<PAGE> 1
DIRECTORS
Graham S. Anderson
Frank S. Bayley
J. Kevin Callaghan
Steven C. Phelps
Madelyn B. Smith
PRINCIPAL OFFICERS
Scott R. Vokey, President
Lisa P. Guzman, Treasurer and Secretary
INVESTMENT ADVISER
Badgley, Phelps and Bell, Inc.
1420 Fifth Avenue, Suite 4400
Seattle, Washington 98101
www.badgley.com
ADMINISTRATOR,
TRANSFER AGENT AND DIVIDEND --
DISBURSING AGENT
Firstar Mutual Fund Services, LLC
Third Floor
615 E. Michigan Street
Milwaukee, Wisconsin 53202
CUSTODIAN
Firstar Bank, 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, 2000
BADGLEY
FUNDS, INC.
Badgley Balanced Fund
Badgley Growth Fund
[BADGLEY FUNDS LOGO]
www.badgleyfunds.com
<PAGE> 2
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 2000
Dear Fellow Shareholders:
Thank you for your investment in the Badgley Funds. We sincerely appreciate the
trust you have placed in our mutual fund team.
During the last year the Badgley Funds assets have grown to over $36.6 million,
an increase of about 59%. We are proud of this growth in Fund assets.
This Badgley Funds, Inc. Annual Report reviews the activities of the Badgley
Growth Fund and the Badgley Balanced Fund for the twelve months ending May 31,
2000. PricewaterhouseCoopers LLP audited our financial statements.
POSITIVE PERFORMANCE. FUND OBJECTIVES MET.
As this report details, performance of both the Badgley Growth Fund and the
Badgley Balanced Fund were positive over the last twelve months. The total
returns for the Funds were 15.86% and 9.23% respectively. This performance
compares very well with our benchmarks for the same period, the S&P 500 (10.48%)
and Lehman Brothers Intermediate Govt./Corp. Bond Index (2.49%) (please see the
fund graphs in the following pages).
Annualized portfolio turnover rates remain very low when compared to other
growth and balanced mutual funds. Turnover rates were 25.88% (Badgley Growth
Fund) and 28.78% (Badgley Balanced Fund).
The objective of the Badgley Growth Fund is long-term capital appreciation while
that of the Badgley Balanced Fund is long-term capital appreciation and income.
Over the last twelve months we met these objectives by investing in stocks of
companies that exhibit consistent and predictable earnings growth, solid balance
sheets, market dominance, and strong management. In addition to this equity
focus, in our Badgley Balanced Fund we met objectives by investing in
intermediate duration bonds characterized by high credit quality, liquidity and
higher relative values.
RECAP OF A VOLATILE MARKET: STOCKS & BONDS.
Our disciplined, long-term approach to the management of your Funds has
continued to pay off over the last twelve months. During this period many
investors chased returns by moving quickly from stock to stock. This behavior,
which included a good dose of sector rotation, increased volatility in the U.S.
stock market, creating one of the worst performing weeks (the week ending April
14) in capital market history.
Volatility was most extreme in the market's hottest sector, technology. Although
performance in this group led the market with an almost 50% return, it masked
the huge decline in the sector in April and May. During these two months, the
technology sector was down more than 50% from its high. Our stock selection in
this segment of the market proved solid as our selections outperformed this
segment of the S&P 500 Index. Three of our companies, Cisco, EMC and Intel,
returned over 100% for the last twelve months.
1
<PAGE> 3
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 2000
Our commitment to a diversified portfolio, and our long-term view, kept us
invested in the healthcare field throughout the year. Many investors had taken
the view that political risks were too high. In the face of this challenge, the
group performed well and our selections in this sector, such as Medtronic (+56%)
and Pfizer (+32%), led to our out-performance.
This last year was also a good example of how our commitment to owning the best
companies pays off in sectors that may be out of favor. Due to rising rates,
both financial and utility sectors were challenged, but the strength of our
holdings, American International Group (+28%), State Street Corporation (+61%),
and AES Corporation (+71%), led to solid returns. Even in the difficult consumer
segments of the market, which finished the last twelve months in negative
territory, we had strong performance from several holdings, including Home Depot
(+25%), Starbucks (29%), and Sysco Foods (+44%). As always, we continue to
position the Funds in companies that can weather challenging economic
environments.
