-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M1RXqEUSGz1nscnrh0BGrEfmj+TyOZq8xHDNOTXp0wMMKe18y5MjlKLEGkWSnwuz 7rl4FZ6w5VIg5kirwZVqig== 0000898531-06-000103.txt : 20060309 0000898531-06-000103.hdr.sgml : 20060309 20060309131635 ACCESSION NUMBER: 0000898531-06-000103 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060309 DATE AS OF CHANGE: 20060309 EFFECTIVENESS DATE: 20060309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAIRD FUNDS INC CENTRAL INDEX KEY: 0001282693 IRS NUMBER: 000000000 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-09997 FILM NUMBER: 06675432 BUSINESS ADDRESS: STREET 1: 777 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 414-765-3500 MAIL ADDRESS: STREET 1: 777 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 0001282693 S000000753 Baird Aggregate Bond Fund C000002163 Institutional BAGIX C000002164 Investor BAGSX 0001282693 S000000754 Baird Core Plus Bond Fund C000002165 Institutional BCOIX C000002166 Investor BCOSX 0001282693 S000000755 Baird Intermediate Bond Fund C000002167 Institutional BIMIX C000002168 Investor BIMSX 0001282693 S000000756 Baird Intermediate Municipal Bond Fund C000002169 Institutional BMBIX C000002170 Investor BMBSX 0001282693 S000000757 Baird Short-Term Bond Fund C000002171 Institutional BSBIX 0001282693 S000000758 Baird LargeCap Fund C000002172 Institutional BHGIX C000002173 Investor BHGSX 0001282693 S000000759 Baird MidCap Fund C000002174 Institutional BMDIX C000002175 Investor BMDSX 0001282693 S000000760 Baird SmallCap Fund C000002176 Institutional BSMIX C000002177 Investor BSMSX N-CSR 1 bfif_bef-ncsra.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-09997 --------- BAIRD FUNDS, INC. ----------------- (Exact name of registrant as specified in charter) 777 EAST WISCONSIN AVENUE, FLOOR 18 ----------------------------------- MILWAUKEE, WI 53202 ------------------- (Address of principal executive offices) (Zip code) CHARLES M. WEBER ---------------- ROBERT W. BAIRD & CO. INCORPORATED ---------------------------------- 777 EAST WISCONSIN AVENUE ------------------------- MILWAUKEE, WI 53202 ------------------- (Name and address of agent for service) 1-866-442-2473 -------------- Registrant's telephone number, including area code Date of fiscal year end: DECEMBER 31, 2005 ----------------- Date of reporting period: DECEMBER 31, 2005 ----------------- ITEM 1. REPORT TO STOCKHOLDERS. - ------------------------------ (BAIRD FUNDS LOGO) ANNUAL REPORT December 31, 2005 Baird Intermediate Bond Fund Baird Aggregate Bond Fund Baird Intermediate Municipal Bond Fund Baird Core Plus Bond Fund Baird Short-Term Bond Fund TABLE OF CONTENTS PAGE ---- LETTER TO SHAREHOLDERS 1 2005 BOND MARKET OVERVIEW 2 BAIRD INTERMEDIATE BOND FUND 6 BAIRD AGGREGATE BOND FUND 20 BAIRD INTERMEDIATE MUNICIPAL BOND FUND 35 BAIRD CORE PLUS BOND FUND 42 BAIRD SHORT-TERM BOND FUND 51 ADDITIONAL INFORMATION ON FUND EXPENSES 61 STATEMENTS OF ASSETS AND LIABILITIES 63 STATEMENTS OF OPERATIONS 64 STATEMENTS OF CHANGES IN NET ASSETS 65 FINANCIAL HIGHLIGHTS 70 NOTES TO THE FINANCIAL STATEMENTS 79 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 89 DIRECTORS AND OFFICERS 90 DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD BOND FUNDS 92 ADDITIONAL INFORMATION 96 This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. CAUTIONARY NOTE ON ANALYSES, OPINIONS AND OUTLOOKS: In this report we offer - --------------------------------------------------- analyses and opinions on the performance of individual securities, companies, industries, sectors, markets, interest rates and governmental policies, including predictions, forecasts and outlooks regarding possible future events. These can generally be identified as such because the context of the statements may include such words as "believe," "should," "will," "expects," "anticipates," "hopes" and words of similar effect. These statements reflect the portfolio managers' good faith beliefs and judgments and involve risks and uncertainties, including the risk that the portfolio managers' analyses, opinions and outlooks are or will prove to be inaccurate. It is inherently difficult to correctly assess and explain the performance of particular securities, sectors, markets, interest rate movements, governmental actions or general economic trends and conditions, and many unforeseen factors contribute to the performance of Baird Funds. Investors are, therefore, cautioned not to place undue reliance on subjective judgments contained in this report. (BAIRD FUNDS LOGO) 1-866-442-2473 www.bairdfunds.com ------------------ February 28, 2006 Dear Shareholders, We would like to thank you for investing in the Baird Funds. We appreciate the opportunity to help our investors navigate the transitions and challenges presented by the financial markets in 2005. The Baird Funds continued to grow during the year with total net assets exceeding $820 million as of December 31, 2005. In addition, three of our Bond Funds and two of our Equity Funds celebrated their 5-year anniversaries during the year. In this Annual Report we review the bond market in 2005 and the performance and composition of each of the Baird Bond Funds. We hope you find this report both informative and helpful in achieving your investment goals. Thank you again for choosing Baird Funds. Sincerely, /s/Mary Ellen Stanek Mary Ellen Stanek, CFA President Baird Funds, Inc. 2005 BOND MARKET OVERVIEW 2005 SUMMARY Despite 200 basis points of Fed tightening and spiking oil prices, the bond market defied the odds and delivered positive returns in 2005. The yield curve went flat and Ford and GM lost their investment grade status. The U.S. dollar rebounded and foreigners added to their holdings of U.S. Treasury debt. Consumer spending, boosted by mortgage equity extraction, helped the economy achieve another year of steady growth and core inflation, held in check by stiff global competition, remained subdued. More in-depth analysis is provided below. FLAT YIELD CURVE The yield curve continued to flatten in 2005 as the Federal Open Market Committee (FOMC) raised its target for the Fed funds rate to 4.25% from 2.25% in eight 0.25% increments. Short-term market rates rose in response to the Fed's action (as did the U.S. dollar), but as in 2004, long-term rates once again declined and the yield curve ended very flat (see chart and table below). The difference between 2-year and 30-year Treasury yields finished the year at just 14 basis points, down from 176 basis points on December 31, 2004. While the table below shows only a 17 basis point increase in the 10-year T-note yield, it is worth noting that over the course of the year it covered a 77 basis point range from a low of 3.89% on June 1, 2005 to a high of 4.66% on November 4, 2005. TREASURY YIELDS Source: Bloomberg Maturity 31-Dec-2004 31-Dec-2005 -------- ----------- ----------- 1 2.77% 4.43% 2 3.07% 4.40% 3 3.22% 4.36% 5 3.61% 4.35% 7 3.93% 4.36% 10 4.22% 4.39% 15 4.65% 4.58% 20 4.85% 4.61% 25 4.90% 4.58% 30 4.83% 4.54% MATURITY DEC. 31, 2004 DEC. 31, 2005 1 YR. CHANGE -------- ------------- ------------- ------------ 1 2.77% 4.43% 1.66% 2 3.07% 4.40% 1.33% 3 3.22% 4.36% 1.14% 5 3.61% 4.35% 0.74% 7 3.93% 4.36% 0.43% 10 4.22% 4.39% 0.17% 15 4.65% 4.58% -0.07% 20 4.85% 4.61% -0.24% 25 4.90% 4.58% -0.32% 30 4.83% 4.54% -0.29% MODEST INFLATION + STRONG FOREIGN DEMAND = LOWER LONG-TERM RATES IN 2005 A significant increase in the price of oil (peaking at $70/barrel in August) pushed the Consumer Price Index (CPI) higher in 2005, but core inflation (CPI excluding food and energy) remained modest at just 2% on a year-over-year basis through November (see chart on next page, top left). Additionally, global competitive forces, led by the supply of cheap foreign labor (see table on next page, top right) have limited domestic wage gains in the U.S. to levels well below prior economic cycles. The lack of wage inflation, the market's confidence in the Fed's resolve to contain inflation overall and a dearth of long-bond issuance kept long-term interest rates low in 2005. CONSUMER PRICE INDEX Date CPI (all items) CPI (excl. Food & Energy) ---- --------------- ------------------------- 12/31/84 3.90% 4.70% 3/29/85 3.70% 4.80% 6/28/85 3.80% 4.40% 9/30/85 3.10% 4.00% 12/31/85 3.80% 4.30% 3/31/86 2.30% 4.10% 6/30/86 1.80% 4.00% 9/30/86 1.80% 4.10% 12/31/86 1.10% 3.80% 3/31/87 3.00% 4.00% 6/30/87 3.70% 4.10% 9/30/87 4.40% 4.30% 12/31/87 4.40% 4.20% 3/31/88 3.90% 4.40% 6/30/88 4.00% 4.50% 9/30/88 4.20% 4.40% 12/30/88 4.40% 4.70% 3/31/89 5.00% 4.70% 6/30/89 5.20% 4.50% 9/29/89 4.30% 4.30% 12/29/89 4.60% 4.40% 3/30/90 5.20% 4.90% 6/29/90 4.70% 4.90% 9/28/90 6.20% 5.50% 12/31/90 6.10% 5.20% 3/29/91 4.90% 5.20% 6/28/91 4.70% 5.00% 9/30/91 3.40% 4.50% 12/31/91 3.10% 4.40% 3/31/92 3.20% 3.90% 6/30/92 3.10% 3.80% 9/30/92 3.00% 3.30% 12/31/92 2.90% 3.30% 3/31/93 3.10% 3.40% 6/30/93 3.00% 3.30% 9/30/93 2.70% 3.20% 12/31/93 2.70% 3.20% 3/31/94 2.50% 2.90% 6/30/94 2.50% 2.90% 9/30/94 3.00% 3.00% 12/30/94 2.70% 2.60% 3/31/95 2.90% 3.00% 6/30/95 3.00% 3.00% 9/29/95 2.50% 2.90% 12/29/95 2.50% 3.00% 3/29/96 2.80% 2.80% 6/28/96 2.80% 2.70% 9/30/96 3.00% 2.70% 12/31/96 3.30% 2.60% 3/31/97 2.80% 2.50% 6/30/97 2.30% 2.40% 9/30/97 2.20% 2.20% 12/31/97 1.70% 2.20% 3/31/98 1.40% 2.10% 6/30/98 1.70% 2.20% 9/30/98 1.50% 2.50% 12/31/98 1.60% 2.40% 3/31/99 1.70% 2.10% 6/30/99 2.00% 2.10% 9/30/99 2.60% 2.00% 12/31/99 2.70% 1.90% 3/31/2000 3.80% 2.40% 6/30/2000 3.70% 2.50% 9/29/2000 3.50% 2.60% 12/29/2000 3.40% 2.60% 3/30/2001 2.90% 2.70% 6/29/2001 3.20% 2.70% 9/28/2001 2.60% 2.60% 12/31/2001 1.60% 2.70% 3/29/2002 1.50% 2.40% 6/28/2002 1.10% 2.30% 9/30/2002 1.50% 2.20% 12/31/2002 2.40% 1.90% 3/31/2003 3.00% 1.70% 6/30/2003 2.10% 1.50% 9/30/2003 2.30% 1.20% 12/31/2003 1.90% 1.10% 3/31/2004 1.70% 1.60% 6/30/2004 3.30% 1.90% 9/30/2004 2.50% 2.00% 12/31/2004 3.30% 2.20% 3/31/2005 3.10% 2.30% 6/30/2005 2.50% 2.00% 9/30/2005 4.70% 2.00% 11/30/2005 3.40% 2.20% Source: Bloomberg MANUFACTURING HOURLY WAGES (in US $) 2004 ---- Germany $31.25 US $23.17 Japan $21.90 Spain $17.10 Taiwan $5.97 Czech Rep $5.43 Mexico $2.50 China* $0.91 * 2002 Source: Bureau of Labor Statistics and ISI Strong foreign demand for U.S. Treasuries also helped keep bond prices up and interest rates down. As the U.S. trade deficit widened, foreign holdings increased to record highs again in 2005 (see chart below, left) despite concerns that waning foreign demand could lead to higher interest rates. A look at yields around the world (see chart below, right) suggests that lack of attractive alternatives may be a key factor that keeps foreign buyers interested in the U.S. Treasury market. FOREIGN HOLDINGS OF PUBLIC U.S. TREASURY DEBT Year $ Billions (left scale) % of Total Outstanding ---- ----------------------- ---------------------- 1980 127 0.17 1981 136 0.17 1982 151 0.15 1983 164 0.14 1984 200 0.15 1985 226 0.14 1986 269 0.15 1987 296 0.15 1988 354 0.17 1989 424 0.19 1990 438 0.18 1991 476 0.17 1992 520 0.17 1993 595 0.18 1994 633 0.18 1995 820 0.23 1996 1,047 0.28 1997 1,166 0.31 1998 1,185 0.32 1999 1,080 0.3 2000 1,026 0.31 2001 1,040 0.31 2002 1,254 0.35 2003 1,539 0.38 2004 1,856 0.43 2005 2,037 0.45 Source: US Federal Reserve GLOBAL YIELD CURVES Maturity U.S. Germany Japan U.K. China -------- ---- ------- ----- ---- ----- 1 4.43% 2.72% 0.06% 4.19% 1.53% 2 4.40% 2.86% 0.29% 4.19% 1.72% 3 4.36% 2.92% 0.42% 4.19% 2.42% 5 4.35% 3.07% 0.86% 4.17% 2.47% 7 4.36% 3.18% 1.18% 4.14% 2.84% 10 4.39% 3.31% 1.48% 4.10% 2.97% 15 4.58% 3.43% 1.67% 4.11% 3.19% 20 4.61% 3.56% 1.98% 4.06% 3.41% 30 4.54% 3.57% 2.31% 3.98% Source: Bloomberg POSITIVE RETURNS, LONGER DURATION OUTPERFORMS Despite the increase in short-term yields, all sectors of the bond market posted positive returns in 2005 (see table on next page). As in 2004, however, shorter benchmarks (e.g. Lehman Brothers 1-3 yr. Gov't/Credit, +1.77%) felt the full effect of the Fed's tightening and lagged full market benchmarks (e.g. Lehman Brothers Aggregate, +2.43% and Lehman Brothers Gov't/Credit, +2.37%) which benefited from the "conundrous" decline in long-term yields. A more detailed listing of various benchmark and sector returns appears in the following table. TOTAL RETURNS OF SELECTED LEHMAN BROTHERS (LB) INDICES AND SECTORS Index/Sector 2005 ------------ ---- LB Aggregate Index 2.43% LB Gov't/Credit Index 2.37% LB Int. Gov't/Credit Index 1.58% LB 1-3 yr. Gov't/Credit Index 1.77% US Treasury Sector 2.79% Government Agency Sector 2.34% Corporate Sector 1.68% AAA 2.54% AA 1.92% A 2.32% BBB 0.81% Mortgage Backed Securities Sector 2.61% Asset-Backed Securities Sector 2.09% High Yield Sector 2.74% Municipal Sector 3.51% FORD AND GM CAUSE CORPORATE SECTOR TO LAG The downgrade of Ford and GM to below investment grade was the major theme in the corporate market in 2005. Dramatic widening of yield spreads on Ford and GM issues caused the performance of the corporate sector (+1.68%) to lag all other sectors for the year. Performance of BBBs (+0.81%) vs. AAAs (+2.54%), AAs (+1.92%) and As (+2.32%) shows that the impact was confined to lower rated issues (and the auto sector in particular). In sympathy with Ford and GM, yield spreads on investment grade corporate bonds in general widened in 2005, but only by 5-10 basis points, as modest new supply of just $85 billion (see supply chart below, left) helped keep corporate spreads relatively tight by historical standards in 2005. At year end, yields on 5-year GMAC issues were approximately 8.5%; yields on 5-year GM Co. bonds were as high as 14.0%. NET NEW SUPPLY Year Treasury Agency Investment Grade Corporate - ---- -------- ------ -------------------------- 1992 282.5 41.2 72.77 1993 235.4 86.7 66.36 1994 136.6 168.2 30.36 1995 181.1 105.7 84.72 1996 152.5 81.2 96.92 1997 -2.9 96.8 104.67 1998 -101.4 273.9 219.25 1999 -74.5 320 232.2 2000 -314.1 235.1 214.39 2001 16.1 219.1 458.72 2002 237.3 215.5 265.55 2003 370.1 269 221.04 2004 369 90 131 2005 219.4 -125.6 85 2006 est. 296 165 110 Source: Lehman Brothers DURATION OF LEHMAN FIXED RATE MBS INDEX Date ---- Jan-85 5.74 Feb-85 5.52 Mar-85 5.54 Apr-85 5.5 May-85 5.59 Jun-85 5.42 Jul-85 5.24 Aug-85 5.15 Sep-85 4.95 Oct-85 4.83 Nov-85 4.79 Dec-85 4.99 Jan-86 5.06 Feb-86 5.23 Mar-86 5.13 Apr-86 4.77 May-86 3.87 Jun-86 3.59 Jul-86 3.41 Aug-86 3.52 Sep-86 3.51 Oct-86 3.68 Nov-86 4.17 Dec-86 4.2 Jan-87 4.45 Feb-87 4.59 Mar-87 4.63 Apr-87 4.47 May-87 4.21 Jun-87 4.26 Jul-87 4.24 Aug-87 4.65 Sep-87 4.8 Oct-87 5.12 Nov-87 5.35 Dec-87 5.51 Jan-88 5.77 Feb-88 5.84 Mar-88 5.79 Apr-88 5.27 May-88 4.93 Jun-88 4.81 Jul-88 4.88 Aug-88 4.79 Sep-88 4.94 Oct-88 5.04 Nov-88 5.03 Dec-88 5.11 Jan-89 4.52 Feb-89 4.65 Mar-89 4.81 Apr-89 4.72 May-89 4.6 Jun-89 4.38 Jul-89 4.19 Aug-89 4.35 Sep-89 4.28 Oct-89 4.07 Nov-89 4.03 Dec-89 4.11 Jan-90 4.32 Feb-90 4.44 Mar-90 4.54 Apr-90 4.72 May-90 4.54 Jun-90 4.37 Jul-90 4.23 Aug-90 4.5 Sep-90 4.5 Oct-90 4.43 Nov-90 4.12 Dec-90 4.04 Jan-91 3.96 Feb-91 4 Mar-91 4.05 Apr-91 4.07 May-91 4.12 Jun-91 4.26 Jul-91 4.36 Aug-91 4.11 Sep-91 3.78 Oct-91 3.75 Nov-91 3.78 Dec-91 2.41 Jan-92 3.58 Feb-92 3.47 Mar-92 3.98 Apr-92 4.05 May-92 3.53 Jun-92 3.4 Jul-92 3.05 Aug-92 2.77 Sep-92 2.78 Oct-92 3.57 Nov-92 3.68 Dec-92 3.44 Jan-93 3.01 Feb-93 2.56 Mar-93 2.56 Apr-93 2.66 May-93 2.76 Jun-93 2.32 Jul-93 2.47 Aug-93 2.16 Sep-93 2.33 Oct-93 2.8 Nov-93 3.43 Dec-93 3.47 Jan-94 3.35 Feb-94 3.47 Mar-94 4.35 Apr-94 4.74 May-94 4.83 Jun-94 4.74 Jul-94 4.6 Aug-94 4.1 Sep-94 4.35 Oct-94 4.43 Nov-94 4.45 Dec-94 4.4 Jan-95 4.24 Feb-95 4.5 Mar-95 4.46 Apr-95 4.28 May-95 3.5 Jun-95 3.47 Jul-95 3.6 Aug-95 3.48 Sep-95 3.32 Oct-95 3.2 Nov-95 2.91 Dec-95 2.57 Jan-96 2.63 Feb-96 3.48 Mar-96 3.86 Apr-96 4.19 May-96 4.36 Jun-96 4.2 Jul-96 4.07 Aug-96 4.21 Sep-96 4.02 Oct-96 3.62 Nov-96 3.18 Dec-96 3.66 Jan-97 3.66 Feb-97 3.72 Mar-97 3.99 Apr-97 3.84 May-97 3.78 Jun-97 3.6 Jul-97 2.94 Aug-97 3.35 Sep-97 3.02 Oct-97 2.64 Nov-97 2.62 Dec-97 2.4 Jan-98 2.09 Feb-98 2.32 Mar-98 2.46 Apr-98 2.48 May-98 2.35 Jun-98 2.27 Jul-98 2.43 Aug-98 2.06 Sep-98 1.37 Oct-98 2.23 Nov-98 2.21 Dec-98 1.95 Jan-99 1.86 Feb-99 2.82 Mar-99 2.94 Apr-99 3.04 May-99 3.6 Jun-99 3.81 Jul-99 4.15 Aug-99 4.31 Sep-99 4.15 Oct-99 4.04 Nov-99 4.17 Dec-99 4.27 Jan-00 4.36 Feb-00 4.17 Mar-00 4.03 Apr-00 4.25 May-00 4.37 Jun-00 4.11 Jul-00 4.11 Aug-00 3.94 Sep-00 3.84 Oct-00 3.75 Nov-00 3.45 Dec-00 3 Jan-2001 2.71 Feb-2001 2.68 Mar-2001 2.84 Apr-2001 3.3 May-2001 3.4 Jun-2001 3.56 Jul-2001 3.05 Aug-2001 2.9 Sep-2001 2.62 Oct-2001 1.46 Nov-2001 2.6 Dec-2001 3.1 Jan-2002 3.16 Feb-2002 2.9 Mar-2002 3.51 Apr-2002 3.03 May-2002 2.83 Jun-2002 2.6 Jul-2002 2.03 Aug-2002 1.4 Sep-2002 0.91 Oct-2002 1.08 Nov-2002 1.63 Dec-2002 0.94 Jan-2003 1.2 Feb-2003 0.81 Mar-2003 1.11 Apr-2003 1.03 May-2003 0.58 Jun-2003 1.02 Jul-2003 3.05 Aug-2003 3.14 Sep-2003 2.49 Oct-2003 3.12 Nov-2003 3.24 Dec-2003 2.98 Jan-2004 2.82 Feb-2004 2.53 Mar-2004 2.37 Apr-2004 3.59 May-2004 4.15 Jun-2004 4.13 Jul-2004 3.85 Aug-2004 3.11 Sep-2004 3.12 Oct-2004 2.73 Nov-2004 3.18 Dec-2004 2.86 Jan-2005 2.5 Feb-2005 3.09 Mar-2005 3.42 Apr-2005 2.89 May-2005 2.38 Jun-2005 2.23 Jul-2005 3.05 Aug-2005 2.57 Sep-2005 3.25 Oct-2005 3.8 Nov-2005 3.85 Dec-2005 3.64 Source: Lehman Brothers MBS, ABS, GOVERNMENT AGENCIES AND MUNICIPALS DELIVER SOLID RETURNS Showing a preference for the lower overall credit risk profile of mortgage- backed (MBS) and asset-backed securities (ABS), investors willingly accepted the intrinsic cash flow timing risks of these sectors as a trade-off. Despite decreases in prepayment speeds and a corresponding extension in mortgage durations from 2.86 to 3.64 years (see chart above, right), strong investor demand helped MBS and ABS post solid returns of +2.61% and +2.09% respectively. Government Agencies performed well on a relative basis (+2.34%), as a $126 billion decrease in net supply (see supply chart above, left) kept FNMA and FHLMC yield spreads mostly stable amidst negative headlines. Municipal bonds, benefiting from a steeper municipal yield curve and longer overall duration, outperformed all other sectors with a +3.51% return. High yield bonds generated Treasury-like returns of +2.74%. 2006 OUTLOOK We believe the Bernanke Fed will cease raising rates in 2006 and we expect moderate economic growth. Strong global competitive forces will prevent inflation and interest rates from rising significantly. Heavy Treasury issuance should be met with solid domestic and foreign demand while the return of the 30- year Treasury bond will limit the magnitude and duration of any inversion of the yield curve. Corporate yield spreads will remain relatively stable amidst modest new supply, and security selection will be key to adding value in this sector. We see good relative value in Government agency debt and also see opportunities to add value in the mortgage and asset-backed sectors. BAIRD ADVISORS Mary Ellen Stanek, CFA Gary A. Elfe, CFA Charles B. Groeschell Warren D. Pierson, CFA Daniel A. Tranchita, CFA M. Sharon deGuzman BAIRD INTERMEDIATE BOND FUND DECEMBER 31, 2005 The Baird Intermediate Bond Fund seeks an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers Intermediate Government/Credit Bond Index. The Lehman Brothers Intermediate Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rated debt including government and corporate securities with maturities between one and ten years. The Fund's performance in 2005 was comparable to that of the Index with the performance of our Institutional Class shares outperforming the Index and our Investor Class shares slightly underperforming the Index. Absolute returns were modest. Helping the Fund's relative performance were the following factors: o The Fund's overall portfolio structure (designed to underweight 2-year and 7 to 10-year maturities and overweight 4 to 5-year and 10-year+ maturities) which benefited from flattening in the yield curve; o The Fund's exposure to high-quality mortgage-backed and asset-backed securities which performed well relative to other sectors and which are not found in the Index; and o Strong performance of individual corporate issues owned by the Fund. The Fund's overweighting of BBB-rated corporate bonds relative to the Index and exposure to individual issues in the auto and media sectors detracted from relative performance in 2005. The Fund maintained its duration-neutral strategy vis-a-vis the Index, holding a broadly diversified portfolio of over 230 securities at year end. The Fund ended 2005 with a yield advantage versus the Index. This yield advantage, combined with exposure to specific sectors which we believe have superior total return potential (mortgage-backed securities, government agency issues and issues in the auto and media sectors), should enhance the Fund's prospects of continuing to add value over its benchmark in the coming year. PORTFOLIO CHARACTERISTICS QUALITY DISTRIBUTION* U.S. Treasury 12% U.S. Gov't Agency 28% AAA 18% AA 4% A 17% BBB 18% Below BBB 2% Not Rated 1% SECTOR WEIGHTINGS* Asset-Backed 8% Financials 18% Industrials 15% Utilities 6% Mortgage-Backed 15% International 2% Municipal 1% U.S. Gov't Agency 20% U.S. Treasuries 12% Cash 3% NET ASSETS: $234,630,466 SEC 30-DAY YIELD:** Institutional Class: 4.78% Investor Class: 4.54% AVERAGE DURATION: 3.63 years AVERAGE MATURITY: 5.04 years ANNUALIZED EXPENSE RATIO: Institutional Class: 0.30% Investor Class: 0.55%*** PORTFOLIO TURNOVER RATIO:**** 42.1% TOTAL NUMBER OF HOLDINGS: 237 * Percentages shown are based on the Fund's total net assets. ** SEC yields are based on SEC guidelines and are calculated for the 30 days ended December 31, 2005. *** Includes 0.25% 12b-1 fee. **** Not annualized. BAIRD INTERMEDIATE BOND FUND BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS VALUE OF A $250,000 INVESTMENT Baird Intermediate Bond Fund - Lehman Brothers Intermediate Date Institutional Class Shares Government/Credit Bond Index ---- ------------------------------ ---------------------------- 9/29/2000 $250,000 $250,000 12/31/2000 $266,589 $259,242 6/30/2001 $277,111 $269,827 12/31/2001 $284,379 $282,476 6/30/2002 $293,461 $291,870 12/31/2002 $307,199 $310,260 6/30/2003 $323,016 $323,504 12/31/2003 $325,290 $323,633 6/30/2004 $325,782 $323,274 12/31/2004 $338,193 $333,477 6/30/2005 $344,066 $338,777 12/31/2005 $344,187 $338,741 GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD INTERMEDIATE BOND FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird Intermediate Bond Fund - Lehman Brothers Intermediate Date Investor Class Shares Government/Credit Bond Index ---- ------------------------------ ---------------------------- 9/29/2000 $10,000 $10,000 12/31/2000 $10,668 $10,370 6/30/2001 $11,075 $10,793 12/31/2001 $11,353 $11,299 6/30/2002 $11,711 $11,675 12/31/2002 $12,231 $12,410 6/30/2003 $12,845 $12,940 12/31/2003 $12,917 $12,945 6/30/2004 $12,921 $12,931 12/31/2004 $13,394 $13,339 6/30/2005 $13,615 $13,551 12/31/2005 $13,603 $13,550 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD INTERMEDIATE BOND FUND AVERAGE ANNUAL TOTAL RETURNS SINCE For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1) - --------------------------------------- -------- ---------- ---------------- Baird Intermediate Bond Fund - Institutional Class Shares 1.77% 5.24% 6.27% Baird Intermediate Bond Fund - Investor Class Shares 1.56% 4.98% 6.03% Lehman Brothers Intermediate Government/Credit Bond Index(2) 1.58% 5.50% 5.95%
(1) For the period from September 29, 2000 (commencement of operations) through December 31, 2005. (2) The Lehman Brothers Intermediate Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt including government and corporate securities with maturities between one and ten years. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS SHOWN IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD INTERMEDIATE BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Principal Amount Value --------- ----- LONG-TERM INVESTMENTS - 96.9% ASSET-BACKED SECURITIES - 7.6% $ 156,099 Amresco Residential Securities Mortgage Loan Trust, Series 1998-1, Class A6, 6.51%, 08/25/2027 $ 155,621 476,193 Banc One Home Equity Trust, Series 1999-2, Class A7, 7.18%, 06/25/2029 479,928 1,150,000 Bayview Financial Acquisition Trust, Series 2005-B, Class 1A2, 4.70%, 04/28/2039 1,136,832 1,333,945 Chase Funding Mortgage Loan, Series 2004-1, Class 1A3, 2.98%, 04/25/2026 1,320,398 865,500 Chemical Master Credit Card Trust I, Series 1996-3, Class A, 7.09%, 02/15/2009 874,345 CitiFinancial Mortgage Securities, Inc.: 5,300 Series 2003-2, Class AF2, 2.13%, 05/25/2033 5,283 1,085,450 Series 2003-3, Class AF2, 3.08%, 08/25/2033 1,077,891 206,714 Contimortgage Home Equity Trust, Series 1999-1, Class A7, 6.47%, 12/25/2013 205,948 765,934 Countrywide Alternative Loan Trust, Series 2005-5R, Class A2, 4.75%, 12/25/2018 756,530 Countrywide Asset-Backed Certificates: 529,898 Series 2004-10, Class AF2, 3.32%, 05/25/2022 528,120 107,513 Series 2004-9, Class AF2, 3.34%, 09/25/2023 107,182 2,200,000 Series 2005-12, Class 1A2, 4.85%, 02/25/2026 2,183,825 1,500,000 Credit Based Asset Servicing and Securities, Series 2005-CB1, Class AF4, 4.62%, 01/25/2035 1,445,354 Delta Funding Home Equity Loan Trust: 305,172 Series 1997-2, Class A6, 7.04%, 06/25/2027 304,241 168,939 Series 1999-1, Class A6F, 6.34%, 12/15/2028 168,640 190,250 Series 1999-2, Class A7F, 7.03%, 08/15/2030 189,838 81,864 Equivantage Home Equity Loan Trust, Series 1996-3, Class A3, 7.70%, 09/25/2027 81,615 Green Tree Financial Corporation: 691,339 Series 1998-4, Class A5, 6.18%, 04/01/2030 680,988 487,344 Series 1999-3, Class A5, 6.16%, 02/01/2031 489,800 113,959 IMC Home Equity Loan Trust, Series 1998-1, Class A6, 6.52%, 06/20/2029 114,634 2,500,000 MBNA Credit Card Master Note Trust, Series 2003-A3, Class A3, 2.93%, 08/15/2010 2,506,102 1,111,839 New Century Home Equity Loan Trust, Series 2003-5, Class AI3, 3.56%, 11/25/2033 1,105,367 330,879 Oakwood Mortgage Investors, Inc., Series 1999-B, Class A3, 6.45%, 11/15/2017 304,811 799,787 Renaissance Home Equity Loan Trust, Series 2004-3, Class AF2, 3.57%, 11/25/2034 793,475 190,828 Residential Asset Mortgage Products, Inc., Series 2003-RS6, Class AI3, 3.08%, 12/25/2028 189,801 Residential Asset Mortgage Products, Inc., 306,834 Series 2003-RS9, Class AI3, 3.61%, 10/25/2028 305,657 214,135 Series 2003-KS7, Class AI3, 3.37%, 11/25/2028 213,440 10,848 Salomon Brothers Mortgage Securities VII, Series 1997-LB6, Class A6, 6.82%, 12/25/2027 10,841 ------------ 17,736,507 ------------ FINANCIAL - 18.3% Allfirst Financial, Inc. Subordinated Notes: 1,300,000 7.20%, 07/01/2007 1,346,392 500,000 6.88%, 06/01/2009 524,054 550,000 American General Finance Corporation Notes, 4.00%, 03/15/2011 520,302 589,000 American General Finance Corporation Senior Notes, 8.45%, 10/15/2009 654,307 630,000 AmSouth Bancorporation Subordinated Debentures, 6.75%, 11/01/2025 702,602 415,000 AmSouth Bank NA Subordinated Notes, 6.45%, 02/01/2018 428,112 500,000 AMVESCAP PLC Notes, 5.38%, 02/27/2013 F 492,741 725,000 Banco Santander Chile SA, 7.00%, 07/18/2007 F 742,610 225,000 Bank of America Corporation Subordinated Notes, 10.20%, 07/15/2015 306,720 350,000 Bank of Oklahoma Subordinated Notes, 7.13%, 08/15/2007 362,187 Bank One Corporation Subordinated Notes: 180,000 6.00%, 02/17/2009 184,366 750,000 10.00%, 08/15/2010 894,487 480,000 Bankers Trust Corporation Subordinated Notes, 7.38%, 05/01/2008 505,437 300,000 CIT Group Company of Canada, 5.20%, 06/01/2015 (Acquired 05/25/2005, Cost $299,151)* F 296,524 800,000 CIT Group, Inc. Senior Notes, 3.38%, 04/01/2009 761,185 1,336,000 Comerica Incorporated Subordinated Notes, 7.25%, 08/01/2007 1,382,640 800,000 Compass Bank Subordinated Notes, 8.10%, 08/15/2009 885,188 260,000 Corestates Capital Trust I, 8.00%, 12/15/2026 (Acquired 11/29/2005, Cost $276,398)* 275,626 Countrywide Home Loans, Inc.: 1,000,000 5.50%, 02/01/2007 1,004,857 650,000 4.00%, 03/22/2011 611,610 900,000 Credit Suisse First Boston USA, Inc. Notes, 6.13%, 11/15/2011 944,768 475,000 Dime Capital Trust, 9.33%, 05/06/2027 519,915 480,562 First National Bank of Chicago Pass Thru Certificates, 8.08%, 01/05/2018 557,913 1,100,000 First National Bank of Omaha Subordinated Notes, 7.32%, 12/01/2010 1,159,363 775,000 FMR Corporation Notes, 4.75%, 03/01/2013 (Acquired 02/26/2003, Cost $776,809)* 763,331 500,000 General Electric Capital Corporation Notes, 6.00%, 06/15/2012 526,595 1,000,000 Genworth Financial Inc. Notes, 5.75%, 06/15/2014 1,043,715 950,000 Glencore Funding LLC, 6.00%, 04/15/2014 (Acquired 03/31/2004 & 02/02/2005; Cost $794,280 & $146,738 respectively)* 893,515 500,000 The Goldman Sachs Group, Inc. Bonds, 5.15%, 01/15/2014 496,707 200,000 The Goldman Sachs Group, Inc. Notes, 6.60%, 01/15/2012 214,838 1,200,000 Household Finance Corporation Senior Unsubordinated Notes, 6.40%, 06/17/2008 1,237,969 300,000 International Lease Finance Corporation Notes, 5.70%, 07/03/2006 300,850 500,000 J.P. Morgan Chase & Company Subordinated Notes, 6.63%, 03/15/2012 538,803 1,550,000 KeyCorp Subordinated Notes, 6.75%, 03/15/2006 1,555,673 Lehman Brothers Holdings, Inc. Notes, 700,000 8.50%, 05/01/2007 731,195 596,000 8.50%, 08/01/2015 724,996 325,000 Lion Connecticut Holding, 7.13%, 08/15/2006 329,455 600,000 Marsh & McLennan Companies, Inc., 5.38%, 07/15/2014 590,534 600,000 MBNA Corporation Notes, 6.13%, 03/01/2013 636,251 175,000 Mellon Capital II, Series B, 8.00%, 01/15/2027 186,265 750,000 Merrill Lynch & Co., Inc. Senior Unsubordinated Notes, 5.00%, 02/03/2014 740,662 1,000,000 Morgan Stanley Dean Witter Debentures, 10.00%, 06/15/2008 1,115,686 300,000 Morgan Stanley Unsubordinated Notes, 6.75%, 04/15/2011 322,958 1,230,000 National Australia Bank Ltd. Yankee Subordinated Notes, Series A, 8.60%, 05/19/2010 F 1,400,052 396,000 National City Bank of Kentucky Subordinated Notes, 6.30%, 02/15/2011 419,233 500,000 Nationwide Life Global Fund Notes, 5.35%, 02/15/2007 (Acquired 02/08/2002; Cost $499,520)* 501,202 125,000 Met Life Global Funding Senior Notes, 4.50%, 05/05/2010 122,564 800,000 Phoenix Companies, 6.68%, 02/16/2008 807,490 894,000 PNC Funding Corporation, 7.50%, 11/01/2009 971,852 1,200,000 Rabobank Nederland Senior Notes, 2.70%, 03/15/2007 (Acquired 02/03/2004, Cost $1,199,760)* F 1,165,792 700,000 Residential Capital Corporation, 6.38%, 06/30/2010 711,281 805,000 SAFECO Corporation, 6.88%, 07/15/2007 823,885 546,000 SAFECO Corporation Senior Notes, 7.25%, 09/01/2012 608,657 Santander Central Hispano Issuances: F 325,000 7.00%, 04/01/2006 326,511 150,000 7.63%, 09/14/2010 166,126 500,000 6.38%, 02/15/2011 531,619 1,160,000 Transamerica Finance Corporation Debentures, 0.00%, 03/01/2010 ^ 919,243 875,000 UFJ Bank Ltd/New York, Subordinated Notes, 7.40%, 06/15/2011 966,209 350,000 UFJ Finance Aruba AEC, 6.75%, 07/15/2013 F 382,153 Union Planters Corporation Subordinated Notes:* 870,000 6.50%, 03/15/2018 (Acquired 05/08/02, 09/22/2005, 02/12/03, and 05/08/03; Cost $200,363, $234,877, $73,378 and $400,227 respectively) 897,326 300,000 7.75%, 03/01/2011 337,735 500,000 Washington Mutual Bank Subordinated Notes, 6.88%, 06/15/2011 540,141 500,000 Washington Mutual Capital I, 8.38%, 06/01/2027 538,811 887,000 Westdeutsche Landesbank Subordinated Notes, 4.80%, 07/15/2015 870,112 ------------ 43,021,898 ------------ INDUSTRIAL - 15.5% 450,000 Alcan, Inc. Notes, 5.00%, 06/01/2015 436,515 30,365 America West Airlines Pass Thru Certificate, 8.54%, 07/02/2007 30,034 810,000 Anthem, Inc., 6.80%, 08/01/2012 883,717 225,000 Auburn Hills Trust Debentures, 12.38%, 05/01/2020 334,560 300,000 BellSouth Corporation, 4.75%, 11/15/2012 292,342 575,000 British Telecom PLC Notes, 8.38%, 12/15/2010 F 654,558 Bunge Ltd. Finance Corporation Notes: 800,000 5.35%, 04/15/2014 791,275 400,000 5.10%, 07/15/2015 387,009 375,000 Caesars Entertainment, Senior Notes, 7.50%, 09/01/2009 399,368 1,000,000 Clear Channel Communications, Inc. Notes, 5.50%, 09/15/2014 956,888 125,000 Comcast Cable Communication Holdings, 8.38%, 03/15/2013 144,685 Continental Airlines, Inc. Pass Thru Certificates: 4,749 7.42%, 10/01/2008 4,395 98,857 6.54%, 09/15/2009 93,899 1,155,000 Cooper Cameron Corporation Senior Notes, 2.65%, 04/15/2007 1,116,728 700,000 Cooper Industries, Inc. Notes, 5.25%, 07/01/2007 702,974 1,175,000 Cox Communications Inc., 7.13%, 10/01/2012 1,258,984 324,000 Delta Air Lines, Inc. Pass Thru Certificates, 9.50%, 11/18/2008 (Acquired 11/24/2004, Cost $324,000)* @ ^ 285,120 1,000,000 Deutsche Telekom International Finance BV, 8.50%, 06/15/2010 1,133,771 300,000 Dollar General Corporation, 8.63%, 06/15/2010 329,250 500,000 Fiserv, Inc. Notes, 4.00%, 04/15/2008 485,524 623,000 Ford Capital BV Debentures, 9.50%, 06/01/2010 521,763 300,000 Ford Motor Company Debentures, 9.22%, 09/15/2021 222,000 500,000 General Electric Company Notes, 5.00%, 02/01/2013 499,740 General Motors Acceptance Corporation Notes: 1,025,000 7.75%, 01/19/2010 957,234 200,000 6.75%, 12/01/2014 179,924 550,000 General Motors Nova Scotia Finance Company, 6.85%, 10/15/2008 F 412,500 Halliburton Company Notes: 475,000 5.63%, 12/01/2008 484,529 625,000 5.50%, 10/15/2010 638,350 650,000 Hanson Australia Funding, 5.25%, 03/15/2013 F 644,349 830,000 Health Care Service Corporation Notes, 7.75%, 06/15/2011 (Acquired 06/20/2001 and 01/26/2005; Cost $497,765 and $373,250 respectively)* 928,978 400,000 Highmark, Inc. Notes, 6.80%, 08/15/2013 (Acquired 08/14/2003; Cost $399,088)* 433,052 975,000 Hutchison Whampoa International Ltd., 6.25%, 01/24/2014 (Acquired 11/19/2003 and 02/08/2005; Cost $749,228 and $243,019 respectively)* F 1,020,346 1,000,000 Ingersoll-Rand Company Debentures, 6.39%, 11/15/2027 F 1,131,555 105,000 International Paper Company Notes, 7.63%, 01/15/2007 107,044 650,000 Laboratory Corporation of America Holdings, 5.50%, 02/01/2013 652,131 500,000 Limited Brands, Inc., 5.25%, 11/01/2014 471,939 500,000 Marathon Oil Corporation Notes, 5.38%, 06/01/2007 502,666 350,000 Marathon Oil Corporation, 6.00%, 07/01/2012 369,682 900,000 The May Department Stores Company Debentures, 8.85%, 03/01/2006 904,534 1,000,000 Nextel Communications Senior Notes, 6.88%, 10/31/2013 1,043,214 Northwest Airlines, Inc.: 497,999 7.25%, 07/02/2014 64,740 230,071 6.26%, 11/20/2021 234,169 700,000 PCCW Capital II Ltd., 6.00%, 07/15/2013 (Acquired 07/10/2003; Cost $696,731)* F 715,012 600,000 Pearson Dollar Finance PLC, 5.70%, 06/01/2014 (Acquired 09/28/2005, Cost $618,130)* F 606,989 Qwest Capital Funding, Inc.: 350,000 7.00%, 08/03/2009 353,500 100,000 7.25%, 02/15/2011 101,250 1,000,000 Reed Elsevier Capital Notes, 4.63%, 06/15/2012 969,133 500,000 SBC Communications, Inc. Notes, 5.63%, 06/15/2016 503,081 650,000 Sealed Air Corporation Senior Notes, 5.38%, 04/15/2008 (Acquired 04/09/2003; Cost $646,490)* 652,439 239,199 Southwest Airlines Company Pass-Thru Certificates, 7.67%, 01/02/2014 249,290 TCI Communications, Inc. Debentures: 325,000 7.88%, 08/01/2013 367,336 300,000 8.75%, 08/01/2015 363,508 1,360,000 Telecom Italia Capital, 4.95%, 09/30/2014 F 1,298,920 200,000 Tele-Communications, Inc. Debentures, 9.80%, 02/01/2012 241,279 Telus Corporation Notes, 380,000 7.50%, 06/01/2007 F 392,401 838,000 Time Warner Companies Inc. Debentures, 9.13%, 01/15/2013 991,837 275,000 Tribune Company, 5.25%, 08/15/2015 262,011 Tyco International Group S.A.: F 700,000 6.38%, 02/15/2006 701,143 400,000 6.38%, 10/15/2011 415,438 650,000 6.00%, 11/15/2013 663,966 257,967 Union Pacific Corporation Pass Thru Certificates, 8.66%, 07/02/2011 276,371 United AirLines, Inc. Pass Thru Certificates: 245,275 7.76%, 10/01/2005 146,302 854,505 6.20%, 09/01/2008 837,716 300,000 10.02%, 03/22/2014 @,^ 197,688 1,000,000 Viacom, Inc., 7.70%, 07/30/2010 1,079,405 160,000 Weyerhaeuser Company Notes, 5.95%, 11/01/2008 163,232 500,000 Willamette Industries, Inc. Notes, 6.60%, 06/05/2012 523,669 325,000 Yosemite Securities Trust I, 8.25%, 11/15/2004 (Acquired 04/26/2001, Cost $325,000)*,@,^ 184,438 ------------ 36,403,389 ------------ UTILITIES - 5.8% 300,000 Baltimore Gas & Electric Company Notes, 5.25%, 12/15/2006 300,784 1,000,000 Dominion Resources Inc., Series C, 5.15%, 07/15/2015 968,822 800,000 Duke Capital LLC Notes, 5.67%, 08/15/2014 806,818 300,000 Edison Mission Energy Senior Notes, 9.88%, 04/15/2011 349,875 600,000 Energy Transfer Partners, 5.65%, 08/01/2012 (Acquired 08/10/2005 and 07/26/2005, Cost $99,249 and $499,485)* 593,122 300,000 Exelon Corporation Senior Notes, 6.75%, 05/01/2011 319,386 464,563 Kiowa Power Partners LLC, 4.81%, 12/30/2013 (Acquired 11/19/2004; Cost $464,563)* 449,683 300,000 Korea Electric Power Corporation, 6.75%, 08/01/2027 F 334,965 800,000 MidAmerican Energy Holdings Company Senior Notes, 4.63%, 10/01/2007 794,218 325,000 National Rural Utilities Cooperative Finance Collateral Trust, 3.88%, 02/15/2008 318,001 925,000 National Rural Utilities Cooperative Finance Corporation Notes, 5.75%, 08/28/2009 949,764 800,000 ONEOK, Inc. Senior Notes, 7.13%, 04/15/2011 864,952 800,000 Pacific Gas and Electric Company 1st Mortgage, 4.80%, 03/01/2014 779,622 1,000,000 Pepco Holdings, Inc. Notes, 3.75%, 02/15/2006 998,751 300,000 PPL Energy Supply, LLC Senior Notes, 6.40%, 11/01/2011 316,211 175,000 PSE&G Energy Holdings LLC Senior Notes, 8.50%, 06/15/2011 