<PAGE> 1
Semi-Annual Report / June 30, 1999
--------------------------------------------------
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>
June 30, 1999 1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Growth Fund ................... 7.1% 27.2% 20.1% 18.0% 29.1% 6.5%
S&P500 Index(1).............. 12.4 28.6 33.4 23.3 37.5 1.3
Value Discovery Fund ........... 4.7 0.7 33.5 - - -
Russell 2000 Index(2)........ 9.3 (2.6) 22.4 16.5 28.4 (1.8)
International Growth Fund....... 26.3 11.5 8.4 10.2 7.2 (0.04)
MSCI AC WLDF ex US Index(3).. 7.2 14.5 2.0 6.7 9.9 6.6
Lipper International Index(4) 6.9 12.7 7.3 14.4 10.0 (0.7)
Emerging Markets Growth Fund.... 41.6 (23.7)(a) - - - -
MSCI EM (Free) Index(5)...... 39.9 (28.9)(a) - - - -
Income Fund .................... (.4) 7.1 8.0 3.1 14.4 (0.7)
Lehman Intermediate Govt./
Corp. Index(6)............. (.6) 8.4 7.9 4.1 15.3 (1.9)
Ready Reserves Fund............. 4.4 5.0 5.0 4.8 5.5 3.7
S&P-rated AAA
Money Market Funds(7)...... 4.3 5.0 5.0 4.8 5.4 3.6
Past performance does not predict future performance.
<CAPTION>
......................................................................................................
Investor Information for the Six Months Ended June 30, 1999
......................................................................................................
Emerging
Value International Markets Ready
Growth Discovery Growth Growth Income Reserves
Fund Fund Fund Fund Fund Fund
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ending Net Assets (in millions) $790 $50 $191 $5 $185 $1,021
Portfolio Turnover Rate (%)(b).. 45 36 149 261 104 -
Expense Ratio (b)............... .84 1.46 1.33 2.25(c) .68 .68
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 2,000 stocks of the Russell
3000 Index (which consists of the
largest 3,000 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 4.29%.
All of the indices referenced in Performance
Highlights represent unmanaged portfolios and
are used for comparative purposes only.
2 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 3
--------------------------------------------------
A Letter from the president
--------------------------------------------------
Dear Shareholders:
Market Environment
------------------
[PHOTO OF The first half of 1999 has been yet another
MARCO HANIG] strong period for U.S. equities, with the S&P
500 index up 12%. The economy grew strongly,
earnings accelerated, and many companies posted
positive earnings surprises.
Performance differences among different U.S.
equity styles were not as pronounced as in the
recent past. Year to date, large cap stocks did
slightly better than small cap stocks (Russell
1000 +12% vs. Russell 2000 +9%). Among small cap
stocks, growth fared better than value (Russell
2000 Growth +13% vs. Russell 2000 Value +5%). In
contrast, value edged out growth among large cap
stocks (Russell 1000 Value +13% vs. Russell 1000
Growth +10%).
It was in the international equity markets where
some of the strongest returns of the first half
could be found: Emerging Markets (MSCI Index
+38%), Asia Pacific (MSCI Index +21%), and Japan
(MSCI Index +20%) all had terrific returns,
while returns in Europe (MSCI Index -3%) were a
stark contrast. Thus, being in the right segment
of the international market was the key to
success.
Fund Performance
----------------
The Growth Fund posted a 7% total return--a
respectable return, but disappointing relative
to its growth peers. Our investment style is to
seek high quality companies with strong,
predictable earnings growth. This approach tends
to reduce volatility and downside risk, but can
lag in periods when cyclical, economically
sensitive companies are benefiting from
accelerating earnings.
The Value Discovery Fund
posted a +4% total return--about in line with
its small cap value peers. This performance is a
tale of two quarters, as small cap value stocks
(as measured by the Russell 2000 Value Index)
declined 10% in the first quarter, only to
rebound in the second quarter with 17% returns.
The International Growth Fund and the Emerging
Markets Growth Fund were standout
performers--both in absolute returns and
relative to their peers. For the first half of
the year, the International Growth Fund and the
Emerging Markets Growth Fund posted total
returns of 26% and 41%, respectively. These
total returns compared with the 7% and 35%
average returns among the Lipper International
Fund Index and the Lipper Emerging Markets Fund
Index, respectively.
In the fixed income markets, rates began to rise
in the second quarter, with the Fed indicating a
"bias toward raising interest rates." While this
promises better yields in the coming months, the
immediate impact was a decline in bond prices.
Thus, the Income Fund only posted a year-to-date
total return of -.4%.
The Ready Reserves Fund had a 4.39% total return
during the first half, which was comparable to
the 4.35% average return posted by other funds
rated AAA by S&P.
Other News
Earlier this year, I had the privilege of
joining the William Blair Mutual Funds as their
new President. Over the coming months, we are
planning to introduce several new
funds and will be strengthening the
communications and services to our shareholders.
Rocky Barber will continue as the Funds' CEO and
as the co-manager of the Growth Fund.
Thank you for investing with us.
/S/Marco Hanig
June 30, 1999 Semi-Annual Report 3
<PAGE> 4
----------------------------------------------------
GROWTH FUND
----------------------------------------------------
----------------------------------------------------
PERFORMANCE HIGHLIGHTS
----------------------------------------------------
----------------------------------------------------
6/30/99 1998 1997 1996 1995 1994
--------- ------- ------- ------- ------- ------
Growth Fund................ 7.07% 27.15% 20.07% 17.99% 29.07% 6.45%
S&P500 Index............ 12.38 28.57 33.36 22.96 37.58 1.32
Russell 2000 Index...... 9.28 (2.55) 22.36 16.49 28.44 (1.82)
Past performance does not predict future performance.
----------------------------------------------------
INVESTOR INFORMATION
----------------------------------------------------
----------------------------------------------------
6/30/99(a) 1998 1997 1996 1995 1994
--------- ------- ------- ------- ------- ------
Ending Net
Assets (in millions)..... $790 $742 $591 $502 $363 $218
Portfolio Turnover
Rate(%).................. 45 37 34 43 32 46
Expense Ratio(%)........... .84 .84 .84 .79 .65 .71
----------------------------------------------------
(a) Rates are annualized.
----------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
----------------------------------------------------
Dear Shareholders:
After a slow first quarter, the U.S. stock market
performed strongly and moved to new highs in June.
A strengthening economy and prospective earnings
acceleration more than compensated for modestly
higher interest rates. While this provided a good
foundation for the market's advance, it also
[PHOTO OF ROCKY BARBER] brought with it a shift in investor preferences
for economically sensitive, cyclical stocks rather
than the higher quality, consistent growth
companies that the Growth Fund invests in. The
market advance also broadened in the second
quarter to include smaller cap stocks, although
these stocks still trail the large cap indices on
a year to date basis.
For the six months, the Growth Fund advanced over
7% compared with 12% and 7% gains, respectively
for the S&P 500 and S&P Midcap indices. From a
fundamental earnings perspective, stocks of
[PHOTO OF companies held by the Fund have performed well,
MARK A. FULLER III] delivering results in line with our expectations.
This is quite consistent with our focus on
companies exhibiting more predictable growth
characteristics. With the economy recovering
rapidly from the global financial panic last fall,
however, stocks of companies held by the Fund have
offered less upside earnings surprise that other
parts of the market and have been somewhat
neglected for the moment.
Within the Fund, our technology holdings performed
very well, but we have resisted the most recent
Internet craze. We feel more comfortable with
proven companies that benefit from the high growth
in technology and telecommunications markets but
are not subject to the risks of extremely rapid
change in business models and lack of key
fundamental valuation parameters. Particular areas
of emphasis includes telecom networking and
infrastructure, semiconductors and technology
services.
In the health care area, our underweighted
position has been appropriate, as we have been
concerned about the impact of new and changing
government regulatory policies. Indeed, this
sector has seen more than its fair share of
disappointment this year, and as valuations become
compelling, we are selectively looking to increase
our exposure in pharmaceuticals, medical products
and healthcare services.
4 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 5
The consumer sector has been a beneficiary of a
strong economy and rising disposable income. The
Fund has emphasized growth retailers and selected
leisure time companies.
The pronounced performance leadership in recent
years of the largest cap stocks has pushed their
valuation to record levels, however, our
flexibility to invest across a broad range of
capitalization keeps many attractively valued
stocks on our list. While mid cap stocks have not
been in favor, we are selectively adding to these
portfolio holdings due to their higher growth
rates and low valuation.
The outlook for the second half of 1999 should see
continued robust economic growth, low inflation
and strong corporate earnings growth. However,
yearly comparisons become more difficult and many
cyclical stocks have priced in those improvements.
The Y2K computer bug is now directly in front of
us as well, and could be disruptive to the
quarterly business trends in some areas of
technology. We continue to work diligently in
reviewing the Fund's holdings with respect to Y2K
readiness.
We continue to be sensitive to the relationship
between risk and reward, even though it is not
currently fashionable. Thoughtful fundamental
analysis and a long-term perspective will prove
rewarding to investors, and we appreciate our
shareholders who share this commitment.
/s/ Rocky Barber /s/ Mark A. Fuller III
Rocky Barber Mark A. Fuller III
----------------------------------------------------
GROWTH FUND
----------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS
AND INCOME DIVIDENDS
Past performance does not predict future performance.
--------------------------------
AVERAGE ANNUAL TOTAL RETURN
(PERIOD ENDING 6/30/99)
1 Year 15.84%
5 Years 22.21%
10 Years 18.10%
--------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Growth $10,000 13,000 12,800 18,500 19,900 22,900 24,400 31,500 37,200 44,600 56,800 60,800
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 65,100
</TABLE>
June 30, 1999 Semi-Annual Report 5
<PAGE> 6
................................................................................
GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
COMMON STOCKS
<S> <C> <C>
TECHNOLOGY--23.6%
257 *A D C Telecommunications, Inc. ....... $ 11,705
226 *Cisco Systems, Inc. .................. 14,603
301 *Electronic Arts, Inc. ................ 16,335
169 Intel Corporation..................... 10,079
284 Linear Technology Corporation......... 19,086
279 *Microsoft Corporation................. 25,162
223 *Oracle Corporation.................... 8,298
449 *Tellabs, Inc. ........................ 30,309
218 Texas Instruments, Inc. .............. 31,639
177 *USWeb Corporation..................... 3,916
271 *Xilinx, Inc. ......................... 15,522
--------
186,654
--------
CONSUMER CYCLICALS--15.5%
465 *Acxiom Corporation.................... 11,583
96 *C D W Computer Center................. 4,224
270 Home Depot, Inc. ..................... 17,372
217 International Speedway Corporation.... 10,289
280 *Jones Lang LaSalle, Inc. ............. 8,362
94 *Kohl's Corporation.................... 7,263
237 Lowes Companies, Inc. ................ 13,452
988 *Office Depot, Inc. ................... 21,796
375 Royal Caribbean Cruises, Ltd. ........ 16,393
132 Tribune Company....................... 11,509
--------
122,243
--------
APPLIED TECHNOLOGY--15.1%
753 Automatic Data Processing, Inc. ...... 33,119
572 *Concord E F S, Inc. .................. 24,186
313 *NOVA Corporation/Georgia.............. 7,835
161 Shared Medical Systems Corporation.... 10,480
306 *Sterling Commerce, Inc. .............. 11,176
110 *Transaction Systems Architects........ 4,286
141 Vodafone Airtouch plc (ADR)........... 27,807
--------
118,889
--------
HEALTHCARE--12.3%
223 *Amgen, Inc. .......................... 13,569
132 Baxter International.................. 7,984
343 *Covance, Inc. ........................ 8,201
264 *Elan Corporation plc (ADR)............ 7,331
844 *Healthsouth Rehabilitation
Corporation......................... 12,601
268 Medtronic, Inc. ...................... 20,878
170 Merck & Co., Inc. .................... 12,565
404 Omnicare, Inc. ....................... 5,102
214 *Quintiles Transnational Corporation... 8,973
--------
97,204
--------
FINANCIAL SERVICES--10.3%
85 American International Group.......... 9,915
281 Associates First Capital Corp., Class
"A"................................. 12,474
151 Federal Home Loan Mortgage
Corporation......................... 8,729
270 Heller Financial, Inc................. 7,509
551 MBNA Corporation...................... 16,885
376 Mellon Bank Corporation............... 13,692
141 State Street Boston Corporation....... 12,047
--------
81,251
--------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
- ---------------------------------------------------- --------
SHARES OR PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------- --------
<S> <C> <C>
CAPITAL GOODS--7.8%
230 Danaher Corporation................... $ 13,343
78 Illinois Tool Works, Inc. ............ 6,421
138 Molex, Inc............................ 5,100
380 Molex, Inc., Class "A"................ 11,975
486 *MSC Industrial Direct Co., Class
"A"................................. 4,978
189 Pentair, Inc. ........................ 8,670
24 *Solectron Corporation................. 1,567
244 *Zebra Technologies Corporation, Class
"A"................................. 9,391
--------
61,445
--------
CONSUMER STAPLES--7.4%
167 *Clear Channel Communications, Inc. ... 11,520
329 CVS Corporation....................... 16,836
281 *U. S. Foodservice..................... 11,971
397 Walgreen Company...................... 11,668
139 *Whole Foods Market, Inc. ............. 6,685
--------
58,680
--------
TRANSPORTATION--2.4%
297 *Heartland Express, Inc. .............. 4,869
232 *Iron Mountain, Inc. .................. 6,644
354 *Knight Transportation, Inc. .......... 7,571
--------
19,084
--------
TOTAL COMMON STOCK--94.4%
(cost $431,802)................................... 745,450
--------
CONVERTIBLE BOND--.4%
$4,700 The Sports Authority, Inc.,
5.25% Subordinated Debentures,
due 9/15/01 (cost $4,439)............ 3,196
--------
CONVERTIBLE PREFERRED STOCK--1.2%
565 Innkeepers USA Trust, 8.625%, Series A
Cumulative Convertible Preferred
Shares of Beneficial Interest, due
9/15/01 (cost $14,112)............... 9,702
--------
SHORT-TERM INVESTMENTS
$9,189 Associates Corp. of North America
Demand Note, 4.60%, due 7/1/99....... 9,189
4,500 Household Finance Corporation, 4.90%,
due 7/9/99........................... 4,500
5,000 G. E. Capital Corporation, 5.02%, due
7./16/99............................. 5,000
4,000 General Motors Acceptance Corporation,
5.03%, due 7/23/99................... 4,000
5,000 Ford Motor Credit Corporation, 5.15%,
due 7/30/99.......................... 5,000
3,500 Household Finance Corporation, 5.15%,
due 8/6/99........................... 3,500
--------
TOTAL SHORT-TERM INVESTMENTS--4.0%
(cost $31,189).................................... 31,189
--------
TOTAL INVESTMENTS--100.0%........................... 789,537
CASH AND OTHER ASSETS, LESS LIABILITIES............. 248
--------
NET ASSETS--100.0%.................................. $789,785
========
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
6 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 7
----------------------------------------------------
VALUE DISCOVERY FUND
----------------------------------------------------
----------------------------------------------------
PERFORMANCE HIGHLIGHTS
----------------------------------------------------
6/30/99 1998 1997
----------- ---------- -----------
Value Discovery Fund....... 4.71% .66% 33.46%
Russell 2000 Index....... 9.28 (2.55) 22.36
Past performance does not predict future performance.
----------------------------------------------------
INVESTOR INFORMATION
----------------------------------------------------
----------------------------------------------------
6/30/99(a) 1998 1997 1996(b)
----------- ---------- ----------- -----------
Ending Net Assets
(in millions)............ $50 $45 $30 $2
Portfolio Turnover
Rate(%).................. 36 78 69 -
Expense Ratio(%)........... 1.46 1.52 1.50(c) -
----------------------------------------------------
(a) Rates are annualized.
(b) For the period December 23, 1996 (Commencement
of Operations) to December 31, 1996.
(c) Without the waiver of expenses, the expense
ratio would have been 1.78%
----------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
----------------------------------------------------
Dear Shareholders:
The Value Discovery Fund returned 17.49% for the
quarter ended June 30, 1999 vs. 15.55% for the
Russell 2000 benchmark*, 16.56% for the Russell
2000 Value** and 14.75% for the Russell 2000
Growth***. The Fund benefited from a modest
[PHOTO GLEN KLECZKA] recovery in small cap equity markets in the
second quarter after a very difficult first
quarter. The Value Discovery Fund year-to-date
total return is up 4.71% while the Russell 2000
is up 9.28%, the Russell 2000 Value is up 5.26%
and the Russell 2000 Growth is up 12.82%.
The small cap investment climate at first glance was
[PHOTO DAVID MITCHELL] particularly challenging in the first half of 1999
for value-style managers. The growth-style
year-to-date outperformed the value-style by 756
basis points. However, Internet stocks were
significant contributors to growth stock
outperformance. There are 51 Internet stocks in the
Russell 2000 Growth and 52 in the Russell 2000
according to Prudential Securities Small Cap
Quantitative group. There are only a few in the
Russell 2000 Value index. These stocks added 658 and
376 basis points to the respective performance of
the Russell 2000 Growth and Russell 2000 indices
according to Prudential Securities. That is,
Internet stocks contributed 51% of the Russell 2000
Growth and 41% of the Russell 2000 total performance
for the first half of 1999. Therefore, the
investment performance year-to-date of the
growth-style as measured by the Russell 2000 Growth
and the value-style as measured by the Russell 2000
Value are more closely aligned when taking out the
effect of Internet stocks. We believe Internet
stocks continue to be a speculative niche in the
financial markets even though speculators have been
well rewarded for incurring substantial investment
risk. On occasion speculation appears to be a
compelling investment strategy validated by strong
investment performance over extended periods of
time. Speculation indeed begins to manifest itself
as conventional investing. While many speculators
remain convinced of the investment appeal of
Internet stocks we continue to avoid them due to
excessive market valuations for businesses incurring
substantial losses on token revenue. Our investment
philosophy remains consistent: Recognize the
difference between investing and speculating and
avoid the latter.
June 30, 1999 Semi-Annual Report 7
<PAGE> 8
[PHOTO CAPPY PRICE] Importantly, the Internet effect could diminish
somewhat in the second half of 1999. Each year at
this time the Frank Russell Company reconstitutes
the Russell indices including the Fund's Russell
2000 benchmark. Approximately 26 Internet stocks
left the Russell 2000 on the date of reconstitution,
June 30, 1999. Internet stocks represented about
7.6% of the benchmark by weight at the end of the
quarter. Many of the Internet stocks that saw
substantial appreciation in the first half of 1999
are now too large for the Russell 2000 and have
migrated to the Russell 1000. The new Internet
constituents in the Russell 2000 are recent
initial-public-offerings. The Russell 2000
post-reconstitution has approximately 90 Internet
stocks with a reduced impact representing
approximately 4.0% of the benchmark by weight.
Therefore, the Russell 2000 benchmark's Internet
exposure has been reduced by almost half. We are
hopeful this will result in less performance skewing
and less volatility in the benchmark in the future.
On the economic front an important psychological
inflection point has apparently been reached that
could present challenges in the second half of 1999
and the first half of 2000. Investors are more
vigilant for any macroeconomic indications of
prospective inflation and its impact on Federal
Reserve policy. Recall that the Fed stemmed the
financial panic of late last year with three cuts in
the fed funds rate, which added meaningful liquidity
to financial markets. Financial markets have fully
recovered from last fall's panic and now face
renewed inflationary concerns. We believe the Fed's
primary concern is with labor market pressures. As a
result, the Fed just implemented a 25 basis point
increase in the fed funds rate which could be the
"opening shot" in a series of moves to stem
prospective inflation. Notwithstanding the Fed's
move to a neutral bias regarding further monetary
tightening, preventing additional fed funds
increases will depend on whether the economy slows
sufficiently to stem any price pressures. As a
result, markets will be more attuned to inflationary
signs and will potentially be more volatile as
economic indicators are released.
The Fund's attractive level of valuation positions
us to take advantage of any continuing upturn in
small stock performance. The Fund continues to trade
at a meaningful discount to the market's valuation
at roughly 11x next-twelve-months estimated earnings
vs. 20x for the Russell 2000. The earnings growth
rate of companies held by the Fund is projected to
be over 12% over the next three years vs. 10% for
the Russell 2000 and 8% at best for companies which
the S & P 500 holds. Therefore, the Value Discovery
Fund continues to trade at a discount valuation with
a superior growth outlook. The weighted average
market capitalization of the Fund is currently $625
million up from last year's $393 million due to a
focus on purchasing larger companies and market
appreciation. We currently hold 46 securities in the
Fund.
In summary, the Value Discovery Fund is off to a
decent start and trades at a very attractive
valuation level. The past year for small cap
investors has been one of the most challenging
environments in a generation. Good earnings and
consistent business performance are not immediately
rewarded in the current environment for small cap
stocks. Rather, many investors in the first half
sold these same companies to chase the easy
performance being generated by Internet stocks. That
bet paid off and they made money with apparent ease.
We anticipate a more favorable investing climate for
small cap value investors during the second half of
1999.
/s/ Glen Kleczka /s/ David Mitchell /s/Cappy Price
Glen Kleczka David Mitchell Cappy Price
* Russell 2000 definition
** Russell 2000 Value definition
*** Russell 2000 Growth definition
8 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 9
----------------------------------------------------
VALUE DISCOVERY FUND
----------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND
INCOME DIVIDENDS
<TABLE>
<S> <C> <C> <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 12,000 14,100
Russell 2000 Index $10,000 9,500 11,000 12,700 12,200 13,500 12,800 10,300 11,900 11,300 13,000
</TABLE>
June 30, 1999 Semi-Annual Report 9
<PAGE> 10
................................................................................
VALUE DISCOVERY FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------- -------
SHARES VALUE
- ----------------------------------------------------- -------
COMMON STOCKS
<C> <S> <C>
FINANCIAL SERVICES--30.0%
111 A R M Financial Group, Inc. ............. $ 941
60 Amerus Life Holdings, Inc., Class "A".... 1,617
59 *Annuity & Life Re Holdings, plc (ADR)... 1,319
93 Brandywine Realty Trust.................. 1,847
19 Bank United Corporation, Class "A"....... 756
107 Equity One, Inc. ........................ 1,054
55 First Industrial Realty Trust............ 1,523
113 *Matrix Bancorp, Inc. ................... 1,578
39 *Mony Group, Inc. ....................... 1,279
50 SCPIE Holdings, Inc. .................... 1,644
99 *Seacoast Financial Services
Corporation.............................. 1,125
22 Walden Residential Property, Inc. ....... 477
-------
15,160
-------
CONSUMER DISCRETIONARY--19.2%
85 *Brauns Fashion Corporation.............. 1,218
63 Cadmus Communications Corporation........ 873
84 *Happy Kids, Inc. ....................... 734
78 *International Total Services, Inc. ..... 248
41 *Michaels Stores, Inc. .................. 1,265
88 Pier 1 Imports, Inc. .................... 984
137 Pizza Inn, Inc. ......................... 456
49 Russ Berrie & Co., Inc. ................. 1,215
44 *Shoe Carnival, Inc. .................... 748
39 *Sunglass Hut International, Inc. ....... 667
29 *Telespectrum Worldwide, Inc. ........... 225
49 *United Stationers, Inc. ................ 1,069
-------
9,702
-------
HEALTHCARE-RELATED SPECIALTIES--10.6%
75 *First Health Group Corporation.......... 1,630
73 *Maxxim Medical, Inc. ................... 1,711
62 *Quorum Health Group..................... 776
171 *Response Oncology, Inc. ................ 503
49 *Sierra Health Services, Inc. ........... 706
-------
5,326
-------
MATERIALS--9.4%
127 Easco, Inc. ............................. 1,343
54 *N C I Building Systems, Inc. ........... 1,148
23 USG Corporation.......................... 1,299
58 Worthington Industries, Inc. ............ 958
-------
4,748
-------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
- ----------------------------------------------------- -------
SHARES OR PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------- -------
<C> <S> <C>
PRODUCER DURABLES--8.4%
36 *Denison International plc (ADR)......... $ 547
46 *Doncasters plc (ADR).................... 807
51 *Kent Electronics Corporation............ 1,011
78 LSI Incorporated......................... 1,892
-------
4,257
-------
UTILITIES--5.2%
45 Illinova Corporation..................... 1,221
39 T N P Enterprises, Inc. ................. 1,421
-------
2,642
-------
AUTOS AND TRANSPORTATION--5.0%
40 *Landstar System, Inc. .................. 1,458
78 *Stoneridge, Inc. ....................... 1,049
-------
2,507
-------
TECHNOLOGY--2.2%
178 *Overland Data, Inc. .................... 1,133
-------
CONSUMER STAPLES--2.0%
34 Sanderson Farms, Inc..................... 477
13 *Suiza Foods Corporation................. 536
-------
1,013
-------
MULTI-INDUSTRY--1.1%
44 *Global Industrial Technologies, Inc. ... 531
-------
ENERGY--.9%
15 *Cal Dive International, Inc. ........... 439
-------
TOTAL COMMON STOCK--94.0%
(cost $40,415)..................................... 47,458
-------
SHORT-TERM INVESTMENTS
$ 29 Investors Bank & Trust Company
Repurchase Agreement 4.25%, dated
6/30/99, collateralized by U.S.
