BAIRD ADJUSTABLE
RATE INCOME FUND
ANNUAL REPORT
SEPTEMBER 30, 1995
(Baird Logo)
BAIRD ADJUSTABLE RATE INCOME FUND
Annual Report November 9, 1995
DEAR FELLOW SHAREHOLDER:
The bond markets staged a remarkable recovery during 1995 after a very
difficult 1994. The yield on the benchmark thirty-year Treasury bond, which
increased from 6% on 09/30/93 to 7.80% by 09/30/94, fell back to around 6.50% by
09/30/95, the end of the Fund's fiscal year.
This turnaround in the bond market was sparked by a slowdown in economic
growth and a significant improvement in the outlook for inflation. Through most
of 1994, the Federal Reserve was pushing interest rates upward out of concern
that the economy could be overheating and inflation accelerating. That Fed
tightening apparently had the intended impact sooner than anticipated. In 1995,
the economy has been growing much slower and the rate of inflation has dropped
to around 2% or less. In response to these bullish economic fundamentals, bond
prices regained a significant part of the ground lost in 1994.
The performance of the bond market in the year ahead will depend primarily
upon whether the United States economy slips into a recession. Those who project
still lower bond yields argue that the United States and the world economy will
continue to weaken in 1996. Others argue that the drop in interest rates in 1995
will spark a rebound in business activity. Recent increases in the pace of home
sales and housing construction, in response to lower mortgage rates, appear to
support the view that the economy is improving somewhat. If so, bond yields may
not decline much further.
The remarkable bond market rally of this past year has sparked a partial
recovery in the prices of CMO floaters. Those floaters indexed to LIBOR have
shown the best price gains, as short-term rates have remained quite high while
note and bond yields declined. A flat yield curve, such as that which emerged in
1995, generally allows LIBOR floaters to perform better than CMT or COFI
floaters. The latter should show better relative performance if the Federal
Reserve were to lower the federal funds rate and the yield curve were to
steepen. That is a possibility if economic growth remains subdued and inflation
remains low in the quarters ahead.
The Fund's investment policy was changed during fiscal 1995 requiring that
portfolio securities be held to maturity or until the securities can be sold at
par. Because of the market recovery, we were able to sell approximately 20% of
the Fund's portfolio of securities at par. The Fund declared a return of capital
distribution of $1.00 per share in September and an additional distribution is
being considered for the fourth quarter. As the portfolio becomes less
diversified because securities in the Fund are sold at par or because of
mortgage paydowns, shareholders may experience somewhat greater volatility in
the net asset value in the coming years.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low,Jr. James Kochan
President Portfolio Manager
100 East Wisconsin Avenue
REPORT OF INDEPENDENT ACCOUNTANTS Suite 1500
Milwaukee, WI 53202
(Price Waterhouse Logo)
To the Shareholders and Board of Directors
of Baird Adjustable Rate Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Baird Adjustable Rate Income Fund
(the ''Fund'') at September 30, 1995, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the two years in the
period then ended and for the year from October 1, 1992 (commencement of
operations) to September 30, 1993, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as ''financial statements'') are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1995 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
November 2, 1995
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
ASSETS:
Investments in securities, at value (amortized cost $87,892,094)$83,950,283
Receivable from investments sold 6,000,000
Interest receivable 385,337
Cash 17,344
Deferred organizational expenses 19,995
