<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, Wisconsin 53202
DISTRIBUTOR
Rafferty Capital Markets, Inc.
1311 Mamaronek Avenue
White Plains, New York 10605
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
ANNUAL
REPORT
May 31, 1999
BADGLEY
FUNDS, INC.
Badgley Balanced Fund
Badgley Growth Fund
[BADGLEY FUNDS LOGO]
<PAGE> 2
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 1999
Dear Shareholders:
It is with great satisfaction that we report to you a very successful first year
of operations for the Badgley Funds. Since the inception of the funds on June
25, 1998, the funds have grown from $1.4 million to their current level of $23.0
million. This growth occurred in an extremely volatile global market
environment. Throughout most of 1998 and early 1999, Asia was mired in a severe
recession, Russia's economy collapsed and Brazil suffered from a serious
currency crisis. These markets have since rebounded, alleviating some of the
pressure on the U.S. economy.
Meanwhile, the U.S. economy continued to operate at healthy levels during the
fiscal year. Interest rates hit a historical low as the 30-year Treasury fell to
4.72% in October. Rates have since risen by more than one percentage point;
however, from a historical perspective, they continue to be low. Unemployment is
also very healthy, and at the end of May was a mere 4.2%. The last time
unemployment was at this level was in February of 1970. Inflation, as measured
by the consumer price index, remains well contained and recently measured in at
an annual rate of 2.1%. Finally, the U.S. government has been running a net
surplus for the last two years and projections indicate a surplus of
approximately $110 billion for the 1999 calendar year.
The equities in both the Growth Fund and the Balanced Fund benefited from the
strong economy in the United States. The consumer cyclical and technology
sectors did particularly well. Our consumer cyclical stocks, such as Home Depot,
Inc. and Costco Companies, Inc., benefited from the "wealth effect," as many
consumers saw their equity investments increase in value and became more
confident in their financial position. This phenomenon, coupled with low
unemployment, has had a positive effect on consumer spending.
The significant outperformance of several of our technology holdings (Cisco
Systems, Inc., Microsoft Corp., Intel Corp. and Hewlett-Packard Co.) was driven
by solid fundamentals as businesses worldwide spent heavily on information
systems to become more efficient. This may potentially have a compounding effect
over time, as an efficient company has the ability to increase cash flows more
rapidly, which may then be used to purchase more technological investments. In
addition, the explosive growth in the Internet continues to provide new avenues
of growth for all of our technology companies. We continue to invest in the
companies that provide the infrastructure and products that facilitate the use
and growth of the Internet rather than the many start-ups that have come to
market recently with high valuations and speculative business strategies.
The healthcare sector underperformed as investors attempted to filter through
all of the possible changes in the delivery of healthcare as mandated by the
federal government. Potential changes in the Medicare program could
substantially alter the profitability of this industry. We currently maintain a
below-market weighting in this sector while we evaluate the industry's prospects
going forward.
The fixed income markets experienced tremendous volatility during the first year
of the Balanced Fund. Interest rates during that time ranged from a historical
low of 4.72% to slightly above 6% -- its current level. Despite this increase in
interest rates, the bonds in the fund managed to post positive returns. The
volatility began last fall when the Federal Reserve cut short-term rates by 75
basis points in response to the extraordinary dislocation that was taking place
in the financial markets. Prior to this crisis, the Fed had a "tightening bias"
toward interest rates as the economy exhibited evidence of strong growth.
Volatility emerged as the bond market was challenged to decipher whether the
lowering of interest rates would prevent a
1
<PAGE> 3
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 1999
recession that could occur due to ailing overseas economies, or if the easing
would exacerbate the already strong economy and ignite inflationary pressures
down the road.
As we entered 1999, it became increasingly evident that the world was gaining
stability and the economy was showing no signs of slowing. Interest rates began
to reverse their course and gained over a full percentage point by the end of
May. Although the recent trend in long-term interest rates has been up, Federal
Reserve Chairman Alan Greenspan recently reiterated the Fed's commitment to
remain vigilant on the inflation front. This should help the bond market resume
its confidence that the Federal Reserve will be able to continue its seven-year
run of nurturing a growing economy with little or no inflation and should
thereby be able to maintain relatively low interest rate levels.
