SEMI-ANNUAL REPORT
IAI FIXED INCOME FUND
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI INSTITUTIONAL BOND FUND
SEMI-ANNUAL REPORT
MAY 31, 1999
(UNAUDITED)
Letter to Shareholders ....................... 2
Fund Manager's Review ........................ 4
Fund Portfolio ............................... 6
Notes to Fund Portfolio ...................... 12
Statement of Assets and Liabilities .......... 13
Statement of Operations ...................... 14
Statements of Changes in Net Assets .......... 15
Financial Highlights ......................... 16
Notes to Financial Statements ................ 17
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors ..................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI INSTITUTIONAL BOND FUND
ECONOMIC MOMENTUM EXPECTED TO CONTINUE
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The U.S. economy continues to amaze most observers. The economic expansion is
marching toward becoming the longest in post-war history and inflation continues
to show modest increases. Demand, particularly from the consumer, has remained
strong. Productivity gains and generally weak commodity prices have enabled that
demand to be met without a significant rise in inflation. However, there is a
debate within the financial community about future prospects. One group believes
sustainable improvement in productivity growth allows the economy to grow faster
without producing inflationary strains. Others believe a combination of good
performance and good luck (weakness overseas and collapsing commodity prices)
has contributed to the strong, low inflation growth.
These two views, sometimes referred to as the New Economy and the Old Economy,
have very different economic policy implications. If the noninflationary growth
rate of the economy is higher than in the past, monetary and fiscal policies
need to adjust to the new reality. If luck has been the primary contributor to
recent economic success, policies need to remain vigilant for the period when
the luck runs out. The Federal Reserve's action at the end of June indicates
they are taking a middle-of-the-road position. The modest 25 basis point
increase in short-term rates and the shift to a neutral bias taps lightly on the
monetary policy brakes. If continued evidence of rapid economic growth or a
resurgence of inflation appears, they are likely to step harder on the brakes.
Bond market investors spent the majority of the first six months pushing
interest rates higher. This in and of itself will slow economic growth as
borrowing costs for business and consumers, particularly homeowners, moved
higher. Equity valuations also paused as interest rates rose. However, following
the Fed's modest move, stocks raced to new highs.
We expect the economy to cool from the torrid pace of late 1998 / early 1999.
The positive influences of annual bonuses and tax refunds will wane. Mortgage
rate increases are slowing refinancings and cooling the housing sector. Energy
price increases seem to be holding and will also dampen the pace of growth.
Continued excess global capacity, modest growth overseas, the strong dollar and
stable to declining commodity prices will continue to keep a lid on inflation.
The strong rise in the CPI in April now appears to have been an aberration as
releases for both May and June showed no signs of a pickup in inflation. Of some
concern is the emergence of discussions in Washington about what to do with the
projected budgetary surpluses. Substantial tax cuts could help maintain high
consumer demand and keep the pressure on the supply portion of the economy to
meet that demand given the tight labor conditions.
2
<PAGE>
LETTER TO SHAREHOLDERS
IAI INSTITUTIONAL BOND FUND
ECONOMIC MOMENTUM EXPECTED TO CONTINUE (CONT.)
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on Fund performance and our strategy going forward. We appreciate
your continued trust and confidence in IAI. If there is any way we can serve you
better, please let us know by calling our toll-free Investor Services Hotline at
1-800-945-3863.
3
<PAGE>
FUND MANAGER'S REVIEW
IAI INSTITUTIONAL BOND FUND
IAI INSTITUTIONAL BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI INSTITUTIONAL BOND
FUND MANAGER
HOW HAS THE FUND PERFORMED?
The Institutional Bond Fund declined (1.07)% for the first six months, (1.50)%
for the year-to-date and has gained 1.97% over the past 12 months. This compares
with returns for the Fund's peer group of Lehman Brothers Aggregate Bond Index
(0.76)%, (1.05)% and 4.35%, respectively.
WERE THERE ANY SIGNIFICANT CHANGES?