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Total assets $90,372,959
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LIABILITIES:
Dividends payable 510,769
Payable to adviser for deferred expenses 19,995
Other liabilities 37,366
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Total liabilities 568,130
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NET ASSETS:
Capital Stock, $0.01 par value; 300,000,000 shares authorized;
10,441,551 shares outstanding 103,030,768
Net unrealized depreciation on investments (3,941,811)
Accumulated net realized loss on investments (9,284,128)
-----------
Net assets 89,804,829
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Total liabilities and net assets $90,372,959
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-----------
CALCULATION OF REDEMPTION PRICE:
Net asset value and redemption price per share
($89,804,829 / 10,441,551 shares outstanding) $ 8.60
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
<TABLE>
SCHEDULE OF INVESTMENTS
September 30, 1995
LONG-TERM INVESTMENTS 88.1% (A)<F1>
<CAPTION>
Principal Amortized Quoted
Amount Cost Market Value
- ----------- ---------- ------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS - 88.1 % (b)<F2>
$ 2,000,000 FNMA 93-72F, 6.044%, due 05/25/08,
(indexed to COFI plus 90bp subject to 10% cap) $2,000,000 $1,926,250
2,954,317 FNMA 93-101FA, 5.994%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 2,948,183 2,832,452
4,111,173 FNMA 93-107F, 5.994%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,683,480 3,942,872
10,000,000 FNMA 92-206FA, 5.40%, due 06/25/18,
(indexed to T10Y minus 75bp subject to 9.5% cap) 9,993,328 9,450,000
5,000,000 FNMA 93-127FA, 5.40%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.5% cap) 4,988,134 4,709,375
5,000,000 FNMA 92-33FPAC, 5.70%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,011,329 4,729,688
1,000,000 FNMA 92-204FE, 5.65%, due 10/25/22,
(indexed to T10Y minus 50bp subject to 9.5% cap) 1,000,000 909,375
265,799 FHLMC 1433FD, 6.444%, due 11/15/22,
(indexed to COFI plus 130bp subject to 10.5% cap) 265,900 254,337
2,895,511 FNMA G93-17FL, 6.20%, due 04/25/23,
(indexed to T10Y minus 25bp subject to 9.5% cap) 2,895,511 2,756,165
3,000,000 FNMA G93-19FD, 5.50%, due 04/25/23,
(indexed to T10Y minus 65bp subject to 9.5% cap) 2,993,302 2,714,063
5,000,000 FHLMC G10I, 6.02%, due 05/25/23,
(indexed to T10Y minus 55bp subject to 9.5% cap) 4,984,328 4,517,187
11,000,000 FHLMC 1608FD, 6.114%, due 06/15/23,
(indexed to COFI plus 97bp subject to 9.5% cap) 10,971,116 10,501,562
4,509,447 FNMA 93-99F, 6.394%, due 07/25/23,
(indexed to COFI plus 125bp subject to 10% cap) 4,519,941 4,340,344
7,355,168 FNMA 93-182FA, 5.50%, due 09/25/23,
(indexed to T10Y minus 65bp subject to 10% cap) 7,328,214 6,725,383
9,428,129 FHLMC 1614TA, 6.144%, due 11/15/23,
(indexed to COFI plus 100bp subject to 9.5% cap) 9,424,948 9,012,702
4,994,771 FHLMC 1717N, 6.07%, due 04/15/24,
(indexed to T10Y minus 50bp subject to 9.5% cap) 4,848,588 4,593,628
---------- ------------
Total long-term investments 77,856,302 73,915,383
<CAPTION>
SHORT-TERM INVESTMENTS 11.9% (A)<F1>
<S> <C> <C>
FEDERAL AGENCIES - 11.7 %
$10,000,000 FHLB, 5.55%, due 12/29/95 $ 9,862,792 $ 9,861,900
---------- ------------
Total federal agencies 9,862,792 9,861,900
REPURCHASE AGREEMENTS - 0.2 %
173,000 Firstar Trust Company Repurchase Agreement,
5.00%, dated 09/29/95; maturing 10/02/95
(secured by $180,000 U.S. Treasury Note,
5.625%, due 08/31/97) 173,000 173,000
---------- ----------
Total repurchase agreements 173,000 173,000
---------- ----------
Total short-term investments 10,035,792 10,034,900
---------- ----------
TOTAL INVESTMENTS - 100% $87,892,094 $83,950,283
---------- ----------
---------- ----------
(a)<F1> Percentages for the various classifications relate to total investments.
(b)<F2> The coupon rate shown on adjustable rate securities represents the rate at period end.
All coupon rates reset monthly.
