As filed with the Securities and Exchange Commission on April 30, 1998
Securities Act Registration No. 333-_____
Investment Company Act Registration No. 811-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __
Post-Effective Amendment No. __
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. __
BADGLEY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1420 Fifth Avenue
Suite 4400 98101
Seattle, Washington (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, including Area Code:
(206) 623-6172
Otis P. Heald III
Badgley, Phelps and Bell, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
(Name and Address of Agent for Service)
Copies to:
Scott A. Moehrke
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Approximate date of proposed public offering: As soon
as practicable after the Registration Statement becomes
effective.
In accordance with Rule 24f-2 under the Investment
Company Act of 1940, Registrant declares that an
indefinite number of shares of its common stock, $.01
par value, is being registered by this Registration
Statement.
The Registrant hereby amends this Registration
Statement on such date or dates as may be necessary to
delay its effective date until the Registrant shall
file a further amendment which specifically states that
this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the
Prospectus and the Statement of Additional Information
of the responses to the Items of Parts A and B of Form
N-1A).
Caption or Subheading in
Prospectus or Statement
Item No. on Form N-1A of Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Investor Expenses;
Highlights
3. Condensed Financial *
Information
4. General Description of Investment Objectives and
Registrant Policies; Implementation
of Policies and Risks;
Fundamental Investment
Restrictions; Fund
Organization and
Management
5. Management of the Fund Fund Organization and
Management
5A. Management's Discussion
of Fund Performance *
6. Capital Stock and Other Highlights; Fund
Securities Organization and
Management; Dividends,
Capital Gains
Distributions and Tax
Treatment
7. Purchase of Securities Fund Organization and
Being Offered Management; How to
Purchase Shares; Exchange
Privilege; Determination
of Net Asset Value;
Distribution and
Shareholder Servicing
Plan
8. Redemption or Repurchase How to Redeem Shares;
Exchange Privilege;
Determination of Net
Asset Value
9. Pending Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF
ADDITIONAL INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and *
History
<PAGE>
13. Investment Objectives and Investment Restrictions;
Policies Investment Policies and
Techniques; Fund
Transactions and
Brokerage
14. Management of the Fund Directors and Officers;
Investment Adviser
15. Control Persons and Principal Principal Shareholders;
Holders of Securities Directors and Officers
16. Investment Advisory and Investment Adviser; Fund
Other Services Organization and
Management (in
Prospectus); Distributor
and Plan of Distribution;
Custodian; Transfer Agent
and Dividend-Disbursing
Agent; Independent
Accountants
17. Brokerage Allocation and Fund Transactions and
Other Practices Brokerage
18. Capital Stock and Other Included in Prospectus
Securities under the heading Fund
Organization and
Management
19. Purchase, Redemption and Included in Prospectus
Pricing of Securities Being under the headings How to
Offered Purchase Shares; How to
Redeem Shares; Exchange
Privilege; Determination
of Net Asset Value; and
in the Statement of
Additional Information
under the heading
Distributor and Plan of
Distribution
20. Tax Status Included in Prospectus
under the heading
Dividends, Capital Gains
Distributions and Tax
Treatment; and in the
Statement of Additional
Information under the
heading Taxes
21. Underwriters Distributor and Plan of
Distribution
22. Calculations of Performance Information
Performance Data
23. Financial Statements Financial Statements
________________________
* Answer negative or inapplicable.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT
BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to completion, dated April 30, 1998
Prospectus
dated , 1998
BADGLEY FUNDS, INC.
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-877-BADGLEY
BADGLEY FUNDS, INC. (the "Corporation") is an open-
end, diversified, management investment company,
commonly referred to as a mutual fund. The Corporation
is currently comprised of two diversified series or
portfolios, including the Badgley Growth Fund (the
"Growth Fund") and the Badgley Balanced Fund (the
"Balanced Fund") (collectively referred to as the
"Funds").
The Growth Fund's investment objective is to seek
long-term capital appreciation. The Growth Fund seeks
to achieve its investment objective by investing in a
diversified portfolio of equity securities consisting
primarily of common stocks. The Balanced Fund's
investment objective is to seek long-term capital
appreciation and income. The Balanced Fund seeks to
achieve its investment objective primarily through
investments in equity securities, principally common
stocks, and through investments in investment grade
bonds and other fixed income securities. Each Fund
seeks to identify common stocks of companies with long-
term growth potential and hold such securities for an
extended period, which has the advantage of lower
portfolio turnover and capital gains distributions.
This Prospectus contains information you should
consider before you invest in one or more of the Funds.
Please read it carefully and keep it for future
reference. A Statement of Additional Information (the
"SAI") for the Funds, dated April 30, 1998, contains
further information, is incorporated by reference into
this Prospectus, and has been filed with the Securities
and Exchange Commission (the "SEC"). The SAI, which
may be revised from time to time, is available without
charge upon request to the above-noted address or
telephone number.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page No.
INVESTOR EXPENSES 1
HIGHLIGHTS 2
INVESTMENT OBJECTIVES AND POLICIES 3
IMPLEMENTATION OF POLICIES AND RISKS 4
FUNDAMENTAL INVESTMENT RESTRICTIONS 8
PRIOR PERFORMANCE OF THE ADVISER 9
FUND ORGANIZATION AND MANAGEMENT 11
HOW TO PURCHASE SHARES 13
HOW TO REDEEM SHARES 15
EXCHANGE PRIVILEGE 17
DETERMINATION OF NET ASSET VALUE 17
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN 18
INDIVIDUAL RETIREMENT ACCOUNTS 19
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX
TREATMENT 20
YEAR 2000 ISSUE 21
FUND PERFORMANCE 21
No person has been authorized to give any
information or to make any representations other than
those contained in this Prospectus and the SAI, and if
given or made, such information or representations may
not be relied upon as having been authorized by the
Funds. This Prospectus does not constitute an offer to
sell securities in any state or jurisdiction in which
such offering may not lawfully be made.
<PAGE>
INVESTOR EXPENSES
The following information is provided in order to
help you understand the various costs and expenses that
you, as an investor in one or more of the Funds, will
bear directly or indirectly.
Shareholder Transaction Expenses(1)
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load Imposed on Redemptions None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses
(after waivers or reimbursements)
(as a percentage of average net assets)
Fund
Growth Balanced
Management Fees 1.00% 0.90%
Rule 12b-1 Fees(2) 0.25 0.25
Other Expenses(3) 0.25 0.15
Total Operating 1.50% 1.30%
Expenses(3)
____________
(1)In addition to these expenses, shareholders who
choose to redeem shares by wire may be charged a
$12 service fee. See "How to Redeem Shares."
(2)See "Distribution and Shareholder Servicing Plan"
for detailed information relating to the Rule 12b-1
distribution and shareholder servicing plan (the
"Plan"). Consistent with the National Association
of Securities Dealers, Inc.'s (the "NASD") rules,
Rule 12b-1 fees could cause long-term investors of
a Fund to pay more than the economic equivalent of
the maximum front-end sales charges permitted under
those same rules.
(3)For the fiscal year ending June 30, 1999, the
Funds' investment adviser, Badgley, Phelps and
Bell, Inc. (the "Adviser"), has agreed to waive its
management fee and/or reimburse each Fund's
respective operating expenses to the extent
necessary to ensure that (i) the total operating
expenses for the Growth Fund do not exceed 1.50% of
its average net assets and (ii) the total operating
expenses of the Balanced Fund do not exceed 1.30%
of its average net assets. After such date, the
expense limitations may be terminated or revised at
any time. Absent these limitations, other expenses
and total operating expenses for the Growth Fund
are estimated to be 1.13% and 2.38%, respectively,
and other expenses and total operating expenses for
the Balanced Fund are estimated to be 1.14% and
2.29%, respectively. For additional information
concerning fees and expenses, see "Fund
Organization and Management."
Example
You would pay the following expenses on a $1,000
investment, assuming (i) a 5% annual return and (ii)
redemption at the end of each time period.
Fund 1 Year 3 Years
Growth $15 $47
Balanced $13 $41
The Example is based on each Fund's "Total
Operating Expenses" described in the table above.
PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE
CONSIDERED AS REPRESENTATIVE OF PAST
<PAGE>
OR FUTURE EXPENSES
AND THAT ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN. The assumption in the Example of a 5%
annual return is required by regulations of the SEC
applicable to all mutual funds. The assumed 5% annual
return is not a prediction of, and does not represent,
the projected or actual performance of a Fund's shares.
HIGHLIGHTS
What are the investment objectives and policies of each
of the Funds?
Each Fund has different investment objectives and
policies. The Growth Fund seeks to provide long-term
capital appreciation. The Balanced Fund seeks to
provide long-term capital appreciation and income
(i.e., risk-adjusted total return). The investment
policies of each Fund are described under "Investment
Objectives and Policies."
Each Fund seeks to identify common stocks of
companies with long-term growth potential and hold such
securities for an extended period, which has the
advantage of lower portfolio turnover and capital gains
distributions.
What types of companies/securities will the Funds
invest?
The Adviser intends to invest primarily in
companies with medium-to-large market capitalizations.
The Growth Fund primarily invests in common stocks.
The Balanced Fund primarily invests in common stocks
and investment grade bonds and other fixed income
securities. Each Fund seeks to identify common stocks
of companies with the potential to grow revenues,
earnings and dividends in excess of the S&P 500 over a
three to five-year time period. The Adviser generally
purchases common stocks with a longer-term investment
horizon, which has the advantage of lower portfolio
turnover and capital gains distributions. Each Fund
may, subject to certain limitations, also invest in
foreign securities, repurchase agreements and illiquid
securities.
Under normal circumstances, the Funds will be
fully invested (the Growth Fund, in common stocks and
the Balanced Fund, in common stocks and investment
grade bonds and other fixed income securities), except
that a small portion of the assets of the Funds may be
held in short-term money market securities and cash to
pay redemption requests and expenses of the Funds.
Under unusual circumstances as a defensive technique,
the Funds may retain a larger portion of cash and/or
money market instruments deemed by the Adviser to be
consistent with a temporary defensive posture. The
Funds may but do not intend to leverage their assets or
invest in options, futures, derivative contracts or
other exotic securities or arrangements. See
"Implementation of Policies and Risks."
What are the potential risks of investing in the Funds?
The Funds are suitable for long-term investors
only and are not designed as a short-term investment.
The share price of each Fund is expected to fluctuate
and may, at redemption, be worth more or less than the
initial purchase price. Investors in either Fund may
be exposed, to a greater or lesser extent depending on
the Fund and the allocation of Fund assets among
investments, to market risks associated with
investments in common stocks and, for the Balanced
Fund, of investment-grade bonds and other fixed income
securities. Market risks associated with common stocks
include the possibility that stock prices in general
will decline over short or even extended periods. This
risk is in addition to the risks inherent in individual
stock selections. Market risks associated with bonds
and other fixed income investments include the
possibility that bond prices in general will decline
when interest rates increase even though such
securities are rated investment grade. While bonds and
other fixed income securities normally fluctuate less
in price than common stocks, there have been extended
periods of increases in interest rates that have caused
significant declines in prices of these securities. In
addition to market risks associated with bonds and
other fixed income investments, individual issues of
fixed income securities may be subject to credit risk
of the issuer.
Other risks associated with investment in the
Funds include:
Opportunity Risk: An investment opportunity may
be missed because the assets necessary to take
advantage of it are tied up in less advantageous
investments.
<PAGE>
Management Risk: A strategy used by the Adviser
may fail to produce the intended result.
Liquidity Risk: Certain securities may be
difficult or impossible to sell at the time and price
that the Funds seek.
See "Implementation of Policies and Risks."
Who will be managing my investment?
Badgley, Phelps and Bell, Inc. (the "Adviser")
serves as investment adviser to the Funds. The Adviser
has been serving clients since 1966 and, as of March
31, 1998, managed approximately $1.3 billion for
individual and institutional clients. See "Prior
Performance of the Adviser" and "Fund Organization and
Management."
What are the procedures for purchasing and redeeming
shares?
Shares of each Fund are offered at net asset value
per share. Shares of each Fund are sold without a
sales charge. See "How to Purchase Shares" for more
details. In addition, the Funds have adopted a
distribution plan under Rule 12b-1 of the Investment
Company Act of 1940, as amended (the "1940 Act"), which
authorizes each Fund to pay a distribution fee of up to
0.25% per annum of its average daily net assets. The
actual dollar amount of distribution fees paid in
current and future years will depend on the amount of a
Fund's assets that become subject to such fees. See
"Distribution and Shareholder Servicing Plan."
The minimum initial investment required by each
Fund is $25,000. The minimum subsequent investment is
$1,000. The minimum initial investment for investors
using the Automatic Investment Plan is $10,000 with a
minimum monthly investment of $250. These minimums may
be changed or waived at any time by the Funds. See
"How to Purchase Shares."
Shares may be redeemed using either written or
telephone redemption procedures at net asset value per
share without the payment of any redemption charges.
See "How to Redeem Shares."
What is the policy regarding dividends and other
distributions?
The policy of each Fund is to distribute
substantially all net realized capital gains annually.
Also, it is the policy of the Balanced Fund to pay
quarterly dividends from net investment income. See
"Dividends, Capital Gains Distributions and Tax
Treatment."
Who should I contact if I have questions?
General inquiries regarding the Funds can be
directed to either your investment professional or the
Funds at the address and telephone number on the front
page of this Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help
you choose the Fund that best fits your investment
objective. The investment objective of each Fund is
discussed below in connection with the Fund's
investment policies. Because of the risks inherent in
investments in common stocks, bonds and other fixed
income securities, there can be no assurance that a
Fund will meet its investment objective or that shares
in a Fund will be worth more than the original purchase
price. The investment objectives presented below may
not be changed without shareholder approval. Other
investment restrictions which may not be changed
without shareholder approval are discussed below under
"Fundamental Investment Restrictions" and in the SAI.
<PAGE>
Growth Fund
The Growth Fund's investment objective is to seek
long-term capital appreciation. The Growth Fund seeks
to achieve its investment objective by investing in a
diversified portfolio of equity securities of companies
with medium to large capitalizations (i.e., companies
with market capitalizations of $2.0 billion or more).
The Growth Fund is designed for investors seeking
long-term capital appreciation, who can tolerate the
fluctuations in portfolio value and other risks that
accompany investments in common stocks and other equity-
type securities. Under normal market conditions, the
Growth Fund expects to be fully invested in equity
securities, consisting primarily of common stocks.
The Growth Fund will focus on equity securities of
companies that the Adviser believes have superior
growth prospects relative to the S&P 500. In
identifying common stocks for the Growth Fund, the
Adviser will generally evaluate the fundamental
prospects for each company using both internal and
external research. In compiling its internal research,
the Adviser uses a number of research sources,
including industry resources, company managements and
other institutional providers. In the research
process, the Adviser reviews certain fundamental
attributes that it believes a "buy" candidate should
possess including (i) consistent and predictable growth
characteristics (revenues, earnings and dividends);
(ii) low financial risk which includes low debt and
lease obligations and strong cash flow; (iii) market
dominance; (iv) significant barriers to entry; (v)
strong management; and (vi) the Adviser's understanding
of the business. Finally, the Adviser values companies
by considering the relationship between the earnings
per share growth rate of a company and its price to
earnings ratio, and by considering the range of a
company's historical relative price to earnings ratio.
The Adviser seeks to achieve low portfolio
turnover resulting from short-term trading of
securities. In general, the Adviser sells common
stocks for the Growth Fund in favor of other common
stocks based on three factors: deteriorating
fundamentals, overvaluation and changing the weighting
of a security or a sector.
Balanced Fund
The Balanced Fund's investment objective is to
seek long-term capital appreciation and income (i.e.,
risk-adjusted total return). The Balanced Fund seeks
to achieve its investment objective primarily through
investments in equity securities, principally common
stocks, and through investments in investment grade
bonds and other fixed income securities.
The Balanced Fund is designed for investors
seeking long-term capital appreciation with a moderate
level of current income, who can tolerate the
fluctuations in portfolio value and other risks that
accompany equity investments. The level of current
income generated by the Balanced Fund is expected to
vary from time to time based on the composition of the
Fund's assets. In addition to equity securities, the
Balanced Fund may invest in investment grade bonds and
other fixed income securities including corporate and
government securities, repurchase agreements and
mortgage-backed securities Under normal market
conditions, the Balanced Fund will invest at least 25%
of its total assets in fixed income senior securities.
The Balanced Fund will focus on intermediate term
investment grade bonds with an average portfolio of
three to seven-year maturities with individual
maturities ranging from one to 10 years. The Balanced
Fund will focus on the securities of companies with
medium-to-large market capitalizations with respect to
equity and corporate debt securities investments. In
selecting common stocks for the Balanced Fund, the
Adviser uses the same methods used for the Growth Fund
as discussed above.
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the general investment policies
described above concerning each Fund, the securities
and investment techniques which may be used by the
Funds are described below. Some of these securities
and investment techniques involve special risks, which
are described below and in the Funds' SAI.
<PAGE>
Common Stocks and Other Equity Securities
The Funds will invest in common stocks and other
equity securities, although each Fund anticipates that
its equity securities will consist primarily of common
stocks. Other equity securities may include depositary
receipts, warrants and other securities convertible or
exchangeable into common stock. Common stocks and
other equity securities generally increase or decrease
in value based on the earnings of a company and on
general industry and market conditions. A Fund that
invests a significant amount of its assets in common
stocks and other equity securities is likely to have
more fluctuations in share price than a Fund that
invests a significant portion of its assets in fixed
income securities.
Fixed Income Securities
Fixed Income Securities in General. Each Fund may
invest a portion of its assets in a wide variety of
fixed income securities, including bonds and other debt
securities and non-convertible preferred stocks. Debt
securities are obligations of the issuer to pay
interest and repay principal. Preferred stocks have
rights senior to a company's common stock, but junior
to a company's creditors and, if held by a Fund as a
fixed income security, will generally pay a dividend.
The value of fixed income securities is affected
by changes in market interest rates. If interest rates
increase, the value of fixed income securities
generally decrease. Similarly, if interest rates
decrease, the value of fixed income securities
generally increase. Shares in a Fund with significant
investments in fixed income securities are likely to
fluctuate in a similar manner. In general, the longer
the remaining maturity of a fixed income security, the
greater its fluctuations in value based on interest
rate changes. Longer-term fixed income securities
generally pay a higher interest rate. The Funds invest
in fixed income securities of varying maturities.
The value of fixed income securities may also be
affected by changes in the credit quality of the
issuer. Lower-rated fixed income securities generally
pay a higher interest rate. Although the Funds only
invest in investment grade debt securities, the value
of these securities may decrease due to changes in
ratings over time.
Types of Fixed Income Securities. The fixed
income securities in which the Funds may invest
include:
Corporate debt securities, including bonds,
debentures and notes;
U.S. government securities;
Mortgage and asset-backed securities;
Preferred stocks;
Convertible securities;
Commercial paper (including variable amount
master demand notes);
Bank obligations, such as certificates of
deposit, banker's acceptances and time
deposits of domestic and foreign banks,
domestic savings association and their
subsidiaries and branches (in amounts in
excess of the current $100,000 per account
insurance coverage provided by the Federal
Deposit Insurance Corporation); and
Repurchase agreements.
Ratings. The Funds will limit investments in
fixed income securities to those that are rated at the
time of purchase as investment grade by at least one
national rating organization, such as S&P or Moody's,
or, if unrated, are determined to be of equivalent
quality by the Adviser. Investment grade fixed income
securities include:
<PAGE>
U.S. government securities;
Bonds or bank obligations rated in one of the
four highest categories (BBB or higher by
S&P);
Short-term notes rated in one of the two
highest categories (SP-2 or higher by S&P);
Commercial paper or short-term bank
obligations rated in one of the three highest
categories (A-3 or higher by S&P); and
Repurchase agreements involving investment
grade fixed income securities.
Investment grade fixed income securities are generally
believed to have a lower degree of credit risk.
However, certain investment grade securities with lower
ratings are considered medium quality and may be
subject to greater credit risk than the highest rated
securities. If a security's rating falls below
investment grade, the Adviser will determine what
action, if any, should be taken to ensure compliance
with a Fund's investment objective and to ensure that
no Fund will at any time have 5% or more of its net
assets invested in non-investment grade debt
securities. Additional information concerning
securities ratings is contained in the Appendix to the
SAI.
Government Securities. U.S. government securities
are issued or guaranteed by the U.S. government or its
agencies or instrumentalities. These securities may
have different levels of government backing. U.S.
Treasury obligations, such as Treasury bills, notes,
and bonds are backed by the full faith and credit of
the U.S. Treasury. Some U.S. government agency
securities are also backed by the full faith and credit
of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association (GNMA). Other
U.S. government securities may be backed by the right
of the agency to borrow from the U.S. Treasury, such as
securities issued by the Federal Home Loan Bank, or may
be backed only by the credit of the agency. The U.S.
government and its agencies and instrumentalities only
guarantee the payment of principal and interest and not
the market value of the securities. The market value
of U.S. government securities will fluctuate based on
interest rate changes and other market factors.
Mortgage- and Asset-Backed Securities. Mortgage-
backed securities represent mortgage loans or interests
in such loans secured by real property, and include
single- and multi-class pass-through securities and
collateralized mortgage obligations. Mortgage-backed
securities are characterized by monthly payments to the
holder of the security, reflecting the monthly payments
made by the borrowers who received the underlying
mortgage loans. The payments to the holders of these
securities (such as a Fund), like the payments on the
underlying loans, represent both principal and
interest. Although the underlying mortgage loans are
for specified periods of time, such as 15 or 30 years,
the borrowers can and may pay them off sooner. Thus,
the holders of these securities frequently receive
prepayments of principal, in addition to the principal
which is part of the regular monthly payment. A
borrower is more likely to prepay a mortgage which
bears a relatively high interest rate. This means that
in times of declining interest rates, some of a Fund's
higher yielding securities might be converted to cash,
and the Fund will be forced to accept lower interest
rates when that cash is used to purchase additional
securities. The increased likelihood of prepayment
when interest rates decline also limits market price
appreciation of mortgage-backed securities. If a Fund
buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a
loss to the Fund of up to the amount of the premium
paid since only timely payment of principal and
interest is guaranteed.
Asset-backed securities have characteristics
similar to mortgage-backed securities. However, the
underlying assets are not first-lien mortgage loans or
interests in these loans, but are assets such as motor
vehicle installment sales contracts, other installment
loan contracts, home equity loans, leases of various
types of property and receivables from credit card or
other revolving credit arrangements. Similar to
mortgage-backed securities, asset-backed securities are
subject to prepayment, which may reduce the overall
return to holders (such as a Fund) of the security.
Asset-backed securities may also be subject to the
risks relating to the underlying assets, which may be
subject to the risk of non-payment, depreciation or
damage to the underlying collateral (such as
automobiles) or certain other factors. Asset-backed
securities may be supported by non-governmental credit
enhancements.
