BAIRD QUALITY
BOND FUND
SEMIANNUAL
REPORT
MARCH 31, 1996
(BAIRD LOGO)
BAIRD QUALITY BOND FUND
SEMIANNUAL REPORT May 28, 1996
DEAR FELLOW SHAREHOLDER:
For the bond markets, the year 1996 has begun on a rather sour note. After
recording strong, positive total returns throughout 1995, the market indices
recorded negative returns during the first quarter of the new year. Those
returns ranged from -0.8% on intermediate term indices to -2.3% on the broad
market indices.
This turnaround in market performance was the result of a major shift in
investor sentiment, from highly optimistic at the beginning of the year to
cautious/apprehensive from mid-February to quarter-end. The December/January
optimism appeared to be based upon expectations of:
1. A domestic economy that would be sufficiently weak to prompt several
additional rounds of Federal Reserve easing,
2. An agreement between Congress and the White House on legislation that would
produce a balanced budget in 5-7 years,
3. Continued strong foreign demand for Treasury notes,
4. Low inflation or even deflation for the foreseeable future.
Starting around mid-February, it became apparent that three of these
assumptions were wrong. The most harmful development was the release of economic
data suggesting that the economy was not as anemic as the consensus forecast had
assumed. Federal Reserve Chairman Greenspan cited this data when he hinted that
the Fed did not believe that sharply lower interest rates were necessary to
sustain a healthy cyclical expansion.
With yields as low as 4.80% on two-year Treasury notes and 6% on long-term
Treasury bonds, the markets were ill-equipped to absorb this news. Yields that
low could be sustained only if there was a good chance that the federal funds
rate would fall to around 4% during the months ahead. Once it became apparent
that such forecasts were overly optimistic, market yields began adjusting
upward.
The prospect for agreement on a balanced budget plan also disappeared during
February. Congress and the Administration have not been able to agree on a
budget for fiscal 1996, which is now half over. Any chance of agreeing on
longer-term spending plans has been eliminated by election year politics.
Consequently, that reason for investor optimism has now evaporated.
Not all of the economic fundamentals are negative, however. Most leading
indicators of inflation remain subdued, and the economy is not overheating as it
was in 1994. Consequently, we do not expect market yields to increase as much in
1996 as they did in 1994.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low, Jr. James Kochan
President Portfolio Manager
BAIRD QUALITY BOND FUND
STATEMENT OF NET ASSETS
March 31, 1996 (Unaudited)
PRINCIPAL AMORTIZED QUOTED
AMOUNT COST MARKET VALUE
- -------- -------- ----------
LONG-TERM INVESTMENTS 93.6% (A)<F1>
CORPORATE BONDS -- 29.6%
$250,000 Southwestern Bell Telephone,
7.375%, due 05/01/12 $256,078 $245,948
400,000 Torchmark Corp., 8.625%, due 03/01/17 381,132 415,916
300,000 Alabama Power Co., 7.75%, due 02/01/23 310,576 296,412
300,000 Midwest Power System, 8.125%, due 02/01/23 317,867 302,244
357,000 Southern California Edison Co.,
8.875%, due 05/01/23 374,717 371,494
300,000 Ralston Purina Co., 7.875%, due 06/15/25 317,227 302,271
---------- ----------
Total corporate bonds 1,957,597 1,934,285
FEDERAL AGENCIES -- 62.5%
250,000 Federal Home Loan Mortgage Corp.,
6.39%, due 04/05/99 250,191 250,117
300,000 SALLIEMAE,
7.00%, due 06/26/00 300,000 301,005
350,000 Federal Farm Credit,
6.73%, due 10/17/00 350,388 349,174
500,000 Federal Home Loan Mortgage Corp.,
7.90%, due 04/27/05 506,670 509,060
500,000 Federal National Mortgage Association,
7.61%, due 06/06/05 500,000 501,755
900,000 Federal Home Loan Mortgage Corp.,
7.13%, due 09/15/05 900,000 890,136
500,000 Federal Home Loan Bank,
7.40%, due 09/22/05 500,000 499,800
400,000 Federal Home Loan Mortgage Corp.,
7.23%, due 09/30/05 403,734 396,848
400,000 Federal National Mortgage Association,
6.94%, due 03/14/11 385,416 387,280
---------- ---------
Total federal agencies 4,096,399 4,085,175
MORTGAGE BACKED SECURITIES -- 1.5% (A)<F1>
100,000 Federal Home Loan Mortgage Corp. 1508G,
6.75%, due 12/15/21 100,775 96,722
---------- ---------
Total long-term investments 6,154,771 6,116,182
