<PAGE> 1
DIRECTORS
J. Kevin Callaghan
Steven C. Phelps
Frank S. Bayley
Madelyn B. Smith
Graham Anderson
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
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, 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, 1999
BADGLEY
FUNDS, INC.
Badgley Growth Fund
Badgley Balanced Fund
[BADGLEY FUNDS LOGO]
www.badgleyfunds.com
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS.................................. 1
STATEMENT OF ASSETS AND LIABILITIES..................... 2
STATEMENT OF OPERATIONS................................. 3
STATEMENT OF CHANGES IN NET ASSETS...................... 4
FINANCIAL HIGHLIGHTS.................................... 6
SCHEDULE OF INVESTMENTS................................. 8
NOTES TO FINANCIAL STATEMENTS........................... 16
</TABLE>
[BADGLEY FUNDS LOGO]
BADGLEY FUNDS, INC.
<PAGE> 3
BADGLEY FUNDS, INC.
SEMI-ANNUAL REPORT
DECEMBER 31, 1999
Dear Shareholder:
December 31 brought to a close one of the most dramatic years in stock market
history. On the face of it, 1999 was a banner year for stocks. The S&P 500 Index
posted its fifth straight year of returns greater than 20%, the NASDAQ index had
its best year ever, and the newly reconstituted Dow Jones Industrial Average
rose to record heights. However, index performance can be very deceiving, as the
drama behind the numbers suggests.
Even as the S&P 500 Index turned in another year of strong gains, half of the
stocks in the Index posted negative returns for 1999. Only 30% of the stocks in
the S&P 500 actually beat the Index itself, and almost one-third of these were
up more than 100%. In other words, strong portfolio returns generally required
owning a very small number of stocks, almost all concentrated in a single sector
- -- technology.
The extraordinary leadership shown by technology stocks is the undisputed top
story in the stock market today. Over the past five years, we have witnessed a
tremendous growth in new technologies that are challenging and transforming
virtually every sector of our economy. Though the rate of price appreciation
among technology stocks may not be sustainable, the revolutionized economy in
which we find ourselves is certainly here to stay.
We are pleased to report another year of competitive returns for your funds,
despite the selective market environment of 1999. As you know, we diversify
investments across economic sectors and focus our energies on selecting the best
companies within these sectors. While this aspect of our philosophy
disadvantaged us last year relative to styles that concentrate in one segment of
the economy or in a particular stock, our diversified approach has provided our
clients with strong returns and reduced risk.
In keeping with our desire to own the best companies, we recently eliminated two
positions from your mutual fund: Franklin Resources and ServiceMaster Co.
Franklin Resources has been challenged in recent years by its out-of-favor
equity products, and by its bond funds, which have been negatively affected by
rising interest rates. These problems have led Franklin's clients to sell its
funds, reducing the compounding gains supporting its growth rate.
Similarly, we sold ServiceMaster because of a decline in earnings visibility.
After reporting disappointing earnings last quarter, management announced that
it would be investing in a number of new business initiatives over the next few
years, which will result in an even further decline in earnings growth. While
these initiatives may lead to rising earnings in the future, we are not
satisfied with management's projections and would prefer to invest in companies
with more certain earnings prospects.
While stock investors had much to applaud, bondholders had a difficult year. In
the two- to ten-year maturity range, interest rates soared nearly two percentage
points (on average) while the 30-year Treasury yield climbed from 5.1% to 6.5%
in only twelve months. A move in interest rates of this magnitude has not
occurred since 1994, when the Fed raised short-term interest rates by 225 basis
points, and wreaked havoc on the bond market. A myriad of factors contributed to
the rise in market interest rates during 1999: recovering overseas economies, a
continued strong domestic economy, rising oil prices and the Fed raising
short-term interest rates by 75 basis points. As for the new year, bond
investors remain worried about more rate hikes in the Fed's script, especially
if the Y2K transition is smooth and we continue to see robust ongoing economic
strength.
During these volatile times, the Badgley Funds have continued to prosper and now
have assets in excess of $27 million. Since our last report to you our outside
directors have nominated Graham S. Anderson as a director of Badgley Funds, Inc.
Mr. Anderson joins other Badgley Funds' outside directors Madelyn Smith and
Frank Bayley. Mr. Anderson is past president, chairman and CEO of Pettit-Morry
Co., an insurance brokerage. Also, he is a director at the U.S. Ski Hall of Fame
and at Tully's Coffee Co. Previously he served as a director of a number of
for-profit companies and numerous ski-related, not-for-profit organizations. We
are fortunate to have him on our board.