During the first six months, there were no major changes to the investment
strategy. The interest rate sensitivity of the Fund remains longer than the
benchmark and sector weightings continue to emphasize the higher yielding
Mortgage and Corporate sector.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Interest rates experienced a steep rise during the first six months as continued
strong economic activity led to the conclusion that inflationary pressures would
re-emerge. This was fueled by an unexpectedly large increase in the CPI index
for the month of April. Long Treasury bond rates increased from 5.5% in early
April to nearly 6.2% a few days before quarter end. Expectations of a Federal
Reserve rate increase materialized on the last day of the quarter but, the Fed
surprised the market by shifting to a neutral bias. This led to a short lived
rally in late June. Wider credit spreads and growing illiquidity plagued the
bond market during this period.
Mortgages performed well compared to the rest of the market.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Actual economic reports support a continuation of strong economic growth with
benign inflation. Following the April blip in the CPI, the May report showed no
change in the level of core prices. In addition, stable labor costs,
productivity advances and very weak commodity prices suggest that inflation will
remain low for the foreseeable future.
It is our belief that the economy will slow from the strong pace of the
past six months. The slowdown will result from higher mortgage rates, higher oil
prices and a falloff in tax refunds. Excess global capacity continues as our
trading partners are growing at a modest rate (Europe) or still struggling
(Japan and Latin America). The slowdown in economic growth toward a 3% annual
rate and continued favorable inflation news should translate into declining
interest rates as the perception of an overheating economy diminishes. The
Fund's current long position will be maintained. Modest overweight positions in
the spread sectors will also be maintained as the economy decelerates to a more
market friendly rate of growth.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI INSTITUTIONAL BOND FUND
VALUE OF $2,000,000 INVESTMENT+
[PLOT POINTS CHART]
IAI INSTITUTIONAL LEHMAN BROTHERS
BOND FUND AGGREGATE
(INCEPTION 11/01/93) BOND INDEX
-------------------- ----------
2,000,000 2,000,000
Nov-93 1,969,914 1,982,986
Dec-93 1,983,107 1,993,734
Jan-94 2,023,572 2,020,653
Feb-94 1,969,973 1,985,548
Mar-94 1,913,071 1,936,697
Apr-94 1,901,464 1,921,133
May-94 1,888,717 1,920,864
Jun-94 1,874,629 1,916,619
Jul-94 1,902,248 1,954,689
Aug-94 1,907,954 1,957,114
Sep-94 1,891,546 1,928,310
Oct-94 1,891,924 1,926,592
Nov-94 1,885,303 1,922,313
Dec-94 1,898,877 1,935,586
Jan-95 1,922,613 1,973,891
Feb-95 1,965,872 2,020,823
Mar-95 2,001,847 2,033,220
Apr-95 2,032,475 2,061,620
May-95 2,084,100 2,141,399
Jun-95 2,085,559 2,157,100
Jul-95 2,087,853 2,152,283
Aug-95 2,096,831 2,178,259
Sep-95 2,112,557 2,199,451
Oct-95 2,135,795 2,228,055
Nov-95 2,167,191 2,261,442
Dec-95 2,196,882 2,293,179
Jan-96 2,209,185 2,308,408
Feb-96 2,170,082 2,268,284
Mar-96 2,155,976 2,252,517
Apr-96 2,142,394 2,239,849
May-96 2,133,396 2,235,299
Jun-96 2,156,223 2,265,252
Jul-96 2,160,320 2,271,389
Aug-96 2,156,863 2,267,507
Sep-96 2,200,863 2,306,962
Oct-96 2,266,889 2,358,177
Nov-96 2,328,322 2,398,501
Dec-96 2,298,287 2,376,200
Jan-97 2,312,766 2,383,476
Feb-97 2,317,623 2,389,406
Mar-97 2,287,725 2,362,929
Apr-97 2,314,034 2,398,300
May-97 2,334,860 2,420,971
Jun-97 2,365,914 2,449,705
Jul-97 2,427,664 2,515,767
Aug-97 2,416,254 2,494,307
Sep-97 2,450,082 2,531,093
Oct-97 2,457,432 2,587,812
Nov-97 2,467,753 2,579,636
Dec-97 2,493,665 2,605,691
Jan-98 2,527,828 2,639,044
Feb-98 2,533,136 2,636,932
Mar-98 2,543,776 2,645,898
Apr-98 2,559,801 2,659,657
May-98 2,583,854 2,684,923
Jun-98 2,605,568 2,707,745
Jul-98 2,619,117 2,713,432
Aug-98 2,616,236 2,757,660
Sep-98 2,657,311 2,822,190
Oct-98 2,618,780 2,807,232
Nov-98 2,663,037 2,823,233
Dec-98 2,674,755 2,831,703
Jan-99 2,667,861 2,851,808
Feb-99 2,628,997 2,801,901
Mar-99 2,854,235 2,817,312
Apr-99 2,664,587 2,826,327
May-99 2,634,477 2,801,456
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/99
Since
Inception
Six Months* 1 Year 5 Years 11/01/93
- --------------------------------------------------------------------------------
IAI INSTITUTIONAL BOND FUND (1.07)% 1.97% 6.88% 5.06%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (0.76)% 4.35% 7.85% 6.23%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED.
