As filed with the Securities and Exchange Commission on July 30, 1999
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 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
BADGLEY FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1420 Fifth Avenue
Suite 4400 98101
Seattle, Washington (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (206) 623-6172
Otis P. Heald III
Badgley, Phelps and Bell, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
(Name and Address of Agent for Service)
Copies to:
Scott A. Moehrke
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on September 28, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective amendment.
<PAGE>
Prospectus
September 28, 1999
Badgley Funds, Inc.
BADGLEY GROWTH FUND
BADGLEY BALANCED FUND
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-877-BADGLEY
The investment objective of the Badgley Growth
Fund (the "Growth Fund") is long-term capital
appreciation. The Growth Fund invests primarily in a
diversified portfolio of common stocks. The investment
objective of the Badgley Balanced Fund (the "Balanced
Fund") is long-term capital appreciation and income.
The Balanced Fund invests primarily in common stocks
and investment grade bonds and other fixed income
securities. Each Fund invests in common stocks of
companies that the Funds' investment adviser, Badgley
Phelps and Bell, Inc. (the "Adviser"), believes have
long-term growth potential, and each Fund holds these
stocks for an extended period, which has the advantage
of lower transaction costs and lower 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.
____________________
The Securities and Exchange Commission (the "SEC")
has not approved or disapproved of these securities or
passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
Page No.
HIGHLIGHTS AND RISKS 1
FEES AND EXPENSES OF THE FUNDS 2
INVESTMENT OBJECTIVES 3
HOW THE FUNDS INVEST 3
PRIOR PERFORMANCE OF THE ADVISER 4
FINANCIAL HIGHLIGHTS 7
FUND MANAGEMENT 8
HOW TO PURCHASE SHARES 9
HOW TO REDEEM SHARES 12
VALUATION OF FUND SHARES 14
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN 14
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT 14
YEAR 2000 ISSUE 15
In deciding whether to invest in one or more of
the Funds, you should rely only on information in this
Prospectus or the Statement of Additional Information
(the "SAI"). The Funds have not authorized others to
provide additional information. The Funds do not
authorize the use of this Prospectus in any state or
jurisdiction in which such offering may not legally be
made.
<PAGE>
HIGHLIGHTS AND RISKS
What are the goals of each Fund?
The Growth Fund's goal is long-term capital
appreciation. The Balanced Fund's goal is long-term
capital appreciation and income (i.e., risk-adjusted
total return). These goals are sometimes referred to
as the Funds' investment objectives. Each Fund
attempts to achieve its goal by choosing investments
that the Adviser believes have long-term growth
potential and holding such investments for an extended
period, which has the advantage of lower transaction
costs and lower capital gains distributions. Neither
Fund can guarantee that it will achieve its goal. For
more information, see "Investment Objectives" and "How
the Funds Invest."
What will the Funds invest in?
The Funds 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. In
trying to achieve the Fund's goals, the stocks selected
for the Funds will be those of companies that the
Adviser believes have 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 transaction
costs and lower capital gains distributions. Each Fund
may also invest in foreign securities, repurchase
agreements and illiquid securities. For more
information, see "How the Funds Invest."
What are the main risks of investing in the Funds?
The main risks of investing in one or more of the Funds are:
* Stock Market Risk: The Funds are subject to stock
market risks and significant fluctuations in value. If
the stock market declines in value, the Funds are
likely to decline in value. Increases or decreases in
value of stocks are generally greater than for bonds or
other debt investments.
* Stock Selection
Risk: The stocks selected by
the Adviser may decline in value or not increase in
value when the stock market in general is rising.
* Liquidity Risk: The Adviser may not be able to
sell stocks or bonds at an optimal time or price.
In addition, the Balanced Fund is subject to the following risks:
* Bond Market Risk: The Balanced Fund is subject
to market risks associated with fixed income
investments. If interest rates rise, bond prices in
general are likely to decline over short or even
extended periods.
* Credit Risk: Individual issues of fixed
income securities may be subject to the credit risk of
the issuer.
You should be aware that you may lose money by
investing in the Growth Fund or the Balanced Fund.
Is the Growth Fund or the Balanced Fund an appropriate investment for me?
The Funds are suitable for long-term investors only. The Funds are not
short-term investment vehicles.
An investment in the Growth Fund may be appropriate if:
* your goal is long-term capital appreciation;
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* you do not require current income from this investment; and
* you are willing to accept short-term to intermediate-term
fluctuations in value to seek possible higher long-term returns.
An investment in the Balanced Fund may be appropriate if:
* your goal is long-term capital appreciation and income;
* you want to receive a moderate level of current income from this
investment; and
* you are willing to accept some short-term to
intermediate-term fluctuations in value to seek
possible higher long-term returns.
Because the Funds have been in operation for less than a full calendar
year, the Funds have no annual return history.
FEES AND EXPENSES OF THE FUNDS
The following table describes the fees and
expenses that you may pay if you buy and hold shares of
one or more of the Funds.
Shareholders Fees (fees paid directly from your investment)
Growth Balanced
Fund Fund
Maximum Sales Charge (Load) Imposed on Purchases None None
Maximum Deferred Sales Charge (Load) None None
Maximum Sales Charge (Load) None None
Redemption Fee None None
Exchange Fee None None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)(1)
Growth Balanced
Fund Fund
Management Fees 1.00% 0.90%
Distribution and Service (12b-1) Fees(2) 0.25% 0.25%
Other Expenses(3) 4.87% 2.68%
Total Annual Fund Operating Expenses(3) 6.12% 3.83%
Fee Waiver/Expense Reimbursement (3) 4.62% 2.53%
Net Expenses 1.50% 1.30%
___________
(1)Fund operating expenses are deducted from Fund
assets before computing the daily share price or
making distributions. As a result, they will not
appear on your account statement, but instead
reduce the amount of total return you receive.
(2)Because Rule 12b-1 fees are paid out of a Fund's
assets on an on-going basis, over time these fees
will increase the cost of your investment and could
cost long-term investors of a Fund more than other
types of sales charges. For more information, see
"Distribution and Shareholder Servicing Plan."
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(3)The Adviser has agreed to waive its 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 until May 31, 2000.
After such date, the total operating expense
limitations may be terminated or revised at any
time. 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, see "Fund Management."
Example
The following Example is intended to help you
compare the cost of investing in a Fund with the cost
of investing in other mutual funds. The Example
assumes that you invest $10,000 in a Fund for the time
periods indicated and then redeem all of your shares at
the end of those periods. The Example also assumes
that your investment has a 5% return each year and that
each Fund's total annual operating expenses remain the
same each year. Please note that the one year numbers
are based on each Fund's net expenses because each Fund
has agreed to waive its management fee and/or reimburse
the Fund's expenses until May 31, 2000, as described
above. Although your actual costs may be higher or
lower, based on these assumptions your costs would be
as follows:
1 Year 3 Years 5 Years 10 Years
Growth Fund $153 $1,405 $2,630 $5,574
Balanced Fund $132 $ 936 $1,759 $3,901
INVESTMENT OBJECTIVES
The Growth Fund's investment objective is long-
term capital appreciation. The Balanced Fund's
investment objective is long-term capital appreciation
and income (i.e., risk-adjusted total return).
HOW THE FUNDS INVEST
Growth Fund
The Growth Fund seeks to achieve its investment
objective by investing primarily in common stocks of
companies with medium to large capitalizations. The
Growth Fund typically invests in companies with market
capitalizations of $2.0 billion or more.
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 generally evaluates 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, the management of companies and
other institutional providers. In the research
process, the Adviser reviews certain fundamental
attributes that it believes a security should have for
the Growth Fund to invest in it, including:
* Consistent and predictable growth characteristics
(revenues, earnings and dividends);
* Low financial risk which includes low debt and
lease obligations and strong cash flow;
* Market dominance;
* Significant barriers to entry;
* Strong management; and
<PAGE>
* 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 Growth Fund holds securities for an extended
time, which has the advantage of low transaction costs
and low capital gains distributions. The Growth Fund
sells a security when the Adviser believes it shows
deteriorating fundamentals or is overvalued or to
change the weighting of a security or a sector.
Under normal circumstances, the Growth Fund
expects to be fully invested in common stocks. Common
stocks are units of ownership of a corporation. In
pursuing its investment objective, the Growth 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.
Pending investment or to pay redemption requests
and expenses, the Growth Fund may hold a portion of its
assets in short-term, investment grade money market
securities and cash. The Growth Fund may also invest a
limited amount of assets in illiquid securities. See
the Funds' SAI for additional information.
