-----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, Jb6qlgYlUuOLlY7WMqnFXLEaua2LsgFp6Rc6K7MCyN9SBylFkq3x3zV71kTKwAOR wp2cqGc3KHN8i+Jk6OiuVw== 0000950137-99-004565.txt : 19991222 0000950137-99-004565.hdr.sgml : 19991222 ACCESSION NUMBER: 0000950137-99-004565 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19991221 EFFECTIVENESS DATE: 19991221 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: 485BPOS SEC ACT: SEC FILE NUMBER: 033-17463 FILM NUMBER: 99777834 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-05344 FILM NUMBER: 99777835 BUSINESS ADDRESS: STREET 1: 222 W ADAMS ST CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3123648000 MAIL ADDRESS: STREET 1: 222 W ADAMS STREET 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 485BPOS 1 POST-EFFECTIVE FORM N-1A AMENDMENT #23 1 As filed with the Securities and Exchange Commission on or about December 20, 1999 Registration No. 33-17463 and 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. 23 X and/or REGISTRATION STATEMENT Under the Investment Company Act of 1940 Amendment No. 24 X WILLIAM BLAIR FUNDS (Exact Name of Registrant as Specified in Charter) 222 WEST ADAMS STREET CHICAGO, ILLINOIS 60606 (Address of Principal Executive Offices, including Zip Code) Registrant's Telephone Number, Including Area Code: (312) 364-8000 Copy to: MARCO HANIG CATHY G. O'KELLY 222 WEST ADAMS STREET VEDDER, PRICE, KAUFMAN & KAMMHOLZ CHICAGO, ILLINOIS 60606 222 NORTH LASALLE STREET (Name and Address of Agent for Service) CHICAGO, ILLINOIS 60601 It is proposed that this filing will become effective (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b); or [X] on December 22, 1999 pursuant to paragraph (b); or [ ] 60 days after filing pursuant to paragraph (a)(1); or [ ] on September 30, 1999 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 December 22, 1999 WILLIAM BLAIR FUNDS --------------------- CLASS N PROSPECTUS GROWTH FUND TAX-MANAGED GROWTH FUND LARGE CAP GROWTH FUND SMALL CAP GROWTH FUND INTERNATIONAL GROWTH FUND EMERGING MARKETS GROWTH FUND DISCIPLINED LARGE CAP FUND VALUE DISCOVERY FUND INCOME FUND READY RESERVES FUND --------------------- This prospectus contains important information about each Fund, including their investment objectives. For your benefit and protection, please read it before you invest and keep it for future reference. This prospectus relates only to the Class N Shares of each Fund. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WILLIAM BLAIR FUNDS 222 West Adams Street Chicago, Illinois 60606 3 TABLE OF CONTENTS SUMMARY..................................................... 1 Growth Fund......................................... 1 Tax-Managed Growth Fund............................. 3 Large Cap Growth Fund............................... 5 Small Cap Growth Fund............................... 6 International Growth Fund........................... 7 Emerging Markets Growth Fund........................ 9 Disciplined Large Cap Fund.......................... 11 Value Discovery Fund................................ 13 Income Fund......................................... 15 Ready Reserves Fund................................. 17 INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES... 19 Growth Fund......................................... 20 Tax-Managed Growth Fund............................. 22 Large Cap Growth Fund............................... 24 Small Cap Growth Fund............................... 26 International Growth Fund........................... 28 Emerging Markets Growth Fund........................ 30 Disciplined Large Cap Fund.......................... 32 Value Discovery Fund................................ 33 Income Fund......................................... 35 Ready Reserves Fund................................. 37 INVESTMENT RISKS............................................ 39 MANAGEMENT OF THE FUNDS..................................... 42 YOUR ACCOUNT................................................ 44 Class N Shares...................................... 44 How to Buy Shares................................... 44 How to Sell Shares.................................. 45 How to Exchange Shares.............................. 48 Dividends and Distributions......................... 48 Taxes............................................... 49 DETERMINATION OF NET ASSET VALUE............................ 50 SHAREHOLDER SERVICES AND ACCOUNT POLICIES................... 51 INVESTMENT GLOSSARY......................................... 53 FINANCIAL HIGHLIGHTS........................................ 57 FOR MORE INFORMATION........................................ Back Cover
4 WILLIAM BLAIR GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions. LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL emerging, rapid growth companies of high quality that have had especially vigorous growth in revenues and earnings. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies may be more volatile and more speculative than the securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 23.69% (4Q98) -14.91% (3Q90)
CHART
1989 30.45 1990 -2.02 1991 44.37 1992 7.61 1993 15.51 1994 6.45 1995 29.07 1996 17.99 1997 20.07 1998 27.15
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual returns for the periods ended December 31, 1998, to a broad-based market benchmark.
1 YEAR 5 YEARS 10 YEARS ------ ------- -------- Growth Fund 27.15% 19.87% 18.96% S&P 500* 28.57% 24.06% 19.21%
- ------------------------- * The Standard and Poor's 500 Stock Index is an unmanaged index that generally represents broad larger capitalization equity market performance. Expenses are not included. 1 5 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .75% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .09% ----- Total Annual Fund Operating Expenses...................... 1.09%
EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $112 $ 347 $601 $1,329
2 6 WILLIAM BLAIR TAX-MANAGED GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Tax-Managed Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies. The Fund employs a number of techniques designed specifically to enhance the long-term, after-tax returns for its shareholders. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL emerging, rapid growth companies of high quality that have had especially vigorous growth in revenues and earnings. The Fund seeks high after-tax returns by balancing investment considerations and tax considerations. The Fund seeks to achieve returns primarily in the form of price appreciation and to minimize income distributions and distributions of realized short-term gains. Among the techniques and strategies used in the tax-efficient management of the Fund are the following: - investing primarily in lower-yielding growth stocks; - employing a long-term, low turnover approach to investing; - attempting to avoid net realized short-term gains; - when appropriate, selling stocks trading below cost to realize losses; - in selling appreciated stocks, selecting the most tax-favored share lots; and - selectively using tax-advantaged hedging techniques, such as derivative transactions, as an alternative to taxable sales. The Fund can generally be expected to distribute a smaller percentage of returns each year than most other equity mutual funds. There can be no assurance, however, that taxable distributions can always be avoided. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies may be more volatile and more speculative than securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. The Fund may engage in derivative transactions to protect against price declines or as a substitute for purchasing or selling securities. The use of these techniques is subject to certain limitations and may expose the Fund to increased risk of principal loss. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual returns have been omitted because the Fund does not have annual returns for a full calendar year. 3 7 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .80% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .51% ----- Total Annual Fund Operating Expenses (without waiver)..... 1.56%(1) Adviser's Expense Waiver.................................. .20% ----- Net Expenses (with waiver)............................. 1.36%
- --------------- (1) The Adviser has entered into an agreement with the Fund to cap the Fund's expenses at 1.36% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $149 $484 $841 $1,848
4 8 WILLIAM BLAIR LARGE CAP GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Large Cap Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks issued by large domestic growth companies of high quality that have demonstrated sustained growth over a long period of time. The Adviser currently defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. The Fund may also invest in medium-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of medium-sized companies are more volatile and more speculative than the securities of large companies. In addition, medium-sized companies may be traded in low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual returns have been omitted because the Fund does not have annual returns for a full calendar year. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .80% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .51% ----- Total Annual Fund Operating Expenses (without waiver)..... 1.56%(1) Adviser's Expense Waiver.................................. .20% ----- Net Expenses (with waiver)............................. 1.36%
- --------------- (1) The Adviser has entered into an agreement with the Fund to cap the Fund's expenses at 1.36% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $149 $484 $841 $1,848
5 9 WILLIAM BLAIR SMALL CAP GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Small Cap Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of small emerging, rapid growth domestic companies that are of high quality and that have had especially vigorous growth in revenues and earnings. The Adviser currently defines small companies as those with market capitalizations of $2 billion or less at the time of the Fund's investment. To a limited extent, the Fund may also invest in companies with business characteristics and growth prospects similar to small companies, but which may have market capitalizations above $2 billion. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies are volatile and less liquid than securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual returns have been omitted because the Fund does not have annual returns for a full calendar year. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. 1.10% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .45% ----- Total Annual Fund Operating Expenses (without waiver)..... 1.80%(1) Adviser's Expense Waiver.................................. .20% ----- Net Expenses (with waiver)............................. 1.60%
- --------------- (1) The Adviser has entered into an agreement with the Fund to cap the Fund's expenses at 1.60% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $173 $557 $966 $2,107
6 10 WILLIAM BLAIR INTERNATIONAL GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair International Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of foreign companies of all sizes. In choosing investments, the Adviser performs fundamental company analysis. The Adviser generally seeks common stocks of companies that historically have had and are expected to maintain superior growth, profitability and quality relative to local markets and relative to companies within the same industry worldwide. Following stock selection, country selection and industry allocation are the next most important investment criteria. The Adviser will vary the geographic diversification and types of securities in which the Fund invests based upon its continuous evaluation of economic, market and political trends throughout the world. The Adviser normally will allocate the Fund's investments among at least six different countries. Normally, the Fund's investments will be divided among Continental Europe, the United Kingdom, Canada, Japan and the markets of the Pacific Basin. However, selective investments may also be made in Latin America and in emerging markets, which include every country in the world except the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in common stocks, the primary risk is that the value of the stocks it holds might decrease in response to the activities of those companies or market and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Foreign investments often involve additional risks, including political instability, differences in financial reporting standards, and less stringent regulation of securities markets. These risks are magnified in less-established, emerging markets. Because the securities held by the Fund usually will be denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates may adversely affect the value of the Fund's investments. In addition, the Fund may invest in the securities of small companies, which may be more volatile and less liquid than securities of large companies. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each calendar year since the Fund started. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 17.43% (1Q98) -16.70% (3Q98)
CHART
1993 33.65 1994 -0.04 1995 7.22 1996 10.20 1997 8.39 1998 11.46
7 11 AVERAGE ANNUAL TOTAL RETURNS. The table compares the Fund's average annual total returns for the periods indicated to a broad-based securities market index.
1 YEAR 5 YEARS LIFE OF FUND** ------ ------- -------------- International Growth Fund 11.46% 7.37% 11.10% MSCI AC WLDF EX U.S.* 14.46% 7.87% 10.91%
- --------------- * The Morgan Stanley Capital International All Country World (Free) except U.S. Index is an unmanaged index that includes developed and emerging markets. Expenses are not included. ** The Fund's inception was October 1, 1992. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. 1.10% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .26% ----- Total Annual Fund Operating Expenses...................... 1.61%
EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above:
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $164 $509 $877 $1,912
8 12 WILLIAM BLAIR EMERGING MARKETS GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Emerging Markets Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of equity securities, including common stocks, issued by companies in emerging markets. In choosing investments, the Adviser first analyzes individual companies. The Adviser generally seeks well-managed companies with superior business fundamentals, including global leadership in product quality or cost competitiveness, dominant or improving market position within a growing local or regional economy, and sustainable above-average and/or increasing returns on invested capital. Following stock selection, the Adviser allocates investments based upon its analysis of the economic strength of various countries and industries. The Adviser normally will allocate the Fund's investments among at least six different countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in equity securities of companies, the primary risk is that value of the securities it holds might decrease in response to the activities of those companies or markets and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Foreign investments often involve additional risks, such as political instability, differences in financial reporting standards and less stringent regulation of securities markets. These risks may be greatly increased in emerging market countries because the securities in emerging markets may be subject to greater volatility and less liquidity than companies in more developed markets. Because the securities held by the Fund usually will be denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates may adversely affect the value of the Fund's investments. The currencies of certain emerging market countries have experienced a steady devaluation relative to the U.S. dollar, and continued devaluations may adversely affect the value of the Fund's assets denominated in such currencies. Many emerging markets have experienced substantial rates of inflation for many years, and continued inflation may adversely affect the economies and securities markets of such countries. The Fund also may invest in the securities of small companies, which may be more volatile and less liquid than securities of large companies. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual returns have been omitted because the Fund does not have annual returns for a full calendar year. 9 13 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. 1.40% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. 4.95% ----- Total Annual Fund Operating Expenses (without waiver)..... 6.60%(1) Adviser's Expense Waiver.................................. 4.60% ----- Net Expenses (with waiver)............................. 2.00%
- --------------- (1) Due to the Adviser voluntarily waiving fees and absorbing expenses, the Fund's actual total expenses were 2.25% (annualized) during 1998. The Adviser has entered into an agreement with the Fund to cap the Fund's expenses at 2.00% until at least April 30, 2000, the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $504 $1,802 $3,059 $6,030
10 14 WILLIAM BLAIR DISCIPLINED LARGE CAP FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Disciplined Large Cap Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of large capitalization domestic companies. The Adviser currently defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. The Adviser chooses the Fund's portfolio investments primarily from companies in the Standard & Poor's 500 Stock Index. The Adviser seeks to outperform the Standard & Poor's 500 Index through careful selection of portfolio securities. The Adviser combines bottom-up stock picking with quantitative measures to help manage risk and create a portfolio with better value, better earnings growth momentum and similar sensitivity to general macro-economic conditions as the Standard & Poor's 500. Generally, the Fund will hold 90-140 companies of the Standard & Poor's 500 companies. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in equity securities of companies, the primary risk is that value of the securities it holds might decrease in response to the activities of those companies or markets and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The Fund may engage in derivative transactions to protect against price declines, to enhance returns or as a substitute for purchasing or selling securities. The use of these techniques is subject to certain limitations and may expose the Fund to increased risk of principal loss. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual returns have been omitted because the Fund does not have annual returns for a full calendar year. 11 15 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .80% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .40% ---- Total Annual Fund Operating Expenses (without waiver)..... 1.45%(1) Adviser's Expense Waiver.................................. .20% ---- Net Expenses (with waiver)............................. 1.25%
- --------------- (1) The Adviser has entered into an agreement with the Fund to cap the Fund's expenses at 1.25% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $138 $450 $783 $1,727
12 16 WILLIAM BLAIR VALUE DISCOVERY FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Value Discovery Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of the equity securities (including common stocks and other forms of equity investments) of small companies that the Adviser believes offer a long-term investment value. In implementing its value discipline, the Adviser evaluates the extent to which a company meets the following criteria: (a) whether the company's current market value reflects a material discount from the Adviser's estimate of the company's value, (b) whether the company has a reasonable expectation of improving its level of profitability over a three-year investment horizon, (c) whether the company has a capable and skilled management team, (d) whether the company has a relatively strong capital structure, and (e) whether there is a likelihood that the company will undergo a positive corporate change within a three-year investment horizon. The weight that the Adviser gives to each of the investment criteria depends upon the circumstances, and some of the Fund's investments will not meet all of the criteria. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in equity securities, the primary risk is that the value of the securities it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of smaller companies may be more volatile and more speculative than the securities of larger, more established issuers, which may cause the Fund's share price to be more volatile. In addition, small companies may be traded in low volumes. This can increase volatility and increase the risk that the Fund will not be able to sell the security on short notice at a reasonable price. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the calendar years since the Fund started. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future.
HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ----------------- ---------------- 26.58% (3Q97) -17.59% (3Q98)
CHART
1997 33.46 1998 0.66
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual returns for the periods ended December 31, 1998, indicated to a broad-based securities market index.
1 YEAR LIFE OF FUND** ------ -------------- Value Discovery Fund 0.66% 15.91% Russell 2000 Index* -2.55% 9.20%
- --------------- * The Russell 2000 Index is an unmanaged composite of the smallest 2000 stocks of the Russell 3000 Index, which consists of the largest 3000 stocks in the U.S. market as determined by market capitalization. Expenses are not included. ** The Fund's inception was on December 23, 1996. 13 17 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares. This redemption fee will be retained by the Fund. The Fund discourages short-term investments in the Fund because they have a negative impact on remaining shareholders. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets. Management Fee.............................................. 1.15% Distribution (Rule 12b-1) Fee............................... .25% Other Expenses.............................................. .37% ---- Total Annual Fund Operating Expenses...................... 1.77%(1) Adviser's Expense Waiver.................................. .13% ---- Net Expenses (with waiver)............................. 1.64%
- --------------- (1) The Adviser has entered an agreement with the Fund to cap the Fund's expense ratio at 1.64% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you: invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. The figures reflect the expense cap for the first year.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $173 $550 $952 $2,077
14 18 WILLIAM BLAIR INCOME FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Income Fund seeks a high level of current income relative to stability of principal. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of intermediate-term income-producing securities, including government securities, U.S. dollar-denominated corporate bonds and notes, collateralized obligations and money market instruments that are rated in one of the top three categories. The Fund's investments are subject to certain maturity and duration restrictions, by which the Fund seeks to approximate the total returns of an intermediate-term debt index while also providing investors with the additional security of shorter-term obligations. The Adviser continually considers the Fund's exposure to interest rate risk. MAIN RISKS OF INVESTING: The primary risk of investing in the Fund is interest rate risk. The yield paid by the Fund will vary with changes in interest rates. Changes in interest rates may cause changes in the Fund's yield, net asset value and total return. Investments with longer maturities, which typically provide higher yield than securities with shorter maturities, may subject the Fund to increased price changes resulting from market yield fluctuations. The Fund is also subject to credit risk. The Fund's net asset value and total return may be adversely affected by the inability of the issuers of the Fund's securities to make payment at maturity. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each calendar year since the Fund started. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 5.44% (4Q91) -1.30% (4Q92)
#CHART#
1991 16.47 - ---- ----- 1992 7.17 1993 7.82 1994 -0.74 1995 14.37 1996 3.07 1997 8.03 1998 7.07
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS LIFE OF FUND** ------ ------- -------------- Income Fund 7.07% 6.22% 7.90% Lehman Intermediate Gov't/Corp. Index* 8.44% 6.60% 8.19%
- --------------- * The Lehman Intermediate Government/Corporate Index is an unmanaged index that represents broad intermediate government/ corporate bond market performance. Expenses are not included. ** The Fund's inception was on September 25, 1990. YIELD: You may obtain the most current yield information for the Fund by calling 1-800-742-7272. 15 19 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. However, the Fund may charge a redemption fee of 1.00% of the value of the shares sold within 180 days of their purchase, in order to compensate the Fund for expenses directly related to the redemption of Fund shares and to discourage short-term investments in the Fund. This redemption fee will be retained by the Fund. SHAREHOLDER FEES are fees paid directly from your investment.
REDEMPTION FEE - -------------- Shares held less than 180 days.............................. 1.00% Shares held 180 days or more................................ None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .59% Distribution (Rule 12b-1) Fee............................... .15% Other Expenses.............................................. .12% ---- Total Annual Fund Operating Expenses...................... .86%
EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year end and incur the same operating expenses as shown above.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $88 $275 $477 $1,061
16 20 WILLIAM BLAIR READY RESERVES FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Ready Reserves Fund seeks current income, a stable share price and daily liquidity. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in short-term U.S. dollar-denominated domestic money market instruments, which include securities issued by domestic corporations; the U.S. Government, its agencies and instrumentalities; and U.S. banks. The Fund invests exclusively in securities that are high-quality, which means that they are rated in the top 2 categories. These instruments are considered to be among the safest investments available because of their short maturities, liquidity and high-quality ratings. The Fund is designed to be highly liquid and seeks to maintain a net asset value of $1.00 per share. The Fund is designed for investors who seek to obtain the maximum current income consistent with the preservation of capital. MAIN RISKS OF INVESTING: Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. As with any money market fund, there is a low risk that the issuers or guarantors of securities will default on the payment of principal or interest or the obligation to repurchase securities from the Fund. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------ ------------ 2.26% (2Q89) 0.64% (2Q93)
CHART
1989 8.86 1990 7.81 1991 5.64 1992 3.32 1993 2.64 1994 3.67 1995 5.45 1996 4.81 1997 5.04 1998 4.98
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual total returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS 10 YEARS ------ ------- -------- Ready Reserves Fund 4.98% 4.77% 5.22% S&P-rated AAA* 4.97% 4.75% 5.20%
- ------------------------- * The Standard and Poor's-rated AAA Money Market Funds Index is a unmanaged index that includes money market mutual funds rated AAA by Standard and Poor's. Expenses are not included. YIELD: You may obtain the most current yield information for the Fund by calling 1-800-742-7272. 17 21 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. Class N shares are no-load investments, so you will not pay any shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. SHAREHOLDER FEES are fees paid directly from your investment. ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .24% Distribution (Rule 12b-1) Fee............................... .35%(1) Other Expenses.............................................. .10% ----- Total Annual Fund Operating Expenses...................... .69%
- --------------- (1) Long-term shareholders may pay more than the equivalent of the maximum permitted front-end sales charge. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $71 $221 $385 $859
18 22 INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- Each Fund is a series of William Blair Funds, an open-end management investment company. William Blair & Company, L.L.C. (the "Adviser") provides management and investment advisory services to the Funds. The following section takes a closer look at the investment objectives of each Fund, its principal investment strategies and certain related investment risks. Each Fund's secondary strategies or investments are described in the Investment Glossary at the end of this prospectus. In addition, the Statement of Additional Information contains more detailed information about certain of these practices, the potential risks and/or the limitations adopted by each Fund to help manage such risks. All investments, including those in mutual funds, have risks. No investment is suitable for all investors. The Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund are intended for long-term investors. In addition, the International Growth Fund and Emerging Markets Growth Fund are intended for investors who can accept the risks entailed in investing in foreign securities. Of course, there can be no assurance that a Fund will achieve its objective. 19 23 WILLIAM BLAIR GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of the common stocks of domestic growth companies with sustainable, above-average growth from one business cycle to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL, emerging, rapid-growth companies that have had especially vigorous growth in revenues and earnings. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. From time to time, the Fund may invest in equity related securities such as preferred stocks, convertible securities and warrants. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. 20 24 PORTFOLIO MANAGEMENT The Growth Fund is co-managed by Rocky Barber, Mark A. Fuller, III and Gretchen Lash. Rocky Barber, a principal of William Blair & Company, L.L.C., has co-managed the Fund since 1992. He joined the firm in 1986 as a portfolio manager and manager of the Investment Management Department. In addition to his management responsibilities, he is a member of the department's Growth team. Previously, he was an equity and fixed-income manager with Alliance Capital Management for nine years and president of the Alliance Capital Bond Fund, a group of fixed-income mutual funds. Rocky is Chief Executive Officer of William Blair Funds and a past Chairman of the Board of Trustees of the Stanford Business School Trust. He currently serves on the Board of the LaRabida Children's Hospital Foundation and is a member of the Investment Analysts Society of Chicago. Education: B.A., M.S. and M.B.A., Stanford University; and CFA. Mark A. Fuller, III, a principal of William Blair & Company, L.L.C., has co-managed the Fund since 1992. He has been with the firm since 1983. He is a portfolio manager for numerous accounts and is a member of the department's Small Cap team. He began his career in Institutional Sales, developing long-standing relationships with each of the firm's research analysts. Prior to joining William Blair, he was a sales representative with IBM Corporation. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. Gretchen Lash, a principal with William Blair & Company, L.L.C., has co-managed the Fund since 1999. She joined the firm in 1997 as a portfolio manager. Previously, she was a partner at Lincoln Capital Asset Management where she was part of a nine person team managing $17 billion in institutional, large cap growth equities. Prior to that, she was a consumer analyst and then a portfolio manager of several growth mutual funds with total assets of $2.6 billion at American Capital. Education: B.A., Cornell University; MBA, Rice University; and CFA. 21 25 WILLIAM BLAIR TAX-MANAGED GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Tax-Managed Growth Fund seeks long-term capital appreciation. The Fund employs a number of techniques designed specifically to enhance the long-term, after-tax returns for its shareholders. The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies with sustainable, above-average growth from one business to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL, emerging, rapid-growth companies that have had especially vigorous growth in revenues and earnings. The Adviser attempts to achieve high after-tax returns by balancing investment considerations and tax considerations. The Adviser seeks to achieve returns primarily in the form of price appreciation and to minimize income distributions and distributions of realized short-term gains. Among the techniques and strategies used in the tax-efficient management of the fund are the following: - investing primarily in lower-yielding stocks; - employing a long-term, low turnover approach to investing; - attempting to avoid net realized short-term gains; - when appropriate, selling stocks trading below cost to realize losses; - in selling appreciated stocks, selecting the most tax-favored share lots; and - selectively using tax-advantage hedging techniques, such as derivative transactions, as an alternative to taxable sales. The Fund can generally be expected to distribute a smaller percentage of returns each year than most other equity mutual funds. There can be no assurance, however, that taxable distributions can always be avoided. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well-managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. 22 26 RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To protect against price declines in securities holdings with large accumulated gains, the Fund may use various hedging techniques (such as purchased put options, equity collars (combining the purchase of a put option and the sale of a call option), equity swaps, and the purchase or sale of stock index futures contracts). By using these techniques rather than selling appreciated securities, the Fund can reduce its exposure to price declines in the securities without realizing substantial capital gains under current tax law. These derivative instruments may also be used by the Fund as a substitute for the purchase or sale of securities. The use of derivatives is highly specialized. The use of derivative instruments can result in losses that substantially exceed the initial amount paid or received by the Fund. Equity swaps and over-the-counter options are private contracts in which there is a risk of loss in the event of a counterparty's default. Derivative instruments may be difficult to value, may be illiquid, and may be subject to wide swings in valuation caused by changes in the value of the underlying security. To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Tax-Managed Growth Fund is co-managed by John F. Jostrand, Gregory J. Pusinelli and Michelle R. Seitz. John Jostrand, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1993 as a portfolio manager. Previously, he was with TRW, Inc. for ten years as Director, Investments, equity portfolio manager and venture capital funds manager. Prior to that he was with Boatmen's National Bank for five years as Assistant Trust Officer, equity fund manager and research analyst. He is a member of the Association for Investment Management and Research and past president of the Pilgrim Village Board of Trustees. Education: B.A., University of Missouri; M.B.A., University of Michigan; and CFA. Greg Pusinelli, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1995 as portfolio manager in the Investment Management Department. In 1996, he became the leader of the Taxable Group. Previously, he was with Stein Roe & Farnham Incorporated for nine years where he was a senior Vice President and Principal responsible for managing client portfolios and a team of portfolio managers. He also co-managed the Investment Counsel Division's Core Portfolio. From 1983 to 1986, he was with the First National Bank of Chicago, where he became a Vice President. Prior to that he was with Harris Trust and Savings Bank from 1980 to 1982. He is a past Chairman of the Board of Trustees of Providence-St. Mel School. Education: B.S., Indiana University; M.B.A., Northwestern University Kellogg Graduate School of Management. Michelle Seitz, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. She joined the firm in 1996 as a portfolio manager. She has over 12 years of investment experience and is a portfolio manager and member of the department's Wealth Management Team. Previously, she was a vice president and senior portfolio manager with Concord Investment Company for four years where she was invited to be a principal in the firm. She managed a team of investment professionals at Concord and was a member of the investment strategy team. Prior to that, she was a portfolio manager with NationsBank for five years and served on the department's asset allocation committee. She is an active member of the Investment Analysts Society of Chicago. She serves on the Board of Advisors for Indiana University's Investment Management Academy in the Graduate School of Business and Northwestern Memorial Foundation's Planned Giving Professional Council. Education: B.S., Indiana University; and CFA. 23 27 WILLIAM BLAIR LARGE CAP GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Large Cap Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks of large domestic growth companies of high quality that have demonstrated sustained growth over a long period of time. The Adviser currently defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. Under normal market conditions, the Fund will invest at least 65% of its total assets in large cap stocks. The Fund may also invest in medium-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established. The Fund invests primarily in a diversified portfolio of companies with sustainable, above-average growth from one business cycle to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. From time to time, the Fund may invest in equity related securities such as preferred stocks, convertible securities and warrants. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. 24 28 PORTFOLIO MANAGEMENT The Large Cap Growth Fund is co-managed by John F. Jostrand and Gretchen Lash. John Jostrand, a principal with William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1993 as a portfolio manager and now is a member of the department's institutional growth team. Previously, he was with TRW, Inc. for ten years as Director, Investments, equity portfolio manager and venture capital funds manager. Prior to that he was with Boatmen's National Bank for five years as Assistant Trust Officer, equity fund manager and research analyst. He is a member of the Association for Investment Management and Research and past president of the Pilgrim Village Board of Trustees. Education: B.A., University of Missouri; M.B.A., University of Michigan; and CFA. Gretchen Lash, a principal with William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. She joined the firm in 1997 as a portfolio manager. Previously, she was a partner at Lincoln Capital Asset Management where she was part of a nine person team managing $17 billion in institutional, large cap growth equities. Prior to that, she was a consumer analyst and then a portfolio manager of several growth mutual funds with total assets of $2.6 billion at American Capital. Education: B.A., Cornell University; MBA, Rice University; and CFA. 25 29 WILLIAM BLAIR SMALL CAP GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Small Cap Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks of small emerging, rapid growth domestic companies that are of high quality and that have had especially vigorous growth in revenues and earnings. The Adviser currently defines small companies as those with market capitalizations of $2 billion or less at the time of the Fund's investment. Under normal market conditions, the Fund will invest at least 65% of its total assets in small cap stocks. To a limited extent, the Fund may also invest in companies with business characteristics and growth prospects similar to small companies, but which may have market capitalizations above $2 billion. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. 26 30 PORTFOLIO MANAGEMENT The Small Cap Growth Fund is co-managed by Karl W. Brewer and Mark A. Fuller III. Karl W. Brewer has co-managed the Fund since its inception in 1999. He has been with William Blair & Company, L.L.C. since 1996. He is an analyst and portfolio manager, and a member of the department's Small Cap team. Previously, he spent six years at Lehman Brothers Inc. in the Mergers & Acquisitions and Los Angeles Corporate Finance Departments. Education: B.A., Washington & Lee University; M.B.A., Northwestern University Kellogg Graduate School of Management. Mark A. Fuller, III, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He has been with the firm since 1983. He is a portfolio manager for numerous accounts and is a member of the department's Small Cap team. He began his career in Institutional Sales, developing long-standing relationships with each of the firm's research analysts. Prior to joining the firm, he was a sales representative with IBM Corporation. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. 27 31 WILLIAM BLAIR INTERNATIONAL GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair International Growth Fund seeks long-term capital appreciation. 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. The Fund's assets normally will be allocated among not fewer than six different countries and will not concentrate investments in any particular industry. However, the Fund may have more than 25% of its assets invested in any major industrial or developed country. No more than 50% of the Fund's equity securities may be invested in securities of issuers of any one country at any given time. The Fund ordinarily will invest at least 80% of its total assets in a diversified portfolio of common stocks with above-average growth, profitability and quality characteristics, issued by companies domiciled outside the U.S., and in securities convertible into, exchangeable for or having the right to buy such common stocks. INVESTMENT PROCESS Stock Selection. In selecting companies for investment, fundamental company analysis and stock selection are the Adviser's primary investment criteria. The Adviser seeks companies that historically have had superior growth, profitability and quality relative to local markets and relative to companies within the same industry worldwide, and that are expected to continue such performance. Such companies generally will exhibit superior business fundamentals, including leadership in their field, quality products or services, distinctive marketing and distribution, pricing flexibility and revenue from products or services consumed on a steady, recurring basis. These business characteristics should be accompanied by management that is shareholder return-oriented and uses conservative accounting policies. Companies with above-average returns on equity, strong balance sheets and consistent, above-average earnings growth at reasonable valuation levels will be the primary focus. Stock selection will take into account both local and global comparisons. Country Allocation. In pursuing the Fund's investment objective, the Adviser will vary the geographic diversification and types of securities based upon the Adviser's continuous evaluation of economic, market and political trends throughout the world. The investment of the Fund's assets in various international securities markets tends to decrease the degree to which events in any one country can affect the entire Fund. In making decisions regarding the country allocation, the Adviser will consider such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries and other pertinent financial, social, national and political factors. Normally, the Fund's investments will be spread throughout the world (excluding the United States). The Adviser intends to maintain approximately 10 to 20 percent of the Fund's assets in emerging markets, although that allocation will vary over time. Emerging market companies are (i) companies organized under the laws of an emerging market country or having securities which are traded principally on an exchange or over-the-counter in an emerging market country; or (ii) companies which, regardless of where organized or traded, have a significant amount of assets (at least 50%) located in and/or derive a significant amount of their revenues (at least 50%) from goods purchased or sold, investments made or services performed in or with emerging market countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. The Adviser will seek investment opportunities in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. 28 32 ADDITIONAL STRATEGIES For liquidity purposes, up to 20% of the Fund's assets may be held in cash (U.S. dollars and foreign currencies) or in short-term securities, such as repurchase agreements, and domestic and foreign money market instruments, such as government obligations, certificates of deposit, bankers' acceptances, time deposits, commercial paper and short-term corporate debt securities. The Fund does not have specific rating requirements for its short-term securities; however, the Adviser presently does not intend to invest more than 5% of the Fund's net assets in securities rated lower than investment grade. The Fund may enter into forward foreign currency transactions in an effort to protect against changes in foreign exchange rates. To a limited extent, the Fund may also invest in depository receipts, foreign currency futures, forward foreign currency transactions, illiquid securities, investment companies, repurchase agreements and when-issued and delayed-delivery securities, which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification, and portfolio turnover. The Fund may invest to a very limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The International Growth Fund is managed by W. George Greig. W. George Greig, a principal of William Blair & Company, L.L.C., has managed the Fund since 1996 when he joined the Investment Management Department as an international portfolio manager. He headed international equities for PNC Bank in Philadelphia from 1995 to 1996 and, prior to that, he was a founding partner of Pilgrim Baxter & Associates, where he was an analyst, research director and portfolio manager for over ten years. He also served as chief investment officer of Framlington Group plc during its association with Pilgrim Baxter and founded and managed a joint venture between the two firms. Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton School of the University of Pennsylvania. 29 33 WILLIAM BLAIR EMERGING MARKETS GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Emerging Markets Growth Fund seeks long-term capital appreciation. The Fund pursues its objective by investing in a diversified portfolio of equity securities issued by companies in emerging economies worldwide. Emerging market companies are (i) companies organized under the laws of an emerging market country or having securities which are traded principally on an exchange or over-the-counter in an emerging market country; or (ii) companies which, regardless of where organized or traded, have a significant amount of assets (at least 50%) located in and/or derive a significant amount of their revenues (at least 50%) from goods purchased or sold, investments made or services performed in or with emerging market countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. The Fund normally will allocate its investments among not less than six different countries and will not concentrate investments in any particular industry. No more than 50% of the Fund's equity securities will be invested in securities of issuers in one country at any given time. The Fund ordinarily will invest at least 65% of its total assets in equity securities issued by emerging market companies. Equity securities include securities convertible into, exchangeable for or having the right to buy common stocks. INVESTMENT PROCESS The Adviser seeks well-managed, high quality growth companies. Such companies will generally exhibit superior business fundamentals, including one or more of the following characteristics: REGIONAL LEADERSHIP in product quality or cost competitiveness; DOMINANT OR IMPROVING MARKET POSITION, generally associated with a competitive advantage in distribution, pricing or business franchise, within a growing local or regional economy; and SUSTAINABLE ABOVE-AVERAGE AND/OR INCREASING RETURNS on invested capital generated from the efficient utilization of assets, increasing profit margins or sound financial management, including improvements that may arise from the process of privatization or restructuring of corporate assets. The research approach used in stock selection will focus intensively on the soundness of corporate management, taking into account management's orientation toward outside shareholders, incentives and ability to execute successful strategies, commitment to transparent and conservative financial reporting policies, and general integrity. 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 upon the allocation of the investments. In pursuing the Fund's investment objective, the Adviser will vary the Fund's geographic diversification and types of securities based upon the Adviser's continuous evaluation of economic, market and political trends throughout the world. The investment of the Fund's assets in various international securities markets tends to decrease the degree to which events in any one country can affect the entire Fund. In making decisions regarding the country allocation, the Adviser will consider such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries and other pertinent financial, social, national and political factors. In addition, the Adviser will seek investment opportunities in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. 30 34 ADDITIONAL STRATEGIES For liquidity purposes, up to 35% of the Fund's assets may be held in cash (U.S. dollars and foreign currencies) or in short-term securities, such as repurchase agreements, and domestic and foreign money market instruments, such as government obligations, certificates of deposit, bankers' acceptances, time deposits, commercial paper and short-term corporate debt securities. The Fund does not have specific rating requirements for its short-term securities; however, the Adviser presently does not intend to invest more than 5% of the Fund's net assets in securities rated below investment grade. The Fund may enter into forward foreign currency transactions in an effort to protect against changes in foreign exchange rates. To a limited extent, the Fund may also invest in depository receipts, foreign currency futures, illiquid securities, investment companies, repurchase agreements and when-issued and delayed delivery securities which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund intends to invest to a very limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Emerging Markets Growth Fund is co-managed by W. George Greig and Jeffrey A. Urbina. W. George Greig, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1998. He joined the Investment Management Department in 1996 as an international portfolio manager. He headed international equities for PNC Bank in Philadelphia from 1995 to 1996 and, prior to that, he was a founding partner of Pilgrim Baxter & Associates, where he was an analyst, research director and portfolio manager for over ten years. He also served as chief investment officer of Framlington Group plc during its association with Pilgrim Baxter and founded and managed a joint venture between the two firms. Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton School of the University of Pennsylvania. Jeffrey A. Urbina joined William Blair & Company, L.L.C. in 1996 and has co-managed the Fund since its inception in 1998. In addition to the Emerging Market Growth Fund, he is responsible for emerging market research for the William Blair International Growth Fund. From 1991 to 1996, he was Senior Vice President/ Director of Emerging Market Research and a Portfolio Manager for the Van Kampen American Capital Navigator Fund, an emerging market equity fund listed in Luxembourg. During his five years at Van Kampen American Capital, he also served as Director of Fixed Income Research and was a member of the Investment Policy Committee. Before joining Van Kampen American Capital, he spent ten years at Citicorp in various capacities, including as a Vice President in the commercial real estate group in Chicago and as a commercial lending officer in the bank's Denver office. He began his banking career at Harris Bank in Chicago, where he was an International Banking Officer. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. 31 35 WILLIAM BLAIR DISCIPLINED LARGE CAP FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Disciplined Large Cap Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks and related equity securities of large capitalization domestic companies. The Adviser chooses the Fund's portfolio investments primarily from companies in the Standard & Poor's 500 Stock Index. The Adviser defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. Under normal market conditions, the Fund will invest at least 65% of its total assets in large cap stocks. INVESTMENT PROCESS The Disciplined Large Cap Fund seeks to consistently outperform the Standard & Poor's 500 Stock Index while maintaining similar market risk by utilizing a disciplined investment process that combines bottom-up stock picking with quantitative measures to help manage risk and create a portfolio with better value, better earnings growth momentum and similar sensitivity to general macro-economic conditions as the Standard & Poor's 500. The portfolio generally will hold the securities of 90-140 companies in the Standard & Poor's 500. The Adviser uses quantitative models to help determine the present value of each stock in the Standard & Poor's 500 Index and to help forecast growth rate momentum. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Fund may also invest to a limited extent in S&P Futures contracts. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Disciplined Large Cap Fund is managed by Stan Kirtman. Stan Kirtman joined William Blair & Company, L.L.C. as a portfolio manager for the Fund in 1999. Previously, he served as President and CIO for Nikko Global Asset Management (USA), Inc from April 1987 to June 1999. From January 1975 to April 1987, he was director of Pension & Profit Sharing at Thomas J. Lipton, Inc., Senior Investment Officer with Gerard Bank, and Assistant Vice President at Provident National Bank. He is a member of the New York Society of Security Analysts and the Market Technicians Association. Education: B.A., Hunter College. 32 36 WILLIAM BLAIR VALUE DISCOVERY FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Value Discovery Fund seeks long-term capital appreciation. The Fund pursues its objective by investing with a value discipline primarily in a diversified portfolio of the equity securities of small companies. INVESTMENT PROCESS In selecting companies for investment, the Adviser evaluates the extent to which a company meets the investment criteria set forth below. The weight given to a particular investment criterion will depend upon the circumstances, and some Fund holdings may not meet all of the following criteria, which are described more fully in the Statement of Additional Information: MATERIAL PRICE/VALUE DISPARITY -- whether the company's current market value reflects a material discount from the Adviser's estimate of the company's intrinsic value. PROBABLE EXPANSION IN PROFITABILITY -- whether the company has a reasonable expectation of improving its level of profitability over a three-year investment horizon. SKILLED AND COMMITTED MANAGEMENT -- whether the company has a capable and skilled management team and a clearly articulated and logical business strategy with a reasonable probability of successful execution. STRONG CAPITAL STRUCTURE -- whether the company has a relatively simple, clean financial structure without excessive use of financial leverage. In addition, the company should adhere to conservative and straightforward accounting practices. POSITIVE CATALYST -- the likelihood that the company will undergo a positive corporate change within a three-year investment horizon. ADDITIONAL STRATEGIES The Fund may also hold debentures and preferred stocks if they are convertible into common stocks that meet the Fund's investment criteria. The Fund may invest up to 15% of its net assets in foreign securities, which may include American Depository Receipts or substantially similar investments; however, the Fund may invest only up to 5% of its net assets directly in foreign securities. To a limited extent, the Fund may invest in depository receipts, foreign securities, illiquid securities, investment companies, real estate investment trusts, repurchase agreements and when-issued and delayed delivery securities which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants and futures, which are described in the Statement of Additional Information. 33 37 PORTFOLIO MANAGEMENT The Value Discovery Fund is co-managed by Glen A. Kleczka, David S. Mitchell and Capucine E. Price. Glen Kleczka joined William Blair & Company, L.L.C. in 1996 to lead the Fund's portfolio management team. For the previous 7 years, he was a partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc. and co-managed the Post-Venture Fund, whose assets totaled more than $900 million. He was also a member of the Private Markets Committee which approved all venture capital and partnership investments. Previously, he spent two years at CNA Financial Corp. as a manager of their Variable Annuity Trust equity portfolio. While at the University of Wisconsin he was a participant at the Center for Applied Security Analysis, a nationally recognized investment management program. He is a member of the Investment Analyst Society of Chicago. Education: B.S., Marquette University; M.B.A., University of Wisconsin. David Mitchell joined William Blair & Company, L.L.C. in 1996 as a portfolio manager for the Fund. In 1996, he was a partner in the U.S. Equity group of Brinson Partners, Inc. and a member of the Post-Venture Fund management team, whose assets totaled more than $900 million. Prior to joining Brinson, he spent four years as a co-manager of Thomas Paine Investors, L.P., a private small-cap fund. Before joining Thomas Paine, he was a Senior Equity Analyst on NBD's small-cap Woodward Opportunity Fund and with Connecticut National Bank as an equity analyst and portfolio manager. Prior to graduate studies he worked as an equity trader and a money market portfolio manager. Education: B.A., Knox College; M.M., Northwestern University. Capucine "Cappy" Price joined William Blair & Company, L.L.C. in 1996 as a portfolio manager for the Fund. For the previous 3 years, she was a partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc. and a member of the Post-Venture Fund management team, whose assets totaled more than $900 million. Previously, she was an equity analyst for the First National Bank of Chicago. While attending Northwestern University she was a participant in First Chicago's First Scholar program. Education: B.A., University of Michigan; M.A., University of Chicago; M.M., Northwestern University. 34 38 WILLIAM BLAIR INCOME FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Income Fund seeks a high level of current income relative to stability of principal. The Fund invests 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 Fund's assets will be invested in the following: U.S. DOLLAR-DENOMINATED CORPORATE DEBT SECURITIES (domestic or foreign) with long-term ratings of "A-" or better, or an equivalent rating, by at least one of the following four nationally recognized statistical rating organizations ("Rating Organizations"): Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc. and Standard & Poor's Corporation; OBLIGATIONS OF OR GUARANTEED BY THE UNITED STATES GOVERNMENT, its agencies or instrumentalities. These securities include direct obligations of the U.S. Treasury, which differ only in their interest rates, maturities and time of issuance and obligations issued or guaranteed by U.S. Government agencies or instrumentalities, which differ in the degree of support provided by the U.S. Government. Although these securities are subject to the market risks resulting from fluctuation in interest rates, they will be paid in full if held to maturity; COLLATERALIZED OBLIGATIONS, which are debt securities issued by a corporation, trust or custodian, or by a U.S. Government agency or instrumentality, that are collateralized by a portfolio or pool of assets, such as mortgages, mortgage-backed securities, debit balances on credit card accounts or U.S. Government securities. The issuer's obligation to make interest and/or principal payments is secured by the underlying pool or portfolio of securities. The Income Fund may invest in collateralized obligations that are not guaranteed by a U.S. Government agency or instrumentality only if the collateralized obligations are rated A- or better, or an equivalent rating, by one of the Rating Organizations; and COMMERCIAL PAPER obligations rated within the highest grade by one of the four Rating Organizations. The anticipated dollar-weighted average maturity of the Fund is three to seven years. The anticipated weighted average modified duration for the Fund is two to five years, with a maximum duration on any instrument of eight years. The Adviser will not continue to hold a security whose duration has moved above eight years. The duration of an instrument is different from the maturity of an instrument in that duration measures the average period remaining until the discounted value of the amounts due (principal and interest) under the instrument are to be paid, rather than by the instrument's stated final maturity. For example, a portfolio duration of five years means that if interest rates increased by one percent, the value of the portfolio would decrease by approximately five percent. Modified duration adjusts duration to take into account the yield to maturity and the number of coupons received each year. For purposes of calculating duration, instruments allowing prepayment will be assigned a maturity schedule by the Adviser based upon industry experience. INVESTMENT PROCESS The Adviser seeks to outperform the total return of an index of broad intermediate-term government and corporate high-grade debt through an actively managed diversified portfolio of debt securities. The Adviser's investment philosophy emphasizes shifts in the Fund's portfolio among various sectors of the debt market, subject to the Fund's credit quality constraints for its portfolio. The Adviser also actively manages the Fund based upon the average duration and yield to maturity of the Fund's portfolio and the Adviser's perceived trends in interest rates. ADDITIONAL STRATEGIES Up to 10% of the Fund's total assets may be invested in unrated debt securities, provided that the Adviser deems such securities to be of at least "A-" quality and provided that the comparable debt of the issuer has a rating of at least "A-" or its equivalent by one of the four Rating Organizations. 35 39 To a limited extent, the Fund may invest in illiquid securities, repurchase agreements and when-issued and delayed delivery securities, which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. In addition, the Fund's policy regarding lending portfolio securities is described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Income Fund is co-managed by Jim Kaplan and Bentley Myer. Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the Fund since 1999. He joined the firm's Investment Management Department in 1994 as a fixed-income portfolio manager. Prior to that he was with First Union National Bank for twelve years. While at First Union, he traded risk positions in mortgage-backed securities and municipal bonds. In addition, he co-managed the mortgage-backed securities portion of the bank's investment portfolio. He is a member of the Investment Analysts Society of Chicago. Education: B.A., Washington & Lee University and C.F.A. Bentley Myer, a principal of William Blair & Company, L.L.C., has managed the Fund since 1992. He joined the firm in 1991 as a fixed-income portfolio manager. From 1983 to 1991, he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that he was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a Trustee of Delnor Community Hospital, as well as a member of the Investment Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A., Wharton School of the University of Pennsylvania. 36 40 WILLIAM BLAIR READY RESERVES FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Ready Reserves Fund seeks current income, a stable share price and daily liquidity. The Fund invests 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 Fund seeks to maintain a net asset value of $1.00 per share. Nevertheless, there is no guarantee that the objective of the Fund will be achieved or that the net asset value of $1.00 per share of the Fund will be maintained. ADDITIONAL STRATEGIES AND RISKS The Fund will invest exclusively in U.S. dollar-denominated money market instruments, including, but not limited to, those issued by: -- Corporations; -- The U.S. Government, its agencies and instrumentalities; -- U.S. and foreign banks; -- Municipalities; -- Foreign governments; and -- Multinational organizations, such as the World Bank. The yield paid by the Ready Reserves Fund will vary with changes in interest rates. While the Fund seeks to maintain its $1.00 share price, there is no guarantee that it will be able to do so. The Fund has adopted certain investment policies designed to limit the market and financial risks of the Fund. The Fund complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940, which governs the maturity and credit quality of money market funds. The Fund 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 Trustees. However, the Fund may invest up to 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 Trustees, has determined present minimal credit risks. Securities are deemed to be highest grade if they are rated high-quality by two Rating Organizations, or, if only rated by one Rating Organization, rated high-quality by that Rating Organization. For example, commercial paper rated "Duff 1 minus," "Fitch 1," "Prime 1" and "A-1" by Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc., and Standard & Poor's Corporation, respectively, would be considered high quality. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, may provide higher yields. Further, the Fund 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 to the Statement of Additional Information. To the extent the Fund invests in short-term U.S. dollar-denominated foreign money market instruments, investing in foreign securities may involve a greater degree of risk than investing in domestic securities due to the possibility of, but not limited to, less publicly available information, more volatile markets, less securities regulation, less favorable tax provisions, war and expropriation. To a limited extent, the Fund may invest in repurchase agreements, Section 4(2) commercial paper, when-issued and delayed delivery securities and variable rate securities, which are more fully described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration and diversification. 37 41 PORTFOLIO MANAGEMENT The Ready Reserves Fund is co-managed by Jim Kaplan and Bentley Myer. Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the Fund since 1999. He joined the firm's Investment Management Department in 1994 as a fixed-income portfolio manager. Prior to that he was with First Union National Bank for twelve years. While at First Union, he traded risk positions in mortgage-backed securities and municipal bonds. In addition, he co-managed the mortgage-backed securities portion of the bank's investment portfolio. He is a member of the Investment Analysts Society of Chicago. Education: B.A., Washington & Lee University and C.F.A. Bentley Myer, a principal with William Blair & Company, L.L.C., has managed the Fund since 1992. He joined the firm in 1991 as a fixed-income portfolio manager. From 1983 to 1991 he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that he was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a Trustee of Delnor Community Hospital as well as a member of the Investment Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A., Wharton School of the University of Pennsylvania. 38 42 INVESTMENT RISKS - -------------------------------------------------------------------------------- The following table summarizes the types of risks described below that each Fund may experience.
