BAIRD QUALITY
BOND FUND
ANNUAL
REPORT
SEPTEMBER 30, 1995
(Baird Logo)
BAIRD QUALITY BOND FUND
Annual Report November 9, 1995
DEAR FELLOW SHAREHOLDER:
The bond markets staged a remarkable recovery during 1995 after a very
difficult 1994. The yield on the benchmark thirty-year Treasury bond, which
increased from 6% on 09/30/93 to 7.80% by 09/30/94, fell back to around 6.50% by
the 09/30/95, the end of the Fund's fiscal year. As a result, the net asset
value of the Fund, which was $9.00 on 09/30/94, rose to $9.46 on 09/30/95.
This turnaround in the bond market was sparked by a slowdown in economic
growth and a significant improvement in the outlook for inflation. Through most
of 1994, the Federal Reserve was pushing interest rates upward out of concern
that the economy could be overheating and inflation accelerating. That Fed
tightening apparently had the intended impact sooner than anticipated. In 1995,
the economy has been growing much slower and the rate of inflation has dropped
to around 2% or less. In response to these bullish economic fundamentals, bond
prices regained virtually all of the ground lost in 1994.
The performance of the bond market in the year ahead will depend primarily
upon whether the United States economy slips into a recession. Those who project
still lower bond yields argue that the United States and the world economy will
continue to weaken in 1996. Others argue that the drop in interest rates in 1995
will spark a rebound in business activity. Recent increases in the pace of home
sales and housing construction, in response to lower mortgage rates, appear to
support the view that the economy is improving somewhat. If so, bond yields may
not decline much further.
Our investment strategy for this economic environment is to emphasize
interest income rather than the potential for price appreciation. We expect to
keep the average maturity of the Fund within the lower half of the intermediate
range and to invest primarily in the corporate and Federal agency notes that
offer yields well above those of comparable Treasury notes. We also expect to
maintain an average quality rating of double A or higher.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low,Jr. James Kochan
President Portfolio Manager
REPORT OF INDEPENDENT ACCOUNTANTS 100 East Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
(Price Waterhouse Logo)
To the Shareholders and Board of Directors
of Baird Quality Bond Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Baird Quality Bond Fund (the `Fund'') at September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the two years in the period then ended and for the year from October 1, 1992
(commencement of operations) to September 30, 1993, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as `financial statements'') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
November 2, 1995
STATEMENT OF NET ASSETS
September 30, 1995
LONG-TERM INVESTMENTS 92.0% (A)<F1>
Principal Amortized Quoted
Amount Cost Market Value
CORPORATE BONDS - 39.1% --------- ---------
$300,000 Bankers Trust NY Corp., 8.25%, due 05/01/05 $ 313,143 $ 323,813
200,000 Wal-Mart Stores, 8.875%, due 06/29/11 209,463 210,375
250,000 Southwestern Bell Telephone,
7.375%, due 05/01/12 256,255 247,500
300,000 Paine Webber Group Inc., 7.625%, due 02/15/14 287,054 288,000
400,000 Lehman Brothers Holdings, 8.50%, due 08/01/15 417,277 422,000
400,000 Becton, Dickinson & Co., 9.25%, due 06/01/16 420,174 420,996
300,000 Kraft Inc., 8.50%, due 02/15/17 310,376 311,078
400,000 Torchmark Corp., 8.625%, due 03/01/17 380,679 413,000
357,000 Southern California Edison Co.,
8.875%, due 05/01/23 375,045 374,927
--------- ---------
Total corporate bonds 2,969,466 3,011,689
FEDERAL AGENCIES - 40.5%
100,000 Federal Home Loan Mortgage Corp.,
8.193%, due 12/16/97 99,734 100,406
300,000 Federal Home Loan Bank,
6.95%, due 05/24/99 300,000 300,797
300,000 SALLIEMAE, 7.00%, due 06/26/00 300,000 300,000
500,000 Federal Home Loan Mortgage Corp.,
7.90%, due 04/27/05 507,652 513,203
500,000 Federal National Mortgage Association,