187,250 PSE&G Power LLC: 275,000 7.75%, 04/15/2011 304,475 400,000 5.00%, 04/01/2014 385,934 841,866 RGS (I&M) Funding Corporation Debentures, 9.82%, 12/07/2022 1,080,240 500,000 System Energy Resources 1st Mortgage, 4.88%, 10/01/2007 496,472 350,000 Tristate Gen & Trans Assn, Series 2003, 6.04%, 01/31/2018 (Acquired 10/14/2003; Cost $350,000)* 360,357 900,000 Vectren Utility Holdings, 6.63%, 12/01/2011 964,112 600,000 The Williams Companies, Inc. Notes, 8.13%, 03/15/2012 654,000 ------------ 13,577,814 ------------ MORTGAGE-BACKED SECURITIES - 14.7% Bank of America Alternative Loan Trust: 495,402 Series 2003-11, Class 4A1, 4.75%, 01/25/2019 482,243 1,905,816 Series 2004-11, Class 4A1, 5.50%, 12/25/2019 1,908,198 Citicorp Mortgage Securities, Inc.: 1,704,844 5.50%, 10/25/2014 1,700,766 1,699,802 5.50%, 06/25/2034 1,670,592 2,146,464 Countrywide Alternative Loan Trust Series 2005-50CB, Class 4A1, 5.00%, 11/25/2020 2,124,527 2,000,000 Countrywide Home Loans, Inc., Series 2003-18, Class A3, 5.25%, 07/25/2033 1,993,788 231,715 Deutsche Mortgage Securities, Inc., Series 2004-1, Class 3A3, 3.69%, 09/25/2033 230,922 76,990 Federal Gold Loan Mortgage (FGLMC) Pass Thru Certificate, 6.00%, 07/01/2028 78,011 Federal Home Loan Mortgage Corporation (FHLMC): 1,992,930 Series 3033, Class LU, 5.50%, 03/15/2013 2,022,660 1,350,000 Series 2592, Class PD, 5.00%, 07/15/2014 1,348,902 1,522,421 Series 2695, Class UA, 5.50%, 09/15/2014 1,534,123 871,150 Series R001, Class AE, 4.38%, 04/15/2015 851,885 2,323,167 Series R003, Class VA, 5.50%, 08/15/2016 2,344,463 32,737 Series 1094, Class K, 7.00%, 06/15/2021 32,726 19,103 Series 1101, Class M, 6.95%, 07/15/2021 19,104 181,226 Series 1136, Class H, 6.00%, 09/15/2021 180,912 74,285 Series 1280, Class B, 6.00%, 04/15/2022 74,156 79,024 Series 1395, Class G, 6.00%, 10/15/2022 79,057 350,185 Series 2531, Class N, 4.00%, 07/15/2027 346,328 Federal National Mortgage Association (FNMA): 1,000,000 Series 2002-73, Class OC, 5.00%, 04/25/2014 998,760 1,500,000 Series 2003-24, Class PC, 5.00%, 11/25/2015 1,495,544 400,000 Series 2002-94, Class BG, 5.00%, 04/25/2016 399,062 312,220 Series 1991-137, Class H, 7.00%, 10/25/2021 324,593 196,164 Series 1992-136, Class PK, 6.00%, 08/25/2022 199,556 133,149 Series 1993-32, Class H, 6.00%, 03/25/2023 133,846 1,173,122 Series 2002-95, Class MD, 5.00%, 07/25/2026 1,169,962 1,134,180 Series 2002-77, Class QP, 5.00%, 09/25/2026 1,131,141 194,118 Series 2003-25, Class PC, 4.50%, 02/25/2027 192,997 47,188 Series 1998-66, Class C, 6.00%, 12/25/2028 47,482 GMAC Mortgage Corporation Loan Trust: 1,900,000 4.39%, 12/25/2025 1,884,133 1,611,855 5.50%, 09/25/2034 1,603,557 Government National Mortgage Association (GNMA): 535,509 5.50%, 03/16/2013 539,866 1,267,906 4.00%, 02/16/2028 1,258,255 672,892 6.00%, 02/20/2029 675,952 920,276 IMPAC Secured Asset Corporation, Series 2004-2, Class A3, 5.00%, 08/25/2034 916,367 765,435 Master Alternative Loans Trust, Series 2004-3, Class 1A1, 5.00%, 03/25/2019 753,956 861,421 Salomon Brothers Mortgage Securities VII, Series 2003-UP2, Class A2, 4.00%, 06/25/2033 832,218 1,001,755 Washington Mutual, Series 2004-CB4, Class 21A, 5.50%, 12/25/2019 1,003,933 ------------ 34,584,543 ------------ INTERNATIONAL (U.S. $ DOMINATED) - 1.9% Corp Andina De Fomento 275,000 Notes, 7.38%, 01/18/2011 F 301,756 Korea Development Bank Notes: F 450,000 4.25%, 11/13/2007 443,987 350,000 4.63%, 09/16/2010 343,008 700,000 Landesbank Baden- Wurttemgerg Subordinated Notes, 6.35%, 04/01/2012 F 763,717 350,000 National Bank of Hungary Yankee Debentures, 8.88%, 11/01/2013 F 442,691 PEMEX Project Funding Master Trust: F 275,000 6.13%, 08/15/2008 280,500 1,625,000 9.13%, 10/13/2010 1,870,375 ------------ 4,446,034 ------------ MUNICIPAL BONDS - 0.9% Tobacco Settlement Financing Corporation: 350,000 Series 2001-A, Class A, 5.92%, 06/01/2012 347,837 868,552 Series 2001-A, Class A, 6.36%, 05/15/2025 875,214 1,046,000 Toll Road Inv. Part II, 0.00%, 02/15/2011 (Acquired 09/28/2004; Cost $782,046)*,^ 807,976 ------------ 2,031,027 ------------ U.S. GOVERNMENT AGENCY ISSUES - 20.3% 25,650,000 Federal Home Loan Mortgage Corporation (FHLMC): 4.13%, 07/12/2010 25,012,649 20,875,000 Federal National Mortgage Association (FNMA): 7.25%, 01/15/2010 22,745,003 ------------ 47,757,652 ------------ U.S. TREASURY OBLIGATIONS - 11.9% U.S. Treasury Bonds: 350,000 9.88%, 11/15/2015 500,035 15,575,000 9.25%, 02/15/2016 21,584,147 5,475,000 U.S. Treasury Note: 6.00%, 08/15/2009 5,770,135 ------------ 27,854,317 ------------ Total Long-Term Investments (Cost $229,600,026) 227,413,181 ------------ Shares - ------ SHORT-TERM INVESTMENTS - 4.3% MONEY MARKET FUNDS - 4.3% 9,373,571 Investment Company Cash Reserve Portfolio - AIM Fund 9,373,571 587,759 Short-Term Investment Trust Prime Portfolio - AIM Fund 587,759 ------------ Total Short-Term Investments (Cost $9,961,330) 9,961,330 ------------ Total Investments (Cost $239,561,356) - 101.2% 237,374,511 ------------ Liabilities in Excess of Other Assets - (1.2)% (2,744,045) ------------ TOTAL NET ASSETS - 100.0% $234,630,466 ------------ ------------ @ Security Default ^ Non-Income Producing Security * Unregistered Security F Foreign Security See notes to the financial statements BAIRD AGGREGATE BOND FUND DECEMBER 31, 2005 The Baird Aggregate Bond Fund seeks an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers Aggregate Bond Index. The Lehman Brothers Aggregate Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Fund outperformed the Index in 2005, although absolute returns were modest. Helping the Fund's relative performance were the following factors: o The Fund's overall portfolio structure (designed to underweight 2-year, 7 to 10-year and 30-year maturities and overweight 4 to 5-year, 11-year and 20-year maturities), which benefited from flattening in the yield curve; o The Fund's significant exposure to asset-backed securities compared to the Index; and o Strong performance of individual corporate issues owned by the Fund. The Fund's overweighting of BBB-rated corporate bonds relative to the benchmark and exposure to individual issues in the auto and media sectors detracted from relative performance in 2005. An underweighting of mortgage pass-through securities versus the Index also detracted from the Fund's relative performance. The Fund maintained its duration-neutral strategy vis-a-vis the Index, holding a broadly diversified portfolio of over 270 securities at year end. The Fund ended 2005 with a yield advantage versus the Index. This yield advantage, combined with exposure to specific sectors which we believe have superior total return potential (asset-backed securities, government agency issues and issues in the auto and media sectors), should enhance the Fund's prospects of continuing to add value over its benchmark in the coming year. PORTFOLIO CHARACTERISTICS QUALITY DISTRIBUTION* U.S. Treasury 12% U.S. Gov't Agency 34% AAA 26% AA 3% A 9% BBB 14% Below BBB 2% SECTOR WEIGHTINGS* Asset-Backed 10% Commercial Mortgage-Backed 2% Financials 12% Industrials 10% Utilities 4% Mortgage-Backed 31% International 1% U.S. Gov't Agency 13% U.S. Treasuries 12% Cash 5% NET ASSETS: $228,422,325 SEC 30-DAY YIELD:** Institutional Class: 4.89% Investor Class: 4.67% AVERAGE DURATION: 4.57 years AVERAGE MATURITY: 7.54 years ANNUALIZED EXPENSE RATIO: Institutional Class: 0.30% Investor Class: 0.55%*** PORTFOLIO TURNOVER RATIO:**** 46.0% TOTAL NUMBER OF HOLDINGS: 275 * Percentages shown are based on the Fund's total net assets. ** SEC yields are based on SEC guidelines and are calculated for the 30 days ended December 31, 2005. *** Includes 0.25% 12b-1 fee. **** Not annualized. BAIRD AGGREGATE BOND FUND BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS VALUE OF A $250,000 INVESTMENT Baird Aggregate Bond Fund - Lehman Brothers Aggregate Date Institutional Class Shares Bond Index ---- -------------------------- ------------------------- 9/29/2000 $250,000 $250,000 12/31/2000 $264,448 $260,514 6/30/2001 $275,084 $269,936 12/31/2001 $286,461 $282,512 6/30/2002 $295,106 $293,222 12/31/2002 $310,239 $311,484 6/30/2003 $328,053 $323,719 12/31/2003 $332,520 $324,268 6/30/2004 $333,936 $324,755 12/31/2004 $350,368 $338,336 6/30/2005 $360,526 $346,843 12/31/2005 $360,351 $346,555 GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD AGGREGATE BOND FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird Aggregate Bond Fund - Lehman Brothers Aggregate Date Investor Class Shares Bond Index ---- --------------------------- ------------------------- 9/29/2000 $10,000 $10,000 12/31/2000 $10,577 $10,421 6/30/2001 $10,985 $10,797 12/31/2001 $11,420 $11,300 6/30/2002 $11,748 $11,729 12/31/2002 $12,343 $12,459 6/30/2003 $13,031 $12,949 12/31/2003 $13,200 $12,971 6/30/2004 $13,269 $12,990 12/31/2004 $13,894 $13,533 6/30/2005 $14,284 $13,874 12/31/2005 $14,247 $13,862 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD AGGREGATE BOND FUND AVERAGE ANNUAL TOTAL RETURNS SINCE For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1) - --------------------------------------- -------- ---------- ----------------- Baird Aggregate Bond Fund - Institutional Class Shares 2.85% 6.38% 7.21% Baird Aggregate Bond Fund - Investor Class Shares 2.54% 6.14% 6.97% Lehman Brothers Aggregate Bond Index(2) 2.43% 5.87% 6.42%
(1) For the period from September 29, 2000 (commencement of operations) through December 31, 2005. (2) The Lehman Brothers Aggregate Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS ON THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD AGGREGATE BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Principal Amount Value --------- ----- LONG-TERM INVESTMENTS 95.5% ASSET-BACKED SECURITIES - 10.0% $ 225,000 Advanta Business Card Master Trust, Series 2003-B, Class A, 2.95%, 12/20/2008 $ 225,343 118,987 Advanta Mortgage Loan Trust, Series 1999-2, 6.82%, 04/25/2014 119,020 342,263 Banc One Home Equity Trust, Series 1999-2, Class A7, 7.18%, 06/25/2029 344,948 465,723 Bear Stearns Asset Backed Securities Trust, Series 2003-AC1, Class A1, 4.10%, 05/25/2033 453,974 CitiFinancial Mortgage Securities, Inc.: 7,227 Series 2003-2, Class AF2, 2.13%, 05/25/2033 7,204 500,000 Series 2003-2, Class AF3, 3.04%, 05/25/2033 496,853 Contimortgage Home Equity Trust: 243,193 Series 1999-1, Class A7, 6.47%, 12/25/2013 242,292 11,001 Series 1997-2, Class A9, 7.09%, 04/15/2028 10,982 134,807 Series 1999-3, Class A8, 4.9%, 05/25/2029 135,173 Countrywide Asset-Backed Certificates: 2,000,000 Series 2005-17, Class 1AF2, 5.36%, 03/25/2030 2,001,156 2,000,000 Series 2004-12, Class AF3, 4.02%, 12/25/2030 1,956,638 1,500,000 Series 2004-15, Class AF6, 4.61%, 04/25/2035 1,439,488 1,300,000 Series 2005-1, Class AF6, 5.03%, 07/25/2035 1,283,398 1,500,000 Series 2005-10, Class AF2, 4.49%, 02/25/2036 1,481,206 Credit Based Asset Servicing and Securities: 1,000,000 Series 2005-CB1, Class AF4, 4.62%, 01/25/2035 963,569 2,000,000 Series 2005-CB8, Class AF2, 5.30%, 12/25/2035 2,000,000 875,000 Daimler Chrysler Master Owner Trust, Series 2004-A, Class A, 2.84%, 01/15/2009 875,171 86,679 Equivantage Home Equity Loan Trust, Series 1996-3, Class A3, 7.70%, 09/25/2027 86,416 GE Capital Mortgage Services, Inc.: 15,267 Series 1997-H3, Class A6, 6.72%, 10/25/2027 15,221 30,974 Series 1997-HE4, Class A7, 6.74%, 12/25/2027 30,879 245,649 Series 1999-HE1, Class A7, 6.27%, 04/25/2029 247,195 Green Tree Financial Corporation: 319,565 Series 1993-3, Class A7, 6.40%, 10/15/2018 321,460 265,774 Series 1993-4, Class A5, 7.05%, 01/15/2019 272,035 13,484 Series 1995-4, Class A5, 6.95%, 06/15/2025 13,666 6,613 Series 1997-1, Class A5, 6.86%, 03/15/2028 6,802 276,318 Series 1997-6, Class A8, 7.07%, 01/15/2029 285,447 380,236 Series 1998-4, Class A5, 6.18%, 04/01/2030 374,543 420,000 Household Automobile Trust, Series 2003-1, 2.22%, 11/17/2009 410,054 48,435 IMC Home Equity Loan Trust, Series 1997-5, Class A10, 6.88%, 11/20/2028 48,349 694,899 New Century Home Equity Loan Trust, Series 2003-5, Class AI3, 3.56%, 11/25/2033 690,855 165,440 Oakwood Mortgage Investors, Inc., Series 1999-B, Class A3, 6.45%, 11/15/2017 152,405 750,000 RAAC Series, Series 2004-SP1, Class AI2, 4.38%, 01/25/2022 741,751 Residential Asset Mortgage Products, Inc.: 189,722 Series 2003-RS11, Class AI3, 3.56%, 08/25/2028 189,120 318,027 Series 2004-RS1, Class AI3, 3.41%, 06/25/2028 316,698 138,357 Series 2004-RS3, Class AI2, 3.05%, 06/25/2029 137,489 1,035,000 Series 2003-RS7, Class AI6, 5.34%, 08/25/2033 1,032,029 1,000,000 Series 2005-RS1, Class AI6, 4.71%, 11/25/2034 974,068 Residential Asset Securities Corporation: 1,000,000 Series 2004-KS7, Class AI2, 3.51%, 05/25/2024 989,881 1,250,000 Series 2004-KS2, Class AI3, 3.02%, 05/25/2029 1,233,242 250,000 Series 2003-KS5, Class AI6, 3.62%, 07/25/2033 242,345 Salomon Brothers Mortgage Securities VII, 15,367 Series 1997-LB6, Class A6, 6.82%, 12/25/2027 15,358 ------------ 22,863,723 ------------ COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.3% 1,200,000 GE Capital Commercial Mortgage Corporation, Series 2002-3A, Class AR, 5.00%, 12/10/2037 1,194,862 250,000 GMAC Commercial Mortgage Securities, Inc., Series 2003-C1, Class A2, 4.08%, 05/10/2036 235,223 Government National Mortgage Association (GNMA): 850,000 4.49%, 04/16/2023 827,072 800,000 4.66%, 04/16/2029 779,139 550,000 Mach One Trust, Series 2004-1A, Class A2, 4.78%, 05/28/2040 (Acquired 07/12/2004, Cost $555,349)* 542,508 1,800,000 Wachovia Bank Commercial Mortgage Trust, Series 2003-C3, Class A2, 4.87%, 02/15/2035 1,772,527 ------------ 5,351,331 ------------ FINANCIAL - 11.6% 600,000 American General Finance Corporation Senior Notes, 8.45%, 10/15/2009 666,527 200,000 AmSouth Bancorporation Subordinated Debentures, 6.75%, 11/01/2025 223,048 275,000 AMVESCAP PLC Notes, 5.38%, 02/27/2013 F 271,008 447,000 Associates Corporation North America Subordinated Debentures, 8.15%, 08/01/2009 493,485 300,000 BAC Capital Trust VI, 5.63% 03/08/2035 295,952 315,000 Bank of America Corporation Subordinated Notes, 10.20%, 07/15/2015 429,408 400,000 Bank of Oklahoma Subordinated Notes, 7.13%, 08/15/2007 413,928 909,000 Bank One Corporation Subordinated Notes, 10.00%, 08/15/2010 1,084,119 250,000 Beaver Valley Funding Corporation Debentures, 9.00%, 06/01/2017 286,767 325,000 CIT Group Company of Canada, 5.20%, 06/01/2015 (Acquired 05/25/2005, Cost $324,080)* F 321,234 300,000 CIT Group, Inc. Senior Notes, 7.75%, 04/02/2012 340,239 590,000 Citigroup, Inc. Subordinated Notes, 5.00%, 09/15/2014 580,769 1,081,000 Compass Bank Subordinated Notes, 8.10%, 08/15/2009 1,196,110 Countrywide Home Loans Inc.: 175,000 5.63%, 07/15/2009 177,647 850,000 4.00%, 03/22/2011 799,797 375,000 Credit Suisse First Boston USA, Inc. Notes, 6.13%, 11/15/2011 393,653 1,070,000 Dime Capital Trust, 9.33%, 05/06/2027 1,171,177 175,000 Dresdner Bank-New York Subordinated Debentures, 7.25%, 09/15/2015 200,395 230,000 First Empire Capital Trust I, 8.23%, 02/01/2027 245,465 625,000 First Empire Capital Trust II, 8.28%, 06/01/2027 672,389 696,815 First National Bank of Chicago Pass Thru Certificates, 8.08%, 01/05/2018 808,974 675,000 First National Bank of Omaha Subordinated Notes, 7.32%, 12/01/2010 711,427 460,000 First Union Capital, 7.94%, 01/15/2027 488,963 250,000 FMR Corporation Notes, 4.75%, 03/01/2013 (Acquired 02/26/2003, Cost $250,583)* 246,236 875,000 Glencore Funding LLC, 6.00%, 04/15/2014 (Acquired 03/31/2004, 02/02/2005 and 10/31/2005; Cost $496,425, $122,281 and $231,448 respectively)* 822,974 850,000 Goldman Sachs Capital I, 6.35%, 02/15/2034 892,953 150,000 The Goldman Sachs Group, Inc. Notes, 6.60%, 01/15/2012 161,128 355,000 HSBC Bank PLC Subordinated Notes, 6.95%, 03/15/2011 382,842 900,000 J.P. Morgan Chase & Company Notes, 5.88%, 03/15/2035 894,808 KeyCorp Institution: 496,000 7.83%, 12/01/2026 525,134 400,000 8.25%, 12/15/2026 425,764 900,000 Kinder Morgan Finance, 5.70%, 01/05/2016 (Acquired 12/12/2005, Cost $895,104)* 907,780 565,000 Liberty Mutual Insurance Notes, 8.00%, 10/15/2097 (Acquired 03/26/2003, Cost $361,573)* 595,588 300,000 Marsh & Mclennan Companies, Inc., 5.38%, 07/15/2014 295,267 400,000 Morgan Stanley Subordinated Notes, 4.75%, 04/01/2014 383,627 600,000 Phoenix Companies, 6.68%, 02/16/2008 605,618 1,000,000 PNC Financial Services, Series C, 8.88%, 03/15/2027 1,083,392 400,000 Republic New York Corporation Subordinated Notes, 9.70%, 02/01/2009 450,453 700,000 Residential Capital Corporation, 6.88%, 06/30/2015 743,810 350,000 Santander Central Hispano Issuances, 7.63%, 09/14/2010 F 387,627 500,000 SLM Corporation Notes, 5.63%, 08/01/2033 502,301 200,000 Transamerica Capital II, 7.65%, 12/01/2026 (Acquired 10/21/2003, Cost $216,762)* 233,810 275,000 UFJ Bank Ltd/New York Subordinated Notes, 7.40%, 06/15/2011 303,666 225,000 UFJ Finance Aruba AEC, 6.75%, 07/15/2013 F 245,670 350,000 Union Planters Corporation Subordinated Notes, 7.75%, 03/01/2011 394,024 280,000 Washington Mutual Capital I, 8.38%, 06/01/2027 301,734 200,000 Washington Mutual, Inc. Subordinated Notes, 8.25%, 04/01/2010 222,693 1,534,000 Westdeutsche Landesbank Subordinated Notes, 5.00%, 07/15/2015 1,504,794 750,000 Willis Group NA, 5.63%, 07/15/2015 749,708 ------------ 26,535,882 ------------ INDUSTRIAL - 10.2% 500,000 Alcan, Inc., 5.75%, 06/01/2035 F 486,835 1,000,000 Ameritech Capital Funding, 6.45%, 01/15/2018 1,044,353 AOL Time Warner, Inc.: 1,100,000 7.63%, 04/15/2031 1,225,014 175,000 7.70%, 05/01/2032 196,815 AT&T Wireless Services, Inc. Senior Notes, 775,000 8.75%, 03/01/2031 1,026,734 441,000 Auburn Hills Trust Debentures, 12.38%, 05/01/2020 655,737 450,000 British Telecom PLC, 8.88%, 12/15/2030 F 602,074 600,000 Bunge Ltd. Finance Corporation Notes, 5.35%, 04/15/2014 593,456 275,000 Caesars Entertainment Senior Notes, 7.50%, 09/01/2009 292,870 700,000 ConAgra Foods, Inc. Subordinated Notes, 9.75%, 03/01/2021 906,299 Continental Airlines, Inc. Pass Thru Certificates: 51,480 6.80%, 07/02/2007 49,117 77,232 6.54%, 09/15/2008 73,358 173,043 8.31%, 10/02/2012 154,806 497,840 6.90%, 01/02/2018 495,845 1,025,000 Cox Communications Inc., 7.13%, 10/01/2012 1,098,263 231,000 Delta Air Lines, Inc. Pass Thru Certificates, 9.50%, 11/18/2008 (Acquired 11/24/2004, Cost $231,000) @ ^ * 203,280 250,000 Deutsche Telekom International Finance BV, 8.75%, 06/15/2030 F 317,967 500,000 Dominion Resources Inc., 7.20%, 09/15/2014 555,484 158,146 FedEx Corp. Pass Thru Certificates, 6.85%, 07/15/2020 171,171 475,000 Ford Capital BV Debentures, 9.50%, 06/01/2010 397,813 403,000 Ford Motor Company Debentures, 9.22%, 09/15/2021 298,220 General Motors Acceptance Corporation Notes: 100,000 7.25%, 03/02/2011 91,914 150,000 6.75%, 12/01/2014 134,943 350,000 Halliburton Company Notes, 5.50%, 10/15/2010 357,476 100,000 Hanson Australia Funding, 5.25%, 03/15/2013 F 99,131 500,000 Health Care Service Corporation Notes, 7.75%, 06/15/2011 (Acquired 06/20/2001 and 01/26/2005; Cost $199,106 and $339,319 respectively)* 559,625 275,000 Highmark, Inc. Notes, 6.80%, 08/15/2013 (Acquired 08/14/2003, Cost $274,373)* 297,723 625,000 Hutchison Whampoa International Ltd., 6.25%, 01/24/2014 (Acquired 06/02/2004 and 02/08/2005; Cost $335,845 and $297,024 respectively)* F 654,068 449,000 ICI North America Debentures, 8.88%, 11/15/2006 462,535 650,000 Knight-Ridder, Inc., 5.75%, 09/01/2017 551,311 400,000 Laboratory Corporation of America, 5.63%, 12/15/2015 405,303 100,000 Marathon Oil Corporation, 6.00%, 07/01/2012 105,623 503,750 The May Department Stores Companies Debentures, 9.75%, 02/15/2021 610,893 444,642 Northwest Airlines, Inc., 7.25%, 07/02/2014 57,803 29,967 Northwest Airlines, Inc. Pass Thru Certificates, Series 1991-C, 8.13%, 08/01/2015 7,192 320,000 Pactiv Corporation, 7.95%, 12/15/2025 365,393 400,000 PCCW Capital II Ltd., 6.00%, 07/15/2013 (Acquired 07/10/2003, Cost $398,132)* F 408,578 700,000 Plum Creek Timberlands, 5.88%, 11/15/2015 709,084 Qwest Capital Funding, Inc., 300,000 7.00%, 08/03/2009 303,000 200,000 7.25%, 02/15/2011 202,500 250,000 Sealed Air Corporation Senior Notes, 5.38%, 04/15/2008 (Acquired 04/09/2003, Cost $248,650)* 250,938 Sprint Capital Corporation: 125,000 7.63%, 01/30/2011 137,841 200,000 8.75%, 03/15/2032 265,416 680,000 TCI Communications, Inc. Debentures, 7.88%, 08/01/2013 768,581 1,000,000 Telecom Italia Capital, 4.95%, 09/30/2014 F 955,088 Tyco International Group S.A.: F 175,000 6.38%, 10/15/2011 181,754 300,000 6.00%, 11/15/2013 306,446 United AirLines, Inc. Pass Thru Certificates: 269,803 7.76%, 04/01/2007 @ ^ 160,932 588,659 6.20%, 03/01/2010 577,093 249,712 U.S. Airways Pass Thru Certificate, Series 1998-1, 6.85%, 07/30/2019 247,478 350,000 Vale Overseas Limited, 8.25%, 01/17/2034 F 402,938 675,000 Viacom, Inc., 7.70%, 07/30/2010 728,598 1,000,000 Wal-Mart Stores, 5.25%, 09/01/2035 970,676 175,000 Waste Management Inc. Notes, 7.00%, 10/15/2006 177,405 ------------ 23,360,790 ------------ UTILITIES - 4.3% 300,000 Aquila, Inc., 7.63%, 11/15/2009 306,000 1,000,000 Duke Capital LLC Notes, 5.67%, 08/15/2014 1,008,523 250,000 Edison Mission Energy Senior Notes, 9.88%, 04/15/2011 291,563 750,000 Energy Transfer Partners, 5.65%, 08/01/2012 (Acquired 08/10/2005, Cost $744,368)* 741,403 300,000 Exelon Corporation Senior Notes, 6.75%, 05/01/2011 319,386 278,737 Kiowa Power Partners LLC, 4.81%, 12/30/2013 (Acquired 11/19/2004; Cost $278,737)* 269,756 Korea Electric Power Corporation: F 100,000 7.75%, 04/01/2013 115,365 365,000 6.75%, 08/01/2027 407,540 750,000 MidAmerican Energy Holdings Company Senior Notes, 7.63%, 10/15/2007 781,644 425,000 ONEOK, Inc. Senior Notes, 7.13%, 04/15/2011 459,506 850,000 Pacific Gas & Electric Company, 6.05%, 03/01/2034 879,715 300,000 PPL Energy Supply, LLC Senior Notes, 6.40%, 11/01/2011 316,211 175,000 PSE&G Energy Holdings LLC Senior Notes, 8.50%, 06/15/2011 187,250 PSE&G Power LLC: 250,000 7.75%, 04/15/2011 276,795 350,000 5.00%, 04/01/2014 337,692 544,737 RGS (I&M) Funding Corporation Debentures, 9.82%, 12/07/2022 698,979 1,000,000 System Energy Resources 1st Mortgage, 4.88%, 10/01/2007 992,945 200,000 Tristate Gen & Trans Assn, Series 2003, 6.04%, 01/31/2018 (Acquired 10/14/2003; Cost $200,000)* 205,918 500,000 Vectren Utility Holdings, 6.63%, 12/01/2011 535,618 550,000 The Williams Companies, Inc. Notes, 8.13%, 03/15/2012 599,500 ------------ 9,731,309 ------------ MORTGAGE-BACKED SECURITIES - 30.5% Bank of America Alternative Loan Trust: 870,520 Series 2003-4, Class 2A1, 5.00%, 06/25/2018 860,797 1,143,235 Series 2003-11, Class 4A1, 4.75%, 01/25/2019 1,112,868 828,616 Series 2004-11, Class 4A1, 5.50%, 12/25/2019 829,651 1,453,382 Series 2005-2, Class 4A1, 5.500, 03/25/2020 1,453,442 1,698,937 Series 2005-2, Class 1CB2, 5.50%, 03/25/2035 1,692,410 1,659,584 Series 2005-9, Class 1CB3, 5.50%, 10/25/2035 1,654,855 992,031 Series 2005-11, Class 1CB4, 5.50%, 12/25/2035 989,628 1,293,539 Chase Mortgage Finance Corporation, Series 2003-S13, Class A11, 5.50%, 11/25/2033 1,291,061 887,430 Citicorp Mortgage Securities, Inc., Series 2004-3, Class A2, 5.25%, 05/25/2034 880,032 1,500,000 Countrywide Alternative Loan Trust, Series 2005-10CB, Class 1A6, 5.50%, 05/25/2035 1,484,067 1,159,679 Countrywide Home Loans, Inc., Series 2003-39, Class A5, 5.00%, 05/25/2012 1,146,806 1,801,396 CS First Boston Mortgage Securities Corporation, Series 2004-4, Class 2A5, 5.50%, 06/25/2015 1,797,829 45,434 Deutsche Mortgage Securities, Inc., Series 2004-1, Class 3A3, 3.69%, 09/25/2033 45,279 1,794,136 Federal Gold Loan Mortgage Corporation (FGLMC), 6.50%, 06/01/2029 1,845,514 Federal Home Loan Mortgage Corporation (FHLMC): 399,356 6.50%, 07/01/2014 410,282 299,528 6.00%, 05/01/2017 305,761 1,073,109 5.50%, 11/01/2022 1,074,214 944,955 5.50%, 07/01/2023 945,713 613,197 Series 2695, Class UA, 5.50%, 09/15/2014 617,911 871,150 Series R001, Class AE, 4.38%, 04/15/2015 851,885 1,122,859 Series 2539, Class QB, 5.00%, 09/15/2015 1,121,978 866,216 Series 2857, Class VA, 5.00%, 09/15/2015 859,227 1,977,164 Series R003, Class VA, 5.50%, 08/15/2016 1,995,288 250,000 Series 2533, Class PC, 5.00%, 10/15/2017 249,988 348,930 Series 206, Class E, 0.00%, 07/15/2019 345,907 235,387 Series 141, Class D, 5.00%, 05/15/2021 234,738 147,849 Series 1074, Class I, 6.75%, 05/15/2021 147,594 210,707 Series 1081, Class K, 7.00%, 05/15/2021 210,649 81,493 Series 1101, Class M, 6.95%, 07/15/2021 81,496 151,129 Series 163, Class F, 6.00%, 07/15/2021 150,766 298,881 Series 188, Class H, 7.00%, 09/15/2021 298,161 155,547 Series 1286, Class A, 6.00%, 05/15/2022 155,277 157,583 Series 2531, Class N, 4.00%, 07/15/2027 155,848 132,722 Series 2141, Class N, 5.55%, 11/15/2027 133,292 575,000 Series 2664, Class LG, 5.50%, 07/15/2028 577,534 Federal National Mortgage Association (FNMA): 1,915,140 5.50%, 07/01/2015 1,932,719 705,402 5.50%, 12/01/2016 710,573 626,081 5.00%, 10/01/2017 620,381 699,322 5.00%, 11/01/2017 692,956 1,084,462 5.00%, 12/01/2017 1,074,589 3,220,189 5.00%, 02/01/2018 3,190,873 589,040 5.00%, 06/01/2018 583,815 780,669 5.00%, 10/01/2018 773,439 1,108,626 5.50%, 01/01/2023 1,109,180 1,020,250 5.50%, 07/01/2023 1,020,452 184,000 5.00%, 10/01/2023 180,086 315,518 5.50%, 01/01/2032 313,352 1,051,362 5.50%, 07/01/2033 1,043,652 665,559 5.00%, 11/01/2033 647,203 1,571,188 5.50%, 02/01/2035 1,557,307 1,150,836 5.50%, 02/01/2035 1,140,669 1,135,223 5.50%, 03/01/2035 1,124,343 1,000,000 Series 2002-73, Class OC, 5.00%, 04/25/2014 998,760 1,175,000 Series 2002-82, Class XC, 5.00%, 05/25/2014 1,173,484 525,000 Series 2003-4, Class PC, 5.00%, 12/25/2014 524,009 260,897 Series 2002-70, Class PL, 5.00%, 04/25/2015 260,498 1,000,000 Series 2003-27, Class OJ, 5.00%, 07/25/2015 997,032 1,150,000 Series 2002-94, Class MC, 5.00%, 08/25/2015 1,146,834 500,000 Series 2003-24, Class PC, 5.00%, 11/25/2015 498,515 2,000,000 Series 2002-74, Class TD, 5.00%, 12/25/2015 1,991,484 1,000,000 Series 2003-18, Class GB, 5.00%, 03/25/2016 997,921 144,037 Series 2002-56, Class MC, 5.50%, 09/25/2017 145,545 91,526 Series 1989-37, Class G, 8.00%, 07/25/2019 96,218 130,766 Series 1989-94, Class G, 7.50%, 12/25/2019 137,154 34,380 Series 1990-58, Class J, 7.00%, 05/25/2020 35,713 150,643 Series 1990-105, Class J, 6.50%, 09/25/2020 151,457 56,517 Series 1990-105, Class G, 7.00%, 09/25/2020 57,916 52,965 Series 1991-1, Class G, 7.00%, 01/25/2021 54,464 129,380 Series 1991-86, Class Z, 6.50%, 07/25/2021 130,810 462,369 Series 2003-28, Class KA, 4.25%, 03/25/2022 440,360 55,973 Series G92-30, Class Z, 7.00%, 06/25/2022 57,913 93,306 Series 1992-150, Class MA, 5.50%, 09/25/2022 92,447 161,861 Series 1993-58, Class H, 5.50%, 04/25/2023 162,856 1,125,000 Series 2003-17, Class QR, 4.50%, 11/25/2025 1,117,683 1,190,796 Series 2003-31, Class KG, 4.50%, 12/25/2028 1,189,004 195,831 Series 1998-66, Class C, 6.00%, 12/25/2028 197,048 152,539 Series 2003-44, Class AB, 3.75%, 05/25/2033 144,724 1,907,029 First Horizon Alternative Mortgage Securities, Series 2005-FA7, Class 2A1, 5.00%, 09/25/2020 1,887,693 400,000 GMAC Mortgage Corporation Loan Trust: Series 2004-GH1, 4.39%, 12/25/2025 396,659 Government National Mortgage Association (GNMA): 77,697 4.00%, 02/16/2026 77,224 126,475 6.00%, 09/16/2028 126,364 98,844 6.00%, 12/20/2028 101,159 803,189 6.00%, 11/20/2033 821,583 152,562 Impac CMB Trust, Series 2004-4, Class 2A2, 5.25%, 09/25/2034 150,653 1,423,547 Master Alternative Loans Trust, Series 2003-5, Class 6A1, 6.00%, 08/25/2033 1,417,709 1,006,027 Residential Accredit Loans, Inc., Series 2004-QS6, Class A1, 5.00%, 05/25/2019 991,728 800,000 Residential Funding Mortgage Security I, Series 2003-S11, Class A2, 4.00%, 06/25/2018 746,590 287,140 Salomon Brothers Mortgage Securities VII, Series 2003-UP2, Class A2, 4.00%, 06/25/2033 277,406 Structured Asset Securities Corporation: 1,500,000 Series 2004-11XS, Class 1A3A, 4.76%, 06/25/2034 1,494,503 90,050 Series 2004-16XS, Class A2, 4.91%, 08/25/2034 89,736 1,204,506 Washington Mutual, Inc. Pass-Thru Certificates, 5.00%, 06/25/2019 1,190,658 1,327,325 Series 2004-CB4, Class 21A, 5.50%, 12/25/2019 1,330,212 ------------ 69,623,063 ------------ INTERNATIONAL (U.S. $ DOMINATED) - 0.9% 50,000 Corp Andina De Fomento Notes, 7.38%, 01/18/2011 F 54,865 175,000 Landesbank Baden- Wurttemgerg Subordinated Notes, 6.35%, 04/01/2012 F 190,929 PEMEX Project Funding Master Trust: F 75,000 6.13%, 08/15/2008 76,500 450,000 9.13%, 10/13/2010 517,950 United Mexican States Notes: F 150,000 9.88%, 02/01/2010 175,950 400,000 7.50%, 04/08/2033 473,600 510,000 National Bank of Hungary Yankee Debentures, 8.88%, 11/01/2013 645,064 ------------ 2,134,858 ------------ MUNICIPAL BONDS - 0.4% Tobacco Settlement Financing Corporation: 180,000 Series 2001-A, 5.92%, 06/01/2012 178,888 667,896 Series 2001-A, 6.36%, 05/15/2025 673,019 ------------ 851,907 ------------ U.S. GOVERNMENT AGENCY ISSUES - 13.2% 27,600,000 Federal National Mortgage Association (FNMA), 7.25%, 01/15/2010 30,072,435 ------------ 30,072,435 ------------ U.S. TREASURY OBLIGATIONS - 12.1% U.S. Treasury Bonds: 4,175,000 9.25%, 02/15/2016 5,785,799 18,200,000 6.25%, 08/15/2023 21,733,366 ------------ 27,519,165 ------------ Total Long-Term Investments (Cost $218,631,188) 218,044,463 ------------ Shares - ------ SHORT-TERM INVESTMENTS - 3.6% MONEY MARKET FUNDS - 3.6% 8,308,157 Investment Company Cash Reserve Portfolio - AIM Fund 8,308,157 ------------ Total Short-Term Investments (Cost $8,308,157) 8,308,157 ------------ Total Investments (Cost $226,939,345) - 99.1% 226,352,620 ------------ Other Assets in Excess of Liabilities - 0.9% 2,069,705 ------------ TOTAL NET ASSETS - 100.0% $228,422,325 ------------ ------------ @ Security in Default ^ Non Income Producing * Unregistered Security F Foreign Securities See notes to the financial statements BAIRD INTERMEDIATE MUNICIPAL BOND FUND DECEMBER 31, 2005 The Baird Intermediate Municipal Bond Fund seeks current income that is substantially exempt from federal income tax. A secondary objective is to provide total return with relatively low volatility of principal. The Fund generated positive results in 2005 despite the increase in short and intermediate-term interest rates. The Fund's relative performance fell short of the Lehman Brothers 7-Year and 10-Year General Obligation Bond Indices. The Fund's minimal exposure to shorter maturities helped the Fund's relative performance while the Fund's limited exposure to issues longer than ten years in maturity detracted from relative performance. The average maturity of the bonds in the Fund's portfolio at December 31, 2005 was 5.82 years, compared to 9.8 years for the Lehman Brothers 10-Year General Obligation Bond Index and 6.9 years for the Lehman Brothers 7-Year General Obligation Bond Index. The Fund's focus on high quality, pre-refunded issues also detracted from performance to some degree when compared to both indices, as heavy new issuance limited relative returns in this sector. The Lehman Brothers 7-Year and 10-Year General Obligation Bond Indices do not include any pre-refunded or escrowed-to-maturity bonds. With yield spreads on lower quality issues relatively tight by historical standards, we continue to emphasize high quality, intermediate holdings in the Fund. The Fund held a diversified portfolio of 50 municipal bonds across various states at year-end. A December 31, 2005 summary of the Fund's portfolio characteristics including quality distribution and sector allocation appears below. Please note that we are comparing the Fund's 2005 performance to that of the Lehman Brothers 7-Year General Obligation Bond Index, reflecting a decision to make a change in our benchmark. Beginning in 2006, the benchmark to which the Fund will compare its performance is the Lehman Brothers 7-Year General Obligation Bond Index rather than the Lehman Brothers 10-Year General Obligation Bond Index. The Lehman Brothers 7-Year General Obligation Bond Index is an unmanaged, market value weighted index of investment grade state and local general obligation bonds with a maturity of six to eight years. This 7-Year Index is identical in all material respects to the 10-Year Index, except with regard to the maturity of the bonds in the index. We have selected the Lehman Brothers 7-Year General Obligation Bond Index as the Fund's new benchmark because the maturities of the bonds in that index are closer to the historical and expected average maturities of the bonds held by the Fund than are the maturities of the bonds in the 10-Year Index, which are on the long side of the intermediate spectrum. PORTFOLIO CHARACTERISTICS QUALITY DISTRIBUTION* AAA 95% AA 4% BBB 1% SECTOR WEIGHTINGS* Pre-refunded ETM 71% Insured 22% General Obligation 4% Cash 2% Revenue 1% NET ASSETS: $55,323,514 SEC 30-DAY YIELD:** Institutional Class: 3.80% Investor Class: 3.57% AVERAGE DURATION: 4.84 years AVERAGE MATURITY: 5.82 years ANNUALIZED EXPENSE RATIO: Institutional Class: 0.30% Investor Class: 0.55%*** PORTFOLIO TURNOVER RATIO:**** 13.7% TOTAL NUMBER OF HOLDINGS: 50 * Percentages shown are based on the Fund's total net assets. ** SEC yields are based on SEC guidelines and are calculated for the 30 days ended December 31, 2005. *** Includes 0.25% 12b-1 fee. **** Not annualized. BAIRD INTERMEDIATE MUNICIPAL BOND FUND BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INSTITUTIONAL CLASS VALUE OF A $250,000 INVESTMENT Baird Intermediate Lehman Brothers Lehman Brothers Municipal Bond 10-Year General 7-Year General Fund - Institutional Obligation Obligation Date Class Shares Bond Index Index ---- -------------------- --------------- --------------- 3/30/2001 $250,000 $250,000 $250,000 6/30/2001 $255,511 $250,675 $251,525 12/31/2001 $262,544 $255,106 $255,876 6/30/2002 $275,570 $268,754 $269,335 12/31/2002 $290,693 $281,322 $281,429 6/30/2003 $302,139 $294,597 $292,827 12/31/2003 $304,973 $297,785 $297,131 6/30/2004 $300,175 $296,147 $295,081 12/31/2004 $313,163 $311,064 $309,923 6/30/2005 $317,383 $319,401 $315,099 12/31/2005 $317,314 $319,587 $315,540 GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION DATE (3/30/01), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird Intermediate Lehman Brothers Lehman Brothers Municipal Bond 10-Year General 7-Year General Fund - Investor Obligation Obligation Date Class Shares Bond Index Index ---- ------------------ --------------- -------------- 3/30/2001 $10,000 $10,000 $10,000 6/30/2001 $10,217 $10,027 $10,061 12/31/2001 $10,474 $10,204 $10,235 6/30/2002 $10,980 $10,750 $10,773 12/31/2002 $11,569 $11,253 $11,257 6/30/2003 $12,007 $11,784 $11,713 12/31/2003 $12,111 $11,912 $11,885 6/30/2004 $11,911 $11,846 $11,803 12/31/2004 $12,402 $12,443 $12,397 6/30/2005 $12,560 $12,776 $12,604 12/31/2005 $12,542 $12,784 $12,622 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (3/30/01), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD INTERMEDIATE MUNICIPAL BOND FUND AVERAGE ANNUAL TOTAL RETURNS For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1) - --------------------------------------- -------- ----------------------- Baird Intermediate Municipal Bond Fund - Institutional Class Shares 1.33% 5.14% Baird Intermediate Municipal Bond Fund - Investor Class Shares 1.13% 4.88% Lehman Brothers 7-Year General Obligation Bond Index(2) 1.81% 4.85% Lehman Brothers 10-Year General Obligation Bond Index(3) 2.74% 5.76%