Similar to our equities approach, our dedicated approach to fixed income
investing led to overall positive returns during a period of tremendous bond
volatility. Three main themes contributed to this challenging bond market:
rising interest rates, an inverted yield curve, and budget surpluses resulting
in decreasing Treasury bond supply.
The Federal Reserve began raising short-term interest rates in June 1999. This
was an attempt to ward off inflation threats as the economy continued its fiery
expansion; however, it wasn't until the fourth quarter that interest rates
soared an average of 2% in the 2-10 year maturity range.
The fixed income markets did manage to recover in the first half of 2000 as
investors flocked to high quality bonds when NASDAQ stocks began to take a
serious beating. Also during the first quarter we experienced a relatively
unusual phenomenon--an inversion of the yield curve. An inversion occurs when
short-term interest rates exceed long-term rates. An inversion happens
infrequently and is usually short-lived as bond investors generally require more
yield on bonds with longer maturities than those with shorter maturities.
Initially the inversion was triggered by investors' expectations that the Fed
would continue its bias towards increasing short-term interest rates, but the
severity and prolonged nature of the curve's continued inversion is now being
attributed to expectations of a reduction in Treasury bond supply.
The U.S. government, which has been running budget surpluses in the last three
years and anticipates more in the foreseeable future, has begun to "buy back"
Treasury bonds to lower its current marketable debt. Additionally, the
government also has announced a reduction in future bond issuance. These
supply-reducing events are beginning to change the dynamics in the bond market.
With current and future supply of Treasuries dwindling, the fixed income markets
are grappling with finding a new "risk-free" asset to measure the merits of all
other asset classes. Despite the volatility in these markets, we remain true to
our discipline of being fully invested and focused on the best values in high
quality bonds.
DEDICATED BADGLEY FUNDS TEAM. BUILDING THE BADGLEY FUNDS ONE SHAREHOLDER AT A
TIME.
Behind the numbers in this report is a team of people dedicated to managing your
funds and meeting your shareholder needs. The heart of our team is the
Institutional Services Committee (ISC) of Badgley, Phelps
2
<PAGE> 4
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 2000
and Bell, Inc., our Investment Advisor for both the Badgley Growth and Badgley
Balanced Funds. The ISC, a team of four seasoned portfolio managers, functions
as manager of the funds. We invite you to review the profiles of your managers
at www.badgleyfunds.com.
How do you build enduring mutual funds? Your Badgley Balanced Fund and Badgley
Growth Fund are constructed on one fundamental principle: always strive to
exceed shareholder expectations. With this in mind, the Badgley Funds are being
constructed one shareholder at a time. The foundation for this construction is
made of strong and consistent performance built on Badgley, Phelps and Bell's
focused fundamental research, which is applied diligently to the investment of
your assets in the best companies and investment grade bonds.
Meeting shareholder service expectations also is key to attracting and keeping
Badgley Funds shareholders, and we have teamed with industry professionals
Firstar Mutual Fund Services to meet shareholder service needs. As we look ahead
to the next year, we are taking steps to improve your on- and off-line
shareholder services and to make Badgley Funds investor information more readily
available to you. We are pleased that many shareholders have opened multiple
Badgley Funds accounts--for general investment, for retirement, for children and
grandchildren.
Thank you for investing in the Badgley Funds. We welcome your comments and
questions. Please contact us toll free at 1.877.223.4539, in writing or via
email.
Sincerely,
/s/ Scott R. Vokey /s/ Lisa P. Guzman
Scott R. Vokey Lisa P. Guzman
President Treasurer and Secretary
Badgley Funds, Inc. Badgley Funds, Inc.
Email: [email protected] Email: [email protected]
3
<PAGE> 5
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 2000
BALANCED FUND GRAPH
<TABLE>
<CAPTION>
LEHMAN BROTHERS
INTERMEDIATE GOVT./CORP.
