<PAGE> 1
As filed with the Securities and Exchange Registration Nos. 33-17463
Commission on or about February 26, 1997 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. 16 X
---- -----
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17 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, 1996
will be filed on or about February 27, 1997.
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, 1997 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
================================================================================
NOTE
Currently, the Registrant has five series. Four of the series have a combined
prospectus and statement of additional information. The fifth series, the
Value Discovery Fund, was added via Post-Effective Amendment No. 15. This
filing combines each of the five series into a single prospectus and statement
of additional information.
<PAGE> 3
WILLIAM BLAIR MUTUAL FUNDS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item No. of Form N-1A Caption
<S> <C>
Part A . . . . . . . . . . . . . . . . . . . . . . . . Prospectus
- ------ ----------
1 . . . . . . . . . . . . . . . . . . . . . . . . Cover page
2 . . . . . . . . . . . . . . . . . . . . . . . . Fund Expenses
3 . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights
4 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; Value Discovery Fund; International
Growth Fund; Income Fund; Ready Reserves Fund
5 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund
5A . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
6 . . . . . . . . . . . . . . . . . . . . . . . . Shareholder Services and Rights; Dividend and
Distribution Policy; Other Important Information;
back cover
7 . . . . . . . . . . . . . . . . . . . . . . . . How to Buy; How to Sell; Exchanges; Shareholder
Services and Rights; Determination of Net Asset
Value
8 . . . . . . . . . . . . . . . . . . . . . . . . How to Sell; Exchanges; Shareholder Services and
Rights; Other Important Information
9 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
Part B Statement of Additional Information
- ------ -----------------------------------
10 . . . . . . . . . . . . . . . . . . . . . . . . Cover page
11 . . . . . . . . . . . . . . . . . . . . . . . . Table of Contents
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Item No. of Form N-1A Caption
<S> <C>
Part B Statement of Additional Information
- ------ -----------------------------------
12 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable
13 . . . . . . . . . . . . . . . . . . . . . . . . Investment Policies and Restrictions; Investment
Practices; 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 . . . . . . . . . . . . . . . . . . . . . . . . Shareholder Rights
19 . . . . . . . . . . . . . . . . . . . . . . . . General Fund Information
20 . . . . . . . . . . . . . . . . . . . . . . . . General Fund Information
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
PROSPECTUS / MAY 1, 1997
WILLIAM BLAIR
MUTUAL FUNDS, INC.
- ----------------------------
GROWTH FUND
- ----------------------------
VALUE DISCOVERY FUND
- ----------------------------
INTERNATIONAL GROWTH FUND
- ----------------------------
INCOME FUND
- ----------------------------
READY RESERVES FUND
- ----------------------------
This prospectus contains important information about the individual portfolios,
including their investment objectives. For your benefit and protection, please
read it before you invest, and keep it for future reference.
An investment in the 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 $1.00 share price.
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 Mutual Funds, Inc.
222 West Adams Street
Chicago, Illinois 060606
<PAGE> 6
TABLE OF
CONTENTS
<TABLE>
<S> <C>
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
VALUE DISCOVERY FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INTERNATIONAL GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INCOME FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
READY RESERVES FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VALUE DISCOVERY FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INTERNATIONAL GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
INCOME FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
READY RESERVES FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
YOUR ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
How to Buy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
How to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Shareholder Services and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Dividend and Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Other Important Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
INVESTMENT GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
<PAGE> 7
OVERVIEW -
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. Each portfolio is managed by the investment
professionals of William Blair & Company, L.L.C. (the "Adviser"), an investment
adviser with over $7.8 billion in assets under management.
For most purposes, each portfolio operates like a separate mutual fund. Each
portfolio has its own goal, strategy and risk/reward profile. The Growth Fund,
the Value Discovery Fund and the International Growth Fund each invest
primarily in equity securities for long-term capital appreciation. Therefore,
they may be more appropriate investments for individuals with longer time
horizons and who are willing to accept higher short-term risk along with higher
potential long-term returns. The Income Fund invests primarily in bonds and
may be more appropriate for individuals with a shorter time horizon and who are
seeking income. The Ready Reserves Fund invests in money market securities,
which are short-term instruments and generally provide a lower level of income
than bonds, but also provide a low degree of volatility.
There can be no assurance that a portfolio will meet its investment objective.
Like all investments, each portfolio is subject to market fluctuations and
financial risks. Because you could lose money by investing in these portfolios,
be sure to read all the information carefully before investing.
The next several pages contain information on the expenses associated with an
investment in each portfolio, as well as financial highlights for all
portfolios. Following the discussion of Fund expenses is concise information
on each of the portfolios, as follows:
<TABLE>
<S> <C>
-GOAL AND STRATEGY the portfolio's investment objective and the method by which it will pursue its
goal
- ----------------------------------------------------------------------------------------------------------------
-PORTFOLIO SECURITIES the primary types of securities in which the portfolio invests
(Certain investments, policies and techniques are described more fully in the
"Investment Glossary" at the end of the prospectus.)
- ----------------------------------------------------------------------------------------------------------------
-RISK FACTORS the major risks associated with investing in the portfolio
- ----------------------------------------------------------------------------------------------------------------
-PORTFOLIO the individuals assigned by the investment adviser to handle the day-to-day
MANAGEMENT management of the portfolio
</TABLE>
<PAGE> 8
FUND EXPENSES -
William Blair Mutual Funds are no-load, which means you do not pay a sales
charge.
<TABLE>
<S> <C>
Shareholder transaction expenses for William Blair Mutual Funds
- ---------------------------------------------------------------
Maximum sales load imposed on purchases NONE
Maximum sales load imposed on reinvestments NONE
Deferred sales load NONE
Redemption fee NONE
</TABLE>
Annual Fund operating expenses
- ------------------------------
(as a percentage of average daily net assets)
Fund investors pay various expenses, either directly or indirectly. This table
shows the expenses for the past year, adjusted to reflect any reimbursements.
Future expenses may be greater or less.
<TABLE>
<CAPTION>
Value International Ready
Growth Discovery Growth Income Reserves
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fee .68% 1.15% 1.10% .58% .60%
Other expenses .11 .35* .34 .12 .11
12b-1 fee None None None None None
---- ---- ---- ---- ----
Total Fund operating
expenses .79% 1.50%* 1.44% .70% .71%
=== ==== ==== === ===
</TABLE>
*After expense reimbursement. The Value Discovery Fund commenced operations on
December 23, 1996; therefore, "other expenses" are based upon the annualized
estimates for the current fiscal year, after reimbursement. During the
portfolio's first year of operations, the Adviser has agreed to voluntarily
absorb total operating expenses that exceed 1.50% of the portfolio's average
daily net assets. Without the Adviser's voluntary absorption of expenses, the
portfolio's total operating expenses are estimated to be 1.95%.
Example: The purpose of this example is to assist the you in understanding the
various costs and expenses that an investor in a portfolio may bear directly or
indirectly.
This table shows what you would pay if you invested $1,000 over the various
time frames indicated. The example assumes you reinvested all dividends and
that the average annual return was 5%.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
GROWTH $ 8 $25 $44 $ 98
VALUE DISCOVERY $15 $47 -- --
INTERNATIONAL GROWTH $15 $46 $79 $ 174
INCOME $ 7 $22 $39 $ 87
READY RESERVES $ 7 $23 $40 $ 89
</TABLE>
THE EXAMPLE IS FOR COMPARISON PURPOSES ONLY AND IS NOT A REPRESENTATION OF A
PORTFOLIO'S ACTUAL EXPENSES AND RETURNS, EITHER PAST OR FUTURE. IT IS BASED
UPON THE ANNUAL FUND OPERATING EXPENSES SHOWN ABOVE. FIGURES ARE SHOWN FOR
THE VALUE DISCOVERY FUND ONLY FOR THE ONE- AND THREE-YEAR PERIODS BECAUSE IT IS
A NEW PORTFOLIO.
2
<PAGE> 9
FINANCIAL HIGHLIGHTS -
The figures below for the periods ended December 31, each portfolio's fiscal
year end, were audited by the Fund's independent auditors.
GROWTH FUND
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210 $ 9.100
Income from investment
operations:
Net investment income (.010) .034 .027 .035 .045 .070 .131 .125 .126 .148
Net realized and unrealized gain (loss)
on investments 2.144 2.750 .581 1.389 .671 2.970 (.287) 2.178 .433 .839
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment operations 2.134 2.784 .608 1.424 .716 3.040 (.156) 2.303 .559 .616
Less distributions from:
Net investment income .010 .030 .025 .035 .047 .070 .130 .130 .160 .135
Net realized gain on investments .544 .454 .713 1.049 .769 .450 .584 2.143 .799 1.371
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total distributions .544 .484 .738 1.084 .816 .520 .714 2.273 .959 1.506
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of period $ 13.480 $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Total return (%) 17.99 29.07 6.45 15.51 7.61 44.37 (2.02) 30.45 7.12 7.99
Ratios to average net assets (%):
Expenses .78 .65 .71 .78 .83 .90 .87 .91 .92 .87
Net investment income (loss) (.03) .34 .32 .38 1.34 .83 1.70 1.36 1.46 1.46
Supplemental data:
Net assets at end of period (000s) $501,774 $363,036 $217,560 $150,046 $111,082 $91,433 $62,898 $67,421 $59,767 $66,279
Portfolio turnover rate (%) 43 32 46 55 27 33 34 34 18 22
Average Commission Rate $ .0621 -- -- -- -- -- -- -- -- --
</TABLE>
VALUE DISCOVERY FUND
<TABLE>
<CAPTION>
Year Ended December 31, 1996(a)
-------------------------------
<S> <C>
Net asset value, beginning of period $ 10.000
Income from investment operations:
Net investment income -
Net realized and unrealized gain
on investments -
Total from investment operations -
Less distributions from:
Net investment income -
Net realized gain on investments -
Total distributions -
Net asset value, end of period $ 10.000
=========
Total return (%)
Ratios to average net assets (%):
Expenses -
Net investment income -
Supplemental data:
Net assets at end of period (000s) $ 2
Portfolio turnover rate (%) -
</TABLE>
- ----------------------
(a) For the period December 23, 1996 (Commencement of Operations) to
December 31, 1996.
3
<PAGE> 10
INTERNATIONAL GROWTH FUND
<TABLE>
<CAPTION>
Years ended December 31, Period Ended
--------------------------------------------------- December 31,
1996 1995 1994 1993 1992(a)(b)
---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.120 $ 12.360 $ 13.180 $ 10.130 $ 10.000
Income from investment operations:
Net investment income (loss) .029 .105 0.016 0.008 (0.011)
Net realized and unrealized gain (loss) on
investments, foreign currency and
other assets and liabilities 1.299 .758 (0.025) 3.401 0.141
-------- --------- --------- -------- --------
Total from investment operations 1.328 .890 (0.009) 3.409 0.130
Less distributions from:
Net investment income .068(c) .130(c) 0.024 -- --
Net realized gain on investments .430 -- 0.714 0.359 --
Tax return of capital -- -- 0.073(d) -- --
-------- --------- --------- -------- --------
Total distributions .498 .130 0.811 0.359 --
-------- --------- --------- -------- --------
Net asset value, end of period $ 13.950 $ 13.120 $ 12.360 $ 13.180 $ 10.130
======== ========= ========= ======== ========
Total return (%) 10.20 7.22 (.04) 33.65 1.30
Ratios to average net assets (%)
Expenses (e) 1.44 1.48 1.51 1.71 1.88
Net investment income (loss) (e) .19 .87 .15 .11 (.56)
Supplemental data:
Net assets at end of period (000s) $105,148 $ 89,762 $ 70,403 $ 40,298 $ 10,767
Portfolio turnover rate (%) 89 77 40 83 5
Average Commission Rate $ .0051 -- -- -- --
</TABLE>
INCOME FUND
<TABLE>
<CAPTION>
Years Ended December 31,
Period Ended
--------------------------------------------------------------- December 31,
1996 1995 1994 1993 1992 1991 1990(a)(f)
---- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.570 $ 9.850 $ 10.580 $ 10.600 $ 10.770 $ 10.200 $ 10.000
Income from investment operations:
Net investment income .619 .646 .661 .651 .832 .95 .164
Net realized and unrealized gain (loss)
on investments (.309) .732 (.741) .159 (.089) .638 .126
--------- -------- --------- --------- --------- --------- ---------
Total from investment operations .310 1.378 (.080) .810 .743 1.583 .290
Less distributions from:
Net investment income .610 .658 .646 .651 .827 .870 .090
Net realized gain on investments -- -- .004 .179 .086 .143 --
--------- -------- --------- --------- --------- --------- ---------
Total distributions .610 .658 .650 .830 .913 1.013 .090
--------- -------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 10.270 $ 10.570 $ 9.850 $ 10.580 $ 10.600 $ 10.770 $ 10.200
========= ======== ========= ========= ========= ========= =========
Total return (%) 3.07 14.37 (.74) 7.82 7.17 16.47 2.91(b)
Ratios to average net assets (%):
Expenses (g) .70 .68 .68 .70 .88 .92 .74
Net investment income (g) 5.97 6.24 6.33 5.96 7.69 8.33 8.39
Supplemental data:
Net assets at end of period (000s) $ 150,006 $147,370 $ 143,790 $ 204,381 $ 136,896 $ 83,041 $ 22,899
Portfolio turnover rate (%) 68 54 63 114 47 64 159
</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 $.022 and $.061 in passive foreign investment company
transactions which are treated as ordinary income for Federal income
tax purposes for 1996 and 1995, respectively.
(d) Includes $431 relating to a tax return of capital.
(e) 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.
(f) For the period from September 25, 1990 (Commencement of Operations) to
December 31, 1990.
(g) 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.
4
<PAGE> 11
READY RESERVES FUND
<TABLE>
<CAPTION>
Years Ended December 31 Period Ended
---------------------------------------------------------------- December 31
1996 1995 1994 1993 1992 1991 1990 1989 1988(a) (b)
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <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 $ 1.0000
Income from investment operations:
Net investment income .0478 .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399
Net realized and unrealized gain
(loss) on investments _ _ (.0026) _ _ _ _ _ _
------- ------- ------- ------- -------- ------- ------ ------ -------
Total from investment operations .0478 .0530 .0335 .0261 .0327 .0551 .0755 .0848 .0399
Less distributions from:
Net investment income .0471 .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399
------- ------- ------- ------- -------- ------- ------ ------ -------
Total distributions .0471 .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 $ 1.0000
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return (%) 4.81 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 71 .72 .71 .71 .71 .71 .75 .80 .81
Net investment income 4.78 5.30 3.61 2.61 3.27 5.51 7.56 8.47 7.54
Supplemental data:
Net assets at end of period (000s) $760,808 $703,993 $1,277 $ 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%.
5
<PAGE> 12
GROWTH FUND -
The portfolio seeks long-term appreciation of capital by investing in
well-managed companies in growing industries.
GOAL AND STRATEGY
The Growth Fund seeks long-term appreciation of capital by investing in well
managed companies in growing industries. The Adviser researches the market for
companies that have grown more rapidly than the gross national product from one
business cycle to the next. 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.
The Adviser intends to seek growth opportunities by investing in each of the
following classes of companies in varying proportions:
LARGE, high quality, seasoned growth companies that have demonstrated sustained
growth over a long period of time;
MEDIUM sized companies of emerging investment quality whose records of sales
and earnings growth are not as well established; and
SMALL, rapid growth companies that have had especially vigorous growth in
revenues and earnings.
The Adviser will invest in companies that it believes are well managed
considering some or all of the following investment criteria:
A leader in the field. The company should be, or clearly have the expectation
of becoming, a significant provider in the primary markets it serves.
Unique or specialty company. The company should have some distinctive
attribute that cannot easily be 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.
Value to customer. The prices of the company's products or services should be
based upon their value to the customer, rather than their production cost.
Return on equity. The company should have achieved, or have the potential to
achieve, an above average return on equity through efficient use of assets and
adequate margins, rather than excessive financial leverage. Such companies
should be able to finance most or all of their growth internally and translate
revenue and 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.
6
<PAGE> 13
The portfolio invests primarily in common stocks.
PORTFOLIO SECURITIES
The portfolio invests primarily in common stocks. The portfolio may, however,
hold convertible debentures and preferred stocks that meet its investment
criteria. To a limited extent, the portfolio may also invest in certain types
of securities and use certain investment techniques, such as depository
receipts, illiquid securities, when-issued and delayed delivery securities and
repurchase agreements, which are more fully described in the Investment
Glossary at the end of this prospectus. The Investment Glossary also describes
the portfolio's policies with regard to borrowing, concentration,
diversification and portfolio turnover, along with the risks associated with
the portfolio's investments and policies. Types of investments and investment
techniques that the portfolio intends to use only to a very limited extent,
such as warrants, are described in the Statement of Additional Information.
Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, if significant adverse market action is
anticipated, investment-grade debt securities may be held without limit as a
temporary defensive measure. Normally, the portfolio does not purchase any
stocks with a view to quick turnover for capital gains.
All investments are subject to market fluctuations and financial risks. The
value of your investment will fluctuate in response to stock market movements.
INVESTMENT RISKS
To the extent that the portfolio invests in small companies, it takes on
additional risks. This is because small companies may be in earlier stages of
development, may be dependent upon a small number of products or services, may
lack substantial capital reserves and/or do not have proven track records.
Smaller companies may be more adversely affected by poor economic or market
conditions. In addition, small companies may be traded in low volumes, which
can increase volatility and liquidity risks. Any 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.
PORTFOLIO MANAGEMENT
The Growth Fund is co-managed by Rocky Barber and Mark A. Fuller, III.
Rocky Barber is a principal of William Blair & Company, L.L.C. He joined
William Blair in 1986 as a portfolio manager and manager of the Investment
Management Department. Besides his management responsibilities, he co-manages
the Growth Fund and is a member of the department's Growth team. Previously,
he was an equity manager with Alliance Capital Management for nine years and
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.,
a past president of the board of Commissioners of the Winnetka Park District
and 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. Education: B.A., M.S. and M.B.A., Stanford University; CFA.
Mark A. Fuller, III is a principal of William Blair & Company, L.L.C. He has
been with William Blair since 1983. He began his career in Institutional
Sales, developing long-standing relationships with each of the firm's research
analysts. Today he is a portfolio manager for numerous accounts, co-manages
the firm's Growth Fund and is a member of the department's Small Cap and
Aggressive Growth teams. Prior to joining William Blair he was a sales
representative with IBM Corporation. Education: B.A., Northwestern
University; M.B.A., Northwestern University Kellogg Graduate School of
Management.
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VALUE DISCOVERY FUND -
The portfolio's objective is long-term capital appreciation. Using a value
discipline, the portfolio invests primarily in the equity securities of small
companies.
GOAL AND STRATEGY
The Value Discovery Fund's investment objective is to seek long-term capital
appreciation. The portfolio pursues its objective by investing with a value
discipline primarily in the equity securities of small companies. In selecting
companies for investment, the Adviser evaluates the extent to which a company
meets the investment criteria set forth below. The weight given to a particular
investment criterion will depend upon the circumstances, and some portfolio
holdings may not meet all of the following criteria:
Material Price/Value Disparity--whether the company's current market value
reflects a material discount from the Adviser's estimate of the company's
intrinsic value. In determining a company's intrinsic value, the Adviser
generally will assess whether a company's share price appears to be inexpensive
relative to any of the following: sales, projected earnings, projected cash
flow, discounted cash flow, asset values and liquidation value. The discount of
the market value from the intrinsic value is considered material when it
provides an adequate return opportunity compared to alternative small company
investments. The Adviser believes that the short-term market assessment of a
company's value can differ materially from a long-term perspective. Therefore,
price/value disparities can result from particular industries and companies
currently being in disfavor in the market. As the reasons for market disfavor
dissipate, a market reassessment can result in price appreciation. However,
there is no guarantee that this will result in market appreciation for a
company.
Probable Expansion in Profitability--whether the company has a reasonable
expectation of improving its level of profitability over a three year
investment horizon. The Adviser believes an expansion in profit margins
generally results in improved market valuation. Therefore, the Adviser will
look for companies that it believes have the potential for normal, sustainable
levels of profitability greater than their current levels. Factors used to
assess the normal level of future profitability for a company include industry
profit levels and competitiveness and the company's competitive advantages and
business strategy.
Skilled and Committed Management--whether the company has a capable and skilled
management team and a clearly articulated and logical business strategy with a
reasonable probability of successful execution. Generally, this determination
will be made through due diligence with management, which often includes
on-site meetings. Factors used to assess management's ability to execute its
business strategy include tangible evidence of prior business success and
management's level of financial commitment to the company through equity
ownership.
Strong Capital Structure--whether the company has a relatively simple, clean
financial structure without excessive use of financial leverage. In addition,
the company should adhere to conservative and straightforward accounting
practices.
Positive Catalyst--the likelihood that the company will undergo a positive
corporate change within a three-year investment horizon. Examples of positive
corporate changes may include: successful execution of its business plan,
acquisitions, mergers, spin-offs, divestitures, new products and management
additions or changes. The portfolio seeks to invest in companies before a
positive catalyst becomes apparent to the market.
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<PAGE> 15
The portfolio will invest in common stocks of small companies.
PORTFOLIO SECURITIES
Generally, most of the portfolio will be invested in the common stocks of small
companies. Debentures and preferred stocks may be held, however, if
convertible into common stocks that meet the investment criteria of the
portfolio. The portfolio may invest up to 5% of its net assets in foreign
securities, which includes depository receipts. To a limited extent, the
portfolio may also invest in certain types of securities and use certain
investment techniques such as depositary receipts, foreign securities, illiquid
securities, investment companies, real estate investment trusts, repurchase
agreements and when-issued and delayed delivery securities, which are more
fully described in the Investment Glossary at the end of this prospectus. The
Investment Glossary also describes the portfolio's policies with regard to
borrowing, concentration, diversification and portfolio turnover, along with
the risks associated with the portfolio's investments and policies. Types of
investments and investment techniques that the portfolio intends to use only to
a very limited extent, such as warrants and futures, are described in more
detail in the Statement of Additional Information.
Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, if significant adverse market action is
anticipated, investment-grade debt securities may be held without limit as a
temporary defensive measure. Normally, the portfolio does not purchase
securities with a view to quick turnover for capital gains.
All investments are subject to market fluctuations and financial risks. The
value of your investment will fluctuate in response to stock market movements.
INVESTMENT RISKS
Stocks of small companies carry higher risks that those of larger companies.
This is because small companies may be in an earlier stage of development, may
be dependent on a small number of products or services, may lack substantial
capital reserves and/or do not have proven track records. Smaller companies
may be more adversely affected by poor economic or market conditions. In
addition, small companies may be traded in low volumes, which can increase
volatility and liquidity risks. From time to time, the portfolio may invest in
the equity securities of very small companies, often referred to as "micro cap"
companies. The considerations noted above are generally intensified for these
investments. Any convertible 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.
PORTFOLIO MANAGEMENT
The portfolio is co-managed by Mr. Glen Kleczka, Ms. Capucine Price and Mr.
David Mitchell.
Glen Kleczka joined William Blair & Company, L.L.C. in 1996 and leads the
Value Discovery Fund portfolio management team. Since 1989, he was a partner
in the Private Markets and U.S. Equity groups of Brinson Partners, Inc.,
managing the firm's Post-Venture Fund. This $900 million fund invested in
small capitalization companies, many of which were previously backed by venture
capitalists. Glen was a member of the firm's Private Markets Committee, which
approved all investments in venture capital deals and partnership investments.
Previously, he spent two years at CNA Financial Corp. as a co-manager of their
Variable Annuity Trust's $60 million equity allocation. Glen is a member of
the Investment Analysts Society of Chicago. Education: B.S., Finance,
Marquette University; M.S. Finance & Investment Banking, University of
Wisconsin-Madison; and CFA.
Capucine "Cappy" Price joined William Blair & Company, L.L.C. in 1996 as
portfolio manager of the Value Discovery Fund. From 1993 to 1996 she was a
partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc.
Her primary responsibility was investment analysis for the firm's Post-Venture
Fund, a micro-cap, value-oriented stock fund. Prior to joining Brinson
Partners, Inc., Cappy was an equity
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<PAGE> 16
analyst and First Scholar with the First National Bank of Chicago. Education:
B.A., Economics, University of Michigan; M.A., Social Science, University of
Chicago;M.B.A., Northwestern University Kellogg Graduate School of Management.
David Mitchell joined William Blair & Company, L.L.C. in 1996 as portfolio
manager of the Value Discovery Fund. Previously, he was a partner in the U.S.
Equity group at Brinson Partners, Inc. At Brinson, he was a member of a four-
person team that managed a $900 million institutional micro-cap value product.
Before that, he was co-manager of Thomas Paine Investors, L.P., a limited
partnership invested in entrepreneurial companies. Education: B.A., Economics,
Knox College; M.B.A., Northwestern University Kellogg Graduate School of
Management; and CFA.
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<PAGE> 17
INTERNATIONAL GROWTH FUND -
The portfolio seeks long-term capital appreciation through investment in
well-managed, quality, growth companies.
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 the U.S., thereby taking advantage of
these differences.
The portfolio primarily invests in common stocks issued by foreign companies.
GOAL AND STRATEGY
The investment objective of the International Growth Fund is long-term capital
appreciation through investment in well- managed, quality growth companies.
Such companies will generally exhibit superior business fundamentals,
including leadership in their field, quality products or services, distinctive
marketing and 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. 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.
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 the Adviser of economic, market and political trends
throughout the world. The investment of the portfolio's assets in various
international securities markets tend to decrease the degree to which events in
any one country can affect the entire portfolio. In making decisions regarding
the country allocation, the Adviser 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. It is
anticipated that the majority of the portfolio's investments normally will be
divided among Continental Europe, the United Kingdom, Japan and the markets of
the Pacific Basin (including Australia and New Zealand). Selective investments
may also be made in Canada and Latin America and in emerging markets worldwide.
While the portfolio normally will invest around 18% of its assets in emerging
markets, from time to time, it may invest as little s 5% and as much as 30% of
its assets in such markets. 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 normally will allocate its investments among not less than six
different countries and will not concentrate investments in any particular
industry. However, the portfolio may have more than 25% of its assets
invested in any major industrial or developed country. 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.
