SEMI-ANNUAL REPORT
IAI FIXED INCOME FUND
IAI BOND FUND
MAY 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BOND FUND
SEMI-ANNUAL REPORT
MAY 31, 1999
(UNAUDITED)
Letter to Shareholders ....................... 2
Fund Managers' Review ........................ 4
Fund Portfolio ............................... 6
Notes to Fund Portfolio ...................... 10
Statement of Assets and Liabilities .......... 11
Statement of Operations ...................... 12
Statements of Changes in Net Assets .......... 13
Financial Highlights ......................... 14
Notes to Financial Statements ................ 15
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI 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 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 MANAGERS' REVIEW
IAI BOND FUND
IAI BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BOND FUND CO-MANAGER
[PHOTO]
STEPHEN C. COLEMAN, CFA
IAI BOND FUND CO-MANAGER
HOW HAS THE FUND PERFORMED?
The Bond Fund declined (0.76)% for the first six months, (0.97)% for the
year-to-date and has gained 1.22% 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 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 MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
LEHMAN BROTHERS
AGGREGATE
IAI BOND FUND BOND FUND
------------- ---------------
10,000 10,000
JUN-89 10,424 10,305
JUL-89 10,673 10,524
AUG-89 10,424 10,368
SEP-89 10,451 10,421
OCT-89 10,789 10,678
NOV-89 10,884 10,779
DEC-89 10,877 10,808
JAN-90 10,597 10,680
FEB-90 10,586 10,714
MAR-90 10,551 10,722
APR-90 10,322 10,624
MAY-90 10,758 10,938
JUN-90 10,977 11,114
JUL-90 11,100 11,268
AUG-90 10,698 11,117
SEP-90 10,816 11,209
OCT-90 11,033 11,352
NOV-90 11,421 11,596
DEC-90 11,645 11,777
JAN-91 11,785 11,922
FEB-91 11,843 12,024
MAR-91 11,878 12,107
APR-91 12,008 12,238
MAY-91 12,032 12,309
JUN-91 11,974 12,303
JUL-91 12,143 12,474
AUG-91 12,507 12,744
SEP-91 12,832 13,002
OCT-91 12,931 13,147
NOV-91 13,054 13,267
DEC-91 13,663 13,661
JAN-92 13,259 13,475
FEB-92 13,335 13,563
MAR-92 13,161 13,486
APR-92 13,225 13,584
MAY-92 13,546 13,840
JUN-92 13,768 14,031
JUL-92 14,193 14,317
AUG-92 14,343 14,462
SEP-92 14,569 14,633
OCT-92 14,293 14,439
NOV-92 14,279 14,443
DEC-92 14,591 14,672
JAN-93 14,971 14,954
FEB-93 15,292 15,215
MAR-93 15,324 15,279
APR-93 15,412 15,385
MAY-93 15,412 15,405
JUN-93 15,910 15,684
JUL-93 16,032 15,773
AUG-93 16,457 16,049
SEP-93 16,511 16,093
OCT-93 16,603 16,153
NOV-93 16,281 16,016
DEC-93 16,390 16,103
JAN-94 16,793 16,320
FEB-94 16,356 16,037
MAR-94 15,808 15,641
APR-94 15,690 15,516
MAY-94 15,605 15,514
JUN-94 15,468 15,480
JUL-94 15,646 15,787
AUG-94 15,689 15,807
SEP-94 15,587 15,574
OCT-94 15,565 15,560
NOV-94 15,477 15,526
DEC-94 15,584 15,633
JAN-95 15,783 15,943
FEB-95 16,163 16,322
MAR-95 16,491 16,422
APR-95 16,739 16,651
MAY-95 17,154 17,295
JUN-95 17,157 17,422
JUL-95 17,176 17,383
AUG-95 17,298 17,593
SEP-95 17,445 17,764
OCT-95 17,614 17,995
NOV-95 17,866 19,265
DEC-95 18,115 18,521
JAN-96 18,173 18,644
FEB-96 17,816 18,320
MAR-96 17,731 18,193
APR-96 17,610 18,091
MAY-96 17,609 18,054
JUN-96 17,795 18,296
JUL-96 17,833 18,345
AUG-96 17,839 18,314
SEP-96 18,161 18,633
OCT-96 18,624 19,046
NOV-96 19,089 18,372
DEC-96 18,860 19,192
JAN-97 19,032 19,251
FEB-97 19,144 19,298
MAR-97 18,863 19,085
APR-97 19,093 19,370
MAY-97 19,314 19,553
JUN-97 19,641 19,786
JUL-97 20,297 20,319
AUG-97 20,084 20,146
SEP-97 20,353 20,443
OCT-97 20,516 20,739
NOV-97 20,645 20,835
DEC-97 20,905 21,045
JAN-98 21,145 21,315
FEB-98 21,200 21,298
MAR-98 21,279 21,370
APR-98 21,392 21,481
MAY-98 21,593 21,685
JUN-98 21,772 21,870
JUL-98 21,807 21,916
AUG-98 21,739 22,273
SEP-98 22,022 22,794
OCT-98 21,610 22,673
NOV-98 22,025 22,802
DEC-98 22,071 22,871
JAN-99 22,188 23,033
FEB-99 21,789 22,630
MAR-99 22,000 22,755
APR-99 22,119 22,827
MAY-99 21,856 22,626
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/99
Six Months* 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI BOND FUND (0.76)% 1.22% 6.97% 8.13%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (0.76)% 4.35% 7.85% 8.51%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED.
