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 811-00505
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Philadelphia Fund, Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1200 North Federal Highway, Suite 424, Boca Raton, FL 33432
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(Address of principal executive offices) (Zip code)
Baxter Financial Corporation
1200 North Federal Highway, Suite 424, Boca Raton, FL 33432
- ------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (561) 395-2155
---------------------------
Date of fiscal year end: November 30, 2006
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Date of reporting period: December 1, 2005 - MAY 31, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
PHILADELPHIA FUND, INC.
PRESIDENT'S LETTER - July 5, 2006
Dear shareholders,
Stocks sneezed in May and June when the market looked at increasing interest
rates and mixed economic indicators. On May 23rd the new Federal Reserve
chairman, Ben Bernanke, said that the inflation outlook "will receive
particular scrutiny" and that the Federal Reserve "will be vigilant" towards
the recent history of higher inflation. Core inflation increased at an annual
rate of 3.2 percent in the last three months and at 2.8 percent in the last
six months. Chairman Bernanke did not find these numbers welcome and said so.
That did it. The Dow Jones dropped 160 points in a vicious sell off. World
stock markets dropped as investors' perceptions changed from cautious optimism
to resigned pessimism.
The role of the Federal Reserve has always been to provide stimulus to the
economy in the form of low interest rates and to take away the punch bowl when
the party gets too exuberant. Seventeen times, since June 2004, the Federal
Reserve has braked the economy by increasing interest rates. The Federal
Reserve is suggesting it will raise rates in coming months. No excess
inflation is Mr. Bernanke's determination.
During the first half of our fiscal year, a number of stocks were sold. A nice
profit was realized when we reduced our position in Sempra Energy to 85,000
shares. We sold Public Service Enterprise Group for a substantial profit. Our
holdings in ConAgra Foods, Inc. and Weyerhaeuser Co. were eliminated. Also,
the higher-priced shares of Kellogg Co. were sold. The last three stocks were
sold at a loss to help offset taxable profits from the others.
We sold H.J. Heinz for a profit when a hedge fund pushed up the price by
pressuring the company for more aggressive measures to profit shareholders.
Four new positions were initiated in the first half of the fiscal year. We
purchased 50,000 shares of Fifth Third Bancorp. This Midwestern bank sells at
a reasonable valuation and pays a good dividend. We purchased 80,000 shares of
Energy East Corp. This company distributes electricity and natural gas in New
England. It is reasonably valued and provides a good dividend. Another utility
with a good dividend, Progress Energy Inc. was added to the portfolio in the
amount of 50,000 shares. This is a reasonably priced utility in the fast-
growing state of Florida.
Fifty thousand shares of First Horizon National were added to the portfolio.
This is a quality niche bank with a good dividend. The bank may be a strong
candidate for acquisition.
As of May 31, 2006, our fund had 39.5% of its net assets in short-term
instruments available to invest in opportunities which we expect later this
year.
Very truly yours,
/s/ Donald H. Baxter
Donald H. Baxter
President
PORTFOLIO SUMMARY BY INDUSTRY - MAY 31, 2006
% of Total % of Total
Net Assets Net Assets
---------- ----------
Short-Term Corporate Notes 39.5% Food Processing 4.1%
Banks 19.6 Retail Specialty 3.8
Electric Utilities 18.3 Health Care Plans 3.6
Oil & Gas Operations 10.6 Publishing 2.9
Natural Gas Utilities 4.5 Conglomerate 2.2
-----
Total Investments 109.1
Liabilities in Excess
of Other Assets* (9.1)
-----
100.0%
=====
* This balance includes obligations created as a result of portfolio
transactions that occurred on May 31, 2006 and were settled on
June 5, 2006.
2
PHILADELPHIA FUND, INC.