As we move into the investment challenges and opportunities of 2000, we look
forward to providing you with the same quality investment products you have come
to expect from the Badgley Funds. If you have any questions, comments or
suggestions for us, we invite you to call at 877-223-4539 or go to our web site
at www.badgleyfunds.com. We appreciate your business, and wish you a happy and
prosperous new year.
Sincerely,
/s/ Otis P. Heald III
Otis P. Heald III (Tres), CFA
President, Badgley Funds, Inc.
1
<PAGE> 4
BADGLEY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
ASSETS:
Investments, at market value (cost of $16,745,646 and
$7,606,477, respectively).............................. $17,826,255 $9,117,269
Cash...................................................... -- 83,468
Dividends receivable...................................... 4,471 4,459
Interest receivable....................................... 123,640 370
Organization costs, net of accumulated amortization....... 18,747 18,750
Receivable from Adviser................................... -- 2,175
Other assets.............................................. 9,162 7,311
----------- ----------
Total assets........................................... 17,982,275 9,233,802
----------- ----------
LIABILITIES:
Accrued expenses and other liabilities.................... 36,712 41,279
Payable to Adviser........................................ 3,009 --
Payable to Custodian...................................... 344 --
----------- ----------
Total liabilities...................................... 40,065 41,279
----------- ----------
NET ASSETS.................................................. $17,942,210 $9,192,523
=========== ==========
NET ASSETS CONSIST OF:
Capital stock............................................. $16,961,245 $7,827,232
Accumulated undistributed net investment income (loss).... 49,901 (26,782)
Accumulated undistributed net realized loss on
investments............................................ (149,545) (118,719)
Net unrealized appreciation on investments................ 1,080,609 1,510,792
----------- ----------
Total net assets....................................... $17,942,210 $9,192,523
=========== ==========
Shares outstanding (par value of $.01, 500,000,000 shares
authorized)............................................ 1,624,773 749,989
=========== ==========
Net Asset Value, Redemption Price and Offering Price Per
Share.................................................. $ 11.04 $ 12.26
=========== ==========
</TABLE>
See Notes to the Financial Statements
2
<PAGE> 5
BADGLEY FUNDS, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1999
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividend income........................................... $ 30,510 $ 26,701
Interest income........................................... 239,067 5,272
--------- --------
Total investment income................................ 269,577 31,973
--------- --------
EXPENSES:
Investment advisory fees.................................. 78,198 39,914
Administration fees....................................... 15,006 15,059
Shareholder servicing and accounting fees................. 22,653 21,221
Distribution fees......................................... 21,722 9,978
Custody fees.............................................. 6,043 6,546
Federal and state registration fees....................... 13,456 6,924
Professional fees......................................... 12,608 17,033
Reports to shareholders................................... 4,024 4,412
Amortization of organization costs........................ 2,813 2,810
Directors' fees and expenses.............................. 774 561
Other..................................................... 3,769 3,524
--------- --------
Total expenses before waiver and reimbursement............ 181,066 127,982
Less: Waiver of expenses and reimbursement from Adviser... (68,113) (68,112)
--------- --------
Net expenses......................................... 112,953 59,870
--------- --------
NET INVESTMENT INCOME (LOSS)................................ 156,624 (27,897)
--------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments.......................... (115,774) (47,212)
Change in unrealized appreciation (depreciation) on
investments............................................ 653,942 696,259
--------- --------
Net realized and unrealized gain (loss) on
investments....................................... 538,168 649,047
--------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 694,792 $621,150
========= ========
</TABLE>
See Notes to the Financial Statements
3
<PAGE> 6
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
BALANCED FUND BALANCED FUND
SIX MONTHS ENDED JUNE 25, 1998(1)
NOVEMBER 30, 1999 THROUGH
(UNAUDITED) MAY 31, 1999
----------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................... $ 156,624 $ 102,072
Net realized loss on investments......................... (115,774) (33,771)
Change in unrealized appreciation (depreciation) on
investments........................................... 653,942 426,668
----------- -----------
Net increase in net assets resulting from
operations.......................................... 694,792 494,969
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............................... (156,153) (84,465)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................ 2,329,694 16,671,176
