<PAGE> 1
Annual Report / December 31, 1998
------------------------------------------------
WILLIAM BLAIR MUTUAL FUNDS, INC.
------------------------------------------------
------------------------------------------------
GROWTH FUND
VALUE DISCOVERY FUND
INTERNATIONAL GROWTH FUND
EMERGING MARKETS 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>
------------------------------------------------
1998 1997 1996 1995 1994
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Growth Fund ...................... 27.2% 20.1% 18.0% 29.1% 6.5%
S&P 500 Index(1) ............... 28.6 33.4 23.3 37.5 1.3
Value Discovery Fund ............. 0.7 33.5 -- -- --
Russell 2000 Index(2) .......... (2.6) 22.4 16.5 28.4 (1.8)
International Growth Fund ........ 11.5 8.4 10.2 7.2 (0.04)
MSCI AC WLDF ex US Index(3)..... 14.5 2.0 6.7 9.9 6.6
Lipper International Index(4)... 12.7 7.3 14.4 10.0 (0.7)
Emerging Markets Growth Fund (a).. (23.7) -- -- -- --
MSCI EM (Free) Index(5)(a)..... (28.9) -- -- -- --
Income Fund ...................... 7.1 8.0 3.1 14.4 (0.7)
Lehman Intermediate Govt./
Corp. Index(6) .............. 8.4 7.9 4.1 15.3 (1.9)
Ready Reserves Fund .............. 5.0 5.0 4.8 5.5 3.7
S&P-rated AAA
Money Market Funds(7) ....... 5.0 5.0 4.8 5.4 3.6
</TABLE>
Past performance does not predict future performance.
------------------------------------------------
INVESTOR INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1998
------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
VALUE INTERNATIONAL MARKETS READY
GROWTH DISCOVERY GROWTH GROWTH INCOME RESERVES
FUND FUND FUND FUND (A) FUND FUND
------ --------- ------------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions) ................... $742 $45 $140 $4 $188 $1,189
Portfolio Turnover Rate (%) ....... 37 78 98 226(b) 96 --
Expense Ratio ..................... .84 1.52 1.36 2.25(b)(c) .71 .69
Shareholder Transaction Expenses
Sales Load ........................ None None None None None None
Redemption Fees ................... None None None None None None
Exchange Fees ..................... None None None None None None
12b-1 Fees ........................ None None None None None None
</TABLE>
------------------------------------------------
(1) The S&P 500 Index indicates broad larger
capitalization equity market performance.
(2) The Russell 2000 Index is a composite of
the smallest 2000 stocks of the Russell
3000 Index (which consists of the largest
3000 stocks in the U.S. market as
determined by market capitalization).
(3) The Morgan Stanley Capital International
All Country World (Free) except U.S. Index
is an index that includes developed and
emerging markets and reduces the Japanese
portion, making it more comparable to the
International Growth Fund in terms of
investment approach.
(4) The Lipper International Index is a
composite of international growth mutual
funds.
(5) The Morgan Stanley Capital International
Emerging Markets (Free) Index is an index
that includes emerging markets around the
world.
(6) The Lehman Intermediate Govt./Corp. Index
indicates broad intermediate
government/corporate bond market
performance.
(7) The S&P-rated AAA Money Market Funds is an
index of money market mutual funds rated
AAA by Standard and Poors.
(a) For the period May 1, 1998 (Commencement of
Operations) to December 31, 1998.
(b) Rates are annualized.
(c) Without the waiver of expenses, the expense
ratio would have been 6.35%. All of the
indices referenced in Performance
Highlights represent unmanaged portfolios
and are used for comparative purposes only.
2 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 3
------------------------------------------------
A LETTER FROM THE PRESIDENT
------------------------------------------------
Dear Shareholders:
[PHOTO OF ROCKY BARBER] On the surface 1998 seemed like a continuance of
the last couple of years, with very robust gains
for U.S. equities. Lower inflation and declining
interest rates were the primary drivers for
stock valuations and also made it a good year
for bonds.
But beneath the surface there were several
negative trends that are impacting the market
and our funds. Domestically, the market advance
continues to be quite narrow. While the largest
50 U.S. stocks were up more than 40%, over half
of all tradeable stocks finished down for the
year. This is reflected in the Russell 2000
Index of smaller capitalization equities which
had a total return of -2.6% in 1998. Thus the
Value Discovery Fund which holds only smaller
cap stocks had an excellent year with a positive
return beating 82% of its competition.* This is
the second year in a row that this Fund has been
in the top quintile of its peer group. Similarly
the Growth Fund, which always holds stocks of
all sizes (currently about 40% in
smaller/mid-size companies), had a very good
relative return which almost matched the large
cap dominated S&P 500.
International investing had a difficult year,
with many smaller emerging economies seeing
their economic growth disintegrate and their
fragile equity markets implode. Nevertheless,
our broad based International Growth Fund still
had a good year, up 11.5% but slightly trailing
its benchmark. Our recently started Emerging
Markets Growth Fund bore the full brunt of the
collapse and was down 23.7% for the eight months
since its inception. However, this was still far
better than most other emerging markets funds or
the emerging markets index which was down almost
29% for the same period.
While interest rates did decline, investors
became very cautious about credit ratings. Thus,
corporate bonds underperformed. Our conservative
stance in this area was rewarded and the Income
Fund finished the year with a solid 7.1% return.
Both the Income Fund and the Ready Reserves Fund
achieved the objectives of adding value for our
shareholders versus returns available from other
funds.
I want to thank Jim Truettner, who retired in
October, for his many years of service on the
Fund's Board of Directors. His counsel and
support have been behind much of the success of
the mutual funds. I am saddened to report that
George Kelm died just before Christmas. He too
had been a director since the Fund group's
inception. His integrity and concern will be
missed.
/s/ ROCKY BARBER
*This information, provided by Morningstar Inc.,
included the performance of 231 investment
companies classified in the Small Cap Value
category ranked by return for the twelve month
period ending December 31, 1998.
December 31, 1998 Annual Report 3
<PAGE> 4
------------------------------------------------
GROWTH FUND
------------------------------------------------
------------------------------------------------
PERFORMANCE HIGHLIGHTS
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Growth Fund ................... 27.15% 20.07% 17.99% 29.07% 6.45%
S&P 500 Index .............. 28.57 33.36 22.96 37.58 1.32
Russell 2000 Index ......... (2.55) 22.36 16.49 28.44 (1.82)
</TABLE>
Past performance does not predict future performance
------------------------------------------------
INVESTOR INFORMATION
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions) .... .......... $742 $591 $502 $363 $218
Portfolio Turnover Rate (%) ... 37 34 43 32 46
Expense Ratio (%) ............. .84 .84 .79 .65 .71
</TABLE>
------------------------------------------------
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
------------------------------------------------
Dear Shareholders:
[PHOTO OF ROCKY BARBER] Even though there were many unexpected events in
1998, the U.S. equity market was able to
overcome all obstacles. The primary driver of
higher stock prices was the growing belief that
inflation would stay low for many years to come.
This also caused long term interest rates to
drop about 1% as the Federal Reserve's guiding
hand reassured investors at just the right time.
Even Congress upheld most of its previously
mandated spending restraints and this allowed
investors to think that government budget
surpluses will provide long term benefits to the
nation.
While many believe the equity market is
overvalued, we do not see the catalyst for a
[PHOTO OF MARK A. FULLER III] prolonged market setback. While this economic
cycle is very mature, at worst we expect a
period of very modest growth as consumers
retrench from the buying binge of the last four
years. We think interest rates will remain low,
although further declines much below 5% are not
likely. Although corporate earnings growth has
slowed to a crawl, we do not see indications of
its decline. Lower interest rates, favorable
currency translation, and lower commodity costs
should all help balance out any domestic or
international sales weakness, and keep earnings
solid.
Even within a relatively flat economic or stock
market scenario, we think that there will be
many opportunities to make good investments at
reasonable prices. While many point to the
overall market's record high P/E of about 26
times, this is heavily influenced by about fifty
very large cap, very high P/E stocks like
Microsoft, Cisco Systems, America Online, Dell
Computer, Pfizer and Coca-Cola. If you look at
the other 450 stocks in the S&P 500, their
average valuations are much more reasonable at
less than 20 times 1999 earnings.
4 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 5
We will continue to focus on high quality stocks
with good growth prospects. Some high P/E stocks
will do well as long as they produce consistent
20+% earnings gains. But we continue to look
most aggressively for issues with more modest
P/E's that can benefit from both earnings gains
and multiple expansion. Currently, many parts of
technology have run up dramatically
(particularly those that are internet-related)
and are very optimistically priced. Our response
is to trim such positions in order to not let
the risk (in this case price risk) of the Growth
Fund become elevated. With diligence and
patience we will continue to seek other less
risky ways to achieve growth.
As shown in the performance highlights, in each
of the last four years, smaller cap stocks
(represented by the Russell 2000 Index) have
underperformed dramatically. Because it has had
such disappointing performance, it is now the
most attractive area of the market. Many good
values exist in these faster growing but less
liquid and less recognized names. We expect this
area to be a real opportunity even if the market
as a whole goes through a period of digestion.
This should keep the Growth Fund on a track to
provide long-term capital growth for you.
