<PAGE> 1
As filed with the Securities and Exchange Registration Nos. 33-17463
Commission on or about March 1, 1996 811-5344
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 _____
Pre-Effective Amendment No. ______ _____
Post-Effective Amendment No. 13 X
-----
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 _____
Amendment No. 15 X
-----
WILLIAM BLAIR MUTUAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
222 West Adams Street
Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 364-8000
Copy to:
James L. Barber, Jr. Charles F. Custer, Esquire
222 West Adams Street Vedder, Price, Kaufman & Kammholz
Chicago, Illinois 60606 222 North LaSalle Street
(Name and Address of Agent for Service) Chicago, Illinois
--------------------
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant
has registered an indefinite amount of capital stock under the Securities Act
of 1933. The Rule 24f-2 Notice for the fiscal year ended December 31, 1995
was filed on or about February 22, 1996.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b); or
/ / on (date) pursuant to paragraph (b); or
/ / 60 days after filing pursuant to paragraph (a)(1); or
/X/ on May 1, 1996 pursuant to paragraph (a)(1); or
/ / 75 days after filing pursuant to paragraph (a)(2); or
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
================================================================================
CALCULATION OF REGISTRATION FEE
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered Per Share Offering Price* Registration Fee
<S> <C> <C> <C> <C>
William Blair 692,418 $10.52 $290,000 $100.00
Income Fund
</TABLE>
* The calculation of the maximum aggregate offering price is made pursuant to
Rule 24e-2.
(b)(2) 3,670,697
(b)(3) 3,005,845
(b)(4) 664,852
<PAGE> 3
WILLIAM BLAIR MUTUAL FUNDS, INC.
GROWTH FUND, INTERNATIONAL GROWTH FUND,
INCOME FUND AND
READY RESERVES FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item No. of Form N-1A Caption
<S> <C>
Part A . . . . . . . . . . . . . . . . . . . . . . . . Prospectus
- ------ ----------
1 . . . . . . . . . . . . . . . . . . . . . . . . Cover page
2 . . . . . . . . . . . . . . . . . . . . . . . . Fund Expense Information
3 . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights
4 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Investment Objectives and
Policies
5 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
5A . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Dividend and Distribution
Policy; Federal Income Taxation;
Shareholder Services and Rights
7 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Management of the Fund;
Determination of Net Asset Value;
How to Purchase; Exchanges
8 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; How to Redeem
9 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
Statement of
Part B Additional Information
- ------ ----------------------
10 . . . . . . . . . . . . . . . . . . . . . . . . Cover page
11 . . . . . . . . . . . . . . . . . . . . . . . . Table of contents
12 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
Item No. of Form N-1A Caption
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
13 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International
Growth Fund; Income Fund;
Ready Reserves Fund; Appendix A;
Appendix B
14 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
15 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
16 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund; General Fund Information
17 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
18 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth
Fund; Income Fund; Ready
Reserves Fund; General Fund
Information
19 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth
Fund; Income Fund; Ready
Reserves Fund; General Fund
Information
20 . . . . . . . . . . . . . . . . . . . . . . . . Federal Income Taxation (in the
Prospectus)
21 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
22 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth
Fund; Income Fund; Ready
Reserves Fund
Part B Statement of Additional Information
- ------ -----------------------------------
23 . . . . . . . . . . . . . . . . . . . . . . . . Financial Information of the Fund
Part C Other Information
- ------ -----------------
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 5
CONTENTS OF PROSPECTUS
<TABLE>
<S> <C>
Fund Expense Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . 8
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Dividend and Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
How to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
How to Redeem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Federal Income Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Shareholder Services and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
WILLIAM BLAIR
MUTUAL FUNDS, INC.
222 West Adams Street
Chicago, Illinois 60606
(312) 364-8000
INVESTMENT ADVISER
WILLIAM BLAIR & COMPANY, L.L.C.
TRANSFER AGENT
Boston Financial Data Services, Inc.
P.O. Box 9104
Boston, MA 02266-9104
1-800-635-2886
(Massachusetts 1-800-635-2840)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
WILLIAM BLAIR & COMPANY, L.L.C.
WILLIAM BLAIR
MUTUAL FUNDS, INC.
222 West Adams Street
Chicago, Illinois 60606
(312) 364-8000
PROSPECTUS
William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end
diversified mutual fund consisting of four portfolios, each with its own
investment objective and policies. For most purposes, each portfolio operates
like a separate mutual fund. The portfolios offered by this Prospectus are:
o GROWTH FUND
o INTERNATIONAL GROWTH FUND
o INCOME FUND
o READY RESERVES FUND
A description of the individual portfolios and their investment
objectives is included in this Prospectus.
An investment in Ready Reserves Fund is neither insured nor guaranteed
by the U.S. Government and there can be no assurance that the Ready Reserves
Fund will be able to maintain a stable net asset value of $1.00.
The Fund's shares are not deposits or obligations of or guaranteed or
endorsed by any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency.
Investment in the Fund's shares involves risk, including the possible loss of
principal.
This Prospectus contains a concise statement of information about the
Fund that a prospective investor should know before investing and should be
retained for future reference. A Statement of Additional Information for the
Fund, dated May 1, 1996, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of
Additional Information is available upon request and without charge by calling
or writing the Fund.
May 1, 1996
<PAGE> 6
FUND EXPENSE INFORMATION
<TABLE>
<CAPTION>
READY
GROWTH INTERNATIONAL INCOME RESERVES
FUND GROWTH FUND FUND FUND
------ ------------- ------ ----
<S> <C> <C> <C> <C>
Shareholder transaction expenses
o Maximum sales load imposed on purchases None None None None
o Maximum sales load imposed on None None None None
reinvestments
o Deferred sales load None None None None
o Redemption fee None None None None
Annual Fund operating expenses (as a percentage of average
daily net assets)
o Management advisory fee .750% 1.100% .601% .606%
o Other expenses .121 .380 .097 .116
o 12b-1 fee None None None None
---- ---- ---- ----
o Total Fund operating expenses .871% 1.480% .698% .722%
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A shareholder would incur the following Growth Fund $ 9 $28 $48 $108
expenses on a $1,000 investment International Growth $15 $47 $81 $178
assuming (1) 5% annual return and Fund
(2) redemption at the end of each
time period. Income Fund $ 7 $22 $39 $ 87
Ready Reserves Fund $ 7 $23 $40 $ 90
</TABLE>
The purpose of this example is to assist the shareholder in
understanding the various costs and expenses that an investor in a portfolio
may bear directly or indirectly. The example should not be considered to be a
representation of past or future expenses. Actual expenses may be greater or
less than those shown. Expenses and fees are based on amounts that would have
been incurred for the 1995 fiscal year, without reimbursements, assuming that
the current fees and expenses had been in effect for the 1995 fiscal year. The
example assumes 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of the portfolios.
The management advisory fee for the Income Fund is based on .25% of the first
$250 million of average daily net assets and .20% of average daily net assets
in excess of $250 million, plus 5.0% of gross income.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The following table shows important financial information expressed in
terms of one share outstanding throughout the periods. The information in the
table has been based upon information audited by the Fund's independent
auditors. Their report appears in the 1995 annual reports to shareholders for
William Blair Mutual Funds, Inc., which may be obtained without charge by
writing Boston Financial Data Services, Inc., P.O. Box 9104, Boston,
Massachusetts 02266-9104. Additional information regarding portfolio
performance is included in the 1995 annual reports to shareholders. The
financial statements appearing in the 1995 annual reports are incorporated
herein by reference.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------------------------------
GROWTH FUND 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210 $ 9.100 $11.820
Income from investment operations:
Net investment income .034 .027 .035 .045 .070 .131 .125 .126 .148 .180
Net realized and unrealized gain
(loss) on investments 2.750 .581 1.389 .671 2.970 (.287) 2.178 .433 .468 .839
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total from investment operations 2.784 .608 1.424 .716 3.040 (.156) 2.303 .559 .616 1.019
Less distributions from:
Net investment income .030 .025 .035 .047 .070 .130 .130 .160 .135 .218
Net realized gain on investments .454 .713 1.049 .769 .450 .584 2.143 .799 1.371 3.521
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Total distributions .484 .738 1.084 .816 .520 .714 2.273 .959 1.506 3.739
-------- -------- -------- -------- ------- ------- ------- ------- ------- -------
Net asset value, end of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210 $ 9.100
======== ======== ======== ======== ======= ======= ======= ======= ======= =======
Total return (%) 29.07 6.45 15.51 7.61 44.37 (2.02) 30.45 7.12 7.99 9.79
Ratios to average net assets (%):
Expenses .65 .71 .78 .83 .90 .87 .91 .92 .87 .90
Net investment income .34 .32 .38 1.34 .83 1.70 1.36 1.46 1.46 1.69
Supplemental data:
Net assets at end of period
(in thousands) $363,036 $217,560 $150,046 $111,082 $91,433 $62,898 $67,421 $59,767 $66,279 $68,555
Portfolio turnover rate (%) 32 46 55 27 33 34 45 18 22 26
</TABLE>
3
<PAGE> 8
<TABLE>
<CAPTION>
Period Ended
Year Ended December 31, December 31,
------------------------ ------------
INTERNATIONAL GROWTH FUND 1995 1994 1993 1992(a)(b)
------------------------- ---- ---- ---- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.360 $13.180 $10.130 $10.000
Income from investment operations:
Net investment income (loss) .105 0.016 0.008 (0.011)
Net realized and unrealized gain (loss on investments,
foreign currency and other assets and liabilities .785 (0.025) 3.401 0.141
------- ------- ------- -------
Total from investment operations .890 (0.009) 3.409 0.130
Less distributions from:
Net investment income .130(c) 0.024 -- --
Net realized gain on investments 0.714 0.359 --
Tax return of capital -- 0.073 --
------- ------- ------- -------
Total distributions .130 0.811 0.359 --
------- ------- ------- -------
Net asset value, end of period $13.120 12.360 13.180 10.130
------- ------- ------- -------
Total return (%) 7.22 (.040) 33.6 1.3
Ratios to average net assets (%)
Expenses (d) 1.48 1.51 1.71 1.88
Net investment income (d) .87 .15 .11 (.56)
Supplemental data:
Net assets at end of period (in thousands) 89,762 70,403 $40,298 $10,767
Portfolio turnover rate (%) 77 40 83 5
</TABLE>
________________________
(a) Ratios are annualized except total return for period less than one
year.
(b) For the period October 1, 1992 (Commencement of Operations) to
December 31, 1992.
(c) Includes $.061 in passive foreign investment company transactions
which are treated as ordinary income for Federal income tax purposes.
(d) Without the waiver of expenses in 1993 and 1992, the expense ratios
would have been 2.08% and 2.55% and the net investment ratios would
have been (.25)% and (1.22)% , respectively.
4
<PAGE> 9
<TABLE>
<CAPTION>
Years Ended December 31 Period Ended
--------------------------------------------------------- December 31,
INCOME FUND 1995 1994 1993 1992 1991 1990(a)(b)
- ----------- --------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.850 $ 10.580 $10.600 $10.770 $10.200 $10.000
Income from investment operations:
Net investment income .646 .661 .651 .832 .945 .164
Net realized and unrealized
gain (loss) on investments .732 (.741) .159 (.089) .638 .126
-------- -------- ------- ------- ------- -------
Total from investment operations 1.378 (.080) .810 .743 1.583 .290
Less distributions from:
Net investment income .658 .646 .651 .827 .870 .090
Net realized gain on
investments -- .004 .179 .086 .143 --
-------- -------- ------ ------- ------ -------
Total distributions .658 .650 .830 .913 1.013 .090
-------- -------- ------ ------- ------- -------
Net asset value, end of period $ 10.570 $ 9.850 $10.580 10.600 10.770 $10.200
Total return (%) 14.37 (.74) 7.82 7.17 16.47 2.91(b)
Ratios to average net assets (%):
Expenses (c) .68 .68 .70 .88 .92 .74
Net investment income (c) 6.24 6.33 5.96 7.69 8.33 8.39
Supplemental data:
Net assets at end of period (in thousands) $147,370 $143,790 $204,381 $136,896 $83,041 $22,899
Portfolio turnover rate (%) 54 63 114 47 64 159
</TABLE>
_________________
(a) Ratios are annualized.
(b) For the period from September 25, 1990 (Commencement of Operations) to
December 31, 1990.
(c) Without the waiver of expenses in 1991 and 1990 the expense ratios
would have been 1.06% and 1.22% and the net investment income ratios
would have been 8.19% and 7.67%, respectively.
5
<PAGE> 10
<TABLE>
<CAPTION>
Years Ended December 31, Period Ended
-------------------------------------------------------------------- December 31,
READY RESERVES FUND 1995 1994 1993 1992 1991 1990 1989 1988(a)(b)
- ------------------- ---- ---- ---- ---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
Income from investment operations:
Net investment income $ .0530 $ .0361 .026 .0327 .0551 .0755 .0848 .0399
Net realized and unrealized
gain (loss) on investments - (.0026) - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0530 .0335 .0261 .0327 .0551 .0755 .0848 .0399
Less distributions from:
Net investment income .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399
Capital contribution - .0026 - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ======== ======== ======== ========
Total return (%) 5.45 3.67(c) 2.64 3.32 5.64 7.81 8.86 7.79(b)
Ratios to average daily net assets (%):
Expenses .72 .71 .71 .71 .71 .75 .80 .81
Net investment income 5.30 3.61 2.61 3.27 5.51 7.56 8.47 7.54
Supplemental data:
Net assets at end of period (in
thousands)
Net assets at end of period
(in thousands) $703,993 $521,277 $477,268 $448,797 $402,978 $415,292 $342,245 $203,704
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
_________________
(a) Ratios are annualized.
(b) For the period from June 22, 1988 (Commencement of Operations) to
December 31, 1988.
(c) The total return includes the impact of the investment adviser's
capital contribution. Without the investment adviser's capital
contribution, the total return would have been 3.40%.
6
<PAGE> 11
THE FUND
William Blair Mutual Funds, Inc. (the "Fund") is a no-load,
open-end diversified mutual fund consisting of four portfolios, each with its
own investment objective and policies. The Fund, which was established as a
Maryland corporation on September 22, 1987, is managed by the investment
professionals of William Blair & Company, L.L.C. For most purposes, each
portfolio operates like a separate mutual fund.
GROWTH FUND: a portfolio whose investment objective is to
provide long-term appreciation of capital by investing in well-managed
companies in growing industries. It invests primarily in equities or their
equivalents.
INTERNATIONAL GROWTH FUND: a portfolio which invests
primarily in common stocks issued by companies domiciled outside of the United
States and securities convertible into, exchangeable for, or having the right
to buy such common stocks. The investment objective of the portfolio is
long-term capital appreciation through investment in well-managed, quality,
growth companies. Current income is not a significant factor in investment
selection although it is anticipated that capital appreciation will normally be
accompanied by modest investment income.
INCOME FUND: a portfolio designed to provide investors with
as high a level of current income as is consistent with preservation of
capital. It invests primarily in a diversified portfolio of high grade
intermediate-term debt securities.
READY RESERVES FUND: a money market portfolio designed for
investors who are looking for professional management of their reserve assets.
The Ready Reserves Fund portfolio seeks to obtain maximum current income
consistent with preservation of capital and invests exclusively in high quality
money market instruments.
All investments are subject to market fluctuations and
financial risks. In particular, the Growth Fund invests in some smaller
companies which tend to involve greater than average risk and potential reward.
The International Growth Fund invests in non-U.S. securities which also tend to
involve greater than average risk. For the Income Fund, although the risk of
loss of principal may be reduced by the quality of investments in which the
portfolio will primarily invest, the portfolio's investment is subject to
financial risk, and the value of the portfolio's investments tend to decrease
when interest rates rise. For the Ready Reserves Fund, the market and
financial risks should be very small. There can be no assurance that a Fund's
investment objectives will be realized.
For information about how to purchase and redeem shares, see
"How To Purchase" and "How To Redeem."
The investment objectives and policies for each portfolio are
set forth in detail below. In addition, the Fund has adopted certain
investment restrictions for each portfolio that are presented in the Statement
of Additional Information. The investment objectives of a portfolio, together
with its fundamental investment restrictions and any investment policies
designated as fundamental cannot be changed without approval by holders of a
majority of the portfolio's outstanding voting shares. As defined in the
Investment Company Act of 1940 (the "1940 Act"), this means the lesser of the
vote of (a) 67% of the shares of the portfolio at a meeting where more than 50%
of the outstanding voting shares are present in person or by proxy; or (b) more
than 50% of the outstanding voting shares of the portfolio. Other investment
techniques and investment policies described below or in the Statement of
Additional Information are not fundamental and, therefore, may be changed by
the Board of Directors without shareholder approval.
7
<PAGE> 12
INVESTMENT OBJECTIVES AND POLICIES
GROWTH FUND
The Growth Fund's investment objective is to provide
long-term appreciation of capital by investing in well- managed companies in
growing industries. In seeking this objective the portfolio's investment
adviser, William Blair & Company, L.L.C. (the "Adviser"), directs its
investment research particularly toward companies that have demonstrated the
ability to grow more rapidly than the gross national product from one business
cycle to the next. Consistent with its investment objective, the portfolio
may invest in cyclical industries when the Adviser deems them to be at or near
the bottom of their business cycle and expects a multi-year period of sustained
growth.
It is the portfolio's policy to seek growth from a broad
portfolio representation among small, medium and large companies. Although the
proportion will vary from time to time due to market conditions or the
investment outlook, it is the Adviser's intention to invest in common stocks of
each of the following classes of companies:
o Small, rapid growth companies that have had especially
vigorous growth in revenues and earnings;
o Medium sized companies of emerging investment quality whose
records of sales and earnings growth are not as well
established; and
o Large, high quality, seasoned growth companies that have
demonstrated an ability to show exceptional growth over a long
period of time.
INVESTMENT RISKS. All investments are subject to market
fluctuations and financial risks. Small company investments, which have less
liquidity and potentially experience greater market volatility and financial
risk than larger company investments, tend to involve greater than average risk
and potential reward.
In seeking to achieve the portfolio's investment objective,
the Adviser will invest in companies that it believes are well managed as
evidenced by the following:
AMONG THE LEADERS IN THE FIELD. The company should be
respected as a leader in its field. It need not be the largest company in a
broad industry classification, but it should be, or clearly have the
expectation of becoming, a significant factor in the primary markets it serves.
UNIQUE OR SPECIALTY COMPANY. The company should have some
significant attribute that cannot be easily duplicated by present or potential
competitors. This may take the form of proprietary products or processes, a
unique distribution system, an entrenched brand name or an especially strong
financial position.
QUALITY PRODUCTS OR SERVICES. The company's products or
services should be regarded as being of superior quality, which should enable
the company to obtain a premium price and to command greater customer loyalty.
MARKETING CAPABILITY. The company should have a distinctive
capability in sales, service or distribution. In many industries there are one
or two companies that have superior sales and service organizations that are
well trained, highly motivated and earn above-average compensation. Others may
have a distribution organization that would be very expensive and/or time
consuming to duplicate.
VALUE TO CUSTOMER. The prices of the company's products or
services should be based on their value to the customer and not on the cost of
producing them. This frequently enables a company to reduce prices and
significantly broaden the market for its products. Conversely, it may enable a
company to raise prices to cover increased costs without reducing demand.
RETURN ON EQUITY. Attention is focused on companies that have
achieved, or have the potential to achieve, an above-average return on equity
through efficient asset utilization and adequate margins (rather than excessive
financial leverage). It is these companies that can finance most or all of
their growth internally and translate revenue and
8
<PAGE> 13
income growth into rising per share earnings and dividends.
CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The
company should have a relatively simple, clean financial structure and adhere
to conservative and straightforward accounting practices. The Adviser believes
that this may allow the company to earn and to maintain the confidence of the
professional investment community if the company achieves consistent gains in
earnings.
In selecting companies for investment, the Adviser considers
the extent to which a company meets the portfolio's investment criteria. The
weight given to particular investment criteria will depend on the
circumstances, and some investments may not meet all the portfolio's criteria.
Generally, most of the portfolio will be invested in common
stocks, but debentures and preferred stocks may be held if convertible into
common stocks that meet the investment criteria of the portfolio. Such
debentures are likely to be lower-rated or non-rated securities, which
generally involve more credit risk than debentures in the higher rating
categories, and generally include some speculative characteristics. Other debt
securities, which would be of investment grade, may be held without limit as a
temporary defensive measure if significantly adverse market action is
anticipated. Normally, the portfolio does not purchase any stocks with a view
to quick turnover for capital gains.
INTERNATIONAL GROWTH FUND
INVESTMENT OBJECTIVE. The investment objective of the
International Growth Fund is long-term capital appreciation through investment
in well-managed, quality, growth companies. These companies will generally
exhibit superior business fundamentals including: leadership in field, quality
products/services, distinctive marketing/distribution, pricing flexibility, and
revenue from products or services consumed on a steady recurring basis. These
business characteristics should be accompanied by a management that is
shareholder return oriented and uses conservative accounting policies. These
companies with above average returns on equity, strong balance sheets and
consistent above average earnings growth at reasonable valuation levels will be
the primary focus. Stock selection will take into account both local and
global comparisons. Current income is not an investment objective, although it
is anticipated that capital appreciation will normally be accompanied by modest
investment income, which may vary depending on the allocation of the
investments.
INVESTMENT POLICIES. The portfolio will ordinarily seek to
invest at least 80% of its total assets in a diversified portfolio of common
stocks with above average growth, profitability and quality characteristics,
issued by companies domiciled outside the U.S. and in securities convertible
into, exchangeable for, or having the right to buy such common stocks. Such
companies would include companies that historically have had superior growth,
profitability and quality characteristics relative to local markets and
relative to companies within the same industry worldwide and are expected to
continue such performance. For liquidity purposes, up to 20% of the portfolio
may be held in cash (U.S. dollars and foreign currencies) or in short-term
securities, including repurchase agreements and domestic and foreign money
market instruments, including government obligations, certificates of deposit,
bankers' acceptances, time deposits, commercial paper and short-term corporate
debt securities. The portfolio does not have any specific rating requirements
for its portfolio securities. In addition, the portfolio may enter into
forward foreign currency transactions in an effort to protect against changes
in foreign exchange rates. (More information concerning such transactions may
be found in the section entitled "Special Investment Techniques" below).
Subject to the monitoring and the review of the Board of
Directors, the portfolio will normally allocate its investments among not less
than six different countries and will not concentrate investments in any
particular industry. The investment of the portfolio's assets in various
international securities markets should, in theory, decrease the degree to
which events in any one country can affect the entire portfolio. The portfolio
may, however, from time to time, have more than 25% of its assets invested in
any major industrial or developed country. It is anticipated that the vast
majority of the portfolio's investments will normally be divided among
Continental Europe, the United Kingdom, Japan and the markets of the
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Far East (including Australia and New Zealand). Selective investments may also
be made in Canada and Latin America and in emerging markets worldwide.
In pursuing its investment objective, the portfolio will vary
the geographic diversification and types of securities in which it invests
based upon continuous evaluation by its investment managers, the Adviser and
Framlington Overseas Investment Management Limited (the "Sub-Adviser"), of
economic, market and political trends throughout the world. No more than 50%
of the portfolio's equity securities may be invested in securities of issuers
of any one country at any given time. In making decisions regarding the
allocation of portfolio assets, the Adviser and Sub-Adviser (collectively
referred to herein as the "Advisers") will consider such factors as the
conditions and growth potential of various economies and securities markets,
currency exchange rates, technological developments in the various countries,
and other pertinent financial, social, national and political factors. The
portfolio will invest in companies at different stages of development ranging
from large, well-established companies to smaller companies at an earlier stage
of development. Fundamental company analysis and stock selection will be the
most important investment criteria.
The portfolio may also invest in foreign issuers through
sponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs") and Global Depository Receipts ("GDRs"). Generally an ADR is a
dollar-denominated security issued by a U.S. bank or trust company which
represents, and may be converted into, the underlying security that is issued
by a foreign company. Generally, an EDR represents a similar securities
arrangement but is issued by a European bank, while GDRs are issued by a
depository. ADRs, EDRs and GDRs may be denominated in a currency different
from the underlying securities into which they may be converted. Typically,
ADRs, in registered form, are designed for issuance in U.S. securities markets
and EDRs, in bearer form, are designed for issuance in European securities
markets.
Several foreign governments permit investments by
non-residents in their markets only through participation in certain investment
companies specifically organized to participate in such markets. Subject to
the provisions of the 1940 Act, the portfolio may invest in the shares of such
investment companies. The portfolio may also invest a portion of its assets in
unit trusts and country funds that invest in foreign markets that are smaller
than those in which the portfolio would ordinarily invest directly.
Investments in such pooled vehicles should enhance the geographical
diversification of the portfolio's assets while reducing the risks associated
with investing in certain smaller foreign markets. Investments by the
portfolio in such vehicles will provide increased liquidity and lower
transaction costs than are normally associated with direct investments in such
markets, however, there may be duplicative expenses, such as advisory fees or
custodial fees. At the present time, the portfolio intends to limit its
investments in these vehicles, together with its investments in other
investment companies, to no more than 10% of its total assets. In addition,
based upon exemptive relief obtained by the portfolio under the 1940 Act, a
portion of the equity and convertible securities that may be acquired by the
portfolio may be issued by foreign companies that, in each of their most recent
fiscal years, derived more than 15% of their gross revenues from their
activities as a broker, a dealer, an underwriter or an investment adviser.
Although the portfolio will normally invest at least 80% of
its assets in the equity securities of companies domiciled outside of the U.S.,
the portfolio may significantly alter its make-up as a temporary defensive
strategy. A defensive strategy would only be employed if, in the judgment of
the Advisers, investments in international equity securities became decidedly
unattractive because of current or anticipated adverse economic, financial,
political and social factors. The types of securities that might be acquired
and held for defensive purposes could include non-convertible preferred stock,
investment-grade debt securities, fixed income securities and securities issued
by the U.S. or foreign governments as well as domestic or foreign money market
instruments. At such time as the Advisers determine that the portfolio's
defensive strategy is no longer warranted, the portfolio will adjust its
portfolio back to its normal complement of international equity securities as
soon as practicable.
SPECIAL CONSIDERATION CONCERNING INTERNATIONAL INVESTING.
Investments in foreign
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equity securities present opportunities for both increased benefits and risks
as compared to investments in the U.S. securities market. Securities markets
in different countries may offer enhanced diversification of investors'
portfolios because of differences in economic, financial, political and social
factors. The portfolio allows investors to diversify their portfolios by
investing in various companies and economies outside of the U.S., thereby
taking advantage of these differences. However, investing in securities of
foreign issuers involves certain risks and considerations not typically
associated with investing in securities of U.S. issuers. These risks may
include less publicly available information and less governmental regulation
and supervision of foreign stock exchanges, brokers and issuers. Foreign
issuers are not usually subject to uniform accounting, auditing and financial
reporting standards, practices and requirements. Securities of foreign
issuers are subject to the possibility of expropriation, nationalization,
confiscatory taxation, adverse changes in investment or exchange control
regulations, political instability and restrictions in the flow of
international capital. Securities of some foreign issuers are less liquid and
their prices more volatile than the securities of U.S. companies. In addition,
the time period for settlement of transactions in foreign securities may be
longer than domestic securities. It may also be more difficult to obtain and
enforce judgments against foreign entities.
The portfolio is expected to incur operating expenses which
are higher than those of mutual funds investing exclusively in U.S. equity
securities, since expenses such as brokerage commissions and custodial fees
related to foreign investments are usually higher than those associated with
investments in U.S. securities. In addition, dividends and interest from
foreign securities may be subject to foreign withholding taxes. (For more
information, see the section entitled "Dividends, Distributions and Taxes"
below.)
The securities held by the portfolio will usually be
denominated in currencies other than the U.S. dollar. Therefore, changes in
foreign exchange rates will affect the value of the securities held in the
portfolio either beneficially or adversely. Fluctuations in foreign currency
exchange rates will also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net investment income
and gains, if any, distributed to shareholders.
If the U.S. government were to impose any restrictions,
through taxation or other means, on foreign investments by U.S. investors such
as those to be made through the portfolio, the Board of Directors of the Fund
will promptly review the policies of the portfolio to determine whether
significant changes in its portfolio are appropriate.
The portfolio may invest a portion of its assets in emerging
markets which may include developing countries or countries with new or
developing capital markets. The considerations noted above are generally
intensified for these investments. These countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade a small number of securities. Securities of issues located
in these countries tend to have volatile prices and may offer significant
potential for loss as well as gain.
ADDITIONAL INVESTMENT INFORMATION. The portfolio's turnover
rate may vary significantly from year to year. Although the portfolio does not
intend to trade securities for short-term profit, there is no limitation on the
length of time securities must be held by the portfolio prior to being sold. A
higher portfolio turnover rate would involve correspondingly higher transaction
costs, which would be borne directly by the portfolio. Although the portfolio
cannot accurately predict its annual portfolio turnover rate, under normal
circumstances it is not expected to exceed 100%.
The portfolio may not borrow money except as a temporary
measure for extraordinary or emergency purposes and not for leverage purposes,
and then only in an amount up to 10% of the value of its total assets, in order
to meet redemption requests.
SPECIAL INVESTMENT TECHNIQUES.
This section describes the types of special investment
techniques which the portfolio may use in an effort to achieve its investment
objective and also describes the risks associated with such investment
techniques. These techniques and related risks are described in more detail in
the Statement of Additional Information.
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FORWARD FOREIGN CURRENCY TRANSACTIONS. The portfolio may
enter into forward foreign currency contracts as a means of managing the risks
associated with changes in exchange rates. A forward foreign currency
contract is an agreement to exchange U.S. dollars for foreign currencies at a
specified future date and specified amount which is set by the parties at the
time of entering into the contract. The Advisers will generally use such
currency contracts to fix a definite price for securities they have agreed to
buy or sell and may also use such contracts to hedge the portfolio's
investments against adverse exchange rate changes. Alternatively, the
portfolio may enter into a forward contract to sell a different foreign
currency for a fixed U.S. dollar amount where the Advisers believe that the
U.S. dollar value of the currency to be sold pursuant to the forward contract
will fall whenever there is a decline in the U.S. dollar value of the currency
in which securities of the portfolio are denominated ("cross-hedge"). The
profitability of forward foreign currency transactions depends upon correctly
predicting future changes in exchange rates between the U.S. dollar and foreign
currencies. As a result, the portfolio may incur either a gain or loss on such
transactions. While forward foreign currency transactions may help reduce
losses on securities denominated in a foreign currency, they may also reduce
gains on such securities depending on the actual changes in the currency's
exchange value relative to that of the offsetting currency involved in the
transaction. The portfolio will not enter into forward foreign currency
transactions for speculative purposes.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to
time, in the ordinary course of business, the portfolio may purchase
newly-issued securities appropriate for the portfolio on a "when-issued" basis
and may purchase or sell securities appropriate for the portfolio on a "delayed
delivery" basis. When-issued or delayed delivery transactions involve a
commitment by the portfolio to purchase or sell particular securities with
payment and delivery to take place at a future date. These transactions allow
the portfolio to lock in an attractive purchase price or yield on a security
the portfolio intends to purchase. Normally, settlement occurs within one
month of the purchase or sale. During the period between purchase and
settlement, no payment is made or received by the portfolio and, for delayed
delivery purchases, no interest accrues to the portfolio. Because the
portfolio is required to set aside cash or liquid high grade securities at
least equal in value to its commitments to purchase when-issued or delayed
delivery securities, the Sub-Adviser's ability to manage the portfolio's assets
is affected by such commitments. The portfolio will only make commitments to
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, but it reserves the right to
sell them before the settlement date if deemed advisable.
FOREIGN CURRENCY FUTURES. The portfolio may purchase and sell
futures on foreign currencies as a hedge against possible variation in foreign
exchange rates. Foreign currency futures contracts are traded on boards of
trade and futures exchanges. A futures contract on a foreign currency is an
agreement between two parties to buy and sell a specified amount of a
particular currency for a particular price on a future date. To the extent
that the portfolio engages in foreign currency futures transactions, but fails
to consummate its obligations under the contract, the net effect to the
portfolio would be the same as speculating in the underlying futures contract.
SPECIAL CONSIDERATIONS RELATING TO FUTURES TRANSACTIONS.
Futures contracts entail certain risks. If the Adviser's judgment about the
general direction of interest rates or markets is wrong, the portfolio's
overall performance may be less than if no such contracts had been entered
into.
There may also be an imperfect correlation between movements
in prices of futures contracts and portfolio securities being hedged. In
addition, the market prices of futures contracts may be affected by certain
factors. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin requirements,
distortions in the normal relationship between the securities and futures
markets could result. Price distortions could also result if investors in
futures contracts decide to make or take delivery of underlying securities
rather than engage in closing transactions, because of the resultant reduction
in the liquidity of the futures market. In addition, because margin
requirements in the future markets are less onerous than margin requirements in
the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Because of price distortions in the
futures market and an
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imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of market
trends by the portfolio's advisers may still not result in a successful hedging
transaction. The portfolio could also experience losses if it could not close
out its futures position because of an illiquid secondary market, and losses on
futures contracts are not limited to the amount invested in the contract. The
above circumstances could cause the portfolio to lose money on the financial
futures contracts and also on the value of its portfolio securities.
APPLICABLE U.S. REGULATORY RESTRICTIONS. To the extent
required to comply with the 1940 Act and the rules and interpretations
thereunder, whenever the portfolio enters into a futures contract, or enters
into a delayed delivery purchase, the portfolio will maintain a segregated
account consisting of either cash or liquid high-grade securities equal to the
portfolio's potential obligation under such contracts. The segregation of
assets places a practical limit on the extent to which the portfolio may engage
in futures contracts, and enter into delayed delivery transactions.
To the extent required to comply with CFTC Rule 4.5 and in
order to avoid "commodity pool operator" status, the portfolio will not enter
into a financial futures contract if immediately thereafter the aggregate
initial margin and premiums for such contracts held by the portfolio would
exceed 5% of the liquidation value of the portfolio's assets. The portfolio
will not engage in transactions in financial futures contracts for speculation,
but only in an attempt to hedge against changes in interest rates or market
conditions affecting the value of securities which the portfolio holds or
intends to purchase. When financial futures contracts are purchased to protect
against a price increase on securities intended to be purchased later, the
portfolio anticipates that it will complete at least 75% of such intended
purchases.
INCOME FUND
The Income Fund pursues its investment objective of providing
investors with as high a level of current income as is consistent with
preservation of capital by investing primarily in a diversified portfolio of
high grade intermediate-term debt securities. As a matter of fundamental
policy, under normal conditions at least 90% of the portfolio's assets will be
invested in the following:
o U.S. dollar denominated debt securities (domestic or foreign)
with long-term ratings of at least A-or better, or an
equivalent rating, by at least one of the following four
nationally recognized statistical rating organizations
("Rating Organizations"): Duff & Phelps, Inc., Fitch Investors
Service, Inc., Moody's Investors Service, Inc. and Standard &
Poor's Corporation;
o Obligations of or guaranteed by the United States Government,
its agencies or instrumentalities. These securities include
direct obligations of the U.S. Treasury, which differ only in
their interest rates, maturities and time of issuance, and
obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, which differ in the degree of support
provided by the U.S. Government. Although these securities are
subject to the market risks resulting from fluctuation in
interest rates, they will be paid in full if held to maturity;
o Collateralized Obligations. A collateralized obligation is a
debt security issued by a corporation, trust or custodian, or
by a U.S. Government agency or instrumentality, that is
collateralized by a portfolio or pool of assets, such as
mortgages, mortgage-backed securities, debit balances on
credit card accounts or U.S. Government securities. The
issuer's obligation to make interest and/or principal
payments is secured by the underlying pool or portfolio of
securities. A variety of types of collateralized obligations
are available currently and others may become available in the
future. Some obligations are for the guaranteed payment of
only principal (the principal-only or "PO" class) or interest
(the interest-only or "IO" class), while others are for the
guaranteed payment of both, or some variation thereof. The
yields to maturity on PO and IO class obligations are more
sensitive than other obligations, with the IO class
obligations being extremely
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sensitive to the rate of principal payments (including
prepayments) on the related underlying assets. The portfolio
will invest only in PO and IO class mortgage obligations
collateralized by securities guaranteed by the U.S. Government.
The mortgage-backed collateralized obligations in which the
portfolio may invest include pools of mortgage loans assembled
for sale to investors by various governmental agencies such as
the Government National Mortgage Association ("GNMA") and
government-related organizations such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Payments of principal and/or
interest on such mortgages, including prepayments, are
guaranteed by the agency or instrumentality. As noted above,
the agencies and instrumentalities are subject to varying
degrees of support by the U.S. Government. The Income Fund
may invest in collateralized obligations (both mortgage-backed
and asset-backed) that are not guaranteed by a U.S. Government
agency or instrumentality only if those collateralized
obligations are rated A-or better, or have received an
equivalent rating, by one of the four Rating Organizations.
The effective credit quality of collateralized obligations is
the credit quality of the collateral. The requirements as to
collateralization are determined by the issuer or sponsor of
the collateralized obligation in order to satisfy rating
agencies. These collateralized obligations generally have
excess collateral but typically any guarantee is limited to a
specified percentage of the pool of assets. Asset-backed
collateralized obligations present certain risks that are not
presented by mortgage-backed obligations. Primarily, these
obligations do not have the benefit of the same security
interest in the related collateral. For example, credit card
receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Other types of asset-backed
obligations may entail problems with recovery of the
collateral. Therefore, there is the possibility that the
collateral may not, in some cases, be available to support
payments on these obligations. The portfolio may invest in
mortgage derivative products like inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is
indexed. The income from an inverse floater may be magnified
to the extent that its rate varies by a magnitude that exceeds
the magnitude of the change in the index rate of interest.
The higher the degree of magnification in an inverse floater,
the greater the volatility in its market value. Accordingly,
the duration of an inverse floater may exceed its stated final
maturity. The coupon of an inverse floating rate note moves
inversely to the movement of interest rates. In addition,
mortgage-backed inverse floaters will experience approximately
the same changes in average lives and durations that other
comparable fixed rate mortgage-backed bonds do when
prepayments rise and fall with declines and increases in
interest rates. In a rising interest rate environment, the
declining coupon coupled with the increase in the average life
can magnify the price decline relative to a fixed rate
obligation. Conversely, rate declines increase coupon income
and gradually shorten the average life, which tends to amplify
the price increase. Inverse floaters are typically priced
based on a matrix. Some types of collateralized obligations
may be less liquid than other types of securities.
Investments in collateralized obligations that are deemed to
be illiquid, which includes PO and IO class mortgage
obligations, will be subject to the 15% limitation on illiquid
assets; and
o Commercial paper obligations rated within the highest grade by
one of the four Rating Organizations.
For greater detail about the portfolio's investments, see
"Income Fund--Investment Policies
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and Techniques" in the Statement of Additional Information. For a description
of ratings, see Appendix B in the Statement of Additional Information.
From time to time, up to 10% of the portfolio's total assets
may be invested in unrated debt securities, which the Adviser deems to be of at
least "A-" quality and provided that the comparable debt of the issuer has a
rating of at least A- or its equivalent by one of the four Rating
Organizations. Obligations that are unrated are not necessarily of lower
quality than those that are rated, but may be less marketable and,
consequently, provide higher yields.
When warranted, in the opinion of the Adviser, by prevailing
market, economic or other conditions, the portfolio for temporary defensive
purposes may invest up to 100% of its assets in other types of securities,
including high quality commercial paper, obligations of banks and savings
institutions, U.S. Government securities, government agency securities and
repurchase agreements; or it may retain funds in cash.
The portfolio will not normally engage in the trading of
securities for the purpose of realizing short-term profits, but it will adjust
its portfolio as considered advisable in view of prevailing or anticipated
market conditions and the portfolio's investment objective. Accordingly, the
portfolio may sell portfolio securities in anticipation of a rise in interest
rates and purchase securities for inclusion in its portfolio in anticipation of
a decline in interest rates. Most of the trading activity of the portfolio
will be undertaken, as described above, to accomplish the portfolio's objective
in relation to anticipated movements in the level of long-term interest rates.
Portfolio turnover rate will not be a limiting factor for the portfolio. For
example, a security may be sold and another of comparable quality and maturity
purchased at approximately the same time to take advantage of what the Adviser
believes to be a temporary disparity in the normal yield relationship between
the two securities. Similar temporary yield disparities may exist between
types of bonds (e.g., between corporate bonds and federal agency bonds) so that
the Adviser may deem it advantageous to switch from one type to the other. It
is anticipated that the Income Fund's turnover rate, under normal
circumstances, will be less than 100%. For purposes of calculating portfolio
turnover, the practice of engaging in mortgage dollar rolls of mortgage-backed
securities will not be treated as a sale or purchase.
Investment Risks. Although in the opinion of the Adviser the
risk of loss of principal should be reduced by the quality of the investments
in which the portfolio will primarily invest, the portfolio's investments are
subject to financial risks. The portfolio's investments are subject to price
fluctuations resulting from various factors, including rising or declining
interest rates (market risks). The value of the portfolio's investments (other
than interest-only class obligations) tends to decrease when interest rates
rise and tends to increase when interest rates fall. They also are subject to
the ability of the issuers of such investments to make payment at maturity
(financial risks). For example, not all securities issued or guaranteed by
agencies or instrumentalities of the U.S. Government are backed by the full
faith and credit of the United States. Such securities involve different
degrees of government backing. Some obligations issued or guaranteed by U.S.
Government agencies or instrumentalities in which the portfolio may invest are
backed by the full faith and credit of the United States, such as modified
pass-through GNMA certificates; while others are backed exclusively by the
agency or instrumentality with limited rights of the issuer to borrow from the
U.S. Treasury (such as obligations of the FNMA and the FHLMC), and others are
backed only by the credit of the issuer itself (such as obligations of the
Student Loan Marketing Association). In addition, the longer maturities that
typically provide the better yields may subject the portfolio to increased
price changes resulting from market yield fluctuations. The potential for
appreciation in the event of a decline in interest rates may be limited or
negated by increased principal prepayments by certain mortgage-backed
securities, such as GNMA Certificates and other collateralized obligations.
During periods of declining interest rates, mortgages underlying the security
are prone to prepayment, causing the security's stated maturity to be
shortened. Prepayment of high interest rate mortgage-backed securities during
times of declining interest rates will tend to lower the return of the
portfolio and may even result in losses to the portfolio if the prepaid
securities were acquired at a premium. Because mortgage-backed securities tend
to be sensitive to prepayment rates on the underlying collateral, their value
to the portfolio is
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dependent upon the accuracy of the prepayment projections used which are a
consensus derived from several major securities dealers. The anticipated
dollar weighted average maturity of the portfolio is 3 to 7 years. The
anticipated weighted average modified duration for this portfolio is 2 to 5
years, with a maximum duration on any instrument of 8 years. The duration of
many mortgage backed securities changes substantially due to changes in
interest rates and prepayment rates. The Adviser will not continue to hold a
security whose duration has moved above 8 years. The duration of an instrument
is different from the maturity of an instrument in that duration measures the
average period remaining until the discounted value of the amounts due
(principal and interest) under the instrument are to be paid rather than the
instrument's stated final maturity. For example, a duration of 5 years means
that if interest rates increase 1%, the value of the portfolio would decrease
approximately 5%. Modified duration adjusts duration to take into account the
yield to maturity and the number of coupons received each year. For purposes
of calculating duration, instruments allowing prepayment will be assigned a
maturity schedule by the Adviser based on general experience.
To the extent the portfolio invests in foreign securities,
such securities may entail risks not associated with domestic securities. The
prices of such securities may be more volatile, there may be less publicly
available information about foreign issuers and many foreign issuers are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic issuers.
OTHER INVESTMENT PRACTICES. From time to time, in the
ordinary course of business, the portfolio may purchase newly-issued securities
appropriate for the portfolio on a "when-issued" basis and may purchase or
sell securities appropriate for the portfolio on a "delayed delivery" basis.
When-issued or delayed delivery transactions involve a commitment by the
portfolio to purchase or sell particular securities with payment and delivery
to take place at a future date. These transactions allow the portfolio to lock
in an attractive purchase price or yield on a security the portfolio intends to
purchase or an attractive sale price on a security the portfolio intends to
sell. Normally, settlement occurs within one month of the purchase or sale.
During the period between purchase or sale and settlement, no payment is made
or received by the portfolio and, for delayed delivery purchases, no interest
accrues to the portfolio. Because the portfolio is required to set aside cash
or liquid high grade securities at least equal in value to its commitments to
purchase when-issued or delayed delivery securities, the Adviser's ability to
manage the portfolio's assets is affected by such commitments. The portfolio
will only make commitments to purchase securities on a when-issued or delayed
delivery basis with the intention of actually acquiring the securities, but it
reserves the right to sell them before the settlement date if deemed advisable.
The portfolio may from time to time lend securities (but not
in excess of 75% of its assets) from its portfolio to brokers, dealers and
financial institutions, provided that: (1) the loan is secured continuously by
collateral consisting of U.S. Government securities, government agency
securities, cash or cash equivalents adjusted daily to have a market value at
least equal to the current market value of the securities loaned plus accrued
interest; (2) the portfolio may at any time call the loan and regain the
securities loaned; and (3) the Adviser (under the supervision of the Board of
Directors) has reviewed the creditworthiness of the borrower and has found it
satisfactory. The portfolio will receive from the borrower amounts equal to
the interest paid on the securities loaned, and will also earn income for
having made the loan. Any cash collateral will be invested in short-term
securities, the income from which will increase the return to the portfolio.
The risks associated with lending portfolio securities are similar to those of
entering into repurchase agreements (see "Ready Reserves Fund--Other Investment
Practices").
The portfolio may invest in repurchase agreements, which are
instruments under which the portfolio acquires ownership of a security and the
seller, who is a broker-dealer or a bank, agrees to repurchase the security at
a mutually agreed upon time and price. The repurchase agreement serves to fix
the yield of the security during the portfolio's holding period. The modified
duration of a security subject to repurchase may exceed 8 years. Investments in
repurchase agreements maturing in more than 7 days, together with any other
securities that are considered to be illiquid, will not exceed 15% of the net
assets of the portfolio. The
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portfolio currently intends to restrict its investment in repurchase agreements
in the same manner as described for the Ready Reserves Fund (see "Ready
Reserves Fund--Other Investment Practices").
READY RESERVES FUND
The Ready Reserves Fund pursues its investment objective of
obtaining the maximum current income consistent with preservation of capital by
investing exclusively in high quality money market instruments. These
instruments are considered to be among the safest investments available because
of their short maturities, liquidity and high quality ratings. The portfolio
seeks to maintain a net asset value of $1.00 per share. Nevertheless, there is
no guarantee that the objective of the portfolio will be achieved or that the
net asset value of $1.00 per share of the portfolio will be maintained.
The portfolio will invest exclusively in the following types
of high quality, U.S. dollar denominated money market instruments that mature
in 13 months or less:
o Obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities;
o Certificates of deposit, bankers' acceptances and time
deposits issued by U.S. banks, savings banks, savings and loan
associations, insurance companies and mortgage bankers, each
entity having assets in excess of $1 billion.
o Short-term corporate obligations, including commercial paper,
notes and bonds; and
o Repurchase agreements on obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
A more complete description of these types of investments is found in Appendix
A of the Statement of Additional Information.
LIMITING INVESTMENT RISKS. The portfolio has adopted certain
investment policies designed to limit the market and financial risks to the
portfolio. (See below for a description of investment risks.) The portfolio
may only invest in securities that, based on their short-term ratings, are
deemed to be the highest grade, or if unrated, are of equivalent quality in the
judgment of the Adviser, subject to the supervision of the Board of Directors.
However, the portfolio may invest up to five percent (5%) of its total assets
in securities deemed within the second highest grade, or if unrated, are of
equivalent quality. In addition, portfolio investments will be limited to
instruments that the Adviser, under the supervision of the Board of Directors,
has determined present minimal credit risks. Securities are deemed to be high
grade if they are rated high quality by two nationally recognized statistical
rating organizations ("Rating Organizations"), or if only rated by one Rating
Organization, rated high quality by that Rating Organization. For example,
commercial paper rated Duff -1 minus, Fitch -1, Prime -1 and A-1 by Duff &
Phelps, Inc., Fitch Investors Service, Inc., Moody Investors Service, Inc. and
Standard & Poor's Corporation, respectively, would be considered high grade.
Obligations that are unrated are not necessarily of lower quality than those
that are rated, but may be less marketable and, consequently, provide higher
yields. To a limited extent, investments in commercial paper may also include
obligations issued under Section 4(2) of the Securities Act of 1933. Because
such obligations are purchased pursuant to a private placement, their
disposition is restricted. Further, the portfolio may invest in other
corporate obligations maturing in thirteen months or less, such as publicly
traded bonds, debentures and notes, if they are rated within the two highest
grades by a Rating Organization. For a description of these ratings, see
Appendix B in the Statement of Additional Information.
The portfolio will not invest more than 25% of its total
assets in any one industry, except that the portfolio may invest more than 25%
of its total assets in the domestic banking industry. This limitation does not
apply to U.S. Government securities, including obligations issued or guaranteed
by its agencies or instrumentalities. The portfolio will also manage its
investments so that the dollar-weighted average maturity of its portfolio will
not exceed 90 days.
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The portfolio's investments are subject to minimal price
fluctuations resulting from various factors, including rising or declining
interest rates (market risks). The value of the portfolio's investments tends
to decrease when interest rates rise and tends to increase when interest rates
fall. They also are subject to the ability of the issuers of such investments
to make payment at maturity (financial risks). For example, not all securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government
are backed by the full faith and credit of the United States. Such securities
involve different degrees of government backing. Some obligations issued or
guaranteed by U.S. Government agencies or instrumentalities in which the
portfolio may invest are backed by the full faith and credit of the United
States, such as modified pass-through GNMA certificates; while others are
backed exclusively by the agency or instrumentality with limited rights of the
issuer to borrow from the U.S. Treasury (such as obligations of the FNMA and
the FHLMC), and others are backed only by the credit of the issuer itself (such
as obligations of the Student Loan Marketing Association). The investment
policies and practices of the portfolio are such that these market and
financial risks should be very small.
OTHER INVESTMENT PRACTICES. The portfolio may engage in
certain other investment practices. The portfolio may invest in some securities
on a when-issued or delayed delivery basis. The portfolio may also invest in
instruments having rates of interest that are adjusted periodically or that
"float" continuously or periodically according to formulae intended to minimize
fluctuation in values of the instruments ("Variable Rate Securities"). The
interest rate on a Variable Rate Security is ordinarily determined by reference
to, or is a percentage of, an objective standard such as a bank's prime rate,
the 90-day U.S. Treasury Bill rate, or the rate of return on commercial paper
or bank certificates of deposit. Generally, the changes in the interest rates
on Variable Rate Securities reduce the fluctuation in the market value of such
securities. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less than for fixed-rate
obligations.
Further, the portfolio may invest in Variable Rate Securities
that have a demand feature entitling the portfolio to resell the securities to
the issuer or a third party at an amount approximately equal to the principal
amount thereof plus accrued interest ("Variable Rate Demand Securities"). As
is the case for other Variable Rate Securities, the interest rate on Variable
Rate Demand Securities varies according to some objective standard intended to
minimize fluctuation in the values of the instruments. Many of these Variable
Rate Demand Securities are unrated, their transfer is restricted by the issuer
and there is little if any secondary market for the securities. Thus, any
inability of the issuers of such securities to pay on demand could adversely
affect the liquidity of these securities.
The portfolio determines the maturity of Variable Rate
Securities in accordance with Securities and Exchange Commission rules,
allowing the portfolio to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument if they
are guaranteed by the U.S. Government or its agencies, they have a stated
maturity date of one year or less or they have demand features prior to
maturity.
Additionally, the portfolio may invest in repurchase agreements, which
are instruments under which the portfolio acquires ownership of a security and
the seller, who is a broker-dealer or a bank, agrees to repurchase the security
at a mutually agreed upon time and price. The repurchase agreement serves to
fix the yield of the security during the portfolio's holding period. The
maturity of a security subject to repurchase may exceed one year. There is no
limit on the percentage of the portfolio's total assets that may be invested in
repurchase agreements, except that repurchase agreements maturing in more than
7 days, together with any securities that are restricted as to disposition
under the federal securities laws or are otherwise considered to be illiquid,
will not exceed 10% of the net assets of the portfolio.
The portfolio currently intends to enter into repurchase
agreements only with member banks of the Federal Reserve System, or with
primary dealers in U.S. Government securities. In all cases, the Adviser for
the portfolio, subject to the supervision of the Board of Directors, must be
satisfied with the creditworthiness of the seller before entering into a
repurchase agreement. In the event of the bankruptcy or other default of the
seller of a repurchase agreement, the portfolio could incur expenses and delays
enforcing its rights under the
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<PAGE> 23
agreement and experience a decline in the value of the underlying securities
and loss of income.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for the Growth Fund and the
International Growth Fund will be determined as of the earlier of 3:00 p.m.,
Chicago time, or the close of business on the New York Stock Exchange on each
day on which that Exchange is open and on each other day on which there is
sufficient trading in the portfolio's investments that it might materially
affect the net asset value, except that the net asset value will not be
computed on a day on which no orders to purchase shares were received and no
shares were tendered for redemption. As of such time, quotations of foreign
securities in foreign currencies are converted into the U.S. dollar equivalents
at the prevailing market rates as computed by Investors Bank & Trust Company,
custodian of the portfolio's assets. Net asset value per share for the Income
Fund will be determined daily, as of 2:00 p.m., Chicago time, on each day when
New York banks are open for business (except on Good Friday), except that the
net asset value may not be computed on a day on which no orders to purchase
shares were received and no shares were tendered for redemption. Net asset
value per share of the Ready Reserves Fund is determined daily, immediately
after the declaration of dividends, as of 3:00 p.m., Chicago time, on each day
when New York banks are open for business (except on Good Friday). The per
share net asset value is determined by dividing the value of the portfolio's
assets, less its liabilities, by the number of its shares outstanding.
