<PAGE> 1
Annual Report / December 31, 1997
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 an offering is made only by the
Prospectus.
William Blair Mutual Funds, Inc.
222 West Adams Street
Chicago, Illinois 60606
<PAGE> 2
----------------------------------------------------
OVERVIEW
----------------------------------------------------
----------------------------------------------------
PERFORMANCE HIGHLIGHTS
----------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- ------------- ------ --------
<S> <C> <C> <C> <C> <C>
Growth Fund ............. 20.1% 18.0% 29.1% 6.5% 15.5%
S&P 500 Index ......... 33.4 23.3 37.5 1.3 10.0
Value Discovery Fund .... 33.5 - - - -
Russell 2000 Index .... 22.4 16.5 28.4 (1.8) 18.9
International
Growth Fund ........... 8.4 10.2 7.2 (0.04) 33.6
MSCI AC WLD ex
US Index* ........... 2.0 6.7 9.9 6.6 34.9
Lipper International
Index ............... 7.3 14.4 10.0 (0.7) 39.2
Income Fund ............. 8.0 3.1 14.4 (0.7) 7.8
Lehman Intermediate
Govt./Corp. Index ... 7.9 4.1 15.3 (1.9) 8.8
Ready Reserves Fund ..... 5.0 4.8 5.5 3.7 2.6
S&P-rated AAA .........
Money Market Funds . 5.0 4.8 5.4 3.6 2.0
</TABLE>
----------------------------------------------------
INVESTOR INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------------------------------
<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) ......... $591 $30 $129 $160 $905
Portfolio Turnover
Rate (%) .............. 34 69 102 83 -
Expense Ratio ........... .84 1.50(a) 1.43 .71 .70
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) Without the waiver of expenses, the expense
ratio would have been 1.78%.
2 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 3
-----------------------------------------------------------
A LETTER FROM THE PRESIDENT
-----------------------------------------------------------
Dear Shareholders:
It has been another truly remarkable year for US equity
investors. I am generally pleased with the returns that
[Photo] William Blair Mutual Fund shareholders received this year.
On the conservative side, our income and money market funds
returned 8.0% and 5.0% respectively and exceeded their
benchmarks. The Fund group's highest returns were from the
Value Discovery and Growth Funds which returned 33.5% and
20.1%, respectively. The Value Discovery Fund's first year
was a smashing success and was in the top decile of
performance of all equity mutual funds. On the other hand,
outperformance of Value Discovery Fund and interest in
value investing meant that the Growth Fund had a sub par
year. In most cases a 20% absolute return is good, yet this
was below many of the broad market indices, as smaller
growth stocks lagged substantially for the third year in a
row.
The International Growth Fund performed very well compared
to its benchmark this year and we are very pleased with the
transition to the in-house management of George Grieg and
his team. Although much of the absolute return was given
back in a very difficult fourth quarter, such periods of
volatility will occur from time to time in these less
mature markets; but this short-term risk is exactly what
makes these investments so rewarding in the long-term.
After being up almost 20% through the first nine
months, the International Growth Fund still finished the
year with an 8.4% gain, well ahead of the international
indices and most other international funds. We remain
convinced that growth will return to Asia and Japan, and
provide the next leg of exceptional performance for these
investments and your Fund.
After two great years in 1995 and 1996, most people
(including us) expected a more subdued 1997. We were
pleasantly surprised as the year unfolded. Fortunately,
investor skepticism remains high going into 1998 so that a
very solid US economy may well ignore the consensus and
lead the way to moderate worldwide growth and another good
year for investors in the William Blair Mutual Funds.
/s/ Rocky Barber
-----------------------
Rocky Barber
December 31, 1997 Annual Report 3
<PAGE> 4
-----------------------------------------------------------
GROWTH FUND
-----------------------------------------------------------
-----------------------------------------------------------
PERFORMANCE HIGHLIGHTS
-----------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Growth Fund ........ 20.1% 18.0% 29.1% 6.5% 15.5%
S&P 500 Index ...... 33.4 23.3 37.5 1.3 10.0
Russell 2000 Index.. 22.4 16.5 28.4 (1.8) 18.9
-----------------------------------------------------------
INVESTOR INFORMATION
-----------------------------------------------------------
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions)..... $591 $502 $363 $218 $150
Portfolio Turnover
Rate (%) ......... 34 43 32 46 55
Expense Ratio (%)... .84 .79 .65 .71 .78
</TABLE>
-----------------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
-----------------------------------------------------------
Dear Shareholders:
The stock market had a strong year in 1997 and highlights
the remarkable strength of the domestic economy. Despite a
[Photo] sharp slowdown at year-end in the Far East region, the US
economy turned in a stunning performance. The current
economic expansion is now more than seven years old and the
third longest in the last 50 years. Surprisingly, inflation
actually declined in the face of this strong growth as
productivity gains offset much of higher labor costs.
Interest rates closed the year at their lowest levels in
decades and stock price to earnings multiples have been
sustained at a relatively high 20 times level. The
combination of rising corporate profits and low interest
rates again fueled a record third year of stock returns in
excess of 20%. The popular Standard & Poor's 500 Index
recorded an increase of over 30% and the Russell 2000
Index, which is populated with smaller stocks, gained about
20%. Smaller stocks remained in the background of the
market for most of the year, and growth oriented companies
generally lagged even more as investors favored cyclical
stocks benefiting from the robust economy. The Growth Fund
with its consistent exposure to a broad range of quality,
non-cyclical stocks returned 20.1% for the year.
Closer analysis of 1997 stock market returns reveals some
unsettling developments under the cover of another record
[Photo] year for the indices. The strongest gains were again
concentrated in the very large global companies, and just
33 of the largest stocks in the S&P 500 represented 50% of
the total return for the index. Returns for many of the
smaller and medium size companies trailed the mega cap
stocks substantially as investors' love affair with a few
household names persisted despite increasingly high
valuations. The narrowness of the market's advance remains
an issue of concern to us. While the very largest companies
have considerable resources and financial clout, their
growth prospects are more sensitive to broad economic
factors. To that point, global growth prospects for 1998
are far more uncertain as a result of the financial and
economic crisis that now grips many of the Asian countries.
The Asian region represents almost one third of the world's
Gross Domestic Product and has been enjoying an economic
boom for more than a decade. These economies have been
important contributors to the global growth rate. Plunging
stock markets and local currencies combined with rising
interest rates are certain to slow that growth considerably
and put pressure on markets worldwide. We have already been
reducing our exposure to stocks with more Asian business
risk, and hope to avoid much of the impact of that slowdown
if it is contained to that region.
4 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 5
Were it not for problems elsewhere around the world, the US
economic outlook would be very robust. Strength in
employment, industrial production and capital spending has
been evident throughout the year and earnings growth has
generally been better than expected. Corporate America has
learned well how to cope with intense global competition,
lack of pricing power and rising labor costs. However,
tough comparisons with last year and a case of the Asian
flu are likely to dampen the earnings outlook for 1998. We
believe that smaller and midsize companies with a domestic
focus offer greater protection from outside forces and more
attractive value in the market. We are accustomed to owning
stocks with significantly higher P/E ratios than that of
the general market due to their quality and consistency,
but that premium is much lower today than we have seen in
many years.
In conclusion, the winds of economic change are constantly
shifting and it appears that slower growth and greater
earnings risk is in the offing. Investors will respond by
searching for stocks with lower economic risk and
reasonable valuation. The Growth Fund portfolio of
companies with consistent growth prospects and lower
business volatility will be increasingly attractive to
investors and positioned to regain leadership in the
market. In the meantime, we remain patient and committed to
our growth stock investment philosophy. We firmly believe
that this approach should provide superior after-tax
returns for shareholders.
/s/ Rocky Barber /s/ Mark A. Fuller, III
----------------------- -----------------------
Rocky Barber Mark A. Fuller, III
-----------------------------------------------------------
GROWTH FUND
-----------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME
DIVIDENDS
<TABLE>
<CAPTION>
1/88 12/88 12/89 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WB Growth Fund $10,000 10,700 14,000 13,700 19,800 21,300 24,600 26,200 33,800 39,800 47,800
S&P 500 Index $10,000 11,700 15,400 14,900 19,400 21,100 23,000 23,300 32,100 39,400 52,600
</TABLE>
December 31, 1997 Annual Report 5
<PAGE> 6
................................................................................
GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
COMMON STOCKS
<C> <S> <C>
APPLIED TECHNOLOGY--20.8%
537 *Acxiom Corporation.................... $ 10,335
300 *Airtouch Communications, Inc.......... 12,469
164 *American Management Systems........... 3,199
427 Automatic Data Processing, Inc. ...... 26,226
368 *B A Merchant Services, Inc. .......... 6,541
122 *Catalina Marketing Corporation........ 5,643
220 Cognizant Corporation................. 9,804
500 First Data Corporation................ 14,625
42 *Gartner Group, Inc.................... 1,576
307 *NFO Worldwide, Inc.................... 6,419
82 Reuters Holdings plc (ADR)............ 5,408
174 Shared Medical Systems Corporation.... 11,498
236 *Sterling Commerce, Inc................ 9,067
--------
122,810
--------
HEALTHCARE-RELATED SPECIALTIES--18.2%
268 *Amgen, Inc............................ 14,511
210 *Boston Scientific Corporation......... 9,634
273 *Covance, Inc.......................... 5,432
206 Dentsply International, Inc........... 6,271
244 *Elan Corporation plc (ADR)............ 12,480
215 *Health Care & Retirement
Corporation........................... 8,643
374 *Healthsouth Rehabilitation
Corporation........................... 10,381
220 Medtronic, Inc ....................... 11,509
314 Omnicare, Inc......................... 9,738
164 *Quintiles Transnational Corporation... 6,255
250 SmithKline Beecham Group plc (ADR).... 12,859
--------
107,713
--------
TECHNOLOGY--12.9%
179 *Aspen Technology, Inc. ............... 6,131
320 *Electronic Arts, Inc. ................ 12,100
100 Intel Corporation..................... 7,025
150 Linear Technology Corporation......... 8,644
110 *Microsoft Corporation................. 14,217
147 Molex, Inc............................ 4,707
238 Molex, Inc., Class "A"................ 6,842
142 *Oracle Corporation.................... 3,180
138 *Xilinx, Inc........................... 4,827
280 *Zebra Technologies Corporation, Class
"A"................................... 8,325
--------
75,998
--------
CONSUMER RETAIL--11.3%
170 CVS Corporation....................... 10,891
200 Home Depot, Inc. ..................... 11,793
150 Lowes Companies, Inc.................. 7,153
236 *Staples, Inc.......................... 6,541
72 *Starbucks Corporation................. 2,744
600 *Viking Office Products, Inc........... 13,087
211 Walgreen Company...................... 6,623
158 *Whole Foods Market, Inc............... 8,087
--------
66,919
--------
FINANCIAL SERVICES--10.6%
120 Associates First Capital Corp., Class
"A"................................... 8,535
446 *Credit Acceptance Corporation......... 3,460
200 Federal Home Loan Mortgage
Corporation........................... 8,387
85 Household International, Inc.......... 10,843
375 MBNA Corporation...................... 10,242
200 State Street Boston Corporation....... 11,637
225 Travelers/Aetna Property and Casualty
Corp., Class "A"...................... 9,900
--------
63,004
--------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
COMMON STOCKS (CONTINUED)
<C> <S> <C>
BUSINESS SERVICES--7.9%
170 *C K S Group, Inc. .................... $ 2,405
179 Cintas Corporation.................... 6,985
316 *Heartland Express, Inc. .............. 8,493
203 *Knight Transportation, Inc. .......... 5,624
188 *Robert Half International, Inc. ...... 7,513
111 *Rural/Metro Corporation............... 3,698
303 Wallace Computer Services, Inc........ 11,795
--------
46,513
--------
DISTRIBUTION--5.7%
195 *Black Box Corporation................. 6,887
100 Cardinal Health, Inc.................. 7,512
298 *JP Foodservice, Inc................... 11,028
201 *MSC Industrial Direct Co., Class
"A"................................... 8,504
--------
33,931
--------
INDUSTRIAL PRODUCTS--4.9%
142 Danaher Corporation................... 8,965
245 M.A. Hanna Company.................... 6,194
299 Minerals Technologies, Inc............ 13,609
--------
28,768
--------
SPECIALTY CONSUMER SERVICES AND PRODUCTS--1.2%
200 *Cendant Corporation................... 6,875
--------
TOTAL COMMON STOCKS--93.5%
(cost $343,603)................................... 552,531
--------
CONVERTIBLE BOND--.7%
$ 5,000 The Sports Authority, Inc.,
5.25% Subordinated Debentures,
due 9/15/01 (cost $4,563)............ 4,325
--------
SHORT-TERM INVESTMENTS
10,895 Associates Corp. of North America
Demand Note, 5.49%, due 1/2/98....... 10,895
8,036 Ford Motor Credit Corporation,
5.73%-5.80%, due 1/16/98-2/6/98...... 8,036
3,030 General Electric Capital Corporation,
5.50%, due 1/2/98.................... 3,030
10,112 General Motors Acceptance Corporation,
5.51%-5.83%, due 1/2/98-1/30/98...... 10,112
1,197 Household Finance Corporation,
5.81%, due 1/23/98................... 1,197
--------
TOTAL SHORT-TERM INVESTMENTS--5.6%
(cost $33,270).................................... 33,270
--------
TOTAL INVESTMENTS--99.8% (cost $381,436)............ 590,126
CASH AND OTHER ASSETS, LESS LIABILITIES--.2%........ 1,227
--------
NET ASSETS--100.0%.................................. $591,353
========
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
6 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 7
-----------------------------------------------------------
VALUE DISCOVERY FUND
-----------------------------------------------------------
-----------------------------------------------------------
PERFORMANCE HIGHLIGHTS
-----------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
1997 1996(a)
----------- ---------------
<S> <S> <S>
Value Discovery
Fund ............ 33.5% -
Russell 2000
Index ......... 22.4 16.5
-----------------------------------------------------------
INVESTOR INFORMATION
-----------------------------------------------------------
1997(b) 1996
----------- ---------------
Ending Net Assets
(in millions).... $30 $2
Portfolio Turnover
Rate (%) ........ 69 -
Expense Ratio (%).. 1.50(b) -
</TABLE>
-----------------------------------------------------------
(a) Commencement of Operations - December 23, 1996.
(b) Without the waiver of expenses, the expense ratio would
have been 1.78%.
-----------------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
-----------------------------------------------------------
Dear Shareholders:
[PHOTO] We are pleased to report to you that the Value Discovery
[Glen Kleczka] Fund returned 33.5% to shareholders in 1997. This compares
favorably to a variety of benchmarks, including the Russell
2000 Index (up 22.4%) and the Lipper Small Company Index
(up 15%). We are also pleased to have outperformed the S&P
500 (up 33.4%). According to the Wall Street Journal,
Lipper Analytical Services indicated that only 10.3% of
U.S. stock funds beat the S&P 500 in 1997. As we have
mentioned previously, the Russell 2000 Index is our primary
performance benchmark, as it is composed entirely of small
companies while the Lipper Small Company Index is a
performance composite of mutual funds that focus on small
company investments. Our goal is to consistently outperform
the Russell 2000 Index. As the above data indicate, this
goal was clearly achieved this year. However, while
outperformance of the magnitude achieved in 1997 is
possible in future years, we feel it is important that
expectations remain reasonable. Good results need to be
achieved over the course of a marathon not a sprint and,
while we like our stride, we have only completed one lap.
[PHOTO] 1997 provided a powerful one-two combination for
[David Mitchell] shareholders - we made a healthy return and we get to keep
most of it. One of our investment principals is to invest
in companies run by owners, not agents. We also practice
what we preach - your Fund's managers are Fund shareholders
as well. Given this, you will not be surprised to know that
we keep an especially keen eye on taxes. As a result, the
Fund's after-tax return was 32.0% or 95.6% of its pretax
return. This is especially rewarding given that, due to the
fund having just achieved its one-year anniversary, all
gains incurred to date have been short-term. Remember that
it's not what you make, it's what you keep.
While not the case for your Fund, small capitalization
stocks generally underperformed their larger brethren for
the fourth consecutive year. While there are many potential
explanations, the latest to make the rounds is the
"population explosion". The Wall Street Journal reports
that from the fall of 1991 to the fall of 1997, the number
of publicly traded companies increased 87%. Six years ago,
70% of stocks in
December 31, 1997 Annual Report 7
<PAGE> 8
the Russell 2000 Index had five or more years of
[PHOTO] performance history. As of September, this number had
[Cappy Price] fallen to 56%. Strong markets increase capital availability
and many new companies find their way into the public realm
during a bull market - some good, some not so good. How
does this affect us as managers? The key for us is setting
our own agenda and not being distracted by someone else's.
The critical issue in achieving performance goals remains
consistent disciplined application of the investment
process. We continue to believe that if we buy quality
companies selling at attractive valuations, we will
generate attractive returns for our shareholders. We will
continue to emphasize companies exhibiting the following
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, we will identify investments
with catalysts that can result in earnings acceleration
through faster growth or improving profitability.
Due to some late December inflows, we ended the year with
10% cash. Net assets totaled $30.4 million and were
invested across 51 securities. The projected earnings
growth rate of the Fund is 19% versus 9% for the Russell
2000 Index. Despite this, the Fund is valued at a
price-to-earnings ratio (1998 projected) of 14 versus 25
for the Russell 2000 Index.
The Fund is currently invested in stocks of small companies
along the following lines: microcap stocks (less than $300
million in market cap) comprised 54%; small cap ($300
million to $1.5 billion in market cap) 31%; midcap (greater
than $1.5 billion) 5%; and cash 10%. The weighted average
market capitalization is $398 million.
/s/ Glen Kleczka /s/ David Mitchell /s/ Cappy Price
------------------- ------------------ ------------------
Glen Kleczka David Mitchell Cappy Price
-----------------------------------------------------------
VALUE DISCOVERY FUND
-----------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME
DIVIDENDS
<TABLE>
<CAPTION>
12/96 1/97 3/97 6/97 9/97 12/97
<S> <C> <C> <C> <C> <C> <C>
Value Discovery Fund $10,000 10,200 9,700 11,100 14,000 13,300
Russell 2000 Index $10,000 10,200 9,500 10,000 12,700 12,200
</TABLE>
8 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 9
................................................................................
VALUE DISCOVERY FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
SHARES VALUE
- ----------------------------------------------------- -------
COMMON STOCKS
<C> <S> <C>
FINANCIAL SERVICES--26.6%
34 *ARM Financial Group, Inc. .............. $ 897
13 Amerus Life Holdings, Inc., Class "A".... 476
20 CCA Prison Realty Trust.................. 875
17 Excel Realty Trust, Inc. ................ 532
Franklin Bank National Association
17 Southfield............................... 306
37 *Inspire Insurance Solutions, Inc. ...... 764
18 *Jackson Hewitt, Inc. ................... 1,244
54 *Matrix Capital Corporation.............. 817
19 SCPIE Holdings, Inc. .................... 564
3 Southwest Bancorp, Inc. ................. 71
17 Statewide Financial Corporation.......... 408
33 *Summit Holding Southeast, Inc. ......... 738
30 Winston Hotels, Inc. .................... 390
-------
8,082
-------
CONSUMER DISCRETIONARY--14.6%
42 Arctic Cat, Inc. ........................ 407
40 Cadmus Communications Corporation........ 826
142 *Farah, Inc. ............................ 790
72 *Homebase, Inc. ......................... 567
27 M/A/R/C, Inc. ........................... 491
16 *Michaels Stores, Inc. .................. 468
72 *Shoe Carnival, Inc. .................... 585
47 *Sunglass Hut International, Inc. ....... 297
-------
4,431
-------
HEALTHCARE-RELATED SPECIALTIES--11.7%
15 *Ameripath, Inc. ........................ 255
16 *ClinTrials Research, Inc. .............. 126
110 *Gensia Sicor, Inc. ..................... 639
142 *IBAH, Inc. ............................. 534
30 *Martek Biosciences Company, Inc. ....... 250
12 *Maxim Medical, Inc. .................... 270
34 *Nitinol Medical Technologies, Inc. ..... 270
42 *Response Oncology, Inc. ................ 350
43 *Safeguard Health Enterprises, Inc....... 585
8 *Sierra Health Services, Inc. ........... 272
-------
3,551
-------
MATERIALS--10.9%
13 Birmingham Steel Corporation............. 202
78 Easco, Inc. ............................. 1,034
20 *Emcor Group, Inc. ...................... 414
12 *N C I Building Systems, Inc. ........... 440
49 *Novamerica Steel, Inc. ................. 570
13 *USG Corporation......................... 661
-------
3,321
-------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
SHARES VALUE
- ----------------------------------------------------- -------
COMMON STOCKS (CONTINUED)
<C> <S> <C>
PRODUCER DURABLES--7.1%
11 *Doncasters PLC (ADR).................... $ 237
50 LSI Industries, Inc. .................... 911
39 Omniquip International, Inc.............. 776
Penn Engineering & Manufacturing
10 Corp. ................................... 228
-------
2,152
-------
UTILITIES--5.1%
31 Illinova Corporation..................... 822
22 T N P Enterprises, Inc. ................. 725
-------
1,547
-------
AUTOS AND TRANSPORTATION--5.1%
30 *International Total Services, Inc. ..... 476
19 *Landstar System, Inc. .................. 506
35 *Stoneridge, Inc. ....................... 560
-------
1,542
-------
ENERGY--3.8%
20 *Cal Dive International, Inc. ........... 490
35 *Unifab International, Inc. ............. 670
-------
1,160
-------
TECHNOLOGY--3.7%
20 *Digital Lightwave, Inc. ................ 262
89 *Overland Data, Inc. .................... 488
40 *Trident Microsystems, Inc. ............. 367
-------
1,117
-------
TOTAL COMMON STOCKS--88.6%
(cost $21,729)..................................... 26,903
-------
SHORT-TERM INVESTMENTS--4.9%
$1,484 Investors Bank & Trust Company
Repurchase Agreement, 5.90%, dated
12/31/97, Collateralized by U.S.
