BAIRD FUNDS, INC.
Prospectus
September 26, 2000
Baird Horizon Growth Fund
The Securities and Exchange Commission has not approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................3
OVERVIEW....................................................................3
INVESTMENT OBJECTIVE........................................................3
PRINCIPAL INVESTMENT STRATEGIES.............................................3
PRINCIPAL RISKS.............................................................5
MANAGEMENT OF THE FUND.........................................................7
THE ADVISOR.................................................................7
THE INVESTMENT MANAGEMENT TEAM..............................................7
FINANCIAL HIGHLIGHTS...........................................................8
YOUR ACCOUNT...................................................................8
DISTRIBUTION OF SHARES......................................................8
DESCRIPTION OF CLASSES......................................................8
SHARE PRICE.................................................................8
BUYING SHARES...............................................................9
SELLING SHARES.............................................................11
EXCHANGING SHARES..........................................................12
GENERAL TRANSACTION POLICIES...............................................13
DISTRIBUTIONS AND TAXES.......................................................14
DIVIDENDS AND DISTRIBUTIONS................................................14
TAXATION...................................................................14
FOR MORE INFORMATION..................................................BACK COVER
RISK/RETURN SUMMARY
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OVERVIEW
This prospectus describes the Baird Horizon Growth Fund (the "Fund"), an
investment portfolio offered by Baird Funds, Inc. (the "Company"). On the
following pages, you will find important information about the Fund, including:
|X| A description of the Fund's investment objective (sometimes referred to as
its goal)
|X| The Fund's principal investment strategies (the steps it takes to try to
meet its goal)
|X| The principal risks associated with the Fund (factors that may prevent it
from meeting its goal)
|X| The fees and expenses you pay as an investor in the Fund
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for investors who:
|X| Wish to invest for the long-term
|X| Want to realize capital appreciation on investments in equity securities
|X| Are looking for an equity component to complete their portfolio
|X| Are willing to assume the risk of investing in equity securities
|X| Have long-term goals such as planning for retirement
The Fund is not appropriate for investors that have short-term financial goals.
Before investing in the Fund, you should carefully consider:
|X| Your own investment goals
|X| The amount of time you are willing to leave your money invested
|X| The amount of risk you are willing to take
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term growth of capital.
Dividend income is a secondary consideration.
PRINCIPAL INVESTMENT STRATEGIES
To achieve its investment objective, the Fund invests, under normal
circumstances, at least 80% of its total assets in the equity securities of
large-capitalization companies, principally common stocks, preferred stocks and
securities convertible into common stocks of U.S. issuers, including foreign
issuers that are directly traded in the United States. The Fund may also invest
a combined total of up to 15% of its assets in American Depositary Receipts
("ADRs") and mid-capitalization companies. ADRs are generally issued by banks or
trust companies and evidence ownership of the underlying foreign securities.
Large-capitalization companies are defined as those companies with a market
capitalization in excess of $5 billion at the time of investment.
Mid-capitalization companies are defined as those companies with a market
capitalization of between $1 billion and $5 billion at the time of investment.
When analyzing equity securities to be purchased by the Fund, Robert W. Baird &
Co. Incorporated (the "Advisor") emphasizes a company's growth prospects. The
Advisor considers growth companies to be those that have projected earnings and
projected dividend growth rates, when applicable, that exceed those of the
Standard & Poor's 500 Stock Index (the "S&P 500 Index"). The Fund's investments
are selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return while controlling
risk. The Fund seeks a portfolio comprised of companies with:
|X| Experienced management;
|X| Leadership positions in their markets;
|X| A strong balance sheet;
|X| A consistent history of earnings stability and growth;
|X| Proprietary products, processes and/or services; and
|X| Realistic growth strategies.
The Advisor applies the following strategies when purchasing securities for the
Fund's portfolio:
|X| Intentionally avoiding short-term trading strategies and rapid shifts in
industry positions.
|X| Setting sector limits of the greater of 30% of the Fund's total assets or
double the weighting of the S&P 500 Index in any one sector. The Fund may
invest more than this limit in companies involved in the production of
non-durable consumer and health care products. Thus, the Fund may be heavily
invested in a single sector. However, one sector, such as health care, may
include numerous subsectors or industries, such as managed-care
organizations and home health-care/sub-acute care. Industries in the sector
of medical devices/hospital supplies may include research
reagents/instrumentations, ophthalmology, and imaging. The Fund may be
concentrated in one sector, while being diversified among several
industries.
|X| Typically holding the securities of less than 50 companies with exposure to
approximately 20 industries.
|X| Investing at least 80% of the Fund's total assets in securities of companies
that the Advisor believes are financially sound, are leaders in their
respective industries, and have a historical record of consistent growth and
stability of earnings and dividends.
The Advisor may sell a security due to fundamental deterioration. Fundamental
deterioration occurs when a company is no longer able to achieve the results
generally expected by the Investment Management Team due to a specific issue,
such as a loss of a customer or pricing pressure in the industry.
CASH OR SIMILAR INVESTMENTS
When the Fund's Advisor believes that market conditions are unfavorable for
profitable investing, or when the Advisor is otherwise unable to locate
attractive investment opportunities, the Fund's cash or similar investments may
increase. For cash management purposes, the Fund may hold up to 20% of its total
assets in cash or similar short-term, investment grade securities such as U.S.
Government securities, repurchase agreements, commercial paper or certificates
of deposit. These investments represent the assets that remain after the Advisor
has committed available assets to desirable investment opportunities.
TEMPORARY INVESTMENTS
The Advisor may from time to time invest any amount in cash or similar
short-term, investment grade securities as a temporary defensive position during
adverse market, economic, political or other conditions to protect the Fund's
assets or maintain liquidity. When the Fund takes a temporary defensive
position, the Fund may not achieve its investment objective.
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INVESTMENT GRADE SECURITIES ARE: Securities rated in the highest 4 categories by
S&P, Moody's, Fitch Inc. or another nationally recognized statistical rating
organization.
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PRINCIPAL RISKS
The main risks of investing in the Fund are:
STOCK MARKET RISKS
Equity security prices vary and may fall, thus reducing the value of the Fund's
investments. Certain stocks selected for the Fund's portfolio may decline in
value more than the overall stock market. In general, the securities of
large-capitalization businesses have exhibited less volatility than those of
medium-capitalization or small-capitalization businesses.
GROWTH-STYLE INVESTING
Different types of stocks tend to shift into and out of favor with stock market
investors depending on market and economic conditions. Because the Fund focuses
on growth-style stocks, the Fund's performance may at times be better or worse
than the performance of funds that focus on other types of stocks or that have a
broader investment style. In recent years, growth stocks have been characterized
by high price-to-earnings ratios, which can be more volatile than stocks with
lower price-to-earnings ratios.
MANAGEMENT RISKS
The Advisor's judgments about the attractiveness, value and potential
appreciation of particular companies' stocks may prove to be incorrect.
FOREIGN SECURITIES RISKS
The Fund may invest up to 15% of its assets in ADRs. Foreign investments involve
additional risks including currency-rate fluctuations, political and economic
instability, differences in financial reporting standards, and less-strict
regulation of securities markets.
The Fund cannot guarantee that it will achieve its investment objective. You
should be aware that you may lose money by investing in the Fund.
PERFORMANCE INFORMATION
Because the Fund is new, no performance information for the Fund is included in
this prospectus.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
The shares of the Fund are 100% no load, so you pay no sales charges (loads) to
buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
This table describes the fees and expenses that you may pay if you buy and hold
Investor Class Shares or Institutional Class Shares of the Fund.
INVESTOR INSTITUTIONAL
CLASS CLASS
SHARES SHARES
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENT OF AVERAGE NET ASSETS)
Management Fees 0.65% 0.65%
Distribution and Service (12b-1)1 Fees 0.25% None
Other Expenses2 0.80% 0.80%
-------------- -- ---------------
Total Annual Fund Operating Expenses3 1.70% 1.45%
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Less Expense Reimbursement -0.05% -0.05%
-------------- -- ---------------
Net Annual Fund Operating Expenses 1.65% 1.40%
(1) Because the Fund pays 12b-1 distribution fees for its Investor Class Shares
which are based upon the Fund's assets attributable to the Investor Class,
if you own Investor Class Shares of the Fund for a long period of time,
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
(2) "Other Expenses" are based on estimated amounts for the current fiscal year
and include custodian, administration, transfer agency and other customary
Fund expenses.
(3) The Advisor has contractually agreed to limit the Total Annual Fund
Operating Expenses to 1.65% of average net assets for the Investor Class
Shares and 1.40% of average net assets for the Institutional Class Shares
of the Fund, at least through December 31, 2001. The Advisor can recapture
any expenses or fees it has waived or reimbursed within a three-year period
if the expense ratios in those future years are less than the limits
specified above and less than the limits in effect at that future time.
However, the Fund is not obligated to pay any such waived fees more than
three years after the end of the fiscal year in which the fee was waived or
reimbursed.
EXAMPLE
The following 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:
|X| You invest $10,000 in the Fund for the time periods indicated;
|X| You redeem all of your shares at the end of those periods;
|X| Your investment has a 5% return each year;
|X| Your dividends and distributions have been reinvested; and
|X| The Fund's operating expenses remain the same.
Please note that the one year numbers are based on the Fund's net expenses
because the Fund has agreed to waive its management fee and/or reimburse the
Fund's expenses until December 31, 2001, as described above. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
------------------------------------------ ------------ -------------
1 Year 3 Years
------------------------------------------ ------------ -------------
Investor Class Shares $168 $531
Institutional Class Shares $143 $454
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MANAGEMENT OF THE FUND
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THE ADVISOR
Robert W. Baird & Co. Incorporated, subject to the general supervision of the
Company's Board of Directors, is responsible for the day-to-day management of
the Fund in accordance with the Fund's investment objective and policies. This
includes making investment decisions, and buying and selling securities.
The Advisor was founded in 1919, and is an indirect majority-owned subsidiary of
the Northwestern Mutual Life Insurance Company. The Advisor has its main office
at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Advisor provides
investment management services for individuals and institutional clients
including pension and profit sharing plans. As of June 30, 2000 the Advisor had
over $8 billion in assets under management.
THE INVESTMENT MANAGEMENT TEAM
The individuals listed below are members of the investment management team at
the Advisor (the "Investment Management Team") that manage the Fund's
investments. No member of the Investment Management Team is solely responsible
for making recommendations for portfolio purchases and sales.
ROBINSON BOSWORTH III
Mr. Bosworth is a Managing Director and Portfolio Manager of the Advisor. Mr.
Bosworth has served as Chief Investment Officer of Baird Investment Management,
a department of the Advisor, since its inception in 1971. Prior to joining the
Advisor, he worked as a security analyst at Stein Roe & Farnham in Chicago and
Standard & Poor's Corporation in New York, N.Y. He earned an M.B.A. from The
Amos Tuck School of Business Administration at Dartmouth College and a B.A.
degree in economics from Amherst College.
DAVID W. BOWMAN
Mr. Bowman is a Senior Vice President and Portfolio Manager of the Advisor. Mr.
Bowman joined Baird Investment Management in 1995. Prior to joining the Advisor,
he spent 18 years at an independent, Milwaukee-area money management firm. As a
Principal and Vice President there, Mr. Bowman had substantial research
responsibilities in addition to portfolio management and systems duties. He
holds a degree in Finance, Investments and Banking from the University of
Wisconsin-Milwaukee, and received the Chartered Financial Analyst designation in
1981.
J. BARY MORGAN
Mr. Morgan is a Senior Vice President and Portfolio Manager of the Advisor. Mr.
Morgan joined Baird Investment Management in 1992. He concentrated his
undergraduate studies in finance and accounting, earning a B.S. degree in
finance from Louisiana Tech University. Mr. Morgan attended the Indiana
University Graduate School of Business and received an M.B.A. He received the
Chartered Financial Analyst designation in 1995.
JOEL D. VRABEL
Mr. Vrabel is a Senior Vice President and Portfolio Manager of the Advisor. Mr.
Vrabel joined Baird Investment Management in January 1995. Prior to joining the
Advisor, he spent ten years as a Principal and Vice President of a $3 billion
west coast investment management organization, and with an independent,
Wisconsin-based investment advisory firm. During the preceding 13 years, he
served in the capacity of Chief Equity Investment Officer and Portfolio Manager
at National Investment Services of America. He holds B.B.A. and M.B.A. degrees
from the University of Wisconsin-Milwaukee, and received the Chartered Financial
Analyst designation in 1977.
FINANCIAL HIGHLIGHTS
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Because the Fund is new, financial highlights are not available.
YOUR ACCOUNT
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DISTRIBUTION OF SHARES
DISTRIBUTOR
The Advisor, Robert W. Baird & Co. Incorporated, is also the distributor for
shares of the Fund, and a member of the National Association of Securities
Dealers, Inc.
RULE 12B-1 PLAN
The Fund has adopted a Rule 12b-1 Plan under the Investment Company Act of 1940.
Under the Rule 12b-1 Plan, Investor Class Shares pay the Advisor a fee of 0.25%
of the average daily net asset value of Investor Class Shares. The Advisor uses
this fee to finance activities that promote the sale of Investor Class Shares.
Such activities include, but are not necessarily limited to, shareholder
servicing, advertising, printing and mailing prospectuses to persons other than
current shareholders, printing and mailing sales literature, and compensating
underwriters, dealers and sales personnel. The 12b-1 Plan has the effect of
increasing the expenses of the Investor Class from what they would otherwise be.
DESCRIPTION OF CLASSES
The Fund offers two classes of shares: Investor Class and Institutional Class.
The classes differ with respect to their minimum investments. In addition,
Investor Class Shares impose a Rule 12b-1 fee which is assessed against the
assets of the Fund attributable to that class.
The Advisor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisors and broker/dealers as agents to
provide sales or administrative services for their clients or customers who
beneficially own Investor Class Shares. Financial institutions will receive fees
from the Advisor based upon shares owned by their clients or customers. The
Advisor will determine the schedule of such fees and the basis upon which such
fees will be paid.
SHARE PRICE
Shares of each class are sold at their net asset value ("NAV").
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When making a purchase request, make sure your is in good order. "Good order"
means your purchase request includes:
|X| The name of the Fund
|X| The dollar amount of shares to be purchased
|X| Purchase application or investment stub
|X| Check payable to Baird Funds, or if paying by wire, when Federal Funds are
received
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The NAV for each class of shares of the Fund is determined as of the close of
regular trading on the New York Stock Exchange (the "NYSE") (currently 3:00
p.m., Central time) Monday through Friday, except on days the NYSE is not open.
If the NYSE closes at any other time, or if an emergency exists, NAV may be
calculated at a different time. Your share price will be the next NAV calculated
after the Fund or its agents receives your request in good order. The NYSE is
closed most national holidays and Good Friday. Please refer to the Fund's
Statement of Additional Information for a complete list of the days that the
NYSE is closed.
The NAV for a class of shares is determined by adding the value of the Fund's
investments, cash and other assets attributable to a particular share class,
subtracting the liabilities attributable to that class and then dividing the
result by the total number of shares outstanding in the class.
The Fund's investments are valued according to market value. When a market quote
is not readily available, the security's value is based on "fair value" as
determined by the Advisor under the supervision of the Company's Board of
Directors.
BUYING SHARES
MINIMUM INVESTMENTS
---------------------------- ----------------------------- ---------------------
INITIAL PURCHASE SUBSEQUENT PURCHASES
---------------------------- ----------------------------- ---------------------
Investor Class Shares $1,000 - IRAs $250
$2,500 - all other accounts $250
Institutional Class Shares $100,000 No minimum
---------------------------- ----------------------------- ---------------------
MINIMUM INVESTMENT WAIVERS - INSTITUTIONAL CLASS SHARES
The minimum initial investment amount for Institutional Class Shares is waived
for all employees, directors and officers of the Advisor or the Fund and members
of their families (including parents, grandparents, siblings, spouses, children
and in-laws of such employees, directors and officers).
TIMING OF REQUESTS
Your price per share will be the NAV next computed after your request is
received in good order by the Fund or its agents. All requests received in good
order before 3:00 p.m. (Central time) will be executed at the NAV computed on
that same day. Requests received after 3:00 p.m. will receive the next business
day's NAV.
RECEIPT OF ORDERS
Shares may only be purchased on days the NYSE is open for business. The Fund may
authorize one or more broker/dealers to accept on its behalf purchase and
redemption orders that are in good order. In addition, these broker/dealers may
designate other financial intermediaries to accept purchase and redemption
orders on the Fund's behalf.
METHODS OF BUYING
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TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
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<S> <C> <C>
By Telephone You may not use telephone transactions If you have completed the "Telephone
for your initial purchase of the Purchase Option" section of the
Fund's shares. If you have elected Account Application Form, call the
the "Telephone Exchange Option" on a Fund (toll-free) at 1-866-44BAIRD to
Baird Fund, you may call that Fund place your order. You will then be
(toll-free) at 1-866-44BAIRD to able to move money from your bank
request an exchange into another Baird account to your Fund account upon
Fund. See "Exchanging Shares." request. Only bank accounts held at
domestic institutions that are Automated
Clearing House (ACH) members may be
used for telephone transactions.
The minimum telephone purchase is $250.
By Mail Make your check payable to "Baird Fill out the investment stub from an
Funds." Forward the check and your account statement, or indicate the
application to the address below. No Fund name and account number on your
third party checks will be accepted. check. Make your check payable to
If your check is returned for any "Baird Funds." Forward the check and
reason, a $25 fee will be assessed stub to the address below.
against your account.
By Federal Funds Wire Forward your application to Baird Call the Fund (toll-free) at
Funds at the address below. Call 1-866-44BAIRD to notify of incoming
(toll-free) 1-866-44BAIRD to obtain an wire. Use the following
account number. Wire funds using the instructions:
instructions to the right. Firstar Bank, N.A.
Milwaukee, WI 53202
ABA#: 042000013
Credit: Firstar Mutual Fund Services, LLC
Account #: 112-952-137
Further Credit:
(name of Fund, share class)
(name/title on the account)
(account #)
The Fund, Advisor and the Transfer Agent
are not responsible for
the consequences of of delays
resulting from the bankingor
Federal Reserve Wire system,
or from incomplete wiring instructions.
Automatic Investment Plan Open a Fund account with one of the If you did not set up an Automatic
other methods. If by mail, be sure to Investment Plan with your original
include your checking account number application, call the Fund
on the appropriate section of your (toll-free) at 1-866-44BAIRD.
application and enclose a voided check Additional investments (minimum of
or deposit slip with initial purchase $250) will be taken automatically
application. monthly or quarterly from your
checking account.
Through Shareholder Service To purchase shares for another To purchase shares for another
Organizations investor, call the Fund (toll-free) at investor, call the Fund (toll-free)
1-866-44BAIRD. at 1-866-44BAIRD.
By Exchange Call the Fund (toll-free) at Call the Fund (toll-free) at
1-866-44-BAIRD to obtain exchange 1-866-44BAIRD to obtain exchange
information. See "Exchanging Shares." information. See "Exchanging Shares."
--------------------------------- ---------------------------------------- ---------------------------------------
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You should use the following addresses when sending documents by mail or by
overnight delivery:
BY MAIL BY OVERNIGHT DELIVERY
Baird Funds Baird Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
NOTE: THE FUND DOES NOT CONSIDER THE U.S. POSTAL SERVICE OR OTHER INDEPENDENT
DELIVERY SERVICES TO BE ITS AGENTS.
SELLING SHARES
METHODS OF SELLING
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TO SELL SOME OR ALL OF YOUR SHARES
---- ---------------------------------------------------------------------------
By Telephone Call the Fund (toll-free) at 1-866-44BAIRD to place the
order. (Note: For security reasons, requests by telephone
will be recorded.)
By Mail Send a letter instructing the Fund to redeem the dollar
amount or number of shares you wish. The letter should
contain the Fund's name, the account number and the number
of shares or the dollar amount of shares to be redeemed.
Be sure to have all shareholders sign the letter. If your
account is an IRA, signatures must be guaranteed. For IRA
accounts, requests submitted without an election whether or
not to withhold will be subject to withholding.
By Federal Funds Call the Fund (toll-free) at 1-866-44BAIRD to request the
Wire amount of money you want. Be sure to have all necessary
information from your bank. Your bank may charge a fee to
receive wired funds.
Systematic The Fund offers shareholders a Systematic Withdrawal Plan.
Withdrawal Plan Call the Fund (toll-free) at 1-866-44BAIRD to arrange for
regular monthly or quarterly fixed withdrawal payments.
The minimum payment you may receive is $50 per period.
Note that this plan may deplete your investment and
affect your income or yield.
Shareholder Consult your account agreement for information on redeeming
Service shares.
Organization
By Exchange Call (toll-free) 1-866-44BAIRD to obtain exchange
information. See "Exchanging Shares" for further
information.
---- ---------------------------------------------------------------------------
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
|X| The name of the Fund
|X| The number of shares or the dollar amount of shares to be redeemed
|X| Signatures of all registered shareholders exactly as the shares are
registered
|X| The account number
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PAYMENT OF REDEMPTION PROCEEDS
You may request redemption of your shares at any time. Your shares will be
redeemed at the next NAV per share calculated after your order is received in
good order by the Fund or its agents. You may receive the proceeds in one of
three ways:
1) We can mail a check to your account's address. You will generally
receive the proceeds within seven days after the Fund or its agents
receives your request in good order. Checks will not be forwarded by the
Postal Service, so please notify us if your address has changed.
2) We can transmit the proceeds by Electronic Funds Transfer ("EFT") to a
properly pre-authorized bank account. The proceeds usually will arrive
at your bank two banking days after we process your redemption.
3) For a $12 fee, which will be deducted from your redemption proceeds, we
can transmit the proceeds by wire to a pre-authorized bank account. The
proceeds usually will arrive at your bank the first banking day after we
process your redemption.
Before selling recently purchased shares, please note that if the Transfer Agent
has not yet collected payment for the shares you are selling, it may delay
sending the proceeds until the payment is collected, which may take up to 10
calendar days from the purchase date. This procedure is intended to protect the
Fund and its shareholders from loss.
The Transfer Agent will send redemption proceeds by wire or EFT only to the bank
and account designated on the account application or in written instructions
(with signatures guaranteed) subsequently received by the Transfer Agent, and
only if the bank is a member of the Federal Reserve System. If the dollar or
share amount requested to be redeemed is greater than the current value of your
account, your entire account balance will be redeemed. If you choose to redeem
your account in full, any Automatic Investment Plan currently in effect for the
account will be terminated unless you indicate otherwise in writing and any
Systematic Withdrawal Plan will be terminated.
SIGNATURE GUARANTEES
A signature guarantee of each owner is required to redeem shares in the
following situations:
|X| If you change ownership on your account
|X| When you want the redemption proceeds sent to a different address than that
registered on the account
|X| If the proceeds are to be made payable to someone other than the account's
owner(s)
|X| Any redemption transmitted by federal wire transfer to a bank other than
your bank of record
|X| If a change of address request has been received by the Transfer Agent
within the last 15 days
|X| For all redemptions of $50,000 or more from any shareholder account
Signature guarantees are designed to protect both you and the Fund from fraud.
Signature guarantees can be obtained from most banks, credit unions or saving
associations, or from broker/dealers, national securities exchanges, registered
securities exchanges or clearing agencies deemed eligible by the Securities and
Exchange Commission ("SEC"). Notaries cannot provide signature guarantees.
CORPORATE, TRUST AND OTHER ACCOUNTS
Redemption requests from corporate, trust and institutional accounts, and
executors, administrators and guardians, require documents in addition to those
described above evidencing the authority of the officers, trustees or others. In
order to avoid delays in processing redemption requests for these accounts, you
should call the Fund at 1-866-44BAIRD before making the redemption request to
determine what additional documents are required.
TRANSFER OF OWNERSHIP
In order to change the account registrant or transfer ownership of an account,
additional documents will be required. To avoid delays in processing these
requests, you should call the Fund at 1-866-44BAIRD before making your request
to determine what additional documents are required.
EXCHANGING SHARES
You may exchange all or a portion of your investment from the same class of one
Baird Fund to another. You may also exchange between classes of the Fund or
other Baird Funds if you meet the minimum investment requirements for the class
you would like to exchange into. Any new account established through an exchange
will be subject to the minimum investment requirements described above.
Exchanges will be executed on the basis of the relative NAV of the shares
exchanged. The exchange privilege may be exercised only in those states where
the class of shares of the Fund being acquired legally may be sold.
In addition to your ability to exchange all or a portion of your investment
between any of the Baird Funds, you may also exchange Fund shares for shares of
the Firstar Institutional Money Market Fund by sending a written exchange
request to the Fund or, if you have established telephone exchange privileges,
call 1-866-44BAIRD. Shares of the Firstar Institutional Money Market Fund are
not offered by this prospectus. Please read that prospectus before making an
exchange into the Firstar Institutional Money Market Fund. This exchange
privilege is offered as a convenience to the Fund's shareholders. Please note
that when exchanging from the Fund to the Firstar Institutional Money Market
Fund, you will begin accruing income from the Firstar Institutional Money Market
Fund the day following the exchange. When exchanging less than all of the
balance from the Firstar Institutional Money Market Fund to your Fund, your
exchange proceeds will exclude accrued and unpaid income from the Firstar
Institutional Money Market Fund through the date of exchange. When exchanging
your entire balance from the Firstar Institutional Money Market Fund, accrued
income will automatically be exchanged into the Fund when the income is
collected and paid from the Firstar Institutional Money Market Fund at the end
of the month.
An exchange is considered to be a sale of shares for federal income tax purposes
on which you may realize a taxable gain or loss.
Call 1-866-44BAIRD to learn more about exchanges and other Baird Funds.
MORE INFORMATION ABOUT THE EXCHANGE PRIVILEGE
The Fund is intended as a long-term investment vehicle and not to provide a
means of speculating on short-term market movements. In addition, excessive
trading can hurt the Fund's performance and shareholders. Therefore, the Fund
may terminate, without notice, the exchange privilege of any investor who uses
the exchange privilege excessively (more than six times each year). The Fund may
change or temporarily suspend the exchange privilege during unusual market
conditions.
GENERAL TRANSACTION POLICIES
The Fund reserves the right to:
|X| Vary or waive any minimum investment requirement.
|X| Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone redemption privileges, for any
reason.
|X| Reject any purchase or exchange request for any reason. Generally, the Fund
does this if the purchase or exchange is disruptive to the efficient
management of the Fund (due to the timing of the investment or an
investor's history of excessive trading).
|X| Redeem all shares in your account if your balance falls below the Fund's
minimum for the applicable class of shares. If, within 60 days of the
Fund's written request, you have not increased your account balance, you
may be required to redeem your shares. The Fund will not require you to
redeem shares if the value of your account drops below the investment
minimum due to fluctuations of NAV.
|X| Delay paying redemption proceeds for up to seven days after receiving a
request, if an earlier payment could adversely affect the Fund.
|X| Modify or terminate the Automatic Investment and Systematic Withdrawal Plans
at any time.
|X| Modify or terminate the exchange privilege after 60 days written notice to
shareholders.
|X| Make a "redemption in kind" (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (i)
$250,000 or (ii) 1% of the Fund's assets. In such cases, you may incur
brokerage costs in converting these securities to cash.
|X| Reject any purchase or redemption request that does not contain all required
documentation.
If you elect telephone privileges on the account application or in a letter to
the Fund, you may be responsible for any fraudulent telephone orders as long as
the Fund has taken reasonable precautions to verify your identity. In addition,
once you place a telephone transaction request, it cannot be canceled or
modified.
During periods of significant economic or market change, telephone transactions
may be difficult to complete. If you are unable to contact the Fund by
telephone, you may also mail the requests to the Fund at the address listed
under Buying Shares.
Your broker/dealer or other financial organization may establish policies that
differ from those of the Fund. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on buying or selling shares in addition to those identified in this prospectus.
Contact your broker/dealer or other financial organization for details.
DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund pays its shareholders dividends from the Fund's net investment income
and distributes any net capital gains the Fund has realized.
Dividends are declared and paid annually. Capital gains, if any, are distributed
once a year.
Dividends on each share class of the Fund are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. So, because Investor Class Shares have
distribution fees, the dividends paid to Investor Class shareholders will be
lower than those paid to Institutional Class shareholders.
All of your dividends and capital gains distributions with respect to the Fund
will be reinvested in additional shares of the same class unless you instruct
otherwise on your account application or have redeemed all shares you held in
the Fund. In such cases, dividends and distributions will be paid in cash.
TAXATION
Fund dividends and distributions are taxable to most investors (unless your
investment is in an IRA or other tax-advantaged account regardless of whether
they are received in cash or reinvested in Fund shares). Dividends paid by the
Fund out of net ordinary income and distributions of net short-term capital
gains are taxable to the Fund's shareholders as ordinary income. Dividends from
net ordinary income may be eligible for the corporate dividends-received
deduction.
Distributions by the Fund of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) to shareholders are generally
taxable to the shareholders at the applicable long-term capital gains rate,
regardless of how long the shareholder has held shares of the Fund.
Shareholders that sell, exchange or redeem shares generally will have a capital
gain or loss from the sale, redemption or exchange. The amount of the gain or
loss and the rate of tax will depend mainly upon the amount paid for the shares,
the amount received from the sale, exchange or redemption, and how long the
shares were held by the shareholder.
A dividend or capital gains distribution declared by the Fund in October,
November or December, but paid during January of the following year will be
considered to be paid on December 31 of the year it was declared.
If the value of shares is reduced below a shareholder's cost as a result of a
distribution by the Fund, the distribution will be taxable even though it, in
effect, represents a return of invested capital. Investors considering buying
shares just prior to a dividend or capital gain distribution payment date should
be aware that, although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those who purchase just prior to the
record date for a distribution may receive a distribution which will be taxable
to them.
Shareholders will be advised annually as to the federal tax status of dividends
and capital gain distributions made by the Fund for the preceding year.
Distributions by the Fund generally will be subject to state and local taxes.
Please note that dividends and distributions are taxable even if reinvested.
Additional tax information may be found in the Statement of Additional
Information. Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences of an investment in
the Fund.
FOR MORE INFORMATION
--------------------------------------------------------------------------------
You can find more information about the Fund in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains details about the investments and techniques of the Fund and
certain other additional information. A current SAI is on file with the SEC and
is incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
within this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
After the Fund has been operating for the appropriate time, annual and
semi-annual reports will be made available. The Fund's annual and semi-annual
reports provide the most recent financial reports and portfolio listings. The
annual report contains a discussion of the market conditions and investment
climate that affected the Fund's performance during the Fund's last fiscal year.
You can obtain a free copy of these documents, request other information, or
make general inquires about the Fund by calling the Fund at 1-866-44BAIRD or by
writing to:
Baird Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
You may write to the SEC Public Reference Room at the regular mailing address or
the e-mail address below and ask them to mail you information about the Fund,
including the SAI. They will charge you a fee for this duplicating service. You
can also visit the SEC Public Reference Room and review and copy documents while
you are there. For more information about the operation of the Public Reference
Room, call the SEC at the telephone number below.
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
[email protected]
1-202-942-8090
Reports and other information about the Fund are also available on the EDGAR
Database on the SEC's Internet site at HTTP://WWW.SEC.GOV.
1940 Act File No. 811-09997
BAIRD FUNDS, INC.
Prospectus
September 26, 2000
Bond Funds
Baird Intermediate Bond Fund
Baird Core Bond Fund
Baird Aggregate Bond Fund
The Securities and Exchange Commission has not approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................3
OVERVIEW....................................................................3
INVESTMENT OBJECTIVES.......................................................3
PRINCIPAL INVESTMENT STRATEGIES.............................................4
PRINCIPAL RISKS.............................................................6
MANAGEMENT OF THE FUNDS........................................................8
THE ADVISOR.................................................................8
THE INVESTMENT MANAGEMENT TEAM..............................................8
FINANCIAL HIGHLIGHTS..........................................................10
YOUR ACCOUNT..................................................................10
DISTRIBUTION OF SHARES.....................................................10
DESCRIPTION OF CLASSES.....................................................10
SHARE PRICE................................................................11
BUYING SHARES..............................................................11
SELLING SHARES.............................................................13
EXCHANGING SHARES..........................................................14
GENERAL TRANSACTION POLICIES...............................................15
DISTRIBUTIONS AND TAXES.......................................................16
DIVIDENDS AND DISTRIBUTIONS................................................16
TAXATION...................................................................16
FOR MORE INFORMATION..................................................BACK COVER
RISK/RETURN SUMMARY
--------------------------------------------------------------------------------
OVERVIEW
This prospectus describes the Baird Intermediate Bond Fund, the Baird Core Bond
Fund, and the Baird Aggregate Bond Fund (each a "Fund" and collectively the
"Funds"), three investment portfolios offered by Baird Funds, Inc. (the
"Company"). On the following pages, you will find important information about
each Fund, including:
|X| A description of each Fund's investment objective (sometimes referred to
as its goal)
|X| Each Fund's principal investment strategies (the steps it takes to try to
meet its goal)
|X| The principal risks associated with each Fund (factors that may prevent it
from meeting its goal)
|X| The fees and expenses you pay as an investor in a Fund
WHO MAY WANT TO INVEST IN THE FUNDS
These Funds may be appropriate for investors who:
|X| Wish to invest for the long-term
|X| Want to earn income on investments considered more stable than stocks
|X| Are looking for a fixed-income component to complete their portfolio
|X| Have long-term goals such as planning for retirement
These Funds are not appropriate for investors that have short-term financial
goals.
Before investing in a Fund, you should carefully consider:
|X| Your own investment goals
|X| The amount of time you are willing to leave your money invested
|X| How much risk you are willing to take
INVESTMENT OBJECTIVES
BAIRD INTERMEDIATE BOND FUND
The investment objective of the Intermediate Bond Fund is to seek an annual rate
of total return, before fund expenses, greater than the annual rate of total
return of the Lehman Brothers Intermediate Government/Credit Bond Index. The
Lehman Brothers Intermediate Government/Credit Bond Index is a market value
weighted performance benchmark for government and corporate fixed-rate debt
issues with maturities between one and ten years.
BAIRD CORE BOND FUND
The investment objective of the Core Bond Fund is to provide an annual rate of
total return, before fund expenses, greater than the annual rate of total return
of the Lehman Brothers Government/Credit Bond Index. The Lehman Brothers
Government/Credit Bond Index is a market value weighted performance benchmark
for government and corporate fixed-rate debt issues with maturities between one
and thirty years or more.
BAIRD AGGREGATE BOND FUND
The investment objective of the Aggregate Bond Fund is to seek an annual rate of
total return, before fund expenses, greater than the annual rate of total return
of the Lehman Brothers Aggregate Bond Index. The Lehman Brothers Aggregate Bond
Index is a market-capitalization weighted index of investment-grade, fixed-rate
debt issues, including government, corporate, asset-backed, and mortgage-backed
securities, with maturities of at least one year.
--------------------------------------------------------------------------------
DURATION: a measure of a fixed income security's average life that reflects the
present value of the security's cash flow, and accordingly is a measure of price
sensitivity to interest rate changes. For example, if interest rates decline by
1%, the market value of a portfolio with a duration of five years would rise by
approximately 5%. Conversely, if interest rates increase by 1%, the market value
of the portfolio would decline by approximately 5%.