Balanced Fund
The Balanced Fund seeks to achieve its investment
objective by investing primarily in common stocks and
investment grade bonds and other fixed income
securities. 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. The Balanced Fund
typically invests in companies with market
capitalizations of $2.0 billion or more.
In selecting equity securities for the Balanced
Fund, the Adviser uses the same methods used for the
Growth Fund as discussed above. In addition to equity
securities, the Balanced Fund invests in investment
grade bonds and other fixed income securities including
corporate and government securities, repurchase
agreements and mortgage-backed 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 holds securities for an extended
time, which has the advantage of low transaction costs
and low capital gains distributions. In selling equity
securities for the Balanced Fund, the Adviser uses the
same methods used for the Growth Fund as discussed
above.
Under normal circumstances, the Balanced Fund
invests at least 25% of its total assets in fixed
income senior securities, including bonds and other
debt securities and non-convertible preferred stocks.
Debt securities are obligations of the issuer to pay
interest and repay principal. Preferred stocks have
rights senior to a company's common stock, but junior
to a company's creditors and, if held by the Balanced
Fund as a fixed income security, will generally pay a
dividend. In pursuing its investment objective, the
Balanced Fund invests in common stocks and may invest
up to 15% of its net assets in ADRs, EDRs or other
foreign instruments.
Pending investment or to pay redemption requests
and expenses, the Balanced Fund may hold a portion of
its assets in short-term, investment grade money market
securities and cash. The Balanced Fund may also invest
a limited amount of assets in illiquid securities. See
the Funds' SAI for additional information.
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
<PAGE>
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. For the total
returns of the Funds, see "Financial Highlights,"
below. 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* 17.1% 0.1% 2.4% 15.6%
1992 -4.2% 0.1% 4.1% 6.9%
1993 -2.4% -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% ____% ___% ____%
1999 ____% ____%
Balanced Composite
Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
1991* 9.6% 0.8% 3.4% 9.9%
1992 -2.7% 1.8% 4.3% 3.4%
1993 0.6% -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% ____% ___% ___%
1999 ____% ____%
* 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 Growth
June 30, 1999 Composite Performance S&P 500(1)
1 Year ____% ____%
3 Years ____% ____%
5 Years ____% ____%
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
June 30, 1999 Balanced Intermediate S&P
Composite Govt./Corp. Bond 500
Performance Index; (1) (2)
1 Year ____% ____% ____%
3 Years ____% ____% ____%
5 Years ____% ____% ____%
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.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help
you understand the Funds' financial performance for the
period from June 25, 1998 (commencement of operations)
to May 31, 1999. Certain information reflects
financial results for a single Fund share. The total
returns in the table represent the rate that an
investor would have earned on an investment in the Fund
for the stated period (assuming reinvestment of all
dividends and distributions). This information has
been audited by PricewaterhouseCoopers LLP, whose
report, along with the Funds' financial statements, are
included in the Funds' annual report, which is
available upon request.
<PAGE>
Balanced Fund Growth Fund
Net asset value, beginning of period $ 10.00 $ 10.00
Income from investment operations:
Net investment income (loss) 0.18 (0.02)
Net realized and unrealized gain
(loss) on investments 0.68 1.48
Total from investment operations 0.86 1.46
Less:
Dividends from net investment income (0.17) (0.04)
Net asset value, end of period $ 10.69 $ 11.42
Total return(1) 8.66% 14.65%
Supplemental data and ratios:
Net assets, end of period $16,524,409 $6,503,740
Ratio of net expenses to average net assets:
Before expense reimbursement(2) 3.83% 6.12%
After expense reimbursement(2) 1.30% 1.50%
Ratio of net investment income to average net assets:
Before expense reimbursement(2) (0.80)% (5.22)%
After expense reimbursement(2) 1.73% (0.60)%
Portfolio turnover rate 16.17% 30.28%
(1) Not annualized.
(2) Annualized.
FUND MANAGEMENT
Adviser
Badgley, Phelps and Bell, Inc. (the "Adviser") is
the investment adviser to the Funds. The Funds have
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 Funds' Board of Directors. 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. As of August 31, 1999, the Adviser managed
approximately $_____ billion for individual and
institutional clients. Under the Investment Advisory
Agreement, the Funds compensate 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 ended May 31, 1999, the Adviser waived its
management fee and reimbursed the Funds' other expenses
so that the Growth Fund's total operating expenses (on
an annual basis) did not exceed 1.50% of its average
daily net assets and that the Balanced Fund's total
operating expenses (on an annual basis) did not exceed
1.30% of its average daily net assets. For the fiscal
year ending May 31, 2000, the Adviser has agreed to
continue 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
(on an annual basis) do not exceed 1.50% of its average
daily net assets and that the Balanced Fund's total
operating expenses (on an annual basis) 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
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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, the
Adviser is responsible for management of each Fund's
assets, as well as for portfolio transactions and
brokerage.
Portfolio Managers. The following individuals are
co-managers of the Funds:
Steven C. Phelps. President and a Director of the
Adviser, Mr. Phelps graduated Phi Beta Kappa and magna
cum laude from Williams College in 1983 with a degree
in political economy and was subsequently awarded a
Fulbright Scholarship at the University of Frankfurt,
Germany for research on policy issues relating to
international monetary coordination. Mr. Phelps joined
the Adviser in 1986 after working for two years with
PACCAR, Inc. as a finance analyst and as an independent
researcher on the economics of the transportation
industry. Mr. Phelps is a Chartered Financial Analyst
and a Chartered Investment Counselor.
Mitzi W. Carletti. Ms. Carletti received a
Bachelor of Arts degree with honors from the University
of Puget Sound in 1978. Prior to joining the Adviser
as a portfolio manager in 1995, Ms. Carletti worked as
a senior research analyst at Frank Russell Company, a
pension fund consulting firm, from 1988 until 1995, and
as a financial consultant with Merrill Lynch from 1979
to 1988.
Mark W. Broughton. Mr. Broughton earned a
Bachelor of Science degree in finance and a Masters of
Business Administration in finance and international
finance/business economics from the University of
Southern California in 1989 and 1995, respectively.
Prior to joining the Adviser in 1996 as a portfolio
manager, Mr. Broughton worked as a portfolio associate
and research analyst at Provident Investment Counsel
for over five years and as an account specialist at
State Street Research & Management for one and a half
years. Mr. Broughton is a Chartered Financial Analyst
and a Chartered Investment Counselor.
Custodian
Firstar Bank Milwaukee, N.A. ("Firstar Bank"), 777
East Wisconsin Avenue, Milwaukee, Wisconsin 53202 acts
as custodian of the Funds' assets.
Transfer Agent and Administrator
Firstar Mutual Fund Services, LCC ("Firstar"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202 acts as transfer agent for the Funds
(the "Transfer Agent") and as the Funds' administrator.
Distributor
Rafferty Capital Markets, Inc., 1311 Mamaroneck
Avenue, White Plains, New York 10605, a registered
broker-dealer and member of the National Association of
Securities Dealers, Inc., acts as distributor of each
Fund's shares (the "Distributor").
HOW TO PURCHASE SHARES
Shares of the Funds may be purchased at net asset
value (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. The
Transfer Agent may also accept purchase applications.
Purchase of Fund Shares
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
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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 Funds at
any time. The Funds will waive the minimums for
employees of the Adviser and their family members.
Shareholders will be given at least 30 days' notice of
any increase in the minimum dollar amount of subsequent
investments.
Net Asset Value
Shares of the Funds are sold on a continual basis
at 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 "Valuation of Fund Shares."
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:
By Mail By Overnight Courier
Firstar Mutual Fund Services, LLC Firstar Mutual Fund Services, LLC
P.O. Box 701 Third Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202
The Funds do 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 a Fund. 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 net asset value next
determined after receipt by a Fund of the dealer's
order to purchase shares. 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 a Fund as a result. Neither
cash nor third-party checks will be accepted. All
applications to purchase Fund shares are subject to
acceptance by a Fund and are not binding until so
accepted. The Funds reserve 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 Milwaukee, N.A.
ABA Number: 075000022
Credit: Firstar Mutual Fund Services, LLC
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 Funds are 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 the
Transfer Agent. 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
net asset value determined at the close of regular
trading on a given date, the Transfer Agent 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).
Purchasing Shares Through Financial Intermediaries
If you purchase shares through a financial
intermediary (such as a broker-dealer), certain
features of a Fund relating to such transactions may
not be available or may be modified. In addition,
certain operational policies of a Fund, including those
related to settlement and dividend accrual, may vary
from those applicable to direct shareholders of the
Fund and may vary among intermediaries. You should
consult your financial intermediary for more
information regarding these matters. Certain financial
intermediaries may charge you transaction fees for
their services. You will not be charged these fees
directly by a Fund if you purchase your Fund shares
directly from the Fund without the intervention of a
financial intermediary. Each Fund may, however,
compensate financial intermediaries for assistance
under the Funds' Distribution and Shareholder Servicing
Plan (i.e., Rule 12b-1 plan) or otherwise.
