BUFFALO
FUNDS
Small Cap Fund
PROSPECTUS
April 14, 1998
BUFFALO
Small Cap
Fund, Inc.
Investment Counsel:
Kornitzer Capital Management, Inc.
Shawnee Mission, Kansas
Managed and Distributed By:
Jones & Babson, Inc.
BMA Tower
700 Karnes Blvd.
Kansas City, Missouri 64108-3306
Toll-Free:
1-800-49-BUFFALO
(1-800-492-8332)
Investment Objective
Buffalo Small Cap Fund, Inc. (the "Fund") seeks long-term capital growth.
Long-term capital growth is intended to be achieved primarily by the Fund's
investment in equity securities of small companies.
Purchase Information
Minimum Investment
Initial Purchase $ 2,500
Initial IRA and Uniform Transfers (Gifts)
to Minors Purchases $ 250
Subsequent Purchase:
By Mail $ 100
By Telephone or Wire $ 1,000
All Automatic Purchases $ 100
Shares are purchased and redeemed at net asset value. There are no sales,
redemption or Rule 12b-1 distribution charges. If you need further
information, please call the Fund at the telephone number indicated above.
Additional Information
This prospectus should be read and retained for future reference. It contains
the information that you should know before you invest. A "Statement of
Additional Information" of the same date as this prospectus has been filed
with the Securities and Exchange Commission and is incorporated by reference.
Investors desiring additional information about the Fund may obtain a copy
without charge by calling the Fund at the telephone number indicated above or
by writing to the address on the cover.
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Table of Contents
Page
Fund Expenses 3
Investment Objective and Portfolio Management Policies 4
Repurchase Agreements 4
Risk Factors 5
Investment Restrictions 6
Historical Performance of Kornitzer Capital Management, Inc. 6
Performance Measures 7
How to Purchase Shares 7
Initial Investments 8
Investments Subsequent to Initial Investment 8
Telephone Investment Service 9
Automatic Monthly Investment Plan 9
How to Redeem Shares 9
Systematic Redemption Plan 11
How to Exchange Shares Between Funds 11
How Share Price is Determined 12
Officers and Directors 13
Management and Investment Counsel 13
General Information and History 14
Dividends, Distributions and Their Taxation 15
Shareholder Services 16
Shareholder Inquiries 18
Fund Expenses
The following information is provided in order to assist you in understanding
the various costs and expenses that a shareholder of the Fund will bear
directly or indirectly. The expenses set forth below are estimates for the
current fiscal year of the Fund.
Buffalo Small Cap Fund, Inc.
Shareholder Transaction Expenses
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fee None
Exchange fee None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 1.00%
12b-1 fees None
Other expenses .07%
Total Fund operating expenses 1.07%
Example
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
1 Year 3 Years
$11 $34
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The assumed
5% annual return is hypothetical and should not be considered a representation
of past or future annual return. The actual return may be greater or less than
the assumed amount.
The various costs and expenses reflected in the foregoing Expense Tables and
Example are explained in more detail in this prospectus. "Other expenses" is
based on estimated amounts for the current fiscal year. Management fees are
discussed in greater detail under "Management and Investment Counsel."
Investment Objective and
Portfolio Management Policies
The Buffalo Small Cap Fund seeks long-term capital growth. Long-term capital
growth is intended to be achieved primarily by the Fund's investment in equity
securities of small companies. Equity securities include common stock,
preferred stock and securities convertible into common stock or preferred
stock.
The Buffalo Small Cap Fund will normally invest in a broad array of
securities, diversified in terms of companies and industries. The Fund invests
at least 65% of its total assets in equity securities of small companies,
during normal market conditions. Small companies are considered to be issuers
with individual market capitalization of up to $1 billion, or issuers whose
individual market capitalization would place them at the time of purchase in
the lowest 20% total market capitalization of companies that have equity
securities listed on a U.S. national securities exchange or traded in the
NASDAQ system.
The Fund may invest in foreign securities through dollar-denominated American
Depository Receipts (ADRs), which are issued by domestic banks and publicly
traded in the United States. ADRs do not involve the same direct currency and
liquidity risks as securities denominated in foreign currency. However, their
value will generally be affected by currency fluctuations that alter the value
of the security underlying the ADRs with respect to the U.S. dollar. The Fund
does not intend to invest directly in foreign securities or foreign
currencies. (See "Risk Factors Applicable to ADRs.")
The Fund is authorized to write (i.e., sell) covered call options on the
securities in which it may invest and to enter into closing purchase
transactions with respect to certain of such options. A covered call option is
an option where the Fund in return for a premium gives another party a right
to buy specified securities owned by the Fund at a specified future date and
price set at the time of the contract. (See "Risk Factors Applicable to
Covered Call Options.")
Covered call options serve as a partial hedge against any price declines of
the underlying securities.
Investments in money market securities shall include government securities,
commercial paper, bank certificates of deposit and repurchase agreements
collateralized by government securities. Investment in commercial paper shall
be restricted to companies in the top two rating categories by Moody's and
Standard & Poor's.
The Fund may also invest in issues of the United States Treasury or a United
States government agency subject to repurchase agreements. The use of
repurchase agreements by the Fund involves certain risks. For a discussion of
these risks, see "Risk Factors Applicable to Repurchase Agreements."
There is no assurance that the Fund's objective of long-term capital growth
can be achieved. Portfolio turnover will be no more than is necessary to meet
the Fund's objective. Under normal circumstances, it is anticipated that the
portfolio turnover rate for securities held in the Fund's portfolio will not
exceed 100% on an annual basis. A high portfolio turnover rate may increase
transaction costs and result in additional taxable gains.
Repurchase Agreements
A repurchase agreement involves the sale of securities to the Fund with the
concurrent agreement by the seller to repurchase the securities at the Fund's
cost plus interest at an agreed rate upon demand or within a specified time,
thereby determining the yield during the purchaser's period of ownership. The
result is a fixed rate of return insulated from market fluctuations during
such period. Under the Investment Company Act of 1940, repurchase agreements
are considered loans by the Fund.
The Fund will enter into such repurchase agreements only with United States
banks having assets in excess of $1 billion which are members of the Federal
Deposit Insurance Corporation, and with certain securities dealers who meet
the qualifications set from time to time by the Board of Directors. The term
to maturity of a repurchase agreement normally will be no longer than a few
days. Repurchase agreements maturing in more than seven days and other
illiquid securities will not exceed 10% of the net assets of the Fund.
Risk Factors
Risk Factors Applicable to
Small Capitalization Securities
Investments in common stocks in general are subject to market, economic and
business risks that will cause their price to fluctuate over time.
Additionally, securities of companies with smaller revenues and
capitalizations may offer greater opportunity for capital appreciation than
larger companies, but investment in such companies present greater risks and
may involve greater price volatility than securities of larger, more
established companies. In addition, the market for small capitalization stocks
is generally less liquid than the markets for larger stocks, which can
contribute to increased price volatility of such stocks. Therefore, an
investment in the Fund may be more suitable for long-term investors who can
bear the risk of these fluctuations.
Risk Factors Applicable to Common Stocks
The Fund is subject to market risk and performance risk. Market risk is the
possibility that stock prices in general will decline over short or even
extended periods of time. Stock markets tend to be cyclical, with periods when
stock prices generally rise and periods when stock prices generally decline.
Performance risk is the possibility that the Fund's performance during a
specific period may not meet or exceed that of the stock market as a whole.
Risk Factors Applicable to
Repurchase Agreements
The Fund may enter into repurchase agreements. The use of repurchase
agreements involves certain risks. For example, if the seller of the agreement
defaults on its obligation to repurchase the underlying securities at a time
when the value of these securities has declined, the Fund may incur a loss
when the securities are sold. If the seller of the agreement becomes insolvent
and subject to liquidation or reorganization under the Bankruptcy Code or
other laws, disposition of the underlying securities may be delayed pending
court proceedings. Finally, it is possible that the Fund may not be able to
perfect its interest in the underlying securities. While the Fund's management
acknowledges these risks, it is expected that they can be controlled through
stringent security selection criteria and careful monitoring procedures.
Risk Factors Applicable to
Covered Call Options
The Fund may engage in covered call option transactions as described herein.
Up to 25% of the Fund's total assets may be subject to covered call options.
By writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option it has written.
Upon the termination of the Fund's obligation under a covered call option
other than through exercise of the option, the Fund will realize a short-term
capital gain or loss. Any gain realized by the Fund from the exercise of an
option will be short- or long-term depending on the period for which the stock
was held. The writing of covered call options creates a straddle that is
potentially subject to the straddle rules, which may override some of the
foregoing rules and result in a deferral of some losses for tax purposes.
Risk Factors Applicable to ADRs
Up to 25% of the Fund's total assets may be invested in ADRs. ADRs (sponsored
or unsponsored) are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying foreign securities. Most ADRs are
traded on a U.S. stock exchange. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR.
Investment Restrictions
In addition to the policies set forth under the caption "Investment Objective
and Portfolio Management Policies," the Fund is subject to certain other
restrictions which may not be changed without approval of the lesser of: (1)
at least 67% of the voting securities present at a shareholder's meeting if
the holders of more than 50% of the outstanding securities of the Fund are
present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Fund. Among these restrictions, the more important
ones are that the Fund will not, as to 75% of its total assets, purchase the
securities of any issuer if more than 5% of the Fund's total assets would be
invested in the securities of such issuer, or the Fund would hold more than
10% of any class of securities of such issuer; the Fund will not make any loan
(the purchase of a security subject to a repurchase agreement or the purchase
of a portion of an issue of publicly distributed debt securities is not
considered the making of a loan); and the Fund will not borrow or pledge its
credit under normal circumstances, except up to 10% of its total assets
(computed at the lower of fair market value or cost) temporarily for emergency
or extraordinary purposes, and not for the purpose of leveraging its
investments; and provided further that any borrowing in excess of 5% of the
total assets of the Fund shall have asset coverage of at least three to one.
The Fund will not buy securities while borrowings are outstanding. The full
text of these restrictions are set forth in the "Statement of Additional
Information."
Historical Performance of
Kornitzer Capital Management, Inc.
