THE GROWTH FUND OF WASHINGTON, INC.
Part B
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
(As amended September 17, 1998)
1101 Vermont Avenue, NW
Washington, D.C. 20005
(202) 842-5665
The Growth Fund of Washington, Inc. (the "Fund") is a diversified, open-end
investment company that seeks long-term capital growth by investing primarily
in securities of companies headquartered or having a major place of business in
Washington, D.C., Maryland or Virginia. This Statement of Additional
Information relating to the Fund is not a prospectus and should be read in
conjunction with the Fund's Prospectus. A copy of the Fund's Prospectus can be
obtained by writing or calling the Secretary of the Fund at the above address.
The date of the Prospectus to which this statement relates is May 1, 1998.
__________________________
Vista Fund Distributors, Inc.
Distributor
Washington Management Corporation
Business Manager
Washington Investment Advisers, Inc.
Investment Adviser
TABLE OF CONTENTS
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CAPTION PAGE
General Information and History 3
Investment Objective and Policies 3
Management of the Fund 8
Directors and Director Compensation 8
Investment Advisory and Other Services 9
Execution of Portfolio Transactions and Brokerage Allocation 12
Purchase, Redemption and Pricing of Securities Being Offered 13
Determination of Net Asset Value 15
Tax Status 15
Investment Results 17
Financial Statements 18
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GENERAL INFORMATION AND HISTORY
The Growth Fund of Washington, Inc. (the "Fund") is a diversified, open-end
investment company that seeks long-term capital growth by investing primarily
in securities of companies headquartered or having a major place of business in
Washington, D.C., Maryland or Virginia. The Fund was incorporated under the
laws of the State of Maryland on May 24, 1985.
Washington Management Corporation, a wholly-owned subsidiary of The
Johnston-Lemon Group, Incorporated ("JLG"), is the Fund's Business Manager.
Washington Investment Advisers, Inc., a wholly-owned subsidiary of JLG, is the
Fund's Investment Adviser. Vista Fund Distributors, Inc., a wholly-owned
subsidiary of The BISYS Group, Inc., is the Distributor of the Fund's shares.
The Investment Adviser believes economic and demographic strengths of the
Washington-Maryland-Virginia area benefit both area businesses and their
shareholders. In the opinion of the Investment Adviser, one measure of such
strengths is the performance of area securities as reflected in the Johnston,
Lemon Index (the "Index"), an unmanaged index of the common stocks of 30
Washington area companies, which is published weekly in THE WASHINGTON POST.
The Fund is not required to invest in stocks in the Index, and may invest a
large portion or all of its assets in stocks not in the Index, so the
performance of the Fund could be better or worse than the performance of the
Index. Past performance of the Index does not predict future performance of
the Index or the Fund. Johnston, Lemon & Co. Incorporated ("Johnston, Lemon"),
a Washington, D.C. based regional brokerage firm and a member of the New York
Stock Exchange, developed the Index. Johnston, Lemon is a wholly-owned
subsidiary of JLG.
Washington Investment Advisers, Inc. has adopted a personal investing policy
based upon Investment Company Institute guidelines. This policy includes: a
ban on acquisitions of securities pursuant to an initial public offering;
restrictions on acquisitions of private placement securities; pre-clearance and
reporting requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; disclosure of personal
holdings by certain investment personnel prior to recommendation for purchase
for the Fund; blackout periods for certain investment personnel; limitations on
service as a director of publicly traded companies; and disclosure of personal
securities transactions.
INVESTMENT OBJECTIVE AND POLICIES
U.S. Government Securities and Other Short-Term Securities
These securities may include direct obligations of the U.S. Treasury (such as
Treasury bills, notes and bonds), federal agency obligations guaranteed as to
principal and interest by the U.S. Treasury, and certain securities issued by
U.S. Government instrumentalities and certain federal agencies which securities
are neither direct obligations of, nor guaranteed by, the Treasury. These
latter securities, however, generally involve federal sponsorship in one way or
another; some are backed by specific types of collateral; some are supported
by the issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations of the
issuer; and others are supported only by the credit of the issuing government
agency or instrumentality. Other short-term securities may also include
commercial paper issued by domestic corporations rated at the time of purchase
Prime-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's
Corporation, or certificates of deposit issued by U.S. Banks having assets in
excess of $1 billion. In addition, the Fund may enter into repurchase
agreements with banks or broker-dealers with respect to such securities.
Options
The Fund may, to a limited extent, engage in transactions involving options,
as described in the Prospectus.