As you know, we do not attempt to predict the direction of the market; rather,
we buy stocks and bonds that have strong fundamentals and long term value.
Regardless of the direction of the economy over the next 12 months, we will work
diligently to invest your assets in the best companies in the U.S. economy.
We thank you for investing in the Badgley Funds, and look forward to serving you
in the future. If you have questions, please do not hesitate to call us toll
free at (877) 223-4539.
Sincerely,
/s/ Otis P. Heald III
Otis P. Heald III, CFA
2
<PAGE> 4
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 1999
BALANCED FUND GRAPH
<TABLE>
<CAPTION>
BADGLEY BALANCED FUND LEHMAN BROTHERS S&P 500
--------------------- INTERMEDIATE GOVT./CORP. -------
BOND INDEX
------------------------
<S> <C> <C> <C>
06/25/98 25000 25000 25000
06/30/98 25000 25027.5 25107.5
07/31/98 24750 25115.1 24841.4
08/31/98 22750 25508.4 21249.3
09/30/98 23805.3 26149.7 22611.4
10/31/98 24913.6 26123.5 24449.7
11/30/98 25770.1 26120.9 25931.3
12/31/98 26788.7 26225.4 27425
01/31/99 27294.6 26389.7 28571.3
02/28/99 26662.2 25982 27682.8
03/31/99 27265.8 26176.9 28790.1
04/30/99 27774 26258 29904.3
05/31/99 27164.2 26055.8 29198.5
</TABLE>
THIS CHART ASSUMES AN INITIAL GROSS INVESTMENT OF $25,000 MADE ON 6/25/98
(COMMENCEMENT OF OPERATIONS). RETURNS SHOWN INCLUDE THE REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTIONS. IN THE ABSENCE OF FEE WAIVERS AND REIMBURSEMENTS,
TOTAL RETURN WOULD BE REDUCED. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT YOUR
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
LEHMAN BROTHERS INTERMEDIATE GOVT./CORP. BOND INDEX - An unmanaged index which
measures the performance of 3,212 issues with a total market value of $2.2
trillion. The minimum market value is $100 million. Maturities range from one to
ten years, with 4.2 years being the average.
S&P 500 INDEX - An unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of the 500 stocks which represent all major
industries.
For the period 6/25/98 thru 6/30/98 the return for the Lehman Brothers
Intermediate Govt./Corp. Bond index was calculated by prorating the total return
as of the end of 6/30/98.
Rate of Return for the Period Ended May 31, 1999
<TABLE>
Since Inception 6/25/98
-----------------------
<S> <C>
- --
- -- Badgley Balanced Fund 8.66%
- --
- -- S&P 500 16.79%
- --
- ---- Lehman Brothers Intermediate Govt./Corp. Bond
Index 4.22%
</TABLE>
3
<PAGE> 5
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 1999
GROWTH FUND GRAPH
<TABLE>
<CAPTION>
BADGLEY GROWTH FUND S&P 500
------------------- -------
<S> <C> <C>
06/25/98 25000.00 25000.00
06/30/98 25000.00 25107.50
07/31/98 24400.00 24841.40
08/31/98 20150.00 21249.30
09/30/98 21675.00 22611.40
10/31/98 23700.00 24449.70
11/30/98 25300.00 25931.30
12/31/98 27256.40 27425.00
01/31/99 28160.00 28571.30
02/28/99 27407.00 27682.80
03/31/99 28536.40 28790.10
04/30/99 29590.50 29904.30
05/31/99 28661.90 29198.50
</TABLE>
THIS CHART ASSUMES AN INITIAL GROSS INVESTMENT OF $25,000 MADE ON 6/25/98
(COMMENCEMENT OF OPERATIONS). RETURNS SHOWN INCLUDE THE REINVESTMENT OF ALL
DIVIDENDS AND DISTRIBUTIONS. IN THE ABSENCE OF FEE WAIVERS AND REIMBURSEMENTS,
TOTAL RETURN WOULD BE REDUCED. PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE
PERFORMANCE. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, SO THAT YOUR
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
S&P 500 INDEX - An unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of the 500 stocks which represent all major
industries.
