As filed with the Securities and Exchange Commission on June 11, 1998
Securities Act Registration No. 333-51431
Investment Company Act Registration No. 811-8769
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. __
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1
BADGLEY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1420 Fifth Avenue
Suite 4400 98101
Seattle, Washington (Zip Code)
(Address of Principal Executiv
e 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
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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 June 11, 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
June ____, 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 5
FUNDAMENTAL INVESTMENT RESTRICTIONS 8
PRIOR PERFORMANCE OF THE ADVISER 9
FUND ORGANIZATION AND MANAGEMENT 12
HOW TO PURCHASE SHARES 14
HOW TO REDEEM SHARES 16
EXCHANGE PRIVILEGE 17
DETERMINATION OF NET ASSET VALUE 18
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN 19
INDIVIDUAL RETIREMENT ACCOUNTS 19
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT 21
YEAR 2000 ISSUE 21
FUND PERFORMANCE 22
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(2) 1.00% 0.90%
Rule 12b-1 Fees(3) 0.25 0.25
Other Expenses(2) 0.25 0.15
Total Operating 1.50% 1.30%
Expenses(2)
____________
(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) "Other Expenses" have been estimated for the current
fiscal year since the Funds did not begin operations until
June ____, 1998. 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 other expenses to the
extent necessary to ensure that (i) the total operating
expenses (on an annual basis) for the Growth Fund do not
exceed 1.50% of its average net assets and (ii) the total
operating expenses (on an annual basis) of the Balanced Fund
do not exceed 1.30% of its average net assets. After such
date, the total operating expense limitations may be
terminated or revised at any time. Absent these limitations,
other expenses and total operating expenses for the Growth
Fund are expected to be 1.13% and 2.38%, respectively, and
other expenses and total operating expenses for the Balanced
Fund are expected to be 1.14% and 2.29%, respectively. Any
waiver or reimbursement is subject to later adjustment to
allow the Adviser to recoup amounts waived or reimbursed to
the extent actual fees and expenses for a period are less
than the expense limitation caps, provided, however, that the
Adviser shall only be entitled to recoup such amounts for a
period of three years from the date such amount was waived or
reimbursed. For additional information concerning fees and
expenses, see "Fund Organization and Management."
(3)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.
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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 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 equity securities and the Balanced Fund, in
equity securities and investment grade bonds and other fixed
income securities), except that a limited portion of the assets
of the Funds (generally not to exceed 15%) may be held in short-
term money market securities and cash pending investment or to
pay redemption requests and expenses of the Funds. 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
<PAGE>
price
than common stocks, an increase in interest rates will generally
cause a decline 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.
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 an initial 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
<PAGE>
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.
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 equity securities 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 equity securities for the Growth Fund in favor of
other equity securities 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 dollar-weighted 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 equity securities for the Balanced Fund, the Adviser
uses the same methods used for the Growth Fund as discussed
above.
<PAGE>
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.
Equity Securities
The Funds will invest in equity securities, including common
stocks and other equity securities, although each Fund
anticipates that its equity securities will consist primarily of
common stocks. Other equity securities 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. The Balanced 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. Each Fund may hold a limited
portion of its assets (generally not to exceed 15% of its total
assets) in short-term money market securities. See "Temporary
Strategies." 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 the Balanced 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 the Balanced Fund 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 Balanced Fund invests 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 Balanced Fund only invests 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 Balanced Fund 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
<PAGE>
Repurchase agreements.
Ratings. The Balanced Fund 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:
U.S. government securities;
Bonds or bank obligations rated in one of the three
highest categories (A- 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 the Balanced Fund's
investment objective and to ensure that the Balanced Fund will at
no 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 the
Balanced 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 the Balanced
Fund's higher yielding securities might be converted to cash, and
the Balanced 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 the Balanced 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
<PAGE>
subject to prepayment,
which may reduce the overall return to holders (such as the
Balanced 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.
Variable and Floating Rate Securities. 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 the Balanced Fund with a certain degree of protection
against rises in interest rates because of the interest rate
reset feature, the Balanced Fund will be subject to any decline
in interest rates as well. The Growth Fund may invest in such
securities as described under "Temporary Strategies."
Repurchase Agreements. The Funds 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 and may include commercial paper, short-term U.S.
government securities, repurchase agreements, banker's
acceptances, certificates of deposit, time deposits and other
short-term fixed-income securities. All money market instruments
will be rated investment-grade as defined under "Fixed Income
Securities," above.
Foreign Securities and ADRs
Each Fund may invest up to 15% of its net assets in American
Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") 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. EDRs are European receipts evidencing a similar
arrangement. 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
<PAGE>
attributable to foreign investing, such as custody
charges and brokerage costs, may be higher than those
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), subject to the limitation that each Fund may only
invest up to 5% of its respective net assets in securities that
may be resold to institutional investors pursuant to Rule 144A
under the Securities Act. 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.
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 equity securities 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. In addition, the Balanced Fund will generally
hold fixed income securities (other than short-term money market
securities) for an extended period. 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 (ii) make other investments or engage in other
transactions permissible under 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). If the amount borrowed at any time
exceeds 33 1/3% of the Fund's total assets, the Fund
will, within three days thereafter (not including
Sundays, holidays and any longer permissible period),
reduce the amount of the borrowings such that the
borrowings do not exceed 33 1/3% of the Fund's total
assets. Each Fund may also borrow from other persons
to the extent permitted by applicable law.
<PAGE>
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.
Limitation on Industry Concentration: Each Fund will
not invest 25% or more 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
substantially similar to the Funds. The growth composite, which
has investment objectives, policies and strategies 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 has investment
objectives, policies and strategies substantially similar to the
Balanced Fund, includes the Adviser's separate accounts that are
fully discretionary, tax-exempt, greater than $250,000 and 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.
1991* ____% ____% ____% ____%
1992 ____% ____% ____% ____%
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.
1991* ____% ____% ____% ____%
1992 ____% ____% ____% ____%
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%
* In January 1991, the Adviser commenced management of accounts
under the Growth and Balanced investment objectives, policies and
strategies substantially similar to the respective Funds.
<PAGE>
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%
From Inception(2) ____% ____%
(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) January 1, 1991.
Balanced Composite
Period Ending Adviser's Lehman Brothers
March 31, Balanced Intermediate S&P 500(2)
1998 Composite Govt./ Corp.
Performance Bond Index(1)
1 Year 33.0% ____% 48.1%
3 Years 21.2% ____% 32.0%
5 Years 14.0% ____% 22.4%
From Inception(3) ____% ____% ____%
(1) 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.
(2) 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.
(3) January 1, 1991.
<PAGE>
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. Shareholders have certain rights,
including the right to call an annual meeting upon a vote of 10%
of the Corporation's outstanding shares for the purpose of voting
to remove one or more directors or to transact any other
business. The 1940 Act requires the Corporation to assist the
shareholders in calling such a meeting. As of June 9, 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 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 the Funds' other 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 period
are less than the expense limitation caps, provided, however,
that the Adviser shall only be entitled to recoup such amounts
for a period of three years from the date such amount was waived
or reimbursed.
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
<PAGE>
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 each Fund's
aggregate average net assets:
Administrative Services Fees
First $200 million of average net assets .06 of 1%*
Next $500 million of average net assets .05 of 1%
Average net assets in excess of $700 million .03 of 1%
_____________________________
* Subject to a minimum fee of $30,000 per Fund.
Accounting Services Fees
Growth Fund Balanced Fund
First $40 million of average net assets $22,000 $23,500
Next $200 million of average net assets .01 of 1% .015 of 1%
Average net assets in excess of $240 million .005 of 1% .01 of 1%
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
<PAGE>
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 (as described below under "Initial Investment" and
"Subsequent Investment") 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."
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:
<PAGE>
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 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.
<PAGE>
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 a redemption request is received in
proper form (as described below) by Firstar. An investor should
contact Firstar for further information concerning redemption of
Fund shares. The Corporation normally will mail your redemption
proceeds the next business day and, in any event, no later than
seven 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.
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.
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.
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
<PAGE>
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.
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.
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
<PAGE>
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 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
<PAGE>
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 monthly. The Distributor will provide reports to the
Board of Directors of the Corporation of all recipients of
payments made (and the purposes for which amounts were paid)
pursuant to the 12b-1 Plan.
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.
<PAGE>
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
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
<PAGE>
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 from net investment
income 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%.
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
<PAGE>
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
Frank S. Bayley
Madelyn B. Smith
PRINCIPAL 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, Wisconsin 53202
DISTRIBUTOR
Rafferty Capital Markets, Inc.
550 Mamaroneck Avenue
Harrison, New York 10528
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
100 East Wisconsin Avenue, Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 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 June ____, 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 June ____, 1998.
<PAGE>
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
DIRECTORS AND OFFICERS 18
PRINCIPAL SHAREHOLDERS 19
INVESTMENT ADVISER 20
FUND TRANSACTIONS AND BROKERAGE 20
CUSTODIAN 21
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 22
DISTRIBUTOR AND PLAN OF DISTRIBUTION 22
TAXES 23
DETERMINATION OF NET ASSET VALUE 23
SHAREHOLDER MEETINGS 23
PERFORMANCE INFORMATION 23
INDEPENDENT ACCOUNTANTS 25
FINANCIAL STATEMENTS 25
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 June
____, 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). If the amount borrowed
at any time exceeds 33 1/3% of the Fund's total assets, the
Fund will, within three days thereafter (not including
Sundays, holidays and any longer permissible period), reduce
the amount of the borrowings such that the borrowings do not
exceed 33 1/3% of the Fund's total assets. 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 or more than 5% of its net
assets would be invested in securities that may be resold to
institutional investors pursuant to Rule 144A under the
Securities Act.
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 total
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), subject to the limitation that each Fund may only
invest up to 5% of its respective net assets in securities that
may be resold to institutional investors pursuant to Rule 144A
under the Securities Act. 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. However, investing in
securities which may be resold pursuant to Rule 144A under the
Securities Act could have the effect of increasing the level of a
Fund's illiquidity to the extent that institutional investors
become, for a time, uninterested in purchasing such securities.
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
<PAGE>
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 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. The Adviser will limit investments in
convertible debt 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. 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
total 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 money market instruments, including short-
term U.S. government securities, commercial paper, repurchase
agreements, banker's acceptances, certificates of deposit, time
deposits and other short-term fixed-income securities.
Variable- or Floating-Rate Securities
The Balanced Fund may invest in securities which offer a
variable- or floating-rate of interest. 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 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
<PAGE>
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.
Variable-rate demand notes include master demand notes which
are obligations that permit the Balanced Fund to invest
fluctuating amounts, which may change daily without penalty,
pursuant to direct arrangements between the Balanced 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, the Balanced 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 Balanced Fund 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
Balanced Fund may invest.
The Balanced 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 Balanced Fund's
investments at the time of purchase. When determining whether
such an obligation meets the Balanced Fund's credit quality
requirements, the Balanced Fund may look to the credit quality of
the financial guarantor providing a letter of credit or other
credit support arrangement. The Growth Fund may invest in such
securities as described under "Temporary Strategies."
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.
<PAGE>
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
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 the Balanced 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 the Balanced
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 the Balanced 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.
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. The Balanced
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 total assets in shares of other
investment companies and up to 5% of its total 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.
Frank S. Bayley, a Director of the Corporation.
Mr. Bayley, 58 years old, earned a Bachelor of Arts degree
and a law degree from Harvard University. Mr. Bayley has been a
partner with the law firm of Baker & McKenzie since 1986. Mr.
Bayley serves as director and co-chairman of C. D. Stimson
Company, a private investment company. In addition, Mr. Bayley
has been a Trustee of AIM Global Mutual Funds (formerly GT Global
Mutual Funds) since 1985.
Madelyn B. Smith, a Director of the Corporation.
Ms. Smith, 67 years old, received a Bachelor of Arts degree
from the University of Puget Sound in 1970. Prior to retiring,
Ms. Smith worked as an analyst and portfolio manager with the
Frank Russell Company from 1971 to 1997.
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
<PAGE>
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.
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.
Bayley is Baker & McKenzie, Two Embarcadero Center, 24th Floor,
San Francisco, California 94111. The address for Ms. Smith is 9
Forest Glen Drive SW, Tacoma, Washington 98498.
As of June 9, 1998, officers and directors of the
Corporation beneficially owned 10,000 shares of common stock or
100% of the Growth Fund's then outstanding shares and 100% of 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.
The following table provides information relating to annual
compensation to be paid to directors of the Corporation for their
services as such (1):
Name Cash Other Tota
Compensation Compensatio l
(2) n
J. Kevin Callaghan $ 0 $0 $ 0
Steven C. Phelps $ 0 $0 $ 0
Frank S. Bayley $1,000 $0 $1,000
Madelyn B. Smith $1,000 $0 $1,000
Smith
All directors $2,000 $0 $2,000
as a group
(4 persons)
____________________
(1) The amounts indicated are estimates of amounts to be paid by
the Corporation.
(2) 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 and reasonable expenses
incurred in connection therewith. The Board anticipates holding
four meetings during fiscal 1999. Thus, each disinterested
director is entitled to up to $1,000 during such time period from
the Corporation, plus reasonable expenses.
PRINCIPAL SHAREHOLDERS
As of June 9, 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:
<PAGE>
Name and Address Fund No. Shares Percentage
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 June 9, 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 and directors.
The investment advisory agreement between the Corporation
and the Adviser dated as of June 23, 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 June 23,
1998 and by the initial shareholders of each Fund on June 23,
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 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 (on an annual
basis) for the Growth Fund do not exceed 1.50% of average daily
net assets, and (ii) the total operating expenses (on an annual
basis) 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 period are less than the expense limitation caps,
provided, however, that, the Adviser shall only be entitled to
recoup such amounts for a maximum period of three years from the
date such amount was waived or reimbursed.
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
<PAGE>
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 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.
<PAGE>
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 June 23, 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
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.
<PAGE>
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 from net investment income 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.
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. Shareholders have the right to call an annual
meeting upon a vote of 10% of the Corporation's outstanding
shares for purposes of voting to remove one or more disinterested
directors or to transact any other business. The 1940 Act
requires the Corporation to assist the shareholders in calling
such a meeting.
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:
<PAGE>
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:
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.
<PAGE>
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
Price Waterhouse LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, 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 the Financial Statement.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Badgley Funds, Inc.
In our opinion, the accompanying statement of assets and
liabilities presents fairly, in all material respects, the
financial position of each of the portfolios of Badgley
Funds, Inc. (the "Funds") at June 10, 1998, in conformity
with generally accepted accounting principles. This
financial statement is the responsibility of the Fund's
management; our responsibility is to express an opinion on
this financial statement based on our audits. We conducted
our audits of this financial statement in accordance with
generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Milwaukee, Wisconsin
June 10, 1998
<PAGE>
Badgley Funds, Inc.
Statement of Assets and Liabilities
June 10, 1998
Badgley Badgley
Growth Balanced
Fund Fund
ASSETS
Cash $ 50,000 $ 50,000
Unamortized organization expenses 23,754 23,754
Total Assets 73,754 73,754
LIABILITIES
Accrued expenses 23,754 23,754
Total Liabilities 23,754 23,754
NET ASSETS $ 50,000 $ 50,000
Capital shares, $0.01 par value;
indefinite shares authorized
per portfolio 5,000 5,000
Net asset value, offering and
redemption price per share
(net assets/shares outstanding) $ 10.00 $ 10.00
The accompanying notes to the financial statement
are an integral part of this statement.
<PAGE>
Badgley Funds, Inc.
Notes to the Financial Statement
June 10, 1998
1. Organization
Badgley Funds, Inc. (the "Corporation") was organized as a
Maryland company incorporated on April 28, 1998 and is
registered under the Investment Company Act of 1940, as
amended (the "1940 Act") as 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 Funds have had no operations other than those relating to
organizational matters, including the sale of 5,000 shares for
cash in the amount of $50,000 of each of the Growth Fund and
the Balanced Fund to capitalize the Funds, which were sold to
Badgley, Phelps and Bell, Inc. (the "Adviser") on June 9,
1998.
2. Significant Accounting Policies
(a) Organization Costs
Costs incurred by the Corporation in connection with the
organization, registration and the initial public offering
of shares, are being deferred and amortized over the period
of benefit, but not to exceed sixty months from the
Corporation's commencement of operations. These costs were
advanced by the Adviser and will be reimbursed by the
Corporation. The proceeds of any redemption of the initial
shares by the original shareholder will be reduced by a pro-
rata portion of any then unamortized organizational
expenses in the same proportion as the number of initial
shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption.
(b) Federal Income Taxes
Each Fund intends to comply with the requirements of the
Internal Revenue Code necessary to qualify as a regulated
investment company and to make the requisite distributions
of income and capital gains to their shareholders
sufficient to relieve it from all or substantially all
Federal income taxes.
3. Investment Adviser
The Corporation has an Investment Advisory Agreement (the
"Agreement") with the Adviser, with whom certain officers and
Directors of the Corporation are affiliated, to furnish
investment advisory services to the Funds. Under the terms of
the Agreement, the 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 the Funds'
other expenses to the extent necessary to ensure that the
Growth
<PAGE>
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. Any such waiver or reimbursement is subject
to later adjustment during the term of the Agreement to allow
the Adviser to recoup amounts waived or reimbursed to the
extent actual fees and expenses for a period are less than the
expense limitation caps, provided, however, that the Adviser
shall only be entitled to recoup such amounts for a period of
three years from the date such amount was waived or
reimbursed.
4. 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 Rafferty Capital Markets,
Inc. (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.
<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 likelihood that aggregate principal and
interest will equal or exceed the rated amount under appropriate
stress conditions.
<PAGE>
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,
A risk factors are more
A- variable and greater in periods of economic stress.
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 (1)
(2) Registrant's By-Laws (1)
(3) None
(4) None
(5) Investment Advisory Agreement
(6) 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 Price Waterhouse LLP
(12) None
(13.1) Subscription Agreement with Mr. Callaghan
(13.2) Subscription Agreement with Mr. Phelps
(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
<PAGE>
(17) Financial Data Schedule
(18) None
______________
(1) Incorporated by reference to Registrant's Form N-1A as filed
with the Commission on April 30, 1998.
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 June 9, 1998
Common Stock, 2
$.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) The Distributor also acts as distributor for The Home
State Funds Group.
(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
And Offices Positions and Offices
Name With Underwriter With Registrant
Thomas A. Mulrooney President None
Derek Park Vice President None
Stephen Sprague Chief Financial None
Officer and
Secretary
(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.
(a) Registrant undertakes to call a meeting of
shareholders, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares,
for the purpose of voting upon the question of the
removal of a director or directors. Registrant also
undertakes to assist in communications with other
shareholders as required by Section 16(c) of the 1940
Act.
<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 Pre-Effective Amendment No. 1 to the 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 10th day of June, 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 and post-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 Pre-Effective Amendment No. 1 to the 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 June 10, 1998
- -----------------------
Otis P. Heald III
/s/ Lisa P. Guzman Treasurer and Secretary June 10, 1998
- -----------------------
Lisa P. Guzman
/s/ J. Kevin Callaghan Director and Co-Chairman June 10, 1998
- -----------------------
J. Kevin Callaghan
/s/ Steven C. Phelps Director and Co-Chairman June 10, 1998
- -----------------------
Steven C. Phelps
/s/ Frank S. Bayley Director June 10, 1998
- -----------------------
Frank S. Bayley
/s/ Madelyn B. Smith Director June 10, 1998
- -----------------------
Madelyn B. Smith
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(1) Registrant's Articles of Incorporation (1)
(2) Registrant's By-Laws (1)
(3) None
(4) None
(5) Investment Advisory Agreement
(6) 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 Price Waterhouse LLP
(12) None
(13.1) Subscription Agreement with Mr. Callaghan
(13.2) Subscription Agreement with Mr. Phelps
(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
___________________
(1) Incorporated by reference to Registrant's Form N-1A as filed
with the Commission on April 30, 1998.
BADGLEY FUNDS, INC.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is entered into as of the 23rd day
of June, 1998, between Badgley Funds, Inc., a Maryland
corporation (the "Corporation") and Badgley, Phelps and
Bell, Inc., a Washington corporation (the "Adviser").
W I T N E S S E T H
WHEREAS, the Corporation is an open-end investment
company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Corporation is
authorized to create separate series, each with its own
separate investment portfolio (the "Funds"), and the
beneficial interest in each such series will be
represented by a separate series of shares (the
"Shares").
WHEREAS, the Adviser is a registered investment
adviser, engaged in the business of rendering
investment advisory services.
WHEREAS, in managing the Corporation's assets, as
well as in the conduct of certain of its affairs, the
Corporation seeks the benefit of the Adviser's services
and its assistance in performing certain managerial
functions. The Adviser desires to furnish such
services and to perform the functions assigned to it
under this Agreement for the consideration provided for
herein.
NOW THEREFORE, the parties mutually agree as
follows:
1. Appointment of the Adviser. The Corporation
hereby appoints the Adviser as investment adviser for
each of the Funds of the Corporation on whose behalf
the Corporation executes an Exhibit to this Agreement,
and the Adviser, by execution of each such Exhibit,
accepts the appointments. Subject to the direction of
the Board of Directors (the "Directors") of the
Corporation, the Adviser shall manage the investment
and reinvestment of the assets of each Fund in
accordance with the Fund's investment objective and
policies and limitations, for the period and upon the
terms herein set forth. The investment of funds shall
also be subject to all applicable restrictions of the
Articles of Incorporation and By-Laws of the
Corporation as may from time to time be in force.
2. Expenses Paid by the Adviser. In addition to the
expenses which the Adviser may incur in the performance
of its responsibilities under this Agreement, and the
expenses which it may expressly undertake to incur and
pay, the Adviser shall incur and pay all reasonable
compensation, fees and related expenses of the
Corporation's officers and its Directors, except for
such Directors who are not interested persons (as that
term is defined in Section 2(a)(19) of the 1940 Act) of
the Adviser, and all expenses related to the rental and
maintenance of the principal offices of the
Corporation.
3. Investment Advisory Functions. In its capacity as
investment adviser, the Adviser shall have the
following responsibilities:
(a) To furnish continuous advice and recommendations
to the Funds, as to the acquisition, holding or
disposition of any or all of the securities or other
assets which the Funds may own or contemplate acquiring
from time to time;
(b) To cause its officers to attend meetings and
furnish oral or written reports, as the Corporation may
reasonably require, in order to keep the Directors and
appropriate officers of the Corporation fully informed
as to the condition of the investments of the Funds,
the investment recommendations of the Adviser, and the
investment considerations which have given rise to
those recommendations; and
(c) To supervise the purchase and sale of securities
or other assets as directed by the appropriate officers
of the Corporation.
The services of the Adviser are not to be
deemed exclusive and the Adviser shall be free to
render similar services to others as long as its
services for others does not in any way
hinder, preclude or prevent the Adviser from performing
its duties and obligations under this Agreement. In
the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or
duties hereunder on the part of the Adviser, the
Adviser shall not be subject to liability to the
Corporation, the Funds, or to any shareholder for any
act or omission in the course of, or in connection
with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale
of any security.
4. Obligations of the Corporation. The Corporation
shall have the following obligations under this
Agreement:
(a) To keep the Adviser continuously and fully
informed as to the composition of the Funds'
investments and the nature of all of their respective
assets and liabilities;
(b) To furnish the Adviser with a copy of any
financial statement or report prepared for it by
certified or independent public accountants, and with
copies of any financial statements or reports made to
the Funds' shareholders or to any governmental body or
securities exchange;
(c) To furnish the Adviser with any further materials
or information which the Adviser may reasonably request
to enable it to perform its functions under this
Agreement; and
(d) To compensate the Adviser for its services in
accordance with the provisions of paragraph 5 hereof.
5. Compensation. The Corporation will pay the
Adviser a fee for its services with respect to each
Fund (the "Advisory Fee") at the annual rate set forth
on the Exhibit(s) hereto. The Advisory Fee shall be
accrued each calendar day during the term of this
Agreement and the sum of the daily fee accruals shall
be paid monthly as soon as practicable following the
last day of each month. The daily fee accruals will be
computed by multiplying 1/365 by the annual rate and
multiplying the product by the net asset value of the
Fund as determined in accordance with the Corporation's
registration statement as of the close of business on
the previous day on which the Fund was open for
business, or in such other manner as the parties agree.