Set forth below is certain information about the investment performance record
of Kornitzer Capital Management, Inc., the Fund's investment counsel
responsible for managing the Fund's portfolio of small cap securities. The
performance information shown is for the Great Plains Trust Company Small Cap
Collective Retirement Fund (the "Small Cap Retirement Fund"), which is managed
by Kornitzer and had approximately $23,202,997 in total assets as of March 31,
1998. The Small Cap Retirement Fund has an investment objective, strategy and
investment policies that are substantially similar to those of the Fund. The
results shown assume the reinvestment of all dividends and capital gains and
reflect the deduction of all management fees charged by Kornitzer. The results
presented are not intended to predict or suggest the return to be experienced
by the Fund or the return that an individual investor might achieve by
investing in the Fund. The Fund's results may be different from the
performance of the Small Cap Retirement Fund because of, among other things,
differences in fees and expenses, and because private accounts are not subject
to certain investment limitations, diversification requirements and other
restrictions imposed by the Investment Company Act of 1940 and the Internal
Revenue Code, each as amended, which, if applicable, may adversely affect the
performance of such accounts.
Annualized Returns for S&P 600
the Periods Ending Small Cap Small Cap
3/31/98 Retirement Fund Index*
One Year 50.08% 47.68%
Three Years 32.81% 28.01%
Since Inception 27.55% 23.88%
(3 yrs., 7 mos.)**
Annual Returns
1998 (1st qtr.) 8.08% 11.07%
1997 33.14% 25.58%
1996 28.81% 21.32%
1995 33.94% 29.95%
1994 (lst 4 mos.) -2.98% -3.32%
*The S&P 600 Small Cap Index is a capitalization-weighted index
that measures the performance of selected U.S. stocks with smaller
market capitalizations (generally less than $1 billion).
The index is unmanaged and therefore does not reflect the
deduction of any fees.
**9/1/94 Inception Date.
Performance Measures
From time to time, the Fund may advertise its performance in various ways, as
summarized below. Further discussion of these matters also appears in the
"Statement of Additional Information." A discussion of Fund performance will
be included in the Fund's Annual Report to Shareholders which will be
available from the Fund upon request at no charge.
Total Return
The Fund may advertise "average annual total return" over various periods of
time. Such total return figures show the average percentage change in value of
an investment in the Fund from the beginning date of the measuring period to
the end of the measuring period. These figures reflect changes in the price of
the Fund's shares and assume that any income dividends and/or capital gains
distributions made by the Fund during the period were reinvested in shares of
the Fund. Figures will be given for recent one-, five- and ten-year periods
(if applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
it is important to note that a Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period.
Performance Comparisons
In advertisements or in reports to shareholders, the Fund may compare its
performance to that of other mutual funds with similar investment objectives
and to stock or other relevant indices. For example, it may compare its
performance to rankings prepared by Lipper Analytical Services, Inc. (Lipper),
a widely recognized independent service which monitors the performance of
mutual funds. The Fund may compare its performance to the Standard & Poor's
600 Small Cap Index (S&P 600), an index of unmanaged groups of common stocks,
or the Consumer Price Index. Performance information, rankings, ratings,
published editorial comments and listings as reported in national financial
publications such as Kiplinger's Personal Finance Magazine, Business Week,
Morningstar Mutual Funds, Investor's Business Daily, Institutional Investor,
The Wall Street Journal, Mutual Fund Forecaster, No-Load Investor, Money,
Forbes, Fortune and Barron's may also be used in comparing performance of the
Fund. Performance comparisons should not be considered as representative of
the future performance of the Fund. Further information regarding the
performance of the Fund is contained in the "Statement of Additional
Information."
Performance rankings, recommendations, published editorial comments and
listings reported in Money, Barron's, Kiplinger's Personal Finance Magazine,
Financial World, Forbes, U.S. News & World Report, Business Week, The Wall
Street Journal, Investors Business Daily, USA Today, Fortune and Stanger's,
may also be cited (if the Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from Morningstar
Mutual Funds, Personal Finance, Income and Safety, The Mutual Fund Letter, No-
Load Fund Investor, United Mutual Fund Selector, No-Load Fund Analyst, No-Load
Fund X, Louis Rukeyeser's Wall Street newsletter, Donoghue's Money Letter, CDA
Investment Technologies, Inc., Wiesenberger Investment Company Service and
Donoghue's Mutual Fund Almanac.
How to Purchase Shares
Shares are purchased at net asset value (no sales charge) from the Fund
through its agent, Jones & Babson, Inc., BMA Tower, 700 Karnes Blvd., Kansas
City, MO 64108-3306. To complete a purchase order by mail, wire or telephone,
please provide information detailed below. For information or assistance call
toll free 1-800-49-BUFFALO (1-800-492-8332). If an investor wishes to engage
the services of any other broker to purchase (or redeem) shares of the Fund, a
fee may be charged by such broker. The Fund will not be responsible for the
consequences of delays including delays in the banking or Federal Reserve wire
systems.
You do not pay a sales commission when you buy shares of the Fund. Shares are
purchased at the Fund's net asset value (price) per share next effective after
a purchase order and payment have been received and accepted by the Fund. In
the case of certain institutions which have made satisfactory payment
arrangements with the Fund, orders may be processed at the net asset value per
share next effective after a purchase order has been received and accepted by
the Fund.
The Fund reserves the right in its sole discretion to withdraw all or any part
of the offering made by this prospectus or to reject purchase orders when, in
the judgment of management, such withdrawal or rejection is in the best
interest of the Fund and its shareholders. The Fund also reserves the right at
any time to waive or increase the minimum requirements applicable to initial
or subsequent investments with respect to any person or class of persons,
which include shareholders of the Fund's special investment programs. The Fund
reserves the right to refuse to accept orders for shares unless accompanied by
payment, except when a responsible person has indemnified the Fund against
losses resulting from the failure of investors to make payment. In the event
that the Fund sustains a loss as the result of failure by a purchaser to make
payment, the Fund's underwriter, Jones & Babson, Inc., will cover the loss.
Initial Investments
Initial investments - By mail. You may open an account and make an investment
by completing and signing the application which accompanies this prospectus.
The minimum initial purchase is $2,500 unless your purchase is pursuant to an
IRA or the Uniform Transfers (Gifts) to Minors Act in which case the minimum
initial purchase is $250. Make your check payable to UMB Bank, n.a. Mail your
application and check to:
Buffalo Small Cap Fund, Inc.
BMA Tower
700 Karnes Blvd.
Kansas City, Missouri 64108-3306
Initial investments - By wire. You may purchase shares of the Fund by wiring
funds ($2,500 minimum) through the Federal Reserve Bank to the custodian, UMB
Bank, n.a. Prior to sending your money, you must call the Fund toll free 1-
800-49-BUFFALO (1-800-492-8332) and provide it with the identity of the
registered account owner, the registered address, the Social Security or
Taxpayer Identification Number of the registered owner, the amount being
wired, the name and telephone number of the wiring bank and the person to be
contacted in connection with the order. You will then be provided a Fund
account number, after which you should instruct your bank to wire the
specified amount, along with the account number and the account registration
to:
UMB Bank, n.a.
Kansas City, Missouri, ABA #101000695
For: Buffalo Small Cap Fund, Inc./
AC = 987090-8328
For Account No. (insert assigned Fund account number and name in which account
is registered)
A completed application must be sent to the Fund as soon as possible so the
necessary remaining information can be recorded in your account. Payment of
redemption proceeds may be delayed until the completed application is received
by the Fund.
Investments Subsequent
to Initial Investment
You may add to your Fund account at any time in amounts of $100 or more if
purchases are made by mail, or $1,000 or more if purchases are made by wire or
telephone. Automatic monthly investments must be in amounts of $100 or more.
Checks should be mailed to the Fund at its address, and made payable to UMB
Bank, n.a. Always identify your account number or include the detachable
reminder stub which accompanies each confirmation.
Wire share purchases should include your account registration, your account
number and the name of the Fund. It also is advisable to notify the Fund by
telephone that you have sent a wire purchase order to the bank.
Telephone Investment Service
To use the Telephone Investment Service, you must first establish your Fund
account and authorize telephone orders in the application form, or,
subsequently, on a special authorization form provided upon request. If you
elect the Telephone Investment Service, you may purchase Fund shares by
telephone and authorize the Fund to draft your checking account for the cost
of the shares so purchased. You will receive the next available price after
the Fund has received your telephone call. Availability and continuance of
this privilege is subject to acceptance and approval by the Fund and all
participating banks. During periods of increased market activity, you may have
difficulty reaching the Fund by telephone, in which case you should contact
the Fund by mail or telegraph. The Fund will not be responsible for the
consequences of delays including delays in the banking or Federal Reserve wire
systems.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are followed,
the Fund will not be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, but are not limited to, requiring
personal identification prior to acting upon instructions received by
telephone, providing written confirmations of such transactions and/or tape
recording of telephone instructions.
The Fund reserves the right to initiate a charge for this service and to
terminate or modify any or all of the privileges in connection with this
service at any time upon 15 days written notice to shareholders, and to
terminate or modify the privileges without prior notice in any circumstances
where such termination or modification is in the best interest of the Fund and
its shareholders.
Automatic Monthly Investment Plan
You may elect to make monthly investments in a constant dollar amount from
your checking account ($100 minimum). The Fund will draft your checking
account on the same day each month in the amount you authorize in your
application, or, subsequently, on a special authorization form provided upon
request. Availability and continuance of this privilege is subject to
acceptance and approval by the Fund and all participating banks. If the date
selected falls on a day upon which Fund shares are not priced, investment will
be made on the first date thereafter upon which Fund shares are priced. The
Fund will not be responsible for the consequences of delays including delays
in the banking or Federal Reserve wire systems.
The Fund reserves the right to initiate a charge for this service and to
terminate or modify any or all of the privileges in connection with this
service at any time upon 15 days written notice to shareholders, and to
terminate or modify the privileges without prior notice in any circumstances
where such termination or modification is in the best interest of the Fund and
its shareholders.
How to Redeem Shares
The Fund will redeem shares at the price (net asset value per share) effective
after receipt of a redemption request in "good order." (See "How Share Price
is Determined.")
A written request for redemption, together with an endorsed share certificate
where a certificate has been issued, must be received by the Fund in order to
constitute a valid tender for redemption. For authorization of redemptions by
a corporation, it will also be necessary to have an appropriate certified copy
of resolutions on file with the Fund before a redemption request will be
considered in "good order." In the case of certain institutions which have
made satisfactory redemption arrangements with the Fund, redemption orders may
be processed by facsimile or telephone transmission at net asset value per
share next effective after receipt by the Fund. If an investor wishes to
engage the services of any other broker to redeem (or purchase) shares of the
Fund, a fee may be charged by such broker.
