<PAGE> 1
DIRECTORS
J. Kevin Callaghan
Steven C. Phelps
Frank S. Bayley
Madelyn B. Smith
PRINCIPAL OFFICERS
Otis P. Heald III (Tres), President
Lisa P. Guzman, Treasurer and Secretary
INVESTMENT ADVISER
Badgley, Phelps and Bell, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
ADMINISTRATOR,
TRANSFER AGENT AND DIVIDEND --
DISBURSING AGENT
Firstar Mutual Fund Services, LLC
Third Floor
615 E. Michigan Street
Milwaukee, Wisconsin 53202
CUSTODIAN
Firstar Bank Milwaukee, N.A.
615 E. Michigan Street
Milwaukee, WI 53202
DISTRIBUTOR
Rafferty Capital Markets, Inc.
550 Mamaroneck Avenue
Harrison, New York 10528
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue, Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 N. Water Street
Milwaukee, Wisconsin 53202
SEMI-ANNUAL REPORT
November 30, 1998
BADGLEY
FUNDS, INC.
Badgley Growth Fund
Badgley Balanced Fund
[BADGLEY FUNDS LOGO]
<PAGE> 2
BADGLEY FUNDS, INC.
SEMI-ANNUAL REPORT
NOVEMBER 30, 1998
Dear Shareholders:
We begin this report by thanking you, our shareholders, for the confidence you
have demonstrated by investing in the Badgley Funds. Badgley, Phelps and Bell,
Inc. is one of the oldest independent investment firms in the Pacific Northwest
and has provided quality service to both private and institutional clients since
1966. It was with great pleasure that we launched our new fund family in June of
this year. We are happy to report that since inception, the assets in the
Badgley Funds have grown in excess of $7.5 million.
You have entrusted us with your assets during a tremendously volatile period in
the capital markets. September 30 marked the largest quarterly decline in the
stock market in eight years as investors worried about a number of issues
ranging from shrinking profits to fears of a broadening international financial
crisis. During this period, troubles in Asia and the collapse of the Russian
economy exacted a costly toll on U.S. hedge funds and their investors.
Of all the issues we contended with in the second half of 1998, the general
slowdown in corporate profit growth was the most worrisome. Although U.S.
corporations have had a few years now to adjust to declining growth in Asia,
increasing competition and falling prices have resulted in reduced profit
expectations in many key industries. This development did not go unnoticed by
the stock market, which punished companies with declining profits and rewarded
companies with dependable earnings.
Nonetheless, the market recovered through November, led by the technology and
consumer growth sectors, as the Standard & Poor's 500 and NASDAQ composite
indices reached new all-time highs. The funds' above-market exposure in these
high-growth areas led to solid investment performance. For the period since
inception (June 25) to November 30, the Growth Fund returned 1.21%, in line with
the broader markets (S&P 500).
Those same tumultuous events that rocked the stock market during this period
also spilled over into the credit markets. As the ailing economies overseas
became too rough and risky of a ride for investors, they flocked to the safety
of U.S. Treasury securities. This flight to quality sent Treasury prices soaring
and pushed interest rates to levels not seen since the 1960s.
With investors becoming more risk-averse during this turmoil, the fortunes for
"spread products" such as U.S. agency, corporate and mortgage-backed bonds were
not as favorable. It wasn't until Federal Reserve Chairman Alan Greenspan gave
the green light to three separate decreases in the federal funds rate that some
stability finally returned to the marketplace.
In the end, 1998 rewarded investors who held high-quality bonds in their
portfolios. The fixed income portion of the Balanced Fund reaped these benefits
and returned 4.5% for the period since inception (June 25) to November 30. The
Balanced Fund's total return for the period ended November 30 was 3.08%.
Higher-quality bonds will continue to be the basis of our fixed income strategy
since we view bonds as a source of stability and do not believe that it is
prudent to sacrifice credit quality for a marginal increase in returns.
With 1999 likely ushering in yet another year of anemic growth, we feel that our
time-tested investment philosophy will be well suited to this uncertain
environment. Once again, we would like to thank you for investing in the Badgley
Funds.