(1) For the period from March 30, 2001 (commencement of operations) through December 31, 2005. (2) The Lehman Brothers 7-Year General Obligation Bond Index is an unmanaged, market value weighted index comprised of investment grade state and local general obligation bonds that have been issued as part of an offering of at least $50 million, have a minimum amount outstanding of at least $5 million, have been issued within the last five years and have a maturity of six to eight years. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. The Lehman Brothers 7-Year General Obligation Bond Index has been selected to replace the Lehman Brothers 10-Year General Obligation Bond Index as the Fund's benchmark because the average maturity of the bonds owned by the Fund are closer to the maturity of the bonds in the Lehman Brothers 7-Year General Obligation Bond Index (6-8 years) than the maturity of the bonds in the Lehman Brothers 10-Year General Obligation Bond Index (8-12 years). (3) The Lehman Brothers 10-Year General Obligation Bond Index is an unmanaged, market value weighted index of bond prices compiled by Lehman Brothers. The index is comprised of investment grade state and local general obligation bonds that have been issued as part of an offering of at least $50 million, have a minimum amount outstanding of at least $5 million, have been issued within the last five years, and have a maturity of eight to twelve years. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD INTERMEDIATE MUNICIPAL BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Principal Amount Value --------- ----- MUNICIPAL BONDS - 95.6% ALABAMA - 0.9% $ 460,000 Mobile Alabama, 6.20%, 02/15/2007 (ETM) $ 471,978 ----------- ARKANSAS - 1.3% 690,000 Springdale Arkansas Sales & Use Tax Revenue, 4.00%, 07/01/2016 (MBIA Insured) 691,835 ----------- CALIFORNIA - 1.8% 500,000 Golden State Tobacco Securitization Corporation, 6.25%, 06/01/2033 543,760 400,000 Santa Rosa California Hospital Revenue, 10.30%, 03/01/2011 (ETM) 471,272 ----------- 1,015,032 ----------- COLORADO - 4.9% 2,000,000 Adams County Colorado Single Family Mortgage Revenue, 8.88%, 08/01/2012 (Pre-refunded to 08-01-2012) 2,578,580 110,000 Colorado Springs Colorado Utilities Revenue, 5.80%, 11/15/2010 (ETM) 116,438 ----------- 2,695,018 ----------- DELAWARE - 3.1% 1,500,000 Delaware State Economic Development Authority Revenue, 6.75%, 01/01/2013 (ETM) 1,716,420 ----------- FLORIDA - 1.3% 300,000 Jacksonville Florida Health Facility Authority Hospital Revenue, 11.50%, 10/01/2012 (ETM) 438,405 270,000 Orange County Florida Health Revenue, 8.75%, 10/01/2009 (ETM) 300,100 ----------- 738,505 ----------- GEORGIA - 2.2% 1,020,000 Fulton County Georgia Hospital Authority Revenue, 7.88%, 10/01/2013 (ETM) 1,231,354 ----------- HAWAII - 6.5% 3,245,000 Honolulu Hawaii City & County, 5.25%, 03/01/2017 (Pre-refunded to 3-01-2013) 3,569,208 ----------- ILLINOIS - 5.0% 1,440,000 Chicago Illinois Metropolitan Water Reclamation District General Obligation, 7.00%, 12/01/2010 (ETM) 1,667,419 1,000,000 Lake County Community High School District No 128, 5.00%, 01/01/2013 1,076,860 ----------- 2,744,279 ----------- INDIANA - 2.0% 745,000 Baugo Indiana School Building Corporation, 5.50%, 01/15/2012 (AMBAC Insured) (ETM) 822,778 215,000 Indiana Toll Road Commission, 9.00%, 01/01/2015 (ETM) 282,175 ----------- 1,104,953 ----------- IOWA - 3.1% 1,010,000 Des Moines Iowa Metropolitan Wastewater Reclamation Authority, 5.00%, 06/01/2015 (MBIA Insured) 1,090,436 585,000 Muscatine Iowa Electric Revenue, 6.70%, 01/01/2013 (ETM) 645,536 ----------- 1,735,972 ----------- LOUISIANA - 7.5% 745,000 Denham Springs-Livingston Housing and Mortgage Finance Authority, 7.20%, 08/01/2010 (ETM) 859,827 1,000,000 Houma-Terrebonne Public Trust Financing Authority Single Family Mortgage Revenue, 7.30%, 04/01/2011 (ETM) 1,170,460 400,000 Houma-Terrebonne Public Trust Financing Authority, 7.30%, 04/01/2010 (ETM) 457,840 1,450,000 Jefferson Parish Louisiana Home Mortgage Authority, 7.10%, 08/01/2010 (ETM) 1,674,039 ----------- 4,162,166 ----------- MINNESOTA - 1.4% 695,000 Western Minnesota Municipal Power Agency, 6.38%, 01/01/2016 (ETM) 776,586 ----------- MISSISSIPPI - 1.9% 600,000 Mississippi Housing Financial Corporation, 0.00%, 06/01/2015 (ETM) 396,966 610,000 Mississippi State, 6.20%, 02/01/2008 (ETM) 640,781 ----------- 1,037,747 ----------- NEVADA - 3.9% 1,965,000 Reno Nevada Capital Improvement Revenue, 5.50%, 06/01/2019 (Pre-refunded to 06-01-2012) 2,170,893 ----------- NEW JERSEY - 4.1% 400,000 New Jersey State Transit Trust, 5.00%, 06/15/2017 (Pre-refunded to 06-15-2009) 421,296 1,000,000 New Jersey State Transportation Trust Fund Authority, 6.00%, 12/15/2017 (Pre-refunded to 12-15-2011) 1,130,240 New Jersey State Turnpike Authority: (ETM) 577,000 6.75%, 01/01/2009 575,915 130,000 6.50%, 01/01/2016 153,175 ----------- 2,280,626 ----------- NEW YORK - 1.9% 1,000,000 Triborough Bridge & Tunnel Authority, 5.25%, 01/01/2014 (ETM) 1,045,620 ----------- OHIO - 0.3% 160,000 Miamisburg Ohio Water Revenue, 7.00%, 11/15/2016 (ETM) 187,658 ----------- OKLAHOMA - 5.0% 2,360,000 Tulsa County Oklahoma Home Financing Authority Single Family Mortgage Revenue, 6.90%, 08/01/2011 (ETM) 2,760,350 ----------- PENNSYLVANIA - 6.3% 850,000 Philadelphia Pennsylvania Gas Works, 7.00%, 05/15/2020 (ETM) 1,029,460 1,405,000 Pittsburgh Pennsylvania Water & Sewer Authority, 7.25%, 09/01/2014 (ETM) 1,619,572 1,000,000 Wilson Pennsylvania Area School District, 0.00%, 05/15/2011 (AMBAC Insured) 811,680 ----------- 3,460,712 ----------- SOUTH CAROLINA - 0.6% 285,000 Greenville South Carolina Waterworks Revenue, 7.00%, 02/01/2010 (ETM) 323,817 ----------- SOUTH DAKOTA - 1.6% 755,000 Heartland Consumers Power District, 7.00%, 01/01/2016 (ETM) 868,507 ----------- TENNESSEE - 4.3% 520,000 Metropolitan Government Nashville & Davidson County Tennessee H&E, 6.10%, 07/01/2010 (ETM) 550,358 1,545,000 Metropolitan Government Nashville & Davidson County Tennessee Water & Sewer Revenue, 6.50%, 12/01/2014 (ETM) 1,831,273 ----------- 2,381,631 ----------- TEXAS - 19.5% 1,125,000 Barbers Hill Texas Independent School District General Obligation, 5.00%, 02/15/2017 (PSF Guaranteed) 1,207,485 1,195,000 Bell County Texas General Obligation, 5.00%, 02/15/2012 (FSA Insured) 1,283,968 1,000,000 Copperas Cove Texas Independent School District, 5.00%, 08/15/2016 (PSF Guaranteed) 1,077,450 1,920,000 Houston Texas Sewer System Revenue, 9.38%, 10/01/2013 (ETM) 2,462,554 1,735,000 Lufkin Texas Independent School District, 5.00%, 08/15/2015 (PSF Guaranteed) 1,872,065 730,000 Sam Rayburn Texas Municipal Power Agency, 6.00%, 09/01/2010 (ETM) 793,663 575,000 Socorro Texas Independent School District, 5.25%, 08/15/2012 (PSF Guaranteed) 625,767 345,000 Texas Public Building Authority Revenue, 7.13%, 08/01/2011 (ETM) 390,526 1,000,000 University of Houston Texas, 5.25%, 02/15/2012 (FSA Insured) 1,088,610 ----------- 10,802,088 ----------- UTAH - 1.3% 605,000 Salt Lake City Utah Hospital Revenue, 8.13%, 05/15/2015 (ETM) 734,815 ----------- WASHINGTON - 3.9% 1,025,000 Clark County School District No. 037, 5.13%, 12/01/2011 1,099,005 1,000,000 Washington State, 5.00%, 09/01/2013 (FGIC Insured) 1,069,930 ----------- 2,168,935 ----------- Total Municipal Bonds (Cost $52,835,288) 52,876,705 ----------- Shares - ------ SHORT-TERM INVESTMENTS - 1.9% MONEY MARKET FUNDS - 1.9% 1,074,551 Tax Free Investment Company Cash Reserve Portfolio - AIM Fund 1,074,551 ----------- Total Short-Term Investment (Cost $1,074,551) 1,074,551 ----------- Total Investments (Cost $53,909,839) - 97.5% 53,951,256 ----------- Other Assets in Excess of Liabilities - 2.5% 1,372,258 ----------- TOTAL NET ASSETS - 100.0% $55,323,514 ----------- ----------- ETM - Escrowed to maturity See notes to the financial statements BAIRD CORE PLUS BOND FUND DECEMBER 31, 2005 The Baird Core Plus Bond Fund seeks an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers U.S. Universal Bond Index. The Lehman Brothers U.S. Universal Bond Index is an unmanaged, market value weighted index of fixed income securities issued in U.S. dollars, including U.S. government and investment grade debt, non-investment grade debt, asset-backed and mortgage-backed securities, Eurobonds, 144A securities and emerging market debt, with maturities of at least one year. The Fund delivered positive results in 2005 but trailed the Index. The following factors contributed positively to the Fund's relative performance: o The Fund's overall portfolio structure (designed to under-weight 2- year, 7 to 10-year and 30-year maturities and over-weight 4 to 5-year, 11-year and 20-year maturities) which benefited from flattening in the yield curve; o The Fund's significantly greater exposure to asset-backed securities than the Index; and o Strong performance of individual corporate issues owned by the Fund. Detracting from the Fund's relative performance in 2005 were its overweighting of BBB-rated corporate bonds relative to the Index, underweighting of below investment grade emerging market issuers, underweighting of mortgage-pass through securities, and exposure to issues in the airline, auto and media sectors. The Fund maintained its duration-neutral strategy vis-a-vis the Index, holding a broadly diversified portfolio of over 120 securities at year end. The Fund ended 2005 with a yield advantage versus the Index. This yield advantage, combined with exposure to specific sectors which we believe have superior total return potential (asset-backed securities, well-structured mortgage-backed securities and issues in the airline, auto and media sectors), should enhance the Fund's prospects of adding value over its benchmark in the coming year. PORTFOLIO CHARACTERISTICS QUALITY DISTRIBUTION* U.S. Treasury 15% U.S. Gov't Agency 38% AAA 9% A 7% BBB 22% Below Baa 6% Not Rated 3% SECTOR WEIGHTINGS* Asset-Backed 6% Commercial Mortgage-Backed 3% Financials 9% Industrials 20% Utilities 6% Mortgage-Backed 30% International 1% Municipal 1% U.S. Gov't Agency 7% U.S. Treasuries 14% Cash 3% NET ASSETS: $32,623,168 SEC 30-DAY YIELD:** Institutional Class: 5.31% Investor Class: 5.08% AVERAGE DURATION: 4.61 years AVERAGE MATURITY: 8.50 years ANNUALIZED EXPENSE RATIO: Institutional Class: 0.30% Investor Class: 0.55%*** PORTFOLIO TURNOVER RATIO:**** 37.6% TOTAL NUMBER OF HOLDINGS: 127 * Percentages shown are based on the Fund's total net assets. ** SEC yields are based on SEC guidelines and are calculated for the 30 days ended December 31, 2005. *** Includes 0.25% 12b-1 fee. **** Not annualized. BAIRD CORE PLUS BOND FUND BAIRD CORE PLUS BOND FUND - INSTITUTIONAL CLASS VALUE OF A $250,000 INVESTMENT Baird Core Plus Bond Fund - Lehman Brothers U.S. Date Institutional Class Shares Universal Bond Index ---- -------------------------- -------------------- 9/29/2000 $250,000 $250,000 12/31/2000 $264,734 $259,261 6/30/2001 $273,977 $268,929 12/31/2001 $282,819 $280,238 6/30/2002 $287,185 $289,675 12/31/2002 $302,329 $307,801 6/30/2003 $321,649 $323,008 12/31/2003 $329,342 $325,717 6/30/2004 $331,030 $326,267 12/31/2004 $350,298 $341,904 6/30/2005 $360,122 $350,493 12/31/2005 $358,114 $351,187 GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD CORE PLUS BOND FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird Core Plus Bond Fund - Lehman Brothers U.S. Date Investor Class Shares Universal Bond Index ---- --------------------------- -------------------- 9/29/2000 $10,000 $10,000 12/31/2000 $10,573 $10,370 6/30/2001 $10,932 $10,757 12/31/2001 $11,281 $11,210 6/30/2002 $11,443 $11,587 12/31/2002 $12,024 $12,312 6/30/2003 $12,787 $12,920 12/31/2003 $13,057 $13,029 6/30/2004 $13,119 $13,051 12/31/2004 $13,860 $13,676 6/30/2005 $14,221 $14,020 12/31/2005 $14,127 $14,047 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD CORE PLUS BOND FUND AVERAGE ANNUAL TOTAL RETURNS SINCE For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1) - --------------------------------------- -------- ---------- ----------------- Baird Core Plus Bond Fund - Institutional Class Shares 2.23% 6.23% 7.08% Baird Core Plus Bond Fund - Investor Class Shares 1.93% 5.96% 6.80% Lehman Brothers U.S. Universal Bond Index(2) 2.72% 6.26% 6.69%
(1) For the period from September 29, 2000 (commencement of operations) through December 31, 2005. (2) The Lehman Brothers U.S. Universal Bond Index is an unmanaged, market value weighted index of fixed income securities issued in U.S. dollars, including U.S. government and investment grade debt, non- investment grade debt, asset-backed and mortgage-backed securities, Eurobonds, 144A securities and emerging market debt, with maturities of at least one year. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD CORE PLUS BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Principal Amount Value --------- ----- LONG-TERM INVESTMENTS - 97.5% ASSET-BACKED SECURITIES - 6.4% $ 103,494 Bear Stearns Asset Backed Securities Trust, Series 2003-AC1, Class A1, 4.10%, 05/25/2033 $ 100,883 140,000 GMAC Mortgage Corporation Loan Trust, Series 2004-HE5, Class A3, 3.97%, 09/25/2034 137,814 Green Tree Financial Corporation: 458,012 Series 1998-4, Class A5, 6.18%, 12/01/2017 451,155 52,907 Series 1997-1, Class A5, 6.86%, 03/15/2028 54,420 166,776 New Century Home Equity Loan Trust, Series 2003-5, Class AI3, 3.56%, 11/25/2033 165,805 94,537 Oakwood Mortgage Investors, Inc., Series 1999-B, Class A3, 6.45%, 11/15/2017 87,089 Residential Asset Mortgage Products, Inc.: 65,990 Series 2003-RS11, Class AI3, 3.56%, 08/25/2028 65,781 300,000 Series 2003-RS10, Class AI7, 4.85%, 11/25/2033 298,024 450,000 Residential Asset Securities Corporation, Series 2003-KS5, Class AI6, 3.62%, 07/25/2033 436,220 300,000 Structured Asset Securities Corporation, Series 2005-7XS, Class 1A4B, 5.44%, 04/25/2035 296,037 ----------- 2,093,228 ----------- COMMERCIAL MORTGAGE - 3.0% 300,000 GE Capital Commercial Mortgage Corporation, Series 2002-3A, Class AR, 5.00%, 12/10/2037 298,716 Government National Mortgage Association (GNMA): 250,000 4.49%, 04/16/2023 243,257 300,000 4.66%, 04/16/2029 292,177 150,000 Mach One Trust, Series 2004-1A, Class A2, 4.78%, 05/28/2040 (Acquired 07/12/2004; Cost $151,431)* 147,957 ----------- 982,107 ----------- FINANCIAL - 8.7% 175,000 AMVESCAP, Inc. Senior Notes, 5.90%, 01/15/2007 175,601 200,000 American General Finance Corporation Senior Notes, 8.45%, 10/15/2009 222,176 100,000 Countrywide Home Loans, Inc., 6.25%, 04/15/2009 103,117 350,000 First National Bank of Omaha Subordinated Notes, 7.32%, 12/01/2010 368,888 250,000 First Union Capital, 7.94%, 01/15/2027 265,741 150,000 Glencore Funding LLC, 6.00%, 04/15/2014 (Acquired 03/31/2004, Cost $148,928 respectively)* 141,081 375,000 Liberty Mutual Insurance Notes, 7.70%, 10/15/2097 (Acquired 03/26/2003; Cost $239,982)* 395,302 100,000 Marsh & McLennan Companies, Inc., 5.38%, 07/15/2014 98,422 50,000 Met Life Global Funding I Notes, 4.75%, 06/20/2007 (Acquired 09/15/2004, Cost $50,848)* 49,828 175,000 PNC Funding Corporation, 6.13%, 02/15/2009 180,611 100,000 Principal Financial Group (AU) Senior Notes, 8.20%, 08/15/2009 (Acquired 09/16/2005, Cost $111,206)* F 109,632 100,000 Residential Capital Corporation, 6.38%, 06/30/2010 101,611 100,000 Transamerica Capital II, 7.65%, 12/01/2026 (Acquired 10/21/2003, Cost $108,381)* 116,905 457,000 Washington Mutual Capital I, 8.38%, 06/01/2027 492,473 ----------- 2,821,388 ----------- INDUSTRIAL - 19.8% 40,059 America West Airlines, Pass Thru Certificate, 8.54%, 07/02/2007 39,623 300,000 AOL Time Warner, Inc. Senior Notes, 7.63%, 04/15/2031 334,095 100,000 AT&T Wireless Services, Inc. Senior Notes, 8.75%, 03/01/2031 132,482 565,104 Atlas Air, Inc. Pass-Thru Certificates, 8.71%, 07/02/2021 576,157 75,000 Best Foods Notes, Series C, 6.15%, 01/15/2006 75,023 Bunge Ltd. Finance Corporation Notes: 150,000 5.35%, 04/15/2014 148,364 100,000 5.10%, 07/15/2015 96,752 375,000 Clear Channel Communications, 4.50%, 01/15/2010 358,650 Continental Airlines, Inc. Pass Thru Certificates: 78,936 6.80%, 07/02/2007 75,313 3,653 7.42%, 10/01/2008 3,381 76,282 6.90%, 01/02/2018 75,976 100,000 Cox Communications Inc. Notes, 7.88%, 08/15/2009 107,429 462,000 Delta Air Lines, Inc. Pass Thru Certificates, 9.50%, 11/18/2008 (Acquired 11/24/2004, Cost $462,000)* ^ @ 406,560 100,000 Deutsche Telekom International Finance BV, 8.75%, 06/15/2030 F 127,187 250,000 Dollar General Corporation, 8.63%, 06/15/2010 274,375 400,000 Ford Motor Company Debentures, 9.22%, 09/15/2021 296,000 General Motors Acceptance Corporation Notes: 75,000 6.75%, 01/15/2006 74,951 150,000 6.75%, 12/01/2014 134,943 175,000 General Motors Nova Scotia Finance Company, 6.85%, 10/15/2008 131,250 100,000 Halliburton Company Notes, 5.50%, 10/15/2010 102,136 100,000 Health Care Service Corporation Notes, 7.75%, 06/15/2011 (Acquired 01/26/2005; Cost $113,106)* 111,925 150,000 Hutchison Whampoa International Limited, 6.25%, 01/24/2014 (Acquired 06/23/2005; Cost $160,918)* F 156,976 271,250 The May Department Stores Companies Debentures, 9.75%, 02/15/2021 328,942 533,570 Northwest Airlines, Inc., 7.25%, 07/02/2014 69,364 PCCW Capital II Ltd., 200,000 6.00%, 07/15/2013 (Acquired 07/10/2003, Cost $199,066)* F 204,289 273,370 Southwest Airlines Company Pass-Thru Certificates, 7.67%, 01/02/2014 284,903 100,000 Sprint Capital Corporation, 8.75%, 03/15/2032 132,708 250,000 Sungard Data Systems Inc. Notes, 3.75%, 01/15/2009 227,500 175,000 TCI Communications, Inc. Debentures, 7.88%, 08/01/2013 197,797 25,000 Time Warner Entertainment Senior Notes, 8.88%, 10/01/2012 29,119 50,000 Tyco International Group S.A., 6.00%, 11/15/2013 F 51,074 640,879 United AirLines, Inc. Pass Thru Certificates, 6.20%, 09/01/2008 628,287 83,000 Univision Communication, Inc., 3.50%, 10/15/2007 80,516 100,000 Vale Overseas Limited, 8.25%, 01/17/2034 115,125 Viacom, Inc., 150,000 7.70%, 07/30/2010 161,911 100,000 Wharf International Finance Ltd, 7.63%, 03/13/2007 F 102,983 ----------- 6,454,066 ----------- UTILITIES - 5.7% 300,000 Edison Mission Energy Senior Notes, 9.88%, 04/15/2011 349,875 150,000 Energy Transfer Partner, 5.65%, 08/01/2012 (Acquired 08/10/2005, Cost $148,874)* 148,281 92,913 Kiowa Power Partners LLC, 4.81%, 12/30/2013 (Acquired 11/19/2004; Cost $92,913)* 89,937 400,000 ONEOK, Inc. Senior Notes, 7.13%, 04/15/2011 432,476 50,000 Pacific Gas & Electric Company 1st Mortgage, 6.05%, 03/01/2034 51,748 200,000 PSE&G Energy Holdings LLC Senior Notes, 8.50%, 06/15/2011 214,000 50,000 PSI Energy, Inc. Debentures, 7.85%, 10/15/2007 52,294 297,129 RGS (I&M) Funding Corporation Debentures, 9.82%, 12/07/2022 381,261 100,000 Tristate Gen & Trans Assn, Series 2003, 6.04%, 01/31/2018 (Acquired 10/14/2003; Cost $100,000)* 102,959 50,000 Williams Cos. Inc. Notes, 7.13%, 09/01/2011 51,937 ----------- 1,874,768 ----------- MORTGAGE-BACKED SECURITIES - 30.3% 256,479 Bank of America Alternative Loan Trust, Series 2005-2, Class 4A1, 5.50%, 03/25/2020 256,490 Federal Gold Loan Mortgage Corporation (FGLMC): 134,787 6.00%, 05/01/2017 137,593 100,914 6.50%, 09/01/2028 103,842 164,869 6.50%, 12/01/2028 169,652 121,584 6.50%, 05/01/2029 125,065 123,154 6.50%, 06/01/2029 126,680 Federal Home Loan Mortgage Corporation (FHLMC): 261,345 Series R001, Class AE, 4.38%, 04/15/2015 255,566 400,000 Series 2567, Class OD, 5.00%, 08/15/2015 399,634 439,380 Series 2539, Class QB, 5.00%, 09/15/2015 439,035 30,411 Series 1053, Class G, 7.00%, 03/15/2021 30,392 66,971 Series 136, Class E, 6.00%, 04/15/2021 66,757 300,000 Series 2673, Class NC, 5.50%, 05/15/2021 304,451 282,544 Series 2804, Class VC, 5.00%, 07/15/2021 276,736 55,669 Series 1122, Class G, 7.00%, 08/15/2021 55,573 129,055 Series 1186, Class I, 7.00%, 12/15/2021 129,124 250,000 Series 2598, Class QC, 4.50%, 06/15/2027 246,533 140,074 Series 2531, Class N, 4.00%, 07/15/2027 138,531 Federal National Mortgage Association (FNMA): 368,707 5.00%, 02/01/2018 365,351 260,223 5.00%, 10/01/2018 257,813 259,499 5.00%, 11/01/2018 257,095 197,054 5.50%, 03/01/2023 197,093 346,518 5.50%, 07/01/2023 346,586 79,349 6.50%, 09/01/2028 81,739 137,161 6.50%, 02/01/2029 141,292 283,966 5.50%, 01/01/2032 282,017 308,479 5.50%, 02/01/2035 305,754 277,053 5.50%, 02/01/2035 274,606 400,000 Series 2002-82, Class XC, 5.00%, 05/25/2014 399,484 401,279 Series 2002-74, Class TC, 5.00%, 03/25/2015 400,648 94,872 Series 2002-70, Class PL, 5.00%, 04/25/2015 94,726 350,000 Series 2002-57, Class PE, 5.50%, 09/25/2015 351,916 300,000 Series 2003-16, Class PC, 5.00%, 10/25/2015 299,184 25,147 Series 1989-94, Class G, 7.50%, 12/25/2019 26,376 32,900 Series 1990-15, Class J, 7.00%, 02/25/2020 33,462 89,269 Series 1990-76, Class G, 7.00%, 07/25/2020 92,319 21,074 Series 1991-21, Class J, 7.00%, 03/25/2021 21,589 478,250 Series 1992-129, Class L, 6.00%, 07/25/2022 486,527 153,953 Series 1993-32, Class H, 6.00%, 03/25/2023 154,760 194,233 Series 1993-58, Class H, 5.50%, 04/25/2023 195,427 428,687 Series 2003-31, Class KG, 4.50%, 12/25/2028 428,041 73,191 Series 2003-44, Class AB, 3.75%, 05/25/2033 69,441 Government National Mortgage Association (GNMA): 141,158 6.50%, 08/15/2027 147,811 228,578 6.00%, 12/20/2028 233,929 83,551 6.50%, 01/20/2029 86,831 78,855 6.50%, 02/20/2029 81,950 214,184 6.00%, 11/20/2033 219,089 280,396 Master Alternative Loans Trust, Series 2003-5, Class 6A1, 6.00%, 08/25/2033 279,246 ----------- 9,873,756 ----------- INTERNATIONAL (U.S. $ DOMINATED) - 1.4% 400,000 PEMEX Project Funding Master Trust, 9.13%, 10/13/2010 F 460,400 ----------- TAXABLE MUNICIPAL BONDS - 0.6% 200,656 Tobacco Settlement Financing Corporation, Series 2001-A, Class A, 6.36%, 05/15/2025 202,194 ----------- Total Municipal Bonds (Cost $200,598) 202,194 ----------- U.S. GOVERNMENT AGENCY ISSUES - 7.3% 2,175,000 Federal National Mortgage Association (FNMA): 7.25%, 01/15/2010 2,369,839 ----------- 2,369,839 ----------- U.S. TREASURY OBLIGATIONS - 14.3% U.S. Treasury Bonds: 500,000 9.25%, 02/15/2016 692,910 3,325,000 6.25%, 08/15/2023 3,970,519 ----------- 4,663,429 ----------- Total Long-Term Investments (Cost $32,063,253) 31,795,175 ----------- Shares - ------ SHORT-TERM INVESTMENTS - 2.0% MONEY MARKET FUND - 2.0% 648,004 Investment Company Cash Reserve Portfolio - AIM Fund 648,004 ----------- Total Short-Term Investments (Cost $648,004) 648,004 ----------- Total Investments (Cost $32,711,257) - 99.5% 32,443,179 ----------- Other Assets in Excess of Liabilities - 0.5% 179,989 ----------- TOTAL NET ASSETS - 100.0% $32,623,168 ----------- ----------- @ Security in Default ^ Non Income Producing * Unregistered Security F Foreign Securities See notes to the financial statements BAIRD SHORT-TERM BOND FUND DECEMBER 31, 2005 The Baird Short-Term Bond Fund seeks an annual rate of total return, before Fund expenses, greater than the annual rate of return of the Lehman Brothers 1-3 Year Government/Credit Bond Index. The Lehman Brothers 1-3 Year Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed rate debt including government and corporate securities with maturities between one and three years. The Fund outperformed the Index in 2005, although absolute returns were modest. An overweighting of shorter BBB-rated corporate bonds and exposure to mortgage- backed and asset-backed securities contributed positively to the Fund's performance. The Fund's exposure to individual issues in the auto and media sectors detracted from relative performance in 2005. The Fund maintained its duration-neutral strategy vis-a-vis the Index, holding a broadly diversified portfolio of over 150 securities at year end. The Fund ended 2005 with a yield advantage versus the Index. This yield advantage, combined with exposure to specific sectors which we believe have superior total return potential (mortgage and asset-backed securities and issues in the auto and media sectors), enhance the Fund's prospects of continuing to add value over its benchmark in the coming year. PORTFOLIO CHARACTERISTICS QUALITY DISTRIBUTION* U.S. Treasury 10% U.S. Gov't Agency 27% AAA 21% AA 5% A 14% BBB 22% Below BBB 1% SECTOR WEIGHTINGS* Asset-Backed 11% Financials 19% Industrials 16% Utilities 5% Mortgage-Backed 10% International 1% Municipal 2% U.S. Gov't Agency 23% U.S. Treasuries 10% Cash 3% NET ASSETS: $97,057,968 SEC 30-DAY YIELD:** Institutional Class: 4.74% AVERAGE DURATION: 1.77 years AVERAGE MATURITY: 2.94 years ANNUALIZED EXPENSE RATIO: Institutional Class: 0.30% PORTFOLIO TURNOVER RATIO:*** 31.8% TOTAL NUMBER OF HOLDINGS: 155 * Percentages shown are based on the Fund's total net assets. ** SEC yields are based on SEC guidelines and are calculated for the 30 days ended December 31, 2005. *** Not annualized. BAIRD SHORT-TERM BOND FUND BAIRD SHORT-TERM BOND FUND - INSTITUTIONAL CLASS* VALUE OF A $250,000 INVESTMENT Baird Short-Term Bond Fund - Lehman 1-3 Year U.S. Date Institutional Class Shares Government/Credit Index ---- ---------------------------- ----------------------- 8/31/2004 $250,000 $250,000 9/30/2004 $249,602 $249,862 12/31/2004 $250,238 $250,114 3/31/2005 $249,651 $249,411 6/30/2005 $252,823 $252,509 9/30/2005 $253,151 $252,834 12/31/2005 $254,859 $254,548 GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION DATE (8/31/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. * The Baird Short-Term Bond Fund is currently offering only the Institutional Class shares to investors. BAIRD SHORT-TERM BOND FUND AVERAGE ANNUAL TOTAL RETURNS For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1) - --------------------------------------- -------- ----------------------- Baird Short-Term Bond Fund - Institutional Class 1.85% 1.45% Lehman Brothers 1-3 Year Government/Credit Bond Index(2) 1.77% 1.36%
(1) For the period from August 31, 2004 (commencement of operations) to December 31, 2005. (2) The Lehman Brothers 1-3 Year Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed- rate debt including government and corporate securities with maturities between one and three years. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD SHORT-TERM BOND FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Principal Amount Value --------- ----- LONG-TERM INVESTMENTS - 96.7% ASSET-BACKED SECURITIES - 11.2% $ 150,000 Advanta Business Card Master Trust, Series 2003-B, Class A, 2.95%, 12/20/2008 $ 150,229 400,000 AESOP Funding II LLC, Series 2005-1A, Class A1, 3.95%, 04/20/2008 391,428 500,000 Bayview Financial Acquisition Trust, Series 2005-B, Class 1A2, 4.70%, 04/28/2039 494,275 250,000 Capital One Multi-Asset Execution Trust, Series 2003-A1, Class A1, 3.20%, 01/15/2009 250,207 120,000 Chase Manhattan Auto Owner Trust, Series 2003-C, Class A4, 2.94%, 06/15/2010 117,145 850,370 Chemical Master Credit Card Trust I: Series 1996-2, Class A, 5.98%, 09/15/2008 850,825 475,000 Series 1996-3, Class A, 7.09%, 02/15/2009 479,854 CitiFinancial Mortgage Securities, Inc.: 14,776 Series 2003-2, Class AF2, 2.13%, 05/25/2033 14,729 208,949 Series 2003-3, Class AF2, 3.08%, 08/25/2033 207,494 400,000 CNH Equipment Trust, Series 2005-A, Class A3, 4.02%, 04/15/2009 395,626 Countrywide Asset-Backed Certificates: 118,553 Series 2004-10, Class AF2, 3.32%, 05/25/2022 118,156 71,675 Series 2004-9, Class AF2, 3.34%, 09/25/2023 71,455 1,000,000 Series 2005-10, Class AF2, 4.49%, 02/25/2036 987,471 1,153,000 Series 2005-12, Class 1A2, 4.85%, 02/25/2036 1,144,523 725,000 Series 2005-13, Class AF2, 5.29%, 04/25/2036 725,354 500,000 Ford Credit Auto Owner Trust, Series 2005-B, Class A4, 4.38%, 01/15/2010 495,123 175,000 Household Automobile Trust, 2.22%, 11/17/2009 170,856 300,000 MBNA Credit Card Master Note Trust, Series 2003-A3, Class A3, 2.93%, 08/15/2010 300,732 416,940 New Century Home Equity Loan Trust, Series 2003-5, Class AI3, 3.56%, 11/25/2033 414,513 347,733 Renaissance Home Equity Loan Trust, Series 2004-3, Class AF2, 3.57%, 11/25/2034 344,989 Residential Asset Mortgage Products, Inc.: 29,807 Series 2003-RS9, Class AI3, 3.61%, 10/25/2028 29,692 140,000 Series 2003-RS7, Class AI6, 5.34%, 08/25/2033 139,598 Residential Asset Securities Corporation: 145,744 Series 2003-KS5, Class AI3, 2.28%, 07/25/2028 144,934 383,231 Series 2003-KS9, Class AI3, 3.25%, 12/25/2028 378,936 1,000,000 Series 2004-KS2, Class AI3, 3.02%, 05/25/2029 986,594 593,450 Series 2003-KS10, Class AI3, 3.25%, 05/25/2029 589,824 504,754 Residential Funding Mortgage Securities, Series 2003-HS3, Class AI2, 3.15%, 07/25/2018 497,203 ----------- 10,891,765 ----------- FINANCIAL - 19.4% ABN-AMRO Bank NV, 880,000 7.00%, 04/01/2008 918,678 250,000 Ahmanson Capital Trust I Bonds, 8.36%, 12/01/2026 (Acquired 08/25/2005, Cost $270,100)* 264,640 380,000 Allfirst Financial, Inc. Subordinated Notes, 7.20%, 07/01/2007 393,561 140,000 American General Finance Corporation Notes, 4.50%, 11/15/2007 139,087 594,000 Bank of Oklahoma Subordinated Notes, 7.13%, 08/15/2007 614,682 251,000 Bank United Notes, 8.00%, 03/15/2009 274,544 472,000 Bankers Trust Corporation Subordinated Notes, 7.38%, 05/01/2008 497,013 110,000 BB&T Corporation Subordinated Notes, 7.25%, 06/15/2007 113,509 400,000 Bear Stearns & Co. Inc. Notes, 7.80%, 08/15/2007 417,810 623,000 Block Financial Corporation Notes, 8.50%, 04/15/2007 648,534 1,000,000 BNY Capital I Notes, Series B, 7.97%, 12/31/2026 1,063,471 500,000 Capital One Bank Notes, 4.88%, 05/15/2008 497,965 100,000 Chubb Corporation Senior Notes, 7.13%, 12/15/2007 103,867 210,000 CIT Group Inc. Senior Notes, 5.50%, 11/30/2007 212,062 643,000 Citicorp Capital II Notes, 8.02%, 02/15/2027 686,826 200,000 Citicorp Subordinated Notes, 7.00%, 07/01/2007 206,075 375,000 Citifinancial Debentures, 10.00%, 05/15/2009 431,249 675,000 Comerica Incorporated Subordinated Notes, 7.25%, 08/01/2007 698,564 537,000 Credit Suisse First Boston USA Inc. Senior Notes, 6.50%, 06/01/2008 554,865 200,000 Franchise Finance Corporation Notes, 7.07%, 01/15/2008 209,550 400,000 HSBC Finance Corporation Notes, 6.88%, 03/01/2007 407,878 500,000 ING Security Life Institutional Funding Notes, 2.70%, 02/15/2007 (Acquired 05/26/2005; Cost $492,335)* 485,953 200,000 J.P. Morgan & Company Incorporated Subordinated Notes, 6.70%, 11/01/2007 205,694 325,000 Key Bank NA Subordinated Notes, 6.50%, 10/15/2027 334,774 KeyCorp Subordinated Notes: 100,000 6.75%, 03/15/2006 100,366 200,000 7.50%, 06/15/2006 202,209 Lehman Brothers Holdings, Inc. Notes: 203,000 8.50%, 05/01/2007 212,046 400,000 3.50%, 08/07/2008 386,061 500,000 MBNA Corporation Notes, 6.25%, 01/17/2007 505,695 500,000 MBNA Europe Funding PLC, 3.88%, 09/07/2007 (Acquired 08/30/2005, Cost $500,000)* F 500,185 180,000 Merrill Lynch & Co, Inc., 7.00%, 01/15/2007 183,994 200,000 Met Life Global Funding I Notes, 4.75%, 06/20/2007 (Acquired 02/11/2005; Cost $203,862)* 199,312 200,000 Morgan Stanley Group, Inc. Debentures, 8.33%, 01/15/2007 206,414 700,000 Phoenix Companies, 6.68%, 02/16/2008 706,554 633,000 PNC Financial Services Subordinated Notes, 9.65%, 06/15/2009 724,036 Principal Life Global: 150,000 5.13%, 06/28/2007 (Acquired 12/28/2004, Cost $154,880)* 150,016 275,000 3.63%, 04/30/2008 (Acquired 08/17/2005, Cost $268,735)* 267,210 1,050,000 Providian Capital I, 9.53%, 02/01/2027 (Acquired 10/19/2005 and 10/20/2005, Cost $438,724 and $712,517, respectively)* 1,137,942 300,000 Reliastar Financial Notes, 8.00%, 10/30/2006 306,621 155,000 Republic New York Corporation Subordinated Notes, 9.70%, 02/01/2009 174,551 487,000 SAFECO Corporation Senior Notes, 6.88%, 07/15/2007 498,425 300,000 Santander Financial Issuances, 7.25%, 05/30/2006 F 302,759 750,000 Southern Company Capital Trust I, 8.19%, 02/01/2037 799,934 200,000 Transamerica Corporation Debentures, 9.38%, 03/01/2008 216,398 162,000 Washington Mutual, Inc. Notes, 7.50%, 08/15/2006 164,459 313,000 Wells Fargo & Company Subordinated Notes, 6.25%, 04/15/2008 322,654 211,000 Westdeutsche Landesbank Subordinated Notes, 4.80%, 07/15/2015 206,983 ----------- 18,855,675 ----------- INDUSTRIAL - 16.1% 306,000 Bell Telephone Co. Pennsylvania Debentures, 7.38%, 07/15/2007 315,239 150,000 BellSouth Telecommunication Debentures, 5.88%, 01/15/2009 153,529 375,000 Bunge Limited Finance Corporation, 4.38%, 12/15/2008 368,529 700,000 Cadbury Schweppes U.S. Finance Notes, 3.88%, 10/01/2008 (Acquired 08/30/2005, Cost $685,854)* 679,785 420,000 Caremark RX Inc. Senior Notes, 7.38%, 10/01/2006 427,160 500,000 Clear Channel Communication Senior Notes, 3.13%, 02/01/2007 488,897 200,000 Comcast Cable Communications, Inc. Notes, 6.20%, 11/15/2008 205,307 300,000 Conagra Foods, Inc. Notes, 6.00%, 09/15/2006 302,077 386,000 Cooper Cameron Corporation Senior Notes, 2.65%, 04/15/2007 373,209 600,000 Corning Inc. Notes, 6.30%, 03/01/2009 615,829 279,000 Devon Energy Corporation Debentures, 10.13%, 11/15/2009 325,760 1,000,000 Fiserv Inc., 3.00%, 06/27/2008 945,904 300,000 Ford Motor Credit Company Senior Notes, 4.95%, 01/15/2008 268,798 600,000 France Telecom SA Notes, 7.07%, 03/01/2006 F 602,407 General Motors Acceptance Corporation Notes: 200,000 6.75%, 01/15/2006 199,868 200,000 6.13%, 09/15/2006 194,271 250,000 6.13%, 08/28/2007 231,744 225,000 Halliburton Company Notes, 5.63%, 12/01/2008 229,514 260,000 Harrahs Operating Company Inc., 7.13%, 06/01/2007 266,598 700,000 ICI North America Debentures, 8.88%, 11/15/2006 721,101 International Paper Company Notes: 500,000 7.00%, 08/15/2006 504,243 250,000 7.63%, 01/15/2007 254,866 600,000 Johnson Controls Inc. Notes, 6.30%, 02/01/2008 613,745 Marathon Oil Corporation Notes: 310,000 5.38%, 06/01/2007 311,653 463,000 6.85%, 03/01/2008 481,083 450,000 News America Holdings, 7.38%, 10/17/2008 475,045 402,000 Southwestern Bell Telephone Company Notes, 6.63%, 07/15/2007 411,308 Sprint Capital Corporation Notes: 175,000 6.00%, 01/15/2007 176,711 500,000 6.38%, 05/01/2009 518,949 300,000 Telecom Italia Capital, 4.00%, 11/15/2008 F 290,938 686,000 Telus Corporation Notes, 7.50%, 06/01/2007 F 708,388 255,000 Time Warner Companies, Inc., 8.18%, 08/15/2007 266,738 600,000 Tyco International Group S.A., 6.38%, 02/15/2006 F 600,980 217,000 Union Pacific Corporation, 6.40%, 02/01/2006 217,233 600,000 Univision Communication, Inc., 3.50%, 10/15/2007 582,043 500,000 Viacom, Inc., 5.63%, 05/01/2007 502,662 784,000 Waste Management Inc. Notes, 7.00%, 10/15/2006 794,775 ----------- 15,626,886 ----------- UTILITIES - 4.9% 391,000 American Electric Power Notes, 6.13%, 05/15/2006 392,768 300,000 Baltimore Gas & Electric Company Notes, 5.25%, 12/15/2006 300,783 189,000 FPL Group Capital, Inc. Notes, 7.63%, 09/15/2006 192,441 220,000 Indiana Michigan Power Company Senior Notes, Series C, 6.13%, 12/15/2006 222,126 211,000 Jersey Central Power & Light Company 1st Mortgage, 6.85%, 11/27/2006 214,266 MidAmerican Energy Holdings Company Senior Notes: 200,000 4.63%, 10/01/2007 198,555 575,000 7.63%, 10/15/2007 599,260 245,000 PanEnergy Corporation Notes, 7.00%, 10/15/2006 247,379 475,000 Pepco Holdings, Inc. Notes, 3.75%, 02/15/2006 474,407 500,000 Progress Energy, Inc. Senior Notes, 6.75%, 03/01/2006 501,570 300,000 PSEG Power LLC, 6.88%, 04/15/2006 301,554 200,000 Public Service Electric & Gas Co. Notes, 6.25%, 01/01/2007 202,748 860,000 System Energy Resources 1st Mortgage, 4.88%, 10/01/2007 853,933 ----------- 4,701,790 ----------- MORTGAGE-BACKED SECURITIES - 10.1% Bank of America Alternative Loan Trust, 1,334,797 Series 2003-4, Class 2A1, 5.00%, 06/25/2018 1,319,889 Citicorp Mortgage Securities, Inc.: 301,918 Series 2003-11, Class 2A8, 5.50%, 12/25/2033 301,422 887,430 Series 2004-3, Class A2, 5.25%, 05/25/2034 880,032 312,823 Series 2004-4, Class A2, 5.25%, 06/25/2034 304,236 975,665 Countrywide Alternative Loan Trust Series 2005-50CB, Class 4A1, 5.00%, 11/25/2020 965,694 1,000,000 Deutsche Alternative Securities Inc. Mortgage, Series 2005-4, Class A2, 5.05%, 09/25/2035 991,501 Federal Home Loan Mortgage Corporation (FHLMC): 166,682 Series 2548, Class HA, 4.50%, 01/15/2010 165,415 238,162 Series 2835, Class VK, 5.50%, 11/15/2012 239,881 729,557 Series 3033, Class LU, 5.50%, 03/15/2013 740,441 200,000 Series 2592, Class PD, 5.00%, 07/15/2014 199,837 266,702 Series 2789, Class VM, 5.50%, 04/15/2015 269,072 Federal National Mortgage Association (FNMA): 936,383 5.50%, 07/01/2015 944,978 200,000 Series 2003-4, Class PC, 5.00%, 12/25/2014 199,622 1,175,000 Series 2003-24, Class LC, 5.00%, 12/25/2015 1,171,453 250,000 Series 2002-94, Class BG, 5.00%, 04/25/2016 249,414 Washington Mutual, 834,796 Series 2004-CB4, Class 21A, 5.50%, 12/25/2019 836,611 ----------- 9,779,498 ----------- INTERNATIONAL (U.S. $ DOMINATED) - 1.0% 175,000 Export-Import Bank Korea Notes, 4.63%, 03/16/2010 F 172,096 200,000 PEMEX Project Funding Master Trust: 6.13%, 08/15/2008 F 204,000 600,000 Korea Development Bank Notes, 3.88%, 03/02/2009 F 580,524 ----------- 956,620 ----------- TAXABLE MUNICIPAL BONDS - 1.5% 190,000 Erie, Pennsylvania General Obligation, 5.60%, 11/15/2007 191,305 450,000 New Jersey Economic Development Authority, 0.00%, 02/15/2007 ^ ETM 427,081 605,000 Redding California Redevelopment Agency Tax Allocation, 6.00%, 09/01/2010 624,638 229,321 Tobacco Settlement Financing Corporation, Series 2001-A, Class A, 6.36%, 05/15/2025 231,080 ----------- 1,474,104 ----------- U.S. GOVERNMENT AGENCY ISSUES - 22.6% 1,000,000 Federal Home Loan Bank (FHLB), 4.70%, 10/07/2010 984,064 Federal National Mortgage Association (FNMA): 11,675,000 2.38%, 02/15/2007 11,371,053 8,150,000 7.25%, 01/15/2010 8,880,085 750,000 Government Backed Trusts, Series T-1, 0.00%, 11/15/2006 ^ 721,178 ----------- 21,956,380 ----------- U.S. TREASURY OBLIGATIONS - 9.9% U.S. Treasury Notes: 3,300,000 3.00%, 12/31/2006 3,253,464 3,850,000 3.25%, 08/15/2008 3,743,374 2,500,000 6.00%, 08/15/2009 2,634,765 ----------- 9,631,603 ----------- Total Long-Term Investments (Cost $94,879,882) 93,874,321 ----------- Shares - ------ SHORT-TERM INVESTMENTS - 4.2% MONEY MARKET FUND - 4.2% 4,070,651 Investment Company Cash Reserve Portfolio- AIM Fund 4,070,651 ----------- Total Short-Term Investments (Cost $4,070,651) 4,070,651 ----------- Total Investments (Cost $98,950,533) - 100.9% 97,944,972 ----------- Liabilities in Excess of Other Assets - (0.9)% (887,004) ----------- TOTAL NET ASSETS - 100.0% $97,057,968 ----------- ----------- Percentages are stated as a percent of net assets. ^ Non-Income Producing Security * Unregistered Security F Foreign Security ETM Escrow to Maturity See notes to the financial statements BAIRD FUNDS, INC. ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2005 EXAMPLE As a shareholder of a mutual fund, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, such as management fees; distribution and/or service (12b-1) fees; and other fund expenses. Although the Funds do not charge any sales loads, redemption fees, or other transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Funds' transfer agent. If you request that a redemption be made by wire transfer, currently the Funds' transfer agent charges a $15.00 fee. This Example is intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (7/1/05 - 12/31/05). ACTUAL EXPENSES The third and fourth columns of the table below provide information about account values based on actual returns and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the fourth column entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The fifth and sixth columns of the table below provide information about hypothetical account values and hypothetical expenses based on the Funds' actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds' actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the sixth column of the table (entitled "Expenses Paid During Period") is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different mutual funds. In addition, if these transactional costs were included, your costs could have been higher. ACTUAL VS. HYPOTHETICAL RETURNS For the Six Months Ended December 31, 2005 HYPOTHETICAL (5% RETURN ACTUAL BEFORE EXPENSES) -------------------------- -------------------------- FUND'S BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED ACCOUNT ACCOUNT PAID ACCOUNT PAID EXPENSE VALUE VALUE DURING VALUE DURING RATIO(1) 7/1/05 12/31/05 PERIOD(1) 12/31/05 PERIOD(1) ------------- --------- -------- -------------- -------- -------------- BAIRD INTERMEDIATE BOND FUND Institutional Class 0.30% $1,000.00 $1,000.40 $1.51 $1,023.69 $1.53 Investor Class 0.55% $1,000.00 $ 999.10 $2.77 $1,022.43 $2.80 BAIRD AGGREGATE BOND FUND Institutional Class 0.30% $1,000.00 $ 999.50 $1.51 $1,023.69 $1.53 Investor Class 0.55% $1,000.00 $ 997.40 $2.77 $1,022.43 $2.80 BAIRD INTERMEDIATE MUNICIPAL BOND FUND Institutional Class 0.30% $1,000.00 $ 999.80 $1.51 $1,023.69 $1.53 Investor Class 0.55% $1,000.00 $ 998.50 $2.77 $1,022.43 $2.80 BAIRD CORE PLUS BOND FUND Institutional Class 0.30% $1,000.00 $ 994.40 $1.51 $1,023.69 $1.53 Investor Class 0.55% $1,000.00 $ 993.40 $2.76 $1,022.43 $2.80 BAIRD SHORT-TERM BOND FUND Institutional Class 0.30% $1,000.00 $1,008.00 $1.52 $1,023.69 $1.53
