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
811-06221
Brandywine Blue Fund, Inc.
--------------------------
(Exact name of registrant as specified in charter)
3711 Kennett Pike
Greenville, DE 19807
--------------------
(Address of principal executive offices) (Zip code)
William F. D'Alonzo
3711 Kennett Pike
Greenville, Delaware 19807
--------------------------
(Name and address of agent for service)
(302) 656-3017
--------------
Registrant's telephone number, including area code:
Date of fiscal year end: September 30
Date of reporting period: September 30, 2006
ITEM 1. REPORTS TO STOCKHOLDERS.
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THE BRANDYWINE FUNDS
Managed by Friess Associates, LLC Annual Report September 30, 2006
Dear Fellow Shareholders:
Economic uncertainty dominated the market mindset in the September quarter.
Investors favored value characteristics over growth profiles and dividend
payouts over earnings gains, showing an affinity for companies believed to be
relatively "safe." Companies on the economy's leading edge apparently held less
appeal.
Brandywine Fund grew 0.22 percent in the September quarter, compared to returns
in the Russell 3000 and Russell 3000 Growth Indexes of 4.64 and 3.44 percent.
Brandywine Blue Fund added 2.30 percent as the S&P 500, Russell 1000 and Russell
1000 Growth Indexes gained 5.67, 5.06 and 3.94 percent.
Statistics compiled by Morningstar showed that stocks categorized by the
investment styles value, core and growth performed in just that order, with
value stocks leading the way by a wide margin. The trend held true in every
market-cap category.
At the same time, growing investor interest in dividends was evident in major
benchmarks. Component companies that occupied the top 20 percent in terms of
dividend yield led performance in the quarter and in the first nine months of
2006 for both the S&P 500 and Russell 3000 Indexes. Most of the rapidly growing
companies you hold reinvest earnings back into their businesses and, as a
result, don't pay dividends.
Actual earnings results held little sway in the September quarter. A noteworthy
85 percent of Brandywine's current holdings exceeded Wall Street earnings
expectations in their most recent quarter. The same percentage of Brandywine
Blue's holdings reported earnings growth that surpassed consensus estimates.
While investors generally favored companies that don't fit our style, the
Brandywine Funds also held companies that seem to run counter to the market's
changing take on the economy. After boosting performance for much of the past
two years and as recently as the March quarter this year, holdings from the
industrial, energy and raw materials sectors weighed on results the past two
quarters in a row. Investors generally perceive companies from these areas to be
sensitive to economic shifts, making them hesitant to reward individual-company
earnings gains amid concerns about slowing growth.
Although macro clouds sapped enthusiasm for the industrial side of the economy,
a drop in the price of gasoline during the September quarter prompted investors
to view companies sensitive to consumer spending in a new light. Holdings from
the consumer-discretionary sector contributed most to performance in both
Brandywine and Brandywine Blue.
Department store operator Kohl's, which beat estimates with 28 percent
July-quarter earnings growth, was a standout performer for both Funds. Best Buy,
also held by both Funds, gained solid ground as demand for flat-panel TVs helped
the electronics retailer top expectations with 27 percent August-quarter
earnings growth. Other notable contributors from the sector included luxury
leather goods maker Coach (Brandywine Blue) and women's apparel retailer
Coldwater Creek (Brandywine), which exceeded estimates with 24 and 78 percent
earnings growth in their most recent quarter, respectively.
Brandywine Brandywine Blue
Cumulative Total Return % Change % Change
----------------------- -------- --------
Quarter 0.22 2.30
One Year 2.44 3.47
Five Years 40.73 52.18
Ten Years 114.65 132.18
Inception 1,254.58*<F1> 644.79**<F2>
Annualized Total Return
-----------------------
Five Years 7.07 8.76
Ten Years 7.94 8.79
Inception 13.38*<F1> 13.62**<F2>
*<F1>12/30/85 **<F2>1/10/91
Performance data quoted represent past performance; past performance does
- -------------------------------------------------------------------------
not guarantee future results. The investment return and principal value of an
- -----------------------------
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance of the Funds
may be lower or higher than the performance quoted. Performance data current to
the most recent month end may be obtained by visiting www.brandywinefunds.com.
Technology holdings also contributed to performance, especially in Brandywine,
where they comprised the largest percentage of assets. Largely unfazed by news
of its board's controversial leak investigation, investors rewarded
Hewlett-Packard (both Funds) for its continued operational improvement. The
company grew July-quarter earnings 44 percent, topping estimates by 11 percent.
Oracle (both Funds), Flextronics International (both Funds) and Harris
(Brandywine) also aided results.
Health-care holdings contributed to performance in both Funds. Their influence
was greater in Brandywine Blue given that seven of the eight companies from the
sector that the Fund held during the quarter gained ground. DaVita (both Funds)
and Fisher Scientific International (both Funds) were leading contributors.
Holdings from the industrial, energy and raw materials sectors detracted from
quarterly results, but energy-related holdings exerted the most significant
negative influence. Only two holdings managed to eke out small gains in a
broad-based downturn sparked by a significant drop in the price of oil. After
climbing for most of the first six months of the year, oil prices fell 15
percent in the September quarter. The price swing means little to the equipment
and service providers that make up the bulk of our energy exposure, but such
details were lost as investors fled the sector en masse.
For more information on the holdings that influenced September-quarter
performance the most, please see Roses & Thorns on page 4 for Brandywine and
page 6 for Brandywine Blue.
Consistently employing our strategy means weathering periods in which factors
other than individual-company fundamentals move the market. Still, our decades
of experience show there's no better gauge of a company's ultimate share-price
direction than its earnings. Even with the recent challenges they faced versus
the indexes, the Brandywine Funds remained well ahead of all their benchmarks in
the three years through September.
THREE YEAR RETURNS
Brandywine Fund 14.85%
Russell 3000 Index 13.00%
Russell 3000 Growth Index 8.64%
Brandywine Blue Fund 14.86%
Russell 1000 Index 12.79%
S&P 500 Index 12.30%
Russell 1000 Growth Index 8.35%
Annualized Total Returns, September 30, 2003 through September 30, 2006.
Recent market moves stem from sweeping assumptions made about the broad economy.
Going forward, however, bottom-up details should matter more and more. We're
confident that individual companies that prove they can thrive within, or even
in spite of, the changing economic backdrop will inevitably attract the rewards
they deserve.
/s/Bill D'Alonzo
Bill D'Alonzo
Brandywine Funds President October 13, 2006
IMPORTANT NOTICE TO SHAREHOLDERS INVESTED THROUGH FINANCIAL INTERMEDIARIES
Two prominent financial intermediaries, or mutual fund "supermarket" providers,
informed us that they will no longer permit the delivery of communications that
are not required under regulatory guidelines. This means the Brandywine Funds
can only send three items - the prospectus, the semi-annual report and the
annual report - to shareholders invested through these intermediaries. We will
not be able to send affected shareholders our quarterly "Looking Forward"
publication or the December- and June-quarter Brandywine Funds reports.
All reports will continue to be available on our web site,
www.brandywinefunds.com, and we are working on a way to allow shareholders to
register e-mail addresses online to facilitate e-delivery notices announcing
future reports as they become available. All shareholders invested directly with
---------------------------------------
the Brandywine Funds will continue to receive all Fund-related communications.
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BRANDYWINE FUND
PERCENT CHANGE IN TOP TEN HOLDINGS FROM BOOK COST
1. Hewlett-Packard Co. +16.3%
2. Fisher Scientific International Inc. +19.2%
3. Precision Castparts Corp. +68.7%
4. Weatherford International Ltd. +91.7%
5. TJX Companies, Inc. +6.6%
6. Comcast Corp. +14.8%
7. Kohl's Corp. +21.3%
8. Baker Hughes Inc. -11.0%
9. Best Buy Co., Inc. +13.9%
10. Harris Corp. +12.7%
EARNINGS GROWTH
Your Companies 29%
S&P 500 14%
FORCASTED INCREASE IN EARNINGS PER SHARE
2006 vs 2005
All figures are dollar weighted and based on data from Baseline. September 30,
2006.
YOUR COMPANIES' MARKET CAPITALIZATION
LARGE CAP
$10 billion and over 38.9%
MID CAP
$2 billion to $10 billion 48.1%
SMALL CAP
below $2 billion 11.6%
CASH 1.4%
TOP TEN INDUSTRY GROUPS
Oil & Gas Equipment & Services 9.2%
Aerospace & Defense 7.8%
Health Care Equipment 6.4%
Apparel Retail 4.7%
Computer Hardware 4.6%
Communications Equipment 4.3%
Life Sciences Tools & Services 4.3%
Broadcasting & Cable TV 4.0%
Steel 4.0%
Department Stores 3.8%
All Other Industry Groups 45.5%
Cash 1.4%
BRANDYWINE FUND
SEPTEMBER QUARTER "ROSES AND THORNS"
$ GAIN
BIGGEST $ WINNERS (IN MILLIONS) % GAIN REASON FOR MOVE
- ----------------- ------------- ------ ---------------
Hewlett-Packard Co. $25.3 15.8 While unfortunate, we believe the
boardroom scandal currently
attracting attention will ultimately
prove immaterial to fundamentals
at the maker of computing and
imaging systems. July-quarter
earnings grew 44 percent,
topping estimates by 11 percent.
Healthy growth in each of its four
divisions was complemented by
expanding operating margins.
Oracle Corp. $24.3 12.0 The developer of database
management systems and
enterprise software grew August-
quarter earnings 29 percent,
topping estimates by 13 percent.
Following a string of niche
acquisitions, stronger-than-
anticipated licensing revenues
reflect the company's newfound
ability to deliver increased
functionality and end-to-end
product solutions to customers.
Your team sold Oracle as shares
neared our target price.
Comcast Corp. $19.0 13.1 The largest cable-TV operator in
the U.S. grew June-quarter
earnings 16 percent, beating
estimates by 10 percent. Better-
than-expected cash flow is likely
to persist as Comcast
aggressively adds voice service
to its existing cable and Internet
markets, increasing the average
revenue generated per user and
reducing subscriber churn.
Kohl's Corp. $18.8 10.2 July-quarter earnings grew 28
percent, topping estimates. The
department store operator is
increasing the number of
exclusive brands it carries and
enhancing its merchandise
assortment, helping drive foot
traffic and expand profit margins.
Total sales jumped 26 percent in
September, while same-store
sales increased 16.3 percent.
Best Buy Co., Inc. $14.4 13.9 The big-box electronics retailer
grew August-quarter earnings 27
percent, topping estimates.
Demand for high-definition and
flat-panel TVs remains high due
to continued average sale
price declines. Profit margins
showed marked improvement as
the company continues to refine its
customer centricity and Geek Squad
initiatives. The company is
favorably positioned to
benefit from the next-generation
gaming cycle through the holiday
season.
$ LOSS
BIGGEST $ LOSERS (IN MILLIONS) % LOSS REASON FOR MOVE
- ---------------- ------------- ------ ---------------
Weatherford
International Ltd. $32.3 15.9 June-quarter earnings grew 66
percent, but a fall in natural gas
prices created concerns of lower
overall energy-industry activity.
While a short-term respite in
North America is possible,
international drilling activity,
where Weatherford has
considerable exposure, is
accelerating. As the cold-weather
season approaches, we expect
production activity concerns to
diminish and continued solid
spending trends for
Weatherford's high-technology
drilling services.
Baker Hughes Inc. $27.0 16.1 June-quarter earnings grew 67
percent, beating estimates.
Concerns over an increase in
North American natural gas
storage levels and their ability to
affect energy-industry activity
depressed prices for energy-
associated companies. Baker
Hughes' outsized international
and oilfield exposure, where our
trade checks indicate growing
exploration and development
outlays, position it for continued
growth.
Cisco Systems Inc. $17.5 10.1 During the quarter, trade checks
with competitors and various
suppliers of the communications-
equipment maker turned up
disappointing industry trends,
prompting our sale. Despite solid
July-quarter earnings results, our
research shows that threats to
the company's growth projections
persist.
Analog Devices, Inc. $15.3 15.1 The maker of integrated circuits
used in myriad electronics
products came under pressure
when management's forecast for
sales missed analysts'
expectations. Some customers
lowered orders on worries related
to the risk of an inventory build
up if an expected seasonal
upturn in cell-phone sales doesn't
materialize. Your team sold
Analog Devices to fund an idea
with greater near-term earnings
prospects.
Avaya Inc. $12.4 20.1 Despite revenue growth above
expectations, the maker of voice-
over-Internet protocol (VoIP) and
other communications solutions
lost ground as it failed to convert
revenues into bottom-line
earnings. Behind the earnings
shortfall was overspending
related to major advertising
campaigns. Your team sold
Avaya to fund an idea with
greater near-term earnings
visibility.
All gains/losses are calculated on an average cost basis
BRANDYWINE BLUE FUND
PERCENT CHANGE IN TOP TEN HOLDINGS FROM BOOK COST
1. Comcast Corp. +15.1%
2. Hewlett-Packard Co. +16.8%
3. TJX Companies, Inc. +6.0%
4. Fisher Scientific International Inc. +23.4%
5. Best Buy Co., Inc. +14.4%
6. General Dynamics Corp. +14.8%
7. Rockwell Collins, Inc. +5.7%
8. Bank of New York Company, Inc. -0.4%
9. Baker Hughes Inc. -8.3%
10. Coach, Inc. +18.8%
EARNINGS GROWTH
Your Companies 28%
S&P 500 14%
FORCASTED INCREASE IN EARNINGS PER SHARE
2006 vs 2005
ALL FIGURES ARE DOLLAR WEIGHTED AND BASED ON DATA FROM BASELINE. SEPTEMBER 30,
2006.
YOUR COMPANIES' MARKET CAPITALIZATION
LARGE CAP
$10 billion and over 70.2%
MID CAP
$2 billion to $10 billion 26.7%
CASH 3.1%
TOP TEN INDUSTRY GROUPS
Aerospace & Defense 9.7%
Computer Hardware 6.5%
Oil & Gas Equipment & Services 6.3%
Health Care Services 5.9%
Health Care Equipment 5.8%
Electric Utilities 5.4%
Broadcasting & Cable TV 4.9%
Apparel Retail 4.4%
Life Sciences Tools & Services 4.4%
Computer & Electronics Retail 3.9%
All Other Industry Groups 39.7%
Cash 3.1%
BRANDYWINE BLUE FUND
SEPTEMBER QUARTER "ROSES AND THORNS"
$ GAIN
BIGGEST $ WINNERS (IN MILLIONS) % GAIN REASON FOR MOVE
- ----------------- ------------- ------ ---------------
Hewlett-Packard Co. $11.9 15.8 While unfortunate, we believe
the boardroom scandal currently
attracting attention will
ultimately prove immaterial to
fundamentals at the maker of
computing and imaging systems.
July-quarter earnings grew 44
percent, topping estimates by 11
percent. Healthy growth in each of
its four divisions was complemented
by expanding operating margins.
Comcast Corp. $10.2 12.7 The largest cable-TV operator in the
U.S. grew June-quarter earnings 16
percent, beating estimates by 10
percent. Better-than-expected cash
flow is likely to persist as
Comcast aggressively adds voice
service to its existing cable and
Internet markets, increasing the
average revenue generated per user
and reducing subscriber churn.
Best Buy Co., Inc. $9.1 14.4 The big-box electronics retailer
grew August-quarter earnings 27
percent, topping estimates. Demand
for high-definition and flat-panel
TVs remains high due to continued
average sale price declines. Profit
margins showed marked improvement
as the company continues to refine
its customer centricity and Geek
Squad initiatives. The company is
favorably positioned to benefit
from the next-generation gaming
cycle through the holiday season.
Coach, Inc. $8.4 16.8 The maker of luxury leather goods
grew June-quarter earnings 24
percent, beating estimates. The
company's Signature Stripe
collection, introduced in July, has
been very successful, and its just-
released Legacy collection is
generating strong interest at higher
price points. Improving top- and
bottom-line forecasts for the
fiscal-year ending June 2007 are
related to strong product
acceptance and sales trends.
Kohl's Corp. $7.8 9.0 July-quarter earnings grew 28
percent, topping estimates. The
department store operator is
increasing the number of exclusive
brands it carries and enhancing its
merchandise assortment, helping
drive foot traffic and expand
profit margins. Total sales jumped
26 percent in September, while
same-store sales increased 16.3
percent.
$ LOSS
BIGGEST $ LOSERS (IN MILLIONS) % LOSS REASON FOR MOVE
- ---------------- ------------- ------ ---------------
Baker Hughes Inc. $11.7 14.7 June-quarter earnings grew 67
percent, beating estimates.
Concerns over an increase in North
American natural gas storage levels
and their ability to affect
energy-industry activity depressed
prices for energy-associated
companies. Baker Hughes' outsized
international and oilfield
exposure, where our trade checks
indicate growing exploration and
development outlays, position it
for continued growth.