Sincerely,
/s/ Otis P. Heald, III, CFA
- ----------------------------
Otis P. Heald III, CFA
President
1
<PAGE> 3
BADGLEY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
NOVEMBER 30, 1998
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
ASSETS:
Investments, at market value (cost of $4,147,613 and
$2,832,311, respectively).............................. $4,368,566 $3,130,902
Dividends receivable...................................... 1,105 1,479
Interest receivable....................................... 26,987 602
Organization costs, net of accumulated amortization....... 24,290 24,290
Receivable from adviser................................... 2,275 2,447
Other assets.............................................. 21,774 21,774
---------- ----------
Total assets........................................... 4,444,997 3,181,494
---------- ----------
LIABILITIES:
Accrued expenses and other liabilities.................... 33,200 32,789
---------- ----------
Total liabilities...................................... 33,200 32,789
---------- ----------
NET ASSETS.................................................. $4,411,797 $3,148,705
========== ==========
NET ASSETS CONSIST OF:
Capital stock............................................. $4,212,341 $2,887,863
Accumulated undistributed net investment income (loss).... 733 (2,886)
Accumulated undistributed net realized gain (loss) on
investments............................................ (22,230) (34,863)
Net unrealized appreciation (depreciation) on
investments............................................ 220,953 298,591
---------- ----------
Total net assets....................................... $4,411,797 $3,148,705
========== ==========
Shares outstanding (par value of $.01, unlimited shares
authorized)............................................ 431,418 311,169
========== ==========
Net Asset Value, Redemption Price and Offering Price Per
Share.................................................. $ 10.23 $ 10.12
========== ==========
</TABLE>
See Notes to the Financial Statements
2
<PAGE> 4
BADGLEY FUNDS, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
JUNE 25, 1998(1) TO NOVEMBER 30, 1998
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income........................................... $ 3,433 $ 4,637
Interest income........................................... 26,770 2,809
-------- --------
Total investment income................................ 30,203 7,446
-------- --------
EXPENSES:
Investment advisory fees.................................. 8,578 6,888
Administration fees....................................... 12,902 12,902
Shareholder servicing and accounting fees................. 19,731 19,099
Distribution fees......................................... 2,383 1,722
Custody fees.............................................. 4,102 3,535
Federal and state registration fees....................... 15,788 15,761
Professional fees......................................... 8,324 8,324
Reports to shareholders................................... 2,239 2,239
Amortization of organization costs........................ 2,171 2,171
Directors' fees and expenses.............................. 713 713
Other..................................................... 3,056 3,056
-------- --------
Total expenses before waiver and reimbursement............ 79,987 76,410
Less: Waiver of expenses and reimbursement from Adviser... (67,596) (66,078)
-------- --------
Net expenses........................................... 12,391 10,332
-------- --------
NET INVESTMENT INCOME (LOSS):............................... 17,812 (2,886)
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments................... (22,230) (34,863)
Change in unrealized appreciation (depreciation) on
investments............................................ 220,953 298,591
-------- --------
Net realized and unrealized gain (loss) on
investments.......................................... 198,723 263,728
-------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $216,535 $260,842
======== ========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
3
<PAGE> 5
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
JUNE 25, 1998(1) TO NOVEMBER 30, 1998
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss).............................. $ 17,812 $ (2,886)
Net realized gain (loss) on investments................... (22,230) (34,863)
Change in unrealized appreciation (depreciation) on
investments............................................ 220,953 298,591
---------- ----------
Net increase in net assets resulting from operations... 216,535 260,842
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (17,080) --
---------- ----------
(17,080) --
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................. 4,213,559 2,888,126
Proceeds from shares issued to holders in reinvestment of
dividends.............................................. 16,358 0
Cost of shares redeemed................................... (17,575) (263)
---------- ----------
Net increase in net assets resulting from capital share
transactions......................................... 4,212,342 2,887,863
---------- ----------
TOTAL INCREASE IN NET ASSETS................................ 4,411,797 3,148,705
---------- ----------
NET ASSETS:
Beginning of period....................................... 0 0
---------- ----------
End of period (including undistributed net investment income
