-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oy35vWmPokfPg0Cx2gvgeY4LEGfWINXi/AMnGQafp/C2uoCRQQ1Bii8gAMZ0scfT kCbksZJhnXbb7Joen8QcHA== 0000950137-96-000141.txt : 19960304 0000950137-96-000141.hdr.sgml : 19960304 ACCESSION NUMBER: 0000950137-96-000141 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19960301 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILLIAM BLAIR MUTUAL FUNDS INC CENTRAL INDEX KEY: 0000822632 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-17463 FILM NUMBER: 96529388 FILING VALUES: FORM TYPE: 485APOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05344 FILM NUMBER: 96529389 BUSINESS ADDRESS: STREET 1: 222 W ADAMS ST CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3123648000 MAIL ADDRESS: STREET 2: 222 W ADAMS STREET CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: BLAIR WILLIAM READY RESERVES INC DATE OF NAME CHANGE: 19920316 485APOS 1 FORM N-1A 1 As filed with the Securities and Exchange Registration Nos. 33-17463 Commission on or about March 1, 1996 811-5344 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _____ Pre-Effective Amendment No. ______ _____ Post-Effective Amendment No. 13 X ----- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _____ Amendment No. 15 X ----- WILLIAM BLAIR MUTUAL FUNDS, INC. (Exact Name of Registrant as Specified in Charter) 222 West Adams Street Chicago, Illinois 60606 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (312) 364-8000 Copy to: James L. Barber, Jr. Charles F. Custer, Esquire 222 West Adams Street Vedder, Price, Kaufman & Kammholz Chicago, Illinois 60606 222 North LaSalle Street (Name and Address of Agent for Service) Chicago, Illinois -------------------- Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant has registered an indefinite amount of capital stock under the Securities Act of 1933. The Rule 24f-2 Notice for the fiscal year ended December 31, 1995 was filed on or about February 22, 1996. It is proposed that this filing will become effective (check appropriate box) / / immediately upon filing pursuant to paragraph (b); or / / on (date) pursuant to paragraph (b); or / / 60 days after filing pursuant to paragraph (a)(1); or /X/ on May 1, 1996 pursuant to paragraph (a)(1); or / / 75 days after filing pursuant to paragraph (a)(2); or / / on (date) pursuant to paragraph (a)(2) of Rule 485. If appropriate, check the following box: / / this post-effective amendment designates a new effective date for a previously filed post-effective amendment. 2 ================================================================================ CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum Proposed Maximum Title of Securities Amount Being Offering Price Aggregate Amount of Being Registered Registered Per Share Offering Price* Registration Fee William Blair 692,418 $10.52 $290,000 $100.00 Income Fund
* The calculation of the maximum aggregate offering price is made pursuant to Rule 24e-2. (b)(2) 3,670,697 (b)(3) 3,005,845 (b)(4) 664,852 3 WILLIAM BLAIR MUTUAL FUNDS, INC. GROWTH FUND, INTERNATIONAL GROWTH FUND, INCOME FUND AND READY RESERVES FUND CROSS REFERENCE SHEET
Item No. of Form N-1A Caption Part A . . . . . . . . . . . . . . . . . . . . . . . . Prospectus - ------ ---------- 1 . . . . . . . . . . . . . . . . . . . . . . . . Cover page 2 . . . . . . . . . . . . . . . . . . . . . . . . Fund Expense Information 3 . . . . . . . . . . . . . . . . . . . . . . . . Financial Highlights 4 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Investment Objectives and Policies 5 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund 5A . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable 6 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Dividend and Distribution Policy; Federal Income Taxation; Shareholder Services and Rights 7 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; Management of the Fund; Determination of Net Asset Value; How to Purchase; Exchanges 8 . . . . . . . . . . . . . . . . . . . . . . . . The Fund; How to Redeem 9 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable Statement of Part B Additional Information - ------ ---------------------- 10 . . . . . . . . . . . . . . . . . . . . . . . . Cover page 11 . . . . . . . . . . . . . . . . . . . . . . . . Table of contents 12 . . . . . . . . . . . . . . . . . . . . . . . . Inapplicable Item No. of Form N-1A Caption
4 13 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth Fund; Income Fund; Ready Reserves Fund; Appendix A; Appendix B 14 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund 15 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund 16 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund; General Fund Information 17 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund 18 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth Fund; Income Fund; Ready Reserves Fund; General Fund Information 19 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth Fund; Income Fund; Ready Reserves Fund; General Fund Information 20 . . . . . . . . . . . . . . . . . . . . . . . . Federal Income Taxation (in the Prospectus) 21 . . . . . . . . . . . . . . . . . . . . . . . . Management of the Fund 22 . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund; International Growth Fund; Income Fund; Ready Reserves Fund Part B Statement of Additional Information - ------ ----------------------------------- 23 . . . . . . . . . . . . . . . . . . . . . . . . Financial Information of the Fund Part C Other Information - ------ -----------------
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Registration Statement. 5 CONTENTS OF PROSPECTUS Fund Expense Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Investment Objectives and Policies . . . . . . . . . . . . . . . . . . . . . . . . . 8 Determination of Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Dividend and Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 How to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 How to Redeem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Federal Income Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Shareholder Services and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
WILLIAM BLAIR MUTUAL FUNDS, INC. 222 West Adams Street Chicago, Illinois 60606 (312) 364-8000 INVESTMENT ADVISER WILLIAM BLAIR & COMPANY, L.L.C. TRANSFER AGENT Boston Financial Data Services, Inc. P.O. Box 9104 Boston, MA 02266-9104 1-800-635-2886 (Massachusetts 1-800-635-2840) THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WILLIAM BLAIR & COMPANY, L.L.C. WILLIAM BLAIR MUTUAL FUNDS, INC. 222 West Adams Street Chicago, Illinois 60606 (312) 364-8000 PROSPECTUS William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end diversified mutual fund consisting of four portfolios, each with its own investment objective and policies. For most purposes, each portfolio operates like a separate mutual fund. The portfolios offered by this Prospectus are: o GROWTH FUND o INTERNATIONAL GROWTH FUND o INCOME FUND o READY RESERVES FUND A description of the individual portfolios and their investment objectives is included in this Prospectus. An investment in Ready Reserves Fund is neither insured nor guaranteed by the U.S. Government and there can be no assurance that the Ready Reserves Fund will be able to maintain a stable net asset value of $1.00. The Fund's shares are not deposits or obligations of or guaranteed or endorsed by any bank, nor are they federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency. Investment in the Fund's shares involves risk, including the possible loss of principal. This Prospectus contains a concise statement of information about the Fund that a prospective investor should know before investing and should be retained for future reference. A Statement of Additional Information for the Fund, dated May 1, 1996, has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The Statement of Additional Information is available upon request and without charge by calling or writing the Fund. May 1, 1996 6 FUND EXPENSE INFORMATION
READY GROWTH INTERNATIONAL INCOME RESERVES FUND GROWTH FUND FUND FUND ------ ------------- ------ ---- Shareholder transaction expenses o Maximum sales load imposed on purchases None None None None o Maximum sales load imposed on None None None None reinvestments o Deferred sales load None None None None o Redemption fee None None None None Annual Fund operating expenses (as a percentage of average daily net assets) o Management advisory fee .750% 1.100% .601% .606% o Other expenses .121 .380 .097 .116 o 12b-1 fee None None None None ---- ---- ---- ---- o Total Fund operating expenses .871% 1.480% .698% .722%
EXAMPLE: PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------------------------------------------------------------------------- A shareholder would incur the following Growth Fund $ 9 $28 $48 $108 expenses on a $1,000 investment International Growth $15 $47 $81 $178 assuming (1) 5% annual return and Fund (2) redemption at the end of each time period. Income Fund $ 7 $22 $39 $ 87 Ready Reserves Fund $ 7 $23 $40 $ 90
The purpose of this example is to assist the shareholder in understanding the various costs and expenses that an investor in a portfolio may bear directly or indirectly. The example should not be considered to be a representation of past or future expenses. Actual expenses may be greater or less than those shown. Expenses and fees are based on amounts that would have been incurred for the 1995 fiscal year, without reimbursements, assuming that the current fees and expenses had been in effect for the 1995 fiscal year. The example assumes 5% annual rate of return pursuant to requirements of the Securities and Exchange Commission. This hypothetical rate of return is not intended to be representative of past or future performance of the portfolios. The management advisory fee for the Income Fund is based on .25% of the first $250 million of average daily net assets and .20% of average daily net assets in excess of $250 million, plus 5.0% of gross income. 2 7 FINANCIAL HIGHLIGHTS The following table shows important financial information expressed in terms of one share outstanding throughout the periods. The information in the table has been based upon information audited by the Fund's independent auditors. Their report appears in the 1995 annual reports to shareholders for William Blair Mutual Funds, Inc., which may be obtained without charge by writing Boston Financial Data Services, Inc., P.O. Box 9104, Boston, Massachusetts 02266-9104. Additional information regarding portfolio performance is included in the 1995 annual reports to shareholders. The financial statements appearing in the 1995 annual reports are incorporated herein by reference.
-------------------------------------------------------------------------------------------- Years Ended December 31, -------------------------------------------------------------------------------------------- GROWTH FUND 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net asset value, beginning of period $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210 $ 9.100 $11.820 Income from investment operations: Net investment income .034 .027 .035 .045 .070 .131 .125 .126 .148 .180 Net realized and unrealized gain (loss) on investments 2.750 .581 1.389 .671 2.970 (.287) 2.178 .433 .468 .839 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total from investment operations 2.784 .608 1.424 .716 3.040 (.156) 2.303 .559 .616 1.019 Less distributions from: Net investment income .030 .025 .035 .047 .070 .130 .130 .160 .135 .218 Net realized gain on investments .454 .713 1.049 .769 .450 .584 2.143 .799 1.371 3.521 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Total distributions .484 .738 1.084 .816 .520 .714 2.273 .959 1.506 3.739 -------- -------- -------- -------- ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 $ 7.840 $ 7.810 $ 8.210 $ 9.100 ======== ======== ======== ======== ======= ======= ======= ======= ======= ======= Total return (%) 29.07 6.45 15.51 7.61 44.37 (2.02) 30.45 7.12 7.99 9.79 Ratios to average net assets (%): Expenses .65 .71 .78 .83 .90 .87 .91 .92 .87 .90 Net investment income .34 .32 .38 1.34 .83 1.70 1.36 1.46 1.46 1.69 Supplemental data: Net assets at end of period (in thousands) $363,036 $217,560 $150,046 $111,082 $91,433 $62,898 $67,421 $59,767 $66,279 $68,555 Portfolio turnover rate (%) 32 46 55 27 33 34 45 18 22 26
3 8
Period Ended Year Ended December 31, December 31, ------------------------ ------------ INTERNATIONAL GROWTH FUND 1995 1994 1993 1992(a)(b) ------------------------- ---- ---- ---- ---------- Net asset value, beginning of period $12.360 $13.180 $10.130 $10.000 Income from investment operations: Net investment income (loss) .105 0.016 0.008 (0.011) Net realized and unrealized gain (loss on investments, foreign currency and other assets and liabilities .785 (0.025) 3.401 0.141 ------- ------- ------- ------- Total from investment operations .890 (0.009) 3.409 0.130 Less distributions from: Net investment income .130(c) 0.024 -- -- Net realized gain on investments 0.714 0.359 -- Tax return of capital -- 0.073 -- ------- ------- ------- ------- Total distributions .130 0.811 0.359 -- ------- ------- ------- ------- Net asset value, end of period $13.120 12.360 13.180 10.130 ------- ------- ------- ------- Total return (%) 7.22 (.040) 33.6 1.3 Ratios to average net assets (%) Expenses (d) 1.48 1.51 1.71 1.88 Net investment income (d) .87 .15 .11 (.56) Supplemental data: Net assets at end of period (in thousands) 89,762 70,403 $40,298 $10,767 Portfolio turnover rate (%) 77 40 83 5
________________________ (a) Ratios are annualized except total return for period less than one year. (b) For the period October 1, 1992 (Commencement of Operations) to December 31, 1992. (c) Includes $.061 in passive foreign investment company transactions which are treated as ordinary income for Federal income tax purposes. (d) Without the waiver of expenses in 1993 and 1992, the expense ratios would have been 2.08% and 2.55% and the net investment ratios would have been (.25)% and (1.22)% , respectively. 4 9
Years Ended December 31 Period Ended --------------------------------------------------------- December 31, INCOME FUND 1995 1994 1993 1992 1991 1990(a)(b) - ----------- --------------------------------------------------------- ------------- Net asset value, beginning of period $ 9.850 $ 10.580 $10.600 $10.770 $10.200 $10.000 Income from investment operations: Net investment income .646 .661 .651 .832 .945 .164 Net realized and unrealized gain (loss) on investments .732 (.741) .159 (.089) .638 .126 -------- -------- ------- ------- ------- ------- Total from investment operations 1.378 (.080) .810 .743 1.583 .290 Less distributions from: Net investment income .658 .646 .651 .827 .870 .090 Net realized gain on investments -- .004 .179 .086 .143 -- -------- -------- ------ ------- ------ ------- Total distributions .658 .650 .830 .913 1.013 .090 -------- -------- ------ ------- ------- ------- Net asset value, end of period $ 10.570 $ 9.850 $10.580 10.600 10.770 $10.200 Total return (%) 14.37 (.74) 7.82 7.17 16.47 2.91(b) Ratios to average net assets (%): Expenses (c) .68 .68 .70 .88 .92 .74 Net investment income (c) 6.24 6.33 5.96 7.69 8.33 8.39 Supplemental data: Net assets at end of period (in thousands) $147,370 $143,790 $204,381 $136,896 $83,041 $22,899 Portfolio turnover rate (%) 54 63 114 47 64 159
_________________ (a) Ratios are annualized. (b) For the period from September 25, 1990 (Commencement of Operations) to December 31, 1990. (c) Without the waiver of expenses in 1991 and 1990 the expense ratios would have been 1.06% and 1.22% and the net investment income ratios would have been 8.19% and 7.67%, respectively. 5 10
Years Ended December 31, Period Ended -------------------------------------------------------------------- December 31, READY RESERVES FUND 1995 1994 1993 1992 1991 1990 1989 1988(a)(b) - ------------------- ---- ---- ---- ---- ---- ---- ---- ------------ Net asset value, beginning of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 Income from investment operations: Net investment income $ .0530 $ .0361 .026 .0327 .0551 .0755 .0848 .0399 Net realized and unrealized gain (loss) on investments - (.0026) - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- Total from investment operations 0530 .0335 .0261 .0327 .0551 .0755 .0848 .0399 Less distributions from: Net investment income .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399 -------- -------- -------- -------- -------- -------- -------- -------- Total distributions .0530 .0361 .0261 .0327 .0551 .0755 .0848 .0399 Capital contribution - .0026 - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 ======== ======== ======== ======== ======== ======== ======== ======== Total return (%) 5.45 3.67(c) 2.64 3.32 5.64 7.81 8.86 7.79(b) Ratios to average daily net assets (%): Expenses .72 .71 .71 .71 .71 .75 .80 .81 Net investment income 5.30 3.61 2.61 3.27 5.51 7.56 8.47 7.54 Supplemental data: Net assets at end of period (in thousands) Net assets at end of period (in thousands) $703,993 $521,277 $477,268 $448,797 $402,978 $415,292 $342,245 $203,704 ======== ======== ======== ======== ======== ======== ======== ========
_________________ (a) Ratios are annualized. (b) For the period from June 22, 1988 (Commencement of Operations) to December 31, 1988. (c) The total return includes the impact of the investment adviser's capital contribution. Without the investment adviser's capital contribution, the total return would have been 3.40%. 6 11 THE FUND William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end diversified mutual fund consisting of four portfolios, each with its own investment objective and policies. The Fund, which was established as a Maryland corporation on September 22, 1987, is managed by the investment professionals of William Blair & Company, L.L.C. For most purposes, each portfolio operates like a separate mutual fund. GROWTH FUND: a portfolio whose investment objective is to provide long-term appreciation of capital by investing in well-managed companies in growing industries. It invests primarily in equities or their equivalents. INTERNATIONAL GROWTH FUND: a portfolio which invests primarily in common stocks issued by companies domiciled outside of the United States and securities convertible into, exchangeable for, or having the right to buy such common stocks. The investment objective of the portfolio is long-term capital appreciation through investment in well-managed, quality, growth companies. Current income is not a significant factor in investment selection although it is anticipated that capital appreciation will normally be accompanied by modest investment income. INCOME FUND: a portfolio designed to provide investors with as high a level of current income as is consistent with preservation of capital. It invests primarily in a diversified portfolio of high grade intermediate-term debt securities. READY RESERVES FUND: a money market portfolio designed for investors who are looking for professional management of their reserve assets. The Ready Reserves Fund portfolio seeks to obtain maximum current income consistent with preservation of capital and invests exclusively in high quality money market instruments. All investments are subject to market fluctuations and financial risks. In particular, the Growth Fund invests in some smaller companies which tend to involve greater than average risk and potential reward. The International Growth Fund invests in non-U.S. securities which also tend to involve greater than average risk. For the Income Fund, although the risk of loss of principal may be reduced by the quality of investments in which the portfolio will primarily invest, the portfolio's investment is subject to financial risk, and the value of the portfolio's investments tend to decrease when interest rates rise. For the Ready Reserves Fund, the market and financial risks should be very small. There can be no assurance that a Fund's investment objectives will be realized. For information about how to purchase and redeem shares, see "How To Purchase" and "How To Redeem." The investment objectives and policies for each portfolio are set forth in detail below. In addition, the Fund has adopted certain investment restrictions for each portfolio that are presented in the Statement of Additional Information. The investment objectives of a portfolio, together with its fundamental investment restrictions and any investment policies designated as fundamental cannot be changed without approval by holders of a majority of the portfolio's outstanding voting shares. As defined in the Investment Company Act of 1940 (the "1940 Act"), this means the lesser of the vote of (a) 67% of the shares of the portfolio at a meeting where more than 50% of the outstanding voting shares are present in person or by proxy; or (b) more than 50% of the outstanding voting shares of the portfolio. Other investment techniques and investment policies described below or in the Statement of Additional Information are not fundamental and, therefore, may be changed by the Board of Directors without shareholder approval. 7 12 INVESTMENT OBJECTIVES AND POLICIES GROWTH FUND The Growth Fund's investment objective is to provide long-term appreciation of capital by investing in well- managed companies in growing industries. In seeking this objective the portfolio's investment adviser, William Blair & Company, L.L.C. (the "Adviser"), directs its investment research particularly toward companies that have demonstrated the ability to grow more rapidly than the gross national product from one business cycle to the next. Consistent with its investment objective, the portfolio may invest in cyclical industries when the Adviser deems them to be at or near the bottom of their business cycle and expects a multi-year period of sustained growth. It is the portfolio's policy to seek growth from a broad portfolio representation among small, medium and large companies. Although the proportion will vary from time to time due to market conditions or the investment outlook, it is the Adviser's intention to invest in common stocks of each of the following classes of companies: o Small, rapid growth companies that have had especially vigorous growth in revenues and earnings; o Medium sized companies of emerging investment quality whose records of sales and earnings growth are not as well established; and o Large, high quality, seasoned growth companies that have demonstrated an ability to show exceptional growth over a long period of time. INVESTMENT RISKS. All investments are subject to market fluctuations and financial risks. Small company investments, which have less liquidity and potentially experience greater market volatility and financial risk than larger company investments, tend to involve greater than average risk and potential reward. In seeking to achieve the portfolio's investment objective, the Adviser will invest in companies that it believes are well managed as evidenced by the following: AMONG THE LEADERS IN THE FIELD. The company should be respected as a leader in its field. It need not be the largest company in a broad industry classification, but it should be, or clearly have the expectation of becoming, a significant factor in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some significant attribute that cannot be easily duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. In many industries there are one or two companies that have superior sales and service organizations that are well trained, highly motivated and earn above-average compensation. Others may have a distribution organization that would be very expensive and/or time consuming to duplicate. VALUE TO CUSTOMER. The prices of the company's products or services should be based on their value to the customer and not on the cost of producing them. This frequently enables a company to reduce prices and significantly broaden the market for its products. Conversely, it may enable a company to raise prices to cover increased costs without reducing demand. RETURN ON EQUITY. Attention is focused on companies that have achieved, or have the potential to achieve, an above-average return on equity through efficient asset utilization and adequate margins (rather than excessive financial leverage). It is these companies that can finance most or all of their growth internally and translate revenue and 8 13 income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. The Adviser believes that this may allow the company to earn and to maintain the confidence of the professional investment community if the company achieves consistent gains in earnings. In selecting companies for investment, the Adviser considers the extent to which a company meets the portfolio's investment criteria. The weight given to particular investment criteria will depend on the circumstances, and some investments may not meet all the portfolio's criteria. Generally, most of the portfolio will be invested in common stocks, but debentures and preferred stocks may be held if convertible into common stocks that meet the investment criteria of the portfolio. Such debentures are likely to be lower-rated or non-rated securities, which generally involve more credit risk than debentures in the higher rating categories, and generally include some speculative characteristics. Other debt securities, which would be of investment grade, may be held without limit as a temporary defensive measure if significantly adverse market action is anticipated. Normally, the portfolio does not purchase any stocks with a view to quick turnover for capital gains. INTERNATIONAL GROWTH FUND INVESTMENT OBJECTIVE. The investment objective of the International Growth Fund is long-term capital appreciation through investment in well-managed, quality, growth companies. These companies will generally exhibit superior business fundamentals including: leadership in field, quality products/services, distinctive marketing/distribution, pricing flexibility, and revenue from products or services consumed on a steady recurring basis. These business characteristics should be accompanied by a management that is shareholder return oriented and uses conservative accounting policies. These companies with above average returns on equity, strong balance sheets and consistent above average earnings growth at reasonable valuation levels will be the primary focus. Stock selection will take into account both local and global comparisons. Current income is not an investment objective, although it is anticipated that capital appreciation will normally be accompanied by modest investment income, which may vary depending on the allocation of the investments. INVESTMENT POLICIES. The portfolio will ordinarily seek to invest at least 80% of its total assets in a diversified portfolio of common stocks with above average growth, profitability and quality characteristics, issued by companies domiciled outside the U.S. and in securities convertible into, exchangeable for, or having the right to buy such common stocks. Such companies would include companies that historically have had superior growth, profitability and quality characteristics relative to local markets and relative to companies within the same industry worldwide and are expected to continue such performance. For liquidity purposes, up to 20% of the portfolio may be held in cash (U.S. dollars and foreign currencies) or in short-term securities, including repurchase agreements and domestic and foreign money market instruments, including government obligations, certificates of deposit, bankers' acceptances, time deposits, commercial paper and short-term corporate debt securities. The portfolio does not have any specific rating requirements for its portfolio securities. In addition, the portfolio may enter into forward foreign currency transactions in an effort to protect against changes in foreign exchange rates. (More information concerning such transactions may be found in the section entitled "Special Investment Techniques" below). Subject to the monitoring and the review of the Board of Directors, the portfolio will normally allocate its investments among not less than six different countries and will not concentrate investments in any particular industry. The investment of the portfolio's assets in various international securities markets should, in theory, decrease the degree to which events in any one country can affect the entire portfolio. The portfolio may, however, from time to time, have more than 25% of its assets invested in any major industrial or developed country. It is anticipated that the vast majority of the portfolio's investments will normally be divided among Continental Europe, the United Kingdom, Japan and the markets of the 9 14 Far East (including Australia and New Zealand). Selective investments may also be made in Canada and Latin America and in emerging markets worldwide. In pursuing its investment objective, the portfolio will vary the geographic diversification and types of securities in which it invests based upon continuous evaluation by its investment managers, the Adviser and Framlington Overseas Investment Management Limited (the "Sub-Adviser"), of economic, market and political trends throughout the world. No more than 50% of the portfolio's equity securities may be invested in securities of issuers of any one country at any given time. In making decisions regarding the allocation of portfolio assets, the Adviser and Sub-Adviser (collectively referred to herein as the "Advisers") will consider such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries, and other pertinent financial, social, national and political factors. The portfolio will invest in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. Fundamental company analysis and stock selection will be the most important investment criteria. The portfolio may also invest in foreign issuers through sponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"). Generally an ADR is a dollar-denominated security issued by a U.S. bank or trust company which represents, and may be converted into, the underlying security that is issued by a foreign company. Generally, an EDR represents a similar securities arrangement but is issued by a European bank, while GDRs are issued by a depository. ADRs, EDRs and GDRs may be denominated in a currency different from the underlying securities into which they may be converted. Typically, ADRs, in registered form, are designed for issuance in U.S. securities markets and EDRs, in bearer form, are designed for issuance in European securities markets. Several foreign governments permit investments by non-residents in their markets only through participation in certain investment companies specifically organized to participate in such markets. Subject to the provisions of the 1940 Act, the portfolio may invest in the shares of such investment companies. The portfolio may also invest a portion of its assets in unit trusts and country funds that invest in foreign markets that are smaller than those in which the portfolio would ordinarily invest directly. Investments in such pooled vehicles should enhance the geographical diversification of the portfolio's assets while reducing the risks associated with investing in certain smaller foreign markets. Investments by the portfolio in such vehicles will provide increased liquidity and lower transaction costs than are normally associated with direct investments in such markets, however, there may be duplicative expenses, such as advisory fees or custodial fees. At the present time, the portfolio intends to limit its investments in these vehicles, together with its investments in other investment companies, to no more than 10% of its total assets. In addition, based upon exemptive relief obtained by the portfolio under the 1940 Act, a portion of the equity and convertible securities that may be acquired by the portfolio may be issued by foreign companies that, in each of their most recent fiscal years, derived more than 15% of their gross revenues from their activities as a broker, a dealer, an underwriter or an investment adviser. Although the portfolio will normally invest at least 80% of its assets in the equity securities of companies domiciled outside of the U.S., the portfolio may significantly alter its make-up as a temporary defensive strategy. A defensive strategy would only be employed if, in the judgment of the Advisers, investments in international equity securities became decidedly unattractive because of current or anticipated adverse economic, financial, political and social factors. The types of securities that might be acquired and held for defensive purposes could include non-convertible preferred stock, investment-grade debt securities, fixed income securities and securities issued by the U.S. or foreign governments as well as domestic or foreign money market instruments. At such time as the Advisers determine that the portfolio's defensive strategy is no longer warranted, the portfolio will adjust its portfolio back to its normal complement of international equity securities as soon as practicable. SPECIAL CONSIDERATION CONCERNING INTERNATIONAL INVESTING. Investments in foreign 10 15 equity securities present opportunities for both increased benefits and risks as compared to investments in the U.S. securities market. Securities markets in different countries may offer enhanced diversification of investors' portfolios because of differences in economic, financial, political and social factors. The portfolio allows investors to diversify their portfolios by investing in various companies and economies outside of the U.S., thereby taking advantage of these differences. However, investing in securities of foreign issuers involves certain risks and considerations not typically associated with investing in securities of U.S. issuers. These risks may include less publicly available information and less governmental regulation and supervision of foreign stock exchanges, brokers and issuers. Foreign issuers are not usually subject to uniform accounting, auditing and financial reporting standards, practices and requirements. Securities of foreign issuers are subject to the possibility of expropriation, nationalization, confiscatory taxation, adverse changes in investment or exchange control regulations, political instability and restrictions in the flow of international capital. Securities of some foreign issuers are less liquid and their prices more volatile than the securities of U.S. companies. In addition, the time period for settlement of transactions in foreign securities may be longer than domestic securities. It may also be more difficult to obtain and enforce judgments against foreign entities. The portfolio is expected to incur operating expenses which are higher than those of mutual funds investing exclusively in U.S. equity securities, since expenses such as brokerage commissions and custodial fees related to foreign investments are usually higher than those associated with investments in U.S. securities. In addition, dividends and interest from foreign securities may be subject to foreign withholding taxes. (For more information, see the section entitled "Dividends, Distributions and Taxes" below.) The securities held by the portfolio will usually be denominated in currencies other than the U.S. dollar. Therefore, changes in foreign exchange rates will affect the value of the securities held in the portfolio either beneficially or adversely. Fluctuations in foreign currency exchange rates will also affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, distributed to shareholders. If the U.S. government were to impose any restrictions, through taxation or other means, on foreign investments by U.S. investors such as those to be made through the portfolio, the Board of Directors of the Fund will promptly review the policies of the portfolio to determine whether significant changes in its portfolio are appropriate. The portfolio may invest a portion of its assets in emerging markets which may include developing countries or countries with new or developing capital markets. The considerations noted above are generally intensified for these investments. These countries may have relatively unstable governments, economies based on only a few industries, and securities markets that trade a small number of securities. Securities of issues located in these countries tend to have volatile prices and may offer significant potential for loss as well as gain. ADDITIONAL INVESTMENT INFORMATION. The portfolio's turnover rate may vary significantly from year to year. Although the portfolio does not intend to trade securities for short-term profit, there is no limitation on the length of time securities must be held by the portfolio prior to being sold. A higher portfolio turnover rate would involve correspondingly higher transaction costs, which would be borne directly by the portfolio. Although the portfolio cannot accurately predict its annual portfolio turnover rate, under normal circumstances it is not expected to exceed 100%. The portfolio may not borrow money except as a temporary measure for extraordinary or emergency purposes and not for leverage purposes, and then only in an amount up to 10% of the value of its total assets, in order to meet redemption requests. SPECIAL INVESTMENT TECHNIQUES. This section describes the types of special investment techniques which the portfolio may use in an effort to achieve its investment objective and also describes the risks associated with such investment techniques. These techniques and related risks are described in more detail in the Statement of Additional Information. 11 16 FORWARD FOREIGN CURRENCY TRANSACTIONS. The portfolio may enter into forward foreign currency contracts as a means of managing the risks associated with changes in exchange rates. A forward foreign currency contract is an agreement to exchange U.S. dollars for foreign currencies at a specified future date and specified amount which is set by the parties at the time of entering into the contract. The Advisers will generally use such currency contracts to fix a definite price for securities they have agreed to buy or sell and may also use such contracts to hedge the portfolio's investments against adverse exchange rate changes. Alternatively, the portfolio may enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Advisers believe that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which securities of the portfolio are denominated ("cross-hedge"). The profitability of forward foreign currency transactions depends upon correctly predicting future changes in exchange rates between the U.S. dollar and foreign currencies. As a result, the portfolio may incur either a gain or loss on such transactions. While forward foreign currency transactions may help reduce losses on securities denominated in a foreign currency, they may also reduce gains on such securities depending on the actual changes in the currency's exchange value relative to that of the offsetting currency involved in the transaction. The portfolio will not enter into forward foreign currency transactions for speculative purposes. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the ordinary course of business, the portfolio may purchase newly-issued securities appropriate for the portfolio on a "when-issued" basis and may purchase or sell securities appropriate for the portfolio on a "delayed delivery" basis. When-issued or delayed delivery transactions involve a commitment by the portfolio to purchase or sell particular securities with payment and delivery to take place at a future date. These transactions allow the portfolio to lock in an attractive purchase price or yield on a security the portfolio intends to purchase. Normally, settlement occurs within one month of the purchase or sale. During the period between purchase and settlement, no payment is made or received by the portfolio and, for delayed delivery purchases, no interest accrues to the portfolio. Because the portfolio is required to set aside cash or liquid high grade securities at least equal in value to its commitments to purchase when-issued or delayed delivery securities, the Sub-Adviser's ability to manage the portfolio's assets is affected by such commitments. The portfolio will only make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities, but it reserves the right to sell them before the settlement date if deemed advisable. FOREIGN CURRENCY FUTURES. The portfolio may purchase and sell futures on foreign currencies as a hedge against possible variation in foreign exchange rates. Foreign currency futures contracts are traded on boards of trade and futures exchanges. A futures contract on a foreign currency is an agreement between two parties to buy and sell a specified amount of a particular currency for a particular price on a future date. To the extent that the portfolio engages in foreign currency futures transactions, but fails to consummate its obligations under the contract, the net effect to the portfolio would be the same as speculating in the underlying futures contract. SPECIAL CONSIDERATIONS RELATING TO FUTURES TRANSACTIONS. Futures contracts entail certain risks. If the Adviser's judgment about the general direction of interest rates or markets is wrong, the portfolio's overall performance may be less than if no such contracts had been entered into. There may also be an imperfect correlation between movements in prices of futures contracts and portfolio securities being hedged. In addition, the market prices of futures contracts may be affected by certain factors. If participants in the futures market elect to close out their contracts through offsetting transactions rather than meet margin requirements, distortions in the normal relationship between the securities and futures markets could result. Price distortions could also result if investors in futures contracts decide to make or take delivery of underlying securities rather than engage in closing transactions, because of the resultant reduction in the liquidity of the futures market. In addition, because margin requirements in the future markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Because of price distortions in the futures market and an 12 17 imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of market trends by the portfolio's advisers may still not result in a successful hedging transaction. The portfolio could also experience losses if it could not close out its futures position because of an illiquid secondary market, and losses on futures contracts are not limited to the amount invested in the contract. The above circumstances could cause the portfolio to lose money on the financial futures contracts and also on the value of its portfolio securities. APPLICABLE U.S. REGULATORY RESTRICTIONS. To the extent required to comply with the 1940 Act and the rules and interpretations thereunder, whenever the portfolio enters into a futures contract, or enters into a delayed delivery purchase, the portfolio will maintain a segregated account consisting of either cash or liquid high-grade securities equal to the portfolio's potential obligation under such contracts. The segregation of assets places a practical limit on the extent to which the portfolio may engage in futures contracts, and enter into delayed delivery transactions. To the extent required to comply with CFTC Rule 4.5 and in order to avoid "commodity pool operator" status, the portfolio will not enter into a financial futures contract if immediately thereafter the aggregate initial margin and premiums for such contracts held by the portfolio would exceed 5% of the liquidation value of the portfolio's assets. The portfolio will not engage in transactions in financial futures contracts for speculation, but only in an attempt to hedge against changes in interest rates or market conditions affecting the value of securities which the portfolio holds or intends to purchase. When financial futures contracts are purchased to protect against a price increase on securities intended to be purchased later, the portfolio anticipates that it will complete at least 75% of such intended purchases. INCOME FUND The Income Fund pursues its investment objective of providing investors with as high a level of current income as is consistent with preservation of capital by investing primarily in a diversified portfolio of high grade intermediate-term debt securities. As a matter of fundamental policy, under normal conditions at least 90% of the portfolio's assets will be invested in the following: o U.S. dollar denominated debt securities (domestic or foreign) with long-term ratings of at least A-or better, or an equivalent rating, by at least one of the following four nationally recognized statistical rating organizations ("Rating Organizations"): Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc. and Standard & Poor's Corporation; o Obligations of or guaranteed by the United States Government, its agencies or instrumentalities. These securities include direct obligations of the U.S. Treasury, which differ only in their interest rates, maturities and time of issuance, and obligations issued or guaranteed by U.S. Government agencies or instrumentalities, which differ in the degree of support provided by the U.S. Government. Although these securities are subject to the market risks resulting from fluctuation in interest rates, they will be paid in full if held to maturity; o Collateralized Obligations. A collateralized obligation is a debt security issued by a corporation, trust or custodian, or by a U.S. Government agency or instrumentality, that is collateralized by a portfolio or pool of assets, such as mortgages, mortgage-backed securities, debit balances on credit card accounts or U.S. Government securities. The issuer's obligation to make interest and/or principal payments is secured by the underlying pool or portfolio of securities. A variety of types of collateralized obligations are available currently and others may become available in the future. Some obligations are for the guaranteed payment of only principal (the principal-only or "PO" class) or interest (the interest-only or "IO" class), while others are for the guaranteed payment of both, or some variation thereof. The yields to maturity on PO and IO class obligations are more sensitive than other obligations, with the IO class obligations being extremely 13 18 sensitive to the rate of principal payments (including prepayments) on the related underlying assets. The portfolio will invest only in PO and IO class mortgage obligations collateralized by securities guaranteed by the U.S. Government. The mortgage-backed collateralized obligations in which the portfolio may invest include pools of mortgage loans assembled for sale to investors by various governmental agencies such as the Government National Mortgage Association ("GNMA") and government-related organizations such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Payments of principal and/or interest on such mortgages, including prepayments, are guaranteed by the agency or instrumentality. As noted above, the agencies and instrumentalities are subject to varying degrees of support by the U.S. Government. The Income Fund may invest in collateralized obligations (both mortgage-backed and asset-backed) that are not guaranteed by a U.S. Government agency or instrumentality only if those collateralized obligations are rated A-or better, or have received an equivalent rating, by one of the four Rating Organizations. The effective credit quality of collateralized obligations is the credit quality of the collateral. The requirements as to collateralization are determined by the issuer or sponsor of the collateralized obligation in order to satisfy rating agencies. These collateralized obligations generally have excess collateral but typically any guarantee is limited to a specified percentage of the pool of assets. Asset-backed collateralized obligations present certain risks that are not presented by mortgage-backed obligations. Primarily, these obligations do not have the benefit of the same security interest in the related collateral. For example, credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Other types of asset-backed obligations may entail problems with recovery of the collateral. Therefore, there is the possibility that the collateral may not, in some cases, be available to support payments on these obligations. The portfolio may invest in mortgage derivative products like inverse floating rate debt instruments ("inverse floaters"). The interest rate on an inverse floater resets in the opposite direction from the market rate of interest to which the inverse floater is indexed. The income from an inverse floater may be magnified to the extent that its rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest. The higher the degree of magnification in an inverse floater, the greater the volatility in its market value. Accordingly, the duration of an inverse floater may exceed its stated final maturity. The coupon of an inverse floating rate note moves inversely to the movement of interest rates. In addition, mortgage-backed inverse floaters will experience approximately the same changes in average lives and durations that other comparable fixed rate mortgage-backed bonds do when prepayments rise and fall with declines and increases in interest rates. In a rising interest rate environment, the declining coupon coupled with the increase in the average life can magnify the price decline relative to a fixed rate obligation. Conversely, rate declines increase coupon income and gradually shorten the average life, which tends to amplify the price increase. Inverse floaters are typically priced based on a matrix. Some types of collateralized obligations may be less liquid than other types of securities. Investments in collateralized obligations that are deemed to be illiquid, which includes PO and IO class mortgage obligations, will be subject to the 15% limitation on illiquid assets; and o Commercial paper obligations rated within the highest grade by one of the four Rating Organizations. For greater detail about the portfolio's investments, see "Income Fund--Investment Policies 14 19 and Techniques" in the Statement of Additional Information. For a description of ratings, see Appendix B in the Statement of Additional Information. From time to time, up to 10% of the portfolio's total assets may be invested in unrated debt securities, which the Adviser deems to be of at least "A-" quality and provided that the comparable debt of the issuer has a rating of at least A- or its equivalent by one of the four Rating Organizations. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, provide higher yields. When warranted, in the opinion of the Adviser, by prevailing market, economic or other conditions, the portfolio for temporary defensive purposes may invest up to 100% of its assets in other types of securities, including high quality commercial paper, obligations of banks and savings institutions, U.S. Government securities, government agency securities and repurchase agreements; or it may retain funds in cash. The portfolio will not normally engage in the trading of securities for the purpose of realizing short-term profits, but it will adjust its portfolio as considered advisable in view of prevailing or anticipated market conditions and the portfolio's investment objective. Accordingly, the portfolio may sell portfolio securities in anticipation of a rise in interest rates and purchase securities for inclusion in its portfolio in anticipation of a decline in interest rates. Most of the trading activity of the portfolio will be undertaken, as described above, to accomplish the portfolio's objective in relation to anticipated movements in the level of long-term interest rates. Portfolio turnover rate will not be a limiting factor for the portfolio. For example, a security may be sold and another of comparable quality and maturity purchased at approximately the same time to take advantage of what the Adviser believes to be a temporary disparity in the normal yield relationship between the two securities. Similar temporary yield disparities may exist between types of bonds (e.g., between corporate bonds and federal agency bonds) so that the Adviser may deem it advantageous to switch from one type to the other. It is anticipated that the Income Fund's turnover rate, under normal circumstances, will be less than 100%. For purposes of calculating portfolio turnover, the practice of engaging in mortgage dollar rolls of mortgage-backed securities will not be treated as a sale or purchase. Investment Risks. Although in the opinion of the Adviser the risk of loss of principal should be reduced by the quality of the investments in which the portfolio will primarily invest, the portfolio's investments are subject to financial risks. The portfolio's investments are subject to price fluctuations resulting from various factors, including rising or declining interest rates (market risks). The value of the portfolio's investments (other than interest-only class obligations) tends to decrease when interest rates rise and tends to increase when interest rates fall. They also are subject to the ability of the issuers of such investments to make payment at maturity (financial risks). For example, not all securities issued or guaranteed by agencies or instrumentalities of the U.S. Government are backed by the full faith and credit of the United States. Such securities involve different degrees of government backing. Some obligations issued or guaranteed by U.S. Government agencies or instrumentalities in which the portfolio may invest are backed by the full faith and credit of the United States, such as modified pass-through GNMA certificates; while others are backed exclusively by the agency or instrumentality with limited rights of the issuer to borrow from the U.S. Treasury (such as obligations of the FNMA and the FHLMC), and others are backed only by the credit of the issuer itself (such as obligations of the Student Loan Marketing Association). In addition, the longer maturities that typically provide the better yields may subject the portfolio to increased price changes resulting from market yield fluctuations. The potential for appreciation in the event of a decline in interest rates may be limited or negated by increased principal prepayments by certain mortgage-backed securities, such as GNMA Certificates and other collateralized obligations. During periods of declining interest rates, mortgages underlying the security are prone to prepayment, causing the security's stated maturity to be shortened. Prepayment of high interest rate mortgage-backed securities during times of declining interest rates will tend to lower the return of the portfolio and may even result in losses to the portfolio if the prepaid securities were acquired at a premium. Because mortgage-backed securities tend to be sensitive to prepayment rates on the underlying collateral, their value to the portfolio is 15 20 dependent upon the accuracy of the prepayment projections used which are a consensus derived from several major securities dealers. The anticipated dollar weighted average maturity of the portfolio is 3 to 7 years. The anticipated weighted average modified duration for this portfolio is 2 to 5 years, with a maximum duration on any instrument of 8 years. The duration of many mortgage backed securities changes substantially due to changes in interest rates and prepayment rates. The Adviser will not continue to hold a security whose duration has moved above 8 years. The duration of an instrument is different from the maturity of an instrument in that duration measures the average period remaining until the discounted value of the amounts due (principal and interest) under the instrument are to be paid rather than the instrument's stated final maturity. For example, a duration of 5 years means that if interest rates increase 1%, the value of the portfolio would decrease approximately 5%. Modified duration adjusts duration to take into account the yield to maturity and the number of coupons received each year. For purposes of calculating duration, instruments allowing prepayment will be assigned a maturity schedule by the Adviser based on general experience. To the extent the portfolio invests in foreign securities, such securities may entail risks not associated with domestic securities. The prices of such securities may be more volatile, there may be less publicly available information about foreign issuers and many foreign issuers are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers. OTHER INVESTMENT PRACTICES. From time to time, in the ordinary course of business, the portfolio may purchase newly-issued securities appropriate for the portfolio on a "when-issued" basis and may purchase or sell securities appropriate for the portfolio on a "delayed delivery" basis. When-issued or delayed delivery transactions involve a commitment by the portfolio to purchase or sell particular securities with payment and delivery to take place at a future date. These transactions allow the portfolio to lock in an attractive purchase price or yield on a security the portfolio intends to purchase or an attractive sale price on a security the portfolio intends to sell. Normally, settlement occurs within one month of the purchase or sale. During the period between purchase or sale and settlement, no payment is made or received by the portfolio and, for delayed delivery purchases, no interest accrues to the portfolio. Because the portfolio is required to set aside cash or liquid high grade securities at least equal in value to its commitments to purchase when-issued or delayed delivery securities, the Adviser's ability to manage the portfolio's assets is affected by such commitments. The portfolio will only make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities, but it reserves the right to sell them before the settlement date if deemed advisable. The portfolio may from time to time lend securities (but not in excess of 75% of its assets) from its portfolio to brokers, dealers and financial institutions, provided that: (1) the loan is secured continuously by collateral consisting of U.S. Government securities, government agency securities, cash or cash equivalents adjusted daily to have a market value at least equal to the current market value of the securities loaned plus accrued interest; (2) the portfolio may at any time call the loan and regain the securities loaned; and (3) the Adviser (under the supervision of the Board of Directors) has reviewed the creditworthiness of the borrower and has found it satisfactory. The portfolio will receive from the borrower amounts equal to the interest paid on the securities loaned, and will also earn income for having made the loan. Any cash collateral will be invested in short-term securities, the income from which will increase the return to the portfolio. The risks associated with lending portfolio securities are similar to those of entering into repurchase agreements (see "Ready Reserves Fund--Other Investment Practices"). The portfolio may invest in repurchase agreements, which are instruments under which the portfolio acquires ownership of a security and the seller, who is a broker-dealer or a bank, agrees to repurchase the security at a mutually agreed upon time and price. The repurchase agreement serves to fix the yield of the security during the portfolio's holding period. The modified duration of a security subject to repurchase may exceed 8 years. Investments in repurchase agreements maturing in more than 7 days, together with any other securities that are considered to be illiquid, will not exceed 15% of the net assets of the portfolio. The 16 21 portfolio currently intends to restrict its investment in repurchase agreements in the same manner as described for the Ready Reserves Fund (see "Ready Reserves Fund--Other Investment Practices"). READY RESERVES FUND The Ready Reserves Fund pursues its investment objective of obtaining the maximum current income consistent with preservation of capital by investing exclusively in high quality money market instruments. These instruments are considered to be among the safest investments available because of their short maturities, liquidity and high quality ratings. The portfolio seeks to maintain a net asset value of $1.00 per share. Nevertheless, there is no guarantee that the objective of the portfolio will be achieved or that the net asset value of $1.00 per share of the portfolio will be maintained. The portfolio will invest exclusively in the following types of high quality, U.S. dollar denominated money market instruments that mature in 13 months or less: o Obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities; o Certificates of deposit, bankers' acceptances and time deposits issued by U.S. banks, savings banks, savings and loan associations, insurance companies and mortgage bankers, each entity having assets in excess of $1 billion. o Short-term corporate obligations, including commercial paper, notes and bonds; and o Repurchase agreements on obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities. A more complete description of these types of investments is found in Appendix A of the Statement of Additional Information. LIMITING INVESTMENT RISKS. The portfolio has adopted certain investment policies designed to limit the market and financial risks to the portfolio. (See below for a description of investment risks.) The portfolio may only invest in securities that, based on their short-term ratings, are deemed to be the highest grade, or if unrated, are of equivalent quality in the judgment of the Adviser, subject to the supervision of the Board of Directors. However, the portfolio may invest up to five percent (5%) of its total assets in securities deemed within the second highest grade, or if unrated, are of equivalent quality. In addition, portfolio investments will be limited to instruments that the Adviser, under the supervision of the Board of Directors, has determined present minimal credit risks. Securities are deemed to be high grade if they are rated high quality by two nationally recognized statistical rating organizations ("Rating Organizations"), or if only rated by one Rating Organization, rated high quality by that Rating Organization. For example, commercial paper rated Duff -1 minus, Fitch -1, Prime -1 and A-1 by Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody Investors Service, Inc. and Standard & Poor's Corporation, respectively, would be considered high grade. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, provide higher yields. To a limited extent, investments in commercial paper may also include obligations issued under Section 4(2) of the Securities Act of 1933. Because such obligations are purchased pursuant to a private placement, their disposition is restricted. Further, the portfolio may invest in other corporate obligations maturing in thirteen months or less, such as publicly traded bonds, debentures and notes, if they are rated within the two highest grades by a Rating Organization. For a description of these ratings, see Appendix B in the Statement of Additional Information. The portfolio will not invest more than 25% of its total assets in any one industry, except that the portfolio may invest more than 25% of its total assets in the domestic banking industry. This limitation does not apply to U.S. Government securities, including obligations issued or guaranteed by its agencies or instrumentalities. The portfolio will also manage its investments so that the dollar-weighted average maturity of its portfolio will not exceed 90 days. 17 22 The portfolio's investments are subject to minimal price fluctuations resulting from various factors, including rising or declining interest rates (market risks). The value of the portfolio's investments tends to decrease when interest rates rise and tends to increase when interest rates fall. They also are subject to the ability of the issuers of such investments to make payment at maturity (financial risks). For example, not all securities issued or guaranteed by agencies or instrumentalities of the U.S. Government are backed by the full faith and credit of the United States. Such securities involve different degrees of government backing. Some obligations issued or guaranteed by U.S. Government agencies or instrumentalities in which the portfolio may invest are backed by the full faith and credit of the United States, such as modified pass-through GNMA certificates; while others are backed exclusively by the agency or instrumentality with limited rights of the issuer to borrow from the U.S. Treasury (such as obligations of the FNMA and the FHLMC), and others are backed only by the credit of the issuer itself (such as obligations of the Student Loan Marketing Association). The investment policies and practices of the portfolio are such that these market and financial risks should be very small. OTHER INVESTMENT PRACTICES. The portfolio may engage in certain other investment practices. The portfolio may invest in some securities on a when-issued or delayed delivery basis. The portfolio may also invest in instruments having rates of interest that are adjusted periodically or that "float" continuously or periodically according to formulae intended to minimize fluctuation in values of the instruments ("Variable Rate Securities"). The interest rate on a Variable Rate Security is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's prime rate, the 90-day U.S. Treasury Bill rate, or the rate of return on commercial paper or bank certificates of deposit. Generally, the changes in the interest rates on Variable Rate Securities reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Further, the portfolio may invest in Variable Rate Securities that have a demand feature entitling the portfolio to resell the securities to the issuer or a third party at an amount approximately equal to the principal amount thereof plus accrued interest ("Variable Rate Demand Securities"). As is the case for other Variable Rate Securities, the interest rate on Variable Rate Demand Securities varies according to some objective standard intended to minimize fluctuation in the values of the instruments. Many of these Variable Rate Demand Securities are unrated, their transfer is restricted by the issuer and there is little if any secondary market for the securities. Thus, any inability of the issuers of such securities to pay on demand could adversely affect the liquidity of these securities. The portfolio determines the maturity of Variable Rate Securities in accordance with Securities and Exchange Commission rules, allowing the portfolio to consider certain of such instruments as having maturities shorter than the maturity date on the face of the instrument if they are guaranteed by the U.S. Government or its agencies, they have a stated maturity date of one year or less or they have demand features prior to maturity. Additionally, the portfolio may invest in repurchase agreements, which are instruments under which the portfolio acquires ownership of a security and the seller, who is a broker-dealer or a bank, agrees to repurchase the security at a mutually agreed upon time and price. The repurchase agreement serves to fix the yield of the security during the portfolio's holding period. The maturity of a security subject to repurchase may exceed one year. There is no limit on the percentage of the portfolio's total assets that may be invested in repurchase agreements, except that repurchase agreements maturing in more than 7 days, together with any securities that are restricted as to disposition under the federal securities laws or are otherwise considered to be illiquid, will not exceed 10% of the net assets of the portfolio. The portfolio currently intends to enter into repurchase agreements only with member banks of the Federal Reserve System, or with primary dealers in U.S. Government securities. In all cases, the Adviser for the portfolio, subject to the supervision of the Board of Directors, must be satisfied with the creditworthiness of the seller before entering into a repurchase agreement. In the event of the bankruptcy or other default of the seller of a repurchase agreement, the portfolio could incur expenses and delays enforcing its rights under the 18 23 agreement and experience a decline in the value of the underlying securities and loss of income. DETERMINATION OF NET ASSET VALUE Net asset value per share for the Growth Fund and the International Growth Fund will be determined as of the earlier of 3:00 p.m., Chicago time, or the close of business on the New York Stock Exchange on each day on which that Exchange is open and on each other day on which there is sufficient trading in the portfolio's investments that it might materially affect the net asset value, except that the net asset value will not be computed on a day on which no orders to purchase shares were received and no shares were tendered for redemption. As of such time, quotations of foreign securities in foreign currencies are converted into the U.S. dollar equivalents at the prevailing market rates as computed by Investors Bank & Trust Company, custodian of the portfolio's assets. Net asset value per share for the Income Fund will be determined daily, as of 2:00 p.m., Chicago time, on each day when New York banks are open for business (except on Good Friday), except that the net asset value may not be computed on a day on which no orders to purchase shares were received and no shares were tendered for redemption. Net asset value per share of the Ready Reserves Fund is determined daily, immediately after the declaration of dividends, as of 3:00 p.m., Chicago time, on each day when New York banks are open for business (except on Good Friday). The per share net asset value is determined by dividing the value of the portfolio's assets, less its liabilities, by the number of its shares outstanding. For the Growth Fund, the market value of portfolio securities is determined by valuing securities traded on national securities markets at the last sale price or, in the absence of a recent sale on the date of determination, at the latest bid price. Securities for which market quotations are not available, and all other assets, are appraised at fair value as determined in good faith by the Board of Directors. For the International Growth Fund, the value of a foreign security held by the portfolio is determined based upon its sale price on the foreign exchange or market on which it is traded and in the currency of that market, as of the close of the appropriate exchange or, if there have been no sales during the day, at the latest bid prices. Trading in securities on exchanges and over-the-counter markets in Europe and the Far East is normally completed at various times prior to 3:00 p.m. Chicago time, the current closing time of the New York Stock Exchange. Trading on foreign exchanges may not take place on every day the New York Stock Exchange is open. Conversely, trading in various foreign markets may take place on days when the New York Stock Exchange is not open and on other days when the portfolio's net asset value is not calculated. Consequently, the calculation of the net asset value for the International Growth Fund may not occur contemporaneously with the determination of the most current market prices of the securities included in such calculation. In addition, the value of the net assets held by the portfolio may be significantly affected on days when shares are not available for purchase or redemption. Securities listed or traded on any domestic (U.S.) securities exchange are valued at the last sale price or, if there have been no sales during the day, at the latest bid prices. Securities traded only on the over-the-counter market are valued at the latest bid prices. Other securities, both foreign and domestic, for which market quotations are not readily available, including restricted securities and other illiquid assets are appraised at fair value as determined in good faith by the Board of Directors. For the Income Fund, fixed-income securities are valued by using market quotations, independent pricing services that use prices provided by market makers or matrixes producing estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. Other securities, and all other assets, are appraised at a fair value as determined in good faith by or under the direction of the Board of Directors. For the purposes of calculating the net asset value of the Ready Reserves Fund, portfolio securities are valued at their amortized cost, which means their acquisition cost adjusted for the amortization of the premium or discount. The 19 24 portfolio seeks to maintain a net asset value of $1.00 per share. PERFORMANCE From time to time, the portfolios may advertise several types of performance information. For the Growth Fund, International Growth Fund and Income Fund performance information may include "average annual total return" and "total return." The Income Fund and Ready Reserves Fund may also advertise yield performance. In addition, the Ready Reserves Fund portfolio may advertise effective yield. Each of these figures is based upon historical results and is not necessarily representative of the future performance of the portfolio. Average annual total return and total return figures measure both the net investment income generated by, and the effect of any realized or unrealized appreciation or depreciation of, the underlying investments in the portfolio for the period in question, assuming the reinvestment of all dividends during the period. Thus, these figures reflect the change in the value of an investment in the portfolio during a specified period. Average annual total return will be quoted for at least the one-, five-and ten-year periods ending on a recent calendar quarter. Average annual total return figures are annualized and, therefore, represent the average annual percentage change over the period in question. Total return figures are not annualized and represent the aggregate percentage or dollar value change over the period in question. For the Income Fund, yield is a measure of the net investment income per share earned over a specific one-month or 30-day period expressed as a percentage of the offering price of the portfolio's shares. For the Ready Reserves Fund, yield is a measure of the net investment income per share earned over a specific 7-day period for the Ready Reserves Fund expressed as a percentage of the offering price of the portfolio's shares. Yield is an annualized figure, which means that it is assumed that the portfolio generates the same level of net investment income over a one-year period. Semiannual compounding is assumed for the Income Fund. The Ready Reserves Fund's effective yield is calculated similarly to its yield, but the net investment income earned is assumed to be compounded when annualized. The portfolio's effective yield will be slightly higher than its yield due to compounding. From time to time, the Growth Fund's performance may be compared to that of various, unmanaged stock indices such as the Standard & Poor's 500 Stock Index, NASDAQ, Value Line, and Russell 1,000, 2,000 and 3,000, and may also be compared to the performance of other growth mutual funds or mutual fund indices as reported by CDA Investment Technologies, Inc. ("CDA"), Lipper Analytical Services, Inc. ("Lipper") or Morningstar, Inc. ("Morningstar"). CDA, Lipper and Morningstar are widely recognized independent mutual fund reporting services. CDA, Lipper and Morningstar performance calculations are based upon changes in net asset value with all dividends and capital gain distributions reinvested. Comparative performance information may be used from time to time in advertising the International Growth Fund, including data from independent fund reporting services, such as: CDA, Lipper, Micropal Ltd. and Morningstar; independent unmanaged indices, such as Morgan Stanley Capital International's Europe, Australia and the Far East (EAFE) Index and Standard and Poor's 500 Stock Index; and industry or financial publications of general U.S. or international interest, such as Morningstar, The Wall Street Journal, The New York Times, Barron's, Business Week, Financial Times, Forbes and Money. From time to time, the Income Fund's performance may be compared to that of the Consumer Price Index or various unmanaged indices, including the Shearson Lehman Intermediate Government/Corporate Bond Index and the Merrill Lynch Intermediate Term Corporate & Government Index; and it may also be compared to the performance of other appropriate fixed income or mutual fund indices as 20 25 reported by Lipper or CDA. Lipper and CDA performance calculations are based upon changes in net asset value with all dividends reinvested. Also, historical performance may be compared to various indices or securities, such as the rate of inflation or the return on intermediate-term government bonds and Treasury Bills. The portfolios may quote information from publications such as Morningstar, The Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, The Chicago Tribune, USA Today, Institutional Investor and Registered Representative. Also, investors may want to compare the historical returns of various investments, performance indexes of those investments or economic indicators, including but not limited to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury obligations. Bank product performance may be based upon, among other things, the Bank Rate Monitor National Index or various certificates of deposit indexes, money market fund performance may be based upon, among other things, the IBC/Donoghue's Money Fund Average (All Taxable). Performance of U.S. Treasury obligations may be based upon, among other things, various U.S. treasury bill indexes. Certain of these alternative investments may offer fixed rates of return, and guaranteed principal and may be insured. From time to time, the Fund may include in its sales literature and shareholder reports a quotation of the current "distribution rate" for the Income Fund. Distribution rate is simply a measure of the level of income and short-term capital gain dividends distributed for a specified period. It differs from yield, which is a measure of the income actually earned by the portfolio's investments, and from total return, which is a measure of the income actually earned by, plus the effect of any realized or unrealized appreciation or depreciation of, such investments during the period. Distribution rate, therefore, is not intended to be a complete measure of performance. Distribution rate may sometimes be greater than yield since, for instance, it may include short-term gains (which may be nonrecurring) and may not include the effect of amortization of bond premiums. The portfolios' returns and net asset value will fluctuate. More information concerning the portfolios' performance appears in the Statement of Additional Information. 21 26 22 27 DIVIDEND AND DISTRIBUTION POLICY The Fund's policy is to distribute substantially all net investment income and all net realized capital gain, if any. For the Growth Fund, income dividends are normally paid in August and December of each year, and capital gain distributions, if any, will generally be paid in December. For the International Growth Fund, income dividends and capital gain distributions, if any, will generally be paid in December. For the Income Fund income dividends are normally paid monthly, with net realized long-term capital gain distributions, if any, generally being paid in December and/or in January. The Fund attempts to maintain relatively level monthly dividends for the Income Fund and therefore, from time to time may distribute or retain net investment income and capital gain or make a return of capital distribution in order to pursue that goal. All distributions of income and capital gain and any return of capital would have the effect of immediately thereafter decreasing the net asset value per share. Income dividends and capital gain distributions will be automatically reinvested in additional shares of the portfolio at net asset value on the reinvestment date, which is generally the 15th day of each month if a business day, unless the shareholder specifically requests otherwise. The shareholder can ask that income dividends or capital gain distributions or both be paid in cash. Cash payments are made by the Fund's Dividend Paying Agent, Boston Financial Data Services, Inc., shortly following the reinvestment date. The Fund's policy is to distribute substantially all Ready Reserves Fund's net investment income and net realized capital gain if any. Income dividends, and any capital gain distributions, will vary from year to year. On each day the Fund is open for business, the Ready Reserves Fund's net investment income will be declared at 3:00 p.m., Chicago time, as a dividend to shareholders who were of record prior to the declaration. Shareholders may elect to have dividends reinvested in additional shares or paid in cash monthly. Dividends are reinvested on the reinvestment date, which is generally the 15th day of each month if a business day, otherwise on the next business day. Dividends will be automatically reinvested in additional shares of the portfolio unless the shareholder specifically requests them in cash. Cash dividends are paid by the Dividend Paying Agent shortly following the reinvestment date. The Fund may vary these dividend practices at any time. Income dividends and any capital gain distributions on all four portfolios will vary from year to year. Dividends and distributions may be subject to withholding as required by the Internal Revenue Service (see "Federal Income Taxation"). 23 28 MANAGEMENT OF THE FUND BOARD OF DIRECTORS Responsibility for overall management of the Fund rests with its directors and officers, and their duties include supervising the business affairs of the Fund, monitoring investment activities and practices, and considering and acting upon future plans for the Fund. The business affairs and investments of the Fund are managed on a day-to-day basis by the Fund's Adviser. THE ADVISER William Blair & Company, L.L.C., the Adviser, 222 West Adams Street, Chicago, Illinois 60606, is the investment adviser and manager of the Fund and provides the Fund with continuous professional investment supervision. The Adviser is also the principal underwriter and distributor ("Distributor") of the Fund and acts as agent of the Fund in the sale of its shares. William Blair & Company, L.L.C. was founded over 50 years ago by William McCormick Blair. Today the firm has more than 100 principals and 500 employees at offices in Chicago, San Francisco, London, Liechtenstein and Zurich. The main office in Chicago houses all investment banking, research and investment management services. The firm's structure attracts professionals of the highest caliber. Free from bureaucratic restrictions and short-term performance goals, these individuals can focus on the long-term growth of the firm. The principals, dedicated to the firm as a whole, foster a team approach that makes each department a source of ideas and innovation. The Investment Management Department oversees the assets of the four William Blair mutual funds, along with corporate pension plans, endowments and foundations, and individual accounts. The department currently manages over $6 billion in equities, fixed-income securities and cash equivalents. Clients are best served when portfolio managers are encouraged to draw on their experience and develop new ideas. This philosophy has helped build a hard-working, results-oriented team of 19 portfolio managers, supported by 23 analysts, with an exceptionally low turnover rate. William Blair portfolio managers average more than a dozen years with William Blair and more than two decades experience in the investment industry. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940. Pursuant to its management agreement, the Adviser directs the investment of the assets of the Fund, and is responsible for the overall management of the business affairs of the portfolios, subject to the supervision of the Fund's Board of Directors. The Adviser's duties include responsibility for determining which investments to buy and sell, placing brokerage and negotiating the terms of securities transactions on behalf of the Fund. It also provides various other services and facilities. The Growth Fund is managed by James L. (Rocky) Barber, Jr. and Mark A. Fuller, III. Rocky Barber joined William Blair in 1986 as a portfolio manager and manager of the Investment Management Department. Previously, he was an equity and fixed-income manager with Alliance Capital Management for nine years and was also president of the Alliance Capital Bond Fund, a group of fixed-income mutual funds. Prior to that, Rocky was a financial analyst with the Stanford University Endowment. Rocky is president of William Blair Mutual Funds, Inc. and is a past president of the Board of Commissioners of the Winnetka Park District as well as a past Chairman of the Board of Trustees of the Stanford Business School Trust. He currently serves on the Board of The LaRabida Children's Hospital Foundation. His educational background includes a B.A., an M.S. and an M.B.A., all from Stanford University. He is a Chartered Financial Analyst. Mark Fuller has been with William Blair since 1983. Prior to joining the firm he was with IBM Corporation in the computer sales industry. He has a B.A. from Northwestern University and an M.B.A. from Northwestern University Kellogg Graduate School of Management. 24 29 Bentley Myer, the manager of the Income Fund and the Ready Reserves Fund, joined William Blair in 1991 as a fixed-income portfolio manager. From 1983 to 1991 he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that, Bentley was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a director of Delnor Community Hospital Foundation and a member of the Investment Analysts Society of Chicago. His education includes a B.A. from Middlebury College and a M.B.A. from Wharton School of the University of Pennsylvania. For the International Growth Fund, the Adviser has, in turn, entered into a sub-management agreement with Framlington Overseas Investment Management Limited ("Framlington"), appointing the latter as sub-investment manager and delegating to Framlington the day-to-day management responsibilities for the portfolio (see below). The Adviser continuously monitors and evaluates the performance of Framlington. THE SUB-ADVISER. Pursuant to its appointment as sub-investment adviser, Framlington Overseas Investment Management Limited ("Sub-Adviser"), located at 155 Bishopsgate, London, ECZM 3XJ, manages the day-to-day investment of the portfolio's assets. The Sub-Adviser is registered as an investment adviser in the U.S. under the Investment Advisers Act of 1940 as well as in the United Kingdom with Investment Management Regulatory Organization Limited (IMRO). The Sub-Adviser is a wholly owned subsidiary of the Framlington Group plc, which has been providing independent investment management services to institutional clients outside of the United Kingdom for many years, with over $3.5 billion in assets under management. The Framlington Group plc is in turn controlled by Credit Commercial de France, S.A. and The Throgmorton Trust plc. Pursuant to the sub-management agreement, the Sub-Adviser has full discretion to purchase and sell portfolio securities and to select brokers for the execution of such purchases and sales, consistent with the International Growth Fund's investment objective, policies and restrictions as well as all applicable laws and regulations. (See the Statement of Additional Information for additional information on the Adviser and Sub-Adviser.) Asset allocation decisions and portfolio strategies for the International Growth Fund are made jointly by Norbert W. Truderung of the Adviser and Michael Vogel and Simon Key of the Sub-Adviser. The portfolio investments are managed by Mr. Vogel and Mr. Key. Messrs. Truderung and Key have performed such functions since the portfolio's inception; Mr. Vogel has served the portfolio since April, 1995. Mr. Truderung is a principal and has been a key member of the Investment Management Services Department of William Blair since 1986. Prior to joining the firm, he was a Vice President, senior investment research analyst and a member of the Investment Policy Committee for The Northern Trust Company. Mr. Truderung has a B.A. from Baldwin-Wallace College. Mr. Vogel is the Group Managing Director of Framlington. He joined the company in April, 1995 from Prolific Financial Management where he undertook the same role. He has fifteen years of experience managing equity portfolios. Mr. Vogel graduated with a degree in commerce and financial management from the University of Birmingham. Mr. Key is the Chief Investment Officer for Framlington. He joined Framlington in 1989 and has overall responsibility for investment research and the coordination of international funds. Mr. Key graduated from the University of East Anglia and attained a Msc in economics at London University prior to becoming an economist with the Bank of England. MANAGEMENT FEE For the Growth Fund, effective as of May 1, 1996, the Fund pays the Adviser a monthly management advisory fee at an annual rate equal to .75% of the average daily net assets of the portfolio. Prior to May 1, 1996, the Fund paid the Adviser a monthly management advisory fee at an annual rate equal to .625% of the first $75 million of the Growth Fund's average daily net assets and .50% of average daily net assets above $75 million. For the services and facilities furnished to the 25 30 Growth Fund pursuant to the advisory agreement during the fiscal year ended December 31, 1995, the Adviser received management advisory fees of $1,561,478. As compensation for its services to the International Growth Fund, effective as of May 1, 1996, the Adviser is entitled to a monthly advisory fee at an annual rate equal to 1.10% of the first $250 million of average daily net assets of the portfolio and 1.00% of average daily net assets above $250 million. The management fee is greater than that paid by most mutual funds. The Adviser pays the Sub-Adviser a monthly sub-advisory fee at an annual rate equal to .40% of the first $100 million of average daily assets of the portfolio and .275% of average daily net assets above $100 million. It is important to note that the sub-investment management fee does not represent a separate or additional charge or assessment against the portfolio. Prior to May 1, 1996, the Fund paid the Adviser a monthly management advisory fee at an annual rate equal to 1.10% of the first $100 million of the International Growth Fund's average daily net assets and .95% of average daily net assets above $100 million. The aggregate amount of management advisory fees paid by the International Growth Fund to the Adviser during the fiscal year ended December 31, 1995 was $886,557; $322,384 of this amount was paid to the Sub-Adviser by the Adviser. For the Income Fund, effective as of May 1, 1996, the Fund pays the Adviser a monthly management advisory fee at an annual rate equal to .25% of the first $250 million of average daily net assets of the portfolio and .20% of average daily net assets in excess of $250 million, plus 5.0% of the gross income earned. This fee structure results in higher compensation to the Adviser when higher income is achieved, including the higher income that is available from riskier securities. Prior to May 1, 1996, the Fund paid the Adviser a monthly management advisory fee at an annual rate equal to .25% of the first $100 million of the Income Fund's average daily net assets, plus .20% of the next $150 million of average daily net assets and .15% of average daily net assets in excess of $250 million, plus 5.0% of the gross income earned by the portfolio. The aggregate amount of management advisory fees paid by the Income Fund during the fiscal year ended December 31, 1995 was $868,277. 26 31 For the Ready Reserves Fund, effective as of May 1, 1996, the Fund pays the Adviser a monthly management advisory fee at the annual rate of .625% of the first $250 million of average daily net assets of the portfolio, .60% of the next $250 million, .575% of the next $2 billion and .55% of the average daily net assets in excess of $2.5 billion. Prior to May 1, 1996, the Fund paid the Adviser a monthly management advisory fee at an annual rate equal to .625% of the first $250 million of the Ready Reserves Fund's average daily net assets, .60% of the next $250 million, .55% of the next $500 million, .50% of the next $2 billion, .45% of the next $2 billion, and .40% of the average daily net assets in excess of $5 billion. For the services and facilities furnished to the Ready Reserves Fund pursuant to the advisory agreement during the fiscal year ended December 31, 1995, the Adviser received management advisory fees of $3,613,262. EXPENSES The Fund's expenses include: the management advisory fees; transaction costs; interest; taxes; legal, accounting, auditing, transfer agency and custodial fees; and certain other operational expenses. In addition, over a five-year period the International Growth Fund is reimbursing the Adviser $50,000 in expenses incurred by the Adviser in establishing the portfolio. CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT The Fund's Custodian is Investors Bank and Trust Company, 89 South Street, Boston, Massachusetts 02205. The Fund's Transfer Agent and Dividend Paying Agent is Boston Financial Data Services, Inc., 2 Heritage Drive, Quincy, Massachusetts 02171. HOW TO PURCHASE An investor may make an initial purchase by completing the "Application" form included with this Prospectus, and sending it to the Distributor or to the Fund's transfer agent, Boston Financial Data Services, Inc. ("BFDS"), P.O. Box 9104, Boston, Massachusetts 02266-9104, together with a check for the amount of the investment made payable to William Blair Mutual Funds, Inc. Subsequent orders should also be sent to BFDS or to the Distributor. 27 32 All purchases are made at a price based on the net asset value per share that is next computed after receipt of the order in proper form by the Distributor or BFDS (or, in the case of a retirement plan established under the Fund's prototype forms, by the custodian of such plan). BFDS and the Distributor may in certain cases make advance arrangements with shareholders for telephone processing of purchase orders with the payment made by wire transfer of Federal Funds. If an order is not paid for, the purchaser will be liable for any loss to the Fund, and, if the purchaser is a shareholder, the Fund may redeem shares to pay such loss. For the Ready Reserves Fund, the net asset value per share will normally be $1.00. Ready Reserves Fund shares purchased will normally begin accruing dividends on the day following the date of purchase. The Fund's shares are sold continuously without a sales load at a public offering price equal to the net asset value next determined. The minimum initial investment for all portfolios is $5,000 ($2,000 for IRAs). The minimum for any subsequent investment is generally $1,000 except Ready Reserves Fund, for which the subsequent minimum is $1. The portfolios may accept smaller amounts under a group payroll deduction or similar plan. These minimum amounts may be changed at any time and may be waived for directors, principals, officers or employees of the Fund or Adviser. In addition, the Fund reserves the right to withdraw all or any part of the offering made by this Prospectus and the Fund or the Distributor may reject purchase orders. Also, from time to time, the Fund may temporarily suspend the offering of its shares to new investors. During the period of such suspension, persons who are already shareholders of a portfolio would normally be permitted to continue to purchase additional shares of the portfolio, to have dividends reinvested and to make redemptions. Fund shares are usually held in open accounts, but the Fund will issue a certificate for full shares on written request by a shareholder. Unless payment for shares is made by certified or cashier's check, a share certificate will not be issued until 30 days after the purchase is completed. In the interest of safekeeping and expediting transfers and redemptions, most shareholders prefer not to receive certificates. If an investor purchases or redeems shares of the Fund through an investment dealer, bank or other institution, that institution may impose charges for its services; these charges would reduce the investor's yield or return. An investor may purchase or redeem shares of the Fund directly from or with the Fund's Distributor or its transfer agent, BFDS, without any such charges. In addition, shares of the Ready Reserves Fund can be purchased through an automatic sweep program if an investor establishes a brokerage account with William Blair & Company, L.L.C., provided the investor meets the current minimum brokerage account size requirements. One purpose of the automatic sweep program is to help investors make convenient, efficient use of free credit balances in their William Blair & Company, L.L.C. brokerage accounts. To purchase shares of the Ready Reserves Fund through the automatic sweep program, the investor must have a free credit balance in the investor's brokerage account with the Distributor. A free credit balance may be created as a result of securities transactions effected through the Distributor, receipt of income, or the deposit of funds (by check or wire) with the Distributor. The Distributor is currently offering a program whereby such free credit balances are automatically used to purchase shares of the portfolio. Under current procedures, if there is a free credit balance of at least $1,000, the Distributor will effect an investment in the portfolio shares on behalf of the investor on an expedited basis. In particular, if there is such a free credit balance resulting from securities transactions in the investor's brokerage account at the opening of business of the Distributor, it generally will be invested in shares of the portfolio on that same day, but in no event later than the next business day. If there is such a free credit balance, resulting from a deposit made prior to 2:00 p.m., Chicago time, or a receipt of income, then it will be invested in shares of the portfolio no later than the next business day. If there is a free credit balance of less than $1,000 and at least $1, it will be invested in shares of the portfolio within a maximum of five business days from the day that the free credit balance is created. DIVIDEND REINVESTMENT PLAN. The Fund automatically reinvests all income dividends and capital gain distributions in additional shares of a portfolio's stock at net asset value on the reinvestment date (see "Dividend and Distribution 28 33 Policy"). The minimum initial investment under this plan is $5,000 for all portfolios, but the Fund may accept smaller amounts under a group payroll-deduction or similar plan. The minimum for IRAs is $2,000. The current minimum amount for subsequent investments is $1,000 for all portfolios except for Ready Reserves Fund for which the subsequent minimum is $1. These minimums are subject to change at any time. CASH-DIVIDEND PLAN. All income dividends are paid in cash, while all capital gain distributions are automatically reinvested in additional shares at net asset value on the reinvestment date. Upon written instructions, the Fund will pay both income dividends and capital gain distributions, if any, in cash. The minimum initial investment under this plan is the same as the Dividend Reinvestment Plan. AUTOMATIC DEPOSIT OF DIVIDENDS. An investor may elect to have all income dividends or capital gain distributions automatically deposited in a previously established bank account. PRE-AUTHORIZED CHECK PLAN. An investor may specify an amount (a minimum of $250) that is to be invested on the 5th and/or 20th of each month, and instruct BFDS to send pre-authorized checks for that amount to the investor's bank automatically. In all other respects this plan is the same as the Dividend Reinvestment Plan. SYSTEMATIC WITHDRAWAL PLAN. Under this plan, which may be established with shares presently held or through a new investment (which the Fund suggests be at least $5,000), a shareholder specifies a dollar amount to be paid monthly, quarterly or annually. Shares corresponding to the specified dollar amount are automatically redeemed from the account on the fifth business day preceding the end of the month, quarter or the year. Such redemptions are treated as sales for Federal income tax purposes. While this plan is in effect, all income dividends and capital gain distributions on shares in the account will be reinvested at net asset value in additional shares. There is no charge for withdrawals, but the minimum withdrawal is $250 per month. Depending on the size of payments requested, and fluctuations in the net asset value of the shares redeemed, redemptions under this plan may reduce or even exhaust the shareholder's account. RETIREMENT PLANS. The Fund has available Individual Retirement Accounts ("IRAs"), under prototypes approved by the Internal Revenue Service, which invest in shares of the portfolios. Contributions to IRAs are fully deductible only to (1) taxpayers who are not active participants in an employer-sponsored retirement plan, and (2) taxpayers who are active participants in an employer-sponsored plan but have adjusted gross income below a specified level. Non-deductible contributions are permitted. The portfolio's shares also may be used with respect to a Simplified Employee Pension Plan ("SEP"), under which an employer makes contributions to all eligible employees' IRAs, or with respect to qualified money purchase pension and/or profit sharing plans. Prototype forms of an IRA and qualified retirement plans and a form of SEP, and additional information concerning such plans, are available from the Fund. BFDS may act as custodian for the portfolio's IRA and certain qualified retirement plans. BFDS charges a $5 plan establishment fee, and there is also an annual $15 custodial fee, and a $10 fee for each lump sum distribution from a plan. These fees may be waived under certain circumstances. CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED both because of the complexity of Federal tax law and because various tax penalties are imposed for excess contributions to, and late or premature distributions from, IRAs or qualified retirement plans. Termination of a plan shortly after its adoption may have adverse tax consequences. With respect to these plans: (1) participation in all plans is voluntary; (2) the shareholder may terminate or change a plan at any time without penalty or charge from the Fund; (3) the Fund will pay any additional expenses that it incurs in connection with such plans; (4) new applicants may select a plan or plans by completing the application form included with this Prospectus; (5) additional forms and further information may be obtained by writing or calling the Fund; (6) the Fund reserves the right to change the minimum amounts for initial and subsequent investments or to terminate any of the above plans; (7) the Fund reserves the right to waive investment minimums at the discretion of the Distributor; and (8) the Fund 29 34 requires a copy of the trust agreement when shares are to be held in trust. 30 35 HOW TO REDEEM Redemption requests should be signed by all owners and sent to Boston Financial Data Services, Inc., P.O. Box 9104, Boston, Massachusetts 02266-9104 or, for the Ready Reserves Fund only, to the Distributor. Redemptions of a portfolio's shares are made at the net asset value per share next computed after BFDS (or the Distributor) receives in good order the redemption request, any stock certificates (endorsed, or accompanied by an endorsed stock power, to the order of the Fund) and any necessary documents, such as an inheritance tax consent or evidence of authority (such as letters testamentary), dated not more than 60 days prior to receipt thereof. ANY SINGLE REDEMPTION OF SHARES HAVING A VALUE OF $5,000 OR MORE REQUIRES THAT SIGNATURE(S) BE GUARANTEED BY A BANK THAT IS A MEMBER OF THE FDIC, BY A BROKERAGE FIRM THAT IS A MEMBER OF THE NASD OR AN ELIGIBLE GUARANTOR WHO IS A MEMBER OF, OR A PARTICIPANT IN, A SIGNATURE GUARANTEE PROGRAM. Signature guarantee(s), if required, must appear on the written redemption request and any endorsed stock certificate or stock power. Payment normally will be mailed by the third business day after the receipt by BFDS (or, in the case of the Ready Reserves Fund, the Distributor) of a redemption request and any required documentation (and after any checks in payment for the shares have cleared). A redeeming shareholder may arrange with BFDS to wire redemption proceeds. Redemption requests should not be sent to the Fund or to the Distributor (except in the case of the Ready Reserves Fund), and doing so will delay their receipt by BFDS; a shareholder who sends a redemption request to the Fund or to the Distributor (except in the case of the Ready Reserves Fund) takes the risk of any decrease in net asset value per share during the delay. BFDS may in certain cases make advance arrangements for telephone processing of redemption requests. The price received by a shareholder on redemption may be more or less than cost, depending on the net asset value at the time of redemption. Redemptions will be treated for Federal income tax purposes as sales, and a gain (or loss) will be recognized if the redemption proceeds are more (or less) than the adjusted basis (usually the cost) of the redeemed shares. Fund shares may be transferred by a written request addressed to the Fund and delivered to BFDS giving the name and social security or taxpayer identification number of the transferee, and accompanied by the same signature guarantees and documents as would be required for a redemption, together with specimen signatures of all transferees. REQUESTS FOR CHANGES IN REGISTRATION OR FOR REDEMPTION OR DIVIDEND CHECKS TO BE SENT TO A PLACE OTHER THAN THE ADDRESS OF RECORD, REGARDLESS OF AMOUNT, MUST CONTAIN A SIGNATURE GUARANTEE BY A BANK THAT IS A MEMBER OF THE FDIC, BY A BROKERAGE FIRM THAT IS A MEMBER OF THE NASD, OR BY AN ELIGIBLE GUARANTOR WHO IS A MEMBER OF, OR A PARTICIPANT IN, A SIGNATURE GUARANTEE PROGRAM. Redemption requests for shares held in a retirement plan established under the Fund's prototype forms should be processed through the plan's custodian. Such requests are effective at the net asset value per share that is next computed after the custodian receives the request and any necessary documentation. In addition, shares of the Ready Reserves Fund can be redeemed by one of the methods discussed below. Redemptions will be processed after the next daily dividend declaration and at the net asset value next determined after receipt by State Street Bank of proper notice of redemption from the Distributor or, for redemptions by check, after receipt by BFDS of the check tendered for payment. In this way, the shareholder will receive the net asset value of such shares and all declared but unpaid dividends on such shares through the date of redemption. REQUEST BY SHAREHOLDER (READY RESERVES FUND ONLY). A shareholder may specifically request that all or a portion of the shareholder's investment in the portfolio be redeemed by calling a William Blair & Company, L.L.C. account executive at 312/364-8000, or by writing William Blair & Company, L.L.C., to the attention of the 31 36 shareholder's account executive at 222 West Adams Street, Chicago, Illinois 60606. Amounts redeemed will be placed in the shareholder's brokerage account. If the Distributor receives notice of the request to redeem the shares by 9:30 a.m., Chicago time, the redemption will be effected as of that date. If notice of the redemption request is received after that time, the redemption will be effected on the next following business day. REDEMPTION BY CHECK (READY RESERVES FUND ONLY). Provided that the Fund has approved the shareholder for check-writing privileges, the shareholder may redeem shares by check. In order to use this method, the shareholder must fill out an application for the check-writing privilege. If the application is approved, the shareholder will be provided with checks that may be made payable to any person in an amount not less than $500 nor more than $9 million. There currently is no charge for this service and no limit on the number of checks that may be written. However, these provisions are subject to change. The payee of the check may cash or deposit it like any other check drawn on a bank. When such check is presented for payment, a sufficient number of full and fractional shares in the shareholder's account will be redeemed at their next determined net asset value per share (which is usually $1.00) to cover the amount of the check. This enables the shareholder to continue earning daily dividends until the check clears. Cancelled checks will be returned to the shareholder by BFDS. Unless one signer is authorized on the application for the check-writing privilege, checks must be signed by all account owners in the same manner as the account is registered. The Fund may refuse to honor checks whenever the right of redemption has been suspended or postponed (as described in the Statement of Additional Information under "Purchase and Redemption of Fund"), or whenever an account is otherwise impaired. An account would be considered impaired when there are insufficient assets to cover the check, when a "stop order" has been placed on the check, and in other situations, such as where there is a dispute over ownership of the account. A $25 service fee will be charged when a check is presented to redeem portfolio shares in excess of the value of the shareholder's account or for checks written for an amount less than $500. AUTOMATIC REDEMPTION (READY RESERVES FUND ONLY). The Distributor has instituted an automatic redemption procedure applicable to shareholders who maintain certain brokerage accounts with it. The Distributor may utilize this procedure to satisfy amounts due it by the shareholder as a result of purchases of securities or other transactions in the shareholder's brokerage account. Under this procedure, if the shareholder so elects, the shareholder's brokerage account will be scanned at the opening of business each day and, after application of any cash balances in the brokerage account, a sufficient number of portfolio shares will be redeemed, effective that day at the next determined net asset value, to satisfy any amounts for which the shareholder is obligated to make payment to the Distributor. The shareholder will receive all dividends declared but unpaid through the date of redemption. AUTOMATIC REDEMPTION OF SMALL ACCOUNTS (ALL PORTFOLIOS). Due to the relatively high cost of maintaining small accounts, the Fund reserves the right to redeem the shares in any account that, following a redemption, is below a specified amount. Currently, the minimum is $5,000 per portfolio. Shareholders will be notified that the values of their accounts have fallen below the minimum and allowed two months to make an additional investment before the redemption will be processed. 32 37 EXCHANGES Subject to the following limitations, shares of the portfolios may be exchanged for each other at their relative net asset values so long as the portfolio to be acquired is registered in the shareholder's state of residence. There is no service fee for an exchange; however, only four (4) exchanges from a portfolio are allowed within any 12-month period. Exchanges will be effected by redemption of shares of the portfolio held and purchase of shares of the other portfolio or portfolios requested. For Federal income tax purposes, any such exchange constitutes a sale upon which a gain or loss will be realized, depending upon whether the value of the shares being exchanged is more or less than the shareholder's adjusted cost basis. Exchanges may be made by a written request to William Blair Mutual Funds, Inc., Attention: Exchange Department, P.O. Box 9104, Boston, MA 02266-9104, or by telephone if an exchange authorization as provided on the account application is on file with BFDS. Once the telephone authorization is on file, State Street Bank will honor requests by any person by telephone at 1-800-635-2886 (in Massachusetts call 1-800-635-2840). Any certificates for shares must be deposited prior to any exchange of such shares. Neither the Fund nor its transfer agent will be liable for any loss, expense or cost arising out of any telephone request pursuant to the telephone exchange privilege, including any fraudulent or unauthorized request, and the shareholder will bear the risk of loss, so long as the Portfolio or its transfer agent reasonably believes, based upon reasonable verification procedures, that the telephonic instructions are genuine. The verification procedures include recording instructions, requiring certain identifying information before acting upon instructions and sending written confirmations. 33 38 FEDERAL INCOME TAXATION Each portfolio intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and, if so qualified, will not be liable for Federal income taxes to the extent its earnings are distributed. Dividends derived from taxable net investment income and net short-term capital gains are taxable to shareholders as ordinary income, and long-term capital gain distributions are taxable to shareholders as long-term capital gains regardless of how long the shares have been held and whether received in cash or shares. Long-term capital gain dividends received by individual shareholders generally are taxed at a maximum rate of 28%. Long-term capital gain dividends received by corporate shareholders are taxed at the same rates as ordinary income. Dividends declared by the Fund in October, November or December to shareholders of record as of a date in one of those months and paid before the following February 1 are treated as having been paid on December 31 of the calendar year declared for federal income tax purposes. Each portfolio intends to declare and make distributions during the calendar year of an amount sufficient to prevent imposition of a 4% non-deductible federal excise tax. The required distribution generally is the sum of 98% of the portfolio's net investment income for the calendar year plus 98% of its capital gain net income for the one-year period ending October 31 plus the sum of any undistributed net investment income and capital gain net income from the prior year less any over-distribution from the prior year. A dividend or distribution received shortly after the purchase of shares reduces the net asset value of the shares by the amount of the dividend or distribution and, although in effect a return of capital, will be subject to income taxes. If the net asset value of shares were reduced below the shareholder's cost by dividends representing gains realized on sales of securities, such dividends would be a return of investment though taxable as stated above. A shareholder who redeems shares of the Fund will recognize capital gain or loss for Federal income tax purposes measured by the difference between the value of the shares redeemed and the basis of the shares. For the Ready Reserves Fund there would be no capital gain or loss for so long as the stable net asset value of $1.00 is maintained. Any loss recognized on the redemption of Fund shares held six months or less will be treated as long-term capital loss to the extent the shareholder has received any long-term capital gain dividends on such shares. It is anticipated that a portion of the ordinary income dividends for the Growth Fund will be eligible for the dividends-received deduction available for corporate shareholders. The International Growth Fund's, Income Fund's and Ready Reserves Fund's ordinary income dividends are not eligible for the dividends-received deduction available to corporate shareholders. The Fund is required to withhold Federal income tax at the rate of 31% (commonly called "backup withholding") from taxable distributions to shareholders who do not furnish the Fund with a taxpayer identification number (in the case of individuals, their social security number) or in other circumstances where shareholders have not complied with Internal Revenue Service regulations. Trustees of qualified retirement plans and 403(b)(7) accounts are required by law to withhold 20% of the taxable portion of any distribution that is eligible to be "rolled over." The 20% withholding requirement does not apply to distributions from Individual Retirement Accounts or any part of a distribution that is transferred directly to another qualified retirement plan, 403(b)(7) account, or IRA. Shareholders should consult their tax advisers regarding the 20% withholding requirement. INTERNATIONAL GROWTH FUND Investment income received from sources within foreign countries may be subject to foreign income taxes. The U.S. has entered into tax treaties with many foreign countries which entitle certain investors to a reduced rate of tax or to certain exemptions from tax. The International Growth Fund will operate so as to qualify for such reduced tax rates or tax exemptions whenever practicable. The portfolio may qualify for and make an election 34 39 permitted under Section 853 of the Code so that shareholders will be able to claim a credit or deduction on their Federal income tax returns for, and will be required to treat as part of the amounts distributed to them, their pro rata portion of the income taxes paid by the portfolio to foreign countries (which taxes relate primarily to investment income). The shareholders of the portfolio may claim a credit by reason of the portfolio's election subject to certain limitations imposed by Section 904 of the Code. However, no deduction for foreign taxes may be claimed under the Code by individual shareholders who do not elect to itemize deductions on their Federal income tax returns, although such a shareholder may claim a credit for foreign taxes and in any event will be treated as having taxable income in the amount of the shareholder's pro rata share of foreign taxes paid by the portfolio. Although the portfolio intends to meet the requirements of the Code to "pass through" such taxes, there can be no assurance that the portfolio will be able to do so. The International Growth Fund has elected to mark-to-market its investments in Passive Foreign Investment Companies for Federal income tax purposes. 35 40 SHAREHOLDER SERVICES AND RIGHTS CONFIRMATIONS. Each purchase or redemption transaction is confirmed to the shareholder, giving details of the purchase or redemption, with the number of shares computed to the third decimal place. FISCAL YEAR. The Fund's fiscal year is the calendar year. REPORTS. Each shareholder receives an audited annual report and an unaudited semi-annual report. SHAREHOLDER RIGHTS. All shares of each portfolio have equal noncumulative voting rights and equal rights with respect to dividends, assets and liquidation of the portfolio. Shares of each portfolio have equal noncumulative voting rights and will be voted in the aggregate, except when a separate vote by portfolio is required under the 1940 Act. Shares are fully paid and nonassessable when issued, are transferable without restriction and have no preemptive or conversion rights. Under Maryland law, the Fund is not required to hold shareholder meetings on an annual basis. It will, however, hold shareholder meetings as required by law, when a sufficient number of shareholders request a meeting or as deemed desirable by the Board of Directors, for such purposes as electing or removing directors, changing fundamental policies or approving an investment management agreement. Additional information about shareholder voting rights is contained in the Statement of Additional Information. SHAREHOLDER INQUIRIES. Shareholders may make inquiries by writing or calling BFDS or the Distributor, as shown on the cover. 36 41 WILLIAM BLAIR & COMPANY, L.L.C. WILLIAM BLAIR MUTUAL FUNDS, INC. 222 WEST ADAMS STREET CHICAGO, ILLINOIS 60606 (312) 364-8000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus of William Blair Mutual Funds, Inc. (the "Fund") dated May 1, 1996. The Prospectus may be obtained without charge by writing or calling the Fund. ______________________ TABLE OF CONTENTS
PAGE ---- MANAGEMENT OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 INTERNATIONAL GROWTH FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 INCOME FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 READY RESERVES FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 GENERAL FUND INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 FINANCIAL INFORMATION OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
_________________________ May 1, 1996 42 MANAGEMENT OF THE FUND INVESTMENT ADVISER AND DISTRIBUTOR As stated in the Prospectus, William Blair & Company, L.L.C. ("Adviser") is the Fund's investment adviser and manager. Pursuant to an investment advisory and management agreement, the Adviser acts as the Fund's adviser, manages its investments, administers its business affairs, furnishes office facilities and equipment, provides clerical, bookkeeping and administrative services, provides shareholder and information services and permits any of its principals or employees to serve without compensation as directors or officers of the Fund if elected to such positions. In addition to the management advisory fee, each portfolio pays the expenses of its operations, including a portion of the Fund's general administrative expenses, allocated on the basis of the portfolio's net asset value. Expenses that will be borne directly by the portfolios include, but are not limited to, the following: the fees and expenses of independent auditors, counsel, custodian and transfer agent, costs of reports and notices to shareholders, stationery, printing, postage, costs of calculating net asset value, brokerage commissions or transaction costs, taxes, registration fees, the fees and expenses of qualifying the Fund and its shares for distribution under Federal and state securities laws and membership dues in the Investment Company Institute or any similar organization. The advisory agreement for a portfolio continues in effect from year to year for so long as its continuation is approved at least annually (a) by a majority of the directors who are not parties to such agreement or interested persons of any such party except in their capacity as directors of the Fund and (b) by the shareholders of the portfolio or the Board of Directors. The agreement may be terminated at any time upon 60 days notice by either party; the Fund may so terminate the agreement either by vote of the Board of Directors or by majority vote of the outstanding shares of the affected portfolio. The agreement may also be terminated at any time either by vote of the Board of Directors or by majority vote of the outstanding voting shares of the subject portfolio if the Adviser were determined to have breached the agreement. The agreement would terminate automatically upon assignment. The agreement provides that the Adviser shall not be liable for any error of judgment or of law, or for any loss suffered by the Fund in connection with the matters to which the agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its obligations and duties, or by reason of its reckless disregard of its obligations and duties under the agreement. Upon termination of the agreement, and when so requested by the Adviser, the Fund will refrain from using the name "William Blair" in its name or in its business in any form or combination. The Adviser has entered into a sub-investment management agreement with Framlington Overseas Investment Management Limited (the "Sub-Adviser") appointing it as sub-investment adviser for the International Growth Fund. The Sub-Adviser is a wholly owned 2 43 subsidiary of Framlington Group plc, which is a wholly owned subsidiary of Framlington Holdings Limited, which in turn is owned 51% by Credit Commercial de France (a commercial and clearing bank) and 49% by The Throgmorton Trust plc (an investment trust). The sub-investment management agreement has the same provisions for continuance and termination as the investment management agreement, except that it would also terminate automatically upon the termination of the advisory agreement between the International Growth Fund and the Adviser. For the services and facilities furnished to the Growth Fund, effective as of May 1, 1996, the Fund pays a monthly management advisory fee at an annual rate of .75% of the portfolio's average net assets. Prior to May 1, 1996, the Fund paid, on behalf of the Growth Fund, a monthly advisory fee at the annual rate of 0.625% of the portfolio's average daily net assets up to $75 million and 0.50% of average daily net assets above $75 million. The advisory fee is accrued daily and paid monthly on the first business day of the following month. For the fiscal years ended December 31, 1995, 1994 and 1993, the Adviser received fees of $1,561,478, $903,986 and $727,001, respectively. For the services and facilities furnished to the International Growth Fund, effective as of May 1, 1996, the Fund pays the Adviser a monthly advisory fee at an annual rate of 1.10% of the first $250 million of average daily net assets plus 1.00% of average daily net assets over $250 million. Prior to May 1, 1996, the Fund paid, on behalf of the International Growth Fund, a monthly advisory fee at an annual rate equal to 1.10% of the first $100,000,000 of average daily net assets of the portfolio and .95% of average daily net assets above $100,000,000. The advisory fee is accrued daily and paid monthly on the first business day of the following month. Under the sub-investment advisory agreement, the Adviser pays the Sub-Adviser a monthly fee at an annual rate equal to .40% of the first $100 million of average daily net assets of the portfolio and .275% of average daily net assets above $100 million. For the services and facilities furnished during the period ended December 31, 1995, 1994 and 1993, the Fund paid $886,557, $651,754 and $237,470 , respectively, pursuant to the investment advisory agreement, of which $322,384, $237,001 and $86,353, respectively, was paid to the Sub-Adviser; $78,535 of fees were waived by the Adviser pursuant to its undertaking to waive fees to the extent expenses exceed 2.0% for the period ended December 31, 1993. For the services and facilities furnished to the Income Fund, effective as of May 1, 1996, the Fund pays a monthly management advisory fee at an annual rate of .25% of the first $250 million of average daily assets plus .20% of average daily net assets over $250 million plus 5% of the gross income earned by the portfolio. Prior to May 1, 1996, the Fund paid, on behalf of the Income Fund, a monthly advisory fee at an annual rate equal to .25% of the first $100 million of average daily net assets of the portfolio, .20% of the next $150 million and .15% of average daily net assets in excess of $250 million, plus 5.0% of the gross income earned. The fee is accrued daily and paid monthly on the first business day of the following month. For the services and facilities furnished to the portfolio pursuant to the 3 44 advisory agreement during the fiscal years ended December 31, 1995, 1994 and 1993, the Fund paid $868,277, $998,125 and $961,639, respectively. For the services and facilities furnished to the Ready Reserves Fund, effective as of May 1, 1996, the Fund pays a monthly management advisory fee at an annual rate of .625% of the first $250 million of average daily net assets, plus .600% of the next $250 million of average daily net assets, plus .575% of the next $2 billion of average daily net assets plus .55% of the average daily net assets over $2.5 billion. Prior to May 1, 1996, the Fund paid, on behalf of the Ready Reserves Fund, a monthly advisory fee at an annual rate of .625% of the first $250 million of average daily net assets of the portfolio, .60% of the next $250 million, .55% of the next $500 million, .50% of the next $2 billion, .45% of the next $2 billion and .40% of average daily net assets in excess of $5 billion. The management advisory fee is accrued daily and paid monthly on the first business day of the following month. For the services and facilities furnished to the portfolio pursuant to the advisory agreement during the fiscal years ended December 31, 1995, 1994 and 1993 the Adviser received fees of $3,613,262, $2,990,786 and $2,992,423 respectively. The Adviser has agreed to reimburse the Fund should all operating expenses of any portfolio, including the compensation of the Adviser but excluding taxes, interest, extraordinary expenses and brokerage commissions or transaction costs, exceed 1-1/2% of the first $30 million of average net assets of the portfolio and 1% of average net assets over $30 million of the portfolio on an annual basis. William Blair & Company, L.L.C. also is the principal underwriter and distributor ("Distributor") for shares of the Fund and acts as agent of the Fund in the sale of its shares. The offering of shares is continuous, although the Distributor and the Fund reserve the right to cease the offer of shares at any time. The Distributor pays for the printing and distribution of copies of the prospectus and shareholder reports used in connection with the offering of shares to prospective investors. The Distributor also pays for supplementary sales literature and advertising costs. Terms of continuation, termination and assignment under the underwriting agreement are substantially the same as those described above with regard to the advisory agreement, except that termination other than upon assignment or upon determination of breach requires six months' notice. Messrs. Barber, Fischer, Fuller, and Ms. Gassman, Messrs. Kaplan, Kayser, McMullan, Myer, Rucinski, Sullivan, Truderung and Truettner, who are directors or officers of the Fund, are also principals or employees of the Adviser/Distributor as indicated under "Directors and Officers." The Adviser/Distributor is a limited liability company, the affairs of which are controlled by all its principals, none of whom owns more than 25% of the firm. The Chief Executive Officer of the firm is E. David Coolidge, III and the Executive Committee is comprised of Harvey Bundy, III, E. David Coolidge, III, Conrad Fischer, Edgar D. Jannotta, 4 45 John P. Kayser, Richard P. Kiphart, Albert J. Lacher, James D. McKinney and James M. McMullan. DIRECTORS AND OFFICERS The directors and officers of the Fund, their ages, their principal occupations during the last five years, their affiliations, if any, with William Blair & Company, L.L.C. and other significant affiliations are set forth below. Unless otherwise noted, the address of each officer and director is 222 West Adams Street, Chicago, Illinois 60606. CONRAD FISCHER (61),* (2) Chairman of the Board and Director; Principal, William Blair & Company, L.L.C.; and Trustee Emeritus, Chicago Child Care Society, a non-profit organization. VERNON ARMOUR (68), (1) (2) (3) Director; 135 South LaSalle St., Suite 1117, Chicago, Illinois 60603; Private investor; Trustee, Illinois Institute of Technology and Northwestern Memorial Hospital; Director and President, OTHO S.A. Sprague Memorial Institute; Life Trustee, Illinois Institute of Technology; and Life Trustee, Northwestern Memorial Hospital. GEORGE KELM (67), (1) (3) Director; Three First National Plaza, Suite 2000, Chicago, Illinois 60602; Retired Chairman of the Board and Director, Sahara Coal Company, Inc., and Sahara Enterprises, Inc.; Director, Rolf Jensen & Associates, Inc.; Trustee, Lawrence University, Newberry Library and McCormick Theological Seminary; President and Director, Woods Fund of Chicago; and Member of the Visiting Committee, University of Chicago Graduate School of Social Service Administration. ANN P. McDERMOTT (56), (3) Director; Trustee, Rush Presbyterian St. Luke's Medical Center; Women's Board, Rush Presbyterian St. Luke's Medical Center; Honorary Director, Visiting Nurse Association; Director, Presbyterian Homes; Northwestern University, Women's Board; University of Chicago, Women's Board; Director, Washington State University Foundation. JAMES M. McMULLAN (61),* Director; Principal , William Blair & Company, L.L.C., Member, NASD Listing Review Committee and Director of Securities Industry Association. JOHN B. SCHWEMM (61), (1) (3) Director; 2 Turvey Lane, Downers Grove, Illinois 60515; Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company, printer; and Director, USG Corp., a building material product company and Walgreen Co., a drug store chain. 5 46 W. JAMES TRUETTNER, JR. (64),* Director and Senior Vice President; Principal, William Blair & Company, L.L.C.; and Director of International Travel Services and Roberts Industries, Inc.; and Trustee, Shenandoah University. JAMES L. BARBER, JR. (44), President of the Fund and Chief Operating Officer of the Growth Fund and the Income Fund; Principal, William Blair & Company, L.L.C.; Vice President and Secretary, LaRabida Hospital Foundation; and President, Stanford Associates. MARK A. FULLER, III (38), Senior Vice President; Principal, William Blair & Company, L.L.C.. BENTLEY M. MYER (49), Senior Vice President and Chief Operating Officer, Ready Reserves Fund; Principal, William Blair & Company, L.L.C.; formerly Vice President, LaSalle National Trust Co. NORBERT W. TRUDERUNG (43), Senior Vice President; Principal, William Blair & Company, L.L.C. JAMES S. KAPLAN (35), Vice President; Associate, William Blair & Company, L.L.C.; formerly Vice President, First Union Bank. JOHN P. KAYSER (46), Vice President; Principal, William Blair & Company, L.L.C., Director, DuPage Children's Museum. TERENCE M. SULLIVAN (52), Vice President; Associate, William Blair & Company, L.L.C.. WALTER RUCINSKI (51), Treasurer; Controller, William Blair & Company, L.L.C.; and Treasurer, Foundation for Special Athletics; and Vice President of Koocanusa Marina, Inc. JANET V. GASSMAN (29), Secretary; Administrative Assistant, William Blair & Company, L.L.C.; formerly, Administrative Assistant, Shearson Lehman Brothers, Inc. ___________ *Directors who are interested persons as defined in the Investment Company Act of 1940. (1) Member of the Standing Audit Committee. (2) Member of Interim Valuation Committee. This committee handles any questions regarding the valuation of portfolio securities that may arise between meetings of the Board of Directors. 6 47 (3) Mr. Armour and Mr. Kelm maintain brokerage accounts with the Adviser and Ms. McDermott and Mr. Schwemm employ the Adviser to manage assets that they control. Mr. Kelm also serves as president and director of Woods Fund of Chicago, a nonprofit organization for which William Blair & Company, L.L.C. serves as investment adviser. In addition, as a result of his former affiliation with the Adviser as a partner of William Blair & Company, L.L.C. from 1973 to 1982, Mr. Armour has a beneficial interest in a Deferred Profit Sharing Plan which is managed by the Adviser. The directors and officers affiliated with the Adviser receive no compensation from the Fund. Directors who are not affiliated with the Adviser currently receive an annual fee of $4,000 plus $2,000 for each meeting attended in person plus expenses. Prior to the 1995 fiscal year, Investors who are not affiliated with the Adviser received an annual fee of $1,000 and prior to July, 1995, such directors received $500 for each meeting attended in person plus expenses. The following table sets forth the compensation earned from the Fund for the fiscal year ended December 31, 1995 by directors who are not affiliated with the Adviser:
Pension or Aggregate Retirement Benefits Estimated Annual Compensation from Accrued as Part of Benefits Upon Total Compensation ------------------------------------------------------------ ------------------ Director the Fund Fund Expenses Retirement -------- -------- ------------- ---------- Vernon Armour $9,000 0 0 $9,000 C. Mathews Dick, Jr. $9,000 0 0 $9,000 * George Kelm $9,000 0 0 $9,000 John H. Olwin, M.D. $8,500 0 0 $8,500 * John B. Schwemm $9,000 0 0 $9,000 John W. Straub * $9,000 0 0 $9,000