For the Growth Fund, the market value of portfolio securities
is determined by valuing securities traded on national securities markets at
the last sale price or, in the absence of a recent sale on the date of
determination, at the latest bid price. Securities for which market quotations
are not available, and all other assets, are appraised at fair value as
determined in good faith by the Board of Directors.
For the International Growth Fund, the value of a foreign
security held by the portfolio is determined based upon its sale price on the
foreign exchange or market on which it is traded and in the currency of that
market, as of the close of the appropriate exchange or, if there have been no
sales during the day, at the latest bid prices. Trading in securities on
exchanges and over-the-counter markets in Europe and the Far East is normally
completed at various times prior to 3:00 p.m. Chicago time, the current closing
time of the New York Stock Exchange. Trading on foreign exchanges may not take
place on every day the New York Stock Exchange is open. Conversely, trading in
various foreign markets may take place on days when the New York Stock Exchange
is not open and on other days when the portfolio's net asset value is not
calculated. Consequently, the calculation of the net asset value for the
International Growth Fund may not occur contemporaneously with the
determination of the most current market prices of the securities included in
such calculation. In addition, the value of the net assets held by the
portfolio may be significantly affected on days when shares are not available
for purchase or redemption. Securities listed or traded on any domestic (U.S.)
securities exchange are valued at the last sale price or, if there have been no
sales during the day, at the latest bid prices. Securities traded only on the
over-the-counter market are valued at the latest bid prices. Other securities,
both foreign and domestic, for which market quotations are not readily
available, including restricted securities and other illiquid assets are
appraised at fair value as determined in good faith by the Board of Directors.
For the Income Fund, fixed-income securities are valued by
using market quotations, independent pricing services that use prices provided
by market makers or matrixes producing estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
Other securities, and all other assets, are appraised at a fair value as
determined in good faith by or under the direction of the Board of Directors.
For the purposes of calculating the net asset value of the Ready Reserves Fund,
portfolio securities are valued at their amortized cost, which means their
acquisition cost adjusted for the amortization of the premium or discount. The
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<PAGE> 24
portfolio seeks to maintain a net asset value of $1.00 per share.
PERFORMANCE
From time to time, the portfolios may advertise several types
of performance information. For the Growth Fund, International Growth Fund and
Income Fund performance information may include "average annual total return"
and "total return." The Income Fund and Ready Reserves Fund may also advertise
yield performance. In addition, the Ready Reserves Fund portfolio may
advertise effective yield. Each of these figures is based upon historical
results and is not necessarily representative of the future performance of the
portfolio.
Average annual total return and total return figures measure
both the net investment income generated by, and the effect of any realized or
unrealized appreciation or depreciation of, the underlying investments in the
portfolio for the period in question, assuming the reinvestment of all
dividends during the period. Thus, these figures reflect the change in the
value of an investment in the portfolio during a specified period. Average
annual total return will be quoted for at least the one-, five-and ten-year
periods ending on a recent calendar quarter. Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question.
For the Income Fund, yield is a measure of the net investment
income per share earned over a specific one-month or 30-day period expressed as
a percentage of the offering price of the portfolio's shares. For the Ready
Reserves Fund, yield is a measure of the net investment income per share earned
over a specific 7-day period for the Ready Reserves Fund expressed as a
percentage of the offering price of the portfolio's shares. Yield is an
annualized figure, which means that it is assumed that the portfolio generates
the same level of net investment income over a one-year period. Semiannual
compounding is assumed for the Income Fund.
The Ready Reserves Fund's effective yield is calculated
similarly to its yield, but the net investment income earned is assumed to be
compounded when annualized. The portfolio's effective yield will be slightly
higher than its yield due to compounding.
From time to time, the Growth Fund's performance may be
compared to that of various, unmanaged stock indices such as the Standard &
Poor's 500 Stock Index, NASDAQ, Value Line, and Russell 1,000, 2,000 and 3,000,
and may also be compared to the performance of other growth mutual funds or
mutual fund indices as reported by CDA Investment Technologies, Inc. ("CDA"),
Lipper Analytical Services, Inc. ("Lipper") or Morningstar, Inc.
("Morningstar"). CDA, Lipper and Morningstar are widely recognized independent
mutual fund reporting services. CDA, Lipper and Morningstar performance
calculations are based upon changes in net asset value with all dividends and
capital gain distributions reinvested.
Comparative performance information may be used from time to
time in advertising the International Growth Fund, including data from
independent fund reporting services, such as: CDA, Lipper, Micropal Ltd. and
Morningstar; independent unmanaged indices, such as Morgan Stanley Capital
International's Europe, Australia and the Far East (EAFE) Index and Standard
and Poor's 500 Stock Index; and industry or financial publications of general
U.S. or international interest, such as Morningstar, The Wall Street Journal,
The New York Times, Barron's, Business Week, Financial Times, Forbes and Money.
From time to time, the Income Fund's performance may be
compared to that of the Consumer Price Index or various unmanaged indices,
including the Shearson Lehman Intermediate Government/Corporate Bond Index and
the Merrill Lynch Intermediate Term Corporate & Government Index; and it may
also be compared to the performance of other appropriate fixed income or mutual
fund indices as
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<PAGE> 25
reported by Lipper or CDA. Lipper and CDA performance calculations are based
upon changes in net asset value with all dividends reinvested. Also,
historical performance may be compared to various indices or securities, such
as the rate of inflation or the return on intermediate-term government bonds
and Treasury Bills.
The portfolios may quote information from publications such as
Morningstar, The Wall Street Journal, Money Magazine, Forbes, Barron's,
Fortune, The Chicago Tribune, USA Today, Institutional Investor and Registered
Representative. Also, investors may want to compare the historical returns of
various investments, performance indexes of those investments or economic
indicators, including but not limited to stocks, bonds, certificates of
deposit, money market funds and U.S. Treasury obligations. Bank product
performance may be based upon, among other things, the Bank Rate Monitor
National Index or various certificates of deposit indexes, money market fund
performance may be based upon, among other things, the IBC/Donoghue's Money
Fund Average (All Taxable). Performance of U.S. Treasury obligations may be
based upon, among other things, various U.S. treasury bill indexes. Certain of
these alternative investments may offer fixed rates of return, and guaranteed
principal and may be insured.
From time to time, the Fund may include in its sales
literature and shareholder reports a quotation of the current "distribution
rate" for the Income Fund. Distribution rate is simply a measure of the level
of income and short-term capital gain dividends distributed for a specified
period. It differs from yield, which is a measure of the income actually
earned by the portfolio's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized or
unrealized appreciation or depreciation of, such investments during the period.
Distribution rate, therefore, is not intended to be a complete measure of
performance. Distribution rate may sometimes be greater than yield since, for
instance, it may include short-term gains (which may be nonrecurring) and may
not include the effect of amortization of bond premiums.
The portfolios' returns and net asset value will fluctuate.
More information concerning the portfolios' performance appears in the
Statement of Additional Information.
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22
<PAGE> 27
DIVIDEND AND DISTRIBUTION POLICY
The Fund's policy is to distribute substantially all net
investment income and all net realized capital gain, if any. For the Growth
Fund, income dividends are normally paid in August and December of each year,
and capital gain distributions, if any, will generally be paid in December.
For the International Growth Fund, income dividends and capital gain
distributions, if any, will generally be paid in December.
For the Income Fund income dividends are normally paid
monthly, with net realized long-term capital gain distributions, if any,
generally being paid in December and/or in January. The Fund attempts to
maintain relatively level monthly dividends for the Income Fund and therefore,
from time to time may distribute or retain net investment income and capital
gain or make a return of capital distribution in order to pursue that goal.
All distributions of income and capital gain and any return of capital would
have the effect of immediately thereafter decreasing the net asset value per
share. Income dividends and capital gain distributions will be automatically
reinvested in additional shares of the portfolio at net asset value on the
reinvestment date, which is generally the 15th day of each month if a business
day, unless the shareholder specifically requests otherwise. The shareholder
can ask that income dividends or capital gain distributions or both be paid in
cash. Cash payments are made by the Fund's Dividend Paying Agent, Boston
Financial Data Services, Inc., shortly following the reinvestment date.
The Fund's policy is to distribute substantially all Ready
Reserves Fund's net investment income and net realized capital gain if any.
Income dividends, and any capital gain distributions, will vary from year to
year. On each day the Fund is open for business, the Ready Reserves Fund's net
investment income will be declared at 3:00 p.m., Chicago time, as a dividend to
shareholders who were of record prior to the declaration. Shareholders may
elect to have dividends reinvested in additional shares or paid in cash
monthly.
Dividends are reinvested on the reinvestment date, which is
generally the 15th day of each month if a business day, otherwise on the next
business day. Dividends will be automatically reinvested in additional shares
of the portfolio unless the shareholder specifically requests them in cash.
Cash dividends are paid by the Dividend Paying Agent shortly following the
reinvestment date.
The Fund may vary these dividend practices at any time.
Income dividends and any capital gain distributions on all four portfolios will
vary from year to year. Dividends and distributions may be subject to
withholding as required by the Internal Revenue Service (see "Federal Income
Taxation").
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MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Responsibility for overall management of the Fund rests with
its directors and officers, and their duties include supervising the business
affairs of the Fund, monitoring investment activities and practices, and
considering and acting upon future plans for the Fund. The business affairs
and investments of the Fund are managed on a day-to-day basis by the Fund's
Adviser.
THE ADVISER
William Blair & Company, L.L.C., the Adviser, 222 West Adams
Street, Chicago, Illinois 60606, is the investment adviser and manager of the
Fund and provides the Fund with continuous professional investment supervision.
The Adviser is also the principal underwriter and distributor ("Distributor")
of the Fund and acts as agent of the Fund in the sale of its shares. William
Blair & Company, L.L.C. was founded over 50 years ago by William McCormick
Blair. Today the firm has more than 100 principals and 500 employees at
offices in Chicago, San Francisco, London, Liechtenstein and Zurich. The main
office in Chicago houses all investment banking, research and investment
management services.
The firm's structure attracts professionals of the highest
caliber. Free from bureaucratic restrictions and short-term performance goals,
these individuals can focus on the long-term growth of the firm. The
principals, dedicated to the firm as a whole, foster a team approach that makes
each department a source of ideas and innovation.
The Investment Management Department oversees the assets of
the four William Blair mutual funds, along with corporate pension plans,
endowments and foundations, and individual accounts. The department currently
manages over $6 billion in equities, fixed-income securities and cash
equivalents.
Clients are best served when portfolio managers are encouraged
to draw on their experience and develop new ideas. This philosophy has helped
build a hard-working, results-oriented team of 19 portfolio managers,
supported by 23 analysts, with an exceptionally low turnover rate. William
Blair portfolio managers average more than a dozen years with William Blair and
more than two decades experience in the investment industry. The Adviser is
registered as an investment adviser under the Investment Advisers Act of 1940.
Pursuant to its management agreement, the Adviser directs the
investment of the assets of the Fund, and is responsible for the overall
management of the business affairs of the portfolios, subject to the
supervision of the Fund's Board of Directors. The Adviser's duties include
responsibility for determining which investments to buy and sell, placing
brokerage and negotiating the terms of securities transactions on behalf of the
Fund. It also provides various other services and facilities.
The Growth Fund is managed by James L. (Rocky) Barber, Jr. and
Mark A. Fuller, III. Rocky Barber joined William Blair in 1986 as a portfolio
manager and manager of the Investment Management Department. Previously, he
was an equity and fixed-income manager with Alliance Capital Management for
nine years and was also president of the Alliance Capital Bond Fund, a group of
fixed-income mutual funds. Prior to that, Rocky was a financial analyst with
the Stanford University Endowment. Rocky is president of William Blair Mutual
Funds, Inc. and is a past president of the Board of Commissioners of the
Winnetka Park District as well as a past Chairman of the Board of Trustees of
the Stanford Business School Trust. He currently serves on the Board of The
LaRabida Children's Hospital Foundation. His educational background includes a
B.A., an M.S. and an M.B.A., all from Stanford University. He is a Chartered
Financial Analyst.
Mark Fuller has been with William Blair since 1983. Prior to
joining the firm he was with IBM Corporation in the computer sales industry.
He has a B.A. from Northwestern University and an M.B.A. from Northwestern
University Kellogg Graduate School of Management.
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<PAGE> 29
Bentley Myer, the manager of the Income Fund and the Ready
Reserves Fund, joined William Blair in 1991 as a fixed-income portfolio
manager. From 1983 to 1991 he was associated with LaSalle National Trust,
first as head of fixed-income investments and later as chief investment
officer. Prior to that, Bentley was head of the municipal investment section
of the trust department of Harris Trust and Savings Bank. He is currently a
director of Delnor Community Hospital Foundation and a member of the Investment
Analysts Society of Chicago. His education includes a B.A. from Middlebury
College and a M.B.A. from Wharton School of the University of Pennsylvania.
For the International Growth Fund, the Adviser has, in turn,
entered into a sub-management agreement with Framlington Overseas Investment
Management Limited ("Framlington"), appointing the latter as sub-investment
manager and delegating to Framlington the day-to-day management
responsibilities for the portfolio (see below). The Adviser continuously
monitors and evaluates the performance of Framlington.
THE SUB-ADVISER. Pursuant to its appointment as
sub-investment adviser, Framlington Overseas Investment Management Limited
("Sub-Adviser"), located at 155 Bishopsgate, London, ECZM 3XJ, manages the
day-to-day investment of the portfolio's assets.
The Sub-Adviser is registered as an investment adviser in the
U.S. under the Investment Advisers Act of 1940 as well as in the United Kingdom
with Investment Management Regulatory Organization Limited (IMRO). The
Sub-Adviser is a wholly owned subsidiary of the Framlington Group plc, which
has been providing independent investment management services to institutional
clients outside of the United Kingdom for many years, with over $3.5 billion
in assets under management. The Framlington Group plc is in turn controlled
by Credit Commercial de France, S.A. and The Throgmorton Trust plc.
Pursuant to the sub-management agreement, the Sub-Adviser has
full discretion to purchase and sell portfolio securities and to select brokers
for the execution of such purchases and sales, consistent with the
International Growth Fund's investment objective, policies and restrictions as
well as all applicable laws and regulations. (See the Statement of Additional
Information for additional information on the Adviser and Sub-Adviser.)
Asset allocation decisions and portfolio strategies for the
International Growth Fund are made jointly by Norbert W. Truderung of the
Adviser and Michael Vogel and Simon Key of the Sub-Adviser. The portfolio
investments are managed by Mr. Vogel and Mr. Key. Messrs. Truderung and Key
have performed such functions since the portfolio's inception; Mr. Vogel has
served the portfolio since April, 1995. Mr. Truderung is a principal and has
been a key member of the Investment Management Services Department of William
Blair since 1986. Prior to joining the firm, he was a Vice President, senior
investment research analyst and a member of the Investment Policy Committee for
The Northern Trust Company. Mr. Truderung has a B.A. from Baldwin-Wallace
College.
Mr. Vogel is the Group Managing Director of Framlington. He
joined the company in April, 1995 from Prolific Financial Management where he
undertook the same role. He has fifteen years of experience managing equity
portfolios. Mr. Vogel graduated with a degree in commerce and financial
management from the University of Birmingham.
Mr. Key is the Chief Investment Officer for Framlington. He
joined Framlington in 1989 and has overall responsibility for investment
research and the coordination of international funds. Mr. Key graduated from
the University of East Anglia and attained a Msc in economics at London
University prior to becoming an economist with the Bank of England.
MANAGEMENT FEE
For the Growth Fund, effective as of May 1, 1996, the Fund
pays the Adviser a monthly management advisory fee at an annual rate equal to
.75% of the average daily net assets of the portfolio. Prior to May 1, 1996,
the Fund paid the Adviser a monthly management advisory fee at an annual rate
equal to .625% of the first $75 million of the Growth Fund's average daily net
assets and .50% of average daily net assets above $75 million. For the
services and facilities furnished to the
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<PAGE> 30
Growth Fund pursuant to the advisory agreement during the fiscal year ended
December 31, 1995, the Adviser received management advisory fees of
$1,561,478.
As compensation for its services to the International Growth
Fund, effective as of May 1, 1996, the Adviser is entitled to a monthly
advisory fee at an annual rate equal to 1.10% of the first $250 million of
average daily net assets of the portfolio and 1.00% of average daily net
assets above $250 million. The management fee is greater than that paid by
most mutual funds. The Adviser pays the Sub-Adviser a monthly sub-advisory fee
at an annual rate equal to .40% of the first $100 million of average daily
assets of the portfolio and .275% of average daily net assets above $100
million. It is important to note that the sub-investment management fee does
not represent a separate or additional charge or assessment against the
portfolio. Prior to May 1, 1996, the Fund paid the Adviser a monthly
management advisory fee at an annual rate equal to 1.10% of the first $100
million of the International Growth Fund's average daily net assets and .95%
of average daily net assets above $100 million. The aggregate amount of
management advisory fees paid by the International Growth Fund to the Adviser
during the fiscal year ended December 31, 1995 was $886,557; $322,384 of this
amount was paid to the Sub-Adviser by the Adviser.
For the Income Fund, effective as of May 1, 1996, the Fund
pays the Adviser a monthly management advisory fee at an annual rate equal to
.25% of the first $250 million of average daily net assets of the portfolio and
.20% of average daily net assets in excess of $250 million, plus 5.0% of the
gross income earned. This fee structure results in higher compensation to the
Adviser when higher income is achieved, including the higher income that is
available from riskier securities. Prior to May 1, 1996, the Fund paid the
Adviser a monthly management advisory fee at an annual rate equal to .25% of
the first $100 million of the Income Fund's average daily net assets, plus
.20% of the next $150 million of average daily net assets and .15% of average
daily net assets in excess of $250 million, plus 5.0% of the gross income
earned by the portfolio. The aggregate amount of management advisory fees
paid by the Income Fund during the fiscal year ended December 31, 1995 was
$868,277.
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<PAGE> 31
For the Ready Reserves Fund, effective as of May 1, 1996, the
Fund pays the Adviser a monthly management advisory fee at the annual rate of
.625% of the first $250 million of average daily net assets of the portfolio,
.60% of the next $250 million, .575% of the next $2 billion and .55% of the
average daily net assets in excess of $2.5 billion. Prior to May 1, 1996, the
Fund paid the Adviser a monthly management advisory fee at an annual rate equal
to .625% of the first $250 million of the Ready Reserves Fund's average daily
net assets, .60% of the next $250 million, .55% of the next $500 million, .50%
of the next $2 billion, .45% of the next $2 billion, and .40% of the average
daily net assets in excess of $5 billion. For the services and facilities
furnished to the Ready Reserves Fund pursuant to the advisory agreement during
the fiscal year ended December 31, 1995, the Adviser received management
advisory fees of $3,613,262.
EXPENSES
The Fund's expenses include: the management advisory fees;
transaction costs; interest; taxes; legal, accounting, auditing, transfer
agency and custodial fees; and certain other operational expenses. In
addition, over a five-year period the International Growth Fund is reimbursing
the Adviser $50,000 in expenses incurred by the Adviser in establishing the
portfolio.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT
The Fund's Custodian is Investors Bank and Trust Company, 89
South Street, Boston, Massachusetts 02205. The Fund's Transfer Agent and
Dividend Paying Agent is Boston Financial Data Services, Inc., 2 Heritage
Drive, Quincy, Massachusetts 02171.
HOW TO PURCHASE
An investor may make an initial purchase by completing the
"Application" form included with this Prospectus, and sending it to the
Distributor or to the Fund's transfer agent, Boston Financial Data Services,
Inc. ("BFDS"), P.O. Box 9104, Boston, Massachusetts 02266-9104, together with a
check for the amount of the investment made payable to William Blair Mutual
Funds, Inc. Subsequent orders should also be sent to BFDS or to the
Distributor.
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<PAGE> 32
All purchases are made at a price based on the net asset value
per share that is next computed after receipt of the order in proper form by
the Distributor or BFDS (or, in the case of a retirement plan established
under the Fund's prototype forms, by the custodian of such plan). BFDS and the
Distributor may in certain cases make advance arrangements with shareholders
for telephone processing of purchase orders with the payment made by wire
transfer of Federal Funds. If an order is not paid for, the purchaser will be
liable for any loss to the Fund, and, if the purchaser is a shareholder, the
Fund may redeem shares to pay such loss. For the Ready Reserves Fund, the net
asset value per share will normally be $1.00. Ready Reserves Fund shares
purchased will normally begin accruing dividends on the day following the date
of purchase.
The Fund's shares are sold continuously without a sales load
at a public offering price equal to the net asset value next determined. The
minimum initial investment for all portfolios is $5,000 ($2,000 for IRAs).
The minimum for any subsequent investment is generally $1,000 except Ready
Reserves Fund, for which the subsequent minimum is $1. The portfolios may
accept smaller amounts under a group payroll deduction or similar plan. These
minimum amounts may be changed at any time and may be waived for directors,
principals, officers or employees of the Fund or Adviser. In addition, the
Fund reserves the right to withdraw all or any part of the offering made by
this Prospectus and the Fund or the Distributor may reject purchase orders.
Also, from time to time, the Fund may temporarily suspend the offering of its
shares to new investors. During the period of such suspension, persons who are
already shareholders of a portfolio would normally be permitted to continue to
purchase additional shares of the portfolio, to have dividends reinvested and
to make redemptions. Fund shares are usually held in open accounts, but the
Fund will issue a certificate for full shares on written request by a
shareholder. Unless payment for shares is made by certified or cashier's check,
a share certificate will not be issued until 30 days after the purchase is
completed. In the interest of safekeeping and expediting transfers and
redemptions, most shareholders prefer not to receive certificates.
If an investor purchases or redeems shares of the Fund through
an investment dealer, bank or other institution, that institution may impose
charges for its services; these charges would reduce the investor's yield or
return. An investor may purchase or redeem shares of the Fund directly from or
with the Fund's Distributor or its transfer agent, BFDS, without any such
charges.
In addition, shares of the Ready Reserves Fund can be
purchased through an automatic sweep program if an investor establishes a
brokerage account with William Blair & Company, L.L.C., provided the investor
meets the current minimum brokerage account size requirements. One purpose of
the automatic sweep program is to help investors make convenient, efficient use
of free credit balances in their William Blair & Company, L.L.C. brokerage
accounts.
To purchase shares of the Ready Reserves Fund through the
automatic sweep program, the investor must have a free credit balance in the
investor's brokerage account with the Distributor. A free credit balance may
be created as a result of securities transactions effected through the
Distributor, receipt of income, or the deposit of funds (by check or wire) with
the Distributor. The Distributor is currently offering a program whereby such
free credit balances are automatically used to purchase shares of the
portfolio. Under current procedures, if there is a free credit balance of at
least $1,000, the Distributor will effect an investment in the portfolio shares
on behalf of the investor on an expedited basis. In particular, if there is
such a free credit balance resulting from securities transactions in the
investor's brokerage account at the opening of business of the Distributor, it
generally will be invested in shares of the portfolio on that same day, but in
no event later than the next business day. If there is such a free credit
balance, resulting from a deposit made prior to 2:00 p.m., Chicago time, or a
receipt of income, then it will be invested in shares of the portfolio no later
than the next business day. If there is a free credit balance of less than
$1,000 and at least $1, it will be invested in shares of the portfolio within a
maximum of five business days from the day that the free credit balance is
created.
DIVIDEND REINVESTMENT PLAN. The Fund automatically reinvests
all income dividends and capital gain distributions in additional shares of a
portfolio's stock at net asset value on the reinvestment date (see "Dividend
and Distribution
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<PAGE> 33
Policy"). The minimum initial investment under this plan is $5,000 for all
portfolios, but the Fund may accept smaller amounts under a group
payroll-deduction or similar plan. The minimum for IRAs is $2,000. The
current minimum amount for subsequent investments is $1,000 for all portfolios
except for Ready Reserves Fund for which the subsequent minimum is $1. These
minimums are subject to change at any time.
CASH-DIVIDEND PLAN. All income dividends are paid in cash,
while all capital gain distributions are automatically reinvested in additional
shares at net asset value on the reinvestment date. Upon written instructions,
the Fund will pay both income dividends and capital gain distributions, if any,
in cash. The minimum initial investment under this plan is the same as the
Dividend Reinvestment Plan.
AUTOMATIC DEPOSIT OF DIVIDENDS. An investor may elect to have
all income dividends or capital gain distributions automatically deposited in a
previously established bank account.
PRE-AUTHORIZED CHECK PLAN. An investor may specify an amount
(a minimum of $250) that is to be invested on the 5th and/or 20th of each
month, and instruct BFDS to send pre-authorized checks for that amount to the
investor's bank automatically. In all other respects this plan is the same as
the Dividend Reinvestment Plan.
SYSTEMATIC WITHDRAWAL PLAN. Under this plan, which may be
established with shares presently held or through a new investment (which the
Fund suggests be at least $5,000), a shareholder specifies a dollar amount to
be paid monthly, quarterly or annually. Shares corresponding to the specified
dollar amount are automatically redeemed from the account on the fifth business
day preceding the end of the month, quarter or the year. Such redemptions are
treated as sales for Federal income tax purposes. While this plan is in
effect, all income dividends and capital gain distributions on shares in the
account will be reinvested at net asset value in additional shares. There is
no charge for withdrawals, but the minimum withdrawal is $250 per month.
Depending on the size of payments requested, and fluctuations in the net asset
value of the shares redeemed, redemptions under this plan may reduce or even
exhaust the shareholder's account.
RETIREMENT PLANS. The Fund has available Individual
Retirement Accounts ("IRAs"), under prototypes approved by the Internal Revenue
Service, which invest in shares of the portfolios. Contributions to IRAs are
fully deductible only to (1) taxpayers who are not active participants in an
employer-sponsored retirement plan, and (2) taxpayers who are active
participants in an employer-sponsored plan but have adjusted gross income below
a specified level. Non-deductible contributions are permitted.
The portfolio's shares also may be used with respect to a
Simplified Employee Pension Plan ("SEP"), under which an employer makes
contributions to all eligible employees' IRAs, or with respect to qualified
money purchase pension and/or profit sharing plans.
Prototype forms of an IRA and qualified retirement plans and a
form of SEP, and additional information concerning such plans, are available
from the Fund. BFDS may act as custodian for the portfolio's IRA and certain
qualified retirement plans. BFDS charges a $5 plan establishment fee, and
there is also an annual $15 custodial fee, and a $10 fee for each lump sum
distribution from a plan. These fees may be waived under certain
circumstances. CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED
both because of the complexity of Federal tax law and because various tax
penalties are imposed for excess contributions to, and late or premature
distributions from, IRAs or qualified retirement plans. Termination of a plan
shortly after its adoption may have adverse tax consequences.
With respect to these plans: (1) participation in all plans
is voluntary; (2) the shareholder may terminate or change a plan at any time
without penalty or charge from the Fund; (3) the Fund will pay any additional
expenses that it incurs in connection with such plans; (4) new applicants may
select a plan or plans by completing the application form included with this
Prospectus; (5) additional forms and further information may be obtained by
writing or calling the Fund; (6) the Fund reserves the right to change the
minimum amounts for initial and subsequent investments or to terminate any of
the above plans; (7) the Fund reserves the right to waive investment minimums
at the discretion of the Distributor; and (8) the Fund
29
<PAGE> 34
requires a copy of the trust agreement when shares are to be held in trust.
30
<PAGE> 35
HOW TO REDEEM
Redemption requests should be signed by all owners and sent to
Boston Financial Data Services, Inc., P.O. Box 9104, Boston, Massachusetts
02266-9104 or, for the Ready Reserves Fund only, to the Distributor.
Redemptions of a portfolio's shares are made at the net asset value per share
next computed after BFDS (or the Distributor) receives in good order the
redemption request, any stock certificates (endorsed, or accompanied by an
endorsed stock power, to the order of the Fund) and any necessary documents,
such as an inheritance tax consent or evidence of authority (such as letters
testamentary), dated not more than 60 days prior to receipt thereof. ANY
SINGLE REDEMPTION OF SHARES HAVING A VALUE OF $5,000 OR MORE REQUIRES THAT
SIGNATURE(S) BE GUARANTEED BY A BANK THAT IS A MEMBER OF THE FDIC, BY A
BROKERAGE FIRM THAT IS A MEMBER OF THE NASD OR AN ELIGIBLE GUARANTOR WHO IS A
MEMBER OF, OR A PARTICIPANT IN, A SIGNATURE GUARANTEE PROGRAM. Signature
guarantee(s), if required, must appear on the written redemption request and
any endorsed stock certificate or stock power.
Payment normally will be mailed by the third business day
after the receipt by BFDS (or, in the case of the Ready Reserves Fund, the
Distributor) of a redemption request and any required documentation (and after
any checks in payment for the shares have cleared). A redeeming shareholder
may arrange with BFDS to wire redemption proceeds. Redemption requests should
not be sent to the Fund or to the Distributor (except in the case of the Ready
Reserves Fund), and doing so will delay their receipt by BFDS; a shareholder
who sends a redemption request to the Fund or to the Distributor (except in the
case of the Ready Reserves Fund) takes the risk of any decrease in net asset
value per share during the delay. BFDS may in certain cases make advance
arrangements for telephone processing of redemption requests.
The price received by a shareholder on redemption may be more
or less than cost, depending on the net asset value at the time of redemption.
Redemptions will be treated for Federal income tax purposes as sales, and a
gain (or loss) will be recognized if the redemption proceeds are more (or less)
than the adjusted basis (usually the cost) of the redeemed shares.
Fund shares may be transferred by a written request addressed
to the Fund and delivered to BFDS giving the name and social security or
taxpayer identification number of the transferee, and accompanied by the same
signature guarantees and documents as would be required for a redemption,
together with specimen signatures of all transferees.
REQUESTS FOR CHANGES IN REGISTRATION OR FOR REDEMPTION OR
DIVIDEND CHECKS TO BE SENT TO A PLACE OTHER THAN THE ADDRESS OF RECORD,
REGARDLESS OF AMOUNT, MUST CONTAIN A SIGNATURE GUARANTEE BY A BANK THAT IS A
MEMBER OF THE FDIC, BY A BROKERAGE FIRM THAT IS A MEMBER OF THE NASD, OR BY AN
ELIGIBLE GUARANTOR WHO IS A MEMBER OF, OR A PARTICIPANT IN, A SIGNATURE
GUARANTEE PROGRAM.
Redemption requests for shares held in a retirement plan
established under the Fund's prototype forms should be processed through the
plan's custodian. Such requests are effective at the net asset value per share
that is next computed after the custodian receives the request and any
necessary documentation.
In addition, shares of the Ready Reserves Fund can be redeemed
by one of the methods discussed below. Redemptions will be processed after the
next daily dividend declaration and at the net asset value next determined
after receipt by State Street Bank of proper notice of redemption from the
Distributor or, for redemptions by check, after receipt by BFDS of the check
tendered for payment. In this way, the shareholder will receive the net asset
value of such shares and all declared but unpaid dividends on such shares
through the date of redemption.
REQUEST BY SHAREHOLDER (READY RESERVES FUND ONLY). A
shareholder may specifically request that all or a portion of the shareholder's
investment in the portfolio be redeemed by calling a William Blair & Company,
L.L.C. account executive at 312/364-8000, or by writing William Blair &
Company, L.L.C., to the attention of the
31
<PAGE> 36
shareholder's account executive at 222 West Adams Street, Chicago, Illinois
60606. Amounts redeemed will be placed in the shareholder's brokerage account.
If the Distributor receives notice of the request to redeem the shares by 9:30
a.m., Chicago time, the redemption will be effected as of that date. If notice
of the redemption request is received after that time, the redemption will be
effected on the next following business day.
REDEMPTION BY CHECK (READY RESERVES FUND ONLY). Provided that
the Fund has approved the shareholder for check-writing privileges, the
shareholder may redeem shares by check. In order to use this method, the
shareholder must fill out an application for the check-writing privilege. If
the application is approved, the shareholder will be provided with checks that
may be made payable to any person in an amount not less than $500 nor more than
$9 million. There currently is no charge for this service and no limit on the
number of checks that may be written. However, these provisions are subject to
change.
The payee of the check may cash or deposit it like any other
check drawn on a bank. When such check is presented for payment, a sufficient
number of full and fractional shares in the shareholder's account will be
redeemed at their next determined net asset value per share (which is usually
$1.00) to cover the amount of the check. This enables the shareholder to
continue earning daily dividends until the check clears. Cancelled checks will
be returned to the shareholder by BFDS. Unless one signer is authorized on
the application for the check-writing privilege, checks must be signed by all
account owners in the same manner as the account is registered.
The Fund may refuse to honor checks whenever the right of
redemption has been suspended or postponed (as described in the Statement of
Additional Information under "Purchase and Redemption of Fund"), or whenever an
account is otherwise impaired. An account would be considered impaired when
there are insufficient assets to cover the check, when a "stop order" has been
placed on the check, and in other situations, such as where there is a dispute
over ownership of the account. A $25 service fee will be charged when a check
is presented to redeem portfolio shares in excess of the value of the
shareholder's account or for checks written for an amount less than $500.
AUTOMATIC REDEMPTION (READY RESERVES FUND ONLY). The
Distributor has instituted an automatic redemption procedure applicable to
shareholders who maintain certain brokerage accounts with it. The Distributor
may utilize this procedure to satisfy amounts due it by the shareholder as a
result of purchases of securities or other transactions in the shareholder's
brokerage account.
Under this procedure, if the shareholder so elects, the
shareholder's brokerage account will be scanned at the opening of business each
day and, after application of any cash balances in the brokerage account, a
sufficient number of portfolio shares will be redeemed, effective that day at
the next determined net asset value, to satisfy any amounts for which the
shareholder is obligated to make payment to the Distributor. The shareholder
will receive all dividends declared but unpaid through the date of redemption.
AUTOMATIC REDEMPTION OF SMALL ACCOUNTS (ALL PORTFOLIOS). Due
to the relatively high cost of maintaining small accounts, the Fund reserves
the right to redeem the shares in any account that, following a redemption, is
below a specified amount. Currently, the minimum is $5,000 per portfolio.
Shareholders will be notified that the values of their accounts have fallen
below the minimum and allowed two months to make an additional investment
before the redemption will be processed.
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<PAGE> 37
EXCHANGES
Subject to the following limitations, shares of the portfolios
may be exchanged for each other at their relative net asset values so long as
the portfolio to be acquired is registered in the shareholder's state of
residence. There is no service fee for an exchange; however, only four (4)
exchanges from a portfolio are allowed within any 12-month period. Exchanges
will be effected by redemption of shares of the portfolio held and purchase of
shares of the other portfolio or portfolios requested. For Federal income tax
purposes, any such exchange constitutes a sale upon which a gain or loss will
be realized, depending upon whether the value of the shares being exchanged is
more or less than the shareholder's adjusted cost basis.
Exchanges may be made by a written request to William Blair
Mutual Funds, Inc., Attention: Exchange Department, P.O. Box 9104, Boston, MA
02266-9104, or by telephone if an exchange authorization as provided on the
account application is on file with BFDS. Once the telephone authorization is
on file, State Street Bank will honor requests by any person by telephone at
1-800-635-2886 (in Massachusetts call 1-800-635-2840). Any certificates for
shares must be deposited prior to any exchange of such shares. Neither the Fund
nor its transfer agent will be liable for any loss, expense or cost arising out
of any telephone request pursuant to the telephone exchange privilege,
including any fraudulent or unauthorized request, and the shareholder will bear
the risk of loss, so long as the Portfolio or its transfer agent reasonably
believes, based upon reasonable verification procedures, that the telephonic
instructions are genuine. The verification procedures include recording
instructions, requiring certain identifying information before acting upon
instructions and sending written confirmations.
33
<PAGE> 38
FEDERAL INCOME TAXATION
Each portfolio intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code and, if so
qualified, will not be liable for Federal income taxes to the extent its
earnings are distributed. Dividends derived from taxable net investment income
and net short-term capital gains are taxable to shareholders as ordinary
income, and long-term capital gain distributions are taxable to shareholders as
long-term capital gains regardless of how long the shares have been held and
whether received in cash or shares. Long-term capital gain dividends received
by individual shareholders generally are taxed at a maximum rate of 28%.
Long-term capital gain dividends received by corporate shareholders are taxed
at the same rates as ordinary income. Dividends declared by the Fund in
October, November or December to shareholders of record as of a date in one of
those months and paid before the following February 1 are treated as having
been paid on December 31 of the calendar year declared for federal income tax
purposes.
Each portfolio intends to declare and make distributions
during the calendar year of an amount sufficient to prevent imposition of a 4%
non-deductible federal excise tax. The required distribution generally is the
sum of 98% of the portfolio's net investment income for the calendar year plus
98% of its capital gain net income for the one-year period ending October 31
plus the sum of any undistributed net investment income and capital gain net
income from the prior year less any over-distribution from the prior year.
A dividend or distribution received shortly after the purchase
of shares reduces the net asset value of the shares by the amount of the
dividend or distribution and, although in effect a return of capital, will be
subject to income taxes. If the net asset value of shares were reduced below
the shareholder's cost by dividends representing gains realized on sales of
securities, such dividends would be a return of investment though taxable as
stated above.
A shareholder who redeems shares of the Fund will recognize
capital gain or loss for Federal income tax purposes measured by the
difference between the value of the shares redeemed and the basis of the
shares. For the Ready Reserves Fund there would be no capital gain or loss for
so long as the stable net asset value of $1.00 is maintained. Any loss
recognized on the redemption of Fund shares held six months or less will be
treated as long-term capital loss to the extent the shareholder has received
any long-term capital gain dividends on such shares. It is anticipated that a
portion of the ordinary income dividends for the Growth Fund will be eligible
for the dividends-received deduction available for corporate shareholders. The
International Growth Fund's, Income Fund's and Ready Reserves Fund's ordinary
income dividends are not eligible for the dividends-received deduction
available to corporate shareholders.
The Fund is required to withhold Federal income tax at the
rate of 31% (commonly called "backup withholding") from taxable distributions
to shareholders who do not furnish the Fund with a taxpayer identification
number (in the case of individuals, their social security number) or in other
circumstances where shareholders have not complied with Internal Revenue
Service regulations. Trustees of qualified retirement plans and 403(b)(7)
accounts are required by law to withhold 20% of the taxable portion of any
distribution that is eligible to be "rolled over." The 20% withholding
requirement does not apply to distributions from Individual Retirement Accounts
or any part of a distribution that is transferred directly to another qualified
retirement plan, 403(b)(7) account, or IRA. Shareholders should consult their
tax advisers regarding the 20% withholding requirement.
INTERNATIONAL GROWTH FUND
Investment income received from sources within foreign
countries may be subject to foreign income taxes. The U.S. has entered into
tax treaties with many foreign countries which entitle certain investors to a
reduced rate of tax or to certain exemptions from tax. The International
Growth Fund will operate so as to qualify for such reduced tax rates or tax
exemptions whenever practicable. The portfolio may qualify for and make an
election
34
<PAGE> 39
permitted under Section 853 of the Code so that shareholders will be able to
claim a credit or deduction on their Federal income tax returns for, and will
be required to treat as part of the amounts distributed to them, their pro rata
portion of the income taxes paid by the portfolio to foreign countries (which
taxes relate primarily to investment income). The shareholders of the
portfolio may claim a credit by reason of the portfolio's election subject to
certain limitations imposed by Section 904 of the Code. However, no deduction
for foreign taxes may be claimed under the Code by individual shareholders who
do not elect to itemize deductions on their Federal income tax returns,
although such a shareholder may claim a credit for foreign taxes and in any
event will be treated as having taxable income in the amount of the
shareholder's pro rata share of foreign taxes paid by the portfolio. Although
the portfolio intends to meet the requirements of the Code to "pass through"
such taxes, there can be no assurance that the portfolio will be able to do so.
The International Growth Fund has elected to mark-to-market its investments in
Passive Foreign Investment Companies for Federal income tax purposes.
35
<PAGE> 40
SHAREHOLDER SERVICES AND RIGHTS
CONFIRMATIONS. Each purchase or redemption transaction is
confirmed to the shareholder, giving details of the purchase or redemption,
with the number of shares computed to the third decimal place.
FISCAL YEAR. The Fund's fiscal year is the calendar year.
REPORTS. Each shareholder receives an audited annual report
and an unaudited semi-annual report.
SHAREHOLDER RIGHTS. All shares of each portfolio have equal
noncumulative voting rights and equal rights with respect to dividends, assets
and liquidation of the portfolio. Shares of each portfolio have equal
noncumulative voting rights and will be voted in the aggregate, except when a
separate vote by portfolio is required under the 1940 Act.
Shares are fully paid and nonassessable when issued, are
transferable without restriction and have no preemptive or conversion rights.
Under Maryland law, the Fund is not required to hold shareholder meetings on an
annual basis. It will, however, hold shareholder meetings as required by law,
when a sufficient number of shareholders request a meeting or as deemed
desirable by the Board of Directors, for such purposes as electing or removing
directors, changing fundamental policies or approving an investment management
agreement. Additional information about shareholder voting rights is contained
in the Statement of Additional Information.
SHAREHOLDER INQUIRIES. Shareholders may make inquiries by
writing or calling BFDS or the Distributor, as shown on the cover.
36
<PAGE> 41
WILLIAM BLAIR & COMPANY, L.L.C.
WILLIAM BLAIR MUTUAL FUNDS, INC.
222 WEST ADAMS STREET
CHICAGO, ILLINOIS 60606
(312) 364-8000
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of William Blair Mutual Funds, Inc.
(the "Fund") dated May 1, 1996. The Prospectus may be obtained without charge
by writing or calling the Fund.
______________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INTERNATIONAL GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
INCOME FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
READY RESERVES FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
GENERAL FUND INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FINANCIAL INFORMATION OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
_________________________
May 1, 1996
<PAGE> 42
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND DISTRIBUTOR
As stated in the Prospectus, William Blair & Company, L.L.C. ("Adviser") is the
Fund's investment adviser and manager. Pursuant to an investment advisory and
management agreement, the Adviser acts as the Fund's adviser, manages its
investments, administers its business affairs, furnishes office facilities and
equipment, provides clerical, bookkeeping and administrative services, provides
shareholder and information services and permits any of its principals or
employees to serve without compensation as directors or officers of the Fund if
elected to such positions. In addition to the management advisory fee, each
portfolio pays the expenses of its operations, including a portion of the
Fund's general administrative expenses, allocated on the basis of the
portfolio's net asset value. Expenses that will be borne directly by the
portfolios include, but are not limited to, the following: the fees and
expenses of independent auditors, counsel, custodian and transfer agent, costs
of reports and notices to shareholders, stationery, printing, postage, costs of
calculating net asset value, brokerage commissions or transaction costs, taxes,
registration fees, the fees and expenses of qualifying the Fund and its shares
for distribution under Federal and state securities laws and membership dues in
the Investment Company Institute or any similar organization.
The advisory agreement for a portfolio continues in effect from year to year
for so long as its continuation is approved at least annually (a) by a majority
of the directors who are not parties to such agreement or interested persons of
any such party except in their capacity as directors of the Fund and (b) by the
shareholders of the portfolio or the Board of Directors. The agreement may be
terminated at any time upon 60 days notice by either party; the Fund may so
terminate the agreement either by vote of the Board of Directors or by majority
vote of the outstanding shares of the affected portfolio. The agreement may
also be terminated at any time either by vote of the Board of Directors or by
majority vote of the outstanding voting shares of the subject portfolio if the
Adviser were determined to have breached the agreement. The agreement would
terminate automatically upon assignment. The agreement provides that the
Adviser shall not be liable for any error of judgment or of law, or for any
loss suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Adviser in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
Upon termination of the agreement, and when so requested by the Adviser, the
Fund will refrain from using the name "William Blair" in its name or in its
business in any form or combination.
The Adviser has entered into a sub-investment management agreement with
Framlington Overseas Investment Management Limited (the "Sub-Adviser")
appointing it as sub-investment adviser for the International Growth Fund. The
Sub-Adviser is a wholly owned
2
<PAGE> 43
subsidiary of Framlington Group plc, which is a wholly owned subsidiary of
Framlington Holdings Limited, which in turn is owned 51% by Credit Commercial
de France (a commercial and clearing bank) and 49% by The Throgmorton Trust plc
(an investment trust). The sub-investment management agreement has the same
provisions for continuance and termination as the investment management
agreement, except that it would also terminate automatically upon the
termination of the advisory agreement between the International Growth Fund and
the Adviser.
For the services and facilities furnished to the Growth Fund, effective as of
May 1, 1996, the Fund pays a monthly management advisory fee at an annual rate
of .75% of the portfolio's average net assets. Prior to May 1, 1996, the Fund
paid, on behalf of the Growth Fund, a monthly advisory fee at the annual rate
of 0.625% of the portfolio's average daily net assets up to $75 million and
0.50% of average daily net assets above $75 million. The advisory fee is
accrued daily and paid monthly on the first business day of the following
month. For the fiscal years ended December 31, 1995, 1994 and 1993, the
Adviser received fees of $1,561,478, $903,986 and $727,001, respectively.
For the services and facilities furnished to the International Growth Fund,
effective as of May 1, 1996, the Fund pays the Adviser a monthly advisory fee
at an annual rate of 1.10% of the first $250 million of average daily net
assets plus 1.00% of average daily net assets over $250 million. Prior to May
1, 1996, the Fund paid, on behalf of the International Growth Fund, a monthly
advisory fee at an annual rate equal to 1.10% of the first $100,000,000 of
average daily net assets of the portfolio and .95% of average daily net assets
above $100,000,000. The advisory fee is accrued daily and paid monthly on the
first business day of the following month. Under the sub-investment advisory
agreement, the Adviser pays the Sub-Adviser a monthly fee at an annual rate
equal to .40% of the first $100 million of average daily net assets of the
portfolio and .275% of average daily net assets above $100 million. For the
services and facilities furnished during the period ended December 31, 1995,
1994 and 1993, the Fund paid $886,557, $651,754 and $237,470 , respectively,
pursuant to the investment advisory agreement, of which $322,384, $237,001 and
$86,353, respectively, was paid to the Sub-Adviser; $78,535 of fees were
waived by the Adviser pursuant to its undertaking to waive fees to the extent
expenses exceed 2.0% for the period ended December 31, 1993.
For the services and facilities furnished to the Income Fund, effective as of
May 1, 1996, the Fund pays a monthly management advisory fee at an annual rate
of .25% of the first $250 million of average daily assets plus .20% of average
daily net assets over $250 million plus 5% of the gross income earned by the
portfolio. Prior to May 1, 1996, the Fund paid, on behalf of the Income Fund,
a monthly advisory fee at an annual rate equal to .25% of the first $100
million of average daily net assets of the portfolio, .20% of the next $150
million and .15% of average daily net assets in excess of $250 million, plus
5.0% of the gross income earned. The fee is accrued daily and paid monthly on
the first business day of the following month. For the services and facilities
furnished to the portfolio pursuant to the
3
<PAGE> 44
advisory agreement during the fiscal years ended December 31, 1995, 1994 and
1993, the Fund paid $868,277, $998,125 and $961,639, respectively.
For the services and facilities furnished to the Ready Reserves Fund, effective
as of May 1, 1996, the Fund pays a monthly management advisory fee at an annual
rate of .625% of the first $250 million of average daily net assets, plus .600%
of the next $250 million of average daily net assets, plus .575% of the next $2
billion of average daily net assets plus .55% of the average daily net assets
over $2.5 billion. Prior to May 1, 1996, the Fund paid, on behalf of the Ready
Reserves Fund, a monthly advisory fee at an annual rate of .625% of the first
$250 million of average daily net assets of the portfolio, .60% of the next
$250 million, .55% of the next $500 million, .50% of the next $2 billion, .45%
of the next $2 billion and .40% of average daily net assets in excess of $5
billion. The management advisory fee is accrued daily and paid monthly on the
first business day of the following month. For the services and facilities
furnished to the portfolio pursuant to the advisory agreement during the fiscal
years ended December 31, 1995, 1994 and 1993 the Adviser received fees of
$3,613,262, $2,990,786 and $2,992,423 respectively.
The Adviser has agreed to reimburse the Fund should all operating expenses of
any portfolio, including the compensation of the Adviser but excluding taxes,
interest, extraordinary expenses and brokerage commissions or transaction
costs, exceed 1-1/2% of the first $30 million of average net assets of the
portfolio and 1% of average net assets over $30 million of the portfolio on an
annual basis.
William Blair & Company, L.L.C. also is the principal underwriter and
distributor ("Distributor") for shares of the Fund and acts as agent of the
Fund in the sale of its shares. The offering of shares is continuous, although
the Distributor and the Fund reserve the right to cease the offer of shares at
any time. The Distributor pays for the printing and distribution of copies of
the prospectus and shareholder reports used in connection with the offering of
shares to prospective investors. The Distributor also pays for supplementary
sales literature and advertising costs. Terms of continuation, termination and
assignment under the underwriting agreement are substantially the same as those
described above with regard to the advisory agreement, except that termination
other than upon assignment or upon determination of breach requires six months'
notice.
Messrs. Barber, Fischer, Fuller, and Ms. Gassman, Messrs. Kaplan, Kayser,
McMullan, Myer, Rucinski, Sullivan, Truderung and Truettner, who are directors
or officers of the Fund, are also principals or employees of the
Adviser/Distributor as indicated under "Directors and Officers."
The Adviser/Distributor is a limited liability company, the affairs of which
are controlled by all its principals, none of whom owns more than 25% of the
firm. The Chief Executive Officer of the firm is E. David Coolidge, III and
the Executive Committee is comprised of Harvey Bundy, III, E. David Coolidge,
III, Conrad Fischer, Edgar D. Jannotta,
4
<PAGE> 45
John P. Kayser, Richard P. Kiphart, Albert J. Lacher, James D. McKinney and
James M. McMullan.
DIRECTORS AND OFFICERS
The directors and officers of the Fund, their ages, their principal occupations
during the last five years, their affiliations, if any, with William Blair &
Company, L.L.C. and other significant affiliations are set forth below. Unless
otherwise noted, the address of each officer and director is 222 West Adams
Street, Chicago, Illinois 60606.
CONRAD FISCHER (61),* (2) Chairman of the Board and Director; Principal,
William Blair & Company, L.L.C.; and Trustee Emeritus, Chicago Child Care
Society, a non-profit organization.
VERNON ARMOUR (68), (1) (2) (3) Director; 135 South LaSalle St., Suite 1117,
Chicago, Illinois 60603; Private investor; Trustee, Illinois Institute of
Technology and Northwestern Memorial Hospital; Director and President, OTHO
S.A. Sprague Memorial Institute; Life Trustee, Illinois Institute of
Technology; and Life Trustee, Northwestern Memorial Hospital.
GEORGE KELM (67), (1) (3) Director; Three First National Plaza, Suite 2000,
Chicago, Illinois 60602; Retired Chairman of the Board and Director, Sahara
Coal Company, Inc., and Sahara Enterprises, Inc.; Director, Rolf Jensen &
Associates, Inc.; Trustee, Lawrence University, Newberry Library and McCormick
Theological Seminary; President and Director, Woods Fund of Chicago; and Member
of the Visiting Committee, University of Chicago Graduate School of Social
Service Administration.
ANN P. McDERMOTT (56), (3) Director; Trustee, Rush Presbyterian St. Luke's
Medical Center; Women's Board, Rush Presbyterian St. Luke's Medical Center;
Honorary Director, Visiting Nurse Association; Director, Presbyterian Homes;
Northwestern University, Women's Board; University of Chicago, Women's Board;
Director, Washington State University Foundation.
JAMES M. McMULLAN (61),* Director; Principal , William Blair & Company, L.L.C.,
Member, NASD Listing Review Committee and Director of Securities Industry
Association.
JOHN B. SCHWEMM (61), (1) (3) Director; 2 Turvey Lane, Downers Grove, Illinois
60515; Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons
Company, printer; and Director, USG Corp., a building material product company
and Walgreen Co., a drug store chain.
5
<PAGE> 46
W. JAMES TRUETTNER, JR. (64),* Director and Senior Vice President; Principal,
William Blair & Company, L.L.C.; and Director of International Travel Services
and Roberts Industries, Inc.; and Trustee, Shenandoah University.
JAMES L. BARBER, JR. (44), President of the Fund and Chief Operating Officer of
the Growth Fund and the Income Fund; Principal, William Blair & Company,
L.L.C.; Vice President and Secretary, LaRabida Hospital Foundation; and
President, Stanford Associates.
MARK A. FULLER, III (38), Senior Vice President; Principal, William Blair &
Company, L.L.C..