SECTORS
% OF PORTFOLIO AS OF 5/31/99
[PIE CHART]
Corporate 33%
Asset-Backed 5%
U.S. Government & Government Agency 20%
Preferred Stock 1%
U.S. Government Agency Mortgage-Backed 31%
Short-Term 10%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/99
[BAR CHART]
YEARS
- -----
0-3 13%
3-5 10%
5-10 25%
10-20 14%
20+ 38%
NOTE TO FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI INSTITUTIONAL BOND FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
CREDIT RATING
% OF PORTFOLIO AS OF 5/31/99
U.S.
Government ......... 57%
Aaa ................ 5%
Aa ................. 6%
A .................. 5%
Baa ................ 14%
Non-Investment
Grade .............. 13%
5
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
CORPORATE BONDS - 33.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BROADCASTING - 2.2%
Radio Unica (STEP BOND) (g) 13.57% 08/01/06 $1,800,000 $1,044,000
- ------------------------------------------------------------------------------------------------
FINANCIAL - 8.4%
Ahold Finance (YANKEE) (e) 6.88 05/01/29 310,000 293,204
Arcadia Financial 11.50 03/15/07 200,000 169,000
Associates 5.50 02/15/04 235,000 225,927
Associates (Pass-Thru Asset Trust) (d) 6.45 09/15/00 450,000 451,824
Bear Stearns 6.15 03/02/04 135,000 131,503
CIT Group 5.50 02/15/04 255,000 246,154
Ford Motor Credit 5.80 01/12/09 410,000 381,698
Goldman Sachs 6.65 05/15/09 270,000 266,627
Household Finance 5.88 02/01/09 505,000 467,559
HSBC Americas 6.63 03/01/09 350,000 339,826
Lehman Brothers 6.63 02/05/06 565,000 543,094
Merrill Lynch 6.00 02/17/09 240,000 225,314
Nationsbank 6.13 07/15/04 230,000 227,155
Toyota Motor Credit 5.63 11/13/03 130,000 126,937
----------
4,095,822
- ------------------------------------------------------------------------------------------------
INDUSTRIAL - 17.1%
Alberta Province (YANKEE) (e) 4.88 10/29/03 340,000 323,823
Biovail (d) 10.88 11/15/05 150,000 153,000
Calpine 7.75 04/15/09 450,000 439,875
Entex Information Services (d) 12.50 08/01/06 1,150,000 805,000
Grove Holdings (STEP BOND) (g) 15.72 05/01/09 200,000 77,000
Integrated Electrical Services (d) 9.38 02/01/09 125,000 125,625
J. Seagram & Sons 6.63 12/15/05 300,000 293,094
Just For Feet (d) 11.00 05/01/09 250,000 200,000
Laidlaw (YANKEE) (e) 7.65 05/15/06 475,000 464,291
Mack-Cali Realty 7.25 03/15/09 255,000 246,618
Noble Drilling 7.50 03/15/19 355,000 356,452
Owens Corning 7.00 03/15/09 325,000 310,437
Petro-Canada (YANKEE) (e) 7.00 11/15/28 400,000 376,360
Premier Graphics (d) 11.50 12/01/05 225,000 220,500
Providian Capital I (d) 9.53 02/01/27 475,000 464,975
Queen Sand Resources 12.50 07/01/08 500,000 335,000
Republic Services 7.13 05/15/09 400,000 397,249
Saks 7.25 12/01/04 250,000 250,941
Sonic Automotive Series B 11.00 08/01/08 625,000 624,219
Speedway Motorsports (d) 8.50 08/15/07 475,000 484,500
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
CORPORATE BONDS (CONT.)