(1) Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184 days and divided by 365 to reflect the one-half year period. BAIRD FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2005 BAIRD BAIRD BAIRD INTERMEDIATE BAIRD BAIRD INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND ------------ --------- ------------ --------- ---------- ASSETS: Investments, at value (cost $239,561,356, $226,939,345, $53,909,839, and $32,711,257 and $98,950,533 respectively) $237,374,510 $226,352,620 $53,951,256 $32,443,179 $97,944,972 Cash 14,553 8,732 -- 2,911 -- Interest receivable 3,754,082 3,113,643 948,528 449,753 1,295,894 Receivable for Fund shares sold 235,000 138,143 443,197 6,475 536,131 ------------ ------------ ----------- ----------- ----------- Total assets 241,378,145 229,613,138 55,342,981 32,902,318 99,776,997 ------------ ------------ ----------- ----------- ----------- LIABILITIES: Payable for securities purchased 1,414,317 1,125,527 -- 196,967 2,673,435 Payable for Fund shares purchased 5,187,506 502 1,000 38,547 21,500 Payable to Advisor and Distributor 63,109 50,867 18,467 8,594 24,094 Payable to the Custodian 82,747 5,422 -- -- -- Other liabilities -- 8,495 -- 35,042 -- ------------ ------------ ----------- ----------- ----------- Total liabilities 6,747,679 1,190,813 19,467 279,150 2,719,029 ------------ ------------ ----------- ----------- ----------- NET ASSETS $234,630,466 $228,422,325 $55,323,514 $32,623,168 $97,057,968 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- NET ASSETS CONSIST OF: Capital stock $238,209,625 $229,105,188 $55,498,092 $32,948,372 $98,186,511 Accumulated undistributed net investment income 154,379 10,472 19,139 -- 40,220 Accumulated net realized gain (loss) on investments sold (1,546,692) (106,610) (235,134) (57,126) (163,202) Net unrealized appreciation (depreciation) on investments (2,186,846) (586,725) 41,417 (268,078) (1,005,561) ------------ ------------ ----------- ----------- ----------- NET ASSETS $234,630,466 $228,422,325 $55,323,514 $32,623,168 $97,057,968 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- INSTITUTIONAL CLASS SHARES Net assets $231,800,807 $227,132,399 $53,831,848 $32,173,459 $97,057,968 Shares outstanding ($0.01 par value, unlimited shares authorized) 21,970,265 21,554,417 5,095,975 3,199,736 9,912,823 Net asset value, offering and redemption price per share $ 10.55 $ 10.54 $ 10.56 $ 10.06 $ 9.79 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- INVESTOR CLASS SHARES Net assets $ 2,829,659 $ 1,289,926 $ 1,491,666 $ 449,709 Shares outstanding ($0.01 par value, unlimited shares authorized) 260,531 119,948 138,700 43,664 Net asset value, offering and redemption price per share $ 10.86 $ 10.75 $ 10.75 $ 10.30 ------------ ------------ ----------- ----------- ------------ ------------ ----------- -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 BAIRD BAIRD BAIRD INTERMEDIATE BAIRD BAIRD INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND ------------ --------- ------------ --------- ---------- INVESTMENT INCOME: Interest income $10,104,354 $7,208,612 $1,876,463 $1,693,252 $2,544,668 ----------- ---------- ---------- ---------- ---------- Total investment income 10,104,354 7,208,612 1,876,463 1,693,252 2,544,668 ----------- ---------- ---------- ---------- ---------- EXPENSES: Investment advisory fee 544,767 370,489 119,102 81,034 166,443 Administration fee 108,953 74,097 23,820 16,207 33,288 Distribution expense - Investor Class Shares 7,415 2,467 6,704 767 -- ----------- ---------- ---------- ---------- ---------- Total expenses 661,135 447,053 149,626 98,008 199,731 ----------- ---------- ---------- ---------- ---------- NET INVESTMENT INCOME 9,443,219 6,761,559 1,726,837 1,595,244 2,344,937 ----------- ---------- ---------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments (687,811) 294,456 (209,761) 22,747 (162,401) Change in unrealized appreciation/ depreciation on investments (4,795,310) (3,005,159) (847,084) (938,103) (797,479) ----------- ---------- ---------- ---------- ---------- Net realized and unrealized loss on investments (5,483,121) (2,710,703) (1,056,845) (915,356) (959,880) ----------- ---------- ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,960,098 $4,050,856 $ 669,992 $ 679,888 $1,385,057 ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD INTERMEDIATE BOND FUND ------------------------------------- Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 9,443,219 $ 7,270,283 Net realized loss on investments (687,811) (599,286) Change in unrealized appreciation/depreciation on investments (4,795,310) (282,245) ------------ ------------ Net increase in net assets resulting from operations 3,960,098 6,388,752 ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 71,651,001 67,465,697 Shares issued to holders in reinvestment of dividends 8,680,587 6,659,149 Cost of shares redeemed (34,654,355) (29,883,566) ------------ ------------ Net increase in net assets resulting from capital share transactions 45,677,233 44,241,280 ------------ ------------ DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (9,464,170) (7,099,177) From realized gains -- (27,024) ------------ ------------ Total Distributions (9,464,170) (7,126,201) ------------ ------------ DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net investment income (118,722) (85,930) From realized gains -- (377) ------------ ------------ Total Distributions (118,722) (86,307) ------------ ------------ TOTAL INCREASE IN NET ASSETS 40,054,439 43,417,524 NET ASSETS: Beginning of year 194,576,027 151,158,503 ------------ ------------ End of year (including undistributed net investment income of $84,156 and $223,829, respectively) $234,630,466 $194,576,027 ------------ ------------ ------------ ------------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD AGGREGATE BOND FUND ------------------------------------ Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 6,761,559 $ 4,787,456 Net realized gain on investments 294,456 425,360 Change in unrealized appreciation/depreciation on investments (3,005,159) 42,347 ------------ ------------ Net increase in net assets resulting from operations 4,050,856 5,255,163 ------------ ------------ CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 119,986,464 49,052,903 Shares issued to holders in reinvestment of dividends 6,520,179 4,563,691 Cost of shares redeemed (11,028,752) (29,904,273) ------------ ------------ Net increase in net assets resulting from capital share transactions 115,477,891 23,712,321 ------------ ------------ DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (7,004,294) (4,819,107) From realized gains (149,762) (311,207) ------------ ------------ Total Distributions (7,154,056) (5,130,314) ------------ ------------ DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net investment income (43,249) (13,976) From realized gains (837) (1,852) ------------ ------------ Total Distributions (44,086) (15,828) ------------ ------------ TOTAL INCREASE IN NET ASSETS 112,330,605 23,821,342 NET ASSETS: Beginning of year 116,091,720 92,270,378 ------------ ------------ End of year (including undistributed net investment income (loss) of $18,641 and $134,477, respectively) $228,422,325 $116,091,720 ------------ ------------ ------------ ------------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD INTERMEDIATE MUNICIPAL BOND FUND -------------------------------------- Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 1,726,837 $ 1,357,546 Net realized loss on investments (209,761) (24,020) Change in unrealized appreciation/depreciation on investments (847,084) (508,690) ----------- ----------- Net increase in net assets resulting from operations 669,992 824,836 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 29,861,346 16,224,440 Shares issued to holders in reinvestment of dividends 1,440,536 1,121,415 Cost of shares redeemed (16,406,963) (6,337,831) ----------- ----------- Net increase (decrease) in net assets resulting from capital share transactions 14,894,919 11,008,024 ----------- ----------- DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (1,658,407) (1,230,984) ----------- ----------- DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net investment income (83,967) (91,886) ----------- ----------- TOTAL INCREASE IN NET ASSETS 13,822,537 10,509,990 NET ASSETS: Beginning of year 41,500,977 30,990,987 ----------- ----------- End of year (including undistributed net investment income of $19,139 and $34,676, respectively) $55,323,514 $41,500,977 ----------- ----------- ----------- -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD CORE PLUS BOND FUND ------------------------------------- Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 1,595,244 $ 1,651,430 Net realized gain on investments 22,747 944,452 Change in unrealized appreciation/depreciation on investments (938,103) (365,553) ----------- ----------- Net increase in net assets resulting from operations 679,888 2,230,329 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 4,215,390 2,987,818 Shares issued to holders in reinvestment of dividends 936,473 1,182,113 Cost of shares redeemed (4,100,728) (14,342,365) ----------- ----------- Net increase (decrease) in net assets resulting from capital share transactions 1,051,135 (10,172,434) ----------- ----------- DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (1,692,217) (1,712,108) From realized gains (21,380) (550,721) ----------- ----------- Total Distributions (1,713,597) (2,262,829) ----------- ----------- DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net investment income (15,455) (5,608) From realized gains (291) (2,085) ----------- ----------- Total Distributions (15,746) (7,693) ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,680 (10,212,627) NET ASSETS: Beginning of year 32,621,488 42,834,115 ----------- ----------- End of year (including undistributed net investment income of $27,534 and $44,701, respectively) $32,623,168 $32,621,488 ----------- ----------- ----------- -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD SHORT-TERM BOND FUND ----------------------------------------- For the Period August 31, 2004(1) Year Ended through December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 2,344,937 $ 243,185 Net realized loss on investments (162,401) (8,613) Change in unrealized appreciation/depreciation on investments (797,479) (208,082) ----------- ----------- Net increase in net assets resulting from operations 1,385,057 26,490 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 81,066,185 33,919,057 Shares issued to holders in reinvestment of dividends 2,142,819 158,249 Cost of shares redeemed (17,200,778) (1,899,021) ----------- ----------- Net increase in net assets resulting from capital share transactions 66,008,226 32,178,285 ----------- ----------- DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (2,308,315) (231,775) ----------- ----------- TOTAL INCREASE IN NET ASSETS 65,084,968 31,973,000 NET ASSETS: Beginning of period 31,973,000 -- ----------- ----------- End of period (including undistributed net investment income of $37,960 and $12,668, respectively) $97,057,968 $31,973,000 ----------- ----------- ----------- -----------
(1) Commencement of operations. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.83 $ 10.88 $ 10.86 $ 10.60 $ 10.55 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.46 0.47(3) 0.49 0.56 0.62(3) Net realized and unrealized gains (losses) on investments (0.27) (0.05) 0.14 0.27 0.08(4) ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.19 0.42 0.63 0.83 0.70 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.47) (0.47) (0.49) (0.56) (0.62) Distributions from net realized gains -- (0.00)(2) (0.12) (0.01) (0.03) ------------ ------------ ------------ ------------ ----------- Total distributions (0.47) (0.47) (0.61) (0.57) (0.65) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.55 $ 10.83 $ 10.88 $ 10.86 $ 10.60 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 1.77% 3.91% 5.89% 8.02% 6.68% Supplemental data and ratios: Net assets, end of period $231,800,807 $191,563,699 $149,836,855 $146,236,339 $89,682,104 Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30% Ratio of net investment income to average net assets 4.34% 4.32% 4.39% 5.20% 5.71% Portfolio turnover rate(1) 42.1% 44.8% 64.4% 41.1% 79.5%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Amount is less than $0.01. (3) Calculated using average shares outstanding during the period. (4) The amount shown may not correlate with the aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD INTERMEDIATE BOND FUND - INVESTOR CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 11.13 $ 11.17 $ 11.13 $ 10.71 $ 10.56 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.45 0.45(3) 0.48 0.54(3) 0.59(3) Net realized and unrealized gains (losses) on investments (0.28) (0.05) 0.14 0.27 0.08(4) ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.17 0.40 0.62 0.81 0.67 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.44) (0.44) (0.46) (0.38) (0.49) Distributions from net realized gains -- (0.00)(2) (0.12) (0.01) (0.03) ------------ ------------ ------------ ------------ ----------- Total distributions (0.44) (0.44) (0.58) (0.39) (0.52) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.86 $ 11.13 $ 11.17 $ 11.13 $ 10.71 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 1.56% 3.65% 5.61% 7.74% 6.43% Supplemental data and ratios: Net assets, end of period $ 2,829,659 $ 3,012,328 $ 1,321,648 $ 1,127,162 $ 1,189,191 Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55% Ratio of net investment income to average net assets 4.09% 4.07% 4.14% 4.95% 5.46% Portfolio turnover rate(1) 42.1% 44.8% 64.4% 41.1% 79.5%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Amount is less than $0.01. (3) Calculated using average shares outstanding during the period. (4) The amount shown may not correlate with the aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.74 $ 10.71 $ 10.69 $ 10.51 $ 10.42 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.49(2) 0.49(2) 0.56 0.62 0.68 Net realized and unrealized gains (losses) on investments (0.19) 0.07 0.20 0.23 0.17 ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.30 0.56 0.76 0.85 0.85 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.49) (0.50) (0.56) (0.62) (0.67) Distributions from net realized gains (0.01) (0.03) (0.18) (0.05) (0.09) ------------ ------------ ------------ ------------ ----------- Total distributions (0.50) (0.53) (0.74) (0.67) (0.76) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.54 $ 10.74 $ 10.71 $ 10.69 $ 10.51 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 2.85% 5.30% 7.19% 8.30% 8.33% Supplemental data and ratios: Net assets, end of period $227,132,399 $115,382,862 $ 91,550,534 $ 87,847,176 $83,392,652 Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30% Ratio of net investment income to average net assets 4.56% 4.58% 4.85% 5.75% 6.33% Portfolio turnover rate(1) 46.0% 72.6% 106.7% 51.2% 79.2%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Calculated using average shares outstanding throughout the period. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD AGGREGATE BOND FUND - INVESTOR CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.95 $ 10.88 $ 10.84 $ 10.57 $ 10.43 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.47(2) 0.48(2) 0.55 0.60(2) 0.65(2) Net realized and unrealized gains (losses) on investments (0.19) 0.07 0.19 0.23 0.17 ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.28 0.55 0.74 0.83 0.82 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.47) (0.45) (0.52) (0.51) (0.59) Distributions from net realized gains (0.01) (0.03) (0.18) (0.05) (0.09) ------------ ------------ ------------ ------------ ----------- Total distributions (0.48) (0.48) (0.70) (0.56) (0.68) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.75 $ 10.95 $ 10.88 $ 10.84 $ 10.57 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 2.54% 5.20% 6.95% 8.08% 7.98% Supplemental data and ratios: Net assets, end of period $ 1,289,926 $ 708,858 $ 719,844 $ 845,481 $ 166,622 Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55% Ratio of net investment income to average net assets 4.31% 4.33% 4.60% 5.50% 6.08% Portfolio turnover rate(1) 46.0% 72.6% 106.7% 51.2% 79.2%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Calculated using average shares outstanding during the period. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INSTITUTIONAL CLASS -------------------------------------------------------------------------------- March 30, 2001(1) Year Ended December 31, through ------------------------------------------------------------- December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.81 $ 10.91 $ 10.86 $ 10.25 $ 10.00 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.39(2) 0.40(2) 0.42(2) 0.43(2) 0.34(2) Net realized and unrealized gains (losses) on investments (0.25) (0.11) 0.10 0.64 0.17(3) ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.14 0.29 0.52 1.07 0.51 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.39) (0.39) (0.43) (0.46) (0.25) Distributions from net realized gains -- -- (0.04) (0.00)(4) (0.01) ------------ ------------ ------------ ------------ ----------- Total distributions (0.39) (0.39) (0.47) (0.46) (0.26) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.56 $ 10.81 $ 10.91 $ 10.86 $ 10.25 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 1.33% 2.69% 4.91% 10.72% 5.02%(5) Supplemental data and ratios: Net assets, end of period $ 53,831,848 $ 36,889,211 $ 30,234,195 $ 31,221,508 $14,448,572 Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30%(6) Ratio of net investment income to average net assets 3.64% 3.70% 3.88% 4.11% 4.32%(6) Portfolio turnover rate(7) 13.7% 4.2% 17.7% 32.6% 14.8%(5)
(1) Commencement of operations. (2) Calculated using average shares outstanding during the period. (3) The amount shown may not correlate with the aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. (4) Amount is less than $0.01. (5) Not annualized. (6) Annualized. (7) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INVESTOR CLASS --------------------------------------------------------------------------------- March 30, 2001(1) Year Ended December 31, through ------------------------------------------------------------- December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.99 $ 11.09 $ 11.02 $ 10.27 $ 10.00 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.37(2) 0.38(2) 0.40(2) 0.41(2) 0.31(2) Net realized and unrealized gains (losses) on investments (0.25) (0.12) 0.10 0.64 0.17(3) ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.12 0.26 0.50 1.05 0.48 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.36) (0.36) (0.39) (0.30) (0.20) Distributions from net realized gains -- -- (0.04) (0.00)(4) (0.01) ------------ ------------ ------------ ------------ ----------- Total distributions (0.36) (0.36) (0.43) (0.30) (0.21) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.75 $ 10.99 $ 11.09 $ 11.02 $ 10.27 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 1.13% 2.40% 4.69% 10.46% 4.74%(5) Supplemental data and ratios: Net assets, end of period $ 1,491,666 $ 4,611,766 $ 756,792 $ 706,207 $ 624,209 Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%(6) Ratio of net investment income to average net assets 3.39% 3.45% 3.63% 3.86% 4.07%(6) Portfolio turnover rate(7) 13.7% 4.2% 17.7% 32.6% 14.8%(5)
(1) Commencement of operations. (2) Calculated using average shares outstanding during the period. (3) The amount shown may not correlate with the aggregate gains and losses of portfolio securities due to the timing of subscriptions and redemptions of Fund shares. (4) Amount is less than $0.01. (5) Not annualized. (6) Annualized. (7) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD CORE PLUS BOND FUND - INSTITUTIONAL CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.38 $ 10.45 $ 10.45 $ 10.42 $ 10.45 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.51(2) 0.54 0.56 0.62 0.65 Net realized and unrealized gains (losses) on investments (0.28) 0.10 0.36 0.07 0.05 ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.23 0.64 0.92 0.69 0.70 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.54) (0.53) (0.56) (0.62) (0.66) Distributions from net realized gains (0.01) (0.18) (0.36) (0.04) (0.07) ------------ ------------ ------------ ------------ ----------- Total distributions (0.55) (0.71) (0.92) (0.66) (0.73) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $ 10.06 $ 10.38 $ 10.45 $ 10.45 $ 10.42 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 2.23% 6.29% 8.94% 6.90% 6.84% Supplemental data and ratios: Net assets, end of period $ 32,173,459 $ 32,495,641 $ 42,709,634 $ 54,221,923 $69,182,002 Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30% Ratio of net investment income to average net assets 4.92% 4.85% 4.56% 6.03% 6.25% Portfolio turnover rate(1) 37.6% 52.5% 103.1% 66.8% 47.0%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Calculated using average shares outstanding during the period. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD CORE PLUS BOND FUND - INVESTOR CLASS ------------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.62 $ 10.67 $ 10.65 $ 10.49 $ 10.45 ------------ ------------ ------------ ------------ ----------- Income from investment operations: Net investment income 0.49(2) 0.53 0.53(2) 0.60(2) 0.64(2) Net realized and unrealized gains (losses) on investments (0.29) 0.10 0.37 0.07 0.05 ------------ ------------ ------------ ------------ ----------- Total from investment operations 0.20 0.63 0.90 0.67 0.69 ------------ ------------ ------------ ------------ ----------- Less distributions: Dividends from net investment income (0.51) (0.50) (0.52) (0.47) (0.58) Distributions from net realized gains (0.01) (0.18) (0.36) (0.04) (0.07) ------------ ------------ ------------ ------------ ----------- Total distributions (0.52) (0.68) (0.88) (0.51) (0.65) ------------ ------------ ------------ ------------ ----------- Net asset value, end of period $10.30 $10.62 $10.67 $10.65 $10.49 ------------ ------------ ------------ ------------ ----------- ------------ ------------ ------------ ------------ ----------- Total return 1.93% 6.09% 8.60% 6.58% 6.70% Supplemental data and ratios: Net assets, end of period $ 449,709 $ 125,847 $ 124,481 $ 296,026 $ 258,351 Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55% Ratio of net investment income to average net assets 4.67% 4.60% 4.31% 5.78% 6.00% Portfolio turnover rate(1) 37.6% 52.5% 103.1% 66.8% 47.0%
(1) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. (2) Calculated using average shares outstanding during the period. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD SHORT-TERM BOND FUND - INSTITUTIONAL CLASS -------------------------------------- Year Ended August 31, 2004(1) December 31, through 2005 December 31, 2004 ------------ ----------------- Per Share Data: Net asset value, beginning of period $ 9.93 $ 10.00 ----------- ----------- Income from investment operations: Net investment income 0.33 0.08 Net realized and unrealized losses on investments (0.15) (0.07) ----------- ----------- Total from investment operations 0.18 0.01 ----------- ----------- Less distributions: Dividends from net investment income (0.32) (0.08) ----------- ----------- Net asset value, end of period $ 9.79 $ 9.93 ----------- ----------- ----------- ----------- Total return 1.85% 0.10%(2) Supplemental data and ratios: Net assets, end of period $97,057,968 $31,973,000 Ratio of expenses to average net assets 0.30% 0.30%(3) Ratio of net investment income to average net assets 3.52% 2.60%(3) Portfolio turnover rate(4) 31.8% 16.7%(2)
(1) Commencement of operations. (2) Not annualized. (3) Annualized. (4) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2005 1. ORGANIZATION Baird Funds, Inc. (the "Corporation") was incorporated on June 9, 2000 as a Wisconsin corporation and is registered as an open-end investment management company under the Investment Company Act of 1940, as amended (the "1940 Act"). The accompanying financial statements include the Baird Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund (each, a "Fund" and collectively, the "Funds"), five of the eight portfolios comprising the Corporation, each of which is diversified within the meaning of the 1940 Act. Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor") serves as investment advisor to the Funds. The Baird Intermediate Bond Fund, Baird Aggregate Bond Fund and Baird Core Plus Bond Fund commenced operations with the sale of both Institutional and Investor class shares on September 29, 2000. The Baird Intermediate Municipal Bond Fund commenced operations with the sale of both Institutional and Investor class shares on March 30, 2001. The Baird Short-Term Bond Fund commenced operations with the sale of Institutional Class Shares on August 31, 2004. The Institutional Class Shares are not subject to a distribution and service (12b-1) fee, while the Investor Class Shares are subject to a distribution and service (12b-1) fee up to 0.25%. The investment objective of the Baird Intermediate Bond Fund is to provide an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers Intermediate Government/Credit Bond Index. The Lehman Brothers Intermediate Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt, including government and corporate securities, with maturities between one and ten years. The investment objective of the Baird Aggregate Bond Fund is to provide an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers Aggregate Bond Index. The Lehman Brothers Aggregate Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The primary investment objective of the Baird Intermediate Municipal Bond Fund is to provide current income that is substantially exempt from federal income tax. A secondary objective is to provide total return with relatively low volatility of principal. The investment objective of the Baird Core Plus Bond Fund is to provide an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers U.S. Universal Bond Index. The Lehman Brothers U.S. Universal Bond Index is an unmanaged, market value weighted index of fixed income securities issued in U.S. dollars, including U.S. government and investment grade debt, non-investment grade debt, asset-backed and mortgage- backed securities, Eurobonds, 144A securities and emerging market debt, with maturities of at least one year. The investment objective of the Baird Short-Term Bond Fund is to provide an annual rate of total return, before Fund expenses, greater than the annual rate of total return of the Lehman Brothers 1-3 Year Government/Credit Bond Index. The Lehman Brothers 1-3 Year Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt including government and corporate securities with maturities between one and three years. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America. a) Investment Valuation - Because market quotations for most debt securities are not readily available, debt securities are stated at fair value as furnished by an independent pricing service, which uses valuation methods such as matrix pricing and other analytical pricing models, as well as on market transactions and dealer quotations. Debt securities purchased with a remaining maturity of 60 days or less are valued at acquisition cost, plus or minus any amortized discount or premium. Investments in mutual funds are valued at their stated net asset value. Common stocks that are listed on a securities exchange are valued at the last quoted sales price. Securities traded on the Nasdaq Stock Market are valued at the Nasdaq Official Closing Price. Price information on listed stocks is taken from the exchange where the security is primarily traded. If such securities were not traded on the valuation date they are valued at the average of the current bid and asked price. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by a valuation committee of the Advisor pursuant to authority delegated, and in accordance with procedures approved, by the Board of Directors. In determining fair value, the valuation committee takes into account all relevant factors and available information. Consequently, the price of the security used by a Fund to calculate its NAV may differ from quoted or published prices for the same security. Fair value pricing involves subjective judgments and there is no single standard for determining a security's fair value. As a result, different mutual funds could reasonably arrive at a different fair value for the same security. It is possible that the fair value determined for a security is materially different from the value that could be realized upon the sale of that security or from the values that other mutual funds may determine. b) Unregistered Securities - Four of the Funds own certain investment securities which are unregistered and thus restricted to resale. These securities are valued by the Funds after giving due consideration to pertinent factors including recent private sales, market conditions and the issuer's financial performance. The value of such securities for the Baird Intermediate Bond, Baird Aggregate Bond, Baird Core Plus Bond and Baird Short-Term Bond Funds were $11,830,828 (5.04% of net assets), $7,261,419 (3.18% of net assets), $2,181,632 (6.69% of net assets) and $3,685,043 (3.80% of net assets), respectively, at December 31, 2005. Restricted securities may be deemed to be liquid as determined by the Advisor based on several factors. These securities generally consist of securities issued pursuant to Rule 144A under the Securities Act of 1933. c) Foreign Securities - The Funds may invest in U.S. dollar-denominated debt obligations of foreign companies and foreign governments. Investing in securities of foreign companies and foreign governments involves special risks and consideration not typically associated with investing in U.S. companies and the U.S. government. These risks include currency rate fluctuations, political and economic instability and differences in financial reporting standards and less strict regulation of securities markets. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. Occasionally, events that affect these values and exchange rates may occur after the close of the exchange on which such securities are traded. If such events materially affect the value of a Fund's securities, these securities may be valued at their fair value pursuant to procedures adopted by the Board of Directors. d) Federal Income Taxes - The Funds intend to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders in a manner which results in no tax cost to the Funds. Therefore, no federal income or excise tax provision is recorded. e) Allocation of Income and Expenses - Each Fund is charged for those expenses directly attributable to it. Expenses directly attributable to a class of shares, such as Rule 12b-1 distribution fees, are charged to that class of shares. Income, expenses and realized and unrealized gains and losses are allocated to the classes based on their respective net assets. Expenses that are not directly attributable to a Fund are allocated among the Funds in the series in proportion to their assets. f) Distributions to Shareholders - Dividends from net investment income are declared and paid monthly. Distributions of net realized capital gains, if any, are declared and paid at least annually. g) Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. h) Other - Investment and shareholder transactions are recorded on trade date. The Funds determine the gain or loss realized from investment transactions by comparing the original cost of the security lot sold with the net sales proceeds. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Premiums and discounts on the purchase of securities are amortized/accreted using the effective interest method. Accounting principles generally accepted in the United States of America require that permanent financial reporting and tax differences be reclassified in the capital accounts. i) Guarantees and Indemnifications - In the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown and would involve future claims against the Funds that have not yet occurred. Based on experience, the Funds would expect the risk of loss to be remote. 3. CAPITAL SHARE TRANSACTIONS The following table summarizes the capital share transactions of each Fund for the past two fiscal periods: BAIRD INTERMEDIATE BOND FUND Year Ended Year Ended December 31, 2005 December 31, 2005 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 71,323,424 6,670,157 Shares sold $ 327,577 29,867 Shares issued through Shares issued through reinvestment of dividends 8,583,507 804,972 reinvestment of dividends 97,080 8,844 Shares redeemed (34,120,091) (3,198,827) Shares redeemed (534,264) (48,785) ------------ ---------- ---------- ------- Net Increase $ 45,786,840 4,276,302 Net Decrease $ (109,607) (10,074) ------------ ---------- ------------ ---------- Shares Outstanding: Shares Outstanding: Beginning of period 17,693,963 Beginning of period 270,605 ---------- ------- End of period 21,970,265 End of period 260,531 ---------- ------- ---------- -------
Year Ended Year Ended December 31, 2004 December 31, 2004 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 65,558,500 6,038,526 Shares sold $1,907,197 170,365 Shares issued through Shares issued through reinvestment of dividends 6,589,217 608,839 reinvestment of dividends 69,932 6,291 Shares redeemed (29,612,681) (2,727,641) Shares redeemed (270,885) (24,345) ------------ ---------- ---------- ------- Net Increase $ 42,535,036 3,919,724 Net Increase $1,706,244 152,311 ------------ ---------- ------------ ---------- Shares Outstanding: Shares Outstanding: Beginning of period 13,774,239 Beginning of period 118,294 ---------- ------- End of period 17,693,963 End of period 270,605 ---------- ------- ---------- -------
BAIRD AGGREGATE BOND FUND Year Ended Year Ended December 31, 2005 December 31, 2005 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $119,199,176 11,216,865 Shares sold $ 787,288 72,544 Shares issued through Shares issued through reinvestment of dividends 6,483,075 609,270 reinvestment of dividends 37,104 3,418 Shares redeemed (10,800,456) (1,013,347) Shares redeemed (228,296) (20,735) ------------ ---------- --------- ------- Net Increase $114,881,795 10,812,788 Net Increase $ 596,096 55,227 ------------ --------- ------------ --------- Shares Outstanding: Shares Outstanding: Beginning of period 10,741,629 Beginning of period 64,721 ---------- ------- End of period 21,554,417 End of period 119,948 ---------- ------- ---------- -------
Year Ended Year Ended December 31, 2004 December 31, 2004 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 48,367,650 4,492,828 Shares sold $ 685,253 62,158 Shares issued through Shares issued through reinvestment of dividends 4,549,171 425,224 reinvestment of dividends 14,520 1,326 Shares redeemed (29,182,312) (2,725,437) Shares redeemed (721,961) (64,948) ------------ ---------- --------- ------- Net Increase $ 23,734,509 2,192,615 Net Decrease $ (22,188) (1,464) ------------ --------- ------------ --------- Shares Outstanding: Shares Outstanding: Beginning of period 8,549,014 Beginning of period 66,185 ---------- ------- End of period 10,741,629 End of period 64,721 ---------- ------- ---------- -------
