addition, an option writing strategy limits the upside profit potential normally associated with stocks. While the Adviser seeks to decrease the Fund's exposure to market risk through use of fixed income and derivative instruments (especially options writing), there is no guarantee these strategies will work in all market environments. BEFORE INVESTING YOU SHOULD CAREFULLY CONSIDER THE FUND'S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. THIS AND OTHER INFORMATION IS IN THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED BY CALLING 1-800-661-3550 OR VISITING THE FUND'S WEBSITE. PLEASE READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST. FORUM FUND SERVICES, LLC, DISTRIBUTOR. (02/05). CONCLUSION In closing, we would like to thank all shareholders for their support. We appreciate your feedback, so please call or write us with any questions or comments. We work for you and value your input. Sincerely, /s/ Richard P. Cancelmo Richard P. Cancelmo, Jr. 6 DISCLOSURE OF FUND EXPENSES (UNAUDITED) As a shareholder to the Fund, you will incur no transactions costs, including sales charges (loads) on purchases, on reinvested dividends, or on other distributions. There are also no redemption fees or exchange fees. However, the fund will incur ongoing costs, including management fees and other Fund expenses. The following examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested on July 1, 2004 and held until December 31, 2004. ACTUAL RETURN. The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 - 8.6), then multiply the result by the number in the first line under the heading "Expense Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL 5% RETURN. The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in a Fund and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The expenses shown in the table are meant to highlight ongoing Fund costs only and do not reflect transaction fees, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and may not help you determine the relative total costs of owning different funds. BRIDGEWAY BALANCED FUND
BEGINNING ENDING EXPENSE PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD* 7/1/04 12/31/04 7/1/04 - 12/31/04 ---------------------------------------------------------------------------------- Actual Fund Return $ 1,000.00 $ 1,040.02 $ 4.83 Hypothetical Fund Return $ 1,000.00 $ 1,020.47 $ 4.78
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 0.94% MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE FIRST FISCAL HALF-YEAR DIVIDED BY 365 DAYS IN THE CURRENT YEAR (TO REFLECT THE ONE HALF-YEAR PERIOD). 7 SCHEDULE OF INVESTMENTS SHOWING PERCENTAGE OF NET ASSETS AS OF DECEMBER 31, 2004 (UNAUDITED)
INDUSTRY COMPANY PRINCIPAL AMOUNT VALUE ---------------------------------------------------------------------------------------------- U.S. GOVERNMENT OBLIGATIONS - 43.2% U.S. TREASURY BILLS - 24.8% 01/13/05 1.63%** $ 900,000 $ 899,511 01/27/05 1.85%** 500,000 499,391 02/03/05 1.74%** 800,000 798,726 03/24/05 1.87%** 500,000 497,600 04/07/05 1.99%** 500,000 497,073 04/28/05 2.04%** 500,000 496,247 05/12/05 2.25%** 500,000 495,700 05/19/05 2.28%** 900,000 891,786 05/26/05 2.36%** 900,000 891,355 06/23/05 2.47%** 900,000 889,387 ------------------ 6,856,776 U.S. TREASURY NOTES - 18.4% 01/31/05 1.63% 200,000 199,969 09/30/05 1.63% 300,000 297,785 10/31/05 1.63% 200,000 198,289 11/30/05 1.88% 200,000 198,438 12/31/05 1.88% 300,000 297,398 01/31/06 1.88% 300,000 297,117 04/30/06 2.25% 500,000 495,859 05/15/06 2.00% 200,000 197,641 05/31/06 2.50% 300,000 298,277 11/15/06 3.50% 200,000 201,688 08/15/07 2.75% 300,000 296,707 11/15/07 3.00% 200,000 198,766 10/15/08 3.13% 200,000 197,867 11/15/08 3.38% 200,000 199,461 04/15/09 3.13% 300,000 295,453 06/15/09 4.00% 300,000 305,707 08/15/09 3.50% 200,000 199,453 10/15/09 3.38% 300,000 297,047 11/15/09 3.50% 200,000 199,062 11/15/13 4.25% 200,000 201,258 ------------------ 5,073,242 TOTAL U.S. GOVERNMENT OBLIGATIONS (Cost $11,947,907) 11,930,018 ------------------ INDUSTRY COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- COMMON STOCKS - 52.3% ADVERTISING - 0.1% Interpublic Group of Cos Inc* 1,400 18,760 AEROSPACE/DEFENSE - 0.8% Boeing Co 700 36,239 General Dynamics Corp 600 62,760 Lockheed Martin Corp 270 14,999 Northrop Grumman Corp 1,200 65,232 United Technologies Corp 370 38,240 ------------------ 217,470 AGRICULTURE - 0.8% Monsanto Co 4,100 227,755 AIRLINES - 0.1% Southwest Airlines Co 1,600 26,048 APPAREL - 0.2% Liz Claiborne Inc 1,200 50,652 AUTO MANUFACTURERS - 2.0% Ford Motor Co 17,500 $ 256,200 General Motors Corp 6,600 264,396 Paccar Inc 400 32,192 ------------------ 552,788 AUTO PARTS & Equipment - 0.1% Johnson Controls Inc 480 30,451 BANKS - 3.1% AmSouth Bancorp 2,540 65,786 Bank of New York Co Inc 2,500 83,550 First Horizon National Corp 1,800 77,598 KeyCorp 2,600 88,140 Marshall & Ilsley Corp 2,000 88,400 National City Corp 2,900 108,895 Regions Financial Corp 2,100 74,739 Synovus Financial Corp 3,500 100,030 Wachovia Corp 1,557 81,898 Wells Fargo & Co 1,000 62,150 Zions Bancorporation 300 20,409 ------------------ 851,595 BEVERAGES - 1.0% Anheuser-Busch Cos Inc 1,200 60,876 Brown-Forman Corp 1,400 68,152 Pepsi Bottling Group Inc 2,400 64,896 PepsiCo Inc 1,300 67,860 ------------------ 261,784 BIOTECHNOLOGY - 0.5% Genzyme Corp* 1,600 92,912 Millipore Corp* 1,000 49,810 ------------------ 142,722 BUILDING MATERIALS - 0.1% Masco Corp 800 29,224 CHEMICALS - 0.9% Eastman Chemical Co 400 23,092 Hercules Inc* 3,300 49,005 Sherwin-Williams Co 1,500 66,945 Sigma-Aldrich Corp 1,600 96,736 ------------------ 235,778 COMMERCIAL SERVICES - 0.3% H&R Block Inc 700 34,300 Robert Half International Inc 1,900 55,917 ------------------ 90,217 COMPUTERS - 2.1% Affiliated Computer Services Inc* 400 24,076 Apple Computer Inc* 2,000 128,800 Computer Sciences Corp* 1,900 107,103 EMC Corp* 2,500 37,175 Hewlet-Packard Co 2,700 56,619 Lexmark International Group Inc* 630 53,550 NCR Corp* 1,300 89,999 SunGard Data Systems Inc* 2,400 67,992 ------------------ 565,314