/s/ ROCKY BARBER /s/ MARK A. FULLER III
------------------------------------------------
GROWTH FUND
------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS
AND INCOME DIVIDENDS
[PERFORMANCE GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth Fund $10,000 13,000 12,800 18,500 19,900 22,900 24,400 31,500 37,200 44,600 56,800
S&P 500 Index $10,000 13,200 12,800 16,600 17,900 19,700 20,000 27,500 33,800 45,100 58,000
</TABLE>
December 31, 1998 Annual Report 5
<PAGE> 6
- - --------------------------------------------------------------------------------
GROWTH FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
COMMON STOCKS
<C> <S> <C>
TECHNOLOGY--21.8%
408 *A D C Telecommunications, Inc......... $ 14,195
279 *Aspen Technology, Inc................. 4,047
178 *Clear Channel Communications, Inc..... 9,679
320 *Electronic Arts, Inc.................. 17,960
80 Intel Corporation...................... 9,509
151 Linear Technology Corporation.......... 13,506
180 *Microsoft Corporation................. 24,964
146 Molex, Inc............................. 5,586
216 Molex, Inc., Class "A"................. 6,884
238 *Tellabs, Inc.......................... 16,345
232 Texas Instruments, Inc................. 19,842
222 *Xilinx, Inc........................... 14,455
179 *Zebra Technologies Corporation, Class
"A".................................... 5,147
--------
162,119
--------
CONSUMER RETAIL--16.6%
340 CVS Corporation........................ 18,700
326 Home Depot, Inc........................ 19,959
100 *Kohl's Corporation.................... 6,144
252 Lowes Companies, Inc................... 12,909
449 Mattel, Inc............................ 10,236
682 *Office Depot, Inc..................... 25,199
247 *Staples, Inc.......................... 10,803
211 Walgreen Company....................... 12,364
148 *Whole Foods Market, Inc............... 7,149
--------
123,463
--------
APPLIED TECHNOLOGY--12.6%
460 *Acxiom Corporation.................... 14,266
300 *Airtouch Communications, Inc.......... 21,637
380 Automatic Data Processing, Inc......... 30,471
459 *B A Merchant Services, Inc............ 9,227
135 Shared Medical Systems Corporation..... 6,739
240 *Sterling Commerce, Inc................ 10,809
--------
93,149
--------
HEALTHCARE-RELATED SPECIALTIES--12.1%
151 *Amgen, Inc............................ 15,778
218 *Covance, Inc.......................... 6,361
184 *Elan Corporation PLC (ADR)............ 12,787
215 *HCR Manor Care, Inc................... 6,308
624 *Healthsouth Rehabilitation
Corporation............................ 9,635
200 Medtronic, Inc......................... 14,850
389 Omnicare, Inc.......................... 13,529
198 *Quintiles Transnational Corporation... 10,592
--------
89,840
--------
FINANCIAL SERVICES--10.2%
60 American International Group, Inc...... 5,797
299 Associates First Capital Corp., Class
"A".................................... 12,679
608 *Concord EFS, Inc...................... 25,743
160 Federal Home Loan Mortgage
Corporation............................ 10,310
436 MBNA Corporation....................... 10,874
150 State Street Boston Corporation........ 10,434
--------
75,837
--------
BUSINESS SERVICES--7.5%
65 Cintas Corporation..................... 4,578
399 *Core Laboratories NV Company.......... 7,631
175 R.R. Donnelly & Sons Company........... 7,658
316 *Heartland Express, Inc................ 5,530
376 *Knight Transportation, Inc............ 10,048
188 *Robert Half International, Inc........ 8,394
81 U.S. Freightways Corporation........... 2,371
360 *USWeb Corporation..................... 9,503
--------
55,713
--------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES OR PRINCIPAL AMOUNT VALUE
- - ---------------------------------------------------- --------
COMMON STOCKS--(CONTINUED)
<C> <S> <C>
DISTRIBUTION--4.5%
150 Cardinal Health, Inc................... $ 11,381
314 *MSC Industrial Direct Co., Class
"A".................................... 7,104
299 *U.S. Foodservice...................... 14,629
--------
33,114
--------
INDUSTRIAL PRODUCTS--2.7%
244 Danaher Corporation.................... 13,249
15 Illinois Tool Works, Inc............... 870
145 Minerals Technologies, Inc............. 5,932
--------
20,051
--------
SPECIALTY CONSUMER SERVICES AND PRODUCTS--1.8%
353 Royal Caribbean Cruises, Ltd........... 13,072
--------
TOTAL COMMON STOCKS--89.8%
(cost $350,404)................................... 666,358
--------
CONVERTIBLE PREFERRED STOCK--1.6%
600 Innkeepers USA Trust,
8.625%, Series A Cumulative
Convertible Preferred Shares of
Beneficial Interest (cost $15,000)... 12,000
--------
CONVERTIBLE BOND--.4%
$ 5,000 The Sports Authority, Inc.,
5.25% Subordinated Debentures,
due 9/15/01 (cost $4,675)............ 3,200
--------
SHORT-TERM INVESTMENTS--8.2%
$10,128 Associates Corp. of North America
Demand Note, 4.60%, due 1/1/99....... 10,128
5,000 General Motors Acceptance
Corporation, 5.32%, due 1/8/99....... 5,000
5,000 General Motors Acceptance
Corporation 5.21%, due 1/11/99....... 5,000
4,000 Household Finance Corporation
5.08%, due 1/15/99................... 4,000
4,000 General Electric Capital
Corporation, 5.18%, due 1/22/99...... 4,000
8,250 Household Finance Corporation
5.15%, due 1/25/99................... 8,250
6,100 General Electric Capital
Corporation, 5.40%, due 1/29/99...... 6,100
5,600 General Motors Acceptance
Corporation 5.20%, due 2/1/99........ 5,600
2,500 Ford Motor Credit Corporation,
5.21%, due 2/5/99.................... 2,500
10,000 General Electric Capital
Corporation, 4.90%, due 2/8/99....... 10,000
--------
TOTAL SHORT-TERM INVESTMENTS
(cost $60,578).................................... 60,578
--------
TOTAL INVESTMENTS--100.0%
(cost $430,657)................................... 742,136
LIABILITIES, LESS CASH AND OTHER ASSETS............. (80)
--------
NET ASSETS--100.0%.................................. $742,056
========
</TABLE>
- - ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
6 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 7
------------------------------------------------
VALUE DISCOVERY FUND
------------------------------------------------
------------------------------------------------
PERFORMANCE HIGHLIGHTS
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997
------- ------
<S> <C> <C>
Value Discovery Fund ........ .66% 33.46%
Russell 2000 Index ....... (2.55) 22.36
</TABLE>
Past performance does not predict future performance.
------------------------------------------------
INVESTOR INFORMATION
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997 1996(a)
------ ------ ---------
<S> <C> <C> <C>
Ending Net Assets
(in millions).. ............. $45 $30 $2
Portfolio Turnover Rate (%) ... 78 69 --
Expense Ratio (%).............. 1.52 1.50(b) --
</TABLE>
------------------------------------------------
(a) For the period December 23, 1996
(Commencement of Operations) to December 31,
1996.
(b) Without the waiver of expenses, the expense
ratio would have been 1.78%
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
------------------------------------------------
Dear Shareholders:
The events of 1998 created one of the most
challenging investment climates for small cap
[PHOTO OF GLEN KLECZKA] investors in recent years. The year began with
the Fed seriously contemplating raising rates to
prevent the economy from overheating and ended
with three rate cuts to avert a global liquidity
crisis and possible recession. In August, Russia
devalued its currency and effectively went into
debt-default creating a crisis of confidence
that spread throughout the world impacting
developed and emerging markets alike. Many asset
classes were impacted by these global events. In
the third quarter small cap equities witnessed
the toughest bear market since 1973-74. Stocks
with a market capitalization of $250 million or
less were down 50% on average from their 52-week
highs while those with a $250 million to $2
billion market cap were down 29% on average.
These declines are comparable to the declines of
the 1987 stock market crash and 1990 bear
market. Spreads between corporate bonds and
treasuries are now 80% wider than at the
beginning of the year reflecting the risk-averse
psychology of current markets. Oil prices were
down 48% plunging to a 12-year low. The Goldman
Sachs Commodity Index* was down 36% for the
year. Gold fell back to $274.30 an ounce, a
price last seen in 1979. The result of all this
instability was a "flight to quality". In U.S.
equity markets this meant a stampede into
investments with the perception of safety (large
cap stocks and index funds) or of unlimited
[PHOTO OF DAVID MITCHELL] growth (Internet and technology stocks).
Investors continued to pour funds into what
already had worked. This did not include small
cap stocks.
The S&P 500 index of large cap stocks
outperformed the Russell 2000 Index of small
caps by almost 30 percentage points. The Russell
2000 Index, our performance benchmark, was down
2.55% and the Russell 2000 Value index declined
6.45%. Our goal is to outperform the benchmark
in down markets as well as up markets. While
most small cap value funds were down for the
year, the Value Discovery Fund eked out a small
moral victory with a gain of 0.66%
Despite the disappointing 1998 performance of
the small cap asset class, we feel fortunate to
have outperformed the Russell 2000 benchmark and
Russell 2000 Value** and, according to
Morningstar, Inc., 82% of all small cap value
funds.*** This performance builds on our strong
up 33.5% in 1997, a strong up market year when
the Russell 2000 was up 22.4%.
December 31, 1998 Annual Report 7
<PAGE> 8
[PHOTO OF CAPPY PRICE] Our investment discipline attempts to deliver
superior investment performance through superior
stock selection while neutralizing sector risk.
As a result, the Fund's overall sector
allocation was comparable to that of the Russell
2000 benchmark in 1998 effectively neutralizing
sector risk. The only significant individual
sector divergence was technology where our
exposure was 2.9% at the end of the year
relative to the Russell's 13.6%. This cautious
stance results from our near-term outlook for
the fundamental operating performance of the
value stocks we monitor in the technology
sector. Many companies are announcing that
business performance is below expectations. The
rally in many technology stocks has priced in a
solid recovery. Therefore, reality may
underperform expectations resulting in
disappointment. Most of the technology rally
occurred in growth stocks rather than the value
stocks we purchase. In 1998, Russell 2000 growth
technology stocks were up 17.2%, Russell 2000
technology stocks were up 12.7% and Russell 2000
value technology stocks were down 4.4%. In the
month of December, Russell 2000 growth and
Russell 2000 technology stocks were up 12.7% and
10.6%, respectively. Value technology stocks
were only up 1.9%. Growth technology stocks
represented five of the top ten contributors and
added a full percentage point to the Russell
2000 index's 1998 returns; two of those five
were Internet stocks. There is a bit of a
casino-mentality in the market these days. We
will continue to tread cautiously in sectors
where this is apparent and will add only very
selectively to technology in the future.
One of the worst contributors to returns for the
Russell 2000 and Russell 2000 Value Indexes in
1998 was the REIT sector. We believe REITs are
now attractively priced, with many selling below
the value of their real estate portfolios
despite solid cash flow growth and very
attractive yields. We have increased our REIT
weighting to 12% from roughly 7% at the
beginning of the year, representing 40% of our
total finance sector exposure. Given their
attractive dividend yields, we are in effect
being paid to wait for the value to be
recognized in this sector. The Russell's weakest
sector in 1998 was energy and we were not
immune. We have a number of opportunities under
evaluation and anticipate increasing our
exposure to energy. At the end of the year, we
purchased Oregon Steel and Worthington
Industries, two steel stocks that boost our
exposure to the materials sector. We believe
many companies in this sector have bottomed and
offer attractive future return potential. We
also pruned six positions from our health care
exposure throughout 1998 to arrive at a solid
core list of holdings. Ibah was bought by
Omnicare and left the portfolio while First
Health was added at the end of the year. The
consumer area was a productive sector for
investment in 1998. We doubled-up during the
late summer bear market on the children's
apparel manufacturer Happy Kids making it the
Fund's largest position. We believed earnings
expectations would be revised upward due to
strong bookings and an excellent product
portfolio. Conversely, we reduced positions in
Brauns Fashions, Cadmus Communications and
Michael's Stores when we realized results would
be weaker than expected. These modifications
were effective in adding to performance this
year. In addition, the apparel company Farah was
bought out by Tropical Sportswear adding to
performance. Finance was also one of the more
productive areas for investment for the fund
last year despite the sector's under-performance
in the Russell 2000. Particularly rewarding
investments that appreciated substantially
included Annuity Life & Re, Inspire Insurance
Solutions and the MONY Group.
We believe 1998 was an important year for small
cap value managers to demonstrate their
commitment to tax management. Most small cap
value funds were down in 1998. Some of these
same funds compounded the pain of negative
returns by making substantial capital gains
distributions to their shareholders. We are
proud that, under these circumstances, we were
able to enhance the Fund's returns on an
after-tax basis by offsetting all short-term and
long-term gains with losses in the portfolio.
Tax law required the Value Discovery Fund to
distribute interest and dividend income for the
year in the amount of $0.093 per share. If we
had not managed the Fund's tax position the
total distribution would have exceeded $1.20 per
share. Therefore, the Value Discovery Fund's
after-tax return (assuming a 39.6% tax bracket)
was 0.37% in 1998 and 31.96% in 1997 resulting
in a compounded after-tax return of 15.09% over
the past two years.
We are optimistic about the future despite the
intractable under-performance of small cap
stocks relative to large. The valuation
disparity between the two continues to be at
historic levels. In addition, the Value
Discovery Fund trades at a valuation discount to
the small cap universe as measured by the P/E
ratio at 10.2x 1999 expected earnings vs. 19.5x
for the Russell 2000. Meanwhile, the earnings on
the Fund's holdings are projected to grow 12%
vs. 10% for the Russell 2000. The Fund also
exhibits decent absolute value as it is
currently trading at 2.0x book value relative to
the 2.5x for the Russell 2000. We look forward
to the day when the valuation disparity between
small cap and large cap narrows meaningfully. In
the meantime, thank you for your continued
investment and support.
8 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 9
* The Goldman Sachs Commodity Index is a
composite index of commodity sector returns
that is broadly diversified across the
spectrum of commodities.
** The Russell 2000 Value Index is an unmanaged
index that tracks stocks in the Russell 2000
Index with lower price-to-book ratios and
lower forecasted growth values.
*** This information, provided by Morningstar,
Inc., included the performance of 231
investment companies classified in the Small
Cap Value category ranked by return for the
twelve month period ending December 31,
1998.