SECTORS
% OF PORTFOLIO AS OF 5/31/99
[PIE CHART]
Corporate 40%
Preferred Stock 3%
U.S. Government Agency Mortgage-Backed 40%
Short-Term 2%
Asset-Backed 6%
U.S. Government & Government Agency 9%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/99
[BAR CHART]
YEARS
- -----
0-3 6%
3-5 7%
5-10 31%
10-20 17%
20+ 39%
NOTE TO FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI BOND FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF 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 INDEXES 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 ......... 50%
Aaa ................ 6%
Aa ................. 6%
A .................. 7%
Baa ................ 18%
Non-Investment
Grade .............. 13%
5
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
CORPORATE BONDS - 40.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BROADCASTING - 2.8%
Radio Unica (STEP BOND) (h) 13.57% 08/01/06 $1,300,000 $ 754,000
- --------------------------------------------------------------------------------------------
FINANCIAL - 10.0%
Ahold Finance (YANKEE) (e) 6.88 05/01/29 210,000 198,622
Arcadia Financial 11.50 03/15/07 425,000 359,125
Bear Stearns 6.15 03/02/04 115,000 112,021
CIT Group 5.50 02/15/04 190,000 183,409
Ford Motor Credit 5.80 01/12/09 415,000 386,353
Household Finance 5.88 02/01/09 435,000 402,749
HSBC Americas 6.63 03/01/09 265,000 257,297
Lehman Brothers 6.63 02/05/06 485,000 466,196
Nationsbank 6.13 07/15/04 215,000 212,340
Toyota Motor Credit 5.63 11/13/03 140,000 136,701
----------
2,714,813
- --------------------------------------------------------------------------------------------
INDUSTRIAL - 21.0%
Alberta Province (YANKEE) (e) 4.88 10/29/03 375,000 357,157
Biovail (d) 10.88 11/15/05 100,000 102,000
Entex Information Services (d) 12.50 08/01/06 950,000 665,000
Grove Holdings (STEP BOND) (h) 15.72 05/01/09 150,000 57,750
Integrated Electrical Services (d) 9.38 02/01/09 75,000 75,375
J. Seagram & Sons 6.63 12/15/05 465,000 454,296
Laidlaw (YANKEE) (e) 7.65 05/15/06 310,000 303,011
Mack-Cali Realty 7.25 03/15/09 185,000 178,919
NE Restaurant 10.75 07/15/08 250,000 233,125
Noble Drilling 7.50 03/15/19 260,000 261,064
Owens Corning 7.00 03/15/09 240,000 229,246
Petro-Canada (YANKEE) (e) 7.00 11/15/28 420,000 395,178
Premier Graphics (d) 11.50 12/01/05 225,000 220,500
Providian Capital I (d) 9.53 02/01/27 200,000 195,779
Queen Sand Resources 12.50 07/01/08 250,000 167,500
Republic Services 7.13 05/15/09 240,000 238,350
Saks 7.25 12/01/04 250,000 250,941
Sonic Automotive Series B 11.00 08/01/08 125,000 124,844
Speedway Motorsports (d) 8.50 08/15/07 100,000 102,000
Styling Technology 10.88 07/01/08 75,000 72,000
Temple-Inland Series F 6.75 03/01/09 210,000 200,277
Thermo Electron (d) 4.25 01/01/03 140,000 125,125
Thermolase (d) 4.38 08/05/04 145,000 119,263
Williams Companies 6.50 08/01/06 570,000 553,252
----------
5,681,952
- --------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
<PAGE>
FUND PORTFOLIO
IAI 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>
TELECOMMUNICATIONS - 4.5%
AT&T Capital Series F 7.50% 11/15/00 $ 375,000 $ 379,283
Covad Communications Group (d) 12.50 02/15/09 225,000 215,437
Global Crossing (PIK preferred) (g) 10.50 12/01/08 1,250(i) 137,500
Sprint Capital 6.90 05/01/19 495,000 472,231
----------
1,204,451
- --------------------------------------------------------------------------------------------
UTILITIES - 2.6%
Calenergy 8.48 09/15/28 400,000 438,805
Enron 7.38 05/15/19 280,000 277,059
----------
715,864
============================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $11,762,149)............................................................. $11,071,080
============================================================================================
</TABLE>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 9.6%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 2.0%
5.38% 02/15/01 $ 150,000(j) $ 149,860
11.13 08/15/03 330,000(j) 395,175
-----------