To be in "good order" the request must include the following:
(1) A written redemption request or stock assignment (stock power)
containing the genuine signature of each registered owner exactly as the
shares are registered, with clear identification of the account by registered
name(s), account number and the number of shares or the dollar amount to be
redeemed;
(2) any outstanding stock certificates representing shares to be redeemed;
(3) signature guarantees as required (see Signature Guarantees); and
(4) any additional documentation which the Fund may deem necessary to insure
a genuine redemption.
Where additional documentation is normally required to support redemptions as
in the case of corporations, fiduciaries and others who hold shares in a
representative or nominee capacity such as certified copies of corporate
resolutions, or certificates of incumbency, or such other documentation as may
be required under the Uniform Commercial Code or other applicable laws or
regulations, it is the responsibility of the shareholder to maintain such
documentation on file and in a current status. A failure to do so will delay
the redemption. If you have questions concerning redemption requirements,
please write or telephone the Fund well ahead of an anticipated redemption in
order to avoid any possible delay.
Requests which are subject to special conditions or which specify an effective
date other than as provided herein cannot be accepted. All redemption requests
must be transmitted to the Fund at BMA Tower, 700 Karnes Blvd., Kansas City,
Missouri 64108-3306.
The Fund will endeavor to transmit redemption proceeds to the proper party, as
instructed, as soon as practicable after a redemption request has been
received in "good order" and accepted, but in no event later than the third
business day thereafter. Transmissions are made by mail unless an expedited
method has been authorized and specified in the redemption request. The Fund
will not be responsible for the consequences of delays including delays in the
banking or Federal Reserve wire systems.
Redemptions will not become effective until all documents in the form required
have been received. In the case of redemption requests made within 15 days of
the date of purchase, the Fund will delay transmission of proceeds until such
time as it is certain that unconditional payment in federal funds has been
collected for the purchase of shares being redeemed or 15 days from the date
of purchase, whichever occurs first. You can avoid the possibility of delay by
paying for all your purchases with a transfer of federal funds.
Signature Guarantees are required in connection with all redemptions by mail,
or changes in share registration, except as hereinafter provided. These
requirements may be waived by the Fund in certain instances where it appears
reasonable to do so and will not unduly affect the interests of other
shareholders. Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined in Rule 17Ad-15 under the Securities Exchange Act of
1934. Eligible guarantor institutions include: (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; or (3)
securities broker/dealers which are members of a national securities exchange
or clearing agency or which have a minimum net capital of $100,000. A
notarized signature will not be sufficient for the request to be in proper
form.
Signature guarantees will be waived for mail redemptions of $10,000 or less,
but they will be required if the checks are to be payable to someone other
than the registered owner(s), or are to be mailed to an address different from
the registered address of the shareholder(s), or where there appears to be a
pattern of redemptions designed to circumvent the signature guarantee
requirement, or where the Fund has other reason to believe that this
requirement would be in the best interests of the Fund and its shareholders.
The right of redemption may be suspended or the date of payment postponed
beyond the normal three-day period when the New York Stock Exchange is closed
or under emergency circumstances as determined by the Securities and Exchange
Commission. Further, the Fund reserves the right to redeem its shares in kind
under certain circumstances. If shares are redeemed in kind, the shareholder
may incur brokerage costs when converting into cash. Redemptions in kind must
be in the form of readily marketable securities. Additional details are set
forth in the "Statement of Additional Information."
Due to the high cost of maintaining smaller accounts, the Board of Directors
has authorized the Fund to close shareholder accounts where their value falls
below the current minimum initial investment requirement at the time of
initial purchase as a result of redemptions and not as the result of market
action, and remains below this level for 60 days after each such shareholder
account is mailed a notice of: (1) the Fund's intention to close the account,
(2) the minimum account size requirement, and (3) the date on which the
account will be closed if the minimum size requirement is not met. Since the
minimum investment and the minimum account size are one and the same, any
redemption from an amount containing only the minimum investment amount may
result in redemption of that account.
Systematic Redemption Plan
If you own shares in an open account valued at $10,000 or more, and desire to
make regular monthly or quarterly withdrawals without the necessity and
inconvenience of executing a separate redemption request to initiate each
withdrawal, you may enter into a Systematic Withdrawal Plan by completing
forms obtainable from the Fund. For this service, the manager may charge you a
fee not to exceed $1.50 for each withdrawal. Currently the manager assumes the
additional expenses arising out of this type of plan, but it reserves the
right to initiate such a charge at any time in the future when it deems it
necessary. If such a charge is imposed, participants will be provided 30 days
notice.
Subject to a $50 minimum, you may withdraw each period a specified dollar
amount. Shares also may be redeemed at a rate calculated to exhaust the
account at the end of a specified period of time.
Dividends and capital gains distributions must be reinvested in additional
shares. Under all withdrawal programs, liquidation of shares in excess of
dividends and distributions reinvested will diminish and may exhaust your
account, particularly during a period of declining share values.
You may revoke or change your plan or redeem all of your remaining shares at
any time. Withdrawal payments will be continued until the shares are exhausted
or until the Fund or you terminate the plan by written notice to the other.
How to Exchange Shares
Between Funds
Shareholders may exchange their Fund shares, which have been held in an
open account for 15 days or more, and for which good payment has been
received, for identically registered shares of any Fund in the Buffalo
or Babson Fund Group which is legally registered for sale in the state
of residence of the investor, except Babson Enterprise Fund, Inc.,
provided that the minimum amount exchanged has a value of $1,000 or more
and meets the minimum investment requirement of the Fund into which it
is exchanged.
Effective at the close of business on January 31, 1992, the Directors of
the Babson Enterprise Fund, Inc. took action to limit the offering of
that Fund's shares. Babson Enterprise Fund, Inc. will not accept any new
accounts, including IRAs and other retirement plans, until further
notice, nor will Babson Enterprise Fund, Inc. accept transfers from
shareholders of other Babson Funds, who were not shareholders of record
of Babson Enterprise Fund, Inc. at the close of business on January 31,
1992.
To authorize the Telephone/Telegraph Exchange Privilege, all registered
owners must sign the appropriate section on the original application, or
the Fund must receive a special authorization form, provided upon
request. During periods of increased market activity, you may have
difficulty reaching the Fund by telephone, in which case you should
contact the Fund by mail or telegraph. The Fund reserves the right to
initiate a charge for this service and to terminate or modify any or all
of the privileges in connection with this service at any time and
without prior notice under any circumstances, where continuance of these
privileges would be detrimental to the Fund or its shareholders, such as
an emergency, or where the volume of such activity threatens the ability
of the Fund to conduct business, or under any other circumstances, upon
60 days written notice to shareholders. The Fund will not be responsible
for the consequences of delays including delays in the banking or
Federal Reserve wire systems.
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are
followed, the Fund will not be liable for losses due to unauthorized or
fraudulent instructions. Such procedures may include, but are not
limited to, requiring personal identification prior to acting upon
instructions received by telephone, providing written confirmations of
such transactions and/or tape recording of telephone instructions.
Exchanges by mail may be accomplished by a written request properly
signed by all registered owners identifying the account by name and
number, the number of shares or dollar amount to be redeemed for
exchange, and the Buffalo or Babson Fund into which the account is being
transferred.
If you wish to exchange part or all of your shares in the Fund for
shares of a Fund in the Buffalo or Babson Fund Group, you should review
the prospectus of the Fund to be purchased, which can be obtained from
Jones & Babson, Inc. Any such exchange will be based upon the respective
net asset values of the shares involved. An exchange between Funds
involves the sale of an asset. Unless the shareholder account is tax-
deferred, this is a taxable event.
How Share Price is Determined
In order to determine the price at which new shares will be sold and at
which issued shares presented for redemption will be liquidated, the net
asset value per share of the Fund is computed once daily, Monday through
Friday, at the specific time during the day that the Board of Directors
sets at least annually, except on days on which changes in the value of
portfolio securities will not materially affect the net asset value, or
days during which no security is tendered for redemption and no order to
purchase or sell such security is received by the Fund, or customary
holidays. For a list of the holidays during which the Fund is not open
for business, see "How Share Price is Determined" in the "Statement of
Additional Information."
The price at which new shares of the Fund will be sold and at which
issued shares presented for redemption will be liquidated is computed
once daily at 4:00 P.M. (Eastern Time), except on those days when the
Fund is not open for business.
The per share calculation is made by subtracting from the Fund's total
assets any liabilities and then dividing into this amount the total
outstanding shares as of the date of the calculation. Each security
listed on an exchange is valued at its last sale price on that exchange
on the date as of which assets are valued. Where the security is listed
on more than one exchange, the Fund will use the price of that exchange
which it generally considers to be the principal exchange on which the
security is traded. Lacking sales, the security is valued at the mean
between the current closing bid and asked prices. An unlisted security
for which over-the-counter market quotations are readily available is
valued at the mean between the last current bid and asked prices. When
market quotations are not readily available, any security or other asset
is valued at its fair value as determined in good faith by the Board of
Directors.
Officers and Directors
The officers of the Fund manage its day-to-day operations. The Fund's
manager and officers are subject to the supervision and control of the
Board of Directors. A list of the officers and directors of the Fund and
a brief statement of their present positions and principal occupations
during the past five years is set forth in the "Statement of Additional
Information."
Management and Investment Counsel
Jones & Babson, Inc. was founded in 1960. It organized the Fund in 1997
and acts as its manager and principal underwriter. Pursuant to the
current Management Agreement, Jones & Babson, Inc. pays or provides the
cost of all management, supervisory and administrative services required
in the normal operation of the Fund. This includes investment management
and supervision; fees of the custodian, independent auditors and legal
counsel; remuneration of officers, directors and other personnel; rent;
shareholder services, including the maintenance of the shareholder
accounting system and transfer agency; and such other items as are
incidental to corporate administration.
Not considered normal operating expenses, and therefore payable by the
Fund, are taxes, interest, fees and other charges of governments and
their agencies, including the cost of qualifying the Fund's shares for
sale in any jurisdiction, brokerage costs, dues, and all extraordinary
costs and expenses including but not limited to legal and accounting
fees incurred in anticipation of or arising out of litigation or
administrative proceedings to which the Fund, its officers or directors
may be subject or a party thereto.
As a part of the Management Agreement, Jones & Babson, Inc. employs at
its own expense Kornitzer Capital Management, Inc. as its investment
counsel to assist in the investment advisory function for the Fund.