Rate of Return for the Period Ended May 31, 1999
<TABLE>
Since Inception 6/25/98
-----------------------
<S> <C>
- --
- -- Badgley Growth Fund 14.65%
- --
- -- S&P 500 16.79%
</TABLE>
4
<PAGE> 6
BADGLEY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1999
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
ASSETS:
Investments, at value (cost of $15,999,706 and $5,688,562,
respectively).......................................... $16,426,374 $6,503,095
Dividends receivable...................................... 4,232 3,220
Interest receivable....................................... 114,130 584
Organization costs, net of accumulated amortization....... 21,560 21,560
Receivable from Adviser................................... -- 7,407
Other assets.............................................. 10,806 8,162
----------- ----------
Total assets........................................... 16,577,102 6,544,028
----------- ----------
LIABILITIES:
Accrued expenses and other liabilities.................... 52,028 40,288
Payable to Adviser........................................ 665 --
----------- ----------
Total liabilities...................................... 52,693 40,288
----------- ----------
NET ASSETS.................................................. $16,524,409 $6,503,740
=========== ==========
NET ASSETS CONSIST OF:
Capital stock............................................. $16,082,082 $5,759,599
Accumulated undistributed net investment income........... 49,430 1,115
Accumulated undistributed net realized loss on
investments............................................ (33,771) (71,507)
Net unrealized appreciation on investments................ 426,668 814,533
----------- ----------
Total net assets....................................... $16,524,409 $6,503,740
=========== ==========
Shares outstanding (par value of $.01, 500,000,000 shares
authorized)............................................ 1,546,079 569,526
=========== ==========
Net Asset Value, Redemption Price and Offering Price Per
Share.................................................. $ 10.69 $ 11.42
=========== ==========
</TABLE>
See Notes to the Financial Statements
5
<PAGE> 7
BADGLEY FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 25, 1998(1) TO MAY 31, 1999
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income........................................... $ 19,779 $ 21,513
Interest income........................................... 159,170 6,739
Other income.............................................. -- 43
-------- --------
Total investment income................................ 178,949 28,295
-------- --------
EXPENSES:
Investment advisory fees.................................. 53,223 31,437
Administration fees....................................... 27,501 27,501
Shareholder servicing and accounting fees................. 45,742 42,954
Distribution fees......................................... 14,784 7,859
Custody fees.............................................. 19,876 16,576
Federal and state registration fees....................... 33,352 33,981
Professional fees......................................... 13,065 13,242
Reports to shareholders................................... 4,995 5,190
Amortization of organization costs........................ 4,901 4,901
Directors' fees and expenses.............................. 2,000 2,000
Other..................................................... 6,878 6,878
-------- --------
Total expenses before waiver and reimbursement............ 226,317 192,519
Less: Waiver of expenses and reimbursement from Adviser... (149,440) (145,364)
-------- --------
Net expenses........................................... 76,877 47,155
-------- --------
NET INVESTMENT INCOME (LOSS)................................ 102,072 (18,860)
-------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments.......................... (33,771) (71,507)
Change in unrealized appreciation on investments.......... 426,668 814,533
-------- --------
Net realized and unrealized gain on investments........ 392,897 743,026
-------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $494,969 $724,166
======== ========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
6
<PAGE> 8
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 25, 1998(1) TO MAY 31, 1999
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income (loss).............................. $ 102,072 $ (18,860)
Net realized loss on investments.......................... (33,771) (71,507)
Change in unrealized appreciation on investments.......... 426,668 814,533
----------- ----------
Net increase in net assets resulting from operations... 494,969 724,166
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (84,465) (14,494)
----------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................. 16,671,176 6,119,128
Proceeds from shares issued to holders in reinvestment of
dividends.............................................. 72,890 14,347
Cost of shares redeemed................................... (680,161) (389,407)
----------- ----------
Net increase in net assets resulting from capital share
transactions......................................... 16,063,905 5,744,068
----------- ----------
TOTAL INCREASE IN NET ASSETS................................ 16,474,409 6,453,740
NET ASSETS:
Beginning of period....................................... 50,000 50,000
----------- ----------