COFI = Cost of Funds Index
T10Y = 10 Year Treasury
bp = basis points
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corp.
FNMA = Federal National Mortgage Association
<FN>
The accompanying notes to financial statements are an integral part of this
schedule.
</TABLE>
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1995
INCOME:
Interest $7,904,136
---------
Total income 7,904,136
---------
EXPENSES:
Management fees 592,787
Administrative services 69,577
Distributor fees 59,962
Professional fees 45,419
Custodian fees 31,325
Board of Director fees 19,150
Transfer agent fees 12,289
Amortization of organizational expenses 9,998
Printing and postage expense 3,036
Registration fees 1,115
Other expenses 12,463
---------
Total expenses before reimbursement 857,121
Less expenses assumed by adviser (510,682)
---------
Net expenses 346,439
---------
NET INVESTMENT INCOME 7,557,697
----------
NET REALIZED LOSS ON INVESTMENTS (6,057,608)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 6,283,289
----------
NET GAIN ON INVESTMENTS 225,681
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,783,378
----------
----------
The accompanying notes to financial statements are an integral part of these
statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1995 and 1994
1995 1994
OPERATIONS: ----------- -----------
Net investment income $ 7,557,697 $ 9,697,819
Net realized loss on investments (6,057,608) (7,697,690)
Net increase (decrease) in unrealized
appreciation on investments 6,283,289 (10,375,656)
----------- -----------
Net increase (decrease) in net assets
resulting from operations 7,783,378 (8,375,527)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.59 and $0.47 per share, respectively) (7,557,697) (9,706,352)
Distribution from net realized gains
($0.00 per share) - (13,226)
Return of capital distribution
($1.00 per share) (10,441,551) -
----------- -----------
Total distributions (17,999,248) (9,719,578)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(130,733 and 27,123,674 shares, respectively) 1,173,191 268,605,440
Capital contribution from
Robert W. Baird & Co. Incorporated 4,489,671 -
Net asset value of shares issued in distributions
(11,046 and 42,829 shares, respectively) 99,542 419,409
Cost of shares redeemed (8,154,600 and
23,006,889 shares, respectively) (73,161,040) (225,797,709)
----------- -----------
Net (decrease) increase in net assets
derived from Fund share activities (67,398,636) 43,227,140
----------- -----------
TOTAL (DECREASE) INCREASE (77,614,506) 25,132,035
NET ASSETS AT THE BEGINNING OF THE YEAR 167,419,335 142,287,300
----------- -----------
NET ASSETS AT THE END OF THE YEAR $ 89,804,829 $167,419,335
----------- -----------
----------- -----------
The accompanying notes to financial statements are an integral part of these
statements.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each year)
FOR THE YEAR FROM
FOR THE YEARS OCTOBER 1, 1992*<F3>
ENDED SEPTEMBER 30, TO SEPTEMBER 30,
1995 1994 1993
------ ------ -------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $ 9.07 $ 9.95 $ 10.00
Income from investment operations:
Net investment income 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments 0.14 (0.88) (0.05)
------ ------ -------
Total from investment operations 0.73 (0.41) 0.41
Capital contribution from
Robert W. Baird & Co. Incorporated 0.39 - -
Less distributions:
Dividends from net investment income (0.59) (0.47) (0.46)
Distribution from net realized gains - (0.00) -
Return of capital distribution (1.00) - -
Total from distributions (1.59) (0.47) (0.46)
------ ------ -------
Net asset value, end of year $ 8.60 $ 9.07 $ 9.95
------- ------- -------
------- ------- -------
TOTAL INVESTMENT RETURN****<F6> 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 89,805 167,419 142,287
Ratio of expenses (after reimbursement)
to average net assets**<F4> 0.3% 0.5% 0.4%
Ratio of net investment income
to average net assets***<F5> 6.4% 4.8% 4.3%
Portfolio turnover rate 3.6% 143.8% 79.4%
*<F3> Commencement of Operations.
