As filed with the Securities and Exchange Commission [date]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08769
BADGLEY FUNDS, INC.
-------------------
(Exact name of registrant as specified in charter)
P.O. BOX 701, MILWAUKEE, WI 53201-0701
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(Address of principal executive offices) (Zip code)
KIRKLAND & ELLIS LLP, 200 EAST RANDOLPH DRIVE, CHICAGO, IL 60601
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(Name and address of agent for service)
1-877-BADGLEY
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Registrant's telephone number, including area code
Date of fiscal year end: MAY 31
------
Date of reporting period: MAY 31, 2006
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ITEM 1. REPORT TO STOCKHOLDERS.
A N N U A L R E P O R T
MAY 31, 2006
BADGLEY FUNDS, INC.
[LOGO]
BADGLEY FUNDS, INC.
[B GRAPHIC]
Badgley Balanced Fund
TICKER BMFBX
[G GRAPHIC]
Badgley Growth Fund
TICKER BMFGX
P.O. Box 701, Milwaukee, Wisconsin 53201-0701 1-877-BADGLEY
www.badgleyfunds.com
TABLE OF CONTENTS
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3 LETTER TO SHAREHOLDERS
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6 PERFORMANCE GRAPHS
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8 SECTOR ALLOCATION OF PORTFOLIO HOLDINGS
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9 STATEMENTS OF ASSETS AND LIABILITIES
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10 STATEMENTS OF OPERATIONS
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11 STATEMENTS OF CHANGES IN NET ASSETS
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13 FINANCIAL HIGHLIGHTS
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15 SCHEDULE OF INVESTMENTS
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24 NOTES TO THE FINANCIAL STATEMENTS
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29 REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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30 EXPENSE EXAMPLE
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32 ADDITIONAL INFORMATION
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THIS REPORT IS NOT AUTHORIZED UNLESS ACCOMPANIED OR
PRECEDED BY A PROSPECTUS FOR BADGLEY FUNDS, INC.
THE BADGLEY FUNDS ARE DISTRIBUTED BY RAFFERTY CAPITAL
MARKETS, LLC. THE DATE OF FIRST USE OF THIS REPORT IS
JULY 30, 2006.
2 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
LETTER TO SHAREHOLDERS
MAY 31, 2006
DEAR FELLOW SHAREHOLDERS:
We are pleased to provide you with the 2006 Annual Report of the
Badgley Funds, Inc. (the "Funds").
This Annual Report summarizes the activities of the Badgley Balanced
Fund and the Badgley Growth Fund for the 12 months ending May 31, 2006.
PricewaterhouseCoopers LLP audited the Funds' financial statements as contained
in the following pages.
EQUITY MARKET REVIEW
The economy proved remarkably resilient despite hurricane devastation
along the Gulf Coast, soaring energy prices, rising short-term interest rates
and mounting inflation risk concerns. Last year, as Hurricane Katrina moved
onshore, the already escalating price of crude oil topped $70 a barrel. Though
crude oil prices subsided considerably by year's end, they spiked again in
January and have continued to increase through the present, pushing gasoline and
heating oil prices up sharply. In addition to the financial pressures of higher
energy costs, consumers continue to feel pressure from housing costs. Mortgage
payments as a percentage of personal income are at the highest level since 1989,
when the United States real estate market last peaked. To combat inflation
pressures, the Federal Reserve continued to "remove accommodation at a measured
pace" by raising the Fed Funds Rate two full percentage points during the fiscal
year to 5.0%. This was the Federal Reserve's 16th quarter-point increase from
the record low of 1.0% in June of 2004.
In the midst of these uncertainties, investors' confidence in the
economy remains firm, corporate profits continue to grow, productivity remains
strong, and inflation is relatively low. Solid business and consumer spending,
increased average hourly earnings, and a weaker but still strong housing market
have buoyed the economy. Healthy job growth resulted in the lowest unemployment
rate since 2001, which is among the lowest in the industrialized world. The
stock market reacted to these positive reports during the latter part of 2005
and the first few months of 2006 by rising sharply, although stock prices have
recently declined somewhat from these earlier levels. Though consumers feel
pressured by rising debt, consumer spending continues to fuel much of the
economic expansion, as evidenced by strong corporate earnings across most
industries.
FIXED INCOME MARKET HIGHLIGHTS
The credit environment has remained remarkably stable in view of the
events of the past year, which include rising energy prices, credit downgrades
of General Motors and Ford, tightening by the Federal Reserve, and some
prominent corporate defaults. While investment-grade credit spreads widened last
year by 16 basis points and high-yield or speculative-grade spreads widened by
approximately 55 basis points, the general year-over-year trend has been quite
restrained, with credit spreads remaining near their cyclical lows. Yields on
shorter maturing bonds have risen more substantially than longer maturities.
This has resulted in a flat to inverted yield curve. Historically, a marked
flattening or an inversion of the yield curve generally signaled an impending
economic slowdown. Today, the debate rages in the marketplace over how good or
bad the yield curve has been as a leading indicator of an economic slowdown.
Citing interest rates that are too low to engineer a slow down, some economists
reject the historical precedent. At this point, it may be premature to dismiss
the message the yield curve is sending. Perhaps it is not the level of rates but
the change in the rates which has the most impact on economic growth.
BADGLEY FUNDS ANNUAL REPORT 3
BADGLEY FUNDS, INC.
LETTER TO SHAREHOLDERS (CONTINUED)
MAY 31, 2006
PERFORMANCE RESULTS
The May 31, 2006 performance results of the Badgley Balanced and
Badgley Growth Funds and their relevant benchmark indices are detailed in the
table below and in the reports that are included in this Annual Report.
Over the last year, our investment adviser's focus on bottom-up stock
selection provided solid results for the Funds. The increased style debate
between growth and value strengthened the Funds' returns as the growth style was
rewarded toward the end of 2005 and beginning of 2006, but retracted somewhat as
of May 31, 2006. The annual performance returns realized by the Badgley Growth
Fund and the equity portion of the Badgley Balanced Fund as compared to the
relevant equity growth indices are mixed. The Funds' equity returns trailed the
S & P 500 Index by over 1.00% for the period. In comparison, the equity returns
of the Funds exceeded the return of the Russell 1000 Growth Index by over 1.45%.
During the past twelve-month period, both mid- and large-cap growth
stocks had positive returns despite some challenges in the investment
environment. Key companies within the information technology, transportation,
and energy sectors offset an otherwise weak environment for consumer stocks. The
continuing need for global access to a growing universe of information has led
to interesting opportunities within the information technology sector. The Funds
benefited from positions in companies such as Amdocs Limited, Apple Computer,
and Google. Good execution of business plans was one of the catalysts that
helped these companies exceed earnings' expectations. Strong global economic
growth has enhanced the need for efficiency and timeliness of product
transportation. Companies such as Expeditors International of Washington and
FedEx provided solid returns while meeting the logistical transportation
requirements for their customers. While the continued increase of energy costs
has dampened some consumer spending, it has provided other investment
opportunities. BJ Services and Schlumberger are two energy investments that
provided a good balance to the challenging consumer market. Consumer spending
has been challenged by not only energy costs, but also rising transportation and
medical care expenses. Expanding costs for such goods and services have
pressured the earnings' growth goals for Bed Bath & Beyond and Michaels Stores,
which operate in the consumer discretionary sector. Overall, lower investment
returns from consumer-related stocks partly offset the positive results realized
by the Funds from energy, information technology, and transportation stocks.