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 with a monthly minimum investment of
$250. To establish the AIP, complete the appropriate
section in the shareholder application. You should
consider your financial ability to continue in the AIP
until the minimum initial investment amount is met
because the Funds have the right to close an investor's
account for failure to reach the minimum initial
investment. For additional information on the AIP,
please see the SAI.
Individual Retirement Accounts
You may invest in a Fund by establishing a tax-
sheltered individual retirement account ("IRA"). The
Funds offer the Traditional IRA and Roth IRA. For
additional information on IRA options, please see the
SAI.
<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
You may request redemption of part or all of your
Fund shares at any time at the next determined net
asset value. See "Valuation of Fund Shares." No
redemption request will become effective until a
redemption request is received in proper form (as
described below) by the Transfer Agent. You should
contact the Transfer Agent for further information
concerning redemption of Fund shares. A Fund 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, a Fund
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 a Fund 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 Funds 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, you need only
furnish a written, unconditional request to redeem your
shares at net asset value to the Transfer Agent:
By Mail By Overnight Courier
Firstar Mutual Fund Services, LLC Firstar Mutual Fund Services, LLC
P.O. Box 701 Third Floor
Milwaukee, Wisconsin 53201-0701 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 Funds do 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 Funds.
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.
<PAGE>
Telephone Redemption
You may also redeem your shares 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, you must have previously
elected this option on your shareholder application and
the redemption proceeds must be mailed directly to you
or transmitted to your predesignated account via wire
or ACH transfer. Funds sent via ACH are automatically
credited to your account within three business days.
There is currently no charge for this service. To
change the designated account, send a written request
with signature(s) guaranteed to the Transfer Agent. To
change the address, call the Transfer Agent or send a
written request with signature(s) guaranteed to the
Transfer Agent. Additional documentation may be
requested from corporations, executors, administrators,
trustees, guardians, agents or attorneys-in-fact. No
telephone redemption requests will be allowed within 15
days of such a change. The Funds reserve the right to
limit the number of telephone redemptions you may make.
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 Funds
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 Funds reserve the right to refuse a
telephone redemption request if so advised.
Redeeming Shares Through Financial Intermediaries
If you redeem shares through a financial
intermediary (such as a broker-dealer), such financial
intermediary may charge you transaction fees for their
services. You will not be charged such fees if you
redeem Fund shares directly through a Fund without the
intervention of a financial intermediary.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan ("SWP") allows you
to make automatic withdrawals from your account at
regular intervals. 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 make a SWP payment, the remaining
amount will be redeemed and the SWP will be terminated.
Please see the SAI for more information.
Signature Guarantees
Signature guarantees are required for:
* redemption requests to be mailed or wired to a
person other than the registered owner(s) of the
shares;
* redemption requests to be mailed or wired to other
than the address that appears of record; and
* any redemption request if a change of address has
been received by the Funds 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
The Funds have established a program which permits
Fund shareholders to exchange Fund shares for shares of
any other Badgley Fund or for shares of the Firstar
Money Market Funds. Please see the SAI for more
information on the exchange privilege.
<PAGE>
VALUATION OF FUND SHARES
Net asset value is calculated by taking the 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. 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. Net asset value is not determined on days
the NYSE is closed. 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. 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. 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 Funds.
DISTRIBUTION AND SHAREHOLDER SERVICING PLAN
The Funds have adopted a plan pursuant to Rule 12b-
1 under the 1940 Act (the "12b-1 Plan"), which
authorizes it to pay the Distributor and certain
financial intermediaries (such as broker-dealers) who
assist in distributing Fund shares or who provide
shareholder services to Fund shareholders a
distribution and shareholder servicing fee of 0.25% of
each Fund's average daily net assets (computed on an
annual basis). The 12b-1 Plan has the effect of
increasing a Fund's expenses from what they would
otherwise be. Because Rule 12b-1 fees are paid out of
a Fund's net assets on an on-going basis, over time
these fees will increase the cost of your investment
and could cost long-term investors of a Fund more than
paying other types of sales charges. For additional
information on the 12b-1 Plan, please see the SAI.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT
For federal income tax purposes, all dividends
paid by the Funds and distributions of net realized
short-term capital gains are taxable as ordinary income
whether reinvested or received in cash unless you are
exempt from taxation or entitled to a tax deferral.
Distributions paid by a Fund from net realized long-
term capital gains, whether received in cash or
reinvested in additional shares, are taxable as a
capital gain. The capital gain holding period is
determined by the length of time the Fund has held the
security and not the length of time you have held
shares in the Fund. The Growth Fund expects that,
because of its investment objective, its distributions
will consist primarily of long-term capital gains. The
Balanced Fund expects that, because of its investment
objective, its distributions will consist primarily of
long-term capital gains and income. 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 Growth Fund intends to pay dividends from net
investment income annually, and the Balanced Fund
intends to pay dividends from net investment income
quarterly. The Funds intend 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).
<PAGE>
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 Funds with your correct
social security number or taxpayer identification
number, the Funds are required by federal law to
withhold federal income tax from your distributions and
redemption proceeds at a rate of 31%.
An exchange of Fund shares for shares pursuant to
the Funds' exchange privilege 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.
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,
Firstar and Firstar Bank. 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. However, there can be
no assurance that the computer systems of the companies
in which the Funds invest will be timely converted or
that the value of such investments will not be
adversely affected by the Year 2000 Issue.
<PAGE>
DIRECTORS CUSTODIAN
J. Kevin Callaghan Firstar Bank Milwaukee, N.A.
Steven C. Phelps 777 East Wisconsin Avenue
Frank S. Bayley Milwaukee, Wisconsin 53202
Madelyn B. Smith
Graham S. Anderson ADMINISTRATOR, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
PRINCIPAL OFFICERS
Firstar Mutual Fund Services, LLC
Otis P. Heald III (Tres), Third Floor
President 615 East Michigan Street
Lisa P. Guzman, Treasurer Milwaukee, Wisconsin 53202
and Secretary
INDEPENDENT ACCOUNTANTS
INVESTMENT ADVISER
PricewaterhouseCoopers LLP
Badgley, Phelps and Bell, Inc. 100 East Wisconsin Avenue, Suite 1500
1420 Fifth Avenue, Suite 4400 Milwaukee, Wisconsin 53202
Seattle, Washington 98101
LEGAL COUNSEL
DISTRIBUTOR
Godfrey & Kahn, S.C.
Rafferty Capital Markets, Inc. 780 North Water Street
1311 Mamaroneck Avenue Milwaukee, Wisconsin 53202
White Plains, New York 10605
The SAI contains additional information about the
Funds. Additional information about the Funds'
investments is contained in the Funds' annual and semi-
annual reports to shareholders. The Funds' annual
report provides a discussion of the market conditions
and investment strategies that significantly affected
the Funds' performance during the last fiscal year.
The Funds' SAI, which is incorporated by reference into
this Prospectus, annual reports and semi-annual reports
are available without charge upon request to the
address or toll-free telephone number noted on the
cover page of this Prospectus. These documents may
also be obtained from certain financial intermediaries,
including the Distributor, who purchase and sell Fund
shares. General inquiries regarding the Funds can be
directed to the Funds at the address and toll-free
telephone number on the cover page of this Prospectus.
Information about the Funds (including the SAI)
can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Please call the SEC
at 1-800-SEC-0330 for information relating to the
operation of the Public Reference Room. Reports and
other information about the Funds are available on the
SEC's Internet site at http://www.sec.gov or upon
payment of a duplicating fee, by writing the Public
Reference Room of the SEC, Washington, D.C. 20549-6009.
The Funds' 1940 Act File Number is 811-8769.
<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 Growth Fund (the "Growth
Fund") and the Badgley Balanced Fund (the "Balanced
Fund"), dated September 28, 1999. The Growth Fund and
the Balanced Fund are each a series of the Badgley
Funds, Inc. (the "Corporation").
A copy of the Prospectus is available without
charge upon request to the above-noted address or toll-
free telephone number.
The Funds' audited financial statements for the
period June 25, 1998 to May 31, 1999, are incorporated
herein by reference to the Funds' Annual Report, which
is available without charge upon request to the above-
noted address or toll-free telephone number.
This Statement of Additional Information is dated September 28, 1999.