BENTLEY M. MYER (49), Senior Vice President and Chief Operating Officer, Ready
Reserves Fund; Principal, William Blair & Company, L.L.C.; formerly Vice
President, LaSalle National Trust Co.
NORBERT W. TRUDERUNG (43), Senior Vice President; Principal, William Blair &
Company, L.L.C.
JAMES S. KAPLAN (35), Vice President; Associate, William Blair & Company,
L.L.C.; formerly Vice President, First Union Bank.
JOHN P. KAYSER (46), Vice President; Principal, William Blair & Company,
L.L.C., Director, DuPage Children's Museum.
TERENCE M. SULLIVAN (52), Vice President; Associate, William Blair & Company,
L.L.C..
WALTER RUCINSKI (51), Treasurer; Controller, William Blair & Company, L.L.C.;
and Treasurer, Foundation for Special Athletics; and Vice President of
Koocanusa Marina, Inc.
JANET V. GASSMAN (29), Secretary; Administrative Assistant, William Blair &
Company, L.L.C.; formerly, Administrative Assistant, Shearson Lehman Brothers,
Inc.
___________
*Directors who are interested persons as defined in the Investment
Company Act of 1940.
(1) Member of the Standing Audit Committee.
(2) Member of Interim Valuation Committee. This committee handles any
questions regarding the valuation of portfolio securities that may
arise between meetings of the Board of Directors.
6
<PAGE> 47
(3) Mr. Armour and Mr. Kelm maintain brokerage accounts with the Adviser
and Ms. McDermott and Mr. Schwemm employ the Adviser to manage assets
that they control. Mr. Kelm also serves as president and director of
Woods Fund of Chicago, a nonprofit organization for which William
Blair & Company, L.L.C. serves as investment adviser. In addition, as
a result of his former affiliation with the Adviser as a partner of
William Blair & Company, L.L.C. from 1973 to 1982, Mr. Armour has a
beneficial interest in a Deferred Profit Sharing Plan which is managed
by the Adviser.
The directors and officers affiliated with the Adviser receive no compensation
from the Fund. Directors who are not affiliated with the Adviser currently
receive an annual fee of $4,000 plus $2,000 for each meeting attended in person
plus expenses. Prior to the 1995 fiscal year, Investors who are not affiliated
with the Adviser received an annual fee of $1,000 and prior to July, 1995, such
directors received $500 for each meeting attended in person plus expenses.
The following table sets forth the compensation earned from the Fund for the
fiscal year ended December 31, 1995 by directors who are not affiliated with
the Adviser:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits Estimated Annual
Compensation from Accrued as Part of Benefits Upon Total Compensation
------------------------------------------------------------ ------------------
Director the Fund Fund Expenses Retirement
-------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Vernon Armour $9,000 0 0 $9,000
C. Mathews Dick, Jr. $9,000 0 0 $9,000
*
George Kelm $9,000 0 0 $9,000
John H. Olwin, M.D. $8,500 0 0 $8,500
*
John B. Schwemm $9,000 0 0 $9,000
John W. Straub * $9,000 0 0 $9,000
</TABLE>
________________________________
*Resigned as directors effective as of May 1, 1996.
The following table provides certain information at January 31, 1996 with
respect to persons known to the Fund to be record holders of 5% or more of the
shares of the following portfolios:
7
<PAGE> 48
<TABLE>
<CAPTION>
Percent of
Name and Portfolio's
Address of Outstanding
Record Owner Number of Shares Common Stock
------------ ---------------- ------------
<S> <C> <C>
GROWTH FUND
-----------
William Blair Employees 4,205,284 13.3%
Profit Sharing Plan
222 West Adams Street
Chicago, Illinois 60606
INTERNATIONAL GROWTH FUND
-------------------------
Trustees of Purdue University 494,950 6.5%
1034 Freehafen Hall
West Lafayette, IN 47907
Purdue Research Foundation 397,591 5.3%
100 Hovde Hall
West Lafayette, IN 47907
</TABLE>
As of January 31, 1996, the Fund's officers and directors as a group owned (or
held or shared investment or voting power with respect to) 784,538 shares or
2.5% of the Growth Fund's stock, 426,973 shares or 5.6% of the International
Growth Fund's stock, 128,719 shares or .9% of the Income Fund's stock and
5,606,865 shares or .8% of the shares of the Ready Reserves Fund. These
figures do not include shares of the portfolios that may be indirectly owned by
certain officers of the Fund as a result of their interest in the William Blair
Profit Sharing Plan.
BROKERAGE AND PORTFOLIO TRANSACTIONS
Decisions on the Fund's portfolio transactions (including the decision to buy
or sell, the appropriate price, allocation of brokerage, use of a broker as
agent or dealer as principal, and negotiation of commissions) are normally made
by the Adviser except that decisions on portfolios transactions for
International Growth Fund are made by the Sub-Adviser, subject to the
monitoring of the Adviser. In purchasing and selling portfolio securities, the
Fund seeks to obtain the most favorable overall result, taking into account the
net price, the method of execution and research services provided by the
broker. Such research services include economic forecasts and analytical,
narrative and statistical reports on industries and companies for consideration
by the Fund and the Adviser's or Sub-Adviser's other clients.
Portfolio transactions may increase or decrease the return of a portfolio
depending upon the Adviser or Sub-Adviser's ability to correctly time and
execute such transactions. A portfolio
8
<PAGE> 49
turnover rate for any year is determined by dividing the lesser of sales or
purchases (excluding in either case cash equivalents, such as short-term
corporate notes) by the portfolio's monthly average net assets, and multiplying
by 100 (with all securities with maturities and expirations of one year or less
excluded from the computation). The portfolio's turnover rate will also vary
from year to year depending on market conditions. Since the Ready Reserves
Fund's assets are invested in securities with short (less than one year)
effective maturities, its portfolio will turn over many times a year. Such
securities, however, are excluded from the Securities and Exchange Commission
required portfolio turnover rate calculations, resulting in no portfolio
turnover rate for reporting purposes.
Selection of a broker for a particular portfolio transaction depends on many
factors, some of which are subjective and which include the net price, the
confidentiality, reliability, integrity, the size and nature of the transaction
and the market in which it is to occur, and any research or other services that
the broker has provided. The Adviser or Sub-Adviser determines the overall
reasonableness of brokerage commissions, and of premiums and discounts on
principal transactions (which do not involve commissions), by review of
comparable trades for the Adviser's or Sub-Adviser's other clients and in the
market generally. If more than one broker is believed to be equally qualified
to effect a portfolio transaction, the Adviser or Sub-Adviser may assign the
transaction to a broker that has furnished research services, but the Adviser
and Sub-Adviser have no agreement, formula or policy as to allocation of
brokerage. The Fund does not ordinarily market its shares through brokers, and
any sales of the Fund's shares by a broker would be neither a qualifying nor
disqualifying factor in allocating brokerage. All the Fund's 1994 portfolio
transactions were with brokers who met the above requirements, some of which
provided research or other services to the Adviser or Sub-Adviser.
The Fund may pay to brokers that provide research services to the Adviser or
Sub-Adviser a commission higher than another broker might have charged if it is
determined that the commission is reasonable in relation to the value of the
brokerage and research services that are provided, viewed in terms of either
the particular transaction or the Adviser's or Sub-Adviser's overall
responsibility to its advisory accounts. The extent to which such commissions
exceed commissions solely for execution cannot be determined, but such research
services, which are involved in portfolio transactions for the Fund and for the
Adviser's or Sub-Adviser's other advisory accounts, can be of benefit to both
the Fund and such other accounts. The value of research services that are
provided by brokers who handle portfolio transactions for the Fund cannot be
precisely determined, and such services are supplemental to the Adviser's or
Sub-Adviser's own efforts, which are undiminished thereby. The Adviser and
Sub-Adviser do not believe that their expenses are reduced by reason of such
services, which benefit the Fund and the Adviser's or Sub-Adviser's other
clients. Transactions in over-the-counter securities are generally executed
as principal trades with primary market makers, except where it is believed
that a better combination of price and execution could otherwise be obtained.
The Growth Fund paid total brokerage fees of $254,434, $198,271 and $219,687 in
1995, 1994 and 1993, respectively. None of such brokerage fees were paid to a
broker who was
9
<PAGE> 50
an affiliated person of the Fund, or to a broker of which an affiliated person
was an affiliated person of the Fund or of the Adviser.
International Growth Fund paid brokerage fees of $454,667, $301,194 and
$224,085 during the period ended December 31, 1995, 1994 and 1993,
respectively. None such brokerage fees were paid to a broker who was
affiliated person of the Fund, or to a broker of which an affiliated person was
an affiliated person of the Fund or of the Adviser or Sub-Adviser.
Purchases and sales of portfolio securities for the Income Fund and Ready
Reserves Fund usually are principal transactions, either directly with the
issuer or with an underwriter or market maker, with no brokerage commissions
paid by the portfolio. No brokerage commissions were paid by the Income Fund
or the Ready Reserves Fund during the fiscal years ended December 31, 1995,
1994 and 1993. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market makers will include the spread between the bid and asked
prices. The primary consideration in the allocation of transactions is prompt
execution of orders in an effective manner at the most favorable price.
The investment decisions for the Fund are reached independently from those for
other accounts managed by the Adviser or Sub-Adviser. Such other accounts also
may make investments in the same type of instruments or securities as the Fund
at the same time as the Fund. When two or more accounts have funds available
for investment in similar instruments, available instruments are allocated as
to amount in a manner considered equitable to each account. In some cases this
procedure may affect the size or price of the position obtainable for the Fund.
However, it is the opinion of the Board of Directors that the benefits
available because of the Adviser's and Sub-Adviser's organization outweigh any
disadvantages that may arise from exposure to simultaneous transactions.
No portfolio transactions are executed for the Fund with or through the Adviser
or Sub-Adviser or any affiliated broker-dealer of the Adviser or Sub-Adviser.
The Fund may purchase securities from other members of an underwriting
syndicate of which the Adviser or an affiliated broker-dealer is a participant,
but only under conditions set forth in applicable rules of the Securities and
Exchange Commission and in accordance with procedures adopted and reviewed
periodically by the Board of Directors.
GROWTH FUND
INVESTMENT POLICIES AND RESTRICTIONS
The Fund has adopted certain investment restrictions for the Growth Fund
("Restrictions"). Restrictions 1 through 9 below and the portfolio's
investment objectives cannot be changed without approval by holders of a
majority of the outstanding voting shares of the portfolio. As
10
<PAGE> 51
defined in the Investment Company Act of 1940 (the "Act"), which term as used
herein includes the rules and regulations thereunder, this means the vote of
the lesser of (a) 67% of the shares of the portfolio at a meeting where more
than 50% of the outstanding voting shares of the portfolio are present in
person or by proxy; or (b) more than 50% of the outstanding voting shares of
the portfolio. Restrictions 10 through 20 may be changed by the Fund's board
of directors, all such changes being subject to applicable law.
(1) The portfolio will operate as an open-end, diversified, management type
investment company, as defined in the Investment Company Act of 1940.
The Growth Fund may not:
(2) Invest in any enterprise for the purpose of exercising control or
management thereof.
(3) Buy or sell real estate or real estate loans.
(4) Underwrite the securities of other issuers.
(5) Make loans to other persons.
(6) Purchase or sell commodities or commodity contracts.
(7) Issue senior securities.
(8) Borrow money, except from banks for current obligations of a minor
character incurred in the ordinary course of business, nor borrow amounts in
excess of 10% of its gross assets. (The portfolio does not presently intend to
borrow any amount in excess of 5% of its gross assets.)
(9) Make an investment if doing so would cause more than 25% of its total
assets to be invested in any one industry.
(10) Pledge, or create a lien on, its assets.
(11) Purchase or retain securities of any issuer if the officers, directors or
trustees of the Company, its advisers, or managers owning beneficially more
than one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer.
(12) Purchase any security including warrants (except certain government and
agency issues) if such purchase would cause more than 5% of the market value of
the portfolio's total assets
11
<PAGE> 52
to be invested in the securities of any one issuer. Any warrants purchased
will be traded on the New York or American Stock Exchange.
(13) Purchase any security if doing so would cause more than 5% of the voting
securities of the issuer to be held by the portfolio.
(14) Purchase securities issued by other open-end investment companies except
when such purchase is part of a plan of merger or consolidation.
(15) Purchase securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, or equity securities of
issuers which are not readily marketable if by reason thereof the value of its
aggregate investment in such classes would exceed 5% of its total assets.
(16) Invest in futures contracts, puts, calls, straddles, spreads or any
combination thereof.
(17) Invest in oil, warrants in oil, gas and mineral leases, gas or other
mineral exploration or development programs, although it may invest in the
securities of issuers which invest in or sponsor such programs.
(18) Invest in securities of issuers which are restricted as to sale to the
public without registration under the Securities Act of 1933, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1993 that have been determined to be liquid by the Board of
Directors, if by reason thereof the value of its aggregate investment in such
securities would exceed 10% of its total assets.
(19) Make short sales of portfolio securities, purchase portfolio securities
on margin or engage in arbitrage transactions.
(20) Invest in real estate limited partnerships although it may invest in
securities of issuers which invest or deal in real estate limited partnerships.
If the above percentage restrictions are adhered to at the time of investment,
a later increase or decrease in percentage beyond the specified limit resulting
from a change in values or total assets will not be considered a violation.
REDEMPTIONS
The portfolio may not suspend the right of redemption or delay payment on
shares of the portfolio more than seven days except (a) during any period when
the New York Stock Exchange is closed (other than customary weekend and holiday
closings), (b) when trading in the markets the portfolio normally utilizes is
restricted, or any emergency exists as determined by the Securities and
Exchange Commission so that disposal of the portfolio's investments or
12
<PAGE> 53
determination of its net asset value is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may
permit for protection of the portfolio's shareholders.
A shareholder who redeems shares of the portfolio will recognize capital gain
or loss for Federal income tax purposes. If a shareholder realizes a loss on
the redemption of portfolio shares and reinvests in portfolio shares within 30
days before or after redemption, the transactions may be subject to the wash
sale rules resulting in a postponement of the recognition of such loss for
Federal income tax purposes.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of the portfolio will be determined as of the earlier
of 3:00 p.m., Chicago time, or the close of business on the New York Stock
Exchange on each day on which that Exchange is open and on each other day on
which there is sufficient trading in the portfolio's investments that it might
materially affect the net asset value, except that the net asset value will not
be computed on a day in which no orders to purchase shares were received and no
shares were tendered for redemption. The New York Stock Exchange is closed for
the observance of New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The per share
net asset value is determined by dividing the value of the portfolio's assets,
less its liabilities, by the number of its shares outstanding. The market
value of the portfolio securities is determined by valuing securities traded on
national securities markets at the last sale price or, in the absence of a sale
on the date of determination, at the latest bid price. Securities for which
market quotations are not readily available, and all other assets, are
appraised at fair value as determined in good faith by the board of directors.
PERFORMANCE
The Growth Fund's historical performance or return may be shown in the form of
"average annual total return" and "total return" figures. These various
measures of performance are described below.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized and unrealized appreciation
or depreciation of, the underlying investments of the portfolio.
The portfolio's average annual total return quotation is computed in accordance
with a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a specific period is found by
first taking a hypothetical $1,000 investment ("initial investment") in the
portfolio's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable
13
<PAGE> 54
value is then divided by the initial investment, and this quotient is taken to
the nth root (n representing the number of years in the period) and 1 is
subtracted from the result, which is then expressed as a percentage. The
calculation assumes that all income dividends and capital gains distributions
by the portfolio have been reinvested at the net asset value on the
reinvestment dates during the period.
Calculation of the portfolio's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in
the portfolio's shares on the first day of the period and computing the "ending
value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends by the portfolio have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period.
The Growth Fund's average annual total return for the one-, five- and ten-year
periods ended December 31, 1995 was 29.1%, 19.8% and 14.9% respectively and for
the same periods the total return was 29.1%, 146.6% and 300.3% respectively.
The portfolio's performance quotations are based upon historical results and
are not necessarily representative of future performance. Returns and net
asset value will fluctuate. The portfolio's performance includes general
market conditions, operating expenses and investment management. Any
additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section. Shares of the portfolio are
redeemable at net asset value, which may be more or less than original cost.
From time to time, the Growth Fund portfolio's performance may be compared to
that of various unmanaged stock indices such as the Standard & Poor's 500 Stock
Index; NASDAQ; Value Line; and Russell 1,000, 2,000 and 3,000; and may also be
compared to the performance of other growth mutual funds or mutual fund indices
as reported by CDA Investment Technologies, Inc. ("CDA"), Lipper Analytical
Services, Inc. ("Lipper") or Morningstar, Inc. ("Morningstar"). CDA, Lipper
and Morningstar are widely recognized independent mutual fund reporting
services. CDA, Lipper and Morningstar performance calculations are based upon
changes in net asset value with all dividends and capital gain distributions
reinvested.
INTERNATIONAL GROWTH FUND
14
<PAGE> 55
INVESTMENT POLICIES AND RESTRICTIONS
The Fund has adopted certain investment restrictions for the International
Growth Fund ("Restrictions"). Restrictions 1 through 15 cannot be changed
without the approval of the holders of a majority of the outstanding shares of
the portfolio. As defined in the Act, which term as used herein includes the
rules and regulations thereunder, the vote of a majority of the outstanding
voting securities of the portfolio means the lesser of the vote of (a) 67% or
more of the shares of the portfolio present at a meeting where more than 50% of
the outstanding voting shares are present in person or by proxy, or (b) more
than 50% of the outstanding voting shares of the portfolio. Restrictions 16 to
18 may be changed by the Fund's Board of Directors, all such changes being
subject to applicable law. All percentage restrictions on investments apply at
the time of the making of the investment and shall not be considered to violate
the limitations unless, immediately after or as a result of the investment, an
excess or deficiency of the restrictions occurs.
The International Growth Fund may not:
1. Borrow money except as a temporary measure for extraordinary or emergency
purposes and then only in an amount up to 10% of the value of its total assets
(any such borrowing under this section will not be collateralized). The
portfolio will not borrow for leverage purposes.
2. Pledge, mortgage or create a lien on its assets.
3. Make loans of money or portfolio securities, except through the purchase
of debt obligations and repurchase agreements.
4. Purchase any securities if, immediately after such purchase, more than
25% of the value of the portfolio's total assets would be invested in the
securities of issuers in the same industry. There is no limitation as to the
portfolio's investments in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities. For purposes of this
restriction, the obligations of each foreign government are deemed to
constitute an industry.
5. Invest more than 5% of the value of its total assets in the securities of
any one issuer or purchase more than 10% of the outstanding voting securities,
or any class of securities, of any one issuer. For purposes of this
restriction, all outstanding debt securities of an issuer are considered as one
class, and all preferred stock of an issuer is considered as one class. (This
restriction does not apply to obligations issued or guaranteed by the U.S.
government, or its agencies or instrumentalities.)
6. Underwrite securities by others, except to the extent the portfolio may
be deemed to be an underwriter, under the Federal securities laws, in
connection with the disposition of portfolio securities.
15
<PAGE> 56
7. Purchase securities of other U.S. or foreign investment companies, except
that the portfolio may make such a purchase (a) in the open market provided
that immediately thereafter (i) not more than 10% of the portfolio's total
assets would be invested in such securities; (ii) not more than 5% of the
portfolio's total assets would be invested in securities of any one investment
company; and (iii) not more than 3% of the total outstanding voting stock of
any one investment company would be owned by the portfolio, or (b) as part of
an offer of exchange, reorganization or as a dividend.
8. Make short sales of securities, or purchase any securities on margin, or
maintain a short position or participate on a joint or a joint and several
basis in any trading account in securities, except that the portfolio may (i)
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities; (ii) purchase or sell futures contracts; and
(iii) deposit or pay initial or variation margin in connection with financial
futures contracts or related options transactions.
9. Purchase or sell put options, call options, or combinations thereof,
except that the portfolio may engage in financial futures contracts and related
options transactions to seek to hedge against either a decline in the value of
securities included in the portfolio or an increase in the price of securities
which the portfolio plans to purchase in the future.
10. Purchase or sell commodities or commodity contracts, except that the
portfolio may enter into financial futures contracts, options on futures
contracts and forward foreign currency exchange contracts.
11. Purchase or sell real estate (although it may purchase securities of
issuers that engage in real estate operations, securities that are secured by
interests in real estate, or securities that represent interests in real
estate, including real estate investment trusts).
12. Invest in interests in oil, gas or other mineral leases, rights or
royalty contracts or exploration or development programs, although it may
invest in the securities of issuers which invest in or sponsor such programs.
13. Invest for the purposes of exercising control or management of another
issuer.
14. Issue any "senior securities" as defined in the Act (except for engage in
futures and options transactions and except for borrowing subject to the
restrictions set forth above).
15. Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years continuous
operation.
16. Invest in real estate or real estate limited partnerships although it may
invest in securities of issuers which invest or deal in real estate limited
partnerships.
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17. Purchase or retain securities of any issuer if the officers, directors or
trustees of the company, its advisers or managers owning beneficially more than
one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer.
18. Purchase securities of unseasoned issuers, including their predecessors,
which have been in operation for less than three years, or equity securities of
issuers which are not readily marketable if by reason thereof the value of its
aggregate investment in such classes would exceed 5% of its total assets.
SPECIAL INVESTMENT TECHNIQUES
The Prospectus describes the portfolio's investment objective as well
as certain investment policies and investment techniques which the portfolio
may employ in an effort to achieve its investment objective. The following
discussion supplements the section entitled "Special Investment Techniques"
contained in the Prospectus. There can be no assurance that these techniques
will enable the portfolio to achieve its investment objective.
FORWARD FOREIGN CURRENCY TRANSACTIONS. The foreign securities held by
the portfolio will usually be denominated in foreign currencies and the
portfolio may temporarily hold foreign currency in connection with such
investments. As a result, the value of the assets held by the portfolio may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations. The portfolio may enter into forward foreign
currency contracts ("forward currency contracts") in an effort to control some
of the uncertainties of foreign currency rate fluctuations. A forward currency
contract is an agreement to purchase or sell a specific currency at a specified
future date and price agreed to by the parties at the time of entering into the
contract. The portfolio will not engage in foreign currency contracts in which
the specified future date is more than one year from the time of entering into
the contract. In addition, the portfolio will not engage in forward currency
contracts for speculation, but only as an attempt to hedge against changes in
foreign currency exchange rates affecting the values of securities which the
portfolio holds or intends to purchase. Thus, the portfolio will not enter
into a forward currency contract if such contract would obligate the portfolio
to deliver an amount of foreign currency in excess of the value of the
portfolio securities or other assets denominated in that currency.
The portfolio may use forward currency contracts to fix the value of
certain securities it has agreed to buy or sell. For example, when the
portfolio enters into a contract to purchase or sell securities denominated in
a particular foreign currency, the portfolio could effectively fix the maximum
cost of those securities by purchasing or selling a foreign currency contract,
for a fixed value of another currency, in the amount of foreign currency
involved in the underlying transaction. In this way, the portfolio can protect
the value of securities in the underlying transaction from an adverse change in
the exchange rate between the currency of the underlying securities in the
transaction and the currency denominated in the foreign currency contract,
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during the period between the date the security is purchased or sold and the
date on which payment is made or received.
The portfolio may also use forward currency contracts to hedge the
value, in U.S. dollars, of securities it currently owns. For example, if the
portfolio held securities denominated in a foreign currency and anticipated a
substantial decline (or increase) in the value of that currency against the
U.S. dollar, the portfolio may enter into a foreign currency contract to sell
(or purchase), for a fixed amount of U.S. dollars, the amount of foreign
currency approximating the value of all or a portion of the securities held
which are denominated in such foreign currency.
Upon the maturity of a forward currency transaction, the portfolio may
either accept or make delivery of the currency specified in the contract or, at
any time prior to maturity, enter into a closing transaction which involves the
purchase or sale of an offsetting contract. An offsetting contract terminates
the portfolio's contractual obligation to deliver the foreign currency pursuant
to the terms of the forward currency contract by obligating the portfolio to
purchase the same amount of the foreign currency, on the same maturity date and
with the same currency trader, as specified in the forward currency contract.
The portfolio realizes a gain or loss as a result of entering into such an
offsetting contract to the extent the exchange rate between the currencies
involved moved between the time of the execution of the original forward
currency contract and the offsetting contract.
The use of forward currency contracts to protect the value of
securities against the decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities the portfolio owns or
intends to acquire, but it does fix a future rate of exchange. Although such
contracts minimize the risk of loss resulting from a decline in the value of
the hedged currency, they also limit the potential for gain resulting from an
increase in the value of the hedged currency. The benefits of forward currency
contracts to the portfolio will depend on the ability of the portfolio's
investment manager to accurately predict future currency exchange rates.
FOREIGN CURRENCY FUTURES. Generally foreign futures contracts will be
executed on a U.S. exchange. To the extent they are not, however, engaging in
such transactions will involve the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures
Association nor any domestic (U.S.) exchange regulates activities of any
foreign boards of trade, including the execution, delivery and clearing of
transactions, or has the power to compel enforcement of the rules of a foreign
board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on
the exchange may be liquidated by a transaction on the appropriate domestic
market. Moreover, applicable laws or regulations will vary depending on the
foreign country in which the foreign futures transaction occurs. Therefore,
entities (such as the portfolio) which trade foreign futures contracts may not
be afforded certain of the protective measures provided by the Commodity
Exchange Act, Commodity Futures Trading Commission ("CFTC") regulations, the
rules of the National Futures Association or those of a domestic
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(U.S.) exchange. In particular, monies received from customers for foreign
futures transactions may not be provided the same protections as monies
received in connection with transactions on U.S. futures exchanges. In
addition, the price of any foreign futures and, therefore, the potential
profits and loss thereon, may be affected by any variance in the foreign
exchange rate between the time the order for the futures contract is placed and
the time it is liquidated, offset or exercised.
REPURCHASE AGREEMENTS. The portfolio may invest up to 5% of its total
assets in repurchase agreements. A repurchase agreement is an instrument
through which the portfolio acquires ownership of a debt security and the
seller (i.e., a bank or broker-dealer) agrees, at the time of the sale, to
repurchase the debt security from the portfolio at a mutually agreed upon time
and price, thereby determining the yield during the portfolio's holding period.
This yield may be more or less than the interest rate on the underlying
security. Each repurchase agreement entered into by the portfolio will be
fully collateralized by the seller (including the yield) using as collateral
either U.S. government securities, bank obligations, cash or cash equivalents
and will be marked-to-market daily during the entire term of the agreement.
The risk to the portfolio is limited to the ability of the seller to pay the
agreed upon sum on the delivery date. In the event of default, a repurchase
agreement provides that the portfolio is entitled to sell the underlying
collateral. The loss, if any, to the portfolio will be the difference between
the proceeds from the sale and the repurchase price. However, if bankruptcy
proceedings are commenced with respect to the seller of the security,
disposition of the collateral by the portfolio may be delayed or limited. In
order to minimize the risk, the Board of Directors of the portfolio will review
and monitor the creditworthiness of broker-dealers and banks with which the
portfolio enters into repurchase agreements.
No more than 15% of the portfolio's net assets will be invested at any
one time in repurchase agreements of more than seven days' duration and in
other investments which are considered not readily marketable.
REDEMPTIONS
The portfolio may not suspend the right of redemption or delay payment on its
shares more than seven days except (a) during any period when the New York
Stock Exchange is closed (other than customary weekend and holiday closings),
(b) when trading in the markets the portfolio normally utilizes is restricted,
or any emergency exists as determined by the Securities and Exchange Commission
so that disposal of the portfolio's investments or determination of its net
asset value is not reasonably practicable, or (c) for such other periods as the
Securities and Exchange Commission by order may permit for protection of the
portfolio's shareholders.
A shareholder who redeems shares of the portfolio will recognize capital gain
or loss for Federal income tax purposes. If a shareholder realizes a loss on
the redemption of portfolio shares and reinvests in portfolio shares within 30
days before or after redemption, the transactions may be
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subject to the wash sale rules resulting in a postponement of the recognition
of such loss for Federal income tax purposes.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of the portfolio will be determined as of the earlier
of 3:00 p.m., Chicago time, or the close of business on the New York Stock
Exchange on each day on which that Exchange is open and on each other day on
which there is sufficient trading in the portfolio's investments that it might
materially affect the net asset value, except that the net asset value will not
be computed on a day in which no orders to purchase shares were received and no
shares were tendered for redemption. The New York Stock Exchange is closed for
the observance of New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The per share
net asset value is determined by dividing the value of the portfolio's assets,
less its liabilities, by the number of its shares outstanding. The market
value of the portfolio securities is determined by valuing securities traded on
national securities markets at the last sale price or, in the absence of a sale
on the date of determination, at the latest bid price. Securities for which
market quotations are not readily available, and all other assets, are
appraised at fair value as determined in good faith by the board of directors.
PERFORMANCE
The portfolio's historical performance or return may be shown in the form of
"average annual total return" and "total return" figures. These various
measures of performance are described below.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized and unrealized appreciation
or depreciation of, the underlying investments of the portfolio.
The average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a specific period is found by
first taking a hypothetical $1,000 investment ("initial investment") in the
portfolio's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the nth
root (n representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income dividends and capital gains distributions by the
portfolio have been reinvested at the net asset value on the reinvestment dates
during the period.
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Calculation of total return is not subject to a standardized formula. Total
return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the
portfolio's shares on the first day of the period and computing the "ending
value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends by the portfolio have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period.
The International Growth Fund's average total return for the fiscal year ended
December 31, 1995 and the fiscal period from October 1, 1992 (initial
investment of public monies) through December 31, 1995 was 7.2% and 12.1%, and
for the same period the total return was 7.2% and 45.1%.
The performance quotations are based upon historical results and are not
necessarily representative of future performance. Returns and net asset value
will fluctuate. The portfolio's performance includes general market
conditions, operating expenses and investment management. Any additional fees
charged by a dealer or other financial services firm would reduce the returns
described in this section. Shares of the portfolio are redeemable at net asset
value, which may be more or less than original cost.
TAXES
The International Growth Fund's options, futures, and foreign currency futures
transactions are subject to special tax provisions that may accelerate or defer
recognition of certain gains or losses, change the character of certain gains
or losses, or alter the holding periods of certain of the portfolio's
securities.
The mark-to-market rules of the Internal Revenue Code (the "Code") may require
the portfolio to recognize unrealized gains and losses on certain forward
options and futures held by the portfolio at the end of the fiscal year. Under
these provisions, 60% of any capital gain net income or loss recognized will
generally be treated as long-term and 40% as short-term. However, although
certain forward contracts and foreign currency futures contracts are
marked-to-market, the gain or loss is generally ordinary under Section 988. In
addition, the straddle rules of the Code would require deferral of certain
losses realized on positions of a straddle to the extent that the portfolio had
unrealized gains in offsetting positions at year end. The International Growth
Fund has elected to mark-to-market its investments in passive foreign
investment companies for Federal income tax purposes.
Gains and losses attributable to fluctuations in the value of foreign
currencies will be characterized generally as ordinary gain or loss under
Section 988 of the Code. For example, if the portfolio sold a foreign bond and
part of the gain or loss on the sale was attributable to
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an increase or decrease in the value of a foreign currency, then the currency
gain or loss may be treated as ordinary income or loss. If such transactions
result in greater net ordinary income, the dividends paid by the portfolio will
be increased; if the result of such transactions is lower net ordinary income,
a portion of dividends paid could be classified as a return of capital.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by an applicable tax treaty.
INCOME FUND
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions for the Income Fund
("Restrictions"). Restrictions 1 through 14 below and the portfolio's
investment objectives cannot be changed without approval by holders of a
majority of the outstanding voting shares of the portfolio. As defined in the
Act, which term as used herein includes the rules and regulations thereunder,
this means the vote of the lesser of (a) 67% of the shares of the portfolio at
a meeting where more than 50% of the outstanding voting shares of the portfolio
are present in person or by proxy; or (b) more than 50% of the outstanding
voting shares of the portfolio. Restrictions 15 through 18 may be changed by
the Fund's board of directors, all such changes being subject to applicable
law.
The Income Fund may not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its total assets would be
invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer, except
that such restriction shall not apply to securities issued or guaranteed by the
United States Government, its agencies or instrumentalities. All debt
securities and all preferred stocks are each considered as one class.
(3) Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years continuous
operation.
(4) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
(5) Write, purchase or sell puts, calls or combinations thereof.
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(6) Invest for the purpose of exercising control or management of another
issuer.
(7) Invest in commodities or commodity futures contracts or in real estate;
although it may invest in securities which are secured by real estate and
securities of issuers which invest or deal in real estate.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs; although it may invest in the securities of issuers which
invest in or sponsor such programs.
(9) Underwrite securities issued by others except to the extent the portfolio
may be deemed to be an underwriter, under the Federal securities laws, in
connection with the disposition of portfolio securities.
(10) Issue senior securities as defined in the Investment Company Act of 1940.
(11) Purchase common stocks, preferred stocks, warrants or other equity
securities.
(12) Make loans to others, except through the purchase of debt obligations or
repurchase agreements or the loaning of portfolio securities not exceeding 75%
of the value of its total assets.
(13) Borrow money, except as a temporary measure and then only in an amount up
to 5% of the value of its total assets (any such borrowing under this section
will not be collateralized). The portfolio will not borrow for leverage
purposes.
(14) Concentrate more than 25% of the value of its total assets in any one
industry. This restriction does not apply to U.S. Government securities or
government agency securities, or to instruments, such as repurchase agreements,
secured by these instruments.
(15) Invest in interests in oil, warrants in oil, gas and mineral leases, gas
or other mineral exploration or development programs; although it may invest in
the securities of issuers which invest in or sponsor such programs.
(16) Purchase securities of issuers which are restricted as to sale to the
public without registration under the Securities Act of 1933, excluding
restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 that have been determined to be liquid by the Board of
Directors, if by reason thereof the value of its aggregate investment in such
securities would exceed 15% of its total assets.
(17) Purchase or retain securities of any issuer if the officers, directors or
trustees of the company, its advisers, or managers owning beneficially more
than one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer.
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(18) Invest in real estate limited partnerships although it may invest in
securities of issuers which invest or deal in real estate limited partnerships.
If the above percentage restrictions are adhered to at the time of investment,
a later increase or decrease in percentage beyond the specified limit resulting
from a change in values or total assets will not be considered a violation.
INVESTMENT POLICIES AND TECHNIQUES
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Income Fund may purchase newly issued securities on a when-issued basis and
may purchase or sell portfolio securities on a delayed delivery basis. When a
portfolio purchases securities on a when-issued or a delayed delivery basis, it
becomes obligated to purchase the securities and it has all the rights and
risks attendant to ownership of the securities, although delivery and payment
occur at a later date. The portfolio will record the transaction and reflect
the liability for the purchase and the value of the security in determining its
net asset value. The value of fixed income securities to be delivered in the
future will fluctuate as interest rates vary. The portfolio generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than take delivery of the security. At the time the portfolio makes the
commitment to sell a security on a delayed delivery basis, it will record the
transaction and include the proceeds to be received in determining its net
asset value; accordingly, any fluctuations in the value of the security sold
pursuant to a delayed delivery commitment are ignored in calculating net asset
value so long as the commitment remains in effect. Normally, settlement occurs
within one month of the purchase or sale.
To the extent the portfolio engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring securities consistent
with the portfolio's investment objective and policies and not for the purpose
of investment leverage or to speculate on interest rate changes; but the
portfolio reserves the right to sell these securities before the settlement
date if deemed advisable. To the extent required to comply with Securities and
Exchange Commission Release No. IC-10666, when purchasing securities on a
when-issued or delayed delivery basis, the portfolio will maintain in a
segregated account cash or liquid high-grade securities equal to the value of
such contracts.
COLLATERALIZED OBLIGATIONS
MORTGAGE-BACKED SECURITIES. Collateralized obligations in which the Income
Fund may invest include mortgage-backed collateralized obligations
("mortgage-backed securities"). Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There currently are
three basic types of mortgage-backed securities: (1) those issued or guaranteed
by the U.S. Government or one of its agencies or instrumentalities, such as
GNMA (Government National
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Mortgage Association), FNMA (Federal National Mortgage Association) and FHLMC
(Federal Home Loan Mortgage Corporation); (2) those issued by private issuers
that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies
or instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or mortgage-backed
securities without a government guarantee but that usually have some form of
private credit enhancement.
The yield characteristics of mortgage-backed securities differ from traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently, usually monthly, and that principal may be
prepaid at any time because the underlying mortgage loans generally may be
prepaid at any time. As a result, if the portfolio purchases such a security
at a premium, a prepayment rate that is faster than expected will reduce yield
to maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Conversely, if the portfolio
purchases these securities at a discount, faster than expected prepayments will
increase yield to maturity, while slower than expected prepayments will reduce
it.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed rate mortgage loans will increase during a period of
falling interest rates and decrease during a period of rising interest rates.
Accordingly, amounts available for reinvestment by the portfolio are likely to
be greater during a period of declining interest rates and, as a result, are
likely to be reinvested at lower interest rates than during a period of rising
interest rates. Mortgage-backed securities may decrease in value as a result
of increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of prepayment.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The portfolio will invest in
mortgage pass-through securities representing participation interests in pools
of residential mortgage loans originated by United States Governmental or
private lenders and guaranteed, to the extent provided in such securities, by
the United States Government or one of its agencies or instrumentalities. Such
securities, which are ownership interests in the underlying mortgage loans,
differ from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the services of the underlying mortgage loans. The guaranteed
mortgage pass-through securities in which the portfolio will invest will
include those issued or guaranteed by GNMA, FNMA and FHLMC.
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GNMA is a wholly-owned corporate instrumentality of the United States within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of and interest on certificates ("Ginnie Mae
Certificates") that are based upon and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the Housing Act, or Title V
of the Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans'
Administration under the Servicemen's Readjustment Act of 1944, as amended (VA
Loans), or by pools of other eligible mortgage loans. Ginnie Mae Certificates
represent a pro rata interest in one or more pools of eligible mortgage loans.
The Housing Act provides that the full faith and credit of the United States
Government is pledged to the payment of all amounts that may be required to be
paid under any guarantee. In order to meet its obligations under such
guarantee, GNMA is authorized to borrow from the United States Treasury with no
limitations as to amount.
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. FNMA was
originally established in 1938 as a United States Government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder owned and privately managed corporation by legislation enacted in
1968. FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each Fannie Mae Certificate will entitle the registered holder thereof to
receive amounts representing the holder's pro rata interest in scheduled
principal payments and interest payments (at such Fannie Mae Certificate's
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments, on the mortgage
loans in the pool represented by such Fannie Mae Certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate will be guaranteed by
FNMA, which guarantee is not backed by the full faith and credit of the United
States Government. FNMA has limited rights to borrow from the United States
Treasury.
FHLMC is a corporate instrumentality of the United States created pursuant to
the Emergency Home Finance Act of 1970, as amended. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of needed housing. The principal activity of FHLMC currently
consists of the purchase of first lien, conventional, residential mortgage
loans and participation interests in such mortgage loans and the resale of the
mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac Certificates.
FHLMC guarantees to each registered holder of a Freddie Mac Certificate the
timely payment of interest at the rate provided for by such Freddie Mac
Certificate, whether or not received. FHLMC also guarantees to each holder of
a Freddie Mac Certificate ultimate collection of all
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principal of the related mortgage loans, without any offset or deduction, but
does not always guarantee the timely payment of scheduled principal. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than 30
days following (i) foreclosure sale, (ii) payment of a claim by any mortgage
insurer, or (iii) the expiration of any right of redemption, whichever occurs
later, but in any event no later than one year after demand has been made upon
the mortgagor for accelerated payment of principal. The obligations of FHLMC
under its guarantee are obligations solely of FHLMC and are not backed by the
full faith and credit of the United States Government. FHLMC has limited
rights to borrow from the United States Treasury.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities ("private pass-throughs") are structured similarly to the Ginnie
Mae, Fannie Mae and Freddie Mac mortgage pass-through securities described
above and are issued by originators of and investors in mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Private
pass-throughs are usually backed by a pool of conventional fixed rate or
adjustable rate mortgage loans. Since private pass-throughs typically are not
guaranteed by an entity having the credit status of GNMA, FNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. See "Types of Credit Support," below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES.
Collateralized mortgage obligations, or, "CMOs," are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as
"Mortgage Assets"). Multiclass pass-through securities are equity interests in
a trust composed of Mortgage Assets. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities
of the United States Government, or by private originators of, or investors in,
mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose subsidiaries of the
foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of a
CMO in innumerable ways. In a common structure, payments of principal,
including any principal prepayments, on the Mortgage Assets are applied to the
classes of the series of a CMO in the order of their respective stated
maturities or final distribution dates, so that no payment of principal will be
made on any class of CMOs until all other classes having an earlier stated
maturity or final distribution date have been paid in full.
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STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the United States Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of Mortgage Assets. A
common type of SMBS will have one class receiving some of the interest and most
of the principal from the Mortgage Assets, while the other class will receive
most of the interest and the remainder of the principal. In the most extreme
case, one class will receive all the interest (the interest-only or "IO"
class), while the other class will receive all the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying Mortgage Assets, and a rapid rate of principal
payments may have a material adverse effect on the portfolio's yield to
maturity. If the underlying Mortgage Assets experience greater than
anticipated prepayments of principal, the portfolio may fail to fully recoup
its initial investment in these securities.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed and, accordingly, may have less liquidity than other
securities. The portfolio will invest only in IO and PO class mortgage
obligations collateralized by securities guaranteed by the United States
Government.
TYPES OF CREDIT SUPPORT. Mortgage-backed and asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by obligors on underlying
assets to make payments, such securities may contain elements of credit
support. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "overcollateralization" (where the scheduled payments on, or the
principal amount of, the
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underlying assets exceeds that required to make payment of the securities and
pay any servicing or other fees). The degree of credit support provided for
each issue is generally based upon historical information respecting the level
of credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated could adversely affect the return on an investment
in such a security.
ASSET-BACKED SECURITIES. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables, are being securitized
in pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure.
The portfolio may invest in these and other types of asset-backed securities
that may be developed in the future.
As with mortgage-backed securities, the yield characteristics of asset-backed
securities differ from traditional debt securities. As with mortgage-backed
securities, asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties and use similar
credit enhancement techniques. See "Mortgage-Backed Securities," above. In
general, however, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Although certain of the factors that affect the rate
of prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities, during any particular period, the
predominant factors affecting prepayment rates on mortgage-backed securities
and asset-backed securities may be different.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicers were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
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REDEMPTIONS
The portfolio may suspend the right of redemption or delay payment on shares of
the portfolio more than seven days (a) during any period when the New York
Stock Exchange is closed for trading (other than customary weekend and holiday
closings), (b) when trading in the markets the portfolio normally utilizes is
restricted, or an emergency exists as determined by the Securities and Exchange
Commission so that disposal of the portfolio's investments or determination of
its net asset value is not reasonably practicable, or (c) for such other
periods as the Securities and Exchange Commission by order may permit for
protection of the portfolio's shareholders.
Although it is the portfolio's present policy to redeem portfolio shares in
cash, if the Board of Directors determines that a material adverse effect would
be experienced by the remaining shareholders if payment of large redemptions
were made wholly in cash, the portfolio will pay the redemption price in whole
or in part by a distribution of portfolio instruments in lieu of cash, in
conformity with the applicable rules of the Securities and Exchange Commission,
taking such instruments at the same value used to determine net asset value and
selecting the instruments in such manner as the Board of Directors may deem
fair and equitable. If such a distribution occurs, shareholders receiving
instruments and selling them before their maturity could receive less than the
redemption value of such instruments and could also incur transaction costs.
The portfolio has elected to be governed by Rule 18f-1 under the Act pursuant
to which the portfolio is obligated to redeem shares of the portfolio solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the portfolio
during any 90-day period for any one shareholder of record.
DETERMINATION OF NET ASSET VALUE
Net asset values of the portfolio will not be calculated on national holidays
when the New York banks are closed, which include the observance of New Year's
Day, Martin Luther King, Jr.'s Birthday, President's Day, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day, or on Good Friday.
PERFORMANCE
The Income Fund's historical performance or return may be shown in the form of
"average annual total return," "total return" and "yield" figures. These
various measures of performance are described below. The Adviser has
voluntarily waived certain advisory management fees for the fiscal year 1991
and to the extent described under "Management of the Fund-Expenses." Without
this waiver, the performance results noted herein would have been lower.
Average annual total return and total return measure both the net investment
income generated by, and the effect of any realized and unrealized appreciation
or depreciation of, the underlying
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investments of the portfolio. Yield is a measure of the net investment income
per share earned over a specific one month or 30-day period expressed as a
percentage of the net asset value.
The portfolio's average annual total return quotation is computed in accordance
with a standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a specific period is found by
first taking a hypothetical $1,000 investment ("initial investment") in the
portfolio's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income dividends and capital gains distributions by the
portfolio have been reinvested at the net asset value on the reinvestment dates
during the period.
Calculation of the portfolio's total return is not subject to a standardized
formula. Total return performance for a specific period is calculated by first
taking an investment (assumed below to be $10,000) ("initial investment") in
the portfolio's shares on the first day of the period and computing the "ending
value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends by the portfolio have been reinvested at net asset
value on the reinvestment dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical investment over the
period.
The Income Fund's average annual total return for the one- and five-year
periods ended December 31, 1995 was 14.4% and 8.84%, respectively, and for the
same periods the total return was 14.4% and 52.8%, respectively. The
portfolio's yield for the 30 days ended December 31, 1995 was 5.89%.
The yield for the portfolio is computed in accordance with a standardized
method prescribed by rules of the Securities and Exchange Commission. The
yield is computed by dividing the net investment income per share earned during
the specific one month or 30-day period by the offering price per share on the
last day of the period, according to the following formula:
YIELD = 2[(((a-b)/cd)+1)6 - 1]
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period entitled to receive dividends.
d = the offering price (net asset value) per share on the
last day of the period.
</TABLE>
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In computing the foregoing yield, the portfolio follows certain standardized
accounting practices specified by Securities and Exchange Commission rules.
These practices are not necessarily consistent with those that the portfolio
uses to prepare its annual and interim financial statements in accordance with
generally accepted accounting principles.
The portfolio's performance quotations are based upon historical results and
are not necessarily representative of future performance. Returns and net
asset value will fluctuate. The portfolio's performance includes general
market conditions, operating expenses and investment management. Any
additional fees charged by a dealer or other financial services firm would
reduce the returns described in this section. Shares of the portfolio are
redeemable at net asset value, which may be more or less than original cost.
From time to time the portfolio may compare its performance with that of
indices, such as the Consumer Price Index, the Shearson Lehman Intermediate
Government/Corporate Bond Index, and the Merrill Lynch Intermediate Term
Corporate & Government Bond index. Please note the differences and
similarities between the investments which the portfolio may purchase and the
investments measured by the applicable indices. The Consumer Price Index is
generally considered to be a measure of inflation. The Shearson Lehman
Government/Corporate Intermediate Bond Index and the Merrill Lynch
Intermediate Term Corporate & Government Bond index generally represent the
performance of intermediate government and investment grade corporate debt
securities under various market conditions. The foregoing bond indices are
unmanaged. No adjustment has been made for taxes payable on interest or
dividends.
DIVIDENDS
The Income Fund normally distributes monthly dividends of net investment income
and net realized short-term capital gains, and it distributes any net realized
long-term capital gains in December and/or January. The portfolio may from
time to time either distribute or retain for reinvestment such of its net
investment income and its net short-term and long-term capital gains or make a
return of capital distribution as the portfolio determines appropriate in order
to maintain relatively level monthly dividends. The portfolio may vary the
foregoing dividend practices from time to time. For example, the portfolio may
make additional distributions of net investment income or capital gains to
satisfy the minimum distribution requirements contained in the Internal Revenue
Code (the "Code").
Shareholders will receive dividends and distributions in additional shares of
the portfolio unless they elect in writing to receive cash. Generally,
dividends will be reinvested monthly at net asset value on the 15th day of each
month if a business day, otherwise on the next business day. If a cash payment
is requested, a check will be sent shortly following the reinvestment date.
Each shareholder will receive a confirmation of dividends and purchase and
redemption transactions.
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READY RESERVES FUND
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions for the Ready Reserves
Fund ("Restrictions"). Restrictions 1 through 15 below and the portfolio's
investment objectives cannot be changed without approval by holders of a
majority of the outstanding voting shares of the portfolio. As defined in the
Act, which term as used herein includes the rules and regulations thereunder,
this means the vote of the lesser of (a) 67% of the shares of the portfolio at
a meeting where more than 50% of the outstanding voting shares of the portfolio
are present in person or by proxy; or (b) more than 50% of the outstanding
voting shares of the portfolio. Restrictions 16 through 18 may be changed by
the fund's board of directors, all such changes being subject to applicable
law.
The Ready Reserves Fund may not:
(1) Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of its total assets would be
invested in securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer,
except that such restriction shall not apply to securities issued or guaranteed
by the United States Government, its agencies or instrumentalities. All debt
securities and all preferred stocks are each considered as one class.
(3) Invest more than 5% of its total assets in securities of issuers which
with their predecessors have a record of less than three years continuous
operation.
(4) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the clearance
of transactions.
(5) Write, purchase or sell puts, calls or combinations thereof.
(6) Invest for the purpose of exercising control or management of another
issuer.
(7) Invest in commodities or commodity futures contracts or in real
estate, although it may invest in securities which are secured by real estate
and securities of issuers which invest or deal in real estate.
(8) Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the securities of issuers which
invest in or sponsor such programs.
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(9) Underwrite securities issued by others except to the extent the
portfolio may be deemed to be an underwriter, under the Federal securities
laws, in connection with the disposition of portfolio securities.
(10) Issue senior securities as defined in the Investment Company Act of
1940.
(11) Make loans to others (except through the purchase of debt obligations
or repurchase agreements in accordance with its investment objective and
policies).
(12) Borrow money except as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to 5% of the value of its
total assets (any such borrowing under this section will not be
collateralized). The portfolio will not borrow for leverage purposes.
(13) Concentrate more than 25% of the value of its total assets in any one
industry; provided, however, that the portfolio reserves freedom of action to
invest up to 100% of its total assets in certificates of deposit, time deposits
or bankers' acceptances or repurchase agreements with domestic branches of
domestic banks when management considers it to be in the interests of the
portfolio in attaining its investment objective.
(14) Invest in securities restricted as to disposition under the Federal
securities laws (except commercial paper issued under Section 4(2) of the
Securities Act of 1933).
(15) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
(16) Invest in interests in oil, warrants in oil, gas and mineral leases,
gas or other mineral exploration or development programs, although it may
invest in the securities of issuers which invest in or sponsor such programs.
(17) Invest in real estate limited partnerships, although it may invest in
securities of issuers which invest or deal in real estate limited partnerships.
(18) Purchase or retain securities of any issuer if the officers, directors
or trustees of the company, its advisers, or managers owning beneficially more
than one-half of one percent of the securities of an issuer together own
beneficially more than five percent of the securities of that issuer.
The Ready Reserves Fund has no present intention of concentrating more than 25%
of the value of its total assets in securities issued by banks pursuant to
investment restriction (13).
If the above percentage restrictions are adhered to at the time of investment,
a later increase or decrease in percentage beyond the specified limit resulting
from a change in values or total assets will not be considered a violation.
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INVESTMENT POLICIES AND TECHNIQUES
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS
The Ready Reserves Fund, to the extent of up to 5% of its total assets, may
purchase newly issued securities on a when-issued basis and may purchase or
sell portfolio securities on a delayed delivery basis. When a portfolio
purchases securities on a when-issued or a delayed delivery basis, it becomes
obligated to purchase the securities and it has all the rights and risks
attendant to ownership of the securities; although delivery and payment occur
at a later date. The portfolio will record the transaction and reflect the
liability for the purchase and the value of the security in determining its net
asset value. The value of fixed income securities to be delivered in the
future will fluctuate as interest rates vary. The portfolio generally has the
ability to close out a purchase obligation on or before the settlement date,
rather than take delivery of the security. At the time the portfolio makes the
commitment to sell a security on a delayed delivery basis, it will record the
transaction and include the proceeds to be received in determining its net
asset value; accordingly, any fluctuations in the value of the security sold
pursuant to a delayed delivery commitment are ignored in calculating net asset
value so long as the commitment remains in effect. Normally, settlement occurs
within one month of the purchase or sale.
To the extent the portfolio engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring securities consistent
with the portfolio's investment objective and policies and not for the purpose
of investment leverage or to speculate on interest rate changes; but the
portfolio reserves the right to sell these securities before the settlement
date if deemed advisable. To the extent required to comply with Securities and
Exchange Commission Release No. IC-10666, when purchasing securities on a
when-issued or delayed delivery basis, the portfolio will maintain in a
segregated account cash or liquid high-grade securities equal to the value of
such contracts.
REDEMPTIONS
The portfolio may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed for
trading (other than customary weekend and holiday closings), (b) when trading
in the markets the portfolio normally utilizes is restricted, or an emergency
exists as determined by the Securities and Exchange Commission so that disposal
of the portfolio's investments or determination of its net asset value is not
reasonably practicable, or (c) for such other periods as the Securities and
Exchange Commission by order may permit for protection of the portfolio's
shareholders.