The annual performance return of the fixed income portion of the
Badgley Balanced Fund portfolio reflects the impact of rising short-term
interest rates and the market's focus on inflation. At the same time, the fixed
income allocation within the Badgley Balanced Fund continues to help dampen the
return volatility of this fund during times of economic uncertainty. The annual
performance returns realized by the Badgley Balanced Fund as compared to the
relevant blended benchmark indices are mixed. Blended Index 1, which is
comprised of 50% of the S & P 500 Index and 50% of the Lehman Intermediate
Government Credit Index, exceeded the Badgley Balanced Fund's return by over
0.80% for the period. In comparison, the Badgley Balanced Fund's return exceeded
the returns of Blended Index 2, which is comprised of 50% of the Russell 1000
Growth Index and 50% of the Lehman Intermediate Government Credit Index, by just
over 0.35%.
The best word to describe bond market returns for the year is
lackluster. While short-term yields rose in lock-step with tightening by the
Federal Reserve, longer-term yields remained largely unchanged. As a result, not
only was the level of absolute return uninspiring, but returns among individual
bond sectors were remarkably uniform. The intermediate Treasury sector performed
only slightly better than its Corporate counterpart, and both of these slightly
underperformed the Government Agency sector. As for credit quality, high quality
bonds outperformed low quality bonds, as the downgrades of Ford and GM weighed
heavily on the latter.
4 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
LETTER TO SHAREHOLDERS (CONTINUED)
MAY 31, 2006
THANK YOU
Thank you for your investment in the Badgley Funds. Please visit
www.badgelyfunds.com for more detailed information. We welcome your comments,
suggestions and questions. Please contact us toll free at 1.877.223.4539, in
writing, or via email at info@badgleyfunds.com.
Sincerely,
BADGLEY FUNDS, INC.
/s/ J. KEVIN CALLAGHAN /S/ LISA P. GUZMAN
- ---------------------- ------------------
J. KEVIN CALLAGHAN LISA P. GUZMAN
PRESIDENT AND DIRECTOR SECRETARY AND TREASURER
Annual Returns
INVESTMENT RETURNS through May 31, 2006
--------------------
Badgley Balanced Fund . . . . . . . . . . . . . . . . . . . . . . . 3.52%
Badgley Growth Fund . . . . . . . . . . . . . . . . . . . . . . . . 7.60%
Lehman Brothers Intermediate Govt/Credit Bond Index . . . . . . . . 0.08%
S & P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . . 8.64%
Russell 1000 Growth Index . . . . . . . . . . . . . . . . . . . . . 6.14%
Blended Index 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 4.35%
Blended Index 2 . . . . . . . . . . . . . . . . . . . . . . . . . . 3.16%
RETURNS QUOTED ABOVE REPRESENT PAST PERFORMANCE. PAST PERFORMANCE CANNOT
GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE
PERFORMANCE DATA SHOWN HERE. FOR PERFORMANCE CURRENT THROUGH THE MOST RECENT
MONTH-END, PLEASE CALL 1-877-BADGLEY (1-877-223-4539).
LEHMAN BROTHERS INTERMEDIATE GOV'T./CREDIT BOND INDEX -- An unmanaged market
value-weighted index composed of all bonds that are investment grade (rated
investment grade by at least two of the following rating agencies: Moody's, S&P
or Fitch) or U.S. Government. All issues must be publicly issued, fixed rate (or
have coupon that adjusts according to a predetermined schedule) and have
maturities between one and ten years and outstanding par value of at least $250
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.
RUSSELL 1000 GROWTH INDEX -- An unmanaged, capitalization weighted index
comprised of the stocks of the top 1000 U.S. corporations as measured by their
market capitalizations. The Russell 1000 Growth Index measures the performance
of those Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values. The stocks cross all major industries, and the index
is used to illustrate the performance of the broad domestic economy.
BLENDED INDEX 1 -- Blend of 50% Lehman Brothers Intermediate Gov't. / Credit
Bond Index and 50% S&P 500 Index.
BLENDED INDEX 2 -- Blend of 50% Lehman Brothers Intermediate Gov't. / Credit
Bond Index and 50% Russell 1000 Growth Index.
BADGLEY FUNDS ANNUAL REPORT 5
BADGLEY FUNDS, INC.
PERFORMANCE GRAPHS
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
[LINE GRAPH]
Blended
Benchmark I Blended Benchmark II
Lehman 50% S&P / Badgley 50% Russell 1000G / S&P Russell 1000
Brothers 50% LBCGI Balanced 50% LBGCI 500 Growth
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6/25/1998 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
11/30/1998 10,450 10,464 10,308 10,596 10,372 10,622
5/31/1999 10,423 11,100 10,866 11,244 11,680 11,953
11/30/1999 10,567 11,593 11,323 12,260 12,540 13,967
5/31/2000 10,683 11,846 11,868 12,785 12,904 14,940
11/30/2000 11,388 11,824 12,385 12,087 12,011 12,353
5/31/2001 12,027 11,946 12,002 11,558 11,542 10,502
11/30/2001 12,708 11,771 11,633 11,376 10,543 9,537
5/31/2002 12,946 11,554 11,469 10,741 9,944 8,310
11/30/2002 13,584 11,196 11,108 10,421 8,802 7,374
5/31/2003 14,483 11,804 11,317 10,985 9,142 7,658
11/30/2003 14,353 12,382 11,755 11,608 10,130 8,609
5/31/2004 14,419 12,829 12,137 11,924 10,818 9,038
11/30/2004 14,818 13,377 12,481 12,147 11,432 9,111
5/31/2005 15,093 13,670 12,500 12,420 11,709 9,339
11/30/2005 15,060 14,058 12,915 12,845 12,397 9,998
5/31/2006 15,105 14,264 12,940 12,813 12,720 9,913
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. This chart and table below do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares. RETURNS SHOWN REPRESENT PAST PERFORMANCE. PAST
PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA SHOWN HERE. FOR PERFORMANCE
CURRENT THROUGH THE MOST RECENT MONTH-END, PLEASE CALL 1-877-BADGLEY
(1-877-223-4539).
LEHMAN BROTHERS INTERMEDIATE GOV'T./CREDIT BOND INDEX -- An unmanaged market
value-weighted index composed of all bonds that are investment grade (rated
investment grade by at least two of the following rating agencies: Moody's, S&P
or Fitch) or U.S. Government. All issues must be publicly issued, fixed rate (or
have coupon that adjusts according to a predetermined schedule) and have
maturities between one and ten years and outstanding par value of at least $250
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.
RUSSELL 1000 GROWTH INDEX -- An unmanaged, capitalization weighted index
comprised of the stocks of the top 1000 U.S. corporations as measured by their
market capitalizations. The Russell 1000 Growth Index measures the performance
of those Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values. The stocks cross all major industries, and the index
is used to illustrate the performance of the broad domestic economy.
BLENDED INDEX 1 -- Blend of 50% Lehman Brothers Intermediate Gov't. / Credit
Bond Index and 50% S&P 500 Index.
BLENDED INDEX 2 -- Blend of 50% Lehman Brothers Intermediate Gov't. / Credit
Bond Index and 50% Russell 1000 Growth Index.
