Filed with the Securities and Exchange Commission on October 11, 2000
1933 Act Registration File No. 333-40128
1940 Act File No. 811-09997
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
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Post-Effective Amendment No. 1 |X|
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 3 |X|
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BAIRD FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
777 East Wisconsin Avenue
Milwaukee, WI 53202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 765-3500
Glen F. Hackmann, Esq.
777 East Wisconsin Avenue
Milwaukee, WI 53202
(Name and Address of Agent for Service)
Copies of all communications to:
Suzanne E. Riley, Esq.
Firstar Mutual Fund Services, LLC
615 East Michigan Street, 2nd Floor
Milwaukee, WI 53202
Brett R. Meili, Esq.
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, WI 53202
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)
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on_____________ pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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X on December 29, 2000 pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on ____________ pursuant to paragraph (a)(2) of Rule 485.
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Title of securities being registered: Baird MidCap Fund.
SUBJECT TO COMPLETION, DATED OCTOBER 11, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
BAIRD FUNDS, INC.
Prospectus
December 29, 2000
Baird MidCap 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...........................................................7
YOUR ACCOUNT...................................................................7
DISTRIBUTION OF SHARES......................................................7
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 MidCap 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.
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
mid-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
up to 15% of its assets in foreign securities, including American Depositary
Receipts ("ADRs"), of mid-capitalization companies. ADRs are generally issued by
banks or trust companies and evidence ownership of the underlying foreign
securities. The Fund defines "mid-capitalization companies" as companies with a
market capitalization substantially similar to that of companies in the Standard
& Poor's MidCap 400 Index (the "S&P MidCap 400 Index") 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
growth rates that exceed those of the S&P 400 MidCap 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 one or
more of the following attributes:
|X| Experienced management;
|X| Leadership positions in their markets;
|X| A strong balance sheet;
|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| Setting sector limits of the greater of 30% of the Fund's total assets
or double the weighting of the S&P 400 MidCap Index in any one sector.
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 100 companies.
|X| Seeking securities whose growth prospects, in the Advisor's opinion,
are not reflected in their current stock prices.
|X| Limiting the size of any one new position. No security will represent more
than 5% of the Fund's assets at the time of purchase.
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 key 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.
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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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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.
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
mid-capitalization businesses have exhibited somewhat more volatility than those
of larger, more established 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 net assets in foreign securities and 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.
MEDIUM SIZED COMPANIES
The Fund invests a substantial portion of its assets in the stocks of
mid-capitalization companies. Mid-capitalization companies often have narrower
markets and more limited managerial and financial resources than larger, more
established companies. As a result, their performance can be more volatile and
they face greater risk of business failure, which could increase the volatility
of the Fund's portfolio. You should expect that the value of the Fund's shares
with be more volatile than a fund that invests exclusively in
large-capitalization companies.
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 0.75% 0.75%
Distribution and Service (12b-1)1 Fees 0.25% None
Other Expenses2 [___%] [___%]
-------------- -- ---------------
Total Annual Fund Operating Expenses3 [___%] [___%]
-------------- ---------------
Less Expense Reimbursement [-___%] [-___%]
-------------- -- ---------------
Net Annual Fund Operating Expenses [1.50%] [1.25%]
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 1.50% of average net assets for the Investor Class
Shares and 1.25% 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 $10,000 in the Fund for the time periods indicated;
|X| You redeem all of your shares at the end of those periods;
|X| Your investment has a 5% return each year;
|X| Your dividends and distributions have been reinvested; and
|X| The Fund's operating expenses remain the same.
Please note that the one year numbers are based on the Fund's net expenses
because the Fund has agreed to waive its management fee and/or reimburse the
Fund's expenses until December 31, 2001, as described above. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
----------------------------------------------------- ------------ -------------
1 Year 3 Years
----------------------------------------------------- ------------ -------------
Investor Class Shares [$___ $___
----------------------------------------------------- ------------ -------------
Institutional Class Shares $___ $___]
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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 September 30, 2000 the Advisor
had over $__ 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.
J. BARY MORGAN
Mr. Morgan is a Senior Vice President and Portfolio Manager of the Advisor.
Mr. Morgan joined the Baird Investment Management department of the Advisor 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.
CHARLES F. SEVERSON
Mr. Severson is a Senior Vice President and Portfolio Manager of the Advisor.