<PAGE>
TABLE OF CONTENTS
Page No.
FUND ORGANIZATION 3
INVESTMENT RESTRICTIONS 3
IMPLEMENTATION OF INVESTMENT OBJECTIVES 4
DIRECTORS AND OFFICERS 21
PRINCIPAL SHAREHOLDERS 23
INVESTMENT ADVISER 23
FUND TRANSACTIONS AND BROKERAGE 24
CUSTODIAN 25
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 25
ADMINISTRATOR 25
DISTRIBUTOR AND PLAN OF DISTRIBUTION 26
PURCHASE, REDEMPTION, EXCHANGE AND PRICING OF SHARES 28
TAXATION OF THE FUNDS 31
PERFORMANCE INFORMATION 31
ADDITIONAL INFORMATION 32
INDEPENDENT ACCOUNTANTS 32
FINANCIAL STATEMENTS 33
APPENDIX A-1
In deciding whether to invest in the Funds, you
should rely on the information in this Statement of
Additional Information and related Prospectus. The
Funds have not authorized others to provide additional
information. The Funds have not authorized the use of
this Statement of Additional Information in any state
or jurisdiction in which such offering may not legally
be made.
<PAGE>
FUND ORGANIZATION
The Corporation is an open-end, diversified,
management investment company, commonly referred to as
a mutual fund. Each Fund is a series of common stock
of 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.
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 following are the Funds'
fundamental investment restrictions which cannot be
changed without the approval of a majority of a Fund's
outstanding voting securities. As used herein, a
"majority of a Fund's outstanding voting securities"
means the lesser of (i) 67% of the shares of common
stock of the Fund represented at a meeting at which
more than 50% of the outstanding shares are present, or
(ii) more than 50% of the outstanding shares of common
stock of the Fund.
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.
<PAGE>
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).
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.
2. Purchase securities on margin, except that the
Fund may obtain such short-term credits as are
necessary for the clearance of transactions; and
provided that margin deposits in connection with
futures contracts, options on futures contracts,
or other derivative instruments shall not
constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of
such investment, more than 10% of its net assets
would be invested in illiquid securities.
4. Purchase securities of other investment companies
except in compliance with the 1940 Act and
applicable state law.
5. Engage in futures or options on futures
transactions which are impermissible pursuant to
Rule 4.5 under the Commodity Exchange Act (the
"CEA") and, in accordance with Rule 4.5, will use
futures or options on futures transactions solely
for bona fide hedging transactions (within the
meaning of the CEA), provided, however, that the
Fund may, in addition to bona fide hedging
transactions, use futures and options on futures
transactions if the aggregate initial margin and
premiums required to establish such positions,
less the amount by which any such options
positions are in the money (within the meaning of
the CEA), do not exceed 5% of the Fund's net
assets.
6. Make any loans, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. Borrow money except from banks or through reverse
repurchase agreements or mortgage dollar rolls,
and will not purchase securities when bank
borrowings exceed 5% of its total assets.
Except for the fundamental investment limitations
listed above and each Fund's investment objective, the
Funds' other investment policies 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.
IMPLEMENTATION OF INVESTMENT OBJECTIVES
The following information supplements the
discussion of the Funds' investment objectives and
strategies described in the Prospectus under the
captions "Investment Objectives" and "How the Funds
Invest."
<PAGE>
Illiquid Securities
Each Fund may invest up to 10% of its respective
net assets in illiquid securities (i.e., securities
that are not readily marketable). For purposes of this
restriction, illiquid securities include, but are not
limited to, restricted securities (securities the
disposition of which is restricted under the federal
securities laws), 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. Each
Fund may invest up to 5% of its respective net assets
in such securities. 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 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.
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."
Changes in market interest rates affect the value
of fixed income securities. 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.
Changes in the credit quality of the issuer also
affect the value of fixed income securities. 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.
<PAGE>
Types of Fixed Income Securities. The Balanced
Fund may invest in the following types of fixed income securities:
* Corporate debt securities, including bonds, debentures and notes;
* U.S. government securities;
* Mortgage and asset-backed securities;
* Preferred stocks;
* Convertible securities;
* Commercial paper (including variable amount master demand notes);
* Bank obligations, such as certificates of
deposit, banker's acceptances and time
deposits of domestic and foreign banks,
domestic savings association and their
subsidiaries and branches (in amounts in
excess of the current $100,000 per account
insurance coverage provided by the Federal
Deposit Insurance Corporation); and
* Repurchase agreements.
Ratings. The Balanced Fund will limit investments
in fixed income securities to those that are rated at
the time of purchase as at least 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. Within the
investment grade categories, the Balanced Fund will
limit its purchases to the following criteria:
* U.S. government securities;
* Bonds or bank obligations rated in one of the
three highest categories (e.g., A- or higher by S&P);
* Short-term notes rated in one of the two
highest categories (e.g., SP-2 or higher by S&P);
* Commercial paper or short-term bank
obligations rated in one of the three highest
categories (e.g., 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. If a
security's rating falls below the above criteria, 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.
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 direct or indirect
participations in, or are secured by and payable from,
mortgage loans secured by real property, and include
single- and
<PAGE>
multi-class pass-through securities and
collateralized mortgage obligations. Such securities
may be issued or guaranteed by U.S. government agencies
or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally
originators and investors in mortgage loans, including
savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities
(collectively, "private lenders"). Mortgage-backed
securities issued by private lenders may be supported
by pools of mortgage loans or other mortgage-backed
securities that are guaranteed, directly or indirectly,
by the U.S. government or one of its agencies or
instrumentalities, or they may be issued without any
governmental guarantee of the underlying mortgage
assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural
characteristics similar to mortgage-backed securities.
Asset-backed debt obligations represent direct or
indirect participations in, or are secured by and
payable from, assets such as motor vehicle installment
sales contracts, other installment loan contracts, home
equity loans, leases of various types of property, and
receivables from credit card or other revolving credit
arrangements. The credit quality of most asset-backed
securities depends primarily on the credit quality of
the assets underlying such securities, how well the
entity issuing the security is insulated from the
credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit
enhancement of the securities. Payments or
distributions of principal and interest on asset-backed
debt obligations may be supported by non-governmental
credit enhancements including letters of credit,
reserve funds, overcollateralization, and guarantees by
third parties. The market for privately issued asset-
backed debt obligations is smaller and less liquid than
the market for government sponsored mortgage-backed
securities.
The rate of principal payment on mortgage- and
asset-backed securities generally depends on the rate
of principal payments received on the underlying assets
which in turn may be effected by a variety of economic
and other factors. As a result, the yield on any
mortgage- and asset-backed security is difficult to
predict with precision and actual yield to maturity may
be more or less than the anticipated yield to maturity.
The yield characteristics of mortgage- and asset-backed
securities differ from those of traditional debt
securities. Among the principal differences are that
interest and principal payments are made more
frequently on mortgage- and asset-backed securities,
usually 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.
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
<PAGE>
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.
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 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
<PAGE>
or other credit support arrangement. 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 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.
Temporary Strategies
Prior to investing the proceeds from sale of Fund
shares and to meet ordinary daily cash needs, the
Adviser may hold cash and/or invest all or a portion of
the Fund's 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.
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.
<PAGE>
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.
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.
<PAGE>
(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.
(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
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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. 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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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 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 up to 15% of its net assets
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
<PAGE>
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.
Investments in securities of foreign issuers
involve risks which are in addition to the usual risks
inherent in domestic investments. In many countries
there is less publicly available information about
issuers than is available in the reports and ratings
published about companies in the United States.
Additionally, foreign countries are not subject to
uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investments
include expropriation; confiscatory taxation;
withholding taxes on dividends or interest; less
extensive regulation of foreign brokers, securities
markets, and issuers; costs incurred in conversions
between currencies; possible delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
may be higher than those 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.
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.
High-Yield (High-Risk) Securities
In General. The Balanced Fund will invest in
fixed income securities rated at the time of purchase
as at lease investment grade by at least one nationally
recognized statistical rating organization ("NRSROs"),
such as S&P or Moody's. If a security's rating falls
below the ratings criteria set forth in the Prospectus,
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. Non-
investment grade debt obligations ("lower-quality
securities") include (1) bonds rated as low as C by
S&P, Moody's and comparable ratings of other NRSROs;
(2) commercial paper rated as low as C by S&P, Not
Prime by Moody's and comparable ratings of other
NRSROs; and (3) unrated debt obligations of comparable
quality. Lower-quality securities, while generally
offering higher yields than investment grade securities
with similar maturities, involve greater risks,
including the possibility of default or bankruptcy.