TOTAL RETURNS THROUGH MAY 31, 2006
AVERAGE ANNUAL
----------------------------------------
SINCE INCEPTION
ONE YEAR FIVE YEARS JUNE 25, 1998
----------------------------------------
Badgley Balanced Fund 3.52% 1.52% 3.30%
Lehman Brothers Intermediate
Gov't./Credit Bond Index 0.08% 4.66% 5.34%
S&P 500 Index 8.64% 1.96% 3.08%
Russell 1000 Growth Index 6.14% -1.15% -0.11%
Blended Index 1 4.35% 3.61% 4.56%
Blended Index 2 3.16% 2.08% 3.14%
6 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
PERFORMANCE GRAPHS
MAY 31, 2006
[G GRAPHIC] BADGLEY GROWTH FUND
[LINE GRAPH]
S&P Badgley Russell 1000
500 Growth Growth
---------------------------------------------------
6/25/1998 $10,000 $10,000 $10,000
11/30/1998 10,372 10,120 10,622
5/31/1999 11,680 11,465 11,953
11/30/1999 12,540 12,308 13,967
5/31/2000 12,904 13,283 14,940
11/30/2000 12,011 13,595 12,353
5/31/2001 11,542 12,149 10,502
11/30/2001 10,543 10,783 9,537
5/31/2002 9,944 10,352 8,310
11/30/2002 8,802 9,107 7,374
5/31/2003 9,142 8,886 7,658
11/30/2003 10,130 9,709 8,609
5/31/2004 10,818 10,331 9,038
11/30/2004 11,432 10,703 9,111
5/31/2005 11,709 10,572 9,339
11/30/2005 12,397 11,315 9,998
5/31/2006 12,720 11,376 9,913
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. This chart and table below do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares. RETURNS SHOWN REPRESENT PAST PERFORMANCE. PAST
PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST. CURRENT PERFORMANCE
MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA SHOWN HERE. FOR PERFORMANCE
CURRENT THROUGH THE MOST RECENT MONTH-END, PLEASE CALL 1-877-BADGLEY
(1-877-223-4539).
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.
RUSSELL 1000 GROWTH INDEX -- An unmanaged, capitalization weighted index
comprised of the stocks of the top 1000 U.S. corporations as measured by their
market capitalizations. The Russell 1000 Growth Index measures the performance
of those Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth values. The stocks cross all major industries, and the index
is used to illustrate the performance of the broad domestic economy.
TOTAL RETURNS THROUGH MAY 31, 2006
AVERAGE ANNUAL
---------------------------------------------
SINCE INCEPTION
ONE YEAR FIVE YEARS JUNE 25, 1998
---------------------------------------------
Badgley Growth Fund 7.60% -1.31% 1.64%
S&P 500 Index 8.64% 1.96% 3.08%
Russell 1000 Growth 6.14% -1.15% -0.11%
Index
BADGLEY FUNDS ANNUAL REPORT 7
BADGLEY FUNDS, INC.
SECTOR ALLOCATION OF PORTFOLIO HOLDINGS
MAY 31, 2006
Percentages represent market value as a percentage of total investments.
[B GRAPHIC] BADGLEY BALANCED FUND
Common Stocks -
50.8%
Corporate Bonds -
21.2%
U.S. Treasury
Obligations - 14.4%
U.S. Government
Agency Issues - 12.4%
Variable Rate
Demand Note - 1.2%
[G GRAPHIC] BADGLEY GROWTH FUND
Information
Technology - 20.9%
Industrials - 16.4%
Health Care - 17.7%
Financials - 12.3%
Consumer Staples - 11.2%
Consumer
Discretionary - 6.8%
Materials - 6.2%
Energy - 5.9%
Variable Rate
Demand Note - 2.6%
8 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
MAY 31, 2006
BALANCED FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------
ASSETS:
Investments, at market value
(cost of $24,120,564 and $12,934,173, respectively) $ 26,895,016 $ 16,559,330
Interest receivable 190,235 1,305
Dividends receivable 5,790 6,904
Other assets 19,345 16,550
- ------------------------------------------------------------------------------------------------------
Total assets 27,110,386 16,584,089
- ------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable to Adviser 9,743 2,745
Payable for distribution fees -- 461
Accrued expenses and other liabilities 47,965 45,662
- ------------------------------------------------------------------------------------------------------
Total liabilities 57,708 48,868
- ------------------------------------------------------------------------------------------------------
NET ASSETS $ 27,052,678 $ 16,535,221
======================================================================================================
NET ASSETS CONSIST OF:
Capital stock $ 25,664,998 $ 16,610,929
Undistributed net investment income 69,360 --
Undistributed net realized loss on investments (1,456,132) (3,700,865)
Net unrealized appreciation on investments 2,774,452 3,625,157
Total net assets $ 27,052,678 $ 16,535,221
- ------------------------------------------------------------------------------------------------------
Shares outstanding (par value of $0.01, 500,000,000 shares authorized) 2,395,834 1,460,060
======================================================================================================
Net Asset Value, Redemption Price and Offering Price Per Share $ 11.29 $ 11.33
======================================================================================================
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 9
BADGLEY FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2006
BALANCED FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest income $ 734,101 $ 8,878
Dividend income (net of withholding tax of $501 and $506, respectively) 133,289 134,368
- ------------------------------------------------------------------------------------------------------
Total investment income 867,390 143,246
- ------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees 289,865 166,263
Shareholder servicing and accounting fees 57,266 50,351
Professional fees 63,316 62,316
Administration fees 31,890 31,275
Distribution fees 39,805 17,450
Federal and state registration fees 11,250 9,972
Directors' fees and expenses 10,176 10,026
Reports to shareholders 8,000 7,843
Custody fees 11,860 7,520
Other 27,723 14,274
- ------------------------------------------------------------------------------------------------------
Total expenses before waiver and reimbursement 551,151 377,290
Less: Waiver of expenses and reimbursement from Adviser (132,457) (127,895)
- ------------------------------------------------------------------------------------------------------
Net expenses 418,694 249,395
- ------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 448,696 (106,149)
- ------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 1,538,192 939,013
Change in net unrealized appreciation/depreciation on investments (790,177) 361,042
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 748,015 1,300,055
- ------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,196,711 $ 1,193,906
======================================================================================================
10 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
[B GRAPHIC] BADGLEY BALANCED FUND
YEAR ENDED YEAR ENDED
MAY 31, 2006 MAY 31, 2005
- ---------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 448,696 $ 501,579
Net realized gain on investments 1,538,192 617,159
Change in net unrealized appreciation/depreciation on investments (790,177) (146,865)
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,196,711 971,873
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME (450,778) (500,034)
- ---------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 3,050,669 7,735,037
Proceeds from shares issued to holders in reinvestment of dividends 399,509 445,366
Cost of shares redeemed (12,719,565) (4,946,737)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions (9,269,387) 3,233,666
- ---------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (8,523,454) 3,705,505
NET ASSETS:
Beginning of year 35,576,132 31,870,627
- ---------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $69,360 and $71,442, respectively) $ 27,052,678 $ 35,576,132
===================================================================================================
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 11
BADGLEY FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
[G GRAPHIC] BADGLEY GROWTH FUND
YEAR ENDED YEAR ENDED
MAY 31, 2006 MAY 31, 2005
- ----------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss $ (106,149) $ (57,211)
Net realized gain on investments 939,013 462,519
Change in net unrealized appreciation/depreciation on investments 361,042 (41,913)
- ----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,193,906 363,395
- ----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 2,639,416 2,617,487
Cost of shares redeemed (4,492,085) (2,018,847)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
capital share transactions (1,852,669) 598,640
- ----------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (658,763) 962,035
NET ASSETS:
Beginning of year 17,193,984 16,231,949
- ----------------------------------------------------------------------------------------------------
End of year $ 16,535,221 $ 17,193,984
====================================================================================================
12 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
[B GRAPHIC] BADGLEY BALANCED FUND
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 2006 MAY 31, 2005 MAY 31, 2004 MAY 31, 2003 MAY 31, 2002
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net asset value, beginning of period $ 11.06 $ 10.90 $ 10.31 $ 10.65 $ 11.36
- ---------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.16 0.16 0.15 0.18 0.21
Net realized and unrealized
gain (loss) on investments 0.23 0.16 0.59 (0.33) (0.71)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.39 0.32 0.74 (0.15) (0.50)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.16) (0.16) (0.15) (0.19) (0.21)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.29 $ 11.06 $ 10.90 $ 10.31 $ 10.65
===========================================================================================================================
TOTAL RETURN 3.52% 2.99% 7.25% -1.33% -4.44%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period $ 27,052,678 $ 35,576,132 $ 31,870,627 $ 29,195,847 $ 28,588,070
Ratio of net expense to average net assets:
Before expense reimbursement 1.71% 1.62% 1.86% 1.82% 1.72%
After expense reimbursement 1.30% 1.30% 1.30% 1.30% 1.30%
Ratio of net investment income
to average net assets:
Before expense reimbursement 0.98% 1.16% 0.86% 1.26% 1.48%
After expense reimbursement 1.39% 1.48% 1.42% 1.78% 1.90%
Portfolio turnover rate 23.78% 27.48% 29.27% 32.08% 35.98%
===========================================================================================================================
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 13
BADGLEY FUNDS, INC.
