<PAGE>
PHILADELPHIA FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
APRIL 1, 1999
This Statement is not a prospectus, but should be read in conjunction with the
Fund's current prospectus (dated April 1, 1999). To obtain the Prospectus
please write to Philadelphia Fund, Inc., 1200 North Federal Highway, Suite
424, Boca Raton, Florida 33432.
Or call:
Nationwide 1-800-749-9933
Florida 1-561-395-2155
The information required by Item 11 "Fund History" of this Statement of
Additional Information is incorporated by reference and is located in the
Fund's prospectus under the heading "Fund History". The information required
by Item 22 "Financial Statements" of this Statement of Additional Information
is incorporated by reference and is located in the Fund's Annual Report dated
November 30, 1998.
TABLE OF CONTENTS PAGE
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Investment Goals, Policies and Risks . . . . . . . . . . . 2
Options Transactions . . . . . . . . . . . . . . . . . . . 2
Futures Contracts . . . . . . . . . . . . . . . . . . . . 4
Taxation of the Fund . . . . . . . . . . . . . . . . . . . 5
Investment Limitations . . . . . . . . . . . . . . . . . . 6
Calculation Of Net Asset Value . . . . . . . . . . . . . . 7
Purchase of Shares . . . . . . . . . . . . . . . . . . . . 7
Automatic Investment Plan . . . . . . . . . . . . . . . . 7
Tax Sheltered Plans . . . . . . . . . . . . . . . . . . . 7
Redemption of Shares . . . . . . . . . . . . . . . . . . . 8
Check Withdrawal Plan . . . . . . . . . . . . . . . . . . 8
Rights of Ownership. . . . . . . . . . . . . . . . . . . . 9
Officers and Directors . . . . . . . . . . . . . . . . . . 9
Brokerage. . . . . . . . . . . . . . . . . . . . . . . . . 11
Information About the Investment Advisor . . . . . . . . . 12
Principal Underwriter. . . . . . . . . . . . . . . . . . . 12
Distribution . . . . . . . . . . . . . . . . . . . . . . . 13
Independent Certified Public Accountant. . . . . . . . . . 14
Calculation of Performance Data. . . . . . . . . . . . . . 14
Comparisons and Advertisements . . . . . . . . . . . . . . 15
Financial Statements . . . . . . . . . . . . . . . . . . . 15
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INVESTMENT GOALS, POLICIES AND RISKS
------------------------------------
The Fund is a diversified open end investment company. Securities will be
bought with the long-term goals of the Fund in view, and it is the practice of
the Fund not to engage in selling portfolio securities on a short-term basis.
However, the Fund may dispose of any portfolio securities acquired at any
time if, in management's judgment, such action is in the best interests of
shareholders. Management will endeavor to apply the flexible investment
policy effectively -- making shifts from bonds to stocks, and vice versa, to
meet changing conditions. If, for example, all of the portfolio securities
were replaced in one year, the portfolio turnover rate would be 100%. It is
not anticipated that the Fund's portfolio turnover rate would exceed 100%.
The portfolio turnover rate (the annual rate at which portfolio securities are
replaced) for the past five years is set forth in the Annual Report to
stockholders for the fiscal year ended November 30, 1998 under "Financial
Highlights".
While the following are not considered to be principal policies of the Fund
they may be employed as described herein.
The Fund may invest in fixed income securities which offer opportunities for
capital appreciation and income. These securities may be rated B-2 or lower by
Moody's or B- or lower by Standard & Poor's. and are deemed to involve a
higher risk level than investment grade debt securities. The Fund may also
invest in unrated securities when Baxter Financial Corporation, the Fund's
investment advisor ("Advisor"), believes that the terms of the security and
the financial condition of the issuer are such that the protection afforded
limits risks to a level similar to that of rated securities in which the Fund
may invest. Fixed income debt securities offer a potential for capital
appreciation because the value of the fixed income security generally
fluctuates inversely with interest rates.
The Fund has authority to invest up to 20% of its assets in the securities of
foreign companies. However, historically the Fund has not invested more than
5% of its assets in foreign securities. Investments in foreign securities
involve risks which are in addition to the usual risks inherent in domestic
investments. There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in
the United States. Foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to United
States companies. Foreign investments may also be affected by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. There is also the possibility of nationalization or other
government policies or instability which could affect investments in
securities of issuers in those nations.
The Fund has authority to buy securities of companies organized as real
estate investment trusts. Real estate investment trusts are subject to price
fluctuations similar to other investments trade on exchanges. In addition,
property values or income produced from properties owned can have an impact on
the value of a real estate investment trust.
The Fund is authorized to invest in "restricted securities" (i.e. securities
which may not be sold without registration or an exemption from registration
under the Securities Act of 1933, as amended). Ordinarily, the Fund does not
expect to have more than 5% of the Fund's total net assets invested in
restricted securities. The Fund will not purchase such securities
if immediately after such purchase more than 15% of the Fund's net assets will
be invested in restricted or other illiquid securities. It is possible that
the advisor may not be able to sell an investment in restricted securities
when it is determined the investment no longer meets the Fund's objectives.
This would cause a negative impact on the value of Fund shares should the
restricted security's price decline before the investment can be sold.
OPTIONS TRANSACTIONS
--------------------
The Fund may sell covered call options (options on securities owned by the
Fund) and uncovered call options (options on securities not owned by the
Fund) which are issued by the Options Clearing Corporation and listed on
national securities exchanges. This practice may enable the Fund to increase
its income because the buyer of the
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option pays the Fund a sum of cash (a premium) for the option whether or not
the buyer ultimately exercises the option. The amount of the premium is
determined on the exchange upon which the option is traded, and will depend
on various factors, such as the market price and volatility of the underlying
securities and the expiration date and exercise price of the option.