The Funds may invest in stripped mortgage- or
asset-backed securities, which receive differing
proportions of the interest and principal payments from
the underlying assets. The market value of such
securities generally is more
<PAGE>
sensitive to changes in
prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and
in some cases the market value may be extremely
volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower
than anticipated may result in a Fund failing to
recover all or a portion of its investment, even though
the securities are investment grade.
Variable and Floating Rate Securities. Each Fund
may invest in variable, floating and inverse floating
rate debt obligations. Variable and floating rate
securities provide for a periodic adjustment of the
interest rate paid on the obligations. These
obligations must provide that interest rates are
adjusted periodically based on a specified interest
rate adjustment index. The adjustment intervals may be
regular (ranging from daily to annually) or may be
based on certain events (such as a change in the prime
rate). The interest rate on a floating rate security is
a variable rate which is tied to another interest rate,
such as a money-market index or U.S. Treasury bill rate
and resets periodically, typically every six months.
While floating rate securities provide a Fund with a
certain degree of protection against rises in interest
rates because of the interest rate reset feature, the
Fund will be subject to any decline in interest rates
as well. The interest rate on an inverse floater
resets in the opposite direction from the market rate
of interest to which the inverse floater is indexed.
An inverse floating rate security may exhibit greater
price volatility than a fixed rate obligation of
similar credit quality. See "Implementation of
Policies and Risks -- Mortgage- and Asset-Backed
Securities" for a discussion of interest only and
principal only securities.
Repurchase Agreements. Each Fund may enter into
repurchase agreements with certain banks and non-bank
dealers. In a repurchase agreement, a Fund buys a
security at one price and at the time of sale, the
seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within
seven days). The repurchase agreement determines the
yield during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. A Fund may enter
into repurchase agreements with respect to any security
in which it may invest. Repurchase agreements could
involve certain risks in the event of a default or
insolvency of the other party to the agreement,
including possible delays or restrictions upon a Fund's
ability to dispose of the underlying securities.
Temporary Strategies
Prior to investing the proceeds from sales of Fund
shares, to meet ordinary daily cash needs, and to
retain the flexibility to respond promptly to changes
in market and economic conditions, the Adviser may hold
cash and/or invest all or a portion of the Funds'
assets in money market instruments, which are short-
term fixed income securities issued by private and
governmental institutions.
Foreign Securities and ADRs
Each Fund may invest up to 15% of its net assets
in American Depositary Receipts ("ADRs") or other
foreign instruments. ADRs are receipts typically
issued by a U.S. bank or trust company evidencing
ownership of the underlying foreign security and
denominated in U.S. dollars. Some institutions issuing
ADRs may not be sponsored by the issuer. A non-
sponsored depositary may not provide the same
shareholder information that a sponsored depositary is
required to provide under the contractual arrangements
with the issuer, including reliable financial
statements. Investments in securities of foreign
issuers involve risks which are in addition to the
usual risks inherent in domestic investments. In many
countries there is less publicly available information
about issuers than is available in the reports and
ratings published about companies in the United States.
Additionally, foreign countries are not subject to
uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investments
include expropriation; confiscatory taxation;
withholding taxes on dividends or interest; less
extensive regulation of foreign brokers, securities
markets, and issuers; costs incurred in conversions
between currencies; possible delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
may be higher than those
<PAGE>
attributable to domestic
investment. The value of a Fund's assets denominated
in foreign currencies will increase or decrease in
response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to
supply and demand in the currency exchange markets,
international balances of payments, governmental
intervention, speculation and other political and
economic conditions.
Illiquid Securities
Each Fund may invest up to 10% of its respective
net assets in illiquid securities (i.e., securities
that are not readily marketable). For purposes of this
restriction, illiquid securities include, but are not
limited to, restricted securities (securities the
disposition of which is restricted under the federal
securities laws), securities which may only be resold
pursuant to Rule 144A under the Securities Act,
repurchase agreements with maturities in excess of
seven days and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 10% limitation. Certain
securities exempt for registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors.
Portfolio Turnover
A change in the investments held by a Fund is
known as "portfolio turnover." Portfolio turnover
generally involves some expenses to a Fund, including
brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and
reinvestment in other securities. Such sales may
result in realization of taxable capital gains. Each
Fund seeks to identify common stocks of companies with
long-term growth potential and hold such securities for
an extended period, which has the advantage of lower
portfolio turnover and capital gains distributions.
Under normal market conditions, the portfolio turnover
rate for each Fund is expected to be approximately 20%
to 30% and generally will not exceed 50%.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Fund has adopted a number of fundamental
investment restrictions, which may not be changed
without approval by the Funds' shareholders. The
Funds' other investment policies may be changed by the
Board of Directors without shareholder approval. The
following is a summary of some of the Funds'
fundamental investment restrictions:
Diversification: Each Fund may not, with
respect to 75% of its total assets, purchase
the securities of any issuer (except U.S.
government securities) if more than 5% of the
Fund's total assets would be invested in the
securities of that issuer or the Fund would
own more than 10% of the outstanding voting
securities of that issuer.
Limitation on Borrowing: Each Fund may (i)
borrow money from banks for temporary or
emergency purposes (but not for leverage or
the purchase of investments) and make other
investments or engage in other transactions
permissible under the 1940 Act, provided that
the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's
total assets (including the amount borrowed),
less the Fund's liabilities (other than
borrowings). Each Fund may also borrow from
other persons to the extent permitted by
applicable law.
Limitation on Lending: Each Fund may not
make loans if, as a result, more than 33 1/3%
of the Fund's assets would be lent to other
persons, except through purchases of debt
securities or other debt instruments or
engaging in repurchase agreements.
Limitation on Senior Securities: Each Fund
will not issue senior securities, except as
permitted under the 1940 Act.
<PAGE>
Limitation on Industry Concentration: Each
Fund will not invest more than 25% of its
total assets in companies in the same
industry.
These fundamental investment restrictions,
together with all of the Funds' fundamental investment
restrictions and non-fundamental investment policies,
are described in greater detail in the Funds' SAI.
PRIOR PERFORMANCE OF THE ADVISER
The following table shows the Adviser's historical
performance data for a growth composite and a balanced
composite managed by the Adviser, for the periods
indicated, that have investment objectives, policies,
strategies and risks similar to the Funds. The growth
composite, which is managed in a manner substantially
similar to the Growth Fund, includes the Adviser's
separate accounts that are fully discretionary, tax-
exempt and greater than $250,000. The balanced
composite, which is managed in a manner substantially
similar to the Balanced Fund, includes the Adviser's
separate accounts that have an asset allocation of
approximately 55% equity securities, approximately 40%
bonds and approximately 5% cash. Accounts which
prohibit full discretionary management are excluded
from the composites. The separate accounts that are
included in the Adviser's composites are not subject to
the same types of expenses to which the Funds are
subject nor to the specific tax restrictions and
investment limitations imposed on the Funds by the
Internal Revenue Code of 1986, as amended (the "Code")
and the 1940 Act. Consequently, the performance
results for the Adviser's composites could have been
adversely affected if the separate accounts included in
the composites had been regulated as investment
companies under the federal tax and securities laws.
The Adviser's performance information has been
calculated in accordance with recommended standards of
the Association for Investment Management and Research
("AIMR"). All returns presented were calculated on a
total return basis and include all dividends and
interest, if any, accrued income, if any, and realized
and unrealized gains and losses. All returns reflect
the deduction of investment advisory fees, brokerage
commissions, and execution costs paid by the Adviser's
private accounts without provision for federal or state
income taxes. Custodial fees, if any, were not
included in the calculation. If custodial fees had
been included, the Adviser's performance would have
been lower. Also excluded from the returns are
expenses and fees, including the advisory fee, that an
investor in the Funds will bear, since the performance
data does not represent the performance of the Funds or
an investment therein. If such expenses and fees were
included, the Adviser's performance would have been
lower. Cash and equivalents are included in
performance returns. Total return is calculated
monthly in accordance with the "time-weighted" rate of
return method provided for by the AIMR standards,
accounted for on a trade-date and accrual basis. AIMR
standards for calculation of total return differ from
the standards required by the SEC for calculation of
average annual total return. Principal additions and
withdrawals are weighted in computing the monthly
returns based on the timing of these transactions.
The following data is provided to illustrate the
past performance of the Adviser in managing accounts
which are substantially similar to the Funds as
measured against specified market indices and does not
represent the performance of the Funds. Investors
should not consider this performance data as an
indication of the future performance of the Funds or
the Adviser.
<PAGE>
Private Account Performance History
Growth Composite
Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1993 * -5.5% 0.5% 4.9%
1994 -3.6% 0.8% 3.2% 0.3%
1995 9.7% 8.1% 6.9% 7.3%
1996 4.9% 6.6% 5.8% 4.3%
1997 0.7% 19.9% 6.2% 4.7%
1998 15.8%
Balanced Composite
Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1993 * -1.9% 1.4% 2.5%
1994 -3.0% 0.1% 1.9% 0.2%
1995 7.2% 6.7% 4.4% 5.6%
1996 2.0% 3.7% 3.9% 3.4%
1997 0.2% 12.1% 4.6% 3.6%
1998 9.5%
* Not Available
Average Annualized Return in Percent
Growth Composite
Period Ending Adviser's
March 31, 1998 Growth S&P
Composite 500(1)
Performance
1 Year 54.4% 48.1%
3 Years 33.5% 32.9%
5 Years 21.2% 22.4%
(1) The S&P 500 is an unmanaged index generally
representative of the U.S. stock market. The index
does not reflect investment management fees, brokerage
commissions and other expenses associated with
investing in equity securities.
<PAGE>
Balanced Composite
55% S&P 500;(1) 40%
Period Ending Adviser's Lehman Brothers
March 31, 1998 Balanced Intermediate Govt./
Composite Corp. Bond Index;(2)
Performance 5% T-Bill(3)
1 Year 33.0% 29.7%
3 Years 21.2% 21.2%
5 Years 14.0% 14.9%
(1) The S&P 500 is an unmanaged index generally
representative of the U.S. stock market. The index
does not reflect investment management fees, brokerage
commissions and other expenses associated with
investing in equity securities.
(2) The Lehman Brothers Intermediate
Government/Corporate Bond Index is a market value
weighted performance benchmark for government and
corporate fixed-rate debt issues with maturities of one
to 10 years. The index does not reflect investment
management fees, brokerage commissions and other
expenses associated with investing in debt securities.
(3) The Merrill Lynch 91-day Treasury Bill return
represents the T-Bill portion of the comparative
composite. Such portion does not reflect investment
management fees, brokerage commissions or other
expenses associated with investing in T-Bills.
FUND ORGANIZATION AND MANAGEMENT
Organization
Each Fund is a series of common stock of a
corporation, Badgley Funds, Inc. (the "Corporation"), a
Maryland company incorporated on April 28, 1998. The
Corporation is authorized to issue shares of common
stock in series and classes. Each share of common
stock of each Fund is entitled to one vote, and each
share is entitled to participate equally in dividends
and capital gains distributions by the respective
series and in the individual assets of the respective
Fund in the event of liquidation. Each Fund bears its
own expenses and the shareholders of each Fund have
exclusive voting rights on matters pertaining to the
Fund's Rule 12b-1 plan. No certificates will be issued
for shares held in your account. You will, however,
have full shareholder rights. Generally, the
Corporation will not hold annual shareholders' meetings
unless required by the 1940 Act or Maryland law. As of
_________ __, 1998, J. Kevin Callaghan and Steven C.
Phelps each owned a controlling interest in the
Corporation.
Management
Under the laws of the State of Maryland, the Board
of Directors of the Corporation is responsible for
managing its business and affairs. The Corporation, on
behalf of the Funds, has entered into an Investment
Advisory Agreement with the Adviser under which the
Adviser manages each of the Fund's investments and
business affairs, subject to the supervision of the
Corporation's Board of Directors.
Adviser
The Adviser, 1420 Fifth Avenue, Suite 4400,
Seattle, Washington 98101, is a Washington corporation
founded in 1966. The Adviser is controlled by several
of its officers. Under the Investment Advisory
Agreement, the
<PAGE>
Corporation, on behalf of the Funds,
compensates the Adviser for its management services at
the annual rate of 1.00% of the Growth Fund's average
daily net assets and 0.90% of the Balanced Fund's
average daily net assets. The advisory fee is accrued
daily and paid monthly. For the fiscal year ending
June 30, 1999, the Adviser has agreed to waive its
management fee and/or reimburse Fund operating expenses
to the extent necessary to ensure that the Growth
Fund's total operating expenses do not exceed 1.50% of
its average daily net assets and that the Balanced
Fund's total operating expenses do not exceed 1.30% of
its average daily net assets. After such time, the
Adviser may voluntarily waive all or a portion of its
management fee and/or reimburse all or a portion of
Fund operating expenses. Any waiver of fees or
reimbursement of expenses will be made on a monthly
basis and, with respect to the latter, will be paid to
the Funds by reduction of the Adviser's fee. Any
waivers or reimbursements will have the effect of
lowering the overall expense ratio for a Fund and
increasing its overall return to investors at the time
any such amounts were waived and/or reimbursed. Any
such waiver or reimbursement is subject to later
adjustment during the term of the Investment Advisory
Agreement to allow the Adviser to recoup amounts waived
or reimbursed to the extent actual fees and expenses
for a specific month are less than the expense
limitation caps. In the event, after fiscal 1999, the
Adviser decides to no longer voluntarily waive and/or
reimburse fees and/or expenses, any unrecovered amounts
previously waived and/or reimbursed will be permanently
forgiven by the Adviser.
Under the Investment Advisory Agreement, not only
is the Adviser responsible for management of each
Fund's assets, but also for portfolio transactions and
brokerage. Please refer to the SAI for more details.
The Adviser has no prior experience advising mutual
funds.
Portfolio Managers. The following individuals are
co-managers of the Funds:
Steven C. Phelps. President and a Director of the
Adviser, Mr. Phelps graduated Phi Beta Kappa and magna
cum laude from Williams College in 1983 with a degree
in political economy and was subsequently awarded a
Fulbright Scholarship at the University of Frankfurt,
Germany for research on policy issues relating to
international monetary coordination. Mr. Phelps joined
the Adviser in 1986 after working for two years with
PACCAR, Inc. as a finance analyst and as an independent
researcher on the economics of the transportation
industry. Mr. Phelps is a Chartered Financial Analyst
and a Chartered Investment Counselor.
Mitzi W. Carletti. Ms. Carletti received a
Bachelor of Arts degree with honors from the University
of Puget Sound in 1978. Prior to joining the Adviser
as a portfolio manager in 1995, Ms. Carletti worked as
a senior research analyst at Frank Russell Company, a
pension fund consulting firm, from 1988 until 1995, and
as a financial consultant with Merrill Lynch from 1979
to 1988.
Mark W. Broughton. Mr. Broughton earned a
Bachelor of Science degree in finance and a Masters of
Business Administration in finance and international
finance/business economics from the University of
Southern California in 1989 and 1995, respectively.
Prior to joining the Adviser in 1996 as a portfolio
manager, Mr. Broughton worked as a portfolio associate
and research analyst at Provident Investment Counsel
for over five years and as an account specialist at
State Street Research & Management for one and a half
years. Mr. Broughton is a Chartered Financial Analyst
and a Chartered Investment Counselor.
Custodian, Transfer Agent and Dividend-Disbursing Agent
Firstar Trust Company ("Firstar"), Mutual Fund
Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 acts as custodian of each
Fund's assets (the "Custodian") and as dividend-
disbursing agent (the "Dividend-Disbursing Agent") and
transfer agent for the Funds (the "Transfer Agent").
Administrator
Pursuant to an Administration Agreement and an
Accounting Servicing Agreement, Firstar also performs
accounting and certain compliance and tax reporting
functions for the Corporation. For these services,
Firstar receives from the Corporation out-of-pocket
expenses plus the following aggregate annual fees,
computed daily and payable monthly, based on the Funds'
aggregate average net assets:
<PAGE>
Administrative Services Fees
First $200 million of average net .06 of 1%*
assets
Next $500 million of average net .05 of 1%
assets
Average net assets in excess of .03 of 1%
$700 million
_____________________________
* Subject to a minimum fee of $30,000 per Fund.
Accounting Services Fees
Growth Fund Balanced Fund
First $40 million of average net $22,000 $23,500
assets
Next $200 million of average net .01 of 1% .015 of 1%
assets
Average net assets in excess of .005 of 1% .01 of 1%
$240 million
Distributor
Rafferty Capital Markets, Inc., 550 Mamaroneck
Avenue, Harrison, New York 10528, acts as distributor
of Fund shares (the "Distributor").
Fund Expenses
Each Fund is responsible for its own expenses,
including interest charges; taxes; brokerage
commissions; organizational expenses; expenses of
registering or qualifying shares for sale with the
states and the SEC; expenses of issue, sale, repurchase
or redemption of shares; expenses of printing and
distributing prospectuses to existing shareholders;
charges of custodians; expenses for accounting,
administrative, audit, and legal services; fees for
outside directors; expenses of fidelity bond coverage
and other insurance; expenses of indemnification;
extraordinary expenses; and costs of shareholder and
director meetings.
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased at the
Offering Price (as defined below) through any dealer
which has entered into a sales agreement with the
Distributor, in its capacity as principal underwriter
of shares of the Funds, or through the Distributor
directly. Firstar, the Funds' Transfer Agent, may also
accept purchase applications.
Payment for Fund shares should be made by check or
money order in U.S. dollars drawn on a U.S. bank,
savings and loan, or credit union. The minimum initial
investment in a Fund is $25,000. Subsequent
investments of at least $1,000 may be made by mail or
by wire. For investors using the Automatic Investment
Plan, as described below, the minimum investment is
$10,000 with a minimum monthly investment of $250.
These minimums can be changed or waived by the
Corporation at any time. Shareholders will be given at
least 30 days' notice of any increase in the minimum
dollar amount of subsequent investments.
Offering Price
Shares of the Funds are sold on a continual basis
at the next offering price (the "Offering Price"),
which is the net asset value per share next computed
following receipt of an order in proper form by a
dealer, the Distributor or the Transfer Agent, as the
case may be. Net asset value per share is calculated
once daily as of the close of trading (currently
4:00 p.m., Eastern Standard Time) on each day the New
York Stock Exchange ("NYSE") is open. See
"Determination of Net Asset Value."
<PAGE>
Initial Investment - Minimum $25,000
You may purchase Fund shares by completing the
enclosed shareholder application and mailing it and a
check or money order payable to "Badgley Funds, Inc."
to your securities dealer, the Distributor or the
Transfer Agent, as the case may be. The minimum
initial investment is $25,000. If mailing to the
Distributor or Transfer Agent, please send to the
following address: Firstar Trust Company, Mutual Fund
Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701. In addition, overnight mail should be sent
to the following address: Badgley Funds, Inc., Firstar
Trust Company, Mutual Fund Services, Third Floor, 615
East Michigan Street, Milwaukee, Wisconsin 53202. The
Corporation does not consider the U.S. Postal Service
or other independent delivery services to be its
agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post
office box, of purchase applications does not
constitute receipt by the Transfer Agent or the
Corporation. Do not mail letters by overnight courier
to the post office box.
If the securities dealer you have chosen to
purchase Fund shares through has not entered into a
sales agreement with the Distributor, such dealer may,
nevertheless, offer to place your order for the
purchase of Fund shares. Purchases made through such
dealers will be effected at the Offering Price. Such
dealers may also charge a transaction fee, as
determined by the dealer. That fee may be avoided if
shares are purchased through a dealer who has entered
into a sales agreement with the Distributor or through
the Transfer Agent.
If your check does not clear, you will be charged
a $20 service fee. You will also be responsible for
any losses suffered by the Corporation as a result.
Neither cash nor third-party checks will be accepted.
All applications to purchase Fund shares are subject to
acceptance by the Corporation and are not binding until
so accepted. The Corporation reserves the right to
decline or accept a purchase order application in whole
or in part.
Wire Purchases
You may also purchase Fund shares by wire. The
following instructions should be followed when wiring
funds to the Transfer Agent for the purchase of Fund
shares:
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Trust Company
Account 112-952-137
Further Credit: Badgley Funds, Inc.
(shareholder account number)
(shareholder name/account
registration)
Please call 1-877-BADGLEY (1-877-223-4539) prior
to wiring any funds to notify the Transfer Agent that
the wire is coming and to verify the proper wire
instructions so that the wire is properly applied when
received. The Corporation is not responsible for the
consequences of delays resulting from the banking or
Federal Reserve wire system.
Telephone Purchases
The telephone purchase option allows investors to
make subsequent investments directly from a bank
checking or savings account. To establish the
telephone purchase option on your account, complete the
appropriate section in the shareholder application.
Only bank accounts held at domestic financial
institutions that are Automated Clearing House ("ACH")
members may be used for telephone transactions. This
option will become effective approximately 15 business
days after the application form is received by Firstar.
Purchases must be in amounts of $250 or more and may
not be used for initial purchases of a Fund's shares.
To have Fund shares purchased at the offering price
determined at the close of regular trading on a given
date, Firstar must receive both your purchase order and
payment by Electronic Funds Transfer through the ACH
system prior to the close of regular trading on such
date. Most
<PAGE>
transfers are completed within one business
day. Subsequent investments may be made by calling 1-
877-BADGLEY (1-877-223-4539).
Automatic Investment Plan - Minimum $10,000
The Automatic Investment Plan ("AIP") allows you
to make regular, systematic investments in one or more
of the Funds from your bank checking or NOW account.
The minimum initial investment for investors using the
AIP is $10,000. To establish the AIP, complete the
appropriate section in the shareholder application.
Under certain circumstances (such as discontinuation of
the AIP before a Fund's minimum initial investment is
reached), the Corporation reserves the right to close
the investor's account. Prior to closing any account
for failure to reach the minimum initial investment,
the Corporation will give the investor written notice
and 60 days in which to reinstate the AIP or otherwise
reach the minimum initial investment. You should
consider your financial ability to continue in the AIP
until the minimum initial investment amount is met
because the Corporation has the right to close an
investor's account for failure to reach the minimum
initial investment. Such closing may occur in periods
of declining share prices.
Under the AIP, you may choose to make monthly
investments on the days of your choosing (or the next
business day thereafter) from your financial
institution in amounts of $250 or more. There is no
service fee for participating in the AIP. However, a
service fee of $20 will be deducted from your Fund
account for any AIP purchase that does not clear due to
insufficient funds or, if prior to notifying the
Corporation in writing or by telephone of your
intention to terminate the plan, you close your bank
account or in any manner prevent withdrawal of funds
from the designated checking or NOW account. You can
set up the AIP with any financial institution that is a
member of ACH.
