BAIRD ADJUSTABLE
RATE INCOME FUND
ANNUAL
REPORT
SEPTEMBER 30, 1996
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
ANNUAL REPORT October 31, 1996
DEAR FELLOW SHAREHOLDER:
After adjusting sharply higher during the first quarter, bond yields remained
in a relatively narrow trading range during the remainder of 1996. The CMO
floaters in the Baird Adjustable Rate Income Fund (the "Fund") portfolio showed
relatively small price declines during February-March as interest rates
increased, and then increased slowly during the second and third quarters. This
relative stability of CMO prices was reflected in the NAV of the Fund. During
the fiscal year, the NAV increased from 8.60 to 8.66, and fluctuated within a
narrow range of 8.60 to 8.75. On the other hand, over the last twelve months,
shareholder redemptions have exceeded $43 million. As a consequence, the Fund
has reduced its portfolio to satisfy these redemptions. Currently, the Fund has
total net assets of $41.9 million with $36.7 million in CMO floaters. As
discussed in the August shareholder letter, fund expenses will absorb a greater
portion of portfolio income as net assets decline.
This recent stability of the bond markets reflects an almost even balance
among the economic fundamentals that influence bond prices. Some have used the
term "Goldilocks economy" to describe an economy that is not too "hot" (strong)
or too "cold" (weak). The Federal Reserve would probably approve of that
characterization. The economy is experiencing growth that is solid, but not so
robust as to require Fed tightening. Third-quarter GDP growth is expected to be
around 2%, which is almost exactly the type of slowdown from the second-quarter
pace that the Fed had hoped to see.
Inflation has become a concern, largely because of signs that tight labor
markets are starting to push wage rates upward. To date, however, higher wages
have not been incorporated into the prices of final goods or services. The
consumer and producer price indices remain very well-behaved. Nevertheless, at
this late stage of a business cycle expansion, some additional inflation and
interest rate pressures would not be unusual. Consequently, it would probably be
overly optimistic to expect the bond market to remain tranquil indefinitely.
Unless the economy turns significantly weaker, interest rates and bond yields
would be expected to move moderately higher during the first quarter of 1997.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low, Jr. James Kochan
President Portfolio Manager
REPORT OF INDEPENDENT ACCOUNTANTS 100 East Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
(PRICE WATERHJOUSE LOGO)
To the Shareholders and Board of Directors
of Baird Adjustable Rate Income Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Baird Adjustable Rate Income Fund (the "Fund") at September 30, 1996, 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 three 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, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse
October 25, 1996
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENT OF NET ASSETS
September 30, 1996
Principal Amortized Quoted
Amount Cost Market Value
- ---------- ---------- -----------
LONG-TERM INVESTMENTS 97.5% (A)<F1>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 97.5% (B)<F2>
$2,000,000 FNMA 93-72F, 5.719%, due 05/25/08,
(indexed to COFI plus 90bp
subject to 10% cap) $2,000,000 $1,912,500
2,954,317 FNMA 93-101FA, 5.669%, due 06/25/08,
(indexed to COFI plus 85bp
subject to 10% cap) 2,948,823 2,808,448
4,111,173 FNMA 93-107F, 5.669%, due 06/25/08,
(indexed to COFI plus 85bp
subject to 10% cap) 3,728,639 3,914,608
10,000,000 FNMA 92-206FA, 6.070%, due 06/25/18,
(indexed to T10Y minus 75bp
subject to 9.50% cap) 9,994,154 9,581,250
5,000,000 FNMA 93-127FA, 6.070%, due 10/25/21,
(indexed to T10Y minus 75bp
subject to 9.50% cap) 4,989,489 4,773,438
5,000,000 FNMA 92-33FPAC, 6.370%, due 03/25/22,
(indexed to T10Y minus 45bp
subject to 10% cap) 5,010,214 4,828,125
1,000,000 FNMA 92-204FE, 6.320%, due 10/25/22,
(indexed to T10Y minus 50bp
subject to 9.50% cap) 1,000,000 945,313
265,799 FHLMC 1433FD, 6.119%, due 11/15/22,
(indexed to COFI plus 130bp
subject to 10.50% cap) 265,867 249,602
79,835 FNMA G93-17FL, 6.260%, due 04/25/23,