Although it is the portfolio's present policy to redeem in cash, if the Board
of Directors determines that a material adverse effect would be experienced by
the remaining shareholders if payment of large redemptions were made wholly in
cash, the portfolio will pay the redemption price in whole or in part by a
distribution of portfolio instruments in lieu of cash, in conformity
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<PAGE> 76
with the applicable rules of the Securities and Exchange Commission, taking
such instruments at the same value used to determine net asset value and
selecting the instruments in such manner as the Board of Directors may deem
fair and equitable. If such a distribution occurs, shareholders receiving
instruments and selling them before their maturity could receive less than the
redemption value of such instruments and could also incur transaction costs.
The portfolio has elected to be governed by Rule 18f-1 under the Act pursuant
to which the portfolio is obligated to redeem shares of the portfolio solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the portfolio
during any 90-day period for any one shareholder of record.
NET ASSET VALUE
As described in the Prospectus, the portfolio securities of the Ready Reserves
Fund are valued at amortized cost; which means that they are valued at their
acquisition cost, as adjusted for amortization of premium or discount, rather
than at current market value. Calculations are made to compare the value of
the portfolio's securities valued at amortized cost with market values. Market
valuations are obtained by using actual quotations provided by market makers,
estimates of market value, or values obtained from yield data relating to
classes of money market securities published by reputable sources at the bid
price for the securities. If a deviation of 1/2 of 1% or more were to occur
between the net asset value per share calculated by reference to market value
and the portfolio's $1.00 per share net asset value, or if there were any other
deviation that the Board of Directors of the Fund believed would result in a
material dilution to shareholders or purchasers, the Board of Directors would
promptly consider what action, if any, should be initiated. If the portfolio's
net asset value per share (computed using market values) were to decline, or
were expected to decline, below $1.00 (computed using amortized cost), the
Board of Directors of the Fund might temporarily reduce or suspend dividend
payments in an effort to maintain the net asset value at $1.00 per share. As a
result of such reduction or suspension of dividends, an investor would receive
less income during a given period than if such a reduction or suspension had
not taken place. Such action could result in an investor receiving no dividend
for the period during which the investor holds shares, and the investor might
also receive, upon redemption, a price per share lower than that which was
paid. On the other hand, if the portfolio's net asset value per share
(computed using market values) were to increase, or were anticipated to
increase, above $1.00 (computed using amortized cost), the Board of Directors
of the Fund might supplement dividends in an effort to maintain the net asset
value at $1.00 per share. The portfolio has never had a deviation of 1/2 of 1%
or more and, therefore, no Board actions of the type described above have been
taken. In order to use the amortized cost method of valuation, the portfolio
is limited to investing in instruments which the Board of Directors has
determined present minimal credit risks and which are determined to be within
certain rating categories by a nationally recognized statistical rating
organization.
Net asset values of the portfolio will not be calculated on national holidays
when the New York banks are closed, which include the observance of New Year's
Day, Martin Luther King, Jr.'s Birthday, President's Day, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day or on Good Friday.
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<PAGE> 77
PERFORMANCE
The Ready Reserves Fund's yield quotations as they may appear in advertising
and sales materials are calculated by a standard method prescribed by rules of
the Securities and Exchange Commission. Under that method, the current yield
quotation is annualized based on a seven-day period and computed as follows:
the portfolio's net investment income per share (accrued interest on portfolio
securities, plus or minus amortized purchase discount or premium, less accrued
expenses) is divided by the price per share (expected to remain constant at
$1.00) during the period ("base period return") and the result is divided by 7
and multiplied by 365 and the current yield figure carried to the nearest
one-hundredth of one percent. Realized capital gains or losses and unrealized
appreciation or depreciation of investments are not included in the
calculation. The effective yield is determined by taking the base period
return and calculating the effect of assumed compounding. The formula for the
effective yield is [(base period return +1) raised to the 365/7 power] - 1.
The Ready Reserves Fund's current yield for the seven days ended December 31,
1995 was 5.08%. The Ready Reserves Fund's effective yield for that same period
was 5.21%.
The Ready Reserves Fund's yield fluctuates, and the publication of an
annualized yield quotation is not a representation as to what an investment in
the portfolio will actually yield for any given future period. Actual yields
will depend not only on changes in interest rates on money market instruments
during the period the investment in the portfolio is held, but also on such
matters as any realized gains and losses and changes in portfolio expenses.
DIVIDENDS
On each day when the Fund is open for business, the Ready Reserves Fund
portfolio's net investment income will be declared at 3:00 p.m., Chicago time,
as a daily dividend to shareholders already of record prior to the declaration.
Shareholders will receive dividends in additional shares of the portfolio
unless they elect to receive cash. Dividends will be reinvested monthly at net
asset value on the 15th day of each month if a business day, otherwise on the
next business day. If a cash payment is requested, a check will be sent on the
business day following the reinvestment date. When an entire account is
redeemed, all dividends accrued but unpaid to the time of redemption will be
sent to the Shareholder within five business days. The portfolio may at any
time vary the foregoing practices and, therefore, reserves the right from time
to time either to distribute or retain for reinvestment such of its net
investment income and its short-term and long-term capital gains as the Board
of Directors of the Fund determines appropriate under then current
circumstances.
The portfolio calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the portfolio consists
of (1) accrued interest income plus or minus amortized purchase discount or
premium, (2) plus or minus all short-term realized
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gains and losses on portfolio securities and (3) minus accrued expenses.
Expenses of the portfolio are accrued each day. So long as the portfolio's
investments are valued at amortized cost, there will be no unrealized gains or
losses on portfolio securities. However, should the net asset value of the
portfolio deviate significantly from market value, the Board of Directors could
decide to value the portfolio securities at market value, in which event
unrealized gains and losses would be included in net investment income.
All shareholders will receive monthly statements reporting dividends and
purchases and redemption transactions of the portfolio.
GENERAL FUND INFORMATION
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS
The Fund's independent auditors are Ernst & Young LLP, Sears Tower, 233 South
Wacker Drive, Chicago, Illinois 60606, who audit and report upon the Fund's
annual financial statements, review certain regulatory reports and the Fund's
Federal tax returns, and perform other professional accounting, auditing, tax
and advisory services when engaged to do so by the Fund. Shareholders will
receive annual audited financial statements and semi-annual unaudited financial
statements.
CUSTODIAN AND SHAREHOLDER SERVICES
Investors Bank and Trust Company ("Investors Bank"), 89 South Street, Boston,
Massachusetts 02111, as custodian, has custody of all securities and cash of
the Fund; and it attends to the collection of principal and income, and payment
for and collection of proceeds of securities bought and sold by the Fund.
Boston Financial Data Services, Inc. ("BFDS"), Two Heritage Drive, Quincy,
Massachusetts 02171, is the Fund's transfer agent and dividend-paying agent.
State Street Bank, as the shareholder service agent, provides certain
bookkeeping, data processing and administrative services pertaining to the
maintenance of shareholder accounts.
RETIREMENT PLANS
The Fund offers a variety of retirement investment programs whereby
contributions are invested in shares of the portfolio, and any income dividends
(and capital gain distributions, if any) are reinvested in additional full and
fractional shares of the portfolio.
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INDIVIDUAL RETIREMENT ACCOUNTS
The Fund has available Individual Retirement Accounts (IRAs) under IRS approved
prototypes. IRA contributions are fully deductible only to (1) taxpayers who
are not active participants in an employer-sponsored retirement plan and (2)
taxpayers who are active participants in an employer-sponsored plan but who
have adjusted gross income below a specified level. For these purposes, a
taxpayer will be deemed to be an active participant in an employer-sponsored
retirement plan if for any part of the plan year either he or his spouse is an
active participant under a qualified pension plan, a qualified profit sharing
or money purchase plan, a 403(a) annuity plan, a 403(b) annuity program, a
Simplified Employee Pension plan or a government plan (other than a plan
maintained for state and local employees under Section 457 of the Internal
Revenue Code). Married taxpayers filing a joint return who are active
participants in an employer-sponsored plan may make a tax deductible IRA
contribution up to $2,000 ($2,250 spousal) if their adjusted gross income
("AGI") is $40,000 or less. Between AGI of $40,000 to $50,000 the IRA
deduction is gradually phased-out. For single taxpayers who are active
participants in an employer-sponsored plan, the $2,000 deductible IRA
contribution is similarly phased-out between $25,000 and $35,000 of adjusted
gross income. To the extent that the IRA deduction is reduced or eliminated by
the phase-out rule, an individual may elect to make nondeductible IRA
contributions which, when combined with any deductible contributions, may not
exceed $2,000 ($2,250 for a spousal IRA). The income on the IRA contribution
will not be taxed until withdrawn.
Under the Internal Revenue Code, an investor has at least seven days in which
to revoke an IRA after receiving certain explanatory information about the
plan. Individuals who have received distributions from certain qualified plans
may roll over all or part of such distributions into an IRA and defer taxes on
the distributions and shelter investment earnings.
SIMPLIFIED EMPLOYEE PENSION
An employer may establish a Simplified Employee Pension (SEP) Plan under which
the employer makes contributions to all eligible employees' IRAs. A
portfolio's shares may be used for this purpose.
QUALIFIED RETIREMENT PLANS
A corporation, partnership or sole proprietorship may establish qualified money
purchase pension and profit sharing plans, and contribute for each participant
up to the lesser of 25% of each participant's compensation (20% of gross
compensation for self-employed persons) or $30,000. Such contributions may be
made by the employer and, if certain conditions are met, participants may also
make nondeductible voluntary contributions.
Prototype forms of an IRA and qualified retirement plans and a form of SEP, and
additional information concerning such plans, are available from the Fund.
State Street Bank may act as a custodian for the Fund's IRA and certain
qualified retirement plans. State Street Bank charges
39
<PAGE> 80
a $5 plan establishment fee. There is also an annual $15 custodial fee and a
$10 fee for each lump sum distribution from a plan. These fees may be waived
under certain circumstances. Consultation with a professional tax adviser is
recommended both because of the complexity of Federal tax law and because
various tax penalties are imposed for excess contributions to, and late or
premature distributions from, IRAs or qualified retirement plans. Termination
of a plan shortly after its adoption may have adverse tax consequences.
SHAREHOLDER RIGHTS
The Fund generally is not required to hold meetings of its shareholders.
However, shareholder meetings will be held in connection with the following
matters: (1) the election or removal of directors, if a meeting is called for
such purpose; (2) the adoption of any contract for which shareholder approval
is required by the Act; (3) any termination of the Fund; (4) any amendment of
the Articles of Incorporation; and (5) such additional matters as may be
required by law, the Articles of Incorporation, the By-laws of the Fund, or any
registration of the Fund with the Securities and Exchange Commission or any
state, or as the directors may consider necessary or desirable. The
shareholders also would vote upon changes in fundamental investment objectives,
policies or restrictions.
Each director serves until the next meeting of shareholders, if any, called for
the purpose of electing directors and until the election and qualification of
his successor or until such director sooner dies, resigns, retires or is
removed by a majority vote of the shares entitled to vote (as described below)
or a majority of the directors. In accordance with the Act (i) the Fund will
hold a shareholder meeting for the election of directors at such time as less
than a majority of the directors has been elected by shareholders, and (ii) if,
as a result of a vacancy in the Board of Directors, less than two-thirds of the
directors have been elected by the shareholders, that vacancy will be filled
only by a vote of the shareholders.
All shares have equal voting rights and may be voted in the election of
directors and upon other matters submitted to a vote of the shareholders.
Shares of all portfolios will be voted in the aggregate unless the Act requires
them to be voted separately. The shares do not have cumulative voting rights,
which means that the holders of a majority of the shares, voting together for
the election of directors, can elect all the directors. The Fund will hold
meetings of shareholders when requested to do so in writing by one or more
shareholders who collectively hold at least 10% of the shares entitled to vote
or when so determined by the Board of Directors in their discretion. At such a
meeting, a director may be removed from office by a vote of the holders of a
majority of the outstanding shares entitled to vote. Upon the written request
of ten or more shareholders who have been such for at least six months and who
hold shares constituting the lesser of 1% of the outstanding shares or $25,000,
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining signatures necessary to demand a meeting to
consider removal of a director, the Fund has undertaken either to disseminate
appropriate materials (at the expense of the requesting shareholders) or to
provide such shareholders access to a list of names and addresses of all
shareholders of record.
40
<PAGE> 81
FUND HISTORY
The Fund was organized as a Maryland corporation on September 22, 1987 under
the name of William Blair Ready Reserves, Inc. On April 30, 1991 a
reorganization of the Fund and Growth Industry Shares, Inc., a Maryland
corporation, was adopted such that Growth Industry Shares, Inc. was reorganized
into a separate portfolio of the Fund, now the Growth Fund portfolio, and the
Fund changed its name to William Blair Mutual Funds, Inc. On February 13,
1996, the Fund's Board of Directors determined that it was in the best
interests of the Fund's shareholders to terminate the Limited Term Tax-Free
Fund; and it was terminated on [April 24, 1996]. While shares of only four
portfolios are presently being offered, the Board of Directors of the Fund may
establish additional portfolios, with different investment objectives, policies
and restrictions, in the future.
FINANCIAL INFORMATION OF THE FUND
The Fund's audited financial statements, including the notes thereto, contained
in the Fund's annual reports to shareholders (for the Growth Fund,
International Growth Fund, Income Fund and Ready Reserves Fund) for the year
ended December 31, 1995, are incorporated herein by reference. Additional
copies of the reports to shareholders may be obtained without charge by writing
or calling the Fund.
41
<PAGE> 82
APPENDIX A
________________________________________________________________________________
DESCRIPTION OF MONEY MARKET INSTRUMENTS
The following information includes a description of certain money market
instruments in which the Ready Reserves Fund portfolio may invest to the extent
consistent with its investment objective.
UNITED STATES GOVERNMENT SECURITIES These include marketable securities issued
by the United States Treasury, which consist of bills, notes and bonds. Such
securities are direct obligations of the United States government and are
backed by the full faith and credit of the United States. They differ mainly
in the length of their maturity. Treasury bills, the most frequently issued
marketable government security, have a maturity of up to one year and are
issued on a discount basis.
GOVERNMENT AGENCY SECURITIES These include debt securities issued by
government-sponsored enterprises, federal agencies or instrumentalities and
international institutions. Such securities are not direct obligations of the
U.S. Treasury but involve some government sponsorship or guarantees. Different
instruments have different degrees of government backing. For example,
securities issued by the Federal National Mortgage Association are supported by
the agency's right to borrow money from the U.S. Treasury under certain
circumstances. Securities issued by the Student Loan Marketing Association are
supported only by the credit of the agency that issued them. Thus, the Fund
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.
SHORT-TERM CORPORATE DEBT INSTRUMENTS These include commercial paper
(including variable amount master demand notes), which refers to short-term
unsecured promissory notes issued by corporations to finance short-term credit
needs. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. In addition, some
short-term paper, which can have a maturity exceeding nine months, is issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper").
The Ready Reserves Fund portfolio may invest in Section 4(2) paper with
maturities of twelve months or less. Section 4(2) paper is restricted as to
disposition under the Federal securities laws, and generally is sold to
institutional investors such as the Fund who agree that they are purchasing the
paper for investment and not with a view to public distribution. Variable
amount master demand notes are demand obligations that permit the investment of
fluctuating amounts at varying market rates of interest pursuant to
arrangements between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes.
A-1
<PAGE> 83
Because variable amount master demand notes are direct lending arrangements
between the lender and the borrower, it is not generally contemplated that such
instruments will be traded and there is no secondary market for the notes.
Typically, agreements relating to such notes provide that the lender may not
sell or otherwise transfer the note without the borrower's consent. Such notes
provide that the interest rate on the amount outstanding is adjusted
periodically, typically on a daily basis in accordance with a stated short-term
interest rate benchmark. Since the interest rate of a variable amount master
demand note is adjusted no less often than every 60 days and since repayment of
the note may be demanded at any time, the Fund values such a note in accordance
with the amortized cost basis at the outstanding principal amount of the note.
Also included are nonconvertible corporate debt securities (e.g., bonds and
debentures) with no more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than
one year tend to become quite liquid, have considerably less market value
fluctuations than longer term issues and are traded as money market securities.
BANK MONEY INSTRUMENTS These include instruments such as certificates of
deposit, time deposits and bankers' acceptances. Certificates of deposit are
generally short-term, interest-bearing negotiable certificates issued by
commercial banks or savings and loan associations against funds deposited in
the issuing institution. A time deposit is a non-negotiable deposit in a
banking institution earning a specified interest rate over a given period of
time. A banker's acceptance is a time draft drawn on a commercial bank by a
borrower usually in connection with an international commercial transaction (to
finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
REPURCHASE AGREEMENTS A repurchase agreement is an instrument under which the
purchaser (e.g., a mutual fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. The underlying
securities will consist only of U.S. Government or government agency or
instrumentality securities.
Repurchase agreements usually are for short periods, typically less than one
week. Repurchase agreements are considered to be loans under the 1940 Act,
with the security subject to repurchase, in effect, serving as "collateral" for
the loan. The Fund will require the seller to provide additional collateral if
the market value of the securities falls below the repurchase price at any time
during the term of the repurchase agreement. In the event of a default by the
seller because of bankruptcy or otherwise, the Fund may suffer time delays and
incur costs or losses in connection with the disposition of the collateral.
A-2
<PAGE> 84
APPENDIX B
________________________________________________________________________________
SHORT-TERM RATINGS (COMMERCIAL PAPER)
DUFF & PHELPS INC. Duff & Phelps Inc. rating system for "Top Grade" commercial
paper incorporates three gradations to recognize quality differences within its
highest grade. Lower grades (Duff - 2 and Duff - 3) do not distinguish between
such quality differences within the grade.
Category 1: Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding and
safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors.
Risk factors are minor.
Duff 1 minus: High certainty of timely payment. Liquidity factors are
strong and supported by fundamental protection factors. Risk
factors are very small.
Category 2: Good Grade
Duff 2: Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing internal
funds needs may enlarge total financing requirements, access
to capital markets is good. Risk factors are small.
FITCH INVESTORS SERVICE, INC. Fitch Investors Service, Inc. commercial paper
ratings are grouped into four categories: Fitch-1 (Strong Credit Quality);
Fitch-2 (Good Credit Quality); Fitch-3 (Fair Credit Quality); and Fitch-4 (Weak
Credit Quality).
Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
Fitch-1 (Very Strong Credit Quality) Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
B-1
<PAGE> 85
Fitch-2 (Good Credit Quality) Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-1+ and F-1
categories.
MOODY'S INVESTORS SERVICE, INC. The ratings Prime-1 and Prime-2 are the two
highest commercial paper ratings assigned by Moody's Investors Service, Inc.
Among the factors considered by it in assigning ratings are the following: (1)
evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; (3) evaluation of the issuer's products
in relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships which
exist with the issuer; and (8) recognition by the management of obligations
which may be present or may arise as a result of public interest questions and
preparations to meet such obligations. Relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated
Prime-1, 2 or 3.
STANDARD & POOR'S CORPORATION The ratings A-1+, A-1 and A-2 are the three
highest commercial paper ratings assigned by Standard & Poor's Corporation.
Commercial paper so rated by Standard & Poor's Corporation has the following
characteristics. Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash flow have
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1+, A-1, A-2 or A-3.
LONG-TERM RATINGS (BONDS)
DUFF & PHELPS INC. BOND RATINGS
<TABLE>
<CAPTION>
General
Category Rating
- -------- ------
<S> <C> <C>
Triple A 1 Highest credit quality. The risk factors are
negligible, being only slightly more than for
risk-free U.S. Treasury debt.
Double A High credit quality. Protection factors are strong.
High 2 Risk is modest but may vary slightly from time to
Middle 3 time because of economic conditions.
Low 4
</TABLE>
B-2
<PAGE> 86
<TABLE>
<S> <C> <C>
Single A Protection factors are average but adequate.
High 5 However, risk factors are more variable and greater
Medium 6 in periods of economic stress.
Low 7
</TABLE>
FITCH INVESTORS SERVICE INC. BOND RATINGS
AAA Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
PLUS (+) OR MINUS (-): The ratings may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
B-3
<PAGE> 87
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in its generic rating
classification in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA This is the highest rating assigned by Standard & Poor's Corporation to a
debt obligation and indicates an extremely strong capacity to pay principal and
interest.
AA Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
B-4
<PAGE> 88
February 2, 1996
Dear Shareholders:
1995 WAS GREAT.
<TABLE>
<CAPTION>
INTERNATIONAL LIMITED TERM READY
GROWTH INCOME TAX-FREE RESERVES
William Blair Funds: GROWTH FUND FUND FUND FUND FUND
----------------------- ------------- --------- --------------- --------
<S> <C> <C> <C> <C> <C>
1995................. 29.1% 7.2% 14.4% 10.0% 5.5%
1994................. 6.5% (0.04%) (0.7%) (1.6%)* 3.7%
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
LIPPER INTERMED. MERRILL LYNCH T-BILLS
Benchmarks: S&P 500 RUSSELL 2000 INTERNATIONAL BOND INTERMED. MUNI. (90 DAY)
------- ------------ ------------- --------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
1995................. 37.5% 28.4% 9.3% 15.3% 10.6% 5.2%
1994................. 1.3% (1.8%) (0.9%) (1.9%) (2.7%) 3.7%
</TABLE>
- ---------------
* Inception date 1/24/94.
At the beginning of the year, investors did not have high expectations for
1995. The prior year had been difficult. Interest rates rose dramatically, and
the stock market struggled all year. While the larger company S&P 500 Index rose
slightly, almost all of the mid/smaller company indices declined. A "wall of
worry" set the stage for positive surprises, and there were many. Inflation did
not rise at all and, as a result, interest rates declined substantially.
Corporate earnings were good (up an estimated 17%), driven by both increased
productivity and lower cost orientation that has spread across all sectors of
the economy. Even political/government developments held some promise of less
drag (regulation and taxes) on the economy. All in all, 1995 was a banner year.
Unfortunately we can not expect things to get much better. Corporate
earnings will likely be up less than 10% in 1996. Additional significant
interest rate declines (to under 5%), while good for bonds, would only be the
result of economic weakness, causing corporate earnings disappointments and
leading to a difficult stock market. Unlike 1995 when all financial assets
performed well, we are not likely to have both stocks and bonds moving up
together. However we see no major signs, other than a "technology" euphoria that
is now abating, that the stock market has a significant problem. By
"significant" we mean more than the normal 10% correction which one should
always expect could happen at any time.
In 1994 and 1995, interest rate movements had a major impact on investment
returns. 1996 is likely to be much more stable. At least in the near term we see
little upward rate pressure. While the Fed is likely to ease a little more, we
don't think the economy is slipping into a recession which would force
significant action. We expect modest 4-7% returns for fixed-income securities.
Although absolute returns for the Growth Fund were excellent, and it is
difficult to be too disappointed with a near 30% return, we did underperform the
S&P 500. We deliberately did not
<PAGE> 89
shift into the kind of technology stocks that were the top performers, fearing
that they will have a hard landing in the not-too-distant future (which actually
may already be upon us). Compared to the U.S., International markets had a more
subdued year, with Japan essentially flat and many of the emerging markets with
negative returns. Smaller company stocks underperformed worldwide in 1995. The
International Growth Fund lagged on a relative basis because of our strategic
bias towards faster growing, somewhat smaller companies in Europe and Japan and
our 10% exposure to emerging markets. Both our equity funds remain well
positioned for the long-term and we look for better relative performance in
1996.
Our fixed-income and short-term reserve funds had predictably good years
with solid returns. Despite good performance, the growth in assets for the bond
funds has been almost non-existent, especially in the Limited Term Tax-Free
Fund. Talk in Washington of a flat tax, with no income tax on any interest
income regardless of source, has caused tax-exempt bond's performance to lag,
and their yields relative to taxable bonds are now more attractive than any time
in almost ten years.
We are looking forward to serving your investment needs throughout the
coming year.
Rocky Barber
President
2
<PAGE> 90
February 2, 1996
Dear Shareholders:
The U.S. financial markets enjoyed an extraordinary advance in 1995. A
powerful combination of strong corporate profit growth and lower interest rates
drove stocks to record levels. Despite a backdrop of moderating economic growth
during the year, corporate profits increased an estimated 17% as profit margins
benefitted from productivity gains and other factors. As a result, quarterly
earnings reports generally exceeded consensus Wall Street expectations and drove
analysts' profit forecasts upward through most of the year. More surprising,
however, was the sharp decline in interest rates where long term Treasury yields
declined to the 6% level by year end versus consensus expectations of over 8% a
year ago. In a nutshell, the positive trends for both earnings and interest
rates against a rather pessimistic forecast a year ago was the near ideal
environment for upside surprise and return.
A closer analysis of the stock market in 1995 reveals that small cap stock
returns trailed behind large cap stocks for the second consecutive year.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
WILLIAM BLAIR GROWTH FUND 29.1% 6.5%
S & P 500 37.5 1.3
Russell 2000 28.4 -1.8
Lipper Growth 31.5 -1.6
</TABLE>
The Russell 2000 Index of smaller companies gained ONLY 28% compared with
the 38% return for the S&P 500 index. In addition to the aforementioned
productivity gains, many large company earnings results were enhanced by
corporate restructuring, cost reduction programs and foreign currency gains from
overseas subsidiaries. As a result earning increases have been very strong and
profit margins are at record levels. However, many of these factors are
non-recurring, and will not drive sustainable growth. We expect the historically
faster growth rates of smaller company stocks to become more evident in 1996.
Consensus expectations for growth in S&P 500 earnings in 1996 are less than 10%,
which is well below the growth rate seen in the past two years. With this in
mind, the relative valuation of smaller company stocks currently stands near the
midpoint of historic ranges and supports a more positive view towards future
performance.
Technology was the strongest performing sector in the market by a
relatively wide margin with gains of about 45% versus about 33% for the rest of
the market. Our investment philosophy has a strong bias towards business
franchises that we believe have above average predictability and consistency to
their financial results. For that reason we have historically had less emphasis
on the more volatile, pure technology product companies and 1995 was no
exception. We prefer to own applied technology companies which sell products or
services based on new technological advancements available in the market or
which use them to lower their costs or improve their productivity. This past
year was difficult for us in that small and large cap portfolios alike were
strongly rewarded for taking more risk than we prefer. We strive to outperform
by focusing on high quality companies with excellent growth prospects, yet below
average business volatility. Our superior long term performance supports this
approach. On the other hand, a concentrated sector oriented strategy, especially
one tilted towards technology, would clearly not be consistent with our
philosophy.
3
<PAGE> 91
Looking ahead to 1996, we see a much more modest, but still positive,
return environment. Interest rates are still somewhat high in real (inflation
adjusted) terms and should not be trending higher. The political climate is
unclear, but, generally moving in the right direction (balanced budget
amendment, lower capital gains taxes, less regulation) and the aging baby
boomers are just beginning to realize the necessity of saving and investing for
their longer term needs. Offsetting these positive forces are the slowing rate
of earnings growth and a strapped U.S. consumer. The risk of a 1997 U.S.
recession, while not highly probable, will still cause some investor caution in
1996.
Ultimately, our challenge in 1996 will be to focus on companies that can
achieve reasonably good earnings growth in an environment of low inflation,
sluggish economies worldwide and ever increasing competition. We are also
focusing on the market valuation excesses that have shown up in some specific
stocks and are making adjustments as necessary.
Rocky Barber Mark A. Fuller, III
President Senior Vice President
Growth Fund Portfolio Manager Growth Fund Portfolio Manager
4
<PAGE> 92
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) GROWTH FUND S&P 500
<S> <C> <C>
1/86 10000 10000
12/86 10979 11821
12/87 11856 12433
12/88 12700 14484
12/89 16567 19038
12/90 16233 18429
12/91 23435 24059
12/92 25219 25907
12/93 29131 28498
12/94 31011 28876
12/95 40026 39706
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE> 93
WILLIAM BLAIR MUTUAL FUNDS, INC.
GROWTH FUND
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- -------- --------
<S> <C> <C> <C> <C>
COMMON STOCKS
APPLIED TECHNOLOGY -- 20.4%
205 * Acxiom Corporation $ 2,164 $ 5,598
300 * Airtouch Communications, Inc. 8,099 8,475
198 * American Management Systems 4,702 5,940
115 Automatic Data Processing, Inc. 6,141 8,539
79 * Catalina Marketing Corporation 3,691 4,957
177 First Data Corporation 6,966 11,852
236 * International Imaging Materials Inc. 5,642 5,964
150 * NFO Research, Inc. 1,870 3,975
60 * Paging Network, Inc. 970 1,463
120 Reuters Holdings PLC (ADR) 4,568 6,615
115 Shared Medical Systems Corporation 3,448 6,237
100 * Solectron Corporation 3,678 4,412
-------- --------
51,939 74,027
-------- --------
CONSUMER RETAIL -- 17.2%
120 Albertson's, Inc. 3,487 3,945
200 * Eckerd Corporation 6,508 8,925
165 Heilig-Meyers Company 4,213 3,032
250 Home Depot, Inc. 10,975 11,969
79 * Kohl's Corporation 3,777 4,158
120 * Micro Warehouse, Inc. 3,295 5,190
100 * Office Depot, Inc. 1,372 1,962
100 The Pep Boys -- Manny, Moe & Jack 2,479 2,563
164 * Staples, Inc. 1,792 3,989
127 * Viking Office Products, Inc. 2,351 5,887
300 Wal-Mart Stores 7,484 6,675
136 Walgreen Company 3,257 4,063
-------- --------
50,990 62,358
-------- --------
FINANCIAL SERVICES -- 9.8%
100 Advanta Corporation, Class "A" 3,108 3,825
20 Advanta Corporation, Class "B" 535 728
174 * Credit Acceptance Corporation 3,691 3,602
100 Federal Home Loan Mortgage Corporation 5,282 8,350
100 Household International, Inc. 3,396 5,912
185 MBNA Corporation 5,710 6,822
140 State Street Boston Corporation 5,180 6,300
-------- --------
26,902 35,539
-------- --------
</TABLE>
6
<PAGE> 94
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- -------- --------
<S> <C> <C> <C> <C>
MEDICAL-RELATED SPECIALTIES -- 9.8%
150 * Elan PLC (ADR) $ 4,708 $ 7,294
106 * Health Care & Retirement Corporation 3,336 3,707
200 * Healthsouth Rehabilitation Corporation 2,871 5,825
195 * Medaphis Corporation 4,214 7,200
100 Omnicare, Inc. 1,465 4,457
81 * Quintiles Transnational Corporation 1,400 3,313
77 * R.P. Scherer Corporation 2,716 3,783
-------- --------
20,710 35,579
-------- --------
TECHNOLOGY -- 8.3%
113 * Digi International, Inc. 2,000 2,137
80 Linear Technology Corporation 2,202 3,140
100 * Microsoft Corporation 5,443 8,775
98 Molex Incorporated 1,041 3,101
159 Molex Incorporated, Class "A" 2,751 4,857
80 * Xilinx, Inc. 3,523 2,434
165 * Zebra Technologies Corporation, Class "A" 2,900 5,603
-------- --------
19,860 30,047
-------- --------
DISTRIBUTION -- 7.8%
220 Alco Standard Corporation 5,900 10,037
60 Cardinal Health, Inc. 2,626 3,285
157 * Gulf South Medical Medical Supply, Inc. 3,580 4,752
151 * Peak Technologies Group, Inc. 3,950 4,734
80 Sysco Corporation 583 2,600
209 * Thompson PBE, Inc. 3,482 2,933
-------- --------
20,121 28,341
-------- --------
INDUSTRIAL PRODUCTS -- 7.7%
160 Air Products & Chemicals, Inc. 7,456 8,440
110 Danaher Corporation 1,274 3,492
170 M.A. Hanna Company 3,940 4,768
196 Minerals Technologies, Inc. 5,250 7,158
137 OEA, Inc. 3,973 4,084
-------- --------
21,893 27,942
-------- --------
SPECIALTY CONSUMER SERVICES AND PRODUCTS -- 6.1%
225 * CUC International, Inc. 3,470 7,678
173 * Day Runner, Inc. 2,792 5,979
135 * Department 56, Inc. 3,596 5,177
130 The Loewen Group, Inc. 2,308 3,291
-------- --------
12,166 22,125
-------- --------
</TABLE>
7
<PAGE> 95
<TABLE>
<CAPTION>
Shares or Amount (all amounts in thousands) Cost Value
- ---------------- -------- --------
<S> <C> <C> <C> <C>
BUSINESS SERVICES -- 4.3%
125 Cintas Corporation $ 3,828 $ 5,571
219 * Heartland Express, Inc. 3,877 4,333
224 * Knight Transportation, Inc. 3,423 3,077
120 * Rural/Metro Corporation 2,278 2,715
-------- --------
13,406 15,696
-------- --------
FOOD RETAIL/PROCESSING -- 3.0%
60 Pepsico, Inc. 3,501 3,353
285 Wendy's International, Inc. 4,985 6,056
106 * Whole Foods Market, Inc. 1,540 1,471
-------- --------
10,026 10,880
-------- --------
TOTAL COMMON STOCK -- 94.4% 248,013 342,534
-------- --------
SHORT-TERM INVESTMENTS
$3,559 Associates Corp. of North America Demand Note,
5.444%, due 1/2/96 3,559 3,559
2,987 Household Finance Corporation, 5.75%, due 1/5/96 2,987 2,987
2,253 Chevron Oil Finance Company, 5.65%, due 1/12/96 2,253 2,253
2,671 Chevron Oil Finance Company, 5.72%, due 1/12/96 2,671 2,671
1,774 General Electric Capital Corporation, 5.74%, due 1/19/96 1,774 1,774
3,000 Chevron Oil Finance Company, 5.65%, due 1/19/96 3,000 3,000
3,200 GMAC Corporation, 5.69%, due 1/26/96 3,200 3,200
3,500 Ford Motor Credit Company, 5.60%, due 2/2/96 3,500 3,500
-------- --------
Total Short-term Investments -- 6.3% 22,944 22,944
-------- --------
TOTAL INVESTMENTS -- 100.7% $270,957 365,478
========
LIABILITIES, PLUS CASH AND OTHER ASSETS -- (.7)% (2,442)
--------
NET ASSETS -- 100.0% $363,036
========
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
8
<PAGE> 96
February 2, 1996
Dear Shareholders:
With the United States 1995's second best performing world stock market
(only Switzerland was up more), United States investors in international
portfolios were modestly rewarded. The EAFE Index returned 11.6% and the Lipper
International Index returned 9.3% as the large Japanese market was essentially
flat and the emerging markets actually declined nearly 10%. Offsetting these
drags were gains of nearly 10% in non-Japan Far East and about 15-18% in
Europe/UK. Clearly, the major investment action in 1995 was here in the U.S.
The International Growth Fund lagged behind both international indices with
a 7.2% return for the year. We emphasize investment in growth stocks which
results in an overweight position in somewhat smaller companies. As shown in the
table below, larger cap stocks outperformed in all major geographic markets in
1995. History clearly demonstrates that this is quite unusual and indeed recent
evidence shows that smaller companies are starting to again perform better in
some markets.
PERFORMANCE OF SMALL CAP VS LARGE CAP*
<TABLE>
<CAPTION>
1994 1995
------------ --------------------------------------
REPRESENTATIVE INDICES Q3 Q4 Q1 Q2 Q3 Q4 YEAR
- -------------------------------------- ---- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Morgan Stanley Capital International
UK (large)*......................... 5.4% 0.5% 5.6% 3.0% 5.4% 2.3% 17.2%
Financial Times Stock Exchange Small
Cap UK, ex Investment Trust
(small)............................. 3.7 -4.7 2.9 4.5 7.2 -3.7 10.9
Morgan Stanley Capital International
EUROPE, ex UK (large)............... 2.8 0.3 5.5 7.1 2.7 3.1 19.7
James Capel Small Cap EUROPE, ex UK
(small)............................. 2.3 -1.9 2.6 5.3 -1.2 -4.1 2.3
Morgan Stanley Capital International
JAPAN (large)....................... -5.5 -1.5 -2.3 -6.5 4.3 4.9 0.0
James Capel Small Cap JAPAN (small)... -8.1 -2.4 -6.8 -10.7 0.4 7.2 -10.3
</TABLE>
- ---------------
* US Dollar adjusted Capital Change
9
<PAGE> 97
Looking ahead to 1996, we can summarize our investment outlook by the
following:
OVERVIEW
- Economic growth remains below trend in the industrial world
- Short-term rates have further to fall in the United States and
Continental Europe
- World growth will accelerate in 1997
- The dollar should strengthen over the year but may be vulnerable short
term
JAPAN
- Economic growth is picking up
- Monetary policy may be tightened earlier than expected
- The equity market has seen the best of its rally
EUROPE
- Growth is slowing and may move to negative levels in the first half of
1996
- Inflation remains very low in core ERM countries
- Short-term interest rates have further to fall
- Overweight classic growth and interest rate sensitive stocks
UK
- The economy is set to grow around 2.5% in 1996
- Headline inflation will fall to 1-2% mid-year
- Long gilt yields should trade in a range of 7-8%
- Growth may be uncomfortably strong by 1997
EMERGING MARKETS
- Economic performance is still deteriorating in some Asian markets
- Latin American growth should accelerate in 1996
- East European markets look set for good performance in 1996
- Represent good value at current levels and should outperform in 1996
The portfolio remains overweighted in Japan, core Europe and emerging
markets. In Japan, we are seeing the beginning of better performance among the
medium and smaller sized stocks and we expect this to continue as the economic
environment improves in 1996. We see some risk of Yen weakness, after an
unprecedented period of strength, and have continued to hedge approximately one
third of our exposure. In core Europe, we see continued benefits from declining
interest rates led by Germany. Smaller company shares throughout Europe have
been in a prolonged bear market and some outstanding values are available;
however, it will require greater optimism on European growth prospects before
they start to outperform. Finally, we see interest returning to many of the
emerging markets as valuations have become more compelling given recent years
declines.
Norbert W. Truderung
Senior Vice President
William Blair Mutual Funds, Inc.
10
<PAGE> 98
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
MEASUREMENT PERIOD INT'L GROWTH LIPPER INT'L
(FISCAL YEAR COVERED) FUND INDEX
<S> <C> <C>
10/92 10000 10000
12/92 10130 09875
6/93 11390 11310
12/93 13534 13744
6/94 13985 13718
12/94 13528 13622
6/95 13332 13962
12/95 14505 14886
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE> 99
WILLIAM BLAIR MUTUAL FUNDS, INC.
INTERNATIONAL GROWTH FUND
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
Shares (all amounts in thousands) Cost Value
- ------------- ------- -------
<S> <C> <C> <C> <C>
COMMON STOCKS -- EUROPE -- 43.8%
AUSTRIA -- .8%
10 Flughafen Wien AG (Vienna Airport) $ 484 $ 675
------- -------
BELGIUM -- .8%
3 Kredietbank (Bank) 607 684
------- -------
DENMARK -- .5%
4 Novo Nordisk AS (Pharmaceutical) 427 479
------- -------
FINLAND -- .5%
11 Nokia (AB) OY (Telecommunications equipment) 732 432
------- -------
FRANCE -- 6.6%
4 Air Liquide (Industrial gases) 577 662
7 Alcatel-Alsthom SA (Telecommunication/
transportation equipment) 710 604
8 Banque Nationale De Paris (Bank) 392 361
4 Cie De St. Gobain (Building materials) 416 382
6 Crometal (Metal, plastic and construction) 509 398
9 Gascogne (Packaging paper and printing) 794 793
7 Interbail (Societe Financiere) (Property leasing and
rental) 592 377
12 * SGS Thomson Micro (Electronic semiconductors) 563 459
4 Societe Bic (Consumer goods) 400 437
7 Societe Generale (Bank) 750 865
2 Sodexho (Contract catering) 305 588
------- -------
6,008 5,926
------- -------
GERMANY -- 5.9%
3 Bayer AG (Chemicals) 696 792
3 Durr Beteil AG (Capital goods and spray paint machinery) 894 749
5 * Ex Cello O Holdings AG (Machine tools) 848 537
1 Linde AG (Engineering) 709 729
2 Mannesmann AG (Engineering-general) 364 509
0.11 Munchener Ruckvers AG (Reinsurance) 182 244
6 Praktiker Bau Und Heimninerker AG (Retailing) 208 191
2 Siemens AG (Electrical engineering) 666 821
2 Simona AG (Plastics processing) 302 305
3 * Varta AG (Batteries) 530 479
------- -------
5,399 5,356
------- -------
</TABLE>
12
<PAGE> 100
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- ------- -------
<S> <C> <C> <C> <C>
ITALY -- 1.7%
404 BCA Fideuram SPA (Fund management) $ 483 $ 467
150 La Rinascente (Retailing) 393 390
400 Telecom Italia Mobile (Mobile telephones) 513 704
------- -------
1,389 1,561
------- -------
LUXEMBOURG -- .7%
20 Millicom International Cellular S A (Communications) 521 610
------- -------
NETHERLANDS -- 4.1%
9 Crown V Gelder G B (Specialists -- paper products) 707 721
17 * Frans Maas Group (Transport services) 502 566
6 Heineken NV (Brewer) 961 1,064
9 Kon Ten Cate NV (Chemicals) 454 380
20 Koninklijke Van Ommeren CVA (Specialty chemicals) 539 623
8 Philips Electronics NV (Consumer electronics) 391 289
------- -------
3,554 3,643
------- -------
PORTUGAL -- .1%
5 Filmes Lusomundo (Media) 61 53
------- -------
SPAIN -- 2.0%
20 Aguas De Barcelona (Water utility) 526 597
25 Centros Com Pryca (Supermarkets) 501 524
15 Hidroel Cantabrico (Electric utility) 483 519
10 Unipapel S A (Office stationery) 268 188
------- -------
1,778 1,828
------- -------
SWEDEN -- 2.9%
7 Autoliv AB (Airbag manufacturers) 392 409
15 Astra AB (Pharmaceutical) 502 599
28 Ericcson (LM) Telefon (Telecommunication equipment) 539 538
50 Munksjo AB (Pulp and paper) 480 328
55 Sparbanken Sverige (Bank) 483 700
------- -------
2,396 2,574
------- -------
SWITZERLAND -- 5.3%
0.25 Baloise Holdings (Insurance) 577 520
0.25 Bobst AG (Printing machines) 377 390
10 CS Holdings (Banking) 1,011 1,025
0.80 Nestle SA (Food) 820 885
0.13 Roche Holdings AG (Pharmaceuticals) 789 989
1 Sandoz AG (Pharmaceuticals) 739 915
------- -------
4,313 4,724
------- -------
</TABLE>
13
<PAGE> 101
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- ------- -------
<S> <C> <C> <C> <C>
TURKEY -- .1%
1,546 Sifas (Textiles) $ 250 $ 83
------- -------
UNITED KINGDOM -- 11.8%
19 Abacus Group (Distributors) 83 82
125 Bank of Scotland (Bank) 358 546
175 Bullough (Engineering) 391 277
125 Chubb Security (Securities firm) 618 618
75 DFS Furniture Company (Furniture
manufacturer and retailer) 315 460
19 Domestic & General Group (Insurance) 386 449
85 Eurotherm (Instruments and controls) 404 722
125 First Leisure Corporation (Entertainment) 599 740
75 Frost Group (Retailers) 247 224
233 Halma (Industrial safety and environmental equipment) 543 634
100 Hays (Bulk distribution, personnel services) 435 584
175 Hogg Robinson (Travel, transport and financial services) 572 620
150 Kwik Fit Holdings (Distributors) 422 396
100 London Forfaiting (Commercial asset-based finance) 235 340
20 Mercury Assets Management Group (Banks/Merchant) 331 276
35 RTZ Corp. (Mining and finance) 381 509
100 S I G (Building material distributor) 371 300
65 Shell Transport & Trading (Oil-Integrated) 753 860
100 Standard Chartered (Retail banks) 621 851
35 Tate & Lyle (Food Producers) 247 257
90 Vero Group (Electronics) 387 380
75 Watmoughs Holdings (Printer) 460 530
------- -------
9,159 10,655
------- -------
COMMON STOCKS -- ASIA -- 41.5%
AUSTRALIA -- 2.5%
45 Broken Hill Proprietary (Mining) 620 635
200 John Fairfax (Newspaper publishing) 346 416
300 Stanilite Pacific (Manufacturer
of emergency lighting systems) 397 137
125 Stanilite Pacific Ltd (Electronic/communication
equipment) 150 57
160 Western Mining Corporation (Mines) 971 1,027
------- -------
2,484 2,272
------- -------
JAPAN -- 32.0%
77 Anritsu Corporation (Electrical machinery) 888 835
75 Asahi Tec Corporation (Automobile parts) 702 498
41 Bank of Tokyo (Bank) 699 719
0.10 DDI Corporation (Cellular telecom service provider) 573 775
</TABLE>
14
<PAGE> 102
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- ------- -------
<S> <C> <C> <C> <C>
25 Enix Corporation (Entertainment software) $ 842 $ 953
60 Exedy Corporation (Automobile parts) 993 953
15 Fuji Machine Manufacturing (Automated
assembly machinery) 481 538
50 Hitachi Metals (Specialty steel maker) 611 625
13 Ito Yokado Company (Food retailer) 552 801
60 Jaccs Company (Consumer finance) 619 622
93 Kamigumi Company (Harbor transport & equipment) 900 893
20 Kato Denki Company (Electrical retailer) 451 519
7 Keyence Corporation (Electronics) 574 807
10 Melco Incorporated (Electronics) 353 527
47 Mitsubishi Trust & Banking (Banking) 749 783
70 Mitsui Fudosan Company (Real estate) 878 861
55 Namco (Commercial use videogame hardware) 1,473 1,832
68 Neturen Company (Metal products) 551 539
50 New Oji Paper Company (Pulp and paper) 461 452
9 Nichiei Company (Finance company) 617 671
90 Nikko Securities (Securities firm) 839 1,159
300 * NKK Corporation (Steel producer) 790 808
90 NTN Corporation (Bearings producer) 598 601
70 Obayashi Corporation (Construction) 558 556
87 Ricoh Company (Color copier manufacturer) 885 952
30 Rinnai Corporation (Metal products) 680 700
8 Riso Kagaku Corporation (Printing machine producer) 660 675
20 Rohm & Co. (Electronics) 595 1,129
21 Ryosan Electro Corporation (Semiconductors/workstations) 465 578
10 SMC Corporation (Machinery) 573 723
33 Santen Pharm Company (Opthalmic pharmaceuticals) 740 748
34 Sanwa Bank (Bank) 655 692
14 Secom Company (Services) 847 974
23 Sho Bond Corporation (Construction) 763 786
30 Sumitumo Bank (Bank) 557 636
55 Sumitumo Trust & Banking (Bank) 786 778
60 Topre Corporation (Automobile pressed parts) 525 477
18 Tostem Corporation (Metal products) 648 598
------- -------
26,131 28,773
------- -------
HONG KONG -- 4.6%
100 China Light & Power (Electric utility) 448 460
59 HSBC Holdings (Bank) 638 896
1,480 Inner Mongolia Erdos Cashmere (Wool producer) 701 555
750 National Mutual Asia (Finance) 471 679
70 Sun Hung Kai Properties (Real estate management) 419 568
</TABLE>
15
<PAGE> 103
<TABLE>
<CAPTION>
Shares (all amounts in thousands) Cost Value
- ------------- ------- -------
<S> <C> <C> <C> <C>
65 Swire Pacific (Airline, general trading
and real estate conglomerate) $ 415 $ 504
1,960 Yizheng Chemical Fibre Company (Chemicals) 555 441
------- -------
3,647 4,103
------- -------
SINGAPORE -- 2.4%
45 City Developments (Real estate company) 275 328
50 Fraser & Neave (Diversified conglomerate) 468 639
3 Fraser & Neave, warrants (expire 5/27/98) 3 20
80 Keppel Corp. (Diversified conglomerate) 490 713
199 Singapore Technologies Industries
(Infrastructure/industrial development projects) 304 450
------- -------
1,540 2,150
------- -------
COMMON STOCKS -- EMERGING MARKETS -- 9.8%
ARGENTINA -- 1.2%
43 Irsa Inversiones Y Representaciones GDR (Property) 878 1,094
------- -------
BRAZIL -- 1.6%
40 (a) Rhodia Ster S A (Packaging) (Rule 144A) 579 410
16 Telecommunicacoes Brasilera, ADR (Telecommunication) 532 741
40 (a) Usinas Siderurgicas De Minas Gerais S.A.,
ADR (Rule 144A) (Steel) 623 325
------- -------
1,734 1,476
------- -------
INDONESIA -- 1.0%
96 (b) Astra International (Assembler/distributor of
automobiles/motorcycles) 139 199
90 (b) Indosat (Telecommunications service provider) 346 335
139 (b) Mulia Industrindo (Glass and ceramic manufacturer) 235 391
------- -------
720 925
------- -------
KOREA -- .4%
15 Korea Electric Power Corporation ADR (Electric utility) 315 401
------- -------
MALAYSIA -- 1.4%
58 Resorts World Berhad (Manages hotel
and gaming operations) 244 311
108 Leader Universal Holdings (Cable manufacturer) 305 247
105 YTL Corporation (Holding company-property/
power generating) 354 662
------- -------
903 1,220
------- -------
</TABLE>
16
<PAGE> 104
<TABLE>
<CAPTION>
Shares or Amount (all amounts in thousands) Cost Value
- ---------------- ------- -------
<S> <C> <C> <C> <C>
PERU -- 1.2%
505 Telefonica Del Peru SA CPT 'B' Shares
(Telephone company) $ 878 $ 1,082
------- -------
SOUTH AFRICA -- 1.0%
115 Free State Consolidated Gold Mines (Mining) 1,249 860
------- -------
THAILAND -- 2.0%
0.05 Formosa Fund (Mutual fund) 351 380
200 (b) Industrial Finance Corporation of Thailand (Bank) 373 679
18 (b) Regional Continental Line (Transportation containers) 207 225
69 Thai Farmers Bank (Bank) 236 471
------- -------
1,167 1,755
------- -------
TOTAL COMMON STOCKS -- 95.1% 78,724 85,394
------- -------
CONVERTIBLE BONDS -- 1.9%
$ 200 Tata Iron & Steel Company, 2.25%
due 4/1/99 (Construction materials) 200 178
550 U Ming Marine Holdings, 1.5%, due 2/7/01 (Shipping) 558 491
500 United Micro Electric, 1.25%, due 6/8/04 (Technology) 855 666
35,000Y Sankyo Frontier Company, 3.00% due 9/29/00 (Licensing) 459 343
------- -------
TOTAL CONVERTIBLE BONDS 2,072 1,678
------- -------
SHORT-TERM INVESTMENTS -- 2.8%
$2,505 State Street Bank Euro-Dollar Time Deposit,
4.75%, due 1/2/96 2,505 2,505
------- -------
TOTAL INVESTMENTS -- 99.8% $83,301 89,577
=======
CASH AND OTHER ASSETS, LESS LIABILITIES -- .2% 185
-------
NET ASSETS -- 100.0% $89,762
=======
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
(a) Securities exempt from registration under Rule 144A of the Securities Act of
1933. These may be resold in transactions exempt from registration, normally
to qualified institutional buyers. At December 31, 1995, the value of these
securities was 0.8% of net assets.
(b) Foreign registered securities (Alien Market).
At December 31, 1995 the Fund's Portfolio of Investments includes the
following categories: Capital Equipment -- 23%; Services -- 23%; Finance --
22%; Materials -- 15%; Consumer Goods -- 11%; Energy -- 4%; and
Multi-Industry -- 2%.
See accompanying Notes to Financial Statements.
17
<PAGE> 105
February 2, 1996
Dear Shareholders:
Unlike the prior year, 1995 was one that bond investors will savor. Double
digit returns were the norm for all but the shortest maturity issues. Economic
growth slowed during the year and inflation remained subdued. The Federal
Reserve Board responded by twice lowering short-term interest rates. This
steadily declining interest rate environment led to a 14.4% return with
dividends reinvested for the Income Fund. While this return exceeded the 10.9%
return of our relevant Lipper peer group, it trailed the 15.3% return of the
Lehman Intermediate Government/Corporate Bond Index.
We maintained our modestly defensive position throughout the second half of
1995 and we expect to continue to do so as we move into 1996. The returns
generated within the bond market last year represent one of the best single-year
performances in bond market history. A great year like 1995 is generally not
followed by another one and this simple recognition is the main reason for
maintaining our position. We continue to emphasize U.S. Treasury notes and more
conservatively structured mortgage-backed bonds as there still does not seem to
be much value in the corporate bond area.
Assets remained very stable in the $150 million range. Additionally, we
changed the monthly dividend on two occasions this year. This basically
reflected the volatility of interest rates that has developed more recently. As
a result, we are modifying our dividend policy very slightly. We will determine
a dividend level at the beginning of each year and will review that level every
quarter to see if an adjustment is necessary. Our philosophy continues to be one
of paying out only income earned and trying to avoid any return of principal. We
look forward to serving your fixed-income needs in 1996.
Bentley M. Myer
Senior Vice President
Income Fund Portfolio Manager
18
<PAGE> 106
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
LEHMAN IN-
TERMED.