8
INDUSTRY COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- COSMETICS/PERSONAL CARE - 1.1% Alberto-Culver Co 1,100 $ 53,427 Avon Products Inc 2,600 100,620 Kimberly-Clark Corp 600 39,486 Procter & Gamble Co 2,000 110,160 ------------------ 303,693 DISTRIBUTION/WHOLESALE - 0.1% WW Grainger Inc 500 33,310 DIVERSIFIED FINANCIAL SERVICE - 4.4% American Express Co 1,900 107,103 Bear Stearns Cos Inc 1,000 102,310 Capital One Financial Corp 1,100 92,631 Countrywide Financial Corp 2,300 85,123 Franklin Resources Inc 1,300 90,545 Goldman Sachs Group Inc 1,100 114,444 JP Morgan Chase & Co 2,000 78,020 Lehman Brothers Holdings Inc 1,400 122,472 MBNA Corp 3,400 95,846 Merrill Lynch & Co Inc 1,600 95,632 Morgan Stanley & Co Inc 1,800 99,936 SLM Corp 1,810 96,636 T Rowe Price Group Inc 700 43,540 ------------------ 1,224,238 ELECTRIC - 1.4% American Electric Power Co Inc 1,035 35,542 Dominion Resources Inc 760 51,482 Duke Energy Corp 1,900 48,127 Edison International 1,800 57,654 Entergy Corp 600 40,554 Exelon Corp 1,200 52,884 Southern Co 1,250 41,900 Texas Utilities 800 51,648 ------------------ 379,791 ELECTRICAL COMPONENTS & EQUIPMENT - 0.2% Power-One Inc* 5,000 44,600 ELECTRONICS - 0.5% Parker Hannifin Corp* 500 37,870 Thermo Electron Corp* 1,700 51,323 Waters Corp 900 42,111 ------------------ 131,304 ENTERTAINMENT - 0.0%^ International Game Technology 300 10,314 ENVIRONMENTAL CONTROL - 0.1% Waste Management Inc 1,300 38,922 FOOD - 0.9% Archer-Daniels-Midland Co 1,800 40,158 Campbell Soup Co 600 17,934 Kellogg Co 1,600 71,456 Sysco Corp 1,100 41,987 Winn Dixie Stores Inc 3,700 16,835 WM Wrigley Jr Co 1,000 69,190 ------------------ 257,560 FOREST PRODUCTS & PAPER - 0.2% Georgia-Pacific Corp 1,670 $ 62,592 Neenah Paper Inc* 18 587 ------------------ 63,179 GAS - 0.1% Nicor Inc 200 7,388 Peoples Energy Corp 400 17,580 ------------------ 24,968 HEALTHCARE PRODUCTS - 1.7% Bausch & Lomb Inc 1,000 64,460 Becton Dickinson & Co 1,220 69,296 Biomet Inc 1,300 56,407 C.R. Bard Inc 700 44,786 St Jude Medical Inc* 1,880 78,828 Stryker Corp 1,960 94,570 Zimmer Holdings Inc* 900 72,108 ------------------ 480,455 HEALTHCARE SERVICES - 0.7% Aetna Inc 600 74,850 Quest Diagnostics Inc 600 57,330 United Health Group Inc 800 70,424 ------------------ 202,604 HOME BUILDERS - 0.2% Centex Corp 400 23,832 KB Homes 200 20,880 ------------------ 44,712 HOUSEHOLD PRODUCTS/WARES - 0.3% Clorox Co 830 48,912 Fortune Brands Inc 400 30,872 ------------------ 79,784 INSURANCE - 2.4% ACE Ltd 1,400 59,850 Allstate Corp 1,800 93,096 AMBAC Financial Group Inc 1,000 82,130 American International Group Inc 800 52,536 CIGNA Corp 1,000 81,570 Metlife Inc 1,900 76,969 Principal Financial Group Inc 1,000 40,940 Progressive Corp 1,380 117,079 Safeco Corp 1,320 68,957 ------------------ 673,127 INTERNET - 0.6% eBay Inc* 600 69,768 Symantec Corp* 2,000 51,520 Yahoo! Inc* 1,500 56,520 ------------------ 177,808 IRON/STEEL - 0.1% United States Steel Corp 500 25,625 LEISURE TIME - 0.2% Brunswick Corp 1,270 62,865 LODGING - 0.1% Marriott International Inc 600 37,788
9
INDUSTRY COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- MACHINERY-CONSTRUCTION & MINING - 0.1% Caterpillar Inc 400 $ 39,004 MACHINERY-DIVERSIFIED - 0.2% Cummins Inc 400 33,516 Deere & Co 300 22,320 ------------------ 55,836 MEDIA - 1.7% Comcast Corp* 2,900 96,512 Knight-Ridder Inc 700 46,858 McGraw-Hill Cos Inc 770 70,486 Meredith Corp 1,330 72,086 Time Warner Inc* 4,700 91,368 Viacom Inc 1,500 54,585 Walt Disney Co 900 25,020 ------------------ 456,915 MINING - 0.3% Freeport-McMoRan Copper & Gold Inc 1,200 45,876 Newmont Mining Corp 800 35,528 ------------------ 81,404 MISCELLANEOUS MANUFACTURING - 2.6% 3M Co 680 55,808 Cooper Industries Ltd 1,900 128,991 Crane Co 3,600 103,824 Danaher Corp 1,900 109,079 Eaton Corp 1,500 108,540 ITT Industries Inc 800 67,560 Pall Corp 1,900 55,005 Textron Inc 1,100 81,180 ------------------ 709,987 OFFICE/BUSINESS EQUIPMENT - 0.1% Pitney Bowes Inc 600 27,768 OIL & GAS - 2.9% Amerada Hess Corp 1,020 84,028 Anadarko Petroleum Corp 1,400 90,734 Apache Corp 1,100 55,627 Burlington Resources Inc 1,600 69,600 ConocoPhillips 1,200 104,196 EOG Resources Inc 1,000 71,360 Exxon Mobile Corp 2,000 102,520 Nabors Industries Ltd* 1,100 56,419 Occidental Petroleum Corp 800 46,688 Royal Dutch Petroleum Co, ADR 600 34,428 Unocal Corp 400 17,296 Valero Energy Corp 1,600 72,640 ------------------ 805,536 OIL & GAS SERVICES - 0.4% Baker Hughes Inc 900 38,403 Halliburton Co 750 29,430 Schlumberger Ltd 600 40,170 ------------------ 108,003 PACKAGING & CONTAINERS - 0.0%^ Bemis Co 400 11,636 PHARMACEUTICALS - 3.7% Allergan Inc 900 72,963 AmerisourceBergen Corp 1,300 $ 76,284 Bristol-Myers Squibb Co 11,600 297,192 Cardinal Health Inc 990 57,569 Caremark RX Inc* 2,000 78,860 Forest Laboratories Inc* 1,362 61,099 Gilead Sciences Inc* 2,000 69,980 Hospira Inc* 2,060 69,010 Medco Health Solutions Inc* 2,900 120,640 Pfizer Inc 1,642 44,153 Wyeth 1,600 68,144 ------------------ 1,015,894 PIPELINES - 0.1% El Paso Corp 3,500 36,400 RETAIL - 3.2% Autonation Inc* 4,100 78,761 Bed Bath & Beyond Inc* 1,820 72,491 Best Buy Co Inc 1,100 65,362 Costco Wholesale Corp 2,100 101,661 CVS Corp 1,800 81,126 Dillard's Inc - Class A 1,100 29,557 Dollar General Corp 3,600 74,772 Federated Department Stores Inc 900 52,011 J.C. Penney Co Inc 1,500 62,100 Lowe's Cos Inc 640 36,858 Nordstrom Inc 2,000 93,460 Office Max Inc 200 6,276 Staples Inc 1,900 64,049 Starbucks Corp* 700 43,652 Yum! Brands Inc 450 21,231 ------------------ 883,367 SAVINGS & LOANS - 0.3% Golden West Financial Corp 1,234 75,792 SEMICONDUCTORS - 1.3% Altera Corp* 2,600 53,820 Analog Devices Inc 1,500 55,380 Applied Materials Inc* 4,400 75,240 Freescale Semiconductor Inc* 276 5,067 Linear Technology Corp 1,200 46,512 Maxim Integrated Products Inc 1,900 80,541 Texas Instruments Inc 1,470 36,191 ------------------ 352,751 SOFTWARE - 2.6% Adobe Systems Inc 1,800 112,932 Autodesk Inc 4,600 174,570 Automatic Data Processing Inc 1,000 44,350 BMC Software Inc* 2,820 52,452 Citrix Systems Inc* 4,100 100,573 Compuware Corp* 5,400 34,938 Electronic Arts Inc* 1,000 61,680 First Data Corp 700 29,778 IMS Health Inc 1,780 41,314 Novell Inc* 5,400 36,450 Oracle Corp* 1,560 21,403 ------------------ 710,440 TELECOMMUNICATIONS - 4.5% ALLTEL Corp 1,100 64,636 AT&T Corp 4,800 91,488 Avaya Inc* 6,500 111,800 Cisco Systems Inc* 3,200 61,760