Government Agency Security with market value of
$1,558 with 1/2/98 repurchase date (cost
$1,484).................................. 1,484
TOTAL INVESTMENTS--93.5%
(cost $23,213)..................................... 28,387
CASH AND OTHER ASSETS, LESS LIABILITIES--6.5%........ 1,967
-------
NET ASSETS--100.0%................................... $30,354
=======
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
December 31, 1997 Annual Report 9
<PAGE> 10
-----------------------------------------------------------
INTERNATIONAL GROWTH FUND
-----------------------------------------------------------
-----------------------------------------------------------
PERFORMANCE HIGHLIGHTS
-----------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
International Growth
Fund ............. 8.4% 10.2% 7.2% (0.0)% 33.6%
MCI AC WLD ex
US Index* ...... 2.0 6.7 9.9 6.6 34.9
Lipper International
Index .......... 7.3 14.4 10.0 (0.7) 39.2
-----------------------------------------------------------
INVESTOR INFORMATION
-----------------------------------------------------------
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions) .... $129 $105 $90 $70 $40
Portfolio Turnover
Rate (%) ......... 102 89 77 40 83
Expense Ratio (%)... 1.43 1.44 1.48 1.51 1.71
</TABLE>
-----------------------------------------------------------
* Morgan Stanley Capital International All Country World
Free except US Index.
-----------------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
-----------------------------------------------------------
Dear Shareholders:
[PHOTO]
[W. George Greig] 1997 was an eventful and tumultuous year for international
markets and economies. The second half of the year was
marked by two historical milestones: the Asian financial
market crisis and the approach of European economic and
monetary union. Both will impact the way we view global
capital flows and growth prospects well into the next
century.
What began early in the year in Thailand, with nothing more
than an uncomfortable current account deficit and a real
estate lending problem, mutated and evolved into a crisis
on a grand scale: systemic financial failures; massive IMF
assistance; declines of 80-90% in the dollar value of many
assets; the prospect of a severe recession; and the rise of
deep-seated doubts about the viability of Asian business
practice, political and bureaucratic conduct, and
fundamental economic values. Asian markets lost over a
quarter of their value in 1997, and in addition lost most
of their collective reputation as the world's most
attractive investment destination.
The undertaking of European monetary union, on the other
hand, remains up to now a story of historical skepticism
being pushed back by the sheer political will of the
participants. In spite of a divisive election in France, a
near-collapse of the Italian government and continuous
political guerrilla warfare in Bonn, markets were by
year-end discounting a high probability of success in
implementing the first stages of EMU in 1998 and 1999. The
prospect of operating in a single currency zone has
irreversibly changed the behavior of both governments and
corporations: both have been forced into becoming more
economically responsible to their respective
constituencies. Partially as a result, European markets
rose by nearly 25% in 1997, as interest rates converged and
declined, and investors began to discount improved
corporate profitability and ongoing restructuring.
10 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 11
It has now become an Asian cliche that the Chinese word for
'crisis' is formed from the characters for 'danger' and
'opportunity.' How a company responds to opportunity and
danger determines how it is positioned for the next crisis.
The lesson for corporate managements and for equity
investors is that improving the productivity of resources
is the key natural selection mechanism in economic
evolution. Our mission continues to be to invest in
companies that meet this critical growth criterion.
/s/ W. George Greig
------------------------
W. George Greig
-----------------------------------------------------------
INTERNATIONAL GROWTH FUND
-----------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME
DIVIDENDS
<TABLE>
<CAPTION>
10/92 12/92 6/93 12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International
Growth Fund $10,000 10,100 11,400 13,500 14,000 13,500 13,300 14,500 15,700 16,000 18,500 17,300
MSCI All Country
World ex-US $10,000 9,700 11,900 13,100 11,400 13,900 14,300 15,300 16,100 16,400 18,400 16,700
Lipper
International
Index $10,000 9,900 11,300 13,700 13,700 13,600 14,000 15,000 16,300 17,200 19,600 18,400
</TABLE>
December 31, 1997 Annual Report 11
<PAGE> 12
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES VALUE
- --------------------------------------------------- --------
COMMON STOCKS--EUROPE--29.4%
<C> <S> <C>
AUSTRIA--1.2%
10 VA Technologie AG (Industrial
engineering)......................... $ 1,518
--------
BELGIUM--0.5%
3.5 Barco Industries NV (Visualisation
systems)............................. 642
--------
DENMARK--0.3%
7.2 Carli Gry International (Apparel
design).............................. 405
--------
FINLAND--2.3%
5 Fiskars AB - A (Homewares producer).... 541
20 Nokia AB - A (Telecommunications
equipment)........................... 1,399
9 TT Tieto OY - B (Consultants).......... 1,013
--------
2,953
--------
FRANCE--4.8%
35 AXA Company (Multi-line insurance)..... 2,708
5 Le Carbone Lorraine (Specialty
chemicals)........................... 1,562
5 Cie Fen de Geophysique (Geophysical
services)............................ 640
3 Promodes (Food distribution)........... 1,245
--------
6,155
--------
GERMANY--1.9%
9 SGL Carbon AG (Carbide/graphite
specialties)......................... 1,161
30 SKW Trostberg AG (Chemical supplier)... 952
22.5 Leica Camera AG (Cameras).............. 369
--------
2,482
--------
IRELAND--0.9%
100 CRH PLC (Building materials)........... 1,160
--------
ITALY--4.0%
500 Credito Emiliano (Investment
banking)............................. 1,135
100 Cararro SpA (Auto components
producer)............................ 499
35 Gewiss SpA (Electrical
systems/devices)..................... 663
150 Gildemeister Italiana (Industrial
machinery)........................... 511
15 Ericsson SpA (Telecommunication
equipment)........................... 656
100 Pagnossin SpA (Ceramics)............... 451
250 Mediaset SpA (Televised media)......... 1,235
--------
5,150
--------
NETHERLANDS--2.6%
40 Computer Management Group
(IT services)........................ 998
10 Draka Holding (Cable & wire
producer)............................ 433
8 Heineken NV (Alcoholic beverages)...... 1,394
25 *Brunel International (Employment
agency).............................. 478
--------
3,303
--------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES VALUE
- --------------------------------------------------- --------
COMMON STOCKS--EUROPE--(CONTINUED)
<C> <S> <C>
NORWAY--1.3%
85 Saga Petroleum ASA (Integrated oil).... $ 1,289
33 *Tandberg Television ASA (Digital
broadcast equipment)................. 380
--------
1,669
--------
SPAIN--1.3%
24 Cortefiel SA (Apparel design and
sales)............................... 481
15 Sol Melia SA (Hotel management)........ 599
10 Campofrio Alimentacion SA (Meat
products manufacture and sales)...... 546
--------
1,626
--------
SWEDEN--1.7%
25 Ericsson AB - B (Telecommunication
equipment)........................... 940
15 Hoganas AB - B (Metallic powder)....... 459
20 *Prosolvia AB - B (Computer
software)............................ 799
--------
2,198
--------
SWITZERLAND--6.6%
2 Belimo Automation AG (Ventilation
controls)............................ 685
17 Credit Suisse Group (Investment
banking)............................. 2,631
2.3 Holderbank Finan Glarus - B (Building
materials)........................... 1,837
2 Nestle AG (Food products).............. 2,998
.2 Disetronic (Medical equipment)......... 438
--------
8,589
--------
COMMON STOCKS--UNITED KINGDOM--17.6%
106 Abott Mead Vickers PLC (Advertising and
marketing services).................. 566
400 *Billiton PLC (Non-energy mining)...... 1,025
166 Capita Group PLC (Commercial
services)............................ 1,012
110 Compass Group (Food services).......... 1,354
70 DFS Furniture Company (Furniture
manufacturer/retailer)............... 598
100 Emap PLC (Communications/media)........ 1,489
250 *Firstbus PLC (Transportation
services)............................ 902
45 Games Workshop Group PLC (Toys)........ 433
150 Harvey Nichols Group PLC
(Retail/department stores)........... 468
240 Hays PLC (Distribution/personnel
services)............................ 3,196
125 Next PLC (Retail apparel).............. 1,427
50 JBA Holdings (Business software and
support)............................. 850
150 Johnson Matthey (Specialty
metallurgical products).............. 1,343
200 Kwik-Fit Holdings PLC
(Retail/automotive).................. 1,155
77 Misys PLC (Computer systems)........... 2,332
424 Rolls Royce PLC (Engineering).......... 1,637
100 Siebe PLC (Electronic control
devices)............................. 1,963
150 WH Smith Group PLC
(Retail/specialty)................... 959
--------
22,709
--------
</TABLE>
12 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 13
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES VALUE
- --------------------------------------------------- --------
<C> <S> <C>
COMMON STOCKS--CANADA--6.1%
45 *ATI Technologies (Computer
accessories)......................... $ 1,040
80 *Berkely Petroleum Corporation (Oil and
gas)................................. 833
30 *Biochem Pharma Inc - ADR (Preventative
pharmaceuticals)..................... 628
100 *Biomira (Cancer diagnostics and
therapeutics)........................ 217
11 *Certicom Corporation
(Cryptographics)..................... 330
20 Four Seasons Hotels Inc. - ADR
(Hotels)............................. 633
25 *IMAX Corporation (Cinema equipment and
operations).......................... 547
15 Mgna International Inc (Automotive