/s/GLENN KLECKA /s/DAVID MITCHELL /s/CAPPY PRICE
------------------------------------------------
VALUE DISCOVERY FUND
------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS
AND INCOME DIVIDENDS
[PERFORMANCE GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Value Discovery Fund $10,000 9,700 11,100 14,000 13,300 15,000 14,600 12,000 13,400
Russell 2000 Index $10,000 9,500 11,000 12,700 12,200 13,500 12,800 10,300 11,900
</TABLE>
December 31, 1998 Annual Report 9
<PAGE> 10
- - --------------------------------------------------------------------------------
VALUE DISCOVERY FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ----------------------------------------------------- -------
SHARES VALUE
- - ----------------------------------------------------- -------
COMMON STOCKS
<C> <S> <C>
FINANCIAL SERVICES--31.4%
49 A R M Financial Group, Inc. ............. $ 1,094
50 Amerus Life Holdings, Inc., Class "A".... 1,125
42 Annuity & Life Re Holdings, PLC (ADR).... 1,137
85 Brandywine Realty Trust.................. 1,512
42 CCA Prison Realty Trust.................. 853
94 Equity One, Inc. ........................ 852
51 First Industrial Realty Trust............ 1,368
100 *Matrix Capital Corporation.............. 1,355
50 *Mony Group, Inc. ....................... 1,565
27 SCPIE Holdings, Inc. .................... 803
85 *Seacoast Financial Services
Corporation.............................. 871
30 Statewide Financial Corporation.......... 578
45 Walden Residential Properties, Inc. ..... 924
-------
14,037
-------
CONSUMER DISCRETIONARY--14.8%
52 *Brauns Fashion Corporation.............. 490
35 Cadmus Communications Corporation........ 666
155 *Happy Kids, Inc. ....................... 1,970
38 *Michaels Stores, Inc. .................. 682
163 Pizza Inn, Inc. ......................... 724
45 Russ Berrie & Co., Inc. ................. 1,046
64 *Shoe Carnival, Inc. .................... 712
45 *Sunglass Hut International, Inc. ....... 312
-------
6,602
-------
MATERIALS--9.6%
5 American Business Products, Inc. ........ 118
79 Easco, Inc. ............................. 613
32 *Hawk Corporation........................ 267
29 *N C I Building Systems, Inc. ........... 810
78 Oregon Steel Mills, Inc. ................ 926
22 USG Corporation.......................... 1,100
36 Worthington Industries, Inc. ............ 456
-------
4,290
-------
HEALTHCARE-RELATED SPECIALTIES--8.4%
70 *First Health Group Corporation.......... 1,163
29 *Maxxim Medical, Inc. ................... 866
161 *Response Oncology, Inc. ................ 655
52 *Sierra Health Services, Inc. ........... 1,091
-------
3,775
-------
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------- -------
SHARES OR PRINCIPAL AMOUNT VALUE
- - ----------------------------------------------------- -------
COMMON STOCKS--(CONTINUED)
<C> <S> <C>
PRODUCER DURABLES--8.1%
54 *Browne & Sharpe Manufacturing Company... $ 431
36 *Denison International PLC (ADR)......... 450
41 *Doncasters PLC (ADR).................... 664
58 LSI Industries, Inc. .................... 1,301
51 Omniquip International, Inc. ............ 770
-------
3,616
-------
AUTOS AND TRANSPORTATION--5.7%
80 *International Total Services, Inc. ..... 400
25 *Landstar System, Inc. .................. 1,027
50 *Stoneridge, Inc. ....................... 1,138
-------
2,565
-------
UTILITIES--5.4%
41 Illinova Corporation..................... 1,030
36 T N P Enterprises, Inc. ................. 1,381
-------
2,411
-------
TECHNOLOGY--2.9%
182 *Overland Data, Inc. .................... 1,300
-------
ENERGY--1.7%
26 *Cal Dive International, Inc. ........... 531
26 *Unifab International, Inc. ............. 210
-------
741
-------
CONSUMER STAPLES--1.5%
45 Sanderson Farms, Inc. ................... 684
-------
MULTI-INDUSTRY--1.1%
44 *Global Industrial Technologies, Inc. ... 470
-------
TOTAL COMMON STOCKS--90.6%
(cost $35,929)..................................... 40,491
-------
SHORT-TERM INVESTMENT--9.8%
$4,385 Investors Bank & Trust Company
Repurchase Agreement 4.25%, dated
12/31/98 collateralized by U.S.
Government security with a market value
of $4,605, 1/4/99 repurchase date (cost
$4,385)................................ 4,385
-------
TOTAL INVESTMENTS--100.4%
(cost $40,314)..................................... 44,876
LIABILITIES, LESS CASH AND OTHER ASSETS--(.4%)....... (201)
-------
NET ASSETS--100.0%................................... $44,675
=======
</TABLE>
- - ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
10 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 11
------------------------------------------------
INTERNATIONAL GROWTH FUND
------------------------------------------------
------------------------------------------------
PERFORMANCE HIGHLIGHTS
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
International Growth Fund ...... 11.46% 8.39% 10.20% 7.22% (.04)%
MCI AC WLD ex US Index* ...... 14.46 2.04 6.68 9.94 6.63
Lipper International Index ... 12.66 7.27 14.43 10.02 (.74)
</TABLE>
Past performance does not predict future performance.
------------------------------------------------
INVESTOR INFORMATION
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Ending Net Assets
(in millions). ............... $140 $129 $105 $90 $70
Portfolio Turnover Rate (%)..... 98 102 89 77 40
Expense Ratio (%)............... 1.36 1.43 1.44 1.48 1.51
</TABLE>
------------------------------------------------
*Morgan Stanley Capital International All
Country World (Free) except U.S. Index.
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
------------------------------------------------
Dear Shareholders:
The second half of 1998 brought first a
[PHOTO OF W. GEORGE GREIG] frightening crisis atmosphere and then a
startling turnaround in global equity markets.
As the financial crisis in emerging markets
spread across the globe, the collapse of
speculative Russian debt positions and the
unforeseen (and ill-advised) leverage of
Long-Term Capital Management created a sense of
panic in financial institutions. By late
September, the financial markets were focused on
the banking system's exposure to emerging
markets and to hedge funds (an unknown quantity
but clearly greater than total global bank
capital)--and fear was growing that a classic
financial panic might be at hand, with the
potential for an accompanying global
debt-deflation recession. In two months the S&P
500 corrected by 20% and the MSCI World Index*
fell by 21%, with many smaller companies and
financial stocks down by 50% or more.
Acknowledging the threat of illiquidity and
deflation, the Federal Reserve lowered interest
rates three times in the second half of the
year, followed by dozens of other central banks.
Money growth accelerated as central banks eased
and strong banks picked up the slack from
weakened credit markets. With investor
confidence rapidly restored, a powerful fourth
quarter recovery in equity markets worldwide
brought international returns back to positive
territory for the year, with the International
Growth Fund posting a 11.5% return for 1998 as
against a total return of 14.5% for the
benchmark MSCI All Country World ex US Index. By
contrast, reflecting weaker liquidity and
greater perceived risk, the MSCI Emerging
Markets (Free) Index fell 25.3% for the year,
and the new Small Cap MSCI All Country World ex
US Index** fell 1.1%.
At year-end, most indices, at least in North
America and Europe, were close to their mid-year
levels. Asian markets had in many cases
recovered substantially from their earlier lows,
and there were increasing signs of an economic
bottom in Asia's worst-hit countries. As we move
into 1999, global markets are being buoyed by
growth in the information and communications
sectors, speculation on the benefits of
restructuring-related mergers, and the potential
increment to growth and efficiency from a
successful introduction of the euro. For the
present, these factors are overshadowing
concerns about slowing in the manufacturing
sectors and continuing imbalances in the
financial system.
What President Clinton referred to as `the
greatest financial crisis in half a century' has
seemingly been contained, if not eliminated.
There will be, in all likelihood, episodes of
volatility of expectations in 1999 that will
December 31, 1998 Annual Report 11
<PAGE> 12
again test investors' confidence. But there is
no reason at this point to depart from a base
assumption of moderate, non-inflationary growth,
driven mainly by the service sectors. In a broad
sense, this scenario should continue to set a
backdrop for an investment strategy based on
superior earnings performance in a relatively
stable interest rate environment.
/s/ W. GEORGE GREIG
* The MSCI World Index is an index consisting
of developed and emerging world markets.
** The MSCI Small Cap Indices were established
in January, 1998. Figures shown are for the
11 months ended December 31, 1998. The MSCI
Small Cap All Country World ex US Index is an
unmanaged index comprised of companies within
the market capitalization range of $200
million to $800 million across 23 developed
markets.
---------------------------------------------
INTERNATIONAL GROWTH FUND
---------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS
AND INCOME DIVIDENDS
[PERFORMANCE GRAPH]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
International Growth Fund $10,000 10,100 11,400 13,500 14,000 13,500 13,300
MSCI All country World ex-US $10,000 9,900 11,300 13,700 13,700 13,600 14,000
Lipper International Index $10,000 9,700 11,900 13,100 14,000 13,900 14,300
<S> <C> <C> <C> <C> <C> <C> <C>
International Growth Fund 14,500 15,700 16,000 18,500 17,300 19,900 19,300
MSCI All country World ex-US 15,000 16,300 17,200 19,600 18,400 21,300 20,800
Lipper International Index 15,300 16,100 16,400 18,400 16,700 18,700 19,100
</TABLE>
12 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 13
- - --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
COMMON STOCKS
<C> <S> <C>
EUROPE--32.6%
BELGIUM--0.7%
4 Barco Industries NV (Visualization
systems)............................ $ 981
--------
FINLAND--4.0%
5 Fiskars AB - A (Homewares producer)... 106
45 Nokia AB - A (Telecommunications
equipment).......................... 5,469
--------
5,575
--------
FRANCE--7.0%
6 Altran Technologies (Aerospace
technology)......................... 1,324
19 AXA Company (Multi-line insurance).... 2,777
7 Cap Gemini (Computer services and
consultancy)........................ 1,121
12 Cegedim (Healthcare database
service)............................ 551
25 *Genset - ADR (Gene therapy
products)........................... 691
3 Promodes (Food distribution).......... 2,178
10 Royal Canin (Pet food
manufacturing)...................... 625
30 *Transgene - ADR (Gene therapy
products)........................... 461
--------
9,728
--------
GERMANY--2.7%
25 Douglas Holding AG (Retailer)......... 1,515
20 Henkel KGAA (Specialty chemicals)..... 1,608
10 *Qiagen NV (Biotechnology
equipment).......................... 641
--------
3,764
--------
IRELAND--1.2%
100 CRH PLC (Building materials).......... 1,699
--------
ITALY--4.6%
300 Banca Comerciale Italiana (Banking)... 2,074
600 *Banca Nazionale Lavoro (Banking)..... 1,785
600 *Banco di Napoli (Banking)............ 848
400 Credito Emiliano (Investment
banking)............................ 1,172
100 Pagnossin SpA (Ceramics).............. 555
--------
6,434
--------
NETHERLANDS--2.6%
80 Computer Management Group (IT
services)........................... 2,107
25 Heineken NV (Alcoholic beverages)..... 1,503
--------
3,610
--------
NORWAY--0.8%
130 *Tandberg Television ASA (Digital
broadcast equipment)................ 1,078
--------
SPAIN--2.8%
40 Cortefiel SA (Apparel design and
sale)............................... 1,054
50 Sol Melia SA (Hotel management)....... 1,744
40 *Superdiplo SA (Supermarket chain).... 1,126
--------
3,924
--------
SWEDEN--0.9%
85 *Modern Times Group (Publishing)...... 1,255
--------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
EUROPE--(CONTINUED)
<C> <S> <C>
SWITZERLAND--5.3%
2 Belimo Automation AG (Ventilation
controls)........................... $ 669
2 Novartis AG (Consumer healthcare)..... 3,140
8 Swisslog Holdings AG (Logistics
systems)............................ 727
4 Zurich Allied AG (Multi-line
insurance).......................... 2,956
--------
7,492
--------
UNITED KINGDOM--14.9%
200 Bank of Scotland (Banking)............ 2,382
150 Capita Group PLC (Commercial
services)........................... 1,384
50 *Colt Telecom PLC
(Telecommunications)................ 744
165 Compass Group (Food services)......... 1,887
150 Filtronic PLC (Cellular telecom
equipment).......................... 1,501
250 Firstgroup PLC (Transportation
services)........................... 1,655
400 Hays PLC (Distribution/personnel
services)........................... 3,504
200 Kwik-Fit Holdings PLC
(Retail/automotive)................. 1,599
75 Luminar PLC (Theme pubs and
restaurants)........................ 838
300 Misys PLC (Computer systems).......... 2,181
190 Vodafone Group PLC (Mobile
telecommunications services)........ 3,080
--------
20,755
--------
CANADA--9.5%
125 *Berkely Petroleum Corporation (Oil
and gas)............................ 946
55 *Biochem Pharma Inc - ADR
(Preventative pharmaceuticals)...... 1,574
50 Four Seasons Hotels Inc. (Hotels)..... 1,469
25 *IMAX Corporation (Cinema equipment
and operations)..................... 806
50 Intrawest Corp. (Ski and resort
operations)......................... 844
60 *JDS Fitel (Fiberoptic components).... 1,488
20 Magna International Inc. (Automotive
components producer)................ 1,245
70 Newcourt Credit Group (Financial
services)........................... 2,445
40 Suncor Energy Inc. (Oil and gas)...... 1,201
100 *Synsorb Biotech (Pharmaceuticals).... 258
50 Trizec Hahn Corp. (Real estate)....... 1,028
--------
13,304
--------
JAPAN--19.2%
260 Bank of Tokyo Mitsubishi (Banking).... 2,686
9 Bellsystem24 Incorporated
(Telemarketing)..................... 2,003
10 Don Quijote Company (Retailer)........ 1,104
30 Fuji Soft ABC Inc. (Software
developer).......................... 1,523
20 Fujitsu Service & Support (IT
services)........................... 1,439
30 Hitachi Software (Computer software
developer).......................... 872
30 Ito-En Ltd. (Soft drinks)............. 1,544
30 Kawasumi Labs (Medical equipment
maker).............................. 588
20 Matsumotokiyoshi (Supermarket
operators).......................... 772
33 *Megachips Corp. (Electronic
components)......................... 1,268
300 Nikko Securities Co. (Investment
banking)............................ 834
1 NTT Mobile Communications (Mobile
telecommunications services)........ 2,464
25 Orix Company (Leasing company)........ 1,863
</TABLE>
See accompanying Notes to Financial Statements.