End of period (including undistributed net investment
income of $49,431 and $1,115, respectively)............ $16,524,409 $6,503,740
=========== ==========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
7
<PAGE> 9
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JUNE 25, 1998(1) TO MAY 31, 1999
<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)........................... 0.18 (0.02)
Net realized and unrealized gain 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(2)............................................. 8.66% 14.65%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................. $16,524,409 $6,503,740
Ratio of net expense to average net assets:
Before expense reimbursement(3)........................ 3.83% 6.12%
After expense reimbursement(3)......................... 1.30% 1.50%
Ratio of net investment income to average net assets:
Before expense reimbursement(3)........................ (0.80)% (5.22)%
After expense reimbursement(3)......................... 1.73% (0.60)%
Portfolio turnover rate................................... 16.17% 30.28%
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
See Notes to the Financial Statements
8
<PAGE> 10
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 1999
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- -----------
<C> <S> <C>
COMMON STOCKS -- 49.7%
------------------------------------------------------------
Bank & Bank Holding Co. -- 2.5%
2,375 Bankamerica Corp............................................ $ 153,633
3,375 State Street Corp........................................... 257,344
-----------
410,977
-----------
Building-Maintenance and Service -- 1.5%
5,725 Ecolab, Inc................................................. 243,313
-----------
Business Service -- 3.0%
6,100 Automatic Data Processing, Inc. ............................ 251,244
3,875 Cintas Corp................................................. 246,063
-----------
497,307
-----------
Chemical Manufacturing -- 1.1%
3,875 Praxair, Inc................................................ 189,148
-----------
Commercial Services -- 1.0%
9,175 Servicemaster Company....................................... 166,297
-----------
Communications & Media -- 1.8%
4,250 Omnicom Group............................................... 297,500
-----------
Cosmetic & Soap -- 1.3%
4,125 Gillette Co. ............................................... 210,375
-----------
Drugs -- 5.5%
2,625 Johnson & Johnson........................................... 243,141
3,575 Medtronic, Inc. ............................................ 253,825
2,900 Merck & Co., Inc. .......................................... 195,750
2,050 Pfizer, Inc................................................. 219,350
-----------
912,066
-----------
Electrical Equipment -- 2.6%
2,600 Emerson Electric Co......................................... 166,075
2,550 General Electric Co. ....................................... 259,303
-----------
425,378
-----------
Electronic Miscellaneous -- 1.0%
3,150 Solection Corp.* ........................................... 172,462
-----------
Electronic Technology -- 2.6%
2,350 Hewlett-Packard Co. ........................................ 221,634
3,800 Intel Corp.................................................. 205,437
-----------
427,071
-----------
</TABLE>
See Notes to the Financial Statements
9
<PAGE> 11
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- -----------
<C> <S> <C>
Energy Raw Material -- 1.4%
4,750 AES Corp.*.................................................. $ 236,313
-----------
Financial Service -- 5.0%
4,175 Fannie Mae.................................................. 283,900
5,300 Franklin Resources, Inc..................................... 230,550
11,000 MBNA Corp. ................................................. 303,875
-----------
818,325
-----------
Food, Beverage & Tobacco -- 3.1%
6,725 Starbucks Corp.* ........................................... 247,984
8,650 Sysco Corp.................................................. 256,797
-----------
504,781
-----------
Insurance -- 1.6%
2,275 American International Group, Inc. ......................... 260,061
-----------
Medical -- Wholesale Drug Dist. -- 1.3%
3,650 Cardinal Health, Inc. ...................................... 220,369
-----------
Oil & Gas -- 1.3%
2,300 Chevron Corp. .............................................. 213,181
-----------
Retail -- General -- 3.3%
3,125 Costco Companies, Inc.*..................................... 226,563
5,625 Home Depot, Inc. ........................................... 319,922
-----------
546,485
-----------
Software -- 2.0%
4,175 Microsoft Corp.*............................................ 336,870
-----------
Telecommunication -- 3.5%
3,225 Cisco Systems, Inc.*........................................ 351,122
4,125 Lucent Technologies, Inc. .................................. 234,609
-----------
585,731
-----------
Telephone -- 2.2%
4,150 MCI WorldCom, Inc.*......................................... 358,456
-----------
Travel & Recreation -- 1.1%
6,050 The Walt Disney Co.......................................... 176,206
-----------
TOTAL COMMON STOCKS (COST $7,561,462)....................... 8,208,672
-----------
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 12
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 21.4%
------------------------------------------------------------
Electronic Technology -- 1.5%
$250,000 IBM Corp.
