BAIRD ADJUSTABLE
RATE INCOME FUND
SEMIANNUAL
REPORT
March 31, 1998
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
SEMIANNUAL REPORT May 27, 1998
DEAR FELLOW SHAREHOLDER:
The bond markets have been remarkably stable thus far in 1998, with yields
kept within narrow trading ranges by two powerful, opposing forces. One force,
tending to push yields higher, is the strong U.S. economy. The second force,
tending to push yields lower, is the financial crisis in Asia. The Federal
Reserve is very concerned that "persistent strength in demand," at a time when
labor markets are unusually tight, will eventually result in a higher rate of
inflation. If it were not for the Asian crisis, the Fed would probably have
tightened its monetary policy stance during the early months of this year.
Asia is a serious concern for the Fed, because turmoil in such nations as
Indonesia, Thailand and South Korea could, if unchecked, precipitate serious
recessions in countries throughout the region, including Japan. Federal Reserve
officials are reluctant to do anything that might make matters worse in those
markets and economies. Consequently they have kept the funds rate unchanged for
over a year. But unless the U.S. economy slows in the months ahead, the Fed may
have no choice but to abandon this neutral stance in favor of a tighter policy.
The NAV of the Baird Adjustable Rate Income Fund (the Fund) has reflected the
relative stability of the bond market. It has fluctuated within a narrow range
of $8.73 to $8.77 thus far in 1998.
At March 31, 1998, the Fund had total net assets of $21,759,466, a decrease
of $2,721,672 or 11.1% from September 30, 1997. As a result of continuing
redemptions, which has resulted in a smaller asset base, the expense ratio
increased to 30 basis points, a 20% increase from the 25 basis points ratio
during most of 1997. That ratio is expected to continue to increase as further
redemptions occur and reduce the asset base over which fixed costs are spread.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ Glen F. Hackmann
Marcus C. Low, Jr. Glen F. Hackmann
President Chairman
Investment Committee
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENT OF NET ASSETS
March 31, 1998 (Unaudited)
<TABLE>
Principal Amortized Quoted
Amount Cost Market Value
--------- ---------- ------------
<S> <C> <C>
LONG-TERM INVESTMENTS 98.5% (A)<F1>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 98.5% (B)<F2>
$ 2,954,317 FNMA 93-101FA, 5.837%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) $ 2,949,753 $ 2,874,920
4,111,173 FNMA 93-107F, 5.837%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,796,039 4,003,256
5,000,000 FNMA 93-127FA, 4.820%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.50% cap) 4,991,514 4,800,000
5,000,000 FNMA 92-33FPAC, 5.120%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,008,694 4,846,875
265,799 FHLMC 1433FD, 6.287%, due 11/15/22,
(indexed to COFI plus 130bp subject to 10.50% cap) 265,857 260,234
5,000,000 FHLMC G10I, 4.950%, due 05/23/23,
(indexed to T10Y minus 55bp subject to 9.50% cap) 4,986,441 4,656,250
----------- ----------
Total long-term investments 21,998,298 21,441,535
SHORT-TERM INVESTMENTS 1.7% (A)<F1>
REPURCHASE AGREEMENTS -- 1.7%
361,000 Firstar Bank Milwaukee Repurchase Agreement,
3.75%, dated 03/31/98, maturing 04/01/98
(secured by $356,000 U.S. Treasury Note,
6.50%, due 04/30/99) 361,000 361,000
----------- ----------
Total short-term investments 361,000 361,000
----------- ----------
Total investments $22,359,298 21,802,535
-----------
-----------
Liabilities, less cash and
receivables (0.2%) (A)<F1> (43,069)
----------
Net Assets $21,759,466
----------
----------
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized), redemption
price ($21,759,466 / 2,483,674
shares outstanding) $ 8.76
----------
----------
</TABLE>
(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 Period Ending March 31, 1998 (Unaudited)
INCOME:
Interest $648,102
--------
Total income 648,102
--------
EXPENSES:
Management fees 55,382
Professional fees 15,823
Administrative services 10,525
Transfer agent fees 6,031
Board of Directors fees 5,200
Custodian fees 4,005
Printing and postage expense 1,763
Other expenses 3,661
--------
Total expenses before management fee waiver
and reimbursement 102,390
Less reimbursement and fee waived by adviser (69,161)
--------
Net expenses 33,229
--------
NET INVESTMENT INCOME 614,873
--------
NET REALIZED LOSS ON INVESTMENTS (77,500)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 75,592
--------
NET LOSS ON INVESTMENTS (1,908)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 612,965