Weatherford
International Ltd. $11.6 12.7 June-quarter earnings
grew 66 percent, but a fall in
natural gas prices created concerns
of lower overall energy-industry
activity. While a short-term
respite in North America is
possible, international drilling
activity, where Weatherford has
considerable exposure, is
accelerating. As the cold-weather
season approaches, we expect
production activity concerns to
diminish and continued solid
spending trends for Weatherford's
high-technology drilling services.
Cisco Systems Inc. $8.0 10.7 During the quarter, trade checks
with competitors and various
suppliers of the
communications-equipment maker
turned up disappointing industry
trends, prompting our sale. Despite
solid July-quarter earnings
results, our research shows that
threats to the company's growth
projections persist.
Transocean Inc. $7.7 17.8 The offshore drilling contractor
experienced higher-than-expected
yard costs in shipyards where rigs
were being built due to materials
prices and yard-specific issues.
Management also announced more rig
downtime due to geographic
logistics. Despite their seemingly
transitory nature, your team sold
Transocean on concerns that these
issues would continue to impact
results in its upcoming quarter.
Analog Devices, Inc. $7.1 15.1 The maker of integrated circuits
used in myriad electronics products
came under pressure when
management's forecast for sales
missed analysts' expectations. Some
customers lowered orders on worries
related to the risk of an inventory
build up if an expected seasonal
upturn in cell-phone sales doesn't
materialize. Your team sold Analog
Devices to fund an idea with
greater near-term earnings
prospects.
All gains/losses are calculated on an average cost basis
MANAGEMENT'S DISCUSSION OF RESULTS, BRANDYWINE FUND
Brandywine Fund's investment strategy emphasizes the relationship between
earnings performance and stock prices. Concrete earnings trends, however, did
not top investor priorities during much of the fiscal year ended September 30
amid a series of macro developments that emerged as the overriding influence on
stocks.
Brandywine's earnings-based approach produced a 2.44 percent fiscal-year
return relative to benchmark returns ranging from 6.05 to 10.79 percent as
investors reacted to volatile energy prices, growing inflationary pressures and
economic uncertainty.
After peaking in lockstep with an especially destructive hurricane season,
oil prices began the fiscal year in decline. While the short-lived drop did not
derail the earnings prospects of Brandywine's energy-related holdings, investors
saw it as reason to flee the sector in an otherwise calm December-quarter
environment. Energy holdings represented the Fund's second-largest percentage of
assets, contributing to a small quarterly decline versus modest returns in
benchmarks.
Persistent strength in the industrial side of the economy fueled a
generally favorable March-quarter climate. Industrial holdings, which
represented roughly one in five companies in the portfolio, contributed most to
performance as demand from the aerospace, energy and commercial construction
markets fueled solid earnings growth. Also, oil prices resumed their rise
following the December-quarter pause, drawing investor attention back to the
earnings promise of the Fund's energy-related holdings. Brandywine handily
outpaced its benchmarks in the March quarter.
With oil prices reaching new highs and the Federal Reserve continuing a
series of interest-rate hikes, inflation concerns and related economic
uncertainty dampened the market's mood in the June quarter. Although companies
from most sectors suffered in this environment, the technology sector led the
downturn as a product delay from Microsoft added to the more generalized
concerns. Tech companies comprised the Fund's largest percentage of assets.
Brandywine and its benchmarks lost ground in the June quarter.
Economic uncertainty overtook inflation as the market's main concern in the
September quarter. While stocks in general gained ground, slower-growing
companies believed to be relatively "safe" investments outperformed. Growth
companies, particularly those perceived to be sensitive to shifts in the overall
economy, did not fare as well. Brandywine's September quarter return trailed
benchmark performance.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN BRANDYWINE FUND,
RUSSELL 3000 GROWTH(1)<F3>, RUSSELL 3000 INDEX(2)<F4> AND S&P 500 INDEX(3)<F5>
Brandywine Russell 3000
Fund S&P 500 Growth Russell 3000
---- ------- ------ ------------
9/30/96 10,000 10,000 10,000 10,000
9/30/97 13,930 14,070 13,510 13,843
9/30/98 10,071 15,350 14,491 14,453
9/30/99 13,778 19,618 19,515 18,258
9/30/00 19,676 22,224 24,173 21,579
9/30/01 15,256 16,308 13,206 15,556
9/30/02 12,695 12,967 10,271 12,628
9/30/03 14,172 16,130 13,039 15,902
9/30/04 16,094 18,368 14,058 18,169
9/30/05 20,958 20,618 15,763 20,817
9/30/06 21,470 22,843 16,717 22,944
AVERAGE ANNUAL TOTAL RETURN
---------------------------
Since Inception
1-Year 5-Year 10-Year 12/30/85
------ ------ ------- --------
2.44% 7.07% 7.94% 13.38%
Past performance is not predictive of future performance. The graph and the
table do not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(1)<F3> The Russell 3000 Growth Index measures the performance of
those Russell 3000 Index companies with higher price-to-book ratios
and higher forecasted growth values. The stocks in this index are also
members of either the Russell 1000 Growth or the Russell 2000 Growth
Indexes.
(2)<F4> The Russell 3000 Index, a trademark of the Frank Russell
Company, is 3,000 of the largest publicly traded companies in the
United States equity market and includes income.
(3)<F5> The S&P 500 Index consists of 500 stocks, mostly on the New
York Stock Exchange, selected by the Standard & Poor's Ratings Group.
Each stock's weighting is based on its relative total market value.
Stocks may be added or deleted from the Index, which assumes
reinvestment of dividends.
BRANDYWINE FUND, INC.
STATEMENT OF NET ASSETS
September 30, 2006
SHARES COST VALUE
------ ---- -----
COMMON STOCKS - 98.6% (A)<F7>
CONSUMER DISCRETIONARY
APPAREL RETAIL - 4.7%
741,300 bebe stores, inc. $ 16,460,671 $ 18,369,414
316,800 Christopher & Banks Corp. 8,245,317 9,339,264
5,889,900 TJX Companies, Inc. 154,942,449 165,093,897
APPAREL, ACCESSORIES & LUXURY GOODS - 0.7%
401,200 Gildan Activewear Inc.*<F6> 16,211,648 19,442,152
375,800 The Warnaco Group, Inc.*<F6> 6,708,769 7,267,972
BROADCASTING & CABLE TV - 4.0%
4,442,100 Comcast Corp.*<F6> 142,613,467 163,691,385
CATALOG RETAIL - 0.7%
1,043,700 Coldwater Creek Inc.*<F6> 25,423,175 30,016,812
COMPUTER & ELECTRONICS RETAIL - 2.9%
2,212,000 Best Buy Co., Inc. 104,057,195 118,474,720
DEPARTMENT STORES - 3.8%
2,404,600 Kohl's Corp.*<F6> 128,682,079 156,106,632
HOMEFURNISHING RETAIL - 0.1%
146,800 Tempur-Pedic
International Inc.*<F6> 2,572,391 2,520,556
LEISURE PRODUCTS - 1.0%
1,792,200 Hasbro, Inc. 35,887,408 40,772,550
SPECIALTY STORES - 0.7%
659,100 Dick's Sporting
Goods, Inc.*<F6> 27,285,590 30,002,232
-------------- --------------
TOTAL CONSUMER DISCRETIONARY 669,090,159 761,097,586
THIS SECTOR IS 13.8% ABOVE YOUR FUND'S COST.
CONSUMER STAPLES
AGRICULTURAL PRODUCTS - 0.6%
689,500 Corn Products
International, Inc. 22,344,696 22,436,330
PERSONAL PRODUCTS - 0.2%
513,500 Nu Skin Enterprises, Inc. 8,955,799 8,996,520
-------------- --------------
TOTAL CONSUMER STAPLES 31,300,495 31,432,850
THIS SECTOR IS 0.4% ABOVE YOUR FUND'S COST.
ENERGY
OIL & GAS EQUIPMENT & SERVICES - 9.2%
2,056,600 Baker Hughes Inc. 157,556,999 140,260,120
989,100 FMC Technologies, Inc.*<F6> 58,972,607 53,114,670
46,000 Oceaneering
International, Inc.*<F6> 1,380,589 1,416,800
338,000 Superior Energy
Services, Inc.*<F6> 4,746,265 8,875,880
4,085,000 Weatherford International
Ltd.*<F6> 88,879,742 170,426,200
OIL & GAS EXPLORATION & PRODUCTION - 0.0%
161,400 Petrohawk Energy Corp.*<F6> 1,818,663 1,675,332
OIL & GAS STORAGE & TRANSPORTATION - 2.9%
2,128,100 Frontline Ltd. 91,172,776 81,953,131
1,608,500 OMI Corp. 30,461,050 34,920,535
-------------- --------------
TOTAL ENERGY 434,988,691 492,642,668
THIS SECTOR IS 13.3% ABOVE YOUR FUND'S COST.
FINANCIALS
INSURANCE BROKERS - 0.6%
685,800 Willis Group Holdings Ltd. 26,398,078 26,060,400
-------------- --------------
TOTAL FINANCIALS 26,398,078 26,060,400
THIS SECTOR IS 1.3% BELOW YOUR FUND'S COST.
HEALTH CARE
HEALTH CARE EQUIPMENT - 6.4%
186,200 American Medical Systems
Holdings, Inc.*<F6> 3,219,054 3,431,666
2,094,900 Baxter International Inc. 94,044,382 95,234,154
661,500 Cytyc Corp.*<F6> 16,704,660 16,193,520
891,000 Respironics, Inc.*<F6> 32,097,574 34,401,510
2,128,400 St. Jude Medical, Inc.*<F6> 77,172,424 75,111,236
697,200 Varian Medical
Systems, Inc.*<F6> 35,157,242 37,223,508
HEALTH CARE FACILITIES - 0.5%
624,700 Psychiatric
Solutions, Inc.*<F6> 19,294,597 21,296,023
HEALTH CARE SERVICES - 3.1%
1,506,000 DaVita, Inc.*<F6> 86,647,821 87,152,220
531,100 Express Scripts, Inc.*<F6> 37,935,707 40,092,739
HEALTH CARE SUPPLIES - 1.8%
2,362,400 DENTSPLY International Inc. 69,736,435 71,131,864
HEALTH CARE TECHNOLOGY - 0.8%
1,229,100 IMS Health Inc. 30,457,914 32,743,224
LIFE SCIENCES TOOLS & SERVICES - 4.3%
2,229,400 Fisher Scientific
International Inc.*<F6> 146,292,628 174,428,256
PHARMACEUTICALS - 1.1%
1,415,200 Endo Pharmaceuticals
Holdings Inc.*<F6> 42,406,274 46,064,760
-------------- --------------
TOTAL HEALTH CARE 691,166,712 734,504,680
THIS SECTOR IS 6.3% ABOVE YOUR FUND'S COST.
INDUSTRIALS
AEROSPACE & DEFENSE - 7.8%
342,400 AAR CORP.*<F6> 7,935,353 8,162,816
639,300 DynCorp International
Inc.*<F6> 9,594,536 8,048,787
380,700 Goodrich Corp. 15,179,577 15,425,964
59,700 Moog Inc.*<F6> 2,022,222 2,069,202
2,719,200 Precision Castparts Corp. 101,776,550 171,744,672
2,055,300 Rockwell Collins, Inc. 110,468,818 112,712,652
AIRLINES - 0.5%
787,500 SkyWest, Inc. 18,492,411 19,309,500
BUILDING PRODUCTS - 0.3%
9,700 Griffon Corp.*<F6> 241,440 231,539
170,100 NCI Building Systems, Inc.*<F6> 8,214,183 9,894,717
CONSTRUCTION & ENGINEERING - 1.8%
417,300 Infrasource Services
Inc.*<F6> 7,323,564 7,323,615
1,856,800 Quanta Services, Inc.*<F6> 29,770,947 31,305,648
1,151,900 Shaw Group Inc.*<F6> 28,301,111 27,230,916
118,100 Washington Group
International, Inc. 6,090,480 6,951,366
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES - 0.2%
145,400 Mobile Mini, Inc.*<F6> 4,078,044 4,130,814
168,700 Navigant Consulting, Inc.*<F6> 3,424,499 3,384,122
ELECTRICAL COMPONENTS & EQUIPMENT - 1.1%
393,000 AMETEK, Inc. 13,338,470 17,115,150
570,500 Hubbell Inc. Cl B 26,959,309 27,326,950
ENVIRONMENTAL & FACILITIES SERVICES - 0.9%
121,600 Allied Waste
Industries, Inc.*<F6> 1,361,384 1,370,432
198,900 Clean Harbors, Inc.*<F6> 5,601,247 8,662,095
314,200 Republic Services, Inc. 12,409,906 12,633,982
363,500 Waste Connections, Inc.*<F6> 12,526,446 13,780,285
INDUSTRIAL CONGLOMERATES - 1.8%
1,745,500 McDermott
International, Inc.*<F6> 30,536,972 72,961,900
INDUSTRIAL MACHINERY - 0.2%
186,600 Gardner Denver Inc.*<F6> 4,214,473 6,172,728
MARINE - 0.7%
258,400 American Commercial Lines
Inc.*<F6> 13,326,288 15,361,880
440,800 Eagle Bulk Shipping Inc. 6,147,650 7,088,064
246,000 Kirby Corp.*<F6> 8,868,798 7,707,180
TRADING COMPANIES & DISTRIBUTORS - 0.2%
107,400 H&E Equipment
Services, Inc.*<F6> 2,778,206 2,619,486
218,400 Williams Scotsman
International Inc.*<F6> 4,614,614 4,665,024
-------------- --------------
TOTAL INDUSTRIALS 495,597,498 625,391,486
THIS SECTOR IS 26.2% ABOVE YOUR FUND'S COST.
INFORMATION TECHNOLOGY
APPLICATION SOFTWARE - 2.3%
153,000 Altiris, Inc.*<F6> 3,540,976 3,226,770
300,900 Autodesk, Inc.*<F6> 10,439,412 10,465,302
479,700 Informatica Corp.*<F6> 7,137,546 6,519,123
394,600 Jack Henry & Associates, Inc. 7,446,229 8,590,442
997,900 Mentor Graphics Corp.*<F6> 13,824,669 14,050,432
1,630,800 Nuance
Communications, Inc.*<F6> 14,804,128 13,323,636
1,174,680 Parametric Technology
Corp.*<F6> 18,305,858 20,509,913
253,000 Reynolds and Reynolds Co. 7,573,268 9,996,030
143,300 Transaction Systems
Architects, Inc.*<F6> 5,275,964 4,918,056
COMMUNICATIONS EQUIPMENT - 4.3%
445,200 Arris Group Inc.*<F6> 4,720,153 5,101,992
1,767,900 Corning Inc.*<F6> 42,443,076 43,154,439
2,624,800 Harris Corp. 103,574,334 116,777,352
64,300 NETGEAR, Inc.*<F6> 1,429,158 1,323,937
418,200 Polycom, Inc.*<F6> 7,269,727 10,258,446
COMPUTER HARDWARE - 4.6%
5,053,100 Hewlett-Packard Co. 159,437,403 185,398,239
COMPUTER STORAGE & PERIPHERALS - 0.8%
1,000,100 Logitech International
S.A. ADR*<F6> 20,303,630 21,762,176
447,500 Rackable Systems Inc.*<F6> 12,736,617 12,248,075
DATA PROCESSING & OUTSOURCED SERVICES - 1.3%
1,382,900 Fidelity National Information
Services, Inc. 51,700,217 51,167,300
ELECTRONIC EQUIPMENT MANUFACTURERS - 0.1%
209,300 Tektronix, Inc. 4,916,447 6,055,049
ELECTRONIC MANUFACTURING SERVICES - 3.6%
2,265,600 Celestica Inc.*<F6> 22,045,089 24,332,544
6,380,100 Flextronics International
Ltd.*<F6> 74,276,368 80,644,464
841,900 Trimble Navigation Ltd.*<F6> 36,524,914 39,636,652
IT CONSULTING & OTHER SERVICES - 1.1%
1,403,300 Accenture Ltd. 41,674,110 44,498,643
INTERNET SOFTWARE & SERVICES - 1.1%
809,600 aQuantive, Inc.*<F6> 19,762,017 19,122,752
1,389,500 ValueClick, Inc.*<F6> 23,963,001 25,761,330
SEMICONDUCTOR EQUIPMENT - 0.1%
134,700 Entegris Inc.*<F6> 1,319,306 1,469,577
62,500 Veeco Instruments Inc.*<F6> 1,310,944 1,259,375
SEMICONDUCTORS - 3.8%
2,661,300 Agere Systems Inc.*<F6> 40,782,124 39,733,209
1,429,100 Fairchild Semiconductor
International, Inc.*<F6> 25,074,069 26,724,170
686,900 Integrated Device
Technology, Inc.*<F6> 9,581,996 11,031,614
2,532,700 NVIDIA Corp.*<F6> 74,374,101 74,942,593
52,900 Standard Microsystems
Corp.*<F6> 1,550,430 1,503,418
SYSTEMS SOFTWARE - 0.3%
268,100 MICROS Systems, Inc.*<F6> 10,969,592 13,115,452
TECHNOLOGY DISTRIBUTORS - 1.5%
3,195,900 Ingram Micro Inc.*<F6> 63,969,900 61,233,444
-------------- --------------
TOTAL INFORMATION TECHNOLOGY 944,056,773 1,009,855,946
THIS SECTOR IS 7.0% ABOVE YOUR FUND'S COST.