6.450%, 8/01/07............................................. $ 250,371
-----------
Finance -- Auto Loans -- 3.0%
500,000 Ford Motor Credit Co.
5.125%, 10/15/01............................................ 489,137
-----------
Finance Company -- 4.8%
500,000 Assoc. Corp. NA
6.000%, 4/15/03............................................. 493,242
300,000 Norwest Corp.
6.125%, 10/15/00............................................ 301,142
-----------
794,384
-----------
Food, Beverage & Tobacco -- 4.0%
100,000 Albertsons, Inc.
6.375%, 6/01/00............................................. 100,731
550,000 Sysco Corp.
7.000%, 5/01/06............................................. 561,439
-----------
662,170
-----------
Multimedia -- 2.9%
500,000 Walt Disney Co.
5.125%, 12/15/03............................................ 477,184
-----------
Oil & Gas -- 0.9%
150,000 Amoco Company
6.250%, 10/15/04............................................ 150,094
-----------
Retail Trade -- 0.3%
55,000 Wal-Mart Stores
6.125%, 10/01/99............................................ 55,128
-----------
Super-Regional Banks -- U.S. -- 1.2%
200,000 Wachovia Corp
6.250%, 8/04/08............................................. 193,755
-----------
Telecommunication Equipment -- 2.8%
500,000 Lucent Technologies
5.500%, 11/15/08............................................ 465,135
-----------
TOTAL CORPORATE BONDS AND NOTES (COST $3,643,663)........... 3,537,358
-----------
</TABLE>
See Notes to the Financial Statements
11
<PAGE> 13
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
GOVERNMENT SECURITIES -- 25.2%
------------------------------------------------------------
Government Bonds & Notes 13.2%
US Treasury Notes:
$100,000 7.500%, 10/31/99............................................ $ 101,031
200,000 5.750%, 10/31/00............................................ 201,063
100,000 6.25%, 10/31/01............................................. 101,594
375,000 5.500%, 2/28/03............................................. 372,539
300,000 7.250%, 8/15/04............................................. 319,969
100,000 5.875%, 11/15/05............................................ 100,375
500,000 5.625%, 2/15/06............................................. 494,531
500,000 5.500%, 2/15/08............................................. 491,719
-----------
TOTAL GOVERNMENT NOTES (COST $2,241,263).................... 2,182,821
-----------
Government Agency -- 12.0%
Federal National Mortgage Association (FNMA) -- 9.9%
100,000 5.360%, 2/16/01............................................. 99,555
525,000 6.290%, 2/11/02............................................. 529,797
500,000 6.800%, 1/10/03............................................. 513,988
250,000 6.350%, 6/10/05............................................. 252,855
250,000 5.250% 1/15/09.............................................. 233,172
-----------
1,629,367
-----------
Federal Home Loan Bank -- 2.1%
50,000 5.960%, 10/06/00............................................ 50,284
300,000 5.755%, 3/25/03............................................. 297,900
-----------
348,184
-----------
TOTAL U.S. GOVERNMENT AGENCY (COST $2,033,346).............. 1,977,551
-----------
TOTAL GOVERNMENT SECURITIES (COST $4,274,609)............... 4,160,372
-----------
</TABLE>
See Notes to the Financial Statements
12
<PAGE> 14
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 3.1%
------------------------------------------------------------
Variable Rate Demand Notes**
$123,850 General Mills Demand Note, 4.6050%.......................... $ 123,850
396,122 Wisconsin Corporation Central Credit Union Demand Note,
4.6700%..................................................... 396,122
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $519,972)................ 519,972
-----------
TOTAL INVESTMENTS -- 99.4%
(COST $15,999,706).......................................... 16,426,374
-----------
OTHER ASSETS AND LIABILITIES, NET -- 0.6%................... 98,035
-----------
TOTAL NET ASSETS -- 100.0%.................................. $16,524,409
===========
</TABLE>
* Non-income producing security.