**<F4> Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 0.7%, 0.9% and 1.1%, respectively, for the years ended September 30,
1995, 1994 and 1993.
***<F5> The ratio of net investment income prior to adviser's expense
limitation undertaking to average net assets for the years ended September 30,
1995, 1994 and 1993 would have been 5.9%, 4.4% and 3.6%, respectively.
****<F6> Total return does not include the sales load which existed when the
Fund was open to new investments. The total return for the year ended
September 30, 1995 is computed after giving effect to the capital contribution
from Robert W. Baird & Co. Incorporated. If the Fund had not received this
capital contribution, the total return would have been 8.4% for the year ended
September 30, 1995.
The accompanying notes to financial statements are an integral part of these
statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The following is a summary of
significant accounting policies of the Baird Adjustable Rate Income Fund (''The
Fund''), which is one portfolio in a series of two portfolios comprising The
Baird Funds, Inc. (the ''Company''), which is registered under the Investment
Company Act of 1940. The assets and liabilities of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which the
shareholder owns shares. The Company was incorporated under the laws of
Wisconsin on June 26, 1992 and commenced operations on October 1, 1992. In
accordance with the terms of the Agreement discussed in Note 2, the Fund was
closed to new investments effective December 23, 1994. The investment objective
of the Fund is to hold its existing portfolio securities to maturity or until
such time as sales become available at prices consistent with the ability to
liquidate securities at their respective par values.
(a) Securities for which market quotations are readily available are valued at
the most recent bid price. Securities for which there are no readily
available market quotations and other assets are valued at their fair value
as determined in good faith in accordance with policies approved by the
Company's Board of Directors. Valuation techniques may include the use of
market quotations for similar securities, transaction prices for the same or
similar securities, prices provided by broker-dealers or estimates of market
values obtained from yield and other data relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors.
Debt securities having a remaining maturity of sixty days or less when
purchased and debt securities originally purchased with maturities in excess
of sixty days but which currently have maturities of sixty days or less are
valued at cost adjusted for amortization of premiums and accretion of
discounts.
(b) Premiums and discounts on Collateralized Mortgage Obligations in the Fund
are amortized to weighted average life. Premiums and discounts on other
securities are amortized to maturity. Investment transactions are recorded no
later than the first business day after the trade date. Cost amounts, as
reported in the schedule of investments, are the same for Federal income tax
purposes.
(c) Net realized gains and losses are computed on the basis of the cost of
specific certificates.
(d) Provision has not been made for Federal income taxes since the Fund has
elected to be taxed as a ''regulated investment company'' and intends to
distribute substantially all income to its shareholders and otherwise comply
with the provisions of the Internal Revenue Code applicable to regulated
investment companies. The Fund has $8,221,605 of net capital losses which
expire September 30, 2003 and $1,062,523 of 1995 post-October losses that
may be used to offset capital gains in future years to the extent provided by
tax regulations.
(e) Dividend income (if any) is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
(f) Generally accepted accounting principles require that permanent financial
reporting and tax differences be reclassified to capital stock.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES - The Fund has a management agreement with Robert W. Baird & Co.
Incorporated (''RWB''), with whom certain officers and directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of the
agreement, the Fund was to pay RWB a monthly management fee at the annual rate
of 0.50% of the daily net assets of the Fund. For the period October 1, 1994
through December 31, 1994, RWB voluntarily waived approximately $76,177 of the
management fees due from the Fund under the agreement. In accordance with the
terms of the Agreement discussed below, RWB has permanently waived all future
management fees due from the Fund effective January 1, 1995 (for the period
January 1, 1995 through September 30, 1995, approximately $402,344).
RWB reimburses the Fund for annual expenses in excess of the lowest expense
limitation imposed by the states. In addition to the reimbursement required
under the management agreement, RWB has voluntarily reimbursed the Fund for all
expenses over 0.3% for the year ended September 30, 1995 totaling $29,332. These
voluntary reimbursements to the Fund may be modified or discontinued at any time
by RWB.