MATERIALS
DIVERSIFIED METALS & MINING - 3.0%
1,305,100 Phelps Dodge Corp. 115,269,674 110,541,970
266,600 RTI International
Metals, Inc.*<F6> 13,111,669 11,618,428
METAL & GLASS CONTAINERS - 1.1%
2,498,400 Crown Holdings, Inc.*<F6> 45,739,480 46,470,240
STEEL - 4.0%
1,596,100 Allegheny Technologies, Inc. 95,139,114 99,261,459
378,600 Carpenter Technology Corp. 23,462,012 40,703,286
201,000 Chaparral Steel Co.*<F6> 6,126,387 6,846,060
288,600 Oregon Steel Mills, Inc.*<F6> 14,170,916 14,103,882
-------------- --------------
TOTAL MATERIALS 313,019,252 329,545,325
THIS SECTOR IS 5.3% ABOVE YOUR FUND'S COST.
TELECOMMUNICATION SERVICES
WIRELESS TELECOMMUNICATION SERVICES - 0.0%
181,200 @Road, Inc.*<F6> 1,065,039 1,058,208
-------------- --------------
TOTAL TELECOMMUNICATION
SERVICES 1,065,039 1,058,208
-------------- --------------
THIS SECTOR IS 0.6% BELOW YOUR FUND'S COST.
Total common stocks 3,606,682,697 4,011,589,149
PRINCIPAL
AMOUNT
------
SHORT-TERM INVESTMENTS - 2.2% (A)<F7>
COMMERCIAL PAPER - 2.2%
$62,000,000 Countrywide Financial Corp.,
due 10/02/06, discounts
of 5.30-5.40% 61,990,803 61,990,803
25,000,000 Alcoa Inc., due 10/12/06,
discount of 5.28% 24,959,667 24,959,667
-------------- --------------
Total commercial paper 86,950,470 86,950,470
VARIABLE RATE DEMAND NOTE - 0.0%
999,126 U.S. Bank, N.A., 5.07% 999,126 999,126
-------------- --------------
Total short-term
investments 87,949,596 87,949,596
-------------- --------------
Total investments $3,694,632,293 4,099,538,745
--------------
--------------
Liabilities, less cash and
receivables (0.8%) (a)<F7> (33,246,378)
--------------
NET ASSETS $4,066,292,367
--------------
--------------
Net Asset Value Per Share
($0.01 par value, 500,000,000
shares authorized), offering
and redemption price
($4,066,292,367 / 125,989,275
shares outstanding) $32.27
------
------
*<F6> Non-dividend paying security.
(a)<F7> Percentages for the various classifications relate to net assets.
ADR - American Depositary Receipts
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2006
INCOME:
Dividends $ 26,124,931
Interest 5,426,036
-------------
Total income 31,550,967
-------------
EXPENSES:
Management fees 40,963,503
Transfer agent fees 1,627,678
Administrative and accounting services 619,193
Printing and postage expense 312,311
Custodian fees 237,194
Registration fees 82,374
Board of Directors fees and expenses 81,002
Professional fees 69,572
Insurance expense 63,569
Other expenses 34,482
-------------
Total expenses 44,090,878
-------------
NET INVESTMENT LOSS (12,539,911)
-------------
NET REALIZED GAIN ON INVESTMENTS 328,031,774
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (219,420,419)
-------------
NET GAIN ON INVESTMENTS 108,611,355
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 96,071,444
-------------
-------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 2006 and 2005
2006 2005
---- ----
OPERATIONS:
Net investment loss $ (12,539,911) $ (10,469,165)
Net realized gain on investments 328,031,774 682,236,498
Net (decrease) increase in unrealized
appreciation on investments (219,420,419) 311,487,501
-------------- --------------
Net increase in net assets
resulting from operations 96,071,444 983,254,834
-------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(15,270,588 and 12,144,409 shares,
respectively) 490,003,223 337,444,419
Cost of shares redeemed (16,126,696
and 33,555,852 shares, respectively) (515,363,981) (911,910,269)
-------------- --------------
Net decrease in net assets
derived from Fund share
activities (25,360,758) (574,465,850)
-------------- --------------
TOTAL INCREASE 70,710,686 408,788,984
NET ASSETS AT THE BEGINNING OF THE YEAR 3,995,581,681 3,586,792,697
-------------- --------------
NET ASSETS AT THE END OF THE YEAR $4,066,292,367 $3,995,581,681
(Includes accumulated net -------------- --------------
investment loss of $0 and -------------- --------------
$687,992, respectively)
The accompanying notes to financial statements are an integral part of these
statements.
BRANDYWINE FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected data for each share of the Fund outstanding throughout each year)
Years Ended September 30,
----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $31.50 $24.19 $21.30 $19.08 $22.93
Income from investment operations:
Net investment loss (1)<F8> (0.10) (0.08) (0.13) (0.10) (0.12)
Net realized and unrealized gains (losses)
on investments 0.87 7.39 3.02 2.32 (3.73)
------ ------ ------ ------ ------
Total from investment operations 0.77 7.31 2.89 2.22 (3.85)
Less distributions:
Dividend from net investment income -- -- -- -- --
Distribution from net realized gains -- -- -- -- --
------ ------ ------ ------ ------
Total from distributions -- -- -- -- --
------ ------ ------ ------ ------
Net asset value, end of year $32.27 $31.50 $24.19 $21.30 $19.08
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 2.44% 30.22% 13.57% 11.64% (16.79%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 4,066,292 3,995,582 3,586,793 3,385,590 3,196,859
Ratio of expenses to average net assets 1.08% 1.08% 1.08% 1.09% 1.08%
Ratio of net investment loss
to average net assets (0.31%) (0.25%) (0.55%) (0.53%) (0.52%)
Portfolio turnover rate 199.9% 183.4% 247.0% 279.3% 272.9%
(1)<F8> Net investment loss per share was calculated using average shares
outstanding.
The accompanying notes to financial statements are an integral part of this
statement.
DEFINITIONS AND DISCLOSURES (THIS SECTION IS NOT PART OF THE AUDITED FINANCIAL
STATEMENTS.)
Performance data quoted represent past performance; past performance does not
guarantee future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance of the Funds
may be lower or higher than the performance quoted. Performance data current to
the most recent month end may be obtained by visiting www.brandywinefunds.com.
The Funds' investment objectives, risks, charges and expenses must be considered
carefully before investing. The prospectus contains this and other important
information about the investment companies, and it may be obtained by calling
1-800-656-3017, or visiting www.brandywinefunds.com. Read it carefully before
investing.
Fund holdings and sector weightings are subject to change at any time and are
not recommendations to buy or sell any securities. Securities discussed were not
held by the Funds as of 9/30/06, unless listed in the accompanying financial
statements. References to the earnings growth rates of the Funds refer solely to
the estimated earnings growth rates of the average investment holding of the
Funds based on consensus estimates from Baseline and not to the actual
performance of the Funds themselves. Baseline Financial Services, Inc.
(Baseline) provides analytical information and services to the investment
community. Morningstar, Inc. is a provider of independent investment research
in the United States and in major international markets.
The Russell 1000, Russell 1000 Growth, Russell 3000, Russell 3000 Growth and S&P
500 Indexes are unmanaged indexes commonly used to measure the performance of
U.S. stocks. You cannot invest directly in an index. As of September 30, 2006,
the Russell 1000 Index's average annual total returns for 1, 5 and 10 years were
10.25, 7.64 and 8.75 percent; the Russell 1000 Growth Index's were 6.04, 4.42
and 5.45 percent; the Russell 3000 Index's were 10.22, 8.08 and 8.70 percent;
the Russell 3000 Growth Index's were 6.05, 4.83 and 5.27 percent; and the S&P
500 Index's were 10.79, 6.97 and 8.58 percent.
MANAGEMENT'S DISCUSSION OF RESULTS, BRANDYWINE BLUE FUND
Brandywine Blue Fund's strategy focuses on the relationship between
earnings performance and stock prices, but individual-company fundamentals
played a muted role in influencing stocks during the fiscal year. Instead, macro
forces, including energy prices, inflation concerns and economic uncertainty,
primarily moved stocks in the 12 months ended September 30.
Brandywine Blue posted a 3.47 percent fiscal-year return versus benchmark
returns that ranged from 6.04 to 10.79 percent.
Following a destructive hurricane season that damaged production assets in
the Gulf of Mexico, energy price jitters were fading with a notable drop in the
price of oil as the December quarter of 2005 began. Energy holdings, which
comprised Brandywine Blue's second-largest percentage of assets, retreated as
investors turned their attention elsewhere. The setback led Brandywine Blue to a
small quarterly decline versus small gains in its benchmarks.
The Fund actually increased its commitment to energy holdings slightly by
the start of the March quarter, as the oil price decline did not materially
affect their fundamental outlooks. Energy holdings became strong contributors as
oil resumed its long-running rise, refocusing investor attention on the sector's
earnings strength. Confidence in the industrial economy also prompted investors
to reward holdings from the industrial sector, which reported strong earnings
gains buoyed by demand from the aerospace, energy and commercial construction
markets. The Fund's March-quarter return outpaced benchmark results.
Evidence that elevated energy prices were contributing to broader inflation
spurred interest-rate hikes and talk of vigilance from the Federal Reserve in
the June quarter. The overall environment deteriorated as inflation became an
overriding concern. Although companies from most sectors suffered, the
technology sector led the downturn as a product delay from Microsoft added to
the more generalized concerns. Tech companies comprised the Fund's largest
percentage of assets, contributing to a quarterly decline. Benchmarks also lost
ground.
In the wake of a pause in the Fed's series of interest rate hikes, investor
attention turned toward uncertainties related to slowing economic growth. Stocks
in general gained ground, but companies that pay dividends and other companies
believed to be relatively "safe" investments outperformed. Growth companies,
particularly those perceived to be sensitive to shifts in the overall economy,
did not fare as well. Brandywine Blue's September-quarter return trailed
benchmark performance.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN BRANDYWINE BLUE FUND,
RUSSELL 1000 GROWTH(1)<F9>, RUSSELL 1000 INDEX(2)<F10>
AND S&P 500 INDEX(3)<F11>
Brandywine Blue S&P 500 Russell 1000
Fund Index Growth Russell 1000
---- ----- ------ ------------
9/30/96 10,000 10,000 10,000 10,000
9/30/97 14,160 14,070 13,631 13,870
9/30/98 10,408 15,357 15,144 14,853
9/30/99 14,071 19,627 20,422 18,859
9/30/00 19,056 22,234 25,207 22,218
9/30/01 15,260 16,315 13,703 15,904
9/30/02 13,104 12,973 10,618 12,801
9/30/03 15,324 16,138 13,369 16,019
9/30/04 18,053 18,376 14,373 18,246
9/30/05 22,435 20,627 16,041 20,848
9/30/06 23,214 22,853 17,009 22,984
AVERAGE ANNUAL TOTAL RETURN
---------------------------
Since Inception
1-Year 5-Year 10-Year 01/10/91
------ ------ ------- --------
3.47% 8.76% 8.79% 13.62%
Past performance is not predictive of future performance. The graph and the
table do not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(1)<F9> The Russell 1000 Growth Index measures the performance of
those Russell 1000 companies with higher price-to-book ratios and
higher forecasted growth values.
(2)<F10> The Russell 1000 Index, a trademark of the Frank Russell
Company, is the largest 1,000 companies of the 3,000 largest publicly
traded companies in the United States equity market and includes
income.
(3)<F11> The S&P 500 Index consists of 500 stocks, mostly on the New
York Stock Exchange, selected by the Standard & Poor's Ratings Group.
Each stock's weighting is based on its relative total market value.
Stocks may be added or deleted from the Index, which assumes
reinvestment of dividends.
BRANDYWINE BLUE FUND
STATEMENT OF NET ASSETS
September 30, 2006
Shares Cost Value
------ ---- -----
COMMON STOCKS - 96.9% (A)<F13>
CONSUMER DISCRETIONARY
APPAREL RETAIL - 4.4%
2,922,400 TJX Companies, Inc. $ 77,245,972 $ 81,914,872
APPAREL, ACCESSORIES, & LUXURY GOODS - 3.2%
1,703,700 Coach, Inc.*<F12> 49,332,673 58,607,280
BROADCASTING & CABLE TV - 4.9%
2,447,600 Comcast Corp.*<F12> 78,351,427 90,194,060
COMPUTER & ELECTRONICS RETAIL - 3.9%
1,350,900 Best Buy Co., Inc. 63,236,327 72,354,204
DEPARTMENT STORES - 3.8%
518,500 J.C. Penney Company, Inc. 33,166,182 35,460,215
532,330 Kohl's Corp.*<F12> 28,315,074 34,558,864
MOVIES & ENTERTAINMENT - 2.3%
1,374,000 The Walt Disney Co. 41,186,001 42,470,340
RESTAURANTS - 1.9%
1,049,800 Starbucks Corp.*<F12> 35,240,576 35,745,690
-------------- --------------
TOTAL CONSUMER DISCRETIONARY 406,074,232 451,305,525
THIS SECTOR IS 11.1% ABOVE YOUR FUND'S COST.
ENERGY
OIL & GAS EQUIPMENT & SERVICES - 6.3%
876,000 Baker Hughes Inc. 65,169,680 59,743,200
1,391,700 Weatherford International
Ltd.*<F12> 34,001,692 58,061,724
-------------- --------------
TOTAL ENERGY 99,171,372 117,804,924
THIS SECTOR IS 18.8% ABOVE YOUR FUND'S COST.
FINANCIALS
ASSET MANAGEMENT & CUSTODY BANKS - 3.3%
1,724,300 Bank of New York Company,
Inc. 61,058,423 60,798,818
-------------- --------------
TOTAL FINANCIALS 61,058,423 60,798,818
THIS SECTOR IS 0.4% BELOW YOUR FUND'S COST.
HEALTH CARE
HEALTH CARE EQUIPMENT - 5.8%
1,083,200 Baxter International Inc. 48,620,213 49,242,272
954,800 St. Jude Medical, Inc.*<F12> 34,779,897 33,694,892
472,200 Varian Medical Systems,
Inc.*<F12> 24,237,678 25,210,758
HEALTH CARE SERVICES - 5.9%
602,100 DaVita, Inc.*<F12> 35,278,604 34,843,527
490,900 Express Scripts, Inc.*<F12> 34,967,230 37,058,041
618,500 Medco Health Solutions,
Inc.*<F12> 34,742,735 37,178,035
LIFE SCIENCES TOOLS & SERVICES - 4.4%
1,043,700 Fisher Scientific
International Inc.*<F12> 66,200,701 81,659,088
PHARMACEUTICALS - 2.5%
925,200 Forest Laboratories,
Inc.*<F12> 45,810,401 46,824,372
-------------- --------------
TOTAL HEALTH CARE 324,637,459 345,710,985
THIS SECTOR IS 6.5% ABOVE YOUR FUND'S COST.
INDUSTRIALS
AEROSPACE & DEFENSE - 9.7%
1,001,800 General Dynamics Corp. 62,539,592 71,799,006
677,700 Precision Castparts Corp. 36,367,821 42,803,532
1,196,500 Rockwell Collins, Inc. 62,102,127 65,616,060
ELECTRICAL COMPONENTS & EQUIPMENT - 2.6%
581,200 Emerson Electric Co. 46,482,245 48,739,432
INDUSTRIAL MACHINERY - 2.2%
858,900 Dover Corp. 37,470,313 40,746,216
-------------- --------------
TOTAL INDUSTRIALS 244,962,098 269,704,246
THIS SECTOR IS 10.1% ABOVE YOUR FUND'S COST.
INFORMATION TECHNOLOGY
APPLICATION SOFTWARE - 0.3%
135,900 Autodesk, Inc.*<F12> 4,714,908 4,726,602
COMMUNICATIONS EQUIPMENT - 1.0%
800,700 Corning Inc.*<F12> 19,219,959 19,545,087
COMPUTER HARDWARE - 6.5%
428,700 Apple Computer, Inc.*<F12> 32,959,257 33,022,761
2,374,500 Hewlett-Packard Co. 74,588,030 87,120,405
DATA PROCESSING & OUTSOURCED SERVICES - 1.9%
976,700 Fidelity National Information
Services, Inc. 36,893,448 36,137,900
ELECTRONIC MANUFACTURING SERVICES - 2.6%
3,808,400 Flextronics International
Ltd.*<F12> 43,367,774 48,138,176
IT CONSULTING & OTHER SERVICES - 1.2%
701,000 Accenture Ltd. 21,014,213 22,228,710
SEMICONDUCTOR EQUIPMENT - 1.5%
779,900 MEMC Electronic Materials,
Inc.*<F12> 24,571,646 28,567,737
SEMICONDUCTORS - 1.8%
1,121,100 NVIDIA Corp.*<F12> 32,598,376 33,173,349
-------------- --------------
TOTAL INFORMATION TECHNOLOGY 289,927,611 312,660,727
THIS SECTOR IS 7.8% ABOVE YOUR FUND'S COST.