PORTFOLIO SECURITIES
The portfolio ordinarily will 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 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
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<PAGE> 18
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.
To a limited extent, the portfolio may also invest in types of securities and
use certain investment techniques, such as depositary receipts, foreign
currency transactions, forward foreign currency contracts, illiquid securities,
investment companies, repurchase agreements and when-issued and delayed
delivery securities, which are more fully described in the Investment Glossary
at the end of this prospectus. The Investment Glossary also describes the
portfolio's policies with regard to borrowing, concentration, diversification,
and portfolio turnover, along with the risks associated with such investments
and policies. Types of investments and investment techniques that the
portfolio intends to use only to a very limited extent, such as warrants, are
described in more detail in the Statement of Additional Information.
Investments in foreign equity securities present opportunities for both
increased benefits and risks as compared to investments in the U.S. securities
market.
The value of your investment will fluctuate in response to the movement of
stock markets in various countries.
INVESTMENT RISKS
The risks of investing in securities of foreign issuers may include less
publicly available information, less governmental regulation and supervision of
foreign stock exchanges, brokers and issuers, a lack of uniform accounting,
auditing and financial reporting standards, practices and requirements, the
possibility of expropriation, nationalization, confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability,
restrictions in the flow of international capital, and difficulty in obtaining
and enforcing judgments against foreign entities. 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 generally is longer than domestic securities. 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.
Although the Fund will try to invest in companies and governments of countries
having stable or improving political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the adoption
of foreign government restrictions and other adverse political, social or
diplomatic developments that could affect investment in these nations.
The risks described above, including the risks of nationalization and
expropriation of assets, are typically increased to the extent that the Fund
invests in issuers located in less developed and developing nations, whose
securities markets are sometimes referred to as "emerging securities markets."
Investments in securities located in such countries are speculative and subject
to certain special risks. Political and economic structure in many of these
countries may be in their infancy and developing rapidly, and such countries
may lack the social, political and economic characteristics of more developed
countries. Certain of these countries have in the past failed to recognize
private property rights and have at times nationalized and expropriated the
assets of private companies.
The currencies of certain emerging market countries have experienced a steady
devaluation relative to the U.S. dollar, and continued devaluations may
adversely affect the value of a fund's assets denominated in such currencies.
Many emerging market countries have experienced substantial rates of inflation
for many years, and continued inflation may adversely affect the economies and
securities markets of such countries.
In addition, unanticipated political or social developments may affect the
values of the Fund's investments in these countries and the availability to the
Fund of additional investments in these countries. The small size, limited
trading volume and relative
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inexperience of the securities markets in these countries may make the Fund's
investments in such countries illiquid and more volatile than investments in
more developed countries, and the Fund may be required to establish special
custodial or other arrangements before making investments in these countries.
There may be little financial or accounting information available with respect
to issuers located in these countries, and it may be difficult as a result to
assess the value or prospects of an investment in such issuers.
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, available for
distribution to shareholders.
The portfolio is expected to incur operating expenses that are higher
than those of mutual funds investing exclusively in U.S. equity securities,
since expenses such as and custodial fees related to foreign investments are
usually higher than those associated with investments in U.S. securities.
Similarly, brokerage commissions on purchases and sales of foreign securities
are generally higher than on domestic securities. In addition, dividends and
interest from foreign securities may be subject to foreign withholding taxes.
(For more information, see "Your Account - Dividends, Distributions and
Taxes".)
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 Adviser, 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.
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PORTFOLIO MANAGEMENT
The portfolio is co-managed by Norbert W. Truderung and George Greig.
Norbert W. Truderung, a principal of William Blair & Company, L.L.C. joined the
firm in 1986. He is a member of the Investment Management Department's
research committee and a senior vice president of William Blair Mutual Funds,
Inc. Norbert is also a member of the department's Small and Aggressive Growth
teams. Previously, Norbert spent eight years at The Northern Trust Company as
a senior investment research analyst and as portfolio manager for the bank's
international investment funds. He was responsible for managing their
international research effort and served as a member of the bank's investment
policy committee. From 1974-78, Norbert was an investment analyst at National
City Corporation (Cleveland). He is a member of the Investment Analysts
Society of Chicago. Education: B.A., Baldwin- Wallace College; CFA.
W. George Greig joined William Blair & Company, L.L.C.'s Investment Management
Department in 1996 as an international portfolio manager. He previously headed
international equities for PNC Bank in Philadelphia. George was a founding
partner of Pilgrim Baxter & Associates, where he was an analyst, research
director and portfolio manager for over ten years. He also served as chief
investment officer of Framlington Group plc during its association with Pilgrim
Baxter and founded and managed a joint venture between the two firms.
Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton
School, University of Pennsylvania.
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INCOME FUND -
The Income Fund's objective is to provide investors with as high a level of
current income as is consistent with the preservation of capital by investing
primarily in a diversified portfolio of high grade intermediate-term debt
securities.
GOAL AND STRATEGY
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.
The anticipated dollar weighted average maturity of the portfolio is three to
seven years. The anticipated weighted average modified duration for the
portfolio is two to five years, with a maximum duration on any instrument of
eight years. The Adviser will not continue to hold a security whose duration
has moved above eight years.
PORTFOLIO SECURITIES
As a matter of fundamental policy, under normal conditions at least 90% of the
portfolio's assets will be invested in the following:
- - U.S. DOLLAR DENOMINATED DEBT SECURITIES (domestic or foreign) with long-term
ratings of "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;
- - 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;
- - COLLATERALIZED OBLIGATIONS, which are debt securities issued by a
corporation, trust or custodian, or by a U.S. Government agency or
instrumentality, that are 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; and
- - COMMERCIAL PAPER obligations rated within the highest grade by one of the
four Rating Organizations.
Up to 10% of the portfolio's total assets may be invested in unrated debt
securities, provided that the Adviser deems such securities 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.
Generally the portfolio will remain fully invested, and the Adviser will not
attempt to time the market. However, 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 does not
invest in equity securities.
To a limited extent, the portfolio may invest in certain types of securities
and use certain investment techniques, such as collateralized obligations,
illiquid securities; repurchase agreements and when issued and delayed delivery
securities which are more fully described in the Investment Glossary at the end
of this Prospectus. The Investment
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<PAGE> 22
Glossary also describes the portfolio's policies with regard to borrowing,
concentration, diversification, duration, lending and portfolio turnover, along
with the risks associated with such investments and policies. In addition, the
portfolio may lend portfolio securities, which is described in more detail in
the Statement of Information.
INVESTMENT RISKS
The portfolio's investments are subject to financial risks. However, in the
opinion of the Adviser, the risk of loss of principal should be reduced due to
the relatively high quality of the investments in which the portfolio will
primarily invest. 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. 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). Others are
backed only by the credit of the issuer itself (such as obligations of the
Student Loan Marketing Association). In addition, investments with longer
maturities, which typically provide the better yields, may subject the
portfolio to increased price changes resulting from market yield fluctuations.
For a description of ratings, see Appendix B in the Statement of Additional
Information.
PORTFOLIO MANAGEMENT
The portfolio is managed by Bentley Myer, a principal of William Blair &
Company, L.L.C. Bentley joined the firm 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
Trustee of Delnor Community Hospital as well as a member of the Investment
Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A.,
Wharton School of the University of Pennsylvania.
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READY RESERVES FUND -
The Ready Reserves Fund's investment objective is to obtain the maximum current
income consistent with preservation of capital by investing exclusively in high
quality money market instruments.
The portfolio will invest exclusively in short-term, high quality U.S. dollar
denominated domestic and foreign money market instruments.
GOAL AND STRATEGY
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.
PORTFOLIO SECURITIES
The portfolio will invest exclusively in U.S. dollar denominated money market
instruments, including those issued by:
- - the U.S. Government, its agencies and instrumentalities;
- - U.S. and foreign banks;
- - Municipalities;
- - Foreign governments; and
- - Multinational organizations, such as the World Bank.
No more than 5% of the portfolio's assets may be invested in securities rated
in the second-highest short-term category (or unrated equivalents). The rest
of the portfolio's investments must be in the highest short-term rating
category.
No more than 25% of the portfolio's assets may be invested in obligations that
are issued either by foreign banks or by foreign branches of U.S. banks, unless
these obligations are backed by the U.S. parent bank. The portfolio maintains
an average maturity of 90 days or less and does not invest in securities with
maturities of more than 13 months.
To a limited extent, the portfolio may also invest in certain types of
securities and use certain investment techniques, such as illiquid securities,
repurchase agreements, Section 4(2) commercial paper, when-issued and delayed
delivery securities and variable rate securities, which are more fully
described in the Investment Glossary at the end of this Prospectus. The
Investment Glossary also describes the portfolio's policies with regard to
borrowing, concentration, diversification, portfolio turnover and ratings,
along with the risks associated with such investments and policies. Types of
investments and investment techniques that the portfolio intends to use only to
a very limited extent are described in the Statement of Additional Information.
INVESTMENT RISKS
The yield paid by the portfolio will vary with changes in interest rates.
While the portfolio seeks to maintain its $1.00 share price, there is no
guarantee that it will be able to do so.
PORTFOLIO MANAGEMENT
The portfolio is managed by Bentley Myer, a principal with William Blair &
Company, L.L.C. Bentley joined the firm 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
Trustee of Delnor Community Hospital as well as a member of the Investment
Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A.,
Wharton School of the University of Pennsylvania.
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YOUR ACCOUNT -
HOW TO BUY
==============================
MINIMUM INVESTMENTS
OPENING AN ACCOUNT
Regular Accounts $5,000
IRAs $2,000
ADDING TO AN ACCOUNT
Ready Reserves Fund $1
All Other Portfolios $1,000
==============================
BY MAIL
OPENING AN ACCOUNT. To open a new account by mail, make out a check for the
amount of your investment, payable to "William Blair Mutual Funds, Inc." (the
"Fund"). Complete the account application included with this Prospectus, and
mail the completed application and the check to the Fund's Transfer Agent,
State Street Bank and Trust Company ("State Street"), P.O. Box 9104, Boston,
Massachusetts 02266-9104.
For the Ready Reserves Fund, send your check and completed application to the
Distributor, William Blair Mutual Funds, Inc., 222 West Adams Street, Chicago,
Illinois 60606.
ADDING TO AN ACCOUNT. To purchase additional shares of the Fund, make out a
check for the amount of your investment, payable to "William Blair Mutual
Funds, Inc." Mail the check together with a letter that specifies the
portfolio name, the account number and the name(s) in which the account is
registered to State Street Bank and Trust Company, P.O. Box 9104, Boston,
Massachusetts 02266-9104.
For the Ready Reserves Fund send your check and letter to the Distributor,
William Blair Mutual Funds, Inc. 222 West Adams Street, Chicago, Illinois
60606.
BY WIRE
OPENING AN ACCOUNT. First, call State Street at 1-800-635-2886 (in
Massachusetts, 1-800-635-2840) for an account number. Then instruct your bank
to wire federal funds to:
State Street Bank and Trust Co.
ABA # 011000028
DDA # 99029340
Attn: Custody & Shareholder Services
225 Franklin Street
Boston, Massachusetts 02110
Include the portfolio name in which you are investing, your assigned account
number and the name(s) in which the account is registered. Finally, complete
the account application, indicate the account number assigned to you and mail
it to William Blair Mutual Funds, Inc., 222 West Adams Street, Chicago,
Illinois 60606.
ADDING TO AN ACCOUNT. To add to your account by wire, instruct your bank to
wire federal funds to:
State Street Bank and Trust Co.
ABA # 011000028
DDA # 99029340
Attn: Custody & Shareholder Services
225 Franklin Street
Boston, Massachusetts 02110
In your request, specify the portfolio name in which you are investing, your
account number and the name(s) in which the account is registered.
To add to an existing account by wire transfer of funds, you must have selected
this option on your account application.
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Load: A load is a sales charge that you pay when you purchase or sell your
mutual fund shares. ALL FIVE OF THE FUND'S PORTFOLIOS ARE NO-LOAD FUNDS.
BY TELEPHONE
OPENING AN ACCOUNT. See "By Wire." ADDING TO AN ACCOUNT. Call your
State Street account executive at
1-800-635- 2886 (in Massachusetts,
1-800-635- 2840). For the Ready
Reserves Fund only, call your
William Blair account executive at
(312) 364-8000.
Tell your account executive
the portfolio name, your account
number and the name(s) in which the
account is registered. You may then
pay for your new shares by mail or by
wire.
To add to an existing account
by telephone, you must have selected
this option on your account
application.
MINIMUM INVESTMENTS. To open an account, the minimum initial investment for
regular accounts is $5,000, and the minimum initial investment for Individual
Retirement Accounts ("IRAs") is $2,000. To add to an account, the minimum
subsequent investment is generally $1,000, except the Ready Reserves Fund, for
which the subsequent minimum investment 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 William Blair & Company, L.L.C. (the
"Adviser").
PURCHASE PRICE. All five portfolios of the Fund are "no-load," which means
that you do not pay a sales charge when you buy or sell shares. All purchases
are made at a price based on the net asset value per share that is next
computed after receipt of your order in proper form by the Distributor, the
Transfer Agent or a designated agent thereof. For the Ready Reserves Fund, the
net asset value per share will normally be $1.00. (For more information, see
"Determination of Net Asset Value.") If you fail to pay for your order, you
will be liable for any loss to the Fund and, if you are a current shareholder,
the Fund may redeem some or all of your shares to cover such loss.
NOTE: All purchases made by check should be in U.S. dollars and made payable
to William Blair Mutual Funds, Inc., or in the case of a retirement account,
the custodian or trustee of such account. Third party checks will not be
accepted. When purchases are made by check or periodic account investment, you
will not be allowed to redeem any of your shares until the investment being
redeemed has been in your account for 15 calendar days.
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HOW TO SELL
You can arrange to take money out of your Fund account at any time by selling
("redeeming") some or all of you shares. You may give instructions to redeem
your shares by mail, by wire or by telephone, as described below.
BY MAIL
To redeem shares by mail, send a written redemption request signed by all
account owners to State Street Bank and Trust Company, P.O. Box 9104, Boston,
Massachusetts 02266-9104.
For the Ready Reserves Fund, send your redemption request to the Distributor,
William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois
60606, to the attention of your account executive. Amounts redeemed will be
placed in your brokerage account.
FOR ALL FIVE PORTFOLIOS OF THE FUND, WRITTEN REDEMPTION REQUESTS MUST INCLUDE:
/ a letter that contains your name, the
portfolio's name and the dollar amount or number
of shares to be redeemed;
/ any stock certificates endorsed, or
accompanied by an endorsed stock power, to the
order of the Fund; and
/ any other necessary documents, such as an
inheritance tax consent or evidence of authority
(for example, letters testamentary), dated not
more than 60 days prior to receipt thereof by
State Street or the Distributor.
BY TELEPHONE
To redeem shares by telephone, you must have elected this option on your
account application. For all portfolios except the Ready Reserves Fund,
contact the Fund's Transfer Agent at 1-800-635-2886 (in Massachusetts,
1-800-635-2840).
For the Ready Reserves Fund, you may redeem some or all of your shares by
telephone by calling your William Blair account executive at (312) 364-8000.
Amounts redeemed will be placed in your brokerage account.
BY WIRE
To redeem some or all of your shares in any of the five portfolios by wire, you
may contact the Transfer Agent, or the Distributor in the case of the Ready
Reserves Fund, by mail or telephone, as explained above. To redeem by wire,
you must have elected this option on your account application and attached a
voided, unsigned check or deposit slip for your bank account to your account
application.
NOTE: Redemption requests should NOT be sent to the Fund or to the Distributor
(except in the case of the READY RESERVES FUND).
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Signature guarantees must be obtained from 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.
SIGNATURE GUARANTEES. Your redemption request must include a signature
guarantee if any of the following situations apply:
/ You wish to redeem shares having a value of $5,000 or more in a single
transaction;
/ Your account registration has changed; or
/ You want a check in the amount of your redemption to be mailed to a different
address than the one on your account (address of record).
Signature guarantees, if required, must appear on the written redemption
request and on any endorsed stock certificate or stock power.
REDEMPTION PRICE. The redemption price that you receive for your shares may be
more or less than the amount that you originally paid for them, depending upon
their net asset value at the time your redemption request is received in proper
order by the Distributor, the Transfer Agent, or a designated agent thereof.
For the Ready Reserves Fund, the net asset value will usually be $1.00.
PAYMENT FOR REDEEMED SHARES. Payment normally will be mailed to you at the
address of record for your account by the third business day after receipt by
State Street (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 your shares have cleared.
For the Ready Reserves Fund, if the Distributor receives notice of your request
to redeem shares by 9:30 a.m., Chicago time, the redemption will be effected as
of that date. If notice of your redemption request is received after that
time, the redemption will be effected on the next business day.
AUTOMATIC REDEMPTION OF SMALL ACCOUNTS. Because of the relatively high cost of
maintaining small accounts, the Fund reserves the right to redeem your shares
in any account that, following a redemption, is below a specified amount.
Currently, the MINIMUM IS $5,000 PER PORTFOLIO. Before the redemption is
processed, you will be notified that the value of your account has fallen below
the minimum and allowed to make an additional investment.
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SPECIAL REDEMPTION METHODS FOR THE
READY RESERVES FUND
In addition to the above methods, shares of the Ready Reserves Fund can be
redeemed by two other methods unique to this portfolio. Redemption requests
will be processed after the next daily dividend declaration at the net asset
value next determined upon receipt by the Distributor of a proper redemption
request. In this way, you will receive the net asset value of your shares and
all declared but unpaid dividends on your shares through the date of
redemption.
1. REDEMPTION BY CHECK. To redeem shares by check, you must fill out the
appropriate section of your account application. If your application for the
check writing privilege is approved, you 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 you may write; 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 the check is presented for payment, a sufficient number of full and
fractional shares from your account will be redeemed at their next determined
net asset value per share, usually $1.00, to cover the amount of the check.
This enables you to continue earning daily dividends until the check clears.
Canceled checks will be returned to you by State Street. For joint accounts,
unless a single signer has been authorized on your account application, checks
must be signed by all joint account owners.
The Fund may refuse to honor checks whenever the right of redemption has been
suspended or postponed or whenever your account is otherwise impaired. For
instance, your account would be considered to be impaired when (1) there are
insufficient assets to cover the check, (2) a "stop order" has been placed on
the check and (3) in other situations, such as where there is a dispute over
ownership of the your account. A $25 SERVICE FEE will be charged when a check
is presented to redeem portfolio shares in excess of the value of your account
or for an amount less than $500.
2. AUTOMATIC REDEMPTION. The Distributor has instituted an automatic
redemption procedure available to Ready Reserve Fund shareholders who maintain
certain brokerage accounts with it. The Distributor may use this procedure to
satisfy amounts due it by you as a result of purchases of securities or other
transactions in your brokerage account. Under this procedure, if you so elect,
your 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 which you are obligated to
pay to the Distributor. You will receive all dividends declared but unpaid
through the date of redemption.
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YOUR ACCOUNT-CONTINUED
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EXCHANGES
. Growth Fund
. Value Discovery Fund
. International Growth Fund
. Income Fund
. Ready Reserves Fund
Subject to the following limitations, you may exchange shares of all five
portfolios for each other at their relative net asset values so long as the
portfolio shares to be acquired are registered in your 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 redeeming your shares of the portfolio held and purchasing shares of the
other portfolio or portfolios requested.
BY MAIL
You may request an exchange of your shares by writing to William Blair Mutual
Funds, Inc., Attention: Exchange Department, P.O. Box 9104, Boston,
Massachusetts 02266-9104.
BY TELEPHONE
You may also exchange your shares by telephone by completing the appropriate
section on your account application. Once your telephone authorization is on
file, State Street will honor your requests to redeem shares by telephone at
1-800-635-2886 (in Massachusetts, 1-800-635-2840). If you hold certificated
shares of the Fund, you must deposit them with State Street prior to any
exchange of such shares.
Neither the Fund nor State Street 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 you will bear
the risk of loss, so long as the Fund or its Transfer Agent reasonably
believes, based upon reasonable verification procedures, that the telephonic
instructions are genuine. The VERIFICATION PROCEDURES include (1) recording
instructions, (2) requiring certain identifying information before acting upon
instructions and (3) sending written confirmations.
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SHAREHOLDER SERVICES AND RIGHTS
William Blair provides a variety of services to help you manage your account.
AUTOMATIC SWEEP PROGRAM. You can purchase shares of the Ready Reserves Fund
through an automatic sweep program if you establish a brokerage account with
the Distributor, William Blair & Company, L.L.C., provided that you meet the
current minimum brokerage account size requirements. The automatic sweep
program helps you to make convenient, efficient use of free credit balances in
your William Blair brokerage account.
TO PURCHASE SHARES of the Ready Reserves Fund through the automatic sweep
program, you must have a free credit balance in your brokerage account with the
Distributor. Currently, free credit balances are used automatically to purchase
shares of the portfolio. If you have a FREE CREDIT BALANCE OF AT LEAST $1,000,
the Distributor will effect on your behalf an investment in the portfolio
shares on an expedited basis.
/If you have a free credit balance resulting from
securities transactions in your 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 you have a free credit balance resulting from
a deposit made prior to 2:00 p.m., Chicago time, or
a receipt of income (by check or wire), then it
will be invested in shares of the portfolio no
later than the next business day.
/If you have a free credit balance of at least $1
and less than $1,000, it will be invested in shares
of the portfolio within a maximum of five business
days from the day when the free credit balance is
created.
DIVIDEND OPTIONS. You may choose to have your distributions reinvested in
additional shares of the Fund automatically or paid in cash by making the
appropriate election on your account application. You may change your election
at any time by providing written notice to State Street.
1. AUTOMATIC 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. (For more information, see
"Dividend and Distribution Policy.")
2. CASH-DIVIDEND PLAN. You may choose to have all
of your income dividends paid in cash and/or have
your capital gain distributions paid in cash. Any
distributions you do not elect to have paid in cash
will be reinvested automatically in additional
shares of the Fund at net asset value.
3. AUTOMATIC DEPOSIT OF DIVIDENDS. You may elect
to have all income dividends and capital gain
distributions automatically deposited in a
previously established bank account.
AUTOMATIC INVESTMENT PLAN. On your account application, you may authorize
State Street to automatically withdraw an amount of money (MINIMUM $250) from
your bank account on the fifth or twentieth day of each month. This amount
will be invested in additional shares. You may change your election at any
time by providing written notice to State Street.
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MINIMUM INVESTMENTS
Initial Investment $2,000
Subsequent Investments $1,000
SYSTEMATIC WITHDRAWAL PLAN. You may establish this plan with shares presently
held or through a new investment, which the Fund suggests be at least $5,000.
Under this plan, you specify a dollar amount to be paid monthly, quarterly or
annually. Shares corresponding to the specified dollar amount are
automatically redeemed from your account on the fifth business day preceding
the end of the month, quarter or year. While this plan is in effect, all
income dividends and capital gain distributions on shares in your 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 upon 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 your
account.
RETIREMENT PLANS. The Fund offers a variety of qualified retirement plans,
including Individual Retirement Accounts ("IRAs"), Simplified Employee Pension
Plans ("SEPs") and other qualified retirement plans. Additional information
concerning such plans is available from the Fund.
The minimum initial retirement plan investment is $2,000 and the minimum
subsequent investment is $1,000. State Street may act as custodian for the
portfolio's IRAs and certain other qualified retirement plans. State Street
charges a $5 plan establishment fee, 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.
With regard to retirement plans:
- participation is voluntary;
- you may terminate or change a plan at any time
without penalty or charge from the Fund;
- the Fund will pay any additional expenses that
it incurs in connection with such plans;
- on your account application you may select a
plan or plans in which to invest;
- additional forms and further information may be
obtained by writing or calling the Fund;
- the Fund reserves the right to change the
minimum amounts for initial and subsequent
investments or to terminate any of the plans;
- the Fund reserves the right to waive investment
minimums at the discretion of the Distributor;
and
- the Fund requires a copy of the trust agreement
when shares are to be held in trust.
CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED, both because of
the complexity of Federal tax laws and because various tax penalties are
imposed for excess contributions to, and late or premature distributions from,
IRAs or other qualified retirement plans. Termination of a plan shortly after
its adoption may have adverse tax consequences.
SHAREHOLDER RIGHTS. All shares of each portfolio have equal rights with
respect to dividends, assets and liquidation of a portfolio and equal,
noncumulative voting rights. Noncumulative voting rights allow the holder or
holders of a majority of shares, voting together for the election of directors,
to elect all the directors. All shares of each portfolio will be voted in the
aggregate, except when a separate vote by portfolio is required under the
Investment Company Act of 1940. Shares are fully paid and nonaccessible 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. As required by law, the Fund will,
however, hold
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shareholder meetings 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. (For additional information about shareholder
voting rights, see the Statement of Additional Information.)
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DIVIDEND AND DISTRIBUTION POLICY
INCOME DIVIDENDS
Each portfolio earns dividends from stocks and interest from bond, money
market, and other investments, which are passed along to shareholders as income
dividends.
CAPITAL GAIN DISTRIBUTIONS
The Fund realizes capital gains whenever it sells securities for a higher price
than it paid for them, which are passed along to shareholders as capital gain
distributions.
As a Fund shareholder, you are entitled to your portion of the Fund's net
income and gains on its investments. The Fund passes its earnings along to you
as distributions. The Fund's policy is to distribute substantially all net
investment income and all net realized capital gain, if any. All
distributions of income and capital gain and any return of capital have the
effect of immediately thereafter decreasing net asset value per share. Income
dividends and capital gain distributions will be automatically reinvested in
additional shares at net asset value on the reinvestment date, which is
generally the fifteenth day of each month if a business day, unless you
specifically request otherwise (see "Dividend Options" under "Shareholder
Services and Rights"). Cash payments are made by the Fund's Dividend Paying
Agent, State Street Bank and Trust Company, shortly following the reinvestment
date.