Mr. Severson joined the Advisor in 1987 as an Institutional Salesman. In 1991,
Mr. Severson joined Baird Investment Management as a Portfolio Manager. He has
a B.B.A. degree in Accounting and Finance and an M.S. degree in Finance from the
University of Wisconsin-Madison. He received the Chartered Financial Analyst
designation in 1990.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
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 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
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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
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INITIAL PURCHASE SUBSEQUENT PURCHASES
---------------------------- -------------------------------- ------------------
Investor Class Shares $1,000 - IRAs $250
$2,500 - all other accounts $250
Institutional Class Shares $100,000 No minimum
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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
<TABLE>
<CAPTION>
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TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
--------------------------------- ---------------------------------------- ---------------------------------------
<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 instructions:
account number. Wire funds using the Firstar Bank, N.A.
instructions to the right. 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 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 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 To purchase shares for another To purchase shares for another
Service 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."
--------------------------------- ---------------------------------------- ---------------------------------------
</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 FUND DOES NOT CONSIDER THE U.S. POSTAL SERVICE OR OTHER INDEPENDENT
DELIVERY SERVICES TO BE ITS AGENTS.
SELLING SHARES
METHODS OF SELLING
-------------------------------------- -----------------------------------------
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 Wire Call the Fund (toll-free) at
1-866-44BAIRD to request
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 Withdrawal Plan The Fund offers shareholders a Systematic
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 Service Organization Consult your account agreement for
information on redeeming shares.
-------------------------------------- -----------------------------------------
By Exchange Call (toll-free) 1-866-44BAIRD
to obtain exchange information. See
"Exchanging Shares" for further
information.
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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 generally
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
SUBJECT TO COMPLETION, DATED OCTOBER 11, 2000
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS; NOT AN OFFER TO SELL
THESE SECURITIES; AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
BAIRD FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
Baird MidCap Fund
December 29, 2000
This Statement of Additional Information ("SAI") is not a prospectus
and should be read in conjunction with the prospectus (the "Prospectus") dated
December 29, 2000 of the Baird MidCap 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...............................................................2
INVESTMENT STRATEGIES AND RISKS................................................2
NET ASSET VALUE................................................................2
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................................2
DESCRIPTION OF SHARES..........................................................2
ADDITIONAL INFORMATION CONCERNING TAXES........................................2
MANAGEMENT OF THE COMPANY......................................................2
PRINCIPAL SHAREHOLDERS.........................................................2
PORTFOLIO TRANSACTIONS.........................................................2
INVESTMENT ADVISORY AND OTHER SERVICES.........................................2
DISTRIBUTOR....................................................................2
DISTRIBUTION PLAN..............................................................2
INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS...............................2
COUNSEL........................................................................2
PERFORMANCE CALCULATIONS.......................................................2
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 portfolio 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 foreign securities and 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 seven 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 MidCap Fund Indefinite
Institutional Class Indefinite
The Board of Directors has also authorized the issuance of six
additional series of common stock representing interests in six 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 December 29, 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.
PRINCIPAL SHAREHOLDERS
As of December 29, 2000, there are no control persons or principal
shareholders of the Fund. Shareholders with a controlling interest could effect
the outcome of proxy voting or the direction of management of the 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 ________, 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 December 31, 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 MidCap Fund to an annual rate of 1.25%
for the Institutional Class and 1.50% 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 0.75% 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.
Because the Fund is new, there are no financial statements available at
this time.
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
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.
BAIRD FUNDS, INC.
PART C
OTHER INFORMATION
Item 23. EXHIBITS.
(a) Articles of Incorporation(1)
(b) Bylaws(1)
(c) Instruments Defining Rights of Security Holders-- Incorporated by
reference to the Articles of Incorporation and Bylaws.
(d) Advisory Agreement(2)
(e) Underwriting Agreement(1)
(f) Bonus or Profit Sharing Contracts - Not applicable.
(g) Custody Agreement(1)
(h) Other Material Contracts
(i) Administration Agreement(2)
(ii) Fund Administration Servicing Agreement1
(iii) Transfer Agent Servicing Agreement1
(iv) Fund Accounting Servicing Agreement1
(i) Opinion and Consent of Counsel(2)
(j) Consent of Independent Public Accountants(2)
(k) Omitted Financial Statements - Not applicable.
(l) Agreement Relating to Initial Capital(2)
(m) Rule 12b-1 Plan(1)
(n) RULE 18f-3 Plan(1)
(o) Reserved.
(p) Code of Ethics
(i) Advisor(1)
(ii) Company(1)
(1) Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
Filing of the Registration Statement filed August 29, 2000.
(2) Incorporated by reference to Registrant's Pre-Effective Amendment No. 2
Filing of the Registration Statement filed September 25, 2000.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is directly or indirectly controlled by or under common
control with the Registrant.
Item 25. INDEMNIFICATION.
Reference is made to Article VII of the Registrant's Bylaws.