PORTFOLIO OF INVESTMENTS - MAY 31, 2006
Shares Value
- ------- -------------
COMMON STOCKS-69.6%
BANKS-19.6%
80,000 AmSouth Bancorporation . . . . . . . . . . . . . . . . $ 2,144,000
80,000 Bank of America Corp. . . . . . .. . . . . . . . . . . 3,872,000
50,000 Fifth Third Bancorp. . . . . . . . . . . . . . . . . . 1,900,000
50,000 First Horizon National Corporation . . . . . . . . . . 1,998,000
50,000 National City Corp. . . . . . . . . . . . . . . . . . 1,844,000
40,000 Wachovia Corp. . . . . . . . . . . . . . . . . . . . . 2,140,000
40,000 Wells Fargo & Co. . . . . . . . . . . . . . . . . . . 2,654,800
------------
16,552,800
------------
CONGLOMERATE-2.2%
70,000 Hawaiian Electric Industries, Inc. . . . . . . . . . . 1,880,900
------------
ELECTRIC UTILITIES-18.3%
30,000 American Electric Power Co., Inc. . . . . . . . . . . 1,028,100
124,800 Duke Energy Corp. . . . . . . . . . . . . . . . . . . 3,521,856
80,000 Energy East Corporation . . . . . . . . . . . . . . . 1,907,200
40,000 FirstEnergy Corp. . . . . . . . . . . . . . . . . . . 2,096,800
50,000 Progress Energy, Inc. . . . . . . . . . . . . . . . . 2,102,000
80,000 Southern Company . . . . . . . . . . . . . . . . . . . 2,557,600
40,000 TXU Corp. . . . . . . . . . . . . . . . . . . . . . . 2,292,000
------------
15,505,556
------------
FOOD PROCESSING-4.1%
40,000 Corn Products International, Inc. . . . . . . . . . . 1,067,200
50,000 Kellogg Co. . . . . . . . . . . . . . . . . . . . . . 2,355,000
------------
3,422,200
------------
HEALTH CARE PLANS-3.6%
70,000 United Health Group Incorporated . . . . . . . . . . . 3,077,200
------------
NATURAL GAS UTILITIES-4.5%
85,000 Sempra Energy . . . . . . . . . . . . . . . . . . . . 3,822,450
------------
OIL & GAS OPERATIONS-10.6%
35,000 ChevronTexaco Corp. . . . . . . . . . . . . . . . . . 2,092,650
45,000 Marathon Oil Corp. . . . . . . . . . . . . . . . . . . 3,377,250
35,000 Occidental Petroleum Corp. . . . . . . . . . . . . . . 3,468,150
------------
8,938,050
------------
Shares Value
- ------- -------------
PUBLISHING-2.9%
3,000 Washington Post Co. Class "B" . . . . . . . . . . . . $ 2,432,700
------------
RETAIL SPECIALTY-3.8%
60,000 Costco Wholesale Corp. . . . . . . . . . . . . . . . . 3,175,800
------------
Total Value of Common Stocks (cost $35,900,120) . . . . . . . . 58,807,656
------------
Principal
Amount
- ---------
SHORT-TERM CORPORATE NOTES-39.5%
$4,000M AGA Capital Inc., 4.982%, due 06/05/2006 . . . . . . . 3,997,817
4,200M Citicorp Funding Inc., 4.953%, due 06/01/2006 . . . . 4,200,000
4,200M General Electric Capital Corp., 4.899%,
due 06/02/2006 . . . . . . . . . . . . . . . . . . . 4,199,436
4,200M HSBC Finance Corp., 4.901%, due 06/05/2006 . . . . . . 4,197,746
4,200M Morgan Stanley Corp., 4.980%, due 06/02/2006 . . . . . 4,199,427
4,200M Prudential Funding LLC, 4.940%, due 06/02/2006 . . . . 4,199,432
4,200M Society Generale NA Inc., 4.970%, due 06/02/2006 . . . 4,199,428
4,200M U.S. Bancorp., 4.880%, due 06/01/2006 . . . . . . . . 4,200,000
------------
Total Value of Short-Term Corporate Notes (Cost $33,393,286) . . 33,393,286
------------
Total Value of Investments (Cost $69,293,406) # . . . . . 109.1% 92,200,942
Excess of liabilities over other assets . . . . . . . . . (9.1) (7,658,405)
----- ------------
Net Assets . . . . . . . . . . . . . . . . . . . . . . . 100.0% $84,542,537
===== ============
# Aggregate cost for tax purposes is $69,293,406.
% Represents percentage of net assets.
See notes to financial statements
3
PHILADELPHIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - MAY 31, 2006
ASSETS
Investments in securities, at value
(identified cost $69,293,406)(Note 1A) . . . . $ 92,200,942
Cash . . . . . . . . . . . . . . . . . . . . . . 41,860
Dividends and interest receivable . . . . . . . . 272,249
Other assets . . . . . . . . . . . . . . . . . . 10,594
------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . 92,525,645
LIABILITIES
Payable for investment securities purchased . . . $7,887,126
Accrued advisory, administrative and 12b-1 fees . 81,007
Other accrued expenses . . . . . . . . . . . . . 14,975
----------
TOTAL LIABILITIES . . . . . . . . . . . . . . 7,983,108
------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . $ 84,542,537
============
NET ASSETS CONSIST OF:
Capital paid-in . . . . . . . . . . . . . . . . . $ 57,936,315
Undistributed net investment income . . . . . . . 478,197
Accumulated net realized gain on investments . . 3,220,489
Net unrealized appreciation in value of
investments . . . . . . . . . . . . . . . . . . 22,907,536
------------
NET ASSETS for 11,311,912 shares outstanding . . . . $ 84,542,537
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION
PRICE PER SHARE ($84,542,537 / 11,311,912 shares). . $7.47
=====
See notes to financial statements
4
PHILADELPHIA FUND, INC.