545,035
- --------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 5.3%
4.75 02/15/04 200,000(j) 192,875
5.25 11/15/28 180,000(j) 162,731
6.50 05/15/05 130,000(j) 134,591
6.63 05/15/07 130,000(j) 136,581
7.50 11/15/16 650,000(j) 743,438
12.38 05/15/04 60,000(j) 76,819
-----------
1,447,035
- --------------------------------------------------------------------------------------------
U.S. TREASURY STRIPS - 1.2%
U.S. Treasury STRIP (zero coupon) 5.54(f) 02/15/19 330,000 97,564
6.28(f) 11/15/18 710,000 214,029
-----------
311,593
- --------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1%
Federal Home Loan Bank 5.13 09/15/03 315,000 305,080
============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $2,680,830).............................................................. $ 2,608,743
============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 40.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 10.5%
6.00% 04/01/11 $ 817,106 $ 800,850
6.00 12/01/13 210,503 205,762
6.00 01/01/29 223,953 213,122
6.00 04/01/29 199,822 190,106
6.50 05/01/29 1,069,007 1,045,914
6.50 06/01/14 405,000(b) 403,734
-----------
2,859,488
- ----------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 18.6%
6.00 11/01/13 123,122 120,187
6.00 10/01/28 997,188 948,009
6.50 05/01/13 735,288 732,520
6.50 11/01/28 926,915 906,118
6.50 03/01/29 303,084 296,284
7.00 05/01/28 773,575 774,874
7.00 08/01/28 638,671 639,479
7.50 04/01/28 408,265 417,130
9.00 06/01/17 183,883 196,667
-----------
5,031,268
- ----------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 11.3%
7.00 01/15/08 130,944 134,084
7.00 12/15/23 193,467 194,309
7.00 08/15/28 319,292 319,826
7.00 01/15/29 725,234 726,219
7.50 12/15/27 909,680 930,807
8.00 12/15/23 555,872 578,462
9.00 11/15/17 173,501 186,876
-----------
3,070,583
==========================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $11,093,494)........................................................................... $10,961,339
==========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
ASSET-BACKED SECURITIES - 6.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOANS - 0.5%
Arcadia Automobile Receivables 5.94% 08/15/03 $130,000 $ 129,442
- -------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGES - 2.2%
Morgan Stanley Capital I, 1998-XL1, Class A3 6.48 06/03/30 325,000 318,526
Morgan Stanley Capital I, 1998-HF2, Class A2 6.48 11/15/30 275,000 270,650
----------
589,176
- -------------------------------------------------------------------------------------------------------
HOME EQUITY - 3.6%
EQCC Home Equity Loan Trust, 1998-2, Class A6F 6.16 04/15/08 560,000 551,818
Residential Asset Securities, 1999-KS1, Class AI3 6.11 05/25/25 440,000 434,645
----------
986,463
=======================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $1,730,626).......................................................................... $1,705,081
=======================================================================================================
</TABLE>
NON-CONVERTIBLE PREFERRED STOCK - 2.6%
<TABLE>
<CAPTION>
Market
Rate Quantity Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL - 2.6%
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: $27,951,130)........................................................................ $27,053,462
=======================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 1.7%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.2%
4.61% 10/21/99 $ 50,000(c) $ 49,065
- -------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 1.5%
General Electric Capital Corp. (Financial Services) 4.62 06/21/99 405,000(j) 403,753
=======================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $452,877).............................................................................. $452,818
=======================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $28,404,007)(k)..................................................................... $27,506,280