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking: "Insofar as indemnification for
liability arising under the Securities Act of 1933 (the "Act") may be permitted
to directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue."
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISOR.
Robert W. Baird & Co. Incorporated serves as the investment advisor for
the Registrant. The business and other connections of Robert W. Baird & Co.
Incorporated are set forth in the Uniform Application for Investment Advisor
Registration ("Form ADV") of Robert W. Baird & Co. Incorporated as filed with
the SEC and incorporated by reference herein.
Item 27. PRINCIPAL UNDERWRITER.
(a) Robert W. Baird & Co. Incorporated, 777 East Wisconsin Avenue,
Milwaukee, Wisconsin, 53202, the Distributor for shares of the
Registrant, also acts as principal underwriter for Mason Street
Funds, Inc.
(b) To the best of Registrant's knowledge, the directors and executive
officers of Robert W. Baird & Co. Incorporated are as follows:
<TABLE>
<CAPTION>
------------------------------- ------------------------------------------ -------------------------------
NAME AND PRINCIPAL POSITION AND OFFICES WITH POSITIONS AND OFFICES WITH
BUSINESS ADDRESS ROBERT W. BAIRD & CO. INCORPORATED REGISTRANT
-------------------------------- ------------------------------------------ ------------------------------
<S> <C> <C>
G. Frederick Kasten, Jr. Director and Chairman of the Board Director and Chairman of the
Board
-------------------------------- ------------------------------------------ ------------------------------
Paul E. Purcell President and Chief Executive Officer None
-------------------------------- ------------------------------------------ ------------------------------
Glen F. Hackmann Secretary, General Counsel, Managing Vice President
Director
-------------------------------- ------------------------------------------ ------------------------------
James D. Bell Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Paul J. Carbone Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Bryce P. Edwards Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Harold C. Elliott Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Keith A. Kolb Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Patrick S. Lawton Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
William W. Mahler Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Terrance P. Maxwell Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Leonard M. Rush Managing Director and Chief Financial Treasurer
Officer
-------------------------------- ------------------------------------------ ------------------------------
Michael J. Schroder Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Russell P. Schwei Managing Director Vice President
-------------------------------- ------------------------------------------ ------------------------------
Mary Ellen Stanek Managing Director and Chief Investment President
Officer
-------------------------------- ------------------------------------------ ------------------------------
John E. Sundeen Senior Vice President and Compliance Compliance Officer
Director
-------------------------------- ------------------------------------------ ------------------------------
Robert J. Venable Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Dominick P. Zarcone Managing Director None
-------------------------------- ------------------------------------------ ------------------------------
Jeffery F. Freiburger Deputy Compliance Director None
-------------------------------- ------------------------------------------ ------------------------------
The address of each of the foregoing is 777 East Wisconsin Avenue, Milwaukee,
Wisconsin, 53202.
</TABLE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS.
The books and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 are maintained in the following locations:
RECORDS RELATING TO: ARE LOCATED AT:
------------------- ---------------
Registrant's Fund Accounting, Fund Firstar Mutual Fund Services, LLC
Administrator and Transfer Agent 615 East Michigan Street
Milwaukee, WI 53202
Registrant's Investment Advisor Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, WI 53202
Registrant's Custodian Firstar Bank, N.A.
425 Walnut Street
Cincinnati, OH 54202
Item 29. MANAGEMENT SERVICES NOT DISCUSSED IN PARTS A AND B.
Not applicable.
Item 30. UNDERTAKINGS.
The Registrant hereby undertakes to furnish each person to whom a
Prospectus for one or more of the series of the Registrant is delivered with a
copy of the relevant latest annual report to shareholders, upon request and
without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, duly authorized, in the City of
Milwaukee and the State of Wisconsin on the 11th day of October, 2000.
BAIRD FUNDS, INC.
BY: /S/ BRETT R. MEILI
--------------------
Brett R. Meili
Secretary
Each person whose signature appears below constitutes and appoints Glen F.
Hackmann, Brett R. Meili, and Leonard M. Rush his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all post-effective amendments to this Registration Statement and to file the
same, with all exhibits thereto, and any other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
body, granting unto said attorney-in-fact and agent, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A has
been signed below on October 11, 2000 by the following persons in the capacities
indicated.
SIGNATURE TITLE
/S/ JOHN W. FELDT Director
-----------------
John W. Feldt
/S/ STEPHEN A. ROELL Director
--------------------
Stephen A. Roell
/S/ GEORGE C. KAISER Director
--------------------
George C. Kaiser
/S/ G. FREDERICK KASTEN, JR. Director
----------------------------
G. Frederick Kasten, Jr.