** Variable rate security. The rates listed are as of May 31, 1999.
See Notes to the Financial Statements
13
<PAGE> 15
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 1999
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- --------
<C> <S> <C>
COMMON STOCKS -- 95.7%
------------------------------------------------------------
Bank & Bank Holding Co. -- 4.8%
1,788 Bankamerica Corp............................................ $115,661
2,575 State Street Corp........................................... 196,344
--------
312,005
--------
Building-Maintenance & Service -- 2.8%
4,325 Ecolab, Inc. ............................................... 183,813
--------
Business Service -- 5.8%
4,625 Automatic Data Processing, Inc.............................. 190,492
2,925 Cintas Corp. ............................................... 185,738
--------
376,230
--------
Chemical Manufacturing -- 2.2%
2,975 Praxair, Inc................................................ 145,217
--------
Commercial Services -- 2.0%
7,050 Servicemaster Company....................................... 127,781
--------
Communications & Media -- 3.5%
3,225 Omnicom Group............................................... 225,750
--------
Cosmetic & Soap -- 2.5%
3,125 Gillette Co. ............................................... 159,375
--------
Drugs -- 10.6%
2,000 Johnson & Johnson........................................... 185,250
2,700 Medtronic, Inc.............................................. 191,700
2,200 Merck & Co., Inc. .......................................... 148,500
1,550 Pfizer, Inc................................................. 165,850
--------
691,300
--------
Electrical Equipment -- 4.9%
1,975 Emerson Electric Co......................................... 126,153
1,925 General Electric Co......................................... 195,748
--------
321,901
--------
Electronic Miscellaneous -- 2.0%
2,425 Solection Corp*............................................. 132,769
--------
Electronic Technology -- 5.0%
1,775 Hewlett-Packard Co. ........................................ 167,405
2,875 Intel Corp.................................................. 155,430
--------
322,835
--------
</TABLE>
See Notes to the Financial Statements
14
<PAGE> 16
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- ----------
<C> <S> <C>
Energy Raw Material -- 2.7%
3,600 AES Corp.*.................................................. $ 179,100
----------
Financial Service -- 9.5%
3,150 Fannie Mae.................................................. 214,200
4,025 Franklin Resources, Inc. ................................... 175,088
8,325 MBNA Corp................................................... 229,978
----------
619,266
----------
Food, Beverage & Tobacco -- 5.9%
5,175 Starbucks Corp.* ........................................... 190,828
6,550 Sysco Corp. ................................................ 194,453
----------
385,281
----------
Insurance -- 3.0%
1,725 American International Group, Inc........................... 197,189
----------
Medical - Wholesale Drug Dist. -- 2.6%
2,750 Cardinal Health, Inc. ...................................... 166,031
----------
Oil & Gas -- 2.5%
1,750 Chevron Corp................................................ 162,203
----------
Retail -- General -- 6.4%
2,375 Costco Companies, Inc.*..................................... 172,187
4,275 Home Depot, Inc. ........................................... 243,141
----------
415,328
----------
Software -- 3.9%
3,150 Microsoft Corp.*............................................ 254,166
----------
Telecommunication -- 6.8%
2,450 Cisco Systems, Inc.*........................................ 266,744
3,125 Lucent Technologies, Inc. .................................. 177,734
----------
444,478
----------
Telephone -- 4.2%
3,150 MCI WorldCom, Inc.*......................................... 272,081
----------
Travel & Recreation -- 2.1%
4,600 The Walt Disney Co. ........................................ 133,975
----------
TOTAL COMMON STOCKS (COST $5,413,540)....................... 6,228,074
----------
</TABLE>
See Notes to the Financial Statements
15
<PAGE> 17
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 1999
GROWTH FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 4.2%
------------------------------------------------------------
Variable Rate Demand Note**
$223,482 General Mills Demand Note, 4.6050%.......................... $ 223,482
51,539 Wisconsin Corporation Central Credit Union Demand Note, 51,539
4.6700%.....................................................