(loss) of $733 and $(2,886), respectively)................ $4,411,797 $3,148,705
========== ==========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
4
<PAGE> 6
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
JUNE 25, 1998(1) TO NOVEMBER 30, 1998
<TABLE>
<CAPTION>
FOR A FUND SHARE OUTSTANDING
THROUGHOUT THE PERIOD
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................... $ 10.00 $ 10.00
Income from investment operations:
Net investment income (loss).............................. 0.07 (0.01)
Net realized and unrealized gain (loss) on investments.... 0.23 0.13
---------- ----------
Total from investment operations....................... 0.30 0.12
---------- ----------
Less:
Dividends from net investment income...................... (0.07) 0.00
---------- ----------
Net asset value, end of period............................ $ 10.23 $ 10.12
========== ==========
TOTAL RETURN(2)............................................. 3.08% 1.21%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................. $4,411,797 $3,148,705
Ratio of net expense to average net assets:
Before expense reimbursement(3)........................ 8.39% 11.09%
After expense reimbursement(3)......................... 1.30% 1.50%
Ratio of net investment income to average net assets:
Before expense reimbursement(3)........................ (5.22)% (10.01)%
After expense reimbursement(3)......................... 1.87% (0.42)%
Portfolio turnover rate................................... 3.94% 8.12%
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
See Notes to the Financial Statements
5
<PAGE> 7
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- --------
<C> <S> <C>
COMMON STOCKS -- 49.4%
------------------------------------------------------------
Bank & Holding Co. -- 2.8%
775 Bankamerica Corp............................................ $ 50,520
1,050 State Street Corp........................................... 72,056
--------
122,576
--------
Business Service -- 3.0%
930 Automatic Data Processing Inc. ............................. 71,610
1,132 Cintas Corp................................................. 62,260
--------
133,870
--------
Chemical Manufacturing -- 1.0%
1,211 Praxair, Inc................................................ 46,245
--------
Communications & Media -- 1.7%
1,384 Omnicom Group............................................... 73,957
--------
Consumer Service -- 1.6%
1,879 Service Corp. International................................. 70,228
--------
Cosmetic & Soap -- 1.2%
1,107 Gillette Co. ............................................... 50,853
--------
Drugs -- 6.0%
727 Johnson & Johnson........................................... 59,069
981 Medtronic, Inc. ............................................ 66,401
449 Merck & Co., Inc. .......................................... 69,539
630 Pfizer, Inc................................................. 70,324
--------
265,333
--------
Electrical Equipment -- 3.8%
820 Emerson Electric Co......................................... 53,300
784 General Electric Co. ....................................... 70,952
1,123 Hubbell, Inc. - CL B........................................ 45,271
--------
169,523
--------
Electronic Technology -- 2.6%
713 Hewlett-Packard Co. ........................................ 44,741
670 Intel Corp.................................................. 72,109
--------
116,850
--------
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- ----------
<C> <S> <C>
Energy Raw Material -- 1.3%
1,301 AES Corp.*.................................................. $ 59,521
----------
Financial Service -- 4.8%
1,078 Fannie Mae.................................................. 78,424
1,392 Franklin Resources, Inc.*................................... 59,508
3,164 MBNA Corp. ................................................. 71,783
----------
209,715
----------
Food, Beverage & Tobacco -- 4.0%
1,208 Pepsico, Inc................................................ 46,735
1,445 Starbucks Corp.* ........................................... 66,651
2,388 Sysco Corp.................................................. 64,327
----------
177,713
----------
Insurance -- 1.6%
751 American International Group, Inc. ......................... 70,594
----------
Oil & Gas -- 1.3%
685 Chevron Corp. .............................................. 57,283
----------
Retail -- General -- 3.7%
1,160 Costco Companies, Inc.*..................................... 72,790
1,809 Home Depot.................................................. 89,998
----------
162,788
----------
Software -- 2.3%
820 Microsoft Corp.*............................................ 100,040
----------
Telecommunication -- 3.5%
1,459 Cisco Systems, Inc.*........................................ 109,972
503 Lucent Technologies, Inc. .................................. 43,289
----------
153,261
----------
Telephone -- 1.9%
1,386 MCI WorldCom, Inc.*......................................... 81,774
----------
Travel & Recreation -- 1.3%
1,752 The Walt Disney Co.......................................... 56,392
----------
TOTAL COMMON STOCKS (COST $1,975,358)....................... 2,178,516
==========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- --------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 17.2%
------------------------------------------------------------
Electronic Technology -- 3.0%
$125,000 IBM Corp.