Government security with a market value
of $30, due 7/1/99 repurchase date
(cost $29)............................. 29
1,277 Associates Corp. of North America Demand
Note, 4.60%, due 7/1/99................ 1,277
-------
TOTAL SHORT-TERM INVESTMENTS--2.6%
(cost $1,306)...................................... 1,306
-------
TOTAL INVESTMENTS--96.6%............................. 48,764
CASH AND OTHER ASSETS, LESS LIABILITIES--3.4%........ 1,708
-------
NET ASSETS--100.0%................................... $50,472
=======
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
See accompanying Notes to Financial Statements.
10 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 11
------------------------------------------------
INTERNATIONAL GROWTH FUND
------------------------------------------------
................................................
Performance Highlights
................................................
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
6/30/99 1998 1997 1996 1995 1994
----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
International Growth Fund....... 26.33% 11.46% 8.39% 10.20% 7.22% (.04)%
MCI AC WLD ex US Index*...... 7.15 14.46 2.04 6.68 9.94 6.63
Lipper International Index... 6.90 12.66 7.27 14.43 10.02 (.74)
Past performance does not predict future performance.
<CAPTION>
................................................................................
Investor Information
................................................................................
--------------------------------------------------------------------------------
6/30/99(a) 1998 1997 1996 1995 1994
----------- ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ending Net Assets (in millions). $191 $140 $129 $105 $90 $70
Portfolio Turnover Rate (%)..... 149 98 102 89 77 40
Expense Ratio (%)............... 1.33 1.36 1.43 1.44 1.48 1.51
--------------------------------------------------------------------------------
*Morgan Stanley Capital International All Country World (Free) except U.S. Index.
(a) Rates are annualized.
</TABLE>
------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGER
------------------------------------------------
Dear Shareholders:
A gradual readjustment of global growth
expectations back toward normal levels meant
[PHOTO OF generally stronger equity markets and weaker
W. GEORGE GREIG] bond markets during the first half of 1999.
Ample liquidity flows provided by central banks
and continued strong domestic demand growth in
the U.S. proved an effective countermeasure
against the deflationary influences of 1998's
financial shocks. The International Growth Fund
showed relatively strong gains during the first
half, returning a 26.3% total return versus a
return of 7.2% for the benchmark MSCI
All-Country World ex US Index.
Global equity market leadership rotated towards
Asia and emerging markets, as shown in the
following index data:
Index Returns, 1999 through June 30
MSCI Emerging Markets (Free) 38.4%
MSCI Asia Pacific 21.2
MSCI Japan 20.3
MSCI World 7.9
MSCI Europe -3.2
------------------------------------------------
Resurgent emerging markets in Asia moved into a
virtuous circle of current account surpluses,
strengthening currencies, declining inflation
and interest rates and capital inflows--all of
which contributed not only to liquidity-driven
market gains but also to encouraging signs of
economic recovery. At mid-year, the growth
outlook in virtually every Asian economy is far
better than it appeared six months ago.
Similarly, in Latin America, the specter of a
destabilizing devaluation in Brazil has largely
given way to improving recovery prospects as the
government has been able to significantly cut
real rates and inflation has receded after only
a brief uptick. Improvements in industrial
commodity pricing have helped basic industry
earners in emerging economies worldwide without
significantly affecting the inflation outlook.
The International Growth Fund has continued to
benefit from an overweight position in global
emerging markets.
Japan, officially pronounced all but
economically dead in 1998, began to show signs
of life this year. Government initiatives in
bank recapitalization, tax cuts, and regulatory
reform complemented the effects of fiscal
stimulus to produce a strong (albeit
exaggerated) first quarter growth showing.
Corporate efforts in restructuring began to take
clearer shape, and foreign investors now believe
that the potential improvement in corporate
performance is worth betting on--as evidenced by
the fact that foreign ownership of Japanese
stocks recently reached a new high. Particularly
strong in the Japanese market, as well as in the
International Growth Fund, during the first half
were high-quality smaller companies, as
investors rewarded entrepreneurial companies
with `economy-proof' growth and
shareholder-value motivation.
Source: MSCI. Returns are with gross dividends
reinvested, expressed in U.S. dollars.
June 30, 1999 Semi-Annual Report 11
<PAGE> 12
For Europe, however, sluggish growth and an
unexpected decline in the single currency
weakened the markets' rate of gain. In spite of
central bank easings both at the European
Central Bank and the Bank of England, bond rates
backed up in concert with U.S. yields. On the
other hand, corporate restructuring, outsourcing
and technology adoption all continue apace in
Europe. The longer term effects of financial
integration should be felt in the form of a
substantially more efficient cost-price
structure throughout the European economy. The
results of this efficiency will be higher
profitability, lower inflation (probably
remaining lower than in the U.S.) and continuing
low interest rates. Our portfolio holdings
emphasize telecommunications, information
technology and retailers as beneficiaries of
these themes.
/S/ W. George Greig
................................................
International Growth Fund
................................................
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions
and income dividends
Past performance does not predict future
perfomance
----------------------------
AVERAGE ANNUAL TOTAL RETURN
(PERIOND ENDING 6/30/99)
1 Year 22.6%
5 Years 11.8%
Since Inception
(10/1/92) 14.1%
----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
International
Growth Fund 10,000 10,100 11,400 13,500 14,000 13,500 13,300 14,500 15,700 16,000 18,500 17,300 19,900 19,300 24,400
MSCI All Country
Word ex-US 10,000 9,900 11,300 13,700 13,700 13,600 14,000 15,000 16,300 17,200 19,600 18,400 21,300 20,800 22,200
Lipper Internation
Index 10,000 9,700 11,900 13,100 14,000 13,900 14,300 15,300 16,100 16,000 18,400 16,700 18,700 19,100 20,500
</TABLE>
12 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 13
<PAGE> 14
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
COMMON STOCKS
<S> <C> <C>
EUROPE--30.4%
AUSTRIA--0.1%
10 Sanochemia Pharmazeutika AG
(Biotechnology)..................... $ 215
--------
DENMARK--1.6%
24 Falck A/S (Safety and security
services)........................... 1,923
45 Lundbeck A/S (Neurological
pharmaceuticals).................... 1,211
--------
3,134
--------
FINLAND--5.0%
25 JOT Automation Group Oyj (Automated
production systems)................. 1,014
80 Nokia Oyj (Telecommunications
equipment).......................... 7,020
15 PMJ Automec Oyj (Automated assembly
equip.)............................. 486
50 Sonera Grp Oyj (Telecommunications
services)........................... 1,094
--------
9,614
--------
FRANCE--4.1%
6 Altran Technologies (Aerospace
technology)......................... 1,454
22 Cegedim (Healthcare database
service)............................ 1,014
95 Genset - ADR (Gene therapy
products)........................... 1,484
10 Hermes International (Fashion
apparel)............................ 1,001
51 Transgene - ADR (Gene therapy
products)........................... 523
30 Vivendi (Industrial service).......... 2,433
--------
7,909
--------
GERMANY--3.1%
40 Kamps AG (Baked goods and frozen food
items).............................. 1,631
10 Qiagen NV (Biotechnology equipment)... 666
15 Rhoen-Klinikum AG (Health care
operator)........................... 1,494
30 Sixt AG (Automobile rental and
leasing)............................ 2,100
--------
5,891
--------
IRELAND--1.7%
101 CRH PLC (Building materials).......... 1,784
26 Ryanair Holdings plc - ADR (Passenger
airline services)................... 1,378
--------
3,162
--------
ITALY--2.7%
75 Autogrill SpA (Restaurant operator)... 775
730 Banca Nazionale Lavoro (Banking)...... 2,305
400 Credito Emiliano (Investment
banking)............................ 1,077
700 Parmalat Finanziaria SpA (Services and
industrial investments)............. 913
--------
5,070
--------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
EUROPE--(CONTINUED)
<S> <C> <C>
NETHERLANDS--3.5%
20 Benckiser NV (Consumer goods)......... $ 1,069
80 Computer Management Group (IT
services)........................... 2,106
35 Draka Holding NV (Wire and cable
manufacturer)....................... 1,312
55 Libertel NV (Mobile telephone
services)........................... 1,079
45 Unique International NV (Temporary
staffing)........................... 1,099
--------
6,665
--------
NORWAY--1.0%
180 Tandberg Television ASA (Digital
broadcast equipment)................ 1,851
--------
SPAIN--3.0%
40 Cortefiel SA (Apparel design and
sale)............................... 1,053
100 Mecalux SA (Materials handling and
storage)............................ 862
5 Sol Melia SA (Hotel management)....... 2,114
80 Superdiplo SA (Supermarket chain)..... 1,776
--------
5,805
--------
SWEDEN--2.9%
50 BT Industries AB (Materials handling
equipment).......................... 863
150 Mandator AB (IT consulting and
solutions).......................... 999
60 Modern Times Group (Publishing)....... 1,304
40 Pharmacia and Upjohn Inc.
(Pharmaceutical and healthcare
products)........................... 2,273
--------
5,439
--------
SWITZERLAND--1.7%
3 Belimo Automation AG (Ventilation
controls)........................... 914
8 Swisslog Holdings AG (Logistics
systems)............................ 969
3 Zurich Allied AG (Multi-line
insurance).......................... 1,423
--------
3,306
--------
UNITED KINGDOM--12.7%
90 Allied Zurich (Multi-line
insurance).......................... 1,131
100 Bank of Scotland (Banking)............ 1,323
190 Capita Group PLC (Commercial
services)........................... 1,965
75 Colt Telecom PLC
(Telecommunications)................ 1,536
55 *Energis PLC (Business
Communications)..................... 1,311
150 Filtronic PLC (Cellular telecom
equipment).......................... 1,764
175 Hays PLC (Distribution/personnel
services)........................... 1,821
300 Invesys PLC (Automation
engineering)........................ 1,419
300 Logica PLC (Computer software and
service)............................ 3,166
75 Luminar PLC (Theme pubs and
restaurants)........................ 1,134
230 Misys PLC (Computer systems).......... 1,973
150 Shire Pharmaceuticals Group PLC
(Prescription medicines)............ 1,249
145 Vodafone Airtouch PLC (Mobile
telecommunications services)........ 2,869
8 Vodafone Airtouch PLC - ADR (Mobile
telecommunications services)........ 1,576
--------
24,237
--------
</TABLE>
See accompanying Notes to Financial Statements.
June 30, 1999 Semi-Annual Report 13
<PAGE> 15
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
<S> <C> <C>
CANADA--6.6%
100 Anderson Exploration (Petroleum and
natural gas)........................ $ 1,309
141 Berkely Petroleum Corporation (Oil and
gas)................................ 1,178
55 Biochem Pharma Inc - ADR (Preventative
pharmaceuticals).................... 1,031
50 Four Seasons Hotels Inc. (Hotels)..... 2,175
40 Genesis Microchip Inc. - ADR
(Semiconductors).................... 945
100 Intrawest Corp. (Ski and resort
operations)......................... 1,529
30 JDS Fitel (Fibreoptic components)..... 2,507
100 Trizec Hahn Corp. (Real estate)....... 2,023
--------
12,697
--------
BAHAMAS--0.7%
45 Steiner Leisure (Spa services)........ 1,364
--------
JAPAN--19.4%
470 Bank of Fukuoka Ltd. (Regional banking
service)............................ 1,976
3 Bellsystem24 Incorporated
(Telemarketing)..................... 1,226
1 Don Quijote Company (Retailer)........ 126
3 Don Quijote Company - new
(Retailer).......................... 620
15 Fast Retailing Co., Ltd.
(Retail/apparel).................... 1,611
200 Fujitsu Limited (Semiconductors)...... 4,023
10 Fujitsu Service and Support (IT
services)........................... 1,514
25 Joint Corporation (Real estate
developer).......................... 1,435
8 Kadokawa Shoten Publishing
(Publisher)......................... 1,633
10 Megachips Corp (Electronic
components)......................... 1,074
0 NTT Mobile Communications (Mobile
telecommunications services)........ 203
3 NTT Mobile Communications - new
(Mobile telecommunications
services)........................... 3,480
26 People Company, Ltd (Fitness clubs)... 1,221
40 Ralse Company, Ltd (Supermarket
chain).............................. 1,126
30 Rohm Co., Ltd. (Semiconductor
devices)............................ 4,697
10 Ryohin Keikaku Company, Ltd
(Retail/specialty).................. 2,516
60 Sanyo Coca Cola Bottling Co. (Beverage
bottling)........................... 1,855
5 Softbank Corporation (Software
distribution)....................... 1,012
5 Shohkoh Fund and Co. (Commercial
loans).............................. 3,908
35 Yamada Denki (Large scale retail
stores)............................. 1,917
--------
37,173
--------
ASIA--7 5%
AUSTRALIA--1.4%
190 Lend Lease Corp., Ltd. (Insurance and
financial services)................. 2,608
--------
HONG KONG--4.7%
4,053 CDL Hotels Intl (Hotel owner and
operator)........................... 1,698
225 Cheung Kong (Property development).... 2,001
2,750 Esprit Holdings Ltd. (Apparel
manufacturer)....................... 1,861
500 Li and Fung Limited (Investment
holding company).................... 1,199
600 Smartone Telecommunications (Mobile
telecommunications services)........ 2,134
--------
8,893
--------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
ASIA--(CONTINUED)
<S> <C> <C>
NEW ZEALAND--0.4%
200 Warehouse Group Limited (Retail)...... $ 778
--------
SINGAPORE--1.0%
350 Avimo Group Limited (Precision
optics)............................. 570
20 Pacific Internet (Internet access
services)........................... 948
450 ST Engineering (Engineering/RandD).... 510
--------
2,028
--------
EMERGING ASIA--5.9%
CHINA--0.3%
2,321 China Pharmaceutical Ent.