BAIRD INTERMEDIATE MUNICIPAL BOND FUND Year Ended Year Ended December 31, 2005 December 31, 2005 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 28,720,646 2,699,678 Shares sold $ 1,140,700 104,296 Shares issued through Shares issued through reinvestment of dividends 1,391,125 130,582 reinvestment of dividends 49,411 4,548 Shares redeemed (12,175,572) (1,147,777) Shares redeemed (4,231,391) (389,626) ------------ ---------- ----------- -------- Net Increase $ 17,936,199 1,682,483 Net Decrease $(3,041,280) (280,782) ------------ ----------- ------------ ----------- Shares Outstanding: Shares Outstanding: Beginning of period 3,413,492 Beginning of period 419,482 ---------- -------- End of period 5,095,975 End of period 138,700 ---------- -------- ---------- --------
Year Ended Year Ended December 31, 2004 December 31, 2004 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 11,175,557 1,016,975 Shares sold $ 5,048,883 456,491 Shares issued through Shares issued through reinvestment of dividends 1,044,261 96,858 reinvestment of dividends 77,154 7,040 Shares redeemed (5,105,189) (471,111) Shares redeemed (1,232,642) (112,263) ------------ ---------- ----------- -------- Net Increase $ 7,114,629 642,722 Net Increase $ 3,893,395 351,268 ------------ ----------- ------------ ----------- Shares Outstanding: Shares Outstanding: Beginning of period 2,770,770 Beginning of period 68,214 ---------- -------- End of period 3,413,492 End of period 419,482 ---------- -------- ---------- --------
BAIRD CORE PLUS BOND FUND Year Ended Year Ended December 31, 2005 December 31, 2005 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 3,826,490 370,555 Shares sold $ 388,900 36,683 Shares issued through Shares issued through reinvestment of dividends 923,131 90,264 reinvestment of dividends 13,342 1,281 Shares redeemed (4,036,994) (391,795) Shares redeemed (63,734) (6,148) ------------ ---------- --------- ------- Net Increase $ 712,627 69,024 Net Increase $ 338,508 31,816 ------------ --------- ------------ --------- Shares Outstanding: Shares Outstanding: Beginning of period 3,130,712 Beginning of period 11,848 ---------- ------- End of period 3,199,736 End of period 43,664 ---------- ------- ---------- -------
Year Ended Year Ended December 31, 2004 December 31, 2004 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 2,974,318 282,586 Shares sold $ 13,500 1,261 Shares issued through Shares issued through reinvestment of dividends 1,177,007 113,096 reinvestment of dividends 5,106 480 Shares redeemed (14,326,134) (1,353,665) Shares redeemed (16,231) (1,555) ------------ ---------- --------- ------- Net Decrease $(10,174,809) (957,983) Net Increase $ 2,375 186 ------------ --------- ------------ --------- Shares Outstanding: Shares Outstanding: Beginning of period 4,088,695 Beginning of period 11,662 ---------- ------- End of period 3,130,712 End of period 11,848 ---------- ------- ---------- -------
BAIRD SHORT-TERM BOND FUND August 31, 2004(1) Year Ended through December 31, 2005 December 31, 2004 --------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ------------ ---------- ------------ ---------- Shares sold $ 81,066,185 8,221,158 Shares sold $33,919,057 3,395,735 Shares issued through Shares issued through reinvestment of dividends 2,142,819 217,900 reinvestment of dividends 158,249 15,909 Shares redeemed (17,200,778) (1,746,644) Shares redeemed (1,899,021) (191,235) ------------ ---------- ----------- --------- Net Increase $ 66,008,226 6,692,414 Net Increase $32,178,285 3,220,409 ------------ ----------- ------------ ----------- Shares Outstanding: Shares Outstanding: Beginning of period 3,220,409 Beginning of period -- ---------- --------- End of period 9,912,823 End of period 3,220,409 ---------- --------- ---------- ---------
(1) Commencement of operations. 4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION During the year ended December 31, 2005, purchases and sales of investment securities (excluding short-term investments) were as follows: Baird Baird Baird Intermediate Baird Baird Intermediate Aggregate Municipal Core Plus Short-Term Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund ------------ --------- ------------ --------- ---------- Purchases: U.S. Government $55,580,226 $100,762,279 $ -- $8,354,348 $29,554,206 Other $76,147,301 $ 75,385,080 $22,009,646 $5,376,258 $54,551,653 Sales: U.S. Government $53,759,324 $ 44,340,210 $ -- $6,064,469 $ 6,693,208 Other $33,854,631 $ 20,986,759 $ 6,186,845 $5,564,558 $12,635,326
At December 31, 2005, gross unrealized appreciation and depreciation of investments and distributable ordinary income and long-term capital gains for federal tax purposes were as follows: INTERMEDIATE INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND ------------ --------- ------------ --------- ---------- Cost of Investments $239,607,514 $227,139,832 $53,915,238 $32,740,923 $98,961,175 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- Gross unrealized appreciation $ 2,412,159 $ 2,579,325 $ 457,271 $ 839,033 $ 30,812 Gross unrealized depreciation (4,645,163) (3,366,537) (421,253) (1,136,777) (1,047,015) ------------ ------------ ----------- ----------- ----------- Net unrealized appreciation/depreciation $ (2,233,004) $ (787,212) $ 36,018 $ (297,744) $(1,016,203) ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- Undistributed ordinary income $ 154,379 $ 10,472 $ 19,139 $ -- $ 40,220 Undistributed long-term capital gain -- 121,173 -- -- -- ------------ ------------ ----------- ----------- ----------- Total distributable earnings $ 154,379 $ 131,645 $ 19,139 $ -- $ 40,220 ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- Other accumulated gains (losses) $ (1,500,534) $ (27,296) $ (229,735) $ (27,460) $ (152,560) ------------ ------------ ----------- ----------- ----------- Total accumulated earnings (losses) $ (3,579,159 $ (682,863) $ (174,578) $ (325,204) $(1,128,543) ------------ ------------ ----------- ----------- ----------- ------------ ------------ ----------- ----------- -----------
Undistributed income or net realized gains for financial statement purposes may differ from federal income tax purposes due to differences in the recognition and characterization of income, expense and capital gain items for financial statement and tax purposes. The tax components of dividends paid during the periods ended December 31, 2005 and 2004 were: 2005 2004 --------------------------------- --------------------------------- ORDINARY LONG-TERM ORDINARY LONG-TERM INCOME CAPITAL GAINS INCOME CAPITAL GAINS DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS ------------- ------------- ------------- ------------- Baird Intermediate Bond Fund $9,582,892 $ -- $7,212,508 $ -- Baird Aggregate Bond Fund $7,047,543 $ 150,599 $5,007,328 $ 138,814 Baird Intermediate Municipal Bond Fund $ -- $ -- $ 8,850 $ -- Baird Core Plus Bond Fund $1,707,672 $ 21,671 $1,816,264 $ 454,258 Baird Short-Term Bond Fund $2,308,315 $ -- $ 231,775 $ --
For the years ended December 31, 2005 and 2004, distributions of $1,742,374 and $1,314,020, respectively, from the Baird Intermediate Municipal Bond Fund were tax-exempt. Under the current tax law, capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2005, the Baird Intermediate Bond, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond, Baird Core Plus Bond Fund and Baird Short-Term Bond Funds elected to defer capital losses occurring between November 1, 2005 and December 31, 2005 in the amount of $79,987, $24,385, $38,449, $21,481 and $85,220, respectively. At December 31, 2005, the Baird Intermediate Bond, Baird Intermediate Municipal Bond, Baird Core Plus Bond and Baird Short-Term Bond Funds had accumulated net realized capital loss carryovers of $1,423,683, $191,286, $5,975 and $67,340, respectively. With respect to the Baird Intermediate Bond Fund, $485,569 of the capital loss carryover expires in 2012 and $938,114 expires in 2013. With respect to the Baird Intermediate Municipal Bond Fund, $6,626 of the capital loss carryover expires in 2012 and $184,660 in 2013. With respect to the Baird Core Plus Bond Fund, $5,975 of the capital loss carryover expires in 2013. With respect to the Baird Short-Term Bond Fund, $8,150 of the capital loss carryover expires in 2012 and $59,190 expires in 2013. To the extent these Funds realize future net capital gains, those gains will be offset by any unused capital loss carryforward. 5. INVESTMENT ADVISORY AND OTHER AGREEMENTS The Funds have entered into an Investment Advisory Agreement with Baird for the provision of investment advisory services. Pursuant to the Investment Advisory Agreement, the Advisor is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 0.25% for the Baird Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund as applied to the respective Fund's average daily net assets. Certain officers of the Advisor are also officers of the Funds. The Funds have entered into an Administration Agreement with Baird. Under the Administration Agreement, the Advisor assumes and pays all expenses of the applicable Fund other than the investment advisory fees and fees under the 12b-1 plan. Pursuant to the Administration Agreement, the Advisor is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 0.05% for the Baird Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund as applied to the respective Fund's average daily net assets. U.S. Bancorp Fund Services, LLC serves as transfer agent, administrator, and accounting services agent for the Funds. U.S. Bank, N.A. serves as custodian for the Funds. Baird (the "Distributor") is the distributor of the Funds pursuant to a distribution agreement. 6. DISTRIBUTION AND SHAREHOLDER SERVICE PLAN The Funds have adopted a distribution and shareholder service plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan allows the Funds to compensate the Distributor for the costs incurred in distributing the Funds' Investor Class Shares, including amounts paid to brokers or dealers, at an annual rate not to exceed 0.25% of the average daily net assets of the Funds' Investor Class Shares. The Baird Intermediate Bond, Baird Aggregate Bond, Baird Intermediate Municipal Bond and Baird Core Plus Bond Funds incurred $7,415, $2,467, $6,704 and $767, respectively, in fees pursuant to the Plan during the year ended December 31, 2005. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Baird Funds, Inc: We have audited the accompanying statements of assets and liabilities of Baird Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund (five of the portfolios constituting Baird Funds, Inc., hereafter referred to as the "Funds"), including the schedules of investments as of December 31, 2005, and the related statements of operations and changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of changes in net assets and the financial highlights of the Funds for the years or periods ended December 31, 2004 and prior were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements and financial highlights in their report dated February 22, 2005. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Funds were not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2005 by correspondence with the Custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the aforementioned funds of Baird Funds, Inc. as of December 31, 2005, the results of their operations, changes in their net assets and their financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Chicago, Illinois February 15, 2006 BAIRD FUNDS, INC. DIRECTORS & OFFICERS AS OF DECEMBER 31, 2005 Number of Portfolios Other Position(s) Term of Office Principal in Complex Directorships Held with and Length of Occupation(s) Overseen Held Name, Address, and Age the Funds Time Served During Past 5 Years by Director by Director - ---------------------- ----------- -------------- ------------------- ----------- ------------- G. Frederick Kasten, Jr.* Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of And Since September 2000-December 2005); Chairman & CEO, the Regal-Beloit 777 East Wisconsin Avenue Chairman 2000 Advisor (January 1998-January 2000); Corporation, Milwaukee, WI 53202 President, Chairman and CEO, the Advisor a manufacturing Age: 66 (June 1983-January 1998); President, the company Advisor (January 1979-January 1983) John W. Feldt Independent Indefinite; Senior Vice President-Finance, University 8 Director of University of Director Since September of Wisconsin Foundation since 1985; Vice Thompson Wisconsin Foundation 2000 President-Finance, University of Wisconsin Plumb Funds, 1848 University Avenue Foundation (1980-1985); Associate Director, Inc., a mutual Madison, WI 53705 University of Wisconsin Foundation fund complex Age: 63 (1967-1980) of which Mr. Feldt oversees 2 portfolios George C. Kaiser Independent Indefinite; CEO, George Kaiser & Co., a business 8 None 759 N. Milwaukee Street Director Since September consulting company, since 1999; Chairman Milwaukee, WI 53202 2000 and CEO, Hanger Tight Company, a Age: 72 manufacturing company (1988-1999); 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) Frederick P. Stratton, Jr. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of 777 East Wisconsin Avenue Director Since May Stratton Corporation, a manufacturing Midwest Air Suite 1400 2004 company, since 2003; Chairman of the Board, Group, Inc., an Milwaukee, WI 53202 Briggs & Stratton Corporation (2001-2002); airline company; Age: 66 Chairman and CEO, Briggs & Stratton Weyco Group, Corporation (1986-2001) Inc., a men's footwear distributor; Wisconsin Energy Corporation and its subsidiaries Wisconsin Electric Company and Wisconsin Gas Company Mary Ellen Stanek President Indefinite; Managing Director, the Advisor, and Chief N/A N/A 777 East Wisconsin Avenue Since September Investment Officer, Baird Advisors, a Milwaukee, WI 53202 2000 department of the Advisor, since March 2000; Age: 49 President and CEO, Firstar Investment Research & Management Company, LLC ("FIRMCO") (November 1998-February 2000); President, Firstar Funds, Inc. (December 1998-March 2000); President and Chief Operating Officer, FIRMCO (March 1994-November 1998) J. Bary Morgan Senior Vice Indefinite; Chief Investment Officer, Baird Investment N/A N/A 777 East Wisconsin Avenue President Since February Management, a department of the Advisor, Milwaukee, WI 53202 2003 since January 2004; Managing Director, the Age: 40 Advisor, since January 2001; Director, Baird Investment Management (January 2001-January 2004); Senior Vice President, the Advisor (January 2000-January 2001); First Vice President, the Advisor (January 1996- January 2000) Todd S. Nichol Vice Indefinite; Chief Compliance Officer, the Advisor since N/A N/A 777 East Wisconsin Avenue President Since August October 2004; Assistant Compliance Director, Milwaukee, WI 53202 and Chief 2004 the Advisor since August 2002; Senior Vice Age: 43 Compliance President, the Advisor since January 2005; Officer First Vice President, the Advisor (January 2004-January 2005): Vice President, the Advisor (August 2002-January 2004); Vice President-Risk Management, BNY Clearing Services, LLC, a division of The Bank of New York (August 1995-August 2002) Russell P. Schwei Vice Indefinite; Operations Director, the Advisor since N/A N/A 777 East Wisconsin Avenue President Since September July 1992; Managing Director, the Advisor Milwaukee, WI 53202 2000 since January 1997; Chief Financial Age: 46 Officer and Managing Director, the Advisor (February 1999-December 1999). Leonard M. Rush Treasurer Indefinite; Chief Financial Officer, the Advisor since N/A N/A 777 East Wisconsin Avenue Since September January 2000 Milwaukee, WI 53202 2000 Age: 59 Charles M. Weber Secretary Indefinite; Senior Vice President and Associate General N/A N/A 777 East Wisconsin Avenue Since August Counsel, the Advisor since July 2005; Milwaukee, WI 53202 2005 Partner, Quarles & Brady LLP, a law firm Age: 42 (October 1998-June 2005)
* Mr. Kasten is an "interested person" of the Corporation (as defined in the 1940 Act) because he serves as the Chairman of the Advisor. Additional information about the Funds' directors is available in the Statement of Additional Information which may be obtained without charge, upon request, by calling 1-866-44BAIRD. BAIRD FUNDS, INC. DISCLOSURE REGARDING THE BOARD OF DIRECTORS APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT FOR THE BAIRD BOND FUNDS The Board of Directors (the "Board") of Baird Funds, Inc (the "Corporation") met on August 15, 2005 to consider the annual renewal of the Investment Advisory Agreement with Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor") for the management of the Baird Intermediate Bond, Aggregate Bond, Intermediate Municipal Bond, Core Plus Bond and Short-Term Bond Funds (the "Funds"). The Board reviewed and discussed numerous documents that had been provided prior to the meeting, including the Investment Advisory Agreement, memoranda prepared by outside legal counsel and the Secretary of the Funds discussing in detail the Board's fiduciary obligations and the factors it should assess in considering the renewal of the Investment Advisory Agreement, information about the Advisor (including its Form ADV, Annual Report and statement of financial condition), comparative information about the Funds' performance, management fees and expense ratios for the periods ended June 30, 2005, and other pertinent information. The Directors who are not "interested persons" of the Corporation or the Advisor ("Independent Directors"), within the meaning of the Investment Company Act of 1940 (the "1940 Act"), met separately in executive session with counsel to consider the agreement. The Board also received information periodically throughout the year that was relevant to its Investment Advisory Agreement renewal process, including performance, management fee and other expense information. Based on its evaluation of information provided by the Advisor, in conjunction with the Funds' other service providers, the Board, including all of the Independent Directors, approved the annual continuation of the Investment Advisory Agreement for the Funds for an additional one-year period. In considering the agreement and reaching its conclusions, the Board reviewed and analyzed various factors that it determined were relevant, including the factors below. NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED TO THE FUNDS - ------------------------------------------------------------ The Board analyzed the nature, extent and quality of the services provided by the Advisor to the Funds. The Board reviewed and considered the Advisor's significant role in establishing the Funds and the construction of their investment objectives, principal strategies, investment limitations and fee structures. The Board noted the Advisor's overall reputation and positive name recognition, the depth of the Advisor's personnel, resources and commitment to the Funds, and the experience, credentials and continuity of the portfolio management teams employed to manage the Funds' investments. The Board considered the Advisor's disciplined investment decision-making process used for the Funds. The Board also considered other services that the Advisor rendered to the Funds in its capacity as their investment advisor, such as providing some of its key personnel available to serve as officers of the Funds, selecting broker-dealers for execution of portfolio transactions, ensuring adherence to the Fund's investment policies and restrictions, providing support services to the Board and the Audit Committee of the Board and overseeing the Funds' other service providers. In addition, the Board considered that the Advisor provides administrative services to each Fund at an annual rate of 0.05% of the Fund's average daily net assets, and is responsible for paying the Fund's custody, transfer agency, accounting, pricing, auditing, legal and director fees and other ordinary expenses (except for advisory and 12b-1 fees), which has the effect of capping the Funds' expense ratios at 0.55% and 0.30% for Investor and Institutional Class shares, respectively. The Board further noted that the Advisor, in its capacity as a registered broker-dealer, also serves as distributor and principal underwriter of shares of the Funds and spends time and effort marketing the Funds. The Board also considered the strength of the Advisor's compliance department, including the Funds' chief compliance officer, and the fact that the Advisor has not experienced any significant legal, compliance or regulatory difficulties since the Funds were launched. The Board concluded that the nature, extent and quality of the services provided by the Advisor to the Fund were appropriate and that each Fund was likely to continue to benefit from services provided under the Investment Advisory Agreement. INVESTMENT PERFORMANCE OF THE ADVISOR AND THE FUNDS - --------------------------------------------------- In considering the investment performance of each Fund, the Board reviewed information as of June 30, 2005 regarding the Fund's performance in comparison to its benchmark index and its peer groups as determined by Lipper. With respect to each Fund's performance relative to its benchmark index, the Board noted that the Baird Intermediate Bond Fund had outperformed the Lehman Brothers Intermediate Government/Credit Index, the Baird Aggregate Bond Fund had outperformed the Lehman Brothers Aggregate Bond Index and the Baird Core Plus Bond Fund had outperformed the Lehman Brothers U.S. Universal Bond Index, in each case for the one-year, three-year and since inception periods ending June 30, 2005. The Board also noted that, while the performance of the Baird Intermediate Municipal Bond Fund was comparable but lower than the Lehman Brothers 10-Year General Obligation Bond Index for each of the one-year, three- year and since inception periods ended June 30, 2005, the Advisor had kept the Board informed of the investment strategy of the Fund and discussed with the Board that the Fund was deliberately managed with measurably less interest rate and credit risk than the benchmark index. The Board also reviewed the brief 10- month performance history of the Baird Short-Term Bond Fund and considered that it had outperformed its benchmark, the Lehman Brothers 1-3 Year Government/Credit Index, during that time. The Board also reviewed information regarding the performance of each Fund relative to other mutual funds with a similar investment objective as determined by Lipper. The Board observed that the performance of the Institutional and Investor Class shares of the Baird Intermediate Bond Fund over the three-year and since inception periods ended June 30, 2005 was better than the Lipper Intermediate Investment Grade Debt Fund average; the performance of the Institutional and Investor Class shares of the Baird Aggregate Bond Fund over the one-year, three-year and since inception periods ended June 30, 2005 was better than the Lipper Intermediate Investment Grade Debt Fund average (in the top quartile for all periods); the performance of the Institutional and Investor Class shares of the Baird Intermediate Municipal Bond Fund over the one-year, three-year and since inception periods ended June 30, 2005 was better than the Lipper Intermediate Municipal Debt Fund average (in the top quartile for the three-year and since inception periods); the performance of the Institutional and Investor Class shares of the Baird Core Plus Bond Fund over the one-year, three-year and since inception periods ended June 30, 2005 was better than the Lipper General Bond Fund average (in the top quartile for all periods); and the performance of the Baird Short Term Bond Fund over the 10-month period ended June 30, 2005 was slightly worse than the Lipper Short-Term Investment Grade Debt Fund average. The Board also considered the Advisor's quarterly portfolio commentaries and reviews explaining the Funds' performance, the Advisor's consistent and disciplined investment decision process and the investment strategies it employs for the Funds. After considering all of the information, the Board concluded that, although past performance is not a guarantee of future results, each Fund and its shareholders were likely to benefit from the Advisor's continued management. COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISOR - -------------------------------------------------------------- The Board examined the fee and expense information for each of the Baird Intermediate Bond, Aggregate Bond, Intermediate Municipal Bond, Core Plus Bond and Short-Term Bond Funds, including a comparison of such information to other similarly situated mutual funds as determined by Lipper. The Board noted that each Fund's investment management (or advisory) fee and total expense ratio (for both its Investor Class and Institutional Class shares) were significantly lower than the average and median advisory fees and expense ratios for all mutual funds in its Lipper category. The Board also reviewed and considered investment management fees charged by the Advisor to other investment advisory clients and found that the fee paid by the Funds (0.25%) was less than the fee that the Advisor charges on the first $25 million of a separately managed account (0.30%) and the same as the fee that the Advisor charges on the next $25 million. The Board noted and discussed the extent of the significant additional services provided to the Funds that the Advisor did not provide in the other advisory relationships. Those services included certain administrative services, oversight of the Fund's other service providers, director support, risk management, regulatory compliance and various other services. The Board considered the fees realized, and the costs incurred, by the Advisor in providing investment management services to the Fund and the profitability to the Advisor of having a relationship with the Funds. The Board noted the unique expense structure of the Funds whereby the Institutional Class shareholders were charged only a management fee and an administration fee and the Adviser incurred all of the other expenses on behalf of each Fund and that Investor Class shareholders incurred the same expenses as the Institutional Class shareholders plus a 0.25% 12b-1 fee. This structure means that the annual expense ratio for each Fund (as a percentage of average daily net assets) is 0.55% for Investor Class shares and 0.30% for Institutional Class shares. The Advisor informed the Board that the profits realized by the Advisor (as a percentage of revenue) from its relationship with the Funds were less than those realized by the Advisor on its investment advisory business as a whole, particularly since the 0.05% administration fee payable to the Advisor by each Fund was considerably less than the Fund's expenses that the Advisor is required to pay. The Board concluded that the profits realized by the Advisor from its relationship with the Funds were appropriate. The Board also reviewed and considered the general financial condition of the Advisor and determined it to be sound. In light of all of the information that it received and considered, the Board concluded that the management fee and total expense ratio of each Fund were reasonable with respect to the services provided and the performance of the Fund. OTHER BENEFITS TO THE ADVISOR - ----------------------------- The Board noted that the Advisor does not have any soft dollar arrangements and does not realize any other tangible benefits in connection of its management of the Baird Intermediate Bond, Aggregate Bond, Intermediate Municipal Bond, Core Plus Bond and Short-Term Bond Funds. The Board believed that the Funds generally benefit from their association with the Advisor and the use of the "Baird" name. The Board concluded that the other benefits realized by the Advisor from its relationship with the Funds were appropriate. ECONOMIES OF SCALE AND FEE LEVELS REFLECTING THOSE ECONOMIES - ------------------------------------------------------------ The Board noted that the Funds' advisory fee structure do not contain any breakpoint reductions as the Funds grow in size. However, the Board recognized that the Advisor essentially bears all of the Funds' expenses other than management, distribution (12b-1) and administration fees. The Board also recognized that the advisory fee rates paid by the Funds were designed to be lower than the fees otherwise charged by the Advisor to its separately managed account clients and to be comparable to the second or third breakpoint advisory fee levels paid by other comparable mutual funds. After consideration of the above factors as well as other factors, the Board, including a majority of the Independent Directors, concluded that the approval of the renewal of the investment advisory agreement was in the best interest of each Fund and its shareholders. ADDITIONAL INFORMATION PROXY VOTING A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds' website at www.bairdfunds.com; and by accessing the SEC's website at www.sec.gov. Each Fund's proxy voting record, if applicable, is available without charge, upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds' website at www.bairdfunds.com; and by accessing the SEC's website at www.sec.gov. The Funds generally do not vote proxies because the securities held in their portfolios, consisting of bonds and other fixed-income securities, are not entitled to vote. PORTFOLIO HOLDINGS DISCLOSURE The Funds file a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q are available on the SEC website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-732-0330. The Funds' Forms N-Q may also be obtained by calling toll-free 1-866-44BAIRD or by accessing the Fund's website at www.bairdfunds.com. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On October 10, 2005, the Audit Committee of the Corporation's Board of Directors and the Board accepted the resignation of PricewaterhouseCoopers LLP as auditors for the Funds. The reports of PricewaterhouseCoopers LLP on the Funds' financial statements for the past two years contained no adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principle. In addition, during the Corporation's two most recent fiscal years and through October 10, 2005, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused them to make a reference thereto in their report on the Corporation's financial statements for such years. On November 22, 2005, the Audit Committee recommended, and the Board approved, the appointment of Grant Thornton LLP, an independent registered public accounting firm, to audit the Funds' 2005 financial statements, subject to completion of the terms of its engagement. Grant Thornton LLP was formally engaged as auditors of the Funds on December 21, 2005. BAIRD FUNDS, INC. c/o U.S. Bancorp Fund Services, LLC P.O. Box 701 Milwaukee, Wisconsin 53201-0701 1-866-44BAIRD BOARD OF DIRECTORS G. Frederick Kasten, Jr. (Chairman) John W. Feldt George C. Kaiser Frederick P. Stratton, Jr. INVESTMENT ADVISOR AND DISTRIBUTOR Robert W. Baird & Co. Incorporated 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 ADMINISTRATOR AND TRANSFER AGENT U.S. Bancorp Fund Services, LLC P.O. Box 701 615 East Michigan Street Milwaukee, WI 53202 CUSTODIAN U.S. Bank, N.A. 425 Walnut Street Cincinnati, OH 45202 LEGAL COUNSEL Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Grant Thornton LLP 175 West Jackson Boulevard, 20th Floor Chicago, Illinois 60604 (BAIRD FUNDS LOGO) ANNUAL REPORT December 31, 2005 Baird LargeCap Fund Baird MidCap Fund Baird SmallCap Fund TABLE OF CONTENTS PAGE ---- LETTER TO SHAREHOLDERS 1 2005 ECONOMIC AND STOCK MARKET COMMENTARY 2 BAIRD LARGECAP FUND 4 BAIRD MIDCAP FUND 11 BAIRD SMALLCAP FUND 18 ADDITIONAL INFORMATION ON FUND EXPENSES 25 STATEMENTS OF ASSETS AND LIABILITIES 27 STATEMENTS OF OPERATIONS 28 STATEMENTS OF CHANGES IN NET ASSETS 29 FINANCIAL HIGHLIGHTS 32 NOTES TO THE FINANCIAL STATEMENTS 38 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 45 DIRECTORS AND OFFICERS 46 DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD EQUITY FUNDS 48 ADDITIONAL INFORMATION 51 This report has been prepared for shareholders and may be distributed to others only if preceded or accompanied by a current prospectus. CAUTIONARY NOTE ON ANALYSES, OPINIONS AND OUTLOOKS: In this report we offer - --------------------------------------------------- analyses and opinions on the performance of individual securities, companies, industries, sectors, markets, interest rates and governmental policies, including predictions, forecasts and outlooks regarding possible future events. These can generally be identified as such because the context of the statements may include such words as "believe," "should," "will," "expects," "anticipates," "hopes" and words of similar effect. These statements reflect the portfolio managers' good faith beliefs and judgments and involve risks and uncertainties, including the risk that the portfolio managers' analyses, opinions and outlooks are or will prove to be inaccurate. It is inherently difficult to correctly assess and explain the performance of particular securities, sectors, markets, interest rate movements, governmental actions or general economic trends and conditions, and many unforeseen factors contribute to the performance of Baird Funds. Investors are, therefore, cautioned not to place undue reliance on subjective judgments contained in this report. (BAIRD FUNDS LOGO) 1-866-442-2473 www.bairdfunds.com ------------------ February 28, 2006 Dear Shareholders, We would like to thank you for investing in the Baird Funds. We appreciate the opportunity to help our investors navigate the transitions and challenges presented by the financial markets in 2005. The Baird Funds continued to grow during the year with total net assets exceeding $820 million as of December 31, 2005. In addition, two of our Equity Funds and three of our Bond Funds celebrated their 5-year anniversaries during the year. In this Annual Report we review the equity market in 2005 and the performance and composition of each of the Baird Equity Funds. We hope you find this report both informative and helpful in achieving your investment goals. Thank you again for choosing Baird Funds. Sincerely, /s/Mary Ellen Stanek Mary Ellen Stanek, CFA President Baird Funds, Inc. 2005 ECONOMIC AND STOCK MARKET COMMENTARY The Dow Jones Industrial Average (DJIA) and the S&P 500 Stock Index, the primary benchmarks used to assess the performance of the stock markets generally, posted modest total returns for 2005 of 1.74% and 4.91%, respectively. In the face of eight interest rate hikes by the Federal Reserve, terrorist bombings in London, a devastating hurricane season and record oil and natural gas prices, such performance, in our view, is remarkable. During the first half of the year, stable U.S. economic growth and robust corporate profit gains were negated by rising short-term interest rates and $60 per barrel oil, keeping the DJIA stuck between 10,000 and 10,900 and the S&P 500 mired between 1140 and 1220. Reflecting a directionless market, total returns for these benchmarks at the mid-year point were -3.64% and -0.82%, respectively. The stock market's attempt at a summer rally in response to a decline in oil prices and longer-term interest rates from their May highs was derailed by Hurricanes Katrina, Rita and Wilma, resulting in a 5% decline in the broad market averages from the August highs to the October lows. Share prices rallied to finish the year with modest gains as stock market investors regained confidence and the U.S. economy appeared to absorb the blows delivered by the hurricanes. Specifically, the DJIA gained 5.59% and the S&P 500 advanced 5.76% during the second half of the year, bringing full-year returns for these benchmarks into positive territory. Inflation-adjusted (i.e., "real") growth in U.S. gross domestic product (GDP) was 3.5% in 2005 while job gains averaged nearly 170,000 per month. Consumer spending was supported by record net worth thanks to rising home values and higher stock prices. Rising net worth and persistent job gains bolstered consumer confidence. Although debt levels are high, research firm ISI Group reports that total consumer debt as a percentage of disposable personal income is lower in the U.S. than in Japan and the U.K. In addition, American households have over $5 trillion in cash and short-term investments on their collective balance sheet according to the Federal Reserve. As long as U.S. consumers remain confident, they should continue spending. Consequently, we believe the most likely outcome for 2006 is for continued growth in consumer spending, though some slowdown is expected as the housing market cools due to rising interest rates and declining affordability. Importantly, job growth should be sustained since U.S. businesses have the financial wherewithal to hire and invest, and