Covered Call Options
The Fund may write covered call options on its portfolio securities. The
writing of covered call options by the Fund is subject to limitations imposed
by certain state securities authorities. The Fund has been advised that under
the most restrictive of such limitations currently in effect, no more than 25%
of the Fund's net assets may be subject to covered options. Further, such
options and the securities underlying the call must both be listed on a
national securities exchange.
When the Fund sells an option, an amount equal to the net premium received by
the Fund is included in the liability section of the Fund's Statement of Assets
and Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked price. If
an option expires on its stipulated expiration date or if the Fund enters into
a closing purchase transaction (i.e., the Fund terminates its obligation as
the writer of the option by purchasing a call option on the same security with
the same exercise price and expiration date as the option previously written),
the Fund will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option was sold) and the
deferred credit related to such option will be eliminated. If an option is
exercised, the Fund will realize a long-term or short-term gain or loss from
the sale of the underlying security and the proceeds of the sale will be
increased by the net premium originally received. The writing of covered
options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which options are written will be
segregated on the books of the Fund's custodian.
Purchasing Put Options
The Fund may purchase exchange traded put options to protect its portfolio
holdings in an underlying security against a substantial decline in market
value. Such hedge protection is provided during the life of the put options
since the Fund, as holder of the put option, is able to sell the underlying
security at the put exercise price regardless of any decline in the underlying
security's market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put
options in this manner, the Fund will reduce any profit it might otherwise have
realized on its underlying security by the premium paid for the put option and
by transaction costs.
Loans of Portfolio Securities
The Fund may lend its portfolio securities provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash or cash equivalents adjusted daily to have a market value at least equal
to the current market value of the securities loaned; (2) the Fund may at any
time call the loan and regain the securities loaned; (3) the Fund will receive
any interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Fund. In addition, it is anticipated that the Fund may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan. Before the Fund enters
into a loan, the Fund's Investment Adviser considers all relevant facts and
circumstances including the creditworthiness of the borrower.
Investment Restrictions
The Fund has adopted the following restrictions which, together with its
investment objective, are its fundamental policies. These fundamental policies
cannot be changed without approval of the holders of a majority (as defined in
the Investment Company Act of 1940, the "Act") of the Fund's outstanding
shares. The Act defines "majority" as the lesser of (1) 67% of the Fund's
outstanding shares present at a meeting at which the holders of more than 50%
of the outstanding shares are present in person or by proxy, or (2) more than
50% of the Fund's outstanding shares.
The Fund may not:
(1) borrow money, except for temporary or emergency purposes and not for
investment purposes and then only from banks in an amount not exceeding at the
time of borrowing the lesser of 10% of the Fund's total assets taken at cost or
5% of the market value of the Fund's total assets;
(2) underwrite any securities issued by other persons, except to the extent
that the purchase of portfolio securities and the later disposition thereof may
be deemed to be underwriting;
(3) purchase or sell real estate, but this shall not prevent the Fund from
investing in securities secured by real estate or interests therein;
(4) purchase or sell commodities, commodities contracts or oil, gas or other
mineral exploration or development programs (although it may invest in
companies which own or invest in such interests);
(5) make loans to other persons, except to the extent that the purchase of
debt obligations in accordance with the Fund's investment objectives is
considered the making of loans, and except that the Fund may (i) lend its
portfolio securities and (ii) enter into repurchase agreements;
(6) purchase any securities which would cause 25% or more of the value of its
total assets at the time of such purchase to be invested in the securities of
one or more issuers having their principal business activities in the same
industry, provided that there is no limitation in respect to investments in
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(7) issue senior securities except as appropriate to evidence indebtedness
which it is permitted to incur;
(8) with respect to 75% of its assets, invest more than 5% of its total assets
(taken at market value) in the securities of any one issuer;
(9) with respect to 75% of its assets, purchase more than 10% of the voting
securities of any one issuer (except for investments in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities). In
order to comply with current state rules this restriction shall be applicable
to 100% of the Fund's assets, but may be lowered to no less than 75% without
shareholder approval if state rules are changed.