----------
TOTAL SHORT-TERM INVESTMENTS (COST $275,022)................ 275,021
----------
TOTAL INVESTMENTS -- 99.9%
(COST $5,688,562)........................................... 6,503,095
OTHER ASSETS AND LIABILITIES, NET -- 0.1%................... 645
----------
TOTAL NET ASSETS -- 100.0%.................................. $6,503,740
==========
</TABLE>
* Non-income producing security.
** Variable rate security. The rates listed are as of May 31, 1999.
See Notes to the Financial Statements
16
<PAGE> 18
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 1999
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 Corporation. 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. A director of Badgley, Phelps and Bell, Inc. (the
"Adviser") and a director of the Corporation each acquired 2,500 shares of
the Balanced Fund capital stock and shares of the Growth Fund capital stock
at $10 per share on June 10, 1998. The Funds commenced operations on June 25,
1998.
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, other equity-type securities and
fixed income securities with a maturity greater than 60 days 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 Funds 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. The
Funds' net realized capital gains, if any, will be distributed at least
annually.
e) Organizational Costs -- The costs incurred in connection with the
organization, initial registration and public offering of shares,
aggregating $26,461 for both the Balanced Fund and Growth Fund, have been
paid by the Funds. These costs are being amortized over the period of
benefit, but not to exceed sixty months from the Funds' commencement of
operations.
f) 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 amounts reported in the
financial statements. Actual results could differ from those estimates.
17
<PAGE> 19
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
g) 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, and interest income is recognized on an accrual basis. Generally
accepted accounting principles require that permanent financial reporting
and tax differences be reclassified among the capital accounts.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the period ended May 31, 1999, were
as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Shares sold................................................. 1,597,563 598,588
Shares issued to holders in reinvestment of dividends....... 7,027 1,321
Shares redeemed............................................. (63,511) (35,383)
--------- -------
Net increase................................................ 1,541,079 564,526
========= =======
</TABLE>
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the period ended May 31, 1999, were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Purchases
U.S. Government........................................... $ 4,285,162 $ --
Other..................................................... 12,143,317 6,423,468
Sales
U.S. Government........................................... -- --
Other..................................................... 900,386 938,420
</TABLE>
At May 31, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Appreciation................................................ $ 949,983 $ 967,973
(Depreciation).............................................. (523,580) (153,440)
--------- ---------
Net appreciation on investments............................. $ 426,403 $ 814,533
========= =========
</TABLE>
At May 31, 1999, the cost of investments for federal income tax purposes was
$15,999,971 and $5,688,562 for the Balanced Fund and the Growth Fund,
respectively.
At May 31, 1999, the Funds had accumulated net realized capital loss
carryovers of $982 and $1,864 for the Balanced Fund and Growth Fund,
respectively. The capital loss carryovers for both Funds expire in
18
<PAGE> 20
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 1999
2007. In addition, the Funds realized, on a tax basis, post-October losses
through May 31, 1999 of $32,524 and $69,643 for the Balanced Fund and Growth
Fund, respectively. These losses are not recognized for tax purposes until
the first day of the following fiscal year.
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.
From June 25, 1998 (commencement of operations) until 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 did not exceed 1.30% of its average daily net assets
and that the Growth Fund's total operating expenses did 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 May 31, 1999, the Adviser waived/reimbursed expenses of $149,440
and $145,364 for the Balanced Fund and Growth Fund, respectively. The Adviser
intends to continue to waive its management fee and/or reimburse the Funds'
other expenses to the extent necessary to ensure that the Balanced Fund's and
Growth Fund's total operating expenses do not exceed 1.30% and 1.50%,
respectively, of their respective average daily net assets until May 31,
2000.
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. During the period ended May 31, 1999, the Balanced Fund and Growth
Fund incurred expenses of $14,784 and $7,859, respectively, pursuant to the
plan.
19
<PAGE> 21
BADGLEY FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Badgley Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Badgley Balanced Fund and the
Badgley Growth Fund (constituting Badgley Funds, Inc., hereafter referred to as
the "Funds") at May 31, 1999, the results of each of their operations, the
changes in each of their net assets and the financial highlights for the period
from June 25, 1998 (commencement of operations) to May 31, 1999, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at May 31, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP sig
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
June 25, 1999
20