________________________________ *Resigned as directors effective as of May 1, 1996. The following table provides certain information at January 31, 1996 with respect to persons known to the Fund to be record holders of 5% or more of the shares of the following portfolios: 7 48
Percent of Name and Portfolio's Address of Outstanding Record Owner Number of Shares Common Stock ------------ ---------------- ------------ GROWTH FUND ----------- William Blair Employees 4,205,284 13.3% Profit Sharing Plan 222 West Adams Street Chicago, Illinois 60606 INTERNATIONAL GROWTH FUND ------------------------- Trustees of Purdue University 494,950 6.5% 1034 Freehafen Hall West Lafayette, IN 47907 Purdue Research Foundation 397,591 5.3% 100 Hovde Hall West Lafayette, IN 47907
As of January 31, 1996, the Fund's officers and directors as a group owned (or held or shared investment or voting power with respect to) 784,538 shares or 2.5% of the Growth Fund's stock, 426,973 shares or 5.6% of the International Growth Fund's stock, 128,719 shares or .9% of the Income Fund's stock and 5,606,865 shares or .8% of the shares of the Ready Reserves Fund. These figures do not include shares of the portfolios that may be indirectly owned by certain officers of the Fund as a result of their interest in the William Blair Profit Sharing Plan. BROKERAGE AND PORTFOLIO TRANSACTIONS Decisions on the Fund's portfolio transactions (including the decision to buy or sell, the appropriate price, allocation of brokerage, use of a broker as agent or dealer as principal, and negotiation of commissions) are normally made by the Adviser except that decisions on portfolios transactions for International Growth Fund are made by the Sub-Adviser, subject to the monitoring of the Adviser. In purchasing and selling portfolio securities, the Fund seeks to obtain the most favorable overall result, taking into account the net price, the method of execution and research services provided by the broker. Such research services include economic forecasts and analytical, narrative and statistical reports on industries and companies for consideration by the Fund and the Adviser's or Sub-Adviser's other clients. Portfolio transactions may increase or decrease the return of a portfolio depending upon the Adviser or Sub-Adviser's ability to correctly time and execute such transactions. A portfolio 8 49 turnover rate for any year is determined by dividing the lesser of sales or purchases (excluding in either case cash equivalents, such as short-term corporate notes) by the portfolio's monthly average net assets, and multiplying by 100 (with all securities with maturities and expirations of one year or less excluded from the computation). The portfolio's turnover rate will also vary from year to year depending on market conditions. Since the Ready Reserves Fund's assets are invested in securities with short (less than one year) effective maturities, its portfolio will turn over many times a year. Such securities, however, are excluded from the Securities and Exchange Commission required portfolio turnover rate calculations, resulting in no portfolio turnover rate for reporting purposes. Selection of a broker for a particular portfolio transaction depends on many factors, some of which are subjective and which include the net price, the confidentiality, reliability, integrity, the size and nature of the transaction and the market in which it is to occur, and any research or other services that the broker has provided. The Adviser or Sub-Adviser determines the overall reasonableness of brokerage commissions, and of premiums and discounts on principal transactions (which do not involve commissions), by review of comparable trades for the Adviser's or Sub-Adviser's other clients and in the market generally. If more than one broker is believed to be equally qualified to effect a portfolio transaction, the Adviser or Sub-Adviser may assign the transaction to a broker that has furnished research services, but the Adviser and Sub-Adviser have no agreement, formula or policy as to allocation of brokerage. The Fund does not ordinarily market its shares through brokers, and any sales of the Fund's shares by a broker would be neither a qualifying nor disqualifying factor in allocating brokerage. All the Fund's 1994 portfolio transactions were with brokers who met the above requirements, some of which provided research or other services to the Adviser or Sub-Adviser. The Fund may pay to brokers that provide research services to the Adviser or Sub-Adviser a commission higher than another broker might have charged if it is determined that the commission is reasonable in relation to the value of the brokerage and research services that are provided, viewed in terms of either the particular transaction or the Adviser's or Sub-Adviser's overall responsibility to its advisory accounts. The extent to which such commissions exceed commissions solely for execution cannot be determined, but such research services, which are involved in portfolio transactions for the Fund and for the Adviser's or Sub-Adviser's other advisory accounts, can be of benefit to both the Fund and such other accounts. The value of research services that are provided by brokers who handle portfolio transactions for the Fund cannot be precisely determined, and such services are supplemental to the Adviser's or Sub-Adviser's own efforts, which are undiminished thereby. The Adviser and Sub-Adviser do not believe that their expenses are reduced by reason of such services, which benefit the Fund and the Adviser's or Sub-Adviser's other clients. Transactions in over-the-counter securities are generally executed as principal trades with primary market makers, except where it is believed that a better combination of price and execution could otherwise be obtained. The Growth Fund paid total brokerage fees of $254,434, $198,271 and $219,687 in 1995, 1994 and 1993, respectively. None of such brokerage fees were paid to a broker who was 9 50 an affiliated person of the Fund, or to a broker of which an affiliated person was an affiliated person of the Fund or of the Adviser. International Growth Fund paid brokerage fees of $454,667, $301,194 and $224,085 during the period ended December 31, 1995, 1994 and 1993, respectively. None such brokerage fees were paid to a broker who was affiliated person of the Fund, or to a broker of which an affiliated person was an affiliated person of the Fund or of the Adviser or Sub-Adviser. Purchases and sales of portfolio securities for the Income Fund and Ready Reserves Fund usually are principal transactions, either directly with the issuer or with an underwriter or market maker, with no brokerage commissions paid by the portfolio. No brokerage commissions were paid by the Income Fund or the Ready Reserves Fund during the fiscal years ended December 31, 1995, 1994 and 1993. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers will include the spread between the bid and asked prices. The primary consideration in the allocation of transactions is prompt execution of orders in an effective manner at the most favorable price. The investment decisions for the Fund are reached independently from those for other accounts managed by the Adviser or Sub-Adviser. Such other accounts also may make investments in the same type of instruments or securities as the Fund at the same time as the Fund. When two or more accounts have funds available for investment in similar instruments, available instruments are allocated as to amount in a manner considered equitable to each account. In some cases this procedure may affect the size or price of the position obtainable for the Fund. However, it is the opinion of the Board of Directors that the benefits available because of the Adviser's and Sub-Adviser's organization outweigh any disadvantages that may arise from exposure to simultaneous transactions. No portfolio transactions are executed for the Fund with or through the Adviser or Sub-Adviser or any affiliated broker-dealer of the Adviser or Sub-Adviser. The Fund may purchase securities from other members of an underwriting syndicate of which the Adviser or an affiliated broker-dealer is a participant, but only under conditions set forth in applicable rules of the Securities and Exchange Commission and in accordance with procedures adopted and reviewed periodically by the Board of Directors. GROWTH FUND INVESTMENT POLICIES AND RESTRICTIONS The Fund has adopted certain investment restrictions for the Growth Fund ("Restrictions"). Restrictions 1 through 9 below and the portfolio's investment objectives cannot be changed without approval by holders of a majority of the outstanding voting shares of the portfolio. As 10 51 defined in the Investment Company Act of 1940 (the "Act"), which term as used herein includes the rules and regulations thereunder, this means the vote of the lesser of (a) 67% of the shares of the portfolio at a meeting where more than 50% of the outstanding voting shares of the portfolio are present in person or by proxy; or (b) more than 50% of the outstanding voting shares of the portfolio. Restrictions 10 through 20 may be changed by the Fund's board of directors, all such changes being subject to applicable law. (1) The portfolio will operate as an open-end, diversified, management type investment company, as defined in the Investment Company Act of 1940. The Growth Fund may not: (2) Invest in any enterprise for the purpose of exercising control or management thereof. (3) Buy or sell real estate or real estate loans. (4) Underwrite the securities of other issuers. (5) Make loans to other persons. (6) Purchase or sell commodities or commodity contracts. (7) Issue senior securities. (8) Borrow money, except from banks for current obligations of a minor character incurred in the ordinary course of business, nor borrow amounts in excess of 10% of its gross assets. (The portfolio does not presently intend to borrow any amount in excess of 5% of its gross assets.) (9) Make an investment if doing so would cause more than 25% of its total assets to be invested in any one industry. (10) Pledge, or create a lien on, its assets. (11) Purchase or retain securities of any issuer if the officers, directors or trustees of the Company, its advisers, or managers owning beneficially more than one-half of one percent of the securities of an issuer together own beneficially more than five percent of the securities of that issuer. (12) Purchase any security including warrants (except certain government and agency issues) if such purchase would cause more than 5% of the market value of the portfolio's total assets 11 52 to be invested in the securities of any one issuer. Any warrants purchased will be traded on the New York or American Stock Exchange. (13) Purchase any security if doing so would cause more than 5% of the voting securities of the issuer to be held by the portfolio. (14) Purchase securities issued by other open-end investment companies except when such purchase is part of a plan of merger or consolidation. (15) Purchase securities of unseasoned issuers, including their predecessors, which have been in operation for less than three years, or equity securities of issuers which are not readily marketable if by reason thereof the value of its aggregate investment in such classes would exceed 5% of its total assets. (16) Invest in futures contracts, puts, calls, straddles, spreads or any combination thereof. (17) Invest in oil, warrants in oil, gas and mineral leases, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (18) Invest in securities of issuers which are restricted as to sale to the public without registration under the Securities Act of 1933, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1993 that have been determined to be liquid by the Board of Directors, if by reason thereof the value of its aggregate investment in such securities would exceed 10% of its total assets. (19) Make short sales of portfolio securities, purchase portfolio securities on margin or engage in arbitrage transactions. (20) Invest in real estate limited partnerships although it may invest in securities of issuers which invest or deal in real estate limited partnerships. If the above percentage restrictions are adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or total assets will not be considered a violation. REDEMPTIONS The portfolio may not suspend the right of redemption or delay payment on shares of the portfolio more than seven days except (a) during any period when the New York Stock Exchange is closed (other than customary weekend and holiday closings), (b) when trading in the markets the portfolio normally utilizes is restricted, or any emergency exists as determined by the Securities and Exchange Commission so that disposal of the portfolio's investments or 12 53 determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the portfolio's shareholders. A shareholder who redeems shares of the portfolio will recognize capital gain or loss for Federal income tax purposes. If a shareholder realizes a loss on the redemption of portfolio shares and reinvests in portfolio shares within 30 days before or after redemption, the transactions may be subject to the wash sale rules resulting in a postponement of the recognition of such loss for Federal income tax purposes. DETERMINATION OF NET ASSET VALUE Net asset value per share of the portfolio will be determined as of the earlier of 3:00 p.m., Chicago time, or the close of business on the New York Stock Exchange on each day on which that Exchange is open and on each other day on which there is sufficient trading in the portfolio's investments that it might materially affect the net asset value, except that the net asset value will not be computed on a day in which no orders to purchase shares were received and no shares were tendered for redemption. The New York Stock Exchange is closed for the observance of New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The per share net asset value is determined by dividing the value of the portfolio's assets, less its liabilities, by the number of its shares outstanding. The market value of the portfolio securities is determined by valuing securities traded on national securities markets at the last sale price or, in the absence of a sale on the date of determination, at the latest bid price. Securities for which market quotations are not readily available, and all other assets, are appraised at fair value as determined in good faith by the board of directors. PERFORMANCE The Growth Fund's historical performance or return may be shown in the form of "average annual total return" and "total return" figures. These various measures of performance are described below. Average annual total return and total return measure both the net investment income generated by, and the effect of any realized and unrealized appreciation or depreciation of, the underlying investments of the portfolio. The portfolio's average annual total return quotation is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The average annual total return for a specific period is found by first taking a hypothetical $1,000 investment ("initial investment") in the portfolio's shares on the first day of the period and computing the "redeemable value" of that investment at the end of the period. The redeemable 13 54 value is then divided by the initial investment, and this quotient is taken to the nth root (n representing the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. The calculation assumes that all income dividends and capital gains distributions by the portfolio have been reinvested at the net asset value on the reinvestment dates during the period. Calculation of the portfolio's total return is not subject to a standardized formula. Total return performance for a specific period is calculated by first taking an investment (assumed below to be $10,000) ("initial investment") in the portfolio's shares on the first day of the period and computing the "ending value" of that investment at the end of the period. The total return percentage is then determined by subtracting the initial investment from the ending value and dividing the remainder by the initial investment and expressing the result as a percentage. The calculation assumes that all income and capital gains dividends by the portfolio have been reinvested at net asset value on the reinvestment dates during the period. Total return may also be shown as the increased dollar value of the hypothetical investment over the period. The Growth Fund's average annual total return for the one-, five- and ten-year periods ended December 31, 1995 was 29.1%, 19.8% and 14.9% respectively and for the same periods the total return was 29.1%, 146.6% and 300.3% respectively. The portfolio's performance quotations are based upon historical results and are not necessarily representative of future performance. Returns and net asset value will fluctuate. The portfolio's performance includes general market conditions, operating expenses and investment management. Any additional fees charged by a dealer or other financial services firm would reduce the returns described in this section. Shares of the portfolio are redeemable at net asset value, which may be more or less than original cost. From time to time, the Growth Fund portfolio's performance may be compared to that of various unmanaged stock indices such as the Standard & Poor's 500 Stock Index; NASDAQ; Value Line; and Russell 1,000, 2,000 and 3,000; and may also be compared to the performance of other growth mutual funds or mutual fund indices as reported by CDA Investment Technologies, Inc. ("CDA"), Lipper Analytical Services, Inc. ("Lipper") or Morningstar, Inc. ("Morningstar"). CDA, Lipper and Morningstar are widely recognized independent mutual fund reporting services. CDA, Lipper and Morningstar performance calculations are based upon changes in net asset value with all dividends and capital gain distributions reinvested. INTERNATIONAL GROWTH FUND 14 55 INVESTMENT POLICIES AND RESTRICTIONS The Fund has adopted certain investment restrictions for the International Growth Fund ("Restrictions"). Restrictions 1 through 15 cannot be changed without the approval of the holders of a majority of the outstanding shares of the portfolio. As defined in the Act, which term as used herein includes the rules and regulations thereunder, the vote of a majority of the outstanding voting securities of the portfolio means the lesser of the vote of (a) 67% or more of the shares of the portfolio present at a meeting where more than 50% of the outstanding voting shares are present in person or by proxy, or (b) more than 50% of the outstanding voting shares of the portfolio. Restrictions 16 to 18 may be changed by the Fund's Board of Directors, all such changes being subject to applicable law. All percentage restrictions on investments apply at the time of the making of the investment and shall not be considered to violate the limitations unless, immediately after or as a result of the investment, an excess or deficiency of the restrictions occurs. The International Growth Fund may not: 1. Borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to 10% of the value of its total assets (any such borrowing under this section will not be collateralized). The portfolio will not borrow for leverage purposes. 2. Pledge, mortgage or create a lien on its assets. 3. Make loans of money or portfolio securities, except through the purchase of debt obligations and repurchase agreements. 4. Purchase any securities if, immediately after such purchase, more than 25% of the value of the portfolio's total assets would be invested in the securities of issuers in the same industry. There is no limitation as to the portfolio's investments in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. For purposes of this restriction, the obligations of each foreign government are deemed to constitute an industry. 5. Invest more than 5% of the value of its total assets in the securities of any one issuer or purchase more than 10% of the outstanding voting securities, or any class of securities, of any one issuer. For purposes of this restriction, all outstanding debt securities of an issuer are considered as one class, and all preferred stock of an issuer is considered as one class. (This restriction does not apply to obligations issued or guaranteed by the U.S. government, or its agencies or instrumentalities.) 6. Underwrite securities by others, except to the extent the portfolio may be deemed to be an underwriter, under the Federal securities laws, in connection with the disposition of portfolio securities. 15 56 7. Purchase securities of other U.S. or foreign investment companies, except that the portfolio may make such a purchase (a) in the open market provided that immediately thereafter (i) not more than 10% of the portfolio's total assets would be invested in such securities; (ii) not more than 5% of the portfolio's total assets would be invested in securities of any one investment company; and (iii) not more than 3% of the total outstanding voting stock of any one investment company would be owned by the portfolio, or (b) as part of an offer of exchange, reorganization or as a dividend. 8. Make short sales of securities, or purchase any securities on margin, or maintain a short position or participate on a joint or a joint and several basis in any trading account in securities, except that the portfolio may (i) obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities; (ii) purchase or sell futures contracts; and (iii) deposit or pay initial or variation margin in connection with financial futures contracts or related options transactions. 9. Purchase or sell put options, call options, or combinations thereof, except that the portfolio may engage in financial futures contracts and related options transactions to seek to hedge against either a decline in the value of securities included in the portfolio or an increase in the price of securities which the portfolio plans to purchase in the future. 10. Purchase or sell commodities or commodity contracts, except that the portfolio may enter into financial futures contracts, options on futures contracts and forward foreign currency exchange contracts. 11. Purchase or sell real estate (although it may purchase securities of issuers that engage in real estate operations, securities that are secured by interests in real estate, or securities that represent interests in real estate, including real estate investment trusts). 12. Invest in interests in oil, gas or other mineral leases, rights or royalty contracts or exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. 13. Invest for the purposes of exercising control or management of another issuer. 14. Issue any "senior securities" as defined in the Act (except for engage in futures and options transactions and except for borrowing subject to the restrictions set forth above). 15. Invest more than 5% of its total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation. 16. Invest in real estate or real estate limited partnerships although it may invest in securities of issuers which invest or deal in real estate limited partnerships. 16 57 17. Purchase or retain securities of any issuer if the officers, directors or trustees of the company, its advisers or managers owning beneficially more than one-half of one percent of the securities of an issuer together own beneficially more than five percent of the securities of that issuer. 18. Purchase securities of unseasoned issuers, including their predecessors, which have been in operation for less than three years, or equity securities of issuers which are not readily marketable if by reason thereof the value of its aggregate investment in such classes would exceed 5% of its total assets. SPECIAL INVESTMENT TECHNIQUES The Prospectus describes the portfolio's investment objective as well as certain investment policies and investment techniques which the portfolio may employ in an effort to achieve its investment objective. The following discussion supplements the section entitled "Special Investment Techniques" contained in the Prospectus. There can be no assurance that these techniques will enable the portfolio to achieve its investment objective. FORWARD FOREIGN CURRENCY TRANSACTIONS. The foreign securities held by the portfolio will usually be denominated in foreign currencies and the portfolio may temporarily hold foreign currency in connection with such investments. As a result, the value of the assets held by the portfolio may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The portfolio may enter into forward foreign currency contracts ("forward currency contracts") in an effort to control some of the uncertainties of foreign currency rate fluctuations. A forward currency contract is an agreement to purchase or sell a specific currency at a specified future date and price agreed to by the parties at the time of entering into the contract. The portfolio will not engage in foreign currency contracts in which the specified future date is more than one year from the time of entering into the contract. In addition, the portfolio will not engage in forward currency contracts for speculation, but only as an attempt to hedge against changes in foreign currency exchange rates affecting the values of securities which the portfolio holds or intends to purchase. Thus, the portfolio will not enter into a forward currency contract if such contract would obligate the portfolio to deliver an amount of foreign currency in excess of the value of the portfolio securities or other assets denominated in that currency. The portfolio may use forward currency contracts to fix the value of certain securities it has agreed to buy or sell. For example, when the portfolio enters into a contract to purchase or sell securities denominated in a particular foreign currency, the portfolio could effectively fix the maximum cost of those securities by purchasing or selling a foreign currency contract, for a fixed value of another currency, in the amount of foreign currency involved in the underlying transaction. In this way, the portfolio can protect the value of securities in the underlying transaction from an adverse change in the exchange rate between the currency of the underlying securities in the transaction and the currency denominated in the foreign currency contract, 17 58 during the period between the date the security is purchased or sold and the date on which payment is made or received. The portfolio may also use forward currency contracts to hedge the value, in U.S. dollars, of securities it currently owns. For example, if the portfolio held securities denominated in a foreign currency and anticipated a substantial decline (or increase) in the value of that currency against the U.S. dollar, the portfolio may enter into a foreign currency contract to sell (or purchase), for a fixed amount of U.S. dollars, the amount of foreign currency approximating the value of all or a portion of the securities held which are denominated in such foreign currency. Upon the maturity of a forward currency transaction, the portfolio may either accept or make delivery of the currency specified in the contract or, at any time prior to maturity, enter into a closing transaction which involves the purchase or sale of an offsetting contract. An offsetting contract terminates the portfolio's contractual obligation to deliver the foreign currency pursuant to the terms of the forward currency contract by obligating the portfolio to purchase the same amount of the foreign currency, on the same maturity date and with the same currency trader, as specified in the forward currency contract. The portfolio realizes a gain or loss as a result of entering into such an offsetting contract to the extent the exchange rate between the currencies involved moved between the time of the execution of the original forward currency contract and the offsetting contract. The use of forward currency contracts to protect the value of securities against the decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities the portfolio owns or intends to acquire, but it does fix a future rate of exchange. Although such contracts minimize the risk of loss resulting from a decline in the value of the hedged currency, they also limit the potential for gain resulting from an increase in the value of the hedged currency. The benefits of forward currency contracts to the portfolio will depend on the ability of the portfolio's investment manager to accurately predict future currency exchange rates. FOREIGN CURRENCY FUTURES. Generally foreign futures contracts will be executed on a U.S. exchange. To the extent they are not, however, engaging in such transactions will involve the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic (U.S.) exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the exchange may be liquidated by a transaction on the appropriate domestic market. Moreover, applicable laws or regulations will vary depending on the foreign country in which the foreign futures transaction occurs. Therefore, entities (such as the portfolio) which trade foreign futures contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, Commodity Futures Trading Commission ("CFTC") regulations, the rules of the National Futures Association or those of a domestic 18 59 (U.S.) exchange. In particular, monies received from customers for foreign futures transactions may not be provided the same protections as monies received in connection with transactions on U.S. futures exchanges. In addition, the price of any foreign futures and, therefore, the potential profits and loss thereon, may be affected by any variance in the foreign exchange rate between the time the order for the futures contract is placed and the time it is liquidated, offset or exercised. REPURCHASE AGREEMENTS. The portfolio may invest up to 5% of its total assets in repurchase agreements. A repurchase agreement is an instrument through which the portfolio acquires ownership of a debt security and the seller (i.e., a bank or broker-dealer) agrees, at the time of the sale, to repurchase the debt security from the portfolio at a mutually agreed upon time and price, thereby determining the yield during the portfolio's holding period. This yield may be more or less than the interest rate on the underlying security. Each repurchase agreement entered into by the portfolio will be fully collateralized by the seller (including the yield) using as collateral either U.S. government securities, bank obligations, cash or cash equivalents and will be marked-to-market daily during the entire term of the agreement. The risk to the portfolio is limited to the ability of the seller to pay the agreed upon sum on the delivery date. In the event of default, a repurchase agreement provides that the portfolio is entitled to sell the underlying collateral. The loss, if any, to the portfolio will be the difference between the proceeds from the sale and the repurchase price. However, if bankruptcy proceedings are commenced with respect to the seller of the security, disposition of the collateral by the portfolio may be delayed or limited. In order to minimize the risk, the Board of Directors of the portfolio will review and monitor the creditworthiness of broker-dealers and banks with which the portfolio enters into repurchase agreements. No more than 15% of the portfolio's net assets will be invested at any one time in repurchase agreements of more than seven days' duration and in other investments which are considered not readily marketable. REDEMPTIONS The portfolio may not suspend the right of redemption or delay payment on its shares more than seven days except (a) during any period when the New York Stock Exchange is closed (other than customary weekend and holiday closings), (b) when trading in the markets the portfolio normally utilizes is restricted, or any emergency exists as determined by the Securities and Exchange Commission so that disposal of the portfolio's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the portfolio's shareholders. A shareholder who redeems shares of the portfolio will recognize capital gain or loss for Federal income tax purposes. If a shareholder realizes a loss on the redemption of portfolio shares and reinvests in portfolio shares within 30 days before or after redemption, the transactions may be 19 60 subject to the wash sale rules resulting in a postponement of the recognition of such loss for Federal income tax purposes. DETERMINATION OF NET ASSET VALUE Net asset value per share of the portfolio will be determined as of the earlier of 3:00 p.m., Chicago time, or the close of business on the New York Stock Exchange on each day on which that Exchange is open and on each other day on which there is sufficient trading in the portfolio's investments that it might materially affect the net asset value, except that the net asset value will not be computed on a day in which no orders to purchase shares were received and no shares were tendered for redemption. The New York Stock Exchange is closed for the observance of New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The per share net asset value is determined by dividing the value of the portfolio's assets, less its liabilities, by the number of its shares outstanding. The market value of the portfolio securities is determined by valuing securities traded on national securities markets at the last sale price or, in the absence of a sale on the date of determination, at the latest bid price. Securities for which market quotations are not readily available, and all other assets, are appraised at fair value as determined in good faith by the board of directors. PERFORMANCE The portfolio's historical performance or return may be shown in the form of "average annual total return" and "total return" figures. These various measures of performance are described below. Average annual total return and total return measure both the net investment income generated by, and the effect of any realized and unrealized appreciation or depreciation of, the underlying investments of the portfolio. The average annual total return quotation is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The average annual total return for a specific period is found by first taking a hypothetical $1,000 investment ("initial investment") in the portfolio's shares on the first day of the period and computing the "redeemable value" of that investment at the end of the period. The redeemable value is then divided by the initial investment, and this quotient is taken to the nth root (n representing the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. The calculation assumes that all income dividends and capital gains distributions by the portfolio have been reinvested at the net asset value on the reinvestment dates during the period. 20 61 Calculation of total return is not subject to a standardized formula. Total return performance for a specific period is calculated by first taking an investment (assumed below to be $10,000) ("initial investment") in the portfolio's shares on the first day of the period and computing the "ending value" of that investment at the end of the period. The total return percentage is then determined by subtracting the initial investment from the ending value and dividing the remainder by the initial investment and expressing the result as a percentage. The calculation assumes that all income and capital gains dividends by the portfolio have been reinvested at net asset value on the reinvestment dates during the period. Total return may also be shown as the increased dollar value of the hypothetical investment over the period. The International Growth Fund's average total return for the fiscal year ended December 31, 1995 and the fiscal period from October 1, 1992 (initial investment of public monies) through December 31, 1995 was 7.2% and 12.1%, and for the same period the total return was 7.2% and 45.1%. The performance quotations are based upon historical results and are not necessarily representative of future performance. Returns and net asset value will fluctuate. The portfolio's performance includes general market conditions, operating expenses and investment management. Any additional fees charged by a dealer or other financial services firm would reduce the returns described in this section. Shares of the portfolio are redeemable at net asset value, which may be more or less than original cost. TAXES The International Growth Fund's options, futures, and foreign currency futures transactions are subject to special tax provisions that may accelerate or defer recognition of certain gains or losses, change the character of certain gains or losses, or alter the holding periods of certain of the portfolio's securities. The mark-to-market rules of the Internal Revenue Code (the "Code") may require the portfolio to recognize unrealized gains and losses on certain forward options and futures held by the portfolio at the end of the fiscal year. Under these provisions, 60% of any capital gain net income or loss recognized will generally be treated as long-term and 40% as short-term. However, although certain forward contracts and foreign currency futures contracts are marked-to-market, the gain or loss is generally ordinary under Section 988. In addition, the straddle rules of the Code would require deferral of certain losses realized on positions of a straddle to the extent that the portfolio had unrealized gains in offsetting positions at year end. The International Growth Fund has elected to mark-to-market its investments in passive foreign investment companies for Federal income tax purposes. Gains and losses attributable to fluctuations in the value of foreign currencies will be characterized generally as ordinary gain or loss under Section 988 of the Code. For example, if the portfolio sold a foreign bond and part of the gain or loss on the sale was attributable to 21 62 an increase or decrease in the value of a foreign currency, then the currency gain or loss may be treated as ordinary income or loss. If such transactions result in greater net ordinary income, the dividends paid by the portfolio will be increased; if the result of such transactions is lower net ordinary income, a portion of dividends paid could be classified as a return of capital. Shareholders who are non-resident aliens are subject to U.S. withholding tax on ordinary income dividends (whether received in cash or shares) at a rate of 30% or such lower rate as prescribed by an applicable tax treaty. INCOME FUND INVESTMENT RESTRICTIONS The Fund has adopted certain investment restrictions for the Income Fund ("Restrictions"). Restrictions 1 through 14 below and the portfolio's investment objectives cannot be changed without approval by holders of a majority of the outstanding voting shares of the portfolio. As defined in the Act, which term as used herein includes the rules and regulations thereunder, this means the vote of the lesser of (a) 67% of the shares of the portfolio at a meeting where more than 50% of the outstanding voting shares of the portfolio are present in person or by proxy; or (b) more than 50% of the outstanding voting shares of the portfolio. Restrictions 15 through 18 may be changed by the Fund's board of directors, all such changes being subject to applicable law. The Income Fund may not: (1) Purchase securities of any issuer (other than obligations of, or guaranteed by, the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the value of its total assets would be invested in securities of that issuer. (2) Purchase more than 10% of any class of securities of any issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States Government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. (3) Invest more than 5% of its total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation. (4) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions. (5) Write, purchase or sell puts, calls or combinations thereof. 22 63 (6) Invest for the purpose of exercising control or management of another issuer. (7) Invest in commodities or commodity futures contracts or in real estate; although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (8) Invest in interests in oil, gas or other mineral exploration or development programs; although it may invest in the securities of issuers which invest in or sponsor such programs. (9) Underwrite securities issued by others except to the extent the portfolio may be deemed to be an underwriter, under the Federal securities laws, in connection with the disposition of portfolio securities. (10) Issue senior securities as defined in the Investment Company Act of 1940. (11) Purchase common stocks, preferred stocks, warrants or other equity securities. (12) Make loans to others, except through the purchase of debt obligations or repurchase agreements or the loaning of portfolio securities not exceeding 75% of the value of its total assets. (13) Borrow money, except as a temporary measure and then only in an amount up to 5% of the value of its total assets (any such borrowing under this section will not be collateralized). The portfolio will not borrow for leverage purposes. (14) Concentrate more than 25% of the value of its total assets in any one industry. This restriction does not apply to U.S. Government securities or government agency securities, or to instruments, such as repurchase agreements, secured by these instruments. (15) Invest in interests in oil, warrants in oil, gas and mineral leases, gas or other mineral exploration or development programs; although it may invest in the securities of issuers which invest in or sponsor such programs. (16) Purchase securities of issuers which are restricted as to sale to the public without registration under the Securities Act of 1933, excluding restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933 that have been determined to be liquid by the Board of Directors, if by reason thereof the value of its aggregate investment in such securities would exceed 15% of its total assets. (17) Purchase or retain securities of any issuer if the officers, directors or trustees of the company, its advisers, or managers owning beneficially more than one-half of one percent of the securities of an issuer together own beneficially more than five percent of the securities of that issuer. 23 64 (18) Invest in real estate limited partnerships although it may invest in securities of issuers which invest or deal in real estate limited partnerships. If the above percentage restrictions are adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or total assets will not be considered a violation. INVESTMENT POLICIES AND TECHNIQUES WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The Income Fund may purchase newly issued securities on a when-issued basis and may purchase or sell portfolio securities on a delayed delivery basis. When a portfolio purchases securities on a when-issued or a delayed delivery basis, it becomes obligated to purchase the securities and it has all the rights and risks attendant to ownership of the securities, although delivery and payment occur at a later date. The portfolio will record the transaction and reflect the liability for the purchase and the value of the security in determining its net asset value. The value of fixed income securities to be delivered in the future will fluctuate as interest rates vary. The portfolio generally has the ability to close out a purchase obligation on or before the settlement date, rather than take delivery of the security. At the time the portfolio makes the commitment to sell a security on a delayed delivery basis, it will record the transaction and include the proceeds to be received in determining its net asset value; accordingly, any fluctuations in the value of the security sold pursuant to a delayed delivery commitment are ignored in calculating net asset value so long as the commitment remains in effect. Normally, settlement occurs within one month of the purchase or sale. To the extent the portfolio engages in when-issued or delayed delivery purchases, it will do so for the purpose of acquiring securities consistent with the portfolio's investment objective and policies and not for the purpose of investment leverage or to speculate on interest rate changes; but the portfolio reserves the right to sell these securities before the settlement date if deemed advisable. To the extent required to comply with Securities and Exchange Commission Release No. IC-10666, when purchasing securities on a when-issued or delayed delivery basis, the portfolio will maintain in a segregated account cash or liquid high-grade securities equal to the value of such contracts. COLLATERALIZED OBLIGATIONS MORTGAGE-BACKED SECURITIES. Collateralized obligations in which the Income Fund may invest include mortgage-backed collateralized obligations ("mortgage-backed securities"). Mortgage-backed securities are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans secured by real property. There currently are three basic types of mortgage-backed securities: (1) those issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, such as GNMA (Government National 24 65 Mortgage Association), FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation); (2) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage-backed securities without a government guarantee but that usually have some form of private credit enhancement. The yield characteristics of mortgage-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans generally may be prepaid at any time. As a result, if the portfolio purchases such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield to maturity. Conversely, if the portfolio purchases these securities at a discount, faster than expected prepayments will increase yield to maturity, while slower than expected prepayments will reduce it. Prepayments on a pool of mortgage loans are influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions. Generally, however, prepayments on fixed rate mortgage loans will increase during a period of falling interest rates and decrease during a period of rising interest rates. Accordingly, amounts available for reinvestment by the portfolio are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates than during a period of rising interest rates. Mortgage-backed securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed income securities from declining interest rates because of the risk of prepayment. GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The portfolio will invest in mortgage pass-through securities representing participation interests in pools of residential mortgage loans originated by United States Governmental or private lenders and guaranteed, to the extent provided in such securities, by the United States Government or one of its agencies or instrumentalities. Such securities, which are ownership interests in the underlying mortgage loans, differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semi-annually) and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the services of the underlying mortgage loans. The guaranteed mortgage pass-through securities in which the portfolio will invest will include those issued or guaranteed by GNMA, FNMA and FHLMC. 25 66 GNMA is a wholly-owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of and interest on certificates ("Ginnie Mae Certificates") that are based upon and backed by a pool of mortgage loans insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Administration under the Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of other eligible mortgage loans. Ginnie Mae Certificates represent a pro rata interest in one or more pools of eligible mortgage loans. The Housing Act provides that the full faith and credit of the United States Government is pledged to the payment of all amounts that may be required to be paid under any guarantee. In order to meet its obligations under such guarantee, GNMA is authorized to borrow from the United States Treasury with no limitations as to amount. FNMA is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act. FNMA was originally established in 1938 as a United States Government agency to provide supplemental liquidity to the mortgage market and was transformed into a stockholder owned and privately managed corporation by legislation enacted in 1968. FNMA provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds for additional lending. FNMA acquires funds to purchase home mortgage loans from many capital market investors that may not ordinarily invest in mortgage loans directly, thereby expanding the total amount of funds available for housing. Each Fannie Mae Certificate will entitle the registered holder thereof to receive amounts representing the holder's pro rata interest in scheduled principal payments and interest payments (at such Fannie Mae Certificate's pass-through rate, which is net of any servicing and guarantee fees on the underlying mortgage loans), and any principal prepayments, on the mortgage loans in the pool represented by such Fannie Mae Certificate and such holder's proportionate interest in the full principal amount of any foreclosed or otherwise finally liquidated mortgage loan. The full and timely payment of principal of and interest on each Fannie Mae Certificate will be guaranteed by FNMA, which guarantee is not backed by the full faith and credit of the United States Government. FNMA has limited rights to borrow from the United States Treasury. FHLMC is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended. FHLMC was established primarily for the purpose of increasing the availability of mortgage credit for the financing of needed housing. The principal activity of FHLMC currently consists of the purchase of first lien, conventional, residential mortgage loans and participation interests in such mortgage loans and the resale of the mortgage loans so purchased in the form of mortgage securities, primarily Freddie Mac Certificates. FHLMC guarantees to each registered holder of a Freddie Mac Certificate the timely payment of interest at the rate provided for by such Freddie Mac Certificate, whether or not received. FHLMC also guarantees to each holder of a Freddie Mac Certificate ultimate collection of all 26 67 principal of the related mortgage loans, without any offset or deduction, but does not always guarantee the timely payment of scheduled principal. FHLMC may remit the amount due on account of its guarantee of collection of principal at any time after default on an underlying mortgage loan, but not later than 30 days following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer, or (iii) the expiration of any right of redemption, whichever occurs later, but in any event no later than one year after demand has been made upon the mortgagor for accelerated payment of principal. The obligations of FHLMC under its guarantee are obligations solely of FHLMC and are not backed by the full faith and credit of the United States Government. FHLMC has limited rights to borrow from the United States Treasury. PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through securities ("private pass-throughs") are structured similarly to the Ginnie Mae, Fannie Mae and Freddie Mac mortgage pass-through securities described above and are issued by originators of and investors in mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. Private pass-throughs are usually backed by a pool of conventional fixed rate or adjustable rate mortgage loans. Since private pass-throughs typically are not guaranteed by an entity having the credit status of GNMA, FNMA or FHLMC, such securities generally are structured with one or more types of credit enhancement. See "Types of Credit Support," below. COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. Collateralized mortgage obligations, or, "CMOs," are debt obligations collateralized by mortgage loans or mortgage pass-through securities. Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole loans or private pass-throughs (such collateral collectively hereinafter referred to as "Mortgage Assets"). Multiclass pass-through securities are equity interests in a trust composed of Mortgage Assets. Payments of principal of and interest on the Mortgage Assets, and any reinvestment income thereon, provide the funds to pay debt service on the CMOs or make scheduled distributions on the multiclass pass-through securities. CMOs may be issued by agencies or instrumentalities of the United States Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. In a CMO, a series of bonds or certificates is issued in multiple classes. Each class of CMOs, often referred to as a "tranche," is issued at a specific fixed or floating coupon rate and has a stated maturity or final distribution date. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal of and interest on the Mortgage Assets may be allocated among the several classes of a series of a CMO in innumerable ways. In a common structure, payments of principal, including any principal prepayments, on the Mortgage Assets are applied to the classes of the series of a CMO in the order of their respective stated maturities or final distribution dates, so that no payment of principal will be made on any class of CMOs until all other classes having an earlier stated maturity or final distribution date have been paid in full. 27 68 STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities ("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by agencies or instrumentalities of the United States Government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of Mortgage Assets. A common type of SMBS will have one class receiving some of the interest and most of the principal from the Mortgage Assets, while the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will receive all the interest (the interest-only or "IO" class), while the other class will receive all the principal (the principal-only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying Mortgage Assets, and a rapid rate of principal payments may have a material adverse effect on the portfolio's yield to maturity. If the underlying Mortgage Assets experience greater than anticipated prepayments of principal, the portfolio may fail to fully recoup its initial investment in these securities. Although SMBS are purchased and sold by institutional investors through several investment banking firms acting as brokers or dealers, these securities were only recently developed and, accordingly, may have less liquidity than other securities. The portfolio will invest only in IO and PO class mortgage obligations collateralized by securities guaranteed by the United States Government. TYPES OF CREDIT SUPPORT. Mortgage-backed and asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors on underlying assets to make payments, such securities may contain elements of credit support. Such credit support falls into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default ensures ultimate payment of the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance policies or letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "overcollateralization" (where the scheduled payments on, or the principal amount of, the 28 69 underlying assets exceeds that required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based upon historical information respecting the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that anticipated could adversely affect the return on an investment in such a security. ASSET-BACKED SECURITIES. The securitization techniques used to develop mortgage-backed securities are now being applied to a broad range of assets. Through the use of trusts and special purpose corporations, various types of assets, primarily automobile and credit card receivables, are being securitized in pass-through structures similar to the mortgage pass-through structures described above or in a pay-through structure similar to the CMO structure. The portfolio may invest in these and other types of asset-backed securities that may be developed in the future. As with mortgage-backed securities, the yield characteristics of asset-backed securities differ from traditional debt securities. As with mortgage-backed securities, asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties and use similar credit enhancement techniques. See "Mortgage-Backed Securities," above. In general, however, the collateral supporting asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. Although certain of the factors that affect the rate of prepayments on mortgage-backed securities also affect the rate of prepayments on asset-backed securities, during any particular period, the predominant factors affecting prepayment rates on mortgage-backed securities and asset-backed securities may be different. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicers were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. 29 70 REDEMPTIONS The portfolio may suspend the right of redemption or delay payment on shares of the portfolio more than seven days (a) during any period when the New York Stock Exchange is closed for trading (other than customary weekend and holiday closings), (b) when trading in the markets the portfolio normally utilizes is restricted, or an emergency exists as determined by the Securities and Exchange Commission so that disposal of the portfolio's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the portfolio's shareholders. Although it is the portfolio's present policy to redeem portfolio shares in cash, if the Board of Directors determines that a material adverse effect would be experienced by the remaining shareholders if payment of large redemptions were made wholly in cash, the portfolio will pay the redemption price in whole or in part by a distribution of portfolio instruments in lieu of cash, in conformity with the applicable rules of the Securities and Exchange Commission, taking such instruments at the same value used to determine net asset value and selecting the instruments in such manner as the Board of Directors may deem fair and equitable. If such a distribution occurs, shareholders receiving instruments and selling them before their maturity could receive less than the redemption value of such instruments and could also incur transaction costs. The portfolio has elected to be governed by Rule 18f-1 under the Act pursuant to which the portfolio is obligated to redeem shares of the portfolio solely in cash up to the lesser of $250,000 or 1% of the net asset value of the portfolio during any 90-day period for any one shareholder of record. DETERMINATION OF NET ASSET VALUE Net asset values of the portfolio will not be calculated on national holidays when the New York banks are closed, which include the observance of New Year's Day, Martin Luther King, Jr.'s Birthday, President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day, or on Good Friday. PERFORMANCE The Income Fund's historical performance or return may be shown in the form of "average annual total return," "total return" and "yield" figures. These various measures of performance are described below. The Adviser has voluntarily waived certain advisory management fees for the fiscal year 1991 and to the extent described under "Management of the Fund-Expenses." Without this waiver, the performance results noted herein would have been lower. Average annual total return and total return measure both the net investment income generated by, and the effect of any realized and unrealized appreciation or depreciation of, the underlying 30 71 investments of the portfolio. Yield is a measure of the net investment income per share earned over a specific one month or 30-day period expressed as a percentage of the net asset value. The portfolio's average annual total return quotation is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The average annual total return for a specific period is found by first taking a hypothetical $1,000 investment ("initial investment") in the portfolio's shares on the first day of the period and computing the "redeemable value" of that investment at the end of the period. The redeemable value is then divided by the initial investment, and this quotient is taken to the Nth root (N representing the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. The calculation assumes that all income dividends and capital gains distributions by the portfolio have been reinvested at the net asset value on the reinvestment dates during the period. Calculation of the portfolio's total return is not subject to a standardized formula. Total return performance for a specific period is calculated by first taking an investment (assumed below to be $10,000) ("initial investment") in the portfolio's shares on the first day of the period and computing the "ending value" of that investment at the end of the period. The total return percentage is then determined by subtracting the initial investment from the ending value and dividing the remainder by the initial investment and expressing the result as a percentage. The calculation assumes that all income and capital gains dividends by the portfolio have been reinvested at net asset value on the reinvestment dates during the period. Total return may also be shown as the increased dollar value of the hypothetical investment over the period. The Income Fund's average annual total return for the one- and five-year periods ended December 31, 1995 was 14.4% and 8.84%, respectively, and for the same periods the total return was 14.4% and 52.8%, respectively. The portfolio's yield for the 30 days ended December 31, 1995 was 5.89%. The yield for the portfolio is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The yield is computed by dividing the net investment income per share earned during the specific one month or 30-day period by the offering price per share on the last day of the period, according to the following formula: YIELD = 2[(((a-b)/cd)+1)6 - 1] Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period entitled to receive dividends. d = the offering price (net asset value) per share on the last day of the period.
