BAIRD ADJUSTABLE
RATE INCOME FUND
ANNUAL
REPORT
SEPTEMBER 30, 1997
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
ANNUAL REPORT November 3, 1997
DEAR FELLOW SHAREHOLDER:
A nearly complete absence of inflation helped the bond market perform quite
well during the twelve months ended September 30, 1997. Inflation, as measured
by the Consumer Price Index, grew at only a 2% rate during that period, down
from an already favorable 3% over the prior twelve months. With inflation that
benign, the Federal Reserve was relatively inactive and the bond market
relatively stable for a period that included the onset of the eighth year of a
business cycle expansion. Indeed, between September 30, 1996 and September 30,
1997, the yield on the 30-year Treasury bond declined from 6.90% to 6.40%. To be
sure, there were episodes of market weakness, such as the March-April period
when the Fed raised the funds rate slightly and the bond yield reached 7.15%,
but those episodes were relatively brief. For most of the period, that yield
remained within a 61/2%-7% range.
This remarkably good market performance was reflected in an increase in the
net asset value per share of the Baird Adjustable Rate Income Fund, from $8.66
on September 30, 1996 to $8.76 on September 30, 1997. A continuation of this
favorable trend into 1998 may be difficult to achieve, however, because Federal
Reserve Officials are on record as being very concerned about the strength of
the economy at a time when labor markets are unusually tight. They are prepared
to tighten monetary policy at the first signs of an increase in the rate of
inflation. It would be unprecedented if the Fed were able to refrain from
tightening during this very late stage of a cyclical expansion.
Shareholder redemptions totaled $22.695 million for the latest year, reducing
the end-of-year net assets to $24.481 million. As a result of the smaller asset
base, the Funds expense ratio increased to 31 basis points from 25 in the
previous year. That expense ratio is projected to rise further in the current
fiscal year.
Sincerely,
/s/ Marcus C.Low. Jr. /s/ Glen F. Hackmann
Marcus C. Low,Jr. Glen F. Hackmann
President Chairman
Investment Committee
REPORT OF INDEPENDENT ACCOUNTANTS 100 East Wisconsin Avenue
Suite 1500
Milwaukee, WI 53202
PRICE WATERHOUSE LLP
(PRICE WATERHOUSE 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, 1997, 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 four 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, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
October 27, 1997
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENT OF NET ASSETS
September 30, 1997
<TABLE>
<CAPTION>
Principal Amortized Quoted
Amount Cost Market Value
--------- --------- ------------
<S> <C> <C>
LONG-TERM INVESTMENTS 95.4% (A)<F1>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 95.4% (B)<F2>
$ 2,000,000 FNMA 93-72F, 5.787%, due 05/25/08,
(indexed to COFI plus 90bp subject to 10% cap) $2,000,000 $1,920,000
2,954,317 FNMA 93-101FA, 5.737%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 2,949,427 2,821,373
4,111,173 FNMA 93-107F, 5.737%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,772,527 3,931,310
5,000,000 FNMA 93-127FA, 5.39%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.50% cap) 4,990,841 4,835,938
5,000,000 FNMA 92-33FPAC, 5.69%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,009,258 4,873,438
265,799 FHLMC 1433FD, 6.187%, due 11/15/22,
(indexed to COFI plus 130bp subject to 10.50% cap) 265,863 254,835
5,000,000 FHLMC G10I, 5.72%, due 05/25/23,
(indexed to T10Y minus 55bp subject to 9.50% cap) 4,986,020 4,704,687
----------- -----------
Total long-term investments 23,973,936 23,341,581
SHORT-TERM INVESTMENTS 4.8% (A)<F1>
REPURCHASE AGREEMENTS -- 4.8%
1,184,000 Firstar Bank Milwaukee Repurchase Agreement,
4.50%, dated 09/30/97; maturing 10/01/97
(secured by $1,125,000 U. S. Treasury Note,
7.875%, due 08/15/01) 1,184,000 1,184,000
----------- -----------
Total short-term investments 1,184,000 1,184,000
----------- -----------
Total investments $25,157,936 24,525,581
===========
Liabilities, less cash and
receivables (0.2%) (A)<F1> (44,443)
----------
Net Assets $24,481,138
===========
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized), redemption price
($24,481,138 / 2,794,748 shares outstanding) $8.76
=====
(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
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENT OF OPERATIONS
For the Year Ended September 30, 1997
INCOME:
Interest $1,865,029
----------
Total income 1,865,029
----------
EXPENSES:
Management fees 151,500
Professional fees 25,468
Administrative services 25,189
Transfer agent fees 12,382
Board of Director fees 11,150
Amortization of organizational expenses 9,997