(indexed to T10Y minus 25bp
subject to 9.50% cap) 79,835 78,688
3,000,000 FNMA G93-19FD, 6.170%, due 04/25/23,
(indexed to T10Y minus 65bp
subject to 9.50% cap) 2,993,768 2,808,750
5,000,000 FHLMC G10I, 6.080%, due 05/25/23,
(indexed to T10Y minus 55bp
subject to 9.50% cap) 4,985,177 4,664,062
5,000,000 FHLMC 1608FD, 5.789%, due 06/15/23,
(indexed to COFI plus 97bp
subject to 9.50% cap) 4,986,037 4,745,312
4,509,447 FNMA 93-99F, 6.069%, due 07/25/23,
(indexed to COFI plus 125bp
subject to 10% cap) 4,519,323 4,265,656
---------- ----------
Total long-term investments 47,501,326 45,575,752
SHORT-TERM INVESTMENTS 3.2% (A)<F1>
REPURCHASE AGREEMENTS -- 3.2%
$ 1,514,000 Firstar Trust Company Repurchase Agreement,
4.25%, dated 09/30/96; maturing 10/01/96
(secured by $1,505,000 U.S. Treasury Note,
6.500%, due 04/30/99) $1,514,000 $1,514,000
---------- ----------
Total repurchase agreements 1,514,000 1,514,000
---------- ----------
Total investments $49,015,326 47,089,752
----------
----------
Liabilities, less cash and
receivables (0.7%) (A)<F1> (322,362)
----------
Net Assets $46,767,390
----------
----------
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized) and redemption price
($46,767,390 / 5,397,548
shares outstanding) $8.66
------
------
(a)<F1>Percentages for the various classifications relate to net assets.
(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
FHLMC = Federal Home Loan Mortgage Corp.
FNMA = Federal National Mortgage Association
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1996
INCOME:
Interest $4,430,860
----------
Total income 4,430,860
----------
EXPENSES:
Management fees 364,969
Professional fees 78,669
Administrative services 46,631
Custodian fees 18,011
Transfer agent fees 12,305
Amortization of organizational expenses 9,998
Board of Director fees 6,200
Printing and postage expense 3,924
Registration fees 712
Other expenses 6,034
---------
Total expenses before management fee waiver 547,453
Less fee waived by adviser (364,969)
---------
Net expenses 182,484
---------
NET INVESTMENT INCOME 4,248,376
----------
NET REALIZED LOSS ON INVESTMENTS (1,356,775)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 2,016,237
----------
NET GAIN ON INVESTMENTS 659,462
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,907,838
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1996 and 1995
1996 1995
----- -----
OPERATIONS:
Net investment income $4,248,376 $7,557,697
Net realized loss on investments (1,356,775) (6,057,608)
Net increase in unrealized appreciation
on investments 2,016,237 6,283,289
----------- ----------
Net increase in net assets
resulting from operations 4,907,838 7,783,378
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.50 and $0.59 per share, respectively) (4,248,376) (7,557,697)
Return of capital distribution
($1.00 per share) --(10,441,551)
----------- -----------
Total distributions (4,248,376)(17,999,248)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (130,733 shares) -- 1,173,191
Capital contribution from
Robert W. Baird & Co. Incorporated -- 4,489,671
Net asset value of shares issued in
distributions (11,046 shares) -- 99,542
Cost of shares redeemed (5,044,003 and
8,154,600 shares, respectively) (43,696,901)(73,161,040)
----------- -----------
Net decrease in net assets
derived from Fund share activities (43,696,901)(67,398,636)
----------- -----------
TOTAL DECREASE (43,037,439)(77,614,506)
NET ASSETS AT THE BEGINNING OF THE YEAR 89,804,829 167,419,335
----------- -----------
NET ASSETS AT THE END OF THE YEAR $46,767,390 $89,804,829
----------- -----------
----------- -----------
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)
<TABLE>
<CAPTION>
FOR THE YEAR FROM
FOR THE YEARS ENDED SEPTEMBER 30, OCTOBER 1, 1992*<F3>
-------------------------------- TO SEPTEMBER 30,
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $8.60 $9.07 $9.95 $10.00
Income from investment operations:
Net investment income 0.50 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments 0.06 0.14 (0.88) (0.05)
------- ------- -------- --------
Total from investment operations 0.56 0.73 (0.41) 0.41
Capital contribution from
Robert W. Baird & Co. Incorporated -- 0.39 -- --
Less distributions:
Dividends from net investment income (0.50) (0.59) (0.47) (0.46)