(Pharmaceuticals)................... 470
798 Shandong Intl Power Development Co. -
H (Electric power plants)........... 180
--------
650
--------
INDIA--1.3%
20 Cipla Limited (Chemicals and
pharmaceuticals).................... 661
15 Hero Honda Motors Ltd.
(Motorcycles)....................... 379
9 NIIT Limited (Computer software)...... 422
33 Punjab Tractors Ltd. (Tractors)....... 994
--------
2,456
--------
INDONESIA--0.7%
2,500 PT Lautan Luas (Specialty
chemicals).......................... 609
35 PT Indosat - ADR (Telecommunications
services)........................... 683
--------
1,292
--------
PHILIPPINES--0.3%
2,250 SM Prime Holdings (Shopping mall
operator)........................... 507
--------
SOUTH KOREA--1.5%
40 LG Chemical (Petrochemicals).......... 1,089
20 Samsung Securities Co (Investment
banking)............................ 1,057
35 Shinhan Bank - GDR (General
banking)............................ 779
--------
2,925
--------
TAIWAN--1.5%
815 Bank Sinopac (Banking and
financing).......................... 568
388 Evergreen Marine (Ship transports).... 485
150 President Chain Store Corp. (7-11
operator)........................... 508
351 TSMC (Semiconductors)................. 1,343
--------
2,904
--------
THAILAND--0.3%
23 Grammy Entertainment (Entertainment
producer)........................... 78
150 Pizza Co., Ltd. (Restaurant
operator)........................... 526
--------
604
--------
EMERGING EUROPE, MID-EAST, AFRICA--3.0%
EGYPT--0.2%
20 MobiNil (Mobil telephone services).... 450
--------
</TABLE>
See accompanying Notes to Financial Statements.
14 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 16
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES VALUE
- ---------------------------------------------------- --------
EMERGING EUROPE, MID-EAST, AFRICA--(CONTINUED)
<S> <C> <C>
GREECE--0.3%
30 Maillis (Packing and plastic
materials).......................... $ 570
--------
HUNGARY--0.3%
11 Gedeon Richter RT (Pharmaceuticals)... 479
--------
POLAND--0.4%
25 Softbank (Financial software
provider)........................... 867
--------
SOUTH AFRICA--1.6%
74 Imperial Holdings Ltd. (Auto rental
and leasing)........................ 730
1,393 Metro Cash and Carry (Food
wholesale).......................... 1,153
95 Specialised Outsourcing (Outsourcing
services)........................... 664
160 Theta Group Ltd. (Consumer banking and
loans).............................. 576
--------
3,123
--------
TURKEY--0.2%
21,000 Akbank T.A.S. (Banking and
investments)........................ 309
--------
LATIN AMERICA--3.4%
BRAZIL--1.3%
60 Tele Norte Leste Participacoes S.A. -
ADR (Local telecommunications
services)........................... 1,114
45 Tele Sudeste Celular Participacoes
S.A. - ADR (Cellular
telecommunications services)........ 1,308
--------
2,422
--------
MEXICO--2.1%
150 Consorcio ARA S.A. (Housing
developers)......................... 602
140 Corporacion Interamericana de
Entretenim S.A. (Live special shows
promoters).......................... 455
172 Grupo Carso Global Telecom - A1
(Telecommunications)................ 1,085
600 Grupo Financiero Banorte S.A.
(Financial services)................ 875
350 Grupo Modelo S.A. (Brewery)........... 995
--------
4,012
--------
TOTAL COMMON STOCK--89.6%
(cost $133,922)................................... 171,409
--------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
SHARES OR PRINCIPAL AMOUNT VALUE
- ---------------------------------------------------- --------
EMERGING EUROPE, MID-EAST, AFRICA--(CONTINUED)
<S> <C> <C>
PREFERRED STOCKS
BRAZIL--1.6%
1,033 EMBRAER - PN (Aircraft
manufacturer)....................... $ 1,749
35,000 Gerdau S.A. (Specialty steel)......... 582
27,500 Votorantim Celulose y Papel (Paper)... 791
--------
3,122
--------
GERMANY--0.3%
15 Fielmann AG (Optical retailer)........ 556
--------
TOTAL PREFERRED STOCK--1.9%
(cost $2,629)..................................... 3,678
--------
WARRANTS, RIGHTS, AND OTHER ISSUES
PHILIPPINES--0.3%
1,000 Jollibee Foods Corp (Fast food
restaurants)........................ 512
--------
SOUTH KOREA--0.1%
5 Samsung Securities Co (Investment
banking)............................ 98
--------
UNITED KINGDOM
8 Luminar PLC (Theme pubs and
restaurants)........................ 34
--------
WARRANTS, RIGHTS, AND OTHER ISSUES--0.4%
(cost $316)....................................... 644
--------
SHORT-TERM INVESTMENTS
$ 9,222 Investors Bank & Trust Company
Repurchase Agreement 4.25%, dated
June 30, 1999, collateralized by
U.S. Government securities with a
market value of $9,684, July 1, 1999
repurchase date (cost $9,222)....... 9,222
699 Associates Corp. of North America
Demand Note, 4.60%, due 7/1/99...... 699
--------
TOTAL SHORT-TERM INVESTMENTS--5.2%
(cost $9,921)..................................... 9,921
--------
TOTAL INVESTMENTS--97.1%............................ 185,652
CASH AND OTHER ASSETS, LESS LIABILITIES--2.9%....... 5,527
--------
NET ASSETS--100.0%.................................. $191,179
========
</TABLE>
- ---------------
* Non-income producing securities
GDR = Global Depository Receipt
ADR = American Depository Receipt
At June 30, 1999 the Fund's Portfolio of Investments includes the following
categories:
Commercial Services - 2%; Consumer Durables - 3%; Consumer Non-Durables - 8%;
Consumer Services - 3%; Electronic Technology - 5%; Energy - 7%; Finance - 23%;
Health Services - 1%; Health Technology - 6%; Industrial Services - 1%; Metal
and Mining - 3%; Process Industries - 11%; Producer Manufacturing - 4%; Retail
Trade - 4%; Technology Services - 1%; Transportation - 2%; and Utilities - 16%
See accompanying Notes to Financial Statements.
June 30, 1999 Semi-Annual Report 15
<PAGE> 17
------------------------------------------------
EMERGING MARKETS GROWTH FUND
------------------------------------------------
................................................
Performance Highlights
................................................
------------------------------------------------
<TABLE>
<CAPTION>
6/30/99 12/31/98(b)
------------------------ --------------
<S> <C> <C>
Emerging Markets Growth Fund... 41.55% (23.70)%
Morgan Stanley Capital
International Emerging
Markets (Free) Index...... 39.87 (28.92)
Past performance does not predict future performance.
</TABLE>
<TABLE>
<CAPTION>
...................................................................................
Investor Information
...................................................................................
-----------------------------------------------------------------------------------
6/30/99(a) 12/31/98(b)
------------------------ --------------
<S> <C> <C>
Ending Net Assets (in millions.. $5 $4
Portfolio Turnover Rate(%)...... 261 226(a)
Expense Ratio(%)................ 2.25(a)(c) 2.25(a)(c)
-----------------------------------------------------------------------------------
(a) Rates are annualized.
(b) For the period May 1, 1998 (Commencement of
Operations) to December 31, 1998.
(c) Without the waiver of expenses in 1999 and
1998, the expense ratio would have been 4.29%
and 6.35%, respectively.
</TABLE>
-----------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
-----------------------------------------------
Dear Shareholders:
During the second quarter, emerging market
economies and stock markets continued to bounce
back from the crisis levels of 1998, with the
MSCI Emerging Markets Free index returning 24.4%
[PHOTO OF for the quarter. Asia outperformed the other
W. GEORGE GREIG] regions on the back of continued corporate
restructuring, declining interest rates and
improving commodity prices. Indonesia was the
best performing equity market in the world
during the second quarter (up 121% in U.S.$) as
investors became more optimistic about the
prospects for a peaceful and fair election in
June. It is notable that essentially all of the
Asian economies are now showing signs of growth
now that banking recapitalization programs have
been implemented in all of the ailing systems.
The issues relating to industrial over-capacity,
which helped precipitate the Asian crisis over
two years ago, will now allow these economies to
grow for the foreseeable future without being
[PHOTO OF impeded by capacity constraints.
JEFFREY A. URBINA]
Emerging European economies and stock markets
were somewhat less robust than in the first
quarter due to their strong ties with the
Western European economies, which have slowed
from last year. All of the major Latin American
markets showed acceptable returns, with the
Brazilian economic problems proving to be less
severe than originally anticipated and Mexico
continuing to be fueled by a strong U.S.
economy.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Index Returns First Quarter, 1999 Second Quarter, 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Emerging Asia 11.1% 39.9%
Latin America 12.9% 16.1%
Eastern Europe & Mid East 14.3% 12.3%
South Africa 13.1% 15.1%
MSCI EMF 12.4% 24.4%
-----------------------------------------------------------------------------------
Source: MSCI. Returns are with gross dividends reinvested, expressed in U.S dollars.
</TABLE>
16 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 18
The Emerging Market Growth Fund outperformed the
index for the second quarter returning 36.5% due
primarily to an overweight position in Indonesia
and stock selection in Brazil. The Fund has
returned 41.6% year to date versus 39.9% for
the index.
Going into the second half of 1999, global
liquidity conditions remain generally favorable
for emerging market stocks. However, the recent
move by the U.S. Federal Reserve to tighten will
likely restrain the exuberant Asian rallies of
the second quarter. China continues to be
focused on reflating its economy. The specter of
a sudden devaluation of the renminbi remains a
possibility as China's export performance
continues to weaken. Perhaps more significantly,
it now appears to be Chinese policy to inflate
the domestic stock market, in an attempt to
boost personal consumption via a "wealth effect"
(who says Zhu Rongji did not learn anything from
his visit to the U.S. in April!). Although there
may be some short-term benefits for investors,
there are signs that the government is creating
an unsustainable "bubble" since the economic
fundamentals do not seem to warrant the 63%
increase in the China index year to date. While
the Brazilian recession has been less severe
than originally anticipated, sustainable growth
will only be achieved in this key Latin American
market once the government solves its budgetary
problems. Elections held in June were remarkably
problem free in both Indonesia and South Africa
and bode well for both countries from both a
social as well as economic perspective. Our
portfolio holdings continue to focus on
telecommunications, technology and domestic
consumption/recovery themes.
/s/W. George Greig
/s/Jeffery A. Urbina
------------------------------------------------
EMERGING MARKETS GROWTH FUND
------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
Past performance does not predict future
performance
-------------------------------
AVERAGE ANNUAL TOTAL RETURN
(PERIOD ENDING 6/30/99)
1 Year 24.14%
Since Inception
(5/1/98) 6.82%
-------------------------------
<TABLE>
<CAPTION>
Emerging Markets
<S> <C> <C> <C> <C> <C>
Growth Fund $10,000 8,700 6,640 7,630 10,800
MSCI EMF Index $10,000 7,660 6,020 7,108 9,900
</TABLE>
June 30, 1999 Semi-Annual Report 17
<PAGE> 19
................................................................................