The AIP is a method of using dollar cost averaging
which is an investment strategy that involves investing
a fixed amount of money at a regular time interval.
However, a program of regular investment cannot ensure
a profit or protect against a loss from declining
markets. By always investing the same amount, you will
be purchasing more shares when the price is low and
fewer shares when the price is high. Since such a
program involves continuous investment regardless of
fluctuating share values, you should consider your
financial ability to continue the program through
periods of low share price levels.
Subsequent Investments - Minimum $1,000
Additions to your account may be made by mail or
by wire. Any subsequent investment must be for at
least $1,000. When making an additional purchase by
mail, enclose a check payable to "Badgley Funds, Inc."
and the Additional Investment Form provided on the
lower portion of your account statement. To make an
additional purchase by wire, please call 1-877-BADGLEY
(1-877-223-4539) for complete wiring instructions.
HOW TO REDEEM SHARES
In General
Investors may request redemption of part or all of
their Fund shares at any time at the next determined
net asset value. See "Determination of Net Asset
Value." No redemption request will become effective
until all documents have been received in proper form
by Firstar. An investor should contact Firstar for
further information concerning documentation required
for a redemption of Fund shares. The Corporation
normally will mail your redemption proceeds the next
business day and, in any event, no later than seven
business days after receipt of a redemption request in
good order. However, when a purchase has been made by
check, the Corporation may hold payment on redemption
proceeds until it is reasonably satisfied that the
check has cleared, which may take up to 12 days.
Redemptions may also be made through brokers or
dealers. Such redemptions will be effected at the net
asset value next determined after receipt by the
Corporation of the broker or dealer's instruction to
redeem shares. Some brokers or dealers may charge a
fee in connection with such redemptions.
<PAGE>
Investors who have an Individual Retirement
Account ("IRA") must indicate on their redemption
requests whether or not federal income tax should be
withheld. Redemption requests failing to make an
election will be subject to withholding.
Written Redemption
For most redemption requests, an investor need
only furnish a written, unconditional request to redeem
his or her shares at net asset value to the Transfer
Agent: Firstar Trust Company, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701. Overnight mail should be sent to
Badgley Funds, Inc., Firstar Trust Company, Mutual Fund
Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202. Requests for redemption
must (i) be signed exactly as the shares are
registered, including the signature of each owner, and
(ii) specify the number of shares or dollar amount to
be redeemed. Redemption proceeds made by written
redemption request may also be wired to a commercial
bank that you have authorized on your account
application. The Transfer Agent will charge a $12.00
service fee for wire transactions. Additional
documentation may be requested from corporations,
executors, administrators, trustees, guardians, agents
or attorneys-in-fact. The Corporation does not
consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposit
in the mail or with such services, or receipt at the
Transfer Agent's post office box of redemption requests
does not constitute receipt by the Transfer Agent or
the Corporation. Do not mail letters by overnight
courier to the post office box. Any written redemption
requests received within 15 days after an address
change must be accompanied by a signature guarantee.
Telephone Redemption
Shares of the Funds may also be redeemed by
calling the Transfer Agent at 1-877-BADGLEY
(1-877-223-4539). Redemption requests by telephone are
available for redemptions of $1,000 or more.
Redemption requests for less than $1,000 must be in
writing. In order to utilize this procedure, an
investor must have previously elected this option in
writing, which election will be reflected in the
records of the Transfer Agent, and the redemption
proceeds must be mailed directly to the investor or
transmitted to the investor's predesignated account via
wire or ACH transfer. Funds sent via ACH are
automatically credited to your account within three
business days. There is currently no charge for this
service. To change the designated account, send a
written request with signature(s) guaranteed to the
Transfer Agent. To change the address, call the
Transfer Agent or send a written request with
signature(s) guaranteed to the Transfer Agent.
Additional documentation may be requested from
corporations, executors, administrators, trustees,
guardians, agents or attorneys-in-fact. No telephone
redemption requests will be allowed within 15 days of
such a change. The Corporation reserves the right to
limit the number of telephone redemptions by an
investor. Once made, telephone redemptions may not be
modified or canceled.
The Transfer Agent will use reasonable procedures
to ensure that instructions received by telephone are
genuine. These procedures may include requiring some
form of personal identification prior to acting upon
telephone instructions, recording telephonic
transactions and/or sending written confirmation of
such transactions to investors. Assuming procedures
such as the above have been followed, neither the
Corporation nor the Transfer Agent will be liable for
any loss, cost, or expense for acting upon an
investor's instructions or for any unauthorized
telephone redemption. The Corporation reserves the
right to refuse a telephone redemption request if so
advised.
Systematic Withdrawal Plan
You may set up automatic withdrawals from your
account at regular intervals. To begin distributions,
you must have an initial balance of $10,000 in your
account and withdraw at least $250 per payment. To
establish the systematic withdrawal plan ("SWP"), you
must complete the appropriate section in the
shareholder application. Redemptions will take place
on a monthly, quarterly, semi-annual or annual basis
(or the following business day) as indicated on your
shareholder application. You may vary the amount or
frequency of withdrawal payments or temporarily
discontinue them by calling 1-877-BADGLEY (1-877-223-
4539). Depending upon the size of the account and the
withdrawals requested (and fluctuations in the net
asset value of the shares redeemed), redemptions for
the purpose of satisfying such withdrawals may reduce
or even exhaust your account. If the amount remaining
in your account is not sufficient to meet a plan
payment, the remaining amount will be redeemed and the
SWP will be terminated.
<PAGE>
Signature Guarantees
Signature guarantees are required for: (i)
redemption requests to be mailed or wired to a person
other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than
the address that appears of record and (iii) any
redemption request if a change of address has been
received by the Corporation or Transfer Agent within
the last 15 days. A signature guarantee may be
obtained from any eligible guarantor institution, as
defined by the SEC. These institutions include banks,
saving associations, credit unions, brokerage firms,
and others. Please note that a notary public stamp or
seal is not acceptable.
Your account may be terminated by the Corporation
on not less than 30 days' notice if, at the time of any
redemption of shares in your account, the value of the
remaining shares in the account falls below $25,000.
Upon any such termination, a check for the proceeds of
redemption will be sent to you within seven days of the
redemption.
EXCHANGE PRIVILEGE
Fund to Fund Exchange
You may exchange your shares in a Fund for shares
in any other Fund of the Corporation at any time by
written request or by telephone exchange if you have
authorized this privilege in the shareholder
application. Exchange requests are available for
exchanges of $1,000 or more. The value of the shares
to be exchanged and the price of the shares being
purchased will be the net asset value next determined
after receipt of instructions for exchange. No sales
charge is imposed on exchanges between Funds; however,
a $5 service fee will be charged for each telephone
exchange request (no charge is imposed with respect to
written exchange requests). Exchange requests should
be directed to: Firstar Trust Company, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701. For exchange requests
delivered in person or by overnight mail, please
deliver to Badgley Funds, Inc., Firstar Trust Company,
Mutual Fund Services, Third Floor, 615 East Michigan
Street, Milwaukee, Wisconsin 53202. To effect a
telephone exchange, you may call 1-877-BADGLEY
(1-877-223-4539). Exchange requests may be subject to
limitations, including those relating to frequency,
that may be established from time to time to ensure
that such exchanges are not disadvantageous to the
Funds or their investors. The Corporation reserves the
right to modify or terminate the exchange privilege
upon 60 days' written notice to each shareholder prior
to the modification or termination taking effect. The
exchange privilege is only available in states where
the securities are registered.
Money Market Exchange
As a service to our shareholders, the Corporation
has established a program whereby our shareholders can
exchange shares of any one of the Funds for shares of
the Firstar Money Market Funds (the "Firstar Funds").
Exchange requests are available for exchanges of $1,000
or more. The Firstar Funds are no-load money market
funds managed by an affiliate of Firstar. The Firstar
Funds are unrelated to the Corporation or any of the
Funds. However, the Distributor may be compensated by
the Firstar Funds for servicing and related services
provided in connection with exchanges made by
shareholders of the Funds. This exchange privilege is
a convenient way to buy shares in money market funds in
order to respond to changes in your goals or in market
conditions. Before exchanging into the Firstar Funds,
please read the applicable prospectus, which may be
obtained by calling 1-877-BADGLEY (1-877-223-4539). As
noted above, there is no charge for written exchange
requests. Firstar will, however, charge a $5.00 fee
for each exchange transaction that is executed via the
telephone.
An exchange from one Fund to another, including
the Firstar Funds, is treated the same as an ordinary
sale and purchase for federal income tax purposes and
you will realize a capital gain or loss. An exchange
is not a tax-free transaction.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of
the close of trading (generally 4:00 p.m. Eastern
Standard Time) on each day the NYSE is open for
business. Purchase orders received or shares tendered
for redemption on a day the NYSE is open for trading,
prior to the close of trading on
<PAGE>
that day, will be
valued as of the close of trading on that day.
Applications for purchase of shares and requests for
redemption of shares received after the close of
trading on the NYSE will be valued as of the close of
trading on the next day the NYSE is open. A Fund's net
asset value may not be calculated on days during which
the Fund receives no orders to purchase shares and no
shares are tendered for redemption. Net asset value is
calculated by taking the fair value of a Fund's total
assets, including interest or dividends accrued, but
not yet collected, less all liabilities, and dividing
by the total number of shares outstanding. The result,
rounded to the nearest cent, is the net asset value per
share.
In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at market value. Common stocks and other equity-
type securities are valued at the last sales price on
the national securities exchange or NASDAQ on which
such securities are primarily traded; however,
securities traded on a national securities exchange or
NASDAQ for which there were no transactions on a given
day, and securities not listed on a national securities
exchange or NASDAQ, are valued at the average of the
most recent bid and asked prices. Fixed income
securities are valued by a pricing service that
utilizes electronic data processing techniques to
determine values for normal institutional-sized trading
units of fixed income securities without regard to sale
or bid prices when such values are believed to more
accurately reflect the fair market value of such
securities; otherwise, actual sale or bid prices are
used. Any securities or other assets for which market
quotations are not readily available are valued at fair
value as determined in good faith by the Board of
Directors of the Corporation. The Board of Directors
may approve the use of pricing services to assist the
Funds in the determination of net asset value. Fixed
income securities having remaining maturities of 60
days or less when purchased are generally valued by the
amortized cost method. Under this method of valuation,
a security is initially valued at its acquisition cost
and, thereafter, amortization of any discount or
premium is assumed each day, regardless of the impact
of fluctuating interest rates on the market value of
the security.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Corporation, on behalf of each of the Funds,
has adopted a plan pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan"), which authorizes it to pay
the Distributor a distribution and shareholder
servicing fee of 0.25% of each Fund's average daily net
assets (computed on an annual basis). All or a portion
of the fee may be used by the Distributor to pay costs
of printing reports and prospectuses for potential
investors and the costs of other distribution and
shareholder servicing expenses. Under the terms of the
12b-1 Plan, the Distributor is authorized to, in turn,
pay all or a portion of this fee to any securities
dealer, financial institution or any other person (the
"Recipient") who renders assistance in distributing or
promoting the sale of Fund shares, or who provides
certain shareholder services to Fund shareholders,
pursuant to a written agreement (the "Related
Agreement"). Payments under the 12b-1 Plan are based
upon a percentage of average daily net assets
attributable to each Fund regardless of the amounts
actually paid or expenses actually incurred by the
Distributor, however, in no event, may such payments
exceed the maximum allowable fee. It is, therefore,
possible that the Distributor may realize a profit in a
particular year as a result of these payments. The 12b-
1 Plan has the effect of increasing the Fund's expenses
from what they would otherwise be. The Board of
Directors reviews each Fund's distribution and
shareholder servicing fee payments in connection with
their determination as to the continuance of the 12b-1
Plan.
The 12b-1 Plan, including a form of the Related
Agreement, has been unanimously approved by a majority
of the Board of Directors of the Corporation, and of
the members of the Board who are not "interested
persons" of the Corporation as defined in the 1940 Act
and who have no direct or indirect financial interest
in the operation of the 12b-1 Plan or any related
agreements (the "Disinterested Directors") voting
separately. The 12b-1 Plan, and any Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Corporation's Board of
Directors and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the 12b-1 Plan or the Related Agreement, as applicable.
In addition, the 12b-1 Plan and any Related Agreement
may be terminated with respect to either or both Funds
at any time, without penalty, by vote of a majority of
the outstanding voting securities of the applicable
Fund, or by vote of a majority of Disinterested
Directors (on not more than 60 days' written notice in
the case of the Related Agreement only). Payment of the
distribution and shareholder servicing fee is to be
made quarterly, within 30 days after the close of the
quarter for which the fee is payable, after the
Distributor forwards to the Board of Directors of the
Corporation a written report of all amounts expensed
pursuant to the 12b-1 Plan.
<PAGE>
INDIVIDUAL RETIREMENT ACCOUNTS
Individuals may establish their own tax-sheltered
IRAs. The Fund offers two types of IRAs, including the
Traditional IRA, that can be adopted by executing the
appropriate Internal Revenue Service ("IRS") Form.
Traditional IRA
In a Traditional IRA, amounts contributed to the
IRA may be tax deductible at the time of contribution
depending on whether the investor is an "active
participant" in an employer-sponsored retirement plan
and the investor's income. Distributions from a
Traditional IRA will be taxed at distribution except to
the extent that the distribution represents a return of
the investor's own contributions for which the investor
did not claim (or was not eligible to claim) a
deduction. Distributions prior to age 59-1/2 may be
subject to an additional 10% tax applicable to certain
premature distributions. Distributions must commence
by April 1 following the calendar year in which the
investor attains age 70-1/2. Failure to begin
distributions by this date (or distributions that do
not equal certain minimum thresholds) may result in
adverse tax consequences.
Roth IRA
In a Roth IRA (sometimes known as the American
Dream IRA), amounts contributed to the IRA are taxed at
the time of contribution, but distributions from the
IRA are not subject to tax if the investor has held the
IRA for certain minimum periods of time (generally,
until age 59-1/2). Investors whose income exceeds
certain limits are ineligible to contribute to a Roth
IRA. Distributions that do not satisfy the
requirements for tax-free withdrawal are subject to
income taxes (and possibly penalty taxes) to the extent
that the distribution exceeds the investor's
contributions to the IRA. The minimum distribution
rules applicable to Traditional IRAs do not apply
during the lifetime of the investor. Following the
death of the investor, certain minimum distribution
rules apply.
For Traditional and Roth IRAs, the maximum annual
contribution generally is equal to the lesser of $2,000
or 100% of the investor's compensation (earned income).
An individual may also contribute to a Traditional IRA
or Roth IRA on behalf of his or her spouse provided
that the individual has sufficient compensation (earned
income). Contributions to a Traditional IRA reduce the
allowable contributions under a Roth IRA, and
contributions to a Roth IRA reduce the allowable
contribution to a Traditional IRA.
Simplified Employee Pension Plan
A Traditional IRA may also be used in conjunction
with a Simplified Employee Pension Plan ("SEP-IRA"). A
SEP-IRA is established through execution of Form 5305-
SEP together with a Traditional IRA established for
each eligible employee. Generally, a SEP-IRA allows an
employer (including a self-employed individual) to
purchase shares with tax deductible contributions not
exceeding annually for any one participant 15% of
compensation (disregarding for this purpose
compensation in excess of $160,000 per year). The
$160,000 compensation limit applies for 1998 and is
adjusted periodically for cost of living increases. A
number of special rules apply to SEP Plans, including a
requirement that contributions generally be made on
behalf of all employees of the employer (including for
this purpose a sole proprietorship or partnership) who
satisfy certain minimum participation requirements.
SIMPLE IRA
An IRA may also be used in connection with a
SIMPLE Plan established by the investor's employer (or
by a self-employed individual). When this is done, the
IRA is known as a SIMPLE IRA, although it is similar to
a Traditional IRA with the exceptions described below.
Under a SIMPLE Plan, the investor may elect to have his
or her employer make salary reduction contributions of
up to $6,000 per year to the SIMPLE IRA. The $6,000
limit is adjusted periodically for cost of living
increases. In addition, the employer will contribute
certain amounts to the investor's SIMPLE IRA, either as
a matching contribution to those participants who make
salary reduction
<PAGE>
contributions or as a non-elective
contribution to all eligible participants whether or
not making salary reduction contributions. A number of
special rules apply to SIMPLE Plans, including (1) a
SIMPLE Plan generally is available only to employers
with fewer than 100 employees; (2) contributions must
be made on behalf of all employees of the employer
(other than bargaining unit employees) who satisfy
certain minimum participation requirements; (3)
contributions are made to a special SIMPLE IRA that is
separate and apart from the other IRAs of employees;
(4) the distribution excise tax (if otherwise
applicable) is increased to 25% on withdrawals during
the first two years of participation in a SIMPLE IRA;
and (5) amounts withdrawn during the first two years of
participation may be rolled over tax-free only into
another SIMPLE IRA (and not to a Traditional IRA or to
a Roth IRA). A SIMPLE IRA is established by executing
Form 5304-SIMPLE together with an IRA established for
each eligible employee.
Under current IRS regulations, all IRA applicants
must be furnished a disclosure statement containing
information specified by the IRS. Applicants generally
have the right to revoke their account within seven
days after receiving the disclosure statement and
obtain a full refund of their contributions. The
custodian may, in its discretion, hold the initial
contribution uninvested until the expiration of the
seven-day revocation period. The Custodian does not
anticipate that it will exercise its discretion but
reserves the right to do so.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX
TREATMENT
The Corporation intends to qualify for treatment
as a "Regulated Investment Company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the
"Code"), and, if so qualified, will not be liable for
federal income taxes to the extent earnings are
distributed on a timely basis. However, for federal
income tax purposes, all dividends paid by the Funds
and distributions of net realized short-term capital
gains are taxable as ordinary income whether reinvested
or received in cash unless you are exempt from taxation
or entitled to a tax deferral. Distributions paid by a
Fund from net realized long-term capital gains, whether
received in cash or reinvested in additional shares,
are taxable as a capital gain. The capital gain
holding period is determined by the length of time the
Fund has held the security and not the length of time
you have held shares in the Fund. Investors are
informed annually as to the amount and nature of all
dividends and capital gains paid during the prior year.
Such capital gains and dividends may also be subject to
state or local taxes. If you are not required to pay
taxes on your income, you are generally not required to
pay federal income taxes on the amounts distributed to
you.
The corporation intends to pay dividends for the
Growth Fund annually and for the Balanced Fund
quarterly and to distribute capital gains, if any, at
least annually. When a dividend or capital gain is
distributed, a Fund's net asset value decreases by the
amount of the payment. If you purchase shares shortly
before a distribution, you will be subject to income
taxes on the distribution, even though the value of
your investment (plus cash received, if any) remains
the same. All dividends and capital gains
distributions will automatically be reinvested in
additional Fund shares at the then prevailing net asset
value unless an investor specifically requests that
either dividends or capital gains or both be paid in
cash. An investor may change an election by telephone,
subject to certain limitations, by calling the Transfer
Agent at 1-877-BADGLEY (1-877-223-4539).
Investors requesting to have dividends and/or
capital gains paid in cash may choose to have such
amounts mailed or sent via electronic funds transfer
("EFT"). Transfers via EFT generally take up to three
business days to reach the investor's bank account.
If an investor elects to receive distributions and
dividends by check and the post office cannot deliver
such check, or if such check remains uncashed for six
months, a Fund reserves the right to reinvest the
distribution check in the shareholder's account at the
Fund's then current net asset value per share and to
reinvest all subsequent distributions in shares of the
Fund.
If you do not furnish the Corporation with your
correct social security number or taxpayer
identification number, the Corporation is required by
federal law to withhold federal income tax from your
distributions and redemption proceeds at a rate of 31%.
<PAGE>
This section is not intended to be a full
discussion of federal income tax laws and the effect of
such laws on you. There may be other federal, state,
or local tax considerations applicable to a particular
investor. You are urged to consult your own tax
advisor.
YEAR 2000 ISSUE
The Funds' operations depend on the seamless
functioning of computer systems in the financial
service industry; including those of the Adviser and
Firstar. Many computer software systems in use today
cannot properly process date-related information after
December 31, 1999 because of the method by which dates
are encoded and calculated. This failure, commonly
referred to as the "Year 2000 Issue," could adversely
affect the handling of security trades, pricing and
account servicing for the Funds.
The Adviser has made compliance with the Year 2000
Issue a high priority and is taking steps that it
believes are reasonably designed to address the Year
2000 Issue with respect to its computer systems. The
Adviser has also been informed that comparable steps
are being taken by the Funds' other major service
providers. The Adviser does not currently anticipate
that the Year 2000 Issue will have a material impact on
its ability to continue to fulfill its duties as
investment adviser to the Funds.
FUND PERFORMANCE
The Funds may from time to time compare their
respective investment results to various passive
indices or other mutual funds and cite such comparisons
in reports to shareholders, sales literature, and
advertisements. The results may be calculated on
several bases, including yield, average annual total
return, total return, and cumulative total return.
Yield is an annualized figure, which means that it
is assumed that a Fund generates the same level of net
investment income over a one-year period. A Fund's
yield is a measure of the net investment incurred per
share earned by the Fund over a specific one-month
period and is shown as a percentage of the net asset
value of the Fund's shares at the end of the period.
Average annual total return and total return
figures measure both the net investment income
generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the
underlying investments in a Fund over a specified
period of time, assuming the reinvestment of all
dividends and distributions. Average annual total
return figures are annualized and therefore represent
the average annual percentage change over the specified
period. Total return figures are not annualized and
represent the aggregate percentage or dollar value
change over the period. Cumulative total return simply
reflects a Fund's performance over a stated period of
time.
<PAGE>
DIRECTORS
J. Kevin Callaghan
Steven C. Phelps
Graham S. Anderson
[2 additional independent directors to be added]
OFFICERS
Otis P. Heald III (Tres), President
Lisa P. Guzman, Treasurer and Secretary
INVESTMENT ADVISER
Badgley, Phelps and Bell, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
CUSTODIAN, ADMINISTRATOR,
TRANSFER AGENT AND DIVIDEND-
DISBURSING AGENT
Firstar Trust Company
Mutual Fund Services
Third Floor
615 E. Michigan Street
Milwaukee, WI 53202
DISTRIBUTOR
Rafferty Capital Markets, Inc.
550 Mamaroneck Avenue
Harrison, New York 10528
INDEPENDENT ACCOUNTANTS
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, WI 53202
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
BADGLEY FUNDS, INC.
Badgley Growth Fund
Badgley Balanced Fund
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-877-BADGLEY
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the BADGLEY FUNDS, INC. (the
"Corporation"), including the Badgley Growth Fund (the
"Growth Fund") and the Badgley Balanced Fund (the
"Balanced Fund"), each a diversified series of the
Corporation (hereinafter collectively referred to as
the "Funds"), dated April 30, 1998. The Prospectus,
which may be revised from time to time, is available
without charge upon request to the above-noted address
or telephone number.