MEASUREMENT PERIOD GOVT/CORP
(FISCAL YEAR COVERED) INCOME FUND INDEX
<S> <C> <C>
9/90 10000 10000
12/90 10291 10410
6/91 10781 10862
12/91 11986 11932
6/92 12390 12292
12/92 12845 12788
6/93 13565 13582
12/93 13849 13912
6/94 13555 13548
12/94 13746 13643
6/95 14935 14953
12/95 15722 15735
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE> 107
WILLIAM BLAIR MUTUAL FUNDS, INC.
INCOME FUND
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- -------- ---------------------------------------------------- --------
<S> <C> <C>
(all amounts in thousands)
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY
GUARANTEED OBLIGATIONS -- 66.5%
U.S. TREASURY -- 26.2%
$ 14,700 U.S. Treasury Note 7.50%, due 11/15/01 $ 16,191
10,322 U.S. Treasury Note 5.75%, due 8/15/03 10,446
10,750 U.S. Treasury Note 7.25%, due 5/15/04 11,929
- -------- --------
35,772 Total U.S. Treasury Obligations 38,566
- -------- --------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS -- 18.5%
SMALL BUSINESS ADMINISTRATION -- 8.9%
-- Receipt for Multiple Originator Fees, #3, 0.786%,
due 11/08/08 (Interest only) WAC 2,225
378 Loan #100023, 9.375%, due 11/25/14 397
-- Receipt for Multiple Originator Fees, #146, 3.021%,
due 6/03/15 (Interest only) WAC 1,858
-- Receipt for Multiple Originator Fees, #156, 3.323%,
due 7/20/15 (Interest only) WAC 1,904
-- Receipt for Multiple Originator Fees, #215, 3.311%,
due 9/03/15 (Interest only) WAC 4,506
-- Receipt for Multiple Originator Fees, #149, 3.082%,
due 10/01/15 (Interest only) WAC 2,308
- -------- --------
378 Total Small Business Administration Obligations 13,198
- -------- --------
U.S. DEPARTMENT OF VETERANS AFFAIRS -- 4.9%
2,060 Mortgage Trust 1992-1, Tranche 2-B,
7.75%, due 9/15/10 2,098
5,000 Mortgage Trust 1992-2, Tranche 2-D,
7.00%, due 9/15/15 5,096
- -------- --------
7,060 Total U.S. Department of Veteran Affairs
- -------- Guaranteed Pass-Through Certificates 7,194
--------
</TABLE>
20
<PAGE> 108
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- -------- ---------------------------------------------------- --------
<S> <C> <C>
(all amounts in thousands)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 3.5%
$ 26 12.50%, due 4/15/14 $ 30
54 13.00%, due 11/15/14 60
2,277 8.50%, due 11/15/21 2,401
1,063 8.50%, due 12/15/21 1,120
1,501 8.50%, due 1/15/22 1,583
- -------- --------
4,921 Total Government National Mortgage
- -------- Association Obligations 5,194
--------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II -- 0.8%
28 12.00%, due 2/20/20 30
21 12.50%, due 2/20/15 24
777 11.00%, due 3/20/16 861
24 10.50%, due 6/20/19 26
97 10.50%, due 8/20/20 107
120 10.50%, due 9/20/20 132
- -------- --------
1,067 Total Government National Mortgage
- -------- Association II Obligations 1,180
--------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MOBILE HOME -- 0.4%
114 9.75%, due 3/15/98 118
54 9.75%, due 1/15/99 57
427 9.50%, due 12/15/10 456
- -------- --------
595 Total Government National Mortgage
- -------- Association Mobile Home Obligations 631
--------
U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS -- 21.8%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) -- 14.7%
403 #1475, Tranche SC, 8.107% FR, due 2/15/08 391
1,092 #1693, Tranche S, 5.225%, due 9/15/08 931
2,214 #1214, Tranche EB, 9.095% FR, due 2/15/15 2,220
2,500 #77, Tranche F, 8.500%, due 6/15/17 2,514
4,395 #845059, Debenture, 7.460% FR, due 5/01/18 4,507
2,000 #1289, Tranche PK, 7.500%, due 5/15/18 2,028
4,846 #1081, Tranche IC, 6.500%, due 12/15/19 4,847
676 #1077, Tranche G, 7.500%, due 5/15/21 678
2,818 #C00137, Debenture, 9.000%, due 5/01/22 2,990
603 #1492, Tranche SE, 10.133%, due 3/15/23 552
- -------- --------
21,547 Total FHLMC Collateralized
- -------- Mortgage Obligations 21,658
--------
</TABLE>
21
<PAGE> 109
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- -------- ---------------------------------------------------- --------
<S> <C> <C> <C>
(all amounts in thousands)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 7.1%
$ 2,900 1993-47, Tranche B, 6.650%, due 3/25/06 $ 2,906
54 13.250%, due 8/01/14 54
4,584 7.623%, due 12/01/2018 4,713
282 1992-105, Tranche A, 7.000%, due 1/25/21 284
276 1991-141, Tranche SB, 12.170% FR, due 10/25/21 276
1,890 1992-200, Tranche SE, 11.500%, due 11/25/22 1,896
266 1993-19, Tranche SH, 11.234%, due 4/25/23 266
- -------- --------
10,252 Total FNMA Collateralized
- -------- Mortgage Obligations 10,395
--------
81,592 Total U.S. Government and U.S. Government
- -------- Agency Guaranteed Obligations 98,016
--------
<CAPTION>
S&P
Rating
-----------
(unaudited)
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 20.9%
3,255 Prudential Home Mortgage Securities Corp., 1992-45,
Tranche A-8, 6.045%, due 1/25/00 AAA 3,158
1,600 Polk Co. HFA, 1991-1, Tranche A-2, 9.550%,
due 1/15/11 AAA 1,708
11,503 Morgan Keegan Funding I, L.P., 8.000%, due 4/25/11 AA- 11,734
212 Clay Co. HFA, 1990, Tranche A-1, 9.500%, due
10/10/12 AAA 226
1,000 Mortgage Obligation Structured Trust, 1993-1,
Tranche A-1, 6.350%, due 10/25/18 AAA 993
5,000 Prudential Home Mortgage Securities Corp., 1993-8,
Tranche A-10, 7.350%, due 3/25/23 AAA 5,018
5,000 Prudential Home Mortgage Securities Corp., 1993-40,
Tranche A-2, 6.500%, due 10/25/23 AAA 5,017
392 Residential Finance Corp., 1991-11,
Tranche A-2, 10.000%, due 4/01/21 AA 393
1,219 Residential Finance Corp., 1991-11, Tranche A-2,
10.000%, due 4/01/21 AA 1,243
263 Resolution Trust Corp., 1991-3, Tranche A-2,
10.385%, due 8/25/21 AAA 274
1,052 Resolution Trust Corp., 1992-5, Tranche 5-C,
8.628%, due 1/25/26 AA 1,081
- -------- --------
30,496 Total Collateralized Mortgage Obligations 30,845
- -------- --------
</TABLE>
22
<PAGE> 110
<TABLE>
<CAPTION>
Principal S&P
Amount Issue Rating Value
- -------- ---------------------------------------------------- ----------- --------
<S> <C> <C> <C>
(all amounts in thousands) (unaudited)
CORPORATE OBLIGATIONS -- 2.2%
$ 1,250 Sears, Roebuck Corp. Medium Term Note, 9.75%,
due 3/21/00 BBB $ 1,424
1,500 Household Finance Corp. Medium Term Note, 10.38%,
due 12/15/00 A 1,778
- -------- --------
2,750 Total Corporate Obligations 3,202
- -------- --------
114,838 TOTAL LONG-TERM INVESTMENTS -- 89.6% 132,063
- -------- --------
SHORT-TERM INVESTMENTS -- 8.8%
1,573 Associates Corp. of North America
Demand Note, 5.444%, due 1/2/96 A-1+ 1,573
3,200 General Motors Acceptance Corp., 5.730%,
due 2/2/96 A-2 3,200
3,000 IBM Credit Corporation, 5.700%,
due 2/2/96 A-1 3,000
2,226 General Motors Acceptance Corp., 5.720%,
2/16/96 A-2 2,226
3,000 American Express Credit Corp., 5.640%,
due 2/16/96 A-1 3,000
- -------- --------
12,999 TOTAL SHORT-TERM INVESTMENTS -- 8.8% 12,999
- -------- --------
$127,837 TOTAL INVESTMENTS (COST $142,123) -- 98.4% 145,062
========
CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.6% 2,308
--------
NET ASSETS -- 100.0% $147,370
========
</TABLE>
- ---------------
WAC = Weighted Average Coupon
FR = Floating Rate
See accompanying Notes to Financial Statements.
23
<PAGE> 111
February 2, 1996
Dear Shareholders:
The discussion of a flat tax and the possible elimination of taxation on all
interest and dividends plagued the municipal market for most of 1995. The ratio
of tax-exempt yields to taxable yields rose to the 80% to 90% level early in the
year and then remained there as the various tax proposals were discussed. The
ongoing budget discussions have recently taken precedence so a consensus
approach to tax reform has not yet developed. It still appears to us that some
reduction in tax rates is possible but that something more severe, like
eliminating deductions and not grandfathering current municipal bond issues is
unlikely.
The Limited Term Tax-Free Fund had a return of 10.0% with dividends
reinvested for the year, which exceeded the 9.0% return of the Lipper Municipal
Short-Term Index but trailed the 10.6% return of the Merrill Lynch Intermediate
Municipal Bond Index. We continued to maintain our moderately defensive position
throughout the second half of the year. While returns in the tax-exempt market
trailed those in the taxable market, the absolute returns were still at the high
end of the historical range. We therefore feel more comfortable recognizing this
fact and keeping a little more cash equivalents than usual. Assets continue to
grow slowly with the total reaching almost $20 million by year end.
Bentley M. Myer
Senior Vice President
Limited Term Tax-Free Fund Portfolio
Manager
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
MERRILL LYNCH
LIMITED TERM INTERMEDIATE
MEASUREMENT PERIOD TAX- FREE MUN. BOND
(FISCAL YEAR COVERED) FUND INDEX
<S> <C> <C>
1/94 10000 10000
3/94 9649 9333
6/94 9760 9307
9/94 9872 9387
12/94 9840 9290
3/95 10156 09922
6/95 10401 10131
9/95 10627 10409
12/95 10820 10932
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE> 112
WILLIAM BLAIR MUTUAL FUNDS, INC.
LIMITED TERM TAX-FREE FUND
Portfolio of Investments December 31, 1995
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- ------- -------------------------------------------------------- -------
<S> <C> <C>
(all amounts in thousands)
REVENUE BONDS -- 47.2%
$ 250 State of Illinois Toll Highway Authority
6.550%, 1/1/96 $ 250
400 Atlanta, Georgia Water and Sewer Revenue
6.000%, 1/1/96 400
450 South Dakota Housing Development Authority
4.500%, 5/1/96 454
400 DuPage County, Illinois Water Commission
6.000%, 5/1/97 411
500 Ball State University, Indiana Student Revenue
4.900%, 7/1/97 508
235 Nevada Housing Division -- Single Family
4.750%, 10/1/97 234
210 Nevada Housing Division -- Single Family
4.950%, 4/1/98 208
500 New Jersey State Transportation Authority
4.500%, 6/15/00 504
500 Massachusetts Municipal Wholesale Electric Commission
4.100%, 7/1/00 496
250 Chicago, Illinois Waterworks Revenue
6.750%, 11/1/00 259
700 Indiana Municipal Power Agency
5.125%, 1/1/01 725
440 New Hampshire Higher Education and Health, University of
New Hampshire, 5.600%, 7/1/02 468
500 Tippecanoe County, Indiana School Building Corporation
5.500%, 7/15/02 528
300 Virginia Public School Authority
6.000%, 8/1/02 327
500 Michigan State Building Authority Series 1
5.100%, 10/1/02 513
500 Indiana Bond Bank Revenue
5.375%, 2/1/03 511
500 Philadelphia, Pennsylvania Gas Works Revenue
4.600%, 8/1/03 503
500 Wenatchee, Washington Water and Sewer Revenue
4.700%, 12/1/03 496
</TABLE>
25
<PAGE> 113
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- ------- -------------------------------------------------------- -------
<S> <C> <C>
(all amounts in thousands)
$ 260 Princeton, Indiana Pollution Control Revenue
5.750%, 12/15/03 $ 262
500 Northern Cook County, Illinois Solid Waste Agency
Contract Revenue, 6.300%, 5/1/04 552
500 Chicago, Illinois Motor Fuel Tax Revenue
5.125%, 1/1/06 512
- ------- -------
8,895 Total Revenue Bonds 9,121
- ------- -------
GENERAL OBLIGATION BONDS -- 32.4%
125 Arlington, Texas
6.800%, 5/1/96 126
300 State of Texas
6.700%, 12/1/96 308
250 Spokane County, Washington
6.650%, 9/1/98 255
250 West Allis Milwaukee, Wisconsin School District
6.300%, 4/1/00 258
530 Wisconsin State Veterans Housing Authority
5.000%, 5/1/00 547
500 Cook County, Illinois
5.500%, 11/15/01 528
250 State of New Jersey
5.400%, 2/15/03 265
500 Kane County, Illinois School District #304
5.900%, 6/1/03 542
500 State of Washington
5.300%, 9/1/03 526
240 New Richmond, Wisconsin School District
4.800%, 10/1/03 244
500 Newport News, Virginia
4.700%, 1/1/04 505
500 Florida State Board of Education Series A
5.000%, 6/1/04 517
515 Flat Rock, Michigan Community School District
5.250%, 5/1/05 534
500 Clark County, Nevada School District
7.000%, 6/1/05 567
500 Naperville, Illinois
6.000%, 12/1/05 544
- ------- -------
5,960 Total General Obligation Bonds 6,266
- ------- -------
</TABLE>
26
<PAGE> 114
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- ------- -------------------------------------------------------- -------
<S> <C> <C>
(all amounts in thousands)
CASH EQUIVALENT BONDS* -- 19.2%
$ 500 State of Massachusetts
5.900%, 12/1/97 $ 500
400 Louisiana State Recovery District Sales Tax Revenue
6.000%, 7/1/98 400
800 Southern California Edison Pollution Control Authority
5.400%, 2/28/08 800
100 Lone Star Texas Airport Improvement Authority
6.000%, 12/1/14 100
500 Delaware County, Pennsylvania
5.900%, 12/1/15 500
300 City of New York, New York
5.000%, 10/1/21 300
100 City of New York, New York
5.000%, 10/1/22 100
100 Columbia, Alabama Pollution Control Revenue
6.000%, 10/1/22 100
900 Burke County, Georgia Pollution Control Revenue
6.000%, 7/1/24 900
- ------- -------
3,700 Total Cash Equivalent Bonds 3,700
- ------- -------
$18,555 TOTAL INVESTMENTS (COST $18,793) -- 98.8% 19,087
=======
CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.2% 233
-------
NET ASSETS -- 100.0% $19,320
=======
</TABLE>
- ---------------
* These securities have maturities of more than one year but have variable rates
and demand features which qualify them as short-term securities. The rate
disclosed is that currently in effect. This rate changes periodically based on
market conditions.
At December 31, 1995 the Fund's Portfolio of Investments includes the
following categories: Education -- 23%; Water and Sewer -- 16%; State
Government -- 13%; Pollution Control -- 11%; Housing -- 10%; Utilities -- 9%;
County Government -- 7%; City Government -- 6%; State Transit -- 4%; and
Airport -- 1%.
See accompanying Notes to Financial Statements.
27
<PAGE> 115
February 2, 1996
Dear Shareholders:
The story in the short end of the bond market in 1995 was the lowering of
interest rates by the Federal Reserve Board. Their initial move took place in
July and they responded again in December. Current levels of interest rates are
implying an additional 50 to 100 basis point downward move in short-term rates.
We do not agree with this consensus as it does not appear that current economic
conditions warrant such a big adjustment.
With this decline in short-term rates, we have been reducing our average
maturity. We lowered the average to about 40 days at mid-year and it is
currently about 32 days. We are at the lower end of our normal range and we
expect to stay here unless economic conditions change. If the economy begins to
show further signs of more significant weakness, we may extend in expectation of
more aggressive moves by the Fed to lower rates.
The return of the Ready Reserves Fund for the year was 5.45%, which
exceeded the 5.38% return of our peer group of S&P rated AAA money market funds.
Assets grew quite a bit during the year and now exceed $700 million. With our
yield still in excess of 5%, we feel that we are maintaining a competitive
return.
Bentley M. Myer
Senior Vice President
Ready Reserves Fund Portfolio Manager
28
<PAGE> 116
WILLIAM BLAIR MUTUAL FUNDS, INC.
READY RESERVES FUND
<TABLE>
<CAPTION>
Portfolio of Investments December 31, 1995
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----------------------------------------------- -------- -------- ---------
<S> <C> <C> <C> <C>
(All amounts in thousands)
U.S. GOVERNMENT AGENCY GUARANTEED -- 3.9%
$ 3,033 Agency for International Development
VRN -- Peru 6.060% 2/01/96 $ 3,033
8,000 Agency for International Development
VRN -- Zimbabwe 6.106% 1/01/96 8,000
6,009 National Oceanic and Atmospheric
Administration VRN 6.258% 1/01/96 6,009
1,103 National Oceanic and Atmospheric
Administration VRN 6.288% 1/01/96 1,103
9,000 Student Loan Marketing Association VRN 5.475% 1/02/96 9,000
- --------- ---------
27,145 27,145
DEMAND NOTE -- 0.2%
1,739 Associates Corp. of North America
- --------- Demand Note VRN 5.444% 1/02/96 1,739
---------
COMMERCIAL PAPER -- 98.1%
FINANCE -- 20.8%
8,317 American Express Credit Corporation 5.650% 1/16/96 8,297
6,644 American Express Credit Corporation 5.690% 1/17/96 6,627
4,000 Associates Corporation of North America 5.670% 1/19/96 3,989
6,178 Associates Corporation of North America 5.650% 2/16/96 6,133
4,137 Associates Corporation of North America 5.670% 2/21/96 4,104
5,160 Associates Corporation of North America 5.450% 3/26/96 5,094
3,000 Avco Financial Services, Incorporated 5.700% 1/22/96 2,990
9,956 Avco Financial Services, Incorporated 5.700% 1/22/96 9,923
6,000 Avco Financial Services, Incorporated 5.700% 1/25/96 5,977
3,361 Avco Financial Services, Incorporated 5.700% 1/31/96 3,345
4,000 Avco Financial Services, Incorporated 5.640% 2/26/96 3,965
4,541 Avco Financial Services, Incorporated 5.700% 2/26/96 4,501
4,205 CIT Group Holdings, Incorporated 5.650% 1/24/96 4,190
9,000 Household Finance Corporation 5.670% 2/07/96 8,947
5,000 John Deere Capital Corporation 5.680% 2/02/96 4,975
3,918 John Deere Capital Corporation 5.690% 2/09/96 3,894
6,000 John Deere Capital Corporation 5.690% 2/13/96 5,959
1,300 John Deere Capital Corporation 5.560% 2/23/96 1,289
6,287 Norwest Financial, Inc. 5.680% 1/25/96 6,263
</TABLE>
29
<PAGE> 117
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----------------------------------------------- -------- -------- ---------
<S> <C> <C> <C> <C>
(All amounts in thousands)
$ 8,289 Norwest Financial, Inc. 5.720% 1/29/96 $ 8,252
4,725 Norwest Financial, Inc. 5.650% 1/30/96 4,703
6,690 Norwest Financial, Inc. 5.630% 2/15/96 6,643
4,000 Norwest Financial, Inc. 5.650% 2/23/96 3,967
7,564 PHH Corporation 5.680% 1/18/96 7,544
8,000 PHH Corporation 5.680% 1/19/96 7,977
6,847 PHH Corporation 5.680% 1/19/96 6,828
- --------- ---------
147,119 146,376
- --------- ---------
INSURANCE -- 19.3%
11,000 American General Finance Corporation 5.700% 1/09/96 10,986
4,200 American General Finance Corporation 5.700% 1/23/96 4,185
6,621 American General Finance Corporation 5.660% 2/08/96 6,582
6,000 American General Finance Corporation 5.560% 2/23/96 5,951
3,757 Aon Corporation 5.500% 2/16/96 3,731
2,563 Metlife Funding Incorporated 5.680% 1/18/96 2,556
5,000 Metlife Funding Incorporated 5.670% 2/01/96 4,976
8,000 Metlife Funding Incorporated 5.640% 2/02/96 7,960
4,820 Metlife Funding Incorporated 5.650% 2/02/96 4,796
4,000 Metlife Funding Incorporated 5.630% 2/05/96 3,978
2,850 Metlife Funding Incorporated 5.630% 2/06/96 2,834
4,310 Metlife Funding Incorporated 5.630% 2/07/96 4,285
3,500 Metlife Funding Incorporated 5.630% 2/21/96 3,472
4,068 Prudential Funding Corporation 5.640% 2/12/96 4,041
5,000 SAFECO Credit Corporation 5.680% 1/12/96 4,991
8,000 SAFECO Credit Corporation 5.680% 2/05/96 7,956
2,500 SAFECO Credit Corporation 5.650% 2/07/96 2,485
9,000 SAFECO Credit Corporation 5.650% 2/16/96 8,935
8,000 SAFECO Credit Corporation 5.630% 2/16/96 7,942
1,000 SAFECO Credit Corporation 5.630% 2/16/96 993
2,000 SAFECO Credit Corporation 5.400% 4/12/96 1,969
3,912 USAA Capital Corporation 5.670% 1/04/96 3,910
4,000 USAA Capital Corporation 5.670% 1/17/96 3,990
7,000 USAA Capital Corporation 5.680% 1/18/96 6,981
5,000 USAA Capital Corporation 5.660% 1/23/96 4,983
4,500 USAA Capital Corporation 5.680% 1/23/96 4,484
6,000 USAA Capital Corporation 5.650% 1/31/96 5,972
- --------- ---------
136,601 135,924
- --------- ---------
MANUFACTURING -- 15.1%
8,923 Ford Motor Credit Company 5.700% 1/08/96 8,913
2,323 Ford Motor Credit Company 5.700% 1/19/96 2,317
</TABLE>
30
<PAGE> 118
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----------------------------------------------- -------- -------- ---------
<S> <C> <C> <C> <C>
(All amounts in thousands)
$ 1,600 Ford Motor Credit Company 5.670% 1/25/96 $ 1,594
3,942 Ford Motor Credit Company 5.700% 2/07/96 3,919
6,500 Ford Motor Credit Company 5.620% 2/13/96 6,456
5,157 Ford Motor Credit Company 5.690% 2/23/96 5,114
4,300 Ford Motor Credit Company 5.500% 3/01/96 4,261
3,112 Ford Motor Credit Company 5.460% 3/29/96 3,071
2,011 General Electric Capital Corporation 5.680% 1/12/96 2,008
7,000 General Electric Capital Corporation 5.690% 1/22/96 6,977
7,173 General Electric Capital Corporation 5.680% 1/26/96 7,145
3,500 General Electric Capital Corporation 5.690% 1/30/96 3,484
4,500 General Electric Capital Corporation 5.680% 2/01/96 4,478
4,364 General Electric Capital Corporation 5.640% 2/09/96 4,337
7,000 General Electric Capital Corporation 5.500% 2/26/96 6,940
5,569 General Electric Company 5.670% 2/05/96 5,538
5,000 Paccar Financial Corporation 5.670% 1/25/96 4,981
5,000 Paccar Financial Corporation 5.660% 2/08/96 4,970
5,000 Paccar Financial Corporation 5.660% 2/09/96 4,969
5,000 Paccar Financial Corporation 5.630% 2/28/96 4,955
5,000 Paccar Financial Corporation 5.600% 3/01/96 4,953
5,000 Paccar Financial Corporation 5.560% 3/14/96 4,944
- --------- ---------
106,974 106,324
- --------- ---------
UTILITIES -- TELEPHONE -- 10.3%
12,000 American Telephone & Telegraph Corporation 5.670% 1/26/96 11,953
3,512 American Telephone & Telegraph Corporation 5.650% 2/12/96 3,489
5,000 American Telephone & Telegraph Corporation 5.610% 2/14/96 4,966
2,750 American Telephone & Telegraph Corporation 5.600% 2/20/96 2,729
2,276 American Telephone & Telegraph Corporation 5.570% 2/23/96 2,257
5,178 American Telephone & Telegraph Corporation 5.590% 2/27/96 5,132
5,000 American Telephone & Telegraph Corporation 5.490% 3/12/96 4,946
2,605 Ameritech Capital Funding Corporation 5.700% 1/16/96 2,599
7,000 Ameritech Capital Funding Corporation 5.590% 2/12/96 6,954
8,000 Bellsouth Capital Funding Corporation 5.660% 1/11/96 7,987
7,000 Bellsouth Capital Funding Corporation 5.630% 1/29/96 6,969
4,880 GTE California, Incorporated 5.630% 2/22/96 4,840
5,000 GTE California, Incorporated 5.560% 3/29/96 4,932
3,000 Pacific Bell 5.650% 1/31/96 2,986
- --------- ---------
73,201 72,739
- --------- ---------
UTILITIES -- ENERGY & GAS -- 6.1%
5,010 Consolidated Natural Gas Company 5.620% 2/06/96 4,982
3,210 Consolidated Natural Gas Company 5.630% 2/07/96 3,192
</TABLE>
31
<PAGE> 119
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----------------------------------------------- -------- -------- ---------
<S> <C> <C> <C> <C>
(All amounts in thousands)
$ 4,000 National Rural Utilities Cooperative Finance
Corp. 5.690% 1/12/96 $ 3,993
17,000 National Rural Utilities Cooperative Finance
Corp. 5.680% 1/24/96 16,938
6,500 National Rural Utilities Cooperative Finance
Corp. 5.650% 2/15/96 6,454
3,100 National Rural Utilities Cooperative Finance
Corp. 5.620% 2/21/96 3,075
4,500 National Rural Utilities Cooperative Finance
Corp. 5.550% 3/06/96 4,455
- --------- ---------
43,320 43,089
- --------- ---------
FOOD/BEVERAGE/TOBACCO -- 4.9%
10,000 Anheuser Busch Companies, Incorporated 5.650% 1/10/96 9,986
8,000 Brown - Forman Corporation 5.680% 1/04/96 7,996
3,473 Brown - Forman Corporation 5.700% 1/16/96 3,465
4,945 Campbell Soup Company 5.670% 2/06/96 4,917
8,000 Campbell Soup Company 5.670% 2/06/96 7,954
- --------- ---------
34,418 34,318
- --------- ---------
BROKERAGE -- 4.8%
5,200 Merrill Lynch & Company, Inc. 5.800% 1/03/96 5,198
9,000 Merrill Lynch & Company, Inc. 5.760% 1/18/96 8,975
3,500 Merrill Lynch & Company, Inc. 5.770% 1/26/96 3,486
7,000 Morgan Stanley Group, Incorporated 5.730% 1/05/96 6,996
3,000 Morgan Stanley Group, Incorporated 5.720% 1/10/96 2,996
6,432 Morgan Stanley Group, Incorporated 5.450% 3/22/96 6,353
- --------- ---------
34,132 34,004
- --------- ---------
CHEMICAL/FOREST -- 3.6%
4,305 DuPont (E.I.) de Nemours & Company 5.650% 1/19/96 4,293
4,773 DuPont (E.I.) de Nemours & Company 5.670% 1/26/96 4,754
8,265 Great Lakes Chemical Corporation 5.700% 1/22/96 8,238
8,000 Great Lakes Chemical Corporation 5.650% 2/01/96 7,961
- --------- ---------
25,343 25,246
- --------- ---------
DRUGS/HEALTH -- 3.2%
6,500 Schering Corporation 5.680% 1/16/96 6,485
8,000 Schering Corporation 5.560% 1/17/96 7,980
8,000 Warner - Lambert Company 5.580% 2/23/96 7,934
- --------- ---------
22,500 22,399
- --------- ---------
ENERGY -- 3.1%
4,000 Chevron Oil Finance Company 5.680% 1/29/96 3,982
7,160 Chevron Oil Finance Company 5.700% 2/12/96 7,113
</TABLE>
32
<PAGE> 120
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----------------------------------------------- -------- -------- ---------
<C> <S> <C> <C> <C>
(All amounts in thousands)
$ 5,000 Chevron U.K. Investment PLC 5.700% 2/05/96 $ 4,972
5,796 Mobil Finance Corporation (Australia) 5.640% 2/02/96 5,767
- --------- ---------
21,956 21,834
- --------- ---------
MEDIA/ENTERTAINMENT -- 3.0%
6,000 Dun and Bradstreet Corporation 5.580% 1/16/96 5,986
8,000 Knight Ridder, Incorporated 5.640% 2/14/96 7,945
7,500 McGraw Hill, Incorporated 5.680% 2/02/96 7,462
- --------- ---------
21,500 21,393
- --------- ---------
ELECTRONIC/TECHNOLOGY -- 2.5%
3,048 IBM Corporation 5.690% 2/01/96 3,033
3,798 IBM Corporation 5.700% 2/02/96 3,779
5,500 IBM Credit Corporation 5.700% 1/30/96 5,475
5,000 Pitney Bowes Credit Corporation 5.640% 1/31/96 4,976
- --------- ---------
17,346 17,263
- --------- ---------
MERCHANDISING -- 1.4%
7,000 Winn - Dixie Stores, Incorporated 5.660% 2/08/96 6,958
2,716 Winn - Dixie Stores, Incorporated 5.650% 2/23/96 2,694
- --------- ---------
9,716 9,652
694,126 Total Commercial Paper 690,561
- --------- ---------
PORTFOLIO WEIGHTED AVERAGE MATURITY 32 Days
$ 723,010 TOTAL INVESTMENTS -- 102.2% 719,445
========
LIABILITIES, PLUS CASH AND OTHER
ASSETS -- (2.2%) (15,452)
---------
NET ASSETS -- 100.0% $ 703,993
========
</TABLE>
- ---------------
VRN = Variable Rate Note
See accompanying Notes to Financial Statements.
33
<PAGE> 121
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(all amounts in thousands)
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GROWTH
FUND FUND
-------- -------------
<S> <C> <C>
ASSETS
Investments at market (cost $270,957 and $83,301) $365,478 $89,577
Cash -- 4
Receivable for:
Fund shares sold 926 270
Interest and dividends 316 52
Foreign withholding tax -- 149
Unrealized appreciation on foreign currency forward contracts -- 343
Deferred organization costs -- 20
Other assets 1 3
-------- -------------
Total assets 366,721 90,418
LIABILITIES
Payable for:
Fund shares redeemed 111 26
Investments purchased 3,297 462
Management fee and organization costs (Notes 1 and 2) 154 103
Other 123 65
-------- -------------
Total liabilities 3,685 656
-------- -------------
Net assets $363,036 $89,762
========= =============
CAPITAL
Capital stock $0.001 par value; 30,515; and 6,842
shares issued and outstanding $ 30 $ 7
Paid-in-surplus 268,053 83,708
Net unrealized appreciation on investments
and foreign currency transactions (net of unrealized
PFIC gain distribution of $0 and $414) 94,521 6,212
Accumulated undistributed net realized gain (loss)
on investments and foreign currency transactions 113 (452)
Undistributed net investment income 319 287
-------- -------------
Net assets $363,036 $89,762
========= =============
Net asset value per share $ 11.90 $ 13.12
========= =============
</TABLE>
34
<PAGE> 122
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(all amounts in thousands)
<TABLE>
<CAPTION>
LIMITED TERM
INCOME TAX-FREE READY RESERVES
FUND FUND FUND
-------- ------------ --------------
<S> <C> <C> <C>
ASSETS
Investments (Cost $142,123; $18,793; and $719,445,
respectively) $145,062 $19,087 $719,445
Cash -- 55 --
Receivable for:
Fund shares sold 1,246 -- 8,500
Investments sold 1 -- --
Interest 1,475 234 507
Deferred organization costs -- 20 --
Other assets 2 -- 22
-------- ------------ --------------
Total assets 147,786 19,396 728,474
LIABILITIES
Payable for:
Fund shares redeemed 276 50 23,829
Management fee and organization costs
(Notes 1 and 2) 75 20 360
Dividends -- -- 121
Other 65 6 171
-------- ------------ --------------
Total liabilities 416 76 24,481
-------- ------------ --------------
Net assets $147,370 $19,320 $703,993
========= ============= ===============
CAPITAL
Capital stock ($0.001 par value; and 13,936; 1,941;
and 703,993 shares issued and outstanding,
respectively) $ 14 $ 2 $ 704
Paid-in-surplus 148,393 19,050 703,289
Net unrealized appreciation
on investments 2,939 294 --
Accumulated undistributed net realized
(loss) on investments (3,963) (30) --
Undistributed net investment income (13) 4 --
-------- ------------ --------------
Net assets $147,370 $19,320 $703,993
========= ============= ===============
Net asset value per share $ 10.57 $ 9.96 $ 1.00
========= ============= ===============
</TABLE>
35
<PAGE> 123
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(all amounts in thousands)
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GROWTH
FUND FUND
------- -------------
<S> <C> <C>
Investment income
Dividends $ 1,621 $ 1,917
Interest 1,297 178
------- ------
2,918 2,095
Less foreign tax withheld (6) (194)
------- ------
Total investment income 2,912 1,901
------- ------
Expenses
Investment advisory fees (Note 2) 1,561 887
Custodian fees 77 190
Professional fees 41 37
Transfer agent fees 95 15
Registration fees 45 31
Organization costs -- 10
Miscellaneous 100 27
------- ------
Total expenses 1,919 1,197
------- ------
Net investment income 993 704
Net realized and unrealized gain (loss) on investments,
foreign currency and other assets and liabilities
Net realized gain (loss) on investments 13,274 (904)
Less foreign tax withheld on investments sold -- (18)
Net realized gain on foreign currency transactions -- 519
------- ------
Total net realized gain (loss) 13,274 (403)
Change in net unrealized appreciation on investments,
and other assets and liabilities (Note 1) 58,269 5,958
------- ------
Net realized and unrealized gain on investments,
foreign currency and other assets and liabilities 71,543 5,555
------- ------
Net increase in net assets resulting from operations $72,536 $ 6,259
======= ======
</TABLE>
36
<PAGE> 124
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(all amounts in thousands)
<TABLE>
<CAPTION>
LIMITED TERM READY
INCOME TAX-FREE RESERVES
FUND FUND FUND
------- ------------ --------
<S> <C> <C> <C>
Investment income
Interest $10,278 $ 763 $36,158
------- ------------ --------
Total investment income 10,278 763 36,158
------- ------------ --------
Expenses
Investment advisory fees (Note 2) 868 94 3,613
Custodian fees 57 41 115
Professional fees 33 29 38
Transfer agent fees 29 6 288
Registration fees 14 15 96
Organization costs 9 6 --
Miscellaneous 3 29 162
------- ------------ --------
Total expenses before waiver 1,013 220 4,312
Less waiver of expenses (Note 2) -- (214) --
------- ------------ --------
Net investment income 9,265 757 31,846
Net realized and unrealized gain (loss) on investments
Net realized loss on investments (955) (22) --
Change in net unrealized appreciation on investments 11,783 764 --
------- ------------ --------
Net realized and unrealized gain on investments 10,828 742 --
------- ------------ --------
Net increase in net assets resulting from operations $20,093 $1,499 $31,846
======= =========== =======
</TABLE>
37
<PAGE> 125
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(all amounts in thousands)
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH
GROWTH FUND FUND
1995 1994 1995 1994
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Operations
Net investment income $ 993 $ 496 $ 704 $ 91
Net realized gain (loss) on investments and foreign currency transactions 13,274 12,614 (403) 3,093
Change in net unrealized appreciation on investments and other assets and
liabilities 58,269 (2,378) 5,958 (4,427)
-------- -------- ------- -------
Net increase (decrease) in net assets resulting from operations 72,536 10,732 6,259 (1,243)
Distributions to shareholders from
Net investment income (817) (423) (880)(a) (114)
Net realized gain (13,275) (12,616) -- (3,679)
Tax return of capital -- -- -- (431)
-------- -------- ------- -------
(14,092) (13,039) (880) (4,224)
Capital stock transactions
Shares sold 106,709 78,439 20,612 34,962
Shares issued in reinvestment of income
dividends and capital gain distributions 12,714 11,700 717 3,571
Less shares redeemed (32,391) (20,318) (7,349) (2,961)
-------- -------- ------- -------
Change from capital stock transactions 87,032 69,821 13,980 35,572
-------- -------- ------- -------
Change in net assets 145,476 67,514 19,359 30,105
Net assets
Beginning of period 217,560 150,046 70,403 40,298
-------- -------- ------- -------
End of period $363,036 $217,560 $89,762 $70,403
======== ======== ======= =======
- -------------------------
Undistributed net investment income at the
end of the period $ 319 $ 143 $ 343 $ --
======== ======== ======= =======
- -------------------------
Capital stock transactions
Shares sold 9,647 8,055 1,688 2,571
Shares issued in reinvestment of income
dividends and capital gain distributions 1,092 1,251 55 289
Less shares redeemed (2,875) (2,072) (595) (224)
-------- -------- ------- -------
Change from capital stock transactions 7,864 7,234 1,148 2,636
======== ======== ======= =======
</TABLE>
- ---------------
(a) Includes $414 relating to PFIC transactions which are treated as ordinary
income for Federal income tax purposes.
38
<PAGE> 126
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(all amounts in thousands)
<TABLE>
<CAPTION>
LIMITED TERM
INCOME FUND TAX-FREE FUND READY RESERVES FUND
1995 1994 1995 1994(A) 1995 1994
-------- -------- ------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income $ 9,265 $ 10,929 $ 757 $ 477 $ 31,846 $ 17,669
Net realized (loss) on investments (955) (3,010) (22) (8) -- (1,268)
Change in net unrealized appreciation (depreciation)
on investments 11,783 (9,564) 764 (470) -- --
-------- -------- ------- ------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations 20,093 (1,645) 1,499 (1) 31,846 16,401
-------- -------- ------- ------- ----------- -----------
Distributions to shareholders from
Net investment income (9,438) (10,769) (759) (471) (31,846) (17,669)
Net realized gain -- (68) -- -- -- --
-------- -------- ------- ------- ----------- -----------
(9,438) (10,837) (759) (471) (31,846) (17,669)
Capital contribution -- -- -- -- -- 1,268
Capital stock transactions
Shares sold 23,930 16,905 7,367 15,809 2,514,548 1,950,105
Shares issued in reinvestment of income
dividends and capital gain distributions 6,875 7,707 430 280 31,117 17,119
Less shares redeemed (37,880) (72,721) (3,333) (1,501) (2,362,949) (1,923,215)
-------- -------- ------- ------- ----------- -----------
Change from capital stock transactions (7,075) (48,109) 4,464 14,588 182,716 44,009
-------- -------- ------- ------- ----------- -----------
Change in net assets 3,580 (60,591) 5,204 14,116 182,716 44,009
Net assets
Beginning of period 143,790 204,381 14,116 -- 521,277 477,268
-------- -------- ------- ------- ----------- -----------
End of period $147,370 $143,790 $19,320 $14,116 $ 703,993 $ 521,277
======== ======== ======= ======= ========== ==========
- -------------------------
Undistributed net investment income at the
end of the period $ (13) $ 160 $ 4 $ 6 $ -- $ --
======== ======== ======= ======= ========== ==========
- -------------------------
Capital stock transactions
Shares sold 2,337 1,646 750 1,617 2,514,548 1,950,105
Shares issued in reinvestment of income
dividends and capital gain distributions 668 760 44 29 31,117 17,119
Less shares redeemed (3,670) (7,126) (342) (157) (2,362,949) (1,923,215)
-------- -------- ------- ------- ----------- -----------
Change from capital stock transactions (665) (4,720) 452 1,489 182,716 44,009
======== ======== ======= ======= ========== ==========
</TABLE>
- ---------------
(a) For the period from January 24, 1994 (Commencement of Operations) to
December 31, 1994.
39
<PAGE> 127
NOTES TO FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
(a) Description of the Fund
William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end
diversified mutual fund consisting of five portfolios, each with its own
investment objective and policies.
The Growth Fund is a portfolio whose principal objective is to provide
long-term appreciation of capital by investing in well-managed companies in
growing industries.
The International Growth Fund is a portfolio which invests primarily in
common stocks issued by companies domiciled outside the United States and
securities convertible into, ex-changeable for, or having the right to buy such
common stocks. The investment objective of the portfolio is long-term capital
appreciation through investment in well-managed, quality, growth companies.
The Income Fund is a portfolio designed to provide investors with as high a
level of current income as is consistent with preservation of capital.
The Limited Term Tax-Free Fund is a portfolio designed to provide investors
with as high a level of current income exempt from Federal income tax as is
consistent with preservation of capital.
The Ready Reserves Fund is a money market portfolio designed for investors
who are looking for professional management of their reserve assets. The Ready
Reserves Fund portfolio seeks to obtain maximum current income consistent with
preservation of capital and invests exclusively in high quality money market
instruments.
All of the portfolio's investments are subject to market fluctuations and
fiscal risks.
(b) Investment Securities
Equity securities traded on national securities markets are valued at the
last sale price or, in the absence of a sale on the date of determination, at
the latest bid price. Long-term fixed-income securities are valued by using
market quotations or independent 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. The value of a foreign
security held is determined based upon its sale price on the foreign exchange or
market on which it is traded as of the close of the appropriate exchange or, if
there have been no sales during the day, at the latest bid price. Other
securities are valued at fair value as determined in good faith by the Board of
Directors. Short-term securities in all Funds except Ready Reserves Fund are
valued at cost which approximates market value. Securities in Ready Reserves
Fund are valued on the amortized cost method. Under this method, any premium or
discount, as of the date an investment security is acquired, is amortized on a
straight-line basis to maturity.
Interest income is determined on the basis of interest accrued, adjusted
for amortization of premium or discount. Dividend income is recorded on the
ex-dividend date, except that certain
40
<PAGE> 128
dividends from foreign securities are recorded as soon as the information is
available. Securities transactions are recorded on the trade date. Realized
gains and losses from securities transactions are reported on an identified cost
basis.
Put bonds may be redeemed at the discretion of the holder on specified
dates prior to maturity. Variable rate bonds and floating rate notes earn
interest at a coupon rate which fluctuates at specific time intervals. The
interest rates shown in the Income Fund, Limited Term Tax-Free Fund and Ready
Reserves Fund Portfolios of Investments are the coupon rates in effect at
December 31, 1995.
(c) Share Valuation and Dividends to Shareholders
Shares are sold and redeemed on a continuous basis at net asset value. Each
Fund determines net asset value per share by dividing the value of its Fund
assets, less liabilities, by the number of shares outstanding as of the earlier
of 3:00 p.m. or the daily close of business of the New York Stock Exchange for
Growth Fund and International Growth Fund, 2:00 p.m. for Income Fund and Limited
Term Tax-Free Fund and at 3:00 p.m. for Ready Reserves Fund. Dividends from net
investment income of the Growth Fund, International Growth Fund, Income Fund,
Limited Term Tax-Free Fund and Ready Reserves Fund are declared at least
semi-annually, annually, monthly, monthly and daily, respectively. Dividends
payable to shareholders are recorded on the ex-dividend date. Dividends are
determined in accordance with Federal income tax principles which may treat
certain transactions differently from generally accepted accounting principles.
The International Growth Fund has elected to mark-to-market its investments in
Passive Foreign Investment Companies ("PFIC") for Federal income tax purposes.
In accordance with this election, $414,000 in unrealized appreciation was
recognized in 1995. The International Growth Fund's distribution for 1994
included $431,097 relating to a tax return of capital. The permanent book and
tax difference relating to this distribution resulted in a reduction to
Paid-in-Surplus.
(d) Repurchase Agreements
The Fund may enter into repurchase agreements through its custodian,
whereby the Fund acquires ownership of a debt security and the custodian agrees,
at the time of the sale, to repurchase the debt security from the Fund at a
mutually agreed upon time and price. The Fund's policy is to take possession of
securities under repurchase agreements. The Fund minimizes credit risk by (i)
monitoring credit exposure of the custodian and (ii) monitoring collateral value
on a daily basis and requiring additional collateral to be deposited with or
returned to the Fund when deemed necessary.
(e) Foreign Currency Translation and Forward Foreign Currency Contracts
All assets and liabilities of the International Growth Fund denominated in
foreign currencies are translated into U.S. dollar amounts at the current
exchange rate at the day of valuation. The International Growth Fund may enter
into forward foreign currency contracts as a means of managing the risks
associated with changes in exchange rates for the purchase or sale of a specific
amount of a particular foreign currency. Additionally, from time to time, the
Fund may enter into contracts to hedge the value, in U.S. dollars, of securities
it currently owns. Forward foreign currency contracts and foreign currencies are
valued at the forward and current exchange rates,
41
<PAGE> 129
respectively, prevailing on the day of valuation. Realized gains and losses from
foreign currency transactions associated with purchases and sales of investments
are included in the cost or proceeds. All other foreign currency transactions
are included in net realized gain or loss from investments.
(f) Income Taxes
Each Fund intends to comply with the special provisions of the Internal
Revenue Code available to regulated investment companies and, therefore, no
provision for Federal income taxes has been made in the accompanying financial
statements since the Funds intend to distribute their taxable income to their
shareholders and be relieved of all Federal income taxes. At December 31, 1995
the International Growth Fund, the Income Fund and the Limited Term Tax-Free
Fund have capital loss carryforwards of $118,000, $3,965,000 and $30,000,
respectively. These loss carryforwards, which expire in 2003, 2002 and 2003,
respectively, can be used to offset capital gains.
(g) Organization Costs
The initial organization costs of the International Growth Fund, Income
Fund and the Limited Term Tax-Free Fund have been paid or accrued by William
Blair & Company (the "Company") and the Funds will reimburse the Company for the
amount of such expenses not exceeding $50,000. The deferred organization costs
are being amortized on the straight-line method and repaid to the Company over a
five year period.
(2) INVESTMENT ADVISORY, TRANSACTIONS WITH AFFILIATES AND DIRECTOR'S FEES
The Company serves as the Funds' Investment Adviser (the "Adviser") and
provides administrative services to the Funds under a Management Agreement.
Growth Fund pays the Company an advisory fee monthly at an annual rate of
.625% of the first $75 million of average daily net assets of the Fund and .50%
of the average daily net assets in excess of $75 million. The Fund may from time
to time own portfolio securities with respect to which the Adviser makes a
market and/or takes a position.
International Growth Fund pays the Company an advisory fee monthly at an
annual rate of 1.10% of the first $100 million of average daily net assets and
.95% of average daily net assets in excess of $100 million. The Company has a
sub-investment management agreement with Framlington Overseas Investment
Management Limited (U.K.) and pays the sub-adviser a monthly fee at an annual
rate equal to 0.40% of the first $100 million of average daily net assets and
0.275% of average daily assets in excess of $100 million.
Income Fund pays the Company an advisory fee monthly at an annual rate of
.25% of the first $100 million of average daily net assets of the Fund, .20% of
the next $150 million and .15% in excess of $250 million of average daily net
assets, plus 5.0% of the gross income earned.
Limited Term Tax-Free Fund pays the Company an advisory fee monthly at an
annual rate of .25% of the first $250 million of average daily net assets of the
Fund and .20% in excess of $250 million, plus 7.0% of the gross income earned.
The Company has voluntarily agreed to waive its management fee and has paid all
other operating expenses of the Fund, except for the amortization of
organization costs.
42
<PAGE> 130
Ready Reserves Fund pays the Company an advisory fee monthly at an annual
rate of .625% of the first $250 million of average daily net assets of the Fund,
.60% of the next $250 million, .55% of the next $500 million, .50% of the next
$2 billion, .45% of the next $2 billion, and .40% of average daily net assets in
excess of $5 billion.
The Company purchased U.S. Government guaranteed obligations at amortized
cost from the Ready Reserves Fund in 1994. The excess of the purchase price
(amortized cost) over the fair market value at the date of purchase was
reflected as a capital contribution to the Fund.
The Funds paid fees of $53,500 to non-affiliated directors of the Funds for
the period ended December 31, 1995.
(3) INVESTMENT TRANSACTIONS (000 OMITTED)
Investment transactions, excluding money market instruments, for the period
ended December 31, 1995, are as follows:
<TABLE>
<CAPTION>
INTERNATIONAL LIMITED TERM
GROWTH GROWTH INCOME TAX-FREE
FUND FUND FUND FUND
-------- ------------- ------- ------------
<S> <C> <C> <C> <C>
Purchases $162,814 $73,889 $70,669 $ 4,563
Proceeds from sales and maturities 87,922 59,521 75,728 3,794
Gross unrealized appreciation
(depreciation) at December 31, 1995
is as follows:
Unrealized appreciation $ 98,802 $11,041 $ 3,275 $ 311
Unrealized depreciation (4,281) (4,765) (336) (17)
-------- ------- ------- -------
Net unrealized appreciation $ 94,521 $ 6,276 $ 2,939 $ 294
======== ======= ======= =======
</TABLE>
Cost of investments is the same for financial statement and federal income
tax purposes.
(4) FORWARD FOREIGN CURRENCY CONTRACTS (000 OMITTED)
In order to protect itself against a decline in the value of the Japanese
yen against the U.S. dollar, the International Growth Fund entered into a
forward contract with its custodian to deliver Japanese Yen in exchange for U.S.
dollars as described below. International Growth Fund bears the market risk that
arises from changes in foreign exchange rates and bears the credit risk if the
counterparty fails to perform under the contract. The unrealized gain associated
with this forward contract is reflected in the accompanying financial
statements. At December 31, 1995, the International Growth Fund had the
following forward foreign currency contract outstanding:
<TABLE>
<CAPTION>
CONTRACT UNREALIZED
FOREIGN CURRENCY AMOUNT IN SETTLEMENT GAIN
TO BE DELIVERED U.S. DOLLARS DATE AT 12/31/95
- --------------------- ------------ ------------------ -----------
<S> <C> <C> <C>
900,000 Japanese Yen $9,086 January 19, 1996 $ 343
</TABLE>
43
<PAGE> 131
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
GROWTH FUND 1995 1994 1993 1992 1991
- -------------------------------------------------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970
Income from investment operations:
Net investment income .034 .027 .035 .045 .070
Net realized and unrealized gain on investments 2.750 .581 1.389 .671 2.970
-------- -------- -------- -------- -------
Total from investment operations 2.784 .608 1.424 .716 3.040
Less distributions from:
Net investment income .030 .025 .035 .047 .070
Net realized gain .454 .713 1.049 .769 .450
-------- -------- -------- -------- -------
Total distributions .484 .738 1.084 .816 .520
-------- -------- -------- -------- -------
Net asset value, end of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490
======== ======== ======== ======== =======
Total return (%) 29.07 6.45 15.51 7.61 44.37
Ratios to average daily net assets (%):
Expenses .65 .71 .78 .83 .90
Net investment income .34 .32 .38 1.34 .83
Supplemental data:
Net assets at end of period (in thousands) $363,036 $217,560 $150,046 $111,082 $91,433
Portfolio turnover rate (%) 32 46 55 27 33
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------- DECEMBER 31,
INTERNATIONAL GROWTH FUND 1995 1994 1993 1992(a)(b)
- ----------------------------------------------------------------- ------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.360 $13.180 $10.130 $10.000
Income from investment operations:
Net investment income (loss) .105 0.016 0.008 (0.011)
Net realized and unrealized gain (loss) on investments
and foreign currency and other assets and liabilities .785 (0.025) 3.401 0.141
------- ------- ------- -------
Total from investment operations .890 (0.009) 3.409 0.130
Less distributions from:
Net investment income .130(c) 0.024 -- --
Net realized gain -- 0.714 0.359 --
Tax return of capital -- 0.073 -- --
------- ------- ------- -------
Total distributions .130 0.811 0.359 --
------- ------- ------- -------
Net asset value, end of period $13.120 $12.360 $13.180 $10.130
======= ======= ======= =======
Total return (%) 7.22 (0.040) 33.6 1.3
Ratios to average daily net assets (%):
Expenses(d) 1.48 1.51 1.71 1.88
Net investment income(d) .87 .15 .11 (.56)
Supplemental data:
Net assets at end of period (in thousands) $89,762 $70,403 $40,298 $10,767
Portfolio turnover rate (%) 77 40 83 5
</TABLE>
- ---------------
(a) Ratios are annualized except total returns for periods less than one year.
(b) For the period October 1, 1992 (Commencement of Operations) to December 31,
1992.
(c) Includes $.061 in PFIC transactions which are treated as ordinary income for
Federal income tax purposes.
(d) Without the waiver of expenses in 1993 and 1992, the expense ratios would
have been 2.08% and 2.55% and the net investment income ratios would have
been (.25)% and (1.22)%, respectively.