December 31, 1998 Annual Report 13
<PAGE> 14
- - --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
JAPAN--(CONTINUED)
<S> <C> <C>
24 People Company, Ltd. (Fitness
clubs).............................. $ 848
50 Ralse Company, Ltd. (Supermarket
chain).............................. 742
15 Ryohin Keikaku Company, Ltd.
(Retail/specialty).................. 1,993
28 Softbank Corporation (Software
distribution)....................... 1,663
50 *Terashima (Pharmaceutical store
operator)........................... 675
.15 *Yahoo! Japan Corp. (Internet search
service)............................ 1,125
35 Yamada Denki (Large scale retail
stores)............................. 779
--------
26,785
--------
ASIA--6.7%
AUSTRALIA--2.1%
120 Brambles Industries Ltd.
(Transport)......................... 2,922
--------
HONG KONG--3.2%
400 Cheung Kong (Property development).... 2,878
500 Li & Fung Limited (Investment holding
company)............................ 1,036
225 Smartone Telecommunications (Mobile
telecommunications services)........ 624
--------
4,538
--------
NEW ZEALAND--0.5%
200 Warehouse Group Limited (Retail)...... 647
--------
SINGAPORE--0.9%
350 Avimo Group Limited (Precision
optics)............................. 549
350 GP Batteries Int'l Ltd. (Batteries)... 746
--------
1,295
--------
EMERGING ASIA--6.6%
CHINA--2.2%
2,000 China Resources Beijing Land (Property
investment and management).......... 498
30 *China Telecom - ADR (Wireless telecom
services)........................... 1,025
800 Cosco Pacific Ltd. (Container leasing
& handling)......................... 333
1,600 First Tractor Co. - H (Agricultural
equipment manufacturer)............. 366
1,750 Legend Holdings Ltd. (Personal
computers).......................... 616
554 Shenzhen Fangda Co. Ltd. - B (Building
materials).......................... 270
--------
3,108
--------
INDIA--1.4%
.024 Housing Dev. Finance Corp. (Housing
finance)............................ 1
10 Infosys Technologies Ltd.
(Software).......................... 697
185 MTNL (Telecommunication services)..... 799
25 Punjab Tractors Ltd. (Tractors)....... 468
--------
1,965
--------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
EMERGING ASIA--(CONTINUED)
<S> <C> <C>
INDONESIA--0.8%
1,650 PT Lautan Luas (Specialty
chemicals).......................... $ 402
2,800 PT Ramayana Lestari (Retail department
store).............................. 658
--------
1,060
--------
PHILIPPINES--0.5%
1,500 *Jollibee Foods Corp. (Fast food
restaurants)........................ 691
--------
SOUTH KOREA--1.0%
33 Samsung Securities Co. (Investment
banking)............................ 903
8 Samsung Electronics (Consumer
electronic products)................ 535
--------
1,438
--------
TAIWAN--0.4%
175 *Compal Electronics (PC Notebooks).... 569
--------
THAILAND--0.3%
325 *Tipco Asphalt Co. (Building
materials).......................... 472
--------
EMERGING EUROPE, MID-EAST, AFRICA--3.1%
GREECE--0.5%
22 Chipita (Snacks and bakery
products)........................... 716
--------
HUNGARY--0.8%
190 Matav RT (Telecommunications
company)............................ 1,086
--------
EGYPT--0.3%
20 Oriental Weavers (Textiles)........... 443
--------
BOTSWANA--0.5%
60 Barclays Bank of Botswana (Banking)... 244
350 Sechaba Brewery Holdings
(Beverages)......................... 406
--------
650
--------
SOUTH AFRICA--1.0%
103 Comparex Holdings Ltd. (Software)..... 831
993 Metro Cash & Carry (Food wholesale)... 657
--------
1,488
--------
LATIN AMERICA--2.2%
BRAZIL--0.4%
31 Brasil Distrib Pao Acucar - ADR
(Household products distributor).... 482
--------
CHILE--0.6%
25 Laboratorio Chile S.A. - ADR (Generic
drugs).............................. 359
20 Vina Concha y Toro - ADR (Winery)..... 505
--------
864
--------
</TABLE>
See accompanying Notes to Financial Statements.
14 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 15
- - --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES VALUE
- - ---------------------------------------------------- --------
<S> <C> <C>
MEXICO--1.2%
318 *Corporacion Geo (Real estate)........ $ 881
300 FEMSA - UB (Beverages)................ 813
--------
1,694
--------
TOTAL COMMON STOCKS--94.8%
(cost $104,280)................................... 132,512
--------
PREFERRED STOCKS
BRAZIL--0.6%
63,600 EMBRAER - PN (Aircraft manufacturer)... 789
--------
GERMANY--1.4%
15 Fielmann AG (Optical retailer)........ 720
2 Wella AG (Health and personal
products)........................... 1,251
--------
1,971
--------
TOTAL PREFERRED STOCKS--2.0%
(cost $2,536)..................................... 2,760
--------
</TABLE>
<TABLE>
<CAPTION>
- - ---------------------------------------------------- --------
SHARES OR PRINCIPAL AMOUNT VALUE
- - ---------------------------------------------------- --------
<S> <C> <C>
SHORT-TERM INVESTMENT--3.9%
$ 5,443 Investors Bank & Trust Company
Repurchase Agreement, 4.25%, dated
12/31/98, collateralized by U.S.
Government securities with a market
value of $5,715, 1/4/99 repurchase
date (cost $5,443).................. $ 5,443
--------
TOTAL INVESTMENTS--100.7% (cost $112,259)......... 140,715
LIABILITIES, LESS CASH AND OTHER ASSETS--(0.7)%..... (969)
--------
NET ASSETS--100.0%.................................. $139,746
========
</TABLE>
- - ---------------
* Non-income producing securities
GDR = Global Depository Receipt
ADR = American Depository Receipt
At December 31, 1998, the Fund's Portfolio of Investments includes the following
categories:
Commercial Services - 9.4%; Consumer Durables - 0.1%; Consumer Non-Durables -
7.9%; Consumer Services - 8.2%; Electronic Technology - 11.4%; Energy Minerals -
1.6%; Finance - 20.9%; Health Services - 0.4%; Health Technology - 5.0%;
Industrial Services - 1.0%; Non-Energy Minerals - 1.6%; Process Industries -
0.6%; Producer Manufacturing - 4.3%; Retail Trade - 11.8%; Technology Services -
7.1%; Transportation - 1.5%; and Utilities - 7.2%
See accompanying Notes to Financial Statements.
December 31, 1998 Annual Report 15
<PAGE> 16
------------------------------------------------
EMERGING MARKETS GROWTH FUND
------------------------------------------------
------------------------------------------------
PERFORMANCE HIGHLIGHTS
------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------
DECEMBER 31, 1998)(a)
---------------------
<S> <C>
Emerging Markets Growth Fund ... (23.70)%
Morgan Stanley Capital
International Emerging Markets
(Free) Index .............. (28.92)
</TABLE>
Past performance does not predict future performance.
------------------------------------------------
INVESTOR INFORMATION
------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1998(a)
--------------------
<S> <C>
Ending Net Assets (in millions) ... $4
Portfolio Turnover Rate (%)........ 226(b)
Expense Ratio (%).................. 2.25(b)(c)
</TABLE>
------------------------------------------------
(a) For the period May 1, 1998 (Commencement of
Operations) to December 31, 1998.
(b) Rates are annualized.
(c) Without the waiver of expenses the expense
ratio would have been 6.35%.
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
------------------------------------------------
Dear Shareholders:
[PHOTO OF W. GEORGE GREIG] After significant declines in both the second
and third quarters of 1998, the fourth quarter
brought a partial recovery in emerging markets,
particularly in Asia. At its worst, in early
September, the benchmark MSCI Emerging Markets
(Free) Index was down 42.7% for the year, but
the total return for the year as a whole was
-25.3%. For the eight months in which the
Emerging Markets Growth Fund operated, its
return was -23.7% versus the index's -28.9%.
Shocked by the severity of the Asian recession
in early 1998, investors abandoned emerging
market debt and equity completely in the
aftermath of the Russian crisis. But as the
Federal Reserve was beginning to contemplate
[PHOTO OF JEFFREY A. URBINA] easing monetary policy in September, divergences
in liquidity trends among emerging markets
themselves began to have an impact on their
financial markets. Collapsing import volumes in
the Asian crisis countries meant that Korea,
Thailand, Malaysia and Indonesia improved their
current account balances dramatically. Combined
with ongoing foreign direct investment, this
improvement meant that most Asian currencies
were able to stabilize and even strengthen
during the second half. With the Japanese yen
beginning to strengthen against the dollar in
the fourth quarter and the Fed reducing US
interest rates, interest rates fell
significantly throughout Asia during the fourth
quarter. Equity markets rallied strongly as a
result, rising 85.4% in Korea, 42.0% in
Thailand, 63.4% in Malaysia, and 67.3% in
Indonesia on a local currency basis over the
last three months of 1998.
16 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 17
On the other hand, because of slumping commodity
prices and poor budgetary conditions, current
account deficits tended to worsen in Latin
America over the course of the year, leading to
higher real interest rates which in turn
weakened both economic prospects for the region
and equity market performance. Argentina,
Mexico, and especially Brazil continue to
struggle toward fiscal reconstruction, but none
has yet found the formula that will restore
foreign investor confidence fully.
Only a handful of the 25 or so significant
emerging equity markets showed a positive return
for 1998; indeed, only about half of all
emerging markets even showed positive economic
growth--an event unprecedented in at least the
last 25 years. We have yet to see recovery fully
take hold in Asia; there are difficult hurdles
to clear in rehabilitating the region's banks,
and legal obstacles to be overcome in clearing
the asset markets. Latin America must find a way
to attract stable foreign financing at
reasonable interest rates. Eastern Europe must
continue to grow in the face of weakening
manufacturing activity in the Euro zone and a
collapse in Russia. These challenges are not
insurmountable, but emerging market recovery
will probably require continued growth in
Western economies at 1998's level or better,
successful containment of deflation, and no
letup in financial and fiscal reforms within the
crisis economies themselves. Whether or not
these conditions are met will have a lot to do
with not only the continuation of the emerging
market rally but also with the risk-return
profile of the world as a whole.