The Adviser may from time to time and for such periods
as it deems appropriate or for such time and to the
extent agreed on Exhibit B for a Fund reduce its
compensation and/or assume expenses for one or more of
the Funds; provided, however, that with respect to any
agreement set forth on Exhibit B the Adviser shall be
entitled to recoup such amounts for a period of up to
three (3) years from the date such amount was reduced
or assumed.
6. Expenses Paid by Corporation.
(a) Except as provided in this paragraph, nothing in
this Agreement shall be construed to impose upon the
Adviser the obligation to incur, pay, or reimburse the
Corporation for any expenses not specifically assumed
by the Adviser under paragraph 2 above. Each Fund
shall pay or cause to be paid all of its expenses and
the Fund's allocable share of the Corporation's
expenses, including, but not limited to, investment
adviser fees; any compensation, fees, or reimbursements
which the Corporation pays to its Directors who are not
interested persons (as that phrase is defined in
Section 2(a)(19) of the 1940 Act) of the Adviser; fees
and expenses of the custodian, transfer agent,
registrar or dividend disbursing agent; current legal,
accounting and printing expenses; administrative,
clerical, recordkeeping and bookkeeping expenses;
brokerage commissions and all other expenses in
connection with the execution of Fund transactions;
interest; all federal, state and local taxes (including
stamp, excise, income and franchise taxes); expenses of
shareholders' meetings and of preparing, printing and
distributing proxy statements, notices and reports to
shareholders; expenses of preparing and filing reports
and tax returns with federal and state regulatory
authorities; and all expenses incurred in complying
with all federal and state laws and the laws of any
foreign country applicable to the issue, offer, or sale
of Shares of the Funds, including but not limited to,
all costs involved in the registration or qualification
of Shares of the Funds for sale in any jurisdiction and
all costs involved in preparing, printing and
distributing prospectuses and statements of additional
information to existing shareholders of the Funds.
(b) If expenses borne by a Fund in any fiscal year
(including the Adviser's fee, but excluding taxes,
interest, brokerage commissions, Rule 12b-1 expenses
and similar fees) exceed those set forth in any
statutory or regulatory formula applicable to a Fund,
the Adviser will reimburse the Fund for any excess.
7. Brokerage Commissions. For purposes of this
Agreement, brokerage commissions paid by a Fund upon
the purchase or sale of securities shall be considered
a cost of the securities of the Fund and shall be paid
by the respective Fund. The Adviser is authorized and
directed to place Fund transactions only with brokers
and dealers who render satisfactory service in the
execution of orders at the most favorable prices and at
reasonable commission rates; provided, however, that
the Adviser may pay a broker or dealer an amount of
commission for effecting a securities transaction in
excess of the amount of commission another broker or
dealer would have charged for effecting that
transaction, if the Adviser determines in good faith
that such amount of commission was reasonable in
relation to the value of the brokerage and research
services provided by such broker or dealer viewed in
terms of either that particular transaction or the
overall responsibilities of the Adviser. In placing
Fund business with such broker or dealers, the Adviser
shall seek the best execution of each transaction, and
all such brokerage placement shall be made in
compliance with Section 28(e) of the Securities
Exchange Act of 1934, as amended, and other applicable
state and federal laws. Notwithstanding the foregoing,
the Corporation shall retain the right to direct the
placement of all Fund transactions, and the Directors
may establish policies or guidelines to be followed by
the Adviser in placing Fund transactions for the Funds
pursuant to the foregoing provisions.
8. Proprietary Rights. The Adviser has proprietary
rights in each Fund's name and the Corporation's name.
The Corporation acknowledges and agrees that the
Adviser may withdraw the use of such names from the
Funds or the Corporation should it cease to act as the
investment adviser to any Fund.
9. Termination. This Agreement may be terminated at
any time, without penalty, by the Directors of the
Corporation or by the shareholders of a Fund acting by
the vote of at least a majority of its outstanding
voting securities (as that phrase is defined in Section
2(a)(42) of the 1940 Act), provided in either case that
60 days' written notice of termination be given to the
Adviser at its principal place of business. This
Agreement may also be terminated by the Adviser at any
time by giving 60 days' written notice of termination
to the Corporation, addressed to its principal place of
business.
10. Assignment. This Agreement shall terminate
automatically in the event of any assignment (within
the meaning of Section 2(a)(4) of the 1940 Act) of this
Agreement.
11. Term. This Agreement shall begin for each Fund as
of the date of execution of the applicable Exhibit and
shall continue in effect with respect to each Fund (and
any subsequent Funds added pursuant to an Exhibit
during the initial term of this Agreement) for two
years from the date of this Agreement and thereafter
for successive periods of one year, subject to the
provisions for termination and all of the other terms
and conditions hereof if such continuation shall be
specifically approved at least annually (i) by the vote
of a majority of the Directors of the Corporation,
including a majority of the Directors who are not
parties to this Agreement or "interested persons" of
any such party (as defined in the 1940 Act), cast in
person at a meeting called for that purpose or (ii) by
the vote of a majority of the outstanding voting
securities (as that phrase is defined in Section
2(a)(42) of the 1940 Act) of each Fund. If a Fund is
added after the first approval by the Directors as
described above, this Agreement will be effective as to
that Fund upon execution of the applicable Exhibit and
will continue in effect until the next annual approval
of this Agreement by the Directors and thereafter for
successive periods of one year, subject to approval as
described above.
12. Amendments. This Agreement may be amended by the
mutual consent of the parties, provided that the terms
of each such amendment shall be approved by the
Directors or by the affirmative vote of a majority of
the outstanding voting securities (as that phrase is
defined in Section 2(a)(42) of the 1940 Act) of each
Fund.
13. Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws
of the State of Washington, provided, however that
nothing herein shall be construed in a manner that is
inconsistent with the 1940 Act, the Investment Advisers
Act of 1940, as amended, or the rules and regulations
promulgated with respect to such respective Acts.
This Agreement will become binding on the parties
hereto upon their execution of the Exhibit(s) to this
Agreement.
EXHIBIT A
to the
Investment Advisory Agreement
BADGLEY GROWTH FUND
For all services rendered by the Adviser
hereunder, the Corporation shall pay the Adviser, on
behalf of the above-named Fund, and the Adviser agrees
to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee
equal to 1.00% of the average daily net assets of the
Fund.
The Adviser hereby agrees that until June 30,
1999, the Adviser will waive its fees and/or reimburse
the Fund's operating expenses to the extent necessary
to ensure that the Fund's total operating expenses (on
an annual basis) do not exceed 1.50% of its average
daily net assets, subject to possible later recoupment
as provided in Section 5.
The annual investment advisory fee shall be
accrued daily at the rate of 1/365th of 1.00% applied
to the daily net assets of the Fund. The advisory fee
so accrued shall be paid by the Corporation to the
Adviser monthly.
Executed as of this 23rd day of June, 1998.
The Adviser:
BADGLEY, PHELPS AND BELL, INC.
By:___________________________
Steven C. Phelps, President
The Corporation:
BADGLEY FUNDS, INC.
By:____________________________
Otis P. Heald III, President
EXHIBIT B
to the
Investment Advisory Agreement
BADGLEY BALANCED FUND
For all services rendered by the Adviser
hereunder, the Corporation shall pay the Adviser, on
behalf of the above-named Fund, and the Adviser agrees
to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee
equal to 0.90% of the average daily net assets of the
Fund.
The Adviser hereby agrees that until June 30,
1999, the Adviser will waive its fees and/or reimburse
the Fund's operating expenses to the extent necessary
to ensure that the Fund's total operating expenses (on
an annual basis) do not exceed 1.30% of its average
daily net assets, subject to possible later recoupment
as provided in Section 5.
The annual investment advisory fee shall be
accrued daily at the rate of 1/365th of 0.90% applied
to the daily net assets of the Fund. The advisory fee
so accrued shall be paid by the Corporation to the
Adviser monthly.
Executed as of this 23rd day of June, 1998.
The Adviser:
BADGLEY, PHELPS AND BELL, INC.
By:___________________________
Steven C. Phelps, President
The Corporation:
BADGLEY FUNDS, INC.
By:____________________________
Otis P. Heald III, President
DISTRIBUTION AGREEMENT
between
BADGLEY FUNDS, INC.
and
RAFFERTY CAPITAL MARKETS, INC.
THIS AGREEMENT is made as of June 23, 1998,
between Badgley Funds, Inc. ("Fund"), a corporation
organized and existing under the laws of Maryland, and
Rafferty Capital Markets, Inc. ("RCM"), a corporation
organized and existing under the laws of the State of
New York.
WHEREAS the Fund is registered under the
Investment Company Act of 1940, as amended ("1940
Act"), as an open-end management investment company,
and has registered one or more distinct series of
shares of common stock ("Shares") for sale to the
public under the Securities Act of 1933, as amended
("1933 Act"), and has qualified its shares for sale to
the public under various state securities laws; and
WHEREAS the Fund desires to retain RCM as
principal underwriter in connection with the offering
and sale of the Shares of each series listed on
Schedule A (as amended from time to time) to this
Agreement; and
WHEREAS this Agreement has been approved by a vote
of the Fund's board of directors ("Board") and its
disinterested directors in conformity with Section
15(c) under the 1940 Act; and
WHEREAS RCM is willing to act as principal
underwriter for the Fund on the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the promises
and mutual covenants herein contained, it is agreed
between the parties hereto as follows:
1. Appointment. The Fund hereby appoints
RCM as its agent to be the principal underwriter so as
to hold itself out as available to receive and accept
orders for the purchase and redemption of the Shares on
behalf of the Fund, subject to the terms and for the
period set forth in this Agreement. RCM hereby accepts
such appointment and agrees to act hereunder. The Fund
understands that any active solicitation activities
conducted on behalf of the Fund will be conducted
primarily, if not exclusively, by employees of the
Fund's sponsor who shall become registered
representatives of RCM.
2. Services and Duties of RCM.
(a) RCM agrees to sell Shares on a best
efforts basis from time to time during the term of this
Agreement as agent for the Fund and upon the terms
described in the Registration Statement. As used in
this Agreement, the term "Registration Statement" shall
mean the currently effective registration statement of
the Fund, and any supplements thereto, under the 1933
Act and the 1940 Act.
(b) RCM will hold itself available to
receive purchase and redemption orders satisfactory to
RCM for Shares and will accept such orders on behalf of
the Fund. Such purchase orders shall be deemed
effective at the time and in the manner set forth in
the Registration Statement.
(c) RCM, with the operational assistance of
the Fund's transfer agent, shall make Shares available
through the National Securities Clearing Corporation's
Fund/SERV System.
(d) RCM shall provide to investors and
potential investors only such information regarding the
Fund as the Fund shall provide or approve. RCM shall
review and file in a reasonably prompt manner all
proposed advertisements and sales literature with
appropriate regulators and consult with the Fund
regarding any comments provided by regulators with
respect to such materials. No employee of RCM shall
make any oral statements or representations regarding
the Fund, provided, however, that this provision shall
not apply to any registered representative who is an
employee of the Fund's sponsor.
(e) The offering price of the Shares shall
be the price determined in accordance with, and in the
manner set forth in, the most-current Prospectus. The
Fund shall make available to RCM a statement of each
computation of net asset value and the details of
entering into such computation.
(f) RCM at its sole discretion may
repurchase Shares offered for sale by the shareholders.
Repurchase of Shares by RCM shall be at the price
determined in accordance with, and in the manner set
forth in, the most-current Prospectus. At the end of
each business day, RCM shall notify, by any appropriate
means, the Fund and its transfer agent of the orders
for repurchase of Shares received by RCM since the last
such report, the amount to be paid for such Shares, and
the identity of the shareholders offering Shares for
repurchase. RCM reserves the right either to
repurchase such Shares or to act as agent for the Fund
to receive and transmit promptly to the Fund's transfer
agent shareholder requests for redemption of Shares.
(g) RCM shall not be obligated to sell any
certain number of Shares.
(h) In connection with the distribution
services provided hereunder and with respect to the
Rule 12b-1 Plan adopted by the Fund, RCM shall prepare
reports for the Board regarding its activities under
this Agreement as from time to time shall be reasonably
requested by the Board and conduct its activities in
accordance with such Plan.
(i) RCM shall in all material respects
conform its activities hereunder to the requirements of
applicable state and federal laws and all applicable
rules of the National Association of Securities
Dealers, Inc. ("NASD").
3. Duties of the Fund.
(a) The Fund shall keep RCM fully informed
of its affairs and shall provide to RCM from time to
time copies of all information, financial statements,
and other papers that RCM may reasonably request for
use in connection with the distribution of Shares,
including, without limitation, certified copies of any
financial statements prepared for the Fund by its
independent public accountant and such reasonable
number of copies of the most current Prospectus,
Statement of Additional Information ("SAI"), and annual
and interim reports as RCM may request, and the Fund
shall fully cooperate in the efforts of RCM to sell and
arrange for the sale of Shares.
(b) The Fund shall maintain a currently
effective Registration Statement on Form N-1A with the
Securities and Exchange Commission (the "SEC"),
maintain qualification with applicable states and file
such reports and other documents as may be required
under applicable federal and state laws. The Fund
shall notify RCM in writing of the states in which the
Shares may be sold and shall notify RCM in writing of
any changes to such information. The Fund (or its
sponsor) shall bear all expenses related to preparing
and typesetting such Prospectuses, SAI and other
materials required by law and such other expenses,
including printing and mailing expenses, related to the
Fund's communication with persons who are shareholders.
(c) The Fund shall not use any
advertisements or other sales materials that have not
been (i) submitted to RCM for its review and approval,
and (ii) filed with the appropriate regulators.
(d) The Fund represents and warrants that
its Registration Statement and any advertisements and
sales literature (excluding statements relating to RCM
and the services it provides that are based upon
written information furnished by RCM expressly for
inclusion therein) of the Fund shall not contain any
untrue statement of material fact or omit to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading, and that all statements or information
furnished to RCM, pursuant to Section 3(a) hereof,
shall be true and correct in all material respects.
4. Other Broker-Dealers. RCM in its discretion
may enter into agreements to sell Shares to such
registered and qualified retail dealers, as reasonably
requested by the Fund. In making agreements with such
dealers, RCM shall act only as principal and not as
agent for the Fund and shall pay any compensation to
such persons. The form of any such dealer agreement
shall be mutually agreed upon and approved by the Fund
and RCM.
5. Withdrawal of Offering. The Fund reserves
the right at any time to withdraw all offerings of any
or all Shares by written notice to RCM at its principal
office. No Shares shall be offered by either RCM or
the Fund under any provisions of this Agreement and no
orders for the purchase or sale of Shares hereunder
shall be accepted by the Fund if and so long as
effectiveness of the Registration Statement then in
effect or any necessary amendments thereto shall be
suspended under any of the provisions of the 1933 Act,
or if and so long as a current prospectus as required
by Section 5(b)(2) of the 1933 Act is not on file with
the SEC.
6. Services Not Exclusive. The services
furnished by RCM hereunder are not to be deemed
exclusive and RCM shall be free to furnish similar
services to others so long as its services under this
Agreement are not impaired thereby.
7. Expenses of the Fund. The Fund (or its
sponsor) shall bear all costs and expenses of
registering the Shares with the SEC and state and other
regulatory bodies, and shall assume expenses related to
communications with shareholders of the Fund including,
but not limited to, (i) fees and disbursements of its
counsel and independent public accountant; (ii) the
preparation, filing, and printing of Registration
Statements and/or Prospectuses or SAIs; (iii) the
preparation and mailing of annual and interim reports,
Prospectuses, SAIs, and proxy materials to
shareholders; (iv) such other expenses related to the
communications with persons who are shareholders of the
Fund; and (v) the qualifications of Shares for sale
under the securities laws of such jurisdictions as
shall be selected by the Fund pursuant to Paragraph
3(b) hereof, and the costs and expenses payable to each
such jurisdiction for continuing qualification therein.
In addition, the Fund (or its sponsor) shall bear all
costs of preparing, printing, mailing and filing any
advertisements and sales literature. RCM does not
assume responsibility for any expenses not assumed in
this Agreement.
8. Compensation. As compensation for the
services performed and the expenses assumed by RCM
under this Agreement including, but not limited to, any
commissions paid for sales of Shares, the Fund shall
pay RCM, as promptly as possible within the timing
provided in the Fund's Distribution Plan pursuant to
Rule 12b-1 under the 1940 Act, but no later than 30
days after the end of each quarter, a fee as set forth
in Schedule B to this Agreement.
9. Share Certificates. The Fund shall not issue
certificates representing Shares unless requested to do
so by a shareholder. If such request is transmitted
through RCM, the Fund will cause certificates
evidencing the Shares owned to be issued in such names
and denominations as RCM shall from time to time
direct.
10. Status of RCM. RCM is an independent
contractor and shall be agent of the Fund only with
respect to the sale and redemption of Shares. RCM is a
duly licensed broker-dealer with the SEC and all
applicable state securities commissions, a member of
the NASD and authorized to sell shares of open-end
investment companies. Neither RCM or any "affiliated
person" (as defined in the 1940 Act) is ineligible
pursuant to Section 9 of the 1940 Act to serve as an
underwriter to any registered investment company.
11. Indemnification.
(a) The Fund agrees to indemnify, defend,
and hold RCM, its officers and directors, and any
person who controls RCM within the meaning of Section
15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities, and expenses
(including the cost of investigating or defending such
claims, demands, or liabilities and any reasonable
counsel fees incurred in connection therewith) that
RCM, its officers, directors, or any such controlling
person may incur under the 1933 Act, or under common
law or otherwise, arising out of or based upon any (i)
alleged untrue statement of a material fact contained
in the Registration Statement, Prospectus, SAI or sales
literature, (ii) alleged omission to state a material
fact required to be stated in the Registration
Statement, Prospectus, SAI or sales literature or
necessary to make the statements therein not
misleading, (iii) action of a registered representative
employed by the Fund's sponsor, or (iv) failure by the
Fund to comply with any material terms of the
Agreement; provided, that in no event shall anything
contained herein be so construed as to protect RCM
against any liability to the Fund or its shareholders
to which RCM would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in
the performance of its duties or by reason of its
reckless disregard of its obligations under this
Agreement.
(b) The Fund shall not be liable to RCM
under this Agreement with respect to any claim made
against RCM or any person indemnified unless RCM or
other such person shall have notified the Fund in
writing of the claim within a reasonable time after the
summons or other first written notification giving
information of the nature of the claim shall have been
served upon RCM or such other person (or after RCM or
the person shall have received notice of service on any
designated agent). However, failure to notify the Fund
of any claim shall not relieve the Fund from any
liability that it may have to RCM or any person against
whom such action is brought otherwise than on account
of this Agreement.
(c) The Fund shall be entitled to
participate at its own expense in the defense or, if it
so elects, to assume the defense of any suit brought to
enforce any claims subject to this Agreement. If the
Fund elects to assume the defense of any such claim,
the defense shall be conducted by counsel chosen by the
Fund and satisfactory to indemnified defendants in the
suit whose approval shall not be unreasonably withheld.
In the event that the Fund elects to assume the defense
of any suit and retain counsel, the indemnified
defendants shall bear the fees and expenses of any
additional counsel retained by them. If the Fund does
not elect to assume the defense of a suit, it will
reimburse the indemnified defendants for the reasonable
fees and expenses of any counsel retained by the
indemnified defendants. The Fund agrees to promptly
notify RCM of the commencement of any litigation or
proceedings against it or any of its officers or
directors in connection with the issuance or sale of
any of its Shares.
(d) RCM agrees to indemnify, defend, and
hold the Fund, its officers and directors, and any
person who controls the Fund within the meaning of
Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities, and
expenses (including the cost of investigating or
defending against such claims, demands, or liabilities
and any reasonable counsel fees incurred in connection
therewith) that the Fund, its directors or officers, or
any such controlling person may incur under the 1933
Act, or under common law or otherwise, resulting from
(i) RCM's willful misfeasance, bad faith or gross
negligence in the performance of its obligations and
duties under this Agreement, (ii) arising out of or
based upon any alleged untrue statement of a material
fact contained in information furnished in writing by
RCM to the Fund for use in the Registration Statement,
Prospectus or SAI arising out of or based upon any
alleged omission to state a material fact in connection
with such information required to be stated in either
thereof or necessary to make such information not
misleading, or (iii) failure by RCM to comply with any
material terms of this Agreement.
(e) RCM shall be entitled to participate, at
its own expense, in the defense or, if it so elects, to
assume the defense of any suit brought to enforce the
claim, but if RCM elects to assume the defense, the
defense shall be conducted by counsel chosen by RCM and
satisfactory to the indemnified defendants whose
approval shall not be unreasonably withheld. In the
event that RCM elects to assume the defense of any suit
and retain counsel, the defendants in the suit shall
bear the fees and expenses of any additional counsel
retained by them. If RCM does not elect to assume the
defense of any suit, it will reimburse the indemnified
defendants in the suit for the reasonable fees and
expenses of any counsel retained by them. RCM agrees
to promptly notify the Fund of (i) the commencement of
any litigation or proceedings against it or any of its
personnel regarding the issuance or sale of its shares
of the Fund, or (ii) any regulatory inspection,
examination or proceeding materially affecting RCM's
ability to act as principal underwriter under this
Agreement.
12. Duration and Termination.
(a) This Agreement shall become effective on
the date first written above or such later date as
indicated in Schedule A and, unless sooner terminated
as provided herein, will continue in effect for two
years from the above written date. Thereafter, if not
terminated this Agreement shall continue in effect for
successive annual periods, provided that such
continuance is specifically approved at least annually
(i) by a vote of a majority of the Fund's Board who are
neither interested persons (as defined in the 1940 Act)
of the Fund ("Independent directors") or RCM, cast in
person at a meeting called for the purpose of voting on
such approval, and (ii) by the Board or by vote of a
majority of the outstanding voting securities of the
Fund.
(b) Notwithstanding the foregoing, this
Agreement may be terminated in its entirety at any
time, without the payment of any penalty, by vote of
the Board, by vote of a majority of the Independent
directors, or by vote of a majority of the outstanding
voting securities of the Fund on sixty days' written
notice to RCM or by RCM at any time, without the
payment of any penalty, on "sixty days' written notice
to the Fund. This Agreement will automatically
terminate in the event of its "assignment" (within the
meaning of the 1940 Act).
13. Amendment of this Agreement. No provision of
this Agreement may be changed, waived, discharged, or
terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the
change, waiver, discharge, or termination is sought.
This Agreement may be amended with the approval of the
Board or of a majority of the outstanding voting
securities of the Fund; provided, that in either case,
such amendment also shall be approved by a majority of
the Independent directors.
14. Notice. Any notice required or permitted to
be given by either party to the other shall be deemed
sufficient upon receipt in writing at the other party's
principal offices.
15. Miscellaneous. The captions in this
Agreement are included for convenience of reference
only and in no way define or delimit any of the
provisions hereof or otherwise affect their
construction or effect. If any provision of this
Agreement shall be held or made invalid by a court
decision, statute, rule, or otherwise, the remainder of
this Agreement shall not be affected thereby. This
Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective
successors. As used in this Agreement, the terms
"majority of the outstanding voting securities,"
"interested person," and "assignment" shall have the
same meaning as such terms have in the 1940 Act.
16. Governing Law. This Agreement shall be
construed in accordance with the laws of the State of
New York and the 1940 Act (without regard, however, to
the conflicts of law principles). To the extent that
the applicable laws of the State of New York conflict
with the applicable provisions of the 1940 Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their officers
designated as of the day and year first above written.
ATTEST: BADGLEY FUNDS, INC.
________________________ By:________________________
ATTEST: RAFFERTY CAPITAL MARKETS, INC.
________________________ By:__________________________
SCHEDULE A
to the
DISTRIBUTION AGREEMENT
between
BADGLEY FUNDS, INC.
and
RAFFERTY CAPITAL MARKETS, INC.