SHORT-TERM INVESTMENTS 5.3% (A)<F1>
VARIABLE RATE DEMAND NOTES
$65,000 American Family Financial Services 65,000 65,000
204,554 Pitney Bowes Credit Corp. 204,554 204,554
75,000 Wisconsin Electric Power Company 75,000 75,000
--------- ---------
Total short-term investments 344,554 344,554
--------- ---------
Total investments $6,499,325 6,460,736
----------
----------
Cash and receivables, less
liabilities -- 1.1% (A)<F1> 75,559
----------
NET ASSETS $6,536,295
----------
----------
Net Asset Value Per Share
($0.01 par value 300,000,000
shares authorized), redemption price
($6,536,295 / 694,325 shares outstanding) $9.41
----------
----------
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
$9.41 x 100 / 96.00) $9.80
----------
----------
(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 Period Ended March 31, 1996 (Unaudited)
INCOME:
Interest $256,994
--------
Total income 256,994
--------
EXPENSES:
Management fees 18,303
Distributor fees 16,472
Professional fees 6,535
Amortization of organizational expenses 4,726
Administrative services 3,661
Transfer agent fees 3,622
Printing and postage expense 2,901
Custodian fees 2,725
Registration fees 1,474
Other expenses 1,842
--------
Total expenses before reimbursement 62,261
Less expenses assumed by adviser (33,358)
--------
Net expenses 28,903
--------
NET INVESTMENT INCOME 228,091
--------
NET REALIZED GAIN ON INVESTMENTS 56,370
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (78,867)
--------
NET LOSS ON INVESTMENTS (22,497)
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $205,594
---------
---------
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENTS OF CHANGES IN NET ASSETS
For the Period Ended March 31, 1996 (Unaudited) and For the Year Ended September
30, 1995
1996 1995
-------- --------
OPERATIONS:
Net investment income $228,091 $587,917
Net realized gain (loss) on investments 56,370 (304,002)
Net (decrease) increase in unrealized
appreciation on investments (78,867) 745,322
---------- ----------
Net increase in net assets resulting
from operations 205,594 1,029,237
---------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.29 and $0.64 per share, respectively) (228,092) (587,917)
---------- ---------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(59,655 and 191,884 shares, respectively) 566,982 1,728,536
Net asset value of shares issued in distributions
(3,291 and 7,938 shares, respectively) 31,371 72,434
Cost of shares redeemed (182,899 and
270,508 shares, respectively) (1,740,575) (2,502,561)
----------- ----------
Net decrease in net assets
derived from Fund share activities (1,142,222) (701,591)
---------- ----------
TOTAL DECREASE (1,164,720) (260,271)
NET ASSETS AT THE BEGINNING OF THE PERIOD 7,701,015 7,961,286
---------- ----------
NET ASSETS AT THE END OF THE PERIOD $6,536,295 $7,701,015
---------- ----------
---------- ----------
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 period)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE FOR THE YEAR FROM
PERIOD ENDED FOR THE YEARS ENDED OCTOBER 1, 1992+<F3>
MARCH 31, SEPTEMBER 30, TO SEPTEMBER 30,
----------------------
1996 1995 1994 1993
------------- -------- --------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $9.46 $9.00 $10.31 $10.00
Income from investment operations:
Net investment income 0.29 0.64 0.67 0.63
Net realized and unrealized (loss) gain
on investments (0.05) 0.46 (1.20) 0.31
------- ------- -------- --------
Total from investment operations 0.24 1.10 (0.53) 0.94
Less distributions:
Dividends from net investment income (0.29) (0.64) (0.67) (0.63)
Distribution from net realized gains -- -- (0.11) --
------- ------- -------- --------
Total from distributions (0.29) (0.64) (0.78) (0.63)
------- ------- -------- --------
Net asset value, end of period $9.41 $9.46 $9.00 $10.31
------- ------- -------- --------
------- ------- -------- --------
TOTAL INVESTMENT RETURN****<F7> 5.2%*<F4> 12.6% (5.4%) 9.8%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 6,536 7,701 7,961 6,240
Ratio of expenses (after reimbursement)
to average net assets**<F5> 0.8%*<F4> 0.6% 0.6% 0.4%
Ratio of net investment income
to average net assets***<F6> 6.2%*<F4> 7.0% 7.0% 6.2%
Portfolio turnover rate 70.8% 197.5% 99.6% 124.1%
+<F3>Commencement of Operations.