WHEN DIVIDENDS ARE PAID FOR EACH PORTFOLIO
- For the GROWTH FUND, VALUE DISCOVERY FUND and the
INTERNATIONAL GROWTH FUND, all income dividends, if
any, 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.
- For the READY RESERVES FUND, on each day that the
Fund is open for business, the portfolio'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.
The Fund may vary these dividend practices at any time. Income dividends and
any capital gain distributions on all five portfolios will vary from year to
year. Dividends and distributions may be subject to withholding as required by
the Internal Revenue Service (see "Taxes").
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TAXES
As with any investment, you should consider how your investment in the Fund
will be taxed. If your account is not a tax-deferred retirement account, you
should be aware of these tax implications.
TAXES ON DISTRIBUTIONS. Distributions are subject to Federal income tax and
may also be subject to state or local taxes. Your distributions are taxable
when they are paid, whether you take them in cash or reinvest them in more
shares of the Fund. However, 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.
Under the Federal tax laws, each portfolio's income dividends and short-term
capital gains distributions are taxed as ordinary income. Long-term capital
gain distributions are taxed as long-term capital gains. It is anticipated
that a portion of the ordinary income dividends for the Growth Fund and the
Value Discovery Fund will be eligible for the dividends-received deduction
available for corporate shareholders. The ordinary income dividends of
International Growth Fund, Income Fund and Ready Reserves Fund are not eligible
for the dividends-received deduction available to corporate shareholders.
TAXES ON TRANSACTIONS. Your redemptions--including exchanges for shares of
other Fund portfolios--are subject to capital gains tax. A capital gain or
loss is the difference between the price that you paid for your shares and the
price that you receive when you sell them. For the Ready Reserves Fund, so
long as a net asset value of $1.00 is maintained, the sale or redemption of
your shares will not result in a capital gain or loss. Any loss recognized on
the redemption of Fund shares held six months or less will be treated as a
long-term capital loss to the extent you have received any long-term capital
gain dividends on such shares. A shareholder that redeems shares of the Fund
will recognize a capital gain or loss for Federal income tax purposes. If you
realize a loss on the redemption of portfolio shares within 30 days before or
after redemption, the two transactions may be subject to the wash sale rules of
the Internal Revenue Code, resulting in a postponement of the recognition of
such loss for federal income tax purposes.
"BUYING A DIVIDEND." If you buy Fund shares shortly before a portfolio deducts
a distribution from its net asset value, you will pay the full price for the
shares and then receive a portion of the price back in the form of a taxable
distribution. See "Dividend and Distribution Policy" for payment schedules,
and call the Distributor if you have further questions.
EFFECT OF FOREIGN TAXES. Investment income received from sources within
foreign countries may be subject to foreign income taxes, which generally will
reduce the Fund's distributions. However, the United States has entered into
tax treaties with many foreign countries that entitle certain investors to a
reduced rate of tax or to certain exemptions from tax. Accordingly, the
International Growth Fund will operate so as to qualify for such reduced tax
rates or tax exemptions whenever practicable.
For a more detailed discussion of taxes, see the Statement of Additional
Information.
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DETERMINATION OF NET ASSET VALUE
NET ASSET VALUE ("NAV")
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding is its net asset value. The value of a single
share is called its share value or share price.
WHEN AND HOW NET ASSET VALUE IS DETERMINED FOR THE PORTFOLIOS
Net asset value per share for each portfolio will be determined as of the close
of trading, generally 3:00 p.m., Chicago time (4:00 p.m. Eastern time), on the
New York Stock Exchange. Net asset value is computed on any day when the
Exchange is open and on any other day on which there is sufficient trading in
the portfolio's investments that it might materially affect net asset value.
For the Ready Reserves Fund, net asset value is calculated on days when New
York banks are open for business (except Good Friday). Net asset value will
not be computed on a day when no orders to purchase shares were received and no
shares were tendered for redemption.
When net asset value is computed, quotations of foreign securities in foreign
currencies are converted into the United States dollar equivalents at the
prevailing market rates as computed by Investors Bank & Trust Company, the
Fund's custodian. 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 that
the New York Stock Exchange is open. Conversely, trading in various foreign
markets may take place on days when a New York Stock Exchange is not open and
on other days when a portfolio's net asset value is not calculated.
Consequently, calculation of the net asset value for the International Growth
Fund may not occur at the same time as determination of the most current market
prices of the securities included in the calculation, and the value of the net
assets held by the International Growth Fund may be significantly affected on
days when shares are not available for purchase or redemption.
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 a premium or discount.
HOW THE MARKET VALUE OF PORTFOLIO SECURITIES IS DETERMINED
DOMESTIC EQUITY SECURITIES. The market value of portfolio domestic equity
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 traded only on the
over-the-counter market are valued at the latest bid price.
FOREIGN EQUITY SECURITIES. The value of a foreign security is
determined based upon the last sale price on the foreign exchange or market on
which it is primarily traded and in the currency of that market, as of the
close of the appropriate exchange or, if there have been no sales during that
day, at the latest bid price.
FIXED-INCOME SECURITIES. 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 ASSETS. Other securities, and all other assets, are
valued at a fair value as determined in good faith by, or under the direction
of, the Board of Directors.
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OTHER
IMPORTANT INFORMATION
WRITTEN CONFIRMATIONS. Each purchase, exchange or redemption transaction is
confirmed in writing to the address of record by giving details of the purchase
or redemption.
CERTIFICATED SHARES. In the interest of safekeeping and expediting transfers
and redemptions, most shareholders prefer not to receive certificates for their
shares. Rather, the value of the shares is represented by your account
balance. The Fund will, however, issue certificated shares upon your written
request. Unless payment for shares is made by certified or cashier's check, a
share certificate will not be issued until thirty days after your purchase is
completed.
USE OF INTERMEDIARIES. If you purchase or redeem shares of the Fund through an
investment dealer, bank or other institution, that institution may impose
charges for its services. These charges would reduce your yield or return.
You may purchase or redeem shares of the Fund directly from the Fund or with
the Fund's Transfer Agent, State Street Bank, without any such charges.
TRANSFER OF SHARES. Fund shares may be transferred by a written request
addressed to the Fund and delivered to State Street 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.
SUSPENSION OF OFFERING. 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. 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 may be
permitted to continue to purchase additional shares of the portfolio, to have
dividends reinvested and to make redemptions.
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MANAGEMENT OF THE FUND o
BOARD OF DIRECTORS
Responsibility for overall management of the Fund rests with its directors and
officers. 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, William Blair & Company,
L.L.C.
THE ADVISER
William Blair & Company, L.L.C., 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 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 60
years ago by William McCormick Blair. Today the firm has more than 100
principals and 600 employees. The main office in Chicago houses all research
and investment management services.
The Investment Management Department oversees the assets of the five William
Blair mutual funds, along with corporate pension plans, endowments and
foundations and individual accounts. The department currently manages over $7.8
billion in equities, fixed-income securities and cash equivalents.
The Adviser firmly believes that 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 over 20
portfolio managers, supported by over 25 analysts, with an exceptionally low
turnover rate. William Blair portfolio managers average more than ten 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 determining which investments
to buy and sell, placing brokerage orders and negotiating the terms of
securities transactions on behalf of the Fund. It also provides various other
services and facilities.
MANAGEMENT FEES
GROWTH FUND. The Growth Fund pays the Adviser a monthly management advisory
fee at an annual rate of .75% of the average daily net assets of the portfolio.
VALUE DISCOVERY FUND. The Value Discovery Fund pays the Adviser a monthly
management advisory fee at an annual rate of 1.15% of the average daily net
assets of the portfolio. The management fee is greater than that paid by most
mutual funds.
INTERNATIONAL GROWTH FUND. The International Growth Fund pays the Adviser a
monthly management advisory fee at an annual rate of 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.
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INCOME FUND. The Income Fund pays the Adviser a monthly management advisory
fee at an annual rate of .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.
READY RESERVES FUND. The Ready Reserves Fund pays the Adviser a monthly
management 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, .575%
of the next $2 billion and .55% of the average daily net assets in excess of
$2.5 billion.
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. During the Value Discovery Fund's
first year of operation, the Adviser has voluntarily agreed to waive the
advisory fee and to absorb other operating expenses if total operating expenses
exceed 1.50% of the portfolio's average daily net assets. In addition, over a
five-year period ending October 1997, the International Growth Fund is
reimbursing the Adviser for $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 State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
PERFORMANCE o
From time to time, the portfolios may advertise several types of performance
information that are based upon historical results and are not necessarily
representative of the future performance of a portfolio.
Average annual total return is a standard measure of portfolio performance. It
assumes that any distributions of capital gains or dividends were reinvested
for the period quoted. Yield is a standard measure of performance for income
funds and money funds. Yield measures the net investment income per share
earned over a specific 30-day period for income funds and a 7-day period for
money funds.
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INVESTMENT GLOSSARY o
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THE FOLLOWING GLOSSARY EXPLAINS SOME OF THE TYPES OF SECURITIES IN WHICH THE
PORTFOLIOS MAY INVEST, INVESTMENT TECHNIQUES THEY MAY EMPLOY AND SOME OF THEIR
SPECIFIC ASSOCIATED RISKS. FOR MORE INFORMATION, PLEASE SEE THE FUND'S
STATEMENT OF ADDITIONAL INFORMATION.
- --------------------------------------------------------------------------------
BORROWING. To a limited extent, each portfolio may borrow money from banks for
limited purposes. The GROWTH FUND, VALUE DISCOVERY FUND AND INTERNATIONAL
GROWTH FUND may borrow up to 10% of their total assets; the INCOME FUND AND
READY RESERVES FUND may borrow up to 5% of their total assets. Most borrowing
is intended only as a temporary measure for extraordinary or emergency
purposes, such as to help meet redemption requests, and not for leverage
purposes.
COLLATERALIZED OBLIGATIONS. The INCOME FUND may invest in collateralized
obligations, which are debt securities issued by a corporation, trust or
custodian or by a U.S. Government agency or instrumentality, that are
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 only 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 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. 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.
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. The agencies and instrumentalities are subject to varying
degrees of support by the U.S. Government. The portfolio 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 Duff & Phelps, Inc., Fitch Investors Services, Inc.,
Moody's Investors Services, Inc. and Standard & Poor's Corporation ("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.
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,
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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 effective 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
dependent upon the accuracy of the prepayment projections used, which are a
consensus derived from several major securities dealers. The duration of many
mortgage backed securities changes substantially due to changes in interest
rates and prepayment rates.
DEPOSITORY RECEIPTS. The GROWTH FUND, VALUE DISCOVERY FUND and INTERNATIONAL
GROWTH FUND may 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 that represents, and may be converted into, the
underlying foreign security, an EDR represents a similar securities
arrangement but is issued by a European bank and a GDR is 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 and GDRs, in bearer form, are designed for issuance in European
securities markets.
DURATION. For the INCOME FUND, 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 by the instrument's
stated final maturity. For example, a duration of five years means that, if
interest rates increased by one percent, the value of the portfolio would
decrease approximately by five percent. 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 upon general
experience.
CONCENTRATION. Each portfolio does not intend to invest more than 25% of its
total asset in any one industry; however, the Ready Reserves Fund may invest
more than 25% of its total assets in the domestic banking industry. These
limitations do not apply to U.S. Government securities.
DIVERSIFICATION. As a matter of fundamental policy, each portfolio will not
purchase the securities of any issuer if, as a result, more than 5% of its
total assets would be invested in such issuer. For the Value Discovery Fund,
that limitation applies to 75% of the portfolio's net assets. In addition,
each portfolio will not purchase more than 10% of the outstanding voting
securities of any issuer. These limitations do not apply to U.S. government
securities.
EXEMPTIVE RELIEF. Based upon exemptive relief obtained by the INTERNATIONAL
GROWTH FUND 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.
FOREIGN CURRENCY FUTURES. The INTERNATIONAL GROWTH FUND 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
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<PAGE> 41
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. 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. 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. Due to price
distortions in the futures market and an 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 Adviser 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.
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 that 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.
FOREIGN SECURITIES. Securities of foreign companies 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.
FORWARD FOREIGN CURRENCY TRANSACTIONS. The INTERNATIONAL GROWTH FUND 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 Adviser will generally use such currency
contracts to fix a definite price for
35
<PAGE> 42
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 Adviser
believes 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.
ILLIQUID SECURITIES. The GROWTH FUND, VALUE DISCOVERY FUND, INTERNATIONAL
GROWTH FUND AND INCOME FUND may each invest up to 15% of its net assets in
illiquid securities. Illiquid securities are those securities that are not
readily marketable, including restricted securities and repurchase obligations
maturing in more than seven days.
INVESTMENT COMPANIES. Subject to the provisions of the 1940 Act, the GROWTH
FUND, VALUE DISCOVERY FUND AND INTERNATIONAL GROWTH FUND may each invest in the
shares of investment companies. 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.
Each 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 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, each
portfolio intends to limit its investment in these vehicles, together with
investments in other investment companies, to no more than 10% of its total
assets.
PORTFOLIO TURNOVER RATE. None of the portfolios intends to trade portfolio
securities for the purpose of realizing short-term profits. However, each will
adjust its portfolio as considered advisable in view of prevailing or
anticipated market conditions and the portfolio's investment objective, and
there is no limitation on the length of time securities must be held by the
portfolio prior to being sold. Portfolio turnover rate will not be a limiting
factor for a portfolio. Although each portfolio's turnover rate will vary from
year to year, it is anticipated that each portfolio's turnover rate, under
normal circumstances, will be less than 100%. A higher portfolio turnover rate
would involve correspondingly higher transaction costs, which would be borne
directly by each portfolio.
RATINGS. The READY RESERVES FUND has adopted certain investment policies
designed to limit the market and financial risks to the portfolio. 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 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
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<PAGE> 43
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 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's 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. 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.
REAL ESTATE INVESTMENT TRUSTS. The VALUE DISCOVERY FUND may invest up to 15% of
its total assets in real estate investment trusts ("REITs"). REITs are subject
to volatility from risks associated with investments in real estate and
investments dependent on income from real estate, such as fluctuating demand
for real estate and sensitivity to adverse economic conditions. In addition,
the failure of a REIT to continue to qualify as a REIT for tax purposes would
have an adverse effect upon on the value of a portfolio's investment in that
REIT.
REPURCHASE AGREEMENTS. Each portfolio may invest in repurchase agreements.
Repurchase agreements are instruments under which a 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 portfolios currently intend 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,
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 agreement and experience a decline in the value of the underlying
securities and loss of income. The maturity of a security subject to
repurchase may exceed one year, and, for the Income Fund, the modified duration
of a security subject to repurchase may exceed 8 years.
The International Growth Fund's investment in repurchase agreements is limited
to 5% of its total assets. For the Growth Fund, Value Discovery Fund, Income
Fund and Ready Reserves Fund, there is no limit on the percentage of a
portfolio's total assets that may be invested in repurchase agreements, except
that repurchase agreements maturing in more than seven 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 15% of the net
assets of the Growth Fund, Value Discovery Fund and Income Fund, and 10% of the
net assets of the Ready Reserves Fund.
SECTION 4(2) PAPER. The READY RESERVES FUND may invest in commercial paper
issued in reliance upon the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Exchange Act of 1933
("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the Federal securities laws, and generally is sold to institutional
investors such as the portfolio. Any resale by the purchaser must be in an
exempt transaction. Sections 4(2) paper normally is resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus providing
liquidity. The Adviser considers the legally restricted but readily saleable
Section 4(2) paper to be liquid; however, pursuant to the procedures approved
by the Fund's Board of Directors,
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<PAGE> 44
if a particular investment in Section 4(2) paper is not determined to be
liquid, that investment will be included within the limitation on illiquid
securities. The Adviser monitors the liquidity of each investment in Section
4(2) paper on a continuing basis.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the
ordinary course of business, each 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. Purchases of such securities by the Ready Reserves Fund are
limited to 5% of the portfolio's total assets. 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 liquid 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 may be
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.
VARIABLE RATE SECURITIES. The READY RESERVES FUND may 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.
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[back cover]
FOR MORE INFORMATION o
If you would like additional information about the William Blair Mutual Funds,
please request a free copy of the current annual/semi-annual report or
Statement of Additional Information.
THE ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS include financial
statements, detailed performance information, portfolio holdings, a statement
from the portfolio manager and the auditor's report. Shareholder reports are
incorporated by reference into this Prospectus, which means that they are part
of this Prospectus for legal purposes.
THE STATEMENT OF ADDITIONAL INFORMATION contains more detailed information
about the Fund and the portfolios. The current Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus, which means that it is part of
this Prospectus for legal purposes.
A copy of the current annual or semi-annual report or Statement of Additional
Information may be obtained without charge by writing or calling the Fund.
WILLIAM BLAIR MUTUAL FUNDS, INC.
222 West Adams Street
Chicago, Illinois 60606
(312) 364-8000
OR
STREET BANK AND TRUST COMPANY
(the Fund's Transfer Agent)
P.O. Box 9104
Boston, MA 02266-9104
1-800-635-2886
(Massachusetts 1-800-635-2840)
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Fund or its distributor. The Prospectus does not constitute
an offering by the Fund or its distributor in any jurisdiction in which such
offering may not lawfully be made.
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<PAGE> 46
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, 1997. 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
Investment Adviser and Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Brokerage and Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
INVESTMENT POLICIES AND RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Growth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Value Discovery Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
International Growth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Income Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Ready Reserves Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INVESTMENT PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Collateralized Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Forward Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Foreign Currency Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Small Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
When-Issued or Delayed Delivery Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
GENERAL FUND INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Transfer Agent Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SHAREHOLDER RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FUND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
FINANCIAL INFORMATION OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
_________________________
May 1, 1997
<PAGE> 47
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.
For the services and facilities furnished to each portfolio, the Fund pays the
Adviser an advisory fee, which is accrued daily and paid monthly on the first
business day of the following month. The Growth Fund pays an advisory fee at a
rate of .75% of the portfolio's average daily net assets. Prior to May 1,
1996, the Growth Fund paid an advisory fee at a 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. For the fiscal years ended December 31,
1996, 1995 and 1994, the Adviser received fees of $3,018,755, $1,561,478 and
$903,986, respectively.
The Value Discovery Fund pays an advisory fee at a rate of 1.15% of the
portfolio's average daily net assets. For the fiscal year from December 23,
1996 (Commencement of Operations) to December 31, 1996, the Adviser waived fees
of $333. The Adviser voluntarily has agreed to reimburse the portfolio during
its first year of operation should all operating expenses, including the
compensation of the Adviser but excluding taxes, interest, extraordinary
expenses and brokerage commissions or transaction costs, exceed 1.50% of
average daily net assets of the portfolio.
The International Growth Fund pays an advisory fee at a 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 International Growth Fund
paid an advisory fee at a rate of 1.10% of the first $100,000,000 of average
daily net assets of the
2
<PAGE> 48
portfolio and .95% of average daily net assets above $100,000,000. Under a
former sub-investment advisory agreement, the Adviser paid a 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
fiscal years ended December 31, 1996, 1995 and 1994, the Adviser received fees
of $1,131,309, $886,557 and $651,754, respectively, of which $303,364 in 1996,
$322,384 in 1995 and $237,001 in 1994 was paid to the sub-adviser.
The Income Fund pays an advisory fee at a 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 Income Fund paid an advisory fee at a rate of .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. For the services and facilities furnished to
the portfolio pursuant to the advisory agreement during the fiscal years ended
December 31, 1996, 1995 and 1994, the Fund paid $880,815, $868,277 and
$998,125, respectively.
The Ready Reserves Fund pays an advisory fee at a 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 Ready Reserves Fund paid an advisory fee at a 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. For the services and facilities furnished to the
portfolio pursuant to the advisory agreement during the fiscal years ended
December 31, 1996, 1995 and 1994, the Adviser received fees of $4,282,827,
$3,613,262 and $2,990,786, respectively.
The Adviser has agreed to reimburse the Fund should all operating expenses of
the Growth Fund, Income Fund or Ready Reserves Fund, including the compensation
of the Adviser but excluding taxes, interest, extraordinary expenses and
brokerage commissions or transaction costs, exceed 1.50% of the first $30
million of average net assets of the portfolio and 1.00% 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. Gassmann, Messrs. Greig, Kaplan,
Kayser, Kleczka, McMullan, Mitchell, Myer, 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, John P. Kayser, Richard P. Kiphart,
Albert J. Lacher, James D. McKinney and James M. McMullan.
3
<PAGE> 49
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 (63),* (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 (69), (1) (2) (3) Director; 135 South LaSalle St., Suite 1117,
Chicago, Illinois 60603; Private investor; Trustee, Illinois Institute of
Technology, Northwestern Memorial Hospital and OTHO S.A. Sprague Memorial
Institute.
GEORGE KELM (68), (1) (3) Director; 4 Court of Connecticut River, Lincolnshire,
Illinois 60069; Retired Chairman of the Board, Sahara Coal Company, Inc. and
Sahara Enterprises, Inc.; Director, Rolf Jensen & Associates, Inc.; Trustee,
Newberry Library and McCormick Theological Seminary.
ANN P. McDERMOTT (57), (3) Director; 330 Willow Road, Winnetka, Illinois 60093;
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 (62),* Director; Principal, William Blair & Company, L.L.C.,
Director of Securities Industry Association.
JOHN B. SCHWEMM (62), (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.
W. JAMES TRUETTNER, JR. (65),* Director and Senior Vice President; Principal,
William Blair & Company, L.L.C.; and Director of Glenview Foundation,
International Travel Services and Roberts Industries, Inc.
ROCKY BARBER (45), President of the Fund and Chief Operating Officer of the
Growth Fund, the Value Discovery Fund, the International 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 (40), Senior Vice President; Principal, William Blair &
Company, L.L.C.
W. GEORGE GREIG (44), Senior Vice President; Portfolio Manager, William Blair &
Co., L.L.C.; formerly Portfolio Manager, Provident Capital Management; Manager
of Akamai, a partnership affiliated with Framlington Investment Management
Limited; and Partner, Pilgrim, Baxter & Greig.
GLEN KLECZKA (34), Senior Vice President; Portfolio Manager, William Blair &
Company, L.L.C.; formerly, Partner with Brinson Partners, formerly, portfolio
manager at CNA Financial Corp.
BENTLEY M. MYER (50), Senior Vice President and Chief Operating Officer, Ready
Reserves Fund; Principal, William Blair & Company, L.L.C.; Director, Delnor
Community Hospital.
NORBERT W. TRUDERUNG (44), Senior Vice President; Principal, William Blair &
Company, L.L.C.
JAMES S. KAPLAN (36), Vice President; Associate, William Blair & Company,
L.L.C.; formerly Vice President, First Union Bank.
4
<PAGE> 50
JOHN P. KAYSER (47), Vice President; Principal, William Blair & Company,
L.L.C., Director, DuPage Children's Museum.
TERENCE M. SULLIVAN (53), Vice President and Treasurer; Associate, William
Blair & Company, L.L.C..
JANET V. GASSMANN (30), 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.
(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.
The following table sets forth the compensation earned from the Fund for the
fiscal year ended December 31, 1996 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 $14,000 0 0 $14,000
C. Mathews Dick, Jr.* $ 4,000 0 0 $ 4,000
George Kelm $12,000 0 0 $12,000
Ann P. McDermott $12,000 0 0 $12,000
John H. Olwin, M.D.* $ 4,000 0 0 $ 4,000
John B. Schwemm $14,000 0 0 $14,000
John W. Straub* $ 4,000 0 0 $ 4,000
</TABLE>
________________________________
*Resigned as directors effective as of May 1, 1996.
5
<PAGE> 51
The following table provides certain information at January 31, 1997 with
respect to persons known to the Fund to be record holders of 5% or more of the
shares of the following portfolios:
<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 4,321,004 11.53%
Profit Sharing Plan
222 West Adams Street
Chicago, IL 60606
Charles A. Schwab & Company 3,830,249 10.21%
101 Montgomery Street
San Francisco, CA 94104
VALUE DISCOVERY FUND
--------------------
William Blair & Co., L.L.C. 200,200 15.56%
Ralph G. Portis
222 West Adams Street
Chicago, IL 60606
William Blair & Co., L.L.C. 197,044 15.31%
Catlin Investments L.P.
222 West Adams Street
Chicago, IL 60606
William Blair & Co., L.L.C. 197,044 15.31%
Travis Investments L.P.
222 West Adams Street
Chicago, IL 60606
William Blair & Co., L.L.C. 100,100 7.78%
Elizabeth I. Blair
222 West Adams Street
Chicago, IL 60606
</TABLE>
As of January 31, 1997, the Fund's officers and directors as a group owned (or
held or shared investment or voting power with respect to) 779,366 shares or
2.1% of the Growth Fund's stock, 85,049 shares or 6.6% of the Value Discovery
Fund's stock, 397,419 shares or 5.5% of the International Growth Fund's stock,
199,551 shares or 1.4% of the Income Fund's stock and 6,845,640 shares or 0.8%
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.
6
<PAGE> 52
BROKERAGE AND PORTFOLIO TRANSACTIONS. Decisions on 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) normally are made by 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 other clients.
Portfolio transactions may increase or decrease the return of a portfolio
depending upon the Adviser's ability to correctly time and execute such
transactions. A portfolio 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 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 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 may assign the transaction to a broker that has furnished research
services, but the Adviser has 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 1996
portfolio transactions were with brokers who met the above requirements, some
of which provided research or other services to the Adviser.
The Fund may pay to brokers that provide research services to the 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 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 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 own efforts, which are undiminished thereby. The
Adviser does not believe that its expenses are reduced by reason of such
services, which benefit the Fund and the 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 $394,561, $254,434 and $198,271 in
1996, 1995 and 1994, respectively. None of such brokerage fees were paid to a
broker who was 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.
The Value Discovery Fund paid total brokerage fees of $12 for the fiscal year
from commencement of operations on December 23, 1996 (Commencement of
Operations) to December 31, 1996. None of such brokerage fees were paid to a
broker who was 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.
7
<PAGE> 53
International Growth Fund paid brokerage fees of $779,507, $454,667 and
$301,194 in 1996, 1995 and 1994, 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.
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, 1996,
1995 and 1994. 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. 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 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 any affiliated broker-dealer of the 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.