EMERGING MARKETS GROWTH FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------
SHARES VALUE
- ------------------------------------------------------ ------
COMMON STOCKS
<S> <C> <C>
ASIA--38.5%
CHINA--2.3%
202 China Pharmaceutical Ent.
(Pharmaceuticals)....................... $ 46
379 *Shandong Intl Power Development Co. - H
(Electric power plants)................. 77
------
123
------
INDIA--8.2%
4 Cipla Limited (Chemicals and
pharmaceuticals)........................ 116
4 Hero Honda Motors Ltd. (Motorcycles)...... 95
2 NIIT Limited (Computer software).......... 103
4 Punjab Tractors Ltd. (Tractors)........... 122
------
436
------
INDONESIA--4.1%
500 PT Lautan Luas (Specialty chemicals)...... 122
5 PT Indosat - ADR (Telecommunications
services)............................... 98
------
220
------
PHILIPPINES--2.1%
500 SM Prime Holdings (Shopping mall
operator)............................... 113
------
SOUTH KOREA--9.0%
6 LG Chemical (Petrochemicals).............. 163
3 Samsung Securities Co (Investment
banking)................................ 149
8 *Shinhan Bank--GDR (General banking)...... 167
------
479
------
TAIWAN--10.5%
170 Bank Sinopac (Banking and financing)...... 118
82 Evergreen Marine (Ship transports)........ 103
30 President Chain Store Corp. (7-11
operator)............................... 102
62 *TSMC (Semiconductors).................... 236
------
559
------
THAILAND--2.3%
5 Grammy Entertainment (Entertainment
producer)............................... 15
30 Pizza Co., Ltd. (Restaurant operator)..... 105
------
120
------
LATIN AMERICA--17.9%
BRAZIL--3.5%
10 Tele Norte Leste Participacoes S.A. - ADR
(Local telecommunications services)..... 186
------
MEXICO--14.4%
30 *Consorcio ARA S.A. (Housing
developers)............................. 120
25 *Corporacion Interamericana de Entretenim
S.A. (Live special shows promoters)..... 81
25 Grupo Carso Global Telecom - A1
(Telecommunications).................... 158
150 *Grupo Financiero Banorte S.A. (Financial
services)............................... 219
65 Grupo Modelo S.A. (Brewery)............... 185
------
763
------
EUROPE, MID-EAST, AFRICA--22.9%
EGYPT--2.1%
5 *MobiNil (Mobil telephone services)....... 113
------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------ ------
SHARES OR PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------ ------
COMMON STOCKS--(CONTINUED)
<S> <C> <C>
GREECE--2.4%
7 Maillis (Packing and plastic materials)... $ 127
------
HUNGARY--2.0%
3 Gedeon Richter RT (Pharmaceuticals)....... 109
------
POLAND--2.6%
4 Softbank (Financial software provider).... 139
------
SOUTH AFRICA--12.4%
15 Imperial Holdings Ltd. (Auto rental and
leasing)................................ 144
250 Metro Cash & Carry (Food wholesale)....... 207
19 Specialised Outsourcing (Outsourcing
services)............................... 129
50 *Theta Group Ltd. (Consumer banking and
loans).................................. 180
------
660
------
TURKEY--1.4%
5,000 Akbank T.A.S. (Banking and investments)... 73
------
TOTAL COMMON STOCK--79.3%
(cost $3,616)....................................... 4,220
------
PREFERRED STOCKS
BRAZIL--8.9%
124 EMBRAER - PN (Aircraft manufacturer)...... 210
7,000 Gerdau S.A. (Specialty steel)............. 116
5,000 Votorantim Celulose y Papel (Paper)....... 144
------
470
------
TOTAL PREFERRED STOCK--8.9%
(cost $315)......................................... 470
------
WARRANTS, RIGHTS, AND OTHER ISSUES
PHILIPPINES--1.9%
200 *Jollibee Foods Corp (Fast food
restaurants)............................ 101
------
SOUTH KOREA--0.5%
1 *Samsung Securities Co (Investment
banking)................................ 24
------
WARRANTS, RIGHTS, AND OTHER ISSUES--2.4%
(cost $63).......................................... 125
------
SHORT-TERM INVESTMENTS
$ 265 Investors Bank & Trust Company Repurchase
Agreement, 4.25%, dated June 30, 1999,
collateralized by U.S. Government
securities with a market value of $278
(cost $265)............................. 265
631 Associates Corp. of North America Demand
Note, 4.60%, due 3/1/99................. 631
------
TOTAL SHORT-TERM INVESTMENTS--16.8%
(cost $896)......................................... 896
------
TOTAL INVESTMENTS--107.4%............................. 5,711
LIABILITIES, PLUS CASH AND OTHER ASSETS--(7.4%)....... (393)
------
NET ASSETS--100.0%.................................... $5,318
======
</TABLE>
- ---------------
* Non-income producing securities
ADR = American Depository Receipt
At June 30, 1999 the Fund's Portfolio of Investments includes the following
categories:
Commercial Services -- 1%; Consumer Durables -- 2%; Consumer
Non-Durables -- 19%; Consumer Services -- 2%; Electronic Technology -- 9%;
Energy -- 6%; Finance -- 19%; Health -- 1%; Industrial Services -- 1%; Metals
and Mining -- 8%; Process Industries -- 8%; Producer Manufacturing -- 4%; Retail
Trade -- 4%; Technology Services -- 1%; Transportation -- 1%; and
Utilities -- 14%.
See accompanying Notes to Financial Statements.
18 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 20
----------------------------------------------------
INCOME FUND
----------------------------------------------------
----------------------------------------------------
PERFORMANCE HIGHLIGHTS
----------------------------------------------------
----------------------------------------------------
6/30/99 1998 1997 1996 1995 1994
----------------------------------------------------
Income Fund................ (.40)% 7.07% 8.03% 3.07% 14.37% (0.74)%
Lehman Intermediate
Govt./Corp. Index...... (.58) 8.44 7.87 4.05 15.33 (1.93)
Past performance does not predict future performance.
----------------------------------------------------
INVESTOR INFORMATION
----------------------------------------------------
----------------------------------------------------
6/30/99(a) 1998 1997 1996 1995 1994
----------------------------------------------------
Ending Net Assets
(in millions)............ $185 $188 $160 $150 $147 $144
Portfolio Turnover Rate(%). 104 96 83 66 54 63
Expense Ratio(%)........... .68 .71 .71 .70 .68 .68
----------------------------------------------------
(a) Rates are annualized.
----------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
----------------------------------------------------
Dear Shareholders:
After a relatively uneventful January, the bond
market experienced a very rough period from February
through June. Interest rates rose pretty steadily
[PHOTO OF BENTLEY M. MYER] during this five-month period as the continuing
strong growth of the economy led to a complete
change in Federal Reserve Board policy. This
culminated recently with the first increase in the
federal funds rate in over two years.
U.S. Treasury notes and bonds had the best
[PHOTO OF JAMES S. KAPLAN] performance during the latter part of 1998 as the
Asian crisis led to a flight to only very high
quality securities. That movement was reversed in
the first half of 1999 as long maturity U.S.
Treasury bonds had the worst returns among all of
the sectors of the aggregate bond market. The more
conservative part of the mortgage-backed market
produced the best returns, with certain short
maturity, fixed rate notes actually generating
positive returns.
The Income Fund started the year with a little more
cash than normal. In addition, U.S. Treasuries were
underweighed while short maturity, fixed rate
mortgage backed notes were overweighted. This helped
the Fund outperform the Lehman Intermediate
Government/Corporate Index during the first six
months. The Fund's return did trail that of the
Lipper Short-term Mutual Fund Index but that was
basically due to the shorter average
maturity/duration of that Index.
We maintained the monthly dividend of $.0525 per
share through the first half of the year and it is
expected to remain at that level through the third
quarter of 1999. Finally, effective May 1, 1999, Jim
Kaplan, who has worked with William Blair & Co.,
L.L.C. in the areas of fixed-income analysis,
trading and portfolio strategy since 1994, became
co-manager of both the Income Fund and the Ready
Reserves Fund.
Bentley M. Myer James S. Kaplan
/s/ Bentley M. Myer /s/ James S. Kaplan
June 30, 1999 Semi-Annual Report 19
<PAGE> 21
----------------------------------------------------
INCOME FUND
----------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND
INCOME DIVIDENDS
Past performance does not predict future performance
------------------------------
AVERAGE ANNUAL TOTAL RETURN
(PERIOD ENDING 6/30/99)
1 Year 3.24%
5 Years 6.59%
Since Inception
(9/25/90) 7.38%
------------------------------
Income Fund $10,000 10,300 10,800 12,000 12,400 12,800 13,600
Lehman Intermed
Govt./Corp. Index 10,000 10,400 10,900 11,900 12,300 12,800 13,600
Lipper Short-Term
U.S. Index 10,000 10,200 10,700 11,500 11,900 12,200 12,700
Income Fund 13,800 13,600 13,700 14,900 15,700 15,700 16,200
Lehman Intermed
Govt./Corp. Index 13,900 13,500 13,600 15,000 15,700 15,700 16,400
Lipper Short-Term
U.S. Index 13,100 13,000 13,100 13,900 14,500 14,700 15,200
Income Fund 16,700 17,500 18,100 18,700 18,700
Lehman Intermed
Govt./Corp. Index 16,000 17,700 18,300 19,200 19,000
Lipper Short-Term
U.S. Index 15,600 16,200 16,600 17,100 16,900
20 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 22
................................................................................
INCOME FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------- --------
<S> <C> <C>
U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY
GUARANTEED OBLIGATIONS--56.1%
U.S. TREASURY--22.8%
$ 9,500 U.S. Treasury Note, 7.250%, due
5/15/04................................ $ 10,083
5,950 U.S. Treasury Note, 7.875%, due
11/15/04............................... 6,505
5,000 U.S. Treasury Note, 6.500%, due
8/15/05................................ 5,163
4,550 U.S. Treasury Note, 6.875%, due
5/15/06................................ 4,799
10,000 U.S. Treasury Note, 6.500%, due
10/15/06............................... 10,337
5,000 U.S. Treasury Note, 6.625%, due
5/15/07................................ 5,213
- ------- --------
40,000 Total U.S. Treasury Obligations.......... 42,100
- ------- --------
U.S. GOVERNMENT GUARANTEED OBLIGATIONS--1.9%
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA)--1.4%
2,507 #255840, 10.00%, due 10/15/09............ 2,633
- ------- --------
SMALL BUSINESS ADMINISTRATION--0.5%
-- Receipt for Multiple Originator Fees, #3
0.8450%, due 11/8/08 (Interest Only)
WAC.................................... 636
318 Loan #100023, 9.375%, due 11/25/14....... 334
- ------- --------
318 Total Small Business Administration
- ------- Obligations............................ 970
--------
U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS--31.4%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC)--12.8%
610 #1429, Tranche K, FR, 11.231%, due
1/15/07................................ 616
2,500 Note, 5.750% , due 4/15/08............... 2,385
2,495 #1544, Tranche TM, 9.146%, due 7/15/08... 2,552
642 #1600, Tranche SE, 8.4500% , due
10/15/08............................... 648
2,003 #1655, Tranche SC, FR, 8.005%, due
12/15/08............................... 1,967
317 #1625, Tranche SB, 9.500%, due
12/15/08............................... 322
372 #1662, Tranche T, FR, 7.945%, due
1/15/09................................ 374
5,570 #1462, Tranche PK, 7.50%, due 7/15/21.... 5,674
2,286 #1608, Tranche SE, 8.959, due 6/15/23.... 2,369
240 #1542, Tranche S, 14.968%, due 7/15/23... 250
1,416 #1611, Tranche MB, FR, 14.051%, due
11/15/23............................... 1,473
5,000 #1904, Tranche C, 7.250%, due 8/15/24.... 5,086
- ------- --------
23,451 Total FHLMC Mortgage Obligations......... 23,716
- ------- --------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------- --------
PRINCIPAL
AMOUNT VALUE
- ---------------------------------------------------- --------
<S> <C> <C>
U.S. GOVERNMENT AGENCY GUARANTEED
OBLIGATIONS--(CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)--18.6%
$ 5,500 Note, 6.00%, due 5/15/08................. $ 5,349
996 1993-212, Tranche SG, 8.00%, due
12/25/08............................... 999
2,104 10.00%, due 9/1/09....................... 2,219
1,433 10.50%, due 3/1/10....................... 1,517
3,611 8.50%, due 8/1/12........................ 3,768
2,134 10.50%, due 1/1/13....................... 2,315
1,365 11.50%, due 1/1/13....................... 1,503
6,098 1993-250, Tranche A, 6.150%, due
9/25/16................................ 6,101
3,385 1993-2, Tranche PH, 7.350%, due
3/25/21................................ 3,430
4,750 1992-28, Tranche SB, 9.012%, due
5/25/21................................ 4,795
11 1993-19, Tranche SH, 11.2339%, due
4/25/23................................ 12
343 1994-72, Tranche SA, 9.75%, due
4/25/24................................ 349
1,986 1997-42, Tranche EA, 7.25%, due
3/18/26................................ 2,011
- ------- --------
33,716 Total FNMA Mortgage Obligations.......... 34,368
- ------- --------
99,992 Total U.S. Government and U.S. Government
- ------- Agency Guaranteed Obligations..........