Pursuant to section 1 of the Distribution
Agreement between Badgley Funds, Inc. ("Fund") and
Rafferty Capital Markets, Inc. ("RCM"), the Fund hereby
appoints RCM as its agent to be the principal
underwriter of Fund with respect to its following
series:
Badgley Growth Fund
Badgley Balanced Fund
Dated June 23, 1998
SCHEDULE B
to the
DISTRIBUTION AGREEMENT
between
BADGLEY FUNDS, INC.
and
RAFFERTY CAPITAL MARKETS, INC.
As compensation pursuant to section 8 of the
Distribution Agreement between Badgley Funds, Inc. (the
"Fund") and Rafferty Capital Markets, Inc. ("RCM"), the
Fund shall pay to RCM the sum of:
1. an annual fee of $15,000 for the first series of
the Fund and $3,000 for each series thereafter or .01%
of the average daily net assets of each series,
computed daily and paid monthly, whichever is greater;
2. the ongoing licensing fees and incidental costs of
those employees of the Fund's sponsor who are
designated by the Fund's sponsor to become registered
representatives of RCM;
3. the compensation, if any, paid by RCM to such
registered representatives in accordance with
compensation schedules, as agreed upon by RCM and the
Fund's sponsor from time to time;
4. the reasonable fees associated with listing and
maintaining shares on the National Securities Clearing
Corporation's Fund/SERV System;
5. incidental expenses associated with printing and
distributing advertising and sales literature, such as
filings with the National Association of Securities
Dealers, Inc.; and
6. any reasonable out-of-pocket expenses, including
travel expenses and retention of records.
In no event shall fees payable by the Fund under this
Agreement exceed the permissible payments authorized
under the Fund's Distribution Plan pursuant to Rule 12b-
1 under the 1940 Act.
Dated: June 23, 1998
Exhibit 8
CUSTODIAN SERVICING AGREEMENT
THIS AGREEMENT made as of June 23rd, 1998, between
Badgley Funds, Inc., a Maryland corporation
(hereinafter called the "Company"), and Firstar Trust
Company, a corporation organized under the laws of the
State of Wisconsin (hereinafter called "Custodian").
WHEREAS, the Company is an open-end management
investment company which is registered under the
Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Company is authorized to create
separate series, each with its own separate investment
portfolio; and
WHEREAS, the Company desires that the securities
and cash of the Badgley Growth Fund (the "Growth
Fund"), the Badgley Balanced Fund (the "Balanced Fund")
and each additional series of the Company listed on
Exhibit A attached hereto (each, a "Fund"), as may be
amended from time to time, shall be hereafter held and
administered by Custodian pursuant to the terms of this
Agreement.
NOW, THEREFORE, in consideration of the mutual
agreements herein made, the Company and Custodian agree
as follows:
1. Definitions
The word "securities" as used herein includes
stocks, shares, bonds, debentures, notes, mortgages or
other obligations, and any certificates, receipts,
warrants or other instruments representing rights to
receive, purchase or subscribe for the same, or
evidencing or representing any other rights or
interests therein, or in any property or assets.
The words "officers' certificate" shall mean a
request or direction or certification in writing signed
in the name of the Company by any two of the President,
a Vice President, the Secretary and the Treasurer of
the Company, or any other persons duly authorized to
sign by the Board of Directors.
The word "Board" shall mean the Board of Directors
of the Company.
2. Names, Titles, and Signatures of the Company's
Officers
An officer of the Company will certify to
Custodian the names and signatures of those persons
authorized to sign the officers' certificates described
in Section 1 hereof, and the names of the members of
the Board of Directors, together with any changes which
may occur from time to time.
3. Receipt and Disbursement of Money
A. Custodian shall open and maintain a separate
account or accounts in the name of the Company, subject
only to draft or order by Custodian acting pursuant to
the terms of this Agreement. Custodian shall hold in
such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account
of the Company. Custodian shall make payments of cash
to, or for the account of, the Company from such cash
only:
(a)for the purchase of securities for the
portfolio of the Fund upon the delivery
of such securities to Custodian,
registered in the name of the Company or
of the nominee of Custodian referred to
in Section 7 or in proper form for
transfer;
(b)for the purchase or redemption of shares
of the common stock of the Fund upon
delivery thereof to Custodian, or upon
proper instructions from the Company;
(c)for the payment of interest, dividends,
taxes, investment adviser's fees or
operating expenses (including, without
limitation thereto, fees for legal,
accounting, auditing and custodian
services, expenses for printing and
postage and payments under any Rule 12b-
1 plan);
(d)for payments in connection with the
conversion, exchange or surrender of
securities owned or subscribed to by the
Fund held by or to be delivered to
Custodian; or
(e)for other proper corporate purposes
certified by resolution of the Board of
Directors of the Company.
Before making any such payment, Custodian shall
receive (and may rely upon) an officers' certificate
requesting such payment and stating that it is for a
purpose permitted under the terms of items (a), (b),
(c), or (d) of this Subsection A, and also, in respect
of item (e), upon receipt of an officers' certificate
specifying the amount of such payment, setting forth
the purpose for which such payment is to be made,
declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom such
payment is to be made, provided, however, that an
officers' certificate need not precede the disbursement
of cash for the purpose of purchasing a money market
instrument, or any other security with same or next-day
settlement, if the President, a Vice President, the
Secretary or the Treasurer of the Company issues
appropriate oral or facsimile instructions to Custodian
and an appropriate officers' certificate is received by
Custodian within two business days thereafter.
B. Custodian is hereby authorized to endorse and
collect all checks, drafts or other orders for the
payment of money received by Custodian for the account
of the Company.
C. Custodian shall, upon receipt of proper
instructions, make federal funds available to the
Company as of specified times agreed upon from time to
time by the Company and the Custodian in the amount of
checks received in payment for shares of the Fund which
are deposited into the Fund's account.
D. If so directed by the Company, Custodian will
invest any and all available cash in overnight cash-
equivalent investments as specified by the investment
manager.
4. Segregated Accounts
Upon receipt of proper instructions, the Custodian
shall establish and maintain a segregated account(s)
for and on behalf of the Fund, into which account(s)
may be transferred cash and/or securities.
5. Transfer, Exchange, Redelivery, etc. of Securities
Custodian shall have sole power to release or
deliver any securities of the Company held by it
pursuant to this Agreement. Custodian agrees to
transfer, exchange or deliver securities held by it
hereunder only:
(a)for sales of such securities for the account of
the Fund upon receipt by Custodian of payment
therefore;
(b)when such securities are called, redeemed or
retired or otherwise become payable;
(c)for examination by any broker selling any such
securities in accordance with "street
delivery" custom;
(d)in exchange for, or upon conversion into, other
securities alone or other securities and cash
whether pursuant to any plan of merger,
consolidation, reorganization,
recapitalization or readjustment, or
otherwise;
(e)upon conversion of such securities pursuant to
their terms into other securities;
(f)upon exercise of subscription, purchase or
other similar rights represented by such
securities;
(g)for the purpose of exchanging interim receipts
or temporary securities for definitive
securities;
(h)for the purpose of redeeming in kind shares of
common stock of the Fund upon delivery
thereof to Custodian; or
(i) for other proper corporate purposes.
As to any deliveries made by Custodian pursuant to
items (a), (b), (d), (e), (f), and (g), securities or
cash receivable in exchange therefor shall be
deliverable to Custodian.
Before making any such transfer, exchange or
delivery, Custodian shall receive (and may rely upon)
an officers' certificate requesting such transfer,
exchange or delivery, and stating that it is for a
purpose permitted under the terms of items (a), (b),
(c), (d), (e), (f), (g), or (h) of this Section 5 and
also, in respect of item (i), upon receipt of an
officers' certificate specifying the securities to be
delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a
proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be
made, provided, however, that an officers' certificate
need not precede any such transfer, exchange or
delivery of a money market instrument, or any other
security with same or next-day settlement, if the
President, a Vice President, the Secretary or the
Treasurer of the Company issues appropriate oral or
facsimile instructions to Custodian and an appropriate
officers' certificate is received by Custodian within
two business days thereafter.
6. Custodian's Acts Without Instructions
Unless and until Custodian receives an officers'
certificate to the contrary, Custodian shall: (a)
present for payment all coupons and other income items
held by it for the account of the Fund, which call for
payment upon presentation and hold the cash received by
it upon such payment for the account of the Fund; (b)
collect interest and cash dividends received, with
notice to the Company, for the account of the Fund; (c)
hold for the account of the Fund hereunder all stock
dividends, rights and similar securities issued with
respect to any securities held by it hereunder; and (d)
execute, as agent on behalf of the Company, all
necessary ownership certificates required by the
Internal Revenue Code of 1986, as amended (the "Code")
or the Income Tax Regulations (the "Regulations") of
the United States Treasury Department (the "Treasury
Department") or under the laws of any state now or
hereafter in effect, inserting the Company's name on
such certificates as the owner of the securities
covered thereby, to the extent it may lawfully do so.
7. Registration of Securities
Except as otherwise directed by an officers'
certificate, Custodian shall register all securities,
except such as are in bearer form, in the name of a
registered nominee of Custodian as defined in the
Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder or in any
provision of any subsequent federal tax law exempting
such transaction from liability for stock transfer
taxes, and shall execute and deliver all such
certificates in connection therewith as may be required
by such laws or regulations or under the laws of any
state. All securities held by Custodian hereunder
shall be at all times identifiable in its records as
being held in an account or accounts of Custodian
containing only the assets of the Company.
The Company shall from time to time furnish to
Custodian appropriate instruments to enable Custodian
to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any
securities which it may hold for the account of the
Company and which may from time to time be registered
in the name of the Company.
8. Voting and Other Action
Neither Custodian nor any nominee of Custodian
shall vote any of the securities held hereunder by or
for the account of the Fund, except in accordance with
the instructions contained in an officers' certificate.
Custodian shall deliver, or cause to be executed and
delivered, to the Company all notices, proxies and
proxy soliciting materials with respect to such
securities, such proxies to be executed by the
registered holder of such securities (if registered
otherwise than in the name of the Company), but without
indicating the manner in which such proxies are to be
voted.
9. Transfer Tax and Other Disbursements
The Company shall pay or reimburse Custodian from
time to time for any transfer taxes payable upon
transfers of securities made hereunder, and for all
other necessary and proper disbursements and expenses
made or incurred by Custodian in the performance of
this Agreement.
Custodian shall execute and deliver such
certificates in connection with securities delivered to
it or by it under this Agreement as may be required
under the provisions of the Code and any Regulations of
the Treasury Department issued thereunder, or under the
laws of any state, to exempt from taxation any exempt
transfers and/or deliveries of any such securities.
10. Concerning Custodian
Custodian shall be paid as compensation for its
services pursuant to this Agreement such compensation
as may from time to time be agreed upon in writing
between the two parties. Until modified in writing,
such compensation shall be as set forth in Exhibit A
attached hereto.
Custodian shall not be liable for any action taken
in good faith upon any certificate herein described or
certified copy of any resolution of the Board, and may
rely on the genuineness of any such document which it
may in good faith believe to have been validly
executed.
The Company agrees to indemnify and hold harmless
Custodian and its nominee from all taxes, charges,
expenses, assessments, claims and liabilities
(including reasonable counsel fees) incurred or
assessed against it or by its nominee in connection
with the performance of this Agreement, except such as
may arise from its or its nominee's own bad faith,
negligent action, negligent failure to act or willful
misconduct. Custodian is authorized to charge any
account of the Fund for such items. In the event of
any advance of cash for any purpose made by Custodian
resulting from orders or instructions of the Company,
or in the event that Custodian or its nominee shall
incur or be assessed any taxes, charges, expenses,
assessments, claims or liabilities in connection with
the performance of this Agreement, except such as may
arise from its or its nominee's own bad faith,
negligent action, negligent failure to act or willful
misconduct, any property at any time held for the
account of the Company shall be security therefor.
Custodian agrees to indemnify and hold harmless
the Company from all charges, expenses, assessments,
and claims/liabilities (including reasonable counsel
fees) incurred or assessed against it in connection
with the performance of this Agreement, except such as
may arise from the Fund's own bad faith, negligent
action, negligent failure to act, or willful
misconduct.
11. Subcustodians
Custodian is hereby authorized to engage another
bank or trust company as a subcustodian for all or any
part of the Company's assets, so long as any such bank
or trust company is itself qualified under the 1940 Act
and the rules and regulations thereunder and provided
further that, if the Custodian utilizes the services of
a subcustodian, the Custodian shall remain fully liable
and responsible for any losses caused to the Company by
the subcustodian as fully as if the Custodian was
directly responsible for any such losses under the
terms of this Agreement.
Notwithstanding anything contained herein, if the
Company requires the Custodian to engage specific
subcustodians for the safekeeping and/or clearing of
assets, the Company agrees to indemnify and hold
harmless Custodian from all claims, expenses and
liabilities incurred or assessed against it in
connection with the use of such subcustodian in regard
to the Company's assets, except as may arise from
Custodian's own bad faith, negligent action, negligent
failure to act or willful misconduct.
12. Reports by Custodian
Custodian shall furnish the Company periodically
as agreed upon with a statement summarizing all
transactions and entries for the account of Company.
Custodian shall furnish to the Company, at the end of
every month, a list of the portfolio securities for the
Fund showing the aggregate cost of each issue. The
books and records of Custodian pertaining to its
actions under this Agreement shall be open to
inspection and audit at reasonable times by officers
of, and by auditors employed by, the Company.
13. Termination or Assignment
This Agreement may be terminated by the Company,
or by Custodian, on ninety (90) days notice, given in
writing and sent by registered mail to:
Firstar Trust Company
Attn.: Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202
or to the Company at:
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, WA 98101
Attn: Corporate Secretary
as the case may be. Upon any termination of this
Agreement, pending appointment of a successor to
Custodian or a vote of the shareholders of the Fund to
dissolve or to function without a custodian of its
cash, securities and other property, Custodian shall
not deliver cash, securities or other property of the
Fund to the Company, but may deliver them to a bank or
trust company of its own selection that meets the
requirements of the 1940 Act as a Custodian for the
Company to be held under terms similar to those of this
Agreement, provided, however, that Custodian shall not
be required to make any such delivery or payment until
full payment shall have been made by the Company of all
liabilities constituting a charge on or against the
properties then held by Custodian or on or against
Custodian, and until full payment shall have been made
to Custodian of all its fees, compensation, costs and
expenses, subject to the provisions of Section 10 of
this Agreement.
This Agreement may not be assigned by Custodian
without the consent of the Company, authorized or
approved by a resolution of its Board of Directors.
14. Deposits of Securities in Securities Depositories
No provision of this Agreement shall be deemed to
prevent the use by Custodian of a central securities
clearing agency or securities depository, provided,
however, that Custodian and the central securities
clearing agency or securities depository meet all
applicable federal and state laws and regulations, and
the Board of Directors of the Company approves by
resolution the use of such central securities clearing
agency or securities depository.
15. Records
Custodian shall keep records relating to its
services to be performed hereunder, in the form and
manner, and for such period, as it may deem advisable
and is agreeable to the Company but not inconsistent
with the rules and regulations of appropriate
government authorities, in particular Section 31 of the
1940 Act and the rules thereunder. Custodian agrees
that all such records prepared or maintained by the
Custodian relating to the services performed by
Custodian hereunder are the property of the Company and
will be preserved, maintained, and made available in
accordance with such section and rules of the 1940 Act
and will be promptly surrendered to the Company on and
in accordance with its request.
16. Governing Law
This Agreement shall be governed by Wisconsin law.
However, nothing herein shall be construed in a manner
inconsistent with the 1940 Act or any rule or
regulation promulgated by the Securities and Exchange
Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by a duly authorized
officer in one or more counterparts as of the day and
year first written above.
Badgley Funds, Inc. FIRSTAR TRUST COMPANY
By:___________________ By:____________________
Attest:_______________ Attest:________________
Custody Services
Annual Fee Schedule - Domestic Funds
Exhibit A
Separate Series of Badgley Funds, Inc.
Name of Series Date Added
Badgley Growth Fund June 23, 1998
Badgley Balanced Fund June 23, 1998
Annual fee based upon market value
2 basis points per year
Minimum annual fee per fund - $3,000
Investment transactions (purchase, sale, exchange,
tender, redemption, maturity, receipt, delivery):
$12.00 per book entry security (depository or
Federal Reserve system)
$25.00 per definitive security (physical)
$25.00 per mutual fund trade
$75.00 per Euroclear
$ 8.00 per principal reduction on pass-
through certificates
$35.00 per option/futures contract
$15.00 per variation margin
$15.00 per Fed wire deposit or withdrawal
Variable Amount Demand Notes: Used as a short-term
investment, variable amount notes offer safety and
prevailing high interest rates. Our charge, which is
1/4 of 1%, is deducted from the variable amount note
income at the time it is credited to your account.
Plus out-of-pocket expenses.
If out-of-pocket expenses exceed $5,000 in any month,
such expenses must be pre-approved by the Company.
Fees and out-of-pocket expenses are billed to the Fund
monthly, based upon market value at the beginning of
the month.
Exhibit 9.1
TRANSFER AGENT SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this
23rd day of June, 1998, by and between Badgley Funds,
Inc., a Maryland corporation (hereinafter referred to
as the "Company"), and Firstar Trust Company, a
corporation organized under the laws of the State of
Wisconsin (hereinafter referred to as the "FTC").
WHEREAS, the Company is an open-end management
investment company which is registered under the
Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Company is authorized to create
separate series, each with its own separate investment
portfolio;
WHEREAS, FTC is a trust company and, among other
things, is in the business of administering transfer
and dividend disbursing agent functions for the benefit
of its customers; and
WHEREAS, the Company desires to retain FTC to
provide transfer and dividend disbursing agent services
to the Badgley Growth Fund (the "Growth Fund"), the
Badgley Balanced Fund (the "Balanced Fund") and each
additional series of the Company listed on Exhibit A
attached hereto (each, a "Fund"), as may be amended
from time to time.
NOW, THEREFORE, in consideration of the mutual
agreements herein made, the Company and FTC agree as
follows:
1. Appointment of Transfer Agent
The Company hereby appoints FTC as Transfer Agent
of the Company on the terms and conditions set forth in
this Agreement, and FTC hereby accepts such appointment
and agrees to perform the services and duties set forth
in this Agreement in consideration of the compensation
provided for herein.
2. Duties and Responsibilities of FTC
FTC shall perform all of the customary services of
a transfer agent and dividend disbursing agent, and as
relevant, agent in connection with accumulation, open
account or similar plans (including without limitation
any periodic investment plan or periodic withdrawal
program), including but not limited to:
A.Receive orders for the purchase of shares;
B.Process purchase orders with prompt delivery,
where appropriate, of payment and supporting
documentation to the Company's custodian, and
issue the appropriate number of
uncertificated shares with such
uncertificated shares being held in the
appropriate shareholder account;
C.Process redemption requests received in good
order and, where relevant, deliver
appropriate documentation to the Company's
custodian;
D.Pay monies upon receipt from the Company's
custodian, where relevant, in accordance with
the instructions of redeeming shareholders;
E.Process transfers of shares in accordance with
the shareholder's instructions;
F.Process exchanges between funds and/or classes
of shares of funds both within the same
family of funds and with the Firstar Money
Market Funds, if applicable;
G.Prepare and transmit payments for dividends and
distributions declared by the Company with
respect to the Fund;
H.Make changes to shareholder records, including,
but not limited to, address changes in plans
(i.e., systematic withdrawal, automatic
investment, dividend reinvestment, etc.);
I.Record the issuance of shares of the Fund and
maintain, pursuant to Rule 17ad-10(e)
promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), a
record of the total number of shares of the
Fund which are authorized, issued and
outstanding;
J.Prepare shareholder meeting lists and, if
applicable, mail, receive and tabulate
proxies;
K.Mail shareholder reports and prospectuses to
current shareholders;
L.Prepare and file U.S. Treasury Department Forms
1099 and other appropriate information
returns required with respect to dividends
and distributions for all shareholders;
M.Provide shareholder account information upon
request and prepare and mail confirmations
and statements of account to shareholders for
all purchases, redemptions and other
confirmable transactions as agreed upon with
the Company;
N.Provide a Blue Sky System which will enable the
Company to monitor the total number of shares
of the Fund sold in each state. In addition,
the Company or its agent, including FTC,
shall identify to FTC in writing those
transactions and assets to be treated as
exempt from the Blue Sky reporting for each
state. The responsibility of FTC for the
Company's Blue Sky state registration status
under this Agreement is solely limited to the
initial compliance by the Company and the
reporting of such transactions to the Company
or its agent.
O.Answer telephone calls and correspondence from
shareholders relating to their accounts
during FTC's normal business hours. FTC
shall strive to promptly respond to all such
telephone or written inquiries from
shareholders. Copies of all correspondence
from shareholders involving complaints about
the management of the Company, services
provided by or for the Company, FTC or
others, shall be promptly forwarded to the
Company. FTC shall keep records of
substantive shareholder telephone calls and
correspondence and replies thereto, and of
the lapse of time between receipt of such
calls and correspondence and replies.
P.Prepare such reports as may be reasonably
requested from time to time by the Company or
its Board of Directors relating to fees paid
out under a Fund's Rule 12b-1 plan.
3. Compensation
The Company agrees to pay FTC for the performance
of the duties listed in this Agreement as set forth on
Exhibit A attached hereto; the fees and out-of-pocket
expenses include, but are not limited to the following:
printing, postage, forms, stationery, record retention
(if requested by the Company), mailing, insertion,
programming (if requested by the Company), labels,
shareholder lists and proxy expenses.
These fees and reimbursable expenses may be
changed from time to time subject to mutual written
agreement between the Company and FTC.
The Company agrees to pay all fees and
reimbursable expenses within ten (10) business days
following the receipt of the billing notice.
4. Representations of FTC
FTC represents and warrants to the Company that:
A.It is a trust company duly organized, existing
and in good standing under the laws of
Wisconsin;
B.It is a registered transfer agent under the
Exchange Act.
C.It is duly qualified to carry on its business in
the State of Wisconsin;
D.It is empowered under applicable laws and by its
charter and bylaws to enter into and perform
this Agreement;
E.All requisite corporate proceedings have been
taken to authorize it to enter and perform
this Agreement;
F.It has and will continue to have access to the
necessary facilities, equipment and personnel
to perform its duties and obligations under
this Agreement; and
G.It will comply with all applicable requirements
of the Securities Act of 1933, as amended,
and the Exchange Act, the 1940 Act, and any
laws, rules, and regulations of governmental
authorities having jurisdiction.
5. Representations of the Company
The Company represents and warrants to FTC that:
A.The Company is an open-end diversified
investment company under the 1940 Act;
B.The Company is a corporation organized,
existing, and in good standing under the laws
of Maryland;
C.The Company is empowered under applicable laws
and by its Articles of Incorporation and
Bylaws to enter into and perform this
Agreement;
D.All necessary proceedings required by the
Articles of Incorporation have been taken to
authorize it to enter into and perform this
Agreement;
E.The Company will comply with all applicable
requirements of the Securities Act, the
Exchange Act, the 1940 Act, and any laws,
rules and regulations of governmental
authorities having jurisdiction; and
F.A registration statement under the Securities
Act will be made effective and will remain
effective, and appropriate state securities
law filings have been made and will continue
to be made, with respect to all shares of the
Company being offered for sale.
6. Covenants of the Company and FTC
The Company shall furnish the Agent a certified
copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of FTC and the
execution of this Agreement. The Company shall provide
to the Agent a copy of its Articles of Incorporation
and Bylaws, and all amendments thereto.
FTC shall keep records relating to the services to
be performed hereunder, in the form and manner as it
may deem advisable and as required under the Exchange
Act. To the extent required by Section 31 of the 1940
Act, and the rules thereunder, FTC agrees that all such
records prepared or maintained by FTC relating to the
services to be performed by FTC hereunder are the
property of the Company and will be preserved,
maintained and made available in accordance with such
section and rules and will be surrendered to the
Company on and in accordance with its request.