31 72 In computing the foregoing yield, the portfolio follows certain standardized accounting practices specified by Securities and Exchange Commission rules. These practices are not necessarily consistent with those that the portfolio uses to prepare its annual and interim financial statements in accordance with generally accepted accounting principles. The portfolio's performance quotations are based upon historical results and are not necessarily representative of future performance. Returns and net asset value will fluctuate. The portfolio's performance includes general market conditions, operating expenses and investment management. Any additional fees charged by a dealer or other financial services firm would reduce the returns described in this section. Shares of the portfolio are redeemable at net asset value, which may be more or less than original cost. From time to time the portfolio may compare its performance with that of indices, such as the Consumer Price Index, the Shearson Lehman Intermediate Government/Corporate Bond Index, and the Merrill Lynch Intermediate Term Corporate & Government Bond index. Please note the differences and similarities between the investments which the portfolio may purchase and the investments measured by the applicable indices. The Consumer Price Index is generally considered to be a measure of inflation. The Shearson Lehman Government/Corporate Intermediate Bond Index and the Merrill Lynch Intermediate Term Corporate & Government Bond index generally represent the performance of intermediate government and investment grade corporate debt securities under various market conditions. The foregoing bond indices are unmanaged. No adjustment has been made for taxes payable on interest or dividends. DIVIDENDS The Income Fund normally distributes monthly dividends of net investment income and net realized short-term capital gains, and it distributes any net realized long-term capital gains in December and/or January. The portfolio may from time to time either distribute or retain for reinvestment such of its net investment income and its net short-term and long-term capital gains or make a return of capital distribution as the portfolio determines appropriate in order to maintain relatively level monthly dividends. The portfolio may vary the foregoing dividend practices from time to time. For example, the portfolio may make additional distributions of net investment income or capital gains to satisfy the minimum distribution requirements contained in the Internal Revenue Code (the "Code"). Shareholders will receive dividends and distributions in additional shares of the portfolio unless they elect in writing to receive cash. Generally, dividends will be reinvested monthly at net asset value on the 15th day of each month if a business day, otherwise on the next business day. If a cash payment is requested, a check will be sent shortly following the reinvestment date. Each shareholder will receive a confirmation of dividends and purchase and redemption transactions. 32 73 READY RESERVES FUND INVESTMENT RESTRICTIONS The Fund has adopted certain investment restrictions for the Ready Reserves Fund ("Restrictions"). Restrictions 1 through 15 below and the portfolio's investment objectives cannot be changed without approval by holders of a majority of the outstanding voting shares of the portfolio. As defined in the Act, which term as used herein includes the rules and regulations thereunder, this means the vote of the lesser of (a) 67% of the shares of the portfolio at a meeting where more than 50% of the outstanding voting shares of the portfolio are present in person or by proxy; or (b) more than 50% of the outstanding voting shares of the portfolio. Restrictions 16 through 18 may be changed by the fund's board of directors, all such changes being subject to applicable law. The Ready Reserves Fund may not: (1) Purchase securities of any issuer (other than obligations of, or guaranteed by, the United States Government, its agencies or instrumentalities) if, as a result, more than 5% of the value of its total assets would be invested in securities of that issuer. (2) Purchase more than 10% of any class of securities of any issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States Government, its agencies or instrumentalities. All debt securities and all preferred stocks are each considered as one class. (3) Invest more than 5% of its total assets in securities of issuers which with their predecessors have a record of less than three years continuous operation. (4) Make short sales of securities, or purchase any securities on margin except to obtain such short-term credits as may be necessary for the clearance of transactions. (5) Write, purchase or sell puts, calls or combinations thereof. (6) Invest for the purpose of exercising control or management of another issuer. (7) Invest in commodities or commodity futures contracts or in real estate, although it may invest in securities which are secured by real estate and securities of issuers which invest or deal in real estate. (8) Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. 33 74 (9) Underwrite securities issued by others except to the extent the portfolio may be deemed to be an underwriter, under the Federal securities laws, in connection with the disposition of portfolio securities. (10) Issue senior securities as defined in the Investment Company Act of 1940. (11) Make loans to others (except through the purchase of debt obligations or repurchase agreements in accordance with its investment objective and policies). (12) Borrow money except as a temporary measure for extraordinary or emergency purposes and then only in an amount up to 5% of the value of its total assets (any such borrowing under this section will not be collateralized). The portfolio will not borrow for leverage purposes. (13) Concentrate more than 25% of the value of its total assets in any one industry; provided, however, that the portfolio reserves freedom of action to invest up to 100% of its total assets in certificates of deposit, time deposits or bankers' acceptances or repurchase agreements with domestic branches of domestic banks when management considers it to be in the interests of the portfolio in attaining its investment objective. (14) Invest in securities restricted as to disposition under the Federal securities laws (except commercial paper issued under Section 4(2) of the Securities Act of 1933). (15) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. (16) Invest in interests in oil, warrants in oil, gas and mineral leases, gas or other mineral exploration or development programs, although it may invest in the securities of issuers which invest in or sponsor such programs. (17) Invest in real estate limited partnerships, although it may invest in securities of issuers which invest or deal in real estate limited partnerships. (18) Purchase or retain securities of any issuer if the officers, directors or trustees of the company, its advisers, or managers owning beneficially more than one-half of one percent of the securities of an issuer together own beneficially more than five percent of the securities of that issuer. The Ready Reserves Fund has no present intention of concentrating more than 25% of the value of its total assets in securities issued by banks pursuant to investment restriction (13). If the above percentage restrictions are adhered to at the time of investment, a later increase or decrease in percentage beyond the specified limit resulting from a change in values or total assets will not be considered a violation. 34 75 INVESTMENT POLICIES AND TECHNIQUES WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The Ready Reserves Fund, to the extent of up to 5% of its total assets, may purchase newly issued securities on a when-issued basis and may purchase or sell portfolio securities on a delayed delivery basis. When a portfolio purchases securities on a when-issued or a delayed delivery basis, it becomes obligated to purchase the securities and it has all the rights and risks attendant to ownership of the securities; although delivery and payment occur at a later date. The portfolio will record the transaction and reflect the liability for the purchase and the value of the security in determining its net asset value. The value of fixed income securities to be delivered in the future will fluctuate as interest rates vary. The portfolio generally has the ability to close out a purchase obligation on or before the settlement date, rather than take delivery of the security. At the time the portfolio makes the commitment to sell a security on a delayed delivery basis, it will record the transaction and include the proceeds to be received in determining its net asset value; accordingly, any fluctuations in the value of the security sold pursuant to a delayed delivery commitment are ignored in calculating net asset value so long as the commitment remains in effect. Normally, settlement occurs within one month of the purchase or sale. To the extent the portfolio engages in when-issued or delayed delivery purchases, it will do so for the purpose of acquiring securities consistent with the portfolio's investment objective and policies and not for the purpose of investment leverage or to speculate on interest rate changes; but the portfolio reserves the right to sell these securities before the settlement date if deemed advisable. To the extent required to comply with Securities and Exchange Commission Release No. IC-10666, when purchasing securities on a when-issued or delayed delivery basis, the portfolio will maintain in a segregated account cash or liquid high-grade securities equal to the value of such contracts. REDEMPTIONS The portfolio may suspend the right of redemption or delay payment more than seven days (a) during any period when the New York Stock Exchange is closed for trading (other than customary weekend and holiday closings), (b) when trading in the markets the portfolio normally utilizes is restricted, or an emergency exists as determined by the Securities and Exchange Commission so that disposal of the portfolio's investments or determination of its net asset value is not reasonably practicable, or (c) for such other periods as the Securities and Exchange Commission by order may permit for protection of the portfolio's shareholders. Although it is the portfolio's present policy to redeem in cash, if the Board of Directors determines that a material adverse effect would be experienced by the remaining shareholders if payment of large redemptions were made wholly in cash, the portfolio will pay the redemption price in whole or in part by a distribution of portfolio instruments in lieu of cash, in conformity 35 76 with the applicable rules of the Securities and Exchange Commission, taking such instruments at the same value used to determine net asset value and selecting the instruments in such manner as the Board of Directors may deem fair and equitable. If such a distribution occurs, shareholders receiving instruments and selling them before their maturity could receive less than the redemption value of such instruments and could also incur transaction costs. The portfolio has elected to be governed by Rule 18f-1 under the Act pursuant to which the portfolio is obligated to redeem shares of the portfolio solely in cash up to the lesser of $250,000 or 1% of the net asset value of the portfolio during any 90-day period for any one shareholder of record. NET ASSET VALUE As described in the Prospectus, the portfolio securities of the Ready Reserves Fund are valued at amortized cost; which means that they are valued at their acquisition cost, as adjusted for amortization of premium or discount, rather than at current market value. Calculations are made to compare the value of the portfolio's securities valued at amortized cost with market values. Market valuations are obtained by using actual quotations provided by market makers, estimates of market value, or values obtained from yield data relating to classes of money market securities published by reputable sources at the bid price for the securities. If a deviation of 1/2 of 1% or more were to occur between the net asset value per share calculated by reference to market value and the portfolio's $1.00 per share net asset value, or if there were any other deviation that the Board of Directors of the Fund believed would result in a material dilution to shareholders or purchasers, the Board of Directors would promptly consider what action, if any, should be initiated. If the portfolio's net asset value per share (computed using market values) were to decline, or were expected to decline, below $1.00 (computed using amortized cost), the Board of Directors of the Fund might temporarily reduce or suspend dividend payments in an effort to maintain the net asset value at $1.00 per share. As a result of such reduction or suspension of dividends, an investor would receive less income during a given period than if such a reduction or suspension had not taken place. Such action could result in an investor receiving no dividend for the period during which the investor holds shares, and the investor might also receive, upon redemption, a price per share lower than that which was paid. On the other hand, if the portfolio's net asset value per share (computed using market values) were to increase, or were anticipated to increase, above $1.00 (computed using amortized cost), the Board of Directors of the Fund might supplement dividends in an effort to maintain the net asset value at $1.00 per share. The portfolio has never had a deviation of 1/2 of 1% or more and, therefore, no Board actions of the type described above have been taken. In order to use the amortized cost method of valuation, the portfolio is limited to investing in instruments which the Board of Directors has determined present minimal credit risks and which are determined to be within certain rating categories by a nationally recognized statistical rating organization. Net asset values of the portfolio will not be calculated on national holidays when the New York banks are closed, which include the observance of New Year's Day, Martin Luther King, Jr.'s Birthday, President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day or on Good Friday. 36 77 PERFORMANCE The Ready Reserves Fund's yield quotations as they may appear in advertising and sales materials are calculated by a standard method prescribed by rules of the Securities and Exchange Commission. Under that method, the current yield quotation is annualized based on a seven-day period and computed as follows: the portfolio's net investment income per share (accrued interest on portfolio securities, plus or minus amortized purchase discount or premium, less accrued expenses) is divided by the price per share (expected to remain constant at $1.00) during the period ("base period return") and the result is divided by 7 and multiplied by 365 and the current yield figure carried to the nearest one-hundredth of one percent. Realized capital gains or losses and unrealized appreciation or depreciation of investments are not included in the calculation. The effective yield is determined by taking the base period return and calculating the effect of assumed compounding. The formula for the effective yield is [(base period return +1) raised to the 365/7 power] - 1. The Ready Reserves Fund's current yield for the seven days ended December 31, 1995 was 5.08%. The Ready Reserves Fund's effective yield for that same period was 5.21%. The Ready Reserves Fund's yield fluctuates, and the publication of an annualized yield quotation is not a representation as to what an investment in the portfolio will actually yield for any given future period. Actual yields will depend not only on changes in interest rates on money market instruments during the period the investment in the portfolio is held, but also on such matters as any realized gains and losses and changes in portfolio expenses. DIVIDENDS On each day when the Fund is open for business, the Ready Reserves Fund portfolio's net investment income will be declared at 3:00 p.m., Chicago time, as a daily dividend to shareholders already of record prior to the declaration. Shareholders will receive dividends in additional shares of the portfolio unless they elect to receive cash. Dividends will be reinvested monthly at net asset value on the 15th day of each month if a business day, otherwise on the next business day. If a cash payment is requested, a check will be sent on the business day following the reinvestment date. When an entire account is redeemed, all dividends accrued but unpaid to the time of redemption will be sent to the Shareholder within five business days. The portfolio may at any time vary the foregoing practices and, therefore, reserves the right from time to time either to distribute or retain for reinvestment such of its net investment income and its short-term and long-term capital gains as the Board of Directors of the Fund determines appropriate under then current circumstances. The portfolio calculates its dividends based on its daily net investment income. For this purpose, the net investment income of the portfolio consists of (1) accrued interest income plus or minus amortized purchase discount or premium, (2) plus or minus all short-term realized 37 78 gains and losses on portfolio securities and (3) minus accrued expenses. Expenses of the portfolio are accrued each day. So long as the portfolio's investments are valued at amortized cost, there will be no unrealized gains or losses on portfolio securities. However, should the net asset value of the portfolio deviate significantly from market value, the Board of Directors could decide to value the portfolio securities at market value, in which event unrealized gains and losses would be included in net investment income. All shareholders will receive monthly statements reporting dividends and purchases and redemption transactions of the portfolio. GENERAL FUND INFORMATION INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS The Fund's independent auditors are Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606, who audit and report upon the Fund's annual financial statements, review certain regulatory reports and the Fund's Federal tax returns, and perform other professional accounting, auditing, tax and advisory services when engaged to do so by the Fund. Shareholders will receive annual audited financial statements and semi-annual unaudited financial statements. CUSTODIAN AND SHAREHOLDER SERVICES Investors Bank and Trust Company ("Investors Bank"), 89 South Street, Boston, Massachusetts 02111, as custodian, has custody of all securities and cash of the Fund; and it attends to the collection of principal and income, and payment for and collection of proceeds of securities bought and sold by the Fund. Boston Financial Data Services, Inc. ("BFDS"), Two Heritage Drive, Quincy, Massachusetts 02171, is the Fund's transfer agent and dividend-paying agent. State Street Bank, as the shareholder service agent, provides certain bookkeeping, data processing and administrative services pertaining to the maintenance of shareholder accounts. RETIREMENT PLANS The Fund offers a variety of retirement investment programs whereby contributions are invested in shares of the portfolio, and any income dividends (and capital gain distributions, if any) are reinvested in additional full and fractional shares of the portfolio. 38 79 INDIVIDUAL RETIREMENT ACCOUNTS The Fund has available Individual Retirement Accounts (IRAs) under IRS approved prototypes. IRA contributions are fully deductible only to (1) taxpayers who are not active participants in an employer-sponsored retirement plan and (2) taxpayers who are active participants in an employer-sponsored plan but who have adjusted gross income below a specified level. For these purposes, a taxpayer will be deemed to be an active participant in an employer-sponsored retirement plan if for any part of the plan year either he or his spouse is an active participant under a qualified pension plan, a qualified profit sharing or money purchase plan, a 403(a) annuity plan, a 403(b) annuity program, a Simplified Employee Pension plan or a government plan (other than a plan maintained for state and local employees under Section 457 of the Internal Revenue Code). Married taxpayers filing a joint return who are active participants in an employer-sponsored plan may make a tax deductible IRA contribution up to $2,000 ($2,250 spousal) if their adjusted gross income ("AGI") is $40,000 or less. Between AGI of $40,000 to $50,000 the IRA deduction is gradually phased-out. For single taxpayers who are active participants in an employer-sponsored plan, the $2,000 deductible IRA contribution is similarly phased-out between $25,000 and $35,000 of adjusted gross income. To the extent that the IRA deduction is reduced or eliminated by the phase-out rule, an individual may elect to make nondeductible IRA contributions which, when combined with any deductible contributions, may not exceed $2,000 ($2,250 for a spousal IRA). The income on the IRA contribution will not be taxed until withdrawn. Under the Internal Revenue Code, an investor has at least seven days in which to revoke an IRA after receiving certain explanatory information about the plan. Individuals who have received distributions from certain qualified plans may roll over all or part of such distributions into an IRA and defer taxes on the distributions and shelter investment earnings. SIMPLIFIED EMPLOYEE PENSION An employer may establish a Simplified Employee Pension (SEP) Plan under which the employer makes contributions to all eligible employees' IRAs. A portfolio's shares may be used for this purpose. QUALIFIED RETIREMENT PLANS A corporation, partnership or sole proprietorship may establish qualified money purchase pension and profit sharing plans, and contribute for each participant up to the lesser of 25% of each participant's compensation (20% of gross compensation for self-employed persons) or $30,000. Such contributions may be made by the employer and, if certain conditions are met, participants may also make nondeductible voluntary contributions. Prototype forms of an IRA and qualified retirement plans and a form of SEP, and additional information concerning such plans, are available from the Fund. State Street Bank may act as a custodian for the Fund's IRA and certain qualified retirement plans. State Street Bank charges 39 80 a $5 plan establishment fee. There is also an annual $15 custodial fee and a $10 fee for each lump sum distribution from a plan. These fees may be waived under certain circumstances. Consultation with a professional tax adviser is recommended both because of the complexity of Federal tax law and because various tax penalties are imposed for excess contributions to, and late or premature distributions from, IRAs or qualified retirement plans. Termination of a plan shortly after its adoption may have adverse tax consequences. SHAREHOLDER RIGHTS The Fund generally is not required to hold meetings of its shareholders. However, shareholder meetings will be held in connection with the following matters: (1) the election or removal of directors, if a meeting is called for such purpose; (2) the adoption of any contract for which shareholder approval is required by the Act; (3) any termination of the Fund; (4) any amendment of the Articles of Incorporation; and (5) such additional matters as may be required by law, the Articles of Incorporation, the By-laws of the Fund, or any registration of the Fund with the Securities and Exchange Commission or any state, or as the directors may consider necessary or desirable. The shareholders also would vote upon changes in fundamental investment objectives, policies or restrictions. Each director serves until the next meeting of shareholders, if any, called for the purpose of electing directors and until the election and qualification of his successor or until such director sooner dies, resigns, retires or is removed by a majority vote of the shares entitled to vote (as described below) or a majority of the directors. In accordance with the Act (i) the Fund will hold a shareholder meeting for the election of directors at such time as less than a majority of the directors has been elected by shareholders, and (ii) if, as a result of a vacancy in the Board of Directors, less than two-thirds of the directors have been elected by the shareholders, that vacancy will be filled only by a vote of the shareholders. All shares have equal voting rights and may be voted in the election of directors and upon other matters submitted to a vote of the shareholders. Shares of all portfolios will be voted in the aggregate unless the Act requires them to be voted separately. The shares do not have cumulative voting rights, which means that the holders of a majority of the shares, voting together for the election of directors, can elect all the directors. The Fund will hold meetings of shareholders when requested to do so in writing by one or more shareholders who collectively hold at least 10% of the shares entitled to vote or when so determined by the Board of Directors in their discretion. At such a meeting, a director may be removed from office by a vote of the holders of a majority of the outstanding shares entitled to vote. Upon the written request of ten or more shareholders who have been such for at least six months and who hold shares constituting the lesser of 1% of the outstanding shares or $25,000, stating that such shareholders wish to communicate with the other shareholders for the purpose of obtaining signatures necessary to demand a meeting to consider removal of a director, the Fund has undertaken either to disseminate appropriate materials (at the expense of the requesting shareholders) or to provide such shareholders access to a list of names and addresses of all shareholders of record. 40 81 FUND HISTORY The Fund was organized as a Maryland corporation on September 22, 1987 under the name of William Blair Ready Reserves, Inc. On April 30, 1991 a reorganization of the Fund and Growth Industry Shares, Inc., a Maryland corporation, was adopted such that Growth Industry Shares, Inc. was reorganized into a separate portfolio of the Fund, now the Growth Fund portfolio, and the Fund changed its name to William Blair Mutual Funds, Inc. On February 13, 1996, the Fund's Board of Directors determined that it was in the best interests of the Fund's shareholders to terminate the Limited Term Tax-Free Fund; and it was terminated on [April 24, 1996]. While shares of only four portfolios are presently being offered, the Board of Directors of the Fund may establish additional portfolios, with different investment objectives, policies and restrictions, in the future. FINANCIAL INFORMATION OF THE FUND The Fund's audited financial statements, including the notes thereto, contained in the Fund's annual reports to shareholders (for the Growth Fund, International Growth Fund, Income Fund and Ready Reserves Fund) for the year ended December 31, 1995, are incorporated herein by reference. Additional copies of the reports to shareholders may be obtained without charge by writing or calling the Fund. 41 82 APPENDIX A ________________________________________________________________________________ DESCRIPTION OF MONEY MARKET INSTRUMENTS The following information includes a description of certain money market instruments in which the Ready Reserves Fund portfolio may invest to the extent consistent with its investment objective. UNITED STATES GOVERNMENT SECURITIES These include marketable securities issued by the United States Treasury, which consist of bills, notes and bonds. Such securities are direct obligations of the United States government and are backed by the full faith and credit of the United States. They differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES These include debt securities issued by government-sponsored enterprises, federal agencies or instrumentalities and international institutions. Such securities are not direct obligations of the U.S. Treasury but involve some government sponsorship or guarantees. Different instruments have different degrees of government backing. For example, securities issued by the Federal National Mortgage Association are supported by the agency's right to borrow money from the U.S. Treasury under certain circumstances. Securities issued by the Student Loan Marketing Association are supported only by the credit of the agency that issued them. Thus, the Fund may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. SHORT-TERM CORPORATE DEBT INSTRUMENTS These include commercial paper (including variable amount master demand notes), which refers to short-term unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. In addition, some short-term paper, which can have a maturity exceeding nine months, is issued in reliance on the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). The Ready Reserves Fund portfolio may invest in Section 4(2) paper with maturities of twelve months or less. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and generally is sold to institutional investors such as the Fund who agree that they are purchasing the paper for investment and not with a view to public distribution. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. A-1 83 Because variable amount master demand notes are direct lending arrangements between the lender and the borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis in accordance with a stated short-term interest rate benchmark. Since the interest rate of a variable amount master demand note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Fund values such a note in accordance with the amortized cost basis at the outstanding principal amount of the note. Also included are nonconvertible corporate debt securities (e.g., bonds and debentures) with no more than one year remaining to maturity at the date of settlement. Corporate debt securities with a remaining maturity of less than one year tend to become quite liquid, have considerably less market value fluctuations than longer term issues and are traded as money market securities. BANK MONEY INSTRUMENTS These include instruments such as certificates of deposit, time deposits and bankers' acceptances. Certificates of deposit are generally short-term, interest-bearing negotiable certificates issued by commercial banks or savings and loan associations against funds deposited in the issuing institution. A time deposit is a non-negotiable deposit in a banking institution earning a specified interest rate over a given period of time. A banker's acceptance is a time draft drawn on a commercial bank by a borrower usually in connection with an international commercial transaction (to finance the import, export, transfer or storage of goods). The borrower is liable for payment as well as the bank, which unconditionally guarantees to pay the draft at its face amount on the maturity date. Most acceptances have maturities of six months or less and are traded in secondary markets prior to maturity. REPURCHASE AGREEMENTS A repurchase agreement is an instrument under which the purchaser (e.g., a mutual fund) acquires ownership of an obligation (debt security) and the seller agrees, at the time of the sale, to repurchase the obligation at a mutually agreed upon time and price, thereby determining the yield during the purchaser's holding period. This results in a fixed rate of return insulated from market fluctuations during such period. The underlying securities will consist only of U.S. Government or government agency or instrumentality securities. Repurchase agreements usually are for short periods, typically less than one week. Repurchase agreements are considered to be loans under the 1940 Act, with the security subject to repurchase, in effect, serving as "collateral" for the loan. The Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of a default by the seller because of bankruptcy or otherwise, the Fund may suffer time delays and incur costs or losses in connection with the disposition of the collateral. A-2 84 APPENDIX B ________________________________________________________________________________ SHORT-TERM RATINGS (COMMERCIAL PAPER) DUFF & PHELPS INC. Duff & Phelps Inc. rating system for "Top Grade" commercial paper incorporates three gradations to recognize quality differences within its highest grade. Lower grades (Duff - 2 and Duff - 3) do not distinguish between such quality differences within the grade. Category 1: Top Grade Duff 1 plus: Highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or ready access to alternative sources of funds, is clearly outstanding and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1: Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff 1 minus: High certainty of timely payment. Liquidity factors are strong and supported by fundamental protection factors. Risk factors are very small. Category 2: Good Grade Duff 2: Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing internal funds needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. FITCH INVESTORS SERVICE, INC. Fitch Investors Service, Inc. commercial paper ratings are grouped into four categories: Fitch-1 (Strong Credit Quality); Fitch-2 (Good Credit Quality); Fitch-3 (Fair Credit Quality); and Fitch-4 (Weak Credit Quality). Fitch-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. Fitch-1 (Very Strong Credit Quality) Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated F-1+. B-1 85 Fitch-2 (Good Credit Quality) Issues carrying this rating have a satisfactory degree of assurance for timely payments, but the margin of safety is not as great as the F-1+ and F-1 categories. MOODY'S INVESTORS SERVICE, INC. The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings assigned by Moody's Investors Service, Inc. Among the factors considered by it in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Relative strength or weakness of the above factors determines whether the issuer's commercial paper is rated Prime-1, 2 or 3. STANDARD & POOR'S CORPORATION The ratings A-1+, A-1 and A-2 are the three highest commercial paper ratings assigned by Standard & Poor's Corporation. Commercial paper so rated by Standard & Poor's Corporation has the following characteristics. Liquidity ratios are adequate to meet cash requirements. Long-term senior debt is rated "A" or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow have an upward trend with allowance made for unusual circumstances. Typically, the issuer's industry is well established and the issuer has a strong position within the industry. The reliability and quality of management are unquestioned. Relative strength or weakness of the above factors determine whether the issuer's commercial paper is rated A-1+, A-1, A-2 or A-3. LONG-TERM RATINGS (BONDS) DUFF & PHELPS INC. BOND RATINGS
General Category Rating - -------- ------ Triple A 1 Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. Double A High credit quality. Protection factors are strong. High 2 Risk is modest but may vary slightly from time to Middle 3 time because of economic conditions. Low 4
B-2 86 Single A Protection factors are average but adequate. High 5 However, risk factors are more variable and greater Medium 6 in periods of economic stress. Low 7
FITCH INVESTORS SERVICE INC. BOND RATINGS AAA Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated F-1+. A Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. PLUS (+) OR MINUS (-): The ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. MOODY'S INVESTORS SERVICE, INC. BOND RATINGS Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future. B-3 87 NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in its generic rating classification in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. STANDARD & POOR'S CORPORATION BOND RATINGS AAA This is the highest rating assigned by Standard & Poor's Corporation to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong, and in the majority of instances they differ from AAA issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. B-4 88 February 2, 1996 Dear Shareholders: 1995 WAS GREAT.
INTERNATIONAL LIMITED TERM READY GROWTH INCOME TAX-FREE RESERVES William Blair Funds: GROWTH FUND FUND FUND FUND FUND ----------------------- ------------- --------- --------------- -------- 1995................. 29.1% 7.2% 14.4% 10.0% 5.5% 1994................. 6.5% (0.04%) (0.7%) (1.6%)* 3.7%
LEHMAN LIPPER INTERMED. MERRILL LYNCH T-BILLS Benchmarks: S&P 500 RUSSELL 2000 INTERNATIONAL BOND INTERMED. MUNI. (90 DAY) ------- ------------ ------------- --------- --------------- -------- 1995................. 37.5% 28.4% 9.3% 15.3% 10.6% 5.2% 1994................. 1.3% (1.8%) (0.9%) (1.9%) (2.7%) 3.7%
- --------------- * Inception date 1/24/94. At the beginning of the year, investors did not have high expectations for 1995. The prior year had been difficult. Interest rates rose dramatically, and the stock market struggled all year. While the larger company S&P 500 Index rose slightly, almost all of the mid/smaller company indices declined. A "wall of worry" set the stage for positive surprises, and there were many. Inflation did not rise at all and, as a result, interest rates declined substantially. Corporate earnings were good (up an estimated 17%), driven by both increased productivity and lower cost orientation that has spread across all sectors of the economy. Even political/government developments held some promise of less drag (regulation and taxes) on the economy. All in all, 1995 was a banner year. Unfortunately we can not expect things to get much better. Corporate earnings will likely be up less than 10% in 1996. Additional significant interest rate declines (to under 5%), while good for bonds, would only be the result of economic weakness, causing corporate earnings disappointments and leading to a difficult stock market. Unlike 1995 when all financial assets performed well, we are not likely to have both stocks and bonds moving up together. However we see no major signs, other than a "technology" euphoria that is now abating, that the stock market has a significant problem. By "significant" we mean more than the normal 10% correction which one should always expect could happen at any time. In 1994 and 1995, interest rate movements had a major impact on investment returns. 1996 is likely to be much more stable. At least in the near term we see little upward rate pressure. While the Fed is likely to ease a little more, we don't think the economy is slipping into a recession which would force significant action. We expect modest 4-7% returns for fixed-income securities. Although absolute returns for the Growth Fund were excellent, and it is difficult to be too disappointed with a near 30% return, we did underperform the S&P 500. We deliberately did not 89 shift into the kind of technology stocks that were the top performers, fearing that they will have a hard landing in the not-too-distant future (which actually may already be upon us). Compared to the U.S., International markets had a more subdued year, with Japan essentially flat and many of the emerging markets with negative returns. Smaller company stocks underperformed worldwide in 1995. The International Growth Fund lagged on a relative basis because of our strategic bias towards faster growing, somewhat smaller companies in Europe and Japan and our 10% exposure to emerging markets. Both our equity funds remain well positioned for the long-term and we look for better relative performance in 1996. Our fixed-income and short-term reserve funds had predictably good years with solid returns. Despite good performance, the growth in assets for the bond funds has been almost non-existent, especially in the Limited Term Tax-Free Fund. Talk in Washington of a flat tax, with no income tax on any interest income regardless of source, has caused tax-exempt bond's performance to lag, and their yields relative to taxable bonds are now more attractive than any time in almost ten years. We are looking forward to serving your investment needs throughout the coming year. Rocky Barber President 2 90 February 2, 1996 Dear Shareholders: The U.S. financial markets enjoyed an extraordinary advance in 1995. A powerful combination of strong corporate profit growth and lower interest rates drove stocks to record levels. Despite a backdrop of moderating economic growth during the year, corporate profits increased an estimated 17% as profit margins benefitted from productivity gains and other factors. As a result, quarterly earnings reports generally exceeded consensus Wall Street expectations and drove analysts' profit forecasts upward through most of the year. More surprising, however, was the sharp decline in interest rates where long term Treasury yields declined to the 6% level by year end versus consensus expectations of over 8% a year ago. In a nutshell, the positive trends for both earnings and interest rates against a rather pessimistic forecast a year ago was the near ideal environment for upside surprise and return. A closer analysis of the stock market in 1995 reveals that small cap stock returns trailed behind large cap stocks for the second consecutive year.
1995 1994 ---- ---- WILLIAM BLAIR GROWTH FUND 29.1% 6.5% S & P 500 37.5 1.3 Russell 2000 28.4 -1.8 Lipper Growth 31.5 -1.6
The Russell 2000 Index of smaller companies gained ONLY 28% compared with the 38% return for the S&P 500 index. In addition to the aforementioned productivity gains, many large company earnings results were enhanced by corporate restructuring, cost reduction programs and foreign currency gains from overseas subsidiaries. As a result earning increases have been very strong and profit margins are at record levels. However, many of these factors are non-recurring, and will not drive sustainable growth. We expect the historically faster growth rates of smaller company stocks to become more evident in 1996. Consensus expectations for growth in S&P 500 earnings in 1996 are less than 10%, which is well below the growth rate seen in the past two years. With this in mind, the relative valuation of smaller company stocks currently stands near the midpoint of historic ranges and supports a more positive view towards future performance. Technology was the strongest performing sector in the market by a relatively wide margin with gains of about 45% versus about 33% for the rest of the market. Our investment philosophy has a strong bias towards business franchises that we believe have above average predictability and consistency to their financial results. For that reason we have historically had less emphasis on the more volatile, pure technology product companies and 1995 was no exception. We prefer to own applied technology companies which sell products or services based on new technological advancements available in the market or which use them to lower their costs or improve their productivity. This past year was difficult for us in that small and large cap portfolios alike were strongly rewarded for taking more risk than we prefer. We strive to outperform by focusing on high quality companies with excellent growth prospects, yet below average business volatility. Our superior long term performance supports this approach. On the other hand, a concentrated sector oriented strategy, especially one tilted towards technology, would clearly not be consistent with our philosophy. 3 91 Looking ahead to 1996, we see a much more modest, but still positive, return environment. Interest rates are still somewhat high in real (inflation adjusted) terms and should not be trending higher. The political climate is unclear, but, generally moving in the right direction (balanced budget amendment, lower capital gains taxes, less regulation) and the aging baby boomers are just beginning to realize the necessity of saving and investing for their longer term needs. Offsetting these positive forces are the slowing rate of earnings growth and a strapped U.S. consumer. The risk of a 1997 U.S. recession, while not highly probable, will still cause some investor caution in 1996. Ultimately, our challenge in 1996 will be to focus on companies that can achieve reasonably good earnings growth in an environment of low inflation, sluggish economies worldwide and ever increasing competition. We are also focusing on the market valuation excesses that have shown up in some specific stocks and are making adjustments as necessary. Rocky Barber Mark A. Fuller, III President Senior Vice President Growth Fund Portfolio Manager Growth Fund Portfolio Manager 4 92 - -------------------------------------------------------------------------------- ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
MEASUREMENT PERIOD (FISCAL YEAR COVERED) GROWTH FUND S&P 500 1/86 10000 10000 12/86 10979 11821 12/87 11856 12433 12/88 12700 14484 12/89 16567 19038 12/90 16233 18429 12/91 23435 24059 12/92 25219 25907 12/93 29131 28498 12/94 31011 28876 12/95 40026 39706
- -------------------------------------------------------------------------------- 5 93 WILLIAM BLAIR MUTUAL FUNDS, INC. GROWTH FUND Portfolio of Investments December 31, 1995
Shares (all amounts in thousands) Cost Value - ------------- -------- -------- COMMON STOCKS APPLIED TECHNOLOGY -- 20.4% 205 * Acxiom Corporation $ 2,164 $ 5,598 300 * Airtouch Communications, Inc. 8,099 8,475 198 * American Management Systems 4,702 5,940 115 Automatic Data Processing, Inc. 6,141 8,539 79 * Catalina Marketing Corporation 3,691 4,957 177 First Data Corporation 6,966 11,852 236 * International Imaging Materials Inc. 5,642 5,964 150 * NFO Research, Inc. 1,870 3,975 60 * Paging Network, Inc. 970 1,463 120 Reuters Holdings PLC (ADR) 4,568 6,615 115 Shared Medical Systems Corporation 3,448 6,237 100 * Solectron Corporation 3,678 4,412 -------- -------- 51,939 74,027 -------- -------- CONSUMER RETAIL -- 17.2% 120 Albertson's, Inc. 3,487 3,945 200 * Eckerd Corporation 6,508 8,925 165 Heilig-Meyers Company 4,213 3,032 250 Home Depot, Inc. 10,975 11,969 79 * Kohl's Corporation 3,777 4,158 120 * Micro Warehouse, Inc. 3,295 5,190 100 * Office Depot, Inc. 1,372 1,962 100 The Pep Boys -- Manny, Moe & Jack 2,479 2,563 164 * Staples, Inc. 1,792 3,989 127 * Viking Office Products, Inc. 2,351 5,887 300 Wal-Mart Stores 7,484 6,675 136 Walgreen Company 3,257 4,063 -------- -------- 50,990 62,358 -------- -------- FINANCIAL SERVICES -- 9.8% 100 Advanta Corporation, Class "A" 3,108 3,825 20 Advanta Corporation, Class "B" 535 728 174 * Credit Acceptance Corporation 3,691 3,602 100 Federal Home Loan Mortgage Corporation 5,282 8,350 100 Household International, Inc. 3,396 5,912 185 MBNA Corporation 5,710 6,822 140 State Street Boston Corporation 5,180 6,300 -------- -------- 26,902 35,539 -------- --------
6 94
Shares (all amounts in thousands) Cost Value - ------------- -------- -------- MEDICAL-RELATED SPECIALTIES -- 9.8% 150 * Elan PLC (ADR) $ 4,708 $ 7,294 106 * Health Care & Retirement Corporation 3,336 3,707 200 * Healthsouth Rehabilitation Corporation 2,871 5,825 195 * Medaphis Corporation 4,214 7,200 100 Omnicare, Inc. 1,465 4,457 81 * Quintiles Transnational Corporation 1,400 3,313 77 * R.P. Scherer Corporation 2,716 3,783 -------- -------- 20,710 35,579 -------- -------- TECHNOLOGY -- 8.3% 113 * Digi International, Inc. 2,000 2,137 80 Linear Technology Corporation 2,202 3,140 100 * Microsoft Corporation 5,443 8,775 98 Molex Incorporated 1,041 3,101 159 Molex Incorporated, Class "A" 2,751 4,857 80 * Xilinx, Inc. 3,523 2,434 165 * Zebra Technologies Corporation, Class "A" 2,900 5,603 -------- -------- 19,860 30,047 -------- -------- DISTRIBUTION -- 7.8% 220 Alco Standard Corporation 5,900 10,037 60 Cardinal Health, Inc. 2,626 3,285 157 * Gulf South Medical Medical Supply, Inc. 3,580 4,752 151 * Peak Technologies Group, Inc. 3,950 4,734 80 Sysco Corporation 583 2,600 209 * Thompson PBE, Inc. 3,482 2,933 -------- -------- 20,121 28,341 -------- -------- INDUSTRIAL PRODUCTS -- 7.7% 160 Air Products & Chemicals, Inc. 7,456 8,440 110 Danaher Corporation 1,274 3,492 170 M.A. Hanna Company 3,940 4,768 196 Minerals Technologies, Inc. 5,250 7,158 137 OEA, Inc. 3,973 4,084 -------- -------- 21,893 27,942 -------- -------- SPECIALTY CONSUMER SERVICES AND PRODUCTS -- 6.1% 225 * CUC International, Inc. 3,470 7,678 173 * Day Runner, Inc. 2,792 5,979 135 * Department 56, Inc. 3,596 5,177 130 The Loewen Group, Inc. 2,308 3,291 -------- -------- 12,166 22,125 -------- --------
7 95
Shares or Amount (all amounts in thousands) Cost Value - ---------------- -------- -------- BUSINESS SERVICES -- 4.3% 125 Cintas Corporation $ 3,828 $ 5,571 219 * Heartland Express, Inc. 3,877 4,333 224 * Knight Transportation, Inc. 3,423 3,077 120 * Rural/Metro Corporation 2,278 2,715 -------- -------- 13,406 15,696 -------- -------- FOOD RETAIL/PROCESSING -- 3.0% 60 Pepsico, Inc. 3,501 3,353 285 Wendy's International, Inc. 4,985 6,056 106 * Whole Foods Market, Inc. 1,540 1,471 -------- -------- 10,026 10,880 -------- -------- TOTAL COMMON STOCK -- 94.4% 248,013 342,534 -------- -------- SHORT-TERM INVESTMENTS $3,559 Associates Corp. of North America Demand Note, 5.444%, due 1/2/96 3,559 3,559 2,987 Household Finance Corporation, 5.75%, due 1/5/96 2,987 2,987 2,253 Chevron Oil Finance Company, 5.65%, due 1/12/96 2,253 2,253 2,671 Chevron Oil Finance Company, 5.72%, due 1/12/96 2,671 2,671 1,774 General Electric Capital Corporation, 5.74%, due 1/19/96 1,774 1,774 3,000 Chevron Oil Finance Company, 5.65%, due 1/19/96 3,000 3,000 3,200 GMAC Corporation, 5.69%, due 1/26/96 3,200 3,200 3,500 Ford Motor Credit Company, 5.60%, due 2/2/96 3,500 3,500 -------- -------- Total Short-term Investments -- 6.3% 22,944 22,944 -------- -------- TOTAL INVESTMENTS -- 100.7% $270,957 365,478 ======== LIABILITIES, PLUS CASH AND OTHER ASSETS -- (.7)% (2,442) -------- NET ASSETS -- 100.0% $363,036 ========
- --------------- * Non-income producing securities ADR = American Depository Receipt See accompanying Notes to Financial Statements. 8 96 February 2, 1996 Dear Shareholders: With the United States 1995's second best performing world stock market (only Switzerland was up more), United States investors in international portfolios were modestly rewarded. The EAFE Index returned 11.6% and the Lipper International Index returned 9.3% as the large Japanese market was essentially flat and the emerging markets actually declined nearly 10%. Offsetting these drags were gains of nearly 10% in non-Japan Far East and about 15-18% in Europe/UK. Clearly, the major investment action in 1995 was here in the U.S. The International Growth Fund lagged behind both international indices with a 7.2% return for the year. We emphasize investment in growth stocks which results in an overweight position in somewhat smaller companies. As shown in the table below, larger cap stocks outperformed in all major geographic markets in 1995. History clearly demonstrates that this is quite unusual and indeed recent evidence shows that smaller companies are starting to again perform better in some markets. PERFORMANCE OF SMALL CAP VS LARGE CAP*
1994 1995 ------------ -------------------------------------- REPRESENTATIVE INDICES Q3 Q4 Q1 Q2 Q3 Q4 YEAR - -------------------------------------- ---- ---- ---- ----- ---- ---- ----- Morgan Stanley Capital International UK (large)*......................... 5.4% 0.5% 5.6% 3.0% 5.4% 2.3% 17.2% Financial Times Stock Exchange Small Cap UK, ex Investment Trust (small)............................. 3.7 -4.7 2.9 4.5 7.2 -3.7 10.9 Morgan Stanley Capital International EUROPE, ex UK (large)............... 2.8 0.3 5.5 7.1 2.7 3.1 19.7 James Capel Small Cap EUROPE, ex UK (small)............................. 2.3 -1.9 2.6 5.3 -1.2 -4.1 2.3 Morgan Stanley Capital International JAPAN (large)....................... -5.5 -1.5 -2.3 -6.5 4.3 4.9 0.0 James Capel Small Cap JAPAN (small)... -8.1 -2.4 -6.8 -10.7 0.4 7.2 -10.3
- --------------- * US Dollar adjusted Capital Change 9 97 Looking ahead to 1996, we can summarize our investment outlook by the following: OVERVIEW - Economic growth remains below trend in the industrial world - Short-term rates have further to fall in the United States and Continental Europe - World growth will accelerate in 1997 - The dollar should strengthen over the year but may be vulnerable short term JAPAN - Economic growth is picking up - Monetary policy may be tightened earlier than expected - The equity market has seen the best of its rally EUROPE - Growth is slowing and may move to negative levels in the first half of 1996 - Inflation remains very low in core ERM countries - Short-term interest rates have further to fall - Overweight classic growth and interest rate sensitive stocks UK - The economy is set to grow around 2.5% in 1996 - Headline inflation will fall to 1-2% mid-year - Long gilt yields should trade in a range of 7-8% - Growth may be uncomfortably strong by 1997 EMERGING MARKETS - Economic performance is still deteriorating in some Asian markets - Latin American growth should accelerate in 1996 - East European markets look set for good performance in 1996 - Represent good value at current levels and should outperform in 1996 The portfolio remains overweighted in Japan, core Europe and emerging markets. In Japan, we are seeing the beginning of better performance among the medium and smaller sized stocks and we expect this to continue as the economic environment improves in 1996. We see some risk of Yen weakness, after an unprecedented period of strength, and have continued to hedge approximately one third of our exposure. In core Europe, we see continued benefits from declining interest rates led by Germany. Smaller company shares throughout Europe have been in a prolonged bear market and some outstanding values are available; however, it will require greater optimism on European growth prospects before they start to outperform. Finally, we see interest returning to many of the emerging markets as valuations have become more compelling given recent years declines. Norbert W. Truderung Senior Vice President William Blair Mutual Funds, Inc. 10 98 - -------------------------------------------------------------------------------- ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
MEASUREMENT PERIOD INT'L GROWTH LIPPER INT'L (FISCAL YEAR COVERED) FUND INDEX 10/92 10000 10000 12/92 10130 09875 6/93 11390 11310 12/93 13534 13744 6/94 13985 13718 12/94 13528 13622 6/95 13332 13962 12/95 14505 14886
- -------------------------------------------------------------------------------- 11 99 WILLIAM BLAIR MUTUAL FUNDS, INC. INTERNATIONAL GROWTH FUND
Portfolio of Investments December 31, 1995 Shares (all amounts in thousands) Cost Value - ------------- ------- ------- COMMON STOCKS -- EUROPE -- 43.8% AUSTRIA -- .8% 10 Flughafen Wien AG (Vienna Airport) $ 484 $ 675 ------- ------- BELGIUM -- .8% 3 Kredietbank (Bank) 607 684 ------- ------- DENMARK -- .5% 4 Novo Nordisk AS (Pharmaceutical) 427 479 ------- ------- FINLAND -- .5% 11 Nokia (AB) OY (Telecommunications equipment) 732 432 ------- ------- FRANCE -- 6.6% 4 Air Liquide (Industrial gases) 577 662 7 Alcatel-Alsthom SA (Telecommunication/ transportation equipment) 710 604 8 Banque Nationale De Paris (Bank) 392 361 4 Cie De St. Gobain (Building materials) 416 382 6 Crometal (Metal, plastic and construction) 509 398 9 Gascogne (Packaging paper and printing) 794 793 7 Interbail (Societe Financiere) (Property leasing and rental) 592 377 12 * SGS Thomson Micro (Electronic semiconductors) 563 459 4 Societe Bic (Consumer goods) 400 437 7 Societe Generale (Bank) 750 865 2 Sodexho (Contract catering) 305 588 ------- ------- 6,008 5,926 ------- ------- GERMANY -- 5.9% 3 Bayer AG (Chemicals) 696 792 3 Durr Beteil AG (Capital goods and spray paint machinery) 894 749 5 * Ex Cello O Holdings AG (Machine tools) 848 537 1 Linde AG (Engineering) 709 729 2 Mannesmann AG (Engineering-general) 364 509 0.11 Munchener Ruckvers AG (Reinsurance) 182 244 6 Praktiker Bau Und Heimninerker AG (Retailing) 208 191 2 Siemens AG (Electrical engineering) 666 821 2 Simona AG (Plastics processing) 302 305 3 * Varta AG (Batteries) 530 479 ------- ------- 5,399 5,356 ------- -------
12 100
Shares (all amounts in thousands) Cost Value - ------------- ------- ------- ITALY -- 1.7% 404 BCA Fideuram SPA (Fund management) $ 483 $ 467 150 La Rinascente (Retailing) 393 390 400 Telecom Italia Mobile (Mobile telephones) 513 704 ------- ------- 1,389 1,561 ------- ------- LUXEMBOURG -- .7% 20 Millicom International Cellular S A (Communications) 521 610 ------- ------- NETHERLANDS -- 4.1% 9 Crown V Gelder G B (Specialists -- paper products) 707 721 17 * Frans Maas Group (Transport services) 502 566 6 Heineken NV (Brewer) 961 1,064 9 Kon Ten Cate NV (Chemicals) 454 380 20 Koninklijke Van Ommeren CVA (Specialty chemicals) 539 623 8 Philips Electronics NV (Consumer electronics) 391 289 ------- ------- 3,554 3,643 ------- ------- PORTUGAL -- .1% 5 Filmes Lusomundo (Media) 61 53 ------- ------- SPAIN -- 2.0% 20 Aguas De Barcelona (Water utility) 526 597 25 Centros Com Pryca (Supermarkets) 501 524 15 Hidroel Cantabrico (Electric utility) 483 519 10 Unipapel S A (Office stationery) 268 188 ------- ------- 1,778 1,828 ------- ------- SWEDEN -- 2.9% 7 Autoliv AB (Airbag manufacturers) 392 409 15 Astra AB (Pharmaceutical) 502 599 28 Ericcson (LM) Telefon (Telecommunication equipment) 539 538 50 Munksjo AB (Pulp and paper) 480 328 55 Sparbanken Sverige (Bank) 483 700 ------- ------- 2,396 2,574 ------- ------- SWITZERLAND -- 5.3% 0.25 Baloise Holdings (Insurance) 577 520 0.25 Bobst AG (Printing machines) 377 390 10 CS Holdings (Banking) 1,011 1,025 0.80 Nestle SA (Food) 820 885 0.13 Roche Holdings AG (Pharmaceuticals) 789 989 1 Sandoz AG (Pharmaceuticals) 739 915 ------- ------- 4,313 4,724 ------- -------
13 101
Shares (all amounts in thousands) Cost Value - ------------- ------- ------- TURKEY -- .1% 1,546 Sifas (Textiles) $ 250 $ 83 ------- ------- UNITED KINGDOM -- 11.8% 19 Abacus Group (Distributors) 83 82 125 Bank of Scotland (Bank) 358 546 175 Bullough (Engineering) 391 277 125 Chubb Security (Securities firm) 618 618 75 DFS Furniture Company (Furniture manufacturer and retailer) 315 460 19 Domestic & General Group (Insurance) 386 449 85 Eurotherm (Instruments and controls) 404 722 125 First Leisure Corporation (Entertainment) 599 740 75 Frost Group (Retailers) 247 224 233 Halma (Industrial safety and environmental equipment) 543 634 100 Hays (Bulk distribution, personnel services) 435 584 175 Hogg Robinson (Travel, transport and financial services) 572 620 150 Kwik Fit Holdings (Distributors) 422 396 100 London Forfaiting (Commercial asset-based finance) 235 340 20 Mercury Assets Management Group (Banks/Merchant) 331 276 35 RTZ Corp. (Mining and finance) 381 509 100 S I G (Building material distributor) 371 300 65 Shell Transport & Trading (Oil-Integrated) 753 860 100 Standard Chartered (Retail banks) 621 851 35 Tate & Lyle (Food Producers) 247 257 90 Vero Group (Electronics) 387 380 75 Watmoughs Holdings (Printer) 460 530 ------- ------- 9,159 10,655 ------- ------- COMMON STOCKS -- ASIA -- 41.5% AUSTRALIA -- 2.5% 45 Broken Hill Proprietary (Mining) 620 635 200 John Fairfax (Newspaper publishing) 346 416 300 Stanilite Pacific (Manufacturer of emergency lighting systems) 397 137 125 Stanilite Pacific Ltd (Electronic/communication equipment) 150 57 160 Western Mining Corporation (Mines) 971 1,027 ------- ------- 2,484 2,272 ------- ------- JAPAN -- 32.0% 77 Anritsu Corporation (Electrical machinery) 888 835 75 Asahi Tec Corporation (Automobile parts) 702 498 41 Bank of Tokyo (Bank) 699 719 0.10 DDI Corporation (Cellular telecom service provider) 573 775
14 102
Shares (all amounts in thousands) Cost Value - ------------- ------- ------- 25 Enix Corporation (Entertainment software) $ 842 $ 953 60 Exedy Corporation (Automobile parts) 993 953 15 Fuji Machine Manufacturing (Automated assembly machinery) 481 538 50 Hitachi Metals (Specialty steel maker) 611 625 13 Ito Yokado Company (Food retailer) 552 801 60 Jaccs Company (Consumer finance) 619 622 93 Kamigumi Company (Harbor transport & equipment) 900 893 20 Kato Denki Company (Electrical retailer) 451 519 7 Keyence Corporation (Electronics) 574 807 10 Melco Incorporated (Electronics) 353 527 47 Mitsubishi Trust & Banking (Banking) 749 783 70 Mitsui Fudosan Company (Real estate) 878 861 55 Namco (Commercial use videogame hardware) 1,473 1,832 68 Neturen Company (Metal products) 551 539 50 New Oji Paper Company (Pulp and paper) 461 452 9 Nichiei Company (Finance company) 617 671 90 Nikko Securities (Securities firm) 839 1,159 300 * NKK Corporation (Steel producer) 790 808 90 NTN Corporation (Bearings producer) 598 601 70 Obayashi Corporation (Construction) 558 556 87 Ricoh Company (Color copier manufacturer) 885 952 30 Rinnai Corporation (Metal products) 680 700 8 Riso Kagaku Corporation (Printing machine producer) 660 675 20 Rohm & Co. (Electronics) 595 1,129 21 Ryosan Electro Corporation (Semiconductors/workstations) 465 578 10 SMC Corporation (Machinery) 573 723 33 Santen Pharm Company (Opthalmic pharmaceuticals) 740 748 34 Sanwa Bank (Bank) 655 692 14 Secom Company (Services) 847 974 23 Sho Bond Corporation (Construction) 763 786 30 Sumitumo Bank (Bank) 557 636 55 Sumitumo Trust & Banking (Bank) 786 778 60 Topre Corporation (Automobile pressed parts) 525 477 18 Tostem Corporation (Metal products) 648 598 ------- ------- 26,131 28,773 ------- ------- HONG KONG -- 4.6% 100 China Light & Power (Electric utility) 448 460 59 HSBC Holdings (Bank) 638 896 1,480 Inner Mongolia Erdos Cashmere (Wool producer) 701 555 750 National Mutual Asia (Finance) 471 679 70 Sun Hung Kai Properties (Real estate management) 419 568
15 103
Shares (all amounts in thousands) Cost Value - ------------- ------- ------- 65 Swire Pacific (Airline, general trading and real estate conglomerate) $ 415 $ 504 1,960 Yizheng Chemical Fibre Company (Chemicals) 555 441 ------- ------- 3,647 4,103 ------- ------- SINGAPORE -- 2.4% 45 City Developments (Real estate company) 275 328 50 Fraser & Neave (Diversified conglomerate) 468 639 3 Fraser & Neave, warrants (expire 5/27/98) 3 20 80 Keppel Corp. (Diversified conglomerate) 490 713 199 Singapore Technologies Industries (Infrastructure/industrial development projects) 304 450 ------- ------- 1,540 2,150 ------- ------- COMMON STOCKS -- EMERGING MARKETS -- 9.8% ARGENTINA -- 1.2% 43 Irsa Inversiones Y Representaciones GDR (Property) 878 1,094 ------- ------- BRAZIL -- 1.6% 40 (a) Rhodia Ster S A (Packaging) (Rule 144A) 579 410 16 Telecommunicacoes Brasilera, ADR (Telecommunication) 532 741 40 (a) Usinas Siderurgicas De Minas Gerais S.A., ADR (Rule 144A) (Steel) 623 325 ------- ------- 1,734 1,476 ------- ------- INDONESIA -- 1.0% 96 (b) Astra International (Assembler/distributor of automobiles/motorcycles) 139 199 90 (b) Indosat (Telecommunications service provider) 346 335 139 (b) Mulia Industrindo (Glass and ceramic manufacturer) 235 391 ------- ------- 720 925 ------- ------- KOREA -- .4% 15 Korea Electric Power Corporation ADR (Electric utility) 315 401 ------- ------- MALAYSIA -- 1.4% 58 Resorts World Berhad (Manages hotel and gaming operations) 244 311 108 Leader Universal Holdings (Cable manufacturer) 305 247 105 YTL Corporation (Holding company-property/ power generating) 354 662 ------- ------- 903 1,220 ------- -------