7.61%, due 06/06/05 500,000 499,375
900,000 Federal Home Loan Mortgage Corp.,
7.13%, due 09/15/05 900,000 900,510
500,000 Federal Home Loan Bank,
7.40%, due 09/22/05 500,000 500,313
--------- ---------
Total federal agencies 3,107,386 3,114,604
MORTGAGE BACKED SECURITIES - 9.4%
389,156 Drexel Burnham Lambert CMO Trust, Series J Class 2,
8.00%, due 07/01/17 388,201 389,157
250,000 Federal Home Loan Mortgage Corp. 1101M,
6.95%, due 07/15/21 249,782 239,375
100,000 Federal Home Loan Mortgage Corp. 1508G,
6.75%, due 12/15/21 100,790 97,078
--------- ---------
Total mortgage backed securities 738,773 725,610
U.S. TREASURY SECURITIES - 3.0%
600,000 U.S. Principal Strips, 0%, due 11/15/09 230,040 234,040
--------- ---------
Total treasury securities 230,040 234,040
--------- ---------
Total long-term investments 7,045,665 7,085,943
SHORT-TERM INVESTMENTS 7.7% (A)<F1>
VARIABLE RATE DEMAND NOTES
$30,000 General Mills, Inc. $ 30,000 $ 30,000
25,000 Pitney Bowes Credit Corp. 25,000 25,000
380,000 Sara Lee Corp. 380,000 380,000
79,700 Warner-Lambert Company 79,700 79,700
80,000 Wisconsin Electric Power Company 80,000 80,000
--------- ---------
Total short-term investments 594,700 594,700
--------- ---------
Total investments $7,640,365 7,680,643
---------
---------
Cash and receivables,
less liabilities - 0.3% (a)<F1> 20,372
---------
NET ASSETS $7,701,015
---------
---------
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized), redemption price
($7,701,015 / 814,278 shares outstanding) $ 9.46
---------
---------
Maximum Offering Price Per Share
(net asset value plus 4.16% of the
net asset value or 4.00% of the
offering price calculated as
$9.46 x 100 / 96.00) $ 9.85
---------
---------
(a)<F1> Percentages for the various classifications relate to net assets.
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1995
INCOME:
Interest $ 638,344
--------
Total income 638,344
--------
EXPENSES:
Management fees 42,023
Professional fees 18,612
Distributor fees 15,518
Amortization of organizational expenses 9,451
Registration fees 8,905
Administrative services 8,359
Custodian fees 6,592
Printing and postage expense 3,264
Transfer agent fees 2,765
Other expenses 2,968
--------
Total expenses before reimbursement 118,457
Less expenses assumed by adviser (68,030)
--------
Net expenses 50,427
--------
NET INVESTMENT INCOME 587,917
--------
NET REALIZED LOSS ON INVESTMENTS (304,002)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 745,322
--------
NET GAIN ON INVESTMENTS 441,320
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,029,237
---------
---------
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1995 and 1994
1995 1994
OPERATIONS: --------- ---------
Net investment income $ 587,917 $ 541,382
Net realized loss on investments (304,002) (173,396)
Net increase (decrease) in unrealized
appreciation on investments 745,322 (829,284)
--------- ---------
Net increase (decrease) in net assets
resulting from operations 1,029,237 (461,298)
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.64 and $0.67 per share, respectively) (587,917) (541,378)
Distribution from net realized gains
($0.11 per share) - (73,944)
--------- ---------
Total distributions (587,917) (615,322)
--------- ---------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(191,884 and 370,441 shares, respectively) 1,728,536 3,667,913
Net asset value of shares issued in distributions
(7,938 and 8,204 shares, respectively) 72,434 79,813
Cost of shares redeemed (270,508 and 99,176
shares, respectively) (2,502,561) (949,644)
---------- ---------
Net (decrease) increase in net assets
derived from Fund share activities (701,591) 2,798,082
--------- ---------
TOTAL (DECREASE) INCREASE (260,271) 1,721,462
NET ASSETS AT THE BEGINNING OF THE YEAR 7,961,286 6,239,824
--------- ---------
NET ASSETS AT THE END OF THE YEAR $7,701,015 $7,961,286
--------- ---------
--------- ---------
The accompanying notes to financial statements are an integral part of these
statements.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each year)