7. Performance of Service; Limitation of Liability
FTC shall exercise reasonable care in the
performance of its duties under this Agreement. FTC
shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company
in connection with matters to which this Agreement
relates, including losses resulting from mechanical
breakdowns or the failure of communication or power
supplies beyond FTC's control, except a loss resulting
from FTC's refusal or failure to comply with the terms
of this Agreement or from bad faith, negligence, or
willful misconduct on its part in the performance of
its duties under this Agreement. Notwithstanding any
other provision of this Agreement, the Company shall
indemnify and hold harmless FTC from and against any
and all claims, demands, losses, expenses, and
liabilities (whether with or without basis in fact or
law) of any and every nature (including reasonable
attorneys' fees) which FTC may sustain or incur or
which may be asserted against FTC by any person arising
out of any action taken or omitted to be taken by it in
performing the services hereunder (i) in accordance
with the foregoing standards, or (ii) in reliance upon
any written or oral instruction provided to FTC by any
duly authorized officer of the Company, such duly
authorized officer to be included in a list of
authorized officers furnished to FTC and as amended
from time to time in writing by resolution of the Board
of Directors of the Company.
FTC shall indemnify and hold the Company harmless
from and against any and all claims, demands, losses,
expenses, and liabilities (whether with or without
basis in fact or law) of any and every nature
(including reasonable attorneys' fees) which the
Company may sustain or incur or which may be asserted
against the Company by any person arising out of any
action taken or omitted to be taken by FTC as a result
of FTC's refusal or failure to comply with the terms of
this Agreement, its bad faith, negligence, or willful
misconduct.
In the event of a mechanical breakdown or failure
of communication or power supplies beyond its control,
FTC shall take all reasonable steps to minimize service
interruptions for any period that such interruption
continues beyond FTC's control. FTC will make every
reasonable effort to restore any lost or damaged data
and correct any errors resulting from such a breakdown
at the expense of FTC. FTC agrees that it shall, at
all times, have reasonable contingency plans with
appropriate parties, making reasonable provision for
emergency use of electrical data processing equipment
to the extent appropriate equipment is available.
Representatives of the Company shall be entitled to
inspect FTC's premises and operating capabilities at
any time during regular business hours of FTC, upon
reasonable notice to FTC.
Regardless of the above, FTC reserves the right to
reprocess and correct administrative errors at its own
expense.
In order that the indemnification provisions
contained in this section shall apply, it is understood
that if in any case the indemnitor may be asked to
indemnify or hold the indemnitee harmless, the
indemnitor shall be fully and promptly advised of all
pertinent facts concerning the situation in question,
and it is further understood that the indemnitee will
use all reasonable care to notify the indemnitor
promptly concerning any situation which presents or
appears likely to present the probability of a claim
for indemnification. The indemnitor shall have the
option to defend the indemnitee against any claim which
may be the subject of this indemnification. In the
event that the indemnitor so elects, it will so notify
the indemnitee and thereupon the indemnitor shall take
over complete defense of the claim, and the indemnitee
shall in such situation initiate no further legal or
other expenses for which it shall seek indemnification
under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in
which the indemnitor will be asked to indemnify the
indemnitee except with the indemnitor's prior written
consent.
8. Proprietary and Confidential Information
FTC agrees on behalf of itself and its directors,
officers, and employees to treat confidentially and as
proprietary information of the Company all records and
other information relative to the Company and prior,
present, or potential shareholders (and clients of said
shareholders) and not to use such records and
information for any purpose other than the performance
of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by
the Company, which approval shall not be unreasonably
withheld and may not be withheld where FTC may be
exposed to civil or criminal contempt proceedings for
failure to comply after being requested to divulge such
information by duly constituted authorities, or when so
requested by the Company.
9. Term of Agreement; Amendment
This Agreement shall become effective as of the
date hereof and, unless sooner terminated as provided
herein, shall continue automatically in effect for
successive annual periods. The Agreement may be
terminated by either party upon giving ninety (90) days
prior written notice to the other party or such shorter
period as is mutually agreed upon by the parties. This
Agreement may be amended only by mutual written consent
of the parties.
10. Notices
Notices of any kind to be given by either party to
the other party shall be in writing and shall be duly
given if mailed or delivered as follows: Notice to FTC
shall be sent to:
Firstar Trust Company
Attn.: Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Company shall be sent to:
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, WA 98101
Attention: Corporate Secretary
11. Duties in the Event of Termination
In the event that, in connection with termination,
a successor to any of FTC's duties or responsibilities
hereunder is designated by the Company by written
notice to FTC, FTC will promptly, upon such termination
and at the expense of the Company, transfer to such
successor all relevant books, records, correspondence,
and other data established or maintained by FTC under
this Agreement in a form reasonably acceptable to the
Company (if such form differs from the form in which
FTC has maintained, the Company shall pay any expenses
associated with transferring the data to such form),
and will cooperate in the transfer of such duties and
responsibilities, including provision for assistance
from FTC's personnel in the establishment of books,
records, and other data by such successor.
12. Governing Law
This Agreement shall be construed and the
provisions thereof interpreted under and in accordance
with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner
inconsistent with the 1940 Act or any rule or
regulation promulgated by the Securities and Exchange
Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by a duly authorized
officer in one or more counterparts as of the day and
year first written above.
Badgley Funds, Inc. FIRSTAR TRUST COMPANY
By:____________________ By:________________________
Attest:________________ Attest:____________________
Transfer Agent and Shareholder Servicing
Annual Fee Schedule
Exhibit A
Separate Series of Badgley Funds, Inc.
Name of Series Date Added
Badgley Growth Fund June 23, 1998
Badgley Balanced Fund June 23, 1998
Annual Fee
$14.00 per shareholder account
Minimum annual fees of $16,250 per Fund
Plus Out-of-Pocket Expenses, including but not limited
to:
Telephone - toll-free lines Proxies
Postage Retention of records (with prior approval)
Programming (with prior approval) Microfilm/fiche of records
Stationery/envelopes Special reports
Mailing ACH fees
Insurance NSCC charges
If out-of-pocket expenses exceed $10,000 in any month,
such expenses must be pre-approved by the Company.
ACH Shareholder Services
$125.00 per month per Fund group
$ .50 per account setup and/or change
$ .50 per item for AIP purchases
$ .35 per item for EFT payments and purchases
$3.50 per correction, reversal, return item
Qualified Plan Fees (Billed to Investors)
Annual maintenance fee per account $12.50 / acct.(Cap at $25.00 per SSN)
Transfer to successor trustee $15.00 / trans.
Distribution to participant $15.00 / trans.(Exclusive of SWP)
Refund of excess contribution $15.00 / trans.
Additional Shareholder Fees (Billed to Investors)
Any outgoing wire transfer $12.00 / wire
Telephone Exchange $ 5.00 / exchange
transaction
Return check fee $20.00 / item
Stop payment $20.00 / stop
(Liquidation, dividend,
draft check)
Research fee $ 5.00 / item
(For requested items of
the second calendar
year [or previous] to the
request)(Cap at $25.00)
NSCC and DAZL
Out-of-Pocket Charges
NSCC Interfaces
Setup
Fund/SERV, Networking ACATS, Exchanges $5,000 setup (one time)
DCCS, RAT
Commissions $5,000 setup (one time)
Processing
Fund/SERV $ 50 / month
Networking $ 250 / month
CPU Access $ 40 / month
Fund/SERV Transactions $ .35 / trade
Networking - per item $ .025/monthly dividend fund
Networking - per item $ .015/non-mo. dividend fund
First Data $ .10 / next-day Fund/SERV trade
First Data $ .15 / same-day Fund/SERV trade
NSCC Implementation
8 to 10 weeks lead time
DAZL (Direct Access Zip Link - Electronic mail
interface to financial advisor network)
Setup $5,000 / fund group-Waived for FIRSTAR
Monthly Usage $1,000 / month
Transmission $ .015 / price record
$ .025 / other record
Enhancement $ 125 / hour
Fees and out-of-pocket expenses are billed to the Fund
monthly.
Exhibit 9.2
FUND ADMINISTRATION SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this
23rd day of June, 1998, by and between Badgley Funds,
Inc., a Maryland corporation (hereinafter referred to
as the "Company"), and Firstar Trust Company, a
corporation organized under the laws of the State of
Wisconsin (hereinafter referred to as "FTC").
WHEREAS, the Company is an open-end management
investment company which is registered under the
Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Company is authorized to create
separate series, each with its own separate investment
portfolio;
WHEREAS, FTC is a trust company and, among other
things, is in the business of providing fund
administration services for the benefit of its
customers; and
WHEREAS, the Company desires to retain FTC to act
as Administrator for the Badgley Growth Fund (the
"Growth Fund"), the Badgley Balanced Fund (the
"Balanced Fund") and for each additional series of the
Company listed on Exhibit A attached hereto (each, a
"Fund"), as may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual
agreements herein made, the Company and FTC agree as
follows:
1. Appointment of Administrator
The Company hereby appoints FTC as Administrator
of the Company on the terms and conditions set forth in
this Agreement, and FTC hereby accepts such appointment
and agrees to perform the services and duties set forth
in this Agreement in consideration of the compensation
provided for herein.
2. Duties and Responsibilities of FTC
A. General Fund Management
1.Act as liaison among all Fund service
providers
2.Coordinate board communication by:
a.Assisting Company counsel in
establishing meeting agendas
b.Preparing board reports based on
financial and administrative data
c.Evaluating independent auditor
d.Securing and monitoring fidelity bond
and director and officer liability
coverage, and making the necessary
SEC filings relating thereto
e.Preparing minutes of meetings of the
board and shareholders
3.Audits
a.Prepare appropriate schedules and
assist independent auditors
b.Provide information to SEC and
facilitate audit process
c.Provide office facilities
4.Assist in overall operations of the Fund
5.Pay Fund expenses upon written
authorization from the Company
B. Compliance
1.Regulatory Compliance
a.Monitor compliance with 1940 Act
requirements, including:
1)Asset diversification tests
2)Total return and SEC yield
calculations
3)Maintenance of books and records
under Rule 31a-3
4)Code of Ethics for the
disinterested directors of the
Fund
b.Monitor Fund's compliance with the
policies and investment limitations
of the Company as set forth in its
Prospectus and Statement of
Additional Information
2.Blue Sky Compliance
a.Prepare and file with the appropriate
state securities authorities any
and all required compliance filings
relating to the registration of the
securities of the Company so as to
enable the Company to make a
continuous offering of its shares
in all states
b.Monitor status and maintain
registrations in each state
3.SEC Registration and Reporting
a.Assist Company counsel in updating
Prospectus and Statement of
Additional Information and in
preparing proxy statements and
Rule 24f-2 notices
b.Prepare annual and semiannual reports
c.Coordinate the printing of publicly
disseminated Prospectuses and
reports
d.File fidelity bond under Rule 17g-1
e.File shareholder reports under Rule
30b2-1
4.IRS Compliance
a.Monitor Company's status as a
regulated investment company under
Subchapter M through review of the
following:
1)Asset diversification
requirements
2)Qualifying income requirements
3)Distribution requirements
b.Calculate required distributions
(including excise tax
distributions)
C. Financial Reporting
1.Provide financial data required by Fund's
Prospectus and Statement of Additional
Information
2.Prepare financial reports for shareholders,
the board, the SEC, and independent
auditors
3.Supervise the Company's Custodian and
Company Accountants in the maintenance
of the Company's general ledger and in
the preparation of the Fund's financial
statements, including oversight of
expense accruals and payments, of the
determination of net asset value of the
Company's net assets and of the
Company's shares, and of the declaration
and payment of dividends and other
distributions to shareholders
D. Tax Reporting
1.Prepare and file on a timely basis
appropriate federal and state tax
returns including Forms 1120/8610 with
any necessary schedules
2.Prepare state income breakdowns where
relevant
3.File Form 1099 Miscellaneous for payments
to directors and other service providers
4.Monitor wash losses
5.Calculate eligible dividend income for
corporate shareholders
3. Compensation
The Company, on behalf of the Fund, agrees to pay
FTC for the performance of the duties listed in this
Agreement, the fees and out-of-pocket expenses as set
forth in the attached Exhibit A.
These fees may be changed from time to time,
subject to mutual written Agreement between the Company
and FTC.
The Company agrees to pay all fees and
reimbursable expenses within ten (10) business days
following the receipt of the billing notice.
4. Performance of Service; Limitation of Liability
A. FTC shall exercise reasonable care in the
performance of its duties under this Agreement. FTC
shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Company
in connection with matters to which this Agreement
relates, including losses resulting from mechanical
breakdowns or the failure of communication or power
supplies beyond FTC's control, except a loss resulting
from FTC's refusal or failure to comply with the terms
of this Agreement or from bad faith, negligence, or
willful misconduct on its part in the performance of
its duties under this Agreement. Notwithstanding any
other provision of this Agreement, the Company shall
indemnify and hold harmless FTC from and against any
and all claims, demands, losses, expenses, and
liabilities (whether with or without basis in fact or
law) of any and every nature (including reasonable
attorneys' fees) which FTC may sustain or incur or
which may be asserted against FTC by any person arising
out of any action taken or omitted to be taken by it in
performing the services hereunder (i) in accordance
with the foregoing standards, or (ii) in reliance upon
any written or oral instruction provided to FTC by any
duly authorized officer of the Company, such duly
authorized officer to be included in a list of
authorized officers furnished to FTC and as amended
from time to time in writing by resolution of the Board
of Directors of the Company.
FTC shall indemnify and hold the Company
harmless from and against any and all claims, demands,
losses, expenses, and liabilities (whether with or
without basis in fact or law) of any and every nature
(including reasonable attorneys' fees) which the
Company may sustain or incur or which may be asserted
against the Company by any person arising out of any
action taken or omitted to be taken by FTC as a result
of FTC's refusal or failure to comply with the terms of
this Agreement, its bad faith, negligence, or willful
misconduct.
In the event of a mechanical breakdown or
failure of communication or power supplies beyond its
control, FTC shall take all reasonable steps to
minimize service interruptions for any period that such
interruption continues beyond FTC's control. FTC will
make every reasonable effort to restore any lost or
damaged data and correct any errors resulting from such
a breakdown at the expense of FTC. FTC agrees that it
shall, at all times, have reasonable contingency plans
with appropriate parties, making reasonable provision
for emergency use of electrical data processing
equipment to the extent appropriate equipment is
available. Representatives of the Company shall be
entitled to inspect FTC's premises and operating
capabilities at any time during regular business hours
of FTC, upon reasonable notice to FTC.
Regardless of the above, FTC reserves the
right to reprocess and correct administrative errors at
its own expense.
B. In order that the indemnification provisions
contained in this section shall apply, it is understood
that if in any case the indemnitor may be asked to
indemnify or hold the indemnitee harmless, the
indemnitor shall be fully and promptly advised of all
pertinent facts concerning the situation in question,
and it is further understood that the indemnitee will
use all reasonable care to notify the indemnitor
promptly concerning any situation which presents or
appears likely to present the probability of a claim
for indemnification. The indemnitor shall have the
option to defend the indemnitee against any claim which
may be the subject of this indemnification. In the
event that the indemnitor so elects, it will so notify
the indemnitee and thereupon the indemnitor shall take
over complete defense of the claim, and the indemnitee
shall in such situation initiate no further legal or
other expenses for which it shall seek indemnification
under this section. The indemnitee shall in no case
confess any claim or make any compromise in any case in
which the indemnitor will be asked to indemnify the
indemnitee except with the indemnitor's prior written
consent.
5. Proprietary and Confidential Information
FTC agrees on behalf of itself and its directors,
officers, and employees to treat confidentially and as
proprietary information of the Company all records and
other information relative to the Company and prior,
present, or potential shareholders of the Company (and
clients of said shareholders), and not to use such
records and information for any purpose other than the
performance of its responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be
withheld where FTC may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by the
Company.
6. Data Necessary to Perform Services
The Company or its agent, which may be FTC, shall
furnish to FTC the data necessary to perform the
services described herein at times and in such form as
mutually agreed upon.
7. Term of Agreement
This Agreement shall become effective as of the
date hereof and, unless sooner terminated as provided
herein, shall continue automatically in effect for
successive annual periods. The Agreement may be
terminated by either party upon giving ninety (90) days
prior written notice to the other party or such shorter
period as is mutually agreed upon by the parties.
However, this Agreement may be amended by mutual
written consent of the parties.
8. Notices
Notices of any kind to be given by either party to
the other party shall be in writing and shall be duly
given if mailed or delivered as follows: Notice to FTC
shall be sent to:
Firstar Trust Company
Attn.: Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Company shall be sent to:
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, WA 98101
Attn: Corporate Secretary
9. Duties in the Event of Termination
In the event that, in connection with termination,
a successor to any of FTC's duties or responsibilities
hereunder is designated by the Company by written
notice to FTC, FTC will promptly, upon such termination
and at the expense of the Company, transfer to such
successor all relevant books, records, correspondence,
and other data established or maintained by FTC under
this Agreement in a form reasonably acceptable to the
Company (if such form differs from the form in which
FTC has maintained, the Company shall pay any expenses
associated with transferring the data to such form),
and will cooperate in the transfer of such duties and
responsibilities, including provision for assistance
from FTC's personnel in the establishment of books,
records, and other data by such successor.
10. Governing Law
This Agreement shall be construed and the
provisions thereof interpreted under and in accordance
with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner
inconsistent with the 1940 Act or any rule or
regulation promulgated by the Securities and Exchange
Commission thereunder.
11. Records
FTC shall keep records relating to the services to
be performed hereunder, in the form and manner, and for
such period as it may deem advisable and is agreeable
to the Company but not inconsistent with the rules and
regulations of appropriate government authorities, in
particular, Section 31 of the 1940 Act and the rules
thereunder. FTC agrees that all such records prepared
or maintained by FTC relating to the services to be
performed by FTC hereunder are the property of the
Company and will be preserved, maintained, and made
available in accordance with such section and rules of
the 1940 Act and will be promptly surrendered to the
Company on and in accordance with its request.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by a duly authorized
officer in one or more counterparts as of the day and
year first written above.
Badgley Funds, Inc. FIRSTAR TRUST COMPANY
By:___________________ By:_____________________
Attest:_______________ Attest:__________________
Fund Administration and Compliance
Annual Fee Schedule - Domestic Funds
Exhibit A
Separate Series of Badgley Funds, Inc.
Name of Series Date Added
Badgley Growth Fund June 23, 1998
Badgley Balanced Fund June 23, 1998
Annual fee based upon average assets per Fund
6 basis points on the first $200 million
5 basis points on the next $500 million
3 basis points on the balance
Minimum annual fee:$30,000 per Fund
Plus out-of-pocket expense reimbursements, including
but not limited to:
Postage
Programming
Stationery
Proxies
Retention of records
Special reports
Federal and state regulatory filing fees
Certain insurance premiums
Expenses from board of directors meetings
Auditing and legal expenses
If out-of-pocket expenses exceed $5,000 in any month,
such expenses must be pre-approved by the Company.
Fees and out-of-pocket expense reimbursements are
billed monthly.
Exhibit 9.3
FUND ACCOUNTING SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this
23rd day of June, 1998, by and between Badgley Funds,
Inc., a Maryland corporation (hereinafter referred to
as the "Company") and Firstar Trust Company, a
corporation organized under the laws of the State of
Wisconsin (hereinafter referred to as "FTC").
WHEREAS, the Company is an open-end management
investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Company is authorized to create
separate series, each with its own separate investment
portfolio;
WHEREAS, FTC is in the business of providing,
among other things, mutual fund accounting services to
investment companies; and
WHEREAS, the Company desires to retain FTC to
provide accounting services to the Badgley Growth Fund
(the "Growth Fund"), the Badgley Balanced Fund (the
"Balanced Fund") and each additional series of the
Company listed on Exhibit A attached hereto (each, a
"Fund"), as it may be amended from time to time.
NOW, THEREFORE, in consideration of the mutual
agreements herein made, the Company and FTC agree as
follows:
1. Appointment of Fund Accountant
The Company hereby appoints FTC as Fund Accountant
of the Company on the terms and conditions set forth in
this Agreement, and FTC hereby accepts such appointment
and agrees to perform the services and duties set forth
in this Agreement in consideration of the compensation
provided for herein.
2. Duties and Responsibilities of FTC
A.Portfolio Accounting Services:
(1) Maintain portfolio records on a trade
date +1 basis using security trade information
communicated from the investment manager.
(2) For each valuation date, obtain prices
from a pricing source approved by the Board of
Directors of the Company and apply those prices to
the portfolio positions. For those securities
where market quotations are not readily available,
the Board of Directors of the Company shall
approve, in good faith, the method for determining
the fair value for such securities.
(3) Identify interest and dividend accrual
balances as of each valuation date and calculate
gross earnings on investments for the accounting
period.
(4) Determine gain/loss on security sales
and identify them as, short-term or long-term;
account for periodic distributions of gains or
losses to shareholders and maintain undistributed
gain or loss balances as of each valuation date.
B.Expense Accrual and Payment Services:
(1) For each valuation date, calculate the
expense accrual amounts as directed by the Company
as to methodology, rate or dollar amount.
(2) Record payments for Fund expenses upon
receipt of written authorization from the Company.
(3) Account for Fund expenditures and
maintain expense accrual balances at the level of
accounting detail, as agreed upon by FTC and the
Company.
(4) Provide expense accrual and payment
reporting.
C.Fund Valuation and Financial Reporting Services:
(1) Account for Fund share purchases, sales,
exchanges, transfers, dividend reinvestments, and
other Fund share activity as reported by the
transfer agent on a timely basis.
(2) Apply equalization accounting as
directed by the Company.
(3) Determine net investment income
(earnings) for the Fund as of each valuation date.
Account for periodic distributions of earnings to
shareholders and maintain undistributed net
investment income balances as of each valuation
date.
(4) Maintain a general ledger and other
accounts, books, and financial records for the
Fund in the form as agreed upon.
(5) Determine the net asset value of the
Fund according to the accounting policies and
procedures set forth in the Fund's Prospectus.
(6) Calculate per share net asset value, per
share net earnings, and other per share amounts
reflective of Fund operations at such time as
required by the nature and characteristics of the
Fund.
(7) Communicate, at an agreed upon time, the
per share price for each valuation date to parties
as agreed upon from time to time.
(8) Prepare monthly reports which document
the adequacy of accounting detail to support month-
end ledger balances.
D.Tax Accounting Services:
(1) Maintain accounting records for the
investment portfolio of the Fund to support the
tax reporting required for IRS-defined regulated
investment companies.
(2) Maintain tax lot detail for the
investment portfolio.
(3) Calculate taxable gain/loss on security
sales using the tax lot relief method designated
by the Company.
(4) Provide the necessary financial
information to support the taxable components of
income and capital gains distributions to the
transfer agent to support tax reporting to the
shareholders.
E.Compliance Control Services:
(1) Support reporting to regulatory bodies
and support financial statement preparation by
making the Fund's accounting records available to
the Company, the Securities and Exchange
Commission, and the outside auditors.
(2) Maintain accounting records according to
the 1940 Act and regulations provided thereunder.
3. Pricing of Securities
For each valuation date, obtain prices from a
pricing source selected by FTC but approved by the
Company's Board of Directors and apply those prices to
the portfolio positions of the Fund. For those
securities where market quotations are not readily
available, the Company's Board of Directors shall
approve, in good faith, the method for determining the
fair value for such securities.
If the Company desires to provide a price which
varies from the pricing source, the Company shall
promptly notify and supply FTC with the valuation of
any such security on each valuation date. All pricing
changes made by the Company will be in writing and must
specifically identify the securities to be changed by
CUSIP, name of security, new price or rate to be
applied, and, if applicable, the time period for which
the new price(s) is/are effective.
4. Changes in Accounting Procedures
Any resolution passed by the Board of Directors of
the Company that affects accounting practices and
procedures under this Agreement shall be effective upon
written receipt and acceptance by the FTC.
5. Changes in Equipment, Systems, Service, Etc.
FTC reserves the right to make changes from time
to time, as it deems advisable, relating to its
services, systems, programs, rules, operating schedules
and equipment, so long as such changes do not adversely
affect the service provided to the Company under this
Agreement.
6. Compensation
FTC shall be compensated for providing the
services set forth in this Agreement in accordance with
the Fee Schedule attached hereto as Exhibit A and as
mutually agreed upon and amended from time to time.