16 104
Shares or Amount (all amounts in thousands) Cost Value - ---------------- ------- ------- PERU -- 1.2% 505 Telefonica Del Peru SA CPT 'B' Shares (Telephone company) $ 878 $ 1,082 ------- ------- SOUTH AFRICA -- 1.0% 115 Free State Consolidated Gold Mines (Mining) 1,249 860 ------- ------- THAILAND -- 2.0% 0.05 Formosa Fund (Mutual fund) 351 380 200 (b) Industrial Finance Corporation of Thailand (Bank) 373 679 18 (b) Regional Continental Line (Transportation containers) 207 225 69 Thai Farmers Bank (Bank) 236 471 ------- ------- 1,167 1,755 ------- ------- TOTAL COMMON STOCKS -- 95.1% 78,724 85,394 ------- ------- CONVERTIBLE BONDS -- 1.9% $ 200 Tata Iron & Steel Company, 2.25% due 4/1/99 (Construction materials) 200 178 550 U Ming Marine Holdings, 1.5%, due 2/7/01 (Shipping) 558 491 500 United Micro Electric, 1.25%, due 6/8/04 (Technology) 855 666 35,000Y Sankyo Frontier Company, 3.00% due 9/29/00 (Licensing) 459 343 ------- ------- TOTAL CONVERTIBLE BONDS 2,072 1,678 ------- ------- SHORT-TERM INVESTMENTS -- 2.8% $2,505 State Street Bank Euro-Dollar Time Deposit, 4.75%, due 1/2/96 2,505 2,505 ------- ------- TOTAL INVESTMENTS -- 99.8% $83,301 89,577 ======= CASH AND OTHER ASSETS, LESS LIABILITIES -- .2% 185 ------- NET ASSETS -- 100.0% $89,762 =======
- --------------- * Non-income producing securities ADR = American Depository Receipt (a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These may be resold in transactions exempt from registration, normally to qualified institutional buyers. At December 31, 1995, the value of these securities was 0.8% of net assets. (b) Foreign registered securities (Alien Market). At December 31, 1995 the Fund's Portfolio of Investments includes the following categories: Capital Equipment -- 23%; Services -- 23%; Finance -- 22%; Materials -- 15%; Consumer Goods -- 11%; Energy -- 4%; and Multi-Industry -- 2%. See accompanying Notes to Financial Statements. 17 105 February 2, 1996 Dear Shareholders: Unlike the prior year, 1995 was one that bond investors will savor. Double digit returns were the norm for all but the shortest maturity issues. Economic growth slowed during the year and inflation remained subdued. The Federal Reserve Board responded by twice lowering short-term interest rates. This steadily declining interest rate environment led to a 14.4% return with dividends reinvested for the Income Fund. While this return exceeded the 10.9% return of our relevant Lipper peer group, it trailed the 15.3% return of the Lehman Intermediate Government/Corporate Bond Index. We maintained our modestly defensive position throughout the second half of 1995 and we expect to continue to do so as we move into 1996. The returns generated within the bond market last year represent one of the best single-year performances in bond market history. A great year like 1995 is generally not followed by another one and this simple recognition is the main reason for maintaining our position. We continue to emphasize U.S. Treasury notes and more conservatively structured mortgage-backed bonds as there still does not seem to be much value in the corporate bond area. Assets remained very stable in the $150 million range. Additionally, we changed the monthly dividend on two occasions this year. This basically reflected the volatility of interest rates that has developed more recently. As a result, we are modifying our dividend policy very slightly. We will determine a dividend level at the beginning of each year and will review that level every quarter to see if an adjustment is necessary. Our philosophy continues to be one of paying out only income earned and trying to avoid any return of principal. We look forward to serving your fixed-income needs in 1996. Bentley M. Myer Senior Vice President Income Fund Portfolio Manager 18 106 - -------------------------------------------------------------------------------- ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
LEHMAN IN- TERMED. MEASUREMENT PERIOD GOVT/CORP (FISCAL YEAR COVERED) INCOME FUND INDEX 9/90 10000 10000 12/90 10291 10410 6/91 10781 10862 12/91 11986 11932 6/92 12390 12292 12/92 12845 12788 6/93 13565 13582 12/93 13849 13912 6/94 13555 13548 12/94 13746 13643 6/95 14935 14953 12/95 15722 15735
- -------------------------------------------------------------------------------- 19 107 WILLIAM BLAIR MUTUAL FUNDS, INC. INCOME FUND Portfolio of Investments December 31, 1995
Principal Amount Issue Value - -------- ---------------------------------------------------- -------- (all amounts in thousands) U.S. GOVERNMENT AND U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS -- 66.5% U.S. TREASURY -- 26.2% $ 14,700 U.S. Treasury Note 7.50%, due 11/15/01 $ 16,191 10,322 U.S. Treasury Note 5.75%, due 8/15/03 10,446 10,750 U.S. Treasury Note 7.25%, due 5/15/04 11,929 - -------- -------- 35,772 Total U.S. Treasury Obligations 38,566 - -------- -------- U.S. GOVERNMENT GUARANTEED OBLIGATIONS -- 18.5% SMALL BUSINESS ADMINISTRATION -- 8.9% -- Receipt for Multiple Originator Fees, #3, 0.786%, due 11/08/08 (Interest only) WAC 2,225 378 Loan #100023, 9.375%, due 11/25/14 397 -- Receipt for Multiple Originator Fees, #146, 3.021%, due 6/03/15 (Interest only) WAC 1,858 -- Receipt for Multiple Originator Fees, #156, 3.323%, due 7/20/15 (Interest only) WAC 1,904 -- Receipt for Multiple Originator Fees, #215, 3.311%, due 9/03/15 (Interest only) WAC 4,506 -- Receipt for Multiple Originator Fees, #149, 3.082%, due 10/01/15 (Interest only) WAC 2,308 - -------- -------- 378 Total Small Business Administration Obligations 13,198 - -------- -------- U.S. DEPARTMENT OF VETERANS AFFAIRS -- 4.9% 2,060 Mortgage Trust 1992-1, Tranche 2-B, 7.75%, due 9/15/10 2,098 5,000 Mortgage Trust 1992-2, Tranche 2-D, 7.00%, due 9/15/15 5,096 - -------- -------- 7,060 Total U.S. Department of Veteran Affairs - -------- Guaranteed Pass-Through Certificates 7,194 --------
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Principal Amount Issue Value - -------- ---------------------------------------------------- -------- (all amounts in thousands) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION -- 3.5% $ 26 12.50%, due 4/15/14 $ 30 54 13.00%, due 11/15/14 60 2,277 8.50%, due 11/15/21 2,401 1,063 8.50%, due 12/15/21 1,120 1,501 8.50%, due 1/15/22 1,583 - -------- -------- 4,921 Total Government National Mortgage - -------- Association Obligations 5,194 -------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II -- 0.8% 28 12.00%, due 2/20/20 30 21 12.50%, due 2/20/15 24 777 11.00%, due 3/20/16 861 24 10.50%, due 6/20/19 26 97 10.50%, due 8/20/20 107 120 10.50%, due 9/20/20 132 - -------- -------- 1,067 Total Government National Mortgage - -------- Association II Obligations 1,180 -------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MOBILE HOME -- 0.4% 114 9.75%, due 3/15/98 118 54 9.75%, due 1/15/99 57 427 9.50%, due 12/15/10 456 - -------- -------- 595 Total Government National Mortgage - -------- Association Mobile Home Obligations 631 -------- U.S. GOVERNMENT AGENCY GUARANTEED OBLIGATIONS -- 21.8% FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) -- 14.7% 403 #1475, Tranche SC, 8.107% FR, due 2/15/08 391 1,092 #1693, Tranche S, 5.225%, due 9/15/08 931 2,214 #1214, Tranche EB, 9.095% FR, due 2/15/15 2,220 2,500 #77, Tranche F, 8.500%, due 6/15/17 2,514 4,395 #845059, Debenture, 7.460% FR, due 5/01/18 4,507 2,000 #1289, Tranche PK, 7.500%, due 5/15/18 2,028 4,846 #1081, Tranche IC, 6.500%, due 12/15/19 4,847 676 #1077, Tranche G, 7.500%, due 5/15/21 678 2,818 #C00137, Debenture, 9.000%, due 5/01/22 2,990 603 #1492, Tranche SE, 10.133%, due 3/15/23 552 - -------- -------- 21,547 Total FHLMC Collateralized - -------- Mortgage Obligations 21,658 --------
21 109
Principal Amount Issue Value - -------- ---------------------------------------------------- -------- (all amounts in thousands) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 7.1% $ 2,900 1993-47, Tranche B, 6.650%, due 3/25/06 $ 2,906 54 13.250%, due 8/01/14 54 4,584 7.623%, due 12/01/2018 4,713 282 1992-105, Tranche A, 7.000%, due 1/25/21 284 276 1991-141, Tranche SB, 12.170% FR, due 10/25/21 276 1,890 1992-200, Tranche SE, 11.500%, due 11/25/22 1,896 266 1993-19, Tranche SH, 11.234%, due 4/25/23 266 - -------- -------- 10,252 Total FNMA Collateralized - -------- Mortgage Obligations 10,395 -------- 81,592 Total U.S. Government and U.S. Government - -------- Agency Guaranteed Obligations 98,016 -------- S&P Rating ----------- (unaudited) COLLATERALIZED MORTGAGE OBLIGATIONS -- 20.9% 3,255 Prudential Home Mortgage Securities Corp., 1992-45, Tranche A-8, 6.045%, due 1/25/00 AAA 3,158 1,600 Polk Co. HFA, 1991-1, Tranche A-2, 9.550%, due 1/15/11 AAA 1,708 11,503 Morgan Keegan Funding I, L.P., 8.000%, due 4/25/11 AA- 11,734 212 Clay Co. HFA, 1990, Tranche A-1, 9.500%, due 10/10/12 AAA 226 1,000 Mortgage Obligation Structured Trust, 1993-1, Tranche A-1, 6.350%, due 10/25/18 AAA 993 5,000 Prudential Home Mortgage Securities Corp., 1993-8, Tranche A-10, 7.350%, due 3/25/23 AAA 5,018 5,000 Prudential Home Mortgage Securities Corp., 1993-40, Tranche A-2, 6.500%, due 10/25/23 AAA 5,017 392 Residential Finance Corp., 1991-11, Tranche A-2, 10.000%, due 4/01/21 AA 393 1,219 Residential Finance Corp., 1991-11, Tranche A-2, 10.000%, due 4/01/21 AA 1,243 263 Resolution Trust Corp., 1991-3, Tranche A-2, 10.385%, due 8/25/21 AAA 274 1,052 Resolution Trust Corp., 1992-5, Tranche 5-C, 8.628%, due 1/25/26 AA 1,081 - -------- -------- 30,496 Total Collateralized Mortgage Obligations 30,845 - -------- --------
22 110
Principal S&P Amount Issue Rating Value - -------- ---------------------------------------------------- ----------- -------- (all amounts in thousands) (unaudited) CORPORATE OBLIGATIONS -- 2.2% $ 1,250 Sears, Roebuck Corp. Medium Term Note, 9.75%, due 3/21/00 BBB $ 1,424 1,500 Household Finance Corp. Medium Term Note, 10.38%, due 12/15/00 A 1,778 - -------- -------- 2,750 Total Corporate Obligations 3,202 - -------- -------- 114,838 TOTAL LONG-TERM INVESTMENTS -- 89.6% 132,063 - -------- -------- SHORT-TERM INVESTMENTS -- 8.8% 1,573 Associates Corp. of North America Demand Note, 5.444%, due 1/2/96 A-1+ 1,573 3,200 General Motors Acceptance Corp., 5.730%, due 2/2/96 A-2 3,200 3,000 IBM Credit Corporation, 5.700%, due 2/2/96 A-1 3,000 2,226 General Motors Acceptance Corp., 5.720%, 2/16/96 A-2 2,226 3,000 American Express Credit Corp., 5.640%, due 2/16/96 A-1 3,000 - -------- -------- 12,999 TOTAL SHORT-TERM INVESTMENTS -- 8.8% 12,999 - -------- -------- $127,837 TOTAL INVESTMENTS (COST $142,123) -- 98.4% 145,062 ======== CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.6% 2,308 -------- NET ASSETS -- 100.0% $147,370 ========
- --------------- WAC = Weighted Average Coupon FR = Floating Rate See accompanying Notes to Financial Statements. 23 111 February 2, 1996 Dear Shareholders: The discussion of a flat tax and the possible elimination of taxation on all interest and dividends plagued the municipal market for most of 1995. The ratio of tax-exempt yields to taxable yields rose to the 80% to 90% level early in the year and then remained there as the various tax proposals were discussed. The ongoing budget discussions have recently taken precedence so a consensus approach to tax reform has not yet developed. It still appears to us that some reduction in tax rates is possible but that something more severe, like eliminating deductions and not grandfathering current municipal bond issues is unlikely. The Limited Term Tax-Free Fund had a return of 10.0% with dividends reinvested for the year, which exceeded the 9.0% return of the Lipper Municipal Short-Term Index but trailed the 10.6% return of the Merrill Lynch Intermediate Municipal Bond Index. We continued to maintain our moderately defensive position throughout the second half of the year. While returns in the tax-exempt market trailed those in the taxable market, the absolute returns were still at the high end of the historical range. We therefore feel more comfortable recognizing this fact and keeping a little more cash equivalents than usual. Assets continue to grow slowly with the total reaching almost $20 million by year end. Bentley M. Myer Senior Vice President Limited Term Tax-Free Fund Portfolio Manager - -------------------------------------------------------------------------------- ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH REINVESTMENT OF CAPITAL GAIN DISTRIBUTIONS AND INCOME DIVIDENDS
MERRILL LYNCH LIMITED TERM INTERMEDIATE MEASUREMENT PERIOD TAX- FREE MUN. BOND (FISCAL YEAR COVERED) FUND INDEX 1/94 10000 10000 3/94 9649 9333 6/94 9760 9307 9/94 9872 9387 12/94 9840 9290 3/95 10156 09922 6/95 10401 10131 9/95 10627 10409 12/95 10820 10932
- -------------------------------------------------------------------------------- 24 112 WILLIAM BLAIR MUTUAL FUNDS, INC. LIMITED TERM TAX-FREE FUND Portfolio of Investments December 31, 1995
Principal Amount Issue Value - ------- -------------------------------------------------------- ------- (all amounts in thousands) REVENUE BONDS -- 47.2% $ 250 State of Illinois Toll Highway Authority 6.550%, 1/1/96 $ 250 400 Atlanta, Georgia Water and Sewer Revenue 6.000%, 1/1/96 400 450 South Dakota Housing Development Authority 4.500%, 5/1/96 454 400 DuPage County, Illinois Water Commission 6.000%, 5/1/97 411 500 Ball State University, Indiana Student Revenue 4.900%, 7/1/97 508 235 Nevada Housing Division -- Single Family 4.750%, 10/1/97 234 210 Nevada Housing Division -- Single Family 4.950%, 4/1/98 208 500 New Jersey State Transportation Authority 4.500%, 6/15/00 504 500 Massachusetts Municipal Wholesale Electric Commission 4.100%, 7/1/00 496 250 Chicago, Illinois Waterworks Revenue 6.750%, 11/1/00 259 700 Indiana Municipal Power Agency 5.125%, 1/1/01 725 440 New Hampshire Higher Education and Health, University of New Hampshire, 5.600%, 7/1/02 468 500 Tippecanoe County, Indiana School Building Corporation 5.500%, 7/15/02 528 300 Virginia Public School Authority 6.000%, 8/1/02 327 500 Michigan State Building Authority Series 1 5.100%, 10/1/02 513 500 Indiana Bond Bank Revenue 5.375%, 2/1/03 511 500 Philadelphia, Pennsylvania Gas Works Revenue 4.600%, 8/1/03 503 500 Wenatchee, Washington Water and Sewer Revenue 4.700%, 12/1/03 496
25 113
Principal Amount Issue Value - ------- -------------------------------------------------------- ------- (all amounts in thousands) $ 260 Princeton, Indiana Pollution Control Revenue 5.750%, 12/15/03 $ 262 500 Northern Cook County, Illinois Solid Waste Agency Contract Revenue, 6.300%, 5/1/04 552 500 Chicago, Illinois Motor Fuel Tax Revenue 5.125%, 1/1/06 512 - ------- ------- 8,895 Total Revenue Bonds 9,121 - ------- ------- GENERAL OBLIGATION BONDS -- 32.4% 125 Arlington, Texas 6.800%, 5/1/96 126 300 State of Texas 6.700%, 12/1/96 308 250 Spokane County, Washington 6.650%, 9/1/98 255 250 West Allis Milwaukee, Wisconsin School District 6.300%, 4/1/00 258 530 Wisconsin State Veterans Housing Authority 5.000%, 5/1/00 547 500 Cook County, Illinois 5.500%, 11/15/01 528 250 State of New Jersey 5.400%, 2/15/03 265 500 Kane County, Illinois School District #304 5.900%, 6/1/03 542 500 State of Washington 5.300%, 9/1/03 526 240 New Richmond, Wisconsin School District 4.800%, 10/1/03 244 500 Newport News, Virginia 4.700%, 1/1/04 505 500 Florida State Board of Education Series A 5.000%, 6/1/04 517 515 Flat Rock, Michigan Community School District 5.250%, 5/1/05 534 500 Clark County, Nevada School District 7.000%, 6/1/05 567 500 Naperville, Illinois 6.000%, 12/1/05 544 - ------- ------- 5,960 Total General Obligation Bonds 6,266 - ------- -------
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Principal Amount Issue Value - ------- -------------------------------------------------------- ------- (all amounts in thousands) CASH EQUIVALENT BONDS* -- 19.2% $ 500 State of Massachusetts 5.900%, 12/1/97 $ 500 400 Louisiana State Recovery District Sales Tax Revenue 6.000%, 7/1/98 400 800 Southern California Edison Pollution Control Authority 5.400%, 2/28/08 800 100 Lone Star Texas Airport Improvement Authority 6.000%, 12/1/14 100 500 Delaware County, Pennsylvania 5.900%, 12/1/15 500 300 City of New York, New York 5.000%, 10/1/21 300 100 City of New York, New York 5.000%, 10/1/22 100 100 Columbia, Alabama Pollution Control Revenue 6.000%, 10/1/22 100 900 Burke County, Georgia Pollution Control Revenue 6.000%, 7/1/24 900 - ------- ------- 3,700 Total Cash Equivalent Bonds 3,700 - ------- ------- $18,555 TOTAL INVESTMENTS (COST $18,793) -- 98.8% 19,087 ======= CASH AND OTHER ASSETS, LESS LIABILITIES -- 1.2% 233 ------- NET ASSETS -- 100.0% $19,320 =======
- --------------- * These securities have maturities of more than one year but have variable rates and demand features which qualify them as short-term securities. The rate disclosed is that currently in effect. This rate changes periodically based on market conditions. At December 31, 1995 the Fund's Portfolio of Investments includes the following categories: Education -- 23%; Water and Sewer -- 16%; State Government -- 13%; Pollution Control -- 11%; Housing -- 10%; Utilities -- 9%; County Government -- 7%; City Government -- 6%; State Transit -- 4%; and Airport -- 1%. See accompanying Notes to Financial Statements. 27 115 February 2, 1996 Dear Shareholders: The story in the short end of the bond market in 1995 was the lowering of interest rates by the Federal Reserve Board. Their initial move took place in July and they responded again in December. Current levels of interest rates are implying an additional 50 to 100 basis point downward move in short-term rates. We do not agree with this consensus as it does not appear that current economic conditions warrant such a big adjustment. With this decline in short-term rates, we have been reducing our average maturity. We lowered the average to about 40 days at mid-year and it is currently about 32 days. We are at the lower end of our normal range and we expect to stay here unless economic conditions change. If the economy begins to show further signs of more significant weakness, we may extend in expectation of more aggressive moves by the Fed to lower rates. The return of the Ready Reserves Fund for the year was 5.45%, which exceeded the 5.38% return of our peer group of S&P rated AAA money market funds. Assets grew quite a bit during the year and now exceed $700 million. With our yield still in excess of 5%, we feel that we are maintaining a competitive return. Bentley M. Myer Senior Vice President Ready Reserves Fund Portfolio Manager 28 116 WILLIAM BLAIR MUTUAL FUNDS, INC. READY RESERVES FUND
Portfolio of Investments December 31, 1995 Principal Interest Amortized Amount Issue Rate Maturity Cost - --------- ----------------------------------------------- -------- -------- --------- (All amounts in thousands) U.S. GOVERNMENT AGENCY GUARANTEED -- 3.9% $ 3,033 Agency for International Development VRN -- Peru 6.060% 2/01/96 $ 3,033 8,000 Agency for International Development VRN -- Zimbabwe 6.106% 1/01/96 8,000 6,009 National Oceanic and Atmospheric Administration VRN 6.258% 1/01/96 6,009 1,103 National Oceanic and Atmospheric Administration VRN 6.288% 1/01/96 1,103 9,000 Student Loan Marketing Association VRN 5.475% 1/02/96 9,000 - --------- --------- 27,145 27,145 DEMAND NOTE -- 0.2% 1,739 Associates Corp. of North America - --------- Demand Note VRN 5.444% 1/02/96 1,739 --------- COMMERCIAL PAPER -- 98.1% FINANCE -- 20.8% 8,317 American Express Credit Corporation 5.650% 1/16/96 8,297 6,644 American Express Credit Corporation 5.690% 1/17/96 6,627 4,000 Associates Corporation of North America 5.670% 1/19/96 3,989 6,178 Associates Corporation of North America 5.650% 2/16/96 6,133 4,137 Associates Corporation of North America 5.670% 2/21/96 4,104 5,160 Associates Corporation of North America 5.450% 3/26/96 5,094 3,000 Avco Financial Services, Incorporated 5.700% 1/22/96 2,990 9,956 Avco Financial Services, Incorporated 5.700% 1/22/96 9,923 6,000 Avco Financial Services, Incorporated 5.700% 1/25/96 5,977 3,361 Avco Financial Services, Incorporated 5.700% 1/31/96 3,345 4,000 Avco Financial Services, Incorporated 5.640% 2/26/96 3,965 4,541 Avco Financial Services, Incorporated 5.700% 2/26/96 4,501 4,205 CIT Group Holdings, Incorporated 5.650% 1/24/96 4,190 9,000 Household Finance Corporation 5.670% 2/07/96 8,947 5,000 John Deere Capital Corporation 5.680% 2/02/96 4,975 3,918 John Deere Capital Corporation 5.690% 2/09/96 3,894 6,000 John Deere Capital Corporation 5.690% 2/13/96 5,959 1,300 John Deere Capital Corporation 5.560% 2/23/96 1,289 6,287 Norwest Financial, Inc. 5.680% 1/25/96 6,263
29 117
Principal Interest Amortized Amount Issue Rate Maturity Cost - --------- ----------------------------------------------- -------- -------- --------- (All amounts in thousands) $ 8,289 Norwest Financial, Inc. 5.720% 1/29/96 $ 8,252 4,725 Norwest Financial, Inc. 5.650% 1/30/96 4,703 6,690 Norwest Financial, Inc. 5.630% 2/15/96 6,643 4,000 Norwest Financial, Inc. 5.650% 2/23/96 3,967 7,564 PHH Corporation 5.680% 1/18/96 7,544 8,000 PHH Corporation 5.680% 1/19/96 7,977 6,847 PHH Corporation 5.680% 1/19/96 6,828 - --------- --------- 147,119 146,376 - --------- --------- INSURANCE -- 19.3% 11,000 American General Finance Corporation 5.700% 1/09/96 10,986 4,200 American General Finance Corporation 5.700% 1/23/96 4,185 6,621 American General Finance Corporation 5.660% 2/08/96 6,582 6,000 American General Finance Corporation 5.560% 2/23/96 5,951 3,757 Aon Corporation 5.500% 2/16/96 3,731 2,563 Metlife Funding Incorporated 5.680% 1/18/96 2,556 5,000 Metlife Funding Incorporated 5.670% 2/01/96 4,976 8,000 Metlife Funding Incorporated 5.640% 2/02/96 7,960 4,820 Metlife Funding Incorporated 5.650% 2/02/96 4,796 4,000 Metlife Funding Incorporated 5.630% 2/05/96 3,978 2,850 Metlife Funding Incorporated 5.630% 2/06/96 2,834 4,310 Metlife Funding Incorporated 5.630% 2/07/96 4,285 3,500 Metlife Funding Incorporated 5.630% 2/21/96 3,472 4,068 Prudential Funding Corporation 5.640% 2/12/96 4,041 5,000 SAFECO Credit Corporation 5.680% 1/12/96 4,991 8,000 SAFECO Credit Corporation 5.680% 2/05/96 7,956 2,500 SAFECO Credit Corporation 5.650% 2/07/96 2,485 9,000 SAFECO Credit Corporation 5.650% 2/16/96 8,935 8,000 SAFECO Credit Corporation 5.630% 2/16/96 7,942 1,000 SAFECO Credit Corporation 5.630% 2/16/96 993 2,000 SAFECO Credit Corporation 5.400% 4/12/96 1,969 3,912 USAA Capital Corporation 5.670% 1/04/96 3,910 4,000 USAA Capital Corporation 5.670% 1/17/96 3,990 7,000 USAA Capital Corporation 5.680% 1/18/96 6,981 5,000 USAA Capital Corporation 5.660% 1/23/96 4,983 4,500 USAA Capital Corporation 5.680% 1/23/96 4,484 6,000 USAA Capital Corporation 5.650% 1/31/96 5,972 - --------- --------- 136,601 135,924 - --------- --------- MANUFACTURING -- 15.1% 8,923 Ford Motor Credit Company 5.700% 1/08/96 8,913 2,323 Ford Motor Credit Company 5.700% 1/19/96 2,317
30 118
Principal Interest Amortized Amount Issue Rate Maturity Cost - --------- ----------------------------------------------- -------- -------- --------- (All amounts in thousands) $ 1,600 Ford Motor Credit Company 5.670% 1/25/96 $ 1,594 3,942 Ford Motor Credit Company 5.700% 2/07/96 3,919 6,500 Ford Motor Credit Company 5.620% 2/13/96 6,456 5,157 Ford Motor Credit Company 5.690% 2/23/96 5,114 4,300 Ford Motor Credit Company 5.500% 3/01/96 4,261 3,112 Ford Motor Credit Company 5.460% 3/29/96 3,071 2,011 General Electric Capital Corporation 5.680% 1/12/96 2,008 7,000 General Electric Capital Corporation 5.690% 1/22/96 6,977 7,173 General Electric Capital Corporation 5.680% 1/26/96 7,145 3,500 General Electric Capital Corporation 5.690% 1/30/96 3,484 4,500 General Electric Capital Corporation 5.680% 2/01/96 4,478 4,364 General Electric Capital Corporation 5.640% 2/09/96 4,337 7,000 General Electric Capital Corporation 5.500% 2/26/96 6,940 5,569 General Electric Company 5.670% 2/05/96 5,538 5,000 Paccar Financial Corporation 5.670% 1/25/96 4,981 5,000 Paccar Financial Corporation 5.660% 2/08/96 4,970 5,000 Paccar Financial Corporation 5.660% 2/09/96 4,969 5,000 Paccar Financial Corporation 5.630% 2/28/96 4,955 5,000 Paccar Financial Corporation 5.600% 3/01/96 4,953 5,000 Paccar Financial Corporation 5.560% 3/14/96 4,944 - --------- --------- 106,974 106,324 - --------- --------- UTILITIES -- TELEPHONE -- 10.3% 12,000 American Telephone & Telegraph Corporation 5.670% 1/26/96 11,953 3,512 American Telephone & Telegraph Corporation 5.650% 2/12/96 3,489 5,000 American Telephone & Telegraph Corporation 5.610% 2/14/96 4,966 2,750 American Telephone & Telegraph Corporation 5.600% 2/20/96 2,729 2,276 American Telephone & Telegraph Corporation 5.570% 2/23/96 2,257 5,178 American Telephone & Telegraph Corporation 5.590% 2/27/96 5,132 5,000 American Telephone & Telegraph Corporation 5.490% 3/12/96 4,946 2,605 Ameritech Capital Funding Corporation 5.700% 1/16/96 2,599 7,000 Ameritech Capital Funding Corporation 5.590% 2/12/96 6,954 8,000 Bellsouth Capital Funding Corporation 5.660% 1/11/96 7,987 7,000 Bellsouth Capital Funding Corporation 5.630% 1/29/96 6,969 4,880 GTE California, Incorporated 5.630% 2/22/96 4,840 5,000 GTE California, Incorporated 5.560% 3/29/96 4,932 3,000 Pacific Bell 5.650% 1/31/96 2,986 - --------- --------- 73,201 72,739 - --------- --------- UTILITIES -- ENERGY & GAS -- 6.1% 5,010 Consolidated Natural Gas Company 5.620% 2/06/96 4,982 3,210 Consolidated Natural Gas Company 5.630% 2/07/96 3,192
31 119
Principal Interest Amortized Amount Issue Rate Maturity Cost - --------- ----------------------------------------------- -------- -------- --------- (All amounts in thousands) $ 4,000 National Rural Utilities Cooperative Finance Corp. 5.690% 1/12/96 $ 3,993 17,000 National Rural Utilities Cooperative Finance Corp. 5.680% 1/24/96 16,938 6,500 National Rural Utilities Cooperative Finance Corp. 5.650% 2/15/96 6,454 3,100 National Rural Utilities Cooperative Finance Corp. 5.620% 2/21/96 3,075 4,500 National Rural Utilities Cooperative Finance Corp. 5.550% 3/06/96 4,455 - --------- --------- 43,320 43,089 - --------- --------- FOOD/BEVERAGE/TOBACCO -- 4.9% 10,000 Anheuser Busch Companies, Incorporated 5.650% 1/10/96 9,986 8,000 Brown - Forman Corporation 5.680% 1/04/96 7,996 3,473 Brown - Forman Corporation 5.700% 1/16/96 3,465 4,945 Campbell Soup Company 5.670% 2/06/96 4,917 8,000 Campbell Soup Company 5.670% 2/06/96 7,954 - --------- --------- 34,418 34,318 - --------- --------- BROKERAGE -- 4.8% 5,200 Merrill Lynch & Company, Inc. 5.800% 1/03/96 5,198 9,000 Merrill Lynch & Company, Inc. 5.760% 1/18/96 8,975 3,500 Merrill Lynch & Company, Inc. 5.770% 1/26/96 3,486 7,000 Morgan Stanley Group, Incorporated 5.730% 1/05/96 6,996 3,000 Morgan Stanley Group, Incorporated 5.720% 1/10/96 2,996 6,432 Morgan Stanley Group, Incorporated 5.450% 3/22/96 6,353 - --------- --------- 34,132 34,004 - --------- --------- CHEMICAL/FOREST -- 3.6% 4,305 DuPont (E.I.) de Nemours & Company 5.650% 1/19/96 4,293 4,773 DuPont (E.I.) de Nemours & Company 5.670% 1/26/96 4,754 8,265 Great Lakes Chemical Corporation 5.700% 1/22/96 8,238 8,000 Great Lakes Chemical Corporation 5.650% 2/01/96 7,961 - --------- --------- 25,343 25,246 - --------- --------- DRUGS/HEALTH -- 3.2% 6,500 Schering Corporation 5.680% 1/16/96 6,485 8,000 Schering Corporation 5.560% 1/17/96 7,980 8,000 Warner - Lambert Company 5.580% 2/23/96 7,934 - --------- --------- 22,500 22,399 - --------- --------- ENERGY -- 3.1% 4,000 Chevron Oil Finance Company 5.680% 1/29/96 3,982 7,160 Chevron Oil Finance Company 5.700% 2/12/96 7,113
32 120
Principal Interest Amortized Amount Issue Rate Maturity Cost - --------- ----------------------------------------------- -------- -------- --------- (All amounts in thousands) $ 5,000 Chevron U.K. Investment PLC 5.700% 2/05/96 $ 4,972 5,796 Mobil Finance Corporation (Australia) 5.640% 2/02/96 5,767 - --------- --------- 21,956 21,834 - --------- --------- MEDIA/ENTERTAINMENT -- 3.0% 6,000 Dun and Bradstreet Corporation 5.580% 1/16/96 5,986 8,000 Knight Ridder, Incorporated 5.640% 2/14/96 7,945 7,500 McGraw Hill, Incorporated 5.680% 2/02/96 7,462 - --------- --------- 21,500 21,393 - --------- --------- ELECTRONIC/TECHNOLOGY -- 2.5% 3,048 IBM Corporation 5.690% 2/01/96 3,033 3,798 IBM Corporation 5.700% 2/02/96 3,779 5,500 IBM Credit Corporation 5.700% 1/30/96 5,475 5,000 Pitney Bowes Credit Corporation 5.640% 1/31/96 4,976 - --------- --------- 17,346 17,263 - --------- --------- MERCHANDISING -- 1.4% 7,000 Winn - Dixie Stores, Incorporated 5.660% 2/08/96 6,958 2,716 Winn - Dixie Stores, Incorporated 5.650% 2/23/96 2,694 - --------- --------- 9,716 9,652 694,126 Total Commercial Paper 690,561 - --------- --------- PORTFOLIO WEIGHTED AVERAGE MATURITY 32 Days $ 723,010 TOTAL INVESTMENTS -- 102.2% 719,445 ======== LIABILITIES, PLUS CASH AND OTHER ASSETS -- (2.2%) (15,452) --------- NET ASSETS -- 100.0% $ 703,993 ========
- --------------- VRN = Variable Rate Note See accompanying Notes to Financial Statements. 33 121 WILLIAM BLAIR MUTUAL FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1995 (all amounts in thousands)
INTERNATIONAL GROWTH GROWTH FUND FUND -------- ------------- ASSETS Investments at market (cost $270,957 and $83,301) $365,478 $89,577 Cash -- 4 Receivable for: Fund shares sold 926 270 Interest and dividends 316 52 Foreign withholding tax -- 149 Unrealized appreciation on foreign currency forward contracts -- 343 Deferred organization costs -- 20 Other assets 1 3 -------- ------------- Total assets 366,721 90,418 LIABILITIES Payable for: Fund shares redeemed 111 26 Investments purchased 3,297 462 Management fee and organization costs (Notes 1 and 2) 154 103 Other 123 65 -------- ------------- Total liabilities 3,685 656 -------- ------------- Net assets $363,036 $89,762 ========= ============= CAPITAL Capital stock $0.001 par value; 30,515; and 6,842 shares issued and outstanding $ 30 $ 7 Paid-in-surplus 268,053 83,708 Net unrealized appreciation on investments and foreign currency transactions (net of unrealized PFIC gain distribution of $0 and $414) 94,521 6,212 Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 113 (452) Undistributed net investment income 319 287 -------- ------------- Net assets $363,036 $89,762 ========= ============= Net asset value per share $ 11.90 $ 13.12 ========= =============
34 122 WILLIAM BLAIR MUTUAL FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1995 (all amounts in thousands)
LIMITED TERM INCOME TAX-FREE READY RESERVES FUND FUND FUND -------- ------------ -------------- ASSETS Investments (Cost $142,123; $18,793; and $719,445, respectively) $145,062 $19,087 $719,445 Cash -- 55 -- Receivable for: Fund shares sold 1,246 -- 8,500 Investments sold 1 -- -- Interest 1,475 234 507 Deferred organization costs -- 20 -- Other assets 2 -- 22 -------- ------------ -------------- Total assets 147,786 19,396 728,474 LIABILITIES Payable for: Fund shares redeemed 276 50 23,829 Management fee and organization costs (Notes 1 and 2) 75 20 360 Dividends -- -- 121 Other 65 6 171 -------- ------------ -------------- Total liabilities 416 76 24,481 -------- ------------ -------------- Net assets $147,370 $19,320 $703,993 ========= ============= =============== CAPITAL Capital stock ($0.001 par value; and 13,936; 1,941; and 703,993 shares issued and outstanding, respectively) $ 14 $ 2 $ 704 Paid-in-surplus 148,393 19,050 703,289 Net unrealized appreciation on investments 2,939 294 -- Accumulated undistributed net realized (loss) on investments (3,963) (30) -- Undistributed net investment income (13) 4 -- -------- ------------ -------------- Net assets $147,370 $19,320 $703,993 ========= ============= =============== Net asset value per share $ 10.57 $ 9.96 $ 1.00 ========= ============= ===============
35 123 WILLIAM BLAIR MUTUAL FUNDS, INC. STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (all amounts in thousands)
INTERNATIONAL GROWTH GROWTH FUND FUND ------- ------------- Investment income Dividends $ 1,621 $ 1,917 Interest 1,297 178 ------- ------ 2,918 2,095 Less foreign tax withheld (6) (194) ------- ------ Total investment income 2,912 1,901 ------- ------ Expenses Investment advisory fees (Note 2) 1,561 887 Custodian fees 77 190 Professional fees 41 37 Transfer agent fees 95 15 Registration fees 45 31 Organization costs -- 10 Miscellaneous 100 27 ------- ------ Total expenses 1,919 1,197 ------- ------ Net investment income 993 704 Net realized and unrealized gain (loss) on investments, foreign currency and other assets and liabilities Net realized gain (loss) on investments 13,274 (904) Less foreign tax withheld on investments sold -- (18) Net realized gain on foreign currency transactions -- 519 ------- ------ Total net realized gain (loss) 13,274 (403) Change in net unrealized appreciation on investments, and other assets and liabilities (Note 1) 58,269 5,958 ------- ------ Net realized and unrealized gain on investments, foreign currency and other assets and liabilities 71,543 5,555 ------- ------ Net increase in net assets resulting from operations $72,536 $ 6,259 ======= ======
36 124 STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (all amounts in thousands)
LIMITED TERM READY INCOME TAX-FREE RESERVES FUND FUND FUND ------- ------------ -------- Investment income Interest $10,278 $ 763 $36,158 ------- ------------ -------- Total investment income 10,278 763 36,158 ------- ------------ -------- Expenses Investment advisory fees (Note 2) 868 94 3,613 Custodian fees 57 41 115 Professional fees 33 29 38 Transfer agent fees 29 6 288 Registration fees 14 15 96 Organization costs 9 6 -- Miscellaneous 3 29 162 ------- ------------ -------- Total expenses before waiver 1,013 220 4,312 Less waiver of expenses (Note 2) -- (214) -- ------- ------------ -------- Net investment income 9,265 757 31,846 Net realized and unrealized gain (loss) on investments Net realized loss on investments (955) (22) -- Change in net unrealized appreciation on investments 11,783 764 -- ------- ------------ -------- Net realized and unrealized gain on investments 10,828 742 -- ------- ------------ -------- Net increase in net assets resulting from operations $20,093 $1,499 $31,846 ======= =========== =======
37 125 WILLIAM BLAIR MUTUAL FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (all amounts in thousands)
INTERNATIONAL GROWTH GROWTH FUND FUND 1995 1994 1995 1994 -------- -------- ------- ------- Operations Net investment income $ 993 $ 496 $ 704 $ 91 Net realized gain (loss) on investments and foreign currency transactions 13,274 12,614 (403) 3,093 Change in net unrealized appreciation on investments and other assets and liabilities 58,269 (2,378) 5,958 (4,427) -------- -------- ------- ------- Net increase (decrease) in net assets resulting from operations 72,536 10,732 6,259 (1,243) Distributions to shareholders from Net investment income (817) (423) (880)(a) (114) Net realized gain (13,275) (12,616) -- (3,679) Tax return of capital -- -- -- (431) -------- -------- ------- ------- (14,092) (13,039) (880) (4,224) Capital stock transactions Shares sold 106,709 78,439 20,612 34,962 Shares issued in reinvestment of income dividends and capital gain distributions 12,714 11,700 717 3,571 Less shares redeemed (32,391) (20,318) (7,349) (2,961) -------- -------- ------- ------- Change from capital stock transactions 87,032 69,821 13,980 35,572 -------- -------- ------- ------- Change in net assets 145,476 67,514 19,359 30,105 Net assets Beginning of period 217,560 150,046 70,403 40,298 -------- -------- ------- ------- End of period $363,036 $217,560 $89,762 $70,403 ======== ======== ======= ======= - ------------------------- Undistributed net investment income at the end of the period $ 319 $ 143 $ 343 $ -- ======== ======== ======= ======= - ------------------------- Capital stock transactions Shares sold 9,647 8,055 1,688 2,571 Shares issued in reinvestment of income dividends and capital gain distributions 1,092 1,251 55 289 Less shares redeemed (2,875) (2,072) (595) (224) -------- -------- ------- ------- Change from capital stock transactions 7,864 7,234 1,148 2,636 ======== ======== ======= =======
- --------------- (a) Includes $414 relating to PFIC transactions which are treated as ordinary income for Federal income tax purposes. 38 126 WILLIAM BLAIR MUTUAL FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (all amounts in thousands)
LIMITED TERM INCOME FUND TAX-FREE FUND READY RESERVES FUND 1995 1994 1995 1994(A) 1995 1994 -------- -------- ------- ------- ----------- ----------- Operations Net investment income $ 9,265 $ 10,929 $ 757 $ 477 $ 31,846 $ 17,669 Net realized (loss) on investments (955) (3,010) (22) (8) -- (1,268) Change in net unrealized appreciation (depreciation) on investments 11,783 (9,564) 764 (470) -- -- -------- -------- ------- ------- ----------- ----------- Net increase (decrease) in net assets resulting from operations 20,093 (1,645) 1,499 (1) 31,846 16,401 -------- -------- ------- ------- ----------- ----------- Distributions to shareholders from Net investment income (9,438) (10,769) (759) (471) (31,846) (17,669) Net realized gain -- (68) -- -- -- -- -------- -------- ------- ------- ----------- ----------- (9,438) (10,837) (759) (471) (31,846) (17,669) Capital contribution -- -- -- -- -- 1,268 Capital stock transactions Shares sold 23,930 16,905 7,367 15,809 2,514,548 1,950,105 Shares issued in reinvestment of income dividends and capital gain distributions 6,875 7,707 430 280 31,117 17,119 Less shares redeemed (37,880) (72,721) (3,333) (1,501) (2,362,949) (1,923,215) -------- -------- ------- ------- ----------- ----------- Change from capital stock transactions (7,075) (48,109) 4,464 14,588 182,716 44,009 -------- -------- ------- ------- ----------- ----------- Change in net assets 3,580 (60,591) 5,204 14,116 182,716 44,009 Net assets Beginning of period 143,790 204,381 14,116 -- 521,277 477,268 -------- -------- ------- ------- ----------- ----------- End of period $147,370 $143,790 $19,320 $14,116 $ 703,993 $ 521,277 ======== ======== ======= ======= ========== ========== - ------------------------- Undistributed net investment income at the end of the period $ (13) $ 160 $ 4 $ 6 $ -- $ -- ======== ======== ======= ======= ========== ========== - ------------------------- Capital stock transactions Shares sold 2,337 1,646 750 1,617 2,514,548 1,950,105 Shares issued in reinvestment of income dividends and capital gain distributions 668 760 44 29 31,117 17,119 Less shares redeemed (3,670) (7,126) (342) (157) (2,362,949) (1,923,215) -------- -------- ------- ------- ----------- ----------- Change from capital stock transactions (665) (4,720) 452 1,489 182,716 44,009 ======== ======== ======= ======= ========== ==========
- --------------- (a) For the period from January 24, 1994 (Commencement of Operations) to December 31, 1994. 39 127 NOTES TO FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES (a) Description of the Fund William Blair Mutual Funds, Inc. (the "Fund") is a no-load, open-end diversified mutual fund consisting of five portfolios, each with its own investment objective and policies. The Growth Fund is a portfolio whose principal objective is to provide long-term appreciation of capital by investing in well-managed companies in growing industries. The International Growth Fund is a portfolio which invests primarily in common stocks issued by companies domiciled outside the United States and securities convertible into, ex-changeable for, or having the right to buy such common stocks. The investment objective of the portfolio is long-term capital appreciation through investment in well-managed, quality, growth companies. The Income Fund is a portfolio designed to provide investors with as high a level of current income as is consistent with preservation of capital. The Limited Term Tax-Free Fund is a portfolio designed to provide investors with as high a level of current income exempt from Federal income tax as is consistent with preservation of capital. The Ready Reserves Fund is a money market portfolio designed for investors who are looking for professional management of their reserve assets. The Ready Reserves Fund portfolio seeks to obtain maximum current income consistent with preservation of capital and invests exclusively in high quality money market instruments. All of the portfolio's investments are subject to market fluctuations and fiscal risks. (b) Investment Securities Equity securities traded on national securities markets are valued at the last sale price or, in the absence of a sale on the date of determination, at the latest bid price. Long-term fixed-income securities are valued by using market quotations or independent services that use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. The value of a foreign security held is determined based upon its sale price on the foreign exchange or market on which it is traded as of the close of the appropriate exchange or, if there have been no sales during the day, at the latest bid price. Other securities are valued at fair value as determined in good faith by the Board of Directors. Short-term securities in all Funds except Ready Reserves Fund are valued at cost which approximates market value. Securities in Ready Reserves Fund are valued on the amortized cost method. Under this method, any premium or discount, as of the date an investment security is acquired, is amortized on a straight-line basis to maturity. Interest income is determined on the basis of interest accrued, adjusted for amortization of premium or discount. Dividend income is recorded on the ex-dividend date, except that certain 40 128 dividends from foreign securities are recorded as soon as the information is available. Securities transactions are recorded on the trade date. Realized gains and losses from securities transactions are reported on an identified cost basis. Put bonds may be redeemed at the discretion of the holder on specified dates prior to maturity. Variable rate bonds and floating rate notes earn interest at a coupon rate which fluctuates at specific time intervals. The interest rates shown in the Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund Portfolios of Investments are the coupon rates in effect at December 31, 1995. (c) Share Valuation and Dividends to Shareholders Shares are sold and redeemed on a continuous basis at net asset value. Each Fund determines net asset value per share by dividing the value of its Fund assets, less liabilities, by the number of shares outstanding as of the earlier of 3:00 p.m. or the daily close of business of the New York Stock Exchange for Growth Fund and International Growth Fund, 2:00 p.m. for Income Fund and Limited Term Tax-Free Fund and at 3:00 p.m. for Ready Reserves Fund. Dividends from net investment income of the Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund are declared at least semi-annually, annually, monthly, monthly and daily, respectively. Dividends payable to shareholders are recorded on the ex-dividend date. Dividends are determined in accordance with Federal income tax principles which may treat certain transactions differently from generally accepted accounting principles. The International Growth Fund has elected to mark-to-market its investments in Passive Foreign Investment Companies ("PFIC") for Federal income tax purposes. In accordance with this election, $414,000 in unrealized appreciation was recognized in 1995. The International Growth Fund's distribution for 1994 included $431,097 relating to a tax return of capital. The permanent book and tax difference relating to this distribution resulted in a reduction to Paid-in-Surplus. (d) Repurchase Agreements The Fund may enter into repurchase agreements through its custodian, whereby the Fund acquires ownership of a debt security and the custodian agrees, at the time of the sale, to repurchase the debt security from the Fund at a mutually agreed upon time and price. The Fund's policy is to take possession of securities under repurchase agreements. The Fund minimizes credit risk by (i) monitoring credit exposure of the custodian and (ii) monitoring collateral value on a daily basis and requiring additional collateral to be deposited with or returned to the Fund when deemed necessary. (e) Foreign Currency Translation and Forward Foreign Currency Contracts All assets and liabilities of the International Growth Fund denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rate at the day of valuation. The International Growth Fund may enter into forward foreign currency contracts as a means of managing the risks associated with changes in exchange rates for the purchase or sale of a specific amount of a particular foreign currency. Additionally, from time to time, the Fund may enter into contracts to hedge the value, in U.S. dollars, of securities it currently owns. Forward foreign currency contracts and foreign currencies are valued at the forward and current exchange rates, 41 129 respectively, prevailing on the day of valuation. Realized gains and losses from foreign currency transactions associated with purchases and sales of investments are included in the cost or proceeds. All other foreign currency transactions are included in net realized gain or loss from investments. (f) Income Taxes Each Fund intends to comply with the special provisions of the Internal Revenue Code available to regulated investment companies and, therefore, no provision for Federal income taxes has been made in the accompanying financial statements since the Funds intend to distribute their taxable income to their shareholders and be relieved of all Federal income taxes. At December 31, 1995 the International Growth Fund, the Income Fund and the Limited Term Tax-Free Fund have capital loss carryforwards of $118,000, $3,965,000 and $30,000, respectively. These loss carryforwards, which expire in 2003, 2002 and 2003, respectively, can be used to offset capital gains. (g) Organization Costs The initial organization costs of the International Growth Fund, Income Fund and the Limited Term Tax-Free Fund have been paid or accrued by William Blair & Company (the "Company") and the Funds will reimburse the Company for the amount of such expenses not exceeding $50,000. The deferred organization costs are being amortized on the straight-line method and repaid to the Company over a five year period. (2) INVESTMENT ADVISORY, TRANSACTIONS WITH AFFILIATES AND DIRECTOR'S FEES The Company serves as the Funds' Investment Adviser (the "Adviser") and provides administrative services to the Funds under a Management Agreement. Growth Fund pays the Company an advisory fee monthly at an annual rate of .625% of the first $75 million of average daily net assets of the Fund and .50% of the average daily net assets in excess of $75 million. The Fund may from time to time own portfolio securities with respect to which the Adviser makes a market and/or takes a position. International Growth Fund pays the Company an advisory fee monthly at an annual rate of 1.10% of the first $100 million of average daily net assets and .95% of average daily net assets in excess of $100 million. The Company has a sub-investment management agreement with Framlington Overseas Investment Management Limited (U.K.) and pays the sub-adviser a monthly fee at an annual rate equal to 0.40% of the first $100 million of average daily net assets and 0.275% of average daily assets in excess of $100 million. Income Fund pays the Company an advisory fee monthly at an annual rate of .25% of the first $100 million of average daily net assets of the Fund, .20% of the next $150 million and .15% in excess of $250 million of average daily net assets, plus 5.0% of the gross income earned. Limited Term Tax-Free Fund pays the Company an advisory fee monthly at an annual rate of .25% of the first $250 million of average daily net assets of the Fund and .20% in excess of $250 million, plus 7.0% of the gross income earned. The Company has voluntarily agreed to waive its management fee and has paid all other operating expenses of the Fund, except for the amortization of organization costs. 42 130 Ready Reserves Fund pays the Company an advisory fee monthly at an annual rate of .625% of the first $250 million of average daily net assets of the Fund, .60% of the next $250 million, .55% of the next $500 million, .50% of the next $2 billion, .45% of the next $2 billion, and .40% of average daily net assets in excess of $5 billion. The Company purchased U.S. Government guaranteed obligations at amortized cost from the Ready Reserves Fund in 1994. The excess of the purchase price (amortized cost) over the fair market value at the date of purchase was reflected as a capital contribution to the Fund. The Funds paid fees of $53,500 to non-affiliated directors of the Funds for the period ended December 31, 1995. (3) INVESTMENT TRANSACTIONS (000 OMITTED) Investment transactions, excluding money market instruments, for the period ended December 31, 1995, are as follows:
INTERNATIONAL LIMITED TERM GROWTH GROWTH INCOME TAX-FREE FUND FUND FUND FUND -------- ------------- ------- ------------ Purchases $162,814 $73,889 $70,669 $ 4,563 Proceeds from sales and maturities 87,922 59,521 75,728 3,794 Gross unrealized appreciation (depreciation) at December 31, 1995 is as follows: Unrealized appreciation $ 98,802 $11,041 $ 3,275 $ 311 Unrealized depreciation (4,281) (4,765) (336) (17) -------- ------- ------- ------- Net unrealized appreciation $ 94,521 $ 6,276 $ 2,939 $ 294 ======== ======= ======= =======
Cost of investments is the same for financial statement and federal income tax purposes. (4) FORWARD FOREIGN CURRENCY CONTRACTS (000 OMITTED) In order to protect itself against a decline in the value of the Japanese yen against the U.S. dollar, the International Growth Fund entered into a forward contract with its custodian to deliver Japanese Yen in exchange for U.S. dollars as described below. International Growth Fund bears the market risk that arises from changes in foreign exchange rates and bears the credit risk if the counterparty fails to perform under the contract. The unrealized gain associated with this forward contract is reflected in the accompanying financial statements. At December 31, 1995, the International Growth Fund had the following forward foreign currency contract outstanding:
CONTRACT UNREALIZED FOREIGN CURRENCY AMOUNT IN SETTLEMENT GAIN TO BE DELIVERED U.S. DOLLARS DATE AT 12/31/95 - --------------------- ------------ ------------------ ----------- 900,000 Japanese Yen $9,086 January 19, 1996 $ 343
43 131 FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, ------------------------------------------------------- GROWTH FUND 1995 1994 1993 1992 1991 - -------------------------------------------------------------- -------- -------- -------- -------- ------- Net asset value, beginning of period $ 9.600 $ 9.730 $ 9.390 $ 9.490 $ 6.970 Income from investment operations: Net investment income .034 .027 .035 .045 .070 Net realized and unrealized gain on investments 2.750 .581 1.389 .671 2.970 -------- -------- -------- -------- ------- Total from investment operations 2.784 .608 1.424 .716 3.040 Less distributions from: Net investment income .030 .025 .035 .047 .070 Net realized gain .454 .713 1.049 .769 .450 -------- -------- -------- -------- ------- Total distributions .484 .738 1.084 .816 .520 -------- -------- -------- -------- ------- Net asset value, end of period $ 11.900 $ 9.600 $ 9.730 $ 9.390 $ 9.490 ======== ======== ======== ======== ======= Total return (%) 29.07 6.45 15.51 7.61 44.37 Ratios to average daily net assets (%): Expenses .65 .71 .78 .83 .90 Net investment income .34 .32 .38 1.34 .83 Supplemental data: Net assets at end of period (in thousands) $363,036 $217,560 $150,046 $111,082 $91,433 Portfolio turnover rate (%) 32 46 55 27 33
YEARS ENDED DECEMBER 31, PERIOD ENDED ------------------------------- DECEMBER 31, INTERNATIONAL GROWTH FUND 1995 1994 1993 1992(a)(b) - ----------------------------------------------------------------- ------- ------- ------- ------------- Net asset value, beginning of period $12.360 $13.180 $10.130 $10.000 Income from investment operations: Net investment income (loss) .105 0.016 0.008 (0.011) Net realized and unrealized gain (loss) on investments and foreign currency and other assets and liabilities .785 (0.025) 3.401 0.141 ------- ------- ------- ------- Total from investment operations .890 (0.009) 3.409 0.130 Less distributions from: Net investment income .130(c) 0.024 -- -- Net realized gain -- 0.714 0.359 -- Tax return of capital -- 0.073 -- -- ------- ------- ------- ------- Total distributions .130 0.811 0.359 -- ------- ------- ------- ------- Net asset value, end of period $13.120 $12.360 $13.180 $10.130 ======= ======= ======= ======= Total return (%) 7.22 (0.040) 33.6 1.3 Ratios to average daily net assets (%): Expenses(d) 1.48 1.51 1.71 1.88 Net investment income(d) .87 .15 .11 (.56) Supplemental data: Net assets at end of period (in thousands) $89,762 $70,403 $40,298 $10,767 Portfolio turnover rate (%) 77 40 83 5
- --------------- (a) Ratios are annualized except total returns for periods less than one year. (b) For the period October 1, 1992 (Commencement of Operations) to December 31, 1992. (c) Includes $.061 in PFIC transactions which are treated as ordinary income for Federal income tax purposes. (d) Without the waiver of expenses in 1993 and 1992, the expense ratios would have been 2.08% and 2.55% and the net investment income ratios would have been (.25)% and (1.22)%, respectively. 44 132
YEARS ENDED DECEMBER 31, ------------------------------------------------------- INCOME FUND 1995 1994 1993 1992 1991 - --------------------------------------------------------- -------- -------- -------- -------- ------- Net asset value, beginning of period $ 9.850 $ 10.580 $ 10.600 $ 10.770 $10.200 Income from investment operations: Net investment income .646 .661 .651 .832 .945 Net realized and unrealized gain (loss) on investments .732 (.741) .159 (.089) .638 -------- -------- -------- -------- ------- Total from investment operations 1.378 (.080) .810 .743 1.583 Less distributions: Net investment income .658 .646 .651 .827 .870 Net realized gain -- .004 .179 .086 .143 -------- -------- -------- -------- ------- Total distributions .658 .650 .830 .913 1.013 -------- -------- -------- -------- ------- Net asset value, end of period $ 10.570 $ 9.850 $ 10.580 $ 10.600 $10.770 ======== ======== ======== ======== ======= Total return (%) 14.37 (.74) 7.82 7.17 16.47 Ratios to average daily net assets (%): Expenses(a) .68 .68 .70 .88 .92 Net investment income(a) 6.24 6.33 5.96 7.69 8.33 Supplemental data: Net assets at end of period (in thousands) $147,370 $143,790 $204,381 $136,896 $83,041 Portfolio turnover rate (%) 54 63 114 47 64
- --------------- (a) Without the waiver of expenses in 1991, the expense ratio would have been 1.06% and the net investment income ratio would have been 8.19%. 45 133
YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, LIMITED TERM TAX-FREE FUND 1995 1994(a)(b) - ------------------------------------------------------------------------ ------------ ------------ Net asset value, beginning of period $ 9.480 $ 10.000 Income from investment operations: Net investment income .446 .362 Net realized and unrealized gain (loss) on investments .482 (.524) ------------ ------------ Total from investment operations .928 (.162) Less distributions Net investment income .448 .358 ------------ ------------ Total distributions .448 .358 ------------ ------------ Net asset value, end of period $ 9.960 $ 9.480 ============= ============= Total return (%) 9.96 (1.60) Ratios to average daily net assets (%): Expenses (c) .04 .11 Net investment income(c) 4.61 4.06 Supplemental data: Net assets at end of period (in thousands) $ 19,320 $ 14,116 Portfolio turnover rate (%) 77 121
(a) Ratios are annualized except for total returns for periods of less than a year. (b) For the period from January 24, 1994 (Commencement of Operations) to December 31, 1994. (c) Without the waiver of expenses in 1995 and 1994, the expense ratios would have been 1.34% and 1.35% and net investment income ratios would have been 3.31% and 2.82%, respectively. FEDERAL TAX STATUS OF DIVIDENDS All of the dividends paid from net investment income by the Fund constitute tax-exempt interest that is not taxable for Federal income tax purposes; however, a portion of the dividends paid may be includable in the alternative minimum tax calculation. - ---------------
YEARS ENDED DECEMBER 31, -------------------------------------------------------- READY RESERVES FUND 1995 1994 1993 1992 1991 - -------------------------------------------------------- -------- -------- -------- -------- -------- Net asset value, beginning of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 Income from investment operations: Net investment income .0530 .0361 .0261 .0327 .0551 Net realized loss on investments -- (.0026) -- -- -- -------- -------- -------- -------- -------- Total from investment operations .0530 .0335 .0261 .0327 .0551 Less distributions from: Net investment income .0530 .0361 .0261 .0327 .0551 -------- -------- -------- -------- -------- Total distributions .0530 .0361 .0261 .0327 .0551 -------- -------- -------- -------- -------- Capital contribution -- .0026 -- -- -- -------- -------- -------- -------- -------- Net asset value, end of period $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 $ 1.0000 ======== ======== ======== ======== ======== Total return (%) 5.45 3.67(d) 2.64 3.32 5.64 Ratios to average daily net assets (%): Expenses .72 .71 .71 .71 .71 Net investment income 5.30 3.61 2.61 3.27 5.51 Supplemental data: Net assets at end of period (in thousands) $703,993 $521,277 $477,268 $448,797 $402,978
- --------------- (d) The total return includes the impact of the Company's capital contribution. Without the Company's capital contribution, the total return would have been 3.40%. 46 134 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders WILLIAM BLAIR MUTUAL FUNDS, INC. We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of William Blair Mutual Funds, Inc. (comprised of Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund) (together the "Funds") as of December 31, 1995, and the related statements of operations for the year then ended and changes in net assets for each of the two fiscal years in the period then ended, and the financial highlights for the periods indicated thereon. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of December 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of William Blair Mutual Funds, Inc. at December 31, 1995, and the results of their operations, the changes in their net assets and the financial highlights for the periods indicated thereon, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 2, 1996 47 135 THE BOARD OF DIRECTORS CONRAD FISCHER, CHAIRMAN Principal, William Blair & Company, L.L.C. VERNON ARMOUR Private Investor C. MATHEWS DICK, JR. Chairman, Intelligent Office Corp. EDWARD M. HOBAN Retired Principal, William Blair & Company, L.L.C. GEORGE KELM Retired Chairman of the Board, Sahara Coal Company, Inc. JAMES M. MCMULLAN Principal, William Blair & Company, L.L.C. JOHN H. OLWIN, MD Emeritus Attending Surgeon, Presbyterian- St. Luke's Hospital and Emeritus Professor of General Surgery, Rush Medical College JOHN B. SCHWEMM Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company JOHN W. STRAUB Chairman and President, W.F. Straub & Company W. JAMES TRUETTNER, JR., SENIOR VICE PRESIDENT Principal, William Blair & Company, L.L.C. - --------------------------------------------------------- Rocky Barber, President Mark A. Fuller, III, Senior Vice President Bentley M. Myer, Senior Vice President Norbert W. Truderung, Senior Vice President James S. Kaplan, Vice President John P. Kayser, Vice President Terence M. Sullivan, Vice President Walter Rucinski, Treasurer Sheila M. Johnson, Secretary - --------------------------------------------------------- (WM BLAIR LOGO) 222 West Adams Street Chicago, Illinois 60606 312-364-8000 INVESTMENT ADVISER (WM BLAIR LOGO) TRANSFER AGENT State Street Bank and Trust Company P.O. Box 9104 Boston, MA 02266-9104 800-635-2886 (Massachusetts 800-635-2840) (COPYWHITE) GROWTH FUND INTERNATIONAL GROWTH FUND INCOME FUND LIMITED TERM TAX-FREE FUND READY RESERVES FUND DECEMBER 31, 1995 ANNUAL REPORT This report has been prepared for the information of the shareholders of William Blair Mutual Funds, Inc. It is not to be construed as an offering to sell or buy any securities of the Fund. Such offering is made only by the Prospectus. 136 WILLIAM BLAIR MUTUAL FUNDS, INC. PART C OTHER INFORMATION ITEM 24. Financial Statements and Exhibits (a) Financial Statements: (i) Financial Statements included in Part A of the Registration Statement: For Growth Fund, International Growth Fund, Income Fund, and Ready Reserves Fund: Financial Highlights (ii) Financial Statements included in Part B of the Registration Statement: The following information contained in the Annual Report for William Blair Mutual Funds, Inc. (Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund) for the fiscal year ended December 31, 1995 is incorporated by reference into Part A. William Blair Mutual Funds, Inc. Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund Statements of Assets and Liabilities at December 31, 1995 Statements of Operations for the year ended December 31, 1995 Statements of Changes in Net Assets for the years ended December 31, 1995 and 1994 (for the period from January 24, 1994 (Commencement of Operations) to December 31, 1995 for the Limited Term Tax-Free Fund) Notes to Financial Statements C-1 137 Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund Schedules II, III, IV, V, VI and VII are omitted as the required information is not present Schedule I has been omitted as the required information is presented in the Schedules of Investments at December 31, 1995 (b) Exhibits 1a. Articles of Incorporation.1/ 1b. Form of Amendment to Articles of Incorporation. 2. By-laws, as amended.5/ 3. Inapplicable 4. See items 1 and 2 above. 5a. Form of Management Agreement. 5b. Form of Management Agreement dated January 5, 1988.2/ 5c. Amendment to Management Agreement.4/ 5d. Form of Second Amendment to Management Agreement.6/ 5e. Form of Third Amendment to Management Agreement.7/ 5f. Form of Sub-Investment Advisory Agreement.8/ _____________________ 1/ Also filed as an exhibit to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 2/ Incorporated herein by reference to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 4/ Incorporated herein by reference to Post-Effective Amendment No. 4 to Registrant's Registration Statement on Form N-1A as filed on or about July 27, 1990. 5/ Also filed as an exhibit to Post-Effective Amendment No. 5 to Registrant's Registration Statement on Form N-1A as filed on or about March 1, 1991. 6/ Incorporated herein by reference to Post-Effective Amendment No. 5 to Registrant's Registration Statement on Form N-1A as filed on or about March 1, 1991. 7/ Incorporated herein by reference to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A as filed on or about July 22, 1992. 8/ Form of agreement filed as an exhibit to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A as filed on or about July 22, 1992. C-2 138 5g. Form of Fourth Amendment to Management Agreement.9/ 6. Underwriting Agreement.3/ 7. Inapplicable. 8. Custodian Agreement. 9. Inapplicable. 10. Opinion and Consent of Vedder, Price, Kaufman & Kammholz. 11. Consent of Ernst & Young LLP. 12. Inapplicable. 13. Subscription Agreement.3/ 14. Inapplicable. 15. Inapplicable. 16. Schedule for calculation of performance quotation. 27. Financial Data Schedule. ITEM 25. Persons Controlled by or under Common Control with Registrant Inapplicable. ITEM 26. Number of Holders of Securities Number of holders of securities as of December 31, 1995:
Number of Title of Class Record Holders - -------------- -------------- Shares of common stock of: Growth Fund 8,357 International Growth Fund 1,054 Income Fund 2,165 Limited Term Tax-Free Fund 142 Ready Reserves Fund 20,044
____________________ 3/ Form of agreement filed as an exhibit to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 9/ Incorporated herein by reference to Post-Effective Amendment No. 9 to Registrant's Registration Statement on Form N-1A as filed on or about November 23, 1993. C-3 139 ITEM 27. Indemnification The Maryland Code, Corporations and Associations, Section 2-418, provides for indemnification of directors, officers, employees and agents. Article VII of the Registrant's Articles of Incorporation provides for indemnification of directors or officers under certain circumstances but does not allow such indemnification in cases of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. The Investment Management Agreement between the Registrant and William Blair & Company, L.L.C. (the "Adviser") provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties thereunder on the part of the Adviser, the Adviser shall not be liable for any error of judgment or mistake of law, or for any loss suffered by the Fund in connection with the matters to which such Agreement relates. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. ITEM 28. Business and Other Connections of Investment Adviser and Sub-Investment Adviser Registrant's investment manager is William Blair & Company, L.L.C., a limited liability company. In addition to its services to Registrant as investment manager as set forth in Parts A and B of this Registration Statement on Form N-1A, William Blair & Company, L.L.C. is a registered broker-dealer and investment adviser and engages in investment banking. The principal occupations of the principals and primary officers of William Blair & Company, L.L.C. are their services as principals and officers of that Company. The address of William Blair & Company, L.L.C. and Registrant is 222 West Adams Street, Chicago, Illinois 60606. Set forth below is information as to any other business, profession, vocation or employment of a substantial nature in which each principal of William Blair & Company, L.L.C. is, or at any time during the last two fiscal years has been, engaged for his own account or in the capacity of director, officer, employee, partner or trustee: C-4 140
Name and Position with Name of Company and/or William Blair & Company, L.L.C. Principal Business Capacity ------------------------------------------------------------------------------------------------------------ James L. Barber, Jr. LaRabida Hospital Foundation Vice President and Secretary Principal of the Board of Directors Stanford Associates President William Blair Mutual Funds, Inc. President Bowen Blair, The Art Institute of Chicago Trustee Senior Principal Chicago Historical Society Trustee Field Museum of Natural History Trustee Receptor Laboratories Director Edward McC. Blair, Sr., The Art Institute of Chicago Life Trustee Senior Principal College of The Atlantic Trustee Pullman Educational Foundation Life Trustee Rush Presbytarian-St. Luke's Life Trustee Medical Center University of Chicago Life Trustee Edward McC. Blair, Jr. Chicago Dock and Canal Trust Trustee Principal Chicago Zoological Society Deputy Chairman Research Industries, Inc. Director Sensar Corporation Director University of Chicago Hospital Trustee Kurt Beuchel, Social Security Fund of the Member Principal Principality of Liechtenstein Investment Advisory Board David G. Chandler, The Bruss Company Director Principal Encore Paper Company Director Gibraltar Packaging Group Director International Jensen Incorporated Director Morton Grove Pharmaceuticals, Inc. Director Predelivery Service Corporation Director Sherwood Enterprises, Inc. Director E. David Coolidge, III, United Stationers, Inc. Director Chief Executive Officer Pittway Corporation Director
C-5 141
Name and Position with Name of Company and/or William Blair & Company, L.L.C. Principal Business Capacity --------------------------------------------------------------------------------------------------------- Conrad Fischer APM Limited Partnership General Partner Chief Executive Officer Chicago Child Care Trustee Emeritus William Blair Mutual Funds, Inc. Chairman and Director Thomas A. FitzSimmons Credit Acceptance Corporation Director Principal Paul W. Franke, Music City Bagels, Inc. Director Principal Mark A. Fuller, III, Fuller Investment Company President Principal William Blair Mutual Funds, Inc. Senior Vice President John K. Greene, Chicago Horticultural Society Trustee Principal Children's Home & Aid Society Trustee of Illinois, Inc. Hazelden Chairman Illinois Advisory Committee Vulcan Materials Co. Director Thomas L. Greene, Tyler School of Secretarial 25% Owner Principal Science Samuel B. Guren, Falcon First Communications, L.P. Board of Advisors Principal Four M Corporation Director Marks Brothers Jewelers, Inc. Director Prime Cable of Alaska Board of Advisors Technetics Director James P. Hickey, Eagle Point Software Director Principal Edgar D. Jannotta, Sr., AAR Corporation Director Senior Principal AON Corporation Director Bandag, Incorporated Director Encyclopedia Britannica, Inc. Director Molex, Incorporated Director New York Stock Exchange, Inc. Director Oil-Dri Corporation of America Director Safety-Kleen Corporation Director
C-6 142
Name and Position with Name of Company and/or William Blair & Company, L.L.C. Principal Business Capacity - ------------------------------------------------------------------------------------------------- Sloan Value Company Director Unicom Corporation Director Edgar D. Jannotta, Jr., Big Sky Joint Venture General Partner Principal The Bruss Company Director Daiseytek International Director Gibraltar Packaging Director Greater Chicago Food Depository Co-Chairman Finance Steering Committee Mid-south Building Supplies Director Towne Holdings, Inc. Director Western Fidelity Holdings, Inc. Director Richard P. Kiphart, Allegheny College Board of Directors Principal McCormick Theological Seminary Board of Directors Woodlands Academy of the Trustee Sacred Heart Robert Lanphier, IV, Ag. Med, Inc. (Private) Chairman Principal Wayne P. Lockwood, Elco Industries, Incorporated Director Principal James McMullan, Listing Review Committee NASDAQ Principal Security Industry Association Director William Blair Mutual Funds, Inc. Director Timothy M. Murray, AGI, Inc. Director Principal The Bruss Company Director Card Establishment Services Director Daiseytek, Incorporated Director Mede America, Inc. Director Mid-south Building Supply Company Director Portland Food Products Director Sherwood Enterprises, Incorporated Director Technetics Corporation Director Towne Holdings, Inc. Director
C-7 143
Name and Position with Name of Company and/or William Blair & Company, L.L.C. Principal Business Capacity ------------------------------------------------------------------------------------------------------- Bentley M. Myer, Delnor Community Hospital Director Principal Foundation William Blair Mutual Funds, Inc. Senior Vice President Neal L. Seltzer, Scholarship and Guidance Foundation Director Principal Ronald B. Stansell, AFO Limited Partnership Limited Partner Principal Thomas H. Story, Security APL, Inc. Member, Advisory Council Principal Mark Timmerman, DIY Home Warehouse, Incorporated Director Principal Prophet 21, Incorporated Director Norbert W. Truderung, William Blair Mutual Funds, Inc. Senior Vice President Principal W. James Truettner, Jr., International Travel Services Director Principal Roberts Industries Director Shendandoah University Trustee William Blair Mutual Funds, Inc. Senior Vice President and Director
Name and position(s) with Framlington Overseas Name of Company and/or Investment Management Limited Principal Business Capacity ------------------------------------------------------------------------------------------------------- Gary Christopher FitzGerald Framlington Group plc Managing Director of (Director) Emerging Markets Framlington Investment Director Management Limited Warren Jay Coleman Framlington Group plc Operations Director (Director) Michael Haski Framlington Group plc Chairman of Emerging (Director) Markets Foster & Braithwaite Limited Director CCF & Partners Asset Director Management Limited European Smaller Companies Fund Director FIDA Holdings Director
C-8 144
Name and position(s) with Framlington Overseas Name of Company and/or Investment Management Limited Principal Business Capacity ----------------------------------------------------------------------------------------------------- Framlington Investment Director Management Limited Fordinvest Director Japan Gamma Director First Islamic Investment Trust Director Limited Oriel Overseas Limited Director Sam Finance Director Selection Amerique Director Selection Euravear Director Selection Plus Director Selection Sante Director Selection Europe Director Jean Luc Schilling Framlington Group plc Managing Director of (Director) International Division Framlington Investment Director Management Limited Framlington Overseas Investment Managing Director Management Limited Michael Andrew Vogel Framlington Group plc Managing Director (Director) Timothy Simon Thomas Key Framlington Group plc Economist/Strategist (Chief Investment Officer) Celia Linda Whitten Framlington Group plc Company Secretary (Company Secretary) Eileen Teresa Milnes Framlington Group plc Compliance Officer (Compliance Officers) Robert John Garton Jenkins Framlington Group plc Fund Manager (Fund Manager)
ITEM 29. Principal Underwriters (a) Inapplicable. (b) The principal business address of each principal and officer of William Blair & Company, L.L.C., principal underwriter for Registrant, is 222 West Adams Street, Chicago, Illinois 60606. See Item 28 for information with respect to officers and principals of William Blair & Company, L.L.C.. C-9 145 (c) Inapplicable. ITEM 30. Location of Accounts and Records All such accounts, books and other documents are maintained by the Registrant's officers at the offices of the Registrant and the offices of the Investment Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois, and also shareholder account information and original shareholder correspondence is available at the offices of the Transfer Agent and Dividend Paying Agent, Investors Bank and Trust Company, P.O. Box 9104, Boston, Massachusetts 02205-9104. ITEM 31. Management Services Inapplicable. ITEM 32. Undertakings (a) Inapplicable. (b) Inapplicable. (c) Registrant undertakes to furnish to each person to whom a prospectus is delivered a copy of the Registrant's latest annual report to shareholders upon request and without charge. C-10 146 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, and State of Illinois, on the 13th day of February, 1996. WILLIAM BLAIR MUTUAL FUNDS, INC. By:/s/James L. Barber, Jr. -------------------------------- James L. Barber, Jr., President Pursuant to the requirements of the Securities Act of 1933, this post-effective amendment to the registration statement has been signed below by the following persons in the capacity and on the date indicated.
Signature Title Date - --------- ----- ---- /s/ Vernon Armour Director February 13, 1996 - ------------------------------------------- Vernon Armour /s/ C. Mathews Dick, Jr. Director February 13, 1996 - ------------------------------------------- C. Mathews Dick, Jr. /s/ Conrad Fischer Director (Chairman of February 13, 1996 - ------------------------------------------- Conrad Fischer the Board) /s/George Kelm Director February 29, 1996 - ------------------------------------------- George Kelm /s/ James M. McMullan Director February 13, 1996 - ------------------------------------------- James M. McMullan
147
Signature Title Date - --------- ----- ---- /s/ John H. Olwin, M.D. Director February 13, 1996 - ------------------------------------------- John H. Olwin, M.D. /s/ John B. Schwemm Director February 13, 1996 - ------------------------------------------- John B. Schwemm /s/ John W. Straub Director February 13, 1996 - ------------------------------------------- John W. Straub /s/ W. James Truettner, Jr. Director February 13, 1996 - ------------------------------------------- W. James Truettner, Jr. /s/ James L. Barber, Jr. President (Principal February 13, 1996 - ------------------------------------------- Executive Officer) James L. Barber, Jr. /s/ Walter Rucinski Treasurer (Principal February 13, 1996 - ------------------------------------------- Financial Officer Walter Rucinski Principal Accounting Officer)
148 EXHIBIT INDEX 99.B1a. Articles of Incorporation.1/ 1b. Form of Amendment to Articles of Incorporation. 99.B2. By-laws, as amended.5/ 99.B3. Inapplicable. 99.B4. See items 1 and 2 above. 99.B5a. Form of Management Agreement. 99.B5b. Form of Management Agreement dated January 5, 1988.2/ 99.B5c. Amendment to Management Agreement.4/ 99.B5d. Form of Second Amendment to Management Agreement.6/ 99.B5e. Form of Third Amendment to Management Agreement.7/ 99.B5f. Sub-Investment Advisory Agreement.8/ 99.B5g. Form of Fourth Amendment to Management Agreement.9/ 99.B6. Underwriting Agreement.3/ 99.B7. Inapplicable. 99.B8. Custodian Agreement. 99.B9. Inapplicable. 99.B10. Opinion of Vedder, Price, Kaufman & Kammholz. 99.B11. Consent of Ernst & Young LLP. 99.B12. Inapplicable. 99.B13. Subscription Agreement.3/ 99.B14. Inapplicable. 99.B15. Inapplicable. 99.B16. Schedule for calculation of performance quotation. 27. Financial Data Schedule. - -------------------------------------------------------------------------------- 1/ Also filed as an exhibit to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 2/ Incorporated herein by reference to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 3/ Form of agreement filed as an exhibit to Registrant's initial Registration Statement on Form N-1A as filed on or about September 25, 1987. 4/ Incorporated herein by reference to Post-Effective Amendment No. 4 to Registrant's Registration Statement on Form N-1A as filed on or about July 27, 1990. 5/ Also filed as an exhibit to Post-Effective Amendment No. 5 to Registrant's Registration Statement on Form N-1A as filed on or about March 1, 1991. 6/ Incorporated herein by reference to Post-Effective Amendment No. 5 to Registrant's Registration Statement on Form N-1A as filed on or about March 1, 1991. 7/ Incorporated herein by reference to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A as filed on or about July 22, 1992. 8/ Form of agreement filed as an exhibit to Post-Effective Amendment No. 7 to Registrant's Registration Statement on Form N-1A as filed on or about July 22, 1992. 9/ Incorporated herein by reference to Post-Effective Amendment No. 9 to Registrant's Registration Statement on Form N-1A as filed on or about November 23, 1993. EX-99.B1A 2 ARTICLES OF INCORP. 1 EXHIBIT 99.B1a ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION WILLIAM BLAIR READY RESERVES. INC. WILLIAM BLAIR READY RESERVES, INC., a Maryland corporation (hereinafter called the Corporation) whose principal office in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202, hereby certifies to the State Department of Assessments and Taxation of Maryland, that: The charter of the Corporation is hereby amended by changing ARTICLE I; NAME, to read as follows: The name of the corporation is WILLIAM BLAIR MUTUAL FUNDS, INC. (hereinafter called the "Corporation"). The Board of Directors, at a meeting held February 5, 1991, unanimously approved and adopted a resolution in which was set forth the foregoing amendment to the Corporation's charter and recommended that the shareholders of both then existing series of the Corporation approve this amendment. A majority of the outstanding voting securities of each such series of the Corporation, such series being Ready Reserves Portfolio 4 Income Portfolio, approved this amendment at a shareholders meeting held April 23, 1991. 2 IN WITNESS WHEREOF, WILLIAM BLAIR READY RESERVES, INC. has caused this to be signed in its name and on its behalf by its President and witnessed by its Secretary on April 29, 1991. WILLIAM BLAIR READY RESERVES, INC. By: /s/James L. Barber, Jr. ----------------------------------- James L. Barber, Jr. President Witness: /s/Olga F. Theodore - ------------------------ Olga F. Theodore Secretary THE UNDERSIGNED, President of WILLIAM BLAIR READY RESERVES, INC., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/James L. Barber, Jr. ----------------------------------- James L. Barber, Jr. President 2 3 ARTICLES OF INCORPORATION OF WILLIAM BLAIR READY RESERVES, INC. The undersigned, James L. Barber, Jr., whose office address is 135 South LaSalle Street, Chicago, Illinois 60603, being at least eighteen years of age, does hereby form a corporation under the general laws of the State of Maryland. ARTICLE I NAME The name of the corporation is WILLIAM BLAIR READY RESERVES, INC. (hereinafter called the "Corporation"). ARTICLE II NATURE AND PURPOSE The nature of the business and the objects and purposes to be transacted, promoted or carried on are to engage in the business of an open-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), investing and reinvesting its assets in accordance with the provisions of these Articles of Incorporation ("Articles"), the Bylaws of the Corporation ("Bylaws") and applicable law. The general nature of its business shall be to buy, hold, sell, exchange, pledge and otherwise deal in notes, stock, bonds, options or other securities or investments of any nature; to do any and all acts and things 4 necessary or incidental thereto to the extent permitted business corporations under the General Laws of Maryland as from time to time amended ("Maryland Law"); to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Corporation; and to issue, sell, hold, redeem, purchase, transfer and reissue, or cancel the shares of its own capital stock. ARTICLE III PRINCIPAL OFFICE AND RESIDENT AGENT The post office address of the place at which the principal office of the Corporation in this State will be located is c/o of The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. The resident agent of the Corporation is The Corporation Trust Incorporated, a corporation of this State, the post office address of which is 32 South Street, Baltimore, Maryland 21202. ARTICLE IV DIRECTORS 4.1 The initial number of Directors of the Corporation shall be three (3), which number may be increased or decreased pursuant to the Bylaws of the Corporation but shall never be less than three. The election of Directors need not be by ballot. The names of the Directors who shall act until the first meeting of shareholders and until their successors are duly elected and qualify are: 2 5 Vernon Armour Conrad Fischer James M. McMullan 4.2 Any determination made in good faith and, as far as accounting matters are involved, in accordance with generally accepted accounting principles, by or pursuant to the direction of the Board of Directors, shall be final and conclusive as to the amount of the assets, debts, obligations or liabilities of the Corporation or of any class of stock of the Corporation; as to the amount of any reserves or charges set up and the propriety thereof; as to the time or purpose for creating such reserves or charges, or the use, alteration or cancellation of any reserves or charges (irrespective of whether any debt, obligation or liability for such reserves or charges shall have been created, shall have been paid or discharged or shall be then or thereafter required to be paid or discharged); as to the establishment or designation of procedures or methods to be employed for valuing any asset of the Corporation; as to the value of any asset; as to the allocation of any asset to a particular class or classes of shares; as to the funds available for the declaration of dividends, or as to the declaration of dividends; as to the charging of any liability to a particular class or classes of shares; as to the number of outstanding shares of any class or classes; as to the estimated expense to the Corporation in connection with purchases or redemptions of its shares;-as to the ability to liquidate investments in an orderly fashion; or as to any other matters relating to the issuance, sale, purchase or redemption or other acquisition or disposition of investments or its shares, or the determination of the net asset value per share of any class. 3 6 ARTICLE V CAPITAL STOCK 5.1 The total number of shares of all classes of stock which the Corporation, by resolution of the Board of Directors, shall have authority to issue is five billion (5,000,000,000), par value $0.001 per share, such shares having an aggregate par value of five million dollars ($5,000,000). Two billion (2,000,000,000) of such shares may be issued in the sole initial class, designated the Money Market Portfolio, subject, however, to the authority hereinafter granted to the Board of Directors to further classify and reclassify any such shares and, incident to such classification or reclassification or otherwise, to increase or decrease such number of shares. The balance of three billion (3,000,000,000) shares of such stock may be issued in such class, or in any new class or classes that may at any time be established by the Board of Directors, each consisting of such number of shares and having such preferences, conversion or other rights and such voting powers, restrictions, limitations as to dividends and qualifications and such terms or conditions of redemption, consistent with these Articles, as shall be determined from time to time by resolution or resolutions providing for the issuance of such stock adopted by the Board of Directors, to whom authority so to establish and determine the same is hereby expressly granted. 5.2 The Board of Directors is authorized, from time to time, by resolution, (a) to classify and reclassify any unissued shares of stock of the Corporation, by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such stock, and (b) to increase or decrease the aggregate number of shares of the stock, or the number of shares of stock of any 4 7 class, that the Corporation has authority to issue; but the number of shares of stock of any class shall not be reduced by the Board of Directors below the number of shares then outstanding. 5.3 Each class of stock of the Corporation now or hereafter designated shall have the following relative preferences, rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption: (1) Assets Belonging to the Class. All consideration received by the Corporation for the issue or sale of shares of a particular class, together with all income, earnings, profits and proceeds thereof (including any proceeds derived from the sale, exchange or liquidation thereof, and any assets derived from any reinvestment of such proceeds), and together with any other assets of the Corporation which are not readily identifiable as belonging to a particular class and which are allocated by or under the supervision of the Board of Directors, in its sole discretion, to the class, are herein referred to collectively as "assets belonging to" such class. The determination of the Board of Directors or its delegate as to such allocation shall be final and conclusive. The power to make such determinations may be delegated by the Board of Directors from time to time to one or more of the Directors or officers of the Corporation, or to an agent of the Corporation appointed for such purpose. (2) Liabilities Belonging to the Class. The liabilities incurred in respect of the class (including, in the discretion of the Board of Directors or its delegate, accrued expenses and reserves), and any other liabilities of the Corporation which are not readily identifiable as belonging to a particular class and which are allocated by or under the supervision of the Board of Directors, in its sole discretion, to the class (and which shall 5 8 be charged against the assets belonging to the class) are herein referred to collectively as the "liabilities belonging to" such class. The power to make determinations as to the amount of liabilities, including accrued expenses and revenues, which are to be charged to one or more particular classes may be delegated by the Board of Directors from time to time to one or more of the Directors or officers of the Corporation, or to an agent of the Corporation appointed for such purpose. (3) Voting Powers. On each matter submitted to a vote of the shareholders, each holder of shares of all classes of stock of the Corporation shall be entitled to one vote or fraction thereof for each share or fraction thereof standing in the name of such shareholder on the books of the Corporation, and all shares of the Corporation then issued and outstanding and entitled to vote, irrespective of class, shall be voted in the aggregate and not by class ("Single Class Voting"); provided, that: (a) as to any matter with respect to which a separate vote of any class is required by the 1940 Act or by Maryland Law, or as to any matter that the Board of Directors determines, in its sole discretion, concerns only one or more particular class or classes, a separate vote by that class or classes shall apply in lieu of Single Class Voting as described above; (b) in the event that for any matter the separate vote requirements referred to in (a) above apply with respect to one or more class or classes, then, subject to (c) below, the shares of all other classes shall vote as a single class on that matter; and (c) when the matter to be acted upon does not affect the interests of a particular class or classes, then only shares of the affected class or classes shall be entitled to be voted thereon. 6 9 (4) Net Asset Value. The net asset value per share of any class shall be the quotient obtained by dividing the value of the net assets of that class (being the value of the assets belonging to that class less the liabilities belonging to that class) by the total number of shares of that class outstanding. (5) Dividends. The relative rights of the shares of each class to receive dividends shall be as set forth in Article X of these Articles. (6) Redemption. The relative rights of the shares of each class to be redeemed or repurchased shall be as set forth in Article VI of these Articles. (7) Liquidation. The relative rights of the shares of each class upon the liquidation of the Corporation or any class shall be as set forth in Article XI of these Articles. ARTICLE VI ISSUANCE, SALE AND REDEMPTION OF STOCK 6.1 The Corporation, pursuant to a resolution of the Board of Directors, may from time to time issue and sell or provide for the issuance and sale of any authorized but unissued shares of any class of stock of the Corporation. All shares of the Corporation sold shall be sold for cash or such other types of consideration as the Board of Directors may deem advisable, subject to such limitations and requirements as may be set forth in these Articles or the Bylaws or under applicable law. 6.2 The Corporation may issue and sell fractions of shares having pro rata all the rights of full shares, including, without limitation, the right to vote and receive dividends; and 7 10 wherever the words "share" or "shares" are used in these Articles or in the Bylaws they shall be deemed to include fractions of shares where the context does not clearly indicate that only full shares are intended. 6.3 No holder of shares shall, as a shareholder, have any preemptive rights including any right to purchase or subscribe for any shares of the capital stock of the Corporation or any other security of the Corporation which it may issue or sell, other than such right, if any, as the Board of Directors in its discretion may determine. 6.4 Each holder of shares of a particular class shall have the right, at such times and on such terms and conditions as may be established by the Corporation, to require the Corporation to redeem all or any part of the shares of that class standing in the name of such shareholder on the books of the Corporation, at a redemption price per share equal to the net asset value per share of that class next determined in accordance with the Corporation's then current prospectus after the shares are properly tendered for redemption, less any redemption fee or other charge as may be determined from time to time by the Board of Directors and set forth in the Corporation's then current prospectus. 6.5 The Corporation may redeem the shares owned by a shareholder at such time as the value of all the shareholder's shares of any class is less than a particular minimum amount that may be determined from time to time by the Board of Directors and set forth in the Corporation's then current prospectus, which amount in any event shall not be greater than $5,000. 6.6 All redemptions or purchases of shares by the Corporation of any class of the Corporation's stock (a) shall be in cash, except that upon determination of the Board of 8 11 Directors redemptions may be made in kind as provided in the Corporation's then current prospectus; and (b) shall be made solely from assets belonging to such class. Notwithstanding anything in this Article to the contrary, the Corporation may postpone payment of the redemption price and may suspend the right of holders of shares of any class to require the Corporation to redeem shares of that class during any period or at any time when and to the extent permissible under the 1940 Act. Any shares of any class of the Corporation's stock purchased or obtained by the Corporation by purchase or redemption shall be deemed retired and shall thereafter have the status of authorized but unissued shares of such class, until such time as the Board of Directors shall reissue such shares. ARTICLE VII CUSTODIAN/TRANSFER AGENT 7.1 The Corporation may employ a custodian, which shall be a bank or trust company having an aggregate capital, surplus and undivided profits of at least $10,000,000, pursuant to such terms and conditions as the Board of Directors may direct and as contained in the Bylaws. 7.2 The Corporation may also employ such custodian, or some other party, as its agent to keep the books and accounts of the Corporation, and to furnish clerical and accounting services. The compensation to be paid to the custodian, or such other party, for such services as it may render to the Corporation shall be in such amount as may be agreed upon by the Corporation and the custodian, or such other party. 9 12 7.3 The Board of Directors in its discretion may employ a transfer agent, registrar or dividend disbursing agent for the Corporation under such terms and conditions as the Board shall deem advisable. ARTICLE VIII OTHER CONTRACTS 8.1 The Corporation, in the discretion of the Board of Directors, may from time to time enter into a contract or contracts with any one or more parties as an underwriter, providing for the sale of the shares of this Corporation. Such contract or contracts may also provide for the repurchase of shares of this Corporation by such underwriter as agent of the Corporation. 8.2 The Corporation, in the discretion of the Board of Directors, may from time to time enter into an investment advisory or management contract with any other person, firm or Corporation, hereinafter called the "manager," to furnish advice to the Corporation with respect to the desirability of investing in, purchasing or selling securities, or other property, or to determine what securities or other property shall be purchased or sold by the Corporation, and to furnish the Corporation such management, investment advisory, statistical and research facilities and such other services and facilities, if any, as the Board of Directors may deem desirable upon such terms and conditions as the Board of Directors may determine. 8.3 The Corporation, in the discretion of the Board of Directors, subject to the provisions of this Article, may in its discretion enter into any contract with any person, firm or corporation, irrespective of whether or not one or more of the Directors or officers of this Corporation may also be an officer, director, shareholder or member of such other person, firm 10 13 or corporation, and such contract shall not be invalidated or rendered voidable by reason of any such relationship. No person holding such relationship shall be liable because of such relationship for any 1088 or expense to the Corporation under or by reason of such contract, or accountable for any profit realized directly or indirectly therefrom, provided that such contract when executed was reasonable and fair, consistent with the provisions of these Articles and approved by a majority of the Board of Directors of this Corporation who are not so related, or by the vote of a majority of the outstanding shares of this Corporation. 8.4 Any contract entered into pursuant to the terms of this Article shall be consistent with and subject to the requirements of the 1940 Act, including any amendment thereto or other applicable act of Congress hereafter enacted, with respect to its duration, termination, authorization, approval, assignment, amendment or renewal. ARTICLE IX EXPENSES 9.1 Subject to the limitations contained in this Article, the Directors shall be entitled to reasonable remuneration from the Corporation for their services as Directors in such amount as may from time to time be fixed by vote of the Board of Directors. 9.2 The Corporation may incur such expenses as are necessary or appropriate in the performance of its functions and such expenses may include but are not limited to the following: compensation to be paid to any other party to an investment advisory or management contract with the Corporation entered into pursuant to Article VIII; the compensation to be paid to the officers, consultants and employees of the Corporation; office hire; ordinary office expenses; 11 14 investment advisory, statistical and research facilities; directors' fees; legal and accounting expenses; taxes and governmental fees; federal and state registration and qualification fees; cost of stock certificates; cost of reports and notices to shareholders; association dues; brokers' commissions; transaction costs; fees and expenses of any custodian; expenses of computing the net asset value; and fees and expenses of any transfer agent, registrar and dividend disbursing agent. During any period during which the determination of net asset value is suspended, the net asset value as last determined and effective shall for the purposes of this Article be deemed to be the net asset value as of the close of business on each business day until a new net asset value is again determined and made effective. 9.3 The provisions of this Article shall not preclude the payment of reasonable fees for legal or accounting services to any firm of which a Director or officer of the Corporation may be a member, shareholder, officer or director, nor of customary brokerage charges in connection with the purchase or sale of securities to any firm in the brokerage business of which a Director or officer of the Corporation may be a member, shareholder, officer or director; and no part of any such fee, charge or compensation shall be deemed compensation to such officer or Director within the purview of this Article. No compensation, commission, fee or profit which may be received by the other party to a contract entered into pursuant to Article VII shall be deemed compensation to any officer or Director of the Corporation simply because such officer or Director is also an officer, director, shareholder or member of such other party. 12 15 ARTICLE X DIVIDENDS 10.1 The Board of Directors may from time to time, in its discretion, declare, and the Corporation shall in such event pay, dividends to shareholders of any class of stock, in cash, shares of such class or any other property. The amount, source and payment thereof shall be within the discretion of the Board of Directors, except that distributions from assets belonging to a particular class of stock may be distributed only to the holders of shares of such class and calculated on the basis of generally accepted accounting principles. All dividends and distributions on shares of a particular class shall be distributed pro rata to the shareholders of that class in proportion to the number of shares of that class held by such holders at the date and time of record established for the payment of such dividends or distributions. No dividends or distributions need be made on shares purchased pursuant to orders received, or for which payment is made, after such date(s) and time(s) as the Board of Directors may determine. 10.2 The dividends and distributions declared by the Board of Directors pursuant to Section 10.1 hereof may vary from class to class to such extent and for such purposes as the Board of Directors may deem appropriate, including, but not limited to, the purpose of complying with requirements of regulatory authorities and applicable law. 10.3 The Corporation has the power, in the discretion of the Board of Directors, to distribute for any year as ordinary dividends and as capital gains distributions, respectively, amounts sufficient to enable the Corporation as a regulated investment company to avoid any liability for federal income tax in respect to that year. 13 16 10.4 In the case of a dividend payable in shares of stock or cash at the election of a shareholder, the Board of Directors may prescribe whether a shareholder failing to express his election before a given time shall be deemed to have elected to take cash rather than shares, or to take shares rather than cash, or to take shares with cash adjustment of fractions. ARTICLE XI LIQUIDATION 11.1 In the event that the determination of a majority of the Board of Directors to dissolve the Corporation is approved by the shareholders in accordance with Maryland Law, no further shares of the Corporation shall be issued, sold or purchased by the Corporation and the Directors shall immediately proceed to wind up the Corporation's affairs, liquidate the assets, pay all liabilities and expenses of the Corporation and distribute the remaining assets, if any, among the shareholders. The Board of Directors shall also do any other acts necessary to secure and complete the dissolution of the Corporation. Further, the Directors then holding office shall continue in office until the liquidation and dissolution of the Corporation has been completed. During the period of liquidation and until final distribution to the shareholders has been made, t he compensation of the Directors and all other parties shall be determined on the same basis as if the computation of the net asset value of the shares had been suspended. 11.2 In the event of the liquidation or dissolution of the Corporation or of a particular class of stock of the Corporation, shareholders of each class to be liquidated shall be entitled to receive, as a class, when and as declared by the Board of Directors, out of the assets of the class available for distribution to shareholders, the excess of the assets belonging to such class over 14 17 the liabilities belonging to the class. The assets so distributable to the shareholders of any class shall be distributed among such shareholders in proportion to the number of shares of such class held by them and recorded on the books of the Corporation. ARTICLE XII INDEMNIFICATION 12.1 The Corporation shall indemnify its directors, officers, employees and agents to the maximum extent required, and may indemnify such directors, officers, employees and agents to the maximum extent permitted under Maryland Law, the 1940 Act or other applicable law, subject to the limitations set forth in these Articles and Bylaws. 12.2 No provision of these Articles shall be effective (a) to require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the 1940 Act, or any rule, regulation or order of the Securities and Exchange Commission thereunder, or (b) to protect or purport to protect any Director, officer, employee or agent of the Corporation from liability to which (s)he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his/her office. ARTICLE XIII AMENDMENT The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles, in the manner now or hereafter prescribed by statute, upon the 15 18 affirmative vote of a majority of the outstanding shares of the Corporation; and all rights conferred upon shareholders herein are granted subject to this reservation. IN WITNESS WHEREOF, being the incorporator of William Blair Ready Reserves, Inc., I have executed these Articles of Incorporation, this 21st day of September, 1987. /s/James L. Barber, Jr. ----------------------------------- James L. Barber, Jr. 16 EX-99.B1B 3 AMEND TO ARTICLES OF INC. 1 EXHIBIT 99.B1b ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF WILLIAM BLAIR MUTUAL FUNDS, INC. WILLIAM BLAIR MUTUAL FUNDS, INC., a Maryland corporation (hereinafter called the Corporation) whose principal office in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202, hereby certifies to the State Department of Assessments and Taxation of Maryland, that: The charter of the Corporation is hereby amended by changing Section 5.2 of ARTICLE V; CAPITAL STOCK, to read as follows: 5.2 The Board of Directors is authorized, from time to time, by resolution, (a) to classify and reclassify any unissued shares of stock of the Corporation, by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such stock, and (b) to increase or decrease the aggregate number of shares of the stock, or the number of shares of stock of any class, that the Corporation has authority to issue; but the number of shares of stock of any class shall not be reduced by the Board of Directors below the number of shares then outstanding. As used in these Articles of Incorporation, a "class" of shares represents interests in the same assets, liabilities, income, earnings and profits of the Corporation; each "sub-class" of shares of a class represents interests in the same 2 underlying assets, liabilities, income, earnings and profits, but may differ from other sub-classes of such class with respect to fees and expenses or such other matters as shall be established by the Board of Directors. Subject to the provisions of Section 5.3 of this Article V and applicable law, the power of the Board of Directors to classify or reclassify any of the shares of capital stock shall include, without limitation, authority to classify or reclassify any such stock into one or more classes of capital stock and to divide and classify shares of any class into one or more sub-classes of such class, by determining, fixing or altering one or more of the following: (1) The distinctive designation of such sub-class or class and the number of shares to constitute such sub-class or class; provided that, unless otherwise prohibited by the terms of such sub-class or class, the number of shares of any sub-class or class may be decreased by the Board of Directors in connection with any classification or reclassification of unissued shares, and the number of shares of such sub-class or class may be increased by the Board of Directors in connection with any such classification or reclassification, and any shares of any sub-class or class which have been redeemed, purchased or otherwise acquired by the corporation shall remain part of the authorized capital stock and be subject to classification and reclassification as provided herein; (2) Whether or not and, if so, the rates, amounts and time at which, and the conditions under which, dividends shall be payable on shares of such sub-class or class; -2- 3 (3) Whether or not shares of such sub-class or class shall have voting rights in addition to any general voting rights provided by law and these Articles of Incorporation and, if so, the terms of such additional voting rights; (4) The rights of the holders of shares of such sub-class or class upon the liquidation, dissolution or winding up of the affairs of, or upon a distribution of the assets of, the Corporation. The charter of the Corporation is hereby further amended by adding a Section 6.7 to ARTICLE VI; ISSUANCE, SALE AND REDEMPTION OF STOCK, to read as follows: 6.7 The Corporation shall, to the extent permitted by applicable law, have the right at any time to redeem all or any part of any class or sub-class or of all classes or sub-classes, of shares of the Corporation, subject to such terms and conditions as the Board of Directors may from time to time approve. The Board of Directors, at a meeting held February 13, 1996, unanimously approved and adopted a resolution in which was set forth the foregoing amendment to the Corporation's charter, determined that the amendment was advisable and recommended that the shareholders of each existing class of the Corporation approve this amendment. A majority of the outstanding voting securities of each such class of the Corporation, such classes being Growth Fund, International Growth Fund, Income Fund, Limited Term Tax-Free Fund and Ready Reserves Fund, approved this amendment at a shareholders meeting held April 23, 1996. -3- 4 IN WITNESS WHEREOF, WILLIAM BLAIR MUTUAL FUNDS, INC. has caused these Articles of Amendment to be signed in its name and on its behalf by its President and witnessed by its Secretary on April ___, 1996. WILLIAM BLAIR MUTUAL FUNDS, INC. By: ---------------------------- James L. Barber, Jr. President Witness: - ---------------------------- Janet V. Gassmann Secretary -4- 5 THE UNDERSIGNED, President of WILLIAM BLAIR MUTUAL FUNDS, INC., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval hereof are true in all material respects, under the penalties of perjury. ---------------------------- James L. Barber, Jr. President -5- EX-99.B2 4 BY LAWS, AS AMENDED 1 EXHIBIT 99.B2 BYLAWS OF WILLIAM BLAIR MUTUAL FUNDS, INC. formerly WILLIAM BLAIR READY RESERVES, INC. (Restated as of February 5, 1991) ARTICLE I Shareholder Meetings 1. Place of Meetings. All meetings of the shareholders of the William Blair Ready Reserves, Inc. (the "Corporation") shall be held at such place, within or without the State of Maryland, as may be determined by the Board of Directors and as shall be stated in the notice of said meeting. 2. Holding of Meeting. No meeting of the shareholders of this Corporation shall be held unless required by applicable law or otherwise determined by the Board of Directors. 3. Call of Meetings. Meetings of the shareholders, for any purpose, unless otherwise prescribed by statute, may be called by the Board of Directors or the President at any time, and shall be called by the Board of Directors or the Secretary of the Corporation upon written application by one or more shareholders holding at least ten percent (10%) of the common stock of the Corporation, then issued and outstanding, and entitled to vote, requesting that a meeting be called for a purpose requiring action by the shareholders as provided herein or in the Articles of Incorporation, which purpose shall be specified in any such written application. Business transacted at such meetings shall be confined to the objects stated in the notice thereof. 2 4. Notice. Written notice of every meeting of the shareholders, stating the time, place and purpose or purposes for which the meeting is called, shall be given by the Secretary to each shareholder entitled to vote thereat and to any shareholder entitled by law to such notice. Such notice shall be given to each shareholder by mailing the same, postage prepaid, to the address of the shareholder as it appears on the books of the Corporation not less than ten (10) days nor more than ninety (90) days before the time fixed for such meeting. 5. Quorum. The holders of a majority of the shares of common stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the shareholders for the transaction of business, except as otherwise provided by applicable law. If such quorum shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time to a date not more than 120 days after the original record date for the meeting, without further notice other than announcement at the meeting. At such adjourned meeting, if a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 6. Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having the right to vote thereat, present in person or represented by proxy, shall determine any matter brought before such meeting, unless the matter is one for which a different vote is required under applicable law, the Article of Incorporation or these Bylaws. Each shareholder shall be entitled to one vote or fraction of a vote for each share or fraction thereof held by the shareholder on the record date determined for such meeting. 2 3 7. Proxies. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing subscribed by such shareholder and bearing a date not more than eleven (11) months prior to said meeting, which instrument shall be filed with the Secretary of the meeting before being voted. 8. Record Date. The Board of Directors may fix a record date not more than ninety (90) nor less than ten (10) days prior to the date for which a meeting is called, as of which the shareholders entitled to vote at such meeting, or any adjournment thereof, shall be determined, notwithstanding any transfer or the issue of any share occurring after such record date. 9. Communications of Shareholders. Whenever ten or more shareholders of record who have been such for at least six months preceding the date of application, and who hold in the aggregate shares either having a net asset value- of at least $25,000 or constituting at least one percent of the outstanding shares of the Corporation, shall apply to the Board of Directors in writing, stating that they wish to communicate with other shareholders with a view to obtaining signatures to a request for a meeting to consider removal of a Director and accompanied by a form of communication and request that they wish to transmit, the Board of Directors shall within five business days after receipt of such application either (a) afford to such applicants access to a list of the names and addresses of all shareholders as recorded on the books of the Corporation, or (b) inform such applicants as to the number of shareholders of record and the approximate cost of mailing to the shareholders of record the proposed communication and form of request. If the Board of Directors elects to follow the course specified in subparagraph 9(b) above, the Board of Directors, upon the written request of such 3 4 applicants, accompanied by a tender of the material to be mailed and of the reasonable expenses of mailing, shall, with reasonable promptness, mail such material to all shareholders of record at their addresses as recorded on the books of the Corporation. Notwithstanding the foregoing, the Board of Directors may refuse to mail such material on the basis and in accordance with the procedures set forth in the last two paragraphs of Section 16(c) of the Investment Company Act of 1940. ARTICLE II Directors 1. Number. The number of Directors which shall constitute the whole Board shall not be less than three (3) nor more than fifteen (15). The number of Directors may be increased or decreased by the Board of Directors prior to each meeting of shareholders for the election of Directors and shall be as stated in the notice of such meeting, but the tenure of office of any Director shall not be affected by any decrease in the number of Directors then in office. 2. Term; Retirement. Subject to death, resignation, removal or retirement, each Director shall hold office, during the lifetime of the Corporation, until the next meeting of shareholders brought for the purpose of electing Directors, and until his successor is elected and qualified. No Director will stand for reelection as Director at any election held after such Director shall have reached 70 years of age, and, after his successor shall have been elected and qualify, such Director shall retire. Directors need not be shareholders of the Corporation or residents of the State of Maryland. 4 5 3. Vacancies. Except as provided below: (a) if the number of Directors is increased by the Board of Directors, then the resulting vacancies may be filled by a majority of the entire Board of Directors, and (b) if the office of any Director or Directors becomes vacant for any other reason, then a majority of the remaining Directors, though less than a quorum, may choose a successor or successors. Vacancies may not be so filled by the Board of Directors unless, if immediately after filling any such vacancy, at least two-thirds (2/3) of the Directors then holding office shall have been elected to such office by the shareholders of the Corporation; otherwise such vacancy shall be filled, if at all, by vote of the shareholders at a meeting called for such purpose. A Director 80 elected by the Board shall hold office until the next election of Directors and until his successor is elected and qualified. In the event that at any time less than a majority of the Directors were elected by the shareholders, a special meeting of the shareholders shall be held as promptly as possible, and in any event within sixty days, for the purpose of electing the necessary new members, unless the Securities and Exchange Commission extends that period. 4. Powers. The business and affairs of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are consistent with the Articles of Incorporation, these Bylaws and applicable law, except those conferred upon or reserved to the shareholders under the Articles of Incorporation, these Bylaws or applicable law. 5. Removals. The shareholders, at any meeting called for such purpose, by vote of the holders of a majority of the outstanding shares entitled to vote, may remove from office any 5 6 Director and, unless the number of Directors constituting the whole Board is simultaneously reduced by the Board, elect a successor. 6. Meetings. Regular meetings of the Board of Directors shall be held at such time and place, either within or without the State of Maryland as shall from time to time be determined by the Board of Directors, and, if so determined, notices thereof need not be given. Special meetings of the Board of Directors may be held at any time when called by the Chairman of the Board, the President or two (2) or more Directors. Not less than twenty-four (24) hours' notice of any special meeting shall be given by the Secretary or other officer calling such meeting to each Director either in person or by telephone, mail or telegram. Such special meetings shall be held at such time and place, within or without the State of Maryland, as the notice thereof or waiver shall specify. Unless otherwise specified in the notice thereof, any and all business may be transacted at any meeting of the Board of Directors. Any member of the Board of Directors, or of any committee organized by the Board pursuant to Article III, may participate in any meeting of the Board or committee of the Board of Directors, by means of a telephone conference or similar communications equipment, provided that all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting. This paragraph shall not be applicable to settings held for the purpose of approving contracts or agreements with persons undertaking to serve as an investment adviser or principal underwriter to the Fund, or for the purpose of conducting any other business with respect to which the members of the Board are required, under applicable law, to attend the meeting in person in order to transact such business. 6 7 7. Quorum. At all settings of the Board of Directors, a majority of the Directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of the majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 8. Informal Action. Except as otherwise required by applicable law, any action to be taken by the Board of Directors may be taken without a meeting, if written consent to such action is signed by all members of the Board and filed with the minutes of the Board's proceedings. 9. Compensation. Directors may receive compensation for services to the Corporation in their capacities as Directors, as determined by the Board. ARTICLE III Committees The Board of Directors may elect from their own number, by resolution or resolutions passed by a majority of the whole Board, an executive committee to consist of two (2) or more Directors, which shall have the power to conduct the current and ordinary business of the Corporation while the Board of Directors is not in session. The Board of Directors may also, in the same manner, appoint from their own number from time to time other committees, the 7 8 number composing any such committee and the powers conferred thereon to be determined from the resolution creating the same. ARTICLE IV Notices 1. Manner of Giving. Whenever, under the provisions of the Articles of Incorporation, these Bylaws or applicable law, notice is required to be given to any shareholder or Director, such requirement shall not be construed to mean personal notice unless the context otherwise provide. Such notice may be given, in the case of shareholders, in writing, by mail, by depositing the same in a post office or letter box, in a postpaid sealed wrapper, addressed to such shareholder at such address as appears on the books of the Corporation; and, in the case of Directors, committees of Directors and advisory board members, by telephone, mail or telegram to the last business address known to the Secretary of the Corporation. Such notice shall be deemed to be given at the time when it is mailed, telephoned or telegraphed. 2. Waiver. Whenever any notice is required to be given under applicable law, the Articles of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, and, if given with respect to a meeting of the Board of Directors or a committee thereof, filed with the records of the meeting, shall be equivalent thereto. Attendance at any meeting where notice is required shall be deemed a waiver of the requirement for such notice. 8 9 ARTICLE V Officers 1. Selection. The Officers of the Corporation shall be a President, one or more Chief Operating Officers, a Secretary and a Treasurer, shall be elected by the Board of Directors and shall serve at the pleasure of the Board. The Board of Directors may elect one of its own members as Chairman of the Board. The Board of Directors may also elect one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other Officers as it may deem advisable, and may prescribe their respective duties. Two or more offices may be held by the same person, except that any person holding the office of President shall not hold the office of Vice President. Officers may be, but need not be, Directors. 2. Chairman of the Board. The Chairman of the Board, if one shall be elected, shall preside at all meetings of the shareholders and Board of Directors and shall perform such other duties as the Board of Directors may from time to time prescribe. 3. President. The President shall be the Chief Executive Officer of the Corporation and shall, in the absence of the Chairman, preside at all meetings of the shareholders and Board of Directors. The President shall have power to sign all certificates for shares of stock. The President shall perform such other duties as the Board of Directors shall from time to time prescribe. 4. Chief Operating Officers. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Fund or a different mode of execution is expressly prescribed by the Board of Directors or these Bylaws or where otherwise required by law, the Chief Operating Officer of a portfolio may execute for that portfolio any 9 10 documents or instruments which the Board has authorized to be executed or the execution of which is in the ordinary course of the Corporation's business. In general, he shall also perform such other duties as from time to time may be prescribed by the Chairman of the Board of Directors. 5. Vice Presidents. The Vice Presidents, in the order of their seniority or as designated by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties as the Board of Directors may from time to time prescribe. 6. Secretary. The Secretary shall record all votes and proceedings of meetings of the shareholders and of the Board of Directors in the corporate records. He shall give, or cause to be given, notice of all meetings of the shareholders and meetings of the Board of Directors when notice thereof is required. The Secretary shall have custody of the corporate seal of the Corporation and may affix the same to any instrument requiring the corporate seal and attest to the same with his signature. He shall have power to sign all certificates for shares of stock and shall perform such other duties as the Board of Directors may from time to time prescribe. 7. Assistant Secretaries. The Assistant Secretaries, in order of their seniority or as directed by the Board of Directors, shall in the absence or disability of the Secretary perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Directors may prescribe. 8. Treasurer. The Treasurer shall deliver all funds and securities of the Corporation which may come into his hands to such bank or trust company as the Board of Directors may designate as custodian. He shall keep such records of the financial transactions of the 10 11 Corporation as the Board of Directors shall prescribe. The Treasurer shall have power to sign all certificates for shares of stock and shall perform such other duties as the Board of Directors may from time to time prescribe. 9. Assistant Treasurers. The Assistant Treasurers, in order of their seniority or as directed by the Board of Directors, shall in the absence or disability of the Treasurer perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Directors may prescribe. 10. Term of Office: Removal: Vacancies. The Officers of the Corporation shall hold office until their successors are chosen and qualified. Any Officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the whole Board of Directors. If the office of any Officer shall become vacant for any reason, the vacancy shall (or, in the case of a Chairman of the Board, a Chief Operating Officer, a Vice President, an Assistant Secretary or an Assistant Treasurer, may) be filled by the Board of Directors. ARTICLE VI Shares and Stock Certificate 1. Issuance of Stock Certificates. The Board of Directors may authorize the issue of some or all of the shares of any or all its series without certificates. Such authorization shall not affect shares already represented by certificates until they are surrendered to the Corporation. 