INVESTMENT POLICIES AND RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions for each
portfolio that, along with the portfolio's investment objective, cannot be
changed without approval by holders of a "majority of the outstanding voting
securities" of the portfolio, which is defined in the Investment Company Act of
1940 (the "Act") to mean 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. All percentage restrictions on
investments apply at the time the investment is made and shall not be
considered to violate the limitations unless, immediately after or as a result
of the investment, a violation of the restriction occurs. There can be no
assurance that a portfolio will meet its investment objective.
THE GROWTH FUND.
(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.
8
<PAGE> 54
(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.
The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.
The Growth Fund may not:
(10) Pledge, or create a lien on, its assets.
(11) Purchase any security if doing so would cause more than 10% of the voting
securities of the issuer to be held by the portfolio.
(12) Purchase except for securities acquired as part of a merger,
consolidation or acquisition of assets, more than 3% of the stock of another
investment company.
(13) Invest in futures contracts, puts, calls, straddles, spreads or any
combination thereof.
(14) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.
(15) Sell securities short, unless the portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
or unless it covers such short sale as required by the current rules and
positions of the Securities and Exchange Commission or its staff and provided
that transactions in futures contracts or other derivative instruments are not
deemed to constitute selling securities short.
(16) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts or other
derivative instruments shall not constitute purchasing securities on margin.
VALUE DISCOVERY FUND.
The Value Discovery Fund:
1. May not with respect to 75% of its total assets, purchase the securities of
any issuer (except securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities) if, as a result, (i) more than 5% of the
portfolio's total assets would be invested in the securities of that issuer, or
(ii) the portfolio would hold more than 10% of the outstanding voting
securities of that issuer.
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2. May (i) borrow money from banks and (ii) make other investments or engage in
other transactions permissible under the Investment Company Act of 1940 (the
"1940 Act") which may involve a borrowing, provided that the combination of (i)
and (ii) shall not exceed 33 1/3% of the value of the portfolio's total assets
(including the amount borrowed), less the portfolio's liabilities (other than
borrowings), or such other percentage permitted by law, except that the
portfolio may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes (but not
for leverage or the purchase of investments).
Note: Presently, the Value Discovery Fund only intends to borrow from banks
for temporary or emergency purposes. However, the portfolio may borrow money
from banks and make other investments or engage in other transactions
permissible under the 1940 Act which may be considered a borrowing (such as
mortgage dollar rolls and reverse repurchase agreements).
3. May not issue senior securities, except as permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's securities, except to the
extent that the portfolio may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase and sale of
portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
portfolio from purchasing or selling options, futures contracts, or other
derivative instruments, or from investing in securities or other instruments
backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the portfolio's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, 25% or more
of the portfolio's total assets would be invested in the securities of issuers,
the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
portfolio from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.
The Value Discovery Fund may not:
9. Sell securities short, unless the portfolio owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and positions
of the Securities and Exchange Commission or its staff and provided that
transactions in futures contracts or other derivative instruments are not
deemed to constitute selling securities short.
10. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts or other
derivative instruments shall not constitute purchasing securities on margin.
11. Invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities.
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12. Purchase except for securities acquired as part of a merger, consolidation
or acquisition of assets, more than 3% of the stock of another investment
company.
13. Engage in futures transactions which are impermissible pursuant to Rule 4.5
under the Commodity Exchange Act and, in accordance with Rule 4.5, will use
futures transactions solely for bona fide hedging transactions (within the
meaning of the Commodity Exchange Act), provided, however, that the portfolio
may, in addition to bona fide hedging transactions, use futures transactions if
the aggregate initial margin and premiums required to establish such positions
do not exceed 5% of the portfolio's net assets. In addition, the aggregate
margin deposits required on all futures transactions being held will not exceed
5% of the portfolio's total assets.
14. Pledge, mortgage or hypothecate any assets owned by the portfolio except as
may be necessary in connection with permissible borrowings or investments and
then such pledging, mortgaging, or hypothecating may not exceed 33 1/3% of the
portfolio's total assets at the time of the borrowing or investment.
INTERNATIONAL GROWTH FUND.
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.
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.
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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.
INCOME FUND.
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.
The following are the portfolio's non-fundamental operating policies, which may
be changed by the Fund's Board of Directors without shareholder approval.
The Income Fund may not:
(1) Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities.
READY RESERVES FUND.
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.
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(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.
(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.
INVESTMENT PRACTICES
The Prospectus describes each portfolio's investment objective as well as
certain investment policies and investment techniques that the portfolio may
employ in pursuing its investment objective. The following discussion
supplements the discussion contained in the Prospectus, including the
Investment Glossary at the end of the Prospectus. Not all of the portfolios
may invest in all of the types of investments listed below.
COLLATERALIZED OBLIGATIONS. Mortgage-Backed Securities. Collateralized
obligations 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 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
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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 a 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 a 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. Mortgage pass-through securities
represent 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.
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
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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 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.
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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.
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 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
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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 Income Fund 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.
Inverse Floaters. Some of the portfolios 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.
FOREIGN SECURITIES. Investing in foreign securities involves a series of risks
not present in investing in U.S. securities. Many of the foreign securities
held by the portfolio will not be registered with the Securities and Exchange
Commission (the "SEC"), nor will the foreign issuers be subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers of securities held by the portfolio than
is available concerning U.S. companies. Disclosure and regulatory standards in
many respects are
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less stringent in emerging market countries than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets and
enforcement of existing regulations may be extremely limited. Foreign companies
and in particular, companies in smaller and emerging capital markets are not
generally subject to uniform accounting, auditing and financial reporting
standards, or to other regulatory requirements comparable to those applicable
to U.S. companies. The portfolio's net investment income and capital gains from
its foreign investment activities may be subject to non-U.S. withholding taxes.
The costs attributable to foreign investing that the portfolio must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
costs of maintaining custody of foreign securities exceeds custodian costs for
domestic securities and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the portfolio may invest may be subject to foreign
withholding or other government taxes that could reduce the return of these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign tax to which the
portfolio would be subject.
Foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when
assets of the portfolio are uninvested and no return is earned thereon. The
inability of the portfolio to make intended security purchases due to
settlement problems could cause the portfolio to miss investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the portfolio due to subsequent declines in the
value of such portfolio security or, if the portfolio has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
Foreign securities may be purchased through depository receipts, including
American Depository Receipts ("ADRs") and European Depository Receipts
("EDRs"), or other securities convertible into securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in the European securities markets. ADRs
are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing a
similar arrangement. For purposes of the portfolio's investment policies, ADRs
and EDRs are deemed to have the same classification as the underlying
securities they represent, except that ADRs and EDRs shall be treated as
indirect foreign investments. Thus, an ADR or EDR representing ownership of
common stock will be treated as common stock. ADR and EDR depositary receipts
do not eliminate all of the risks associated with directly investing in the
securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants.
A depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions and the performance of other services. The depository of an
unsponsored facility frequently is under no obligation to pass through voting
rights to ADR holders in respect of the deposited securities. In addition, an
unsponsored facility is generally not
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<PAGE> 65
obligated to distribute communications received from the issuer of the
deposited securities or to disclose material information about such issuer in
the U.S. and thus there may not be a correlation between such information and
the market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that the issuer of the deposited securities
enters into a deposit agreements with the depository. The deposit agreement
sets out the rights and responsibilities of the issuer, the depository and the
ADR holders. With sponsored facilities, the issuer of the deposited securities
generally will bear some of the costs relating to the facility (such as
dividend payment fees of the depository), although ADR holders continue to bear
certain other costs (such as deposit and withdrawal fees). Under the terms of
most sponsored arrangements, depositories agree to distribute notices of
shareholder meetings and voting instructions and to provide shareholder
communications and other information to the ADR holders at the request of the
issuer of the deposited securities.
FORWARD FOREIGN CURRENCY TRANSACTIONS. The foreign securities held by the
International Growth Fund 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 International Growth Fund 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, during the period between the date the security is purchased
or sold and the date on which payment is made or received.
The International Growth Fund 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
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<PAGE> 66
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 (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.
FUTURES. The Value Discovery Fund may purchase and sell futures contracts on
domestic stock indexes in order to facilitate exposure to the market or in
order to help meet redemption requests. The portfolio may purchase and sell
futures contracts on stock indexes, such as the S&P 500 Index, as a substitute
for purchasing or selling the underlying securities. The portfolio may not
purchase or sell a futures contract unless, immediately after any such
transaction, the sum of the aggregate amount of initial margin deposits on its
existing futures positions is 5% or less of its total assets (after taking into
account certain technical adjustments).
The Value Discovery Fund may be subject to additional risks associated with
futures contracts, such as the possibility that the Adviser's forecasts of
market values and other factors are not correct, imperfect correlation between
the hedging instrument and the asset or liability being hedged, default by the
other party to the transaction and inability to close out a position because of
the lack of a liquid market. In addition to the possibility that there may be
an imperfect correlation, or no correlation at all, between movements in a
futures contract and the securities being hedged, the price of futures
contracts may not correlate perfectly with movement in the cash market due to
certain market distortions. As a result of these factors, a correct forecast of
general market trends or interest rate movements by the Adviser may still not
result in a successful hedging transaction over a short time frame.
The transactions described above are frequently referred to as derivative
transactions. In general, derivatives are instruments whose value is based
upon, or derived from, some underlying index, reference rate (e.g., interest
rates or currency exchange rates), security, commodity or other asset.
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<PAGE> 67
ILLIQUID SECURITIES. Illiquid securities are securities that are not readily
marketable. The Board of Directors of the Fund, or its delegate, has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are illiquid for purposes of this limitation.
Certain securities exempt from registration or issued in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), such as securities that may be resold to institutional investors under
Rule 144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Fund's Board of Directors.
The Board of Directors has delegated to the Adviser the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. The Board of
Directors has directed the Adviser to look to such factors as (i) the frequency
of trades or quotes for a security, (ii) the number of dealers willing to
purchase or sell the security and number of dealers willing to purchase or sell
the security and number of potential buyers, (iii) the willingness of dealers
to undertake to make a market in the security, (iv) the nature of the security
and nature of the marketplace trades, such as the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer, (v)
the likelihood that the security's marketability will be maintained throughout
the anticipated holding period and (vi) any other relevant factors. The Adviser
may determine 4(2) commercial paper to be liquid if (i) the 4(2) commercial
paper is not traded flat or in default as to principal and interest, (ii) the
4(2) commercial paper is rated in one of the two highest rating categories by
at least two nationally recognized statistical rating organizations ("NRSRO"),
or if only one NRSRO rates the security, by that NRSRO, or is determined by the
Adviser to be of equivalent quality and (iii) the Adviser considers the trading
market for the specific security taking into account relevant factors. With
respect to a portfolio's foreign holdings, a foreign security may be considered
liquid by the Adviser (despite its restricted nature under the Securities Act)
if the security can be freely traded in a foreign securities market and the
facts and circumstances support a finding of liquidity.
LENDING. The Income Fund 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: (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. While the Value Discovery Fund has the authority
to lend portfolio securities, it has no current intention to do so.
REPURCHASE AGREEMENTS. In a repurchase agreement, a portfolio buys a security
at one price and at the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price (usually within seven
days). The repurchase agreement, thereby, determines the yield during the
purchaser's holding period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The Adviser will monitor, on
an ongoing basis, the value of the underlying securities to ensure that the
value always equals or exceeds the repurchase price plus accrued interest.
Repurchase agreements could involve certain risks in the event of a default or
insolvency of the other party to the agreement, including possible delays or
restrictions upon a portfolio's ability to dispose of the underlying
securities. The risk to a 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
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<PAGE> 68
delayed or limited. Although no definitive creditworthiness criteria are used,
the Adviser reviews the creditworthiness of the banks and non-bank dealers with
which the portfolio enters into repurchase agreements to evaluate those risks.
The Board of Directors will review and monitor the creditworthiness of
broker-dealers and banks with which a portfolio enters into repurchase
agreements. A portfolio may, under certain circumstances, deem repurchase
agreements collateralized by U.S. government securities to be investments in
U.S. government securities.
RESTRICTED SECURITIES. Restricted securities may be sold only in privately
negotiated transactions or in a public offering with respect to which a
registration statement is in effect under the Securities Act. Where
registration is required, a portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the portfolio might obtain a less
favorable price than prevailed when it decided to sell. If through the
appreciation of restricted securities or the depreciation of unrestricted
securities, a portfolio should be in a position where more of its net assets
are invested in illiquid securities, including restricted securities which are
not readily marketable (except for 144A Securities and 4(2) commercial paper
deemed to be liquid by the Adviser) than are permitted by its investment
restrictions, the Fund will take such steps as is deemed advisable, if any, to
protect liquidity.
SMALL COMPANIES. While smaller companies generally have the potential for
rapid growth, investments in smaller companies often involve greater risks than
investments in larger, more established companies because smaller companies may
lack the management experience, financial resources, product diversification
and competitive strengths of larger companies. In addition, in many instances
the securities of smaller companies are traded only over-the-counter or on a
regional securities exchange and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to greater and more abrupt price
fluctuations. When making large sales, the portfolio may have to sell portfolio
holdings at discounts from quoted prices or may have to make a series of small
sales over an extended period of time due to the trading volume of smaller
company securities. Investors should be aware that, based on the foregoing
factors, an investment in the portfolio may be subject to greater price
fluctuations than an investment in a fund that invests primarily in larger,
more established companies. The Adviser's research efforts may also play a
greater role in selecting securities for the portfolio than in a fund that
invests in larger, more established companies.
WARRANTS. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance) during a specified period
or perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered to have more speculative
characteristics than certain other types of investments. In addition, the value
of a warrant does not necessarily change with the value of the underlying
securities and a warrant ceases to have value if it is not exercised prior to
its expiration date.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Value Discovery Fund, the
International Growth Fund, the Income Fund and the Ready Reserves 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
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<PAGE> 69
rights and risks attendant to ownership of the securities, although delivery
and payment occur at a later date. A 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. A 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 a 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 a 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 each
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, each portfolio will maintain in a
segregated account cash or liquid high-grade securities equal to the value of
such contracts.
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GENERAL FUND INFORMATION
REDEMPTIONS. Suspension of Redemption or Delay in Payment. The Fund may not
suspend the right of redemption or delay payment on its shares for more than
seven days except (a) during any period when the New York Stock Exchange is
closed (other than on weekends and customary holidays); (b) when trading in the
markets that 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 may permit by order for protection of the Fund's
shareholders.
Special Redemptions. Although it is the present policy of all five of the
portfolios 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
portfolios 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 portfolios have elected to be
governed by Rule 18f-1 under the Act, pursuant to which the portfolios are
obligated to redeem portfolio shares 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. For the Growth Fund, the Value Discovery
Fund and the International Growth Fund, net asset value is not determined on
the days that the New York stock exchange is closed, which include New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the Income Fund and the Ready Reserves Fund, net asset value is not
determined on national holidays when New York banks are closed, which include
New Year's Day, Martin Luther King, Jr.'s Birthday, President's Day, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day
and Christmas Day. Net asset value for these portfolios also is not determined
on Good Friday.
As mentioned in the prospectus, the Ready Reserves Fund values its portfolio
instruments at amortized cost in accordance with Rule 2a-7 under the Investment
Company Act of 1940, which means that they are valued at their acquisition cost
(as adjusted for amortization of premium or discount), rather than at current
market value. This involves initially valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the portfolio would receive if it sold the
instrument. Calculations are made to compare the value of the portfolio's
investments 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 instruments published by reputable sources at the bid price for such
securities.
If a deviation of one-half of one percent or more were to occur between the net
asset value per share calculated by reference to market values and the
portfolio's $1.00 per share net asset value, or if there were any other
deviation that the Board of Directors determined 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
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portfolio's net asset value per share (computed using market values) declined,
or was 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 or other action by the
Board of Directors, 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 investors receiving no dividends for the period during which they
held shares and receiving, upon redemption, a price per share lower than that
which they 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 Ready Reserves Fund has never had a deviation of one-half of one percent or
more between its net asset value per share calculated by reference to market
values and its $1.00 per share net asset value; therefore, no Board actions of
the type described above have been taken. To use the amortized cost method of
valuation, the portfolio is limited to investing in instruments that the Board
of Directors has determined present minimal credit risks and that are within
certain rating categories of a nationally recognized statistical rating
organization.
PERFORMANCE.
Historical Performance
In general. The historical performance or return of the Growth Fund, the Value
Discovery Fund, the International Growth Fund and the Income Fund may be shown
in the form of "average annual total return" and "total return" figures. The
Income Fund's and Ready Reserves Fund's historical performance or return may
also be shown in the form of "yield 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, assuming the
reinvestment of all dividends during the period. Average annual total return
figures represent the average annual percentage change over the period in
question. Total returns represent the aggregate percentage or dollar value
change over the period in question. Yield is a measure of the net investment
income per share earned over a specified period, expressed as a percentage of
the net asset value. Yield is an annualized figure, which means that it
assumes that a portfolio generates the same level of net investment income over
a one-year period.
The performance quotations for all of the portfolios are based upon historical
results and are not necessarily representative of future performance. Returns
and net asset value will fluctuate. The portfolios' performance depends upon
general market conditions, operating expenses and the performance of the
investment manager. Any additional fees charged by a dealer or other financial
services firm would reduce the returns described in this section.
In addition, from time to time the adviser has voluntarily absorbed certain
operating expenses of certain of the portfolios. For the Income Fund, the
Adviser has voluntarily waived certain advisory management fees for the fiscal
years from 1990 to 1993 and to the extent described under "Management of the
Fund--Investment Adviser and Distributor." For the Value Discovery Fund, the
adviser is currently waiving certain advisory management fees. Without such
waiver, the performance results noted above for these portfolios would have
been lower.
Average annual total return. The portfolios' average annual total return 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 a
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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. This calculation
assumes that all income dividends and capital gains distributions by the
portfolio have been reinvested at net asset value on the reinvestment dates
during the period.
The average annual total return for the Value Discovery Fund from commencement
of operations on December 23, 1996 (Commencement of Operations) through
December 31, 1996 was 0%.
The average annual total return for the Growth Fund, the International Growth
Fund and the Income Fund for the one-, five- and ten-year periods, or, if less,
from commencement of operations through December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR OR
LIFE OF FUND
- -----------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH FUND 17.99 15.04 15.71
INTERNATIONAL GROWTH FUND(1) 10.20 - 11.57
INCOME FUND(2) 3.07 6.20 8.01
- ----------------------
</TABLE>
(1) Commenced operations on October 1, 1992
(2) Commenced operations on September 25, 1990
Total return. Total return performance for a specific period is calculated by
first taking an investment (assumed below to be $10,000) ("initial investment")
in a 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, dividing the remainder by the initial investment and expressing
the result as a percentage. This 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 total return for the Value Discovery Fund from December 23, 1996
(Commencement of Operations) through December 31, 1996 was 0%.
The total return for the Growth Fund, the International Growth Fund and the
Income Fund for the one-, five- and ten-year periods, or, if less, from
commencement of operations through December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR OR
LIFE OF FUND
- -----------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH FUND 17.99 201.50 429.70
INTERNATIONAL GROWTH FUND(1) 10.20 - 159.90
INCOME FUND(2) 3.07 135.10 161.90
- ----------------------
</TABLE>
(1) Commenced operations on October 1, 1992
(2) Commenced operations on September 25, 1990
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<PAGE> 73
Yield. Like the portfolios' average annual total return, the yield for the
Income Fund 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 a
specific one-month or 30-day period by the offering price per share on the last
day of that 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>
The Income Fund's current yield for the 30-day period ended December 31, 1996
was 6.44%. Semiannual compounding is assumed.
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.
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 Income Fund'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 Ready Reserves Fund's yield quotations as they may appear in advertising
and sales materials also 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 seven and multiplied by 365 and the current yield figure is 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 according to the
following formula:
YIELD = [(BASE PERIOD RETURN +1)(365/7)] - 1
The Ready Reserve Fund's effective yield is calculated similarly to its current
yield, except that the net investment income earned is assumed to be compounded
when annualized. The Ready Reserves Fund effective yield will be slightly
higher than its current yield due to compounding.
The Ready Reserves Fund's current yield for the seven-day period ended December
31, 1996 was 4.78%. The Ready Reserves Fund's effective yield for the same
period was 4.89%.
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<PAGE> 74
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.
Comparison of Portfolio Performance to Market Indices
From time to time, in marketing and other Fund literature, each portfolio's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar goals,
as tracked by independent organizations. Such market comparisons are set forth
briefly below.
From time to time, the portfolios' 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. The portfolios'
performance 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: CDA is a widely recognized independent mutual fund reporting
service that is based upon changes in net asset value with all dividends
reinvested.
. LIPPER: Lipper is a widely used independent research firm that ranks
mutual funds' overall performance, investment objectives and assets.
Lipper performance figures are based on changes in net asset value, with
all income and capital gain dividends assumed to be reinvested. Lipper's
calculations do not include the effect of any sales charges imposed by
other funds. Lipper also issues a monthly yield analysis for fixed
income funds.
. MORNINGSTAR: Morningstar rates funds on the basis of historical risk
and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average
for three-, five- and ten-year periods. Ratings are not absolute and do
not represent future results.
The portfolios may also compare their 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. Both the Shearson Lehman and the Merrill Lynch bond indices are
unmanaged and do not adjust for taxes payable on interest or dividends. When
assessing a portfolio's performance as compared to that of any of these
indicies, it is important to note the differences and similarities between the
investments that the portfolio may purchase and the investments measured by the
applicable indices.
. CONSUMER PRICE INDEX: The Consumer Price Index is generally considered
to be a measure of inflation.
. SHEARSON LEHMAN GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX: This
index generally represents the performance of intermediate government and
investment grade corporate debt securities under various market
conditions.
. MERRILL LYNCH INTERMEDIATE TERM CORPORATE & GOVERNMENT BOND INDEX: This
index also generally represents the performance of intermediate
government and investment grade corporate debt securities under various
market conditions.
Bank product performance may be based upon, among other things, the Bank Rate
Monitor National Index or various certificates of deposit indexes. Performance
of U.S. Treasury obligations may be based upon, among
29
<PAGE> 75
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. Money market fund performance may be based upon, among other things,
the IBC/Donoghue's Money Fund Average (All Taxable). Investors may also 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 and the rate of inflation.
Comparative performance information other than that listed above may be used
from time to time in advertising the International Growth Fund, including data
from Micropal Ltd., an independent fund reporting service and independent
unmanaged indices, such as Morgan Stanley Capital International's Europe,
Australia and the Far East (EAFE) Index or Morgan Stanley Capital
International's All Country World (Free) Except United States (ACWFxUS) Index.
In addition, the portfolios may quote information from industry or financial
publications of general U.S. or international interest, such as information
from Morningstar, The Wall Street Journal, Money Magazine, Forbes, Barron's,
Fortune, The Chicago Tribune, USA Today, Institutional Investor and Registered
Representative.
TAX STATUS. Each series (portfolio) of the Fund is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to
be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code (the "Code") and intends to continue to so qualify in the
future. As such and by complying with the applicable provisions of the Code
regarding the sources of its income, the timing of its distributions and the
diversification of its assets, the Fund will not be subject to federal income
tax on its taxable income (including net short-term and long-term capital
gains) that is distributed to shareholders in accordance with the timing
requirements of the Code.
Each portfolio intends to declare and make distributions during the calendar
year of an amount sufficient to prevent imposition of a 4% nondeductible
federal excise tax. The required distribution generally is the sum of 98% of a
portfolio's net investment income for the calendar year plus 98% of its capital
gain 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.
The Fund is required to withhold Federal income tax at the rate of 31%
(commonly called "backup withholding") from taxable distributions to
shareholders that do not provide the fund with a taxpayer identification
(social security) number or in other circumstances where shareholders have
failed to comply with Internal Revenue Service regulations.
Special tax provisions 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 a portfolio's securities. Specifically, the
mark-to-market rules of the Internal Revenue Code (the "Code") may require a
portfolio to recognize unrealized gains and losses on certain forward
contracts, futures and foreign currency futures held by a portfolio at the end
of the Fund's 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. Although certain foreign currency forward contracts and foreign
currency futures contracts are marked-to-market, any gain or loss is generally
treated as ordinary under Section 988 of the Code (see below). In addition,
the straddle rules of the Code require deferral of certain losses realized on
positions of a straddle to the extent that the portfolio has unrealized gains
in offsetting positions at year end. The portfolios have elected to
mark-to-market their investments in passive foreign investment companies for
Federal income tax purposes.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions that involve foreign currency-denominated debt securities,
certain foreign currency options, foreign currency forward
30
<PAGE> 76
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of distributions to shareholders. For
example, if a portfolio sold a foreign stock or bond and part of the gain or
loss on the sale was attributable to 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 higher 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.
The International Growth Fund may qualify for and make an election permitted
under the "pass through" provisions of Section 853 of the Internal Revenue
Code, which allows a regulated investment company to elect to have its foreign
tax credit taken by its shareholders instead of on its own tax return. To be
eligible for this credit, more than 50% of the value of the Fund's total assets
at the close of its taxable year must consist of stock or other securities in
foreign corporations and the Fund must have distributed at least 90% of its
taxable income.
If the Fund makes this election, it may not take any foreign tax credit and may
not take a deduction for foreign taxes paid. However, the Fund is allowed to
include the amount of foreign taxes paid in a taxable year in its dividends
paid deduction. Each shareholder would then include in his gross income and
treat as paid by him, his proportionate share of the foreign taxes paid by the
Fund.
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 International Growth Fund to determine whether significant
changes in its investments are appropriate.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above and in the
prospectus. Such investors may be subject to nonresident alien withholding tax
at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts
treated as ordinary dividends from the Fund and, unless an effective IRS Form
W-8 or authorized substitute for Form W-8 is on file, to 31% backup withholding
on certain other payments from the Fund. Non-U.S. investors should consult
their tax advisers regarding such treatment and the application of foreign
taxes to an investment in the Fund.