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Styling Technology 10.88% 07/01/08 $ 75,000 $ 72,000
Temple-Inland Series F 6.75 03/01/09 270,000 257,499
Thermo Electron (d) 4.25 01/01/03 220,000 196,625
Thermolase (d) 4.38 08/05/04 225,000 185,062
Williams Companies 6.50 08/01/06 625,000 606,636
----------
8,266,781
- ------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 3.4%
AT&T Capital Series F 7.50 11/15/00 345,000 348,940
COVAD Comm Group (d) 12.50 02/15/09 450,000 430,875
Global Crossing (PIK preferred) (f) 10.50 12/01/08 1,250(h) 137,500
Sprint Capital 6.90 05/01/19 755,000 720,271
----------
1,637,586
- ------------------------------------------------------------------------------------------------
UTILITIES - 2.1%
Calenergy 8.48 09/15/28 500,000 548,506
Enron 7.38 05/15/19 485,000 479,906
----------
1,028,412
================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $17,117,412)................................................................. $16,072,601
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 20.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 7.9%
4.63% 12/31/00 $ 125,000 $ 123,555
5.38 02/15/01 1,000,000 999,063
4.75 02/15/04 1,830,000 1,764,806
6.50 05/15/05 210,000 217,416
6.50 08/15/05 200,000 207,063
6.63 05/15/07 180,000 189,112
4.75 11/15/08 370,000 343,985
----------
3,845,000
- ------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 9.2%
11.13 08/15/03 510,000 610,725
12.38 05/15/04 840,000 1,075,463
7.50 11/15/16 1,695,000 1,938,656
6.38 08/15/27 500,000 520,781
5.50 08/15/28 110,000 102,506
5.25 11/15/28 255,000 230,536
----------
4,478,667
- ------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.9%
Federal Home Loan Bank 5.13 09/15/03 280,000 271,182
Fannie Mae 6.21 08/06/38 1,155,000 1,106,756
----------
1,377,938
================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $10,039,310).................................................................. $9,701,605
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 31.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 14.5%
6.00% 04/01/11 $1,310,070 $1,284,008
6.00 12/01/13 138,719 135,594
6.50 06/01/14 1,000,000(b) 996,875
6.00 01/01/29 268,744 255,746
6.00 04/01/29 294,738 280,406
6.50 05/01/29 4,147,147 4,057,563
----------
7,010,192
- ------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 8.4%
6.50 03/01/13 473,817 472,245
6.00 11/01/13 77,883 76,027
7.50 04/01/28 489,919 500,556
7.00 05/01/28 1,248,904 1,251,002
7.50 05/01/28 490,646 501,299
7.00 08/01/28 379,418 379,898
6.00 10/01/28 961,957 914,517
----------
4,095,544
- ------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 8.3%
7.00 01/15/08 176,681 180,918
9.00 11/15/17 413,096 444,941
8.00 12/15/23 826,244 859,822
7.50 12/15/27 810,938 829,772
7.00 02/15/28 512,152 513,009
7.00 01/15/29 1,171,155 1,172,745
----------
4,001,207
================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $15,263,220)................................................................. $15,106,943
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
ASSET-BACKED SECURITIES - 4.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOANS - 0.4%
Arcadia Automobile Receivables 5.94% 08/15/03 $175,000 $ 174,249
- -----------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGES - 2.0%
Morgan Stanley Capital I, 1998-XL1, Class A3 6.48 06/03/30 485,000 475,339
Morgan Stanley Capital I, 1998-HF2, Class A2 6.48 11/15/30 485,000 477,327
----------
952,666
- ------------------------------------------------------------------------------------------------------
HOME EQUITY - 2.4%
EQCC Home Equity Loan Trust, 1998-2, Class A6F 6.16 04/15/08 595,000 586,307
Residential Asset Securities, 1999-KS1, Class AI3 6.11 05/25/25 605,000 597,637
----------
1,183,944
======================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $2,344,743)......................................................................... $2,310,859