10
INDUSTRY COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- Citizens Communications Co 4,800 $ 66,192 Corning Inc* 6,400 75,328 Motorola Inc 2,500 43,000 Qualcomm Inc 1,700 72,080 SBC Communications Inc 12,000 309,240 Scientific-Atlanta Inc 2,500 82,525 Sprint Corp-FON Group 3,800 94,430 Tellabs Inc* 6,700 57,553 Western Wireless Corp* 4,000 117,200 ------------------ 1,247,232 TOYS, GAMES & HOBBIES - 0.1% Hasbro Inc 1,300 25,194 TRANSPORTATION - 0.8% FedEx Corp 700 68,943 Norfolk Southern Corp 2,700 97,713 Ryder Systems Inc 300 14,331 United Parcel Services Inc 300 25,638 ------------------ 206,625 TOTAL COMMON STOCKS (Cost $11,962,877) 14,446,989 ------------------ PRINCIPAL AMOUNT --------------- CORPORATE NOTES - 3.5% Leucadia National Corp, 7.75% Senior Notes 08/15/13 $ 775,000 837,000 Sea Containers Ltd, Class A, 7.88% Series B 02/15/08 120,000 121,800 ------------------ TOTAL CORPORATE NOTES (Cost $930,173) 958,800 ------------------ SHARES --------------- PURCHASED CALL OPTIONS - LONG - 0.0%^ Bristol-Myers Squibb Co expiring Jan 06 at $25.00 50,000 11,875 ------------------ TOTAL PURCHASED CALL OPTIONS (Cost $10,300) 11,875 ------------------ MONEY MARKET MUTUAL FUNDS - 0.9% First American Treasury Obligations Fund - Class S 246,498 246,498 ------------------ TOTAL MONEY MARKET MUTUAL FUNDS (Cost $246,498) 246,498 ------------------ TOTAL INVESTMENTS - 99.9% (Cost $25,097,755) 27,594,180 Other Assets In Excess of Liabilities - 0.1% 15,614 ------------------ NET ASSETS - 100.0% $ 27,609,794 ==================
* NON-INCOME PRODUCING SECURITY ** RATE DISCLOSED REPRESENTS DISCOUNT RATE. ^ LESS THAN 0.05% OF NET ASSETS ADR - AMERICAN DEPOSITARY RECEIPT SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 11 SCHEDULE OF OPTIONS WRITTEN DECEMBER 31, 2004 (UNAUDITED)
COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- COVERED CALL OPTIONS WRITTEN ADOBE SYSTEMS INC expiring Jan 05 at $60.00 1,400 $ (4,760) AETNA INC expiring Apr 05 at $130.00 600 (3,030) ALTERA CORP expiring Mar 05 at $25.00 1,000 (250) ANADARKO PETROLEUM CORP expiring Jan 05 at $70.00 1,000 (100) APACHE CORP expiring Jan 05 at $55.00 1,100 (138) APPLE COMPUTER INC expiring Jan 05 at $60.00 1,000 (5,950) AUTODESK INC expiring Jan 05 at $35.00 3,000 (10,050) BED BATH & BEYOND INC expiring Feb 05 at $42.50 900 (315) BEMIS INC expiring Jan 05 at $27.50 400 (710) BEST BUY INC expiring Jan 05 at $65.00 800 (120) BMC SOFTWARE INC expiring Feb 05 at $20.00 1,400 (735) BRISTOL-MYERS SQUIBB CO expiring Jan 05 at $25.00 4,800 (3,600) BURLINGTON RESOURCES INC expiring Jan 05 at $42.50 800 (1,380) CARDINAL HEALTH INC expiring Jan 05 at $55.00 900 (3,330) CAREMARK RX INC expiring Mar 05 at $40.00 700 (1,365) CIGNA CORP expiring Jan 05 at $80.00 1,000 (3,200) CITRIX SYSTEMS INC expiring Mar 05 at $25.00 1,500 (2,175) COMPUTER SCIENCES CORP expiring Jan 05 at $55.00 1,400 (2,940) CONOCOPHILLIPS expiring Jan 05 at $90.00 900 (382) CORNING INC expiring Jan 05 at $12.50 4,900 (613) CVS CORP expiring Feb 05 at $47.50 900 (405) ELECTRONIC ARTS INC expiring Mar 05 at $55.00 500 (4,100) FORD MOTOR CO expiring Jan 05 at $15.00 3,200 (560) expiring Feb 05 at $15.00 7,000 (2,625) GENERAL MOTORS CORP expiring Jan 05 at $40.00 3,000 (2,775) expiring Feb 05 at $40.00 3,000 (3,825) GENZYME CORP expiring Jan 05 at $60.00 600 (390) HALLIBURTON CO expiring Jan 05 at $40.00 700 (437) JOHNSON CONTROLS INC expiring Jan 05 at $60.00 400 (1,480) JP MORGAN CHASE & CO expiring Jan 05 at $37.50 2,000 (3,150) MAXIM INTEGRATED PRODUCTS INC expiring Jan 05 at $50.00 800 (40) MEDCO HEALTH SOLUTIONS INC expiring Jan 05 at $35.00 1,000 (6,700) MONSANTO CO expiring Jan 05 at $40.00 2,000 $ (31,200) NABORS INDUSTRIES LTD expiring Jan 05 at $55.00 800 (280) NCR CORP expiring Jan 05 at $60.00 1,300 (12,090) NORDSTROM INC expiring Apr 05 at $50.00 1,000 (1,475) NORFOLK SOUTHERN CORP expiring Jan 05 at $35.00 2,000 (3,100) ORACLE CORP expiring Mar 05 at $15.00 1,500 (413) PEPSICO INC expiring Jan 05 at $50.00 1,300 (3,055) POWER-ONE INC expiring Jan 05 at $7.50 2,500 (3,875) PROGRESSIVE CORP expiring Jan 05 at $95.00 700 (18) QUALCOMM INC expiring Jan 05 at $45.00 900 (337) SAFECO CORP expiring Feb 05 at $50.00 700 (1,908) SCIENTIFIC-ATLANTA INC expiring Mar 05 at $35.00 1,800 (2,430) SPRINT CORP - FON GROUP expiring Jan 05 at $22.50 2,500 (5,938) ST. JUDE MEDICAL INC expiring Jan 05 at $42.50 900 (653) STAPLES INC expiring Mar 05 at $35.00 1,000 (1,050) STRYKER CORP expiring Mar 05 at $45.00 1,000 (4,350) SYMANTEC CORP expiring Jan 05 at $35.00 1,000 (25) TEXAS INSTRUMENTS INC expiring Apr 05 at $27.50 700 (437) TEXAS UTILITIES expiring Jan 05 at $65.00 800 (1,100) W.W. GRAINGER INC expiring Jan 05 at $60.00 500 (3,325) WATERS CORP expiring Feb 05 at $50.00 500 (237) WESTERN WIRELESS CORP expiring Jan 05 at $30.00 500 (275) WRIGLEY (WM) JR CO expiring Mar 05 at $70.00 500 (837) ------------------ TOTAL COVERED CALL OPTIONS WRITTEN (Premiums Received -$88,892) $ (150,038) ================== PUT OPTIONS WRITTEN AK STL HOLDING CORP expiring Jan 05 at $10.00 5,000 $ (250) expiring Jan 05 at $12.50 20,000 (4,500) APPLE COMPUTER INC expiring Jan 05 at $55.00 2,500 (1,313) expiring Jan 05 at $60.00 1,200 (1,800) expiring Jan 05 at $65.00 2,000 (7,400) AT&T CORP expiring Jan 05 at $12.50 5,000 (125) expiring Jan 05 at $15.00 3,500 (88) expiring Jan 05 at $17.50 5,000 (625)
12