STATEMENT OF OPERATIONS - SIX MONTHS ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends . . . . . . . . . . . . . . . . $ 882,500
Interest . . . . . . . . . . . . . . . . 591,928
---------
Total income . . . . . . . . . . . . . $1,474,428
EXPENSES (Notes 3 and 5):
Investment advisory fee . . . . . . . . . 321,441
Administrative fee . . . . . . . . . . . 107,150
Distribution plan expenses . . . . . . . 64,290
Professional fees . . . . . . . . . . . . 41,052
Director fees and expenses . . . . . . . 26,773
Transfer agent and dividend disbursing
agent's fees and expenses . . . . . . . 20,048
Fund accounting agent's fees . . . . . . 18,553
Custodian fees . . . . . . . . . . . . . 15,263
Other expenses . . . . . . . . . . . . . 38,007
---------
Total expenses . . . . . . . . . . . . 652,577
Less: Fees paid indirectly . . . . . . 3,295
---------
Net expenses . . . . . . . . . . . . . 649,282
---------
Net Investment Income . . . . . . . . 825,146
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (Note 4):
Net realized gain on investments . . . . 3,227,207
Net unrealized depreciation of
investments . . . . . . . . . . . . . . (758,529)
---------
Net gain on investments . . . . . . . 2,468,678
---------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS . . . . . . . . . . . . . . . . . $3,293,824
==========
See notes to financial statements
5
PHILADELPHIA FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
Six Months
Ended Year Ended
May 31, November 30,
2006 2005
------------- ------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS
Investment income-net . . . . . . . . . . . . $ 825,146 $ 1,425,688
Net realized gain on investments . . . . . . 3,227,207 8,299,341
Net unrealized appreciation (depreciation)
of investments . . . . . . . . . . . . . . (758,529) (1,714,605)
---------- ----------
Net increase in net assets resulting
from operations . . . . . . . . . . . . 3,293,824 8,010,424
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ($0.071 and $0.11
per share, respectively) . . . . . . . . . (779,489) (1,203,546)
Net realized gain on investments ($0.78
and $0.375 per share, respectively) . . . . (8,296,818) (4,075,346)
CAPITAL SHARE TRANSACTIONS
Increase (decrease) in net assets resulting
from capital share transactions (Note 2) . 4,341,428 (1,622,850)
---------- ----------
Net increase (decrease) in net assets . . (1,441,055) 1,108,682
NET ASSETS
Beginning of year . . . . . . . . . . . . . . . 85,983,592 84,874,910
---------- ----------
End of period (including undistributed net
investment income of $478,197 and $432,540,
respectively) . . . . . . . . . . . . . . . . $84,542,537 $85,983,592
========== ==========
See notes to financial statements
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Philadelphia Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified open-end management investment company.
The Fund's investment objective is to achieve long-term growth of capital and
income. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. Security Valuation - securities listed on national exchanges are valued
at the closing sales price on May 31, 2006, while securities trading on the
NASDAQ National Market are valued at the NASDAQ Official Closing Price. If
market quotations are not readily available, securities will be valued at
their fair values as determined in accordance with procedures approved by the
Board of Directors. Short-term obligations acquired at par are stated at cost
which, when combined with interest receivable, approximates fair value. Short-
term obligations acquired at a discount are stated at amortized cost which
approximates fair value.
6
PHILADELPHIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
B. Federal Income Taxes - no provision has been made for Federal income
taxes on net income or capital gains, since it is the policy of the Fund to
continue to comply with the special provisions of the Internal Revenue Code
applicable to investment companies and to make sufficient distributions of
income and capital gains to relieve the Fund from all, or substantially all,
such taxes.
C. Distributions to Shareholders - the Fund distributes its net investment
income quarterly and net realized gains annually. Income and capital gain
distributions which are determined in accordance with income tax regulations
are recorded on the ex-dividend date.
D. Use of Estimates - the preparation of the financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the
reporting period. Actual amounts could differ from those estimates.
E. Other - the Fund records security transactions on the trade date.
Dividend income is recognized on the ex-dividend date. Interest income is
recognized on the accrual basis and includes accretion of discounts and
amortization of premiums. Estimated expenses are accrued daily.