RETIREMENT PLANS. The Fund offers a variety of retirement investment programs
whereby contributions are invested in shares of the Fund's portfolios and any
income dividends or capital gain distributions are reinvested in additional
full and fractional shares of the Fund.
Individual Retirement Accounts. The Fund has available Individual Retirement
Accounts ("IRAs") under Internal Revenue Service 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
("SEP") 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 tax deductible IRA contributions up to $2,000
individually, or $4,000 jointly, if their adjusted gross income ("AGI") is
$40,000 or less. The IRA deduction is gradually phased out for AGI between
$40,000 and $50,000. For single
31
<PAGE> 77
taxpayers who are active participants in an employer-sponsored plan, a $2,000
deductible IRA contribution is available for taxpayers with AGI up to $25,000.
This deduction is gradually phased out for AGI between $25,000 and $35,000. 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
individually or $4,000 jointly for a spousal IRA. Tax deductible IRA
contributions are not subject to Federal income taxation until such
contributions are withdrawn.
Simplified Employee Pension Plans. An employer may establish a SEP plan under
which the employer makes contributions to all eligible employees' IRAs. Any
portfolio's shares may be used for this purpose.
Qualified Retirement Plans. A corporation, partnership, or sole proprietorship
may establish a qualified money purchase pension and profit sharing plan and
make contributions for each participant up to the lesser of 25% of each
participant's gross 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.
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, which will defer
taxes on the distributions and shelter investment earnings. 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, however, does not apply to
distributions from IRAs or any part of a distribution that is transferred
directly to another qualified retirement plan, 403(b)(7) account or IRA.
Shareholders are advised to consult with a tax professional regarding this
requirement.
INDEPENDENT AUDITORS. The Fund's independent auditors are Ernst & Young LLP,
Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606. Ernst & Young
audits and reports upon the Fund's annual financial statements, reviews certain
regulatory reports and the Fund's Federal tax returns and performs other
professional accounting, auditing, tax and advisory services when engaged to do
so by the Fund.
CUSTODIAN. The Fund's custodian, Investors Bank and Trust Company, 89 South
Street, Boston, Massachusetts 02111, has custody of all securities and cash of
the Fund and attends to the collection of principal and income and payment for
and collection of proceeds of securities bought and sold by the Fund.
TRANSFER AGENT SERVICES. State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, is the Fund's transfer agent
and dividend-paying agent. State Street, as the shareholder service agent,
provides certain bookkeeping, data processing and administrative services
pertaining to the maintenance of shareholder accounts.
REPORTS TO SHAREHOLDERS. Shareholders will receive annual audited financial
statements and semi-annual unaudited financial statements.
SHAREHOLDER RIGHTS
All shares of each portfolio have equal rights with respect to dividends,
assets and liquidation of a portfolio and equal, noncumulative voting rights.
Noncumulative voting rights allow the holder or holders of a majority of
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<PAGE> 78
shares, voting together for the election of directors, to elect all the
directors. All shares of each portfolio will be voted in the aggregate, except
when a separate vote by portfolio is required under the Investment Company Act
of 1940. Shares are fully paid and nonaccessable when issued, are transferable
without restriction and have no preemptive or conversion rights.
Under Maryland law, the Fund generally is not required to hold annual
shareholders' meetings. Upon the written request of ten or more shareholders
that have held Fund shares for at least six months in an amount equal to the
lesser of 1% of the outstanding shares or $25,000, the Fund will either
disseminate appropriate materials (at the expense of the requesting
shareholders) or provide such shareholders access to a list of names and
addresses of all shareholders of record. The written notice must state that
the shareholders making such request wish to communicate with the other
shareholders to obtain the signatures necessary to demand a meeting to consider
removal of a director. The Fund will hold Shareholders' meetings when
requested to do so in writing by one or more shareholders collectively holding
at least 10% of the shares entitled to vote, or when determined by the Board of
Directors in their discretion. Shareholders' meetings also 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 that the directors may
consider necessary or desirable, such as changes in fundamental investment
objectives, policies or restrictions.
The Fund's directors serve until the next meeting of shareholders, if any,
called for the purpose of electing directors and until the election and
qualification of their successors or until a director sooner dies, resigns,
retires, or is removed by a majority vote of the shares entitled to vote or by
a majority of the directors. In accordance with the Act, the Fund will hold a
shareholder meeting for the election of directors at such time that (1) less
than a majority of the directors has been elected by the shareholders and (2)
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. A director may be removed
from office by a vote of the holders of a majority of the outstanding shares
entitled to vote.
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, occurred 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 23, 1996. Presently, the Fund is only offering shares of
the five portfolios described in the prospectus. The Board of Directors of the
Fund may, however, establish additional portfolios with different investment
objectives, policies and restrictions in the future.
33
<PAGE> 79
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, Value
Discovery Fund, International Growth Fund, Income Fund and Ready Reserves Fund)
for the period ended December 31, 1996, are incorporated herein by reference.
Additional copies of the reports to shareholders may be obtained without charge
by writing or calling the Fund.
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<PAGE> 80
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.
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
A-1
<PAGE> 81
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.
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<PAGE> 82
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+.
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.
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<PAGE> 83
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
Single A Protection factors are average but adequate. However,
High 5 risk factors are more variable and greater in periods
Medium 6 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
B-2
<PAGE> 84
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.
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-3
<PAGE> 85
ANNUAL REPORT/ DECEMBER, 1996
WILLIAM BLAIR MUTUAL FUNDS, INC.
GROWTH FUND
VALUE DISCOVERY FUND
INTERNATIONAL GROWTH FUND
INCOME FUND
READY RESERVES FUND
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> 86
TABLE OF CONTENTS
Overview 3
A Letter from the President 3
Growth Fund 5
A Letter from the Portfolio Managers 5
Portfolio of Investments 8
Value Discovery Fund 10
A Letter from the Portfolio Managers 10
Portfolio of Investments 11
International Growth Fund 12
A Letter from the Portfolio Manager 12
Portfolio of Investments 15
Income Fund 18
A Letter from the Portfolio Manager 18
Portfolio of Investments 20
Ready Reserves Fund 22
A Letter from the Portfolio Manager 22
Portfolio of Investments 23
Notes to Financial Statements 30
Board of Directors 40
Officers 40
2
<PAGE> 87
BLAIR MUTUAL OVERVIEW LOGO
- --------------------------------------------------------------------------------
Performance Highlights
<TABLE>
<CAPTION>
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Growth Fund 18.0% 29.1% 6.5% 15.5%
S&P 500 Index 23.3 37.5 1.3 10.0
Russell 2000 Index 16.5 28.4 (1.8) 18.9
Value Discovery Fund (Inception 12/23/96)
International Growth Fund 10.2 7.2 (0.04) 33.6
Lipper International Index 14.4 10.0 (0.7) 39.2
MSCI AC WLD ex US Index* 6.7 9.9 6.6 34.9
Income Fund 3.0 14.4 (0.7) 7.8
Lehman Intermediate Govt./Corp.
Index 4.1 15.3 (1.9) 8.8
Ready Reserves Fund 4.8 5.5 3.7 2.6
S&P-rated AAA Money Market Funds 4.8 5.4 3.6 2.0
</TABLE>
- --------------------------------------------------------------------------------
Investor Information
For the Period Ended December 31, 1996
<TABLE>
<CAPTION>
Value International Ready
Growth Discovery Growth Income Reserves
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Ending Net Assets (in millions) $502 $2 $105 $150 $761
Portfolio Turnover Rate (%) 43 -- 89 66 --
Expense Ratio (%) .79 -- 1.44 .70 .71
Sales Load None None None None None
Redemption Fees None None None None None
Exchange Fees None None None None None
12b-1 Fees None None None None None
</TABLE>
- --------------------------------------------------------------------------------
* Morgan Stanley Capital International All Country World Free except U.S. Index
A LETTER FROM THE PRESIDENT
[PHOTO ROCKY BARBER]
Dear Shareholders:
William Blair Mutual Funds experienced a dynamic year in 1996. While it was a
difficult year to outperform the indices, all of our funds had good results.
The Growth Fund's return of 18%, while weak in comparison to the very large
capitalization S&P 500, was competitive with the returns posted by other mutual
funds in its peer group. On a relative basis, our other funds fared better,
with returns that were generally in line with their benchmarks.
During the year, we made several changes that will affect the future
performance of the funds. First, after many months of consideration and
planning, we decided to move the management of the International Growth Fund to
a dedicated team of in-house portfolio managers/analysts. We believe this will
increase the focus on individual companies in the portfolio and renew the
emphasis on small and mid-sized (capitalization) growth issues outside of the
United States. George Greig and his team of three assumed management
responsibility in the fourth quarter, and we look forward to a good 1997. I
urge you to read his report and consider adding to and diversifying your
portfolio with this fund.
(continued)
3
<PAGE> 88
Just before year end we introduced a new portfolio, the Value Discovery
Fund, which invests in small emerging companies with inexpensive valuations
that do not adequately reflect their growth potential. This portfolio is run
by a trio of experienced portfolio managers/analysts headed by Glen Kleczka. We
think that smaller cap value is an under-researched area with substantial
capital gains potential for investors.
Our administrative and client services areas have been revamped in
order to improve customer service and to maintain a low expense structure. We
remain very proud of our relatively low expense ratios that allow more of the
portfolio return to flow to shareholders. As we look to years ahead when
portfolio returns may not be double digits as has been the case in the equity
markets over the past two years, lower expenses will be a significant component
in delivering superior returns.
We are very excited about the growth and opportunities within William
Blair Mutual Funds and look forward to serving your investment needs for many
years to come.
Rocky Barber
4
<PAGE> 89
BLAIR MUTUAL GROWTH FUND LOGO
Performance Highlights
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Growth Fund 18.0% 29.1% 6.5% 15.5% 7.6%
S&P 500 Index 23.3 37.5 1.3 10.0 7.7
Russell 2000 Index 16.5 28.4 (1.8) 18.9 18.4
</TABLE>
- --------------------------------------------------------------------------------
Investor Information
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Ending Net Assets (in millions) $502 $363 $218 $150 $111
Portfolio Turnover Rate (%) 43 32 46 55 27
Expense Ratio (%) .79 .65 .71 .78 .83
</TABLE>
- --------------------------------------------------------------------------------
[A LETTER FROM THE PORTFOLIO MANAGERS]
[PHOTO ROCKY BARBER]
[PHOTO MARK A. FULLER III]
Dear Shareholders:
For the second year in a row the equity market has registered a strong
gain, with the S&P 500 up 23%. However, the strength was again concentrated in
the very largest capitalization issues, and most mid-sized to smaller companies
settled for more modest returns. These trends can be seen clearly in the
tables highlighted above and below.
1996 1995 1994
- -----------------------------------------------------------------------------
WILLIAM BLAIR GROWTH FUND 18.0% 29.1% 6.5%
Lipper Growth Fund Average 17.5 31.2 -1.6
- -----------------------------------------------------------------------------
Stronger than expected economic growth coupled with a substantial increase in
the value of the U.S. dollar provided the underpinnings of investor fervor for
large cap stocks. As we look to 1997 we expect domestic growth to moderate and
dollar appreciation to subside. Inflation and interest rates are likely to
remain well behaved, so while equity prices in general are historically high,
we do not fear a major sell-off in the market. Indeed, we expect that slower
GNP growth in 1997 will increase the attractiveness of smaller stocks as many
of our companies are less dependent on a strong economy to support their
growth. If, as we expect, larger companies only grow 5-10% in 1997, then
smaller companies in our portfolio growing 15-20+% will look relatively more
attractive than the past two years when almost all companies, whether large or
small, were 15-20% gains.
Our larger cap stocks performed well in 1996, although much of the
strength was concentrated in the financial services sector and in "Wintel"
(short for Microsoft WINdows and InTEL)-the dynamic duo that have a dominant
position in PCs. While the fund's exposure to smaller and medium sized
companies has been more limited over the past 18 months (currently about 20% in
the under $1 billion, or small, capitalization sector), even this more modest
allocation to an underperforming area has caused the fund as a whole to lag the
S&P 500 in 1995 and 1996.
The final quarter of 1996 saw small cap stock performance shift away
from the quality growth franchise that we covet. Our emphasis on companies
with more predictable growth has a defensive nature to it that serves us well
in most markets. However,
5
<PAGE> 90
domestic economic data suggesting stronger growth helped boost more economically
sensitive sectors such as energy, capital goods and technology while more
defensive growth sectors such as health care, distribution and business services
lagged.
Small cap holdings that performed particularly well in 1996 often were
driven by strong earnings trends that exceeded expectations. Good examples of
this include HEARTLAND EXPRESS, ACXIOM, CATALINA MARKETING AND QUINTILES
TRANSNATIONAL. Conversely, disappointments were treated very harshly, and single
day drops of 25% or more in the stock price were not unusual. As a result,
stocks such as DIGI INTERNATIONAL, SUNGLASS HUT AND PEAK TECHNOLOGIES failed to
sustain their growth trendlines and represented setbacks for the portfolio.
The outlook for 1997 is quite dependent upon the level of economic growth
and the behavior of interest rates and inflation. While we can't predict the
future, after two years of strong gains it is prudent to lower our expectations
for the near term. We expect further slowing in corporate earnings growth this
year, primarily due to tough earnings comparisons against a surprisingly strong
1996. If the economy begins to slow in the second half of 1997, the relative
earnings growth of the Growth Fund will look very attractive against the market
and should improve our performance. In the meantime, while we recognize that the
use of small and large growth companies has hindered our performance for the
past two years, we remain committed to the investment philosophy and disciplines
that have served us well over the long term.
Rocky Barber Mark A. Fuller III
6
<PAGE> 91
[GROWTH FUND WILLIAM BLAIR MUTUAL FUNDS, INC. LOGO]
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
[GRAPH]
MEASUREMENT PERIOD GROWTH
(FISCAL YEAR COVERED) FUND S&P 500
<S> <C> <C>
1/87 10000 10000
12/87 10799 10517
12/88 11567 12253
12/89 15090 16104
12/90 14785 15590
12/91 21345 20352
12/92 22969 21916
12/93 26532 24107
12/94 28245 24427
12/95 36456 33588
12/96 43013 41396
</TABLE>
7
<PAGE> 92
(BLAIR MUTUAL GROWTH FUND LOGO)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
Shares Value
- ------ -----
<S> <C> <C> <C>
COMMON STOCKS
APPLIED TECHNOLOGY -- 18.6%
285 * Acxiom Corporation $ 6,849
432 * Airtouch Communications, Inc. 10,911
187 * American Management Systems 4,588
250 Automatic Data Processing, Inc. 10,705
142 * B A Merchant Services, Inc., Class
"A" 2,536
115 * BISYS Group, Inc. 4,267
140 * Catalina Marketing Corporation 7,718
222 Cognizant Corporation 7,320
100 * Desktop Data 1,930
340 First Data Corporation 12,423
204 * NFO Research, Inc. 4,497
288 * Paging Network, Inc. 4,393
82 Reuters Holdings PLC (ADR) 6,244
123 Shared Medical Systems Corporation 6,058
83 * Sterling Commerce, Inc. 2,912
--------
93,351
--------
TECHNOLOGY -- 14.6%
172 * Broderbund Software, Inc. 5,131
72 * Electronic Arts 2,156
96 Intel Corporation 12,574
144 * Intuit, Inc. 4,540
150 Linear Technology Corporation 6,581
154 * Microsoft Corporation 12,695
94 Molex Incorporated 3,669
152 Molex Incorporated, Class "A" 5,426
115 * Oracle Corporation 4,811
48 * Solectron Corporation 2,563
177 * Xilinx, Inc. 6,529
280 * Zebra Technologies Corporation,
Class "A" 6,541
--------
73,216
--------
HEALTHCARE-RELATED SPECIALTIES -- 13.5%
48 * Amgen, Inc. 2,611
288 * Elan PLC (ADR) 9,579
274 * Health Care & Retirement
Corporation 7,856
192 * Healthsouth Rehabilitation
Corporation 7,418
190 Medtronic, Inc. 12,920
224 Omnicare, Inc. 7,206
66 * Quintiles Transnational
Corporation 4,371
96 * R. P. Scherer Corporation 4,825
160 Smithkline Beecham PLC (ADR) 10,880
--------
67,666
--------
</TABLE>
<TABLE>
<CAPTION>
Shares Value
- ------ -----
<S> <C>
CONSUMER RETAIL -- 13.4%
144 Albertson's, Inc. $ 5,131
240 CVS Corporation 9,933
188 * Eckerd Corporation 6,019
230 Home Depot, Inc. 11,552
86 * Kohl's Corporation 3,392
307 * Office Depot, Inc. 5,454
155 * PetSmart, Inc. 3,384
236 * Staples, Inc. 4,258
118 * Starbucks Corporation 3,381
209 * Viking Office Products, Inc. 5,571
154 Walgreen Company 6,146
133 Whole Foods Market, Inc. 2,992
--------
67,213
--------
FINANCIAL SERVICES -- 11.1%
204 Associates First Capital Corp.,
Class "A" 9,016
304 * Credit Acceptance Corporation 7,144
76 Federal Home Loan Mortgage
Corporation 8,416
96 Household International, Inc. 8,858
266 MBNA Corporation 11,059
173 State Street Boston Corporation 11,149
--------
55,642
--------
DISTRIBUTION -- 9.0%
217 * Airgas, Inc. 4,778
154 Alco Standard Corporation 7,932
128 * Black Box Corporation 5,292
144 Cardinal Health, Inc. 8,390
123 * Gulf South Medical Supply, Inc. 3,164
299 * JP Foodservice, Inc. 8,322
201 * MSC Industrial Direct Co., Class
"A" 7,426
--------
45,304
--------
BUSINESS SERVICES -- 9.0%
106 Cintas Corporation 6,206
316 * Heartland Express, Inc. 7,703
126 * Interim Services, Inc. 4,490
228 * Knight Transportation, Inc. 4,333
145 * Patterson Dental Co. 4,083
154 Reynolds & Reynolds, Inc., Class
"A" 3,995
125 * Robert Half International, Inc. 4,304
140 * Rural/Metro Corporation 5,054
141 Wallace Computer Services, Inc. 4,877
--------
45,045
--------
INDUSTRIAL PRODUCTS -- 4.3%
142 Danaher Corporation 6,622
245 M.A. Hanna Company 5,366
229 Minerals Technologies, Inc. 9,394
--------
21,382
--------
</TABLE>
8
<PAGE> 93
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------- --------
COMMON STOCKS (CONTINUED)
SPECIALTY CONSUMER SERVICES
AND PRODUCTS -- 4.1%
<S> <C> <C> <C>
54 * Blyth Industries, Inc. $ 2,453
134 * Boston Chicken, Inc. 4,802
250 * CUC International, Inc. 5,937
147 * Day Runner, Inc. 2,872
180 * Department 56, Inc. 4,463
--------
20,527
--------
FOOD-RELATED COMPANIES -- .8%
144 Pepsico, Inc. 4,214
--------
TOTAL COMMON STOCK -- 98.4% 493,560
--------
(cost $355,663)
<CAPTION>
Principal Amount Value
- ----------------------------------------------- --------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
$ 322 Associates Corp. of North America
Demand Note, 5.23%, due 1/2/97 $ 322
2,000 Ford Motor Credit Corp., 5.42%,
due 1/17/97 2,000
2,707 General Motors Acceptance
Corporation 5.39%, due 1/24/97 2,707
1,995 GE Capital Corp., 5.40%, due
1/31/97 1,995
--------
TOTAL SHORT-TERM
INVESTMENTS -- 1.4% 7,024
--------
(cost $7,024)
TOTAL INVESTMENTS -- 99.8% 500,584
(COST $362,687)
CASH AND OTHER ASSETS, LESS
LIABILITIES -- .2% 1,190
--------
NET ASSETS -- 100.0% $501,774
========
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
9
<PAGE> 94
VALUE DISCOVERY FUND (BLAIR MUTUAL GROWTH FUND LOGO)
A Letter from the
Portolio Managers
[Photo Glen Kleczka]
[Photo Cappy Price]
[Photo David Mitchell]
Dear Shareholders:
We are pleased to announce the addition of the Value Discovery Fund to
the William Blair Mutual Funds family. The fund was officially launched
December 23, 1996 and is currently accepting capital contributions.
The name "Value Discovery" was chosen for our fund because we will
invest using a value investment discipline. Value investing can be likened to
a process of discovery. Your investment team will discover companies whose
future growth prospects are underestimated by the market. We will focus on
companies that possess excellent emerging growth characteristics but may not
yet have an established, historical growth record. We believe these companies
are often overlooked as investors extrapolate past performance in formulating a
future outlook. Emerging growth companies often trade like value stocks
because they lack an established record of growth. Investors tend to assume
that a lack of historical growth portends diminished emerging growth
opportunities. We believe otherwise.
Success in investment management means producing returns above and
beyond a market benchmark on a consistent basis. Our goal is to consistently
outperform the Russell 2000 Index which tracks the performance of small
companies. Value Discovery invests in companies with market capitalizations
from $20 million to $1.5 billion. Of the over 20,000 publicly-traded
companies in the U.S., approximately 70% have market capitalizations of less
than $300 million, and 90% have less than $1.5 billion. We will concentrate on
this universe of small companies to produce superior returns. These companies,
we believe, are growing aster than larger companies and have less research
coverage by investment firms.
The Value Discovery Fund will seek for purchase companies exhibiting
four distinct characteristics. First, they will be financially strong, often
with substantial liquidity and no debt. Second, they will be trading at
material discounts to our estimate of intrinsic value with meaningful stock
price support to reduce downside risk. Third, they will have good secular
growth prospects and be well-positioned within growing industries. Finally,
the Value Discovery Fund will identify investments with catalysts that can
result in earnings acceleration through faster growth or improving
profitability.
We are proud to be a part of the William Blair Mutual Funds family, and
we welcome your investment.
Glen Kleczka Cappy Price David Mitchell
10
<PAGE> 95
VALUE DISCOVERY FUND * WILLIAM BLAIR MUTUAL GROWTH FUND LOGO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<S> <C>
CASH AND OTHER ASSETS, LESS LIABILITIES $2,175
------
NET ASSETS -- 100.0% $2,175
======
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 96
INTERNATIONAL GROWTH FUND - WILLIAM BLAIR MUTUAL FUNDS, INC.
<TABLE>
<CAPTION>
- --------------------------------------Performance Highlights----------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
International Growth Fund 10.2% 7.2% (0.0)% 33.6%
Lipper International 14.4 10.0 (0.7) 39.2
MSCI AC WLD ex US Index* 6.7 9.9 6.6 34.9
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------Investor Information----------------------------------------
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Ending Net Assets (in millions) $105 $90 $70 $40
Portfolio Turnover Rate (%) 89 77 40 83
Expense Ratio (%) 1.44 1.48 1.51 1.71
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Morgan Stanley Capital International All Country World Free except U.S. Index
A LETTER FROM THE Dear Shareholders:
PORTFOLIO MANAGER The year 1996 brought in a bumper crop of good economic
and political news.
[GEORGE GREIG PHOTO] - Economic growth, while improving from 1995's
sluggish pace, remained moderate. Only two major
economies--Australia and Japan--grew at a rate
above 3%; only Italy and Switzerland fell below 1%
growth.
- Inflation trended below its long term average level
in every major economy worldwide, and fell below 4%
in every European country with the exception of
Greece. By the end of 1996, even China and Brazil
had experienced single-digit inflation. In spite of
generally improving economic growth, interest rates
fell everywhere except in the UK and the US.
- Central bankers achieved their collective goal of
steadily strengthening the dollar without causing
undue market volatility.
- Elections in the US and Japan came off exactly as
forecast: opinion polls in Britain remained
unchanged all year long; even the Prodi government
in Italy was viewed as stable. Something like a
political consensus for the European monetary union
and its fiscal preconditions seemed to be in place
by year-end. No significant new trade disputes
arose anywhere.
- Among the 25 emerging marker economies we follow,
none suffered a decline in real GDP during 1996,
none underwent an involuntary change in government,
only one experienced a significant real
devaluation, and all but three showed rising
foreign exchange reserves.
If this seems like the ideal environment for financial markets, it was.
Twenty-percent or better market returns were commonplace in Europe, developed
Asia, and many emerging markets. The exceptions were few but significant: South
Africa, Chile, and Thailand all fell by more than 15% in dollar terms, as did
Japan, where investor confidence seemed to erode as they year wore on. We
continue to believe in corporate performance as the key driver of international
equity investment decision in 1997 and beyond. For many years, returns on
capital and returns to shareholders have been downplayed or ignored in Europe
and Japan. We believe that over the next several years these same criteria,
which have dominated the U.S. market, will begin to rise to the top of the
corporate agenda abroad.
As you know, we implemented a management change within the fund during
1996, creating an in-house research and portfolio team to take charge of the
fund's day-to-day
(continued)
12
<PAGE> 97
INTERNATIONAL GROWTH FUND - WILLIAM BLAIR MUTUAL FUNDS, INC.
management. The team is now in place, and the composition of the portfolio has
been changed to reflect a strengthened commitment to both above-average
fundamental characteristics and the long-term quality growth approach for which
William Blair is known.
The International Growth Fund will now be compared to the new Morgan
Stanley All County World Free except the U.S. Index. Unlike the Morgan Stanley
Europe-Australia-Far East Index, this new benchmark includes emerging markets
and reduces the Japanese portion to approximately 30%, making it more
comparable to our fund in terms of investment approach.
George Greig
13
<PAGE> 98
INTERNATIONAL GROWTH FUND-WILLIAM BLAIR MUTUAL FUNDS, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
[GRAPH]
<TABLE>
<CAPTION>
10/92 12/92 6/93 12/93 6/94 12/94 6/95 12/95 6/96 12/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Int'l Growth Fund $10,000 10,130 11,390 13,534 13,985 13,528 13,332 14,505 15,687 15,687
MSCI All Country $10,000 9,694 11,885 13,078 13,960 13,945 14,269 15,331 16,148 16,355
World Free Ex-U.S.*
Lipper Inter- $10,000 9,876 11,311 13,745 13,717 13,644 13,983 15,012 16,316 17,178
national Index
MSCI EAFE** $10,000 9,623 11,879 12,793 13,935 13,825 14,206 15,422 16,142 16,403
</TABLE>
* MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY WORLD FREE EXCEPT U.S.