The following restrictions are not fundamental and may be changed by the
Fund without shareholder approval, in compliance with applicable law,
regulation, or regulatory policy. The Fund may not:
(a) make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions;
(b) purchase or sell any put or call options or any combination thereof,
except to the extent described above and in the Prospectus under "Investment
Objective, Policies and Techniques";
(c) purchase any securities subject to legal or contractual restrictions on
the resale thereof, or purchase securities which are not readily marketable, or
enter into repurchase agreements not terminable within seven business days, if
such purchase or entering into a repurchase agreement would cause more than 10%
of the value of its total assets to be invested in such securities and such
repurchase agreements;
(d) purchase securities of any issuer with a record of less than three years
continuous operation, including predecessors, except obligations issued or
guaranteed by the U.S. Government or its agencies, if such purchase would cause
the investments of the Fund in all such issuers to exceed 5% of the value of
its total assets;
(e) invest its assets in securities of other open-end investment companies,
but may invest up to 5% of its assets in closed-end investment companies, and
may (together with other investment companies having the same investment
adviser or controlled by the Fund or such other investment companies) purchase
or acquire up to 10% of the outstanding voting stock of a closed-end fund, and
may acquire securities of other investment companies as part of a merger,
consolidation or acquisition of assets;
(f) purchase warrants of any issuer if, as a result more than 2% of the value
of its total assets would be invested in warrants which are not listed on the
New York Stock Exchange or the American Stock Exchange, or more than 5% of the
value of its total assets would be invested in warrants whether or not so
listed, such warrants in each case to be valued at market or fair value, but
assigning no value to warrants acquired by the Fund in units with or attached
to debt securities.
(g) pledge, mortgage or hypothecate its assets, (i) except to the extent that
the writing of covered call options may be deemed to involve the pledge of
securities against which the option is being written and (ii) except to secure
borrowings permitted by subparagraph (1) above, it may pledge securities having
a value at the time of pledge not exceeding 15% of the cost of its total
assets.
For the purposes of subparagraphs (1), (6), (c), (d) and (f) "value" shall
mean the value used in determining the Fund's net asset value.
All percentage limitations shall be computed as of the time of making the
investment or taking the action to which the limitation refers. Moreover, any
investment restriction which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, the restricted activity.
MANAGEMENT OF THE FUND
FUND DIRECTORS AND OFFICERS
Directors and Director Compensation
(with their principal occupations during the past five years)#
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Name and Address Position with Principal Occupation(s) during Aggregate Compensation from Total
Compensation from
Registrant Past 5 Years# Registrant during Fiscal Year ended Registrant and
Fund
12/31/97 Complex/3/
Cyrus A. Ansary Director President, Investment Services $1,600 $1,600
1725 K Street, NW Suite 410 International Co.
Washington, DC 20006
Age: 64
*James H. Lemon, Jr./1,2/ Chairman of the Chairman and Chief Executive 0 0
Age: 62 Board Officer, The Johnston-Lemon
Group, Incorporated
*Harry J. Lister/1,2/ President and President and Director, 0 0
Age: 62 Director Washington Management
Corporation
T. Eugene Smith Director President, T. Eugene Smith, Inc. $2,000 $2,000
666 Tintagel Lane
McLean, VA 22101
Age: 67
Leonard P. Steuart II Director Vice President, Steuart $2,000 $2,000
5454 Wisconsin Avenue Investment Company
Chevy Chase, MD 20815
Age: 63
Margita E. White Director President, Association for $2,000 $2,000
1776 Massachusetts Ave., NW Maximum Service Television,
Suite 310 Inc.
Washington, DC 20036
Age: 60
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#Positions within the organizations listed may have changed during the period.
* Address is 1101 Vermont Avenue, NW, Washington, DC 20005
/1/ James H. Lemon, Jr. and Harry J. Lister are affiliated with the Business
Manager and, accordingly, receive no remuneration from the Fund.
/2/ Directors who are considered "interested persons" as defined in the Act.
The Fund pays all Directors who are not "interested persons" an attendance fee
of $400 per meeting and $200 for each committee meeting attended. The total
compensation paid by the Fund to such Directors for the fiscal year ended
December 31, 1997 was $7,600. All directors who are not "interested persons"
of the Fund serve on the Contracts, Audit and Nominating Committees. No
officers, directors or employees of the Business Manager or Investment Adviser
receive remuneration directly from the Fund.
/3/ No director serves on any other fund boards in the complex and none has any
pension or retirement benefits from the Fund.