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT THE PERIOD
[G GRAPHIC] BADGLEY GROWTH FUND
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 2006 MAY 31, 2005 MAY 31, 2004 MAY 31, 2003 MAY 31, 2002
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net asset value, beginning of period $ 10.53 $ 10.29 $ 8.85 $ 10.31 $ 12.10
- --------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.07)(1) (0.04)(1) (0.05) (0.04) (0.07)
Net realized and unrealized
gain (loss) on investments 0.87 0.28 1.49 (1.42) (1.72)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.80 0.24 1.44 (1.46) (1.79)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 11.33 $ 10.53 $ 10.29 $ 8.85 $ 10.31
==========================================================================================================================
TOTAL RETURN 7.60% 2.33% 16.27% -14.16% -14.79%
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period $16,535,221 $17,193,984 $16,231,949 $16,678,147 $17,539,824
Ratio of net expense to average net assets:
Before expense reimbursement 2.27% 2.39% 2.51% 2.43% 2.23%
After expense reimbursement 1.50% 1.50% 1.50% 1.50% 1.50%
Ratio of net investment loss to average
net assets:
Before expense reimbursement (1.41)% (1.23)% (1.52)% (1.42)% (1.41)%
After expense reimbursement (0.64)% (0.34)% (0.51)% (0.49)% (0.68)%
Portfolio turnover rate 40.62% 30.96% 45.58% 29.52% 39.51%
==========================================================================================================================
1 Net investment loss per share is calculated using the balance of undistributed net investment loss prior to
considerations of adjustments for book and tax differences.
14 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 50.5%
CONSUMER DISCRETIONARY -- 3.6%
7,666 Michaels Stores, Inc. $ 297,977
12,010 Starbucks Corporation(a) 428,157
8,445 Toll Brothers, Inc.(a) 238,656
- --------------------------------------------------------------------------------
964,790
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 5.8%
7,750 Costco Wholesale Corporation 410,207
14,290 CVS Corporation 398,691
7,275 PepsiCo, Inc. 439,846
10,125 Sysco Corporation 309,623
- --------------------------------------------------------------------------------
1,558,367
- --------------------------------------------------------------------------------
ENERGY -- 3.0%
12,250 BJ Services Company 448,963
5,660 Schlumberger Limited(b) 371,126
- --------------------------------------------------------------------------------
820,089
- --------------------------------------------------------------------------------
FINANCIALS -- 6.4%
4,800 American Express Company 260,928
4,925 American International Group, Inc. 299,440
9,100 Citigroup Inc. 448,630
6,925 State Street Corporation 430,043
3,645 T. Rowe Price Group Inc. 288,319
- --------------------------------------------------------------------------------
1,727,360
- --------------------------------------------------------------------------------
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 15
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
SHARES VALUE
- --------------------------------------------------------------------------------
HEALTH CARE -- 9.1%
4,850 Amgen Inc.(a) $ 327,811
7,025 Medtronic, Inc. 354,692
7,525 Quest Diagnostics Incorporated 419,444
7,325 Stryker Corporation 321,568
8,600 Teva Pharmaceutical Industries Ltd. - ADR(b) 313,126
6,400 Varian Medical Systems, Inc.(a) 300,160
6,095 WellPoint Inc.(a) 436,280
- --------------------------------------------------------------------------------
2,473,081
- --------------------------------------------------------------------------------
INDUSTRIALS -- 8.5%
3,800 3M Co. 317,908
3,720 Expeditors International of Washington, Inc. 366,234
4,875 FedEx Corp. 532,691
11,400 General Electric Company 390,564
5,750 L-3 Communications Holdings, Inc. 419,520
8,010 Pentair, Inc. 273,622
- --------------------------------------------------------------------------------
2,300,539
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -- 10.9%
5,450 Affiliated Computer Services, Inc.- Class A(a) 272,064
11,075 Amdocs Limited(a)(b) 414,980
4,010 Apple Computer, Inc.(a) 239,678
21,175 Cisco Systems, Inc.(a) 416,724
6,455 Cognizant Technology Solutions Corporation - Class A(a) 380,845
7,675 Fiserv, Inc.(a) 331,176
835 Google Inc. - Class A(a) 310,470
9,150 Microsoft Corporation 207,247
16,405 Seagate Technology(a)(b) 383,057
- --------------------------------------------------------------------------------
2,956,241
- --------------------------------------------------------------------------------
16 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
MATERIALS -- 3.2%
10,290 Ecolab, Inc. $ 398,326
8,925 Praxair, Inc. 470,347
- --------------------------------------------------------------------------------
868,673
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $10,485,500) 13,669,140
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 12.0%
U.S. TREASURY NOTES -- 12.0%
$ 250,000 3.25%, 08/15/2008 240,781
805,000 4.25%, 08/15/2013 764,341
175,000 4.75%, 05/15/2014 170,933
650,000 5.50%, 02/15/2008 655,180
250,000 5.75%, 08/15/2010 257,041
750,000 6.00%, 08/15/2009 771,269
355,000 6.50%, 02/15/2010 372,459
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS (COST $3,325,241) 3,232,004
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES -- 12.3%
FANNIE MAE -- 4.3%
820,000 5.25%, 04/15/2007 to 01/15/2009 819,092
325,000 6.625%, 09/15/2009 337,493
- --------------------------------------------------------------------------------
1,156,585
- --------------------------------------------------------------------------------
FEDERAL FARM CREDIT BANK -- 1.8%
500,000 4.25%, 10/10/2008 488,692
- --------------------------------------------------------------------------------
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 17
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK -- 2.8%
$ 330,000 4.50%, 11/14/2014 $ 309,737
450,000 5.75%, 05/15/2012 458,385
- --------------------------------------------------------------------------------
768,122
- --------------------------------------------------------------------------------
FREDDIE MAC -- 3.4%
500,000 5.125%, 07/15/2012 492,881
425,000 5.75%, 01/15/2012 432,100
- --------------------------------------------------------------------------------
924,981
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY ISSUES (COST $3,465,338) 3,338,380
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 21.1%
CONSUMER DISCRETIONARY -- 0.9%
250,000 Johnson Controls, Inc.
4.875%, 09/15/2013 233,984
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 2.8%
475,000 The Estee Lauder Companies Inc.
6.00%, 01/15/2012 481,897
300,000 Wal-Mart Stores, Inc.