components producer)................. 939
30 Newcourt Credit Group (Financial
services)............................ 1,004
10 Newcourt Credit Group - Rights
(Financial services)................. 331
10 Northern Telecom (Telecommunications
equipment)........................... 887
80 *Synsorb Biotech (Pharmaceuticals)..... 430
--------
7,819
--------
COMMON STOCKS--JAPAN--19.7%
25 Aderans Company, Ltd (Wigs)............ 604
35 ARRK Corporation (Testing products).... 510
9 Bellsystem24 Incorporated
(Telemarketing)...................... 1,180
51 Credit Saison (Credit cards)........... 1,250
30 Ito-En Ltd (Soft drinks)............... 794
8 Keyence Corporation (Electronics)...... 1,140
485 LTCB (Long Term Credit Bank)
(Banking)............................ 777
50 Meiwa Estate Corporation, Ltd
(Residential real estate)............ 375
20 Matsumotokiyoshi (Supermarket
operators)........................... 767
20 Meitec (Software engineering).......... 563
40 NIC Corporation (Medical clerical
business)............................ 223
26 NAC Company, Ltd (Commercial
services)............................ 177
15 Nichii Gakkan Company (Medical record
keeping)............................. 518
16 Nichiei Company, Ltd (Commercial
finance)............................. 1,706
25 Nintendo Company, Ltd (Video games).... 2,454
120 Minebea Company, Ltd (Miniature
bearings)............................ 1,289
150 Nomura Securities Company, Ltd
(Investment banking)................. 2,002
40 Nissei ASB Machine Company, Ltd
(Molding machinery).................. 302
18 Noritsu Koki Company, Ltd (Photo
processing equipment)................ 445
20 Oiles Corporation (Machinery).......... 474
20 People Company, Ltd (Fitness clubs).... 307
50 Ralse Company, Ltd (Supermarket
chain)............................... 546
15 Ryohin Keikaku Company, Ltd
(Retail/specialty)................... 989
28 Softbank Corporation (Software
distribution)........................ 722
14 Secom Company, Ltd (Services).......... 896
3 SHOHKOH Fund (Commercial finance)...... 916
36 Sony Corporation (Consumer
electronics)......................... 3,203
40 Yamada Denki (Retailer/electronics).... 310
--------
25,439
--------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES VALUE
- --------------------------------------------------- --------
<C> <S> <C>
COMMON STOCKS--ASIA--2.3%
AUSTRALIA--0.7%
485 Hoyt's Cinemas Group (Cinemas)......... $ 853
--------
HONG KONG--0.5%
500 Li & Fung Limited (Investment holding
company)............................. 700
--------
NEW ZEALAND--0.4%
200 Warehouse Group Limited (Retail)....... 534
--------
SINGAPORE--0.7%
350 Avimo Group Limited (Precision
optics).............................. 441
20 *Creative Technology (Computer
multimedia).......................... 407
--------
848
--------
COMMON STOCKS--EMERGING ASIA--2.8%
CHINA--2.1%
600 *First Tractor Co - H (Agricultural
equipment manufacturer).............. 362
1,130 Founder (Hong Kong) Ltd (Publishing
software)............................ 700
400 GuangDong Kelon Elec - H
(Refrigerators)...................... 410
500 Guangnan Holdings Ltd (Foodstuffs)..... 410
400 Shenzhen Fangda - B (Building
materials)........................... 459
100 Shanghai Industrial Holdings (Consumer
non-durables)........................ 372
--------
2,713
--------
INDIA--0.5%
40 Carrier Aircon Ltd (Air
conditioners)........................ 221
25 *MTNL - GDR (Telecommunication
services)............................ 386
--------
607
--------
INDONESIA--0.2%
1,500 PT Dynaplast (Plastic packaging and
sheets).............................. 123
1,000 *PT Putra Surya Multidana
(Financing).......................... 95
--------
218
--------
COMMON STOCKS--EMERGING EUROPE, MIDEAST,
SOUTH AFRICA--5.4%
HUNGARY--1.2%
6 Gedeon Richter RT (Pharmaceuticals).... 681
8 Pannonplast Plastics (PVC
manufacturing)....................... 421
6 Pick Szeged (Meat processor)........... 478
--------
1,580
--------
ISRAEL--0.3%
10 Tadiran Ltd - ADR (Telecommunication
equipment)........................... 354
--------
POLAND--0.6%
14.4 Agros Holdings - C (Food).............. 301
44 Elektrim SA (Telecommunication/wire
manufacturer)........................ 429
--------
730
--------
</TABLE>
December 31, 1997 Annual Report 13
<PAGE> 14
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES VALUE
- --------------------------------------------------- --------
COMMON STOCKS--EMERGING EUROPE, MIDEAST,
SOUTH AFRICA--5.4%--(CONTINUED)
<C> <S> <C>
RUSSIA--0.4%
2 *Gaz Auto Plant (Auto manufacturer).... $ 212
10 *Vimpel Communications - ADR
(Telecommunication service).......... 357
--------
569
--------
SOUTH AFRICA--2.9%
100 *Amalgamated Bank of South Africa
(Banking)............................ 575
75 Ellerine Holdings Ltd
(Retail/specialty)................... 484
200 GENCOR Ltd (Mining).................... 331
47 Liberty Life Association of Africa
(Life/health insurance).............. 1,207
645 MACMED Healthcare Ltd (Medical products
and equipment)....................... 422
811 Metro Cash & Carry (Food
wholesale/retail).................... 708
--------
3,727
--------
COMMON STOCKS--LATIN AMERICA--5.5%
ARGENTINA--1.2%
20 Banco de Galicia - ADR (Banking)....... 515
25 Import Export Patagonia - B (Retail)... 450
17 IRSA - GDR (Real estate)............... 627
--------
1,592
--------
BRAZIL--0.2%
100 *Latas de Aluminio - ON (Aluminum
cans)................................ 227
--------
CHILE--0.6%
17 Laboratorio Chile S.A. - ADR
(Generic drugs)...................... 381
15 Vina Concha y Toro - ADR (Winery)...... 375
--------
756
--------
MEXICO--3.1%
130 *Acer Computec Latino America (Personal
computers)........................... 354
70 Corporacion Indusrial San Luis (Auto
parts)............................... 568
400 Grupo Financiero Banorte - B
(Banking)............................ 699
325 Grupo Elektra S.A.
(Retail/specialty)................... 568
175 Soriana S.A. - B (Retail/specialty).... 774
45 T V Azteca - ADR (Televised media)..... 1,015
--------
3,978
--------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------- --------
SHARES OR PRINCIPAL AMOUNT VALUE
- --------------------------------------------------- --------
COMMON STOCKS--LATIN AMERICA--(CONTINUED)
<C> <S> <C>
PERU--0.4%
253 Telefonica de Peru
(Telecommunication).................. $ 564
--------
TOTAL COMMON STOCKS--88.8% (cost $109,012)......... 114,367
--------
PREFERRED STOCKS
BRAZIL--2.1%
680 Cia Cervejaria Brahma - PN
(Beverages).......................... 457
9,700 Duratex - PN (Wood products
manufacturer)........................ 382
35,600 EMBRAER - PN (Aircraft manufacturer)... 543
3,617 TELESP - PN (Telecommunication)........ 963
17,100 Votorantim Celulose Papel - PN
(Paper products)..................... 329
--------
2,674
--------
GERMANY--1.2%
12 Mobel Walther AG (Furniture stores).... 377
2 Wella AG (Health and personal
products)............................ 1,138
--------
1,515
--------
TOTAL PREFERRED STOCKS--3.3% (cost $4,612)......... 4,189
--------
SHORT-TERM INVESTMENTS--5.0%
$6,452 Investors Bank & Trust Company
Repurchase Agreement, 5.90%, dated
12/31/97, Collateralized by U.S.
Government Agency Security with
market value of $6,776 with 1/2/98
repurchase date (cost $6,452)........ 6,452
--------
TOTAL INVESTMENTS--97.1% (cost $120,076)........... 125,008
CASH AND OTHER ASSETS, LESS LIABILITIES--2.9%...... 3,739
--------
NET ASSETS--100.0%................................. $128,747
========
</TABLE>
- ---------------
* Non-income producing securities
GDR = Global Depository Receipt
ADR = American Depository Receipt
At December 31, 1997, the Fund's Portfolio of Investments includes the following
categories: Finance - 15.3%; Producer Manufacturing - 12.3%; Electronic
Technology - 10.0%; Retail Trade - 9.8%; Commercial Services - 9.7% Consumer
Non-durable - 8.5%; Consumer Services 7.8%; Durables - 6.2%; Non-energy Minerals
- -3.9%; Technology - 3.8%; Process Industries - 3.3%; Health Technology - 3.1%;
Utilities -1.9%; Energy Minerals - 1.8%; Industrial Services - 1.8%; and
Transportation - .8%
See accompanying Notes to Financial Statements.
14 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 15
-----------------------------------------------------------
INCOME FUND
-----------------------------------------------------------
-----------------------------------------------------------
PERFORMANCE HIGHLIGHTS
-----------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------- ------------- ------ --------
<S> <C> <C> <C> <C> <C>
Income Fund ........ 8.0% 3.1% 14.4% (0.7)% 7.8%
Lehman Intermediate
Govt./Corp.
Index............. 7.9 4.1 15.3 (1.9) 8.8
-----------------------------------------------------------
INVESTOR INFORMATION
-----------------------------------------------------------
-----------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------- ------------- ------ --------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions) .... $160 $150 $147 $144 $204
Portfolio Turnover
Rate (%).......... 83 66 54 63 114
Expense Ratio (%) .. .71 .70 .68 .68 .70
</TABLE>
-----------------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
-----------------------------------------------------------
Dear Shareholders:
[PHOTO] The big story in the second half of 1997 was the turmoil in
[Bentley M. Meyer] the Far East. Starting in Thailand, the implosion of
markets and then economies spread quickly across the
Pacific Rim. The effects are now just starting to be felt
in the US. Many pundits are looking for economic growth in
this country to slow fairly significantly as a
result, but that forecast may be a little too severe. In
1996, US exports to all of the emerging countries in Asia
accounted for just 20% of our total. Exports to Canada,
Mexico and Europe account for a much larger share. Since
the economies in these areas are expected to continue to
expand, the decline in total US exports should not be too
dramatic. Overall, the economy should slow down and this
will provide more good news to an already bright inflation
picture.