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
To achieve each Fund's investment objective, Robert W. Baird & Co. Incorporated
(the "Advisor") attempts to keep the duration of each Fund's portfolio
substantially equal to that of its benchmark. The Advisor seeks to control
credit quality risk by purchasing only investment grade, U.S. dollar denominated
securities. The Advisor attempts to diversify each Fund's portfolio by holding
securities of many different issuers and choosing issuers in a variety of
sectors.
The effective dollar-weighted average portfolio maturity of the Intermediate
Bond Fund will be more than three years but less than ten years during normal
market conditions. The effective dollar-weighted average portfolio maturity of
the Core Bond Fund and the Aggregate Bond Fund will be more than five years
during normal market conditions. The stated maturity of a bond is the date when
the issuer must repay the bond's entire principal value to an investor. Some
types of bonds may also have an "effective maturity" that is shorter than the
stated date due to prepayment or call provisions. Securities without prepayment
or call provisions generally have an effective maturity equal to their stated
maturity. Dollar-weighted effective maturity is calculated by averaging the
effective maturity of bonds held by the Fund with each effective maturity
"weighted" according to the percentage of net assets that it represents.
--------------------------------------------------------------------------------
INVESTMENT GRADE SECURITIES ARE: Securities rated in the highest 4 categories
by S&P, Moody's, Fitch Inc. or another nationally recognized statistical rating
organization.
--------------------------------------------------------------------------------
The Advisor attempts to achieve annual rates of total return greater than each
Fund's respective benchmark index. The Core Bond Fund and Aggregate Bond Fund
each maintain longer maturities than the Intermediate Bond Fund, thus providing
a greater potential for return, with an increased level of risk. Each of the
Core Bond Fund's and Aggregate Bond Fund's investments are based on, although do
not replicate, the securities composition of the respective Fund's benchmark
index. Consequently, each Fund's portfolio composition and risks will differ.
For example, the Aggregate Bond Fund will typically invest a higher percentage
of its total net assets in mortgage-backed securities than the Core Bond Fund,
while the Core Bond Fund will typically invest a higher percentage of its total
net assets in government obligations and individual corporate issuers. Due to
its higher percentage of mortgage-backed securities, the Aggregate Bond Fund is
expected to perform more closely to the overall investment-grade bond market
than the Core Bond Fund.
In determining which securities to buy for the Funds, the Advisor attempts to
achieve returns that exceed a Fund's benchmark primarily in three ways:
YIELD CURVE POSITIONING: The yield curve is a graphic representation of
the actual or projected yields of fixed-income securities in relation
to their maturities and durations. The Advisor attempts to match the
average duration of the securities in the Fund with the average
duration of the securities in the Fund's benchmark. The securities in
the Fund, though, will not be identical to the securities in the
benchmark. The Advisor selects securities for the Fund with maturities
and yields that it believes have the greatest potential for achieving
the Fund's objective. Because the yield curve is constantly changing,
the Advisor regularly adjusts the Fund's portfolio to purchase
securities that it believes will best assist the Fund in achieving its
objectives.
SECTOR ALLOCATION: The Advisor next evaluates the return potential of
each sector (including asset-backed securities, mortgage-backed
securities, government and governmental agency bonds, and corporate
bonds). The Advisor invests in securities in those sectors which it
believes represent the greatest potential for achieving the Fund's
objectives. The Advisor regularly adjusts the portfolio in order to
address changes in yields and underlying risks in various sectors.
SECURITY SELECTION: The Advisor then focuses on selecting individual
securities. The Advisor determines which issuers it believes offer the
best relative value within each sector and then decides which available
securities of that issuer to purchase.
DEBT SECURITIES
The Advisor will attempt to keep each Fund fully invested. Each Fund's policy is
to invest at least 65% of its total assets in the following types of debt
securities:
|X| U.S. government |X| U.S. government agencies
|X| Stripped U.S. government |X| Corporate
|X| Collateralized mortgage obligations |X| Medium-term notes
|X| Asset-backed and mortgage-backed obligations |X| Eurobonds
Debt obligations acquired by a Fund will be "investment grade," as rated by at
least one rating agency. The Advisor may purchase unrated obligations that are
determined by the Advisor to be comparable in quality to the rated obligations.
Average quality for a Fund is expected to be at least the second highest rating
category of S&P or Moody's. After purchase, a security may cease to be rated or
may have its rating reduced below the minimum rating required by a Fund for
purchase. In such cases, the Advisor will consider whether to continue to hold
the security. If over 5% of a Fund's net assets consist of obligations that have
fallen below the minimum rating, the Advisor will immediately sell some of those
securities to reduce the aggregate value of such securities to less than 5% of
the Fund's net assets.
ILLIQUID INVESTMENTS
Each Fund may invest up to 15% of its net assets in illiquid investments. In
general, illiquid securities are securities that cannot be sold or disposed of
within seven days at their approximate market value. For example, some
securities are not registered under the U.S. securities laws and cannot be sold
to the U.S. public because of Securities and Exchange Commission ("SEC")
regulations (these are known as "restricted securities").
FOREIGN SECURITIES
Each Fund may invest up to 20% of its net assets in U.S. dollar-denominated debt
obligations of foreign corporations and governments.
The Advisor generally will sell a security when it, on a relative basis and in
the Advisor's opinion, will no longer help a Fund attain its objectives. Each
Fund typically holds less than 200 securities.
CASH OR SIMILAR INVESTMENTS
When the Advisor believes that market conditions are unfavorable for profitable
investing, or when the Advisor is otherwise unable to locate attractive
investment opportunities, a Fund's cash or similar investments may increase. In
other words, the Funds may not always stay fully invested in bonds. Cash or
similar investments generally are a residual - they represent the assets that
remain after the Advisor has committed available assets to desirable investment
opportunities. Under normal market conditions, each Fund intends to invest no
more than 35% of its total assets in cash or similar investments.
TEMPORARY INVESTMENTS
The Advisor may from time to time invest any amount in cash or similar
short-term, investment grade securities as a temporary defensive position during
adverse market, economic, political or other conditions to protect a Fund's
assets or maintain liquidity. When a Fund takes a temporary defensive position,
the Fund may not achieve its investment objective.
PRINCIPAL RISKS
The main risks of investing in each of the Funds are substantially similar.
However, certain risks are enhanced for each Fund. Specifically, the Core Bond
Fund and Aggregate Bond Fund each maintain longer maturities than the
Intermediate Bond Fund, thus providing a greater potential for return, with an
increased level of risk. In addition, although the Core Bond and Aggregate Bond
Funds' maturities are similar, their portfolio composition and the resulting
risks are different. The Aggregate Bond Fund will typically hold a higher
percentage of its total net assets in mortgage-backed securities than the Core
Bond Fund. Thus, the Aggregate Bond Fund's exposure to this associated risk will
typically be greater than the Core Bond Fund's. Because of its greater
investment in mortgage-backed securities, in a volatile interest rate
environment the Aggregate Bond Fund may underperform the Core Bond Fund. The
risks associated with government obligations and the credit risks associated
with individual corporate issuers will typically be greater for the Core Bond
Fund than the Aggregate Bond Fund, because the Core Bond Fund will typically
hold a higher percentage of its total net assets in those securities.
MANAGEMENT RISKS
The Advisor may err in its choices of securities or portfolio mixes. Such errors
could result in a negative return and a loss to you. In the event the
performance of a Fund is not greater than its benchmark index, the Fund's Board
of Directors will examine the reasons for the deviation and the availability of
corrective measures.
Because each Fund holds fewer issues than its benchmark index, material events
affecting the Fund's portfolio (for example, an issuer's decline in credit
quality) may influence the performance of the Fund to a greater degree than such
events will influence its benchmark index and may prevent the Fund from
attaining its investment objective for particular periods.
BOND MARKET RISKS
The major risks of each Fund are those of investing in the bond market. A bond's
market value is affected significantly by changes in interest rates - generally,
when interest rates rise, the bond's market value declines and when interest
rates decline, its market value rises (interest-rate risk). Generally, the
longer a bond's maturity, the greater the risk and the higher its yield.
Conversely, the shorter a bond's maturity, the lower the risk and the lower its
yield (maturity risk). A bond's value can also be affected by changes in the
bond's credit quality rating or its issuer's financial condition (credit-quality
risk). Because bond values fluctuate, a Fund's share price fluctuates. So, if
the value of a Fund's investments goes down, you may lose money.
CREDIT RISKS
Individual issues of fixed-income securities may be subject to the credit risk
of the issuer. This means that the underlying company may experience
unanticipated financial problems causing it to be unable to meet its payment
obligations. Bonds receiving the lowest investment grade rating may have
speculative characteristics and, compared to higher grade securities, may have a
weakened capacity to make principal and interest payments due to changes in
economic conditions or other circumstances.
LIQUIDITY RISKS
Liquidity risk is the risk that certain securities may be difficult or
impossible to sell at the time and price that the Advisor would like to sell.
The Advisor may have to lower the price, sell other securities instead or forego
an investment opportunity, any of which could have a negative effect on Fund
management or performance.
MORTGAGE- AND ASSET-BACKED SECURITIES RISKS
Mortgage-backed and asset-backed securities are subject to prepayment risk,
which is the risk that the borrower will prepay some or all of the principal
owed to the issuer. If that happens, a Fund may have to replace the security by
investing the proceeds in a less attractive security. This could reduce the
Fund's share price and its income distributions.
FOREIGN SECURITIES RISKS
Foreign investments involve additional risks including political and economic
instability, differences in financial reporting standards, and less strict
regulation of securities markets.
GOVERNMENT OBLIGATIONS RISKS
For Fund investments in securities issued or guaranteed by the U.S. government,
its agencies and instrumentalities, no assurance can be given that the U.S.
government will provide financial support to U.S. government-sponsored agencies
or instrumentalities where it is not obligated to do so by law.
The Funds cannot guarantee that they will achieve their respective investment
objectives. You should be aware that you may lose money by investing in the
Funds.
PERFORMANCE INFORMATION
Because the Funds are new, no performance information for the Funds is included
in this prospectus.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
The shares of each Fund are 100% no-load, so you pay no sales charges (loads) to
buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
This table describes the fees and expenses that you may pay if you buy and hold
Investor Class Shares or Institutional Class Shares of the Intermediate Bond
Fund, the Core Bond Fund or the Aggregate Bond Fund.
INVESTOR INSTITUTIONAL
CLASS SHARES CLASS SHARES
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENT OF AVERAGE NET ASSETS)
Management Fees 0.25% 0.25%
Distribution and Service (12b-1)1 Fees 0.25% None
Other Expenses2 0.05% 0.05%
-------------- --------------
Total Annual Fund Operating Expenses 0.55% 0.30%
(1) Because each Fund pays 12b-1 distribution fees for its Investor Class
Shares which are based upon the Fund's assets attributable to the Investor
Class, if you own Investor Class Shares of a Fund for a long period of
time, these fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
(2) "Other Expenses" are based on estimated amounts for the current fiscal year
and include custodian, administration, transfer agency and other customary
Fund expenses. Fees payable under an Administration Agreement between each
Fund and the Advisor are fixed at 0.05% of the Fund's average daily net
assets. Under the Administration Agreement, the Advisor assumes and pays
all expenses of the applicable Fund, excluding all brokerage fees and
commissions, taxes, borrowing costs (such as interest and dividend expenses
on securities sold short) and extraordinary or non-recurring expenses.
EXAMPLE
The following example is intended to help you compare the cost of investing in
each Fund with the cost of investing in other mutual funds.
The example assumes that:
|X| You invest $10,000 in a Fund for the time periods indicated;
|X| You redeem all of your shares at the end of those periods;
|X| Your investment has a 5% return each year;
|X| Your dividends and distributions have been reinvested; and
|X| The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
-------------------------------------------------------- ------------ ----------
1 Year 3 Years
-------------------------------------------------------- ------------ ----------
Intermediate Bond Fund - Investor Class Shares $56 $176
-------------------------------------------------------- ------------ ----------
Intermediate Bond Fund - Institutional Class Shares $31 $97
-------------------------------------------------------- ------------ ----------
Core Bond Fund - Investor Class Shares $56 $176
-------------------------------------------------------- ------------ ----------
Core Bond Fund - Institutional Class Shares $31 $97
-------------------------------------------------------- ------------ ----------
Aggregate Bond Fund - Investor Class Shares $56 $176
-------------------------------------------------------- ------------ ----------
Aggregate Bond Fund - Institutional Class Shares $31 $97
-------------------------------------------------------- ------------ ----------
MANAGEMENT OF THE FUNDS
--------------------------------------------------------------------------------
THE ADVISOR
Robert W. Baird & Co. Incorporated, subject to the general supervision of the
Company's Board of Directors, is responsible for the day-to-day management of
the Funds in accordance with each Fund's respective investment objective and
policies. This includes making investment decisions, and buying and selling
securities.
The Advisor was founded in 1919, and is an indirect majority-owned subsidiary of
the Northwestern Mutual Life Insurance Company. The Advisor has its main office
at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Advisor provides
investment management services for individuals and institutional clients
including pension and profit sharing plans. As of June 30, 2000 the Advisor had
over $8 billion in assets under management.
THE INVESTMENT MANAGEMENT TEAM
The individuals listed below are members of the investment management team at
the Advisor (the "Investment Management Team") that manage the Funds'
investments. No member of the Investment Management Team is solely responsible
for making recommendations for portfolio purchases and sales.
MARY ELLEN STANEK
Ms. Stanek is a Managing Director of the Advisor and Chief Investment Officer of
Baird Advisors, a department of the Advisor. Ms. Stanek has over 21 years of
investment experience managing various types of fixed income portfolios.
Ms. Stanek joined Baird Advisors in March, 2000. Prior to joining Baird
Advisors, Ms. Stanek was employed by Firstar Investment Research & Management
Company, LLC ("FIRMCO") where she most recently served as President and CEO from
November, 1998 to March, 2000, and Chief Operating Officer and President from
March, 1994 to November, 1998. Ms. Stanek obtained her undergraduate degree
from Marquette University and M.B.A. from the University of Wisconsin-Milwaukee.
She received the Chartered Financial Analyst designation in 1983. Ms. Stanek
is a member of the Association for Investment Management and Research ("AIMR")
and the Milwaukee Investment Analysts Society.
GARY A. ELFE
Mr. Elfe is a Managing Director and Senior Portfolio Manager of the Advisor.
Mr. Elfe has over 21 years of investment experience managing various types of
fixed income portfolios. Mr. Elfe joined Baird Advisors in February, 2000.
Prior to joining Baird Advisors, Mr. Elfe was a Senior Vice President and Senior
Portfolio Manager with FIRMCO, where he was Director of Fixed Income Research &
Trading. Mr. Elfe obtained his undergraduate degree and M.B.A. from the
University of Wisconsin-Milwaukee. He received the Chartered Financial
Analyst designation in 1982. Mr. Elfe is a member of AIMR and the Milwaukee
Investment Analysts Society.
CHARLES B. GROESCHELL
Mr. Groeschell is a Managing Director and Senior Portfolio Manager of the
Advisor. Mr. Groeschell has over 20 years of investment experience managing
various types of fixed income portfolios. Mr. Groeschell joined Baird Advisors
in February, 2000. Prior to joining Baird Advisors, Mr. Groeschell was a Senior
Vice President and Senior Portfolio Manager with FIRMCO, where he played a lead
role in the overall management of major fixed income client relationships.
Mr. Groeschell received his B.A. from Texas Christian University and his M.B.A.
from the University of Wisconsin-Milwaukee.
WARREN D. PIERSON
Mr. Pierson is a Senior Vice President and Senior Portfolio Manager of the
Advisor. Mr. Pierson has over 14 years of investment experience managing
taxable and tax-exempt fixed income portfolios. Mr. Pierson joined Baird
Advisors in February, 2000. Prior to joining Baird Advisors, Mr. Pierson was
employed by FIRMCO where he served as a Senior Vice President and Senior
Portfolio Manager from February, 1999 to February, 2000, Vice President and
Senior Portfolio Manager from June, 1997 to February, 1999, and Vice President
and Portfolio Manager from May, 1993 to June, 1997. Mr. Pierson managed
municipal bond portfolios and intermediate taxable bond portfolios while
at FIRMCO. Mr. Pierson received his undergraduate degree from Lawrence
University in Appleton, Wisconsin. He became a Chartered Financial Analyst
in 1990. Mr. Pierson is a member of AIMR and is President of the Milwaukee
Investment Analysts Society.
DANIEL A. TRANCHITA
Mr. Tranchita is a Senior Vice President and Senior Portfolio Manager of the
Advisor. Mr. Tranchita has 11 years of investment experience managing taxable
and tax-exempt fixed income portfolios. Mr. Tranchita joined Baird
Advisors in February, 2000. Prior to joining Baird Advisors, Mr. Tranchita was
employed by FIRMCO where he most recently served as a Senior Vice President and
Senior Portfolio Manager from February, 1999 to February, 2000, Vice President
and Senior Portfolio Manager from June, 1997 to February, 1999, and Vice
President and Portfolio Manager from June, 1993 to June, 1997. Mr. Tranchita
did quantitative fixed income analysis and portfolio management while at FIRMCO.
Mr. Tranchita received his undergraduate degree and an M.B.A. from Marquette
University. He became a Chartered Financial Analyst in 1993. Mr. Tranchita is
a member of AIMR and the Milwaukee Investment Analysts Society.
M. SHARON DEGUZMAN
Ms. deGuzman is a Vice President and Portfolio Manager of the Advisor.
Ms. deGuzman has nine years of investment experience managing taxable and
tax-exempt fixed income portfolios. Ms. deGuzman joined Baird Advisors in
February, 2000. Prior to joining Baird Advisors, Ms. deGuzman was employed by
FIRMCO where she served as a Portfolio Manager from November, 1998 to
February, 2000, an Assistant Vice President from November, 1996 to
November, 1998, a Fixed Income Analyst from November, 1995 to November, 1996,
and an Operations Assistant from October, 1994 to November, 1995. Ms. deGuzman
did quantitative fixed income analysis and portfolio management while at FIRMCO.
She received her undergraduate degree from Eastern Illinois University.
She is a member of AIMR and the Milwaukee Investment Analysts Society.
Ms. deGuzman is currently pursuing the Chartered Financial Analyst
designation.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Because the Funds are new, financial highlights are not available.
YOUR ACCOUNT
--------------------------------------------------------------------------------
DISTRIBUTION OF SHARES
DISTRIBUTOR
The Advisor, Robert W. Baird & Co. Incorporated, is also the distributor for
shares of the Funds, and a member of the National Association of Securities
Dealers, Inc.
RULE 12B-1 PLAN
The Funds have adopted a Rule 12b-1 Plan under the Investment Company Act of
1940. Under the Rule 12b-1 Plan, Investor Class Shares pay the Advisor a fee of
0.25% of the average daily net asset value of Investor Class Shares. The Advisor
uses this fee to finance activities that promote the sale of Investor Class
Shares. Such activities include, but are not necessarily limited to, shareholder
servicing, advertising, printing and mailing prospectuses to persons other than
current shareholders, printing and mailing sales literature, and compensating
underwriters, dealers and sales personnel. The 12b-1 Plan has the effect of
increasing the expenses of the Investor Class from what they would otherwise be.
DESCRIPTION OF CLASSES
The Funds offer two classes of shares: Investor Class and Institutional Class.
The classes differ with respect to their minimum investments. In addition,
Investor Class Shares impose a Rule 12b-1 fee which is assessed against the
assets of a Fund attributable to that class.
The Advisor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisors and broker/dealers as agents to
provide sales or administrative services for their clients or customers who
beneficially own Investor Class Shares. Financial institutions will receive fees
from the Advisor based upon shares owned by their clients or customers. The
Advisor will determine the schedule of such fees and the basis upon which such
fees will be paid.
SHARE PRICE
Shares of each class in a Fund are sold at their net asset value ("NAV").
-------------------------------------------------------------------------------
When making a purchase request, make sure your request is in good order. "Good
order" means your purchase request includes:
|X| The name of the Fund
|X| The dollar amount of shares to be purchased
|X| Purchase application or investment stub
|X| Check payable to Baird Funds, or if paying by wire, when Federal Funds
are received
--------------------------------------------------------------------------------
The NAV for each class of shares of a Fund is determined as of the close of
regular trading on the New York Stock Exchange (the "NYSE") (currently 3:00
p.m., Central time) Monday through Friday, except on days the NYSE is not open.
If the NYSE closes at any other time, or if an emergency exists, NAV may be
calculated at a different time. Your share price will be the next NAV calculated
after a Fund or its agents receives your request in good order. The NYSE is
closed most national holidays and Good Friday. Please refer to the Funds'
Statement of Additional Information for a complete list of the days that the
NYSE is closed.
The NAV for a class of shares is determined by adding the value of each Fund's
investments, cash and other assets attributable to a particular share class,
subtracting the liabilities attributable to that class and then dividing the
result by the total number of shares outstanding in the class.
Each Fund's investments are valued according to market value. When a market
quote is not readily available, the security's value is based on "fair value" as
determined by the Advisor under the supervision of the Company's Board of
Directors.
BUYING SHARES
MINIMUM INVESTMENTS
---------------------------- ----------------------------- ---------------------
INITIAL PURCHASE SUBSEQUENT PURCHASES
---------------------------- ----------------------------- ---------------------
Investor Class Shares $1,000 - IRAs $500
$2,500 - all other accounts $500
Institutional Class Shares $250,000 No minimum
---------------------------- ----------------------------- ---------------------
MINIMUM INVESTMENT WAIVERS - INSTITUTIONAL CLASS SHARES
The minimum initial investment amount for Institutional Class Shares is waived
for all employees, directors and officers of the Advisor or the Funds and
members of their families (including parents, grandparents, siblings, spouses,
children and in-laws of such employees, directors and officers).
TIMING OF REQUESTS
Your price per share will be the NAV next computed after your request is
received in good order by a Fund or its agents. All requests received in good
order before 3:00 p.m. (Central time) will be executed at the NAV computed on
that same day. Requests received after 3:00 p.m. will receive the next business
day's NAV.
RECEIPT OF ORDERS
Shares may only be purchased on days the NYSE is open for business. The Funds
may authorize one or more broker/dealers to accept on their behalf purchase and
redemption orders that are in good order. In addition, these broker/dealers may
designate other financial intermediaries to accept purchase and redemption
orders on a Fund's behalf.
<TABLE>
<CAPTION>
METHODS OF BUYING
------------------------------------- ----------------------------------- ----------------------------------------
<S> <C> <C>
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
By Telephone You may not use telephone If you have completed the "Telephone
transactions for your initial Purchase Option" section of the
purchase of a Fund's shares. If Account Application Form, call the
you have elected the "Telephone Fund (toll-free) at 1-866-44BAIRD to
Exchange Option" on a Baird Fund, place your order. You will then be
you may call that Fund able to move money from your bank
(toll-free) at 1-866-44BAIRD to account to your Fund account upon
request an exchange into another request. Only bank accounts held at
Baird Fund. See "Exchanging domestic institutions that are
Shares." Automated Clearing House (ACH) members
may be used for telephone
transactions. The minimum telephone
purchase is $500.
By Mail Make your check payable to "Baird Fill out the investment stub from an
Funds." Forward the check and account statement, or indicate the
your application to the address Fund name and account number on your
below. No third party checks check. Make your check payable to
will be accepted. If your check "Baird Funds." Forward the check and
is returned for any reason, a $25 stub to the address below.
fee will be assessed against your
account.
By Federal Funds Wire Forward your application to Baird Call the Funds (toll-free) at
Funds at the address below. Call 1-866-44BAIRD to notify of incoming
(toll-free) 1-866-44BAIRD to wire. Use the following instructions:
obtain an account number. Wire Firstar Bank, N.A.
funds using the instructions to Milwaukee, WI 53202
the right. ABA#: 042000013
Credit: Firstar Mutual Fund
Credit:Firstar Mutual Fund Services, LLC
Account #: 112-952-137
Further Credit:
(name of Fund, share class)
(name/title on the account)
(account#)
The Funds, Advisor and the Transfer
Agent are not responsible for
the consequences of delays
resulting from the banking
or Federal Reserve Wire
system, or from incomplete
wiring instructions.
Automatic Investment Plan Open a Fund account with one of If you did not set up an Automatic
the other methods. If by mail, Investment Plan with your original
be sure to include your checking application, call the Funds
account number on the appropriate (toll-free) at 1-866-44BAIRD.
section of your application and Additional investments (minimum of
enclose a voided check or deposit $500) will be taken automatically
slip with initial purchase monthly or quarterly from your
application. checking account.
Through Shareholder Service To purchase shares for another To purchase shares for another
Organizations investor, call the Funds investor, call the Funds (toll-free)
(toll-free) at 1-866-44BAIRD. at 1-866-44BAIRD.
By Exchange Call the Funds (toll-free) at Call the Funds (toll-free) at
1-866-44BAIRD to obtain exchange 1-866-44BAIRD to obtain exchange
information. See "Exchanging information. See "Exchanging Shares."
Shares."
------------------------------------- ----------------------------------- ----------------------------------------
</TABLE>
You should use the following addresses when sending documents by mail or by
overnight delivery:
BY MAIL BY OVERNIGHT DELIVERY
Baird Funds Baird Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
Note: The Funds do not consider the U.S. Postal Service or other independent
delivery services to be their agents.
SELLING SHARES
METHODS OF SELLING
---- ---------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
--------------------------------------------------------------------------------
By Telephone Call the Funds (toll-free) at 1-866-44BAIRD to place the
order. (Note: For security reasons, requests by telephone
will be recorded.)
By Mail Send a letter instructing the Funds to redeem the dollar
amount or number of shares you wish. The letter should
contain the Fund's name, the account number and the number
of shares or the dollar amount of shares to be redeemed. Be
sure to have all shareholders sign the letter. If your
account is an IRA, signatures must be guaranteed. For IRA
accounts, requests submitted without an election whether or
not to withhold will be subject to withholding.
By Federal Funds Call the Funds (toll-free) at 1-866-44BAIRD to request the
Wire amount of money you want. Be sure to have all necessary
information from your bank. Your bank may charge a fee to
receive wired funds.
Systematic The Funds offer shareholders a Systematic Withdrawal Plan.
Withdrawal Plan Call the Funds (toll-free) at 1-866-44BAIRD to arrange for
regular monthly or quarterly fixed withdrawal payments.
The minimum payment you may receive is $50 per period. Note
that this plan may deplete your investment and affect your
income or yield.
Shareholder Consult your account agreement for information on redeeming
Service shares.
Organization
By Exchange Call (toll-free) 1-866-44BAIRD to obtain exchange
information. See "Exchanging Shares" for further
information.
--------------------------------------------------------------------------------
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
|X| The name of the Fund
|X| The number of shares or the dollar amount of shares to be redeemed
|X| Signatures of all registered shareholders exactly as the shares are
registered
|X| The account number
--------------------------------------------------------------------------------
PAYMENT OF REDEMPTION PROCEEDS
You may request redemption of your shares at any time. Your shares will be
redeemed at the next NAV per share calculated after your order is received in
good order by a Fund or its agents. You may receive the proceeds in one of three
ways:
1) We can mail a check to your account's address. You will generally
receive the proceeds within seven days after the Fund or its agents
receives your request in good order. Checks will not be forwarded by the
Postal Service, so please notify us if your address has changed.
2) We can transmit the proceeds by Electronic Funds Transfer ("EFT") to a
properly pre-authorized bank account. The proceeds usually will arrive
at your bank two banking days after we process your redemption.
3) For a $12 fee, which will be deducted from your redemption proceeds, we
can transmit the proceeds by wire to a pre-authorized bank account. The
proceeds usually will arrive at your bank the first banking day after we
process your redemption.
Before selling recently purchased shares, please note that if the Transfer Agent
has not yet collected payment for the shares you are selling, it may delay
sending the proceeds until the payment is collected, which may take up to 10
calendar days from the purchase date. This procedure is intended to protect the
Fund and its shareholders from loss.
The Transfer Agent will send redemption proceeds by wire or EFT only to the bank
and account designated on the account application or in written instructions
(with signatures guaranteed) subsequently received by the Transfer Agent, and
only if the bank is a member of the Federal Reserve System. If the dollar or
share amount requested to be redeemed is greater than the current value of your
account, your entire account balance will be redeemed. If you choose to redeem
your account in full, any Automatic Investment Plan currently in effect for the
account will be terminated unless you indicate otherwise in writing and any
Systematic Withdrawal Plan will be terminated.
SIGNATURE GUARANTEES
A signature guarantee of each owner is required to redeem shares in the
following situations:
|X| If you change ownership on your account
|X| When you want the redemption proceeds sent to a different address than that
registered on the account
|X| If the proceeds are to be made payable to someone other than the account's
owner(s)
|X| Any redemption transmitted by federal wire transfer to a bank other than
your bank of record
|X| If a change of address request has been received by the Transfer Agent
within the last 15 days
|X| For all redemptions of $50,000 or more from any shareholder account
Signature guarantees are designed to protect both you and the Funds from fraud.
Signature guarantees can be obtained from most banks, credit unions or saving
associations, or from broker/dealers, national securities exchanges, registered
securities exchanges or clearing agencies deemed eligible by the SEC. Notaries
cannot provide signature guarantees.
CORPORATE, TRUST AND OTHER ACCOUNTS
Redemption requests from corporate, trust and institutional accounts, and
executors, administrators and guardians, require documents in addition to those
described above evidencing the authority of the officers, trustees or others. In
order to avoid delays in processing redemption requests for these accounts, you
should call the Funds at 1-866-44BAIRD before making the redemption request to
determine what additional documents are required.
TRANSFER OF OWNERSHIP
In order to change the account registrant or transfer ownership of an account,
additional documents will be required. To avoid delays in processing these
requests, you should call the Funds at 1-866-44BAIRD before making your request
to determine what additional documents are required.
EXCHANGING SHARES
You may exchange all or a portion of your investment from the same class of one
Baird Fund to another. You may also exchange between classes of the Fund or
other Baird Funds if you meet the minimum investment requirements for the class
you would like to exchange into. Any new account established through an exchange
will be subject to the minimum investment requirements described above.
Exchanges will be executed on the basis of the relative NAV of the shares
exchanged. The exchange privilege may be exercised only in those states where
the class of shares of the Fund being acquired legally may be sold.
In addition to your ability to exchange all or a portion of your investment
between any of the Baird Funds, you may also exchange Fund shares for shares of
the Firstar Institutional Money Market Fund by sending a written exchange
request to the Funds or, if you have established telephone exchange privileges,
call 1-866-44BAIRD. Shares of the Firstar Institutional Money Market Fund are
not offered by this prospectus. Please read that prospectus before making an
exchange into the Firstar Institutional Money Market Fund. This exchange
privilege is offered as a convenience to the Funds' shareholders. Please note
that when exchanging from a Fund to the Firstar Institutional Money Market Fund,
you will begin accruing income from the Firstar Institutional Money Market Fund
the day following the exchange. When exchanging less than all of the balance
from the Firstar Institutional Money Market Fund to your Fund, your exchange
proceeds will exclude accrued and unpaid income from the Firstar Institutional
Money Market Fund through the date of exchange. When exchanging your entire
balance from the Firstar Institutional Money Market Fund, accrued income will
automatically be exchanged into the Fund when the income is collected and paid
from the Firstar Institutional Money Market Fund at the end of the month.
An exchange is considered to be a sale of shares for federal income tax purposes
on which you may realize a taxable gain or loss.
Call 1-866-44BAIRD to learn more about exchanges and other Baird Funds.
MORE INFORMATION ABOUT THE EXCHANGE PRIVILEGE
The Funds are intended as long-term investment vehicles and not to provide a
means of speculating on short-term market movements. In addition, excessive
trading can hurt a Fund's performance and shareholders. Therefore, each Fund may
terminate, without notice, the exchange privilege of any investor who uses the
exchange privilege excessively (more than six times each year). The Funds may
change or temporarily suspend the exchange privilege during unusual market
conditions.
GENERAL TRANSACTION POLICIES
The Funds reserve the right to:
|X| Vary or waive any minimum investment requirement.
|X| Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone redemption privileges, for any
reason.
|X| Reject any purchase or exchange request for any reason. Generally, a Fund
does this if the purchase or exchange is disruptive to the efficient
management of a Fund (due to the timing of the investment or an investor's
history of excessive trading).
|X| Redeem all shares in your account if your balance falls below the Fund's
minimum for the applicable class of shares. If, within 60 days of a Fund's
written request, you have not increased your account balance, you may be
required to redeem your shares. The Funds will not require you to redeem
shares if the value of your account drops below the investment minimum due
to fluctuations of NAV.
|X| Delay paying redemption proceeds for up to seven days after receiving a
request, if an earlier payment could adversely affect a Fund.
|X| Modify or terminate the Automatic Investment and Systematic Withdrawal Plans
at any time.
|X| Modify or terminate the exchange privilege after 60 days written notice to
shareholders.
|X| Make a "redemption in kind" (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (i)
$250,000 or (ii) 1% of the Fund's assets. In such cases, you may incur
brokerage costs in converting these securities to cash.
|X| Reject any purchase or redemption request that does not contain all required
documentation.
If you elect telephone privileges on the account application or in a letter to
the Funds, you may be responsible for any fraudulent telephone orders as long as
the Funds have taken reasonable precautions to verify your identity. In
addition, once you place a telephone transaction request, it cannot be canceled
or modified.
During periods of significant economic or market change, telephone transactions
may be difficult to complete. If you are unable to contact the Funds by
telephone, you may also mail the requests to the Funds at the address listed
under Buying Shares.
Your broker/dealer or other financial organization may establish policies that
differ from those of the Funds. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on buying or selling shares in addition to those identified in this prospectus.
Contact your broker/dealer or other financial organization for details.
DISTRIBUTIONS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Each Fund pays its shareholders dividends from the Fund's net investment income
and distributes any net capital gains the Fund has realized.
Dividends are declared and paid monthly. Capital gains, if any, are distributed
once a year. It is expected that each Fund's annual distributions will be
primarily income dividends.
Dividends on each share class of the Funds are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. So, because Investor Class Shares have
distribution fees, the dividends paid to Investor Class shareholders will be
lower than those paid to Institutional Class shareholders.
All of your dividends and capital gains distributions with respect to a
particular Fund will be reinvested in additional shares of the same class unless
you instruct otherwise on your account application or have redeemed all shares
you held in the Fund. In such cases, dividends and distributions will be paid in
cash.
TAXATION
Fund dividends and distributions are taxable to most investors (unless your
investment is in an IRA or other tax-advantaged account regardless of whether
they are received in cash or reinvested in Fund shares). Dividends paid by a
Fund out of net ordinary income and distributions of net short-term capital
gains are taxable to the Fund's shareholders as ordinary income. Dividends from
net ordinary income may be eligible for the corporate dividends-received
deduction.
Distributions by a Fund of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) to shareholders are generally
taxable to the shareholders at the applicable long-term capital gains rate,
regardless of how long the shareholder has held shares of the Fund.
Shareholders that sell, exchange or redeem shares generally will have a capital
gain or loss from the sale, redemption or exchange. The amount of the gain or
loss and the rate of tax will depend mainly upon the amount paid for the shares,
the amount received from the sale, exchange or redemption, and how long the
shares were held by the shareholder.
A dividend or capital gains distribution declared by a Fund in October, November
or December, but paid during January of the following year will be considered to
be paid on December 31 of the year it was declared.
If the value of shares is reduced below a shareholder's cost as a result of a
distribution by a Fund, the distribution will be taxable even though it, in
effect, represents a return of invested capital. Investors considering buying
shares just prior to a dividend or capital gain distribution payment date should
be aware that, although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those who purchase just prior to the
record date for a distribution may receive a distribution which will be taxable
to them.