The Company agrees to pay all fees and reimbursable
expenses within ten (10) business days following the
receipt of the billing notice.
7. Performance of Service; Limitation of Liability
A. FTC shall exercise reasonable care in
the performance of its duties under this
Agreement. FTC shall not be liable for any error
of judgment or mistake of law or for any loss
suffered by the Company in connection with matters
to which this Agreement relates, including losses
resulting from mechanical breakdowns or the
failure of communication or power supplies beyond
FTC's control, except a loss resulting from FTC's
refusal or failure to comply with the terms of
this Agreement or from bad faith, negligence, or
willful misconduct on its part in the performance
of its duties under this Agreement.
Notwithstanding any other provision of this
Agreement, the Company shall indemnify and hold
harmless FTC from and against any and all claims,
demands, losses, expenses, and liabilities
(whether with or without basis in fact or law) of
any and every nature (including reasonable
attorneys' fees) which FTC may sustain or incur or
which may be asserted against FTC by any person
arising out of any action taken or omitted to be
taken by it in performing the services hereunder
(i) in accordance with the foregoing standards, or
(ii) in reliance upon any written or oral
instruction provided to FTC by any duly authorized
officer of the Company, such duly authorized
officer to be included in a list of authorized
officers furnished to FTC and as amended from time
to time in writing by resolution of the Board of
Directors of the Company.
FTC shall indemnify and hold the Company
harmless from and against any and all claims,
demands, losses, expenses, and liabilities
(whether with or without basis in fact or law) of
any and every nature (including reasonable
attorneys' fees) which the Company may sustain or
incur or which may be asserted against the Company
by any person arising out of any action taken or
omitted to be taken by FTC as a result of FTC's
refusal or failure to comply with the terms of
this Agreement, its bad faith, negligence, or
willful misconduct.
In the event of a mechanical breakdown or
failure of communication or power supplies beyond
its control, FTC shall take all reasonable steps
to minimize service interruptions for any period
that such interruption continues beyond FTC's
control. FTC will make every reasonable effort to
restore any lost or damaged data and correct any
errors resulting from such a breakdown at the
expense of FTC. FTC agrees that it shall, at all
times, have reasonable contingency plans with
appropriate parties, making reasonable provision
for emergency use of electrical data processing
equipment to the extent appropriate equipment is
available. Representatives of the Company shall
be entitled to inspect FTC's premises and
operating capabilities at any time during regular
business hours of FTC, upon reasonable notice to
FTC.
Regardless of the above, FTC reserves the
right to reprocess and correct administrative
errors at its own expense.
B. In order that the indemnification
provisions contained in this section shall apply,
it is understood that if in any case the
indemnitor may be asked to indemnify or hold the
indemnitee harmless, the indemnitor shall be fully
and promptly advised of all pertinent facts
concerning the situation in question, and it is
further understood that the indemnitee will use
all reasonable care to notify the indemnitor
promptly concerning any situation which presents
or appears likely to present the probability of a
claim for indemnification. The indemnitor shall
have the option to defend the indemnitee against
any claim which may be the subject of this
indemnification. In the event that the indemnitor
so elects, it will so notify the indemnitee and
thereupon the indemnitor shall take over complete
defense of the claim, and the indemnitee shall in
such situation initiate no further legal or other
expenses for which it shall seek indemnification
under this section. Indemnitee shall in no case
confess any claim or make any compromise in any
case in which the indemnitor will be asked to
indemnify the indemnitee except with the
indemnitor's prior written consent.
8. No Agency Relationship
Nothing herein contained shall be deemed to
authorize or empower FTC to act as agent for the other
party to this Agreement, or to conduct business in the
name of, or for the account of the other party to this
Agreement.
9. Records
FTC shall keep records relating to the services to
be performed hereunder, in the form and manner, and for
such period as it may deem advisable and is agreeable
to the Company but not inconsistent with the rules and
regulations of appropriate government authorities, in
particular, Section 31 of the 1940 Act, and the rules
thereunder. FTC agrees that all such records prepared
or maintained by FTC relating to the services to be
performed by FTC hereunder are the property of the
Company and will be preserved, maintained, and made
available in accordance with such section and rules of
the 1940 Act and will be promptly surrendered to the
Company on and in accordance with its request.
10. Data Necessary to Perform Services
The Company or its agent, which may be FTC, shall
furnish to FTC the data necessary to perform the
services described herein at such times and in such
form as mutually agreed upon. If FTC is also acting as
the transfer agent for the Company, nothing herein
shall be deemed to relieve FTC of any of its
obligations under the Transfer Agent Servicing
Agreement.
11. Notification of Error
The Company will notify FTC of any balancing or
control error caused by FTC within three (3) business
days after receipt of any reports rendered by FTC to
the Company, or within three (3) business days after
discovery of any error or omission not covered in the
balancing or control procedure, or within three (3)
business days of receiving notice from any shareholder.
12. Proprietary and Confidential Information
FTC agrees on behalf of itself and its directors,
officers, and employees to treat confidentially and as
proprietary information of the Company all records and
other information relative to the Company and prior,
present, or potential shareholders of the Company (and
clients of said shareholders), and not to use such
records and information for any purpose other than the
performance of its responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be
withheld where FTC may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by the
Company.
13. Term of Agreement
This Agreement shall become effective as of the
date hereof and, unless sooner terminated as provided
herein, shall continue automatically in effect for
successive annual periods. This Agreement may be
terminated by either party upon giving ninety (90) days
prior written notice to the other party or such shorter
period as is mutually agreed upon by the parties.
However, this Agreement may be replaced or modified by
a subsequent agreement between the parties.
14. Notices
Notices of any kind to be given by either party to
the other party shall be in writing and shall be duly
given if mailed or delivered as follows: Notice to FTC
shall be sent to:
Firstar Trust Company
Attn.: Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202
and notice to the Company shall be sent to:
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, WA 98101
Attn: Corporate Secretary
15. Duties in the Event of Termination
In the event that in connection with termination,
a successor to any of FTC's duties or responsibilities
hereunder is designated by the Company by written
notice to FTC, FTC will promptly, upon such termination
and at the expense of the Company transfer to such
successor all relevant books, records, correspondence
and other data established or maintained by FTC under
this Agreement in a form reasonably acceptable to the
Company (if such form differs from the form in which
FTC has maintained the same, the Company shall pay any
expenses associated with transferring the same to such
form), and will cooperate in the transfer of such
duties and responsibilities, including provision for
assistance from FTC's personnel in the establishment of
books, records and other data by such successor.
16. Governing Law
This Agreement shall be construed in accordance
with the laws of the State of Wisconsin. However,
nothing herein shall be construed in a manner
inconsistent with the 1940 Act or any rule or
regulation promulgated by the SEC thereunder.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by a duly authorized
officer in one or more counterparts as of the day and
year first written above.
Badgley Funds, Inc. FIRSTAR TRUST COMPANY
By:__________________ By:_______________________
Attest:______________ Attest:___________________
Fund Accounting Services
Annual Fee Schedule
Exhibit A
Separate Series of Badgley Funds, Inc.
Name of Series Date Added
Badgley Growth Fund June 23, 1998
Badgley Balanced Fund June 23, 1998
Domestic Equity Funds
$22,000 for the first $40 million
1/100 of 1% (1 basis point) on the next $200 million
.5/100 of 1% (.5 basis point) on average net
assets exceeding $240 million
Domestic Balanced Funds
$23,500 for the first $40 million
1.5/100 of 1% (1.5 basis points) on the next $200 million
1/100 of 1% (1.0 basis point) on average net assets exceeding
$240 million
Plus out-of-pocket expenses, including pricing service:
Domestic and Canadian Equities $.15
Options $.15
Corp/Gov/Agency Bonds $.50
CMO's $.80
International Equities and Bonds $.50
Municipal Bonds $.80
Money Market Instruments $.80
If out-of-pocket expenses exceed $5,000 in any month,
such expenses must be pre-approved by the Company.
Fees and out-of-pocket expenses are billed to the Fund
monthly.
Exhibit 9.4
FULFILLMENT SERVICING AGREEMENT
THIS AGREEMENT is made and entered into as of this
23rd day of June, 1998, by and between Badgley Funds,
Inc., a Maryland corporation (hereinafter referred to
as the "Company"), Firstar Trust Company, a
corporation organized under the laws of the State of
Wisconsin (hereinafter referred to as "FTC"), Badgley,
Phelps and Bell, Inc., a Washington corporation
(hereinafter referred to as the "Adviser"), and
Rafferty Capital Markets, Inc., a New York corporation
(hereinafter referred to as the "Distributor").
WHEREAS, the Adviser is a registered investment
adviser under the Investment Advisers Act of 1940, as
amended;
WHEREAS, the Adviser serves as investment adviser
to the Company, a registered investment company under
the Investment Company Act of 1940, as amended, which
is authorized to create separate series of funds;
WHEREAS, the Distributor is a registered broker-
dealer under the Securities Exchange Act of 1934, as
amended, and serves as principal distributor of Company
shares;
WHEREAS, FTC provides fulfillment services to
mutual funds;
WHEREAS, the Adviser, the Distributor, and the
Company desire to retain FTC to provide fulfillment
services for the Badgley Growth Fund (the "Growth
Fund"), the Badgley Balanced Fund (the "Balanced Fund")
and each additional series of the Company listed on
Exhibit A attached hereto (each, a "Fund"), as may be
amended from time to time.
NOW, THEREFORE, the parties agree as follows:
1. Duties and Responsibilities of FTC
1.Answer all prospective shareholder calls
concerning the Fund.
2.Send all available Fund material requested by
the prospect within 24 hours from time of
call.
3.Receive and update all Fund fulfillment
literature so that the most current
information is sent and quoted.
4.Provide 24-hour answering service to record
prospect calls made after hours (7 p.m. to
8 a.m. CT).
5.Maintain and store Fund fulfillment inventory.
6.Send periodic fulfillment reports to the Company
as agreed upon between the parties.
2. Duties and Responsibilities of the Company
1.Provide Fund fulfillment literature updates to
FTC as necessary.
2.Coordinate with the Distributor the filing with
the NASD, SEC and State Regulatory Agencies,
as appropriate, all fulfillment literature
that the Fund requests FTC send to
prospective shareholders.
3.Supply FTC with sufficient inventory of
fulfillment materials as requested from time
to time by FTC.
4.Provide FTC with any sundry information about
the Fund in order to answer prospect
questions.
3. Indemnification
The Company agrees to indemnify FTC from any
liability arising out of the distribution of
fulfillment literature which has not been approved by
the appropriate Federal and State Regulatory Agencies.
FTC agrees to indemnify the Company from any liability
arising from the improper use of fulfillment literature
during the performance of duties and responsibilities
identified in this agreement.
4. Compensation
The Company, if permissible under any Rule 12b-1
plan in effect from time to time for the benefit of the
Fund and only to the extent consistent with the terms
of such plan, or the Adviser, or the Distributor,
agrees to compensate FTC for the services performed
under this Agreement in accordance with the attached
Exhibit A. All invoices shall be paid within ten days
of receipt.
5. Proprietary and Confidential Information
FTC agrees on behalf of itself and its directors,
officers, and employees to treat confidentially and as
proprietary information of the Company all records and
other information relative to the Company and prior,
present, or potential shareholders of the Company (and
clients of said shareholders), and not to use such
records and information for any purpose other than the
performance of its responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Company, which approval
shall not be unreasonably withheld and may not be
withheld where FTC may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by the
Company.
6. Termination
This Agreement may be terminated by any party upon
30 days written notice.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be executed by a duly
authorized officer in one or more counterparts as of
the day and year first written above.
Badgley Funds, Inc. FIRSTAR TRUST COMPANY
By:______________________ By:_________________________
Attest:__________________ Attest:_____________________
Badgley, Phelps and Bell, Inc. Rafferty Capital Markets, Inc.
By:_____________________ By:_________________________
Attest:_________________ Attest:______________________
Literature Fulfillment Services
Annual Fee Schedule
Exhibit A
Separate Series of Badgley Funds, Inc.
Name of Series Date Added
Badgley Growth Fund June 23, 1998
Badgley Balanced Fund June 23, 1998
Customer Service
State registration compliance edits
Literature database
Record prospect request and profile
Prospect servicing 8:00 am to 7:00 pm CT
Recording and transcription of requests
received off-hours
Periodic reporting of leads to client
Service Fee: $.99 / minute
$100 / month minimum
$780 one-time setup
Assembly and Distribution of Literature Requests
Generate customized prospect letters
Assembly and insertion of literature items
Inventory tracking
Inventory storage, reporting
Periodic reporting of leads by state, items
requested, market source
Service Fee: $.45 / lead - insertion
of up to 4 items/lead
$.15 / additional inserts
Fees and out-of-pocket expenses are billed to the fund
monthly.
If out-of-pocket expenses exceed $5,000 in any month,
such expenses must be pre-approved by the Company.
Godfrey & Kahn, S.C.
Attorneys-At-Law
780 North Water Street
Milwaukee, Wisconsin 53202
Tel: (414) 273-3500
June 10, 1998
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
Ladies and Gentlemen:
We have acted as your counsel in connection with
the preparation of a Registration Statement on Form N-
1A (Registration Nos. 333-51431 and 811-8769) (the
"Registration Statement") relating to the sale by you
of an indefinite number of shares of Badgley Funds,
Inc. (the "Company") common stock, $0.01 par value (the
"Shares"), in the manner set forth in the Registration
Statement (and the Prospectus included therein).
We have examined: (a) the Registration Statement
(and the Prospectus included therein), (b) the
Company's Articles of Incorporation and By-Laws, (c)
certain resolutions of the Company's Board of
Directors, and (d) such other proceedings, documents
and records as we have deemed necessary to enable us to
render this opinion.
Based upon the foregoing, we are of the opinion
that the Shares, when sold as contemplated in the
Registration Statement, will be duly authorized and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an
exhibit to the Registration Statement. In giving this
consent, however, we do not admit that we are "experts"
within the meaning of Section 11 of the Securities Act
of 1933, as amended, or within the category of persons
whose consent is required by Section 7 of said Act.
Very truly yours,
/s/ Godfrey & Kahn, S.C.
GODFREY & KAHN, S.C.
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of
Additional Information constituting part of this
Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration
Statement") of our report dated June 10, 1998,
relating to the statement of assets and liabilities
of Badgley Funds, Inc., which appears in such
Statement of Additional Information, and to the
incorporation by reference of our report into the
Prospectus which constitutes part of this
Registration Statement. We also consent to the
references to us under the heading "Independent
Accountants" in such Statement of Additional
Information.
Price Waterhouse LLP
Milwaukee, Wisconsin
June 10, 1998
SUBSCRIPTION AGREEMENT
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington, 98101
Gentlemen:
The undersigned purchaser (the "Purchaser") hereby
subscribes to the number of shares (the "Shares") of
common stock of Badgley Funds, Inc. (the "Company") as
follows:
Aggregate
Series Number of Per Share Purchase Price
Shares Price
Badgley Growth Fund 2,500 $10 $25,000
Badgley Balanced Fund 2,500 $10 $25,000
-------
$50,000
It is understood that a certificate representing
the Shares shall not be issued to the undersigned, but
such ownership shall be recorded on the books and
records of the Company's transfer agent.
Notwithstanding the fact that a certificate
representing ownership will not be issued, the Shares
will be deemed fully paid and nonassessable.
The Purchaser agrees that the Shares are being
purchased for investment with no present intention to
resell or redeem the Shares.
The Purchaser acknowledges that assuming the
Company's registration statement on Form N-1A becomes
effective and shares are sold to the public prior to
June 30, 1998, costs incurred by the Company in
connection with its organization, registration and
initial public offering of Shares of the Company will
be deferred and will be amortized over a period of five
years from the date upon which the Company commences
its investment activities.
The Purchaser agrees that in the event any of the
Shares purchased under this Subscription Agreement are
redeemed during this five-year period, the Company is
authorized to reduce the redemption proceeds to cover
any unamortized organizational expenses in the same
proportion as the number of Shares being redeemed bears
to the number of Shares outstanding at the time of the
redemption. If, for any reason, the reduction of
redemption proceeds is not in fact made by the Company
in the event of such a redemption, the Purchaser agrees
to reimburse the Company immediately for any
unamortized organizational expenses in the proportion
stated above.
Dated and effective as of the 9th day of June,
1998.
Purchaser:
\s\ J. Kevin Callaghan
--------------------------
By: J. Kevin Callaghan
ACCEPTANCE
The foregoing subscription is hereby accepted.
Dated and effective as of the 9th day of June,
1998.
BADGLEY FUNDS, INC.
\s\ Otis P. Heald III
---------------------------------
By: Otis P. Heald III, President
SUBSCRIPTION AGREEMENT
Badgley Funds, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington, 98101
Gentlemen:
The undersigned purchaser (the "Purchaser") hereby
subscribes to the number of shares (the "Shares") of
common stock of Badgley Funds, Inc. (the "Company") as
follows:
Aggregate
Series Number of Per Share Purchase Price
Shares Price
Badgley Growth Fund 2,500 $10 $25,000
Badgley Balanced Fund 2,500 $10 $25,000
-------
$50,000
It is understood that a certificate representing
the Shares shall not be issued to the undersigned, but
such ownership shall be recorded on the books and
records of the Company's transfer agent.
Notwithstanding the fact that a certificate
representing ownership will not be issued, the Shares
will be deemed fully paid and nonassessable.
The Purchaser agrees that the Shares are being
purchased for investment with no present intention to
resell or redeem the Shares.
The Purchaser acknowledges that assuming the
Company's registration statement on Form N-1A becomes
effective and shares are sold to the public prior to
June 30, 1998, costs incurred by the Company in
connection with its organization, registration and
initial public offering of Shares of the Company will
be deferred and will be amortized over a period of five
years from the date upon which the Company commences
its investment activities.
The Purchaser agrees that in the event any of the
Shares purchased under this Subscription Agreement are
redeemed during this five-year period, the Company is
authorized to reduce the redemption proceeds to cover
any unamortized organizational expenses in the same
proportion as the number of Shares being redeemed bears
to the number of Shares outstanding at the time of the
redemption. If, for any reason, the reduction of
redemption proceeds is not in fact made by the Company
in the event of such a redemption, the Purchaser agrees
to reimburse the Company immediately for any
unamortized organizational expenses in the proportion
stated above.
Dated and effective as of the 9th day of June,
1998.
Purchaser:
\s\ Steven C. Phelps
-----------------------
By: Steven C. Phelps
ACCEPTANCE
The foregoing subscription is hereby accepted.
Dated and effective as of the 9th day of June,
1998.
BADGLEY FUNDS, INC.
\s\ Otis P. Heald III
---------------------------------
By: Otis P. Heald III, President
Individual Retirement Account Disclosure Statement
GENERAL INFORMATION
Please read the following information together
with the Individual Retirement Account Custodial
Agreement and the Prospectus(es) for the fund(s) you
select for investment of IRA contributions.
GENERAL PRINCIPLES
1. Are There Different Types of IRAs?
Yes. Upon creation of an IRA, you must designate
whether the IRA will be a Traditional IRA or a Roth
IRA. (In addition, there are SEP-IRAs and SIMPLE IRAs,
which are discussed in the Disclosure Statement for
Traditional IRAs.)
In a Traditional IRA, amounts contributed to the
IRA may be tax deductible at the time of contribution.
Distributions from the IRA will be taxed at
distribution except to the extent that the distribution
represents a return of your own contributions for which
you did not claim (or were not eligible to claim) a
deduction.
In a Roth IRA, amounts contributed to your IRA are
taxed at the time of contribution, but distributions
from the IRA are not subject to tax if you have held
the IRA for certain minimum periods of time (generally,
until age 59 1/2 but in some cases longer).
Each type of IRA is a custodial account created
for the exclusive benefit of the beneficiary, you (or
your spouse). Firstar Trust Company serves as
custodian of the IRA. Your, your spouse's or your
beneficiary's (as applicable) interest in the account
is nonforfeitable.
2. Can I Revoke My Account?
This account may be revoked any time within seven
calendar days after it is established by mailing or
delivering a written request for revocation to: The
Badgley Funds, c/o Firstar Trust Company, 615 East
Michigan Street, 3rd Floor, Milwaukee, Wisconsin
53202, Attention: Mutual Fund Department. If the
revocation is mailed, the date of the postmark (or the
date of certification if sent by certified or
registered mail) will be considered the revocation
date. Upon proper revocation, a full refund of the
initial contribution will be issued, without any
adjustments for items such as administrative fees or
fluctuations in market value. You may always revoke
your account after this time, but the amounts
distributed to you will be subject to the tax rules
applicable upon distribution from an IRA account as
discussed below. (While current regulations
technically only extend the right to revoke to
Traditional IRAs, it has been assumed that that right
applies to all Roth and Education IRAs as well and such
IRAs will thus be administered consistent with that
interpretation until the IRS issues guidance to the
contrary.)
3. How Will My Account Be Invested?
Contributions made to an IRA will be invested, at
your election, in one or more of the regulated
investment companies for which Badgley, Phelps, and
Bell, Inc. serves as Investment Advisor or any other
regulated investment company designated by Badgley,
Phelps, and Bell, Inc. No part of the IRA may be
invested in life insurance contracts; further, the
assets of the IRA may not be commingled with other
property.
Information about the shares of each mutual fund
available for investment by your IRA must be furnished
to you in the form of a prospectus governed by rules of
the Securities and Exchange Commission. Please refer
to the prospectus for detailed information concerning
your mutual fund. You may obtain further information
concerning IRAs from any District Office of the
Internal Revenue Service.
Fees and other expenses of maintaining the account
may be charged to you or the account. The Custodian's
current fee schedule follows. The fee schedule may be
changed from time to time.
Transfer to successor trustee$
15.00
Distribution to a participant
15.00
(exclusive of systematic withdrawal plans)
Refund of excess contribution
15.00
Federal wire fee
12.00
Traditional & Roth IRA annual maintenance fee per
account
12.50*
*capped at $25.00 per social security number.
Individual Retirement Account Disclosure Statement For
Traditional IRAs
1. Am I Eligible to Contribute to a Traditional IRA?
Employees with compensation income and self-
employed individuals with earned income are eligible to
contribute to a Traditional IRA. (For convenience, all
future references to compensation are deemed to mean
"earned income" in the case of a self-employed
individual.) Employers may also contribute to
Traditional IRAs established for the benefit of their
employees. In addition, you may establish a
Traditional IRA to receive rollover contributions and
transfers from the trustee or custodian of another
Traditional IRA or the custodian or trustee of certain
other retirement plans.
2. When Can I Make Contributions?
You may make regular contributions to your
Traditional IRA any time up to and including the due
date for filing your tax return for the year, not
including extensions. You may continue to make regular
contributions to your Traditional IRA up to (but not
including) the calendar year in which you reach age 70
1/2. (If you are over age 70 1/2 but your spouse has
not yet attained that age, contributions to your
spouse's Traditional IRA may continue so long as you
and your spouse, based on a joint tax return, have
sufficient compensation income.) Employer
contributions to a Simplified Employee Pension Plan or
a SIMPLE Plan may be continued after you attain age 70
1/2. Eligible rollover contributions and transfers may
be made at any time, including after you reach age 70
1/2.
3. How Much May I Contribute to a Traditional IRA?
You may make annual contributions to a Traditional
IRA in any amount up to 100% of your compensation for
the year or $2,000, whichever is less. The $2,000
limitation is reduced by contributions you make to a
Roth IRA, but is not reduced by contributions to an
Educational IRA for the benefit of another taxpayer.
Qualifying rollover contributions and transfers are not
subject to these limitations.
In addition, if you are married and file a joint
return, you may make contributions to your spouse's
Traditional IRA. However, the maximum amount
contributed to both your own and to your spouse's
Traditional IRA may not exceed 100% of your combined
compensation or $4,000, whichever is less. The maximum
amount that may be contributed to either your
Traditional IRA or your spouse's Traditional IRA is
$2,000. Again, these dollar limits are reduced by any
contributions you or your spouse make to a Roth IRA,
but are not affected by contributions either of you
make to an Education IRA for the benefit of another
taxpayer.