Custodian fees 8,815
Other expenses 1,108
----------
Total expenses before management fee waiver 245,609
Less fee waived by adviser (151,500)
----------
Net expenses 94,109
----------
NET INVESTMENT INCOME 1,770,920
----------
NET REALIZED LOSS ON INVESTMENTS (884,829)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 1,293,219
----------
NET GAIN ON INVESTMENTS 408,390
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,179,310
==========
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, 1997 and 1996
1997 1996
---- ----
OPERATIONS:
Net investment income $1,770,920 $4,248,376
Net realized loss on investments (884,829) (1,356,775)
Net increase in unrealized
appreciation on investments 1,293,219 2,016,237
----------- -----------
Net increase in net assets
resulting from operations 2,179,310 4,907,838
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment
income ($0.51 and $0.50 per share,
respectively) (1,770,920) (4,248,376)
----------- -----------
FUND SHARE ACTIVITIES:
Cost of shares redeemed (2,602,800 and
5,044,003 shares, respectively) (22,694,642) (43,696,901)
----------- -----------
Net decrease in net assets
derived from Fund share
activities (22,694,642) (43,696,901)
----------- -----------
TOTAL DECREASE (22,286,252) (43,037,439)
NET ASSETS AT THE BEGINNING OF THE YEAR 46,767,390 89,804,829
----------- -----------
NET ASSETS AT THE END OF THE YEAR $24,481,138 $46,767,390
=========== ===========
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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year $8.66 $8.60 $9.07 $9.95 $10.00
Income from investment operations:
Net investment income 0.51 0.50 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments 0.10 0.06 0.14 (0.88) (0.05)
----- ----- ----- ----- -----
Total from investment operations 0.61 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 (0.51) (0.50) (0.59) (0.47) (0.46)
Distribution from net realized gains -- -- -- (0.00) --
Return of capital distribution -- -- (1.00) -- --
----- ----- ----- ----- -----
Total from distributions (0.51) (0.50) (1.59) (0.47) (0.46)
----- ----- ----- ----- -----
Net asset value, end of year $8.76 $8.66 $8.60 $9.07 $9.95
===== ===== ===== ===== =====
TOTAL INVESTMENT RETURN****<F6> 7.2% 6.7% 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 24,481 46,767 89,805 167,419 142,287
Ratio of expenses (after waiver
and/or reimbursement)
to average net assets**<F4> 0.31% 0.25% 0.29% 0.51% 0.38%
Ratio of net investment income
to average net assets***<F5> 5.86% 5.85% 6.37% 4.82% 4.31%
Portfolio turnover rate 0.0% 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 0.81%, 0.75%, 0.72%, 0.95% and 1.07%, respectively, for the years ended September 30, 1997, 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, 1997, 1996, 1995, 1994 and 1993 would have been 5.35%, 5.35%, 5.94%, 4.38% and 3.62%, 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.
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(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, Robert W. Baird &Co. Incorporated ("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, $1,062,523 and $1,740,857 of net capital losses which
expire September 30, 2003, 2004 and 2005 respectively, and $500,747 of 1997
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 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, 1997, RWB
waived $151,500 of management fees.
During the year ended September 30, 1997, 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,
1997.
(4) DEFERRED EXPENSES -- Organizational expenses were deferred and were
amortized on a straight-line basis over a period of five years. These expenses
were advanced by RWB who was reimbursed by the Fund. The unamortized
organizational expenses for the Fund at September 30, 1997 was $- 0 -.
(5) INVESTMENT TRANSACTIONS -- For the year ended September 30, 1997, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $- 0 - and $22,689,038, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of September 30, 1997,
liabilities of the Fund included the following:
Dividends payable $104,791
Other liabilities 18,324
(7) SOURCES OF NET ASSETS -- As of September 30, 1997, the sources of net assets
were as follows:
Fund shares issued and outstanding $36,639,225
Net unrealized depreciation on investments (632,355)
Accumulated net realized loss on investments (11,525,732)
-----------
$24,481,138
===========
Aggregate net unrealized depreciation as of September 30, 1997 consisted of
the following:
Aggregate gross unrealized appreciation $158,783
Aggregate gross unrealized depreciation (791,138)
---------
Net unrealized depreciation $(632,355)
=========
(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)1997 Robert W. Baird & Co. Incorporated