44
<PAGE> 132
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
INCOME FUND 1995 1994 1993 1992 1991
- --------------------------------------------------------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.850 $ 10.580 $ 10.600 $ 10.770 $10.200
Income from investment operations:
Net investment income .646 .661 .651 .832 .945
Net realized and unrealized gain (loss) on investments .732 (.741) .159 (.089) .638
-------- -------- -------- -------- -------
Total from investment operations 1.378 (.080) .810 .743 1.583
Less distributions:
Net investment income .658 .646 .651 .827 .870
Net realized gain -- .004 .179 .086 .143
-------- -------- -------- -------- -------
Total distributions .658 .650 .830 .913 1.013
-------- -------- -------- -------- -------
Net asset value, end of period $ 10.570 $ 9.850 $ 10.580 $ 10.600 $10.770
======== ======== ======== ======== =======
Total return (%) 14.37 (.74) 7.82 7.17 16.47
Ratios to average daily net assets (%):
Expenses(a) .68 .68 .70 .88 .92
Net investment income(a) 6.24 6.33 5.96 7.69 8.33
Supplemental data:
Net assets at end of period (in thousands) $147,370 $143,790 $204,381 $136,896 $83,041
Portfolio turnover rate (%) 54 63 114 47 64
</TABLE>
- ---------------
(a) Without the waiver of expenses in 1991, the expense ratio would have been
1.06% and the net investment income ratio would have been 8.19%.
45
<PAGE> 133
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
LIMITED TERM TAX-FREE FUND 1995 1994(a)(b)
- ------------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Net asset value, beginning of period $ 9.480 $ 10.000
Income from investment operations:
Net investment income .446 .362
Net realized and unrealized gain (loss) on investments .482 (.524)
------------ ------------
Total from investment operations .928 (.162)
Less distributions
Net investment income .448 .358
------------ ------------
Total distributions .448 .358
------------ ------------
Net asset value, end of period $ 9.960 $ 9.480
============= =============
Total return (%) 9.96 (1.60)
Ratios to average daily net assets (%):
Expenses (c) .04 .11
Net investment income(c) 4.61 4.06
Supplemental data:
Net assets at end of period (in thousands) $ 19,320 $ 14,116
Portfolio turnover rate (%) 77 121
</TABLE>
(a) Ratios are annualized except for total returns for periods of less than a
year.
(b) For the period from January 24, 1994 (Commencement of Operations) to
December 31, 1994.
(c) Without the waiver of expenses in 1995 and 1994, the expense ratios would
have been 1.34% and 1.35% and net investment income ratios would have been
3.31% and 2.82%, respectively.
FEDERAL TAX STATUS OF DIVIDENDS
All of the dividends paid from net investment income by the Fund constitute
tax-exempt interest that is not taxable for Federal income tax purposes;
however, a portion of the dividends paid may be includable in the alternative
minimum tax calculation.
- ---------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
READY RESERVES FUND 1995 1994 1993 1992 1991
- -------------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
Income from investment operations:
Net investment income .0530 .0361 .0261 .0327 .0551
Net realized loss on investments -- (.0026) -- -- --
-------- -------- -------- -------- --------
Total from investment operations .0530 .0335 .0261 .0327 .0551
Less distributions from:
Net investment income .0530 .0361 .0261 .0327 .0551
-------- -------- -------- -------- --------
Total distributions .0530 .0361 .0261 .0327 .0551
-------- -------- -------- -------- --------
Capital contribution -- .0026 -- -- --
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000
======== ======== ======== ======== ========
Total return (%) 5.45 3.67(d) 2.64 3.32 5.64
Ratios to average daily net assets (%):
Expenses .72 .71 .71 .71 .71
Net investment income 5.30 3.61 2.61 3.27 5.51
Supplemental data:
Net assets at end of period (in thousands) $703,993 $521,277 $477,268 $448,797 $402,978
</TABLE>
- ---------------
(d) The total return includes the impact of the Company's capital contribution.
Without the Company's capital contribution, the total return would have been
3.40%.
46
<PAGE> 134
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
WILLIAM BLAIR MUTUAL FUNDS, INC.
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of William Blair Mutual Funds, Inc.
(comprised of Growth Fund, International Growth Fund, Income Fund, Limited Term
Tax-Free Fund and Ready Reserves Fund) (together the "Funds") as of December 31,
1995, and the related statements of operations for the year then ended and
changes in net assets for each of the two fiscal years in the period then ended,
and the financial highlights for the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
William Blair Mutual Funds, Inc. at December 31, 1995, and the results of their
operations, the changes in their net assets and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 2, 1996
47
<PAGE> 135
THE BOARD OF DIRECTORS
CONRAD FISCHER, CHAIRMAN
Principal, William Blair & Company, L.L.C.
VERNON ARMOUR
Private Investor
C. MATHEWS DICK, JR.
Chairman, Intelligent Office Corp.
EDWARD M. HOBAN
Retired Principal,
William Blair & Company, L.L.C.
GEORGE KELM
Retired Chairman of the Board,
Sahara Coal Company, Inc.
JAMES M. MCMULLAN
Principal, William Blair & Company, L.L.C.
JOHN H. OLWIN, MD
Emeritus Attending Surgeon, Presbyterian-
St. Luke's Hospital and Emeritus
Professor of General Surgery,
Rush Medical College
JOHN B. SCHWEMM
Retired Chairman and
Chief Executive Officer,
R.R. Donnelley & Sons Company
JOHN W. STRAUB
Chairman and President,
W.F. Straub & Company
W. JAMES TRUETTNER, JR., SENIOR VICE PRESIDENT
Principal, William Blair & Company, L.L.C.
- ---------------------------------------------------------
Rocky Barber, President
Mark A. Fuller, III, Senior Vice President
Bentley M. Myer, Senior Vice President
Norbert W. Truderung, Senior Vice President
James S. Kaplan, Vice President
John P. Kayser, Vice President
Terence M. Sullivan, Vice President
Walter Rucinski, Treasurer
Sheila M. Johnson, Secretary
- ---------------------------------------------------------
(WM BLAIR LOGO)
222 West Adams Street
Chicago, Illinois 60606
312-364-8000
INVESTMENT ADVISER
(WM BLAIR LOGO)
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 9104
Boston, MA 02266-9104
800-635-2886
(Massachusetts 800-635-2840)
(COPYWHITE)
GROWTH FUND
INTERNATIONAL
GROWTH FUND
INCOME FUND
LIMITED TERM
TAX-FREE FUND
READY RESERVES
FUND
DECEMBER 31, 1995
ANNUAL REPORT
This report has been prepared for the information of the shareholders of William
Blair Mutual Funds, Inc. It is not to be construed as an offering to sell or buy
any securities of the Fund. Such offering is made only by the Prospectus.
<PAGE> 136
WILLIAM BLAIR MUTUAL FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements:
(i) Financial Statements included in Part A of
the Registration Statement:
For Growth Fund, International Growth Fund,
Income Fund, and Ready Reserves Fund:
Financial Highlights
(ii) Financial Statements included in Part B of
the Registration Statement:
The following information contained in the
Annual Report for William Blair Mutual Funds,
Inc. (Growth Fund, International Growth
Fund, Income Fund, Limited Term Tax-Free Fund
and Ready Reserves Fund) for the fiscal year
ended December 31, 1995 is incorporated by
reference into Part A.
William Blair Mutual Funds, Inc.
Growth Fund, International Growth Fund,
Income Fund, Limited Term Tax-Free
Fund and Ready Reserves Fund
Statements of Assets and
Liabilities at
December 31, 1995
Statements of Operations
for the year ended
December 31, 1995
Statements of Changes in
Net Assets for the years
ended December 31, 1995 and
1994 (for the period from
January 24, 1994 (Commencement
of Operations) to December 31,
1995 for the Limited Term
Tax-Free Fund)
Notes to Financial Statements
C-1
<PAGE> 137
Growth Fund, International Growth Fund,
Income Fund, Limited Term Tax-Free
Fund and Ready Reserves Fund
Schedules II, III, IV, V,
VI and VII are omitted as the
required information is not
present
Schedule I has been
omitted as the required
information is presented in the
Schedules of Investments at
December 31, 1995
(b) Exhibits
1a. Articles of Incorporation.1/
1b. Form of Amendment to Articles of
Incorporation.
2. By-laws, as amended.5/
3. Inapplicable
4. See items 1 and 2 above.
5a. Form of Management Agreement.
5b. Form of Management Agreement dated January 5,
1988.2/
5c. Amendment to Management Agreement.4/
5d. Form of Second Amendment to Management
Agreement.6/
5e. Form of Third Amendment to Management
Agreement.7/
5f. Form of Sub-Investment Advisory
Agreement.8/
_____________________
1/ Also filed as an exhibit to Registrant's initial Registration
Statement on Form N-1A as filed on or about September 25, 1987.
2/ Incorporated herein by reference to Registrant's initial Registration
Statement on Form N-1A as filed on or about September 25, 1987.
4/ Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A as filed on or about
July 27, 1990.
5/ Also filed as an exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1991.
6/ Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1991.
7/ Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A as filed on or about
July 22, 1992.
8/ Form of agreement filed as an exhibit to Post-Effective Amendment No.
7 to Registrant's Registration Statement on Form N-1A as filed on or
about July 22, 1992.
C-2
<PAGE> 138
5g. Form of Fourth Amendment to Management
Agreement.9/
6. Underwriting Agreement.3/
7. Inapplicable.
8. Custodian Agreement.
9. Inapplicable.
10. Opinion and Consent of Vedder, Price, Kaufman
& Kammholz.
11. Consent of Ernst & Young LLP.
12. Inapplicable.
13. Subscription Agreement.3/
14. Inapplicable.
15. Inapplicable.
16. Schedule for calculation of performance
quotation.
27. Financial Data Schedule.
ITEM 25. Persons Controlled by or under Common Control with Registrant
Inapplicable.
ITEM 26. Number of Holders of Securities
Number of holders of securities as of December 31, 1995:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
Shares of common stock of:
Growth Fund 8,357
International Growth Fund 1,054
Income Fund 2,165
Limited Term Tax-Free Fund 142
Ready Reserves Fund 20,044
</TABLE>
____________________
3/ Form of agreement filed as an exhibit to Registrant's initial
Registration Statement on Form N-1A as filed on or about September 25,
1987.
9/ Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 23, 1993.
C-3
<PAGE> 139
ITEM 27. Indemnification
The Maryland Code, Corporations and Associations, Section
2-418, provides for indemnification of directors, officers, employees and
agents.
Article VII of the Registrant's Articles of Incorporation
provides for indemnification of directors or officers under certain
circumstances but does not allow such indemnification in cases of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
The Investment Management Agreement between the Registrant and William
Blair & Company, L.L.C. (the "Adviser") provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties thereunder on the part of the Adviser, the Adviser shall
not be liable for any error of judgment or mistake of law, or for any loss
suffered by the Fund in connection with the matters to which such Agreement
relates.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "1933 Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
ITEM 28. Business and Other Connections of Investment Adviser and
Sub-Investment Adviser
Registrant's investment manager is William Blair & Company,
L.L.C., a limited liability company. In addition to its services to Registrant
as investment manager as set forth in Parts A and B of this Registration
Statement on Form N-1A, William Blair & Company, L.L.C. is a registered
broker-dealer and investment adviser and engages in investment banking.
The principal occupations of the principals and primary officers of
William Blair & Company, L.L.C. are their services as principals and officers
of that Company. The address of William Blair & Company, L.L.C. and Registrant
is 222 West Adams Street, Chicago, Illinois 60606.
Set forth below is information as to any other business, profession,
vocation or employment of a substantial nature in which each principal of
William Blair & Company, L.L.C. is, or at any time during the last two fiscal
years has been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee:
C-4
<PAGE> 140
<TABLE>
<CAPTION>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James L. Barber, Jr. LaRabida Hospital Foundation Vice President and Secretary
Principal of the Board of Directors
Stanford Associates President
William Blair Mutual Funds, Inc. President
Bowen Blair, The Art Institute of Chicago Trustee
Senior Principal
Chicago Historical Society Trustee
Field Museum of Natural History Trustee
Receptor Laboratories Director
Edward McC. Blair, Sr., The Art Institute of Chicago Life Trustee
Senior Principal
College of The Atlantic Trustee
Pullman Educational Foundation Life Trustee
Rush Presbytarian-St. Luke's Life Trustee
Medical Center
University of Chicago Life Trustee
Edward McC. Blair, Jr. Chicago Dock and Canal Trust Trustee
Principal
Chicago Zoological Society Deputy Chairman
Research Industries, Inc. Director
Sensar Corporation Director
University of Chicago Hospital Trustee
Kurt Beuchel, Social Security Fund of the Member
Principal Principality of Liechtenstein Investment Advisory Board
David G. Chandler, The Bruss Company Director
Principal
Encore Paper Company Director
Gibraltar Packaging Group Director
International Jensen Incorporated Director
Morton Grove Pharmaceuticals, Inc. Director
Predelivery Service Corporation Director
Sherwood Enterprises, Inc. Director
E. David Coolidge, III, United Stationers, Inc. Director
Chief Executive Officer
Pittway Corporation Director
</TABLE>
C-5
<PAGE> 141
<TABLE>
<CAPTION>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Conrad Fischer APM Limited Partnership General Partner
Chief Executive Officer
Chicago Child Care Trustee Emeritus
William Blair Mutual Funds, Inc. Chairman and Director
Thomas A. FitzSimmons Credit Acceptance Corporation Director
Principal
Paul W. Franke, Music City Bagels, Inc. Director
Principal
Mark A. Fuller, III, Fuller Investment Company President
Principal
William Blair Mutual Funds, Inc. Senior Vice President
John K. Greene, Chicago Horticultural Society Trustee
Principal
Children's Home & Aid Society Trustee
of Illinois, Inc.
Hazelden Chairman Illinois Advisory
Committee
Vulcan Materials Co. Director
Thomas L. Greene, Tyler School of Secretarial 25% Owner
Principal Science
Samuel B. Guren, Falcon First Communications, L.P. Board of Advisors
Principal
Four M Corporation Director
Marks Brothers Jewelers, Inc. Director
Prime Cable of Alaska Board of Advisors
Technetics Director
James P. Hickey, Eagle Point Software Director
Principal
Edgar D. Jannotta, Sr., AAR Corporation Director
Senior Principal
AON Corporation Director
Bandag, Incorporated Director
Encyclopedia Britannica, Inc. Director
Molex, Incorporated Director
New York Stock Exchange, Inc. Director
Oil-Dri Corporation of America Director
Safety-Kleen Corporation Director
</TABLE>
C-6
<PAGE> 142
<TABLE>
<CAPTION>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Sloan Value Company Director
Unicom Corporation Director
Edgar D. Jannotta, Jr., Big Sky Joint Venture General Partner
Principal
The Bruss Company Director
Daiseytek International Director
Gibraltar Packaging Director
Greater Chicago Food Depository Co-Chairman Finance
Steering Committee
Mid-south Building Supplies Director
Towne Holdings, Inc. Director
Western Fidelity Holdings, Inc. Director
Richard P. Kiphart, Allegheny College Board of Directors
Principal
McCormick Theological Seminary Board of Directors
Woodlands Academy of the Trustee
Sacred Heart
Robert Lanphier, IV, Ag. Med, Inc. (Private) Chairman
Principal
Wayne P. Lockwood, Elco Industries, Incorporated Director
Principal
James McMullan, Listing Review Committee NASDAQ
Principal
Security Industry Association Director
William Blair Mutual Funds, Inc. Director
Timothy M. Murray, AGI, Inc. Director
Principal
The Bruss Company Director
Card Establishment Services Director
Daiseytek, Incorporated Director
Mede America, Inc. Director
Mid-south Building Supply Company Director
Portland Food Products Director
Sherwood Enterprises, Incorporated Director
Technetics Corporation Director
Towne Holdings, Inc. Director
</TABLE>
C-7
<PAGE> 143
<TABLE>
<CAPTION>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bentley M. Myer, Delnor Community Hospital Director
Principal Foundation
William Blair Mutual Funds, Inc. Senior Vice President
Neal L. Seltzer, Scholarship and Guidance Foundation Director
Principal
Ronald B. Stansell, AFO Limited Partnership Limited Partner
Principal
Thomas H. Story, Security APL, Inc. Member, Advisory Council
Principal
Mark Timmerman, DIY Home Warehouse, Incorporated Director
Principal
Prophet 21, Incorporated Director
Norbert W. Truderung, William Blair Mutual Funds, Inc. Senior Vice President
Principal
W. James Truettner, Jr., International Travel Services Director
Principal
Roberts Industries Director
Shendandoah University Trustee
William Blair Mutual Funds, Inc. Senior Vice President and
Director
</TABLE>
<TABLE>
<CAPTION>
Name and position(s) with
Framlington Overseas Name of Company and/or
Investment Management Limited Principal Business Capacity
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gary Christopher FitzGerald Framlington Group plc Managing Director of
(Director) Emerging Markets
Framlington Investment Director
Management Limited
Warren Jay Coleman Framlington Group plc Operations Director
(Director)
Michael Haski Framlington Group plc Chairman of Emerging
(Director) Markets
Foster & Braithwaite Limited Director
CCF & Partners Asset Director
Management Limited
European Smaller Companies Fund Director
FIDA Holdings Director
</TABLE>
C-8
<PAGE> 144
<TABLE>
<CAPTION>
Name and position(s) with
Framlington Overseas Name of Company and/or
Investment Management Limited Principal Business Capacity
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Framlington Investment Director
Management Limited
Fordinvest Director
Japan Gamma Director
First Islamic Investment Trust Director
Limited
Oriel Overseas Limited Director
Sam Finance Director
Selection Amerique Director
Selection Euravear Director
Selection Plus Director
Selection Sante Director
Selection Europe Director
Jean Luc Schilling Framlington Group plc Managing Director of
(Director) International Division
Framlington Investment Director
Management Limited
Framlington Overseas Investment Managing Director
Management Limited
Michael Andrew Vogel Framlington Group plc Managing Director
(Director)
Timothy Simon Thomas Key Framlington Group plc Economist/Strategist
(Chief Investment Officer)
Celia Linda Whitten Framlington Group plc Company Secretary
(Company Secretary)
Eileen Teresa Milnes Framlington Group plc Compliance Officer
(Compliance Officers)
Robert John Garton Jenkins Framlington Group plc Fund Manager
(Fund Manager)
</TABLE>
ITEM 29. Principal Underwriters
(a) Inapplicable.
(b) The principal business address of each principal and
officer of William Blair & Company, L.L.C., principal
underwriter for Registrant, is 222 West Adams Street,
Chicago, Illinois 60606. See Item 28 for
information with respect to officers and principals
of William Blair & Company, L.L.C..
C-9
<PAGE> 145
(c) Inapplicable.
ITEM 30. Location of Accounts and Records
All such accounts, books and other documents are maintained by
the Registrant's officers at the offices of the Registrant and the offices of
the Investment Adviser, William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois, and also shareholder account information and original
shareholder correspondence is available at the offices of the Transfer Agent
and Dividend Paying Agent, Investors Bank and Trust Company, P.O. Box 9104,
Boston, Massachusetts 02205-9104.
ITEM 31. Management Services
Inapplicable.
ITEM 32. Undertakings
(a) Inapplicable.
(b) Inapplicable.
(c) Registrant undertakes to furnish to each person to
whom a prospectus is delivered a copy of the
Registrant's latest annual report to shareholders
upon request and without charge.
C-10
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the registrant has duly caused this amended registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, and State of Illinois, on the 13th day of
February, 1996.
WILLIAM BLAIR MUTUAL FUNDS, INC.
By:/s/James L. Barber, Jr.
--------------------------------
James L. Barber, Jr., President
Pursuant to the requirements of the Securities Act of 1933, this post-effective
amendment to the registration statement has been signed below by the following
persons in the capacity and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Vernon Armour Director February 13, 1996
- -------------------------------------------
Vernon Armour
/s/ C. Mathews Dick, Jr. Director February 13, 1996
- -------------------------------------------
C. Mathews Dick, Jr.
/s/ Conrad Fischer Director (Chairman of February 13, 1996
- -------------------------------------------
Conrad Fischer the Board)
/s/George Kelm Director February 29, 1996
- -------------------------------------------
George Kelm
/s/ James M. McMullan Director February 13, 1996
- -------------------------------------------
James M. McMullan
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John H. Olwin, M.D. Director February 13, 1996
- -------------------------------------------
John H. Olwin, M.D.
/s/ John B. Schwemm Director February 13, 1996
- -------------------------------------------
John B. Schwemm
/s/ John W. Straub Director February 13, 1996
- -------------------------------------------
John W. Straub
/s/ W. James Truettner, Jr. Director February 13, 1996
- -------------------------------------------
W. James Truettner, Jr.
/s/ James L. Barber, Jr. President (Principal February 13, 1996
- ------------------------------------------- Executive Officer)
James L. Barber, Jr.
/s/ Walter Rucinski Treasurer (Principal February 13, 1996
- ------------------------------------------- Financial Officer
Walter Rucinski Principal Accounting
Officer)
</TABLE>
<PAGE> 148
EXHIBIT INDEX
99.B1a. Articles of Incorporation.1/
1b. Form of Amendment to Articles of Incorporation.
99.B2. By-laws, as amended.5/
99.B3. Inapplicable.
99.B4. See items 1 and 2 above.
99.B5a. Form of Management Agreement.
99.B5b. Form of Management Agreement dated January 5, 1988.2/
99.B5c. Amendment to Management Agreement.4/
99.B5d. Form of Second Amendment to Management Agreement.6/
99.B5e. Form of Third Amendment to Management Agreement.7/
99.B5f. Sub-Investment Advisory Agreement.8/
99.B5g. Form of Fourth Amendment to Management Agreement.9/
99.B6. Underwriting Agreement.3/
99.B7. Inapplicable.
99.B8. Custodian Agreement.
99.B9. Inapplicable.
99.B10. Opinion of Vedder, Price, Kaufman & Kammholz.
99.B11. Consent of Ernst & Young LLP.
99.B12. Inapplicable.
99.B13. Subscription Agreement.3/
99.B14. Inapplicable.
99.B15. Inapplicable.
99.B16. Schedule for calculation of performance quotation.
27. Financial Data Schedule.
- --------------------------------------------------------------------------------
1/ Also filed as an exhibit to Registrant's initial Registration
Statement on Form N-1A as filed on or about September 25, 1987.
2/ Incorporated herein by reference to Registrant's initial Registration
Statement on Form N-1A as filed on or about September 25, 1987.
3/ Form of agreement filed as an exhibit to Registrant's initial
Registration Statement on Form N-1A as filed on or about September 25,
1987.
4/ Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A as filed on or about
July 27, 1990.
5/ Also filed as an exhibit to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1991.
6/ Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1991.
7/ Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A as filed on or about
July 22, 1992.
8/ Form of agreement filed as an exhibit to Post-Effective Amendment No.
7 to Registrant's Registration Statement on Form N-1A as filed on or
about July 22, 1992.
9/ Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 23, 1993.
<PAGE> 1
EXHIBIT 99.B1a
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
WILLIAM BLAIR READY RESERVES. INC.
WILLIAM BLAIR READY RESERVES, INC., a Maryland corporation (hereinafter
called the Corporation) whose principal office in the State of Maryland is c/o
The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202,
hereby certifies to the State Department of Assessments and Taxation of
Maryland, that:
The charter of the Corporation is hereby amended by changing
ARTICLE I; NAME, to read as follows: The name of the corporation
is WILLIAM BLAIR MUTUAL FUNDS, INC. (hereinafter called the
"Corporation").
The Board of Directors, at a meeting held February 5, 1991, unanimously
approved and adopted a resolution in which was set forth the foregoing
amendment to the Corporation's charter and recommended that the shareholders of
both then existing series of the Corporation approve this amendment. A
majority of the outstanding voting securities of each such series of the
Corporation, such series being Ready Reserves Portfolio 4 Income Portfolio,
approved this amendment at a shareholders meeting held April 23, 1991.
<PAGE> 2
IN WITNESS WHEREOF, WILLIAM BLAIR READY RESERVES, INC. has caused this to
be signed in its name and on its behalf by its President and witnessed by its
Secretary on April 29, 1991.
WILLIAM BLAIR READY RESERVES, INC.
By: /s/James L. Barber, Jr.
-----------------------------------
James L. Barber, Jr.
President
Witness:
/s/Olga F. Theodore
- ------------------------
Olga F. Theodore
Secretary
THE UNDERSIGNED, President of WILLIAM BLAIR READY RESERVES, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval thereof are true in all material respects, under
the penalties of perjury.
/s/James L. Barber, Jr.
-----------------------------------
James L. Barber, Jr.
President
2
<PAGE> 3
ARTICLES OF INCORPORATION
OF
WILLIAM BLAIR READY RESERVES, INC.
The undersigned, James L. Barber, Jr., whose office address is 135 South
LaSalle Street, Chicago, Illinois 60603, being at least eighteen years of age,
does hereby form a corporation under the general laws of the State of Maryland.
ARTICLE I
NAME
The name of the corporation is WILLIAM BLAIR READY RESERVES, INC.
(hereinafter called the "Corporation").
ARTICLE II
NATURE AND PURPOSE
The nature of the business and the objects and purposes to be transacted,
promoted or carried on are to engage in the business of an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), investing and reinvesting its assets in accordance
with the provisions of these Articles of Incorporation ("Articles"), the Bylaws
of the Corporation ("Bylaws") and applicable law. The general nature of its
business shall be to buy, hold, sell, exchange, pledge and otherwise deal in
notes, stock, bonds, options or other securities or investments of any nature;
to do any and all acts and things
<PAGE> 4
necessary or incidental thereto to the extent permitted business corporations
under the General Laws of Maryland as from time to time amended ("Maryland
Law"); to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Corporation; and to issue, sell, hold, redeem, purchase, transfer and reissue,
or cancel the shares of its own capital stock.
ARTICLE III
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the place at which the principal office of the
Corporation in this State will be located is c/o of The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202. The resident agent
of the Corporation is The Corporation Trust Incorporated, a corporation of this
State, the post office address of which is 32 South Street, Baltimore, Maryland
21202.
ARTICLE IV
DIRECTORS
4.1 The initial number of Directors of the Corporation shall be
three (3), which number may be increased or decreased pursuant to the Bylaws of
the Corporation but shall never be less than three. The election of Directors
need not be by ballot. The names of the Directors who shall act until the
first meeting of shareholders and until their successors are duly elected and
qualify are:
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<PAGE> 5
Vernon Armour
Conrad Fischer
James M. McMullan
4.2 Any determination made in good faith and, as far as accounting
matters are involved, in accordance with generally accepted accounting
principles, by or pursuant to the direction of the Board of Directors, shall be
final and conclusive as to the amount of the assets, debts, obligations or
liabilities of the Corporation or of any class of stock of the Corporation; as
to the amount of any reserves or charges set up and the propriety thereof; as
to the time or purpose for creating such reserves or charges, or the use,
alteration or cancellation of any reserves or charges (irrespective of whether
any debt, obligation or liability for such reserves or charges shall have been
created, shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged); as to the establishment or designation of
procedures or methods to be employed for valuing any asset of the Corporation;
as to the value of any asset; as to the allocation of any asset to a particular
class or classes of shares; as to the funds available for the declaration of
dividends, or as to the declaration of dividends; as to the charging of any
liability to a particular class or classes of shares; as to the number of
outstanding shares of any class or classes; as to the estimated expense to the
Corporation in connection with purchases or redemptions of its shares;-as to
the ability to liquidate investments in an orderly fashion; or as to any other
matters relating to the issuance, sale, purchase or redemption or other
acquisition or disposition of investments or its shares, or the determination
of the net asset value per share of any class.
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<PAGE> 6
ARTICLE V
CAPITAL STOCK
5.1 The total number of shares of all classes of stock which the
Corporation, by resolution of the Board of Directors, shall have authority to
issue is five billion (5,000,000,000), par value $0.001 per share, such shares
having an aggregate par value of five million dollars ($5,000,000). Two
billion (2,000,000,000) of such shares may be issued in the sole initial class,
designated the Money Market Portfolio, subject, however, to the authority
hereinafter granted to the Board of Directors to further classify and
reclassify any such shares and, incident to such classification or
reclassification or otherwise, to increase or decrease such number of shares.
The balance of three billion (3,000,000,000) shares of such stock may be issued
in such class, or in any new class or classes that may at any time be
established by the Board of Directors, each consisting of such number of shares
and having such preferences, conversion or other rights and such voting powers,
restrictions, limitations as to dividends and qualifications and such terms or
conditions of redemption, consistent with these Articles, as shall be
determined from time to time by resolution or resolutions providing for the
issuance of such stock adopted by the Board of Directors, to whom authority so
to establish and determine the same is hereby expressly granted.
5.2 The Board of Directors is authorized, from time to time, by
resolution, (a) to classify and reclassify any unissued shares of stock of the
Corporation, by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such stock, and (b) to
increase or decrease the aggregate number of shares of the stock, or the number
of shares of stock of any
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<PAGE> 7
class, that the Corporation has authority to issue; but the number of shares of
stock of any class shall not be reduced by the Board of Directors below the
number of shares then outstanding.
5.3 Each class of stock of the Corporation now or hereafter
designated shall have the following relative preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption:
(1) Assets Belonging to the Class. All consideration
received by the Corporation for the issue or sale of shares of a
particular class, together with all income, earnings, profits and
proceeds thereof (including any proceeds derived from the sale,
exchange or liquidation thereof, and any assets derived from any
reinvestment of such proceeds), and together with any other assets of
the Corporation which are not readily identifiable as belonging to a
particular class and which are allocated by or under the supervision of
the Board of Directors, in its sole discretion, to the class, are
herein referred to collectively as "assets belonging to" such class.
The determination of the Board of Directors or its delegate as to such
allocation shall be final and conclusive. The power to make such
determinations may be delegated by the Board of Directors from time to
time to one or more of the Directors or officers of the Corporation, or
to an agent of the Corporation appointed for such purpose.
(2) Liabilities Belonging to the Class. The liabilities
incurred in respect of the class (including, in the discretion of the
Board of Directors or its delegate, accrued expenses and reserves), and
any other liabilities of the Corporation which are not readily
identifiable as belonging to a particular class and which are allocated
by or under the supervision of the Board of Directors, in its sole
discretion, to the class (and which shall
5
<PAGE> 8
be charged against the assets belonging to the class) are herein
referred to collectively as the "liabilities belonging to" such class.
The power to make determinations as to the amount of liabilities,
including accrued expenses and revenues, which are to be charged to one
or more particular classes may be delegated by the Board of Directors
from time to time to one or more of the Directors or officers of the
Corporation, or to an agent of the Corporation appointed for such
purpose.
(3) Voting Powers. On each matter submitted to a vote of
the shareholders, each holder of shares of all classes of stock of the
Corporation shall be entitled to one vote or fraction thereof for each
share or fraction thereof standing in the name of such shareholder on
the books of the Corporation, and all shares of the Corporation then
issued and outstanding and entitled to vote, irrespective of class,
shall be voted in the aggregate and not by class ("Single Class
Voting"); provided, that: (a) as to any matter with respect to which a
separate vote of any class is required by the 1940 Act or by Maryland
Law, or as to any matter that the Board of Directors determines, in its
sole discretion, concerns only one or more particular class or classes,
a separate vote by that class or classes shall apply in lieu of Single
Class Voting as described above; (b) in the event that for any matter
the separate vote requirements referred to in (a) above apply with
respect to one or more class or classes, then, subject to (c) below,
the shares of all other classes shall vote as a single class on that
matter; and (c) when the matter to be acted upon does not affect the
interests of a particular class or classes, then only shares of the
affected class or classes shall be entitled to be voted thereon.
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<PAGE> 9
(4) Net Asset Value. The net asset value per share of any
class shall be the quotient obtained by dividing the value of the net
assets of that class (being the value of the assets belonging to that
class less the liabilities belonging to that class) by the total number
of shares of that class outstanding.
(5) Dividends. The relative rights of the shares of each
class to receive dividends shall be as set forth in Article X of these
Articles.
(6) Redemption. The relative rights of the shares of each
class to be redeemed or repurchased shall be as set forth in Article VI
of these Articles.
(7) Liquidation. The relative rights of the shares of each
class upon the liquidation of the Corporation or any class shall be as
set forth in Article XI of these Articles.
ARTICLE VI
ISSUANCE, SALE AND REDEMPTION OF STOCK
6.1 The Corporation, pursuant to a resolution of the Board of
Directors, may from time to time issue and sell or provide for the issuance and
sale of any authorized but unissued shares of any class of stock of the
Corporation. All shares of the Corporation sold shall be sold for cash or such
other types of consideration as the Board of Directors may deem advisable,
subject to such limitations and requirements as may be set forth in these
Articles or the Bylaws or under applicable law.
6.2 The Corporation may issue and sell fractions of shares having
pro rata all the rights of full shares, including, without limitation, the
right to vote and receive dividends; and
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<PAGE> 10
wherever the words "share" or "shares" are used in these Articles or in the
Bylaws they shall be deemed to include fractions of shares where the context
does not clearly indicate that only full shares are intended.
6.3 No holder of shares shall, as a shareholder, have any
preemptive rights including any right to purchase or subscribe for any shares
of the capital stock of the Corporation or any other security of the
Corporation which it may issue or sell, other than such right, if any, as the
Board of Directors in its discretion may determine.
6.4 Each holder of shares of a particular class shall have the
right, at such times and on such terms and conditions as may be established by
the Corporation, to require the Corporation to redeem all or any part of the
shares of that class standing in the name of such shareholder on the books of
the Corporation, at a redemption price per share equal to the net asset value
per share of that class next determined in accordance with the Corporation's
then current prospectus after the shares are properly tendered for redemption,
less any redemption fee or other charge as may be determined from time to time
by the Board of Directors and set forth in the Corporation's then current
prospectus.
6.5 The Corporation may redeem the shares owned by a shareholder at
such time as the value of all the shareholder's shares of any class is less
than a particular minimum amount that may be determined from time to time by
the Board of Directors and set forth in the Corporation's then current
prospectus, which amount in any event shall not be greater than $5,000.
6.6 All redemptions or purchases of shares by the Corporation of
any class of the Corporation's stock (a) shall be in cash, except that upon
determination of the Board of
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<PAGE> 11
Directors redemptions may be made in kind as provided in the Corporation's then
current prospectus; and (b) shall be made solely from assets belonging to such
class. Notwithstanding anything in this Article to the contrary, the
Corporation may postpone payment of the redemption price and may suspend the
right of holders of shares of any class to require the Corporation to redeem
shares of that class during any period or at any time when and to the extent
permissible under the 1940 Act. Any shares of any class of the Corporation's
stock purchased or obtained by the Corporation by purchase or redemption shall
be deemed retired and shall thereafter have the status of authorized but
unissued shares of such class, until such time as the Board of Directors shall
reissue such shares.
ARTICLE VII
CUSTODIAN/TRANSFER AGENT
7.1 The Corporation may employ a custodian, which shall be a bank
or trust company having an aggregate capital, surplus and undivided profits of
at least $10,000,000, pursuant to such terms and conditions as the Board of
Directors may direct and as contained in the Bylaws.
7.2 The Corporation may also employ such custodian, or some other
party, as its agent to keep the books and accounts of the Corporation, and to
furnish clerical and accounting services. The compensation to be paid to the
custodian, or such other party, for such services as it may render to the
Corporation shall be in such amount as may be agreed upon by the Corporation
and the custodian, or such other party.
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<PAGE> 12
7.3 The Board of Directors in its discretion may employ a transfer
agent, registrar or dividend disbursing agent for the Corporation under such
terms and conditions as the Board shall deem advisable.
ARTICLE VIII
OTHER CONTRACTS
8.1 The Corporation, in the discretion of the Board of Directors,
may from time to time enter into a contract or contracts with any one or more
parties as an underwriter, providing for the sale of the shares of this
Corporation. Such contract or contracts may also provide for the repurchase of
shares of this Corporation by such underwriter as agent of the Corporation.
8.2 The Corporation, in the discretion of the Board of Directors,
may from time to time enter into an investment advisory or management contract
with any other person, firm or Corporation, hereinafter called the "manager,"
to furnish advice to the Corporation with respect to the desirability of
investing in, purchasing or selling securities, or other property, or to
determine what securities or other property shall be purchased or sold by the
Corporation, and to furnish the Corporation such management, investment
advisory, statistical and research facilities and such other services and
facilities, if any, as the Board of Directors may deem desirable upon such
terms and conditions as the Board of Directors may determine.
8.3 The Corporation, in the discretion of the Board of Directors,
subject to the provisions of this Article, may in its discretion enter into any
contract with any person, firm or corporation, irrespective of whether or not
one or more of the Directors or officers of this Corporation may also be an
officer, director, shareholder or member of such other person, firm
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<PAGE> 13
or corporation, and such contract shall not be invalidated or rendered voidable
by reason of any such relationship. No person holding such relationship shall
be liable because of such relationship for any 1088 or expense to the
Corporation under or by reason of such contract, or accountable for any profit
realized directly or indirectly therefrom, provided that such contract when
executed was reasonable and fair, consistent with the provisions of these
Articles and approved by a majority of the Board of Directors of this
Corporation who are not so related, or by the vote of a majority of the
outstanding shares of this Corporation.
8.4 Any contract entered into pursuant to the terms of this Article
shall be consistent with and subject to the requirements of the 1940 Act,
including any amendment thereto or other applicable act of Congress hereafter
enacted, with respect to its duration, termination, authorization, approval,
assignment, amendment or renewal.
ARTICLE IX
EXPENSES
9.1 Subject to the limitations contained in this Article, the
Directors shall be entitled to reasonable remuneration from the Corporation for
their services as Directors in such amount as may from time to time be fixed by
vote of the Board of Directors.
9.2 The Corporation may incur such expenses as are necessary or
appropriate in the performance of its functions and such expenses may include
but are not limited to the following: compensation to be paid to any other
party to an investment advisory or management contract with the Corporation
entered into pursuant to Article VIII; the compensation to be paid to the
officers, consultants and employees of the Corporation; office hire; ordinary
office expenses;
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investment advisory, statistical and research facilities; directors' fees;
legal and accounting expenses; taxes and governmental fees; federal and state
registration and qualification fees; cost of stock certificates; cost of
reports and notices to shareholders; association dues; brokers' commissions;
transaction costs; fees and expenses of any custodian; expenses of computing
the net asset value; and fees and expenses of any transfer agent, registrar and
dividend disbursing agent. During any period during which the determination of
net asset value is suspended, the net asset value as last determined and
effective shall for the purposes of this Article be deemed to be the net asset
value as of the close of business on each business day until a new net asset
value is again determined and made effective.
9.3 The provisions of this Article shall not preclude the payment
of reasonable fees for legal or accounting services to any firm of which a
Director or officer of the Corporation may be a member, shareholder, officer or
director, nor of customary brokerage charges in connection with the purchase or
sale of securities to any firm in the brokerage business of which a Director or
officer of the Corporation may be a member, shareholder, officer or director;
and no part of any such fee, charge or compensation shall be deemed
compensation to such officer or Director within the purview of this Article. No
compensation, commission, fee or profit which may be received by the other
party to a contract entered into pursuant to Article VII shall be deemed
compensation to any officer or Director of the Corporation simply because such
officer or Director is also an officer, director, shareholder or member of such
other party.
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ARTICLE X
DIVIDENDS
10.1 The Board of Directors may from time to time, in its
discretion, declare, and the Corporation shall in such event pay, dividends to
shareholders of any class of stock, in cash, shares of such class or any other
property. The amount, source and payment thereof shall be within the
discretion of the Board of Directors, except that distributions from assets
belonging to a particular class of stock may be distributed only to the holders
of shares of such class and calculated on the basis of generally accepted
accounting principles. All dividends and distributions on shares of a
particular class shall be distributed pro rata to the shareholders of that
class in proportion to the number of shares of that class held by such holders
at the date and time of record established for the payment of such dividends or
distributions. No dividends or distributions need be made on shares purchased
pursuant to orders received, or for which payment is made, after such date(s)
and time(s) as the Board of Directors may determine.
10.2 The dividends and distributions declared by the Board of
Directors pursuant to Section 10.1 hereof may vary from class to class to such
extent and for such purposes as the Board of Directors may deem appropriate,
including, but not limited to, the purpose of complying with requirements of
regulatory authorities and applicable law.
10.3 The Corporation has the power, in the discretion of the Board
of Directors, to distribute for any year as ordinary dividends and as capital
gains distributions, respectively, amounts sufficient to enable the Corporation
as a regulated investment company to avoid any liability for federal income tax
in respect to that year.
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10.4 In the case of a dividend payable in shares of stock or cash
at the election of a shareholder, the Board of Directors may prescribe whether
a shareholder failing to express his election before a given time shall be
deemed to have elected to take cash rather than shares, or to take shares
rather than cash, or to take shares with cash adjustment of fractions.
ARTICLE XI
LIQUIDATION
11.1 In the event that the determination of a majority of the Board
of Directors to dissolve the Corporation is approved by the shareholders in
accordance with Maryland Law, no further shares of the Corporation shall be
issued, sold or purchased by the Corporation and the Directors shall
immediately proceed to wind up the Corporation's affairs, liquidate the assets,
pay all liabilities and expenses of the Corporation and distribute the
remaining assets, if any, among the shareholders. The Board of Directors shall
also do any other acts necessary to secure and complete the dissolution of the
Corporation. Further, the Directors then holding office shall continue in
office until the liquidation and dissolution of the Corporation has been
completed. During the period of liquidation and until final distribution to
the shareholders has been made, t he compensation of the Directors and all
other parties shall be determined on the same basis as if the computation of
the net asset value of the shares had been suspended.
11.2 In the event of the liquidation or dissolution of the
Corporation or of a particular class of stock of the Corporation, shareholders
of each class to be liquidated shall be entitled to receive, as a class, when
and as declared by the Board of Directors, out of the assets of the class
available for distribution to shareholders, the excess of the assets belonging
to such class over
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the liabilities belonging to the class. The assets so distributable to the
shareholders of any class shall be distributed among such shareholders in
proportion to the number of shares of such class held by them and recorded on
the books of the Corporation.
ARTICLE XII
INDEMNIFICATION
12.1 The Corporation shall indemnify its directors, officers,
employees and agents to the maximum extent required, and may indemnify such
directors, officers, employees and agents to the maximum extent permitted under
Maryland Law, the 1940 Act or other applicable law, subject to the limitations
set forth in these Articles and Bylaws.
12.2 No provision of these Articles shall be effective (a) to
require a waiver of compliance with any provision of the Securities Act of
1933, as amended, or the 1940 Act, or any rule, regulation or order of the
Securities and Exchange Commission thereunder, or (b) to protect or purport to
protect any Director, officer, employee or agent of the Corporation from
liability to which (s)he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his/her office.
ARTICLE XIII
AMENDMENT
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in these Articles, in the manner now or hereafter
prescribed by statute, upon the
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affirmative vote of a majority of the outstanding shares of the Corporation;
and all rights conferred upon shareholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, being the incorporator of William Blair Ready
Reserves, Inc., I have executed these Articles of Incorporation, this 21st day
of September, 1987.
/s/James L. Barber, Jr.
-----------------------------------
James L. Barber, Jr.
16
<PAGE> 1
EXHIBIT 99.B1b
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
WILLIAM BLAIR MUTUAL FUNDS, INC.
WILLIAM BLAIR MUTUAL FUNDS, INC., a Maryland corporation (hereinafter
called the Corporation) whose principal office in the State of Maryland is c/o
The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202, hereby certifies to the State Department of Assessments and Taxation of
Maryland, that:
The charter of the Corporation is hereby amended by changing
Section 5.2 of ARTICLE V; CAPITAL STOCK, to read as follows:
5.2 The Board of Directors is authorized, from time to time,
by resolution, (a) to classify and reclassify any unissued shares
of stock of the Corporation, by setting or changing the
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms
or conditions of redemption of such stock, and (b) to increase or
decrease the aggregate number of shares of the stock, or the
number of shares of stock of any class, that the Corporation has
authority to issue; but the number of shares of stock of any class
shall not be reduced by the Board of Directors below the number of
shares then outstanding.
As used in these Articles of Incorporation, a "class" of
shares represents interests in the same assets, liabilities,
income, earnings and profits of the Corporation; each "sub-class"
of shares of a class represents interests in the same
<PAGE> 2
underlying assets, liabilities, income, earnings and profits, but
may differ from other sub-classes of such class with respect to
fees and expenses or such other matters as shall be established by
the Board of Directors. Subject to the provisions of Section 5.3
of this Article V and applicable law, the power of the Board of
Directors to classify or reclassify any of the shares of capital
stock shall include, without limitation, authority to classify or
reclassify any such stock into one or more classes of capital
stock and to divide and classify shares of any class into one or
more sub-classes of such class, by determining, fixing or altering
one or more of the following:
(1) The distinctive designation of such sub-class or class and the
number of shares to constitute such sub-class or class; provided that,
unless otherwise prohibited by the terms of such sub-class or class, the
number of shares of any sub-class or class may be decreased by the Board
of Directors in connection with any classification or reclassification of
unissued shares, and the number of shares of such sub-class or class may
be increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any sub-class or
class which have been redeemed, purchased or otherwise acquired by the
corporation shall remain part of the authorized capital stock and be
subject to classification and reclassification as provided herein;
(2) Whether or not and, if so, the rates, amounts and time at
which, and the conditions under which, dividends shall be payable on
shares of such sub-class or class;
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<PAGE> 3
(3) Whether or not shares of such sub-class or class shall have
voting rights in addition to any general voting rights provided by law
and these Articles of Incorporation and, if so, the terms of such
additional voting rights;
(4) The rights of the holders of shares of such sub-class or class
upon the liquidation, dissolution or winding up of the affairs of, or
upon a distribution of the assets of, the Corporation.
The charter of the Corporation is hereby further amended by adding a
Section 6.7 to ARTICLE VI; ISSUANCE, SALE AND REDEMPTION OF STOCK, to read as
follows:
6.7 The Corporation shall, to the extent permitted by
applicable law, have the right at any time to redeem all or
any part of any class or sub-class or of all classes or
sub-classes, of shares of the Corporation, subject to such
terms and conditions as the Board of Directors may from time
to time approve.
The Board of Directors, at a meeting held February 13, 1996, unanimously
approved and adopted a resolution in which was set forth the foregoing
amendment to the Corporation's charter, determined that the amendment was
advisable and recommended that the shareholders of each existing class of the
Corporation approve this amendment. A majority of the outstanding voting
securities of each such class of the Corporation, such classes being Growth
Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and
Ready Reserves Fund, approved this amendment at a shareholders meeting held
April 23, 1996.
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<PAGE> 4
IN WITNESS WHEREOF, WILLIAM BLAIR MUTUAL FUNDS, INC. has caused these
Articles of Amendment to be signed in its name and on its behalf by its
President and witnessed by its Secretary on April ___, 1996.
WILLIAM BLAIR MUTUAL FUNDS, INC.
By:
----------------------------
James L. Barber, Jr.
President
Witness:
- ----------------------------
Janet V. Gassmann
Secretary
-4-
<PAGE> 5
THE UNDERSIGNED, President of WILLIAM BLAIR MUTUAL FUNDS, INC., who
executed on behalf of said corporation the foregoing Articles of Amendment, of
which this certificate is made a part, hereby acknowledges, in the name and on
behalf of said corporation, the foregoing Articles of Amendment to be the
corporate act of said corporation and further certifies that, to the best of
his knowledge, information and belief, the matters and facts set forth therein
with respect to the approval hereof are true in all material respects, under
the penalties of perjury.
----------------------------
James L. Barber, Jr.
President
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<PAGE> 1
EXHIBIT 99.B2
BYLAWS
OF
WILLIAM BLAIR MUTUAL FUNDS, INC.
formerly
WILLIAM BLAIR READY RESERVES, INC.
(Restated as of February 5, 1991)
ARTICLE I
Shareholder Meetings
1. Place of Meetings. All meetings of the shareholders of the
William Blair Ready Reserves, Inc. (the "Corporation") shall be held at such
place, within or without the State of Maryland, as may be determined by the
Board of Directors and as shall be stated in the notice of said meeting.
2. Holding of Meeting. No meeting of the shareholders of this
Corporation shall be held unless required by applicable law or otherwise
determined by the Board of Directors.
3. Call of Meetings. Meetings of the shareholders, for any
purpose, unless otherwise prescribed by statute, may be called by the Board of
Directors or the President at any time, and shall be called by the Board of
Directors or the Secretary of the Corporation upon written application by one
or more shareholders holding at least ten percent (10%) of the common stock of
the Corporation, then issued and outstanding, and entitled to vote, requesting
that a meeting be called for a purpose requiring action by the shareholders as
provided herein or in the Articles of Incorporation, which purpose shall be
specified in any such written application. Business transacted at such
meetings shall be confined to the objects stated in the notice thereof.
<PAGE> 2
4. Notice. Written notice of every meeting of the shareholders,
stating the time, place and purpose or purposes for which the meeting is
called, shall be given by the Secretary to each shareholder entitled to vote
thereat and to any shareholder entitled by law to such notice. Such notice
shall be given to each shareholder by mailing the same, postage prepaid, to the
address of the shareholder as it appears on the books of the Corporation not
less than ten (10) days nor more than ninety (90) days before the time fixed
for such meeting.
5. Quorum. The holders of a majority of the shares of common
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall be requisite and shall constitute a quorum at all
meetings of the shareholders for the transaction of business, except as
otherwise provided by applicable law. If such quorum shall not be present or
represented at any meeting of the shareholders, the shareholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time to a date not more than 120 days after
the original record date for the meeting, without further notice other than
announcement at the meeting. At such adjourned meeting, if a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified.
6. Vote. When a quorum is present at any meeting, the vote of
the holders of a majority of the shares having the right to vote thereat,
present in person or represented by proxy, shall determine any matter brought
before such meeting, unless the matter is one for which a different vote is
required under applicable law, the Article of Incorporation or these Bylaws.
Each shareholder shall be entitled to one vote or fraction of a vote for each
share or fraction thereof held by the shareholder on the record date determined
for such meeting.
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<PAGE> 3
7. Proxies. At any meeting of the shareholders, every
shareholder having the right to vote shall be entitled to vote in person or by
proxy appointed by an instrument in writing subscribed by such shareholder and
bearing a date not more than eleven (11) months prior to said meeting, which
instrument shall be filed with the Secretary of the meeting before being voted.
8. Record Date. The Board of Directors may fix a record date not
more than ninety (90) nor less than ten (10) days prior to the date for which a
meeting is called, as of which the shareholders entitled to vote at such
meeting, or any adjournment thereof, shall be determined, notwithstanding any
transfer or the issue of any share occurring after such record date.
9. Communications of Shareholders. Whenever ten or more
shareholders of record who have been such for at least six months preceding the
date of application, and who hold in the aggregate shares either having a net
asset value- of at least $25,000 or constituting at least one percent of the
outstanding shares of the Corporation, shall apply to the Board of Directors in
writing, stating that they wish to communicate with other shareholders with a
view to obtaining signatures to a request for a meeting to consider removal of
a Director and accompanied by a form of communication and request that they
wish to transmit, the Board of Directors shall within five business days after
receipt of such application either (a) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Corporation, or (b) inform such applicants as to the number of shareholders
of record and the approximate cost of mailing to the shareholders of record the
proposed communication and form of request. If the Board of Directors elects
to follow the course specified in subparagraph 9(b) above, the Board of
Directors, upon the written request of such
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<PAGE> 4
applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, shall, with reasonable promptness, mail such
material to all shareholders of record at their addresses as recorded on the
books of the Corporation. Notwithstanding the foregoing, the Board of
Directors may refuse to mail such material on the basis and in accordance with
the procedures set forth in the last two paragraphs of Section 16(c) of the
Investment Company Act of 1940.
ARTICLE II
Directors
1. Number. The number of Directors which shall constitute the
whole Board shall not be less than three (3) nor more than fifteen (15). The
number of Directors may be increased or decreased by the Board of Directors
prior to each meeting of shareholders for the election of Directors and shall
be as stated in the notice of such meeting, but the tenure of office of any
Director shall not be affected by any decrease in the number of Directors then
in office.
2. Term; Retirement. Subject to death, resignation, removal or
retirement, each Director shall hold office, during the lifetime of the
Corporation, until the next meeting of shareholders brought for the purpose of
electing Directors, and until his successor is elected and qualified. No
Director will stand for reelection as Director at any election held after such
Director shall have reached 70 years of age, and, after his successor shall
have been elected and qualify, such Director shall retire. Directors need not
be shareholders of the Corporation or residents of the State of Maryland.
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3. Vacancies. Except as provided below: (a) if the number of
Directors is increased by the Board of Directors, then the resulting vacancies
may be filled by a majority of the entire Board of Directors, and (b) if the
office of any Director or Directors becomes vacant for any other reason, then a
majority of the remaining Directors, though less than a quorum, may choose a
successor or successors. Vacancies may not be so filled by the Board of
Directors unless, if immediately after filling any such vacancy, at least
two-thirds (2/3) of the Directors then holding office shall have been elected
to such office by the shareholders of the Corporation; otherwise such vacancy
shall be filled, if at all, by vote of the shareholders at a meeting called for
such purpose. A Director 80 elected by the Board shall hold office until the
next election of Directors and until his successor is elected and qualified.
In the event that at any time less than a majority of the Directors were
elected by the shareholders, a special meeting of the shareholders shall be
held as promptly as possible, and in any event within sixty days, for the
purpose of electing the necessary new members, unless the Securities and
Exchange Commission extends that period.
4. Powers. The business and affairs of the Corporation shall be
managed by its Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are consistent with the
Articles of Incorporation, these Bylaws and applicable law, except those
conferred upon or reserved to the shareholders under the Articles of
Incorporation, these Bylaws or applicable law.