If you are the beneficiary of an Education IRA,
certain additional limits may apply to you. Please
contact your tax advisor for more information.
4. Can I Roll Over or Transfer Amounts from Other
IRAs or Employer Plans?
You are allowed to "roll over" a distribution or
transfer your assets from one Traditional IRA to
another without any tax liability. Rollovers between
Traditional IRAs may be made once per year and must be
accomplished within 60 days after the distribution.
Also, under certain conditions, you may roll over (tax-
free) all or a portion of a distribution received from
a qualified plan or tax-sheltered annuity in which you
participate or in which your deceased spouse
participated. However, strict limitations apply to
such rollovers, and you should seek competent advice in
order to comply with all of the rules governing
rollovers.
Most distributions from qualified retirement plans
will be subject to a 20% withholding requirement. The
20% withholding can be avoided by electing a "direct
rollover" of the distribution to a Traditional IRA or
to certain other types of retirement plans. You should
receive more information regarding these withholding
rules and whether your distribution can be transferred
to a Traditional IRA from the plan administrator prior
to receiving your distribution. (Note that legislation
pending as of this printing would deny your ability to
roll over a hardship distribution from an employer's
plan to your IRA.)
5. Are My Contributions to a Traditional IRA Tax
Deductible?
Although you may make a contribution to a
Traditional IRA within the limitations described above,
all or a portion of your contribution may be
nondeductible. No deduction is allowed for a rollover
contribution (including a "direct rollover") or
transfer. For "regular" contributions, the taxability
of your contribution depends upon your tax filing
status, whether you (and in some cases your spouse) are
an "active participant" in an employer-sponsored
retirement plan, and your income level.
If you are not married (including a taxpayer
filing under the "head of household" status), the
following rules apply:
If you are not an "active participant" in an
employer-sponsored retirement plan, you may make a
fully deductible contribution to a Traditional IRA (up
to the contribution limits described above).
If you are an "active participant" in an employer-
sponsored retirement plan, you may make a fully
deductible contribution to a Traditional IRA (up to the
contribution limits described above) if your adjusted
gross income (as defined below) does not exceed $30,000
for 1998. If your 1998 adjusted gross income is
between $30,000 and $40,000, your deduction will be
limited as described below. If your adjusted gross
income exceeds $40,000, your contribution will not be
deductible. After 1998, the deductibility of a
contribution is as follows:
If you are married, the following rules apply:
If you and your spouse file a joint tax return and
neither you nor your spouse is an "active
participant," in an employer-sponsored retirement
plan, you and your spouse may make a fully
deductible contribution to a Traditional IRA (up
to the contribution limits described above).
If you and your spouse file a joint tax return and
both you and your spouse are "active participants"
in employer-sponsored retirement plans, you and
your spouse may make fully deductible
contributions to a Traditional IRA (up to the
contribution limits described above, if your 1998
combined adjusted gross income (as defined below)
does not exceed $50,000. If your 1998 adjusted
gross income is between $50,000 and $60,000, your
deduction will be limited as described below. If
your adjusted gross income exceeds $60,000, your
contribution will not be deductible. After 1998,
the deductibility of a contribution is as follows:
If you and your spouse file a joint tax return and
only one of you is an "active participant" in an
employer-sponsored retirement plan, special rules
apply. If your spouse is the "active
participant', a fully deductible contribution can
be made to your IRA (up to the contribution limits
described above) if your combined adjusted gross
income does not exceed $150,000. If your combined
adjusted gross income is between $150,000 and
$160,000, your deduction will be limited as
described below. If your combined adjusted gross
income exceeds $160,000, your contribution will
not be deductible. Your spouse, as an active
participant in an employer-sponsored retirement
plan, may make a fully deductible contribution to
a Traditional IRA if your 1998 combined adjusted
gross income does not exceed $50,000 (with a
partial deduction being available if 1998 combined
adjusted gross income is between $50,000 and
$60,000). Conversely, if you are an "active
participant" and your spouse is not, a
contribution to your Traditional IRA will be
deductible if your 1998 combined adjusted gross
income does not exceed $50,000 (with a partial
deduction being available if 1998 combined
adjusted gross income is between $50,000 and
$60,000). After 1998, the $50,000 and $60,000
amounts are adjusted in the manner described in
the preceding table; the $150,000 and $160,000
amounts are not adjusted.
If you are married and file a separate return and
are not an "active participant" in an employer-
sponsored retirement plan, you may make a fully
deductible contribution to a Traditional IRA (up
to the contribution limits described above). If
you are married and filing separately and are an
"active participant" in an employer-sponsored
retirement plan, you may not make a fully
deductible contribution to a Traditional IRA. A
partial deduction is available if your 1998
adjusted gross income is less than $10,000. This
amount is not adjusted for cost-of-living changes
or otherwise.
An employer-sponsored retirement plan includes any
of the following types of retirement plans:
a qualified pension, profit-sharing, or stock
bonus plan established in accordance with IRC
401(a) or 401(k);
a Simplified Employee Pension Plan (SEP) (IRC
408(k));
a deferred compensation plan maintained by a
governmental unit or agency;
tax-sheltered annuities and custodial accounts
(IRC 403(b) and 403(b)(7));
a qualified annuity plan under IRC Section 403(a);
or
a Savings Incentive Match Plan for Employees of
Small Employers (SIMPLE Plan).
Generally, you are considered an "active
participant" in a defined contribution plan if an
employer contribution or forfeiture was credited to
your account during the year. You are considered an
"active participant" in a defined benefit plan if you
are eligible to participate in a plan, even though you
elect not to participate. You are also treated as an
"active participant" if you make a voluntary or
mandatory contribution to any type of plan, even if
your employer makes no contribution to the plan.
For purposes of these rules, adjusted gross income
(1) is determined without regard to the exclusions from
income arising under Section 135 (exclusion of certain
savings bond interest), Section 137 (exclusion of
certain employer provided adoption expenses) and
Section 911 (certain exclusions applicable to U.S.
citizens or residents living abroad) of the Code, (2)
is not reduced for any deduction that you may be
entitled to for IRA contributions, and (3) takes into
account the passive loss limitations under Section 469
of the Code and any taxable benefits under the Social
Security Act and Railroad Retirement Act as determined
in accordance with Section 86 of the Code.
Please note that the deduction limits are not the
same as the contribution limits. You can contribute to
your Traditional IRA in any amount up to the
contribution limits described above (the lesser of
$2,000 or 100 percent of your compensation income).
The amount of your contribution that is deductible for
federal income tax purposes is based upon the rules
described in this section. If you (or where
applicable, your spouse) is an "active participant" in
an employer-sponsored retirement plan, you can use the
following steps to calculate whether your contribution
will be fully or partially deductible:
(a) Subtract the applicable income limit from
your adjusted gross income as determined
above. (For example, if you are a single
taxpayer, your 1998 income limit is $30,000.)
If the result is $10,000 or more (after 2006,
$20,000 or more for a married individual
filing jointly), you can only make a
nondeductible contribution to your
Traditional IRA.
(b) Divide the above figure by $10,000 (after
2006, $20,000 for a married individual filing
jointly), and multiply that percentage by
$2,000.
(c) Subtract the dollar amount (result from (b)
above) from $2,000 to determine the amount
that is deductible.
If the deduction limit is not a multiple of $10
then it should be rounded up to the next $10. If you
are eligible to make any deductible contribution, you
may make a $200 minimum deductible contribution.
Even if your income exceeds the limits
described above, you may make a contribution to your
IRA up to the contribution limitations described in
Item 3 above. To the extent that your contribution
exceeds the deductible limits, it will be
nondeductible. However, earnings on all IRA
contributions are tax deferred until distribution.
6. What if I Make an Excess Contribution?
Contributions that exceed the allowable maximum
for federal income tax purposes are treated as excess
contributions. A nondeductible penalty tax of 6% of
the excess amount contributed will be added to your
income tax for each year in which the excess
contribution remains in your account.
7. How Do I Correct an Excess Contribution?
If you make a contribution in excess of your
allowable maximum, you may correct the excess
contribution and avoid the 6% penalty tax for that year
by withdrawing the excess contribution and its earnings
on or before the date, including extensions, for filing
your tax return for the tax year for which the
contribution was made. Any earnings on the withdrawn
excess contribution may be subject to a 10% early
distribution penalty tax if you are under age 59 1/2.
In addition, in certain cases an excess contribution
may be withdrawn after the time for filing your tax
return. Finally, excess contributions for one year may
be carried forward and applied against the contribution
limitation in succeeding years.
8. Can a Simplified Employee Pension Plan Be Used in
Conjunction with a Traditional IRA?
A Traditional IRA may also be used in connection
with a Simplified Employee Pension Plan established by
your employer (or by you if you are self-employed). In
addition, if your SEP Plan as in effect on December 31,
1996 permitted salary reduction contributions, you may
elect to have your employer make salary reduction
contributions. Several limitations on the amount that
may be contributed apply. First, salary reduction
contributions (for plans that are eligible) may not
exceed $10,000 per year (certain lower limits may apply
for highly compensated employees). The $10,000 limit
applies for 1998 and is adjusted periodically for cost
of living increases. Second, the combination of all
contributions for any year (including employer
contributions and, if your SEP Plan is eligible, salary
reduction contributions) cannot exceed 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. It
is your responsibility and that of your employer to see
that contributions in excess of normal IRA limits are
made under and in accordance with a valid SEP Plan.
9. Can a Savings and Incentive Match Plan for
Employees of Small Employers ("SIMPLE") Be Used in
Conjunction with a Traditional IRA?
A Traditional IRA may also be used in connection
with a SIMPLE Plan established by your employer (or by
you if you are self-employed). 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, you may elect to have your
employer make salary reduction contributions of up to
$6,000 per year to your SIMPLE IRA. The $6,000 limit
applies for 1998 and is adjusted periodically for cost
of living increases. In addition, your employer will
contribute certain amounts to your SIMPLE IRA, either
as a matching contribution to those participants who
make salary reduction 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 your other IRAs, (4) if you
withdraw from your SIMPLE IRA during the two-year
period during which you first began participation in
the SIMPLE Plan, the early distribution excise tax (if
otherwise applicable) is increased to 25%; and (5)
during this two-year period, any amount withdrawn may
be rolled over tax-free only into another SIMPLE IRA
(and not to a Traditional IRA (that is not a SIMPLE
IRA) or to a Roth IRA). It is your responsibility and
that of your employer to see that contributions in
excess of normal IRA limits are made under and in
accordance with a valid SIMPLE Plan.
10. What Forms of Distribution Are Available from a
Traditional IRA?
You may at any time request distribution of all or
any portion of your account. However, distributions
made prior to your attainment of age 59 1/2 may be
subject to an additional 10% penalty tax. Once you
reach your "required beginning date" (see Item 11
below), distribution of your account may be made in any
one of three methods:
(a) a lump-sum distribution,
(b) installments over a period not extending
beyond your life expectancy (as determined by
actuarial tables), or
(c) installments over a period not extending
beyond the joint life expectancy of you and
your designated beneficiary (as determined by
actuarial tables).
You may also use your account balance to purchase
an annuity contract, in which case your custodial
account will terminate.
11. When Must Distributions from a Traditional IRA
Begin?
You must begin receiving the assets in your
account no later than April 1 following the calendar
year in which you reach age 70 1/2 (your "required
beginning date"). In general, the minimum amount that
must be distributed each year is equal to the amount
obtained by dividing the balance in your Traditional
IRA on the last day of the prior year (or the last day
of the year prior to the year in which you attain age
70 1/2) by your life expectancy, the joint life
expectancy of you and your beneficiary, or the
specified payment term, whichever is applicable. A
federal tax penalty may be imposed against you if the
required minimum distribution is not made for the year
you reach age 70 1/2 and for each year thereafter. The
penalty is equal to 50% of the amount by which the
actual distribution is less than the required minimum.
Unless you or your spouse elects otherwise, your
life expectancy and/or the life expectancy of your
spouse will be recalculated annually. (The election,
if you choose to make it, must be made by your required
beginning date.) Once you reach your required
beginning date, an election not to recalculate life
expectancy(ies) is irrevocable and will apply to all
subsequent years. The life expectancy of a nonspouse
beneficiary may not be recalculated.
If you have two or more Traditional IRAs, you may
satisfy the minimum distribution requirements by
receiving a distribution from one of your Traditional
IRAs in an amount sufficient to satisfy the minimum
distribution requirements for your other Traditional
IRAs. You must still calculate the required minimum
distribution separately for each Traditional IRA, but
then such amounts may be totaled and the total
distribution taken from one or more of your individual
Traditional IRAs.
Distribution from your Traditional IRA must
satisfy the special "incidental death benefit" rules of
the Internal Revenue Code. These provisions set forth
certain limitations on the joint life expectancy of you
and your beneficiary. If your beneficiary is not your
spouse, your beneficiary will be generally considered
to be no more than 10 years younger than you for the
purpose of calculating the minimum amount that must be
distributed.
12. Are There Distribution Rules that Apply after My
Death?
Yes. If you die before receiving the balance of
your Traditional IRA, distribution of your remaining
account balance is subject to several special rules.
If you die on or after your required beginning date,
distribution must continue in a method at least as
rapid as under the method of distribution in effect at
your death. If you die before your required beginning
date, your remaining interest will, at the election of
your beneficiary or beneficiaries, (i) be distributed
by December 31 of the year in which occurs the fifth
anniversary of your death, or (ii) commence to be
distributed by December 31 of the year following your
death over a period not exceeding the life or life
expectancy of your designated beneficiary or
beneficiaries.
Two additional distribution options are available
if your spouse is the beneficiary: (i) payments to
your spouse may commence as late as December 31 of the
year you would have attained age 70 1/2 and be
distributed over a period not exceeding the life or
life expectancy of your spouse, or (ii) your spouse can
simply elect to treat your Traditional IRA as his or
her own, in which case distributions will be required
to commence by April 1 following the calendar year in
which your spouse attains age 70 1/2.
13. How Are Distributions From a Traditional IRA Taxed
for Federal Income Tax Purposes?
Amounts distributed to you are generally
includable in your gross income in the taxable year you
receive them and are taxable as ordinary income. To
the extent, however, that any part of a distribution
constitutes a return of your nondeductible
contributions, it will not be included in your income.
The amount of any distribution excludable from income
is the portion that bears the same ratio as your
aggregate nondeductible contributions bear to the
balance of your Traditional IRA at the end of the year
(calculated after adding back distributions during the
year). For this purpose, all of your Traditional IRAs
are treated as a single Traditional IRA. Furthermore,
all distributions from a Traditional IRA during a
taxable year are to be treated as one distribution.
The aggregate amount of distributions excludable from
income for all years cannot exceed the aggregate
nondeductible contributions for all calendar years.
No distribution to you or anyone else from a
Traditional IRA can qualify for capital gains treatment
under the federal income tax laws. Similarly, you are
not entitled to the special five- or ten-year averaging
rule for lump-sum distributions that may be available
to persons receiving distributions from certain other
types of retirement plans. All distributions are taxed
to the recipient as ordinary income except the portion
of a distribution that represents a return of
nondeductible contributions. Historically, so-called
"excess distributions" to you as well as "excess
accumulations" remaining in your account as of your
date of death were subject to additional taxes. These
additional taxes no longer apply.
You must indicate on distribution requests whether
or not federal income taxes should be withheld.
Redemption requests not indicating an election not to
have federal income tax withheld will be subject to
withholding.
Any distribution that is properly rolled over will
not be includable in your gross income.
14. Are There Penalties for Early Distribution from a
Traditional IRA?
Distributions from your Traditional IRA made
before age 59 1/2 will be subject (in addition to
ordinary income tax) to a 10% nondeductible penalty tax
unless (i) the distribution is a return of
nondeductible contributions, (ii) the distribution is
made because of your death, disability, or as part of a
series of substantially equal periodic payments over
your life expectancy or the joint life expectancy of
you and your beneficiary, (iii) the distribution is
made for medical expenses in excess of 7.5% of adjusted
gross income or is made for reimbursement of medical
premiums while you are unemployed, (iv) the
distribution is made to pay for certain higher
education expenses for you, your spouse, your child,
your grandchild, or the child or grandchild of your
spouse, (v) subject to various limits, the distribution
is used to purchase a first home or, in limited cases,
a second or subsequent home for you, your spouse, or
your or your spouse's child, grandchild or ancestor, or
(vi) the distribution is an exempt withdrawal of an
excess contribution. The penalty tax may also be
avoided if the distribution is rolled over to another
IRA. See Item 9 above for special rules applicable to
distributions from a SIMPLE IRA.
15. What If I Engage in a Prohibited Transaction?
If you engage in a `prohibited transaction," as
defined in Section 4975 of the Internal Revenue Code,
your account will be disqualified, and the entire
balance in your account will be treated as if
distributed to you and will be taxable to you as
ordinary income. Examples of prohibited transactions
are:
(a) the sale, exchange, or leasing of any
property between you and your account,
(b) the lending of money or other extensions of
credit between you and your account,
(c) the furnishing of goods, services, or
facilities between you and your account.
If you are under age 59 1/2, you may also be
subject to the 10% penalty tax on early distributions.
16. What If I Pledge My Account?
If you use (pledge) all or part of your
Traditional IRA as security for a loan, then the
portion so pledged will be treated as if distributed to
you and will be taxable to you as ordinary income
during the year in which you make such pledge. The 10%
penalty tax on early distributions may also apply.
17. How Are Contributions to a Traditional IRA
Reported for Federal Tax Purposes?
Deductible contributions to your Traditional IRA
may be claimed as a deduction on your IRS Form 1040 for
the taxable year contributed. If any nondeductible
contributions are made by you during a tax year, such
amounts must be reported on Form 8606 and attached to
your Federal Income Tax Return for the year
contributed. If you report a nondeductible
contribution to your Traditional IRA and do not make
the contribution, you will be subject to a $100 penalty
for each overstatement unless a reasonable cause is
shown for not contributing. Other reporting will be
required by you in the event that special taxes or
penalties described herein are due. You must also file
Form 5329 with the IRS for each taxable year in which
the contribution limits are exceeded, a premature
distribution takes place, or less than the required
minimum amount is distributed from your Traditional
IRA.
18. How Are Earnings on My Account Calculated and
Allocated?
The method of computing and allocating annual
earnings is set forth in Article VIII, Section 1 of the
Individual Retirement Account Custodial Agreement. The
growth in value of your IRA is neither guaranteed nor
projected.
Your Individual Retirement Account Plan has been
approved as to form by the Internal Revenue Service.
The Internal Revenue Service approval is a
determination only as to the form of the Plan and does
not represent a determination of the merits of the Plan
as adopted by you. You may obtain further information
with respect to your Individual Retirement Account from
any district office of the Internal Revenue Service.
19. Income Tax Withholding
You must indicate on distribution requests whether
or not federal income taxes should be withheld.
Redemption requests not indicating an election not to
have federal income tax withheld will be subject to
withholding.
20. Other Information
Information about the shares of each mutual fund
available for investment by your IRA must be furnished
to you in the form of a prospectus governed by rules of
the Securities and Exchange Commission. Please refer
to the prospectus for detailed information concerning
your mutual fund. You may obtain further information
concerning IRAs from any District Office of the
Internal Revenue Service.
Traditional Individual Retirement Custodial Account
The following constitutes an agreement
establishing an Individual Retirement Account (under
Section 408(a) of the Internal Revenue Code) between
the Depositor and the Custodian.
Article I
The Custodian may accept additional cash
contributions on behalf of the Depositor for a tax year
of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the
contribution is a rollover contribution described in
Section 402(c) (but only after December 31, 1992),
403(a)(4), 403(b)(8), 408(d)(3), or an employer
contribution to a simplified employee pension plan as
described in Section 408(k). Rollover contributions
before January 1, 1993, include rollovers described in
Section 402(a)(5), 402(a)(6), 402(a)(7), 403(a)(4),
403(b)(8), 408(d)(3), or an employer contribution to a
simplified employee pension plan as described in
Section 408(k).
Article II
The Depositor's interest in the balance in the
custodial account is nonforfeitable.
Article III
1. No part of the custodial funds may be
invested in life insurance contracts, nor may the
assets of the custodial account be commingled with
other property except in a common trust fund or common
investment fund (within the meaning of Section
408(a)(5)).
2. No part of the custodial funds may be
invested in collectibles (within the meaning of Section
408(m)) except as otherwise permitted by Section
408(m)(3) which provides an exception for certain gold
and silver coins and coins issued under the laws of any
state.
Article IV
1. Notwithstanding any provision of this
agreement to the contrary, the distribution of the
depositor's interest in the custodial account shall be
made in accordance with the following requirements and
shall otherwise comply with Section 408(a)(6) and
Proposed Regulations Section 1.408-8, including the
incidental death benefit provisions of Proposed
Regulations Section 1.401(a)(9)-2, the provisions of
which are herein incorporated by reference.
2. Unless otherwise elected by the time
distributions are required to begin to the Depositor
under Item 3, or to the surviving spouse under Item 4,
other than in the case of a life annuity, life
expectancies shall be recalculated annually. Such
election shall be irrevocable as to the Depositor and
the surviving spouse and shall apply to all subsequent
years. The life expectancy of a nonspouse beneficiary
may not be recalculated.
3. The Depositor's entire interest in the
custodial account must be, or begin to be, distributed
by the Depositor's required beginning date, April 1
following the calendar year end in which the Depositor
reaches age 70 1/2. By that date, the Depositor may
elect, in a manner acceptable to the Custodian, to have
the balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal
or substantially equal monthly, quarterly, or
annual payments over the life of the Depositor.
(c) An annuity contract that provides equal
or substantially equal monthly, quarterly, or
annual payments over the joint and last survivor
lives of the Depositor and his or her designated
beneficiary.
(d) Equal or substantially equal annual
payments over a specified period that may not be
longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual
payments over a specified period that may not be
longer than the joint life and last survivor
expectancy of the Depositor and his or her
designated beneficiary.
4. If the Depositor dies before his or her
entire interest is distributed to him or her, the
entire remaining interest will be distributed as
follows:
(a) If the Depositor dies on or after
distribution of his or her interest has begun,
distribution must continue to be made in
accordance with Item 3.
(b) If the Depositor dies before
distribution of his or her interest has begun, the
entire remaining interest will, at the election of
the Depositor or, if the Depositor has not so
elected, at the election of the beneficiary or
beneficiaries, either:
(i) Be distributed by the December 31
of the year containing the fifth anniversary
of the Depositor's death, or
(ii) Be distributed in equal or
substantially equal payments over the life or
life expectancy of the designated beneficiary
or beneficiaries starting by December 31 of
the year following the year of the
Depositor's death. If, however, the
beneficiary is the Depositor's surviving
spouse, then this distribution is not
required to begin before December 31 of the
year in which the Depositor would have turned
age 70 1/2.
(c) Except where distribution in the form of
an annuity meeting the requirements of Section
408(b)(3) and its related regulations has
irrevocably commenced, distributions are treated
as having begun on the Depositor's required
beginning date, even though payments may actually
have been made before that date.
(d) If the Depositor dies before his or her
entire interest has been distributed and if the
beneficiary is other than the surviving spouse, no
additional cash contributions or rollover
contributions may be accepted in the account.
5. In the case of a distribution over life
expectancy in equal or substantially equal annual
payments, to determine the minimum annual payment for
each year, divide the Depositor's entire interest in
the custodial account as of the close of business on
December 31 of the preceding year by the life
expectancy of the Depositor (or the joint life and last
survivor expectancy of the Depositor and the
depositor's designated beneficiary, or the life
expectancy of the designated beneficiary, whichever
applies). In the case of distributions under Item 3,
determine the initial life expectancy (or joint life
and last survivor expectancy) using the attained ages
of the Depositor and designated beneficiary as of their
birthdays in the year the Depositor reaches age 70 1/2.
In the case of a distribution in accordance with Item
4(b)(ii), determine life expectancy using the attained
age of the designated beneficiary as of the
beneficiary's birthday in the year distributions are
required to commence.
6. The owner of two or more individual
retirement accounts may use the "alternative method"
described in Notice 88-38, 1988-1 C.B. 524, to satisfy
the minimum distribution requirements described above.