TEMPORARY SMALLER COUNTRY EMERGING OPERATING DEFENSE INTEREST STOCKS ALLOCATION MARKETS EXPENSES POSITION RATE CREDIT ------- ---------- -------- --------- --------- -------- ------ Growth Fund............................ X X Tax-Managed Growth Fund................ X X Large Cap Growth Fund.................. X Small Cap Growth Fund.................. X X International Growth Fund.............. X X X X Emerging Markets Growth Fund........... X X X X X Disciplined Large Cap Growth Fund...... X Value Discovery Fund................... X X Income Fund............................ X X X Ready Reserve Fund..................... X
EQUITY FUNDS General. Because the each equity fund invests substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds may decrease in response to the activities of an individual company or in response to general market, business and economic conditions. If this occurs, a Fund's share price may also decrease. Smaller Stocks. Stocks of smaller companies involve greater risk than those of larger, more established companies. This is because smaller companies may be in earlier stages of development, may be dependent on a small number of products or services, may lack substantial capital reserves and/or do not have proven track records. Smaller companies may be more adversely affected by poor economic or market conditions, and may be traded in low volumes, which may increase volatility and liquidity risks. From time to time, the Growth Fund, the Small Cap Growth Fund, the Emerging Markets Growth Fund and the Value Discovery Fund may invest in the equity securities of very small companies, often referred to as "micro-cap" companies. The considerations noted above are generally intensified for these investments. Any convertible debentures issued by small companies 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, including uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. Country Allocation. The International Growth Fund and Emerging Markets Growth Fund seek to invest in companies and governments of countries having stable or improving political environments; however, there is the possibility of expropriation or confiscatory taxation, seizure or nationalization of foreign bank deposits or other assets, establishment of exchange controls, the adoption of foreign government restrictions and other adverse political, social or diplomatic developments that could affect investments in these nations. The risks of investing in securities of foreign issuers may include less publicly available information, less governmental regulation and supervision of foreign stock exchanges, brokers and issuers, a lack of uniform accounting, auditing and financial reporting standards, practices and requirements, the possibility of expropriation, nationalization, confiscatory taxation, adverse changes in investment or exchange control regulations, political instability, restrictions on the flow of international capital and difficulty in obtaining and enforcing judgments against foreign entities. Securities of some foreign issuers are less liquid and their prices more volatile than the securities of U.S. companies. In addition, the time period for settlement of transactions in foreign securities generally is longer than for domestic securities. These risks are typically intensified in emerging markets, which are the less developed and developing nations. Certain of these countries have in the past failed to recognize private property rights and have at times nationalized and expropriated the assets of private companies. 39 43 Emerging Markets. Investments in emerging markets companies are speculative and subject to special risks. Political and economic structures in many of these countries may be in their infancy and developing rapidly. Such countries may also lack the social, political and economic characteristics of more developed countries. The currencies of certain emerging market countries have experienced a steady devaluation relative to the U.S. dollar, and continued devaluations may adversely affect the value of a fund's assets denominated in such currencies. Many emerging market countries have experienced substantial rates of inflation for many years, and continued inflation may adversely affect the economies and securities markets of such countries. In addition, unanticipated political or social developments may affect the values of a Fund's investments in emerging market countries and the availability to the Fund of additional investments in these countries. The small size, limited trading volume and relative inexperience of the securities markets in these countries may make a Fund's investments in such countries illiquid and more volatile than investments in more developed countries, and the Fund may be required to establish special custodial or other arrangements before making investments in these countries. There may be little financial or accounting information available with respect to issuers located in these countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers. In many foreign countries there is less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the U.S. There is an increased risk, therefore, of uninsured loss due to lost, stolen, or counterfeit stock certificates. Prior governmental approval of non-domestic investments may be required under certain circumstances in some developing countries, and the extent of foreign investment in domestic companies may be subject to limitation in other developing countries. Foreign ownership limitations also may be imposed by the charters of individual companies in developing countries to prevent, among other concerns, violation of foreign investment limitations. Repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval in some developing countries. A Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for such repatriation. Further, the economies of certain developing countries may be dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The securities held by the International Growth Fund and the Emerging Markets Growth Fund usually will 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 Fund either beneficially or adversely. Fluctuations in foreign currency exchange rates will also affect the dollar value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, available for distribution to shareholders. The Emerging Markets Growth Fund may invest in Russian securities. Russian securities involve additional significant risks, including political and social uncertainty (for example, regional conflicts and risk of war), currency exchange rate volatility, pervasiveness of corruption and crime in the Russian economic, social and legal systems, delays in settling Fund transactions and risk of loss arising out of Russia's system of share registration and custody. Russia's system of share registration and custody creates certain risks of loss (including the risk of total loss) that are not normally associated with investments in other securities markets. Operating Expenses. The International Growth Fund and Emerging Markets Growth Fund are expected to incur operating expenses that are higher than those of mutual funds investing exclusively in U.S. equity securities, since expenses such as custodial fees related to foreign investments are usually higher than those associated with investments in U.S. securities. Similarly, brokerage commissions on purchases and sales of foreign securities are generally higher than on domestic securities. In addition, dividends and interest from foreign securities may be subject to foreign withholding taxes. (For more information, see "Your Account -- Taxes.") 40 44 Temporary Defensive Position. Each Fund may significantly alter its make-up as a temporary defensive strategy. A defensive strategy will be employed only if, in the judgment of the Adviser, investments in a Fund's usual markets or types of securities become decidedly unattractive because of current or anticipated adverse economic, financial, political and social factors. Generally, the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund will remain fully invested, and the Adviser will not attempt to time the market. However, if a significant adverse market action is anticipated, investment-grade debt securities may be held without limit as a temporary defensive measure. Normally, the Funds do not purchase any stocks with a view to quick turnover for capital gains. For the International Growth Fund and Emerging Markets Growth Fund, the types of securities that might be acquired and held for defensive purposes could include fixed-income securities and securities issued by the U.S. or foreign governments as well as domestic or foreign money market instruments and non-convertible preferred stock, each of which would be of investment-grade. At such time as the Adviser determines that the Fund's defensive strategy is no longer warranted, the Fund will adjust its Fund back to its normal complement securities as soon as practicable. When a Fund is invested defensively, it may not meet its investment objective. INCOME FUND Interest Rate Risk. The Income Fund's investments are subject to price fluctuations resulting from various factors, including rising or declining interest rates (interest rate risk). The value of the portfolio's investments (other than an interest-only class of a collateralized obligation) tends to decrease when interest rates rise and tends to increase when interest rates fall. In addition, investments with longer maturities, which typically provide better yields, may subject the Fund to increased price changes resulting from market yield fluctuations. Credit Risk. The value of the Fund's securities is subject to the ability of the issuers of such securities to make payment at maturity (credit risk). However, in the opinion of the Adviser, the risk of loss of principal should be reduced due to the relatively high quality of the investments in which the Fund primarily will invest. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, provide higher yields. 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 Fund may invest are backed by the full faith and credit of the United States, such as modified pass-through certificates issued by the Government National Mortgage Association, 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 Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). Others are backed only by the credit of the issuer itself (such as obligations of the Student Loan Marketing Association). For a description of ratings, see Appendix B in the Statement of Additional Information. Temporary Defensive Position. Generally the Fund will remain fully invested. However, for temporary defensive purposes, the Fund 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 Fund does not invest in equity securities. 41 45 MANAGEMENT OF THE FUNDS - -------------------------------------------------------------------------------- TRUSTEES, OFFICERS AND ADVISER. The Board of Trustees of the William Blair Funds (the "Trust") has overall management responsibility. The duties of the trustees and officers of the Trust include supervising the business affairs of the Trust, monitoring investment activities and practices and considering and acting upon future plans for the Trust. The Statement of Additional Information has the names of and additional information about the trustees and officers of the Trust. The Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, is responsible for providing investment advisory and management services to the Funds, subject to the direction of the Board of Trustees. The Adviser is also the principal underwriter and distributor of the Trust and acts as agent of the Trust in the sale of its shares (the "Distributor"). William Blair & Company, L.L.C. was founded over 60 years ago by William McCormick Blair. Today, the firm has 150 principals and 850 employees. The main office in Chicago houses all research and investment management services. The Investment Management Department oversees the assets of the William Blair Funds, along with corporate pension plans, endowments and foundations and individual accounts. The department currently manages approximately $12 billion in equities, fixed-income securities and cash equivalents. The Adviser firmly believes that clients are best served when portfolio managers are encouraged to draw on their experience and develop new ideas. This philosophy has helped build a hard-working, results-oriented team of over 30 portfolio managers, supported by over 40 analysts, with an exceptionally low turnover rate. William Blair portfolio managers generally average more than ten years with William Blair and more than two decades of experience in the investment industry. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940. Each Fund pays the Adviser a monthly investment management fee based upon the percentage of the Fund's average net assets as shown below:
FEE AS A % OF FUND AVERAGE NET ASSETS - ---- ------------------ Growth Fund 0.75%* Tax-Managed Growth Fund .80% Large Cap Growth Fund .80% Small Cap Growth Fund 1.10% International Growth Fund 1.10%* Emerging Markets Growth Fund 1.40%* Disciplined Large Cap Fund .80% Value Discovery Fund 1.15%* Income Fund 0.59%* Ready Reserves Fund 0.59%*(1)
- --------------- * For the most recently completed fiscal year. (1) Effective January 1, 2000, the fee will change to 0.24%. CUSTODIAN. The Custodian is Investors Bank and Trust Company, 200 Clarendon Street, Boston, Massachusetts 02117. The Custodian is responsible for custody of portfolio securities, fund accounting and the calculation of the Fund's net asset value. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, may serve as the Custodian for Individual Retirement Accounts ("IRAs"). TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Transfer Agent and Dividend Paying Agent is State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. YEAR 2000. A critical issue has emerged in the investment services industry and for the economy overall regarding how existing application software programs and operating systems can accommodate the date value for the year 2000. Many existing application software products in the marketplace were designed only to accommodate a two-digit date position which represents the year (e.g., "95" is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems 42 46 will be able to accurately process. The Trust is in the process of working with the Adviser and other service providers to assure that the Trust is prepared for the year 2000. The Trust has been assured by the Adviser and other service providers that they do not believe that the Trust will be materially adversely affected by year 2000. Nevertheless, the inability of the Adviser and other service providers to successfully address year 2000 issues could result in interruptions in the Trust's business and have a material adverse effect on the Trust's operations. Year 2000 problems would also increase the risks of a Fund's investments. To assess the potential effect of the year 2000 problem, the Adviser is reviewing information regarding the year 2000 readiness of issuers of securities a Fund may purchase. However, this may be difficult with certain issuers. For example, a Fund that deals with foreign service providers or invests in foreign securities will have difficulty determining the year 2000 readiness of those entities. This is especially true of entities or issuers in emerging markets. The financial impact of these issues for the Funds are still being determined. There can be no assurance that potential year 2000 problems would not have a material adverse effect on the Trust. 43 47 YOUR ACCOUNT - -------------------------------------------------------------------------------- CLASS N SHARES The Class N shares offered herein are offered only to investors who acquire the shares directly through the Trust's distributor or through a select number of financial intermediaries with whom the distributor has entered into selling agreements specifically authorizing them to sell Class N shares. William Blair Funds has adopted a plan under Rule 12b-1 of the Investment Company that provides for fees payable to compensate the Distributor for distribution and other services provided to shareholders of Class N. Because 12b-1 fees are paid out of Fund assets on an ongoing basis, they will, over time, increase the cost of investment and may cost more than other types of sales charges. Long-term shareholders may pay more than the economic equivalent of the maximum initial sales charge permitted by the National Association of Securities Dealers. HOW TO BUY SHARES (By Mail, by Wire or by Telephone) MINIMUM INVESTMENTS. To open an account, the minimum initial investment for regular accounts is $5,000, and the minimum initial investment for Individual Retirement Accounts ("IRAs") is $2,000. To add to an account, the minimum subsequent investment is generally $1,000 for all Funds, except the Ready Reserves Fund, for which the subsequent minimum investment is $1.00. The Funds 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 trustees, principals, officers or employees of the Trust or the Adviser. PURCHASE PRICE. All Class N shares are sold at their public offering price, which is the net asset value per share that is next computed after receipt of your order in proper form by the Distributor, the Transfer Agent or a designated agent thereof. For the Ready Reserves Fund, shares are sold at the net asset value per share that is next computed after receipt of your order in proper form by the Distributor, the Transfer Agent or a designated agent thereof. The net asset value per share of the Ready Reserves Fund normally will be $1.00. (For more information, see "Determination of Net Asset Value.") If you fail to pay for your order, you will be liable for any loss to the Funds and, if you are a current shareholder, the Funds may redeem some or all of your shares to cover such loss. NOTE: All purchases made by check should be in U.S. dollars and made payable to William Blair Funds, or in the case of a retirement account, the custodian or trustee of such account. Third party checks will not be accepted. When purchases are made by check or periodic account investment, the Funds may delay sending redemption proceeds until they determine that collected funds have been received for the purchase of such shares, which may be up to 15 calendar days. RIGHT TO REJECT YOUR PURCHASE ORDER. The Trust reserves the right to decline your purchase order (including exchanges) upon receipt for any reason, including excessive, short-term (market-timing) or other abusive trading practices which may disrupt portfolio management strategies and harm Fund performance. The Trust also reserves the right to delay delivery of redemption proceeds--up to seven days--or to honor certain redemptions with securities, rather than cash. BY MAIL OPENING AN ACCOUNT. To open a new account by mail (except for the Ready Reserves Fund), make out a check for the amount of your investment, payable to "William Blair Funds" Complete the account application included with this Prospectus and mail the completed application and the check to the Transfer Agent, State Street Bank and Trust Company ("State Street"), P.O. Box 8506, Boston, Massachusetts 02266-8506. For the Ready Reserves Fund, send your check and completed application to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To purchase additional shares, make out a check for the amount of your investment, payable to "William Blair Funds" Except for the Ready Reserves Fund, mail the check, together with a letter 44 48 that specifies the portfolio name, the account number and the name(s) in which the account is registered, to State Street Bank and Trust Company, P.O. Box 8506, Boston, Massachusetts 02266-8506. For the Ready Reserves Fund, send your check and letter to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. BY WIRE OPENING AN ACCOUNT. First, call State Street at 1-800-635-2886 (in Massachusetts, 1-800-635-2840) for an account number. Then instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 Include the name of the Fund in which you are investing, your assigned account number and the name(s) in which the account is registered. Finally, complete the account application, indicate the account number assigned to you by State Street and mail it to William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To add to your account by wire, instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 In your request, specify the portfolio name in which you are investing, your account number, and the name(s) in which the account is registered. To add to an existing account by wire transfer of funds, you must have selected this option on your account application. BY TELEPHONE OPENING AN ACCOUNT. See "By Wire." ADDING TO AN ACCOUNT. Call State Street at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). For the Ready Reserves Fund only, call your William Blair account executive. Tell your account executive the Fund name, your account number and the name(s) in which the account is registered. You may then pay for your new shares by mail or by wire. To add to an existing account by telephone, you must have selected this option on your account application. HOW TO SELL SHARES (By Mail, by Wire or by Telephone) You can arrange to take money out of your account by selling ("redeeming") some or all of your shares. You may give instructions to redeem your shares by mail, by wire or by telephone, as described below. BY MAIL For all Funds except the Ready Reserves Fund, to redeem shares by mail, send a written redemption request signed by all account owners to State Street Bank and Trust Company, P.O. Box 8506, Boston, Massachusetts 02266-8506. 45 49 For the Ready Reserves Fund, send your redemption request signed by all account owners to the Distributor, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, to the attention of your account executive. Amounts redeemed will be placed in your brokerage account. FOR ALL FUNDS, WRITTEN REDEMPTION REQUESTS MUST INCLUDE: -- a letter that contains your name, the Fund's name and the dollar amount or number of shares to be redeemed; and -- any other necessary documents, such as an inheritance tax consent or evidence of authority (for example, letters testamentary), dated not more than 60 days prior to receipt thereof by State Street or the Distributor. BY WIRE To redeem some or all of your shares in any Funds by wire, you may contact the Transfer Agent, or the Distributor in the case of the Ready Reserves Fund, by mail or telephone, as explained herein. To redeem by wire, you must have elected this option on your account application and attached to the application a voided, unsigned check or deposit slip for your bank account. BY TELEPHONE TO REDEEM SHARES BY TELEPHONE, YOU MUST HAVE ELECTED THIS OPTION ON YOUR ACCOUNT APPLICATION. For all Funds except the Ready Reserves Fund, contact the Transfer Agent at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). For the Ready Reserves Fund, you may redeem some or all of your shares by telephone by calling your William Blair account executive. Amounts redeemed will be placed in your brokerage account. NOTE: Redemption requests should NOT be sent to the Trust or to the Distributor (except in the case of the Ready Reserves Fund). SIGNATURE GUARANTEES. Signature guarantees must be obtained from a bank that is a member of the FDIC, by a brokerage firm that is a member of the NASD, or by an eligible guarantor who is a member of, or a participant in, a signature guarantee program. Your redemption request must include a signature guarantee if any of the following situations apply: -- You wish to redeem shares having a value of $5,000 or more in a single transaction; -- Your account registration has changed; or -- You want a check in the amount of your redemption to be mailed to a different address than the one on your account application (address of record). SIGNATURE GUARANTEES, IF REQUIRED, MUST APPEAR ON THE WRITTEN REDEMPTION REQUEST AND ON ANY ENDORSED STOCK CERTIFICATE OR STOCK POWER. REDEMPTION PRICE. The redemption price that you receive for your shares may be more or less than the amount that you originally paid for them, depending upon their net asset value next calculated after receipt of your redemption request in proper order by the Distributor, the Transfer Agent or a designated agent thereof. For the Ready Reserves Fund, the net asset value normally will be $1.00. PAYMENT FOR REDEEMED SHARES. Payment normally will be mailed to you at the address of record for your account by the third business day after receipt by State Street (or, in the case of the Ready Reserves Fund, the Distributor) of a redemption request and any other required documentation and after any checks in payment for your shares have cleared. For the Ready Reserves Fund, if the Distributor receives notice of your request to redeem shares by 9:30 a.m., Chicago time, the redemption will be effected as of that date and proceeds normally will be paid that day. If 46 50 notice of your redemption request is received after that time, proceeds normally will not be paid until the next business day. DELAYED PROCEEDS. The Trust reserves the right to delay delivery of your redemption proceeds--up to seven days--or to honor certain redemptions with securities, rather than cash, as described in the next section. In addition, redemption of shares from a Fund, other than the Ready Reserves Fund, within 180 days of purchase may be subject to a 1.00% redemption fee. REDEMPTIONS IN KIND. If the Adviser determines that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other financial assets, valued for this purpose as they are valued in computing the NAV for each of the Fund's shares. Shareholders receiving securities or other financial assets on redemption may realize a gain or loss for tax purposes, and will incur any costs of sale, as well as the associated inconveniences. Notwithstanding the above, each of the Funds are obligated to redeem shares solely in cash up to the lesser of $250,000 or 1.00% of the net asset value of such Fund during any 90-day period for any one shareholder of record. AUTOMATIC REDEMPTION OF SMALL ACCOUNTS. Because of the relatively high cost of maintaining small accounts, the Trust reserves the right to redeem your shares in any account that, following a redemption, is below a specified amount. Currently, the MINIMUM IS $5,000 PER ACCOUNT. Before the redemption is processed, you will be notified that the value of your account has fallen below the minimum and allowed to make an additional investment. SPECIAL REDEMPTION METHODS FOR THE READY RESERVES FUND. In addition to the above methods, shares of the Ready Reserves Fund can be redeemed by two other methods unique to this Fund. Redemption requests will be processed after the next daily dividend declaration at the net asset value next determined upon receipt by the Distributor of a proper redemption request. In this way, you will receive the net asset value of your shares and all declared but unpaid dividends on your shares through the date of redemption. 1. REDEMPTION BY CHECK. To redeem shares by check, you must fill out the appropriate section of your account application. If your application for the check-writing privilege is approved, you will be provided with checks that may be made payable to any person IN AN AMOUNT NOT LESS THAN $500 NOR MORE THAN $9 MILLION. There currently is no charge for this service and no limit on the number of checks that you may write; however, these provisions are subject to change. The payee of the check may cash or deposit it like any other check drawn on a bank. When the check is presented for payment, a sufficient number of full and fractional shares from your account will be redeemed at their next-determined net asset value per share, usually $1.00, to cover the amount of the check. This enables you to continue earning daily dividends until the check clears. Canceled checks will be returned to you by State Street. For joint accounts, unless a single signer has been authorized on your account application, checks must be signed by all joint account owners. The Trust may refuse to honor checks whenever the right of redemption has been suspended or postponed or whenever your account is otherwise impaired. For instance, your account would be considered to be impaired when (1) there are insufficient assets to cover the check, (2) a "stop order" has been placed on the check, and (3) in other situations, such as where there is a dispute over ownership of the your account. A $25 SERVICE FEE may be charged when a check is presented to redeem shares in excess of the value of your account or for an amount less than $500. 2. AUTOMATIC REDEMPTION. The Distributor has instituted an automatic redemption procedure available to Ready Reserve Fund shareholders who maintain certain brokerage accounts with it. The Distributor may use this procedure to satisfy amounts due it by you as a result of purchases of securities or other transactions in your brokerage account. Under this procedure, if you so elect, your brokerage account will be scanned at the opening of business each day and, after application of any cash balances in the brokerage account, a sufficient number of shares will be redeemed, effective that day at the next-determined net asset value, to satisfy any amounts which you are obligated to pay to the Distributor. You will receive all dividends declared but unpaid through the date of redemption. 47 51 HOW TO EXCHANGE SHARES (BY MAIL OR BY TELEPHONE) Subject to the following limitations, you may exchange shares of Class N shares of each Fund into either Class N shares of another Fund or into shares of the Ready Reserves Fund at their relative net asset values so long as the shares to be acquired are available for sale in your state of residence. Only four (4) exchanges from a Fund are allowed within any 12-month period. Exchanges will be effected by redeeming your shares and purchasing shares of the other Fund or Funds requested. BY MAIL You may request an exchange of your shares by writing to William Blair Funds, Attention: Exchange Department, P.O. Box 8506, Boston, Massachusetts 02266-8506. BY TELEPHONE You may also exchange your shares by telephone by completing the appropriate section on your account application. Once your telephone authorization is on file, State Street will honor your requests to redeem shares by telephone at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). If you hold certificated shares, you must deposit them with State Street prior to any exchange of such shares. Neither the Trust nor State Street will be liable for any loss, expense or cost arising out of any telephone request pursuant to the telephone exchange privilege, including any fraudulent or unauthorized request, and you will bear the risk of loss, so long as the Trust or the Transfer Agent reasonably believes, based upon reasonable verification procedures, that the telephonic instructions are genuine. The verification procedures include (1) recording instructions, (2) requiring certain identifying information before acting upon instructions and (3) sending written confirmations. DIVIDENDS AND DISTRIBUTIONS INCOME DIVIDENDS. Each Fund earns dividends from stocks and interest from bond, money market, and other investments, which are passed along to shareholders as income dividends as long as expenses do not exceed income. CAPITAL GAIN DISTRIBUTIONS. Each Fund realizes capital gains whenever it sells securities for a higher price than it paid for them, which are passed along to shareholders as capital gain distributions. As a shareholder, you are entitled to your portion of the Fund's net income and gains on its investments. Each Fund passes its earnings along to you as distributions. Each Fund's policy is to distribute substantially all net investment income, if any, and all net realized capital gain, if any. All distributions of income and capital gain and any return of capital have the effect of immediately thereafter decreasing net asset value per share. Income dividends and capital gain distributions will be automatically reinvested in additional shares at net asset value on the reinvestment date, unless you specifically request otherwise (see "Shareholder Services and Account Policies--Dividend Options"). Cash payments are made by the Dividend Paying Agent, State Street Bank and Trust Company, shortly following the reinvestment date. WHEN DIVIDENDS ARE PAID -- For the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund, all income dividends, if any, and capital gain distributions, if any, generally will be paid in December and/or January. -- For the Income Fund, income dividends are normally paid the fifteenth day of each month, if a business day, with net-realized long-term capital gain distributions, if any, generally paid in December and/or January. The Income Fund attempts to maintain relatively level monthly dividends and, 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. 48 52 -- For the Ready Reserves Fund, the Fund's net investment income will be declared at the close of the New York Stock Exchange on each day that the Fund is open for business, which is generally 3:00 p.m., Chicago time, as a dividend to shareholders who were of record prior to the declaration. The Funds may vary these dividend practices at any time. Income dividends and any capital gain distributions on all Funds will vary from year to year. Dividends and distributions may be subject to withholding, as required by the Internal Revenue Service (see "Your Account--Taxes"). TAXES As with any investment, you should consider how your investment in a Fund will be taxed. If your account is not a tax-deferred retirement account, you should be aware of these tax implications. TAXES ON DISTRIBUTIONS. Each Fund's distributions are subject to Federal income tax and may also be subject to state or local taxes. Distributions may be taxable at different rates depending upon the length of time the Fund holds the security. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them in additional shares. However, dividends declared 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. The Funds will inform you of the amount and nature of distributions paid. Under the Federal tax laws, income dividends and short-term capital gains distributions are taxed as ordinary income. Long-term capital gain distributions are taxed as long-term capital gains. It is anticipated that a portion of the ordinary income dividends for the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund will be eligible for the dividends-received deduction available for corporate shareholders. The ordinary income dividends of International Growth Fund, Emerging Markets Growth Fund, Income Fund and Ready Reserves Fund are not eligible for the dividends-received deduction available to corporate shareholders. TAXES ON TRANSACTIONS. Redemptions of Fund shares and exchanges for shares of other Funds are treated as sales and are subject to capital gains taxation. A capital gain or loss is the difference between the price that you paid for your shares and the price that you receive when you sell (or exchange) them. For the Ready Reserves Fund, so long as a net asset value of $1.00 is maintained, the sale or redemption of your shares will not result in a capital gain or loss. Any loss recognized on the redemption of shares held six months or less will be treated as a long-term capital loss to the extent you have received any long-term capital gain dividends on such shares. A shareholder who redeems shares normally will recognize a capital gain or loss for Federal income tax purposes. If you realize a loss on the redemption of Fund shares within 30 days before or after an acquisition of shares of the same Fund, the two transactions may be subject to the wash sale rules of the Internal Revenue Code, resulting in a postponement of the recognition of such loss for Federal income tax purposes. "BUYING A DIVIDEND." If you buy shares before a Fund deducts a distribution from its net asset value, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable distribution. See "Your Account--Dividends and Distributions" for payment schedules, and call the Distributor if you have further questions. EFFECT OF FOREIGN TAXES. Investment income received from sources within foreign countries may be subject to foreign income taxes, which generally will reduce a Fund's distributions. However, the United States has entered into tax treaties with many foreign countries that entitle certain investors to a reduced rate of tax or to certain exemptions from tax. Accordingly, the International Growth Fund and Emerging Markets Growth Fund will operate so as to qualify for such reduced tax rates or tax exemptions whenever practicable. For a more detailed discussion of taxes, see the Statement of Additional Information. 49 53 DETERMINATION OF NET ASSET VALUE - -------------------------------------------------------------------------------- WHEN AND HOW NET ASSET VALUE ("NAV") IS DETERMINED A Fund's net asset value is the market value of its total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. The net asset value per share shall be determined as of the close of trading on the New York Stock Exchange, which is generally 3:00 p.m., Chicago time (4:00 p.m. Eastern time), on each day when the Exchange is open. In addition, the Ready Reserves Fund does not price its shares on the observance of Columbus Day and Veterans Day. When net asset value is computed, quotations of foreign securities in foreign currencies are converted into the United States dollar equivalents at the prevailing market rates as computed by Investors Bank & Trust Company, the custodian. Trading in securities on exchanges and over-the-counter markets in Europe and the Far East is normally completed at various times prior to 3:00 p.m., Chicago time, the current closing time of the New York Stock Exchange. Trading on foreign exchanges may not take place on every day that the New York Stock Exchange is open. Conversely, trading in various foreign markets may take place on days when the New York Stock Exchange is not open and on other days when net asset value is not calculated. Consequently, calculation of the net asset value for the International Growth Fund and the Emerging Markets Growth Fund may not occur at the same time as determination of the most current market prices of the securities included in the calculation, and the value of the net assets held by the International Growth Fund and the Emerging Markets Growth Fund may be significantly affected on days when shares are not available for purchase or redemption. For the purposes of calculating the net asset value of the Ready Reserves Fund, portfolio securities are valued at their amortized cost, which means their acquisition cost adjusted for the amortization of a premium or discount. HOW THE MARKET VALUE OF FUND SECURITIES IS DETERMINED DOMESTIC EQUITY SECURITIES. The market value of domestic equity securities is determined by valuing securities traded on national securities markets at the last sale price or, in the absence of a recent sale on the date of determination, at the latest bid price. Securities traded only on the over-the-counter market are valued at the latest bid price. FOREIGN EQUITY SECURITIES. The value of a foreign equity security is determined based upon the last sale price on the foreign exchange or market on which it is primarily traded and in the currency of that market, as of the close of the appropriate exchange or, if there have been no sales during that day, at the latest bid price. FIXED-INCOME SECURITIES. Fixed-income securities are valued by using market quotations or independent pricing services that use either prices provided by market-makers or matrixes that produce estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. OTHER SECURITIES AND ASSETS. Other securities, and all other assets, including securities for which a market price is not available, are valued at a fair value as determined in good faith by, or under the direction of, the Board of Trustees and in accordance with the Trust's pricing procedures. 50 54 SHAREHOLDER SERVICES AND ACCOUNT POLICIES - -------------------------------------------------------------------------------- The Funds provide a variety of services to help you manage your account. AUTOMATIC SWEEP PROGRAM. You can purchase shares of the Ready Reserves Fund through an automatic sweep program if you establish a brokerage account with the Distributor, provided that you meet the current minimum brokerage account size requirements. The automatic sweep program helps you to make convenient, efficient use of free credit balances in your William Blair brokerage account. To purchase shares of the Ready Reserves Fund through the automatic sweep program, you must have a free credit balance in your brokerage account with the Distributor. Currently, free credit balances are used automatically to purchase shares. If you have a FREE CREDIT BALANCE OF AT LEAST $1,000, the Distributor will effect on your behalf an investment in shares on an expedited basis. -- If you have a free credit balance resulting from securities transactions in your brokerage account at the opening of business of the Distributor, it generally will be invested in shares on that same day, but in no event later than the next business day. -- If you have a free credit balance resulting from a deposit made prior to 2:00 p.m., Chicago time, or a receipt of income (by check or wire), then it will be invested in shares no later than the next business day. -- If you have a free credit balance of at least $1 and less than $1,000, it will be invested in shares within a maximum of five business days from the day when the free credit balance is created. DIVIDEND OPTIONS. You may choose to have your distributions reinvested in additional shares automatically or paid in cash by making the appropriate election on your account application. You may change your election at any time by providing written notice to State Street. 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN. The Funds automatically reinvest all income dividends and capital gain distributions in additional shares of stock at net asset value on the reinvestment date. (For more information, see "Dividend and Distribution Policy.") 2. CASH-DIVIDEND PLAN. You may choose to have all of your income dividends paid in cash and/or have your capital gain distributions paid in cash. Any distributions you do not elect to have paid in cash will be reinvested automatically in additional shares at net asset value. 3. AUTOMATIC DEPOSIT OF DIVIDENDS. You may elect to have all income dividends and capital gain distributions automatically deposited in a previously established bank account. AUTOMATIC INVESTMENT PLAN. On your account application, you may authorize State Street to automatically withdraw an amount of money (MINIMUM $250) from your bank account on the fifth or twentieth day of each month. This amount will be invested in additional shares. You may change your election at any time by providing written notice to State Street. SYSTEMATIC WITHDRAWAL PLAN. You may establish this plan with shares presently held or through a new investment, which should be at least $5,000. Under this plan, you specify a dollar amount to be paid monthly, quarterly or annually. Shares corresponding to the specified dollar amount are automatically redeemed from your account on the fifth business day preceding the end of the month, quarter or year. While this plan is in effect, all income dividends and capital gain distributions on shares in your account will be reinvested at net asset value in additional shares. There is no charge for withdrawals, but the MINIMUM WITHDRAWAL IS $250 PER MONTH. Depending upon the size of payments requested, and fluctuations in the net asset value of the shares redeemed, redemptions under this plan may reduce or even exhaust your account. RETIREMENT PLANS. The Funds offer a variety of qualified retirement plans, including several types of Individual Retirement Accounts ("IRAs") (e.g. traditional IRAs, Roth IRAs and education IRAs), Simplified Employee Pension Plans ("SEPs") and other qualified retirement plans. Additional information concerning such plans is available from the Funds. 51 55 The minimum initial retirement plan investment is $2,000 and the minimum subsequent investment is $1,000. State Street serves as custodian for IRAs. State Street charges a $5 plan establishment fee, an annual $15 custodial fee and a $10 fee for each lump sum distribution from a plan. These fees may be waived under certain circumstances. With regard to retirement plans: -- participation is voluntary; -- you may terminate or change a plan at any time without penalty or charge from the Funds; -- the Funds will pay any additional expenses that they incur in connection with such plans; -- on your account application, you may select a plan or plans in which to invest; -- additional forms and further information may be obtained by writing or calling the Funds; -- the Funds reserve the right to change the minimum amounts for initial and subsequent investments or to terminate any of the plans; -- the Funds reserve the right to waive investment minimums at the discretion of the Distributor; and -- the Funds require a copy of the trust agreement when shares are to be held in trust. WRITTEN CONFIRMATIONS. Each purchase, exchange or redemption transaction is confirmed in writing to the address of record by giving details of the purchase or redemption. USE OF INTERMEDIARIES. If you purchase or redeem shares through an investment dealer, bank or other institution, that institution may impose charges for its services. These charges would reduce your yield or return. You may purchase or redeem shares directly from the Fund or with the Transfer Agent, State Street Bank, without any such charges. TRANSFER OF SHARES. Fund shares may be transferred by a written request addressed to the Trust and delivered to State Street, giving the name and social security or taxpayer identification number of the transferee and accompanied by the same signature guarantees and documents as would be required for a redemption, together with specimen signatures of all transferees. SUSPENSION OF OFFERING. The Trust reserves the right to withdraw all or any part of the offering made by this Prospectus, and the Trust or the Distributor may reject purchase orders. From time to time, the Trust may temporarily suspend the offering of shares to new investors. During the period of such suspension, persons who are already shareholders of a Fund may be permitted to continue to purchase additional shares of the Fund, to have dividends reinvested and to make redemptions. CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED, both because of the complexity of Federal tax laws and because various tax penalties are imposed for excess contributions to, and late or premature distributions from, IRAs or other qualified retirement plans. Termination of a plan shortly after its adoption may have adverse tax consequences. SHAREHOLDER RIGHTS. All shares of each Fund have equal rights with respect to dividends, assets and liquidation of a Fund and equal, noncumulative voting rights. Noncumulative voting rights allow the holder or holders of a majority of shares, voting together for the election of trustees, to elect all the trustees. All shares of each Fund will be voted in the aggregate, except when a separate vote by Fund is required under the Investment Company Act of 1940 (the "1940 Act"). Shares are fully paid and nonassessable when issued, are transferable without restriction, and have no preemptive or conversion rights. Under Delaware law, the Trust is not required to hold shareholder meetings on an annual basis. As required by law, the Funds will, however, hold shareholder meetings when a sufficient number of shareholders request a meeting, or as deemed desirable by the Board of Trustees, for such purposes as electing or removing trustees, changing fundamental policies or approving an investment management agreement. (For additional information about shareholder voting rights, see the Statement of Additional Information.) 52 56 INVESTMENT GLOSSARY - -------------------------------------------------------------------------------- The following glossary explains some of the types of securities in which the Funds may invest, investment techniques they may employ, and some of the related risks. For more information, please see the Statement of Additional Information. BORROWING. To a certain extent, each Fund may borrow money from banks for limited purposes to the extent allowable under the 1940 Act. Most borrowing is intended only as a temporary measure for extraordinary or emergency purposes, such as to help meet redemption requests, and not for leverage purposes. COLLATERALIZED OBLIGATIONS. The Income Fund may invest in collateralized obligations (debt securities issued by a corporation, trust or custodian or by a U.S. Government agency or instrumentality), that are collateralized by a portfolio or pool of assets, such as mortgages, mortgage-backed securities, debit balances on credit card accounts or U.S. Government securities. The issuer's obligation to make interest and/or principal payments is secured by the underlying pool or portfolio of securities. A variety of types of collateralized obligations are available currently, and others may become available in the future. Some obligations are for the guaranteed payment of only principal (the principal-only or "PO" class) or only interest (the interest-only or "IO" class), while others are for the guaranteed payment of both, or some variation thereof. The yields to maturity on PO and IO class obligations are more sensitive than other obligations, with the IO class obligations being extremely sensitive to the rate of principal payments (including prepayments) on the related underlying assets. The Fund will invest only in PO and IO class mortgage obligations collateralized by securities guaranteed by the U.S. Government. Some types of collateralized obligations may be less liquid than other types of securities. Investments in collateralized obligations that are deemed to be illiquid, which includes PO and IO class mortgage obligations, will be subject to the 15% limitation on illiquid assets. The mortgage-backed collateralized obligations in which the Fund may invest include pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association ("GNMA") and government-related organizations such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Payments of principal and/or interest on such mortgages, including prepayments, are guaranteed by the agency or instrumentality. The agencies and instrumentalities are subject to varying degrees of support by the U.S. Government. The effective credit quality of collateralized obligations is the credit quality of the collateral. The requirements as to collateralization are determined by the issuer or sponsor of the collateralized obligation in order to satisfy rating agencies. These collateralized obligations generally have excess collateral, but typically, any guarantee is limited to a specified percentage of the pool of assets. The potential for appreciation in the event of a decline in interest rates may be limited or negated by increased principal prepayments by certain mortgage-backed securities, such as GNMA Certificates and other collateralized obligations. During periods of declining interest rates, mortgages underlying the security are prone to prepayment, causing the security's effective maturity to be shortened. Prepayment of high interest rate mortgage-backed securities during times of declining interest rates will tend to lower the return of the Fund and may even result in losses to the Fund 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 Fund is dependent upon the accuracy of the prepayment projections used, which are a consensus derived from several major securities dealers. The duration of many mortgage-backed securities changes substantially in response to changes in interest rates and prepayment rates. CONCENTRATION. Each of the Funds intends to invest not more than 25% of its net asset in any one industry; however, the Ready Reserves Fund may invest more than 25% of its net assets in the domestic banking industry. These limitations do not apply to obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, or to instruments such as repurchase agreements secured by these instruments or to tax-exempt securities. DEPOSITORY RECEIPTS. All of the Funds except the Income Fund and Ready Reserves Fund may invest in foreign issuers through sponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"). Generally, an ADR is a dollar-denominated security issued by a 53 57 U.S. bank or trust company that represents, and may be converted into, the underlying foreign security. An EDR represents a similar securities arrangement but is issued by a European bank and a GDR is issued by a depository. ADRs, EDRs and GDRs may be denominated in a currency different from the underlying securities into which they may be converted. Typically, ADRs, in registered form, are designed for issuance in U.S. securities markets, and EDRs and GDRs, in bearer form, are designed for issuance in European securities markets. Investments in depository receipts entail risks similar to direct investments in foreign securities. These risks are detailed in the sections on "Investment Risks" under the "International Growth Fund" and "Emerging Markets Growth Fund" above and in the Statement of Additional Information. DIVERSIFICATION. Each Fund will not purchase the securities of any issuer if, as a result, more than 5% of its total assets would be invested in such issuer. For the Value Discovery Fund and Emerging Markets Growth Fund, that limitation applies to 75% of the Fund's net assets. In addition, each Fund will not purchase more than 10% of the outstanding voting securities of any issuer. These limitations do not apply to U.S. Government securities or to government agency or instrumentality securities. FOREIGN CURRENCY FUTURES. The International Growth Fund and Emerging Markets Growth Fund may purchase and sell futures on foreign currencies as a hedge against possible variation in foreign exchange rates. Foreign currency futures contracts are traded on boards of trade and futures 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 Fund engages in foreign currency futures transactions, but fails to consummate its obligations under the contract, the net effect to the Fund would be the same as speculating in the underlying futures contract. Futures contracts entail certain risks. If the Adviser's judgment about the general direction of rates or markets is wrong, the Fund'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 the 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 to meet margin requirements, distortions in the normal relationship between the securities and futures markets could result. In addition, because margin requirements in the future markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to price distortions in the futures market and an imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of market trends by the Fund's Adviser may still not result in a successful hedging transaction. The Fund 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 Fund to lose money on the financial futures contracts and also on the value of its portfolio securities. To the extent required to comply with the Investment Company Act of 1940 (the "1940 Act") and the rules and interpretations thereunder, whenever the Fund enters into a futures contract, the Fund will maintain a segregated account consisting of either cash or liquid securities equal to the Fund's potential obligation under such contracts. The segregation of assets places a practical limit on the extent to which the Fund may engage in futures contracts. To the extent required to comply with CFTC Rule 4.5 and in order to avoid "commodity pool operator" status, each Fund will not enter into a financial futures contract if immediately thereafter the aggregate initial margin and premiums for such contracts held by the Fund would exceed 5% of the liquidation value of the Fund's assets. The Fund will not engage in transactions in financial futures contracts for speculation, but only in an attempt to hedge against changes in interest rates or market conditions affecting the value of securities that the Fund holds or intends to purchase. FORWARD FOREIGN CURRENCY TRANSACTIONS. The International Growth Fund and Emerging Markets Growth Fund may enter into forward foreign currency contracts as a means of managing the risks associated with changes in exchange rates. A forward foreign currency contract is an agreement to exchange U.S. dollars for foreign currencies at a specified future date and specified amount which is set by the parties at the time of entering into the contract. The Adviser will generally use such currency contracts to fix a definite price for securities they 54 58 have agreed to buy or sell and may also use such contracts to hedge the Fund's investments against adverse exchange rate changes. Alternatively, the Funds may enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Adviser believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which securities of the Fund 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, a Fund 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 Funds will not enter into forward foreign currency transactions for speculative purposes. ILLIQUID SECURITIES. Each Fund except the Ready Reserves Fund may invest up to 15% of its net assets in illiquid securities. The Ready Reserves Fund may invest up to 10% of its net assets in illiquid securities. Illiquid securities are those securities that are not readily marketable, including restricted securities and repurchase obligations maturing in more than seven days. INVESTMENT COMPANIES. Subject to the provisions of the 1940 Act, the Growth Fund, International Growth Fund, Emerging Markets Growth Fund and Value Discovery Fund may each invest in the shares of investment companies. Investment in other investment companies may provide advantages of diversification and increased liquidity; however, there may be duplicative expenses, such as advisory fees or custodial fees. 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. In addition, investments in unit trusts and country funds permit investments in foreign markets that are smaller than those in which the Fund would ordinarily invest directly. Investments in such pooled vehicles should enhance the geographical diversification of the Fund's assets, while reducing the risks associated with investing in certain smaller foreign markets. Investments in such vehicles will provide increased liquidity and lower transaction costs than are normally associated with direct investments in such markets; however, there may be duplicative expenses, such as advisory fees or custodial fees. PORTFOLIO TURNOVER RATE. None of the Funds intend to trade portfolio securities for the purpose of realizing short-term profits. However, each will adjust its portfolio as considered advisable in view of prevailing or anticipated market conditions and the Fund's investment objective, and there is no limitation on the length of time securities must be held by the Fund prior to being sold. Fund turnover rate will not be a limiting factor for a Fund. Although each Fund's turnover rate will vary from year to year, it is anticipated that each Fund's turnover rate, under normal circumstances, will be less than 100%. A higher portfolio turnover rate would involve correspondingly higher transaction costs, which would be borne directly by each Fund. REAL ESTATE INVESTMENT TRUSTS. Although the Value Discovery Fund currently does not invest primarily in real estate investment trusts ("REITs"), the Fund may invest without limit in REITs. REITs are subject to volatility from risks associated with investments in real estate and investments dependent on income from real estate, such as fluctuating demand for real estate and sensitivity to adverse economic conditions. In addition, the failure of a REIT to continue to qualify as a REIT for tax purposes would have an adverse effect upon the value of an investment in that REIT. REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements. Repurchase agreements are instruments under which a Fund acquires ownership of a security, and the seller, 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 Fund's holding period. The Funds currently intend to enter into repurchase agreements only with member banks of the Federal Reserve System or with primary dealers in U.S. Government securities. In all cases, the Adviser, subject to the supervision of the Board of Trustees, 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 Fund could incur expenses and delays enforcing its rights under the agreement, and experience a decline in the value of the underlying securities and loss of income. The maturity of a security subject to repurchase may exceed one year, and, for the Income Fund, the 55 59 modified duration of a security subject to repurchase may exceed eight years. Repurchase agreements maturing in more than seven days, together with any securities that are restricted as to disposition under the federal securities laws or are otherwise considered to be illiquid, will not exceed 15% of the net assets of the Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Value Discovery Fund and Income Fund and 10% of the net assets of the Ready Reserves Fund. SECTION 4(2) PAPER. The Ready Reserves Fund may invest in commercial paper issued in reliance upon the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Exchange Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the Federal securities laws, and generally is sold to institutional investors such as the Fund. Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper normally is resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in the Section 4(2) paper, thus providing liquidity. The Adviser considers the legally restricted but readily saleable Section 4(2) paper to be liquid; however, pursuant to the procedures approved by the Fund's Board of Trustees, if a particular investment in Section 4(2) paper is not determined to be liquid, that investment will be included within the limitation on illiquid securities. The Adviser monitors the liquidity of each investment in Section 4(2) paper on a continuing basis. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the ordinary course of business, each Fund may purchase newly issued securities appropriate for the Fund on a "when-issued" basis, and may purchase or sell securities appropriate for the Fund on a "delayed delivery" basis. When-issued or delayed delivery transactions involve a commitment by the Fund to purchase or sell particular securities, with payment and delivery to take place at a future date. These transactions allow the Fund to lock in an attractive purchase price or yield on a security the Fund 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 Fund and, for delayed delivery purchases, no interest accrues to the Fund. Because the Fund is required to set aside cash or liquid securities at least equal in value to its commitments to purchase when-issued or delayed delivery securities, the Adviser's ability to manage the Fund's assets may be affected by such commitments. The Fund 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 it is deemed advisable. VARIABLE RATE SECURITIES. The Ready Reserves Fund may invest in instruments having rates of interest that are adjusted periodically or that "float" continuously or periodically according to formulae intended to minimize fluctuation in values of the instruments ("Variable Rate Securities"). The interest rate on a Variable Rate Security is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's prime rate, the 90-day U.S. Treasury Bill rate or the rate of return on commercial paper or bank certificates of deposit. Generally, the changes in the interest rates on Variable Rate Securities reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Further, the Fund may invest in Variable Rate Securities that have a demand feature entitling the Fund 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 Fund determines the maturity of Variable Rate Securities in accordance with Securities and Exchange Commission rules, which allow the Fund 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, if they have a stated maturity date of one year or less, or if they have demand features prior to maturity. 56 60 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below are intended to help you understand each Fund's financial performance for the past several years. The total return figures show what an investor in a Fund would have earned (or lost) assuming reinvestment of all dividends and distributions. This information has been audited by Ernst & Young LLP, whose report, along with the Fund's financial statement, is included in the annual report, which is available upon request (see back cover). WILLIAM BLAIR GROWTH FUND
YEARS ENDED DECEMBER 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net asset value, beginning of year......... $ 15.350 $ 13.480 $ 11.900 $ 9.600 $ 9.730 Income from investment operations: Net investment income (loss)............. (.003) (.023) (.010) .034 .027 Net realized and unrealized gain on investments........................... 4.123 2.694 2.144 2.750 .581 -------- -------- -------- -------- -------- Total from investment operations........... 4.120 2.671 2.134 2.784 .608 Less distributions from: Net investment income.................... -- -- .010 .030 .025 Net realized gain on investments......... 1.500 .801 .544 .454 .713 -------- -------- -------- -------- -------- Total distributions........................ 1.500 .801 .554 .484 .738 -------- -------- -------- -------- -------- Net asset value, end of year............... $ 17.970 $ 15.350 $ 13.480 $ 11.900 $ 9.600 ======== ======== ======== ======== ======== Total return (%)........................... 27.15 20.07 17.99 29.07 6.45 Ratios to average net assets (%): Expenses................................. .84 .84 .79 .65 .71 Net investment income (loss)............. (.02) (.16) (.08) .34 .32 Supplemental data: Net assets at end of year (000s)......... $742,056 $591,353 $501,774 $363,036 $217,560 Portfolio turnover rate (%).............. 37 34 43 32 46
WILLIAM BLAIR INTERNATIONAL GROWTH FUND
YEARS ENDED DECEMBER 31 -------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- ------- ------- Net asset value, beginning of year........... $ 13.140 $ 13.950 $ 13.120 $12.360 $13.180 Income from investment operations: Net investment income...................... .074 .072 .029 .105 .016 Net realized and unrealized gain (loss) on investments, foreign currency and other assets and liabilities.................. 1.431 1.056 1.299 .785 (.025) -------- -------- -------- ------- ------- Total from investment operations............. 1.505 1.128 1.328 .890 (.009) Less distributions from: Net investment income...................... .024(a) .078(a) .068(a) .130(a) .024 Net realized gain on investments........... .001 1.860 .430 -- .714 Tax return of capital........................ -- -- -- -- .073(b) -------- -------- -------- ------- ------- Total distributions.......................... .025 1.938 .498 .130 .811 -------- -------- -------- ------- ------- Net asset value, end of year................. $ 14.620 $ 13.140 $ 13.950 $13.120 $12.360 ======== ======== ======== ======= ======= Total return (%)............................. 11.46 8.39 10.20 7.22 (.04) Ratios to average net assets (%): Expenses................................... 1.36 1.43 1.44 1.48 1.51 Net investment income...................... .09 .01 .19 .87 .15 Supplemental data: Net assets at end of year (000s)........... $139,746 $128,747 $105,148 $89,762 $70,403 Portfolio turnover rate (%)................ 98 102 89 77 40
- --------------- (a) Includes $.024, $.078, $.022 and $.061 in passive foreign investment company transactions which are treated as ordinary income for Federal income tax purposes for 1998, 1997, 1996 and 1995, respectively. (b) Includes $431 relating to a tax return of capital. 57 61 WILLIAM BLAIR EMERGING MARKETS GROWTH FUND
YEAR ENDED DECEMBER 31, 1998(a)(b) ----------------------- Net asset value, beginning of period........................ $10.000 Income from investment operations: Net investment income..................................... .002 Net realized and unrealized gain (loss) on investments, foreign currency and other assets and liabilities...... (2.372) ------- Total from investment operations............................ (2.370) Less distributions from: Net investment income..................................... -- Net realized gain on investments.......................... -- ------- Total distributions......................................... -- ------- Net asset value, end of year................................ $ 7.630 ======= Total return (%)............................................ (23.70) Ratios to average net assets (%): Expenses(c)............................................... 2.25% Net investment income(c).................................. .04% Supplemental data: Net assets at end of year (000s).......................... $ 3,754 Portfolio turnover rate (%)............................... 226
- --------------- (a) For the period May 1, 1998 (Commencement of Operations) to December 31, 1998. (b) Rates are annualized, except total returns for periods less than one year. (c) Without the waiver of expenses in 1998, the expense ratio would have been 6.35% and the net investment loss ratio would have been 4.06%. WILLIAM BLAIR VALUE DISCOVERY FUND
YEARS ENDED DECEMBER 31 --------------------------- 1998 1997 1996(A) ------- ------- ------- Net asset value, beginning of year.......................... $12.970 $10.000 $10.000 Income from investment operations: Net investment income..................................... .088 .029 -- Net realized and unrealized gain (loss) on investments.... (.005) 3.305 -- ------- ------- ------- Total from investment operations............................ .083 3.334 -- Less distributions from: Net investment income..................................... .093 .020 -- Net realized gain on investments.......................... -- .344 -- ------- ------- ------- Total distributions......................................... .093 .364 -- ------- ------- ------- Net asset value, end of year................................ $12.960 $12.970 $10.000 ======= ======= ======= Total return (%)............................................ 0.66 33.46 -- Ratios to average net assets (%): Expenses.................................................. 1.52 1.50(b) -- Net investment income..................................... .76 .29(b) -- Supplemental data: Net assets at end of year (000s).......................... $44,675 $30,354 $ 2 Portfolio turnover rate (%)............................... 78 69 --
- --------------- (a) For the period December 23, 1996 (Commencement of Operations) to December 31, 1996. (b) Without the waiver of expenses in 1997, the expense ratio would have been 1.78% and the net investment income ratio would have been .016%. 58 62 WILLIAM BLAIR INCOME FUND
YEARS ENDED DECEMBER 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net asset value, beginning of year......... $ 10.410 $ 10.270 $ 10.570 $ 9.850 $ 10.580 Income from investment operations: Net investment income.................... .640 .659 .619 .646 .661 Net realized and unrealized gain (loss) on investments........................ .076 .140 (.309) .732 (.741) -------- -------- -------- -------- -------- Total from investment operations........... .716 .799 .310 1.378 (.080) Less distributions from: Net investment income.................... .636 .659 .610 .658 .646 Net realized gain on investments......... -- -- -- -- .004 -------- -------- -------- -------- -------- Total distributions........................ .636 .659 .610 .658 .650 -------- -------- -------- -------- -------- Net asset value, end of year............... $ 10.490 $ 10.410 $ 10.270 $ 10.570 $ 9.850 ======== ======== ======== ======== ======== Total return (%)........................... 7.07 8.03 3.07 14.37 (.74) Ratios to average net assets (%): Expenses................................. .71 .71 .70 .68 .68 Net investment income.................... 6.81 6.40 5.97 6.24 6.33 Supplemental data: Net assets at end of year (000s)......... $188,051 $160,055 $150,006 $147,370 $143,790 Portfolio turnover rate (%).............. 96 83 66 54 63
WILLIAM BLAIR READY RESERVES FUND
YEARS ENDED DECEMBER 31 ------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- -------- -------- -------- -------- Net asset value, beginning of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from investment operations: Net investment income.................. .05 .05 .05 .05 .04 Net realized and unrealized gain (loss) on investments...................... -- -- -- -- (.01) ---------- -------- -------- -------- -------- Total from investment operations......... .05 .05 .05 .05 .03 Less distributions from: Net investment income.................. .05 .05 .05 .05 .04 ---------- -------- -------- -------- -------- Total distributions.................... .05 .05 .05 .05 .04 ---------- -------- -------- -------- -------- Capital contribution..................... -- -- -- -- .01 ---------- -------- -------- -------- -------- Net asset value, end of year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========== ======== ======== ======== ======== Total return (%)......................... 4.98 5.04 4.81 5.45 3.67(a) Ratios to average net assets (%): Expenses............................... .69 .70 .71 .72 .71 Net investment income.................. 4.87 4.92 4.78 5.30 3.61 Supplemental data: Net assets at end of year (000s)....... $1,189,051 $904,569 $760,808 $703,993 $521,277
- --------------- (a) The total return includes the effect of the investment adviser's capital contribution. Without the investment adviser's capital contribution, the total return would have been 3.40%. 59 63 FOR MORE INFORMATION More information about the Funds is available without charge, upon request, including the following: SEMI-ANNUAL/ANNUAL REPORTS The Semi-Annual and audited Annual Reports to Shareholders include financial statements, detailed performance information, portfolio holdings and statements from the Fund managers. In the Annual Report, you will find a discussion of the market conditions and investment strategies that the Adviser believes significantly affected the Fund's performance in its last fiscal year. Shareholder reports are incorporated by reference into this Prospectus, which means that they are part of this Prospectus for legal purposes. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds. The current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into this Prospectus, which means that it is part of this Prospectus for legal purposes. TO OBTAIN INFORMATION: BY TELEPHONE Call: 1-800-635-2886 (In Massachusetts 1-800-635-2840) BY MAIL Write to: William Blair Funds 222 West Adams Street Chicago, Illinois 60606 or STATE STREET BANK AND TRUST COMPANY (the Fund's Transfer Agent) P.O. Box 8506 Boston, MA 02266-8506 ON THE INTERNET Text-only versions of fund documents can be viewed online or downloaded from the SEC at http://www.sec.gov You can also obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090) or, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Room Section, Washington, D.C. 20549-0102. No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or its distributor. The Prospectus does not constitute an offering by the Trust or its distributor in any jurisdiction in which such offering may not lawfully be made. WILLIAM BLAIR FUNDS December 22, 1999 Investment Company Act File No.: 811-5344 64 December 22, 1999 WILLIAM BLAIR FUNDS --------------------- CLASS A, B, C AND I PROSPECTUS GROWTH FUND TAX-MANAGED GROWTH FUND LARGE CAP GROWTH FUND SMALL CAP GROWTH FUND INTERNATIONAL GROWTH FUND EMERGING MARKETS GROWTH FUND DISCIPLINED LARGE CAP FUND VALUE DISCOVERY FUND INCOME FUND --------------------- CLASS N SHARES READY RESERVES FUND --------------------- This prospectus contains important information about each Fund, including their investment objectives. For your benefit and protection, please read it before you invest and keep it for future reference. For each Fund other than the Ready Reserves Fund, this prospectus relates only to the Class A, Class B, Class C and Class I shares and relates only to Class N shares for the Ready Reserves Fund. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WILLIAM BLAIR FUNDS 222 West Adams Street Chicago, Illinois 60606 65 TABLE OF CONTENTS SUMMARY..................................................... 1 Growth Fund........................................ 1 Tax-Managed Growth Fund............................ 3 Large Cap Growth Fund.............................. 5 Small Cap Growth Fund.............................. 7 International Growth Fund.......................... 9 Emerging Markets Growth Fund....................... 12 Disciplined Large Cap Fund......................... 14 Value Discovery Fund............................... 16 Income Fund........................................ 19 Ready Reserves Fund................................ 22 INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES... 24 Growth Fund........................................ 25 Tax-Managed Growth Fund............................ 27 Large Cap Growth Fund.............................. 29 Small Cap Growth Fund.............................. 31 International Growth Fund.......................... 33 Emerging Markets Growth Fund....................... 35 Disciplined Large Cap Fund......................... 37 Value Discovery Fund............................... 38 Income Fund........................................ 40 Ready Reserves Fund................................ 42 INVESTMENT RISKS............................................ 44 MANAGEMENT OF THE FUNDS..................................... 47 CHOOSING A SHARE CLASS...................................... 49 Class A Shares..................................... 50 Class B Shares..................................... 53 Class C Shares..................................... 54 Class I Shares..................................... 55 YOUR ACCOUNT................................................ 56 How to Buy Shares.................................. 56 How to Sell Shares................................. 57 How to Exchange Shares............................. 59 Dividends and Distributions........................ 60 Taxes.............................................. 61 DETERMINATION OF NET ASSET VALUE............................ 62 SHAREHOLDER SERVICES AND ACCOUNT POLICIES................... 63 INVESTMENT GLOSSARY......................................... 65 FINANCIAL HIGHLIGHTS........................................ 69 FOR MORE INFORMATION........................................ Back Cover
66 WILLIAM BLAIR GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions. LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL emerging, rapid growth companies of high quality that have had especially vigorous growth in revenues and earnings. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies may be more volatile and more speculative than the securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. ANNUAL TOTAL RETURNS (CLASS N SHARES)(1) HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 23.69% (4Q98) -14.91% (3Q90)
CHART
1989 30.45 1990 -2.02 1991 44.37 1992 7.61 1993 15.51 1994 6.45 1995 29.07 1996 17.99 1997 20.07 1998 27.15
- --------------- (1) The Class A, Class B, Class C and Class I shares are new classes of the Fund for which performance is not yet available. The Class N shares of the Fund are offered in a separate prospectus. The returns for the Class A, Class B, Class C and Class I shares will be substantially similar to those of the Class N shares shown in the chart below because all shares of the Fund are invested in the same portfolio of securities. The annual returns of the different Classes of shares will differ only to the extent that the expenses of the Classes differ. Class A, B and C share sale loads are not reflected in the chart below. If sales loads were reflected, the Fund's returns would be less than those shown. Class I has no sales loads. 1 67 AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's Class N average annual returns for the periods ended December 31, 1998, to a broad-based market benchmark.
1 YEAR 5 YEARS 10 YEARS ------ ------- -------- Growth Fund Class N Shares 27.15% 19.87% 18.96% S&P 500* 28.57% 24.06% 19.21%
- --------------- * The Standard and Poor's 500 Stock Index generally represents broad larger capitalization equity market performance; expenses are not included. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price) 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds) None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days None None None 1.00% Shares held more than 180 days None None None None Exchange Fee None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee............................ .75% .75% .75% .75% Distribution (12b-1) and/or Service Fees.................................... .25% 1.00% 1.00%(2) None Other Expenses............................ .09% .09% .09% .09% ----- ----- ----- ----- Total Annual Fund Operating Expenses.... 1.09% 1.84% 1.84% .84%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year.................................... $ 680 $ 687 $ 287 $ 86 3 Years................................... 902 879 579 269 5 Years................................... 1,142 1,196 996 466 10 Years.................................. 1,828 1,871 2,159 1,038
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year.................................... $ 680 $ 187 $ 187 $ 86 3 Years................................... 902 579 579 269 5 Years................................... 1,142 996 996 466 10 Years.................................. 1,828 1,871 2,159 1,038
2 68 WILLIAM BLAIR TAX-MANAGED GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Tax-Managed Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies. The Fund employs a number of techniques designed specifically to enhance the long-term, after-tax returns for its shareholders. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL emerging, rapid growth companies of high quality that have had especially vigorous growth in revenues and earnings. The Fund seeks high after-tax returns by balancing investment considerations and tax considerations. The Fund seeks to achieve returns primarily in the form of price appreciation, and to minimize income distributions and distributions of realized short-term gains. Among the techniques and strategies used in the tax-efficient management of the Fund are the following: - investing primarily in lower-yielding growth stocks; - employing a long-term, low turnover approach to investing; - attempting to avoid net realized short-term gains; - when appropriate, selling stocks trading below cost to realize losses; - in selling appreciated stocks, selecting the most tax-favored share lots; and - selectively using tax-advantaged hedging techniques, such as derivative transactions, as an alternative to taxable sales. The Fund can generally be expected to distribute a smaller percentage of returns each year than most other equity mutual funds. There can be no assurance, however, that taxable distributions can always be avoided. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies may be more volatile and more speculative than securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. The Fund may engage in derivative transactions to protect against price declines or as a substitute for purchasing or selling securities. The use of these techniques is subject to certain limitations and may expose the Fund to increased risk of principal loss. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual return has been omitted because the Fund does not have annual returns for a full calendar year. 3 69 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)........ 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)................. None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions...... None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days.......... None None None 1.00% Shares held more than 180 days.......... None None None None Exchange Fee.............................. None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee............................ .80% .80% .80% .80% Distribution (12b-1) and/or Service Fees.................................... .25% 1.00% 1.00%(2) None Other Expenses............................ .51% .51% .51% .51% ---- ---- ---- ---- Total Annual Fund Operating Expenses (without waiver)(3).................. 1.56% 2.31% 2.31% 1.31% Adviser's Expense Waiver................ .20% .20% .20% .20% ---- ---- ---- ---- Net Expenses (with waiver)........... 1.36% 2.11% 2.11% 1.11%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) The Adviser has entered into an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.11% at least until April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.11% plus any distribution and/or shareholder services fees. EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year.................................... $ 716 $ 724 $ 324 $ 125 3 Years................................... 1,031 1,011 711 406 5 Years................................... 1,368 1,426 1,226 710 10 Years.................................. 2,317 2,361 2,637 1,571
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year.................................... $ 716 $ 224 $ 224 $ 125 3 Years................................... 1,031 711 711 406 5 Years................................... 1,368 1,226 1,226 710 10 Years.................................. 2,317 2,361 2,637 1,571
4 70 WILLIAM BLAIR LARGE CAP GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Large Cap Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks issued by large domestic growth companies of high quality that have demonstrated sustained growth over a long period of time. The Adviser currently defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. The Fund may also invest in medium-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of medium-sized companies are more volatile and more speculative than the securities of large companies. In addition, medium sized companies may be traded inn low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended results. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual return has been omitted because the Fund does not have annual returns for a full calendar year. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)........... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)....................... None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions......... None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days............. None None None 1.00% Shares held more than 180 days............. None None None None Exchange Fee................................. None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee............................... .80% .80% .80% .80% Distribution (12b-1) and/or Service Fees..... .25% 1.00% 1.00%(2) None Other Expenses............................... .51% .51% .51% .51% ----- ----- ----- ----- Total Annual Fund Operating Expenses (without waiver)(3)..... 1.56% 2.31% 2.31% 1.31% Adviser's Expense Waiver..................... .20% .20% .20% .20% ----- ----- ----- ----- Net Expenses (with waiver)................. 1.36% 2.11% 2.11% 1.11%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) The Adviser has entered into an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.11% at least until April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.11% plus any distribution and/or shareholder services fees. 5 71 EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year....................................... $ 716 $ 724 $ 324 $ 125 3 Years...................................... 1,031 1,011 711 406 5 Years...................................... 1,368 1,426 1,226 710 10 Years..................................... 2,317 2,361 2,637 1,571
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year....................................... $ 716 $ 224 $ 224 $ 125 3 Years...................................... 1,031 711 711 406 5 Years...................................... 1,368 1,226 1,226 710 10 Years..................................... 2,317 2,361 2,657 1,571
6 72 WILLIAM BLAIR SMALL CAP GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Small Cap Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of small emerging, rapid growth domestic companies that are of high quality and that have had especially vigorous growth in revenues and earnings. The Adviser currently defines small companies as those with market capitalizations of $2 billion or less at the time of the Fund's investment. To a limited extent, the Fund may also invest in companies with business characteristics and growth prospects similar to small companies, but which may have market capitalizations above $2 billion. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in common stocks, the primary risk is that value of the stocks it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of small and medium-sized companies are volatile and less liquid than securities of large companies. In addition, small and medium-sized companies may be traded in low volumes, which can increase volatility. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual return has been omitted because the Fund does not have annual returns for a full calendar year. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)........... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)....................... None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions......... None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days............. None None None 1.00% Shares held more than 180 days............. None None None None Exchange Fee................................. None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee............................... 1.10% 1.10% 1.10% 1.10% Distribution (12b-1) and/or Service Fees..... .25% 1.00% 1.00%(2) None Other Expenses............................... .45% .45% .45% .45% ----- ----- ----- ----- Total Annual Fund Operating Expenses (without waiver)(3)..... 1.80% 2.55% 2.55% 1.55% Adviser's Expense Waiver..................... .20% .20% .20% .20% ----- ----- ----- ----- Net Expenses (with waiver)................. 1.60% 2.35% 2.35% 1.35%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) The Adviser has entered into an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.35% at least until April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.35% plus any distribution and/or shareholders services fees. 7 73 EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year....................................... $ 738 $ 748 $ 348 $ 148 3 Years...................................... 1,100 1,083 783 480 5 Years...................................... 1,485 1,546 1,346 836 10 Years..................................... 2,561 2,607 2,876 1,837
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year....................................... $ 738 $ 248 $ 248 $ 148 3 Years...................................... 1,100 783 783 480 5 Years...................................... 1,485 1,346 1,346 836 10 Years..................................... 2,561 2,607 2,876 1,837
8 74 WILLIAM BLAIR INTERNATIONAL GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair International Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of common stocks of foreign companies of all sizes. In choosing investments, the Adviser performs fundamental company analysis. The Adviser generally seeks common stocks of companies that historically have had and are expected to maintain superior growth, profitability and quality relative to local markets and relative to companies within the same industry worldwide. Following stock selection, country selection and industry allocation are the next most important investment criteria. The Adviser will vary the geographic diversification and types of securities in which the Fund invests based upon its continuous evaluation of economic, market and political trends throughout the world. The Adviser normally will allocate the Fund's investments among at least six different countries. Normally, the Fund's investments will be divided among Continental Europe, the United Kingdom, Canada, Japan and the markets of the Pacific Basin. However, selective investments may also be made in Latin America and in emerging markets, which include every country in the world except the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in common stocks, the primary risk is that the value of the stocks it holds might decrease in response to the activities of those companies or market and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Foreign investments often involve additional risks, including political instability, differences in financial reporting standards, and less stringent regulation of securities markets. These risks are magnified in less-established, emerging markets. Because the securities held by the Fund usually will be denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates may adversely affect the value of the Fund's investments. In addition, the Fund may invest in the securities of small companies, which may be more volatile and less liquid than securities of large companies. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each calendar year since the Fund started. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. ANNUAL TOTAL RETURNS (CLASS N SHARES)(1) [CHART] HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 17.43% (1Q98) -16.70% (3Q98)
- --------------- (1) The Class A, Class B, Class C and Class I shares are new Classes of the Fund for which performance is not yet available. The Class N shares of the Fund are offered in a separate prospectus. The returns for the Class A, Class B, Class C and Class I shares will be substantially similar to those of the Class N shares shown in the chart because all shares of the Fund are invested in the same portfolio of securities. The annual returns of the different Classes of shares will differ only to the extent that the expenses of the Classes differ. 9 75 Class A, B and C share sale loads are not reflected in the above chart. If sales loads were reflected, the Fund's returns would be less than those shown. Class I has no sales loads. AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's Class N average annual total returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS LIFE OF FUND** ------ ------- -------------- International Growth Fund Class N Shares 11.46% 7.37% 11.10% MSCI AC WLDF EX U.S. 14.46% 7.87% 10.91%
- --------------- * The Morgan Stanley Capital International All Country World (Free) except U.S. Index includes developed and emerging markets; expenses are not included in the index. ** The Fund's inception was October 1, 1992. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)......................... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)........................... None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions........................ None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days........................ None None None 1.00% Shares held more than 180 days................. None None None None Exchange Fee..................................... None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee................................... 1.10% 1.10% 1.10% 1.10% Distribution (12b-1) and/or Service Fees......... .25% 1.00% 1.00%(2) None Other Expenses................................... .26% .26% .26% .26% ------ ------ ------ ------ Total Annual Fund Operating Expenses... 1.61% 2.36% 2.36% 1.36%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class--Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. 10 76 EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as those shown above:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 730 $ 740 $ 340 $ 139 3 Years.......................................... 1,054 1,037 737 431 5 Years.......................................... 1,401 1,461 1,261 745 10 Years......................................... 2,377 2,423 2,697 1,636
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 730 $ 240 $ 240 $ 139 3 Years.......................................... 1,054 737 737 431 5 Years.......................................... 1,401 1,261 1,261 745 10 Years......................................... 2,377 2,423 2,697 1,636
11 77 WILLIAM BLAIR EMERGING MARKETS GROWTH FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Emerging Markets Growth Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of equity securities, including common stocks, issued by companies in emerging markets. In choosing investments, the Adviser first analyzes individual companies. The Adviser generally seeks well-managed companies with superior business fundamentals, including global leadership in product quality or cost competitiveness, dominant or improving market position within a growing local or regional economy, and sustainable above-average and/or increasing returns on invested capital. Following stock selection, the Adviser allocates investments based upon its analysis of the economic strength of various countries and industries. The Adviser normally will allocate the Fund's investments among at least six different countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in equity securities of companies, the primary risk is that value of the securities it holds might decrease in response to the activities of those companies or markets and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Foreign investments often involve additional risks, such as political instability, differences in financial reporting standards and less stringent regulation of securities markets. These risks may be greatly increased in emerging market countries because the securities in emerging markets may be subject to greater volatility and less liquidity than companies in more developed markets. Because the securities held by the Fund usually will be denominated in currencies other than the U.S. dollar, changes in foreign currency exchange rates may adversely affect the value of the Fund's investments. The currencies of certain emerging market countries have experienced a steady devaluation relative to the U.S. dollar, and continued devaluations may adversely affect the value of the Fund's assets denominated in such currencies. Many emerging markets have experienced substantial rates of inflation for many years, and continued inflation may adversely affect the economies and securities markets of such countries. The Fund also may invest in the securities of small companies, which may be more volatile and less liquid than securities of large companies. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual return has been omitted because the Fund does not have annual returns for a full calendar year. 12 78 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)......................... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)........................... None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions........................ None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days................. None None None 1.00% Shares held more than 180 days................. None None None None Exchange Fee..................................... None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee................................... 1.40% 1.40% 1.40% 1.40% Distribution (12b-1) and/or Service Fees......... .25% 1.00% 1.00%(2) None Other Expenses................................... 4.95% 4.95% 4.95% 4.95% ----- ----- ----- ----- Total Annual Fund Operating Expenses (without waiver)(3).................................. 6.60% 7.35% 7.35% 6.35% Adviser's Expense Waiver......................... 4.60% 4.60% 4.60% 4.60% ----- ----- ----- ----- Net Expenses (with waiver)..................... 2.00% 2.75% 2.75% 1.75%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class--Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) Due to the Adviser voluntarily waiving fees and absorbing expenses, the actual total expenses for the Fund's Class I shares were 2.25% (annualized) during 1998. The Adviser has entered into an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.75% at least until April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.75% plus any distribution and/or shareholder servicing fees. EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $1,050 $1,078 $ 678 $ 480 3 Years.......................................... 2,274 2,302 2,002 1,735 5 Years.......................................... 3,458 3,559 3,359 2,956 10 Years......................................... 6,258 6,316 6,484 5,869
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $1,058 $ 578 $ 578 $ 480 3 Years.......................................... 2,274 2,002 2,002 1,735 5 Years.......................................... 3,458 3,359 3,359 2,956 10 Years......................................... 6,258 6,316 6,484 5,869
13 79 WILLIAM BLAIR DISCIPLINED LARGE CAP FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Disciplined Large Cap Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of large capitalization domestic companies. The Adviser currently defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. The Adviser chooses the Fund's portfolio investments primarily from companies in the Standard & Poor's 500 Stock Index. The Adviser seeks to outperform the Standard & Poor's 500 Index through careful selection of portfolio securities. The Adviser combines bottom-up stock picking with quantitative measures to help manage risk and create a portfolio with better value, better earnings growth momentum and similar sensitivity to general macro-economic conditions as the Standard & Poor's 500. Generally, the Fund will hold 90-140 companies of the Standard & Poor's 500 companies. MAIN RISKS OF INVESTING: Because the Fund invests most of its assets in equity securities of companies, the primary risk is that value of the securities it holds might decrease in response to the activities of those companies or markets and economic conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY: The bar chart and table showing the Fund's annual return has been omitted because the Fund does not have annual returns for a full calendar year. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)...................................... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)............................................. None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions............................... None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days........................ None None None 1.00% Shares held more than 180 days........................ None None None None Exchange Fee............................................ None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee.......................................... .80% .80% .80% .80% Distribution (12b-1) and/or Service Fees................ .25% 1.00% 1.00%(2) None Other Expenses.......................................... .40% .40% .40% .40% ----- ----- ----- ----- Total Annual Fund Operating Expenses (without waiver)(3).......................................... 1.45% 2.20% 2.20% 1.20% Adviser's Expense Waiver................................ .20% .20% .20% .20% ----- ----- ----- ----- Net Expenses (with waiver)............................ 1.25% 2.00% 2.00% 1.00%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) The Adviser has entered into an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.00% at least until April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.00% plus any distribution and/or shareholder services fees. 14 80 EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 705 $ 713 $ 313 $ 114 3 Years.......................................... 999 978 678 372 5 Years.......................................... 1,313 1,370 1,170 651 10 Years......................................... 2,203 2,247 2,525 1,447
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 705 $ 213 $ 213 $ 114 3 Years.......................................... 999 678 678 372 5 Years.......................................... 1,313 1,170 1,170 651 10 Years......................................... 2,203 2,247 2,525 1,447
15 81 WILLIAM BLAIR VALUE DISCOVERY FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Value Discovery Fund seeks long-term capital appreciation. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of the equity securities (includes common stocks and other forms of equity investments) of small companies that the Adviser believes offer a long-term investment value. In implementing its value discipline, the Adviser evaluates the extent to which a company meets the following criteria: (a) whether the company's current market value reflects a material discount from the Adviser's estimate of the company's value, (b) whether the company has a reasonable expectation of improving its level of profitability over a three-year investment horizon, (c) whether the company has a capable and skilled management team, (d) whether the company has a relatively strong capital structure, and (e) whether there is a likelihood that the company will undergo a positive corporate change within a three-year investment horizon. The weight that the Adviser gives to each of the investment criteria depends upon the circumstances, and some of the Fund's investments will not meet all of the criteria. MAIN RISKS OF INVESTING: Since the Fund invests most of its assets in equity securities, the primary risk is that the value of the securities it holds might decrease in response to the activities of an individual company or general economic and market conditions. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. The securities of smaller companies may be more volatile and more speculative than the securities of larger, more established issuers, which may cause the Fund's share price to be more volatile. In addition, small companies may be traded in low volumes. This can increase volatility and increase the risk that the Fund will not be able to sell the security on short notice at a reasonable price. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. The Fund is designed for long-term investors. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the calendar years since the Fund started. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. ANNUAL TOTAL RETURNS (CLASS N SHARES)(1) HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ------------- -------------- 26.58% (3Q97) -17.59% (3Q98)
CHART
1997 33.46 1998 0.66
- --------------- (1) The Class A, Class B, Class C and Class I shares are new Classes of the Fund for which performance is not yet available. The Class N shares of the Fund are offered in a separate prospectus. The returns for the Class A, Class B, Class C and Class I shares will be substantially similar to those of the Class N shares shown in the chart because all shares of the Fund are invested in the same portfolio of securities. The annual returns of the different Classes of shares will differ only to the extent that the expenses of the Classes differ. Class A, B and C share sale loads are not reflected in the above chart. If sales loads were reflected, the Fund's returns would be less than those shown. Class I has no sales loads. 16 82 AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's Class N average annual returns for the periods ended December 31, 1998, indicated to a broad-based securities market index.
1 YEAR LIFE OF FUND** ----------------- ----------------- Value Discovery Fund Class N Shares............. 0.66% 15.91% Russell 2000 Index*............................. -2.55% 9.20%
- --------------- * The Russell 2000 Index is a composite of the smallest 2000 stocks of the Russell 3000 Index, which consists of the largest 3000 stocks in the U.S. market as determined by market capitalization; expenses are not included. ** The Fund's inception was December 23, 1996. FEES AND EXPENSES: This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)......................... 5.75% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)........................... None(1) 5.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions........................ None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days................. None None None 1.00% Shares held more than 180 days................. None None None None Exchange Fee..................................... None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee................................... 1.15% 1.15% 1.15% 1.15% Distribution (12b-1) and/or Service Fees......... .25% 1.00% 1.00%(2) None Other Expenses................................... .37% .37% .37% .37% ----- ----- ----- ----- Total Annual Fund Operating Expenses........... 1.77% 2.52% 2.52% 1.52%(3) Adviser's Expense Waiver....................... .13% .13% .13% .13% ----- ----- ----- ----- Net Expenses (with waiver)..................... 1.64% 2.39% 2.39% 1.39%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of 1.00% during the first year and 0.50% during the second year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class -- Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. (3) The Adviser has entered an agreement with the Fund to cap the expenses for the Fund's Class I shares at 1.39% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.39% plus any distribution and/or shareholder servicing fees. EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund; redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above (the first year in each example reflects the fee waiver noted above):
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 738 $ 747 $ 347 $ 148 3 Years.......................................... 1,093 1,076 776 473 5 Years.......................................... 1,473 1,533 1,333 822 10 Years......................................... 2,533 2,578 2,848 1,806
17 83 You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 738 $ 247 $ 247 $ 148 3 Years.......................................... 1,093 776 776 473 5 Years.......................................... 1,473 1,333 1,333 822 10 Years......................................... 2,533 2,578 2,848 1,806
18 84 WILLIAM BLAIR INCOME FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Income Fund seeks a high a level of current income relative to stability of principal. The Fund invests primarily in a diversified portfolio of high-grade, intermediate-term debt securities. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in a diversified portfolio of intermediate-term income-producing securities, including government securities, U.S. dollar-denominated corporate bonds and notes, collateralized obligations and money market instruments that are rated in one of the top three categories. The Fund's investments are subject to certain maturity and duration restrictions, by which the Fund seeks to approximate the total returns of an intermediate-term debt index while also providing investors with the additional security of shorter-term obligations. The Adviser continually considers the Fund's exposure to interest rate risk. MAIN RISKS OF INVESTING: The primary risk of investing in the Fund is interest rate risk. The yield paid by the Fund will vary with changes in interest rates. As noted above, changes in interest rates may cause changes in the Fund's yield, net asset value and total return. Investments with longer maturities, which typically provide higher yield than securities with shorter maturities, may subject the Fund to increased price changes resulting from market yield fluctuations. The Fund is also subject to credit risk. The Fund's net asset value and total return may be adversely affected by the inability of the issuers of the Fund's securities to make payment at maturity. Thus, the Fund's returns will vary, and you could lose money by investing in the Fund. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. ANNUAL TOTAL RETURNS (CLASS N SHARES)(1) HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN ----------------- ---------------- 5.44% (4Q91) -1.30% (4Q92)
CHART
1991 16.47 1992 7.17 1993 7.82 1994 -0.74 1995 14.37 1996 3.07 1997 8.03 1998 7.07
- --------------- (1) The Class A, Class B, Class C and Class I shares are new Classes of the Fund for which performance is not yet available. The Class N shares of the Fund are offered in a separate prospectus. The returns for the Class A, Class B, Class C and Class I shares will be substantially similar to those of the Class N shares shown in the chart below because all shares of the Fund are invested in the same portfolio of securities. The annual returns of the different Classes of shares will differ only to the extent that the expenses of the Classes differ. Class A, B and C share sale loads are not reflected in the above chart. If sales loads were reflected, the Fund's returns would be less than those shown. Class I has no sales loads. 19 85 AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS LIFE OF FUND** ------ ------- -------------- Income Fund Class N Shares 7.07% 6.22% 7.90% Lehman Intermediate Gov't/Corp. Index* 8.44% 6.60% 8.19%
- --------------- * The Lehman Intermediate Government/Corporate Index represents broad intermediate government/corporate bond market performance; expenses are not included. ** The Fund's inception was September 25, 1990. YIELD: You may obtain the most current yield information for the Fund by calling 1-800-742-7272. FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES are paid directly from your investment:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Maximum Sales Charge (Load) Imposed on Purchases (as % of offering price)......................... 2.00% None None None Maximum Deferred Sales Charge (Load) (as % of redemption proceeds)........................... None(1) 2.00% 1.00% None Maximum Sales Charge (Load) Imposed on Reinvested Dividends/Distributions........................ None None None None Redemption Fee (as % of amount redeemed) Shares held less than 180 days................. None None None 1.00% Shares held more than 180 days................. None None None None Exchange Fee..................................... None None None None
ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- Management Fee................................... .59% .59% .59% .59% Distribution (12b-1) and/or Service Fees......... .25% 1.00% 1.00%(2) None Other Expenses................................... .12% .12% .12% .12% --- ----- ----- ---- Total Annual Fund Operating Expenses........... 96% 1.71% 1.71% .71%
- --------------- (1) The redemption of Class A shares purchased at net asset value under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge of .25% during the first year. For more information about the Large Order NAV Purchase Privilege see "Choosing a Share Class--Special Features" below. (2) Long-term shareholders may indirectly pay more than the equivalent of the maximum permitted front-end sales charge. 20 86 EXAMPLE: This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of those periods shown, earn a 5% return each year and incur the same operating expenses as shown above:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 296 $ 374 $ 274 $ 73 3 Years.......................................... 500 639 539 228 5 Years.......................................... 721 929 929 396 10 Years......................................... 1,355 1,728 2,020 883
You would pay the following expenses if you did not redeem your shares:
CLASS A CLASS B CLASS C CLASS I ------- ------- ------- ------- 1 Year........................................... $ 296 $ 274 $ 174 $ 78 3 Years.......................................... 500 539 539 228 5 Years.......................................... 721 929 929 396 10 Years......................................... 1,355 1,728 2,020 883
21 87 WILLIAM BLAIR READY RESERVES FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Ready Reserves Fund seeks current income, a stable share price and daily liquidity. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in short-term U.S. dollar-denominated domestic money market instruments, which include securities issued by domestic corporations; the U.S. Government, its agencies and instrumentalities; and U.S. banks. The Fund invests exclusively in securities that are high-quality, which means that they are rated in the top 2 categories. These instruments are considered to be among the safest investments available because of their short maturities, liquidity and high-quality ratings. The Fund is designed to be highly liquid and seeks to maintain a net asset value of $1.00 per share. The Fund is designed for investors who seek to obtain the maximum current income consistent with the preservation of capital. MAIN RISKS OF INVESTING: Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. As with any money market fund, there is a low risk that the issuers or guarantors of securities will default on the payment of principal or interest or the obligation to repurchase securities from the Fund. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Of course, for all mutual funds there is the risk that a strategy used by the Adviser may fail to produce its intended result. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. HIGHEST QUARTERLY LOWEST QUARTERLY RETURN RETURN -------------- -------------- 2.26% (2Q89) 0.64% (2Q93)
CHART
1989 8.86 1990 7.81 1991 5.64 1992 3.32 1993 2.64 1994 3.67 1995 5.45 1996 4.81 1997 5.04 1998 4.98
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual total returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS 10 YEARS ------ ------- -------- Ready Reserves Fund 4.98% 4.77% 5.22% S&P-rated AAA* 4.97% 4.75% 5.20%
- --------------- * The Standard and Poor's-rated AAA Money Market Funds Index is a unmanaged index that includes money market mutual funds rated AAA by Standard and Poor's. Expenses are not included. YIELD: You may obtain the most current yield information for the Fund by calling 1-800-742-7272. 22 88 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class N shares of the Fund. SHAREHOLDER FEES. Class N shares are no-load investments, so you will not pay any shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class N shares of another Fund. ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets: Management Fee.............................................. .24% Distribution (Rule 12b-1) Fee............................... .35%(1) Other Expenses.............................................. .10% ---- Total Annual Fund Operating Expenses...................... .69%
- --------------- (1) Long-term shareholders may pay more than the equivalent of the maximum permitted front-end sales charge. EXAMPLE: This example is intended to help you compare the cost of investing in Class N shares of the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above.
