BAIRD ADJUSTABLE
RATE INCOME FUND
ANNUAL
REPORT
SEPTEMBER 30, 1998
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
ANNUAL REPORT October 31, 1998
DEAR FELLOW SHAREHOLDER:
For virtually all of the past twelve months, the Asian/emerging markets
crisis has been the major influence on the bond markets. The crisis began last
October when the Thailand currency plummeted, and has since spread throughout
Asia, Russia and Latin America. Each round of devaluations and credit
downgrades sparked a rush into Treasuries as domestic and overseas investors
withdrew from the emerging markets. A default by Russia on bank loans and ruble
denominated government debt was the strongest blow. That action created shock
waves that are still adversely affecting all markets except Treasuries. Yield
spreads to Treasuries have increased to record levels in almost every sector of
the corporate, mortgage-backed, asset backed and municipal markets.
The demand for all types of mortgage-backed securities weakened somewhat
during this period because of a very substantial increase in the rate of
prepayments on outstanding mortgage loans. More recently, the market for CMOs
has been hurt by the well-publicized losses and forced liquidations at several
hedge funds. In combination, these developments have reduced somewhat the
market values of the securities in the fund. Since the onset of the hedge fund
problems, the NAV of the fund declined from $8.78 in early September of this
year to $8.66 by the middle of October.
Recently, a second round of Federal Reserve rate cuts has helped calm the
markets and may have arrested the flight to Treasuries. As the markets continue
to stabilize, the demand for so-called spread products, such as mortgage-backed
securities, would be expected to improve. Most observers, however, continue to
warn of the potential for unusually volatile markets as long as the emerging
markets remain prone to credit downgrades and the threat of defaults.
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
(PricewaterhouseCoopers 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, 1998, 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 five 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, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
October 27, 1998
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENT OF NET ASSETS
September 30, 1998
<TABLE>
Principal Amortized Market
Amount Cost Value
-------- -------- ------
<C> <C> <C>
LONG-TERM INVESTMENTS 99.3% (A)<F1>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 99.3% (B)<F2>
$2,954,317 FNMA 93-101FA, 5.761%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) $2,950,116 $2,905,387
4,111,173 FNMA 93-107F, 5.761%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,819,822 4,039,228
5,000,000 FNMA 93-127FA, 4.08%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.50% cap) 4,992,192 4,746,875
5,000,000 FNMA 92-33FPAC, 4.38%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,008,029 4,825,000
5,000,000 FHLMC G10I, 4.84%, due 05/25/23,
(indexed to T10Y minus 55bp subject to 9.50% cap) 4,986,908 4,607,812
----------- -----------
Total long-term investments 21,757,067 21,124,302
SHORT-TERM INVESTMENTS 0.9% (A)<F1>
REPURCHASE AGREEMENTS -- 0.9%
192,000 Firstar Bank Milwaukee Repurchase Agreement,
3.50%, dated 09/30/98; maturing 10/01/98,
(collateralized by $196,508 U.S. Treasury Note,
7.88%, due 08/15/01) 192,000 192,000
----------- -----------
Total short-term investments 192,000 192,000
----------- -----------
Total investments $21,949,067 21,316,302
-----------
-----------
Liabilities, less cash and
receivables (0.2%) (A)<F1> (39,381)
-----------
Net Assets $21,276,921
-----------
-----------
Net Asset Value Per Share ($0.01 par value,
300,000,000 shares authorized), redemption price
($21,276,921 / 2,437,375 shares outstanding) $8.73
-----------
-----------
</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.