/s/ W. GEORGE GREIG /s/ JEFFREY A. URBINA
------------------------------------------------
EMERGING MARKETS GROWTH FUND
------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
[PERFORMANCE GRAPH]
<TABLE>
<S> <C> <C> <C> <C>
Emerging Markets Growth Fund $10,000 8,700 6,640 7,630
MSCI EMF Index $10,000 7,660 6,020 7,108
</TABLE>
December 31, 1998 Annual Report 17
<PAGE> 18
- - --------------------------------------------------------------------------------
EMERGING MARKETS GROWTH FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ------------------------------------------------------ ------
SHARES VALUE
- - ------------------------------------------------------ ------
<S> <C> <C>
COMMON STOCKS
ASIA--47.1%
CHINA--14.1%
4 *China Telecom - ADR (Wireless telecom
services).............................. $ 139
400 First Tractor Co. - H (Agricultural
equipment manufacturer)................ 91
500 China Resources Beijing Land (Property
investment and management)............. 125
350 Legend Holdings Ltd. (Personal
computers)............................. 123
108 Shenzhen Fangda Co., Ltd. - B (Building
materials)............................. 53
------
531
------
INDIA--8.8%
30 MTNL (Telecommunication services)........ 130
5 Punjab Tractors (Tractors)............... 94
2 Infosys Technologies Ltd. (Software)..... 105
------
329
------
INDONESIA--4.8%
350 PT Lautan Luas (Specialty chemicals)..... 85
400 PT Ramayana Lestari (Retail department
store)................................. 94
------
179
------
PHILIPPINES--3.7%
300 *Jollibee Foods Corp. (Fast food
restaurants)........................... 138
------
SOUTH KOREA--8.2%
8 Samsung Securities Co. (Investment
banking)............................... 219
1 Samsung Electronics (Consumer electronic
products).............................. 90
------
309
------
TAIWAN--4.6%
53 *Compal Electronics (PC Notebooks)....... 172
------
THAILAND--2.9%
75 *Tipco Asphalt Co. (Building
materials)............................. 109
------
EUROPE, MID-EAST, AFRICA--19.1%
GREECE--2.6%
3 Chipita (Snacks and bakery products)..... 98
------
HUNGARY--4.6%
30 Matav RT (Telecommunications company).... 172
------
</TABLE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------ ------
SHARES OR PRINCIPAL AMOUNT VALUE
- - ------------------------------------------------------ ------
EUROPE, MID-EAST, AFRICA--(CONTINUED)
<S> <C> <C>
EGYPT--2.9%
5 Oriental Weavers (Textiles).............. $ 111
------
BOTSWANA--1.9%
60 Sechaba Brewery Holdings (Beverages)..... 70
SOUTH AFRICA--7.1%
13 Comparex Holdings Ltd. (Software)........ 101
250 Metro Cash & Carry (Food wholesale)...... 165
------
266
------
LATIN AMERICA--12.9%
BRAZIL--1.6%
4 Brasil Distrib Pao Acucar - ADR
(Household products distributor)....... 62
------
CHILE--3.1%
8 Laboratorio Chile S.A. - ADR (Generic
drugs)................................. 115
------
MEXICO--8.2%
63 *Corporacion Geo (Real estate)........... 173
50 FEMSA - UB (Beverages)................... 135
------
308
------
TOTAL COMMON STOCKS--79.1%
(Cost $2,810)............................ 2,969
------
TOTAL PREFERRED STOCK--4.6%
BRAZIL--1.6%
14,000 EMBRAER - PN (Aircraft manufacturer)
(Cost $211)............................ 174
------
TOTAL SHORT-TERM INVESTMENT--23.7%
$ 888 Investors Bank & Trust Company
Repurchase Agreement 4.25%, dated
12/31/98 collateralized by U.S.
Government security with a market value
of $932, 1/4/99 repurchase date (cost
$888).................................. 888
------
TOTAL INVESTMENTS--107.4%
(Cost $3,909)....................................... 4,031
LIABILITIES, LESS PLUS CASH AND OTHER
ASSETS--(7.4%)...................................... (277)
------
NET ASSETS--100.0%.................................... $3,754
======
</TABLE>
- - ---------------
* Non-income producing securities
ADR = American Depository Receipt
At December 31, 1998, the Fund's Portfolio of Investments includes the following
categories:
Consumer Non-Durables -- 14.0%; Electronic Technology -- 15.6%;
Finance -- 16.5%; Non-Energy Minerals -- 3.5%; Process Industries -- 6.3%;
Producer Manufacturing -- 13.0%; Retail Trade -- 13.9%; Technology
Services -- 3.2% and Utilities -- 14.0%.
18 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 19
----------------------------------------------------
INCOME FUND
----------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Fund..................... 7.07% 8.03% 3.07% 14.37% (0.74)%
Lehman Intermediate Govt./
Corp. Index................ 8.44 7.87 4.05 15.33 (1.93)
Past performance does not predict future performance.
--------------------------------------------------------------------------------
INVESTOR INFORMATION
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
Ending Net Assets (in millions). $188 $160 $150 $147 $144
Portfolio Turnover Rate (%)..... 96 83 66 54 63
Expense Ratio (%)............... .71 .71 .70 .68 .68
--------------------------------------------------------------------------------
</TABLE>
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
------------------------------------------------
Dear Shareholders:
In the last letter, the reduced level of
[PHOTO] volatility was highlighted as a major
Bentley M. Myer crosscurrent during the first six months of
1998. What a difference six months makes!
Volatility was very evident during the latter
part of 1998, particularly during the months of
September and October. The ten year U.S.
Treasury note's yield declined from 5.25% in
late August to below 4.20% by early October.
Then, by early November, yields had retraced
about one-half of the earlier decline and
eventually settled at 4.65% by year end.
During this first period of declining rates, the
yield difference or spread between U.S.
Treasuries and all other sectors within the
aggregate bond market increased to levels not
seen for many years. The financial crisis that
started overseas and then quickly spread to the
U.S. (largely via hedge funds) led to a flight
to the safety of U.S. Treasury notes and bonds.
All other non-U.S. Treasury securities had
dramatic underperformance and since the Income
Fund did not have a large position in U.S.
Treasuries, the relative performance also
suffered.
The Income Fund's return of 7.1% for the year
trailed the 8.4% return of the Lehman
Intermediate Government/Corporate Index and
virtually all of the return difference occurred
during the September/October period. The Fund's
return did, however, well exceed the 5.75%
return of the Lipper Short-term Mutual Fund
Index.* The monthly dividend of $.0525 was
maintained through the year and will remain at
that level through the first quarter of 1999.
Beyond that, it is hard to forecast a level
since we strive to pay out only what is being
earned on a current basis and to avoid paying
out capital to maintain a dividend level.
/s/ Bentley M. Myer
* The Lipper Short-term Mutual Fund Index is a
composite of short-term mutual bond funds.
December 31, 1998 Annual Report 19
<PAGE> 20
----------------------------------------------------
INCOME FUND
----------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS
AND INCOME DIVIDENDS
[Graph]
- - -----------------------------
AVERAGE ANNUAL TOTAL RETURN
(PERIOD ENDING 12/31/98)
1 YEAR 7.07%
5 YEARS 6.22%
Since Inception
(9/25/90) 7.90%
- - -----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9/90 12/90 6/91 12/91 6/92 12/92 6/93 12/93 6/94 12/94 6/95
Income Fund $10,000 10,300 10,800 12,000 12,400 12,800 13,600 13,800 13,600 13,700 14,900
Lehman Intermed $10,000 10,400 10,900 11,900 12,300 12,800 13,600 13,900 13,500 13,600 15,000
Govt/Corp.Index
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
12/95 6/96 12/96 6/97 12/97 6/98 12/98
Income Fund $15,700 15,700 16,200 16,700 17,500 18,100 18,700
Lehman Intermed $15,700 15,700 16,400 16,800 17,700 18,300 19,200
Govt/Corp.Index
</TABLE>
Past performance does not predict future performance.
20 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 21
- - --------------------------------------------------------------------------------
INCOME FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------- --------
PRINCIPAL
AMOUNT VALUE
- - --------------------------------------------------------------------------- --------
<S> <C> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY
GUARANTEED OBLIGATIONS--49.8%
U.S. TREASURY--19.5%
$ 9,500 U.S. Treasury Note, 7.250%, due 5/15/04........................ $ 10,638
5,950 U.S. Treasury Note, 7.875%, due 11/15/04....................... 6,884
4,550 U.S. Treasury Note, 6.875%, due 5/15/06........................ 5,139
7,500 U.S. Treasury Note, 6.500%, due 10/15/06....................... 8,308
5,000 U.S. Treasury Note, 6.625%, due 5/15/07........................ 5,615
- - -------- --------
32,500 Total U.S. Treasury Obligations................................ 36,584
- - -------- --------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS--0.6%
SMALL BUSINESS ADMINISTRATION--0.6%
-- Receipt for Multiple Originator Fees, #3
0.8180%, due 4/9/09 (Interest Only) WAC...................... 852
322 Loan #100023, 9.375%, due 11/25/14............................. 342
- - -------- --------
322 Total Small Business Administration Obligations................ 1,194
- - -------- --------
U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS--29.7%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)--15.3%
1,151 #1429, Tranche K, 9.135%, due 11/15/07......................... 1,168
7,000 Note, 5.750%, due 4/15/08...................................... 7,220
3,413 #1544, Tranche TM, 9.146%, due 7/15/08......................... 3,510
1,092 #1693, Tranche S, 7.137%, due 9/15/08.......................... 1,088
815 #1600, Tranche SE, 8.4500%, due 10/15/08....................... 824
2,003 #1655, Tranche SC, 7.514%, due 12/15/08........................ 2,007
949 #1625, Tranche Sb, 9.500%, due 12/15/08........................ 970
457 #1662, Tranche T, 7.427%, due 1/15/09.......................... 464
6,250 #117, Tranche G, 8.50%, due 1/15/21............................ 6,700
2,286 #1608, Tranche SE, 8.959%, due 6/15/23......................... 2,411
370 #1542, Tranche S, 14.284%, due 7/15/23......................... 390
1,958 #1611, Tranche MB, 12.308%, due 11/15/23....................... 2,068
- - -------- --------
27,744 Total FHLMC Mortgage Obligations............................... 28,820
- - -------- --------
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------- --------
PRINCIPAL
AMOUNT VALUE
- - --------------------------------------------------------------------------- --------
U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS--(CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)--14.4%
<S> <C> <C>
$ 5,500 Note, 6.00%, due 5/15/08....................................... $ 5,784
1,348 1993-212, Tranche SG, 8.00%, due 11/25/08...................... 1,357
2,678 10.00%, due 9/1/09............................................. 2,846
1,951 10.50%, due 3/1/10............................................. 2,082
4,288 8.500%, due 8/1/12............................................. 4,503
2,420 10.50%, due 1/1/13............................................. 2,642
1,893 11.50%, due 1/1/13............................................. 2,107
5,000 1993-79, Tranche SE, 8.370%, due 1/25/22....................... 5,108
266 1993-19, Tranche SH, 11.2339%, due 4/25/23..................... 291
356 1994-72, Tranche SA, 9.75%, due 4/25/24........................ 367
- - -------- --------
25,700 Total FNMA Mortgage Obligations................................ 27,087
- - -------- --------
86,266 Total U.S. Government and U.S. Government Agency
- - -------- Guaranteed Obligations....................................... 93,685
--------
</TABLE>
See accompanying Notes to Financial Statements.
December 31, 1998 Annual Report 21
<PAGE> 22
- - --------------------------------------------------------------------------------
INCOME FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - --------------------------------------------------------- ----------- --------
CREDIT
PRINCIPAL RATING
AMOUNT (unaudited) VALUE
- - --------------------------------------------------------- ----------- --------
COLLATERALIZED MORTGAGE OBLIGATIONS--22.9%
<S> <C> <C> <C>
$ 605 Polk Co. HFA, 1991-1,
Tranche A-2, 9.550%,
due 1/15/11................................. AAA $ 627
10,625 Morgan Keegan Funding I,
L.P., 8.000%, due 4/25/11................... AA- 10,941
71 Residential Finance Corp.,
1991-11, Tranche A-2,
10.000%, due 4/25/21........................ AA 70
550 Resolution Trust Corp.,
1992-2, Tranche A,
7.9221%, due 8/25/21........................ AA 563
117 Resolution Trust Corp.,
1991-3, Tranche A-2,
10.372%, due 8/25/21........................ AAA 121
3,297 Bear, Stearns & Co.,
1992-3B1, 7.548%, due
5/25/23..................................... AA 3,358
4,579 Prudential Home Mortgage,
1993-62 6.75%, due
12/26/23.................................... AAA 4,601
472 Resolution Trust Corp.,
1992-5, Tranche 5-C,
8.621%, due 1/25/26......................... AA 485
1,257 Goldman Sachs Mortgage
Security, 98-4M, 7.50%,
due 12/21/26................................ A 1,277
1,210 Goldman Sachs Mortgage
Security, 98-3M, 7.75%,
due 2/20/27................................. A 1,239
5,000 Residential Asset Securities,
7.125%, due 7/25/27......................... AAA 5,020
1,107 Goldman Sachs Mortgage
Security, 98, 8.00%, due
9/20/27..................................... A 1,145
4,225 Green Tree Home Improvement,
7.27%, due 6/15/28.......................... A+ 4,212
4,459 Residential Asset Securities,
98, Tranche A, 6.75%, due 7/25/28........... AAA 4,496
4,865 Country Wide Alt Loan, 6.75%,
- - -------- due 8/25/28................................. AAA 4,889
--------
42,439 Total Collateralized Mortgage
- - -------- Obligations................................. 43,044
--------
CORPORATE OBLIGATIONS--16.7%
1,250 Sears, Roebuck Corp. Medium
Term Note, 9.75%, due
3/21/00..................................... A- 1,316
1,500 Household Finance Corp.