Ordinarily, call options would be sold on stocks whose market value is not
expected to appreciate above the option exercise price by the expiration
date of the option, or when the premium received plus the exercise price of
the option exceeds the price at which the Advisor expects the underlying
securities to be trading by the expiration date of the option. When the Fund
sells an option it is obligated to deliver the underlying securities until the
expiration date of the option (which may be one, two, three, six or nine
months from the date the option is issued) if the option is exercised. If the
option is exercised, the Fund would deliver the underlying securities to the
buyer if the option was a covered option or buy the underlying securities to
deliver to the purchaser of the option if the option was uncovered.
The sale of covered call options should enable the Fund to increase its
income through the receipt of premium income on the call options it sells.
However, the Fund risks limiting potential gains the Fund would otherwise
realize if the market value of the underlying securities of a covered call
option appreciates above the exercise price of the option because the
purchaser will then exercise the option. In the case of uncovered call
options, the Fund risks a loss upon closing its option position if the market
price of the optioned securities at the time the option is exercised exceeds
the exercise price plus the premium received by the Fund.
The Fund may purchase call options when the Advisor believes that the
market price of the underlying securities will exceed the strike price of the
option, plus the premium the Fund must pay for the option, by the option
expiration date. If the market price of the underlying securities appreciates
after the option is purchased, the price of the option also will appreciate,
thereby affording the Fund the opportunity to resell the option at a profit
or, as an alternative, to purchase the underlying securities at the option
exercise price anytime until or on the expiration date and retain or resell
the underlying securities at their appreciated value. Purchasing call
options, however, entails the risk that the market price of the underlying
securities may decrease and the market value of the call option will also
decrease, and in these circumstances, while the Fund may sell the option, the
transaction is likely to result in a loss.
The Fund may also buy and sell put options. For the sale of a put option
the Fund receives a premium, which is determined on the exchange on which the
put is traded. The amount of the premium is influenced by the same factors as
influence the market price of call options.
The sale of a put option obligates the seller to purchase the underlying
securities at the option exercise price anytime until or on the expiration
date if the option is exercised. Alternatively, the seller may satisfy its
obligation by purchasing an identical put option for delivery to the purchaser
of the put option.
The option will be exercised if the market price of the underlying
securities is less than the strike price of the option on the expiration date
of the option. The Fund may sell put options to obtain premium income on
underlying securities whose market price the Advisor expects to increase or
remain relatively constant for the duration of the option. They may also be
sold when the Advisor believes the underlying securities are an attractive
long-term investment, despite a possible short term decline in their market
value. In these circumstances, the Fund would purchase the underlying
securities pursuant to the option rather than buy an identical put option to
close the transaction, if the option is exercised by the buyer.
The Fund also may buy put options to protect against a decline in the market
value of underlying securities that are held in the Fund's investment
portfolio. In return for paying a premium to the seller of the put option,
the Fund acquires the right to sell the underlying securities to the seller of
the option at the exercise price, thereby protecting itself against a decline
in the market price of the underlying securities. If, however, at the
expiration date of the option, the market value of the underlying securities
has not declined below the option exercise price, the Fund will not exercise
its put option.
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Puts and calls also may be used in combination, to hedge investments in
underlying securities. For example, if the Fund has bought a call that
entitles it to purchase underlying securities at a specified strike price, it
may also buy a put, which enables it to sell the same securities at a
specified strike price. Put options, as well as call options, are frequently
available on identical underlying securities with identical expiration dates,
but at different strike prices. In this type of hedging transaction, the Fund
might seek to buy a put option whose strike price is higher than the strike
price of an otherwise identical call option on the same underlying securities,
thereby obtaining the right to buy the underlying securities at a lower price
than the price at which it would have the right to sell the securities.
The success of options transactions depends largely on the ability of the
Advisor to predict future stock and option movements. Further, an option
position may be closed out only on an exchange which provides a secondary
market for an option of the same series. Although the Fund will generally
purchase or sell only those options for which the Advisor believes there is an
active secondary market, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option. The inability to
close-out an option position could result in a loss to the Fund.
When the Fund sells an uncovered call option or a put option, it will be
required to maintain in a segregated account, which will be "marked to market,
" with its custodian bank cash or highly liquid, short-term U.S. government
securities in an amount equal to its obligation under the call or put option.
With respect to a put option this will be an amount equal to the price of the
underlying securities it will be obligated to buy if the option is exercised.
With respect to a call option, it would be the market value of the underlying
securities it is obligated to deliver if the option is exercised.
FUTURES CONTRACTS
-----------------
The Fund may buy and sell financial futures contracts and options on
futures contracts. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of specific securities at
a specified future time and at a specified price. Financial futures contracts
which are standardized as to maturity date and the underlying financial
instruments are traded on national futures exchanges, and include futures
contracts on equity securities, debt securities and foreign currencies.
Although index futures contracts by their terms call for settlement in cash,
in most cases the contracts are closed out before the settlement date.
Closing out an open futures position is done by taking an opposite position
("buying") a contract which has previously been "sold" or "selling" a contract
previously purchased in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.
Positions in futures contracts may be closed out only on an exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Therefore, it might not be possible to close a
futures position. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Fund may be required to
make delivery of the securities underlying futures contracts it holds.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts can be substantial, due to the
low margin deposits required. As a result, a relatively small price movement
in a futures contract may result in immediate and substantial loss (as well as
gain) to the investor. There is also the risk of loss by the Fund of margin
deposits, in the event of bankruptcy of a broker with whom the Fund has an
open position in the futures contract or related option.