BADGLEY BALANCED FUND BOND INDEX S&P 500
--------------------- ------------------------ -------
<S> <C> <C> <C>
06/25/98 10000.00 10000.00 10000.00
08/31/98 9100.08 10203.80 8499.72
11/30/98 10308.60 10448.60 10372.20
02/28/99 10665.20 10393.30 11073.40
05/31/99 10865.80 10422.40 11680.20
08/31/99 10923.30 10428.60 11884.60
11/30/99 11323.10 10566.30 12540.60
02/29/00 11352.60 10580.00 12373.80
05/31/00 11869.00 10683.00 12906.00
</TABLE>
THIS CHART ASSUMES AN INITIAL GROSS INVESTMENT OF $10,000 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 market
value-weighted index composed of all bonds that are investment grade (rated Baa
or higher by Moody's or BBB or higher by S&P, if unrated by Moody's). All issues
have maturities between one and ten years and an outstanding par value of at
least $150 million.
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
for 6/30/98.
Average Annual Total Return Through May
31, 2000
<TABLE>
<CAPTION>
One Year Since Inception 6/25/98
-------- -----------------------
<S> <C> <C>
--
-- Badgley Balanced Fund 9.23% 9.23%
--
-- S&P 500 10.48% 14.08%
--
---- Lehman Brothers Intermediate Govt./Corp. Bond
Index 2.49% 3.47%
</TABLE>
4
<PAGE> 6
BADGLEY FUNDS, INC.
ANNUAL REPORT
MAY 31, 2000
GROWTH FUND GRAPH
<TABLE>
<CAPTION>
BADGLEY GROWTH FUND S&P 500
------------------- -------
<S> <C> <C>
06/25/98 10000.00 10000.00
08/31/98 8059.81 8499.72
11/30/98 10119.90 10372.20
02/28/99 10962.90 11073.40
05/31/99 11465.00 11680.20
08/31/99 11615.20 11884.60
11/30/99 12307.40 12540.60
02/29/00 12429.30 12373.80
05/31/00 13283.00 12906.00
</TABLE>
THIS CHART ASSUMES AN INITIAL GROSS INVESTMENT OF $10,000 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.
Average Annual Total Return through May
31, 2000
<TABLE>
One Year Since Inception 6/25/98
-------- -----------------------
<S> <C> <C>
--
-- Badgley Growth Fund 15.86% 15.76%
--
-- S&P 500 10.48% 14.08%
</TABLE>
5
<PAGE> 7
BADGLEY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2000
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
ASSETS:
Investments, at market value (cost of $22,342,855 and
$9,955,171, respectively).............................. $24,121,466 $12,263,366
Dividends receivable...................................... 3,423 3,268
Interest receivable....................................... 197,715 2,794
Organization costs, net of accumulated amortization....... 16,071 16,070
Receivable from Adviser................................... -- 1,054
Other assets.............................................. 16,326 13,900
----------- -----------
Total assets........................................... 24,355,001 12,300,452
----------- -----------
LIABILITIES:
Accrued expenses and other liabilities.................... 48,762 49,028
Payable to Adviser........................................ 5,450 --
Payable to Custodian...................................... 14,703 --
----------- -----------
Total liabilities...................................... 68,915 49,028
----------- -----------
NET ASSETS.................................................. $24,286,086 $12,251,424
=========== ===========
NET ASSETS CONSIST OF:
Capital stock............................................. $22,525,875 $10,010,075
Accumulated undistributed net investment income........... 80,611 --
Accumulated undistributed net realized loss on
investments............................................ (99,011) (66,846)
Net unrealized appreciation on investments................ 1,778,611 2,308,195
----------- -----------
Total net assets....................................... $24,286,086 $12,251,424
=========== ===========
Shares outstanding (par value of $.01, 500,000,000 shares
authorized)............................................ 2,118,272 925,723
=========== ===========
Net Asset Value, Redemption Price and Offering Price Per
Share.................................................. $ 11.47 $ 13.23
=========== ===========
</TABLE>
See Notes to the Financial Statements
6
<PAGE> 8
BADGLEY FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2000
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income........................................... $ 61,694 $ 57,261
Interest income........................................... 565,559 16,169
---------- ----------
Total investment income................................ 627,253 73,430
---------- ----------
EXPENSES:
Investment advisory fees.................................. 175,548 95,152
Administration fees....................................... 30,012 29,987