6.450%, 8/01/07............................................. $133,316
--------
Finance Company -- 5.7%
150,000 Assoc. Corp. NA
6.000%, 4/15/03............................................. 152,269
100,000 Norwest Corp.
6.125%, 10/15/00............................................ 101,258
--------
253,527
--------
Food, Beverage & Tobacco -- 4.8%
100,000 Albertsons, Inc.
6.375%, 6/01/00............................................. 101,626
100,000 Sysco Corp.
7.000%, 5/01/06............................................. 109,504
--------
211,130
--------
Oil & Gas -- 2.4%
100,000 Amoco Company
6.250%, 10/15/04............................................ 105,354
--------
Retail Trade -- 1.3%
55,000 Wal-Mart Stores Note
6.125%, 10/01/99............................................ 55,459
--------
TOTAL CORPORATE BONDS (COST $749,443)....................... 758,786
========
GOVERNMENT SECURITIES -- 27.1%
------------------------------------------------------------
Government Bonds & Notes 13.0%
US Treasury Notes:
100,000 7.500%, 10/31/99............................................ 102,438
100,000 5.875%, 11/15/05............................................ 106,906
150,000 5.750%, 10/31/00............................................ 153,047
100,000 5.625%, 2/15/06............................................. 105,344
100,000 5.500%, 2/15/08............................................. 105,563
--------
TOTAL GOVERNMENT NOTES (COST $565,922)...................... 573,298
========
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 10
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
Government Agency -- 14.1%
Federal National Mortgage Association (FNMA) -- 10.1%
$100,000 6.800%, 1/10/03............................................. $ 105,948
100,000 5.360%, 2/16/01............................................. 100,912
125,000 6.290%, 2/11/02............................................. 130,051
100,000 6.350%, 6/10/05............................................. 106,387
----------
443,298
----------
Federal Home Loan Bank -- 4.0%
50,000 5.960%, 10/06/00............................................ 50,931
125,000 5.755%, 3/25/03............................................. 127,663
----------
178,594
----------
TOTAL U.S. GOVERNMENT AGENCY (COST $620,816)................ 621,892
==========
TOTAL GOVERNMENT SECURITIES (COST $1,186,738)............... 1,195,190
==========
SHORT-TERM INVESTMENTS -- 5.4%
------------------------------------------------------------
Variable Rate Demand Notes
181,802 Wisc Corp Central Credit Union Demand Note.................. 181,802
26,310 General Mills Demand Note................................... 26,310
15,944 Sara Lee Demand Note........................................ 15,944
12,018 Pitney Bowes Demand Note.................................... 12,018
----------
TOTAL SHORT-TERM INVESTMENTS (COST $236,074)................ 236,074
----------
TOTAL INVESTMENTS -- 99.1%
(COST $4,147,613)........................................... 4,368,566
----------
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.9%......... 43,231
----------
TOTAL NET ASSETS -- 100.0%.................................. $4,411,797
==========
</TABLE>
* Non-income producing security.