The Fund may use financial futures and options thereon to implement a number
of hedging strategies. For example, because the purchase of a financial
futures contract requires only a relatively small initial margin deposit,
<PAGE> 5
the Fund could remain exposed to the market activity of a broad-based number
of stocks contained in the futures index, while maintaining liquidity to meet
redemptions. Also, the Fund might temporarily invest available cash in stock
index futures contracts or options pending investments in securities. These
investments entail the risk that an imperfect correlation may exist between
changes in the market price of an index futures contract and the value of the
securities that comprise the index.
There are also limited risk strategies that involve combinations of options
and futures positions. For example, the Fund might purchase a futures
contract in anticipation of higher prices while simultaneously buying an
option on a futures contract to protect against the risk of lower prices.
Further, inasmuch as the Fund may purchase foreign securities which are
denominated in foreign currencies, the Fund may purchase foreign currency
futures contracts in order to hedge against fluctuations in foreign currency
exchange rates.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
"variation" (additional) margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the Fund. Variation margin payments are made to and from the
futures broker for as long as the contract remains open. The Fund expects to
earn income on its margin deposits. The Fund will not enter into futures
contract transactions to the extent that, immediately thereafter, the sum of
its initial and variation margin deposits on open contracts exceeds 5% of the
market value of the Fund's total assets.
When the Fund has a long position in a futures contract or sells a put option,
it must establish a segregated account with its custodian bank containing cash
or highly liquid, short-term U.S. government securities in an amount equal to
the purchase price of the contract or the strike price of the put option (less
any margin on deposit). When the Fund sells a call option on a futures
contract, it must establish a segregated account with its custodian bank
containing cash or highly liquid, short-term U.S. government securities in an
amount that, when added to the amount of the margin deposit, equals the market
value of the instruments underlying the call option (but are not less than
the strike price of the call option). Minimum initial margin requirements are
established by the futures exchange and may be changed. Brokers may establish
deposit requirements which are higher than the exchange minimums.
TAXATION OF THE FUND
--------------------
The Fund intends to continue to qualify for tax treatment under Subchapter M
of the Internal Revenue Code and to distribute to shareholders all of its net
investment income and realized net capital gains (in excess of any available
capital loss carryovers) to relieve the Fund from all Federal income tax.
Should the Fund not qualify it would be subject to Federal income tax on its
earnings and profits.
Except for transactions the Fund has identified as hedging transactions, the
Fund is required for federal income tax purposes to recognize as income for
each taxable year its net unrealized gains and losses on certain futures
contracts as of the end of the year as well as those actually realized during
the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and
40% short-term capital gain or loss, without regard to the holding period of
the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by the Fund may affect
the holding period of such securities and, consequently, the nature of the
gain or loss on such securities upon disposition.
In order for the Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for its
taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities and other income derived with respect to the Fund's business of
investing in securities.
<PAGE> 6
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes, including unrealized
gains at the end of the Fund's fiscal year on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments.
INVESTMENT LIMITATIONS
----------------------
The Fund has adopted the following limitations which are designed to reduce
certain risks inherent in securities investment and which may be changed only
with the approval of the lesser of: (i) at least 67% of the voting securities
of the Fund present at a meeting if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund.
The Fund may not:
invest more than 5% of its gross assets in securities of any one
issuer (except U.S. Government obligations); invest more than 25% in
the securities of companies in the same industry; buy more than 10%
of the voting securities of any company; borrow or lend money (this
policy shall not prohibit the purchasing of debt securities commonly
purchased by institutional investors); purchase securities on margin;
buy securities to exercise control or management; issue senior
securities (except the Fund may buy and sell options); make short sales
(the Fund does not consider the sale of an uncovered call option or
financial futures contracts to be short sales); encumber its assets to
secure debts; buy or sell real estate or real estate mortgage loans,
commodities, or commodity contracts (except financial futures contracts
and options thereon); underwrite the securities of any other issuer
(except when deemed to be a statutory underwriter in connection with
the acquisition of "restricted securities"); acquire the securities of
any other domestic or foreign investment company (except in connection
with a plan of merger or consolidation with or acquisition of
substantially all the assets of such other investment company); this
policy shall not prevent the Fund from investing in the securities
issued by a real estate investment trust, provided that such Trust is
not permitted to invest in real estate or interests in real estate
other than mortgages or other security interests.
Although changes in the following restrictions are not subject to stockholder
approval, the Fund does not intend to: invest more than 15% of its assets in
so-called "restricted securities" (i.e. securities which may not be sold
without registration or an exemption from registration under the Securities
Act of 1933, as amended, securities with a legal or contractual obligation on
resale, foreign securities not listed on a recognized domestic or foreign
securities exchange, securities which do not have a bona fide market or
securities not readily marketable). In purchasing restricted securities, the
Fund may be deemed to be a statutory underwriter unless it acquires and
disposes of such securities pursuant to an exemption available under the
Securities Act of 1933. If an exemption is not available, the Fund may be
required to bear the cost of registering such securities. Ordinarily,
restricted securities may be acquired at a discount from the market price of
similar securities of the issuer and, therefore, in certain instances, may
offer greater opportunity for capital appreciation. The method of valuing
restricted securities is described under "Calculation of Net Asset Value".