Officers
(with their principal occupations during the past five years)#
* Stephen Hartwell (Age: 83), EXECUTIVE VICE PRESIDENT. Washington Management
Corporation, Chairman
* Howard L. Kitzmiller (Age: 67), SENIOR VICE PRESIDENT, SECRETARY/TREASURER
AND CHIEF FINANCIAL OFFICER. Washington Management Corporation, Senior Vice
President, Secretary, Assistant Treasurer and Director
* Prabha S. Carpenter (Age: 44), VICE PRESIDENT. Washington Investment
Advisers, Inc., Vice President
* Lois A. Erhard (Age: 45), VICE PRESIDENT. Washington Management Corporation,
Vice President
* Michael W. Stockton (Age: 31), ASSISTANT VICE PRESIDENT, ASSISTANT SECRETARY
AND ASSISTANT TREASURER. Washington Management Corporation, Assistant Vice
President, Assistant Secretary and Assistant Treasurer
* J. Lanier Frank (Age: 37), ASSISTANT VICE PRESIDENT. Washington Management
Corporation, Assistant Vice President
#Positions within the organizations listed may have changed during the period.
* Address is 1101 Vermont Avenue, NW, Washington, DC 20005
Directors of the Fund, acting on behalf of shareholders, direct and coordinate
the Fund's overall policy and have retained the services of the Business
Manager and Investment Adviser to operate the Fund.
As of April 6, 1998 and directors as a group owned beneficially or of record
approximately 144,000 shares of the Fund (6%).
INVESTMENT ADVISORY AND OTHER SERVICES
As compensation for services rendered to the Fund, the Fund pays the
Investment Adviser a fee, computed daily and paid monthly, of .375% per annum
on the Fund's net assets up to $100,000,000, decreasing to .35% per annum on
the net assets in excess of $100,000,000. The Fund also pays the Business
Manager, as compensation for services rendered to the Fund, a fee computed
daily and paid monthly, of .375% per annum on the Fund's net assets up to
$40,000,000, decreasing to .30% on the next $60,000,000 of net assets and .25%
per annum on net assets in excess of $100,000,000. During the fiscal year ended
December 31, 1997 the Business Manager received a fee of $190,793 and the
Investment Adviser $201,092. During fiscal year ended December 31, 1996, the
Business Manager received $172,781 and the Investment Adviser received
$178,474. Comparable fees for the fiscal year ended December 31, 1995 were
$147,686 and $148,597 respectively.
Subject to the supervision and direction of the Fund's Board of Directors, the
Investment Adviser determines the securities to be bought, sold or held in the
Fund's portfolio, determines the timing and amount of transactions, and places
orders with broker-dealers of its choice. The Business Manager provides the
facilities and services required to carry on the Fund's general administrative
and corporate affairs. Such services include providing executive personnel,
clerical staff, office space and equipment, arranging for and supervising all
shareholder services and federal and state regulatory compliance.
The Investment Advisory and Business Management Agreements are subject to
annual approval by (i)the Board of Directors of the Fund or (ii)vote of a
majority (as defined in the Act) of the outstanding voting securities of the
Fund, provided that in either event the continuance is also approved by a
majority of the Directors who are not "interested persons" of the Fund by vote
cast in person at a meeting called for the purpose of voting on such approval.
The Investment Advisory and the Business Management Agreements were last
approved by shareholders at the annual meeting on April 29, 1991. The Board of
Directors, including a majority of the Directors who are not "interested
persons" of the Fund, at a meeting held on March 5, 1998, voted to extend the
Investment Advisory and Business Management Agreements for one year beginning
May 1, 1998 until April 30, 1999. The Investment Advisory and Business
Management Agreements are each terminable without penalty on not less than 60
days' notice by the Board of Directors of the Fund or by vote of the holders of
a majority of the Fund's shares. Each will terminate automatically in the
event of their assignment.
The Chase Manhattan Bank (the "Custodian"), One Chase Manhattan Plaza, New
York, NY 10081, serves as the Fund's custodian. As Custodian, it maintains
custody of Fund assets, settles portfolio purchases and sales, collects
portfolio income, maintains general ledger and capital stock accounts and
investment ledgers, prepares daily trial balances and calculates net asset
values. DST Systems, Inc. (the "Transfer Agent"), located at 210 W. 10th
Street, Kansas City, MO 64105 serves as the Fund's transfer agent. The
Transfer Agent maintains the Fund's official record of shareholders and, as
dividend agent, it is responsible for crediting dividends to shareholders
accounts.
Johnson Lambert & Co., independent certified public accountants, located at
7500 Old Georgetown Road, Bethesda, Maryland 20814, has been selected as
auditor for the Fund. In such capacity, Johnson Lambert & Co. conducts an
annual audit of the Fund, meets with the Fund's Audit Committee and management
at least annually, reads filings, such as Form N-SAR and registration statement
amendments, prepares tax returns, and reads the Fund's annual and semi-annual
reports.