2. Form of Certificates; Replacement. If the Board of Directors shall not have adopted a resolution providing that the Corporation shall issue all shares of all classes without 11 12 certificates, each holder of shares of a class for which certificates may be issued shall be entitled to a certificate or certificates representing shares of such class owned by such shareholder, in such form as shall be approved by the Board of Directors. The certificates shall be signed by the President or a Vice President and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. Any or all of the signatures or the seal on such certificates say be a facsimile. In the case of any Officer who has signed or whose facsimile signature has been used on any such certificate shall cease to be such Officer, such certificate may be issued and delivered as though the person whose signature appears on the certificate had not ceased to be such Officer. All certificates for shares of a class shall be consecutively numbered or otherwise identified. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation, alleged to have been lost or destroyed. When authorizing the issue of a new certificate, the Board of Directors may, as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate, or its legal representative, to either advertise the same in such manner as it shall require or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. 3. Shareholder Open Accounts. The Corporation may (or, if the Board of Directors shall have authorized the issue of all shares without certificate pursuant to paragraph 1 of this Article VI, shall) maintain for each shareholder a shareholder open account in which shall be recorded such shareholder's ownership of shares and all changes therein. Even if the Board shall not have 80 authorized the issue of all shares without certificates, certificates need not be 12 13 issued for shares 80 recorded in a shareholder open account unless requested by such shareholder. 4. Transfers. Transfers of shares for which certificates have been issued will be made only upon surrender to the Corporation or its transfer agent of a certificate for shares of the same class duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer. Transfers of stock evidenced by open account authorized by Article VI, paragraph 3 will be made upon delivery to the Corporation or its transfer agent of instructions for transfer or evidence of assignment or succession of the shares of a particular class, in each case executed in such manner and with such supporting evidence as the Corporation or transfer agent may reasonably require. 5. Record Dates. The Board of Directors may fix in advance a date not exceeding ninety days preceding the date fixed for the payment of any dividend or the allotment of rights as a record date for the determination of the shareholders to receive any such dividend or allotment. 6. Registered Ownership. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, except as otherwise provided by the laws of Maryland ("Maryland Law"). 13 14 ARTICLE VII General Provisions 1. Disbursement of Funds. All checks, drafts, orders or instructions for the payment of money and all notes of the Corporation shall be signed as the Board of Directors may designate. 2. Voting Shares of Other Corporations. Unless otherwise ordered by the Board of Directors, the President or any Officer designated by the President shall have full power and authority to execute proxies to vote shares at, or attend, act and vote at, any meeting of shareholders of any other corporation in which this Corporation may own shares. 3. Execution of Instruments. All deeds, mortgages, bonds, contracts, stock powers, reports and other instruments may be executed on behalf of the Corporation by the Chairman of the Board, the President, any Vice President, or other Officer or agent authorized by the Board of Directors to act with respect to such matters. Such authorization may be general or specific. 4. Seal. The seal of the Corporation shall be in such form as the Board of Directors may from time to time determine. The seal may be affixed or reproduced or otherwise. In the event it is deemed inconvenient to use such seal at any time, the signature of the Corporation following the word "Seals shall be deemed the seal of the Corporation. 5. Fiscal Year. Except as otherwise from time to time provided by the Board of Directors, the fiscal year of the Corporation shall begin January 1 and end December 31. 6. Custodian. All funds, securities and other investments of the Corporation shall be deposited in the safekeeping of such banks or other companies as the Board of Directors of 14 15 the Corporation may from time to time determine. Every arrangement entered into with any bank or other company for the safekeeping of the securities and investments of the Corporation shall contain provisions complying with the 1940 Act and the general rules and regulations thereunder. 7. Auditor. An auditor shall be selected annually in accordance with the 1940 Act or any successor statute. ARTICLE VIII Indemnification 1. Indemnification of Directors and Officers. Except as provided in paragraph 2 herein, every person who is, or has been, a Director or Officer of the Corporation (including any person who, while a Director of the Corporation, has served at the request of the Corporation as a director, officer or trustee of another organization in which the Corporation has an interest as a shareholder, creditor or otherwise), hereinafter referred to as a "Covered Person, shall be indemnified by the Corporation to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by such person in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of such directorship, officership, trusteeship or employment, and against amounts paid or incurred by him in the settlement thereof. The words claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits or proceeding" (civil, criminal or other, including appeals), actual or threatened, and the words "liability" and "expenses" shall include, without 15 16 limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. 2. Limitation of Indemnification. No indemnification shall be provided hereunder to any Covered Person: (a) who shall have been finally adjudicated by a court or body before which the proceeding was brought: (i) to be liable to the Corporation or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (ii) not to have acted in good faith (A) in the case of a director acting in his or her official capacity with the Corporation, in the reasonable belief that his or her conduct was in the best interests of the Corporation, or 18 (B) in all other cases, in the reasonable belief that his or her conduct was at best not opposed to the best interests of the Corporation; or (b) in the event of a settlement, unless there has been a determination that such Director or Officer did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office: (i) by the court or other body approving the settlement; (ii) by at least a majority of those Directors who are neither interested persons of the Corporation nor are parties to the matter based upon 16 17 a review of readily available facts (as opposed to a full trial-type inquiry); or (iii) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial type inquiry); provided, however, that any shareholder may, by appropriate legal proceedings, challenge any such determination by the Directors, or by independent counsel. 3. Insurance. The rights of indemnification provided to Covered Persons herein may be insured against by policies maintained by the Corporation, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such director, trustee or officer and shall inure to the benefit of the heirs, executors and administrators of such person. Nothing contained herein shall affect any rights to indemnification to which Corporation personnel and other persons, other than Covered Persons, may be entitled by contract or otherwise under applicable law. 4. Expenses. Expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in paragraph 1 of this Article VIII may be paid by the Corporation from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Corporation if it is ultimately determined that he is not entitled to indemnification under this Article VIII; provided, however, that either: 17 18 (a) such Covered Person shall have provided appropriate security for such undertaking; (b) the Corporation is insured against losses arising out of any such advance payments; or (c) either a majority of the Directors who are neither interested persons of the Corporation nor are parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that such Covered Person will be found entitled to indemnification under this Article VIII. 5. Indemnification of Other Persons. Subject to the provisions of this Article VIII, the Corporation may indemnify, in the discretion of the Board of Directors, any person who is or has been an employee or agent of the Corporation or who has served at the request of the Corporation as an employee or agent of another organization in which the Corporation has an interest as a shareholder, creditor or otherwise, who is not a Covered Person, against any liability and all expenses reasonably incurred or paid by such person in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of such employment or agency and against amounts paid or incurred by him in the settlement thereof. 18 19 ARTICLE IX Amendments Either the Board of Directors or the shareholders may make, amend, alter or repeal the Bylaws at any meeting duly held. 19 EX-99.B5A 5 MGMT AGMT 1 EXHIBIT 99.B5a MANAGEMENT AGREEMENT AGREEMENT made as of this first day of May, 1996, by and between WILLIAM BLAIR MUTUAL FUNDS, INC., a Maryland corporation (the "Fund"), and WILLIAM BLAIR & COMPANY, L.L.C., an Illinois limited liability company (the "Manager"). WHEREAS, the Fund is an open-end, diversified management investment company registered under the Investment Company Act of 1940, the shares of common stock, $.001 per value per share ("Shares"), of which are registered or are to be registered under the Securities Act of 1933; and WHEREAS, the Fund is authorized to issue Shares in separate series with each such series representing the interests in a separate portfolio of securities and other assets; and WHEREAS, the Fund currently offers Shares in four portfolios, designated the Growth Fund, the International Growth Fund, the Income Fund and the Ready Reserves Fund, herein referred to as the "Existing Portfolios", together with any other Fund portfolios which may be established later and served by the Manager hereunder, being herein referred to collectively as the "Portfolios" and individually referred to as a "Portfolio"; and WHEREAS, the Fund desires at this time to retain the Manager to render investment advisory and management services to the Existing Portfolios, and the Manager is willing to render such services; NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. Employment; Services. The Fund hereby employs the Manager to act as the adviser for the Existing Portfolios and other Portfolios hereunder and to manage the investment 2 and reinvestment of the assets of such Portfolios in accordance with applicable investment objectives, policies and restrictions, and to administer its affairs to the extent requested by and subject to the supervision of the Board of Directors of the Fund for the period and upon the terms herein set forth. The investment of funds shall be subject to all applicable restrictions of the Articles of Incorporation and By-Laws of the Fund as may from time to time be in force. The Manager accepts such employment and agrees during such period to render such services, to furnish office facilities and equipment and clerical, bookkeeping and administrative services for the Fund, to permit any of its principals or employees to serve without compensation as directors or officers of the Fund if elected to such positions, and to assume the obligations herein set forth for the compensation herein provided. The Manager shall for all purposes herein provided be deemed to be an independent contractor and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Fund in any way or otherwise be deemed an agent of the Fund. It is understood and agreed that the Manager, by separate agreements with the Fund, may also serve the Fund in other capacities. 2. Additional Portfolios. In the event that the Fund establishes one or more portfolios other than the Existing Portfolios with respect to which it desires to engage the Manager to render investment advisory and management services hereunder, it shall notify the Manager in writing. If the Manager is willing to render such services and the Fund and the Manager agree upon the management fee rates (including breakpoints) to be payable by such portfolio or portfolios, the Manager shall notify the Fund in writing, whereupon such portfolio or portfolios shall become a Portfolio or Portfolios hereunder. -2- 3 3. Management Fee. For the services and facilities described in Section 1, the Fund will pay to the Manager a management fee based upon an annual percentage of the average daily net assets of each Portfolio, as follows: a. For the Growth Fund: .75% of average daily net assets. b. For the International Growth Fund: 1.10% of the first $250 million of average daily net assets; plus 1.00% of average daily net assets over $250 million. c. For the Income Fund: .25% of the first $250 million of average daily net assets; plus .20% of average daily net assets over $250 million; plus 5.0% of the gross income earned by the Portfolio. d. For the Ready Reserves Fund: .625% of the first $250 million of average daily net assets; plus .600% of the next $250 million of average daily net assets; plus .575% of the next $2,000 million of average daily net assets; plus .550% of average daily net assets over $2,500 million. The fee payable under this Agreement shall be calculated and accrued for each business day by applying the appropriate annual rates to the net assets of the Portfolio as of the close of the preceding business day, and dividing the sum so computed by the number of business days in the fiscal year. The fee for a given month shall be paid on the first business day of the following month. For the month and year in which this Agreement becomes effective or -3- 4 terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during the month and year, respectively. The services of the Manager to the Fund under this Agreement are not to be deemed exclusive, and the Manager shall be free to render similar services or other services to others so long as its services hereunder are not impaired thereby. 4. Expenses. In addition to the fee of the Manager, the Fund shall assume and pay expenses for services rendered by a custodian for the safekeeping of the Fund's securities or other property, for keeping its books for account, for any other charges of the custodian, and for calculating the net asset value of the Fund as provided in the prospectus of the Fund. The Manager shall not be required to pay and the Fund shall assume and pay the charges and expenses of its operations, including but not limited to compensation of the directors (other than those affiliated with the Manager), charges and expenses of independent auditors, of legal counsel, of any transfer or dividend disbursement agent, any registrar of the Fund, costs of acquiring and disposing of portfolio securities, interest, if any, on obligations incurred by the Fund, costs of share certificates and of reports, membership dues in the Investment Company Institute or any similar organization, reports and notices to shareholders, stationery, printing, postage, other like miscellaneous expenses and all taxes and fees payable to federal, state or other government agencies on account of the registration of securities issued by the Fund, filing of corporate documents or otherwise. The Fund shall not pay or incur any obligation for any expenses for which the Fund intends to seek reimbursement from the Manager as herein provided without first obtaining the written approval of the Manager. The Manager shall arrange, if desired by the Fund, for principals or employees of the Manager to serve, without -4- 5 compensation from the Fund, as directors, officers or agents of the Fund if duly elected or appointed to such positions and subject to their individual consent and to any limitations imposed by law. If expenses borne by the Fund for any Portfolio which the Manager manages in any fiscal year (including the Manager's fee, but excluding interest, taxes, fees incurred in acquiring and disposing of portfolio securities and, to the extent permitted, extraordinary expenses) exceed 1.5% of the first $30,000,000 of average daily net assets of such Portfolio and 1% of average daily net assets of the Portfolio over $30,000,000, the Manager will reduce its fee or reimburse the Portfolio for any excess. If for any month the expenses of a Portfolio properly chargeable to the income account shall exceed 1/12 of the percentage of average net assets allowable as expenses, the payment to the Manager with respect to such Portfolio for that month shall be reduced so that the total net expense will not exceed such percentage. As of the end of the Fund's fiscal year, however, the foregoing computations and payments shall be readjusted so that the aggregate compensation payable to the Manager for the year is equal to the percentage set forth in Section 3 hereof of the average net asset values as determined as described herein throughout the fiscal year, diminished to the extent necessary so that the total of the aforementioned expense items shall not exceed the expense limitation. The aggregate of repayments, if any, by the Manager to the Portfolio for the year shall be the amount necessary to limit the said net expense to said percentage. Notwithstanding anything in the foregoing to the contrary, the Manager shall not be obligated to reimburse the Portfolio in an amount exceeding its advisory fee for the period received from such Portfolio. -5- 6 The net asset value for each Portfolio shall be calculated in accordance with the provisions of the Fund's prospectus or at such other time or times as the directors may determine in accordance with the provisions of the Investment Company Act of 1940. On each day when the net asset value is not calculated, the net asset value of a share of a Portfolio shall be deemed to be the net asset value of such a share as of the close of business on the last day on which such calculation was made for the purpose of the foregoing computations. 5. Affiliations. Subject to applicable statutes and regulation, it is understood that directors, officers or agents of the Fund are or may be interested in the Manager as principals, agents or otherwise, and that the principals and agents of the Manager may be interested in the Fund otherwise than as a director, officer or agent. 6. Limitation of Liability of Manager. The Manager shall not be liable for any error of judgment or of law or for any loss suffered by the Fund in connection with the matters to which this Agreement relates, except loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Manager in the performance of its obligations and duties or by reason of its reckless disregard of its obligations and duties under this Agreement. 7. Term; Termination; Amendment. This Agreement shall become effective with respect to the Existing Portfolios on the date hereof and shall remain in full force until April 30, 1997, unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter with respect to the Existing Portfolios and each other Portfolio to which the Agreement shall have become applicable, but only so long as such continuance is specifically approved for each Portfolio at least annually in the manner required by the Investment Company Act of 1940 and the rules and regulations thereunder; provided, -6- 7 however, that if the continuation of this Agreement is not approved for a Portfolio, the Manager may continue to serve in such capacity for such Portfolio in the manner and to the extent permitted by the Investment Company Act of 1940 and the rules and regulations thereunder. This Agreement shall automatically terminate in the event of its assignment and may be terminated at any time without the payment of any penalty by the Fund or by the Manager on sixty (60) days written notice to the other party. The Fund may effect termination with respect to any Portfolio by action of the Board of Directors or by vote of a majority of the outstanding voting securities of such Portfolio. This Agreement may also be terminated with respect to any Portfolio at any time, without the payment of any penalty, by the Board of Directors or by vote of a majority of the outstanding voting securities of such Portfolio, in the event that it shall have been established by a court of competent jurisdiction that the Manager or any officer or principal of the Manager has taken any action which results in a breach of the covenants of the Manager set forth herein. The terms "assignment" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth in the Investment Company Act of 1940 and the rules and regulations thereunder. Termination of this Agreement shall not affect the right of the Manager to receive payments on any unpaid balance of the compensation described in Section 3 earned prior to such termination. As to each Portfolio of the Fund, this Agreement may be amended only by an instrument in writing signed by the party against which enforcement of the amendment is sought. An amendment of this Agreement affecting a Portfolio hereunder shall not be effective until -7- 8 approved by (i) vote of the holders of a majority of the outstanding voting securities of the Portfolio; and (ii) a majority of those Directors of the Fund who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any party to this Agreement, cast in person at a meeting called for the purpose of voting on such approval. 8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder shall not be thereby affected. 9. Notice. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 10. Applicable Law. This Agreement shall be construed in accordance with applicable federal law and the laws of the State of Illinois. -8- 9 IN WITNESS WHEREOF, the Fund and the Manager have caused this Agreement to be executed as of the day and year first above written. WILLIAM BLAIR MUTUAL FUNDS, INC. By: ------------------------------------- ATTEST: - --------------------------- WILLIAM BLAIR & COMPANY, L.L.C. By: ------------------------------------- ATTEST: - --------------------------- -9- EX-99.B5F 6 SUB-INVEST. ADV. AGMT 1 EXHIBIT 99.B5f SUB-INVESTMENT ADVISORY AGREEMENT AGREEMENT dated as of October 1, 1992 by and among WILLIAM BLAIR & COMPANY, a Delaware corporation and U.S. registered investment adviser (the "Adviser"), FRAMLINGTON OVERSEAS INVESTMENT MANAGEMENT LIMITED, an English corporation and U.S. registered investment adviser (the "Sub-Adviser"), and FRAMLINGTON GROUP plc, an English corporation ("Framlington"). WHEREAS, the Adviser is the investment manager for William Blair Mutual Funds, Inc. (the "Fund"), an open-end diversified, management investment company registered under the Investment Company Act of 1940, as amended ("1940 Act"); and WHEREAS, the Adviser serves as investment adviser and manager for the International Growth Shares Portfolio, an investment portfolio of the Fund (the "Portfolio") and wants to retain the Sub-Adviser as the Adviser's agent to furnish certain investment advisory services for the Portfolio; and WHEREAS, FRAMLINGTON is the parent corporation of the Sub-Adviser. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Appointment. The Adviser hereby appoints the Sub-Adviser to provide certain sub-investment management services to the Fund for the period and on the terms set forth in this Agreement. The Sub-Adviser accepts such appointment and agrees to furnish the services herein set forth for the compensation herein provided. 2. Management. Subject always to the supervision of the Fund's Board of Directors and the Adviser, the Sub-Adviser will furnish an investment program in respect of, and make investment decisions for, all assets of the Portfolio and place all orders for the purchase and sale of securities, all on behalf of the Portfolio. In the performance of its duties, the Sub-Adviser will satisfy its fiduciary duties to the Portfolio (as set forth in Section 8, below), and will monitor the Portfolio's investments, and will comply with the provisions of the Fund's Articles of Incorporation and By-Laws, as amended from time to time, and the stated investment objectives, policies and restrictions of the Portfolio. The Sub-Adviser and the Adviser will each make its officers and employees available to the other from time to time at reasonable times to review investment policies of the Portfolio and to consult with each other regarding the investment affairs of the Portfolio. The Sub-Adviser will report to the Board of Directors and to the Adviser with respect to the implementation of such program. The Sub-Adviser further agrees that it: (a) will use the same skill and care in providing such services as it uses in providing services to fiduciary accounts for which it has investment responsibilities; 2 (b) will conform with all applicable Rules and Regulations of the Securities and Exchange Commission and the Rules of IMRO (Investment Management Regulatory Organisation Limited) and in addition will conduct its activities under this Agreement in accordance with any applicable regulations of any governmental authority pertaining to its investment advisory activities; (c) will place orders pursuant to its investment determinations for the Portfolio either directly with the issuer or with any broker or dealer. In placing orders with brokers and dealers, the Sub-Adviser will attempt to obtain the most favorable overall results, taking into account the net price, the method of execution and research services provided. Consistent with this obligation, when the execution and price offered by two or more brokers or dealers are comparable, the Sub-Adviser may, in its discretion, purchase and sell portfolio securities to and from brokers and dealers who provide the Sub-Adviser with research advice and other services. In no instance will portfolio securities be purchased from or sold to the Adviser, the Sub-Adviser or any affiliated person of either the Fund, the Adviser, or the Sub-Adviser, except as may be permitted under the 1940 Act; (d) will report regularly to the Adviser and to the Board of Directors and will make appropriate persons available for the purpose of reviewing with representatives of the Adviser and the Board of Directors on a regular basis at reasonable times the management of the Portfolio, the performance of the Portfolio in relation to standard industry indices, interest rate considerations and general conditions affecting the marketplace and will provide various other reports from time to time as reasonably requested by the Adviser; (e) will maintain books and records with respect to the Fund's securities transactions and will furnish the Adviser and the Fund's Board of Directors such periodic and special reports as the Board or the Adviser may request; (f) will act upon instructions from the Adviser not inconsistent with the fiduciary duties hereunder; (g) will treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund, and will not use records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld either where the Sub-Adviser may be exposed to civil or criminal contempt proceedings for failure to comply, or when requested to divulge such information by duly constituted authorities, or when so requested by the Fund; and (h) will receive the research and recommendations of the Adviser with respect to the investment and reinvestment of the assets of the Portfolio. 2 3 3. Books and Records. In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees that all records which it maintains for the Fund are the property of the Fund and further agrees to surrender promptly to the Fund any of such records or copies of such records upon the Fund's request. The Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. 4. Expenses. During the term of this Agreement, the Sub-Adviser will pay all expenses incurred by it in connection with its activities under this Agreement other than the cost of securities (including brokerage commissions, if any) purchased for the Fund. 5. Sub-Advisory Fees. For the services provided and the expenses assumed pursuant to this Agreement, the Adviser will pay the Sub-Adviser, and the Sub-Adviser agrees to accept as full compensation therefor, a sub-advisory fee, accrued daily and payable monthly, computed at the annual rate of .40% of the first $100,000,000 of average daily net assets of the Portfolio subject to this Agreement and .275% of the average daily net assets in excess of $100,000,000. 6. Services to Others. The Adviser understands, and has advised the Fund's Board of Directors, that the Sub-Adviser may in the future act as an investment adviser to fiduciary and other managed accounts and as investment adviser or sub-investment adviser to other investment companies. The Adviser has no objection to the Sub-Adviser's acting in such capacities, provided that whenever the Portfolio and one or more other investment companies, or accounts advised by the Sub-Adviser have available funds for investment, investments suitable and appropriate for each will be allocated in a manner which in the opinion of the Sub-Adviser is the most equitable for the Portfolio and all other companies concerned. The Adviser recognizes, and has advised the Fund's Board of Directors, that in some cases this procedure may adversely affect the size of the position that the Portfolio may obtain in a particular security. In addition, the Adviser understands, and has advised the Fund's Board of Directors, that the persons employed by the Sub-Adviser to assist in the Sub-Adviser's duties under this Agreement will not devote their full time to such service and nothing contained in this Agreement will be deemed to limit or restrict the right of Sub-Adviser or any of its affiliates to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. (a) The Adviser shall be responsible for making custodial arrangements for the Portfolio. (b) All assets in respect of which the Sub-Adviser shall provide services pursuant to this Agreement shall be the property of the Fund. All investments capable of registration will be registered in the name of the Fund or the Fund's Custodian. All certificates and documents of title relating to any such assets (whether or not in registered form) will be held for safekeeping by the Fund's Custodian. 3 4 (c) The Adviser hereby authorizes the Sub-Adviser to give such instructions to the Fund's Custodian for delivery of all documents relating to title, rights and privileges attaching to investments as is necessary in connection with any services provided by the Sub-Adviser under this Agreement. 7. Limitation of Liability. The Adviser will not take any action against the Sub-Adviser to hold the Sub-Adviser liable for any error of judgment or mistake of law or for any loss or failure to take profit or advantage in connection with the performance of the Sub-Adviser's duties under this Agreement, except a loss resulting from Sub-Adviser's willful misfeasance, bad faith, or gross negligence in the performance of its duties under this Agreement. In addition, the Sub-Adviser shall not be liable for any act or default by the Fund's Custodian. 8. Indemnification. The Adviser agrees to indemnify the Sub-Adviser and the Sub-Adviser and Framlington each agree to indemnify the Adviser against any claim against, loss or liability to such other party (including reasonable attorneys' fees) arising out of any action on the part of the indemnifying party which constitutes willful misfeasance, bad faith or gross negligence. 9. Duration and Termination. This Agreement will become effective as to the Portfolio on October 1, 1992, provided that it has been approved by vote of a majority of the outstanding voting securities of the Portfolio in accordance with the requirements under the 1940 Act, and, unless sooner terminated as provided herein, will continue in effect until April 30, 1994. Thereafter, if not terminated, this Agreement will continue in effect for the Portfolio for successive periods of twelve months each ending on April 30 of each year, provided such continuation is specifically approved at least annually (a) by the vote of a majority of those members of the Fund's Board of Directors who are not interested persons of the Fund, the Sub-Adviser, or the Adviser, cast in person at a meeting called for the purpose of voting on such approval, and (b) by the vote of a majority of the Fund's Board of Directors or by the vote of a majority of all votes attributable to the outstanding Shares of the Portfolio. Notwithstanding the foregoing, this Agreement may be terminated as to the Portfolio at any time, without the payment of any penalty, on sixty days' written notice by the Adviser or by the Sub-Adviser on ninety (90) days' written notice and may also be terminated at any time without penalty by the Board of Directors of the Fund or by vote of a majority of all votes attributable to the outstanding shares of the Portfolio on sixty (60) day's written notice to Sub-Adviser by the Fund. This Agreement will immediately terminate in the event of its assignment. (As used in this Agreement, the terms "majority of the outstanding voting securities," "interested persons" and "assignment" have the same meaning of such terms in the 1940 Act.) This Agreement shall automatically terminate in the event that the Management Agreement between the Adviser and the Fund with respect to the Portfolio is terminated, assigned or not renewed. 4 5 10. Amendment of this Agreement. No provision of this Agreement may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. 11. Notice. Any notice under this Agreement shall be in writing, addressed and delivered or mailed, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 12. Miscellaneous. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement is held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. This Agreement will be binding upon and shall inure to the benefit of the parties hereto and their respective successors and will be governed by the laws of the United States and the State of Illinois. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written. WILLIAM BLAIR & COMPANY By: /s/Norbert W. Truderung ------------------------------ Name: NORBERT W. TRUDERUNG Title: PARTNER, WILLIAM BLAIR & COMPANY, SENIOR V.P., WILLIAM BLAIR MUTUAL FUNDS, INC. FRAMLINGTON OVERSEAS INVESTMENT MANAGEMENT LIMITED By: /s/W.G. Greig ------------------------------ Name: W.G. Greig ----------------------------- Title: Director ---------------------------- 5 6 FRAMLINGTON OVERSEAS INVESTMENT MANAGEMENT LIMITED By: /s/M. Hasui ------------------------------ Name: M. Hasui ----------------------------- Title: Deputy Chairman ---------------------------- 6 EX-99.B6 7 UNDERWRITING AGMT 1 EXHIBIT 99.B6 UNDERWRITING AGREEMENT AGREEMENT made as of this 5th day of January, 1988, between WILLIAM BLAIR READY RESERVES, INC., a Maryland corporation (hereinafter called the "Fund"), and WILLIAM BLAIR & COMPANY, a general partnership (hereinafter called the "Underwriter"); W I T N E S S E T H: In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Fund hereby appoints the Underwriter as its agent for the distribution of shares (hereinafter called "shares") of stock of any of the Fund's authorized Portfolios in jurisdictions wherein shares of the Fund may legally be offered for sale; provided, however, that the Fund in its absolute discretion may issue or sell shares directly to holders of shares of the Fund upon such terms and conditions and for such consideration, if any, as it may determine, whether in connection with the distribution of subscription or purchase rights, the payment or reinvestment of dividends or distributions, or otherwise. 2. The Underwriter hereby accepts appointment as agent for the distribution of the shares of the Fund and agrees that it will use its best efforts with reasonable promptness to sell such part of the authorized shares of the Fund remaining unissued as from time to time shall be effectively registered under the Securities Act of 1933 ("Securities Act"), at prices determined as hereinafter provided and on terms hereinafter set forth, all subject to applicable federal and state laws and regulations and to the Articles of Incorporation and the Bylaws of the Fund and in accordance with the then effective registration statement ("Registration Statement") of the Fund under the Securities Act (and related prospectus). 3. The Fund agrees that it will use its best efforts to keep effectively registered under the Securities Act for sale as herein contemplated such shares as the Underwriter shall reasonably request and as the Securities and Exchange Commission shall permit to be so registered. 4. Notwithstanding any other provision hereof, the Fund may terminate, suspend or withdraw the offering of shares whenever, in its sole discretion, it deems such action to be desirable. 5. The Underwriter shall hold itself available to receive or will arrange for the receipt of orders for the purchase of shares of each Portfolio and shall have authority to receive and accept or reject, or arrange for the receipt and acceptance of, such orders in accordance with the provisions hereof and the then effective Registration Statement of the Fund. 6. Shares of the Fund offered for sale or sold by the Underwriter shall be so offered or sold at a price per share determined in accordance with the Fund's then current prospectus relating to the sale of such shares except as departure from such prices shall be permitted by the 2 rules and regulations of the Securities and Exchange Commission; provided, however, that any public offering price for shares of the Fund shall be the net asset value per share. The net asset value per share shall be determined in the manner and at the times set forth in the then effective Registration Statement (and related prospectus) relating to such shares. 7. The price the Fund shall receive for all shares purchased from the Fund shall be the net asset value used in determining the public offering price applicable to the sale of such shares. 8. The Underwriter shall issue and deliver on behalf of the Fund such confirmations of sales made by it as agent pursuant to this agreement as may be required. At or prior to the time of issuance of shares, the Underwriter will pay or cause to be paid to the Fund the amount due the Fund for the sale of such shares. Shares shall be registered on the transfer books of the Fund in such names and denominations as the Underwriter may specify. 9. The Fund will execute any and all documents and furnish any and all information which may be reasonably necessary in connection with the qualification of its shares for sale in such states as the Underwriter may reasonably request (it being understood that the Fund shall not be required without its consent to comply with any requirement which in its opinion is unduly burdensome). 10. The Fund will furnish to the Underwriter from time to time such information with respect to the Fund and its shares as the Underwriter may reasonably request for use in connection with the sale of shares of the Fund. The Underwriter agrees that it will not use or distribute or authorize the use, distribution or dissemination by others in connection with the sale of such shares any statements, other than those contained in the Fund's current prospectus or statement of additional information, except such supplemental literature or advertising as shall be lawful under federal and state securities laws and regulations, and that it will furnish the Fund with copies of all such material. 11. The Underwriter shall order shares of the Fund from the Fund only to the extent that it shall have received purchase orders therefor. The Underwriter will not make, or authorize any others to make, any short sales of shares of the Fund. 12. The Underwriter, as agent of and for the account of the Fund, may repurchase the shares of the Fund at such prices and upon such terms and conditions as shall be specified in the current prospectus or statement of additional information of the Fund. 13. In selling or reacquiring shares of the Fund for the account of the Fund, the Underwriter will in all respects conform to the requirements of all state and Federal laws and the Rules of Fair Practice of the National Association of Securities Dealers, Inc., relating to such sale or reacquisition, as the case may be, and will indemnify and save harmless the Fund from any damage or expense on account of any wrongful act by the Underwriter or any employee, representative or agent of the Underwriter. The Underwriter will observe and be bound by all 2 3 the provisions of the Agreement and Articles of Incorporation of the Fund (and of any fundamental policies adopted by the Fund pursuant to the Investment Company Act of 1940 and set forth in the Registration Statement, or as to which notice shall otherwise have been given to the Underwriter) which at any time in any way require, limit, restrict or prohibit or otherwise regulate any action on the part of the Underwriter. 14. The Underwriter will require each of its employees, agents or representatives to conform to the provisions hereof and the Registration Statement (and related prospectus) at the time in effect under the Securities Act with respect to the public offering price of the Fund's shares, and neither the Underwriter nor any such employees, agents or representatives shall withhold the placing of purchase orders so as to make a profit thereby. 15. The Fund will pay or cause to be paid expenses (including the fees and disbursements of its own counsel) and all taxes and fees payable to the federal, state or other governmental agencies on account of the registration or qualifications of securities issued by the Fund or otherwise. The Fund will also pay or cause to be paid expenses incident to the issuance of shares of beneficial interest, such as the cost of share certificates, issue taxes, and fees of the transfer agent. The Underwriter will pay all expenses (other than expenses which one or more dealers may bear pursuant to any agreement with the Underwriter) incident to the sale and distribution of the shares issued or sold hereunder, including, without limiting the generality of the foregoing, all expenses of printing and distributing any prospectus and of preparing, printing and distributing or disseminating any other literature, advertising and selling aids in connection with the offering of the shares for sale (except that such expenses need not include expenses incurred by the Fund in connection with the preparation, typesetting, printing and distribution of any registration statement or report or other communication to stockholders in their capacity as such) and expenses of advertising in connection with such offering. 16. This agreement shall become effective on the date hereof and shall continue in effect until April 30, 1989 and from year to year thereafter, but only so long as such continuance is approved in the manner required by the Investment Company Act of 1940. Either party hereto may terminate this agreement on any date by giving the other party at least six months prior written notice of such termination specifying the date fixed therefor. Without prejudice to any other remedies of the Fund in any such event the Fund may terminate this agreement at any time immediately upon any failure of fulfillment of any of the obligations of the Underwriter hereunder. 17. This agreement shall automatically terminate in the event of its assignment. 18. Any notice under this agreement shall be in writing, addressed and delivered or mailed, postage postpaid, to the other party at such address as such other party may designate for the receipt of such notice. 3 4 IN WITNESS WHEREOF, the Fund and the Underwriter have each caused this agreement to be executed on its behalf by an officer thereunto duly authorized and its seal to be affixed as of the day and year first above written. ATTEST: WILLIAM BLAIR READY RESERVES, INC. /s/Terence M. Sullivan By: /s/James L. Barber, Jr. - -------------------------- ------------------------------------ ATTEST: WILLIAM BLAIR & COMPANY /s/W. James Truettner, Jr. By: /s/Conrad Fischer - -------------------------- ------------------------------------ 4 EX-99.B8 8 CUSTODIAN AGMT 1 EXHIBIT 99.B8 CUSTODIAN AGREEMENT Between WILLIAM BLAIR MUTUAL FUNDS, INC. and INVESTORS BANK & TRUST COMPANY 2 TABLE OF CONTENTS
Page ---- 1. Bank Appointed Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Authorized Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Portfolio Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.4 Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Book-Entry System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.6 Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.7 Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Certification as to Authorized Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. Custody of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.1 Purchase of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.2 Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.3 Distributions and Expenses of Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.4 Payment in Respect of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.5 Repayment of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.6 Repayment of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.7 Foreign Exchange Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.8 Other Authorized Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.9 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.1 Segregation and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.2 Voting and Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.3 Book-Entry System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6.4 Use of a Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.5 Use of Book-Entry System for Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.6 Use of Immobilization Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.7 Eurodollar CDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.8 Options and Futures Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.9 Segregated Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 6.10 Interest Bearing Call or Time Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.11 Transfer of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7. Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8. Merger, Dissolution, etc. of Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9. Actions of Bank Without Prior Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10. Collections and Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 11. Maintenance of Records and Accounting Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 12. Fund Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 13. Concerning the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 13.1 Performance of Duties and Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 13.2 Agents and Subcustodians with Respect to Property of the Fund Held in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.3 Duties of the Bank with Respect to Property of the Fund Held Outside of the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 13.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 13.5. Fees and Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 13.6 Advances by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 14. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 15. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 16. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 17. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 18. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 19. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 20. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 21. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ii 4 CUSTODIAN AGREEMENT AGREEMENT made as of this 26th day of February, 1996, between WILLIAM BLAIR MUTUAL FUNDS, INC., a Maryland corporation (the "Fund"), and INVESTORS BANK & TRUST COMPANY (the "Bank"). The Fund, an open-end management investment company, desires to place and maintain all of its portfolio securities and cash in the custody of the Bank. The Bank has at least the minimum qualifications required by Section 17(f)(1) of the Investment Company Act of 1940 (the "1940 Act") to act as custodian of the portfolio securities and cash of the Fund, and has indicated its willingness to so act, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties hereto agree as follows: 1. Bank Appointed Custodian. The Fund hereby appoints the Bank as custodian of its portfolio securities and cash delivered to the Bank as hereinafter described and the Bank agrees to act as such upon the terms and conditions hereinafter set forth. 2. Definitions. Whenever used herein, the terms listed below will have the following meaning: 2.1 Authorized Person. Authorized Person will mean any of the persons duly authorized to give Proper Instructions or otherwise act on behalf of the Fund by appropriate resolution of its Board of Directors or the Board of Trustees as the case may be ("the Board"), and set forth in a certificate as required by Section 4 hereof. 2.2 Security. The term security as used herein will have the same meaning as when such term is used in the Securities Act of 1933, as amended, including, without limitation, any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to a foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to, or option contract to purchase or sell any of the foregoing, and futures, forward contracts and options thereon. 2.3 Portfolio Security. Portfolio Security will mean any Security owned by the Fund. 5 2.4 Officers' Certificate. Officers' Certificate will mean, unless otherwise indicated, any request, direction, instruction, or certification in writing signed by any two Authorized Persons of the Fund. 2.5 Book-Entry System. Book-Entry System shall mean the Federal Reserve-Treasury Department Book Entry System for United States government, instrumentality and agency securities operated by the Federal Reserve Bank, its successor or successors and its nominee or nominees. 2.6 Depository. Depository shall mean The Depository Trust Company ("DTC"), a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934 ("Exchange Act"), its successor or successors and its nominee or nominees. The term "Depository" shall further mean and include any other person authorized to act as a depository under the 1940 Act, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Board. 2.7 Proper Instructions. Proper Instructions shall mean (i) instructions (which may be continuing instructions) regarding the purchase or sale of Portfolio Securities, and payments and deliveries in connection therewith, given by an Authorized Person as shall have been designated in an Officers' Certificate, such instructions to be given in such form and manner as the Bank and the Fund shall agree upon from time to time, and (ii) instructions (which may be continuing instructions) regarding other matters signed or initialed by such one or more persons from time to time designated in an Officers' Certificate as having been authorized by the Board. Oral instructions will be considered Proper Instructions if the Bank reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be promptly confirmed in writing. The Bank shall act upon and comply with any subsequent Proper Instruction which modifies a prior instruction and the sole obligation of the Bank with respect to any follow-up or confirmatory instruction shall be to make reasonable efforts to detect any discrepancy between the original instruction and such confirmation and to report such discrepancy to the Fund. The Fund shall be responsible, at the Fund's expense, for taking any action, including any reprocessing, necessary to correct any such discrepancy or error, and to the extent such action requires the Bank to act the Fund shall give the Bank specific Proper Instructions as to the action required. Upon receipt of an Officers' Certificate as to the authorization by the Board accompanied by a detailed description of procedures approved by the Fund, Proper Instructions may include communication effected directly between electro-mechanical or electronic devices provided that the Board and the Bank are satisfied that such procedures afford adequate safeguards for the Fund's assets. 3. Separate Accounts. If the Fund has more than one series or portfolio, the Bank will segregate the assets of each series or portfolio to which this Agreement relates into a separate account for each such series or portfolio containing the assets of such series or portfolio (and all investment earnings thereon). Unless the context otherwise requires, any reference in 2 6 this Agreement to any actions to be taken by the Fund shall be deemed to refer to the Fund acting on behalf of one or more of its series, any reference in this Agreement to any assets of the Fund, including, without limitation, any Portfolio Securities and cash and earnings thereon, shall be deemed to refer only to assets of the applicable series, any duty or obligation of the Bank hereunder to the Fund shall be deemed to refer to duties and obligations with respect to the individual series, and any obligation or liability of the Fund hereunder shall be binding only with respect to the individual series, and shall be discharged only out of the assets of such series. 4. Certification as to Authorized Persons. The Secretary or Assistant Secretary of the Fund will at all times maintain on file with the Bank his or her certification to the Bank, in such form as may be acceptable to the Bank, of (i) the names and signatures of the Authorized Persons and (ii) the names of the members of the Board, it being understood that upon the occurrence of any change in the information set forth in the most recent certification on file (including without limitation any person named in the most recent certification who is no longer an Authorized Person as designated therein), the Secretary or Assistant Secretary of the Fund, will sign a new or amended certification setting forth the change and the new, additional or omitted names or signatures. The Bank will be entitled to rely and act upon any Officers' Certificate given to it by the Fund which has been signed by Authorized Persons named in the most recent certification. 5. Custody of Cash. As custodian for the Fund, the Bank will open and maintain a separate account or accounts in the name of the Fund or in the name of the Bank, as Custodian of the Fund, and will deposit to the account of the Fund all of the cash of the Fund, except for cash held by a subcustodian appointed pursuant to Section 13.2 or Section 13.3 hereof, including borrowed funds, delivered to the Bank, subject only to draft or order by the Bank acting pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper Instructions (which may be continuing instructions) or in the case of payments for redemptions and repurchases of outstanding shares of common stock of the Fund, notification from the Fund's transfer agent as provided in Section 7, requesting such payment, designating the payee or the account or accounts to which the Bank will release funds for deposit, and stating that it is for a purpose permitted under the terms of this Section 5, specifying the applicable subsection, the Bank will make payments of cash held for the accounts of the Fund, insofar as funds are available for that purpose, only as permitted in subsections 5.1-5.9 below. 5.1 Purchase of Securities. Upon the purchase of securities for the Fund, against contemporaneous receipt of such securities by the Bank or, against delivery of such securities to the Bank in accordance with generally accepted settlement practices and customs in the jurisdiction or market in which the transaction occurs, registered in the name of the Fund or in the name of, or properly endorsed and in form for transfer to, the Bank, or a nominee of the Bank, or receipt for the account of the Bank pursuant to the provisions of Section 6 below, each such payment to be made at the purchase price shown on a broker's confirmation (or transaction report in the case of Book Entry Paper) of purchase of the securities received by the Bank before such payment is made, as confirmed in the Proper Instructions received by the Bank before such payment is made. 3 7 5.2 Redemptions. In such amount as may be necessary for the repurchase or redemption of common shares of the Fund offered for repurchase or redemption in accordance with Section 7 of this Agreement. 5.3 Distributions and Expenses of Fund. For the payment on the account of the Fund of dividends or other distributions to shareholders as may from time to time be declared by the Board, interest, taxes, management or supervisory fees, distribution fees, fees of the Bank for its services hereunder and reimbursement of the expenses and liabilities of the Bank as provided hereunder, fees of any transfer agent, fees for legal, accounting, and auditing services, or other operating expenses of the Fund. 5.4 Payment in Respect of Securities. For payments in connection with the conversion, exchange or surrender of Portfolio Securities or securities subscribed to by the Fund held by or to be delivered to the Bank. 5.5 Repayment of Loans. To repay loans of money made to the Fund, but, in the case of final payment, only upon redelivery to the Bank of any Portfolio Securities pledged or hypothecated therefor and upon surrender of documents evidencing the loan; 5.6 Repayment of Cash. To repay the cash delivered to the Fund for the purpose of collateralizing the obligation to return to the Fund certificates borrowed from the Fund representing Portfolio Securities, but only upon redelivery to the Bank of such borrowed certificates. 5.7 Foreign Exchange Transactions. For payments in connection with foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery which may be entered into by the Bank on behalf of the Fund upon the receipt of Proper Instructions, such Proper Instructions to specify the currency broker or banking institution (which may be the Bank, or any other subcustodian or agent hereunder, acting as principal) with which the contract or option is made, and the Bank shall have no duty with respect to the selection of such currency brokers or banking institutions with which the Fund deals or for their failure to comply with the terms of any contract or option. 5.8 Other Authorized Payments. For other authorized transactions of the Fund, or other obligations of the Fund incurred for proper Fund purposes; provided that before making any such payment the Bank will also receive a certified copy of a resolution of the Board signed by an Authorized Person (other than the Person certifying such resolution) and certified by its Secretary or Assistant Secretary, naming the person or persons to whom such payment is to be made, and either describing the transaction for which payment is to be made and declaring it to be an authorized transaction of the Fund, or specifying the amount of the obligation for which payment is to be made, setting forth the purpose for which such obligation was incurred and declaring such purpose to be a proper corporate purpose. 4 8 5.9 Termination. Upon the termination of this Agreement as hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement. 6. Securities. 6.1 Segregation and Registration. Except as otherwise provided herein, and except for securities to be delivered to any subcustodian appointed pursuant to Section 13.2 hereof, the Bank as custodian, will receive and hold pursuant to the provisions hereof, in a separate account or accounts and physically segregated at all times from those of other persons, any and all Portfolio Securities which may now or hereafter be delivered to it by or for the account of the Fund. All such Portfolio Securities will be held or disposed of by the Bank for, and subject at all times to, the instructions of the Fund pursuant to the terms of this Agreement. Subject to the specific provisions herein relating to Portfolio Securities that are not physically held by the Bank, the Bank will register all Portfolio Securities (unless otherwise directed by Proper Instructions or an Officers' Certificate), in the name of a registered nominee of the Bank as defined in the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, and will execute and deliver all such certificates in connection therewith as may be required by such laws or regulations or under the laws of any state. The Fund will from time to time furnish to the Bank appropriate instruments to enable it to hold or deliver in proper form for transfer, or to register in the name of its registered nominee, any Portfolio Securities which may from time to time be registered in the name of the Fund. 6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank will vote any of the Portfolio Securities held hereunder, except in accordance with Proper Instructions or an Officers' Certificate. The Bank will execute and deliver, or cause to be executed and delivered, to the Fund all notices, proxies and proxy soliciting materials with respect to such Securities, such proxies to be executed by the registered holder of such Securities (if registered otherwise than in the name of the Fund), but without indicating the manner in which such proxies are to be voted. 6.3 Book-Entry System. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving deposits of Fund assets in the Book-Entry System, and (ii) for any subsequent changes to such arrangements following such approval, the Board has reviewed and approved the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval: (a) The Bank may keep Portfolio Securities in the Book-Entry System provided that such Portfolio Securities are represented in an account ("Account") of the Bank (or its agent) in such System which shall not include any assets of the Bank (or such agent) other than assets held as a fiduciary, custodian, or otherwise for customers; 5 9 (b) The records of the Bank (and any such agent) with respect to the Fund's participation in the Book-Entry System through the Bank (or any such agent) will identify by book entry Portfolio Securities which are included with other securities deposited in the Account and shall at all times during the regular business hours of the Bank (or such agent) be open for inspection by duly authorized officers, employees or agents of the Fund. Where securities are transferred to the Fund's account, the Bank shall also, by book entry or otherwise, identify as belonging to the Fund a quantity of securities in fungible bulk of securities (i) registered in the name of the Bank or its nominee, or (ii) shown on the Bank's account on the books of the Federal Reserve Bank; (c) The Bank (or its agent) shall pay for Portfolio Securities purchased for the account of the Fund or shall pay cash collateral against the return of Portfolio Securities loaned by the Fund upon (i) receipt of advice from the Book-Entry System that such Portfolio Securities have been transferred to the Account, and (ii) the making of an entry on the records of the Bank (or its agent) to reflect such payment and transfer for the account of the Fund. The Bank (or its agent) shall transfer securities sold or loaned for the account of the Fund upon (i) receipt of advice from the Book-Entry System that payment for securities sold or payment of the initial cash collateral against the delivery of Portfolio Securities loaned by the Fund has been transferred to the Account; and (ii) the making of an entry on the records of the Bank (or its agent) to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Book-Entry System of transfers of Securities for the account of the Fund shall identify the Fund, be maintained for the Fund by the Bank and shall be provided to the Fund at its request. The Bank shall send the Fund a confirmation, as defined by Rule 17f4 under the 1940 Act, of any transfers to or from the account of the Fund; (d) The Bank will promptly provide the Fund with any report obtained by the Bank or its agent on the Book-Entry System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Book-Entry System; and (e) The Bank shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Book-Entry System by reason of any gross negligence, wilful misfeasance or bad faith of the Bank or any of its agents or of any of its or their employees or from any reckless disregard by the Bank or any such agent of its duty to use its best efforts to enforce such rights as it may have against the Book-Entry System; at the election of the Fund, it shall be entitled to be substituted for the Bank in any claim against the Book-Entry System or any other person which the Bank or its agent may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any loss or damage. 6 10 6.4 Use of a Depository. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving deposits in DTC or other such Depository and (ii) for any subsequent changes to such arrangements following such approval, the Board has reviewed and approved the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval: (a) The Bank may use a Depository to hold, receive, exchange, release, lend, deliver and otherwise deal with Portfolio Securities including stock dividends, rights and other items of like nature, and to receive and remit to the Bank on behalf of the Fund all income and other payments thereon and to take all steps necessary and proper in connection with the collection thereof; (b) Registration of Portfolio Securities may be made in the name of any nominee or nominees used by such Depository; (c) Payment for Portfolio Securities purchased and sold may be made through the clearing medium employed by such Depository for transactions of participants acting through it. Upon any purchase of Portfolio Securities, payment will be made only upon delivery of the securities to or for the account of the Fund and the Fund shall pay cash collateral against the return of Portfolio Securities loaned by the Fund only upon delivery of the Portfolio Securities to or for the account of the Fund; and upon any sale of Portfolio Securities, delivery of the securities will be made only against payment therefor or, in the event Portfolio Securities are loaned, delivery of Portfolio Securities will be made only against receipt of the initial cash collateral to or for the account of the Fund; and (d) The Bank shall be liable to the Fund for any loss or damage to the Fund resulting from use of a Depository by reason of any gross negligence, willful misfeasance or bad faith of the Bank or its employees or from any reckless disregard by the Bank of its duty to use its best efforts to enforce such rights as it may have against a Depository. In this connection, the Bank shall use its best efforts to ensure that: (i) The Depository obtains replacement of any certificated Portfolio Security deposited with it in the event such Security is lost, destroyed, wrongfully taken or otherwise not available to be returned to the Bank upon its request; (ii) Any proxy materials received by a Depository with respect to Portfolio Securities deposited with such Depository are forwarded immediately to the Bank for prompt transmittal to the Fund; (iii) Such Depository immediately forwards to the Bank confirmation of any purchase or sale of Portfolio Securities and of the appropriate book entry made by such Depository to the Fund's account; 7 11 (iv) Such Depository prepares and delivers to the Bank such records with respect to the performance of the Bank's obligations and duties hereunder as may be necessary for the Fund to comply with the recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31(a) thereunder; and (v) Such Depository delivers to the Bank and the Fund all internal accounting control reports, whether or not audited by an independent public accountant, as well as such other reports as the Fund may reasonably request in order to verify the Portfolio Securities held by such Depository. 6.5 Use of Book-Entry System for Commercial Paper. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving participation in a system maintained by the Bank for the holding of commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year following such approval the Board has received and approved the arrangements, upon receipt of Proper Instructions and upon receipt of confirmation from an Issuer (as defined below) that the Fund has purchased such Issuer's Book-entry Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund, commercial paper issued by issuers with whom the Bank has entered into a book-entry agreement (the "Issuers"). In maintaining its Book-entry Paper System, the Bank agrees that: (a) the Bank will maintain all Book-entry Paper held by the Fund in an account of the Bank that includes only assets held by it for customers; (b) the records of the Bank with respect to the Fund's purchase of Book-entry Paper through the Bank will identify, by book-entry, Commercial Paper belonging to the Fund which is included in the Book-entry Paper System and shall at all times during the regular business hours of the Bank be open for inspection by duly authorized officers, employees or agents of the Fund; (c) the Bank shall pay for Book-Entry Paper purchased for the account of the Fund upon contemporaneous (i) receipt of advice from the Issuer that such sale of Book-Entry Paper has been effected, and (ii) the making of an entry on the records of the Bank to reflect such payment and transfer for the account of the Fund; (d) the Bank shall cancel such Book-Entry Paper obligation upon the maturity thereof upon contemporaneous (i) receipt of advice that payment for such BookEntry Paper has been transferred to the Fund, and (ii) the making of an entry on the records of the Bank to reflect such payment for the account of the Fund; (e) the Bank shall transmit to the Fund a transaction journal confirming each transaction in Book-Entry Paper for the account of the Fund on the next business day following the transaction; and 8 12 (f) the Bank will send to the Fund such reports on its system of internal accounting control with respect to the Book-Entry Paper System as the Fund may reasonably request from time to time. 6.6 Use of Immobilization Programs. Provided (i) the Bank has received a certified copy of a resolution of the Board specifically approving the maintenance of Portfolio Securities in an immobilization program operated by a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and (ii) for each year following such approval the Board has reviewed and approved the arrangement and has not delivered an Officer's Certificate to the Bank indicating that the Board has withdrawn its approval, the Bank shall enter into such immobilization program with such bank acting as a subcustodian hereunder. 6.7 Eurodollar CDs. Any Portfolio Securities which are Eurodollar CDs may be physically held by the European branch of the U.S. banking institution that is the issuer of such Eurodollar CD (a "European Branch"), provided that such Securities are identified on the books of the Bank as belonging to the Fund and that the books of the Bank identify the European Branch holding such Securities. Notwithstanding any other provision of this Agreement to the contrary, except as stated in the first sentence of this subsection 6.7, the Bank shall be under no other duty with respect to such Eurodollar CDs belonging to the Fund, and shall have no liability to the Fund or its shareholders with respect to the actions, inactions, whether negligent or otherwise of such European Branch in connection with such Eurodollar CDs, except for any loss or damage to the Fund resulting from the Bank's own gross negligence, willful misfeasance or bad faith in the performance of its duties hereunder. 6.8 Options and Futures Transactions. The Fund is not allowed under its prospectus to enter into any Option or Futures transactions. 6.9 Segregated Account. The Bank shall upon receipt of Proper Instructions establish and maintain a Segregated Account or Accounts for and on behalf of the Fund. 1. Upon receipt of Proper Instructions cash and/or Portfolio Securities may be transferred into the Segregated Account or Accounts: (a) in accordance with the provisions of any agreement among the Fund, the Bank and a broker-dealer registered under the Exchange Act and a member of the NASD or any Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Options Clearing Corporation and of any registered national securities exchange or the Commodity Futures Trading Commission or any registered Contract Market, or of any similar organizations regarding escrow or other arrangements in connection with transactions by the Fund; 9 13 (b) for the purpose of segregating cash or securities in connection with options purchased or written by the Fund or commodity futures purchased or written by the Fund; (c) for the deposit of liquid assets, such as cash, U.S. Government securities or other high grade debt obligations, having a market value (marked to market on a daily basis) at all times equal to not less than the aggregate purchase price due on the settlement dates of all the Fund's then outstanding forward commitment or "when-issued" agreements relating to the purchase of Portfolio Securities and all the Fund's then outstanding commitments under reverse repurchase agreements entered into with broker-dealer firms; (d) for the deposit of any Portfolio Securities which the Fund has agreed to sell on a forward commitment basis, all in accordance with Investment Company Act Release No. 10666; (e) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of Segregated Accounts by registered investment companies; or (f) for other proper corporate purposes, but only, in the case of this clause (f), upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board, or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such Segregated Account and declaring such purposes to be proper corporate purposes. 2. Upon receipt of Proper Instructions cash and/or Portfolio Securities may be withdrawn from the Segregated Account or Accounts. (a) in accordance with the provisions of any agreements referenced in (a) or (b) above; (b) for sale or delivery to meet the Fund's obligations under outstanding firm commitment or when-issued agreements for the purchase of Portfolio Securities and under reverse repurchase agreements; (c) for exchange for other liquid assets of equal or greater value deposited in the Segregated Account; (d) to the extent that the Fund's outstanding forward commitment or when issued agreements for the purchase of portfolio securities or reverse repurchase 10 14 agreements are sold to other parties or the Fund's obligations thereunder are met from assets of the Fund other than those in the Segregated Account; or (e) for delivery upon settlement of a forward commitment agreement for the sale of Portfolio Securities. 6.10 Interest Bearing Call or Time Deposits. The Bank shall, upon receipt of Proper Instructions relating to the purchase by the Fund of interest-bearing fixed-term and call deposits, transfer cash, by wire or otherwise, in such amounts and to such bank or banks as shall be indicated in such Proper Instructions. The Bank shall include in its records with respect to the assets of the Fund appropriate notation as to the amount of each such deposit, the banking institution with which such deposit is made (the "Deposit Bank"), and shall retain such forms of advice or receipt evidencing the deposit, if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall be deemed Portfolio Securities of the Fund and the responsibility of the Bank therefore shall be the same as and no greater than the Bank's responsibility in respect of other Portfolio Securities of the Fund. 6.11 Transfer of Securities. The Bank will transfer, exchange, deliver or release Portfolio Securities held by it hereunder, insofar as such Securities are available for such purpose, provided that before making any transfer, exchange, delivery or release under this Section the Bank will receive Proper Instructions requesting such transfer, exchange or delivery stating that it is for a purpose permitted under the terms of this Section 6.11, specifying the applicable subsection, or describing the purpose of the transaction with sufficient particularity to permit the Bank to ascertain the applicable subsection, only: (a) upon sales of Portfolio Securities for the account of the Fund, against contemporaneous receipt by the Bank of payment therefor in full, or, against payment to the Bank in accordance with generally accepted settlement practices and customs in the jurisdiction or market in which the transaction occurs, each such payment to be in the amount of the sale price shown in a broker's confirmation of sale of the Portfolio Securities received by the Bank before such transfer is made, as confirmed in the Proper Instructions received by the Bank before such transfer is made; (b) in exchange for or upon conversion into other securities alone or other securities and cash pursuant to any plan of merger, consolidation, reorganization, share split-up, change in par value, recapitalization or readjustment or otherwise, upon exercise of subscription, purchase or sale or other similar rights represented by such Portfolio Securities, or for the purpose of tendering shares in the event of a tender offer therefor, provided however that in the event of an offer of exchange, tender offer, or other exercise of rights requiring the physical tender or delivery of Portfolio Securities, the Bank shall have no liability for failure to so tender in a timely manner unless such Proper Instructions are received by the Bank at least two business days prior to the date required for tender, and unless the Bank (or its agent or subcustodian hereunder) has actual possession of such Security at least two business days prior to the date of tender; 11 15 (c) upon conversion of Portfolio Securities pursuant to their terms into other securities; (d) for the purpose of redeeming in kind shares of the Fund upon authorization from the Fund; (e) in the case of option contracts owned by the Fund, for presentation to the endorsing broker; (f) when such Portfolio Securities are called, redeemed or retired or otherwise become payable; (g) for the purpose of effectuating the pledge of Portfolio Securities held by the Bank in order to collateralize loans made to the Fund by any bank, including the Bank; provided, however, that such Portfolio Securities will be released only upon payment to the Bank for the account of the Fund of the moneys borrowed, except that in cases where additional collateral is required to secure a borrowing already made, and such fact is made to appear in the Proper Instructions, further Portfolio Securities may be released for that purpose without any such payment. In the event that any such pledged Portfolio Securities are held by the Bank, they will be so held for the account of the lender, and after notice to the Fund from the lender in accordance with the normal procedures of the lender, that an event of deficiency or default on the loan has occurred, the Bank may deliver such pledged Portfolio Securities to or for the account of the lender; (h) for the purpose of releasing certificates representing Portfolio Securities, against contemporaneous receipt by the Bank of the fair market value of such securities, as set forth in the Proper Instructions received by the Bank before such payment is made; (i) for the purpose of delivering securities lent by the Fund to a bank or broker dealer, but only against receipt in accordance with street delivery custom except as otherwise provided herein, of adequate collateral as agreed upon from time to time by the Fund and the Bank, and upon receipt of payment in connection with any repurchase agreement relating to such securities entered into by the Fund; (j) for other authorized transactions of the Fund or for other proper corporate purposes; provided that before making such transfer, the Bank will also receive a certified copy of resolutions of the Board, signed by an authorized officer of the Fund (other than the officer certifying such resolution) and certified by its Secretary or Assistant Secretary, specifying the Portfolio Securities to be delivered, setting forth the transaction in or purpose for which such delivery is to be made, declaring such transaction to be an authorized transaction of the Fund or such purpose to be a proper 12 16 corporate purpose, and naming the person or persons to whom delivery of such securities shall be made; and (k) upon termination of this Agreement as hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement. As to any deliveries made by the Bank pursuant to subsections (a), (b), (c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange therefor shall be delivered to the Bank. 7. Redemptions. In the case of payment of assets of the Fund held by the Bank in connection with redemptions and repurchases by the Fund of outstanding common shares, the Bank will rely on notification by the Fund's transfer agent of receipt of a request for redemption and certificates, if issued, in proper form for redemption before such payment is made. Payment shall be made in accordance with the Articles and Bylaws of the Fund, from assets available for said purpose. 8. Merger, Dissolution, etc. of Fund. In the case of the following transactions, not in the ordinary course of business, namely, the merger of the Fund into or the consolidation of the Fund with another investment company where the Fund is not the surviving entity, the sale by the Fund of all, or substantially all, of its assets to another investment company, or the liquidation or dissolution of the Fund and distribution of its assets, the Bank will deliver the Portfolio Securities held by it under this Agreement and disburse cash only upon the order of the Fund set forth in an Officers' Certificate, accompanied by a certified copy of a resolution of the Board authorizing any of the foregoing transactions. Upon completion of such delivery and disbursement and the payment of the fees, disbursements and expenses of the Bank, this Agreement will terminate. 9. Actions of Bank Without Prior Authorization. Notwithstanding anything herein to the contrary, unless and until the Bank receives an Officers' Certificate to the contrary, it will without prior authorization or instruction of the Fund or the transfer agent: 9.1 Endorse for collection and collect on behalf of and in the name of the Fund all checks, drafts, or other negotiable or transferable instruments or other orders for the payment of money received by it for the account of the Fund and hold for the account of the Fund all income, dividends, interest and other payments or distribution of cash with respect to the Portfolio Securities held thereunder; 9.2 Present for payment all coupons and other income items held by it for the account of the Fund which call for payment upon presentation and hold the cash received by it upon such payment for the account of the Fund; 9.3 Receive and hold for the account of the Fund all securities received as a distribution on Portfolio Securities as a result of a stock dividend, share split-up, reorganization, 13 17 recapitalization, merger, consolidation, readjustment, distribution of rights and similar securities issued with respect to any Portfolio Securities held by it hereunder; 9.4 Execute as agent on behalf of the Fund all necessary ownership and other certificates and affidavits required by the Internal Revenue Code or the regulations of the Treasury Department issued thereunder, or by the laws of any state, now or hereafter in effect, inserting the Fund's name on such certificates as the owner of the securities covered thereby, to the extent it may lawfully do so and as may be required to obtain payment in respect thereof. The Bank will execute and deliver such certificates in connection with Portfolio Securities delivered to it or by it under this Agreement as may be required under the provisions of the Internal Revenue Code and any Regulations of the Treasury Department issued thereunder, or under the laws of any state; 9.5 Present for payment all Portfolio Securities which are called, redeemed, retired or otherwise become payable, and hold cash received by it upon payment for the account of the Fund; and 9.6 Exchange interim receipts or temporary securities for definitive securities. 10. Collections and Defaults. The Bank will use all reasonable efforts to collect any funds which may to its knowledge become collectible arising from Portfolio Securities, including dividends, interest and other income, and to transmit to the Fund notice actually received by it of any call for redemption, offer of exchange, right of subscription, reorganization or other proceedings affecting such Securities. If Portfolio Securities upon which such income is payable are in default or payment is refused after due demand or presentation, the Bank will notify the Fund in writing of any default or refusal to pay within two business days from the day on which it receives knowledge of such default or refusal. In addition, the Bank will send the Fund a written report once each month showing any income on any Portfolio Security held by it which is more than ten days overdue on the date of such report and which has not previously been reported. 11. Maintenance of Records and Accounting Services. The Bank will maintain records with respect to transactions for which the Bank is responsible pursuant to the terms and conditions of this Agreement, and in compliance with the applicable rules and regulations of the 1940 Act and will furnish the Fund daily with a statement of condition of the Fund. The Bank will furnish to the Fund at the end of every month, and at the close of each quarter of the Fund's fiscal year, a list of the Portfolio Securities and the aggregate amount of cash held by it for the Fund. The books and records of the Bank pertaining to its actions under this Agreement and reports by the Bank or its independent accountants concerning its accounting system, procedures for safeguarding securities and internal accounting controls will be open to inspection and audit at reasonable times by officers of or auditors employed by the Fund and will be preserved by the Bank in the manner and in accordance with the applicable rules and regulations under the 1940 Act. 14 18 The Bank shall keep the books of account and render statements or copies from time to time as reasonably requested by the Treasurer or any executive officer of the Fund. The Bank shall assist generally in the preparation of reports to shareholders and others, audits of accounts, and other ministerial matters of like nature. The books and records maintained by the Bank on behalf of the Fund are the property of the Fund and will be surrendered upon request in accordance with Section 14. 12. Fund Evaluation. The Bank shall compute and, unless otherwise directed by the Board, determine as of the close of business on the New York Stock Exchange on each day on which said Exchange is open for unrestricted trading and as of such other hours, if any, as may be authorized by the Board the net asset value and the public offering price of a share of capital stock of the Fund, such determination to be made in accordance with the provisions of the Articles and By-laws of the Fund and Prospectus and Statement of Additional Information relating to the Fund, as they may from time to time be amended, and any applicable resolutions of the Board at the time in force and applicable; and promptly to notify the Fund, the proper exchange and the NASD or such other persons as the Fund may request of the results of such computation and determination. In computing the net asset value hereunder, the Bank may rely in good faith upon information furnished to it by any Authorized Person in respect of (i) the manner of accrual of the liabilities of the Fund and in respect of liabilities of the Fund not appearing on its books of account kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such reserves have been authorized, (iii) the source of the quotations to be used in computing the net asset value, (iv) the value to be assigned to any security for which no price quotations are available, and (v) the method of computation of the public offering price on the basis of the net asset value of the shares, and the Bank shall not be responsible for any loss occasioned by such reliance or for any good faith reliance on any quotations received from a source pursuant to (iii) above. 13. Concerning the Bank. 13.1 Performance of Duties and Standard of Care. In performing its duties hereunder and any other duties listed on any Schedule hereto, if any, the Bank will be entitled to receive and act upon the advice of independent counsel of its own selection, which may be counsel for the Fund, and will be without liability for any action taken or thing done or omitted to be done in accordance with this Agreement in good faith in conformity with such advice. In the performance of its duties hereunder, the Bank will be protected and not be liable, and will be indemnified and held harmless for any action taken or omitted to be taken by it in good faith reliance upon the terms of this Agreement, any Officers' Certificate, Proper Instructions, resolution of the Board, telegram, notice, request, certificate or other instrument reasonably believed by the Bank to be genuine and for any other loss to the Fund except in the case of its negligence, willful misfeasance or bad faith in the performance of its duties or reckless disregard of its obligations and duties hereunder. 15 19 The Bank will be under no duty or obligation to inquire into and will not be liable for: (a) the validity of the issue of any Portfolio Securities purchased by or for the Fund, the legality of the purchases thereof or the propriety of the price incurred therefor; (b) the legality of any sale of any Portfolio Securities by or for the Fund or the propriety of the amount for which the same are sold; (c) the legality of an issue or sale of any common shares of the Fund or the sufficiency of the amount to be received therefor; (d) the legality of the repurchase of any common shares of the Fund or the propriety of the amount to be paid therefor; (e) the legality of the declaration of any dividend by the Fund or the legality of the distribution of any Portfolio Securities as payment in kind of such dividend; and (f) any property or moneys of the Fund unless and until received by it, and any such property or moneys delivered or paid by it pursuant to the terms hereof. Moreover, the Bank will not be under any duty or obligation to ascertain whether any Portfolio Securities at any time delivered to or held by it for the account of the Fund are such as may properly be held by the Fund under the provisions of its Articles, By-laws, any federal or state statutes or any rule or regulation of any governmental agency. Notwithstanding anything in this Agreement to the contrary, in no event shall the Bank be liable hereunder or to any third party: (a) for any losses or damages of any kind resulting from acts of God, earthquakes, fires, floods, storms or other disturbances of nature, epidemics, strikes, riots, nationalization, expropriation, currency restrictions, acts of war, civil war or terrorism, insurrection, nuclear fusion, fission or radiation, the interruption, loss or malfunction of utilities, transportation, or computers (hardware or software) and computer facilities, the unavailability of energy sources and other similar happenings or events except as results from the Bank's own gross negligence; or (b) for special, punitive or consequential damages arising from the provision of services hereunder, even if the Bank has been advised of the possibility of such damages. 13.2 Agents and Subcustodians with Respect to Property of the Fund Held in the United States. The Bank may employ agents in the performance of its duties hereunder and 16 20 shall be responsible for the acts and omissions of such agents as if performed by the Bank hereunder. Upon receipt of Proper Instructions, the Bank may employ certain subcustodians, provided that any such subcustodian meets at least the minimum qualifications required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Fund's assets with respect to property of the Fund held in the United States. The Bank shall have no liability to the Fund or any other person by reason of any act or omission of such subcustodian and the Fund shall indemnify the Bank and hold it harmless from and against any and all actions, suits and claims, arising directly or indirectly out of the performance of such subcustodian. Upon request of the Bank, the Fund shall assume the entire defense of any action, suit, or claim subject to the foregoing indemnity. The Fund shall pay all fees and expenses of such subcustodian. 13.3 Duties of the Bank with Respect to Property of the Fund Held Outside of the United States. (a) Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and instructs the Bank to employ as sub-custodians for the Fund's Portfolio Securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on the Schedule attached hereto (each, a "Selected Foreign Sub-Custodian"). Upon receipt of Proper Instructions, together with a certified resolution of the Fund's Board of Trustees, the Bank and the Fund may agree to designate additional foreign banking institutions and foreign securities depositories to act as Selected Foreign Sub-Custodians hereunder. Upon receipt of Proper Instructions, the Fund may instruct the Bank to cease the employment of any one or more such Selected Foreign Sub-Custodians for maintaining custody of the Fund's assets, and the Bank shall so cease to employ such sub-custodian as soon as alternate custodial arrangements have been implemented. (b) Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Bank and the Fund, assets of the Fund shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as Selected Foreign Sub-Custodians pursuant to the terms hereof. Where possible, such arrangements shall include entry into agreements containing the provisions set forth in subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise be agreed upon in writing by the Bank and the Fund, the Fund authorizes the deposit in Euro-clear, the securities clearance and depository facilities operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of Foreign Portfolio Securities eligible for deposit therein and to utilize such securities depository in connection with settlements of purchases and sales of securities and deliveries and returns of securities, until notified to the contrary pursuant to subparagraph (a) hereunder. 17 21 (c) Segregation of Securities. The Bank shall identify on its books as belonging to the Fund the Foreign Portfolio Securities held by each Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank employs a foreign banking institution shall require that such institution establish a custody account for the Bank and hold in that account, Foreign Portfolio Securities and other assets of the Fund, and, in the event that such institution deposits Foreign Portfolio Securities in a foreign securities depository, that it shall identify on its books as belonging to the Bank the securities so deposited. (d) Agreements with Foreign Banking Institutions. Each of the agreements pursuant to which a foreign banking institution holds assets of the Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially in the form previously made available to the Fund and shall provide that: (a) the Fund's assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration (including, without limitation, any fees or taxes payable upon transfers or reregistration of securities); (b) beneficial ownership of the Fund's assets will be freely transferable without the payment of money or value other than for custody or administration (including, without limitation, any fees or taxes payable upon transfers or reregistration of securities); (c) adequate records will be maintained identifying the assets as belonging to Bank; (d) officers of or auditors employed by, or other representatives of the Bank, including to the extent permitted under applicable law, the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Bank; and (e) assets of the Fund held by the Selected Foreign Sub-Custodian will be subject only to the instructions of the Bank or its agents. (e) Access of Independent Accountants of the Fund. Upon request of the Fund, the Bank will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a Selected Foreign Sub-Custodian insofar as such books and records relate to the performance of such foreign banking institution under its Foreign Sub-Custodian Agreement. (f) Reports by Bank. The Bank will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by Selected Foreign Sub-Custodians, including but not limited to an identification of entities having possession of the Foreign Portfolio Securities and other assets of the Fund. (g) Transactions in Foreign Custody Account. Transactions with respect to the assets of the Fund held by a Selected Foreign Sub-Custodian shall be effected pursuant to Proper Instructions from the Fund to the Bank and shall be effected in accordance with the applicable Foreign Sub-Custodian Agreement. If at any time any 18 22 Foreign Portfolio Securities shall be registered in the name of the nominee of the Selected Foreign Sub-Custodian, the Fund agrees to hold any such nominee harmless from any liability by reason of the registration of such securities in the name of such nominee. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for Foreign Portfolio Securities received for the account of the Fund and delivery of Foreign Portfolio Securities maintained for the account of the Fund may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. In connection with any action to be taken with respect to the Foreign Portfolio Securities held hereunder, including, without limitation, the exercise of any voting rights, subscription rights, redemption rights, exchange rights, conversion rights or tender rights, or any other action in connection with any other right, interest or privilege with respect to such Securities (collectively, the "Rights"), the Bank shall promptly transmit to the Fund such information in connection therewith as is made available to the Bank by the Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign Sub-Custodian any instructions, forms or certifications with respect to such Rights, and any instructions relating to the actions to be taken in connection therewith, as the Bank shall receive from the Fund pursuant to Proper Instructions. Notwithstanding the foregoing, the Bank shall have no further duty or obligation with respect to such Rights, including, without limitation, the determination of whether the Fund is entitled to participate in such Rights under applicable U.S. and foreign laws, or the determination of whether any action proposed to be taken with respect to such Rights by the Fund or by the applicable Foreign Sub-Custodian will comply with all applicable terms and conditions of any such Rights or any applicable laws or regulations, or market practices within the market in which such action is to be taken or omitted. (h) Liability of Selected Foreign Sub-Custodians. Each Foreign Sub-Custodian Agreement with a foreign banking institution shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Bank and each Fund from and against certain losses, damages, costs, expenses, liabilities or claims arising out of or in connection with the institution's performance of such obligations, all as set forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges that the Bank, as a participant in Euro-clear, is subject to the Terms and Conditions Governing the Euro-Clear System, a copy of which has been made available to the Fund. The Fund acknowledges that pursuant to such Terms and Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or assert any and all rights or claims in respect of actions or omissions of, or the 19 23 bankruptcy or insolvency of, any other depository, clearance system or custodian utilized by Euro-clear in connection with the Fund's securities and other assets. (i) Liability of Bank. The Bank shall have no more or less responsibility or liability on account of the acts or omissions of any Selected Foreign Sub-Custodian employed hereunder than any such Selected Foreign Sub-Custodian has to the Bank and, without limiting the foregoing, the Bank shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism, political risk (including, but not limited to, exchange control restrictions, confiscation, insurrection, civil strife or armed hostilities) other losses due to Acts of God, nuclear incident or any loss where the Selected Foreign Sub-Custodian has otherwise exercised reasonable care. (j) Monitoring Responsibilities. The Bank shall furnish annually to the Fund, information concerning the Selected Foreign Sub-Custodians employed hereunder for use by the Fund in evaluating such Selected Foreign Sub-Custodians to ensure compliance with the requirements of Rule 17f-5 of the Act. In addition, the Bank will promptly inform the Fund in the event that the Bank is notified by a Selected Foreign Sub-Custodian that there appears to be a substantial likelihood that its shareholders' equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders' equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles) or any other capital adequacy test applicable to it by exemptive order, or if the Bank has actual knowledge of any material loss of the assets of the Fund held by a Foreign Sub-Custodian. (k) Tax Law. The Bank shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund or the Bank as custodian of the Fund by the tax laws of any jurisdiction, and it shall be the responsibility of the Fund to notify the Bank of the obligations imposed on the Fund or the Bank as the custodian of the Fund by the tax law of any non-U.S. jurisdiction, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of jurisdictions for which the Fund has provided such information. 13.4 Insurance. The Bank shall use the same care with respect to the safekeeping of Portfolio Securities and cash of the Fund held by it as it uses in respect of its own similar property but it need not maintain any special insurance for the benefit of the Fund. 13.5. Fees and Expenses of Bank. The Fund will pay or reimburse the Bank from time to time for any transfer taxes payable upon transfer of Portfolio Securities made hereunder, and for all necessary proper disbursements, expenses and charges made or incurred 20 24 by the Bank in the performance of this Agreement (including any duties listed on any Schedule hereto, if any) including any indemnities for any loss, liabilities or expense to the Bank as provided above. For the services rendered by the Bank hereunder, the Fund will pay to the Bank such compensation or fees at such rate and at such times as shall be agreed upon in writing by the parties from time to time. The Bank will also be entitled to reimbursement by the Fund for all reasonable expenses incurred in conjunction with termination of this Agreement by the Fund. 13.6 Advances by Bank. The Bank may, in its sole discretion, advance funds on behalf of the Fund to make any payment permitted by this Agreement upon receipt of any proper authorization required by this Agreement for such payments by the Fund. Should such a payment or payments, with advanced funds, result in an overdraft (due to insufficiencies of the Fund's account with the Bank, or for any other reason) this Agreement deems any such overdraft or related indebtedness, a loan made by the Bank to the Fund payable on demand and bearing interest at the current rate charged by the Bank for such loans unless the Fund shall provide the Bank with agreed upon compensating balances. The Fund agrees that the Bank shall have a continuing lien and security interest to the extent of any overdraft or indebtedness, in and to any property at any time held by it for the Fund's benefit or in which the Fund has an interest and which is then in the Bank's possession or control (or in the possession or control of any third party acting on the Bank's behalf). The Fund authorizes the Bank, in its sole discretion, at any time to charge any overdraft or indebtedness, together with interest due thereon against any balance of account standing to the credit of the Fund on the Bank's books. 14. Termination. 14.1 The term of this agreement is three years commencing upon the date of conversion of the Fund's assets to the Bank. Either party may terminate this agreement for cause prior to the third anniversary of the conversion date after a written description of the facts for cause has been delivered to the other party and the other party has been given a reasonable opportunity to cure, such opportunity being not less then 90 days in duration. Either party may terminate the agreement at any time subsequent to the third anniversary date without cause or penalty. Any termination will be effective upon sixty days written notice delivered by either party to the other by means of registered mail, and, upon the expiration of such sixty days this Agreement will terminate; provided, however, that the effective date of such termination may be postponed to a date not more than ninety days from the date of delivery of such notice (i) by the Bank in order to prepare for the transfer by the Bank of all of the assets of the Fund held hereunder, and (ii) by the Fund in order to give the Fund an opportunity to make suitable arrangements for a successor custodian. At any time after the termination of this Agreement, the Fund will, at its request, have access to the records of the Bank relating to the performance of its duties as custodian. 14.2 In the event of the termination of this Agreement, the Bank will immediately upon receipt or transmittal, as the case may be, of notice of termination, commence and prosecute diligently to completion the transfer of all cash and the delivery of all Portfolio 21 25 Securities duly endorsed and all records maintained under Section 11 to the successor custodian when appointed by the Fund. The obligation of the Bank to deliver and transfer over the assets of the Fund held by it directly to such successor custodian will commence as soon as such successor is appointed and will continue until completed as aforesaid. If the Fund does not select a successor custodian within ninety (90) days from the date of delivery of notice of termination the Bank may, subject to the provisions of subsection (14.3), deliver the Portfolio Securities and cash of the Fund held by the Bank to a bank or trust company of its own selection which meets the requirements of Section 17(f)(1) of the 1940 Act and has a reported capital, surplus and undivided profits aggregating not less than $2,000,000, to be held as the property of the Fund under terms similar to those on which they were held by the Bank, whereupon such bank or trust company so selected by the Bank will become the successor custodian of such assets of the Fund with the same effect as though selected by the Board. 14.3 Prior to the expiration of ninety (90) days after notice of termination has been given, the Fund may furnish the Bank with an order of the Fund advising that a successor custodian cannot be found willing and able to act upon reasonable and customary terms and that there has been submitted to the shareholders of the Fund the question of whether the Fund will be liquidated or will function without a custodian for the assets of the Fund held by the Bank. In that event the Bank will deliver the Portfolio Securities and cash of the Fund held by it, subject as aforesaid, in accordance with one of such alternatives which may be approved by the requisite vote of shareholders, upon receipt by the Bank of a copy of the minutes of the meeting of shareholders at which action was taken, certified by the Fund's Secretary and an opinion of counsel to the Fund in form and content satisfactory to the Bank. 15. Confidentiality. Both parties hereto agree that any non-public information obtained hereunder concerning the other party is confidential and may not be disclosed to any other person without the consent of the other party, except as may be required by applicable law or at the request of a governmental agency. The parties further agree that a breach of this provision would irreparably damage the other party and accordingly agree that each of them is entitled, without bond or other security, to an injunction or injunctions to prevent breaches of this provision. 16. Notices. Any notice or other instrument in writing authorized or required by this Agreement to be given to either party hereto will be sufficiently given if addressed to such party and mailed or delivered to it at its office at the address set forth below; namely: (a) In the case of notices sent to the Fund to: William Blair Mutual Funds, Inc. 222 West Adams Street Chicago, IL 60606 22 26 (b) In the case of notices sent to the Bank to: Investors Bank & Trust Company 89 South Street Boston, Massachusetts 02111 Attention: Tim Murphy or at such other place as such party may from time to time designate in writing. 17. Amendments. This Agreement may not be altered or amended, except by an instrument in writing, executed by both parties, and in the case of the Fund, such alteration or amendment will be authorized and approved by its Board. 18. Parties. This Agreement will be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that this Agreement will not be assignable by the Fund without the written consent of the Bank or by the Bank without the written consent of the Fund, authorized and approved by its Board; and provided further that termination proceedings pursuant to Section 14 hereof will not be deemed to be an assignment within the meaning of this provision. 19. Governing Law. This Agreement and all performance hereunder will be governed by the laws of the Commonwealth of Massachusetts. 20. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. 21. Limitation of Liability. A copy of the Agreement and Declaration of Trust of the Fund is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this Agreement has been executed on behalf of the Fund by an officer of the Fund as an officer and not individually and the obligations of the Fund arising out of this Agreement are not binding upon any of the trustees, officers, or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. 23 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first written above. William Blair Mutual Funds, Inc. By: -------------------------------- Name: Title: ATTEST: - ------------------------------------ Investors Bank & Trust Company By: -------------------------------- Name: Title: ATTEST: - ------------------------------------ DATE: ------------------------------- 24 EX-99.B10 9 OPINION OF VEDDER, PRICE 1 EXHIBIT 99.B10 VEDDER, PRICE, KAUFMAN & KAMMHOLZ February 29, 1996 William Blair Mutual Funds, Inc. 222 W. Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Reference is made to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A under the Securities Act of 1933 being filed by William Blair Mutual Funds, Inc. (the "Fund") in connection with its registration of shares of common stock, par value $.001 per share ("Shares"), in the Income Fund portfolio ("Portfolio"). We have acted as counsel to the Fund since its inception and in such capacity are familiar with the Fund's organization and have counseled the Fund regarding various legal matters. We have examined such Fund records and other documents and certificates as we have considered necessary or appropriate for the purposes of this opinion. In our examination of such materials, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. Based upon the foregoing, and assuming that the Fund's Articles of Incorporation dated September 22, 1987, as amended on April 30, 1991, and the By-Laws of the Fund adopted February 5, 1991 are presently in full force and effect and have not been further amended in any respect and that the resolutions adopted by the Board of Directors of the Fund on September 23, 1987, July 24, 1990, February 5, 1991, July 21, 1992 and October 26, 1993 relating to organizational matters, securities matters and the issuance of shares are presently in full force and effect and have not been amended in any respect, we advise you and opine that (a) the Fund is a duly authorized and validly existing corporation with transferrable shares under the laws of the State of Maryland and is authorized to issue five hundred million shares in the Portfolio having an aggregate par value of five hundred thousand dollars; and (b) upon the issuance of the Shares in accordance with the Fund's Articles of Incorporation and the receipt by the Portfolio of a purchase price not less than the net asset value per Share, the Shares will be legally issued and outstanding, fully paid and nonassessable. 2 This opinion is solely for the benefit of the Fund, the Fund's Board of Directors and the Fund's officers and may not be relied upon by any other person without our prior written consent. We hereby consent to the use of this opinion in connection with said Post-Effective Amendment. Very truly yours, /s/Vedder, Price, Kaufman & Kammholz VEDDER, PRICE, KAUFMAN & KAMMHOLZ COK:dd -2- EX-99.B11 10 CONSENT OF ERNST & YOUNG 1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights" and "Independent Auditors and Reports to Shareholders" and to the use our report dated February 2, 1996 with respect to William Blair Mutual Funds, Inc. (comprised of Growth Fund, International Growth, Income Fund, Limited Term Tax-Free Fund, and Ready Reserves Fund) in the Registration Statement (Form N-lA) of William Blair Mutual Funds, Inc. and its incorporation by reference in the related Prospectus and Statement of Additional Information, filed with the Securities and Exchange Commission in this Post-Effective Amendment No. 13 to the Registration Statement under the Securities Act of 1933 (Registration No. 33-17463) and this Amendment No. 15 to the Registration Statement under the Investment Company Act of 1940 (Registration No. 811-5344). /S/ ERNST & YOUNG LLP ---------------------- ERNST & YOUNG LLP Chicago, Illinois February 29, 1996 2 TO COME EX-99.B13 11 SUBSCRIPTION AGMT 1 EXHIBIT 99.B13 WILLIAM BLAIR READY RESERVES, INC. SUBSCRIPTION AGREEMENT 1. Share Subscription. The undersigned hereby agrees to purchase from William Blair Ready Reserves, Inc. ("Fund"), which is a series type mutual fund currently having one series, the Money Market Portfolio ("Portfolio"), 100,000 shares (par value of $0.001 per share) of the Portfolio ("Shares") at a purchase price of $1.00 per share, on the terms and conditions set forth herein and in the Preliminary Prospectus described below. The undersigned hereby tenders $100,000 for the purchase of the Shares. The undersigned understands that the Fund has filed a Registration Statement (No. 33-17463) on Form N-1A with the Securities and Exchange Commission, which contains the Preliminary Prospectus describing the Fund and the Shares. By its signature hereto, the undersigned hereby acknowledges receipt of a copy of the Preliminary Prospectus. The undersigned recognizes that the Fund will not be fully operational until such time as it commences the offering of its shares. Accordingly, a number of features of the Fund described in the Preliminary Prospectus, including, without limitation, the declaration and payment of dividends and redemptions of shares upon request of shareholders, are not, in fact, in existence at the present time and will not be instituted until the Fund's Registration Statement on Form N-1A is declared effective. 2. Representations and Warranties. The undersigned hereby represents and warrants as follows: a. It is aware that no federal or state agency has made any findings or determination as to the fairness for investment, nor any recommendations or endorsement, of the Shares; b. It has such knowledge and experience of financial and business matters as will enable it to utilize the information made available to it, in connection with the offering of the Shares, to evaluate the merits and risks of the prospective investment and to make an informed investment decision; c. It recognizes that the Fund has only recently been organized and has no financial or operating history and, further, that investment in the Fund involves certain risks, and it has taken full cognizance of and understands all of the risks related to the purchase of the Shares, and it acknowledges that it has suitable financial resources and anticipated income to bear the economic risk of such an investment; 2 d. It is purchasing the Shares for its own account, for investment, and not with any intention of redemption, distribution, or resale of the Shares, either in whole or in part; e. It will not sell the Shares purchased by it without registration of the Shares under the Securities Act of 1933 or exemption therefrom; f. It has been furnished with, and has carefully read, this Agreement and the Preliminary Prospectus and such material documents relating to the Fund as it has requested and as have been provided to it by the Fund; and g. It has also had the opportunity to ask questions of, and receive answers from, the Fund concerning the Fund and the terms of the offering. IN WITNESS WHEREOF, the undersigned has executed this instrument as of November 19, 1987. WILLIAM BLAIR & COMPANY By: /s/ James L. Barber, Jr. ------------------------------------ Partner -2- EX-99.B16 12 EXHIBIT OF PERFORMANCE CALCULATIONS 1 EXHIBIT 99.B16 EXHIBIT OF PERFORMANCE CALCULATIONS THIS EXHIBIT REFLECTS THE CALCULATION OF CERTAIN PERFORMANCE FIGURES THAT APPEAR UNDER "PERFORMANCE" IN THE PART B STATEMENT OF ADDITIONAL INFORMATION ("PART B") OF WILLIAM BLAIR MUTUAL FUNDS, INC. (THE "FUND") A. TOTAL RETURN. 1. Formula. The total return performance of the Fund for a specified period equals the change in the value of a hypothetical $10,000 Investment ("Initial Investment") from the beginning of the period to the end of the period. It is assumed that all dividends and capital gains distributions are reinvested. Total return may be expressed either as a dollar value change or as a percentage change. Total return information is set forth in the discussion of total return that appears under "Performance" in Part B. 2. Performance Reflected. The representative total return calculations reflected in this Section A are for the International Growth Fund portfolio (the "Portfolio") for the period beginning January 1, 1995 and ending December 31, 1995. 3. Total Return. The total return information for the Fund shows the total return of that Portfolio as a percentage change. The percentage change in value of the Initial Investment for the period is calculated by determining the percentage increase in the net asset value per share ("NAV") of the Portfolio over the period and adjusting that for the dividends reinvested over the period. There was 1 dividend during the period. The percentage change is then calculated as follows: Percentage Change = Shares x Ending NAV - 1 ----------------------- Beginning NAV Ending NAV = NAV on December 31, 1995 = $13.12/Share ------ Beginning NAV = NAV on January 1, 1995 = $12.36/Share ------ Shares = Number of shares at the end of the period assuming a one share investment at the beginning of the period and reinvestment of dividends. "Shares" is computed under the following formula.
Shares = (1 + DIV1 ) ----- RNAV1 DIVn = Dollar amount distributed for the nth dividend of the period. n is 1 in the present example since there was 1 dividend distributed. RNAVn = NAV on the date that the nth dividend in the period was reinvested. n is 1 in the present example.
2 The following data is presented: n DIVn RNAVn - ---- ----- 1 $.13/Share $13.01/Share
Shares = 1 + $.13 = 1.01 $13.01 Share Percentage Change = 1.01 x $13.12 / Share - 1 = .072 $12.36/Share The decimal return is converted to a percentage by multiplying by 100. .072 X 100 = 7.2% B. AVERAGE ANNUAL TOTAL RETURN. 1. Formula. The average annual return of the Fund for a specific period is found by taking a hypothetical $1,000 investment ("Initial Investment") at the beginning of the period and computing the redeemable value at the end of the period ("Redeemable Value"). The Redeemable Value is then divided by the Initial Investment, and this quotient is taken to the Nth root (N represents the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. Thus, the following formula applies: Average Annual Total Return = ( Redeemable Value ) 1/N -1 ---------------- Initial Investment 2. Performance Reflected. The representative average annual total return calculation reflected in this Section B is for the International Growth Fund portfolio (the "Portfolio") for the period from January 1, 1993 through December 31, 1995. 3. Calculation. The Redeemable Value is equal to the Initial Investment plus the percentage change in the value of such investment over the period. The percentage change over the period is calculated in the same manner as in Sub-Section 3 of Section A above. The percentage change over the period is 43.18%. Redeemable Value=$1,000+(43.18% of $1,000)=$1,000+(.4318 x $1,000.00)=$1,431.80 The period covered is from January 1, 1993 to December 31, 1995, or 3 years. N = number of years in the period = 3 2 3 Using the formula provided above, average annual total return for the period may then be calculated. The Redeemable Value is divided by the initial investment. ($1,431.80/$1,000) = 1.4318 --------- ------ This quotient is taken to the Nth root. The 3rd root of 1.4318 = 1.1271 ------ ------ 1 is subtracted from the result. 1.1271 - 1 = .1271 ------ ----- The decimal return is converted to a percentage by multiplying by 100. .1271 X 100 = 12.71% ----- ----- C. YIELD (NON MONEY MARKET). 1. Formula. The yield for the Fund is computed by dividing the net investment income per share earned during a specified one month or 30-day period by the offering price per share on the last day of the period, according to the following formula: YIELD = 2[a - b + 1)6 - 1] ----- cd Where: a = dividends and interest earned during the period. b = expenses accrued for the period (net of reimbursements). c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the offering price per share on the last day of the period.
2. Performance Reflected. The representative yield calculation reflected in this Section C is for the Income Fund portfolio (the "Portfolio") for the 30-day period ended December 31, 1995. 3. Calculation. For the period reflected, the following figures are provided for use in the formula provided in Sub-section 1 above: a = $774,743 -------- 3 4 b = $54,992 c = 14,038,337 d = $10.57 Thus, the yield is calculated as follows: YIELD = 2[(a - b + 1)6 - 1] ----- cd = 2[( 719,751 + 1) 6 - 1] ----------- 148,385,222 = 2[(1.00485)6 - 1] ------- = 2[1.02945 - 1] = .0589 ----- The decimal return is converted to a percentage by multiplying by 100. .0589 X 100 = 5.89% D. YIELD (MONEY MARKET). 1. Formula. The current yield for the Ready Reserves Fund ("Portfolio") is computed as follows: the Portfolio's net investment income per share (accrued interest on portfolio securities, plus or minus amortized purchase discount or premium, less accrued expenses) is divided by the price per share (expected to remain constant at $1.00) during the period ("base period return") and the result is divided by 7 and multiplied by 365. The effective yield is determined by the following formula: [(base period return + 1) raised to the 365/7 power] - 1. 2. Performance Reflected. The calculation for the Portfolio reflected in this Section D are for the 7-day period ended December 31, 1995. 3. Calculation. The current yield for the period reflected above is calculated as follows: .000974 x 365 = 5.08% ------- --- 1 7 The effective yield for the period reflected above is calculated as follows: [(.000974 + 1) raised to the 365/7 power] - 1 = 5.21% 4 EX-27.1 13 FDS - GROWTH FUND WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000822632 WM. BLAIR MUTUAL FUNDS, INC. 1 GROWTH FUND 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 270,957 365,478 1,242 1 0 366,721 3,297 0 388 3,685 0 268,083 30,515 22,651 319 0 113 0 94,521 363,036 1,615 1,297 0 1,919 993 13,274 58,269 72,536 0 817 13,275 0 9,647 1,875 1,092 145,476 143 114 0 0 1,561 0 1,919 295,127 9,600 .034 2.750 .030 .454 0 11.90 .68 0 0
EX-27.2 14 FDS - READY RESERVES FUND WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000822632 WM. BLAIR MUTUAL FUNDS, INC. 2 READY RESERVES FUND 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 719,445 719,445 9,007 22 0 728,474 0 0 24,481 24,481 0 703,993 703,993 521,277 0 0 0 0 0 703,993 0 36,158 0 4,312 31,846 0 0 31,846 0 31,846 0 0 2,514,548 2,362,949 31,117 182,716 0 0 0 0 3,613 0 4,312 600,700 1.000 .053 .000 .053 .000 .000 1.000 .72 0 0
EX-27.3 15 FDS - INCOME FUND WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000822632 WM. BLAIR MUTUAL FUNDS, INC. 3 INCOME FUND 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 142,123 145,062 2,722 2 0 147,786 0 0 416 416 0 148,407 13,936 14,601 (13) 0 (3,963) 0 2,939 147,370 0 10,278 0 1,013 9,265 (955) 11,783 20,093 0 9,438 0 0 2,337 3,670 668 3,580 160 (3,008) 0 0 868 0 1,013 148,585 9.850 .646 .732 .658 0 0 10.570 .68 0 0
EX-27.4 16 FDS - INT'L GROWTH FUND WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000822632 WM. BLAIR MUTUAL FUNDS, INC. 4 INTERNATIONAL GROWTH FUND 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 83,301 89,577 834 7 0 90,418 462 0 194 656 0 83,715 6,842 5,694 287 0 (452) 0 6,212 89,762 1,723 178 0 1,197 704 (403) 5,958 6,259 0 880 0 0 1,688 595 55 19,359 0 0 0 431 887 0 1,197 80,596 12.360 .105 .785 .130 0 0 13.120 1.48 0 0
EX-27.5 17 FDS - LTD TERM TAX FREE FUND WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000822632 WM. BLAIR MUTUAL FUNDS, INC. 5 LTD. TERM TAX-FREE FUND 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 18,793 19,087 471 370 0 19,396 0 0 76 76 0 19,052 1,941 1,489 4 0 (30) 0 294 19,320 0 763 0 6 757 (22) 764 1,499 0 759 0 0 750 342 44 5,204 6 (8) 0 0 0 0 6 16,412 9.480 .446 .482 .448 0 0 9.960 .04 0 0
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