Shareholder servicing and accounting fees................. 51,565 46,376
Distribution fees......................................... 48,763 23,788
Custody fees.............................................. 9,971 12,008
Federal and state registration fees....................... 14,204 13,234
Professional fees......................................... 29,931 27,201
Reports to shareholders................................... 7,551 8,447
Amortization of organization costs........................ 5,489 5,490
Directors' fees and expenses.............................. 2,168 2,196
Other..................................................... 11,391 5,960
---------- ----------
Total expenses before waiver and reimbursement............ 386,593 269,839
Less: Waiver of expenses and reimbursement from Adviser... (133,024) (127,681)
---------- ----------
Net expenses........................................... 253,569 142,158
---------- ----------
NET INVESTMENT INCOME/(LOSS)................................ 373,684 (68,728)
---------- ----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on investments................... (65,240) 4,661
Change in unrealized appreciation/(depreciation) on
investments............................................ 1,351,943 1,493,662
---------- ----------
Net realized and unrealized gain on investments........ 1,286,703 1,498,323
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $1,660,387 $1,429,595
========== ==========
</TABLE>
See Notes to the Financial Statements
7
<PAGE> 9
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
BALANCED FUND
BALANCED FUND JUNE 25, 1998(1)
YEAR ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 373,684 $ 102,072
Net realized loss on investments.......................... (65,240) (33,771)
Change in unrealized appreciation/(depreciation) on
investments............................................ 1,351,943 426,668
----------- -----------
Net increase in net assets resulting from operations... 1,660,387 494,969
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (346,071) (84,465)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................. 9,246,953 16,671,176
Proceeds from shares issued to holders in reinvestment of
dividends.............................................. 322,854 72,890
Cost of shares redeemed................................... (3,122,446) (680,161)
----------- -----------
Net increase in net assets resulting from capital share
transactions......................................... 6,447,361 16,063,905
----------- -----------
TOTAL INCREASE IN NET ASSETS................................ 7,761,677 16,474,409
NET ASSETS:
Beginning of period....................................... 16,524,409 50,000
----------- -----------
End of period (including undistributed net investment
income of $80,611 and $49,430, respectively)........... $24,286,086 $16,524,409
=========== ===========
</TABLE>
(1) Commencement of operations.
See Notes to the Financial Statements
8
<PAGE> 10
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH FUND
GROWTH FUND JUNE 25, 1998(1)
YEAR ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
------------ ----------------
<S> <C> <C>
OPERATIONS:
Net investment loss....................................... $ (68,728) $ (18,860)
Net realized gain/(loss) on investments................... 4,661 (71,507)
Change in unrealized appreciation/(depreciation) on
investments............................................ 1,493,662 814,533
----------- -----------
Net increase in net assets resulting from operations... 1,429,595 724,166
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................ (1,118) (14,494)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................. 5,303,112 6,119,128
Proceeds from shares issued to holders in reinvestment of
dividends.............................................. 1,089 14,347
Cost of shares redeemed................................... (984,994) (389,407)
----------- -----------
Net increase in net assets resulting from capital share
transactions......................................... 4,319,207 5,744,068
----------- -----------
TOTAL INCREASE IN NET ASSETS................................ 5,747,684 6,453,740
NET ASSETS:
Beginning of period....................................... 6,503,740 50,000
----------- -----------
End of period (including undistributed net investment
income of $0 and $1,115, respectively)................. $12,251,424 $ 6,503,740
=========== ===========
</TABLE>
(1) Commencement of operations.