This method permits an individual to satisfy these
requirements by taking from one individual retirement
account the amount required to satisfy the requirement
for another.
Article V
1. The Depositor agrees to provide the Custodian
with information necessary for the Custodian to prepare
any reports required under Section 408(i) and
Regulations Section 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the
Internal Revenue Service and the Depositor prescribed
by the Internal Revenue Service.
Article VI
Notwithstanding any other articles which may be
added or incorporated, the provisions of Articles I
through III and this sentence will be controlling. Any
additional articles that are not consistent with
Section 408(a) and related regulations will be invalid.
Article VII
This agreement will be amended from time to time
to comply with the provisions of the Code and related
regulations.
Article VIII
1. Investment of Account Assets
(a) All contributions to the custodial
account shall be invested in the shares of the
Badgley Funds or, if available, any other series
of the Badgley Funds or other regulated investment
companies for which Badgley, Phelps and Bell, Inc.
serves as Investment Advisor or designates as
being eligible for investment ("Investment
Company"). Shares of stock of an Investment
Company shall be referred to as `Investment
Company Shares." To the extent that two or more
funds are available for investment, contributions
shall be invested in accordance with the
Depositor's investment election.
(b) Each contribution to the custodial
account shall identify the Depositor's account
number and be accompanied by a signed statement
directing the investment of that contribution.
The Custodian may return to the Depositor, without
liability for interest thereon, any contribution
which is not accompanied by adequate account
identification or an appropriate signed statement
directing investment of that contribution.
(c) Contributions shall be invested in whole
and fractional Investment Company Shares at the
price and in the manner such shares are offered to
the public. All distributions received on
Investment Company Shares, including both dividend
and capital gain distributions, held in the
custodial account shall be reinvested in like
shares. If any distribution of Investment Company
Shares may be received in additional like shares
or in cash or other property, the Custodian shall
elect to receive such distribution in additional
like Investment Company Shares.
(d) All Investment Company Shares acquired
by the Custodian shall be registered in the name
of the Custodian or its nominee. The Depositor
shall be the beneficial owner of all Investment
Company Shares held in the custodial account and
the Custodian shall not vote any such shares,
except upon written direction of the Depositor,
timely received, in a form acceptable to the
Custodian. The Custodian agrees to forward to the
Depositor each prospectus, report, notice, proxy
and related proxy soliciting materials applicable
to Investment Company Shares held in the custodial
account received by the Custodian.
(e) The Depositor may, at any time, by
written notice to the Custodian, in a form
acceptable to the Custodian, redeem any number of
shares held in the custodial account and reinvest
the proceeds in the shares of any other Investment
Company upon the terms and within the limitations
imposed by the current prospectus of such other
Investment Company in which the Depositor elects
to invest. By giving such instructions, the
Depositor will be deemed to have acknowledged
receipt of such prospectus. Such redemptions and
reinvestments shall be done at the price and in
the manner such shares are then being redeemed or
offered by the respective Investment Companies.
2. Amendment and Termination
(a) Badgley, Phelps and Bell, Inc., the
Investment Advisor for the Badgley Funds, may
amend the Custodial Account (including retroactive
amendments) by delivering to Custodian and to the
Depositor written notice of such amendment setting
forth the substance and effective date of the
amendment. The Custodian and the Depositor shall
be deemed to have consented to any such amendment
not objected to in writing by the Custodian or
Depositor as applicable within 30 days of receipt
of the notice, provided that no amendment shall
cause or permit any part of the assets of the
custodial account to be diverted to purposes other
than for the exclusive benefit of the Depositor or
his or her beneficiaries.
(b) The Depositor may terminate the
custodial account at any time by delivering to the
Custodian a written notice of such termination.
(c) The custodial account shall
automatically terminate upon distribution to the
Depositor or his or her beneficiaries of its
entire balance.
3. Taxes and Custodial Fees
Any income taxes or other taxes levied or assessed
upon or in respect of the assets or income of the
custodial account and any transfer taxes incurred shall
be paid from the custodial account. All administrative
expenses incurred by the Custodian in the performance
of its duties, including fees for legal services
rendered to the Custodian, in connection with the
custodial account, and the Custodian's compensation
shall be paid from the custodial account, unless
otherwise paid by the Depositor or his or her
beneficiaries. Sufficient shares will be liquidated
from the custodial account to pay such fees and
expenses.
The Custodian's fees are set forth in a schedule
provided to the Depositor. Extraordinary charges
resulting from unusual administrative responsibilities
not contemplated by the schedule will be subject to
such additional charges as will reasonably compensate
the Custodian. Fees for refund of excess
contributions, transferring to a successor trustee or
custodian, or redemption/reinvestment of Investment
Company Shares will be deducted from the refund or
redemption proceeds and the remaining balance will be
remitted to the Depositor, or reinvested or transferred
in accordance with the Depositor's instructions.
4. Reports and Notices
(a) The Custodian shall keep adequate
records of transactions it is required to perform
hereunder. After the close of each calendar year,
the Custodian shall provide to the Depositor or
his or her legal representative a written report
or reports reflecting the transactions effected by
it during such year and the assets and liabilities
of the Custodial Account at the close of the year.
(b) All communications or notices shall be
deemed to be given upon receipt by the Custodian
at: Firstar Trust Company, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 or the Depositor
at his or her most recent address shown in the
Custodian's records. The Depositor agrees to
advise the Custodian promptly, in writing, of any
change of address.
5. Designation of Beneficiary
The Depositor may designate a beneficiary or
beneficiaries to receive benefits from the custodial
account in the event of the Depositor's death. In the
event the Depositor has not designated a beneficiary,
or if all beneficiaries shall predecease the Depositor,
the following persons shall take in the order named:
(a) The spouse of the Depositor;
(b) If the spouse shall predecease the
Depositor or if the Depositor does not have a
spouse, then to the Depositor's estate.
The Depositor may also change or revoke any
previously made designation of beneficiary. A
designation or change or revocation of a designation
shall be made by written notice in a form acceptable to
and filed with the Custodian, prior to the complete
distribution of the balance in the custodial account.
The last such designation on file at the time of the
Depositor's death shall govern. If a beneficiary dies
after the Depositor, but prior to receiving his or her
entire interest in the custodial account, the remaining
interest in the custodial account shall be paid to the
beneficiary's estate.
6. Multiple Individual Retirement Accounts
In the event the Depositor maintains more than one
individual retirement account (as defined in Section
408(a)) and elects to satisfy his or her minimum
distribution requirements described in Article IV above
by making a distribution for another individual
retirement account in accordance with Item 6 thereof,
the Depositor shall be deemed to have elected to
calculate the amount of his or her minimum distribution
under this custodial account in the same manner as
under the individual retirement account from which the
distribution is made.
7. Inalienability of Benefits
The benefits provided under this custodial account
nor the assets held therein shall be subject to
alienation, assignment, garnishment, attachment,
execution or levy of any kind and any attempt to cause
such benefits or assets to be so subjected shall not be
recognized except to the extent as may be required by
law.
8. Rollover Contributions and Transfers
The Custodian shall have the right to receive
rollover contributions and to receive direct transfers
from other custodians or trustees. All contributions
must be made in cash or check.
9. Conflict in Provisions
To the extent that any provisions of this Article
VIII shall conflict with the provisions of Articles IV,
V and/or VII, the provisions of this Article VIII shall
govern.
10. Applicable State Law
This custodial account shall be construed,
administered and enforced according to the laws of the
State of Wisconsin.
11. Resignation or Removal of Custodian
The Custodian may resign at any time upon 90 days
notice in writing to the Investment Company. Upon such
resignation, the Investment Company shall notify the
Depositor, and shall appoint a successor custodian
under this Agreement. The Depositor or the Investment
Company at any time may remove the Custodian upon 90
days written notice to that effect in a form acceptable
to and filed with the Custodian. Such notice must
include designation of a successor custodian. The
successor custodian shall satisfy the requirements of
Section 408(h) of the Code. Upon receipt by the
Custodian of written acceptance of such appointment by
the successor custodian, the Custodian shall transfer
and pay over to such successor the assets of and
records relating to the Custodial Account. The
Custodian is authorized, however, to reserve such sum
of money as it may deem advisable for payment of all
its fees, compensation, costs and expenses, or for
payment of any other liability constituting a charge on
or against the assets of the Custodial Account or on or
against the Custodian, and where necessary may
liquidate shares in the Custodial Account for such
payments. Any balance of such reserve remaining after
the payment of all such items shall be paid over to the
successor Custodian. The Custodian shall not be liable
for the acts or omissions of any predecessor or
successor custodian or trustee.
12. Limitation on Custodian Responsibility
The Custodian will not under any circumstances be
responsible for the timing, purpose or propriety of any
contribution or of any distribution made hereunder, nor
shall the Custodian incur any liability or
responsibility for any tax imposed on account of any
such contribution or distribution. Further, the
custodian shall not incur any liability or
responsibility in taking or omitting to take any action
based on any notice, election, or instruction or any
written instrument believed by the Custodian to be
genuine and to have been properly executed. The
Custodian shall be under no duty of inquiry with
respect to any such notice, election, instruction, or
written instrument, but in its discretion may request
any tax waivers, proof of signatures or other evidence
which it reasonably deems necessary for its protection.
The Depositor and the successors of the Depositor
including any executor or administrator of the
Depositor shall, to the extent permitted by law,
indemnify the Custodian and its successors and assigns
against any and all claims, actions or liabilities of
the Custodian to the Depositor or the successors or
beneficiaries of the Depositor whatsoever (including
without limitation all reasonable expenses incurred in
defending against or settlement of such claims, actions
or liabilities) which may arise in connection with this
Agreement or the Custodial Account, except those due to
the Custodian's own bad faith, gross negligence or
willful misconduct. The Custodian shall not be under
any duty to take any action not specified in this
Agreement, unless the Depositor shall furnish it with
instructions in proper form and such instructions shall
have been specifically agreed to by the Custodian, or
to defend or engage in any suit with respect hereto
unless it shall have first agreed in writing to do so
and shall have been fully indemnified to its
satisfaction.
Individual Retirement Account Disclosure Statement For
Roth (American Dream) IRAs
1. Am I Eligible to Contribute to a Roth IRA?
Anyone with compensation income whose adjusted
gross income does not exceed the limits described below
is eligible to contribute to a Roth IRA. You may also
establish a Roth IRA to receive rollover contributions
or transfers from another Roth IRA or, in some cases,
from a Traditional IRA. You may not roll amounts into
a Roth IRA from other retirement plans such as an
employer-sponsored qualified plan. However, current
law does not appear to prohibit a rollover from a
qualified plan into a Traditional IRA and then from the
Traditional IRA into a Roth IRA.
2. When Can I Make Contributions?
You may make annual contributions to your Roth IRA
any time up to and including the due date for filing
your tax return for the year, not including extensions.
Unlike a Traditional IRA, you may continue to make
regular contributions to your Roth IRA even after you
attain age 70 1/2. In addition, rollover contributions
and transfers (to the extent permitted as discussed
below) may be made at any time, regardless of your age.
3. How Much May I Contribute to a Roth IRA?
You may make annual contributions to a Roth IRA in
any amount up to 100% of your compensation for the year
or $2,000, whichever is less. The $2,000 limitation is
reduced by any contributions made by you or on your
behalf to any other individual retirement plan (such as
a Traditional IRA). (Legislation pending as of this
printing clarifies that, for this purpose, the term
individual retirement plan does not include SEP IRAs or
SIMPLE IRAs.) However, your annual contribution
limitation is not reduced by contributions you make to
an Education IRA that covers someone other than
yourself. Qualifying rollover contributions and
transfers are not subject to these limitations.
In addition, if you are married and file a joint
return, you may make contributions to your spouse's
Roth IRA. However, the maximum amount contributed to
both your own and to your spouse's Roth IRA may not
exceed 100% of your combined compensation or $4,000,
whichever is less. The maximum amount that may be
contributed to either your Roth IRA or your spouse's
Roth IRA is $2,000. Again, these dollar limits are
reduced by any contributions made by or on behalf of
you or your spouse to any other individual retirement
plan (such as a Traditional IRA), except that the limit
is not reduced for contributions either of you make to
an Education IRA for someone other than yourselves.
As noted in Item 1, your eligibility to contribute
to a Roth IRA depends on your adjusted gross income (as
defined below). The amount that you may contribute to
a Roth IRA is reduced proportionately for adjusted
gross income as calculated above which exceeds the
applicable dollar amount. The applicable dollar amount
is $95,000 for a taxpayer filing as an individual or
head of household and $150,000 for a taxpayer filing as
a married individual filing a joint tax return. The
applicable dollar limit for a taxpayer filing as a
married individual filing a separate return is $0. If
your adjusted gross income as calculated above exceeds
the applicable dollar amount by $15,000 or less
($10,000 or less in the case of a married individual
filing jointly), you may make a contribution to a Roth
IRA. The amount you may contribute, however, will be
less than $2,000. (Legislation pending as of this
printing would change the phaseout range for a married
individual filing separately from $0 to $10,000.) Note
that the amount you may contribute to a Roth IRA is not
affected by your participation in an employer-sponsored
retirement plan.
For this purpose, your adjusted gross income (1)
is determined without regard to the exclusions from
income arising under Section 135 (exclusion of certain
savings bond interest), Section 137 (exclusion of
certain employer provided adoption expenses) and
Section 911 (certain exclusions applicable to U.S.
citizens or residents living abroad) of the Code, (2)
is reduced by the amount paid under an endowment
contract described in Section 408(b) of the Code which
is properly allocated to the cost of life insurance,
(3) takes into account the passive loss limitations
under Section 469 of the Code and any taxable benefits
under the Social Security Act and Railroad Retirement
Act as determined in accordance with Section 86 of the
Code, (4) does not take into account income from
rollovers of Traditional IRAs, and (5) does take into
account the deduction for a Traditional IRA.
(Legislation pending as of this printing indicates that
the deduction for a contribution to a Traditional IRA
would not be taken into account for determining your
adjusted gross income.)
To determine the amount you may contribute to a
Roth IRA (assuming you have at least $2,000 of income),
use the following calculations:
(a) Subtract the amount contributed on your
behalf to all Traditional IRAs and employer-
sponsored individual retirement plans from
$2,000. This amount is known as the "maximum
potential contribution."
(b) Subtract the applicable dollar amount from
your adjusted gross income as determined
above. If the result is $15,000 or more
($10,000 or more in the case of a married
individual filing jointly), you cannot make a
contribution to a Roth IRA.
(c) Divide the above figure by $15,000 ($10,000
in the case of a married individual filing
jointly), and multiply that percentage by the
maximum possible contribution.
(d) Subtract the dollar amount (result from (c)
above) from the maximum possible contribution
to determine the amount you may contribute to
a Roth IRA.
(Legislation pending as of this printing indicates
that you are eligible to make a contribution to a Roth
IRA of the lesser of: (i) $2,000 (assuming you have at
least $2,000 of income) less contributions to all other
individual retirement accounts or (ii) $2,000 minus the
quantity $2,000 times the fraction determined in part
(c).)
If the contribution limit is not a multiple of $10
then it should be rounded up to the next $10. If you
are eligible to make any contribution, you may make a
minimum $200 contribution.
Your contribution to a Roth IRA is not reduced by
any amount you contribute to an Education IRA for the
benefit of someone other than yourself. If you are the
beneficiary of an Education IRA, additional limits may
apply to you. Please contact your tax advisor for more
information.
4. Can I Roll Over or Transfer Amounts from Other
IRAs?
You are allowed to "roll over" a distribution or
transfer your assets from one Roth IRA to another
without any tax liability. Rollovers between Roth IRAs
are permitted once per year and must be accomplished
within 60 days after the distribution. In addition, if
you are a single, head of household or married filing
jointly taxpayer and your adjusted gross income is not
more than $100,000, you may roll over amounts from
another individual retirement plan (such as a
Traditional IRA) to a Roth IRA. Such amounts are
subject to tax as if they were additional income to you
for the year, but are not subject to the 10% penalty
tax. (However, under legislation pending as of this
printing, if the amount rolled over is distributed
before the end of the five-tax-year period beginning
with the beginning of the tax year of the rollover, a
10% penalty tax will apply to the taxed portion of the
rollover.)
If you roll over amounts from a Traditional IRA to
a Roth IRA during 1998, you may take advantage of
special tax treatment. Under the special rules, you
may take your rollover into income as if one quarter of
the amount rolled over was distributed to you in 1998
and one quarter of the amount was distributed to you in
each of the following three years.
(Legislation pending as of this printing indicates
that if you die prior to taking all four amounts into
income, the remaining amounts are included in income
for the year of your death unless you have a spouse and
your spouse elects to take those amounts into the
spouse's income over the remaining period.)
Subject to the foregoing limits, you may also
directly convert a Traditional IRA to a Roth IRA with
similar tax results.
Furthermore, if you have made contributions to a
Traditional IRA during the year in excess of the
deductible limit, you may convert those nondeductible
IRA contributions to contributions to a Roth IRA
(subject to the contribution limit for a Roth IRA).
You may not roll over amounts to a Roth IRA from a
qualified retirement plan or any other retirement plan
that is not an individual retirement plan.
5. What if I Make an Excess Contribution?
Contributions that exceed the allowable maximum
for federal income tax purposes are treated as excess
contributions. A nondeductible penalty tax of 6% of
the excess amount contributed will be added to your
income tax for each year in which the excess
contribution remains in your account.
6. How Do I Correct an Excess Contribution?
If you make a contribution in excess of your
allowable maximum, you may correct the excess
contribution and avoid the 6% penalty tax for that year
by withdrawing the excess contribution and its earnings
on or before the date, including extensions, for filing
your tax return for the tax year for which the
contribution was made. Any earnings on the withdrawn
excess contribution may also be subject to the 10%
early distribution penalty tax if you are under age 59
1/2 or have not satisfied the five-year requirement
described below. In addition, although you will still
owe penalty taxes for one or more years, excess
contributions may be withdrawn after the time for
filing your tax return. Finally, excess contributions
for one year may be carried forward and applied against
the contribution limitation in succeeding years.
(Legislation pending as of this printing would
permit an individual who is partially or entirely
ineligible for a Roth IRA to transfer amounts of up to
$2,000 to a nondeductible Traditional IRA (subject to
reduction for amounts remaining in the Roth IRA and for
other Traditional IRA contributions).)
7. What Forms of Distribution Are Available from a
Roth IRA?
You may at any time request distribution of all or
any portion of your account. However, distributions
made prior to your attainment of age 59 1/2 (or in some
cases within five years of establishing your account)
may produce adverse tax consequences.
8. When Must Distributions from a Roth IRA Begin?
Unlike Traditional IRAs, there is no requirement
that you begin distribution of your account at any
particular age.
9. Are There Distribution Rules that Apply after My
Death?
Your account must be distributed after your death
in accordance with rules similar to those that apply to
distributions from a Traditional IRA. Thus, although
the IRS has not issued guidance it is expected that the
rules will require that your remaining interest in your
Roth IRA will, at the election of your beneficiary or
beneficiaries, (i) be distributed by December 31 of the
year in which occurs the fifth anniversary of your
death, or (ii) commence to be distributed by December
31 of the year following your death over a period not
exceeding the life or life expectancy of your
designated beneficiary or beneficiaries.
It is expected that two additional distribution
options will be available if your spouse is the
beneficiary: (i) payments to your spouse may commence
as late as December 31 of the year you would have
attained age 70 1/2 and be distributed over a period
not exceeding the life or life expectancy of your
spouse, or (ii) your spouse can simply elect to treat
your Roth IRA as his or her own, in which case
distributions will be required to commence by April 1
following the calendar year in which your spouse
attains age 70 1/2.
10. How Are Distributions from a Roth IRA Taxed for
Federal Income Tax Purposes?
Amounts distributed to you are generally
excludable from your gross income if they (i) are paid
after you attain age 59 1/2, (ii) are made to your
beneficiary after your death, (iii) are attributable to
your becoming disabled, (iv) subject to various limits,
are made for the purchase of a first home (or for a
second or subsequent home in certain limited cases) for
you, your spouse, or your or your spouse's children,
grandchildren, or parents, or (v) are rolled over to
another Roth IRA.
Regardless of the foregoing, if you or your
beneficiary receive a distribution within the five-
taxable-year period starting with the beginning of the
year to which your initial contribution to your Roth
IRA applies, the earnings on your account are
includable in taxable income. In addition, if you roll
over funds to your Roth IRA from another individual
retirement plan (such as a Traditional IRA or another
Roth IRA into which amounts were rolled from a
Traditional IRA), the portion of a distribution
attributable to rolled-over amounts which exceeds the
amounts taxed in connection with the conversion to a
Roth IRA is includable in income (and subject to
penalty tax) if it is distributed prior to the end of
the five-tax-year period beginning with the start of
the tax year during which the rollover occurred.
(Under legislation pending at the date of this
printing, an amount taxed in connection with a rollover
would be subject to a 10% penalty tax if it is
distributed before the end of the five-tax-year period.
The pending legislation also suggests that if an
individual makes multiple taxable rollovers to the same
Roth IRA, the five-year period runs from the date of
the most recent rollover.)
In any event, any part of a distribution to you
that constitutes a return of your contributions will
not be included in your taxable income. Amounts
distributed to you are treated as coming first from
your nondeductible contributions. (Legislation pending
as of this printing clarifies that the next portion of
a distribution is treated as coming from amounts which
have been rolled over from a Traditional IRA and are
subject to the four-year recognition treatment
described above. Next, amounts are treated as coming
from other rollovers from a Traditional IRA. Any
remaining amounts are treated as distributed last.)
Any portion of your distribution which does not meet
the criteria for exclusion from gross income is also
subject to a 10% penalty tax.
Note that to the extent a distribution would be
taxable to you, neither you nor anyone else can qualify
for capital gains treatment for amounts distributed
from your account. Similarly, you are not entitled to
the special five- or ten-year averaging rule for lump-
sum distributions that may be available to persons
receiving distributions from certain other types of
retirement plans. Rather, the taxable portion of any
distribution is taxed to you as ordinary income. Your
Roth IRA is not subject to taxes on excess
distributions or on excess amounts remaining in your
account as of your date of death.
You may be required to indicate on distribution
requests whether or not federal income taxes should be
withheld on the taxable portion (if any) of a
distribution from a Roth IRA. Redemption requests not
indicating an election not to have federal income tax
withheld will be subject to withholding with respect to
the taxable portion (if any) of a distribution to the
extent required under federal law. (Note that
legislation pending as of this printing clarifies that,
for federal tax purposes, Roth IRAs are taxed
separately from Traditional IRAs, Roth IRAs with
rollovers are taxed separately from Roth IRAs without
rollovers, and Roth IRAs with rollovers with different
five-year periods are taxed separately.)
11. Are There Penalties for Early Distribution from a
Roth IRA?
As indicated above, earnings on your contributions
that are distributed before certain events are subject
to various taxes.
12. What if I Engage in a Prohibited Transaction?
If you engage in a "prohibited transaction," as
defined in Section 4975 of the Internal Revenue Code,
your account could lose its tax-favored status.
Examples of prohibited transactions are:
(a) the sale, exchange, or leasing of any
property between you and your account,
(b) the lending of money or other extensions of
credit between you and your account,
(c) the furnishing of goods, services, or
facilities between you and your account.
13. What if I Pledge My Account?
If you use (pledge) all or part of your Roth IRA
as security for a loan, your account may lose its tax-
favored status.
14. How Are Contributions to a Roth IRA Reported for
Federal Tax Purposes?
As of the date of this printing, the Internal
Revenue Service had not issued forms for reporting
information related to contributions to and
distributions from a Roth IRA.
15. How Are Earnings on My Account Calculated and
Allocated?
The method of computing and allocating annual
earnings is set forth in the Roth Individual Retirement
Account Custodial Agreement. The growth in value of
your IRA is neither guaranteed nor projected.
16. Is There Anything Else I Should Know?
Your Roth Individual Retirement Account Plan has
been approved as to form by the Internal Revenue
Service. The Internal Revenue Service approval is a
determination only as to the form of the Plan and does
not represent a determination of the merits of the Plan
as adopted by you. You may obtain further information
with respect to your Roth Individual Retirement Account
from any district office of the Internal Revenue
Service. The statute provides that Roth IRAs are to be
treated the same as Traditional IRAs for most purposes.