Shareholders will be advised annually as to the federal tax status of dividends
and capital gain distributions made by each Fund for the preceding year.
Distributions by the Funds generally will be subject to state and local taxes.
Please note that dividends and distributions are taxable even if reinvested.
Additional tax information may be found in the Statement of Additional
Information. Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences of an investment in
the Funds.
FOR MORE INFORMATION
--------------------------------------------------------------------------------
You can find more information about the Funds in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains details about the investments and techniques of the Funds and
certain other additional information. A current SAI is on file with the SEC and
is incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
within this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
After the Funds have been operating for the appropriate time, annual and
semi-annual reports will be made available. The Funds' annual and semi-annual
reports provide the most recent financial reports and portfolio listings. The
annual report contains a discussion of the market conditions and investment
climate that affected the Funds' performance during the Funds' last fiscal year.
You can obtain a free copy of these documents, request other information, or
make general inquires about the Funds by calling the Funds at 1-866-44BAIRD or
by writing to:
Baird Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
You may write to the SEC Public Reference Room at the regular mailing address or
the e-mail address below and ask them to mail you information about the Funds,
including the SAI. They will charge you a fee for this duplicating service. You
can also visit the SEC Public Reference Room and review and copy documents while
you are there. For more information about the operation of the Public Reference
Room, call the SEC at the telephone number below.
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
[email protected]
1-202-942-8090
Reports and other information about the Funds are also available on the EDGAR
Database on the SEC's Internet site at HTTP://WWW.SEC.GOV.
1940 Act File No. 811-09997
BAIRD FUNDS, INC.
Prospectus
September 26, 2000
Bond Funds
Baird Short-Term Bond Fund
Baird Intermediate Municipal Bond Fund
The Securities and Exchange Commission has not approved or disapproved of these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................3
OVERVIEW....................................................................3
SHORT-TERM BOND FUND........................................................3
INTERMEDIATE MUNICIPAL BOND FUND............................................7
MANAGEMENT OF THE FUNDS.......................................................12
THE ADVISOR................................................................12
THE INVESTMENT MANAGEMENT TEAM.............................................12
FINANCIAL HIGHLIGHTS..........................................................13
YOUR ACCOUNT..................................................................14
DISTRIBUTION OF SHARES.....................................................14
DESCRIPTION OF CLASSES.....................................................14
SHARE PRICE................................................................14
BUYING SHARES..............................................................15
SELLING SHARES.............................................................17
EXCHANGING SHARES..........................................................18
GENERAL TRANSACTION POLICIES...............................................19
DISTRIBUTIONS AND TAXES.......................................................20
DIVIDENDS AND DISTRIBUTIONS................................................20
TAXATION...................................................................21
FOR MORE INFORMATION..................................................BACK COVER
RISK/RETURN SUMMARY
--------------------------------------------------------------------------------
OVERVIEW
This prospectus describes the Baird Short-Term Bond Fund and the Baird
Intermediate Municipal Bond Fund (each a "Fund" and collectively the "Funds"),
two investment portfolios offered by Baird Funds, Inc. (the "Company"). On the
following pages, you will find important information about each Fund, including:
|X| A description of each Fund's investment objective (sometimes referred to as
its goal)
|X| Each Fund's principal investment strategies (the steps it takes to try to
meet its goal)
|X| The principal risks associated with each Fund (factors that may prevent it
from meeting its goal)
|X| The fees and expenses you pay as an investor in a Fund
WHO MAY WANT TO INVEST IN THE FUNDS
These Funds may be appropriate for investors who:
|X| Wish to invest for the long-term
|X| Want to earn income on investments considered more stable than stocks
|X| Are looking for a fixed-income component to complete their portfolio
|X| Have long-term goals such as planning for retirement
In addition, the Intermediate Municipal Bond Fund may be appropriate for
investors who are looking for income that is exempt from federal income tax.
These Funds are not appropriate for investors that have short-term financial
goals, and the Intermediate Municipal Bond Fund is not an appropriate investment
for tax-deferred retirement accounts, such as IRAs, because its returns before
taxes are generally lower than those of taxable funds.
Before investing in a Fund, you should carefully consider:
|X| Your own investment goals
|X| The amount of time you are willing to leave your money invested
|X| How much risk you are willing to take
SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE
The investment objective of the Short-Term Bond Fund is to provide an annual
rate of total return, before fund expenses, greater than the annual rate of
total return of the Lehman Brothers 1-3 Year Government/Credit Bond Index. The
Lehman Brothers 1-3 Year Government/Credit Bond Index is a market value weighted
performance benchmark for government and corporate fixed-rate debt issues with
maturities between one and three years.
--------------------------------------------------------------------------------
DURATION: a measure of a fixed income security's average life that reflects the
present value of the security's cash flow, and accordingly is a measure of price
sensitivity to interest rate changes. For example, if interest rates decline by
1%, the market value of a portfolio with a duration of five years would rise by
approximately 5%. Conversely, if interest rates increase by 1%, the market value
of the portfolio would decline by approximately 5%.
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENT STRATEGIES
To achieve the Fund's objective, Robert W. Baird & Co. Incorporated (the
"Advisor") attempts to keep the duration of the Fund's portfolio substantially
equal to that of its benchmark. The Advisor seeks to control credit quality risk
by purchasing only investment grade, U.S. dollar denominated securities. The
Advisor attempts to diversify the Fund's portfolio by holding securities of many
different issuers and choosing issuers in a variety of sectors.
The effective dollar-weighted average portfolio maturity of the Fund will be
more than one year but less than three years during normal market conditions.
The stated maturity of a bond is the date when the issuer must repay the bond's
entire principal value to an investor. Some types of bonds may also have an
"effective maturity" that is shorter than the stated date due to prepayment or
call provisions. Securities without prepayment or call provisions generally have
an effective maturity equal to their stated maturity. Dollar-weighted effective
maturity is calculated by averaging the effective maturity of bonds held by the
Fund with each effective maturity "weighted" according to the percentage of net
assets that it represents.
--------------------------------------------------------------------------------
INVESTMENT GRADE SECURITIES ARE:
Securities rated in the highest 4 categories by S&P, Moody's, Fitch Inc. or
another nationally recognized statistical rating organization.
--------------------------------------------------------------------------------
The Advisor attempts to achieve returns that exceed the Fund's benchmark
primarily in three ways:
YIELD CURVE POSITIONING: The yield curve is a graphic representation of
the actual or projected yields of fixed-income securities in relation
to their maturities and durations. The Advisor attempts to match the
average duration of the securities in the Fund with the average
duration of the securities in the Fund's benchmark. The securities in
the Fund, though, will not be identical to the securities in the
benchmark. The Advisor selects securities for the Fund with maturities
and yields that it believes have the greatest potential for achieving
the Fund's objective. Because the yield curve is constantly changing,
the Advisor regularly adjusts the Fund's portfolio to purchase
securities that it believes will best assist the Fund in achieving its
objectives.
SECTOR ALLOCATION: The Advisor next evaluates the return potential of
each sector (including asset-backed securities, mortgage-backed
securities, government and governmental agency bonds, and corporate
bonds). The Advisor invests in securities in those sectors which it
believes represent the greatest potential for achieving the Fund's
objectives. The Advisor regularly adjusts the portfolio in order to
address changes in yields and underlying risks in various sectors.
SECURITY SELECTION: The Advisor then focuses on selecting individual
securities. The Advisor determines which issuers it believes offer the
best relative value within each sector and then decides which available
securities of that issuer to purchase.
DEBT SECURITIES
The Advisor will attempt to keep the Fund fully invested. The Fund's policy is
to invest at least 65% of total assets in the following types of debt
securities:
|X| U.S. government |X| U.S. government agencies
|X| Stripped U.S. government |X| Corporate
|X| Collateralized mortgage obligations |X| Medium-term notes
|X| Asset-backed and mortgage-backed obligations |X| Eurobonds
Debt obligations acquired by the Fund will be "investment grade," as rated by at
least one rating agency. The Advisor may purchase unrated obligations that are
determined by the Advisor to be comparable in quality to the rated obligations.
Average quality for the Fund is expected to be at least the second highest
rating category of S&P or Moody's. After purchase, a security may cease to be
rated or may have its rating reduced below the minimum rating required by the
Fund for purchase. In such cases, the Advisor will consider whether to continue
to hold the security. If over 5% of the Fund's net assets consist of obligations
that have fallen below the minimum rating, the Advisor will immediately sell
some of those securities to reduce the aggregate value of such securities to
less than 5% of the Fund's net assets.
ILLIQUID INVESTMENTS
The Fund may invest up to 15% of its net assets in illiquid investments. In
general, illiquid securities are securities that cannot be sold or disposed of
within seven days at their approximate market value. For example, some
securities are not registered under the U.S. securities laws and cannot be sold
to the U.S. public because of Securities and Exchange Commission ("SEC")
regulations (these are known as "restricted securities").
FOREIGN SECURITIES
The Fund may invest up to 20% of its net assets in U.S. dollar-denominated debt
obligations of foreign corporations and governments.
The Advisor generally will sell a security when it, on a relative basis and in
the Advisor's opinion, will no longer help the Fund to attain its objectives.
The Fund typically holds less than 200 securities.
CASH OR SIMILAR INVESTMENTS
When the Advisor believes that market conditions are unfavorable for profitable
investing, or when the Advisor is otherwise unable to locate attractive
investment opportunities, the Fund's cash or similar investments may increase.
In other words, the Fund may not always stay fully invested in bonds. Cash or
similar investments generally are a residual - they represent the assets that
remain after the Advisor has committed available assets to desirable investment
opportunities. The Fund may invest up to 35% of its total assets in cash or
similar investments.
TEMPORARY INVESTMENTS
The Advisor may from time to time invest any amount in cash or similar
short-term, investment grade securities as a temporary defensive position during
adverse market, economic, political or other conditions to protect the Fund's
assets or maintain liquidity. When the Fund's investments in cash or similar
investments increase, the Fund may not achieve its investment objective.
PRINCIPAL RISKS
The main risks of investing in the Fund are:
MANAGEMENT RISKS
The Advisor may err in its choices of securities or portfolio mixes. Such errors
could result in a negative return and a loss to you. In the event the
performance of the Fund is not greater than the performance of the Lehman
Brothers 1-3 Year Government/Credit Bond Index, the Fund's Board of Directors
will examine the reasons for the deviation and the availability of corrective
measures.
Because of the smaller number of issues held by the Fund than the Lehman
Brothers 1-3 Year Government/Credit Bond Index, material events affecting the
Fund's portfolio (for example, an issuer's decline in credit quality) may
influence the performance of the Fund to a greater degree than such events will
influence the Lehman Brothers 1-3 Year Government/Credit Bond Index and may
prevent the Fund from attaining its investment objective for particular periods.
BOND MARKET RISKS
The major risks of the Fund are those of investing in the bond market. A bond's
market value is affected significantly by changes in interest rates - generally,
when interest rates rise, the bond's market value declines and when interest
rates decline, its market value rises (interest rate risk). Generally, the
longer a bond's maturity, the greater the risk and the higher its yield.
Conversely, the shorter a bond's maturity, the lower the risk and the lower its
yield (maturity risk). A bond's value can also be affected by changes in the
bond's credit quality rating or its issuer's financial condition (credit quality
risk). Because bond values fluctuate, the Fund's share price fluctuates. So, if
the value of the Fund's investments goes down, you may lose money.
CREDIT RISKS
Individual issues of fixed-income securities may be subject to the credit risk
of the issuer. This means that the underlying company may experience
unanticipated financial problems causing it to be unable to meet its payment
obligations. Bonds receiving the lowest investment grade rating may have
speculative characteristics and, compared to higher grade securities, may have a
weakened capacity to make principal and interest payments due to changes in
economic conditions or other circumstances.
LIQUIDITY RISKS
Liquidity risk is the risk that certain securities may be difficult or
impossible to sell at the time and price that the Advisor would like to sell.
The Advisor may have to lower the price, sell other securities instead or forego
an investment opportunity, any of which could have a negative effect on Fund
management or performance.
MORTGAGE-AND ASSET-BACKED SECURITIES RISKS
Mortgage-backed and asset-backed securities are subject to prepayment risk,
which is the risk that the borrower will prepay some or all of the principal
owed to the issuer. If that happens, the Fund may have to replace the security
by investing the proceeds in a less attractive security. This could reduce the
Fund's share price and its income distributions.
FOREIGN SECURITIES RISKS
Foreign investments involve additional risks including political and economic
instability, differences in financial reporting standards, and less-strict
regulation of securities markets.
GOVERNMENT OBLIGATIONS RISKS
In addition to U.S. Treasury obligations, the Fund may invest in other
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. No assurance can be given that the U.S. government will
provide financial support to U.S. government-sponsored agencies or
instrumentalities where it is not obligated to do so by law.
The Fund cannot guarantee that it will achieve its investment objective. You
should be aware that you may lose money by investing in the Fund.
PERFORMANCE INFORMATION
Because the Fund is new, no performance information for the Fund is included in
this prospectus.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
The shares of the Fund are 100% no load, so you pay no sales charges (loads) to
buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
This table describes the fees and expenses that you may pay if you buy and hold
Investor Class Shares or Institutional Class Shares of the Short-Term Bond Fund.
INVESTOR INSTITUTIONAL
CLASS SHARES CLASS SHARES
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENT OF AVERAGE NET ASSETS)
Management Fees 0.25% 0.25%
Distribution and Service (12b-1)1 Fees 0.25% None
Other Expenses2 0.05% 0.05%
-------------- --------------
Total Annual Fund Operating Expenses 0.55% 0.30%
1 Because the Fund pays 12b-1 distribution fees for its Investor Class Shares
which are based upon the Fund's assets attributable to the Investor Class,
if you own Investor Class Shares of the Fund for a long period of time,
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
2 "Other Expenses" are based on estimated amounts for the current fiscal year
and include custodian, administration, transfer agency and other customary
Fund expenses. Fees payable under an Administration Agreement between the
Fund and the Advisor are fixed at 0.05% of the Fund's average daily net
assets. Under the Administration Agreement, the Advisor assumes and pays
all expenses of the Fund, excluding all brokerage fees and commissions,
taxes, borrowing costs (such as interest and dividend expenses on
securities sold short) and extraordinary or non-recurring expenses.
EXAMPLE
The following 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:
|X| You invest $10,000 in the Fund for the time periods indicated;
|X| You redeem all of your shares at the end of those periods;
|X| Your investment has a 5% return each year;
|X| Your dividends and distributions have been reinvested; and
|X| The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
--------------------------------------------------- ------------ -------------
1 Year 3 Years
--------------------------------------------------- ------------ -------------
Short-Term Bond Fund - Investor Class Shares $56 $176
--------------------------------------------------- ----------- --------------
Short-Term Bond Fund - Institutional Class Shares $31 $97
--------------------------------------------------- ---------- ---------------
INTERMEDIATE MUNICIPAL BOND FUND
INVESTMENT OBJECTIVE
The primary investment objective of the Intermediate Municipal Bond Fund is to
provide current income that is substantially exempt from federal income tax. A
secondary objective is to provide total return with relatively low volatility of
principal. The Intermediate Municipal Bond Fund strives to achieve an annual
rate of return, before Fund expenses, greater than the annual rate of total
return of the Lehman Brothers 10-Year General Obligation Bond Index. The Lehman
Brothers 10-Year General Obligation Bond Index is a widely recognized unmanaged
index of bond prices compiled by Lehman Brothers. This index is comprised of
investment grade state and local general obligation bonds that have been issued
as part of an offering of at least $50 million; have a minimum amount
outstanding of at least $5 million; have been issued within the last five years;
and have a maturity of eight to twelve years.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests principally in investment-grade, intermediate-term municipal
obligations issued by state and local governments exempt from federal income
tax. During normal market conditions, the Fund will invest at least 80% of its
net assets in securities, the interest on which is exempt from regular federal
income and alternative minimum taxes and will invest at least 65% of its total
assets in bonds and debentures.
The effective dollar-weighted average portfolio maturity of the Fund will be
more than five years but less than fifteen during normal market conditions.
There is no limit on the maturity of any individual security in the Fund, and
the Fund may invest in short-term municipal obligations and tax-exempt
commercial paper.
The stated maturity of a bond is the date when the issuer must repay the bond's
entire principal value to an investor. Some types of bonds may also have an
"effective maturity" that is shorter than the stated date due to prepayment or
call provisions. Securities without prepayment or call provisions generally have
an effective maturity equal to their stated maturity. Dollar-weighted effective
maturity is calculated by averaging the effective maturity of bonds held by the
Fund with each effective maturity "weighted" according to the percentage of the
net assets that it represents.
--------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS: are dollar-denominated debt obligations issued by or on
behalf of states, territories and possessions of the United States, the District
of Columbia and their authorities, agencies, instrumentalities and political
subdivisions.
--------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS
In pursuing its investment objective, the Fund invests in a diversified
portfolio of municipal obligations. Municipal obligations purchased by the Fund
will be:
|X| Investment grade at the time of purchase (i.e., BBB or higher by S&P or
Fitch Inc., or Baa or higher by Moody's, or in the highest four categories
by another nationally recognized rating agency)
|X| Unrated at the time of purchase but determined to be of comparable quality
by the Advisor
|X| Municipal notes and other short-term obligations rated SP-1 by S&P or MIG-1
by Moody's
|X| Tax-exempt commercial paper rated A-1 or higher by S&P or VMIG-1 by Moody's
After purchase, a security may cease to be rated or may have its rating reduced
below the minimum rating required by the Fund for purchase. In such cases, the
Advisor will consider whether to continue to hold the security. If over 5% of
the Fund's net assets consist of obligations that have fallen below the minimum
rating, the Advisor will immediately sell some of those securities to reduce the
aggregate value of such securities to less than 5% of the Fund's net assets.
--------------------------------------------------------------------------------
INVESTMENT GRADE SECURITIES ARE: Securities rated in the highest 4 categories by
S&P, Moody's, Fitch Inc. or another nationally recognized statistical rating
organization.
--------------------------------------------------------------------------------
To achieve the Fund's objective, the Advisor attempts to keep the duration of
the Fund's portfolio substantially equal to that of its benchmark. The Advisor
seeks to control credit quality risk by purchasing only investment grade, U.S.
dollar denominated securities. The Advisor attempts to diversify the Fund's
portfolio by holding securities of many different issuers and choosing issuers
in a variety of sectors.
The Advisor attempts to achieve returns that exceed the Fund's benchmark
primarily in three ways:
YIELD CURVE POSITIONING: The yield curve is a graphic representation of
the actual or projected yields of fixed-income securities in relation
to their maturities and durations. The Advisor attempts to match the
average duration of the securities in the Fund with the average
duration of the securities in the Fund's benchmark. The securities in
the Fund, though, will not be identical to the securities in the
benchmark. The Advisor selects securities for the Fund with maturities
and yields that it believes have the greatest potential for achieving
the Fund's objective. Because the yield curve is constantly changing,
the Advisor regularly adjusts the Fund's portfolio to purchase
securities that it believes will best assist the Fund in achieving its
objectives.
SECTOR ALLOCATION: The Advisor next evaluates the return potential of
each sector (including general obligation bonds, revenue bonds,
pre-refunded bonds, and insured bonds). The Advisor invests in
securities in those sectors which it believes represent the greatest
potential for achieving the Fund's objectives. The Advisor regularly
adjusts the portfolio in order to address changes in yields and
underlying risks in various sectors.
SECURITY SELECTION: The Advisor then focuses on selecting individual
securities. The Advisor determines which issuers it believes offer the
best relative value within each sector and then decides which available
securities of that issuer to purchase.
The Advisor generally will sell a security when it, on a relative basis and in
the Advisor's opinion, will no longer help the Fund attain its objectives.
CASH OR SIMILAR INVESTMENTS
When the Advisor believes that market conditions are unfavorable for profitable
investing, or when the Advisor is otherwise unable to locate attractive
investment opportunities, the Fund's cash or similar investments may increase.
In other words, the Fund does not always stay fully invested in bonds. Cash or
similar investments generally are a residual - they represent the assets that
remain after the Advisor has committed available assets to desirable investment
opportunities. Under normal market conditions, the Fund intends to invest no
more than 20% of its total assets in cash or similar investments.
TEMPORARY INVESTMENTS
The Advisor may from time to time invest any amount in cash or similar
short-term, investment grade securities as a temporary defensive position during
adverse market, economic, political or other conditions to protect the Fund's
assets or maintain liquidity. Taxable obligations purchased by the Fund normally
will not exceed 20% of the Fund's total assets at the time of purchase. When the
Fund's investments in cash or similar investments increase, the Fund may not
achieve its investment objective.
PRINCIPAL RISKS
The main risks of investing in the Fund are:
MANAGEMENT RISKS
The Advisor may err in its choices of securities or portfolio mixes. Such errors
could result in a negative return and a loss to you. In the event the
performance of the Fund is not greater than the performance of the Lehman
Brothers 10-Year General Obligation Bond Index, the Fund's Board of Directors
will examine the reasons for the deviation and the availability of corrective
measures.
Because of the smaller number of issues held by the Fund than the Lehman
Brothers 10-Year General Obligation Bond Index, material events affecting the
Fund's portfolio (for example, an issuer's decline in credit quality) may
influence the performance of the Fund to a greater degree than such events will
influence the Lehman Brothers 10-Year General Obligation Bond Index and may
prevent the Fund from attaining its investment objective for particular periods.
BOND MARKET RISKS
The major risks of the Fund are those of investing in the bond market. A bond's
market value is affected significantly by changes in interest rates - generally,
when interest rates rise, the bond's market value declines and when interest
rates decline, its market value rises (interest-rate risk). Generally, the
longer a bond's maturity, the greater the risk and the higher its yield.
Conversely, the shorter a bond's maturity, the lower the risk and the lower its
yield (maturity risk). A bond's value can also be affected by changes in the
bond's credit quality rating or its issuer's financial condition (credit-quality
risk). Because bond values fluctuate, the Fund's share price fluctuates. So, if
the value of the Fund's investments goes down, you may lose money.
CREDIT RISKS
Individual issues of fixed-income securities may be subject to the credit risk
of the issuer. This means that the underlying company may experience
unanticipated financial problems causing it to be unable to meet its payment
obligations. Bonds receiving the lowest investment grade rating may have
speculative characteristics and, compared to higher grade securities, may have a
weakened capacity to make principal and interest payments due to changes in
economic conditions or other circumstances.
TAX RISKS
Municipal securities are less attractive and may decrease in value during times
when tax rates are low. Since interest income on municipal obligations is
normally not subject to regular federal income taxation, the attractiveness of
municipal obligations in relation to other investment alternatives is affected
by changes in federal income tax rates applicable to, or the continuing federal
tax-exempt status of, such interest income. Any proposed or actual changes in
such rates or exempt status, therefore, can significantly affect the demand for
and supply, liquidity and marketability of municipal obligations, which would in
turn affect the Fund's ability to acquire and dispose of municipal obligations
at desirable yield and price levels.
Investment in tax-exempt securities poses additional risks. In many cases, the
Internal Revenue Service has not ruled on whether the interest received on a
tax-exempt obligation is tax-exempt, and accordingly, purchases of these
securities are based on the opinion of bond counsel to the issuers at the time
of issuance. The Fund and the Advisor rely on these opinions and will not review
the basis for them.
MUNICIPAL OBLIGATIONS RISKS
The Fund may invest more than 25% of its total assets in municipal obligations
issued by persons located in the same state and the interest on which is paid
solely from revenues of similar projects. As a result, changes in economic,
business or political conditions relating to a particular state or types of
projects may have a disproportionate impact on the Fund's share price.
It is anticipated that the Fund will invest in municipal securities issued by
governmental authorities throughout the United States and its territories. The
Fund intends to purchase various types of municipal bonds. These include general
obligation and pre-refunded bonds issued for any purpose, and revenue bonds
funding education, housing and transportation and essential services including,
without limitation, water, sewer and electricity.
Municipal obligations which the Fund may acquire include municipal lease
obligations, which are issued by a state or local government or authority to
acquire land and a wide variety of equipment and facilities. If the funds are
not appropriated for the following year's lease payments, the lease may
terminate, with the possibility of default on the lease obligation and
significant loss to the Fund.
The Fund cannot guarantee that it will achieve its investment objective. You
should be aware that you may lose money by investing in the Fund.
PERFORMANCE INFORMATION
Because the Fund is new, no performance information for the Fund is included in
this prospectus.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
The shares of the Fund are 100% no load, so you pay no sales charges (loads) to
buy or sell shares.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
This table describes the fees and expenses that you may pay if you buy and hold
Investor Class Shares or Institutional Class Shares of the Intermediate
Municipal Bond Fund.
INVESTOR INSTITUTIONAL
CLASS SHARES CLASS SHARES
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENT OF AVERAGE NET ASSETS)
Management Fees 0.25% 0.25%
Distribution and Service (12b-1)1 Fees 0.25% None
Other Expenses2 0.05% 0.05%
-------------- ---------------
Total Annual Fund Operating Expenses 0.55% 0.30%
(1) Because the Fund pays 12b-1 distribution fees for its Investor Class Shares
which are based upon the Fund's assets attributable to the Investor Class,
if you own Investor Class Shares of the Fund for a long period of time,
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
(2) "Other Expenses" are based on estimated amounts for the current fiscal year
and include custodian, administration, transfer agency and other customary
Fund expenses. Fees payable under an Administration Agreement between the
Fund and the Advisor are fixed at 0.05% of the Fund's average daily net
assets. Under the Administration Agreement, the Advisor assumes and pays
all expenses of the Fund, excluding all brokerage fees and commissions,
taxes, borrowing costs (such as interest and dividend expenses on
securities sold short) and extraordinary or non-recurring expenses.
EXAMPLE
The following 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:
|X| You invest $10,000 in the Fund for the time periods indicated;
|X| You redeem all of your shares at the end of those periods;
|X| Your investment has a 5% return each year;
|X| Your dividends and distributions have been reinvested; and
|X| The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
---------------------------------------------------------------- ------------ -------------
1 Year 3 Years
---------------------------------------------------------------- ------------ -------------
<S> <C> <C>
Intermediate Municipal Bond Fund - Investor Class Shares $56 $176
---------------------------------------------------------------- ------------ -------------
Intermediate Municipal Bond Fund - Institutional Class Shares $31 $97
----------------------------------------------------------------- ----------- -------------
</TABLE>
MANAGEMENT OF THE FUNDS
--------------------------------------------------------------------------------
THE ADVISOR
Robert W. Baird & Co. Incorporated, subject to the general supervision of the
Company's Board of Directors, is responsible for the day-to-day management of
the Funds in accordance with each Fund's respective investment objective and
policies. This includes making investment decisions, and buying and selling
securities.
The Advisor was founded in 1919, and is an indirect majority-owned subsidiary of
the Northwestern Mutual Life Insurance Company. The Advisor has its main office
at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Advisor provides
investment management services for individuals and institutional clients
including pension and profit sharing plans. As of June 30, 2000 the Advisor had
over $8 billion in assets under management.
THE INVESTMENT MANAGEMENT TEAM
The individuals listed below are members of the investment management team at
the Advisor (the "Investment Management Team") that manage the Funds'
investments. No member of the Investment Management Team is solely responsible
for making recommendations for portfolio purchases and sales.
MARY ELLEN STANEK
Ms. Stanek is a Managing Director of the Advisor and Chief Investment Officer of
Baird Advisors, a department of the Advisor. Ms. Stanek has over 21 years of
investment experience managing various types of fixed income portfolios.
Ms. Stanek joined Baird Advisors in March, 2000. Prior to joining Baird
Advisors, Ms. Stanek was employed by Firstar Investment Research & Management
Company, LLC ("FIRMCO") where she most recently served as President and CEO from
November, 1998 to March, 2000, and Chief Operating Officer and President from
March, 1994 to November, 1998. Ms. Stanek obtained her undergraduate degree
from Marquette University and M.B.A. from the University of Wisconsin-Milwaukee
She received the Chartered Financial Analyst designation in 1983. Ms. Stanek
is a member of the Association for Investment Management and Research ("AIMR")
and the Milwaukee Investment Analysts Society.
GARY A. ELFE
Mr. Elfe is a Managing Director and Senior Portfolio Manager of the Advisor.
Mr. Elfe has over 21 years of investment experience managing various types of
fixed income portfolios. Mr. Elfe joined Baird Advisors in February, 2000.
Prior to joining Baird Advisors, Mr. Elfe was a Senior Vice President and Senior
Portfolio Manager with FIRMCO, where he was Director of Fixed Income Research &
Trading. Mr. Elfe obtained his undergraduate degree and M.B.A. from the
University of Wisconsin-Milwaukee. He received the Chartered Financial Analyst
designation in 1982. Mr. Elfe is a member of AIMR and the Milwaukee Investment
Analysts Society.
CHARLES B. GROESCHELL
Mr. Groeschell is a Managing Director and Senior Portfolio Manager of the
Advisor. Mr. Groeschell has over 20 years of investment experience managing
various types of fixed income portfolios. Mr. Groeschell joined Baird Advisors
in February, 2000. Prior to joining Baird Advisors, Mr. Groeschell was a Senior
Vice President and Senior Portfolio Manager with FIRMCO, where he played a lead
role in the overall management of major fixed income client relationships.
Mr. Groeschell received his B.A. from Texas Christian University and his M.B.A.
from the University of Wisconsin-Milwaukee.
WARREN D. PIERSON
Mr. Pierson is a Senior Vice President and Senior Portfolio Manager of the
Advisor. Mr. Pierson has over 14 years of investment experience managing
taxable and tax-exempt fixed income portfolios. Mr. Pierson joined Baird
Advisors in February, 2000. Prior to joining Baird Advisors, Mr. Pierson was
employed by FIRMCO where he served as a Senior Vice President and Senior
Portfolio Manager from February, 1999 to February, 2000, Vice President and
Senior Portfolio Manager from June, 1997 to February, 1999, and Vice President
and Portfolio Manager from May, 1993 to June, 1997. Mr. Pierson managed
municipal bond portfolios and intermediate taxable bond portfolios while
at FIRMCO. Mr. Pierson received his undergraduate degree from Lawrence
University in Appleton, Wisconsin. He became a Chartered Financial Analyst in
1990. Mr. Pierson is a member of AIMR and is President of the Milwaukee
Investment Analysts Society.
DANIEL A. TRANCHITA
Mr. Tranchita is a Senior Vice President and Senior Portfolio Manager of the
Advisor. Mr. Tranchita has 11 years of investment experience managing taxable
and tax-exempt fixed income portfolios. Mr. Tranchita joined Baird Advisors
in February, 2000. Prior to joining Baird Advisors, Mr. Tranchita was employed
by FIRMCO where he most recently served as a Senior Vice President and Senior
Portfolio Manager from February, 1999 to February, 2000, Vice President and
Senior Portfolio Manager from June, 1997 to February, 1999, and Vice President
and Portfolio Manager from June, 1993 to June, 1997. Mr. Tranchita did
quantitative fixed income analysis and portfolio management while at FIRMCO.
Mr. Tranchita received his undergraduate degree and an M.B.A. from Marquette
University. He became a Chartered Financial Analyst in 1993. Mr. Tranchita is
a member of AIMR and the Milwaukee Investment Analysts Society.
M. SHARON DEGUZMAN
Ms. deGuzman is a Vice President and Portfolio Manager of the Advisor.
Ms. deGuzman has nine years of investment experience managing taxable and
tax-exempt fixed income portfolios. Ms. deGuzman joined Baird Advisors in
February, 2000. Prior to joining Baird Advisors, Ms. deGuzman was employed by
FIRMCO where she served as a Portfolio Manager from November, 1998 to
February, 2000, an Assistant Vice President from November, 1996 to November,
1998, a Fixed Income Analyst from November, 1995 to November, 1996, and an
Operations Assistant from October, 1994 to November, 1995. Ms. deGuzman did
quantitative fixed income analysis and portfolio management while at FIRMCO.
She received her undergraduate degree from Eastern Illinois University. She is
a member of AIMR and the Milwaukee Investment Analysts Society. Ms. deGuzman is
currently pursuing the Chartered Financial Analyst designation.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Because the Funds are new, financial highlights are not available.
YOUR ACCOUNT
--------------------------------------------------------------------------------
DISTRIBUTION OF SHARES
DISTRIBUTOR
The Advisor, Robert W. Baird & Co. Incorporated, is also the distributor for
shares of the Funds, and a member of the National Association of Securities
Dealers, Inc.
RULE 12B-1 PLAN
The Funds have adopted a Rule 12b-1 Plan under the Investment Company Act of
1940. Under the Rule 12b-1 Plan, Investor Class Shares pay the Advisor a fee of
0.25% of the average daily net asset value of Investor Class Shares. The Advisor
uses this fee to finance activities that promote the sale of Investor Class
Shares. Such activities include, but are not necessarily limited to, shareholder
servicing, advertising, printing and mailing prospectuses to persons other than
current shareholders, printing and mailing sales literature, and compensating
underwriters, dealers and sales personnel. The 12b-1 Plan has the effect of
increasing the expenses of the Investor Class from what they would otherwise be.
DESCRIPTION OF CLASSES
The Funds offer two classes of shares: Investor Class and Institutional Class.
The classes differ with respect to their minimum investments. In addition,
Investor Class Shares impose a Rule 12b-1 fee which is assessed against the
assets of the Fund attributable to that class.
The Advisor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisors and broker/dealers as agents to
provide sales or administrative services for their clients or customers who
beneficially own Investor Class Shares. Financial institutions will receive fees
from the Advisor based upon shares owned by their clients or customers. The
Advisor will determine the schedule of such fees and the basis upon which such
fees will be paid.
SHARE PRICE
Shares of each class in a Fund are sold at their net asset value ("NAV").
--------------------------------------------------------------------------------
When making a purchase request, make sure your request is in good order. "Good
order" means your purchase request includes:
|X| The name of the Fund
|X| The dollar amount of shares to be purchased
|X| Purchase application or investment stub
|X| Check payable to Baird Funds, or if paying by wire, when Federal Funds are
received
--------------------------------------------------------------------------------
The NAV for each class of shares of a Fund is determined as of the close of
regular trading on the New York Stock Exchange (currently 3:00 p.m., Central
time) Monday through Friday, except on days the New York Stock Exchange (NYSE)
is not open. If the NYSE closes at any other time, or if an emergency exists,
NAV may be calculated at a different time. Your share price will be the next NAV
calculated after a Fund or its agents receives your request in good order. The
NYSE is closed most national holidays and Good Friday. Please refer to the
Funds' Statement of Additional Information for a complete list of the days that
the NYSE is closed.
The NAV for a class of shares is determined by adding the value of each Fund's
investments, cash and other assets attributable to a particular share class,
subtracting the liabilities attributable to that class and then dividing the
result by the total number of shares outstanding in the class.
Each Fund's investments are valued according to market value. When a market
quote is not readily available, the security's value is based on "fair value" as
determined by the Advisor under the supervision of the Company's Board of
Directors.