See Notes to the Financial Statements
9
<PAGE> 11
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
BALANCED FUND
BALANCED FUND JUNE 25, 1998(1)
YEAR ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
------------- ----------------
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................... $ 10.69 $ 10.00
Income from investment operations:
Net investment income.................................. 0.20 0.18
Net realized and unrealized gain on investments........ 0.78 0.68
----------- -----------
Total from investment operations....................... 0.98 0.86
----------- -----------
Less:
Dividends from net investment income...................... (0.20) (0.17)
----------- -----------
Net asset value, end of period............................ $ 11.47 $ 10.69
=========== ===========
TOTAL RETURN................................................ 9.23% 8.66%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................. $24,286,086 $16,524,409
Ratio of net expense to average net assets:
Before expense reimbursement........................... 1.98% 3.83%(3)
After expense reimbursement............................ 1.30% 1.30%(3)
Ratio of net investment income to average net assets:
Before expense reimbursement........................... 1.24% (0.80)%(3)
After expense reimbursement............................ 1.92% 1.73%(3)
Portfolio turnover rate................................... 28.78% 16.17%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
See Notes to the Financial Statements
10
<PAGE> 12
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
GROWTH FUND
GROWTH FUND JUNE 25, 1998(1)
YEAR ENDED THROUGH
MAY 31, 2000 MAY 31, 1999
------------ ----------------
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................... $ 11.42 $ 10.00
Income from investment operations:
Net investment income (loss)........................... (0.08) (0.02)
Net realized and unrealized gain on investments........ 1.89 1.48
----------- ----------
Total from investment operations....................... 1.81 1.46
----------- ----------
Less:
Dividends from net investment income...................... (0.00)(4) (0.04)
----------- ----------
Net asset value, end of period............................ $ 13.23 $ 11.42
=========== ==========
TOTAL RETURN................................................ 15.86% 14.65%(2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period................................. $12,251,424 $6,503,740
Ratio of net expense to average net assets:
Before expense reimbursement........................... 2.84% 6.12%(3)
After expense reimbursement............................ 1.50% 1.50%(3)
Ratio of net investment income to average net assets:
Before expense reimbursement........................... (2.06)% (5.22)%(3)
After expense reimbursement............................ (0.72)% (0.60)%(3)
Portfolio turnover rate................................... 25.88% 30.28%
</TABLE>
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) Dividends from net investment income paid at rate of $0.0014 per share.
See Notes to the Financial Statements
11
<PAGE> 13
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 2000
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<C> <S> <C>
COMMON STOCKS -- 49.4%
------------------------------------------------------------
Bank & Bank Holding Co. -- 2.0%
4,300 State Street Corp........................................... $ 479,450
-----------
Building -- Maintenance & Service -- 1.2%
7,800 Ecolab, Inc................................................. 298,350
-----------
Business Service -- 4.6%
7,350 Automatic Data Processing, Inc.............................. 403,791
10,050 Cintas Corp................................................. 442,200
7,500 Paychex, Inc................................................ 262,500
-----------
1,108,491
-----------
Communications & Media -- 1.8%
5,250 Omnicom Group............................................... 440,672
-----------
Computer Manufacturing -- 1.8%
3,650 EMC Corp. Massachusetts*.................................... 424,541
-----------
Cosmetics & Toiletries -- 0.9%
4,050 Colgate-Palmolive Co........................................ 213,131
-----------
Drugs -- 4.7%
3,350 Johnson & Johnson........................................... 299,825
9,550 Medtronic, Inc.............................................. 493,019
8,000 Pfizer, Inc................................................. 356,500
-----------
1,149,344
-----------
Electrical Equipment -- 2.7%
3,450 Emerson Electric Co......................................... 203,550
8,550 General Electric Co......................................... 449,944
-----------
653,494
-----------
Electronic -- Miscellaneous -- 1.5%
10,800 Solectron Corp.*............................................ 357,075
-----------
Electronic Technology -- 4.5%
2,900 Hewlett-Packard Co.......................................... 348,363
3,500 Intel Corp.................................................. 436,406
4,400 Texas Instruments, Inc...................................... 317,900
-----------
1,102,669
-----------
</TABLE>
See Notes to the Financial Statements
12
<PAGE> 14
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<C> <S> <C>
Energy Raw Material -- 2.1%
5,850 AES Corp.*.................................................. $ 510,413
-----------
Financial Service -- 4.1%
5,850 Fannie Mae.................................................. 351,731
10,500 Charles Schwab Corp......................................... 301,875
12,350 MBNA Corp................................................... 344,256
-----------
997,862
-----------
Food, Beverage & Tobacco -- 3.1%
8,875 Starbucks Corp.*............................................ 301,750
10,850 Sysco Corp.................................................. 455,022
-----------
756,772
-----------
Insurance -- 1.7%
3,750 American International Group, Inc........................... 422,109
-----------
Medical -- Wholesale Drug Dist. -- 1.4%
5,200 Cardinal Health, Inc........................................ 337,350
-----------
Retail -- Food & Drugs -- 1.4%
7,800 CVS Corp.................................................... 339,300
-----------
Retail -- General -- 2.8%
8,050 Costco Companies, Inc.*..................................... 257,097
8,750 Home Depot, Inc............................................. 427,109
-----------
684,206
-----------
Software -- 1.5%
5,700 Microsoft Corp.*............................................ 356,606
-----------
Telecommunication -- 4.0%
7,400 Cisco Systems, Inc.*........................................ 421,337
5,250 Lucent Technologies, Inc.................................... 301,219
5,000 Nokia Corp. ADR............................................. 260,000
-----------
982,556
-----------
Telephone -- 1.6%
10,050 WorldCom, Inc.*............................................. 378,131
-----------
TOTAL COMMON STOCKS (COST $9,707,155)....................... 11,992,522
-----------
</TABLE>
See Notes to the Financial Statements
13
<PAGE> 15
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- ----------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 23.9%
------------------------------------------------------------
Chemicals -- 1.0%
$ 250,000 E. I. Du Pont De Nemours
6.875%, 10/15/09............................................ $ 236,928
----------
Electronic Technology -- 1.0%
250,000 IBM Corp.