The Fund indemnifies its officers and directors for certain liabilities
that might arise from the performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of representations and warranties and which provide
general indemnification. The Fund's maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the
Fund and/or its affiliates that have not yet occurred. However, based on
experience, the Fund expects the risk of loss to be remote.
2. CAPITAL STOCK
As of May 31, 2006, 30,000,000 shares of $1.00 par value capital stock were
authorized. Transactions in shares of capital stock were as follows:
Six Months Ended Year Ended
May 31, 2006 November 30, 2005
------------------------ ---------------------
Shares Amount Shares Amount
---------- ----------- --------- ----------
Shares sold . . . . . . . . 126,343 $ 939,315 169,520 $ 1,341,335
Shares issued in
reinvestment of
distributions . . . . . . . 1,016,428 7,425,542 576,392 4,378,125
Shares redeemed . . . . . . (532,722) ( 4,023,429) (930,748) (7,342,310)
---------- ----------- --------- ----------
Net increase (decrease) . 610,049 $ 4,341,428 (184,836) $(1,622,850)
========== =========== ========= ==========
3. INVESTMENT ADVISORY AND OTHER TRANSACTIONS WITH AFFILIATES
Baxter Financial Corporation (BFC) is the investment advisor and the
administrator of the Fund. Certain officers and a director of the Fund are
also officers and a director of BFC.
As investment advisor, BFC supervises the Fund's investments on a
continuous basis and provides the Fund with investment advice and
recommendations for an annual fee equal to .75% of the first $200 million of
net assets, .625% of net assets between $200 million and $400 million, and
..50% of net assets in excess of $400 million.
7
PHILADELPHIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
As the Fund's administrator, BFC is responsible for providing overall
supervision of the Fund's administrative operations and receives an annual fee
of .25% of the average net assets of the Fund.
Both the investment advisory fee and the administrative fee are payable
monthly, based on month-end net asset values of the Fund.
During the six months ended May 31, 2006, directors of the Fund who are not
affiliated with BFC received directors' fees aggregating $18,400, and the
Fund's custodian provided credits in the amount of $3,295 against custodian
charges based on the uninvested cash balances of the Fund. Thomas J. Flaherty,
a director and former officer of the Fund, receives a monthly pension
from the Fund which amounted to $6,250 for the above six month period.
Keith Edelman serves as the Fund's Chief Compliance Officer (CCO). Mr.
Edelman, is also an employee of BFC, and a Vice President of the Fund. For the
six month period ending May 31, 2006, the Fund's CCO salary expense for Mr.
Edelman amounted to $5,138.
4. INVESTMENT TRANSACTIONS
For the six months ended May 31, 2006, purchases and sales of securities
(other than U.S. Government obligations and short-term notes) aggregated
$13,228,381 and $14,379,803, respectively. The specific identification method
is used to determine tax cost basis when calculating realized gains and
losses.
5. DISTRIBUTION PLAN
Pursuant to an amended Distribution Plan adopted under rule 12b-1 of the
Investment Company Act of 1940, the Fund may pay a fee in an amount up to .5%
of the Fund's average net assets calculated monthly. A component of the 12b-1
fee (.25% of the Fund's average net assets) may be paid to BFC for providing
shareholder services, which include advice and information regarding:
share accounts; applications; use of the prototype retirement plans of the
Fund; assistance with questions regarding the Fund's transfer agent, as well
as other information and services. At its discretion, BFC may make payments to
registered broker-dealers and members of the National Association of
Securities Dealers, Inc. for providing Fund shareholders with similar
services.
The remainder of the 12b-1 fee may be used to pay brokers and dealers which
enter into agreements with BFC or which provide sales, promotional, or
advertising services to the Fund, and to pay for other distribution,
advertising, registration and promotional expenses associated
with the sale of Fund shares.
Until further notice, BFC has agreed to reduce the Fund's 12b-1 fees to
..15% of the Fund's average net assets.
6. TAX COMPONENTS OF NET ASSETS
As of May 31, 2006, the components of net assets on a tax basis were as
follows:
Undistributed income . . . . . . . . . . $ 478,197
Undistributed long-term gain . . . . . . 3,220,489
Gross unrealized appreciation . . . . . . 22,912,351
Gross unrealized depreciation . . . . . . (4,815)
Capital paid-in . . . . . . . . . . . . . 57,936,315
-----------
Total . . . . . . . . . . . . . . . . . $84,542,537
===========
8
PHILADELPHIA FUND, INC.