4.55%, 05/01/2013 280,882
- --------------------------------------------------------------------------------
762,779
- --------------------------------------------------------------------------------
18 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
FINANCIALS -- 11.7%
$ 500,000 AFLAC Incorporated
6.50%, 04/15/2009 $ 512,530
170,000 American General Finance Corporation
5.375%, 09/01/2009 169,268
500,000 Citigroup Inc.
6.50%, 01/18/2011 517,799
525,000 General Electric Capital Corporation
7.375%, 01/19/2010 554,428
250,000 JPMorgan Chase & Co.
4.50%, 01/15/2012 235,822
400,000 Merrill Lynch & Co., Inc.
5.00%, 02/03/2014 375,893
400,000 Morgan Stanley
4.75%, 04/01/2014 367,250
300,000 SLM Corporation
5.125%, 08/27/2012 289,091
140,000 Wells Fargo Financial, Inc.
5.50%, 08/01/2012 138,263
- --------------------------------------------------------------------------------
3,160,344
- --------------------------------------------------------------------------------
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 19
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[B GRAPHIC] BADGLEY BALANCED FUND
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
INDUSTRIALS -- 1.3%
$ 125,000 Cintas Corporation
5.125%, 06/01/2007 $ 124,567
255,000 Emerson Electric Co.
4.50%, 05/01/2013 238,030
- --------------------------------------------------------------------------------
362,597
- --------------------------------------------------------------------------------
MATERIALS -- 2.5%
400,000 Ecolab Inc.
6.875%, 02/01/2011 417,615
300,000 Praxair, Inc.
3.95%, 06/01/2013 268,473
- --------------------------------------------------------------------------------
686,088
- --------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES -- 1.9%
500,000 Southwestern Bell Telephone Company
6.625%, 07/15/2007 504,941
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $5,898,749) 5,710,733
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 3.5%
U.S. TREASURY NOTE -- 2.3%
625,000 6.50%, 10/15/2006 628,101
- --------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTE* -- 1.2%
316,658 U.S. Bank, N.A. - 4.859% 316,658
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $945,736) 944,759
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 99.4% 26,895,016
(COST $24,120,564)
- --------------------------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.6% 157,662
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 27,052,678
================================================================================
ADR -- American Depository Receipt.
(a) -- Non-income producing security.
(b) -- Foreign security.
* -- Variable rate security. Rate listed as of May 31, 2006.
20 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS
MAY 31, 2006
[G GRAPHIC] BADGLEY GROWTH FUND
SHARES VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS -- 97.6%
CONSUMER DISCRETIONARY -- 6.8%
8,876 Michaels Stores, Inc. $ 345,010
14,320 Starbucks Corporation (a) 510,508
9,810 Toll Brothers, Inc. (a) 277,231
- --------------------------------------------------------------------------------
1,132,749
- --------------------------------------------------------------------------------
CONSUMER STAPLES -- 11.2%
9,225 Costco Wholesale Corporation 488,279
17,020 CVS Corporation 474,858
8,700 PepsiCo, Inc. 526,002
11,750 Sysco Corporation 359,315
- --------------------------------------------------------------------------------
1,848,454
- --------------------------------------------------------------------------------
ENERGY -- 5.9%
14,600 BJ Services Company 535,090
6,680 Schlumberger Limited (b) 438,008
- --------------------------------------------------------------------------------
973,098
- --------------------------------------------------------------------------------
FINANCIALS -- 12.3%
5,660 American Express Company 307,678
5,825 American International Group, Inc. 354,160
10,575 Citigroup Inc. 521,347
8,300 State Street Corporation 515,430
4,200 T. Rowe Price Group Inc. 332,220
- --------------------------------------------------------------------------------
2,030,835
- --------------------------------------------------------------------------------
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 21
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[G GRAPHIC] BADGLEY GROWTH FUND
SHARES VALUE
- --------------------------------------------------------------------------------
HEALTH CARE -- 17.8%
5,925 Amgen Inc. (a) $ 400,471
8,175 Medtronic, Inc. 412,756
9,000 Quest Diagnostics Incorporated 501,660
8,650 Stryker Corporation 379,735
10,175 Teva Pharmaceutical Industries Ltd. - ADR (b) 370,472
7,425 Varian Medical Systems, Inc. (a) 348,232
7,320 WellPoint Inc. (a) 523,965
- --------------------------------------------------------------------------------
2,937,291
- --------------------------------------------------------------------------------
INDUSTRIALS -- 16.4%
4,395 3M Co. 367,686
4,310 Expeditors International of Washington, Inc. 424,319
5,850 FedEx Corp. 639,230
13,500 General Electric Company 462,510
6,875 L-3 Communications Holdings, Inc. 501,600
9,470 Pentair, Inc. 323,495
- --------------------------------------------------------------------------------
2,718,840
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY -- 21.0%
6,350 Affiliated Computer Services, Inc.- Class A (a) 316,992
12,850 Amdocs Limited (a) (b) 481,490
4,740 Apple Computer, Inc. (a) 283,310
25,225 Cisco Systems, Inc. (a) 496,428
7,710 Cognizant Technology Solutions Corporation - Class A (a) 454,890
9,075 Fiserv, Inc. (a) 391,586
950 Google Inc. - Class A (a) 353,229
10,650 Microsoft Corporation 241,222
19,280 Seagate Technology (a) (b) 450,188
- --------------------------------------------------------------------------------
3,469,335
- --------------------------------------------------------------------------------
22 BADGLEY FUNDS ANNUAL REPORT SEE NOTES TO THE FINANCIAL STATEMENTS.
BADGLEY FUNDS, INC.
SCHEDULE OF INVESTMENTS (continued)
MAY 31, 2006
[G GRAPHIC] BADGLEY GROWTH FUND
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------------------------
MATERIALS -- 6.2%
11,955 Ecolab Inc. $ 462,778
10,650 Praxair, Inc. 561,255
- --------------------------------------------------------------------------------
1,024,033
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $12,509,478) 16,134,635
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.5%
VARIABLE RATE DEMAND NOTE* -- 2.5%
$ 424,695 U.S. Bank, N.A. -- 4.859% 424,695
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $424,695) 424,695
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.1%
(COST $12,934,173) 16,559,330
- --------------------------------------------------------------------------------
LIABILITIES IN EXCESS OF OTHER ASSETS -- (0.1)% (24,109)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS -- 100.0% $ 16,535,221
================================================================================
ADR -- American Depository Receipt.
(a) -- Non-income producing security.
(b) -- Foreign security.
* -- Variable rate security. Rate listed as of May 31, 2006.
SEE NOTES TO THE FINANCIAL STATEMENTS. BADGLEY FUNDS ANNUAL REPORT 23
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
MAY 31, 2006
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 accounting principles
generally accepted in the United States of America.
a) INVESTMENT VALUATION -- Securities listed on the NASDAQ National
Market are valued at the NASDAQ Official Closing Price ("NOCP").
Other securities traded on a national securities exchange (including
options on indices so traded) are valued at the last sales price at
the close of that exchange where primarily traded. Exchange-traded
securities for which there were no transactions and NASDAQ-traded
securities for which there is no NOCP are valued at the mean of the
bid and ask prices. Securities for which market quotations are not
readily available are valued at fair value as determined in good
faith by the Board of Directors. The Board has adopted specific
procedures for valuing portfolio securities and delegated the
implementation of these procedures to Badgley, Phelps and Bell, Inc.
(the "Adviser"). The procedures authorize the Adviser to make all
necessary determinations regarding the fair value of a portfolio
security and to report such determination to the Board of Directors.