Kornitzer Capital Management, Inc. is an independent investment
counseling firm founded in 1989. It serves a broad variety of
individual, corporate and other institutional clients by maintaining an
extensive research and analytical staff. It has an experienced
investment analysis and research staff which eliminates the need for
Jones & Babson, Inc. and the Fund to maintain an extensive duplicate
staff, with the consequent increase in the cost of investment advisory
service. The cost of the services of Kornitzer Capital Management, Inc.
is included in the fee of Jones & Babson, Inc. The Management Agreement
limits the liability of the manager and its investment counsel, as well
as their officers, directors and personnel, to acts or omissions
involving willful malfeasance, bad faith, gross negligence or reckless
disregard of their duties. The organizational arrangements of the
investment counsel require that all investment decisions be made by
committee, and no person is primarily responsible for making
recommendations to that committee.
As compensation for all the foregoing services, the Fund pays Jones &
Babson, Inc. a fee at the annual rate of one percent (1%) of average
daily net assets from which Jones & Babson, Inc. pays Kornitzer Capital
Management, Inc. a fee of 50/100 of one percent (.50%) of the average
daily total net assets. The fees are computed daily and paid
semimonthly.
Certain officers and directors of the Fund are also officers or
directors or both of other Buffalo Funds, Jones & Babson, Inc. or
Kornitzer Capital Management, Inc.
Jones & Babson, Inc. is a wholly-owned subsidiary of Business Men's
Assurance Company of America which is considered to be a controlling
person under the Investment Company Act of 1940. Assicurazioni Generali
S.p.A., an insurance organization founded in 1831 based in Trieste,
Italy is considered to be a controlling person and is the ultimate
parent of Business Men's Assurance Company of America. Mediobanca is a
5% owner of Generali.
Kornitzer Capital Management, Inc. is a closely held corporation and has
limitations in the ownership of its stock designed to maintain control
in those who are active in management. Owners of 5% or more of Kornitzer
Capital Management, Inc. are John C. Kornitzer, Kent W. Gasaway, Willard
R. Lynch, Thomas W. Laming and Susan Stack.
The current Management Agreement between the Fund and Jones & Babson,
Inc., which includes the Investment Counsel Agreement between Jones &
Babson, Inc. and Kornitzer Capital Management, Inc. will continue in
effect until October 31, 1999. The Agreements will continue
automatically for successive annual periods ending each October 31 so
long as such continuance is specifically approved at least annually by
the Board of Directors of the Fund or by the vote of a majority of the
outstanding voting securities of the Fund, and, provided also that such
continuance is approved by the vote of a majority of the directors who
are not parties to the Agreements or interested persons of any such
party at a meeting held in person and called specifically for the
purpose of evaluating and voting on such approval. Both Agreements
provide that either party may terminate by giving the other 60 days
written notice. The Agreements terminate automatically if assigned by
either party, as required under the Investment Company Act of 1940.
General Information and History
The Fund was incorporated in Maryland on October 16, 1997. The Fund has
a present authorized capitalization of 10,000,000 shares of $1 par value
common stock. The Fund may divide its shares into series or sub-series
(classes) with the approval of its Board of Directors. The Fund
currently issues a single class of shares which all have like rights and
privileges. Each full and fractional share, when issued and outstanding,
has: (1) equal voting rights with respect to matters which affect the
Fund; and (2) equal dividend, distribution and redemption rights to the
assets of the Fund. Shares when issued are fully paid and non-
assessable. The Fund may create other series of stock but will not issue
any senior securities. Shareholders do not have pre-emptive or
conversion rights.
Non-cumulative voting - These shares have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for
the election of directors can elect 100% of the directors, if they
choose to do so, and in such event, the holders of the remaining less
than 50% of the shares voting will not be able to elect any directors.
The Maryland General Corporation Law permits registered investment
companies, such as the Fund, to operate without an annual meeting of
shareholders under specified circumstances if an annual meeting is not
required by the Investment Company Act of 1940. There are procedures
whereby the shareholders may remove directors. These procedures are
described in the "Statement of Additional Information" under the caption
"Officers and Directors." The Fund has adopted the appropriate
provisions in its By-Laws and may not, at its discretion, hold annual
meetings of shareholders for the following purposes unless required to
do so: (1) election of directors; (2) approval of any investment
advisory agreement; (3) ratification of the selection of independent
auditors; and (4) approval of a distribution plan. As a result, the Fund
does not intend to hold annual meetings.
The Fund may use the name "Buffalo" in its name so long as Kornitzer
Capital Management, Inc. is continued as its investment counsel.
Complete details with respect to the use of the name are set out in the
Management Agreement between the Fund and Jones & Babson, Inc.
This prospectus omits certain of the information contained in the registration
statement filed with the Securities and Exchange Commission, Washington, D.C.
These items may be inspected at the offices of the Commission or obtained from
the Commission upon payment of the fee prescribed.
Dividends, Distributions
and Their Taxation
The Fund pays dividends from net investment income semiannually, usually
in June and December. Distributions from capital gains realized on the
sale of securities, if any, will be declared annually on or before
December 31. Dividend and capital gains distributions will be reinvested
automatically in additional shares at the net asset value per share next
computed and effective at the close of business on the day after the
record date, unless the shareholder has elected on the original
application, or by written instructions filed with the Fund, to have
them paid in cash.
The Fund intends to qualify for taxation as a "regulated investment
company" under Subchapter M of the Internal Revenue Code (the "Code") so
that the Fund will not be subject to federal income tax to the extent
that it distributes its income to its shareholders. As such, the Fund
will not be subject to federal income tax, or to any excise tax, to the
extent its earnings are distributed as provided in the Code and by
satisfying certain other requirements relating to the sources of its
income and diversification of its assets. Dividends, either in cash or
reinvested in shares, paid by the Fund from net investment income will
be taxable to shareholders as ordinary income, and will generally
qualify in part for the 70% dividends-received deduction for
corporations. The portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by the Fund from
domestic (U.S.) sources. The Fund will send to shareholders a statement
each year advising the amount of the dividend income which qualifies for
such treatment.
Dividends from net investment income or net short-term gains will be
taxable to those investors who are subject to income taxes as ordinary
income, whether received in cash or in additional shares. Whether paid
in cash or additional shares of the Fund, and regardless of the length
of time Fund shares have been owned by the shareholder, distributions
from long-term capital gains are taxable to shareholders as such, but
are not eligible for the dividends-received deduction for corporations.
The Fund does not try to realize any particular amount of capital gains
during a year; rather, realized gains are a by-product of Fund
management activities. Consequently, capital gains distributions may be
expected to vary considerably from year to year. Also, for those
investors subject to tax, if purchases of shares in a Fund are made
shortly before a record date for a dividend or capital gains
distribution, a portion of the investment will be returned as a taxable
distribution. The 1997 Act creates a category of long-term capital gain
for individual taxpayers that will be taxed at new lower tax rates. For
investors who are in the 28% or higher federal income tax brackets,
these gains will be taxed at a maximum of 20%. For investors who are in
the 15% federal income tax bracket, these gains will be taxed at a
maximum of 10%. Capital gain distributions will qualify for these new
maximum tax rates, depending on when the Fund's securities were sold and
how long they were held by the Fund before they were sold. Investors who
want more information on holding periods and other qualifying rules
relating to these new rates should review the expanded discussion in the
"Statement of Additional Information," or should contact their personal
tax advisors. The Fund will advise you in its annual information
reporting at calendar year end of the amount of its capital gains
distributions which will qualify for these maximum federal tax rates.
Shareholders are notified annually by the Fund as to federal tax status
of dividends and distributions paid by the Fund. Such dividends and
distributions may also be subject to state and local taxes.
Exchange and redemption of Fund shares are taxable events for federal
income tax purposes. Shareholders may also be subject to state and
municipal taxes on such exchanges and redemptions. Any loss incurred on
a sale or exchange of Fund shares held for six months or less will be
treated as a long-term capital loss to the extent of capital gain
dividends received with respect to such shares. You should consult your
tax adviser with respect to the tax status of distributions from the
Fund in your state and locality.
The Fund intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of the federal excise tax. To do
so, the Fund expects to distribute during each calendar year an amount
equal to: (1) 98% of its calendar year ordinary income; (2) 98% of its
capital gains net income (the excess of short- and long-term capital
gain over short- and long-term capital loss) for the one-year period
ending each October 31; and (3) 100% of any undistributed ordinary or
capital gain net income from the prior calendar year. Dividends declared
in October, November or December and made payable to shareholders of
record in such a month are deemed to have been paid by the Fund and
received by shareholders on December 31 of such year, so long as the
dividends are actually paid before February 1 of the following year.
To comply with IRS regulations, the Fund is required by federal law to
withhold 31% of reportable payments (which may include dividends,
capital gains distributions and redemptions) paid to shareholders who
have not complied with IRS regulations. In order to avoid this
withholding requirement, shareholders must certify on their application,
or on a separate form supplied by the Fund, that their Social Security
or Taxpayer Identification Number provided is correct and that they are
not currently subject to backup withholding, or that they are exempt
from backup withholding.
The federal income tax status of all distributions will be reported to
shareholders each January as a part of the annual statement of
shareholder transactions. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN
THE FUND.
Shareholder Services
The Fund and its manager offer shareholders a broad variety of services
described throughout this prospectus. In addition, the following
services are available:
Automatic Monthly Investment - You may elect to make monthly
investments in a constant dollar amount from your checking account ($100
minimum). The Fund will draft your checking account on the same day each
month in the amount you authorize in your application, or, subsequently,
on a special authorization form provided upon request.
Automatic Reinvestment - Dividends and capital gains distributions may
be reinvested automatically, or shareholders may elect to have dividends
paid in cash and capital gains reinvested, or to have both paid in cash.
Telephone Investments - You may make investments of $1,000 or more by
telephone if you have authorized such investments in your application,
or, subsequently, on a special authorization form provided upon request.
See "Telephone Investment Service."
Automatic Exchange - You may exchange shares from your account ($100
minimum) in any of the Buffalo Funds to an identically registered
account in any other Fund in the Buffalo or Babson Group according to
your instructions. Monthly exchanges will be continued until all shares
have been exchanged or until you terminate the Automatic Exchange
authorization. A special authorization form will be provided upon
request.
Transfer of Ownership - A shareholder may transfer shares to another
shareholder account. The requirements which apply to redemptions apply
to transfers. A transfer to a new account must meet initial investment
requirements.