Distribution Plan
The Fund has adopted a Distribution Plan (the "Plan") under which the Fund
will pay to the Distributor a monthly fee at a maximum annual rate of .25 of 1%
of the Fund's net assets. Payments under the Plan will be made to the
Distributor to finance activity which is primarily intended to result in the
sale and retention of Fund shares including, but not limited to, advertising,
salaries and other expenses of the Distributor relating to selling or servicing
efforts, expenses of organizing and conducting sales seminars, printing of
prospectuses and reports for other than existing shareholders, preparation and
distribution of advertising material and sales literature and payments to
dealers whose customers purchase Fund shares.
The Plan, together with a distribution agreement with the Distributor, was
approved by the Directors including a majority of the Directors who are not
"interested persons", as defined in the Act, who have no direct or indirect
financial interest in the operation of the Plan or the Distribution Agreement
("Plan Directors"). While the Plan is in effect, the selection and nomination
of Directors who are not "interested persons" shall be committed to the
discretion of Plan Directors. The Plan was approved by shareholders at the
annual meeting on August 28, 1986. Renewal of the Plan must be considered by
the Board of Directors annually after their review of information and
consideration of all pertinent factors with respect to the Plan at a meeting
called for that purpose. In considering whether to continue the Plan and any
agreement related to it, the Directors have a duty to request and evaluate, and
the Distributor has a duty to furnish, such information as the Directors deem
reasonably necessary for them to reach an informed determination. Each year
that the Plan remains in effect the Distributor will prepare and furnish to the
Directors at least quarterly, and the Directors will review, a written report
of the amounts expended under the Plan and the purpose for which expenditures
were made.
All material amendments to the Plan must be approved by a vote of the
Directors, including a majority of the Plan Directors, at a meeting called for
that purpose. The Plan may not be amended to increase materially the amount to
be spent for distribution without shareholder approval. The Plan may be
terminated without penalty at any time by a vote of a majority of the Plan
Directors or a majority of the outstanding shares of the Fund. Any agreement
under the Plan may be terminated upon 60 days' written notice and will
terminate automatically in the event of its assignment.
The total amount paid to the Distributor under the Plan for the fiscal year
ended December 31, 1997 was $84,223. Those amounts were expended as follows
and such expenditures were reviewed quarterly by the Fund's Board of Directors:
Service Fees to Dealers $79,470
Distributor's Selling and
Servicing Expenses $ 4,753
All officers of the Fund and two of its Directors, who are "interested
persons" of the Fund, are officers or directors of Washington Management
Corporation or Washington Investment Advisers, Inc., wholly-owned subsidiaries
of JLG. Johnston, Lemon, also a subsidiary of JLG, participates in receiving
dealer service fee payments from the Plan. Some of the Fund's officers and two
Directors who are "interested persons" of the Fund are also registered
representatives with Johnston, Lemon and, as such, to the extent they have sold
shares of the Fund, receive a portion of the service fee payments in the same
manner as all other Johnston, Lemon registered representatives.
During the fiscal year ended December 31, 1997, the Fund's Distributor, Vista
Fund Distributors, Inc. ("VFD"), received $4,071 (after allowance to dealers),
as its portion of sales charges paid by purchasers of the Fund's shares.
Additionally, VFD received $84,223 from the Fund's Distribution Plan.
Johnston, Lemon received $7,601 in commissions from sales and $40,682 in dealer
service fees from VFD in accordance with the terms of VFD's Selling Group
Agreement. All of the officers of the Fund and two of its directors are
officers of or associated with JLG.
Brokerage commissions paid on portfolio transactions for the fiscal years
ended December 31, 1997, 1996, and 1995 amounted to $17,314, $21,010 and
$31,032, respectively. Differences in commission amounts reflect essentially
differences in aggregate dollar amount of the portfolio transactions. During
fiscal years ended December 31, 1997, 1996, and 1995 Johnston, Lemon received
$0, $0 and $1,096, respectively, in commissions for executing portfolio
transactions for the Fund.
EXECUTION OF PORTFOLIO TRANSACTIONS
AND BROKERAGE ALLOCATION
Orders for the Fund's portfolio securities transactions are placed by the
Investment Adviser. The objective of the Fund is to obtain the best available
prices in its portfolio transactions taking into account the costs and
promptness of executions. There is no agreement or commitment to place orders
with any broker-dealer. In transactions executed in the over-the-counter
market, purchases and sales are transacted directly with principal
market-makers except in those circumstances where, in the opinion of the
Investment Adviser, better prices and executions are available elsewhere.