======================================================================================================
</TABLE>
NON-CONVERTIBLE PREFERRED STOCK - 1.4%
<TABLE>
<CAPTION>
Market
Rate Quantity Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL - 1.4%
SI Financing Trust I 9.50% 26,500 $707,219
======================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCK
(COST: $684,031)............................................................................. $707,219
======================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $45,448,716)....................................................................... $43,899,227
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
10
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
SHORT-TERM SECURITIES - 10.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEMAND NOTES - 3.5%
General Mills (Food) 4.52% $ 175,000(i) $ 175,000
Pitney Bowes (Technology) 4.52 250,000(i) 250,000
Sara Lee (Food) 4.52 375,000(i) 375,000
Warner Lambert (Pharmaceuticals) 4.52 200,000(i) 200,000
Wisconsin Electric (Utilities) 4.52 673,714 673,714
----------
1,673,714
- ------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 7.0%
General Electric Capital Corp. (Financial
Services) 4.82 06/21/99 1,000,000(i) 996,920
Warner Lambert (Pharmaceuticals) 4.90 06/01/99 2,400,000(i) 2,399,020
----------
3,395,940
- ------------------------------------------------------------------------------------------------
OTHER SECURITIES - 0.1%
Firstar Institutional Money Market 4.19 73,488 73,488
- ------------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.2%
4.64 10/21/99 90,000(c) 88,317
================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $5,231,534)................................................................... $5,231,459
================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $50,680,250) (j)............................................................. $49,130,686
================================================================================================
LIABILITIES LESS OTHER ASSETS - (1.4)%............................................... $(663,987)
================================================================================================
TOTAL NET ASSETS.................................................................... $48,466,699
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
11
<PAGE>
NOTES TO FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At May 31, 1999, the total cost of securities
purchased on a when-issued basis was $1,001,875. Collateral for the security
purchased on a when-issued basis has been secured by Government National
Mortgage Association, 7.00%, maturing January 25, 2029, valued at $1,172,745.
(c)
Security is pledged to cover initial margin on open futures contracts (see Note
5 to financial statements).
(d)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. These issues
may only be sold to other qualified institutional buyers, and are considered
liquid under guidelines established by the Board of Directors. The market value
of such securities was $3,717,986 (7.7% of net assets) at May 31, 1999.
(e)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(f)
The interest rate shown for Payment-in-Kind securities (PIK securities)
represents effective yield at May 31, 1999. PIK-Payment-in-Kind income is
generally paid by issuing additional par or shares of the security rather than
paying cash.
(g)
A step bond is a security that remains zero-coupon until a predetermined date at
which time the stated coupon rate becomes payable at regular intervals. The
interest rate shown for step bonds represents the effective yield at May 31,
1999, based upon the estimated timing and amount of future interest and
principal payments.
(h)
Represents a preferred security. Quantity is disclosed in units. One unit
represents 100 par.
(i)
All or a portion of the principal amount has been committed as collateral for
the market value of open futures contracts.