The Fund is authorized to lend its portfolio securities and enter into
repurchase agreements. Investments in repurchase agreements involve certain
risks. For example, if the seller of the underlying securities defaults on
its obligation to repurchase the securities at a time when their value has
declined, the Fund may incur a loss upon disposition. If the seller becomes
insolvent and subject to liquidation or reorganization under the Bankruptcy
Code or other laws, a bankruptcy court may determine that the underlying
securities are collateral not within the control of the Fund and, therefore,
subject to sale by the trustee in bankruptcy. Finally, it is possible that
the Fund may not be able to substantiate its interest in the underlying
securities. While management acknowledges these risks, it believes that they
can be controlled through stringent security selection criteria and careful
monitoring procedures.
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CALCULATION OF NET ASSET VALUE
------------------------------
Shares are sold at the Fund's net asset value per share. The net asset value
per share is equal to the current market value of the Fund's securities
investments, plus cash and other assets, less liabilities, divided by the
number of the Fund's outstanding shares (adjusted to the nearest cent).
Portfolio securities traded on a securities exchange or the NASDAQ National
Market System are valued at the closing sales price on the market on which
they are principally traded. Securities traded over-the-counter, except those
that are quoted on the NASDAQ National Market System, are valued at the
prevailing quoted bid price. Other assets and securities for which no
quotations are readily available, including restricted securities, are valued
at fair value, as determined in good faith by the Board of Directors, or a
delegated person acting pursuant to the directions of the Board. The method
of valuing assets and securities for which no quotations are available,
including restricted securities, will be reviewed at appropriate
intervals by the Board.
PURCHASE OF SHARES
------------------
The Fund calculates the net asset value per share at the close of the New
York Stock Exchange on days when the New York Stock Exchange is open. On
other days, the Fund will generally be closed and pricing calculations will
not be made. The New York Stock Exchange is scheduled to be open Monday
through Friday throughout the year except for New Year's Day, Martin Luther
King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Orders for redemption and
purchase will not be processed if received when the Fund is not open for
business.
The Fund will not knowingly sell its shares where, after the sale, such
shares would be owned directly, indirectly, or through a unit investment trust
by another investment company, whether a foreign or domestic in the amount of
3% or more, or by an individual or any kind of entity, owning directly,
indirectly, or through a unit investment trust in the amount of 5% or more of
the then outstanding shares of the Fund. However, this shall not prevent the
holding by the Custodian for Philadelphia Fund Investing Programs (a unit
investment trust for accumulation of shares of the Fund) or by Philadelphia
Fund International Limited required to service their respective security
holders.
AUTOMATIC INVESTMENT PLAN
-------------------------
The Automatic Investment Plan enables shareholders to make regular monthly
investments in shares through automatic charges to their bank checking
accounts. With shareholder authorization and bank approval, Firstar Bank, N.A.
will automatically charge the bank account for the amount specified, which
will be automatically invested in shares at the net asset value on the date
specified by the shareholder. Bank accounts will be charged on the day or a
few days before investments are credited, depending on the bank's
capabilities, and shareholders will receive a quarterly confirmation statement
showing the transactions during the calendar quarter. Participation in the
plan will begin within 30 days after receipt of a completed section 7 of the
Account Application and a voided check from your checking account. If your
bank account cannot be charged due to insufficient funds, a stop payment
order, or the closing of your bank account, the plan may be terminated and the
related investment reversed. The shareholder may change the amount of the
investment or discontinue the plan at any time by writing to American Data
Services, Inc.
TAX SHELTERED PLANS
-------------------
For self-employed individuals, partnerships, and corporations there is
available through the Fund a prototype Profit Sharing/Money Purchase Pension
Plan which has been approved by the Internal Revenue Service. The Profit
Sharing Plan permits an employer to make tax-deductible investments in the
Fund on behalf of each participant up to the lesser of 15% of each
participant's earned income (or compensation), or $30,000. The Money Purchase
<PAGE> 8
Pension Plan permits an employer to make tax-deductible contributions on
behalf of each participant up to the lesser of 25% of earned income (or
compensation), or $30,000. If an employer adopts both the Profit Sharing Plan
and the Money Purchase Pension Plan, deductible contributions to both plans,
in the aggregate, may be made on behalf of each participant up to the lesser
of 25% of earned income (or compensation), or $30,000. Also, the Fund makes
available an Individual Retirement Account (IRA) which permits tax-deductible
investments in the Fund by certain taxpayers up to $2,000 per year. All
taxpayers may make nondeductible IRA contributions up to $2,000 to a separate
account whether or not they are eligible for a deductible contribution. The
minimum amount which must be contributed to establish an IRA account is
$1,000, and there is a $250 minimum investment amount required to establish a
Spousal IRA account. Dividends and capital gains distributions paid on Fund
shares held in a retirement plan or an IRA will be reinvested at net asset
value and accumulate free from tax until withdrawn.
The Fund also makes available a "Roth IRA" - which permits nondeductible
investments in the Fund by certain taxpayers up to $2,000 per tax year. If
the Roth IRA is maintained for at least a five-year period beginning with the
first tax year for which a contribution to the Roth IRA was made,
distributions from the Roth IRA after age 59-1/2 or under certain other
circumstances will be completely tax free.
An annual limit of $2,000 applies to contributions to regular and Roth IRAs.
For example, if a taxpayer contributes $2,000 to a regular IRA for a year, he
or she may not make any contribution to a Roth IRA for that year.
Forms to establish an IRA or Profit Sharing/Money Purchase Pension Plan are
available from the Fund or Baxter Financial Corporation.