Subject to the requirement of seeking the best available prices and
executions, the Investment Adviser may, in circumstances in which two or more
broker-dealers are in a position to offer comparable prices and execution, give
preference to broker-dealers which have provided research, statistical, and
other related services to the Investment Adviser for the benefit of the Fund
if, in its judgment, the Fund will obtain prices and executions comparable with
those available from other qualified firms. The Investment Adviser is of the
opinion that while such research and related services are useful in varying
degrees, they are of indeterminable value and do not reduce the expenses of the
Investment Adviser.
The Directors of the Fund have adopted a policy which permits the Investment
Adviser, subject to the objective of obtaining the best price and execution, to
consider a broker-dealer's sale of Fund shares as a factor in selecting from
among broker-dealers qualified to offer comparable prices and execution of
portfolio transactions. This policy does not imply a commitment by the Fund to
execute portfolio transactions through all broker-dealers which sell shares of
the Fund. The Investment Adviser will periodically report to the Directors to
enable them to assure themselves that the best execution objective continues to
be paramount in selection of executing broker-dealers.
The Fund's Board of Directors has determined that the Fund may effect
portfolio transactions through Johnston, Lemon (i) if, in the Investment
Adviser's judgment, the use of Johnston, Lemon is likely to result in prices
and executions at least as favorable as those of other qualified
broker-dealers, (ii) if, in the transaction, the commission, fee or other
remuneration to be received by Johnston, Lemon is consistent with those charged
by Johnston, Lemon to comparable unaffiliated customers in similar transactions
and (iii) if such commission, fee or other remuneration is reasonable and fair
compared to the commission, fee or other remuneration received by other
broker-dealers in connection with comparable transactions involving similar
securities being purchased or sold on an exchange during a comparable period of
time. The Fund's Board of Directors, including a majority of those Directors
who are not "interested persons" of the Fund, have adopted procedures which are
reasonably designed to provide that any commission, fee or other remuneration
received by Johnston, Lemon is consistent with these standards. Johnston,
Lemon will not participate in commissions from brokerage given by the Fund to
other brokers or dealers. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which better
prices and executions may be obtained elsewhere. The Fund will in no event
effect principal transactions with Johnston, Lemon, even in securities in which
Johnston, Lemon makes a market.
The Fund does not consider that it has an obligation to obtain the lowest
available commission rate to the exclusion of price, service and qualitative
considerations. Nevertheless, the personnel of the Investment Adviser are
authorized to negotiate payment only for brokerage services rendered and not
for research, statistical or other services. The Fund does not authorize the
payment of commissions to broker-dealers in excess of commissions other
qualified broker-dealers would have charged for handling comparable
transactions in recognition of their having provided research, statistical, or
other related services, or of their having sold Fund shares.
PURCHASE, REDEMPTION AND
PRICING OF SECURITIES BEING OFFERED
How to Purchase Shares
Vista Fund Distributors, Inc., is the Distributor of the Fund shares. The
information pertaining to the purchase and redemption of the Fund's shares
appearing in the Prospectus under the caption "HOW TO PURCHASE SHARES" is
hereby incorporated by reference.
The Fund's shares may be purchased at their net asset value next computed
after receipt of an order, plus a sales charge (the "Offering Price"), through
broker-dealers who have current sales agreements with the Distributor. In the
alternative, once an account has been established and the selling broker-dealer
has been recorded, additional Fund shares may be purchased by wire or by
sending a check payable to The Growth Fund of Washington, Inc. with the
shareholder's Fund account number indicated on the check, to:
Chase Vista Service Center
P.O. Box 419392
Kansas City, MO 64141-6392
The "Invest by Mail" stub which accompanies each Fund confirmation statement
should be included with any purchase order. The Fund will send each
shareholder a statement confirming the number of shares purchased.
Purchases may also be made by automatic investment plan whereby your bank
account is debited at specified amounts and intervals or by telephone if
certain preauthorization and indemnification is made (see items 5, 6, and 8 of
the Account Application).
A minimum initial investment of $2,500 ($1,000 for IRAs, SEP IRAs and
Systematic Investment Plans) is required to open a shareholder account and each
subsequent investment must be $100 or more.
Fund shares may be purchased in full and fractional shares calculated to three
decimal places and acquired through a broker-dealer or the transfer agent. No
stock certificate will be issued unless a shareholder makes a written request
therefor to the Transfer Agent at the above address, in which case a
certificate will be provided at no cost to the shareholder. No certificates
will be issued for fractional shares.