MATERIALS
DIVERSIFIED METALS & MINING - 2.7%
582,600 Phelps Dodge Corp. 52,127,793 49,346,220
STEEL - 2.2%
664,800 Allegheny Technologies,
Inc. 41,519,440 41,343,912
-------------- --------------
TOTAL MATERIALS 93,647,233 90,690,132
THIS SECTOR IS 3.2% BELOW YOUR FUND'S COST.
TELECOMMUNICATION SERVICES
WIRELESS TELECOMMUNICATION SERVICES - 2.7%
818,100 NII Holdings Inc.*<F12> 46,167,332 50,853,096
-------------- --------------
TOTAL TELECOMMUNICATION
SERVICES 46,167,332 50,853,096
THIS SECTOR IS 10.1% ABOVE YOUR FUND'S COST.
UTILITIES
ELECTRIC UTILITIES - 5.4%
562,200 Entergy Corp. 43,688,506 43,980,906
923,900 Exelon Corp. 51,814,257 55,932,906
-------------- --------------
TOTAL UTITITIES 95,502,763 99,913,812
THIS SECTOR IS 4.6% ABOVE YOUR FUND'S COST.
Total common stocks 1,661,148,523 1,799,442,265
PRINCIPAL
AMOUNT
------
SHORT-TERM INVESTMENTS - 3.6% (A)<F13>
COMMERCIAL PAPER - 3.5%
$55,000,000 Countrywide Financial Corp.,
due 10/02/06,
discounts of 5.30%-5.40% 54,991,819 54,991,819
10,000,000 Countrywide Financial Corp.,
due 10/03/06, discount
of 5.30% 9,997,056 9,997,056
-------------- --------------
Total commercial paper 64,988,875 64,988,875
VARIABLE RATE DEMAND NOTE - 0.1%
1,111,440 U.S. Bank, N.A., 5.07% 1,111,440 1,111,440
-------------- --------------
Total short-term
investments 66,100,315 66,100,315
-------------- --------------
Total investments $1,727,248,838 1,865,542,580
--------------
--------------
Liabilities, less cash and
receivables (0.5%) (a)<F13> (9,046,896)
--------------
NET ASSETS $1,856,495,684
--------------
--------------
Net Asset Value Per Share
($0.01 par value, 100,000,000
shares authorized), offering
and redemption price
($1,856,495,684 / 59,589,825
shares outstanding) $31.15
------
------
*<F12> Non-dividend paying security.
(a)<F13> Percentages for the various classifications relate to net assets.
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE BLUE FUND
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2006
INCOME:
Dividends $13,750,025
Interest 2,936,957
-----------
Total income 16,686,982
-----------
EXPENSES:
Management fees 15,353,283
Transfer agent fees 767,009
Printing and postage expense 311,626
Administrative and accounting services 147,187
Registration fees 126,196
Custodian fees 91,920
Professional fees 66,016
Board of Directors fees and expenses 35,386
Insurance expense 25,301
Other expenses 8,539
-----------
Total expenses 16,932,463
-----------
NET INVESTMENT LOSS (245,481)
-----------
NET REALIZED GAIN ON INVESTMENTS 63,165,548
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (6,301,103)
-----------
NET GAIN ON INVESTMENTS 56,864,445
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $56,618,964
-----------
-----------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 2006 and 2005
2006 2005
---- ----
OPERATIONS:
Net investment loss $ (245,481) $ (1,265,431)
Net realized gain on investments 63,165,548 67,387,191
Net (decrease) increase in
unrealized appreciation on
investments (6,301,103) 108,286,530
-------------- --------------
Net increase in net assets
resulting from operations 56,618,964 174,408,290
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized
gains ($1.13878 per share) (46,370,407) --
-------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(28,256,976 and 22,380,835 shares,
respectively) 862,455,609 642,136,150
Net asset value of shares issued
in distributions reinvested
(1,398,550 shares) 38,795,788 --
Cost of shares redeemed (9,349,252
and 4,180,668 shares, respectively) (285,940,533) (117,123,835)
-------------- --------------
Net increase in net assets
derived from Fund share
activities 615,310,864 525,012,315
-------------- --------------
TOTAL INCREASE 625,559,421 699,420,605
NET ASSETS AT THE BEGINNING OF THE YEAR 1,230,936,263 531,515,658
-------------- --------------
NET ASSETS AT THE END OF THE YEAR $1,856,495,684 $1,230,936,263
(Includes accumulated net -------------- --------------
investment loss of $0 and $173,297, -------------- --------------
respectively)
The accompanying notes to financial statements are an integral part of these
statements.
BRANDYWINE BLUE FUND
FINANCIAL HIGHLIGHTS
(Selected data for each share of the Fund outstanding throughout each year)
Years Ended September 30,
----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $31.33 $25.21 $21.40 $18.30 $21.31
Income from investment operations:
Net investment loss(1)<F14> (0.00)*<F15> (0.04) (0.08) (0.08) (0.05)
Net realized and unrealized gains
(losses) on investments 0.96 6.16 3.89 3.18 (2.96)
------ ------ ------ ------ ------
Total from investment operations 0.96 6.12 3.81 3.10 (3.01)
Less distributions:
Dividend from net investment income -- -- -- -- --
Distributions from net realized gains (1.14) -- -- -- --
------ ------ ------ ------ ------
Total from distributions (1.14) -- -- -- --
------ ------ ------ ------ ------
Net asset value, end of year $31.15 $31.33 $25.21 $21.40 $18.30
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 3.47% 24.28% 17.80% 16.94% (14.12%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 1,856,496 1,230,936 531,516 312,726 217,738
Ratio of expenses to average net assets 1.10% 1.12% 1.13% 1.14% 1.13%
Ratio of net investment loss
to average net assets (0.02%) (0.13%) (0.32%) (0.41%) (0.26%)
Portfolio turnover rate 207.0% 180.5% 247.4% 300.0% 310.7%
(1)<F14> Net investment loss per share was calculated using average shares
outstanding.
*<F15> Amount less than $0.005 per share.
The accompanying notes to financial statements are an integral part of this
statement.
THE BRANDYWINE FUNDS
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of Brandywine
Fund, Inc. (the "Brandywine Fund") and Brandywine Blue Fund (the "Blue
Fund," one of two Funds in a series of the Brandywine Blue Fund, Inc.)
(collectively the "Brandywine Funds" or the "Funds"). Each Fund is
registered as a diversified open-end management company under the
Investment Company Act of 1940, as amended. The assets and liabilities of
each Fund are segregated and a shareholder's interest is limited to the
Fund in which the shareholder owns shares. The Brandywine Fund was
incorporated under the laws of Maryland on October 9, 1985. The Blue Fund
was incorporated under the laws of Maryland on November 13, 1990. The
investment objective of each Fund is to produce long-term capital
appreciation principally through investing in common stocks.
(a) Each security, excluding short-term investments, is valued at the
last sale price reported by the principal security exchange on which
the issue is traded. Securities that are traded on the Nasdaq Markets
(Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital
Market formerly known as the Nasdaq National Market or the Nasdaq
SmallCap Market) are valued at the Nasdaq Official Closing Price, or
if no sale is reported, the latest bid price. Securities which are
traded over-the-counter are valued at the latest bid price. Securities
for which quotations are not readily available are valued at fair
value as determined by the investment adviser under the supervision of
the Board of Directors. The fair value of a security may differ from
the last quoted price and the Fund may not be able to sell a security
at the fair value. Market quotations may not be available, for
example, if trading in particular securities has halted during the day
and not resumed prior to the close of trading on the New York Stock
Exchange. Short-term investments with maturities of 60 days or less
are valued at amortized cost which approximates value. For financial
reporting purposes, investment transactions are recorded on the trade
date; however, for purposes of executing shareholder transactions, the
Funds record changes in holdings of portfolio securities no later than
the first business day after the trade date in accordance with Rule
2a-4 of the Investment Company Act. Accordingly, certain differences
between net asset value for financial reporting and for executing
shareholder transactions may arise.
In September 2006, the Financial Accounting Standards Board issued
its new Standard No. 157, "Fair Value Measurements" ("FAS 157"). FAS
157 is designed to unify guidance for the measurement of fair value of
all types of assets, including financial instruments, and certain
liabilities, throughout a number of accounting standards. FAS 157 also
establishes a hierarchy for measuring fair value in generally accepted
accounting principles and expands financial statement disclosures
about fair value measurements that are relevant to mutual funds. FAS
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and earlier adoption is permitted.
At this time, management believes the adoption of FAS 157 will have no
material impact on the financial statements of the Funds.
(b) Net realized gains and losses on sales of securities are
computed on the identified cost basis.
(c) Dividend income is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
(d) The Funds have investments in short-term variable rate demand
notes, which are unsecured instruments. The Funds may be susceptible
to credit risk with respect to these notes to the extent the issuer
defaults on its payment obligation. The Funds' policy is to monitor
the creditworthiness of the issuer and nonperformance by these
counterparties is not anticipated.
(e) Accounting principles generally accepted in the United States of
America ("GAAP") require that permanent differences between income for
financial reporting and tax purposes be reclassified in the capital
accounts.
(f) The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
(g) No provision has been made for Federal income taxes since the
Funds have elected to be taxed as "regulated investment companies" and
intend to distribute substantially all net investment company taxable
income and net capital gains to shareholders and otherwise comply with
the provisions of the Internal Revenue Code applicable to regulated
investment companies.
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain
tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax
positions taken or expected to be taken in the course of preparing the
Funds' tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not
threshold would be recorded as a tax benefit or expense in the current
year. Adoption of FIN 48 is required for fiscal years beginning after
December 15, 2006 and is to be applied to all open tax years as of the
effective date. At this time, management is evaluating the
implications of FIN 48 and its impact in the financial statements, but
does not anticipate that FIN 48 will have a material impact on the
Funds' financial statements.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENTS AND TRANSACTIONS WITH
RELATED PARTIES
Each Fund has a management agreement with Friess Asso-ciates, LLC (the
"Adviser"), with whom certain Officers and Directors of the Funds are
affiliated, to serve as investment adviser and manager. Under the terms of
the agreements, each Fund will pay the Adviser a monthly management fee at
the annual rate of one percent (1%) on the daily net assets of such Fund.
Also, the Adviser is reimbursed for administrative services rendered to
each Fund by a consultant paid by the Adviser.
The Adviser entered into sub-advisory agreements with its affiliate, Friess
Associates of Delaware, LLC (the "Sub-Adviser"), to assist it in the
day-to-day management of each of the Funds. The Adviser and, if so
delegated, the Sub-Adviser supervise the investment portfolios of the
Funds, directing the purchase and sale of investment securities in the
day-to-day management of the Funds. The Adviser pays the Sub-Adviser a fee
equal to 110% of the monthly expenses the Sub-Adviser incurs in performing
its services as Sub-Adviser. This relationship does not increase the annual
management fee the Funds pay to the Adviser.
The Brandywine Fund, Inc. and Brandwine Blue Fund, Inc. pay each of the six
independent directors annual fees of $20,000 and $7,500, respectively,
reinvested in shares of each Fund. The lead independent director and
chairman of the audit committee are paid an additional $5,000 and $2,500
annually, respectively, reinvested in shares of the Funds, divided
proportionately among all the Funds. The Funds also reimburse directors for
travel costs incurred in order to attend meetings of the Board of
Directors. For the year ended September 30, 2006, the Funds expensed the
following directors fees and costs:
Brandywine Blue
Fund Fund
---- ----
Directors Fees and Travel Costs Paid
during the Period $81,002 $35,386
In the normal course of business the Funds enter into contracts with
service providers that contain general indemnification clauses. The Funds'
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Funds that have not yet
occurred. However, based on experience, the Funds expect the risk of loss
to be remote.
(3) CREDIT AGREEMENT
U.S. Bank, N.A. has made available to each Fund a credit facility pursuant
to Credit Agreements effective July 22, 2004, for the purpose of having
cash available to cover incoming redemptions. The Brandywine Fund has a
$50,000,000 credit facility and the Blue Fund has a $10,000,000 credit
facility. Principal and interest of such loan under the Credit Agreements
are due not more than 31 days after the date of the loan. Amounts under the
credit facilities bear interest at a rate per annum equal to the current
prime rate minus one on the amount borrowed. Advances will be
collateralized by securities owned by the respective Fund. During the year
ended September 30, 2006, neither Fund borrowed against their Agreement.
The Credit Agreements expire on December 18, 2006.
(4) DISTRIBUTIONS TO SHAREHOLDERS
Net investment income and net realized gains, if any, are distributed to
shareholders at least annually. The Board of Directors has approved a
distribution of net realized gains on October 26, 2006 for the Brandywine
Fund and Blue Fund to shareholders of record on October 25, 2006. These
distributions, which are subject to change, are expected to be $8,419,328
and $48,228,743, respectively from net long-term gains and $14,618,964 from
net short-term capital gains for the Blue Fund only.
(5) INVESTMENT TRANSACTIONS AND RELATED COSTS
For the year ended September 30, 2006, purchases and proceeds of sales of
investment securities (excluding short-term investments) for the Funds were
as follows:
SALE TRANSACTION RATIO OF COST TO
PURCHASES PROCEEDS COST AVERAGE NET ASSETS
--------- -------- ---- ------------------
Brandywine Fund $7,962,640,187 $7,959,411,847 $18,615,489 0.45%
Blue Fund 3,616,096,024 3,048,908,633 6,758,028 0.44%
Transaction cost represents the total commissions paid by each Fund on its
respective purchases and sales of investment securities. These costs are
added to the cost basis of the securities purchased and are deducted from
the proceeds of securities sold, thereby reducing the realized gains or
increasing the realized losses upon the sale of the securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 2006, liabilities of each Fund included the following:
Brandywine Blue
Fund Fund
---- ----
Payable to brokers for investments purchased $92,129,443 $45,216,375
Payable to Adviser for management fees 3,316,940 1,472,202
Due to custodian 600,533 --
Payable to shareholders for redemptions 15,475 279,860
Other liabilities 620,021 306,929
(7) SOURCES OF NET ASSETS
As of September 30, 2006, the sources of net assets were as follows:
Brandywine Blue
Fund Fund
---- ----
Fund shares issued and outstanding $3,658,266,350 $1,655,456,506
Net unrealized appreciation on investments 404,906,452 138,293,742
Accumulated net realized gains 3,119,565 62,745,436
-------------- --------------
$4,066,292,367 $1,856,495,684
-------------- --------------
-------------- --------------
(8) INCOME TAX INFORMATION
The following information for the Funds is presented on an income tax basis
as of September 30, 2006:
GROSS GROSS NET UNREALIZED DISTRIBUTABLE DISTRIBUTABLE
COST OF UNREALIZED UNREALIZED APPRECIATION ORDINARY LONG-TERM
INVESTMENTS APPRECIATION DEPRECIATION ON INVESTMENTS INCOME CAPITAL GAINS
----------- ------------ ------------ -------------- ------ -------------
Brandywine Fund $3,699,932,056 $465,411,251 $65,804,562 $399,606,689 $ -- $ 8,419,328
Blue Fund 1,727,351,110 151,320,166 13,128,696 138,191,470 14,618,964 $48,228,743
The difference, if any, between the cost amounts for financial statement
and federal income tax purposes is due primarily to timing differences in
recognizing certain gains and losses in security transactions.
The tax components of dividends paid during the years ended September 30,
2006 and 2005, capital loss carryovers, which may be used to offset future
capital gains, subject to Internal Revenue Code limitations as of September
30, 2006, and tax basis post-October losses as of September 30, 2006, which
are not recognized for tax purposes until the first day of the following
fiscal year are:
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
-------------------------------------------------------------------- -------------------------------
ORDINARY LONG-TERM NET CAPITAL ORDINARY LONG-TERM
INCOME CAPITAL GAINS LOSS POST-OCTOBER INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS CARRYOVERS LOSSES DISTRIBUTIONS DISTRIBUTIONS
------------- ------------- ---------- ------ ------------- -------------
Brandywine Fund $ -- $ -- $ -- $ -- $ -- $ --
Blue Fund 35,062,637 11,307,770 $ -- $ -- $ -- $ --
The Brandywine Fund has utilized $324,643,003 of its capital loss
carryovers during the year ended September 30, 2006.
For corporate shareholders in the Blue Fund, the percentage of dividend
income distributed for the year ended September 30, 2006, which is
designated as qualifying for the dividends received deduction is 18%
(unaudited).
For the shareholders in the Blue Fund, the percentage of dividend income
distributed for the year ended September 30, 2006, which is designated as
qualified dividend income under the Jobs and Growth Tax Relief Act of 2003
is 18% (unaudited).