Medium Term Note, 10.38%,
due 12/15/00................................ A 1,639
<CAPTION>
- - --------------------------------------------------------- ----------- --------
CREDIT
PRINCIPAL RATING
AMOUNT (unaudited) VALUE
- - --------------------------------------------------------- ----------- ---------
CORPORATE OBLIGATIONS--(CONTINUED)
<S> <C> <C> <C>
$ 4,050 Salomon Smith Barney,
6.375%, due 10/1/04........................ A $ 4,085
3,675 Chubb Corporation, 6.150%,
due 8/15/05................................ AA+ 3,789
3,350 Applied Materials Inc.,
6.75%, due 10/15/07........................ BBB+ 3,434
2,775 Amgen, Inc., 6.50%, due
12/1/07.................................... A 2,906
2,600 Dover Corp., 6.25%, due
6/1/08..................................... A+ 2,739
4,700 Cardinal Health, Inc.,
6.25%, due 7/15/08......................... A 4,798
2,750 Tribune Company, 5.50%, due
11/15/08................................... A 2,687
4,000 Monsanto Company, 5.875%,
- - -------- due 12/1/08................................ A 3,970
---------
30,650 Total Corporate Obligations.................. 31,363
- - -------- ---------
159,355 TOTAL LONG TERM INVESTMENTS--89.4%
- - -------- (cost $165,910)............................ 168,092
---------
SHORT-TERM INVESTMENTS--9.7%
1,174 Associates Corp. of North America Demand Note,
4.60%, due 1/1/99........................... A-1+ 1,174
5,500 General Motors Acceptance
Corporation, 5.35%-5.38%,
due 1/5/99-1/22/99.......................... A-2 5,500
4,000 Prudential Funding Corporation,
5.36%-5.38%, due 1/11/99-1/21/99............ A-1+ 4,000
5,520 Sears Roebuck Acceptance Corp.,
5.22%-5.41%, due 1/19/99-2/24/99............ A-1+ 5,520
2,000 Ford Motor Credit Company,
- - -------- 5.20% due 1/20/99........................... A-2 2,000
18,194 TOTAL SHORT-TERM INVESTMENTS ---------
- - -------- (cost $18,194).............................. 18,194
---------
$177,549 TOTAL INVESTMENTS--99.1%
======== (cost $184,104)............................. 186,286
CASH AND OTHER ASSETS, LESS
LIABILITIES--.9%............................ 1,765
---------
NET ASSETS--100.0%............................ $188,051
=========
</TABLE>
- - ---------------
WAC = Weighted Average Coupon
See accompanying Notes to Financial Statements.
22 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 23
-----------------------------------------------
READY RESERVES FUND
-----------------------------------------------
<TABLE>
<CAPTION>
PERFORMANCE HIGHLIGHTS
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ready Reserves Fund............. 4.98% 5.01% 4.88% 5.46% 3.70%
S&P-rated AAA Money
Market Funds............... 4.95 5.00 4.87 5.45 3.64
Past performance does not predict future performance.
<CAPTION>
--------------------------------------------------------------------------------
INVESTOR INFORMATION
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ending Net Assets (in millions). $1,189 $905 $761 $704 $521
Expense Ratio (%)............... .69 .70 .71 .72 .71
--------------------------------------------------------------------------------
</TABLE>
-----------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
-----------------------------------------------
Dear Shareholders:
The financial crisis that started in August led
[PHOTO] to a severe squeeze on credit in the capital
Bentley M. Myer markets during the months of September and
October. The Federal Reserve Board responded by
lowering the federal funds rate three times
during this relatively short period of time.
Liquidity has improved recently and with the
economy showing few signs of slowing, it is
likely that the Fed will stay on hold for the
time being. However, should another crisis
develop that reduces liquidity some more, the
Fed is likely to act quickly to lower rates
further.
All money market yields fell in concert with the
Fed changes and the expectation in the market is
for still further reductions in the federal
funds rate. There is therefore little incentive
to extend maturities because longer maturity
money market rates are about the same as shorter
maturity rates. The Ready Reserves Fund's
average maturity reflects this as the current
forty day average maturity is at the shorter end
of our normal forty to sixty day range.
The return for the year was 4.98%, slightly
exceeding the 4.95% return of our peer group,
the S&P- rated AAA Money Market Funds' average.
Assets continued to grow and recently reached a
level just above $1.2 billion.
/s/ Bentley M. Myer
December 31, 1998 Annual Report 23
<PAGE> 24
- - --------------------------------------------------------------------------------
READY RESERVES FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- - ------------------------------------------------- ----------
U.S. GOVERNMENT AGENCY GUARANTEED--3.3%
<S> <C> <C>
$ 1,633 Agency for International
Development, VRN--Peru
5.686%, 2/1/99................... $ 1,633
20,000 Federal Home Loan Bank VRN
4.988%, 3/10/99.................. 19,995
3,936 Federal Home Loan Mortgage Corp.
7.00%, 10/1/99................... 3,958
1,833 Federal Home Loan Mortgage Corp.
6.50%, 10/1/99................... 1,842
1,283 Federal National Mortgage
Association 6.50%, 10/1/99....... 1,288
10,000 Federal National Mortgage
- - ---------- Association, VRN 5.048%,
1/5/99........................... 9,998
----------
38,685 38,714
- - ---------- ----------
DEMAND NOTE--0.0%
37 Associates Corporation of North
- - ---------- America, VRN 4.60%, 1/1/99....... 37
----------
VARIABLE RATE NOTE--0.4%
5,000 General Motors Acceptance Corp, VRN
- - ---------- 5.22%, 2/24/99................... 4,995
----------
MEDIUM TERM NOTES--0.4%
1,000 Chrysler Financial Corporation
8.42%, 2/1/99.................... 1,003
1,600 General Motors Corporation
5.70%, 2/9/99.................... 1,600
2,200 Household Finance Corporation
- - ---------- 7.70%, 3/8/99.................... 2,209
----------
4,800 4,812
- - ---------- ----------
FIXED RATE NOTES--0.8%
1,083 SBC Communications, Inc.
4.625%, 4/1/99................... 1,082
2,050 Associates Corporation
7.50%, 5/15/99................... 2,064
1,200 Ford Motor Credit Company
7.90%, 5/17/99................... 1,211
1,440 General Motors Acceptance Corp.
8.625%, 6/15/99.................. 1,462
3,000 Paccar Financial Corporation
6.217%, 7/7/99................... 3,010
1,000 Norwest Financial
- - ---------- 6.375%, 10/1/99.................. 1,010
----------
9,773 9,839
- - ---------- ----------
COMMERCIAL PAPER--94.8%
FINANCE--23.9%
7,900 American Express Credit Company
5.10%-5.26%, 2/23/99-2/24/99..... 7,839
48,974 Associates Corporation of North
America
5.04%-5.30%, 1/6/99-3/11/99...... 48,749
58,735 Associates First Capital
Corporation
5.07%-5.35%, 1/4/99-3/18/99...... 58,464
60,544 Block Financial Corporation
5.10%-5.33%, 1/7/99-2/26/99...... 60,356
16,222 CIT Group Holdings
5.05%-5.40%, 2/3/99-3/17/99...... 16,079
</TABLE>
<TABLE>
<CAPTION>
- - ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- - ------------------------------------------------- ----------
COMMERCIAL PAPER--(CONTINUED)
<S> <C> <C>
$ 35,633 Commercial Credit Corporation
5.14%-5.17%, 2/2/99-2/8/99....... $ 35,452
57,824 Household Finance Corporation
- - ---------- 5.03%-5.20%, 1/12/99-3/23/99..... 57,502
----------
285,832 284,441
- - ---------- ----------
INSURANCE--21.9%
60,294 American General Corporation
5.05%-5.32%, 1/11/99-3/12/99..... 59,950
60,084 American General Finance
Corporation
5.06%-5.23%, 1/19/99-3/9/99...... 59,826
57,100 Aon Corporation
5.30%-5.35%, 1/25/99-2/19/99..... 56,798
44,950 Marsch & McLennan Inc.
5.04%-5.19%, 1/25/99-2/25/99..... 44,765
6,310 MetLife Funding, Inc.
5.30%, 1/6/99.................... 6,305
29,701 Prudential Funding Corporation
5.05%-5.33%, 1/21/99-2/18/98..... 29,571
3,224 USAA Capital Corporation
- - ---------- 5.30%, 1/19/99................... 3,215
----------
261,663 260,430
- - ---------- ----------
MANUFACTURING--19.3%
59,519 Chrysler Finance Corporation
5.14%-5.33%, 1/22/99-2/16/99..... 59,217
10,000 Dover Corporation
5.22%, 1/15/99................... 9,980
9,707 Ford Motor Credit Company
5.08%-5.26%, 1/27/99-2/23/99..... 9,650
25,979 General Electric Capital
Corporation
5.00%-5.14%, 1/27/99-3/19/99..... 25,811
60,073 General Electric Capital Services
of Puerto Rico, Inc.
5.08%-5.24%, 1/25/99-3/2/99...... 59,697
33,910 General Electric Capital Services
5.14%-5.30%, 1/20/99-2/18/99..... 33,689
32,323 General Motors Acceptance Corp.
- - ---------- 5.05%-5.29%, 1/13/99-2/23/99..... 32,184
----------
231,511 230,228
- - ---------- ----------
UTILITIES--ENERGY & GAS--8.9%
46,370 Consolidated Natural Gas Corp.
5.10%-5.15%, 1/19/99-2/8/99...... 46,164
59,665 National Rural Utilities
- - ---------- Cooperative Finance Corporation
5.00%-5.12%, 1/11/99-3/29/99..... 59,164
----------
106,035 105,328
- - ---------- ----------
ENERGY--6.7%
19,701 Atlantic Richfield & Company
4.90%-5.07%, 3/1/99-3/5/99....... 19,527
47,659 Chevron U.K. Investment, plc
5.05%-5.33%, 1/14/99-3/12/99..... 47,423
12,890 Mobil, Inc.--Australia
- - ---------- 5.28%, 1/29/99................... 12,837
----------
80,250 79,787
- - ---------- ----------
</TABLE>
See accompanying Notes to Financial Statements.
24 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 25
- - --------------------------------------------------------------------------------
READY RESERVES FUND
- - --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
- - ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- - ------------------------------------------------- ----------
COMMERCIAL PAPER--(CONTINUED)
<S> <C> <C>
CHEMICAL/FOREST--4.2%
$ 45,178 DuPont (E.I.) De Nemours & Company
4.80%-5.29%, 1/7/99-4/14/99...... $ 44,964
5,040 Monsanto Company
- - ---------- 5.02%-5.30%, 2/9/99-3/30/99...... 5,004
----------
50,218 49,968
- - ---------- ----------
ELECTRONIC/TECHNOLOGY--3.5%
19,180 IBM Corporation
5.10%-5.24%, 2/4/99-2/11/99...... 19,080
16,577 Motorola Credit, Inc.
5.07%-5.12%, 2/16/99-2/26/99..... 16,448
6,100 Motorola, Inc.
- - ---------- 5.30%, 1/29/99................... 6,075
----------
41,857 41,603
- - ---------- ----------
DRUGS/HEALTH--2.7%
32,000 Glaxo Wellcome plc
- - ---------- 5.05%-5.17%, 2/9/99-3/9/99....... 31,745
----------
MERCHANDISING--2.0%
23,843 Winn Dixie Stores Inc.