COMPANY SHARES VALUE ---------------------------------------------------------------------------------------------- AUTODESK INC expiring Jan 05 at $30.00 5,000 $ (125) expiring Jan 05 at $32.50 5,000 (500) BELLSOUTH CORP expiring Jan 05 at $27.50 5,000 (1,875) expiring Feb 05 at $27.50 5,000 (3,375) BRISTOL-MYERS SQUIBB CO expiring Jan 05 at $25.00 5,000 (1,625) expiring Jan 05 at $22.50 5,000 (125) BUILDING MATERIAL HOLDING CORP expiring Jan 05 at $35.00 2,500 (938) CARPENTER TECHNOLOGY CORP expiring Jan 05 at $50.00 2,500 (625) CARPENTER TECHNOLOGY CORP expiring Jan 05 at $55.00 4,000 (4,200) CIGNA CORP expiring Jan 05 at $65.00 3,500 (175) expiring Jan 05 at $70.00 2,000 (300) EASTMAN CHEMICAL CO expiring Jan 05 at $55.00 8,000 (1,200) EDISON INTERNATIONAL expiring Jan 05 at $25.00 2,500 (62) FHLMC expiring Jan 05 at $65.00 2,000 (150) FORD MOTOR CO expiring March 05 at $12.50 5,000 (625) expiring Feb 05 at $15.00 7,000 (5,775) GENERAL MOTORS CORP expiring Jan 05 at $37.50 5,000 (875) LYONDELL CHEMICAL CO expiring Jan 05 at $25.00 10,000 (750) MARATHON OIL GROUP expiring Feb 05 at $35.00 3,500 (1,575) MAY DEPARTMENT STORES CO expiring Jan 05 at $27.50 7,000 (1,575) METLIFE INC expiring Feb 05 at $40.00 4,000 (3,800) OMI CORP expiring Jan 05 at $20.00 5,000 (16,000) RESEARCH IN MOTION LTD expiring Jan 05 at $70.00 1,500 (412) expiring Jan 05 at $80.00 2,000 (3,800) SBC COMMUNICATIONS INC expiring Jan 05 at $25.00 2,500 (500) expiring Apr 05 at $25.00 5,000 (4,250) SOUTHWESTERN ENERGY CO expiring Jan 05 at $50.00 3,000 (4,950) TEXAS UTILITIES expiring Jan 05 at $60.00 3,000 (975) expiring Jan 05 at $65.00 2,000 (3,350) URBAN OUTFITTERS INC expiring Jan 05 at $40.00 2,500 (500) VALERO ENERGY CORP expiring Feb 05 at $40.00 6,000 (3,300) VERIZON COMMUNICATIONS INC expiring Jan 05 at $40.00 5,000 (3,000) expiring Feb 05 at $40.00 2,500 (2,437) WESTERN WIRELESS CORP expiring Jan 05 at $25.00 6,000 (300) ------------------ TOTAL PUT OPTIONS WRITTEN (Premiums Received -$176,644) $ (90,125) ================== TOTAL OPTIONS WRITTEN (Total Premiums Received - 265,536) $ (240,163) ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004 (UNAUDITED) ASSETS: Investments at value (cost - $25,097,755) $ 27,594,180 Receivable for investments sold 115,477 Receivable for fund shares sold 99,420 Dividends receivable 13,077 Interest receivable 54,037 Prepaid expenses 26,022 -------------------------------------------------------------------------------------------------- Total assets 27,902,213 -------------------------------------------------------------------------------------------------- LIABILITIES: Accrued investment adviser fee 9,285 Accrued administration fee 1,196 Accrued directors fee 613 Other payables 41,110 Futures variation margin 52 Call options written at value (premiums received $88,892) 150,038 Put options written at value (premiums received $176,644) 90,125 -------------------------------------------------------------------------------------------------- Total liabilities 292,419 -------------------------------------------------------------------------------------------------- NET ASSETS $ 27,609,794 ================================================================================================== NET ASSETS REPRESENT: Paid-in capital $ 25,212,245 Undistributed net investment income 206 Accumulated net realized loss on investments (124,455) Net unrealized appreciation of investments 2,521,798 -------------------------------------------------------------------------------------------------- NET ASSETS $ 27,609,794 ================================================================================================== Shares of common stock outstanding of $.001 par value, 50,000,000 shares authorized 2,385,495 -------------------------------------------------------------------------------------------------- Net asset value, offering and redemption price per share $ 11.57 ==================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 14 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding tax of $81) $ 105,941 Interest 137,541 -------------------------------------------------------------------------------------------------- Total investment income 243,482 EXPENSES: Investment advisory fees 75,443 Administration fees 6,287 Accounting fees 28,914 Transfer agent fees 14,823 Audit fees 3,944 Tax fees 6,013 Custody fees 11,016 Legal fees 1,732 Directors fees 866 Registration fees 564 Reports to shareholders 500 Miscellaneous 2,115 -------------------------------------------------------------------------------------------------- Total expenses before fees advisory fees waived 152,217 Less investment advisory fees waived (34,023) -------------------------------------------------------------------------------------------------- Net expenses 118,194 -------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 125,288 -------------------------------------------------------------------------------------------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investment securities (125,206) Net realized gain on options 306,681 Net realized loss on futures contracts (244,860) Net change in unrealized appreciation / depreciation on investments 1,012,849 -------------------------------------------------------------------------------------------------- Net realized and unrealized gain on investments 949,464 -------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,074,752 ==================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 2004* JUNE 30, 2004 -------------------------------------------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 125,288 $ 87,559 Net realized loss on investment securities (125,206) (190,689) Net realized gain on options 306,681 511,403 Net realized loss on futures contracts (244,860) (41,706) Net change in unrealized appreciation / depreciation on investments 1,012,849 1,200,151 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from operations 1,074,752 1,566,718 -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS: From net investment income (179,999) (61,044) From net realized gains (243,673) 0 -------------------------------------------------------------------------------------------------------------------- Net decrease in net assets from distributions (423,672) (61,044) -------------------------------------------------------------------------------------------------------------------- SHARE TRANSACTIONS: Proceeds from sale of shares 9,565,036 15,549,707 Reinvestment of distributions 415,022 59,369 Cost of shares redeemed (6,233,095) (2,246,830) -------------------------------------------------------------------------------------------------------------------- Net increase in net assets from share transactions 3,746,963 13,362,246 -------------------------------------------------------------------------------------------------------------------- Net increase in net assets 4,398,043 14,867,920 NET ASSETS: Beginning of period 23,211,751 8,343,831 -------------------------------------------------------------------------------------------------------------------- End of period ** $ 27,609,794 $ 23,211,751 ==================================================================================================================== SHARES ISSUED & REDEEMED: Issued 847,240 1,421,691 Distributions reinvested 35,871 5,437 Redeemed (551,326) (203,741) -------------------------------------------------------------------------------------------------------------------- Net increase 331,785 1,223,387 Outstanding at beginning of period 2,053,710 830,323 -------------------------------------------------------------------------------------------------------------------- Outstanding at end of period 2,385,495 2,053,710 ==================================================================================================================== * Unaudited ** Including undistributed net investment income of: $ 206 $ 54,917
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 16 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
SIX MONTHS ENDED DECEMBER 31, FOR THE YEAR ENDED JUNE 30, 2004*** 2004 2003 2002 2001** -------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Net asset value, beginning of period $ 11.30 $ 10.05 $ 9.87 $ 10.00 $ 10.00 -------------------------------------------------------------------------------------------------------------------- Income from investment operations: Net investment income^ 0.06 0.06 0.10 0.04 0.00 -------------------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) 0.39 1.24 0.15 (0.12) 0.00 -------------------------------------------------------------------------------------------------------------------- Total from investment operations 0.45 1.30 0.25 (0.08) 0.00 -------------------------------------------------------------------------------------------------------------------- Less distributions to shareholders: Net investment income (0.08) (0.05) (0.06) (0.05) 0.00 Net realized gain (0.10) 0.00 (0.01) 0.00 0.00 -------------------------------------------------------------------------------------------------------------------- Total distributions (0.18) (0.05) (0.07) (0.05) 0.00 -------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 11.57 $ 11.30 $ 10.05 $ 9.87 $ 10.00 ==================================================================================================================== TOTAL RETURN+ 4.00%# 12.94% 2.57% (0.80%) 0.00%# RATIOS & SUPPLEMENTAL DATA Net assets, end of period ('000's) $ 27,610 $ 23,212 $ 8,344 $ 4,960 $ 370 Ratios to average net assets: Expenses after waivers and reimbursements 0.94%* 0.94% 0.94% 0.94% 0.00% Expenses before waivers and reimbursements 1.21%* 1.51% 1.66% 2.07% 0.00% Net investment income after waivers and reimbursements 1.00%* 0.60% 1.06% 0.49% 0.00% Portfolio turnover rate 9.0% 123.7% 98.2% 112.5% 0.0%
* ANNUALIZED ** COMMENCED OPERATIONS ON JUNE 30, 2001. *** UNAUDITED + TOTAL RETURN WOULD HAVE BEEN LOWER HAD VARIOUS FEES NOT BEEN WAIVED DURING THE PERIOD. # TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED. ^ PER SHARE AMOUNTS CALCULATED BASED ON THE AVERAGE DAILY SHARES OUTSTANDING DURING THE PERIOD. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 (UNAUDITED) 1. ORGANIZATION: Bridgeway Funds, Inc. ("Bridgeway") 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. Bridgeway is authorized to issue 1,000,000,000 shares of common stock at $0.001 per share, of which 50,000,000 shares have been classified into the Balanced Fund. Bridgeway is organized as a series fund and, as of December 31, 2004, had eleven funds: Aggressive Investors 1, Aggressive Investors 2, Ultra-Small Company, Ultra-Small Company Market, Micro-Cap Limited, Blue Chip 35 Index, Balanced, Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value Funds. On November 21, 2001, the Aggressive Investors 1 Fund closed to new investors. On December 10, 2001, the Ultra-Small Company Fund closed to all investors. On July 7, 2003, the Micro-Cap Limited Fund closed to all investors. On August 15, 2003, the Ultra-Small Company Market Fund closed to new investors. The initial public offering of the Large-Cap Growth Fund, the Large-Cap Value Fund, the Small-Cap Growth Fund and the Small-Cap Value Fund was October 31, 2003. The Balanced Fund seeks to provide a high current return with short-term risk less than or equal to 40% of the stock market. Bridgeway Capital Management, Inc. (the "Adviser") is the Adviser. 