Since there were no ordinary distributions paid for the Brandywine Fund for
the year ended September 30, 2006, there were no distributions designated
as qualifying for the dividends received deduction for corporate
shareholders nor as qualified dividend income under the Jobs and Growth Tax
Relief Act of 2003 (unaudited).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF BRANDYWINE FUND, INC. AND BRANDYWINE BLUE FUND
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Brandywine Fund, Inc. and Brandywine Blue Fund (a series of the Brandywine Blue
Fund, Inc.) (the "Funds") at September 30, 2006, the results of their operations
for the year then ended, the changes in each of their net assets for each of the
two years in the period then ended and the financial highlights for each of the
five years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with 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 are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at September 30, 2006 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 13, 2006
COST DISCUSSION
Mutual fund shareholders incur two types of costs: (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution [and/or service] (12b-1) fees; and other
fund expenses. Brandywine and Brandywine Blue do not have 12b-1 distribution
fees. This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Brandywine Funds and to compare these costs with
the ongoing costs of investing in other mutual funds.
In addition to the costs highlighted and described below, the only Fund
transaction costs you might currently incur would be wire fees ($15 per wire),
if you choose to have proceeds from a redemption wired to your bank account
instead of receiving a check. Additionally, U.S. Bank charges an annual
processing fee ($15) if you maintain an IRA account with the Funds. To determine
your total costs of investing in the Funds, you would need to add any applicable
wire or IRA processing fees you've incurred during the period to the costs
provided in the example below.
The example is based on an investment of $1,000 invested at the beginning
of the period and held for the entire period from April 1, 2006 through
September 30, 2006.
ACTUAL EXPENSES
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 entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
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 the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs. While the
Brandywine Funds currently do not assess sales charges, redemption or exchange
fees, other funds do, and those costs will not be reflected in their expense
example tables. Therefore, the second line of the table is useful in comparing
ongoing costs only, and will not help you determine the relative total costs of
owning different funds.
BEGINNING ENDING
ACCOUNT ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*<F16>
4/01/06 9/30/06 4/01/06-9/30/06
------- ------- ---------------
Brandywine Actual $1,000 $1,000.00 $ 949.70 $5.28
Hypothetical (5% return before
expenses) $1,000.00 $1,019.70 $5.47
Brandywine Blue Actual $1,000 $1,000.00 $ 978.90 $5.45
Hypothetical (5% return before
expenses) $1,000.00 $1,019.60 $5.57
*<F16> Expenses are equal to the Funds' annualized expense ratios of 1.08%
and 1.10%, multiplied by the average account value over the period,
multiplied by 183/365 (to reflect the one-half year period between
April 1, 2006 and September 30, 2006).
ADDITIONAL DIRECTOR INFORMATION, PROXY VOTING POLICYAND QUARTERLY PORTFOLIO
SCHEDULES
For additional information about the Directors and Officers or for a
description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities, please call (800) 656-3017 and
request a Statement of Additional Information. One will be mailed to you free of
charge. The Statement of Additional Information is also available on the website
of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information on how the Funds voted proxies relating to
portfolio securities during the twelve month period ending June 30, 2006 is
available on the Funds' website at http://www.brandywinefunds.com or the website
of the Commission. The Funds file their complete schedule of portfolio holdings
with the Commission for the first and third quarters of each fiscal year on Form
N-Q. The Funds' Forms N-Q are available on the Commission's website. The Funds'
Forms N-Q may be reviewed and copied at the Commission's Public Reference Room
in Washington, DC, and that information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
Position, Term of Office
and Length of Time Served
and Number of
Portfolios in Fund
Complex Overseen by Principal Occupation Other Directorships Held
Name, Age, Address Director or Officer During Past Five Years by Director or Officer
- ------------------ ------------------- ---------------------- ----------------------
Robert F. Birch, 70 Director Mr. Birch has been President and Hyperion Funds (5
8 Knollwood Drive Indefinite Term since Director of the New America High portfolios), New America
Dover, MA 02030 October, 2001 Income Fund since 1992, a high- High Income Fund
3 Portfolios yield bond fund traded on the New
York Stock Exchange.
C. Quentin S. Jackson, 62 Lead Independent Mr. Jackson was the President and None
54 Goldenrod Court, Director Chief Executive Officer of Nuclear
Kiawah Island, SC 29455 Indefinite Term since Electric Insurance Ltd.,
October, 2001 a multibillion-dollar company
3 Portfolios mutually owned by energy companies.
Stuart A. McFarland, 59 Director Mr. McFarland is Chairman at Federal Hyperion Funds
c/o Federal City Bancorp Indefinite Term since City Bancorp, Inc. Holding Company (5 portfolios),
Holding Company for October, 2001 Audit for American Partners Bank. From Newcastle Investment
American Partners Bank Committee Chairman, 1999 until 2002, he served as President Corporation
6903 Rockledge Drive June 2004 and Chief Executive of Pedestal Inc.
Suite 525 3 Portfolios Mr. McFarland also served as Chief
Bethesda, MD 20817 Financial Officer of Fannie Mae, and an officer
of G.E. Capital.
W. Richard Scarlett III, 67 Director Mr. Scarlett is Chairman and United Bancorporation of
c/o United Bancorporation Indefinite Term since Chief Executive Officer of United Wyoming, Inc.
of Wyoming, Inc. October, 2001 Bancorporation of Wyoming, Inc.,
50 Buffalo Way 3 Portfolios having been with the Bank since 1981.
Jackson, WY 83001
Thomas D. Wren, 54 Director Mr. Wren was the Treasurer ACM Financial Trust, Inc.
540 Way Road Indefinite Term since of MBNA Corporation and its
Wilmington, DE 19807 June, 2006 MBNA America Bank, N.A.
3 Portfolios subsidiary from 1995 to 2006.
Serves on the Board of ACM Financial Trust, Inc.
James W. Zug, 66 Director Mr. Zug is a retired Partner of Allianz Funds
5 Radnor Corporate Center, Indefinite Term since PricewaterhouseCoopers LLP. He (32 portfolios),
Suite 520 October, 2001 was employed with PricewaterhouseCoopers Amkor Technology, Inc.
100 Matsonford Road 3 Portfolios and its predecessors and Teleflex Inc.
Radnor, PA 19087 from 1964 until 2000.
"Interested Persons" of the Funds*<F17>
William F. Director Mr. D'Alonzo joined Friess None
D'Alonzo*<F17>, 51 Indefinite Term since Associates in 1981 as part of the
c/o Friess Associates October, 2001 research team, became Chief
3711 Kennett Pike President since 2003 Investment Officer in 1997 and
Greenville, DE 19807 Chairman since 2004 Chief Executive Officer in 2002.
3 Portfolios
Foster S. Friess*<F17>, 66 Director Mr. Friess founded Friess None
c/o Friess Associates Indefinite Term since Associates in 1974 with his wife,
115 East Snow King Avenue October, 1985 Lynnette E. Friess. He serves as Founder
Jackson, WY 83001 3 Portfolios Chairman of the Friess Companies.
Lynda J. Vice President since 1998 Ms. Campbell joined Friess Associates None
Campbell*<F17>, 60 Secretary since 1990 in 1985, the year of Brandywine
c/o Friess Associates 3 Portfolios Fund's inception.
3711 Kennett Pike Ms. Campbell is currently Chief
Greenville, DE 19807 Administrative Officer of the
Friess Companies.
Christopher G. Vice President since 2002 Mr. Long joined Friess Associates in None
Long*<F17>, 40 Treasurer since 2003 1996, and became Chief Operating
c/o Friess Associates 3 Portfolios Officer of the Friess Companies
3711 Kennett Pike in 2001.
Greenville, DE 19807
David D. Marky*<F17>, 41 Vice President since 2002 Mr. Marky joined Friess Associates None
c/o Friess Associates Chief Compliance Officer in 2000, following 13 years with
3711 Kennett Pike since 2004 PFPC, Inc. He currently serves as
Greenville, DE 19807 3 Portfolios Chief Compliance Officer for the
Friess Companies and the
Brandywine Funds.
Paul R.
Robinson*<F17>, 83 Vice President since Mr. Robinson has been a consultant None
c/o Friess Associates 1990 to Friess Associates, LLC since
3711 Kennett Pike 3 Portfolios June 1985, just six months before
Greenville, DE 19807 Brandywine Fund's launch.
For additional information about the Directors and Officers, please call (800)
656-3017 and request a Statement of Additional Information. One will be mailed
to you free of charge.
*<F17> Messrs. D'Alonzo, Friess, Long, Marky and Robinson and Ms.
Campbell are "interested persons" of the Funds as that term is defined
in the Investment Company Act of 1940 by reason of their being
officers of the Funds and employees of Friess Associates, LLC.
Brandywine Fund generated the sixth-highest average annual total return among
"all-size-company FUNDS" OVER THE PAST 20 YEARS, outpacing the category average
by 1.7 percentage points each year on average. The category consisted of 379
equity funds of various investment styles that invest in stocks free from
market-capitalization constraints.
Kiplinger's Personal Finance, "And the Winners are...," September 2006
CAPITAL GAINS UPDATE...
The Brandywine Funds will make October capital gains distributions. The
distributions are based on gains realized during the fiscal year ended September
30, and will be made October 26 to shareholders of record as of October 25.
For Brandywine, gains to be distributed total approximately $0.07 per
share, with the full amount representing long-term gains. Brandywine Blue will
distribute gains totaling approximately $1.05 per share, including $0.80 in
long-term gains and $0.25 in short-term gains.
Other than shareholders investing through IRAs and other tax-advantaged
accounts, the distribution will be taxable to anyone owning shares on the
October 25 record date. Please consult your tax adviser if you have questions on
how the distribution affects your personal tax situation.
IRA INVESTORS...
For IRA shareholders, the annual $15 maintenance fee is due on November 3,
2006. For your convenience, US Bancorp will automatically deduct this amount
from your IRA on the due date, or if you'd prefer not to have the fee swept from
your account, please send a check to US Bancorp by the due date.
P.O. Box 4166, Greenville, DE 19807
(800) 656-3017 www.brandywinefunds.com bfunds@friess.com
Investment Adviser: FRIESS ASSOCIATES, LLC
Investment Sub-Adviser: FRIESS ASSOCIATES OF DELAWARE, LLC
Custodian: U.S. BANK, N.A.
Transfer Agent: U.S. BANCORP FUND SERVICES, LLC
Independent Registered Public Accounting Firm: PRICEWATERHOUSECOOPERS LLP
Legal Counsel: FOLEY & LARDNER LLP
OFFICERS:Foster Friess, Founder; William D'Alonzo, Chairman and President; Lynda
Campbell, Vice President and Secretary; Christopher Long, Vice President and
Treasurer; David Marky, Chief Compliance Officer, Vice President and Assistant
Secretary; and Paul Robinson, Vice President
Report Editor: Chris Aregood Report Staff: Rebecca Buswell, David Marky,
Adam Rieger
BRANDYWINE ADVISORS FUND
MANAGED BY FRIESS ASSOCIATES, LLC ANNUAL REPORT SEPTEMBER 30, 2006
DEAR FELLOW SHAREHOLDERS:
Economic uncertainty dominated the market mindset in the September quarter.
Investors favored value characteristics over growth profiles and dividend
payouts over earnings gains, showing an affinity for companies generally
believed to be more conservative investments. Companies on the economy's leading
edge apparently held less appeal.
Brandywine Advisors Fund retraced 0.37 percent in the September quarter,
compared to returns in the Russell Midcap Growth, Russell Midcap and S&P 500
Indexes of 0.89, 2.11 and 5.67 percent.
Statistics compiled by Morningstar showed that stocks categorized by the
investment styles value, core and growth performed in just that order, with
value stocks leading the way by a wide margin. The trend held true in every
market-cap category.
At the same time, growing investor interest in dividends was evident in
major benchmarks. Component companies that occupied the top 20 percent in terms
of dividend yield led performance in the quarter and in the first nine months of
2006 for the S&P 500 Index. Most of the rapidly growing companies the Fund holds
reinvest earnings back into their businesses and, as a result, don't pay
dividends.
Nine out of 10 current Fund holdings met or exceeded Wall Street earnings
expectations in their most recent quarter, but actual earnings results held
little sway in the September quarter. According to Prudential Equity, component
companies with long-term earnings growth rates of 20 percent or more were the
worst performers within the Russell Midcap Growth and Russell Midcap Indexes.
While investors generally favored companies that don't fit our style,
Brandywine Advisors also held companies that seem to run counter to the market's
changing take on the economy. After boosting performance for much of the past
two years and as recently as the March quarter this year, holdings from the
industrial, energy and raw materials sectors weighed on results the past two
quarters in a row. Investors generally perceive companies from these areas to be
sensitive to economic shifts, making them hesitant to reward individual-company
earnings gains amid concerns about slowing growth.
Nevertheless, we continue to dedicate considerable assets to industrial
companies. Aerospace-related companies represent the largest concentration of
our exposure to the sector, and the projects that drive their visible earnings
prospects involve long lead times. On average, the industrial companies held in
Brandywine Advisors are expected to grow earnings 18 percent over the next 12
months.
While we hold much fewer companies from the energy and materials sectors,
the same basic reasoning holds true. Companies that provide equipment and
services to energy producers, which comprise our largest concentration within
the energy sector, shouldn't suddenly see their fortunes evaporate with a fall
in the price of oil to $60 or even $50 a barrel. The projects they participate
in are measured in years. The metals makers we hold benefit from demand driven
by the aerospace cycle, another persistent trend.
Given rising concerns that the economy could be at a crossroad, we've seen
signs of diverging investor attitudes. Technology stock performance in the
September quarter reflected confidence in business spending, while similar
strength in health-care shares hinted at a more defensive posture. Brandywine
Advisors holds companies from both sectors, though the reasons why are more
developed.
BRANDYWINE ADVISORS
CUMULATIVE TOTAL RETURN % CHANGE
----------------------- --------
Quarter -0.37
One Year -1.10
Five Years 45.74
Inception - 10/31/00 15.98
Annualized Total Return
------------------------
Five Years 7.82
Inception - 10/31/00 2.54
Performance data quoted represent past performance; past performance does not
- -----------------------------------------------------------------------------
guarantee future results. The investment return and principal value of an
- -------------------------
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. Current performance of the Fund may
be lower or higher than the performance quoted. Performance data current to the
most recent month end may be obtained by visiting www.brandywinefunds.com.
We're optimistic about business spending, especially as it relates to
productivity enhancement. Corporate cash balances remain well above historical
norms, but the dramatic growth in cash balances that began in 2002 is beginning
to reverse. Along with share repurchases, dividend increases and cash-funded
acquisitions, companies are investing in efficiency and expansion.
Spending on high-tech equipment has been running at an annualized rate of
more than 15 percent since the beginning of 2005. Outlays for new equipment and
software have been growing nearly 10 percent. With evidence of these trends
bolstering their earnings prospects, communications equipment makers and
software companies represent our biggest commitments within the tech sector.
Trimble Navigation (page 3) offers an array of technologies that allow
commercial customers in agriculture, construction and other markets to optimize
their resource usage by automating everything from fertilizer application to
construction site excavation through the Global Positioning System.
Technology holdings, which represented the Fund's largest percentage of
assets, contributed most to performance. Top contributors included Flextronics
International, Harris and Ingram Micro.
In health care, which accounted for the second greatest performance
contribution, DaVita, Fisher Scientific International and Express Scripts were
notable positive influences. Equipment makers account for the largest percentage
of assets dedicated to the health-care sector, with company-specific reasoning
behind each holding.
For example, Varian Medical (page 3) continues to take market share in the
radiation arena because of superior technology. Its image-guided radiation
therapy equipment delivers radiation with greater precision than traditional
methods, improving cancer cell eradication while reducing healthy tissue damage.
For more information on the holdings that influenced September-quarter
performance the most, please see Roses & Thorns on page 6.
As usual, consumer spending power is hard to gauge. News proclaiming the
residential housing boom's end is inescapable, with homebuilders issuing profit
warnings, existing home sales falling for five consecutive months and the median
home price dropping for the first time in 11 years. Foreclosures are rising, and
Freddie Mac predicts cash-out refinancing activity will plummet by almost 40
percent next year. Meanwhile, the price of a gallon of regular gasoline is down
more than 20 percent since the first week of August, which frees up an estimated
$250 million a day for consumers to spend elsewhere.
GAS TANK - RETAIL PRICES FALL 22% IN SEVEN WEEKS
5-08-06 2.91
5-15-06 2.95
5-22-06 2.89
5-29-06 2.87
6-05-06 2.89
6-12-06 2.91
6-19-06 2.87
6-26-06 2.87
7-03-06 2.93
7-10-06 2.97
7-17-06 2.99
7-24-06 3.00
7-31-06 3.00
8-07-06 3.04
8-14-06 3.00
8-21-06 2.92
8-28-06 2.85
9-04-06 2.73
9-11-06 2.62
9-18-06 2.50
9-25-06 2.38
We continue to be selective regarding companies sensitive to consumer
spending. Companies from the health-care, technology and industrial sectors
account for the portfolio's largest percentages of assets.