Proceeds from shares issued to holders in reinvestment of
dividends............................................. 146,065 72,890
Cost of shares redeemed.................................. (1,596,597) (680,161)
----------- -----------
Net increase in net assets resulting from capital
share transactions.................................. 879,162 16,063,905
----------- -----------
TOTAL INCREASE IN NET ASSETS............................... 1,417,801 16,474,409
----------- -----------
NET ASSETS:
Beginning of period...................................... 16,524,409 50,000
----------- -----------
End of period (including undistributed net investment
income of $49,901 and $49,431, respectively).......... $17,942,210 $16,524,409
=========== ===========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
4
<PAGE> 7
BADGLEY FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH FUND GROWTH FUND
SIX MONTHS ENDED JUNE 25, 1998(1)
NOVEMBER 30, 1999 THROUGH
(UNAUDITED) MAY 31, 1999
----------------- ----------------
<S> <C> <C>
OPERATIONS:
Net investment loss...................................... $ (27,897) $ (18,860)
Net realized loss on investments......................... (47,212) (71,507)
Change in unrealized appreciation (depreciation) on
investments........................................... 696,259 814,533
---------- ----------
Net increase in net assets resulting from
operations.......................................... 621,150 724,166
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income............................... -- (14,494)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold................................ 2,539,035 6,119,128
Proceeds from shares issued to holders in reinvestment of
dividends............................................. -- 14,347
Cost of shares redeemed.................................. (471,402) (389,407)
---------- ----------
Net increase in net assets resulting from capital
share transactions.................................. 2,067,633 5,744,068
---------- ----------
TOTAL INCREASE IN NET ASSETS............................... 2,688,783 6,453,740
---------- ----------
NET ASSETS:
Beginning of period...................................... 6,503,740 50,000
---------- ----------
End of period (including undistributed net investment
income (loss) of ($26,782) and $1,115,
respectively)......................................... $9,192,523 $6,503,740
========== ==========
</TABLE>
- ---------------
(1) Commencement of operations.
See Notes to the Financial Statements
5
<PAGE> 8
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
BALANCED FUND BALANCED FUND
SIX MONTHS ENDED JUNE 25, 1998(1)
NOVEMBER 30, 1999 THROUGH
(UNAUDITED) 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................................ 0.08 0.18
Net realized and unrealized gain on investments...... 0.37 0.68
----------- -----------
Total from investment operations................... 0.45 0.86
----------- -----------
Less:
Dividends from net investment income.................... (0.10) (0.17)
----------- -----------
Net asset value, end of period.......................... $ 11.04 $ 10.69
=========== ===========
TOTAL RETURN(2)........................................... 4.21 % 8.66 %
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period............................... $17,942,210 $16,524,409
Ratio of net expense to average net assets:
Before expense reimbursement(3).................... 2.08 % 3.83 %
After expense reimbursement(3)..................... 1.30 % 1.30 %
Ratio of net investment income to average net assets:
Before expense reimbursement(3).................... 1.02 % (0.80)%
After expense reimbursement(3)..................... 1.80 % 1.73 %
Portfolio turnover rate................................. 10.05 % 16.17 %
</TABLE>
- ---------------
(1)Commencement of operations.
(2)Not annualized.
(3)Annualized.
See Notes to the Financial Statements
6
<PAGE> 9
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
GROWTH FUND GROWTH FUND
SIX MONTHS ENDED JUNE 25, 1998(1)
NOVEMBER 30, 1999 THROUGH
(UNAUDITED) 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 loss................................ (0.08) (0.02)
Net realized and unrealized gain on investments.... 0.92 1.48
---------- ----------
Total from investment operations................. 0.84 1.46
---------- ----------
Less:
Dividends from net investment income.................. 0.00 (0.04)
---------- ----------
Net asset value, end of period........................ $ 12.26 $ 11.42
========== ==========
TOTAL RETURN(2)......................................... 7.36 % 14.65 %
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period............................. $9,192,523 $6,503,740
Ratio of net expense to average net assets:
Before expense reimbursement(3).................. 3.20 % 6.12 %
After expense reimbursement(3)................... 1.50 % 1.50 %
Ratio of net investment income to average net assets:
Before expense reimbursement(3).................. (2.40)% (5.22)%
After expense reimbursement(3)................... (0.70)% (0.60)%
Portfolio turnover rate............................... 5.35 % 30.28 %
</TABLE>
- ---------------
(1)Commencement of operations.
(2)Not annualized.
(3)Annualized.