6.450%, 8/01/07............................................. 234,401
----------
Finance -- Auto Loans -- 4.1%
1,000,000 Ford Motor Credit Co.
7.500%, 3/15/05............................................. 981,196
----------
Finance Company -- 5.2%
500,000 Assoc. Corp. NA
6.000%, 4/15/03............................................. 476,815
500,000 General Electric Capital Corp.
7.375%, 1/19/10............................................. 493,240
300,000 Norwest Corp.
6.125%, 10/15/00............................................ 299,294
----------
1,269,349
----------
Food, Beverage & Tobacco -- 2.2%
550,000 Sysco Corp.
7.000%, 5/1/06.............................................. 534,150
----------
Multimedia -- 1.9%
500,000 Walt Disney Co.
5.125%, 12/15/03............................................ 465,387
----------
Retail -- General -- 4.1%
1,050,000 Wal-mart Stores
6.875%, 8/10/09............................................. 1,000,996
----------
Super-Regional Banks -- US -- 0.7%
200,000 Wachovia Corp.
6.250%, 8/04/08............................................. 177,920
----------
</TABLE>
See Notes to the Financial Statements
14
<PAGE> 16
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- ----------
<C> <S> <C>
Telecommunication -- 1.8%
$ 500,000 Lucent Technologies, Inc.
5.500%, 11/15/08............................................ $ 436,539
----------
Telephone -- 1.9%
500,000 WorldCom, Inc.
6.400%, 8/15/05............................................. 468,690
----------
TOTAL CORPORATE BONDS AND NOTES (COST $6,086,494)........... 5,805,556
----------
GOVERNMENT SECURITIES -- 23.6%
------------------------------------------------------------
Government Bonds & Notes -- 11.8%
US Treasury Notes:
100,000 5.750%, 10/31/00............................................ 99,750
100,000 6.250%, 10/31/01............................................ 99,375
675,000 5.500%, 2/28/03............................................. 654,750
500,000 7.250%, 8/15/04............................................. 510,781
550,000 6.500%, 8/15/05............................................. 547,766
500,000 5.625%, 2/15/06............................................. 478,282
500,000 5.500%, 2/15/08............................................. 471,094
----------
TOTAL GOVERNMENT NOTES (COST $2,980,336).................... 2,861,798
----------
Government Agency -- 11.8%
Federal National Mortgage Association (FNMA) -- 7.8%
525,000 6.290%, 2/11/02............................................. 517,573
825,000 6.800%, 1/10/03............................................. 814,356
250,000 6.350%, 6/10/05............................................. 239,132
350,000 6.500%, 4/29/09............................................. 320,607
----------
1,891,668
----------
Federal Home Loan Mortgage (FHLMC) -- 4.0%
1,000,000 7.100%, 4/10/07............................................. 978,353
----------
TOTAL U.S. GOVERNMENT AGENCY (COST $2,977,301).............. 2,870,021
----------
TOTAL GOVERNMENT SECURITIES (COST $5,957,637)............... 5,731,819
----------
</TABLE>
See Notes to the Financial Statements
15
<PAGE> 17
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- -----------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 2.4%
------------------------------------------------------------
Variable Rate Demand Notes**
$526,699 Firstar Bank Demand Note, 6.3913%........................... $ 526,699
64,023 Wisconsin Corporation Central Credit Union Demand Note,
6.3113%..................................................... 64,023
847 Wisconsin Electric Company Demand Note, 6.2251%............. 847
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $591,569)................ 591,569
-----------
TOTAL INVESTMENTS -- 99.3%
(COST $22,342,855).......................................... 24,121,466
-----------
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.7%......... 164,620
-----------
TOTAL NET ASSETS -- 100.0%.................................. $24,286,086
===========
</TABLE>
* -- Non-income producing security.