1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------ ------- ------- -------- $71 $221 $385 $859
23 89 INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES - -------------------------------------------------------------------------------- Each Fund is a series of William Blair Funds, an open-end management investment company. William Blair & Company, L.L.C. (the "Adviser") provides management and investment advisory services to the Funds. The following section takes a closer look at the investment objectives of each Fund, its principal investment strategies and certain related investment risks. Each Fund's secondary strategies or investments are described in the Investment Glossary at the end of this prospectus. In addition, the Statement of Additional Information contains more detailed information about certain of these practices, the potential risks and/or the limitations adopted by each Fund to help manage such risks. All investments, including those in mutual funds, have risks. No investment is suitable for all investors. The Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund are intended for long-term investors. In addition, the International Growth Fund and Emerging Markets Growth Fund are intended for investors who can accept the risks entailed in investing in foreign securities. Of course, there can be no assurance that a Fund will achieve its objective. 24 90 WILLIAM BLAIR GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of the common stocks of domestic growth companies with sustainable, above-average growth from one business cycle to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL, emerging, rapid-growth companies that have had especially vigorous growth in revenues and earnings. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. From time to time, the Fund may invest in related equity securities such as preferred stocks, convertible securities and warrants. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. 25 91 PORTFOLIO MANAGEMENT The Growth Fund is co-managed by Rocky Barber, Mark A. Fuller, III. and Gretchen Lash. Rocky Barber, a principal of William Blair & Company, L.L.C., has co-managed the Fund since 1992. He joined the firm in 1986 as a portfolio manager and manager of the Investment Management Department. In addition to his management responsibilities, he is a member of the department's Growth team. Previously, he was an equity and fixed-income manager with Alliance Capital Management for nine years and president of the Alliance Capital Bond Fund, a group of fixed-income mutual funds. Rocky is Chief Executive Officer of William Blair Funds and a past Chairman of the Board of Trustees of the Stanford Business School Trust. He currently serves on the Board of the LaRabida Children's Hospital Foundation and is a member of the Investment Analysts Society of Chicago. Education: B.A., M.S. and M.B.A., Stanford University; and CFA. Mark A. Fuller, III, a principal of William Blair & Company, L.L.C., has co-managed the Fund since 1992. He has been with the firm since 1983. He is a portfolio manager for numerous accounts and is a member of the department's Small Cap team. He began his career in Institutional Sales, developing long-standing relationships with each of the firm's research analysts. Prior to joining William Blair, he was a sales representative with IBM Corporation. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. Gretchen Lash, a principal with William Blair & Company, L.L.C., has co-managed the Fund since 1999. She joined the firm in 1997 as a portfolio manager. Previously, she was a partner at Lincoln Capital Asset Management where she was part of a nine person team managing $17 billion in institutional, large cap growth equities. Prior to that, she was a consumer analyst and then a portfolio manager of several growth mutual funds with total assets of $2.6 billion at American Capital. Education: B.A., Cornell University; MBA, Rice University; and CFA. 26 92 WILLIAM BLAIR TAX-MANAGED GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Tax-Managed Growth Fund seeks long-term capital appreciation. The Fund employs a number of techniques designed specifically to enhance the long-term, after-tax returns for its shareholders. The Fund invests primarily in a diversified portfolio of common stocks of domestic growth companies with sustainable, above-average growth from one business to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. The Adviser seeks growth opportunities by investing in large, medium and small companies in varying proportions: LARGE, high quality growth companies that have demonstrated sustained growth over a long period of time; MEDIUM-sized companies of recognized investment quality whose records of sales and earnings growth may not be as well established; and SMALL, emerging, rapid-growth companies that have had especially vigorous growth in revenues and earnings. The Adviser attempts to achieve high after-tax returns by balancing investment considerations and tax considerations. The Adviser seeks to achieve returns primarily in the form of price appreciation, and to minimize income distributions and distributions of realized short-term gains. Among the techniques and strategies used in the tax-efficient management of the fund are the following: - investing primarily in lower-yielding stocks; - employing a long-term, low turnover approach to investing; - attempting to avoid net realized short-term gains; - when appropriate, selling stocks trading below cost to realize losses; - in selling appreciated stocks, selecting the most tax-favored share lots; and - selectively using tax-advantage hedging techniques, such as derivative transactions, as an alternative to taxable sales. The Fund can generally be expected to distribute a smaller percentage of returns each year than most other equity mutual funds. There can be no assurance, however, that taxable distributions can always be avoided. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well-managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. 27 93 RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To protect against price declines in securities holdings with large accumulated gains, the Fund may use various hedging techniques (such as purchased put options, equity collars (combining the purchase of a put option and the sale of a call option), equity swaps, and the purchase or sale of stock index futures contracts). By using these techniques rather than selling appreciated securities, the Fund can reduce its exposure to price declines in the securities without realizing substantial capital gains under current tax law. These derivative instruments may also be used by the Fund as a substitute for the purchase or sale of securities. The use of derivatives is highly specialized. The use of derivative instruments can result in losses that exceed the initial amount paid or received by the Fund. Equity swaps and over-the-counter options are private contracts in which there is a risk of loss in the event of a counterparty's default. Derivative instruments may be difficult to value, may be illiquid, and may be subject to wide swings in valuation caused by changes in the value of the underlying security. To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Tax-Managed Growth Fund is co-managed by John F. Jostrand, Gregory J. Pusinelli and Michelle R. Seitz. John Jostrand, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1993 as a portfolio manager. Previously, he was with TRW, Inc. for ten years as Director, Investments, equity portfolio manager and venture capital funds manager. Prior to that he was with Boatmen's National Bank for five years as Assistant Trust Officer, equity fund manager and research analyst. He is a member of the Association for Investment Management and Research and past president of the Pilgrim Village Board of Trustees. Education: B.A., University of Missouri; M.B.A., University of Michigan; and CFA. Greg Pusinelli, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1995 as portfolio manager in the Investment Management Department. In 1996, he became the leader of the Taxable Group. Previously, he was with Stein Roe & Farnham Incorporated for nine years where he was a senior Vice President and Principal responsible for managing client portfolios and a team of portfolio managers. He also co-managed the Investment Counsel Division's Core Portfolio. From 1983 to 1986, he was with the First National Bank of Chicago, where he became a Vice President. Prior to that he was with Harris Trust and Savings Bank from 1980 to 1982. He is a past Chairman of the Board of Trustees of Providence-St. Mel School. Education: B.S., Indiana University; M.B.A., Northwestern University Kellogg Graduate School of Management. Michelle Seitz, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. She joined the firm in 1996 as a portfolio manager. She has over 12 years of investment experience and is a portfolio manager and member of the department's Wealth Management Team. Previously, she was a vice president and senior portfolio manager with Concord Investment Company for four years where she was invited to be a principal in the firm. She managed a team of investment professionals at Concord and was a member of the investment strategy team. Prior to that, she was a portfolio manager with NationsBank for five years and served on the department's asset allocation committee. She is an active member of the Investment Analysts Society of Chicago. She serves on the Board of Advisors for Indiana University's Investment Management Academy in the Graduate School of Business and Northwestern Memorial Foundation's Planned Giving Professional Council. Education: B.S., Indiana University; and CFA. 28 94 WILLIAM BLAIR LARGE CAP GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Large Cap Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks of large domestic growth companies of high quality that have demonstrated sustained growth over a long period of time. The Adviser currently defines large companies as those with market capitalization of $10 billion or more at the time of the Fund's investment. Under normal conditions, the Fund will invest at least 65% of its total assets in large cap stocks. The Fund may also invest in medium-sized growth companies of recognized investment quality whose records of sales and earnings growth may not be as well established. The Fund invests primarily in a diversified portfolio of companies with sustainable, above-average growth from one business cycle to the next. The Fund generally does not invest in cyclical industries, but may do so when the Adviser expects a multi-year period of sustained growth. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. From time to time, the Fund may invest in equity related securities such as preferred stocks, convertible securities and warrants. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. 29 95 PORTFOLIO MANAGEMENT The Large Cap Growth Fund is co-managed by John F. Jostrand and Gretchen Lash. John Jostrand, a principal with William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He joined the firm in 1993 as a portfolio manager and now is a member of the department's institutional growth team. Previously, he was with TRW, Inc. for ten years as Director, Investments, equity portfolio manager and venture capital funds manager. Prior to that he was with Boatmen's National Bank for five years as Assistant Trust Officer, equity fund manager and research analyst. He is a member of the Association for Investment Management and Research and past president of the Pilgrim Village Board of Trustees. Education: B.A., University of Missouri; M.B.A., University of Michigan; and CFA. Gretchen Lash, a principal with William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. She joined the firm in 1997 as a portfolio manager. Previously, she was a partner at Lincoln Capital Asset Management where she was part of a nine person team managing $17 billion in institutional, large cap growth equities. Prior to that, she was a consumer analyst and then a portfolio manager of several growth mutual funds with total assets of $2.6 billion at American Capital. Education: B.A., Cornell University; MBA, Rice University; and CFA. 30 96 WILLIAM BLAIR SMALL CAP GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Small Cap Growth Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks and related equity securities of small emerging, rapid growth domestic companies that are of high quality and that have had especially vigorous growth in revenues and earnings. The Adviser currently defines small companies as those with market capitalizations of $2 billion or less at the time of the Fund's investment. Under normal conditions, the Fund will invest at least 65% of its total assets in small cap stocks. To a limited extent, the Fund may also invest in companies with business characteristics and growth prospects similar to small companies, but which may have market capitalizations above $2 billion. INVESTMENT PROCESS The Adviser utilizes an investment process that relies on thorough, in-depth fundamental research of a company, its competitors, its suppliers and its customers. The Adviser will invest in companies that it believes are well- managed considering some or all of the following investment criteria: A LEADER IN THE FIELD. The company should be, or clearly have the expectation of becoming, a significant provider in the primary markets it serves. UNIQUE OR SPECIALTY COMPANY. The company should have some distinctive attribute that cannot easily be duplicated by present or potential competitors. This may take the form of proprietary products or processes, a unique distribution system, an entrenched brand name or an especially strong financial position. QUALITY PRODUCTS OR SERVICES. The company's products or services should be regarded as being of superior quality, which should enable the company to obtain a premium price and to command greater customer loyalty. MARKETING CAPABILITY. The company should have a distinctive capability in sales, service or distribution. VALUE TO CUSTOMER. The prices of the company's products or services should be based upon their value to the customer, rather than their production cost. RETURN ON EQUITY. The company should have achieved, or have the potential to achieve, an above-average return on equity through efficient use of assets and adequate margins, rather than excessive financial leverage. Such companies should be able to finance most or all of their growth internally and translate revenue and income growth into rising per share earnings and dividends. CONSERVATIVE FINANCIAL POLICIES AND ACCOUNTING PRACTICES. The company should have a relatively simple, clean financial structure and adhere to conservative and straightforward accounting practices. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. 31 97 PORTFOLIO MANAGEMENT The Small Cap Growth Fund is co-managed by Karl W. Brewer and Mark A. Fuller III. Karl W. Brewer has co-managed the Fund since its inception in 1999. He has been with William Blair & Company, L.L.C. since 1996. He is an analyst and portfolio manager, and a member of the department's Small Cap team. Previously, he spent six years at Lehman Brothers Inc. in the Mergers & Acquisitions and Los Angeles Corporate Finance Departments. Education: B.A., Washington & Lee University; M.B.A., Northwestern University Kellogg Graduate School of Management. Mark A. Fuller, III, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1999. He has been with the firm since 1983. He is a portfolio manager for numerous accounts and is a member of the department's Small Cap team. He began his career in Institutional Sales, developing long-standing relationships with each of the firm's research analysts. Prior to joining the firm, he was a sales representative with IBM Corporation. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. 32 98 WILLIAM BLAIR INTERNATIONAL GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair International Growth Fund seeks long-term capital appreciation. 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. The Fund's assets normally will be allocated among not fewer than six different countries and will not concentrate investments in any particular industry. However, the Fund may have more than 25% of its assets invested in any major industrial or developed country. No more than 50% of the Fund's equity securities may be invested in securities of issuers of any one country at any given time. The Fund ordinarily will invest at least 80% of its total assets in a diversified portfolio of common stocks with above-average growth, profitability and quality characteristics, issued by companies domiciled outside the U.S., and in securities convertible into, exchangeable for or having the right to buy such common stocks. INVESTMENT PROCESS Stock Selection. In selecting companies for investment, fundamental company analysis and stock selection are the Adviser's primary investment criteria. The Adviser seeks companies that historically have had superior growth, profitability and quality relative to local markets and relative to companies within the same industry worldwide, and that are expected to continue such performance. Such companies generally will exhibit superior business fundamentals, including leadership in their field, quality products or services, distinctive marketing and distribution, pricing flexibility and revenue from products or services consumed on a steady, recurring basis. These business characteristics should be accompanied by management that is shareholder return-oriented and uses conservative accounting policies. Companies with above-average returns on equity, strong balance sheets and consistent, above-average earnings growth at reasonable valuation levels will be the primary focus. Stock selection will take into account both local and global comparisons. Country Allocation. In pursuing the Fund's investment objective, the Adviser will vary the geographic diversification and types of securities based upon the Adviser's continuous evaluation of economic, market and political trends throughout the world. The investment of the Fund's assets in various international securities markets tends to decrease the degree to which events in any one country can affect the entire Fund. In making decisions regarding the country allocation, the Adviser will consider such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries and other pertinent financial, social, national and political factors. Normally, the Fund's investments will be spread throughout the world (excluding the United States). The Adviser intends to maintain approximately 10 to 20 percent of the Fund's assets in emerging markets, although that allocation will vary over time. Emerging market companies are (i) companies organized under the laws of an emerging market country or having securities which are traded principally on an exchange or over-the-counter in an emerging market country; or (ii) companies which, regardless of where organized or traded, have a significant amount of assets (at least 50%) located in and/or derive a significant amount of their revenues (at least 50%) from goods purchased or sold, investments made or services performed in or with emerging market countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. The Adviser will seek investment opportunities in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. 33 99 ADDITIONAL STRATEGIES For liquidity purposes, up to 20% of the Fund's assets may be held in cash (U.S. dollars and foreign currencies) or in short-term securities, such as repurchase agreements, and domestic and foreign money market instruments, such as government obligations, certificates of deposit, bankers' acceptances, time deposits, commercial paper and short-term corporate debt securities. The Fund does not have specific rating requirements for its short-term securities; however, the Adviser presently does not intend to invest more than 5% of the Fund's net assets in securities rated lower than investment grade. The Fund may enter into forward foreign currency transactions in an effort to protect against changes in foreign exchange rates. To a limited extent, the Fund may also invest in depository receipts, foreign currency futures, forward foreign currency transactions, illiquid securities, investment companies, repurchase agreements and when-issued and delayed-delivery securities, which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification, and portfolio turnover. The Fund may invest to a very limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The International Growth Fund is managed by W. George Greig. W. George Greig, a principal of William Blair & Company, L.L.C., has managed the Fund since 1996 when he joined the Investment Management Department as an international portfolio manager. He headed international equities for PNC Bank in Philadelphia from 1995 to 1996 and, prior to that, he was a founding partner of Pilgrim Baxter & Associates, where he was an analyst, research director and portfolio manager for over ten years. He also served as chief investment officer of Framlington Group plc during its association with Pilgrim Baxter and founded and managed a joint venture between the two firms. Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton School of the University of Pennsylvania. 34 100 WILLIAM BLAIR EMERGING MARKETS GROWTH FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Emerging Markets Growth Fund seeks long-term capital appreciation. The Fund pursues its objective by investing in a diversified portfolio of equity securities issued by companies in emerging economies worldwide. Emerging market companies are (i) companies organized under the laws of an emerging market country or having securities which are traded principally on an exchange or over-the-counter in an emerging market country; or (ii) companies which, regardless of where organized or traded, have a significant amount of assets (at least 50%) located in and/or derive a significant amount of their revenues (at least 50%) from goods purchased or sold, investments made or services performed in or with emerging market countries. Currently, emerging markets include every country in the world other than the United States, Canada, Japan, Australia, New Zealand, Hong Kong, Singapore and most Western European countries. The Fund normally will allocate its investments among not less than six different countries and will not concentrate investments in any particular industry. No more than 50% of the Fund's equity securities will be invested in securities of issuers in one country at any given time. The Fund ordinarily will invest at least 65% of its total assets in equity securities issued by emerging market companies. Equity securities include securities convertible into, exchangeable for or having the right to buy common stocks. INVESTMENT PROCESS The Adviser seeks well-managed, high quality growth companies. Such companies will generally exhibit superior business fundamentals, including one or more of the following characteristics: REGIONAL LEADERSHIP in product quality or cost competitiveness; DOMINANT OR IMPROVING MARKET POSITION, generally associated with a competitive advantage in distribution, pricing or business franchise, within a growing local or regional economy; and SUSTAINABLE ABOVE-AVERAGE AND/OR INCREASING RETURNS on invested capital generated from the efficient utilization of assets, increasing profit margins or sound financial management, including improvements that may arise from the process of privatization or restructuring of corporate assets. The research approach used in stock selection will focus intensively on the soundness of corporate management, taking into account management's orientation toward outside shareholders, incentives and ability to execute successful strategies, commitment to transparent and conservative financial reporting policies, and general integrity. 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 upon the allocation of the investments. In pursuing the Fund's investment objective, the Adviser will vary the Fund's geographic diversification and types of securities based upon the Adviser's continuous evaluation of economic, market and political trends throughout the world. The investment of the Fund's assets in various international securities markets tends to decrease the degree to which events in any one country can affect the entire Fund. In making decisions regarding the country allocation, the Adviser will consider such factors as the conditions and growth potential of various economies and securities markets, currency exchange rates, technological developments in the various countries and other pertinent financial, social, national and political factors. In addition, the Adviser will seek investment opportunities in companies at different stages of development ranging from large, well-established companies to smaller companies at an earlier stage of development. 35 101 ADDITIONAL STRATEGIES For liquidity purposes, up to 35% of the Fund's assets may be held in cash (U.S. dollars and foreign currencies) or in short-term securities, such as repurchase agreements, and domestic and foreign money market instruments, such as government obligations, certificates of deposit, bankers' acceptances, time deposits, commercial paper and short-term corporate debt securities. The Fund does not have specific rating requirements for its short-term securities; however, the Adviser presently does not intend to invest more than 5% of the Fund's net assets in securities rated below investment grade. The Fund may enter into forward foreign currency transactions in an effort to protect against changes in foreign exchange rates. To a limited extent, the Fund may also invest in depository receipts, foreign currency futures, illiquid securities, investment companies, repurchase agreements and when-issued and delayed delivery securities which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund intends to invest to a very limited extent in warrants, which are described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Emerging Markets Growth Fund is co-managed by W. George Greig and Jeffrey A. Urbina. W. George Greig, a principal of William Blair & Company, L.L.C., has co-managed the Fund since its inception in 1998. He joined the Investment Management Department in 1996 as an international portfolio manager. He headed international equities for PNC Bank in Philadelphia from 1995 to 1996 and, prior to that, he was a founding partner of Pilgrim Baxter & Associates, where he was an analyst, research director and portfolio manager for over ten years. He also served as chief investment officer of Framlington Group plc during its association with Pilgrim Baxter and founded and managed a joint venture between the two firms. Education: B.S., Massachusetts Institute of Technology; M.B.A., Wharton School of the University of Pennsylvania. Jeffrey A. Urbina joined William Blair & Company, L.L.C. in 1996 and has co-managed the Fund since its inception in 1998. In addition to the Emerging Market Growth Fund, he is responsible for emerging market research for the William Blair International Growth Fund. From 1991 to 1996, he was Senior Vice President/ Director of Emerging Market Research and a Portfolio Manager for the Van Kampen American Capital Navigator Fund, an emerging market equity fund listed in Luxembourg. During his five years at Van Kampen American Capital, he also served as Director of Fixed Income Research and was a member of the Investment Policy Committee. Before joining Van Kampen American Capital, he spent ten years at Citicorp in various capacities, including as a Vice President in the commercial real estate group in Chicago and as a commercial lending officer in the bank's Denver office. He began his banking career at Harris Bank in Chicago, where he was an International Banking Officer. Education: B.A., Northwestern University; M.B.A., Northwestern University Kellogg Graduate School of Management. 36 102 WILLIAM BLAIR DISCIPLINED LARGE CAP FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Disciplined Large Cap Fund seeks long-term capital appreciation. The Fund invests primarily in a diversified portfolio of common stocks and related equity securities of large capitalization domestic companies. The Adviser chooses the Fund's portfolio investments primarily from companies in the Standard & Poor's 500 Stock Index. The Adviser defines large companies as those with market capitalizations of $10 billion or more at the time of the Fund's investment. Under normal conditions, the Fund will invest at least 65% of its total assets in large cap stocks. INVESTMENT PROCESS The Disciplined Large Cap Fund seeks to consistently outperform the Standard & Poor's 500 Stock Index while maintaining similar market risk by utilizing a disciplined investment process that combines bottom-up stock picking with quantitative measures to help manage risk and create a portfolio with better value, better earnings growth momentum and similar sensitivity to general macro-economic conditions as the Standard & Poor's 500. The portfolio generally will hold the securities of 90-140 companies in the Standard & Poor's 500. The Adviser uses quantitative models to help determine the present value of each stock in the Standard & Poor's 500 Index and to help forecast growth rate momentum. ADDITIONAL STRATEGIES To a limited extent, the Fund may invest in depository receipts, illiquid securities, investment companies, when-issued and delayed delivery securities and repurchase agreements which are described in the Investment Glossary at the end of this prospectus. The Fund may also invest to a limited extent in S&P Futures contracts. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants, which are described in the Statement of Additional Information. The Fund also may use options, futures and other derivative instruments for hedging and risk management purposes, as further described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Disciplined Large Cap Fund is managed by Stan Kirtman. Stan Kirtman joined William Blair & Company, L.L.C. as a portfolio manager for the Fund in 1999. Previously, he served as President and CIO for Nikko Global Asset Management (USA), Inc from April 1987 to June 1999. From January 1975 to April 1987 he was director of Pension & Profit Sharing at Thomas J. Lipton, Inc., Senior Investment Officer with Gerard Bank, and Assistant Vice President at Provident National Bank. He is a member of the New York Society of Security Analysts and the Market Technicians Association. Education: B.A., Hunter College. 37 103 WILLIAM BLAIR VALUE DISCOVERY FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Value Discovery Fund seeks long-term capital appreciation. The Fund pursues its objective by investing with a value discipline primarily in a diversified portfolio of the equity securities of small companies. INVESTMENT PROCESS In selecting companies for investment, the Adviser evaluates the extent to which a company meets the investment criteria set forth below. The weight given to a particular investment criterion will depend upon the circumstances, and some Fund holdings may not meet all of the following criteria, which are described more fully in the Statement of Additional Information: MATERIAL PRICE/VALUE DISPARITY--whether the company's current market value reflects a material discount from the Adviser's estimate of the company's intrinsic value. PROBABLE EXPANSION IN PROFITABILITY--whether the company has a reasonable expectation of improving its level of profitability over a three-year investment horizon. SKILLED AND COMMITTED MANAGEMENT--whether the company has a capable and skilled management team and a clearly articulated and logical business strategy with a reasonable probability of successful execution. STRONG CAPITAL STRUCTURE--whether the company has a relatively simple, clean financial structure without excessive use of financial leverage. In addition, the company should adhere to conservative and straightforward accounting practices. POSITIVE CATALYST--the likelihood that the company will undergo a positive corporate change within a three-year investment horizon. ADDITIONAL STRATEGIES The Fund may also hold debentures and preferred stocks if they are convertible into common stocks that meet the Fund's investment criteria. The Fund may invest up to 15% of its net assets in foreign securities, which may include American Depository Receipts or substantially similar investments; however, the Fund may invest only up to 5% of its net assets directly in foreign securities. To a limited extent, the Fund may invest in depository receipts, foreign securities, illiquid securities, investment companies, real estate investment trusts, repurchase agreements and when-issued and delayed delivery securities which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. The Fund may invest to a limited extent in warrants and futures, which are described in the Statement of Additional Information. 38 104 PORTFOLIO MANAGEMENT The Value Discovery Fund is co-managed by Glen A. Kleczka, David S. Mitchell and Capucine E. Price. Glen Kleczka joined William Blair & Company, L.L.C. in 1996 to lead the Fund's portfolio management team. For the previous 7 years, he was a partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc. and co-managed the Post-Venture Fund, whose assets totaled more than $900 million. He was also a member of the Private Markets Committee which approved all venture capital and partnership investments. Previously, he spent two years at CNA Financial Corp. as a manager of their Variable Annuity Trust equity portfolio. While at the University of Wisconsin he was a participant at the Center for Applied Security Analysis, a nationally recognized investment management program. He is a member of the Investment Analyst Society of Chicago. Education: B.S., Marquette University; M.B.A., University of Wisconsin. David Mitchell joined William Blair & Company, L.L.C. in 1996 as a portfolio manager for the Fund. In 1996, he was a partner in the U.S. Equity group of Brinson Partners, Inc. and a member of the Post-Venture Fund management team, whose assets totaled more than $900 million. Prior to joining Brinson, he spent four years as a co-manager of Thomas Paine Investors, L.P., a private small-cap fund. Before joining Thomas Paine, he was a Senior Equity Analyst on NBD's small-cap Woodward Opportunity Fund and with Connecticut National Bank as an equity analyst and portfolio manager. Prior to graduate studies he worked as an equity trader and a money market portfolio manager. Education: B.A., Knox College; M.M., Northwestern University. Capucine "Cappy" Price joined William Blair & Company, L.L.C. in 1996 as a portfolio manager for the Fund. For the previous 3 years, she was a partner in the Private Markets and U.S. Equity groups of Brinson Partners, Inc. and a member of the Post-Venture Fund management team, whose assets totaled more than $900 million. Previously, she was an equity analyst for the First National Bank of Chicago. While attending Northwestern University she was a participant in First Chicago's First Scholar program. Education: B.A., University of Michigan; M.A., University of Chicago; M.M., Northwestern University. 39 105 WILLIAM BLAIR INCOME FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Income Fund seeks a high level of current income relative to stability of principal. The Fund invests 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 Fund's assets will be invested in the following: U.S. DOLLAR-DENOMINATED CORPORATE DEBT SECURITIES (domestic or foreign) with long-term ratings of "A-" or better, or an equivalent rating, by at least one of the following four nationally recognized statistical rating organizations ("Rating Organizations"): Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc. and Standard & Poor's Corporation; OBLIGATIONS OF OR GUARANTEED BY THE UNITED STATES GOVERNMENT, its agencies or instrumentalities. These securities include direct obligations of the U.S. Treasury, which differ only in their interest rates, maturities and time of issuance and obligations issued or guaranteed by U.S. Government agencies or instrumentalities, which differ in the degree of support provided by the U.S. Government. Although these securities are subject to the market risks resulting from fluctuation in interest rates, they will be paid in full if held to maturity; COLLATERALIZED OBLIGATIONS, which are debt securities issued by a corporation, trust or custodian, or by a U.S. Government agency or instrumentality, that are collateralized by a portfolio or pool of assets, such as mortgages, mortgage-backed securities, debit balances on credit card accounts or U.S. Government securities. The issuer's obligation to make interest and/or principal payments is secured by the underlying pool or portfolio of securities. The Income Fund may invest in collateralized obligations that are not guaranteed by a U.S. Government agency or instrumentality only if the collateralized obligations are rated A- or better, or an equivalent rating, by one of the Rating Organizations; and COMMERCIAL PAPER obligations rated within the highest grade by one of the four Rating Organizations. The anticipated dollar-weighted average maturity of the Fund is three to seven years. The anticipated weighted average modified duration for the Fund is two to five years, with a maximum duration on any instrument of eight years. The Adviser will not continue to hold a security whose duration has moved above eight years. The duration of an instrument is different from the maturity of an instrument in that duration measures the average period remaining until the discounted value of the amounts due (principal and interest) under the instrument are to be paid, rather than by the instrument's stated final maturity. For example, a portfolio duration of five years means that if interest rates increased by one percent, the value of the portfolio would decrease by approximately five percent. Modified duration adjusts duration to take into account the yield to maturity and the number of coupons received each year. For purposes of calculating duration, instruments allowing prepayment will be assigned a maturity schedule by the Adviser based upon industry experience. INVESTMENT PROCESS The Adviser seeks to outperform the total return of an index of broad intermediate-term government and corporate high-grade debt through an actively managed diversified portfolio of debt securities. The Adviser's investment philosophy emphasizes shifts in the Fund's portfolio among various sectors of the debt market, subject to the Fund's credit quality constraints for its portfolio. The Adviser also actively manages the Fund based upon the average duration and yield to maturity of the Fund's portfolio and the Adviser's perceived trends in interest rates. ADDITIONAL STRATEGIES Up to 10% of the Fund's total assets may be invested in unrated debt securities, provided that the Adviser deems such securities to be of at least "A-" quality and provided that the comparable debt of the issuer has a rating of at least "A-" or its equivalent by one of the four Rating Organizations. 40 106 To a limited extent, the Fund may invest in illiquid securities, repurchase agreements and when-issued and delayed delivery securities, which are described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration, diversification and portfolio turnover. In addition, the Fund's policy regarding lending portfolio securities is described in the Statement of Additional Information. PORTFOLIO MANAGEMENT The Income Fund is co-managed by Jim Kaplan and Bentley Myer. Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the Fund since 1999. He joined the firm's Investment Management Department in 1994 as a fixed-income portfolio manager. Prior to that he was with First Union National Bank for twelve years. While at First Union, he traded risk positions in mortgage-backed securities and municipal bonds. In addition, he co-managed the mortgage-backed securities portion of the bank's investment portfolio. He is a member of the Investment Analysts Society of Chicago. Education: B.A., Washington & Lee University and C.F.A. Bentley Myer, a principal of William Blair & Company, L.L.C., has managed the Fund since 1992. He joined the firm in 1991 as a fixed-income portfolio manager. From 1983 to 1991, he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that he was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a Trustee of Delnor Community Hospital, as well as a member of the Investment Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A., Wharton School of the University of Pennsylvania. 41 107 WILLIAM BLAIR READY RESERVES FUND - -------------------------------------------------------------------------------- GOAL AND PRINCIPAL STRATEGIES The William Blair Ready Reserves Fund seeks current income, a stable share price and daily liquidity. The Fund invests 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 Fund seeks to maintain a net asset value of $1.00 per share. Nevertheless, there is no guarantee that the objective of the Fund will be achieved or that the net asset value of $1.00 per share of the Fund will be maintained. ADDITIONAL STRATEGIES AND RISKS The Fund will invest exclusively in U.S. dollar-denominated money market instruments, including, but not limited to, those issued by: -- Corporations; -- The U.S. Government, its agencies and instrumentalities; -- U.S. and foreign banks; -- Municipalities; -- Foreign governments; and -- Multinational organizations, such as the World Bank. The yield paid by the Ready Reserves Fund will vary with changes in interest rates. While the Fund seeks to maintain its $1.00 share price, there is no guarantee that it will be able to do so. The Fund has adopted certain investment policies designed to limit the market and financial risks of the Fund. The Fund complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940, which governs the maturity and credit quality of money market funds. The Fund 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 Trustees. However, the Fund may invest up to 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 Trustees, has determined present minimal credit risks. Securities are deemed to be highest grade if they are rated high-quality by two Rating Organizations, or, if only rated by one Rating Organization, rated high-quality by that Rating Organization. For example, commercial paper rated "Duff 1 minus," "Fitch 1," "Prime 1" and "A-1" by Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc., and Standard & Poor's Corporation, respectively, would be considered high quality. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, may provide higher yields. Further, the Fund 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 to the Statement of Additional Information. To the extent the Fund invests in short-term U.S. dollar-denominated foreign money market instruments, investing in foreign securities may involve a greater degree of risk than investing in domestic securities due to the possibility of, but not limited to, less publicly available information, more volatile markets, less securities regulation, less favorable tax provisions, war and expropriation. To a limited extent, the Fund may invest in repurchase agreements, Section 4(2) commercial paper, when-issued and delayed delivery securities and variable rate securities, which are more fully described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration and diversification. 42 108 PORTFOLIO MANAGEMENT The Ready Reserves Fund is co-managed by Jim Kaplan and Bentley Myer. Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the Fund since 1999. He joined the firm's Investment Management Department in 1994 as a fixed-income portfolio manager. Prior to that he was with First Union National Bank for twelve years. While at First Union, he traded risk positions in mortgage-backed securities and municipal bonds. In addition, he co-managed the mortgage-backed securities portion of the bank's investment portfolio. He is a member of the Investment Analysts Society of Chicago. Education: B.A., Washington & Lee University and C.F.A. Bentley Myer, a principal with William Blair & Company, L.L.C., has managed the Fund since 1992. He joined the firm in 1991 as a fixed-income portfolio manager. From 1983 to 1991 he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that he was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a Trustee of Delnor Community Hospital as well as a member of the Investment Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A., Wharton School of the University of Pennsylvania. 43 109 INVESTMENT RISKS - -------------------------------------------------------------------------------- The following table summarizes the types of risks described below that each Fund may experience:
TEMPORARY SMALLER COUNTRY EMERGING OPERATING DEFENSE INTEREST STOCKS ALLOCATION MARKETS EXPENSES POSITION RATE CREDIT ------- ---------- -------- --------- --------- -------- ------ Growth Fund........................... X X Tax-Managed Growth Fund............... X X Large Cap Growth Fund................. X Small Cap Growth Fund................. X X International Growth Fund............. X X X X Emerging Markets Growth Fund.......... X X X X X Disciplined Large Cap Growth Fund..... X Value Discovery Fund.................. X X Income Fund........................... X X X Ready Reserve Fund.................... X
EQUITY FUNDS General. Because the each equity fund invests substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds may decrease in response to the activities of an individual company or in response to general market, business and economic conditions. If this occurs, a Fund's share price may also decrease. Smaller Stocks. Stocks of smaller companies involve greater risk than those of larger, more established companies. This is because smaller companies may be in earlier stages of development, may be dependent on a small number of products or services, may lack substantial capital reserves and/or do not have proven track records. Smaller companies may be more adversely affected by poor economic or market conditions, and may be traded in low volumes, which may increase volatility and liquidity risks. From time to time, the Growth Fund, the Small Cap Growth Fund, Emerging Markets Growth Fund and Value Discovery Fund may invest in the equity securities of very small companies, often referred to as "micro-cap" companies. The considerations noted above are generally intensified for these investments. Any convertible debentures issued by small companies 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, including uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. Country Allocation. The International Growth Fund and Emerging Markets Growth Fund seek to invest in companies and governments of countries having stable or improving political environments; however, there is the possibility of expropriation or confiscatory taxation, seizure or nationalization of foreign bank deposits or other assets, establishment of exchange controls, the adoption of foreign government restrictions and other adverse political, social or diplomatic developments that could affect investments in these nations. The risks of investing in securities of foreign issuers may include less publicly available information, less governmental regulation and supervision of foreign stock exchanges, brokers and issuers, a lack of uniform accounting, auditing and financial reporting standards, practices and requirements, the possibility of expropriation, nationalization, confiscatory taxation, adverse changes in investment or exchange control regulations, political instability, restrictions on the flow of international capital and difficulty in obtaining and enforcing judgments against foreign entities. Securities of some foreign issuers are less liquid and their prices more volatile than the securities of U.S. companies. In addition, the time period for settlement of transactions in foreign securities generally is longer than for domestic securities. 44 110 These risks are typically intensified in emerging markets, which are the less developed and developing nations. Certain of these countries have in the past failed to recognize private property rights and have at times nationalized and expropriated the assets of private companies. Emerging Markets. Investments in emerging markets companies are speculative and subject to special risks. Political and economic structures in many of these countries may be in their infancy and developing rapidly. Such countries may also lack the social, political and economic characteristics of more developed countries. The currencies of certain emerging market countries have experienced a steady devaluation relative to the U.S. dollar, and continued devaluations may adversely affect the value of a fund's assets denominated in such currencies. Many emerging market countries have experienced substantial rates of inflation for many years, and continued inflation may adversely affect the economies and securities markets of such countries. In addition, unanticipated political or social developments may affect the values of a Fund's investments in emerging market countries and the availability to the Fund of additional investments in these countries. The small size, limited trading volume and relative inexperience of the securities markets in these countries may make a Fund's investments in such countries illiquid and more volatile than investments in more developed countries, and the Fund may be required to establish special custodial or other arrangements before making investments in these countries. There may be little financial or accounting information available with respect to issuers located in these countries, and it may be difficult as a result to assess the value or prospects of an investment in such issuers. In many foreign countries there is less government supervision and regulation of business and industry practices, stock exchanges, brokers and listed companies than in the U.S. There is an increased risk, therefore, of uninsured loss due to lost, stolen, or counterfeit stock certificates. Prior governmental approval of non-domestic investments may be required under certain circumstances in some developing countries, and the extent of foreign investment in domestic companies may be subject to limitation in other developing countries. Foreign ownership limitations also may be imposed by the charters of individual companies in developing countries to prevent, among other concerns, violation of foreign investment limitations. Repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval in some developing countries. A Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for such repatriation. Further, the economies of certain developing countries may be dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The securities held by the International Growth Fund and the Emerging Markets Growth Fund usually will 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 Fund either beneficially or adversely. Fluctuations in foreign currency exchange rates will also affect the dollar value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, available for distribution to shareholders. The Emerging Markets Growth Fund may invest in Russian securities. Russian securities involve additional significant risks, including political and social uncertainty (for example, regional conflicts and risk of war), currency exchange rate volatility, pervasiveness of corruption and crime in the Russian economic, social and legal systems, delays in settling Fund transactions and risk of loss arising out of Russia's system of share registration and custody. Russia's system of share registration and custody creates certain risks of loss (including the risk of total loss) that are not normally associated with investments in other securities markets. Operating Expenses. The International Growth Fund and Emerging Markets Growth Fund are expected to incur operating expenses that are higher than those of mutual funds investing exclusively in U.S. equity securities, since expenses such as custodial fees related to foreign investments are usually higher than those associated with investments in U.S. securities. Similarly, brokerage commissions on purchases and sales of foreign securities are generally higher than on domestic securities. In addition, dividends and interest from 45 111 foreign securities may be subject to foreign withholding taxes. (For more information, see "Your Account -- Taxes.") Temporary Defensive Position. Each Fund may significantly alter its make-up as a temporary defensive strategy. A defensive strategy will be employed only if, in the judgment of the Adviser, investments in a Fund's usual markets or types of securities become decidedly unattractive because of current or anticipated adverse economic, financial, political and social factors. Generally, the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund will remain fully invested, and the Adviser will not attempt to time the market. However, if a significant adverse market action is anticipated, investment-grade debt securities may be held without limit as a temporary defensive measure. Normally, the Funds do not purchase any stocks with a view to quick turnover for capital gains. For the International Growth Fund and Emerging Markets Growth Fund, the types of securities that might be acquired and held for defensive purposes could include fixed-income securities and securities issued by the U.S. or foreign governments as well as domestic or foreign money market instruments and non-convertible preferred stock, each of which would be of investment-grade. At such time as the Adviser determines that the Fund's defensive strategy is no longer warranted, the Fund will adjust its Fund back to its normal complement securities as soon as practicable. When a Fund is invested defensively, it may not meet its investment objective. INCOME FUND Interest Rate Risk. The Income Fund's investments are subject to price fluctuations resulting from various factors, including rising or declining interest rates (interest rate risk). The value of the portfolio's investments (other than an interest-only class of a collateralized obligation) tends to decrease when interest rates rise and tends to increase when interest rates fall. In addition, investments with longer maturities, which typically provide better yields, may subject the Fund to increased price changes resulting from market yield fluctuations. Credit Risk. The value of the Fund's securities is subject to the ability of the issuers of such securities to make payment at maturity (credit risk). However, in the opinion of the Adviser, the risk of loss of principal should be reduced due to the relatively high quality of the investments in which the Fund primarily will invest. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, provide higher yields. 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 Fund may invest are backed by the full faith and credit of the United States, such as modified pass-through certificates issued by the Government National Mortgage Association, 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 Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). Others are backed only by the credit of the issuer itself (such as obligations of the Student Loan Marketing Association). For a description of ratings, see Appendix B in the Statement of Additional Information. Temporary Defensive Position. Generally the Fund will remain fully invested. However, for temporary defensive purposes, the Fund 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 Fund does not invest in equity securities. 46 112 MANAGEMENT OF THE FUNDS - -------------------------------------------------------------------------------- TRUSTEES, OFFICERS AND ADVISER. The Board of Trustees of William Blair Funds (the "Trust") has overall management responsibility. The duties of the directors and officers of the Trust include supervising the business affairs of the Trust, monitoring investment activities and practices and considering and acting upon future plans for the Trust. The Statement of Additional Information has the names of and additional information about the directors and officers of the Trust. The Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, is responsible for providing investment advisory and management services to the Trust, subject to the direction of the Board of Trustees. The Adviser is also the principal underwriter and distributor of the Trust and acts as agent of the Trust in the sale of its shares (the "Distributor"). William Blair & Company, L.L.C. was founded over 60 years ago by William McCormick Blair. Today, the firm has 150 principals and 850 employees. The main office in Chicago houses all research and investment management services. The Investment Management Department oversees the assets of the William Blair Funds, along with corporate pension plans, endowments and foundations and individual accounts. The department currently manages approximately $12 billion in equities, fixed-income securities and cash equivalents. The Adviser firmly believes that clients are best served when portfolio managers are encouraged to draw on their experience and develop new ideas. This philosophy has helped build a hard-working, results-oriented team of over 30 portfolio managers, supported by over 40 analysts, with an exceptionally low turnover rate. William Blair portfolio managers generally average more than ten years with William Blair and more than two decades of experience in the investment industry. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940. Each Fund pays the Adviser a monthly investment management fee based upon the percentage of the average net assets as shown below:
FEE AS A % OF FUND AVERAGE NET ASSETS - ---- ------------------ Growth Fund................................. 0.75%* Tax-Managed Growth Fund..................... .80% Large Cap Growth Fund....................... .80% Small Cap Growth Fund....................... 1.10% International Growth Fund................... 1.10%* Emerging Markets Growth Fund................ 1.40%* Disciplined Large Cap Fund.................. .80% Value Discovery Fund........................ 1.15%* Income Fund................................. 0.59%* Ready Reserves Fund......................... 0.59%*(1)
- --------------- * For the most recently completed fiscal year. (1) Effective January 1, 2000, the management fee will change to 0.24%. CUSTODIAN. The Custodian is Investors Bank and Trust Company, 200 Clarendon Street, Boston, Massachusetts 02117. The Custodian is responsible for custody of portfolio securities, fund accounting and calculation of the Fund's net asset value. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, may serve as the Custodian for Individual Retirement Accounts ("IRAs"). TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Transfer Agent and Dividend Paying Agent is Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. YEAR 2000. A critical issue has emerged in the investment services industry and for the economy overall regarding how existing application software programs and operating systems can accommodate the date value for the year 2000. Many existing application software products in the marketplace were designed only to accommodate a two-digit date position which represents the year (e.g., "95" is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems 47 113 will be able to accurately process. The Trust is in the process of working with the Adviser and other service providers to assure that the Trust is prepared for the year 2000. The Trust has been assured by the Adviser and other service providers that they do not believe that the Trust will be materially adversely affected by year 2000. Nevertheless, the inability of the Adviser and other service providers to successfully address year 2000 issues could result in interruptions in the Trust's business and have a material adverse effect on the Trust's operations. Year 2000 problems would also increase the risks of a Fund's investments. To assess the potential effect of the year 2000 problem, the Adviser is reviewing information regarding the year 2000 readiness of issuers of securities a Fund may purchase. However, this may be difficult with certain issuers. For example, a Fund that deals with foreign service providers or invests in foreign securities will have difficulty determining the year 2000 readiness of those entities. This is especially true of entities or issuers in emerging markets. The financial impact of these issues for the Funds are still being determined. There can be no assurance that potential year 2000 problems would not have a material adverse effect on the Trust. 48 114 CHOOSING A SHARE CLASS - -------------------------------------------------------------------------------- CLASS A SHARES Offered at net asset value plus a maximum sales charge of 5.75% (2.00% for the Income Fund) of the offering price, subject to a 0.25% shareholder services fee. Reduced sales charges apply to purchases of $50,000 or more. CLASS B SHARES Offered at net asset value without an initial sales charge, but subject to a 0.75% Rule 12b-1 distribution fee, a 0.25% shareholder services fee and a contingent deferred sales charge that declines from 5.00% to zero on certain redemptions made within seven years of purchase (for the Income Fund, 2.00% to zero on certain redemptions made within two years of purchase) within three years of purchase. Class B shares automatically convert into Class A shares (which have lower ongoing expenses) at the end of the seventh year after purchase (third year for the Income Fund). CLASS C SHARES Offered at net asset value without an initial sales charge, but subject to a 0.75% Rule 12b-1 distribution fee, a 0.25% shareholder services fee, and a 1.00% contingent deferred sales charge on redemptions made within one year of purchase. Class C shares do not convert into another class. CLASS I SHARES Offered at net asset value without an initial sales charge, Rule 12b-1 distribution fee or shareholder services fee. Certain eligibility requirements apply. - -------------------------------------------------------------------------------- When placing purchase orders, investors must specify whether the order is for Class A, Class B, Class C or Class I shares. Each class of shares represents interest in the same portfolio of investments of a Fund. The Ready Reserves Fund currently does not offer Class A, Class B or Class C shares. The Ready Reserves Fund offers Class N shares via this prospectus and Class I shares via another prospectus. Each other Fund offers Class N shares through a separate prospectus. Class N shares, which are offered without a sales charge, are offered only to investors who acquire the shares directly through the Fund's distributor or through a select number of financial intermediaries with whom the Distributor has entered into selling agreements specifically authorizing them to sell Class N shares. The decision as to which class to choose depends on a number of factors, including the amount and intended length of the investment. Investors that qualify for reduced sales charges might consider Class A shares. Investors who prefer not to pay an initial sales charge and who plan to hold their investment for more than seven years might consider Class B shares. Investors who prefer not to pay an initial sales charge but who plan to redeem their shares within seven years might consider Class C shares. Investors who qualify for Class I shares will not pay sales charges. For more information about the three sales arrangements, consult your financial representative and the Statement of Additional Information. Financial services firms may receive different compensation depending upon which class of shares they sell. RULE 12b-1 PLAN William Blair Funds has adopted plans under Rule 12b-1 of the Investment Company Act of 1940 that provide for fees payable to compensate the Distributor for distribution and other services provided to shareholders of Class B, Class C and Class N shares. Because 12b-1 fees are paid out of Fund assets on an ongoing basis, they will, over time, increase the cost of investment and may cost more than other types of sales charges. Long-term shareholders of Class B and Class C shares and Class N shares of the Ready Reserves Fund may pay more than the economic equivalent of the maximum initial sales charges permitted by the National Association of Securities Dealers, although the Distributor believes that it is unlikely, in the case of Class B Shares, because of the automatic conversion feature of those shares. 49 115 SHAREHOLDER SERVICES AGREEMENT Each Fund has entered into a Shareholder Services Agreement with the Distributor that provides for fees as an expense of the Class A, Class B and Class C shares that are used by the Distributor to pay for shareholder services provided to shareholders of these classes. SPECIAL FEATURES CLASS A SHARES--COMBINED PURCHASES. Each Fund's Class A shares (or the equivalent) may be purchased at the rate applicable to the discount bracket attained by combining concurrent investments in Class A shares of William Blair Funds. CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A shares also apply to the aggregate amount of purchases made by any purchaser within a 12-month period under a written Letter of Intent ("Letter") provided by the Distributor. The Letter, which imposes no obligation to purchase or sell additional Class A shares, provides for a price adjustment depending upon the actual amount purchased within such period. CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of a Fund may also be purchased at the rate applicable to the discount bracket attained by adding to the cost of shares of a Fund being purchased, the value of all Class A shares of the above mentioned William Blair Funds (computed at the maximum offering price at the time of the purchase for which the discount is applicable) already owned by the investor. CLASS A SHARES--LARGE ORDER NAV PURCHASE PRIVILEGE. Class A shares of a Fund may be purchased at net asset value by any purchaser provided that the amount invested in such Fund or other William Blair Funds totals at least $1,000,000 including purchases of Class A shares pursuant to the "Combined Purchase," "Letter of Intent" and "Discount" features described above (the "Large Order NAV Purchase Privilege"). EXCHANGE PRIVILEGE--GENERAL. Shareholders of Class A, Class B, Class C and Class I shares may exchange their shares for shares of the corresponding class of a Fund. For purposes of determining whether the 15-Day Hold Policy applies to a particular exchange, the value of the shares to be exchanged is computed by aggregating the value of shares being exchanged for all accounts under common control, direction or advice, including without limitation accounts administered by a financial services firm offering market timing, asset allocation or similar services. For purposes of determining any contingent deferred sales charge that may be imposed upon the redemption of the shares received on exchange, amounts exchanged retain their original cost and purchase date. CLASS A SHARES PUBLIC OFFERING PRICE Net asset value per share plus the following sales charge:
EQUITY FUNDS SALES CHARGE DEALER REALLOWANCE --------------------------------- ------------------ AS A % OF AS A % OF NET AS A % OF AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED* OFFERING PRICE - ------------------ -------------- ---------------- ------------------ $0--$49,999................ 5.75% 6.10% 5.00% $50,000--$99,999........... 4.50% 4.71% 3.75% $100,000--$249,999......... 3.50% 3.63% 2.75% $250,000--$499,999......... 2.50% 2.56% 2.00% $500,000--$999,999......... 2.00% 2.04% 1.75% $1 million and over**...... 0.00% 0.00% 1.00%
- --------------- * Rounded to the nearest one hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. 50 116
EQUITY FUNDS SALES CHARGE DEALER REALLOWANCE --------------------------------- ------------------ AS A % OF AS A % OF NET AS A % OF AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED* OFFERING PRICE - ------------------ -------------- ---------------- ------------------ $0--$49,999................ 2.00% 2.04% 1.75% $50,000--$99,999........... 2.00% 2.04% 1.75% $100,000--$249,999......... 1.50% 1.52% 1.25% $250,000--$499,999......... 1.50% 1.52% 1.25% $500,000--$999,999......... 1.00% 1.01% 0.75% $1 million and over**...... 0.00% 0.00% 0.50%
- --------------- * Rounded to the nearest one hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. NAV PURCHASES Class A shares of a Fund may be purchased at net asset value by: - - shareholders in connection with the investment or reinvestment of income dividends and capital gain distributions; - - a participant-directed qualified retirement plan or a participant-directed non-qualified deferred compensation plan or a participant-directed qualified retirement plan, provided in each case that such plan has not less than 200 eligible employees; - - any purchaser with investment totals in the Funds of at least $1,000,000; - - in connection with the acquisition of the assets of or merger or consolidation with another investment company; and - - certain investment advisers registered under the Investment Advisers Act of 1940 and other financial services firms, acting solely as agent for their clients, that adhere to certain standards established by the Distributor. CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge may be imposed upon redemption of Class A shares purchased under the Large Order NAV Purchase Privilege as follows: for all Funds (except the Income Fund), 1.00% if they are redeemed within one year of purchase and 0.50% if they are redeemed during the second year following purchase; for the Income Fund, 0.50% if they are redeemed within one year of purchase. The charge will not be imposed upon redemption of reinvested dividends or share appreciation. The charge is applied to the value of the shares redeemed, excluding amounts not subject to the charge. The contingent deferred sales charge will be waived in the event of: - - redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA account (with the maximum amount subject to this waiver being based only upon the shareholder's William Blair IRA accounts); - - redemptions made pursuant to any IRA systematic withdrawal based on the shareholder's life expectancy including, but not limited to, substantially equal periodic payments described in Code; Section 72(t)(2)(A)(iv) prior to age 59 1/2; - - redemptions under a Fund's Systematic Withdrawal Plan at the maximum of 10% per year of the net asset value of the account; - - the redemption of shares of a shareholder (including a registered joint owner) who has died; 51 117 - - redemption of shares of a shareholder (including a registered joint owner) who after purchase of the shares being redeemed becomes totally disabled (as evidenced by a determination by the federal Social Security Administration); - - redemptions by a participant-directed qualified retirement plan or a participant-directed non-qualified deferred compensation plan, provided in each case that such plan has not less than 200 eligible employees; and - - the redemption of shares whose dealer of record at the time of the investment notifies the Distributor that the dealer waives the commission applicable to such Large Order NAV Purchase Privilege. DISTRIBUTION (RULE 12b-1) FEE None SHAREHOLDER SERVICES FEE 0.25% EXCHANGE PRIVILEGE Class A shares of a Fund may be exchanged for the Class A shares of another Fund at their relative net asset values. Class A shares purchased under the Large Order NAV Purchase Privilege may be exchanged for Class A shares of any William Blair Mutual Fund without paying any contingent deferred sales charge. If the Class A shares received on exchange are redeemed thereafter, a contingent deferred sales charge may be imposed. 52 118 CLASS B SHARES PUBLIC OFFERING PRICE Net asset value per share without any sales charge at the time of purchase. CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge may be imposed upon redemption of Class B shares. There is no such charge upon redemption of any share appreciation or reinvested dividends. The sales charge is applied to the value of the shares redeemed, excluding amounts not subject to the charge. The charge is computed at the following rates applied to the value of the shares redeemed excluding amounts not subject to the charge. EQUITY FUNDS:
YEAR OF REDEMPTION AFTER PURCHASE: FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH - --------------- ----- ------ ----- ------ ----- ----- ------- Contingent Deferred Sales Charge:.......................... 5.00% 4.00% 3.00% 3.00% 2.00% 1.00% 0.00%
INCOME FUND:
YEAR OF REDEMPTION AFTER PURCHASE: FIRST SECOND THIRD FOURTH FIFTH SIXTH SEVENTH - --------------- ----- ------ ----- ------ ----- ----- ------- Contingent Deferred Sales Charge:.......................... 2.00% 1.00% 0.00% 0.00% 0.00% 0.00% 0.00%
The contingent deferred sales charge will be waived in the event of: - - redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA account (with the maximum amount subject to this waiver being based only upon the shareholder's William Blair IRA accounts); - - redemptions made pursuant to any IRA systematic withdrawal based on the shareholder's life expectancy including, but not limited to, substantially equal periodic payments described in Code; Section 72(t)(2)(A)(iv) prior to age 59 1/2; - - redemptions made pursuant to a Fund's Systematic Withdrawal Plan for up to 10% per year of the net asset value per year of the account; - - the total disability (as evidenced by a determination by the federal Social Security Administration) of the shareholder (including a registered joint owner) occurring after the purchase of the shares being redeemed; and - - the redemption of shares of a shareholder (including a registered joint owner) who has died. DISTRIBUTION (RULE 12b-1) FEE 0.75% SHAREHOLDER SERVICES FEE 0.25% CONVERSION FEATURE Class B shares of a Fund will automatically convert to Class A shares of the same Fund at the end of the seventh year after purchase for equity funds and at the end of the third year after purchase for the Income Fund after issuance on the basis of the relative net asset value per share. Shares purchased through the reinvestment of dividends and other distributions paid with respect to Class B shares in a shareholder's account will be converted to Class A shares on a pro rata basis. EXCHANGE PRIVILEGE Class B shares of a Fund may be exchanged for Class B Shares of another Fund at their relative net asset values without a contingent deferred sales charge. However, for shares exchanged from the Income Fund into an equity fund, the shares will be treated according to the equity fund schedule based upon the date purchased into the Income Fund. 53 119 CLASS C SHARES PUBLIC OFFERING PRICE Net asset value per share without any sales charge at the time of purchase. CONTINGENT DEFERRED SALES CHARGE A contingent deferred sales charge of 1.00% may be imposed upon redemption of Class C shares redeemed within one year of purchase. The charge will not be imposed upon redemption of reinvested dividends or share appreciation. The charge is applied to the value of the shares redeemed, excluding amounts not subject to the charge. The contingent deferred sales charge will be waived in the event of: - - redemptions by a participant-directed qualified retirement plan described in Code Section 401(a) or a participant-directed non-qualified deferred compensation plan described in Code Section 457; - - the redemption of shares of a shareholder (including a registered joint owner) who has died; - - the redemption of shares of a shareholder (including a registered joint owner) who after purchase of the shares being redeemed becomes totally disabled (as evidenced by a determination by the federal Social Security Administration); - - redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per year of the net asset value of the account; - - the redemption of shares by an employer sponsored employee benefit plan that offers funds in addition to William Blair Funds and whose dealer of record has waived the advance of the first year administrative service and distribution fees applicable to such shares and agrees to receive such fees quarterly; and - - the redemption of shares purchased through a dealer-sponsored asset allocation program maintained on an omnibus record-keeping system provided the dealer of record has waived the advance of the first year administrative services and distribution fees applicable to such shares and has agreed to receive such fees quarterly. DISTRIBUTION (RULE 12b-1) FEE 0.75% SHAREHOLDER SERVICES FEE 0.25% CONVERSION FEATURE None EXCHANGE PRIVILEGE Class C shares of a Fund may be exchanged for the Class C shares of another Fund at their relative net sales values without a contingent deferred sales charge. However, for shares exchanged from the Income Fund into an equity fund, the shares will be treated according to the equity fund schedule based upon the date purchased into the Income Fund. 54 120 CLASS I SHARES PUBLIC OFFERING PRICE Net asset active without any sales change at the time of purchase. CONTINGENT DEFERRED SALES CHARGE None DISTRIBUTION (RULE 12B-1) FEE None SHAREHOLDER SERVICES FEE None EXCHANGE PRIVILEGE Class I shares of a Fund may be exchanged for the Class I share of another Fund at their relative net asset value. ELIGIBILITY Class I shares are available for purchase exclusively by the following categories of institutional investors: - - institutional investors (such as qualified retirement plans, wrap fee plans and other programs charging asset-based fees) with $500,000 or more invested in the William Blair Funds. Purchases may be aggregated but must be in an omnibus account; - - clients of William Blair & Company, L.L.C. with $2 million in aggregate assets under management with William Blair & Company, L.L.C.; and - - clients of William Blair & Company, L.L.C. who opened an equity or income fund account prior to September 30, 1999. 55 121 YOUR ACCOUNT - -------------------------------------------------------------------------------- HOW TO BUY SHARES (By Mail, by Wire or by Telephone) MINIMUM INVESTMENTS. To open an account, the minimum initial investment for regular accounts is $5,000, and the minimum initial investment for Individual Retirement Accounts ("IRAs") is $2,000. To add to an account, the minimum subsequent investment is generally $1,000 for all Funds, except the Ready Reserves Fund, for which the subsequent minimum investment is $1.00. The Funds 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 trustees, principals, officers or employees of the Trust or the Adviser. PURCHASE PRICE. All Funds are sold at their public offering price, which is the net asset value per share that is next computed after receipt of your order in proper form by the Distributor, the Transfer Agent or a designated agent thereof plus, with regard to the Class A shares of each Fund, an initial sales charge. For the Ready Reserves Fund, shares are sold at the net asset value per share that is next computed after receipt of your order in proper form by the Distributor, the Transfer Agent or a designated agent thereof. The net asset value per share of the Ready Reserves Fund normally will be $1.00. (For more information, see "Determination of Net Asset Value.") If you fail to pay for your order, you will be liable for any loss to the Funds and, if you are a current shareholder, the Funds may redeem some or all of your shares to cover such loss. NOTE: All purchases made by check should be in U.S. dollars and made payable to William Blair Funds, or in the case of a retirement account, the custodian or trustee of such account. Third party checks will not be accepted. When purchases are made by check or periodic account investment, the Funds may delay sending redemption proceeds until they determine that collected funds have been received for the purchase of such shares, which may be up to 15 calendar days. RIGHT TO REJECT YOUR PURCHASE ORDER. The Trust reserves the right to decline your purchase order (including exchanges) upon receipt for any reason, including excessive, short-term (market-timing) or other abusive trading practices which may disrupt portfolio management strategies and harm Fund performance. The Trust also reserves the right to delay delivery of redemption proceeds--up to seven days--or to honor certain redemptions with securities, rather than cash. CLASS A, B AND C SHARES. You may open a new account and purchase additional shares by contacting the securities dealer or other financial services firm from whom you received the prospectus. CLASS I SHARES. For those who are eligible to purchase Class I shares, you may open a new account and purchase additional shares by contacting the securities dealer or other financial services firm from whom you received this prospectus or you may purchase shares directly from the Company by mail, by wire or by telephone as described below. CLASS N SHARES OF READY RESERVES FUND. The Class N shares of the Ready Reserves Fund offered herein are offered only to investors who acquire the shares directly through the Fund's distributor or through a select number of financial intermediaries with whom the distributor has entered into selling agreements specifically authorizing them to sell Class N shares. You may purchase shares by mail, by wire or by telephone as described below. BY MAIL OPENING AN ACCOUNT. To open a new account for Class I shares of the Funds by mail, make out a check for the amount of your investment, payable to "William Blair Funds" Complete the account application included with this Prospectus and mail the completed application and the check to the Transfer Agent, State Street Bank and Trust Company ("State Street"), P.O. Box 8506, Boston, Massachusetts 02266-8506. For the Ready Reserves Fund, send your check and completed application to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To purchase additional Class I shares, make out a check for the amount of your investment, payable to "William Blair Funds" Except for the Ready Reserves Fund, mail the check, together with a letter that specifies the portfolio name, the account number and the name(s) in which the account is registered, to State Street Bank and Trust Company, P.O. Box 8506, Boston, Massachusetts 02266-8506. 56 122 For the Ready Reserves Fund, send your check and letter to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. BY WIRE OPENING AN ACCOUNT. For Class I shares of the Funds and Class N of the Ready Reserves Fund, first, call State Street at 1-800-635-2886 (in Massachusetts, 1-800-635-2840) for an account number. Then instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 Include the name of the Fund in which you are investing, your assigned account number and the name(s) in which the account is registered. Finally, complete the account application, indicate the account number assigned to you by State Street and mail it to William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To add to your Class I share account or Ready Reserves Fund Class N share account by wire, instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 In your request, specify the Fund name in which you are investing, your account number, and the name(s) in which the account is registered. To add to an existing account by wire transfer of funds, you must have selected this option on your account application. BY TELEPHONE OPENING AN ACCOUNT. See "By Wire." ADDING TO AN ACCOUNT. Call State Street at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). For the Ready Reserves Fund only, call your William Blair account executive. Tell your account executive the Fund name, your account number and the name(s) in which the account is registered. You may then pay for your new shares by mail or by wire. To add to an existing account by telephone, you must have selected this option on your account application. HOW TO SELL SHARES (By Mail, by Wire or by Telephone) CLASS A, B AND C SHARES. Contact your securities dealer or other financial services firm to arrange for share redemption. Any shareholder may require a fund to redeem his or her shares. When shares are held for the account of a shareholder by the funds' transfer agent, the shareholder may redeem them by sending a written request with signatures guaranteed to the Transfer Agent, State Street Bank and Trust Company, P.O. Box 8506, Boston, Massachusetts. CLASS I SHARES. Contact your securities dealer or other financial services firm to arrange for share redemption or you may give instructions to redeem your shares directly to the Company by mail, by wire or by telephoned, as described below. CLASS N SHARES OF READY RESERVES FUND. Class N shareholders of the Ready Reserves Fund may redeem shares by mail, by wire or by telephone, as described below. 57 123 BY MAIL To redeem Class I shares by mail, send a written redemption request signed by all account owners to State Street Bank and Trust Company, P.O. Box 8506, Boston, Massachusetts 02266-8506. For the Ready Reserves Fund, send your redemption request signed by all account owners to the Distributor, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, to the attention of your account executive. Amounts redeemed will be placed in your William Blair brokerage account. FOR ALL FUNDS, WRITTEN REDEMPTION REQUESTS MUST INCLUDE: -- a letter that contains your name, the Fund's name and the dollar amount or number of shares to be redeemed; and -- any other necessary documents, such as an inheritance tax consent or evidence of authority (for example, letters testamentary), dated not more than 60 days prior to receipt thereof by State Street or the Distributor. BY WIRE To redeem some or all of your Class I shares in any Funds or Class N shares of the Ready Reserves Fund by wire, you may contact the Transfer Agent, or the Distributor in the case of the Ready Reserves Fund; by mail or telephone, as explained herein. To redeem by wire, you must have elected this option on your account application and attached to the application a voided, unsigned check or deposit slip for your bank account. BY TELEPHONE TO REDEEM SHARES BY TELEPHONE, YOU MUST HAVE ELECTED THIS OPTION ON YOUR ACCOUNT APPLICATION. For Class I shares, contact the Transfer Agent at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). For the Ready Reserves Fund, you may redeem some or all of your shares by telephone by calling your William Blair account executive. Amounts redeemed will be placed in your brokerage account. NOTE: Redemption requests should NOT be sent to the Trust or to the Distributor (except in the case of the Ready Reserves Fund). SIGNATURE GUARANTEES. Signature guarantees must be obtained from a bank that is a member of the FDIC, by a brokerage firm that is a member of the NASD, or by an eligible guarantor who is a member of, or a participant in, a signature guarantee program. Your redemption request must include a signature guarantee if any of the following situations apply: -- You wish to redeem shares having a value of $5,000 or more in a single transaction; -- Your account registration has changed; or -- You want a check in the amount of your redemption to be mailed to a different address than the one on your account application (address of record). SIGNATURE GUARANTEES, IF REQUIRED, MUST APPEAR ON THE WRITTEN REDEMPTION REQUEST AND ON ANY ENDORSED STOCK CERTIFICATE OR STOCK POWER. REDEMPTION PRICE. The redemption price that you receive for your shares may be more or less than the amount that you originally paid for them, depending upon their net asset value next calculated after receipt of your redemption request, in proper order, by the Distributor, the Transfer Agent or a designated agent thereof. For the Ready Reserves Fund, the net asset value normally will be $1.00. PAYMENT FOR REDEEMED SHARES. Payment normally will be mailed to you at the address of record for your account by the third business day after receipt by State Street (or, in the case of the Ready Reserves Fund, the Distributor) of a redemption request and any other required documentation and after any checks in payment for your shares have cleared. For the Ready Reserves Fund, if the Distributor receives notice of your request to redeem shares by 9:30 a.m., Chicago time, the redemption will be effected as of that date and proceeds normally will be paid that day. If notice of your redemption request is received after that time, proceeds normally will not be paid until the next business day. 58 124 DELAYED PROCEEDS. The Trust reserves the right to delay delivery of your redemption proceeds--up to seven days--or to honor certain redemptions with securities, rather than cash, as described in the next section. In addition, redemption of shares from a Fund, other than the Ready Reserves Fund, within 180 days of purchase may be subject to a 1.00% redemption fee. REDEMPTIONS IN KIND. If the Adviser determines that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other financial assets, valued for this purpose as they are valued in computing the NAV for each of the Fund's shares. Shareholders receiving securities or other financial assets on redemption may realize a gain or loss for tax purposes, and will incur any costs of sale, as well as the associated inconveniences. Notwithstanding the above, each of the Funds are obligated to redeem shares solely in cash up to the lesser of $250,000 or 1.00% of the net asset value of such Fund during any 90-day period for any one shareholder of record. AUTOMATIC REDEMPTION OF SMALL ACCOUNTS. Because of the relatively high cost of maintaining small accounts, the Trust reserves the right to redeem your shares in any account that, following a redemption, is below a specified amount. Currently, THE MINIMUM IS $5,000 PER ACCOUNT. Before the redemption is processed, you will be notified that the value of your account has fallen below the minimum and allowed to make an additional investment. SPECIAL REDEMPTION METHODS FOR THE READY RESERVES FUND. In addition to the above methods, shares of the Ready Reserves Fund can be redeemed by two other methods unique to this Fund. Redemption requests will be processed after the next daily dividend declaration at the net asset value next determined upon receipt by the Distributor of a proper redemption request. In this way, you will receive the net asset value of your shares and all declared but unpaid dividends on your shares through the date of redemption. 1. REDEMPTION BY CHECK. To redeem shares by check, you must fill out the appropriate section of your account application. If your application for the check-writing privilege is approved, you will be provided with checks that may be made payable to any person IN AN AMOUNT NOT LESS THAN $500 NOR MORE THAN $9 MILLION. There currently is no charge for this service and no limit on the number of checks that you may write; however, these provisions are subject to change. The payee of the check may cash or deposit it like any other check drawn on a bank. When the check is presented for payment, a sufficient number of full and fractional shares from your account will be redeemed at their next-determined net asset value per share, usually $1.00, to cover the amount of the check. This enables you to continue earning daily dividends until the check clears. Canceled checks will be returned to you by State Street. For joint accounts, unless a single signer has been authorized on your account application, checks must be signed by all joint account owners. The Trust may refuse to honor checks whenever the right of redemption has been suspended or postponed or whenever your account is otherwise impaired. For instance, your account would be considered to be impaired when (1) there are insufficient assets to cover the check, (2) a "stop order" has been placed on the check, and (3) in other situations, such as where there is a dispute over ownership of the your account. A $25 SERVICE FEE may be charged when a check is presented to redeem shares in excess of the value of your account or for an amount less than $500. 2. AUTOMATIC REDEMPTION. The Distributor has instituted an automatic redemption procedure available to Ready Reserve Fund shareholders who maintain certain brokerage accounts with it. The Distributor may use this procedure to satisfy amounts due it by you as a result of purchases of securities or other transactions in your brokerage account. Under this procedure, if you so elect, your brokerage account will be scanned at the opening of business each day and, after application of any cash balances in the brokerage account, a sufficient number of shares will be redeemed, effective that day at the next- determined net asset value, to satisfy any amounts which you are obligated to pay to the Distributor. You will receive all dividends declared but unpaid through the date of redemption. HOW TO EXCHANGE SHARES (By Mail or by Telephone) Subject to the following limitations, you may exchange shares of all Class A, B, C and I shares into either shares of each corresponding Class A, B, C and I shares of another Fund at their relative net asset values so long as the shares to be acquired are available for sale in your state of residence. Class N shares of the Ready Reserve Fund 59 125 may be exchanged for Class N shares of each Fund which are offered in a separate prospectus at their relative net asset value so long as the shares to be acquired are available for sale in your state of residence. Only four (4) exchanges from a Fund are allowed within any 12-month period. Exchanges will be effected by redeeming your shares and purchasing shares of the other Fund or Funds requested. Shares of a William Blair Fund with a value in excess of $1,000,000 acquired by exchange from another William Blair Fund may not be exchanged thereafter until they have been owned for 15 days (the "15 Day Hold Policy"). CLASS A, B AND C. Contact your securities dealer or other financial services firm to arrange for share exchanges. CLASS I. Contact your securities dealer or other financial services firm to arrange for share exchange or contact the Company directly by mail or telephone as described below. CLASS N SHARES OF THE READY RESERVES FUND. You may exchange shares by mail or telephone as described below. BY MAIL You may request an exchange of your shares by writing to William Blair Funds, Attention: Exchange Department, P.O. Box 8506, Boston, Massachusetts 02266-8506. BY TELEPHONE You may also exchange your Class I shares of each Fund and Class N shares of the Ready Reserves Fund by telephone by completing the appropriate section on your account application. Once your telephone authorization is on file, State Street will honor your requests to redeem shares by telephone at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). Neither the Trust nor State Street will be liable for any loss, expense or cost arising out of any telephone request pursuant to the telephone exchange privilege, including any fraudulent or unauthorized request, and you will bear the risk of loss, so long as the Trust or the Transfer Agent reasonably believes, based upon reasonable verification procedures, that the telephonic instructions are genuine. The verification procedures include (1) recording instructions, (2) requiring certain identifying information before acting upon instructions and (3) sending written confirmations. DIVIDENDS AND DISTRIBUTIONS INCOME DIVIDENDS. Each Fund earns dividends from stocks and interest from bond, money market, and other investments, which are passed along to shareholders as income dividends as long as expenses do not exceed income. CAPITAL GAIN DISTRIBUTIONS. Each Fund realizes capital gains whenever it sells securities for a higher price than it paid for them, which are passed along to shareholders as capital gain distributions. As a shareholder, you are entitled to your portion of the Fund's net income and gains on its investments. Each Fund passes its earnings along to you as distributions. The Funds' policy is to distribute substantially all net investment income, if any, and all net realized capital gain, if any. All distributions of income and capital gain and any return of capital have the effect of immediately thereafter decreasing net asset value per share. Income dividends and capital gain distributions will be automatically reinvested in additional shares at net asset value on the reinvestment date, unless you specifically request otherwise (see "Shareholder Services and Account Policies--Dividend Options"). Cash payments are made by the Dividend Paying Agent, State Street Bank and Trust Company, shortly following the reinvestment date. WHEN DIVIDENDS ARE PAID -- For the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund, all income dividends, if any, and capital gain distributions, if any, generally will be paid in December and/or January. -- For the Income Fund, income dividends are normally paid the fifteenth day of each month, if a business day, with net-realized long-term capital gain distributions, if any, generally being paid in December and/or January. The Income Fund attempts to maintain relatively level monthly 60 126 dividends and, from time to time, may distribute or retain net investment income and capital gain or make a return of capital distribution in order to pursue that goal. -- For the Ready Reserves Fund, the Fund's net investment income will be declared at the close of the New York Stock Exchange on each day that the Fund is open for business, which is generally 3:00 p.m., Chicago time, as a dividend to shareholders who were of record prior to the declaration. The Funds may vary these dividend practices at any time. Income dividends and any capital gain distributions on all Funds will vary from year to year. Dividends and distributions may be subject to withholding, as required by the Internal Revenue Service (see "Your Account--Taxes"). TAXES As with any investment, you should consider how your investment in a Fund will be taxed. If your account is not a tax-deferred retirement account, you should be aware of these tax implications. TAXES ON DISTRIBUTIONS. Each Fund's distributions are subject to Federal income tax and may also be subject to state or local taxes. Distributions may be taxable at different rates depending upon the length of time the Fund holds the security. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them in additional shares. However, dividends declared 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. The Funds will inform you of the amount and nature of distributions paid. Under the Federal tax laws, income dividends and short-term capital gains distributions are taxed as ordinary income. Long-term capital gain distributions are taxed as long-term capital gains. It is anticipated that a portion of the ordinary income dividends for the Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund will be eligible for the dividends-received deduction available for corporate shareholders. The ordinary income dividends of International Growth Fund, Emerging Markets Growth Fund and Income Fund are not eligible for the dividends-received deduction available to corporate shareholders. TAXES ON TRANSACTIONS. Redemptions of Fund shares and exchanges for shares of other Funds are treated as sales and are subject to capital gains taxation. A capital gain or loss is the difference between the price that you paid for your shares and the price that you receive when you sell (or exchange) them. For the Ready Reserves Fund, so long as a net asset value of $1.00 is maintained, the sale or redemption of your shares will not result in a capital gain or loss. Any loss recognized on the redemption of shares held six months or less will be treated as a long-term capital loss to the extent you have received any long-term capital gain dividends on such shares. A shareholder who redeems shares normally will recognize a capital gain or loss for Federal income tax purposes. If you realize a loss on the redemption of Fund shares within 30 days before or after an acquisition of shares of the same Fund, the two transactions may be subject to the wash sale rules of the Internal Revenue Code, resulting in a postponement of the recognition of such loss for Federal income tax purposes. "BUYING A DIVIDEND." If you buy shares before a Fund deducts a distribution from its net asset value, you will pay the full price for the shares and then receive a portion of the price back in the form of a taxable distribution. See "Your Account--Dividends and Distributions" for payment schedules, and call the Distributor if you have further questions. EFFECT OF FOREIGN TAXES. Investment income received from sources within foreign countries may be subject to foreign income taxes, which generally will reduce a Fund's distributions. However, the United States has entered into tax treaties with many foreign countries that entitle certain investors to a reduced rate of tax or to certain exemptions from tax. Accordingly, the International Growth Fund and Emerging Markets Growth Fund will operate so as to qualify for such reduced tax rates or tax exemptions whenever practicable. For a more detailed discussion of taxes, see the Statement of Additional Information. 61 127 DETERMINATION OF NET ASSET VALUE - -------------------------------------------------------------------------------- WHEN AND HOW NET ASSET VALUE ("NAV") IS DETERMINED A mutual fund's net asset value is the market value of its total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. The net asset value per share shall be determined as of the close of trading on the New York Stock Exchange, which is generally 3:00 p.m., Chicago time (4:00 p.m. Eastern time), on each day when the Exchange is open. In addition, the Ready Reserves Fund does not price its shares on the observance of Columbus Day and Veterans Day. When net asset value is computed, quotations of foreign securities in foreign currencies are converted into the United States dollar equivalents at the prevailing market rates as computed by Investors Bank & Trust Company, the custodian. Trading in securities on exchanges and over-the-counter markets in Europe and the Far East is normally completed at various times prior to 3:00 p.m., Chicago time, the current closing time of the New York Stock Exchange. Trading on foreign exchanges may not take place on every day that the New York Stock Exchange is open. Conversely, trading in various foreign markets may take place on days when the New York Stock Exchange is not open and on other days when net asset value is not calculated. Consequently, calculation of the net asset value for the International Growth Fund and the Emerging Markets Growth Fund may not occur at the same time as determination of the most current market prices of the securities included in the calculation, and the value of the net assets held by the International Growth Fund and the Emerging Markets Growth Fund may be significantly affected on days when shares are not available for purchase or redemption. For the purposes of calculating the net asset value of the Ready Reserves Fund, portfolio securities are valued at their amortized cost, which means their acquisition cost adjusted for the amortization of a premium or discount. HOW THE MARKET VALUE OF FUND SECURITIES IS DETERMINED DOMESTIC EQUITY SECURITIES. The market value of domestic equity securities is determined by valuing securities traded on national securities markets at the last sale price or, in the absence of a recent sale on the date of determination, at the latest bid price. Securities traded only on the over-the-counter market are valued at the latest bid price. FOREIGN EQUITY SECURITIES. The value of a foreign equity security is determined based upon the last sale price on the foreign exchange or market on which it is primarily traded and in the currency of that market, as of the close of the appropriate exchange or, if there have been no sales during that day, at the latest bid price. FIXED-INCOME SECURITIES. Fixed-income securities are valued by using market quotations, independent pricing services that use either prices provided by market-makers or matrixes that produce estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. OTHER SECURITIES AND ASSETS. Other securities, and all other assets, including securities for which a market price is not available, are valued at a fair value as determined in good faith by, or under the direction of, the Board of Trustees and in accordance with the Trust's pricing procedures. 62 128 SHAREHOLDER SERVICES AND ACCOUNT POLICIES - -------------------------------------------------------------------------------- The Funds provide a variety of services to help you manage your account. AUTOMATIC SWEEP PROGRAM. You can purchase shares of the Ready Reserves Fund through an automatic sweep program if you establish a brokerage account with the Distributor, provided that you meet the current minimum brokerage account size requirements. The automatic sweep program helps you to make convenient, efficient use of free credit balances in your William Blair brokerage account. To purchase shares of the Ready Reserves Fund through the automatic sweep program, you must have a free credit balance in your brokerage account with the Distributor. Currently, free credit balances are used automatically to purchase shares. If you have a FREE CREDIT BALANCE OF AT LEAST $1,000, the Distributor will effect on your behalf an investment in shares on an expedited basis. -- If you have a free credit balance resulting from securities transactions in your brokerage account at the opening of business of the Distributor, it generally will be invested in shares on that same day, but in no event later than the next business day. -- If you have a free credit balance resulting from a deposit made prior to 2:00 p.m., Chicago time, or a receipt of income (by check or wire), then it will be invested in shares no later than the next business day. -- If you have a free credit balance of at least $1 and less than $1,000, it will be invested in shares within a maximum of five business days from the day when the free credit balance is created. DIVIDEND OPTIONS. You may choose to have your distributions reinvested in additional shares automatically or paid in cash by making the appropriate election on your account application. You may change your election at any time by providing written notice to State Street. 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN. The Funds automatically reinvest all income dividends and capital gain distributions in additional shares of stock at net asset value on the reinvestment date. (For more information, see "Dividend and Distribution Policy.") 2. CASH-DIVIDEND PLAN. You may choose to have all of your income dividends paid in cash and/or have your capital gain distributions paid in cash. Any distributions you do not elect to have paid in cash will be reinvested automatically in additional shares at net asset value. 3. AUTOMATIC DEPOSIT OF DIVIDENDS. You may elect to have all income dividends and capital gain distributions automatically deposited in a previously established bank account. AUTOMATIC INVESTMENT PLAN. On your account application, you may authorize State Street to automatically withdraw an amount of money (MINIMUM $250) from your bank account on the fifth or twentieth day of each month. This amount will be invested in additional shares. You may change your election at any time by providing written notice to State Street. SYSTEMATIC WITHDRAWAL PLAN. You may establish this plan with shares presently held or through a new investment, which should be at least $5,000. Under this plan, you specify a dollar amount to be paid monthly, quarterly or annually. Shares corresponding to the specified dollar amount are automatically redeemed from your account on the fifth business day preceding the end of the month, quarter or year. While this plan is in effect, all income dividends and capital gain distributions on shares in your account will be reinvested at net asset value in additional shares. There is no charge for withdrawals, but the MINIMUM WITHDRAWAL IS $250 PER MONTH. Depending upon the size of payments requested, and fluctuations in the net asset value of the shares redeemed, redemptions under this plan may reduce or even exhaust your account. RETIREMENT PLANS. The Funds offer a variety of qualified retirement plans, including several types of Individual Retirement Accounts ("IRAs") (e.g. traditional IRAs, Roth IRAs and education IRAs), Simplified Employee Pension Plans ("SEPs") and other qualified retirement plans. Additional information concerning such plans is available from the Funds. 63 129 The minimum initial retirement plan investment is $2,000 and the minimum subsequent investment is $1,000. State Street serves as custodian for IRAs. State Street charges a $5 plan establishment fee, an annual $15 custodial fee and a $10 fee for each lump sum distribution from a plan. These fees may be waived under certain circumstances. With regard to retirement plans: -- participation is voluntary; -- you may terminate or change a plan at any time without penalty or charge from the Funds; -- the Funds will pay any additional expenses that they incur in connection with such plans; -- on your account application, you may select a plan or plans in which to invest; -- additional forms and further information may be obtained by writing or calling the Funds; -- the Funds reserve the right to change the minimum amounts for initial and subsequent investments or to terminate any of the plans; -- the Funds reserve the right to waive investment minimums at the discretion of the Distributor; and -- the Funds require a copy of the trust agreement when shares are to be held in trust. WRITTEN CONFIRMATIONS. Each purchase, exchange or redemption transaction is confirmed in writing to the address of record by giving details of the purchase or redemption. USE OF INTERMEDIARIES. If you purchase or redeem shares through an investment dealer, bank or other institution, that institution may impose charges for its services. These charges would reduce your yield or return. You may purchase or redeem shares directly from the Fund or with the Transfer Agent, State Street Bank, without any such charges. TRANSFER OF SHARES. Fund shares may be transferred by a written request addressed to the Trust and delivered to State Street, giving the name and social security or taxpayer identification number of the transferee and accompanied by the same signature guarantees and documents as would be required for a redemption, together with specimen signatures of all transferees. SUSPENSION OF OFFERING. The Trust reserves the right to withdraw all or any part of the offering made by this Prospectus, and the Trust or the Distributor may reject purchase orders. From time to time, the Trust may temporarily suspend the offering of shares to new investors. During the period of such suspension, persons who are already shareholders of a Fund may be permitted to continue to purchase additional shares of the Fund, to have dividends reinvested and to make redemptions. CONSULTATION WITH A PROFESSIONAL TAX ADVISER IS RECOMMENDED, both because of the complexity of Federal tax laws and because various tax penalties are imposed for excess contributions to, and late or premature distributions from, IRAs or other qualified retirement plans. Termination of a plan shortly after its adoption may have adverse tax consequences. SHAREHOLDER RIGHTS. All shares of each Fund have equal rights with respect to dividends, assets and liquidation of a Fund and equal, noncumulative voting rights. Noncumulative voting rights allow the holder or holders of a majority of shares, voting together for the election of trustees, to elect all the trustees. All shares of each Fund will be voted in the aggregate, except when a separate vote by Fund is required under the Investment Company Act of 1940 (the "1940 Act"). Shares are fully paid and nonassessable when issued, are transferable without restriction, and have no preemptive or conversion rights. Under Delaware law, the Trust is not required to hold shareholder meetings on an annual basis. As required by law, the Funds will, however, hold shareholder meetings when a sufficient number of shareholders request a meeting, or as deemed desirable by the Board of Trustees, for such purposes as electing or removing directors, changing fundamental policies or approving an investment management agreement. (For additional information about shareholder voting rights, see the Statement of Additional Information.) 64 130 INVESTMENT GLOSSARY - -------------------------------------------------------------------------------- The following glossary explains some of the types of securities in which the Funds may invest, investment techniques they may employ, and some of the related risks. For more information, please see the Statement of Additional Information. BORROWING. To a certain extent, each Fund may borrow money from banks for limited purposes to the extent allowable under the 1940 Act. The Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund, International Growth Fund, Emerging Markets Growth Fund, Disciplined Large Cap Fund and Value Discovery Fund may borrow up to 10% of their total assets; the Income Fund and Ready Reserves Fund may borrow up to 5% of their total assets. Most borrowing is intended only as a temporary measure for extraordinary or emergency purposes, such as to help meet redemption requests, and not for leverage purposes. COLLATERALIZED OBLIGATIONS. The Income Fund may invest in collateralized obligations (debt securities issued by a corporation, trust or custodian or by a U.S. Government agency or instrumentality), that are collateralized by a portfolio or pool of assets, such as mortgages, mortgage-backed securities, debit balances on credit card accounts or U.S. Government securities. The issuer's obligation to make interest and/or principal payments is secured by the underlying pool or portfolio of securities. A variety of types of collateralized obligations are available currently, and others may become available in the future. Some obligations are for the guaranteed payment of only principal (the principal-only or "PO" class) or only interest (the interest-only or "IO" class), while others are for the guaranteed payment of both, or some variation thereof. The yields to maturity on PO and IO class obligations are more sensitive than other obligations, with the IO class obligations being extremely sensitive to the rate of principal payments (including prepayments) on the related underlying assets. The Fund will invest only in PO and IO class mortgage obligations collateralized by securities guaranteed by the U.S. Government. Some types of collateralized obligations may be less liquid than other types of securities. Investments in collateralized obligations that are deemed to be illiquid, which includes PO and IO class mortgage obligations, will be subject to the 15% limitation on illiquid assets. The mortgage-backed collateralized obligations in which the Fund may invest include pools of mortgage loans assembled for sale to investors by various governmental agencies, such as the Government National Mortgage Association ("GNMA") and government-related organizations such as the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Payments of principal and/or interest on such mortgages, including prepayments, are guaranteed by the agency or instrumentality. The agencies and instrumentalities are subject to varying degrees of support by the U.S. Government. The effective credit quality of collateralized obligations is the credit quality of the collateral. The requirements as to collateralization are determined by the issuer or sponsor of the collateralized obligation in order to satisfy rating agencies. These collateralized obligations generally have excess collateral, but typically, any guarantee is limited to a specified percentage of the pool of assets. The potential for appreciation in the event of a decline in interest rates may be limited or negated by increased principal prepayments by certain mortgage-backed securities, such as GNMA Certificates and other collateralized obligations. During periods of declining interest rates, mortgages underlying the security are prone to prepayment, causing the security's effective maturity to be shortened. Prepayment of high interest rate mortgage-backed securities during times of declining interest rates will tend to lower the return of the Fund and may even result in losses to the Fund 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 Fund is dependent upon the accuracy of the prepayment projections used, which are a consensus derived from several major securities dealers. The duration of many mortgage-backed securities changes substantially in response to changes in interest rates and prepayment rates. CONCENTRATION. Each of the Funds intends to invest not more than 25% of its net assets in any one industry, however, the Ready Reserves Fund may invest more than 25% of its net assets in the domestic banking industry. These limitations do not apply to obligations issued or guaranteed by the U.S. Government, its agencies and instrumentalities or to instruments, such as repurchase agreements, secured by these instruments or in tax-exempt securities or certificates of deposit. 65 131 DEPOSITORY RECEIPTS. All of the Funds except the Income Fund and Ready Reserves Fund may invest in foreign issuers through sponsored American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs"). Generally, an ADR is a dollar-denominated security issued by a U.S. bank or trust company that represents, and may be converted into, the underlying foreign security. An EDR represents a similar securities arrangement but is issued by a European bank and a GDR is issued by a depository. ADRs, EDRs and GDRs may be denominated in a currency different from the underlying securities into which they may be converted. Typically, ADRs, in registered form, are designed for issuance in U.S. securities markets, and EDRs and GDRs, in bearer form, are designed for issuance in European securities markets. Investments in depository receipts entail risks similar to direct investments in foreign securities. These risks are detailed in the sections on "Investment Risks" under the "International Growth Fund" and "Emerging Markets Growth Fund" above and in the Statement of Additional Information. DIVERSIFICATION. Each Fund will not purchase the securities of any issuer if, as a result, more than 5% of its total assets would be invested in such issuer. For the Value Discovery Fund and Emerging Markets Growth Fund, that limitation applies to 75% of the Fund's net assets. In addition, each Fund will not purchase more than 10% of the outstanding voting securities of any issuer. These limitations do not apply to U.S. Government securities or to government agency or instrumentality securities. FOREIGN CURRENCY FUTURES. The International Growth Fund and Emerging Markets Growth Fund may purchase and sell futures on foreign currencies as a hedge against possible variation in foreign exchange rates. Foreign currency futures contracts are traded on boards of trade and futures 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 Fund engages in foreign currency futures transactions, but fails to consummate its obligations under the contract, the net effect to the Fund would be the same as speculating in the underlying futures contract. Futures contracts entail certain risks. If the Adviser's judgment about the general direction of rates or markets is wrong, the Fund'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 the 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 to meet margin requirements, distortions in the normal relationship between the securities and futures markets could result. In addition, because margin requirements in the future markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to price distortions in the futures market and an imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of market trends by the Fund's Adviser may still not result in a successful hedging transaction. The Fund 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 Fund to lose money on the financial futures contracts and also on the value of its portfolio securities. To the extent required to comply with the Investment Company Act of 1940 (the "1940 Act") and the rules and interpretations thereunder, whenever the Fund enters into a futures contract, the Fund will maintain a segregated account consisting of either cash or liquid securities equal to the Fund's potential obligation under such contracts. The segregation of assets places a practical limit on the extent to which the Fund may engage in futures contracts. To the extent required to comply with CFTC Rule 4.5 and in order to avoid "commodity pool operator" status, each Fund will not enter into a financial futures contract if immediately thereafter the aggregate initial margin and premiums for such contracts held by the Fund would exceed 5% of the liquidation value of the Fund's assets. The Fund will not engage in transactions in financial futures contracts for speculation, but only in an attempt to hedge against changes in interest rates or market conditions affecting the value of securities that the Fund holds or intends to purchase. FORWARD FOREIGN CURRENCY TRANSACTIONS. The International Growth Fund and Emerging Markets Growth Fund may enter into forward foreign currency contracts as a means of managing the risks associated with changes in 66 132 exchange rates. A forward foreign currency contract is an agreement to exchange U.S. dollars for foreign currencies at a specified future date and specified amount which is set by the parties at the time of entering into the contract. The Adviser will generally use such currency contracts to fix a definite price for securities they have agreed to buy or sell and may also use such contracts to hedge the Fund's investments against adverse exchange rate changes. Alternatively, the Funds may enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Adviser believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which securities of the Fund 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, a Fund 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 Funds will not enter into forward foreign currency transactions for speculative purposes. ILLIQUID SECURITIES. Each Fund, except the Ready Reserves Fund, may invest up to 15% of their net assets in illiquid securities. The Ready Reserves Fund may invest up to 10% of its net assets in illiquid securities. Illiquid securities are those securities that are not readily marketable, including restricted securities and repurchase obligations maturing in more than seven days. INVESTMENT COMPANIES. Subject to the provisions of the 1940 Act, the Growth Fund, Value Discovery Fund, International Growth Fund and Emerging Markets Growth Fund may each invest in the shares of investment companies. Investment in other investment companies may provide advantages of diversification and increased liquidity; however, there may be duplicative expenses, such as advisory fees or custodial fees. 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. In addition, investments in unit trusts and country funds permit investments in foreign markets that are smaller than those in which the Fund would ordinarily invest directly. Investments in such pooled vehicles should enhance the geographical diversification of the Fund's assets, while reducing the risks associated with investing in certain smaller foreign markets. Investments in such vehicles will provide increased liquidity and lower transaction costs than are normally associated with direct investments in such markets; however, there may be duplicative expenses, such as advisory fees or custodial fees. PORTFOLIO TURNOVER RATE. None of the Funds intend to trade portfolio securities for the purpose of realizing short-term profits. However, each will adjust its portfolio as considered advisable in view of prevailing or anticipated market conditions and the Fund's investment objective, and there is no limitation on the length of time securities must be held by the Fund prior to being sold. Fund turnover rate will not be a limiting factor for a Fund. Although each Fund's turnover rate will vary from year to year, it is anticipated that each Fund's turnover rate, under normal circumstances, will be less than 100%. A higher portfolio turnover rate would involve correspondingly higher transaction costs, which would be borne directly by each Fund. REAL ESTATE INVESTMENT TRUSTS. Although the Value Discovery Fund currently does not invest primarily in real estate investment trusts ("REITs"), the Fund may invest without limit in REITs. REITs are subject to volatility from risks associated with investments in real estate and investments dependent on income from real estate, such as fluctuating demand for real estate and sensitivity to adverse economic conditions. In addition, the failure of a REIT to continue to qualify as a REIT for tax purposes would have an adverse effect upon the value of an investment in that REIT. REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements. Repurchase agreements are instruments under which a Fund acquires ownership of a security, and the seller, 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 Fund's holding period. The Funds currently intend to enter into repurchase agreements only with member banks of the Federal Reserve System or with primary dealers in U.S. Government securities. In all cases, the Adviser, subject to the supervision of the Board of Trustees, 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 Fund could incur expenses and delays enforcing its 67 133 rights under the agreement, and experience a decline in the value of the underlying securities and loss of income. The maturity of a security subject to repurchase may exceed one year, and, for the Income Fund, the modified duration of a security subject to repurchase may exceed eight years. Repurchase agreements maturing in more than seven days, together with any securities that are restricted as to disposition under the federal securities laws or are otherwise considered to be illiquid, will not exceed 15% of the net assets of the Growth Fund, Value Discovery Fund, International Growth Fund, Emerging Markets Growth Fund and Income Fund and 10% of the net assets of the Ready Reserves Fund. SECTION 4(2) PAPER. The Ready Reserves Fund and Income Fund may invest in commercial paper issued in reliance upon the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Exchange Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the Federal securities laws, and generally is sold to institutional investors such as the Fund. Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper normally is resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in the Section 4(2) paper, thus providing liquidity. The Adviser considers the legally restricted but readily saleable Section 4(2) paper to be liquid; however, pursuant to the procedures approved by the Fund's Board of Trustees, if a particular investment in Section 4(2) paper is not determined to be liquid, that investment will be included within the limitation on illiquid securities. The Adviser monitors the liquidity of each investment in Section 4(2) paper on a continuing basis. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the ordinary course of business, each Fund may purchase newly issued securities appropriate for the Fund on a "when-issued" basis, and may purchase or sell securities appropriate for the Fund on a "delayed delivery" basis. When-issued or delayed delivery transactions involve a commitment by the Fund to purchase or sell particular securities, with payment and delivery to take place at a future date. These transactions allow the Fund to lock in an attractive purchase price or yield on a security the Fund 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 Fund and, for delayed delivery purchases, no interest accrues to the Fund. Because the Fund is required to set aside cash or liquid securities at least equal in value to its commitments to purchase when-issued or delayed delivery securities, the Adviser's ability to manage the Fund's assets may be affected by such commitments. The Fund 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 it is deemed advisable. VARIABLE RATE SECURITIES. The Ready Reserves Fund may invest in instruments having rates of interest that are adjusted periodically or that "float" continuously or periodically according to formulae intended to minimize fluctuation in values of the instruments ("Variable Rate Securities"). The interest rate on a Variable Rate Security is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's prime rate, the 90-day U.S. Treasury Bill rate or the rate of return on commercial paper or bank certificates of deposit. Generally, the changes in the interest rates on Variable Rate Securities reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Further, the Fund may invest in Variable Rate Securities that have a demand feature entitling the Fund 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 Fund determines the maturity of Variable Rate Securities in accordance with Securities and Exchange Commission rules, which allow the Fund 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, if they have a stated maturity date of one year or less, or if they have demand features prior to maturity. 68 134 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- WILLIAM BLAIR READY RESERVES FUND
YEARS ENDED DECEMBER 31 ------------------------------------------------------ 1998 1997 1996 1995 1994 ---------- -------- -------- -------- -------- Net asset value, beginning of year....... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from investment operations: Net investment income.................. .05 .05 .05 .05 .04 Net realized and unrealized gain (loss) on investments...................... -- -- -- -- (.01) ---------- -------- -------- -------- -------- Total from investment operations......... .05 .05 .05 .05 .03 Less distributions from: Net investment income.................. .05 .05 .05 .05 .04 ---------- -------- -------- -------- -------- Total distributions.................... .05 .05 .05 .05 .04 ---------- -------- -------- -------- -------- Capital contribution..................... -- -- -- -- .01 ---------- -------- -------- -------- -------- Net asset value, end of year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ========== ======== ======== ======== ======== Total return (%)......................... 4.98 5.04 4.81 5.45 3.67(a) Ratios to average net assets (%): Expenses............................... .69 .70 .71 .72 .71 Net investment income.................. 4.87 4.92 4.78 5.30 3.61 Supplemental data: Net assets at end of year (000s)....... $1,189,051 $904,569 $760,808 $703,993 $521,277
- --------------- (a) The total return includes the effect of the adviser's capital contribution. Without the advisers capital contribution, the total return would have been 3.04%. 69 135 FOR MORE INFORMATION More information about the Funds is available without charge, upon request, including the following: SEMI-ANNUAL/ANNUAL REPORTS The Semi-Annual and audited Annual Reports to Shareholders include financial statements, detailed performance information, portfolio holdings and statements from the Fund managers. In the Annual Report, you will find a discussion of the market conditions and investment strategies that the Adviser believes significantly affected the Fund's performance in its last fiscal year. Shareholder reports are incorporated by reference into this Prospectus, which means that they are part of this Prospectus for legal purposes. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Funds. The current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into this Prospectus, which means that it is part of this Prospectus for legal purposes. TO OBTAIN INFORMATION: BY TELEPHONE Call: 1-800-635-2886 (In Massachusetts 1-800-635-2840) BY MAIL Write to: WILLIAM BLAIR FUNDS 222 West Adams Street Chicago, Illinois 60606 or STATE STREET BANK AND TRUST COMPANY (the Fund's Transfer Agent) P.O. Box 8506 Boston, MA 02266-8506 ON THE INTERNET Text-only versions of fund documents can be viewed online or downloaded from the SEC at http://www.sec.gov You can also obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090) or, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Room Section, Washington, D.C. 20549-0102. No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or its distributor. The Prospectus does not constitute an offering by the Trust or its distributor in any jurisdiction in which such offering may not lawfully be made. WILLIAM BLAIR FUNDS December 22, 1999 Investment Company Act File No.: 811-5344 136 December 22, 1999 WILLIAM BLAIR FUNDS ------------------ CLASS I PROSPECTUS READY RESERVES FUND ------------------ This prospectus contains important information about Class I shares of the Ready Reserves Fund, including its investment objectives. For your benefit and protection, please read it before you invest and keep it for future reference. TABLE OF CONTENTS Summary........................................................................1 Financial Highlights...........................................................2 Investment Objectives, Principal Investment Strategies and Risks...............3 Management of the Funds........................................................5 Your Account...................................................................6 How to Buy Shares..............................................................6 How to Sell Shares.............................................................7 How to Exchange Shares.........................................................8 Dividends and Distributions....................................................9 Taxes..........................................................................9 Determination of Net Asset Value..............................................10 Shareholder Services and Account Policies.....................................10 Investment Glossary...........................................................11 For More Information..................................................Back Cover THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WILLIAM BLAIR FUNDS 222 West Adams Street Chicago, Illinois 60606 137 - -------------------------------------------------------------------------------- WILLIAM BLAIR READY RESERVES FUND SUMMARY - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVE: The William Blair Ready Reserves Fund seeks current income, a stable share price and daily liquidity. MAIN INVESTMENT STRATEGIES: The Fund invests primarily in short-term U.S. dollar-denominated domestic money market instruments, which include securities issued by domestic corporations; the U.S. Government, its agencies and instrumentalities; and U.S. banks. The Fund invests exclusively in securities that are high-quality, which means that they are rated in the top 2 investment categories. These instruments are considered to be among the safest investments available because of their short maturities, liquidity and high-quality ratings. The Fund is designed to be highly liquid and seeks to maintain a net asset value of $1.00 per share. The Fund is designed for investors who seek to obtain the maximum current income consistent with the preservation of capital. MAIN RISKS OF INVESTING: Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. As with any money market fund, there is a low risk that the issuers or guarantors of securities will default on the payment of principal or interest or the obligation to repurchase securities from the Fund. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Of course, the skill of the Adviser will play a significant role in the Fund's ability to achieve its investment objective. FUND PERFORMANCE HISTORY ANNUAL TOTAL RETURNS. The bar chart below provides an illustration of how the Fund's performance has varied in each of the last 10 calendar years. The information below provides some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for the years indicated compare with those of a broad measure of market performance. The Fund's past performance does not necessarily indicate how it will perform in the future. [BAR GRAPH]
HIGHEST LOWEST QUARTERLY QUARTERLY 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 RETURN RETURN - ----------------------------------------------------------- --------- --------- 8.86 7.81 5.64 3.32 2.64 3.67 5.45 4.81 5.04 4.98 2.26% (2Q89) 0.64% (2Q93)
AVERAGE ANNUAL TOTAL RETURNS. The following table compares the Fund's average annual total returns for the periods ended December 31, 1998, to a broad-based securities market index.
1 YEAR 5 YEARS 10 YEARS ------ ------- -------- Ready Reserves Fund 4.98% 4.77% 5.22% S&P-rated AAA* 4.97% 4.75% 5.20% - --------------
* The Standard and Poor's-rated AAA Money Market Funds Index is an unmanaged index that includes money market mutual funds rated AAA by Standard and Poor's. Expenses are not included. YIELD: You may obtain the most current yield information for the Fund by calling 1-800-742-7272. 1 138 FEES AND EXPENSES: This section describes the fees and expenses that you may pay if you buy and hold Class I shares of the Fund. SHAREHOLDER FEES. Class I shares are no-load investments, so you will not pay any shareholder fees to buy shares, reinvest dividends in additional shares or exchange into the Class I shares of another Fund. ANNUAL FUND OPERATING EXPENSES are deducted from the Fund's assets. Management Fee...............................................................24% Distribution (Rule 12b-1) Fee.............................................. None Other Expenses...............................................................10% --- Total Annual Fund Operating Expenses........................................34% EXAMPLE: This example is intended to help you compare the cost of investing in Class I shares of the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund, redeem all of your shares at the end of the periods shown, earn a 5% return each year and incur the same operating expenses as shown above. 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $35 $109 $191 $431 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
WILLIAM BLAIR READY RESERVES FUND YEARS ENDED DECEMBER 31 ------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------- ------------ ---------- ------------ --------- Net asset value, beginning of year.................... $1.00 $1.00 $1.00 $1.00 $1.00 Income from investment operations: Net investment income................................ .05 .05 .05 .05 .04 Net realized and unrealized gain (loss) on investments....................................... -- -- -- -- (01) ------ ----- ----- ----- ----- Total from investment operations...................... .05 .05 .05 .05 .03 Less distributions from: Net investment income................................ .05 .05 .05 .05 .04 ------ ------- ------- ------- ------- Total distributions.................................. .05 .05 .05 .05 .04 ------ ------- ------- ------- ------- Capital contribution.................................. .01 ------- Net asset value, end of year.......................... $1.00 $1.00 $1.00 $1.00 $1.00 ===== ===== ===== ===== ===== -- -- -- -- .01 ------ ------ ------ ------- ------ Total return (%)...................................... 4.98 5.04 4.81 5.45 3.67(a) Ratios to average net assets (%): Expenses............................................. .69 .70 .71 .72 .71 Net investment income................................ 4.87 4.92 4.78 5.30 3.61 Supplemental data: Net assets at end of year (000s)..................... $1,189,051 $904,569 $760,808 $703,993 $521,277 - --------------
(a) The total return includes the effect of the Adviser's capital contribution. Without the Adviser's capital contribution, the total return would have been 3.04%. 2 139 - -------------------------------------------------------------------------------- INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RISKS - -------------------------------------------------------------------------------- The Ready Reserves Fund is a series of William Blair Funds, an open-end management investment company. William Blair & Company, L.L.C. (the "Adviser") provides management and investment advisory services to the Fund. The following section takes a closer look at the investment objectives of the Fund, its principal investment strategies and certain related investment risks. In addition, the Statement of Additional Information contains more detailed information about certain of these practices, the potential risks and/or the limitations adopted by the Fund to help manage such risks. All investments, including those in mutual funds, have risks. No investment is suitable for all investors. Of course, there can be no assurance that the Fund will achieve its objective. GOAL AND PRINCIPAL STRATEGIES The Ready Reserves Fund seeks current income, a stable share price and daily liquidity. The Fund invests 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 Fund seeks to maintain a net asset value of $1.00 per share. Nevertheless, there is no guarantee that the objective of the Fund will be achieved or that the net asset value of $1.00 per share of the Fund will be maintained. ADDITIONAL STRATEGIES AND RISKS The Fund will invest exclusively in U.S. dollar-denominated money market instruments, including, but not limited to, those issued by: -- Corporations; -- The U.S. Government, its agencies and instrumentalities; -- U.S. and foreign banks; -- Municipalities; -- Foreign governments; and -- Multinational organizations, such as the World Bank. The yield paid by the Ready Reserves Fund will vary with changes in interest rates. While the Fund seeks to maintain its $1.00 share price, there is no guarantee that it will be able to do so. The Fund has adopted certain investment policies designed to limit the market and financial risks of the Fund. The Fund complies with the requirements of Rule 2a-7 under the Investment Company Act of 1940, which governs the maturity and credit quality of money market funds. The Fund 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 Trustees. However, the Fund may invest up to 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 Trustees, has determined present minimal credit risks. Securities are deemed to be highest grade if they are rated high-quality by two Rating Organizations, or, if only rated by one Rating Organization, rated high-quality by that Rating Organization. For example, commercial paper rated "Duff 1 minus," "Fitch 1," "Prime 1" and "A-1" by Duff & Phelps, Inc., Fitch Investors Service, Inc., Moody's Investors Service, Inc., and Standard & Poor's Corporation, respectively, would be considered high quality. Obligations that are unrated are not necessarily of lower quality than those that are rated, but may be less marketable and, consequently, may provide higher yields. Further, the Fund 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 to the Statement of Additional Information. To the extent the Fund invests in short-term U.S. dollar-denominated foreign money market instruments, investing in foreign securities may involve a greater degree of risk than investing in domestic securities due to the possibility 3 140 of, but not limited to, less publicly available information, more volatile markets, less securities regulation, less favorable tax provisions, war and expropriation. To a limited extent, the Fund may invest in repurchase agreements, Section 4(2) commercial paper, when-issued and delayed delivery securities and variable rate securities, which are more fully described in the Investment Glossary at the end of this prospectus. The Investment Glossary also describes the Fund's policies with regard to borrowing, concentration and diversification. PORTFOLIO MANAGEMENT The Ready Reserves Fund is co-managed by Jim Kaplan and Bentley Myer. Jim Kaplan, an associate of William Blair & Company, L.L.C., has co-managed the Fund since 1999. He joined the firm's Investment Management Department in 1994 as a fixed-income portfolio manager. Prior to that he was with First Union National Bank for twelve years. While at First Union, he traded risk positions in mortgage-backed securities and municipal bonds. In addition, he co-managed the mortgage-backed securities portion of the bank's investment portfolio. He is a member of the Investment Analysts Society of Chicago. Education: B.A., Washington & Lee University and C.F.A. Bentley Myer, a principal with William Blair & Company, L.L.C., has managed the Fund since 1992. He joined the firm in 1991 as a fixed-income portfolio manager. From 1983 to 1991 he was associated with LaSalle National Trust, first as head of fixed-income investments and later as chief investment officer. Prior to that he was head of the municipal investment section of the trust department of Harris Trust and Savings Bank. He is currently a Trustee of Delnor Community Hospital as well as a member of the Investment Analysts Society of Chicago. Education: B.A., Middlebury College; M.B.A., Wharton School of the University of Pennsylvania. 4 141 MANAGEMENT OF THE FUNDS TRUSTEES, OFFICERS AND ADVISER. The Board of Trustees of William Blair Funds (the "Trust") has overall management responsibility. The duties of the directors and officers of the Trust include supervising the business affairs of the Trust, monitoring investment activities and practices and considering and acting upon future plans for the Trust. The Statement of Additional Information has the names of and additional information about the directors and officers of the Trust. The Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606, is responsible for providing investment advisory and management services to the Trust, subject to the direction of the Board of Trustees. The Adviser is also the principal underwriter and distributor of the Trust and acts as agent of the Trust in the sale of its shares (the "Distributor"). William Blair & Company, L.L.C. was founded over 60 years ago by William McCormick Blair. Today, the firm has 150 principals and 750 employees. The main office in Chicago houses all research and investment management services. The Investment Management Department oversees the assets of the William Blair Funds, along with corporate pension plans, endowments and foundations and individual accounts. The department currently manages approximately $12 billion in equities, fixed-income securities and cash equivalents. The Adviser firmly believes that clients are best served when portfolio managers are encouraged to draw on their experience and develop new ideas. This philosophy has helped build a hard-working, results-oriented team of over 30 portfolio managers, supported by over 40 analysts, with an exceptionally low turnover rate. William Blair portfolio managers generally average more than ten years with William Blair and more than two decades of experience in the investment industry. The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940. For the most recently completed fiscal year, the Ready Reserves Fund paid the Adviser a monthly investment management fee of 0.24% of the Fund's average net assets. CUSTODIAN. The Custodian is Investors Bank and Trust Company, 200 Clarendon Street, Boston, Massachusetts 02117. The Custodian is responsible for custody of portfolio securities, fund accounting and calculation of the Fund's net asset value. TRANSFER AGENT AND DIVIDEND PAYING AGENT. The Transfer Agent and Dividend Paying Agent is Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. YEAR 2000. A critical issue has emerged in the investment services industry and for the economy overall regarding how existing application software programs and operating systems can accommodate the date value for the year 2000. Many existing application software products in the marketplace were designed only to accommodate a two- digit date position which represents the year (e.g., "95" is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., "99") could be the maximum date value these systems will be able to accurately process. The Trust is in the process of working with the Adviser and other service providers to assure that the Trust is prepared for the year 2000. The Trust has been assured by the Adviser and other service providers that they do not believe that the Trust will be materially adversely affected by year 2000. Nevertheless, the inability of the Adviser and other service providers to successfully address year 2000 issues could result in interruptions in the Trust's business and have a material adverse effect on the Trust's operations. Year 2000 problems would also increase the risks of a Fund's investments. To assess the potential effect of the year 2000 problem, the Adviser is reviewing information regarding the year 2000 readiness of issuers of securities a Fund may purchase. However, this may be difficult with certain issuers. For example, a Fund that deals with foreign service providers or invests in foreign securities will have difficulty determining the year 2000 readiness of those entities. This is especially true of entities or issuers in emerging markets. The financial impact of these issues for the Funds are still being determined. There can be no assurance that potential year 2000 problems would not have a material adverse effect on the Trust. 5 142 - ------------------------------------------------------------------------------- YOUR ACCOUNT - ------------------------------------------------------------------------------- HOW TO BUY SHARES (By Mail, by Wire or by Telephone) ELIGIBILITY AND MINIMUM INVESTMENT. The Fund is designed primarily for institutional investors. Fund shares may not be purchased directly by individuals, although institutions may purchase shares for accounts maintained by individuals. Generally, each investor is required to open a single account with the Fund for all purposes. In certain cases, the Trust may request investors to maintain separate omnibus accounts for shares held by the investor for its own account, for the account of other institutions and for accounts for which the institution acts as a fiduciary. The minimum initial investment is $10,000,000 or any lesser amount if, in the Trust's opinion, the investor has adequate intent and availability of funds to reach a future level of investment of $10,000,000. There is no minimum for subsequent purchases. The initial investment must be accompanied by the Account Application and corporate resolutions, if applicable. The Trust reserves the right to offer Fund shares without regard to the minimum purchase requirements to qualified or non-qualified employee benefit plans. The Trust does not impose any sales charges in connection with purchases of Fund shares, although Service Agents and other institutions may charge their clients fees in connection with purchases for the accounts of their clients. Service Agents may receive different levels of compensation for selling different classes of shares. The Fund does not issue share certificates. To add to an account, the minimum subsequent investment is $1.00. These minimum amounts may be changed at any time. PURCHASE PRICE. The Fund is sold at its public offering price, which is the net asset value per share that is next computed after receipt of your order in proper form by the Distributor, the Transfer Agent or a designated agent thereof. (For more information, see "Determination of Net Asset Value.") If you fail to pay for your order, you will be liable for any loss to the Fund and, if you are a current shareholder, the Fund may redeem some or all of your shares to cover such loss. NOTE: All purchases made by check should be in U.S. dollars and made payable to William Blair Funds. Third party checks will not be accepted. When purchases are made by check or periodic account investment, the Fund may delay sending redemption proceeds until it determines that collected funds have been received for the purchase of such shares, which may be up to 15 calendar days. RIGHT TO REJECT YOUR PURCHASE ORDER. The Trust reserves the right to decline your purchase order (including exchanges) upon receipt for any reason, including excessive, short-term or other abusive trading practices which may disrupt portfolio management strategies and harm Fund performance. The Trust also reserves the right to delay delivery of redemption proceeds -- up to seven days - -- or to honor certain redemptions with securities, rather than cash. BY MAIL OPENING AN ACCOUNT. Send your check and completed application to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To purchase additional shares, make out a check for the amount of your investment, payable to "William Blair Funds." Send your check and letter to the Distributor, William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. 6 143 BY WIRE OPENING AN ACCOUNT. First, call State Street at 1-800-635-2886 (in Massachusetts, 1-800-635-2840) for an account number. Then instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 Include the name of the Fund and the share class in which you are investing, your assigned account number and the name(s) in which the account is registered. Finally, complete the account application, indicate the account number assigned to you by State Street and mail it to William Blair Funds, 222 West Adams Street, Chicago, Illinois 60606. ADDING TO AN ACCOUNT. To add to your account by wire, instruct your bank to wire federal funds to: State Street Bank and Trust Co. ABA # 011000028 DDA # 99029340 Attn: Custody & Shareholder Services 225 Franklin Street Boston, Massachusetts 02110 In your request, specify the Fund name and the share class in which you are investing, your account number, and the name(s) in which the account is registered. To add to an existing account by wire transfer of funds, you must have selected this option on your account application. BY TELEPHONE OPENING AN ACCOUNT. See "By Wire." HOW TO SELL SHARES (By Mail, by Wire or by Telephone) You can arrange to take money out of your account by selling ("redeeming") some or all of your shares. You may give instructions to redeem your shares by mail, by wire or by telephone, as described below. Redemption requests will be processed after the next daily dividend declaration at the net asset value next determined upon receipt by the Distributor of a proper redemption request. In this way, you will receive the net asset value of your shares and all declared but unpaid dividends on your shares through the date of redemption. BY MAIL Send your redemption request signed by all account owners to the Transfer Agent or to the Distributor, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606. WRITTEN REDEMPTION REQUESTS MUST INCLUDE: -- a letter that contains your name, the Fund's name and the dollar amount or number of shares to be redeemed; and -- any other necessary documents, such as corporate resolutions, an inheritance tax consent or evidence of authority (for example, letters testamentary), dated not more than 60 days prior to receipt thereof by State Street or the Distributor. 7 144 BY WIRE To redeem some or all of your shares in any Funds by wire, you must have elected this option on your account application and attached to the application a voided, unsigned check or deposit slip for your bank account. BY TELEPHONE TO REDEEM SHARES BY TELEPHONE, YOU MUST HAVE ELECTED THIS OPTION ON YOUR ACCOUNT APPLICATION. You may redeem some or all of your shares by telephone by calling the Transfer Agent. REDEMPTION PRICE. The Fund's net asset value normally will be $1.00. However, the redemption price that you receive for your shares may be more or less than the amount that you originally paid for them, depending upon their net asset value next calculated after receipt of your redemption request, in proper order. PAYMENT FOR REDEEMED SHARES. Payment normally will be mailed to you at the address of record for your account by the third business day after receipt by the Distributor of a redemption request and any other required documentation and after any checks in payment for your shares have cleared. DELAYED PROCEEDS. The Trust reserves the right to delay delivery of your redemption proceeds--up to seven days--or to honor certain redemptions with securities, rather than cash, as described in the next section. REDEMPTIONS IN KIND. If the Adviser determines that existing conditions make cash payments undesirable, redemption payments may be made in whole or in part in securities or other financial assets, valued for this purpose as they are valued in computing the NAV for each of the Fund's shares. Shareholders receiving securities or other financial assets on redemption may realize a gain or loss for tax purposes, and will incur any costs of sale, as well as the associated inconveniences. Notwithstanding the above, the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1.00% of the Fund's net asset value during any 90-day period for any one shareholder of record. REDEMPTION BY CHECK. To redeem shares by check, you must fill out the appropriate section of your account application. If your application for the check-writing privilege is approved, you will be provided with checks that may be made payable to any person IN AN AMOUNT NOT LESS THAN $500 NOR MORE THAN $9 MILLION. There currently is no charge for this service and no limit on the number of checks that you may write; however, these provisions are subject to change. The payee of the check may cash or deposit it like any other check drawn on a bank. When the check is presented for payment, a sufficient number of full and fractional shares from your account will be redeemed at their next- determined net asset value per share, usually $1.00, to cover the amount of the check. This enables you to continue earning daily dividends until the check clears. Canceled checks will be returned to you by State Street. For joint accounts, unless a single signer has been authorized on your account application, checks must be signed by all joint account owners. The Trust may refuse to honor checks whenever the right of redemption has been suspended or postponed or whenever your account is otherwise impaired. For instance, your account would be considered to be impaired when (1) there are insufficient assets to cover the check, (2) a "stop order" has been placed on the check, and (3) in other situations, such as where there is a dispute over ownership of the your account. A $25 SERVICE FEE may be charged when a check is presented to redeem shares in excess of the value of your account or for an amount less than $500. HOW TO EXCHANGE SHARES (By Mail or by Telephone) Subject to the following limitations, you may exchange shares of Class I shares into either shares of Class I shares of another Fund at their relative net asset values so long as the shares to be acquired are available for sale in your state of residence. Only four (4) exchanges from a Fund are allowed within any 12-month period. Exchanges will be effected by redeeming your shares and purchasing shares of the other Fund or Funds requested. Shares of a 8 145 William Blair Fund with a value in excess of $1,000,000 acquired by exchange from another William Blair Fund may not be exchanged thereafter until they have been owned for 15 days (the "15 Day Hold Policy"). BY MAIL You may request an exchange of your shares by writing to William Blair Funds, Attention: Exchange Department, P.O. Box 8506, Boston, Massachusetts 02266-8506. BY TELEPHONE You may also exchange your shares by telephone by completing the appropriate section on your account application. Once your telephone authorization is on file, State Street will honor your requests to redeem shares by telephone at 1-800-635-2886 (in Massachusetts, 1-800-635-2840). Neither the Trust nor State Street will be liable for any loss, expense or cost arising out of any telephone request pursuant to the telephone exchange privilege, including any fraudulent or unauthorized request, and you will bear the risk of loss, so long as the Trust or the Transfer Agent reasonably believes, based upon reasonable verification procedures, that the telephonic instructions are genuine. The verification procedures include (1) recording instructions, (2) requiring certain identifying information before acting upon instructions and (3) sending written confirmations. DIVIDENDS AND DISTRIBUTIONS INCOME DIVIDENDS. The Fund earns interest from short-term U.S. dollar denominated domestic money market instruments, which are passed along to shareholders as income dividends as long as expenses do not exceed income. As a shareholder, you are entitled to your portion of the Fund's net income. The Fund passes its earnings along to you as distributions. The Funds' policy is to distribute substantially all net investment income. All distributions have the effect of immediately thereafter decreasing net asset value per share. Income dividends will be automatically reinvested in additional shares at net asset value on the reinvestment date, unless you specifically request otherwise (see "Shareholder Services and Account Policies -- Dividend Options"). Cash payments are made by the Dividend Paying Agent, State Street Bank and Trust Company, shortly following the reinvestment date. WHEN DIVIDENDS ARE PAID The Ready Reserves Fund's net investment income will be declared at the close of the New York Stock Exchange on each day that the Fund is open for business, which is generally 3:00 p.m., Chicago time, as a dividend to shareholders who were of record prior to the declaration. The Fund may vary its dividend practices at any time. Income dividends from the Fund will vary from year to year. Dividends may be subject to withholding, as required by the Internal Revenue Service (see "Your Account -- Taxes"). TAXES As with any investment, you should consider how your investment in the Fund will be taxed. If your account is not a tax-deferred retirement account, you should be aware of these tax implications. TAXES ON DISTRIBUTIONS. The Fund's distributions are subject to Federal income tax and may also be subject to state or local taxes. Distributions may be taxable at different rates depending upon the length of time the Fund holds the security. Your distributions are taxable when they are paid, whether you take them in cash or reinvest them in additional shares. The Fund will inform you of the amount and nature of distributions paid. 9 146 Under the Federal tax laws, income dividends and short-term capital gains distributions are taxed as ordinary income. TAXES ON TRANSACTIONS. For the Ready Reserves Fund, so long as a net asset value of $1.00 is maintained, the sale or redemption of your shares will not result in a capital gain or loss. For a more detailed discussion of taxes, see the Statement of Additional Information. - -------------------------------------------------------------------------------- DETERMINATION OF NET ASSET VALUE - -------------------------------------------------------------------------------- WHEN AND HOW NET ASSET VALUE IS DETERMINED The Fund's net asset value is the market value of its total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price. The net asset value per share shall be determined as of the close of trading on the New York Stock Exchange, which is generally 3:00 p.m., Chicago time (4:00 p.m. Eastern time), on each day when the Exchange is open. In addition, the Ready Reserves Fund does not price its shares on the observance of Columbus Day and Veterans Day. For the purposes of calculating the net asset value of the Ready Reserves Fund, portfolio securities are valued at their amortized cost, which means their acquisition cost adjusted for the amortization of a premium or discount. Securities for which a market price is not available, are valued at a fair value as determined in good faith by, or under the direction of, the Board of Trustees and in accordance with the Trust's pricing procedures. - -------------------------------------------------------------------------------- SHAREHOLDER SERVICES AND ACCOUNT POLICIES - -------------------------------------------------------------------------------- The Fund provides a variety of services to help you manage your account. DIVIDEND OPTIONS. You may choose to have your distributions reinvested in additional shares automatically or paid in cash by making the appropriate election on your account application. You may change your election at any time by providing written notice to State Street. 1. AUTOMATIC DIVIDEND REINVESTMENT PLAN. The Fund automatically reinvests all income dividends and capital gain distributions in additional shares of stock at net asset value on the reinvestment date. (For more information, see "Dividend and Distribution Policy.") 2. CASH-DIVIDEND PLAN. You may choose to have all of your income dividends paid in cash. Any distributions you do not elect to have paid in cash will be reinvested automatically in additional shares at net asset value. 3. AUTOMATIC DEPOSIT OF DIVIDENDS. You may elect to have all income dividends automatically deposited in a previously established bank account. WRITTEN CONFIRMATIONS. Each purchase, exchange or redemption transaction is confirmed in writing to the address of record by giving details of the purchase or redemption. USE OF INTERMEDIARIES. If you purchase or redeem shares through an investment dealer, bank or other institution, that institution may impose charges for its services. These charges would reduce your yield or return. You may purchase or redeem shares directly from the Fund or with the Transfer Agent, State Street Bank, without any such charges. 10 147 TRANSFER OF SHARES. Fund shares may be transferred by a written request addressed to the Trust and delivered to State Street, giving the name and social security or taxpayer identification number of the transferee and accompanied by the same signature guarantees and documents as would be required for a redemption, together with specimen signatures of all transferees. SUSPENSION OF OFFERING. The Trust reserves the right to withdraw all or any part of the offering made by this Prospectus, and the Trust or the Distributor may reject purchase orders. From time to time, the Trust may temporarily suspend the offering of shares to new investors. During the period of such suspension, persons who are already shareholders of the Fund may be permitted to continue to purchase additional shares of the Fund, to have dividends reinvested and to make redemptions. SHAREHOLDER RIGHTS. All shares have equal rights with respect to dividends, assets and liquidation of the Fund and equal, noncumulative voting rights. Noncumulative voting rights allow the holder or holders of a majority of shares, voting together for the election of trustees, to elect all the trustees. All shares will be voted in the aggregate, except when a separate vote by Fund is required under the Investment Company Act of 1940 (the "1940 Act"). Shares are fully paid and nonassessable when issued, are transferable without restriction, and have no preemptive or conversion rights. Under Delaware law, the Trust is not required to hold shareholder meetings on an annual basis. As required by law, the Fund will, however, hold shareholder meetings when a sufficient number of shareholders request a meeting, or as deemed desirable by the Board of Trustees, for such purposes as electing or removing directors, changing fundamental policies or approving an investment management agreement. (For additional information about shareholder voting rights, see the Statement of Additional Information.) - -------------------------------------------------------------------------------- INVESTMENT GLOSSARY - -------------------------------------------------------------------------------- The following glossary explains some of the types of securities in which the Funds may invest, investment techniques they may employ, and some of the related risks. For more information, please see the Statement of Additional Information. BORROWING. The Ready Reserves Fund may borrow up to 5% of its total assets. Most borrowing is intended only as a temporary measure for extraordinary or emergency purposes, such as to help meet redemption requests, and not for leverage purposes. CONCENTRATION. The Ready Reserves Fund may invest more than 25% of its total assets in the domestic banking industry. DIVERSIFICATION. As a matter of fundamental policy, the Fund will not purchase the securities of any issuer if, as a result, more than 5% of its total assets would be invested in such issuer. In addition, the Fund will not purchase more than 10% of the outstanding voting securities of any issuer. These limitations do not apply to U.S. Government securities or to government agency or instrumentality securities. ILLIQUID SECURITIES. The Ready Reserves Fund may invest up to 10% of its net assets in illiquid securities. Illiquid securities are those securities that are not readily marketable, including restricted securities and repurchase obligations maturing in more than seven days. REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. Repurchase agreements are instruments under which the Fund acquires ownership of a security, and the seller, 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 Fund's holding period. The Fund 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 the event of the bankruptcy or other default of the seller of a repurchase agreement, the Fund could incur expenses and delays enforcing its rights under the agreement, and experience a decline in the value of the underlying securities and loss of income. Repurchase agreements maturing in more than seven days, together with any 11 148 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 Fund's net assets. SECTION 4(2) PAPER. The Fund may invest in commercial paper issued in reliance upon the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Exchange Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition under the Federal securities laws, and generally is sold to institutional investors such as the Fund. Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper normally is resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in the Section 4(2) paper, thus providing liquidity. The Adviser considers the legally restricted but readily saleable Section 4(2) paper to be liquid; however, pursuant to the procedures approved by the Fund's Board of Trustees, if a particular investment in Section 4(2) paper is not determined to be liquid, that investment will be included within the limitation on illiquid securities. The Adviser monitors the liquidity of each investment in Section 4(2) paper on a continuing basis. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. From time to time, in the ordinary course of business, the Fund may purchase newly issued securities appropriate for the Fund on a "when-issued" basis, and may purchase or sell securities appropriate for the Fund on a "delayed delivery" basis. When-issued or delayed delivery transactions involve a commitment by the Fund to purchase or sell particular securities, with payment and delivery to take place at a future date. These transactions allow the Fund to lock in an attractive purchase price or yield on a security the Fund 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 Fund and, for delayed delivery purchases, no interest accrues to the Fund. Because the Fund is required to set aside cash or liquid securities at least equal in value to its commitments to purchase when-issued or delayed delivery securities, the Adviser's ability to manage the Fund's assets may be affected by such commitments. The Fund 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 it is deemed advisable. VARIABLE RATE SECURITIES. The Fund may invest in instruments having rates of interest that are adjusted periodically or that "float" continuously or periodically according to formulae intended to minimize fluctuation in values of the instruments ("Variable Rate Securities"). The interest rate on a Variable Rate Security is ordinarily determined by reference to, or is a percentage of, an objective standard such as a bank's prime rate, the 90-day U.S. Treasury Bill rate or the rate of return on commercial paper or bank certificates of deposit. Generally, the changes in the interest rates on Variable Rate Securities reduce the fluctuation in the market value of such securities. Accordingly, as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for fixed-rate obligations. Further, the Fund may invest in Variable Rate Securities that have a demand feature entitling the Fund 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 Fund determines the maturity of Variable Rate Securities in accordance with Securities and Exchange Commission rules, which allow the Fund 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, if they have a stated maturity date of one year or less, or if they have demand features prior to maturity. 12 149 FOR MORE INFORMATION More information about the Fund is available without charge, upon request, including the following: SEMI-ANNUAL/ANNUAL REPORTS The Semi-Annual and audited Annual Reports to Shareholders include financial statements, detailed performance information, portfolio holdings and statements from the Fund managers. In the Annual Report, you will find a discussion of the market conditions and investment strategies that the Adviser believes significantly affected the Fund's performance in its last fiscal year. Shareholder reports are incorporated by reference into this Prospectus, which means that they are part of this Prospectus for legal purposes. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Fund. The current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into this Prospectus, which means that it is part of this Prospectus for legal purposes. TO OBTAIN INFORMATION: BY TELEPHONE Call: 1-800-635-2886 (In Massachusetts 1-800-635-2840) BY MAIL Write to: WILLIAM BLAIR FUNDS 222 West Adams Street Chicago, Illinois 60606 or STATE STREET BANK AND TRUST COMPANY (the Fund's Transfer Agent) P.O. Box 8506 Boston, MA 02266-8506 ON THE INTERNET Text-only versions of fund documents can be viewed online or downloaded from the SEC at http://www.sec.gov You can also obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. (1-202-942-8090) or, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Room Section, Washington, D.C. 20549-0102. No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Trust or its distributor. The Prospectus does not constitute an offering by the Trust or its distributor in any jurisdiction in which such offering may not lawfully be made. William Blair Funds December 22, 1999 Investment Company Act File No.: 811-5344 150 WILLIAM BLAIR FUNDS 222 WEST ADAMS STREET CHICAGO, ILLINOIS 60606 (312) 364-8000 STATEMENT OF ADDITIONAL INFORMATION DECEMBER 22, 1999 This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus of William Blair Funds (the "Trust") dated December 22, 1999. The financial statements for the William Blair Funds for the year ended December 31, 1998, and the Report of Independent Auditors thereon are incorporated by reference from the Annual Report to Shareholders dated December 31, 1998. The Prospectus and Annual Report to Shareholders may be obtained without charge by writing or calling the Trust. TABLE OF CONTENTS
PAGE MANAGEMENT OF THE TRUST..............................................................................................1 Investment Adviser..........................................................................................1 Distributor.................................................................................................3 Trustees and Officers.......................................................................................3 Brokerage and Fund Transactions............................................................................12 INVESTMENT POLICIES AND RESTRICTIONS................................................................................14 INVESTMENT PRACTICES................................................................................................19 Borrowings.................................................................................................19 Collateralized Obligations.................................................................................19 Foreign Securities.........................................................................................30 Forward Foreign Currency Transactions......................................................................33 Foreign Currency Futures...................................................................................33 Futures....................................................................................................34 High-Yield/High-Risk Securities............................................................................34 Investment Companies.......................................................................................35 Illiquid Securities........................................................................................35 Lending....................................................................................................35 Repurchase Agreements......................................................................................35 Restricted Securities......................................................................................36 Small Companies............................................................................................36 Warrants...................................................................................................36 When-Issued or Delayed Delivery Transactions...............................................................36 ADDITIONAL INFORMATION ABOUT SHARE CLASSES..........................................................................37 Purchase of Shares--Alternative Purchase Arrangements......................................................37 Eligibility................................................................................................37 Distribution Fees..........................................................................................38 Shareholder Service Fees...................................................................................38 Summary of Ongoing Fees for Class A Shares.................................................................38 Summary of Ongoing Fees for Class B Shares.................................................................38 Summary of Ongoing Fees for Class C Shares.................................................................38 Summary of Ongoing Fees for Class N Shares.................................................................39 Summary of Ongoing Fees for Class I Shares.................................................................39 Initial Sales Charge Alternative--Class A Shares...........................................................39
i 151
Deferred Sales Charge Alternative--Class B Shares..........................................................40 Purchase of Class C Shares.................................................................................41 Purchase of Class N and Class I Shares.....................................................................41 Fees Paid by Distributor to Service Firms..................................................................41 Class A Shares.............................................................................................41 Class B Shares.............................................................................................42 Class C Shares.............................................................................................42 Class N Shares.............................................................................................42 General....................................................................................................42 Redemptions................................................................................................43 Special Redemptions........................................................................................43 Contingent Deferred Sales Charge--Large Order NAV Purchase Privilege.......................................44 Contingent Deferred Sales Charge--Class B Shares...........................................................44 Contingent Deferred Sales Charge--Class C Shares...........................................................45 Contingent Deferred Sales Charge--General..................................................................45 Special Features...........................................................................................45 Class A Shares--Combined Purchases.........................................................................45 Class A Shares--Letter of Intent...........................................................................45 Class A Shares--Cumulative Discount........................................................................46 Class A Shares--Availability of Quantity Discounts.........................................................46 Exchange Privilege.........................................................................................46 GENERAL TRUST INFORMATION...........................................................................................47 Determination of Net Asset Value...........................................................................47 Performance................................................................................................48 Historical Performance.....................................................................................48 Comparison of Fund Performance to Market Indices...........................................................51 Tax Status.................................................................................................53 Retirement Plans...........................................................................................54 Independent Auditors.......................................................................................55 Legal Counsel..............................................................................................56 Custodian..................................................................................................56 Transfer Agent Services....................................................................................56 Reports to Shareholders....................................................................................56 SHAREHOLDER RIGHTS..................................................................................................56 INVESTMENT CRITERIA.................................................................................................56 TRUST HISTORY.......................................................................................................58 FINANCIAL INFORMATION OF THE FUND...................................................................................58 APPENDIX A...........................................................................................................1 APPENDIX B...........................................................................................................1
ii 152 MANAGEMENT OF THE TRUST - -------------------------------------------------------------------------------- INVESTMENT ADVISER. As stated in the Prospectus, William Blair & Company, L.L.C. ("Adviser") is the Trust's investment adviser and manager. Pursuant to an investment advisory and management agreement, the Adviser acts as each 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 Trust's general administrative expenses, allocated on the basis of the Fund's net asset value. Expenses that will be borne directly by the Funds 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 each 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 Fund continues in effect from year to year for so long as its continuation is approved at least annually (a) by a majority of the trustees who are not parties to such agreement or interested persons of any such party except in their capacity as trustees of the Trust and (b) by the shareholders of the Fund or the Board of Trustees. 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 Trustees 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 Trustees 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 will 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 Trust will refrain from using the name "William Blair" in its name or in its business in any form or combination. For the services and facilities furnished to each portfolio, the Trust pays the Adviser an advisory fee, which is accrued daily and paid monthly on the first business day of the following month. The Growth Fund pays an advisory fee at a rate of .75% of the portfolio's average daily net assets. Prior to May 1, 1996, the Growth Fund paid an advisory fee at a rate of 0.625% of the portfolio's average daily net assets up to $75 million and 0.50% of average daily net assets above $75 million. For the fiscal years ended December 31, 1998, 1997 and 1996, the Adviser received fees of $4,861,435, $4,093,417 and $3,018,755, respectively. The Tax-Managed Growth Fund pays an advisory fee at a rate of .80% of the portfolio's average daily net assets. The Adviser has entered into an agreement with the Trust to cap the Fund's Class I share expenses at 1.11% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.11% plus any distribution and/or shareholder services fees. The Large Cap Growth Fund pays an advisory fee at a rate of .80% of the portfolio's average daily net assets. The Adviser has entered into an agreement with the Trust to cap the Fund's Class I share expenses at 1.11% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.11% plus any distribution and/or shareholder services fees. The Small Cap Growth Fund pays an advisory fee at a rate of 1.10% of the portfolio's average daily net assets. The Adviser has entered into an agreement with the Trust to cap the Fund's Class I share expenses at 1.35% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.35% plus any distribution and/or shareholder services fees. B-1 153 The International Growth Fund pays an advisory fee at a rate of 1.10% of the first $250 million of average daily net assets plus 1.00% of average daily net assets over $250 million. Prior to May 1, 1996, the International Growth Fund paid an advisory fee at a rate of 1.10% of the first $100,000,000 of average daily net assets of the portfolio and .95% of average daily net assets above $100,000,000. Under a former investment sub-advisory agreement, the Adviser paid a sub-adviser a monthly fee at an annual rate equal to .40% of the first $100 million of average daily net assets of the portfolio and .275% of average daily net assets above $100 million. For the services and facilities furnished during the fiscal years ended December 31, 1998, 1997 and 1996, the Adviser received fees of $1,557,766, $1,351,263 and $1,131,309, respectively, of which $303,364 in 1996 was paid to the former sub-adviser. The Emerging Markets Growth Fund pays an advisory fee at a rate of 1.40% of the portfolio's average daily net assets. The Adviser voluntarily has agreed to reimburse the portfolio during its first year of operation should all operating expenses, including the compensation of the Adviser but excluding taxes, interest, extraordinary expenses and brokerage commissions or transaction costs, exceed 2.25% of average daily net assets of the portfolio. For the services and facilities furnished during the fiscal period from the portfolio's incorporation on May 1, 1998 to December 31, 1998, the Adviser received fees of $34,835. The Adviser voluntarily agreed to reimburse the portfolio during its first year of operation should all operating expenses, including the compensation of the Adviser but excluding taxes, interest, extraordinary expenses and brokerage commissions or transaction costs, exceed 2.25% of average daily net assets of the portfolio. The Adviser has entered into an agreement with the Fund to cap the Fund's Class I shares expenses at 1.75% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.75% plus any distribution and/or shareholder services fees. The Disciplined Large Cap Fund pays an advisory fee at a rate of .80% of the portfolio's average daily net assets. The Adviser has entered into an agreement with the Trust to cap the Fund's Class B share's expenses at 1.00% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expense will be capped at 1.00% plus any distribution and/or shareholder services fees. The Value Discovery Fund pays an advisory fee at a rate of 1.15% of the portfolio's average daily net assets. For services and facilities furnished to the portfolio pursuant to the advisory agreement during the fiscal years 1998 and 1997 and for the fiscal year from December 23, 1996 (Commencement of Operations) to December 31, 1996, the Trust paid $442,942, $241,689 and $333, respectively. The Adviser has entered into an agreement with the Fund to cap the Fund's Class I expenses at 1.39% until at least April 30, 2000; the Adviser may continue to waive fees voluntarily thereafter. For the Fund's Class A, B and C shares, the expenses will be capped at 1.39% plus any distribution and/or shareholder services fees. The Income Fund pays an advisory fee at a rate of .25% of the first $250 million of average daily net assets plus .20% of average daily net assets over $250 million plus 5% of the gross income earned by the portfolio. Prior to May 1, 1996, the Income Fund paid an advisory fee at a rate of .25% of the first $100 million of average daily net assets of the portfolio, .20% of the next $150 million and .15% of average daily net assets in excess of $250 million, plus 5.0% of the gross income earned. For the services and facilities furnished to the portfolio pursuant to the advisory agreement during the fiscal years ended December 31, 1998, 1997 and 1996, the Fund paid $1,046,049, $918,833 and $880,815, respectively. The Ready Reserves Fund pays an advisory fee at a rate of .28% of the first $250 million of average daily net assets, plus .25% of the next $250 million of average daily net assets, plus .23% of the next $2 billion of average daily net assets, plus .20% of the average daily net assets over $2.5 billion. Prior to January 1, 2000, the Ready Reserves Fund paid an advisory fee at a rate of .625% of the first $250 million of average daily net assets, plus .60% of the next $250 million of average daily net assets, plus .575% of the next $2 billion of average daily net assets, plus .55% of the average daily net assets over $2.5 billion. Prior to May 1, 1996, the Ready Reserves Fund paid an advisory fee at a rate of .625% of the first $250 million of average daily net assets of the portfolio, .60% of the next $250 million, .55% of the next $500 million, .50% of the next $2 billion, .45% of the next $2 billion and .40% of average daily net assets in excess of $5 billion. For the services and facilities furnished to the portfolio pursuant to the advisory agreement during the fiscal years ended December 31, 1998, 1997 and 1996, the Adviser received fees of $6,215,491, $5,236,627 and $4,282,827, respectively. B-2 154 The Adviser has agreed to reimburse the Trust should all operating expenses of the Growth Fund, Income Fund or Ready Reserves Fund, including the compensation of the Adviser but excluding taxes, distribution and shareholder services fees, interest, extraordinary expenses and brokerage commissions or transaction costs, exceed 1.50% of the first $30 million of average net assets of the portfolio and 1.00% of average net assets over $30 million of the portfolio on an annual basis. DISTRIBUTOR. Pursuant to separate Underwriting and Distribution Agreements, William Blair & Company, L.L.C. also is the principal underwriter and distributor ("Distributor") for shares of the Trust and acts as agent of the Trust in the sale of its shares. The Distribution Agreement continues in effect from year to year so long as such continuance is approved for each class at least annually by a vote of the Board of Trustees of the Trust, including the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the agreement. Each agreement automatically terminates in the event of its assignment and may be terminated for a class at any time without penalty by a Fund or by the Distributor upon 60 days' notice. Termination by the Trust with respect to a class may be by vote of a majority of the Board of Trustees, or a majority of the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the agreement, or a "majority of the outstanding voting securities" of the class of a Fund, as defined under the 1940 Act. The agreement may not be amended for a class to increase the fee to be paid by a Fund with respect to such class without approval by a majority of the outstanding voting securities of such class of the Fund and all material amendments must in any event be approved by the Board of Trustees in the manner described above with respect to the continuation of the agreement. Messrs. Barber, Fischer, Fuller, Greig, Hanig, Kaplan, Kayser, Kleczka, McMullan, Myer, Sullivan and Urbina, Ms. Gassmann and Ms. Johnson, who are directors or officers of the Fund, are also principals or employees of the Adviser/Distributor as indicated under "Trustees 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 Rocky Barber, E. David Coolidge, III, Edgar D. Jannotta, John P. Kayser, Richard P. Kiphart, Albert J. Lacher, Joseph F. LaManna, James D. McKinney and William C. Perlitz. TRUSTEES AND OFFICERS. The trustees and officers of the Trust, 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 (65),* Chairman of the Board and Trustee; Principal, William Blair & Company, L.L.C.; Trustee Emeritus, Chicago Child Care Society, a non-profit organization, and Investment Committee, Kalamazoo College. J. GRANT BEADLE (66), (1)(2)(3) Trustee; 985 Riomar Drive, Vero Beach, Florida 32963; Retired Chairman and Chief Executive Officer, Union Special Corporation, industrial sewing machine manufacturer; Retired Associate Director, Northwestern University Institute for Learning Sciences; Oliver Products Company, Batts, Inc. and Woodward Governor Company. THEODORE A. BOSLER (64), (1)(2)(3) Trustee; 812 Oak Street, Winnetka, Illinois 60093; Retired Principal and Vice President, Lincoln Capital Management; Director, Thresholds, a psychiatric recovery center, and Institute of Chartered Financial Analysts. JOHN P. KAYSER (49),* Trustee; Vice President of the Trust; Principal, William Blair & Company, L.L.C.; Director, DuPage Children's Museum. ANN P. MCDERMOTT (59), (1)(2)(3) Trustee; 330 Willow Road, Winnetka, Illinois 60093; Trustee, Rush Presbyterian St. Luke's Medical Center; Women's Board, Rush Presbyterian St. Luke's Medical Center; Honorary B-3 155 Director, Visiting Nurse Association; Director, Presbyterian Homes; Northwestern University, Women's Board; University of Chicago, Women's Board; Director, Washington State University Foundation. JOHN B. SCHWEMM (65), (1)(2)(3) Trustee; 2 Turvey Lane, Downers Grove, Illinois 60515; Retired Chairman and Chief Executive Officer, R.R. Donnelley & Sons Company, printer; Director, USG Corp., building material product company, and Walgreen Co., drug store chain. ROBERT E. WOOD II (61), (1)(2) Trustee; 401 North Michigan Avenue, Suite 700, Chicago, Illinois 60611; Retired Executive Vice President, Morgan Stanley Dean Witter; Chairman, Add-Vision, Inc.; Chairman, Micro-Combustion, LLC. ROCKY BARBER (47), Chief Executive Officer; Principal, William Blair & Company, L.L.C.; Vice President and Secretary, LaRabida Hospital Foundation; Past President, Stanford Associates. MARCO HANIG (41), President; Associate, William Blair & Company, L.L.C.; former Senior Vice President, First Chicago NBD; Engagement Manager, Marakon Associates. MARK A. FULLER, III (42), Senior Vice President; Principal, William Blair & Company, L.L.C. W. GEORGE GREIG (46), Senior Vice President; Principal, William Blair & Co., L.L.C.; former Portfolio Manager, Provident Capital Management; Manager, Akamai, partnership affiliated with Framlington Investment Management Limited; Partner, Pilgrim, Baxter & Greig. GLEN KLECZKA (36), Senior Vice President; Portfolio Manager, William Blair & Company, L.L.C.; former Partner, Brinson Partners; former Portfolio Manager, CNA Financial Corp. BENTLEY M. MYER (52), Senior Vice President; Principal, William Blair & Company, L.L.C.; Director, Delnor Community Hospital. JAMES S. KAPLAN (38), Vice President; Associate, William Blair & Company, L.L.C.; former Vice President, First Union Bank. TERENCE M. SULLIVAN (55), Vice President and Treasurer; Associate, William Blair & Company, L.L.C. JEFFREY A. URBINA (44), Vice President; Associate, William Blair & Company, L.L.C.; former Director of Emerging Market Research and Portfolio Manager, Van Kampen American Capital. SHEILA M. JOHNSON (32), Secretary; Administrative Assistant, William Blair & Company, L.L.C. JANET V. GASSMANN (32), Assistant Secretary; Administrative Assistant, William Blair & Company, L.L.C.; former Administrative Assistant, Shearson Lehman Brothers, Inc. - -------------- * Trustees who are interested persons as defined in the 1940 Act. (1) Member of the Standing Audit Committee. Mr. Schwemm is Chairperson of the Standing Audit Committee. (2) Member of the Nominating Committee. J. Grant Beadle is the Chairperson of the Nominating Committee. (3) Mr. Beadle, Mr. Bosler, Ms. McDermott and Mr. Schwemm employ the Adviser to manage assets that they control. 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. Effective February 1, 1998, trustees who are not affiliated with the Adviser receive an annual fee of $8,000 plus $3,000 for each meeting attended in person plus expenses, $1,500 for each meeting by telephone and $3,000 for each committee meeting held on a different day from a board meeting. Prior to February 1, 1998, the trustees and B-4 156 officers not affiliated with the Adviser received an annual fee of $4,000 plus $2,000 for each meeting attended in person plus expenses. The trustees and officers affiliated with the Adviser received no compensation from the Trust. The following table sets forth the compensation earned from the Trust for the fiscal year ended December 31, 1998 by trustees who are not affiliated with the Adviser:
PENSION OR RETIREMENT BENEFITS ESTIMATED AGGREGATE ACCRUED ANNUAL COMPENSATION AS PART OF BENEFITS UPON TOTAL TRUSTEE FROM THE TRUST TRUST EXPENSES RETIREMENT COMPENSATION - ------- -------------- -------------- ----------- ------------ J. Grant Beadle.......................... $23,000 0 0 $23,000 Theodore A. Bosler....................... $23,000 0 0 $23,000 George Kelm.............................. $18,500 0 0 $18,500 Ann P. McDermott......................... $23,000 0 0 $23,000 John B. Schwemm.......................... $21,500 0 0 $21,500
The following table provides certain information at December 8, 1999 with respect to persons known to the Trust to be record holders of 5% or more of the shares of the following portfolios:
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- GROWTH FUND CLASS A - ------------------- William Blair & Co., L.L.C. 11.43% 1,507 Sharon Lappin 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 9.23% 1,217 Mark E. Lawler 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 8.64% 1,139 Dudley J. Stroup 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 7.11% 937 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.79% 763 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307