See Notes to the Financial Statements
7
<PAGE> 10
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1999 (UNAUDITED)
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- -----------
<C> <S> <C>
COMMON STOCKS -- 51.3%
------------------------------------------------------------
Bank & Bank Holding Co. -- 2.2%
2,625 Bank of America Corp........................................ $ 153,562
3,400 State Street Corp........................................... 249,688
-----------
403,250
-----------
Building -- Maintenance & Service -- 1.2%
6,225 Ecolab Inc.................................................. 215,541
-----------
Business Service -- 2.7%
5,975 Automatic Data Processing, Inc.............................. 295,016
4,200 Cintas Corp................................................. 192,938
-----------
487,954
-----------
Chemical Manufacturing -- 1.0%
4,175 Praxair, Inc................................................ 186,309
-----------
Commercial Services -- 0.8%
11,025 Servicemaster Co............................................ 141,258
-----------
Communications & Media -- 2.1%
4,250 Omnicom Group............................................... 374,531
-----------
Computer Manufacturing -- 1.4%
3,050 EMC Corp. Massachusetts* ................................... 254,866
-----------
Drugs -- 6.1%
2,825 Johnson & Johnson........................................... 293,094
8,100 Medtronic, Inc.............................................. 314,887
3,050 Merck & Co., Inc............................................ 239,425
6,575 Pfizer, Inc................................................. 237,933
-----------
1,085,339
-----------
Electrical Equipment -- 2.7%
2,700 Emerson Electric Co......................................... 153,900
2,500 General Electric Co......................................... 325,000
-----------
478,900
-----------
Electronic -- Miscellaneous -- 1.5%
3,325 Solectron Corp.* ........................................... 273,897
-----------
Electronic Technology -- 3.0%
2,450 Hewlett-Packard Co.......................................... 232,444
4,000 Intel Corp.................................................. 306,750
-----------
539,194
-----------
</TABLE>
See Notes to the Financial Statements
8
<PAGE> 11
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
BALANCED FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- -----------
<C> <S> <C>
Energy Raw Material -- 1.5%
4,700 AES Corp.................................................... $ 272,306
-----------
Financial Service -- 3.9%
4,300 Fannie Mae.................................................. 286,487
5,550 Franklin Resources, Inc..................................... 174,478
9,725 MBNA Corp................................................... 245,556
-----------
706,521
-----------
Food, Beverage & Tobacco -- 3.1%
9,500 Starbucks Corp.* ........................................... 252,344
8,000 Sysco Corp.................................................. 304,500
-----------
556,844
-----------
Insurance -- 1.8%
3,193 American International Group, Inc........................... 329,677
-----------
Medical -- Wholesale Drug Dist -- 1.3%
4,425 Cardinal Health, Inc........................................ 231,483
-----------
Oil & Gas -- 1.2%
2,325 Chevron Corp................................................ 205,908
-----------
Retail -- Food & Drugs -- 1.1%
4,825 CVS Corp.................................................... 191,492
-----------
Retail -- General -- 4.0%
3,325 Costco Companies, Inc.* .................................... 304,861
5,150 Home Depot, Inc............................................. 407,172
-----------
712,033
-----------
Software -- 2.0%
4,000 Microsoft Corp.* ........................................... 364,187
-----------
Telecommunication -- 4.6%
5,525 Cisco Systems, Inc.* ....................................... 492,761
4,450 Lucent Technologies, Inc.................................... 325,128
-----------
817,889
-----------
Telephone -- 2.1%
4,450 MCI WorldCom, Inc.* ........................................ 367,959
-----------
TOTAL COMMON STOCKS (COST $7,799,866)....................... 9,197,338
===========
</TABLE>
See Notes to the Financial Statements
9
<PAGE> 12
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- 22.3%
------------------------------------------------------------
Chemicals -- 1.4%
$250,000 E. I. Du Pont De Nemours
6.875%, 10/15/09............................................ $ 245,919
-----------
Electronic Technology -- 1.4%
250,000 IBM Corp.
6.450%, 8/01/07............................................. 242,661
-----------
Finance -- Auto Loans -- 2.7%
500,000 Ford Motor Credit Co.
5.125%, 10/15/01............................................ 486,121
-----------
Finance Company -- 4.4%
500,000 Assoc. Corp. NA
6.000%, 4/15/03............................................. 486,495
300,000 Norwest Corp.
6.125%, 10/15/00............................................ 299,472
-----------
785,967
-----------
Food, Beverage & Tobacco -- 3.6%
100,000 Albertsons, Inc.