=======================================================================================================
LIABILITIES LESS OTHER ASSETS - (1.5)%...................................................... $(398,033)
=======================================================================================================
TOTAL NET ASSETS........................................................................... $27,108,247
=======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
<PAGE>
NOTES TO FUND PORTFOLIO
IAI 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 $405,759. Collateral for the security
purchased on a when-issued basis has been secured by Federal Home Loan Mortgage
Corporation Gold, 6.50%, maturing May 1, 2029 valued at $1,045,914.
(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 $1,820,479 (6.7% of net assets) at May 31, 1999.
(e)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(f)
Interest rate shown represents yield-to-maturity at date of purchase.
(g)
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.
(h)
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.
(i)
Represents a preferred security. Quantity is disclosed in units. One unit
represents 100 par.
(j)
All or a portion of the principal amount has been committed as collateral for
the market value of open futures contracts.
(k)
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 ........................... $ 28,436,787
============
Gross unrealized appreciation .................................. $ 104,397
Gross unrealized depreciation .................................. (1,034,904)
------------
Net unrealized depreciation .................................... $ (930,507)
============
10
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $28,404,007) $ 27,506,280
Cash 114,525
Receivable for investment securities sold 537,816
Receivable for Fund shares sold 3,075
Accrued interest receivable 301,164
Variation margin receivable 5,000
Other 24,582
------------
TOTAL ASSETS 28,492,442
------------
LIABILITIES
Accrued management fee 23,130
Payable for investment securities purchased 551,557
Payable for investment securities purchased on a
when-issued basis 405,759
Payable for Fund shares redeemed 403,749
------------
TOTAL LIABILITIES 1,384,195
------------
NET ASSETS $ 27,108,247
============
NET ASSETS REPRESENTED BY:
Capital stock $ 29,398,572
Undistributed net investment income 8,157
Accumulated net realized losses on investments, futures
contracts, and foreign currency transactions (1,332,480)
Unrealized depreciation on:
Investment securities $ (897,727)
Futures contracts (68,275) (966,002)
---------- ------------
NET ASSETS $ 27,108,247
============
Shares of capital stock outstanding (authorized 10 billion
shares, $0.01 par value) 2,981,989
============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER SHARE $ 9.09
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
STATEMENT OF OPERATIONS
IAI BOND FUND
SIX MONTHS ENDED MAY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest $ 1,413,391
Dividends 116,225
------------
TOTAL INCOME 1,529,616
------------
EXPENSES:
Management fees 215,211
Compensation of Directors 5,585
------------
TOTAL EXPENSES 220,796
Less fees reimbursed by Advisers (5,585)
------------
NET EXPENSES 215,211
------------
NET INVESTMENT INCOME 1,314,405
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (500,525)
Futures contracts (143,614)
Foreign currency transactions 32,487
------------
Net realized gain (loss) (611,652)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (878,349)
Futures contracts (41,131)
Foreign currency transactions 4,198 (915,282)
---------- ------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (1,526,934)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (212,529)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND
<TABLE>
<CAPTION>
Six months ended
May 31, 1999 Year ended
(unaudited) November 30, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 1,314,405 $ 3,469,387
Net realized gain (loss) (611,652) 1,120,153
Net change in unrealized appreciation or depreciation (915,282) (682,352)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (212,529) 3,907,188