BUYING SHARES
MINIMUM INVESTMENTS
---------------------------- ----------------------------- ---------------------
INITIAL PURCHASE SUBSEQUENT PURCHASES
---------------------------- ----------------------------- ---------------------
Investor Class Shares $1,000 - IRAs $500
$2,500 - all other accounts $500
Institutional Class Shares $250,000 No minimum
---------------------------- ----------------------------- ---------------------
MINIMUM INVESTMENT WAIVERS - INSTITUTIONAL CLASS SHARES
The minimum initial investment amount for Institutional Class Shares is waived
for all employees, directors and officers of the Advisor or the Funds and
members of their families (including parents, grandparents, siblings, spouses,
children and in-laws of such employees, directors and officers).
TIMING OF REQUESTS
Your price per share will be the NAV next computed after your request is
received in good order by a Fund or its agents. All requests received in good
order before 3:00 p.m. (Central time) will be executed at the NAV computed on
that same day. Requests received after 3:00 p.m. will receive the next business
day's NAV.
RECEIPT OF ORDERS
Shares may only be purchased on days the NYSE is open for business. The Funds
may authorize one or more broker/dealers to accept on their behalf purchase and
redemption orders that are in good order. In addition, these broker/dealers may
designate other financial intermediaries to accept purchase and redemption
orders on a Fund's behalf.
<TABLE>
<CAPTION>
METHODS OF BUYING
------------------------------------- ----------------------------------- ----------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
<S> <C> <C>
By Telephone You may not use telephone If you have completed the "Telephone
transactions for your initial Purchase Option" section of the
purchase of a Fund's shares. If Account Application Form, call the
you have elected the "Telephone Fund (toll-free) at 1-866-44BAIRD to
Exchange Option" on a Baird Fund, place your order. You will then be
you may call that Fund able to move money from your bank
(toll-free) at 1-866-44BAIRD to account to your Fund account upon
request an exchange into another request. Only bank accounts held at
Baird Fund. See "Exchanging domestic institutions that are
Shares." Automated Clearing House (ACH) members
may be used for telephone
transactions. The minimum telephone
purchase is $500.
By Mail Make your check payable to "Baird Fill out the investment stub from an
Funds." Forward the check and account statement, or indicate the
your application to the address Fund name and account number on your
below. No third party checks check. Make your check payable to
will be accepted. If your check "Baird Funds." Forward the check and
is returned for any reason, a $25 stub to the address below.
fee will be assessed against your
account.
By Federal Funds Wire Forward your application to Baird Call the Funds (toll-free) at
Funds at the address below. Call 1-866-44BAIRD to notify of incoming
(toll-free) 1-866-44BAIRD to wire. Use the following instructions:
obtain an account number. Wire Firstar Bank, N.A.
funds using the instructions to Milwaukee, WI 53202
the right. ABA#: 042000013
Credit: Firstar Mutual Fund
Services, LLC
Account #: 112-952-137
Further Credit:
(name of Fund, share class)
(name/title on the account)
(account #)
The Funds, Advisor and the Transfer
Agent are not responsible for the
consequences of delays delays resulting
from the banking or Federal Reserve
Wire system, or from incomplete
wiring instructions.
Automatic Investment Plan Open a Fund account with one of If you did not set up an Automatic
the other methods. If by mail, Investment Plan with your original
be sure to include your checking application, call the Funds
account number on the appropriate (toll-free) at 1-866-44BAIRD.
section of your application and Additional investments (minimum of
enclose a voided check or deposit $500) will be taken automatically
slip with initial purchase monthly or quarterly from your
application. checking account.
Through Shareholder Service To purchase shares for another To purchase shares for another
Organizations investor, call the Funds investor, call the Funds (toll-free)
(toll-free) at 1-866-44BAIRD. at 1-866-44BAIRD.
By Exchange Call the Funds (toll-free) at Call the Funds (toll-free) at
1-866-44BAIRD to obtain exchange 1-866-44BAIRD to obtain exchange
information. See "Exchanging information. See "Exchanging Shares."
Shares."
------------------------------------- ----------------------------------- ----------------------------------------
</TABLE>
You should use the following addresses when sending documents by mail or by
overnight delivery:
BY MAIL BY OVERNIGHT DELIVERY
Baird Funds Baird Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 E. Michigan Street, Third Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
NOTE: THE FUNDS DO NOT CONSIDER THE U.S. POSTAL SERVICE OR OTHER INDEPENDENT
DELIVERY SERVICES TO BE THEIR AGENTS.
SELLING SHARES
METHODS OF SELLING
-------------------------------------- -----------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
-------------------------------------- -----------------------------------------
By Telephone Call the Funds (toll-free) at 1-866-44BAIRD to place the
order. (Note: For security reasons, requests by telephone
will be recorded.)
By Mail Send a letter instructing the Funds to redeem the dollar
amount or number of shares you wish. The letter should
contain the Fund's name, the account number and the number
of shares or the dollar amount of shares to be redeemed. Be
sure to have all shareholders sign the letter. If your
account is an IRA, signatures must be guaranteed. For IRA
accounts, requests submitted without an election whether or
not to withhold will be subject to withholding.
By Federal Funds Call the Funds (toll-free) at 1-866-44BAIRD to request
Wire the amount of money you want. Be sure to
have all necessary information from your
bank. Your bank may charge a fee to
receive wired funds.
Systematic The Funds offer shareholders a Systematic Withdrawal
Withdrawal Plan Plan. Call the Funds (toll-free) at
1-866-44BAIRD to arrange for regular
monthly or quarterly fixed withdrawal
payments. The minimum payment you may
receive is $50 per period. Note that this
plan may deplete your investment and
affect your income or yield.
Shareholder Service Consult your account agreement for information
Organization on redeeming shares.
By Exchange Call (toll-free) 1-866-44BAIRD
to obtain exchange information. See
"Exchanging Shares" for further information.
--------------------------------------------------------------------------------
When making a redemption request, make sure your request is in good order. "Good
order" means your letter of instruction includes:
|X| The name of the Fund
|X| The number of shares or the dollar amount of shares to be redeemed
|X| Signatures of all registered shareholders exactly as the shares are
registered
|X| The account number
--------------------------------------------------------------------------------
PAYMENT OF REDEMPTION PROCEEDS
You may request redemption of your shares at any time. Your shares will be
redeemed at the next NAV per share calculated after your order is received in
good order by a Fund or its agents. You may receive the proceeds in one of three
ways:
1) We can mail a check to your account's address. You will generally
receive the proceeds within seven days after a Fund or its agents
receives your request in good order. Checks will not be forwarded by the
Postal Service, so please notify us if your address has changed.
2) We can transmit the proceeds by Electronic Funds Transfer ("EFT") to a
properly pre-authorized bank account. The proceeds usually will arrive
at your bank two banking days after we process your redemption.
3) For a $12 fee, which will be deducted from your redemption proceeds, we
can transmit the proceeds by wire to a pre-authorized bank account. The
proceeds usually will arrive at your bank the first banking day after we
process your redemption.
Before selling recently purchased shares, please note that if the Transfer Agent
has not yet collected payment for the shares you are selling, it may delay
sending the proceeds until the payment is collected, which may take up to 10
calendar days from the purchase date. This procedure is intended to protect the
Fund and its shareholders from loss.
The Transfer Agent will send redemption proceeds by wire or EFT only to the bank
and account designated on the account application or in written instructions
(with signatures guaranteed) subsequently received by the Transfer Agent, and
only if the bank is a member of the Federal Reserve System. If the dollar or
share amount requested to be redeemed is greater than the current value of your
account, your entire account balance will be redeemed. If you choose to redeem
your account in full, any Automatic Investment Plan currently in effect for the
account will be terminated unless you indicate otherwise in writing and any
Systematic Withdrawal Plan will be terminated.
SIGNATURE GUARANTEES
A signature guarantee of each owner is required to redeem shares in the
following situations:
|X| If you change ownership on your account
|X| When you want the redemption proceeds sent to a different address than that
registered on the account
|X| If the proceeds are to be made payable to someone other than the account's
owner(s)
|X| Any redemption transmitted by federal wire transfer to a bank other than
your bank of record
|X| If a change of address request has been received by the Transfer Agent
within the last 15 days
|X| For all redemptions of $50,000 or more from any shareholder account
Signature guarantees are designed to protect both you and the Funds from fraud.
Signature guarantees can be obtained from most banks, credit unions or saving
associations, or from broker/dealers, national securities exchanges, registered
securities exchanges or clearing agencies deemed eligible by the SEC. Notaries
cannot provide signature guarantees.
CORPORATE, TRUST AND OTHER ACCOUNTS
Redemption requests from corporate, trust and institutional accounts, and
executors, administrators and guardians, require documents in addition to those
described above evidencing the authority of the officers, trustees or others. In
order to avoid delays in processing redemption requests for these accounts, you
should call the Funds at 1-866-44BAIRD before making the redemption request to
determine what additional documents are required.
TRANSFER OF OWNERSHIP
In order to change the account registrant or transfer ownership of an account,
additional documents will be required. To avoid delays in processing these
requests, you should call the Funds at 1-866-44BAIRD before making your request
to determine what additional documents are required.
EXCHANGING SHARES
You may exchange all or a portion of your investment from the same class of one
Baird Fund to another. You may also exchange between classes of each Fund or
other Baird Funds if you meet the minimum investment requirements for the class
you would like to exchange into. Any new account established through an exchange
will be subject to the minimum investment requirements described above.
Exchanges will be executed on the basis of the relative NAV of the shares
exchanged. The exchange privilege may be exercised only in those states where
the class of shares of the Fund being acquired legally may be sold.
In addition to your ability to exchange all or a portion of your investment
between any of the Baird Funds, you may also exchange Fund shares for shares of
the Firstar Institutional Money Market Fund by sending a written exchange
request to the Fund or, if you have established telephone exchange privileges,
call 1-866-44BAIRD. Shares of the Firstar Institutional Money Market Fund are
not offered by this prospectus. Please read that prospectus before making an
exchange into the Firstar Institutional Money Market Fund. This exchange
privilege is offered as a convenience to the Funds' shareholders. Please note
that when exchanging from the Fund to the Firstar Institutional Money Market
Fund, you will begin accruing income from the Firstar Institutional Money Market
Fund the day following the exchange. When exchanging less than all of the
balance from the Firstar Institutional Money Market Fund to your Fund, your
exchange proceeds will exclude accrued and unpaid income from the Firstar
Institutional Money Market Fund through the date of exchange. When exchanging
your entire balance from the Firstar Institutional Money Market Fund, accrued
income will automatically be exchanged into the Fund when the income is
collected and paid from the Firstar Institutional Money Market Fund at the end
of the month.
An exchange is considered to be a sale of shares for federal income tax purposes
on which you may realize a taxable gain or loss.
Call 1-866-44BAIRD to learn more about exchanges and other Baird Funds.
MORE INFORMATION ABOUT THE EXCHANGE PRIVILEGE
The Funds are intended as long-term investment vehicles and not to provide a
means of speculating on short-term market movements. In addition, excessive
trading can hurt a Fund's performance and shareholders. Therefore, each Fund may
terminate, without notice, the exchange privilege of any investor who uses the
exchange privilege excessively (more than six times each year). The Funds may
change or temporarily suspend the exchange privilege during unusual market
conditions.
GENERAL TRANSACTION POLICIES
The Funds reserve the right to:
|X| Vary or waive any minimum investment requirement.
|X| Refuse, change, discontinue, or temporarily suspend account services,
including purchase, exchange, or telephone redemption privileges, for any
reason.
|X| Reject any purchase or exchange request for any reason. Generally, a Fund
does this if the purchase or exchange is disruptive to the efficient
management of a Fund (due to the timing of the investment or an investor's
history of excessive trading).
|X| Redeem all shares in your account if your balance falls below the Fund's
minimum for the applicable class of shares. If, within 60 days of a Fund's
written request, you have not increased your account balance, you may be
required to redeem your shares. The Funds will not require you to redeem
shares if the value of your account drops below the investment minimum due
to fluctuations of NAV.
|X| Delay paying redemption proceeds for up to seven days after receiving a
request, if an earlier payment could adversely affect a Fund.
|X| Modify or terminate the Automatic Investment and Systematic Withdrawal Plans
at any time.
|X| Modify or terminate the exchange privilege after 60 days written notice to
shareholders.
|X| Make a "redemption in kind" (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (i)
$250,000 or (ii) 1% of the Fund's assets. In such cases, you may incur
brokerage costs in converting these securities to cash.
|X| Reject any purchase or redemption request that does not contain all required
documentation.
If you elect telephone privileges on the account application or in a letter to
the Funds, you may be responsible for any fraudulent telephone orders as long as
the Funds have taken reasonable precautions to verify your identity. In
addition, once you place a telephone transaction request, it cannot be canceled
or modified.
During periods of significant economic or market change, telephone transactions
may be difficult to complete. If you are unable to contact the Funds by
telephone, you may also mail the requests to the Funds at the address listed
under Buying Shares.
Your broker/dealer or other financial organization may establish policies that
differ from those of the Funds. For example, the organization may charge
transaction fees, set higher minimum investments, or impose certain limitations
on buying or selling shares in addition to those identified in this prospectus.
Contact your broker/dealer or other financial organization for details.
DISTRIBUTIONS AND TAXES
-------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
Each Fund pays its shareholders dividends from the Fund's net investment income
and distributes any net capital gains the Fund has realized.
Dividends are declared and paid monthly. Capital gains, if any, are distributed
once a year. It is expected that each Fund's annual distributions will be
primarily income dividends.
Dividends on each share class of the Funds are determined in the same manner and
are paid in the same amount. However, each share class bears all expenses
associated with that particular class. So, because Investor Class Shares have
distribution fees, the dividends paid to Investor Class shareholders will be
lower than those paid to Institutional Class shareholders.
All of your dividends and capital gains distributions with respect to a
particular Fund will be reinvested in additional shares of the same class unless
you instruct otherwise on your account application or have redeemed all shares
you held in the Fund. In such cases, dividends and distributions will be paid in
cash.
TAXATION
TAX-EXEMPT DISTRIBUTIONS
The Intermediate Muncipal Bond Fund intends to distribute tax-exempt dividends
from interest earned on qualifying municipal obligations to shareholders.
However, the Fund may invest a portion of its assets in securities that generate
income that is not exempt from federal or state income tax. Income exempt from
federal tax may be subject to state and local income tax. If you are subject to
AMT, you may have to pay federal tax on a portion of your income from tax-exempt
dividends.
TAXABLE DISTRIBUTIONS
Dividends from interest earned on securities held by the Short-Term Bond Fund
are taxable to most investors (unless your investment is in an IRA or other
tax-advantaged account regardless of whether they are received in cash or
reinvested in Fund shares). Dividends paid by either Fund out of net ordinary
income and distributions of net short-term capital gains are taxable to the
Fund's shareholders as ordinary income. Dividends from net ordinary income may
be eligible for the corporate dividends-received deduction.
Distributions by the Intermediate Municipal Bond Fund and the Short-Term Bond
Fund of net capital gains (the excess of net long-term capital gains over net
short-term capital losses) to shareholders are generally taxable to the
shareholders at the applicable long-term capital gains rate, regardless of how
long the shareholder has held shares of the Fund.
Shareholders that sell, exchange or redeem shares generally will have a capital
gain or loss from the sale, redemption or exchange. The amount of the gain or
loss and the rate of tax will depend mainly upon the amount paid for the shares,
the amount received from the sale, exchange or redemption, and how long the
shares were held by the shareholder.
A dividend or capital gains distribution declared by a Fund in October, November
or December, but paid during January of the following year will be considered to
be paid on December 31 of the year it was declared.
If the value of shares is reduced below a shareholder's cost as a result of a
distribution by a Fund, the distribution will be taxable even though it, in
effect, represents a return of invested capital. Investors considering buying
shares just prior to a dividend or capital gain distribution payment date should
be aware that, although the price of shares purchased at that time may reflect
the amount of the forthcoming distribution, those who purchase just prior to the
record date for a distribution may receive a distribution which will be taxable
to them.
Shareholders will be advised annually as to the federal tax status of dividends
and capital gain distributions made by each Fund for the preceding year.
Distributions by the Funds generally will be subject to state and local taxes.
Please note that dividends and distributions are taxable even if reinvested.
Additional tax information may be found in the Statement of Additional
Information. Because everyone's tax situation is unique, always consult your tax
professional about federal, state and local tax consequences of an investment in
the Funds.
TAXABLE INVESTMENTS
The Intermediate Municipal Bond Fund may invest up to 20% of its net assets in
U.S. government and corporate bonds, and other debt securities that are of the
same quality as the Fund's investments in municipal bonds. These bonds produce
taxable income, unlike municipal bonds which generally provide tax-exempt
income.
IF YOU ARE SUBJECT TO THE ALTERNATIVE MINIMUM TAX
The Intermediate Municipal Bond Fund may invest up to 20% of its net assets in
municipal obligations whose interest is a tax-preference item for purposes of
the federal alternative minimum tax ("AMT"). If you are subject to the AMT, a
portion of the Fund's distributions to you may not be exempt from federal income
tax. If this is the case, the Fund's net return to you may be lower.
FOR MORE INFORMATION
--------------------------------------------------------------------------------
You can find more information about the Fund in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains details about the investments and techniques of the Funds and
certain other additional information. A current SAI is on file with the SEC and
is incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
within this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
After the Fund has been operating for the appropriate time, annual and
semi-annual reports will be made available. The Funds' annual and semi-annual
reports provide the most recent financial reports and portfolio listings. The
annual report contains a discussion of the market conditions and investment
climate that affected the Funds' performance during the Funds' last fiscal year.
You can obtain a free copy of these documents, request other information, or
make general inquires about the Fund by calling the Fund at 1-866-44BAIRD or by
writing to:
Baird Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
You may write to the SEC Public Reference Room at the regular mailing address or
the e-mail address below and ask them to mail you information about the Fund,
including the SAI. They will charge you a fee for this duplicating service. You
can also visit the SEC Public Reference Room and review and copy documents while
you are there. For more information about the operation of the Public Reference
Room, call the SEC at the telephone number below.
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
[email protected]
1-202-942-8090
Reports and other information about the Fund are also available on the EDGAR
Database on the SEC's Internet site at HTTP://WWW.SEC.GOV.
1940 Act File No. 811-09997
BAIRD FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
Baird Intermediate Bond Fund
Baird Core Bond Fund
Baird Aggregate Bond Fund
Baird Short-Term Bond Fund*
Baird Intermediate Municipal Bond Fund*
September 26, 2000
This Statement of Additional Information ("SAI") is not a prospectus
and should be read in conjunction with Baird Funds, Inc.'s prospectuses (each a
"Prospectus") dated September 26, 2000, of the Baird Intermediate Bond Fund, the
Baird Core Bond Fund, the Baird Aggregate Bond Fund, the Baird Short-Term Bond
Fund, and the Baird Intermediate Municipal Bond Fund (individually a "Fund" and
collectively referred to as the "Funds"). The Funds are each series of the Baird
Funds, Inc. (the "Company"). This Statement of Additional Information contains
additional information about principal strategies and risks already described in
the Prospectus (and no information about new principal strategies or risks), as
well as descriptions of non-principal strategies not described in the
Prospectus. Copies of the Prospectus for the Funds may be obtained by writing
the Funds at 615 East Michigan Street, P.O. Box 701, Milwaukee, WI 53201-0701 or
by calling 1-866-44BAIRD. You should read this SAI together with the Prospectus
and retain it for further reference.
*Neither the Institutional Class nor the Investor Class of the Baird Short-Term
Bond Fund and Baird Intermediate Municipal Bond Fund are presently being offered
to investors.
TABLE OF CONTENTS
PAGE
BAIRD FUNDS, INC.............................................................3
INVESTMENT STRATEGIES AND RISKS..............................................3
NET ASSET VALUE..............................................................22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................22
DESCRIPTION OF SHARES........................................................25
ADDITIONAL INFORMATION CONCERNING TAXES......................................26
MANAGEMENT OF THE COMPANY....................................................26
PRINCIPAL SHAREHOLDERS.......................................................30
PORTFOLIO TRANSACTIONS.......................................................30
INVESTMENT ADVISORY AND OTHER SERVICES.......................................32
DISTRIBUTOR..................................................................34
DISTRIBUTION PLAN............................................................34
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.............................36
COUNSEL......................................................................40
PERFORMANCE CALCULATIONS.....................................................40
PERFORMANCE HISTORY..........................................................44
APPENDIX A...................................................................A-1
BAIRD FUNDS, INC.
The Company is an open-end, diversified management investment company.
Each Fund is a series of common stock of the Company, a Wisconsin corporation
that was incorporated on June 9, 2000. The Company is authorized to issue shares
of common stock in series and classes. Each series of the Company is currently
divided into two classes, an Investor class and an Institutional class. The
Company also offers another fund that is described in a separate Prospectus and
Statement of Additional Information.
INVESTMENT STRATEGIES AND RISKS
RATINGS. The ratings of Standard & Poor's, Moody's and other nationally
recognized rating agencies represent their opinions as to the quality of debt
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
The payment of principal and interest on most debt securities purchased
by a Fund will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its debt securities are subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by federal or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. The power or ability of an issuer to meet its obligations
for the payment of interest on, and principal of, its debt securities may be
materially adversely affected by litigation or other conditions.
Subsequent to its purchase by a Fund, a rated security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. Robert W. Baird & Co. Incorporated (the "Advisor") will
consider such an event in determining whether the Fund should continue to hold
the security. For a more detailed description of ratings, see Appendix A.
SECURITIES LENDING. Each of the Funds may lend its portfolio securities
to unaffiliated domestic broker/dealers and other institutional investors
pursuant to agreements requiring that the loans be secured by collateral equal
in value to at least the market value of the securities loaned in order to
increase return on portfolio securities. During the term of such arrangements, a
Fund will maintain such value by the daily marking-to-market of the collateral.
Collateral for such loans may include cash, securities of the U.S. government,
its agencies or instrumentalities, or an irrevocable letter of credit issued by
a bank which meets the investment standards stated below under "Money Market
Instruments," or any combination thereof. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even a
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans will be made only to borrowers deemed by the Advisor
to be of good standing and when, in the Advisor's judgment, the income to be
earned from the loan justifies the attendant risks. When a Fund lends its
securities, it continues to receive interest or dividends on the securities
loaned and may simultaneously earn interest on the investment of the cash
collateral which will be invested in readily marketable, high-quality,
short-term obligations. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called at any time
and will be called so that the securities may be voted by a Fund if a material
event affecting the investment is to occur.
MONEY MARKET INSTRUMENTS. The Funds may invest from time to time in
"money market instruments," a term that includes, among other things, U.S.
government obligations, repurchase agreements, cash, bank obligations,
commercial paper, variable amount master demand notes and corporate bonds with
remaining maturities of 13 months or less. These investments are used to help
meet anticipated redemption requests or if other suitable securities are
unavailable.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by each Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of such Fund's total assets at the time of purchase. The Funds may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 5% of its net assets.
Investments by a Fund in commercial paper will consist of issues rated
at the time A-1 and/or P-1 by Standard & Poor's, Moody's or similar rating by
another nationally recognized statistical rating organization. In addition, the
Funds may acquire unrated commercial paper and corporate bonds that are
determined by the Advisor at the time of purchase to be of comparable quality to
rated instruments that may be acquired by such Fund as previously described.
The Funds may also purchase variable amount master demand notes which
are unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, a Fund
may demand payment of the principal of the instrument at any time. The notes are
not typically rated by credit rating agencies, but issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, a Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Funds invest in
variable amount master demand notes only when the Advisor deems the investment
to involve minimal credit risk.
REPURCHASE AGREEMENTS. Each Fund may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). During the term of the
repurchase agreement, the Advisor will continue to monitor the creditworthiness
of the seller and will require the seller to maintain the value of the
securities subject to the repurchase agreement at not less than 102% of the
repurchase price. Default or bankruptcy of the seller would, however, expose the
Fund to a possible loss because of adverse market action or delay in connection
with the disposition of the underlying securities. The securities held subject
to a repurchase agreement may have stated maturities exceeding one year,
provided the repurchase agreement itself matures in less than one year.
The repurchase price under the repurchase agreements generally equals
the price paid by a Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements will be held by the Funds' custodian or in the Federal
Reserve/Treasury book-entry system or other authorized securities depository.
Repurchase agreements are considered to be loans under the 1940 Act.
INVESTMENT COMPANIES. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not more
than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund.
The Funds may invest from time to time in securities issued by other
investment companies that invest in high-quality, short-term debt securities.
Securities of other investment companies will be acquired by the Funds within
the limits prescribed by the 1940 Act. As a shareholder of another investment
company, the Funds would bear, along with other shareholders, their pro-rata
portion of the other investment company's expenses, including advisory fees, and
such fees and other expenses will be borne indirectly by the Fund's
shareholders. These expenses would be in addition to the advisory and other
expenses that the Funds bear directly in connection with their own operations.
U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in a variety of U.S.
Treasury obligations including bonds, notes and bills that mainly differ only in
their interest rates, maturities and time of issuance. The Funds may also invest
in other securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities; such as obligations of Federal Home Loan Banks, Federal
Farm Credit Banks, Federal Land Banks, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, and Resolution Trust Corp.
BANK OBLIGATIONS. For purposes of the Funds' investment policies with
respect to bank obligations, the assets of a bank or savings institution will be
deemed to include the assets of its domestic and foreign branches. A Fund's
investments in the obligations of foreign branches of U.S. banks and of foreign
banks may subject the Fund to investment risks (similar to those discussed below
under "Foreign Securities") that are different in some respects from those of
investments in obligations of U.S. domestic issuers. Such risks include future
political and economic developments, the possible imposition of withholding
taxes on interest income, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of principal and interest of such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting and record keeping
standards than those applicable to domestic branches of U.S. banks.
RESTRICTED SECURITIES. Each Fund may invest up to 15% of its net assets
in securities that are illiquid at the time of purchase. While these holdings
may offer more potential for growth, they may present a higher degree of
business and financial risk, which can result in substantial losses. The Funds
may have difficulty valuing these holdings and may be unable to sell these
holdings at the time or price desired. Restricted securities may include Rule
144A Securities. These securities are restricted securities that are eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "1933 Act"). A Fund may treat a Rule 144A security as liquid if determined
to be so under procedures adopted by the Board of Directors.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. Each Fund may borrow
money to the extent allowed (as described below) to meet shareholder redemptions
from banks or through reverse repurchase agreements. These strategies involve
leveraging. If the securities held by a Fund should decline in value while
borrowings are outstanding, the Fund's net asset value will decline in value by
proportionately more than the decline in value suffered by a Fund's securities.
As a result, the Fund's net asset value may be subject to greater fluctuation
until the borrowing is paid off.
Reverse repurchase agreements are considered to be borrowings under the
1940 Act. At the time a Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a segregated
custodial account U.S. government securities or other liquid securities having a
value equal to or greater than the repurchase price (including accrued
interest), and will subsequently monitor the account to insure that such value
is maintained. Reverse repurchase agreements involve the risks that the interest
income earned by the Fund (from the investment of the proceeds) will be less
than the interest expense of the transaction, that the market value of the
securities sold by the Fund may decline below the price of the securities it is
obligated to repurchase and that the securities may not be returned to the Fund.
PREFERRED STOCKS. Each Fund except the Intermediate Municipal Bond Fund
may invest in preferred stocks. Preferred stocks are securities that represent
an ownership interest providing the holder with claims on the issuer's earnings
and assets before common stock but after bond owners. Unlike debt securities,
the obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default. Each of the Funds will limit
its investments in preferred stock to no more than 5% of its respective net
assets.
WHEN-ISSUED PURCHASES, DELAYED DELIVERY AND FORWARD COMMITMENTS. The
Funds may purchase or sell particular securities with payment and delivery
taking place at a later date. The price or yield obtained in a transaction may
be less favorable than the price or yield available in the market when the
securities delivery takes place. When a Fund agrees to purchase securities on a
when-issued or delayed delivery basis or enter into a forward commitment to
purchase securities, its custodian will set aside cash or liquid securities
equal to the amount of the commitment in a segregated account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the segregated account in order to ensure that the value of the
account remains equal to the amount of the Fund's commitments. It may be
expected that the market value of a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. In the case of a forward commitment to
sell portfolio securities, the Fund's custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. When-issued and forward commitment transactions involve the risk
that the price or yield obtained in a transaction (and therefore the value of a
security) may be less favorable than the price or yield (and therefore the value
of a security) available in the market when the securities delivery takes place.
The Funds will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
a Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases, the Fund may
realize a capital gain or loss.
When the Funds engage in when-issued, delayed delivery and forward
commitment transactions, they rely on the other party to consummate the trade.
Failure of such party to do so may result in a Fund incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the net asset value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When a Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the market value
of the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund except the
Intermediate Municipal Bond Fund may purchase residential and commercial
mortgage-backed as well as other asset-backed securities (collectively called
"asset-backed securities") that are secured or backed by automobile loans,
installment sale contracts, credit card receivables or other assets and are
issued by entities such as Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), commercial banks, trusts, financial companies, finance
subsidiaries of industrial companies, savings and loan associations, mortgage
banks and investment banks. These securities represent interests in pools of
assets in which periodic payments of interest and/or principal on the securities
are made, thus, in effect passing through periodic payments made by the
individual borrowers on the assets that underlie the securities, net of any fees
paid to the issuer or guarantor of the securities.
The average life of these securities varies with the maturities and the
prepayment experience of the underlying instruments. The average life of a
mortgage-backed instrument may be substantially less than the original maturity
of the mortgages underlying the securities as the result of scheduled principal
payments and mortgage prepayments. The rate of such mortgage prepayments, and
hence the life of the security, will be a function of current market rates and
current conditions in the relevant housing and commercial markets. In periods of
falling interest rates, the rate of mortgage prepayments tends to increase.
During such periods, the reinvestment of prepayment proceeds by a Fund will
generally be at lower rates than the rates that were carried by the obligations
that have been prepaid. As a result, the relationship between mortgage
prepayments and interest rates may give some high-yielding mortgage-related
securities less potential for growth in value than non-callable bonds with
comparable maturities. In calculating the average weighted maturity of each
Fund, the maturity of asset-backed securities will be based on estimates of
average life. There can be no assurance that these estimates will be accurate.
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities guaranteed
by GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly owned U.S. government corporation within the Department
of Housing and Urban Development. Ginnie Maes also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by FNMA include FNMA Guaranteed
Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are
solely the obligations of FNMA and are not backed by or entitled to the full
faith and credit of the United States, but are supported by the right of the
issuer to borrow from the Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-backed securities issued
by the FHLMC include FHLMC Mortgage Participation Certificates (also known as
"Freddie Macs" or "PCs"). FHLMC is a corporate instrumentality of the United
States, created pursuant to an Act of Congress. Freddie Macs are not guaranteed
by the United States or by any Federal Home Loan Bank and do not constitute a
debt or obligation of the United States or of any Federal Home Loan Bank.
Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
As stated in the Prospectus for the Funds, mortgage-backed securities
such as collateralized mortgage obligations ("CMOs") may be purchased. There are
several types of mortgage-backed securities which provide the holder with a
pro-rata interest in the underlying mortgages, and CMOs which provide the holder
with a specified interest in the cash flow of a pool of underlying mortgages or
other mortgage-backed securities. CMOs are issued in multiple classes and their
relative payment rights may be structured in many ways. In many cases, however,
payments of principal are applied to the CMO classes in order of their
respective maturities, so that no principal payments will be made on a CMO class
until all other classes having an earlier maturity date are paid in full. The
classes may include accrual certificates (also known as "Z-Bonds"), which do not
accrue interest at a specified rate until other specified classes have been
retired and are converted thereafter to interest-paying securities. They may
also include planned amortization classes ("PACs") which generally require,
within certain limits, that specified amounts of principal be applied to each
payment date, and generally exhibit less yield and market volatility than other
classes. Investments in CMO certificates can expose the Fund to greater
volatility and interest rate risk than other types of mortgage-backed
obligations. Prepayments on mortgage-backed securities generally increase with
falling interest rates and decrease with rising interest rates; furthermore,
prepayment rates are influenced by a variety of economic and social factors.
Each Fund will invest less than 50% of its respective total assets in CMOs.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (i.e.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
security is purchased at a premium, a prepayment rate that is faster than
expected may reduce yield to maturity, while a prepayment rate that is slower
than expected may have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments may increase, while slower than expected prepayments may
decrease, yield to maturity. Moreover, asset-backed securities may involve
certain risks that are not presented by mortgage-backed securities arising
primarily from the nature of the underlying assets (i.e., credit card and
automobile loan receivables as opposed to real estate mortgages). For example,
credit card receivables are generally unsecured and may require the repossession
of personal property upon the default of the debtor, which may be difficult or
impracticable in some cases.
Asset-backed securities may be subject to greater risk of default
during periods of economic downturn than other instruments. Also, while the
secondary market for asset-backed securities is ordinarily quite liquid, in
times of financial stress the secondary market may not be as liquid as the
market for other types of securities, which could result in a Fund experiencing
difficulty in valuing or liquidating such securities.
In general, the collateral supporting non-mortgage asset-backed
securities is of shorter maturity than mortgage loans. Like other fixed-income
securities, when interest rates rise the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities.
Non-mortgage asset-backed securities do not have the benefit of the
same security in the collateral as mortgage-backed securities. 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
have given debtors the right to reduce the balance due on the credit cards. Most
issuers of automobile receivables permit the servicers to retain possession of
the underlying obligations. If the servicer were to sell these obligations to
another party, there is the risk that the purchaser would acquire an interest
superior to that of the holders of 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 an effective security interest in all of the
obligations backing such receivables. Therefore, there is a possibility that
payments on the receivables together with recoveries on repossessed collateral
may not, in some cases, be able to support payments on these securities.
VARIABLE RATE MEDIUM TERM NOTES. Each Fund except the Intermediate
Municipal Bond Fund may purchase variable rate medium term notes that provide
for periodic adjustments in the interest rates. The adjustments in interest
rates reflect changes in an index (which may be the Lehman Brothers Intermediate
Government/Credit Bond Index, the Lehman Brothers 1-3 year Government/Credit
Bond Index, the Lehman Brothers Government/Credit Bond Index, or the Lehman
Brothers Aggregate Bond Index).
STRIPPED SECURITIES. Each Fund other than the Intermediate Municipal
Bond Fund may purchase participations in trusts that hold U.S. Treasury and
agency securities (such as TIGRs and CATs) and also may purchase Treasury
receipts and other "stripped" securities that evidence ownership in either the
future interest payments or the future principal payments of U.S. government
obligations. These participations are issued at a discount to their "face
value," and may (particularly in the case of stripped mortgage-backed
securities) exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
BOND INDEX. In an effort to make a Fund's duration and return
comparable to those of its respective bond index, the Advisor will monitor a
Fund's portfolio and market changes. The calculation of the Fund's duration and
average portfolio maturity will be based on certain estimates relating to the
duration and maturity of the securities held by a Fund. There can be no
assurance that these estimates will be accurate or that the duration or average
portfolio maturity of a Fund will always remain within the maximum limits
described in the Prospectus. The value of each Fund's portfolio, as is generally
the case with each bond index, can be expected to vary inversely from changes in
prevailing interest rates.