--------
--------
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, 1998 (Unaudited) and For the Year Ended
September 30, 1997
1998 1997
----------- -----------
OPERATIONS:
Net investment income $ 614,873 $1,770,920
Net realized loss on investments (77,500) (884,829)
Net increase in unrealized appreciation
on investments 75,592 1,293,219
----------- -----------
Net increase in net assets
resulting from operations 612,965 2,179,310
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.24 and $0.51 per share, respectively) (614,873) (1,770,920)
----------- -----------
FUND SHARE ACTIVITIES:
Cost of shares redeemed (311,074 and
2,602,800 shares, respectively) (2,719,764) (22,694,642)
----------- -----------
Net decrease in net assets
derived from Fund share activities (2,719,764) (22,694,642)
----------- -----------
TOTAL DECREASE (2,721,672) (22,286,252)
NET ASSETS AT THE BEGINNING OF THE PERIOD 24,481,138 46,767,390
----------- -----------
NET ASSETS AT THE END OF THE PERIOD $21,759,466 $24,481,138
----------- -----------
----------- -----------
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>
(Unaudited) For The Year From
For The Period October 1, 1992*<F3>
Ended March 31, For The Years Ended September 30, to September 30,
------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------------- --------- ---------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period $ 8.76 $ 8.66 $ 8.60 $ 9.07 $ 9.95 $ 10.00
Income from investment
operations:
Net investment income 0.24 0.51 0.50 0.59 0.47 0.46
Net realized and unrealized
gain (loss) on investments 0.00 0.10 0.06 0.14 (0.88) (0.05)
------- ------- ------- ------- ------- -------
Total from investment operations 0.24 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 (0.24) (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 (0.24) (0.51) (0.50) (1.59) (0.47) (0.46)
------- ------- ------- ------- ------- -------
Net asset value, end of period $ 8.76 $ 8.76 $ 8.66 $ 8.60 $ 9.07 $ 9.95
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT
RETURN****<F8> 2.8%+<F4> 7.2% 6.7% 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in 000's $) 21,759 24,481 46,767 89,805 167,419 142,287
Ratio of expenses
(after waiver
and/or reimbursement)
to average net assets**<F6> 0.30%++<F5> 0.31% 0.25% 0.29% 0.51% 0.38%
Ratio of net investment
income to average
net assets***<F7> 5.55%++<F5> 5.86% 5.85% 6.37% 4.82% 4.31%
Portfolio turnover rate 0.0% 0.0% 0.0% 3.6% 143.8% 79.4%
*<F3> Commencement of Operations.
+<F4> Not Annualized.
++<F5>Annualized.
**<F6>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 0.92%++<F5>, 0.81%, 0.75%, 0.72%, 0.95% and 1.07%, respectively, for the period
ended March 31, 1998 and for the years ended September 30, 1997, 1996, 1995, 1994
and 1993.
***<F7>The ratio of net investment income prior to adviser's expense
limitation undertaking to average net assets for the period ended March 31, 1998
and for the years ended September 30, 1997, 1996, 1995, 1994 and 1993 would have
been 4.93%++<F5>, 5.35%, 5.35%, 5.94%, 4.38% and 3.62%, respectively.
****<F8>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
March 31, 1998 (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, 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 $2,241,604 of net capital losses which
expire September 30, 2003, 2004 and 2005 respectively, 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 period ended March 31, 1998, RWB
waived $55,382 of management fees.
During the period ended March 31, 1998, 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 ended March 31, 1998.
(4) INVESTMENT TRANSACTIONS -- For the period ended March 31, 1998, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $- 0 - and $1,922,500, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of March 31, 1998,
liabilities of the Fund included the following:
Dividends payable $ 97,336
Redemptions payable 9,450
Other liabilities 2,626
(6) SOURCES OF NET ASSETS -- As of March 31, 1998, the sources of net assets
were as follows:
Fund shares issued and outstanding $33,919,461
Net unrealized depreciation on investments (556,763)
Accumulated net realized loss on investments (11,603,232)
-----------
$21,759,466
-----------
-----------
Aggregate net unrealized depreciation as of March 31, 1998, consisted of the
following:
Aggregate gross unrealized appreciation $ 207,217
Aggregate gross unrealized depreciation (763,980)
-----------
Net unrealized depreciation $ (556,763)
-----------
-----------
(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)1998 Robert W. Baird & Co. Incorporated