Systematic Redemption Plan - Shareholders who own shares in open
account valued at $10,000 or more may arrange to make regular
withdrawals without the necessity of executing a separate redemption
request to initiate each withdrawal.
Sub-Accounting - Keogh and corporate tax qualified retirement plans, as
well as certain other investors who must maintain separate participant
accounting records, may meet these needs through services provided by
the Fund's manager, Jones & Babson, Inc. Investment minimums may be met
by accumulating the separate accounts of the group. Although there is
currently no charge for sub-accounting, the Fund and its manager reserve
the right to make reasonable charges for this service.
Prototype Retirement Plans - Jones & Babson, Inc. offers a defined
contribution prototype plan - The Universal Retirement Plan - which is
suitable for all who are self-employed, including sole proprietors,
partner-
ships and corporations. The Universal Prototype includes both money
purchase pension and profit-sharing plan options.
Individual Retirement Accounts - Also available are the following
Individual Retirement Accounts (IRAs):
Traditional IRA: The IRS has increased the phase-out ranges for
deductible contributions. The IRA uses the IRS model form of plan and
provides an excellent way to accumulate a retirement fund which will
earn tax-deferred dollars until withdrawn. An IRA may also be used to
defer taxes on certain distributions from employer-sponsored retirement
plans. You may contribute up to $2,000 of compensation each year ($4,000
if a spousal IRA is established), some or all of which may be
deductible. Consult your tax adviser concerning the amount of the tax
deduction, if any, as well as the best IRA for your financial goals.
Roth IRA: Unlike the traditional IRA, contributions are non-deductible,
however, distribution will be exempt from federal taxes provided that,
at the time of withdrawal, the IRA has been held for five years and (1)
the account holder is 59 1/2 years old or (2) the withdrawals are used
to purchase a first home. The maximum contribution to a Roth IRA is
$2,000 and eligibility is subject to restrictions. Traditional IRAs may
be converted into Roth IRAs. Consult your tax adviser to determine the
best IRA for your financial goals.
Simplified Employee Pensions (SEPs) - The Jones & Babson IRA may be
used with IRS Form 5305 - SEP to establish a SEP-IRA, to which the self-
employed individual may contribute up to 15% of net earned income or
$30,000, whichever is less. A SEP-IRA offers the employer the ability to
make the same level of deductible contributions as a Profit-Sharing Plan
with greater ease of administration, but less flexibility in plan
coverage of employees.
Shareholder Inquiries
Telephone inquiries may be made toll free to the Fund, 1-800-49-BUFFALO
(1-800-492-8332).
Shareholders may address written inquiries to the Fund at:
Buffalo Small Cap Fund, Inc.
BMA Tower
700 Karnes Blvd.
Kansas City, MO 64108-3306
INVESTMENT COUNSEL
KORNITZER CAPITAL MANAGEMENT, INC.
Shawnee Mission, Kansas
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
Kansas City, Missouri
LEGAL COUNSEL
STRADLEY, RONON, STEVENS & YOUNG, LLP
Philadelphia, Pennsylvania
JOHN G. DYER
Kansas City, Missouri
CUSTODIAN
UMB BANK, n.a.
Kansas City, Missouri
TRANSFER AGENT
JONES & BABSON, INC.
Kansas City, Missouri
(This page left blank intentionally.)
BUFFALO MUTUAL FUNDS
Balanced Fund
Equity Fund
High Yield Fund
Small Cap Fund
USA Global Fund
Buffalo Funds
Jones & Babson Distributors
A member of the Generali Group
BMA Tower
700 Karnes Blvd.
Kansas City, Missouri 64108-3306
1-800-49-BUFFALO
(1-800-492-8332)
JB156 4/98
<PAGE>
PART B
BUFFALO(r) SMALL CAP FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
April 14, 1998
This Statement is not a Prospectus but should be read in conjunction
with the Fund's current Prospectus dated April 14, 1998. To obtain
the Prospectus please call the Fund toll-free at 1-800-49-BUFFALO
(1-800-492-8332).
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE AND POLICIES 2
PORTFOLIO TRANSACTIONS 2
INVESTMENT RESTRICTIONS 3
PERFORMANCE MEASURES 3
HOW THE FUND'S SHARES ARE DISTRIBUTED 3
HOW SHARE PURCHASES ARE HANDLED 4
REDEMPTION OF SHARES 5
DISTRIBUTIONS AND TAXES 5
SIGNATURE GUARANTEES 7
MANAGEMENT AND INVESTMENT COUNSEL 7
HOW SHARE PRICE IS DETERMINED 7
OFFICERS AND DIRECTORS 8
CUSTODIAN 10
INDEPENDENT AUDITORS 11
OTHER JONES & BABSON FUNDS 11
DESCRIPTION OF COMMERCIAL PAPER RATINGS 11
FINANCIAL STATEMENTS 13
JB157 4/98
INVESTMENT OBJECTIVE
AND POLICIES
The following policies supplement the Fund's
investment objective and policies set forth in the
Prospectus.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the
Fund are made by Jones & Babson, Inc.
pursuant to recommendations by Kornitzer
Capital Management, Inc. Officers of the Fund
and Jones & Babson, Inc. are generally
responsible for implementing or supervising
these decisions, including allocation of portfolio
brokerage and principal business and the
negotiation of commissions and/or the price of
the securities. In instances where securities are
purchased on a commission basis, the Fund will
seek competitive and reasonable commission
rates based on circumstances of the trade
involved and to the extent that they do not
detract from the quality of the execution.
The Fund, in purchasing and selling portfolio
securities, will seek the best available
combination of execution and overall price
(which shall include the cost of the transaction)
consistent with the circumstances which exist at
the time. The Fund does not intend to solicit
competitive bids on each transaction.
The Fund believes it is in its best interest and
that of its shareholders to have a stable and
continuous relationship with a diverse group of
financially strong and technically qualified
broker-dealers who will provide quality
executions at competitive rates. Broker-dealers
meeting these qualifications also will be selected
for their demonstrated loyalty to the Fund, when
acting on its behalf, as well as for any research
or other services provided to the Fund. The
Fund may execute a substantial portion of its
portfolio transactions through brokerage firms
which are members of the New York Stock
Exchange or through other major securities
exchanges. When buying securities in the over-
the-counter market, the Fund will select a broker
who maintains a primary market for the security
unless it appears that a better combination of
price and execution may be obtained elsewhere.
The Fund normally will not pay a higher
commission rate to broker-dealers providing
benefits or services to it than it would pay to
broker-dealers who do not provide it such
benefits or services. However, the Fund reserves
the right to do so within the principles set out in
Section 28(e) of the Securities Exchange Act of
1934 when it appears that this would be in the
best interests of the shareholders.
No commitment is made to any broker or
dealer with regard to placing of orders for the
purchase or sale of Fund portfolio securities,
and no specific formula is used in placing such
business. Allocation is reviewed regularly by
both the Board of Directors of the Fund and
Jones & Babson, Inc.
Since the Fund does not market its shares
through intermediary brokers or dealers, it is
not the Fund's practice to allocate brokerage or
principal business on the basis of sales of its
shares which may be made through such firms.
However, it may place portfolio orders with
qualified broker-dealers who recommend the
Fund to other clients, or who act as agent in the
purchase of the Fund's shares for their clients.
Research services furnished by broker-dealers
may be useful to the Fund's manager and its
investment counsel in serving other clients, as
well as the Fund. Conversely, the Fund may
benefit from research services obtained by the
manager or its investment counsel from the
placement of portfolio brokerage of other clients.
When it appears to be in the best interests of
its shareholders, the Fund may join with other
clients of the manager and its investment
counsel in acquiring or disposing of a portfolio
holding. Securities acquired or proceeds
obtained will be equitably distributed between
the Fund and other clients participating in the
transaction. In some instances, this investment
procedure may affect the price paid or received
by the Fund or the size of the position obtained
by the Fund.
2
INVESTMENT RESTRICTIONS
In addition to the investment objective and
portfolio management policies set forth in the
Prospectus under the caption "Investment
Objective and Portfolio Management Policies,"
the following restrictions also may not be
changed without approval of the "holders of a
majority of the outstanding shares" of the Fund.
The Fund will not: (1) as to 75% of its total
assets, purchase the securities of any one issuer,
except the United States government, if
immediately after and as a result of such
purchase (a) the value of the holdings of the
Fund in the securities of such issuer exceeds 5%
of the value of the Fund's total assets, or (b) the
Fund owns more than 10% of the outstanding
voting securities, or any other class of securities,
of such issuer; (2) engage in the purchase or sale
of real estate or commodities; (3) underwrite the
securities of other issuers; (4) make loans to
other persons, except by the purchase of debt
obligations which are permitted under its policy
(the purchase of a security subject to a
repurchase agreement or the purchase of a
portion of an issue of publicly distributed debt
securities is not considered the making of a
loan); (5) purchase securities on margin, or sell
securities short, except that the Fund may write
covered call options; (6) borrow or pledge its
credit under normal circumstances, except up to
10% of its gross assets (computed at the lower of
fair market value or cost) for temporary or
emergency purposes, and not for the purpose of
leveraging its investments, and provided further
that any borrowing in excess of 5% of the total
assets of the Fund shall have asset coverage of at
least three to one; or (7) purchase any securities
which would cause more than 25% of the value
of a Portfolio's total net assets at the time of such
purchase to be invested in any one industry.
The following are "non-fundamental"
restrictions which can be changed by the Board
of Directors of the Fund without shareholder
approval. The Fund may not: (1) invest in
companies for the purpose of exercising control
of management; (2) purchase shares of other
investment companies except as permitted under
the Investment Company Act of 1940, as
amended from time to time or pursuant to a plan
of merger or consolidation or similar
transaction; (3) invest in the aggregate more
than 5% of the value of its gross assets in the
securities of issuers (other than federal, state,
territorial, or local governments, or
corporations, or authorities established thereby),
which, including predecessors, have not had at
least three years' continuous operations; or (4)
except for transactions in its shares or other
securities through brokerage practices which are
considered normal and generally accepted under
circumstances existing at the time, enter into
dealings with its officers or directors, its
manager or und
erwriter, or their officers or directors or any
organizations in which such persons have a
financial interest.