103,787
--------
</TABLE>
See accompanying Notes to Financial Statements.
June 30, 1999 Semi-Annual Report 21
<PAGE> 23
................................................................................
INCOME FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------- ----------- --------
S&P
PRINCIPAL RATING
AMOUNT (unaudited) VALUE
- ---------------------------------------- ----------- --------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--24.3%
$ 1,709 Prudential Home Securities,
1992-13 Tranche B2,
7.500%, due 6/25/07....... AAA $ 1,723
458 Polk Co. HFA, 1991-1,
Tranche A-2, 9.550%, due
1/15/11................... AAA 470
9,043 Morgan Keegan Funding I,
L.P., 8.000%, due
4/25/11................... AA- 9,226
5,000 Empire Funding, 1999-1,
Tranche A2, 6.290%, due
9/25/11................... AAA 4,953
1,804 DBL T 3 8.450%, due
1/20/19................... AAA 1,820
70 Residential Finance Corp.,
1991-11, Tranche A-2,
10.000%, due 4/25/21...... AAA 70
469 Resolution Trust Corp.,
1992-2, Tranche A,
7.9221%, due 8/25/21...... AA 481
89 Resolution Trust Corp.,
1991-3, Tranche A-2,
10.372%, due 8/25/21...... AAA 89
3,297 Bear, Stearns & Co.,
1992-3B1 7.080%, due
5/25/23................... AA 3,339
3,775 First Plus Home Loan 7.420%,
due 5/10/24............... A 3,387
2,159 Countrywide Funding 8.500%,
due 6/25/25............... A 2,180
385 Resolution Trust Corp.,
1992-5, Tranche 5-C,
8.621%, due 1/25/26....... AA 396
4,226 Green Tree Home Improvement,
7.27%, due 6/15/28........ A 4,135
3,703 Residential Asset
Securities, 98, Tranche A
6.75%, due 7/25/28........ AAA 3,681
5,300 Country Wide Alt Loan,
1999-1, Tranche A9 6.75%,
due 6/25/29............... AAA 5,118
1,813 Goldman Sachs Mortgage
Security, 99-1 B2 7.50%,
due 1/19/39............... A 1,794
2,069 Goldman Sachs Mortgage
- -------- Security, 99-1 B1 7.50%,
due 1/19/39............... AA 2,078
--------
45,369 Total Collateralized
- -------- Mortgage Obligations...... 44,940
--------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------- ----------- --------
S&P
PRINCIPAL RATING
AMOUNT (unaudited) VALUE
- ---------------------------------------- ----------- --------
<S> <C> <C> <C>
CORPORATE OBLIGATIONS--15.4%
$ 1,250 Sears, Roebuck Corp. Medium
Term Note, 9.75%, due
3/21/00................... A- $ 1,287
1,500 Household Finance Corp.
Medium Term Note, 10.38%,
due 12/15/00.............. A 1,589
3,150 Ford Motor Credit Note,
6.50%, due 2/28/02........ A+ 3,175
5,675 Xerox Capital Europe Note,
5.75%, due 5/15/02........ A 5,593
2,775 Amgen,Inc. Note, 6.50%, due
12/1/07................... A 2,743
3,350 Applied Materials Inc. Note,
6.75%, due 10/15/07....... BBB+ 3,296
4,700 Cardinal Health Note, 6.25%,
due 6/1/08................ A+ 4,491
2,750 Tribune Company Note, 5.50%,
due 10/6/08............... A+ 2,502
4,000 Merrill Lynch Note, 6.00%,
- -------- due 2/17/09............... AA 3,710
--------
29,150 Total Corporate
Obligations............... 28,386
--------
- --------
174,511 TOTAL LONG TERM
- -------- INVESTMENTS--95.8% (Cost
$180,363)................. 177,113
--------
SHORT-TERM INVESTMENTS
3,012 Associates Corp. of North
America Demand Note,
4.60%, due 7/1/99......... A-1+ 3,012
3,000 General Electric Corporation
- -------- 4.84%, due 8/6/99......... A-1+ 3,000
--------
6,012 TOTAL SHORT-TERM
- -------- INVESTMENTS--3.2% (Cost
$6,012)................... 6,012
--------
$180,523 TOTAL INVESTMENTS--99.0%.... 183,125
========
CASH AND OTHER ASSETS, LESS
LIABILITIES--1.0%......... 1,772
--------
NET ASSETS--100.0%.......... $184,897
========
</TABLE>
- ---------------
WAC = Weighted Average Coupon
FR = Floating Rate
See accompanying Notes to Financial Statements.
22 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 24
----------------------------------------------------
READY RESERVES FUND
----------------------------------------------------
----------------------------------------------------
PERFORMANCE HIGHLIGHTS
----------------------------------------------------
----------------------------------------------------
6/30/99(a) 1998 1997 1996 1995 1994
---------- ------ ------- -------- -------- --------
Ready Reserves Fund........ 4.39% 4.98% 5.01% 4.88% 5.46% 3.70%
S&P-rated AAA Money
Market Funds.......... 4.34 4.95 5.00 4.87 5.45 3.64
Past performance does not predict future performance.
----------------------------------------------------
INVESTOR INFORMATION
----------------------------------------------------
----------------------------------------------------
6/30/99(a) 1998 1997 1996 1995 1994
---------- ------ ------- -------- -------- --------
Ending Net Assets
(in millions)............ $1,021 $1,189 $905 $761 $704 $521
Expense Ratio (%).......... .68 .69 .70 .71 .72 .71
----------------------------------------------------
(a) Rates are annualized.
----------------------------------------------------
A LETTER FROM THE PORTFOLIO MANAGERS
----------------------------------------------------
Dear Shareholders:
Money market interest rates remained fairly stable
during the first few months of 1999, even as the
economy showed signs of accelerating growth. At the
[PHOTO OF time, the consensus seemed to feel that the economy
BENTLEY M. MYER] would slow as the year progressed. However, that
view changed as a series of reports indicated that
there was quite a bit of momentum in the economy and
that the recovery from the Asian crisis last year
was complete. The Federal Reserve Board responded in
late June by raising the federal funds rate.
The Ready Reserves Fund's average maturity was kept
[PHOTO OF at the shorter end of the normal forty to sixty day
JAMES S. KAPLAN] range for the first part of 1999. More recently, the
process of extending the average maturity has begun
as there is now a more normal difference between
short-term and longer-term money market yields.
Additionally, about ten percent of the assets have
been committed to high quality, floating rate notes
that more quickly add yield during a period of
rising rates. That commitment may be increased some
if there appears to be a greater chance that the Fed
will raise federal funds rates further.
The return for the period January 1 to June 30, 1999
was 4.39%, ahead of the 4.35% return of our peer
group, the S&P rated AAA money market funds'
average. Assets remained fairly stable at about $1.2
billion.
/s/ Bentley M. Myer /s/ James S. Kaplan
Bentley M. Myer James S. Kaplan
June 30, 1999 Semi-Annual Report 23
<PAGE> 25
................................................................................
READY RESERVES FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ----------
<S> <C> <C>
U.S. GOVERNMENT AGENCY GUARANTEED--8.4%
$ 1,400 Agency for International
Development, VRN--Peru
5.009%, 8/1/99................... $ 1,400
13,000 Agency for International
Development, VRN--India
5.339%, 7/6/99................... 12,943
15,000 Federal Home Loan Bank VRN
5.191%, 9/24/99.................. 15,000
15,000 Federal Home Loan Bank VRN
5.000%, 1/11/00.................. 15,000
15,013 Federal Home Loan Mortgage Corp.,
VRN 5.389%, 7/6/99............... 15,011
2,632 Federal Home Loan Mortgage Corp.
7.00%, 10/1/99................... 2,610
1,305 Federal Home Loan Mortgage Corp.
6.50%, 10/1/99................... 1,296
837 Federal Home Loan Mortgage Corp.
7.00%, 12/1/99................... 835
6,587 Federal Home Loan Mortgage Corp.
7.00%, 2/1/00.................... 6,575
9,996 Federal National Mortgage
Association, VRN 5.299%,
7/6/99........................... 10,000
926 Federal National Mortgage
Association
6.50%, 10/1/99................... 922
4,181 Federal National Mortgage
- ---------- Association
7.00%, 2/1/00.................... 4,181
----------
85,877 85,773
- ---------- ----------
DEMAND NOTE
400 Associates Corporation of North
- ---------- America, VRN 4.60%, 7/1/99....... 400
----------
VARIABLE RATE NOTE--4.9%
10,000 General Motors Acceptance Corp, VRN
5.018%-5.188%, 8/23/99-8/24/99... 10,004
35,018 Household Finance Corp, VRN
5.11%-5.304%, 8/17/99-9/21/99.... 35,015
5,002 National Rural Utilities
- ---------- Cooperative Finance Corporation,
VRN
5.006%, 7/28/99.................. 5,001
----------
50,020 50,020
- ---------- ----------
FIXED RATE NOTES--1.9%
1,013 Norwest Financial Corp.
6.375%, 10/1/99.................. 1,003
5,021 Paccar Financial Corporation
6.217%, 7/7/99................... 5,000
13,241 Wal-Mart Stores, Inc.
6.125%, 10/1/99.................. 13,237
- ---------- ----------
19,275 19,240
- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ----------
<S> <C> <C>
COMMERCIAL PAPER--84.8%
MANUFACTURING--23.4%
$ 41,562 DaimlerChrysler Finance
Corporation, NA
4.79%-4.94%, 7/19/99-8/31/99..... $ 41,332
50,545 Ford Motor Credit Company
4.79%-4.95%, 7/8/99-7/23/99...... 50,460
17,745 General Electric Capital
Corporation
4.81%-4.86%, 7/29/99-8/12/99..... 17,669
38,182 General Electric Capital Services
of Puerto Rico, Inc.
4.82%-4.88%, 7/21/99-8/18/99..... 37,997
48,004 General Electric Capital Services
4.81%-5.13%, 7/7/99-10/4/99...... 47,752
37,963 General Motors Acceptance Corp.
4.81%, 7/21/99-8/6/99............ 37,826
6,267 Paccar Financial Corporation
- ---------- 5.030%, 9/10/99.................. 6,205
----------
240,268 239,241
- ---------- ----------
FINANCE--13.9%
51,000 Associates Corporation of North
America
4.80%-4.92%, 7/2/99-8/4/99....... 50,899
54,190 Associates First Capital
Corporation
4.81%-4.98%, 7/22/99-9/8/99...... 53,881
17,820 CIT Group Holdings
4.81%-4.83%, 7/1/99-7/26/99...... 17,809
19,438 Household Finance Corporation
- ---------- 4.86%-4.92%, 8/9/99-9/2/99....... 19,302
----------
142,448 141,891
- ---------- ----------
INSURANCE--11.4%
45,070 American General Corporation
4.81%-4.94%, 7/23/99-9/2/99...... 44,762
41,110 American General Finance
Corporation
4.79%-5.16%, 7/12/99-10/7/99..... 40,849
7,500 Aon Corporation
4.91%-5.22%, 7/27/99-7/30/99..... 7,470
23,623 Prudential Funding Corporation
- ---------- 4.80%-5.04%, 7/12/99-9/20/99..... 23,400
----------
117,303 116,481
- ---------- ----------
ENERGY--6.6%
10,000 Atlantic Richfield & Company
5.20%, 9/28/99................... 9,871
42,535 Chevron U.K. Investment, plc
4.80%-4.85%, 8/3/99-8/17/99...... 42,316
15,540 Haliburton Company
- ---------- 4.81%-4.97%, 7/1/99-8/12/99...... 15,494
----------
68,075 67,681
- ---------- ----------
</TABLE>
See accompanying Notes to Financial Statements.