REDEMPTION OF SHARES
--------------------
Payments for shares redeemed, or the right of redemption, may be suspended for
any period during which the New York Stock Exchange is closed, other than
customary week-end and holiday closings or during which, by order of the
Securities and Exchange Commission, trading on the New York Stock Exchange is
restricted, or for any period during which an emergency, as determined by
order of the Commission, exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable, or it is not reasonably
practicable for the Fund fairly to determine the values of its net assets, or
for such other periods as the Commission may, by order, permit for the
protection of security holders of the Fund.
CHECK WITHDRAWAL PLAN
---------------------
An investor with a minimum account balance of $5,000 who is not currently
participating in the Automatic Investment Plan may have sufficient Fund shares
automatically redeemed at regular monthly or quarterly intervals to provide
payments of $25 or more. This minimum amount is not necessarily a recommended
amount. The privilege may be exercised by a written request to American Data
Services, Inc. specifying the amount of the check to be received each month
(or each quarter as desired). Share certificates cannot be issued while the
Plan is in effect. With the Custodian's approval, payment amounts may be
revised at any time by the investor. All shares owned or purchased will be
credited to the Check Withdrawal Plan and a sufficient number of shares will
be sold from the investor's account to meet the requested withdrawal payments.
All income dividends and capital gains distributions on shares held will be
reinvested in additional shares at net asset value on the ex-dividend date.
Since the withdrawal payments represent the proceeds from the sales of shares,
there will be a reduction of invested capital to the extent that the
withdrawal payments exceed the income dividends and capital gains
distributions paid and reinvested in shares held in the account. While no
charge is contemplated on each withdrawal payment at present, the right is
reserved at any future time to deduct $1.00 from each withdrawal payment. At
present, the expenses are paid by the Fund. This Plan, upon written notice to
the Custodian, can be terminated at any time without penalty. Any subsequent
investments in this type of Plan must be $1,000 or more.
<PAGE> 9
RIGHTS OF OWNERSHIP
-------------------
Each share of the Fund's common stock has an equal interest in the Fund's
assets, net investment income, and in any net capital gains realized by the
Fund and is entitled to one vote. The shares are non-assessable, fully
transferable, and redeemable at the option of the shareholder. They may be
sold only for cash, except to acquire the major portion of the assets of
another investment company. They have no conversion, preemptive, or other
subscription rights. Shareholders having questions about the Fund or their
accounts may call or write to the Fund at its telephone number or address
shown on the cover of this Statement of Additional Information.
Ordinarily, the Fund does not intend to hold an annual meeting of shareholders
in any year except when required under the Investment Company Act of 1940.
OFFICERS AND DIRECTORS
----------------------
The Board of Directors, guided by the recommendations of the Advisor,
establish the broad investment policy and, under Maryland law, are responsible
to oversee the management of the Fund.
The officers and directors of the Fund and their principal business
occupations are listed below. All officers and directors hold identical
positions with Eagle Growth Shares Inc., a registered investment company, and
with the Fund. Each Director who is an "interested person" of the Fund, as
defined in Section 2(a)(19) of the Investment Company Act of 1940, is
indicated by an asterisk. All of the officers and directors aggregately own
less than 1% of the securities of the Fund.
Kenneth W. McArthur, Director (63)
93 Riverwood Parkway, Toronto, Ontario, Canada, M8Y 4E4
Chairman, Shurway Capital Corp. (private investment company); formerly, Vice
President and Director, Nesbitt Investment Management; formerly President,
Chief Executive Officer, and Director, Fahnestock & Co., Inc. (securities
brokerage); formerly Senior Vice President and Chief Financial Officer,
Nesbitt Thomson Inc. (holding company).
Donald H. Baxter, Director and President* (55)
1200 North Federal Highway, Suite 424, Boca Raton, Florida 33432
Director, President, and Treasurer, Baxter Financial Corporation; Director,
Sunol Molecular Corp. (biotechnology); Director, Great Eastern Bank; formerly
Managing Member, Crown Capital Asia Limited Liability Company (private
investment company); formerly Managing Member, Baxter Biotech Ventures Limited
Company (private investment company); formerly, Portfolio Manager, Nesbitt
Thomson Asset Management, Inc.
Donald P. Parson, Director* (57)
c/o Parson & Brown, 666 Third Avenue, New York, NY 10017
Partner, Parson & Brown, Attorney at Law; Director, ITSN, Inc. (interactive
satellite kiosks); formerly, Partner, Whitman & Ransom, Attorney at Law.
<PAGE> 10
Robert A. Utting, Director (75)
c/o The Royal Bank of Canada, 1 Place Ville Marie,
Montreal, Quebec, Canada H3C 3A9
Director, R. A. Utting & Associates Inc. (investment company); Director, MICC
Investments Limited; Director, Continental Can Company, Inc.; Director, AVCORP
Industries, Inc.; Director, Cambridge Shopping Center Limited; formerly,
President, R. A. Utting & Associates Inc.; formerly, Chairman and Director,
The Mortgage Insurance Company of Canada; formerly, Vice Chairman, Royal Bank
of Canada.
Robert L. Meyer, Director (58)
c/o Ehrlich Meyer Associates, Inc., 25 Griffin Avenue,
P.O. Box 496, Bedford Hills, NY 10507
President, Ehrlich Meyer Associates, Inc.; formerly Principal Officer,
Convergent Capital Corporation (holding company); formerly Director, Vice
President, and Senior Vice President, Fahnestock & Co., Inc.
James Keogh, Director (82)
202 West Lyon Farm Drive, Greenwich, CT 06831
Writer/Editor; formerly Executive Editor, TIME (newsmagazine); formerly,
Director, United States Information Agency; formerly, Executive Director, The
Business Round Table.