Turmoil in international markets normally causes a flight
to high quality investments such as US Treasury notes and
bonds. This time, the same pattern was followed. The bond
market ended the year on a very strong note and the result
was a very strong year in virtually all parts of the
market. The Income Fund participated to a large extent in
the rally and the 8.03% return was the highest since 1995.
The return exceeded the 7.86% return of the Lehman
Intermediate Government / Corporate Index and was well
ahead of the 6.30% return of the Lipper Short Term Mutual
Fund Index.
Looking forward, the Income Fund is currently positioned
with a little more cash and thus a little more "defensive"
bias. This is simply a reflection of the big rally that has
occurred, particularly over the last month. Some corporate
bonds were purchased more recently, marking the first time
in several years that this sector weighting has increased.
Some value finally returned here and about 5% of the total
portfolio was shifted from US Treasuries to some high
quality corporate obligations. Finally, the monthly
dividend of $.0525 per share was maintained throughout the
second half of 1997. That rate will be continued through
the first quarter of 1998 but if yields continue to
decline, the payment rate may have to be reduced slightly
so that the Fund is not paying out more than it is earning
on a current basis.
/s/ Bentley M. Myer
---------------------
Bentley M. Myer
December 31, 1997 Annual Report 15
<PAGE> 16
-----------------------------------------------------------
INCOME FUND
-----------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH
REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME
DIVIDENDS
<TABLE>
<CAPTION>
9/90 12/90 6/91 12/91 6/92 12/92
<S> <C> <C> <C> <C> <C> <C>
Income Fund $10,000 10,300 10,800 12,000 12,400 12,800
Lehman Intermed
Govt./Corp.
Index $10,000 10,400 10,900 11,900 12,300 12,800
<CAPTION>
6/93 12/93 6/94 12/94 6/95 12/95
<S> <C> <C> <C> <C> <C> <C>
Income Fund $13,600 13,800 13,600 13,700 14,900 15,700
Lehman Intermed
Govt./Corp.
Index $13,600 13,900 13,500 13,600 15,000 15,700
<CAPTION>
6/96 12/96 6/97 12/97
<S> <C> <C> <C> <C>
Income Fund $15,700 16,200 16,700 17,500
Lehman Intermed
Govt./Corp.
Index $15,700 16,400 16,800 17,700
</TABLE>
16 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 17
................................................................................
INCOME FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------- -------
<C> <S> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY
GUARANTEED OBLIGATIONS--60.8%
U.S. TREASURY--27.5%
$ 5,875 U.S. Treasury Note, 6.625%, due
3/31/02.................................. $ 6,064
10,322 U.S. Treasury Note, 5.750%, due
8/15/03.................................. 10,327
9,500 U.S. Treasury Note, 7.250%, due
5/15/04.................................. 10,250
3,000 U.S. Treasury Note, 7.250%, due
8/15/04.................................. 3,243
12,650 U.S. Treasury Note, 7.875%, due
11/15/04.................................. 14,138
- ------- -------
41,347 Total U.S. Treasury Obligations........... 44,022
- ------- -------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS--4.1%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
ADJUSTABLE RATE MORTGAGE--2.5%
3,942 7.000%, due 2/20/22....................... 4,041
- ------- -------
SMALL BUSINESS ADMINISTRATION--1.0%
-- Receipt for Multiple Originator Fees #3,
0.795%, due 11/8/08 (Interest Only)
WAC..................................... 1,201
331 Loan #100023, 9.375%, due 11/25/14........ 351
- ------- -------
331 Total Small Business Administration
- ------- Obligations.............................
1,552
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--0.6%
13
12 12.000%, due 2/20/00......................
24
21 12.500%, due 2/20/15......................
512
456 11.000%, due 3/20/16......................
15
13 10.500%, due 6/20/19......................
412
366 11.000%, due 8/20/19......................
63
56 10.500%, due 8/20/20......................
68
61 10.500%, due 9/20/20......................
-------
- -------
985 Total Government National Mortgage
- ------- Association Obligations.................
1,107
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--0.0%
12
10 12.500%, due 4/15/14......................
44
38 13.000%, due 11/15/14.....................
-------
- -------
48 Total Government National Mortgage
- ------- Association Obligations.................
56
-------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
MOBILE HOME--0.0%
4
3 9.750%, due 1/15/99.......................
-------
- -------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
PRINCIPAL
AMOUNT VALUE
- ----------------------------------------------------- -------
<C> <S> <C>
U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS--29.2%
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)--18.4%
$ 517 1991-79, Tranche S, 16.809% FR, due
7/25/98................................. $ 538
936 8.543%, due 11/25/07...................... 955
397 11.250%, due 12/15/11..................... 446
406 12.250%, due 12/15/11..................... 469
53 13.250%, due 8/1/14....................... 61
427 12.000%, due 4/25/17...................... 497
1,381 12.000%, due 5/1/17....................... 1,608
3,561 9.500%, due 5/1/17........................ 3,831
5,000 7.500%, due 9/25/19....................... 5,103
2,640 1992-200, Tranche SE, 11.500%, due
11/25/22................................ 2,656
4,957 7.691%, due 3/1/23........................ 5,121
266 1993-19, Tranche SH, 11.2339%, due
4/25/23................................. 294
2,931 9.500%, due 2/1/25........................ 3,079
4,693 6.199%, due 11/1/36....................... 4,758
- ------- -------
28,165 Total FNMA Mortgage Obligations........... 29,416
- ------- -------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)--10.8%
403 #1475, Tranche SC, 9.457% FR,
due 2/15/08............................. 399
5,017 #1544, Tranche TM, 9.3028%,
due 7/15/08............................. 5,199
1,221 #1561, Tranche SC, 7.785%, due 8/15/08.... 1,204
1,092 #1693, Tranche S +, 5.725%, due 9/15/08... 994
922 #1600, Tranche SE, 8.4500%,
due 10/15/08............................ 952
1,014 #1662, Tranche T, 7.2570%, due 1/15/09.... 1,017
1,320 #1500, Tranche SJ, 6.082%, due 12/15/22... 1,291
603 #1492, Tranche SE, 10.133%,
due 3/15/23............................. 600
2,017 #1542, Tranche S, 14.346%, due 7/15/23.... 2,065
3,472 #G42, Tranche M, 8.00%, due 1/17/24....... 3,472
- ------- -------
17,081 Total FHLMC Mortgage Obligations.......... 17,193
- ------- -------
91,902 Total U.S. Government and U.S. Government
- ------- Agency Guaranteed Obligations...........
97,391
-------
</TABLE>
December 31, 1997 Annual Report 17
<PAGE> 18
................................................................................
INCOME FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- -------------------------------------- ----------- --------
PRINCIPAL S&P RATING
AMOUNT (UNAUDITED) VALUE
- -------------------------------------- ----------- --------
COLLATERALIZED MORTGAGE OBLIGATIONS--19.1%
<C> <S> <C> <C>
$ 1,036 Polk Co. HFA, 1991-1,
Tranche A-2, 9.550%, due
1/15/11................. AAA $ 1,082
13,479 Morgan Keegan Funding I,
L.P., 8.000%, due
4/25/11................. AA- 13,819
149 Residential Finance Corp.,
1991-11, Tranche A-2,
10.000%, due 4/01/21.... AA 150
724 Residential Trust Corp,
1992-2, Tranche A,
7.943%, due 8/25/21..... AA 737
171 Resolution Trust Corp.,
1991-3, Tranche A-2,
10.372%, due 8/25/21.... AAA 178
3,298 Bear, Stearns Mortgage
Security Co., 1992-3B1,
7.577%, due 5/25/23..... AA 3,421
666 Resolution Trust Corp.,
1992-5, Tranche 5-C,
8.621%, due 1/25/26..... AA 687
5,500 Headlands Mortgage Corp.,
1997-1 AI7, 7.25%, due
3/25/27................. AAA 5,545
5,000 Residential Asset
- -------- Securities, 7.125%, due
7/25/27.................
AAA 5,000
--------
30,023 Total Collateralized
- -------- Mortgage Obligations....
30,619
--------
CORPORATE OBLIGATIONS--10.0%
1,250 Sears, Roebuck Corp.
Medium Term Note, 9.75%, 1,344
due 3/21/00............. A-
1,500 Household Finance Corp.
Medium Term Note, 1,671
10.38%, due 12/15/00.... A
4,044 Society National Bank
Subordinated Note, 4,230
7.25%, due 6/1/05....... A-
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------- ----------- --------
PRINCIPAL S&P RATING
AMOUNT (UNAUDITED) VALUE
- -------------------------------------- ----------- --------
CORPORATE OBLIGATIONS--(CONTINUED)
<C> <S> <C> <C>
$ 3,000 Merrill Lynch & Company,
Inc. Note, 7.00%, due
1/15/07................. AA- $ 3,113
2,500 Amgen, Inc., Note, 6.50%,
due 12/1/07............. A 2,511
3,000 Mattell, Inc. Medium Term
- -------- Note, 7.14%, due
3/11/08.................
A- 3,132
--------
15,294 Total Corporate 16,001
Obligations.............
--------
- --------
137,219 TOTAL LONG TERM
- -------- INVESTMENTS--89.9%
(Cost $142,503).........
144,011
--------
SHORT-TERM INVESTMENTS--8.8%
1,085 Associates Corp. of North
America Demand Note, 1,085
5.497%, due 1/1/98...... A-1+
2,500 Chrysler Financial
Corporation, 5.73%, due 2,500
3/11/98................. A-1
2,731 General Motors Acceptance
Corp., 5.63%-5.8432%, 2,731
due 1/16/98-3/17/98..... A-1
3,500 Merrill Lynch & Company,
Inc., 5.530%, due 3,500
1/6/98.................. A-1+
1,872 Prudential Funding
Corporation 5.74%-6.11%, 1,872
due 1/12/98-1/26/98..... A-1
2,418 Sears Roebuck Acceptance
- -------- Corporation, 5.666%, due
1/13/98.................