This Statement of Additional Information is dated April 30, 1998.
<PAGE>
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
DIRECTORS AND OFFICERS 18
PRINCIPAL SHAREHOLDERS 19
INVESTMENT ADVISER 19
FUND TRANSACTIONS AND BROKERAGE 20
CUSTODIAN 21
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 21
DISTRIBUTOR AND PLAN OF DISTRIBUTION 21
TAXES 22
DETERMINATION OF NET ASSET VALUE 22
SHAREHOLDER MEETINGS 23
PERFORMANCE INFORMATION 23
INDEPENDENT ACCOUNTANTS 24
FINANCIAL STATEMENTS 24
APPENDIX A-1
No person has been authorized to give any
information or to make any representations other than
those contained in this Statement of Additional
Information and the Prospectus dated April 30, 1998,
and if given or made, such information or
representations may not be relied upon as having been
authorized by the Funds. This Statement of Additional
Information does not constitute an offer to sell
securities in any state or jurisdiction in which such
offering may not lawfully be made.
<PAGE>
INVESTMENT RESTRICTIONS
The investment objective of the Growth Fund is to
seek long-term capital appreciation. The investment
objective of the Balanced Fund is to seek long-term
capital appreciation and income (i.e., risk-adjusted
total return). The Funds' investment objectives and
policies are described in detail in the Prospectus
under the caption "Investment Objectives and Policies."
The following are the Funds' fundamental investment
restrictions which cannot be changed without
shareholder approval.
Each Fund:
1. May not with respect to 75% of its total assets,
purchase the securities of any issuer (except
securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities)
if, as a result, (i) more than 5% of the Fund's
total assets would be invested in the securities
of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of
that issuer.
2. May (i) borrow money from banks for temporary or
emergency purposes (but not for leveraging or the
purchase of investments) and (ii) make other
investments or engage in other transactions
permissible under the Investment Company Act of
1940, as amended (the "1940 Act"), which may
involve a borrowing, including borrowing through
reverse repurchase agreements, provided that the
combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets
(including the amount borrowed), less the Fund's
liabilities (other than borrowings). Each Fund
may also borrow money from other persons to the
extent permitted by applicable law.
3. May not issue senior securities, except as
permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's
securities, except to the extent that the Fund may
be deemed to be an underwriter within the meaning
of the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent the Fund from purchasing or selling
options, futures contracts, or other derivative
instruments, or from investing in securities or
other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33
1/3% of the Fund's total assets would be lent to
other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if,
as a result, more than 25% of the Fund's total
assets would be invested in the securities of
issuers, the principal business activities of
which are in the same industry.
8. May not purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or
other instruments backed by real estate or of
issuers engaged in real estate activities).
In addition to the non-fundamental operating
policies set forth in the Prospectus, the following are
each Fund's non-fundamental operating policies which
may be changed by the Board of Directors without
shareholder approval.
Each Fund may not:
1. Sell securities short, unless the Fund owns or has
the right to obtain securities equivalent in kind
and amount to the securities sold short, or unless
it covers such short sale as required by the
current rules and positions of the Securities and
Exchange Commission (the "SEC") or its staff, and
provided that transactions in options, futures
contracts, options on futures contracts, or other
derivative instruments are not deemed to
constitute selling securities short.
<PAGE>
2. Purchase securities on margin, except that the
Fund may obtain such short-term credits as are
necessary for the clearance of transactions; and
provided that margin deposits in connection with
futures contracts, options on futures contracts,
or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of
such investment, more than 10% of its net assets
would be invested in illiquid securities.
4. Purchase securities of other investment companies
except in compliance with the 1940 Act and
applicable state law.
5. Engage in futures or options on futures
transactions which are impermissible pursuant to
Rule 4.5 under the Commodity Exchange Act (the
"CEA") and, in accordance with Rule 4.5, will use
futures or options on futures transactions solely
for bona fide hedging transactions (within the
meaning of the CEA), provided, however, that the
Fund may, in addition to bona fide hedging
transactions, use futures and options on futures
transactions if the aggregate initial margin and
premiums required to establish such positions,
less the amount by which any such options
positions are in the money (within the meaning of
the CEA), do not exceed 5% of the Fund's net
assets.
6. Make any loans, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. Borrow money except from banks or through reverse
repurchase agreements or mortgage dollar rolls,
and will not purchase securities when bank
borrowings exceed 5% of its assets.
Except for the fundamental investment limitations
listed above and each Fund's investment objective, the
other investment policies described in the Prospectus
and this Statement of Additional Information are not
fundamental and may be changed with approval of the
Corporation's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at
the time of investment, a later increase or decrease in
percentage resulting from a change in the Fund's assets
(i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not
constitute a violation of that restriction.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the
discussion of the Funds' investment objectives,
policies, and techniques that are described in the
Prospectus under the captions "Investment Objectives
and Policies" and "Implementation of Policies and
Risks."
Illiquid Securities
Each Fund may invest up to 10% of its respective
net assets in illiquid securities (i.e., securities
that are not readily marketable). For purposes of this
restriction, illiquid securities include, but are not
limited to, restricted securities (securities the
disposition of which is restricted under the federal
securities laws), securities which may only be resold
pursuant to Rule 144A under the Securities Act,
repurchase agreements with maturities in excess of
seven days, and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 10% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors.
The Board of Directors has delegated to the
Adviser the day-to-day determination of the liquidity
of any security, although it has retained oversight and
ultimate responsibility for such determinations.
Although no definitive liquidity criteria are used, the
Board of Directors has directed the Adviser to look to
such factors as (i) the nature of the market for a
security (including the institutional private resale
market), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase
obligations and
<PAGE>
demand instruments), (iii) the
availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other
permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, a Fund may be obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, a Fund should be in a position
where more than 10% of the value of its net assets are
invested in illiquid securities, including restricted
securities which are not readily marketable (except for
Rule 144A securities deemed to be liquid by the
Adviser), the affected Fund will take such steps as is
deemed advisable, if any, to protect liquidity.
Convertible Securities
Each Fund may invest in convertible securities,
which are bonds, debentures, notes, preferred stocks,
or other securities that may be converted into or
exchanged for a specified amount of common stock of the
same or a different issuer within a particular period
of time at a specified price or formula. A convertible
security entitles the holder to receive interest
normally paid or accrued on debt or the dividend paid
on preferred stock until the convertible security
matures or is redeemed, converted, or exchanged.
Convertible securities have unique investment
characteristics in that they generally (i) have higher
yields than common stocks, but lower yields than
comparable non-convertible securities, (ii) are less
subject to fluctuation in value than the underlying
stock since they have fixed income characteristics, and
(iii) provide the potential for capital appreciation if
the market price of the underlying common stock
increases. A convertible security may be subject to
redemption at the option of the issuer at a price
established in the convertible security's governing
instrument. If a convertible security held by a Fund
is called for redemption, the Fund will be required to
permit the issuer to redeem the security, convert it
into the underlying common stock, or sell it to a third
party. With respect to the Balanced Fund's investments
in convertible securities, the Balanced Fund will only
include that portion of convertible senior securities
with fixed income characteristics in computing whether
the Balanced Fund has at least 25% of its assets in
fixed income convertible securities.
Temporary Strategies
When the Adviser determines that market conditions
warrant a temporary defensive position, a Fund may
invest without limitation in cash and short-term fixed
income securities, including U.S. government
securities, commercial paper, banker's acceptances,
certificates of deposit, and time deposits.
Variable- or Floating-Rate Securities
Each Fund may invest in securities which offer a
variable- or floating-rate of interest, including
inverse floating rate securities debt obligations.
Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals
(e.g., daily, monthly, semi-annually, etc.). Floating-
rate securities generally provide for automatic
adjustment of the interest rate whenever some specified
interest rate index changes. The interest rate on an
inverse floater resets in the opposite direction from
the market rate of interest to which the interest rate
is indexed. The interest rate on variable- or floating-
rate securities is ordinarily determined by reference
to or is a percentage of a bank's prime rate, the 90-
day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an
index of short-term interest rates, or some other
objective measure.
Variable- or floating-rate securities frequently
include a demand feature entitling the holder to sell
the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on
seven days notice, in other cases, the demand feature
is exercisable at any time on 30 days notice or on
similar notice at intervals of not more than one year.
Some securities which do not have variable or floating
interest rates may be accompanied by puts producing
similar results and price characteristics.
<PAGE>
Variable-rate demand notes include master demand
notes which are obligations that permit a Fund to
invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. The
interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in
its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified
number of days' notice to the holders of such
obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate,
such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The
interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by
banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be
traded. There generally is not an established
secondary market for these obligations, although they
are redeemable at face value. Accordingly, where the
obligations are not secured by letters of credit or
other credit support arrangements, a Fund's right to
redeem is dependent on the ability of the borrower to
pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and,
if not so rated, the Funds may invest in them only if
the Adviser determines that at the time of investment
other obligations are of comparable quality to the
other obligations in which the Funds may invest.
Each Fund will not invest more than 10% of its net
assets in variable- and floating-rate demand
obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed
readily marketable and will not be subject to this
limitation). See "Investment Policies and Techniques
- -- Illiquid Securities" and "Investment Restrictions."
In addition, each variable- and floating-rate
obligation must meet the credit quality requirements
applicable to all the Fund's investments at the time of
purchase. When determining whether such an obligation
meets a Fund's credit quality requirements, the Fund
may look to the credit quality of the financial
guarantor providing a letter of credit or other credit
support arrangement.
Mortgage- and Asset-Backed Securities
Mortgage-backed securities represent direct or
indirect participations in, or are secured by and
payable from, mortgage loans secured by real property,
and include single- and multi-class pass-through
securities and collateralized mortgage obligations.
Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities, such as the
Government National Mortgage Association and the
Federal National Mortgage Association, or by private
issuers, generally originators and investors in
mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers,
and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by
private lenders may be supported by pools of mortgage
loans or other mortgage-backed securities that are
guaranteed, directly or indirectly, by the U.S.
government or one of its agencies or instrumentalities,
or they may be issued without any governmental
guarantee of the underlying mortgage assets but with
some form of non-governmental credit enhancement.
Asset-backed securities have structural
characteristics similar to mortgage-backed securities.
Asset-backed debt obligations represent direct or
indirect participations in, or are secured by and
payable from, assets such as motor vehicle installment
sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and
receivables from credit card or other revolving credit
arrangements. The credit quality of most asset-backed
securities depends primarily on the credit quality of
the assets underlying such securities, how well the
entity issuing the security is insulated from the
credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit
enhancement of the securities. Payments or
distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental
credit enhancements including letters of credit,
reserve funds, overcollateralization, and guarantees by
third parties. The market for privately issued asset-
backed debt obligations is smaller and less liquid than
the market for government sponsored mortgage-backed
securities.
The rate of principal payment on mortgage- and
asset-backed securities generally depends on the rate
of principal payments received on the underlying assets
which in turn may be effected by a variety of economic
and other factors. As a result, the yield on any
mortgage- and asset-backed security is difficult to
predict with precision and actual yield to maturity may
be more or less than the anticipated yield to maturity.
The yield characteristics of mortgage- and asset-backed
securities differ from those of traditional debt
securities. Among the principal differences are that
interest and principal payments are made more
frequently on mortgage- and asset-backed securities,
usually
<PAGE>
monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a
result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite
effect of increasing the yield to maturity.
Conversely, if a Fund purchases these securities at a
discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a
prepayment rate that is slower than expected will
reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose
a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is
prepaid in full.
While many mortgage- and asset-backed securities
are issued with only one class of security, many are
issued in more than one class, each with different
payment terms. Multiple class mortgage- and asset-
backed securities are issued for two main reasons.
First, multiple classes may be used as a method of
providing credit support. This is accomplished
typically through creation of one or more classes whose
right to payments on the security is made subordinate
to the right to such payments of the remaining class or
classes. Second, multiple classes may permit the
issuance of securities with payment terms, interest
rates, or other characteristics differing both from
those of each other and from those of the underlying
assets. Examples include so-called "strips" (mortgage-
and asset-backed securities entitling the holder to
disproportionate interests with respect to the
allocation of interest and principal of the assets
backing the security), and securities with class or
classes having characteristics which mimic the
characteristics of non-mortgage- or asset-backed
securities, such as floating interest rates (i.e.,
interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.
The Funds may invest in stripped mortgage- or
asset-backed securities, which receive differing
proportions of the interest and principal payments from
the underlying assets. The market value of such
securities generally is more sensitive to changes in
prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and
in some cases such market value may be extremely
volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO")
classes, a rate of prepayment that is faster or slower
than anticipated may result in a Fund failing to
recover all or a portion of its investment, even though
the securities are rated investment grade.
Mortgage- and asset-backed securities backed by
assets, other than as described above, or in which the
payment streams on the underlying assets are allocated
in a manner different than those described above may be
issued in the future. A Fund may invest in such
securities if such investment is otherwise consistent
with its investment objectives, policies and
restrictions.
Repurchase Agreements
The Funds may enter into repurchase agreements
with certain banks or non-bank dealers. In a
repurchase agreement, a Fund buys a security at one
price, and at the time of sale, the seller agrees to
repurchase the obligation at a mutually agreed upon
time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield
during the purchaser's holding period, while the
seller's obligation to repurchase is secured by the
value of the underlying security. The Adviser will
monitor, on an ongoing basis, the value of the
underlying securities to ensure that the value always
equals or exceeds the repurchase price plus accrued
interest. Repurchase agreements could involve certain
risks in the event of a default or insolvency of the
other party to the agreement, including possible delays
or restrictions upon a Fund's ability to dispose of the
underlying securities. Although no definitive
creditworthiness criteria are used, the Adviser reviews
the creditworthiness of the banks and non-bank dealers
with which the Funds enter into repurchase agreements
to evaluate those risks.
Reverse Repurchase Agreements
The Funds may, with respect to up to 5% of its net
assets, engage in reverse repurchase agreements. In a
reverse repurchase agreement, a Fund would sell a
security and enter into an agreement to repurchase the
security at a specified future date and price. A Fund
generally retains the right to interest and principal
payments on the security. Since a Fund receives cash
upon entering into a reverse repurchase agreement, it
may be considered a borrowing. When required by
guidelines of the SEC, the Fund will set aside
permissible liquid assets in a segregated account to
secure its obligations to repurchase the security.
<PAGE>
Derivative Instruments
In General. Although it does not currently intend
to engage in derivative transactions, each Fund may
invest up to 5% of its respective net assets in
derivative instruments. Derivative instruments may be
used for any lawful purpose consistent with a Fund's
investment objective such as hedging or managing risk,
but not for speculation. Derivative instruments are
commonly defined to include securities or contracts
whose value depend on (or "derive" from) the value of
one or more other assets, such as securities,
currencies, or commodities. These "other assets" are
commonly referred to as "underlying assets."
A derivative instrument generally consists of, is
based upon, or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts, swap contracts,
as well as exchange-traded futures. Option-based
derivatives include privately negotiated, over-the-
counter (OTC) options (including caps, floors, collars,
and options on forward and swap contracts) and exchange-
traded options on futures. Diverse types of
derivatives may be created by combining options or
forward contracts in different ways, and by applying
these structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no further
financial obligation. The holder of an option-based
derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward is a sales contract between a buyer
(holding the "long" position) and a seller (holding the
"short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed
price at the agreed future date and the seller agrees
to deliver the asset. The seller hopes that the market
price on the delivery date is less than the agreed upon
price, while the buyer hopes for the contrary. The
change in value of a forward-based derivative generally
is roughly proportional to the change in value of the
underlying asset.
Hedging. A Fund may use derivative instruments to
protect against possible adverse changes in the market
value of securities held in, or are anticipated to be
held in, the Fund's portfolio. Derivatives may also be
used by a Fund to "lock-in" its realized but
unrecognized gains in the value of its portfolio
securities. Hedging strategies, if successful, can
reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price
movements in the investments being hedged. However,
hedging strategies can also reduce the opportunity for
gain by offsetting the positive effect of favorable
price movements in the hedged investments.
Managing Risk. A Fund may also use derivative
instruments to manage the risks of the Fund's
portfolio. Risk management strategies include, but are
not limited to, facilitating the sale of portfolio
securities, managing the effective maturity or duration
of debt obligations in a Fund's portfolio, establishing
a position in the derivatives markets as a substitute
for buying or selling certain securities, or creating
or altering exposure to certain asset classes, such as
equity, debt, and foreign securities. The use of
derivative instruments may provide a less expensive,
more expedient or more specifically focused way for a
Fund to invest than "traditional" securities (i.e.,
stocks or bonds) would.
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. Over-the-
counter transactions are subject to additional risks,
such as the credit risk of the counterparty to the
instrument, and are less liquid than exchange-traded
derivatives since they often can only be closed out
with the other party to the transaction.
<PAGE>
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose a Fund to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly the Adviser's ability to predict
movements of the securities, currencies, and
commodities markets, which requires different skills
than predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect the
Adviser's judgment that the derivative transaction will
provide value to the Fund and its shareholders and is
consistent with the Fund's objectives, investment
limitations, and operating policies. In making such a
judgment, the Adviser will analyze the benefits and
risks of the derivative transaction and weigh them in
the context of the Fund's entire portfolio and
investment objective.
(2) Credit Risk. A Fund will be subject to the
risk that a loss may be sustained by the Fund as a
result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty
risk for exchange-traded derivative instruments is
generally less than for privately-negotiated or OTC
derivative instruments, since generally a clearing
agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of
performance. For privately-negotiated instruments,
there is no similar clearing agency guarantee. In all
transactions, a Fund will bear the risk that the
counterparty will default, and this could result in a
loss of the expected benefit of the derivative
transaction and possibly other losses to the Fund. A
Fund will enter into transactions in derivative
instruments only with counterparties that the Adviser
reasonably believes are capable of performing under the
contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of an instrument
and price movements of investments being hedged. For
example, if the value of a derivative instrument used
in a short hedge (such as writing a call option, buying
a put option, or selling a futures contract) increased
by less than the decline in value of the hedged
investments, the hedge would not be perfectly
correlated. Such a lack of correlation might occur due
to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded. The
effectiveness of hedges using instruments on indices
will depend, in part, on the degree of correlation
between price movements in the index and price
movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or
replaced quickly at or very close to its fundamental
value. Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. A Fund might be required by applicable
regulatory requirement to maintain assets as "cover,"
maintain segregated accounts, and/or make margin
payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options). If a
Fund is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured, or is closed out.
The requirements might impair a Fund's ability to sell
a portfolio security or make an investment at a time
when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a
disadvantageous time. A Fund's ability to sell or
close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to a Fund.
<PAGE>
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon
which they may be traded, and the Commodity Futures
Trading Commission ("CFTC").
The Corporation has filed a notice of eligibility
for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in
the futures markets. In accordance with Rule 4.5 of
the regulations under the CEA, the notice of
eligibility for the Funds includes representations that
each Fund will use futures contracts and related
options solely for bona fide hedging purposes within
the meaning of CFTC regulations, provided that a Fund
may hold other positions in futures contracts and
related options that do not qualify as a bona fide
hedging position if the aggregate initial margin
deposits and premiums required to establish these
positions, less the amount by which any such futures
contracts and related options positions are "in the
money," do not exceed 5% of the Fund's net assets. To
the extent the Fund were to engage in derivative
transactions, it will limit such transactions to no
more than 5% of its net assets.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging a Fund's assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of a Fund's
assets, as defined under the 1940 Act, the SEC has
stated that a Fund may use coverage or the segregation
of a Fund's assets. The Funds will also set aside
permissible liquid assets in a segregated custodial
account if required to do so by SEC and CFTC
regulations. Assets used as cover or held in a
segregated account cannot be sold while the derivative
position is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion
of a Fund's assets to segregated accounts could impede
portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
In some cases a Fund may be required to maintain
or limit exposure to a specified percentage of its
assets to a particular asset class. In such cases,
when a Fund uses a derivative instrument to increase or
decrease exposure to an asset class and is required by
applicable SEC guidelines to set aside liquid assets in
a segregated account to secure its obligations under
the derivative instruments, the Adviser may, where
reasonable in light of the circumstances, measure
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use of the derivative instrument and not by
reference to the nature of the exposure arising from
the assets set aside in the segregated account (unless
another interpretation is specified by applicable
regulatory requirements).
Options. A Fund may use options for any lawful
purpose consistent with the Fund's investment objective
such as hedging or managing risk but not for
speculation. An option is a contract in which the
"holder" (the buyer) pays a certain amount (the
"premium") to the "writer" (the seller) to obtain the
right, but not the obligation, to buy from the writer
(in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. A Fund may purchase (buy) or write
(sell) put and call options on assets, such as
securities, currencies, commodities, and indices of
debt and equity securities ("underlying assets") and
enter into closing transactions with respect to such
options to terminate an existing position. Options
used by the Funds may include
<PAGE>
European, American, and
Bermuda style options. If an option is exercisable
only at maturity, it is a "European" option; if it is
also exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it
is a "Bermuda" option.
Each Fund may purchase (buy) and write (sell) put
and call options and enter into closing transactions
with respect to such options to terminate an existing
position. The purchase of call options serves as a
long hedge, and the purchase of put options serves as a
short hedge. Writing put or call options can enable a
Fund to enhance income by reason of the premiums paid
by the purchaser of such options. Writing call options
serves as a limited short hedge because declines in the
value of the hedged investment would be offset to the
extent of the premium received for writing the option.
However, if the security appreciates to a price higher
than the exercise price of the call option, it can be
expected that the option will be exercised and the Fund
will be obligated to sell the security at less than its
market value or will be obligated to purchase the
security at a price greater than that at which the
security must be sold under the option. All or a
portion of any assets used as cover for OTC options
written by a Fund would be considered illiquid to the
extent described under "Investment Policies and
Techniques Illiquid Securities." Writing put options
serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the
extent of the premium received for writing the option.
However, if the security depreciates to a price lower
than the exercise price of the put option, it can be
expected that the put option will be exercised and the
Fund will be obligated to purchase the security at more
than its market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment, and
general market conditions.
A Fund may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, a Fund may terminate its
obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or
call option it had purchased by writing an identical
put or call option; this is known as a closing sale
transaction. Closing transactions permit a Fund to
realize the profit or limit the loss on an option
position prior to its exercise or expiration.
The Funds may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between a Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a
bank) with no clearing organization guarantee. Thus,
when a Fund purchases or writes an OTC option, it
relies on the counterparty to make or take delivery of
the underlying investment upon exercise of the option.
Failure by the counterparty to do so would result in
the loss of any premium paid by the Fund as well as the
loss of any expected benefit of the transaction.