See Notes to the Financial Statements
9
<PAGE> 11
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- --------
<C> <S> <C>
COMMON STOCKS -- 95.1%
------------------------------------------------------------
Bank & Bank Holding Co. -- 5.4%
1,078 Bankamerica Corp............................................ $ 70,272
1,443 State Street Corp........................................... 99,026
--------
169,298
--------
Business Service -- 5.8%
1,278 Automatic Data Processing, Inc.............................. 98,406
1,556 Cintas Corp................................................. 85,580
--------
183,986
--------
Chemical Manufacturing -- 2.0%
1,663 Praxair, Inc................................................ 63,506
--------
Communication & Media -- 3.2%
1,901 Omnicom Group............................................... 101,585
--------
Consumer Service -- 3.1%
2,580 Service Corp. International................................. 96,428
--------
Cosmetic & Soap -- 2.2%
1,520 Gillette Co. ............................................... 69,825
--------
Drugs -- 11.6%
998 Johnson & Johnson........................................... 81,088
1,348 Medtronic, Inc.............................................. 91,243
616 Merck & Co., Inc............................................ 95,403
865 Pfizer, Inc................................................. 96,556
--------
364,290
--------
Electrical Equipment -- 7.4%
1,126 Emerson Electric Co......................................... 73,190
1,077 General Electric Co......................................... 97,468
1,543 Hubbell, Inc. - CL B........................................ 62,202
--------
232,860
--------
Electronic Technology -- 5.1%
980 Hewlett-Packard Co. ........................................ 61,495
921 Intel Corp.................................................. 99,123
--------
160,618
--------
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 12
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- --------
<C> <S> <C>
Energy Raw Material -- 2.6%
1,787 AES Corp.*.................................................. $ 81,755
---------
Financial Service -- 9.1%
1,481 Fannie Mae.................................................. 107,743
1,912 Franklin Resources, Inc.* .................................. 81,738
4,346 MBNA Corp................................................... 98,600
---------
288,081
---------
Food, Beverage & Tobacco -- 7.7%
1,660 Pepsico, Inc. .............................................. 64,221
1,985 Starbucks Corp.* ........................................... 91,558
3,281 Sysco Corp. ................................................ 88,382
---------
244,161
---------
Insurance -- 3.1%
1,032 American International Group, Inc........................... 97,008
---------
Oil & Gas -- 2.5%
941 Chevron Corp................................................ 78,691
---------
Retail -- General -- 7.1%
1,594 Costco Companies, Inc.*..................................... 100,023
2,485 Home Depot.................................................. 123,629
---------
223,652
---------
Software -- 4.4%
1,126 Microsoft Corp.*............................................ 137,372
---------
Telecommunication -- 6.7%
2,004 Cisco Systems, Inc.*........................................ 151,051
691 Lucent Technologies, Inc. .................................. 59,469
---------
210,520
---------
Telephone -- 3.6%
1,903 MCI WorldCom, Inc.*......................................... 112,277
---------
Travel & Recreation -- 2.5%
2,407 The Walt Disney Co. ........................................ 77,475
---------
2,993,388
TOTAL COMMON STOCKS (COST $2,694,796)....................... =========
</TABLE>
See Notes to the Financial Statements
11
<PAGE> 13
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED)
NOVEMBER 30, 1998
GROWTH FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 4.4%
------------------------------------------------------------
Variable Rate Demand Note
$137,514 Wisc. Corp. Central Credit Union Demand Note................ $ 137,514
----------
TOTAL SHORT-TERM INVESTMENTS (COST $137,515)................ 137,514
==========
TOTAL INVESTMENTS -- 99.5%
(COST $2,832,311)........................................... 3,130,902
----------
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.5% 17,803
----------
TOTAL NET ASSETS -- 100.0%.................................. $3,148,705
==========
</TABLE>
* Non-income producing security.
See Notes to the Financial Statements
12
<PAGE> 14
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION
Badgley Funds, Inc. (the "Corporation") was incorporated on April 28, 1998,
as a Maryland Corporation and is registered as an open-end management
investment company under the Investment Company Act of 1940. The Badgley
Balanced Fund (the "Balanced Fund") and the Badgley Growth Fund (the "Growth
Fund") (collectively referred to as the "Funds") are separate, diversified
investment portfolios of the Company. The principal investment objective of
the Balanced Fund is to seek long-term capital appreciation and income. The
principal investment objective of the Growth Fund is to seek long-term
capital appreciation. The Investment Adviser held 5,000 shares of the
Balanced Fund capital stock and 5,000 shares of the Growth Fund capital stock
at $10 per share on June 10, 1998. The Funds commenced operations on June 25,
1998.