Debt securities maturing in 60 days or less are valued at amortized
cost, which approximates fair value. Debt securities having
maturities over 60 days or for which amortized cost is not deemed to
reflect fair value may be priced by independent pricing services
that use prices provided by market makers or estimates of market
values obtained from yield data relating to instruments or
securities with similar characteristics.
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.
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 may be allocated among
the Funds in proportion to their respective net assets, number of
shareholder accounts or net sales, etc., 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.
24 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
MAY 31, 2006
e) USE OF ESTIMATES -- The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
f) GUARANTEES AND INDEMNIFICATIONS -- In the normal course of business
the Funds enter into contracts with service providers that contain
general indemnification clauses. The Funds' maximum exposure under
these arrangements is unknown as this would involve future claims
that may be made against the Funds that have not yet occurred. Based
on experience, however, the Funds expect the risk of loss to be
remote.
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. All discounts and premiums are
accreted and amortized, as appropriate, on the effective interest
method for tax and financial reporting purposes.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Funds for the year ended May 31, 2006,
were as follows:
BALANCED FUND GROWTH FUND
-----------------------------------------------------------------------
Shares sold 268,986 231,832
Shares issued to holders in
reinvestment of dividends 35,708 --
Shares redeemed (1,125,035) (404,035)
-----------------------------------------------------------------------
Net decrease (820,341) (172,203)
=======================================================================
Transactions in shares of the Funds for the year ended May 31, 2005,
were as follows:
BALANCED FUND GROWTH FUND
-----------------------------------------------------------------------
Shares sold 700,285 248,193
Shares issued to holders in
reinvestment of dividends 40,333 --
Shares redeemed (449,325) (193,371)
-----------------------------------------------------------------------
Net increase 291,293 54,822
=======================================================================
BADGLEY FUNDS ANNUAL REPORT 25
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
MAY 31, 2006
4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
The aggregate purchases and sales of investments, excluding short-term
investments, by the Funds for the year ended May 31, 2006, were as follows:
BALANCED FUND GROWTH FUND
-----------------------------------------------------------------------
Purchases
U.S. Government $ 1,439,184 $ --
Other 5,846,441 6,657,923
Sales
U.S. Government 2,365,506 --
Other 13,559,723 8,877,923
As of May 31, 2006 the components of accumulated earnings (losses) on a
tax basis were as follows:
BALANCED FUND GROWTH FUND
-----------------------------------------------------------------------
Cost of Investments (a) $ 24,231,381 $ 13,049,536
=======================================================================
Gross Unrealized appreciation 3,416,556 3,839,793
Gross unrealized depreciation (752,921) (329,999)
-----------------------------------------------------------------------
Net unrealized appreciation 2,663,635 3,509,794
-----------------------------------------------------------------------
Undistributed ordinary income 69,360 --
Undistributed long-term capital gain -- --
-----------------------------------------------------------------------
Total distributable earnings 69,360 --
-----------------------------------------------------------------------
Other accumulated losses (1,345,315) (3,585,502)
-----------------------------------------------------------------------
Total accumulated earnings (losses) $ 1,387,680 $ (75,708)
-----------------------------------------------------------------------
(a) Represents cost for federal income tax purposes and differs from
the cost for financial reporting purposes due to wash sales.
For the year ended May 31, 2006, capital loss carryforwards of
$1,484,555 and $911,851 were utilized by the Balanced and Growth Funds,
respectively. At May 31, 2006, the Balanced and the Growth Fund had accumulated
net realized capital loss carryovers of $1,345,315 and $3,585,502, respectively.
The capital loss carryovers for the Balanced Fund of $798,052, and $547,263
expire in 2011 and 2012, respectively. The capital loss carryovers for the
Growth Fund of $95,072, $2,533,832, and $956,598 expire in 2010, 2011, and 2012,
respectively. The above losses will be offset by any future realized capital
gains.
26 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
MAY 31, 2006
On the Statement of Assets and Liabilities, the following adjustments were made
for permanent tax adjustments.
UNDISTRIBUTED NET
UNDISTRIBUTED NET REALIZED LOSS
CAPITAL STOCK INVESTMENT INCOME ON INVESTMENTS
- --------------------------------------------------------------------------------
Balanced Fund (1) -- 1
Growth Fund (106,146) 106,149 (3)
The permanent differences primarily relate to net operating losses.
For the year ended May 31, 2006, the components of distributions on a tax basis
were as follows:
BALANCED FUND GROWTH FUND
- --------------------------------------------------------------------------------
Ordinary income $ 450,778 $ --
Long-term capital gains -- --
- --------------------------------------------------------------------------------
Total distributions paid $ 450,778 $ --
================================================================================
For the year ended May 31, 2005, the components of distributions on a tax basis
were as follows:
BALANCED FUND GROWTH FUND
- --------------------------------------------------------------------------------
Ordinary income $ 500,034 $ --
Long-term capital gains -- --
- --------------------------------------------------------------------------------
Total distributions paid $ 500,034 $ --
================================================================================
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.
BADGLEY FUNDS ANNUAL REPORT 27
BADGLEY FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS (continued)
MAY 31, 2006
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 the period of three years from
the date such amount was waived or reimbursed. For the year ended May 31, 2006,
the Adviser waived/reimbursed expenses of $132,457 and $127,895 for the Balanced
Fund and Growth Fund, respectively. Waived/reimbursed expenses subject to
potential recovery by year of expiration are as follows:
YEAR OF EXPIRATION BALANCED FUND GROWTH FUND
--------------------------------------------------------------------------
5/31/2007 $ 170,562 $ 172,985
5/31/2008 109,115 150,881
5/31/2009 132,457 127,895
--------------------------------------------------------------------------
The Funds have adopted an amended and restated plan of distribution
under Rule 12b-1 under the 1940 Act (the "12b-1 Plan") allowing for the
reimbursement or payment of distribution and marketing expenses in any amount
not to exceed an annual rate of 0.25% of each Fund's average daily net assets.
An amended and restated plan of distribution became effective in July 2004. The
12b-1 Plan authorizes the Funds to pay Rafferty Capital Markets, LLC, an
unaffiliated distributor, (the "Distributor") a maximum allowable distribution
and shareholder servicing fee of 0.25% of each Fund's average daily net assets
(computed on an annual basis) subject to a minimum of $18,000 for the
Corporation, which is allocated to the Funds based on each of their net assets.
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. Currently, the Adviser has a
Related Party Agreement with Rafferty Capital Markets, LLC, which allows the
Adviser to be reimbursed for the cost of marketing the Funds. During the year
ended May 31, 2006, the Adviser was reimbursed for marketing related expenses
for the Balanced Fund and the Growth Fund in the amount of $44,378 and $22,976,
respectively. During the year ended May 31, 2006, total expenses incurred by the
Balanced Fund and Growth Fund pursuant to the 12b-1 Plan were $39,805 and
$17,450, respectively.
U.S. Bank, N.A., a subsidiary of U.S. Bancorp, a publicly held bank
holding company, serves as custodian for the Funds. U.S. Bancorp Fund Services,
LLC, a wholly-owned limited liability company of U.S. Bank, N.A., serves as
transfer agent, administrator and accounting services agent for the Funds.
28 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MAY 31, 2006
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 (the "Funds") at May 31, 2006, the results of each of their
operations for the year then ended, the changes in each of their net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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, 2006 by
correspondence with the custodian, provide a reasonable basis for our opinion.
/S/ PRICEWATERHOUSECOOPERS LLP
- -------------------------------
PricewaterhouseCoopers LLP
Seattle, Washington
June 23, 2006
BADGLEY FUNDS ANNUAL REPORT 29
BADGLEY FUNDS, INC.