B-5 157
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- William Blair & Co., L.L.C. 5.54% 730 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.27% 695 Pastora San Juan Cafferty TTEE 222 West Adams Street Chicago, IL 60606-5307 GROWTH FUND CLASS B - ------------------- William Blair & Co., L.L.C. 37.40% 1,521 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 22.07% 897 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 15.94% 648 Ferne Reichman Trustee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 8.90% 362 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 8.31% 338 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 GROWTH FUND CLASS C - ------------------- William Blair & Co., L.L.C. 32.58% 1,066 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 29.00% 949 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 16.40% 537 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307
B-6 158
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- William Blair & Co., L.L.C. 13.30% 435 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.64% 185 Patricia T. Bergeson Cust 222 West Adams Street Chicago, IL 60606-5307 GROWTH FUND CLASS I - ------------------- Society National Bank 13.32% 3,721,896 FBO William Blair Profit Sharing Plan PO Box 94870 Cleveland, OH 44101-4870 GROWTH FUND CLASS N - ------------------- Charles Schwab & Co. Inc. 48.15% 4,970,142 Attn: Mutual Funds Dept. 101 Montgomery Street San Francisco, CA 94104-4122 NFSC 41.42% 4,275,111 F B O Our Customers Liberty Street One World Financial Center Attn: Mutual Funds Dept., 15th Fl New York, NY 10281 VALUE DISCOVERY FUND CLASS A - ---------------------------- William Blair & Co., L.L.C. 47.36% 763 The Chomicz Family Foundation 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 47.28% 762 John R. Garofalo 222 West Adams Street Chicago, IL 60606-5307 VALUE DISCOVERY FUND CLASS B - ---------------------------- William Blair & Co., L.L.C. 91.08% 79 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307
B-7 159
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- VALUE DISCOVERY FUND CLASS C - ---------------------------- William Blair & Co., L.L.C. 88.31% 687 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 10.19% 79 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307 VALUE DISCOVERY FUND CLASS I - ---------------------------- William Blair & Co., L.L.C. 6.38% 219,089 Ralph Gerald Portis B 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.95% 204,261 Travis Investments LP 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.95% 204,261 Catlin Investment LP 222 West Adams Street Chicago, IL 60606-5307 Society National Bank 5.34% 183,510 FBO William Blair Profit Sharing Plan PO Box 94870 Cleveland, OH 441014870 VALUE DISCOVERY FUND CLASS N - ---------------------------- Mitra & Co. 49.21% 78,123 c/o Marshall & Ilsley Trust co. PO Box 2977 Milwaukee, WI 53201-2977 Charles Schwab & Co., Inc. 43.00% 72,704 Attn: Mutual Funds Dept. 101 Montgomery Street San Francisco, CA 94104-4122 INTERNATIONAL GROWTH CLASS A - ---------------------------- William Blair & Co., L.L.C. 22.30% 422 John R. Garofalo & 222 West Adams Street Chicago, IL 60606-5307
B-8 160
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- William Blair & Co., L.L.C. 22.15% 419 The Chomicz Family Foundation 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 19.81% 375 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 12.78% 242 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 11.54% 218 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 INTERNATIONAL GROWTH CLASS B - ---------------------------- William Blair & Co., L.L.C. 33.59% 800 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 23.47% 559 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 21.67% 516 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 13.68% 326 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 7.32% 174 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 INTERNATIONAL GROWTH CLASS C - ---------------------------- William Blair & Co., L.L.C. 40.33% 829 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307
B-9 161
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- William Blair & Co., L.L.C. 30.59% 628 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 18.64% 383 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 7.83% 161 Patricia T. Bergeson Cust 222 West Adams Street Chicago, IL 60606-5307 INTERNATIONAL GROWTH CLASS N - ---------------------------- Charles Schwab & Co., Inc. 61.38% 751,311 Special Custody Account for Exclusive Benefit of Customers Attn: Mutual Funds Dept. 101 Montgomery Street San Francisco, CA 94104-4122 NFSC 14.75% 180,497 F B O Our Customers Liberty Street One World Financial Center Attn: Mutual Funds Dept., 5th Fl New York, NY 10281 EMERGING MARKETS CLASS A - ------------------------ William Blair & Co., L.L.C. 86.53% 87 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307 EMERGING MARKETS CLASS B - ------------------------ William Blair & Co., L.L.C. 87.88% 93 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307 EMERGING MARKETS CLASS C - ------------------------ William Blair & Co., L.L.C. 87.21% 93 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307
B-10 162
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- EMERGING MARKETS CLASS I - ------------------------ William Blair & Co., L.L.C. 11.06% 50,000 Edgar David Coolidge, III 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.53% 25,000 John P. Nicholas Trustee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 5.53% 25,000 William George Greig 222 West Adams Street Chicago, IL 60606-5307 INCOME FUND CLASS A - ------------------- William Blair & Co., L.L.C. 97.07% 493 Delaware Charter Guarantee 222 West Adams Street Chicago, IL 60606-5307 INCOME FUND CLASS B - ------------------- William Blair & Co., L.L.C. 91.88% 1,297 Ferne Reichman Trustee 222 West Adams Street Chicago, IL 60606-5307 William Blair & Co., L.L.C. 7.07% 100 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307 INCOME FUND CLASS C - ------------------- William Blair & Co., L.L.C. 87.00% 100 Mutual Fund Investment Account 222 West Adams Street Chicago, IL 60606-5307 INCOME FUND CLASS I - ------------------- William Blair & Co., L.L.C. 5.07% 82,779 MidMfg Inc. Money Pur Pen Plan 222 West Adams Street Chicago, IL 60606-5307 INCOME FUND CLASS N - ------------------- Charles Schwab & Co., Inc. 59.84% 1,050,118 Attn: Mutual Funds Dept 101 Montgomery Street San Francisco, CA 94104-4122
B-11 163
PERCENT OF FUND's NAME AND ADDRESS OUTSTANDING OF RECORD OWNER COMMON STOCK NUMBER OF SHARES - ---------------- ----------------- ---------------- NFSC F B O Our Customers 17.99% 315,806 Liberty Street One World Financial Center Attn: Mutual Funds Dept., 5th Fl New York, NY 10281 Post & Co. A/C 016009 6.07% 106,549 c/o The Bank of New York Mutual Fund/Reorg. Dept. PO Box 1066, Wall Street Station New York, NY 10268-1066 Bear Stearns Securities Corp. 5.62% 98,659 FBO 103-21060-13 1 Metrotech Center North Brooklyn, NY 11201-3870
As of December 8, 1999, the Trust's officers and directors as a group owned (or held or shared investment or voting power with respect to) 147,911 shares or 4.38% of the Value Discovery Fund's Class I shares, 109,967 shares or 1.19% of the International Growth Fund's Class I shares, 105,394 shares or 23.35% of the Emerging Markets Growth Fund's Class I shares. As of December 8, 1999, the Trust's officers and directors as a group did not own more than 1% of the outstanding shares of the Growth Fund, Income Fund and the Ready Reserves Fund. These figures do not include shares of the Funds that may be indirectly owned by certain officers of the Trust as a result of their interest in the William Blair Profit Sharing Plan. BROKERAGE AND FUND TRANSACTIONS. Decisions on portfolio transactions (including the decision to buy or sell, the appropriate price, allocation of brokerage, use of a broker as agent or dealer as principal and negotiation of commissions) normally are made by the Adviser. In purchasing and selling portfolio securities, the Trust 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 Trust and the Adviser's other clients. Portfolio transactions may increase or decrease the return of a Fund depending upon the Adviser's ability to correctly time and execute such transactions. A portfolio turnover rate for any year is determined by dividing the lesser of sales or purchases (excluding in either case cash equivalents, such as short-term corporate notes) by the portfolio's monthly average net assets and multiplying by 100 (with all securities with maturities and expirations of one year or less excluded from the computation). The Fund'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's required portfolio turnover rate calculations, resulting in no portfolio turnover rate for reporting purposes. Selection of a broker for a particular portfolio transaction depends on many factors, some of which are subjective and which include the net price, the confidentiality, reliability, integrity, the size and nature of the transaction and the market in which it is to occur and any research or other services that the broker has provided. The Adviser determines the overall reasonableness of brokerage commissions and of premiums and discounts on principal transactions (which do not involve commissions) by review of comparable trades for the Adviser's other clients and in the market generally. If more than one broker is believed to be equally qualified to effect a portfolio transaction, the Adviser may assign the transaction to a broker that has furnished research services, but the Adviser has no B-12 164 agreement, formula or policy as to allocation of brokerage. The Adviser may place orders with a broker on the basis that the broker has or has not sold shares of a Fund. The Trust may pay to brokers that provide research services to the Adviser a commission higher than another broker might have charged if it is determined that the commission is reasonable in relation to the value of the brokerage and research services that are provided, viewed in terms of either the particular transaction or the Adviser's overall responsibility to its advisory accounts. The extent to which such commissions exceed commissions solely for execution cannot be determined, but such research services, which are involved in portfolio transactions for the Trust and for the Adviser's other advisory accounts, can be of benefit to both the Trust and such other accounts. The value of research services that are provided by brokers who handle portfolio transactions for the Trust cannot be precisely determined and such services are supplemental to the Adviser's own efforts, which are undiminished thereby. The Adviser does not believe that its expenses are reduced by reason of such services, which benefit the Trust and the Adviser's other clients. Transactions in over-the-counter securities are generally executed as principal trades with primary market makers, except where it is believed that a better combination of price and execution could otherwise be obtained. The Adviser receives research products and services from broker/dealers and third parties in the form of written reports on individual companies and industries of particular interest to the Adviser, general economic conditions, pertinent Federal and State legislative developments and changes in accounting practices; direct access by telephone or meetings with leading research analysts throughout the financial community, corporate management personnel, and industry experts, comparative performance and evaluation and technical measurement services for issuers, industries and the market as a whole; access to and monitoring of equity valuation models; and services from recognized experts on investment matters of particular interest to the Adviser. The Growth Fund paid total brokerage fees of $515,832, $422,714 and $394,561 in 1998, 1997 and 1996, respectively. None of these brokerage fees were paid to a broker that was an affiliated person of the Trust or to a broker of which an affiliated person was an affiliated person of the Trust or of the Adviser. The increase in brokerage fees from year to year is in proportion to the change in the Fund's asset size. The Value Discovery Fund paid total brokerage fees of $103,906 in 1998, $35,216 in 1997 and $12 for the period from December 23, 1996 (Commencement of Operations) to December 31, 1996. None of these brokerage fees were paid to a broker that was an affiliated person of the Trust or to a broker of which an affiliated person was an affiliated person of the Trust or of the Adviser. The International Growth Fund paid brokerage fees of $889,064, $820,267 and $779,507 in 1998, 1997 and 1996, respectively. None of these brokerage fees were paid to a broker that was an affiliated person of the Trust or to a broker of which an affiliated person was an affiliated person of the Trust or of the Adviser. The Emerging Markets Growth Fund paid brokerage fees of $60,161 in 1998. None of these brokerage fees were paid to a broker that was an affiliated person of the Trust or to a broker of which an affiliated person was an affiliated person of the Trust or the Adviser. Purchases and sales of portfolio securities for the Income Fund and the 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, 1998, 1997 and 1996. 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. No brokerage commissions were paid by the Tax-Managed Growth Fund, the Large Cap Growth Fund, the Small Cap Growth Fund and the Disciplined Large Cap Fund during the last fiscal year ended December 31, 1998 because the Funds did not begin operation until December 8, 1999. Generally, the investment decisions for the Funds are reached independently from those for other accounts managed by the Adviser. However, some other accounts may make investments in the same type of instruments or securities B-13 165 as the Funds at the same time as the Funds. In those instances where the Funds and another client of the Adviser trade in the same type of instrument at the same time, the Adviser has established allocation procedures that ensure an equitable allocation of such trades among its various clients and the Funds. In some cases this procedure may affect the size or price of the position obtainable for the Funds. However, it is the opinion of the Board of Trustees that the benefits available because of the Adviser's organization outweigh any disadvantages that may arise from exposure to simultaneous transactions. No portfolio transactions are executed for the Funds with or through the Adviser or any affiliated broker-dealer of the Adviser. The Funds 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 Trustees. INVESTMENT POLICIES AND RESTRICTIONS The Trust has adopted certain fundamental investment restrictions for each portfolio that, along with the Fund's investment objective, can not be changed without approval by holders of a "majority of the outstanding voting securities" of the Fund, which is defined in the Investment Company Act of 1940 (the "1940 Act") to mean the lesser of (a) 67% of the shares of the portfolio at a meeting where more than 50% of the outstanding voting shares of the Fund are present in person or by proxy; or (b) more than 50% of the outstanding voting shares of the Fund. All percentage restrictions on investments apply at the time the investment is made and shall not be considered to violate the limitations unless, immediately after or as a result of the investment, a violation of the restriction occurs. There can be no assurance that a portfolio will meet its investment objective. Except as otherwise noted, the following fundamental investment restrictions apply to each Fund: CONCENTRATION. Each Fund except the Ready Reserves Fund: The Fund will not make investments that will result in the concentration (as that term is defined in the 1940 Act, any rule or order thereunder, or SEC staff interpretation thereof) of its investments in the securities of issuers primarily engaged in the same industry, provided that this restriction does not limit the Fund from investing in obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities, or in tax exempt securities. This restriction also does not limit the Fund from investing in instruments, such as repurchase agreements, secured by obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. Ready Reserves Fund: The Fund will not make investments that will result in the concentration (as that term is defined in the 1940 Act, any rule or order thereunder, or SEC staff interpretation thereof) of its investments in the securities of issuers primarily engaged in the same industry; provided, however, that the Fund reserves the freedom of action to invest up to 100% of its total assets in securities or instruments issued by domestic banks, which include certificates of deposit, time deposits, bankers' acceptances and repurchase agreements. SENIOR SECURITIES AND BORROWING. The Fund may not borrow money or issue senior securities, except as the 1940 Act, any rule or order thereunder, or SEC staff interpretation thereof may permit. UNDERWRITING. The Fund may not underwrite the securities of other issuers, except that the Fund may engage in transactions involving the acquisition, disposition, or resale of its portfolio securities under circumstances where it may be considered to be an underwriter under the Securities Act of 1933. REAL ESTATE. The Fund may not purchase or sell real estate unless the real estate is acquired as a result of ownership of securities or other instrument; and provided that this restriction does not prevent the Fund from investing in issuers that invest, deal, or otherwise engage in transactions in real estate or interests therein, or investing in securities that are secured by real estate or interest therein. B-14 166 COMMODITIES. The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instrument; however, this restriction shall not prevent the Fund from engaging in transactions involving futures contracts, options or other derivative instruments, or investing in securities that are secured by physical commodities. LENDING. The Fund may not make loans, provided that this restriction does not prevent the Fund from purchasing debt obligations, entering into repurchase agreements, loaning its assets to broker/dealers or institutional investors, and investing in loans, including assignments and participation interests. DIVERSIFICATION. Growth Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund and Disciplined Large Cap Fund. The Fund will operate as an open-end, diversified, management type investment company, as defined in the 1940 Act. The Fund will not purchase any security if doing so would cause more than 10% of the voting securities of the issuer to be held by the Fund. International Growth Fund: The Fund may not 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.) Emerging Markets Growth Fund and Value Discovery Fund: The Fund may not with respect to 75% of its total assets, purchase the securities of any issuer (except securities issued or guaranteed by the U.S. government or its agencies or instrumentalities) if, as a result, (i) more than 5% of the portfolio's total assets would be invested in the securities of that issuer or (ii) the portfolio would hold more than 10% of the outstanding voting securities of that issuer. Income Fund and Ready Reserves Fund: The Fund may not 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. The Fund may not 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. The following are each Fund's non-fundamental operating policies, which may be changed by the Trust's Board of Trustees without shareholder approval. The Growth Fund may not: (1) Pledge, or create a lien on, its assets. (2) Purchase, except for securities acquired as part of a merger, consolidation or acquisition of assets, more than 3% of the stock of another investment company, except as otherwise permitted by statute, rule, exemptive order, SEC no-action letter or investment restriction. B-15 167 (3) Invest in futures contracts, puts, calls, straddles, spreads or any combination thereof. (4) Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities. (5) Sell securities short, unless the portfolio owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, or unless it covers such short sale as required by the current rules and positions of the Securities and Exchange Commission or its staff and provided that transactions in futures contracts or other derivative instruments are not deemed to constitute selling securities short. (6) Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions; and provided that margin deposits in connection with futures contracts or other derivative instruments shall not constitute purchasing securities on margin. (7) Invest in any enterprise for the purpose of exercising control or management thereof. The International Growth Fund may not: (1) Pledge, mortgage or create a lien on its assets. (2) 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. (3) 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. (4) 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. (5) 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. (6) Invest for the purposes of exercising control or management of another issuer. (7) 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. The Emerging Markets Growth Fund may not: (1) Sell securities short, unless the portfolio owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, or unless it covers such short sale as required by the current rules and positions of the Securities and Exchange Commission or its staff and provided that transactions in futures contracts or other derivative instruments are not deemed to constitute selling securities short. B-16 168 (2) Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions; and provided that margin deposits in connection with futures contracts or other derivative instruments shall not constitute purchasing securities on margin. (3) Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities. (4) Purchase, except for securities acquired as part of a merger, consolidation or acquisition of assets, more than 3% of the stock of another investment company, except as otherwise permitted by statute, rule, exemptive order, SEC no-action letter or investment restriction. (5) Engage in futures transactions which are impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in accordance with Rule 4.5, will use futures transactions solely for bona fide hedging transactions (within the meaning of the Commodity Exchange Act); provided, however, that the portfolio may, in addition to bona fide hedging transactions, use futures transactions if the aggregate initial margin and premiums required to establish such positions do not exceed 5% of the portfolio's net assets. In addition, the aggregate margin deposits required on all futures transactions being held will not exceed 5% of the portfolio's total assets. (6) Pledge, mortgage or hypothecate any assets owned by the portfolio except as may be necessary in connection with permissible borrowings or investments and then such pledging, mortgaging or hypothecating may not exceed 331/3% of the portfolio's total assets at the time of the borrowing or investment. The Value Discovery Fund may not: (1) Sell securities short, unless the portfolio owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, or unless it covers such short sale as required by the current rules and positions of the Securities and Exchange Commission or its staff and provided that transactions in futures contracts or other derivative instruments are not deemed to constitute selling securities short. (2) Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions; and provided that margin deposits in connection with futures contracts or other derivative instruments shall not constitute purchasing securities on margin. (3) Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities. (4) Purchase, except for securities acquired as part of a merger, consolidation or acquisition of assets, more than 3% of the stock of another investment company, except as otherwise permitted by statute, rule, exemptive order, SEC no-action letter or investment restriction. (5) Engage in futures transactions which are impermissible pursuant to Rule 4.5 under the Commodity Exchange Act and, in accordance with Rule 4.5, will use futures transactions solely for bona fide hedging transactions (within the meaning of the Commodity Exchange Act); provided, however, that the portfolio may, in addition to bona fide hedging transactions, use futures transactions if the aggregate initial margin and premiums required to establish such positions do not exceed 5% of the portfolio's net assets. In addition, the aggregate margin deposits required on all futures transactions being held will not exceed 5% of the portfolio's total assets. B-17 169 The Income Fund may not: (1) 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. (2) 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. (3) Write, purchase or sell puts, calls or combinations thereof. (4) Invest for the purpose of exercising control or management of another issuer. (5) 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. (6) Purchase common stocks, preferred stocks, warrants or other equity securities. (7) Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities. The Ready Reserves Fund may not: (1) 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. (2) 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. (3) Write, purchase or sell puts, calls or combinations thereof. (4) Invest for the purpose of exercising control or management of another issuer. (5) 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. (6) 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). (7) Purchase securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets. The Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund and Disciplined Large Cap Fund may not: (1) Invest in illiquid securities if, as a result of such investment, more than 15% of its net assets would be invested in illiquid securities. (2) Sell securities short, unless the portfolio owns or has the right to obtain securities equivalent in kind and amount to the securities sold short, or unless it covers such short sale as required by the current rules and positions of the Securities and Exchange Commission or its staff and provided that transactions in futures contracts or other derivative instruments are not deemed to constitute selling securities short. B-18 170 (3) Purchase securities on margin, except that the Fund may obtain such short-term credits as are necessary for the clearance of transactions; and provided that margin deposits in connection with futures contracts or other derivative instruments shall not constitute purchasing securities on margin. INVESTMENT PRACTICES The Prospectus describes each Fund's investment objective as well as certain investment policies and investment techniques that the Fund may employ in pursuing its investment objective. The following discussion supplements the discussion contained in the Prospectus, including the Investment Glossary at the end of the Prospectus. Not all of the Funds may invest in all of the types of investments listed below. BORROWINGS. Note: Presently, the Funds only intend to borrow from banks for temporary or emergency purposes. However, each Fund may borrow money from banks and make other investments or engage in other transactions permissible under the 1940 Act which may be considered a borrowing (such as mortgage dollar rolls and reverse repurchase agreements). COLLATERALIZED OBLIGATIONS. Mortgage-Backed Securities. Collateralized obligations include mortgage-backed collateralized obligations ("mortgage-backed securities"). Mortgage-backed securities are securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans secured by real property. There currently are three basic types of mortgage-backed securities: (1) those issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, such as GNMA (Government National Mortgage Association), FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation); (2) those issued by private issuers that represent an interest in or are collateralized by mortgage-backed securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities; and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or mortgage-backed securities without a government guarantee but that usually have some form of private credit enhancement. The yield characteristics of mortgage-backed securities differ from traditional debt securities. Among the major differences are that interest and principal payments are made more frequently, usually monthly, and that principal may be prepaid at any time because the underlying mortgage loans generally may be prepaid at any time. As a result, if a portfolio purchases such a security at a premium, a prepayment rate that is faster than expected will reduce yield to maturity, while a prepayment rate that is slower than expected will increase yield to maturity. Conversely, if a portfolio purchases these securities at a discount, faster than expected prepayments will increase yield to maturity, while slower than expected prepayments will reduce it. Prepayments on a pool of mortgage loans are influenced by a variety of economic, geographic, social and other factors, including changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity in the mortgaged properties and servicing decisions. Generally, however, prepayments on fixed-rate mortgage loans will increase during a period of falling interest rates and decrease during a period of rising interest rates. Accordingly, amounts available for reinvestment by the portfolio are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates than during a period of rising interest rates. Mortgage-backed securities may decrease in value as a result of increases in interest rates and may benefit less than other fixed income securities from declining interest rates because of the risk of prepayment. Guaranteed Mortgage Pass-Through Securities. Mortgage pass-through securities represent participation interests in pools of residential mortgage loans originated by United States Governmental or private lenders and guaranteed, to the extent provided in such securities, by the United States Government or one of its agencies or instrumentalities. Such securities, which are ownership interests in the underlying mortgage loans, differ from conventional debt securities, which provide for periodic payment of interest in fixed amounts (usually semi-annually) and principal payments at maturity or on specified call dates. Mortgage pass-through securities provide for monthly payments that are a "pass-through" of the monthly interest and principal payments (including any prepayments) made by the individual borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of such securities and the B-19 171 services of the underlying mortgage loans. The guaranteed mortgage pass-through securities in which the portfolio will invest will include those issued or guaranteed by GNMA, FNMA and FHLMC. GNMA is a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development. The National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of the principal of and interest on certificates ("Ginnie Mae Certificates") that are based upon and backed by a pool of mortgage loans insured by the Federal Housing Administration under the Housing Act or Title V of the Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans' Administration under the Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of other eligible mortgage loans. Ginnie Mae Certificates represent a pro rata interest in one or more pools of eligible mortgage loans. The Housing Act provides that the full faith and credit of the United States Government is pledged to the payment of all amounts that may be required to be paid under any guarantee. In order to meet its obligations under such guarantee, GNMA is authorized to borrow from the United States Treasury with no limitations as to amount. FNMA is a federally chartered and privately owned corporation organized and existing under the Federal National Mortgage Association Charter Act. FNMA was originally established in 1938 as a United States Government agency to provide supplemental liquidity to the mortgage market and was transformed into a stockholder owned and privately managed corporation by legislation enacted in 1968. FNMA provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds for additional lending. FNMA acquires funds to purchase home mortgage loans from many capital market investors that may not ordinarily invest in mortgage loans directly, thereby expanding the total amount of funds available for housing. Each Fannie Mae Certificate will entitle the registered holder thereof to receive amounts representing the holder's pro rata interest in scheduled principal payments and interest payments (at such Fannie Mae Certificate's pass-through rate, which is net of any servicing and guarantee fees on the underlying mortgage loans) and any principal prepayments, on the mortgage loans in the pool represented by such Fannie Mae Certificate and such holder's proportionate interest in the full principal amount of any foreclosed or otherwise finally liquidated mortgage loan. The full and timely payment of principal of and interest on each Fannie Mae Certificate will be guaranteed by FNMA, which guarantee is not backed by the full faith and credit of the United States Government. FNMA has limited rights to borrow from the United States Treasury. FHLMC is a corporate instrumentality of the United States created pursuant to the Emergency Home Finance Act of 1970, as amended. FHLMC was established primarily for the purpose of increasing the availability of mortgage credit for the financing of needed housing. The principal activity of FHLMC currently consists of the purchase of first lien, conventional, residential mortgage loans and participation interests in such mortgage loans and the resale of the mortgage loans so purchased in the form of mortgage securities, primarily Freddie Mac Certificates. FHLMC guarantees to each registered holder of a Freddie Mac Certificate the timely payment of interest at the rate provided for by such Freddie Mac Certificate, whether or not received. FHLMC also guarantees to each holder of a Freddie Mac Certificate ultimate collection of all principal of the related mortgage loans, without any offset or deduction, but does not always guarantee the timely payment of scheduled principal. FHLMC may remit the amount due on account of its guarantee of collection of principal at any time after default on an underlying mortgage loan, but not later than 30 days following (i) foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of any right of redemption, whichever occurs last, 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 B-20 172 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. 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 B-21 173 letters of credit obtained by the issuer or sponsor from third parties, through various means of structuring the transaction or through a combination of such approaches. Examples of credit support arising out of the structure of the transaction include "senior-subordinated securities" (multiple class securities with one or more classes subordinate to other classes as to the payment of principal thereof and interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class), creation of "reserve funds" (where cash or investments, sometimes funded from a portion of the payments on the underlying assets, are held in reserve against future losses) and "overcollateralization" (where the scheduled payments on, or the principal amount of, the underlying assets exceeds that required to make payment of the securities and pay any servicing or other fees). The degree of credit support provided for each issue is generally based upon historical information respecting the level of credit 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 scrutinized in pass-through structures similar to the mortgage pass-through structures described above or in a pay-through structure similar to the CMO structure. The Income Fund may invest in these and other types of asset-backed securities that may be developed in the future. As with mortgage-backed securities, the yield characteristics of asset-backed securities differ from traditional debt securities. As with mortgage-backed securities, asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties and use similar credit enhancement techniques. See "Mortgage-Backed Securities," above. In general, however, the collateral supporting asset-backed securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments. Although certain of the factors that affect the rate of prepayments on mortgage-backed securities also affect the rate of prepayments on asset-backed securities, during any particular period, the predominant factors affecting prepayment rates on mortgage-backed securities and asset-backed securities may be different. Asset-backed securities present certain risks that are not presented by mortgage-backed securities. Primarily, these securities do not have the benefit of the same security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the services to retain possession of the underlying obligations. If the servicers were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Inverse Floaters. The Income Fund 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. B-22 174 DERIVATIVE INSTRUMENTS. In General. The Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund and Disciplined Large Cap Fund may use derivative instruments solely for the purpose of bona fide hedging or risk management. Derivative instruments are commonly defined to include securities or contracts whose values depend on (or "derive" from) the value of one or more other assets, such as securities, currencies, or commodities. These "other assets" are commonly referred to as "underlying assets." A derivative instrument generally consists of, is based upon, or exhibits characteristics similar to OPTIONS or FORWARD CONTRACTS. Options and forward contracts are considered to be the basic "building blocks" of derivatives. For example, forward-based derivatives include forward contracts, swap contracts, as well as exchange-traded futures. Option-based derivatives include privately negotiated, over-the-counter ("OTC") options (including caps, floors, collars, and options on forward and swap contracts) and exchange-traded options on futures. Diverse types of derivatives may be created by combining options or forward contracts in different ways, and by applying these structures to a wide range of underlying assets. An option is a contract in which the "holder" (the buyer) pays a certain amount ("premium") to the "writer" (the seller) to obtain the right, but not the obligation, to buy from the writer (in a "call") or sell to the writer (in a "put") a specific asset at an agreed upon price at or before a certain time. The holder pays the premium at inception and has no further financial obligation. The holder of an option-based derivative generally will benefit from favorable movements in the price of the underlying asset but is not exposed to corresponding losses due to adverse movements in the value of the underlying asset. The writer of an option-based derivative generally will receive fees or premiums but generally is exposed to losses due to changes in the value of the underlying asset. A forward is a sales contract between a buyer (holding the "long" position) and a seller (holding the "short" position) for an asset with delivery deferred until a future date. The buyer agrees to pay a fixed price at the agreed future date and the seller agrees to deliver the asset. The seller hopes that the market price on the delivery date is less than the agreed upon price, while the buyer hopes for the contrary. The change in value of a forward-based derivative generally is roughly proportional to the change in value of the underlying asset. Hedging. The Funds may use derivative instruments to protect against possible adverse changes in the market value of securities held in, or are anticipated to be held in, its portfolio. Derivatives may also be used to "lock-in" realized but unrecognized gains in the value of its portfolio securities. Hedging strategies, if successful, can reduce the risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the investments being hedged. However, hedging strategies can also reduce the opportunity for gain by offsetting the positive effect of favorable price movements in the hedged investments. To the extent that a hedge matures prior to or after the disposition of the investment subject to the hedge, any gain or loss on the hedge will be realized earlier or later than any offsetting gain or loss on the hedged investment. Managing Risk. The Funds may also use derivative instruments to manage the risks of its portfolio. Risk management strategies include, but are not limited to, facilitating the sale of portfolio securities, managing the effective maturity or duration of debt obligations in its portfolio, establishing a position in the derivatives markets as a substitute for buying or selling certain securities, or creating or altering exposure to certain asset classes, such as equity, debt, or foreign securities. The use of derivative instruments may provide a less expensive, more expedient or more specifically focused way to invest than "traditional" securities (i.e., stocks or bonds) would. Exchange and OTC Derivatives. Derivative instruments may be exchange-traded or traded in OTC transactions between private parties. Exchange-traded derivatives are standardized options and futures contracts traded in an auction on the floor of a regulated exchange. Exchange contracts are generally very liquid. The exchange clearinghouse is the counterparty of every contract. Thus, each holder of an exchange contract bears the credit risk of the clearinghouse (and has the benefit of its financial strength) rather than that of a particular counterparty. OTC transactions are subject to additional risks, such as the credit risk of the counterparty to the instrument, and are less liquid than exchange-traded derivatives since they often can only be closed out with the other party to the transaction. B-23 175 Risks and Special Considerations. The use of derivative instruments involves risks and special considerations as described below. Risks pertaining to particular derivative instruments are described in the sections that follow. (1) Market Risk. The primary risk of derivatives is the same as the risk of the underlying assets, namely that the value of the underlying asset may go up or down. Adverse movements in the value of an underlying asset can expose the Funds to losses. Derivative instruments may include elements of leverage and, accordingly, the fluctuation of the value of the derivative instrument in relation to the underlying asset may be magnified. The successful use of derivative instruments depends upon a variety of factors, particularly the ability of the Adviser to predict movements of the securities, currencies, and commodity markets, which requires different skills than predicting changes in the prices of individual securities. There can be no assurance that any particular strategy adopted will succeed. The Adviser's decision to engage in a derivative transaction will reflect its judgment that the derivative transaction will provide value to the Funds and their shareholders and is consistent with the Funds' objectives, investment limitations, and operating policies. In making such a judgment, the Adviser will analyze the benefits and risks of the derivative transaction and weigh them in the context of the Funds' entire portfolio and investment objective. (2) Credit Risk. The Funds will be subject to the risk that a loss may be sustained as a result of the failure of a counterparty to comply with the terms of a derivative instrument. The counterparty risk for exchange-traded derivative instruments is generally less than for privately negotiated or OTC derivative instruments, since generally a clearing agency, which is the issuer or counterparty to each exchange-traded instrument, provides a guarantee of performance. For privately negotiated instruments, there is no similar clearing agency guarantee. In all transactions, the Funds will bear the risk that the counterparty will default, and this could result in a loss of the expected benefit of the derivative transaction and possibly other losses. The Funds will enter into transactions in derivative instruments only with counterparties that the Adviser reasonably believes are capable of performing under the contract. (3) Correlation Risk. When a derivative transaction is used to completely hedge another position, changes in the market value of the combined position (the derivative instrument plus the position being hedged) result from an imperfect correlation between the price movements of the two instruments. With a perfect hedge, the value of the combined position remains unchanged for any change in the price of the underlying asset. With an imperfect hedge, the values of the derivative instrument and the hedged position are not perfectly correlated. Correlation risk is the risk that there might be imperfect correlation, or even no correlation, between price movements of a derivative instrument and price movements of investments being hedged. For example, if the value of a derivative instrument used in a short hedge (such as writing a call option, buying a put option, or selling a futures contract) increased by less than the decline in value of the hedged investments, the hedge would not be perfectly correlated. Such a lack of correlation might occur due to factors unrelated to the value of the investments being hedged, such as speculative or other pressures on the markets in which these instruments are traded. The effectiveness of hedges using instruments on indices will depend, in part, on the degree of correlation between price movements in the index and price movements in the investments being hedged. (4) Liquidity Risk. Derivatives are also subject to liquidity risk. Liquidity risk is the risk that a derivative instrument cannot be sold, closed out, or replaced quickly at or very close to its fundamental value. Generally, exchange contracts are very liquid because the exchange clearinghouse is the counterparty of every contract. OTC transactions are less liquid than exchange-traded derivatives since they often can be closed out only with the other party to the transaction. The Funds might be required by applicable regulatory requirement to maintain assets as "cover," maintain segregated accounts, and/or make margin payments when they take positions in derivative instruments involving obligations to third parties (i.e., instruments other than purchased options). If the Funds were unable to close out their positions in such instruments, they might be required to continue to maintain such assets or accounts or make such payments until the position expired, matured, or was closed out. The requirements might impair the Funds' ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Funds sell a portfolio security at a disadvantageous time. The Funds' ability to sell or close out a position in an instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the counterparty to enter into a B-24 176 transaction closing out the position. Therefore, there is no assurance that any derivatives position can be sold or closed out at a time and price that is favorable to the Funds. (5) Legal Risk. Legal risk is the risk of loss caused by the legal unenforceability of a party's obligations under the derivative. While a party seeking price certainty agrees to surrender the potential upside gain in exchange for downside protection, the party taking the risk is looking for a positive payoff. Despite this voluntary assumption of risk, a counterparty that has lost money in a derivative transaction may try to avoid payment by exploiting various legal uncertainties about certain derivative products. (6) Systemic or "Interconnection" Risk. Interconnection risk is the risk that a disruption in the financial markets will cause difficulties for all market participants. In other words, a disruption in one market will spill over into other markets, perhaps creating a chain reaction. Much of the OTC derivatives market takes place among the OTC dealers themselves, thus creating a large interconnected web of financial obligations. This interconnectedness raises the possibility that a default by one large dealer could create losses at other dealers and destabilize the entire market for OTC derivative instruments. General Limitations. The use of derivative instruments is subject to applicable regulations of the SEC, the several options and futures exchanges upon which they may be traded, the Commodity Futures Trading Commission ("CFTC"), and various state regulatory authorities. In addition, the Funds' ability to use derivative instruments may be limited by certain tax considerations. The Funds have filed a notice of eligibility for exclusion from the definition of the term "commodity pool operator" with the CFTC and the National Futures Association, which regulate trading in the futures markets. In accordance with Rule 4.5 of the regulations under the Commodity Exchange Act ("CEA"), the notice of eligibility for the Funds includes representations that the Funds will use futures contracts and related options solely for bona fide hedging purposes within the meaning of CFTC regulations, provided that the Funds may hold other positions in futures contracts and related options that do not qualify as a bona fide hedging position if the aggregate initial margin deposits and premiums required to establish these positions, less the amount by which any such futures contracts and related options positions are "in the money," do not exceed 5% of a Fund's net assets. Adherence to these guidelines does not limit a Fund's risk to 5% of the Fund's assets. The SEC has identified certain trading practices involving derivative instruments that involve the potential for leveraging the Funds' assets in a manner that raises issues under the 1940 Act. In order to limit the potential for the leveraging of the Funds' assets, as defined under the 1940 Act, the SEC has stated that the Funds may use coverage or the segregation of the Funds' assets. To the extent required by SEC guidelines, the Funds will not enter into any such transactions unless it owns either: (1) an offsetting ("covered") position in securities, options, futures, or derivative instruments; or (2) cash or liquid securities positions with a value sufficient at all times to cover its potential obligations to the extent that the position is not "covered". The Funds will also set aside cash and/or appropriate liquid assets in a segregated custodial account if required to do so by SEC and CFTC regulations. Assets used as cover or held in a segregated account cannot be sold while the derivative position is open, unless they are replaced with similar assets. As a result, the commitment of a large portion of the Funds' assets to segregated accounts could impede portfolio management or the Funds' ability to meet redemption requests or other current obligations. In some cases, the Funds may be required to maintain or limit exposure to a specified percentage of its assets to a particular asset class. In such cases, when the Funds uses a derivative instrument to increase or decrease exposure to an asset class and is required by applicable SEC guidelines to set aside liquid assets in a segregated account to secure its obligations under the derivative instruments, the Adviser may, where reasonable in light of the circumstances, measure compliance with the applicable percentage by reference to the nature of the economic exposure created through the use of the derivative instrument and not by reference to the nature of the exposure arising from the liquid assets set aside in the segregated account (unless another interpretation is specified by applicable regulatory requirements). B-25 177 Options. The Funds may use options for any bona fide hedging or risk management purpose. An option is a contract in which the "holder" (the buyer) pays a certain amount ("premium") to the "writer" (the seller) to obtain the right, but not the obligation, to buy from the writer (in a "call") or sell to the writer (in a "put") a specific asset at an agreed upon price ("strike price" or "exercise price") at or before a certain time ("expiration date"). The holder pays the premium at inception and has no further financial obligation. The holder of an option will benefit from favorable movements in the price of the underlying asset but is not exposed to corresponding losses due to adverse movements in the value of the underlying asset. The writer of an option will receive fees or premiums but is exposed to losses due to changes in the value of the underlying asset. The Funds may buy or write (sell) put and call options on assets, such as securities, currencies, futures, financial commodities, and indices of debt and equity securities ("underlying assets") and enter into closing transactions with respect to such options to terminate an existing position. Options used by the Funds may include European, American, and Bermuda style options. If an option is exercisable only at maturity, it is a "European" option; if it is also exercisable prior to maturity, it is an "American" option. If it is exercisable only at certain times, it is a "Bermuda" option. The Funds may purchase (buy) and write (sell) put and call options on underlying assets and enter into closing transactions with respect to such options to terminate an existing position. The purchase of a call option serves as a long hedge, and the purchase of a put option serves as a short hedge. Writing put or call options can enable the Funds to enhance income by reason of the premiums paid by the purchaser of such options. Writing call options serves as a limited short hedge because declines in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security appreciates to a price higher than the exercise price of the call option, it can be expected that the option will be exercised and the Funds will be obligated to sell the security at less than its market value or will be obligated to purchase the security at a price greater than that at which the security must be sold under the option. All or a portion of any assets used as cover for OTC options written by the Funds would be considered illiquid. Writing put options serves as a limited long hedge because decreases in the value of the hedged investment would be offset to the extent of the premium received for writing the option. However, if the security depreciates to a price lower than the exercise price of the put option, it can be expected that the put option will be exercised and the Funds will be obligated to purchase the security at more than its market value. The value of an option position will reflect, among other things, the historical price volatility of the underlying investment, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment, and general market conditions. The Funds may effectively terminate a right or obligation under an option by entering into a closing transaction. For example, the Funds may terminate an obligation under a call or put option that they had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, the Funds may terminate a position in a put or call option they had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit the Funds to realize the profit or limit the loss on an option position prior to its exercise or expiration. The Funds may purchase or write both exchange-traded and OTC options. Exchange-traded options are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between the Funds and the other party to the transaction ("counterparty") (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when the Funds purchase or write an OTC option, they rely on the counterparty to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by the Funds as well as the loss of any expected benefit of the transaction. The Funds' ability to establish and close out positions in exchange-listed options depends on the existence of a liquid market. The Funds intend to purchase or write only those exchange-traded options for which there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. Although the Funds will enter into OTC options only with counterparties that are expected to be capable of entering into closing transactions with the Funds, there is no B-26 178 assurance that the Funds will in fact be able to close out an OTC option at a favorable price prior to expiration. In the event of insolvency of the counterparty, the Funds might be unable to close out an OTC option position at any time prior to its expiration. If the Funds were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The Funds also may engage in options transactions as described above on securities indices and other financial indices and in so doing can achieve many of the same objectives they would achieve through the sale or purchase of options on individual securities or other instruments. Options on securities indices and other financial indices are similar to options on a security or other instrument except that, rather than settling by physical delivery of the underlying instrument, they settle by cash settlement, i.e., an option on an index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the index upon which the option is based exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option (except if, in the case of an OTC option, physical delivery is specified). This amount of cash is equal to the excess of the closing price of the index over the exercise price of the option, which also may be multiplied by a formula value. The seller of the option is obligated, in return for the premium received, to make delivery of this amount. The gain or loss on an option on an index depends on price movements in the instruments making up the market, market segment, industry or other composite on which the underlying index is based, rather than price movements in individual securities, as is the case with respect to options on securities. The writing and purchasing of options is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Imperfect correlation between the options and securities markets may detract from the effectiveness of the attempted hedging. Futures Contracts. The Funds may enter into contracts for the purchase or sale for future delivery of fixed-income securities, foreign currencies or contracts based on financial indices, including indices of U.S. government securities, foreign government securities, equity or fixed-income securities. The Funds may also purchase put and call options, and write covered put and call options, on futures in which it is allowed to invest. The purchase of futures or call options thereon can serve as a long hedge, and the sale of futures or the purchase of put options thereon can serve as a short hedge. Writing covered call options on futures contracts can serve as a limited short hedge, and writing covered put options on futures contracts can serve as a limited long hedge, using a strategy similar to that used for writing covered options in securities. The Funds may also write put options on futures contracts while at the same time purchasing call options on the same futures contracts in order to create synthetically a long futures contract position. Such options would have the same strike prices and expiration dates. The Funds will engage in this strategy only when the Adviser believes it is more advantageous to the Funds than purchasing the futures contract. The Funds may use futures contracts solely for the purpose of bona fide hedging or risk management. A Fund's primary purpose in entering into futures contracts is to protect that Fund from fluctuations in the value of securities or interest rates without actually buying or selling the underlying debt or equity security. For example, if a Fund anticipates an increase in the price of stocks, and it intends to purchase stocks at a later time, that Fund could enter into a futures contract to purchase a stock index as a temporary substitute for stock purchases. If an increase in the market occurs that influences the stock index, as anticipated, the value of the futures contracts will increase, thereby serving as a hedge against that Fund not participating in a market advance. Conversely, if a Fund holds stocks and seeks to protect itself from a decrease in stock prices, the Fund might sell stock index futures contracts, thereby hoping to offset the potential decline in the value of its portfolio securities by a corresponding increase in the value of the futures contract position. A Fund could protect against a decline in stock prices by selling portfolio securities and investing in money market instruments, but the use of futures contracts enables it to maintain a defensive position without having to sell portfolio securities. Although techniques other than sales and purchases of futures contracts could be used to reduce the Funds' exposure to market or interest rate fluctuations, the Funds may be able to hedge its exposure more effectively and perhaps at a lower cost through the use of futures contracts. B-27 179 A futures contract provides for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument for a specified price at a designated date, time, and place. An index futures contract is an agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index futures contract was originally written. Transaction costs are incurred when a futures contract is bought or sold and margin deposits must be maintained. A futures contract may be satisfied by delivery or purchase, as the case may be, of the instrument or by payment of the change in the cash value of the index. More commonly, futures contracts are closed out prior to delivery by entering into an offsetting transaction in a matching futures contract. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of those securities is made. If the offsetting purchase price is less than the original sale price, the Funds realize a gain; if it is more, the Funds realize a loss. Conversely, if the offsetting sale price is more than the original purchase price, the Funds realize a gain; if it is less, the Funds realize a loss. The transaction costs must also be included in these calculations. There can be no assurance, however, that the Funds will be able to enter into an offsetting transaction with respect to a particular futures contract at a particular time. If the Funds are not able to enter into an offsetting transaction, the Funds will continue to be required to maintain the margin deposits on the futures contract. No price is paid by the Funds upon entering into a futures contract. Instead, at the inception of a futures contract, the Funds are required to deposit in a segregated account with its custodian, in the name of the futures broker through whom the transaction was effected, "initial margin" consisting of cash and/or other appropriate liquid assets in an amount generally equal to 10% or less of the contract value. Margin must also be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin on futures contracts does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to the Funds at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, the Funds may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action. Subsequent "variation margin" payments are made to and from the futures broker daily as the value of the futures position varies, a process known as "marking to market." Variation margin does not involve borrowing, but rather represents a daily settlement of the Funds' obligations to or from a futures broker. When the Funds purchases an option on a future, the premium paid plus transaction costs is all that is at risk. In contrast, when the Funds purchase or sell a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If the Funds have insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous. Purchasers and sellers of futures positions and options on futures can enter into offsetting closing transactions by selling or purchasing, respectively, an instrument identical to the instrument held or written. Positions in futures and options on futures may be closed only on an exchange or board of trade that provides a secondary market. The Funds intends to enter into futures transactions only on exchanges or boards of trade where there appears to be a liquid secondary market. However, there can be no assurance that such a market will exist for a particular contract at a particular time. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a future or option on a futures contract can vary from the previous day's settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions. If the Funds were unable to liquidate a futures or option on a futures contract position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Funds would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, the Funds would continue to be required to make daily variation margin payments and might be required to maintain the position being hedged by the future or option or to maintain cash or securities in a segregated account. B-28 180 Certain characteristics of the futures market might increase the risk that movements in the prices of futures contracts or options on futures contracts might not correlate perfectly with movements in the prices of the investments being hedged. For example, all participants in the futures and options on futures contracts markets are subject to daily variation margin calls and might be compelled to liquidate futures or options on futures contracts positions whose prices are moving unfavorably to avoid being subject to further calls. These liquidations could increase price volatility of the instruments and distort the normal price relationship between the futures or options and the investments being hedged. Also, because initial margin deposit requirements in the futures markets are less onerous than margin requirements in the securities markets, there might be increased participation by speculators in the future markets. This participation also might cause temporary price distortions. In addition, activities of large traders in both the futures and securities markets involving arbitrage, "program trading" and other investment strategies might result in temporary price distortions. Swap Agreements. The Funds may enter into interest rate, securities index, commodity, or security and currency exchange rate swap agreements and related caps, floors, and collars. The Funds will use such instruments solely for the purpose of bona fide hedging or risk management, such as for the purpose of attempting to obtain or preserve a particular desired return or spread at a lower cost to the Funds than if the Funds had invested directly in an instrument that yielded that desired return or spread. The Funds also may enter into swaps in order to protect against an increase in the price of, or the currency exchange rate applicable to, securities that the Funds anticipate purchasing at a later date. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to several years. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount" (i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate) in a particular foreign currency, or in a "basket" of securities representing a particular index. Swap agreements may include caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that a specified index exceed a specified rate or amount, or "cap;" floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that a specified index fall below a specified level, or "floor;" and collars, under which a party sells a cap and purchases a floor, or vice versa, in an attempt to protect itself against movements interest or values exceeding given minimum or maximum levels. The "notional amount" of the swap agreement is the agreed upon basis for calculating the obligations that the parties to a swap agreement have agreed to exchange. Under most swap agreements entered into by the Funds, the obligations of the parties would be exchanged on a "net basis." Consequently, the Funds' obligation (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. A Fund's obligation under a swap agreement will be accrued daily (offset against amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash and/or other appropriate liquid assets. Whether the Funds' use of swap agreements will be successful in furthering their investment objectives will depend, in part, on the Adviser's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. The swap market has grown substantially in recent years with a large number of banking firms acting as both principals and agents using standardized swap documentation. As a result, the swap market has become relatively liquid. Caps, floors and collars are more recent innovations for which standardized documentation has not been fully developed and, accordingly, they are less liquid than swaps. Moreover, the Funds bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. Certain restrictions imposed on the Funds by the Internal Revenue Code of 1986 ("IRC") may limit the Funds' ability to use swap agreements. The swaps market is largely unregulated. The Funds will enter swap agreements only with counterparties that the Adviser reasonably believes are capable of performing under the swap agreements. If there is a default by the other party to such a transaction, the Funds will have to rely on its contractual remedies (which may be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements related to the transaction. B-29 181 Additional Derivative Instruments and Strategies. In addition to the derivative instruments and strategies described above and in the Prospectus, the Adviser expects additional derivative instruments and other hedging or risk management techniques to develop from time to time. The Adviser may utilize these new derivative instruments and techniques to the extent that they are consistent with the Funds' investment objective and permitted by the Funds' investment limitations, operating policies, and applicable regulatory authorities. FOREIGN SECURITIES. Investing in foreign securities involves a series of risks not present in investing in U.S. securities. Most of the foreign securities held by the portfolios will not be registered with the Securities and Exchange Commission (the "SEC"), nor will the foreign issuers be subject to SEC reporting requirements. Accordingly, there may be less publicly available information concerning foreign issuers of securities held by the portfolio than is available concerning U.S. companies. Disclosure and regulatory standards in many respects are less stringent in emerging market countries than in the U.S. and other major markets. There also may be a lower level of monitoring and regulation of emerging markets and the activities of investors in such markets and enforcement of existing regulations may be extremely limited. Foreign companies and, in particular, companies in smaller and emerging capital markets are not generally subject to uniform accounting, auditing and financial reporting standards, or to other regulatory requirements comparable to those applicable to U.S. companies. The portfolio's net investment income and capital gains from its foreign investment activities may be subject to non-U.S. withholding taxes. The costs attributable to foreign investing that a Fund must bear frequently are higher than those attributable to domestic investing; this is particularly true with respect to emerging capital markets. For example, the costs of maintaining custody of foreign securities exceeds custodian costs for domestic securities and transaction and settlement costs of foreign investing also frequently are higher than those attributable to domestic investing. Costs associated with the exchange of currencies also make foreign investing more expensive than domestic investing. Investment income on certain foreign securities in which the portfolio may invest may be subject to foreign withholding or other government taxes that could reduce the return of these securities. Tax treaties between the United States and foreign countries, however, may reduce or eliminate the amount of foreign tax to which the portfolio would be subject. The economies of individual emerging market countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. Investments in companies domiciled in developing countries may be subject to potentially higher risks than investments in developed countries. These risks include (i) less social, political and economic stability; (ii) the small current size of the markets for such securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) certain national policies which may restrict a portfolio's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (iv) the absence of developed legal structures governing private or foreign investment or allowing for judicial redress for injury to private property; (v) the absence, until recently in certain Eastern European countries, of a capital market structure or market-oriented economy; and (vi) the possibility that recent favorable economic developments in Eastern Europe may be slowed or reversed by unanticipated political or social events in such countries. In addition, many countries in which the Funds may invest have experienced substantial, and in some periods extremely high, rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. Moreover, the economies of some developing countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resources self-sufficiency and balance of payments position. B-30 182 Investments in Eastern European countries may involve risks of nationalization, expropriation and confiscatory taxation. The communist governments of a number of Eastern European countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that such expropriation will not occur in the future. In the event of such expropriation, a portfolio could lose a substantial portion of any investments it has made in the affected countries. Finally, even though certain Eastern European currencies may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to portfolio shareholders. Further, no accounting standards exist in Eastern European countries. Investing in Russian securities involves a high degree of risk and special considerations not typically associated with investing in the U.S. securities markets, and should be considered highly speculative. Such risks include: (1) delays in settling portfolio transactions and risk of loss arising out of Russia's system of share registration and custody; (2) the risk that it may be impossible or more difficult than in other countries to obtain and/or enforce a judgment; (3) pervasiveness of corruption and crime in the Russian economic system; (4) currency exchange rate volatility and the lack of available currency hedging instruments; (5) higher rates of inflation (including the risk of social unrest associated with periods of hyper-inflation); (6) controls on foreign investment and local practices disfavoring foreign investors and limitations on repatriation of invested capital, profits and dividends, and on a portfolio's ability to exchange local currencies for U.S. dollars; (7) the risk that the government of Russia or other executive or legislative bodies may decide not to continue to support the economic reform programs implemented since the dissolution of the Soviet Union and could follow radically different political and/or economic policies to the detriment of investors, including non-market-oriented policies such as the support of certain industries at the expense of other sectors or investors, or a return to the centrally planned economy that existed prior to the dissolution of the Soviet Union; (8) the financial condition of Russian companies, including large amounts of inter-company debt which may create a payments crisis on a national scale; (9) dependency on exports and the corresponding importance of international trade; (10) the risk that the Russian tax system will not be reformed to prevent inconsistent, retroactive and/or exorbitant taxation; and (11) possible difficulty in identifying a purchaser of securities held by a portfolio due to the underdeveloped nature of the securities markets. There is little historical data on Russian securities markets because they are relatively new and a substantial proportion of securities transactions in Russia are privately negotiated outside of stock exchanges. Because of the recent formation of the securities markets as well as the underdeveloped state of the banking and telecommunications systems, settlement, clearing and registration of securities transactions are subject to significant risks. Ownership of shares (except where shares are held through depositories that meet the requirements of the 1940 Act) is defined according to entries in the company's share register and normally evidenced by extracts from the register or by formal share certificates. However, there is no central registration system for shareholders and these services are carried out by the companies themselves or by registrars located throughout Russia. These registrars are not necessarily subject to effective state supervision and it is possible for a portfolio to lose its registration through fraud, negligence or even mere oversight. While each portfolio will endeavor to ensure that its interest continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the portfolio of its ownership rights or improperly dilute its interests. In addition, while applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for a portfolio to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Furthermore, although a Russian public enterprise with more than 1,000 shareholders is required by law to contract out the maintenance of its shareholder register to an independent entity that meets certain criteria, in practice this regulation has not always been strictly enforced. Because of this lack of independence, management of a company may be able to exert considerable influence over who can purchase and sell the company's shares by illegally instructing the registrar to refuse to record transactions in the share register. This practice may prevent a portfolio from investing in the securities of certain Russian issuers deemed suitable by its portfolio manager. Further, this also could cause a delay in the sale of Russian securities by a portfolio if a potential purchaser is deemed unsuitable, which may expose the portfolio to potential loss on the investment. Each portfolio endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread in currency exchange (to cover service charges) will be incurred, particularly when a portfolio changes B-31 183 investments from one country to another or when proceeds of the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent a portfolio from transferring cash out of the country or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization or confiscatory taxation, withholding and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments which could affect investments in securities of issuers in foreign nations. Foreign markets also have different clearance and settlement procedures and in certain markets there have been times when settlements have failed to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could result in temporary periods when assets of the portfolio are uninvested and no return is earned thereon. The inability of the portfolio to make intended security purchases due to settlement problems could cause the portfolio to miss investment opportunities. Inability to dispose of a portfolio security due to settlement problems either could result in losses to the portfolio due to subsequent declines in the value of such portfolio security or, if the portfolio has entered into a contract to sell the security, could result in possible liability to the purchaser. Foreign securities may be purchased through depository receipts, including American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") Global Depository Receivables ("GDRs"), or other securities convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted. Generally, ADRs, in registered form, are denominated in U.S. dollars and are designed for use in the U.S. securities markets, while EDRs and GDRs may be denominated in other currencies and are designed for use in the European securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. EDRs and GDRs are European receipts evidencing a similar arrangement. For purposes of the portfolio's investment policies, ADRs, EDRs and GDRs are deemed to have the same classification as the underlying securities they represent, except that ADRs, EDRs and GDRs shall be treated as indirect foreign investments. Thus, an ADR, EDR or GDR representing ownership of common stock will be treated as common stock. ADR, EDR and GDR depository receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers. ADR facilities may be established as either "unsponsored" or "sponsored." While ADRs issued under these two types of facilities are in some respects similar, there are distinctions between them relating to the rights and obligations of ADR holders and the practices of market participants. A depository may establish an unsponsored facility without participation by (or even necessarily the acquiescence of) the issuer of the deposited securities, although typically the depository requests a letter of non-objection from such issuer prior to the establishment of the facility. Holders of unsponsored ADRs generally bear all the costs of such facilities. The depository usually charges fees upon the deposit and withdrawal of the deposited securities, the conversion of dividends into U.S. dollars, the disposition of non-cash distributions and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to pass through voting rights to ADR holders with respect to the deposited securities. In addition, an unsponsored facility is generally not obligated to distribute communications received from the issuer of the deposited securities or to disclose material information about such issuer in the U.S. and thus there may not be a correlation between such information and the market value of the depository receipts. Sponsored ADR facilities are created in generally the same manner as unsponsored facilities, except that the issuer of the deposited securities enters into a deposit agreement with the depository. The deposit agreement sets out the rights and responsibilities of the issuer, the depository and the ADR holders. With sponsored facilities, the issuer of the deposited securities generally will bear some of the costs relating to the facility (such as dividend payment fees of the depository), although ADR holders continue to bear certain other costs (such as deposit and withdrawal fees). Under the terms of most sponsored arrangements, depositories agree to distribute notices of shareholder meetings and voting instructions and to provide shareholder communications and other information to the ADR holders at the request of the issuer of the deposited securities. B-32 184 FORWARD FOREIGN CURRENCY TRANSACTIONS. The foreign securities held by the International Growth Fund and the Emerging Markets Growth Fund will usually be denominated in foreign currencies and the Fund may temporarily hold foreign currency in connection with such investments. As a result, the value of the assets held by the Fund may be affected favorably or unfavorably by changes in foreign currency exchange rates, by exchange control regulations and by indigenous economic and political developments. Some countries in which the Funds may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded. Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which a Fund's securities are denominated may have a detrimental impact on that Fund. A Fund 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 Fund 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 Fund 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 Fund holds or intends to purchase. Thus, the Fund will not enter into a forward currency contract if such contract would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund securities or other assets denominated in that currency. The International Growth Fund and the Emerging Markets Growth Fund may use forward currency contracts to fix the value of certain securities it has agreed to buy or sell. For example, when a Fund enters into a contract to purchase or sell securities denominated in a particular foreign currency, the Fund 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, a Fund can protect the value of securities in the underlying transaction from an adverse change in the exchange rate between the currency of the underlying securities in the transaction and the currency denominated in the foreign currency contract, during the period between the date the security is purchased or sold and the date on which payment is made or received. The International Growth Fund and the Emerging Markets Growth Fund may also use forward currency contracts to hedge the value, in U.S. dollars, of securities it currently owns. For example, if the portfolio held securities denominated in a foreign currency and anticipated a substantial decline (or increase) in the value of that currency against the U.S. dollar, the Fund 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 Fund's contractual obligation to deliver the foreign currency pursuant to the terms of the forward currency contract by obligating the Fund 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 Fund 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 B-33 185 subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic (U.S.) exchange regulates activities of any foreign boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true even if the exchange is formally linked to a domestic market so that a position taken on the exchange may be liquidated by a transaction on the appropriate domestic market. Moreover, applicable laws or regulations will vary depending on the foreign country in which the foreign futures transaction occurs. Therefore, entities (such as the portfolio) which trade foreign futures contracts may not be afforded certain of the protective measures provided by the Commodity Exchange Act, Commodity Futures Trading Commission ("CFTC") regulations, the rules of the National Futures Association or those of a domestic (U.S.) exchange. In particular, monies received from customers for foreign futures transactions may not be provided the same protections as monies received in connection with transactions on U.S. futures exchanges. In addition, the price of any foreign futures and, therefore, the potential profits and loss thereon, may be affected by any variance in the foreign exchange rate between the time the order for the futures contract is placed and the time it is liquidated, offset or exercised. HIGH-YIELD/HIGH-RISK SECURITIES. High-yield/high-risk securities (or "junk" bonds) are debt securities rated below investment grade by the primary rating agencies (such as Standard & Poor's Ratings Services and Moody's Investors Service, Inc.). The value of lower quality securities generally is more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk) than is the case for higher quality securities. Conversely, the value of higher quality securities may be more sensitive to interest rate movements than lower quality securities. Issuers of high-yield securities may not be as strong financially as those issuing bonds with higher credit ratings. Investments in such companies are considered to be more speculative than higher quality investments. Issuers of high-yield securities are more vulnerable to real or perceived economic changes (for instance, an economic downturn or prolonged period of rising interest rates), political changes or adverse developments specific to the issuer. The market for lower quality securities is generally less liquid than the market for higher quality securities. Adverse publicity and investor perceptions as well as new or proposed laws may also have a greater negative impact on the market for lower quality securities. B-34 186 INVESTMENT COMPANIES. The Trust has applied for certain exemptive relief with the SEC that, if granted, will allow the Funds to invest a portion of their assets into shares of the Ready Reserves Fund based upon the terms and conditions of such relief. ILLIQUID SECURITIES. Illiquid securities are securities that are not readily marketable. The Board of Trustees, or its delegate, has the ultimate authority to determine, to the extent permissible under the federal securities laws, which securities are illiquid for purposes of this limitation. Certain securities exempt from registration or issued in transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), such as securities that may be resold to institutional investors under Rule 144A under the Securities Act and Section 4(2) commercial paper may be considered liquid under guidelines adopted by the Board of Trustees. The Board of Trustees has delegated to the Adviser the day-to-day determination of the liquidity of a security, although it has retained oversight for such determinations. The Board of Trustees has approved procedures that allow the Adviser to deem Section 4(2) commercial paper liquid only if the Adviser determines that there is no significant difference between Section 4(2) commercial paper and traditional commercial paper based upon an evaluation of the following characteristics: (i) market characteristic, such as the nature of the security and the nature of marketplace trades; (ii) trading characteristics, such as the frequency of trades and quotes for the security, the number of dealers willing to purchase or sell the security and the number of other potential purchasers; and (iii) the quality of the issue or issuer. With respect to a portfolio's foreign holdings, a foreign security may be considered liquid by the Adviser (despite its restricted nature under the Securities Act) if the security can be freely traded in a foreign securities market and the facts and circumstances support a finding of liquidity. LENDING. The Income Fund may from time to time lend securities (but not in excess of 75% of its assets) from its portfolio to brokers, dealers and financial institutions, provided: (1) the loan is secured continuously by collateral consisting of U.S. Government securities, government agency securities, U.S. Government instrumentality 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 Trustees) has reviewed the creditworthiness of the borrower and has found it satisfactory. The Funds will receive from the borrower amounts equal to the interest paid on the securities loaned and will also earn income for having made the loan. Any cash collateral will be invested in short-term securities, the income from which will increase the return to the portfolio. The risks associated with lending portfolio securities are similar to those of entering into repurchase agreements. While the Value Discovery Fund, Tax-Managed Growth Fund, Large Cap Growth Fund, Small Cap Growth Fund and Disciplined Large Cap Fund also have the authority to lend portfolio securities, they have no current intention to do so. REPURCHASE AGREEMENTS. In a repurchase agreement, a portfolio buys a security at one price and at the time of sale, the seller agrees to repurchase the obligation at a mutually agreed upon time and price (usually within seven days). The repurchase agreement thereby determines the yield during the purchaser's holding period, while the seller's obligation to repurchase is secured by the value of the underlying security. The Adviser will monitor, on an ongoing basis, the value of the underlying securities to ensure that the value always equals or exceeds the repurchase price plus accrued interest. Repurchase agreements could involve certain risks in the event of a default or insolvency of the other party to the agreement, including possible delays or restrictions upon a portfolio's ability to dispose of the underlying securities. The risk to a portfolio is limited to the ability of the seller to pay the agreed upon sum on the delivery date. In the event of default, a repurchase agreement provides that the portfolio is entitled to sell the underlying collateral. The loss, if any, to the portfolio will be the difference between the proceeds from the sale and the repurchase price. However, if bankruptcy proceedings are commenced with respect to the seller of the security, disposition of the collateral by the portfolio may be delayed or limited. Although no definitive creditworthiness criteria are used, the Adviser reviews the creditworthiness of the banks and non-bank dealers with which the portfolio enters into repurchase agreements to evaluate those risks. The Board of Trustees will review and monitor the creditworthiness of broker-dealers and banks with which a portfolio enters into repurchase agreements. A portfolio may, under certain circumstances, deem repurchase agreements collateralized by U.S. government securities to be investments in U.S. government securities. B-35 187 RESTRICTED SECURITIES. Restricted securities may be sold only in privately negotiated transactions or in a public offering with respect to which a registration statement is in effect under the Securities Act. Where registration is required, a portfolio may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the portfolio may be permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, the portfolio might obtain a less favorable price than prevailed when it decided to sell. If through the appreciation of restricted securities or the depreciation of unrestricted securities, a portfolio would be in a position where more of its net assets are invested in illiquid securities, including restricted securities that are not readily marketable (except for 144A Securities and 4(2) commercial paper deemed to be liquid by the Adviser), than is permitted by its investment restrictions, the Fund will take such steps as it deems advisable, if any, to protect liquidity. SMALL COMPANIES. While smaller companies generally have the potential for rapid growth, investments in smaller companies often involve greater risks than investments in larger, more established companies because smaller companies may lack the management experience, financial resources, product diversification and competitive strengths of larger companies. In addition, in many instances the securities of smaller companies are traded only over-the-counter or on a regional securities exchange and the frequency and volume of their trading is substantially less than is typical of larger companies. Therefore, the securities of smaller companies may be subject to greater and more abrupt price fluctuations. When making large sales, the portfolio may have to sell portfolio holdings at discounts from quoted prices or may have to make a series of small sales over an extended period of time due to the trading volume of smaller company securities. Investors should be aware that, based on the foregoing factors, an investment in the Value Discovery Fund and the Emerging Markets Growth Fund, and to a lesser extent, the Growth Fund and the International Growth Fund, may be subject to greater price fluctuations than an investment in a fund that invests primarily in larger, more established companies. The Adviser's research efforts may also play a greater role in selecting securities for the portfolio than in a fund that invests in larger, more established companies. WARRANTS. Warrants are securities giving the holder the right, but not the obligation, to buy the stock of an issuer at a given price (generally higher than the value of the stock at the time of issuance) during a specified period or perpetually. Warrants may be acquired separately or in connection with the acquisition of securities. Warrants do not carry with them the right to dividends or voting rights with respect to the securities that they entitle their holder to purchase and they do not represent any rights in the assets of the issuer. As a result, warrants may be considered to have more speculative characteristics than certain other types of investments. In addition, the value of a warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date. WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. Each 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 Fund 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. A Fund will record the transaction and reflect the liability for the purchase and the value of the security in determining its net asset value. The value of fixed-income securities to be delivered in the future will fluctuate as interest rates vary. A Fund generally has the ability to close out a purchase obligation on or before the settlement date, rather than take delivery of the security. At the time a Fund makes the commitment to sell a security on a delayed delivery basis, it will record the transaction and include the proceeds to be received in determining its net asset value; accordingly, any fluctuations in the value of the security sold pursuant to a delayed delivery commitment are ignored in calculating net asset value so long as the commitment remains in effect. Normally, settlement occurs within one month of the purchase or sale. To the extent a Fund engages in when-issued or delayed delivery purchases, it will do so for the purpose of acquiring securities consistent with the Fund's investment objective and policies and not for the purpose of investment leverage or to speculate on interest rate changes, but each Fund reserves the right to sell these securities before the settlement date if deemed advisable. To the extent required to comply with Securities and Exchange Commission Release No. IC-10666, when purchasing securities on a when-issued or delayed delivery basis, each Fund will maintain in a segregated account cash or liquid securities equal to the value of such contracts. B-36 188 ADDITIONAL INFORMATION ABOUT SHARE CLASSES PURCHASE OF SHARES--ALTERNATIVE PURCHASE ARRANGEMENTS. Class A shares of each Fund are sold to investors subject to an initial sales charge. Class B shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares and a contingent deferred sales charge payable upon certain redemptions. Class B shares automatically convert to Class A shares at the end of the seventh year after issuance. Class C shares are sold without an initial sales charge but are subject to higher ongoing expenses than Class A shares, are subject to a contingent deferred sales charge payable upon certain redemptions within the first year following purchase, and do not convert into another class. Class N shares are sold to investors without an initial sales charge or a contingent deferred sales charge but have higher ongoing expenses than Class I shares. Class I shares are sold to investors without an initial sales charge or a contingent deferred sales charge, and have lower ongoing expenses than Class N shares. When placing purchase orders, investors must specify whether the order is for Class A, Class B, Class C shares, Class N shares or Class I shares. The primary distinctions among the classes of each Fund's shares lie in their initial and contingent deferred sales charge structure and in their ongoing expenses, including asset-based sales charges in the form of Rule 12b-1 distribution fees and shareholder services fees. These differences are summarized in the table below. Each class has distinct advantages and disadvantages for different investors, and investors may choose the class that best suits their circumstances and objectives.