A Fund's ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. Each Fund intends to
purchase or write only those exchange-traded options
for which there appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time. Closing
transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market
exists. Although each Fund will enter into OTC options
only with counterparties that are expected to be
capable of entering into closing transactions with the
Funds, there is no assurance that the Funds will in
fact be able to close out an OTC option at a favorable
price prior to expiration. In the event of insolvency
of the counterparty, a Fund might be unable to close
out an OTC option position at any time prior to its
expiration. If a Fund were unable to effect a closing
transaction for an option it had purchased, it would
have to exercise the option to realize any profit.
The Funds may engage in options transactions on
indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
<PAGE>
The writing and purchasing of options is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio securities transactions.
Imperfect correlation between the options and
securities markets may detract from the effectiveness
of attempted hedging.
Spread Transactions. A Fund may use spread
transactions for any lawful purpose consistent with the
Fund's investment objective such as hedging or managing
risk, but not for speculation. A Fund may purchase
covered spread options from securities dealers. Such
covered spread options are not presently exchange-
listed or exchange-traded. The purchase of a spread
option gives a Fund the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that
the Fund does not own, but which is used as a
benchmark. The risk to a Fund in purchasing covered
spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be
available. The purchase of spread options will be used
to protect a Fund against adverse changes in prevailing
credit quality spreads, i.e., the yield spread between
high quality and lower quality securities. Such
protection is only provided during the life of the
spread option.
Futures Contracts. A Fund may use futures
contracts for any lawful purpose consistent with the
Fund's investment objective such as hedging and
managing risk but not for speculation. A Fund may
enter into futures contracts, including interest rate,
index, and currency futures. Each Fund may also
purchase put and call options, and write covered put
and call options, on futures in which it is allowed to
invest. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of
futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options
on futures contracts can serve as a limited short
hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a
strategy similar to that used for writing covered
options in securities. The Funds' hedging may include
purchases of futures as an offset against the effect of
expected increases in currency exchange rates and
securities prices and sales of futures as an offset
against the effect of expected declines in currency
exchange rates and securities prices.
To the extent required by regulatory authorities,
the Funds may enter into futures contracts that are
traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures
contracts could be used to reduce a Fund's exposure to
market, currency, or interest rate fluctuations, a Fund
may be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures
contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a
specified price at a designated date, time, and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out
prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although
the value of an index might be a function of the value
of certain specified securities, no physical delivery
of those securities is made. If the offsetting
purchase price is less than the original sale price, a
Fund realizes a gain; if it is more, a Fund realizes a
loss. Conversely, if the offsetting sale price is more
than the original purchase price, a Fund realizes a
gain; if it is less, a Fund realizes a loss. The
transaction costs must also be included in these
calculations. There can be no assurance, however, that
a Fund will be able to enter into an offsetting
transaction with respect to a particular futures
contract at a particular time. If a Fund is not able
to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits
on the futures contract.
No price is paid by a Fund upon entering into a
futures contract. Instead, at the inception of a
futures contract, a Fund is required to deposit in a
segregated account with its custodian, in the name of
the futures broker through whom the transaction was
effected, "initial margin," consisting of cash, U.S.
government securities or other liquid, high-grade debt
obligations, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transaction, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a
<PAGE>
performance bond or good-faith deposit that is
returned to a Fund at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, a Fund may be required by
an exchange to increase the level of its initial margin
payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of a Fund's
obligations to or from a futures broker. When a Fund
purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast,
when a Fund purchases or sells a futures contract or
writes a call or put option thereon, it is subject to
daily variation margin calls that could be substantial
in the event of adverse price movements. If a Fund has
insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a
time when such sales are disadvantageous. Purchasers
and sellers of futures positions and options on futures
can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument
identical to the instrument held or written. Positions
in futures and options on futures may be closed only on
an exchange or board of trade that provides a secondary
market. The Funds intend to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If a Fund were unable to liquidate a futures or
option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Fund would continue to be subject to market risk
with respect to the position. In addition, except in
the case of purchased options, the Fund would continue
to be required to make daily variation margin payments
and might be required to maintain the position being
hedged by the future or option or to maintain certain
liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the future markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading," and other investment strategies
might result in temporary price distortions.
Foreign Currencies. The Funds may purchase and
sell foreign currency on a spot basis, and may use
currency-related derivatives instruments such as
options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies
and forward currency contracts (i.e., an obligation to
purchase or sell a specific currency at a specified
future date, which may be any fixed number of days from
the contract date agreed upon by the parties, at a
price set at the time the contract is entered into).
The Funds may use these instruments for hedging or any
other lawful purpose consistent with their respective
investment objectives, including transaction hedging,
anticipatory hedging, cross hedging, proxy hedging, and
position hedging. The Funds' use of currency-related
derivative instruments will be directly related to a
Fund's current or anticipated portfolio securities, and
the Funds may engage in transactions in currency-
related derivative instruments as a means to protect
against some or all of the effects of adverse changes
in foreign currency exchange rates on their portfolio
investments. In general, if the currency in which a
portfolio investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase.
<PAGE>
Conversely, a decline in the exchange rate
of the currency would adversely effect the value of the
portfolio investment expressed in U.S. dollars.
For example, a Fund might use currency-related
derivative instruments to "lock in" a U.S. dollar price
for a portfolio investment, thereby enabling the Fund
to protect itself against a possible loss resulting
from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or
sold and the date on which payment is made or received.
A Fund also might use currency-related derivative
instruments when the Adviser believes that one currency
may experience a substantial movement against another
currency, including the U.S. dollar, and it may use
currency-related derivative instruments to sell or buy
the amount of the former foreign currency,
approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, a Fund may
use currency-related derivative instruments to hedge
all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency
where such currency or currencies act as an effective
proxy for other currencies. The use of this basket
hedging technique may be more efficient and economical
than using separate currency-related derivative
instruments for each currency exposure held by the
Fund. Furthermore, currency-related derivative
instruments may be used for short hedges -- for
example, a Fund may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from
the anticipated sale of a security denominated in a
foreign currency.
In addition, a Fund may use a currency-related
derivative instrument to shift exposure to foreign
currency fluctuations from one foreign country to
another foreign country where the Adviser believes that
the foreign currency exposure purchased will appreciate
relative to the U.S. dollar and thus better protect the
Fund against the expected decline in the foreign
currency exposure sold. For example, if a Fund owns
securities denominated in a foreign currency and the
Adviser believes that currency will decline, it might
enter into a forward contract to sell an appropriate
amount of the first foreign currency, with payment to
be made in a second foreign currency that the Adviser
believes would better protect the Fund against the
decline in the first security than would a U.S. dollar
exposure. Hedging transactions that use two foreign
currencies are sometimes referred to as "cross hedges."
The effective use of currency-related derivative
instruments by a Fund in a cross hedge is dependent
upon a correlation between price movements of the two
currency instruments and the underlying security
involved, and the use of two currencies magnifies the
risk that movements in the price of one instrument may
not correlate or may correlate unfavorably with the
foreign currency being hedged. Such a lack of
correlation might occur due to factors unrelated to the
value of the currency instruments used or investments
being hedged, such as speculative or other pressures on
the markets in which these instruments are traded.
A Fund also might seek to hedge against changes in
the value of a particular currency when no hedging
instruments on that currency are available or such
hedging instruments are more expensive than certain
other hedging instruments. In such cases, the Fund may
hedge against price movements in that currency by
entering into transactions using currency-related
derivative instruments on another foreign currency or a
basket of currencies, the values of which the Adviser
believes will have a high degree of positive
correlation to the value of the currency being hedged.
The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements
in the price of the currency being hedged is magnified
when this strategy is used.
The use of currency-related derivative instruments
by a Fund involves a number of risks. The value of
currency-related derivative instruments depends on the
value of the underlying currency relative to the U.S.
dollar. Because foreign currency transactions
occurring in the interbank market might involve
substantially larger amounts than those involved in the
use of such derivative instruments, a Fund could be
disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1
million) for the underlying foreign currencies at
prices that are less favorable than for round lots
(generally consisting of transactions of greater than
$1 million).
There is no systematic reporting of last sale
information for currencies or any regulatory
requirement that quotations available through dealers
or other market sources be firm or revised on a timely
basis. Quotation information generally is
representative of very large transactions in the
interbank market and thus might not reflect odd-lot
transactions where rates might be less favorable. The
interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options
or futures markets are closed while the markets for the
underlying
<PAGE>
currencies remain open, significant price
and rate movements might take place in the underlying
markets that cannot be reflected in the markets for the
derivative instruments until they re-open.
Settlement of transactions in currency-related
derivative instruments might be required to take place
within the country issuing the underlying currency.
Thus, a Fund might be required to accept or make
delivery of the underlying foreign currency in
accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to
pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
When a Fund engages in a transaction in a currency-
related derivative instrument, it relies on the
counterparty to make or take delivery of the underlying
currency at the maturity of the contract or otherwise
complete the contract. In other words, the Fund will
be subject to the risk that it may sustain a loss as a
result of the failure of the counterparty to comply
with the terms of the transaction. The counterparty
risk for exchange-traded instruments is generally less
than for privately-negotiated or OTC currency
instruments, since generally a clearing agency, which
is the issuer or counterparty to each instrument,
provides a guarantee of performance. For privately-
negotiated instruments, there is no similar clearing
agency guarantee. In all transactions, the Fund will
bear the risk that the counterparty will default, and
this could result in a loss of the expected benefit of
the transaction and possibly other losses to the Fund.
The Funds will enter into transactions in currency-
related derivative instruments only with counterparties
that the Adviser reasonably believes are capable of
performing under the contract.
Purchasers and sellers of currency-related
derivative instruments may enter into offsetting
closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument
purchased or sold. Secondary markets generally do not
exist for forward currency contracts, with the result
that closing transactions generally can be made for
forward currency contracts only by negotiating directly
with the counterparty. Thus, there can be no assurance
that a Fund will, in fact, be able to close out a
forward currency contract (or any other currency-
related derivative instrument) at a time and price
favorable to the Fund. In addition, in the event of
insolvency of the counterparty, a Fund might be unable
to close out a forward currency contract at any time
prior to maturity. In the case of an exchange-traded
instrument, a Fund will be able to close the position
out only on an exchange which provides a market for the
instruments. The ability to establish and close out
positions on an exchange is subject to the maintenance
of a liquid market, and there can be no assurance that
a liquid market will exist for any instrument at any
specific time. In the case of a privately-negotiated
instrument, a Fund will be able to realize the value of
the instrument only by entering into a closing
transaction with the issuer or finding a third party
buyer for the instrument. While the Funds will enter
into privately-negotiated transactions only with
entities who are expected to be capable of entering
into a closing transaction, there can be no assurance
that the Funds will, in fact, be able to enter into
such closing transactions.
The precise matching of currency-related
derivative instrument amounts and the value of the
portfolio securities involved generally will not be
possible because the value of such securities, measured
in the foreign currency, will change after the currency-
related derivative instrument position has been
established. Thus, a Fund might need to purchase or
sell foreign currencies in the spot (cash) market. The
projection of short-term currency market movements is
extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain.
Permissible foreign currency options will include
options traded primarily in the OTC market. Although
options on foreign currencies are traded primarily in
the OTC market, the Funds will normally purchase or
sell OTC options on foreign currency only when the
Adviser reasonably believes a liquid secondary market
will exist for a particular option at any specific
time.
There will be a cost to the Funds of engaging in
transactions in currency-related derivative instruments
that will vary with factors such as the contract or
currency involved, the length of the contract period
and the market conditions then prevailing. A Fund
using these instruments may have to pay a fee or
commission or, in cases where the instruments are
entered into on a principal basis, foreign exchange
dealers or other counterparties will realize a profit
based on the difference ("spread") between the prices
at which they are buying and selling various
currencies. Thus, for example, a dealer may offer to
sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
<PAGE>
When required by the SEC guidelines, the Funds
will set aside permissible liquid assets in segregated
accounts or otherwise cover their respective potential
obligations under currency-related derivatives
instruments. To the extent a Fund's assets are so set
aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced
with similar assets. As a result, if a large portion
of a Fund's assets are so set aside, this could impede
portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
The Adviser's decision to engage in a transaction
in a particular currency-related derivative instrument
will reflect the Adviser's judgment that the
transaction will provide value to the Fund and its
shareholders and is consistent with the Fund's
objectives and policies. In making such a judgment,
the Adviser will analyze the benefits and risks of the
transaction and weigh them in the context of the Fund's
entire portfolio and objectives. The effectiveness of
any transaction in a currency-related derivative
instrument is dependent on a variety of factors,
including the Adviser's skill in analyzing and
predicting currency values and upon a correlation
between price movements of the currency instrument and
the underlying security. There might be imperfect
correlation, or even no correlation, between price
movements of an instrument and price movements of
investments being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of
the investments being hedged, such as speculative or
other pressures on the markets in which these
instruments are traded. In addition, a Fund's use of
currency-related derivative instruments is always
subject to the risk that the currency in question could
be devalued by the foreign government. In such a case,
any long currency positions would decline in value and
could adversely affect any hedging position maintained
by the Fund.
The Funds' dealing in currency-related derivative
instruments will generally be limited to the
transactions described above. However, the Funds
reserve the right to use currency-related derivatives
instruments for different purposes and under different
circumstances. Of course, the Funds are not required
to use currency-related derivatives instruments and
will not do so unless deemed appropriate by the
Adviser. It should also be realized that use of these
instruments does not eliminate, or protect against,
price movements in the Funds' securities that are
attributable to other (i.e., non-currency related)
causes. Moreover, while the use of currency-related
derivatives instruments may reduce the risk of loss due
to a decline in the value of a hedged currency, at the
same time the use of these instruments tends to limit
any potential gain which may result from an increase in
the value of that currency.
Swap Agreements. The Funds may enter into
interest rate, securities index, commodity, or security
and currency exchange rate swap agreements for any
lawful purpose consistent with each Fund's investment
objective, such as for the purpose of attempting to
obtain or preserve a particular desired return or
spread at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that
desired return or spread. The Funds may also enter
into swaps in order to protect against an increase in
the price of, or the currency exchange rate applicable
to, securities that the particular Fund anticipates
purchasing at a later date. Swap agreements are two-
party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to
several years. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials
in rates of return) earned or realized on particular
predetermined investments or instruments. The gross
returns to be exchanged or "swapped" between the
parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular
interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular
index. Swap agreements may include interest rate caps,
under which, in return for a premium, one party agrees
to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap;"
interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other
to the extent that interest rates fall below a
specified level, or "floor;" and interest rate collars,
under which a party sells a cap and purchases a floor,
or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or
maximum levels.
The "notional amount" of the swap agreement is the
agreed upon basis for calculating the obligations that
the parties to a swap agreement have agreed to
exchange. Under most swap agreements entered into by a
Fund, the obligations of the parties would be exchanged
on a "net basis." Consequently, a Fund's obligation
(or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received
under the agreement based on the relative values of the
positions held by each party to the agreement (the "net
amount"). A Fund's obligation under a swap agreement
will be accrued daily (offset against amounts owed to
the Fund) and any accrued but unpaid net
<PAGE>
amounts owed
to a swap counterparty will be covered by the
maintenance of a segregated account generally
consisting of liquid assets.
Whether a Fund's use of swap agreements will be
successful in furthering its investment objective will
depend, in part, on the Adviser's ability to predict
correctly whether certain types of investments are
likely to produce greater returns than other
investments. Swap agreements may be considered to be
illiquid. Moreover, a Fund bears the risk of loss of
the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of
a swap agreement counterparty. Certain restrictions
imposed on the Funds by the Internal Revenue Code may
limit the Funds' ability to use swap agreements. The
swaps market is largely unregulated.
The Funds will enter swap agreements only with
counterparties that the Adviser reasonably believes are
capable of performing under the swap agreements. If
there is a default by the other party to such a
transaction, a Fund will have to rely on its
contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction.
Additional Derivative Instruments and Strategies.
In addition to the derivative instruments and
strategies described above, the Adviser expects to
discover additional derivative instruments and other
hedging or risk management techniques. The Adviser may
utilize these new derivative instruments and techniques
to the extent that they are consistent with a Fund's
investment objective and permitted by the Fund's
investment limitations, operating policies, and
applicable regulatory authorities.
Depositary Receipts
Each Fund may invest in foreign securities by
purchasing depositary receipts, including American
Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs") or other securities convertible into
securities or issuers based in foreign countries.
These securities may not necessarily be denominated in
the same currency as the securities into which they may
be converted. Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in
the U.S. securities markets, while EDRs, in bearer
form, may be denominated in other currencies and are
designed for use in European securities markets. ADRs
are receipts typically issued by a U.S. Bank or trust
company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a
similar arrangement. For purposes of a Fund's
investment policies, ADRs and EDRs are deemed to have
the same classification as the underlying securities
they represent. Thus, an ADR or EDR representing
ownership of common stock will be treated as common
stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. For example, a non-
sponsored depositary may not provide the same
shareholder information that a sponsored depositary is
required to provide under its contractual arrangements
with the issuer, including reliable financial
statements. Under the terms of most sponsored
arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to
provide shareholder communications and other
information to the ADR holders at the request of the
issuer of the deposited securities.
Foreign Investment Companies
The Funds may invest, to a limited extent, in
foreign investment companies. Some of the countries in
which the Funds invest may not permit direct investment
by outside investors. Investments in such countries
may only be permitted through foreign government-
approved or -authorized investment vehicles, which may
include other investment companies. In addition, it
may be less expensive and more expedient for a Fund to
invest in a foreign investment company in a country
which permits direct foreign investment. Investing
through such vehicles may involve frequent or layered
fees or expenses and may also be subject to limitation
under the 1940 Act. Under the 1940 Act, a Fund may
invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any
one investment company as long as the investment does
not represent more than 3% of the voting stock of the
acquired investment company. The Funds do not intend
to invest in such investment companies unless, in the
judgment of the Adviser, the potential benefits of such
investments justify the payment of any associated fees
and expenses.
<PAGE>
Warrants
Each Fund may invest in warrants, valued at the
lower of cost or market value, if, after giving effect
thereto, not more than 5% of its net assets will be
invested in warrants other than warrants acquired in
units or attached to other securities. Warrants are
options to purchase equity securities at a specific
price for a specific period of time. They do not
represent ownership of the securities but only the
right to buy them. Investing in warrants is purely
speculative in that they have no voting rights, pay no
dividends and have no rights with respect to the assets
of the corporation issuing them. In addition, the
value of a warrant does not necessarily change with the
value of the underlying securities, and a warrant
ceases to have value if it is not exercised prior to
its expiration date.
Short Sales Against the Box
Each Fund may sell securities short against the
box to hedge unrealized gains on portfolio securities.
Selling securities short against the box involves
selling a security that a Fund owns or has the right to
acquire, for delivery at a specified date in the
future. If a Fund sells securities short against the
box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price
rises.
DIRECTORS AND OFFICERS
The directors and officers of the Corporation,
together with information as to their principal
business occupations during the last five years, and
other information, are shown below. Each director who
is deemed an "interested person," as defined in the
1940 Act, is indicated by an asterisk.
*J. Kevin Callaghan, a Director and Co-Chairman of
the Corporation.
Mr. Callaghan, 40 years old, received a Bachelor
of Arts degree in economics and finance from the
University of Puget Sound in 1981. Mr. Callaghan has
been with the Adviser since 1983 and is currently a
portfolio manager with the Adviser.
*Steven C. Phelps, a Director and Co-Chairman of
the Corporation.
Mr. Phelps, 37 years old, graduated magna cum
laude from Williams College in 1983 with a degree in
political economy and was awarded a Fulbright
Scholarship at the University of Frankfurt, Germany.
Mr. Phelps joined the Adviser in 1986 after working for
two years with PACCAR, Inc. as an analyst in the
treasury department of the finance subsidiary and as an
independent researcher in the field of transportation
economics. Mr. Phelps is a Chartered Financial Analyst
and a Chartered Investment Counselor.
Graham S. Anderson, a Director of the Corporation.
Mr. Anderson, 65 years old, received a Bachelor of
Arts from the University of Washington. From 1987
until 1994, Mr. Anderson served as the Chairman and
Chief Executive Officer of Pettit-Morry Co., an
insurance broker, and prior thereto served as President
and Chief Executive Officer of Pettit-Morry Co. In
addition, Mr. Anderson has served as a director of
Market International, a ski equipment manufacturer
since 1985, director of Commerce Bank Corporation since
1991, director of Gray's Harbor Paper Company since
1992 and director of Acordia Northwest, Inc., the
successor to Pettit-Morry Co. Mr. Anderson was also
the Chairman of the National Association of Insurance
Brokers and Alberg Holding Co.
Otis P. Heald III (Tres), President of the
Corporation.
Mr. Heald, 33 years old, earned a Bachelor of
Science degree in finance and real estate from San
Francisco State University in 1989 and a Master's of
Business Administration in finance from the University
of Southern California in 1995. Prior to joining the
Adviser as a portfolio manager in 1996, Mr. Heald was a
portfolio manager and securities analyst at Wells
Fargo/First Interstate Capital Management. Mr. Heald
worked as a credit analyst and commercial lender for
four years before entering the investment management
industry.
<PAGE>
Lisa P. Guzman, Treasurer and Secretary of the
Corporation.
Ms. Guzman, 43 years old, graduated with honors
from the University of Washington in 1977 with a
Bachelor of Arts degree and from the University of
Puget Sound in 1983 with a Master's of Business
Administration. Prior to joining the Adviser in 1990,
Ms. Guzman worked for 12 years at PACCAR, Inc., the
last four years as cash manager of its finance
subsidiary.
The address for Messrs. Callaghan, Phelps and
Heald and Ms. Guzman is Badgley, Phelps and Bell, Inc.,
1420 Fifth Avenue, Suite 4400, Seattle, Washington,
98101. The address for Mr. Anderson is Graco
Investments Inc., 520 Pike Street, 20th Floor, Seattle,
Washington 98101.
As of _________ __, 1998, officers and directors
of the Corporation did not beneficially own any of the
shares of common stock of the Growth Fund's or the
Balanced Fund's then outstanding shares. Directors and
officers of the Corporation who are also officers,
directors, employees, or shareholders of the Adviser do
not receive any remuneration from any of the Funds for
serving as directors or officers.
Each director who is not deemed an "interested
person" as defined in the 1940 Act, will receive $250
for each Board of Directors meeting attended by such
person. The Board anticipates holding four meetings
during fiscal 1999.