OPTIONS TRADING. Each Fund other than the Intermediate Municipal Bond
Fund may purchase put and call options. Option purchases by a Fund will not
exceed 5% of its net assets. Such options may relate to particular securities or
to various indices and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. This is a highly
specialized activity which entails greater than ordinary investment risks,
including the complete loss of the amount paid as premiums to the writer of the
option. Regardless of how much the market price of the underlying security or
index increases or decreases, the option buyer's risk is limited to the amount
of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities or
indices, and therefore, on a percentage basis, an investment in options may be
subject to greater fluctuation than an investment in the underlying securities.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
A call option gives the purchaser of the option the right to buy, and a
writer the obligation to sell, the underlying security or index at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A put
option gives the purchaser the right to sell the underlying security or index at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security or index. Put and call
options purchased by a Fund will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
Each Fund other than the Intermediate Municipal Bond Fund may purchase
put options on portfolio securities at or about the same time that it purchases
the underlying security or at a later time. By buying a put, a Fund limits its
risk of loss from a decline in the market value of the security until the put
expires. Any appreciation in the value of and yield otherwise available from the
underlying security, however, will be partially offset by the amount of the
premium paid for the put option and any related transaction costs. Call options
may be purchased by a Fund in order to acquire the underlying security at a
later date at a price that avoids any additional cost that would result from an
increase in the market value of the security. A call option may also be
purchased to increase a Fund's return to investors at a time when the call is
expected to increase in value due to anticipated appreciation of the underlying
security. Prior to its expiration, a purchased put or call option may be sold in
a "closing sale transaction" (a sale by a Fund, prior to the exercise of the
option that it has purchased, of an option of the same series), and profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the option plus the related transaction costs. In
addition, each Fund other than the Intermediate Municipal Bond Fund may sell
covered call options listed on a national securities exchange. Such options may
relate to particular securities or to various indices. A call option on a
security is covered if a Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or cash
equivalents in such amount as required are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. A call
option on an index is covered if a Fund maintains with its custodian cash or
cash equivalents equal to the contract value. A call option is also covered if a
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by a Fund in cash or cash equivalents in a
segregated account with its custodian. The aggregate value of the Fund's assets
subject to covered options written by the Funds will not exceed 5% of the value
of its net assets.
A Fund's obligation under a covered call option written by it may be
terminated prior to the expiration date of the option by the Fund's executing a
closing purchase transaction, which is effected by purchasing on an exchange an
option of the same series (i.e., same underlying security or index, exercise
price and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new option containing
different terms. The cost of such a liquidation purchase plus transaction costs
may be greater than the premium received upon the original option, in which
event a Fund will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary market
on an exchange will exist for any particular option. A covered call option
writer, unable to effect a closing purchase transaction, will not be able to
sell an underlying security until the option expires or the underlying security
is delivered upon exercise with the result that the writer in such circumstances
will be subject to the risk of market decline during such period. A Fund will
write an option on a particular security only if the Advisor believes that a
liquid secondary market will exist on an exchange for options of the same series
which will permit the Fund to make a closing purchase transaction in order to
close out its position.
By writing a covered call option on a security, a Fund foregoes the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price except insofar as the premium represents such
a profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Fund effects a closing purchase transaction by
purchasing an option of the same series. Except to the extent that a written
call option on an index is covered by an option on the same index purchased by
the Fund, movements in the index may result in a loss to the Fund; however, such
losses may be mitigated by changes in the value of securities held by the Fund
during the period the option was outstanding. The use of covered call options
will not be a primary investment technique of the Funds. When a Fund writes a
covered call option, an amount equal to the net premium (the premium less the
commission) received by the Fund is included in the liability section of the
Fund's statement of assets and liabilities. The amount of the liability will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the liability related to such option will be eliminated. Any gain on a
covered call option on a security may be offset by a decline in the market price
of the underlying security during the option period. If a covered call option on
a security is exercised, the Fund may deliver the underlying security held by it
or purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired options written
by a Fund and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. These risks include (i) an
imperfect correlation between the change in market value of the securities the
Fund holds and the prices of options relating to the securities purchased or
sold by the Fund; and (ii) the possible lack of a liquid secondary market for an
option. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and a transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
FUTURES CONTRACTS AND RELATED OPTIONS. The Advisor may determine that
it would be in the best interest of each Fund to purchase or sell futures
contracts, or options thereon, as a hedge against changes resulting from market
conditions in the value of the securities held by a Fund, or of securities which
it intends to purchase to maintain liquidity, to have fuller exposure to price
movements in the respective bond index or to reduce transaction costs. For
example, a Fund may enter into transactions involving a bond or stock index
futures contract, which is a bilateral agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value (which assigns relative
values to the securities included in the index) at the close of the last trading
day of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying bonds or stocks in the index is
made. The Advisor may also determine that it would be in the interest of a Fund
to purchase or sell interest rate futures contracts, or options thereon, which
provide for the future delivery of specified fixed-income securities.
Risks associated with the use of futures contracts and options on
futures include (a) imperfect correlation between the change in market values of
the securities held by a Fund and the prices of related futures contracts and
options on futures purchased or sold by the Fund, and (b) the possible lack of a
liquid secondary market for futures contracts (or related options) and the
resulting inability of a Fund to close open futures positions, which could have
an adverse impact on the Fund's ability to hedge.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
holdings to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge.
Successful use of futures by the Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. In addition, in some situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by a Fund involves the risk of loss
by the Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Each Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission ("CFTC"). In addition, a Fund may not
engage in such transactions if the sum of the amount of initial margin deposits
and premiums paid for unexpired commodity options, other than for bona fide
hedging transactions, would exceed 5% of the liquidation value of its assets,
after taking into account unrealized profits and unrealized losses on such
contracts it has entered into; provided, however, that in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount may be
excluded in calculating the percentage limitation. In connection with a futures
transaction, unless the transaction is covered in accordance with SEC positions,
the Fund will maintain a segregated account with its custodian or sub-custodian
consisting of cash or liquid securities to the entire amount at risk (less
margin deposits) on a continuous basis. The Company intends to comply with the
regulations of the CFTC exempting each Fund from registration as a "commodity
pool operator."
The Funds intend to limit their transactions in futures contracts and
related options so that not more than 5% of each Fund's respective net assets
are at risk.
FOREIGN SECURITIES. The Funds may invest up to 20% of their respective
net assets at the time of purchase in dollar-denominated debt obligations of
foreign issuers. Such securities may be subject to greater fluctuations in price
than securities of domestic corporations. In addition, there may be less
publicly available information about a foreign company than about a domestic
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. With respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries.
ZERO COUPON BONDS. Zero coupon obligations have greater price
volatility than coupon obligations and will not result in the payment of
interest until maturity, provided that a Fund will purchase such zero coupon
obligations only if the likely relative greater price volatility of such zero
coupon obligations is not inconsistent with the Fund's investment objective.
Although zero coupon securities pay no interest to holders prior to maturity,
interest on these securities is reported as income to a Fund and distributed to
its shareholders. These distributions must be made from a Fund's cash assets or,
if necessary, from the proceeds of sales of portfolio securities. Additional
income producing securities may not be able to be purchased with cash used to
make such distributions and its current income ultimately may be reduced as a
result.
GUARANTEED INVESTMENT CONTRACTS. Each Fund except the Intermediate
Municipal Bond Fund may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. insurance companies. Pursuant to
such contracts, a Fund makes cash contributions to a separate account of the
insurance company which has been segregated from the general assets of the
issuer. The insurance company then pays to the Fund, at the end of the contract,
an amount equal to the cash contributions adjusted for the total return of an
index. A GIC is a separate account obligation of the issuing insurance company.
A Fund will only purchase GICs from issuers which, at the time of purchase, are
rated A or higher by Moody's or S&P, have assets of $1 billion or more and meet
quality and credit standards established by the Advisor. Generally, GICs are not
assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in GICs does not currently exist.
Therefore, GICs are considered by the Fund to be subject to the 15% limitation
on illiquid investments. Generally, a GIC allows a purchaser to buy an annuity
with the money accumulated under the contract; however, a Fund will not purchase
any such annuities.
SMALL COMPANIES AND UNSEASONED ISSUERS. Small companies in which the
Funds may invest may have limited product lines, markets, or financial
resources, or may be dependent upon a small management group, and their
securities may be subject to more abrupt or erratic market movements than
larger, more established companies, both because their securities are typically
traded in lower volume and because the issuers are typically subject to a
greater degree of change in their earnings and prospects.
PORTFOLIO TURNOVER. Each Fund may sell a portfolio investment soon
after its acquisition if the Advisor believes that such a disposition is
consistent with attaining the investment objective of the Fund. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. A high rate of portfolio turnover (over
100%) may involve correspondingly greater transaction costs, which must be borne
directly by the Fund and ultimately by its shareholders. High portfolio turnover
may result in the realization of substantial net capital gains; to the extent
short-term capital gains are realized, distributions relating from such gains
will be ordinary income for federal income tax purposes.
OTHER INVESTMENT CONSIDERATIONS- INTERMEDIATE MUNICIPAL BOND FUND
The Fund's cash balances may be invested in short-term municipal notes
and tax-exempt commercial paper, as well as municipal bonds with remaining
maturities of thirteen months or less and securities issued by other investment
companies which invest in high quality, short-term municipal debt securities.
The value of the Fund's portfolio can be expected to vary inversely to changes
in prevailing interest rates.
From time to time, on a temporary defensive basis due to market
conditions, the Fund may hold without any limitation uninvested cash reserves
and invest without any limitations in high quality short-term taxable money
market obligations in such proportions as in the opinion of the Advisor,
prevailing market or economic conditions warrant. Uninvested cash reserves will
not earn income. Taxable obligations acquired by the Fund will not exceed under
normal conditions 20% of the Fund's net assets at the time of purchase.
MUNICIPAL OBLIGATIONS. Municipal obligations which may be acquired by
the Intermediate Municipal Bond Fund include debt obligations issued by
governmental entities to obtain funds for various public purposes, including the
construction of a wide range of public facilities, the refunding of outstanding
obligations, the payment of general operating expenses and the extension of
loans to public institutions and facilities.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
the Advisor will review the proceedings relating to the issuance of municipal
obligations or the basis for such opinions.
Certain of the municipal obligations held by the Fund may be insured at
the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the municipal
obligation at the time of its original issuance. In the event that the issuer
defaults on interest or principal payment, the insurer will be notified and will
be required to make payment to the bondholders. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will not
protect against market fluctuations caused by changes in interest rates and
other factors, including credit downgrades, supply and demand. The Fund may,
from time to time, invest more than 25% of its assets in municipal obligations
covered by insurance policies.
The payment of principal and interest on most securities purchased by
the Fund will depend upon the ability of the issuers to meet their obligations.
An issuer's obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on, and principal of, its municipal obligations may be materially
adversely affected by litigation or other conditions.
Certain types of municipal obligations (private activity bonds) have
been or are issued to obtain funds to provide privately operated housing
facilities, pollution control facilities, convention or trade show facilities,
mass transit, airport, port or parking facilities and certain local facilities
for water supply, gas, electricity or sewage or solid waste disposal. Private
activity bonds are also issued on behalf of privately held or publicly owned
corporations in the financing of commercial or industrial facilities. State and
local governments are authorized in most states to issue private activity bonds
for such purposes in order to encourage corporations to locate within their
communities. The principal and interest on these obligations may be payable from
the general revenues of the users of such facilities.
Municipal obligations purchased by the Fund may be backed by letters of
credit issued by foreign and domestic banks and other financial institutions.
Such letters of credit are not necessarily subject to federal deposit insurance
and adverse developments in the banking industry could have a negative effect on
the credit quality of the Fund's portfolio securities and its ability to
maintain a stable net asset value and share price. Letters of credit issued by
foreign banks, like other obligations of foreign banks, may involve certain
risks in addition to those of domestic obligations.
The Fund may purchase put options on municipal obligations. A put gives
the Fund the right to sell a municipal obligation at a specified price at any
time before a specified date. A put will be sold, transferred or assigned only
with the related municipal obligation. The Fund will acquire puts only to
enhance liquidity, shorten the maturity of the related municipal security or
permit the Fund to invest its assets at more favorable rates. The aggregate
price of a security subject to a put may be higher than the price which
otherwise would be paid for the security without such an option, thereby
increasing the security's cost and reducing its yield.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of
1986, interest on certain private activity bonds must be included in an
investor's alternative minimum taxable income, and corporate investors must
include all tax-exempt interest in their federal alternative minimum taxable
income. The Company cannot, of course, predict what legislation, if any, may be
proposed in the future as regards the income tax status of interest on municipal
obligations, or which proposals, if any, might be enacted. Such proposals, while
pending or if enacted, might materially and adversely affect the availability of
municipal obligations for investment by the Fund and the liquidity and value of
the Fund's portfolio. In such an event, the Company would reevaluate the Fund's
investment objective and policies and consider possible changes in its structure
or possible dissolution.
MUNICIPAL LEASE OBLIGATIONS. As stated in the Prospectus, the Fund may
acquire municipal lease obligations that are issued by a state or local
government authority to acquire land and a wide variety of equipment and
facilities. These obligations typically are not fully backed by the
municipality's credit, and their interest may become taxable if the lease is
assigned. If the funds are not appropriated for the following year's lease
payments, the lease may terminate, with the possibility of default on the lease
obligation and significant loss to the Fund. Certificates of participation in
municipal lease obligations or installment sale contracts entitle the holder to
a proportionate interest in the lease-purchase payments made. The Advisor
determines and monitors the liquidity of municipal lease obligations (including
certificates of participation) under guidelines approved by the Board of
Directors requiring the Advisor to evaluate the credit quality of such
obligations and report on the nature of and the Fund's trading experience in the
municipal lease market. Under the guidelines, municipal lease obligations that
are not readily marketable and transferable are treated as illiquid. In making a
determination that a municipal lease obligation is liquid, the Advisor may
consider, among other things (i) whether the lease can be canceled; (ii) the
likelihood that the assets represented by the lease can be sold; (iii) the
strength of the lessee's general credit; (iv) the likelihood that the
municipality will discontinue appropriating funds for the leased property
because the property is no longer deemed essential to the operations of the
municipality; and (v) availability of legal recourse in the event of failure to
appropriate. The Fund will not knowingly invest more than 15% of the value of
its net assets in securities, including municipal leases, that are illiquid.
STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a "stand-by
commitment" a dealer agrees to buy from the Fund, at the Fund's option,
specified municipal obligations at a specified price. "Stand-by commitment"
acquired by the Fund may also be referred to in this Statement of Additional
Information as "put" options.
The amount payable to the Fund upon its exercise of a "stand-by
commitment" is normally (i) the Fund's acquisition cost of the municipal
obligations (excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period. A stand-by commitment may be sold, transferred or assigned
by the Fund only with the instrument involved.
The Fund expects that "stand-by commitments" will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for the portfolio securities
which are acquired subject to the commitment (thus reducing the yield to
maturity otherwise available for the same securities). The total amount paid in
either manner for outstanding "stand-by commitments" held by the Fund will not
exceed 1/2 of 1% of the value of its total assets calculated immediately after
each "stand-by commitment" is acquired.
The Fund intends to enter into "stand-by commitments" only with
dealers, banks and broker/dealers which, in the Advisor's opinion, present
minimal credit risks. The Fund's reliance upon the credit of these dealers,
banks and broker/dealers is secured by the value of the underlying municipal
obligations that are subject to a commitment.
The Fund would acquire "stand-by commitments" solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a "stand-by commitment" would not affect
the valuation or assumed maturity of the underlying municipal securities, which
would continue to be valued in accordance with the ordinary method of valuation
employed by the Fund. "Stand-by commitment" which would be acquired by the Fund
would be valued at zero in determining net asset value. Where the Fund paid any
consideration directly or indirectly for a "stand-by commitment" its cost would
be reflected as unrealized depreciation for the period during which the
commitment was held by the Fund.
VARIABLE AND FLOATING RATE INSTRUMENTS. Municipal obligations purchased
by the Fund may include variable and floating rate instruments issued by
industrial development authorities and other governmental entities. If such
instruments are unrated, they will be determined by the Fund's Advisor (under
the supervision of the Board of Directors) to be of comparable quality at the
time of purchase to investment grade. While there may be no active secondary
market with respect to a particular variable or floating rate demand instrument
purchased by the Fund, the Fund may (at any time or during specified periods not
exceeding thirteen months, depending upon the instrument involved) demand
payment in full of the principal of the instrument and has the right to resell
the instrument to a third party. The absence of such an active secondary market,
however, could make it difficult for the Fund to dispose of a variable or
floating rate demand instrument if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss
with respect to such instruments.
With respect to the variable and floating rate instruments that may be
acquired by the Fund, the Advisor will consider the earning power, cash flows
and other liquidity ratios of the issuers and guarantors of such instruments
and, if the instrument is subject to a demand feature, will monitor their
financial status to meet payment on demand. In determining average weighted
portfolio maturity, an instrument will usually be deemed to have a maturity
equal to the longer of the period remaining to the next interest rate adjustment
or the time the Fund can recover payment of principal as specified in the
instrument. Variable U.S. government obligations held by the Fund, however, will
be deemed to have maturities equal to the period remaining until the next
interest rate adjustment.
TEMPORARY DEFENSIVE POSITION APPLICABLE TO ALL FUNDS
When the Advisor believes that market conditions are unfavorable for
profitable investing, or when the Advisor is otherwise unable to locate
attractive investment opportunities, the Fund's cash or similar investments may
increase. In other words, the Funds may not always stay fully invested in bonds.
Cash or similar investments generally are a residual - they represent the assets
that remain after the Advisor has committed available assets to desirable
investment opportunities. However, the Advisor may from time to time invest any
amount of its total assets in cash or similar investments (such as U.S.
Government securities, repurchase agreements, commercial paper or certificates
of deposit) as a temporary defensive position during adverse market conditions
to protect the Fund's assets or maintain liquidity. When a Fund takes a
temporary position, the Fund may not achieve its investment objective.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the fundamental investment limitations
enumerated in this subsection which may be changed only by a vote of the holders
of a majority of the Fund's outstanding shares. A majority of the outstanding
shares of the Fund means the lesser of (1) 67% of the shares of common stock of
the Fund represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of the Fund.
The Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any one 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 Fund's total assets would be invested in the securities of that
issuer, or (ii) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
2. May (i) borrow from banks for temporary or emergency purposes (but
not for leveraging or the purchase of investments), and (ii) make other
investments or engage in other transactions permissible under the 1940 Act,
which may involve a borrowing, including borrowing through reverse repurchase
agreements, provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets (including the amount borrowed),
less the Fund's liabilities (other than borrowings). If the amount borrowed at
any time exceeds 33 1/3% of the Fund's total assets, the Fund will, within three
days thereafter (not including Sundays, holidays and any longer permissible
period), reduce the amount of the borrowings such that the borrowings do not
exceed 33 1/3% of the Fund's total assets. The Fund may also borrow money from
other persons to the extent permitted by applicable laws.
3. May not issue senior securities, except as permitted under the
1940 Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within the
meaning of the 1933 Act, in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of other securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options, future contracts or other
derivative instruments, or from investing in securities or other instruments
backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same industry;
provided, however, that with regard to the Intermediate Municipal Bond Fund,
there is no limitation with respect to instruments issued or guaranteed by the
United States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions and repurchase agreements secured by such instruments.
8. May not purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or other instruments backed by real
estate or of issuers engaged in real estate activities).
9. With respect the Intermediate Municipal Bond Fund, may not invest
less than 80% of its net assets in securities the interest on which is exempt
from federal income tax, except during defensive periods or during unusual
market conditions. For purposes of this fundamental policy, municipal
obligations that are subject to federal alternative minimum tax are considered
taxable.
With respect to investment limitation No. 8, as it relates to the
Intermediate Municipal Bond Fund, real estate shall include real estate
mortgages. Although the foregoing investment limitations would permit the
Intermediate Municipal Bond Fund to invest in options, futures contracts,
options on futures contracts and engage in securities lending, the Fund, during
the current fiscal year, does not intend to trade in such instruments (except
that the Fund may purchase put options on municipal obligations) or lend
portfolio securities. Prior to engaging in any such transactions, the Fund will
provide its shareholders with notice and add any additional descriptions
concerning the instruments to the Prospectus and this SAI as may be required.
Unless noted otherwise, if a percentage restriction is adhered to at
the time of investment, a later increase or decrease in percentage resulting
from a change in the Fund's assets (i.e., due to cash inflows or redemptions) or
in market value of the investment or the Fund's assets will not constitute a
violation of that restriction. This does not, however, apply to the borrowing
policy set forth above.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS
The following are each Fund's non-fundamental operating policies which
may be changed by the Board of Directors without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund 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 (the "SEC") or its staff, and provided
that transactions in options, futures contracts, options on 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, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Purchase securities of other investment companies except in
compliance with the 1940 Act and applicable state law.
4. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act (the "CEA")
and, in accordance with Rule 4.5, will use futures or options on futures
transactions solely for bona fide hedging transactions (within the meaning of
the CEA), provided, however, that the Fund may, in addition to bona fide hedging
transactions, use futures and options on futures transactions if the aggregate
initial margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within the meaning
of the CEA), do not exceed 5% of the Fund's net assets.
5. Make any loans, except through (i) purchases of debt
securities or other debt instruments, or (ii) engaging in repurchase agreements.
6. Borrow money except from banks or through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
The Funds' non-fundamental investment policies listed above may be
changed with the approval of the Company's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in the Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or the Fund's assets will not constitute a violation of that
restriction. This does not, however, apply to the borrowing policy set forth
above.
NET ASSET VALUE
Shares of the Fund are sold on a continual basis at the net asset value
next computed following receipt of an order in proper form by a dealer, the
Distributor or the Transfer Agent.
The net asset value per share of the Fund is calculated separately for
the Investor Class Shares and Institutional Class Shares by adding the value of
all portfolio securities and other assets per class (including interest or
dividend accrued, but not yet collected) subtracting the liabilities, and
dividing the result by the number of outstanding shares of that class. The
result, rounded to the nearest cent, is the net asset value per share.
On determining net asset value, expenses are accrued and applied daily.
Common stocks and other equity-type securities are valued at the last sales
price on the national securities exchange or Nasdaq on which such securities are
primarily traded; however, securities traded on a national securities exchange
or Nasdaq for which there were no transactions on a given day, and securities
not listed on a national securities exchange or Nasdaq, are valued at the
average of the most recent bid and asked prices. Any securities or other assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by the Board of Directors of the Company or its
delegate. The Board of Directors may approve the use of pricing services to
assist the Fund in the determination of net asset value. All money market
instruments held by the Fund will be valued on an amortized cost basis. The
calculation of the net asset value of the Fund may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and 3:00 p.m. Central
time, and at other times, may not be reflected in the calculation of net asset
value of the Fund. The New York Stock Exchange is currently closed on the
following holidays: New Year's Day, Martin Luther King Jr.'s Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shareholder organizations or institutions may be paid by the Fund for
advertising, distribution or shareholder services. Depending on the terms of the
particular account, shareholder organizations or institutions also may charge
their customers fees for automatic investment, redemption and other services
provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Shareholder organizations or institutions are responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Fund may also suspend or postpone the recording
of the transfer of their shares upon the occurrence of any of the foregoing
conditions.)
The Company has filed an election pursuant to Rule 18f-1 under the 1940
Act which provides that each fund of the Company is obligated to redeem shares
solely in cash up to $250,000 or 1% of the net asset value of the class of
shares of the fund being redeemed, whichever is less, for any one shareholder
within a 90-day period. Any redemption beyond this amount may be made in
proceeds other than cash.
In addition to the situations described in the Fund's Prospectus under
"General Transaction Policies," the Fund may redeem shares involuntarily when
appropriate under the 1940 Act, such as to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectus from time to time.
EXCHANGE PRIVILEGE. By use of the exchange privilege, shareholders
authorize the transfer agent to act on exchange instructions received in
writing, by telephone, or through the Fund's website from any person
representing himself to be the shareholder, or, in some cases, the shareholder's
registered representative or account representative of record, and believed by
the transfer agent to be genuine. The transfer agent's records of such
instructions are binding. The exchange privilege may be modified or terminated
at any time upon notice to shareholders.
Shares in the Fund from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new Fund into which the shareholder is
investing will be purchased at the net asset value per share next determined
after acceptance of the request by the Fund's transfer agent in accordance with
the policies for accepting investments. Exchanges of shares will be available
only in states where they may legally be made.
RETIREMENT PLANS: INVESTOR CLASS SHARES OF THE FUNDS
INDIVIDUAL RETIREMENT ACCOUNTS. The Company has available a plan (the
"Traditional IRA") for use by individuals with earned income who wish to use
shares of the Fund as a funding medium for individual retirement saving.
However, except for rollover contributions, an individual who has attained, or
will attain, age 70 1/2 before the end of the taxable year may only contribute
to a Traditional IRA for his or her nonworking spouse under age 70 1/2.
The Company also has available a Roth Individual Retirement Account
(the "Roth IRA") for retirement saving for use by individuals with earned
income. A single individual with adjusted gross income of up to $110,000 may
contribute to a Roth IRA (for married couples filing jointly, the adjusted gross
income limit is $160,000), and contributions may be made even after the Roth IRA
owner has attained age 70 1/2, as long as the account owner has earned income.
The Company permits certain employers (including self-employed
individuals) to make contributions to employees' Traditional IRAs if the
employer establishes a Simplified Employee Pension ("SEP") plan and/or a Salary
Reduction SEP ("SARSEP"). Although SARSEPs may not be established after 1996,
employers may continue to make contributions to SARSEPs established before
January 1, 1997, under the pre-1997 federal tax law.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS. The
Company also has available a simplified tax-favored retirement plan for
employees of small employers (a "SIMPLE IRA Plan"). If an employer establishes a
SIMPLE IRA Plan, contributions under the Plan are made to eligible employees'
SIMPLE individual retirement accounts ("SIMPLE IRAs"). Each eligible employee
may choose to defer a percentage of his or her pre-tax compensation to the
employee's SIMPLE IRA. The employer must generally make an annual matching
contribution to the SIMPLE IRA of each eligible employee equal to the employee's
salary reduction contributions, up to a limit of 3% of the employee's
compensation. Alternatively, the employer may make an annual non-discretionary
contribution to the SIMPLE IRA of each eligible employee equal to 2% of each
employee's compensation.
In the SIMPLE IRA Plan and in Traditional and Roth IRAs, distributions
of net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the SIMPLE IRA Plan, the Traditional IRA, or the Roth IRA
available for investment in the Funds. Any person who wishes to establish a
retirement plan account may do so by contacting the Funds at 1-866-44BAIRD. The
complete Plan documents and applications will be provided to existing or
prospective shareholders upon request, without obligation. The Company
recommends that investors consult their attorneys or tax advisors to determine
if the retirement programs described herein are appropriate for their needs.
ADDITIONAL INFORMATION REGARDING SHAREHOLDER SERVICES
The Investor Class and Institutional Class Shares of the Funds offer an
Automatic Investment Plan whereby a shareholder may automatically make purchases
of shares of a Fund on a regular, monthly basis ($500 minimum per transaction).
Under the Automatic Investment Plan, a shareholder's designated bank or other
financial institution debits a preauthorized amount on the shareholder's account
each month or quarter and applies the amount to the purchase of Fund Shares. The
Automatic Investment Plan must be implemented with a financial institution that
is a member of the Automated Clearing House. No service fee is currently charged
by a Fund for participation in the Automatic Investment Plan. A $25 fee will be
imposed by the transfer agent if sufficient funds are not available in the
shareholder's account or the shareholder's account has been closed at the time
of the automatic transaction.
The Automatic Investment Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in Shares at predetermined intervals. This may
help investors to reduce their average cost per share because the agreed upon
fixed investment amount allows more Fund Shares to be purchased during periods
of lower Fund Share prices and fewer Fund Shares to be purchased during periods
of higher Fund Share prices. In order to be effective, Dollar Cost Averaging
should usually be followed on a sustained, consistent basis. Investors should be
aware, however, that Fund Shares bought using Dollar Cost Averaging are
purchased without regard to their price on the day of investment or to market
trends. Dollar Cost Averaging does not assure a profit and does not protect
against losses in a declining market. In addition, while investors may find
Dollar Cost Averaging to be beneficial, it will not prevent a loss if an
investor ultimately redeems his Fund Shares at a price which is lower than their
purchase price. An investor may want to consider his financial ability to
continue purchases through periods of low price levels.
The Shares of the Funds offer shareholders a Systematic Withdrawal
Plan, which allows a shareholder who owns shares of a Fund worth at least $5,000
at current net asset value at the time the shareholder initiates the Systematic
Withdrawal Plan to designate that a fixed sum ($50 minimum per transaction) be
distributed to the shareholder or as otherwise directed at regular intervals.
SPECIAL PROCEDURES FOR IN-KIND PAYMENTS
Payment for shares of a Fund may, in the discretion of the Fund, be
made in the form of securities that are permissible investments for the Fund as
described in its Prospectus. For further information about this form of payment,
contact the Funds at 1-866-44BAIRD. In connection with an in-kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund;
that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; that adequate information be provided to
the Fund concerning the basis and other tax matters relating to the securities;
and that the amount of the purchase be at least $1,000,000.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of
Directors to issue an indefinite number of shares of common stock, $.01 par
value per share, which is classified into six series (each, a "series" or
"fund"). Each series is divided into two classes designated as Investor Class
Shares and Institutional Class Shares (each, a "Class") and consists of the
number of shares set forth next to its Fund name in the table below:
Class of Fund in which Stock Number of Authorized
Common Stock Represents Interest Shares in Each Series
Investor Intermediate Bond Fund Indefinite
Institutional Indefinite
Investor Core Bond Fund Indefinite
Institutional Indefinite
Investor Aggregate Bond Fund Indefinite
Institutional Indefinite
Investor Short-Term Bond Fund Indefinite
Institutional Indefinite
Investor Intermediate Municipal Bond Fund Indefinite
Institutional Indefinite
The Board of Directors has also authorized the issuance of one
additional series of common stock representing an interest in one other separate
investment portfolio which is described in a separate Statement of Additional
Information. The Board of Directors may classify or reclassify any particular
class of shares into one or more additional series or classes. Each share of
common stock of each class is entitled to one vote, and each share is entitled
to participate equally in dividends and capital gains distribution by the
respective class of shares and in the residual assets of the respective class in
the event of liquidation. However, each class of shares bears its own expenses,
and the Investor Class has exclusive voting rights on matters pertaining to the
Rule 12b-1 Plan.
ADDITIONAL INFORMATION CONCERNING TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Code, and to distribute out its income to shareholders each
year, so that the Fund itself generally will be relieved of federal income and
excise taxes. If a Fund were to fail to so qualify: (1) the Fund would be taxed
at regular corporate rates without any deduction for distributions to
shareholders; and (2) shareholders would be taxed as if they received ordinary
dividends, although corporate shareholders could be eligible for the dividends
received deduction.
The Intermediate Municipal Bond Fund intends to invest all, or
substantially all, of its assets in debt obligations, the interest on which is
exempt for federal income tax purposes. For the Fund to pay tax-exempt dividends
for any taxable year, at least 50% of the aggregate value of the Fund's assets
at the close of each quarter of the Fund's taxable year must consist of
exempt-interest obligations. The Intermediate Municipal Bond Fund is designed to
provide investors with current tax-exempt interest income. The Fund is not
intended to constitute a balanced investment program and is not designed for
investors seeking capital appreciation or maximum tax-exempt income irrespective
of fluctuations in principal. Shares of the Fund may not be suitable for
tax-exempt institutions, or for retirement plans qualified under Section 401 of
the Code, H.R. 10 plans and individual retirement accounts because such plans
and accounts are generally tax-exempt and, therefore, not only would not gain
any additional benefit from the Fund's dividends being tax-exempt, but such
dividends ultimately would be taxable to the beneficiaries when distributed to
them. In addition, the Fund may not be an appropriate investment for entities
which are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, who occupies more
than 5% of the usable area of such facilities, or for whom such facilities, or a
part thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
MANAGEMENT OF THE COMPANY
Under the laws of the State of Wisconsin, the business and affairs of
the Fund are managed under the direction of the Board of Directors (the "Board")
of the Company. The Board is responsible for acting on behalf of the
shareholders.
The Company does not normally hold shareholders' meetings except when
required by the 1940 Act or other applicable law. The Board will call a
shareholders' meeting for the purpose of voting on the question of removal of a
Director when requested to do so in writing by the record holders of not less
than 10% of the outstanding shares of the Company that are entitled to vote.
DIRECTORS AND OFFICERS
Directors and officers of the Company, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each Director who is deemed an "interested person,"
as defined in the 1940 Act, is indicated by an asterisk (*). Each officer and
Director holds the same positions with the Company and each Fund. The Company,
in the aggregate, pays each Director who is not a director, officer, or employee
of the Advisor, or any affiliated company (a "disinterested director") an annual
fee of $10,000 plus $1,000 per Board meeting. In addition, each disinterested
director is reimbursed by the Baird Funds for travel and other expenses incurred
in connection with attendance at such meetings. Officers and directors of the
Baird Funds who are deemed "interested persons" of the Company or the Fund, as
defined in the 1940 Act, receive no compensation or expense reimbursement from
the Baird Funds. Neither the Company nor the Fund maintains any deferred
compensation, pension or retirement plans, and no pension or retirement benefits
are accrued as part of Company or Fund expenses.
<TABLE>
<CAPTION>
------------------------------------- ----------------------- -------------------------------------------------------
POSITION(S) HELD WITH PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS AND OTHER
NAME, ADDRESS & AGE THE COMPANY AFFILIATIONS
------------------------------------- ----------------------- -------------------------------------------------------
<S> <C> <C>
G. Frederick Kasten, Jr.* Director and Chairman Chairman, the Advisor since January 2000; Chairman &
777 East Wisconsin Avenue CEO, the Advisor (January 1998-January 2000);
Milwaukee, WI 53202 President, Chairman and CEO, the Advisor (June
(DOB 2/14/39) 1963-January 1998)
John W. Feldt Director Senior Vice President-Finance, University of
University of Wisconsin Foundation Wisconsin Foundation since 1985; Vice
1848 University Avenue President-Finance, University of Wisconsin Foundation
Madison, WI 53705 (1980-1985); Associate Director, University of
(DOB 5/2/42) Wisconsin Foundation (1967-1980)
George C. Kaiser Director CEO, George Kaiser & Co., a business consulting
759 N. Milwaukee Street company, since 1988; Chairman and CEO, Hanger Tight
Milwaukee, WI 53202 Company, a manufacturing company (1988-1999);
(DOB 1/20/33) Chairman and CEO, Interstore Transfer Systems, Ltd.,
a manufacturing company (1992-1999); Chairman,
International Retail Services Group, Ltd.