Distribution from net realized gains -- -- (0.00) --
Return of capital distribution -- (1.00) -- --
------- ------- -------- --------
Total from distributions (0.50) (1.59) (0.47) (0.46)
------- ------- -------- --------
Net asset value, end of year $8.66 $8.60 $9.07 $9.95
------- ------- -------- --------
------- ------- -------- --------
TOTAL INVESTMENT RETURN****<F6> 6.7% 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 46,767 89,805 167,419 142,287
Ratio of expenses (after waiver
and/or reimbursement)
to average net assets**<F4> 0.3% 0.3% 0.5% 0.4%
Ratio of net investment income
to average net assets***<F5> 5.8% 6.4% 4.8% 4.3%
Portfolio turnover rate 0.0% 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 0.8%, 0.7%, 0.9% and 1.1%, respectively, for the years ended September 30,
1996, 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,
1996, 1995, 1994 and 1993 would have been 5.3%, 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 this
statement.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- The following is a summary of
significant accounting policies of the Baird Adjustable Rate Income Fund (the
"Fund"), a portfolio of The Baird Funds, Inc. (the "Company"), which is
registered under the Investment Company Act of 1940. The Company was
incorporated under the laws of Wisconsin on June 26, 1992 and the Fund 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.
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.
(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 net investment company taxable income and net
capital gains 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 and $1,062,523 of net capital losses which expire
September 30, 2003 and 2004, respectively, and $1,356,775 of 1996 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.
(g) The preparation of financial statements in conformity with generally
accepted accounting principles 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 these estimates.
(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. In accordance with the terms of
the Agreement with shareholders dated January 13, 1995, RWB has permanently
waived all future management fees due from the Fund effective January 1, 1995.
For the year ended September 30, 1996, RWB waived $364,969 of management fees.
During the year ended September 30, 1996, the Company was advised that the
Fund did not pay any brokerage fees to RWB on the execution of purchases and
sales of portfolio securities.
(3) DISTRIBUTION TO SHAREHOLDERS -- Dividends from net investment income for the
Fund are declared daily and paid monthly. Distributions of net realized gains,
if any, for the Fund, will be declared at least once a year.
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 not paid for the year ended September 30,
1996.
(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, 1996 were $9,997.
(5) INVESTMENT TRANSACTIONS -- For the year ended September 30, 1996, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $- 0 - and $29,064,933, respectively, and $14,549,124 and
$19,612,203, respectively, of short-term U.S. Government Securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of September 30, 1996,
liabilities of the Fund included the following:
Dividends payable............................ $231,257
Redemptions payable.......................... 222,463
Payable to adviser for deferred expenses..... 9,997
Other liabilities............................ 23,840
(7) SOURCES OF NET ASSETS -- As of September 30, 1996, the sources of net assets
were as follows:
Fund shares issued and outstanding........... $59,333,867
Net unrealized depreciation on investments... (1,925,574)
Accumulated net realized loss on investments. (10,640,903)
-----------
$46,767,390
-----------
-----------
Aggregate net unrealized depreciation as of September 30, 1996 consisted of
the following:
Aggregate gross unrealized appreciation...... $185,969
Aggregate gross unrealized depreciation...... (2,111,543)
-----------
Net unrealized depreciation.................. $(1,925,574)
-----------
-----------
(BAIRD LOGO)
A NORTHWESTERN
MUTUAL COMPANY
Robert W. Baird & Co. Incorporated
777 E. Wisconsin Avenue, Milwaukee, WI 53202
Phone 414 765-3500. Toll Free 1-800-RW-BAIRD
(c)1996 Robert W. Baird & Co. Incorporated