- - ---------- 5.07%, 1/5/99-1/12/99............ 23,823
----------
OTHER CONSUMER--0.8%
9,200 Colgate-Palmolive Corporation
- - ---------- 5.02%, 12/9/99-12/10/99.......... 9,115
----------
</TABLE>
<TABLE>
<CAPTION>
- - ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- - ------------------------------------------------- ----------
COMMERCIAL PAPER--(CONTINUED)
<S> <C> <C>
FOOD/BEVERAGE/TOBACCO--0.6%
$ 4,171 Coca-Cola Company
5.12%, 2/22/99................... $ 4,140
3,000 Heinz Company
- - ---------- 5.12%, 2/9/99.................... 2,983
----------
7,171 7,123
- - ---------- ----------
UTILITIES--TELEPHONE--0.3%
4,000 Bell South Telecommunications
- - ---------- 5.06%, 2/19/99................... 3,972
----------
1,133,580 TOTAL COMMERCIAL PAPER............. 1,127,563
- - ---------- ----------
$1,191,875 TOTAL INVESTMENTS--99.7%
========== (Cost $1,185,960)................ 1,185,960
CASH AND OTHER NET ASSETS, LESS
LIABILITIES--0.3%.................. 3,091
----------
NET ASSETS--100.0%................. $1,189,051
==========
PORTFOLIO WEIGHTED AVERAGE
MATURITY........................... 40 Days
</TABLE>
- - ---------------
VRN = Variable Rate Note
See accompanying Notes to Financial Statements.
December 31, 1998 Annual Report 25
<PAGE> 26
- - --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- - --------------------------------------------------------------------------------
DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
EMERGING
VALUE INTERNATIONAL MARKETS READY
GROWTH DISCOVERY GROWTH GROWTH INCOME RESERVES
FUND FUND FUND FUND FUND FUND
-------- --------- ------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments, at market (cost $430,657;
$40,314; $112,259; $3,909; $184,104;
and $1,185,960, respectively)........ $742,136 $44,876 $140,715 $4,031 $186,286 $1,185,960
Cash................................... -- -- 542 4 -- --
Receivable for:
Fund shares sold..................... 3,098 2,625 485 24 932 15,517
Investments sold..................... -- -- 1,161 -- 1 --
Interest and dividends............... 400 77 50 3 1,671 443
Foreign withholding tax.............. -- -- 108 -- -- --
Deferred organization costs............ -- 28 -- 29 -- --
Other assets........................... 42 1 340 -- 5 35
-------- ------- -------- ------ -------- ----------
Total assets..................... 745,676 47,607 143,401 4,091 188,895 1,201,955
LIABILITIES
Payable for:
Fund shares redeemed................. 1,135 365 1,741 254 685 11,857
Investments purchased................ 1,893 2,367 1,705 -- -- --
Dividends............................ -- -- -- -- 103
Investment advisory fees,
organization and other costs (Notes
1 and 2)........................... 445 161 133 66 92 586
Other.................................. 147 39 76 17 67 358
-------- ------- -------- ------ -------- ----------
Total liabilities................ 3,620 2,932 3,655 337 844 12,904
-------- ------- -------- ------ -------- ----------
Net Assets.................... $742,056 $44,675 $139,746 $3,754 $188,051 $1,189,051
======== ======= ======== ====== ======== ==========
CAPITAL
Capital stock ($0.001 par value 41,295;
3,446; 9,557; 492; 17,921; and
1,189,156 shares issued and
outstanding, respectively)........... $ 41 $ 3 $ 10 $ 1 $ 18 $ 1,189
Paid-in-surplus........................ 430,419 40,175 120,101 4,775 190,107 1,187,966
Net unrealized appreciation on
investments and foreign currency
transactions (net of $73 PFIC net
unrealized gain distribution for
International Growth Fund only)...... 311,479 4,562 28,383 122 2,182 --
Accumulated undistributed net realized
gain (loss) on investments, futures
and foreign currency transactions.... 117 (74) (8,748) (1,145) (4,368) (109)
Undistributed net investment income.... -- 9 -- 1 112 5
-------- ------- -------- ------ -------- ----------
Net Assets.................... $742,056 $44,675 $139,746 $3,754 $188,051 $1,189,051
======== ======= ======== ====== ======== ==========
Net asset value per share.............. $ 17.97 $ 12.96 $ 14.62 $ 7.63 $ 10.49 $ 1.00
======== ======= ======== ====== ======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
26 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 27
- - --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- - --------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 (all amounts in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
EMERGING
VALUE INTERNATIONAL MARKETS READY
GROWTH DISCOVERY GROWTH GROWTH INCOME RESERVES
FUND FUND FUND FUND(a) FUND FUND
-------- --------- ------------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest................ $ 2,440 $ 335 $ 474 $ 27 $12,051 $ 58,287
Dividends............... 2,881 545 1,762 32 -- --
Less foreign tax
withheld.............. -- -- (186) (2) -- --
-------- ----- ------- ------- ------- ---------
5,321 880 2,050 57 12,051 58,287
EXPENSES
Investment advisory
fees.................. 4,861 443 1,558 35 1,046 6,215
Custodian fees.......... 133 15 236 45 41 218
Transfer agent fees..... 121 16 19 8 23 331
Professional fees....... 64 50 74 50 60 72
Registration fees....... 40 15 16 4 27 162
Organization costs...... -- 9 -- 4 -- --
Miscellaneous........... 209 39 17 13 62 250
-------- ----- ------- ------- ------- ---------
Total expenses before
waiver.............. 5,428 587 1,920 159 1,259 7,248
Less expenses waived
and absorbed by
Company.......... -- -- -- (103) -- --
-------- ----- ------- ------- ------- ---------
Net investment
income (loss)....... (107) 293 130 1 10,792 51,039
Net realized and
unrealized gain (loss)
on investments, futures,
foreign currency
transactions and other
assets and liabilities
Net realized gain
(loss) on
investments......... 57,805 (468) (4,911) (1,144) 693 (1)
Net realized gain on
futures............. -- 393 -- -- -- --
Net realized loss on
foreign currency
transactions and
other assets and
liabilities......... -- -- (3,248) (1) -- --
-------- ----- ------- ------- ------- ---------
Total net realized
gain (loss)......... 57,805 (75) (8,159) (1,145) 693 (1)
Change in net unrealized
appreciation/depreciation
on investments and other
assets and
liabilities............. 102,789 (612) 23,550 122 675 0
-------- ----- ------- ------- ------- ---------
Net increase (decrease) in
net assets resulting
from operations......... $160,487 $(394) $15,521 $(1,022) $12,160 $ 51,038
======== ===== ======= ======= ======= =========
</TABLE>
- - ---------------
(a) For the period from May 1, 1998 (Commencement of Operations) to December 31,
1998
See accompanying Notes to Financial Statements.
December 31, 1998 Annual Report 27
<PAGE> 28
- - --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (all amounts in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
EMERGING
VALUE INTERNATIONAL MARKETS
GROWTH DISCOVERY GROWTH GROWTH INCOME
FUND FUND FUND FUND FUND
-------------------- ----------------- ------------------- -------- -------------------
1998 1997 1998 1997 1998 1997 1998(a) 1998 1997
---- ---- ---- ---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss)................... $ (107) $ (892) $ 293 $ 61 $ 130 $ 12 $ 1 $ 10,792 $ 9,707
Net realized gain (loss) on
investments, futures,
foreign currency
transactions and other
assets and liabilities... 57,805 29,286 (75) 747 (8,159) 16,247 (1,145) 693 1,058
Change in net unrealized
appreciation/depreciation
on investments, futures
and other assets and
liabilities.............. 102,789 70,793 (612) 5,174 23,550 (8,255) 122 675 973
-------- --------- ------- ------- -------- -------- ------ -------- --------
Net increase (decrease) in
net assets resulting from
operations............... 160,487 99,187 (394) 5,982 15,521 8,004 (1,022) 12,160 11,738
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income...... -- -- (302) (43) (238) (664) -- (10,795) (9,704)
Net realized gain.......... (57,744) (29,286) -- (746) (11) (15,931) -- -- --
-------- --------- ------- ------- -------- -------- ------ -------- --------
(57,744) (29,286) (302) (789) (249) (16,595) -- (10,795) (9,704)
CAPITAL STOCK TRANSACTIONS
Shares sold................ 173,606 118,126 23,035 23,070 84,365 45,557 5,662 53,183 21,930
Shares issued in
reinvestment of income
dividends and capital
gain distributions....... 51,776 26,500 286 752 227 15,576 -- 7,837 6,970
Less shares redeemed....... (177,422) (124,958) (8,304) (836) (88,865) (28,943) (886) (34,389) (20,885)
-------- --------- ------- ------- -------- -------- ------ -------- --------
Change from capital stock
transactions............... 47,960 19,668 15,017 22,986 (4,273) 32,190 4,776 26,631 8,015
-------- --------- ------- ------- -------- -------- ------ -------- --------
Change in net assets....... 150,703 89,569 14,321 28,179 10,999 23,599 3,754 27,996 10,049
Net assets
Beginning of period........ 591,353 501,784 30,354 2,175 128,747 105,148 -- 160,055 150,006
-------- --------- ------- ------- -------- -------- ------ -------- --------
End of period.............. $742,056 $ 591,353 $44,675 $30,354 $139,746 128,747 $3,754 $188,051 $160,055
======== ========= ======= ======= ======== ======== ====== ======== ========
Undistributed net investment
income at the end of the
period..................... -- -- $ 9 $ 17 $ -- $ 252 $ 1 $ 112 $ 115
======== ========= ======= ======= ======== ======== ====== ======== ========
CAPITAL STOCK TRANSACTIONS
Shares sold................ 10,367 8,330 1,726 2,133 5,983 2,935 606 5,069 2,123
Shares issued in
reinvestment of income
dividends and capital
gain distributions....... 2,974 1,803 23 60 16 1,211 -- 748 676
Less shares redeemed....... (10,559) (8,829) (643) (71) (6,240) (1,888) (114) (3,272) (2,025)
-------- --------- ------- ------- -------- -------- ------ -------- --------
Change from capital stock
transactions............... 2,782 1,304 1,106 2,122 (241) 2,258 492 2,545 774
======== ========= ======= ======= ======== ======== ====== ======== ========
<CAPTION>
-------------------------
READY
RESERVES
FUND
-------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATIONS
Net investment income
(loss)................... $ 51,039 $ 43,151
Net realized gain (loss) on
investments, futures,
foreign currency
transactions and other
assets and liabilities... (1) (1)
Change in net unrealized
appreciation/depreciation
on investments, futures
and other assets and
liabilities.............. -- --
----------- -----------
Net increase (decrease) in
net assets resulting from
operations............... 51,038 43,150
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income...... (51,038) (43,150)
Net realized gain.......... -- --
----------- -----------
(51,038) (43,150)
CAPITAL STOCK TRANSACTIONS
Shares sold................ 3,808,318 3,202,303
Shares issued in
reinvestment of income
dividends and capital
gain distributions....... 50,013 42,208
Less shares redeemed....... (3,573,849) (3,100,750)
----------- -----------
Change from capital stock
transactions............... 284,482 143,761
----------- -----------
Change in net assets....... 284,482 143,761
Net assets
Beginning of period........ 904,569 760,808
----------- -----------
End of period.............. $ 1,189,051 $ 904,569
=========== ===========
Undistributed net investment
income at the end of the
period..................... $ 5 $ 4
=========== ===========
CAPITAL STOCK TRANSACTIONS
Shares sold................ 3,808,318 3,202,303
Shares issued in
reinvestment of income
dividends and capital
gain distributions....... 50,013 42,208
Less shares redeemed....... (3,573,849) (3,100,750)
----------- -----------
Change from capital stock
transactions............... 284,482 143,761
=========== ===========
</TABLE>
- - ---------------
(a) For the period from May 1, 1998 (Commencement of Operations) to December 31,
1998
See accompanying Notes to Financial Statements.
28 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 29
................................................................................
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 six portfolios, each with its own investment
objectives 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 that 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 Emerging Markets Growth Fund is a portfolio whose principal objective is to
provide long-term appreciation by investing in well-managed quality growth
companies in emerging economies worldwide.
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 principally 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 using 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 were
the rates in effect at December 31, 1998.
(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 close of trading on
the New York Stock Exchange, which is generally 3:00 p.m. Chicago time (4:00
p.m. Eastern time), on each day when the Exchange is open. In addition, the
Ready Reserves Fund does not sell its shares on Columbus Day or Veterans Day.