(j)
At May 31, 1999, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
Cost for federal income tax purposes .......................... $ 50,717,007
============
Gross unrealized appreciation ................................. $ 80,133
Gross unrealized depreciation ................................. $ (1,666,454)
------------
Net unrealized depreciation ................................... $ (1,586,321)
============
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $50,680,250) $ 49,130,686
Cash 317,960
Receivable for investment securities sold 497,391
Accrued interest receivable 497,180
Variation margin receivable 4,875
------------
TOTAL ASSETS 50,448,092
------------
LIABILITIES
Accrued management fee 15,605
Payable for investment securities purchased 963,913
Payable for investment securities purchased on a
when-issued basis 1,001,875
------------
TOTAL LIABILITIES 1,981,393
------------
NET ASSETS $ 48,466,699
============
NET ASSETS REPRESENTED BY:
Capital stock 50,542,035
Undistributed net investment income 44,442
Accumulated net realized gains (losses) on investments (493,265)
Unrealized appreciation (depreciation) on:
Investment securities $ (1,549,564)
Futures contracts (76,949) (1,626,513)
------------ ------------
NET ASSETS $ 48,466,699
============
Shares of capital stock outstanding; authorized 10 billion
shares of $0.01 par value stock 5,532,942
------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 8.76
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
STATEMENT OF OPERATIONS
IAI INSTITUTIONAL BOND FUND
SIX MONTHS ENDED MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest $ 1,744,657
Dividends 57,297
------------
TOTAL INCOME 1,801,954
------------
EXPENSES:
Management fees 119,976
Compensation of Directors 7,012
------------
TOTAL EXPENSES 126,988
Less fees reimbursed by Advisers (7,012)
------------
NET EXPENSES 119,976
------------
NET INVESTMENT INCOME 1,681,978
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (387,838)
Futures contracts (143,614)
Foreign currency transactions 38,914
------------
Net realized gain (loss) (492,538)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (1,670,804)
Foreign currency transactions 4,689
Futures contracts (49,805)
------------
(1,715,920)
------------
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS (2,208,458)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (526,480)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
Six months ended
May 31, 1999 Year ended
(unaudited) November 30, 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 1,681,978 $ 5,035,795
Net realized gains (losses) (492,538) 2,075,932
Net change in unrealized appreciation or depreciation (1,715,920) (537,061)
------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (526,480) 6,574,666
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Capital gains (2,032,878) --
Net investment income (1,899,270) (5,187,365)
------------ -------------
TOTAL DISTRIBUTIONS (3,932,148) (5,187,365)
------------ -------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 487,155 and 1,348,084 shares 4,442,474 12,829,367
Net asset value of 434,126 and 542,957 shares issued in
reinvestment of distributions 3,928,899 5,179,038
Cost of 518,637 and 8,175,947 shares redeemed (4,741,643) (78,467,061)
------------ -------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARES
TRANSACTIONS 3,629,730 (60,458,656)
------------ -------------
TOTAL DECREASE IN NET ASSETS (828,898) (59,071,355)
NET ASSETS AT BEGINNING OF PERIOD 49,295,597 108,366,952
------------ -------------
NET ASSETS AT END OF PERIOD $ 48,466,699 $ 49,295,597
------------ -------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 44,442 $ 261,734
============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
FINANCIAL HIGHLIGHTS
IAI INSTITUTIONAL BOND FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended
Six months ended November 30, Period from
May 31, 1999 -------------------------------------------------- April 1, 1994 to
(unaudited) 1998 1997 1996 1995 November 30, 1994+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.61 $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income 0.31 0.64 0.58 0.63 0.62 0.38
Net realized and unrealized
gains (losses) (0.41) 0.09 (0.04) 0.04 0.66 (0.51)
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS (0.10) 0.73 0.54 0.67 1.28 (0.13)
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Capital gains (0.40) -- -- -- -- --
Net investment income (0.35) (0.61) (0.59) (0.63) (0.63) (0.38)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.75) (0.61) (0.59) (0.63) (0.63) (0.38)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 8.76 $ 9.61 $ 9.49 $ 9.54 $ 9.50 $ 8.85
======== ======== ======== ======== ======== ========
Total investment return* (1.07)% 7.92% 5.97% 7.44% 14.95% (1.44)%
Net assets at end of period
(000's omitted) $ 48,467 $ 49,296 $108,367 $ 97,085 $101,429 $ 73,724
RATIOS
Expenses to average daily net
assets 0.50%** 0.50% 0.50% 0.50% 0.50% 0.50%**
Net investment income to
average daily net assets 6.90%** 6.24% 6.19% 6.75% 6.76% 6.42%**
Portfolio turnover rate
(excluding short-term
securities) 111.9% 333.3% 511.0% 323.0% 358.8% 235.1%
</TABLE>
*TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
**ANNUALIZED
+REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies. IAI
Institutional Bond Fund (Institutional Bond Fund) is a separate portfolio of IAI
Investment Funds I, Inc. The Fund's primary investment objective is to provide
shareholders with a high level of total return derived from a combination of
capital appreciation and current income. The Fund pursues its objective by
investing primarily in a diversified portfolio of U.S. Government securities and
investment- and non-investment-grade bonds and other debt securities of similar
quality. This report covers only Institutional Bond Fund (the Fund).
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price. Such valuations are obtained from pricing services or are
supplied by dealers.