PRINCIPAL SHAREHOLDERS
As of _________ __, 1998, the following person
owned of record or is known by the Corporation to own
of record or beneficially 5% or more of the outstanding
shares of each Fund:
Name and Address Fund No. SharesPercentage
J. Kevin Callaghan Growth Fund 2,500 50%
Balanced Fund 2,500 50%
Steven C. Phelps Growth Fund 2,500 50%
Balanced Fund 2,500 50%
Based on the foregoing, as of _________ __, 1998,
Messrs. Callaghan and Phelps each owned a controlling
interest in the Corporation. Shareholders with a
controlling interest could effect the outcome of proxy
voting or the direction of management of the
Corporation.
INVESTMENT ADVISER
Badgley, Phelps and Bell, Inc. (the "Adviser") is
the investment adviser to the Funds. The Adviser is
controlled by several of its officers.
The investment advisory agreement between the
Corporation and the Adviser dated as of _________ __,
1998 (the "Advisory Agreement") has an initial term of
two years and thereafter is required to be approved
annually by the Board of Directors of the Corporation
or by vote of a majority of each of the Fund's
outstanding voting securities (as defined in the 1940
Act). Each annual renewal must also be approved by the
vote of a majority of the Corporation's directors who
are not parties to the Advisory Agreement or interested
persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The
Advisory Agreement was approved by the Board of
Directors, including a majority of the disinterested
directors on _________ __, 1998 and by the initial
shareholders of each Fund on _________ __, 1998. The
Advisory Agreement is terminable without penalty, on 60
days' written notice by the Board of Directors of the
Corporation, by vote of a majority of each of the
Fund's outstanding voting securities or by the Adviser,
and will terminate automatically in the event of its
assignment.
Under the terms of the Advisory Agreement, the
Adviser manages the Funds' investments and business
affairs, subject to the supervision of the
Corporation's Board of Directors. At its expense, the
Adviser provides office space and all necessary office
facilities, equipment and personnel for managing the
investments of the Funds. As
<PAGE>
compensation for its
services, the Growth Fund pays the Adviser an annual
management fee of 1.00% of its average daily net
assets, and the Balanced Fund pays the Adviser an
annual management fee of 0.90% of its average daily net
assets. The advisory fee is accrued daily and paid
monthly. The organizational expenses of each Fund were
advanced by the Adviser and will be reimbursed by the
Funds over a period of not more than 60 months.
The Adviser has agreed that for the fiscal year
ending June 30, 1999, the Adviser will waive its
management fee and/or reimburse the Fund's operating
expenses to the extent necessary to ensure that (i) the
total operating expenses for the Growth Fund do not
exceed 1.50% of average daily net assets, and (ii) the
total operating expenses for the Balanced Fund do not
exceed 1.30% of the average daily net assets. After
such date, the Adviser may from time to time
voluntarily waive all or a portion of its fee and/or
absorb expenses for the Funds. Any waiver of fees or
absorption of expenses will be made on a monthly basis
and, with respect to the latter, will be paid to the
Funds by reduction of the Adviser's fee. Any such
waiver/absorption is subject to later adjustment during
the term of the Advisory Agreement to allow Adviser to
recoup amounts waived/absorbed to the extent actual
fees and expenses for a specific month are less than
the expense limitation caps. In the event, after
fiscal 1999, the Adviser decides to no longer
voluntarily waive and/or reimburse fees and/or
expenses, any unrecovered amounts previously waived
and/or reimbursed will be permanently forgiven by the
Adviser.
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser, in its
capacity as portfolio manager, is responsible for
decisions to buy and sell securities for the Funds and
for the placement of the Funds' securities business,
the negotiation of the commissions to be paid on such
transactions and the allocation of portfolio brokerage
business. The Adviser seeks to obtain the best
execution at the best security price available with
respect to each transaction. The best price to the
Funds means the best net price without regard to the
mix between purchase or sale price and commission, if
any. While the Adviser seeks reasonably competitive
commission rates, the Funds do not necessarily pay the
lowest available commission. Brokerage will not be
allocated based on the sale of a Fund's shares.
Section 28(e) of the Securities Exchange Act of
1934, as amended, ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement, and custody).
In selecting brokers or dealers, the Adviser
considers investment and market information and other
research, such as economic, securities and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
the Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value
of the research information and brokerage services
provided by such broker or dealer to the Funds. The
Adviser believes that the research information received
in this manner provides the Funds with benefits by
supplementing the research otherwise available to the
Funds. Such higher commissions will not be paid by the
Funds unless (a) the Adviser determines in good faith
that the amount is reasonable in relation to the
services in terms of the particular transaction or in
terms of the Adviser's overall responsibilities with
respect to the accounts, including the Funds, as to
which it exercises investment discretion; (b) such
payment is made in compliance with the provisions of
Section 28(e) and other applicable state and federal
laws; and (c) in the opinion of the Adviser, the total
commissions paid by the Funds will be reasonable in
relation to the benefits to the Funds over the long
term.
The Adviser places portfolio transactions for
other advisory accounts managed by the Adviser.
Research services furnished by firms through which the
Funds effect their securities transactions may be used
by the Adviser in servicing all of its accounts; not
all of such services may be used by the Adviser in
connection with the Funds. The Adviser believes it is
not possible to measure separately the benefits from
research services to each of the accounts (including
the Funds) managed by it. Because the volume and
nature of the trading activities of the accounts are
not
<PAGE>
uniform, the amount of commissions in excess of
those charged by another broker paid by each account
for brokerage and research services will vary.
However, the Adviser believes such costs to the Funds
will not be disproportionate to the benefits received
by the Funds on a continuing basis. The Adviser seeks
to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell
securities by the Funds and another advisory account.
In some cases, this procedure could have an adverse
effect on the price or the amount of securities
available to the Funds. In making such allocations
between a Fund and other advisory accounts, the main
factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the
availability of cash for investment and the size of
investment commitments generally held.
Each Fund anticipates that its annual portfolio
turnover rate will not exceed 50%, and is expected to
be between 20% and 30%. The annual portfolio turnover
rate indicates changes in a Fund's securities holdings;
for instance, a rate of 100% would result if all the
securities in a portfolio (excluding securities whose
maturities at acquisition were one year or less) at the
beginning of an annual period had been replaced by the
end of the period. The turnover rate may vary from
year to year, as well as within a year, and may be
affected by portfolio sales necessary to meet cash
requirements for redemptions of a Fund's shares.
CUSTODIAN
As custodian of the Funds' assets, Firstar Trust
Company ("Firstar"), Mutual Fund Services, Third Floor,
615 East Michigan Street, Milwaukee, Wisconsin 53202,
has custody of all securities and cash of each Fund,
delivers and receives payment for portfolio securities
sold, receives and pays for portfolio securities
purchased, collects income from investments and
performs other duties, all as directed by the officers
of the Corporation.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar also acts as transfer agent and dividend-
disbursing agent for the Funds. Firstar is compensated
based on an annual fee per open account of $14 (subject
to a minimum annual fee of $16,250 per Fund) plus out-
of-pocket expenses, such as postage and printing
expenses in connection with shareholder communications.
Firstar also receives an annual fee per closed account
of $14.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated _________ __,
1998 (the "Distribution Agreement"), Rafferty Capital
Markets, Inc. (the "Distributor") acts as principal
distributor of the Funds' shares. The Distribution
Agreement provides that the Distributor will use its
best efforts to distribute the Funds' shares, which
shares are offered for sale by the Funds continuously
at net asset value per share without the imposition of
a sales charge. Pursuant to the terms of the
Distribution Agreement, the Distributor bears the costs
of printing prospectuses and shareholder reports which
are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of
Fund shares. All or a portion of the distribution and
shareholder servicing fee may be used by the
Distributor to pay such expenses under the distribution
and shareholder servicing plan discussed below.
Distribution and Shareholder Servicing Plan
The Corporation, on behalf of the Funds, has
adopted a plan pursuant to Rule 12b-1 under the 1940
Act (the "12b-1 Plan"), which requires it to pay the
Distributor, in its capacity as the principal
distributor of Fund shares, a distribution and
shareholder servicing fee of 0.25% per annum of each
Fund's average daily net assets. Under the terms of
the 12b-1 Plan, the Distributor is authorized to, in
turn, pay all or a portion of this fee to any
securities dealer, financial institution or any other
person (the "Recipient") who renders assistance in
distributing or promoting the sale of Fund shares, or
who provides certain shareholder services to Fund
shareholders, pursuant to a written agreement (the
"Related Agreement"). Payments under the 12b-1 Plan
are based upon a percentage of average daily net units
attributable to each Fund regardless of the amounts
actually paid or expenses actually incurred by the
Distributor, however, in no event, may such payments
exceed the maximum allowable fee. It is, therefore,
possible that the
<PAGE>
Distributor may realize a profit in a
particular year as a result of these payments. The 12b-
1 Plan has the effect of increasing the Fund's expenses
from what they would otherwise be.
Anticipated Benefits to the Funds
The Board of Directors considered various factors
in connection with its decision to approve the 12b-1
Plan, including: (a) the nature and causes of the
circumstances which make implementation of the 12b-1
Plan necessary and appropriate; (b) the way in which
the 12b-1 Plan would address those circumstances,
including the nature and potential amount of
expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans
or pricing structures; (e) the relationship of the
12b-1 Plan to other distribution efforts of the Funds;
and (f) the possible benefits of the 12b-1 Plan to any
other person relative to those of the Funds.
Based upon its review of the foregoing factors and
the material presented to it, and in light of its
fiduciary duties under relevant state law and the 1940
Act, the Board of Directors determined, in the exercise
of its business judgment, that the 12b-1 Plan was
reasonably likely to benefit the Funds and their
respective shareholders in at least one or several
potential ways. Specifically, the Board concluded that
the Distributor and any Recipients operating under
Related Agreements would have little or no incentive to
incur promotional expenses on behalf of a Fund if a
12b-1 Plan were not in place to reimburse them, thus
making the adoption of such 12b-1 Plan important to the
initial success and thereafter, continued viability of
the Funds. In addition, the Board determined that the
payment of distribution fees to these persons should
motivate them to provide an enhanced level of service
to Fund shareholders, which would, of course, benefit
such shareholders. Finally, the adoption of the 12b-1
Plan would help to increase net assets under management
in a relatively short amount of time, given the
marketing efforts on the part of the Distributor and
Recipients to sell Fund shares, which should result in
certain economies of scale.
While there is no assurance that the expenditure
of Fund assets to finance distribution of Fund shares
will have the anticipated results, the Board of
Directors believes there is a reasonable likelihood
that one or more of such benefits will result, and
since the Board will be in a position to monitor the
distribution and shareholder servicing expenses of the
Funds, it will be able to evaluate the benefit of such
expenditures in deciding whether to continue the 12b-1
Plan.
TAXES
Each Fund will be treated as a separate entity for
federal income tax purposes since the Tax Reform Act of
1986 requires that all portfolios of a series fund be
treated as separate taxpayers. As indicated under
"Dividends, Capital Gains Distributions, and Tax
Treatment" in the Prospectus, each Fund intends to
qualify annually as a "regulated investment company"
under the Code. This qualification does not involve
government supervision of the Funds' management
practices or policies.
A dividend or capital gain distribution received
shortly after the purchase of shares reduces the net
asset value of shares by the amount of the dividend or
distribution and, although in effect a return of
capital, will be subject to income taxes. Net gains on
sales of securities when realized and distributed are
taxable as capital gains. If the net asset value of
shares were reduced below a shareholder's cost by
distribution of gains realized on sales of securities,
such distribution would be a return of investment
although taxable as indicated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same
caption, the net asset value of each of the Funds will
be determined as of the close of trading on each day
the New York Stock Exchange (the "NYSE") is open for
trading. The Funds do not determine net asset value on
days the NYSE is closed and at other times described in
the Prospectus. The NYSE is closed on New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Additionally, if
any of the aforementioned holidays falls on a Saturday,
the NYSE will not be open for trading on the preceding
Friday and when such holiday falls on a Sunday, the
NYSE will not be open for trading on the succeeding
Monday, unless unusual business conditions exist, such
as the ending of a monthly or the yearly accounting
period.
<PAGE>
SHAREHOLDER MEETINGS
Maryland law permits registered investment
companies, such as the Corporation, to operate without
an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by
the 1940 Act. The Corporation has adopted the
appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in
which the election of directors is not required to be
acted on by shareholders under the 1940 Act.
PERFORMANCE INFORMATION
As described in the "Fund Performance" section of
the Funds' Prospectus, the Funds' historical
performance or return may be shown in the form of
various performance figures. The Funds' performance
figures are based upon historical results and are not
necessarily representative of future performance.
Factors affecting the Funds' performance include
general market conditions, operating expenses, and
investment management.
Total Return
The average annual total return of each Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment
of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the stated periods
at the end of the stated periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in a Fund's shares on the first
day of the period and computing the "ending value" of
that investment at the end of the period. The total
return percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes
that all income and capital gains dividends paid by a
Fund have been reinvested at the net asset value of the
Fund on the reinvestment dates during the period.
Total return may also be shown as the increased dollar
value of the hypothetical investment over the period.
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between these factors and
their contributions to total return.
Yield
Yield is computed in accordance with a
standardized method prescribed by rules of the SEC.
Under that method, the current yield quotation for a
Fund is based on a one month or 30-day period. The
yield is computed by dividing the net investment income
per share earned during the 30-day or one month period
by the maximum offering price per share on the last day
of the period, according to the following formula:
<PAGE>
YIELD=2[(a-b +1)6-1]
cd
Where: a = dividends and interest earned
during the period.
b = expenses accrued for the period (net
of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
Comparisons
From time to time, in marketing and other Fund
literature, the Funds' performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Funds will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.
("Morningstar"), which ranks funds on the basis of
historical risk and total return. Morningstar's
rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a
weighted average for 3, 5 and 10 year periods.
Rankings are not absolute or necessarily predictive of
future performance.
Evaluations of Fund performance made by
independent sources may also be used in advertisements
concerning the Funds, including reprints of or
selections from, editorials or articles about the
Funds. Sources for Fund performance and articles about
the Funds may include publications such as Money,
Forbes, Kiplinger's, Financial World, Business Week,
U.S. News and World Report, the Wall Street Journal,
Barron's and a variety of investment newsletters.
The Funds may compare their performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index, the Russell 2500
Index and the Lehman Aggregate Bond Index. There are
differences and similarities between the investments
that the Funds may purchase for their respective
portfolios and the investments measured by these
indices.
INDEPENDENT ACCOUNTANTS
____________________, [address], independent
accountants for the Funds, audit and report on the
Funds' financial statements.
FINANCIAL STATEMENTS
The following financial statements of each of the
Funds are contained herein:
(a) Report of Independent Accountants.*
(b) Statement of Assets and Liabilities.*
(c) Notes to Statement of Assets and
Liabilities.*
____________
* To be filed by Amendment.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days_including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are graded into several categories,
ranging from `A-1' for the highest quality obligations
to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is rated
in the highest category by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is strong.
Within this category, certain obligations are
designated with a plus sign (+). This
indicates that the obligor's capacity to meet
its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits
adequate protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded
as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation are not
made on the date due even if the applicable
grace period has not expired, unless Standard
& Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
<PAGE>
Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
obligations. This will normally be evidenced
by many of the characteristics cited above,
but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
<PAGE>
F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory capacity
for timely payment of financial commitments,
but the margin of safety is not as great as
in the case of the higher ratings.
F-3 Fair credit quality. The capacity for timely
payment of financial commitments is adequate;
however, near term adverse changes could
result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for timely
payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent payment
default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
ratings are consistent with the rating criteria used by
money market participants. The ratings apply to all
obligations with maturities of under one year,
including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of
credit and current maturities of long-term debt. Asset-
backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term debt ratings is the refinement of
the traditional `1' category. The majority of short-
term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-
term liquidity, including internal operating
factors and/or access to alternative sources
of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment.
Liquidity factors are excellent and supported
by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors
are very small.
<PAGE>
Good Grade
D-2 Good certainty of timely payment. Liquidity
factors and company fundamentals are sound.
Although ongoing funding needs may enlarge
total financing requirements, access to
capital markets is good. Risk factors are
small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection
factors qualify issue as to investment grade.
Risk factors are larger and subject to more
variation. Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment characteristics.
Liquidity is not sufficient to insure against
disruption in debt service. Operating
factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal
and/or interest payments.
LONG-TERM RATINGS
Standard & Poor's Long-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Credit ratings are based, in varying degrees, on
the following considerations: (1) likelihood of
payment_capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance
with the terms of the obligation; (2) nature of and
provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The rating definitions are expressed in terms of
default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such
differentiation applies when an entity has both senior
and subordinated obligations, secured and unsecured
obligations, or operating company and holding company
obligations.) Accordingly, in the case of junior debt,
the rating may not conform exactly with the category
definition.
AAA An obligation rated `AAA' has the highest
rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial
commitment on the obligation is EXTREMELY
STRONG.
AA An obligation rated `AA' differs from the
highest rated obligations only in small
degree. The obligor's capacity to meet its
financial commitment on the obligation is
VERY STRONG.
<PAGE>
A An obligation rated `A' is somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
obligations in higher rated categories.
However, the obligor's capacity to meet its
financial commitment on the obligation is
still STRONG.
BBB An obligation rated `BBB' exhibits ADEQUATE
protection parameters. However, adverse
economic conditions or changing circumstances
are more likely to lead to a weakened
capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated `BB', `B', `CCC, `CC', and `C'
are regarded as having significant speculative
characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
BB An obligation rated `BB' is LESS VULNERABLE
to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties
or exposure to adverse business, financial or
economic conditions which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated `B' is MORE VULNERABLE to
nonpayment than obligations rated `BB', but
the obligor currently has the capacity to
meet its financial commitment on the
obligation. Adverse business, financial or
economic conditions will likely impair the
obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated `CCC' is CURRENTLY
VULNERABLE to nonpayment, and is dependent
upon favorable business, financial and
economic conditions for the obligor to meet
its financial commitment on the obligation.
In the event of adverse business, financial
or economic conditions, the obligor is not
likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated `CC' is CURRENTLY HIGHLY
VULNERABLE to nonpayment.
C The `C' rating may be used to cover a
situation where a bankruptcy petition has
been filed or similar action has been taken,
but payments on this obligation are being
continued.
D An obligation rated `D' is in payment
default. The `D' rating category is used
when payments on an obligation are not made
on the date due even if the applicable grace
period has not expired, unless Standard &
Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Plus (+) or minus (_): The ratings from `AA' to
`CCC' may be modified by the addition of a plus or
minus sign to show relative standing within the major
rating categories.
Moody's Long-Term Debt Ratings
Aaa Bonds which are rated `Aaa' are judged to be
of the best quality. They carry the smallest
degree of investment risk and are generally
referred to as "gilt edged." Interest
payments are protected by a large or by an
exceptionally stable margin and principal is
secure. While the various protective
elements are likely to change, such changes
as can be visualized are most unlikely to
impair the fundamentally strong position of
such issues.
Aa Bonds which are rated `Aa' are judged to be
of high quality by all standards. Together
with the Aaa group they comprise what are
generally known as high-grade bonds. They
are rated lower than the best bonds because
margins of protection may not be as large as
in Aaa securities or fluctuation of
protective elements may be of greater
amplitude or there may be other elements
present which make the long-term risk appear
somewhat larger than Aaa securities.
<PAGE>
A Bonds which are rated `A' possess many
favorable investment attributes and are to be
considered as upper-medium-grade obligations.
Factors giving security to principal and
interest are considered adequate, but
elements may be present which suggest a
susceptibility to impairment some time in the
future.
Baa Bonds which are rated `Baa' are considered as
medium-grade obligations (i.e., they are
neither highly protected nor poorly secured).
Interest payments and principal security
appear adequate for the present but certain
protective elements may be lacking or may be
characteristically unreliable over any great
length of time. Such bonds lack outstanding
investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated `Ba' are judged to have
speculative elements; their future cannot be
considered as well-assured. Often the
protection of interest and principal payments
may be very moderate, and thereby not well
safeguarded during both good and bad times
over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated `B' generally lack
characteristics of the desirable investment.
Assurance of interest and principal payments
or of maintenance of other terms of the
contract over any long period of time may be
small.
Caa Bonds which are rated `Caa' are of poor
standing. Such issues may be in default or
there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated `Ca' represent
obligations which are speculative in a high
degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated `C' are the lowest
rated class of bonds, and issues so rated can
be regarded as having extremely poor
prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from `Aa' through
`B.' The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that
generic rating category.
Fitch IBCA International Long-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these long-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
Investment Grade
AAA Highest credit quality. `AAA' ratings
denote the lowest expectation of credit
risk. They are assigned only in case of
exceptionally strong capacity for timely
payment of financial commitments. This
capacity is highly unlikely to be
adversely affected by foreseeable
events.
<PAGE>
AA Very high credit quality. `AA' ratings
denote a very low expectation of credit
risk. They indicate very strong
capacity for timely payment of financial
commitments. This capacity is not
significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote
a low expectation of credit risk. The
capacity for timely payment of financial
commitments is considered strong. This
capacity may, nevertheless, be more
vulnerable to changes in circumstances
or in economic conditions than is the
case for higher ratings.
BBB Good credit quality. `BBB' ratings
indicate that there is currently a low
expectation of credit risk. The
capacity for timely payment of financial
commitments is considered adequate, but
adverse changes in circumstances and in
economic conditions are more likely to
impair this capacity. This is the
lowest investment grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that
there is a possibility of credit risk
developing, particularly as the result
of adverse economic change over time;
however, business or financial
alternatives may be available to allow
financial commitments to be met.
B Highly speculative. `B' ratings
indicate that significant credit risk is
present, but a limited margin of safety
remains. Financial commitments are
currently being met; however, capacity
for continued payment is contingent upon
a sustained, favorable business and
economic environment.
CCC, CC, C High default risk. Default is a
real possibility. Capacity for meeting
financial commitments is solely reliant
upon sustained, favorable business or
economic developments. A `CC' rating
indicates that default of some kind
appears probable. `C' ratings signal
imminent default.
DDD, DD and D Default. Securities are not
meeting current obligations and are
extremely speculative. `DDD' designates
the highest potential for recovery of
amounts outstanding on any securities
involved. For U.S. corporates, for
example, `DD' indicates expected
recovery of 50% - 90% of such
outstandings, and `D' the lowest
recovery potential, i.e. below 50%.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of `BBB-` and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the
<PAGE>
likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk factors are
negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
strong. Risk is modest but may
AA vary slightly from time to time because of
economic conditions.
AA-
A+ Protection factors are average but adequate.
However, risk factors are more
A variable and greater in periods of economic
stress.
A-
BBB+ Below-average protection factors but still
considered sufficient for prudent
BBB investment. Considerable variability in risk
during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to
meet obligations when due.