appear to have confidence in the economy. Improved U.S. business confidence is supported by record profitability, strong balance sheets, growing markets and easy access to capital. Nonetheless, history shows that interest rate hikes by the Federal Reserve and sustained increases in energy prices typically impact the economy with a lag. As a result, economic growth should slow eventually. In the meantime, our economy continues to show remarkable resilience. Today's global economy is often characterized as being driven by U.S. consumers buying imported manufactured goods with money borrowed from foreigners through loans secured by appreciating assets (i.e., houses and stocks). PIMCO's Paul McCulley refers to this phenomenon as "stable disequilibrium." In addition, the Federal Reserve has created a global liquidity glut that keeps asset prices high and interest rates low. With globalization providing an almost unlimited supply of cheap labor, the liquidity glut stimulates the supply-side of the global economy by fostering investment in new production capacity. This has worked to keep inflation low by flooding the global market with increasingly cheaper goods. This is the opposite result of the 1970's, when the Fed stimulated the demand-side of a more insular U.S. economy and created high inflation. The biggest risk to stable disequilibrium is a sharp decline in U.S. consumer spending or a sudden drop in the value of the dollar against foreign currencies. The Federal Reserve and other central banks are expected to do whatever is necessary to prevent either of these developments. As long as globalization keeps inflation low, the world's central banks have great flexibility to sustain stable disequilibrium. Consequently, stable disequilibrium could last longer than many observers expect. The low inflation, low interest rate, pro-growth environment associated with sustained stable equilibrium is generally regarded as positive for financial markets. The U.S. continues to attract foreign investment because America has capitalized on globalization and has been the most successful among the developed nations in transitioning from an industrial to a service and knowledge-based economy. Our success is largely attributable to a flexible labor force, a business-friendly regulatory environment and an entrepreneurial culture that embraces innovation and risk-taking. For example, many U.S. companies are moving away from the vertical design/produce/sell business model. Where possible, U.S. companies have outsourced production, the most volatile of the three processes, in order to focus on the more profitable and higher value-added design and marketing functions. GaveKal Research calls these businesses "platform companies." The emergence of platform companies and a growing service sector have made the U.S. economy more stable and less vulnerable to the volatile swings of the manufacturing cycle (i.e., the volatility of the manufacturing cycle has been outsourced along with the jobs). This is why recent economic cycles in the U.S. have lasted longer and been less "bumpy" than previous cycles. Just as stable businesses can carry more debt and produce higher returns than more volatile businesses, stable economies can carry higher debt loads and sustain higher living standards than more volatile economies. Since U.S. economic cycles are more stable, U.S. businesses could be viewed as less risky. Consequently, it could be argued that the additional return investors demand to compensate them for risk (i.e., the risk premium) should be lower in today's environment. Indeed, lower risk premiums for bond investors are reflected in today's low real interest rates and narrow credit spreads. For stock investors, lower risk premiums are reflected in today's high price-to- earnings ratios and low dividend yields. In essence, a more stable economy means lower returns for investors. When viewed from this perspective, the high returns captured by investors in the 1980's and 1990's were primarily the result of the transition from a more volatile to a more stable U.S. economy. With that transition now largely complete, investors in U.S. assets should expect more modest investment returns in the future. OUTLOOK FOR 2006 To summarize, the most likely outcome for 2006 is decelerating economic growth due to smaller increases in consumer spending. The slowdown in consumer spending should be partially offset by continued job growth and double-digit increases in business investment. Confident that inflation is contained, the Federal Reserve will most likely stop raising short-term interest rates after one or two more quarter-point hikes. Ironically, this could result in a modest rise in longer-term interest rates. However, any rise in long-term rates is unlikely to be substantial enough to be a drag on economic activity. Such an environment should favor stock market investments over investments in the bond market. But, America's unbalanced global financial position (stable disequilibrium), the Federal budget crisis facing America if Medicare and Social Security promises to aging baby boomers are to be kept, and the potential for severe global economic dislocations from an unanticipated shock (e.g., oil, Iran, Iraq, terrorism, bird flu, etc.) are likely to produce wider swings in share prices in 2006 versus 2005's below-average volatility. BAIRD LARGECAP FUND DECEMBER 31, 2005 PORTFOLIO MANAGERS' COMMENTARY Stock market performance trends in 2005 extended tendencies in place since the market rebounded from the lows reached in late 2002. Like 2003 and 2004, stock market performance in 2005 favored lower quality companies over high quality companies and value stocks over growth stocks. In addition, investors continued to favor companies benefiting from the sharp rise in commodity prices, such as firms in the energy, metals and mining industries. These trends put the high quality, persistent growth companies held in the Baird LargeCap Fund at a performance disadvantage. Consequently, the Fund's equity performance trailed the broad market benchmarks in 2005. Specifically, Baird LargeCap Fund Institutional Class shares provided a 3.39% total return in 2005 (3.15% for Investor Class shares), lagging the 5.27% and 4.91% returns on the Russell 1000 Growth Index (the Fund's primary benchmark) and the S&P 500 Index, respectively. Last year's winning themes were not consistent with the Fund's emphasis on high quality companies, i.e., companies that are leaders in their ---- respective industries and that have strong balance sheets and an established record of consistent growth in sales, earnings, cash flows and dividends. Indeed, Standard & Poor's reports that the growth stock component of the S&P 500 (S&P 500/Barra Growth Index) posted a 3.46% gain in 2005 while the value stock component (S&P 500/Barra Value Index) gained 6.33%. Also, S&P 500 companies in the highest quality categories (A+, A and A-) provided a 3.44% total return in 2005 versus a 9.55% return for companies in the lower quality categories (B, B-, C and D). The underperformance of the Fund's equities in recent years can be viewed as a normal adjustment following the above-market returns posted by these stocks during the market decline from the "bubble" highs in early 2000 to the lows of October 2002. Investors should again embrace high quality, predictable growth companies when, as we anticipate, the economy slows to a more sustainable growth rate and profit gains moderate. We believe our emphasis on high quality growth companies is a winning strategy over the full market cycle, delivering competitive returns with less price volatility. Consequently, we intend to adhere to our investment discipline despite recent performance trends. The Fund's sector weightings were the major source of underperformance versus the S&P 500 Index during the year with above benchmark exposure to the weak consumer discretionary sector compounded by under exposure to the better performing energy and financial sectors and by lack of exposure to the utilities sector. In contrast, stock selection accounted for the bulk of the Fund's underperformance versus the Russell 1000 Growth Index during the year with disappointing results from core technology and industrial holdings Dell, Maxim Integrated Products and UPS (-28%, -15% and -12%, respectively, in 2005) compounded by the Fund's holdings in the energy sector gaining "only" 24% versus 56% for the more speculative energy holdings in the Russell benchmark. Stock selections in the consumer groups and in the health care sector were bright spots for the portfolio in 2005. Strong returns from core holdings Best Buy and Walgreen (+10% and +15%, respectively, in 2005) and more recent additions eBay and Starbucks (+17% and +31%, respectively, since their initial purchase dates in April 2005) and standout returns from core health care holdings Teva Pharmaceutical Industries and Caremark Rx (+44% and +31%, respectively in 2005) and new addition Genentech (+92% since the initial purchase date in February 2005) positively affected the Fund's relative performance. Four stocks eliminated from the portfolio in 2005, American International Group, Cintas, IBM and Zebra Technologies, contributed meaningfully to the Fund's disappointing relative performance. From the beginning of the year through the dates the positions were eliminated, AIG declined 23%, Cintas dropped 13%, IBM fell 19% and Zebra Technologies declined 23%. In summary, our focus on high quality, large capitalization growth companies was a performance liability for the Fund in 2005. But, as economic and corporate profit growth slows and investors shift their focus from short-term speculative opportunities to long-term investment merit, relative price performance should favor the shares of higher quality, steady growth companies. Consequently, we believe our investment strategy should be rewarded as the market cycle evolves. Portfolio Managers: David W. Bowman, CFA Richard A. Burling, CFA Douglas E. Guffy J. Bary Morgan, CFA Joel D. Vrabel, CFA BAIRD LARGECAP FUND A December 31, 2005 summary of the Fund's top 10 holdings and equity sector analysis compared to the Russell 1000 Growth Index and the S&P 500 Index is shown below. TOP 10 HOLDINGS* Teva Pharmaceutical Industries Ltd. 4.0% Medtronic, Inc. 3.7% Amgen, Inc. 3.6% General Electric Company 3.5% Emerson Electric Company 3.4% Proctor & Gamble Company 3.2% Illinois Tool Works, Inc. 3.2% Target Corporation 3.2% Best Buy Co., Inc. 3.2% Genentech, Inc. 3.0% NET ASSETS: $29,776,151 PORTFOLIO TURNOVER RATIO: 28.6% NUMBER OF EQUITY HOLDINGS: 38 PORTFOLIO EXPENSE RATIO:*** INSTITUTIONAL CLASS: 0.75% INVESTOR CLASS: 1.00%**** EQUITY SECTOR ANALYSIS** LargeCap Russell 1000 S&P 500 Fund Growth Index Index -------- ------------ ------- Consumer Discretionary 19.3% 14.7% 10.8% Consumer Staples 12.7% 11.4% 9.5% Energy 6.4% 3.6% 9.3% Financials 6.7% 6.2% 21.3% Health Care 26.2% 19.9% 13.3% Industrials 13.2% 14.4% 11.4% Information Technology 13.0% 26.6% 15.1% Materials 2.7% 2.1% 3.0% Telecommunication Services 0.0% 0.6% 3.0% Utilities 0.0% 0.5% 3.4% * The Fund's portfolio composition is subject to change and there is no assurance that the Fund will continue to hold any particular security. Percentages shown relate to the Fund's total net assets as of December 31, 2005. ** Percentages shown in parentheses relate to the Fund's total equity investments as of December 31, 2005, and may not add up to 100% due to rounding. *** The Advisor has contractually agreed to limit the Fund's total annual fund operating expenses to 0.75% of average daily net assets for the Institutional Class shares and 1.00% of average daily net assets for the Investor Class shares, at least through December 31, 2006. **** Includes 0.25% 12b-1 fee. BAIRD LARGECAP FUND BAIRD LARGECAP FUND - INSTITUTIONAL CLASS VALUE OF A $100,000 INVESTMENT Baird LargeCap Fund - Russell 1000 S&P 500 Date Institutional Class Shares Growth Index Index ---- -------------------------- ------------ ------- 9/29/2000 $100,000 $100,000 $100,000 12/31/2000 $95,854 $78,655 $92,176 6/30/2001 $86,949 $67,454 $86,003 12/31/2001 $86,421 $62,591 $81,220 6/30/2002 $70,799 $49,587 $70,532 12/31/2002 $64,357 $45,138 $63,270 6/30/2003 $70,181 $51,045 $70,710 12/31/2003 $78,357 $58,566 $81,418 6/30/2004 $79,364 $60,170 $84,222 12/31/2004 $82,442 $62,256 $90,278 6/30/2005 $81,530 $61,185 $89,548 12/31/2005 $85,237 $65,533 $94,712 GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD LARGECAP FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird LargeCap Fund - Russell 1000 S&P 500 Date Investor Class Shares Growth Index Index ---- --------------------- ------------ ------- 9/29/2000 $10,000 $10,000 $10,000 12/31/2000 $9,572 $7,865 $9,218 6/30/2001 $8,672 $6,745 $8,600 12/31/2001 $8,612 $6,259 $8,122 6/30/2002 $7,052 $4,959 $7,053 12/31/2002 $6,403 $4,514 $6,327 6/30/2003 $6,953 $5,105 $7,071 12/31/2003 $7,760 $5,857 $8,142 6/30/2004 $7,850 $6,017 $8,422 12/31/2004 $8,148 $6,226 $9,028 6/30/2005 $8,037 $6,118 $8,955 12/31/2005 $8,404 $6,553 $9,471 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD LARGECAP FUND AVERAGE ANNUAL TOTAL RETURNS For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS SINCE INCEPTION(1) - --------------------------------------- -------- ---------- ----------------------- Baird LargeCap Fund - Institutional Class Shares 3.39% -2.32% -2.99% Baird LargeCap Fund - Investor Class Shares 3.15% -2.57% -3.25% Russell 1000 Growth Index(2) 5.27% -3.59% -7.73% S&P 500 Index(3) 4.91% 0.55% -1.03%
(1) For the period from September 29, 2000 (commencement of operations) through December 31, 2005. (2) The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth rates. The Russell 1000 Index consists of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index, which in turn is comprised of the 3,000 largest U.S. domiciled publicly traded common stocks by market capitalization. These indices do not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. The Russell 1000 Growth Index has been selected to replace the S&P 500 Index as the Fund's primary benchmark because the Russell 1000 Growth Index more accurately represents the performance of growth-style stocks in which the Fund invests. (3) The S&P 500 Index is an unmanaged, market-value weighted index of 500 stocks chosen by Standard & Poor's on the basis of market size, liquidity and industry group representation. The S&P 500 Index is one of the most widely used benchmarks of U.S. equity performance. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD LARGECAP FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Shares Value ------ ----- COMMON STOCKS - 99.0% AIR FREIGHT & LOGISTICS - 2.2% 8,837 United Parcel Service, Inc. - Class B $ 664,100 ----------- BEVERAGES - 2.7% 13,560 PepsiCo, Inc. 801,125 ----------- BIOTECHNOLOGY - 6.6% 13,714 Amgen, Inc.* 1,081,486 9,740 Genentech, Inc.* 900,950 ----------- 1,982,436 ----------- CHEMICALS - 2.5% 14,130 Praxair, Inc. 748,325 ----------- COMMERCIAL BANKS - 2.5% 11,652 Wells Fargo & Company 732,095 ----------- COMMUNICATIONS EQUIPMENT - 1.8% 31,030 Cisco Systems, Inc.* 531,234 ----------- COMPUTERS & PERIPHERALS - 2.4% 23,580 Dell, Inc.* 707,164 ----------- DIVERSIFIED FINANCIAL SERVICES - 2.6% 15,846 Citigroup, Inc. 769,006 ----------- ELECTRICAL EQUIPMENT - 3.4% 13,750 Emerson Electric Company 1,027,125 ----------- ENERGY EQUIPMENT & SERVICES - 2.0% 16,130 BJ Services Company 591,487 ----------- FOOD & STAPLES RETAILING - 6.1% 18,430 Sysco Corporation 572,252 14,990 Walgreen Company 663,457 12,270 Wal-Mart Stores, Inc. 574,236 ----------- 1,809,945 ----------- HEALTH CARE EQUIPMENT & SUPPLIES - 6.1% 19,000 Medtronic, Inc. 1,093,830 10,790 Zimmer Holdings, Inc.* 727,678 ----------- 1,821,508 ----------- HEALTH CARE PROVIDERS & SERVICES - 2.4% 13,840 Caremark Rx, Inc.* 716,774 ----------- HOTELS, RESTAURANTS & LEISURE - 2.3% 22,720 Starbucks Corporation* 681,827 ----------- HOUSEHOLD PRODUCTS - 3.2% 16,610 Procter & Gamble Company 961,387 ----------- INDUSTRIAL CONGLOMERATES - 3.5% 29,600 General Electric Company 1,037,480 ----------- INSURANCE - 2.3% 14,800 AFLAC, Incorporated 687,016 ----------- INTERNET & CATALOG RETAIL - 3.0% 20,530 eBay, Inc.* 887,922 ----------- IT SERVICES - 2.1% 14,340 Fiserv, Inc.* 620,492 ----------- MACHINERY - 3.2% 10,880 Illinois Tool Works, Inc. 957,331 ----------- MEDIA - 2.5% 14,510 The McGraw-Hill Companies, Inc. 749,151 ----------- MULTILINE RETAIL - 3.2% 17,280 Target Corporation 949,882 ----------- OIL & GAS - 6.0% 13,080 Apache Corporation 896,242 15,850 Exxon Mobil Corporation 890,294 ----------- 1,786,536 ----------- PHARMACEUTICALS - 10.1% 12,510 Abbott Laboratories 493,269 11,460 Johnson & Johnson 688,746 11,840 Novartis AG - ADR F 621,363 27,780 Teva Pharmaceutical Industries Ltd. - ADR F 1,194,818 ----------- 2,998,196 ----------- SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 3.2% 20,398 Intel Corporation 509,134 12,120 Maxim Integrated Products, Inc. 439,229 ----------- 948,363 ----------- SOFTWARE - 2.8% 31,700 Microsoft Corporation 828,955 ----------- SPECIALTY RETAIL - 8.3% 21,695 Best Buy Co., Inc. 943,299 18,196 Home Depot, Inc. 736,574 34,900 Staples, Inc. 792,579 ----------- 2,472,452 ----------- Total Common Stocks (Cost $22,943,465) 29,469,314 ----------- SHORT TERM INVESTMENTS - 0.1% MONEY MARKET FUNDS - 0.1% 34,757 Investment Company Cash Reserve Portfolio- AIM Fund 34,757 ----------- Total Short-Term Investments (Cost $34,757) 34,757 ----------- Total Investments (Cost $22,978,222) - 99.1% 29,504,071 ----------- Other Assets in Excess of Liabilities - 0.9% 272,080 ----------- TOTAL NET ASSETS - 100.0% $29,776,151 ----------- ----------- ADR - American Depository Receipt * Non Income Producing F Foreign Security See notes to the financial statements BAIRD MIDCAP FUND DECEMBER 31, 2005 PORTFOLIO MANAGERS' COMMENTARY For a third consecutive year, mid-cap shares advanced. Inflation-adjusted U.S. GDP growth of 3.5% in 2005 was stronger than consensus expectations. Corporate profit growth remained strong and balance sheets continue to improve. Growth actually accelerated during the last six months of the year in the face of a 50% year-over-year increase in energy costs, higher short-term interest rates, unprecedented hurricane dislocations, and declining housing affordability. These issues have scarcely impacted consumer spending. Late in 2005 the quality growth stocks held by the Fund started to perform better than the mid-cap benchmarks. However, since the beginning of the market recovery in late 2002, investors have not shown a strong preference for higher quality mid-cap companies. Market sectors such as basic materials, utilities and, most notably, energy have been standout performers during the recent economic advance. As you may remember, the Fund typically has little, if any exposure in those more commodity oriented or heavily regulated areas. On the other hand, the Fund's primary benchmark, the Russell Midcap Growth Index, as well as the S&P MidCap 400 Index, have greater exposure to those very cyclical parts of the economy, helping to explain the variation between the Fund's performance and the performance of those benchmarks. We prefer to stay focused on what we believe to be the true secular growth areas of the economy. Those beliefs lead us to such sectors as financials, information technology, health care and consumer discretionary - and to businesses that earn above average returns on invested capital, grow faster than their peers and can fund their growth without relying upon external sources. The Fund tends to have more exposure than the benchmarks in several of those more consistent and higher quality, growth areas. This period represents the longest time during Baird's 13-year mid-cap investment history that our strategy has been out of favor with investors. History suggests that investors' emphasis will shift as this cycle matures and profit growth decelerates. Additionally, during the past two years, a significant portion of the Russell benchmark performance has been derived from companies larger in market capitalization than our typical $2 billion to $10 billion range. While we have stayed true to our style and market cap size parameters, this has meant being somewhat out of sync with the benchmarks. Obviously, this has been challenging for you and us, but we remain convinced that our long term, risk controlled strategy will prove successful over full market cycles. Our investments in quality industrial companies such as C.H. Robinson Worldwide, Joy Global and Rockwell Automation helped the Fund's performance significantly during 2005. Manufacturing and transportation related companies in the Fund's portfolio enjoyed very strong earnings growth, which was reflected in solid price appreciation. We see that pattern continuing and expect to maintain an overweight in the industrial sector during 2006. Our conviction in those businesses caused us to maintain an overweight position in the industrial sector for most of 2005 when compared with the Russell Midcap Growth Index, which bolstered the Fund's performance. Energy sector investments in oil service companies such as XTO Energy, Cooper Cameron and Smith International performed well, as you would expect, during the year. We will be opportunistic in adding to this sector during the new year, as we expect price volatility for the underlying commodities. Visibility of earnings growth, especially for oil service companies, is very good. However, we did not have as much exposure to the energy sector as either of the fund's benchmarks during 2005, which hurt overall performance. We were most disappointed in the performance of our holdings of growth companies in the financial sector because of our consistent overweight of that sector related to our primary benchmark. Solid performers in 2004, these companies suffered from earnings-multiple pressure as the Federal Reserve (Fed) raised rates during every scheduled meeting during the year. TCF Financial, Amegy Bank and East West Bancorp lagged during the year. Earnings growth, however, remained quite robust, providing us the comfort to be patient investors. As the tightening cycle comes to a close, we expect multiples to rise again and will be an opportunity to add to the sector. Fund holdings in the consumer discretionary sector were also challenging during 2005. Typically an area of solid fundamental growth, shares in those stocks faced the headwinds of higher oil prices and interest rates. Specifically, our holdings in restaurants and traditional retail hurt performance as did a lack of exposure to home builders. Holdings within the information technology (IT) sector also underperformed for the year. We generally maintained an underweight position versus the Russell benchmark but stock selection was the primary reason for underperformance in IT. Specifically, our exposure to the RFID sector and the shares of Symbol Tech as well as long time holding Zebra Technologies hurt performance in 2005. We have hired two new research analysts covering information technology companies in order to improve our stock selection capabilities in that sector. Finally, the health care sector, traditionally a more stable performer, was nothing of the sort for us in 2005. We have historically maintained an equal- to-overweight position in this sector compared to the Russell Midcap Growth benchmark and an overweight position compared to the S&P Midcap 400. Early in the year, as investors threw caution to the wind and added aggressively to the commodity sectors, our health care stocks came under significant selling pressure. Several of the stocks fell more than 25-30% during the first half of the year, hurting performance of the Fund. Given the strong earnings outlooks, we used the weakness to add to our holdings. The Fund was rewarded by remaining long term investors as the shares rebounded in the second half of the year. For the entire year, our healthcare exposure hurt Fund performance. The Fed continued to raise short-term interest rates during the fourth quarter. We believe sustainable domestic growth is important to the Fed's rate policy, thus any interest rates hikes should not cause a significant slowdown. The Fed raising the Funds rate to a "neutral" range of 4.50% - 4.75% is most likely and should support the current environment of low inflation and stable growth. Energy cost increases contributed to the 3.5% rise in the consumer price index last year. While energy costs may trend higher next year, our 3% real GDP growth forecast implies that increases should be more moderate. Increased globalization, technology, and competition have kept core inflation contained, offsetting higher energy prices. Our outlook for 2006 calls for continued economic growth, solid corporate profits growth and an advancing stock market led by a shift back to quality growth companies. Confident that inflation is contained, the Fed will most likely stop raising short-term interest rates after one or two more quarter- point hikes. Low inflation is absolutely critical to the optimistic outlook because it will keep the Fed from pursuing a restrictive monetary policy. If inflation stays muted, then the liquidity backdrop should remain favorable for financial markets. Portfolio Management Team: Greg P. Edwards, CFA J. Bary Morgan, CFA Charles F. Severson, CFA BAIRD MIDCAP FUND A December 31, 2005 summary of the Fund's top 10 holdings and equity sector analysis compared to the Russell Midcap Growth Index and the S&P MidCap 400 Index is shown below. TOP 10 HOLDINGS* Cytyc Corporation 3.9% Gen-Probe, Incorporated 3.2% Smith International, Inc. 2.8% Rockwell Automation, Inc. 2.8% Investors Financial Services Corporation 2.8% Medicis Pharmaceutical Corporation - Class A 2.7% Dick's Sporting Goods, Inc. 2.6% Zebra Technologies Corporation - Class A 2.6% Williams-Sonoma, Inc. 2.5% Microchip Technology Incorporated 2.5% NET ASSETS: $90,177,616 PORTFOLIO TURNOVER RATIO: 77.4% NUMBER OF EQUITY HOLDINGS: 44 PORTFOLIO EXPENSE RATIO:*** INSTITUTIONAL CLASS: 0.85% INVESTOR CLASS: 1.10%**** EQUITY SECTOR ANALYSIS** MidCap Russell Midcap S&P 400 Fund Growth Index Index ------ -------------- ------- Consumer Discretionary 21.0% 23.0% 16.2% Consumer Staples 2.2% 2.2% 3.3% Energy 7.6% 10.0% 9.6% Financials 11.7% 9.0% 18.5% Health Care 23.3% 16.7% 11.5% Industrials 12.8% 12.7% 13.3% Information Technology 21.3% 21.1% 15.6% Materials 0.0% 3.0% 4.3% Telecommunication Services 0.0% 1.4% 0.4% Utilities 0.0% 0.9% 7.4% * The Fund's portfolio composition is subject to change and there is no assurance that the Fund will continue to hold any particular security. Percentages shown relate to the Fund's total net assets as of December 31, 2005. ** Percentages shown in parentheses relate to the Fund's total equity investments as of December 31, 2005, and may not add up to 100% due to rounding. *** The Advisor has contractually agreed to limit the Fund's total annual fund operating expenses to 0.85% of average daily net assets for the Institutional Class shares and 1.10% of average daily net assets for the Investor Class shares, at least through December 31, 2006. **** Includes 0.25% 12b-1 fee. BAIRD MIDCAP FUND BAIRD MIDCAP FUND - INSTITUTIONAL CLASS VALUE OF A $100,000 INVESTMENT Baird MidCap Fund - Russell Midcap S&P MidCap Date Institutional Class Shares Growth Index 400 Index ---- -------------------------- -------------- ---------- 12/29/2000 $100,000 $100,000 $100,000 6/30/2001 $93,807 $84,792 $99,105 12/31/2001 $91,108 $77,788 $97,562 6/30/2002 $85,310 $62,460 $94,427 12/31/2002 $76,610 $56,466 $83,398 6/30/2003 $83,400 $67,046 $93,756 12/31/2003 $97,200 $80,586 $113,108 6/30/2004 $103,800 $85,367 $119,991 12/31/2004 $109,289 $93,057 $131,753 6/30/2005 $106,688 $94,639 $136,825 12/31/2005 $115,372 $104,311 $148,305 GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION DATE (12/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD MIDCAP FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird MidCap Fund - Russell Midcap S&P MidCap Date Investor Class Shares Growth Index 400 Index ---- --------------------- -------------- ---------- 12/29/2000 $10,000 $10,000 $10,000 6/30/2001 $9,370 $8,479 $9,910 12/31/2001 $9,091 $7,779 $9,756 6/30/2002 $8,511 $6,246 $9,443 12/31/2002 $7,631 $5,647 $8,340 6/30/2003 $8,300 $6,705 $9,376 12/31/2003 $9,650 $8,059 $11,311 6/30/2004 $10,300 $8,537 $11,999 12/31/2004 $10,839 $9,306 $13,175 6/30/2005 $10,568 $9,464 $13,683 12/31/2005 $11,406 $10,431 $14,830 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (12/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD MIDCAP FUND AVERAGE ANNUAL TOTAL RETURNS For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS SINCE INCEPTION(1) - --------------------------------------- -------- ---------- ----------------------- Baird MidCap Fund - Institutional Class Shares 5.56% 3.53% 2.90% Baird MidCap Fund - Investor Class Shares 5.24% 3.29% 2.66% Russell Midcap Growth Index(2) 12.10% 1.37% 0.85% S&P MidCap 400 Index(3) 12.55% 8.60% 8.19%
(1) For the period from December 29, 2000 (commencement of operations) through December 31, 2005. (2) The Russell Midcap Growth Index measures the performance of those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth rates. The Russell Midcap Index consists of the 800 smallest companies in the Russell 1000 Index, which represent approximately 24% of the total market capitalization of the Russell 1000 Index. The Russell 1000 Index consists of the largest companies in the Russell 3000 Index, which in turn is comprised of the 3,000 largest U.S. domiciled publicly traded common stocks by market capitalization. These indices do not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. The Russell MidCap Growth Index has been selected to replace the S&P MidCap 400 Index as the Fund's primary benchmark because the Russell MidCap Growth Index more accurately reflects the performance of the growth-style stocks in which the Fund invests. (3) The S&P MidCap 400 Index is an unmanaged, market-value weighted index of 400 mid-cap stocks chosen by Standard & Poor's on the basis of market size, liquidity and industry group representation. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD MIDCAP FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Shares Value ------ ----- COMMON STOCKS - 98.1% AIR FREIGHT & LOGISTICS - 1.8% 44,275 C.H. Robinson Worldwide, Inc. $ 1,639,503 ----------- AUTO COMPONENTS - 4.6% 46,935 Autoliv, Inc. 2,131,788 103,890 Gentex Corporation 2,025,855 ----------- 4,157,643 ----------- CAPITAL MARKETS - 4.8% 68,128 Eaton Vance Corporation 1,863,982 67,445 Investors Financial Services Corporation 2,483,999 ----------- 4,347,981 ----------- COMMERCIAL BANKS - 6.3% 61,335 East West Bancorp, Inc. 2,238,114 57,944 TCF Financial Corporation 1,572,600 33,619 Wintrust Financial Corporation 1,845,683 ----------- 5,656,397 ----------- COMMERCIAL SERVICES & SUPPLIES - 2.0% 30,241 Stericycle, Inc.* 1,780,590 ----------- COMMUNICATIONS EQUIPMENT - 1.7% 140,230 Tellabs, Inc.* 1,528,507 ----------- ELECTRICAL EQUIPMENT - 4.4% 42,451 Rockwell Automation, Inc. 2,511,401 36,054 Roper Industries, Inc. 1,424,494 ----------- 3,935,895 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.0% 31,077 CDW Corporation 1,789,103 ----------- ENERGY EQUIPMENT & SERVICES - 9.0% 41,905 BJ Services Company 1,536,656 53,570 Cooper Cameron Corporation* 2,217,798 55,045 Patterson-UTI Energy, Inc. 1,813,733 68,194 Smith International, Inc. 2,530,679 ----------- 8,098,866 ----------- FOOD & STAPLES RETAILING - 2.0% 69,725 United Natural Foods, Inc.* 1,840,740 ----------- HEALTH CARE EQUIPMENT & SUPPLIES - 13.8% 124,407 Cytyc Corporation* 3,512,010 58,906 Gen-Probe, Incorporated* 2,874,024 43,745 Kyphon Inc.* 1,786,108 56,298 ResMed, Inc.* 2,156,776 41,663 Varian Medical Systems, Inc.* 2,097,315 ----------- 12,426,233 ----------- HEALTH CARE PROVIDERS & SERVICES - 3.1% 35,065 Patterson Companies, Inc.* 1,171,171 26,630 Pharmaceutical Product Development, Inc. 1,649,729 ----------- 2,820,900 ----------- HOTELS, RESTAURANTS & LEISURE - 3.9% 47,315 The Cheesecake Factory Incorporated* 1,769,108 35,579 PF Chang's China Bistro, Inc.* 1,765,786 ----------- 3,534,894 ----------- HOUSEHOLD DURABLES - 2.0% 18,155 Harman International Industries, Incorporated 1,776,467 ----------- IT SERVICES - 6.8% 57,615 Alliance Data Systems Corporation* 2,051,094 39,085 Cognizant Technology Solutions Corporation* 1,967,930 44,906 Global Payments, Inc. 2,093,068 ----------- 6,112,092 ----------- INTERNET SOFTWARE & SERVICES - 2.1% 43,525 NAVTEQ* 1,909,442 ----------- MACHINERY - 4.9% 55,912 Joy Global Inc. 2,236,480 63,320 Pentair, Inc. 2,185,806 ----------- 4,422,286 ----------- MEDIA - 1.8% 30,819 Pixar* 1,624,778 ----------- OFFICE ELECTRONICS - 2.6% 54,278 Zebra Technologies Corporation - Class A* 2,325,812 ----------- PHARMACEUTICALS - 4.6% 75,304 Medicis Pharmaceutical Corporation - Class A 2,413,493 100,490 MGI Pharma, Inc.* 1,724,409 ----------- 4,137,902 ----------- SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 2.5% 70,165 Microchip Technology Incorporated 2,255,805 ----------- SOFTWARE - 2.1% 138,790 Activision, Inc.* 1,906,974 ----------- SPECIALTY RETAIL - 7.5% 70,448 Dick's Sporting Goods, Inc.* 2,341,692 40,450 Tractor Supply Company* 2,141,423 53,180 Williams-Sonoma, Inc.