Thomas J. Flaherty, Director (74)
400 Ocean Road, House No. 175, Vero Beach, FL 32963
Retired. Formerly, Executive Vice President, Philadelphia Fund, Inc.;
formerly, President Eagle Growth Shares, Inc.; formerly, President and
Director, Universal Programs, Inc. (investment advisor); formerly, partner
Fahnestock & Co.
Ronald F. Rohe, Vice President, Secretary, and Treasurer (55)
1200 North Federal Highway, Suite 424, Boca Raton, Florida 33432
Chief Operating Officer and Marketing Director, Baxter Financial Corporation;
formerly registered representative, Paine Webber Incorporated
Each director, except Donald H. Baxter, receives from the Philadelphia Fund a
$2,000 annual fee and $1,150 for each quarterly Board of Director's meeting
they attend. Donald H. Baxter does not receive any annual or meeting fees as
a director. Thomas J. Flaherty a director and former officer of the Fund
receives a monthly pension from the Fund which amounted to $12,500 for the
year ended November 30, 1998. Donald P. Parson, a director of the Fund, is a
partner of the firm Parson and Brown which handles certain legal matters for
the Fund. In addition, each director, except Donald H. Baxter, receives $50
from Eagle Growth Shares for each quarterly Board of Director's meeting they
attend.
<PAGE> 11
________________________________________________________________________________
|COMPENSATION TABLE |
|for the fiscal year ended 11/30/98 |
|---------------------------------- Pension or |
| Retirement |
| Benefits Estimated Total |
| Accrued Annual Compensation |
| Aggregate as part Benefits from Fund and |
| Compensation of Fund Upon Eagle Growth |
|Name, Position From Fund Expenses Retirement Shares, Inc. |
|______________________________________________________________________________|
|Thomas J. Flaherty, Director $6,600 $12,500 $6,800 |
|------------------------------------------------------------------------------|
|James Keogh, Director $6,600 $6,800 |
|------------------------------------------------------------------------------|
|Kenneth W. McArthur, Director $6,600 $6,800 |
|------------------------------------------------------------------------------|
|Robert L. Meyer, Director $6,600 $6,800 |
|------------------------------------------------------------------------------|
|Donald P. Parson $5,450 $5,600 |
|------------------------------------------------------------------------------|
|Robert A. Utting, Director $4,300 $4,400 |
|------------------------------------------------------------------------------|
BROKERAGE
---------
Donald H. Baxter, President of Baxter Financial Corporation, the Fund's
investment advisor and underwriter, is responsible for the selection of
brokers to execute Fund portfolio transactions. Mr. Baxter seeks to obtain
the best price and execution of Fund portfolio transactions and selects
brokers with this goal in mind. In selecting brokers, Mr. Baxter also
considers the commission rate being paid by the Fund. Commissions on listed
securities are based on competitive rates, and Mr. Baxter seeks assurance
that the commissions paid by the Fund are reasonable in relation to the rates
paid by other similar institutions which are comparable in size and portfolio
characteristics to the Fund, and commensurate with the services being provided
by the broker. To accomplish this, Mr. Baxter negotiates commission levels
with brokers with whom the Fund does business; compares the quoted commission
level, and applies his own knowledge regarding the general levels of
commissions prevailing from time to time. Baxter Financial Corporation is
authorized to allocate brokerage transactions to dealers that have sold Fund
shares. Such transactions are subject to the requirement to seek to obtain the
best price and execution. Mr. Baxter also considers the value of research
services provided to the Fund by these brokers. Mr. Baxter is permitted to
pay a higher commission than another broker might charge when, in his good
faith judgment, such commission is reasonable in relation to the value of
research or brokerage services provided by such broker. During fiscal year
ended November 30, 1998, the Fund paid total brokerage commissions of $146,741
to brokers that provided research services.
Receipt of research information, including statistical and market analyses,
economic and financial studies from other securities firms, electronic
quotation services, and on-line electronic analysis software, enables the
advisor to supplement its own research and analysis activities by taking
available views of other securities firms and is a factor considered in
selecting brokers for the Fund. Allocations of brokerage for the receipt of
research and statistical information are made in the best judgment of Mr.
Baxter and not in accordance with any formula.
Baxter Financial Corporation serves as investment advisor to two registered
investment companies, the Fund and Eagle Growth Shares, Inc., and to various
institutional and individual investors. Receipt of research information by
Baxter Financial Corporation may also be of benefit to Eagle Growth Shares,
Inc. and these other private accounts.
During the fiscal years ended November 30, 1998, 1997, and 1996, the Fund paid
total brokerage commissions of $379,791, $121,456, and $78,518, respectively.
The increased level of commissions incurred by the Fund in 1998 was partially
caused by the portfolio manager's decision to take profits due to his belief
that the market was temporarily vulnerable. This judgment was validated when
the market declined precipitously in the 3rd quarter. This provided an
opportunity to invest in more reasonably valued shares in the 4th quarter. The
increased level of commissions incurred by the Fund in 1997 was due to the
portfolio manager's decision to take profits in a rising
<PAGE> 12
market. Rising prices provided the opportunity for capital gains while other
issues provided desirable alternative investment vehicles.
On over-the-counter transactions the Fund generally deals with the principal
market makers and no commissions are paid to a broker except in situations
where execution through the broker is likely to result in a savings to the
Fund.