FINANCIAL HIGHLIGHTS
(For A Share of Capital Stock Outstanding Throughout Each Period)
Six Months Year Ended November 30,
Ended ---------------------------------------
SELECTED PER SHARE DATA May 31, 2006 2005 2004 2003 2002 2001
- ----------------------- ------------ ------ ------ ------ ------ ------
Net Asset Value, Beginning of Year.. $ 8.03 $ 7.80 $ 6.51 $ 6.06 $ 6.89 $ 7.73
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income............... 0.07 0.13 0.11 0.12 0.08 0.12
Net Realized & Unrealized
Gains (Loss) on Investments....... 0.22 0.59 1.39 0.62 (0.63) (0.24)
------ ------ ------ ------ ------ ------
Total From Investment Operations.... 0.29 0.72 1.50 0.74 (0.55) (0.12)
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net Investment Income............... 0.07 0.11 0.13 0.12 0.07 0.16
Net Realized Gains.................. 0.78 0.38 0.08 0.17 0.21 0.56
------ ------ ------ ------ ------ ------
Total Distributions................. 0.85 0.49 0.21 0.29 0.28 0.72
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period...... $ 7.47 $ 8.03 $ 7.80 $ 6.51 $ 6.06 $ 6.89
====== ====== ====== ====== ====== ======
TOTAL RETURN (%).................... 3.91 # 9.59 23.43 12.78 (8.37) (2.23)
- ------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period
(in thousands)..................... $84,543 $85,984 $84,875 $74,129 $71,543 $84,956
Ratio to Average Net Assets:
Expenses (%)....................... 1.53(a) 1.52 1.52 1.54 1.48 1.50
Net Investment Income (%).......... 1.93(a) 1.64 1.56 1.99 1.17 1.68
Portfolio Turnover Rate (%).......... 22 # 26 44 52 140 119
(a) Annualized
# Not annualized
See notes to financial statements
9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of
Directors of Philadelphia Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments of Philadelphia Fund, Inc., as of May
31, 2006 and the related statement of operations for the six months
then ended, the statements of changes in net assets for the six months ended
May 31, 2006 and the year ended November 30, 2005 and financial highlights for
each of the five and one-half year periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of May 31, 2006, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Philadelphia Fund, Inc., at May 31, 2006, the results of its operations, the
changes in its net assets and its financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
June 16, 2006
10
PHILADELPHIA FUND, INC.
INFORMATION ABOUT YOUR FUND'S EXPENSES - For the six months ended May 31,
2006.
As a shareholder of the Fund, you incur ongoing costs, including management
fees and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with ongoing costs of investing in other mutual funds. The example is
based on an investment of $1,000 made at the beginning of the period and held
for the entire semi-annual period, December 1, 2005 through May 31, 2006.
This table illustrates the Fund's costs in two ways:
ACTUAL FUND RETURN: This section helps you to estimate the actual expenses
that you paid over the period. The "Ending Account Value" shown is derived
from the Fund's actual return for the past six month period, the "Expense
Ratio" column shows the period's annualized expense ratio, and the "Expenses
Paid During Period" column shows the dollar amount that would have been
paid by an investor who started with $1,000 in the Fund at the beginning of
the period. You may use the information here, together with your account
value, to estimate the expenses that you paid over the period. To do so,
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 given
for the Fund in the first line under the heading entitled "Expenses Paid
During Period."
HYPOTHETICAL 5% RETURN: This section is intended to help you compare the
Fund's costs with those of other mutual funds. It assumes that the Fund had an
annual return of 5% before expenses, but that the expense ratio is unchanged.
In this case, because the return used is not the Fund's actual return, the
results do not apply to your investment. This example is useful in making
comparisons to other mutual funds because the Securities and Exchange
Commission requires all mutual funds to provide examples of expenses
calculated and based on an assumed 5% annual return. You can assess the Fund's
costs by comparing this hypothetical example with the hypothetical examples
that appear in shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight and
help you compare your ongoing costs only and do not reflect any transactional
costs such as sales charges (loads), redemption fees, or exchange fees. The
Philadelphia Fund does not charge any sales loads, redemption fees, or
exchange fees, but these fees may be present in other funds to which you
compare the Fund. Therefore, the hypothetical portions of the table are useful
in comparing ongoing costs only, and will not help you determine the relative
total costs of owning different funds.
Beginning Ending
Account Value Account Value Expense Expenses Paid
12/01/05 05/31/06 Ratio During Period#
------------- ------------- ------- --------------
Actual Fund Return* . . $1,000 $1,039.10 1.53%(a) $7.78
Hypothetical 5% Return . $1,000 $1,017.30 1.53%(a) $7.70
* The actual total return for the six-month period ended May 31, 2006 was
3.91%. The actual total return figure assumes the reinvestment of all
dividends and capital gain distributions, if any.
# Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by the number of days in
the most recent fiscal half-year, then divided by 365.
(a)Annualized.
11
PHILADELPHIA FUND, INC.
REVIEW AND APPROVAL OF THE FUND'S INVESTMENT ADVISORY AGREEMENT
When making its decision to renew the Fund's Investment Advisory Agreement
(the "Advisory Agreement") with Baxter Financial Corporation ("BFC" or the
"Advisor"), the Board of Directors (the "Board") carefully considered a
variety of materials, which the Directors had received prior to the March 13,
2006 Board meeting (which specifically had been called to consider the renewal
of the Advisory Agreement). At the Board meeting, BFC provided detailed
responses to a series of questions contained in a letter from the Fund's
independent legal counsel, submitted on behalf of the Directors who are not
"interested persons" (as that term is defined in the Investment Company Act of
1940 (the "1940 Act")) (the "Independent Directors"), requesting information
for the Board's consideration of the continuation of the Advisory Agreement
(the "Information Request Letter").
The Information Request Letter had asked BFC to provide responses to a series
of questions relating to the following categories of information: a
description of the Advisor's business, the Advisor's personnel and operations,
the services that the Advisor provides to the Fund, the compensation
payable to the Advisor for the services provided to the Fund, comparative
performance information (relating to the Fund and the Advisor), expenses of
the Fund, the Fund's and the Advisor's compliance policies and procedures, and
certain other relevant information. The Board thoroughly reviewed all of the
responses provided by BFC to the questions in each of these categories,
including performance statistics, index comparisons and expense comparisons.
The Board compared the Fund's performance to the performance of the S&P 500
Index, the Fund's benchmark, as well as the S&P 500/BARRA Value Index,
S&P/Citigroup Value Index; Russell 1000 Index, Russell 1000 Value Index,
Wilshire 5000, and Wilshire Target Large Value Index. The Board also compared
the Fund with the average Morningstar star rating, Morningstar risk and
Morningstar returns of other funds with a growth and income objective listed
in the Morningstar Large Value Category.
The Board compared the Fund's management related, non-management related,
and total expense ratios to those of other funds with total net assets
between $50 million and $100 million contained in Lipper's Growth and Income
Category. The Board also took into account information furnished by BFC
throughout the year at quarterly Board meetings, as well as the information
specifically furnished to respond to the Information Request Letter.
Information provided throughout the year included reports on the Fund's
investment performance, expenses, portfolio composition and turnover, and
sales and redemptions, along with related financial statements,
information about the scope and quality of services provided by BFC (as the
Fund's investment advisor, principal underwriter and administrator),
Unified Fund Services, Inc. (as both the Fund's transfer agent and fund
accounting agent), and U.S. Bank (the Fund's custodian). The Board
also had received periodic reports relating to compliance with the Fund's
investment policies and restrictions and compliance policies, and various
information on regulatory issues relating to the investment company industry.
When considering the continuation of BFC as the Fund's investment advisor and
the approval of the Advisory Agreement, the Board discussed the following
specific factors:
[BULLET] the nature, extent and quality of the services provided by BFC;
[BULLET] the investment performance of the Fund and of BFC;
[BULLET] the Advisor's cost of providing the services to the Fund and the
profitability of managing the Fund to BFC; and
12
PHILADELPHIA FUND, INC.
REVIEW AND APPROVAL OF THE FUND'S INVESTMENT ADVISORY AGREEMENT (Continued)
[BULLET] whether the Fund would realize any economies of scale as the Fund
grows larger, and the breakpoints included in the Advisory Agreement
that allow shareholders to participate in the resulting benefits.
In considering the materials described above, the Independent Directors
referred to the memorandum from their independent legal counsel, Stradley
Ronon Stevens & Young, LLP. The memorandum discussed the provisions of the
1940 Act applicable to the continuation of the Advisory Agreement, and
outlined the Board's responsibilities when considering the renewal of the
Agreement. The Board noted that: (i) Section 15(c) of the 1940 Act requires
the Board to request and evaluate, and BFC to furnish, such information as may
reasonably be necessary to evaluate the terms of the Advisory Agreement, and
(ii) BFC's responses to the Information Request Letter were intended to assist
the Board in meeting these requirements.
In its deliberations, the Board took into account a combination of factors,
including the following:
Nature, Extent and Quality of Services
--------------------------------------
In considering the nature, extent and quality of advisory services provided by
the Advisor, consideration was given by the Board to the qualifications of
Donald Baxter, the Fund's portfolio manager. Also, the Board considered how
BFC had performed the research and management processes, and the Advisor's
record of compliance with the Fund's investment policies and restrictions, as
well as compliance with the Fund's compliance policies and procedures and the
code of ethics that governs personal securities trading by Fund management.