They are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and
repay principal. The special risk considerations in
<PAGE>
connection with investments in these securities are
discussed below. Refer to the Appendix for a
description of the securities ratings.
Effect of Interest Rates and Economic Changes.
The lower-quality and comparable unrated security
market is relatively new and its growth has paralleled
a long economic expansion. As a result, it is not
clear how this market may withstand a prolonged
recession or economic downturn. Such conditions could
severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically
experience appreciation when interest rates decline and
depreciation when interest rates rise. The market
value of lower-quality and comparable unrated
securities tend to reflect individual corporate
developments to a greater extent than do higher rated
securities. As a result, they generally involve more
credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained
period of rising interest rates, highly leveraged
issuers of lower-quality and comparable unrated
securities may experience financial stress and may not
have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet
specific projected business forecasts or the
unavailability of additional financing. The risk of
loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated
securities because such securities are generally
unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower-quality
or comparable unrated security defaulted, the Balanced
Fund might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also
generally result in increased volatility in the market
prices of these securities and thus in the Balanced
Fund's net asset value.
As previously stated, the value of a lower-quality
or comparable unrated security will decrease in a
rising interest rate market and accordingly, so will
the Balanced Fund's net asset value. If the Balanced
Fund experiences unexpected net redemptions in such a
market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment
merits. Due to the limited liquidity of lower-quality
and comparable unrated securities (discussed below),
the Balanced Fund may be forced to liquidate these
securities as a substantial discount. Any such
liquidation would force the Balanced Fund to sell the
more liquid portion of its portfolio.
Payment Expectations. Lower-quality and
comparable unrated securities typically contain
redemption, call or prepayment provisions which permit
the issuer of such securities containing such
provisions to, at its discretion, redeem the
securities. During periods of falling interest rates,
issuers of these securities are likely to redeem or
prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent
an issuer is able to refinance the securities, or
otherwise redeem them, the Balanced Fund may have to
replace the securities with a lower yielding security,
which would result in a lower return for the Balanced
Fund.
Credit Ratings. Credit ratings issued by credit
rating agencies are designed to evaluate the safety of
principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully
reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy
or in the condition of the issuer that affect the
market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and
comparable unrated obligations will be more dependent
on the Adviser's credit analysis than would be the case
with investments in investment-grade debt obligations.
The Adviser employs its own credit research and
analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend
of earnings. The Adviser continually monitors the
investments in the Balanced Fund's portfolio and
carefully evaluates whether to dispose of or to retain
lower-quality and comparable unrated securities whose
credit ratings or credit quality may have changed.
Liquidity and Valuation. The Balanced Fund may
have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a
thin trading market for such securities. Because not
all dealers maintain markets in all lower-quality and
comparable unrated securities, there is no established
retail secondary market for many of these securities.
The Balanced Fund anticipates that such securities
could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary
trading market does exist, it is generally not as
liquid as the secondary market for higher-rated
securities. The lack of a liquid secondary market may
have an adverse impact on
<PAGE>
the market price of the
security. As a result, the Balanced Fund's asset value
and ability to dispose of particular securities, when
necessary to meet the Balanced Fund's liquidity needs
or in response to a specific economic event, may be
impacted. The lack of a liquid secondary market for
certain securities may also make it more difficult for
the Balanced Fund to obtain accurate market quotations
for purposes of valuing the Balanced Fund's portfolio.
Market quotations are generally available on many lower-
quality and comparable unrated issues only from a
limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for
actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to
increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and
liquidity of lower-quality and comparable unrated
securities, especially in a thinly traded market.
Legislation. Legislation may be adopted, from
time to time, designed to limit the use of certain
lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if additional
legislation is enacted or proposed, it could have a
material affect on the value of these securities and
the existence of a secondary trading market for the
securities.
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
Under the laws of the State of Maryland, the Board
of Directors of the Corporation is responsible for
managing its business and affairs. 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, 41 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, 38 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.
<PAGE>
Frank S. Bayley, a Director of the Corporation since June 1998.
Mr. Bayley, 60 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 since June 1998.
Ms. Smith, 68 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.
Graham S. Anderson, a Director of the Corporation since July 1999.
Mr. Anderson, 66 years old, received a Bachelor of
Arts from the University of Washington. Mr. Anderson
has served as a director of Tully's Coffee Co. since
1992. From 1987 until 1994, Mr. Anderson served as the
Chairman and Chief Executive Officer of Pettit-Morry
Co., an insurance broker, and prior thereto served as
President and Chief Executive Officer of Pettit-Morry
Co. In addition, Mr. Anderson served as a director of
Marker International, a ski equipment manufacturer,
from 1985 to 1999, director of Commerce Bank
Corporation from 1991 to 1999, director of Gray's
Harbor Paper Company from 1992 to 1998 and director of
Acordia Northwest, Inc., the successor to Pettit-Morry
Co., until 1998. Mr. Anderson was also the Chairman of
the National Association of Insurance Brokers and
Alberg Holding Co.
Otis P. Heald III (Tres), President of the Corporation.
Mr. Heald, 34 years old, earned a Bachelor of
Science degree in finance and real estate from San
Francisco State University in 1989 and a Master's of
Business Administration in finance from the University
of Southern California in 1995. Prior to joining the
Adviser as a portfolio manager in 1996, Mr. Heald was a
portfolio manager and securities analyst at Wells
Fargo/First Interstate Capital Management. Mr. Heald
worked as a credit analyst and commercial lender for
four years before entering the investment management
industry. Mr. Heald is a Chartered Financial Analyst.
Lisa P. Guzman, Treasurer and Secretary of the Corporation.
Ms. Guzman, 44 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. The
address for Mr. Anderson is Graco Investments Inc., 520
Pike Street, 20th Floor, Seattle, Washington 98101.
As of August 31, 1999, officers and directors of
the Corporation beneficially owned ______% of the
Growth Fund's then outstanding shares and _____% 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 compensation from any of the Funds for
serving as directors or officers.
The following table provides information relating
to compensation paid to directors of the Corporation
for their services as such for the period June 25, 1998
to May 31, 1999:
<PAGE>
Name Cash Other Total
Compensation(1) Compensation
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
Graham S. Anderson(2) $ 0 $0 $ 0
All directors $2,000 $0 $2,000
as a group
(5 persons)
____________________
(1) Each director who is not deemed an "interested
person" as defined in the 1940 Act, receives $250 for
each Board of Directors meeting attended by such person
and reasonable expenses incurred in connection
therewith. The Board held four meetings during fiscal
1999.
(2) Mr. Anderson was elected to the Board of Directors
in July 1999. Accordingly, he did not receive any
compensation from any of the Funds during fiscal 1999.
PRINCIPAL SHAREHOLDERS
As of August 31, 1999, the following persons owned
of record or are known by the Corporation to own of
record or beneficially 5% or more of the outstanding
shares of each Fund:
Name and Address Fund No. Shares Percentage
[Update]
Based on the foregoing, as of August 31, 1999,
_______________________________ 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.
<PAGE>
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.
For the fiscal year ended May 31, 1999, the
Adviser waived its management fee and reimbursed the
Funds' other expenses so that the Growth Fund's total
operating expenses (on an annual basis) did not exceed
1.50% of its average daily net assets and that the
Balanced Fund's total operating expenses (on an annual
basis) did not exceed 1.30% of its average daily net
assets. The Adviser has agreed that for the fiscal
year ending May 31, 2000, the Adviser will continue to
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 extend 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. For the period June
25, 1998 to May 31, 1999, the Funds did not pay a
management fee to the Adviser because the Adviser
waived its entire management fee. If the Adviser had
not agreed to waive its management fee, the Adviser
would have received $31,437 and $53,223 from the Growth
Fund and Balanced Fund, respectively, for its
investment advisory services.
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser, in its
capacity as portfolio manager, is responsible for
decisions to buy and sell securities for the Funds and
for the placement of the Funds' securities business,
the negotiation of the commissions to be paid on such
transactions and the allocation of portfolio brokerage
business. The Adviser seeks to obtain the best
execution at the best security price available with
respect to each transaction. The best price to the
Funds means the best net price without regard to the
mix between purchase or sale price and commission, if
any. While the Adviser seeks reasonably competitive
commission rates, the Funds do not necessarily pay the
lowest available commission. Brokerage will not be
allocated based on the sale of a Fund's shares.
Section 28(e) of the Securities Exchange Act of
1934, as amended, ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement, and custody).