5. Removals. The shareholders, at any meeting called for such
purpose, by vote of the holders of a majority of the outstanding shares
entitled to vote, may remove from office any
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Director and, unless the number of Directors constituting the whole Board is
simultaneously reduced by the Board, elect a successor.
6. Meetings. Regular meetings of the Board of Directors shall be
held at such time and place, either within or without the State of Maryland as
shall from time to time be determined by the Board of Directors, and, if so
determined, notices thereof need not be given. Special meetings of the Board
of Directors may be held at any time when called by the Chairman of the Board,
the President or two (2) or more Directors. Not less than twenty-four (24)
hours' notice of any special meeting shall be given by the Secretary or other
officer calling such meeting to each Director either in person or by telephone,
mail or telegram. Such special meetings shall be held at such time and place,
within or without the State of Maryland, as the notice thereof or waiver shall
specify. Unless otherwise specified in the notice thereof, any and all
business may be transacted at any meeting of the Board of Directors.
Any member of the Board of Directors, or of any committee organized by
the Board pursuant to Article III, may participate in any meeting of the Board
or committee of the Board of Directors, by means of a telephone conference or
similar communications equipment, provided that all persons participating in
the meeting can hear each other at the same time. Participation in a meeting
by these means constitutes presence in person at the meeting. This paragraph
shall not be applicable to settings held for the purpose of approving contracts
or agreements with persons undertaking to serve as an investment adviser or
principal underwriter to the Fund, or for the purpose of conducting any other
business with respect to which the members of the Board are required, under
applicable law, to attend the meeting in person in order to transact such
business.
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7. Quorum. At all settings of the Board of Directors, a majority
of the Directors shall be necessary and sufficient to constitute a quorum for
the transaction of business, and the act of the majority of the Directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute, by
the Articles of Incorporation or by these Bylaws. If a quorum shall not be
present at any meeting of the Board of Directors, the Directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
8. Informal Action. Except as otherwise required by applicable
law, any action to be taken by the Board of Directors may be taken without a
meeting, if written consent to such action is signed by all members of the
Board and filed with the minutes of the Board's proceedings.
9. Compensation. Directors may receive compensation for services
to the Corporation in their capacities as Directors, as determined by the
Board.
ARTICLE III
Committees
The Board of Directors may elect from their own number, by resolution
or resolutions passed by a majority of the whole Board, an executive committee
to consist of two (2) or more Directors, which shall have the power to conduct
the current and ordinary business of the Corporation while the Board of
Directors is not in session. The Board of Directors may also, in the same
manner, appoint from their own number from time to time other committees, the
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number composing any such committee and the powers conferred thereon to be
determined from the resolution creating the same.
ARTICLE IV
Notices
1. Manner of Giving. Whenever, under the provisions of the
Articles of Incorporation, these Bylaws or applicable law, notice is required
to be given to any shareholder or Director, such requirement shall not be
construed to mean personal notice unless the context otherwise provide. Such
notice may be given, in the case of shareholders, in writing, by mail, by
depositing the same in a post office or letter box, in a postpaid sealed
wrapper, addressed to such shareholder at such address as appears on the books
of the Corporation; and, in the case of Directors, committees of Directors and
advisory board members, by telephone, mail or telegram to the last business
address known to the Secretary of the Corporation. Such notice shall be deemed
to be given at the time when it is mailed, telephoned or telegraphed.
2. Waiver. Whenever any notice is required to be given under
applicable law, the Articles of Incorporation or these Bylaws, a waiver thereof
in writing, signed by the person or persons entitled to said notice, whether
before or after the time stated therein, and, if given with respect to a
meeting of the Board of Directors or a committee thereof, filed with the
records of the meeting, shall be equivalent thereto. Attendance at any meeting
where notice is required shall be deemed a waiver of the requirement for such
notice.
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ARTICLE V
Officers
1. Selection. The Officers of the Corporation shall be a
President, one or more Chief Operating Officers, a Secretary and a Treasurer,
shall be elected by the Board of Directors and shall serve at the pleasure of
the Board. The Board of Directors may elect one of its own members as Chairman
of the Board. The Board of Directors may also elect one or more Vice
Presidents, one or more Assistant Secretaries and Assistant Treasurers, and
such other Officers as it may deem advisable, and may prescribe their
respective duties. Two or more offices may be held by the same person, except
that any person holding the office of President shall not hold the office of
Vice President. Officers may be, but need not be, Directors.
2. Chairman of the Board. The Chairman of the Board, if one
shall be elected, shall preside at all meetings of the shareholders and Board
of Directors and shall perform such other duties as the Board of Directors may
from time to time prescribe.
3. President. The President shall be the Chief Executive Officer
of the Corporation and shall, in the absence of the Chairman, preside at all
meetings of the shareholders and Board of Directors. The President shall have
power to sign all certificates for shares of stock. The President shall
perform such other duties as the Board of Directors shall from time to time
prescribe.
4. Chief Operating Officers. Except in those instances in which
the authority to execute is expressly delegated to another officer or agent of
the Fund or a different mode of execution is expressly prescribed by the Board
of Directors or these Bylaws or where otherwise required by law, the Chief
Operating Officer of a portfolio may execute for that portfolio any
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<PAGE> 10
documents or instruments which the Board has authorized to be executed or the
execution of which is in the ordinary course of the Corporation's business. In
general, he shall also perform such other duties as from time to time may be
prescribed by the Chairman of the Board of Directors.
5. Vice Presidents. The Vice Presidents, in the order of their
seniority or as designated by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President and shall perform such other duties as the Board of Directors may
from time to time prescribe.
6. Secretary. The Secretary shall record all votes and
proceedings of meetings of the shareholders and of the Board of Directors in
the corporate records. He shall give, or cause to be given, notice of all
meetings of the shareholders and meetings of the Board of Directors when notice
thereof is required. The Secretary shall have custody of the corporate seal of
the Corporation and may affix the same to any instrument requiring the
corporate seal and attest to the same with his signature. He shall have power
to sign all certificates for shares of stock and shall perform such other
duties as the Board of Directors may from time to time prescribe.
7. Assistant Secretaries. The Assistant Secretaries, in order
of their seniority or as directed by the Board of Directors, shall in the
absence or disability of the Secretary perform the duties and exercise the
powers of the Secretary and shall perform such other duties as the Board of
Directors may prescribe.
8. Treasurer. The Treasurer shall deliver all funds and
securities of the Corporation which may come into his hands to such bank or
trust company as the Board of Directors may designate as custodian. He shall
keep such records of the financial transactions of the
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Corporation as the Board of Directors shall prescribe. The Treasurer shall
have power to sign all certificates for shares of stock and shall perform such
other duties as the Board of Directors may from time to time prescribe.
9. Assistant Treasurers. The Assistant Treasurers, in order of
their seniority or as directed by the Board of Directors, shall in the absence
or disability of the Treasurer perform the duties and exercise the powers of
the Treasurer and shall perform such other duties as the Board of Directors may
prescribe.
10. Term of Office: Removal: Vacancies. The Officers of the
Corporation shall hold office until their successors are chosen and qualified.
Any Officer elected or appointed by the Board of Directors may be removed at
any time by the affirmative vote of a majority of the whole Board of Directors.
If the office of any Officer shall become vacant for any reason, the vacancy
shall (or, in the case of a Chairman of the Board, a Chief Operating Officer, a
Vice President, an Assistant Secretary or an Assistant Treasurer, may) be
filled by the Board of Directors.
ARTICLE VI
Shares and Stock Certificate
1. Issuance of Stock Certificates. The Board of Directors may
authorize the issue of some or all of the shares of any or all its series
without certificates. Such authorization shall not affect shares already
represented by certificates until they are surrendered to the Corporation.
2. Form of Certificates; Replacement. If the Board of Directors
shall not have adopted a resolution providing that the Corporation shall issue
all shares of all classes without
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certificates, each holder of shares of a class for which certificates may be
issued shall be entitled to a certificate or certificates representing shares
of such class owned by such shareholder, in such form as shall be approved by
the Board of Directors. The certificates shall be signed by the President or a
Vice President and by the Treasurer, an Assistant Treasurer, the Secretary or
an Assistant Secretary. Any or all of the signatures or the seal on such
certificates say be a facsimile. In the case of any Officer who has signed or
whose facsimile signature has been used on any such certificate shall cease to
be such Officer, such certificate may be issued and delivered as though the
person whose signature appears on the certificate had not ceased to be such
Officer. All certificates for shares of a class shall be consecutively
numbered or otherwise identified. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation, alleged to have been lost or destroyed. When authorizing the
issue of a new certificate, the Board of Directors may, as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate, or its legal representative, to either advertise the same in such
manner as it shall require or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
3. Shareholder Open Accounts. The Corporation may (or, if the
Board of Directors shall have authorized the issue of all shares without
certificate pursuant to paragraph 1 of this Article VI, shall) maintain for
each shareholder a shareholder open account in which shall be recorded such
shareholder's ownership of shares and all changes therein. Even if the Board
shall not have 80 authorized the issue of all shares without certificates,
certificates need not be
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issued for shares 80 recorded in a shareholder open account unless requested by
such shareholder.
4. Transfers. Transfers of shares for which certificates have
been issued will be made only upon surrender to the Corporation or its transfer
agent of a certificate for shares of the same class duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer. Transfers of stock evidenced by open account authorized by Article
VI, paragraph 3 will be made upon delivery to the Corporation or its transfer
agent of instructions for transfer or evidence of assignment or succession of
the shares of a particular class, in each case executed in such manner and with
such supporting evidence as the Corporation or transfer agent may reasonably
require.
5. Record Dates. The Board of Directors may fix in advance a
date not exceeding ninety days preceding the date fixed for the payment of any
dividend or the allotment of rights as a record date for the determination of
the shareholders to receive any such dividend or allotment.
6. Registered Ownership. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends and to vote as such owner and shall not be bound
to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person, except as otherwise provided by the
laws of Maryland ("Maryland Law").
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ARTICLE VII
General Provisions
1. Disbursement of Funds. All checks, drafts, orders or
instructions for the payment of money and all notes of the Corporation shall be
signed as the Board of Directors may designate.
2. Voting Shares of Other Corporations. Unless otherwise ordered
by the Board of Directors, the President or any Officer designated by the
President shall have full power and authority to execute proxies to vote shares
at, or attend, act and vote at, any meeting of shareholders of any other
corporation in which this Corporation may own shares.
3. Execution of Instruments. All deeds, mortgages, bonds,
contracts, stock powers, reports and other instruments may be executed on
behalf of the Corporation by the Chairman of the Board, the President, any Vice
President, or other Officer or agent authorized by the Board of Directors to
act with respect to such matters. Such authorization may be general or
specific.
4. Seal. The seal of the Corporation shall be in such form as
the Board of Directors may from time to time determine. The seal may be
affixed or reproduced or otherwise. In the event it is deemed inconvenient to
use such seal at any time, the signature of the Corporation following the word
"Seals shall be deemed the seal of the Corporation.
5. Fiscal Year. Except as otherwise from time to time provided
by the Board of Directors, the fiscal year of the Corporation shall begin
January 1 and end December 31.
6. Custodian. All funds, securities and other investments of the
Corporation shall be deposited in the safekeeping of such banks or other
companies as the Board of Directors of
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<PAGE> 15
the Corporation may from time to time determine. Every arrangement entered
into with any bank or other company for the safekeeping of the securities and
investments of the Corporation shall contain provisions complying with the 1940
Act and the general rules and regulations thereunder.
7. Auditor. An auditor shall be selected annually in accordance
with the 1940 Act or any successor statute.
ARTICLE VIII
Indemnification
1. Indemnification of Directors and Officers. Except as provided
in paragraph 2 herein, every person who is, or has been, a Director or Officer
of the Corporation (including any person who, while a Director of the
Corporation, has served at the request of the Corporation as a director,
officer or trustee of another organization in which the Corporation has an
interest as a shareholder, creditor or otherwise), hereinafter referred to as a
"Covered Person, shall be indemnified by the Corporation to the fullest
extent permitted by law against liability and against all expenses reasonably
incurred or paid by such person in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of
such directorship, officership, trusteeship or employment, and against amounts
paid or incurred by him in the settlement thereof. The words claim," "action,"
"suit" or "proceeding" shall apply to all claims, actions, suits or proceeding"
(civil, criminal or other, including appeals), actual or threatened, and the
words "liability" and "expenses" shall include, without
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<PAGE> 16
limitation, attorneys' fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
2. Limitation of Indemnification. No indemnification shall be
provided hereunder to any Covered Person:
(a) who shall have been finally adjudicated by a court or
body before which the proceeding was brought:
(i) to be liable to the Corporation or its
shareholders by reason of willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in
the conduct of his office;
(ii) not to have acted in good faith (A) in the
case of a director acting in his or her
official capacity with the Corporation, in
the reasonable belief that his or her conduct
was in the best interests of the Corporation,
or 18 (B) in all other cases, in the
reasonable belief that his or her conduct was
at best not opposed to the best interests of
the Corporation; or
(b) in the event of a settlement, unless there has been a
determination that such Director or Officer did not
engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties
involved in the conduct of his office:
(i) by the court or other body approving the
settlement;
(ii) by at least a majority of those Directors who
are neither interested persons of the
Corporation nor are parties to the matter
based upon
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a review of readily available facts (as
opposed to a full trial-type inquiry); or
(iii) by written opinion of independent legal
counsel based upon a review of readily
available facts (as opposed to a full trial
type inquiry); provided, however, that any
shareholder may, by appropriate legal
proceedings, challenge any such determination
by the Directors, or by independent counsel.
3. Insurance. The rights of indemnification provided to Covered
Persons herein may be insured against by policies maintained by the
Corporation, shall be severable, shall not be exclusive of or affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such director, trustee or officer
and shall inure to the benefit of the heirs, executors and administrators of
such person. Nothing contained herein shall affect any rights to
indemnification to which Corporation personnel and other persons, other than
Covered Persons, may be entitled by contract or otherwise under applicable law.
4. Expenses. Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of the
character described in paragraph 1 of this Article VIII may be paid by the
Corporation from time to time prior to final disposition thereof upon receipt
of an undertaking by or on behalf of such Covered Person that such amount will
be paid over by him to the Corporation if it is ultimately determined that he
is not entitled to indemnification under this Article VIII; provided, however,
that either:
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(a) such Covered Person shall have provided appropriate
security for such undertaking;
(b) the Corporation is insured against losses arising out
of any such advance payments; or
(c) either a majority of the Directors who are neither
interested persons of the Corporation nor are parties
to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a
review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to
believe that such Covered Person will be found
entitled to indemnification under this Article VIII.
5. Indemnification of Other Persons. Subject to the provisions
of this Article VIII, the Corporation may indemnify, in the discretion of the
Board of Directors, any person who is or has been an employee or agent of the
Corporation or who has served at the request of the Corporation as an employee
or agent of another organization in which the Corporation has an interest as a
shareholder, creditor or otherwise, who is not a Covered Person, against any
liability and all expenses reasonably incurred or paid by such person in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of such employment or agency and
against amounts paid or incurred by him in the settlement thereof.
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ARTICLE IX
Amendments
Either the Board of Directors or the shareholders may make, amend,
alter or repeal the Bylaws at any meeting duly held.
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EXHIBIT 99.B5a
MANAGEMENT AGREEMENT
AGREEMENT made as of this first day of May, 1996, by and between WILLIAM
BLAIR MUTUAL FUNDS, INC., a Maryland corporation (the "Fund"), and WILLIAM
BLAIR & COMPANY, L.L.C., an Illinois limited liability company (the "Manager").
WHEREAS, the Fund is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, the shares of
common stock, $.001 per value per share ("Shares"), of which are registered or
are to be registered under the Securities Act of 1933; and
WHEREAS, the Fund is authorized to issue Shares in separate series with
each such series representing the interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund currently offers Shares in four portfolios, designated
the Growth Fund, the International Growth Fund, the Income Fund and the Ready
Reserves Fund, herein referred to as the "Existing Portfolios", together with
any other Fund portfolios which may be established later and served by the
Manager hereunder, being herein referred to collectively as the "Portfolios"
and individually referred to as a "Portfolio"; and
WHEREAS, the Fund desires at this time to retain the Manager to render
investment advisory and management services to the Existing Portfolios, and the
Manager is willing to render such services;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, it is hereby agreed by and between the parties hereto as follows:
1. Employment; Services. The Fund hereby employs the Manager to
act as the adviser for the Existing Portfolios and other Portfolios hereunder
and to manage the investment
<PAGE> 2
and reinvestment of the assets of such Portfolios in accordance with applicable
investment objectives, policies and restrictions, and to administer its affairs
to the extent requested by and subject to the supervision of the Board of
Directors of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of the
Articles of Incorporation and By-Laws of the Fund as may from time to time be
in force.
The Manager accepts such employment and agrees during such period to
render such services, to furnish office facilities and equipment and clerical,
bookkeeping and administrative services for the Fund, to permit any of its
principals or employees to serve without compensation as directors or officers
of the Fund if elected to such positions, and to assume the obligations herein
set forth for the compensation herein provided. The Manager shall for all
purposes herein provided be deemed to be an independent contractor and, unless
otherwise expressly provided or authorized, shall have no authority to act for
or represent the Fund in any way or otherwise be deemed an agent of the Fund.
It is understood and agreed that the Manager, by separate agreements with the
Fund, may also serve the Fund in other capacities.
2. Additional Portfolios. In the event that the Fund establishes
one or more portfolios other than the Existing Portfolios with respect to which
it desires to engage the Manager to render investment advisory and management
services hereunder, it shall notify the Manager in writing. If the Manager is
willing to render such services and the Fund and the Manager agree upon the
management fee rates (including breakpoints) to be payable by such portfolio or
portfolios, the Manager shall notify the Fund in writing, whereupon such
portfolio or portfolios shall become a Portfolio or Portfolios hereunder.
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3. Management Fee. For the services and facilities described in
Section 1, the Fund will pay to the Manager a management fee based upon an
annual percentage of the average daily net assets of each Portfolio, as
follows:
a. For the Growth Fund:
.75% of average daily net assets.
b. For the International Growth Fund:
1.10% of the first $250 million of average daily net assets;
plus
1.00% of average daily net assets over $250 million.
c. For the Income Fund:
.25% of the first $250 million of average daily net assets;
plus
.20% of average daily net assets over $250 million; plus
5.0% of the gross income earned by the Portfolio.
d. For the Ready Reserves Fund:
.625% of the first $250 million of average daily net assets;
plus
.600% of the next $250 million of average daily net assets;
plus
.575% of the next $2,000 million of average daily net assets;
plus
.550% of average daily net assets over $2,500 million.
The fee payable under this Agreement shall be calculated and accrued for each
business day by applying the appropriate annual rates to the net assets of the
Portfolio as of the close of the preceding business day, and dividing the sum
so computed by the number of business days in the fiscal year. The fee for a
given month shall be paid on the first business day of the following month.
For the month and year in which this Agreement becomes effective or
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<PAGE> 4
terminates, there shall be an appropriate proration on the basis of the number
of days that the Agreement is in effect during the month and year,
respectively. The services of the Manager to the Fund under this Agreement are
not to be deemed exclusive, and the Manager shall be free to render similar
services or other services to others so long as its services hereunder are not
impaired thereby.
4. Expenses. In addition to the fee of the Manager, the Fund shall
assume and pay expenses for services rendered by a custodian for the
safekeeping of the Fund's securities or other property, for keeping its books
for account, for any other charges of the custodian, and for calculating the
net asset value of the Fund as provided in the prospectus of the Fund. The
Manager shall not be required to pay and the Fund shall assume and pay the
charges and expenses of its operations, including but not limited to
compensation of the directors (other than those affiliated with the Manager),
charges and expenses of independent auditors, of legal counsel, of any transfer
or dividend disbursement agent, any registrar of the Fund, costs of acquiring
and disposing of portfolio securities, interest, if any, on obligations
incurred by the Fund, costs of share certificates and of reports, membership
dues in the Investment Company Institute or any similar organization, reports
and notices to shareholders, stationery, printing, postage, other like
miscellaneous expenses and all taxes and fees payable to federal, state or
other government agencies on account of the registration of securities issued
by the Fund, filing of corporate documents or otherwise. The Fund shall not
pay or incur any obligation for any expenses for which the Fund intends to seek
reimbursement from the Manager as herein provided without first obtaining the
written approval of the Manager. The Manager shall arrange, if desired by the
Fund, for principals or employees of the Manager to serve, without
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<PAGE> 5
compensation from the Fund, as directors, officers or agents of the Fund if
duly elected or appointed to such positions and subject to their individual
consent and to any limitations imposed by law.
If expenses borne by the Fund for any Portfolio which the Manager manages
in any fiscal year (including the Manager's fee, but excluding interest, taxes,
fees incurred in acquiring and disposing of portfolio securities and, to the
extent permitted, extraordinary expenses) exceed 1.5% of the first $30,000,000
of average daily net assets of such Portfolio and 1% of average daily net
assets of the Portfolio over $30,000,000, the Manager will reduce its fee or
reimburse the Portfolio for any excess. If for any month the expenses of a
Portfolio properly chargeable to the income account shall exceed 1/12 of the
percentage of average net assets allowable as expenses, the payment to the
Manager with respect to such Portfolio for that month shall be reduced so that
the total net expense will not exceed such percentage. As of the end of the
Fund's fiscal year, however, the foregoing computations and payments shall be
readjusted so that the aggregate compensation payable to the Manager for the
year is equal to the percentage set forth in Section 3 hereof of the average
net asset values as determined as described herein throughout the fiscal year,
diminished to the extent necessary so that the total of the aforementioned
expense items shall not exceed the expense limitation. The aggregate of
repayments, if any, by the Manager to the Portfolio for the year shall be the
amount necessary to limit the said net expense to said percentage.
Notwithstanding anything in the foregoing to the contrary, the Manager shall
not be obligated to reimburse the Portfolio in an amount exceeding its advisory
fee for the period received from such Portfolio.
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The net asset value for each Portfolio shall be calculated in accordance
with the provisions of the Fund's prospectus or at such other time or times as
the directors may determine in accordance with the provisions of the Investment
Company Act of 1940. On each day when the net asset value is not calculated,
the net asset value of a share of a Portfolio shall be deemed to be the net
asset value of such a share as of the close of business on the last day on
which such calculation was made for the purpose of the foregoing computations.
5. Affiliations. Subject to applicable statutes and regulation, it
is understood that directors, officers or agents of the Fund are or may be
interested in the Manager as principals, agents or otherwise, and that the
principals and agents of the Manager may be interested in the Fund otherwise
than as a director, officer or agent.
6. Limitation of Liability of Manager. The Manager shall not be
liable for any error of judgment or of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement relates, except loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of the Manager in the performance of its obligations and duties or by reason of
its reckless disregard of its obligations and duties under this Agreement.
7. Term; Termination; Amendment. This Agreement shall become
effective with respect to the Existing Portfolios on the date hereof and shall
remain in full force until April 30, 1997, unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter with respect to the Existing Portfolios and each other Portfolio to
which the Agreement shall have become applicable, but only so long as such
continuance is specifically approved for each Portfolio at least annually in
the manner required by the Investment Company Act of 1940 and the rules and
regulations thereunder; provided,
-6-
<PAGE> 7
however, that if the continuation of this Agreement is not approved for a
Portfolio, the Manager may continue to serve in such capacity for such
Portfolio in the manner and to the extent permitted by the Investment Company
Act of 1940 and the rules and regulations thereunder.
This Agreement shall automatically terminate in the event of its
assignment and may be terminated at any time without the payment of any penalty
by the Fund or by the Manager on sixty (60) days written notice to the other
party. The Fund may effect termination with respect to any Portfolio by action
of the Board of Directors or by vote of a majority of the outstanding voting
securities of such Portfolio.
This Agreement may also be terminated with respect to any Portfolio at any
time, without the payment of any penalty, by the Board of Directors or by vote
of a majority of the outstanding voting securities of such Portfolio, in the
event that it shall have been established by a court of competent jurisdiction
that the Manager or any officer or principal of the Manager has taken any
action which results in a breach of the covenants of the Manager set forth
herein.
The terms "assignment" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth in the Investment Company Act of
1940 and the rules and regulations thereunder.
Termination of this Agreement shall not affect the right of the Manager to
receive payments on any unpaid balance of the compensation described in Section
3 earned prior to such termination.
As to each Portfolio of the Fund, this Agreement may be amended only by an
instrument in writing signed by the party against which enforcement of the
amendment is sought. An amendment of this Agreement affecting a Portfolio
hereunder shall not be effective until
-7-
<PAGE> 8
approved by (i) vote of the holders of a majority of the outstanding voting
securities of the Portfolio; and (ii) a majority of those Directors of the Fund
who are not parties to this Agreement or "interested persons" (as defined in
the Investment Company Act of 1940) of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
8. Severability. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
shall not be thereby affected.
9. Notice. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
10. Applicable Law. This Agreement shall be construed in
accordance with applicable federal law and the laws of the State of Illinois.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the Fund and the Manager have caused this Agreement to
be executed as of the day and year first above written.
WILLIAM BLAIR MUTUAL FUNDS, INC.
By:
-------------------------------------
ATTEST:
- ---------------------------
WILLIAM BLAIR & COMPANY, L.L.C.
By:
-------------------------------------
ATTEST:
- ---------------------------
-9-
<PAGE> 1
EXHIBIT 99.B5f
SUB-INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of October 1, 1992 by and among WILLIAM BLAIR &
COMPANY, a Delaware corporation and U.S. registered investment adviser (the
"Adviser"), FRAMLINGTON OVERSEAS INVESTMENT MANAGEMENT LIMITED, an English
corporation and U.S. registered investment adviser (the "Sub-Adviser"), and
FRAMLINGTON GROUP plc, an English corporation ("Framlington").
WHEREAS, the Adviser is the investment manager for William Blair Mutual
Funds, Inc. (the "Fund"), an open-end diversified, management investment
company registered under the Investment Company Act of 1940, as amended ("1940
Act"); and
WHEREAS, the Adviser serves as investment adviser and manager for the
International Growth Shares Portfolio, an investment portfolio of the Fund (the
"Portfolio") and wants to retain the Sub-Adviser as the Adviser's agent to
furnish certain investment advisory services for the Portfolio; and
WHEREAS, FRAMLINGTON is the parent corporation of the Sub-Adviser.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Appointment. The Adviser hereby appoints the Sub-Adviser to
provide certain sub-investment management services to the Fund for the period
and on the terms set forth in this Agreement. The Sub-Adviser accepts such
appointment and agrees to furnish the services herein set forth for the
compensation herein provided.
2. Management. Subject always to the supervision of the Fund's
Board of Directors and the Adviser, the Sub-Adviser will furnish an investment
program in respect of, and make investment decisions for, all assets of the
Portfolio and place all orders for the purchase and sale of securities, all on
behalf of the Portfolio. In the performance of its duties, the Sub-Adviser
will satisfy its fiduciary duties to the Portfolio (as set forth in Section 8,
below), and will monitor the Portfolio's investments, and will comply with the
provisions of the Fund's Articles of Incorporation and By-Laws, as amended from
time to time, and the stated investment objectives, policies and restrictions
of the Portfolio. The Sub-Adviser and the Adviser will each make its officers
and employees available to the other from time to time at reasonable times to
review investment policies of the Portfolio and to consult with each other
regarding the investment affairs of the Portfolio. The Sub-Adviser will report
to the Board of Directors and to the Adviser with respect to the implementation
of such program.
The Sub-Adviser further agrees that it:
(a) will use the same skill and care in providing such services as
it uses in providing services to fiduciary accounts for which it has
investment responsibilities;
<PAGE> 2
(b) will conform with all applicable Rules and Regulations of the
Securities and Exchange Commission and the Rules of IMRO (Investment
Management Regulatory Organisation Limited) and in addition will conduct
its activities under this Agreement in accordance with any applicable
regulations of any governmental authority pertaining to its investment
advisory activities;
(c) will place orders pursuant to its investment determinations for
the Portfolio either directly with the issuer or with any broker or
dealer. In placing orders with brokers and dealers, the Sub-Adviser will
attempt to obtain the most favorable overall results, taking into account
the net price, the method of execution and research services provided.
Consistent with this obligation, when the execution and price offered by
two or more brokers or dealers are comparable, the Sub-Adviser may, in its
discretion, purchase and sell portfolio securities to and from brokers and
dealers who provide the Sub-Adviser with research advice and other
services. In no instance will portfolio securities be purchased from or
sold to the Adviser, the Sub-Adviser or any affiliated person of either
the Fund, the Adviser, or the Sub-Adviser, except as may be permitted
under the 1940 Act;
(d) will report regularly to the Adviser and to the Board of
Directors and will make appropriate persons available for the purpose of
reviewing with representatives of the Adviser and the Board of Directors
on a regular basis at reasonable times the management of the Portfolio,
the performance of the Portfolio in relation to standard industry indices,
interest rate considerations and general conditions affecting the
marketplace and will provide various other reports from time to time as
reasonably requested by the Adviser;
(e) will maintain books and records with respect to the Fund's
securities transactions and will furnish the Adviser and the Fund's Board
of Directors such periodic and special reports as the Board or the Adviser
may request;
(f) will act upon instructions from the Adviser not inconsistent
with the fiduciary duties hereunder;
(g) will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund, and will not
use records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to
and approval in writing by the Fund, which approval shall not be
unreasonably withheld and may not be withheld either where the Sub-Adviser
may be exposed to civil or criminal contempt proceedings for failure to
comply, or when requested to divulge such information by duly constituted
authorities, or when so requested by the Fund; and
(h) will receive the research and recommendations of the Adviser
with respect to the investment and reinvestment of the assets of the
Portfolio.
2
<PAGE> 3
3. Books and Records. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which
it maintains for the Fund are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records or copies of such records
upon the Fund's request. The Sub-Adviser further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act the records required to be
maintained by Rule 31a-1 under the 1940 Act.
4. Expenses. During the term of this Agreement, the Sub-Adviser will
pay all expenses incurred by it in connection with its activities under this
Agreement other than the cost of securities (including brokerage commissions,
if any) purchased for the Fund.
5. Sub-Advisory Fees. For the services provided and the expenses
assumed pursuant to this Agreement, the Adviser will pay the Sub-Adviser, and
the Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory
fee, accrued daily and payable monthly, computed at the annual rate of .40% of
the first $100,000,000 of average daily net assets of the Portfolio subject to
this Agreement and .275% of the average daily net assets in excess of
$100,000,000.
6. Services to Others. The Adviser understands, and has advised the
Fund's Board of Directors, that the Sub-Adviser may in the future act as an
investment adviser to fiduciary and other managed accounts and as investment
adviser or sub-investment adviser to other investment companies. The Adviser has
no objection to the Sub-Adviser's acting in such capacities, provided that
whenever the Portfolio and one or more other investment companies, or accounts
advised by the Sub-Adviser have available funds for investment, investments
suitable and appropriate for each will be allocated in a manner which in the
opinion of the Sub-Adviser is the most equitable for the Portfolio and all
other companies concerned. The Adviser recognizes, and has advised the Fund's
Board of Directors, that in some cases this procedure may adversely affect the
size of the position that the Portfolio may obtain in a particular security. In
addition, the Adviser understands, and has advised the Fund's Board of
Directors, that the persons employed by the Sub-Adviser to assist in the
Sub-Adviser's duties under this Agreement will not devote their full time to
such service and nothing contained in this Agreement will be deemed to limit or
restrict the right of Sub-Adviser or any of its affiliates to engage in and
devote time and attention to other businesses or to render services of whatever
kind or nature.
(a) The Adviser shall be responsible for making custodial
arrangements for the Portfolio.
(b) All assets in respect of which the Sub-Adviser shall provide
services pursuant to this Agreement shall be the property of the Fund. All
investments capable of registration will be registered in the name of the
Fund or the Fund's Custodian. All certificates and documents of title
relating to any such assets (whether or not in registered form) will be
held for safekeeping by the Fund's Custodian.
3
<PAGE> 4
(c) The Adviser hereby authorizes the Sub-Adviser to give such
instructions to the Fund's Custodian for delivery of all documents
relating to title, rights and privileges attaching to investments as is
necessary in connection with any services provided by the Sub-Adviser
under this Agreement.
7. Limitation of Liability. The Adviser will not take any action
against the Sub-Adviser to hold the Sub-Adviser liable for any error of
judgment or mistake of law or for any loss or failure to take profit or
advantage in connection with the performance of the Sub-Adviser's duties under
this Agreement, except a loss resulting from Sub-Adviser's willful misfeasance,
bad faith, or gross negligence in the performance of its duties under this
Agreement. In addition, the Sub-Adviser shall not be liable for any act or
default by the Fund's Custodian.
8. Indemnification. The Adviser agrees to indemnify the
Sub-Adviser and the Sub-Adviser and Framlington each agree to indemnify the
Adviser against any claim against, loss or liability to such other party
(including reasonable attorneys' fees) arising out of any action on the part of
the indemnifying party which constitutes willful misfeasance, bad faith or
gross negligence.
9. Duration and Termination. This Agreement will become effective
as to the Portfolio on October 1, 1992, provided that it has been approved by
vote of a majority of the outstanding voting securities of the Portfolio in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, will continue in effect until April 30, 1994.
Thereafter, if not terminated, this Agreement will continue in
effect for the Portfolio for successive periods of twelve months each ending on
April 30 of each year, provided such continuation is specifically approved at
least annually (a) by the vote of a majority of those members of the Fund's
Board of Directors who are not interested persons of the Fund, the Sub-Adviser,
or the Adviser, cast in person at a meeting called for the purpose of voting on
such approval, and (b) by the vote of a majority of the Fund's Board of
Directors or by the vote of a majority of all votes attributable to the
outstanding Shares of the Portfolio. Notwithstanding the foregoing, this
Agreement may be terminated as to the Portfolio at any time, without the
payment of any penalty, on sixty days' written notice by the Adviser or by the
Sub-Adviser on ninety (90) days' written notice and may also be terminated at
any time without penalty by the Board of Directors of the Fund or by vote of a
majority of all votes attributable to the outstanding shares of the Portfolio
on sixty (60) day's written notice to Sub-Adviser by the Fund. This Agreement
will immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" have the same meaning of such terms in
the 1940 Act.) This Agreement shall automatically terminate in the event that
the Management Agreement between the Adviser and the Fund with respect to the
Portfolio is terminated, assigned or not renewed.
4
<PAGE> 5
10. Amendment of this Agreement. No provision of this Agreement
may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
11. Notice. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement is held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement will not be
affected thereby. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and will be
governed by the laws of the United States and the State of Illinois.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
WILLIAM BLAIR & COMPANY
By: /s/Norbert W. Truderung
------------------------------
Name: NORBERT W. TRUDERUNG
Title: PARTNER, WILLIAM BLAIR
& COMPANY, SENIOR V.P., WILLIAM
BLAIR MUTUAL FUNDS, INC.
FRAMLINGTON OVERSEAS INVESTMENT
MANAGEMENT LIMITED
By: /s/W.G. Greig
------------------------------
Name: W.G. Greig
-----------------------------
Title: Director
----------------------------
5
<PAGE> 6
FRAMLINGTON OVERSEAS INVESTMENT
MANAGEMENT LIMITED
By: /s/M. Hasui
------------------------------
Name: M. Hasui
-----------------------------
Title: Deputy Chairman
----------------------------
6
<PAGE> 1
EXHIBIT 99.B6
UNDERWRITING AGREEMENT
AGREEMENT made as of this 5th day of January, 1988, between WILLIAM BLAIR
READY RESERVES, INC., a Maryland corporation (hereinafter called the "Fund"),
and WILLIAM BLAIR & COMPANY, a general partnership (hereinafter called the
"Underwriter");
W I T N E S S E T H:
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Fund hereby appoints the Underwriter as its agent for the
distribution of shares (hereinafter called "shares") of stock of any of the
Fund's authorized Portfolios in jurisdictions wherein shares of the Fund may
legally be offered for sale; provided, however, that the Fund in its absolute
discretion may issue or sell shares directly to holders of shares of the Fund
upon such terms and conditions and for such consideration, if any, as it may
determine, whether in connection with the distribution of subscription or
purchase rights, the payment or reinvestment of dividends or distributions, or
otherwise.
2. The Underwriter hereby accepts appointment as agent for the
distribution of the shares of the Fund and agrees that it will use its best
efforts with reasonable promptness to sell such part of the authorized shares
of the Fund remaining unissued as from time to time shall be effectively
registered under the Securities Act of 1933 ("Securities Act"), at prices
determined as hereinafter provided and on terms hereinafter set forth, all
subject to applicable federal and state laws and regulations and to the
Articles of Incorporation and the Bylaws of the Fund and in accordance with the
then effective registration statement ("Registration Statement") of the Fund
under the Securities Act (and related prospectus).
3. The Fund agrees that it will use its best efforts to keep
effectively registered under the Securities Act for sale as herein contemplated
such shares as the Underwriter shall reasonably request and as the Securities
and Exchange Commission shall permit to be so registered.
4. Notwithstanding any other provision hereof, the Fund may
terminate, suspend or withdraw the offering of shares whenever, in its sole
discretion, it deems such action to be desirable.
5. The Underwriter shall hold itself available to receive or will
arrange for the receipt of orders for the purchase of shares of each Portfolio
and shall have authority to receive and accept or reject, or arrange for the
receipt and acceptance of, such orders in accordance with the provisions hereof
and the then effective Registration Statement of the Fund.
6. Shares of the Fund offered for sale or sold by the Underwriter
shall be so offered or sold at a price per share determined in accordance with
the Fund's then current prospectus relating to the sale of such shares except
as departure from such prices shall be permitted by the
<PAGE> 2
rules and regulations of the Securities and Exchange Commission; provided,
however, that any public offering price for shares of the Fund shall be the net
asset value per share. The net asset value per share shall be determined in
the manner and at the times set forth in the then effective Registration
Statement (and related prospectus) relating to such shares.
7. The price the Fund shall receive for all shares purchased from
the Fund shall be the net asset value used in determining the public offering
price applicable to the sale of such shares.
8. The Underwriter shall issue and deliver on behalf of the Fund
such confirmations of sales made by it as agent pursuant to this agreement as
may be required. At or prior to the time of issuance of shares, the
Underwriter will pay or cause to be paid to the Fund the amount due the Fund
for the sale of such shares. Shares shall be registered on the transfer books
of the Fund in such names and denominations as the Underwriter may specify.
9. The Fund will execute any and all documents and furnish any and
all information which may be reasonably necessary in connection with the
qualification of its shares for sale in such states as the Underwriter may
reasonably request (it being understood that the Fund shall not be required
without its consent to comply with any requirement which in its opinion is
unduly burdensome).
10. The Fund will furnish to the Underwriter from time to time such
information with respect to the Fund and its shares as the Underwriter may
reasonably request for use in connection with the sale of shares of the Fund.
The Underwriter agrees that it will not use or distribute or authorize the use,
distribution or dissemination by others in connection with the sale of such
shares any statements, other than those contained in the Fund's current
prospectus or statement of additional information, except such supplemental
literature or advertising as shall be lawful under federal and state securities
laws and regulations, and that it will furnish the Fund with copies of all such
material.
11. The Underwriter shall order shares of the Fund from the Fund
only to the extent that it shall have received purchase orders therefor. The
Underwriter will not make, or authorize any others to make, any short sales of
shares of the Fund.
12. The Underwriter, as agent of and for the account of the Fund,
may repurchase the shares of the Fund at such prices and upon such terms and
conditions as shall be specified in the current prospectus or statement of
additional information of the Fund.
13. In selling or reacquiring shares of the Fund for the account of
the Fund, the Underwriter will in all respects conform to the requirements of
all state and Federal laws and the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., relating to such sale or
reacquisition, as the case may be, and will indemnify and save harmless the
Fund from any damage or expense on account of any wrongful act by the
Underwriter or any employee, representative or agent of the Underwriter. The
Underwriter will observe and be bound by all
2
<PAGE> 3
the provisions of the Agreement and Articles of Incorporation of the Fund (and
of any fundamental policies adopted by the Fund pursuant to the Investment
Company Act of 1940 and set forth in the Registration Statement, or as to which
notice shall otherwise have been given to the Underwriter) which at any time in
any way require, limit, restrict or prohibit or otherwise regulate any action
on the part of the Underwriter.
14. The Underwriter will require each of its employees, agents or
representatives to conform to the provisions hereof and the Registration
Statement (and related prospectus) at the time in effect under the Securities
Act with respect to the public offering price of the Fund's shares, and neither
the Underwriter nor any such employees, agents or representatives shall
withhold the placing of purchase orders so as to make a profit thereby.
15. The Fund will pay or cause to be paid expenses (including the
fees and disbursements of its own counsel) and all taxes and fees payable to
the federal, state or other governmental agencies on account of the
registration or qualifications of securities issued by the Fund or otherwise.
The Fund will also pay or cause to be paid expenses incident to the issuance of
shares of beneficial interest, such as the cost of share certificates, issue
taxes, and fees of the transfer agent. The Underwriter will pay all expenses
(other than expenses which one or more dealers may bear pursuant to any
agreement with the Underwriter) incident to the sale and distribution of the
shares issued or sold hereunder, including, without limiting the generality of
the foregoing, all expenses of printing and distributing any prospectus and of
preparing, printing and distributing or disseminating any other literature,
advertising and selling aids in connection with the offering of the shares for
sale (except that such expenses need not include expenses incurred by the Fund
in connection with the preparation, typesetting, printing and distribution of
any registration statement or report or other communication to stockholders in
their capacity as such) and expenses of advertising in connection with such
offering.
16. This agreement shall become effective on the date hereof and
shall continue in effect until April 30, 1989 and from year to year thereafter,
but only so long as such continuance is approved in the manner required by the
Investment Company Act of 1940. Either party hereto may terminate this
agreement on any date by giving the other party at least six months prior
written notice of such termination specifying the date fixed therefor. Without
prejudice to any other remedies of the Fund in any such event the Fund may
terminate this agreement at any time immediately upon any failure of
fulfillment of any of the obligations of the Underwriter hereunder.
17. This agreement shall automatically terminate in the event of
its assignment.
18. Any notice under this agreement shall be in writing, addressed
and delivered or mailed, postage postpaid, to the other party at such address
as such other party may designate for the receipt of such notice.
3
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Underwriter have each caused this
agreement to be executed on its behalf by an officer thereunto duly authorized
and its seal to be affixed as of the day and year first above written.
ATTEST: WILLIAM BLAIR READY RESERVES, INC.
/s/Terence M. Sullivan By: /s/James L. Barber, Jr.
- -------------------------- ------------------------------------
ATTEST: WILLIAM BLAIR & COMPANY
/s/W. James Truettner, Jr. By: /s/Conrad Fischer
- -------------------------- ------------------------------------
4
<PAGE> 1
EXHIBIT 99.B8
CUSTODIAN AGREEMENT
Between
WILLIAM BLAIR MUTUAL FUNDS, INC.
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Bank Appointed Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Authorized Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Portfolio Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Book-Entry System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Certification as to Authorized Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Custody of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.1 Purchase of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.2 Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.3 Distributions and Expenses of Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.4 Payment in Respect of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.5 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.6 Repayment of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.7 Foreign Exchange Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.8 Other Authorized Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.9 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.1 Segregation and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.2 Voting and Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.3 Book-Entry System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.4 Use of a Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.5 Use of Book-Entry System for Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.6 Use of Immobilization Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.7 Eurodollar CDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.8 Options and Futures Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.9 Segregated Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.10 Interest Bearing Call or Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.11 Transfer of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7. Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. Merger, Dissolution, etc. of Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. Actions of Bank Without Prior Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10. Collections and Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11. Maintenance of Records and Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
12. Fund Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13. Concerning the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.1 Performance of Duties and Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.2 Agents and Subcustodians with Respect to
Property of the Fund Held in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13.3 Duties of the Bank with Respect to Property
of the Fund Held Outside of the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
13.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
13.5. Fees and Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
13.6 Advances by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
15. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
17. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
20. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
21. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
ii
<PAGE> 4
CUSTODIAN AGREEMENT
AGREEMENT made as of this 26th day of February, 1996, between WILLIAM
BLAIR MUTUAL FUNDS, INC., a Maryland corporation (the "Fund"), and INVESTORS
BANK & TRUST COMPANY (the "Bank").
The Fund, an open-end management investment company, desires to place
and maintain all of its portfolio securities and cash in the custody of the
Bank. The Bank has at least the minimum qualifications required by Section
17(f)(1) of the Investment Company Act of 1940 (the "1940 Act") to act as
custodian of the portfolio securities and cash of the Fund, and has indicated
its willingness to so act, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank
as custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. Definitions. Whenever used herein, the terms listed below
will have the following meaning:
2.1 Authorized Person. Authorized Person will mean any
of the persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Fund by appropriate resolution of its Board of Directors or the
Board of Trustees as the case may be ("the Board"), and set forth in a
certificate as required by Section 4 hereof.
2.2 Security. The term security as used herein will have
the same meaning as when such term is used in the Securities Act of 1933, as
amended, including, without limitation, any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation
in any profit sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option, or privilege on any security, certificate of deposit, or
group or index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option, or privilege entered into
on a national securities exchange relating to a foreign currency, or, in
general, any interest or instrument commonly known as a "security", or any
certificate of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to, or option
contract to purchase or sell any of the foregoing, and futures, forward
contracts and options thereon.
2.3 Portfolio Security. Portfolio Security will mean any
Security owned by the Fund.
<PAGE> 5
2.4 Officers' Certificate. Officers' Certificate will
mean, unless otherwise indicated, any request, direction, instruction, or
certification in writing signed by any two Authorized Persons of the Fund.
2.5 Book-Entry System. Book-Entry System shall mean the
Federal Reserve-Treasury Department Book Entry System for United States
government, instrumentality and agency securities operated by the Federal
Reserve Bank, its successor or successors and its nominee or nominees.
2.6 Depository. Depository shall mean The Depository
Trust Company ("DTC"), a clearing agency registered with the Securities and
Exchange Commission under Section 17A of the Securities Exchange Act of 1934
("Exchange Act"), its successor or successors and its nominee or nominees. The
term "Depository" shall further mean and include any other person authorized to
act as a depository under the 1940 Act, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a
resolution of the Board.
2.7 Proper Instructions. Proper Instructions shall mean
(i) instructions (which may be continuing instructions) regarding the purchase
or sale of Portfolio Securities, and payments and deliveries in connection
therewith, given by an Authorized Person as shall have been designated in an
Officers' Certificate, such instructions to be given in such form and manner as
the Bank and the Fund shall agree upon from time to time, and (ii) instructions
(which may be continuing instructions) regarding other matters signed or
initialed by such one or more persons from time to time designated in an
Officers' Certificate as having been authorized by the Board. Oral
instructions will be considered Proper Instructions if the Bank reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause
all oral instructions to be promptly confirmed in writing. The Bank shall act
upon and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up
or confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to
report such discrepancy to the Fund. The Fund shall be responsible, at the
Fund's expense, for taking any action, including any reprocessing, necessary to
correct any such discrepancy or error, and to the extent such action requires
the Bank to act the Fund shall give the Bank specific Proper Instructions as to
the action required. Upon receipt of an Officers' Certificate as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Fund, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank are satisfied that such procedures afford adequate
safeguards for the Fund's assets.
3. Separate Accounts. If the Fund has more than one series or
portfolio, the Bank will segregate the assets of each series or portfolio to
which this Agreement relates into a separate account for each such series or
portfolio containing the assets of such series or portfolio (and all investment
earnings thereon). Unless the context otherwise requires, any reference in
2
<PAGE> 6
this Agreement to any actions to be taken by the Fund shall be deemed to refer
to the Fund acting on behalf of one or more of its series, any reference in
this Agreement to any assets of the Fund, including, without limitation, any
Portfolio Securities and cash and earnings thereon, shall be deemed to refer
only to assets of the applicable series, any duty or obligation of the Bank
hereunder to the Fund shall be deemed to refer to duties and obligations with
respect to the individual series, and any obligation or liability of the Fund
hereunder shall be binding only with respect to the individual series, and
shall be discharged only out of the assets of such series.
4. Certification as to Authorized Persons. The Secretary or
Assistant Secretary of the Fund will at all times maintain on file with the
Bank his or her certification to the Bank, in such form as may be acceptable to
the Bank, of (i) the names and signatures of the Authorized Persons and (ii)
the names of the members of the Board, it being understood that upon the
occurrence of any change in the information set forth in the most recent
certification on file (including without limitation any person named in the
most recent certification who is no longer an Authorized Person as designated
therein), the Secretary or Assistant Secretary of the Fund, will sign a new or
amended certification setting forth the change and the new, additional or
omitted names or signatures. The Bank will be entitled to rely and act upon
any Officers' Certificate given to it by the Fund which has been signed by
Authorized Persons named in the most recent certification.
5. Custody of Cash. As custodian for the Fund, the Bank will
open and maintain a separate account or accounts in the name of the Fund or in
the name of the Bank, as Custodian of the Fund, and will deposit to the account
of the Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Section 13.2 or Section 13.3 hereof, including borrowed
funds, delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of common stock of the
Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of
securities for the Fund, against contemporaneous receipt of such securities by
the Bank or, against delivery of such securities to the Bank in accordance with
generally accepted settlement practices and customs in the jurisdiction or
market in which the transaction occurs, registered in the name of the Fund or
in the name of, or properly endorsed and in form for transfer to, the Bank, or
a nominee of the Bank, or receipt for the account of the Bank pursuant to the
provisions of Section 6 below, each such payment to be made at the purchase
price shown on a broker's confirmation (or transaction report in the case of
Book Entry Paper) of purchase of the securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made.
3
<PAGE> 7
5.2 Redemptions. In such amount as may be necessary for
the repurchase or redemption of common shares of the Fund offered for
repurchase or redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment
on the account of the Fund of dividends or other distributions to shareholders
as may from time to time be declared by the Board, interest, taxes, management
or supervisory fees, distribution fees, fees of the Bank for its services
hereunder and reimbursement of the expenses and liabilities of the Bank as
provided hereunder, fees of any transfer agent, fees for legal, accounting, and
auditing services, or other operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in
connection with the conversion, exchange or surrender of Portfolio Securities
or securities subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to
the Fund, but, in the case of final payment, only upon redelivery to the Bank
of any Portfolio Securities pledged or hypothecated therefor and upon surrender
of documents evidencing the loan;
5.6 Repayment of Cash. To repay the cash delivered to
the Fund for the purpose of collateralizing the obligation to return to the
Fund certificates borrowed from the Fund representing Portfolio Securities, but
only upon redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions. For payments in
connection with foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery which may be entered into by
the Bank on behalf of the Fund upon the receipt of Proper Instructions, such
Proper Instructions to specify the currency broker or banking institution
(which may be the Bank, or any other subcustodian or agent hereunder, acting as
principal) with which the contract or option is made, and the Bank shall have
no duty with respect to the selection of such currency brokers or banking
institutions with which the Fund deals or for their failure to comply with the
terms of any contract or option.
5.8 Other Authorized Payments. For other authorized
transactions of the Fund, or other obligations of the Fund incurred for proper
Fund purposes; provided that before making any such payment the Bank will also
receive a certified copy of a resolution of the Board signed by an Authorized
Person (other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made,
setting forth the purpose for which such obligation was incurred and declaring
such purpose to be a proper corporate purpose.
4
<PAGE> 8
5.9 Termination. Upon the termination of this Agreement
as hereinafter set forth pursuant to Section 8 and Section 14 of this
Agreement.
6. Securities.
6.1 Segregation and Registration. Except as otherwise
provided herein, and except for securities to be delivered to any subcustodian
appointed pursuant to Section 13.2 hereof, the Bank as custodian, will receive
and hold pursuant to the provisions hereof, in a separate account or accounts
and physically segregated at all times from those of other persons, any and all
Portfolio Securities which may now or hereafter be delivered to it by or for
the account of the Fund. All such Portfolio Securities will be held or
disposed of by the Bank for, and subject at all times to, the instructions of
the Fund pursuant to the terms of this Agreement. Subject to the specific
provisions herein relating to Portfolio Securities that are not physically held
by the Bank, the Bank will register all Portfolio Securities (unless otherwise
directed by Proper Instructions or an Officers' Certificate), in the name of a
registered nominee of the Bank as defined in the Internal Revenue Code and any
Regulations of the Treasury Department issued thereunder, and will execute and
deliver all such certificates in connection therewith as may be required by
such laws or regulations or under the laws of any state.
The Fund will from time to time furnish to the Bank
appropriate instruments to enable it to hold or deliver in proper form for
transfer, or to register in the name of its registered nominee, any Portfolio
Securities which may from time to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee
of the Bank will vote any of the Portfolio Securities held hereunder, except in
accordance with Proper Instructions or an Officers' Certificate. The Bank will
execute and deliver, or cause to be executed and delivered, to the Fund all
notices, proxies and proxy soliciting materials with respect to such
Securities, such proxies to be executed by the registered holder of such
Securities (if registered otherwise than in the name of the Fund), but without
indicating the manner in which such proxies are to be voted.