The market has been choppy so far this year and, even though its mood has
been changing from quarter to quarter, we don't currently see anything in the
environment that challenges our confidence in the companies we hold. We hold
companies from a variety of fields that, we believe, together represent one of
the strongest collections of earnings growth available at reasonable prices.
Consistently employing our strategy means weathering periods in which
factors other than individual-company fundamentals move the market. Still, our
decades of experience show there's no better gauge of a company's ultimate
share-price direction than its earnings.
Recent market moves stem from sweeping assumptions made about the broad
economy. Going forward, however, bottom-up details should matter more and more.
We're confident that individual companies that prove they can thrive within, or
even in spite of, the changing economic backdrop should inevitably attract the
rewards they deserve.
/s/Bill D'Alonzo
Bill D'Alonzo
Brandywine Funds President October 13, 2006
TRIMBLE NAVIGATION LTD., TRMB
With as many as 10 big spraying booms operating at once, simply steering a
commercial tractor around a tree or other obstacle can mean reapplying
fertilizer to an already treated area, wasting costly chemicals and threatening
crops. A new Trimble Navigation product not only automates application, but also
maximizes land utilization, saves fuel and enables usage day or night by
controlling the tractor based on a farm field's topography.
Nasdaq-listed Trimble Navigation Ltd. offers innovative ways to use Global
Positioning System (GPS), laser and other positioning technologies in commercial
settings. The company boasts a line of more than 300 products with applications
in agriculture, construction, law enforcement, mapping, the military, mining and
surveying. Revenue reached $846 million in the 12 months through June. The
company has no long-term debt.
Trimble grew June-quarter earnings 34 percent, topping estimates by 13
percent. The company exceeded earnings estimates in each quarter over the past
two-and-a-half years. Quarterly revenues grew 20 percent from the year-ago
period, with strong contributions from higher-margin segments such as
agriculture, geographical information and construction. In the 12 months through
June, Trimble hit a nine-year high for free cash flow, or cash coming in net of
capital expenditures.
Your team spoke with Chief Financial Officer Rajat Bahri about various ways
in which Trimble products perform tasks more effectively than human operators.
The company offers connected construction site systems, which can precisely
steer, for example, a bulldozer in real-time through GPS systems linked to
on-site surveying equipment, while tracking the location and utilization of all
equipment at the site.
Wall Street predicts Trimble will grow earnings 37 percent this year. Your
team bought Trimble at about 21 times current earnings estimates for the 12
months through June 2007.
VARIAN MEDICAL SYSTEMS, INC., VAR
About one out of two American men will develop cancer in their lifetimes,
according to the American Cancer Society. For women, it's about one out of
three. With 77 percent of these diagnoses taking place after age 55, Varian
Medical Systems offers the baby boom population a beam of hope in the fight
against this disease.
NYSE-listed Varian holds about 60 percent of the global market for
intensity-modulated radiation therapy (IMRT) and its next generation
application, image-guided radiation therapy (IGRT). Both technologies deliver
radiation therapy with greater precision and accuracy than traditional methods,
increasing the likelihood of eradicating cancerous cells and reducing damage to
healthy tissue. Varian also makes X-ray tubes, flat-panel digital imaging
products, and scanning machines for airport and shipping security.
June-quarter earnings grew 24 percent, topping consensus estimates. Overall
revenues grew 14 percent to $396 million as leading cancer treatment clinics and
university research hospitals adopted Varian's IGRT technology. X-ray product
revenue grew 15 percent in the quarter, while orders in the security and
inspection business almost doubled, reflecting growing homeland security demand
for cargo screening.
IGRT improves upon IMRT by using real-time imaging to address the problem
of tumors moving during treatment due to patient positioning or normal internal
organ action. Your team spoke with Chief Financial Officer Elisha Finney about
how the enhanced accuracy provided by IGRT now allows surgeons to destroy cancer
without invasive surgery, opening the door for its use in treating more types of
the disease at earlier stages. Neurosurgeons have adopted it for some
applications.
Wall Street expects Varian to grow earnings 19 percent in the fiscal year
ended this September, followed by 14 percent growth next fiscal year.
COST DISCUSSION
Mutual fund shareholders incur two types of costs: (1) transaction costs,
including sales charges (loads) on purchase payments, reinvested dividends, or
other distributions; redemption fees; and exchange fees; and (2) ongoing costs,
including management fees; distribution [and/or service] (12b-1) fees; and other
fund expenses. This example is intended to help you understand your ongoing
costs (in dollars) of investing in Brandywine Advisors Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
In addition to the costs highlighted and described below, the only Fund
transaction costs you might currently incur would be wire fees ($15 per wire),
if you choose to have proceeds from a redemption wired to your bank account
instead of receiving a check. Additionally, U.S. Bank charges an annual
processing fee ($15) if you maintain an IRA account with the Fund. To determine
your total costs of investing in the Fund, you would need to add any applicable
wire or IRA processing fees you've incurred during the period to the costs
provided in the example at the end of this article.
The example is based on $1,000 invested at the beginning of the period and
held for the entire period from April 1, 2006 through September 30, 2006.
ACTUAL EXPENSES
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 entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
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 the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any transactional costs. While
Brandywine Advisors currently does not assess sales charges, redemption or
exchange fees, other funds do, and those costs will not be reflected in their
expense example tables. Therefore, the second line of the table is useful in
comparing ongoing costs only, and will not help you determine the relative total
costs of owning different funds.
BEGINNING ENDING
ACCOUNT ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*<F18>
4/01/06 9/30/06 4/01/06-9/30/06
------- ------- ---------------
Brandywine Advisors Actual $1,000.00 $ 936.60 $5.63
Hypothetical (5% return before expenses) $1,000.00 $1,019.30 $5.87
*<F18> Expenses are equal to the Fund's annualized expense ratio of
1.16%, multiplied by the average account value over the period,
multiplied by 183/365 (to reflect the one-half year period between
April 1, 2006 and September 30, 2006).
ADDITIONAL DIRECTOR INFORMATION, PROXY VOTING POLICYAND QUARTERLY PORTFOLIO
SCHEDULES
For additional information about the Directors and Officers or for a
description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities, please call (877) 636-6460 and
request a Statement of Additional Information. One will be mailed to you free of
charge. The Statement of Additional Information is also available on the website
of the Securities and Exchange Commission (the "Commission") at
http://www.sec.gov. Information on how the Fund voted proxies relating to
portfolio securities during the twelve month period ending June 30, 2006 is
available on the Fund's website at http://www.brandywinefunds.com or the website
of the Commission. The Fund files its complete schedule of portfolio holdings
with the Commission for the first and third quarters of each fiscal year on Form
N-Q. The Fund's Form N-Q is available on the Commission's website. The Fund's
Form N-Q may be reviewed and copied at the Commission's Public Reference Room in
Washington, DC, and that information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330.
BRANDYWINE ADVISORS FUND
PERCENT CHANGE IN TOP TEN HOLDINGS FROM BOOK COST
1. Fisher Scientific International Inc. +54.3%
2. Precision Castparts Corp. +76.7%
3. Harris Corp. +16.4%
4. McDermott International, Inc. +78.9%
5. DaVita, Inc. +0.0%
6. IMS Health, Inc. +5.4%
7. DENTSPLY International Inc. +2.5%
8. TJX Companies, Inc. +8.3%
9. Ingram Micro Inc. -3.9%
10. Rockwell Collins,Inc. +0.5%
EARNINGS GROWTH
The Fund's Companies 19%
S&P 500 14%
FORCASTED INCREASE IN EARNINGS PER SHARE
2006 vs 2005
ALL FIGURES ARE DOLLAR WEIGHTED AND BASED ON DATA FROM BASELINE. SEPTEMBER 30,
2006.
THE PORTFOLIO'S MARKET CAPITALIZATION
SMALL CAP
below $2 billion 1.6%
CASH 3.7%
LARGE CAP
$10 billion and over 7.2%
MID CAP
$2 billion to $10 billion 87.5%
TOP TEN INDUSTRY GROUPS
Aerospace & Defense 10.5%
Health Care Services 6.0%
Health Care Equipment 5.4%
Electronic Manufacturing Services 5.3%
Communications Equipment 4.9%
Life Sciences Tools & Services 4.9%
Semiconductors 4.8%
Industrial Conglomerates 4.2%
Apparel Retail 4.1%
Electrical Components & Equipment 4.0%
All Other Industry Groups 42.2%
Cash 3.7%
BRANDYWINE ADVISORS FUND
SEPTEMBER QUARTER "ROSES AND THORNS"
$ GAIN
BIGGEST $ WINNERS (IN THOUSANDS) % GAIN REASON FOR MOVE
- ----------------- -------------- ------ ---------------
DaVita, Inc. $1,064 16.4 June-quarter earnings jumped 20
percent, beating estimates by 11
percent. Revenues grew 86 percent.
The provider of dialysis service to
patients with chronic kidney
failure has been able to use
predictably strong cash flow from
operations to gain market share
through acquisitions, while at the
same time managing debt and
expanding margins.
Flextronics
International Ltd. $809 19.0 The provider of contract
manufacturing services to the
electronics industry boasts a
growing pipeline of new business
wins from leading electronics
companies. Earnings and revenue
forecasts have been revised higher
based on strong customer momentum
and new outsourcing opportunities.
Sales are expected to grow 22
percent this year, following a
lengthy period of relatively flat
results.
Reynolds and
Reynolds Co. $751 28.8 The maker of office-management
software grew June-quarter earnings
26 percent, topping estimates by 10
percent. Shares jumped when
privately held Universal Computer
Systems agreed to buy the company
for $2.8 billion.
Harris Corp. $630 7.1 The maker of communications devices
used by the military grew
June-quarter earnings 48 percent,
beating estimates. Management
increased its earnings guidance for
the fiscal-year ending June 2007 by
10 percent given contract wins for
Harris' radio frequency
communications division and a
better-than-expected outlook for
defense spending on tactical
radios.
Fisher Scientific
International Inc. $623 6.6 Better profit margins on an
increasing number of
self-manufactured products and
expansion into new markets fueled
results. The laboratory equipment
maker will merge with Thermo
Electron later this year, and
expectations are higher as a
result. Fisher's consumable
products such as lab disposables
and reagent kits are a strategic
counterpart to Thermo Electron's
instrumentation products and
services. The combined company also
expects to realize substantial
cost-related savings.
$ LOSS
BIGGEST $ LOSERS (IN THOUSANDS) % LOSS REASON FOR MOVE
- ---------------- -------------- ----- ---------------
Avaya Inc. $981 20.9 Despite revenue growth above
expectations, the maker of
voice-over-Internet protocol (VoIP)
and other communications solutions
lost ground as it failed to convert
revenues into bottom-line earnings.
Behind the earnings shortfall was
overspending related to major
advertising campaigns. Your team
sold Avaya to fund an idea with
greater near-term earnings
visibility.
McDermott
International, Inc. $766 6.8 June-quarter earnings more than
doubled to $0.71 per share, beating
estimates by 34 percent.
Fundamentals are intact, but shares
fell with others in the energy
sector on concerns that a fall in
commodity prices would translate
into less production activity.
Meanwhile, orders continue to climb
within the company's diverse group
of business segments, which offer
everything from subsea
infrastructure products to coal
scrubbers.
Oil States
International, Inc. $738 19.9 June-quarter earnings grew 69
percent, topping estimates by 19
percent. The small oil-field
services company fell in step with
the entire energy sector on
concerns that lower commodity
prices would result in less rig
activity. While rig counts remain
steady, your team sold Oil States
due to its exposure to land-based
U.S. rigs, where the misperception
that supply will now outstrip
demand is currently the strongest.
Ann Taylor Stores Corp. $634 9.0 July-quarter earnings more
than tripled to $0.59 per share,
beating estimates by 31 percent.
While the women's specialty
retailer experienced solid
comparable-store sales gains and
profit margin expansion, your team
sold AnnTaylor at a gain from its
purchase price due to concerns that
profit momentum would slow in
coming quarters.
Thomas & Betts Corp. $598 13.9 The manufacturer of products
used in the electrical,
communications and utility markets
grew June-quarter earnings 40
percent. Shares fell with those of
other industrial-related companies
on macro concerns related to
slowing economic growth. While
shares retraced in the quarter,
your team sold Thomas & Betts at a
gain from its purchase price.
All gains/losses are calculated on an average cost basis
MANAGEMENT'S DISCUSSION OF RESULTS, BRANDYWINE ADVISORS FUND
Brandywine Advisors Fund's investment strategy emphasizes the relationship
between earnings performance and stock prices. Concrete earnings trends,
however, did not top investor priorities during much of the fiscal year ended
September 30 amid a series of macro developments that emerged as the overriding
influence on stocks.
Brandywine Advisors declined 1.10 percent in the fiscal year versus
benchmark returns ranging from 7.03 to 10.79 percent as investors reacted to
volatile energy prices, growing inflationary pressures and economic uncertainty.
After peaking in lockstep with an especially destructive hurricane season,
oil prices began the fiscal year in decline. While the short-lived drop did not
derail the earnings prospects of the Fund's energy-related holdings, investors
saw it as reason to flee the sector in an otherwise calm December-quarter
environment. Energy holdings represented the Fund's second-largest percentage of
assets, contributing to a quarterly decline versus modest returns in benchmarks.
Persistent strength in the industrial side of the economy fueled a
generally favorable March-quarter climate. Industrial holdings, which
represented roughly one in five companies in the portfolio, contributed most to
performance as demand from the aerospace, energy and commercial construction
markets fueled solid earnings growth. Also, oil prices resumed their rise
following the December-quarter pause, drawing investor attention back to the
earnings promise of the Fund's energy-related holdings. Brandywine Advisors
outpaced its benchmarks in the March quarter.
With oil prices reaching new highs and the Federal Reserve continuing a
series of interest-rate hikes, inflation concerns and related economic
uncertainty dampened the market's mood in the June quarter. Although companies
from most sectors suffered in this environment, the technology sector led the
downturn as a product delay from Microsoft added to the more generalized
concerns. Tech companies comprised the Fund's largest percentage of assets,
contributing to a decline that was greater than benchmark declines in the June
quarter.
Economic uncertainty overtook inflation as the market's main concern in the
September quarter. While stocks in general gained ground, slower-growing
companies believed to be more conservative investments outperformed. Growth
companies, particularly those perceived to be sensitive to shifts in the overall
economy, did not fare as well. The Fund retraced slightly during the quarter,
trailing benchmark returns.
HYPOTHETICAL COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN BRANDYWINE
ADVISORS FUND, RUSSELL MIDCAP GROWTH INDEX(1)<F19>, RUSSELL MIDCAP INDEX(2)<F20>
AND S&P 500 INDEX(3)<F21>
Brandywine Russell MidCap Russell
Advisors Fund S&P 500 Growth MidCap
------------- ------- ------ ------
10/31/00 10,000 10,000 10,000 10,000
12/31/00 10,267 9,257 8,239 9,793
3/31/01 8,864 8,159 6,172 8,765
6/30/01 9,198 8,637 7,170 9,600
9/30/01 7,958 7,369 5,177 7,885
12/31/01 8,292 8,157 6,578 9,241
3/31/02 8,254 8,180 6,462 9,634
6/30/02 7,853 7,084 5,282 8,714
9/30/02 6,956 5,859 4,374 4,775
12/31/02 6,889 6,353 4,775 7,745
3/31/03 6,842 6,153 4,774 7,563
6/30/03 7,863 7,101 5,670 8,944
9/30/03 8,034 7,289 6,076 9,519
12/31/03 8,874 8,176 6,814 10,848
3/31/04 9,027 8,315 7,143 11,406
6/30/04 8,969 8,458 7,218 11,571
9/30/04 8,798 8,300 6,906 11,474
12/31/04 9,752 9,066 7,869 13,042
3/31/05 9,876 8,871 7,737 13,009
6/30/05 10,277 8,993 8,003 13,553
9/30/05 11,727 9,317 8,527 14,355
12/31/05 11,391 9,512 8,820 14,692
3/31/06 12,383 9,912 9,491 15,810
6/30/06 11,641 9,769 9,046 15,403
9/30/06 11,598 10,323 9,127 15,728
AVERAGE ANNUAL TOTAL RETURN
Since Effective Date
1-Year 5-Year 10/31/00
------ ------ --------
-1.10% 7.82% 2.54%
Past performance is not predictive of future performance. The graph and the
table do not reflect the deduction of taxes that a shareholder would pay on
Fund distributions or the redemption of Fund shares.
(1)<F19> The Russell Midcap Growth Index measures the performance of
those Russell Midcap companies with higher price-to-book ratios and
higher forecasted growth values. The stocks are also members of the
Russell 1000 Growth Index.
(2)<F20> The Russell Midcap Index, a trademark of the Frank Russell
Company, measures the performance of the smallest 800 companies in the
Russell 1000 Index and includes income.
(3)<F21> The S&P 500 Index consists of 500 stocks, mostly on the New
York Stock Exchange, selected by the Standard & Poor's Ratings Group.