INDEX
** MORGAN STANLEY EUROPE-AUSTRALIA-FAR EAST INDEX
14
<PAGE> 99
INTERNATIONAL GROWTH FUND - BLAIR MUTUAL INTERNATIONAL
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
Shares Value
------ -----
<C> <C> <S> <C>
COMMON STOCKS -- EUROPE 43.6%
AUSTRIA -- 1.5%
10 VA Technologie AG (Industrial
engineering) $ 1,570
--------
DENMARK -- 1.3%
7 Novo Nordisk AS (Pharmaceutical) 1,318
--------
FINLAND -- 2.3%
19 Nokia (AB) OY
(Telecommunications equipment) 1,103
9 Raision Tehtaat OY (Food) 535
9 TT Tieto OY, "B" Shares
(Consultants) 746
--------
2,384
--------
FRANCE -- 5.6%
6 Canal Plus (Media/television) 1,369
38 Lagardere Groupe (Industrial
holding company) 1,043
10 Louis Dreyfus Citrus (Food
processing) 328
29 * SGS Thomson Microelectronics
(Semiconductors) 2,051
2 Sodexho (Contract catering) 1,114
--------
5,905
--------
GERMANY -- 5.6%
1 Altana Industrie -- Aktiem Und
Anlagen DM50 (Pharmaceuticals) 739
11 Adidas AG ORD (Sporting goods) 950
15 * Leica Camera AG (Cameras) 468
3 * Mannesmann AG (General
engineering) 1,083
8 Moebel Walther (Furniture
stores) 442
9 SGL Carbon AG (Chemicals) 1,134
18 Veba AG (Utility) 1,040
--------
5,856
--------
ITALY -- 2.0%
502 Banca Fideuram SPA (Fund
management) 1,102
400 Telecom Italia Mobile (Cellular
service) 1,013
--------
2,115
--------
NETHERLANDS -- 3.1%
20 ABN AMRO Holdings (Banks) 1,301
26 Philips Electronics NV (Consumer
electronics) 1,053
20 Van Ommeren (Specialty
chemicals) 903
--------
3,257
--------
Shares Value
------ -----
<C> <C> <S> <C>
NORWAY -- 1.7%
58 * Tandberg (Digital television
systems) $ 1,811
--------
SWEDEN -- 5.7%
28 Autoliv AB (Airbag
manufacturers) 1,224
45 Astra AB (Pharmaceuticals) 2,217
50 Ericsson AB Telecom
(Telecommunication services) 1,542
22 Kinnevik AB "B" Free Shares
(Industrial holding company) 618
22 Netcom Systems AB "B" Shares
(Telecommunications) 363
--------
5,964
--------
SWITZERLAND -- 1.8%
0.43 Baloise Holdings (Insurance) 853
10 CS Holdings (Banking) 1,026
--------
1,879
--------
UNITED KINGDOM -- 13.0%
40 Abbott Mead Vickers PLC
(Advertising agency) 442
75 Cairn Energy (Energy utility) 538
50 DFS Furniture Company (Furniture
manufacturer/retailer) 514
125 First Leisure Corporation PLC
(Entertainment) 721
250 Firstbus PLC (Transportation
services) 871
70 Games Workshop (Toys) 647
135 Grand Metropolitan PLC
(Breweries) 1,064
100 Harvey Nichols Group PLC
(Department stores) 596
240 Hays PLC (Bulk
distribution/personnel
services) 2,310
200 Kwik Fit Holdings ORD PLC
(Distributors) 745
60 Mercury Assets Management Group
(Banks/Merchant) 1,278
125 Next PLC (Retail apparel) 1,215
60 Page (Michael) Group PLC
(Recruitment) 426
50 Rolls Royce PLC (Engineering) 220
65 Standard Chartered PLC (Retail
banks) 803
126 Tesco PLC (Food Retailer) 768
25 Wetherspoon (J.D.) PLC (Retail
pubs) 505
--------
13,663
--------
COMMON STOCKS -- ASIA -- 36.7%
AUSTRALIA -- .6%
125 QBE Insurance Group Limited
(General insurer) 659
--------
</TABLE>
15
<PAGE> 100
<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
HONG KONG -- 6.4%
2,200 Cafe de Coral Holdings, Limited
(Fast food) $ 590
2,200 * Founder Hong Kong, Limited
(Electronic publishing) 846
1,000 * Glorious Sun Enterprises,
Limited (Textile products) 417
600 * Guang Nan Holdings, Limited
(Miscellaneous distribution) 516
84 HSBC Holdings (Bank) 1,802
250 * New World Infrastructure
(Construction) 730
200 Shanghai Industrial Holdings,
Limited (Tobacco/
pharmaceutical holdings) 729
185 Television Broadcasts, Limited
(Broadcasting) 739
1,550 Tingyi (Cayman Island) Holdings
(Food manufacturing) 406
--------
6,775
--------
JAPAN -- 26.9%
25 Aderans Company, Limited (Wigs) 611
77 Anritsu Corporation (Electrical
machinery) 831
95 Canon, Incorporated (Computer
and office equipment) 2,099
16 Chodai Company, Limited
(Consulting services) 404
44 Credit Saison (Credit cards) 984
0.20 DDI Corporation (Telecom service
provider) 1,322
25 Enix Corporation (Entertainment
software) 563
15 Fuji Machine Manufacturing
(Automated assembly machine) 397
21 Giken Seisakusho Company,
Limited (Machinery) 281
17 Hirose Electronics Company,
Limited (Connectors) 985
30 Hoya Corporation (Specialty
glass) 1,178
6 Imagineer Company, Limited (Game
software) 363
60 Jaccs Company (Consumer finance) 466
7 Keyence Corporation
(Electronics) 864
20 Meiwa Estate Corporation,
Limited (Condominiums) 501
120 Minebea Company, Limited
(Miniature bearings) 1,003
16 Nichiei Company, Limited
(Finance company) 1,181
10 Nichii Gakkan Company (Medical
recordkeeping) 499
15 Noritsu Kohki Company, Limited
(Photo processing equipment) 706
21 Oiles Corporation (Machinery) 638
<CAPTION>
Shares Value
- ------------ JAPAN (CONTINUED) --------
<S> <C> <C>
87 Ricoh Corporation, Limited
(Color copier manufacturer) $ 999
20 Rohm Company (Electronics) 1,314
15 Ryohin Keikaku Company, Limited
(Home furnishing/
apparel stores) 1,114
10 SMC Corporation (Machinery) 672
10 Sakai Moving Service
(Residential moving) 251
36 Santen Pharmaceutical Company
(Opthalmic pharmaceuticals) 746
14 Secom Company, Limited
(Services) 847
23 Sho Bond Construction
Corporation (Construction) 630
51 Sodick Company, Limited
(Electronics) 423
41 Sony Corporation (Consumer
electronics) 2,686
95 Takeda Chemical Industries,
Limited (Pharmaceuticals) 1,993
6 Tiemco Company, Limited (Sport
fishing equipment) 384
9 World Company, Limited
(Wholesale apparel) 373
--------
28,308
--------
MALAYSIA -- 2.0%
90 Commerce Asset Holdings Berhad
(Retail bank) 677
120 Malaysia Assurance Alliance
(Insurance) 585
158 YTL Corporation Berhad (Holding
company/power generation) 848
--------
2,110
--------
SINGAPORE -- .8%
95 City Developments (Real estate) 855
--------
COMMON STOCKS -- EMERGING MARKETS -- 14.9%
ARGENTINA -- .6%
22 Banco Frances Rio Plata ADR
(Bank) 606
--------
BRAZIL -- 3.4%
30,000 Lojas Arapua PN (Retail) 554
16,000 Telebras S.A.
(Telecommunications) 1,147
8 Telecommunicacoes Brasilera, ADR
(Telecommunications) 612
3,200 Telecommunicacoes de Sao Paolo
(Telecommunications) 693
17,230 Uniao de Bancos Brasilera (Bank) 562
--------
3,568
--------
CHILE -- .9%
17 Laboratorio Chile S.A. (Generic
drugs) 280
6 Quimica Y Minera Chile ADR
(Mining) 313
19 Santa Isabel S.A. GDR (Food
retailer) 428
--------
1,021
--------
</TABLE>
16
<PAGE> 101
<TABLE>
<CAPTION>
Shares Value
- ------------ CHILE (CONTINUED) --------
<S> <C> <C>
CHINA -- .6%
751 * Huangshan Tourism Development
Co. (Tourism) $ 331
300 * Wuxi Little Swan (Appliance
manufacturing) 303
--------
634
--------
GREECE -- .4%
13 Goody S.A. (Retail restaurants) 224
20 Sarantis (Cosmetics) 216
--------
440
--------
HUNGARY -- .6%
6 Gedeon Richter RT
(Pharmaceuticals) 351
8 Pannonplast Plastic Industries
(Plastic pipe manufacturing) 294
--------
645
--------
INDIA -- .4%
50 Gujarat Ambuja Cements (Building
products) 413
--------
INDONESIA -- 1.3%
150 PT Ramayana Lestari Sentosa
(Retail department store) 324
650 PT Telecomunikasion
(Telecommunications) 1,087
--------
1,411
--------
ISRAEL -- .4%
24 Koor Industries, Limited
(Fertilizer) 411
--------
KOREA -- 1.6%
49 Korea Electric Power Corporation
ADR (Electric utility) 1,015
6 Samsung Display Devices, Limited
(Electronic displays) 330
2 Sungmi Telecom Company
(Telecommunication equipment) 298
--------
1,643
--------
PERU -- 1.2%
17 Corporation Banco Credito del
Peru (Bank) 306
505 Telefonica Del Peru S.A. CPT "B"
Shares (Telephone company) 940
--------
1,246
--------
<CAPTION>
<S> <C> <C>
PHILIPPINES -- .8%
1,000 C & P Homes (Housing
development) $ 513
1,250 Davao Union Cement Corporation,
Class "B" (Cement) 352
--------
865
--------
POLAND -- .6%
12 Agros Holdings, Class "C" (Food) 315
34 Electrim S.A. (Telecommunication
wire manufacturing) 308
--------
623
--------
SOUTH AFRICA -- 1.3%
30 Liberty Life Association of
Africa (Life/health insurance) 752
100 Metropolitan Cash & Carry,
Limited (Food retail) 331
30 Nasionale Pers Beperk
(Publishing) 277
--------
1,360
--------
THAILAND -- .5%
200 (a) Industrial Finance Corporation
of Thailand (Bank) 534
54 Thai Farmers Bank Warrants
(Bank) --
--------
534
--------
TURKEY -- .3%
2,000 Ardem Pisirici (Stove
manufacturing) 296
--------
TOTAL COMMON STOCKS 95.2%
(COST $86,980) 100,145
--------
SHORT-TERM INVESTMENTS -- 4.3%
$4,485 Investors Bank & Trust Company
Repurchase Agreement,
5.91% ,dated 12/31/96
Collateralized by U.S.
Government Agency Security
with market value of $4,710
with 1/2/97 repurchase date
(cost $4,485) 4,485
--------
TOTAL INVESTMENTS -- 99.5% 104,630
(cost $91,465)
OTHER ASSETS, LESS
LIABILITIES -- .5% 518
--------
NET ASSETS -- 100.0% $105,148
========
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
GDR = Global Depository Receipt
(a) Foreign registered securities (Alien Market)
At December 31, 1996, the Fund's Portfolio of Investments includes the following
categories: Technology -- 22%; Services -- 18%; Finance -- 17%; Manufacturing --
12%; Consumer Goods -- 9%; Utilities -- 8%; Retail -- 7%; Processing -- 3%;
Transportation -- 2%; and Other -- 2%
See accompanying Notes to Financial Statements.
17
<PAGE> 102
INCOME FUND-WILLIAM BLAIR MUTUAL FUNDS, INC.
Performance Highlights
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Fund 3.0% 14.4% (0.7)% 7.8% 7.2%
Lehman Intermediate Govt./Corp. Index 4.1 15.3 (1.9) 8.8 7.2
</TABLE>
Investor Information
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Ending Net Assets (in millions) $150 $147 $144 $204 $137
Portfolio Turnover Rate (%) 66 54 63 114 47
Expense Ratio (%) .70 .68 .68 .70 .88
</TABLE>
A LETTER FROM THE PORTFOLIO MANAGER
[BENTLEY MYER PHOTO]
Dear Shareholders:
The big story in the bond market for the second half of 1996 was the
slowdown in the economy during the third quarter. Real Gross Domestic Product
grew at a very robust rate of 4.7% during the second quarter, but slipped to
just 2.1% during the third quarter. Early reports for the fourth quarter
suggest that the growth rate picked up, but not in any significant way.
The bond market tracked these changes very closely with prices rising
strongly in the third quarter, only to reverse course later in the fourth
quarter. Looking ahead, it appears that the economy will continue to grow at a
moderate rate into the first half of 1997. There do not appear to be many
excesses that would lead the Federal Reserve Board to change their more neutral
policy and start raising short-term interest rates. One exception is the
continuing upward movement in stock prices; a large correction could dampen
consumer confidence.
Our strategy continued to run counter to market sentiment as we
started raising cash reserves during the third quarter rally. This move hurt
our relative performance early on, but we have benefitted more recently as
interest rates moved back up. U.S. Treasury notes and more conservative
mortgage-backed securities continue to be our preferred sector choices. This
again runs against popular thinking which favors corporate bonds. We continue
to have concerns in the corporate sector, as the risk and return
characteristics for most issues do not look attractive.
Finally, in November we raised the monthly dividend from $.05 per share
to $.0525. We waited until later in the year to raise this rate because we
wanted to make sure we could sustain the increased payment for some period of
time. This more conservative approach will continue to be our policy in 1997
and beyond.
Bentley Myer
18
<PAGE> 103
INCOME FUND - WILLIAM BLAIR MUTUAL FUNDS, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
<TABLE>
<CAPTION>
LEHMAN IN-
TERMEDIATE
GOVERN-
MEASUREMENT PERIOD INCOME MENT/CORPORATE
(FISCAL YEAR COVERED) FUND INDEX
- --------------------- ------ ----------------
<S> <C> <C>
9/90 10,000 10,000
12/90 10,291 10,490
6/91 10,781 10,946
12/91 11,966 12,024
6/92 12,390 12,387
12/92 12,845 12,887
6/93 13,565 13,687
12/93 13,849 13,955
6/94 13,555 13,652
12/94 13,746 13,748
6/95 14,935 15,069
12/95 15,722 15,857
6/96 15,670 15,823
12/96 16,189 16,498
</TABLE>
19
<PAGE> 104
INCOME FUND WILLIAM BLAIR MUTUAL FUNDS, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
Principal
Amount Issue Value
- --------- ----- --------
<C> <S> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY GUARANTEED
OBLIGATIONS -- 65.0%
U.S. TREASURY NOTES -- 30.3%
$ 10,322 5.750%, due 8/15/03 $ 10,019
15,500 7.250%, due 5/15/04 16,324
5,000 7.250%, due 8/15/04 5,267
12,650 7.875%, due 11/15/04 13,816
-------- --------
43,472 Total U.S. Treasury Obligations 45,426
-------- --------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS -- 9.1%
U.S. DEPARTMENT OF VETERANS
AFFAIRS -- 3.3%
5,000 Mortgage Trust 1992-2, 5,019
-------- Tranche 2-D, 7.000%, due --------
9/15/15
FEDERAL HOUSING AUTHORITY -- 2.9%
4,120 9.680%, due 3/1/25 4,282
-------- --------
SMALL BUSINESS ADMINISTRATION -- 1.2%
-- Receipt for Multiple
Originator Fees, #3
0.785%, due 11/8/08 1,503
(Interest Only) WAC
339 Loan #100023, 9.375%, due 352
-------- 11/25/14 --------
339 Total Small Business 1,855
-------- Administration --------
Obligations
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION II -- 1.0%
20 12.000%, due 2/20/00 21
21 12.500%, due 2/20/15 24
659 11.000%, due 3/20/16 738
17 10.500%, due 6/20/19 18
440 11.000%, due 8/20/19 492
69 10.500%, due 8/20/20 75
87 10.500%, due 9/20/20 95
-------- --------
1,313 Total Government National 1,463
-------- Mortgage Association --------
Obligations II
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 0.7%
11 12.500%, due 4/15/14 12
54 13.000%, due 11/15/14 60
909 8.500%, due 12/15/21 953
-------- --------
974 Total Government National 1,025
-------- Mortgage Association --------
Obligations
<CAPTION>
Principal
Amount Issue Value
- --------- ----- --------
<C> <S> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION MOBILE HOME -- 0.0%
$ 35 9.750%, due 3/15/98 $ 36
17 9.750%, due 1/15/99 18
-------- --------
52 Total Government National 54
-------- Mortgage Association --------
Mobile Home Obligations
U.S. GOVERNMENT AGENCY GUARANTEED
OBLIGATIONS -- 25.6%
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA) -- 10.6%
746 1991-79, Tranche S, 16.596%
FR, due 7/25/98 799
1,123 8.500%, due 7/1/99 1,145
567 11.250%, due 12/15/11 624
569 12.250%, due 12/15/11 641
53 13.250%, due 8/1/14 53
2,640 1992-200, Tranche SE,
11.500%, due 11/25/22 2,653
266 1993-19, Tranche SH,
11.234%, due 4/25/23 259
4,842 5.724% FR, due 9/1/26 4,949
4,701 5.900% FR, due 10/1/26 4,801
-------- --------
15,507 Total FNMA Mortgage 15,924
-------- Obligations --------
FEDERAL HOME LOAN MORTGAGE
CORP. (FHLMC) -- 8.7%
403 #1475, Tranche SC, 9.457% 386
FR, due 2/15/08
1,092 #1693, Tranche S+, 5.725%, 893
due 9/15/08
166 #1214, Tranche EB, 9.900% 166
FR, due 2/15/15
3,445 #555280, Pass Through, 3,579
8.500% , due 9/1/17
2,000 #1289, Tranche PK, 7.500%, 2,019
due 5/15/18
3,390 #1166, Tranche PG, 8.000%, 3,439
due 2/15/20
603 #1492, Tranche SE, 10.133%, 529
due 3/15/23
2,017 #1542, Tranche S, 14.346%, 2,060
-------- due 7/15/23 --------
13,116 Total FHLMC Mortgage 13,071
-------- Obligations --------
</TABLE>
20
<PAGE> 105
<TABLE>
<CAPTION>
Principal S & P
Amount Issue Rating Value
- --------- ----- ----------- --------
(Unaudited)
<S> <C> <C> <C>
FEDERAL HOME LOAN BANKS
(FHLB) -- 6.3%
4,000 #AI-03, Tranche 1, 6.953%,
due 4/25/03 $ 4,005
5,500 #BJ-03, Tranche 1, 6.750%, 5,503
-------- due 10/24/03 --------
9,500 Total FHLB Mortgage Obli- 9,508
-------- gations --------
$ 93,393 Total U.S. Government and 97,627
-------- U.S. Government Agency --------
Guaranteed Obligations
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 20.3%
3,256 Prudential Home Mortgage
Securities Corp.,
1992-45, Tranche A-8, AAA 3,158
6.370% FR, due 1/25/00
1,418 Polk Co. HFA, 1991-1,
Tranche A-2, 9.550%, due AAA 1,471
1/15/11
12,452 Morgan Keegan Funding I, AA- 12,701
L.P., 8.000%, due 4/25/11
416 Mortgage Obligation Struc-
tured Trust, 1993-1,
Tranche A-1, 6.350%, due AAA 414
10/25/18
5,385 Citicorp, 1993-2, Tranche AAA 5,430
A-4, 7.500%, due 7/25/21
5,000 Prudential Home Mortgage
Securities Corp., 1993-8,
Tranche A-10, 7.350%, due AAA 5,023
3/25/23
174 Residential Finance Corp.,
1991-11, Tranche A-2, AA 175
10.000%, due 4/01/21
944 Residential Trust Corp.,
1992-2, Tranche A, AA 958
7.943%, due 8/25/21
212 Resolution Trust Corp.,
1991-3, Tranche A-2, AAA 224
10.372%, due 8/25/21
862 Resolution Trust Corp.,
-------- 1992-5, Tranche 5-C,
8.621%, due 1/25/26 886
AA --------
30,119 Total Collateralized Mort- 30,440
-------- gage Obligations --------
<CAPTION>
Principal S & P
Amount Issue Rating Value
- --------- ----- ----------- --------
(Unaudited)
<S> <C> <C> <C>
CORPORATE OBLIGATIONS -- 2.1%
$ 1,250 Sears, Roebuck Corp. Me-
dium Term Note, 9.75%,
due 3/21/00 A- $ 1,374
1,500 Household Finance Corp.
-------- Medium Term Note, 10.38%,
due 12/15/00 1,705
A --------
2,750 Total Corporate Obligations 3,079
-------- --------
126,262 TOTAL LONG-TERM IN- 131,146
-------- VESTMENTS -- 87.4% --------
(cost $130,611)
SHORT-TERM INVESTMENTS -- 11.5%
1,456 Associates Corp. of North
America Demand Note, 1,456
5.233%, due 1/1/97 A-1+
3,250 Sears Commercial Paper, 3,250
5.408%, due 1/13/97 A-2
4,000 General Motors Acceptance
Corp., 5.300%, due 4,000
1/16/97 A-2
1,750 Sears Commercial Paper, 1,750
5.551%, due 1/23/97 A-2
2,500 Sears Commercial Paper, 2,500
5.452%, due 1/24/97 A-2
1,750 Ford Motor Credit Company, 1,750
5.300%, due 2/7/97 A-1
2,500 General Motors Acceptance
-------- Corp., 5.300%, due 3/3/97 2,500
A-2 --------
17,206 TOTAL SHORT-TERM IN-
-------- VESTMENTS -- 11.5% 17,206
--------
(cost $17,206)
$143,468 TOTAL INVESTMENTS -- 98.9%
======== 148,352
(cost $147,817)
OTHER ASSETS, LESS
LIABILITIES -- 1.1% 1,654
--------
NET ASSETS -- 100.0% $150,006
========
</TABLE>
- ---------------
WAC = Weighted Average Coupon
FR = Floating Rate
See accompanying Notes to Financial Statements.
21
<PAGE> 106
Blair Mutual Ready Reserves Fund Logo
Performance Highlights
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Ready Reserves Fund 4.8% 5.5% 3.7% 2.6% 3.3%
S&P-rated AAA Money Market Funds 4.8 5.4 3.6 2.0 3.2
</TABLE>
Investor Information
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Ending Net Assets (in millions) $761 $704 $521 $477 $449
Expense Ratio (%) .71 .72 .71 .71 .71
</TABLE>
A LETTER FROM THE PORTFOLIO MANAGER
[BENTLEY MYER PHOTO]
Dear Shareholders:
The sentiment regarding changes in Federal Reserve Board policy swung
over a fairly wide range during the second half of 1996. Short-term interest
rates were expected to be increased early in the he period in response to signs
that the economy was expanding at a very rapid rate. As subsequent signs emerged
indicating a slowing in the growth rate of the economy, expectations changed to
an actual lowering in short rates. When the dust had settled at year end, the
federal funds rate stood at 5.25%, or exactly where it began the period. The
current forecast is for a continuation at this level, but, with the increased
amount of speculation in the money markets, there will probably be a change in
sentiment in the very near future.
With the fairly narrow spread between shorter-and longer-maturity money
market rates, we have allowed our average maturity to drift down to a current
level of 37 days. This is at the lower end of our normal maturity range of 35 to
60 days. We are likely to maintain this average until we feel that we are
adequately compensated for extending our maturities. From a sector standpoint,
we sold some floating rate notes and reinvested the proceeds in highly rated,
fixed rate commercial paper. With Federal Reserve Board policy unlikely to
change in the near term, we felt more comfortable with a fixed rate option.
Assets continued to grow and have reached the $750 million level recently.
We look forward to serving your money market needs in 1997.