(1995-1999); Executive Vice President, Arandell
Schmidt Co., a catalog printer company (1984-1987);
various positions, Arthur Andersen & Co. (1957-1964,
1967-1984), most recently serving as Partner
(1969-1984); Secretary of Administration, State of
Wisconsin (1965-1967)
Stephen A. Roell Director Senior Vice President and Chief Financial Officer,
5757 N. Green Bay Avenue Johnson Controls, Inc., a manufacturing company,
Milwaukee, WI 53201 since 1998; Vice President and Chief Financial
(DOB 12/21/49) Officer, Johnson Controls, Inc. (1991-1998);
Corporate Controller and Assistant Secretary, Johnson
Controls, Inc. (1990-1991)
Mary Ellen Stanek President Managing Director and Chief Financial Officer, the
777 East Wisconsin Avenue Advisor since March 2000; President and CEO, Firstar
Milwaukee, WI 53202 Investment Research & Management Company, LLC
(DOB 4/18/56) ("Firstar") (November 1998-February 2000); President
and Chief Operating Officer, Firstar (March 1994-November
1998); Executive Vice President, Firstar (July 1990-March 1994);
Vice President and Director of Fixed Income Services,
Firstar Trust Company Services (May 1983-July 1990); Portfolio
Manager, Firstar Trust Company (April 1979-July 1990)
Joel D. Vrabel Senior Vice President Senior Vice President and Portfolio Manager, the
777 East Wisconsin Avenue Advisor since January 1995; Vice President, Campbell,
Milwaukee, WI 53202 Newman, Pottinger & Associates, Inc. (May
(DOB 6/2/49) 1991-January 1995); Vice President, Kennedy
Associates, Inc. (August 1985-April 1991); President,
Ziegler & Vrabel Investment Advisors (August
1983-July 1985)
Glen F. Hackmann Vice President Secretary, General Counsel and Managing Director, the
777 East Wisconsin Avenue Advisor (September 1984-present)
Milwaukee, WI 53202
(DOB 4/30/41)
Russell P. Schwei Vice President Operations Director, the Advisor since December 1999;
777 East Wisconsin Avenue Chief Financial Officer and Managing Director, the
Milwaukee, WI 53202 Advisor (February 1999-December 1999); Managing
(DOB 6/2/59) Director, the Advisor (January 1997-present); Senior
Vice President, the Advisor (January 1996-January
1997); First Vice President (June 1984-January 1996)
Leonard M. Rush Treasurer Chief Financial Officer, the Advisor since January
777 East Wisconsin Avenue 2000; Assistant Treasurer, FMR Company, a mutual
Milwaukee, WI 53202 funds company (April 1994-December 1999); Chief
(DOB 1/2/46) Compliance Officer, FMR Corporation, a holding
company (March 1993-April 1994); Chief Financial
Officer, Fidelity Brokerage Services Inc. (October
1990-March 1993)
Brett R. Meili Secretary Associate General Counsel, the Advisor since April
777 East Wisconsin Avenue 1999; Senior Counsel, Strong Capital Management, Inc.
Milwaukee, WI 53202 (January 1996-April 1999); Senior Counsel, Blue Cross
(DOB 4/27/62) Blue Shield United of Wisconsin (November
1993-December 1995); Attorney, Godfrey & Kahn, S.C.
(August 1990-November 1993)
Lisa L. Kollmeyer Assistant Secretary Senior Paralegal, the Advisor since April 2000;
777 East Wisconsin Avenue Senior Paralegal, Strong Capital Management (April
Milwaukee, WI 53202 1995-April 2000); Paralegal, Godfrey & Kahn, S.C.
(DOB 12/28/66) (February 1992-April 1995)
Christine P. Gray Assistant Treasurer Compliance Officer, Firstar Mutual Fund Services, LLC
615 East Michigan Street since December 1998; Attest Services In-Charge, KPMG
Milwaukee, WI 53202 LLP (July 1996 - December 1998); Associate, B.C.
(DOB 11/27/74) Holdings Inc. (January 1994 - June 1996)
------------------------------------- ----------------------- -------------------------------------------------------
</TABLE>
The disinterested members of the Company's Board of Directors receive
the following compensation:
-------------------- ----------------------- ------------------------
NAME AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM COMPANY PAID TO
COMPANY(1) DIRECTORS
-------------------- ----------------------- ------------------------
John W. Feldt $6,000 $6,000
George C. Kaiser $6,000 $6,000
Stephen A. Roell $6,000 $6,000
-------------------- ----------------------- ------------------------
(1) Compensation is estimated for the current fiscal year, ending
December 31, 2000.
As of September 26, 2000, Directors and Officers of the Company did not
beneficially own any of the shares of common stock of the Fund's then
outstanding shares; however, the Advisor owned 100% of such shares.
PRINCIPAL SHAREHOLDERS
As of September 26, 2000, which was prior to the public offering of the
Fund's shares, the Advisor, a Wisconsin corporation, owned of record 100% of the
Fund's shares. Accordingly, as of September 26, 2000, the Advisor owned a
controlling interest in the Fund. Shareholders with a controlling interest could
effect the outcome of proxy voting or the direction of management of the
Company. The Advisor is a majority owned subsidiary of Baird Financial
Corporation which is a majority owned subsidiary of the Northwestern Mutual Life
Insurance Company.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Company's Board of Directors,
the Advisor is responsible for, makes decisions with respect to, and places
orders for all purchases and sales of portfolio securities for each Fund.
The portfolio turnover rate for each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Funds to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making portfolio
decisions, and each Fund may engage in short-term trading to achieve its
investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Advisor will normally deal directly with dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere or as described below.
Fixed income securities purchased and sold by the Funds are generally
traded in the over-the-counter market on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Advisor, in its
sole discretion, believes such practice to be in the Funds' interests.
The Investment Advisory Agreement (the "Agreement") between the Company
and the Advisor provides that, in executing portfolio transactions and selecting
brokers or dealers, the Advisor will seek to obtain the most favorable prices
and at reasonable commission rates. In assessing the best overall terms
available for any transaction, the Advisor shall consider factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commissions, if any, both for the specific
transaction and on a continuing basis. In addition, the Agreement authorizes the
Advisor to cause the Funds to pay a broker/dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker/dealer for effecting the same transaction, provided that the
Advisor determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker/dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Advisor to the Funds. Such brokerage and
research services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable to it by the Funds. The Board of Directors will
periodically review the commissions paid by the Funds to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Funds. Research services furnished by
the firms through which the Fund effects its securities transactions may be used
by the Advisor in servicing all of its accounts; not all of such services may be
used by the Advisor in connection with the Fund. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other accounts for which investment discretion is exercised. Conversely,
a Fund may be the primary beneficiary of the research or services received as a
result of portfolio transactions effected for such other account.
Portfolio securities will not be purchased from or sold to (and savings
deposits will not be made in and repurchase and reverse repurchase agreements
will not be entered into with) the Advisor or an affiliated person of the
Advisor (as such term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) acting as principal. In addition, the Funds will not
purchase securities during the existence of any underwriting or selling group
relating thereto of which the Advisor or an affiliated person is a member,
except to the extent permitted by the SEC.
Investment decisions for the Funds are made independently from those
for other accounts advised or managed by their Advisor. Such other accounts may
also invest in the same securities as the Funds. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Advisor believes to be
equitable to the Fund and such other account. In some instances, this investment
procedure may adversely affect the price paid or received by a Fund or the size
of the position obtained or sold by the Fund. To the extent permitted by law,
the Advisor may aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for other accounts in executing transactions.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY SERVICES
On August 14, 2000, the Board of Directors (including at least a
majority of the disinterested Directors) and the shareholders of the Fund
approved an investment advisory agreement (the "Advisory Agreement") pursuant to
which Robert W. Baird & Co. Incorporated, 777 East Wisconsin Avenue, Milwaukee,
WI 53202, furnishes continuous investment advisory services and management to
the Fund. The Advisor is an investment advisory firm formed in the state of
Wisconsin on December 29, 1919. In its Advisory Agreement, the Advisor has
agreed to pay all expenses incurred by it in connection with its advisory
activities, other than the cost of securities and other investments, including
brokerage commissions and other transaction charges, if any, purchased or sold
for the Fund.
The Advisory Agreement terminates in the event of its assignment and
generally may be terminated by either party if certain conditions are met,
without penalty, on 60 days' notice. The Advisory Agreement will continue in
effect until September 29, 2002 (unless sooner terminated) and thereafter for
successive one-year periods so long as it is approved annually (a) by the vote
of a majority of the disinterested Directors, cast in person at a meeting called
for the purpose of voting on such approval, and (b) either by the Board of
Directors of the Company or by the vote of the shareholders as described under
"Miscellaneous" below.
The Company has entered into an Administration Agreement with the
Advisor for each Fund.
Under the Administration Agreement the Advisor renders all
administrative and supervisory services to the applicable Fund. The Advisor
oversees the maintenance of all books and records with respect to the Fund's
securities transactions and the Fund's book of accounts in accordance with all
applicable federal and state laws and regulations. The Advisor also arranges for
the preservation of journals, ledgers, corporate documents, brokerage account
records and other records which are required pursuant to Rule 31a-1 promulgated
under the 1940 Act. The Advisor is also responsible for the equipment, staff,
office space and facilities necessary to perform its obligations. The Advisor
has delegated some of its administrative and other responsibilities to Firstar
Mutual Fund Services, LLC ("FMFS") and is responsible for paying all fees and
expenses of FMFS. Under the Administration Agreement, the Advisor assumes and
pays all expenses of the applicable Fund, excluding brokerage fees and
commissions, taxes, borrowing costs (such as (a) interest and (b) dividend
expenses on securities sold short) and extraordinary or non-recurring expenses.
Each Fund also pays expenses which it is authorized to pay pursuant to Rule
12b-1 under the 1940 Act.
Pursuant to the Administration Agreement, the Advisor receives a fee
which is paid monthly at an annual rate of 0.05% of the applicable Fund's
average daily net assets.
The Advisor may act as an investment advisor and administrator to other
persons, firms, or corporations (including investment companies), and may have
numerous advisory clients besides the Funds.
As compensation for its advisory services, the Fund pays to the Advisor
a monthly management fee at the annual rate of 0.25% of the average daily net
asset value of the Fund. From time to time the Advisor may voluntarily waive all
or a portion of its Management Fee for the Fund.
CODE OF ETHICS
The Company, the Advisor and the Distributor have each adopted a
written Code of Ethics under Rule 17j-1 of the 1940 Act. These Codes of Ethics
govern the personal securities transactions of directors, officers, managers,
members, and employees who may have access to current trading information of the
Funds. These Codes of Ethics permit such persons to invest in securities for
their personal accounts, including securities that may be purchased or held by
the Funds. These Codes of Ethics include reporting and other obligations to
monitor personal transactions and ensure that such transactions are consistent
with the best interests of the Funds.
FUND ADMINISTRATION
FMFS provides administrative personnel and services (including blue-sky
services) to the Company and the Funds. Administrative services include, but are
not limited to, providing equipment, telephone facilities, various personnel,
including clerical and supervisory, and computers as is necessary or beneficial
to provide compliance services to the Funds and the Company.
FINANCIAL INTERMEDIARIES
From time to time, the Funds may pay, directly or indirectly, amounts
to financial intermediaries that provide transfer-agent type and/or other
administrative services relating to the Funds to their customers or other
persons who beneficially own interests in the Funds, such as participants in
401(k) plans. These services may include, among other things, sub-accounting
services, transfer agent-type services, answering inquiries relating to the
Funds, transmitting, on behalf of the Funds, proxy statements, annual reports,
updated prospectuses, other communications regarding the Funds, and related
services as the Funds or the intermediaries' customers or such other persons may
reasonably request. In such cases, to the extent paid by the Funds, the Funds
will not pay more for these services through intermediary relationships than it
would if the intermediaries' customers were direct shareholders in the Funds.
CUSTODIAN
Firstar Bank, N.A., 425 Walnut Street Cincinnati, Ohio, 45202, serves
as custodian of the Funds' assets. Under the Custody Agreement, Firstar Bank,
N.A. has agreed to (i) maintain a separate account in the name of each Fund,
(ii) make receipts and disbursements of money on behalf of each Fund, (iii)
collect and receive all income and other payments and distributions on account
of each Fund's portfolio investments, (iv) respond to correspondence from
shareholders, security brokers and others relating to its duties and (v) make
periodic reports to the Company concerning each Fund's operations. Firstar Bank,
N.A. may, at its own expense, open and maintain a custody account or accounts on
behalf of each Fund with other banks or trust companies, provided that Firstar
Bank, N.A. shall remain liable for the performance of all of its duties under
the Custody Agreement notwithstanding any delegation.
TRANSFER AGENT
FMFS, 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as
transfer agent and dividend disbursing agent for each Fund under a Shareholder
Servicing Agent Agreement. As transfer and dividend disbursing agent, FMFS has
agreed to (i) issue and redeem shares of the Funds, (ii) make dividend and other
distributions to shareholders of the Funds, (iii) respond to correspondence by
Fund shareholders and others relating to its duties, (iv) maintain shareholder
accounts, and (v) make periodic reports to the Funds.
FUND ACCOUNTING
In addition, the Funds have entered into a Fund Accounting Servicing
Agreement with FMFS pursuant to which FMFS has agreed to maintain the financial
accounts and records of the Funds in compliance with the 1940 Act and to provide
other accounting services to the Funds.
DISTRIBUTOR
Robert W. Baird & Co. Incorporated also serves as the principal
distributor for shares of the Funds pursuant to a Distribution Agreement with
the Company dated as of September 26, 2000 (the "Distribution Agreement"). The
Advisor is registered as a broker/dealer under the Securities Exchange Act of
1934 and each state's securities laws and is a member of the NASD. The offering
of the Funds' shares is continuous. The Distribution Agreement provides that the
Advisor, as agent in connection with the distribution of Fund shares, will use
its best efforts to distribute the Funds' shares.
DISTRIBUTION PLAN
PLAN
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. The Plan authorizes payments by the Fund in connection
with the distribution of Investor Class Shares at an annual rate of 0.25% of the
Fund's average daily net asset value. Payments may be made by the Fund under the
Plan for the purpose of financing any activity primarily intended to result in
the sale of shares of the Fund, as determined by the Board of Directors. Such
activities typically include advertising; compensation for sales and sales
marketing activities of financial service agents and others, such as dealers or
distributors; shareholder account servicing; production and dissemination of
prospectuses and sales and marketing materials; and capital or other expenses of
associated equipment, rent, salaries, bonuses, interest and other overhead. To
the extent any activity is one which the Fund may finance without the Plan, the
Fund may also make payments to finance such activity outside of the Plan and not
subject to its limitations. Payments under the Plan are based upon a percentage
of average daily net assets attributable to the Investor Class regardless of the
amounts actually paid or expenses actually incurred by the Distributor; however,
in no event, may such payments exceed the maximum allowable fee. It is,
therefore, possible that the Distributor may realize a profit in a particular
year as a result of these payments. The Plan increases the Investor Class's
expenses from what they would otherwise be. The Fund may engage in joint
distribution activities with other Baird Funds and to the extent the expenses
are not allocated to a specific Fund, expenses will be allocated based on each
Fund's net assets.
Administration of the Plan is regulated by Rule 12b-1 under the 1940
Act, which requires that the Board of Directors receive and review at least
quarterly reports concerning the nature and qualification of expenses which are
made, that the Board of Directors, including a majority of the disinterested
Directors, approve all agreements implementing the Plan and that the Plan may be
continued from year-to-year only if the Board of Directors, including a majority
of the disinterested Directors, concludes at least annually that continuation of
the Plan is likely to benefit shareholders.
INTERESTS OF CERTAIN PERSONS
With the exception of the Advisor, in its capacity as the Fund's
investment advisor and principal underwriter of Fund shares, no "interested
person" of the Fund, as defined in the 1940 Act, and no director of the Company
who is not an "interested person" has or had a direct or indirect financial
interest in the Plan or any related agreement.
ANTICIPATED BENEFITS TO THE FUND
The Board of Directors considered various factors in connection with
its decision to approve the Plan, including: (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans or pricing structures;
(e) the relationship of the Plan to other distribution efforts of the Fund; and
(f) the possible benefits of the Plan to any person relative to those of the
Fund.
Based upon its review of the foregoing factors an the material
presented to it, and in light of its fiduciary activities under relevant state
law and the 1940 Act, the Board of Directors determined, in the exercise of its
business judgment, that the Plan was reasonably likely to benefit the Investor
Class and its shareholders in at least one or several potential ways.
Specifically, the Board concluded that the Distributor and any recipients would
have little or no incentive to incur promotional expenses on behalf of the
Investor Class if the Plan were not in place to reimburse them, thus making the
adoption of the Plan important to the initial success and thereafter, continued
viability of the Investor Class. In addition, the Board determined that the
payment of distribution fees to these persons should motivate them to provide an
enhanced level of service to Investor Class shareholders, which would, of
course, benefit such shareholders. Finally, the adoption of the Plan would help
to increase assets under the management in a short amount of time, given the
marketing efforts on the part of the Distributor and recipients to sell Investor
Class shares which should result in certain economies of scale.
While there is no assurance that the expenditure of Investor Class
assets to finance distribution of Investor Class shares will have the
anticipated results, the Board of Directors believe there is a reasonable
likelihood that one or more of such benefits will result, and since the Board
will be in a position to monitor the distribution expenses of the Investor
Class, it will be able to determine the benefit of such expenditures in deciding
whether to continue the Plan.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin, 53202, has been selected as the independent accountants of
the Company. As such, it is responsible for auditing the financial statements of
the Funds.
The following financial statements of the Fund are contained herein:
Report of Independent Accountants
To the Shareholder and Board of Directors of
Baird Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Baird Intermediate Bond Fund, the Baird Core Bond
Fund, the Baird Aggregate Bond Fund, and the Baird Horizon Growth Fund
(comprising Baird Funds, Inc., hereafter referred to as the "Funds") at
September 14, 2000 and the results of its operations from the period June 9,
2000 (inception date) through September 14, 2000 , in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Funds' management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 15, 2000
<TABLE>
<CAPTION>
INTERMEDIATE CORE AGGREGATE HORIZON
BOND FUND BOND FUND BOND FUND GROWTH FUND
----------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 25,000 $ 25,000 $ 25,000 $ 25,000
Receivable from advisor - - - 7,405
----------------- ---------------- ---------------- ------------------
25,000 25,000 25,000 32,405
LIABILITIES
Accrued organizational expenses - - - 7,405
----------------- ---------------- ---------------- ------------------
NET ASSETS $ 25,000 $ 25,000 $ 25,000 $ 25,000
----------------- ---------------- ---------------- ------------------
INSTITUTIONAL SHARES
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares outstanding
($0.01 par value, unlimited
shares authorized) 1,250 1,250 1,250 1,250
Net asset value and offering
price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------------- ---------------- ---------------- ------------------
INVESTOR SHARES
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares outstanding
($0.01 par value, unlimited
shares authorized) 1,250 1,250 1,250 1,250
Net asset value and offering
price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------------- ---------------- ---------------- ------------------
Expenses:
Organizational $ - $ - $ - $ 7,405
expenses
Expenses reimbursed - - - (7,405)
by advisor ----------------- --------------- --------------- ------------------
Net income/loss $ - $ - $ - $ -
----------------- --------------- --------------- ------------------
</TABLE>
1. ORGANIZATION
The Baird Funds, Inc. (the "Corporation") was organized as a
Wisconsin corporation on June 9, 2000 and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The
Corporation currently offers four series of shares to investors: the
Baird Intermediate Bond Fund, the Baird Core Bond Fund, the Baird
Aggregate Bond Fund, and the Baird Horizon Growth Fund (collectively
referred to as the "Funds"). Pursuant to the 1940 Act, the Funds are
"diversified" series of the Corporation. Each Fund's operations to date
have been limited to the receipt of $25,000 of seed capital from Robert
W. Baird & Co. Incorporated (the "Advisor") and any organizational
activities. Each Fund offers both Investor Class shares and
Institutional Class shares. Two additional series, the Baird Short-Term
Bond Fund and the Baird Intermediate Municipal Bond Fund, are not
presently being offered to investors.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION COSTS
Expenses in connection with the organization of the Baird
Intermediate Bond Fund, the Baird Core Bond Fund, and the Baird
Aggregate Bond Fund have been assumed by the Advisor, pursuant to an
Administration Agreement between the Funds and the Advisor (see Note
2). Accordingly, no organizational expenses have been reported in these
Funds' Statement of Operations. Expenses in connection with the
organization of the Baird Horizon Growth Fund will be reimbursed by the
Advisor. These reimbursed expenses may be recovered by the Advisor in
the future, subject to certain limitations (see Note 3).
FEDERAL INCOME TAXES
The Funds intend to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders in a manner which results in no tax cost to the Funds.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the
financial statements. Actual results could differ from those estimates.
3. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
The Corporation has an agreement with the Advisor, with whom
certain officers and directors of the Funds are affiliated, to furnish
investment advisory services to the Funds. Under the terms of the
agreement, the Funds compensate the Advisor for its management services
at the annual rate of 0.25% of each Fund's average daily net assets,
except the Baird Horizon Growth Fund, which compensates the Advisor at
a rate of 0.65%.
The Corporation has entered into an Administration Agreement with the
Advisor covering the Baird Intermediate Bond Fund, the Baird Core Bond
Fund, and the Baird Aggregate Bond Fund. Under the Administration
Agreement the Advisor renders all administrative and supervisory
services to these Funds. The Advisor oversees the accounting and
recordkeeping of the applicable Funds and is also responsible for the
equipment, staff, office space and facilities necessary to perform its
obligations. The Advisor has delegated some of its administrative and
other responsibilities to Firstar Mutual Fund Services, LLC ("FMFS")
and is responsible for paying all fees and expenses of FMFS. Under the
Administration Agreement, the Advisor assumes and pays all expenses of
the applicable Fund, excluding brokerage fees and commissions, taxes,
borrowing costs (such as (a) interest and (b) dividend expenses on
securities sold short) and extraordinary or non-recurring expenses.
Pursuant to the Administration Agreement, the Advisor receives a fee
which is paid monthly at an annual rate of 0.05% of the applicable
Fund's average daily net assets.
For the Baird Horizon Growth Fund, the Advisor has agreed, through
December 31, 2001, to waive its fees and reimburse expenses to the
extent that the Fund's total annual operating expenses exceed an annual
rate of 1.40% of average net assets attributable to the Institutional
Class and 1.65% of average net assets attributable to the Investor
Class. The Advisor can recapture any expenses or fees it has waived or
reimbursed within a three-year period if the expenses ratios in those
future years are less than the limits specified above and less than the
limits in effect at that future time. However, the Fund is not
obligated to pay any such waived fees more than three years after the
end of the fiscal year in which the fee was waived or reimbursed.
4. DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments
by the Funds in connection with the distribution of Investor Class
Shares at an annual rate of 0.25% of each Fund's average daily net
asset value attributable to the Investor Class shares. Payments under
the Plan are based upon a percentage of average daily net assets
attributable to the Investor Class regardless of the amounts actually
paid or expenses actually incurred by the distributor. The Advisor also
serves as distributor for the Funds.
COUNSEL
Godfrey & Kahn, S.C., 780 N. Water Street, Milwaukee, WI 53202,
serves as counsel to the Company and will pass upon the legality of the shares
offered by the Funds' Prospectus.
PERFORMANCE CALCULATIONS
From time to time, the total return and the yields of Investor Class
Shares and Institutional Class Shares of each Fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
Performance information is generally available by calling the Funds at
1-866-44BAIRD.
YIELD CALCULATIONS
Yield is computed based on the net income of a series of class of a
Fund during a 30-day (or one-month) period, which will be identified in
connection with the particular yield quotation. More specifically, the yield of
a class of shares is calculated by dividing the net investment income per share
for that class (as described below) earned during a 30-day (or one-month) period
by the net asset value per share for that class on the last day of the period
and annualizing the result on a semiannual basis by adding one to the quotient,
raising the sum to the power of six, subtracting one from the result and then
doubling the difference. Net investment income per share earned during the
period attributable to that class is based on the average daily number of shares
of the class outstanding during the period entitled to receive dividends and
includes dividends and interest earned during the period attributable to that
class minus expenses accrued for the period, attributable to that class net of
reimbursements.
This calculation can be expressed as follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
c x d
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = Maximum offering price per share on the last
day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by a Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. A Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest) and dividing
the result by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the portfolio. For purposes of this calculation, it is assumed
that each month contains 30 days. The maturity of an obligation with a call
provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Interest earned on tax-exempt obligations of the Intermediate Municipal
Bond Fund that are issued without original issue discount and have a current
market discount is calculated by using the coupon rate of interest instead of
the yield to maturity. In the case of tax-exempt obligations that are issued
with original issue discount but which have discounts based on current market
value that exceed the then-remaining portion of the original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. On the other hand, in the case of
tax-exempt obligations that are issued with original issue discount but which
have the discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed obligations which
are expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) a
Fund may elect either (i) to amortize the discount and premium on the remaining
security, based on the cost of the security, to the weighted average maturity
date, if such information is available, or to the remaining term of the
security, if any, if the weighted average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security.
Undeclared earned income may be subtracted from the net asset value per
share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the 30-day base period, has not been
declared as a dividend, but is reasonably expected to be and is declared as a
dividend shortly thereafter.
In addition, the Intermediate Municipal Bond Fund may advertise a
"tax-equivalent yield" which shows the level of taxable yield needed to produce
an after-tax equivalent to the tax-free yield of the Fund. This is done by
increasing the yield of the series of shares (calculated as stated above) by the
amount necessary to reflect the payment of federal income taxes at a stated
rate. This is computed by: (a) dividing the portion of the Fund's yield for a
particular series (as calculated above) that is exempt from federal income tax
by one minus a stated federal income tax rate; and (b) adding the figure
resulting from (a) above to that portion, if any, of the Fund's yield that is
not exempt from federal income tax. The "tax-equivalent" yield will always be
higher than the yield of the Fund.
TOTAL RETURN CALCULATIONS
Each Fund computes "average annual total return" separately for its
Investor Class Shares and Institutional Class Shares. Average annual total
return reflects the average annual percentage change in value of an investment
in shares of a series over the measuring period. This is computed by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular class to the ending
redeemable value of such investment in the class. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
P(1 + T)n = ERV
Where:
P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV= ending redeemable value at the end
of the period covered by the computation of
a hypothetical $1,000 payment made at the
beginning of the period.
The Funds may compute aggregate total return, which reflects the total
percentage change in value over the measuring period. The Funds compute their
aggregate total returns separately for the Investor Class Shares and
Institutional Class Shares by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular class to the ending redeemable value of such investment in the class.
The formula for calculating aggregate total return is as follows:
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
COMPARISONS
The total return and yield of a Fund's Shares may be compared in
publications to those of other mutual funds with similar investment objectives
and to stock, bond and other relevant indices, to rankings, or other information
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds or to investments for which
reliable performance data is available. For example, the total return and yield,
as appropriate, of a Fund's shares may be compared to data prepared by Lipper
Analytical Services, Inc. The total return of a Fund's shares may be compared to
the Lehman Brothers 1-3 Year Government/Credit Bond Index; the Merrill Lynch
1-2.99 U.S. Treasury Bond Index; the Lehman Brothers Intermediate
Government/Credit Bond Index; the Lehman Brothers 5-Year General Obligation Bond
Index; the Lehman Brothers Government/Credit Bond Index; and the Consumer Price
Index. Total return and yield data as reported in national financial
publications, such as MONEY MAGAZINE, FORBES, BARRON'S, MORNINGSTAR MUTUAL
FUNDS, MUTUAL FUNDS MAGAZINE, KIPLINGER'S PERSONAL FINANCE MAGAZINE, THE WALL
STREET JOURNAL and THE NEW YORK TIMES, or in publications of a local or regional
nature, may also be used in comparing the performance of the Funds.
Performance quotations represent past performance, and should not be
considered as representative of future results. Performance assumes the
reinvestment of all net investment income and capital gains and reflects fee
waivers. In the absence of fee waivers, performance would be reduced. The
investment return and principal value of an investment in a Fund's class of
shares will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Since performance will fluctuate,
performance data for a Fund cannot necessarily be used to compare an investment
in a Fund's class of shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by institutions directly to their customer accounts in connection
with investments in a Fund will not be included in the Fund's calculations of
yield and total return and will reduce the yield and total return received by
the accounts.
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Funds may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance of
information contained in shareholder reports (including the investment
composition of a Fund), as well as the views of the Advisor as to market,
economic, trade and interest trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Fund. The Funds may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, treasury bills and shares of a Fund. In addition, advertisement or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in a Fund. Such advertisements or
communications may include symbols, headlines or other materials which highlight
or summarize the information discussed in more detail therein.
PERFORMANCE HISTORY
Because the Funds are new, no performance history is provided in this
SAI.
APPENDIX A
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. Ratings are graded into several categories, ranging from `A' for
the highest-quality obligations to `D' for the lowest. These categories are as
follows:
"A-1" - This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated `A-1'.
"A-3" - Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" - Issues rated `B' are regarded as having only speculative capacity
for timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Debt rated `D' is in payment default. The `D' rating category is
used when interest payments of principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard & Poor's
believes such payments will be made during such grace period.
Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade to indicate the
relative repayment ability of rated issuers:
"Prime-1" - Issuers rated Prime-1 (or supporting institutions) 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" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers rated Not Prime do not fall within any of the
Prime rating categories.
Fitch's short-term debt credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these short-term ratings
assess its general creditworthiness on a senior basis. When applied to specific
issues and programs, these ratings take into account the relative preferential
position of the holder of the security and reflect the terms, conditions, and
covenants attaching to that security.
Short-term debt credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for US public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the Best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D DEFAULT. Denotes actual or imminent payment default.
NOTES: "+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to Short-term ratings other
than `F1'.`NR' indicates that Fitch does not rate the issuer or issue in
question. `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced. Rating Watch: Ratings are placed
on Rating Watch to notify investors that there is a reasonable probability of a
rating change and the likely direction of such change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for a potential
downgrade, or "Evolving", if ratings may be raised, lowered or maintained.
Rating Watch is typically resolved over a relatively short period.
Thomson Bank Watch assigns Short-Term Debt Ratings to specific debt
instruments with original maturities of one year or less. These ratings
incorporate basically the same factors used for the BankWatch Issuer Ratings.
There is one major difference, however: The ShorT-Term Debt Ratings put a
greater emphasis on the likelihood of government support.
Thomson Bank Watch ratings represent an assessment of the likelihood of
an untimely payment of principal and interest. Important factors that may
influence this assessment are the overall financial health of the particular
company, and the probability that the government will come to the aid of a
troubled institution in order to avoid a default or failure. The probability of
government intervention stems from four primary factors:
|X| Government guarantees
|X| Government or quasi-government ownership or control
|X| The degree of concentration in the banking system
|X| Government precedent
As with the Issuer Ratings, the Short-Term Debt Ratings incorporate
both qualitative and quantitative factors. The ratings are not meant to be
"pass/fail' but rather to provide a relative indication of creditworthiness.
Therefore, obligations rated TBW-3 are still considered investment-grade.
These Short-Term Debt Ratings can also be restricted to local currency
instruments. In such cases, the ratings will be preceded by the designation LC
for Local Currency. Short-Term Debt Ratings are based on the following scale and
the definitions are:
"TBW-1" "LC-1"
The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" "LC-2"
The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
"TBW-3" "LC-3"
The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal and
external) than those with higher ratings, the capacity to service principal and
interest in a timely fashion is considered adequate.
"TBW-4" "LC-4"
The lowest rating category; this rating is regarded as non-investment grade and
therefore speculative.
STANDARD & POOR'S
Standard & Poor's issue credit ratings based in varying degrees, on the
following considerations:
1. Likelihood of payment - capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation 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.
"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" - Obligations rated "BB," "B," "CCC,"
"CC" and "C" are 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
may be outweighed by large uncertainties or major exposures to adverse
conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions, which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment 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" - An obligation rated "CCC" is currently vulnerable to nonpayment
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
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a 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.
"C" - The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"P" - The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"R"- The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return 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.
N.R. - NOT RATED - Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
Moody's uses the following categories for long-term obligations.
"Aaa" - Bonds that are rated "Aaa" to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." 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 that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than the
"Aaa" securities.
"A" - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Baa" - Bonds that are rated "Baa" considered as 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" - Bonds that are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
"B" - Bonds that are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" - Bonds that are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
"Ca" - Bonds that are rated "Ca" represent obligations that are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" - Bonds that are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch's long-term debt credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long-term ratings
assess its general creditworthiness on a senior basis. When applied to specific
issues and programs, these ratings take into account the relative preferential
position of the holder of the security and reflect the terms, conditions, and
covenants attaching to that security.
Long-term debt credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A HIGH CREDIT QUALITY. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB GOOD CREDIT QUALITY. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
SPECULATIVE GRADE
BB SPECULATIVE. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B HIGHLY SPECULATIVE. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C HIGH DEFAULT RISK. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of some
kind appears probable. `C' ratings signal imminent default.
DDD, DD, D DEFAULT. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated 'DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D' are generally undergoing a
formal reorganization or liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
'D' have a poor prospect for repaying all obligations.
NOTES: "+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, or to categories below `CCC'.
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
Long-Term Debt Ratings assigned by Thomson Financial BankWatch ALSO
WEIGH HEAVILY GOVERNMENT OWNERSHIP AND SUPPORT. The quality of both the
company's management and franchise are of even greater importance in the
Long-Term Debt Rating decisions. Long-Term Debt Ratings look out over a cycle
and are not adjusted frequently for what we believe are short-term performance
aberrations.
Long-Term Debt Ratings can be restricted to local currency debt -
ratings will be identified by the designation LC. In addition, Long-Term Debt
Ratings may include a plus (+) or minus (-) to indicate where within the
category the issue is placed. BankWatch Long-Term Debt Ratings are based on the
following scale:
INVESTMENT GRADE
"AAA" "LC-AAA"
Indicates that the ability to repay principal and interest on a timely basis
is extremely high.
"AA" "LC-AA"
Indicates a very strong ability to repay principal and interest on a timely
basis, with limited incremental risk compared to issues rated in the highest
category.
"A" "LC-A"
Indicates that the ability to repay principal and interest is strong.
Issues rated "A" could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BBB" "LC-BBB"
The lowest investment-grade category; indicates an acceptable capacity to repay
principal and interest. "BBB" issues are more vulnerable to adverse developments
(both internal and external) than obligations with higher ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest
"BB" "LC-BB"
While not investment grade, the "BB" rating suggests that the likelihood of
default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately
service debt obligations.
"B" "LC-B"
Issues rated B show a higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse developments could
negatively affect the payment of interest and principal on a timely basis.
"CCC" "LC-CCC"
Issues rated CCC clearly have a high likelihood of default, with little capacity
to address further adverse changes in financial circumstances.
"CC" "LC-CC"
"CC" is applied to issues that are subordinate to other obligations rated "CCC"
and are afforded less protection in the event of bankruptcy or reorganization.
"D" "LC-D"
Default.
MUNICIPAL NOTE RATINGS
A Standard and Poor's note rating reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
o Source of payment- the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
"SP-1" - Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service are given a
plus (+) designation.
"SP-2" - Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
"SP-3" - Speculative capacity to pay principal and interest.
In municipal debt issuance, there are three rating categories for short-term
obligations that are considered investment grade. These ratings are designated
as Moody's Investment Grade (MIG) and are divided into three levels -- MIG 1
through MIG 3.
In addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component rating
is assigned. The first element represents Moody's evaluation of the degree of
risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated as
VMIG. When either the long- or short-term aspect of a VRDO is not rated, that
piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations will
be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1
This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes strong credit quality. Margins of protection are ample,
although not as large as in the preceding group.
MIG 3/VMIG 3
This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
BAIRD FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
Baird Horizon Growth Fund
September 26, 2000
This Statement of Additional Information ("SAI") is not a prospectus
and should be read in conjunction with the prospectus (the "Prospectus") dated
September 26, 2000 of the Baird Horizon Growth Fund (the "Fund"). The Fund is a
series of the Baird Funds, Inc. (the "Company"). This Statement of Additional
Information contains additional information about principal strategies and risks
already described in the Prospectus (and no information about new principal
strategies or risks), as well as descriptions of non-principal strategies not
described in the Prospectus. Copies of the Prospectus for the Fund may be
obtained by writing the Fund at 615 East Michigan Street, P.O. Box 701,
Milwaukee, WI 53201-0701 or by calling 1-866-44BAIRD. You should read this SAI
together with the Prospectus and retain it for further reference.