As the IRS clarifies its interpretation of the statute,
revised or updated information will be provided.
Roth Individual Retirement Custodial Account
The following constitutes an agreement
establishing a Roth IRA (under Section 408A of the
Internal Revenue Code) between the Depositor and the
Custodian.
Article I
1. If this Roth IRA is not designated as a Roth
Conversion IRA, then, except in the case of a rollover
contribution described in Section 408A(e), the
Custodian will accept only cash contributions and only
up to a maximum amount of $2,000 for any tax year of
the Depositor.
2. If this Roth IRA is designated as a Roth
Conversion IRA, no contributions other than IRA
Conversion Contributions made during the same tax year
will be accepted.
Article II
The $2,000 limit described in Article I is
gradually reduced to $0 between certain levels of
adjusted gross income (AGI). For a single Depositor,
the $2,000 annual contribution is phased out between
AGI of $95,000 and $110,000; for a married Depositor
who files jointly, between AGI of $150,000 and
$160,000; and for a married Depositor who files
separately, between $0 and $10,000. In the case of a
conversion, the Custodian will not accept IRA
Conversion Contributions in a tax year if the
Depositor's AGI for that tax year exceeds $100,000 or
if the Depositor is married and files a separate
return. Adjusted gross income is defined in Section
408A(c)(3) and does not include IRA Conversion
Contributions.
Article III
The Depositor's interest in the balance in the
custodial account is nonforfeitable.
Article IV
1. No part of the custodial funds may be
invested in life insurance contracts, nor may the
assets of the custodial account be commingled with
other property except in a common trust fund or common
investment fund (within the meaning of Section
408(a)(5)).
2. No part of the custodial funds may be
invested in collectibles (within the meaning of Section
408(m) except as otherwise permitted by Section
408(m)(3), which provides an exception for certain
gold, silver, and platinum coins, coins issued under
the laws of any state, and certain bullion.
Article V
1. If the Depositor dies before his or her
entire interest is distributed to him or her and the
grantor's surviving spouse is not the sole beneficiary,
the entire remaining interest will, at the election of
the Depositor or, if the Depositor has not so elected,
at the election of the beneficiary or beneficiaries,
either:
(a) Be distributed by December 31 of the
year containing the fifth anniversary of the
Depositor's death, or
(b) Be distributed over the life expectancy
of the designated beneficiary starting no later
than December 31 of the year following the year of
the Depositor's death.
If distributions do not begin by the date
described in (b), distribution method (a) will apply.
2. In the case of distribution method 1.(b)
above, to determine the minimum annual payment for each
year, divide the grantor's entire interest in the trust
as of the close of business on December 31 of the
preceding year by the life expectancy of the designated
beneficiary using the attained age of the designated
beneficiary as of the beneficiary's birthday in the
year distributions are required to commence and
subtract one for each subsequent year.
3. If the Depositor's spouse is the sole
beneficiary on the Depositor's date of death, such
spouse will then be treated as the Depositor.
Article VI
1. The Depositor agrees to provide the custodian
with information necessary for the Custodian to prepare
any reports required under Section 408(i) and
408A(d)(3)(E), regulations Sections 1.408-5 and 1.408-
6, and under guidance published by the Internal Revenue
Service.
2. The Custodian agrees to submit reports to the
Internal Revenue Service and the Depositor as
prescribed by the Internal Revenue Service.
Article VII
Notwithstanding any other articles which may be
added or incorporated, the provisions of Articles I
through IV and this sentence will be controlling. Any
additional articles that are not consistent with
Section 408A, the related regulations, and other
published guidance will be invalid.
Article VIII
This Agreement will be amended from time to time
to comply with the provisions of the Code, related
regulations, and other published guidance. Other
amendments may be made with the consent of the persons
whose signatures appear below.
Article IX
1. Investment of Account Assets.
(a) All contributions to the custodial
account shall be invested in the shares of any
regulated investment company ("Investment
Company") for which Badgley, Phelps and Bell, Inc.
serves as Investment Advisor, or any other
regulated investment company designated by the
Investment Advisor. Shares of stock of an
Investment Company shall be referred to as
"Investment Company Shares."
(b) Each contribution to the custodial
account shall identify the Depositor's account
number and be accompanied by a signed statement
directing the investment of that contribution.
The Custodian may return to the Depositor, without
liability for interest thereon, any contribution
which is not accompanied by adequate account
identification or an appropriate signed statement
directing investment of that contribution.
(c) Contributions shall be invested in whole
and fractional Investment Company Shares at the
price and in the manner such shares are offered to
the public. All distributions received on
Investment Company Shares held in the custodial
account shall be reinvested in like shares. If
any distribution of Investment Company Shares may
be received in additional like shares or in cash
or other property, the Custodian shall elect to
receive such distribution in additional like
Investment Company Shares.
(d) All Investment Company Shares acquired
by the Custodian shall be registered in the name
of the Custodian or its nominee. The Depositor
shall be the beneficial owner of all Investment
Company Shares held in the custodial account and
the Custodian shall not vote any such shares,
except upon written direction of the Depositor.
The Custodian agrees to forward to the Depositor
each prospectus, report, notice, proxy and related
proxy soliciting materials applicable to
Investment Company Shares held in the custodial
account received by the Custodian.
(e) The Depositor may, at any time, by
written notice to the Custodian, redeem any number
of shares held in the custodial account and
reinvest the proceeds in the shares of any other
Investment Company. Such redemptions and
reinvestments shall be done at the price and in
the manner such shares are then being redeemed or
offered by the respective Investment Companies.
2. Amendment and Termination.
(a) The Custodian may amend the Custodial
Account (including retroactive amendments) by
delivering to the depositor written notice of such
amendment setting forth the substance and
effective date of the amendment. The depositor
shall be deemed to have consented to any such
amendment not objected to in writing by the
Depositor within 30 days of receipt of the notice,
provided that no amendment shall cause or permit
any part of the assets of the custodial account to
be diverted to purposes other than for the
exclusive benefit of the depositor or his or her
beneficiaries.
(b) The Depositor may terminate the
custodial account at any time by delivering to the
Custodian a written notice of such termination.
(c) The custodial account shall
automatically terminate upon distribution to the
Depositor or his or her beneficiaries of its
entire balance.
3. Taxes and Custodial Fees.
Any income taxes or other taxes levied or assessed
upon or in respect of the assets or income of the
custodial account and any transfer taxes incurred shall
be paid from the custodial account. All administrative
expenses incurred by the Custodian in the performance
of its duties, including fees for legal services
rendered to the Custodian, and the Custodian's
compensation shall be paid from the custodial account,
unless otherwise paid by the Depositor or his or her
beneficiaries.
The Custodian's fees are set forth in a schedule
provided to the Depositor. Extraordinary charges
resulting from unusual administrative responsibilities
not contemplated by the schedule will be subject to
such additional charges as will reasonably compensate
the Custodian. Fees for refund of excess
contributions, transferring to a successor trustee or
custodian, or redemption/reinvestment of Investment
Company Shares will be deducted from the refund or
redemption proceeds and the remaining balance will be
remitted to the Depositor, or reinvested or transferred
in accordance with the Depositor's instructions.
4. Reports and Notices.
(a) The Custodian shall keep adequate
records of transactions it is required to perform
hereunder. After the close of each calendar year,
the Custodian shall provide to the Depositor or
his or her legal representative a written report
or reports reflecting the transactions effected by
it during such year and the assets and liabilities
of the Custodial Account at the close of the year.
(b) All communications or notices shall be
deemed to be given upon receipt by the Custodian
at 615 E. Michigan St., Milwaukee, WI 53202 or the
Depositor at his most recent address shown in the
Custodian's records. The Depositor agrees to
advise the custodian promptly, in writing, of any
change of address.
5. Designation of Beneficiary.
The Depositor may designate a beneficiary or
beneficiaries to receive benefits from the custodial
account in the event of the Depositor's death. In the
event the Depositor has not designated a beneficiary,
or if all beneficiaries shall predecease the Depositor,
the following persons shall take in the order named:
(a) The spouse of the Depositor;
(b) If the spouse shall predecease the
Depositor or if the Depositor does not have a
spouse, then to the personal representative of the
Depositor's estate.
6. Inalienability of Benefits.
The benefits provided under this custodial account
shall not be subject to alienation, assignment,
garnishment, attachment, execution or levy of any kind
and any attempt to cause such benefits to be so
subjected shall not be recognized except to the extent
as may be required by law.
7. Rollover Contributions and Transfers.
Subject to the restrictions in Article I, the
Custodian shall have the right to receive rollover
contributions and to receive direct transfers from
other custodians or trustees. All contributions must
be made in cash or check.
8. Conflict in Provisions.
To the extent that any provisions of this Article
VIII shall conflict with the provisions of Articles V,
VI and/or VIII, the provisions of this Article IX shall
govern.
9. Applicable State Law.
This custodial account shall be construed,
administered and enforced according to the laws of the
State of Wisconsin.
BADGLEY FUNDS, INC.
BADGLEY GROWTH FUND
BADGLEY BALANCED FUND
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The following Distribution and Shareholder
Servicing Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "Act"), by Badgley Funds, Inc. (the
"Corporation"), a Maryland corporation, on behalf of
the Badgley Growth Fund and the Badgley Balanced Fund
(each, a "Fund"), each, a series of the Corporation.
The Plan has been approved by a majority of the
Corporation's Board of Directors, including a majority
of the directors who are not interested persons of the
Corporation and who have no direct or indirect
financial interest in the operation of the Plan or in
any Rule 12b-1 related agreement (as defined below)
(the "Disinterested Directors"), cast in person at a
meeting called for the purpose of voting on such plan.
In approving the Plan, the Board of Directors
determined that adoption of the Plan would be prudent
and in the best interests of each Fund and its
shareholders. Such approval by the Board of Directors
included a determination, in the exercise of its
reasonable business judgment and in light of its
fiduciary duties, that there is a reasonable likelihood
that the Plan will benefit each Fund and its
shareholders.
The provisions of the Plan are as follows:
1. PAYMENTS BY THE FUND TO PROMOTE THE SALE OF FUND
SHARES
(a) The Corporation, on behalf of each Fund,
will pay Rafferty Capital Markets, Inc. (the
"Distributor"), as a principal underwriter of the
Fund's shares, a distribution and shareholder
servicing fee of 0.25% of the average daily net
assets of the Fund in connection with the
promotion and distribution of Fund shares and the
provision of personal services to shareholders,
including, but not necessarily limited to,
advertising, compensation to underwriters, dealers
and seller personnel, the printing and mailing of
prospectuses to other than current Fund
shareholders, and the printing and mailing of
sales literature. The Distributor may pay all or
a portion of these fees to any registered
securities dealer, financial institution or any
other person (the "Recipient") who renders
assistance in distributing or promoting the sale
of shares, or who provides certain shareholder
services, pursuant to a written agreement (the
"Rule 12b-1 Related Agreement"), a form of which
is attached hereto as Appendix A with respect to
the Badgley Growth Fund and Appendix B with
respect to the Badgley Balanced Fund. Payment of
these fees shall be made monthly promptly
following the close of the month.
(b) No Rule 12b-1 Related Agreement shall be
entered into with respect to either Fund, and no
payments shall be made pursuant to any Rule 12b-1
Related Agreement, unless such Rule 12b-1 Related
Agreement is in writing and the form of which has
first been delivered to and approved 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 such Rule 12b-1 Related Agreement.
The form of Rule 12b-1 Related Agreement relating
to the Badgley Growth Fund attached hereto as
Appendix A and the form of Rule 12b-1 Related
Agreement relating to the Badgley Balanced Fund
attached hereto as Exhibit B have been approved by
the Corporation's Board of Directors as specified
above.
(c) Any Rule 12b-1 Related Agreement shall
describe the services to be performed by the
Recipient and shall specify the amount of, or the
method for determining, the compensation to the
Recipient.
(d) No Rule 12b-1 Related Agreement may be
entered into unless it provides (i) that it may be
terminated with respect to a Fund at any time,
without the payment of any penalty, by vote of a
majority of the shareholders of such Fund, or by
vote of a majority of the Disinterested Directors,
on not more than 60 days' written notice to the
other party to the Rule 12b-1 Related Agreement,
and (ii) that it shall automatically terminate in
the event of its assignment.
(e) The Rule 12b-1 Related Agreement shall
continue in effect for a period of more than one
year from the date of its execution only if such
continuance is specifically approved at least
annually by a vote of a majority of the Board of
Directors, and of the Disinterested Directors,
cast in person at a meeting called for the purpose
of voting on such Rule 12b-1 Related Agreement.
2. QUARTERLY REPORTS
The Distributor shall provide to the Board of
Directors, and the Directors shall review, at
least quarterly, a written report of all amounts
expended pursuant to the Plan. This report shall
include the identity of the Recipient of each
payment and the purpose for which the amounts were
expended and such other information as the Board
of Directors may reasonably request.
3. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective immediately
upon approval by the vote of a majority of the
Board of Directors, and of the Disinterested
Directors, cast in person at a meeting called for
the purpose of voting on the approval of the Plan.
The Plan shall continue in effect for a period of
one year from its effective date unless terminated
pursuant to its terms. Thereafter, the Plan shall
continue with respect to each Fund from year to
year, provided that such continuance is approved
at least annually by a vote of a majority of the
Board of Directors, and of the Disinterested
Directors, cast in person at a meeting called for
the purpose of voting on such continuance. The
Plan may be terminated with respect to each Fund
at any time by a majority vote of shareholders of
such Fund, or by vote of a majority of the
Disinterested Directors.
4. SELECTION OF DISINTERESTED DIRECTORS
During the period in which the Plan is
effective, the selection and nomination of those
Directors who are Disinterested Directors of the
Corporation shall be committed to the discretion
of the Disinterested Directors.
5. AMENDMENTS
All material amendments of the Plan shall be
in writing and shall be approved by a vote of a
majority of the Board of Directors, and of the
Disinterested Directors, cast in person at a
meeting called for the purpose of voting on such
amendment. In addition, the Plan may not be
amended to increase materially the amount to be
expended by a Fund hereunder without the approval
by a majority vote of shareholders of each Fund
affected thereby.
6. RECORDKEEPING
The Corporation shall preserve copies of the
Plan, any Rule 12b-1 Related Agreement and all
reports made pursuant to Section 2 for a period of
not less than six years from the date of this
Plan, any such Rule 12b-1 Related Agreement or
such reports, as the case may be, the first two
years in an easily accessible place.
APPENDIX A
Rule 12b-1 Related Agreement
Rafferty Capital Markets, Inc.
550 Mamaroneck Avenue
Harrison, New York 10528
____________, 1998
[Recipient's Name and Address]
Ladies and Gentlemen:
This letter will confirm our understanding and
agreement with respect to payments to be made to you
pursuant to a Distribution and Shareholder Servicing
Plan (the "Plan") adopted by Badgley Funds, Inc. (the
"Corporation"), on behalf of the Badgley Growth Fund
(the "Fund"), a series of the Corporation, pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Act"). The Plan and this related
agreement (the "Rule 12b-1 Related Agreement") have
been approved by a majority of the Board of Directors
of the Corporation, including a majority of the Board
of Directors who are not "interested persons" of the
Corporation, as defined in the Act, and who have no
direct or indirect financial interest in the operation
of the Plan or in this or any other Rule 12b-1 Related
Agreement (the "Disinterested Directors"), cast in
person at a meeting called for the purpose of voting
thereon. Such approval included a determination by the
Board of Directors that, in the exercise of its
reasonable business judgment and in light of its
fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Fund's shareholders.
1. To the extent you provide distribution and
marketing services in the promotion of the Fund's
shares, including furnishing services and assistance to
your customers who invest in and own shares, including,
but not limited to, answering routine inquiries
regarding the Fund and assisting in changing account
designations and addresses, we shall pay you a fee of
up to 0.25% of the average daily net assets of the Fund
(computed on an annual basis) which are owned of record
by your firm as nominee for your customers or which are
owned by those customers of your firm whose records, as
maintained by the Corporation or its agent, designate
your firm as the customer's dealer or service provider
of record. We reserve the right to increase, decrease
or discontinue the fee at any time in our sole
discretion upon written notice to you.
You agree that all activities conducted under this
Rule 12b-1 Related Agreement will be conducted in
accordance with the Plan, as well as all applicable
state and federal laws, including the Act, the
Securities Exchange Act of 1934, the Securities Act of
1933 and any applicable rules of the NASD.
We shall make the determination of the net asset
value, which determination shall be made in the manner
specified in the Fund's current Prospectus, and pay to
you, on the basis of such determination, the fee
specified above, to the extent permitted under the
Plan. No such fee will be paid to you with respect to
shares purchased by you and redeemed or repurchased by
the Fund, its agent or us within seven business days
after the date of our confirmation of such purchase.
In addition, no such fee will be paid to you with
respect to any of your customers if the amount of such
fee based upon the value of such customers' shares will
be less than $25.00. Payment of such fee shall be made
promptly after the close of each month for which such
fee is payable.
2. You shall furnish us with such information as
shall reasonably be requested by the Board of
Directors, on behalf of the Fund, with respect to the
fees paid to you pursuant to this Rule 12b-1 Related
Agreement.
3. We shall furnish to the Board of Directors,
for its review, on a quarterly basis, a written report
of the amounts expended under the Plan by us and the
purposes for which such expenditures were made.
4. This Rule 12b-1 Related Agreement may be
terminated by the vote of (a) a majority vote of
shareholders, or (b) a majority of the Disinterested
Directors, on 60 days' written notice, without payment
of any penalty. In addition, this Rule 12b-1 Related
Agreement will be terminated by any act which
terminates the Distribution and Shareholder Servicing
Agreement between the Corporation and us and shall
terminate immediately in the event of its assignment.
This Rule 12b-1 Related Agreement may be amended by us
upon written notice to you, and you shall be deemed to
have consented to such amendment upon effecting any
purchases of shares for your own account or on behalf
of any of your customer's accounts following your
receipt of such notice.
5. This Rule 12b-1 Related Agreement shall
become effective on the date accepted by you and shall
continue in full force and effect so long as the
continuance of the Plan and this Rule 12b-1 Related
Agreement are approved at least annually by a vote of
the Board of Directors of the Corporation and of the
Disinterested Directors, cast in person at a meeting
called for the purpose of voting thereon. All
communications to us should be sent to the above
address. Any notice to you shall be duly given if
mailed or telegraphed to you at the address specified
by you below.
RAFFERTY CAPITAL MARKETS, INC.,
on behalf of the Badgley Growth
Fund
By:_____________________________
(Name and Title)
Accepted:
__________________________________
(Dealer or Service Provider Name)
___________________________________
(Street Address)
______________________________________
(City) (State) (ZIP)
_______________________________________
(Telephone No.)
_______________________________________
(Facsimile No.)
By:___________________________________
(Name and Title)
APPENDIX B
Rule 12b-1 Related Agreement
Rafferty Capital Markets, Inc.,
550 Mamaroneck Avenue
Harrison, New York 10528
____________, 1998
[Recipient's Name and Address]
Ladies and Gentlemen:
This letter will confirm our understanding and
agreement with respect to payments to be made to you
pursuant to a Distribution and Shareholder Servicing
Plan (the "Plan") adopted by Badgley Funds, Inc. (the
"Corporation"), on behalf of the Badgley Balanced Fund
(the "Fund"), a series of the Corporation, pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "Act"). The Plan and this related
agreement (the "Rule 12b-1 Related Agreement") have
been approved by a majority of the Board of Directors
of the Corporation, including a majority of the Board
of Directors who are not "interested persons" of the
Corporation, as defined in the Act, and who have no
direct or indirect financial interest in the operation
of the Plan or in this or any other Rule 12b-1 Related
Agreement (the "Disinterested Directors"), cast in
person at a meeting called for the purpose of voting
thereon. Such approval included a determination by the
Board of Directors that, in the exercise of its
reasonable business judgment and in light of its
fiduciary duties, there is a reasonable likelihood that
the Plan will benefit the Fund's shareholders.
1. To the extent you provide distribution and
marketing services in the promotion of the Fund's
shares, including furnishing services and assistance to
your customers who invest in and own shares, including,
but not limited to, answering routine inquiries
regarding the Fund and assisting in changing account
designations and addresses, we shall pay you a fee of
up to 0.25% of the average daily net assets of the Fund
(computed on an annual basis) which are owned of record
by your firm as nominee for your customers or which are
owned by those customers of your firm whose records, as
maintained by the Corporation or its agent, designate
your firm as the customer's dealer or service provider
of record. We reserve the right to increase, decrease
or discontinue the fee at any time in our sole
discretion upon written notice to you.
You agree that all activities conducted under this
Rule 12b-1 Related Agreement will be conducted in
accordance with the Plan, as well as all applicable
state and federal laws, including, the Act, the
Securities Exchange Act of 1934, the Securities Act of
1933 and any applicable rules of the NASD.
We shall make the determination of the net asset
value, which determination shall be made in the manner
specified in the Fund's current Prospectus, and pay to
you, on the basis of such determination, the fee
specified above, to the extent permitted under the
Plan. No such fee will be paid to you with respect to
shares purchased by you and redeemed or repurchased by
the Fund, its agent or us within seven business days
after the date of our confirmation of such purchase.
In addition, no such fee will be paid to you with
respect to any of your customers if the amount of such
fee based upon the value of such customers' shares will
be less than $25.00. Payment of such fee shall be made
promptly after the close of each month for which such
fee is payable.
2. You shall furnish us with such information as
shall reasonably be requested by the Board of
Directors, on behalf of the Fund, with respect to the
fees paid to you pursuant to this Rule 12b-1 Related
Agreement.
3. We shall furnish to the Board of Directors,
for its review, on a quarterly basis, a written report
of the amounts expended under the Plan by us and the
purposes for which such expenditures were made.
4. This Rule 12b-1 Related Agreement may be
terminated by the vote of (a) a majority vote of
shareholders, or (b) a majority of the Disinterested
Directors, on 60 days' written notice, without payment
of any penalty. In addition, this Rule 12b-1 Related
Agreement will be terminated by any act which
terminates the Distribution and Shareholder Servicing
Agreement between the Corporation and us and shall
terminate immediately in the event of its assignment.
This Rule 12b-1 Related Agreement may be amended by us
upon written notice to you, and you shall be deemed to
have consented to such amendment upon effecting any
purchases of shares for your own account or on behalf
of any of your customer's accounts following your
receipt of such notice.
5. This Rule 12b-1 Related Agreement shall
become effective on the date accepted by you and shall
continue in full force and effect so long as the
continuance of the Plan and this Rule 12b-1 Related
Agreement are approved at least annually by a vote of
the Board of Directors of the Corporation and of the
Disinterested Directors, cast in person at a meeting
called for the purpose of voting thereon. All
communications to us should be sent to the above
address. Any notice to you shall be duly given if
mailed or telegraphed to you at the address specified
by you below.
RAFFERTY CAPITAL MARKETS, INC.,
on behalf of the Badgley Balanced
Fund
By:________________________________
(Name and Title)
Accepted:
______________________________________
(Dealer or Service Provider Name)
______________________________________
(Street Address)
_______________________________________
(City) (State) (ZIP)
________________________________________
(Telephone No.)
__________________________________________
(Facsimile No.)
By:_____________________________________
(Name and Title)
[ARTICLE] 6
<TABLE>
<S> <C>
[PERIOD-TYPE] OTHER
[FISCAL-YEAR-END] JUN-30-1998
[PERIOD-END] JUN-30-1998
[INVESTMENTS-AT-COST] 0
[INVESTMENTS-AT-VALUE] 0
[RECEIVABLES] 0
[ASSETS-OTHER] 147,508
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 147,508
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 47,508
[TOTAL-LIABILITIES] 47,508
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 100,000
[SHARES-COMMON-STOCK] 10,000
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 100,000
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10,000
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 100,000
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 100,000
[PER-SHARE-NAV-BEGIN] 0
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 0
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 10.00
</TABLE>