Each stock's weighting is based on its relative total market value.
Stocks may be added or deleted from the Index, which assumes
reinvestment of dividends.
BRANDYWINE ADVISORS FUND
STATEMENT OF NET ASSETS
SEPTEMBER 30, 2006
SHARES COST VALUE
------ ---- -----
COMMON STOCKS - 96.3% (A)<F23>
CONSUMER DISCRETIONARY
APPAREL RETAIL - 4.1%
51,300 bebe stores, inc. $ 1,128,116 $ 1,271,214
227,400 TJX Companies, Inc. 5,886,613 6,374,022
APPAREL, ACCESSORIES, & LUXURY GOODS - 1.5%
57,600 Gildan Activewear Inc.*<F22> 2,359,429 2,791,296
CATALOG RETAIL - 0.7%
48,100 Coldwater Creek Inc.*<F22> 1,169,396 1,383,356
LEISURE PRODUCTS - 1.2%
94,800 Hasbro, Inc. 1,893,986 2,156,700
SPECIALTY STORES - 1.5%
63,500 Dick's Sporting Goods,
Inc.*<F22> 2,615,907 2,890,520
------------ ------------
TOTAL CONSUMER DISCRETIONARY 15,053,447 16,867,108
THIS SECTOR IS 12.0% ABOVE YOUR FUND'S COST.
CONSUMER STAPLES
AGRICULTURAL PRODUCTS - 1.4%
79,000 Corn Products
International, Inc. 2,574,750 2,570,660
------------ ------------
TOTAL CONSUMER STAPLES 2,574,750 2,570,660
THIS SECTOR IS 0.2% BELOW YOUR FUND'S COST.
ENERGY
OIL & GAS EQUIPMENT & SERVICES - 2.0%
69,500 FMC Technologies, Inc.*<F22> 4,049,560 3,732,150
OIL & GAS STORAGE & TRANSPORATION - 2.6%
125,300 Frontline Ltd. 5,277,721 4,825,303
------------ ------------
TOTAL ENERGY 9,327,281 8,557,453
THIS SECTOR IS 8.3% BELOW YOUR FUND'S COST.
FINANCIALS
INSURANCE BROKERS - 0.6%
31,700 Willis Group Holdings Ltd. 1,220,160 1,204,600
------------ ------------
TOTAL FINANCIALS 1,220,160 1,204,600
THIS SECTOR IS 1.3% BELOW YOUR FUND'S COST.
HEALTH CARE
HEALTH CARE EQUIPMENT - 5.4%
151,700 Cytyc Corp.*<F22> 3,808,780 3,713,616
105,200 Respironics, Inc.*<F22> 3,863,978 4,061,772
43,200 Varian Medical Systems,
Inc.*<F22> 2,184,893 2,306,448
HEALTH CARE SERVICES - 6.0%
130,200 DaVita, Inc.*<F22> 7,532,269 7,534,674
49,100 Express Scripts, Inc.*<F22> 3,484,404 3,706,559
HEALTH CARE SUPPLIES - 3.5%
220,000 DENTSPLY International Inc. 6,460,636 6,624,200
HEALTH CARE TECHNOLOGY - 3.5%
249,200 IMS Health Inc. 6,298,326 6,638,688
LIFE SCIENCES TOOLS & SERVICES - 4.9%
118,300 Fisher Scientific
International Inc.*<F22> 5,998,215 9,255,792
PHARMACEUTICALS - 2.9%
167,800 Endo Pharmaceuticals
Holdings Inc.*<F22> 5,015,652 5,461,890
------------ ------------
TOTAL HEALTH CARE 44,647,153 49,303,639
THIS SECTOR IS 10.4% ABOVE YOUR FUND'S COST.
INDUSTRIALS
AEROSPACE & DEFENSE - 10.5%
109,200 Goodrich Corp. 4,427,858 4,424,784
146,100 Precision Castparts Corp. 5,221,282 9,227,676
111,200 Rockwell Collins, Inc. 6,064,858 6,098,208
CONSTRUCTION & ENGINEERING - 2.6%
68,200 Quanta Services, Inc.*<F22> 1,138,306 1,149,852
93,200 URS Corp.*<F22> 3,891,527 3,624,548
ELECTRICAL COMPONENTS & EQUIPMENT - 4.0%
115,400 AMETEK, Inc. 4,406,802 5,025,670
52,800 Hubbell Inc. Cl B 2,591,722 2,529,120
ENVIRONMENTAL & FACILITIES SERVICES - 1.5%
5,600 Allied Waste Industries,
Inc.*<F22> 62,696 63,112
70,100 Republic Services, Inc. 2,765,602 2,818,721
INDUSTRIAL CONGLOMERATES - 4.2%
187,850 McDermott International,
Inc.*<F22> 4,389,711 7,852,130
------------ ------------
TOTAL INDUSTRIALS 34,960,364 42,813,821
THIS SECTOR IS 22.5% ABOVE YOUR FUND'S COST.
INFORMATION TECHNOLOGY
APPLICATION SOFTWARE - 2.6%
14,000 Autodesk, Inc.*<F22> 485,729 486,920
82,900 Jack Henry & Associates, Inc. 1,828,384 1,804,733
66,100 Reynolds and Reynolds Co. 2,002,672 2,611,611
COMMUNICATIONS EQUIPMENT - 4.9%
205,200 Harris Corp. 7,844,417 9,129,348
COMPUTER STORAGE & PERIPHERALS - 1.2%
100,000 Logitech International
S.A. ADR*<F22> 2,016,032 2,176,000
DATA PROCESSING & OUTSOURCED SERVICES - 2.0%
99,600 Fidelity National Information
Services, Inc. 3,722,958 3,685,200
ELECTRONIC EQUIPMENT MANUFACTURERS - 2.1%
136,500 Tektronix, Inc. 3,410,634 3,948,945
ELECTRONIC MANUFACTURING SERVICES - 5.3%
85,800 Celestica Inc.*<F22> 820,029 921,492
400,700 Flextronics International
Ltd.*<F22> 4,599,526 5,064,848
85,400 Trimble Navigation Ltd.*<F22> 3,618,877 4,020,632
SEMICONDUCTORS - 4.8%
186,000 Agere Systems Inc.*<F22> 2,872,519 2,776,980
101,100 Fairchild Semiconductor
International, Inc.*<F22> 1,761,257 1,890,570
51,400 Integrated Device
Technology, Inc.*<F22> 677,928 825,484
116,400 NVIDIA Corp.*<F22> 3,382,238 3,444,276
TECHNOLOGY DISTRIBUTORS - 3.4%
327,500 Ingram Micro Inc.*<F5> 6,527,299 6,274,900
------------ ------------
TOTAL INFORMATION TECHNOLOGY 45,570,499 49,061,939
THIS SECTOR IS 7.7% ABOVE YOUR FUND'S COST.
MATERIALS
METAL & GLASS CONTAINERS - 1.4%
145,700 Crown Holdings, Inc.*<F22> 2,658,798 2,710,020
STEEL - 4.0%
84,700 Allegheny Technologies, Inc. 5,092,722 5,267,493
20,100 Carpenter Technology Corp. 1,900,495 2,160,951
------------ ------------
TOTAL MATERIALS 9,652,015 10,138,464
------------ ------------
THIS SECTOR IS 5.0% ABOVE YOUR FUND'S COST.
Total common stocks 163,005,669 180,517,684
PRINCIPAL
AMOUNT
------
SHORT-TERM INVESTMENTS - 5.1% (A)<F23>
COMMERCIAL PAPER - 4.6%
$8,500,000 Countrywide Financial Corp.,
due 10/02/06, discount
of 5.40% 8,498,725 8,498,725
VARIABLE RATE DEMAND NOTE - 0.5%
952,516 Wisconsin Corporate Central
Credit Union, 4.99% 952,516 952,516
------------ ------------
Total short-term investments 9,451,241 9,451,241
------------ ------------
Total investments $172,456,910 189,968,925
------------
------------
Liabilities, less cash and
receivables (1.4%) (a)<F23> (2,587,692)
------------
NET ASSETS $187,381,233
------------
------------
Net Asset Value Per Share
($0.01 par value, 100,000,000
shares authorized), offering
and redemption price
($187,381,233 / 4 17,631,036
shares outstanding) $10.63
------
------
*<F22> Non-dividend paying security.
(a)<F23> Percentages for the various classifications relate to net assets.
ADR - American Depositary Receipts
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE ADVISORS FUND
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2006
INCOME:
Dividends $ 864,020
Interest 386,951
-----------
Total income 1,250,971
-----------
EXPENSES:
Management fees 1,929,962
Service and Distribution expenses 103,240
Professional fees 56,781
Transfer agent fees 48,199
Administrative and accounting services 39,360
Registration fees 28,790
Printing and postage expense 25,039
Custodian fees 20,215
Board of Directors fees and expenses 12,005
Insurance expense 8,358
Other expenses 6,328
-----------
Net expenses 2,278,277
-----------
NET INVESTMENT LOSS (1,027,306)
-----------
NET REALIZED GAIN ON INVESTMENTS 14,021,565
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (15,945,931)
-----------
NET LOSS ON INVESTMENTS (1,924,366)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,951,672)
-----------
-----------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 2006 and 2005
2006 2005
---- ----
OPERATIONS:
Net investment loss $ (1,027,306) $ (820,684)
Net realized gain on investments 14,021,565 29,354,327
Net (decrease) increase in unrealized
appreciation on investments (15,945,931) 19,048,051
------------ ------------
Net (decrease) increase in net
assets resulting from operations (2,951,672) 47,581,694
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from realized gains
($1.40103 per share) (22,982,673) --
------------ ------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(3,042,806 and 1,493,573 shares,
respectively) 32,165,918 16,668,564
Net asset value of shares issued in
distributions reinvested (610,242
shares) 6,004,139 --
Cost of shares redeemed (2,348,509 and
416,442 shares, respectively) (25,447,844) (4,302,727)
------------ ------------
Net increase in net assets derived
from Fund share activities 12,722,213 12,365,837
------------ ------------
TOTAL (DECREASE) INCREASE (13,212,132) 59,947,531
------------ ------------
NET ASSETS AT THE BEGINNING OF THE YEAR 200,593,365 140,645,834
------------ ------------
NET ASSETS AT THE END OF THE YEAR $187,381,233 $200,593,365
(Includes accumulated net investment ------------ ------------
loss of $0 and $82,457, respectively) ------------ ------------
The accompanying notes to financial statements are an integral part of these
statements.
BRANDYWINE ADVISORS FUND
FINANCIAL HIGHLIGHTS
(Selected data for each share of the Fund outstanding throughout each year)
For the Years Ended September 30,
------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $12.29 $9.22 $8.42 $7.29 $8.34
Income from investment operations:
Net investment loss(1)<F24> (0.06) (0.05) (0.07) (0.06) (0.06)
Net realized and unrealized gains (losses)
on investments (0.20) 3.12 0.87 1.19 (0.99)
------- ------- ------- ------- -------
Total from investment operations (0.26) 3.07 0.80 1.13 (1.05)
Less distributions:
Dividend from net investment income -- -- -- -- --
Distribution from net realized gains (1.40) -- -- -- --
------- ------- ------- ------- -------
Total from distributions (1.40) -- -- -- --
------- ------- ------- ------- -------
Net asset value, end of year $10.63 $12.29 $9.22 $8.42 $7.29
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (1.10%) 33.30% 9.50% 15.50% (12.59%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 187,381 200,593 140,646 128,606 108,692
Ratio of expenses to average net assets 1.18% 1.19% 1.20% 1.22% 1.25%
Ratio of net investment loss
to average net assets (0.53%) (0.51%) (0.75%) (0.75%) (0.77%)
Portfolio turnover rate 207.6% 206.8% 269.5% 269.5% 258.7%
(1)<F24> Net investment loss per share was calculated using average
shares outstanding.
The accompanying notes to financial statements are an integral part of this
statement.
BRANDYWINE ADVISORS FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies of Brandywine
Advisors Fund (the "Fund"). The Fund is registered as a diversified
open-end management company under the Investment Company Act of 1940, as
amended, and is a series of the Brandywine Blue Fund, Inc. (the "Blue
Fund"). The Blue Fund was incorporated under the laws of Maryland on
November 13, 1990. The Fund was privately offered from October 1, 2000
(commencement of operations) to October 31, 2000 (effective date), the date
shares were first offered to the public. The assets and liabilities of each
series in the Blue Fund are segregated and a shareholder's interest is
limited to the Fund in which the shareholder owns shares. The investment
objective of the Fund is to produce capital appreciation principally
through investing in common stocks.
(a) Each security, excluding short-term investments, is valued at the
last sale price reported by the principal security exchange on which
the issue is traded. Securities that are traded on the Nasdaq Markets
(Nasdaq Global Select Market, Nasdaq Global Market and Nasdaq Capital
Market formerly known as the Nasdaq National Market or the Nasdaq
SmallCap Market) are valued at the Nasdaq Official Closing Price, or
if no sale is reported, the latest bid price. Securities which are
traded over-the-counter are valued at the latest bid price. Securities
for which quotations are not readily available are valued at fair
value as determined by the investment adviser under the supervision of
the Board of Directors. The fair value of a security may differ from
the last quoted price and the Fund may not be able to sell a security
at the fair value. Market quotations may not be available, for
example, if trading in particular securities has halted during the day
and not resumed prior to the close of trading on the New York Stock
Exchange. Short-term investments with maturities of 60 days or less
are valued at amortized cost, which approximates value. For financial
reporting purposes, investment transactions are recorded on the trade
date; however, for purposes of executing shareholder transactions, the
Fund records changes in holdings of portfolio securities no later than
the first business day after the trade date in accordance with Rule
2a-4 of the Investment Company Act. Accordingly certain differences
between net asset value for financial reporting and for executing
shareholder transactions may arise.
In September 2006, the Financial Accounting Standards Board issued
its new Standard No. 157, "Fair Value Measurements" ("FAS 157"). FAS
157 is designed to unify guidance for the measurement of fair value of
all types of assets, including financialinstruments, and certain
liabilities, throughout a number of accounting standards. FAS 157 also
establishes a hierarchy for measuring fair value in generally accepted
accounting principles and expands financial statement disclosures
about fair value measurements that are relevant to mutual funds. FAS
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and earlier adoption is permitted.
At this time, management believes the adoption of FAS 157 will have no
material impact on the financial statements of the Fund.
(b) Net realized gains and losses on sales of securities are computed
on the identified cost basis.
(c) Dividend income is recorded on the ex-dividend date. Interest
income is recorded on an accrual basis.
(d) The Fund has investments in short-term variable rate demand
notes, which are unsecured instruments. The Fund may be susceptible to
credit risk with respect to these notes to the extent the issuer
defaults on its payment obligation. The Fund's policy is to monitor
the creditworthiness of the issuer and nonperformance by these
counterparties is not anticipated.
(e) Accounting principles generally accepted in the United States of
America ("GAAP") require that permanent differences between income for
financial reporting and tax purposes be reclassified in the capital
accounts.
(f) The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
(g) No provision has been made for Federal income taxes since the
Fund has elected to be taxed as a "regulated investment company" and
intends to distribute substantially all net investment company taxable
income and net capital gains to shareholders and otherwise comply with
the provisions of the Internal Revenue Code applicable to regulated
investment companies.
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain
tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax
positions taken or expected to be taken in the course of preparing the
Fund's tax return to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax
authority. Tax positions not deemed to meet the more-likely-than-not
threshold would be recorded as a tax benefit or expense in the current
year. Adoption of FIN 48 is required for fiscal years beginning after
December 15, 2006 and is to be applied to all open tax years as of the
effective date. At this time, management is evaluating the
implications of FIN 48 and its impact in the financial statements, but
does not anticipate that FIN 48 will have a material impact on the
Fund's financial statements.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH
RELATED PARTIES
The Fund has a management agreement with Friess Associates, LLC (the
"Adviser"), with whom certain Officers and Directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of
the agreement, the Fund will pay the Adviser a monthly management fee at
the annual rate of one percent (1%) on the daily net assets of the Fund.
Also, the Adviser is reimbursed for administrative services rendered to the
Fund by a consultant paid by the Adviser.
The Adviser entered into a sub-advisory agreement with its affiliate,
Friess Associates of Delaware, LLC (the "Sub-Adviser"), to assist it in the
day-to-day management of the Fund. The Adviser and, if so delegated, the
Sub-Adviser supervise the investment portfolio of the Fund, directing the
purchase and sale of investment securities in the day-to-day management of
the Fund. The Adviser pays the Sub-Adviser a fee equal to 110% of the
monthly expenses the Sub-Adviser incurs in performing its services as
Sub-Adviser. This relationship does not increase the annual management fee
the Fund pays to the Adviser.