ANNUAL ANNUAL 12B-1 FEES SHAREHOLDER (AS A % OF SERVICES FEES AVERAGE DAILY (AS A % OF AVERAGE OTHER SALES CHARGE NET ASSETS) DAILY NET ASSETS) INFORMATION ------------ ------------- ------------------ ----------- Class A Maximum initial sales charge of None 0.25% Initial sales charge 5.75% (2.00% for the Income waived or reduced Fund) of the public offering price for certain purchases Class B Maximum contingent deferred 0.75% 0.25% Shares convert to sales charge of 5.00% (2.00% for Class A shares the Income Fund) of redemption eight years after proceeds; declines to zero after issuance (three for six years (two years for the the Income Fund) Income Fund) Class C Contingent deferred sales charge 0.75% 0.25% No conversion of 1% of redemption proceeds for feature redemptions made during first year after purchase Class N None 0.25%(1) None Class I None None None
- -------------- (1) For all Funds except the Income Fund (0.15%) and the Ready Reserves Fund (0.35%). ELIGIBILITY. In addition to the eligibility requirements set forth in the prospectus, the following types of investors may invest in the following classes of shares: B-37 189 Class A: (1) through certain investment advisers registered under the Investment Advisers Act of 1940 and other financial services firms, acting solely as agent for their clients, that adhere to certain standards established by the Distributor, including a requirement that such shares be purchased for the benefit of their clients participating in an investment advisory program or agency commission program under which such clients pay a fee to the investment advisor or the other firm for portfolio management or agency brokerage services. Class I: (1) tax-exempt retirement plans (Profit Sharing, 401(k), Money Purchase Pension and Defined Benefit Plans) of William Blair and it affiliates and rollover accounts from those plans; and (2) investment companies managed by William Blair that invest primarily in other investment companies. Share certificates will not be issued. DISTRIBUTION FEES. Each Fund has adopted plans under Rule 12b-1 ("Distribution Plans") that provide for fees to compensate the Distributor for distribution and services for Class B, Class C and Class N shares. Because Rule 12b-1 fees are paid out of Fund assets on an ongoing basis, they will, over time, increase the cost of an investment and cost more than other types of sales charges. For its services under the Distribution Plan, the Distributor reserves a distribution fee from each Fund, payable monthly, at the annual rate of 0.75%, 0.75% and 0.25%, of average daily net assets attributable to Class B, Class C and Class N shares, respectively, of each Fund except for Class N shares of the Income Fund and the Ready Reserves Fund. For the Class N shares of the Income Fund and Ready Reserves Fund, the Distributor receives a fee under the Distribution Plan, payable monthly, at the annual rate of 0.15% and 0.35%, respectively. If a Distribution Plan is terminated in accordance with its terms, the obligation of a Fund to make payments to the Distributor pursuant to the Distribution Plan will cease and the Fund will not be required to make any payments past the termination date. Thus, there is no legal obligation for the Fund to pay any expenses incurred by the Distributor in excess of its fees under a Distribution Plan, if for any reason the Plan is terminated in accordance with its terms. Future fees under a Distribution Plan may or may not be sufficient to reimburse the Distributor for its expenses incurred. SHAREHOLDER SERVICE FEES. Shareholder services are provided to each Fund's Class A, Class B and Class C shares under a Shareholder Services Agreement with the Distributor. The Distributor bears all its expenses of providing services pursuant to the Shareholder Services Agreement, including the payment of shareholder service fees. The Fund pays the Distributor a shareholder services fee, payable monthly, at an annual rate of 0.25% of average daily net assets of Class A, Class B and Class C shares of the Fund. SUMMARY OF ONGOING FEES FOR CLASS A SHARES. Under a Shareholder Service Agreement, the Funds pay a shareholder services fee to the Distributor, payable monthly, at an annual rate of 0.25% of average daily net assets of each Fund attributable to Class A shares. The fee is accrued daily as an expense of Class A shares. SUMMARY OF ONGOING FEES FOR CLASS B SHARES. Under a Distribution Plan, the Funds pay a distribution fee to the Distributor, payable monthly, at the annual rate of 0.75% of average daily net assets of each Fund attributable to Class B shares. Under a Shareholder Service Agreement, the Funds also pay to the Distributor a shareholder services fee, payable monthly, at an annual rate of 0.25% of average daily net assets of each Fund attributable to Class B shares. Both fees are accrued daily as an expense of Class B shares. SUMMARY OF ONGOING FEES FOR CLASS C SHARES. Under a Distribution Plan, the Funds pay a distribution fee to the Distributor, payable monthly, at an annual rate of 0.75% of average daily net assets of each Fund attributable to B-38 190 Class C shares. Under a separate Shareholder Services Agreement, the Funds also pay to the Distributor a shareholder services fee, payable monthly, at an annual rate of 0.25% of average daily net assets of each Fund attributable to Class C shares. Both fees are accrued daily as an expense of Class C shares. SUMMARY OF ONGOING FEES FOR CLASS N SHARES. Under a Distribution Plan, the Funds pay a distribution fee to the Distributor, payable monthly, at the annual rate of 0.25% of average daily net assets of each Fund (0.15% for the Income Fund and 0.35% for the Ready Reserves Fund) attributable to Class N shares. The fee is accrued daily as an expense of Class N shares. SUMMARY OF ONGOING FEES FOR CLASS I SHARES. The Funds do not pay a distribution or shareholder services fee for Class I shares. INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES. The public offering price of Class A shares for purchasers choosing the initial sales charge alternative is the net asset value plus a sales charge, as set forth below:
EQUITY FUNDS SALES CHARGE ------------------------------------------------------------- ALLOWED TO DEALERS AS A PERCENTAGE AS A PERCENTAGE OF AS A PERCENTAGE OF AMOUNT OF PURCHASE OF OFFERING PRICE NET ASSET VALUE* OFFERING PRICE*** ------------------ ----------------- ------------------ ------------------ $0 - $49,999 5.75% 6.10% 5.00% $50,000 - $99,999 4.50% 4.71% 3.75% $100,000 - $249,999 3.50% 3.63% 2.75% $250,000 - $499,999 2.50% 2.56% 2.00% $500,000 - $999,999 2.00% 2.04% 1.75% $1 million and over** 0.00% 0.00% 1.00%
- -------------- * Rounded to the nearest one-hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. *** Commission is payable by the Distributor as discussed below.
INCOME FUND SALES CHARGE ------------------------------------------------------------ ALLOWED TO DEALERS AS A PERCENTAGE AS A PERCENTAGE OF AS A PERCENTAGE OF AMOUNT OF PURCHASE OF OFFERING PRICE NET ASSET VALUE* OFFERING PRICE*** ------------------ ----------------- ------------------ ------------------ $0 - $49,999 2.00% 2.04% 1.75% $50,000 - $99,999 2.00% 2.04% 1.75% $100,000 - $249,999 1.50% 1.52% 1.25% $250,000 - $499,999 1.50% 1.52% 1.25% $500,000 - $999,999 1.00% 1.01% 0.75% $1 million and over** 0.0% 0.0% 0.50%
- -------------- * Rounded to the nearest one-hundredth percent. ** Redemption of shares may be subject to a contingent deferred sales charge as discussed below. *** Commission is payable by the Distributor as discussed below. Class A shares of a Fund may be purchased at net asset value to the extent that the amount invested represents the net proceeds from a redemption of shares of a mutual fund for which William Blair or an affiliate does not serve as investment manager ("non-William Blair Fund") provided that: (a) the investor has previously paid either an initial sales charge in connection with the purchase of the non-William Blair Fund shares, and (b) the purchase of Fund shares is made within 90 days after the date of such redemption. To make such a purchase at net asset value, the B-39 191 investor or the investor's dealer must, at the time of purchase, submit a request that the purchase be processed at net asset value pursuant to this privilege. The Distributor may in its discretion compensate firms for sales of Class A shares under this privilege at a commission rate of 0.50% of the amount of Class A shares purchased. The redemption of the shares of the non-William Blair Fund is, for Federal income tax purposes, a sale upon which a gain or loss may be realized. Class A shares of a Fund may be purchased at net asset value by: (a) any purchaser provided that the amount invested in such Fund or other William Blair Funds listed under " Special Features -- Class A Shares-- Combined Purchases" totals at least $1,000,000 including purchases of Class A shares pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features described under "Special Features"; or (b) a participant- directed qualified retirement plan described in Code Section 401(a) or a participant-directed non-qualified deferred compensation plan described in Code Section 457, provided in each case that such plan has not less than 200 eligible employees (the "Large Order NAV Purchase Privilege"). Redemption within two years of shares purchased under the Large Order NAV Purchase Privilege may be subject to a contingent deferred sales charge. See "Contingent Deferred Sales Charge-Large Order NAV Purchase Privilege" below. Class A shares may be sold at a net asset value in any amount to: (a) officers, trustees, directors, employees (including retirees) and sales representatives of a Fund, its investment manager, it principal underwriter or certain affiliate companies, for themselves or members of their families; (b) registered representatives and employees of broker-dealers having selling group agreements with the Distributor and officers, directors and employees of service agents of the Funds, for themselves or their spouses or dependent children; and (c) any trust, pension, profit-sharing or other benefit plan for only such persons. Class A shares may be sold at net asset value in any amount to selected employees (including their spouses and dependent children) of banks and other financial services firms that provide services related to order placement and payment to facilitate transactions in shares of the Funds on their clients pursuant to an agreement with the Distributor or one of its affiliates. Only those employees of such banks and other firms who as part of their usual duties provide services related to transactions in Fund shares may purchase Fund Class A shares at net asset value hereunder. Class A shares of a Fund may be sold at net asset value through certain investment advisers registered under the Investment Advisors Act of 1940 and other financial services firms that adhere to certain standards established by the Distributor, including a requirement that such shares be sold for the benefit of their clients participating in an investment advisory program under which such clients pay a fee to the Adviser or other firm for portfolio management and other services. Such shares are sold for investment purposes and on the condition that they will not be resold except through redemption or repurchase by the Funds. The Funds may also issue Class A shares at net asset value in connection with the acquisition of the assets of or merger or consolidation with another investment company, or to shareholders in connection with the investment or reinvestment of income and capital gain dividends. The sales charge scale is applicable to purchases made at one time by any "purchaser" which includes: an individual; or an individual, his or her spouse and children under the age of 21; or a trustee or other fiduciary of a single trust estate or single fiduciary account; or an organization exempt from federal income tax under Section 501(c)(3) or (13) of the code; or a pension, profit-sharing or other employee benefit plan whether or not qualified under Section 401 of the Code; or other organized group of persons whether incorporated or not, provided the organization has been in existence for at least six months and has some purpose other than the purchase of redeemable securities of a registered investment company at a discount. In order to qualify for a lower sales charge, all orders from an organized group will have to be placed through a single investment dealer or other firm and identified as originating from a qualifying purchaser. DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES. Investors choosing the deferred sales charge alternative may purchase Class B shares at net asset value per share without any sales charge at the time of purchase. Since Class B shares are being sold without an initial sales charge, the full amount of the investor's purchase payment will be invested in Class B shares for his or her account. A contingent deferred sales charge may be imposed upon redemption of Class B shares. See "Redemption or Repurchase of Shares--Contingent Deferred Sales Charge--Class B Shares." B-40 192 Class B shares of a Fund will automatically convert to Class A shares of the same fund eight years (three years for the Income Fund) after issuance on the basis of the relative net asset value per share. The purpose of the conversion feature is to relieve holders of Class B shares from the distribution services fee when they have been outstanding long enough for the Distributor to have been compensated for distribution related expenses. For purposes of conversion to Class A shares, shares purchased through the reinvestment of dividends and other distributions paid with respect to Class B shares in a shareholder's Fund account will be converted to Class a shares on a pro rata basis. PURCHASE OF CLASS C SHARES. The public offering price of the Class C shares of a Fund is the next determined net asset value. No initial sales charge is imposed. Since Class C shares are sold without an initial sales charge, the full amount of the investor's purchase payment will be invested in Class C shares for his or her account. A contingent deferred sales charge may be imposed upon the redemption of Class C shares if they are redeemed within one year of purchase. See "Contingent Deferred Sales Charge--Class C Shares" below. PURCHASE OF CLASS N AND CLASS I SHARES. The public offering price of the Class N and Class I shares of a Fund (except Ready Reserves) is the next determined net asset value. No initial sales charge or contingent deferred charge is imposed. Since Class N and Class I shares are sold without an initial sales charge, the full amount of the investor's purchase payment will be invested in Class N and Class I shares for the investor's account. FEES PAID BY DISTRIBUTOR TO SERVICE FIRMS. The Distributor may enter into related arrangements with various broker-dealer firms and other service firms ("firms"), that provide services and facilities for their customers or clients who are shareholders of a Fund. The firms provide such office space and equipment, telephone facilities and personnel as is necessary or beneficial for providing information and services to their clients. Such services and assistance may include, but are not limited to, establishing and maintaining accounts and records, processing purchase and redemption transactions, answering routine inquiries regarding the Fund, assistance to clients in changing dividend and investment options, account designations and addresses and such other services as may be agreed upon from time to time and permitted by applicable statute, rule or regulation. The Distributor also may provide some of the above services and retains any portion of the fee under the Shareholder Services Agreement not paid to firms. Currently, the shareholder services fee payable to the Distributor is based upon all Fund assets. CLASS A SHARES. Each Fund receives the entire net asset value of all its Class A shares sold. The Distributor retains the sales charge on sales of Class A shares from which it allows discounts from the applicable public offering price to investment dealers, which discounts are uniform for all dealers in the United States and its territories. The normal discount allowed to dealers (up to 5.00% for equity funds and up to 1.75% for the Income Fund) is set forth in the table in "Initial Sales Change Alternative--Class A shares" above. Upon notice to all dealers with whom it has sales agreements, the Distributor may allow up to the full applicable sales charge, as shown in the above table, during periods and for transactions specified in such notice and such reallowances may be based upon attainment of minimum sales levels. During periods when 90% or more of the sales charge is reallowed, such dealers may be deemed to be underwriters as that term is defined in the Securities Act of 1933. The Distributor may in its discretion compensate investment dealers or other financial services firms in connection with the sale of Class A shares of a Fund at net asset value in accordance with the Large Order NAV Purchase Privilege up to the following amounts: 1.00% of the net asset value of shares of all Funds (except the Income Fund) and sold 0.50% on the net asset value of shares of the Income Fund sold. The commission schedule will be reset on a calendar year basis for sales of shares pursuant to the Large Order NAV Purchase Privilege to employer sponsored employee benefit plans using the subaccount recordkeeping system available through William Blair. For purposes of determining the appropriate commission percentage to be applied to a particular sale, the Distributor will consider the cumulative amount invested by the purchaser in a Fund and other Funds listed under "Special Features--Class A Shares--Combined Purchases," including purchases pursuant to the "Combined Purchases," "Letter of Intent" and "Cumulative Discount" features referred to above. The privilege of purchasing Class A shares of a Fund at net asset value under the Large Order NAV Purchase Privilege is not available if another asset value purchase privilege also applies. B-41 193 For periods after the first year, the Distributor intends to pay firms for sales of Class A shares a shareholder services fee, payable quarterly, at an annual rate of 0.25% of net assets attributable to Class A shares. The fee will continue until terminated by the Distributor or the Fund. CLASS B SHARES. For Class B shares, the Distributor receives any contingent deferred sales charges but may compensate firms for sales of Class B shares at the time of sale at a commission rate of up to 4.00% for equity funds (1.50% for the Income Fund). For periods after the first year, the Distributor intends to pay firms for sales of Class B shares a shareholder services fee, payable quarterly, at an annual rate of 0.25% of net assets attributable to Class B shares. The fee will continue until terminated by the Distributor or the Fund. CLASS C SHARES. The Distributor currently intends to pay firms for sales of Class C shares a distribution and shareholder services fee, payable quarterly, at an annual rate of 1.00% of net assets attributable to Class C shares. The Distributor retains any contingent deferred sales charge on Class C shares. CLASS N SHARES. The Distributor, in its discretion, may compensate firms, payable quarterly, at an annual rate up to 0.25% (0.15% for the Income Fund and 0.35% for the Ready Reserves Fund) of the net assets attributable to Class N shares. GENERAL. Banks and other financial services firms may provide services related to order placement and payment to facilitate transactions in shares of a Fund for their clients, and the Distributor may pay them a transaction fee up to the level of the discount or commission allowable or payable to dealers, as described above. Banks are currently prohibited under the Glass-Steagall Act from providing certain underwriting or distribution services. Banks or other financial services firms may be subject to various state laws regarding the services described above and may be required to register as dealers pursuant to state law. If banking firms were prohibited from acting in any capacity or providing any of the described services, management would consider what action, if any, would be appropriate. The Distributor does not believe that termination of a relationship with a bank would result in any material adverse consequences to a Fund. The Distributor may, from time to time, pay or allow to firms a 1% commission on the amount of shares of the Fund sold under the following conditions: (i) the purchase shares are held in a William Blair IRA account, (ii) the shares are purchased as a direct "roll over" of a distribution from a qualified retirement plan account maintained on a participant subaccount record keeping system provided by William Blair, and (iii) the purchase is not otherwise subject to a commission. In addition to the discounts or commissions described above, the Distributor will, from time to time, pay or allow additional discounts, commissions or promotional incentives, in the form of cash or other compensation, to firms that sell shares of the Funds. Noncash compensation includes luxury merchandise and trips to luxury resorts. In some instances, such discounts, commissions or other incentives will be offered only to certain firms that sell or are expected to sell during specified time periods certain minimum amounts of shares of the Funds, or other funds underwritten by the Distributor. Orders for the purchase of shares of a Fund will be confirmed at a price based on the net asset value of that Fund next determined after receipt by the Distributor of the order accompanied by payment. However, orders received by dealers or other financial services firms prior to the determination of net asset value (see "Net Asset Value") and received by the Distributor prior to the close of its business day will be confirmed at a price based on the net asset value effective on that day ("trade date"). The Funds reserve the right to determine the net asset value more frequently than once a day if deemed desirable. Dealers and other financial services firms are obligated to transmit orders promptly. Collection may take significantly longer for a check drawn on a foreign bank than for a check drawn on a domestic bank. Therefore, if an order is accompanied by a check drawn on a foreign bank, funds must normally be collected before shares will be purchased. Investment dealers and other firms provide varying arrangements for their clients to purchase and redeem the Funds' shares. Some may establish higher minimum investment requirement than set forth above. Firms may arrange with their clients for other investments or administrative services. Such firms may independently establish B-42 194 and charge additional amounts to their clients for such services, which charges would reduce the clients' return. Firms also may hold the Funds' shares in nominee or street name as agent for and on behalf of their customers. In such instances, the Funds' transfer agent will have no information with respect to or control over the accounts of specific shareholders. Such shareholders may obtain access to their accounts and information about their accounts only from their firm. Certain of these firms may receive compensation from the Funds through the Distributor for recordkeeping and other expenses relating to these nominee accounts. In addition, certain privileges with respect to the purchase and redemption of shares or the reinvestment of dividends may not be available through such firms. Some firms may participate in a program allowing them access to their client's accounts for servicing including, without limitation, transfers of registration and dividend payee changes; and may perform functions such as generation of confirmation statements and reimbursement of cash dividends. Such firms may receive compensation from the Funds through the Distributor Service Agent for these services. This statement of additional information should be read in connection with such firms' material regarding their fees and services. The Funds reserve the right to withdraw all or any part of the offering made by this statement of additional information and reject purchase orders. Also, from time to time, each Fund may temporarily suspend the offering of any class of its shares to new investors. During the period of such suspension, persons who are already shareholders of such class of such Fund normally are permitted to continue to purchase additional shares of such class and to have dividends reinvested. The conversion of Class B shares to Class A shares may be subject to the continuing availability of an opinion of counsel, ruling by the Internal Revenue Service or other assurance acceptable to each Fund to the effect that (a) the assessment of the distribution services fee with respect to Class B shares and not Class A shares does not result in the Fund's dividends constituting "preferential dividends" under the Internal Revenue Code, and (b) that the conversion of Class B shares to Class A shares does not constitute a taxable event under the Internal Revenue Code. The conversion of Class B shares to Class A shares may be suspended if such assurance is not available. In that event, no further conversion of Class B shares would occur, and shares might continue to be subject to the distribution services fee for an indefinite period that may extend beyond the proposed conversion date as described herein. The Trust has authorized certain members of the National Association of Securities Dealers, Inc. ("NASD"), other than the Distributor to accept purchase and redemption orders for the Funds' shares. Those brokers may also designate other parties to accept purchase and redemption orders on the Funds' behalf. Orders for purchase or redemption will be deemed to have been received by the Trust when such brokers or their authorized designees accept the orders. Subject to the terms of the contract between the Trust and the broker, ordinarily orders will be priced at the Fund's net asset value next computed after acceptance by such brokers or their authorized designees. Further, if purchases or redemptions of a Fund's shares are arranged and settlement is made at an investor's election through any other authorized NASD member, that member may, at its discretion, charge a fee for that service. The Board of Trustees and the Distributor each has the right to limit the amount of purchases by, and to refuse to sell to, any person. The Board of Trustees and the Distributor may suspend or terminate the offering of shares of a Fund at any time for any reason. REDEMPTIONS. SUSPENSION OF REDEMPTION OR DELAY IN PAYMENT. The Trust may not suspend the right of redemption or delay payment on its shares for more than seven days except (a) during any period when the New York Stock Exchange is closed (other than on weekends and customary holidays); (b) when trading in the markets that the portfolio normally utilizes is restricted or any emergency exists as determined by the Securities and Exchange Commission, so that disposal of a Fund's investments or determination of its net asset value is not reasonably practicable; or (c) for such other periods as the Securities and Exchange Commission may permit by order for protection of the Trust's shareholders. SPECIAL REDEMPTIONS. Although it is the present policy of all of the Fund's to redeem shares in cash, if the Board of Trustees determines that a material adverse effect would be experienced by the remaining shareholders if payment of large redemptions were made wholly in cash, the Funds 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 B-43 195 and selecting the instruments in such manner as the Board of Trustees 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 Funds have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which the Funds are obligated to redeem portfolio shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the portfolio during any 90-day period for any one shareholder of record. CONTINGENT DEFERRED SALES CHARGE--LARGE ORDER NAV PURCHASE PRIVILEGE. A contingent deferred sales charge may be imposed upon redemption of Class A shares that are purchased under the Large Order NAV Purchase Privilege as follows: for all Funds (except the Income Fund), 1% if they are redeemed within one year of purchase and 0.50% if they are redeemed during the second year after purchase and for the Income Fund, 0.50% if they are redeemed within one year of purchase. The charge will not be imposed upon redemption of reinvested dividends or share appreciation. The charge is applied to the value of the shares redeemed, excluding amounts not subject to the charge. The contingent deferred sales charge will be waived in the event of: (a) redemptions by a participant-directed qualified retirement plan described in Code Section 401(a) or a participant-directed non-qualified deferred compensation plan described in Code Section 457, provided in each case that such plan has not less than 200 eligible employees; (b) redemption of shares of a shareholder (including a registered joint owner) who has died; (c) redemption of shares of a shareholder (including a registered joint owner) who after purchase of the shares being redeemed becomes totally disabled (as evidenced by a determination by the federal Social Security Administration); (d) redemptions under a Fund's Systematic Withdrawal Plan at a maximum of 10% per year of the net asset value of the account; and (e) redemptions of shares whose dealer of record at the time of the investment notifies the Distributor that the dealer waives the discretionary commission applicable to such Large Order NAV Purchase. CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. A contingent deferred sales charge may be imposed upon redemption of Class B shares. There is no such charge upon redemption of any share appreciation or reinvested dividends on Class B shares. The charge is applied to the value of the shares redeemed, excluding amounts not subject to the charge. The charge is computed at the following rates applied to the value of the shares redeemed excluding amounts not subject to the charge.
EQUITY FUNDS INCOME FUNDS CONTINGENT DEFERRED CONTINGENT DEFERRED YEAR OF REDEMPTION AFTER PURCHASE SALES CHARGE SALES CHARGE --------------------------------- ------------------- ------------------- First............................ 5.00% 2.00% Second........................... 4.00% 1.00% Third............................ 3.00% 0.00% Fourth........................... 3.00% 0.00% Fifth............................ 2.00% 0.00% Sixth............................ 1.00% 0.00% Seventh.......................... 0.00% 0.00%
The contingent deferred sales charge will be waived: (a) in the event of the total disability (as evidenced by a determination by the federal Social Security Administration) of the shareholder (including a registered joint owner) occurring after the purchase of the shares being redeemed, (b) in the event of the death of the shareholder (including a registered joint owner), (c) for redemptions made pursuant to a systematic withdrawal plan for up to 10% of net assets annually (see "Special Features--Systematic Withdrawal Plan" below), (d) for redemptions made pursuant to any IRA systematic withdrawal based on the shareholder's life expectancy including, but not limited to, substantially equal periodic payments described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2 and (e) for redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA account (with the maximum amount subject to this waiver being based only upon the shareholder's William Blair IRA accounts). The contingent deferred sales charge will also be waived in connection with the following redemptions of shares held by employer sponsored employee benefit plans maintained on the subaccount record keeping system made available by the Distributor: (a) redemptions to satisfy participant loan advances (note that loan repayments constitute new purchases for purposes of the contingent deferred sales charge and the conversion privilege), (b) redemptions in B-44 196 connection with retirement distributions (limited at any one time to 10% of the total value of plan assets invested in a Fund), (c) redemptions in connection with distributions qualifying under the hardship provisions of the Internal Revenue Code and (d) redemptions representing returns of excess contributions to such plans. CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES. A contingent deferred sales charge of 1% may be imposed upon redemption of Class C shares if they are redeemed within one year of purchase. The charge will not be imposed upon redemption of reinvested dividends or share appreciation. The charge is applied to the value of the shares redeemed excluding amounts not subject to the charge. The contingent deferred sales charge will be waived: (a) in the event of the total disability (as evidenced by a determination by the federal Social Security Administration) of the shareholder (including a registered joint owner) occurring after the purchase of the shares being redeemed, (b) in the event of the death of the shareholder (including a registered joint owner), (c) for redemptions made pursuant to a systematic withdrawal plan (limited to 10% of the net asset value of the account, see "Special Features--Systematic Withdrawal Plan"), (d) for redemptions made pursuant to any IRA systematic withdrawal based on the shareholder's life expectancy including, but not limited to, substantially equal periodic payments described in Internal Revenue Code Section 72(t)(2)(A)(iv) prior to age 59 1/2, (e) for redemptions to satisfy required minimum distributions after age 70 1/2 from an IRA account (with the maximum amount subject to this waiver being based only upon the shareholder's William Blair IRA accounts), (f) for any participant-directed redemptions of shares held by employer sponsored employee benefit plans maintained on the subaccount record keeping system made available by the Distributor and (g) redemption of shares by an employer sponsored employee benefit plan that offers funds in addition to William Blair Funds and whose dealer of record has waived the advance of the first year administrative service and distribution fees applicable to such shares and agrees to receive such fees quarterly. CONTINGENT DEFERRED SALES CHARGE--GENERAL. The following example will illustrate the operation of the contingent deferred sales charge. Assume that an investor makes a single purchase of $10,000 of a Fund's Class B shares and that 16 months later the value of the shares has grown by $1,000 through reinvested dividends and by an additional $1,000 of share appreciation to a total of $12,000. If the investor were then to redeem the entire $12,000 in share value, the contingent deferred sales charge would be payable only with respect to $10,000 because neither the $1,000 of reinvested dividends nor the $1,000 of share appreciation is subject to the charge. The charge would be at the rate of 4.00% (1.00% for the Income Fund) ($40 ($10 for the Income Fund)) because it was in the second year after the purchase was made. The rate of the contingent deferred sales charge is determined by the length of the period of ownership. Investments are tracked on a monthly basis. The period of ownership for this purpose begins the first day of the month in which the order for the investment is received. For example, an investment made in December, 1999 will be eligible for the second year's charge if redeemed on or after December 1, 2000. In the event no specific order is requested when redeeming shares subject to a contingent deferred sales charge, the redemption will be made first from shares representing reinvested dividends and then from the earliest purchase of shares. The Distributor receives any contingent deferred sales charge directly. SPECIAL FEATURES. CLASS A SHARES--COMBINED PURCHASES. Each Fund's Class A shares (or the equivalent) may be purchased at the rate applicable to the discount bracket attained by combining concurrent investments in Class A shares of any William Blair Fund. CLASS A SHARES--LETTER OF INTENT. The same reduced sales charges for Class A shares, as shown in the applicable prospectus or statement of additional information, also apply to the aggregate amount of purchase of such Fund made by any purchaser within a 12-month period under a written Letter of Intent ("Letter") provided by the Distributor. The Letter, which imposes no obligation to purchase or sell additional Class A shares, provides for a price adjustment depending upon the actual amount purchased within such period. The Letter provides that the first purchase following execution of the Letter must be at least 5% of the amount of the intended purchase, and that 5% of the amount of the intended purchase normally will be held in escrow in the form of shares pending completion of the intended purchase. If the total investments under the Letter are less than the intended amount and thereby B-45 197 qualify only for a higher sales charge than actually paid, the appropriate number of escrowed shares are redeemed and the proceeds used toward satisfaction of the obligation to pay the increased sales charge. The Letter for an employer sponsored employee benefit plan maintained on the subaccount record keeping system available through the Distributor may have special provisions regarding payment of any increased sales charge resulting from a failure to complete the intended purchase under the Letter. A shareholder may include the value (at the maximum offering price) of all shares of such William Blair Funds held of record as of the initial purchase date under the Letter as an "accumulation credit" toward the completion of the Letter, but no price adjustment will be made on such shares. Only investments in Class A shares are included in this privilege. CLASS A SHARES--CUMULATIVE DISCOUNT. Class A shares of a Fund may also be purchased at the rate applicable to the discount bracket attained by adding to the cost of shares of a Fund being purchased, the value of all Class A shares of the William Blair Funds (computer at the maximum offering price at the time of purchase for which the discount is applicable) already owned by the investor. CLASS A SHARES--AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the investor's dealer or other financial services firm must notify the Distributor whenever a quantity discount or reduced sales charge is applicable to a purchase. Upon such notification, the investor will receive the lowest applicable sales charge. Quantity discounts described above may be modified or terminated at any time. EXCHANGE PRIVILEGE. Shareholders of Class A, Class B, Class C, Class N and Class I shares may exchange their shares for shares of the corresponding class of other William Blair Funds in accordance with the provisions below. Class A Shares. Class A shares of the William Blair Funds may be exchanged for each other at their relative net asset values. Class A shares of a Fund purchased under the Large Order NAV Purchase Privilege may be exchanged for Class A shares of another William Blair Fund under the exchange privilege described above without paying any contingent deferred sales charge at the time of exchange. If the Class A shares received on exchange are redeemed thereafter, a contingent deferred sales charge may be imposed in accordance with the foregoing requirements provided that the shares redeemed will retain their original cost and purchase date for purposes of the contingent deferred sales charge. Class B Shares. Class B shares of a Fund may be exchanged for each other at their relative net asset values. Class B shares may be exchanged without a contingent deferred sales charge being imposed at the time of exchange. For purposes of the contingent deferred sales charge that may be imposed upon the redemption of the Class B shares received on exchange, amounts exchanged retain their original cost and purchase date. Class C Shares. Class C shares of a Fund may be exchanged for each other at their relative net asset values. Class C shares may be exchanged without a contingent deferred sales charge being imposed at the time of exchange. For determining whether there is a contingent deferred sales charge that may be imposed upon the redemption of the Class C shares received, by exchange, they retain the cost and purchase date of the shares that were originally purchased and exchanged. General. Shares of a William Blair Fund with a value in excess of $1,000,000 acquired by exchange from another William Blair Fund may not be exchanged thereafter until they have been owned for 15 days (the "15-Day Hold Policy"). For purposes of determining whether the 15-Day Hold Policy applies to a particular exchange, the value of the shares to be exchanged shall be computed by aggregating the value of shares being exchanged for all accounts under common control, discretion or advice, including without limitation accounts administered by a financial services firm offering market timing, asset allocation or similar services. The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges are made based on relative dollar values of the shares involved in the exchange. There is no service fee for an exchange; however, dealers or other firms may charge for their services in effecting exchange transactions. Exchanges will be effected by redemption of shares of the fund held and purchase of shares of the other Fund. For federal income tax purposes, any such exchange constitutes a sale upon which a gain or loss may B-46 198 be realized, depending upon whether the value of the shares being exchanged is more or less than the shareholder's adjusted cost basis of such shares. Shareholders interested in exercising the exchange privilege may obtain prospectuses of the other funds from dealers, other firms or the Distributor. Exchanges may be accomplished by a written request to William Blair, or by telephone if the shareholder has given authorization. Once the authorization is on file, the Distributor will honor requests by telephone subject to the limitations on liability under "Purchase, Repurchase and Redemption of Shares--General." Any share certificates must be deposited prior to any exchange of such shares. During periods when it is difficult to contact the Distributor by telephone, it may be difficult to use the telephone exchange privilege. The exchange privilege is not a right and may be suspended, terminated or modified at any time. Exchanges may only be made for the funds that are available for sale in the shareholder's state of residence. GENERAL TRUST INFORMATION DETERMINATION OF NET ASSET VALUE. For each Fund, net asset value is not determined on the days that the New York Stock Exchange is closed, which generally includes the observance of New Year's Day, Dr. Martin Luther King Jr.'s Birthday, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In addition, the net asset value for the Ready Reserves Fund is not calculated on the observance of Columbus Day and Veteran's Day. Net asset value is not required to be computed on a day when no orders to purchase shares were received and no shares were tendered for redemption. As mentioned in the prospectus, the Ready Reserves Fund values its portfolio instruments at amortized cost in accordance with Rule 2a-7 under the 1940 Act, which means that they are valued at their acquisition cost (as adjusted for amortization of premium or discount), rather than at current market value. This involves initially valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the portfolio would receive if it sold the instrument. Calculations are made to compare the value of the portfolio's investments valued at amortized cost with market values. Market valuations are obtained by using actual quotations provided by market makers, estimates of market value or values obtained from yield data relating to classes of money market instruments published by reputable sources at the bid price for such securities. If a deviation of one-half of one percent or more were to occur between the net asset value per share calculated by reference to market values and the portfolio's $1.00 per share net asset value, or if there were any other deviation that the Board of Trustees determined would result in a material dilution to shareholders or purchasers, the Board of Trustees would promptly consider what action, if any, should be initiated. If the portfolio's net asset value per share (computed using market values) declined, or was expected to decline, below $1.00 (computed using amortized cost), the Board of Trustees might temporarily reduce or suspend dividend payments in an effort to maintain the net asset value at $1.00 per share. As a result of such reduction or suspension of dividends or other action by the Board of Trustees, an investor would receive less income during a given period than if such a reduction or suspension had not taken place. Such action could result in investors receiving no dividends for the period during which they held shares and receiving, upon redemption, a price per share lower than that which they paid. On the other hand, if the portfolio's net asset value per share (computed using market values) were to increase, or were anticipated to increase, above $1.00 (computed using amortized cost), the Board of Trustees might supplement dividends in an effort to maintain the net asset value at $1.00 per share. The Ready Reserves Fund has never had a deviation of one-half of one percent or more between its net asset value per share calculated by reference to market values and its $1.00 per share net asset value; therefore, no Board actions of the type described above have been taken. To use the amortized cost method of valuation, the portfolio is limited to investing in instruments that the Board of Trustees has determined present minimal credit risks and that are within certain rating categories of a nationally recognized statistical rating organization. B-47 199 PERFORMANCE. From time to time, the Trust may advertise its total return for prior period. Any such advertisement would include at least average annual total return quotations for one-year, five-year and ten-year (or since inception) periods. Other total return quotations, aggregate or average, over other time periods may also be included. HISTORICAL PERFORMANCE In general. The historical performance or return of the Growth Fund, the Tax-Managed Growth Fund, the Large Cap Growth Fund, the Small Cap Growth Fund, the International Growth Fund, the Emerging Markets Growth Fund, the Disciplined Large Cap Fund, the Value Discovery Fund and the Income Fund may be shown in the form of "average annual total return" and "total return" figures. The Tax-Managed Growth Fund may use annual average total return figures showing after-tax returns, including comparisons to tax-deferred vehicles such as Individual Retirement Accounts and variable annuities. The Income Fund's and Ready Reserves Fund's historical performance or return may also be shown in the form of "yield figures." These various measures of performance are described below. Average annual total return and total return measure both the net investment income generated by and the effect of any realized and unrealized appreciation or depreciation of, the underlying investments of the portfolio, assuming the reinvestment of all dividends during the period. Average annual total return figures represent the average annual percentage change over the period in question. Total returns represent the aggregate percentage or dollar value change over the period in question. Yield is a measure of the net investment income per share earned over a specified period, expressed as a percentage of the net asset value. Yield is an annualized figure, which means that it assumes that a portfolio generates the same level of net investment income over a one-year period. The Trust may advertise cumulative (non-annualized) total return of each class of shares of a Fund for various periods. Cumulative total return is calculated by measuring the value of an initial investment in a given class of shares of a Fund at a given time, deducting the value of all subsequent reinvested distributions, and dividing the net change in the value of the investment as of the end period by the amount of the initial investment and expressing the result as a percentage. Cumulative total return will be calculated separately for each class of shares. Cumulative total return calculations do not reflect the imposition of a contingent deferred sales charge, and if any such contingent deferred sales charge imposed at the time of redemption were reflected, it would reduce the performance quoted. The performance quotations for all of the Funds are based upon historical results and are not necessarily representative of future performance. Returns and net asset value will fluctuate. The Funds' performance depends upon general market conditions, operating expenses and the performance of the investment manager. Any additional fees charged by a dealer or other financial services firm would reduce the returns described in this section. In addition, from time to time the adviser has voluntarily absorbed certain operating expenses of certain of the Funds. For the Income Fund, the Adviser voluntarily waived certain advisory management fees for the fiscal years from 1990 to 1993 and to the extent described under "Management of the Fund--Investment Adviser and Distributor." For the Value Discovery Fund, the Adviser voluntarily waived certain advisory fees from December 23, 1996 (Commencement of Operations) to December 31, 1997 and to the extent described under "Management of the Fund -- Investment Adviser and Distributor." For the Tax-Managed Growth Fund, the Large Cap Growth Fund, the Small Cap Growth Fund, the Emerging Markets Growth Fund and the Value Discovery Fund, the Adviser is currently voluntarily waiving certain advisory fees. Without such waives, the performance results noted above for these Funds would be lower. Average annual total return. The Funds' average annual total return is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The average annual total return for a specific period is found by first taking a hypothetical $1,000 investment ("initial investment") in a 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 B-48 200 redeemable value is then divided by the initial investment and this quotient is taken to the nth root (n representing the number of years in the period) and 1 is subtracted from the result, which is then expressed as a percentage. This calculation assumes that all income dividends and capital gains distributions by a Fund have been reinvested at net asset value on the reinvestment dates during the period. The average annual total return for the Class N shares of the Funds for the one-, five- and ten-year periods, or, if less, from commencement of operations through December 31, 1998 are as follows:
10-YEAR OR 1-YEAR 5-YEAR LIFE OF FUND ------ ------ ------------ Growth Fund 27.15% 19.87% 18.96% Value Discovery Fund (1) 0.66 -- 15.91 International Growth Fund (2) 11.46 7.37 11.10 Emerging Markets Growth Fund (3) -- -- (23.70) Income Fund (4) 7.07 6.22 7.90
- -------------- (1) Commenced operations on December 23, 1996. (2) Commenced operations on October 1, 1992. (3) Commenced operations on May 1, 1998. (4) Commenced operations on September 25, 1990. Average annual after-tax total return. The Tax-Managed Growth Fund's average annual after-tax total return is calculated by finding the average annual compounded rates of return over the 1-, 5-, and 10- year periods (or for the periods of the Fund's operations) that would equate the initial amount invested to the after-tax value, according to the following formula: After tax return (pre-liquidation): P(1+T)(n) = ATV (pre) Where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ATV(pre)= after-tax value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, 10-year periods, assuming no liquidation of the investment at the end of the measurement periods. In calculating after-tax returns, the Fund will, in general, will make certain assumptions. First, the Fund will assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 payment. Second, the Fund will assume all distributions by the Fund are reinvested--less the taxes due on such dividends and distributions--at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. Third, the Fund will calculate the taxes due on distributions by the Fund by applying the required federal marginal tax rates to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain, etc.). Note that the required tax rates may vary over time. The Fund will assume no taxes are due on the portions of any distributions classified as exempt interest or non-taxable (i.e., return of capital). The Fund will not deduct any amounts for state or local taxes. Fourth, if the Fund elects to pass through any foreign taxes paid, the amount of the foreign taxes paid will be added to the ordinary income distribution before applying the required marginal tax rate to that portion of the distribution. Then, the taxes due on distributions will be reduced by the amount of the assumed foreign tax credit resulting from such distributions. If the calculated tax due is less than zero, the Fund will assume that the tax due equals to zero. Fifth, the Fund will include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, the Fund will assume an account size equal to the Fund's mean (or median) account size. The Fund will assume that no additional taxes or tax credits B-49 201 result from any redemption of shares required to pay such fees. Finally, the Fund will state the total return to the nearest hundredth of one percent. Total return. Total return performance for a specific period is calculated by first taking an investment (assumed below to be $10,000) ("initial investment") in a Fund's shares on the first day of the period and computing the "ending value" of that investment at the end of the period. The total return percentage is then determined by subtracting the initial investment from the ending value, dividing the remainder by the initial investment and expressing the result as a percentage. This calculation assumes that all income and capital gains dividends by the Fund have been reinvested at net asset value on the reinvestment dates during the period. Total return may also be shown as the increased dollar value of the hypothetical investment over the period. The total return for the Class N shares of the Funds for the one-, five- and ten-year periods, or, if less, from commencement of operations through December 31, 1998 are as follows:
10-YEAR OR 1-YEAR 5-YEAR LIFE OF FUND ------ ------ ------------ Growth Fund 27.15% 147.51% 467.73% Value Discovery Fund (1) 0.66 -- 34.34 International Growth Fund (2) 11.46 42.69 93.12 Emerging Markets Growth Fund (3) -- -- (23.70) Income Fund (4) 7.07 35.21 87.25
- -------------- (1) Commenced operations on December 23, 1996. (2) Commenced operations on October 1, 1992. (3) Commenced operations on May 1, 1998. (4) Commenced operations on September 25, 1990. Yield. Like the portfolios' average annual total return, the yield for the Income Fund is computed in accordance with a standardized method prescribed by rules of the Securities and Exchange Commission. The yield is computed by dividing the net investment income per share earned during a specific one-month or 30-day period by the offering price per share on the last day of that period according to the following formula: YIELD = 2[(((a-b)/cd)+1)(6) - 1] 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 The Income Fund's current yield for the 30-day period ended December 31, 1998 was 5.72%. Semiannual compounding is assumed. In computing the foregoing yield, the portfolio follows certain standardized accounting practices specified by Securities and Exchange Commission rules. These practices are not necessarily consistent with those that the Fund uses to prepare its annual and interim financial statements in accordance with generally accepted accounting principles. From time to time, the Trust may include in its sales literature and shareholder reports a quotation of the current "distribution rate" for the Income Fund. Distribution rate is simply a measure of the level of income and short-term capital gain dividends distributed for a specified period. It differs from yield, which is a measure of the income actually earned by the Income Fund's investments and from total return, which is a measure of the income actually earned by, plus the effect of any realized or unrealized appreciation or depreciation of, such investments during the period. Distribution rate, therefore, is not intended to be a complete measure of performance. Distribution rate may B-50 202 sometimes be greater than yield since, for instance, it may include short-term gains (which may be nonrecurring) and may not include the effect of amortization of bond premiums. The Ready Reserves Fund's yield quotations as they may appear in advertising and sales materials also are calculated by a standard method prescribed by rules of the Securities and Exchange Commission. Under that method, the current yield quotation is annualized based on a seven-day period and computed as follows: the portfolio's net investment income per share (accrued interest on portfolio securities, plus or minus amortized purchase discount or premium, less accrued expenses) is divided by the price per share (expected to remain constant at $1.00) during the period ("base period return") and the result is divided by seven and multiplied by 365 and the current yield figure is carried to the nearest one-hundredth of one percent. Realized capital gains or losses and unrealized appreciation or depreciation of investments are not included in the calculation. The effective yield is determined by taking the base period return and calculating the effect of assumed compounding according to the following formula: YIELD = [(BASE PERIOD RETURN +1)(365/7)] - 1 The Ready Reserves Fund's effective yield is calculated similarly to its current yield, except that the net investment income earned is assumed to be compounded when annualized. The Ready Reserves Fund effective yield will be slightly higher than its current yield due to compounding. The Ready Reserves Fund's current yield for the seven-day period ended December 31, 1998 was 4.58%. The Ready Reserves Fund's effective yield for the same period was 4.68%. 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 Fund 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 Fund expenses. COMPARISON OF FUND PERFORMANCE TO MARKET INDICES. From time to time, in marketing and other Trust literature, each Fund's performance may be compared to the performance of other mutual funds in general or to the performance of particular types of mutual funds with similar goals, as tracked by independent organizations. Such market comparisons are set forth briefly below. From time to time, the Funds' 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 1000, 2000 and 3000. The Funds' performance may also be compared to the performance of other growth mutual funds or mutual fund indices as reported by CDA Investment Technologies, Inc. ("CDA"), Lipper Analytical Services, Inc. ("Lipper") or Morningstar, Inc. ("Morningstar"). - CDA: CDA is a widely recognized independent mutual fund reporting service that is based upon changes in net asset value with all dividends reinvested. - LIPPER: Lipper is a widely used independent research firm that ranks mutual funds' overall performance, investment objectives and assets. Lipper performance figures are based on changes in net asset value, with all income and capital gain dividends assumed to be reinvested. Lipper's calculations do not include the effect of any sales charges imposed by other funds. Lipper also issues a monthly yield analysis for fixed- income funds. - MORNINGSTAR: Morningstar rates funds on the basis of historical risk and total return. Morningstar's ratings range from five stars (highest) to one star (lowest) and represent Morningstar's assessment of the historical risk level and total return of a fund as a weighted average for three-, five- and ten-year periods. Ratings are not absolute and do not represent future results. Morningstar also publishes mutual fund rankings. B-51 203 The portfolios may also compare their performance with that of indices, such as the Consumer Price Index or the Lehman Intermediate Government/Corporate Bond Index. The Lehman bond index is unmanaged and does not adjust for taxes payable on interest or dividends. When assessing a portfolio's performance as compared to that of any of these indices, it is important to note the differences and similarities between the investments that the portfolio may purchase and the investments measured by the applicable indices. - CONSUMER PRICE INDEX: The Consumer Price Index is generally considered to be a measure of inflation. - LEHMAN GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX: This index generally represents the performance of intermediate government and investment grade corporate debt securities under various market conditions. The Trust may also utilize performance information in hypothetical illustrations. For example, a Fund may, from time to time: (1) illustrate the benefits of tax-deferral by comparing taxable investments to investments made through tax-deferred retirement plans; (2) illustrate in graph or chart form, or otherwise, the benefits of dollar cost averaging by comparing investments made pursuant to a systematic investment plan; (3) illustrate allocations among different types of mutual funds or other investments for investors at different stages of their lives; and (4) illustrate the benefits of compounding at various assumed rates of return. Bank product performance may be based upon, among other things, the Bank Rate Monitor National Index or various certificates of deposit indices. Performance of U.S. Treasury obligations may be based upon, among other things, various U.S. treasury bill indices. Certain of these alternative investments may offer fixed rates of return and guaranteed principal and may be insured. Money market fund performance may be based upon, among other things, the IBC/Donoghue's Money Fund Average (All Taxable). Investors may also want to compare the historical returns of various investments, performance indexes of those investments or economic indicators, including but not limited to stocks, bonds, certificates of deposit, money market funds and U.S. Treasury obligations and the rate of inflation. Comparative performance information other than that listed above may be used from time to time in advertising the International Growth Fund and the Emerging Markets Growth Fund, including data from Micropal Ltd., an independent fund reporting service, and independent unmanaged indices. For the International Growth Fund indices include the Morgan Stanley Capital International's Europe, Australia and the Far East (EAFE) Index or Morgan Stanley Capital International's All Country World (Free) Except United States (ACWFxUS) Index. For the Emerging Markets Growth Fund such indices include the MSCI Emerging Markets (free) Index. From time to time marketing materials may show a Fund's asset class diversification, top sectors, ten largest holdings and other Fund asset structures. In addition, marketing materials may include various actual or estimated portfolio characteristics, including but not limited to median market capitalizations, earnings per share, alphas, betas, price/earnings ratios, returns on equity, dividend yields, capitalization ranges, growth rates, price/book ratios, and breakdowns by geographic regions or industries. Materials may also mention how the Adviser believes a Fund compares relative to other William Blair Funds. The portfolios may quote information from industry or financial publications of general U.S. or international interest, such as information from Morningstar, the Wall Street Journal, Money Magazine, Forbes, Barron's, Fortune, the Chicago Tribune, USA Today, Institutional Investor and Registered Representative. From time to time, the Adviser or portfolio manager may provide views on the current economy and portfolio strategy. In addition, portfolio holdings are available on a delayed basis upon request. Occasionally statistics may be used in marketing materials to specify a Fund's volatility or risk. The general premise is that greater volatility connotes greater risk undertaken in achieving performance. Measures of volatility or risk are generally used to compare a Fund's net asset value or performance relative to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market as represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility greater than the market, and a B-52 204 beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is a statistical tool that measures the degree to which a fund's performance has varied from its average performance during a particular time period. Standard deviation is calculated using the following formula: Standard deviation = the square root of S(xi - xm)2 n-1 Where: S= "the sum of", xi= each individual return during the time period, xm= the average return over the time period, and n= the number of individual returns during the time period. Statistics may also be used to discuss a Fund's relative performance. One such measure is alpha. Alpha measures the actual return of a fund compared to the expected return of a fund given its risk (as measured by beta). The expected return is based on how the market as a whole performed, and how the particular fund has historically performed against the market. Specifically, alpha is the actual return less the expected return. The expected return is computed by multiplying the advance or decline in a market representation by the Fund's beta. A positive alpha quantifies the value that the fund manager has added, and a negative alpha quantifies the value that the fund manager has lost. Other measures of volatility and relative performance may be used as appropriate. However, all such measures will fluctuate and do not represent future results. TAX STATUS. Each series (Fund) of the Trust is treated as a separate entity for accounting and tax purposes. The Trust has qualified and elected to be treated as a "regulated investment company" under Subchapter M of the Internal Revenue Code (the "Code") and intends to continue to so qualify in the future. As such, and by complying with the applicable provisions of the Code regarding the sources of its income, the timing of its distributions and the diversification of its assets, the Trust will not be subject to Federal income tax on its taxable income (including net short-term and long-term capital gains) that is distributed to shareholders in accordance with the timing requirements of the Code. Each Fund intends to declare and make distributions during the calendar year of an amount sufficient to prevent imposition of a 4% nondeductible Federal excise tax. The required distribution generally is the sum of 98% of a Fund's net investment income for the calendar year plus 98% of its net capital gain income for the one-year period ending October 31, plus the sum of any undistributed net investment income and capital gain net income from the prior year, less any over-distribution from the prior year. The Trust is required to withhold Federal income tax at the rate of 31% (commonly called "backup withholding") from taxable distributions to shareholders that do not provide the Fund with a taxpayer identification (social security) number or in other circumstances where shareholders have failed to comply with Internal Revenue Service regulations. Special tax provisions may accelerate or defer recognition of certain gains or losses, change the character of certain gains or losses or alter the holding periods of certain of a Fund's securities. Specifically, the mark-to-market rules of the Code may require a Fund to recognize unrealized gains and losses on certain forward contracts, futures and foreign currency futures held by a Fund at the end of the Trust's fiscal year. Under these provisions, 60% of any capital gain net income or loss recognized will generally be treated as long-term and 40% as short-term. Although certain foreign currency forward contracts and foreign currency futures contracts are marked-to-market, any gain or loss related to foreign currency fluctuations is generally treated as ordinary income under Section 988 of the Code (see below). In addition, the straddle rules of the Code require deferral of certain losses realized on positions of a straddle to the extent that the portfolio has unrealized gains in offsetting positions at year end. The portfolios have B-53 205 elected to mark-to-market their investments in passive foreign investment companies for Federal income tax purposes. Foreign exchange gains and losses realized by the Trust in connection with certain transactions that involve foreign currency-denominated debt securities, certain foreign currency options, foreign currency forward contracts, foreign currencies or payables or receivables denominated in a foreign currency are subject to Section 988 of the Code, which generally causes such gains and losses to be treated as ordinary income and losses and may affect the amount, timing and character of distributions to shareholders. For example, if a Fund sold a foreign stock or bond and part of the gain or loss on the sale was attributable to an increase or decrease in the value of a foreign currency, then the currency gain or loss may be treated as ordinary income or loss. If such transactions result in higher net ordinary income, the dividends paid by the Fund will be increased; if such transactions result in lower net ordinary income, a portion of dividends paid could be classified as a return of capital. The International Growth Fund and Emerging Markets Growth Fund may qualify for and make an election permitted under the "pass through" provisions of Section 853 of the Code, which allows a regulated investment company to elect to have its foreign tax credit taken by its shareholders instead of on its own tax return. To be eligible for this credit, more than 50% of the value of the Fund's total assets at the close of its taxable year must consist of stock or other securities in foreign corporations, and the Fund must have distributed at least 90% of its taxable income. If a Fund makes this election, it may not take any foreign tax credit and may not take a deduction for foreign taxes paid. However, the Fund is allowed to include the amount of foreign taxes paid in a taxable year in its dividends paid deduction. Each shareholder would then include in his gross income, and treat as paid by him, his proportionate share of the foreign taxes paid by the Fund. If the U.S. government were to impose any restrictions, through taxation or other means, on foreign investments by U.S. investors such as those to be made through the Fund, the Board of Trustees will promptly review the Fund's policies to determine whether significant changes in its investments are appropriate. Non-U.S. investors not engaged in a U.S. trade or business with which their investment in a Fund is effectively connected will be subject to U.S. Federal income tax treatment that is different from that described above and in the prospectus. Such investors may be subject to nonresident alien withholding tax at the rate of 30% (or a lower rate under an applicable tax treaty) on amounts treated as ordinary dividends from the Fund, unless an effective IRS Form W-8 or authorized substitute for Form W-8 is on file, and to 31% backup withholding on certain other payments from the Fund. Non-U.S. investors should consult their tax advisers regarding such treatment and the application of foreign taxes to an investment in a Fund. RETIREMENT PLANS. The Trust offers a variety of retirement investment programs whereby contributions are invested in shares of the Trust's Funds and any income dividends or capital gain distributions are reinvested in additional full and fractional shares of the Fund. Individual Retirement Accounts. One of the tax-deferred retirement plan accounts that may hold shares is an Individual Retirement Account ("IRA"). There are three kinds of IRAs that an individual may establish: traditional IRAs, Roth IRAs and education IRAs. With a traditional IRA, an individual may be able to make a deductible contribution of up to $2,000 or, if less, the amount of the individual's earned income for any taxable year prior to the year the individual reaches age 70 1/2 if neither the individual nor his or her spouse is an active participant in an employer's retirement plan. An individual who is (or who has a spouse who is) an active participant in an employer retirement plan may be eligible to make deductible IRA contributions; the amount, if any, of IRA contributions that are deductible by such an individual is determined by the individual's (and spouse's, if applicable) adjusted gross income for the year. Even if an individual is not permitted to make a deductible contribution to an IRA for a taxable year, however, the individual nonetheless may make nondeductible contributions up to $2,000, or 100% of earned income if less, for that year. A spouse also may contribute up to $2,000, as long as the spouses' joint earned income is at least $4,000. There are special rules for determining how withdrawals are to be taxed if an IRA contains both deductible and nondeductible amounts. In general, a proportionate amount of each withdrawal will be deemed to be B-54 206 made from nondeductible contributions; amounts treated as a return of nondeductible contributions will not be taxable. Lump sum distributions from another qualified retirement plan may be rolled over into a traditional IRA also. With a Roth IRA, an individual may make only nondeductible contributions; contributions can be made of up to $2,000 or, if less, the amount of the individual's earned income for any taxable year, but only if the individual's (and spouse's, if applicable) adjusted gross income for the year is less than $95,000 for single individuals or $150,000 for married individuals. The maximum contribution amount phases out and falls to zero between $95,000 and $110,000 for single persons and between $150,000 and $160,000 for married persons. Contributions to a Roth IRA may be made even after the individual attains age 70 1/2. Distributions from a Roth IRA that satisfy certain requirements will not be taxable when taken; other distributions of earnings will be taxable. An individual with adjusted gross income of $100,000 or less generally may elect to roll over amounts from a traditional IRA to a Roth IRA. The full taxable amount held in the traditional IRA that is rolled over to a Roth IRA will be taxable in the year of the rollover, except rollovers made in 1998, which may be included in taxable income over a four-year period. An education IRA provides a method for saving for the higher education expenses of a child; it is not designed for retirement savings. Generally, amounts held in an education IRA may be used to pay for qualified higher education expenses at an eligible (post-secondary) educational institution. An individual may contribute to an education IRA for the benefit of a child under 18 years old if the individual's income does not exceed certain limits. The maximum contribution for the benefit of any one child is $500 per year. Contributions are not deductible, but earnings accumulate tax-free until withdrawal, and withdrawals used to pay qualified higher education expenses of the beneficiary (or transferred to an education IRA of a qualified family member) will not be taxable. Other withdrawals will be subject to tax. Please call the Trust to obtain information regarding the establishment of IRAs. An IRA plan custodian may charge fees in connection with establishing and maintaining the IRA. An investor should consult with a competent tax adviser for specific advice concerning his or her tax status and the possible benefits of establishing one or more IRAs. The description above is only very general; there are numerous other rules applicable to these plans to be considered before establishing one. Shareholders should consult their tax advisers about the application of the provisions of tax law in light of their particular tax situations. Simplified Employee Pension Plans. An employer may establish a SEP plan under which the employer makes contributions to all eligible employees' IRAs. Any Fund's shares may be used for this purpose. Qualified Retirement Plans. A corporation, partnership or sole proprietorship may establish a qualified money purchase pension and profit sharing plan and make contributions for each participant up to the lesser of 25% of each participant's gross compensation or $30,000. Such contributions may be made by the employer and, if certain conditions are met, participants may also make nondeductible voluntary contributions. Under the Code, an investor has at least seven days in which to revoke an IRA after receiving certain explanatory information about the plan. Individuals who have received distributions from certain qualified plans may roll over all or part of such distributions into an IRA, which will defer taxes on the distributions and shelter investment earnings. Trustees of qualified retirement plans and 403(b)(7) accounts are required by law to withhold 20% of the taxable portion of any distribution that is eligible to be "rolled over." The 20% withholding requirement, however, does not apply to distributions from IRAs or any part of a distribution that is transferred directly to another qualified retirement plan, 403(b)(7) account or IRA. Shareholders are advised to consult with a tax professional regarding this requirement. INDEPENDENT AUDITORS. The Trust's independent auditors are Ernst & Young LLP, Sears Tower, 233 South Wacker Drive, Chicago, Illinois 60606. Ernst & Young audits and reports upon the Trust's annual financial statements, reviews certain regulatory reports, prepares the Trust's Federal and state tax returns and performs other professional accounting, auditing, tax and advisory services when engaged to do so by the Trust. B-55 207 LEGAL COUNSEL. Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601, is the Trust's Counsel. CUSTODIAN. The Trust's custodian, Investors Bank and Trust Company, 200 Clarendon Street, Boston, Massachusetts 02117, has custody of all securities and cash of the Trust and attends to the collection of principal and income and payment for and collection of proceeds of securities bought and sold by the Trust. The custodian for IRAs may be State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. TRANSFER AGENT SERVICES. State Street Bank and Trust Company ("State Street"), 225 Franklin Street, Boston, Massachusetts 02110, is the Trust's transfer agent and dividend-paying agent. State Street, as the shareholder service agent, provides certain bookkeeping, data processing and administrative services pertaining to the maintenance of shareholder accounts. REPORTS TO SHAREHOLDERS. Shareholders will receive annual audited financial statements and semi-annual unaudited financial statements. SHAREHOLDER RIGHTS All shares of each Fund have equal rights with respect to dividends, assets and liquidation of a portfolio and equal, noncumulative voting rights. Noncumulative voting rights allow the holder or holders of a majority of shares, voting together for the election of directors, to elect all the directors. All shares of each Fund will be voted in the aggregate, except when a separate vote by Fund 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 Delaware law, the Trust generally is not required to hold annual shareholders' meetings. Upon the written request of ten or more shareholders that have held Fund shares for at least six months in an amount equal to the lesser of 1% of the outstanding shares or $25,000, the Fund will either disseminate appropriate materials (at the expense of the requesting shareholders) or provide such shareholders access to a list of names and addresses of all shareholders of record. The written notice must state that the shareholders making such request wish to communicate with the other shareholders to obtain the signatures necessary to demand a meeting to consider removal of a director. The Fund will hold shareholders' meetings when requested to do so in writing by one or more shareholders collectively holding at least 10% of the shares entitled to vote, such request specifying the purpose or purposes for which each meeting is to be called, or when determined by a majority of the Board of Trustees in their discretion. Shareholders' meetings also will be held in connection with the following matters: (1) the election or removal of directors, if a meeting is called for such purpose; (2) the adoption of any contract for which shareholder approval is required by the Act; (3) any termination of the Fund; (4) any amendment of the Declaration of Trust; (5) any merger, consolidation or sale of assets; (6) incorporation of the Trust; and (7) such additional matters as may be required by law, the Declaration of Trust, the By-Laws of the Fund or any registration of the Fund with the Securities and Exchange Commission or any state, or that the Trustees may consider necessary or desirable, such as changes in fundamental investment objectives, policies or restrictions. The Trustees serve until the next meeting of shareholders, if any, called for the purpose of electing trustees and until the election and qualification of their successors or until a director sooner dies, resigns, retires, or is removed by a majority vote of the shares entitled to vote or by a majority of the trustees. In accordance with the Act, the Trust will hold a shareholder meeting for the election of trustees at such time that (1) less than a majority of the trustees has been elected by the shareholders and (2) if, as a result of a vacancy in the Board of Trustees, less than two-thirds of the trustees have been elected by the shareholders. A trustee may be removed from office by a vote of the holders of a majority of the outstanding shares entitled to vote. INVESTMENT CRITERIA VALUE DISCOVERY FUND. The Value Discovery Fund's investment objective is to seek long-term capital appreciation. The Fund pursues its objective by investing with a value discipline primarily in the equity securities of small companies. The Adviser's small cap value search begins with the total universe of companies with market B-56 208 capitalizations of less than $1,500 million. This represents approximately 90% of all companies trading in the U.S. They identify and quantify potential price/value disparities, conduct fundamental due diligence and formulate an opinion of the firm, estimate the value of the fund, calculate the total expected return for all portfolio and database firms daily, build a portfolio of high-expected return, low valuation and high qualify firms and adhere to a structured sell discipline. In selecting companies for investment, the Adviser evaluates the extent to which a company meets the investment criteria set forth below. The weight given to a particular investment criterion will depend upon the circumstances, and some portfolio holdings may not meet all of the following criteria: Material Price/Value Disparity--whether the company's current market value reflects a material discount from the Adviser's estimate of the company's intrinsic value. In determining a company's intrinsic value, the Adviser generally will assess whether a company's share price appears to be inexpensive relative to any of the following: sales, projected earnings, projected cash flow, discounted cash flow, asset values and liquidation value. The discount of the market value from the intrinsic value is considered material when it provides an adequate return opportunity compared to alternative small company investments. The Adviser believes that the short-term market assessment of a company's value can differ materially from a long-term perspective. Therefore, price/value disparities can result from particular industries and companies currently being in disfavor in the market. As the reasons for market disfavor dissipate, a market reassessment can result in price appreciation. However, there is no guarantee that this will result in market appreciation for a company. Probable Expansion in Profitability--whether the company has a reasonable expectation of improving its level of profitability over a three-year investment horizon. The Adviser believes an expansion in profit margins generally results in improved market valuation. Therefore, the Adviser will look for companies that it believes have the potential for normal, sustainable levels of profitability greater than their current levels. Factors used to assess the normal level of future profitability for a company include industry profit levels and competitiveness and the company's competitive advantages and business strategy. Skilled and Committed Management--whether the company has a capable and skilled management team and a clearly articulated and logical business strategy with a reasonable probability of successful execution. Generally, this determination will be made through due diligence with management, which often includes on-site meetings. Factors used to assess management's ability to execute its business strategy include tangible evidence of prior business success and management's level of financial commitment to the company through equity ownership. Strong Capital Structure--whether the company has a relatively simple, clean financial structure without excessive use of financial leverage. In addition, the company should adhere to conservative and straightforward accounting practices. Positive Catalyst--the likelihood that the company will undergo a positive corporate change within a three-year investment horizon. Examples of positive corporate changes may include: successful execution of its business plan, acquisitions, mergers, spin-offs, divestitures, new products and management additions or changes. The portfolio seeks to invest in companies before a positive catalyst becomes apparent to the market. INCOME FUND. The Adviser uses the following process to construct fixed income portfolios: - - A maturity range is selected that meets the fund's overall risk parameters. - - Cash levels and maturity distributions are chosen to reflect current and expected interest rates. The fund's need for liquidity is also factored. B-57 209 - - When buying securities, careful attention is paid to factors such as options, prepayments, etc., that may adversely affect prices in different interest rate environments. - - Individual, non-government position sizes are limited to less than 10% of the value of the Fund. - - Bond types are varied to favor sectors expected to benefit from periodic changes in yield spreads. TRUST HISTORY The Trust is a Delaware business trust organized under a Declaration of Trust dated September 8, 1999. The Trust was formerly organized as a Maryland corporation on September 22, 1987 under the name of William Blair Ready Reserves, Inc. (the "Company"). On April 30, 1991, a reorganization of the Company and Growth Industry Shares, Inc., a Maryland corporation, occurred such that Growth Industry Shares, Inc. was reorganized into a separate portfolio of the Company, now the Growth Fund, and the Fund changed its name to William Blair Mutual Funds, Inc. On December 15, 1999, the Company was reorganized into the Trust and changed its name to William Blair Funds. Presently, the Trust is offering shares of the nine funds described in the prospectuses. The Board of Trustees of the Trust may, however, establish additional portfolios with different investment objectives, policies and restrictions in the future. FINANCIAL INFORMATION OF THE FUND The Trust's audited financial statements, including the notes thereto, contained in the Trust's annual reports to shareholders for the period ended December 31, 1998, are incorporated herein by reference. Additional copies of the reports to shareholders may be obtained without charge by writing or calling the Trust. B-58 210 APPENDIX A DESCRIPTION OF MONEY MARKET INSTRUMENTS The following information includes a description of certain money market instruments in which the Ready Reserves Fund portfolio may invest to the extent consistent with its investment objective. UNITED STATES GOVERNMENT SECURITIES. These include marketable securities issued by the United States Treasury, which consist of bills, notes and bonds. Such securities are direct obligations of the United States government and are backed by the full faith and credit of the United States. They differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis. GOVERNMENT AGENCY SECURITIES. These include debt securities issued by government-sponsored enterprises, federal agencies or instrumentalities and international institutions. Such securities are not direct obligations of the U.S. Treasury but involve some government sponsorship or guarantees. Different instruments have different degrees of government backing. For example, securities issued by the Federal National Mortgage Association are supported by the agency's right to borrow money from the U.S. Treasury under certain circumstances. Securities issued by the Student Loan Marketing Association are supported only by the credit of the agency that issued them. Thus, the Fund may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitment. SHORT-TERM CORPORATE DEBT INSTRUMENTS. These include commercial paper (including variable amount master demand notes), which refers to short-term unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months. In addition, some short-term paper, which can have a maturity exceeding nine months, is issued in reliance on the so-called "private placement" exemption from registration afforded by Section 4(2) of the Securities Act of 1933 ("Section 4(2) paper"). The Ready Reserves Fund portfolio may invest in Section 4(2) paper with maturities of twelve months or less. Section 4(2) paper is restricted as to disposition under the Federal securities laws and generally is sold to institutional investors such as the Fund who agree that they are purchasing the paper for investment and not with a view to public distribution. Variable amount master demand notes are demand obligations that permit the investment of fluctuating amounts at varying market rates of interest pursuant to arrangements between the issuer and a commercial bank acting as agent for the payees of such notes, whereby both parties have the right to vary the amount of the outstanding indebtedness on the notes. Because variable amount master demand notes are direct lending arrangements between the lender and the borrower, it is not generally contemplated that such instruments will be traded and there is no secondary market for the notes. Typically, agreements relating to such notes provide that the lender may not sell or otherwise transfer the note without the borrower's consent. Such notes provide that the interest rate on the amount outstanding is adjusted periodically, typically on a daily basis in accordance with a stated short-term interest rate benchmark. Since the interest rate of a variable amount master demand note is adjusted no less often than every 60 days and since repayment of the note may be demanded at any time, the Fund values such a note in accordance with the amortized cost basis at the outstanding principal amount of the note. Also included are nonconvertible corporate debt securities (e.g., bonds and debentures) with no more than one year remaining to maturity at the date of settlement. Corporate debt securities with a remaining maturity of less 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 A-1 211 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-2 212 APPENDIX B COMMERCIAL PAPER RATINGS A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. The following summarizes the rating categories used by Standard and Poor's for commercial paper: "A-1" - Issue's degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted "A-1+." "A-2" - Issue's capacity for timely payment is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1." "A-3" - Issue has an adequate capacity for timely payment. It is, however, somewhat more vulnerable to the adverse effects of changes and circumstances than an obligation carrying a higher designation. "B" - Issue has only a speculative capacity for timely payment. "C" - Issue has a doubtful capacity for payment. "D" - Issue is in payment default. The "D" category is used when interest payments or principal payments are not made on the due date, even if the applicable grace period has not expired when S & P believes such payments will be made during such grace period. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of one year, unless explicitly noted. The following summarizes the rating categories used by Moody's for commercial paper: "Prime-1" - Issuer or related supporting institutions are considered to have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. "Prime-2" - Issuer or related supporting institutions are considered to have a strong capacity for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. "Prime-3" - Issuer or related supporting institutions have an acceptable ability for repayment of senior short-term debt obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. "Not Prime"- Issuer does not fall within any of the Prime rating categories. The three rating categories of Duff & Phelps for investment grade commercial paper and short-term debt are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating category. The following summarizes the rating categories used by Duff & Phelps for commercial paper: B-1 213 "Duff 1+" - Debt possesses highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. "Duff 1" - Debt possesses very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. "Duff 1-" - Debt possesses high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small. "Duff 2" - Debt possesses good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. "Duff 3" - Debt possesses satisfactory liquidity, and other protection factors qualify issue as investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. "Duff 4" - Debt possesses speculative investment characteristics. Liquidity is not sufficient to ensure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. "Duff 5" - Issuer has failed to meet scheduled principal and/or interest payments. Fitch short-term ratings apply generally to debt obligations that are payable on demand or have original maturities of up to three years. The following summarizes the rating categories used by Fitch for short-term obligations: "F-1+" - Securities possess exceptionally strong credit quality. Issues assigned this rating are regarded as having the strongest degree of assurance for timely payment. "F-1" - Securities possess very strong credit quality. Issues assigned this rating reflect an assurance of timely payment only slightly less in degree than issues rated "F-1+." "F-2" - Securities possess good credit quality. Issues carrying this rating have a satisfactory degree of assurance for timely payment, but the margin of safety is not as great as the "F-1+" and "F-1" categories. "F-3" - Securities possess fair credit quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate; however, near-term adverse changes could cause these securities to be rated below investment grade. "F-S" - Securities possess weak credit quality. Issues assigned this rating have characteristics suggesting a minimal degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial and economic conditions. "D" - Securities are in actual or imminent payment default. CORPORATE LONG-TERM DEBT RATINGS The following summarizes the ratings used by Standard & Poor's for corporate and municipal debt: "AAA" - This designation represents the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment is extremely strong. "AA" - An obligation rated "AA" differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. B-2 214 "A" - An obligation rated "A" is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. "BBB" - An obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. "BB," "B," "CCC," "CC," and "C" - Debt is regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and "C" the highest. While such obligations will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. "BB" - Debt is less vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to obligor's inadequate capacity to meet its financial commitment on the obligation. "B" - Debt is more vulnerable to non-payment than obligations rated "BB," but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. "CCC" - Debt is currently vulnerable to non-payment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. "CC" - An obligation rated "CC" is currently highly vulnerable to non-payment. "C" - The "C" rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued. "D" - An obligation rated "D" is in payment default. This rating is used when payments on an obligation are not made on the date due, even if the applicable grace period has not expired, unless S & P believes that such payments will be made during such grace period. "D" rating is also used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. "r" - This rating is attached to highlight derivative, hybrid, and certain other obligations that S & P believes may experience high volatility or high variability in expected returns due to non-credit risks. Examples of such obligations are: securities whose principal or interest return is indexed to equities, commodities or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return. The following summarizes the ratings used by Moody's for corporate and municipal long-term debt: "Aaa" - Bonds 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 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 B-3 215 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 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. "Baa" - Bonds considered medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. "Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings provide questionable protection of interest and principal ("Ba" indicates some speculative elements; "B" indicates a general lack of characteristics of desirable investment; "Caa" represents a poor standing; "Ca" represents obligations which are speculative in a high degree; and "C" represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default. Con. (--) - Bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals which begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon completion of construction or elimination of basis of condition. (P) - When applied to forward delivery bonds, indicates that the rating is provisional pending delivery of the bonds. The rating may be revised prior to delivery if changes occur in the legal documents or the underlying credit quality of the bonds. Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1. The following summarizes the ratings used by Duff & Phelps for corporate and municipal long-term debt: "AAA" - Debt is considered to be of the highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt. "AA" - Debt is considered of high credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. "A" - Debt possesses protection factors which are average but adequate. However, risk factors are more variable and greater in periods of economic stress. "BBB" - Debt possesses below average protection factors but such protection factors are still considered sufficient for prudent investment. Considerable variability in risk is present during economic cycles. "BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings is considered to be below investment grade. Although below investment grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B" possesses the risk that obligations will not be met when due. Debt rated "CCC" is well below investment grade and has considerable uncertainty as to timely payment of principal, interest or preferred dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP" represents preferred stock with dividend averages. To provide more detailed indications of credit quality, the "AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major categories. The following summarizes the highest four ratings used by Fitch for corporate and municipal bonds: B-4 216 "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. "BBB" - Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have an adverse impact on these bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. "BB" - Bonds considered to be speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified, which could assist the obligor in satisfying its debt service requirements. "B" - Bonds are considered highly speculative. While securities in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. "CCC " - Bonds have certain identifiable characteristics that, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. "CC" - Bonds are minimally protected. Default in payments of interest and/or principal seems probable over time. "C" - Bonds are in imminent default in payment of interest or principal. "DDD," "DD" and "D" - Bonds are in default on interest and/or principal payments. Such securities are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these securities, and "D" represents the lowest potential for recovery. To provide more detailed indications of credit quality, the Fitch ratings from and including "AA" to "C" may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within these major rating categories. B-5 217 WILLIAM BLAIR FUNDS PART C OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust dated September 3, 1999.* (b) By-laws.* (c) None. (d) (i) Form of Management Agreement dated May 1, 1996, as amended. (3)/ (ii) Form of Management Agreement dated December 23, 1996. (2)/ (iii) Form of Management Agreement dated April 30, 1998. (4)/ (iv) Form of Management Agreement (Amended and Restated) dated December 15, 1999.* (e) (i) Underwriting Agreement. (1)/ (ii) Form of Distribution Agreement -- Class B and Class C. (5)/ (iii) Distribution Agreement -- Class N. (6)/ (f) None. (g) (i) Custodian Agreement. (6)/ (ii) Delegation Agreement. (4)/ (h) (i) Shareholder Services Agreement -- Class A, Class B and Class C dated July 30, 1999.* (ii) Expense Limitation Agreement for the Value Discovery Fund dated September 30, 1999.* (iii) Expense Limitation Agreement for the Emerging Markets Growth Fund dated September 30, 1999.* (iv) Expense Limitation Agreement for the Tax Managed Growth Fund dated December 15, 1999.* (v) Expense Limitation Agreement for the Disciplined Large Cap Fund dated December 15, 1999.* (vi) Expense Limitation Agreement for the Small Cap Growth Fund dated December 15, 1999.* (vii) Expense Limitation Agreement for the Large Cap Growth Fund dated December 15, 1999.* (i) Opinion and Consent of Vedder, Price, Kaufman & Kammholz. * (j) Consent of Ernst & Young LLP. * (k) Not applicable. (l) Subscription Agreement. (1)/ (m) (i) Form of Distribution Plan -- Class B and Class C. (5)/ (ii) Distribution Plan -- Class N. (6)/ (n) (i) Form of Multi-Class Plan. (5)/ (ii) Amended Multi-Class Plan. (6)/ (o) (i) Powers of Attorney for each trustee except John P. Kayser and Robert E. Wood II.(6)/ (ii) Powers of Attorney for John P. Kayser and Robert E. Wood II.* C-1 218 - ------------------ (1)/ Incorporated herein by reference to Post-Effective Amendment No. 13 to Registrant's Registration Statement on Form N-1A as filed on or about March 1, 1996. (2)/ Incorporated herein by reference to Post-Effective Amendment No. 15 to Registrant's Registration Statement on Form N-1A as filed on or about November 5, 1996. (3)/ Incorporated herein by reference to Post-Effective Amendment No. 16 to Registrant's Registration Statement on Form N-1A as filed on or about February 26, 1997. (4)/ Incorporated herein by reference to Post-Effective Amendment No. 17 to Registrant's Registration Statement on Form N-1A as filed on or about February 27, 1998. (5)/ Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on Form N-1A as filed on or about July 30, 1999. (6)/ Incorporated herein by reference to Post-Effective Amendment No. 21 to Registrant's Registration Statement on Form N-1A as filed on or about September 29, 1999. * Filed herewith. ITEM 24. Persons Controlled by or Under Common Control with Registrant Not applicable. ITEM 25. Indemnification Section 5.2 of Article V of the Registrant's Declaration of Trust provides for indemnification of directors and officers under certain circumstances but does not allow such indemnification in cases of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. The Investment Management Agreement between the Registrant and William Blair & Company, L.L.C. (the "Adviser") provides that, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties thereunder on the part of the Adviser, the Adviser shall not be liable for any error of judgment or mistake of law, or for any loss suffered by the Fund in connection with the matters to which such Agreement relates. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be permitted to trustees, 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 trustee, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such trustee, 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 26. Business and Other Connections of 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-2 219
NAME AND POSITION WITH WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY - ------------------------------- ------------------ -------- Michael Balkin The New Providence Fund General Partner Principal Rocky Barber LaRabida Hospital Foundation Vice President of the Board of Trustees Principal Metropolitan Chicago YMCA Director Metropolitan Club Board Member Stanford Business School Member Advisory Council William Blair Funds Chief Executive Officer Bowen Blair, The Art Institute of Chicago Trustee Senior Principal Chicago Historical Society Trustee Field Museum of Natural History Trustee Edward McC. Blair, Sr., The Art Institute of Chicago Life Trustee Senior Principal College of The Atlantic Board of Trustees Pullman Educational Foundation Life Trustee Rush Presbyterian-St. Luke'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 Medical, Inc. Director University of Chicago Hospital Trustee Kurt Beuchel, Social Security Fund of the Member, Investment Advisory Board Principal Principality of Liechtenstein George Busse Busse Venture Associates Partner Principal George L. Busse & Co. Director Mount Prospect National Bank Director David G. Chandler, Electronic Manufacturing Systems, Director Principal Inc. Director Encore Paper Company Director Engineered Materials Corp. Director Gibraltar Packaging Group Director Harmonic Systems, Inc. Director Morton Grove Pharmaceuticals, Inc. Director Pacwest Telecom, Inc. Director Pharma Research Corp. Director Predelivery Service Corporation Director Sweetwater Sound, Inc. E. David Coolidge, III, Pittway Corporation Director Chief Executive Officer Conrad Fischer, APM Limited Partnership General Partner Principal Chicago Child Care Trustee, Emeritus Kalamazoo College Investment Committee William Blair Funds Chairman and Director
C-3 220
NAME AND POSITION WITH WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY - ------------------------------- ------------------ -------- Mark A. Fuller, III, Fuller Investment Company President Principal Fulsen Howney Partners Partner Three Rio Grande, LLC Principal William Blair Funds Senior Vice President John K. Greene, Chicago Horticultural Society Trustee Principal Children's Home & Aid Society Trustee of Illinois, Inc. Garden Conservatory Trustee Hazelden Chairman, Illinois Board of Trustees Vulcan Materials Co. Director James P. Hickey, Eagle Point Software Director Principal Edgar D. Jannotta, Sr., AAR Corporation Director Senior Principal AON Corporation Director Bandag, Incorporated Director Molex, Incorporated Director Oil-Dri Corporation of America Director Sloan Valve Company Director Unicom Corporation Director John P. Kayser, William Blair Funds Trustee Principal Richard P. Kiphart, McCormick Theological Seminary Board of Trustees Principal Concord EFS, Inc. Director Charles Kraft, Spartan Holdings LLC President Principal Dalton, Grenar, Hartman, Maher LP Limited Partner Robert Lamphier, IV, Ag. Med, Inc. Chairman Principal James McMullan, University of Mississippi Foundation Director Principal David W. Morrison, Bell Flavors & Fragrances, Inc. Director Principal Timothy M. Murray, Daisytek International Director Principal Mede America, Inc. Director Portland Food Products, Incorporated Director Towne Holdings, Inc. Director Bentley M. Myer, Delnor Community Hospital Director Principal William Blair Funds Senior Vice President David G. O'Neill, Elder Care Information Network Director Principal Resume Link, Inc. Director Svboda, Collins & Co. Advisory Board
C-4 221
NAME AND POSITION WITH WILLIAM BLAIR & COMPANY, L.L.C. PRINCIPAL BUSINESS CAPACITY - ------------------------------- ------------------ -------- Phillip Reitz, Fairway Drive Funding Corp. Director Principal Worcester Co. Director XOLOX Corporation Advisory Board Neal L. Seltzer, Scholarship and Guidance Director Principal Foundation Director Lake Shore Country Club General Partner Serendipity Fund II, L.P. General Partner New Providence Fund, L.P. William Semmer, Chicago Home and Garden Magazine Director Principal Thomas H. Story, Security APL, Inc. Member, Advisory Council Principal Mark Timmerman, DIY Home Warehouse, Incorporated Director Principal Prophet 21, Incorporated Director W. James Truettner, Jr., Glenview Foundation Director Principal International Travel Services Director Kathleen A. Wieland, Blue Egg Enterprises President Principal D/B/A Robin's Bookshop
ITEM 27. Principal Underwriters (a) Not applicable. (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 26 for information with respect to officers and principals of William Blair & Company, L.L.C. (c) Not applicable. ITEM 28. Location of Accounts and Records All such accounts, books and other documents are maintained by the Registrant's officers at the offices of the Registrant and the offices of the Investment Adviser, William Blair & Company, L.L.C., 222 West Adams Street, Chicago, Illinois 60606. Shareholder account information and original shareholder correspondence is also available at the offices of the Transfer Agent and Dividend Paying Agent, State Street Bank and Trust Company, P.O. Box 9104, Boston, Massachusetts 02266-9104. ITEM 29. Management Services Not applicable. ITEM 30. Undertakings Not applicable. C-5 222 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the registrant certifies that it meets all of the requirements for effectiveness of this post-effective amendment to the registration statement under Rule 485(b) under the Securities Act of 1933 and 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 20th day of December, 1999. WILLIAM BLAIR FUNDS By: /s/ MARCO HANIG -------------------------------- Marco Hanig, 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 indicated and on the 20th day of December, 1999. SIGNATURE TITLE - --------- ----- /s/J. GRANT BEADLE* Trustee - -------------------------- J. Grant Beadle /s/THEODORE A. BOSLER* Trustee - -------------------------- Theodore A. Bosler /s/CONRAD FISCHER* Trustee (Chairman of the Board) - -------------------------- Conrad Fischer /s/JOHN P. KAYSER* Trustee - -------------------------- John P. Kayser /s/ANN P. MCDERMOTT* Trustee - -------------------------- Ann P. McDermott /s/JOHN B. SCHWEMM* Trustee - -------------------------- John B. Schwemm /s/ROBERT E. WOOD II* Trustee - -------------------------- Robert E. Wood II /s/MARCO HANIG President (Principal Executive Officer) - -------------------------- Marco Hanig /s/TERENCE M. SULLIVAN Treasurer (Principal Financial Officer, - -------------------------- Terence M. Sullivan Principal Accounting Officer) - -------------- * Marco Hanig signs this document pursuant to powers of attorney previously filed or as filed herewith. 223 Index to Exhibits (a) Declaration of Trust dated September 3, 1999. (b) By-laws. (d) (iv) Form of Management Agreement dated December 15, 1999. (h) (i) Shareholder Services Agreement -- Class A, Class B and Class C dated July 30, 1999.* (ii) Expense Limitation Agreement for the Value Discovery Fund dated September 30, 1999.* (iii) Expense Limitation Agreement for the Emerging Markets Growth Fund dated September 30, 1999.* (iv) Expense Limitation Agreement for the Tax Managed Growth Fund dated December 15, 1999.* (v) Expense Limitation Agreement for the Disciplined Large Cap Fund dated December 15, 1999.* (vi) Expense Limitation Agreement for the Small Cap Growth Fund dated December 15, 1999.* (vii) Expense Limitation Agreement for the Large Cap Growth Fund dated December 15, 1999.* (i) Opinion of Consent of Vedder, Price, Kaufman & Kammholz. (j) Consent of Ernst & Young LLP. (o) (ii) Powers of Attorney for John P. Kayser and Robert E. Wood II. EX-99.(A) 2 DECLARATION OF TRUST DATED 9/3/99 1 EXHIBIT (a) DECLARATION OF TRUST OF WILLIAM BLAIR FUNDS September 3, 1999 2 DECLARATION OF TRUST OF WILLIAM BLAIR FUNDS TABLE OF CONTENTS
Page ARTICLE I The Trust..............................................................................................1 1.1 Name............................................................................................1 1.2 Trust Purpose...................................................................................1 1.3 Definitions.....................................................................................2 ARTICLE II Trustees...............................................................................................3 2.1 Number and Qualification........................................................................3 2.2 Term and Election...............................................................................4 2.3 Resignation and Removal.........................................................................4 2.4 Vacancies.......................................................................................4 2.5 Meetings........................................................................................5 2.6 Officers; Chairperson of the Board..............................................................6 2.7 By-Laws.........................................................................................6 ARTICLE III Powers of Trustees.....................................................................................6 3.1 General.........................................................................................6 3.2 Investments.....................................................................................6 3.3 Legal Title.....................................................................................7 3.4 Sale of Interests...............................................................................7 3.5 Borrow Money....................................................................................7 3.6 Delegation; Committee...........................................................................7 3.7 Collection and Payment..........................................................................8 3.8 Expenses........................................................................................8 3.9 Miscellaneous Powers............................................................................8 3.10 Further Powers..................................................................................8
i 3 ARTICLE IV Investment Advisory, Administrative, and Placement Agent Services......................................9 4.1 Investment Advisory and Other Services..........................................................9 4.2 Parties to Contract.............................................................................9 ARTICLE V Limitations of Liability..............................................................................10 5.1 No Personal Liability of Trustees, Officers, Employees or Agents...............................10 5.2 Indemnification of Trustees, Officers, Employees and Agents....................................10 5.3 Liability of Holders; Indemnification..........................................................11 5.4 No Bond Required of Trustees...................................................................11 5.5 No Duty of Investigation; Notice in Trust Instruments, Etc.....................................11 5.6 Reliance on Experts, Etc.......................................................................11 5.7 Assent to Declaration..........................................................................12 ARTICLE VI Interests in the Trust................................................................................12 6.1 General Characteristics........................................................................12 6.2 Establishment of Series of Interests...........................................................13 6.3 Establishment of Classes.......................................................................13 6.4 Assets of Series...............................................................................14 6.5 Liabilities of Series..........................................................................14 6.6 Dividends and Distributions....................................................................15 6.7 Voting Rights..................................................................................16 6.8 Record Dates...................................................................................16 6.9 Transfer.......................................................................................16 6.10 Equality.......................................................................................16 6.11 Fractions......................................................................................16 6.12 Class Differences..............................................................................17 6.13 Conversion of Interests........................................................................17 6.14 Investments in the Trust.......................................................................17 6.15 Trustees and Officers as Holders...............................................................17 6.16 No Preemptive Rights; Derivative Suits.........................................................17 6.17 No Appraisal Rights............................................................................17 6.18 Status of Interests and Limitation of Personal Liability.......................................17 6.19 Elimination of Series..........................................................................18 ARTICLE VII Purchases and Redemptions.............................................................................18 7.1 Purchases......................................................................................18 7.2 Redemption by Holder...........................................................................18 7.3 Redemption by Trust............................................................................19 7.4 Net Asset Value................................................................................19
ii 4 ARTICLE VIII Holders...............................................................................................20 8.1 Rights of Holders..............................................................................20 8.2 Register of Interests..........................................................................20 8.3 Notices........................................................................................20 8.4 Meetings of Holders............................................................................20 8.5 Notice of Meetings.............................................................................21 8.6 Record Date....................................................................................21 8.7 Proxies, Etc...................................................................................21 8.8 Reports........................................................................................22 8.9 Inspection of Records..........................................................................22 8.10 Voting Powers..................................................................................22 8.11 Holder Action by Written Consent...............................................................22 8.12 Holder Communications..........................................................................22 ARTICLE IX Duration; Termination of Trust; Amendment; Mergers; Etc...............................................23 9.1 Duration.......................................................................................23 9.2 Termination of Trust...........................................................................23 9.3 Amendment Procedure............................................................................24 9.4 Merger, Consolidation and Sale of Assets.......................................................25 9.5 Incorporation..................................................................................25 ARTICLE X Miscellaneous.........................................................................................25 10.1 Certificate of Designation; Agent for Service of Process.......................................25 10.2 Governing Law..................................................................................26 10.3 Counterparts...................................................................................26 10.4 Reliance by Third Parties......................................................................26 10.5 Provisions in Conflict With Law or Regulations.................................................26 10.6 Trust Only.....................................................................................27 10.7 Withholding....................................................................................27 10.8 Headings and Construction......................................................................27
iii 5 This DECLARATION OF TRUST OF WILLIAM BLAIR FUNDS is made on the 3rd day of September, 1999 by the parties signatory hereto, as Trustees. WHEREAS, the Trustees desire to form a business trust under the law of Delaware for the investment and reinvestment of its assets; and WHEREAS, it is proposed that the Trust assets be composed of cash, securities and other assets contributed to the Trust by the Holders of Interests in the Trust entitled to ownership rights in the Trust; NOW, THEREFORE, the Trustees hereby declare that the Trustees will hold in trust all cash, securities and other assets which they may from time to time acquire in any manner as Trustees hereunder, and manage and dispose of the same for the benefit of the Holders of Interests in the Trust, and subject to the following terms and conditions. ARTICLE I The Trust 1.1 Name. The name of the Trust created hereby (the "Trust") shall be "William Blair Funds," and so far as may be practicable the Trustees shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever hereinafter used) shall not refer to the Trustees in their individual capacities or to the officers, agents, employees or Holders of Interest in the Trust. However, should the Trustees determine that the use of the name of the Trust is not advisable, they may select such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name. Any name change shall become effective upon the execution by a majority of the then Trustees of an instrument setting forth the new name and the filing of a certificate of amendment pursuant to Section 3810(b) of the DBTA. Any such instrument shall not require the approval of the Holders of Interests in the Trust, but shall have the status of an amendment to this Declaration. 1.2 Trust Purpose. The purpose of the Trust is to conduct, operate and carry on the business of an open-end management investment company registered under the 1940 Act. In furtherance of the foregoing, it shall be the purpose of the Trust to do everything necessary, suitable, convenient or proper for the conduct, promotion and attainment of any businesses and purposes which at any time may be incidental or may appear conducive or expedient for the accomplishment of the business of an open-end management investment company registered under the 1940 Act and which may be engaged in or carried on by a trust organized under the DBTA, and in connection therewith, the Trust shall have and may exercise all of the powers conferred by the laws of the State of Delaware upon a Delaware business trust. 6 1.3 Definitions. As used in this Declaration, the following terms shall have the following meanings: (a) "1940 Act" shall mean the Investment Company Act of 1940, as amended from time to time, and the rules and regulations thereunder, as adopted or amended from time to time. (b) "Affiliated Person," "Assignment" and "Interested Person" shall have the meanings given such terms in the 1940 Act. (c) "Administrator" shall mean any party furnishing services to the Trust pursuant to any administrative services contract described in Section 4.1. (d) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder, as adopted or amended from time to time. (f) "Commission" shall mean the Securities and Exchange Commission. (g) "Declaration" shall mean this Declaration of Trust, as amended from time to time. References in this Declaration to "Declaration," "hereof," "herein" and "hereunder" shall be deemed to refer to the Declaration rather than the article or section in which such words appear. This Declaration shall, together with the By-Laws, constitute the governing instrument of the Trust under the DBTA. (h) "DBTA" shall mean the Delaware Business Trust Act, Delaware Code Annotated Title 12, Sections 3801, et seq., as amended from time to time. (i) "Fiscal Year" shall mean an annual period as determined by the Trustees unless otherwise provided by the Code or applicable regulations. (j) "Holders" shall mean as of any particular time any or all holders of record of Interests in the Trust or in Trust Property, as the case may be, at such time. (k) "Interest" shall mean a Holder's units of interest into which the beneficial interest in the Trust and each series and class of the Trust shall be divided from time to time. (l) "Investment Adviser" shall mean any party furnishing services to the Trust pursuant to any investment advisory contract described in Section 4.1 hereof. 2 7 (m) "Majority Interests Vote" shall mean the vote, at a meeting of the Holders of Interests, of the lesser of (i) 67% or more of the Interests present or represented at such meeting, provided the Holders of more than 50% of the Interests are present or represented by proxy or (ii) more than 50% of the Interests. (n) "Person" shall mean and include an individual, corporation, partnership, trust, foundation, plan, association, joint venture, estate and other entity, whether or not a legal entity, and a government and agencies and political subdivisions thereof, whether domestic or foreign. (o) "Registration Statement" as of any particular time shall mean the Registration Statement of the Trust which is effective at such time under the 1940 Act. (p) "Trust Property" shall mean as of any particular time any and all property, real or personal, tangible or intangible, which at such time is owned or held by or for the account of the Trust or the Trustees or any series of the Trust established in accordance with Section 6.2. (q) "Trustees" shall mean such persons who have signed this Declaration, so long as they shall continue in office in accordance with the terms of this Declaration, and all other persons who at the time in question have been duly elected or appointed as trustees in accordance with the provisions of this Declaration and are then in office, in their capacity as trustees hereunder. ARTICLE II Trustees 2.1 Number and Qualification. The number of Trustees shall initially be one and shall thereafter be fixed from time to time by written instrument signed, or by resolution approved at a duly constituted meeting, by a majority of the Trustees so fixed, then in office, provided, however, that the number of Trustees shall in no event be less than one. A Trustee shall be an individual at least 21 years of age who is not under a legal disability. (a) Any vacancy created by an increase in Trustees shall be filled by the appointment or election of an individual having the qualifications described in this Article as provided in Section 2.4. Any such appointment shall not become effective, however, until the individual appointed or elected shall have accepted in writing such appointment or election and agreed in writing to be bound by the terms of the Declaration. No reduction in the number of Trustees shall have the effect of removing any Trustee from office. (b) Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in Section 2.4 hereof, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. 2.2 Term and Election. Each Trustee named herein, or elected or appointed prior to the first meeting of the Holders, shall (except in the event of resignations or removals or vacancies 3 8 pursuant to Section 2.3 or 2.4 hereof) hold office until his or her successor has been elected at such meeting and has qualified to serve as Trustee. Beginning with the Trustees elected at the first meeting of Holders, each Trustee shall hold office during the lifetime of this Trust and until its termination as hereinafter provided unless such Trustee resigns or is removed as provided in Section 2.3 below or his term expires pursuant to Section 2.4 hereof. 2.3 Resignation and Removal. Any Trustee may resign (without need for prior or subsequent accounting) by an instrument in writing signed by him or her and delivered or mailed to the Chairperson, if any, the President or the Secretary and such resignation shall be effective upon such delivery, or at a later date according to the terms of the instrument. (a) Any of the Trustees may be removed with or without cause by the affirmative vote of the Holders of two-thirds (2/3) of the Interests or (provided the aggregate number of Trustees, after such removal and after giving effect to any appointment made to fill the vacancy created by such removal, shall not be less than the number required by Section 2.1 hereof) with cause, by the action of two-thirds (2/3) of the remaining Trustees, or without cause, by the action of eighty percent (80%) of the remaining Trustees. Removal with cause shall include, but not be limited to, the removal of a Trustee due to physical or mental incapacity. (b) Upon the resignation or removal of a Trustee, or his or her otherwise ceasing to be a Trustee, he or she shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in the name of the resigning or removed Trustee. Upon the death of any Trustee or upon removal or resignation due to any Trustee's incapacity to serve as trustee, his or her legal representative shall execute and deliver on his or her behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. 2.4 Vacancies. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of the earliest to occur of the following: the Trustee's death, resignation, adjudicated incompetence or other incapacity to perform the duties of the office, or the removal of the Trustee. A vacancy shall also occur in the event of an increase in the number of Trustees as provided in Section 2.1. No such vacancy shall operate to annul this Declaration or to revoke any existing trust created pursuant to the terms of this Declaration. In the case of a vacancy, the Holders of a plurality of the Interests entitled to vote, acting at any meeting of the Holders held in accordance with Article VIII hereof, or, to the extent permitted by the 1940 Act, a majority vote of the Trustees continuing in office acting by written instrument or instruments, may fill such vacancy, and any Trustee so elected by the Trustees or the Holders shall hold office as provided in this Declaration. There shall be no cumulative voting by the Holders in the election of Trustees. 2.5 Meetings. Meetings of the Trustees shall be held from time to time within or without the State of Delaware upon the call of the Chairperson, if any, the Chief Executive Officer, the President, the Secretary, an Assistant Secretary or any two Trustees. (a) Regular meetings of the Trustees may be held without call or notice at a time and place fixed by the By-Laws or by resolution of the Trustees. Notice of any other meeting shall 4 9 be given not later than 72 hours preceding the meeting by United States mail or by electronic transmission to each Trustee at his or her business address as set forth in the records of the Trust or otherwise given personally not less than 24 hours before the meeting but may be waived in writing by any Trustee either before or after such meeting. The attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Trustee attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting has not been lawfully called or convened. (b) A quorum for all meetings of the Trustees shall be one-third of the total number of Trustees, but (except at such time as there is only one Trustee) no less than two Trustees. Unless provided otherwise in this Declaration, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consent of a majority of the Trustees, which written consent shall be filed with the minutes of proceedings of the Trustees or any such committee. If there be less than a quorum present at any meeting of the Trustees, a majority of those present may adjourn the meeting until a quorum shall have been obtained. (c) Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be two or more of the members thereof, unless the Board shall provide otherwise. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members, which written consent shall be filed with the minutes of proceedings of the Trustees or any such committee. (d) With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons of the Trust or are otherwise interested in any action to be taken may be counted for quorum purposes under this Section 2.5 and shall be entitled to vote to the extent permitted by the 1940 Act. (e) All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to such communications system shall constitute presence in person at such meeting, unless the 1940 Act specifically requires the Trustees to act "in person," in which case such term shall be construed consistent with Commission or staff releases or interpretations. 2.6 Officers; Chairperson of the Board. The Trustees shall, from time to time, elect officers of the Trust, including a Chief Executive Officer, a President, a Secretary and a Treasurer. The Trustees shall elect or appoint, from time to time, a Trustee to act as Chairperson of the Board who shall preside at all meetings of the Trustees and carry out such other duties as the Trustees shall designate. The Trustees may elect or appoint or authorize the Chief Executive Officer and/or the President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. The President, Secretary and Treasurer may, but need not, be a Trustee. The Chairperson 5 10 of the Board and such officers of the Trust shall serve in such capacity for such time and with such authority as the Trustees may, in their discretion, so designate or as provided for in the By-Laws. 2.7 By-Laws. The Trustees may adopt and, from time to time, amend or repeal the By-Laws for the conduct of the business of the Trust not inconsistent with this Declaration, and such By-Laws are hereby incorporated in this Declaration by reference thereto. ARTICLE III Powers of Trustees 3.1 General. The Trustees shall have exclusive and absolute control over management of the business and affairs of the Trust, but with such powers of delegation as may be permitted by this Declaration and the DBTA. The Trustees may perform such acts as in their sole discretion are proper for conducting the business and affairs of the Trust. The enumeration of any specific power herein shall not be construed as limiting the aforesaid power. Such powers of the Trustee may be exercised without order of, or recourse to, any court. 3.2 Investments. The Trustees shall have power to: (a) conduct, operate and carry on the business of an investment company; and (b) subscribe for, invest in, reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign, lend, transfer, exchange, distribute, write or otherwise deal in or dispose of United States and foreign currencies and related instruments including forward contracts, and securities, including common and preferred stock, warrants, bonds, debentures, time notes, bankers acceptances and all other evidences of indebtedness, negotiable or non-negotiable instruments, obligations, certificates of deposit or indebtedness, commercial paper, repurchase agreements, reverse repurchase agreements, convertible securities, forward contracts, options, futures contracts, and other securities, including, without limitation, those issued, guaranteed or sponsored by any state, territory or possession of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, or by the United States Government, any foreign government, or any agency, instrumentality or political subdivision of the United States Government or any foreign government, or international instrumentalities, or by any bank, savings institution, corporation or other business entity organized under the laws of the United States or under foreign laws or in "when-issued" contracts for such securities; and to exercise any and all rights, powers and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more persons, firms, associations, or corporations to exercise any of said rights, powers and privileges in respect of any of said instruments; and the Trustees shall be deemed to have the foregoing powers with respect to any additional securities in which the Trustees may determine to invest. 6 11 The Trustees shall not be limited to investing in obligations maturing before the possible termination of the Trust, nor shall the Trustees be limited by any law limiting the investments which may be made by fiduciaries. 3.3 Legal Title. Legal title to all the Trust Property shall be vested in the Trust as a separate legal entity under the DBTA, except that the Trustees shall have the power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees or in the name of any other Person on behalf of the Trust on such terms as the Trustees may determine. In the event that title to any part of the Trust Property is vested in one or more Trustees, the right, title and interest of the Trustees in the Trust Property shall vest automatically in each person who may hereafter become a Trustee upon his or her due election and qualification. Upon the resignation, removal or death of a Trustee he or she shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. To the extent permitted by law, such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. 3.4 Sale of Interests. Subject to the more detailed provisions set forth in Article VII, the Trustees shall have the power to permit persons to purchase Interests and to add or reduce, in whole or in part, their Interest in the Trust. 3.5 Borrow Money. The Trustees shall have power to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security the assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee or undertake the performance of any obligation, contract or engagement of any other person, firm, association or corporation. 3.6 Delegation; Committee. The Trustees shall have the power, consistent with their continuing exclusive authority over the management of the Trust and the Trust Property, to delegate from time to time to such of their number or to officers, employees or agents of the Trust the doing of such things and the execution of such instruments, either in the name of the Trust or the names of the Trustees or otherwise, as the Trustees may deem expedient. 3.7 Collection and Payment. The Trustees shall have the power to collect all property due to the Trust; to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations, by virtue of which any property is owed to the Trust; and to enter into releases, agreements and other instruments. 3.8 Expenses. The Trustees shall have the power to incur and pay any expenses which in the opinion of the Trustees are necessary or incidental to carry out any of the purposes of this Declaration, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees. The Trustees may pay themselves such compensation for special services, including legal and brokerage 7 12 services, as they in good faith may deem reasonable (subject to any limitations in the 1940 Act), and reimbursement for expenses reasonably incurred by themselves on behalf of the Trust. There shall be no retirement compensation plan for the Trustees; provided, however, that the Trustees may adopt a deferred compensation plan consistent with industry and regulatory standards. 3.9 Miscellaneous Powers. The Trustees shall have the power to: (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the business of the Trust and terminate such employees or contractual relationships as they consider appropriate; (b) enter into joint ventures, partnerships and any other combinations or associations; (c) purchase, and pay for out of Trust Property, insurance policies (including, but not limited to, fidelity bonding and errors and omission policies) insuring the Investment Adviser, Administrator, distributor, Holders, Trustees, officers, employees, agents, or independent contractors of the Trust against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such Person in such capacity, whether or not the Trust would have the power to indemnify such Person against liability; (d) establish pension, profit-sharing and other retirement, incentive and benefit plans for any officers, employees and agents of the Trust; (e) to the extent permitted by law, indemnify any Person with whom the Trust has dealings, including the Investment Adviser, Administrator, distributor, Holders, Trustees, officers, employees, agents or independent contractors of the Trust, to such extent as the Trustees shall determine; (f) guarantee indebtedness or contractual obligations of others; (g) determine and change the Fiscal Year of the Trust and the method by which its accounts shall be kept; and (h) adopt a seal for the Trust, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust. 3.10 Further Powers. The Trustees shall have power to conduct the business of the Trust and carry on its operations in any and all of its branches and maintain offices, whether within or without the State of Delaware, in any and all states of the United States of America, in the District of Columbia, in any foreign countries, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign countries, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive and shall be binding upon the Trust and the Holders, past, present and future. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees shall not be required to obtain any court order to deal with Trust Property. ARTICLE IV Investment Advisory, Administrative, and Placement Agent Services 4.1 Investment Advisory and Other Services. The Trustees may in their discretion, from time to time, enter into contracts or agreements for investment advisory services, administrative services (including management, transfer and dividend disbursing agency services), distribution services, fiduciary (including custodian, subcustodian and depository) services, placement agent services, Holder servicing and distribution services, or other services, whereby the other party to 8 13 such contract or agreement shall undertake to furnish the Trustees such services as the Trustees shall, from time to time, consider desirable and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any other provisions of this Declaration to the contrary, the Trustees may authorize any Investment Adviser (subject to such general or specific instructions as the Trustees may, from time to time, adopt) to effect purchases, sales, loans or exchanges of Trust Property on behalf of the Trustees or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of any such Investment Adviser (all without further action by the Trustees). Any such purchases, sales, loans or exchanges shall be binding upon the Trust. 4.2 Parties to Contract. Any contract or agreement of the character described in Section 4.1 of this Article IV or in the By-Laws of the Trust may be entered into with any Person, although one or more of the Trustees or officers of the Trust or any Holder may be an officer, director, trustee, shareholder, or member of such other party to the contract or agreement, and no such contract or agreement shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of such contract or agreement or held accountable for any profit realized directly or indirectly therefrom, provided that the contract or agreement when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. Any Trustee or officer of the Trust or any Holder may be the other party to contracts or agreements entered into pursuant to Section 4.1 hereof or the By-Laws of the Trust, and any Trustee or officer of the Trust or any Holder may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts or agreements mentioned in this Section 4.2. ARTICLE V Limitations of Liability 5.1 No Personal Liability of Trustees, Officers, Employees or Agents. No Trustee, officer, employee or agent of the Trust when acting in such capacity shall be subject to any personal liability whatsoever, in his or her individual capacity, to any Person, other than the Trust or its Holders, in connection with Trust Property or the affairs of the Trust; and all such Persons shall look solely to the Trust Property for satisfaction of claims of any nature against a Trustee, officer, employee or agent of the Trust arising in connection with the affairs of the Trust. No Trustee, officer, employee or agent of the Trust shall be liable to the Trust, Holders of Interests therein, or to any Trustee, officer, employee, or agent thereof for any action or failure to act (including, without limitation, the failure to compel in any way any former or acting Trustee to redress any breach of trust), except for his or her own bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties. 5.2 Indemnification of Trustees, Officers, Employees and Agents. The Trust shall indemnify each of its Trustees, officers, employees, and agents (including Persons who serve at its request as directors, officers or trustees of another organization in which it has any interest, as a shareholder, creditor or otherwise) against all liabilities and expenses (including amounts paid in 9 14 satisfaction of judgments, in compromise, as fines and penalties, and as counsel fees) reasonably incurred by him or her in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he or she may be involved or with which he or she may be threatened, while in office or thereafter, by reason of his or her being or having been such a Trustee, officer, employee or agent, except with respect to any matter as to which he or she shall have been adjudicated to have acted in bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties; provided, however, that as to any matter disposed of by a compromise payment by such Person, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office by the court or other body approving the settlement or other disposition or by a reasonable determination, based upon review of readily available facts (as opposed to a full trial-type inquiry), that he or she did not engage in such conduct or by a reasonable determination, based upon a review of the facts, that such Person was not liable by reason of such conduct, by (a) the vote of a majority of a quorum of Trustees who are neither "interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) a written opinion from independent legal counsel approved by the Trustees. The rights accruing to any Person under these provisions shall not exclude any other right to which he or she may be lawfully entitled; provided that no Person may satisfy any right of indemnity or reimbursement granted herein or in Section 5.1 or to which he or she may be otherwise entitled except out of the Trust Property. The Trustees may make advance payments in connection with indemnification under this Section 5.2, provided that the indemnified Person shall have given a written undertaking to reimburse the Trust in the event it is subsequently determined that he or she is not entitled to such indemnification. All payments shall be made in compliance with Section 17(h) of the 1940 Act. 5.3 Liability of Holders; Indemnification. The Trust shall indemnify and hold each Holder harmless from and against any claim or liability to which such Holder may become subject solely by reason of his or her being or having been a Holder and not because of such Holder's acts or omissions or for some other reason, and shall reimburse such Holder for all legal and other expenses reasonably incurred by him or her in connection with any such claim or liability (upon proper and timely request by the Holder); provided, however, that no Holder shall be entitled to indemnification by any series established in accordance with Section 8.8 unless such Holder is a Holder of Interests of such series. The rights accruing to a Holder under this Section 5.3 shall not exclude any other right to which such Holder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Holder in any appropriate situation even though not specifically provided herein. 5.4 No Bond Required of Trustees. No Trustee shall, as such, be obligated to give any bond or surety or other security for the performance of any of his or her duties hereunder. 5.5 No Duty of Investigation; Notice in Trust Instruments, Etc. No purchaser, lender, or other Person dealing with the Trustees or any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, 10 15 loaned, or delivered to or on the order of the Trustees or of said officer, employee or agent. Every obligation, contract, instrument, certificate or other interest or undertaking of the Trust, and every other act or thing whatsoever executed in connection with the Trust, shall be conclusively relied upon as having been executed or done by the executors thereof only in their capacities as Trustees, officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate or other interest or undertaking of the Trust made by the Trustees or by any officer, employee or agent of the Trust, in his or her capacity as such, shall contain an appropriate recital to the effect that the Trustee, officer, employee or agent of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had to their private property or the private property of the Holders for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to the Declaration, and may contain any further recital which they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Trustees, officers, employees or agents of the Trust. The Trustees may maintain insurance for the protection of the Trust Property, Holders, Trustees, officers, employees and agents in such amount as the Trustees shall deem advisable. 5.6 Reliance on Experts, Etc. Each Trustee and officer or employee of the Trust shall, in the performance of his or her duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by any Investment Adviser, Administrator, accountant, appraiser or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee. 5.7 Assent to Declaration. Every Holder, by virtue of having become a Holder in accordance with the terms of this Declaration, shall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. ARTICLE VI Interests in the Trust 6.1 General Characteristics. (a) The Trustees shall have the power and authority, without Holder approval, to issue Interests in one or more series from time to time as they deem necessary or desirable. Each series shall be separate from all other series in respect to the assets and liabilities allocated to that series and shall represent a separate investment portfolio of the Trust. The Trustees shall have exclusive power, without Holder approval, to establish and designate such separate and distinct series, as set forth in Section 6.2, and to fix and determine the relative rights and preferences as between the Interests of the separate series as to right of redemption, special and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the series shall have separate voting rights or no voting rights. (b) The Trustees may, without Holder approval, divide Interests of any series into two or more classes, Interests of each such class having such preferences and special or relative rights and privileges (including conversion rights, if any) as the Trustees may determine as provided 11 16 in Section 6.3. The fact that a series shall have been initially established and designated without any specific establishment or designation of classes, shall not limit the authority of the Trustees to divide a series and establish and designate separate classes thereof. (c) The number of Interests authorized shall be unlimited, and the Interests so authorized may be represented in part by fractional Interests. From time to time, the Trustees may divide or combine the Interests of any series or class into a greater or lesser number without thereby changing the proportionate beneficial interests in the series or class. The Trustees may issue Interests of any series or class thereof for such consideration and on such terms as they may determine (or for no consideration if pursuant to an Interest dividend or split-up), all without action or approval of the Holders. All Interests when so issued on the terms determined by the Trustees shall be fully paid and non-assessable. The Trustees may classify or reclassify any unissued Interests or any Interests previously issued and reacquired of any series or class thereof into one or more series or classes thereof that may be established and designated from time to time. The Trustees may hold as treasury Interests, reissue for such consideration and on such terms as they may determine, or cancel, at their discretion from time to time, any Interests of any series or class thereof reacquired by the Trust. 6.2 Establishment of Series of Interests. (a) Without limiting the authority of the Trustees set forth in Section 6.2(b) to establish and designate any further series, the Trustees hereby establish and designate six series, as follows: William Blair Growth Fund William Blair Value Discovery Fund William Blair International Growth Fund William Blair Emerging Markets Growth Fund William Blair Income Fund William Blair Ready Reserves Fund The provisions of this Article VI shall be applicable to the above designated series and any further series that may from time to time be established and designated by the Trustees as provided in Section 6.2(b). (b) The establishment and designation of any series of Interests other than the one set forth above shall be effective upon the execution, by a majority of the Trustees, of an instrument setting forth such establishment and designation and the relative rights and preferences of such series, or as otherwise provided in such instrument. At any time that there are no Interests outstanding of any particular series previously established and designated, the Trustees may by an instrument executed by a majority of their number abolish that series and the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment of this Declaration. (c) Section 9.2 of this Declaration of Trust shall apply also with respect to each such series as if such series were a separate trust. 12 17 6.3 Establishment of Classes. (a) Without limiting the authority of the Trustees set forth in Section 6.3(b) to establish and designate any further classes, the Trustees hereby establish five classes of each series (except the Ready Reserves Fund) as follows: Class A Shares Class B Shares Class C Shares Class N Shares Class I Shares Without limiting the authority of the Trustees set forth in Section 6.3(b) to establish and designate any further classes, the Trustees hereby establish two classes of the Ready Reserves Fund as follows: Class N Shares Class I Shares The provision of this Article VI shall be applicable to the above designated classes and any further classes that may from time to time be established and designated by the Trustees as provided in Section 6.3(b). (b) The division of any series into two or more classes and the establishment and designation of such classes shall be effective upon the execution by a majority of the Trustees of an instrument setting forth such division, and the establishment, designation, and relative rights and preferences of such classes, or as otherwise provided in such instrument. The relative rights and preferences of the classes of any series may differ in such respects as the Trustees may determine to be appropriate, provided that such differences are set forth in the aforementioned instrument. At any time that there are no Interests outstanding of any particular class previously established and designated, the Trustees may by an instrument executed by a majority of their number abolish that class and the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment to this Declaration. (c) Section 9.2 of this Declaration of Trust shall apply also with respect to each such class as if such class were a separate trust. 6.4 Assets of Series. All consideration received by the Trust for the issue or sale of Interests of a particular series together with all Trust Property in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that series for all purposes, subject only to the rights of creditors of such series and except as may otherwise be required by applicable tax laws, and shall be so recorded upon the books of account of the Trust. Separate and distinct records shall be maintained for each series and the assets associated with a series shall be held and accounted for separately from the other assets of the Trust, or any other series. In the event that there is any Trust Property, or any income, earnings, profits, and 13 18 proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular series, the Trustees shall allocate them among any one or more of the series established and designated from time to time in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Each such allocation by the Trustees shall be conclusive and binding upon the Holders of all Interests for all purposes. 6.5 Liabilities of Series. (a) The Trust Property belonging to each particular series shall be charged with the liabilities of the Trust in respect to that series and all expenses, costs, charges and reserves attributable to that series, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular series shall be allocated and charged by the Trustees to and among any one or more of the series established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the Holders of all Interests for all purposes. The Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items shall be treated as income and which items as capital, and each such determination and allocation shall be conclusive and binding upon the Holders. (b) Without limitation of the foregoing provisions of this Section, but subject to the right of the Trustees in their discretion to allocate general liabilities, expenses, costs, charges or reserves as herein provided, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of any other series. Notice of this limitation on interseries liabilities shall be set forth in the certificate of trust of the Trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the DBTA, and upon the giving of such notice in the certificate of trust, the statutory provisions of Section 3804 of the DBTA relating to limitations on interseries liabilities (and the statutory effect under Section 3804 of setting forth such notice in the certificate of trust) shall become applicable to the Trust and each series. Every note, bond, contract or other undertaking issued by or on behalf of a particular series shall include a recitation limiting the obligation represented thereby to that series and its assets. 6.6 Dividends and Distributions. (a) Dividends and distributions on Interests of a particular series or any class thereof may be paid with such frequency as the Trustees may determine, which may be daily or otherwise, pursuant to a standing resolution or a resolution adopted only once or with such frequency as the Trustees may determine, to the Holders of Interests in that series or class, from such of the income and capital gains, accrued or realized, from the Trust Property belonging to that series, or in the case of a class, belonging to that series and allocable to that class, as the Trustees may determine, after providing for actual and accrued liabilities belonging to that series. All dividends and distributions on Interests in a particular series or class thereof shall be distributed pro rata to the Holders of Interests in that series or class in proportion to the total outstanding Interests in that series or class held by such Holders at the date and time of record established for the payment of such dividends or distribution, except to the extent otherwise required or permitted by the preferences and special or relative rights and privileges of any series or class. Such dividends and distributions may be made in cash or Interests of that series or class or a 14 19 combination thereof as determined by the Trustees or pursuant to any program that the Trustees may have in effect at the time for the election by each Holder of the mode of the paying of such dividend or distribution to that Holder. Any such dividend or distribution paid in Interests will be paid at the net asset value thereof as determined in accordance with Section 7.4. (b) The Interests in a series or a class of the Trust shall represent beneficial interests in the Trust Property belonging to such series or in the case of a class, belonging to such series and allocable to such class. Each Holder of Interests in a series or a class shall be entitled to receive its pro rata share of distributions of income and capital gains made with respect to such series or such class. Upon reduction or withdrawal of its Interests or indemnification for liabilities incurred by reason of being or having been a Holder of Interests in a series or a class, such Holder shall be paid solely out of the funds and property of such series or in the case of a class, the funds and property of such series and allocable to such class of the Trust. Upon liquidation or termination of a series or class of the Trust, Holders of Interests in such series or class shall be entitled to receive a pro rata share of the Trust Property belonging to such series or in the case of a class, belonging to such series and allocable to such class. 6.7 Voting Rights. Notwithstanding any other provision hereof, on each matter submitted to a vote of the Holders, each Holder shall be entitled to one vote for each whole Interest standing in his name on the books of the Trust, and each fractional Interest shall be entitled to a proportionate fractional vote, irrespective of the series thereof or class thereof, and all Interests of all series and classes thereof shall vote together as a single class; provided, however, that (a) as to any matter with respect to which a separate vote of one or more series or classes thereof is permitted or required by the 1940 Act or the provisions of the instrument establishing and designating the series or class, such requirements as to a separate vote by such series or class thereof shall apply in lieu of all Interests of all series and classes thereof voting together; and (b) as to any matter which affects only the interests of one or more particular series or classes thereof, only the Holders of the one or more affected series or classes shall be entitled to vote, and each such series or class shall vote as a separate series or class. 6.8 Record Dates. The Trustees may from time to time close the transfer books or establish record dates and times for the purposes of determining the Holders entitled to be treated as such, to the extent provided or referred to in Section 8.6. 6.9 Transfer. All Interests of each particular series or class thereof shall be transferable, but transfers of Interests of a particular series or class thereof will be recorded on the Interest transfer records of the Trust applicable to that series or class only at such times as Holders shall have the right to require the Trust to redeem Interests of that series or class and at such other times as may be permitted by the Trustees. 6.10 Equality. Except as provided herein or in the instrument designating and establishing any class or series, all Interests of each particular series or class thereof shall represent an equal proportionate interest in the assets belonging to that series, or in the case of a class, belonging to that series and allocable to that class, subject to the liabilities belonging to that series, and each Interest of any particular series or class shall be equal to each other Interest of that series or class; but the 15 20 provisions of this sentence shall not restrict any distinctions permissible under Section 6.6 that may exist with respect to dividends and distributions on Interests of the same series or class. The Trustees may from time to time divide or combine the Interests of any particular series or class into a greater or lesser number of Interests of that series or class without thereby changing the proportionate beneficial interest in the assets belonging to that series or class or in any way affecting the rights or Interests of any other series or class. 6.11 Fractions. Any fractional Interest of any series or class, if any such fractional Interest is outstanding, shall carry proportionately all the rights and obligations of a whole Interest of that series or class, including rights and obligations with respect to voting, receipt of dividends and distributions, redemption of Interests, and liquidation of the Trust. 