Bentley M. Myer
22
<PAGE> 107
READY RESERVES FUND - WILLIAM BLAIR MUTUAL FUNDS, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY GUARANTEED -- 2.2%
$ 2,200 Agency for
International
Development
VRN -- Peru 5.778% 1/1/97 $ 2,200
366 Agency for
International
Development
VRN -- Zimbabwe 5.778% 1/1/97 366
9,000 Student Loan
Marketing
Association VRN 5.645% 1/1/97 9,000
5,000 Student Loan
Marketing
Association VRN 5.545% 1/1/97 5,000
- -------- --------
16,566 16,566
- -------- --------
DEMAND NOTE-- 0.0%
103 Associates
Corporation of
North America
Demand Note VRN 5.233% 1/2/97 103
--------
FIXED RATE NOTES -- 0.3%
2,000
- --------
National Rural
Utilities
Cooperative
Finance
Corporation 8.160% 1/15/97 2,002
--------
COMMERCIAL PAPER -- 96.6%
INSURANCE -- 20.6%
8,000
A. I. Credit
Corporation 5.280% 2/14/97 7,948
2,858
American General
Finance
Corporation 5.310% 1/22/97 2,849
6,500
American General
Finance
Corporation 5.300% 1/30/97 6,472
1,707
American General
Finance
Corporation 5.320% 1/30/97 1,700
8,117
American General
Finance
Corporation 5.370% 4/4/97 8,004
6,000
Aon Corporation 5.300% 1/21/97 5,982
2,254
Metlife Funding
Incorporated 5.300% 1/23/97 2,247
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<S> <C> <C> <C> <C>
$ 3,483 Metlife Funding
Incorporated 5.300% 1/23/97 $ 3,472
10,673 Metlife Funding
Incorporated 5.290% 2/12/97 10,607
7,000 Metlife Funding
Incorporated 5.280% 2/13/97 6,956
3,300 Metlife Funding
Incorporated 5.330% 2/13/97 3,279
3,846 Metlife Funding
Incorporated 5.300% 3/6/97 3,810
7,350 Metlife Funding
Incorporated 5.300% 3/13/97 7,273
10,643 Prudential Funding
Corporation 5.520% 1/14/97 10,622
6,640 Prudential Funding
Corporation 5.320% 1/24/97 6,617
7,263 Prudential Funding
Corporation 5.330% 2/6/97 7,224
8,000 Prudential Funding
Corporation 5.410% 2/19/97 7,941
5,000 SAFECO Credit
Corporation 5.380% 1/3/97 4,999
3,500 SAFECO Credit
Corporation 5.320% 2/4/97 3,482
6,500 SAFECO Credit
Corporation 5.280% 2/6/97 6,466
3,000 SAFECO Credit
Corporation 5.280% 2/7/97 2,984
2,577 USAA Capital
Corporation 5.470% 1/2/97 2,577
2,740 USAA Capital
Corporation 5.410% 1/13/97 2,735
10,000 USAA Capital
Corporation 5.450% 1/16/97 9,977
5,118 USAA Capital
Corporation 5.290% 1/24/97 5,101
8,000 USAA Capital
Corporation 5.300% 2/13/97 7,949
3,115 USAA Capital
Corporation 5.300% 2/27/97 3,089
5,000 USAA Capital
Corporation 5.300% 3/17/97 4,945
- -------- --------
158,184 157,307
- -------- --------
</TABLE>
23
<PAGE> 108
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<C> <S> <C> <C> <C>
FINANCE -- 20.2%
$ 3,745 Associates
Corporation of
North America 5.310% 1/27/97 $ 3,731
6,436 Associates
Corporation of
North America 5.310% 1/28/97 6,410
6,974 Associates
Corporation of
North America 5.320% 1/31/97 6,943
3,000 Associates
Corporation of
North America 5.390% 2/4/97 2,985
4,431 Associates
Corporation of
North America 5.300% 3/11/97 4,386
3,608 Associates
Corporation of
North America 5.370% 3/18/97 3,567
4,500 Associates First
Capital
Corporation 5.310% 2/11/97 4,473
5,414 Avco Financial
Services
Incorporated 5.470% 1/15/97 5,402
10,116 Beneficial
Corporation 5.380% 2/5/97 10,063
6,865 Beneficial
Corporation 5.320% 2/10/97 6,824
6,000 Block Financial
Corporation 5.350% 1/27/97 5,977
5,725 Block Financial
Corporation 5.350% 3/12/97 5,665
4,751 Block Financial
Corporation 5.330% 3/14/97 4,700
4,909 CIT Group Holdings 5.410% 3/17/97 4,854
2,462 Household Finance
Corporation 5.520% 1/10/97 2,459
5,000 Household Finance
Corporation 5.320% 1/10/97 4,993
4,237 Norwest Financial,
Inc. 5.300% 1/29/97 4,220
8,000 Norwest Financial,
Inc. 5.300% 1/31/97 7,965
8,000 Norwest Financial,
Inc. 5.290% 2/18/97 7,944
8,000 Norwest Financial,
Inc. 5.290% 2/19/97 7,942
6,000 Norwest Financial,
Inc. 5.310% 2/21/97 5,955
8,000 PHH Corporation 5.370% 1/29/97 7,967
8,500 PHH Corporation 5.370% 1/30/97 8,463
5,000 PHH Corporation 5.460% 2/4/97 4,974
5,000 PHH Corporation 5.480% 2/5/97 4,973
3,677 PHH Corporation 5.380% 2/7/97 3,657
3,000 PHH Corporation 5.420% 2/12/97 2,981
3,361 PHH Corporation 5.450% 2/14/97 3,339
- -------- --------
154,711 153,812
- -------- --------
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<C> <S> <C> <C> <C>
MANUFACTURING -- 14.0%
$ 8,000 Dover Corporation 5.470% 2/7/97 $ 7,955
6,582 John Deere Capital
Corporation 5.390% 1/31/97 6,553
841 Ford Motor Credit
Company 5.310% 1/8/97 840
2,976 Ford Motor Credit
Company 5.550% 1/9/97 2,972
3,071 Ford Motor Credit
Company 5.300% 1/24/97 3,061
7,678 Ford Motor Credit
Company 5.330% 2/5/97 7,638
3,520 General Electric
Capital
Corporation 5.370% 1/13/97 3,514
6,293 General Electric
Capital
Corporation 5.500% 1/22/97 6,273
4,500 General Electric
Capital
Corporation 5.310% 1/23/97 4,485
5,800 General Electric
Capital
Corporation 5.320% 1/27/97 5,778
5,981 General Electric
Capital
Corporation 5.410% 1/29/97 5,956
3,000 General Electric
Capital
Corporation 5.410% 1/30/97 2,987
3,436 General Electric
Capital
Corporation 5.560% 2/3/97 3,419
3,110 General Electric
Capital
Corporation 5.310% 3/5/97 3,081
2,100 General Electric
Capital Services,
Inc. 5.370% 3/14/97 2,077
8,946 General Electric
Company 5.280% 2/14/97 8,888
8,100 General Electric
Company 5.300% 2/20/97 8,040
3,102 General Electric
Company 5.310% 2/24/97 3,077
4,500 Minnesota Mining &
Manufacturing Co. 5.290% 2/21/97 4,466
3,000 Paccar Financial
Corporation 5.300% 1/28/97 2,988
6,000 Paccar Financial
Corporation 5.280% 2/25/97 5,952
6,000 Paccar Financial
Corporation 5.280% 2/26/97 5,951
1,050 Paccar Financial
Corporation 5.300% 2/28/97 1,041
- -------- --------
107,586 106,992
- -------- --------
</TABLE>
24
<PAGE> 109
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<S> <C> <C> <C> <C>
BROKERAGE -- 7.8%
$ 8,000 Merrill Lynch &
Company, Inc. 5.330% 1/14/97 $ 7,985
6,100 Merrill Lynch &
Company, Inc. 5.330% 1/24/97 6,079
5,000 Merrill Lynch &
Company, Inc. 5.350% 1/31/97 4,978
2,300 Merrill Lynch &
Company, Inc. 5.390% 2/18/97 2,284
8,600 Merrill Lynch &
Company, Inc.
Australia 5.420% 2/18/97 8,538
6,702 Morgan Stanley
Group Incorporated 5.320% 1/13/97 6,690
5,216 Morgan Stanley
Group Incorporated 5.320% 1/15/97 5,205
5,000 Morgan Stanley
Group Incorporated 5.320% 1/16/97 4,989
2,500 Morgan Stanley
Group Incorporated 5.550% 1/27/97 2,490
4,226 Morgan Stanley
Group Incorporated 5.320% 2/10/97 4,201
5,700 Morgan Stanley
Group Incorporated 5.320% 2/11/97 5,665
- -------- --------
59,344 59,104
- -------- --------
CHEMICAL / FOREST -- 6.4%
3,500 DuPont (E.I.) De
Nemours & Co. 5.280% 2/11/97 3,479
8,456 DuPont (E.I.) De
Nemours & Co. 5.260% 2/12/97 8,404
4,921 DuPont (E.I.) De
Nemours & Co. 5.290% 2/27/97 4,880
2,000 Great Lakes
Chemical
Corporation 5.370% 1/21/97 1,994
5,325 Great Lakes
Chemical
Corporation 5.400% 3/7/97 5,273
4,241 Great Lakes
Chemical
Corporation 5.380% 3/18/97 4,193
2,500 Great Lakes
Chemical
Corporation 5.370% 3/28/97 2,468
1,559 Great Lakes
Chemical
Corporation 5.450% 4/9/97 1,536
11,400 Monsanto Co. 5.320% 1/15/97 11,376
5,000 Monsanto Co. 5.300% 2/6/97 4,973
- -------- --------
48,902 48,576
- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<S> <C> <C> <C> <C>
ENERGY -- 5.5%
$ 4,909 Chevron U.K.
Investment PLC 5.320% 1/6/97 $ 4,905
3,400 Chevron U.K.
Investment PLC 5.510% 1/7/97 3,397
6,100 Chevron U.K.
Investment PLC 5.320% 1/13/97 6,089
8,000 Chevron U.K.
Investment PLC 5.430% 1/17/97 7,981
3,500 Chevron U.K.
Investment PLC 5.470% 1/23/97 3,488
6,000 Chevron U.K.
Investment PLC 5.310% 2/7/97 5,967
5,150 Chevron U.K.
Investment PLC 5.310% 3/20/97 5,091
4,999 Mobil Finance
Corporation
(Australia) 5.310% 1/24/97 4,982
- -------- --------
42,058 41,900
- -------- --------
MEDIA / ENTERTAINMENT -- 4.9%
2,725 Knight Ridder
Incorporated 5.300% 1/10/97 2,721
7,500 Knight Ridder
Incorporated 5.300% 1/14/97 7,486
4,000 Knight Ridder
Incorporated 5.300% 1/16/97 3,991
4,000 Knight Ridder
Incorporated 5.300% 1/17/97 3,991
5,000 Knight Ridder
Incorporated 5.300% 1/28/97 4,980
10,000 Knight Ridder
Incorporated 5.320% 2/20/97 9,926
4,500 Knight Ridder
Incorporated 5.300% 3/21/97 4,448
- -------- --------
37,725 37,543
- -------- --------
UTILITIES - TELEPHONE -- 4.4%
6,000 American Telephone
& Telegraph Corp. 5.370% 3/6/97 5,943
5,000 American Telephone
& Telegraph Corp. 5.370% 3/7/96 4,951
4,470 BellSouth Capital
Funding
Corporation 5.360% 1/21/97 4,456
5,000 BellSouth Capital
Funding
Corporation 5.300% 2/3/97 4,976
2,970 BellSouth Capital
Funding
Corporation 5.300% 2/4/97 2,955
10,000 BellSouth
Telecommunications
Inc. 5.300% 2/13/97 9,937
- -------- --------
33,440 33,218
- -------- --------
</TABLE>
25
<PAGE> 110
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<C> <S> <C> <C> <C>
UTILITIES -- ENERGY & GAS -- 3.4%
$ 6,000 National Rural
Utilities
Cooperative
Finance
Corporation 5.320% 1/9/97 $ 5,993
4,000 National Rural
Utilities
Cooperative
Finance
Corporation 5.300% 1/13/97 3,993
4,000 National Rural
Utilities
Cooperative
Finance
Corporation 5.300% 1/17/97 3,991
5,101 National Rural
Utilities
Cooperative
Finance
Corporation 5.310% 1/22/97 5,085
4,500 National Rural
Utilities
Cooperative
Finance
Corporation 5.290% 2/3/97 4,478
2,000 National Rural
Utilities
Cooperative
Finance
Corporation 5.290% 2/3/97 1,990
- -------- --------
25,601 25,530
- -------- --------
TRANSPORTATION -- 2.4%
18,239 Norfolk Southern
Corporation 5.350% 3/13/97 18,046
- -------- --------
MERCHANDISING -- 2.3%
4,303 Winn-Dixie Stores
Inc. 5.300% 1/28/97 4,286
12,950 Winn-Dixie Stores
Inc. 5.380% 1/28/97 12,898
- -------- --------
17,253 17,184
- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Principal Interest Amortized
Amount Issue Rate Maturity Cost
- --------- ----- -------- -------- ---------
<C> <S> <C> <C> <C>
ELECTRONIC / TECHNOLOGY -- 2.0%
$ 12,000 Pitney Bowes
Credit Corporation 5.300% 3/10/97 $ 11,880
3,000 Xerox Corporation 5.350% 1/6/97 2,998
- -------- --------
15,000 14,878
- -------- --------
DRUGS / HEALTH -- 1.2%
4,500 Pfizer
Incorporated 5.280% 3/19/97 4,449
5,000 Warner - Lambert
Company 5.300% 1/8/97 4,995
- -------- --------
9,500 9,444
- -------- --------
OTHER CONSUMER -- 1.0%
5,000 Proctor & Gamble
Company 5.270% 2/6/97 4,974
2,500 Proctor & Gamble
Company 5.300% 2/19/97 2,482
- -------- --------
7,500 7,456
- -------- --------
FOOD / BEVERAGE / TOBACCO -- 0.5%
4,000 Campbell Soup
Company 5.300% 1/17/97 3,991
- -------- --------
739,043 Total Commercial
Paper 734,981
--------
PORTFOLIO WEIGHTED
AVERAGE MATURITY 37 Days
$757,712 TOTAL INVESTMENTS -- 99.1% 753,652
CASH AND OTHER ASSETS, LESS
LIABILITIES -- .9% 7,156
--------
NET ASSETS -- 100.0% $760,808
========
</TABLE>
- ---------------
VRN = Variable Rate Note
See accompanying Notes to Financial Statements.
26
<PAGE> 111
[WILLILAM BLAIR MUTUAL FUNDS, INC. LOGO]
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
VALUE INTERNATIONAL READY
GROWTH DISCOVERY GROWTH INCOME RESERVES
FUND FUND FUND FUND FUND
-------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at market (cost $362,687; $--; $91,465;
$147,817; and $753,652, respectively) $500,584 $ -- $104,630 $148,352 $753,652
Cash -- 1,174 -- -- --
Receivable for:
Fund shares sold 1,708 1,004 481 280 17,830
Investments sold -- -- 3,254 87 --
Interest and dividends 328 -- 60 1,546 251
Foreign withholding tax -- -- 128 -- --
Deferred organization costs -- 13 10 -- --
Other assets 23 -- -- -- 1
-------- ------ -------- -------- --------
Total assets 502,643 2,191 108,563 150,265 771,734
LIABILITIES
Cash overdraft -- -- 2,487 52 --
Payable for:
Fund shares redeemed 436 -- 17 69 10,350
Investments purchased -- -- 768 -- --
Dividends -- -- -- -- 86
Management fee and organization
costs (Notes 1 and 2) 318 14 103 76 373
Other 115 2 40 62 117
-------- ------ -------- -------- --------
Total liabilities 869 16 3,415 259 10,926
-------- ------ -------- -------- --------
Net assets $501,774 $2,175 $105,148 $150,006 $760,808
======== ====== ======== ======== ========
CAPITAL
Capital stock ($0.001 par value; 37,209; 218; 7,540;
14,602; and 760,912 shares issued and outstanding,
respectively) $ 37 $ -- $ 8 $ 15 $ 761
Paid-in-surplus 363,163 2,175 92,434 155,462 760,151
Net unrealized appreciation (depreciation) on
investments and foreign currency transactions
(net of unrealized PFIC gain distribution of $442 for
International Growth Fund only) 137,897 -- 12,723 535 --
Accumulated undistributed net realized gain (loss) on
investments and foreign currency transactions 677 -- -- (6,119) (107)
Undistributed net investment income (loss) -- -- (17) 113 3
-------- ------ -------- -------- --------
Net assets $501,774 $2,175 $105,148 $150,006 $760,808
======== ====== ======== ======== ========
Net asset value per share $13.48 $10.00 $13.95 $10.27 $1.00
====== ====== ====== ====== =====
</TABLE>
See accompanying Notes to Financial Statements.
27
<PAGE> 112
[WILLIAM BLAIR MUTUAL FUNDS, INC. LOGO]
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(all amounts in thousands)
<TABLE>
<CAPTION>
VALUE INTERNATIONAL READY
GROWTH DISCOVERY GROWTH INCOME RESERVES
FUND FUND(a) FUND FUND FUND
------- --------- ------------- ------- --------
<S> <C> <C> <C> <C> <C>
Investment income
Interest $ 1,167 $ -- $ 177 $10,173 $39,282
Dividends 2,020 -- 1,724 -- --
Less foreign tax withheld (15) -- (217) -- --
------- ----- ------- ------- -------
Total investment income 3,172 -- 1,684 10,173 39,282
Expenses
Investment advisory fees (Note 2) 3,019 -- 1,131 881 4,283
Custodian fees 119 -- 204 48 174
Transfer agent fees 113 1 17 25 325
Professional fees 51 4 51 46 50
Registration fees 51 1 28 17 51
Organization costs -- -- 10 -- --
Miscellaneous 155 1 46 50 226
------- ----- ------- ------- -------
Total expenses before waiver 3,508 7 1,487 1,067 5,109
Less expenses waived and
absorbed by Company (Note 2) -- (7) -- -- --
------- ----- ------- ------- -------
Net investment income (loss) (336) -- 197 9,106 34,173
------- ----- ------- ------- -------
Net realized and unrealized gain (loss)
on investments, foreign currency transactions
and other assets and liabilities
Net realized gain (loss) on investments 27,804 -- 3,025 (2,156) (107)
Net realized gain on foreign currency transactions
and other assets and liabilities -- -- 514 -- --
------- ----- ------- ------- -------
Total net realized gain (loss) 27,804 -- 3,539 (2,156) (107)
Change in net unrealized appreciation/
depreciation on investments, and
other assets and liabilities (Note 1) 43,376 -- 6,539 (2,404) --
------- ----- ------- ------- -------
Net realized and unrealized gain (loss)
on investments, foreign currency and
other assets and liabilities 71,180 -- 10,078 (4,560) (107)
------- ----- ------- ------- -------
Net increase in net
assets resulting from operations $70,844 $ -- $10,275 $ 4,546 $34,066
======= ===== ======= ======= =======
</TABLE>
- -------------------------
(a) For the period from December 23, 1996 (Commencement of Operations) to
December 31, 1996.
See accompanying Notes to Financial Statements.
28
<PAGE> 113
WILLIAM BLAIR MUTUAL FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(all amounts in thousands)
<TABLE>
<CAPTION>
VALUE
DISCOVERY INTERNATIONAL
GROWTH FUND FUND GROWTH FUND INCOME FUND
------------------- --------- --------------------- -------------------
1996 1995 1996(A) 1996 1995 1996 1995
-------- -------- --------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (loss) $ (336) $ 993 $ -- $ 197 $ 704 $ 9,106 $ 9,265
Net realized gain (loss) on
investments, foreign currency
transactions and
other assets and liabilities 27,804 13,274 -- 3,539 (403) (2,156) (955)
Change in net unrealized
appreciation/depreciation
on investments and other assets
and liabilities 43,376 58,269 -- 6,539 5,958 (2,404) 11,783
-------- -------- --------- -------- ------- -------- --------
Net increase in net assets
resulting from operations 70,844 72,536 -- 10,275 6,259 4,546 20,093
Distributions to shareholders from
Net investment income (343) (817) -- (491)(b) (880)(b) (8,980) (9,438)
Net realized gain (19,503) (13,275) -- (3,125) -- -- --
-------- -------- --------- -------- ------- -------- --------
(19,846) (14,092) -- (3,616) (880) (8,980) (9,438)
Capital stock transactions
Shares sold 165,769 106,709 2,175 29,640 20,612 28,857 23,930
Shares issued in reinvestment of
income dividends and capital
gain distributions 18,035 12,714 -- 3,461 717 6,494 6,875
Less shares redeemed (96,064) (32,391) -- (24,374) (7,349) (28,281) (37,880)
-------- -------- --------- -------- ------- -------- --------
Change from capital stock
transactions 87,740 87,032 2,175 8,727 13,980 7,070 (7,075)
-------- -------- --------- -------- ------- -------- --------
Change in net assets 138,738 145,476 2,175 15,386 19,359 2,636 3,580
Net assets
Beginning of period 363,036 217,560 -- 89,762 70,403 147,370 143,790
-------- -------- --------- -------- ------- -------- --------
End of period $501,774 $363,036 $ 2,175 $105,148 $89,762 $150,006 $147,370
======== ======== ========= ======== ======= ======== ========
- -------------------------
Undistributed net investment
income (loss) at the end of the
period $ -- $ 319 $ -- $ 257 $ 343 $ 113 $ (13)
======== ======== ========= ======== ======= ======== ========
- -------------------------
Capital stock transactions
Shares sold 12,563 9,647 218 2,196 1,688 2,771 2,337
Shares issued in reinvestment of
income dividends and capital
gain distributions 1,351 1,092 -- 253 55 630 668
Less shares redeemed (7,220) (2,875) -- (1,751) (595) (2,735) (3,670)
-------- -------- --------- -------- ------- -------- --------
Change from capital stock
transactions 6,694 7,864 218 698 1,148 666 (665)
======== ======== ========= ======== ======= ======== ========
<CAPTION>
READY RESERVES FUND
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operations
Net investment income (loss) $ 34,173 $ 31,846
Net realized gain (loss) on
investments,
foreign currency transactions
and
other assets and liabilities (107) --
Change in net unrealized
appreciation/depreciation
on investments and other assets
and liabilities -- --
---------- ----------
Net increase in net assets
resulting from operations 34,066 31,846
Distributions to shareholders from
Net investment income (34,170) (31,846)
Net realized gain -- --
---------- ----------
(34,170) (31,846)
Capital stock transactions
Shares sold 2,994,231 2,514,548
Shares issued in reinvestment of
income dividends and capital
gain distributions 33,371 31,117
Less shares redeemed (2,970,683) (2,362,949)
---------- ----------
Change from capital stock
transactions 56,919 182,716
---------- ----------
Change in net assets 56,815 182,716
Net assets
Beginning of period 703,993 521,277
---------- ----------
End of period $ 760,808 $ 703,993
========== ==========
- -------------------------
Undistributed net investment
income (loss) at the end of the
period $ 3 $ --
========== ==========
- -------------------------
Capital stock transactions
Shares sold 2,994,231 2,514,548
Shares issued in reinvestment of
income dividends and capital
gain distributions 33,371 31,117
Less shares redeemed (2,970,683) (2,362,949)
---------- ----------
Change from capital stock
transactions 56,919 182,716
========== ==========
</TABLE>
- ---------------
(a) For the period from December 23, 1996 (Commencement of Operations) to
December 31, 1996.
(b) Includes $160 and $414 relating to PFIC transactions which are treated as
ordinary income for Federal income tax purposes in 1996 and 1995, respectively.
See accompanying Notes to Financial Statements.
29
<PAGE> 114
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 currently 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 Value Discovery Fund, which commenced operations on December 23, 1996,
is a portfolio whose principal objective is to seek long-term capital
appreciation by investing with a value discipline primarily in the securities of
small companies.
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, 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.
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 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.
(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 valuation, 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 is
determined based upon its sale price on the foreign exchange or market on which
it is primarily traded as of the close of the appropriate exchange or, if there
have been no sales on the date of valuation 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 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 and Ready Reserves Fund Portfolios of
Investments are the rates in effect at December 31, 1996.
30
<PAGE> 115
(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 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, Value Discovery Fund and International Growth Fund or on each day when New
York banks are open for business (except Good Friday) for Income Fund and Ready
Reserves Fund. Dividends from net investment income of the Growth Fund, Value
Discovery Fund and International Growth Fund are declared at least annually.
Dividends from the Income Fund and Ready Reserves Fund are declared monthly and
daily, respectively. Capital gain distributions, if any, are declared annually
in December. 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.
(d) Repurchase Agreements
The Fund may enter into repurchase agreements with 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.
(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, respectively, prevailing on
the day of valuation. Gains and losses from foreign currency transactions
associated with purchases and sales of investments are included with the net
realized or unrealized gain or loss on 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, 1996,
the Fund's most recent tax year-end, the Income Fund and the Ready Reserves Fund
have capital loss carryforwards of $6,121,000 and $107,000, respectively. These
loss carryforwards, which expire in 2004, can be used to offset net capital
gains.
A reclassification of $7,737,000 has been made in 1996 in the capital
accounts of the Growth Fund from accumulated undistributed net realized gain on
investments into paid-in surplus to reflect a difference between financial and
income tax basis reporting resulting from an in-kind redemption of fund shares.
The International Growth Fund has elected to mark-to-market its investment
in Passive Foreign Investment Companies ("PFIC's) for Federal income tax
purposes. In accordance with this election, the fund recognized unrealized
appreciation of $133,000 and $414,000 in 1996 and 1995, respectively. In
addition, the fund recorded net realized gains of $132,000 on sales of PFIC's
during 1996, of which $105,000 had been recognized in prior years. Dividends to
shareholders from net investment income included $160,000 and $414,000 relating
to PFIC's during 1996 and 1995, which are treated as ordinary income for Federal
income tax purposes.
31
<PAGE> 116
(g) Organization Costs
The initial organization costs of the Value Discovery Fund and
International Growth Fund have been paid by William Blair & Company L.L.C. (the
"Company"). 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 provides investment advisory and other administrative and
accounting services to the Funds under terms of the Management Agreement. The
Funds pay the Company a monthly fee determined as a specified percentage of
average daily net assets. The rates for the Growth Fund, International Growth
Fund, Income Fund and Ready Reserves Fund were modified effective May 1, 1996. A
summary of the annual rates expressed as a percentage of average daily net
assets, are as follows:
<TABLE>
<CAPTION>
PRIOR TO MAY 1, 1996 AFTER MAY 1, 1996
-------------------------------- --------------------------------
<S> <C> <C>
Growth Fund 0.625% of the first $75 million 0.75%
0.500%, in excess of $75 million
International Growth Fund 1.10% of the first $100 million 1.10% of the first $250 million
.95%, in excess of $100 million 1.00%, in excess of $250 million
Income Fund
Management Fee 0.25% of the first $100 million 0.25% of the first $250 million
0.20%, in excess of $150 million 0.20%, in excess of $250 million
0.15%, in excess of $250 million
5.00% of gross income 5.00% of gross income
Ready Reserves Fund 0.625% of the first $250 million 0.625% of the first $250 million
0.600%, of the next $250 million 0.600%, of the next $250 million
0.550%, of the next $500 million 0.575%, of the next $2 billion
0.500%, of the next $2 billion 0.550%, in excess of $2.5 billion
0.450%, of the next $2 billion
0.400%, in excess of $5 billion
</TABLE>
The advisory fee for the Value Discovery Fund is equal to 1.15% of average
daily net assets. The Company has voluntarily agreed to waive the advisory fee
and to absorb other operating expenses if total expenses exceed 1.50% of average
daily net assets.
Prior to September 30, 1996, the Company had a sub-advisory agreement with
Framlington Overseas Investment Management Ltd. (UK) for the International
Growth Fund whereby the Company paid a monthly fee at an annual rate equal to
0.40% of the first $100 million in average daily net assets and 0.275% of
average daily net assets in excess of $100 million. On October 1, 1996 the
Company began to directly manage the International Growth Fund.