INFORMATION ABOUT THE INVESTMENT ADVISOR
----------------------------------------
The Advisor receives an investment advisory fee from the Fund which, on an
annual basis, equals .75 percent of the net assets of the Fund not exceeding
$200,000,000. The rate of this annual fee is reduced to .625 percent on net
assets in excess of $200,000,000 but less than $400,000,000, and to .50
percent on net assets in excess of $400,000,000. The fee is payable monthly,
based on the month-end net asset value of the Fund, at 1/12th of the annual
fee rate. As of November 30, 1998, the net assets of the Fund were
$118,074,623. For the fiscal year ended November 30, 1998, the Fund paid
BFC total advisory fees equal on an annual basis to .75% of the average net
assets.
During the fiscal years ended November 30, 1998, 1997, and 1996, the Fund
paid investment advisory fees to Baxter Financial Corporation totaling
$886,634, $776,208, and $685,222, respectively.
The Investment Advisory Agreement between Baxter Financial Corporation and the
Fund was approved by the Fund's shareholders on March 19, 1991 and became
effective on April 1, 1991. The agreement requires Baxter Financial
Corporation to provide the Fund with a continuous review of and
recommendations regarding investment of the Fund's assets.
The Advisor is also responsible for providing the Fund with administrative
services, such as clerical and secretarial personnel and facilities, necessary
to the administrative affairs of the Fund, pursuant to an Administration
Agreement between the Fund and the Advisor. For these services, the Fund
pays the Advisor a fee which is equal on an annual basis to .25 percent of the
net assets of the Fund. All services provided by the Advisor are subject to
the approval and the overall supervision of the Fund's Board of Directors.
During the fiscal years ended November 30, 1998, 1997, and 1996, the Fund paid
administration fees totaling $295,736, $258,736, and $228,408, respectively,
to Baxter Financial Corporation.
The current Administration Agreement between the Fund and Baxter Financial
Corporation requires Baxter Financial Corporation to supervise and provide for
the administrative operations of the Fund, including the provision of office
space, utilities, equipment, and clerical, secretarial, and administrative
personnel.
The Fund pays all of its own operating expenses, including: custodian and
transfer agent fees, insurance premiums, registration fees, cost of Directors'
and stockholders' meetings, distribution expenses, legal and accounting fees,
printing, and postage. Firstar Bank, N.A. acts as the Fund's custodian.
American Data Services, Inc. acts as transfer agent, dividend paying agent,
and provides the Fund with certain accounting services.
PRINCIPAL UNDERWRITER
---------------------
The Fund's shares are offered, without sales charge, on a continuous basis by
Baxter Financial Corporation, the Fund's principal underwriter on a "best
efforts" basis.
<PAGE> 13
DISTRIBUTION
------------
The Board of Directors and stockholders of the Fund approved a Plan of
Distribution in accordance with Rule 12b-1 of the Investment Company Act of
1940 (the "Distribution Plan") which provides for payment by the Fund of
expenses related to the distribution of Fund shares. Under the Distribution
Plan the Fund may make payments in any month in an amount not greater than
1/24th of 1% of the net asset value of the Fund (.5% on an annual basis) based
on the net asset value calculated on the last business day of each month.
Payment may be made on either a compensatory or reimbursement basis as
determined by the Board of Directors.
Distribution payments may be made by the Fund directly or to Baxter Financial
Corporation for any advertising and promotional expenses incurred which
further the sale and distribution of Fund shares, including the incremental
costs of printing prospectuses, statements of additional information, annual
reports and other periodic reports for distribution to persons who are not
shareholders of the Fund; the costs of preparing and distributing any
supplemental sales literature; costs of radio, television, newspaper and other
advertising; telecommunications expenses, including the costs of telephones,
telephone lines and other communications equipment used in the sale of Fund
shares, the salary of a Marketing Director and related support personnel, the
costs of sales seminars, the costs of maintaining an office for the sale of
the Fund's shares, and to defray the costs of such other products or services
to be used to sell, or further the sale of, Fund shares, as may be approved by
the Board of Directors of the Fund. Payments under the Distribution Plan to
Baxter Financial Corporation are for actual costs and expenses incurred or to
be incurred by Baxter Financial Corporation in connection with the
distribution of Fund shares. Payments to dealers may include commissions and
"trail commissions" or service fees for services in connection with the sale
or retention of Fund shares. Payments may not be used to defray the overhead
expense of Baxter Financial Corporation, interest, or for the carry forward of
expenses which are incurred which would be in excess of the expense ceiling
(.5% annually) in expectation of payment under the Plan in future
years.
During fiscal year ended November 30, 1998, the Fund paid out a total of
$307,059 under the Distribution Plan. Of that amount $295,545 was a service
fee to provide shareholders of the Fund (including persons who are indirect
shareholders through ownership of Philadelphia Fund Investing Programs) with
personal services, including advice and information regarding their share
accounts, such as information regarding account activity and other related
information; the application and use of the prototype retirement plans of the
Fund; a semiannual newsletter; assistance with questions or problems regarding
the Fund's transfer agent; and other information and services, including the
personnel, communications equipment, office space, and supplies to provide
such specified services. The remaining $11,514 paid out by the Fund, was
attributable to marketing salaries.
The Distribution Plan may be continued for one year terms if approved at least
annually by a majority vote, cast in person, of both the Board of Directors
and Disinterested Directors of the Fund, at a meeting called for the purpose
of voting on the Distribution Plan. The Distribution Plan may be terminated
at any time, without penalty, by a vote of a majority of the Fund's
disinterested directors, or by vote of a majority of the outstanding voting
securities of the Fund. The Distribution Plan terminates automatically in the
event of an "assignment" of the Plan as defined in section 2(a)(4) of the
Investment Company Act of 1940. Also, while the Distribution Plan remains in
effect the nomination of the Disinterested Directors of the Fund is committed
to the discretion of such Directors.