Debt securities for which quotations are not readily available are valued
primarily using dealer-supplied valuations or at their fair value as determined
in good faith using consistently applied procedures under the general
supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those with maturities greater
than 60 days from the date of initial acquisition are marked-to-market on a
daily basis.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Fund on a
forward commitment or when-issued basis may occur a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Fund maintains, in a segregated account, assets with a
market value equal to the amount of its purchase commitments.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Fund may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities into a segregated account, representing the
initial margin, equal to a certain percentage of the contract value. Subsequent
changes in the value of the contract, or variation margin, are recorded daily as
unrealized gains or losses. The variation margin is paid or received in cash
daily by the Fund. The Fund realizes a gain or loss when the contract is closed
or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will
realized a gain or loss upon expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option,
the purchase cost for a written put option or the cost of a security for a
purchase put or call option is adjusted by the amount of premium received or
paid.
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
The Fund may invest in foreign securities. The market value of securities and
other assets and liabilities denominated in foreign currencies is translated
daily into U.S. dollars at the closing rate of exchange. Purchases
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
and sales of securities, income and expenses are translated at the exchange rate
on the transaction date and are recorded in realized and unrealized appreciation
or depreciation on foreign currency transactions.
Exchange gains and losses may also be realized between the trade and settlement
dates on security and foreign currency contract transactions. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
taxable income to its shareholders, no provision for income taxes is required.
In order to avoid the payment of any federal excise taxes, the Fund is required
to distribute substantially all of its net investment income and net realized
gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of recognition of certain foreign currency
gains and losses as ordinary income and deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year from net
investment income or net realized gains may also differ from its ultimate
characterization for tax purposes.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily. The Fund amortizes discount purchased on
long-term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. Distributions
from the net investment income are made monthly. Capital gains, if any, are
primarily distributed at the end of the calendar year. Additional capital gains
distributions as needed to comply with federal tax regulations are distributed
during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
For purposes of obtaining certain types of insurance coverage for the Fund and
its officers and directors, the Fund is a policyholder in an industry-sponsored
mutual insurance company (the Company). In connection with its obligation as a
policyholder, the Fund is committed to make future capital contributions, if
requested by the Company.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1999
(UNAUDITED)
[2] COMMITMENTS AND CONTINGENCIES (CONT.)
LINE OF CREDIT
The Fund had available a $9,000,000 line of credit with a bank at the prime
interest rate. To the extent funds were drawn against the line, securities were
held in a segregated account. No compensating balances or commitment fees were
required under the line of credit. During the six months ended May 31, 1999, the
Fund paid $3.67, in interest on the line of credit at the average rate of 7.75%.
This interest is included in interest income on the Statement of Operations.
There were no borrowings outstanding at May 31, 1999.
[3] FEES AND EXPENSES
Under the terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sales of assets, taxes, interest
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to the Advisers. The fee is equal to an annual rate
of 0.50% of average daily net assets. This fee is paid monthly. The Management
Agreement further provides that Advisers will either reimburse the Fund for the
fees and expenses it pays to Directors who are not "interested persons" of the
Fund or reduce its fee by an equivalent amount.
[4] PURCHASE AND SALES OF SECURITIES
For the six months ended May 31, 1999, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund were as
follows:
U.S. GOVERNMENT OTHER
--------------- ----------
Purchases 28,167,001 23,785,206
Sales 30,815,607 22,052,868
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of May 31, 1999. The
market value of securities deposited to cover initial margin requirements for
the open positions at six months ended May 31, 1999 was $88,317. The unrealized
depreciation on these contracts is included in unrealized appreciation or
depreciation on investment securities.
FUTURES
<TABLE>
<CAPTION>
Number
of Market Unrealized
Type Contracts Expiration Month Position Value Depreciation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond 15 June 1999 Long $1,768,594 $51,206
U.S. Treasury Bond 4 September 1999 Long $ 469,875 $ 4,030
U.S. Treasury Notes 20 September 1999 Long $2,230,625 $21,712
</TABLE>
19
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
http://www.iaifunds.com
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 510
Milwaukee, WI 53201-0510
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. Box 701, Milwaukee, WI 53201-0701
800.945.3863