BB Present or prospective financial protection
factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk
that obligations will not be met
B when due. Financial protection factors will
fluctuate widely according to
B- economic cycles, industry conditions and/or
company fortunes. Potential
exists for frequent changes in the rating
within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk can be
substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (Included in Parts A and B)
Report of Independent Accountants
Statement of Assets and Liabilities
Notes to Statement of Assets and
Liabilities
(b) Exhibits
(1) Registrant's Articles of Incorporation
(2) Registrant's By-Laws
(3) None
(4) None
(5) Investment Advisory Agreement*
(6.1) Distribution Agreement with
Rafferty Capital Markets, Inc.*
(7) None
(8) Custodian Agreement with Firstar Trust
Company*
(9.1) Transfer Agency Agreement with
Firstar Trust Company*
(9.2) Administration Agreement with
Firstar Trust Company*
(9.3) Fund Accounting Agreement with
Firstar Trust Company*
(9.4) Fulfillment Servicing Agreement
with Firstar Trust Company*
(10) Opinion and Consent of Godfrey & Kahn,
S.C.*
(11) Consent of [Independent Accountants]*
(12) None
(13) Subscription Agreement*
(14) Individual Retirement Account Disclosure
Statement and Custodial Account*
(15.1) Rule 12b-1 Distribution and
Shareholder Servicing Plan*
(15.2) Form of 12b-1 Related Agreement*
(16) None
(17) Financial Data Schedule*
<PAGE>
(18) None
______________
* To be filed by Amendment.
Item 25. Persons Controlled by or under Common Control
with Registrant
Registrant neither controls any person nor is
under common control with any other person.
Item 26. Number of Holders of Securities
Number of Record
Holders
Title of Securities as of _________ __, 1998
Common Stock, $.01 ___
par value
Item 27. Indemnification
Article VI of Registrant's By-Laws provides as
follows:
ARTICLE VI INDEMNIFICATION
The Corporation shall indemnify (a) its
directors and officers, whether serving the
Corporation or, at its request, any other entity,
to the full extent required or permitted by (i)
Maryland law now or hereafter in force, including
the advance of expenses under the procedures and
to the full extent permitted by law, and (ii) the
1940 Act and (b) other employees and agents to
such extent as shall be authorized by the Board of
Directors and be permitted by law. The foregoing
rights of indemnification shall not be exclusive
of any other rights to which those seeking
indemnification may be entitled. The Board of
Directors may take such action as is necessary to
carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend
from time to time such resolutions or contracts
implementing such provisions or such further
indemnification arrangements as may be permitted
by law.
Item 28. Business and Other Connections of Investment
Adviser and Subadviser
Besides serving as investment adviser to private
accounts, the Adviser is not currently and has not
during the past two fiscal years engaged in any other
business, profession, vocation or employment of a
substantial nature. Information regarding the
business, profession, vocation or employment of a
substantial nature of each of the Adviser's directors
and officers is hereby incorporated by reference from
the information contained under "Fund Organization and
Management -- Management" in the Prospectus.
Item 29. Principal Underwriters
(a) [Name of each investment company for which
the Distributor also acts as principal
underwriter, depositor or investment
adviser.]
(b) The principal business address of Rafferty
Capital Markets, Inc. ("Rafferty"), the
Registrant's principal underwriter, is 550
Mamaroneck Avenue, Harrison, New York 10528.
The following information relates to each
director and officer of Rafferty:
<PAGE>
Positions Positions and
And Offices Offices
Name With Underwriter With Registrant
(c) None.
Item 30. Location of Accounts and Records
All accounts, books or other documents required to
be maintained by Section 31(a) of the Investment
Company Act of 1940, as amended, and the rules
promulgated thereunder are in the possession of
Badgley, Phelps and Bell, Inc., Registrant's investment
adviser, at Registrant's corporate offices, except
records held and maintained by Firstar Trust Company,
Mutual Fund Services, Third Floor, 615 E. Michigan
Street, Milwaukee, Wisconsin 53202, relating to its
function as custodian, transfer agent, administrator,
and fund accountant.
Item 31. Management Services
All management-related service contracts entered
into by Registrant are discussed in Parts A and B of
this Registration Statement.
Item 32. Undertakings.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement
on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of
Seattle and State of Washington on the 28th day of
April, 1998.
BADGLEY FUNDS, INC.
(Registrant)
By:/s/ Otis P. Heald III
----------------------
Otis P. Heald III,
President
Each person whose signature appears below
constitutes and appoints Otis P. Heald III, his or her
true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and
all capacities, to sign any and all pre-effective
amendments to this Registration Statement and to file
the same, with all exhibits thereto, and any other
documents in connection therewith, with the Securities
and Exchange Commission and any other regulatory body,
granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every
act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his or her
substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act
of 1933, this Registration Statement on Form N-1A has
been signed below by the following persons in the
capacities and on the date(s) indicated.
Name Title Date
/s/ Otis P. Heald III President April 28, 1998
- ------------------------
Otis P. Heald III
/s/ Lisa P. Guzman Treasurer April 28, 1998
- ------------------------ and Secretary
Lisa P. Guzman
/s/ J. Kevin Callaghan Director April 29, 1998
- ----------------------- and Co-Chairman
J. Kevin Callaghan
/s/ Steven C. Phelps Director April 29, 1998
- ----------------------- and Co-Chairman
Steven C. Phelps
/s/ Graham S. Anderson Director April 29, 1998
- -----------------------
Graham S. Anderson
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(1) Registrant's Articles of Incorporation
(2) Registrant's By-Laws
(3) None
(4) None
(5) Investment Advisory Agreement*
(6.1) Distribution Agreement with Rafferty Capital
Markets, Inc.*
(7) None
(8) Custodian Agreement with Firstar Trust
Company*
(9.1) Transfer Agency Agreement with Firstar Trust
Company*
(9.2) Administration Agreement with Firstar Trust
Company*
(9.3) Fund Accounting Agreement with Firstar Trust
Company*
(9.4) Fulfillment Servicing Agreement with Firstar
Trust Company*
(10) Opinion and Consent of Godfrey & Kahn, S.C.*
(11) Consent of [Independent Accountants]*
(12) None
(13) Subscription Agreement*
(14) Individual Retirement Account Disclosure
Statement and Custodial Account*
(15.1) Rule 12b-1 Distribution and Shareholder
Servicing Plan*
(15.2) Form of 12b-1 Related Agreement*
(16) None
(17) Financial Data Schedule*
(18) None
___________________
* To be filed by Amendment.
ARTICLES OF INCORPORATION
OF
BADGLEY FUNDS, INC.
ARTICLE I
Incorporator
1.1 Incorporator. The undersigned, Renee Hardt
Torr, whose post office address is Godfrey & Kahn,
S.C., 780 North Water Street, Milwaukee, Wisconsin
53202, being at least eighteen (18) years of age, does
hereby act as incorporator to form a corporation under
the general laws of the State of Maryland.
ARTICLE II
Name
2.1 Name. The name of the corporation is Badgley
Funds, Inc. (the "Corporation").
ARTICLE III
Corporate Purposes and Powers
3.1 Corporate Purposes and Powers. The purpose
for which the Corporation is formed is, without
limitation, to act as an investment company pursuant to
the Investment Company Act of 1940, as amended (the
"1940 Act"), and to exercise and enjoy all the powers,
rights and privileges granted to, or conferred upon,
corporations by the Maryland General Corporation Law,
as amended from time to time (the "MGCL").
ARTICLE IV
Principal Office and Resident Agent
4.1 Principal Office and Resident Agent. The
post office address of the principal office of the
Corporation in the State of Maryland is c/o The
Corporation Trust Incorporated, 300 East Lombard
Street, Baltimore, Maryland 21202. The name of the
Corporation's resident agent in the State of Maryland
is The Corporation Trust Incorporated, a corporation of
the State of Maryland, and the post office address of
the resident agent is 300 East Lombard Street,
Baltimore, Maryland 21202.
ARTICLE V
Capital Stock
5.1 Authorized Shares. The total number of
shares of capital stock which the Corporation shall
have authority to issue is Five Hundred Million
(500,000,000) shares of Common Stock with a par value
of one cent ($0.01) per share and with an aggregate par
value of Five Million Dollars ($5,000,000).
5.2 Power to Classify. The Board of Directors
may classify or reclassify (i.e., into classes and/or
series), from time to time, any unissued shares of
Common Stock of the Corporation, whether now or
hereafter authorized, by setting or changing the prefer
ences, conversion or other rights, voting powers,
restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of
such shares of stock and, pursuant to such
classification or reclassification, to increase or
decrease the number of authorized shares of Common
Stock, or the number of shares of any class or series
of Common Stock, that the Corporation has the authority
to issue. Except as otherwise provided herein, all
references to Common Stock shall apply without
discrimination to the shares of each class or series of
Common Stock. Pursuant to such power, the Board of
Directors has initially designated the authorized
shares of the Corporation into two series of shares of
Common Stock as follows:
Name of Series Number of Shares
Initially Allocated
Badgley Growth Fund 50,000,000
Badgley Balanced Fund 50,000,000
The remaining Four Hundred Million (400,000,000) shares
of Common Stock shall remain unclassified until action
is taken by the Board of Directors pursuant to this
paragraph.
5.3 Classes and Series. Unless otherwise
provided by the Board of Directors prior to the
issuance of shares, the shares of any and all classes
and series of Common Stock shall be subject to the
following:
(a) Redesignation of Class or Series. The
Board may change the designation of a class or series,
whether or not shares of such class or series are
issued and outstanding, provided that such change does
not affect the preferences, conversion or other rights,
voting powers, restrictions, limitations as to
dividends, qualifications, or terms or conditions of
redemption of such class or series.
(b) Authorization of Stock Issuance. The
Board of Directors may authorize the issuance and sale
of any class or series of shares of Common Stock from
time to time in such amounts and on such terms and
conditions, for such purposes and for such amounts or
kind of consideration as the Board of Directors shall
determine, subject to any limits required by then
applicable law. Nothing in this paragraph shall be
construed in any way as limiting the Board of
Director's authority to issue shares of Common Stock in
connection with a share dividend under the MGCL.
(c) Assets, Liabilities, Income and Expenses
of Each Class or Series. The assets and liabilities
and the income and expenses for each class or series of
Common Stock shall be attributable to that class or
series. The income or gain and the expense or
liabilities of the Corporation shall be allocated to
each class or series as determined by or under the
direction of the Board of Directors.
(d) Dividends and Distributions. The
holders of each class or series of Common Stock of
record as of a date determined by the Board of
Directors from time to time shall be entitled, from
funds or other assets legally available therefor, to
dividends or distributions, payable in shares or in
cash or both, in such amounts and at such times as may
be determined by the Board of Directors. Dividends or
distributions shall be paid on shares of a class or
series only out of the assets belonging to that class
or series. The amounts of dividends or distributions
declared and paid with respect to the various classes
or series of Common Stock and the timing thereof may
vary among such classes and series.
(e) Liquidation. At any time there are no
shares outstanding for a particular class or series of
Common Stock, the Board of Directors may liquidate such
class or series in accordance with applicable law. In
the event of the liquidation or dissolution of the
Corporation, or of a class or series thereof when there
are shares outstanding of the Corporation or of such
class or series, as applicable, the stockholders of the
Corporation or of each class or series, as applicable,
shall be entitled to receive, as a class or series, out
of the assets of the Corporation available for
distribution to stockholders, the assets belonging to
that class or series less the liabilities allocated to
that class or series. The assets so distributed to the
holders of a class or series shall be distributed among
such holders in proportion to the number of shares of
that class or series held by them and recorded on the
books of the Corporation. In the event that there are
any assets available for distribution that are not
attributable to any particular class or series, such
assets shall be allocated to all classes or series in
proportion to the net asset value of the respective
class or series.
(f) Fractional Shares. The Corporation may
issue fractional shares. Any fractional shares shall
carry proportionately all the rights of whole shares,
including, without limitation, the right to vote and
the right to receive dividends and distributions.
(g) Voting Rights. On each matter submitted
to a vote of stockholders, each holder of a share of
Common Stock of the Corporation shall be entitled to
one vote for each full share, and a fractional vote for
each fractional share, of stock standing in such
holder's name on the books of the Corporation,
irrespective of the class or series thereof. In
addition, all shares of all classes and series shall
vote together as a single class; provided, however,
that (i) when the MGCL or the 1940 Act requires that a
class or series vote separately with respect to a given
matter, the separate voting requirements of the
applicable law shall govern with respect to the
affected class and/or series and other classes and
series shall vote as a single class, and (ii) unless
otherwise required by the MGCL or the 1940 Act, no
class or series shall have the right to vote on any
matter which does not affect the interest of that class
or series.
(h) Quorum. The presence in person or by
proxy of the holders of one-third of the shares of
Common Stock of the Corporation entitled to vote,
without regard to class or series, shall constitute a
quorum at any meeting of the stockholders, except with
respect to any matter which, under applicable statutes
or regulatory requirements, requires approval by a
separate vote of one or more classes or series of
Common Stock, in which case the presence in person or
by proxy of the holders of one-third of the shares of
each class or series of Common Stock required to vote
as a class or series on the matter shall constitute a
quorum. If, at any meeting of the stockholders, there
shall be less than a quorum present, the stockholders
present at such meeting may, without further notice,
adjourn the same from time to time until a quorum shall
be present.
(i) Authorizing Vote. Notwithstanding any
provision of the MGCL requiring for any purpose a
proportion greater than a majority of the votes of the
Corporation or of a class or series of Common Stock of
the Corporation, the affirmative vote of the holders of
a majority of the total number of shares of Common
Stock of the Corporation, or of a class or series of
Common Stock of the Corporation, as applicable,
outstanding and entitled to vote under such
circumstances pursuant to these Articles of
Incorporation and the By-Laws of the Corporation shall
be effective for such purpose, except to the extent
otherwise required by the 1940 Act and rules
thereunder; provided, however, that, to the extent
consistent with the MGCL and other applicable law, the
By-Laws may provide for authorization to be by the vote
of a proportion less than a majority of the votes of
the Corporation, or of a class or series of Common
Stock.
(j) Change of Name. The Board of Directors,
without action by the Corporation's stockholders, shall
have the authority to change the name of the
Corporation or of any class or series of its Common
Stock created herein or hereafter.
(k) Preemptive Rights. No holder of any
class or series of Common Stock of the Corporation
shall, as such holder, have any right to purchase or
subscribe for any shares of any class or series of
Common Stock which the Corporation may issue or sell
(whether out of the number of shares authorized by
these Articles of Incorporation, or out of any shares
of any class or series of Common Stock of the
Corporation acquired by it after the issue thereof, or
otherwise), other than such right, if any, as the Board
of Directors, in its sole discretion, may determine.
(l) Redemption.
(i) Subject to the suspension of the
right of redemption or postponement of the date of
payment or satisfaction upon redemption in
accordance with the 1940 Act, each holder of any
class or series of the Common Stock of the
Corporation, upon request and after complying with
the redemption procedures established by or under
the supervision of the Board of Directors, shall
be entitled to require the Corporation to redeem,
out of legally available funds, all or any part of
the Common Stock standing in the name of such
holder on the books of the Corporation at the net
asset value (as determined in accordance with the
1940 Act) of such shares (less any applicable
redemption fee).
(ii) The Board of Directors may
authorize the Corporation, at its option and to
the extent permitted by and in accordance with the
conditions of the 1940 Act, to redeem any shares
of any class or series of Common Stock of the
Corporation owned by any stockholder under
circumstances deemed appropriate by the Board of
Directors in its sole discretion from time to
time, including, without limitation, failure to
maintain ownership of a specified minimum number
or value of shares of any class or series of
Common Stock of the Corporation, at the net asset
value (as determined in accordance with the 1940
Act) of such shares (less any applicable
redemption fee).
(iii) Payment for redeemed stock shall be
made in cash unless, in the opinion of the Board of
Directors, which shall be conclusive, conditions exist
which make it advisable for the Corporation to make
payment wholly or partially in securities or other
property or assets of the class or series of Common
Stock being redeemed. Payment made wholly or partially
in securities or other property or assets may be delayed to
such reasonable extent, not inconsistent with applicable law,
as is reasonably necessary under the circumstances. No
stockholder shall have the right, except as determined by the
Board of Directors, to have his shares redeemed in such
securities, property or other assets.
(iv) The Board of Directors may, upon
reasonable notice to the holders of any class or
series of Common Stock of the Corporation, impose
a fee for the redemption of shares, such fee to be
not in excess of the amount set forth in the
Corporation's then existing By-Laws and to apply
in the case of such redemptions and under such
terms and conditions as the Board of Directors
shall determine. The Board of Directors shall
have the authority to rescind the imposition of
any such fee in its discretion and to reimpose the
redemption fee from time to time upon reasonable
notice.
(v) Any shares of Common Stock redeemed
by the Corporation shall be deemed to be canceled
and restored to the status of authorized but
unissued shares of the particular class or series.
(m) Valuation. With respect to any class or
series of Common Stock, the Board of Directors may
adopt provisions to seek to maintain a stable net asset
value per share. Without limiting the foregoing, the
Board of Directors may determine that the net asset
value per share of any class or series should be
maintained at a designated constant value and may
establish procedures, not inconsistent with applicable
law, to accomplish that result. Such procedures may
include a requirement, in the event of a net loss with
respect to the particular class or series from time to
time, for automatic pro rata capital contributions from
each stockholder of that class or series in amounts
sufficient to maintain the designated constant share
value.
ARTICLE VI
Board Of Directors
6.1 Number of Directors. The number of directors
of the Corporation shall be three (3), which may be
changed in accordance with the By-Laws and subject to
the limitations of the MGCL. The directors may fix a
different number of directors and may authorize a
majority of the directors to increase or decrease the
number of directors set by these Articles or the By-
Laws within limits set by the By-Laws. The directors
may also fill vacancies created by an increase in the
number of directors. Unless otherwise provided by the
By-Laws, the directors of the Corporation need not be
stockholders of the Corporation.
6.2 Names of Directors. The names of the
directors who will serve until the first annual meeting
and until their successors are elected and qualify are
as follows:
J. Kevin Callaghan
Steven C. Phelps
Graham S. Anderson
6.3 Limits on Liability of Directors and
Officers. To the fullest extent that limitations on
the liability of directors and officers are permitted
by the MGCL, no director or officer of the Corporation
shall have any personal liability to the Corporation or
to its stockholders for monetary damages. No amendment
to these Articles of Incorporation or repeal of any of
its provisions shall limit or eliminate the benefits
provided to directors and officers under this provision
with respect to any act or omission which occurred
prior to such amendment or repeal.
6.4 Indemnification of Directors and Officers.
The Corporation shall indemnify its directors and
officers and make advance payment of related expenses
to the fullest extent permitted, and in accordance with
the procedures required, by the MGCL and the 1940 Act.
The By-Laws may provide that the Corporation shall
indemnify its employees and/or agents in any manner and
within such limits as permitted by applicable law.
Such indemnification shall be in addition to any other
right or claim to which any director, officer, employee
or agent may otherwise be entitled. The Corporation
may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or
agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer,
partner, trustee, employee or agent of another foreign
or domestic corporation, partnership, joint venture,
trust or other enterprise or employee benefit plan,
against any liability (including, with respect to
employee benefit plans, excise taxes) asserted against
and incurred by such person in any such capacity or
arising out of such person's position, whether or not
the Corporation would have had the power to indemnify
against such liability. The rights provided to any
person by this Article 6.4 shall be enforceable against
the Corporation by such person who shall be presumed to
have relied upon such rights in serving or continuing
to serve in the capacities indicated herein. No
amendment of these Articles of Incorporation shall
impair the rights of any person arising at any time
with respect to events occurring prior to such
amendment.
6.5 Powers of Directors. In addition to any
powers conferred herein or in the By-Laws, the Board of
Directors may, subject to any express limitations
contained in these Articles of Incorporation or in the
By-Laws, exercise the full extent of powers conferred
by the MGCL, and the enumeration and definition of
particular powers herein or in the By-Laws shall in no
way be deemed to restrict or otherwise limit those
lawfully conferred powers. In furtherance and without
limitation of the foregoing, the Board of Directors
shall have power:
(a) To cause the Corporation to enter into,
from time to time, investment advisory agreements
providing for the management and supervision of the
investments of the Corporation and the furnishing of
advice to the Corporation with respect to the
desirability of investing in, purchasing or selling
securities or other assets. Such agreements shall
contain such terms, provisions and conditions as the
Board of Directors may deem advisable and as are
permitted by the 1940 Act.
(b) To designate, without limitation,
distributors, custodians, transfer agents,
administrators, account servicing and other agents for
the stock, assets and business of the Corporation and
employ and fix the powers, rights, duties,
responsibilities and compensation of each such
distributor, custodian, transfer agent, administrator,
account servicing and other agent.
ARTICLE VII
Amendments
7.1 Amendments. The Corporation reserves the
right from time to time to amend, alter, change or
repeal any provision of these Articles of
Incorporation, and all rights conferred upon
stockholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, the undersigned incorporator
of Badgley Funds, Inc. hereby executes the foregoing
Articles of Incorporation and acknowledges the same to
be her act.
Dated this 27th day of April, 1998.
/s/ Renee Hardt Torr
-------------------------
Renee Hardt Torr
BY-LAWS
OF
BADGLEY FUNDS, INC.
ARTICLE I
Offices
1.1 Principal Office. The principal office of
Badgley Funds, Inc. ("the Corporation") in the State of
Maryland shall be in the City of Baltimore.
1.2 Other Offices. The Corporation may have such
other offices in such places as the Board of Directors
may from time to time determine.
ARTICLE II
Meetings of Stockholders
2.1 Annual Meeting. Subject to this Article II,
an annual meeting of stockholders for the election of
directors and the transaction of such other business as
may properly come before the meeting shall be held at
such time and place as the Board of Directors shall
select. The Corporation shall not be required to hold
an annual meeting of its stockholders in any year in
which the election of directors is not required to be
acted upon under the Investment Company Act of 1940, as
amended (the "1940 Act").
2.2 Special Meetings. Special meetings of
stockholders may be called at any time by the
President, the Secretary, the Treasurer, or by a
majority of the Board of Directors and shall be held at
such time and place as may be stated in the notice of
the meeting. Special meetings of the stockholders
shall be called by the Secretary upon receipt of
written request of the holders of shares entitled to
cast not less than 10% of the votes entitled to be cast
at such meeting, provided that such request shall state
the purposes of such meeting and the matters proposed
to be acted on.
2.3 Place of Meetings. Meetings of stockholders
shall be held at such place within the United States as
the Board of Directors may from time to time determine.
