BAIRD ADJUSTABLE
RATE INCOME FUND
SEMIANNUAL REPORT
March 31, 1997
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
SEMIANNUAL REPORT May 8, 1997
DEAR FELLOW SHAREHOLDER:
It now appears that during most of 1997, short-term interest rates will be
rising and bond prices will be steady or somewhat lower. On March 25, the
Federal Reserve took the first step toward a tighter monetary policy when it
raised the federal funds rate 25 basis points to 5 1/2%. Market yields
increased rather sharply in response to this Fed action. During the first
quarter, yields on Treasury notes and bonds increased approximately one-half of
a percentage point. Floating rate instruments, such as those held in the Baird
Adjustable Rate Income Fund (the "Fund") portfolio performed quite well during
this difficult period. The NAV of the Fund declined slightly, from $8.74 on
12/31/96 to $8.72 on 03/31/97. Shareholder redemptions during the past six
months totaled $18,480,180. Currently, the Fund has total net assets of $28.6
million, with approximately $27 million in CMO floaters.
The primary question now confronting the bond markets is how many additional
tightening moves are likely in the months ahead. The Federal Reserve tightened
its policy stance despite the fact that there is very little evidence that
inflation has begun to accelerate. The primary reason cited for this action was
"persistent strength in demand." In other words, the economy has been growing at
a pace that, if sustained in the quarters ahead, would very likely result in a
significant increase in the rate of inflation. The Fed acted preemptively in an
effort to avoid higher inflation six to twelve months from now. Hence, the Fed
can be expected to continue increasing the federal funds rate in small
increments until the data show that GDP growth has moderated.
The consensus among forecasters is that a federal funds rate of around 6%
should be sufficient to produce a slowdown in growth. The worst-case scenario
envisions a funds rate as high as 7% late this year or early in 1998. A funds
rate of 6% proved to be sufficient to slow the economy in 1994-1995, and should
do so again. The fact that commodity prices are not rising, that the dollar is
quite strong and that most overseas economies are not robust also suggest that
short-term rates need not move sharply higher in the months ahead.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low, Jr. James Kochan
President Portfolio Manager
<TABLE>
<CAPTION>
STATEMENT OF NET ASSETS
March 31, 1997 (Unaudited)
Principal Amortized Quoted
Amount Cost Market Value
- --------- ---------- ------------
<S> <C> <C>
LONG-TERM INVESTMENTS 94.7% (A)<F1>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 94.7% (B)<F2>
$ 2,000,000 FNMA 93-72F, 5.721%, due 05/25/08,
(indexed to COFI plus 90bp subject to 10% cap) $ 2,000,000 $ 1,921,875
2,954,317 FNMA 93-101FA, 5.671%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 2,949,124 2,824,143
4,111,173 FNMA 93-107F, 5.671%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,750,551 3,933,879
5,000,000 FNMA 93-127FA, 5.880%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.50% cap) 4,990,163 4,795,313
5,000,000 FNMA 92-33FPAC, 6.180%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,009,731 4,818,750
1,000,000 FNMA 92-204FE, 6.130%, due 10/25/22,
(indexed to T10Y minus 50bp subject to 9.50% cap) 1,000,000 939,062
265,799 FHLMC 1433FD, 6.121%, due 11/15/22,
(indexed to COFI plus 130bp subject to 10.50% cap) 265,865 251,845
79,835 FNMA G93-17FL, 5.990%, due 04/25/23,
(indexed to T10Y minus 25bp subject to 9.50% cap) 79,835 78,787
3,000,000 FNMA G93-19FD, 5.980%, due 04/25/23,
(indexed to T10Y minus 65bp subject to 9.50% cap) 2,993,986 2,835,938
5,000,000 FHLMC G10I, 5.780%, due 05/25/23,
(indexed to T10Y minus 55bp subject to 9.50% cap) 4,985,597 4,662,500
---------- ----------
Total long-term investments 28,024,852 27,062,092
SHORT-TERM INVESTMENTS 5.5% (A)<F1>
REPURCHASE AGREEMENTS -- 5.5%
$ 1,576,000 Firstar Trust Company Repurchase Agreement,
4.25%, dated 03/31/97; maturing 04/01/97
(secured by $1,610,000 U.S. Treasury Note,
5.500%, due 09/30/97) $ 1,576,000 $ 1,576,000
----------- ------------
Total repurchase agreements 1,576,000 1,576,000
----------- ------------
Total investments $29,600,852 28,638,092
===========
Liabilities, less cash and
receivables (0.2%) (A)<F1> (57,021)
-----------
Net Assets $28,581,071
===========
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized), redemption price
($28,581,071 / 3,278,473
shares outstanding) $8.72
=====
(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.