A-1+ 2,418
--------
14,106 Total Short-term
- -------- Investments
(Cost $14,106)..........
14,106
--------
$151,325 TOTAL INVESTMENTS--98.7%
======== (cost $156,609).........
158,117
CASH AND OTHER ASSETS,
LESS
LIABILITIES--1.3%....... 1,938
--------
$160,055
NET ASSETS--100.0%........
========
</TABLE>
- ---------------
WAC = Weighted Average Coupon
FR = Floating Rate
See accompanying Notes to Financial Statements.
18 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 19
-----------------------------------------------------------
READY RESERVES FUND
-----------------------------------------------------------
-----------------------------------------------------------
PERFORMANCE HIGHLIGHTS
-----------------------------------------------------------
<TABLE>
<CAPTION>
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ready Reserves Fund. 5.0% 4.8% 5.5% 3.7% 2.6%
S&P-rated AAA Money
Market Funds... 5.0 4.8 5.4 3.6 2.0
-----------------------------------------------------------
INVESTOR INFORMATION
-----------------------------------------------------------
-----------------------------------------------------------
1997 1996 1995 1994 1993
------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions)..... $905 $761 $704 $521 $477
Expense Ratio (%)... .70 .71 .72 .71 .71
</TABLE>
-----------------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
-----------------------------------------------------------
Dear Shareholders:
[PHOTO] Short-term interest rates were raised by the Federal
[Bentley M. Myer] Reserve Board in the early part of the past year, but
despite some heavy speculation in the ensuing months, no
further changes in Fed policy followed. The Federal Funds
rate target is still 5.50%, but the problems in Asia
certainly raise the possibility that this target rate could
be reduced. In fact, Alan Greenspan, Chairman of the Fed,
raised that possibility more recently in a speech he made
in Chicago. The decline might become reality if the effects
from the problems in Asia filter through the economy more
than they already have, but for now, that does not seem
likely.
The Ready Reserves Fund had a good year with a return of
5.04%, which exceeded the 4.96% return of the S & P-rated
AAA average. The current average maturity of 43 days is
close to the midpoint of our normal range of 30 to 60 days.
Real or inflation adjusted short-term rates are attractive,
but not enough so that we want to more aggressively
lengthen our maturities. Assets continued to grow during
the year. Starting from a base of approximately $761
million, assets grew over 19% to $905 million by year-end.
The most recent increase probably reflects a flight to
safety, given the problems in equity markets around the
world.
/s/ Bentley M. Myer
-----------------------
Bentley M. Myer
December 31, 1997 Annual Report 19
<PAGE> 20
................................................................................
READY RESERVES FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ---------
U.S. GOVERNMENT AGENCY GUARANTEED--5.1%
<C> <S> <C>
$ 2,100 Agency for International
Development, VRN--Peru, 5.716%,
2/1/98............................ $ 2,100
14,270 Federal Home Loan Bank
5.75%, 11/12/98................... 14,270
5,192 Federal Home Loan Mortgage Corp.,
VRN, 7.00%-7.75%,
2/1/98-10/15/98................... 5,228
10,000 Federal National Mortgage
Association, VRN, 5.503%,
1/5/98............................ 9,994
15,000 Student Loan Marketing Association,
- -------- VRN, 5.664%, 1/6/98...............
14,999
--------
46,591
46,562
--------
- --------
DEMAND NOTE--0.1%
682 Associates Corporation of North
- -------- America, VRN, 5.50%, 1/2/98.......
682
--------
COMMERCIAL PAPER--95.8%
INSURANCE--20.8%
8,274 A. I. Credit Corporation 8,257
5.51%-5.59%, 1/14/98-1/16/98......
25,650 American General Corporation 25,442
5.50%-5.720%, 1/23/98-3/17/98.....
14,439 American General Finance Corporation 14,415
5.54%-5.70%, 1/8/98-1/26/98.......
44,667 Aon Corporation
5.50%-5.77%, 44,401
1/6/98-3/10/98....................
10,801 General Re Corporation 10,664
5.72%-5.77%, 2/20/98-4/30/98......
45,573 Met Life Funding, Inc. 45,277
5.57%-5.75%, 1/7/98-3/19/98.......
7,000 Prudential Funding Corporation 6,940
5.71%, 2/24/98....................
32,586 USAA Capital Corporation
- -------- 5.54%-5.70%, 1/30/98-2/26/98......
32,365
--------
187,761
188,990
--------
FINANCE--16.7%
43,421 Associates Corporation of North
America 43,184
5.50%-5.75%, 1/12/98-3/20/98......
19,000 Associates First Capital Corporation 18,853
5.59%-5.68%, 2/9/98-2/27/98.......
13,749 AVCO Financial Services, Inc. 13,656
5.56%-5.68%, 2/3/98-2/17/98.......
12,500 Block Financial Corporation 12,462
5.57%, 1/20/98-1/22/98............
22,958 CIT Group Holdings 22,843
5.54%-5.60%, 1/2/98-2/23/98.......
4,000 Household Finance Corp., 5.55%, 3,993
1/13/98...........................
36,120 Norwest Financial, Inc.
- -------- 5.54%-5.72%, 1/6/98-3/3/98........
35,886
--------
150,877
151,748
--------
- --------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ---------
<C> <S> <C>
MANUFACTURING--14.3%
$ 5,800 Chrysler Finance Corporation
5.70%, 3/25/98.................... $ 5,724
21,004 Ford Motor Credit Company of Puerto
Rico, Inc., 5.51%-5.68%,
1/7/98-2/2/98..................... 20,945
2,149 Ford Motor Credit Company
5.70%, 2/24/98.................... 2,131
6,600 General Electric Capital Corporation
5.54%-5.73%, 2/25/98-3/24/98...... 6,547
39,400 General Electric Capital Services of
Puerto Rico, Inc.
5.52%-5.69%, 1/15/98-2/20/98...... 39,183
45,054 General Electric Company
5.50%-5.71%, 1/16/98-3/13/98...... 44,813
10,000 Paccar Financial Corporation
- -------- 5.52%-5.56%, 2/10/98-3/19/98......
9,910
--------
129,253
130,007
--------
- --------
BROKERAGE--11.6%
36,613 Goldman, Sachs & Company 36,402
5.72%-5.93%, 1/7/98-2/13/98.......
35,525 Merrill Lynch & Company, Inc. 35,306
5.60%-5.75%, 1/26/98-2/26/98......
33,431 Morgan Stanley Group, Inc.
- -------- 5.60%-5.77%, 1/14/98-3/4/98.......
33.202
--------
104,910
105,569
--------
- --------
DRUGS/HEALTH--6.3%
40,460 Glaxo Wellcome plc 40,278
5.53%-5.70%, 1/5/98-3/2/98........
2,850 Schering-Plough Corporation 2,845
5.48%, 1/3/98.....................
13,905 Warner Lambert Company
- -------- 5.50%, 1/20/98-1/26/98............
13,854
--------
56,977
57,215
--------
- --------
UTILITIES--ENERGY & GAS--5.0%
45,600 National Rural Utilities Cooperative
- -------- Finance Corporation
5.52%-5.70%, 2/2/98-3/23/98.......
45,260
--------
ENERGY--4.9%
45,173 Chevron U.K. Investment plc
- -------- 5.48%-5.68%, 7/17/98-8/26/98......
44,877
--------
MEDIA/ENTERTAINMENT--4.1%
34,980 Dun & Bradstreet Corporation 34,708
5.57%-5.75%, 1/16/98-3/24/98......
2,000 McGraw-Hill Companies, Inc.
- -------- 5.76%, 2/24/98....................
1,983
--------
36,691
36,980
--------
- --------
</TABLE>
20 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 21
................................................................................
READY RESERVES FUND
................................................................................
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ---------
COMMERCIAL PAPER--(CONTINUED)
<C> <S> <C>
CHEMICAL/FOREST--3.1%
$ 16,550 DuPont (E.I.) De Nemours & Co.
5.50%-5.67%, 1/12/98-2/5/98....... $ 16,477
6,088 Kimberly Clark Corporation
5.65%, 1/22/98-1/23/98............ 6,067
6,000 Monsanto Co., 5.52%, 3/2/98.........
- -------- 5,945
--------
28,489
28,638
--------
- --------
UTILITIES--TELEPHONE--2.5%
12,200 Ameritech Capital Funding
Corporation 12,158
5.55%-5.58%, 1/23/98..............
2,239
2,260 AT&T Corporation, 5.75%, 2/27/98....
8,579 Bell South Capital Funding
- -------- Corporation
5.70%-5.71%, 2/25/98-2/26/98......
8,504
--------
22,901
23,039
--------
- --------
FOOD/BEVERAGE/TOBACCO--1.7%
3,875 Campbell Soup Company, 5.52%, 3,870
1/9/98............................
12,000 Coca-Cola Company, 5.60%, 2/6/98....
- -------- 11,933
--------
15,803
15,875
--------
- --------
ELECTRONIC/TECHNOLOGY--1.7%
8,071 IBM Credit Corporation 8,053
5.54%-5.68%, 1/14/98-1/21/98......
6,984 Xerox Overseas Holdings, 5.60%,
- -------- 1/12/98...........................
6,972
--------
15,025
15,055
--------
- --------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------- ---------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ---------
COMMERCIAL PAPER--(CONTINUED)
<C> <S> <C>
MERCHANDISING--1.1%
$ 9,900 Winn Dixie Stores Inc.
- -------- 5.55%-5.60%, 1/13/98-1/20/98......
$ 9,873
--------
BANKING--1.0%
8,998 Morgan (J.P.) & Company, Inc.
- -------- 5.57%, 1/30/98....................
8,958
--------
OTHER CONSUMER--1.0%
8,712 Procter & Gamble Company
- -------- 5.48%-5.55%, 1/7/98-2/19/98.......
8,663
--------
866,318
$918,743 TOTAL COMMERCIAL PAPER..............
--------
========
TOTAL INVESTMENTS--101.0%
(cost $913,591)..................... 913,591
LIABILITIES, LESS CASH AND OTHER
NET ASSETS--(1.0%).................. (9,022)
--------
$904,569
NET ASSETS--100.0%..................
========
PORTFOLIO WEIGHTED AVERAGE
MATURITY............................ 43 Days
</TABLE>
- ---------------
VRN = Variable Rate Note
See accompanying Notes to Financial Statements.
December 31, 1997 Annual Report 21
<PAGE> 22
................................................................................