FOR THE YEAR FROM
FOR THE YEARS OCTOBER 1, 1992*<F3>
ENDED SEPTEMBER 30, TO SEPTEMBER 30,
----------------------
1995 1994 1993
------- ------- -------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $ 9.00 $ 10.31 $ 10.00
Income from investment operations:
Net investment income 0.64 0.67 0.63
Net realized and unrealized gain
(loss) on investments 0.46 (1.20) 0.31
------- ------- -------
Total from investment operations 1.10 (0.53) 0.94
Less distributions:
Dividends from net investment income (0.64) (0.67) (0.63)
Distribution from net realized gains - (0.11) -
------- ------- -------
Total from distributions (0.64) (0.78) (0.63)
------- ------- -------
Net asset value, end of year $ 9.46 $ 9.00 $ 10.31
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN****<F6> 12.6% (5.4%) 9.8%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 7,701 7,961 6,240
Ratio of expenses (after reimbursement)
to average net assets**<F4> 0.6% 0.6% 0.4%
Ratio of net investment income
to average net assets***<F5> 7.0% 7.0% 6.2%
Portfolio turnover rate 197.5% 99.6% 124.1%
*<F3>Commencement of Operations.
**<F4>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 1.4%, 1.7% and 2.1%, respectively, for the years ended September 30,
1995, 1994 and 1993.
***<F5>The ratio of net investment income prior to adviser's expense
limitation undertaking to average net assets for the years ended September
30, 1995, 1994 and 1993 would have been 6.2%, 5.9% and 4.5%, respectively.
****<F6>Total return does not include the sales load.
The accompanying notes to financial statements are an integral part of these
statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of
significant accounting policies of the Baird Quality Bond Fund (the ''Fund''),
which is one portfolio in a series of two portfolios comprising The Baird Funds,
Inc. (the ''Company''), which is registered under the Investment Company Act of
1940. The assets and liabilities of each portfolio are segregated and a
shareholder's interest is limited to the portfolio in which the shareholder owns
shares. The Company was incorporated under the laws of Wisconsin on June 26,
1992 and commenced operations on October 1, 1992.
(a) Debt securities are valued on the basis of valuations provided by broker-
dealers (including broker-dealers from whom such securities may have been
purchased) or by a pricing service, approved by the Fund's Board of
Directors, which may utilize information with respect to transactions in such
securities, quotations from dealers, market transactions in comparable
securities, various relationships among securities and yield data in
determining values. Securities for which there are no readily available
market quotations and other assets will be valued at their fair value as
determined in good faith in accordance with policies approved by the Fund's
Board of Directors. Debt securities having a remaining maturity of sixty days
or less when purchased and debt securities originally purchased with
maturities in excess of sixty days but which currently have maturities of
sixty days or less are valued at cost adjusted for amortization of premiums
and accretion of discounts.
(b) Premiums and discounts on securities are amortized to maturity. Investment
transactions are recorded no later than the first business day after the
trade date. Cost amounts, as reported in the statement of net assets, are the
same for Federal income tax purposes.
(c) Net realized gains and losses are computed on the basis of the cost of
specific certificates.
(d) Provision has not been made for Federal income taxes since the Fund has
elected to be taxed as a ''regulated investment company'' and intends to
distribute substantially all income to its shareholders and otherwise comply
with the provisions of the Internal Revenue Code applicable to regulated
investment companies. The Fund has $214,202 of net capital losses which
expire September 30, 2003, and $283,586 of 1995 post-October losses, that may
be used to offset capital gains in future years to the extent provided by tax
regulations.