</TABLE>
STATEMENT OF OPERATIONS
For the Period Ending March 31, 1997 (Unaudited)
INCOME:
Interest $1,075,165
----------
Total income 1,075,165
----------
EXPENSES:
Management fees 87,410
Administrative services 13,729
Professional fees 7,915
Transfer agent fees 6,352
Amortization of organizational expenses 4,999
Custodian fees 4,871
Printing and postage expense 2,011
Other expenses 3,828
----------
Total expenses before management fee waiver 131,115
Less fee waived by adviser (87,410)
----------
Net expenses 43,705
----------
NET INVESTMENT INCOME 1,031,460
----------
NET REALIZED LOSS ON INVESTMENTS (668,953)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 962,814
----------
NET GAIN ON INVESTMENTS 293,861
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,325,321
==========
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENTS OF CHANGES IN NET ASSETS
For the Period Ending March 31, 1997 (Unaudited) and For the Year Ended
September 30, 1996
1997 1996
---- ----
OPERATIONS:
Net investment income $1,031,460 $4,248,376
Net realized loss on investments (668,953) (1,356,775)
Net increase in unrealized
appreciation on investments 962,814 2,016,237
----------- -----------
Net increase in net assets
resulting from operations 1,325,321 4,907,838
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.25 and $0.50 per share, respectively) (1,031,460) (4,248,376)
----------- -----------
FUND SHARE ACTIVITIES:
Cost of shares redeemed (2,119,075 and
5,044,003 shares, respectively) (18,480,180) (43,696,901)
----------- -----------
Net decrease in net assets
derived from Fund
share activities (18,480,180) (43,696,901)
----------- -----------
TOTAL DECREASE (18,186,319) (43,037,439)
NET ASSETS AT THE BEGINNING OF THE PERIOD 46,767,390 89,804,829
----------- -----------
NET ASSETS AT THE END OF THE PERIOD $28,581,071 $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 period)
<TABLE>
<CAPTION>
(Unaudited)
For The For The Year From
Period Ending October 1, 1992+<F3>
March 31, For The Years Ended September 30, to September 30,
---------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $ 8.66 $ 8.60 $ 9.07 $ 9.95 $10.00
Income from investment operations:
Net investment income 0.25 0.50 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments 0.06 0.06 0.14 (0.88) (0.05)
------ ------ ------ ------ ------
Total from investment operations 0.31 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 (0.25) (0.50) (0.59) (0.47) (0.46)
Distribution from net realized gains -- -- -- (0.00) --
Return of capital distribution -- -- (1.00) -- --
------ ------ ------ ------ ------
Total from distributions (0.25) (0.50) (1.59) (0.47) (0.46)
Net asset value, end of period $ 8.72 $ 8.66 $ 8.60 $ 9.07 $ 9.95
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN****<F7> 7.5%*<F4> 6.7% 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 28,581 46,767 89,805 167,419 142,287
Ratio of expenses (after waiver
and/or reimbursement)
to average net assets**<F5> 0.3%*<F4> 0.3% 0.3% 0.5% 0.4%
Ratio of net investment income
to average net assets***<F6> 5.9%*<F4> 5.8% 6.4% 4.8% 4.3%
Portfolio turnover rate 0.0% 0.0% 3.6% 143.8% 79.4%
+<F3> Commencement of Operations.
*<F4> Annualized.
**<F5>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 0.8%*, 0.8%, 0.7%, 0.9% and 1.1%, respectively, for the period ending March
31, 1997 and for the years ended September 30, 1996, 1995, 1994 and 1993.
***<F6>The ratio of net investment income prior to adviser's expense limitation
undertaking to average net assets for the period ending March 31, 1997 and for
the years ended September 30, 1996, 1995, 1994 and 1993 would have been 5.4%*,
5.3%, 5.9%, 4.4% and 3.6%, respectively.
****<F7>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
March 31, 1997 (Unaudited)
(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 period ending March 31, 1997, RWB waived $87,410 of management fees.
During the period ending March 31, 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 period ending March 31,
1997.
(4) DEFERRED EXPENSES -- Organizational expenses were deferred and are being
amortized on a straight-line basis over a period of not more than five years.
These expenses were advanced by RWB who will be reimbursed by the Fund over a
period of not more than five years. The proceeds of any redemption of the
initial shares by the original shareholder will be reduced by a pro-rata portion
of any then unamortized deferred expenses in the same proportion as the number
of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption. The unamortized organizational
expenses for the Fund at March 31, 1997 were $4,998.
(5) INVESTMENT TRANSACTIONS -- For the period ending March 31, 1997, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $- 0 - and $18,831,078, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of March 31, 1997,
liabilities of the Fund included the following:
Dividends payable............................ $137,398
Payable to adviser for deferred expenses..... 4,998
Other liabilities............................ 9,687
(7) SOURCES OF NET ASSETS -- As of March 31, 1997, the sources of net assets
were as follows:
Fund shares issued and outstanding $40,853,687
Net unrealized depreciation on investments (962,760)
Accumulated net realized loss on investments (11,309,856)
-----------
$28,581,071
===========
Aggregate net unrealized depreciation as of March 31, 1997 consisted of the
following:
Aggregate gross unrealized appreciation $ 183,329
Aggregate gross unrealized depreciation (1,146,089)
----------
Net unrealized depreciation $ (962,760)
==========
(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 1997 Robert W. Baird & Co. Incorporated