2.4 Notice of Meetings; Waiver of Notice. Notice
of the place, date and time of the holding of each
stockholders' meeting and, if the meeting is a special
meeting, the purpose or purposes of the meeting, shall
be given personally or by mail, not less than ten nor
more than ninety days before the date of such meeting,
to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the
meeting. Notice by mail shall be deemed to be duly
given when deposited in the United States mail
addressed to the stockholder at his or her address as
it appears on the records of the Corporation, with
postage prepaid. Notice of any meeting of stockholders
shall be deemed waived by any stockholder who attends
such meeting in person or by proxy, or who, either
before or after the meeting, submits a signed waiver of
notice which is filed with the records of the meeting.
2.5 Quorum, Adjournment of Meetings. The
presence at any stockholders' meeting, in person or by
proxy, of stockholders of one-third of the shares of
the Common Stock of the Corporation entitled to vote,
without regard to class or series, shall be necessary
and sufficient to constitute a quorum for the
transaction of business, except for any matter which,
under applicable statutes or regulatory requirements,
requires approval by a separate vote of one or more
classes or series of Common Stock, in which case the
presence in person or by proxy of holders of one-third
of the shares of each class or series of Common Stock
required to vote as a class or series on the matter
shall constitute a quorum. The holders of a majority
of shares of Common Stock entitled to vote at the
meeting and present in person or by proxy, whether or
not sufficient to constitute a quorum, or, any officer
present entitled to preside or act as Secretary of such
meeting may adjourn the meeting without determining the
date of the new meeting or from time to time without
further notice to a date not more than one hundred and
twenty days after the original record date. Any
business that might have been transacted at the meeting
originally called may be transacted at any such
adjourned meeting at which a quorum is present.
2.6 Organization. At each meeting of the
stockholders, the President, or in his or her absence
or inability to act, a Vice President, shall act as
chairman of the meeting; provided, however, that if no
such officer is present or able to act, a chairman of
the meeting shall be elected at the meeting. The
Secretary or, in his or her absence or inability to
act, any person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep
the minutes thereof.
2.7 Order of Business. The order of business at
all meetings of the stockholders shall be as determined
by the chairman of the meeting.
2.8 Voting. Except as otherwise provided by
statute or the Articles of Incorporation, each holder
of record of shares of Common Stock of the Corporation
shall be entitled at each meeting of the stockholders
to one vote for every full share of such stock, with a
fractional vote for any fractional shares, standing in
his or her name on the record of stockholders of the
Corporation, irrespective of the class or series
thereof, as of the record date determined pursuant to
Section 2.9 or if the record date has not been fixed,
then at the later of (i) the close of business on the
day on which notice of the meeting is mailed or (ii)
the thirtieth day before the meeting. Each stockholder
entitled to vote at any meeting of stockholders may
authorize another person or persons to act for him or
her by a proxy signed by such stockholder or his or her
attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof,
unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the stockholder
executing it, except in those cases where such proxy
states that it is irrevocable and where the proxy is
coupled with an interest in the stock to be voted under
the proxy or another general interest in the
Corporation or its assets or liabilities. Except as
otherwise provided by statute, the Articles of
Incorporation or these By-Laws, any corporate action to
be taken by vote of the stockholders shall be
authorized by the affirmative vote of the holders of a
majority of the total number of shares of Common Stock,
or of a class or series of Common Stock, as applicable,
outstanding and entitled to vote at a meeting of
stockholders at which a quorum is present. No votes
need to be taken by ballot other than the election of
directors, which shall be by written ballot, or unless
required by statute, these By-Laws, or determined by
the chairman of the meeting to be advisable. On a vote
by ballot, each ballot shall be signed by the
stockholder voting or by his or her proxy and shall
state the number of shares voted.
2.9 Fixing of Record Date. The Board of
Directors may fix a time not less than ten nor more
than ninety days prior to the date of any meeting of
stockholders or prior to the last day on which the
consent or dissent of stockholders may be effectively
expressed for any purpose without a meeting, as the
time as of which stockholders entitled to notice of and
to vote at such a meeting or whose consent or dissent
is required or may be expressed for any purpose, as the
case may be, shall be determined; and only persons who
were holders of record of Common Stock at such time and
no other shall be entitled to notice of and to vote at
such meeting or to express their consent or dissent, as
the case may be. If no record date has been fixed, the
record date for the determination of stockholders
entitled to notice of or to vote at a meeting of
stockholders shall be the later of the close of
business on the day on which notice of the meeting is
mailed or the thirtieth day before the meeting, or if
notice is waived by all stockholders, at the close of
business on the tenth day next preceding the day on
which the meeting is held. The Board of Directors may
fix a record date for determining stockholders entitled
to receive payment of a dividend or distribution, but
such date shall be not more than ninety days before the
date on which such payment is made. If no record date
has been fixed, the record date for determining
stockholders entitled to receive dividends or
distributions shall be the close of business on the day
on which the resolution of the Board of Directors
declaring the dividend or distribution is adopted, but
the payment shall not be made more than sixty days
after the date on which the resolution is adopted.
2.10 Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided by statute or the Articles
of Incorporation, any action required to be taken at
any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken
without a meeting, without prior notice and without a
vote, if the following are filed with the records of
stockholders meetings: (i) a unanimous written consent
which sets forth the action and is signed by each stock
holder entitled to vote on the matter and (ii) a
written waiver of any right to dissent signed by each
stockholder entitled to notice of the meeting but not
entitled to vote thereat.
ARTICLE III
Board of Directors
3.1 General Powers. The business and affairs of
the Corporation shall be managed under the direction of
the Board of Directors and all powers of the
Corporation may be exercised by or under authority of
the Board of Directors.
3.2 Number of Directors. The number of directors
shall be fixed from time to time by resolution of the
Board of Directors adopted by a majority of the
Directors then in office; provided, however, that the
number of Directors shall in no event be less than
three nor more than fifteen except that the Corporation
may have less than three but no less than one director
if there is no stock outstanding, and may have a number
of directors no fewer than the number of stockholders
so long as there are fewer than three stockholders.
Any vacancy created by an increase in directors may be
filled in accordance with Section 3.6. No reduction in
the number of directors shall have the effect of
removing any director from office prior to the
expiration of his or her term unless such director is
specifically removed pursuant to Section 3.5 at the
time of such decrease. Directors need not be
stockholders.
3.3 Election and Term of Directors. Directors
shall be elected annually, by written ballot at the
annual meeting of stockholders or a special meeting
held for that purpose; provided, however, that if no
annual meeting of the stockholders of the Corporation
is required to be held in a particular year pursuant to
Section 2.1, directors shall be elected at the next
annual meeting held. The term of office of each
director shall be from the time of his or her election
and qualification until the election of directors next
succeeding his or her election and until his or her
successor shall have been elected and shall have
qualified.
3.4 Resignation. A director of the Corporation
may resign at any time by giving written notice of his
or her resignation to the Board of Directors, the
President or the Secretary. Any such resignation shall
take effect at the time specified therein or, if the
time when it shall become effective shall not be
specified therein, immediately upon its receipt.
Unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it
effective.
3.5 Removal of Directors. Any director of the
Corporation may be removed by the affirmative vote of a
majority of (a) the Board of Directors, (b) a committee
of the Board of Directors appointed for such purpose,
or (c) the stockholders by vote of a majority of the
outstanding shares of Common Stock of the Corporation.
3.6 Vacancies. If any vacancies occur in the
Board of Directors (i) by reason of death, resignation,
removal or otherwise, the remaining directors shall
continue to act, and subject to the provisions of the
1940 Act, such vacancies (if not previously filled by
the stockholders) may be filled by a majority of the
remaining directors and (ii) by reason of an increase
in the authorized number of directors, such vacancies
(if not previously filled by the stockholders) may be
filled by a majority vote of the entire Board of
Directors.
3.7 Place of Meeting. The directors may hold
their meetings, have one or more offices and keep the
books of the Corporation at any office or offices of
the Corporation or at any other place within or without
the State of Maryland as they may determine, or in the
case of meetings, as they may determine or as shall be
specified or fixed in the respective notices or waivers
of notice thereof.
3.8 Regular Meetings. The Board of Directors
from time to time may provide by resolution for the
holding of regular meetings and fix their time and
place as the Board of Directors may determine. Notice
of such regular meetings need not be in writing,
provided that notice of any change in the time or place
or such fixed regular meetings shall be communicated
promptly to each director not present at the meeting at
which such change was made in the manner provided in
Section 3.9 for notice of special meetings. Members of
the Board of Directors or any committee designated
thereby may participate in a meeting of such Board of
Directors or committee by means of a conference
telephone or similar communications equipment by means
of which all persons participating in the meeting can
hear each other at the same time, and participation by
such means shall constitute presence in person at a
meeting, except where meetings are required to be held
in person pursuant to the 1940 Act.
3.9 Special Meetings. Special meetings of the
Board of Directors may be held at any time or place and
for any purpose when called by the President, the
Secretary or two or more of the directors. Notice of
special meetings, stating the time and place, shall be
communicated to each director personally by telephone
or transmitted to him or her by telegraph, telefax,
telex, cable or wireless at least one day before the
meeting.
3.10 Waiver of Notice. No notice of any meeting
of the Board of Directors or a committee of the Board
of Directors need be given to any director who is
present at the meeting or who waives notice of such
meeting in writing (which waiver shall be filed with
the records of such meeting), either before or after
the time of the meeting.
3.11 Quorum and Voting. At all meetings of the
Board of Directors, the presence of one-third of the
entire Board of Directors shall constitute a quorum
unless there are only two or three Directors, in which
case two directors shall constitute a quorum. If there
is only one director, the sole director shall
constitute a quorum. At any adjourned meeting at which
a quorum is present, any business may be transacted
which might have been transacted at the meeting as
originally called.
3.12 Organization. The Board of Directors may, by
resolution adopted by a majority of the entire Board of
Directors, designate a chairman or co-chairmen who
shall preside at each meeting. In the absence or
inability of such persons to preside at a meeting, the
President, or in his or her absence or inability to
act, another director chosen by a majority of the
directors present, shall act as chairman of the meeting
and preside thereat. The Secretary (or in his or her
absence or inability to act, any person appointed by
the chairmen) shall act as secretary of the meeting and
keep the minutes thereof.
3.13 Written Consent of Directors in Lieu of a
Meeting. Subject to the provisions of the 1940 Act,
any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee
thereof may be taken without a meeting if all members
of the Board of Directors or committee, as the case may
be, consent thereto in writing, and the writing or
writings are filed with the minutes of the proceedings.
3.14 Compensation. Directors may receive
compensation for services to the Corporation in their
capacities as directors or otherwise in such manner and
in such amounts as may be fixed from time to time by
the Board of Directors.
ARTICLE IV
Committees
4.1 Organization. By resolution adopted by the
Board of Directors, the Board may designate one or more
committees composed of two or more directors. The
Chairmen of such committees shall be elected by the
Board of Directors. The Board of Directors shall have
the power at any time to change the members of such
committees and to fill vacancies in the committees.
The Board of Directors may delegate to these committees
any of its powers, except the power to authorize the
issuance of stock, declare a dividend or distribution
on stock, recommend to stockholders any action
requiring stockholder approval, amend these By-Laws, or
approve any merger or share exchange which does not
require stockholder approval. If the Board of
Directors has given general authorization for the
issuance of stock, a committee of the Board, in
accordance with a general formula or method specified
by the Board by resolution or by adoption of a stock
option or other plan, may fix the terms of stock
subject to classification or reclassification and the
terms on which any stock may be issued, including all
terms and conditions required or permitted to be
established or authorized by the Board of Directors.
4.2 Proceedings and Quorum. In the absence of an
appropriate resolution of the Board of Directors, each
committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting
as it shall deem proper and desirable. In the event
any member of any committee is absent from any meeting,
the members thereof present at the meeting, whether or
not they constitute a quorum, may appoint a member of
the Board of Directors to act in the place of such
absent member.
ARTICLE V
Officers, Agents and Employees
5.1 General. The officers of the Corporation
shall be a President, Secretary and Treasurer, and may
include one or more additional Vice Presidents and/or
such other officers as may be appointed in accordance
with the provisions of Section 5.8.
5.2 Election, Tenure and Qualifications. The
officers of the Corporation, except those appointed as
provided in Section 5.8, shall be elected by the Board
of Directors at its first meeting and thereafter
annually at an annual meeting. If any officers are not
chosen at any annual meeting, such officers may be
chosen at any subsequent regular or special meeting of
the Board. Except as otherwise provided in this
Article V, each officer chosen by the Board of
Directors shall hold office until the next annual
meeting of the Board of Directors and until his or her
successor shall have been elected and qualified. Any
person may hold one or more offices of the Corporation
except the offices of President and Vice President.
5.3 Removal and Resignation. Whenever in the
judgment of the Board of Directors the best interest of
the Corporation will be served thereby, any officer may
be removed from office by the vote of a majority of the
members of the Board of Directors at any regular
meeting or at a special meeting called for such
purpose. Any officer may resign his office at any time
by delivering a written resignation to the Board of
Directors, the President or the Secretary. Unless
otherwise specified therein, such resignation shall
take effect upon delivery.
5.4 President. The President shall be the chief
executive officer of the Corporation, and shall have
general charge of the business, affairs and property of
the Corporation and general supervision over its
officers, employees and agents. Except as the Board of
Directors may otherwise order, he or she may sign in
the name and on behalf of the Corporation all deeds,
bonds, contracts, or agreements. He or she shall
exercise such other powers and perform such other
duties as from time to time may be assigned to him or
her by the Board of Directors.
5.5 Vice President. The Board of Directors may
from time to time elect one or more Vice Presidents who
shall have such powers and perform such duties as from
time to time may be assigned to them by the Board of
Directors or the President. At the request or in the
absence or disability of the President, the Vice
President (or if there are two or more Vice Presidents,
then the more senior of such officers present and able
to act) may perform all the duties of the President and
when so acting, shall have all the powers of and be
subject to all the restrictions upon the President.
Any Vice President may perform such duties as the Board
of Directors may assign.
5.6 Treasurer. The Treasurer shall be the
principal financial and accounting officer of the
Corporation and shall have general charge of the
finances and books of account of the Corporation.
Except as otherwise provided by the Board of Directors,
he or she shall have general supervision of the funds
and property of the Corporation and of the performance
by the Custodian of its duties with respect thereto.
He or she shall render to the Board of Directors,
whenever directed, an account of the financial
condition of the Corporation and of all his or her
transactions as Treasurer; and as soon as possible
after the close of each fiscal year he or she shall
make and submit to the Board of Directors a like report
for such fiscal year.
5.7 Secretary. The Secretary shall attend to the
giving and serving of all notices of the Corporation
and shall record all proceedings of the meetings of the
stockholders and directors in books to be kept for that
purpose. He or she shall keep in safe custody the seal
of the Corporation, and shall have charge of the
records of the Corporation, including the stock books
and such other books and papers as the Board of
Directors may direct and such books, reports,
certificates and other documents required by law to be
kept, all of which shall at all reasonable times be
open to inspection by any director. He or she shall
perform such other duties as appertain to his or her
office or as may be required by the Board of Directors.
5.8 Subordinate Officers. The Board of Directors
from time to time may appoint such other officers or
agents as it may deem advisable, each of whom shall
have such title, hold office for such period, have such
authority and perform such duties as the Board of
Directors may determine. The Board of Directors from
time to time may delegate to one or more officers or
agents the power to appoint any such subordinate
officers or agents and to prescribe their rights, terms
of office, authorities and duties.
5.9 Remuneration. The salaries or other
compensation of the officers of the Corporation shall
be fixed from time to time by resolution of the Board
of Directors, except that the Board of Directors may by
resolution delegate to any person or group of persons
the power to fix the salaries or other compensation of
any subordinate officers or agents appointed in
accordance with the provisions of Section 5.8.
5.10 Surety Bonds. The Board of Directors may
require any officer or agent of the Corporation to
execute a bond (including, without limitation, any bond
required by the 1940 Act, and the rules and regulations
of the Securities and Exchange Commission) to the
Corporation in such sum and with such surety or
sureties as the Board of Directors may determine,
conditioned upon the faithful performance of his or her
duties to the Corporation, including responsibility for
negligence and for the accounting of any of the
Corporation's property, funds or securities that may
come into his or her hands.
ARTICLE VI
Indemnification
6.1 Indemnification. The Corporation shall
indemnify (a) its directors and officers, whether
serving the Corporation or, at its request, any other
entity, to the full extent required or permitted by (i)
Maryland law now or hereafter in force, including the
advance of expenses under the procedures and to the
full extent permitted by law, and (ii) the 1940 Act,
and (b) other employees and agents to such extent as
shall be authorized by the Board of Directors and be
permitted by law. The foregoing rights of
indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action
as is necessary to carry out these indemnification
provisions and is expressly empowered to adopt, approve
and amend from time to time such resolutions or
contracts implementing such provisions or such further
indemnification arrangements as may be permitted by
law.
ARTICLE VII
Capital Stock
7.1 Stock Certificates. The interest of each
stockholder of the Corporation may be evidenced by
certificates for shares of Common Stock in such form as
the Board of Directors may from time to time prescribe.
The certificates representing shares of Common Stock
shall be signed by or in the name of the Corporation by
the President or a Vice President and countersigned by
the Secretary or the Treasurer. Certificates may be
sealed with the actual corporate seal or a facsimile of
it or in any other form. Any or all of the signatures
or the seal on the certificate may be manual or a
facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to
be such officer, transfer agent or registrar before
such certificate shall be issued, it may be issued by
the Corporation with the same effect as if such
officer, transfer agent or registrar were still in
office at the date of issue unless written instructions
of the Corporation to the contrary are delivered to
such officer, transfer agent or registrar.
7.2 Stock Ledgers. The stock ledgers of the
Corporation, containing the names and addresses of the
stockholders and the number of shares held by them
respectively, shall be kept at the principal offices of
the Corporation or, if the Corporation employs a
transfer agent, at the offices of the transfer agent of
the Corporation.
7.3 Transfers of Shares. Transfers of shares of
Common Stock of the Corporation shall be made on the
stock records of the Corporation only by the registered
holder thereof, or by his or her attorney thereunto
authorized by power of attorney duly executed and filed
with the Secretary or with a transfer agent or transfer
clerk, and on surrender of the certificate or certifi
cates, if issued, for such shares properly endorsed or
accompanied by proper evidence of succession,
assignment or authority to transfer, with such proof of
the authenticity of the signature as the Corporation or
its agents may reasonably require and the payment of
all taxes thereon. Except as otherwise provided by
law, the Corporation shall be entitled to recognize the
exclusive right of a person in whose name any share or
shares of Common Stock stand on the record of
stockholders as the owner of such share or shares for
all purposes, including, without limitation, the rights
to receive dividends or other distributions, and to
vote as such owner, and the Corporation shall not be
bound to recognize any equitable or legal claim to or
interest in any such share or shares of Common Stock on
the part of any other person. The Board of Directors
may make such additional rules and regulations, not
inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and
registration of certificates for shares of Common Stock
of the Corporation.
7.4 Transfer Agents and Registrars. The Board of
Directors may from time to time appoint or remove
transfer agents and/or registrars of transfers of
shares of Common Stock of the Corporation, and it may
appoint the same person as both transfer agent and
registrar. Upon any such appointment being made, all
certificates representing shares of capital stock
thereafter issued shall be countersigned by one of such
transfer agents or by one of such registrars of
transfers or by both and shall not be valid unless so
countersigned. If the same person shall be both
transfer agent and registrar, only one countersignature
by such person shall be required.
7.5 Lost, Destroyed or Mutilated Certificates.
The holder of any certificates representing shares of
Common Stock of the Corporation shall immediately
notify the Corporation of any loss, destruction or
mutilation of such certificate, and the Corporation may
issue a new certificate of Common Stock in the place of
any certificate theretofore issued by it which the
owner thereof shall allege to have been lost or
destroyed or which shall have been mutilated, and the
Board may, in its discretion, require such owner or his
or her legal representatives to give to the Corporation
a bond in such sum, limited or unlimited, and in such
form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify
the Corporation against any claim that may be made
against it on account of the alleged loss or
destruction of any such certificate, or issuance of a
new certificate. Anything herein to the contrary
notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except
pursuant to legal proceedings under the laws of the
State of Maryland.
ARTICLE VIII
Seal
8.1 Seal. The seal of the Corporation shall
bear, in addition to any other emblem or device
approved by the Board of Directors, the name of the
Corporation, the year of its incorporation and the
words "Corporate Seal" and "Maryland." The form of the
seal may be altered by the Board of Directors. Said
seal may be used by causing it or a facsimile thereof
to be impressed or affixed or in any other manner repro
duced. Any officer or director of the Corporation
shall have the authority to affix the corporate seal of
the Corporation to any document requiring the same.
ARTICLE IX
Fiscal Year
9.1 Fiscal Year. The fiscal year of the Company
shall be the year ended June 30.
ARTICLE X
Depositories and Custodians
10.1 Depositories. The funds of the Corporation
shall be deposited with such banks or other
depositories as the Board of Directors may from time to
time determine.
10.2 Custodians. All securities and other
investments shall be deposited in the safe keeping of
such banks or other companies as the Board of Directors
may from time to time determine. Every arrangement
entered into with any bank or other company for the
safe keeping of the securities and investments of the
Corporation shall contain provisions complying with the
1940 Act and the general rules and regulations
thereunder.
ARTICLE XI
Execution of Instruments
11.1 Checks, Notes, Drafts, etc. Checks, notes,
drafts, acceptances, bills of exchange and other orders
obligations for the payment of money shall be signed by
such officer or officers or person or persons as the
Board of Directors by resolution shall from time to
time designate or as these By-Laws provide.
11.2 Sale or Transfer of Securities. Stock
certificates, bonds or other securities at any time
owned by the Corporation may be held on behalf of the
Corporation or sold, transferred or otherwise disposed
of subject to any limits imposed by these By-Laws and
pursuant to authorization by the Board of Directors
and, when so authorized to be held on behalf of the
Corporation or sold, transferred or otherwise disposed
of, may be transferred from the name of the Corporation
by the signature of the President, any Vice President
or the Treasurer or pursuant to any procedure approved
by the Board of Directors, subject to applicable law.
ARTICLE XII
Independent Public Accountants
12.1 Independent Public Accountants. The
Corporation shall employ an independent public
accountant or a firm of independent public accountants
as its accountants to examine the accounts of the
Corporation and to sign and certify financial
statements filed by the Corporation.
ARTICLE XIII
Amendments
13.1 Amendments. These By-Laws may be amended,
altered or repealed at any regular meeting of the
stockholders or at any special meeting of the
stockholders at which a quorum is present or
represented, provided that notice of the proposed
amendment, alteration or repeal be contained in the
notice of such special meeting. These By-Laws may also
be amended, altered or repealed by the affirmative vote
of a majority of the Board of Directors at any regular
or special meeting of the Board of Directors, except
any particular By-Law which is specified as not subject
to alteration or repeal by the Board of Directors,
subject to the requirements of the 1940 Act.