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENTOFOPERATIONS
For the Year Ended September 30, 1998
INCOME:
Interest $1,255,936
----------
Total income 1,255,936
----------
EXPENSES:
Management fees 109,877
Professional fees 21,892
Administrative services 20,991
Transfer agent fees 12,032
Board of Director fees 9,950
Custodian fees 8,009
Printing and postage expense 3,355
Other expenses 5,437
----------
Total expenses before management fee waiver 191,543
Less fee waived by adviser (109,877)
----------
Net expenses 81,666
----------
NET INVESTMENT INCOME 1,174,270
----------
NET REALIZED LOSS ON INVESTMENTS (77,541)
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (410)
----------
NET LOSS ON INVESTMENTS (77,951)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,096,319
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
BAIRD ADJUSTABLE RATE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended September 30, 1998 and 1997
1998 1997
------------ ------------
OPERATIONS:
Net investment income $ 1,174,270 $ 1,770,920
Net realized loss on investments (77,541) (884,829)
Net (decrease) increase in
unrealized appreciation on investments (410) 1,293,219
------------ ------------
Net increase in net assets
resulting from operations 1,096,319 2,179,310
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
($0.47 and $0.51 per share, respectively) (1,174,270) (1,770,920)
------------ ------------
FUND SHARE ACTIVITIES:
Cost of shares redeemed (357,373 and
2,602,800 shares, respectively) (3,126,266) (22,694,642)
------------ ------------
Net decrease in net assets
derived from Fund share activities (3,126,266) (22,694,642)
------------ ------------
TOTAL DECREASE (3,204,217) (22,286,252)
NET ASSETS AT THE BEGINNING OF THE YEAR 24,481,138 46,767,390
------------ ------------
NET ASSETS AT THE END OF THE YEAR $ 21,276,921 $ 24,481,138
------------ ------------
------------ ------------
The accompanying notes to financial statements are an integral part of these
statements.
BAIRD ADJUSTABLE RATE INCOME FUND
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each year)
<TABLE>
FOR THE YEAR FROM
OCTOBER 1, 1992*<F3>
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 year $ 8.76 $ 8.66 $ 8.60 $ 9.07 $ 9.95 $10.00
Income from investment operations:
Net investment income 0.47 0.51 0.50 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments (0.03) 0.10 0.06 0.14 (0.88) (0.05)
------- ------- ------- ------- ------- -------
Total from investment operations 0.44 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 (0.47) (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 (0.47) (0.51) (0.50) (1.59) (0.47) (0.46)
------- ------- ------- ------- ------- -------
Net asset value, end of year $ 8.73 $ 8.76 $ 8.66 $ 8.60 $ 9.07 $ 9.95
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL INVESTMENT RETURN****<F6> 5.1% 7.2% 6.7% 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in 000's $) 21,277 24,481 46,767 89,805 167,419 142,287
Ratio of expenses (after waiver
and/or reimbursement)
to average net assets**<F4> 0.37% 0.31% 0.25% 0.29% 0.51% 0.38%
Ratio of net investment income
to average net assets*** <F5> 5.34% 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%
</TABLE>
*<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 0.87%, 0.81%, 0.75%, 0.72%, 0.95% and 1.07%,
respectively, for the years ended September 30, 1998, 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, 1998, 1997, 1996, 1995, 1994 and 1993 would have been
4.84%, 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.
The accompanying notes to financial statements are an integral part of this
statement.
BAIRD ADJUSTABLE RATE INCOME FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(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 as a diversified open-end management investment company 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 1(a), 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 except to the
extent sales of assets are required to meet redemptions.
(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 held by the
Fund are amortized to weighted average life. Premiums and discounts on
other securities are amortized to maturity. For financial reporting
purposes, investment transactions are recorded on trade date. Cost amounts,
as reported in the statement of net assets, are the same for Federal income
tax purposes.
(c) Net realized gains and losses are computed on the identified cost basis.
(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, $1,740,857 and $578,247 of net capital
losses which expire September 30, 2003, 2004, 2005 and 2006, respectively.
The Fund has $41 of post-October losses. These amounts 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 differences
between income for financial reporting and tax purposes be reclassified in
the capital accounts.
(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 management 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, RWB has
permanently waived all future management fees due from the Fund effective
January 1, 1995. For the year ended September 30, 1998, RWB waived $109,877 of
management fees.
During the year ended September 30, 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 year ended September 30,
1998.
(4) INVESTMENT TRANSACTIONS -- For the year ended September 30, 1998, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $- 0 - and $2,188,299, respectively.
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of September 30, 1998,
liabilities of the Fund included the following:
Other liabilities $12,675
(6) SOURCES OF NET ASSETS -- As of September 30, 1998, the sources of net assets
were as follows:
Fund shares issued and outstanding $ 33,512,959
Net unrealized depreciation on investments (632,765)
Accumulated net realized loss on investments (11,603,273)
-------------
$ 21,276,921
-------------
-------------
Aggregate net unrealized depreciation as of September 30, 1998 consisted of
the following:
Aggregate gross unrealized appreciation $ 219,406
Aggregate gross unrealized depreciation (852,171)
-------------
Net unrealized depreciation $ (632,765)
-------------
-------------
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