* 2,294,717 ----------- 6,777,832 ----------- TRADING COMPANIES & DISTRIBUTORS - 1.8% 41,594 Fastenal Company 1,630,069 ----------- Total Common Stocks (Cost $75,625,683) 88,436,711 ----------- SHORT TERM INVESTMENTS - 1.9% MONEY MARKET FUNDS - 1.9% 1,731,216 Investment Company Cash Reserve Portfolio- AIM Fund $1,731,215 ----------- Total Short-Term Investments (Cost $1,731,215) 1,731,215 ----------- Total Investments (Cost $77,356,898) - 100.0% 90,167,926 ----------- Other Assets in Excess of Liabilities - 0.0% 9,690 ----------- TOTAL NET ASSETS - 100.0% $90,177,616 ----------- ----------- * Non Income Producing See notes to the financial statements BAIRD SMALLCAP FUND DECEMBER 31, 2005 PORTFOLIO MANAGERS' COMMENTARY Small company shares continued their upward path in 2005, marking the third year in succession, although at a modest rate for the Baird SmallCap Fund. Inflation-adjusted U.S. GDP growth of 3.5% in 2005 was stronger than consensus expectations. Growth actually accelerated during the last six months of the year in the face of a 50% year-over-year increase in energy cost, higher short term interest rates, unprecedented hurricane dislocations, and declining housing affordability. These issues have scarcely impacted consumer spending. Since the beginning of the market recovery in 2002, investors have not shown a strong preference for high quality, small cap growth companies. Market sectors such as basic materials, utilities and, most obviously, energy have been standout performers during the most recent economic advance. To highlight this effect, over 50% of the return of the Russell 2000 Growth Index, the Fund's primary benchmark, during 2005 was a result of energy share appreciation. As you may remember, the Fund typically has little, if any, exposure in those more commodity oriented or heavily regulated areas. On the other hand, the Russell 2000 Growth Index, as well as the S&P Small Cap 600 Index, have greater exposure to those very cyclical parts of the economy, helping to explain the variation between the Fund's performance and the performance of the benchmarks. We prefer to stay focused on what we believe to be the true secular growth areas of the economy. Those beliefs lead us to such sectors as financials, information technology, health care and consumer discretionary - and to businesses that earn above average returns on invested capital, grow faster than their peers and can fund their growth without relying upon external sources. The Fund tends to have more exposure than the benchmarks in several of those more consistent, and higher quality, growth areas. History suggests that investors' emphasis will shift as this cycle matures and profit growth decelerates. Our investments in quality industrial companies such as Watsco, Skywest Airlines, Brady Corporation, and Bucyrus International helped the Fund's performance significantly during 2005. Manufacturing and transportation related companies in the Fund's portfolio enjoyed very strong earnings growth, which was reflected in solid price appreciation. We see that pattern continuing and expect to maintain at least an average weight in the industrial sector in 2006. The Fund maintained an overweight in the industrial sector compared with the Russell benchmark for much of 2005, but profit-taking late in the year reduced the sector to average weight. The Fund ended the year in an underweight position in industrials versus the S&P benchmark. Energy sector investments in oil service companies such as Oceaneering International and Gulfmark Offshore performed well, as you would expect, during the year. We will be opportunistic in adding to this sector during the new year, as we expect price volatility for the underlying commodities. Visibility of earnings growth for oil service companies is very good. During 2005, we did not have as much exposure to the energy sector as either Russell 2000 Growth Index or the S&P SmallCap 600 Index, which hurt relative performance. We were most disappointed in the performance of our holdings of growth companies in the consumer discretionary sector. Shares in companies in the restaurant and retail categories were pressured by the fear of a significant decline in consumer spending following the spike in energy prices and the further rise in interest rates. The Fund reduced its exposure to this sector during the year, but issue selection caused underperformance in the sector when compared with the benchmarks. We expect the shares to perform better in 2006 as interest rates peak and employment levels remain high. Fund shareholders were rewarded again in 2005 by the holdings in the financials sector, which was an equal to overweighted sector for much of the year. Shares of Boston Private Holdings and Wintrust Financial were solid contributors to performance. Earnings growth and visibility remains good, providing us the comfort to be patient investors. These companies suffered from earnings multiple pressure during much of 2005, and as the Federal Reserve tightening cycle concludes we would expect to add to the sector. Holdings within the information technology (IT) sector also outperformed the growth benchmark during the year. While negative on an absolute basis in 2005, the combination of an underweighted position versus the primary benchmark for the year, and contribution from companies such as Plexus and Zoran helped fund performance. Business spending remains strong in light of high levels of corporate profits will cause us to keep a sector weighting somewhat below the Russell 2000 Growth Index and above the S&P SmallCap 600 Index. Additionally, we have hired two new research analysts covering IT companies in order to improve our stock selection capabilities in that sector. Finally, the health care sector, traditionally a more stable performer, was nothing of the sort for the Fund in 2005. We have historically maintained an equal to overweight position in this sector compared to the Russell benchmark and an overweight position compared to the S&P Small Cap 600. Early year gains relative to the Russell benchmark were erased due to disappointing results from companies such as Martek Biosciences, Wright Medical and MGI Pharma. Overall results for the sector were slightly negative on an absolute basis for the year, reflecting the fact that our stock selection was a negative contributor to Fund shareholders. The Fed continued to raise short-term interest rates during the fourth quarter, as well as the first month of 2006. We believe sustainable domestic growth is important to the Fed's rate policy; thus, any interest rate hikes should not cause a significant slowdown. The Fed raising rates to a "neutral" range of 4.50% - 4.75% is most likely and should support the current environment of low inflation and stable growth. Energy cost increases contributed to the 3.5 % rise in the consumer price index last year. While energy costs may trend higher next year, our 3% real GDP growth forecast implies that increases should be more moderate. Increased globalization, technology and competition have kept core inflation contained, offsetting higher energy prices. Our outlook for 2006 calls for continued economic growth, solid corporate profits growth and an advancing stock market led by a shift back to quality growth companies. Confident that inflation is contained, the Fed will most likely stop raising short-term interest rates after one or two more quarter- point hikes in 2006. Low inflation is absolutely critical to the optimistic outlook because it will keep the Fed from pursuing a restrictive monetary policy. If inflation stays muted, then the liquidity backdrop should remain favorable for financial markets. Portfolio Management Team: Greg P. Edwards, CFA J. Bary Morgan, CFA Charles F. Severson, CFA BAIRD SMALLCAP FUND A December 31, 2005 summary of the Fund's top 10 holdings and equity sector analysis compared to the Russell 2000 Growth Index and the S&P 600 Index is shown below. TOP 10 HOLDINGS* Brady Corporation - Class A 3.8% Scan Source, Inc. 3.3% Wintrust Financial Corporation 3.2% Boston Private Financial Holdings, Inc. 3.0% Insight Enterprises, Inc. 3.0% Tractor Supply Company 2.9% Providence Service Corporation 2.9% Plexus Corporation 2.7% Marlin Business Services, Inc. 2.7% Watsco, Inc. 2.6% NET ASSETS: $47,373,660 PORTFOLIO TURNOVER RATIO: 56.4% NUMBER OF EQUITY HOLDINGS: 43 PORTFOLIO EXPENSE RATIO:*** INSTITUTIONAL CLASS: 0.95% INVESTOR CLASS: 1.20%**** EQUITY SECTOR ANALYSIS** SmallCap Russell 2000 S&P 600 Fund Growth Index Index -------- ------------ ------- Consumer Discretionary 17.2% 15.0% 15.8% Consumer Staples 2.5% 2.4% 3.5% Energy 7.8% 7.2% 8.1% Financials 11.0% 9.7% 14.7% Health Care 21.8% 20.2% 12.5% Industrials 17.4% 15.0% 18.8% Information Technology 22.2% 25.7% 16.2% Materials 0.0% 3.6% 5.7% Telecommunication Services 0.0% 0.9% 0.2% Utilities 0.0% 0.3% 4.4% * The Fund's portfolio composition is subject to change and there is no assurance that the Fund will continue to hold any particular security. Percentages shown relate to the Fund's total net assets as of December 31, 2005. ** Percentages shown in parentheses relate to the Fund's total equity investments as of December 31, 2005, and may not add up to 100% due to rounding. *** The Advisor has contractually agreed to limit the Fund's total annual fund operating expenses to 0.95% of average daily net assets for the Institutional Class shares and 1.20% of average daily net assets for the Investor Class shares, at least through December 31, 2006. **** Includes 0.25% 12b-1 fee. BAIRD SMALLCAP FUND BAIRD SMALLCAP FUND - INSTITUTIONAL CLASS VALUE OF A $100,000 INVESTMENT Baird SmallCap Fund - Russell 2000 S&P SmallCap Date Institutional Class Shares Growth Index 600 Index ---- -------------------------- ------------ ------------- 6/30/2004 $100,000 $100,000 $100,000 12/31/2004 $108,400 $108,163 $111,451 6/30/2005 $108,100 $104,286 $113,448 12/31/2005 $112,000 $112,655 $120,011 GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION DATE (6/30/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD SMALLCAP FUND - INVESTOR CLASS VALUE OF A $10,000 INVESTMENT Baird SmallCap Fund - Russell 2000 S&P SmallCap Date Investor Class Shares Growth Index 600 Index ---- --------------------- ------------ ------------ 6/30/2004 $10,000 $10,000 $10,000 12/31/2004 $10,830 $10,816 $11,145 6/30/2005 $10,780 $10,429 $11,345 12/31/2005 $11,160 $11,266 $12,001 GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE (6/30/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS. BAIRD SMALLCAP FUND AVERAGE ANNUAL TOTAL RETURNS For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1) - --------------------------------------- -------- ---------------------- Baird SmallCap Fund - Institutional Class Shares 3.32% 7.83% Baird SmallCap Fund - Investor Class Shares 3.05% 7.57% Russell 2000 Growth Index(2) 4.15% 8.27% S&P SmallCap 600 Index(3) 7.68% 12.93%
(1) For the period from June 30, 2004 (commencement of operations) through December 31, 2005. (2) The Russell 2000 Growth Index measures the performance of those Russell 2000 Index companies with higher price-to-book and higher forecasted growth rates. The Russell 2000 Index consists of the 2,000 smallest U.S. domiciled publicly-traded common stocks that are included in the Russell 3000 Index. These common stocks represent approximately 8% of the U.S. equity market. These indices do not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. The Russell 2000 Growth Index has been selected to replace the S&P SmallCap 600 as the Fund's primary benchmark because the Russell 2000 Growth Index more accurately reflects the performance of the growth-style stocks in which the Fund invests. (3) The S&P SmallCap 600 Index is an unmanaged, market-value weighted index of 600 small-capitalization common stocks chosen by Standard & Poor's on the basis of market size, liquidity and industry characteristics. This index does not reflect any deduction for fees, expenses or taxes. A direct investment in an index is not possible. THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH- END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. BAIRD SMALLCAP FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 Shares Value ------ ----- COMMON STOCKS - 97.1% AIRLINES - 1.4% 24,040 SkyWest, Inc. $ 645,714 ----------- BIOTECHNOLOGY - 2.0% 34,241 PRA International* 963,884 ----------- COMMERCIAL BANKS - 10.3% 47,355 Boston Private Financial Holdings, Inc. 1,440,539 26,586 East West Bancorp, Inc. 970,123 36,058 United Community Banks, Inc. 961,307 27,320 Wintrust Financial Corporation 1,499,868 ----------- 4,871,837 ----------- COMMERCIAL SERVICES & SUPPLIES - 8.3% 49,547 Brady Corporation - Class A 1,792,610 22,213 G & K Services, Inc. 871,860 53,194 Marlin Business Services, Inc.* 1,270,805 ----------- 3,935,275 ----------- COMMUNICATIONS EQUIPMENT - 2.2% 75,746 Tekelec* 1,052,869 ----------- DIVERSIFIED FINANCIAL SERVICES - 1.3% 28,550 Heartland Payment Systems, Inc.* 618,393 ----------- ELECTRONIC EQUIPMENT & INSTRUMENTS - 6.0% 55,999 Plexus Corporation* 1,273,417 28,779 ScanSource, Inc.* 1,573,636 ----------- 2,847,053 ----------- ENERGY EQUIPMENT & SERVICES - 6.3% 32,407 Dawson Geophysical Company* 998,784 29,138 GulfMark Offshore, Inc.* 863,067 22,579 Oceaneering International, Inc.* 1,123,983 ----------- 2,985,834 ----------- FOOD & STAPLES RETAILING - 2.5% 45,176 United Natural Foods, Inc.* 1,192,646 ----------- HEALTH CARE EQUIPMENT & SUPPLIES - 4.0% 23,674 Kyphon Inc.* 966,609 45,545 Wright Medical Group, Inc.* 929,118 ----------- 1,895,727 ----------- HEALTH CARE PROVIDERS & SERVICES - 11.1% 59,017 Allscripts Healthcare Solutions, Inc.* 790,828 24,409 American Healthways, Inc.* 1,104,507 24,575 Computer Programs & Systems, Inc. 1,018,142 46,987 Providence Service Corporation* 1,352,756 31,152 United Surgical Partners International, Inc.* 1,001,537 ----------- 5,267,770 ----------- HOTELS, RESTAURANTS & LEISURE - 3.9% 20,956 PF Chang's China Bistro, Inc.* 1,040,046 16,261 Red Robin Gourmet Burgers Inc.* 828,661 ----------- 1,868,707 ----------- HOUSEHOLD PRODUCTS - 2.1% 21,860 Central Garden & Pet Company* 1,004,248 ----------- INTERNET & CATALOG RETAIL - 3.0% 71,406 Insight Enterprises, Inc.* 1,400,272 ----------- IT SERVICES - 4.4% 66,296 Covansys Corporation* 902,289 38,974 SRA International, Inc. - Class A* 1,190,266 ----------- 2,092,555 ----------- MACHINERY - 2.2% 19,305 Bucyrus International, Inc. - Class A 1,017,374 ----------- MULTILINE RETAIL - 2.1% 61,432 Fred's, Inc. 999,499 ----------- PHARMACEUTICALS - 3.9% 53,195 MGI Pharma, Inc.* 912,826 51,721 Salix Pharmaceuticals, Ltd.* 909,255 ----------- 1,822,081 ----------- SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 3.9% 23,318 Varian Semiconductor Equipment Associates, Inc.* 1,024,359 50,994 Zoran Corporation* 826,613 ----------- 1,850,972 ----------- SOFTWARE - 6.5% 25,322 Kronos Incorporated* 1,059,979 50,993 Open Solutions Inc.* 1,168,760 34,978 THQ Inc.* 834,225 ----------- 3,062,964 ----------- SPECIALTY RETAIL - 7.1% 64,825 AC Moore Arts & Crafts, Inc.* 943,204 36,684 Hibbett Sporting Goods, Inc.* 1,044,760 26,225 Tractor Supply Company* 1,388,352 ----------- 3,376,316 ----------- TRADING COMPANIES & DISTRIBUTORS - 2.6% 20,591 Watsco, Inc. 1,231,548 ----------- Total Common Stocks (Cost $42,200,787) 46,003,538 ----------- SHORT TERM INVESTMENTS - 2.5% MONEY MARKET FUNDS - 2.5% 1,179,431 Investment Company Cash Reserve Portfolio- AIM Fund 1,179,431 ----------- Total Short-Term Investments (Cost $1,179,431) 1,179,431 ----------- Total Investments (Cost $43,380,218) - 99.6% 47,182,969 ----------- Other Assets in Excess of Liabilities - 0.4% 190,691 ----------- TOTAL NET ASSETS - 100.0% $47,373,660 ----------- ----------- * Non Income Producing See notes to the financial statements BAIRD FUNDS, INC. ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2005 (UNAUDITED) EXAMPLE As a shareholder of a mutual fund, you incur two types of costs: (1) transaction costs, which may include sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, such as management fees; distribution and/or service (12b-1) fees; and other fund expenses. Although the Funds do not charge any sales loads, redemption fees, or other transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund's transfer agent. If you request that a redemption be made by wire transfer, currently the Fund's transfer agent charges a $15.00 fee. This Example is intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (7/1/05 - 12/31/05). ACTUAL EXPENSES The third and fourth columns of the table below provide information about account values based on actual returns and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the fourth column entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The fifth and sixth columns of the table below provide information about hypothetical account values and hypothetical expenses based on the Funds' actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds' actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the sixth column of the table (entitled "Expenses Paid During Period") is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different mutual funds. In addition, if these transactional costs were included, your costs could have been higher. ACTUAL VS. HYPOTHETICAL RETURNS For the Six Months Ended December 31, 2005 HYPOTHETICAL (5% RETURN ACTUAL BEFORE EXPENSES) -------------------------- -------------------------- FUND'S BEGINNING ENDING EXPENSES ENDING EXPENSES ANNUALIZED ACCOUNT ACCOUNT PAID ACCOUNT PAID EXPENSE VALUE VALUE DURING VALUE DURING RATIO(1) 7/1/05 12/31/05 PERIOD(1) 12/31/05 PERIOD(1) ------------- ------ -------- -------------- -------- -------------- BAIRD LARGECAP FUND Institutional Class 0.75% $1,000.00 $1,045.50 $3.87 $1,021.42 $3.82 Investor Class 1.00% $1,000.00 $1,045.70 $5.16 $1,020.16 $5.09 BAIRD MIDCAP FUND Institutional Class 0.85% $1,000.00 $1,081.40 $4.46 $1,020.92 $4.33 Investor Class 1.10% $1,000.00 $1,079.30 $5.77 $1,019.66 $5.60 BAIRD SMALLCAP FUND Institutional Class 0.95% $1,000.00 $1,036.10 $4.88 $1,020.42 $4.84 Investor Class 1.20% $1,000.00 $1,035.20 $5.64 $1,019.66 $5.60
(1) Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over the period, multiplied by 184 days and divided by 365 to reflect the one-half year period. BAIRD FUNDS, INC. STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2005 BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP FUND FUND FUND -------------- ------------ -------------- ASSETS: Investments, at value (cost $22,978,222; $77,356,898; and $43,380,218, respectively) $29,504,071 $90,167,926 $47,182,969 Dividends receivable 22,849 14,202 3,511 Interest receivable 815 7,291 6,093 Receivable for investments sold 1,404,744 -- -- Receivable for fund shares sold 6,860 87,654 220,899 Other assets 9,769 8,479 29,815 ----------- ----------- ----------- Total assets 30,949,108 90,285,552 47,443,287 ----------- ----------- ----------- LIABILITIES: Payable to Advisor and Distributor 9,731 46,240 19,482 Payable for fund shares repurchased 1,116,624 1,579 7,500 Accrued expenses and other liabilities 46,602 60,117 42,645 ----------- ----------- ----------- Total liabilities 1,172,957 107,936 69,627 ----------- ----------- ----------- NET ASSETS $29,776,151 $90,177,616 $47,373,660 ----------- ----------- ----------- ----------- ----------- ----------- NET ASSETS CONSIST OF: Capital stock $29,834,468 $76,266,993 $44,396,139 Accumulated undistributed net investment income 35 -- -- Accumulated net realized gain (loss) on investments sold (6,584,201) 1,099,595 (825,230) Net unrealized appreciation on investments 6,525,849 12,811,028 3,802,751 ----------- ----------- ----------- NET ASSETS $29,776,151 $90,177,616 $47,373,660 ----------- ----------- ----------- ----------- ----------- ----------- INSTITUTIONAL CLASS SHARES Net assets $27,375,626 $85,670,669 $45,010,093 Shares outstanding ($0.01 par value, unlimited shares authorized) 3,287,395 7,702,045 4,018,386 Net asset value, offering and redemption price per share $ 8.33 $ 11.12 $ 11.20 ----------- ----------- ----------- ----------- ----------- ----------- INVESTOR CLASS SHARES Net assets $ 2,400,525 $ 4,506,947 $ 2,363,567 Shares outstanding ($0.01 par value, unlimited shares authorized) 289,729 409,927 211,828 Net asset value, offering and redemption price per share $ 8.29 $ 10.99 $ 11.16 ----------- ----------- ----------- ----------- ----------- -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP FUND FUND FUND -------------- ------------ -------------- INVESTMENT INCOME: Dividends (net of foreign taxes withheld of $2,968, $0 and $0, respectively) $ 685,188 $ 555,481 $ 74,943 Interest 54,416 82,411 35,629 ---------- ---------- ---------- Total investment income 739,604 637,892 110,572 ---------- ---------- ---------- EXPENSES: Investment advisory fees 398,856 742,939 249,325 Administration fees 35,606 56,955 14,206 Shareholder servicing fees 24,279 29,466 30,327 Fund accounting fees 32,163 39,305 28,015 Professional fees 27,678 41,805 12,450 Federal and state registration 31,339 32,746 29,668 Directors fees 6,145 10,293 2,855 Custody fees 4,174 7,703 12,746 Reports to shareholders 4,186 3,650 2,310 Distribution fees - Investor Class Shares 6,049 10,613 1,646 Miscellaneous 4,817 6,910 1,091 ---------- ---------- ---------- Total expenses 575,292 982,385 384,639 Expense reimbursement by Advisor (109,024) (129,774) (104,335) ---------- ---------- ---------- Total expenses 466,268 852,611 280,304 ---------- ---------- ---------- NET INVESTMENT INCOME (LOSS) 273,336 (214,719) (169,732) ---------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments 2,075,582 4,534,559 (622,142) Change in unrealized appreciation/depreciation on investments (360,051) 1,330,768 2,209,185 ---------- ---------- ---------- Net realized and unrealized gain on investments 1,715,531 5,865,327 1,587,043 ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,988,867 $5,650,608 $1,417,311 ---------- ---------- ---------- ---------- ---------- ----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD LARGECAP FUND ------------------------------------- Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment income $ 273,336 $ 443,344 Net realized gain (loss) on investments 2,075,582 (696,191) Change in unrealized appreciation/depreciation on investments (360,051) 3,517,047 ----------- ----------- Net increase in net assets resulting from operations 1,988,867 3,264,200 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 4,077,942 6,437,380 Shares issued to holders in reinvestment of dividends 269,481 439,027 Cost of shares redeemed (42,940,244) (3,421,800) ----------- ----------- Net increase (decrease) in net assets resulting from capital share transactions (38,592,821) 3,454,607 ----------- ----------- DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net investment income (258,497) (431,568) ----------- ----------- DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net investment income (15,591) (10,989) ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (36,878,042) 6,276,250 NET ASSETS: Beginning of year 66,654,193 60,377,943 ----------- ----------- End of year (including undistributed net investment income of $35 and $787, respectively) $29,776,151 $66,654,193 ----------- ----------- ----------- -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD MIDCAP FUND ------------------------------------- Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment loss $ (214,719) $ (258,644) Net realized gain on investments 4,534,559 1,764,507 Change in unrealized appreciation on investments 1,330,768 6,685,264 ------------ ----------- Net increase in net assets resulting from operations 5,650,608 8,191,127 ------------ ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 22,919,718 56,415,797 Shares issued to holders in reinvestment of dividends 2,763,152 149,585 Cost of shares redeemed (28,445,712) (3,773,365) ------------ ----------- Net increase (decrease) in net assets resulting from capital share transactions (2,762,842) 52,792,017 ------------ ----------- DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS: From net realized gains (2,976,399) (143,452) ------------ ----------- DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS: From net realized gains (155,477) (6,831) ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (244,110) 60,832,861 NET ASSETS: Beginning of year 90,421,726 29,588,865 ------------ ----------- End of year $ 90,177,616 $90,421,726 ------------ ----------- ------------ -----------
See notes to the financial statements BAIRD FUNDS, INC. STATEMENTS OF CHANGES IN NET ASSETS BAIRD SMALLCAP FUND --------------------------------------- June 30, 2004(1) Year Ended through December 31, 2005 December 31, 2004 ----------------- ----------------- OPERATIONS: Net investment loss $ (169,732) $ (50,298) Net realized loss on investments (622,142) (203,088) Change in unrealized appreciation on investments 2,209,185 1,593,566 ----------- ----------- Net increase in net assets resulting from operations 1,417,311 1,340,180 ----------- ----------- CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 33,342,662 17,042,209 Cost of shares redeemed (4,785,759) (982,943) ----------- ----------- Net increase in net assets resulting from capital share transactions 28,556,903 16,059,266 ----------- ----------- TOTAL INCREASE IN NET ASSETS 29,974,214 17,399,446 NET ASSETS: Beginning of period 17,399,446 -- ----------- ----------- End of period $47,373,660 $17,399,446 ----------- ----------- ----------- -----------
(1) Commencement of operations. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD LARGECAP FUND - INSTITUTIONAL CLASS ------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 8.13 $ 7.78 $ 6.41 $ 8.63 $ 9.58 ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income 0.04(1) 0.06(1) 0.02 0.02 0.01 Net realized and unrealized gains (losses) on investments 0.24 0.35 1.37 (2.22) (0.95) ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.28 0.41 1.39 (2.20) (0.94) ----------- ----------- ----------- ----------- ----------- Less distributions: Dividends from net investment income (0.08) (0.06) (0.02) (0.02) (0.01) Distributions from net realized gains -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total distributions (0.08) (0.06) (0.02) (0.02) (0.01) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $8.33 $8.13 $7.78 $6.41 $8.63 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total return 3.39% 5.21% 21.75% (25.53)% (9.84)% Supplemental data and ratios: Net assets, end of period $27,375,626 $64,754,140 $59,743,783 $48,900,767 $51,446,666 Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.75% 0.75% Ratio of expenses to average net assets (before waivers) 0.93% 0.93% 0.95% 0.95% 1.06% Ratio of net investment income to average net assets 0.46% 0.72% 0.34% 0.23% 0.12% Ratio of net investment income (loss) to average net assets (before waivers) 0.28% 0.54% 0.14% 0.03% (0.19)% Portfolio turnover rate(2) 28.6% 23.2% 24.8% 16.2% 9.0%
(1) Calculated using average shares outstanding during the period. (2) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD LARGECAP FUND - INVESTOR CLASS ------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 8.09 $ 7.75 $ 6.40 $ 8.61 $ 9.57 ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income (loss) 0.02(1) 0.04(1) 0.01 (0.00)(2) (0.01) Net realized and unrealized gains (losses) on investments 0.23 0.35 1.35 (2.21) (0.95) ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.25 0.39 1.36 (2.21) (0.96) ----------- ----------- ----------- ----------- ----------- Less distributions: Dividends from net investment income (0.05) (0.05) (0.01) (0.00) -- Distributions from net realized gains -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total distributions (0.05) (0.05) (0.01) (0.00) -- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 8.29 $ 8.09 $ 7.75 $ 6.40 $ 8.61 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total return 3.15% 5.00% 21.20% (25.65)% (10.03)% Supplemental data and ratios: Net assets, end of period $2,400,525 $1,900,053 $634,160 $647,018 $615,533 Ratio of expenses to average net assets 1.00% 1.00% 1.00% 1.00% 1.00% Ratio of expenses to average net assets (before waivers) 1.18% 1.18% 1.20% 1.20% 1.31% Ratio of net investment income (loss) to average net assets 0.21% 0.47% 0.09% (0.02)% (0.13)% Ratio of net investment income (loss) to average net assets (before waivers) 0.03% 0.29% (0.11)% (0.22)% (0.44)% Portfolio turnover rate(3) 28.6% 23.2% 24.8% 16.2% 9.0%
(1) Calculated using average shares outstanding during the period. (2) Amount is less than $0.01. (3) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD MIDCAP FUND - INSTITUTIONAL CLASS ------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.91 $ 9.72 $ 7.66 $ 9.11 $ 9.70 ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income (0.02)(1) (0.04)(1) (0.07) (0.07)(1) (0.06)(1) Net realized and unrealized gains (losses) on investments 0.63 1.25 2.13 (1.38) (0.53) ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.61 1.21 2.06 (1.45) (0.59) ----------- ----------- ----------- ----------- ----------- Less distributions: Distributions from net realized gains (0.40) (0.02) -- -- -- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 11.12 $ 10.91 $ 9.72 $ 7.66 $ 9.11 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total return 5.56% 12.44% 26.89% (15.92)% (6.08)% Supplemental data and ratios: Net assets, end of period $85,670,669 $86,476,869 $28,629,656 $20,864,264 $13,049,574 Ratio of expenses to average net assets 0.85% 0.85% 1.20% 1.25% 1.25% Ratio of expenses to average net assets (before waivers) 0.98% 1.05% 1.20% 1.39% 2.06% Ratio of net investment loss to average net assets (0.21)% (0.43)% (0.81)% (0.84)% (0.67)% Ratio of net investment loss to average net assets (before waivers) (0.34)% (0.63)% (0.81)% (0.98)% (1.48)% Portfolio turnover rate(2) 77.4% 77.9% 81.8% 55.4% 73.6%
(1) Calculated using average shares outstanding during the period. (2) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD MIDCAP FUND - INVESTOR CLASS ------------------------------------------------------------------------- Year Ended December 31, 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of period $ 10.82 $ 9.65 $ 7.63 $ 9.09 $ 9.70 ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income (0.05)(1) (0.07)(1) (0.09) (0.09)(1) (0.08)(1) Net realized and unrealized gains (losses) on investments 0.62 1.26 2.11 (1.37) (0.53) ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.57 1.19 2.02 (1.46) (0.61) ----------- ----------- ----------- ----------- ----------- Less distributions: Distributions from net realized gains (0.40) (0.02) -- -- -- ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 10.99 $ 10.82 $ 9.65 $ 7.63 $ 9.09 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total return 5.24% 12.32% 26.47% (16.06)% (6.29)% Supplemental data and ratios: Net assets, end of period $4,506,947 $3,944,857 $959,209 $801,703 $1,050,356 Ratio of expenses to average net assets 1.10% 1.10% 1.45% 1.50% 1.50% Ratio of expenses to average net assets (before waivers) 1.23% 1.30% 1.45% 1.64% 2.31% Ratio of net investment loss to average net assets (0.46)% (0.68)% (1.06)% (1.09)% (0.92)% Ratio of net investment loss to average net assets (before waivers) (0.59)% (0.88)% (1.06)% (1.23)% (1.73)% Portfolio turnover rate(2) 77.4% 77.9% 81.8% 55.4% 73.6%
(1) Calculated using average shares outstanding during the period. (2) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD SMALLCAP FUND - INSTITUTIONAL CLASS ------------------------------------- Year Ended June 30, 2004(1) December 31, through 2005 December 31, 2004 ------------ ----------------- Per Share Data: Net asset value, beginning of period $ 10.84 $ 10.00 ----------- ----------- Income from investment operations: Net investment loss(2) (0.06) (0.03) Net realized and unrealized gains (losses) on investments 0.42 0.87 ----------- ----------- Total from investment operations 0.36 0.84 ----------- ----------- Net asset value, end of period $ 11.20 $ 10.84 ----------- ----------- ----------- ----------- Total return 3.32% 8.40%(3) Supplemental data and ratios: Net assets, end of period $45,010,093 $17,331,262 Ratio of expenses to average net assets 0.95% 0.95%(4) Ratio of expenses to average net assets (before waivers) 1.31% 1.89% Ratio of net investment loss to average net assets (0.57)% (0.65)%(4) Ratio of net investment loss to average net assets (before waivers) (0.93)% (1.59)% Portfolio turnover rate(5) 56.4% 34.7%(3)
(1) Commencement of operations. (2) Calculated using average shares outstanding during the period. (3) Not annualized. (4) Annualized. (5) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. FINANCIAL HIGHLIGHTS BAIRD SMALLCAP FUND - INVESTOR CLASS ------------------------------------- Year Ended June 30, 2004(1) December 31, through 2005 December 31, 2004 ------------ ----------------- Per Share Data: Net asset value, beginning of period $ 10.83 $ 10.00 ----------- ----------- Income from investment operations: Net investment loss(2) (0.09) (0.05) Net realized and unrealized gains (losses) on investments 0.42 0.88 ----------- ----------- Total from investment operations 0.33 0.83 ----------- ----------- Net asset value, end of period $ 11.16 $ 10.83 ----------- ----------- ----------- ----------- Total return 3.05% 8.30%(3) Supplemental data and ratios: Net assets, end of period $ 2,363,567 $ 68,184 Ratio of expenses to average net assets 1.20%(4) 1.20%(4) Ratio of expenses to average net assets (before waivers) 1.56% 2.14% Ratio of net investment loss to average net assets (0.82)%(4) (0.90)%(4) Ratio of net investment loss to average net assets (before waivers) (1.18)% (1.84)% Portfolio turnover rate(5) 56.36% 34.7%(3)
(1) Commencement of operations. (2) Calculated using average shares outstanding during the period. (3) Not annualized. (4) Annualized. (5) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between the classes of shares issued. See notes to the financial statements BAIRD FUNDS, INC. NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2005 1. ORGANIZATION Baird Funds, Inc. (the "Corporation") was incorporated on June 9, 2000 as a Wisconsin corporation and is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). The accompanying financial statements include the Baird LargeCap Fund, the Baird MidCap Fund and the Baird SmallCap Fund (each a "Fund" and collectively the "Funds"), three of the eight portfolios comprising the Corporation. Pursuant to the 1940 Act, the Funds are "diversified" series of the Corporation. The investment advisor to the Funds is Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor"). The Baird LargeCap Fund commenced operations with the sale of both Institutional and Investor Class Shares on September 29, 2000. The Baird MidCap Fund commenced operations with the sale of both Institutional and Investor Class Shares on December 29, 2000. The Baird SmallCap Fund commenced operations with the sale of both Institutional and Investor Class Shares on June 30, 2004. The Institutional Class Shares are not subject to a distribution and service (12b-1) fee, while the Investor Class Shares are subject to a distribution and service (12b-1) fee up to 0.25%. The investment objective of the Baird LargeCap Fund is long-term growth of capital through investments in equity securities of large-capitalization companies. The investment objective of the Baird MidCap Fund is long-term growth of capital through investments in equity securities of mid-capitalization companies. The investment objective of the Baird SmallCap Fund is long-term growth of capital through investments in equity securities of small-capitalization companies. On December 31, 2005, one shareholder related to the Advisor held approximately 70% of the Baird LargeCap Fund. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America. a) Investment Valuation - Common stocks that are listed on a securities exchange are valued at the last quoted sales price. Securities traded on the Nasdaq Stock Market are valued at the Nasdaq Official Closing Price. Price information on listed stocks is taken from the exchange where the security is primarily traded. If such securities were not traded on the valuation date they are valued at the average of the current bid and asked price. Because market quotations for most debt securities are not readily available, debt securities are stated at fair value as furnished by an independent pricing service, which uses valuation methods such as matrix pricing and other analytical pricing models, as well as market transactions and dealer quotations. Debt securities purchased with a remaining maturity of 60 days or less are valued at acqusition cost plus or minus any amortized discount or premium. Investments in mutual funds are valued at their stated net asset value. Other assets and securities for which no quotations are readily available are valued at fair value as determined in good faith by a valuation committee of the Advisor pursuant to authority delegated, and in accordance with procedures approved, by the Corporation's Board of Directors. In determining fair value, the valuation committee takes into account all relevant factors and available information. Consequently, the price of the security used by a Fund to calculate its NAV may differ from quoted or published prices for the same security. Fair value pricing involves subjective judgments and there is no single standard for determining a security's fair value. As a result, different mutual funds could reasonably arrive at a different fair value for the same security. It is possible that the fair value determined for a security is materially different from the value that could be realized upon the sale of that security or from the values that other mutual funds may determine. b) Foreign Securities - Investing in securities of foreign companies and foreign governments involves special risks and consideration not typically associated with investing in U.S. companies and the U.S. government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of many foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. companies and the U.S. government. c) Federal Income Taxes - The Funds intend to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders in a manner which results in no tax cost to the Funds. Therefore, no federal income or excise tax provision is recorded. d) Distributions to Shareholders - Dividends from net investment income are declared and paid annually. Distributions of net realized gains, if any, are declared and paid at least annually. e) Allocation of Income and Expenses - Each Fund is charged for those expenses directly attributable to it. Expenses directly attributable to a class of shares, such as Rule 12b-1 distribution fees, are charged to that class of shares. Income, expenses, and realized and unrealized gains and losses are allocated to the classes based on their respective net assets. Expenses that are not directly attributable to a Fund are allocated among the Funds in the series in proportion to their assets. f) Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. g) Other - Investment and shareholder transactions are recorded on trade date. The Funds determine the gain or loss realized from investment transactions by comparing the original cost of the security lot sold with the net sales proceeds. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis. Accounting principles generally accepted in the United States require that permanent financial reporting and tax differences be reclassified in the capital accounts. h) Guarantees and Indemnifications - In the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds' maximum exposure under these arrangements is unknown and this would involve future claims against the Funds that have not yet occurred. Based on experience, the Funds would expect the risk of loss to be remote. 3. CAPITAL SHARE TRANSACTIONS The following table summarizes the capital share transactions of each Fund for the past two fiscal periods: BAIRD LARGECAP FUND Year Ended Year Ended December 31, 2005 December 31, 2005 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $ 3,287,419 410,040 Shares sold $ 790,523 98,881 Shares issued through Shares issued through reinvestment of dividends 253,910 30,227 reinvestment of dividends 15,571 1,863 Shares redeemed (42,566,187) (5,113,671) Shares redeemed (374,057) (45,879) ------------ ---------- ---------- ------- Net Decrease $(39,024,858) (4,673,404) Net Increase $432,037 54,865 ------------ ---------- ------------ ---------- Shares Outstanding: Shares Outstanding: Beginning of period 7,960,799 Beginning of period 234,864 ---------- ------- End of period 3,287,395 End of period 289,729 ---------- ------- ---------- -------