The Board evaluated the Advisor's portfolio management process. The Board also
evaluated how BFC performed its oversight responsibilities with respect to the
Fund's custodian, transfer agent, fund accounting and shareholder services
agents. The Board took note of the increasing array of regulations with which
the Fund and Advisor, in managing the Fund, must comply. The Board concluded
that the Advisor had provided competent supervision, regulatory compliance
services, portfolio oversight services, and reporting functions to the Fund.
The Board concluded that the scope and quality of advisory services provided
by BFC were consistent with the Fund's operational requirements, and
shareholders of the Fund had received reasonable value in return for the fees
paid to BFC.
Investment Performance of the Fund and the Advisor
--------------------------------------------------
In evaluating performance, attention was given to both short-term and long-
term performance of the Fund in comparison with the Fund's benchmark and other
relevant indexes, as well as the performance of the Fund's peer group, and to
the Fund's compliance with its specific investment objective and investment
restrictions. The Board also discussed how the Fund's portfolio composition
impacted its performance, given the market conditions existing over the prior
year. The Board concluded that the Fund's investment performance was
satisfactory, relative to both the relevant market indexes and the Fund's peer
group. The Board also concluded that it was satisfied with the Advisor's
performance.
13
PHILADELPHIA FUND, INC.
REVIEW AND APPROVAL OF THE FUND'S INVESTMENT ADVISORY AGREEMENT (Continued)
Costs of Providing Services
---------------------------
In considering the costs of BFC's providing advisory services and the
reasonableness of the Fund's expenses, the Board considered the advisory fee
schedule and the fact that breakpoints were included in the schedule. The
Board evaluated both the Advisor's fee schedule and its breakpoints against
the fee schedules of other investment companies in the Fund's peer group.
Emphasis was placed on the Fund's total expense ratio, management-related
expenses and non-management-related expenses, compared with the averages
reported for the Fund's peer group. The Independent Directors also considered
the benefits to BFC of providing various other services to the Fund, such as
administration and distribution services, under separate agreements between
the Fund and BFC. The Independent Directors also noted that, as a consequence
of increased regulations, the costs of providing advisory services to the Fund
had increased over the years. The Board determined that BFC's fees were
reasonable, in light of the costs of the services provided by BFC and the fees
charged by other advisers offering comparable services to similar funds.
The Advisor's Profitability
---------------------------
The Independent Directors considered BFC's level of profitability in providing
investment management services to the Fund, Eagle Growth Shares, Inc., and
certain private clients. The Board noted that BFC did not manage other
registered investment companies (other than Eagle Growth Shares, Inc.), pooled
investment vehicles or separate accounts. In evaluating the Advisor's
profitability in managing Fund, the Independent Directors reviewed BFC's 2004
and 2005 financial statements. The Board also considered the extent to which
BFC may potentially achieve economies of scale and possibly derive other
ancillary benefits from Fund operations, including the allocation of Fund
brokerage and the use of the Fund's soft dollars to pay for research and other
similar services. The Board noted that the increased costs of providing
advisory services will, in the long term, serve to reduce the Advisor's
profitability. The Board pointed out that the profitability and financial
viability of the Advisor are important for personnel stability and continuity.
The Board concluded that BFC's profitability, in managing the Fund, based on
the services provided, was reasonable and not excessive.
Economies of Scale
------------------
The Board analyzed the Advisor's fee schedule and the breakpoints in the fee
schedule against the fee schedules of other investment companies in the Fund's
peer group. The Board concluded that economies of scale would be realized as
the Fund's assets increased, and noted the fact that BFC's advisory fee
schedule was designed to allow the Fund's shareholders to participate in the
benefits of these economies of scale (i.e., the Advisor's fees would be
reduced), once certain asset levels were met. The Board noted that it will
continue to review the availability of such economies of scale.
Based on the foregoing considerations and the overall quality and experience
of BFC's personnel and operations, and investment advisory capabilities of the
Advisor, the Board determined that the continuation of the Advisory Agreement
was in the best interests of the Fund. The Independent Directors met
separately, without management being present, to consider the renewal of the
Advisory Agreement. After full consideration of the factors discussed above,
with no single factor identified as being of paramount or controlling
importance, the Board, including a majority of the Independent Directors,
approved the renewal of the Advisory Agreement.
14
PHILADELPHIA FUND, INC.