2. SIGNIFICANT ACCOUNTING POLICIES: The following summary of significant accounting policies followed in the preparation of the financial statements of the Balanced Fund (the "Fund") are in conformity with accounting principles generally accepted in the United States of America. SECURITIES, OPTIONS, FUTURES AND OTHER INVESTMENTS VALUATION Other than options, portfolio securities (including futures contracts) that are principally traded on a national securities exchange are valued at their last sale on the exchange on which they are principally traded prior to the close of the New York Stock Exchange ("NYSE"), on each day the NYSE is open for business. Portfolio securities other than options that are principally traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") are valued at the NASDAQ Official Closing Price ("NOCP"). In the absence of recorded sales on their home exchange or NOCP in the case of NASDAQ traded securities, the security will be valued according to the following priority: Bid prices for long positions and ask prices for short positions. Fixed income securities having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market value. Options are valued at the average of the best bid and best asked quotations. Other investments for which no sales are reported are valued at the latest bid price in accordance with the pricing policy established by the Board of Directors. Investments in open-end registered investment companies and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in closed-end registered investment companies that trade on an exchange are valued at the last sales price as of the close of the customary trading session on the exchange where the security is principally traded. When market quotations are not readily available or when events occur that make established valuation methods unreliable, securities of the Fund may be valued at fair value as determined in good faith by or under the direction of the Board of Directors. SECURITIES LENDING Upon lending its securities to third parties, the Fund receives compensation in the form of fees. The Fund also continues to receive dividends on the securities loaned. The loans are secured by collateral at least equal to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. The Fund has the right under the lending agreement to recover the securities from the borrower on demand. Additionally, the Fund does not have the right to sell or repledge collateral received in the form of securities unless the borrower goes into default. The risks to the Fund of securities lending are that the borrower may not provide additional collateral when required or return the securities when due. As of December 31, 2004, the Fund had no securities on loan. It is the Fund's policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. USE OF ESTIMATES IN FINANCIAL STATEMENTS In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 18 management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Fund provides for various investment options, including stocks and call and put options. Such investments are exposed to various risks, such as interest rate, market and credit. Due to the risks involved, it is at least reasonably possible that changes in risks in the near term would materially affect shareholders' account values and the amounts reported in the financial statements and financial highlights. 12b-1 PLAN The Fund has adopted a 12b-1 plan, approved by shareholders on October 15, 1996 and amended on October 22, 2003, that permits the Adviser to pay up to 0.25% of the Fund's average daily assets for sales and distribution of Fund shares. Since the cost of distributing Fund shares is borne by the Adviser, the Fund pays no 12b-1 fees. Forum Fund Services, LLC serves as the Fund's distributor. Prior to January 2, 2004, the Fund acted as its own distributor. SECURITY TRANSACTIONS, EXPENSES, GAINS AND LOSSES AND ALLOCATIONS Bridgeway expenses that are not series fund specific are allocated to each series based upon its relative proportion of net assets to Bridgeway's total net assets. 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 from settlement date. Discounts and premiums are accreted / amortized on the interest method. FUTURES CONTRACTS A futures contract is an agreement between two parties to buy or sell a financial instrument at a set price on a future date. Upon entering into such a contract the Fund is required to pledge to the broker an amount of cash or U.S. government securities equal to the minimum "initial margin" requirements of the exchange on which the futures contract is traded. The contract amount reflects the extent of a Fund's exposure in these financial instruments. The Fund's participation in the futures markets involves certain risks, including imperfect correlation between movements in the price of futures contracts and movements in the price of the securities hedged or used for cover. The Fund's activities in the futures contracts are conducted through regulated exchanges that do not result in counterparty credit risks on a periodic basis. Pursuant to a contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the fluctuation in value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the Fund as unrealized appreciation or depreciation. When a contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. As of December 31, 2004 there were no outstanding futures contracts. OPTIONS An option is a contract conveying a right to buy or sell a financial instrument at a specified price during a stipulated period. The premium paid by the Fund for the purchase of a call or a put option is included in the Fund's Schedule of Investments as an investment and subsequently marked to market to reflect the current market value of the option. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as a liability and is subsequently marked to market to reflect the current market value of the option written. If an option that the Fund has written either expires on its stipulated expiration date, or if the Fund enters into a closing purchase transaction, the Fund realizes a gain (or a loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such options is extinguished. If a call option that the Fund has written is assigned, the Fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option that the Fund has written is assigned, the amount of the premium originally received reduces the cost of the security which the Fund purchased upon exercise of the option. As of December 31, 2004, the Fund held $150,038 of call options written, $90,125 of put options written, and $11,875 in purchased call options. COVERED CALL OPTIONS AND SECURED PUTS The Fund may write call options on a covered basis, that is, the Fund will own the underlying security, or the Fund may write secured puts. The principal reason for writing covered calls and secured puts on a security is to attempt to realize income, through the receipt of premiums. The option writer has, in return for the premium, given up the opportunity for profit from a substantial price increase in the underlying security so long as the obligation as a writer continues, but has retained the risk of loss should the price of the security decline. All options were listed on exchanges and considered liquid positions with readily available market quotes. 19 A SUMMARY OF THE OPTION TRANSACTIONS WRITTEN BY THE BALANCED FUND FOLLOWS:
WRITTEN CALL OPTIONS CONTRACTS PREMIUMS ----------------------------------------------------------------------- Outstanding, June 30, 2004 1,174 $ 131,987 Positions Opened 3,732 389,067 Exercised (1,077) (116,875) Expired (2,179) (208,767) Closed (875) (106,520) Split 15 - ----------------------------------------------------------------------- Outstanding, December 31, 2004 790 $ 88,892 Market Value, December 31, 2004 - $ (150,038) WRITTEN PUT OPTIONS CONTRACTS PREMIUMS ----------------------------------------------------------------------- Outstanding, June 30, 2004 1,415 $ 140,591 Positions Opened 5,330 546,452 Exercised (408) (59,808) Expired (3,885) (394,555) Closed (615) (56,036) Split 50 - ----------------------------------------------------------------------- Outstanding, December 31, 2004 1,887 $ 176,644 Market Value, December 31, 2004 - $ (90,125)
INDEMNIFICATION Under the Company's organizational documents, the Fund's officers, directors, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts. 3. MANAGEMENT FEES, OTHER RELATED PARTY TRANSACTIONS AND CONTINGENCIES: The Fund has entered into a management contract with the Adviser, a shareholder of the Fund. As compensation for the advisory services rendered, facilities furnished, and expenses borne by the Adviser, the Fund pays the Adviser, a flat 0.6% annual management fee, computed daily and payable monthly, subject to a maximum expense ratio of 0.94%. The Adviser has agreed to reimburse the Fund for operating expenses and management fees above 0.94% of the value of its average net assets for the six months ended December 31, 2004. For the six months ended December 31, 2004, the Adviser waived fees in the amount of $34,023. The Adviser expects to continue this contractual level of reimbursement, for the foreseeable future. On occasion, Bridgeway Funds will engage in inter-portfolio trades when it is to the benefit of both parties. These trades are reviewed quarterly by the Board of Directors. No inter-portfolio purchases or sales were entered into during the six months ended December 31, 2004. On July 1, 2004, the Adviser entered into a Master Administrative Agreement with the Fund pursuant to which Bridgeway Capital Management acts as Administrator for the Fund. Under the terms of the agreement, Bridgeway Capital Management provides or arranges for the provision of certain accounting and other administrative services to the Fund that it is not required to provide under the terms of the investment advisory agreement. As compensation under the Master Administrative Agreement, Bridgeway Capital Management receives a monthly fee from each Fund calculated at the annual rate of 0.05% of average daily net assets. 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 BOARD OF DIRECTORS COMPENSATION Bridgeway pays an annual retainer of $7,000 and fees of $2,000 per meeting to each Independent Director. The Independent Directors receive this compensation in the form of shares of Bridgeway Funds, credited to his or her account. Such Directors are reimbursed for any expenses incurred in attending meetings and conferences and expenses for subscriptions or printed materials. No such reimbursements were made during the six months ended December 31, 2004. The amount attributable to the Balanced Fund is disclosed in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENT SECURITIES: Purchases and sales of securities, other than cash equivalents, for the six months ended December 31, 2004, aggregated $5,367,785 and $1,719,349, respectively. Purchases and sales of U.S. government securities, other than cash equivalents, for the six months ended December 31, 2004, aggregated $1,196,856 and $100,000, respectively. 5. FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund intends to comply with the requirements of the Internal Revenue Code applicable to regulated investment 20 companies and distribute substantially all of its net taxable income including net realized gains on investments, if any, to its shareholders each year. The Fund is not subject to income or excise taxes to the extent such distributions are made. The amount of net unrealized appreciation and the cost of investment securities for tax purposes, including short-term securities at December 31, 2004, were as follows: Gross unrealized appreciation $ 2,623,844 Gross unrealized (depreciation) (122,047) ----------------------------------------------------------------- Net unrealized appreciation on investments $ 2,501,797 ================================================================= Cost of investments $ 24,852,220 =================================================================
The difference between book and tax net unrealized appreciation is wash sale loss deferrals. The Fund used $96,405 of capital loss carryovers for the year ended June 30, 2004 to offset net realized gains for federal income tax purposes. As of June 30, 2004, the components of net assets on a tax basis were: Undistributed ordinary income $ 0 Accumulated capital losses (553,376)