Year Ended Year Ended December 31, 2004 December 31, 2004 ------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $ 5,204,938 657,907 Shares sold $1,232,442 156,739 Shares issued through Shares issued through reinvestment of dividends 428,099 52,721 reinvestment of dividends 10,928 1,354 Shares redeemed (3,382,487) (430,488) Shares redeemed (39,313) (5,082) ------------ ---------- ---------- ------- Net Increase $ 2,250,550 280,140 Net Increase $1,204,057 153,011 ---------- ------- ---------- ------- Shares Outstanding: Shares Outstanding: Beginning of period 7,680,659 Beginning of period 81,853 ---------- ------- End of period 7,960,799 End of period 234,864 ---------- ------- ---------- -------
BAIRD MIDCAP FUND Year Ended Year Ended December 31, 2005 December 31, 2005 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $ 21,848,259 2,032,237 Shares sold $1,071,459 99,399 Shares issued through Shares issued through reinvestment of dividends 2,612,352 234,082 reinvestment of dividends 150,800 13,672 Shares redeemed (27,724,642) (2,488,411) Shares redeemed (721,070) (67,838) ------------ ---------- ---------- ------- Net Decrease $ (3,264,031) (222,092) Net Decrease $ 501,189 45,233 ------------ ---------- ------------ ---------- Shares Outstanding: Shares Outstanding: Beginning of period 7,924,137 Beginning of period 364,694 ---------- ------- End of period 7,702,045 End of period 409,927 ---------- ------- ---------- -------
Year Ended Year Ended December 31, 2004 December 31, 2004 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $ 53,356,727 5,302,856 Shares sold $3,059,070 299,099 Shares issued through Shares issued through reinvestment of dividends 142,982 13,214 reinvestment of dividends 6,603 615 Shares redeemed (3,419,077) (337,955) Shares redeemed (354,288) (34,372) ------------ ---------- ---------- ------- Net Increase $ 50,080,632 4,978,115 Net Increase $2,711,385 265,342 ------------ ---------- ------------ ---------- Shares Outstanding: Shares Outstanding: Beginning of period 2,946,022 Beginning of period 99,352 ---------- ------- End of period 7,924,137 End of period 364,694 ---------- ------- ---------- -------
BAIRD SMALLCAP FUND Year Ended Year Ended December 31, 2005 December 31, 2005 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $30,846,152 2,842,497 Shares sold $2,496,510 225,110 Shares redeemed (4,571,120) (422,581) Shares redeemed (214,639) (19,578) ----------- --------- ---------- ------- Net Increase $26,275,032 2,419,916 Net Increase $2,281,871 205,532 ----------- ---------- ----------- ---------- Shares Outstanding: Shares Outstanding: Beginning of period 1,598,470 Beginning of period 6,296 --------- ------- End of period 4,018,386 End of period 211,828 --------- ------- --------- -------
June 30, 2004(1) June 30, 2004(1) through through December 31, 2004 December 31, 2004 -------------------------- -------------------------- INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares ----------- -------- ----------- -------- Shares sold $16,977,724 1,699,415 Shares sold $ 64,485 6,296 Shares redeemed (982,943) (100,945) Shares redeemed -- -- ----------- --------- ---------- ------- Net Increase $15,994,781 1,598,470 Net Increase $ 64,485 6,296 ----------- ---------- ----------- ---------- Shares Outstanding: Shares Outstanding: Beginning of period -- Beginning of period -- --------- ------- End of period 1,598,470 End of period 6,296 --------- ------- --------- -------
(1) Commencement of operations. 4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION During the year ended December 31, 2005, purchases and sales of investment securities (excluding short-term investments) were as follows: Baird Baird Baird LargeCap Fund MidCap Fund SmallCap Fund ------------- ----------- ------------- Purchases: $16,779,701 $74,465,351 $43,554,721 Sales: $52,270,044 $80,671,023 $16,085,251 At December 31, 2005, accumulated earnings/losses on a tax basis were as follows: LARGECAP MIDCAP SMALLCAP FUND FUND FUND -------- ------ -------- Cost of Investments $23,018,742 $77,466,370 $43,511,561 ----------- ----------- ----------- ----------- ----------- ----------- Gross unrealized appreciation $ 6,813,854 $15,186,002 $ 5,745,436 Gross unrealized depreciation (328,525) (2,484,446) (2,074,028) ----------- ----------- ----------- Net unrealized appreciation/(depreciation) $ 6,485,329 $12,701,556 $ 3,671,408 ----------- ----------- ----------- ----------- ----------- ----------- Undistributed ordinary income $ 35 $ 355,507 $ -- Undistributed long-term capital gain -- 853,560 -- ----------- ----------- ----------- Total distributable earnings $ 35 $ 1,209,067 $ -- ----------- ----------- ----------- ----------- ----------- ----------- Other accumulated gains (losses) $(6,543,681) $ -- $ (693,887) ----------- ----------- ----------- Total accumulated earnings/(losses) $ (58,317) $13,910,623 $ 2,977,521 ----------- ----------- ----------- ----------- ----------- -----------
Undistributed income or net realized gains for financial statement purposes may differ from amounts recognized for federal income tax purposes due to differences in the recognition and characterization of income, expense and capital gain items. Under the current tax law, capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2005, the Baird SmallCap Fund elected to defer capital losses occurring between November 1, 2005 and December 31, 2005 in the amount of $147,920. At December 31, 2005, the Baird LargeCap Fund had accumulated net realized capital loss carryovers of $1,167,011 that expire in 2012, $3,094,411 that expire in 2011 and $2,282,259 that expire in 2010. At December 31, 2005, the Baird SmallCap Fund had accumulated net realized capital loss carryovers of $190,878 expiring in 2012 and $355,089 that expire in 2013. To the extent the Funds realize future net capital gains, taxable distributions to shareholders will be offset by any unused capital loss carryovers. During the year ended December 31, 2005, the Baird LargeCap Fund utilized $2,058,234 in capital loss carryovers from previous years. During the year ended December 31, 2005, the Funds paid the following dividends: ORDINARY INCOME DIVIDENDS NET LONG-TERM CAPITAL GAINS ------------------------- --------------------------- Baird LargeCap Fund $274,088 -- Baird MidCap Fund 674,962 $2,456,914 Baird SmallCap Fund -- -- During the period ended December 31, 2004, the Funds paid the following dividends: ORDINARY INCOME DIVIDENDS NET LONG-TERM CAPITAL GAINS ------------------------- --------------------------- Baird LargeCap Fund $442,557 -- Baird MidCap Fund -- $150,283 Baird SmallCap Fund -- -- 5. INVESTMENT ADVISORY AND OTHER AGREEMENTS The Funds have entered into an Investment Advisory Agreement with Baird for the provision of investment advisory services. Pursuant to the Investment Advisory Agreement, the Advisor is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 0.65% for the Baird LargeCap Fund, 0.75% for the Baird MidCap Fund and 0.85% for the Baird SmallCap Fund as applied to the respective Fund's average daily net assets. Certain officers of the Advisor are also officers of the Funds. For each of the fiscal years ended December 31, 2005 and 2006, the Advisor has contractually agreed to waive its investment advisory fee and/or reimburse the Funds' operating expenses (exclusive of brokerage, interest, taxes, and extraordinary expenses) to the extent necessary to ensure that each Fund's operating expenses do not exceed the following percentages of average daily net assets: INSTITUTIONAL CLASS SHARES INVESTOR CLASS SHARES -------------------------- --------------------- Baird LargeCap Fund 0.75% 1.00% Baird MidCap Fund 0.85% 1.10% Baird SmallCap Fund 0.95% 1.20% To the extent that the Advisor reimburses or absorbs fees and expenses, it may seek payment of such amounts for three years after the year in which expenses were reimbursed or absorbed. A Fund will make no such payment, however, if its total annual operating expenses exceed the expense limits in effect at the time the expenses were reimbursed or at the time these payments are proposed. Fiscal Period Ended December 31, -------------------------------- 2005 2004 2003 ---- ---- ---- REIMBURSED / ABSORBED EXPENSES SUBJECT TO RECOVERY BY ADVISOR UNTIL: 2008 2007 2006 BAIRD LARGECAP FUND $109,024 $114,127 $108,138 BAIRD MIDCAP FUND $129,774 $116,179 $ 1,122 BAIRD SMALLCAP FUND $104,335 $ 72,320 -- U.S. Bancorp Fund Services, LLC serves as transfer agent, administrator, and accounting services agent for the Funds. U.S. Bank, N.A. serves as custodian for the Funds. Robert W. Baird & Co. Incorporated (the "Distributor") is the sole distributor of the Funds pursuant to a distribution agreement. No commissions were earned by the Distributor for services rendered as a registered broker-dealer in securities transactions for the Baird LargeCap Fund, Baird MidCap Fund and Baird SmallCap Fund for the year ended December 31, 2005. 6. DISTRIBUTION AND SHAREHOLDER SERVICE PLAN The Funds have adopted a distribution and shareholder service plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan allows the Funds to compensate the Distributor for the costs incurred in distributing the Funds' Investor Class Shares, including amounts paid to brokers or dealers, at an annual rate not to exceed 0.25% of the average daily net assets of the Funds' Investor Class Shares. The Baird LargeCap Fund, Baird MidCap Fund and Baird SmallCap Fund incurred $6,049, $10,613 and $1,646, respectively, in fees pursuant to the Plan during the year ended December 31, 2005. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Baird Funds, Inc: We have audited the accompanying statements of assets and liabilities of Baird LargeCap Fund, Baird MidCap Fund and Baird SmallCap Fund (three of the portfolios constituting Baird Funds, Inc., hereafter referred to as the "Funds"), including the schedules of investments as of December 31, 2005, and the related statements of operations and changes in net assets, and financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The statements of changes in net assets and the financial highlights of the Funds for the years or periods ended December 31, 2004 and prior were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements and financial highlights in their report dated February 22, 2005. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Funds were not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2005 by correspondence with the Custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the aforementioned funds of Baird Funds, Inc. as of December 31, 2005, the results of their operations, changes in their net assets and their financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/Grant Thornton LLP Chicago, Illinois February 15, 2006 BAIRD FUNDS, INC. DIRECTORS & OFFICERS AS OF DECEMBER 31, 2005 Number of Portfolios Other Position(s) Term of Office Principal in Complex Directorships Held with and Length of Occupation(s) Overseen Held Name, Address, and Age the Funds Time Served During Past 5 Years by Director by Director - ---------------------- ----------- -------------- ------------------- ----------- ------------- G. Frederick Kasten, Jr.* Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of And Since September 2000-December 2005); Chairman & CEO, the Regal-Beloit 777 East Wisconsin Avenue Chairman 2000 Advisor (January 1998-January 2000); Corporation, Milwaukee, WI 53202 President, Chairman and CEO, the Advisor a manufacturing Age: 66 (June 1983-January 1998); President, the company Advisor (January 1979-January 1983) John W. Feldt Independent Indefinite; Senior Vice President-Finance, University 8 Director of University of Director Since September of Wisconsin Foundation since 1985; Vice Thompson Wisconsin Foundation 2000 President-Finance, University of Wisconsin Plumb Funds, 1848 University Avenue Foundation (1980-1985); Associate Director, Inc., a mutual Madison, WI 53705 University of Wisconsin Foundation fund complex Age: 63 (1967-1980) of which Mr. Feldt oversees 2 portfolios George C. Kaiser Independent Indefinite; CEO, George Kaiser & Co., a business 8 None 759 N. Milwaukee Street Director Since September consulting company, since 1999; Chairman Milwaukee, WI 53202 2000 and CEO, Hanger Tight Company, a Age: 72 manufacturing company (1988-1999); 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) Frederick P. Stratton, Jr. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of 777 East Wisconsin Avenue Director Since May Stratton Corporation, a manufacturing Midwest Air Suite 1400 2004 company, since 2003; Chairman of the Group, Inc., an Milwaukee, WI 53202 Board, Briggs & Stratton Corporation airline company; Age: 66 (2001-2002); Chairman and CEO, Briggs & Weyco Group, Stratton Corporation (1986-2001) Inc., a men's footwear distributor; Wisconsin Energy Corporation and its subsidiaries Wisconsin Electric Company and Wisconsin Gas Company Mary Ellen Stanek President Indefinite; Managing Director, the Advisor, and Chief N/A N/A 777 East Wisconsin Avenue Since September Investment Officer, Baird Advisors, a Milwaukee, WI 53202 2000 department of the Advisor, since March Age: 49 2000; President and CEO, Firstar Investment Research & Management Company, LLC ("FIRMCO") (November 1998-February 2000); President, Firstar Funds, Inc. (December 1998-March 2000); President and Chief Operating Officer, FIRMCO (March 1994-November 1998) J. Bary Morgan Senior Vice Indefinite; Chief Investment Officer, Baird Investment N/A N/A 777 East Wisconsin Avenue President Since February Management, a department of the Advisor, Milwaukee, WI 53202 2003 since January 2004; Managing Director, the Age: 40 Advisor, since January 2001; Director, Baird Investment Management (January 2001-January 2004); Senior Vice President, the Advisor (January 2000-January 2001); First Vice President, the Advisor (January 1996-January 2000) Todd S. Nichol Vice Indefinite; Chief Compliance Officer, the Advisor N/A N/A 777 East Wisconsin Avenue President Since August since October 2004; Assistant Compliance Milwaukee, WI 53202 and Chief 2004 Director, the Advisor since August 2002; Age: 43 Compliance Senior Vice President, the Advisor since Officer January 2005; First Vice President, the Advisor (January 2004-January 2005): Vice President, the Advisor (August 2002- January 2004); Vice President-Risk Management, BNY Clearing Services, LLC, a division of The Bank of New York (August 1995-August 2002) Russell P. Schwei Vice Indefinite; Operations Director, the Advisor since N/A N/A 777 East Wisconsin Avenue President Since September July 1992; Managing Director, the Advisor Milwaukee, WI 53202 2000 since January 1997; Chief Financial Age: 46 Officer and Managing Director, the Advisor (February 1999-December 1999) Leonard M. Rush Treasurer Indefinite; Chief Financial Officer, the Advisor since N/A N/A 777 East Wisconsin Avenue Since September January 2000 Milwaukee, WI 53202 2000 Age: 59 Charles M. Weber Secretary Indefinite; Senior Vice President and Associate N/A N/A 777 East Wisconsin Avenue Since August General Counsel, the Advisor since July Milwaukee, WI 53202 2005 2005; Partner, Quarles & Brady LLP, a law Age: 42 firm (October 1998-June 2005)
* Mr. Kasten is an "interested person" of the Corporation (as defined in the 1940 Act) because he serves as the Chairman of the Advisor. Additional information about the Funds' directors is available in the Statement of Additional Information which may be obtained without charge, upon request, by calling 1-866-44BAIRD. BAIRD FUNDS, INC. DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD EQUITY FUNDS The Board of Directors (the "Board") of Baird Funds, Inc. (the "Corporation") met on August 15, 2005 to consider the annual renewal of the Investment Advisory Agreement with Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor") for the management of the Baird LargeCap, MidCap and SmallCap Funds (the "Funds"). The Board reviewed and discussed numerous documents that had been provided prior to the meeting, including the Investment Advisory Agreement, memoranda prepared by outside legal counsel and the Secretary of the Funds discussing in detail the Board's fiduciary obligations and the factors it should assess in considering the renewal of the Investment Advisory Agreement, information about the Advisor (including its Form ADV, Annual Report and statement of financial condition), comparative information about the Funds' performance, management fees and expense ratios for the periods ended June 30, 2005, and other pertinent information. The Directors who are not "interested persons" of the Corporation or the Advisor ("Independent Directors"), within the meaning of the Investment Company Act of 1940 (the "1940 Act"), met separately in executive session with counsel to consider the agreement. The Board also received information periodically throughout the year that was relevant to its investment advisory agreement renewal process, including performance, management fee and other expense information. Based on its evaluation of information provided by the Advisor, in conjunction with the Funds' other service providers, the Board, including all of the Independent Directors, approved the annual continuation of the Investment Advisory Agreement for the Funds for an additional one-year period. In considering the Investment Advisory Agreement and reaching its conclusions, the Board reviewed and analyzed various factors that it determined were relevant, including the factors below. NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED TO THE FUNDS - ------------------------------------------------------------ The Board analyzed the nature, extent and quality of the services provided by the Advisor to the Funds. The Board reviewed and considered the Advisor's significant role in establishing the Funds and the construction of their investment objectives, principal strategies, investment limitations and fee structures. The Board noted the Advisor's overall reputation and positive name recognition, the depth of the Advisor's personnel, resources and commitment to the Funds, and the experience, credentials and continuity of the portfolio management teams employed to manage the Funds' investments. The Board considered the Advisor's disciplined investment decision-making process used for the Funds. The Board also considered other services that the Advisor rendered to the Funds in its capacity as their investment advisor, such as providing some of its key personnel available to serve as officers of the Funds, selecting broker-dealers for execution of portfolio transactions, ensuring adherence to the Fund's investment policies and restrictions, providing support services to the Board and the Audit Committee of the Board and overseeing the Funds' other service providers. The Board further noted that the Advisor, in its capacity as a registered broker-dealer, also serves as distributor and principal underwriter of shares of the Funds and spends time and effort marketing the Funds. The Board also considered the strength of the Advisor's compliance department, including the Funds' chief compliance officer, and the fact that the Advisor has not experienced any significant legal, compliance or regulatory difficulties since the Funds were launched. The Board concluded that the nature, extent and quality of the services provided by the Advisor to the Fund were appropriate and that each Fund was likely to continue to benefit from services provided by the Advisor under the Investment Advisory Agreement. INVESTMENT PERFORMANCE OF THE FUNDS - ----------------------------------- In considering the investment performance of each Fund, the Board reviewed information as of June 30, 2005 regarding the Fund's performance in comparison to various benchmark indices and their peer groups as determined by Lipper. With respect to the Baird LargeCap Fund, the Board observed that the Fund had outperformed its primary benchmark, the Russell 1000 Growth Index, for the one- year and since inception periods ended June 30, 2005, while recognizing that the Fund had underperformed that index for the three-year period ended June 30, 2005 and the S&P 500 Index for the one-year, three-year and since inception periods then ended. The Board further noted that, for the period from the Fund's inception through June 30, 2005, the Fund had performed in the top quartile of the Lipper Universe of Large Cap Growth Funds, and that for the one- and three- year periods then ended the Fund had performed slightly below the Lipper Large Cap Growth Fund average. The Board noted that the Baird MidCap Fund had outperformed the Russell MidCap Growth Index, its primary benchmark, for the period from the Fund's inception through June 30, 2005, while acknowledging that it had underperformed that benchmark for the one-year and three year periods ending June 30, 2005. The Board further noted that, for the period from the Fund's inception through June 30, 2005, the Fund had performed in the top quartile of the Lipper Universe of Mid Cap Growth Funds, and that for the one- and three-year periods then ended the Fund had performed below the Lipper Mid Cap Growth Fund average. With respect to the Baird SmallCap Fund, the Board observed that the Fund had significantly outperformed its primary benchmark index, the Russell 2000 Growth Index, for the one-year period ended June 30, 2005. The Fund commenced operations on June 30, 2004. The Board also considered the Advisor's quarterly portfolio commentaries and reviews explaining the Funds' performance, the Advisor's consistent and disciplined investment decision process and the investment strategies it employs for the Funds. After considering all of the information, the Board concluded that, although past performance is not a guarantee of future results, each Fund and its shareholders were likely to benefit from the Advisor's continued management. COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISOR - -------------------------------------------------------------- The Board examined the fee and expense information for each of the LargeCap, MidCap and SmallCap Funds, including a comparison of such information to other similarly situated mutual funds as determined by Lipper. The Board noted that, as of June 30, 2005, each Fund's investment management (or advisory) fee was either below or close to the average and median for the universe of all mutual funds in its Lipper category. The Board also reviewed and considered management fees charged by the Advisor to other investment advisory clients and found that the investment management fee paid by the Funds was less than what the Advisor charges on the first $5 million of a separately managed account. The Board recognized the extent of the significant additional services provided to each Fund that the Advisor did not provide to its other clients, such as certain administrative services, oversight of the Fund's other service providers, director support, risk management, regulatory compliance and various other services. The Board also examined the total expense ratio of each Fund relative to all other mutual funds in its Lipper category based on information available as of June 30, 2005. The Board noted that each Fund's total expense ratio (both for its investor class and institutional class shares), after fee waivers and expense reimbursements by the Advisor, was lower than the average and median expense ratios for all funds in its Lipper category, and compared favorably to the average and median expense ratios for institutional class shares of other similarly sized funds in its Lipper category. The Board considered the fees realized, and the costs incurred, by the Advisor in providing investment management services to the Funds and the profitability to the Advisor of having a relationship with the Funds. The Board noted that the Adviser had waived significant fees and/or reimbursed expenses for the Funds since their respective inception dates and that this was likely to continue in the future in order to maintain the competitiveness of the Funds' expense ratios. The Advisor informed the Board that the profits realized by the Advisor (as a percentage of revenue) from its relationship with the Fund were less than those realized by the Advisor on its investment advisory business as a whole. The Board concluded that the profits realized by the Advisor from its relationship with the Funds were appropriate. The Board also reviewed and considered the general financial condition of the Advisor and determined it to be sound. In light of all of the information that it received and considered, the Board concluded that the management fee and total expense ratio of each Fund were reasonable with respect to the services provided by the Advisor and the performance of the Fund. OTHER BENEFITS TO THE ADVISOR - ----------------------------- The Board noted that the Advisor realizes ancillary benefits from its association with the Funds in the form of research products and services received from unaffiliated broker-dealers who execute portfolio trades for the Funds. The Board noted that such products and services are limited in number and have been used for legitimate purposes relating to the Funds. The Board believed that the Funds generally benefit from their association with the Advisor and the use of the "Baird" name. The Board concluded that the other benefits realized by the Advisor from its relationship with the Funds were appropriate. ECONOMIES OF SCALE AND FEE LEVELS REFLECTING THOSE ECONOMIES - ------------------------------------------------------------ The Board noted that the Funds' advisory fee structure do not contain any breakpoint reductions as the Funds grow in size. However, the Board recognized that the Advisor has been waiving fees and/or reimbursing expenses for the Funds since their inception and anticipates that the Advisor will continue to do so for the foreseeable future. The Board also recognized that the advisory fee rates paid by the Funds were designed to be lower than the fees otherwise charged by the Advisor to its separately managed account clients and to be comparable to the second or third breakpoint advisory fee levels paid by other comparable mutual funds. After consideration of the above factors, the Board, including a majority of the Independent Directors, approved the renewal of the Investment Advisory Agreement with the Funds as being in the best interests of the Funds and their respective shareholders. ADDITIONAL INFORMATION PROXY VOTING A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds' website at www.bairdfunds.com; and by accessing the SEC's website at www.sec.gov. Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds' website at www.bairdfunds.com; and by accessing the SEC's website at www.sec.gov. PORTFOLIO HOLDINGS DISCLOSURE The Funds file a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q are available on the SEC website at www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-732-0330. The Funds' Forms N-Q may also be obtained by calling toll-free 1-866-44BAIRD or by accessing the Fund's website at www.bairdfunds.com. ADDITIONAL TAX INFORMATION The Baird LargeCap Fund designates 100% of dividends declared from net investment income as qualified dividend income under the Jobs Growth and Tax Relief Reconciliation Act of 2003. The Baird MidCap Fund designates 53.3% as qualified dividend income. Additionally, 100% and 53.4% of the dividends paid by the Baird LargeCap Fund and Baird MidCap Fund qualify for the dividend received deduction. CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM On October 10, 2005, the Audit Committee of the Corporation's Board of Directors and the Board accepted the resignation of PricewaterhouseCoopers LLP as auditors for the Funds. The reports of PricewaterhouseCoopers LLP on the Funds' financial statements for the past two years contained no adverse opinion or a disclaimer of opinion, and were not qualifed or modified as to uncertainty, audit scope or accounting principle. In addition, during the Corporation's two most recent fiscal years and through October 10, 2005, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principle or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused them to make a reference thereto with their reports on the Funds' financial statements for such years. On November 22, 2005, the Audit Committee recommended, and the Board approved, the appointment of Grant Thornton LLP, an independent registered public accounting firm, to audit the Funds' 2005 financial statements, subject to completion of the terms of its engagement. Grant Thornton LLP was formally engaged as auditors of the Funds on December 21, 2005. BAIRD FUNDS, INC. c/o U.S. Bancorp Fund Services, LLC P.O. Box 701 Milwaukee, Wisconsin 53201-0701 1-866-44BAIRD BOARD OF DIRECTORS G. Frederick Kasten, Jr. (Chairman) John W. Feldt George C. Kaiser Frederick P. Stratton, Jr. INVESTMENT ADVISOR AND DISTRIBUTOR Robert W. Baird & Co. Incorporated 777 East Wisconsin Avenue Milwaukee, Wisconsin 53202 ADMINISTRATOR AND TRANSFER AGENT U.S. Bancorp Fund Services, LLC P.O. Box 701 615 East Michigan Street Milwaukee, WI 53202 CUSTODIAN U.S. Bank, N.A. 425 Walnut Street Cincinnati, OH 45202 LEGAL COUNSEL Godfrey & Kahn, S.C. 780 North Water Street Milwaukee, Wisconsin 53202 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Grant Thornton LLP 175 West Jackson Boulevard, 20th Floor Chicago, Illinois 60604 ITEM 2. CODE OF ETHICS. - ----------------------- As of the end of the period covered by this report, the Registrant has adopted a code of ethics that applies to the Registrant's principal executive officer and principal financial officer. The Registrant has not made any amendments to its code of ethics during the period covered by this report. The Registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. - ---------------------------------------- The Registrant's board of directors has determined that John W. Feldt and Frederick P. Stratton, Jr., members of the audit committee, each qualify as an "audit committee financial expert" as such term is defined in paragraph (b) of Item 3 of Form N-CSR. Mr. Feldt and Mr. Stratton are each "independent" as such term is defined in paragraph (a)(2) of Item 3 of Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. - ----------------------------------------------- Fees Billed by Grant Thornton LLP and PricewaterhouseCoopers LLP. The aggregate fees billed for professional services by Grant Thornton LLP ("GT") during fiscal 2005 and PricewaterhouseCoopers LLP during fiscal 2004 were as follows: FYE FYE --- --- Type of Fees 12/31/05 12/31/04 Audit Fees $100,000 $93,370 Audit-Related Fees -- -- Tax Fees 24,000 32,230 All Other Fees -- -- In the above table, "audit fees" are fees billed for professional services for the audit of the Registrant's annual financial statements or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. "Tax fees" are fees billed for professional services rendered for tax compliance, tax advice and tax planning. The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services rendered to the Registrant, as well as all non-audit services provided to the Registrant's investment adviser and any entity affiliated with the Registrant's investment adviser with respect to any engagement that relates directly to the operations and financial reporting of the Registrant. In accordance with its pre-approval policies and procedures, the audit committee pre-approved all audit and tax services provided by GT during fiscal 2005. During the past two fiscal years, the Registrant did not receive any non-audit services from PWC or GT pursuant to any waivers of the pre-approval requirement under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. All of GT's hours spent on auditing the Registrant's financial statements were attributed to work performed by full-time permanent employees of GT. During the last two fiscal years, GT has served as the auditor to Robert W. Baird & Co. Incorporated ("RWB"), the Registrant's investment adviser, and has rendered non-audit services to an affiliate of RWB. The non-audit services consisted of tax services provided to investment partnerships affiliated with RWB, which partnerships do not provide ongoing services to the Registrant. GT charged the following amounts for such non-audit services to the RWB-affiliated partnerships: $128,000 in 2004 and $96,000 in 2005. The Audit Committee has concluded that the provision of these audit services to RWB and non-audit services to RWB-affiliated partnerships is compatible with GT's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. - ---------------------------------------------- Not applicable because the Registrant is not a "listed issuer" within the meaning of Rule 10A-3 under the Securities Exchange Act of 1934. ITEM 6. SCHEDULE OF INVESTMENTS. - -------------------------------- The Schedules of Investments are included as part of the reports to shareholders filed under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END - ------------------------------------------------------------------------- MANAGEMENT INVESTMENT COMPANIES. - -------------------------------- Not applicable because the Registrant is not a closed-end management investment company. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. - ------------------------------------------------------------------------- Not applicable because the Registrant is not a closed-end management investment company. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT - --------------------------------------------------------------------------- COMPANY AND AFFILIATED PURCHASES. - --------------------------------- Not applicable because the Registrant is not a closed-end management investment company. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant's board of directors. ITEM 11. CONTROLS AND PROCEDURES. - --------------------------------- (a) The Registrant's management, with the participation of its principal executive and principal financial officers, has evaluated the effectiveness of the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940), as of a date within 90 days prior to the filing date of this Form N-CSR. Based on such evaluation, the Registrant's principal executive and principal financial officers have concluded that the design and operation of the Registrant's disclosure controls and procedures are effective in providing reasonable assurance that the information required to be disclosed on Form N-CSR is recorded, processed, summarized and reported within the applicable time periods. (b) There were no significant changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. - ----------------- (a) (1) Code of ethics. Incorporated by reference to the Registrant's Form N- CSR filed on March 9, 2004. (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. (3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable because the Registrant is not a closed-end management investment company. (b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Baird Funds, Inc. By: /s/Mary Ellen Stanek ---------------------------- Mary Ellen Stanek, President Date: March 7, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/Mary Ellen Stanek ---------------------------- Mary Ellen Stanek, President Date: March 7, 2006 By: /s/Leonard Rush ----------------------- Leonard Rush, Treasurer Date: March 7, 2006 EX-99.CERT 2 bfif_bef-ex99cert302.txt Exhibit 12(a)(2) CERTIFICATIONS -------------- I, Mary Ellen Stanek, certify that: 1. I have reviewed this report on Form N-CSR of Baird Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2006 /s/Mary Ellen Stanek ------------------ -------------------------- Mary Ellen Stanek President CERTIFICATIONS -------------- I, Leonard Rush, certify that: 1. I have reviewed this report on Form N-CSR of Baird Funds, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 7, 2006 /s/Leonard Rush ------------------ -------------------- Leonard Rush Treasurer EX-99.906 CERT 3 bfif_bef-ex99cert906.txt Exhibit 12(b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT --------------------------------------------------------------- Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Baird Funds, Inc., does hereby certify, to such officer's knowledge, that the report on Form N-CSR of Baird Funds, Inc. for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of Baird Funds, Inc. for the stated period. /s/Mary Ellen Stanek /s/Leonard Rush - ---------------------------- ---------------------------- Mary Ellen Stanek Leonard Rush President, Baird Funds, Inc. Treasurer, Baird Funds, Inc. Dated: March 7, 2006 ------------------ This statement accompanies this report on Form N-CSR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by Baird Funds, Inc. for purposes of the Securities Exchange Act of 1934. -----END PRIVACY-ENHANCED MESSAGE-----