OFFICERS
DONALD H. BAXTER, Chairman and President
RONALD F. ROHE, Vice President/Secretary/Treasurer
KEITH A. EDELMAN, Vice President/Chief Compliance Officer
DIANE M. SARRO, Vice President/Director of Shareholder Services
DIRECTORS
DONALD H. BAXTER
THOMAS J. FLAHERTY
KENNETH W. MCARTHUR
ROBERT L. MEYER
DONALD P. PARSON
PHILADELPHIA FUND, INC.
1200 North Federal Highway, Suite 424, Boca Raton, FL 33432 (561) 395-2155
INVESTMENT ADVISOR, ADMINISTRATOR AND UNDERWRITER
BAXTER FINANCIAL CORP., member NASD
1200 North Federal Highway, Suite 424, Boca Raton, FL 33432
CUSTODIAN
U.S. BANK, N.A., 425 Walnut Street, Cincinnati, OH 45202
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
UNIFIED FUND SERVICES, INC.
P.O. Box 6110, Indianapolis, IN 46206-6110
LEGAL COUNSEL
STRADLEY, RONON, STEVENS & YOUNG, LLP Philadelphia, PA
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BRIGGS, BUNTING & DOUGHERTY, LLP Philadelphia, PA
15
Philadelphia Fund, Inc. PHILADELPHIA
1200 North Federal Highway FUND, INC.
[LOGO] Suite 424
Boca Raton, FL 33432 SEMI-ANNUAL
(561) 395-2155 REPORT
May 31, 2006
The Fund files its complete schedule
of portfolio holdings with the
Securities and Exchange Commission
(SEC) for the first and third
quarters of each fiscal year on Form
N-Q. The Fund's Forms N-Q are available
on the SEC's website at
http://www.sec.gov, by calling the
Fund at 1-800-749-9933, and may be
reviewed and copied at the SEC's
Public Reference Room. Information on
the operation of the SEC's Public
Reference Room may be obtained by
calling 1-800-SEC-0300.
The Fund's proxy voting policies and
procedures and how the Fund voted
proxies relating to portfolio
securities during the most
recent 12-month period ended
June 30, 2006 are available without
charge (i) upon request, by calling
1-800-749-9933; (ii) by writing to the
Fund at the above address; and (iii) on
the SEC's website at www.sec.gov.
Established 1923
You will find important information
about PHILADELPHIA FUND - its
investment policy and management, past
record and the method of calculating
the per-share net asset value in the
current prospectus. This report is
submitted for the general information
of the Fund's shareholders. It is not
authorized for distribution to
prospective investors unless preceded
or accompanied by an effective prospectus.
ITEM 2. CODE OF ETHICS.
Not applicable for filing of Semi-Annual Reports to Shareholders.
The registrant's Code Of Business Ethics for Principal Executive
and Financial Officers is available, without charge, upon request,
by writing to the above address, or by calling 1-800-749-9933.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for filing of Semi-Annual Reports to Shareholders.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable for filing of Semi-Annual Reports to Shareholders.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to registrant, which is an open-end management
investment company.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable; full Schedule of Investments filed under Item 1 of
this report.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to registrant, which is an open-end management
investment company.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to registrant, which is an open-end management
investment company.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to registrant, which is an open-end management
investment company.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no changes to the procedures by which shareholders may
recommend nominees to the registrant's board of directors during
the reporting period.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have evaluated the registrant's disclosure
controls and procedures (the "Procedures") within 90 days of the
filing of this report, and have concluded that the Procedures are
effective in providing reasonable assurances that the information
required to be disclosed by the registrant in its reports or
statements filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and
Exchange Commission.
(b) There were no changes 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) that occurred during
the registrant's last fiscal half-year that have materially
affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable for filing of Semi-Annual Reports to
Shareholders.
(2) The certifications required by Rule 30a-2(a) under the
Investment Company Act of 1940, as amended, and Sections 302
and 906 of the Sarbanes-Oxley Act of 2002 are attached as
exhibits hereto.
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.
(Registrant) Philadelphia Fund, Inc.
--------------------------------------------------------------------
By (Signature and Title)* /s/ Donald H Baxter
-------------------------------------------------------
Donald H. Baxter, Chief Executive Officer
Date July 26, 2006
---------------------
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 (Signature and Title)* /s/ Donald H. Baxter
-------------------------------------------------------
Donald H. Baxter, Chief Executive Officer
Date July 26, 2006
---------------------
By (Signature and Title)* /s/ Ronald F. Rohe
-------------------------------------------------------
Ronald F. Rohe, Chief Financial Officer
Date July 26, 2006
---------------------
* Print the name and title of each signing officer under his or her signature.