PERFORMANCE MEASURES
Total Return
The Fund's "average annual total return"
figures will be computed according to a formula
prescribed by the Securities and Exchange
Commission. The formula can be expressed as
follows:
P(1+T)n = ERV
Where P = a hypothetical initial pay-
ment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value
of a hypothetical $1000
payment made at the
beginning of the 1, 5 or 10
year (or other) periods at
the end of the 1, 5 or 10
year (or other) periods (or
fractional portions thereof).
HOW THE FUND'S SHARES
ARE DISTRIBUTED
Jones & Babson, Inc., as agent of the Fund,
agrees to supply its best efforts as sole
distributor of the Fund's shares and, at its own
expense, pay all sales and distribution expenses
in connection with their offering other than
registration fees and other government charges.
3
Jones & Babson, Inc. does not receive any fee
or other compensation under the distribution
agreement which continues in effect until
October 31, 1999, and which will continue
automatically for successive annual periods
ending each October 31 if continued at least
annually by the Fund's Board of Directors,
including a majority of those Directors who are
not parties to such Agreement or interested
persons of any such party. It terminates
automatically if assigned by either party or upon
60 days written notice by either party to the
other.
Jones & Babson, Inc. also acts as sole
distributor of the shares of David L. Babson
Growth Fund, Inc., D.L. Babson Bond Trust,
D.L. Babson Money Market Fund, Inc., D.L.
Babson Tax- Free Income Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund, Inc., Shadow Stock
Fund, Inc., Babson-Stewart Ivory International
Fund, Inc., Scout Stock Fund, Inc., Scout Bond
Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc.,
Scout Regional Fund, Inc., Scout WorldWide
Fund, Inc., Scout Balanced Fund, Inc., Scout
Kansas Tax-Exempt Bond Fund, Inc., Scout
Capital Preservation Fund, Inc., Buffalo
Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA
Global Fund, Inc. and AFBA Five Star Fund,
Inc.
HOW SHARE PURCHASES
ARE HANDLED
Each order accepted will be fully invested in
whole and fractional shares, unless the purchase
of a certain number of whole shares is specified,
at the net asset value per share next effective
after an order is accepted by the Fund.
Each investment is confirmed by a year-to-
date statement which provides the details of the
immediate transaction, plus all prior
transactions in your account during the current
year. This includes the dollar amount invested,
the number of shares purchased or redeemed,
the price per share and the aggregate shares
owned. A transcript of all activity in your
account during the previous year will be
furnished each January. By retaining each
annual summary and the last year-to-date
statement, you have a complete detailed history
of your account which provides necessary tax
information. A duplicate copy of a past annual
statement is available from Jones & Babson, Inc.
at its cost, subject to a minimum charge of $5
per account, per year requested.
Normally, the shares which you purchase are
held by the Fund in open account, thereby
relieving you of the responsibility of providing
for the safekeeping of a negotiable share
certificate. Should you have a special need for a
certificate, one will be issued on request for all
or a portion of the whole shares in your account.
There is no charge for the first certificate issued.
A charge of $3.50 will be made for any
replacement certificates issued. n order to
protect the interests of the other shareholders,
share certificates will be sent to those
shareholders who request them only after the
Fund has determined that unconditional
payment for the shares represented by the
certificate has been received by its custodian,
UMB Bank, n.a.
If an order to purchase shares must be
canceled due to non-payment, the purchaser will
be responsible for any loss incurred by the Fund
arising out of such cancellation. To recover any
such loss, the Fund reserves the right to redeem
shares owned by any purchaser whose order is
canceled, and such purchaser may be prohibited
or restricted in the manner of placing further
orders.
The Fund reserves the right in its sole
discretion to withdraw all or any part of the
offering made by the Prospectus or to reject
purchase orders when, in the judgment of
management, such withdrawal or rejection is in
the best interest of the Fund and its
shareholders. The Fund also reserves the right
at any time to waive or increase the minimum
requirements applicable to initial or subsequent
investments with respect to any person or class
of persons, which include shareholders of the
Fund's special investment programs.
4
REDEMPTION OF SHARES
The right of redemption may be suspended, or
the date of payment postponed beyond the
normal three-day period by the Fund's Board of
Directors under the following conditions
authorized by the Investment Company Act of
1940: (1) for any period (a) during which the
New York Stock Exchange is closed, other than
customary weekend and holiday closing, or (b)
during which trading on the New York Stock
Exchange is restricted; (2) for any period during
which an emergency exists as a result of which
(a) disposal by the Fund of securities owned by
it is not reasonably practicable, or (b) it is not
reasonably practicable for the Fund to determine
the fair value of its net assets; or (3) for such
other periods as the Securities and Exchange
Commission may by order permit for the
protection of the Fund's shareholders.
The Fund may satisfy redemption requests by
distributing securities in kind. The method of
valuing securities used to make redemptions in
kind will be the same as the method of valuing
portfolio securities described under "How Share
Price is Determined" in the Prospectus, and such
valuation will be made as of the same time the
redemption price is determined.
DISTRIBUTIONS AND TAXES
Distributions of Net Investment Income.
The Fund receives income generally in the form
of dividends, interest, original issue, market and
acquisition discount, and other income derived
from its investments. This income, less
expenses incurred in the operation of the Fund,
constitutes its net investment income from
which dividends may be paid to you. Any
distributions by the Fund from such income will
be taxable to you, whether you take them in cash
or in additional shares.
Distributions of Capital Gains. The Fund
may derive capital gains and losses in
connection with sales or other dispositions of its
portfolio securities. Distributions derived from
the excess of net short-term capital gains over
net long-term capital losses will be taxable to
you as ordinary income. Distributions paid from
long-term capital gains realized by the Fund will
be taxable to you as long-term capital gain,
regardless of how long you have held your
shares in the Fund. Any net short-term or long-
term capital gains realized by the Fund (net of
any capital loss carryovers) will generally be
distributed once each year, and may be
distributed more frequently, if necessary, in
order to reduce or eliminate federal excise or
income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the
"1997 Act"), the Fund is required to track its
sales of portfolio securities and to report its
capital gain distributions to you according to the
following categories of holding periods:
"28 percent tax rate gains:" Securities sold
by the Fund after July 28, 1997 that were held
for more than one year but not more than 18
months, and under a transitional rule securities
sold by the Fund before May 7, 1997 that were
held for more than 12 months. These gains will
be taxable to individual investors at a maximum
rate of 28%.
"20 percent tax rate gains:" Securities sold
by the Fund after July 28, 1997, that were held
for more than 18 months, and under a
transitional rule securities sold by the Fund
between May 7, 1997, and July 28, 1997, that
were held for more than 12 months. These gains
will be taxable to individual investors at a
maximum rate of 20% for investors in the 28%
or higher federal income tax rate brackets, and
at a maximum rate of 10% for investors in the
15% federal income tax rate bracket.
"Qualified 5-year gains:" For individuals
in the 15% federal income tax rate bracket,
qualified 5-year gains are net gains on securities
held for more than 5 years which are sold after
December 31, 2000. For individuals who are
subject to tax at higher federal income tax rate
brackets, qualified 5-year gains are net gains on
securities which are purchased after December
31, 2000 and are held for more than 5 years.
Taxpayers subject to tax at the higher federal
income tax rate brackets may also make an
election for shares held on January 1, 2001 to
recognize gain on their shares in order to qualify
such shares as qualified 5-year property. These
gains will be taxable to individual investors at a
maximum rate of 18% for investors in the 28%
or higher federal income tax brackets, and at a
5
maximum rate of 8% for investors in the 15%
federal income tax rate bracket.
The Fund will advise you in its annual
information reporting at calendar year end of the
amount of its capital gain distributions which
will qualify for these maximum federal tax rates
for each calendar year. Questions concerning
each investor's personal tax reporting should be
addressed to the investor's personal tax advisor.
Election to be Taxed as a Regulated
Investment Company. The Fund has elected to
be treated as a regulated investment company
under Subchapter M of the Internal Revenue
Code ("Code"), and intends to so qualify during
the current fiscal year. The directors reserve the
right not to maintain the qualification of the
Fund as a regulated investment company if they
determine such course of action to be beneficial
to you. In such case, the Fund will be subject to
federal and possibly state corporate taxes on its
taxable income and gains, and distributions to
you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and
profits.
In order to qualify as a regulated investment
company for federal income tax purposes, the
Fund must meet certain specific requirements,
including:
(i) The Fund must maintain a diversified
portfolio of securities, wherein no
security (other than U.S. Government
securities and securities of other
regulated investment companies) can
exceed 25% of the Fund's total assets,
and, with respect to 50% of the
Fund's total assets, no investment
(other than cash and cash items, U.S.
Government securities and securities
of other regulated investment
companies) can exceed 5% of the
Fund's total assets;
(ii) The Fund must derive at least 90% of
its gross income from dividends,
interest, payments with respect to
securities loans and gains from the
sale or disposition of stock or
securities or foreign currencies, or
other income derived with respect to
its business of investing in such
stock, securities or currencies;
(iii) The Fund must distribute to its
shareholders at least 90% of its net
investment income and net tax-
exempt income for each of its fiscal
years; and
(iv) The Fund must realize less than 30%
of its gross income for each fiscal
year from gains from the sale of
securities and certain other assets
that have been held by the Fund for
less than three months ("short-short
income"). The 1997 Act repealed the
30% short-short income test for tax
years of regulated investment
companies beginning after August 5,
1997; however, this rule may have
continuing effect in some states for
purposes of classifying the Fund as a
regulated investment company.
Excise Tax Distribution Requirements. The
Code requires the Fund to distribute at least
98% of its taxable ordinary income earned
during the calendar year and 98% of its capital
gain net income earned during the 12-month
period ending October 31 (in addition to
amounts from the prior year that were neither
distributed nor taxed to the Fund) to you by
December 31 of each year in order to avoid
federal excise taxes. The Fund intends as a
matter of policy to declare and pay sufficient
dividends in December or January (which are
treated by you as received in December) but does
not guarantee and can give no assurances that
its distributions will be sufficient to eliminate all
such taxes.
Dividends-Received Deduction for Corpora-
tions. Because the Fund's income is derived
primarily from dividends, a portion of its
distributions will generally be eligible for the
dividends-received deduction. The dividends-
received deduction will be available only with
respect to dividends designated by the Fund as
eligible for such treatment. Dividends so
6
designated by the Fund must be attributable to
dividends earned by the Fund from U.S.
corporations which are not debt-financed. A
holding period requirement applies both at the
Fund level and the corporate shareholder level.