How to Redeem Shares
The information pertaining to redemption of the Fund's shares appearing in the
Prospectus under the caption "HOW TO REDEEM SHARES" is hereby incorporated by
reference.
Shares tendered for redemption to Vista Service Center at the address given
above under "How to Purchase Shares" are redeemed without charge but shares
tendered for redemption through Dealers may be subject to a service charge by
such Dealers. The redemption price may be more or less than the shareholder's
cost for the redeemed shares depending on the market value of the Fund's
portfolio securities at the time of redemption.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of trading
on the New York Stock Exchange (the "NYSE") (currently 4:00 p.m. New York time
for stocks and 4:15 p.m. for options) on each day, Monday through Friday, on
which the NYSE is open for trading. The Fund is not required to determine its
net asset value per share on days when changes in the value of its portfolio
securities will not affect such value or on days during which no orders to
purchase or sell Fund shares are received. Net asset value per share is
computed by dividing the value of the Fund's total assets less liabilities by
the total number of shares outstanding. The Fund's expenses and fees are
accrued daily and taken into account in determining the net asset value.
TAX STATUS
The Fund intends to qualify and elect to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code ("Code").
Qualification and election to be taxed as a regulated investment company
involve no supervision or management by any government agency. To qualify as
a regulated investment company the Fund must distribute to shareholders at
least 90% of its net investment income, and meet certain diversification of
assets, source of income, and other requirements of the Code. By so doing, the
Fund will not be subject to income tax on that portion of its net investment
income and net realized capital gains distributed to shareholders. If the Fund
does not meet all of these Code requirements, it will be taxed as an ordinary
corporation and its dividends and distributions will be taxable to shareholders
as ordinary income dividends regardless of whether such distributions were
derived from the Fund's net long-term capital gains.
The Fund will be subject to a non-deductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax the Fund must distribute during each calendar
year (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses for the twelve-month period ending on
December 31, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years. To avoid application of the
excise tax, the Fund intends, to the extent practicable, to make its
distributions in accordance with the calendar year distribution requirement. A
distribution will be treated as paid during the calendar year if it is declared
by the Fund in December, with a record date in that month, and paid by the Fund
by January 31 of the following year. Such distributions will be taxable to
shareholders in the year the distributions are declared, rather than the year
in which the distributions are received.
Dividends from net investment income and net short-term capital gain
distributions are taxable to shareholders as ordinary income. To the extent
determined each year, such dividends are eligible for the dividends received
deduction available to corporations.
Distributions of net long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of the length of time the Fund shares have
been held by a shareholder, and are not eligible for the dividends received
deduction. A loss by a shareholder on the sale of shares of the Fund with
respect to which long-term capital gain distributions have been paid will, to
the extent of such long-term capital gain distributions, be treated as
long-term capital loss even though such shares have been held by the
shareholder for less than one year.
All dividends and distributions are taxable to the shareholder whether
reinvested in additional shares or received in cash. Shareholders receiving
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share equal to the net asset value of a
share of the Fund on the reinvestment date. Shareholders will be notified
annually as to the federal tax status of such payments.
Distributions and dividends by the Fund reduce the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, it nevertheless would be taxable to the shareholder
as ordinary income or capital gains as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Therefore,
those purchasing Fund shares just prior to a distribution will receive a return
of capital upon the ensuing distribution which will nevertheless be taxable to
them.
Upon redemption, sale or exchange of his shares, a shareholder will realize a
taxable gain or loss depending upon his cost basis in his shares. Such gain or
loss will be treated as capital gain or loss if the shares are capital assets
in the shareholder's hands. Such gain or loss will be long-term or short-term
depending on the shareholder's holding period for the shares.
A gain realized on a redemption will not be affected by exercise of the
reinstatement privilege. A loss realized on a redemption, however, will be
disallowed to the extent the shares redeemed are replaced pursuant to exercise
of the reinstatement privilege. In such case, the basis of the shares acquired
pursuant to the exercise of the reinstatement privilege will be adjusted to
reflect the disallowed loss.
Certain of the options transactions that may be undertaken by the Fund would
result in "straddles" for federal income tax purposes. Without regard to
the straddle rules, any gains (or losses) on the options are generally
considered short-term capital gains (or losses) for federal income tax
purposes. The straddle rules, however, may affect the character of gains (or
losses) realized. Losses realized by the Fund on either options or the
underlying securities may be deferred under the straddle rules, rather than
being taken into account in calculating the taxable income for the taxable year
in which the losses are realized. Because only a few of the regulations
implementing the straddle rules have been promulgated, the consequences of
straddle transactions to the Fund are not entirely clear.