The temporary differences between book and tax are primarily due to wash sales and post October losses. Dividends from net investment income and distributions of net realized gains, if any, will be declared and paid at least annually. Distributions to shareholders are recorded on ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. 6. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: On November 10, 2004, PricewaterhouseCoopers LLP was dismissed as the independent registered public accounting firm for Bridgeway Funds. PricewaterhouseCoopers LLP was previously engaged as the independent registered public accounting firm to audit the Funds' financial statements. PricewaterhouseCoopers LLP issued reports on the Funds' financial statements as of June 30, 2004 and 2003. Such reports did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The decision to remove PricewaterhouseCoopers LLP was approved by the Funds' Audit Committee and ratified by the Funds' Board of Directors. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, were there any disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. At no time during the period immediately preceding the dismissal of PricewaterhouseCoopers LLP through June 30, 2004, did any of the events relating to management's representations, an expansion of the scope of audit work or discovery information impacting the fairness or reliability of Bridgeway Funds' financial statements enumerated in paragraphs (1)(v)(B) through (D) of Item 304(a) of Regulation S-K occur. With respect to internal control matters described in paragraph (1)(v)(A) PricewaterhouseCoopers LLP noted that during the years ended June 30, 2004 and 2003, daily cash reconciliations were not performed in accordance with the Fund's procedures. With respect to the Funds' Transfer Agent PricewaterhouseCoopers LLP noted that during the year ended November 30, 2003 there was a lack of segregation of duties surrounding access to the Returned by Post Office ("RPO") function and over the monitoring of shareholder accounts placed on RPO status. These matters were considered to be a material weakness in control procedure and its operation. The audit committee of the Funds discussed these matters with PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has been authorized to respond fully to inquiries of the successor independent registered public accounting firm. The Funds engaged Briggs Bunting & Dougherty, LLP as its new independent registered public accounting firm on November 10, 2004. 21 OTHER INFORMATION (UNAUDITED) 1. PROXY VOTING: Fund policies and procedures used in determining how to vote proxies relating to fund securities and a summary of proxies voted by the Fund for the period ended June 30, 2004 are available without a charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the Securities Exchange Commission's ("SEC") website at http:/www.sec.gov. 2. FUND HOLDINGS: The Bridgeway Funds file complete schedules of Fund holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q within 60 days after the end of the period. Copies of the Fund's Form N-Q are available without charge, upon request, by contacting Bridgeway Funds at 1-800-661-3550 and on the SEC's website at http:/www.sec.gov. You may also review and copy Form N-Q at the SEC's Public Reference Room in Washington, D.C. For more information about the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. 3. OTHER Shareholders individually holding more than 5% of the Fund's outstanding shares as of December 31, 2004, constituted 60% of the Fund. 22 This Page Intentionally Left Blank Item 2. CODE OF ETHICS. Not applicable to semi-annual report. Item 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to semi-annual report. Item 4. PRINCIPAL ACCOUNTING FEES AND SERVICES. Not applicable to semi-annual report. Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. Item 6. SCHEDULE OF INVESTMENTS. Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this form. Item 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Item 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. Item 10. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. On September 22, 2004, the Board of Directors of Bridgeway Funds, Inc. adopted procedures by which shareholders may recommend nominees to the Board of Directors. The Board of Directors will consider director candidates that are recommended by shareholders of the Funds. Such recommendations should be submitted to the Secretary of the Funds, who will forward the recommendation to the Board of Directors for consideration. Prior to this meeting, the Funds did not have procedures by which shareholders could recommend nominees to the Board of 2 Directors. Item 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive officer and principal financial officer have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document. (b) There was no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. EXHIBITS. (a)(1) Not applicable to semi-annual report. (a)(2) The certifications required by Rule 30a-2(a) of the Investment Company Act of 1940, as amended, and Section 302 of the Sarbanes-Oxley Act of 2002 is attached hereto as Ex99.Cert. (a)(3) Not applicable. (b) A certification for the registrant's Principal Executive Officer and Principal Financial Officer, as required by Rule 30a-2(b) of the Investment Company Act of 1940, as amended, and Section 906 of the Sarbanes-Oxley Act of 2002 is attached hereto as Ex99.906Cert. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRIDGEWAY FUNDS, INC. By: /s/ John N.R. Montgomery ----------------------- John N.R. Montgomery President and Principal Executive Officer Date: March 9, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ John N.R. Montgomery ------------------------ John N.R. Montgomery President and Principal Executive Officer Date: March 9, 2005 By: /s/ Linda Giuffre ----------------- Linda Giuffre Treasurer and Principal Financial Officer Date: March 9, 2005 4