Under the 1997 Act, the amount that the Fund
may designate as eligible for the dividends-
received deduction will be reduced or eliminated
if the shares on which the dividends earned by
the Fund are debt-financed or held by the Fund
for less than a 46-day period during a 90-day
period beginning 45 days before the ex-dividend
date and ending 45 days after the ex-dividend
date. Similarly, if your Fund shares are debt-
financed or held by you for less than a 46-day
period during a 90-day period beginning 45 days
before the ex-dividend date and ending 45 days
after the ex-dividend date, then the dividend-
received deduction for fund dividends on your
shares may also be reduced or eliminated. Even
if designated as dividends eligible for the
dividend received deduction, all dividends
(including any deducted portion) must be
included in your alternative minimum taxable
income calculation.
SIGNATURE GUARANTEES
Signature guarantees normally reduce the
possibility of forgery and are required in
connection with each redemption method to
protect shareholders from loss. Signature
guarantees are required in connection with all
redemptions by mail or changes in share
registration, except as provided in the
Prospectus.
Signature guarantees must appear together
with the signature(s) of the registered owner(s),
on:
(1) a written request for redemption;
(2) a separate instrument of assignment,
which should specify the total number
of shares to be redeemed (this "stock
power" may be obtained from the
Fund or from most banks or stock
brokers); or
(3) all stock certificates tendered for
redemption.
MANAGEMENT AND
INVESTMENT COUNSEL
As a part of the Management Agreement,
Jones & Babson, Inc. employs at its own
expense Kornitzer Capital Management, Inc., as
its investment counsel.
Kornitzer Capital Management, Inc., was
founded in 1989. It is a private investment
research and counseling organization serving
individual, corporate and other institutional
clients.
The aggregate management fee to be paid to
Jones & Babson, Inc. by the Fund during the
current fiscal year is 1%. The annual fee
charged by Jones & Babson, Inc. covers all
normal operating costs of the Fund.
Kornitzer Capital Management, Inc., has an
experienced investment analysis and research
staff which eliminates the need for Jones &
Babson, Inc. and the Fund to maintain an
extensive duplicate staff, with the consequent
increase in the cost of investment advisory
service. The cost of the services of Kornitzer
Capital Management, Inc., is included in the fee
of Jones & Babson, Inc.
HOW SHARE PRICE IS DETERMINED
The net asst value per share of the Fund
portfolio is computed once daily, Monday
through Friday at the specific time during the
day that the Board of Directors of the Fund sets
at least annually, except on days on which
changes in the value of a Fund's portfolio
securities will not materially affect the net asset
value, or days during which no security is
tendered for redemption and no order to
purchase or sell such security is received by the
Fund, or the following holidays:
New Year's Day January 1
Martin Luther Third Monday
King, Jr. Day in January
Presidents' Holiday Third Monday in
February
Good Friday Friday before Easter
Memorial Day Last Monday in May
Independence Day July 4
7
Labor Day First Monday in
September
Thanksgiving Day Fourth Thursday in
November
Christmas Day December 25
OFFICERS AND DIRECTORS
The Fund is managed by Jones & Babson, Inc.
subject to the supervision and control of the
Board of Directors. The following table lists the
officers and directors of the Fund and their ages.
Unless noted otherwise, the address of each
officer and director is BMA Tower, 700 Karnes
Blvd., Kansas City, Missouri 64108-3306.
Except as indicated, each has been an employee
of Jones & Babson, Inc. for more than five
years.
* Larry D. Armel (56), President and
Director. President and Director, Jones &
Babson, Inc., David L. Babson Growth Fund,
Inc., D.L. Babson Money Market Fund, Inc.,
D.L. Babson Tax-Free Income Fund, Inc.,
Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund,
Inc., Shadow Stock Fund, Inc., Babson-
Stewart Ivory International Fund, Inc., Scout
Stock Fund, Inc., Scout Bond Fund, Inc.,
Scout Money Market Fund, Inc., Scout Tax-
Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund
Inc., Scout Balanced Fund, Inc., Scout Kansas
Tax-Exempt Bond Fund, Inc., Scout Capital
Preservation Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo
USA Global Fund, Inc., Buffalo High Yield
Fund, Inc., Investors Mark Series Fund, Inc.;
Director, AFBA Five Star Fund, Inc.;
President and Trustee, D.L. Babson Bond
Trust.
* Kent W. Gasaway (38), Director. Senior
Vice President, Kornitzer Capital
Management, Inc., KCM Building, Shawnee
Mission, Kansas 66201. Director, Buffalo
Balanced Fund, Inc., Buffalo Equity Fund,
Inc., Buffalo USA Global Fund, Inc., Buffalo
High Yield Fund, Inc.; formerly Assistant
Vice President, Waddell & Reed, Inc., 6300
Lamar Avenue, Shawnee Mission, Kansas
66202.
* Stephen S. Soden (53), Director. President,
BMA Financial Services. Chairman and
Director, Jones & Babson, Inc.; Director,
Buffalo Balanced Fund, Inc., Buffalo Equity
Fund, Inc., Buffalo USA Global Fund, Inc.,
Buffalo High Yield Fund, Inc.
Thomas S. Case (56), Director. Retired,
3485 Paydirt Dr., Placerville, California
95667. Director, Buffalo Balanced Fund, Inc.,
Buffalo Equity Fund, Inc., Buffalo High Yield
Fund, Inc., Buffalo USA Global Fund, Inc.;
formerly President and Chief Executive
Officer, the Frankona American Companies,
2405 Grant Blvd., Suite 900, Kansas City,
Missouri 64108.
Francis C. Rood (63), Director. Retired, 73-
395 Agave Lane, Palm Desert, California
92260-6653. Director, David L. Babson
Growth Fund, Inc., D.L. Babson Money
Market Fund, Inc., D.L. Babson Tax-Free
Income Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., Shadow Stock Fund, Inc.,
Buffalo Balanced Fund, Inc., Buffalo Equity
Fund, Inc., Buffalo USA Global Fund, Inc.,
Buffalo High Yield Fund, Inc., Investors Mark
Series Fund, Inc.; Trustee, D.L. Babson Bond
Trust; formerly Vice President of Finance,
Hallmark Cards, Inc.
William H. Russell (74), Director. Financial
Consultant, 645 West 67th Street, Kansas City,
Missouri 64113. Director, David L. Babson
Growth Fund, Inc., D.L. Babson Money
Market Fund, Inc., D.L. Babson Tax-Free
Income Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-Stewart Ivory International Fund,
Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo USAGlobal Fund,
Inc., Buffalo High Yield Fund, Inc., Investors
Mark Series Fund, Inc.; Trustee, D.L. Babson
Bond Trust; formerly Vice President, Sprint.
_______________________________________
* Directors who are interested persons as
that term is defined in the Investment
Company Act of 1940, as amended.
8
H. David Rybolt (55), Director. Consultant,
HDR Associates, P.O. Box 2468, Shawnee
Mission, Kansas 66201. Director, David L.
Babson Growth Fund, Inc., D.L. Babson Money
Market Fund, Inc., D.L. Babson Tax-Free
Income Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., Shadow Stock Fund, Inc.,
Buffalo Balanced Fund, Inc., Buffalo Equity
Fund, Inc., Buffalo USA Global Fund, Inc.,
Buffalo High Yield Fund, Inc., Investors Mark
Series Fund, Inc.; Trustee, D.L. Babson Bond
Trust.
P. Bradley Adams (37), Vice President and
Treasurer. Vice President and Treasurer, Jones
& Babson, Inc., David L. Babson Growth Fund,
Inc., D.L. Babson Money Market Fund, Inc.,
D.L. Babson Tax-Free Income Fund, Inc.,
Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund,
Inc., Shadow Stock Fund, Inc., Babson-Stewart
Ivory International Fund, Inc., D.L. Babson
Bond Trust, Scout Stock Fund, Inc., Scout Bond
Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund,
Inc., Scout Balanced Fund, Inc., Scout Capital
Preservation Fund, Inc., Scout Kansas Tax-
Exempt Bond Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo
High Yield Fund, Inc., Buffalo USA Global
Fund, Inc.; Vice President and Chief Financial
Officer, AFBA Five Star Fund, Inc.; Principal
Financial Officer, Investors Mark Series Fund,
Inc.
Michael A. Brummel (40), Vice President,
Assistant Secretary and Assistant Treasurer.
Vice President, Jones & Babson, Inc., David L.
Babson Growth Fund, Inc., D.L. Babson Money
Market Fund, Inc., D.L. Babson Tax-Free
Income Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-Stewart Ivory International Fund, Inc.,
D.L. Babson Bond Trust, Scout Stock Fund,
Inc., Scout Bond Fund, Inc., Scout Money
Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout Regional Fund, Inc.,
Scout WorldWide Fund, Inc., Scout Balanced
Fund, Inc., Scout Kansas Tax-Exempt Bond
Fund, Inc., Scout Capital Preservation Fund,
Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.
Martin A. Cramer (48), Vice President and
Secretary. Vice President and Secretary, David
L. Babson Growth Fund, Inc., D.L. Babson
Money Market Fund, Inc., D.L. Babson Tax-
Free Income Fund, Inc., Babson Enterprise
Fund, Inc., Babson Enterprise Fund II, Inc.,
Babson Value Fund, Inc., Shadow Stock Fund,
Inc., Babson-Stewart Ivory International Fund,
Inc., D.L. Babson Bond Trust, Scout Stock
Fund, Inc., Scout Bond Fund, Inc., Scout Money
arket Fund, Inc., Scout Tax-Free Money Market
Fund, Inc., Scout Regional Fund, Inc., Scout
WorldWide Fund, Inc., Scout Balanced Fund,
Inc., Scout Kansas Tax-Exempt Bond Fund,
Inc., Scout Capital Preservation Fund, Inc.,
Buffalo Balanced Fund, Inc., Buffalo Equity
Fund, Inc., Buffalo High Yield Fund, Inc.,
Buffalo USA Global Fund, Inc.; Secretary and
Assistant Vice President, AFBA Five Star Fund,
Inc.; Secretary, Investors Mark Series Fund, Inc.
Constance E. Martin (36), Vice President.
Assistant Vice President, Jones & Babson, Inc.
Vice President, David L. Babson Growth Fund,
Inc., D.L. Babson Money Market Fund, Inc.,
D.L. Babson Tax-Free Income Fund, Inc.,
Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund,
Inc., Shadow Stock Fund, Inc., Babson-Stewart
Ivory International Fund, Inc., D. L. Babson
Bond Trust, Scout Stock Fund, Inc., Scout Bond
Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund,
Inc., Scout Balanced Fund, Inc., Scout Capital
Preservation Fund, Inc., Scout Kansas Tax-
Exempt Bond Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo
High Yield Fund, Inc., Buffalo USA Global
Fund, Inc.