In selecting brokers or dealers, the Adviser
considers investment and market information and other
research, such as economic, securities and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
the Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value
of the research information and brokerage services
provided by such broker or dealer to the Funds. The
Adviser believes that the research information received
in this manner provides the Funds with benefits by
supplementing the research otherwise available to the
Funds. Such higher commissions will not be paid by the
Funds unless (a) the Adviser determines in good faith
that the amount is reasonable in relation to the
services in terms of the particular
<PAGE>
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 aggregate amount of brokerage commissions paid
by the Growth Fund and the Balanced Fund for the period
June 25, 1998 to May 31, 1999 were $8,180 and $10,395,
respectively. For the period June 25, 1998 to May 31,
1999, the Funds did not pay brokerage commissions with
respect to transactions for which research services
were provided. During the period June 25, 1998 to May
31, 1999, the Funds did not acquire any stock of their
regular brokers or dealers.
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.
CUSTODIAN
As custodian of the Funds' assets, Firstar Bank
Milwaukee, N.A. ("Firstar Bank"), 777 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202, has custody of all
securities and cash of each Fund, delivers and receives
payment for portfolio securities sold, receives and
pays for portfolio securities purchased, collects
income from investments and performs other duties, all
as directed by the officers of the Corporation.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar Mutual Fund Services, LLC ("Firstar"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, 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.
From time to time, the Corporation, on behalf of
the Funds, directly or indirectly through arrangements
with the Adviser, the Distributor (as defined below) or
Firstar, may pay amounts to third parties that provide
transfer agent type services and other administrative
services relating to the Funds to persons who
beneficially have interests in a Fund, such as
participants in 401(k) plans. These services may
include, among other things, sub-accounting services,
transfer agent type activities, answering inquiries
relating to the Funds, transmitting proxy statements,
annual reports, updated prospectuses, other
communications regarding the Funds and related services
as Funds or beneficial owners may reasonably request.
In such cases, the Funds will not pay fees based on the
number of beneficial owners at a rate that is greater
than the rate the Funds are currently paying Firstar
for providing these services to the Funds' shareholders
(i.e., $14 per account plus expenses).
ADMINISTRATOR
Pursuant to a Fund Administration Servicing
Agreement and a Fund Accounting Servicing Agreement,
Firstar also performs accounting and certain compliance
and tax reporting functions for the Corporation. For
these services,
<PAGE>
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%
For the period June 25, 1998 to May 31, 1999,
Firstar received $27,501 and $27,501 from the Growth
Fund and the Balanced Fund, respectively, under the
Fund Administration Servicing Agreement, and $15,519.54
and $17,762.54 from the Growth Fund and the Balanced
Fund, respectively, under the Fund Accounting Servicing
Agreement.
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated June 23, 1998
(the "Distribution Agreement"), Rafferty Capital
Markets, Inc. (the "Distributor"), 1311 Mamaroneck
Avenue, White Plains, New York 10605, 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 receives from
the Corporation out-of-pocket expenses plus an annual
fee equal to the greater of (i) $18,000 or (ii) .01% of
each Fund's net assets, computed daily and payable
monthly. 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 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
<PAGE>
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.
Interests of Certain Persons
With the exception of the Adviser, in its capacity
as the Funds' investment adviser, and the Distributor,
in its capacity as principal underwriter of Fund
shares, no "interested person" of the Funds, as defined
in the 1940 Act, and no director of the Corporation who
is not an "interested person" has or had a direct or
indirect financial interest in the 12b-1 Plan or any
Related Agreement.
Anticipated Benefits to the Funds
The Board of Directors considered various factors
in connection with its decision to approve the 12b-1
Plan, including: (a) the nature and causes of the
circumstances which make implementation of the 12b-1
Plan necessary and appropriate; (b) the way in which
the 12b-1 Plan would address those circumstances,
including the nature and potential amount of
expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans
or pricing structures; (e) the relationship of the
12b-1 Plan to other distribution efforts of the Funds;
and (f) the possible benefits of the 12b-1 Plan to any
other person relative to those of the Funds.
Based upon its review of the foregoing factors and
the material presented to it, and in light of its
fiduciary duties under relevant state law and the 1940
Act, the Board of Directors determined, in the exercise
of its business judgment, that the 12b-1 Plan was
reasonably likely to benefit the Funds and their
respective shareholders in at least one or several
potential ways. Specifically, the Board concluded that
the Distributor and any Recipients operating under
Related Agreements would have little or no incentive to
incur promotional expenses on behalf of a Fund if a
12b-1 Plan were not in place to reimburse them, thus
making the adoption of such 12b-1 Plan important to the
initial success and thereafter, continued viability of
the Funds. In addition, the Board determined that the
payment of distribution fees to these persons should
motivate them to provide an enhanced level of service
to Fund shareholders, which would, of course, benefit
such shareholders. Finally, the adoption of the 12b-1
Plan would help to increase net assets under management
in a relatively short amount of time, given the
marketing efforts on the part of the Distributor and
Recipients to sell Fund shares, which should result in
certain economies of scale.
While there is no assurance that the expenditure
of Fund assets to finance distribution of Fund shares
will have the anticipated results, the Board of
Directors believes there is a reasonable likelihood
that one or more of such benefits will result, and
since the Board will be in a position to monitor the
distribution and shareholder servicing expenses of the
Funds, it will be able to evaluate the benefit of such
expenditures in deciding whether to continue the 12b-1
Plan.
Amounts Expensed Under the Plan
For the period June 25, 1998 to May 31, 1999, the
Growth Fund incurred expenses of $13,599.85 under the 12b-1
Plan. Of this amount, $704.32 was spent on
advertising, $84.58 on printing and mailing
prospectuses to other than current shareholders and
$5,589.82 was spent on compensation to broker-dealers.
The Distributor received $5,147.16 of the amounts
incurred under the 12b-1 Plan with respect to the
Growth Fund. For the same period, the Balanced Fund
incurred expenses of $20,973.61 under the 12b-1 Plan. Of
this amount, $1,721.87 was spent on advertising,
$69.66 on printing and mailing to other than current
shareholders and $6,067.27 was spent on compensation to
broker-dealers. The Distributor received $11,040.84 of
the amounts incurred under the 12b-1 Plan with respect
to the Balanced Fund.
<PAGE>
PURCHASE, REDEMPTION, EXCHANGE AND PRICING OF SHARES
Financial Intermediaries
If you purchase or redeem shares of a Fund through
a financial intermediary (such as a broker-dealer),
certain features of the Fund relating to such
transactions may not be available or may be modified.
In addition, certain operational policies of a Fund,
including those related to settlement and dividend
accrual, may vary from those applicable to direct
shareholders of a Fund and may vary among
intermediaries. You should consult your financial
intermediary for more information regarding these
matters. Refer to "Transfer Agent and Dividend-
Disbursing Agent" for information regarding certain
fees paid by the Corporation to financial
intermediaries. In addition, financial intermediaries
may receive compensation pursuant to the 12b-1 Plan
under a Related Agreement and may receive additional
compensation in excess of such amounts from the
Adviser. Certain financial intermediaries may charge
you an advisory, transaction or other fee for their
services. You will not be charged for such fees if you
purchase or redeem your Fund shares directly from a
Fund without the intervention of a financial
intermediary.
Automatic Investment Plan
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 with a monthly minimum investment of
$250. 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.
Individual Retirement Accounts
In addition to purchasing Fund shares as described
in the Prospectus under "How to Purchase Shares,"
individuals may establish their own tax-sheltered IRAs.
The Funds offer 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
<PAGE>
calendar year in which the investor attains age 70-1/2.
Failure to begin distributions by this date (or
distributions that do not equal certain minimum
thresholds) may result in adverse tax consequences.
Roth IRA. In a Roth IRA (sometimes known as the
American Dream IRA), amounts contributed to the IRA are
taxed at the time of contribution, but distributions
from the IRA are not subject to tax if the investor has
held the IRA for certain minimum periods of time
(generally, until age 59-1/2). Investors whose income
exceeds certain limits are ineligible to contribute to
a Roth IRA. Distributions that do not satisfy the
requirements for tax-free withdrawal are subject to
income taxes (and possibly penalty taxes) to the extent
that the distribution exceeds the investor's
contributions to the IRA. The minimum distribution
rules applicable to Traditional IRAs do not apply
during the lifetime of the investor. Following the
death of the investor, certain minimum distribution
rules apply.
For Traditional and Roth IRAs, the maximum annual
contribution generally is equal to the lesser of $2,000
or 100% of the investor's compensation (earned income).
An individual may also contribute to a Traditional IRA
or Roth IRA on behalf of his or her spouse provided
that the individual has sufficient compensation (earned
income). Contributions to a Traditional IRA reduce the
allowable contributions under a Roth IRA, and
contributions to a Roth IRA reduce the allowable
contribution to a Traditional IRA.