EXPENSE EXAMPLE
MAY 31, 2006
As a shareholder of the Funds you incur two types of costs: (1)
transaction costs, and (2) ongoing costs, including advisory fees and other Fund
expenses. This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Funds and to compare these costs with the ongoing
costs of investing in other mutual funds. The example is based on an investment
of $1,000 invested at the beginning of the period and held for the entire period
(12/1/05 - 5/31/06).
ACTUAL EXPENSES
The first line of each table below provides information about actual
account values and actual expenses. Although the Funds charge no sales load or
transaction fees, you will be assessed fees for outgoing wire transfers,
returned checks and stop payment orders at prevailing rates charged by U.S.
Bancorp Fund Services, LLC, the Funds' transfer agent. If you request that a
redemption be made by wire transfer, currently a $15.00 fee is charged by the
Funds' transfer agent. IRA accounts will be charged a $15.00 annual maintenance
fee and a $25.00 distribution fee. These expenses are not included in the
following example below. The example includes, but is not limited to, advisory
fees, shareholder servicing fees, fund accounting and custody fees. However, the
example does not include portfolio trading commissions and related expenses, and
other extraordinary expenses as determined under generally accepted accounting
principles. You may use the information in this line, together with the amount
you invested, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading entitled "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of each of the following tables provides information
about hypothetical account values and hypothetical expenses based on the Funds'
actual expense ratios and an assumed rate of return of 5% per year before
expenses, which are not the Funds' actual returns. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use the information to
compare the ongoing costs of investing in the Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds. Please note that the expenses
shown in the table are meant to highlight your ongoing costs only and do not
reflect any transactional costs, such as redemption fees. Therefore, the second
line of the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
30 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
EXPENSE EXAMPLE (continued)
MAY 31, 2006
BADGLEY BALANCED FUND
-------------------------------------------------------
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD
12/1/05 5/31/06 12/1/05 -
5/31/06(1)
-------------------------------------------------------
Actual $1,000.00 $1,001.90 $ 6.49
Hypothetical (5% return
before expenses) 1,000.00 1,018.45 6.54
(1) Expenses are equal to the Fund's annualized expense ratio which was capped
at 1.30%, multiplied by the account valueover the period, multiplied by
average 182/365 to reflect the one-half year period.
BADGLEY GROWTH FUND
-------------------------------------------------------
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD
12/1/05 5/31/06 12/1/05 -
5/31/06(1)
-------------------------------------------------------
Actual $1,000.00 $1,005.30 $ 7.50
Hypothetical (5% return
before expenses) 1,000.00 1,017.45 7.54
(1) Expenses are equal to the Fund's annualized expense ratio which was capped
at 1.50%, multiplied by the average account value over the period,
multiplied by 182/365 to reflect the one-half year period.
BADGLEY FUNDS ANNUAL REPORT 31
BADGLEY FUNDS, INC.
ADDITIONAL INFORMATION
MAY 31, 2006
PROXY VOTING
The Badgley Funds have adopted proxy voting policies and procedures
that delegate to Badgley, Phelps and Bell, Inc., the Funds' investment adviser,
the authority to vote proxies. A description of the Badgley Funds proxy voting
policies and procedures is available without charge, upon request, by calling
the Funds toll free at 1-877-BADGLEY or by e-mail at
ProxyVotes@badgleyfunds.com. A description of these policies and procedures is
also included in the Funds' Statement of Additional Information, which is
available on the SEC's website at www.sec.gov and the Funds' website at
www.badgleyfunds.com.
The actual voting records relating to portfolio securities during the
twelve month periods ended June 30 (as filed with the SEC on Form N-PX) are
available without charge, upon request, by calling the Funds toll free at
1-877-BADGLEY or by accessing the SEC's website at www.sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Funds are required to file complete schedules of portfolio holdings
with the SEC for the first and third fiscal quarters on Form N-Q. Once filed,
the Funds' Form N-Q is available without charge, upon request on the SEC's
website (http://www.sec.gov) and may be available by calling 1-877-BADGLEY. You
can also obtain copies of Form N-Q by (i) visiting the SEC's Public Reference
Room in Washington, DC (information on the operation of the Public Reference
Room may be obtained by calling 1-800-SEC-0330); (ii) sending your request and a
duplicating fee to the SEC's Public Reference Room, Washington, DC 20549-0102;
or (iii) sending your request electronically to publicinfosec.gov.
For the fiscal year ended May 31, 2006 certain dividends paid by the
Funds may be subject to a maximum tax rate of 15%, as provided for by the Jobs
and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends
declared from net investment income designated as qualified dividend income were
as follows:
Balanced Fund . . . . . . . . . . . . . . . . . . . . 31%
Growth Fund . . . . . . . . . . . . . . . . . . . . 0%
For corporate shareholders, the percent of ordinary income
distributions qualifying for the corporate dividends received deduction for the
fiscal year ended May 31, 2006 were as follows:
Balanced Fund . . . . . . . . . . . . . . . . . . . . 30%
Growth Fund . . . . . . . . . . . . . . . . . . 0%
32 BADGLEY FUNDS ANNUAL REPORT
BADGLEY FUNDS, INC.
HIGHLIGHTED STOCKS
PERCENTAGE OF FUNDS' ASSETS AS OF MAY 31, 2006
COMMON STOCK BALANCED FUND GROWTH FUND
- --------------------------------------------------------------------------------
Amdocs Limited 1.53% 2.91%
Apple Computer, Inc. 0.89% 1.71%
BJ Services Company 1.66% 3.24%
Expeditors International of Washington, Inc. 1.35% 2.57%
FedEx Corp. 1.97% 3.87%
Google Inc. 1.15% 2.14%
Michael's Stores, Inc. 1.10% 2.09%
Schlumberger Limited 1.37% 2.65%
- --------------------------------------------------------------------------------
BADGLEY FUNDS ANNUAL REPORT 33
BADGLEY FUNDS, INC.
DIRECTORS AND OFFICERS
MAY 31, 2006
TERM OF # OF
POSITION OFFICE AND PORTFOLIOS
WITH THE LENGTH OF PRINCIPAL OCCUPATION IN FUND
NAME, ADDRESS* AND AGE CORPORATION TIME SERVED DURING PAST FIVE YEARS COMPLEX OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------------
Graham S. Anderson**, 73 Director Indefinite Retired. Formerly 2 Director Emeritus, The
term since Chairman and Chief Commerce Bank
1999. Executive Officer of
Pettit-Morry Co.
- ----------------------------------------------------------------------------------------------------------------------------
Frank S. Bayley**, 66 Director Indefinite Retired. Formerly of 2 Director and Chairman, C.D.
term since Counsel and Partner, Stimson Company (private
1998. Baker & McKenzie. real estate investment
company); Trustee, AIM Funds
- ----------------------------------------------------------------------------------------------------------------------------
Victor E. Parker**, 65 Director Indefinite Retired. Formerly 2 Director, First Mutual
term since Chairman and Chief Bancshares, Inc.
2003. Executive Officer of
Parker, Smith & Feek,
Inc.
- ----------------------------------------------------------------------------------------------------------------------------
Madelyn B. Smith**, 74 Director Indefinite Retired. Formerly 2 Director and Advisory Board
term since Financial Member, Marvin and Palmer
1998. Analyst/Portfolio Associates, Inc.
Manager, Frank Russell
Co., Inc.