The Fund pays each of the six independent directors annual fees of $2,500,
reinvested in shares of the Fund. The Lead Independent Director and
Chairman of the Audit Committee are paid additional fees of $5,000 and
$2,500 annually, divided proportionately among and reinvested in shares of
all the Brandywine Funds. The Fund also reimburses directors for travel
costs incurred in order to attend meetings of the Board of Directors. For
the year ended September 30, 2006 the Fund expensed the following directors
fees and costs:
Directors Fees and Travel Costs Paid during the Period $ 12,005
The Fund has adopted a Service and Distribution Plan (the "Plan") pursuant
to Rule 12b-1 under the Investment Company Act of 1940. The Plan provides
that the Fund may incur certain costs which may not exceed a maximum amount
equal to 0.25% per annum of the Fund's average net assets. Payments made
pursuant to the Plan may only be used to pay distribution expenses incurred
in the current year.
In the normal course of business the Fund enters into contracts with
service providers that contain general 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, based on experience, the Fund expects the risk of loss to be
remote.
At September 30, 2006, approximately 85% of the outstanding shares of the
Fund are owned by one of the Fund's Directors.
(3) CREDIT AGREEMENT
U.S. Bank, N.A. has made available to the Fund a $4,000,000 uncommitted
credit facility pursuant to a Credit Agreement, which was booked on
December 6, 2004, for the purpose of having cash available to cover
incoming redemptions. Principal and interest of such loan under the Credit
Agreement is due not more than 31 days after the date of the loan. Amounts
under the credit facility bear interest at a rate per annum equal to the
current prime rate minus one on the amount borrowed. During the year ended
September 30, 2006, the Fund did not borrow against its Agreement. The
Credit Agreement expires on December 18, 2006.
(4) DISTRIBUTIONS TO SHAREHOLDERS
Net investment income and net realized gains, if any, are distributed to
shareholders at least annually. The Board of Directors has approved a
distribution of net realized gains on October 26, 2006 to shareholders of
record on October 25, 2006. These distributions, which are subject to
change, are expected to be $801,653 from net short-term gains and
$10,769,105 from net long-term gains.
(5) INVESTMENT TRANSACTIONS AND RELATED COSTS
For the year ended September 30, 2006, purchases and proceeds of sales of
investment securities (excluding short-term investments) for the Fund were
as follows:
SALE TRANSACTION RATIO OF COST TO
PURCHASES PROCEEDS COST AVERAGE NET ASSETS
--------- -------- ---- ------------------
$385,474,635 $384,040,418 $903,123 0.47%
Transaction cost represents the total commissions paid by the Fund on its
purchases and sales of investment securities. These costs are added to the
cost basis of the securities purchased and are deducted from the proceeds
of securities sold, thereby reducing the realized gains or increasing the
realized losses upon the sale of the securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As of September 30, 2006, liabilities of the Fund included the following:
Payable to brokers for investments purchased $ 2,927,164
Payable to Adviser for management fees 153,719
Due to custodian 1,108
Other liabilities 42,380
(7) SOURCES OF NET ASSETS
As of September 30, 2006, the sources of net assets were as follows:
Fund shares issued and outstanding $158,298,460
Net unrealized appreciation on investments 17,512,015
Accumulated net realized gains 11,570,758
------------
$187,381,233
------------
------------
(8) INCOME TAX INFORMATION
The following information for the Fund is presented on an income tax basis
as of September 30, 2006:
Gross Gross Net Unrealized Distributable Distributable
Cost of Unrealized Unrealized Appreciation Ordinary Long-Term
Investments Appreciation Depreciation on Investments Income Capital Gains
----------- ------------ ------------ -------------- ------ -------------
$172,456,910 $19,499,840 $1,987,825 $17,512,015 $801,653 $10,769,105
The difference, if any, between the cost amount for financial statement and
federal income tax purposes is due primarily to timing differences in
recognizing certain gains and losses in security transactions.
The tax components of dividends paid during the years ended September 30,
2006 and 2005, capital loss carryovers, which may be used to offset future
capital gains, subject to Internal Revenue Code limitations, as of
September 30, 2006, and tax basis post-October losses as of September 30,
2006, which are not recognized for tax purposes until the first day of the
following fiscal year are:
September 30, 2006 September 30, 2005
-------------------------------------------------------------------------- ----------------------------------
Ordinary Long-Term Net Capital Ordinary Long-Term
Income Capital Gains Loss Post-October Income Capital Gains
Distribution Distributions Carryovers Losses Distribution Distribution
------------ ------------- ---------- ------ ------------ ------------
$13,635,503 $9,347,170 $ -- $ -- $ -- $ --
For corporate shareholders in the Fund, the percentage of dividend income
distributed for the year ended September 30, 2006, which is designated as
qualifying for the dividends received deduction is 6% (unaudited).
For the shareholders in the Fund, the percentage of dividend income
distributed for the year ended September 30, 2006, which is designated as
qualified dividend income under the Jobs and Growth Tax Relief Act of 2003,
is 6% (unaudited).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF BRANDYWINE ADVISORS FUND
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Brandywine Advisors Fund (the "Fund," a series of the Brandywine Blue Fund,
Inc.) at September 30, 2006, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 2006 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
October 13, 2006
BRANDYWINE ADVISORS FUND DIRECTORS AND OFFICERS
Position, Term of Office
and Length of Time Served
and Number of Portfolios
in Fund Complex Overseen Principal Occupation Other Directorships Held
Name, Age, Address by Director or Officer During Past Five Years by Director or Officer
- ------------------ ---------------------- ---------------------- ----------------------
Robert F. Birch, 70 Director Mr. Birch has been President and Hyperion Funds (5
8 Knollwood Drive Indefinite Term since Director of the New America High portfolios), New America
Dover, MA 02030 October, 2001 Income Fund since 1992, a high- High Income Fund
3 Portfolios yield bond fund traded on the New
York Stock Exchange.
C. Quentin S. Jackson, 62 Lead Independent Mr. Jackson was the President and None
54 Goldenrod Court, Director Chief Executive Officer of Nuclear
Kiawah Island, SC 29455 Indefinite Term since Electric Insurance Ltd.,
October, 2001 a multibillion-dollar company
3 Portfolios mutually owned by energy companies.
Stuart A. McFarland, 59 Director Mr. McFarland is Chairman at Federal Hyperion Funds
c/o Federal City Bancorp Indefinite Term since City Bancorp, Inc. Holding Company (5 portfolios),
Holding Company for October, 2001 for American Partners Bank. From Newcastle Investment
American Partners Bank Audit Committee 1999 until 2002, he served as President Corporation
6903 Rockledge Drive Chairman, June 2004 and Chief Executive of Pedestal Inc.
Suite 525 3 Portfolios Mr. McFarland also served as Chief
Bethesda, MD 20817 Financial Officer of Fannie Mae, and
an officer of G.E. Capital.
W. Richard Scarlett Director Mr. Scarlett is Chairman and United Bancorporation of
III, 67 Indefinite Term since Chief Executive Officer of United Wyoming, Inc.
c/o United Bancorporation October, 2001 Bancorporation of Wyoming, Inc.,
of Wyoming, Inc. 3 Portfolios having been with the Bank since 1981.
50 Buffalo Way
Jackson, WY 83001
Thomas D. Wren, 54 Director Mr. Wren was the Treasurer ACM Financial Trust, Inc.
540 Way Road Indefinite Term since of MBNA Corporation and its
Wilmington, DE 19807 June, 2006 MBNA America Bank, N.A.
3 Portfolios subsidiary from 1995 to 2006.
Serves on the Board of ACM
Financial Trust, Inc.
James W. Zug, 66 Director Mr. Zug is a retired Partner of Allianz Funds
5 Radnor Corporate Center, Indefinite Term since PricewaterhouseCoopers LLP. He (32 portfolios),
Suite 520 October, 2001 was employed with Pricewater- Amkor Technology, Inc.
100 Matsonford Road 3 Portfolios houseCoopers and its predecessors and Teleflex Inc.
Radnor, PA 19087 from 1964 until 2000.
"Interested Persons"
of the Fund*<F25>
- -----------------
William F. Director Mr. D'Alonzo joined Friess None
D'Alonzo*<F25>, 51 Indefinite Term since Associates in 1981 as part of the
c/o Friess Associates October, 2001 research team, became Chief
3711 Kennett Pike President since 2003 Investment Officer in 1997 and
Greenville, DE 19807 Chairman since 2004 Chief Executive Officer in 2002.
3 Portfolios
Foster S. Director Mr. Friess founded Friess None
Friess*<F25>, 66 Indefinite Term since Associates in 1974 with his wife,
c/o Friess Associates October, 1985 Lynnette E. Friess. He serves as
115 East Snow King Avenue Founder Chairman of the Friess Companies.
Jackson, WY 83001 3 Portfolios
Lynda J. Vice President since 1998 Ms. Campbell joined Friess None
Campbell*<F25>, 60 Secretary since 1990 Associates in 1985. Ms. Campbell
c/o Friess Associates 3 Portfolios is currently Chief Administrative
3711 Kennett Pike Officer of the Friess Companies.
Greenville, DE 19807
Christopher G. Vice President since 2002 Mr. Long joined Friess Associates in None
Long*<F25>, 40 Treasurer since 2003 1996, and became Chief Operating
c/o Friess Associates 3 Portfolios Officer of the Friess Companies
3711 Kennett Pike in 2001.
Greenville, DE 19807
David D. Vice President since 2002 Mr. Marky joined Friess Associates None
Marky*<F25>, 41 Chief Compliance Officer in 2000, following 13 years with
c/o Friess Associates since 2004 PFPC, Inc. He currently serves as
3711 Kennett Pike 3 Portfolios Chief Compliance Officer for the
Greenville, DE 19807 Friess Companies and the
Brandywine Funds.
Paul R. Vice President since Mr. Robinson has been a consultant None
Robinson*<F25>, 83 1990 to Friess Associates, LLC since
c/o Friess Associates 3 Portfolios June 1985.
3711 Kennett Pike
Greenville, DE 19807
For additional information about the Directors and Officers, please call
877-636-6460 and request a Statement of Additional Information. One will be
mailed to you free of charge.
*<F25> Messrs. D'Alonzo, Friess, Long, Marky and Robinson and Ms.
Campbell are "interested persons" of the Fund as that term is defined
in the Investment Company Act of 1940 by reason of their being
officers of the Fundand employees of Friess Associates, LLC.
IMPORTANT NOTICE TO SHAREHOLDERS INVESTED THROUGH FINANCIAL INTERMEDIARIES...
Two prominent financial intermediaries, or mutual fund "supermarket"
providers, informed us that they will no longer permit the delivery of
communications that are not required under regulatory guidelines. This means the
Brandywine Advisors Fund can only send three items - the prospectus, the
semi-annual report and the annual report - to shareholders invested through
these intermediaries. We will not be able to send affected shareholders our
quarterly "Looking Forward" publication or the December- and June-quarter
Brandywine Advisors Fund reports.
All reports will continue to be available on our web site,
www.brandywinefunds.com, and we are working on a way to allow shareholders to
register e-mail addresses online to facilitate e-delivery notices announcing
future reports as they become available. All shareholders invested directly with
---------------------------------------
the Brandywine Advisors Fund will continue to receive all Fund-related
- ----------------------------------------------------------------------
communications.
- ---------------
CAPITAL GAINS UPDATE...
Brandywine Advisors Fund will make an October capital gains distribution.
The distribution is based on gains realized during the fiscal year ended
September 30, and will be made October 26 to shareholders of record as of
October 25. Gains to be distributed total approximately $0.65 per share,
including $0.60 in long-term gains and $0.05 in short-term gains.
Other than shareholders investing through IRAs and other tax-advantaged
accounts, the distribution will be taxable to anyone owning shares on the
October 25 record date. Please consult your tax adviser if you have questions on
how the distribution affects your personal tax situation.
IRA INVESTORS...
For IRA shareholders, the annual $15 maintenance fee is due on November 3,
2006. For your convenience, US Bancorp will automatically deduct this amount
from your IRA on the due date, or if you'd prefer not to have the fee swept from
your account, please send a check to US Bancorp by the due date.
P.O. Box 4166, Greenville, DE 19807
(877) 636-6460 www.brandywinefunds.com bfunds@friess.com
Investment Adviser: FRIESS ASSOCIATES, LLC
Investment Sub-Adviser: FRIESS ASSOCIATES OF DELAWARE, LLC
Custodian: U.S. BANK, N.A.
Transfer Agent: U.S. BANCORP FUND SERVICES, LLC
Independent Registered Public Accounting Firm: PRICEWATERHOUSECOOPERS LLP
Legal Counsel: FOLEY & LARDNER LLP
Distributor: QUASAR DISTRIBUTORS, LLC
OFFICERS: Foster S. Friess, Founder; William D'Alonzo, Chairman and President;
Lynda Campbell, Vice President and Secretary; Christopher Long, Vice President
and Treasurer; David Marky, Chief Compliance Officer, Vice President and
Assistant Secretary; and Paul Robinson, Vice President
Report Editor: Chris AregoodReport Staff: Rebecca Buswell, Dave Marky, Adam
Rieger
The Fund's investment objectives, risks, charges and expenses must be considered
carefully before investing. The Prospectus contains this and other important
information about the investment company, and it may be obtained by calling
1-877-636-6460, or visiting www.brandywinefunds.com. Read it carefully before
investing.
MUTUAL FUND INVESTING INVOLVES RISK. PRINCIPAL LOSS IS POSSIBLE. Fund holdings
and sector weightings are subject to change at any time and are not
recommendations to buy or sell any securities. Securities discussed were not
held by the Fund as of 9/30/06, unless listed in the accompanyingstatement of
net assets. Cash flow measures the cash-generating capability of a company by
adding non-cash charges (e.g. depreciation) and interest expense to pretax
income. References to the earnings growth rates of the Fund refer solely to the
estimated earnings growth rates of the average investment holding of the Fund
based on consensus estimates from Baseline and not to the actual performance of
the Fund itself. Baseline Financial Services, Inc. (Baseline) provides
analytical information and services to the investment community. The S&P 500,
Russell Midcap and Russell Midcap Growth Indexes are unmanaged indices commonly
used to measure the performance of U.S. stocks.You cannot invest directly in an
index.
As of September 30, 2006, the S&P 500 Index's average annual total returns for
1, 5 and 10 years were 10.79, 6.97 and 8.58 percent; the Russell Midcap Index's
were 9.57, 14.81 and 11.95 percent; and the Russell Midcap Growth Index's were
7.03, 12.01 and 8.20 percent. 10/06
ITEM 2. CODE OF ETHICS.
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Registrant has adopted a code of ethics. See attached Exhibit 12 (a).
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
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Registrant's Board of Directors has determined that 2 members of its audit
committee, Mr. Stuart A. McFarland and Mr. Robert F. Birch, are audit committee
financial experts. Messrs. McFarland and Birch are "independent" as such term
is defined in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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(a) Audit Fees
$44,300 (FY 2006) and $44,163 (FY 2005) are the aggregate fees billed for each
of the last two fiscal years for professional services rendered by the principal
accountant to the registrant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years.
(b) Audit-Related Fees
There were no fees billed in each of the last two fiscal years for Audit-Related
Fees.
(c) Tax Fees
$12,220 (FY 2006) and $11,421 (FY 2005) are the aggregate fees billed in each of
the last two fiscal years for professional services rendered by the principal
accountant to the registrant for tax compliance, tax advice, tax planning and
tax return preparation.
(d) All Other Fees
There were no fees billed in each of the last two fiscal years for products and
services provided by the principal accountant to the registrant, other than the
services reported in paragraphs (a) - (c) of this Item 4.
(e) (1) None
(e) (2) None
(f) Not applicable.
(g) $67,900 (FY 2006) and $18,100 (FY 2005) in non-audit fees were billed to the
registrant's investment adviser for tax return preparation and AIMR performance
verification services.
(h) The Audit Committee of the registrant determined that the non-audit fees
billed to the registrant's investment adviser by the principal accountant
disclosed in paragraph (g) of this Item 4, was compatible with maintaining the
principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
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Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
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MANAGEMENT INVESTMENT COMPANIES
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Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
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Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
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COMPANY AND AFFILIATED PURCHASERS.
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Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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None.
ITEM 11. CONTROLS AND PROCEDURES.
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(a) The disclosure controls and procedures of the Brandywine Blue Fund, Inc.
are periodically evaluated. As of October 23, 2006, the date of the last
evaluation, we concluded that our disclosure controls and procedures are
adequate.
(b) The internal controls of the Brandywine Blue Fund, Inc. are periodically
evaluated. There were no changes to Brandywine Blue Fund's internal control
over financial reporting that occurred during the second fiscal quarter of
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, such controls.
ITEM 12. EXHIBITS.
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(a) Any code of ethics or amendment thereto. Filed herewith.
(b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
(c) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
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.
Brandywine Blue Fund, Inc.
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Registrant
By /s/William F. D'Alonzo
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William F. D'Alonzo Principal Executive Officer
Date October 23, 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.
Brandywine Blue Fund, Inc.
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Registrant
By /s/Christopher G. Long
--------------------------------------
Christopher G. Long, Principal Financial Officer
Date October 23, 2006
---------------------------------