6.375%, 6/01/00............................................. 100,070
550,000 Sysco Corp.
7.000%, 5/01/06............................................. 546,715
-----------
646,785
-----------
</TABLE>
See Notes to the Financial Statements
10
<PAGE> 13
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
Multimedia -- 2.6%
$500,000 Walt Disney Co.
5.125%, 12/15/03............................................ $ 471,023
-----------
Super-Regional Banks -- US -- 1.0%
200,000 Wachovia Corp
6.250%, 8/04/08............................................. 187,121
-----------
Telecommunication Equipment -- 2.5%
500,000 Lucent Technologies, Inc.
5.500%, 11/15/08............................................ 450,190
-----------
Telephone -- 2.7%
500,000 Worldcom, Inc.
6.400%, 8/15/05............................................. 486,328
-----------
TOTAL CORPORATE BONDS AND NOTES (COST $4,168,120)........... 4,002,115
===========
GOVERNMENT SECURITIES -- 24.3%
------------------------------------------------------------
Government Bonds & Notes -- 12.3%
US Treasury Notes:
200,000 5.750%, 10/31/00............................................ 199,813
100,000 6.250%, 10/31/01............................................ 100,406
375,000 5.500%, 2/28/03............................................. 368,437
300,000 7.250%, 8/15/04............................................. 312,844
250,000 6.500%, 8/15/05............................................. 253,125
500,000 5.625%, 2/15/06............................................. 485,157
500,000 5.500%, 2/15/08............................................. 476,719
-----------
TOTAL GOVERNMENT NOTES (COST $2,285,833).................... 2,196,501
===========
Government Agency -- 12.0%
------------------------------------------------------------
Federal National Mortgage Association (FNMA) -- 9.0%
525,000 6.290%, 2/11/02............................................. 524,428
500,000 6.800%, 1/10/03............................................. 505,027
250,000 6.350%, 6/10/05............................................. 246,986
350,000 6.500%, 4/29/09............................................. 331,389
-----------
1,607,830
-----------
</TABLE>
See Notes to the Financial Statements
11
<PAGE> 14
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
BALANCED FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- -----------
<C> <S> <C>
Federal Home Loan Bank -- 3.0%
$300,000 5.755%, 3/25/03............................................. $ 293,683
250,000 7.100%, 4/10/07............................................. 253,885
-----------
547,568
-----------
TOTAL U.S. GOVERNMENT AGENCY (COST $2,216,924).............. 2,155,398
===========
TOTAL GOVERNMENT SECURITIES (COST $4,502,757)............... 4,351,899
===========
SHORT TERM INVESTMENTS -- 1.5%
------------------------------------------------------------
Variable Rate Demand Notes**
274,903 Firstar Bank Demand Note, 5.340%............................ 274,903
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $274,903)................ 274,903
-----------
TOTAL INVESTMENTS -- 99.4%
(COST $16,745,646).......................................... 17,826,255
-----------
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.6%......... 115,955
-----------
TOTAL NET ASSETS -- 100.0%.................................. $17,942,210
===========
</TABLE>
* Non-income producing security.
** Variable rate security. The rates listed are as of November 30, 1999.
See Notes to the Financial Statements
12
<PAGE> 15
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
NOVEMBER 30, 1999 (UNAUDITED)
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- ----------
<C> <S> <C>
COMMON STOCKS -- 99.2%
------------------------------------------------------------
Bank & Bank Holding Co. -- 4.3%
2,688 Bank of America Corp........................................ $ 157,248
3,250 State Street Corp........................................... 238,672
----------
395,920
----------
Building -- Maintenance & Service -- 2.4%
6,350 Ecolab Inc.................................................. 219,869
----------
Business Service -- 5.1%
5,775 Automatic Data Processing, Inc.............................. 285,141
4,075 Cintas Corp................................................. 187,195
----------
472,336
----------
Chemical Manufacturing -- 2.0%
4,075 Praxair, Inc................................................ 181,847
----------
Commercial Services -- 1.5%
10,675 Servicemaster Co............................................ 136,773
----------
Communications & Media -- 3.9%
4,075 Omnicom Group............................................... 359,109
----------
Computer Manufacturing -- 2.7%
2,975 EMC Corp. Massachusetts*.................................... 248,598
----------
Drugs -- 11.8%
2,750 Johnson & Johnson........................................... 285,313
7,800 Medtronic, Inc.............................................. 303,225
3,250 Merck & Co., Inc............................................ 255,125
6,700 Pfizer, Inc................................................. 242,456
----------
1,086,119
----------
Electrical Equipment -- 5.2%
2,650 Emerson Electric Co......................................... 151,050
2,500 General Electric Co......................................... 325,000
----------
476,050
----------
Electronic -- Miscellaneous -- 2.9%
3,225 Solectron Corp.*............................................ 265,659