- ----------------------------------------------------------------------------------------------------------------------------
INTERESTED DIRECTORS
- ----------------------------------------------------------------------------------------------------------------------------
J. Kevin Callaghan***, 48 President President Investment Counselor, 2 Chairman, Badgley, Phelps
and Director since 2004; Badgley, Phelps and Bell, and Bell, Inc.
Director Inc.
since 1998
- ----------------------------------------------------------------------------------------------------------------------------
Steven C. Phelps***, 44 Director and Indefinite Chartered Financial 2 Director, Badgley, Phelps
Chairman term since Analyst, Chartered and Bell, Inc.
1998. Investment Counselor and
Chief Executive Officer,
Badgley, Phelps and
Bell, Inc.
- ----------------------------------------------------------------------------------------------------------------------------
OFFICERS
- ----------------------------------------------------------------------------------------------------------------------------
Lisa P. Guzman, 51 Secretary, Indefinite Chief Operating Officer, 2 Director, Badgley, Phelps
Treasurer term since Badgley, Phelps and Bell, and Bell, Inc.
and Chief 1998. CCO Inc.
Compliance Since 2004.
Officer
- ----------------------------------------------------------------------------------------------------------------------------
* Address for all listed persons is 1420 Fifth Avenue, Seattle, WA 98101.
** Denotes those Directors who are not "interested persons" of the
Corporation as defined under the 1940 Act.
*** Denotes those Directors who are "interested persons" of the Corporation
under the 1940 Act.
The Funds' Statement of Additional Information includes additional information
about Directors and is available without charge upon request by calling
1-877-BADGLEY.
34 BADGLEY FUNDS ANNUAL REPORT
DIRECTORS
Graham S. Anderson
Frank S. Bayley
J. Kevin Callaghan
Victor E. Parker
Steven C. Phelps
Madelyn B. Smith
PRINCIPAL OFFICERS
J. Kevin Callaghan, PRESIDENT
Lisa P. Guzman, CHIEF COMPLIANCE OFFICER, TREASURER AND SECRETARY
INVESTMENT ADVISER
BADGLEY, PHELPS AND BELL, INC.
1420 Fifth Avenue
Seattle, Washington 98101
DISTRIBUTOR
RAFFERTY CAPITAL MARKETS, LLC
59 Hilton Avenue, Suite 101
Garden City, New York 11530
CUSTODIAN
U.S. BANK, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
ADMINISTRATOR, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
U.S. BANCORP FUND SERVICES, LLC
Third Floor
615 East Michigan Street
Milwaukee, Wisconsin 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PRICEWATERHOUSECOOPERS LLP
1420 Fifth Avenue, Suite 1900
Seattle, Washington 98101
LEGAL COUNSEL
KIRKLAND & ELLIS LLP
200 East Randolph Drive
Chicago, Illinois 60601
ANNUAL REPORT
MAY 31, 2006
BADGLEY
FUNDS,
INC.
[B GRAPHIC] Badgley Balanced Fund
[G GRAPHIC] Badgley Growth Fund
[LOGO]
www.badgleyfunds.com
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the period covered by this
report. The registrant has not granted any waivers from any provisions of the
code of ethics during the period covered by this report.
A COPY OF THE REGISTRANT'S CODE OF ETHICS THAT APPLIES TO THE REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER IS FILED HEREWITH.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that it does not have an
audit committee financial expert serving on its audit committee. At this time,
the registrant believes that the experience provided by each member of the audit
committee together offers the registrant adequate oversight for the registrant's
level of financial complexity.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
4 (A) - (D) The registrant has engaged its principal accountant to perform audit
services, audit-related services, tax services and other services during the
past two fiscal years. "Audit services" refer to performing an audit of the
registrant's annual financial statements or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for those fiscal years. "Audit-related services" refer to the
assurance and related services by the principal accountant that are reasonably
related to the performance of the audit. "Tax services" refer to professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning. The following table details the aggregate fees billed or
expected to be billed for each of the last two fiscal years for audit fees,
audit-related fees, tax fees and other fees by the principal accountant.
- ----------------------------- ----------------------- -----------------------
FYE 5/31/2006 FYE 5/31/2005
- ----------------------------- ----------------------- -----------------------
Audit Fees $34,500 $30,500
Audit-Related Fees $0 $0
Tax Fees $5,900 $4,700
All Other Fees $0 $0
- ----------------------------- ----------------------- -----------------------
4 (E) (1) The Audit Committee currently does not have pre-approval policies and
procedures because the Audit Committee pre-approves the engagement of the
registrant's independent public accountants and any audit or permissible
non-audit services to be provided by such accountants. The registrant's Audit
Committee Charter provides that the Audit Committee of the registrant approve
(a) all audit and permissible non-audit services to be provided to registrant
and (b) all permissible non-audit services to be provided by the registrant's
independent public accountants to the Adviser or any entity controlling,
controlled by, or under common control with the Adviser that provides ongoing
services to the registrant, if the engagement relates directly to the operations
and financial reporting of the registrant.
1
4 (E) (2) Not applicable.
4 (F) Not applicable.
4 (G) The following table indicates the non-audit fees billed or expected to be
billed by the registrant's accountant for services to the registrant and to the
registrant's investment adviser and any other controlling entity, controlled by,
or under common control with the adviser that provides ongoing services to the
registrant for each of the last two fiscal years.
- ------------------------------------ ---------------------- --------------------
Non-Audit Related Fees FYE 5/31/2006 FYE 5/31/2005
- ------------------------------------ ---------------------- --------------------
Registrant $5,900 $4,700
Registrant's Investment Adviser $0 $0
- ------------------------------------ ---------------------- --------------------
These amounts were paid for tax services provided to the registrant (as
disclosed above) and were pre-approved by the registrant's Audit Committee.
4 (H) Not applicable because the registrant's independent public accountants did
not provide any audit or non-audit services to the Adviser or any entity
controlling, controlled by or under common control with the Adviser that
provides ongoing services to the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to registrants who are not listed issuers (as defined in Rule
10A-3 under the Securities Exchange Act of 1934).
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to open-end investment companies.
2
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have reviewed the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940 (the "Act")) as of a date within 90 days of the filing of this report,
as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934. Based on their review, such
officers have concluded that the disclosure controls and procedures are
effective in ensuring that information required to be disclosed in this
report is appropriately recorded, processed, summarized and reported and
made known to them by others within the Registrant and by the Registrant's
service provider.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) ANY CODE OF ETHICS OR AMENDMENT THERETO, THAT IS SUBJECT OF THE
DISCLOSURE REQUIRED BY ITEM 2, TO THE EXTENT THAT THE REGISTRANT INTENDS TO
SATISFY ITEM 2 REQUIREMENTS THROUGH FILING AN EXHIBIT. Filed herewith.
(2) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002. Filed herewith.
(3) ANY WRITTEN SOLICITATION TO PURCHASE SECURITIES UNDER RULE 23C-1 UNDER
THE ACT SENT OR GIVEN DURING THE PERIOD COVERED BY THE REPORT BY OR ON
BEHALF OF THE REGISTRANT TO 10 OR MORE PERSONS. Not applicable to open-end
investment companies.
(b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Furnished herewith.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) BADGLEY FUNDS, INC.
By (Signature and Title) /S/ J. KEVIN CALLAGHAN
-----------------------------------------
J. Kevin Callaghan, President
Date JULY 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /S/ J. KEVIN CALLAGHAN
-----------------------------------------
J. Kevin Callaghan, President
Date JULY 28, 2006
By (Signature and Title) /S/ LISA P. GUZMAN
-----------------------------------------
Lisa P. Guzman, Treasurer
Date JULY 28, 2006
4