6.12 Class Differences. Subject to Section 6.3, the relative rights and preferences of the classes of any series may differ in such other respects as the Trustees may determine to be appropriate in their sole discretion, provided that such differences are set forth in the instrument establishing and designating such classes and executed by a majority of the Trustees. 6.13 Conversion of Interests. Subject to compliance with the requirements of the 1940 Act, the Trustees shall have the authority to provide that Holders of Interests of any series shall have the right to convert said Interests into one or more other series in accordance with such requirements and procedures as may be established by the Trustees. The Trustees shall also have the authority to provide that Holders of Interests of any class of a particular series shall have the right to convert said Interests into one or more other classes of that particular series or any other series in accordance with such requirements and procedures as may be established by the Trustees. 6.14 Investments in the Trust. The Trustees may accept investments in the Trust from such persons and on such terms and for such consideration, not inconsistent with the provisions of the 1940 Act, as they from time to time authorize. The Trustees may authorize any distributor, principal underwriter, custodian, transfer agent or other person to accept orders for the purchase of Interests that conform to such authorized terms and to reject any purchase orders for Interests whether or not conforming to such authorized terms. 6.15 Trustees and Officers as Holders. Any Trustee, officer or other agent of the Trust, and any organization in which any such person is interested, may acquire, own, hold and dispose of Interests of the Trust to the same extent as if such person were not a Trustee, officer or other agent of the Trust; and the Trust may issue and sell or cause to be issued and sold and may purchase Interests from any such person or any such organization subject only to the general limitations, restrictions or other provisions applicable to the sale or purchase of Interests generally. 6.16 No Preemptive Rights; Derivative Suits. Holders shall have no preemptive or other right to subscribe to any additional Interests or other securities issued by the Trust. No action may be brought by a Holder on behalf of the Trust unless Holders owning no less than 10% of the then outstanding Interests, or series or class thereof, join in the bringing of such action. A Holder of Interests in a particular series or a particular class of the Trust shall not be entitled to participate in 16 21 a derivative or class action lawsuit on behalf of any other series or any other class or on behalf of the Holders of Interests in any other series or any other class of the Trust. 6.17 No Appraisal Rights. Holders shall have no right to demand payment for their Interests or to any other rights of dissenting Holders in the event the Trust participates in any transaction which would give rise to appraisal or dissenters' rights by a stockholder of a corporation organized under the General Corporation Law of Delaware, or otherwise. 6.18 Status of Interests and Limitation of Personal Liability. Interests shall be deemed to be personal property giving only the rights provided in this Declaration of Trust. Every Holder by virtue of acquiring Interests shall be held to have expressly assented and agreed to the terms hereof and to be bound hereby. The death, incapacity, dissolution, termination or bankruptcy of a Holder during the continuance of the Trust shall not operate to dissolve or terminate the Trust or any series thereof nor entitle the representative of such Holder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle the representative of such Holder only to the rights of such Holder under this Trust. Ownership of Interests shall not entitle the Holder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Interests constitute the Holders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust, shall have any power to bind personally any Holder, nor except as specifically provided herein to call upon any Holder for the payment of any sum of money or assessment whatsoever other than such as the Holder may at any time personally agree to pay. 6.19 Elimination of Series. Without limiting the authority of the Trustees set forth in Section 9.2 of this Declaration of Trust, at any time that there are no Interests outstanding of a series (or class), the Trustees may abolish such series (or class). ARTICLE VII Purchases and Redemptions 7.1 Purchases. The Trustees, in their discretion, may, from time to time, without a vote of the Holders, permit the purchase of Interests by such party or parties (or increase in the Interests of a Holder), for such type of consideration, including, without limitation, cash or property, at such time or times (including, without limitation, each business day), and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including, without limitation, the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. 7.2 Redemption by Holder. Each Holder of Interests of the Trust or any series or class thereof shall have the right at such times as may be permitted by the Trust to require the Trust to redeem all or any part of his or her Interests of the Trust, or series or class thereof, at a redemption price equal to the net asset value per Interest of the Trust or series or class thereof, next determined in accordance with Section 7.4 hereof after the Interests are properly tendered for redemption, subject to any contingent deferred sales charge or redemption charge in effect at the time of redemption. Payment of the redemption price shall be in cash; provided, however, that if the 17 22 Trustees determine, which determination shall be conclusive, that conditions exist which make payment wholly in cash unwise or undesirable, the Trust may, subject to the requirements of the 1940 Act, make payment wholly or partly in securities or other assets belonging to the Trust or series or class thereof of which the Interests being redeemed are part of the value of such securities or assets used in such determination of the net asset value. Notwithstanding the foregoing, the Trust may postpone payment of the redemption price and may suspend the right of the Holders of Interests of the Trust, or series or class thereof, to require the Trust to redeem Interests of the Trust, or of any series or class thereof, during any period or at any time when and to the extent permissible under the 1940 Act. 7.3 Redemption by Trust. Each Interest of the Trust, or series or class thereof that has been established and designated is subject to redemption by the Trust at the redemption price which would be applicable if such Interest was then being redeemed by the Holder pursuant to Section 7.2 hereof: (a) at any time, if the Trustees determine in their sole discretion and by majority vote that it is in the best interest of the Trust, or any series or class thereof, to so redeem, or (b) upon such other conditions as may from time to time be determined by the Trustees and set forth in the then current Prospectus of the Trust with respect to maintenance of Holder accounts of a minimum or maximum amount or percentage. Upon such redemption the Holders of the Interests so redeemed shall have no further right with respect thereto other than to receive payment of such redemption price. 7.4 Net Asset Value. The net asset value per Interest of any series shall be (a) in the case of a series whose Interests are not divided into classes, the quotient obtained by dividing the value of the net assets of that series (being the value of the assets belonging to that series less the liabilities belonging to that series) by the total number of Interests of that series outstanding, and (b) in the case of a class of Interests of a series whose Interests are divided into classes, the quotient obtained by dividing the value of the net assets of that series allocable to such class (being the value of the assets belonging to that series allocable to such class less the liabilities belonging to such class) by the total number of Interests of such class outstanding; all determined in accordance with the methods and procedures, including without limitation those with respect to rounding, established by the Trustees from time to time. The Trustees may determine to maintain the net asset value per Interest of any series or any class at a designated constant dollar amount and in connection therewith may adopt procedures consistent with the 1940 Act for continuing declarations of income attributable to that series or that class as dividends payable in additional Interests of that series at the designated constant dollar amount and for the handling of any losses attributable to that series or that class. Such procedures may provide that in the event of any loss each Holder shall be deemed to have contributed to the capital of the Trust attributable to that series his or her pro rata portion of the total number of Interests required to be canceled in order to permit the net asset value per Interest of that series or class to be maintained, after reflecting such loss, at the designated constant dollar amount. Each Holder of the Trust shall be deemed to have agreed, by his or her investment in any series or class with respect to which the Trustees shall have adopted any such procedure, to make the contribution referred to in the preceding sentence in the event of any such loss. 18 23 ARTICLE VIII Holders 8.1 Rights of Holders. The right to conduct any business hereinbefore described is vested exclusively in the Trustees, and the Holders shall have no rights under this Declaration or with respect to the Trust Property other than the beneficial interest conferred by their Interests and the voting rights accorded to them under this Declaration. 8.2 Register of Interests. A register shall be kept by the Trust under the direction of the Trustees which shall contain the names and addresses of the Holders and the number of Interests held by each Holder. Each such register shall be conclusive as to the identity of the Holders of the Trust and the Persons who shall be entitled to payments of distributions or otherwise to exercise or enjoy the rights of Holders. No Holder shall be entitled to receive payment of any distribution, nor to have notice given to it as herein provided, until it has given its address to such officer or agent of the Trustees as shall keep the said register for entry thereon. No certificates certifying the ownership of interests need be issued except as the Trustees may otherwise determine from time to time. 8.3 Notices. Any and all notices to which any Holder hereunder may be entitled and any and all communications shall be deemed duly served or given if presented personally to a Holder, left at his or her residence or usual place of business, or sent via United States mail or by electronic transmission to a Holder at his or her address as it is registered with the Trust, as provided in Section 8.2. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the Holder at his or her address as it is registered with the Trust, as provided in Section 8.2, with postage thereon prepaid. 8.4 Meetings of Holders. Meetings of the Holders may be called at any time by a majority of the Trustees and shall be called by any Trustee upon written request of Holders holding, in the aggregate, not less than 10% of the Interests (or series or class thereof), such request specifying the purpose or purposes for which such meeting is to be called. Any such meeting shall be held within or without the State of Delaware on such day and at such time as the Trustees shall designate. Holders of one-third of the Interests in the Trust, present in person or by proxy, shall constitute a quorum for the transaction of any business, except as may otherwise be required by the 1940 Act or other applicable law or by this Declaration or the By-Laws of the Trust. If a quorum is present at a meeting, an affirmative vote by the Holders present, in person or by proxy, holding more than 50% of the total Interests (or series or class thereof) of the Holders present, either in person or by proxy, at such meeting constitutes the action of the Holders, unless the 1940 Act, other applicable law, this Declaration or the By-Laws of the Trust require a greater number of affirmative votes. Notwithstanding the foregoing, the affirmative vote by the Holders present, in person or by proxy, holding less than 50% of the Interests (or class or series thereof) of the Holders present, in person or by proxy, at such meeting shall be sufficient for adjournments. Any meeting of Holders, whether or not a quorum is present, may be adjourned for any lawful purpose provided that no meeting shall be adjourned for more than six months beyond the originally scheduled meeting date. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting without the necessity of further notice. 19 24 8.5 Notice of Meetings. Written or printed notice of all meetings of the Holders, stating the time, place and purposes of the meeting, shall be given as provided in Section 8.3. At any such meeting, any business properly before the meeting may be considered, whether or not stated in the notice of the meeting. Any adjourned meeting held as provided in Section 8.4 shall not require the giving of additional notice. 8.6 Record Date. For the purpose of determining the Holders who are entitled to notice of any meeting, to vote at any meeting, to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time fix a date, not more than 90 calendar days prior to the date of any meeting of the Holders or payment of distributions or other action, as the case may be, as a record date for the determination of the persons to be treated as Holders of record for such purposes, and any Holder who was a Holder at the date and time so fixed shall be entitled to vote at such meeting or to be treated as a Holder of record for purposes of such other action, even though he or she has since that date and time disposed of his or her Interests, and no Holder becoming such after that date and time shall be so entitled to vote at such meeting or to be treated as a Holder of record for purposes of such other action. If the Trustees shall divide the Interests into two or more series in accordance with Section 6.2 herein, nothing in this Section shall be construed as precluding the Trustees from setting different record dates for different series and if the Trustees shall divide any series into two or more classes in accordance with Section 6.3 herein, nothing in this Section 8.6 shall be construed as precluding the Trustees from setting different record dates for different classes. 8.7 Proxies, Etc. At any meeting of Holders, any Holder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. (a) Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust. Only Holders of record shall be entitled to vote. Each Holder shall be entitled to a vote proportionate to its Interest in the Trust. (b) When Interests are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect to such Interest, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect to such Interest. (c) A proxy purporting to be executed by or on behalf of a Holder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the Holder is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person regarding the charge or management of his or her Interest, he or she may vote by his or her guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. 20 25 8.8 Reports. The Trustees shall cause to be prepared, at least annually, a report of operations containing a balance sheet and statement of income and undistributed income of the Trust prepared in conformity with generally accepted accounting principles and an opinion of an independent public accountant on such financial statements. The Trustees shall, in addition, furnish to the Holders at least semi-annually an interim report containing an unaudited balance sheet as of the end of such period and an unaudited statement of income and surplus for the period from the beginning of the current Fiscal Year to the end of such period. 8.9 Inspection of Records. The records of the Trust shall be open to inspection by Holders during normal business hours and for any purpose not harmful to the Trust. 8.10 Voting Powers. (a) The Holders shall have power to vote only (i) for the election or removal of Trustees as contemplated by Section 2.2 and 2.3 hereof, (ii) with respect to any investment advisory contract as contemplated by Section 4.1 hereof, (iii) with respect to termination of the Trust as provided in Section 9.2 hereof, (iv) with respect to amendments to the Declaration of Trust as provided in Section 9.3 hereof, (v) with respect to any merger, consolidation or sale of assets as provided in Section 9.4 hereof, (vi) with respect to incorporation of the Trust to the extent and as provided in Section 9.5 hereof, and (vii) with respect to such additional matters relating to the Trust as may be required by the 1940 Act, DBTA, or any other applicable law, the Declaration, the By-Laws or any registration of the Trust with the Commission (or any successor agency) or any state, or as and when the Trustees may consider necessary or desirable. (b) Each Holder shall be entitled to vote based on the ratio his or her Interest bears to the Interests of all Holders entitled to vote. Until Interests are issued, the Trustees may exercise all rights of Holders and may take any action required by law, the Declaration or the By-Laws to be taken by Holders. The By-Laws may include further provisions for Holders' votes and meetings and related matters not inconsistent with this Declaration. 8.11 Holder Action by Written Consent. Any action which may be taken by the Holders may be taken without notice and without a meeting if Holders holding more than 50% of the total Interests entitled to vote (or such larger proportion thereof as shall be required by any express provision of this Declaration) shall consent to the action in writing and the written consents shall be filed with the records of the meetings of Holders. Such consents shall be treated for all purposes as votes taken at a meeting of the Holders. 8.12 Holder Communications. (a) Whenever ten or more Holders who have been such for at least six months preceding the date of application, and who hold in the aggregate at least 1% of the total Interests, shall apply to the Trustees in writing, stating that they wish to communicate with other Holders with a view to obtaining signatures for a request for a meeting of Holders and accompanied by a form of communication and request which they wish to transmit, the Trustees shall within five business days after receipt of such application either (i) afford to such applicants access to a list of the names and addresses of all Holders as recorded on the books of the Trust; or (ii) inform such applicants as to the approximate number of Holders, and the approximate cost of transmitting to them the proposed communication and form of request. 21 26 (b) If the Trustees elect to follow the course specified in clause (ii) above, the Trustees, upon the written request of such applicants, accompanied by a tender of the material to be transmitted and of the reasonable expenses of transmission, shall, with reasonable promptness, transmit, by United States mail or by electronic transmission, such material to all Holders at their addresses as recorded on the books, unless within five business days after such tender the Trustees shall transmit, by United States mail or by electronic transmission, to such applicants and file with the Commission, together with a copy of the material to be transmitted, a written statement signed by at least a majority of the Trustees to the effect that in their opinion either such material contains untrue statements of fact or omits to state facts necessary to make the statements contained therein not misleading, or would be in violation of applicable law, and specifying the basis of such opinion. The Trustees shall thereafter comply with any order entered by the Commission and the requirements of the 1940 Act and the Securities Exchange Act of 1934. ARTICLE IX Duration; Termination of Trust; Amendment; Mergers; Etc. 9.1 Duration. Subject to possible termination in accordance with the provisions of Section 9.2, the Trust created hereby shall continue perpetually pursuant to Section 3808 of DBTA. 9.2 Termination of Trust. (a) The Trust may be terminated (i) by the affirmative vote of the Holders of not less than two-thirds of the Interests in the Trust at any meeting of the Holders, or (ii) by an instrument in writing, without a meeting, signed by a majority of the Trustees and consented to by the Holders of not less than two-thirds of such Interests, or (iii) by the Trustees by written notice to the Holders. Upon any such termination, (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust shall have been wound up, including the power to fulfill or discharge the contracts of the Trust, collect its assets, sell, convey, assign, exchange, or otherwise dispose of all or any part of the remaining Trust Property to one or more Persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business; provided that any sale, conveyance, assignment, exchange, or other disposition of all or substantially all of the Trust Property shall require approval of the principal terms of the transaction and the nature and amount of the consideration by the Holders with a Majority Interests Vote. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and refunding agreements, as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property, in cash or in kind or partly each, among the Holders according to their respective rights. 22 27 (b) Upon termination of the Trust and distribution to the Holders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination and file a certificate of cancellation in accordance with Section 3810 of the DBTA. Upon termination of the Trust, the Trustees shall thereon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Holders shall thereupon cease. 9.3 Amendment Procedure. (a) All rights granted to the Holders under this Declaration of Trust are granted subject to the reservation of the right of the Trustees to amend this Declaration of Trust as herein provided, except as set forth herein to the contrary. Subject to the foregoing, the provisions of this Declaration of Trust (whether or not related to the rights of Holders) may be amended at any time, so long as such amendment is not in contravention of applicable law, including the 1940 Act, by an instrument in writing signed by a majority of the Trustees (or by an officer of the Trust pursuant to the vote of a majority of such Trustees). Any such amendment shall be effective as provided in the instrument containing the terms of such amendment or, if there is no provision therein with respect to effectiveness, upon the execution of such instrument and of a certificate (which may be a part of such instrument) executed by a Trustee or officer of the Trust to the effect that such amendment has been duly adopted. (b) No amendment may be made, under Section 9.3(a) above, which would change any rights with respect to any Interest in the Trust by reducing the amount payable thereon upon liquidation of the Trust, by repealing the limitations on personal liability of any Holder or Trustee, or by diminishing or eliminating any voting rights pertaining thereto, except with a Majority Interests Vote. (c) A certification signed by a majority of the Trustees setting forth an amendment and reciting that it was duly adopted by the Holders or by the Trustees as aforesaid or a copy of the Declaration, as amended, and executed by a majority of the Trustees, shall be conclusive evidence of such amendment when lodged among the records of the Trust. (d) Notwithstanding any other provision hereof, until such time as Interests are first sold, this Declaration may be terminated or amended in any respect by the affirmative vote of a majority of the Trustees or by an instrument signed by a majority of the Trustees. 9.4 Merger, Consolidation and Sale of Assets. The Trust may merge or consolidate with any other corporation, association, trust or other organization or may sell, lease or exchange all or substantially all of its property, including its good will, upon such terms and conditions and for such consideration when and as authorized by no less than a majority of the Trustees and by a Majority Interests Vote of the Trust or by an instrument or instruments in writing without a meeting, consented to by the Holders of not less than 50% of the total Interests of the Trust or such series, as the case may be, and any such merger, consolidation, sale, lease or exchange shall be deemed for all purposes to have been accomplished under and pursuant to the statutes of the State of Delaware. In 23 28 accordance with Section 3815(f) of DBTA, an agreement of merger or consolidation may effect any amendment to the Declaration or By-Laws or effect the adoption of a new declaration of trust or by-laws of the Trust if the Trust is the surviving or resulting business trust. A certificate of merger or consolidation of the Trust shall be signed by a majority of the Trustees. 9.5 Incorporation. Upon a Majority Interests Vote, the Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all of the Trust Property or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property to any such corporation, trust, association or organization in exchange for the equity interests thereof or otherwise, and to lend money to, subscribe for the equity interests of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire equity interests. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of the Holders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities. ARTICLE X Miscellaneous 10.1 Certificate of Designation; Agent for Service of Process. The Trust shall file, in accordance with Section 3812 of DBTA, in the office of the Secretary of State of Delaware, a certificate of trust, in the form and with such information required by Section 3810 of DBTA and executed in the manner specified in Section 3811 of DBTA. In the event the Trust does not have at least one Trustee qualified under Section 3807(a) of DBTA, then the Trust shall comply with Section 3807(b) of DBTA by having and maintaining a registered office in Delaware and by designating a registered agent for service of process on the Trust, which agent shall have the same business office as the Trust's registered office. The failure to file any such certificate, to maintain a registered office, to designate a registered agent for service of process, or to include such other information shall not affect the validity of the establishment of the Trust, the Declaration, the By-Laws or any action taken by the Trustees, the Trust officers or any other Person with respect to the Trust except insofar as a provision of the DBTA would have governed, in which case the Delaware common law governs. 10.2 Governing Law. This Declaration is executed by all of the Trustees and delivered with reference to DBTA and the laws of the State of Delaware, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to DBTA and the laws of the State of Delaware (unless and to the extent otherwise provided for and/or preempted by the 1940 Act or other applicable federal securities laws); provided, however, that there shall not be applicable to the Trust, the Trustees or this Declaration (a) the provisions of 24 29 Section 3540 of Title 12 of the Delaware Code, or (b) any provisions of the laws (statutory or common) of the State of Delaware (other than the DBTA) pertaining to trusts which are inconsistent with the rights, duties, powers, limitations or liabilities of the Trustees set forth or referenced in this Declaration. 10.3 Counterparts. This Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. 10.4 Reliance by Third Parties. The original or a copy of this instrument and of each restatement and/or amendment hereto shall be kept at the office of the Trust where it may be inspected by any Holder. Any certificate executed by an individual who, according to the records of the Trust or of any recording office in which this Declaration may be recorded, appears to be a Trustee hereunder, certifying to (a) the number or identity of Trustees or Holders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Holders, (d) the fact that the number of Trustees or Holders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts which in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trustees and their successors. 10.5 Provisions in Conflict With Law or Regulations. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the DBTA, or with other applicable laws and regulations, the conflicting provisions shall be deemed never to have constituted a part of this Declaration; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. 10.6 Trust Only. It is the intention of the Trustees to create only a business trust under DBTA with the relationship of trustee and beneficiary between the Trustees and each Holder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment, or any form of legal relationship other than a Delaware business trust except to the extent such trust is deemed to constitute a corporation under the Code and applicable state tax laws. Nothing in this Declaration of Trust shall be construed to make the Holders, either by themselves or with the Trustees, partners or members of a joint stock association. 25 30 10.7 Withholding. Should any Holder be subject to withholding pursuant to the Code or any other provision of law, the Trust shall withhold all amounts otherwise distributable to such Holder as shall be required by law and any amounts so withheld shall be deemed to have been distributed to such Holder under this Declaration of Trust. If any sums are withheld pursuant to this provision, the Trust shall remit the sums so withheld to and file the required forms with the Internal Revenue Service, or other applicable government agency. 10.8 Headings and Construction. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. /s/ JAMES M. MCMULLAN September 3, 1999 - --------------------------- Trustee 26 EX-99.(B) 3 BY-LAWS 1 EXHIBIT (B) BY-LAWS OF WILLIAM BLAIR FUNDS Section 1. Declaration of Trust and Principal Office 1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to the Declaration of Trust, as from time to time in effect, of William Blair Funds, a Delaware business trust established by the Declaration of Trust (the "Trust"). 1.2 Principal Office of the Trust. The principal office of the Trust shall be located at 222 W. Adams Street, Chicago, Illinois 60606. Section 2. Shareholders 2.1 Shareholder Meetings. A meeting of the shareholders of the Trust or of any one or more series of shares may be called at any time by the Trustees, by the president or, if the Trustees and the president shall fail to call any meeting of shareholders for a period of 30 days after written application of one or more shareholders who hold at least 10% of all outstanding shares of the Trust, if shareholders of all series are required under the Declaration of Trust to vote in the aggregate and not by individual series at such meeting, or of any series, if shareholders of such series are entitled under the Declaration of Trust to vote by individual series at such meeting, then such shareholders may call such meeting. If the meeting is a meeting of the shareholders of one or more series, but not a meeting of all shareholders of the Trust, then only the shareholders of such one or more series shall be entitled to notice of and to vote at the meeting. Each call of a meeting shall state the place, date, hour and purposes of the meeting. 2.2 Place of Meetings. All meetings of the shareholders shall be held at the principal office of the Trust or at such other place within the United States as shall be designated by the Trustees or the president of the Trust. 2.3 Notice of Meetings. A written notice of each meeting of shareholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each shareholder entitled to vote thereat by leaving such notice with him or her or at his or her residence or usual place of business or by mailing it, postage prepaid, and addressed to such shareholder at his or her address as it appears in the records of the Trust. Such notice shall be given by the secretary or an assistant secretary or by an officer designated by the Trustees. No notice of any meeting of shareholders need be given to a shareholder if a written waiver of notice, executed before or after the meeting by such shareholder or his or her attorney thereunto duly authorized, is filed with the records of the meeting. 2 2.4 Ballots. No ballot shall be required for any election unless requested by a shareholder present or represented at the meeting and entitled to vote in the election. 2.5 Proxies. Shareholders entitled to vote may vote either in person or by proxy in writing dated not more than six months before the meeting named therein, which proxies shall be filed with the secretary or other person responsible to record the proceedings of the meeting before being voted. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. Section 3. Trustees 3.1 Committees and Advisory Board. The Trustees may appoint from their number an executive committee and other committees. Except as the Trustees may otherwise determine, and subject to the provisions of the Declaration of Trust, any such committee may make rules for conduct of its business. The Trustees may appoint an advisory board to consist of not less than one nor more than five members. The members of the advisory board shall be compensated in such manner as the Trustees may determine and shall confer with and advise the Trustees regarding the investments and other affairs of the Trust. Each member of the advisory board shall hold office until the first meeting of the Trustees following the next meeting of the shareholders and until his or her successor is elected and qualified, or until he or she sooner dies, resigns, is removed or becomes disqualified, or until the advisory board is sooner abolished by the Trustees. 3.2 Nominating Committee of Disinterested Directors. The Trustees who are not interested persons (as defined in the Investment Company Act of 1940) of the Trust shall, without any action by the Board of Trustees, constitute a Nominating Committee that has all the powers of the Board of Trustees in the selection and nomination for election or appointment to the Board of Trustees of Trustees who are not interested persons (as so defined) of the Trust. The Chairman of the Nominating Committee shall be elected by the Nominating Committee. The Nominating Committee may fix its own rules of procedure and may meet when and as provided by such rules. 3.3 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such times as the trustees may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent Trustees. 3.4 Special Meetings. Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting, when called by the president or the treasurer or by two or more Trustees, sufficient notice thereof being given to each Trustee by the secretary or an assistant secretary or by the officer or one of the Trustees calling the meeting. 3.5 Compensation of Trustees. No Trustee shall receive any stated salary or fees from the Trust for his or her services as such if such Trustee is, as director, officer, or employee of the Trust's investment adviser, administrator or principal underwriter, if any. Except as provided in the preceding sentence, Trustees shall be entitled to receive such compensation from the Trust for their 2 3 services in such manner and such amounts as may from time to time be voted by the Board of Trustees. 3.6 Notice. It shall be sufficient notice to a Trustee to send notice by mail or electronic transmission at least seventy-two hours before the meeting addressed to the Trustee at his or her usual or last known business or residence address or to give notice to him or her in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him or her before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.7 Quorum. At any meeting of the Trustees one-third of the Trustees then in office shall constitute a quorum; provided, however, a quorum shall not be less than two (except at such time as there is only one Trustee). Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. Section 4. Officers and Agents 4.1 Enumeration; Qualification. The officers of the Trust shall be a chief executive officer, a president, a vice president, a treasurer, a secretary and such other officers, if any, as the Trustees from time to time may in their discretion elect or appoint. The Trust may also have such agents, if any, as the Trustees from time to time may in their discretion appoint. Any officer may be but none need be a Trustee or shareholder. Any two or more offices may be held by the same person. 4.2 Powers. Subject to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to his or her office as if the Trust were organized as a Delaware business corporation and such other duties and powers as the Trustees may from time to time designate, including without limitation the power to make purchases and sales of portfolio securities of the Trust pursuant to recommendations of the Trust's investment adviser in accordance with the policies and objectives of the Trust set forth in its prospectus and with such general or specific instructions as the Trustees may from time to time have issued. 4.3 Election. The chief executive officer, the president, the vice president, the treasurer and the secretary shall be elected annually by the Trustees. Other officers, if any, may be elected or appointed by the Trustees at any time. 4.4 Tenure. The chief executive officer, the president, the vice president, the treasurer and the secretary shall hold office until their respective successors are chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer shall hold office at the pleasure of the Trustees. Each agent shall retain his or her authority at the pleasure of the Trustees. 3 4 4.5 Chief Executive Officer. The Chief Executive Officer shall, in the absence of the Chairman, preside at all meetings of the shareholders and Board of Trustees. The Chief Executive Officer shall perform such other duties as the Board of Trustees shall from time to time prescribe. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Trust or a different mode of execution is expressly prescribed by the Board of Trustees or these Bylaws or where otherwise required by law, the Chief Executive Officer may execute any documents or instruments which the Board has authorized to be executed or the execution of which is in the ordinary course of the Trust's business. 4.6 President. The President shall, in the absence of the Chairman and the Chief Executive Officer, preside at all meetings of the shareholders and Board of Trustees. The President shall have power to sign all certificates for shares of beneficial interest. The President shall perform such other duties as the Board of Trustees shall from time to time prescribe. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Trust or a different mode of execution is expressly prescribed by the Board of Trustees or these Bylaws or where otherwise required by law, the President may execute any documents or instruments which the Board has authorized to be executed or the execution of which is in the ordinary course of the Trust's business. 4.7 Vice President. In the absence of the president or in the event of his inability or refusal to act, the vice president shall perform the duties of the president. The vice president shall perform such other duties as from time to time may be prescribed by the president or the Board of Trustees. 4.8 Treasurer and Assistant Treasurer. Subject to any arrangement made by the Trustees with a bank or trust company or other organization as custodian or transfer or shareholder services agent, the treasurer shall be in charge of the Trust's valuable papers and shall keep or cause to be kept correct and complete books and records of account. The treasurer shall keep such records of the financial transactions of the Trust as the Board of Trustees shall prescribe. The treasurer shall have power to sign all certificates for shares of beneficial interest, if authorized by the Trustees, and shall perform such other duties as from time to time may be prescribed by the president or the Board of Trustees. Any assistant treasurer shall have such duties and powers as shall be designated from time to time by the Trustees. 4.9 Secretary and Assistant Secretary. The secretary shall record all proceedings of the shareholders and the Trustees in books to be kept therefor, which books shall be kept at the principal office of the Trust. In the absence of the secretary from any meeting of shareholders or Trustees, an assistant secretary, or if there be none or he or she is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof in the aforesaid books. Section 5. Resignations, Retirement and Removals Any Trustee, officer or advisory board member may resign at any time by delivering his or her resignation in writing to the president, the vice president or the secretary or to a meeting of the Trustees. No Trustee will stand for reelection as Trustee at any election held after such Trustee shall have reached 70 years of age, and, after his successor shall have been elected and qualify, such 4 5 Trustee shall retire. The Trustees may remove any officer elected by them with or without cause by the vote of a majority of the Trustees then in office. Except to the extent expressly provided in a written agreement with the Trust, no Trustee, officer, or advisory board member resigning, and no officer or advisory board member removed, shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages on account of such removal. Section 6. Vacancies A vacancy in any office may be filled at any time. Each successor shall hold office for the unexpired term, and in the case of the president, the vice president, the treasurer and the secretary, until his or her successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Section 7. Shares of Beneficial Interest Certificates certifying the ownership of shares may be issued as the Trustees may authorize. In lieu of issuing certificates for shares, the Trustees or the transfer agent shall keep accounts upon the books of the Trust for the record holders of such shares, who shall be deemed, for all purposes hereunder, to be the holders of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. Any certificates issued shall be in such form as the Board of Trustees may from time to time prescribe, including on its face the name of the Trust, the name of the person to whom it is issued, and the class of shares and number of shares it represents. The certificate shall contain on its face or back either a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the shares of each class which the Trust is authorized to issue or a statement that the Trust will furnish such statement or summary to any shareholder on request and without charge. Each certificate issued shall be signed by the President, a Vice-President or the Chairman of the Board and countersigned by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. Such signatures may be either manual or facsimile signatures. A certificate is valid whether or not an officer who signed it is still an officer when it is issued. Each certificate may be sealed with the actual seal of the Trust or a facsimile of it or in any other form. Section 8. Record Date and Closing Transfer Books The Trustees may fix in advance a time, which shall not be more than 90 days before the date of any meeting of shareholders or the date for the payment of any dividend or making of any other distribution to shareholders, as the record date for determining the shareholders having the right to notice and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date; or without fixing such record date the Trustees may for any of such purposes close the transfer books for all or any part of such period. 5 6 Section 9. Seal The Board of Trustees may provide for a suitable seal for the Trust, in such form and bearing such inscriptions as it may determine. Section 10. Execution of Papers Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the Trust shall be signed, and all transfers of securities standing in the name of the Trust shall be executed, by the president, by the vice president, secretary, treasurer or assistant secretary or treasurer or by whomsoever else shall be designated for that purpose by the vote of the Trustees and need not bear the seal of the Trust. Section 11. Fiscal Year Except as from time to time otherwise provided by the Trustees, the fiscal year of the Trust shall end on December 31. Section 12. Amendments These By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such a majority. Approved: September 8, 1999 6 EX-99.(D)(IV) 4 FORM OF MANAGEMENT AGREEMENT DATED 12/15/99 1 Exhibit (d)(iv) MANAGEMENT AGREEMENT (Amended and Restated) AGREEMENT made as of this 15th day of December, 1999, by and between WILLIAM BLAIR FUNDS, a Delaware business trust (the "Trust"), and WILLIAM BLAIR & COMPANY, L.L.C., an Illinois limited liability company (the "Manager"). WHEREAS, the Trust is an open-end, diversified management investment company registered under the Investment Company Act of 1940, the common shares ("Shares") of which are registered or are to be registered under the Securities Act of 1933; and WHEREAS, the Trust 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 Trust currently offers Shares in the portfolios listed on Appendix A hereto, together with any other Trust 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 Trust desires to retain the Manager to render investment advisory and management services to the Portfolios listed on Appendix A hereto, 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 Trust hereby employs the Manager to act as the adviser for the Portfolios hereunder and to manage the investment 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 2 Trustees of the Trust for the period and upon the terms herein set forth. The investment of funds shall be subject to all applicable restrictions of the Declaration of Trust and By-Laws of the Trust 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 Trust, to permit any of its principals or employees to serve without compensation as trustees or officers of the Trust 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 Trust in any way or otherwise be deemed an agent of the Trust. It is understood and agreed that the Manager, by separate agreements with the Trust, may also serve the Trust in other capacities. 2. Additional Portfolios. In the event that the Trust establishes one or more portfolios in addition to 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 Trust and the Manager agree upon the management fee rates (including breakpoints) to be payable by such portfolio or portfolios, the Manager shall notify the Trust in writing, whereupon such portfolio or portfolios shall become a Portfolio or Portfolios hereunder. 3. Management Fee. For the services and facilities described in Section 1, the Trust will pay to the Manager a management fee based upon an annual percentage of the average daily net assets of each Portfolio, as described in Appendix A hereto. 2 3 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 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 Trust 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 Trust shall assume and pay expenses for services rendered by a custodian for the safekeeping of the Trust'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 Trust as provided in the prospectus of the Trust. The Manager shall not be required to pay and the Trust shall assume and pay the charges and expenses of its operations, including but not limited to compensation of the trustees (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 Trust, costs of acquiring and disposing of portfolio securities, interest, if any, on obligations incurred by the Trust, 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 Trust, filing of corporate documents or otherwise. The Trust shall not pay or incur any obligation for any expenses for which the Trust intends to seek reimbursement from the 3 4 Manager as herein provided without first obtaining the written approval of the Manager. The Manager shall arrange, if desired by the Trust, for principals or employees of the Manager to serve, without compensation from the Trust, as trustees, officers or agents of the Trust 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 Trust for the Growth Fund and Income Fund (including the Manager's fee, but excluding interest, taxes, fees incurred in acquiring and disposing of portfolio securities, distribution fees, shareholder servicing fees 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 expenses borne by the Trust for the Ready Reserves Fund (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 Trust'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 4 5 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. The net asset value for each Portfolio shall be calculated in accordance with the provisions of the Trust's prospectus or at such other time or times as the trustees 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 trustees, officers or agents of the Trust 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 Trust otherwise than as a trustee, 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 Trust 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 the dates set forth in Appendix B hereto with respect to each Portfolio or unless sooner terminated as hereinafter provided. This Agreement shall continue in force from year to year thereafter with respect to the 5 6 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, 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 Trust or by the Manager on sixty (60) days written notice to the other party. The Trust may effect termination with respect to any Portfolio by action of the Board of Trustees 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 Trustees 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. 6 7 As to each Portfolio of the Trust, 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 approved by (i) vote of the holders of a majority of the outstanding voting securities of the Portfolio; and (ii) a majority of those Trustees of the Trust 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. 7 8 IN WITNESS WHEREOF, the Trust and the Manager have caused this Agreement to be executed as of the day and year first above written. WILLIAM BLAIR FUNDS By: -------------------------------------- ATTEST: - ---------------------------------- WILLIAM BLAIR & COMPANY, L.L.C. By: -------------------------------------- ATTEST: - ---------------------------------- 9 9 APPENDIX A Management Fees William Blair Growth Fund: .75% of average daily net assets William Blair Tax-Managed Growth Fund: .80% of average daily net assets William Blair Large Cap Growth Fund: .80% of average daily net assets William Blair Small Cap Growth Fund: 1.10% of average daily net assets William Blair 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 William Blair Emerging Markets Growth Fund: 1.40% of average daily net assets William Blair Disciplined Large Cap Fund: .80% of average daily net assets William Blair Value Discovery Fund: 1.15% of average daily net assets William Blair Income Fund: .25% of the first $250 million of average daily net assets; plus .20% of average daily net assets over $250 million; plus 5.00% of the gross income earned by the Portfolio William Blair Ready Reserves Fund(1): .275% of the first $250 million of average daily net assets; plus .250% of the next $250 million of average daily net assets; plus .225% of the next $2,000 million of average daily net assets; plus .200% of the average daily net assets over $2,500 million - ---------------------- (1)From the date of this Agreement until December 31, 1999, the Ready Reserves Fund pays the Adviser as follows: .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 the average daily net assets over $2,500 million A-1 10 APPENDIX B Date of End of Initial Term For the William Blair Growth Fund, the William Blair International Growth Fund, the William Blair Emerging Markets Growth Fund, the William Blair Value Discovery Fund, the William Blair Income Fund and the William Blair Ready Reserves Fund: April 30, 2000 For the William Blair Tax-Managed Growth Fund, the William Blair Large Cap Growth Fund, the William Blair Small Cap Growth Fund and the William Blair Disciplined Large Cap Fund: April 30, 2001 B-1 EX-99.(H)(I) 5 SHAREHOLDER SERVICES AGREEMENT CLASS A,B,C 7/30/99 1 EXHIBIT (h)(i) SHAREHOLDER SERVICES AGREEMENT (CLASS A, B AND C) AGREEMENT made as of this 21st day of July, 1999 by and between WILLIAM BLAIR MUTUAL FUNDS, INC., a Maryland corporation (the "Company") and WILLIAM BLAIR & COMPANY, L.L.C., an Illinois limited liability company ("William Blair"). In consideration of the mutual covenants hereinafter contained, it is hereby agreed by and between the parties hereto as follows: 1. The Company hereby appoints William Blair to provide information and shareholder services for the benefit of the Company and its shareholders. In this regard, William Blair shall appoint various broker-dealer firms and other service firms ("Firms") to provide related services and facilities for persons who are investors in the Company ("investors"). The Firms shall provide such office space and equipment, telephone facilities, personnel or other services as may be necessary or beneficial for providing information and services to investors in the Company. Such services and assistance may include, but are not limited to, establishing and maintaining accounts and records, processing purchase and redemption transactions, answering routine inquiries regarding the Company and the Funds and special features available to shareholders, assistance to investors in changing dividend and investment options, account designations and addresses, and such other services as the Company or William Blair may reasonably request. Firms may include affiliates of William Blair. William Blair may also provide some of the above services for the Company directly. William Blair accepts such appointment and agrees during such period to render such services and to assume the obligations herein set forth for the compensation herein provided. William Blair 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 Company in any way or otherwise be deemed an agent of the Company. William Blair, by separate agreement with the Company, may also serve the Company in other capacities. In carrying out its duties and responsibilities hereunder, William Blair will appoint various Firms to provide services described herein directly to or for the benefit of investors in the Company. Such firms shall at all times be deemed to be independent contractors retained by William Blair and not the Company. William Blair and not the Company will be responsible for the payment of compensation to such Firms for such services. 2. For the shareholder services and facilities described in Section 1, the Company will pay to William Blair at the end of each calendar month a shareholder services fee computed at an annual rate of 0.25 of 1% of the average daily net assets of each Class A, B and C share of each separate series (each a "Fund") of the Company. The shareholder services fee will be calculated 2 separately for each Class A, B and C share of a Fund as an expense of each such class. For the month and year in which this Agreement becomes effective or terminates, there shall be an appropriate proration on the basis of the number of days that the Agreement is in effect during such month and year, respectively. The services of William Blair to the Company under this Agreement are not to be deemed exclusive, and William Blair shall be free to render similar services or other services to others. The net asset value for each share of a Fund shall be calculated in accordance with the provisions of the Company's current prospectus. On each day when net asset value is not calculated, the net asset value of a share of each Fund 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. 3. The Company shall assume and pay all charges and expenses of its operations not specifically assumed or otherwise to be provided by William Blair under this Agreement. 4. This Agreement may be terminated at any time without the payment of any penalty by the Company or by William Blair on sixty (60) days written notice to the other party. Termination of this Agreement shall not affect the right of William Blair to receive payments on any unpaid balance of the compensation described in Section 2 hereof earned prior to such termination. All material amendments to this Agreement must be approved by vote of the Board of Directors of the Company. 5. 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. 6. Any notice under this Agreement shall be in writing, addressed and delivered or mail, postage prepaid, to the other party at such address as such other party may designate for the receipt of such notice. 7. This Agreement shall be construed in accordance with applicable federal law and the laws of the State of Illinois. [SIGNATURES APPEAR ON THE NEXT PAGE] 2 3 IN WITNESS WHEREOF, the Company and William Blair have caused this Agreement to be executed as of the day and year first above written. WILLIAM BLAIR MUTUAL FUNDS, INC. Attest: /s/ Janet V. Gassmann By: /s/ Marco Hanig ---------------------------- -------------------------------- WILLIAM BLAIR & COMPANY, L.L.C. Attest: /s/ John P. Kayser By: /s/ Conrad Fischer ---------------------------- -------------------------------- 3 EX-99.(H)(II) 6 EXPENSE LIMITATION AGREEMENT DATED 9/30/99 1 EXHIBIT (h)(ii) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of September 30, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Mutual Funds, Inc. (the "Company"), on behalf of the William Blair Value Discovery Fund series of the Company (the "Fund"). WHEREAS, the Company is a Maryland corporation, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Company; WHEREAS, the Company and the Adviser have entered into a Management Agreement dated December 23, 1996 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Company and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.39% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be 1.39% plus any shareholder/distribution service fees under Rule 12b-1 under the 1940 Act and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee or absorb the other Fund expenses in an amount sufficient to pay that day's Excess Amount. The Company may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. TERM AND TERMINATION OF AGREEMENT. The Agreement shall terminate either upon the termination of the Advisory Agreement or on April 30, 2000. The obligation of the Adviser under Section 1 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 3. MISCELLANEOUS. 3.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 3.2 Interpretation. Nothing herein contained shall be deemed to require the Company or the Fund to take any action contrary to the Company's Articles of Incorporation or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Company's Board of Directors of its responsibility for and control of the conduct of the affairs of the Company or the Fund. 3.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 3.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 3.5 Assignment. This Agreement may be assigned to the successors in interest of either party with the consent of the other party. 2 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR MUTUAL FUNDS, INC. By: /s/ Marco Hanig --------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer --------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(H)(III) 7 EXPENSE LIMITATION AGREEMENT DATED 9/30/99 1 EXHIBIT (h)(iii) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of September 30, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Mutual Funds, Inc. (the "Company"), on behalf of the William Blair Emerging Markets Growth Fund series of the Company (the "Fund"). WHEREAS, the Company is a Maryland corporation, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Company; WHEREAS, the Company and the Adviser have entered into a Management Agreement dated April 30, 1998 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Company and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.75% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be 1.75% plus any shareholder/distribution service fees under Rule 12b-1 and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee or absorb the other Fund expenses in an amount sufficient to pay that day's Excess Amount. The Company may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. TERM AND TERMINATION OF AGREEMENT. The Agreement shall terminate either upon the termination of the Advisory Agreement or on April 30, 2000. The obligation of the Adviser under Section 1 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 3. MISCELLANEOUS. 3.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 3.2 Interpretation. Nothing herein contained shall be deemed to require the Company or the Fund to take any action contrary to the Company's Articles of Incorporation or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Company's Board of Directors of its responsibility for and control of the conduct of the affairs of the Company or the Fund. 3.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 3.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 3.5 Assignment. This Agreement may be assigned to the successors in interest of either party with the consent of the other party. 2 3 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR MUTUAL FUNDS, INC. By: /s/ Marco Hanig ------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer ------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(H)(IV) 8 EXPENSE LIMITATION AGREEMENT DATED 12/15/99 1 EXHIBIT (H)(IV) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of December 15, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Funds (the "Trust"), on behalf of the William Blair Tax-Managed Growth Fund series of the Trust (the "Fund"). WHEREAS, the Trust is a Delaware business trust, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Trust; WHEREAS, the Trust and the Adviser have entered into a Management Agreement dated December 15, 1999 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.11% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be 1.11% plus any shareholder/distribution service fees under Rule 12b-1 and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee or absorb the other Fund expenses in an amount sufficient to pay that day's Excess Amount. The Trust may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS. 2.1 Reimbursement. If on any day during which the Advisory Agreement is in effect, the estimated annualized Fund Operating Expenses of the Fund for that day are less than the Operating Expense Limit, the Adviser shall be entitled to reimbursement by the Fund of the investment advisory fees waived or reduced, and any other expense reimbursements or similar payments remitted by the Adviser to the Fund pursuant to Section 1 hereof (the "Reimbursement Amount") during any of the previous five (5) years, to the extent that the Fund's annualized Operating Expenses plus the amount so reimbursed equals, for such day, the Operating Expense Limit, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed. 3. TERM AND TERMINATION OF AGREEMENT. This Agreement may be terminated by the Trust or, after April 30, 2000, by the Adviser, without payment of any penalty, upon sixty (60) days' prior written notice to the Trust at its principal place of business. In any event, the Agreement shall terminate upon the termination of the Advisory Agreement or [five] years after the Fund's commencement of operations. The obligation of the Adviser under Section 1 of this Agreement and of the Trust under Section 2 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 4. MISCELLANEOUS. 4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 Interpretation. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Fund. 2 3 4.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 4.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 4.5 Limitation of Liability. This Agreement is executed by or on behalf of the Trust, and Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Agreement and Declaration of Trust, as amended, of the Trust and agrees that the obligations assumed by the Trust pursuant to this Agreement shall be limited in all cases to the Trust and its assets, and Adviser shall not seek satisfaction of any such obligations from the trustees, officers or shareholders of the Trust. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR FUNDS By: /s/ Marco Hanig ----------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer ----------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(H)(V) 9 EXPENSE LIMITATION AGREEMENT DATED 12/15/99 1 EXHIBIT (H)(V) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of December 15, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Funds (the "Trust"), on behalf of the William Blair Disciplined Large Cap Fund series of the Trust (the "Fund"). WHEREAS, the Trust is a Delaware business trust, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Trust; WHEREAS, the Trust and the Adviser have entered into a Management Agreement dated December 15, 1999 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.14% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be _____% plus any shareholder/distribution service fees under Rule 12b-1 and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee in an amount sufficient to pay that day's Excess Amount. The Trust may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS. If on any day during which the Advisory Agreement is in effect, the estimated annualized Fund Operating Expenses of the Fund for that day are less than the Operating Expense Limit, the Adviser shall be entitled to reimbursement by the Fund of the investment advisory fees waived or reduced, and any other expense reimbursements or similar payments remitted by the Adviser to the Fund pursuant to Section 1 hereof (the "Reimbursement Amount") during any of the previous five (5) years, to the extent that the annualized Fund Operating Expenses plus the amount so reimbursed equals, for such day, the Operating Expense Limit, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed. 3. TERM AND TERMINATION OF AGREEMENT. This Agreement may be terminated by the Trust or, after April 30, 2000, by the Adviser, without payment of any penalty, upon sixty (60) days' prior written notice to the Trust at its principal place of business. In any event, the Agreement shall terminate upon the termination of the Advisory Agreement or [five] years after the Fund's commencement of operations. The obligation of the Adviser under Section 1 of this Agreement and of the Trust under Section 2 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 4. MISCELLANEOUS. 4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 Interpretation. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Fund. 2 3 4.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 4.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 4.5 Limitation of Liability. This Agreement is executed by or on behalf of the Trust, and Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Agreement and Declaration of Trust, as amended, of the Trust and agrees that the obligations assumed by the Trust pursuant to this Agreement shall be limited in all cases to the Trust and its assets, and Adviser shall not seek satisfaction of any such obligations from the trustees, officers or shareholders of the Trust. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR FUNDS By: /s/ Marco Hanig -------------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer -------------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(H)(VI) 10 EXPENSE LIMITATION AGREEMENT DATED 12/15/99 1 EXHIBIT (H)(VI) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of December 15, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Funds (the "Trust"), on behalf of the William Blair Tax-Managed Growth Fund series of the Trust (the "Fund"). WHEREAS, the Trust is a Delaware business trust, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Trust; WHEREAS, the Trust and the Adviser have entered into a Management Agreement dated December 15, 1999 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.11% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be 1.11% plus any shareholder/distribution service fees under Rule 12b-1 and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee or absorb the other Fund expenses in an amount sufficient to pay that day's Excess Amount. The Trust may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS. 2.1 Reimbursement. If on any day during which the Advisory Agreement is in effect, the estimated annualized Fund Operating Expenses of the Fund for that day are less than the Operating Expense Limit, the Adviser shall be entitled to reimbursement by the Fund of the investment advisory fees waived or reduced, and any other expense reimbursements or similar payments remitted by the Adviser to the Fund pursuant to Section 1 hereof (the "Reimbursement Amount") during any of the previous five (5) years, to the extent that the Fund's annualized Operating Expenses plus the amount so reimbursed equals, for such day, the Operating Expense Limit, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed. 3. TERM AND TERMINATION OF AGREEMENT. This Agreement may be terminated by the Trust or, after April 30, 2000, by the Adviser, without payment of any penalty, upon sixty (60) days' prior written notice to the Trust at its principal place of business. In any event, the Agreement shall terminate upon the termination of the Advisory Agreement or [five] years after the Fund's commencement of operations. The obligation of the Adviser under Section 1 of this Agreement and of the Trust under Section 2 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 4. MISCELLANEOUS. 4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 Interpretation. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Fund. 2 3 4.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 4.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 4.5 Limitation of Liability. This Agreement is executed by or on behalf of the Trust, and Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Agreement and Declaration of Trust, as amended, of the Trust and agrees that the obligations assumed by the Trust pursuant to this Agreement shall be limited in all cases to the Trust and its assets, and Adviser shall not seek satisfaction of any such obligations from the trustees, officers or shareholders of the Trust. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR FUNDS By: /s/ Marco Hanig ----------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer ----------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(H)(VII) 11 EXPENSE LIMITATION AGREEMENT DATED 12/15/99 1 EXHIBIT (H)(VII) EXPENSE LIMITATION AGREEMENT EXPENSE LIMITATION AGREEMENT (the "Agreement"), effective as of December 15, 1999 by and between William Blair & Company, L.L.C., an Illinois limited liability company (the "Adviser") and William Blair Funds (the "Trust"), on behalf of the William Blair Disciplined Large Cap Fund series of the Trust (the "Fund"). WHEREAS, the Trust is a Delaware business trust, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management company of the series type, and the Fund is a series of the Trust; WHEREAS, the Trust and the Adviser have entered into a Management Agreement dated December 15, 1999 ("Advisory Agreement"), pursuant to which the Adviser provides investment management services to the Fund for compensation based on the value of the average daily net assets of the Fund; and WHEREAS, the Trust and the Adviser have determined that it is appropriate and in the best interests of the Fund and its shareholders to maintain the expenses of the Fund at a level below the level to which the Fund may otherwise be subject; NOW THEREFORE, the parties hereto agree as follows: 1. EXPENSE LIMITATION. 1.1 Applicable Expense Limit. To the extent that the ordinary operating expenses incurred by the Fund in any fiscal year, including but not limited to investment advisory fees of the Adviser, but excluding interest, taxes, brokerage commissions, other investment-related costs and extraordinary expenses, such as litigation and other expenses not incurred in the ordinary course of the Fund's business ("Fund Operating Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2 below, such excess amount (the "Excess Amount") shall be the liability of the Adviser to the extent set forth in this Agreement. 1.2 Operating Expense Limit. The Operating Expense Limit in any year with respect to the Fund shall be 1.11% (annualized) of the average daily net assets of the Fund for its Class I shares. For the Fund's Class A, B, C and N shares, the Operating Expense Limit shall be 1.11% plus any shareholder/distribution service fees under Rule 12b-1 and/or shareholder service fees as described in the then current registration statement offering shares of the Fund. 1.3 Duration of Operating Expense Limit. The Operating Expense Limit with respect to the Fund shall remain in effect during the term of this Agreement. 2 1.4 Method of Computation. To determine the Adviser's obligation with respect to the Excess Amount, each day the Fund Operating Expenses for the Fund shall be annualized. If the annualized Fund Operating Expenses for any day of the Fund exceed the Operating Expense Limit of the Fund, the Adviser shall waive or reduce its investment advisory fee in an amount sufficient to pay that day's Excess Amount. The Trust may offset amounts owed to the Fund pursuant to this Agreement against the advisory fee payable to the Adviser. Furthermore, to the extent that the Excess Amount exceeds such waived or reduced investment advisory fees, the Adviser shall, if required pursuant to the securities laws or regulations of any state in which the Fund's shares are qualified for sale, or may, voluntarily, reimburse the Fund for any operating expenses. 2. REIMBURSEMENT OF FEE WAIVERS AND EXPENSE REIMBURSEMENTS. 2.1 Reimbursement. If on any day during which the Advisory Agreement is in effect, the estimated annualized Fund Operating Expenses of the Fund for that day are less than the Operating Expense Limit, the Adviser shall be entitled to reimbursement by the Fund of the investment advisory fees waived or reduced, and any other expense reimbursements or similar payments remitted by the Adviser to the Fund pursuant to Section 1 hereof (the "Reimbursement Amount") during any of the previous five (5) years, to the extent that the annualized Fund Operating Expenses plus the amount so reimbursed equals, for such day, the Operating Expense Limit, provided that such amount paid to the Adviser will in no event exceed the total Reimbursement Amount and will not include any amounts previously reimbursed. 3. TERM AND TERMINATION OF AGREEMENT. This Agreement may be terminated by the Trust or, after April 30, 2000, by the Adviser, without payment of any penalty, upon sixty (60) days' prior written notice to the Trust at its principal place of business. In any event, the Agreement shall terminate upon the termination of the Advisory Agreement or [five] years after the Fund's commencement of operations. The obligation of the Adviser under Section 1 of this Agreement and of the Trust under Section 2 of this Agreement shall survive the termination of the Agreement solely as to expenses and obligations incurred prior to the date of such termination. 4. MISCELLANEOUS. 4.1 Captions. The captions in this Agreement are included for convenience of reference only and in no other way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 4.2 Interpretation. Nothing herein contained shall be deemed to require the Trust or the Fund to take any action contrary to the Trust's Declaration of Trust or By-Laws, or any applicable statutory or regulatory requirement to which it is subject or by which it is bound, or to relieve or deprive the Trust's Board of Trustees of its responsibility for and control of the conduct of the affairs of the Trust or the Fund. 2 3 4.3 Definitions. Any question of interpretation of any term or provision of this Agreement, including but not limited to the investment advisory fee, the computations of net asset values, and the allocation of expenses, having a counterpart in or otherwise derived from the terms and provisions of the Advisory Agreement or the 1940 Act, shall have the same meaning as and be resolved by reference to such Advisory Agreement or the 1940 Act. 4.4 Amendments. This Agreement may be amended only by a written agreement signed by each of the parties hereto. 4.5 Limitation of Liability. This Agreement is executed by or on behalf of the Trust, and Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Agreement and Declaration of Trust, as amended, of the Trust and agrees that the obligations assumed by the Trust pursuant to this Agreement shall be limited in all cases to the Trust and its assets, and Adviser shall not seek satisfaction of any such obligations from the trustees, officers or shareholders of the Trust. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective officers thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first above written. WILLIAM BLAIR FUNDS By: /s/ Marco Hanig -------------------------------------- Name: Marco Hanig Title: President WILLIAM BLAIR & COMPANY, L.L.C. By: /s/ Conrad Fischer -------------------------------------- Name: Conrad Fischer Title: Principal 3 EX-99.(I) 12 OPINION OF CONSENT OF VEDDER, PRICE 1 EXHIBIT (I) [Vedder, Price, Kaufman & Kammholz letterhead] December 20, 1999 William Blair Funds 222 West Adams Street Chicago, Illinois 60606 Ladies and Gentlemen: Reference is made to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A under the Securities Act of 1933 being filed by William Blair Funds, a Delaware business trust (the "Trust") in connection with the public offering from time to time of units of beneficial interest, no par value ("Shares") in the William Blair Income Fund, the William Blair Growth Fund, the William Blair International Growth Fund, the William Blair Value Discovery Fund, the William Blair Emerging Markets Growth Fund, the William Blair Ready Reserves Fund, the William Blair Tax-Managed Growth Fund, the William Blair Large Cap Growth Fund, the William Blair Small Cap Growth Fund and the William Blair Disciplined Large Cap Fund (each, a "Fund" and collectively, the "Funds"), respectively, of which the shares of each Fund (other than the William Blair Ready Reserves Fund) have been further classified and designated as Class A, Class B, Class C, Class N and Class I shares (each a "Class"); the shares of William Blair Ready Reserves Fund have been classified and designated as Class N and Class I shares. We have acted as counsel to the Trust since its inception, and in such capacity are familiar with the Trust's organization and have counseled the Trust regarding various legal matters. We have examined such Trust 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 Trust's Declaration of Trust dated September 3, 1999, as amended by Written Instrument Amending the Declaration of Trust dated September 8, 1999, the Written Instrument Establishing and Designating Class A, B, C, N and I Shares of the William Blair Tax-Managed Growth Fund, the William Blair Large Cap Growth Fund, the William Blair Small Cap Growth Fund and the William Blair Disciplined Large Cap Fund dated October 19, 1999, and the By-Laws of the Fund dated September 8, 1999, are presently in full force and effect and have not been amended in any respect except as provided above and that the 2 VEDDER PRICE William Blair Funds December 20, 1999 Page 2 resolutions adopted by the Board of Trustees of the Trust on September 8, 1999 and October 19, 1999 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 Trust is a validly existing voluntary association with transferable shares under the laws of the State of Delaware and is authorized to issue an unlimited number of Shares in the Funds; and (b) presently and upon such further issuance of the Shares in accordance with the Trust's Declaration of Trust and the receipt by the Trust of a purchase price not less than the net asset value per Share and when the pertinent provisions of the Securities Act of 1933 and such "blue sky" and securities laws as may be applicable have been complied with, and assuming that the Trust continues to validly exist as provided in (a) above, the Shares are and will be legally issued and outstanding, fully paid and nonassessable. This opinion is solely for the benefit of the Trust, the Trust's Board of Trustees and the Trust'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, VEDDER, PRICE, KAUFMAN & KAMMHOLZ COK/RJM/MLW EX-99.(J) 13 CONSENT OF ERNST & YOUNG LLP 1 Exhibit (j) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Financial Highlights" and "Independent Auditors" and to the use of our report dated February 2, 1999 for William Blair Mutual Funds, Inc. (comprised of the Growth Fund, Value Discovery Fund, International Growth Fund, Emerging Markets Growth Fund, Income Fund and Ready Reserves Fund) in the Registration Statement (Form N-1A) 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. 23 to the Registration Statement under the Securities Act of 1933 (Registration No. 33-17463) and this Amendment No. 24 to the Registration Statement under the Investment Company Act of 1940 (Registration No. 811-5344). /s/ Ernst & Young LLP ------------------------------ ERNST & YOUNG LLP Chicago, Illinois December 20, 1999 EX-99.(O)(II) 14 POWERS OF ATTORNEY FOR KAYSER & WOOD 1 Exhibit (o)(ii) LIMITED POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Conrad Fischer, Rocky Barber, Marco Hanig, Cathy G. O'Kelly or any of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any amendment to the Registration Statement of William Blair Mutual Funds, Inc. on Form N-1A under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. DATED: December 17, 1999 ------------------- /s/ John P. Kayser --------------------------- John P. Kayser 2 LIMITED POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and appoints Conrad Fischer, Rocky Barber, Marco Hanig, Cathy G. O'Kelly or any of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any amendment to the Registration Statement of William Blair Mutual Funds, Inc. on Form N-1A under the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. DATED: December 17, 1999 ------------------- /s/ Robert E. Wood II --------------------------- Robert E. Wood II -----END PRIVACY-ENHANCED MESSAGE-----