The Fund had adopted a Distribution Plan (the ''Plan''), pursuant to Rule 12b-
1 under the Investment Company Act of 1940 with RWB. The Plan provided that the
Fund incur certain costs not to exceed the lesser of a monthly amount equal to
0.30% per year of the Fund's daily net assets or the actual distribution costs
incurred by RWB during the year. Amounts paid under the Plan were paid monthly
to RWB for any activities or expenses primarily intended to result in the sale
of shares of the Fund. For the period October 1, 1994 through December 27, 1994,
RWB voluntarily waived approximately $2,829 of the distribution fees due from
the Fund under the Plan. The Fund terminated the Plan effective December 27,
1994.
During the year ended September 30, 1995, the Company was advised that RWB
received $112 from investors of the Fund, representing commissions on sales of
Fund shares and the Fund did not pay any brokerage fees to RWB on the execution
of purchases and sales of portfolio securities.
Effective January 13, 1995, RWB and shareholders representing approximately
99% of the Fund's shares outstanding as of August 10, 1994 entered into an
agreement (''Agreement'') resolving a dispute arising out of the 1994 decline in
the Fund's per share net asset value. In accordance with the terms of the
Agreement, RWB made a payment of $4,616,549 ($0.40 per share on the funding
date, February 10, 1995) directly to the Fund on behalf of the Fund shareholders
to compensate the Fund for capital losses realized by the Fund. The payment was
credited directly to the Fund's additional paid-in capital. Legal expenses
incurred by the Fund in conjunction with the Agreement totaling $126,878 or
$0.01 per share were also charged directly against additional paid-in capital.
This net contribution of $4,489,671 was treated as a capital gain for tax
purposes.
(3) DISTRIBUTION TO SHAREHOLDERS - Dividends from net investment income for the
Fund are declared daily and paid monthly. Distributions of net realized gains,
if any, for the Fund, will be declared at least once a year.
In accordance with the terms of the Agreement, the Fund will seek to maximize
returns of capital to investors by making distributions of substantially all
returns of capital and revenues (subject to retention of cash or cash
equivalents not to exceed the lesser of $5,000,000 or 10% of net assets). Such a
return of capital distribution was paid on September 26, 1995 in the amount of
$10,441,551 ($1.00 per share).
(4) DEFERRED EXPENSES - Organizational expenses were deferred and are being
amortized on a straight-line basis over a period of not more than five years.
These expenses were advanced by RWB who will be reimbursed by the Fund over a
period of not more than five years. The proceeds of any redemption of the
initial shares by the original shareholder will be reduced by a pro-rata portion
of any then unamortized deferred expenses in the same proportion as the number
of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption. The unamortized organizational
expenses for the Fund at September 30, 1995 were $19,995.
(5) INVESTMENT TRANSACTIONS - For the year ended September 30, 1995, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $3,648,667 and $80,272,384, respectively, and $142,827,428
and $119,205,390, respectively, of short-term U.S. Government Securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES - As of September 30, 1995,
liabilities of the Fund included the following:
Dividends payable $ 510,769
Payable to adviser for deferred expenses 19,995
Other liabilities 37,366
(7) SOURCES OF NET ASSETS - As of September 30, 1995, the sources of net assets
were as follows:
Fund shares issued and outstanding $103,030,768
Net unrealized depreciation on investments (3,941,811)
Accumulated net realized loss on investments (9,284,128)
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$ 89,804,829
-----------
-----------
Aggregate net unrealized depreciation as of September 30, 1995 consisted of
the following:
Aggregate gross unrealized appreciation $ 259,392
Aggregate gross unrealized depreciation (4,201,203)
-----------
Net unrealized depreciation $(3,941,811)
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(BAIRD LOGO)
A NORTHWESTERN MUTUAL COMPANY
Robert W. Baird & Co. Incorporated
777 E. Wisconsin Avenue, Milwaukee, WI 53202
Phone 414 765-3500. Toll Free 1-800-RW-BAIRD
Copyright 1995 Robert W. Baird & Co. Incorporated