TABLE OF CONTENTS
PAGE
BAIRD FUNDS, INC.............................................................3
INVESTMENT STRATEGIES AND RISKS..............................................3
NET ASSET VALUE..............................................................15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION...............................16
DESCRIPTION OF SHARES........................................................19
ADDITIONAL INFORMATION CONCERNING TAXES......................................20
MANAGEMENT OF THE COMPANY....................................................20
PRINCIPAL SHAREHOLDERS.......................................................23
PORTFOLIO TRANSACTIONS.......................................................23
INVESTMENT ADVISORY AND OTHER SERVICES.......................................25
DISTRIBUTOR..................................................................27
DISTRIBUTION PLAN............................................................27
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS.............................29
COUNSEL......................................................................33
PERFORMANCE CALCULATIONS.....................................................33
PERFORMANCE HISTORY..........................................................31
APPENDIX A...................................................................A-1
BAIRD FUNDS, INC.
The Company is an open-end, diversified, management investment company.
The Fund is a series of common stock of the Company, a Wisconsin corporation
that was incorporated on June 9, 2000. The Company is authorized to issue shares
of common stock in series and classes. The Fund is currently divided into two
classes, an Investor class and an Institutional class. The Company also offers
other funds that are described in separate Statements of Additional Information.
INVESTMENT STRATEGIES AND RISKS
GENERAL INFORMATION REGARDING THE FUND
Robert W. Baird & Co. Incorporated (the "Advisor") may purchase for the
Fund common stocks, preferred stocks, interests in real estate investment
trusts, convertible debt obligations, convertible preferred stocks, equity
interests in trusts, partnerships, joint ventures, limited liability companies
and similar enterprises, warrants and stock purchase rights ("equity
securities"). The Advisor may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. Equity securities in the Fund's portfolios will generally be
sold when the Advisor believes that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive investments
are identified.
RATINGS. The ratings of Standard & Poor's, Moody's and other nationally
recognized rating agencies represent their opinions as to the quality of debt
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and debt securities with the same maturity,
interest rate and rating may have different yields while debt securities of the
same maturity and interest rate with different ratings may have the same yield.
The payment of principal and interest on most debt securities purchased
by the Fund will depend upon the ability of the issuers to meet their
obligations. An issuer's obligations under its debt securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations. The power or ability of an issuer to meet
its obligations for the payment of interest on, and principal of, its debt
securities may be materially adversely affected by litigation or other
conditions.
Subsequent to its purchase by the Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Advisor will consider such an event in determining
whether the Fund should continue to hold the security. For a more detailed
description of ratings, see Appendix A.
SECURITIES LENDING. The Fund may lend its portfolio securities to
unaffiliated domestic broker/dealers and other institutional investors pursuant
to agreements requiring that the loans be secured by collateral equal in value
to at least the market value of the securities loaned in order to increase
return on portfolio securities. Collateral for such loans may include cash,
securities of the U.S. government, its agencies or instrumentalities, or an
irrevocable letter of credit issued by a bank which meets the investment
standards stated below under "Money Market Instruments," or any combination
thereof. There may be risks of delay in receiving additional collateral or in
recovering the securities loaned or even a loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will be
made only to borrowers deemed by the Advisor to be of good standing and when, in
the Advisor's judgment, the income to be earned from the loan justifies the
attendant risks. When the Fund lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral which will be invested in
readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by the Fund if a material event affecting the investment
is to occur.
MONEY MARKET INSTRUMENTS. The Fund may invest from time to time in
"money market instruments," a term that includes, among other things, U.S.
government obligations, repurchase agreements, cash, bank obligations,
commercial paper, variable amount master demand notes and corporate bonds with
remaining maturities of 13 months or less. These investments are used to help
meet anticipated redemption requests or if other suitable securities are
unavailable.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Fund will invest in money market obligations
of foreign banks or foreign branches of U.S. banks only where the Advisor
determines the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1 billion
in total assets at the time of purchase, and investments by the Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of the Fund's total assets at the time of purchase. The Fund may also make
interest-bearing savings deposits in commercial and savings banks in amounts not
in excess of 5% of its net assets.
Investments by the Fund in commercial paper will consist of issues
rated at the time A-1 and/or P-1 by Standard & Poor's, Moody's or similar rating
by another nationally recognized statistical rating organization. In addition,
the Fund may acquire unrated commercial paper and corporate bonds that are
determined by the Advisor at the time of purchase to be of comparable quality to
rated instruments that may be acquired by such Fund as previously described.
The Fund may also purchase variable amount master demand notes which
are unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, the Fund
may demand payment of the principal of the instrument at any time. The notes are
not typically rated by credit rating agencies, but issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, the Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Fund invests in
variable amount master demand notes only when the Advisor deems the investment
to involve minimal credit risk.
REPURCHASE AGREEMENTS. The Fund may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). During the term of the
repurchase agreement, the Advisor will continue to monitor the creditworthiness
of the seller and will require the seller to maintain the value of the
securities subject to the repurchase agreement at not less than 102% of the
repurchase price. Default or bankruptcy of the seller would, however, expose the
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying securities. The securities held subject
to a repurchase agreement may have stated maturities exceeding one year,
provided the repurchase agreement itself matures in less than one year.
The repurchase price under the repurchase agreements generally equals
the price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements will be held by the Fund's custodian or in the Federal
Reserve/Treasury book-entry system or other authorized securities depositary.
Repurchase agreements are considered to be loans under the 1940 Act.
INVESTMENT COMPANIES. The Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not more
than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund.
The Fund may invest from time to time in securities issued by other
investment companies that invest in high-quality, short-term debt securities.
Securities of other investment companies will be acquired by the Fund within the
limits prescribed by the 1940 Act. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro-rata
portion of the other investment company's expenses, including advisory fees, and
such fees and other expenses will be borne indirectly by the Fund's
shareholders. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in a variety of U.S.
Treasury obligations including bonds, notes and bills that mainly differ only in
their interest rates, maturities and time of issuance. The Fund may also invest
in other securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities; such as obligations of Federal Home Loan Banks, Federal
Farm Credit Banks, Federal Land Banks, the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association, Federal
National Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Maritime Administration, and Resolution Trust Corp.
BORROWINGS AND REVERSE REPURCHASE AGREEMENTS. The Fund may borrow money
to the extent allowed (as described below) to meet shareholder redemptions from
banks or through reverse repurchase agreements. These strategies involve
leveraging. If the securities held by the Fund should decline in value while
borrowings are outstanding, the Fund's net asset value will decline in value by
proportionately more than the decline in value suffered by the Fund's
securities. As a result, the Fund's net asset value may be subject to greater
fluctuation until the borrowing is paid off.
Reverse repurchase agreements are considered to be borrowings under the
1940 Act. At the time the Fund enters into a reverse repurchase agreement (an
agreement under which the Fund sells portfolio securities and agrees to
repurchase them at an agreed-upon date and price), it will place in a segregated
custodial account U.S. government securities or other liquid securities having a
value equal to or greater than the repurchase price (including accrued
interest), and will subsequently monitor the account to insure that such value
is maintained. Reverse repurchase agreements involve the risks that the interest
income earned by the Fund (from the investment of the proceeds) will be less
than the interest expense of the transaction, that the market value of the
securities sold by the Fund may decline below the price of the securities it is
obligated to repurchase and that the securities may not be returned to the Fund.
PREFERRED STOCKS. The Fund may invest in preferred stocks. Preferred
stocks are securities that represent an ownership interest providing the holder
with claims on the issuer's earnings and assets before common stock but after
bond owners. Unlike debt securities, the obligations of an issuer of preferred
stock, including dividend and other payment obligations, may not typically be
accelerated by the holders of such preferred stock on the occurrence of an event
of default (such as a covenant default or filing of a bankruptcy petition) or
other non-compliance by the issuer with the terms of the preferred stock. Often,
however, on the occurrence of any such event of default or non-compliance by the
issuer, preferred stockholders will be entitled to gain representation on the
issuer's board of directors or increase their existing board representation. In
addition, preferred stockholders may be granted voting rights with respect to
certain issues on the occurrence of any event of default. The Fund will limit
its investments in preferred stock to no more than 5% of its net assets.
WHEN-ISSUED PURCHASES, DELAYED DELIVERY AND FORWARD COMMITMENTS. The
Fund may purchase or sell particular securities with payment and delivery taking
place at a later date. The price or yield obtained in a transaction may be less
favorable than the price or yield available in the market when the securities
delivery takes place. When the Fund agrees to purchase securities on a
when-issued or delayed delivery basis or enter into a forward commitment to
purchase securities, its custodian will set aside cash or liquid securities
equal to the amount of the commitment in a segregated account. Normally, the
custodian will set aside portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required subsequently to place additional
assets in the segregated account in order to ensure that the value of the
account remains equal to the amount of the Fund's commitments. It may be
expected that the market value of the Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. In the case of a forward commitment to
sell portfolio securities, the Fund's custodian will hold the portfolio
securities themselves in a segregated account while the commitment is
outstanding. When-issued and forward commitment transactions involve the risk
that the price or yield obtained in a transaction (and therefore the value of a
security) may be less favorable than the price or yield (and therefore the value
of a security) available in the market when the securities delivery takes place.
The Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
the securities. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases, the Fund may
realize a capital gain or loss.
When the Fund engages in when-issued, delayed delivery and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or
a forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the net asset value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date. When the Fund makes a
forward commitment to sell securities it owns, the proceeds to be received upon
settlement are included in the Fund's assets. Fluctuations in the market value
of the underlying securities are not reflected in the Fund's net asset value as
long as the commitment remains in effect.
OPTIONS TRADING. The Fund may purchase put and call options. Option
purchases by the Fund will not exceed 5% of its net assets. Such options may
relate to particular securities or to various indices and may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. This is a highly specialized activity which entails greater than
ordinary investment risks, including the complete loss of the amount paid as
premiums to the writer of the option. Regardless of how much the market price of
the underlying security or index increases or decreases, the option buyer's risk
is limited to the amount of the original investment for the purchase of the
option. However, options may be more volatile than the underlying securities or
indices, and therefore, on a percentage basis, an investment in options may be
subject to greater fluctuation than an investment in the underlying securities.
In contrast to an option on a particular security, an option on an index
provides the holder with the right to make or receive a cash settlement upon
exercise of the option. The amount of this settlement will be equal to the
difference between the closing price of the index at the time of exercise and
the exercise price of the option expressed in dollars, times a specified
multiple.
The Fund will engage in unlisted over-the-counter options only with
broker/dealers deemed creditworthy by the Advisor. Closing transactions in
certain options are usually effected directly with the same broker/dealer that
effected the original option transaction. The Fund bears the risk that the
broker/dealer will fail to meet its obligations. There is no assurance that a
liquid secondary trading market exists for closing out an unlisted option
position. Furthermore, unlisted options are not subject to the protections
afforded purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to perform in connection with
the purchase or sale of options.
A call option gives the purchaser of the option the right to buy, and a
writer the obligation to sell, the underlying security or index at the stated
exercise price at any time prior to the expiration of the option, regardless of
the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A put
option gives the purchaser the right to sell the underlying security or index at
the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security or index. Put and call
options purchased by the Fund will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
The Fund may purchase put options on portfolio securities at or about
the same time that it purchases the underlying security or at a later time. By
buying a put, the Fund limits its risk of loss from a decline in the market
value of the security until the put expires. Any appreciation in the value of
and yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by the Fund in order to
acquire the underlying security at a later date at a price that avoids any
additional cost that would result from an increase in the market value of the
security. A call option may also be purchased to increase the Fund's return to
investors at a time when the call is expected to increase in value due to
anticipated appreciation of the underlying security. Prior to its expiration, a
purchased put or call option may be sold in a "closing sale transaction" (a sale
by the Fund, prior to the exercise of the option that it has purchased, of an
option of the same series), and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the option
plus the related transaction costs. In addition, the Fund may sell covered call
options listed on a national securities exchange. Such options may relate to
particular securities or to various indices. A call option on a security is
covered if the Fund owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as required are held in a segregated account by its custodian) upon
conversion or exchange of other securities held by it. A call option on an index
is covered if the Fund maintains with its custodian cash or cash equivalents
equal to the contract value. A call option is also covered if the Fund holds a
call on the same security or index as the call written where the exercise price
of the call held is (i) equal to or less than the exercise price of the call
written, or (ii) greater than the exercise price of the call written provided
the difference is maintained by the Fund in cash or cash equivalents in a
segregated account with its custodian. The aggregate value of the Fund's assets
subject to covered options written by the Fund will not exceed 5% of the value
of its net assets.
The Fund's obligation under a covered call option written by it may be
terminated prior to the expiration date of the option by the Fund's executing a
closing purchase transaction, which is effected by purchasing on an exchange an
option of the same series (i.e., same underlying security or index, exercise
price and expiration date) as the option previously written. Such a purchase
does not result in the ownership of an option. A closing purchase transaction
will ordinarily be effected to realize a profit on an outstanding option, to
prevent an underlying security from being called, to permit the sale of the
underlying security or to permit the writing of a new option containing
different terms. The cost of such a liquidation purchase plus transaction costs
may be greater than the premium received upon the original option, in which
event the Fund will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary market
on an exchange will exist for any particular option. A covered call option
writer, unable to effect a closing purchase transaction, will not be able to
sell an underlying security until the option expires or the underlying security
is delivered upon exercise with the result that the writer in such circumstances
will be subject to the risk of market decline during such period. The Fund will
write an option on a particular security only if the Advisor believes that a
liquid secondary market will exist on an exchange for options of the same series
which will permit the Fund to make a closing purchase transaction in order to
close out its position.
By writing a covered call option on a security, the Fund foregoes the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price except insofar as the premium represents such
a profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Fund effects a closing purchase transaction by
purchasing an option of the same series. Except to the extent that a written
call option on an index is covered by an option on the same index purchased by
the Fund, movements in the index may result in a loss to the Fund; however, such
losses may be mitigated by changes in the value of securities held by the Fund
during the period the option was outstanding. The use of covered call options
will not be a primary investment technique of the Fund. When the Fund writes a
covered call option, an amount equal to the net premium (the premium less the
commission) received by the Fund is included in the liability section of the
Fund's statement of assets and liabilities. The amount of the liability will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the liability related to such option will be eliminated. Any gain on a
covered call option on a security may be offset by a decline in the market price
of the underlying security during the option period. If a covered call option on
a security is exercised, the Fund may deliver the underlying security held by it
or purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received,
and the Fund will realize a gain or loss. Premiums from expired options written
by the Fund and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on closing
purchase transactions are short-term capital losses.
As noted previously, there are several risks associated with
transactions in options on securities and indices. These risks include (i) an
imperfect correlation between the change in market value of the securities the
Fund holds and the prices of options relating to the securities purchased or
sold by the Fund; and (ii) the possible lack of a liquid secondary market for an
option. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and a transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
FUTURES CONTRACTS AND RELATED OPTIONS. The Advisor may determine that
it would be in the best interest of the Fund to purchase or sell futures
contracts, or options thereon, as a hedge against changes resulting from market
conditions in the value of the securities held by the Fund, or of securities
which it intends to purchase to maintain liquidity, to have fuller exposure to
price movements in the respective equity index or to reduce transaction costs.
For example, the Fund may enter into transactions involving a bond or stock
index futures contract, which is a bilateral agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the index value (which assigns
relative values to the securities included in the index) at the close of the
last trading day of the contract and the price at which the futures contract is
originally struck. No physical delivery of the underlying stocks in the index is
made.
A stock index assigns relative values to the stocks included in the
index and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexes,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks. Futures contracts are traded on
organized exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing corporation, which
guarantees the performance of the parties to each contract.
The Fund may sell index futures contracts. The Fund may do so either to
hedge the value of its portfolio as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Fund may purchase index futures contracts. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, but a long futures
position may be terminated without a corresponding purchase of securities.
In addition, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of the portfolio will decline prior to the
time of sale.
Risks associated with the use of futures contracts and options on
futures include (a) imperfect correlation between the change in market values of
the securities held by the Fund and the prices of related futures contracts and
options on futures purchased or sold by the Fund, and (b) the possible lack of a
liquid secondary market for futures contracts (or related options) and the
resulting inability of the Fund to close open futures positions, which could
have an adverse impact on the Fund's ability to hedge.
Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
holdings to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge.
Successful use of futures by the Fund is also subject to the Advisor's
ability to correctly predict movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have approximately equal
offsetting losses in its futures positions. In addition, in some situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
in accordance with the terms of the exchange on which such futures contract is
traded, the Fund may be required to deposit with the broker or in a segregated
account with the Fund's custodian an amount of cash or cash equivalents, the
value of which may vary but is generally equal to 10% or less of the value of
the contract. This amount is known as initial margin. The initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, before any deduction for the transaction
costs, if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
Utilization of futures transactions by the Fund involves the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
The Fund's commodities transactions must constitute bona fide hedging
or other permissible transactions pursuant to regulations promulgated by the
Commodity Futures Trading Commission ("CFTC"). In addition, the Fund may not
engage in such transactions if the sum of the amount of initial margin deposits
and premiums paid for unexpired commodity options, other than for bona fide
hedging transactions, would exceed 5% of the liquidation value of its assets,
after taking into account unrealized profits and unrealized losses on such
contracts it has entered into; provided, however, that in the case of an option
that is in-the-money at the time of purchase, the in-the-money amount may be
excluded in calculating the percentage limitation. In connection with a futures
transaction, unless the transaction is covered in accordance with SEC positions,
the Fund will maintain a segregated account with its custodian or sub-custodian
consisting of cash or liquid securities to the entire amount at risk (less
margin deposits) on a continuous basis. The Company intends to comply with the
regulations of the CFTC exempting the Fund from registration as a "commodity
pool operator".
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase or sale of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected in
the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs).
The Fund intends to limit its transactions in futures contracts and
related options so that not more than 5% of the Fund's respective net assets are
at risk.
FOREIGN SECURITIES AND AMERICAN DEPOSITARY RECEIPTS ("ADRS"). The Fund
may invest in sponsored ADRs. ADRs are receipts issued by an American bank or
trust company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs may be listed on a national securities exchange or may trade in the
over-the-counter market. ADR prices are denominated in U.S. dollars; the
underlying security may be denominated in a foreign currency. The underlying
security may be subject to foreign government taxes which would reduce the yield
on such securities. Investments in foreign securities and ADRs also involve
certain inherent risks, such as political or economic instability of the country
of issue, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. Such securities may also be
subject to greater fluctuations in price than securities of domestic
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. With
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, or diplomatic developments which could affect investment
in those countries.
While "sponsored" and "unsponsored" ADR programs are similar, there are
differences regarding ADR holders' rights and obligations and the practices of
market participants. A depositary may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depositary requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored ADRs generally bear
all the costs of the ADR facility. The depositary usually charges fees upon the
deposit and withdrawal of the underlying securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distribution, and the performance
of other services. The depositary of an unsponsored facility frequently is under
no obligation to distribute shareholder communications received from the
underlying issuer or to pass through voting rights to ADR holders in respect of
the underlying securities.
Sponsored ADR facilities are created in generally the same manner as
unsponsored facilities, except that sponsored ADRs are established jointly by a
depositary and the underlying issuer through a deposit agreement. The deposit
agreement sets out the rights and responsibilities of the underlying issuer, the
depositary and the ADR holders. With sponsored facilities, the underlying issuer
typically bears some of the costs of the ADR (such as dividend payment fees of
the depositary), although ADR holders may bear costs such as deposit and
withdrawal fees. Depositories of most sponsored ADRs agree to distribute notices
of shareholder meetings, voting instructions, and other shareholder
communications and information to the ADR holders at the underlying issuer's
request.
Investments in foreign securities, whether made directly or through
ADRs, involve certain inherent risks and considerations not typically associated
with investing in U.S. companies, such as political or economic instability of
the issuer or the country of issue, the difficulty of predicting international
trade patterns, changes in exchange rates of foreign currencies and the
possibility of adverse changes in investment or exchange control regulations.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign companies are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. In addition, foreign banks and foreign branches of U.S.
banks are subject to less stringent reserve requirements and to different
accounting, auditing, reporting and recordkeeping standards than those
applicable to domestic branches of U.S. banks. With respect to certain foreign
countries, there is a possibility of expropriation or confiscatory taxation,
limitations on the removal of assets or diplomatic developments that could
affect investment within those countries. Additionally, foreign securities and
dividends and interest payable on those securities may be subject to foreign
taxes, including foreign withholding taxes, and other foreign taxes may apply
with respect to securities transactions. Changes in foreign exchange rates will
also affect the value of securities denominated or quoted in currencies other
than the U.S. dollar. In this regard, the Fund does not intend to hedge against
foreign currency risk (except on unsettled trades). Changes in currency exchange
rates will affect the value of unhedged positions and will impact the Fund's net
asset value (positively or negatively) irrespective of the performance of the
portfolio securities held by the Fund. The Fund and its shareholders may
encounter substantial difficulties in obtaining and enforcing judgments against
non-U.S. resident individuals and companies. Because of these and other factors,
securities of foreign companies acquired by the Fund may be subject to greater
fluctuation in price than securities of domestic companies.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the fundamental investment limitations
enumerated in this subsection which may be changed only by a vote of the holders
of a majority of the Fund's outstanding shares. A majority of the outstanding
shares of the Fund means the lesser of (1) 67% of the shares of common stock of
the Fund represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (2) more
than 50% of the outstanding shares of the Fund.
The Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any one 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 Fund's total assets would be invested in the securities of that
issuer, or (ii) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
2. May (i) borrow from banks for temporary or emergency purposes (but
not for leveraging or the purchase of investments), and (ii) make other
investments or engage in other transactions permissible under the 1940 Act,
which may involve a borrowing, including borrowing through reverse repurchase
agreements, provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets (including the amount borrowed),
less the Fund's liabilities (other than borrowings). If the amount borrowed at
any time exceeds 33 1/3% of the Fund's total assets, the Fund will, within three
days thereafter (not including Sundays, holidays and any longer permissible
period), reduce the amount of the borrowings such that the borrowings do not
exceed 33 1/3% of the Fund's total assets. The Fund may also borrow money from
other persons to the extent permitted by applicable laws.
3. May not issue senior securities, except as permitted under the
1940 Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within the
meaning of the 1933 Act, in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of other securities or other instruments (but this shall not
prevent the Fund from purchasing or selling options, future contracts or other
derivative instruments, or from investing in securities or other instruments
backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same industry.
8. May not purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or other instruments backed by real
estate or of issuers engaged in real estate activities).
Unless noted otherwise, if a percentage restriction is adhered to at
the time of investment, a later increase or decrease in percentage resulting
from a change in the Fund's assets (i.e., due to cash inflows or redemptions) or
in market value of the investment or the Fund's assets will not constitute a
violation of that restriction. This does not, however, apply to the borrowing
policy set forth above.
NON-FUNDAMENTAL INVESTMENT LIMITATIONS
The following are the Fund's non-fundamental operating policies which
may be changed by the Board of Directors without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund 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 (the "SEC") or its staff, and provided
that transactions in options, futures contracts, options on 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, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Purchase securities of other investment companies except in
compliance with the 1940 Act and applicable state law.
4. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act (the "CEA")
and, in accordance with Rule 4.5, will use futures or options on futures
transactions solely for bona fide hedging transactions (within the meaning of
the CEA), provided, however, that the Fund may, in addition to bona fide hedging
transactions, use futures and options on futures transactions if the aggregate
initial margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within the meaning
of the CEA), do not exceed 5% of the Fund's net assets.
5. Make any loans, except through (i) purchases of debt securities or
other debt instruments, or (ii) engaging in repurchase agreements.
6. Borrow money except from banks or through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
The Fund's non-fundamental investment policies listed above may be
changed with the approval of the Company's Board of Directors. Unless noted
otherwise, if a percentage restriction is adhered to at the time of investment,
a later increase or decrease in percentage resulting from a change in the Fund's
assets (i.e., due to cash inflows or redemptions) or in market value of the
investment or the Fund's assets will not constitute a violation of that
restriction. This does not, however, apply to the borrowing policy set forth
above.
NET ASSET VALUE
Shares of the Fund are sold on a continual basis at the net asset value
next computed following receipt of an order in proper form by a dealer, the
Distributor or the Transfer Agent.
The net asset value per share of the Fund is calculated separately for
the Investor Class Shares and Institutional Class Shares by adding the value of
all portfolio securities and other assets per class (including interest or
dividend accrued, but not yet collected) subtracting the liabilities, and
dividing the result by the number of outstanding shares of that class. The
result, rounded to the nearest cent, is the net asset value per share.
On determining net asset value, expenses are accrued and applied daily.
Common stocks and other equity-type securities are valued at the last sales
price on the national securities exchange or Nasdaq on which such securities are
primarily traded; however, securities traded on a national securities exchange
or Nasdaq for which there were no transactions on a given day, and securities
not listed on a national securities exchange or Nasdaq, are valued at the
average of the most recent bid and asked prices. Any securities or other assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by the Board of Directors of the Company or its
delegate. The Board of Directors may approve the use of pricing services to
assist the Fund in the determination of net asset value. All money market
instruments held by the Fund will be valued on an amortized cost basis. The
calculation of the net asset value of the Fund may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and 3:00 p.m. Central
time, and at other times, may not be reflected in the calculation of net asset
value of the Fund. The New York Stock Exchange is currently closed on the
following holidays: New Year's Day, Martin Luther King Jr.'s Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shareholder organizations or institutions may be paid by the Fund for
advertising, distribution or shareholder services. Depending on the terms of the
particular account, shareholder organizations or institutions also may charge
their customers fees for automatic investment, redemption and other services
provided. Such fees may include, for example, account maintenance fees,
compensating balance requirements or fees based upon account transactions,
assets or income. Shareholder organizations or institutions are responsible for
providing information concerning these services and any charges to any customer
who must authorize the purchase of Fund shares prior to such purchase.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment for shares during any period when (a) trading on
the Exchange is restricted by applicable rules and regulations of the SEC; (b)
the Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC. (The Fund may also suspend or postpone the recording
of the transfer of their shares upon the occurrence of any of the foregoing
conditions.)
The Company has filed an election pursuant to Rule 18f-1 under the 1940
Act which provides that each fund of the Company is obligated to redeem shares
solely in cash up to $250,000 or 1% of the net asset value of the class of
shares of the fund being redeemed, whichever is less, for any one shareholder
within a 90-day period. Any redemption beyond this amount may be made in
proceeds other than cash.
In addition to the situations described in the Fund's Prospectus under
"General Transaction Policies," the Fund may redeem shares involuntarily when
appropriate under the 1940 Act, such as to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectus from time to time.
EXCHANGE PRIVILEGE. By use of the exchange privilege, shareholders
authorize the transfer agent to act on exchange instructions received in
writing, by telephone, or through the Fund's website from any person
representing himself to be the shareholder, or, in some cases, the shareholder's
registered representative or account representative of record, and believed by
the transfer agent to be genuine. The transfer agent's records of such
instructions are binding. The exchange privilege may be modified or terminated
at any time upon notice to shareholders.
Shares in the Fund from which the shareholder is withdrawing an
investment will be redeemed at the net asset value per share next determined on
the date of receipt. Shares of the new Fund into which the shareholder is
investing will be purchased at the net asset value per share next determined
after acceptance of the request by the Fund's transfer agent in accordance with
the policies for accepting investments. Exchanges of shares will be available
only in states where they may legally be made.
RETIREMENT PLANS: INVESTOR CLASS SHARES OF THE FUND
INDIVIDUAL RETIREMENT ACCOUNTS. The Company has available a plan (the
"Traditional IRA") for use by individuals with earned income who wish to use
shares of the Fund as a funding medium for individual retirement saving.
However, except for rollover contributions, an individual who has attained, or
will attain, age 70 1/2 before the end of the taxable year may only contribute
to a Traditional IRA for his or her nonworking spouse under age 70 1/2.
The Company also has available a Roth Individual Retirement Account
(the "Roth IRA") for retirement saving for use by individuals with earned
income. A single individual with adjusted gross income of up to $110,000 may
contribute to a Roth IRA (for married couples filing jointly, the adjusted gross
income limit is $160,000), and contributions may be made even after the Roth IRA
owner has attained age 70 1/2, as long as the account owner has earned income.
The Company permits certain employers (including self-employed
individuals) to make contributions to employees' Traditional IRAs if the
employer establishes a Simplified Employee Pension ("SEP") plan and/or a Salary
Reduction SEP ("SARSEP"). Although SARSEPs may not be established after 1996,
employers may continue to make contributions to SARSEPs established before
January 1, 1997, under the pre-1997 federal tax law.
SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES OF SMALL EMPLOYERS. The
Company also has available a simplified tax-favored retirement plan for
employees of small employers (a "SIMPLE IRA Plan"). If an employer establishes a
SIMPLE IRA Plan, contributions under the Plan are made to eligible employees'
SIMPLE individual retirement accounts ("SIMPLE IRAs"). Each eligible employee
may choose to defer a percentage of his or her pre-tax compensation to the
employee's SIMPLE IRA. The employer must generally make an annual matching
contribution to the SIMPLE IRA of each eligible employee equal to the employee's
salary reduction contributions, up to a limit of 3% of the employee's
compensation. Alternatively, the employer may make an annual non-discretionary
contribution to the SIMPLE IRA of each eligible employee equal to 2% of each
employee's compensation.
In the SIMPLE IRA Plan and in Traditional and Roth IRAs, distributions
of net investment income and capital gains will be automatically reinvested.
The foregoing brief descriptions are not complete or definitive
explanations of the SIMPLE IRA Plan, the Traditional IRA, or the Roth IRA
available for investment in the Fund. Any person who wishes to establish a
retirement plan account may do so by contacting the Fund at 1-866-44BAIRD. The
complete Plan documents and applications will be provided to existing or
prospective shareholders upon request, without obligation. The Company
recommends that investors consult their attorneys or tax advisors to determine
if the retirement programs described herein are appropriate for their needs.
ADDITIONAL INFORMATION REGARDING SHAREHOLDER SERVICES
The Investor Class and Institutional Class Shares of the Fund offer an
Automatic Investment Plan whereby a shareholder may automatically make purchases
of shares of the Fund on a regular, monthly basis ($250 minimum per
transaction). Under the Automatic Investment Plan, a shareholder's designated
bank or other financial institution debits a preauthorized amount on the
shareholder's account each month or quarter and applies the amount to the
purchase of Fund Shares. The Automatic Investment Plan must be implemented with
a financial institution that is a member of the Automated Clearing House. No
service fee is currently charged by the Fund for participation in the Automatic
Investment Plan. A $25 fee will be imposed by the transfer agent if sufficient
funds are not available in the shareholder's account or the shareholder's
account has been closed at the time of the automatic transaction.
The Automatic Investment Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in Fund Shares at predetermined intervals.
This may help investors to reduce their average cost per share because the
agreed upon fixed investment amount allows more Fund Shares to be purchased
during periods of lower Fund Share prices and fewer Fund Shares to be purchased
during periods of higher Fund Share prices. In order to be effective, Dollar
Cost Averaging should usually be followed on a sustained, consistent basis.
Investors should be aware, however, that Fund Shares bought using Dollar Cost
Averaging are purchased without regard to their price on the day of investment
or to market trends. Dollar Cost Averaging does not assure a profit and does not
protect against losses in a declining market. In addition, while investors may
find Dollar Cost Averaging to be beneficial, it will not prevent a loss if an
investor ultimately redeems his Fund Shares at a price which is lower than their
purchase price. An investor may want to consider his financial ability to
continue purchases through periods of low price levels.
The Shares of the Fund offer shareholders a Systematic Withdrawal Plan,
which allows a shareholder who owns shares of the Fund worth at least $5,000 at
current net asset value at the time the shareholder initiates the Systematic
Withdrawal Plan to designate that a fixed sum ($50 minimum per transaction) be
distributed to the shareholder or as otherwise directed at regular intervals.
SPECIAL PROCEDURES FOR IN-KIND PAYMENTS
Payment for shares of the Fund may, in the discretion of the Fund, be
made in the form of securities that are permissible investments for the Fund as
described in its Prospectus. For further information about this form of payment,
contact the Fund at 1-866-44BAIRD. In connection with an in-kind securities
payment, the Fund will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Fund; that the Fund receive satisfactory assurances that it will have good and
marketable title to the securities received by it; that the securities be in
proper form for transfer to the Fund; that adequate information be provided to
the Fund concerning the basis and other tax matters relating to the securities;
and that the amount of the purchase be at least $1,000,000.
DESCRIPTION OF SHARES
The Company's Articles of Incorporation authorize the Board of
Directors to issue an indefinite number of shares of common stock, $.01 par
value per share, which is classified into six series (each, a "series" or
"fund"). Each series is divided into two classes designated as Investor Class
Shares and Institutional Class Shares (each, a "Class") and consists of the
number of shares set forth next to its Fund name in the table below:
Class of Fund in which Stock Number of Authorized
Common Stock Represents Interest Shares in Each Series
Investor Class Horizon Growth Fund Indefinite
Institutional Class Indefinite
The Board of Directors has also authorized the issuance of five
additional series of common stock representing interests in five other separate
investment portfolios which are described in separate Statements of Additional
Information. The Board of Directors may classify or reclassify any particular
class of shares into one or more additional series or classes. Each share of
common stock of each class is entitled to one vote, and each share is entitled
to participate equally in dividends and capital gains distribution by the
respective class of shares and in the residual assets of the respective class in
the event of liquidation. However, each class of shares bears its own expenses,
and the Investor Class has exclusive voting rights on matters pertaining to the
Rule 12b-1 Plan.
ADDITIONAL INFORMATION CONCERNING TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code, and to distribute out its income to shareholders each
year, so that the Fund itself generally will be relieved of federal income and
excise taxes. If the Fund were to fail to so qualify: (1) the Fund would be
taxed at regular corporate rates without any deduction for distributions to
shareholders; and (2) shareholders would be taxed as if they received ordinary
dividends, although corporate shareholders could be eligible for the dividends
received deduction.
MANAGEMENT OF THE COMPANY
Under the laws of the State of Wisconsin, the business and affairs of
the Fund are managed under the direction of the Board of Directors (the "Board")
of the Company. The Board is responsible for acting on behalf of the
shareholders.
The Company does not normally hold shareholders' meetings except when
required by the 1940 Act or other applicable law. The Board will call a
shareholders' meeting for the purpose of voting on the question of removal of a
Director when requested to do so in writing by the record holders of not less
than 10% of the outstanding shares of the Company that are entitled to vote.
DIRECTORS AND OFFICERS
Directors and officers of the Company, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each Director who is deemed an "interested person,"
as defined in the 1940 Act, is indicated by an asterisk (*). Each officer and
Director holds the same positions with the Company and the Fund. The Company, in
the aggregate, pays each Director who is not a director, officer, or employee of
the Advisor, or any affiliated company (a "disinterested director") an annual
fee of $10,000 plus $1,000 per Board meeting. In addition, each disinterested
director is reimbursed by the Baird Funds for travel and other expenses incurred
in connection with attendance at such meetings. Officers and directors of the
Baird Funds who are deemed "interested persons" of the Company or the Fund, as
defined in the 1940 Act, receive no compensation or expense reimbursement from
the Baird Funds. Neither the Company nor the Fund maintains any deferred
compensation, pension or retirement plans, and no pension or retirement benefits
are accrued as part of Company or Fund expenses.