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,547,311) (3,563,967)
------------- -------------
TOTAL DISTRIBUTIONS (1,547,311) (3,563,967)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 501,549 and 2,928,073 shares 4,744,515 28,071,182
Net asset value of 157,740 and 357,698 shares issued in
reinvestment of distributions 1,471,071 3,415,929
Cost of 3,065,561 and 5,126,967 shares redeemed (28,706,186) (49,092,006)
------------- -------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (22,490,600) (17,604,895)
------------- -------------
TOTAL DECREASE IN NET ASSETS (24,250,440) (17,261,674)
NET ASSETS AT BEGINNING OF PERIOD 51,358,687 68,620,361
------------- -------------
NET ASSETS AT END OF PERIOD $ 27,108,247 $ 51,358,687
============= =============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 8,157 $ 241,063
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
FINANCIAL HIGHLIGHTS
IAI 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 $ 9.53 $ 9.49 $ 9.32 $ 9.34 $ 8.65 $ 9.32
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income 0.33 0.58 0.54 0.56 0.58 0.36
Net realized and unrealized
gains (losses) (0.40) 0.04 0.19 0.04 0.72 (0.55)
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS (0.07) 0.62 0.73 0.60 1.30 (0.19)
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.37) (0.58) (0.56) (0.62) (0.61) (0.35)
Net realized gains -- -- -- -- -- (0.13)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.37) (0.58) (0.56) (0.62) (0.61) (0.48)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 9.09 $ 9.53 $ 9.49 $ 9.32 $ 9.34 $ 8.65
======== ======== ======== ======== ======== ========
Total investment return* (0.76)% 6.68% 8.15% 6.85% 15.46% (2.10)%
Net assets at end of period (000's
omitted) $ 27,108 $ 51,359 $ 68,620 $ 86,803 $ 77,526 $ 80,622
RATIOS
Expenses to average net assets 1.10%** 1.10% 1.10% 1.10% 1.09% 1.10%**
Net investment income to
average net assets 6.72%** 5.85% 5.74% 6.20% 6.32% 6.03%**
Portfolio turnover rate
(excluding short-term
securities) 99.8% 280.3% 482.2% 342.4% 424.7% 226.7%
</TABLE>
+REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
*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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI 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 Bond Fund
(Bond Fund) is a separate portfolio of IAI Investment Funds I, Inc. The Fund's
primary objective is to provide a high level of current income consistent with
capital preservation, through investments in a diversified portfolio of
primarily investment grade bonds and other dept securities of similar high
quality. This report covers only 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 and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
and are recorded in realized and unrealized appreciationor 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.
For federal income tax purposes, the Fund had a capital loss carryover of
approximately $725,000 at November 30, 1998, which, if not offset by subsequent
capital gains, will expire in 2002. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryover is offset or expires.
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 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.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 1999
(UNAUDITED)
[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.
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 $178.30, 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 Advisers. The fee is equal to an annual rate of
1.10% declining to 1.00% 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] PURCHASES 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 22,788,010 15,436,833
Sales 33,044,104 25,844,348
[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 $49,065.
FUTURES
<TABLE>
<CAPTION>
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond 20 June 1999 Long $2,358,125 $68,275
</TABLE>
17
<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