** -- Variable rate security. The rates listed are as of May 31, 2000.
ADR -- American Depository Receipt.
See Notes to the Financial Statements
16
<PAGE> 18
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 2000
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<C> <S> <C>
COMMON STOCKS -- 98.0%
------------------------------------------------------------
Bank & Bank Holding Co. -- 3.9%
4,300 State Street Corp. ......................................... $ 479,450
-----------
Building -- Maintenance & Service -- 2.4%
7,700 Ecolab, Inc. ............................................... 294,525
-----------
Business Service -- 9.1%
7,400 Automatic Data Processing, Inc. ............................ 406,537
10,150 Cintas Corp. ............................................... 446,600
7,425 Paychex, Inc. .............................................. 259,875
-----------
1,113,012
-----------
Communications & Media -- 3.6%
5,200 Omnicom Group............................................... 436,475
-----------
Computer Manufacturing -- 3.6%
3,750 EMC Corp. Massachusetts *................................... 436,172
-----------
Cosmetics & Toiletries -- 1.8%
4,150 Colgate-Palmolive Co. ...................................... 218,394
-----------
Drugs -- 9.3%
3,300 Johnson & Johnson........................................... 295,350
9,600 Medtronic, Inc. ............................................ 495,600
7,900 Pfizer, Inc. ............................................... 352,044
-----------
1,142,994
-----------
Electrical Equipment -- 5.3%
3,400 Emerson Electric Co. ....................................... 200,600
8,600 General Electric Co. ....................................... 452,575
-----------
653,175
-----------
Electronic -- Miscellaneous -- 2.9%
10,800 Solectron Corp. *........................................... 357,075
-----------
Electronic Technology -- 9.1%
2,950 Hewlett-Packard Co. ........................................ 354,369
3,550 Intel Corp. ................................................ 442,641
4,400 Texas Instruments, Inc. .................................... 317,900
-----------
1,114,910
-----------
Energy Raw Material -- 4.2%
5,950 AES Corp.*.................................................. 519,137
-----------
</TABLE>
See Notes to the Financial Statements
17
<PAGE> 19
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----------
<C> <S> <C>
Financial Service -- 8.2%
5,900 Fannie Mae.................................................. $ 354,737
10,650 Charles Schwab Corp. ....................................... 306,188
12,100 MBNA Corp. ................................................. 337,287
-----------
998,212
-----------
Food, Beverage & Tobacco -- 6.1%
8,700 Starbucks Corp.*............................................ 295,800
10,650 Sysco Corp. ................................................ 446,634
-----------
742,434
-----------
Insurance -- 3.5%
3,850 American International Group, Inc. ......................... 433,366
-----------
Medical -- Wholesale Drug Dist. -- 2.7%
5,150 Cardinal Health, Inc. ...................................... 334,106
-----------
Retail -- Food & Drugs -- 2.7%
7,700 CVS Corp. .................................................. 334,950
-----------
Retail -- General -- 5.6%
8,150 Costco Companies, Inc.*..................................... 260,291
8,800 Home Depot, Inc. ........................................... 429,550
-----------
689,841
-----------
Software -- 3.0%
5,800 Microsoft Corp.*............................................ 362,862
-----------
Telecommunication -- 7.9%
7,300 Cisco Systems, Inc.*........................................ 415,644
5,200 Lucent Technologies, Inc. .................................. 298,350
4,900 Nokia Corp. ADR............................................. 254,800
-----------
968,794
-----------
Telephone -- 3.1%
9,950 WorldCom, Inc.*............................................. 374,369
-----------
TOTAL COMMON STOCKS (COST $9,696,058)....................... 12,004,253
-----------
</TABLE>
See Notes to the Financial Statements
18
<PAGE> 20
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
MAY 31, 2000
GROWTH FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------- -----------
<C> <S> <C>
SHORT-TERM INVESTMENTS -- 2.1%
------------------------------------------------------------
Variable Rate Demand Notes**
$ 2,100 Firstar Bank Demand Note, 6.3913%........................... $ 2,100
21,208 General Mills Demand Note, 6.2463%.......................... 21,208
235,805 Wisconsin Corporation Central Credit Union Demand Note, 235,805
6.3113%.....................................................