----------
</TABLE>
See Notes to the Financial Statements
13
<PAGE> 16
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- ----------
<C> <S> <C>
Electronic Technology -- 5.9%
2,575 Hewlett-Packard Co.......................................... $ 244,303
3,900 Intel Corp.................................................. 299,081
----------
543,384
----------
Energy Raw Material -- 2.9%
4,550 AES Corp.................................................... 263,616
----------
Financial Service -- 7.8%
4,400 Fannie Mae.................................................. 293,150
5,400 Franklin Resources, Inc..................................... 169,763
10,000 MBNA Corp................................................... 252,500
----------
715,413
----------
Food, Beverage & Tobacco -- 5.8%
9,175 Starbucks Corp.*............................................ 243,711
7,725 Sysco Corp.................................................. 294,033
----------
537,744
----------
Insurance -- 3.5%
3,137 American International Group, Inc........................... 323,895
----------
Medical -- Wholesale Drug Dist -- 2.4%
4,275 Cardinal Health, Inc........................................ 223,636
----------
Oil & Gas -- 2.3%
2,350 Chevron Corp................................................ 208,122
----------
Retail -- Food & Drugs -- 2.0%
4,625 CVS Corp.................................................... 183,555
----------
Retail -- General -- 8.1%
3,575 Costco Companies, Inc.*..................................... 327,783
5,300 Home Depot, Inc............................................. 419,031
----------
746,814
----------
Software -- 3.9%
3,950 Microsoft Corp.*............................................ 359,635
----------
</TABLE>
See Notes to the Financial Statements
14
<PAGE> 17
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
GROWTH FUND
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
- --------- ----------
<C> <S> <C>
Telecommunication -- 8.9%
5,600 Cisco Systems, Inc.*........................................ $ 499,450
4,300 Lucent Technologies, Inc.................................... 314,169
----------
813,619
----------
Telephone -- 3.9%
4,300 MCI WorldCom, Inc.*......................................... 355,556
----------
TOTAL COMMON STOCKS (COST $7,606,477)....................... 9,117,269
----------
TOTAL INVESTMENTS -- 99.2%
(COST $7,606,477)........................................... 9,117,269
----------
OTHER ASSETS IN EXCESS OF OTHER LIABILITIES -- 0.8%......... 75,254
----------
TOTAL NET ASSETS -- 100.0%.................................. $9,192,523
==========
</TABLE>
* Non-income producing security.
See Notes to the Financial Statements
15
<PAGE> 18
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOVEMBER 30, 1999 (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 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 the Balanced Fund and Growth Fund each, have been
16
<PAGE> 19
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
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.
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 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. 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 six months ended November 30,
1999, were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Shares sold................................................. 213,975 221,023
Shares issued to holders in reinvestment of dividends....... 13,509 --
Shares redeemed............................................. (148,790) (40,560)
-------- -------
Net increase (decrease)..................................... 78,694 180,463
======== =======
</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>
17
<PAGE> 20
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the six months ended November 30, 1999, were as
follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Purchases
U.S. Government........................................... $ 844,243 $ --
Other..................................................... 1,974,469 2,654,268
Sales
U.S. Government........................................... 571,935 --
Other..................................................... 1,120,426 414,119
</TABLE>
At November 30, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
<TABLE>
<CAPTION>
BALANCED FUND GROWTH FUND
------------- -----------
<S> <C> <C>
Appreciation................................................ $1,764,733 $1,837,135
(Depreciation).............................................. (684,124) (326,343)
---------- ----------
Net appreciation on investments............................. $1,080,609 $1,510,792
========== ==========
</TABLE>
At November 30, 1999, the cost of investments for federal income tax purposes
was $16,745,646 and $7,606,477 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 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.
For the fiscal year ending May 31, 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
18
<PAGE> 21
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 1999 (UNAUDITED)
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 six months ended November 30, 1999, the Adviser waived/reimbursed
expenses of $68,113 and $68,112 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. During the six months ended November 30, 1999, the Balanced Fund
and Growth Fund incurred expenses of $21,722 and $9,978, respectively,
pursuant to the plan.
19