*<F4>Annualized.
**<F5>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 1.5%*, 1.4%, 1.7% and 2.1%, respectively, for the period ending March 31,
1996 and for the years ended September 30, 1995, 1994 and 1993.
***<F6>The ratio of net investment income prior to adviser's expense
limitation undertaking to average net assets for the period ended March 31,
1996 and for the years ended September 30, 1995, 1994 and 1993 would have been
5.5%*, 6.2%, 5.9% and 4.5%, respectively.
****<F7>Total return does not include the sales load.
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1996 (Unaudited)
(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 period ending March 31, 1996,
RWB voluntarily waived approximately $1,926 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 0.8% for the period ending March 31, 1996 totaling $33,358. 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 period ending March 31, 1996,
RWB waived distribution fees in excess of 0.20%, totaling $9,247.
During the period ending March 31, 1996, the Company was advised that RWB
received $2,297 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 March 31, 1996 were $14,176.
(5) INVESTMENT TRANSACTIONS -- For the period ending March 31, 1996, purchases
and proceeds of sales of investment securities of the Fund (excluding short-term
securities) were $3,831,174 and $4,743,727, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of March 31, 1996,
liabilities of the Fund included the following:
Dividends payable $34,605
Payable to adviser for management and
distributor fees and deferred expenses 18,390
Other liabilities 3,390
(7) SOURCES OF NET ASSETS -- As of March 31, 1996, the sources of net assets
were as follows:
Fund shares issued and outstanding $7,016,302
Net unrealized depreciation on investments (38,589)
Accumulated net realized loss on investments (441,418)
----------
$6,536,295
----------
----------
Aggregate net unrealized depreciation as of March 31, 1996 consisted of the
following:
Aggregate gross unrealized appreciation $41,798
Aggregate gross unrealized depreciation (80,387)
---------
Net unrealized depreciation $(38,589)
---------
---------
(8) SUBSEQUENT EVENTS -- On or about June 3, 1996, the assets (net of its
liabilities) of the Fund will be sold to AIM Income Fund, a series portfolio of
AIM Funds Group, pursuant to the Agreement and Plan of Reorganization dated
December 20, 1995, as amended, between the Company, on behalf of the Fund, and
AIM Funds Group, on behalf of AIMIncome Fund (the "Agreement and Plan of
Reorganization"). In the reorganization transaction, the shareholders of the
Fund will receive shares of AIMIncome Fund having a net asset value equal to the
net asset value of the Fund immediately prior to the transaction. Following the
reorganization, the Fund will terminate its status as a designated series of The
Baird Funds, Inc. The reorganization transaction was approved by shareholders of
the Fund at a special meeting called for that purpose on March 15, 1996. See
Note 9 below.
(9) MATTERS SUBMITTED TO A VOTE OF SHAREHOLDERS -- At a special meeting held on
March 15, 1996, the shareholders of the Fund approved the Agreement and Plan of
Reorganization and the reorganization transaction contemplated thereby. The
requisite vote for approval was a majority of the shares of the Fund outstanding
on the record date (January 25, 1996). Of the 752,974 shares outstanding on the
record date, 496,636 shares (or 65.9% of the total outstanding shares) were
present at the meeting in person or by proxy, 469,783 shares (or 62.4% of the
total outstanding shares) voted for approval of the Agreement and Plan of
Reorganization and the reorganization transaction, and 26,853 shares either
voted against or abstained from voting on the matter.
(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
(c)1996 Robert W. Baird & Co. Incorporated