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $259,113)................ 259,113
-----------
TOTAL INVESTMENTS -- 100.1%
(COST $9,955,171)........................................... 12,263,366
-----------
OTHER LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.1)%....... (11,942)
-----------
TOTAL NET ASSETS -- 100.0%.................................. $12,251,424
===========
</TABLE>
* -- Non-income producing security.
** -- Variable rate security. The rates listed are as of May 31, 2000.
ADR -- American Depository Receipt.
See Notes to the Financial Statements
19
<PAGE> 21
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2000
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. 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
substantially all of the Funds' investment company net taxable income and
net realized gains to shareholders.
Generally accepted accounting principles require that permanent differences
between financial reporting and tax reporting be reclassified between
various components of net assets.
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, are distributed at least
annually.
e) Organization Costs -- 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 each, have been
20
<PAGE> 22
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
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.
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.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the year ended May 31, 2000, were as
follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Shares sold................................................. 826,896 436,559
Shares issued to holders in reinvestment of dividends....... 28,785 83
Shares redeemed............................................. (283,488) (80,445)
--------- -------
Net increase................................................ 572,193 356,197
========= =======
</TABLE>
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>
21
<PAGE> 23
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the period ended May 31, 2000, were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Purchases
U.S. Government........................................... $2,719,637 $ --
Other..................................................... 9,116,209 6,673,127
Sales
U.S. Government........................................... 962,463 --
Other..................................................... 4,499,670 2,395,270
</TABLE>
At May 31, 2000, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Appreciation................................................ $2,679,147 $2,690,367
(Depreciation).............................................. (977,218) (396,687)
---------- ----------
Net appreciation on investments............................. $1,701,929 $2,293,680
========== ==========
</TABLE>
At May 31, 2000, the cost of investments for federal income tax purposes was
$22,419,537 and $9,969,686 for the Balanced Fund and the Growth Fund,
respectively.
At May 31, 2000, the Growth Fund had accumulated net realized capital loss
carryovers of $52,331. The capital loss carryovers for the Growth Fund of
$1,864 and $50,467 expire in 2007 and 2008, respectively. In addition, the
Balanced Fund realized, on a tax basis, post-October losses through May 31,
2000 of $27,404. These losses are not recognized for tax purposes until the
first day of the following fiscal year.
On the Statement of Assets and Liabilities, as a result of permanent
book-to-tax differences, undistributed net investment income has been
increased, and capital stock decreased by $3,568 and $68,728 for the Balanced
Fund and Growth Fund, respectively. These permanent book-to-tax differences
are the result of non-deductible organization costs and net operating losses.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Corporation has an Investment Advisory Agreement (the "Agreement") with
Badgley, Phelps and Bell, Inc. (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.
22
<PAGE> 24
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MAY 31, 2000
For the fiscal year ended May 31, 2000 and through September 30, 2000, 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 expenses 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 May 31, 2000, the Adviser waived/reimbursed expenses of $133,024
and $127,681 for the Balanced Fund and Growth Fund, respectively.
Waived/reimbursed expenses subject to potential recovery by year of
expiration are as follows:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION BALANCED FUND GROWTH FUND
------------------ ------------- -----------
<S> <C> <C>
5/31/2002................................................... $149,440 $145,364
5/31/2003................................................... 133,024 127,681
</TABLE>
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., an unaffiliated distributor, (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, 2000, the Balanced Fund and Growth Fund incurred expenses of $48,763 and
$23,788, respectively, pursuant to the 12b-1 Plan.
23
<PAGE> 25
BADGLEY FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors 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, 2000, the results of each of their operations for the
year then ended, and the changes in each of their net assets and the financial
highlights for each of the periods presented, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 at May 31,
2000 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP sig
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
June 23, 2000
24
<PAGE> 26
FOR A PROSPECTUS CONTAINING MORE INFORMATION, PLEASE CALL 1-877-BADGLEY OR
CONTACT THE BADGLEY FUNDS ON-LINE AT WWW.BADGLEYFUNDS.COM. PLEASE READ THE
PROSPECTUS CAREFULLY BEFORE INVESTING OR SENDING MONEY.