24 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 26
................................................................................
READY RESERVES FUND
................................................................................
PORTFOLIO OF INVESTMENTS, JUNE 30, 1999 (all amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ----------
COMMERCIAL PAPER--(CONTINUED)
<S> <C> <C>
DRUGS/HEALTH--5.2%
$ 53,196 Glaxo Wellcome plc
- ---------- 4.80%-4.97%, 7/6/99-9/1/99....... $ 52,998
----------
UTILITIES--ENERGY & GAS--4.8%
49,774 National Rural Utilities
- ---------- Cooperative Finance Corporation
4.82%-5.05%, 7/23/99-10/4/99..... 49,359
----------
MEDIA/ENTERTAINMENT--4.6%
37,900 Dun & Bradstreet, Inc.
4.80%-4.81%, 7/9/99-7/20/99...... 37,820
9,200 McGraw Hill & Company
- ---------- 5.04%, 9/14/99................... 9,103
----------
47,100 46,923
- ---------- ----------
BROKERAGE--4.3%
44,334 Merrill Lynch, Inc.
- ---------- 4.80%-4.81%, 7/15/99-7/16/99..... 44,247
----------
ELECTRONIC/TECHNOLOGY--3.9%
17,324 IBM Credit Corporation
4.96%-5.03%, 8/25/99-8/27/99..... 17,188
8,500 IBM Corporation
4.98%, 9/3/99.................... 8,425
5,050 Motorola Credit, Inc.
4.81%, 7/2/99.................... 5,049
8,860 Motorola, Inc.
- ---------- 4.80%, 7/29/99-7/30/99........... 8,826
----------
39,734 39,488
- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------- ----------
PRINCIPAL AMORTIZED
AMOUNT COST
- ------------------------------------------------- ----------
COMMERCIAL PAPER--(CONTINUED)
<S> <C> <C>
CHEMICAL/FOREST--3.6%
$ 1,600 DuPont (E.I.) De Nemours & Company
4.80%, 7/15/99................... $ 1,597
35,962 Monsanto Company
- ---------- 4.80%-5.00%, 8/11/99-10/6/99..... 35,674
----------
37,562 37,271
- ---------- ----------
UTILITIES--TELEPHONE--2.3%
6,000 AT&T Corporation
4.81%, 7/28/99................... 5,978
18,260 Bell South Telecommunications
- ---------- 5.18%, 9/7/99.................... 18,081
----------
24,260 24,059
- ---------- ----------
FOOD/BEVERAGE/TOBACCO--0.8%
6,600 Coca-Cola Company
4.83%-4.88%, 7/19/99-8/13/99..... 6,568
1,900 Hershey Foods Inc.
- ---------- 5.05%, 9/8/99.................... 1,881
----------
8,500 8,449
- ---------- ----------
872,554 TOTAL COMMERCIAL PAPER............. 868,088
- ---------- ----------
$1,028,126 TOTAL INVESTMENTS--100.0%.......... 1,023,521
==========
LIABILITIES, PLUS CASH AND OTHER
ASSETS........................... (2,248)
----------
$1,021,273
NET ASSETS--100.0%.................
==========
PORTFOLIO WEIGHTED AVERAGE 40 Days
MATURITY.........................
</TABLE>
- ---------------
VRN = Variable Rate Note
See accompanying Notes to Financial Statements.
June 30, 1999 Semi-Annual Report 25
<PAGE> 27
................................................................................
STATEMENTS OF ASSETS AND LIABILITIES
................................................................................
JUNE 30, 1999 (all amounts in thousands) (unaudited)
<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 $481,542;
$41,721; $146,788; $4,890; $186,375;
and $1,023,521, respectively)........ $789,537 $48,764 $185,652 $5,711 $183,125 $1,023,521
Cash................................... -- -- 2,427 143 -- --
Receivable for:
Fund shares sold..................... 857 23 6,839 -- 525 11,710
Investments sold..................... 10,598 2,480 3,635 100 2,012 --
Interest and dividends............... 769 106 115 19 1,740 1,604
Foreign withholding tax.............. -- -- 122 -- -- --
Deferred organization costs............ -- 24 -- 27 -- --
Other assets........................... 24 1 3 2 6 36
-------- ------- -------- ------ -------- ----------
Total assets..................... 801,785 51,398 198,793 6,002 187,408 1,036,871
LIABILITIES
Payable for:
Fund shares redeemed................. 3,317 30 35 12 297 12,977
Investments purchased................ 8,057 783 7,413 561 2,000 --
Dividends............................ -- -- -- -- -- 1,857
Investment advisory fees,
organization and other costs....... 466 46 158 27 89 499
Other.................................. 160 67 8 84 125 265
-------- ------- -------- ------ -------- ----------
Total liabilities................ 12,000 926 7,614 684 2,511 15,598
-------- ------- -------- ------ -------- ----------
Net Assets.................... $789,785 $50,472 $191,179 $5,318 $184,897 $1,021,273
======== ======= ======== ====== ======== ==========
CAPITAL
Capital stock ($0.001 par value 41,059;
3,718; 10,350; 492; 18,190; and
1,021,378 shares issued and
outstanding, respectively)........... $ 41 $ 4 $ 10 $ 1 $ 18 $ 1,021
Paid-in-surplus........................ 450,151 43,749 133,425 4,774 192,870 1,020,361
Net unrealized
appreciation/(depreciation) on
investments and foreign currency
transactions......................... 307,995 7,043 38,864 821 (3,250) --
Accumulated undistributed net realized
gain (loss) on investments and
foreign currency transactions........ 31,707 (505) 19,045 (271) (5,175) (116)
Undistributed net investment income
(loss)............................... (109) 181 (165) (7) 434 7
-------- ------- -------- ------ -------- ----------
Net Assets.................... $789,785 $50,472 $191,179 $5,318 $184,897 $1,021,273
======== ======= ======== ====== ======== ==========
Net asset value per share.............. $ 19.24 $ 13.57 $ 18.47 $10.80 $ 10.16 $ 1.00
======== ======= ======== ====== ======== ==========
</TABLE>
See accompanying Notes to Financial Statements.
26 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 28
................................................................................
STATEMENTS OF OPERATIONS
................................................................................
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (all amounts in thousands) (unaudited)
<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>
INVESTMENT INCOME
Interest...................... $ 938 $ 94 $ 99 $ 8 $6,169 $ 28,706
Dividends..................... 2,086 412 839 34 -- --
Less foreign tax withheld..... -- -- (80) (2) -- --
------ --------- ------------- -------- ------ --------
3,024 506 858 40 6,169 28,706
EXPENSES
Investment advisory fees...... 2,778 254 841 29 538 3,420
Custodian fees................ 77 8 115 30 20 115
Transfer agent fees........... 73 8 10 7 10 183
Professional fees............. 66 13 26 10 34 80
Registration fees............. 11 5 11 6 6 13
Organization costs............ -- 4 -- 3 -- --
Miscellaneous................. 128 33 20 4 28 106
------ --------- ------------- -------- ------ --------
Total expenses before
waiver.................... 3,133 325 1,023 89 636 3,917
Less expenses waived and
absorbed by Company.... -- -- -- (42) -- --
------ --------- ------------- -------- ------ --------
Net investment income
(loss).................... (109) 181 (165) (7) 5,533 24,789
Net realized and unrealized gain
(loss) on investments, foreign
currency transactions and
other assets and liabilities
Net realized gain (loss) on
investments............... 31,590 (431) 27,793 873 (808) (6)
Addition to Surplus from In-
kind Redemption (Growth
Fund Only)................ 23,040
------ --------- ------------- -------- ------ --------
Total net realized gain
(loss).................... 54,630 (431) 27,793 873 (808) (6)
Change in net unrealized
appreciation (depreciation) on
investments and other assets
and liabilities............... (3,484) 2,482 10,382 699 (5,432) 0
------ --------- ------------- -------- ------ --------
Net increase (decrease) in net
assets resulting from
operations.................... $51,037 $ 2,232 $ 38,010 $ 1,565 $ (707) $ 24,783
====== ========= ============= ======== ====== ========
</TABLE>
See accompanying Notes to Financial Statements.
June 30, 1999 Semi-Annual Report 27
<PAGE> 29
................................................................................
STATEMENTS OF CHANGES IN NET ASSETS
................................................................................
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND THE YEAR ENDED DECEMBER 31, 1998 (all
amounts in thousands) (unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
EMERGING
VALUE INTERNATIONAL MARKETS
GROWTH DISCOVERY GROWTH GROWTH INCOME
FUND FUND FUND FUND FUND
--------------------- ----------------- -------------------- ---------------- --------
1999 1998 1999 1998 1999 1998 1999 1998(A) 1999
---- ---- ---- ---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss)... $ (109) $ (107) $ 181 $ 293 $ (165) $ 130 $ (7) $ 1 $ 5,533
Net realized gain (loss) on
investments, futures, foreign
currency transactions and
other assets and
liabilities.................. 54,630 57,805 (431) (75) 27,793 (8,159) 873 (1,145) (808)
Change in net unrealized
appreciation (depreciation)
on investments, foreign
currency transactions and
other assets and
liabilities.................. (3,484) 102,789 2,482 (612) 10,382 23,550 699 122 (5,432)
--------- --------- ------- ------- --------- -------- ------ ------- --------
Net increase (decrease) in net
assets resulting from
operations................... 51,037 160,487 2,232 (394) 38,010 15,521 1,565 (1,022) (707)
DISTRIBUTIONS TO SHAREHOLDERS
FROM
Net investment income.......... -- -- -- (302) -- (238) -- -- (5,211)
Net realized gain.............. -- (57,744) -- -- -- (11) -- -- --
--------- --------- ------- ------- --------- -------- ------ ------- --------
(57,744) (302) (249) (5,211)
CAPITAL STOCK TRANSACTIONS
Shares sold.................... 192,312 173,606 8,035 23,035 154,696 84,365 282 5,662 18,225
Shares issued in reinvestment
of income dividends and
capital gain distributions... -- 51,776 -- 286 -- 227 -- -- 3,833
Less shares redeemed........... (195,620) (177,422) (4,470) (8,304) (141,273) (88,865) (283) (886) (19,294)
--------- --------- ------- ------- --------- -------- ------ ------- --------
Change from capital stock
transactions................... (3,308) 47,960 3,565 15,017 13,423 (4,273) (1) 4,776 2,764
--------- --------- ------- ------- --------- -------- ------ ------- --------
Change in net assets........... 47,729 150,703 5,797 14,321 51,433 10,999 1,564 3,754 (3,154)
Net assets
Beginning of period............ 742,056 591,353 44,675 30,354 139,746 128,747 3,754 0 188,051
--------- --------- ------- ------- --------- -------- ------ ------- --------
End of period.................. $ 789,785 $ 742,056 $50,472 $44,675 $ 191,179 $139,746 $5,318 $ 3,754 $184,897
========= ========= ======= ======= ========= ======== ====== ======= ========
Undistributed net investment
income (loss) at the end of the
period......................... $ (109) -- $ 181 $ 9 $ (165) -- $ (7) $ 1 $ 434
========= ========= ======= ======= ========= ======== ====== ======= ========
CAPITAL STOCK TRANSACTIONS
Shares sold.................... 10,656 10,367 633 1,726 9,551 5,983 32 606 1,763
Shares issued in reinvestment
of income dividends and
capital gain distributions... -- 2,974 -- 23 -- 16 -- -- 373
Less shares redeemed........... (10,892) (10,559) (361) (643) (8,758) (6,240) (32) (114) (1,867)
--------- --------- ------- ------- --------- -------- ------ ------- --------
Change from capital stock
transactions................... (236) 2,782 272 1,106 793 (241) 0 492 269
========= ========= ======= ======= ========= ======== ====== ======= ========
<CAPTION>
------------------------------------
READY
INCOME RESERVES
FUND FUND
-------- -------------------------
1998 1999 1998
---- ---- ----
<S> <C> <C> <C>
OPERATIONS
Net investment income (loss)... $ 10,792 $ 24,789 $ 51,039
Net realized gain (loss) on
investments, futures, foreign
currency transactions and
other assets and
liabilities.................. 693 (6) (1)
Change in net unrealized
appreciation (depreciation)
on investments, foreign
currency transactions and
other assets and
liabilities.................. 675 -- --
-------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations................... 12,160 24,783 51,038
DISTRIBUTIONS TO SHAREHOLDERS
FROM
Net investment income.......... (10,795) (24,783) (51,038)
Net realized gain.............. -- -- --
-------- ----------- -----------
(10,795) (24,783) (51,038)
CAPITAL STOCK TRANSACTIONS
Shares sold.................... 53,183 1,947,052 3,808,318
Shares issued in reinvestment
of income dividends and
capital gain distributions... 7,837 22,500 50,013
Less shares redeemed........... (34,389) (2,137,330) (3,573,849)
-------- ----------- -----------
Change from capital stock
transactions................... 26,631 (167,778) 284,482
-------- ----------- -----------
Change in net assets........... 27,996 (167,778) 284,482
Net assets
Beginning of period............ 160,055 1,189,051 904,569
-------- ----------- -----------
End of period.................. $188,051 $ 1,021,273 $ 1,189,051
======== =========== ===========
Undistributed net investment
income (loss) at the end of the
period......................... $ 112 $ 7 $ 5
======== =========== ===========
CAPITAL STOCK TRANSACTIONS
Shares sold.................... 5,069 1,947,052 3,808,318
Shares issued in reinvestment
of income dividends and
capital gain distributions... 748 22,500 50,013
Less shares redeemed........... (3,272) (2,137,330) (3,573,849)
-------- ----------- -----------
Change from capital stock
transactions................... 2,545 (167,778) 284,482
======== =========== ===========
</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. June 30, 1999
<PAGE> 30
................................................................................