The costs incurred in connection with the organization, initial registration
and public offering of shares, aggregating $26,461 for the Balanced Fund and
Growth Fund, respectively, have been paid by the Funds. These costs are being
amortized over the period of benefit, but not to exceed sixty months from the
Fund's commencement of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
a) Investment Valuation -- Common stocks and other equity-type securities are
valued at the last sales price on the national securities exchange on
which such securities are primarily traded. Securities traded on a
national securities exchange for which there were no transactions on a
given day, and securities not listed on a national securities exchange are
valued at the average of the most recent bid and asked prices. Any
securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the
Board of Directors of the Corporation. Instruments with a remaining
maturity of 60 days or less are valued at amortized cost, which
approximates market value.
b) Federal Income Taxes -- No provision for federal income taxes has been
made since the Funds have complied to date with the provisions of the
Internal Revenue Code applicable to regulated investment companies and
intend to continue to so comply in future years and to distribute
investment company net taxable income and net realized gains to
shareholders.
c) Income and Expenses -- The Funds are charged for those expenses that are
directly attributable to each portfolio, such as advisory, administration
and certain shareholder service fees. Expenses that are not directly
attributable to a portfolio are typically allocated among the Company's
portfolios in proportion to their respective net assets, number of
shareholder accounts or net sales, where applicable.
d) Distributions to Shareholders -- Dividends from net investment income of
the Balanced Fund are declared and paid quarterly. Dividends from net
investment income of the Growth Fund are declared and paid annually.
Distributions of the Balanced and Growth Funds' net realized capital
gains, if any, will be declared at least annually.
e) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the
13
<PAGE> 15
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1998 (UNAUDITED)
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
f) Other -- Investment and shareholder transactions are recorded on trade
date. The Funds determine the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with
the net sales proceeds. Dividend income is recognized on the ex-dividend
date or as soon as information is available to the Funds, and interest
income is recognized on an accrual basis. Generally accepted accounting
principles require that permanent financial reporting and tax differences
be reclassified to capital stock.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the period ended November 30, 1998,
were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Shares sold................................................. 431,513 311,197
Shares issued to holders in reinvestment of dividends....... 1,731 --
Shares redeemed............................................. (1,826) (28)
------- -------
Net increase................................................ 431,418 311,169
======= =======
</TABLE>
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the period ended November 30, 1998, were as
follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Purchases
U.S. Government........................................... $1,583,408 $ --
Other..................................................... 2,424,533 2,841,535
Sales
U.S. Government........................................... -- --
Other..................................................... 94,463 146,739
</TABLE>
At November 30, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Appreciation................................................ $255,986 $344,033
(Depreciation).............................................. (35,033) (45,442)
-------- --------
Net appreciation on investments............................. $220,953 $298,591
======== ========
</TABLE>
14
<PAGE> 16
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1998 (UNAUDITED)
At November 30, 1998, the cost of investments for federal income tax purposes
was $4,147,613 and $2,832,311 for the Balanced Fund and the Growth Fund,
respectively.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Corporation has an Investment Advisory Agreement (the "Agreement") with
the Adviser, with whom certain officers and Directors of the Corporation are
affiliated, to furnish investment advisory services to the Funds. Under the
terms of the Agreement, the Corporation, on behalf of the Funds, compensates
the Adviser for its management services at the annual rate of 0.90% of the
Balanced Fund's average daily net assets and 1.00% of the Growth Fund's
average daily net assets. The advisory fee is accrued daily and paid monthly.
For the fiscal year ending June 30, 1999, the Adviser has agreed to waive its
management fee and/or reimburse the Funds' other expenses to the extent
necessary to ensure that the Balanced Fund's total operating expense do not
exceed 1.30% of its average daily net assets and that the Growth Fund's total
operating expenses do not exceed 1.50% of its average daily net assets. Any
such waiver or reimbursement is subject to later adjustment during the term
of the Agreement to allow the Adviser to recoup amounts waived or reimbursed
to the extent actual fees and expenses for a period are less than the expense
limitation caps, provided, however, that the Adviser shall only be entitled
to recoup such amounts for a period of three years from the date such amount
was waived or reimbursed. For the period ended November 30, 1998, the Adviser
waived expenses of $67,596 and $66,078 for the Balanced Fund and Growth Fund,
respectively.
The Corporation, on behalf of each of the Funds, has adopted a plan pursuant
to Rule 12b-1 under the 1940 Act (the "12b-1 Plan"), which authorizes it to
pay Rafferty Capital Markets, Inc. (the "Distributor") a distribution and
shareholder servicing fee of 0.25% of each Fund's average daily net assets
(computed on an annual basis). All or a portion of the fee may be used by the
Distributor to pay costs of printing reports and prospectuses for potential
investors and the costs of other distribution and shareholder servicing
expenses.
15