Simplified Employee Pension Plan. A Traditional
IRA may also be used in conjunction with a Simplified
Employee Pension Plan ("SEP-IRA"). A SEP-IRA is
established through execution of Form 5305-SEP together
with a Traditional IRA established for each eligible
employee. Generally, a SEP-IRA allows an employer
(including a self-employed individual) to purchase
shares with tax deductible contributions not exceeding
annually for any one participant 15% of compensation
(disregarding for this purpose compensation in excess
of $160,000 per year). The $160,000 compensation limit
applies for 1999 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 applies for 1999 and 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.
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
<PAGE>
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.
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 the following
address:
By Mail In Person or By Overnight Mail
Firstar Mutual Fund Services, LLC Firstar Mutual Fund Services, LLC
P.O. Box 701 Third Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202
To effect a telephone exchange, you may call
1-877-BADGLEY (1-877-223-4539). Exchange requests may
be subject to limitations, including those relating to
frequency, that may be established from time to time to
ensure that such exchanges are not disadvantageous to
the Funds or their investors. The Corporation reserves
the right to modify or terminate the exchange privilege
upon 60 days' written notice to each shareholder prior
to the modification or termination taking effect. The
exchange privilege is only available in states where
the securities are registered.
Money Market Exchange. As a service to our
shareholders, the Corporation has established a program
whereby our shareholders can exchange shares of any one
of the Funds for shares of the Firstar Money Market
Funds (the "Firstar Funds"). Exchange requests are
available for exchanges of $1,000 or more. The Firstar
Funds are no-load money market funds managed by an
affiliate of Firstar. The Firstar Funds are unrelated
to the Corporation or any of the Funds. However, the
Distributor may be compensated by the Firstar Funds for
servicing and related services provided in connection
with exchanges made by shareholders of the Funds. This
exchange privilege is a convenient way to buy shares in
money market funds in order to respond to changes in
your goals or in market conditions. Before exchanging
into the Firstar Funds, please read the applicable
prospectus, which may be obtained by calling 1-877-
BADGLEY (1-877-223-4539). As noted above, there is no
charge for written exchange requests. Firstar will,
however, charge a $5.00 fee for each exchange
transaction that is executed via the telephone.
An exchange from one Fund to another, including
the Firstar Funds, is treated the same as an ordinary
sale and purchase for federal income tax purposes and
you will realize a capital gain or loss. An exchange
is not a tax-free transaction.
Pricing of Shares
Shares of the Funds are sold on a continual basis
at the net asset value per share next computed
following receipt of an order in proper form by a
dealer, the Distributor or Firstar, the Funds' transfer
agent.
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 New York Stock Exchange
(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
<PAGE>
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. The
net asset value is calculated by taking the 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 the 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. 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.
TAXATION OF THE FUNDS
Each Fund intends to qualify annually as a
"regulated investment company" under Subchapter M of
the Code, and, if so qualified, will not be liable for
federal income taxes to the extent earnings are
distributed to shareholders on a timely basis. In the
event a Fund fails to qualify as a "regulated
investment company," it will be treated as a regular
corporation for federal income tax purposes.
Accordingly, the Fund would be subject to federal
income taxes and any distributions that it makes would
be taxable and non-deductible by the Fund. This would
increase the cost of investing in the Fund for
shareholders and would make it more economical for
shareholders to invest directly in securities held by
the Fund instead of investing indirectly in such
securities through the Fund.
PERFORMANCE INFORMATION
The Funds' historical performance or return may be
shown in the form of various performance figures. The
Funds' performance figures are based upon historical
results and are not necessarily representative of
future performance. Factors affecting the Funds'
performance include general market conditions,
operating expenses, and investment management.
Total Return
The average annual total return of each Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the stated periods
at the end of the stated periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in a Fund's shares on the first
day of the period and computing the "ending value" of
that investment at the end of the period. The total
return percentage is then determined by subtracting the
initial investment from the ending value and dividing
the remainder by the initial investment and expressing
the result as a percentage. The
<PAGE>
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.
The total returns for the Growth Fund and the
Balanced Fund for the period June 25, 1998 to May 31,
1999 were 14.65% and 8.66%, respectively.
Comparisons
From time to time, in marketing and other Fund
literature, the Funds' performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives, and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Funds will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Funds' performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.
("Morningstar"), which ranks funds on the basis of
historical risk and total return. Morningstar's
rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a
weighted average for 3, 5 and 10 year periods.
Rankings are not absolute or necessarily predictive of
future performance.
Evaluations of Fund performance made by
independent sources may also be used in advertisements
concerning the Funds, including reprints of or
selections from, editorials or articles about the
Funds. Sources for Fund performance and articles about
the Funds may include publications such as Money,
Forbes, Kiplinger's, Financial World, Business Week,
U.S. News and World Report, the Wall Street Journal,
Barron's and a variety of investment newsletters.
The Funds may compare their performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index, the Russell 2500
Index and the Lehman Aggregate Bond Index. There are
differences and similarities between the investments
that the Funds may purchase for their respective
portfolios and the investments measured by these
indices.
ADDITIONAL INFORMATION
From time to time, in marketing and other Fund
literature, the Funds may quote founders, officers,
directors and other employees of the Adviser, such as a
quote from Charles H. Badgley who said, "Success in any
endeavor is best achieved when goals are defined and
strategy is well planned. This is especially true with
money management."
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin
Avenue, Suite 1500, Milwaukee, Wisconsin 53202,
independent accountants for the Funds, audit and report
on the Funds' financial statements.
<PAGE>
FINANCIAL STATEMENTS
The following audited financial statements of each
of the Funds are incorporated herein by reference to
the Funds' Annual Report for the period June 25, 1998
to May 31, 1999, as filed with the Securities and
Exchange Commission on July ____, 1999:
(a) Report of Independent Accountants.
(b) Schedule of Investments as of May 31, 1999.
(c) Statement of Assets and Liabilities as of May 31, 1999.
(d) Statement of Operations for the period June 25,
1998 to May 31, 1999.
(e) Statement of Changes in Net Assets for the period
June 25, 1998 to May 31, 1999.
(f) Financial Highlights for the period June 25, 1998
to May 31, 1999.
(g) Notes to the Financial Statements.
<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, High default risk. Default is a
C 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 Default. Securities are not
and D meeting current obligations and are
extremely speculative. `DDD' designates
the highest potential for recovery of
amounts outstanding on any securities
involved. For U.S. corporates, for
example, `DD' indicates expected
recovery of 50% - 90% of such
outstandings, and `D' the lowest
recovery potential, i.e. below 50%.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of `BBB-` and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the
<PAGE>
likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk factors are
negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
AA strong. Risk is modest but may
AA- vary slightly from time to time because of
economic conditions.
A+ Protection factors are average but adequate.
A However, risk factors are more
A- variable and greater in periods of economic stress.
BBB+ Below-average protection factors but still
BBB considered sufficient for prudent
BBB- investment. Considerable variability in risk
during economic cycles.
BB+ Below investment grade but deemed likely to
BB meet obligations when due.
BB- Present or prospective financial protection
factors fluctuate according to
industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk
B that obligations will not be met
B- when due. Financial protection factors will
fluctuate widely according to
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 23. Exhibits
(a) Registrant's Articles of Incorporation (1)
(b) Registrant's By-Laws (1)
(c) None
(d) Investment Advisory Agreement
(e) Distribution Agreement with Rafferty Capital
Markets, Inc.
(f) None
(g) Custodian Servicing Agreement with Firstar Trust
Company
(h.1) Transfer Agent Servicing Agreement with Firstar Trust Company
(h.2) Fund Administration Servicing Agreement with Firstar Trust Company
(h.3) Fund Accounting Servicing Agreement with Firstar Trust Company
(h.4) Fulfillment Servicing Agreement with Firstar Trust Company
(h.5) Expense Cap/Reimbursement Agreement
(i) Opinion and Consent of Godfrey & Kahn, S.C.(2)
(j) Consent of PricewaterhouseCoopers LLP*
(k) None
(l.1) Subscription Agreement with Mr. Callaghan(2)
(l.2) Subscription Agreement with Mr. Phelps(2)
(m.1) Rule 12b-1 Distribution and Shareholder Servicing Plan
(m.2) Form of 12b-1 Related Agreement
(n) Financial Data Schedule(3)
(o) None
______________
(1) Incorporated by reference to Registrant's Form
N-1A as filed with the Commission on April 30, 1998.
(2) Incorporated by reference to Registrant's Pre-
Effective Amendment No. 1 as filed with the Commission
on June 11, 1998.