John G. Dyer (52), Vice President. Vice
President, Scout Stock Fund, Inc., Scout Bond
Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund,
Inc., Scout Balanced Fund, Inc., Scout Kansas
Tax-Exempt Bond Fund, Inc., Scout Capital
Preservation Fund, Inc., Buffalo Balanced Fund,
9
Inc., Buffalo Equity Fund, Inc., Buffalo High
Yield Fund, Inc., Buffalo USA Global Fund,
Inc.
None of the officers or directors will be
remunerated by the Fund for their normal duties
and services. Their compensation and expenses
arising out of normal operations will be paid by
Jones & Babson, Inc. under the provisions of the
Management Agreement.
Messrs. Case, Rood, Russell and Rybolt have
no financial interest in, nor are they affiliated
with, either Jones & Babson, Inc. or Kornitzer
Capital Management, Inc.
The Audit Committee of the Board of
Directors is composed of Messrs. Case, Rood,
Russell and Rybolt.
The officers and directors of the Fund as a
group own less than 1% of any of the Funds.
<TABLE>
<CAPTION>
Compensation Table
Aggregate Pension or Retirement Estimated Annual Total Compensation
Compensation Benefits Accrued as Benefits upon From All Buffalo Funds
Name of Director for Fund Service Part of Fund Expenses Retirement Paid to Directors**
________________ ________________ _____________________ ________________ ______________________
</CAPTION>
<S> <C> <C> <C> <C>
Larry D. Armel* -- -- -- --
Kent W. Gasaway* -- -- -- --
Thomas S. Case $125 -- -- $5,250
Stephen S. Soden* -- -- -- --
Francis C. Rood $125 -- -- $2,125
William H. Russell $125 -- -- $2,125
H. David Rybolt $125 -- -- $2,125
</TABLE>
*As "interested directors," Messrs. Armel, Gasaway and Soden receive no
compensation for their services as directors.
**The amounts reported in this column reflect the total compensation paid to
each director for his services as a director of five Buffalo Funds during
the fiscal year ended March 31, 1998. Directors' fees are paid by the Funds'
manager and not by the Funds themselves.
The Fund will not hold annual meetings
except as required by the Investment Company
Act of 1940 and other applicable laws. The
Fund is a Maryland corporation. Under
Maryland law, a special meeting of stockholders
of the Fund must be held if the Fund receives
the written request for a meeting from the
stockholders entitled to cast at least 25% of all
the votes entitled to be cast at the meeting. To
the extent required under Maryland law, the
Fund will assist shareholder communications in
such matters.
CUSTODIAN
The Fund's portfolio assets are held for
safekeeping by an independent custodian, UMB
Bank, n.a. This means the bank, rather than the
Fund, has possession of the Fund's cash and
securities. The custodian bank is not
responsible for the Fund's investment
management or administration. But, as directed
by the Fund's officers, it delivers cash to those
who have sold securities to the Fund in return
for such securities, and to those who have
purchased portfolio securities from the Fund, it
delivers such securities in return for their cash
purchase price. It also collects income directly
from issuers of securities owned by the Fund and
holds this for payment to shareholders after
deduction of the Fund's expenses. The
custodian is compensated for its services by the
manager. There is no charge to the Fund.
10
INDEPENDENT AUDITORS
The Fund's financial statements are audited
annually by independent auditors approved by
the directors each year, and in years in which an
annual meeting is held the directors may submit
their selection of independent auditors to the
shareholders for ratification. Ernst & Young
LLP, One Kansas City Place, 1200 Main Street,
Suite 2000, Kansas City, Missouri 64105, is the
Fund's present independent auditor.
Reports to shareholders will be published at
least semiannually.
OTHER JONES & BABSON FUNDS
Jones & Babson, Inc. sponsors and manages,
in association with its investment counsel,
Kornitzer Capital Management, Inc., the four
additional no-load Buffalo Funds described
below.
BUFFALO BALANCED FUND, INC. was
organized in 1994 with the objective of long-
term capital growth and high current income
through investing in common stocks and
secondarily by investing in convertible bonds,
preferred stocks and convertible preferred
stocks.
BUFFALO HIGH YIELD FUND, INC. was
organized in 1994 with the objective of a high
level of current income and secondarily, capital
growth by investing primarily in high-yielding
fixed income securities.
BUFFALO USA GLOBAL FUND, INC.
was organized in 1994 with the objective of
capital growth by investing in common stocks of
U.S. companies that receive greater than 40% of
their revenues or pre-tax income from
international operations.
BUFFALO EQUITY FUND, INC.
organized in 1994 with the objective of long-
term capital appreciation by investing in
common stocks. Realization of dividend income
is a secondary consideration to the extent that it
supplements the return on the Fund's
investments and investment in the dividend-
producing securities is consistent with achieving
the Fund's objective of long-term capital
appreciation.
A prospectus for any of the Funds may be
obtained from Jones & Babson, Inc., BMA
Tower, 700 Karnes Blvd., Kansas City, Missouri
64108-3306.
Jones & Babson, Inc. also sponsors and
manages, in association with its investment
counsel, David L. Babson & Co. Inc., nine no-
load funds comprising the Babson Mutual Fund
Group. They are: David L. Babson Growth
Fund, Inc., Babson Enterprise Fund, Inc.,
Babson Enterprise Fund II, Inc., Shadow Stock
Fund, Inc., Babson-Stewart Ivory International
Fund, Inc., Babson Value Fund, Inc., D. L.
Babson Bond Trust, D. L. Babson Money
Market Fund, Inc. and D. L. Babson Tax-Free
Income Fund, Inc.
Jones & Babson, Inc. also sponsors nine
mutual funds which especially seek to provide
services to customers of affiliate banks of UMB
Financial Corporation. They are: Scout Stock
Fund, Inc., Scout Bond Fund, Inc., Scout Money
Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout Regional Fund, Inc,
Scout WorldWide Fund, Inc., Scout Balanced
Fund, Inc., Scout Kansas Tax-Exempt Bond
Fund, Inc. and Scout Capital Preservation Fund,
Inc.
Jones & Babson also sponsors the AFBA Five
Star Fund, Inc.
DESCRIPTION OF COMMERCIAL
PAPER RATINGS
Moody's. Moody's commercial paper rating
is an opinion of the ability of an issuer to repay
punctually promissory obligations not having an
original maturity in excess of nine months.
Moody's has one rating - prime. Every such
prime rating means Moody's believes that the
commercial paper note will be redeemed as
agreed. Within this single rating category are
the following classifications:
Prime - 1 Highest Quality
Prime - 2 Higher Quality
Prime - 3 High Quality
11
The criteria used by Moody's for rating a
commercial paper issuer under this graded
system include, but are not limited to the
following factors:
(1) evaluation of the management of the
issuer;
(2) economic evaluation of the issuer's
industry or industries and an appraisal
of speculative type risks which may be
inherent in certain areas;
(3) evaluation of the issuer's products in
relation to competition and customer
acceptance;
(4) liquidity;
(5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten
years;
(7) financial strength of a parent company
and relationships which exist with the
issuer; and
(8) recognition by the management of
obligations which may be present or
may arise as a result of public interest
questions and preparations to meet such
obligations.
S&P. Standard & Poor's commercial paper
rating is a current assessment of the likelihood
of timely repayment of debt having an original
maturity of no more than 270 days. Ratings are
graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the
lowest. The four categories are as follows:
"A" Issues assigned this highest rating
are regarded as having the greatest
capacity for timely payment. Issues
in this category are further refined
with the designations 1, 2, and 3 to
indicate the relative degree of safety.
"A-1" This designation indicates that the
degree of safety regarding timely
payment is very strong.
"A-2" Capacity for timely payment on
issues with this designation is
strong. However, the relative degree
of safety is not as overwhelming.
"A-3" Issues carrying this designation
have a satisfactory capacity for
timely payment. They are,
however, somewhat more vulnerable
to the adverse effects of changes in
circumstances than obligations
carrying the higher designations.
"B" Issues rated "B" are regarded as
having only an adequate capacity
for timely payment. Furthermore,
such capacity may be damaged by
changing conditions or short-term
adversities.
"C" This rating is assigned to short-term
debt obligations with a doubtful
capacity for payment.
"D" This rating indicates that the issuer
is either in default or is expected to
be in default upon maturity.
12
FINANCIAL STATEMENTS
Report of Independent Auditors
The Shareholder and Board of Directors
Buffalo Small Cap Fund, Inc.
We have audited the accompanying statement of net assets of Buffalo
Small Cap Fund, Inc. (the Company) as of January 12, 1998. This statement of
net assets is the responsibility of the Company's management. Our
responsibility is to express an opinion on this statement of net assets based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of net assets
is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the statement
of net assets. Our procedures included confirmation of cash as of
January 12, 1998, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of net
assets presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of net assets referred to above presents
fairly, in all material respects, the financial position of the Company at
January 12, 1998, in conformity with generally accepted accounting principles.
/S/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
January 14, 1998
13
Buffalo Small Cap Fund, Inc.
Statement of Net Assets
January 12, 1998
Assets
Cash $100,000
----------
Net assets applicable to outstanding shares $100,000
==========
Capital shares, $1.00 par value
Authorized 10,000,000
==========
Outstanding 10,000
==========
Net asset value per share $10.00
==========
13
Note - Significant Accounting Policies
Organization - Buffalo Small Cap Fund, Inc. (the Company) was organized as a
Maryland corporation on October 16, 1997 and is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. Shares outstanding for the Company on January 12, 1998 were
issued to Jones & Babson, the Company's manager and distributor (the Manager).
The costs of organization will be paid by the Manager.
Management Fees - The Manager will charge the Company a fee based on an annual
rate of one percent (1.00%) of the Company's average daily net assets from which
the Manager will pay Kornitzer Capital Management, Inc., which serves as
investment counsel (the Adviser), a fee of one half of one percent (0.50%) of
average daily net assets. The Manager will pay all other operating expenses
except the cost of acquiring and disposing of portfolio securities, the taxes,
if any, imposed directly on the Company and its shares and the cost of
qualifying the Company's shares for sale in any jurisdiction. Certain officers
and directors of the Company are also officers or directors of the Manager.
14