Dividends from net investment income, if any, of the Growth Fund, Value
Discovery Fund, International Growth Fund and Emerging Markets 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
December 31, 1998 Annual Report 29
<PAGE> 30
Fund's policy is to take possession of the debt security as their collateral
under repurchase agreements. The Fund minimizes credit risk by (i) monitoring
credit exposure to the custodian and (ii) monitoring the collateral value on a
daily basis.
(e) Foreign Currency Translation and Forward Foreign Currency Contracts
Assets and liabilities of the International Growth Fund and the Emerging Markets
Growth Fund denominated in foreign currencies are translated into U.S. dollar
amounts at the current exchange rate at the date of valuation. The International
Growth Fund and the Emerging Markets 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, the Funds may enter into contracts to hedge the
value, in U.S. dollars, of securities it currently owns. Forward foreign
currency contracts and foreign currencies are valued at the forward and current
exchange rates, respectively, prevailing on the date of valuation. Gains and
losses from foreign currency transactions associated with purchases and sales of
investments and forward foreign currency contracts are included with the net
realized and 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, 1998, the Value
Discovery Fund, the International Growth Fund, the Emerging Markets Growth Fund,
the Income Fund and the Ready Reserves Fund had capital loss carryforwards (in
thousands) of $10, $8,207, $1,145, $4,368 and $109, respectively. These loss
carryforwards, which will expire in 2006 (2005 for the Income Fund), can be used
to offset net realized 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 net unrealized
appreciation of $73 and $916 in 1998 and 1997, respectively. In addition, the
Fund recorded net realized gains of $353 on sales of PFIC's during 1998, of
which $1,049 had been recognized as income in prior years. Dividends to
shareholders from net investment income included $238 and $664 relating to
PFIC's during 1998 and 1997, respectively, which are treated as ordinary income
for Federal income tax purposes.
(g) Organization Costs
The initial organization costs of the Value Discovery Fund and the Emerging
Markets 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.
(h) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results may
differ from those estimates.
(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
Emerging Markets Growth Fund 1.40%
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 Emerging Markets Growth Fund's
investment advisory fee and to absorb other operating expenses if total expenses
exceed 2.25% of average daily net assets.
The Funds paid fees of $129,000 to non-affiliated directors of the Funds for the
year ended December 31, 1998.
30 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 31
(3) INVESTMENT TRANSACTIONS
Investment transactions, excluding money market instruments, for the year ended
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
EMERGING
VALUE INTERNATIONAL MARKETS
GROWTH DISCOVERY GROWTH GROWTH INCOME
FUND FUND FUND FUND FUND
-------- --------- ------------- -------- --------
(all amounts in thousands)
<S> <C> <C> <C> <C> <C>
Purchases............................................... $222,395 $ 40,152 $ 127,976 $ 8,082 $176,968
Proceeds from sales and maturities...................... 258,287 25,484 129,839 3,926 154,254
Gross unrealized appreciation/depreciation
at December 31, 1998 was as follows:
Unrealized appreciation............................... $329,378 $ 6,793 $ 31,688 $ 379 $ 3,098
Unrealized depreciation............................... 17,899 2,231 3,232 257 916
-------- --------- ------------- -------- --------
Net unrealized appreciation............................. $311,479 $ 4,562 $ 28,456 $ 122 $ 2,182
======== ========= ============= ======== ========
</TABLE>
Cost of investments is the same for financial statement and Federal income tax
purposes except for the Value Discovery Fund and the International Growth Fund
where the cost for Federal income taxes purposes was $40,379 and $112,873,
respectively.
(4) FUTURES CONTRACTS
During 1998 and 1997 the Value Discovery Fund purchased exchange-traded index
futures contracts, which are contracts that obligate the Fund to make or take
delivery of the cash value of a securities index at a specified future date at a
specified price. The Fund entered into such contracts to hedge a portion of its
portfolio. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities (initial margin). Subsequent payments
(variation margin) are made or received by the Fund, generally on a daily basis.
The variation margin payments are equal to the daily changes in the contract
value and are recorded as unrealized gains or losses. The Fund recognized a
realized gain or loss when the contract was closed or expired. The statement of
operations reflects the net realized gains and losses on these contracts. There
were no outstanding contracts at December 31, 1998.
(5) 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 and the Emerging Markets
Growth Fund enter into forward foreign currency contracts with its custodian and
others. The Funds bear the market risk that arises from changes in foreign
exchange rates and bear 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.
December 31, 1998 Annual Report 31
<PAGE> 32
................................................................................
FINANCIAL HIGHLIGHTS
................................................................................
GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 15.350 $ 13.480 $ 11.900 $ 9.600 $ 9.730
Income from investment operations:
Net investment income (loss).............................. (.003) (.023) (.010) .034 .027
Net realized and unrealized gain on investments........... 4.123 2.694 2.144 2.750 .581
-------- -------- -------- -------- --------
Total from investment operations............................ 4.120 2.671 2.134 2.784 .608
Less distributions from:
Net investment income..................................... -- -- .010 .030 .025
Net realized gain......................................... 1.500 .801 .544 .454 .713
-------- -------- -------- -------- --------
Total distributions......................................... 1.500 .801 .554 .484 .738
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 17.970 $ 15.350 $ 13.480 $ 11.900 $ 9.600
======== ======== ======== ======== ========
Total return (%)............................................ 27.15 20.07 17.99 29.07 6.45
Ratios to average daily net assets (%):
Expenses.................................................. .84 .84 .79 .65 .71
Net investment income (loss).............................. (.02) (.16) (.08) .34 .32
Supplemental data:
Net assets at end of year (in thousands).................. $742,056 $591,353 $501,774 $363,036 $217,560
Portfolio turnover rate (%)............................... 37 34 43 32 46
</TABLE>
................................................................................
VALUE DISCOVERY FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996(a)
-------- ------- --------
<S> <C> <C> <C>
Net asset value, beginning of year.......................... $12.970 $10.000 $ 10.000
Income from investment operations:
Net investment income..................................... .088 .029 --
Net realized and unrealized gain (loss) on investments and
futures................................................. (.005) 3.305 --
------- ------- --------
Total from investment operations............................ .083 3.334 --
Less distributions from:
Net investment income..................................... .093 .020 --
Net realized gain......................................... -- .344 --
------- ------- --------
Total distributions......................................... .093 .364 --
------- ------- --------
Net asset value, end of year................................ $12.960 $12.970 $ 10.000
======= ======= ========
Total return (%)............................................ .66 33.46 --
Ratios to average daily net assets (%):
Expenses.................................................. 1.52 1.50(b) --
Net investment income..................................... .76 .29(b) --
Supplemental data:
Net assets at end of year (in thousands).................. $44,675 $30,354 $ 2
Portfolio turnover rate (%)............................... 78 69 --
</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%.
32 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 33
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year................... $ 13.140 $ 13.950 $ 13.120 $12.360 $13.180
Income from investment operations:
Net investment income.............................. .074 .072 .029 .105 .016
Net realized and unrealized gain (loss) on
investments, foreign currency and other assets
and liabilities.................................. 1.431 1.056 1.299 .785 (.025)
-------- -------- -------- ------- -------
Total from investment operations..................... 1.505 1.128 1.328 .890 (.009)
Less distributions from:
Net investment income.............................. .024(a) .078(a) .068(a) .130 .024
Net realized gain.................................. .001 1.860 .430 -- .714
Tax return of capital.............................. -- -- -- -- .073(b)
-------- -------- -------- ------- -------
Total distributions.................................. .025 1.938 .498 .130 .811
-------- -------- -------- ------- -------
Net asset value, end of year......................... $ 14.620 $ 13.140 $ 13.950 $13.120 $12.360
======== ======== ======== ======= =======
Total return (%)..................................... 11.46 8.39 10.20 7.22 (.04)
Ratios to average daily net assets (%):
Expenses........................................... 1.36 1.43 1.44 1.48 1.51
Net investment income.............................. .09 .01 .19 .87 .15
Supplemental data:
Net assets at end of year (in thousands)........... $139,746 $128,747 $105,148 $89,762 $70,403
Portfolio turnover rate (%)........................ 98 102 89 77 40
</TABLE>
- - ---------------
(a) Includes $.024, $.078 and $0.022 in PFIC transactions which are treated as
ordinary income for Federal income tax purposes for 1998, 1997 and 1996,
respectively.
(b) Includes $431 relating to a tax return of capital.
................................................................................
EMERGING MARKETS GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
DECEMBER 31,
1998(a)(b)
------------
<S> <C>
Net asset value, beginning of period.................... $10.000
Income from investment operations:
Net investment income................................. .002
Net realized and unrealized gain (loss) on
investments, foreign currency and other assets and
liabilities......................................... (2.372)
-------
Total from investment operations........................ (2.370)
Less distributions from:
Net investment income................................. --
Net realized gain..................................... --
-------
Total distributions..................................... --
-------
Net asset value, end of year............................ $ 7.630
=======
Total return (%)........................................ (23.70)
Ratios to average daily net assets (%):
Expenses(c)........................................... 2.25
Net investment income(c).............................. .04%
Supplemental data:
Net assets at end of period (in thousands)............ $ 3,754
Portfolio turnover rate (%)........................... 226
</TABLE>
- - ---------------
(a) For the period May 1, 1998 (Commencement of Operations) to December 31,
1998.
(b) Rates are annualized, except total returns for periods less than one year.
(c) Without the waiver of expenses in 1998, the expense ratio would have been
6.35% and the net investment loss ratio would have been 4.06%.
December 31, 1998 Annual Report 33
<PAGE> 34
................................................................................
INCOME FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year......................... $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580
Income from investment operations:
Net investment income.................................... .640 .659 .619 .646 .661
Net realized and unrealized gain (loss) on investments... .076 .140 (.309) .732 (.741)
-------- -------- -------- -------- --------
Total from investment operations........................... .716 .799 .310 1.378 (.080)
Less distributions from:
Net investment income.................................... .636 .659 .610 .658 .646
Net realized gain........................................ -- -- -- -- .004
-------- -------- -------- -------- --------
Total distributions........................................ .636 .659 .610 .658 .650
-------- -------- -------- -------- --------
Net asset value, end of year............................... $ 10.490 $ 10.410 $ 10.270 $ 10.570 $ 9.850
======== ======== ======== ======== ========
Total return (%)........................................... 7.07 8.03 3.07 14.37 (.74)
Ratios to average daily net assets (%):
Expenses................................................. .71 .71 .70 .68 .68
Net investment income.................................... 6.81 6.40 5.97 6.24 6.33
Supplemental data:
Net assets at end of year (in thousands)................. $188,051 $160,055 $150,006 $147,370 $143,790
Portfolio turnover rate (%).............................. 96 83 66 54 63
</TABLE>
................................................................................
READY RESERVES FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
<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 .05 .04
Net realized loss on investments......................... -- -- -- -- (.01)
---------- -------- -------- -------- --------
Total from investment operations........................... .05 .05 .05 .05 .03
Less distributions from:
Net investment income.................................... .05 .05 .05 .05 .04
---------- -------- -------- -------- --------
Total distributions........................................ .05 .05 .05 .05 .04
---------- -------- -------- -------- --------
Capital contribution....................................... -- -- -- -- .01
---------- -------- -------- -------- --------
Net asset value, end of year............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ======== ======== ======== ========
Total return (%)........................................... 4.98 5.04 4.81 5.45 3.67(a)
Ratios to average daily net assets (%):
Expenses................................................. .69 .70 .71 .72 .71
Net investment income.................................... 4.87 4.92 4.78 5.30 3.61
Supplemental data:
Net assets at end of year (in thousands)................. $1,189,051 $904,569 $760,808 $703,993 $521,277
</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%.
34 William Blair Mutual Funds, Inc. December 31, 1998
<PAGE> 35
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, Emerging Markets
Growth Fund, Income Fund and Ready Reserves Fund) (collectively, the "Funds") as
of December 31, 1998, 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, 1998 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, 1998, 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.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Chicago, Illinois
February 2, 1999
December 31, 1998 Annual Report 35
<PAGE> 36
________________________________________________
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
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
___________________________________________________
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
Jeffrey A. Urbina, Vice President
Sheila M. Johnson, 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
For customer assistance, call
1-800-635-2886
(Massachusetts 1-800-635-2840)
William Blair Mutual Funds, Inc.
222 West Adams Street
Chicago, Illinois 60606
December 31, 1998