6.3 Book-Entry System. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
deposits of Fund assets in the Book-Entry System, and (ii) for any subsequent
changes to such arrangements following such approval, the Board has reviewed
and approved the arrangement and has not delivered an Officer's Certificate to
the Bank indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the
Book-Entry System provided that such Portfolio Securities are
represented in an account ("Account") of the Bank (or its agent) in
such System which shall not include any assets of the Bank (or such
agent) other than assets held as a fiduciary, custodian, or otherwise
for customers;
5
<PAGE> 9
(b) The records of the Bank (and any such agent)
with respect to the Fund's participation in the Book-Entry System
through the Bank (or any such agent) will identify by book entry
Portfolio Securities which are included with other securities
deposited in the Account and shall at all times during the regular
business hours of the Bank (or such agent) be open for inspection by
duly authorized officers, employees or agents of the Fund. Where
securities are transferred to the Fund's account, the Bank shall also,
by book entry or otherwise, identify as belonging to the Fund a
quantity of securities in fungible bulk of securities (i) registered
in the name of the Bank or its nominee, or (ii) shown on the Bank's
account on the books of the Federal Reserve Bank;
(c) The Bank (or its agent) shall pay for
Portfolio Securities purchased for the account of the Fund or shall
pay cash collateral against the return of Portfolio Securities loaned
by the Fund upon (i) receipt of advice from the Book-Entry System that
such Portfolio Securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Bank (or its agent)
to reflect such payment and transfer for the account of the Fund. The
Bank (or its agent) shall transfer securities sold or loaned for the
account of the Fund upon
(i) receipt of advice from the
Book-Entry System that payment for securities sold or payment
of the initial cash collateral against the delivery of
Portfolio Securities loaned by the Fund has been transferred
to the Account; and
(ii) the making of an entry on the
records of the Bank (or its agent) to reflect such transfer
and payment for the account of the Fund. Copies of all
advices from the Book-Entry System of transfers of Securities
for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Bank and shall be provided to
the Fund at its request. The Bank shall send the Fund a
confirmation, as defined by Rule 17f4 under the 1940 Act, of
any transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with
any report obtained by the Bank or its agent on the Book-Entry
System's accounting system, internal accounting control and procedures
for safeguarding securities deposited in the Book-Entry System; and
(e) The Bank shall be liable to the Fund for any
loss or damage to the Fund resulting from use of the Book-Entry System
by reason of any gross negligence, wilful misfeasance or bad faith of
the Bank or any of its agents or of any of its or their employees or
from any reckless disregard by the Bank or any such agent of its duty
to use its best efforts to enforce such rights as it may have against
the Book-Entry System; at the election of the Fund, it shall be
entitled to be substituted for the Bank in any claim against the
Book-Entry System or any other person which the Bank or its agent may
have as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any loss or damage.
6
<PAGE> 10
6.4 Use of a Depository. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
deposits in DTC or other such Depository and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold,
receive, exchange, release, lend, deliver and otherwise deal with
Portfolio Securities including stock dividends, rights and other items
of like nature, and to receive and remit to the Bank on behalf of the
Fund all income and other payments thereon and to take all steps
necessary and proper in connection with the collection thereof;
(b) Registration of Portfolio Securities may be
made in the name of any nominee or nominees used by such Depository;
(c) Payment for Portfolio Securities purchased
and sold may be made through the clearing medium employed by such
Depository for transactions of participants acting through it. Upon
any purchase of Portfolio Securities, payment will be made only upon
delivery of the securities to or for the account of the Fund and the
Fund shall pay cash collateral against the return of Portfolio
Securities loaned by the Fund only upon delivery of the Portfolio
Securities to or for the account of the Fund; and upon any sale of
Portfolio Securities, delivery of the securities will be made only
against payment therefor or, in the event Portfolio Securities are
loaned, delivery of Portfolio Securities will be made only against
receipt of the initial cash collateral to or for the account of the
Fund; and
(d) The Bank shall be liable to the Fund for any
loss or damage to the Fund resulting from use of a Depository by
reason of any gross negligence, willful misfeasance or bad faith of
the Bank or its employees or from any reckless disregard by the Bank
of its duty to use its best efforts to enforce such rights as it may
have against a Depository. In this connection, the Bank shall use its
best efforts to ensure that:
(i) The Depository obtains replacement
of any certificated Portfolio Security deposited with it in
the event such Security is lost, destroyed, wrongfully taken
or otherwise not available to be returned to the Bank upon its
request;
(ii) Any proxy materials received by a
Depository with respect to Portfolio Securities deposited with
such Depository are forwarded immediately to the Bank for
prompt transmittal to the Fund;
(iii) Such Depository immediately forwards
to the Bank confirmation of any purchase or sale of Portfolio
Securities and of the appropriate book entry made by such
Depository to the Fund's account;
7
<PAGE> 11
(iv) Such Depository prepares and
delivers to the Bank such records with respect to the
performance of the Bank's obligations and duties hereunder as
may be necessary for the Fund to comply with the recordkeeping
requirements of Section 31(a) of the 1940 Act and Rule 31(a)
thereunder; and
(v) Such Depository delivers to the Bank
and the Fund all internal accounting control reports, whether
or not audited by an independent public accountant, as well as
such other reports as the Fund may reasonably request in order
to verify the Portfolio Securities held by such Depository.
6.5 Use of Book-Entry System for Commercial Paper.
Provided (i) the Bank has received a certified copy of a resolution of the
Board specifically approving participation in a system maintained by the Bank
for the holding of commercial paper in book-entry form ("Book-Entry Paper") and
(ii) for each year following such approval the Board has received and approved
the arrangements, upon receipt of Proper Instructions and upon receipt of
confirmation from an Issuer (as defined below) that the Fund has purchased such
Issuer's Book-entry Paper, the Bank shall issue and hold in book-entry form, on
behalf of the Fund, commercial paper issued by issuers with whom the Bank has
entered into a book-entry agreement (the "Issuers"). In maintaining its
Book-entry Paper System, the Bank agrees that:
(a) the Bank will maintain all Book-entry Paper
held by the Fund in an account of the Bank that includes only assets
held by it for customers;
(b) the records of the Bank with respect to the
Fund's purchase of Book-entry Paper through the Bank will identify, by
book-entry, Commercial Paper belonging to the Fund which is included
in the Book-entry Paper System and shall at all times during the
regular business hours of the Bank be open for inspection by duly
authorized officers, employees or agents of the Fund;
(c) the Bank shall pay for Book-Entry Paper
purchased for the account of the Fund upon contemporaneous (i) receipt of
advice from the Issuer that such sale of Book-Entry Paper has been effected,
and (ii) the making of an entry on the records of the Bank to reflect such
payment and transfer for the account of the Fund;
(d) the Bank shall cancel such Book-Entry Paper
obligation upon the maturity thereof upon contemporaneous (i) receipt
of advice that payment for such BookEntry Paper has been transferred
to the Fund, and (ii) the making of an entry on the records of the
Bank to reflect such payment for the account of the Fund;
(e) the Bank shall transmit to the Fund a
transaction journal confirming each transaction in Book-Entry Paper
for the account of the Fund on the next business day following the
transaction; and
8
<PAGE> 12
(f) the Bank will send to the Fund such reports
on its system of internal accounting control with respect to the
Book-Entry Paper System as the Fund may reasonably request from time
to time.
6.6 Use of Immobilization Programs. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving the maintenance of Portfolio Securities in an immobilization program
operated by a bank which meets the requirements of Section 26(a)(1) of the 1940
Act, and (ii) for each year following such approval the Board has reviewed and
approved the arrangement and has not delivered an Officer's Certificate to the
Bank indicating that the Board has withdrawn its approval, the Bank shall enter
into such immobilization program with such bank acting as a subcustodian
hereunder.
6.7 Eurodollar CDs. Any Portfolio Securities which are
Eurodollar CDs may be physically held by the European branch of the U.S.
banking institution that is the issuer of such Eurodollar CD (a "European
Branch"), provided that such Securities are identified on the books of the Bank
as belonging to the Fund and that the books of the Bank identify the European
Branch holding such Securities. Notwithstanding any other provision of this
Agreement to the contrary, except as stated in the first sentence of this
subsection 6.7, the Bank shall be under no other duty with respect to such
Eurodollar CDs belonging to the Fund, and shall have no liability to the Fund
or its shareholders with respect to the actions, inactions, whether negligent
or otherwise of such European Branch in connection with such Eurodollar CDs,
except for any loss or damage to the Fund resulting from the Bank's own gross
negligence, willful misfeasance or bad faith in the performance of its duties
hereunder.
6.8 Options and Futures Transactions. The Fund is not
allowed under its prospectus to enter into any Option or Futures transactions.
6.9 Segregated Account. The Bank shall upon receipt of
Proper Instructions establish and maintain a Segregated Account or Accounts for
and on behalf of the Fund.
1. Upon receipt of Proper Instructions cash and/or
Portfolio Securities may be transferred into the Segregated Account or
Accounts:
(a) in accordance with the provisions of any
agreement among the Fund, the Bank and a broker-dealer registered
under the Exchange Act and a member of the NASD or any Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Options Clearing
Corporation and of any registered national securities exchange or the
Commodity Futures Trading Commission or any registered Contract
Market, or of any similar organizations regarding escrow or other
arrangements in connection with transactions by the Fund;
9
<PAGE> 13
(b) for the purpose of segregating cash or
securities in connection with options purchased or written by the Fund
or commodity futures purchased or written by the Fund;
(c) for the deposit of liquid assets, such as
cash, U.S. Government securities or other high grade debt obligations,
having a market value (marked to market on a daily basis) at all times
equal to not less than the aggregate purchase price due on the
settlement dates of all the Fund's then outstanding forward commitment
or "when-issued" agreements relating to the purchase of Portfolio
Securities and all the Fund's then outstanding commitments under
reverse repurchase agreements entered into with broker-dealer firms;
(d) for the deposit of any Portfolio Securities
which the Fund has agreed to sell on a forward commitment basis, all
in accordance with Investment Company Act Release No. 10666;
(e) for the purposes of compliance by the Fund
with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of Segregated Accounts
by registered investment companies; or
(f) for other proper corporate purposes, but
only, in the case of this clause (f), upon receipt of, in addition to
Proper Instructions, a certified copy of a resolution of the Board, or
of the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting forth
the purpose or purposes of such Segregated Account and declaring such
purposes to be proper corporate purposes.
2. Upon receipt of Proper Instructions cash and/or
Portfolio Securities may be withdrawn from the Segregated Account or Accounts.
(a) in accordance with the provisions of any
agreements referenced in (a) or (b) above;
(b) for sale or delivery to meet the Fund's
obligations under outstanding firm commitment or when-issued
agreements for the purchase of Portfolio Securities and under reverse
repurchase agreements;
(c) for exchange for other liquid assets of equal
or greater value deposited in the Segregated Account;
(d) to the extent that the Fund's outstanding
forward commitment or when issued agreements for the purchase of
portfolio securities or reverse repurchase
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agreements are sold to other parties or the Fund's obligations
thereunder are met from assets of the Fund other than those in the
Segregated Account; or
(e) for delivery upon settlement of a forward
commitment agreement for the sale of Portfolio Securities.
6.10 Interest Bearing Call or Time Deposits. The Bank
shall, upon receipt of Proper Instructions relating to the purchase by the Fund
of interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect
to the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Bank by the Deposit Bank. Such
deposits shall be deemed Portfolio Securities of the Fund and the
responsibility of the Bank therefore shall be the same as and no greater than
the Bank's responsibility in respect of other Portfolio Securities of the Fund.
6.11 Transfer of Securities. The Bank will transfer,
exchange, deliver or release Portfolio Securities held by it hereunder, insofar
as such Securities are available for such purpose, provided that before making
any transfer, exchange, delivery or release under this Section the Bank will
receive Proper Instructions requesting such transfer, exchange or delivery
stating that it is for a purpose permitted under the terms of this Section
6.11, specifying the applicable subsection, or describing the purpose of the
transaction with sufficient particularity to permit the Bank to ascertain the
applicable subsection, only:
(a) upon sales of Portfolio Securities for the
account of the Fund, against contemporaneous receipt by the Bank of
payment therefor in full, or, against payment to the Bank in
accordance with generally accepted settlement practices and customs in
the jurisdiction or market in which the transaction occurs, each such
payment to be in the amount of the sale price shown in a broker's
confirmation of sale of the Portfolio Securities received by the Bank
before such transfer is made, as confirmed in the Proper Instructions
received by the Bank before such transfer is made;
(b) in exchange for or upon conversion into other
securities alone or other securities and cash pursuant to any plan of
merger, consolidation, reorganization, share split-up, change in par
value, recapitalization or readjustment or otherwise, upon exercise of
subscription, purchase or sale or other similar rights represented by
such Portfolio Securities, or for the purpose of tendering shares in
the event of a tender offer therefor, provided however that in the
event of an offer of exchange, tender offer, or other exercise of
rights requiring the physical tender or delivery of Portfolio
Securities, the Bank shall have no liability for failure to so tender
in a timely manner unless such Proper Instructions are received by the
Bank at least two business days prior to the date required for tender,
and unless the Bank (or its agent or subcustodian hereunder) has
actual possession of such Security at least two business days prior to
the date of tender;
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(c) upon conversion of Portfolio Securities
pursuant to their terms into other securities;
(d) for the purpose of redeeming in kind shares
of the Fund upon authorization from the Fund;
(e) in the case of option contracts owned by the
Fund, for presentation to the endorsing broker;
(f) when such Portfolio Securities are called,
redeemed or retired or otherwise become payable;
(g) for the purpose of effectuating the pledge of
Portfolio Securities held by the Bank in order to collateralize loans
made to the Fund by any bank, including the Bank; provided, however,
that such Portfolio Securities will be released only upon payment to
the Bank for the account of the Fund of the moneys borrowed, except
that in cases where additional collateral is required to secure a
borrowing already made, and such fact is made to appear in the Proper
Instructions, further Portfolio Securities may be released for that
purpose without any such payment. In the event that any such pledged
Portfolio Securities are held by the Bank, they will be so held for
the account of the lender, and after notice to the Fund from the
lender in accordance with the normal procedures of the lender, that an
event of deficiency or default on the loan has occurred, the Bank may
deliver such pledged Portfolio Securities to or for the account of the
lender;
(h) for the purpose of releasing certificates
representing Portfolio Securities, against contemporaneous receipt by
the Bank of the fair market value of such securities, as set forth in
the Proper Instructions received by the Bank before such payment is
made;
(i) for the purpose of delivering securities lent
by the Fund to a bank or broker dealer, but only against receipt in
accordance with street delivery custom except as otherwise provided
herein, of adequate collateral as agreed upon from time to time by the
Fund and the Bank, and upon receipt of payment in connection with any
repurchase agreement relating to such securities entered into by the
Fund;
(j) for other authorized transactions of the Fund
or for other proper corporate purposes; provided that before making
such transfer, the Bank will also receive a certified copy of
resolutions of the Board, signed by an authorized officer of the Fund
(other than the officer certifying such resolution) and certified by
its Secretary or Assistant Secretary, specifying the Portfolio
Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such
transaction to be an authorized transaction of the Fund or such
purpose to be a proper
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<PAGE> 16
corporate purpose, and naming the person or persons to whom delivery
of such securities shall be made; and
(k) upon termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this
Agreement.
As to any deliveries made by the Bank pursuant to subsections (a),
(b), (c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. Redemptions. In the case of payment of assets of the Fund
held by the Bank in connection with redemptions and repurchases by the Fund of
outstanding common shares, the Bank will rely on notification by the Fund's
transfer agent of receipt of a request for redemption and certificates, if
issued, in proper form for redemption before such payment is made. Payment
shall be made in accordance with the Articles and Bylaws of the Fund, from
assets available for said purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the
following transactions, not in the ordinary course of business, namely, the
merger of the Fund into or the consolidation of the Fund with another
investment company where the Fund is not the surviving entity, the sale by the
Fund of all, or substantially all, of its assets to another investment company,
or the liquidation or dissolution of the Fund and distribution of its assets,
the Bank will deliver the Portfolio Securities held by it under this Agreement
and disburse cash only upon the order of the Fund set forth in an Officers'
Certificate, accompanied by a certified copy of a resolution of the Board
authorizing any of the foregoing transactions. Upon completion of such
delivery and disbursement and the payment of the fees, disbursements and
expenses of the Bank, this Agreement will terminate.
9. Actions of Bank Without Prior Authorization. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an
Officers' Certificate to the contrary, it will without prior authorization or
instruction of the Fund or the transfer agent:
9.1 Endorse for collection and collect on behalf of and
in the name of the Fund all checks, drafts, or other negotiable or transferable
instruments or other orders for the payment of money received by it for the
account of the Fund and hold for the account of the Fund all income, dividends,
interest and other payments or distribution of cash with respect to the
Portfolio Securities held thereunder;
9.2 Present for payment all coupons and other income
items held by it for the account of the Fund which call for payment upon
presentation and hold the cash received by it upon such payment for the account
of the Fund;
9.3 Receive and hold for the account of the Fund all
securities received as a distribution on Portfolio Securities as a result of a
stock dividend, share split-up, reorganization,
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<PAGE> 17
recapitalization, merger, consolidation, readjustment, distribution of rights
and similar securities issued with respect to any Portfolio Securities held by
it hereunder;
9.4 Execute as agent on behalf of the Fund all necessary
ownership and other certificates and affidavits required by the Internal
Revenue Code or the regulations of the Treasury Department issued thereunder,
or by the laws of any state, now or hereafter in effect, inserting the Fund's
name on such certificates as the owner of the securities covered thereby, to
the extent it may lawfully do so and as may be required to obtain payment in
respect thereof. The Bank will execute and deliver such certificates in
connection with Portfolio Securities delivered to it or by it under this
Agreement as may be required under the provisions of the Internal Revenue Code
and any Regulations of the Treasury Department issued thereunder, or under the
laws of any state;
9.5 Present for payment all Portfolio Securities which
are called, redeemed, retired or otherwise become payable, and hold cash
received by it upon payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for
definitive securities.
10. Collections and Defaults. The Bank will use all reasonable
efforts to collect any funds which may to its knowledge become collectible
arising from Portfolio Securities, including dividends, interest and other
income, and to transmit to the Fund notice actually received by it of any call
for redemption, offer of exchange, right of subscription, reorganization or
other proceedings affecting such Securities. If Portfolio Securities upon
which such income is payable are in default or payment is refused after due
demand or presentation, the Bank will notify the Fund in writing of any default
or refusal to pay within two business days from the day on which it receives
knowledge of such default or refusal. In addition, the Bank will send the Fund
a written report once each month showing any income on any Portfolio Security
held by it which is more than ten days overdue on the date of such report and
which has not previously been reported.
11. Maintenance of Records and Accounting Services. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms and conditions of this Agreement, and in compliance with
the applicable rules and regulations of the 1940 Act and will furnish the Fund
daily with a statement of condition of the Fund. The Bank will furnish to the
Fund at the end of every month, and at the close of each quarter of the Fund's
fiscal year, a list of the Portfolio Securities and the aggregate amount of
cash held by it for the Fund. The books and records of the Bank pertaining to
its actions under this Agreement and reports by the Bank or its independent
accountants concerning its accounting system, procedures for safeguarding
securities and internal accounting controls will be open to inspection and
audit at reasonable times by officers of or auditors employed by the Fund and
will be preserved by the Bank in the manner and in accordance with the
applicable rules and regulations under the 1940 Act.
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<PAGE> 18
The Bank shall keep the books of account and render statements or
copies from time to time as reasonably requested by the Treasurer or any
executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
The books and records maintained by the Bank on behalf of the Fund are
the property of the Fund and will be surrendered upon request in accordance
with Section 14.
12. Fund Evaluation. The Bank shall compute and, unless otherwise
directed by the Board, determine as of the close of business on the New York
Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other hours, if any, as may be authorized by the Board
the net asset value and the public offering price of a share of capital stock
of the Fund, such determination to be made in accordance with the provisions of
the Articles and By-laws of the Fund and Prospectus and Statement of Additional
Information relating to the Fund, as they may from time to time be amended, and
any applicable resolutions of the Board at the time in force and applicable;
and promptly to notify the Fund, the proper exchange and the NASD or such other
persons as the Fund may request of the results of such computation and
determination. In computing the net asset value hereunder, the Bank may rely
in good faith upon information furnished to it by any Authorized Person in
respect of (i) the manner of accrual of the liabilities of the Fund and in
respect of liabilities of the Fund not appearing on its books of account kept
by the Bank, (ii) reserves, if any, authorized by the Board or that no such
reserves have been authorized, (iii) the source of the quotations to be used in
computing the net asset value, (iv) the value to be assigned to any security
for which no price quotations are available, and (v) the method of computation
of the public offering price on the basis of the net asset value of the shares,
and the Bank shall not be responsible for any loss occasioned by such reliance
or for any good faith reliance on any quotations received from a source
pursuant to (iii) above.
13. Concerning the Bank.
13.1 Performance of Duties and Standard of Care. In
performing its duties hereunder and any other duties listed on any Schedule
hereto, if any, the Bank will be entitled to receive and act upon the advice of
independent counsel of its own selection, which may be counsel for the Fund,
and will be without liability for any action taken or thing done or omitted to
be done in accordance with this Agreement in good faith in conformity with such
advice. In the performance of its duties hereunder, the Bank will be protected
and not be liable, and will be indemnified and held harmless for any action
taken or omitted to be taken by it in good faith reliance upon the terms of
this Agreement, any Officers' Certificate, Proper Instructions, resolution of
the Board, telegram, notice, request, certificate or other instrument
reasonably believed by the Bank to be genuine and for any other loss to the
Fund except in the case of its negligence, willful misfeasance or bad faith in
the performance of its duties or reckless disregard of its obligations and
duties hereunder.
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<PAGE> 19
The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio
Securities purchased by or for the Fund, the legality of the purchases
thereof or the propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio
Securities by or for the Fund or the propriety of the amount for which
the same are sold;
(c) the legality of an issue or sale of any
common shares of the Fund or the sufficiency of the amount to be
received therefor;
(d) the legality of the repurchase of any common
shares of the Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any
dividend by the Fund or the legality of the distribution of any
Portfolio Securities as payment in kind of such dividend; and
(f) any property or moneys of the Fund unless and
until received by it, and any such property or moneys delivered or
paid by it pursuant to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to
ascertain whether any Portfolio Securities at any time delivered to or held by
it for the account of the Fund are such as may properly be held by the Fund
under the provisions of its Articles, By-laws, any federal or state statutes or
any rule or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no
event shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind
resulting from acts of God, earthquakes, fires, floods, storms or
other disturbances of nature, epidemics, strikes, riots,
nationalization, expropriation, currency restrictions, acts of war,
civil war or terrorism, insurrection, nuclear fusion, fission or
radiation, the interruption, loss or malfunction of utilities,
transportation, or computers (hardware or software) and computer
facilities, the unavailability of energy sources and other similar
happenings or events except as results from the Bank's own gross
negligence; or
(b) for special, punitive or consequential
damages arising from the provision of services hereunder, even if the
Bank has been advised of the possibility of such damages.
13.2 Agents and Subcustodians with Respect to Property of
the Fund Held in the United States. The Bank may employ agents in the
performance of its duties hereunder and
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<PAGE> 20
shall be responsible for the acts and omissions of such agents as if performed
by the Bank hereunder.
Upon receipt of Proper Instructions, the Bank may employ certain
subcustodians, provided that any such subcustodian meets at least the minimum
qualifications required by Section 17(f)(1) of the 1940 Act to act as a
custodian of the Fund's assets with respect to property of the Fund held in the
United States. The Bank shall have no liability to the Fund or any other
person by reason of any act or omission of such subcustodian and the Fund shall
indemnify the Bank and hold it harmless from and against any and all actions,
suits and claims, arising directly or indirectly out of the performance of such
subcustodian. Upon request of the Bank, the Fund shall assume the entire
defense of any action, suit, or claim subject to the foregoing indemnity. The
Fund shall pay all fees and expenses of such subcustodian.
13.3 Duties of the Bank with Respect to Property of the
Fund Held Outside of the United States.
(a) Appointment of Foreign Sub-Custodians. The
Fund hereby authorizes and instructs the Bank to employ as
sub-custodians for the Fund's Portfolio Securities and other assets
maintained outside the United States the foreign banking institutions
and foreign securities depositories designated on the Schedule
attached hereto (each, a "Selected Foreign Sub-Custodian"). Upon
receipt of Proper Instructions, together with a certified resolution
of the Fund's Board of Trustees, the Bank and the Fund may agree to
designate additional foreign banking institutions and foreign
securities depositories to act as Selected Foreign Sub-Custodians
hereunder. Upon receipt of Proper Instructions, the Fund may instruct
the Bank to cease the employment of any one or more such Selected
Foreign Sub-Custodians for maintaining custody of the Fund's assets,
and the Bank shall so cease to employ such sub-custodian as soon as
alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. Except as
may otherwise be agreed upon in writing by the Bank and the Fund,
assets of the Fund shall be maintained in foreign securities
depositories only through arrangements implemented by the foreign
banking institutions serving as Selected Foreign Sub-Custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
subparagraph (d) hereof. Notwithstanding the foregoing, except as may
otherwise be agreed upon in writing by the Bank and the Fund, the Fund
authorizes the deposit in Euro-clear, the securities clearance and
depository facilities operated by Morgan Guaranty Trust Company of New
York in Brussels, Belgium, of Foreign Portfolio Securities eligible
for deposit therein and to utilize such securities depository in
connection with settlements of purchases and sales of securities and
deliveries and returns of securities, until notified to the contrary
pursuant to subparagraph (a) hereunder.
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(c) Segregation of Securities. The Bank shall
identify on its books as belonging to the Fund the Foreign Portfolio
Securities held by each Selected Foreign Sub-Custodian. Each
agreement pursuant to which the Bank employs a foreign banking
institution shall require that such institution establish a custody
account for the Bank and hold in that account, Foreign Portfolio
Securities and other assets of the Fund, and, in the event that such
institution deposits Foreign Portfolio Securities in a foreign
securities depository, that it shall identify on its books as
belonging to the Bank the securities so deposited.
(d) Agreements with Foreign Banking Institutions.
Each of the agreements pursuant to which a foreign banking institution
holds assets of the Fund (each, a "Foreign Sub-Custodian Agreement")
shall be substantially in the form previously made available to the
Fund and shall provide that: (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody
or administration (including, without limitation, any fees or taxes
payable upon transfers or reregistration of securities); (b)
beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration (including, without limitation, any fees or taxes
payable upon transfers or reregistration of securities); (c) adequate
records will be maintained identifying the assets as belonging to
Bank; (d) officers of or auditors employed by, or other
representatives of the Bank, including to the extent permitted under
applicable law, the independent public accountants for the Fund, will
be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Bank;
and (e) assets of the Fund held by the Selected Foreign Sub-Custodian
will be subject only to the instructions of the Bank or its agents.
(e) Access of Independent Accountants of the
Fund. Upon request of the Fund, the Bank will use its best efforts to
arrange for the independent accountants of the Fund to be afforded
access to the books and records of any foreign banking institution
employed as a Selected Foreign Sub-Custodian insofar as such books and
records relate to the performance of such foreign banking institution
under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the
Fund from time to time, as mutually agreed upon, statements in respect
of the securities and other assets of the Fund held by Selected
Foreign Sub-Custodians, including but not limited to an identification
of entities having possession of the Foreign Portfolio Securities and
other assets of the Fund.
(g) Transactions in Foreign Custody Account.
Transactions with respect to the assets of the Fund held by a Selected
Foreign Sub-Custodian shall be effected pursuant to Proper
Instructions from the Fund to the Bank and shall be effected in
accordance with the applicable Foreign Sub-Custodian Agreement. If at
any time any
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<PAGE> 22
Foreign Portfolio Securities shall be registered in the name of the
nominee of the Selected Foreign Sub-Custodian, the Fund agrees to hold
any such nominee harmless from any liability by reason of the
registration of such securities in the name of such nominee.
Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign
Portfolio Securities received for the account of the Fund and delivery
of Foreign Portfolio Securities maintained for the account of the Fund
may be effected in accordance with the customary established
securities trading or securities processing practices and procedures
in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
In connection with any action to be taken
with respect to the Foreign Portfolio Securities held hereunder,
including, without limitation, the exercise of any voting rights,
subscription rights, redemption rights, exchange rights, conversion
rights or tender rights, or any other action in connection with any
other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the
Fund such information in connection therewith as is made available to
the Bank by the Foreign Sub-Custodian, and shall promptly forward to
the applicable Foreign Sub-Custodian any instructions, forms or
certifications with respect to such Rights, and any instructions
relating to the actions to be taken in connection therewith, as the
Bank shall receive from the Fund pursuant to Proper Instructions.
Notwithstanding the foregoing, the Bank shall have no further duty or
obligation with respect to such Rights, including, without limitation,
the determination of whether the Fund is entitled to participate in
such Rights under applicable U.S. and foreign laws, or the
determination of whether any action proposed to be taken with respect
to such Rights by the Fund or by the applicable Foreign Sub-Custodian
will comply with all applicable terms and conditions of any such
Rights or any applicable laws or regulations, or market practices
within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians.
Each Foreign Sub-Custodian Agreement with a foreign banking
institution shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Bank and each Fund from and against certain losses, damages,
costs, expenses, liabilities or claims arising out of or in connection
with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund
acknowledges that the Bank, as a participant in Euro-clear, is subject
to the Terms and Conditions Governing the Euro-Clear System, a copy of
which has been made available to the Fund. The Fund acknowledges that
pursuant to such Terms and Conditions, Morgan Guaranty Brussels shall
have the sole right to exercise or assert any and all rights or claims
in respect of actions or omissions of, or the
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<PAGE> 23
bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euro-clear in connection with the Fund's
securities and other assets.
(i) Liability of Bank. The Bank shall have no
more or less responsibility or liability on account of the acts or
omissions of any Selected Foreign Sub-Custodian employed hereunder
than any such Selected Foreign Sub-Custodian has to the Bank and,
without limiting the foregoing, the Bank shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war
or terrorism, political risk (including, but not limited to, exchange
control restrictions, confiscation, insurrection, civil strife or
armed hostilities) other losses due to Acts of God, nuclear incident
or any loss where the Selected Foreign Sub-Custodian has otherwise
exercised reasonable care.
(j) Monitoring Responsibilities. The Bank shall
furnish annually to the Fund, information concerning the Selected
Foreign Sub-Custodians employed hereunder for use by the Fund in
evaluating such Selected Foreign Sub-Custodians to ensure compliance
with the requirements of Rule 17f-5 of the Act. In addition, the Bank
will promptly inform the Fund in the event that the Bank is notified
by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline
below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting
principles) or any other capital adequacy test applicable to it by
exemptive order, or if the Bank has actual knowledge of any material
loss of the assets of the Fund held by a Foreign Sub-Custodian.
(k) Tax Law. The Bank shall have no
responsibility or liability for any obligations now or hereafter
imposed on the Fund or the Bank as custodian of the Fund by the tax
laws of any jurisdiction, and it shall be the responsibility of the
Fund to notify the Bank of the obligations imposed on the Fund or the
Bank as the custodian of the Fund by the tax law of any non-U.S.
jurisdiction, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.
13.4 Insurance. The Bank shall use the same care with
respect to the safekeeping of Portfolio Securities and cash of the Fund held by
it as it uses in respect of its own similar property but it need not maintain
any special insurance for the benefit of the Fund.
13.5. Fees and Expenses of Bank. The Fund will pay or
reimburse the Bank from time to time for any transfer taxes payable upon
transfer of Portfolio Securities made hereunder, and for all necessary proper
disbursements, expenses and charges made or incurred
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<PAGE> 24
by the Bank in the performance of this Agreement (including any duties listed
on any Schedule hereto, if any) including any indemnities for any loss,
liabilities or expense to the Bank as provided above. For the services
rendered by the Bank hereunder, the Fund will pay to the Bank such compensation
or fees at such rate and at such times as shall be agreed upon in writing by
the parties from time to time. The Bank will also be entitled to reimbursement
by the Fund for all reasonable expenses incurred in conjunction with
termination of this Agreement by the Fund.
13.6 Advances by Bank. The Bank may, in its sole
discretion, advance funds on behalf of the Fund to make any payment permitted
by this Agreement upon receipt of any proper authorization required by this
Agreement for such payments by the Fund. Should such a payment or payments,
with advanced funds, result in an overdraft (due to insufficiencies of the
Fund's account with the Bank, or for any other reason) this Agreement deems any
such overdraft or related indebtedness, a loan made by the Bank to the Fund
payable on demand and bearing interest at the current rate charged by the Bank
for such loans unless the Fund shall provide the Bank with agreed upon
compensating balances. The Fund agrees that the Bank shall have a continuing
lien and security interest to the extent of any overdraft or indebtedness, in
and to any property at any time held by it for the Fund's benefit or in which
the Fund has an interest and which is then in the Bank's possession or control
(or in the possession or control of any third party acting on the Bank's
behalf). The Fund authorizes the Bank, in its sole discretion, at any time to
charge any overdraft or indebtedness, together with interest due thereon
against any balance of account standing to the credit of the Fund on the Bank's
books.
14. Termination.
14.1 The term of this agreement is three years commencing
upon the date of conversion of the Fund's assets to the Bank. Either party may
terminate this agreement for cause prior to the third anniversary of the
conversion date after a written description of the facts for cause has been
delivered to the other party and the other party has been given a reasonable
opportunity to cure, such opportunity being not less then 90 days in duration.
Either party may terminate the agreement at any time subsequent to the third
anniversary date without cause or penalty. Any termination will be effective
upon sixty days written notice delivered by either party to the other by means
of registered mail, and, upon the expiration of such sixty days this Agreement
will terminate; provided, however, that the effective date of such termination
may be postponed to a date not more than ninety days from the date of delivery
of such notice (i) by the Bank in order to prepare for the transfer by the Bank
of all of the assets of the Fund held hereunder, and (ii) by the Fund in order
to give the Fund an opportunity to make suitable arrangements for a successor
custodian. At any time after the termination of this Agreement, the Fund will,
at its request, have access to the records of the Bank relating to the
performance of its duties as custodian.
14.2 In the event of the termination of this Agreement,
the Bank will immediately upon receipt or transmittal, as the case may be, of
notice of termination, commence and prosecute diligently to completion the
transfer of all cash and the delivery of all Portfolio
21
<PAGE> 25
Securities duly endorsed and all records maintained under Section 11 to the
successor custodian when appointed by the Fund. The obligation of the Bank to
deliver and transfer over the assets of the Fund held by it directly to such
successor custodian will commence as soon as such successor is appointed and
will continue until completed as aforesaid. If the Fund does not select a
successor custodian within ninety (90) days from the date of delivery of notice
of termination the Bank may, subject to the provisions of subsection (14.3),
deliver the Portfolio Securities and cash of the Fund held by the Bank to a
bank or trust company of its own selection which meets the requirements of
Section 17(f)(1) of the 1940 Act and has a reported capital, surplus and
undivided profits aggregating not less than $2,000,000, to be held as the
property of the Fund under terms similar to those on which they were held by
the Bank, whereupon such bank or trust company so selected by the Bank will
become the successor custodian of such assets of the Fund with the same effect
as though selected by the Board.
14.3 Prior to the expiration of ninety (90) days after
notice of termination has been given, the Fund may furnish the Bank with an
order of the Fund advising that a successor custodian cannot be found willing
and able to act upon reasonable and customary terms and that there has been
submitted to the shareholders of the Fund the question of whether the Fund will
be liquidated or will function without a custodian for the assets of the Fund
held by the Bank. In that event the Bank will deliver the Portfolio Securities
and cash of the Fund held by it, subject as aforesaid, in accordance with one
of such alternatives which may be approved by the requisite vote of
shareholders, upon receipt by the Bank of a copy of the minutes of the meeting
of shareholders at which action was taken, certified by the Fund's Secretary
and an opinion of counsel to the Fund in form and content satisfactory to the
Bank.
15. Confidentiality. Both parties hereto agree that any
non-public information obtained hereunder concerning the other party is
confidential and may not be disclosed to any other person without the consent
of the other party, except as may be required by applicable law or at the
request of a governmental agency. The parties further agree that a breach of
this provision would irreparably damage the other party and accordingly agree
that each of them is entitled, without bond or other security, to an injunction
or injunctions to prevent breaches of this provision.
16. Notices. Any notice or other instrument in writing authorized
or required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
William Blair Mutual Funds, Inc.
222 West Adams Street
Chicago, IL 60606
22
<PAGE> 26
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: Tim Murphy
or at such other place as such party may from time to time designate in
writing.
17. Amendments. This Agreement may not be altered or amended,
except by an instrument in writing, executed by both parties, and in the case
of the Fund, such alteration or amendment will be authorized and approved by
its Board.
18. Parties. This Agreement will be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement will not be assignable by the
Fund without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 14 hereof will not be deemed
to be an assignment within the meaning of this provision.
19. Governing Law. This Agreement and all performance hereunder
will be governed by the laws of the Commonwealth of Massachusetts.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
21. Limitation of Liability. A copy of the Agreement and
Declaration of Trust of the Fund is on file with the Secretary of State of the
Commonwealth of Massachusetts and notice is hereby given that this Agreement
has been executed on behalf of the Fund by an officer of the Fund as an officer
and not individually and the obligations of the Fund arising out of this
Agreement are not binding upon any of the trustees, officers, or shareholders
of the Fund individually but are binding only upon the assets and property of
the Fund.
23
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
day and year first written above.
William Blair Mutual Funds, Inc.
By:
--------------------------------
Name:
Title:
ATTEST:
- ------------------------------------
Investors Bank & Trust Company
By:
--------------------------------
Name:
Title:
ATTEST:
- ------------------------------------
DATE:
-------------------------------
24
<PAGE> 1
EXHIBIT 99.B10
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
February 29, 1996
William Blair Mutual Funds, Inc.
222 W. Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A under the Securities Act of 1933 being
filed by William Blair Mutual Funds, Inc. (the "Fund") in connection with its
registration of shares of common stock, par value $.001 per share ("Shares"),
in the Income Fund portfolio ("Portfolio").
We have acted as counsel to the Fund since its inception and in such
capacity are familiar with the Fund's organization and have counseled the Fund
regarding various legal matters. We have examined such Fund records and other
documents and certificates as we have considered necessary or appropriate for
the purposes of this opinion. In our examination of such materials, we have
assumed the genuineness of all signatures and the conformity to original
documents of all copies submitted to us.
Based upon the foregoing, and assuming that the Fund's Articles of
Incorporation dated September 22, 1987, as amended on April 30, 1991, and the
By-Laws of the Fund adopted February 5, 1991 are presently in full force and
effect and have not been further amended in any respect and that the
resolutions adopted by the Board of Directors of the Fund on September 23,
1987, July 24, 1990, February 5, 1991, July 21, 1992 and October 26, 1993
relating to organizational matters, securities matters and the issuance of
shares are presently in full force and effect and have not been amended in any
respect, we advise you and opine that (a) the Fund is a duly authorized and
validly existing corporation with transferrable shares under the laws of the
State of Maryland and is authorized to issue five hundred million shares in the
Portfolio having an aggregate par value of five hundred thousand dollars; and
(b) upon the issuance of the Shares in accordance with the Fund's Articles of
Incorporation and the receipt by the Portfolio of a purchase price not less
than the net asset value per Share, the Shares will be legally issued and
outstanding, fully paid and nonassessable.
<PAGE> 2
This opinion is solely for the benefit of the Fund, the Fund's Board
of Directors and the Fund's officers and may not be relied upon by any other
person without our prior written consent. We hereby consent to the use of this
opinion in connection with said Post-Effective Amendment.
Very truly yours,
/s/Vedder, Price, Kaufman & Kammholz
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
COK:dd
-2-
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors and Reports to Shareholders" and to the
use our report dated February 2, 1996 with respect to William Blair Mutual
Funds, Inc. (comprised of Growth Fund, International Growth, Income Fund,
Limited Term Tax-Free Fund, and Ready Reserves Fund) in the Registration
Statement (Form N-lA) of William Blair Mutual Funds, Inc. and its
incorporation by reference in the related Prospectus and Statement of
Additional Information, filed with the Securities and Exchange Commission in
this Post-Effective Amendment No. 13 to the Registration Statement under the
Securities Act of 1933 (Registration No. 33-17463) and this Amendment No. 15 to
the Registration Statement under the Investment Company Act of 1940
(Registration No. 811-5344).
/S/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Chicago, Illinois
February 29, 1996
<PAGE> 2
TO COME
<PAGE> 1
EXHIBIT 99.B13
WILLIAM BLAIR READY RESERVES, INC.
SUBSCRIPTION AGREEMENT
1. Share Subscription. The undersigned hereby agrees to purchase
from William Blair Ready Reserves, Inc. ("Fund"), which is a series type mutual
fund currently having one series, the Money Market Portfolio ("Portfolio"),
100,000 shares (par value of $0.001 per share) of the Portfolio ("Shares") at a
purchase price of $1.00 per share, on the terms and conditions set forth herein
and in the Preliminary Prospectus described below. The undersigned hereby
tenders $100,000 for the purchase of the Shares.
The undersigned understands that the Fund has filed a Registration
Statement (No. 33-17463) on Form N-1A with the Securities and Exchange
Commission, which contains the Preliminary Prospectus describing the Fund and
the Shares. By its signature hereto, the undersigned hereby acknowledges
receipt of a copy of the Preliminary Prospectus.
The undersigned recognizes that the Fund will not be fully operational
until such time as it commences the offering of its shares. Accordingly, a
number of features of the Fund described in the Preliminary Prospectus,
including, without limitation, the declaration and payment of dividends and
redemptions of shares upon request of shareholders, are not, in fact, in
existence at the present time and will not be instituted until the Fund's
Registration Statement on Form N-1A is declared effective.
2. Representations and Warranties. The undersigned hereby
represents and warrants as follows:
a. It is aware that no federal or state agency has made any
findings or determination as to the fairness for investment, nor any
recommendations or endorsement, of the Shares;
b. It has such knowledge and experience of financial and
business matters as will enable it to utilize the information made
available to it, in connection with the offering of the Shares, to
evaluate the merits and risks of the prospective investment and to make
an informed investment decision;
c. It recognizes that the Fund has only recently been
organized and has no financial or operating history and, further, that
investment in the Fund involves certain risks, and it has taken full
cognizance of and understands all of the risks related to the purchase
of the Shares, and it acknowledges that it has suitable financial
resources and anticipated income to bear the economic risk of such an
investment;
<PAGE> 2
d. It is purchasing the Shares for its own account, for
investment, and not with any intention of redemption, distribution, or
resale of the Shares, either in whole or in part;
e. It will not sell the Shares purchased by it without
registration of the Shares under the Securities Act of 1933 or
exemption therefrom;
f. It has been furnished with, and has carefully read, this
Agreement and the Preliminary Prospectus and such material documents
relating to the Fund as it has requested and as have been provided to
it by the Fund; and
g. It has also had the opportunity to ask questions of, and
receive answers from, the Fund concerning the Fund and the terms of the
offering.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
November 19, 1987.
WILLIAM BLAIR & COMPANY
By: /s/ James L. Barber, Jr.
------------------------------------
Partner
-2-
<PAGE> 1
EXHIBIT 99.B16
EXHIBIT OF PERFORMANCE CALCULATIONS
THIS EXHIBIT REFLECTS THE CALCULATION OF CERTAIN PERFORMANCE FIGURES THAT
APPEAR UNDER "PERFORMANCE" IN THE PART B STATEMENT OF ADDITIONAL INFORMATION
("PART B") OF WILLIAM BLAIR MUTUAL FUNDS, INC. (THE "FUND")
A. TOTAL RETURN.
1. Formula. The total return performance of the Fund for a
specified period equals the change in the value of a hypothetical $10,000
Investment ("Initial Investment") from the beginning of the period to the end
of the period. It is assumed that all dividends and capital gains
distributions are reinvested. Total return may be expressed either as a dollar
value change or as a percentage change. Total return information is set forth
in the discussion of total return that appears under "Performance" in Part B.
2. Performance Reflected. The representative total return
calculations reflected in this Section A are for the International Growth Fund
portfolio (the "Portfolio") for the period beginning January 1, 1995 and ending
December 31, 1995.
3. Total Return. The total return information for the Fund shows
the total return of that Portfolio as a percentage change. The percentage
change in value of the Initial Investment for the period is calculated by
determining the percentage increase in the net asset value per share ("NAV") of
the Portfolio over the period and adjusting that for the dividends reinvested
over the period. There was 1 dividend during the period. The percentage
change is then calculated as follows:
Percentage Change = Shares x Ending NAV - 1
-----------------------
Beginning NAV
Ending NAV = NAV on December 31, 1995 = $13.12/Share
------
Beginning NAV = NAV on January 1, 1995 = $12.36/Share
------
<TABLE>
<S> <C>
Shares = Number of shares at the end of the period assuming a one
share investment at the beginning of the period and
reinvestment of dividends. "Shares" is computed under the
following formula.
</TABLE>
Shares = (1 + DIV1 )
-----
RNAV1
<TABLE>
<S> <C>
DIVn = Dollar amount distributed for the nth dividend of the period.
n is 1 in the present example since there was 1 dividend
distributed.
RNAVn = NAV on the date that the nth dividend in the period was reinvested.
n is 1 in the present example.
</TABLE>
<PAGE> 2
The following data is presented:
<TABLE>
<S> <C> <C>
n DIVn RNAVn
- ---- -----
1 $.13/Share $13.01/Share
</TABLE>
Shares = 1 + $.13 = 1.01
$13.01 Share
Percentage Change = 1.01 x $13.12 / Share - 1 = .072
$12.36/Share
The decimal return is converted to a percentage by multiplying by 100.
.072 X 100 = 7.2%
B. AVERAGE ANNUAL TOTAL RETURN.
1. Formula. The average annual return of the Fund for a specific
period is found by taking a hypothetical $1,000 investment ("Initial
Investment") at the beginning of the period and computing the redeemable value
at the end of the period ("Redeemable Value"). The Redeemable Value is then
divided by the Initial Investment, and this quotient is taken to the Nth root
(N represents the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. Thus, the following formula
applies:
Average Annual Total Return = ( Redeemable Value ) 1/N -1
----------------
Initial Investment
2. Performance Reflected. The representative average annual
total return calculation reflected in this Section B is for the International
Growth Fund portfolio (the "Portfolio") for the period from January 1, 1993
through December 31, 1995.
3. Calculation. The Redeemable Value is equal to the Initial
Investment plus the percentage change in the value of such investment over the
period. The percentage change over the period is calculated in the same manner
as in Sub-Section 3 of Section A above. The percentage change over the period
is 43.18%.
Redeemable Value=$1,000+(43.18% of $1,000)=$1,000+(.4318 x $1,000.00)=$1,431.80
The period covered is from January 1, 1993 to December 31, 1995, or 3 years.
N = number of years in the period = 3
2
<PAGE> 3
Using the formula provided above, average annual total return for the period
may then be calculated.
The Redeemable Value is divided by the initial investment.
($1,431.80/$1,000) = 1.4318
--------- ------
This quotient is taken to the Nth root.
The 3rd root of 1.4318 = 1.1271
------ ------
1 is subtracted from the result.
1.1271 - 1 = .1271
------ -----
The decimal return is converted to a percentage by multiplying by 100.
.1271 X 100 = 12.71%
----- -----
C. YIELD (NON MONEY MARKET).
1. Formula. The yield for the Fund is computed by dividing the
net investment income per share earned during a specified one month or 30-day
period by the offering price per share on the last day of the period, according
to the following formula:
YIELD = 2[a - b + 1)6 - 1]
-----
cd
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the offering price per share on the last day of the
period.
</TABLE>
2. Performance Reflected. The representative yield calculation
reflected in this Section C is for the Income Fund portfolio (the "Portfolio")
for the 30-day period ended December 31, 1995.
3. Calculation. For the period reflected, the following figures
are provided for use in the formula provided in Sub-section 1 above:
a = $774,743
--------
3
<PAGE> 4
b = $54,992
c = 14,038,337
d = $10.57
Thus, the yield is calculated as follows:
YIELD = 2[(a - b + 1)6 - 1]
-----
cd
= 2[( 719,751 + 1) 6 - 1]
-----------
148,385,222
= 2[(1.00485)6 - 1]
-------
= 2[1.02945 - 1]
= .0589
-----
The decimal return is converted to a percentage by multiplying by 100.
.0589 X 100 = 5.89%
D. YIELD (MONEY MARKET).
1. Formula. The current yield for the Ready Reserves Fund
("Portfolio") is computed as follows: the Portfolio's net investment income per
share (accrued interest on portfolio securities, plus or minus amortized
purchase discount or premium, less accrued expenses) is divided by the price
per share (expected to remain constant at $1.00) during the period ("base
period return") and the result is divided by 7 and multiplied by 365. The
effective yield is determined by the following formula: [(base period return +
1) raised to the 365/7 power] - 1.
2. Performance Reflected. The calculation for the Portfolio
reflected in this Section D are for the 7-day period ended December 31, 1995.
3. Calculation. The current yield for the period reflected above
is calculated as follows:
.000974 x 365 = 5.08%
------- ---
1 7
The effective yield for the period reflected above is calculated as
follows:
[(.000974 + 1) raised to the 365/7 power] - 1 = 5.21%
4
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000822632
<NAME> WM. BLAIR MUTUAL FUNDS, INC.
<SERIES>
<NUMBER> 1
<NAME> GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 270,957
<INVESTMENTS-AT-VALUE> 365,478
<RECEIVABLES> 1,242
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 366,721
<PAYABLE-FOR-SECURITIES> 3,297
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 388
<TOTAL-LIABILITIES> 3,685
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 268,083
<SHARES-COMMON-STOCK> 30,515
<SHARES-COMMON-PRIOR> 22,651
<ACCUMULATED-NII-CURRENT> 319
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 113
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 94,521
<NET-ASSETS> 363,036
<DIVIDEND-INCOME> 1,615
<INTEREST-INCOME> 1,297
<OTHER-INCOME> 0
<EXPENSES-NET> 1,919
<NET-INVESTMENT-INCOME> 993
<REALIZED-GAINS-CURRENT> 13,274
<APPREC-INCREASE-CURRENT> 58,269
<NET-CHANGE-FROM-OPS> 72,536
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 817
<DISTRIBUTIONS-OF-GAINS> 13,275
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,647
<NUMBER-OF-SHARES-REDEEMED> 1,875
<SHARES-REINVESTED> 1,092
<NET-CHANGE-IN-ASSETS> 145,476
<ACCUMULATED-NII-PRIOR> 143
<ACCUMULATED-GAINS-PRIOR> 114
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,561
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,919
<AVERAGE-NET-ASSETS> 295,127
<PER-SHARE-NAV-BEGIN> 9,600
<PER-SHARE-NII> .034
<PER-SHARE-GAIN-APPREC> 2.750
<PER-SHARE-DIVIDEND> .030
<PER-SHARE-DISTRIBUTIONS> .454
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.90
<EXPENSE-RATIO> .68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000822632
<NAME> WM. BLAIR MUTUAL FUNDS, INC.
<SERIES>
<NUMBER> 2
<NAME> READY RESERVES FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 719,445
<INVESTMENTS-AT-VALUE> 719,445
<RECEIVABLES> 9,007
<ASSETS-OTHER> 22
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 728,474
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,481
<TOTAL-LIABILITIES> 24,481
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 703,993
<SHARES-COMMON-STOCK> 703,993
<SHARES-COMMON-PRIOR> 521,277
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 703,993
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,158
<OTHER-INCOME> 0
<EXPENSES-NET> 4,312
<NET-INVESTMENT-INCOME> 31,846
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 31,846
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 31,846
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,514,548
<NUMBER-OF-SHARES-REDEEMED> 2,362,949
<SHARES-REINVESTED> 31,117
<NET-CHANGE-IN-ASSETS> 182,716
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,613
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,312
<AVERAGE-NET-ASSETS> 600,700
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .053
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> .053
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000822632
<NAME> WM. BLAIR MUTUAL FUNDS, INC.
<SERIES>
<NUMBER> 3
<NAME> INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 142,123
<INVESTMENTS-AT-VALUE> 145,062
<RECEIVABLES> 2,722
<ASSETS-OTHER> 2
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 147,786
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 416
<TOTAL-LIABILITIES> 416
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 148,407
<SHARES-COMMON-STOCK> 13,936
<SHARES-COMMON-PRIOR> 14,601
<ACCUMULATED-NII-CURRENT> (13)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,963)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,939
<NET-ASSETS> 147,370
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10,278
<OTHER-INCOME> 0
<EXPENSES-NET> 1,013
<NET-INVESTMENT-INCOME> 9,265
<REALIZED-GAINS-CURRENT> (955)
<APPREC-INCREASE-CURRENT> 11,783
<NET-CHANGE-FROM-OPS> 20,093
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,438
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,337
<NUMBER-OF-SHARES-REDEEMED> 3,670
<SHARES-REINVESTED> 668
<NET-CHANGE-IN-ASSETS> 3,580
<ACCUMULATED-NII-PRIOR> 160
<ACCUMULATED-GAINS-PRIOR> (3,008)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 868
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,013
<AVERAGE-NET-ASSETS> 148,585
<PER-SHARE-NAV-BEGIN> 9.850
<PER-SHARE-NII> .646
<PER-SHARE-GAIN-APPREC> .732
<PER-SHARE-DIVIDEND> .658
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.570
<EXPENSE-RATIO> .68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000822632
<NAME> WM. BLAIR MUTUAL FUNDS, INC.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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