(3) Incorporated by reference to Registrant's Annual
Report for the period June 25, 1998 to May 31, 1999, as
filed with the Commission on July ____, 1999.
* To be filed by amendment.
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
Registrant neither controls any person nor is
under common control with any other person.
Item 25. 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 26. 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 "Directors and
Officers" in the SAI.
Item 27. Principal Underwriters
(a) The Distributor also acts as distributor for
Kirr, Marbach Partners Funds, Inc., Bearguard
Funds, Inc., The Home State Funds Group,
Potomac Funds, Brazos Mutual Funds, Bremer
Investment Funds, Inc., Golf Associated Fund,
Leuthold Funds, Inc. and Texas Capital Value
Funds, Inc..
(b) The principal business address of Rafferty
Capital Markets, Inc. ("Rafferty"), the
Registrant's principal underwriter, is 1311
Mamaroneck Avenue, White Plains, New York
10605. The following information relates to
each director and officer of Rafferty:
Positions Positions and
And Offices 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.
<PAGE>
Item 28. 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 Bank Milwaukee,
N.A., 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, relating to its function as custodian, and
Firstar Mutual Fund Services, LLC, Third Floor, 615
East Michigan Street, Milwaukee, Wisconsin 53202,
relating to its function as transfer agent,
administrator and fund accountant.
Item 29. Management Services
All management-related service contracts entered
into by Registrant are discussed in Parts A and B of
this Registration Statement.
Item 30. 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 Post-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 29th day of July, 1999.
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 Post-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 July 29, 1999
- ----------------------
Otis P. Heald III
/s/ Lisa P. Guzman Treasurer and Secretary July 29, 1999
- ------------------
Lisa P. Guzman
/s/ J. Kevin Callaghan Director and Co-Chairman July 29, 1999
- ----------------------
J. Kevin Callaghan
/s/ Steven C. Phelps Director and Co-Chairman July 29, 1999
- ----------------------
Steven C. Phelps
/s/ Frank S. Bayley Director July 29, 1999
- --------------------
Frank S. Bayley
/s/ Madelyn B. Smith Director July 29, 1999
- --------------------
Madelyn B. Smith
/s/ Graham S. Anderson Director July 29, 1999
- ----------------------
Graham S. Anderson
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(a) Registrant's Articles of Incorporation (1)
(b) Registrant's By-Laws (1)
(c) None
(d) Investment Advisory Agreement
(e) Distribution Agreement with Rafferty Capital Markets, Inc.
(f) None
(g) Custodian Servicing Agreement with Firstar Trust Company
(h.1) Transfer Agent Servicing Agreement with Firstar Trust Company
(h.2) Fund Administration Servicing Agreement with Firstar Trust Company
(h.3) Fund Accounting Servicing Agreement with Firstar Trust Company
(h.4) Fulfillment Servicing Agreement with Firstar Trust Company
(h.5) Expense Cap/Reimbursement Agreement
(i) Opinion and Consent of Godfrey & Kahn, S.C.(2)
(j) Consent of PricewaterhouseCoopers LLP*
(k) None
(l.1) Subscription Agreement with Mr. Callaghan(2)
(l.2) Subscription Agreement with Mr. Phelps(2)
(m.1) Rule 12b-1 Distribution and Shareholder Servicing Plan
(m.2) Form of 12b-1 Related Agreement
(n) Financial Data Schedule(3)
(o) None
___________________
(1) Incorporated by reference to Registrant's Form N-
1A as filed with the Commission on April 30, 1998.
(2) Incorporated by reference to Registrant's Pre-
Effective Amendment No. 1 as filed with the Commission
on June 11, 1998.
(3) Incorporated by reference to Registrant's Annual
Report for the period June 25, 1998 to May 31, 1999, as
filed with the Commission on July ____, 1999.
* To be filed by amendment.
Exhibit d
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
<PAGE>
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
<PAGE>
(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 Exhibits A and 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 Exhibits A and 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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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: /s/ Steven C. Phelps
-------------------------------
Steven C. Phelps, President
The Corporation:
BADGLEY FUNDS, INC.
By: /s/ Otis P. Heald III
-------------------------------
Otis P. Heald III, President
<PAGE>
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: /s/ Steven C. Phelps
------------------------------
Steven C. Phelps, President
The Corporation:
BADGLEY FUNDS, INC.
By: /s/ Otis P. Heald III
-----------------------------
Otis P. Heald III, President
Exhibit e
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.
<PAGE>
(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").
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
/s/ Lisa P. Guzman By: /s/ Otis P. Heald III
-------------------- -------------------------
ATTEST: RAFFERTY CAPITAL MARKETS, INC.
/s/ Brendan Moyna By: /s/ Thomas A. Mulrooney
-------------------- --------------------------
<PAGE>
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
<PAGE>
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 g
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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: /s/ Otis P. Heald III By: /s/ Joseph Neuberger
------------------------- -------------------------
Attest: /s/ Lisa P. Guzman Attest: /s/ Christine M. Radonski
--------------------- ------------------------------
<PAGE>
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 h.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:
<PAGE>
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;
<PAGE>
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;
<PAGE>
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.
<PAGE>
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.
<PAGE>
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:
<PAGE>
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: /s/ Otis P. Heald III By: /s/ Joseph Neuberger
------------------------- ---------------------------
Attest: /s/ Lisa P. Guzman Attest: /s/ Christine M. Radonski
--------------------- ---------------------------
<PAGE>
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 Microfilm/fiche of records
approval)
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)
<PAGE>
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 h.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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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: /s/ Otis P. Heald III By: /s/ Joseph Neuberger
---------------------- -----------------------
Attest: /s/ Lisa P. Guzman Attest: /s/ Christine M. Radonski
------------------- ---------------------------
<PAGE>
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 h.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
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<PAGE>
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: /s/ Otis P. Heald III By: /s/ Joseph Neuberger
--------------------- ---------------------
Attest: /s/ Lisa P. Guzman Attest: /s/ Christine M. Radonski
------------------- ---------------------------
<PAGE>
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 h.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.
<PAGE>
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
<PAGE>
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: /s/ Otis P. Heald III By: /s/ Joseph Neuberger
--------------------- -----------------------
Attest: /s/ Lisa P. Guzman Attest: /s/ Christine M. Radonski
-------------------- ---------------------------
BADGLEY, PHELPS AND BELL, INC. RAFFERTY CAPITAL MARKETS, INC.
By: /s/ Steven C. Phelps By: /s/ Thomas A. Mulrooney
----------------------- --------------------------
Attest: /s/ Lisa. P. Guzman Attest: /s/ Brendan Moyna
--------------------- ------------------------
<PAGE>
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.
Exhibit h.5
EXPENSE CAP/REIMBURSEMENT AGREEMENT
This Agreement is entered into as of the 30th day
of June, 1999, between Badgley, Phelps and Bell, Inc.
(the "Adviser") and Badgley Funds, Inc. (the "Company")
on behalf of the Badgley Growth Fund (the "Growth
Fund") and the Badgley Balanced Fund (the "Balanced
Fund") (collectively, the "Funds").
WHEREAS, the Adviser desires to contractually
agree to waive a portion of its advisory fee or
reimburse certain of the Funds' operating expenses to
ensure that the Funds' total operating expenses do not
exceed the levels described below.
NOW THEREFORE, the parties agree as follows:
The Adviser agrees that, for the fiscal year ended
May 31, 2000, it will reduce its compensation as
provided for in the Investment Advisory Agreement
between the Company and the Adviser dated June 23,
1998, and/or assume expenses for the Fund to the extent
necessary to ensure that the Growth Fund's total
operating expenses (on an annual basis) do not exceed
1.50% of the Growth Fund's average daily net assets and
that the Balanced Fund's total operating expenses (on
an annual basis) do not exceed 1.30% of the Balanced
Fund's average daily net assets.
The Adviser shall be entitled to recoup such
amounts for a period of up to three (3) years following
the fiscal year in which the Adviser reduced its
compensation and/or assumed expenses for the Fund,
provided that the total operating expenses including
this recoupment do not exceed the established cap on
expenses for that year.
BADGLEY, PHELPS AND BELL, INC.
By: /s/ J. Kevin Callaghan
------------------------------
J. Kevin Callaghan, Managing Director
BADGLEY FUNDS, INC.
By: /s/ Otis P. Heald III
------------------------------
Otis P. Heald III, President
Exhibit m.1
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.
<PAGE>
(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
<PAGE>
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.
Exhibit m.2
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
<PAGE>
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
<PAGE>
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)
<PAGE>
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
<PAGE>
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
<PAGE>
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)