The Board of Directors believe there is a reasonable likelihood that the
Distribution Plan will benefit the Fund and its shareholders in light of the
perceived need to increase the sale of Fund shares. The benefits that would
accrue to the Fund by an increase in the level of sales of Fund shares are
that the Fund would have the ability to expand the investment opportunities
available to it with increased cash, certain costs of operation would be
decreased in proportion to the size of the Fund, and the Fund could benefit
from a scaled-down advisory fee rate if the Fund's net assets grow to exceed
$200,000,000 (a decrease from an annual fee of .75 percent to .625 percent of
those assets in excess of $200,000,000). Mr. Baxter, President and sole
stockholder of Baxter Financial Corporation, investment advisor of the Fund
and underwriter, would benefit from increased sales of Fund Shares.
The Distribution Plan provides that out of the total maximum distribution fee
payable , which is .5% of the net assets value of the Fund on an annual basis,
a monthly fee, equal on an annual basis to .25% of the net asset value of the
Fund, will be paid to BFC for providing shareholders of the Fund, with
personal services, including advice
<PAGE> 14
and information regarding their share accounts, the application and use of
the prototype retirement plans of the Fund, a periodic newsletter, assistance
with questions or problems regarding the Fund's transfer agent, and other
information and services designed to retain the loyalty of shareholders to
the Fund and enhance the likelihood that the shareholders will refrain from
redeeming their shares. In connection with the foregoing, BFC is required to
provide personnel, communications equipment and other facilities, including
office space, supplies and the like, and, in its discretion, may make
payments to broker-dealers that are registered under the Securities Act of
1934 and members of the National Association of Securities Dealers, Inc., for
providing shareholders of the Fund with services that are similar to those
described above.
An NASD rule has reduced and may continue to reduce the amount that the Fund
may pay for sales related expenses under the Distribution Plan.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
---------------------------------------
Briggs, Bunting & Dougherty, LLP, Philadelphia PA, serve as the independent
certified public accountant of the Fund. As such, that firm conducts audits
of the Fund's annual and semi-annual reports to stockholders and prepares the
Fund's tax returns.
CALCULATION OF PERFORMANCE DATA
-------------------------------
Following are quotations of the annualized total returns for the one, five,
and ten year periods ended November 30, 1998 using the standardized method of
calculation pursuant to SEC Guidelines:
Average Annual Total Returns
----------------------------
One-Year..................... 12.31%
Five-Year.................... 14.34%
Ten-Year..................... 12.30%
As the following formula indicates, the average annual total return is
determined by multiplying a hypothetical initial purchase order of $1,000 by
the average annual compounded rate of return (including capital
appreciation/depreciation and dividends and distributions paid and reinvested)
for the stated period, less any recurring fees charged to a shareholder
account. The results are annualized and presented accordingly. The
calculation assumes that the maximum sales load is deducted from the initial
$1,000 purchase order and that all dividends and distributions are reinvested
at the net asset value on the reinvestment dates during the period. The
quotation assumes the account was completely redeemed at the end of each one,
five, and ten year period and the deduction of all applicable charges and
fees.
The SEC Guidelines provide that "average annual total return" be computed
according to the following formula:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of 1, 5, or 10 year periods at the end of the
1, 5, or 10 year periods (or fractional portion thereof).
<PAGE> 15
Non-standardized performance figures may also be presented in connection
with Fund advertisements. Performance figures calculated in this manner may
exclude charges which might otherwise reduce return figures, including, for
example, the sales performance over periods of time other than the one, five,
and ten year periods. Non-standardized total return figures, when furnished,
shall be accompanied by standardized total return figures which shall reflect
Fund performance over the following time periods: (1) one-year to date and May
1, 1987 to date, the latter being the date on which Mr. Donald H. Baxter
assumed exclusive portfolio management responsibilities pertaining to the
Fund, or (2) one, five, and ten year periods as of the most recent fiscal year
end of the Fund. However, notwithstanding the foregoing, standardized total
return figures for one, five, and ten year periods shall always be presented
in the Fund's Statement of Additional Information.
COMPARISONS AND ADVERTISEMENTS
------------------------------
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, Fund advertisements may discuss total
return as reported by various financial publications, or they may also compare
total return to total return as reported by other investments, indices, and
averages. Without limitation, the following publications, indices, and
averages may be used:
(a) Dow Jones Composite Average or its component averages -- an
unmanaged index presently composed of 30 industrial corporation
stocks (Dow Jones Industrial Average), 15 utility company stocks and
20 transportation company stocks. Comparisons of performance assume
reinvestment of dividends.
(b) Standard & Poor's 500 Stock Index -- an unmanaged index presently
composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance
assume reinvestment of dividends.
(c) The New York Stock Exchange composite or component indices --
unmanaged indices of all industrial, utilities, transportation, and
finance stocks listed on the New York Stock Exchange.
(d) Lipper -- Mutual Fund Performance Analysis and Lipper Mutual Fund
Indices -- measures total return and average current yield for the
mutual fund industry. Ranks individual mutual fund performance over
specified time periods assuming reinvestment of all distributions,
exclusive of sales charges.
(e) Financial publications, including Business Week, Changing Times,
Financial World, Forbes, Fortune, Money Magazine, Wall Street
Journal, Barron's, which rate fund performance over various time
periods.
FINANCIAL STATEMENTS
--------------------
The financial statements of the Fund for the fiscal year ended November 30,
1998, including the Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
Notes to Financial Statements, Financial Highlights, and Independent Auditor's
Report, as set forth in the Fund' Annual Report to Stockholders for fiscal
year ended November 30, 1998, is incorporated herein by reference.