<TABLE>
<CAPTION>
------------------------------------- ----------------------- -------------------------------------------------------
POSITION(S) HELD WITH PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS AND OTHER
NAME, ADDRESS & AGE THE COMPANY AFFILIATIONS
------------------------------------- ----------------------- -------------------------------------------------------
<S> <C> <C>
G. Frederick Kasten, Jr.* Director and Chairman Chairman, the Advisor since January 2000; Chairman &
777 East Wisconsin Avenue CEO, the Advisor (January 1998-January 2000);
Milwaukee, WI 53202 President, Chairman and CEO, the Advisor (June
(DOB 2/14/39) 1963-January 1998)
John W. Feldt Director Senior Vice President-Finance, University of
University of Wisconsin Foundation Wisconsin Foundation since 1985; Vice
1848 University Avenue President-Finance, University of Wisconsin Foundation
Madison, WI 53705 (1980-1985); Associate Director, University of
(DOB 5/2/42) Wisconsin Foundation (1967-1980)
George C. Kaiser Director CEO, George Kaiser & Co., a business consulting
759 N. Milwaukee Street company, since 1988; Chairman and CEO, Hanger Tight
Milwaukee, WI 53202 Company, a manufacturing company (1988-1999);
(DOB 1/20/33) Chairman and CEO, Interstore Transfer Systems, Ltd.,
a manufacturing company (1992-1999); Chairman,
International Retail Services Group, Ltd.
(1995-1999); Executive Vice President, Arandell
Schmidt Co., a catalog printer company (1984-1987);
various positions, Arthur Andersen & Co. (1957-1964,
1967-1984), most recently serving as Partner
(1969-1984); Secretary of Administration, State of
Wisconsin (1965-1967)
Stephen A. Roell Director Senior Vice President and Chief Financial Officer,
5757 N. Green Bay Avenue Johnson Controls, Inc., a manufacturing company,
Milwaukee, WI 53201 since 1998; Vice President and Chief Financial
(DOB 12/21/49) Officer, Johnson Controls, Inc. (1991-1998);
Corporate Controller and Assistant Secretary, Johnson
Controls, Inc. (1990-1991)
Mary Ellen Stanek President Managing Director and Chief Financial Officer, the
777 East Wisconsin Avenue Advisor since March 2000; President and CEO, Firstar
Milwaukee, WI 53202 Investment Research & Management Company, LLC
(DOB 4/18/56) ("Firstar") (November 1998-February 2000); President
and Chief Operating Officer, Firstar (March
1994-November 1998); Executive Vice President,
Firstar (July 1990-March 1994); Vice President and
Director of Fixed Income Services, Firstar Trust
Company Services (May 1983-July 1990); Portfolio
Manager, Firstar Trust Company (April 1979-July 1990)
Joel D. Vrabel Senior Vice President Senior Vice President and Portfolio Manager, the
777 East Wisconsin Avenue Advisor since January 1995; Vice President, Campbell,
Milwaukee, WI 53202 Newman, Pottinger & Associates, Inc. (May
(DOB 6/2/49) 1991-January 1995); Vice President, Kennedy
Associates, Inc. (August 1985-April 1991); President,
Ziegler & Vrabel Investment Advisors (August
1983-July 1985)
Glen F. Hackmann Vice President Secretary, General Counsel and Managing Director, the
777 East Wisconsin Avenue Advisor (September 1984-present)
Milwaukee, WI 53202
(DOB 4/30/41)
Russell P. Schwei Vice President Operations Director, the Advisor since December 1999;
777 East Wisconsin Avenue Chief Financial Officer and Managing Director, the
Milwaukee, WI 53202 Advisor (February 1999-December 1999); Managing
(DOB 6/2/59) Director, the Advisor (January 1997-present); Senior
Vice President, the Advisor (January 1996-January
1997); First Vice President (June 1984-January 1996)
Leonard M. Rush Treasurer Chief Financial Officer, the Advisor since January
777 East Wisconsin Avenue 2000; Assistant Treasurer, FMR Company, a mutual
Milwaukee, WI 53202 funds company (April 1994-December 1999); Chief
(DOB 1/2/46) Compliance Officer, FMR Corporation, a holding
company (March 1993-April 1994); Chief Financial
Officer, Fidelity Brokerage Services Inc. (October
1990-March 1993)
Brett R. Meili Secretary Associate General Counsel, the Advisor since April
777 East Wisconsin Avenue 1999; Senior Counsel, Strong Capital Management, Inc.
Milwaukee, WI 53202 (January 1996-April 1999); Senior Counsel, Blue Cross
(DOB 4/27/62) Blue Shield United of Wisconsin (November
1993-December 1995); Attorney, Godfrey & Kahn, S.C.
(August 1990-November 1993)
Lisa L. Kollmeyer Assistant Secretary Senior Paralegal, the Advisor since April 2000;
777 East Wisconsin Avenue Senior Paralegal, Strong Capital Management (April
Milwaukee, WI 53202 1995-April 2000); Paralegal, Godfrey & Kahn, S.C.
(DOB 12/28/66) (February 1992-April 1995)
Christine P. Gray Assistant Treasurer Compliance Officer, Firstar Mutual Fund Services, LLC
615 East Michigan Street since December 1998; Attest Services In-Charge, KPMG
Milwaukee, WI 53202 LLP (July 1996 - December 1998); Associate, B.C.
(DOB 11/27/74) Holdings Inc. (January 1994 - June 1996)
------------------------------------- ----------------------- -------------------------------------------------------
</TABLE>
The disinterested members of the Company's Board of Directors receive
the following compensation:
----------------------- ----------------------- ------------------------
NAME AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM FROM COMPANY PAID TO
COMPANY(1) DIRECTORS
----------------------- ----------------------- ------------------------
John W. Feldt $6,000 $6,000
George C. Kaiser $6,000 $6,000
Stephen A. Roell $6,000 $6,000
----------------------- ----------------------- ------------------------
(1) Compensation is estimated for the current fiscal year, ending December 31,
2000.
As of September 26, 2000, Directors and Officers of the Company did not
beneficially own any of the shares of common stock of the Fund's then
outstanding shares; however, the Advisor owned 100% of such shares.
PRINCIPAL SHAREHOLDERS
As of September 26, 2000, which was prior to the public offering of the
Fund's shares, the Advisor, a Wisconsin corporation, owned of record 100% of the
Fund's shares. Accordingly, as of September 26, 2000, the Advisor owned a
controlling interest in the Fund. Shareholders with a controlling interest could
effect the outcome of proxy voting or the direction of management of the
Company. The Advisor is a majority owned subsidiary of Baird Financial
Corporation which is a majority owned subsidiary of the Northwestern Mutual Life
Insurance Company.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors, the
"Advisor is responsible for, makes decisions with respect to, and places orders
for all purchases and sales of portfolio securities for the Fund.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable the Fund to receive favorable tax treatment. Portfolio turnover will not
be a limiting factor in making portfolio decisions, and the Fund may engage in
short-term trading to achieve its investment objective.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are generally principal
transactions with dealers and the costs of such transactions involve dealer
spreads rather than brokerage commissions. With respect to over-the-counter
transactions, the Advisor will normally deal directly with dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere or as described below.
Fixed income securities purchased and sold by the Fund are generally
traded in the over-the-counter market on a net basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. The cost of securities purchased from underwriters includes an
underwriting commission or concession, and the prices at which securities are
purchased from and sold to dealers include a dealer's mark-up or mark-down.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Advisor, in its
sole discretion, believes such practice to be in the Fund's interests.
The Investment Advisory Agreement (the "Agreement") between the Company
and the Advisor provides that, in executing portfolio transactions and selecting
brokers or dealers, the Advisor will seek to obtain the most favorable prices
and at reasonable commission rates. In assessing the best overall terms
available for any transaction, the Advisor shall consider factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commissions, if any, both for the specific
transaction and on a continuing basis. In addition, the Agreement authorizes the
Advisor to cause the Fund to pay a broker/dealer which furnishes brokerage and
research services a higher commission than that which might be charged by
another broker/dealer for effecting the same transaction, provided that the
Advisor determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker/dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Advisor to the Fund. Such brokerage and research
services might consist of reports and statistics relating to specific companies
or industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable to it by the Fund. The Board of Directors will
periodically review the commissions paid by the Fund to consider whether the
commissions paid over representative periods of time appear to be reasonable in
relation to the benefits inuring to the Fund. Research services furnished by
firms through which the Fund effects its securities transactions may be used by
the Advisor in servicing all of its accounts; not all of such services may be
used by the Advisor in connection with the Fund. It is possible that certain of
the supplementary research or other services received will primarily benefit one
or more other accounts for which investment discretion is exercised. Conversely,
the Fund may be the primary beneficiary of the research or services received as
a result of portfolio transactions effected for such other account.
Portfolio securities will not be purchased from or sold to (and savings
deposits will not be made in and repurchase and reverse repurchase agreements
will not be entered into with) the Advisor, or an affiliated person of the
Advisor (as such term is defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) acting as principal. In addition, the Fund will not
purchase securities during the existence of any underwriting or selling group
relating thereto of which the Advisor or an affiliated person is a member,
except to the extent permitted by the SEC.
Investment decisions for the Fund are made independently from those for
other accounts advised or managed by its Advisor. Such other accounts may also
invest in the same securities as the Fund. When a purchase or sale of the same
security is made at substantially the same time on behalf of the Fund and
another account, the transaction will be averaged as to price and available
investments allocated as to amount, in a manner which the Advisor believes to be
equitable to the Fund and such other account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the Advisor may aggregate the securities to be sold or purchased for the
Fund with those to be sold or purchased for other accounts in executing
transactions.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISORY SERVICES
On August 14, 2000, the Board of Directors (including at least a
majority of the disinterested Directors) and the shareholders of the Fund
approved an investment advisory agreement (the "Advisory Agreement") pursuant to
which Robert W. Baird & Co. Incorporated, 777 East Wisconsin Avenue, Milwaukee,
WI 53202, furnishes continuous investment advisory services and management to
the Fund. The Advisor is an investment advisory firm formed in the state of
Wisconsin on December 29, 1919. In its Advisory Agreement, the Advisor has
agreed to pay all expenses incurred by it in connection with its advisory
activities, other than the cost of securities and other investments, including
brokerage commissions and other transaction charges, if any, purchased or sold
for the Fund.
The Advisory Agreement terminates in the event of its assignment and
generally may be terminated by either party if certain conditions are met,
without penalty, on 60 days' notice. The Advisory Agreement will continue in
effect until September 29, 2002 (unless sooner terminated) and thereafter for
successive one-year periods so long as it is approved annually (a) by the vote
of a majority of the disinterested Directors, cast in person at a meeting called
for the purpose of voting on such approval, and (b) either by the Board of
Directors of the Company or by the vote of the shareholders as described under
"Miscellaneous" below.
As described in the Prospectus, the Advisor has contractually agreed to
limit the total expenses of the Horizon Growth Fund to an annual rate of 1.40%
for the Institutional Class and 1.65% for the Investor Class, through December
31, 2001. Pursuant to the Advisory Agreement, the Advisor can recapture any
expenses or fees it has waived or reimbursed within a three-year period, if the
expense ratios in those future years are less than the limits specified above
and less than the limits in effect at that future time. However, the Fund is not
obligated to pay any such waived fees more than three years after the end of the
fiscal year in which the fee was waived or reimbursed.
As compensation for its advisory services, the Fund pays to the Advisor
a monthly management fee at the annual rate of 0.65% of the average daily net
asset value of the Fund. From time to time the Advisor may voluntarily waive all
or a portion of its Management Fee for the Fund.
CODE OF ETHICS
The Company, the Advisor, and the Distributor have each adopted a
written Code of Ethics under Rule 17j-1 of the 1940 Act. These Codes of Ethics
govern the personal securities transactions of directors, officers, managers,
members, and employees who may have access to current trading information of the
Fund. These Codes of Ethics permit such persons to invest in securities for
their personal accounts, including securities that may be purchased or held by
the Fund. These Codes of Ethics include reporting and other obligations to
monitor personal transactions and ensure that such transactions are consistent
with the best interests of the Fund.
FUND ADMINISTRATION
Firstar Mutual Fund Services, LLC provides administrative personnel and
services (including blue-sky services) to the Company and the Fund.
Administrative services include, but are not limited to, providing equipment,
telephone facilities, various personnel, including clerical and supervisory, and
computers as is necessary or beneficial to provide compliance services to the
Fund and the Company.
FINANCIAL INTERMEDIARIES
From time to time, the Fund may pay, directly or indirectly, amounts to
financial intermediaries that provide transfer-agent type and/or other
administrative services relating to the Fund to their customers or other persons
who beneficially own interests in the Fund, such as participants in 401(k)
plans. These services may include, among other things, sub-accounting services,
transfer agent-type services, answering inquiries relating to the Fund,
transmitting, on behalf of the Fund, proxy statements, annual reports, updated
prospectuses, other communications regarding the Fund, and related services as
the Fund or the intermediaries' customers or such other persons may reasonably
request. In such cases, to the extent paid by the Fund, the Fund will not pay
more for these services through intermediary relationships than it would if the
intermediaries' customers were direct shareholders in the Fund.
CUSTODIAN
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio, 45202, serves
as custodian of the Fund's assets. Under the Custody Agreement, Firstar Bank,
N.A. has agreed to (i) maintain a separate account in the name of the Fund, (ii)
make receipts and disbursements of money on behalf of the Fund, (iii) collect
and receive all income and other payments and distributions on account of the
Fund's portfolio investments, (iv) respond to correspondence from shareholders,
security brokers and others relating to its duties and (v) make periodic reports
to the Company concerning the Fund's operations. Firstar Bank, N.A. may, at its
own expense, open and maintain a custody account or accounts on behalf of the
Fund with other banks or trust companies, provided that Firstar Bank, N.A. shall
remain liable for the performance of all of its duties under the Custody
Agreement notwithstanding any delegation.
TRANSFER AGENT
Firstar Mutual Fund Services, LLC, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, serves as transfer agent and dividend disbursing agent for the
Fund under a Shareholder Servicing Agent Agreement. As transfer and dividend
disbursing agent, Firstar Mutual Fund Services, LLC has agreed to (i) issue and
redeem shares of the Fund, (ii) make dividend and other distributions to
shareholders of the Fund, (iii) respond to correspondence by Fund shareholders
and others relating to its duties, (iv) maintain shareholder accounts, and (v)
make periodic reports to the Fund.
FUND ACCOUNTING
In addition, the Fund has entered into a Fund Accounting Servicing
Agreement with Firstar Mutual Fund Services, LLC pursuant to which Firstar
Mutual Fund Services, LLC has agreed to maintain the financial accounts and
records of the Fund in compliance with the 1940 Act and to provide other
accounting services to the Fund.
DISTRIBUTOR
Robert W. Baird & Co. Incorporated also serves as the principal
distributor for shares of the Fund pursuant to a Distribution Agreement with the
Company dated as of September 26, 2000 (the "Distribution Agreement"). The
Advisor is registered as a broker/dealer under the Securities Exchange Act of
1934 and each state's securities laws and is a member of the NASD. The offering
of the Fund's shares is continuous. The Distribution Agreement provides that the
Advisor, as agent in connection with the distribution of Fund shares, will use
its best efforts to distribute the Fund's shares.
DISTRIBUTION PLAN
PLAN
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. The Plan authorizes payments by the Fund in connection
with the distribution of Investor Class Shares at an annual rate of 0.25% of the
Fund's average daily net asset value. Payments may be made by the Fund under the
Plan for the purpose of financing any activity primarily intended to result in
the sale of shares of the Fund, as determined by the Board of Directors. Such
activities typically include advertising; compensation for sales and sales
marketing activities of financial service agents and others, such as dealers or
distributors; shareholder account servicing; production and dissemination of
prospectuses and sales and marketing materials; and capital or other expenses of
associated equipment, rent, salaries, bonuses, interest and other overhead. To
the extent any activity is one which the Fund may finance without the Plan, the
Fund may also make payments to finance such activity outside of the Plan and not
subject to its limitations. Payments under the Plan are based upon a percentage
of average daily net assets attributable to the Investor Class regardless of the
amounts actually paid or expenses actually incurred by the Distributor; however,
in no event, may such payments exceed the maximum allowable fee. It is,
therefore, possible that the Distributor may realize a profit in a particular
year as a result of these payments. The Plan increases the Investor Class's
expenses from what they would otherwise be. The Fund may engage in joint
distribution activities with other Baird Funds and to the extent the expenses
are not allocated to a specific Fund, expenses will be allocated based on each
Fund's net assets.
Administration of the Plan is regulated by Rule 12b-1 under the 1940
Act, which requires that the Board of Directors receive and review at least
quarterly reports concerning the nature and qualification of expenses which are
made, that the Board of Directors, including a majority of the disinterested
Directors, approve all agreements implementing the Plan and that the Plan may be
continued from year-to-year only if the Board of Directors, including a majority
of the disinterested Directors, concludes at least annually that continuation of
the Plan is likely to benefit shareholders.
INTERESTS OF CERTAIN PERSONS
With the exception of the Advisor, in its capacity as the Fund's
investment advisor and principal underwriter of Fund shares, no "interested
person" of the Fund, as defined in the 1940 Act, and no director of the Company
who is not an "interested person" has or had a direct or indirect financial
interest in the Plan or any related agreement.
ANTICIPATED BENEFITS TO THE FUND
The Board of Directors considered various factors in connection with
its decision to approve the Plan, including: (a) the nature and causes of the
circumstances which make implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those circumstances, including the
nature and potential amount of expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans or pricing structures;
(e) the relationship of the Plan to other distribution efforts of the Fund; and
(f) the possible benefits of the Plan to any person relative to those of the
Fund.
Based upon its review of the foregoing factors an the material
presented to it, and in light of its fiduciary activities under relevant state
law and the 1940 Act, the Board of Directors determined, in the exercise of its
business judgment, that the Plan was reasonably likely to benefit the Investor
Class and its shareholders in at least one or several potential ways.
Specifically, the Board concluded that the Distributor and any recipients would
have little or no incentive to incur promotional expenses on behalf of the
Investor Class if the Plan were not in place to reimburse them, thus making the
adoption of the Plan important to the initial success and thereafter, continued
viability of the Investor Class. In addition, the Board determined that the
payment of distribution fees to these persons should motivate them to provide an
enhanced level of service to Investor Class shareholders, which would, of
course, benefit such shareholders. Finally, the adoption of the Plan would help
to increase assets under the management in a short amount of time, given the
marketing efforts on the part of the Distributor and recipients to sell Investor
Class shares which should result in certain economies of scale.
While there is no assurance that the expenditure of Investor Class
assets to finance distribution of Investor Class shares will have the
anticipated results, the Board of Directors believe there is a reasonable
likelihood that one or more of such benefits will result, and since the Board
will be in a position to monitor the distribution expenses of the Investor
Class, it will be able to determine the benefit of such expenditures in deciding
whether to continue the Plan.
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin, 53202, has been selected as the independent accountants of
the Company. As such, it is responsible for auditing the financial statements of
the Fund.
The following financial statements of the Fund are contained herein:
Report of Independent Accountants
To the Shareholder and Board of Directors of
Baird Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of the Baird Intermediate Bond Fund, the Baird Core Bond
Fund, the Baird Aggregate Bond Fund, and the Baird Horizon Growth Fund
(comprising Baird Funds, Inc., hereafter referred to as the "Funds") at
September 14, 2000 and the results of its operations from the period June 9,
2000 (inception date) through September 14, 2000 , in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Funds' management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
September 15, 2000
<TABLE>
<CAPTION>
INTERMEDIATE CORE AGGREGATE HORIZON
BOND FUND BOND FUND BOND FUND GROWTH FUND
----------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 25,000 $ 25,000 $ 25,000 $ 25,000
Receivable from advisor - - - 7,405
----------------- ---------------- ---------------- ------------------
25,000 25,000 25,000 32,405
LIABILITIES
Accrued organizational expenses - - - 7,405
----------------- ---------------- ---------------- ------------------
NET ASSETS $ 25,000 $ 25,000 $ 25,000 $ 25,000
----------------- ---------------- ---------------- ------------------
INSTITUTIONAL SHARES
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares outstanding
($0.01 par value, unlimited
shares authorized) 1,250 1,250 1,250 1,250
Net asset value and offering
price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------------- ---------------- ---------------- ------------------
INVESTOR SHARES
Net assets $ 12,500 $ 12,500 $ 12,500 $ 12,500
Shares outstanding
($0.01 par value, unlimited
shares authorized) 1,250 1,250 1,250 1,250
Net asset value and offering
price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
----------------- ---------------- ---------------- ------------------
Expenses:
Organizational $ - $ - $ - $ 7,405
expenses
Expenses reimbursed - - - (7,405)
by advisor ---------------- ---------------- ---------------- ------------------
Net income/loss $ - $ - $ - $ -
---------------- ---------------- ---------------- ------------------
</TABLE>
1. ORGANIZATION
The Baird Funds, Inc. (the "Corporation") was organized as a
Wisconsin corporation on June 9, 2000 and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The
Corporation currently offers four series of shares to investors: the
Baird Intermediate Bond Fund, the Baird Core Bond Fund, the Baird
Aggregate Bond Fund, and the Baird Horizon Growth Fund (collectively
referred to as the "Funds"). Pursuant to the 1940 Act, the Funds are
"diversified" series of the Corporation. Each Fund's operations to date
have been limited to the receipt of $25,000 of seed capital from Robert
W. Baird & Co. Incorporated (the "Advisor") and any organizational
activities. Each Fund offers both Investor Class shares and
Institutional Class shares. Two additional series, the Baird Short-Term
Bond Fund and the Baird Intermediate Municipal Bond Fund, are not
presently being offered to investors.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION COSTS
Expenses in connection with the organization of the Baird
Intermediate Bond Fund, the Baird Core Bond Fund, and the Baird
Aggregate Bond Fund have been assumed by the Advisor, pursuant to an
Administration Agreement between the Funds and the Advisor (see Note
2). Accordingly, no organizational expenses have been reported in these
Funds' Statement of Operations. Expenses in connection with the
organization of the Baird Horizon Growth Fund will be reimbursed by the
Advisor. These reimbursed expenses may be recovered by the Advisor in
the future, subject to certain limitations (see Note 3).
FEDERAL INCOME TAXES
The Funds intend to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its
shareholders in a manner which results in no tax cost to the Funds.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the
financial statements. Actual results could differ from those estimates.
3. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS
The Corporation has an agreement with the Advisor, with whom
certain officers and directors of the Funds are affiliated, to furnish
investment advisory services to the Funds. Under the terms of the
agreement, the Funds compensate the Advisor for its management services
at the annual rate of 0.25% of each Fund's average daily net assets,
except the Baird Horizon Growth Fund, which compensates the Advisor at
a rate of 0.65%.
The Corporation has entered into an Administration Agreement with the
Advisor covering the Baird Intermediate Bond Fund, the Baird Core Bond
Fund, and the Baird Aggregate Bond Fund. Under the Administration
Agreement the Advisor renders all administrative and supervisory
services to these Funds. The Advisor oversees the accounting and
recordkeeping of the applicable Funds and is also responsible for the
equipment, staff, office space and facilities necessary to perform its
obligations. The Advisor has delegated some of its administrative and
other responsibilities to Firstar Mutual Fund Services, LLC ("FMFS")
and is responsible for paying all fees and expenses of FMFS. Under the
Administration Agreement, the Advisor assumes and pays all expenses of
the applicable Fund, excluding brokerage fees and commissions, taxes,
borrowing costs (such as (a) interest and (b) dividend expenses on
securities sold short) and extraordinary or non-recurring expenses.
Pursuant to the Administration Agreement, the Advisor receives a fee
which is paid monthly at an annual rate of 0.05% of the applicable
Fund's average daily net assets.
For the Baird Horizon Growth Fund, the Advisor has agreed, through
December 31, 2001, to waive its fees and reimburse expenses to the
extent that the Fund's total annual operating expenses exceed an annual
rate of 1.40% of average net assets attributable to the Institutional
Class and 1.65% of average net assets attributable to the Investor
Class. The Advisor can recapture any expenses or fees it has waived or
reimbursed within a three-year period if the expenses ratios in those
future years are less than the limits specified above and less than the
limits in effect at that future time. However, the fund is not
obligated to pay any such waived fees more than three years after the
end of the fiscal year in which the fee was waived or reimbursed.
4. DISTRIBUTION PLAN
The Funds have adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments
by the Funds in connection with the distribution of Investor Class
Shares at an annual rate of 0.25% of each Fund's average daily net
asset value attributable to the Investor Class shares. Payments under
the Plan are based upon a percentage of average daily net assets
attributable to the Investor Class regardless of the amounts actually
paid or expenses actually incurred by the distributor. The Advisor also
serves as distributor for the Funds.
COUNSEL
Godfrey & Kahn, S.C., 780 N. Water Street, Milwaukee, WI 53202, serves
as counsel to the Company and will pass upon the legality of the shares offered
by the Fund's Prospectus.
PERFORMANCE CALCULATIONS
From time to time, the total return of Investor Class Shares and
Institutional Class Shares of the Fund may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling the Fund at 1-866-44BAIRD.
TOTAL RETURN CALCULATIONS
The Fund computes "average annual total return" separately for its
Investor Class Shares and Institutional Class Shares. Average annual total
return reflects the average annual percentage change in value of an investment
in shares of a series over the measuring period. This is computed by determining
the average annual compounded rates of return during specified periods that
equate the initial amount invested in a particular class to the ending
redeemable value of such investment in the class. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years (or
fractional portion thereof) covered by the computation and subtracting one from
the result. This calculation can be expressed as follows:
P(1 + T)n = ERV
Where:
P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV= ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
The Fund may compute aggregate total return, which reflects the total
percentage change in value over the measuring period. The Fund computes the
aggregate total returns separately for the Investor Class Shares and
Institutional Class Shares by determining the aggregate rates of return during
specified periods that likewise equate the initial amount invested in a
particular class to the ending redeemable value of such investment in the class.
The formula for calculating aggregate total return is as follows:
ERV
T = [(-----) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
COMPARISON
The total return of the Fund's shares may be compared in publications
to those of other mutual funds with similar investment objectives and to
relevant indices, to rankings, or other information prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds or to investments for which reliable performance
data is available. For example, the total return of the Fund's shares may be
compared to data prepared by Lipper Analytical Services, Inc. The total return
of the Fund's shares may be compared to the S&P 500 Index; the Russell 2000
Index; and the Consumer Price Index. Total return data as reported in national
financial publications, such as Money Magazine, Forbes, Barron's, Morningstar
Mutual Funds, Mutual Funds Magazine, Kiplinger's Personal Finance Magazine, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature, may also be used in comparing the performance of the Fund.
Performance quotations represent past performance, and should not be
considered as representative of future results. Performance assumes the
reinvestment of all net investment income and capital gains and reflects fee
waivers. In the absence of fee waivers, performance would be reduced. The
investment return and principal value of an investment in the Fund's class of
shares will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. Since performance will fluctuate,
performance data for the Fund cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Investors should remember that performance is
generally a function of the kind and quality of the investments held in a
portfolio, portfolio maturity, operating expenses and market conditions. Any
fees charged by institutions directly to their customer accounts in connection
with investments in the Fund will not be included in the Fund's calculations of
total return and will reduce the total return received by the accounts.
The Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the Fund, economic conditions, the effects
of inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance of
information contained in shareholder reports (including the investment
composition of the Fund), as well as the views of the Advisor as to market,
economic, trade and interest trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stocks,
bonds, treasury bills and shares of the Fund. In addition, advertisement or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other materials which highlight
or summarize the information discussed in more detail therein.
PERFORMANCE HISTORY
Because the Fund is new, no performance history is provided in this
SAI.
APPENDIX A
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. Ratings are graded into several categories, ranging from `A' for
the highest-quality obligations to `D' for the lowest. These categories are as
follows:
"A-1" - This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
"A-2" - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated `A-1'.
"A-3" - Issues carrying this designation have an adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
"B" - Issues rated `B' are regarded as having only speculative capacity
for timely payment.
"C" - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
"D" - Debt rated `D' is in payment default. The `D' rating category is
used when interest payments of principal payments are not made on the date due,
even if the applicable grace period has not expired, unless Standard & Poor's
believes such payments will be made during such grace period.
Moody's short-term debt ratings are opinions on the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's employs the
following three designations, all judged to be investment grade to indicate the
relative repayment ability of rated issuers:
"Prime-1" - Issuers rated Prime-1 (or supporting institutions) 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" - Issuers rated Prime-2 (or supporting institutions) have a
strong ability 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuers rated Not Prime do not fall within any of the
Prime rating categories.
Fitch's short-term debt credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these short-term ratings
assess its general creditworthiness on a senior basis. When applied to specific
issues and programs, these ratings take into account the relative preferential
position of the holder of the security and reflect the terms, conditions, and
covenants attaching to that security.
Short-term debt credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for US public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 HIGHEST CREDIT QUALITY. Indicates the Best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D DEFAULT. Denotes actual or imminent payment default.
NOTES: "+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to Short-term ratings other
than `F1'. `NR' indicates that Fitch does not rate the issuer or issue in
question. `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced. Rating Watch: Ratings are placed
on Rating Watch to notify investors that there is a reasonable probability of a
rating change and the likely direction of such change. These are designated as
"Positive", indicating a potential upgrade, "Negative", for a potential
downgrade, or "Evolving", if ratings may be raised, lowered or maintained.
Rating Watch is typically resolved over a relatively short period.
Thomson Bank Watch assigns Short-Term Debt Ratings to specific debt
instruments with original maturities of one year or less. These ratings
incorporate basically the same factors used for the BankWatch Issuer Ratings.
There is one major difference, however: The Short-Term Debt Ratings put a
greater emphasis on the likelihood of government support.
Thomson Bank Watch ratings represent an assessment of the likelihood of
an untimely payment of principal and interest. Important factors that may
influence this assessment are the overall financial health of the particular
company, and the probability that the government will come to the aid of a
troubled institution in order to avoid a default or failure. The probability of
government intervention stems from four primary factors:
|X| Government guarantees
|X| Government or quasi-government ownership or control
|X| The degree of concentration in the banking system
|X| Government precedent
As with the Issuer Ratings, the Short-Term Debt Ratings incorporate
both qualitative and quantitative factors. The ratings are not meant to be
"pass/fail' but rather to provide a relative indication of creditworthiness.
Therefore, obligations rated TBW-3 are still considered investment-grade.
These Short-Term Debt Ratings can also be restricted to local currency
instruments. In such cases, the ratings will be preceded by the designation LC
for Local Currency. Short-Term Debt Ratings are based on the following scale and
the definitions are:
"TBW-1" "LC-1"
The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" LC-2"
The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
"TBW-3" "LC-3"
The lowest investment-grade category; indicates that while the obligation is
more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
"TBW-4" "LC-4"
The lowest rating category; this rating is regarded as non-investment grade
and therefore speculative.
STANDARD & POOR'S
Standard & Poor's issue credit ratings based in varying degrees, on the
following considerations:
1. Likelihood of payment - capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation 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.
"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" - Obligations rated "BB," "B," "CCC,"
"CC" and "C" are 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
may be outweighed by large uncertainties or major exposures to adverse
conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions, which could lead
to the obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment 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" - An obligation rated "CCC" is currently vulnerable to nonpayment
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
nonpayment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a 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.
"C" - The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"P" - The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
"R"- The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks. Examples of
such obligations are securities with principal or interest return 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.
N.R. - NOT RATED - Debt obligations of issuers outside the United
States and its territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the obligor but do
not take into account currency exchange and related uncertainties.
Moody's uses the following categories for long-term obligations.
"Aaa" - Bonds that are rated "Aaa" to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." 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 that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risk appear somewhat larger than the
"Aaa" securities.
"A" - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Baa" - Bonds that are rated "Baa" considered as 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" - Bonds that are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
"B" - Bonds that are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
"Caa" - Bonds that are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
"Ca" - Bonds that are rated "Ca" represent obligations that are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
"C" - Bonds that are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch's long-term debt credit ratings are applied to the spectrum of
corporate, structured, and public finance. They cover sovereign (including
supranational and subnational), financial, bank, insurance, and other corporate
entities and the securities they issue, as well as municipal and other public
finance entities, and securities backed by receivables or other financial
assets, and counterparties. When applied to an entity, these long-term ratings
assess its general creditworthiness on a senior basis. When applied to specific
issues and programs, these ratings take into account the relative preferential
position of the holder of the security and reflect the terms, conditions, and
covenants attaching to that security.
Long-term debt credit ratings assess the capacity to meet foreign
currency or local currency commitments. Both "foreign currency" and "local
currency" ratings are internationally comparable assessments. The local currency
rating measures the probability of payment within the relevant sovereign state's
currency and jurisdiction and therefore, unlike the foreign currency rating,
does not take account of the possibility of foreign exchange controls limiting
transfer into foreign currency.
INVESTMENT GRADE
AAA HIGHEST CREDIT QUALITY. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A HIGH CREDIT QUALITY. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB GOOD CREDIT QUALITY. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
SPECULATIVE GRADE
BB SPECULATIVE. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B HIGHLY SPECULATIVE. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C HIGH DEFAULT RISK. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A `CC' rating indicates that default of some
kind appears probable. `C' ratings signal imminent default.
DDD, DD, D DEFAULT. The ratings of obligations in this category are based on
their prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect for repaying all obligations.
NOTES: "+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' long-term
rating category, or to categories below `CCC'.
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
Long-Term Debt Ratings assigned by Thomson Financial BankWatch Also
Weigh Heavily Government Ownership and Support. The quality of both the
company's management and franchise are of even greater importance in the
Long-Term Debt Rating decisions. Long-Term Debt Ratings look out over a cycle
and are not adjusted frequently for what we believe are short-term performance
aberrations.
Long-Term Debt Ratings can be restricted to local currency debt -
ratings will be identified by the designation LC. In addition, Long-Term Debt
Ratings may include a plus (+) or minus (-) to indicate where within the
category the issue is placed. BankWatch Long-Term Debt Ratings are based on the
following scale:
INVESTMENT GRADE
"AAA" "LC-AAA"
Indicates that the ability to repay principal and interest on a timely basis
is extremely high.
"AA" "LC-AA"
Indicates a very strong ability to repay principal and interest on a timely
basis, with limited incremental risk compared to issues rated in the highest
category.
"A" "LC-A"
Indicates that the ability to repay principal and interest is strong. Issues
rated "A" could be more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BBB" "LC-BBB"
The lowest investment-grade category; indicates an acceptable capacity to repay
principal and interest. "BBB" issues are more vulnerable to adverse developments
(both internal and external) than obligations with higher ratings.
Non-Investment Grade - may be speculative in the likelihood of timely repayment
of principal and interest
"BB" "LC-BB"
While not investment grade, the "BB" rating suggests that the likelihood of
zefault is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations.
"B" "LC-B"
Issues rated B show a higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse developments could
negatively affect the payment of interest and principal on a timely basis.
"CCC" "LC-CCC"
Issues rated CCC clearly have a high likelihood of default, with little capacity
to address further adverse changes in financial circumstances.
"CC" "LC-CC"
"CC" is applied to issues that are subordinate to other obligations rated "CCC"
and are afforded less protection in the event of bankruptcy or reorganization.
"D" "LC-D"
Default.