The Fund is required to report to the Internal Revenue Service all dividends
and distributions as well as gross proceeds from the redemption of Fund shares,
except in the case of certain exempt shareholders. All dividends and proceeds
will be subject to withholding of federal income tax at a rate of 31% ("backup
withholding") in the case of non-exempt shareholders if (1) the shareholder
fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the Internal Revenue
Service notifies the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he is not subject to backup withholding. If the withholding provisions
are applicable, any such dividends or proceeds, whether reinvested in
additional shares or taken in cash, will be reduced by the amounts required to
be withheld.
The foregoing discussion relates only to federal income tax law as applicable
to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions and dividends
by the Fund also may be subject to state and local taxes, and their treatment
under state and local income tax laws may differ from federal income tax
treatment. Shareholders should consult their tax advisers with respect to
particular questions of federal, state and local taxation. Shareholders who
are not U.S. persons should consult their tax advisers regarding U.S. and
foreign tax consequences of ownership of shares of the Fund, including the
likelihood that dividends to them would be subject to withholding of U.S. tax.
INVESTMENT RESULTS
From time to time, the Fund may use hypothetical investment examples and
performance information in advertisements, shareholder reports or other
communications to shareholders. From time to time, the performance and yield
of the Fund may be quoted and compared to those of other mutual funds with
similar investment objectives, unmanaged investment accounts, including savings
accounts, or other similar products and to stock or other relevant indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to data prepared by CDA/Wiesenberger,
Ibbotson Associates, Lipper Analytical Services and Morningstar, Inc.
Performance and yield data as reported in national financial publications
including, but not limited to, MONEY MAGAZINE, FORBES, BARRON'S, THE WALL
STREET JOURNAL and THE NEW YORK TIMES, or in local or regional publications,
may also be used in comparing the performance and yield of the Fund.
Additionally, the Fund may, with proper authorization, reprint articles written
about the Fund and provide them to prospective shareholders.
Quotations of total return for the Fund will be expressed in terms of the
annual compound rate of return of a hypothetical investment in the Fund over
periods of 1 year, five years and 10 years, calculated pursuant to the
following formula required by the Securities and Exchange Commission: P(1 +
T)/n/ = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period.
The Fund's average annual compound rates of return for the 1, 5 and 10 year
periods, ending December 31, 1997 were +28.71%, +16.79% and +13.56%
respectively. These figures assume deduction of the maximum sales charge of
5.75% from the investment at the beginning of each period and assume that all
dividends and distributions are reinvested at net asset value on the
reinvestment date. (Sales charges are reduced under certain circumstances as
described in the Prospectus under "How to Purchase Shares", but these
reductions are not reflected in the quoted return figures above.) The average
annual compound rates of return for the same periods without assuming deduction
of a sales charge would be +36.56%, +18.17% and +14.23%, respectively.
The Fund's investment results will vary from time to time depending upon
market conditions, the composition of the Fund's portfolio and operating
expenses, so that total return should not be considered representative of what
an investment in the Fund may earn in any future period. These factors and
possible differences in the methods used in calculating performance should be
considered when comparing the Fund's investment results with those published
for other investment companies, other investment vehicles and unmanaged
indices. The Fund's results also should be considered relative to the risks
associated with its investment objective and policies.
YEAR 2000
The Fund and its shareholders depend on the proper functioning of computer
systems maintained by key service providers, including the investment adviser,
administrator, transfer agent and custodian. Many computer systems in use
today will require reprogramming or replacement prior to the year 2000 because
of the way they store dates and make date-related calculations. The Fund
understands that these service providers are taking steps to address the "Year
2000 problem". However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the Fund. In addition, the Fund's
investments may be impacted by the Year 2000 problem. For example, the markets
for securities in which the Fund invests could experience settlement problems
and liquidity issues. Corporate and government data processing errors may
cause losses for individual companies and overall economic uncertainties.
Earnings of individual issuers are likely to be affected by the costs of
addressing the problem, which may be substantial and may be reported
inconsistently.
FINANCIAL STATEMENTS
The Investment Portfolio, Statement of Assets and Liabilities, Statement of
Operations, Statement of Changes in Net Assets, Notes to Financial Statements,
and Report of Independent Accountants contained in the Attached Annual Report
dated December 31, 1997, are hereby incorporated by reference into this
statement of additional information.