NOTES TO FINANCIAL STATEMENTS
................................................................................
(unaudited)
(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 of all sizes domiciled outside the United States and
in 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 markets.
The Income Fund is a portfolio designed to provide investors with as high a
level of current income that is consistent with preservation of capital by
investing primarily in a diversified portfolio of high-grade, intermediate-term
debt securities.
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 by investing 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. The value of foreign securities are determined based upon
the sales price on the foreign exchange or market on which it is primarily
traded as of the close of the appropriate exchange or market or, if there have
been no sales on the date of valuation, at the latest bid price. Long-term
fixed-income securities are valued based on market quotations or independent
services that use prices provided by market makers or by estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. 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 dividends from certain 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 June 30, 1999.
(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 price its shares on the observance of 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
June 30, 1999 Semi-Annual Report 29
<PAGE> 31
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 on the date of valuation. The International
Growth Fund and 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, International Growth Fund, Emerging Markets Growth Fund, Income
Fund and 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 (in thousands) of $73 in 1998. 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 related to PFIC's during 1998, which were
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. 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 Fund under terms of the Management Agreement. The Fund pays 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 of each Fund, 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 Fund paid fees of $70,000 to non-affiliated directors of the Fund for the
period ended June 30, 1999.
30 William Blair Mutual Funds, Inc. June 30, 1999
<PAGE> 32
(3) INVESTMENT TRANSACTIONS
Investment transactions, excluding money market instruments, for the period
ended June 30, 1999, 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............................................... $209,306 $ 13,789 $ 110,028 $ 4,927 $103,419
Proceeds from sales and maturities...................... 160,674 7,388 107,630 4,839 87,842
Gross unrealized appreciation/depreciation
at June 30, 1999 was as follows:
Unrealized appreciation............................... 329,959 9,259 43,527 894 878
Unrealized depreciation............................... (21,964) (2,216) (4,663) (73) (4,128)
-------- --------- ------------- -------- --------
Net unrealized appreciation (depreciation).............. 307,995 7,043 38,864 821 (3,250)
======== ========= ============= ======== ========
</TABLE>
(4) FUTURES CONTRACTS
During 1998 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 recognizes any
gain or loss as realized when the contract is closed or expired. The statement
of operations reflects the net realized gains and losses on these contracts. In
addition, the Fund is required to segregate liquid assets in an amount equal to
the underlying value of the open futures positions, less any margin on deposit
with the financial intermediary. There were no outstanding contracts at June 30,
1999.
(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.
There were no outstanding contracts at June 30, 1999.
June 30, 1999 Semi-Annual Report 31
<PAGE> 33
................................................................................
FINANCIAL HIGHLIGHTS
................................................................................
GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------
1999(A) 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 17.970 $ 15.350 $ 13.480 $ 11.900 $ 9.600 $ 9.730
Income from investment operations:
Net investment income (loss).............................. (.003) (.003) (.023) (.010) .034 .027
Net realized and unrealized gain on investments........... 1.273 4.123 2.694 2.144 2.750 .581
-------- -------- -------- -------- -------- --------
Total from investment operations............................ 1.270 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 period.............................. $ 19.240 $ 17.970 $ 15.350 $ 13.480 $ 11.900 $ 9.600
======== ======== ======== ======== ======== ========
Total return (%)............................................ 7.07 27.15 20.07 17.99 29.07 6.45
Ratios to average daily net assets (%):
Expenses.................................................. .84 .84 .84 .79 .65 .71
Net investment income (loss).............................. (.01) (.02) (.16) (.08) .34 .32
Supplemental data:
Net assets at end of period (in thousands)................ $789,785 $742,056 $591,353 $501,774 $363,036 $217,560
Portfolio turnover rate (%)............................... 45 37 34 43 32 46
</TABLE>
- ---------------
(a) Rates are annualized, except for total returns for periods less than one
year.
................................................................................
VALUE DISCOVERY FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
JUNE 30, -----------------------------
1999(A) 1998 1997 1996(B)
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $12.960 $12.970 $10.000 $ 10.000
Income from investment operations:
Net investment income..................................... .049 .088 .029 --
Net realized and unrealized gain (loss) on investments and
futures................................................. .561 (.005) 3.305 --
------- ------- ------- --------
Total from investment operations............................ .610 .083 3.334 --
Less distributions from:
Net investment income..................................... -- .093 .020 --
Net realized gain......................................... -- -- .344 --
------- ------- ------- --------
Total distributions......................................... -- .093 .364 --
------- ------- ------- --------
Net asset value, end of period.............................. $13.570 $12.960 $12.970 $ 10.000
======= ======= ======= ========
Total return (%)............................................ 4.71 .66 33.46 --
Ratios to average daily net assets (%):
Expenses.................................................. 1.46 1.52 1.50(b) --
Net investment income..................................... .82 .76 .29(c) --
Supplemental data:
Net assets at end of period (in thousands)................ $50,472 $44,675 $30,354 $ 2
Portfolio turnover rate (%)............................... 36 78 69 --
</TABLE>
- ---------------
(a) Rates are annualized, except for total returns for periods less than one
year.
(b) For the period December 23, 1996 (Commencement of Operations) to December
31, 1996.
(c) 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. June 30, 1999
<PAGE> 34
................................................................................
INTERNATIONAL GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
JUNE 30, --------------------------------------------------
1999(a) 1998 1997 1996 1995 1994
-------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year.......................... $ 14.620 $ 13.140 $ 13.950 $ 13.120 $12.360 $13.180
Income from investment operations:
Net investment income (loss).............................. (.016) .074 .072 .029 .105 .016
Net realized and unrealized gain (loss) on investments,
foreign currency and other assets and liabilities....... 3.866 1.431 1.056 1.299 .785 (.025)
-------- -------- -------- -------- ------- -------
Total from investment operations............................ 3.850 1.505 1.128 1.328 .890 (.009)
Less distributions from:
Net investment income..................................... -- .024(b) .078(b) .068(b) .130 .024
Net realized gain......................................... -- .001 1.860 .430 -- .714
Tax return of capital..................................... -- -- -- -- -- .073(c)
-------- -------- -------- -------- ------- -------
Total distributions......................................... -- .025 1.938 .498 .130 .811
-------- -------- -------- -------- ------- -------
Net asset value, end of period.............................. $ 18.470 $ 14.620 $ 13.140 $ 13.950 $13.120 $12.360
======== ======== ======== ======== ======= =======
Total return (%)............................................ 26.33 11.46 8.39 10.20 7.22 (.04)
Ratios to average daily net assets (%):
Expenses.................................................. 1.33 1.36 1.43 1.44 1.48 1.51
Net investment income (loss).............................. (.11) .09 .01 .19 .87 .15
Supplemental data:
Net assets at end of period (in thousands)................ $191,179 $139,746 $128,747 $105,148 $89,762 $70,403
Portfolio turnover rate (%)............................... 149 98 102 89 77 40
</TABLE>
- ---------------
(a) Rates are annualized, except for total returns for periods less than one
year.
(b) 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.
(c) Includes $431 relating to a tax return of capital.
................................................................................
EMERGING MARKETS GROWTH FUND
................................................................................
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999(a) 1998(a)(b)
-------- ------------
<S> <C> <C>
Net asset value, beginning of period........................ $ 7.630 $10.000
Income from investment operations:
Net investment income (loss).............................. (.016) .002
Net realized and unrealized gain (loss) on investments,
foreign currency and other assets and liabilities....... 3.186 (2.372)
------- -------
Total from investment operations............................ 3,170 (2.370)
Less distributions from:
Net investment income..................................... -- --
Net realized gain......................................... -- --
------- -------
Total distributions......................................... -- --
------- -------
Net asset value, end of period.............................. $10.800 $ 7.630
======= =======
Total return (%)............................................ 41.55 (23.70)
Ratios to average daily net assets (%):
Expenses(c)............................................... 2.25 2.25
Net investment income (loss)(c)........................... (.17) .04
Supplemental data:
Net assets at end of period (in thousands)................ $ 5,318 $ 3,754
Portfolio turnover rate (%)............................... 261 226
</TABLE>
- ---------------
(a) Rates are annualized, except total returns for periods less than one year.
(b) For the period May 1, 1998 (Commencement of Operations) to December 31,
1998.
(c) Without the waiver of expenses in 1999 and 1998, the expense ratio would
have been 4.29% and 6.35% and the net investment loss ratio would have been
2.39% and 4.06%, respectively.
June 30, 1999 Semi-Annual Report 33
<PAGE> 35
................................................................................
INCOME FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
JUNE 30, 1999(a) 1998 1997 1996 1995 1994
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year......................... $ 10.490 $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580
Income from investment operations:
Net investment income.................................... .306 .640 .659 .619 .646 .661
Net realized and unrealized gain (loss) on investments... (.347) .076 .140 (.309) .732 (.741)
-------- -------- -------- -------- -------- --------
Total from investment operations........................... (.040) .716 .799 .310 1.378 (.080)
Less distributions from:
Net investment income.................................... .289 .636 .659 .610 .658 .646
Net realized gain........................................ -- -- -- -- -- .004
-------- -------- -------- -------- -------- --------
Total distributions........................................ .289 .636 .659 .610 .658 .650
-------- -------- -------- -------- -------- --------
Net asset value, end of period............................. $ 10.160 $ 10.490 $ 10.410 $ 10.270 $ 10.570 $ 9.850
======== ======== ======== ======== ======== ========
Total return (%)........................................... (.40) 7.07 8.03 3.07 14.37 (.74)
Ratios to average daily net assets (%):
Expenses................................................. .68 .71 .71 .70 .68 .68
Net investment income.................................... 5.94 6.81 6.40 5.97 6.24 6.33
Supplemental data:
Net assets at end of period (in thousands)............... $184,897 $188,051 $160,055 $150,006 $147,370 $143,790
Portfolio turnover rate (%).............................. 104 96 83 66 54 63
</TABLE>
- ---------------
(a) Rates are annualized, except for total returns for periods less than one
year.
................................................................................
READY RESERVES FUND
................................................................................
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
JUNE 30, 1999(a) 1998 1997 1996 1995 1994
---------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year..................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income................................ .05 .05 .05 .05 .05 .04
Net realized loss on investments..................... -- -- -- -- -- (.01)
---------- ---------- -------- -------- -------- --------
Total from investment operations....................... .05 .05 .05 .05 .05 .03
Less distributions from:
Net investment income................................ .05 .05 .05 .05 .05 .04
---------- ---------- -------- -------- -------- --------
Total distributions.................................... .05 .05 .05 .05 .05 .04
---------- ---------- -------- -------- -------- --------
Capital contribution................................... -- -- -- -- -- .01
---------- ---------- -------- -------- -------- --------
Net asset value, end of period......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ======== ======== ======== ========
Total return (%)....................................... 4.39 4.98 5.04 4.81 5.45 3.67(b)
Ratios to average daily net assets (%):
Expenses............................................. .68 .69 .70 .71 .72 .71
Net investment income................................ 4.28 4.87 4.92 4.78 5.30 3.61
Supplemental data:
Net assets at end of period (in thousands)........... $1,021,273 $1,189,051 $904,569 $760,808 $703,993 $521,277
</TABLE>
- ---------------
(a) Rates are annualized, except total returns for periods less than one year.
(b) 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. June 30, 1999
<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, Chief Executive Officer
Marco Hanig, 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
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
Janet V. Gassmann, Assistant 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
June 30, 1999