STATEMENTS OF ASSETS AND LIABILITIES
................................................................................
DECEMBER 31, 1997 (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
$381,436; $23,213; $120,076;
$156,609; and $913,591,
respectively)................... $590,126 $28,387 $125,008 $158,117 $913,591
Cash.............................. -- 1,984 6,818 99 32
Receivable for:
Fund shares sold................ 1,355 587 528 362 5,434
Investments sold................ -- -- -- 25 --
Interest and dividends.......... 476 28 70 1,661 461
Foreign withholding tax......... -- -- 60 -- --
Deferred organization costs....... -- 36 -- --
Other assets...................... 26 -- -- -- 1
-------- --------- ------------- -------- --------
Total assets................ 591,983 31,022 132,484 160,264 919,519
LIABILITIES
Payable for:
Fund shares redeemed............ 115 13 728 75 14,172
Investments purchased........... -- 311 2,756 -- --
Dividends....................... 40 -- 26 -- 91
Investment advisory fees and
organization costs (Notes 1
and 2)........................ 365 221 123 81 449
Net unrealized depreciation on
foreign currency forward
contracts..................... -- -- 17 -- --
Other............................. 110 123 87 53 238
-------- --------- ------------- -------- --------
Total liabilities........... 630 668 3,737 209 14,950
-------- --------- ------------- -------- --------
Net Assets............... $591,353 $30,354 $128,747 $160,055 $904,569
======== ========= ============= ======== ========
CAPITAL
Capital stock ($0.001 par value
38,513; 2,340; 9,798; 15,376;
and 904,674 shares issued and
outstanding, respectively)...... $ 38 $ 2 $ 11 $ 15 $ 905
Paid-in-surplus................... 382,569 25,159 124,588 163,477 903,768
Net unrealized appreciation/
(depreciation) on investments
and foreign currency
transactions (net of $1,049 PFIC
unrealized gain distribution for
International Growth Fund
only)........................... 208,690 5,174 3,861 1,508 --
Accumulated undistributed net
realized gain (loss) on
investments and foreign currency
transactions.................... 56 1 35 (5,061) (108)
Undistributed net investment
income.......................... -- 18 252 116 4
-------- --------- ------------- -------- --------
Net Assets............... $591,353 $30,354 $128,747 $160,055 $904,569
======== ========= ============= ======== ========
Net asset value per share......... $ 15.35 $ 12.97 $ 13.14 $ 10.41 $ 1.00
======== ========= ============= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
22 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 23
................................................................................
STATEMENTS OF OPERATIONS
................................................................................
DECEMBER 31, 1997 (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>
INVESTMENT INCOME
Interest.................................... $ 1,580 $ 204 $ 410 $10,788 $49,283
Dividends................................... 2,132 170 1,534 -- --
Less foreign tax withheld................... (8) -- (174) -- --
-------- --------- ------------- ------- --------
3,704 374 1,770 10,788 49,283
EXPENSES
Investment advisory fees.................... 4,093 242 1,351 919 5,237
Custodian fees.............................. 124 8 241 37 197
Transfer agent fees......................... 117 12 18 22 326
Professional fees........................... 64 54 64 50 68
Registration fees........................... 37 22 29 20 116
Organization costs.......................... -- 6 10 -- --
Miscellaneous............................... 161 26 45 33 188
-------- --------- ------------- ------- --------
Total expenses before waiver.............. 4,596 370 1,758 1,081 6,132
Less expenses waived and absorbed by
Company.............................. -- (57) -- -- --
-------- --------- ------------- ------- --------
Net investment income (loss).............. (892) 61 12 9,707 43,151
Net realized and unrealized gain (loss) on
investments, futures, foreign currency
transactions and other assets and
liabilities
Net realized gain (loss) on investments... 29,286 909 15,719 1,058 (1)
Net realized loss on futures.............. -- (162) -- -- --
Net realized gain on foreign currency
transactions and other assets and
liabilities............................. -- -- 528 -- --
-------- --------- ------------- ------- --------
Total net realized gain (loss)............ 29,286 747 16,247 1,058 (1)
Change in net unrealized appreciation/
(depreciation) on investments, and other
assets and liabilities...................... 70,793 5,174 (8,255) 973 --
-------- --------- ------------- ------- --------
Net realized and unrealized gain (loss) on
investments, futures, foreign currency
and other assets and liabilities........ 100,079 5,921 7,992 2,031 (1)
-------- --------- ------------- ------- --------
Net increase in net assets resulting from
operations.................................. $ 99,187 $5,982 $ 8,004 $11,738 $43,150
======== ========= ============= ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
December 31, 1997 Annual Report 23
<PAGE> 24
................................................................................
STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (all amounts in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
VALUE INTERNATIONAL
GROWTH DISCOVERY GROWTH INCOME
FUND FUND FUND FUND
-------------------- ----------------- ------------------- -------------------
1997 1996 1997 1996(A) 1997 1996 1997 1996
---- ---- ---- ------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)..... $ (892) $ (336) $ 61 -- $ 12 $ 197 $ 9,707 $ 9,106
Net realized gain (loss) on
investments, futures, foreign
currency transactions and
other assets and
liabilities................... 29,286 27,804 747 -- 16,247 3,539 1,058 (2,156)
Change in net unrealized
appreciation/depreciation on
investments and other assets
and liabilities............... 70,793 43,376 5,174 -- (8,255) 6,539 973 (2,404)
--------- -------- ------- ------ -------- -------- -------- --------
Net increase (decrease) in net
assets resulting from
operations.................... 99,187 70,844 5,982 -- 8,004 10,275 11,738 4,546
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income............ -- (333) (43) -- (664)(b) (491)(b) (9,704) (8,980)
Net realized gain............... (29,286) (19,503) (746) -- (15,931) (3,125) -- --
--------- -------- ------- ------ -------- -------- -------- --------
(29,286) (19,836) (789) -- (16,595) (3,616) (9,704) (8,980)
CAPITAL STOCK TRANSACTIONS
Shares sold...................... 118,126 165,769 23,070 2,175 45,557 29,640 21,930 28,857
Shares issued in reinvestment of
income dividends and capital
gain distributions............ 26,500 18,035 752 -- 15,576 3,461 6,970 6,494
Less shares redeemed............ (124,958) (96,064) (836) -- (28,943) (24,374) (20,885) (28,281)
--------- -------- ------- ------ -------- -------- -------- --------
Change from capital stock
transactions.................... 19,668 87,740 22,986 2,175 32,190 8,727 8,015 7,070
--------- -------- ------- ------ -------- -------- -------- --------
Change in net assets............ 89,569 138,748 28,179 2,175 23,599 15,386 10,049 2,636
Net assets
Beginning of year............... 501,784 363,036 2,175 -- 105,148 89,762 150,006 147,370
--------- -------- ------- ------ -------- -------- -------- --------
End of year..................... $ 591,353 $501,784 $30,354 $2,175 $128,747 $105,148 $160,055 $150,006
========= ======== ======= ====== ======== ======== ======== ========
Undistributed net investment
income at the end of the year... $ -- $ -- $ 18 -- $ 252 $ -- $ 116 $ 113
========= ======== ======= ====== ======== ======== ======== ========
CAPITAL STOCK TRANSACTIONS
Shares sold...................... 8,330 12,563 2,133 218 2,935 2,196 2,123 2,771
Shares issued in reinvestment of
income dividends and capital
gain distributions............ 1,803 1,351 60 -- 1,211 253 676 630
Less shares redeemed............ (8,829) (7,220) (71) -- (1,888) (1,751) (2,025) (2,735)
--------- -------- ------- ------ -------- -------- -------- --------
Change from capital stock
transactions.................... 1,304 6,694 2,122 218 2,258 698 774 666
========= ======== ======= ====== ======== ======== ======== ========
<CAPTION>
-------------------------
READY
RESERVES
FUND
-------------------------
1997 1996
---- ----
<S> <C> <C>
OPERATIONS
Net investment income (loss)..... $ 43,151 $ 34,173
Net realized gain (loss) on
investments, futures, foreign
currency transactions and
other assets and
liabilities................... (1) (107)
Change in net unrealized
appreciation/depreciation on
investments and other assets
and liabilities............... -- --
----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 43,150 34,066
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income............ (43,150) (34,170)
Net realized gain............... -- --
----------- -----------
(43,150) (34,170)
CAPITAL STOCK TRANSACTIONS
Shares sold...................... 3,202,303 2,994,231
Shares issued in reinvestment of
income dividends and capital
gain distributions............ 42,208 33,371
Less shares redeemed............ (3,100,750) (2,970,683)
----------- -----------
Change from capital stock
transactions.................... 143,761 56,919
----------- -----------
Change in net assets............ 143,761 56,815
Net assets
Beginning of year............... 760,808 703,993
----------- -----------
End of year..................... $ 904,569 $ 760,808
=========== ===========
Undistributed net investment
income at the end of the year... $ 4 $ 3
=========== ===========
CAPITAL STOCK TRANSACTIONS
Shares sold...................... 3,202,303 2,994,231
Shares issued in reinvestment of
income dividends and capital
gain distributions............ 42,208 33,371
Less shares redeemed............ (3,100,750) (2,970,683)
----------- -----------
Change from capital stock
transactions.................... 143,761 56,919
=========== ===========
</TABLE>
(a) For the period from December 23, 1996 (Commencement of Operations) to
December 31, 1996.
(b) Includes $664 and $160 relating to PFIC transactions which are treated as
ordinary income for Federal income tax purposes in 1997 and 1996,
respectively.
See accompanying Notes to Financial Statements.
24 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 25
................................................................................
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 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.
(b) Investment Securities
Equity securities traded on a national securities exchange or market 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 based on
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 market 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, 1997.
(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.
December 31, 1997 Annual Report 25
<PAGE> 26
(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 US dollar amounts at the current exchange
rate at the date 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 US 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 date 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, 1997, the Income
Fund and the Ready Reserves Fund have capital loss carryforwards of $5,048,000
and $109,000, respectively. These loss carryforwards, which expire in 2005, can
be used to offset net capital gains.
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
$916,000 and $133,000 in 1997 and 1996, respectively. In addition, the Fund
recorded net realized losses of $400,000 on sales of PFIC's during 1997, of
which $309,000 had been recognized as income in prior years. Dividends to
shareholders from net investment income included $664,000 and $160,000 relating
to PFIC's during 1997 and 1996, which are treated as ordinary income from
Federal income tax purposes.