(e) Dividend income (if any) is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
(f) The Fund has investments in short-term variable rate demand notes, which
are unsecured instruments. The Fund may be susceptible to credit risk with
respect to these notes to the extent the issuer defaults on its payment
obligation. The Fund's policy is to monitor the creditworthiness of the
issuer and does not anticipate nonperformance by these counterparties.
(g) Generally accepted accounting principles require that permanent financial
reporting and tax differences be reclassified to capital stock.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES - The Fund has a management agreement with Robert W. Baird & Co.
Incorporated (''RWB''), with whom certain officers and directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of the
agreement, the Fund will pay RWB a monthly management fee at the annual rate of
0.50% of the daily net assets of the Fund. For the year ended September 30,
1995, RWB voluntarily waived approximately $8,405 of the management fees due
from the Fund under the agreement.
RWB reimburses the Fund for annual expenses in excess of the lowest expense
limitation imposed by the states. In addition to the reimbursement required
under the management agreement, RWB has voluntarily reimbursed the Fund for all
expenses over 0.6% for the year ended September 30, 1995 totaling $56,714. These
voluntary reimbursements to the Fund may be modified or discontinued at any time
by RWB.
The Fund has adopted a Distribution Plan (the ''Plan''), pursuant to Rule 12b-
1 under the Investment Company Act of 1940 with RWB. The Plan provides that the
Fund may incur certain costs which may not exceed the lesser of a monthly amount
equal to 0.45% per year of the Fund's daily net assets or the actual
distribution costs incurred by RWB during the year. Amounts paid under the Plan
are paid monthly to RWB for any activities or expenses primarily intended to
result in the sale of shares of the Fund. For the year ended September 30, 1995,
RWB waived distribution fees in excess of .15%, totaling $2,911.
During the year ended September 30, 1995, the Company was advised that RWB
received $19,586 from investors of the Fund, representing commissions on sales
of Fund shares and the Fund did not pay any brokerage fees to RWB on the
execution of purchases and sales of portfolio securities.
(3) DISTRIBUTION TO SHAREHOLDERS - Dividends from net investment income for the
Fund are declared daily and paid monthly. Distributions of net realized gains,
if any, for the Fund, will be declared at least once a year.
(4) DEFERRED EXPENSES - Organizational expenses were deferred and are being
amortized on a straight-line basis over a period of not more than five years.
These expenses were advanced by RWB who will be reimbursed by the Fund over a
period of not more than five years. The proceeds of any redemption of the
initial shares by the original shareholder will be reduced by a pro-rata portion
of any then unamortized deferred expenses in the same proportion as the number
of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption. The unamortized organizational
expenses for the Fund at September 30, 1995 were $18,902.
(5) INVESTMENT TRANSACTIONS - For the year ended September 30, 1995, purchases
and proceeds of sales of investment securities of the Fund (excluding short-term
securities) were $14,652,497 and $14,637,912, respectively, and $938,936 and
$943,558, respectively for short-term U.S. Government Securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - As of September 30, 1995,
liabilities of the Fund included the following:
Redemptions payable $ 57,099
Dividends payable 44,083
Payable to adviser for management and
distributor fees and deferred expenses 22,351
Other liabilities 1,170
(7) SOURCES OF NET ASSETS - As of September 30, 1995, the sources of net assets
were as follows:
Fund shares issued and outstanding $8,158,525
Net unrealized appreciation on investments 40,278
Accumulated net realized loss on investments (497,788)
---------
$7,701,015
---------
---------
Aggregate net unrealized appreciation as of September 30, 1995 consisted of
the following:
Aggregate gross unrealized appreciation $ 63,894
Aggregate gross unrealized depreciation (23,616)
---------
Net unrealized appreciation $ 40,278
---------
---------
(Baird Logo)
A NORTHWESTERN MUTUAL COMPANY
Robert W. Baird & Co. Incorporated
777 E. Wisconsin Avenue, Milwaukee, WI 53202
Phone 414 765-3500. Toll Free 1-800-RW-BAIRD
Copyright 1995 Robert W. Baird & Co. Incorporated