The Funds paid fees of $64,000 to non-affiliated directors of the Funds for
the period ended December 31, 1996.
32
<PAGE> 117
(3) INVESTMENT TRANSACTIONS
Investment transactions, excluding money market instruments, for the period
ended December 31, 1996, are as follows:
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GROWTH INCOME
FUND FUND FUND
-------- ------------- -------
(all amounts in thousands)
<S> <C> <C> <C>
Purchases $269,794 $91,070 $89,218
Proceeds from sales and maturities 182,189 87,977 85,575
Gross unrealized appreciation (depreciation) at
December 31, 1996 is as follows:
Unrealized appreciation $147,017 $15,125 $ 1,603
Unrealized depreciation (9,120) (2,402) (1,068)
-------- ---------- -------
Net unrealized appreciation $137,897 $12,723 $ 535
======== ========== =======
</TABLE>
Cost of investments is the same for financial statement and Federal income
tax purposes except for International Growth Fund where the cost is $91,907.
33
<PAGE> 118
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
GROWTH FUND 1996 1995 1994 1993 1992
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490
Income from investment operations:
Net investment income (loss) (.010) .034 .027 .035 .045
Net realized and unrealized gain on investments 2.144 2.750 .581 1.389 .671
------- ------- ------- ------- -------
Total from investment operations 2.134 2.784 .608 1.424 .716
Less distributions from:
Net investment income .010 .030 .025 .035 .047
Net realized gain .544 .454 .713 1.049 .769
------- ------- ------- ------- -------
Total distributions .554 .484 .738 1.084 .816
------- ------- ------- ------- -------
Net asset value, end of period $ 13.480 $ 11.900 $ 9.600 $ 9.730 $ 9.390
======= ======= ======= ======= =======
Total return (%) 17.99 29.07 6.45 15.51 7.61
Ratios to average daily net assets (%):
Expenses .79 .65 .71 .78 .83
Net investment income (loss) (.08) .34 .32 .38 1.34
Supplemental data:
Net assets at end of period (in thousands) $501,774 $363,036 $217,560 $150,046 $111,082
Portfolio turnover rate (%) 43 32 46 55 27
Average commission rate $ .0621
<CAPTION>
VALUE DISCOVERY FUND 1996(A)
-------------------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.000
Income from investment operations:
Net investment income (loss) --
Net realized and unrealized gain on investments --
-------
Total from investment operations --
Less distributions from:
Net investment income --
Net realized gain --
-------
Total distributions --
Net asset value, end of period $10.000
=======
Total return (%) --
Ratios to average daily net assets (%):
Expenses --
Net investment income --
Supplemental data:
Net assets at end of period (in thousands) $ 2
Portfolio turnover rate (%) --
</TABLE>
- ---------------
(a) For the period December 23, 1996 (Commencement of Operations) to December
31, 1996.
34
<PAGE> 119
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------- DECEMBER 31,
INTERNATIONAL GROWTH FUND 1996 1995 1994 1993 1992(A)(B)
------------------------- -------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.120 $12.360 $13.180 $10.130 $10.000
Income from investment operations:
Net investment income (loss) .029 .105 .016 .008 (.011)
Net realized and unrealized gain (loss) on investments,
foreign currency and other assets and liabilities 1.299 .785 (.025) 3.401 .141
-------- -------- ------- ------- -------
Total from investment operations 1.328 .890 (.009) 3.409 .130
Less distributions from:
Net investment income .068(c) .130(c) .024 -- --
Net realized gain .430 -- .714 .359 --
Tax return of capital -- -- .073(d) -- --
-------- -------- ------- ------- -------
Total distributions .498 .130 .811 .359 --
-------- -------- ------- ------- -------
Net asset value, end of period $ 13.95 $13.120 $12.360 $13.180 $10.130
======== ======== ======== ======== =======
Total return (%) 10.20 7.22 (.04) 33.65 1.30
Ratios to average daily net assets (%):
Expenses(e) 1.44 1.48 1.51 1.71 1.88
Net investment income (loss)(e) .19 .87 .15 .11 (.56)
Supplemental data:
Net assets at end of period (in thousands) $105,148 $89,762 $70,403 $40,298 $10,767
Portfolio turnover rate (%) 89 77 40 83 5
Average commission rate $.0051
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
INCOME FUND 1996 1995 1994 1993 1992
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.570 $ 9.850 $ 10.580 $ 10.600 $ 10.770
Income from investment operations:
Net investment income .619 .646 .661 .651 .832
Net realized and unrealized gain (loss) on investments (.309) .732 (.741) .159 (.089)
-------- --------- -------- ------- -------
Total from investment operations .310 1.378 (.080) .810 .743
Less distributions:
Net investment income .610 .658 .646 .651 .827
Net realized gain -- -- .004 .179 .086
-------- --------- -------- ------- -------
Total distributions .610 .658 .650 .830 .913
-------- --------- -------- ------- -------
Net asset value, end of period $ 10.270 $ 10.570 $ 9.850 $ 10.580 $ 10.600
======== ========= ======== ======== ========
Total return (%) 3.07 14.37 (.74) 7.82 7.17
Ratios to average daily net assets (%):
Expenses .70 .68 .68 .70 .88
Net investment income 5.97 6.24 6.33 5.96 7.69
Supplemental data:
Net assets at end of period (in thousands) $150,006 $147,370 $143,790 $204,381 $136,896
Portfolio turnover rate (%) 66 54 63 114 47
</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 $.022 and $.061 in PFIC transactions which are treated as ordinary
income for Federal income tax purposes for 1996 and 1995, respectively.
(d) Includes $431 relating to a tax return of capital.
(e) 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 (loss) ratios would
have been (.25)% and (1.22)%, respectively.
35
<PAGE> 120
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
READY RESERVES FUND 1996 1995 1994 1993 1992
------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income .05 .05 .04 .03 .03
Net realized loss on investments -- -- (.01) -- --
-------- -------- -------- -------- --------
Total from investment operations .05 .05 .03 .03 .03
Less distributions:
Net investment income .05 .05 .04 .03 .03
-------- -------- -------- -------- --------
Total distributions .05 .05 .04 .03 .03
-------- -------- -------- -------- --------
Capital contribution -- -- .01 -- --
-------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return (%) 4.81 5.45 3.67(a) 2.64 3.32
Ratios to average daily net assets (%):
Expenses .71 .72 .71 .71 .71
Net investment income 4.78 5.30 3.61 2.61 3.27
Supplemental data:
Net assets at end of period (in thousands) $760,808 $703,993 $521,277 $477,268 $448,797
</TABLE>
- ---------------
(a) 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%.
36
<PAGE> 121
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, Value Discovery Fund, International Growth Fund,
Income Fund and Ready Reserves Fund) (collectively, the "Funds") as of December
31, 1996, 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,
except for the Value Discovery Fund for which the period is December 23, 1996
(Commencement of Operations) to December 31, 1996, and the financial highlights
for the periods indicated therein. 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, 1996, 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, 1996, and the results of their
operations, the changes in their net assets and the financial highlights for the
periods indicated therein, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 3, 1997
37
<PAGE> 122
SPECIAL MEETINGS OF SHAREHOLDERS
A Special Meeting of Shareholders was held on March 7, 1996. At the
meeting, shareholders of the Fund were asked to consider and act upon six
issues: the election of the seven nominees for director; the approval of an
amendment to the Fund's Articles of Incorporation authorizing the establishment
of separate classes of shares; approval of an amendment to the Fund's Articles
of Incorporation to permit the redemption of series of shares; ratification of
the selection of Ernst & Young LLP as the Fund's independent auditors; approval
of the new management agreement; and approval of an amendment to the Growth
Fund's investment objective. The results of all matters voted on by shareholders
of the Funds at the Special Meeting were as follows:
A. ELECTION OF THE SEVEN NOMINEES FOR DIRECTOR:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ----------
<S> <C> <C> <C>
Growth Fund Conrad Fischer 25,290,662 291,076
Vernon Armour 25,281,674 300,064
George Kelm 25,282,580 299,158
Ann P. McDermott 25,239,304 342,434
James M. McMullan 25,289,797 290,941
John B. Schwemm 25,288,928 292,810
W. James Truettner, Jr. 25,290,636 291,102
International Growth Fund Conrad Fischer 7,468,902 7,388
Vernon Armour 7,468,902 7,388
George Kelm 7,468,902 7,388
Ann P. McDermott 7,469,739 6,551
James M. McMullan 7,468,902 7,388
John B. Schwemm 7,468,902 7,388
W. James Truettner, Jr. 7,468,902 7,388
Income Fund Conrad Fischer 14,003,865 18,594
Vernon Armour 14,002,528 19,931
George Kelm 14,002,528 19,931
Ann P. McDermott 14,002,528 19,931
James M. McMullan 14,003,865 18,594
John B. Schwemm 14,002,528 19,931
W. James Truettner, Jr. 14,003,865 18,594
Ready Reserves Fund Conrad Fischer 697,546,412 13,663,682
Vernon Armour 697,546,412 13,663,682
George Kelm 697,546,412 13,663,682
Ann P. McDermott 697,546,412 13,663,682
James M. McMullan 697,546,412 13,663,682
John B. Schwemm 697,546,412 13,663,682
W. James Truettner, Jr. 697,546,412 13,663,682
</TABLE>
B. APPROVAL OF AN AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION AUTHORIZING
THE ESTABLISHMENT OF SEPARATE CLASSES OF SHARES:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
Growth Fund 16,414,473 7,774,224 1,392,442
International Growth Fund 6,089,506 1,359,521 27,263
Income Fund 13,266,777 651,876 103,805
Ready Reserves Fund 678,899,931 23,022,369 9,287,794
</TABLE>
38
<PAGE> 123
C. APPROVAL OF AN AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION TO PERMIT
THE REDEMPTION, BY BOARD ACTION, OF SERIES OF SHARES:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
Growth Fund 19,070,938 638,950 2,028,043
International Growth Fund 7,392,951 55,406 27,933
Income Fund 8,879,866 62,738 59,115
Ready Reserve Fund 396,287,229 19,043,815 8,847,982
</TABLE>
D. RATIFICATION OF THE SELECTION OF ERNST & YOUNG LLP AS THE FUND'S INDEPENDENT
AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1996:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
Growth Fund 25,241,034 149,453 191,251
International Growth Fund 7,469,995 837,686 5,458
Income Fund 13,969,024 16,354 37,081
Ready Reserves Fund 693,504,783 12,871,620 4,833,691
</TABLE>
E. APPROVAL OF THE NEW MANAGEMENT AGREEMENT:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
Growth Fund 17,620,139 3,680,445 437,348
International Growth Fund 7,316,082 105,284 54,924
Income Fund 8,764,699 136,333 100,687
Ready Reserves Fund 391,001,236 21,852,722 11,325,068
</TABLE>
F. APPROVAL OF AN AMENDMENT TO THE GROWTH FUND PORTFOLIO'S INVESTMENT OBJECTIVE:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
Growth Fund 20,154,604 1,256,369 326,958
</TABLE>
Another Special Meeting of Stockholders of the International Growth Fund of
William Blair Mutual Funds, Inc. was held on December 17, 1996. At the meeting,
shareholders were asked to consider and act upon one issue:
A. APPROVAL OR DISAPPROVAL OF AMENDMENTS TO REFORM THE PRIOR AND CURRENT
MANAGEMENT AGREEMENTS, RATIFYING PRIOR AND CURRENT PAYMENTS MADE UNDER THE
AGREEMENTS AS REFORMED:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----------- ---------- ----------
<S> <C> <C> <C>
International Growth Fund 6,465,834 11,541 6,223
</TABLE>
39
<PAGE> 124
BOARD OF DIRECTORS
CONRAD FISCHER, CHAIRMAN
Principal, William Blair & Company, L.L.C.
VERNON ARMOUR
Private Investor
GEORGE KELM
Retired Chairman of the Board, Sahara Coal Company, Inc.
JAMES M. MCMULLAN
Principal, William Blair & Company, L.L.C.
ANN P. MCDERMOTT
Director and Trustee
Profit and not-for-profit organizations
JOHN B. SCHWEMM
Retired Chairman and CEO, R.R. Donnelley & Sons Company
W. JAMES TRUETTNER, JR., SENIOR VICE PRESIDENT
Principal, William Blair & Company, L.L.C.
OFFICERS
Rocky Barber, President
Mark A. Fuller, III, Senior Vice President
George Greig, 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
Janet V. Gassmann, Secretary
INVESTMENT ADVISER
William Blair & Company, L.L.C.
TRANSFER AGENT
State Street Bank and Trust Company
P.O. Box 9104
Boston, MA 02266-9104
800-635-2840
(Massachusetts 800-635-2840)
WILLIAM BLAIR MUTUAL FUNDS, INC.
222 West Adams Street
Chicago, IL 60606
<PAGE> 125
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, Value Discovery 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, Value Discovery Fund,
International Growth Fund, Income Fund, and
Ready Reserves Fund) for the fiscal year
ended December 31, 1996 is incorporated by
reference into Part A.
William Blair Mutual Funds, Inc.
Growth Fund, Value Discovery Fund,
International Growth Fund, Income
Fund, and Ready Reserves Fund
Statements of Assets and Liabilities at
December 31, 1996
Statements of Operations for the Year
Ended December 31, 1996 (for
the period from December 23,
1996 (Commencement of
Operations) to December 31,
1996 for the Value Discovery
Fund)
Statements of Changes in Net Assets for
the Years Ended December 31,
1996 and 1995 (for the period
from December 23, 1996
(Commencement of Operations)
to December 31, 1996 for the
Value Discovery Fund)
C-1
<PAGE> 126
Notes to Financial Statements
Growth Fund, Value Discovery Fund,
International Growth Fund, Income
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 Portfolio of
Investments at December 31,
1996
(b) Exhibits
1a. Articles of Incorporation.(1)/
1b. Form of Amendment to Articles of
Incorporation.(1)/
2. By-laws, as amended.(1)/
3. Inapplicable
4. See items 1 and 2 above.
5a. Form of Management Agreement dated
May 1, 1996, as amended.
5b. Form of Management Agreement dated
December 23, 1996.(2)/
6. Underwriting Agreement.(1)/
7. Inapplicable.
8. Custodian Agreement.(1)/
9. Inapplicable.
10. Inapplicable.
11. Consent of Ernst & Young LLP.
12. Opinion and Consent of Vedder, Price, Kaufman
& Kammholz.*
13. Subscription Agreement.(1)/
14. Inapplicable.
15. Inapplicable.
16. Schedule for calculation of performance
quotation.(1)/
27. Financial Data Schedule.
_____________________
(1)/ Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1996.
(2)/ Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 5, 1996.
* To be filed.
ITEM 25. Persons Controlled by or under Common Control with Registrant
Inapplicable.
C-2
<PAGE> 127
ITEM 26. Number of Holders of Securities
Number of holders of securities as of December 31, 1996:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
Shares of common stock of:
Growth Fund 9,716
Value Discovery Fund 32
International Growth Fund 1,271
Income Fund 2,071
Ready Reserves Fund 20,673
</TABLE>
ITEM 27. Indemnification
Section 2-418 of the Maryland General Corporation Law provides
for indemnification of directors, officers, employees and agents.
Article XII of the Registrant's Articles of Incorporation
provides for indemnification of directors and 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
C-3
<PAGE> 128
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:
<TABLE>
<S> <C> <C>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
- -------------------------------------------------------------------------------------------------------------
James L. Barber, Jr., LaRabida Hospital Foundation Vice President of the Board
Principal 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
Edward McC. Blair, Sr., The Art Institute of Chicago Life Trustee
Senior Principal
College of The Atlantic Board of Trustees
Pullman Educational Foundation Life Trustee
Rush Presbyterian-St. Luke 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 Medical, Inc. Director
University of Chicago Hospital Trustee
Kurt Beuchel, Social Security Fund of the Member
Principal Principality of Liechtenstein Investment Advisory Board
</TABLE>
C-4
<PAGE> 129
<TABLE>
<S> <C> <C>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
- -----------------------------------------------------------------------------------------------------------
David G. Chandler, The Bruss Company Director
Principal
Encore Paper Company Director
Electronic Manufacturing Systems, Director
Inc.
Gibraltar Packaging Group Director
International Jensen Incorporated Director
Morton Grove Pharmaceuticals, Inc. Director
Predelivery Service Corporation Director
E. David Coolidge, III, Pittway Corporation Director
Chief Executive Officer
Conrad Fischer APM Limited Partnership General Partner
Chief Investment Officer
Chicago Child Care Trustee, Emeritus
William Blair Mutual Funds, Inc. Chairman and Director
Thomas A. FitzSimmons, Credit Acceptance Corporation Director
Principal
Mark A. Fuller, III, Fuller Investment Company President
Principal
Fulsen Howney Partners Partner
Three Rio Grande, LLC 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 Board of
Directors
Vulcan Materials Co. Director
Thomas L. Greene, Tyler School of Secretarial 25% Owner
Principal Science
James P. Hickey, Eagle Point Software Director
Principal
</TABLE>
C-5
<PAGE> 130
<TABLE>
<S> <C> <C>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
- -----------------------------------------------------------------------------------------------------------
Edgar D. Jannotta, Sr., AAR Corporation Director
Senior Principal
AON Corporation Director
Bandag, Incorporated Director
Commonwealth Edison Company Director
Molex, Incorporated Director
New York Stock Exchange, Inc. Director
Oil-Dri Corporation of America Director
Safety-Kleen Corporation Director
Sloan Valve Company Director
Unicom Corporation Director
Edgar D. Jannotta, Jr., Big Sky Joint Venture General Partner
Principal
The Bruss Company Director
CARA Corporation Director
Chicago Communities in Schools Director
Corporate Project Director
Resources, Inc.
Daisytek International Director
Electronic Manufacturing Services, Director
Inc.
Gibraltar Packaging Director
Greater Chicago Food Depository Co-Chairman Finance
GNWC Wire & Cable, Inc. Steering Committee
Midsouth Building Supplies Director
Towne Holdings, Inc. Director
Richard P. Kiphart, McCormick Theological Seminary Board of Directors
Principal
Robert Lanphier, IV, Ag. Med, Inc. (Private) Chairman
Principal
James McMullan, Security Industry Association Director
Principal
William Blair Mutual Funds, Inc. Director
</TABLE>
C-6
<PAGE> 131
<TABLE>
<S> <C> <C>
Name and Position with Name of Company and/or
William Blair & Company, L.L.C. Principal Business Capacity
- -----------------------------------------------------------------------------------------------------------
David W. Morrison, Bell Flavors & Fragrances, Inc. Director
Principal
Timothy M. Murray, AGI, Inc. Director
Principal
The Bruss Company Director
Daisytek International Director
GNWC Wire & Cable, Inc. Director
Mede America, Inc. Director
MRC Group, Inc. Director
Portland Food Products, Incorporated Director
Towne Holdings, Inc.
Director
Bentley M. Myer, Delnor Community Hospital Director
Principal Foundation
William Blair Mutual Funds, Inc. Senior Vice President
David G. O'Neill, Elder Care Information Network Director
Principal
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., Glenview Foundation Director
Principal
International Travel Services Director
Roberts Industries Director
William Blair Mutual Funds, Inc. Senior Vice President and
Director
</TABLE>
C-7
<PAGE> 132
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) 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 60606. Shareholder account information and original
shareholder correspondence is also available at the offices of the Transfer
Agent and Dividend Paying Agent, State Street Bank and Trust Company, P.O. Box
9104, Boston, Massachusetts 02205-9104.
ITEM 31. Management Services
Inapplicable.
ITEM 32. Undertakings
(a) Inapplicable.
(b) With respect to the Value Discovery Fund, Registrant
undertakes to file a post-effective amendment, using
financial statements which need not be certified,
within four to six months from the effective date of
registrant's 1933 Act registration statement.
(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-8
<PAGE> 133
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 11th day of
February, 1997.
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 11, 1997
----------------------------------
Vernon Armour
/s/Ann P. McDermott Director February 11, 1997
----------------------------------
Ann P. McDermott
/s/Conrad Fischer Director (Chairman of February 11, 1997
---------------------------------- the Board)
Conrad Fischer
/s/George Kelm Director February 11, 1997
----------------------------------
George Kelm
/s/James M. McMullan Director February 11, 1997
----------------------------------
James M. McMullan
/s/John B. Schwemm Director February 11, 1997
----------------------------------
John B. Schwemm
/s/W. James Truettner, Jr. Director February 11, 1997
----------------------------------
W. James Truettner, Jr.
/s/James L. Barber, Jr. President (Principal February 11, 1997
---------------------------------- Executive Officer)
James L. Barber, Jr.
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Terence M. Sullivan Treasurer (Principal February 11, 1997
---------------------------------- Financial Officer
Terence M. Sullivan Principal Accounting
Officer)
</TABLE>
<PAGE> 135
EXHIBIT INDEX
1a. Articles of Incorporation.(1)/
1b. Form of Amendment to Articles of Incorporation.(1)/
2. By-laws, as amended.(1)/
3. Inapplicable.
4. See items 1 and 2 above.
5a. Form of Management Agreement dated May 1, 1996, as amended.
5b. Form of Management Agreement dated December 23, 1996.(2)/
6. Underwriting Agreement.(1)/
7. Inapplicable.
8. Custodian Agreement.(1)/
9. Inapplicable.
10. Opinion and Consent of Vedder, Price, Kaufman & Kammholz.*
11. Consent of Ernst & Young LLP.
12. Inapplicable.
13. Subscription Agreement.(1)/
14. Inapplicable.
15. Inapplicable.
16. Schedule for calculation of performance quotation.(1)/
27. Financial Data Schedule.
(1)/ Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A as filed on or about
March 1, 1996.
(2)/ Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A as filed on or about
November 5, 1996.
* To be filed.
<PAGE> 1
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.
-2-
<PAGE> 3
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
-3-
<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
-4-
<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.
-5-
<PAGE> 6
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> 10
AMENDMENT TO WRITTEN MANAGEMENT AGREEMENT
THIS AMENDMENT, made as of this 17th day of December, 1996, amends the
written Management Agreement dated May 1, 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"). Terms
used herein shall have the same meaning as set forth in the Management
Agreement.
At a Special Meeting of Stockholders on December 17, 1996, the
stockholders approved amendments to reform the current and prior management
agreements which ratified payments made under the agreements as reformed.
The Fund and the Manager hereby agree that this amendment reforms the
written Management Agreement dated May 1, 1996 as to the International Growth
Fund (the "Portfolio") to conform said written Management Agreement to the
actual understanding and agreement of the parties.
The written Management Agreement did not properly exclude the
Portfolio from terms therein regarding the reimbursement of fees, contrary to
the actual understanding and agreement of the parties. Accordingly, the
parties agree that the first sentence of the second paragraph of Section 4 of
the written Management Agreement should have read, and is hereby amended and
reformed to read, as follows:
If expenses borne by the Fund for any Portfolio, except the
International Growth Fund, 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.
<PAGE> 1
EXHIBIT 99.B/11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" and to the use of our report dated
February 3, 1997 with respect to William Blair Mutual Funds, Inc. (comprised of
Growth Fund, Value Discovery Fund, International Growth Fund, Income Fund, and
Ready Reserved Fund) in the Registration Statement (Form N-1A) 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. 16 to the
Registration Statement under the Securities Act of 1933 (Registration No.
33-17463) and this Amendment No. 17 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 26, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> GROWTH FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 362,687
<INVESTMENTS-AT-VALUE> 500,584
<RECEIVABLES> 2,036
<ASSETS-OTHER> 23
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 502,643
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 869
<TOTAL-LIABILITIES> 869
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 363,200
<SHARES-COMMON-STOCK> 37,209
<SHARES-COMMON-PRIOR> 30,515
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 677
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 137,897
<NET-ASSETS> 501,774
<DIVIDEND-INCOME> 2,005
<INTEREST-INCOME> 1,167
<OTHER-INCOME> 0
<EXPENSES-NET> 3,508
<NET-INVESTMENT-INCOME> (336)
<REALIZED-GAINS-CURRENT> 27,804
<APPREC-INCREASE-CURRENT> 43,376
<NET-CHANGE-FROM-OPS> 70,844
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 343
<DISTRIBUTIONS-OF-GAINS> 19,503
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,563
<NUMBER-OF-SHARES-REDEEMED> 7,220
<SHARES-REINVESTED> 1,351
<NET-CHANGE-IN-ASSETS> 138,738
<ACCUMULATED-NII-PRIOR> 319
<ACCUMULATED-GAINS-PRIOR> 113
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,019
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,508
<AVERAGE-NET-ASSETS> 440,506
<PER-SHARE-NAV-BEGIN> 11,900
<PER-SHARE-NII> (.010)
<PER-SHARE-GAIN-APPREC> 2.144
<PER-SHARE-DIVIDEND> .010
<PER-SHARE-DISTRIBUTIONS> .544
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.480
<EXPENSE-RATIO> .79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> READY RESERVES FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 753,652
<INVESTMENTS-AT-VALUE> 753,652
<RECEIVABLES> 18,081
<ASSETS-OTHER> 1
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 771,734
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,926
<TOTAL-LIABILITIES> 10,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 760,912
<SHARES-COMMON-STOCK> 760,912
<SHARES-COMMON-PRIOR> 703,993
<ACCUMULATED-NII-CURRENT> 3
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (107)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 760,808
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 39,282
<OTHER-INCOME> 0
<EXPENSES-NET> 5,109
<NET-INVESTMENT-INCOME> 34,173
<REALIZED-GAINS-CURRENT> (107)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 34,066
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34,170
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,994,231
<NUMBER-OF-SHARES-REDEEMED> 2,970,683
<SHARES-REINVESTED> 33,371
<NET-CHANGE-IN-ASSETS> 56,919
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,283
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,109
<AVERAGE-NET-ASSETS> 703,036
<PER-SHARE-NAV-BEGIN> 1,000
<PER-SHARE-NII> .048
<PER-SHARE-GAIN-APPREC> .000
<PER-SHARE-DIVIDEND> .047
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 147,817
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> INTERNATIONAL GROWTH FUND
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> VALUE DISCOVERY FUND
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<S> <C>
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</TABLE>