(g) Organization Costs
The initial organization costs of the Value Discovery Fund and the 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 DIRECTORS' 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. A summary of the annual rates expressed as a percentage of average daily
net assets, are as follows:
<TABLE>
<S> <C>
Growth Fund 0.75%
Value Discovery Fund 1.15%
International Growth Fund 1.10% of the first $250 million
1.00% in excess of $250 million
Income Fund 0.25% of the first $250 million
0.20% in excess of $250 million
5.00% of gross income
Ready Reserves Fund 0.625% of the first $250 million
0.600% of the next $250 million
0.575% of the next $2 billion
0.550% in excess of $2.5 billion
</TABLE>
The Company has voluntarily agreed to waive the Value Discovery Fund's advisory
fee and to absorb other operating expenses if total expenses exceed 1.50% of
average daily net assets.
The Funds paid fees of $56,000 to non-affiliated directors of the Funds for the
year ended December 31, 1997.
26 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 27
(3) INVESTMENT TRANSACTIONS
Investment transactions, excluding money market instruments, for the year ended
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Value International
Growth Discovery Growth Income
Fund Fund Fund Fund
-------- --------- ------------- --------
(all amounts in thousands)
<S> <C> <C> <C> <C>
Purchases.................................................. $172,255 $32,331 $126,202 $125,277
Proceeds from sales and maturities......................... 208,945 11,522 115,310 113,721
Gross unrealized appreciation/depreciation at December 31,
1997 was as follows:
Unrealized appreciation.................................. $222,142 $ 6,103 $ 16,350 $ 2,101
Unrealized depreciation.................................. 13,452 929 11,418 593
-------- --------- ------------- --------
Net unrealized appreciation................................ $208,690 $ 5,174 $ 4,932 $ 1,508
======== ========= ============= ========
</TABLE>
Cost of investments is the same for financial statement and Federal income tax
purposes, except for International Growth Fund where the cost was $119,617 at
December 31, 1997.
(4) FORWARD FOREIGN CURRENCY CONTRACTS
In order to protect itself against a decline in the value of foreign currency
against the U.S. dollar, the International Growth Fund enters into forward
foreign currency contracts with its custodian. International Growth Fund bears
the market risk that arises from changes in foreign exchange rates and bears the
credit risk if the counterparty fails to perform under the contract. The net
realized and unrealized gains and losses associated with forward contracts are
reflected in the accompanying financial statements. At December 31, 1997, the
International Growth Fund had the following forward foreign currency contract
outstanding:
<TABLE>
<CAPTION>
Contract Unrealized
Foreign Currency amount in Settlement Loss
to be delivered U.S. Dollars Date at 12/31/97
---------------- ------------ ---------- -----------
(all amounts in thousands)
<S> <C> <C> <C>
1,301,750 Japanese Yen...................................... $10,000 January 20, 1998 $17
</TABLE>
................................................................................
FINANCIAL HIGHLIGHTS
................................................................................
GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 13.480 $ 11.900 $ 9.600 $ 9.730 $ 9.390
Income from investment operations:
Net investment income (loss).............................. (.023) (.010) .034 .027 .035
Net realized and unrealized gain on investments........... 2.694 2.144 2.750 .581 1.389
-------- -------- -------- -------- --------
Total from investment operations............................ 2.671 2.134 2.784 .608 1.424
Less distributions from:
Net investment income..................................... -- .010 .030 .025 .035
Net realized gain......................................... .801 .544 .454 .713 1.049
-------- -------- -------- -------- --------
Total distributions......................................... .801 .554 .484 .738 1.084
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 15.350 $ 13.480 $ 11.900 $ 9.600 $ 9.730
======== ======== ======== ======== ========
Total return (%)............................................ 20.07 17.99 29.07 6.45 15.51
Ratios to average daily net assets (%):
Expenses.................................................. .84 .79 .65 .71 .78
Net investment income (loss).............................. (.16) (.08) .34 .32 .38
Supplemental data:
Net assets at end of year (in thousands).................. $591,353 $501,774 $363,036 $217,560 $150,046
Portfolio turnover rate (%)............................... 34 43 32 46 55
Average commission rate................................... $ .0598 $ .0621
</TABLE>
December 31, 1997 Annual Report 27
<PAGE> 28
................................................................................
VALUE DISCOVERY FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1997 1996(A)
------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period... $10.000 $10.000
Income from investment operations:
Net investment income................ .029 --
Net realized and unrealized gain on
investments........................ 3.305 --
------- -------
Total from investment operations....... 3.334 --
Less distributions from:
Net investment income................ .020 --
Net realized gain.................... .344 --
------- -------
Total distributions.................... .364 --
------- -------
Net asset value, end of year........... $12.970 $10.000
======= =======
Total return (%)....................... 33.46 --
Ratios to average daily net assets (%):
Expenses(b).......................... 1.50 --
Net investment income(b)............. .29 --
Supplemental data:
Net assets at end of year (in
thousands)......................... $30,354 $ 2
Portfolio turnover rate (%).......... 69 --
Average commission rate.............. $ .0616 --
</TABLE>
- ---------------
(a) For the period December 23, 1996 (Commencement of Operations) to December
31, 1996.
(b) Without the waiver of expenses in 1997, the expense ratio would have been
1.78% and the net investment income ratio would have been .016%.
28 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 29
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $ 13.950 $ 13.120 $12.360 $13.180 $10.130
Income from investment operations:
Net investment income............................... .072 .029 .105 .016 .008
Net realized and unrealized gain (loss) on
investments,
foreign currency and other assets and
liabilities....................................... 1.056 1.299 .785 (.025) 3.401
-------- -------- ------- ------- -------
Total from investment operations...................... 1.128 1.328 .890 (.009) 3.409
Less distributions from:
Net investment income............................... .078(a) .068(a) .130 .024 --
Net realized gain................................... 1.860 .430 -- .714 .359
Tax return of capital............................... -- -- -- .073(b) --
-------- -------- ------- ------- -------
Total distributions................................... 1.938 .498 .130 .811 .359
-------- -------- ------- ------- -------
Net asset value, end of year.......................... $ 13.140 $ 13.950 $13.120 $12.360 $13.180
======== ======== ======= ======= =======
Total return (%)...................................... 8.39 10.20 7.22 (.04) 33.65
Ratios to average daily net assets (%):
Expenses(c)......................................... 1.43 1.44 1.48 1.51 1.71
Net investment income(c)............................ .01 .19 .87 .15 .11
Supplemental data:
Net assets at end of year (in thousands)............ $128,747 $105,148 $89,762 $70,403 $40,298
Portfolio turnover rate (%)......................... 102 89 77 40 83
Average commission rate............................. $.0038 $.0051
</TABLE>
- ---------------
(a) Includes $.078 and $.022 in PFIC transactions which are treated as ordinary
income for Federal income tax purposes for 1997 and 1996, respectively.
(b) Includes $431 relating to a tax return of capital.
(c) Without the waiver of expenses in 1993, the expense ratio would have been
2.08% and the net investment loss ratio would have been (.25)%.
December 31, 1997 Annual Report 29
<PAGE> 30
................................................................................
INCOME FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year......................... $ 10.270 $ 10.570 $ 9.850 $ 10.580 $ 10.600
Income from investment operations:
Net investment income.................................... .659 .619 .646 .661 .651
Net realized and unrealized gain (loss) on investments... (.140) (.309) .732 (.741) .159
-------- -------- -------- -------- --------
Total from investment operations........................... .799 .310 1.378 (.080) .810
Less distributions:
Net investment income.................................... .659 .610 .658 .646 .651
Net realized gain........................................ -- -- -- .004 .179
-------- -------- -------- -------- --------
Total distributions........................................ .659 .610 .658 .650 .830
-------- -------- -------- -------- --------
Net asset value, end of year............................... $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580
======== ======== ======== ======== ========
Total return (%)........................................... 8.03 3.07 14.37 (.74) 7.82
Ratios to average daily net assets (%):
Expenses................................................. .71 .70 .68 .68 .70
Net investment income.................................... 6.40 5.97 6.24 6.33 5.96
Supplemental data:
Net assets at end of year (in thousands)................. $160,055 $150,006 $147,370 $143,790 $204,381
Portfolio turnover rate (%).............................. 83 66 54 63 114
</TABLE>
................................................................................
READY RESERVES FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income.................................... .05 .05 .05 .04 .03
Net realized loss on investments......................... -- -- -- (.01) --
-------- -------- -------- -------- --------
Total from investment operations........................... .05 .05 .05 .03 .03
Less distributions:
Net investment income.................................... .05 .05 .05 .04 .03
-------- -------- -------- -------- --------
Total distributions........................................ .05 .05 .05 .04 .03
-------- -------- -------- -------- --------
Capital contribution....................................... -- -- -- .01 --
-------- -------- -------- -------- --------
Net asset value, end of year............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return (%)........................................... 5.04 4.81 5.45 3.67(a) 2.64
Ratios to average daily net assets (%):
Expenses................................................. .70 .71 .72 .71 .71
Net investment income.................................... 4.92 4.78 5.30 3.61 2.61
Supplemental data:
Net assets at end of year (in thousands)................. $904,569 $760,808 $703,993 $521,277 $477,268
</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%.
30 William Blair Mutual Funds, Inc. December 31, 1997
<PAGE> 31
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, 1997, and
the related statements of operations, changes in net assets 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, 1997 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, 1997, 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
Chicago, Illinois
February 3, 1998
December 31, 1997 Annual Report 31
<PAGE> 32
-----------------------------------------------------------
BOARD OF DIRECTORS
-----------------------------------------------------------
CONRAD FISCHER, CHAIRMAN
Principal, William Blair & Company, L.L.C.
VERNON ARMOUR
Private Investor
J. GRANT BEADLE
Retired Chairman and CEO, Union Special Corporation
THEODORE A. BOSLER
Retired Principal and Vice President, Lincoln Capital
Management Company
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.
Principal, William Blair & Company, L.L.C.
-----------------------------------------------------------
Officers
-----------------------------------------------------------
Rocky Barber, President
Mark A. Fuller, III, Senior Vice President
W. George Greig, Senior Vice President
Glen A. Kleczka, 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 and 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
1-800-635-2886
(Massachusetts 1-800-635-2840)
William Blair Mutual Funds, Inc.
222 West Adams Street
Chicago, Illinois 60606
December 31, 1997
