SEMI-ANNUAL REPORT
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BOND FUND
SEMI-ANNUAL REPORT
MAY 31, 2000
(UNAUDITED)
Letter to Shareholders ...................... 2
Fund Manager's 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 OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
Signs of a developing economic slowdown began to surface during the second
quarter. However, the length and depth of the slowdown are still open to debate.
In each of the last two years the economy paused in the second quarter, only to
reaccelerate in the last half of the year. It's still too early to tell if this
pattern will be repeated this year, but six interest rate increases by the Fed
in the last twelve months make a strong case for a longer lasting slowdown.
Nevertheless, the question remains: Is the Fed done?
Despite the record length of this economic expansion, the inflation outlook
continues to be mixed. Certainly the trend of inflation has been moving higher.
Gasoline prices have received a lot of recent attention and energy prices have
been driving the consumer price index up. However, price indices excluding
energy costs are still relatively well behaved. Likewise, commodity prices
(excluding energy) and the price of gold are moving sideways, giving no clear
signal about the future trend. Although this inflation news is better than what
might be expected, it is important to remember that inflation is a lagging
indicator. As such, the inflation rate may continue to rise even as the economy
cools. Thus, the threat of rising inflation does not immediately go away.
Instead, it presents a dilemma for the Fed and a risk for investors.
Some of the most convincing evidence of a slowdown comes from the labor markets.
Private sector payroll gains slowed in the second quarter. The headline reports
probably overstated the weakness because the unemployment rate remained near its
30-year low while some anecdotal evidence continued to point toward upward wage
pressure from a tight labor market. Yet, a softer trend seems to be developing.
New job creation is the engine that drives consumer confidence, income growth
and spending. Consumer spending is the engine that drives the U.S. economy.
Thus, a softer labor market is consistent with a slower economy. But again the
dilemma: Can the Fed tighten to curb rising inflation if the labor markets look
soft - particularly in a presidential election year? Policy makers will see one
more month's employment data before their August meeting; that report will
likely help some Fed members make their decision.
Monetary policy during the last year has been extremely erratic. The Fed started
raising interest rates in June of last year, but chose to reverse its policy at
year-end in an attempt to forestall potential Y2K liquidity problems. Although
viewed as a temporary - but necessary - action, the amount of additional
liquidity provided by the Fed was overwhelming. By February, the Fed was
aggressively withdrawing the excess liquidity, pushing reserve growth into
record negative territory. These wide swings in policy probably explain the
unprecedented market volatility experienced during the last six months.
2
--------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
IAI BOND FUND
ECONOMIC OUTLOOK (CONT.)
Clearly the Fed has increased short-term interest rates during the last year;
and the economy is beginning to feel the impact of this change. Yet, it's just
as clear that monetary policy is not "tight" - at least not in comparison to the
way credit availability was strangled by the Fed at times in the 1980s. This
policy ambiguity - higher rates but adequate credit availability - is consistent
with the mixed data coming from the economy. The policy is also consistent with
the Fed's attempt to "fine tune" the economy onto a less inflationary path
without causing recession.
The markets responded favorably in May to signs of a slowing economy. Investors
viewed the data as a strong signal that the Fed might be done raising interest
rates. This shift in sentiment sparked the rally. Yet investor sentiment is
probably ahead of economic reality. The Fed is likely to nudge rates higher at
the August meeting and then hope they have done enough to achieve a soft
landing.
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
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<PAGE>
FUND MANAGER'S REVIEW
IAI BOND FUND
IAI BOND FUND
FUND MANAGEMENT
LARRY R. HILL, CFA
HOW HAS THE FUND PERFORMED?
The IAI Bond Fund declined (0.54)% for the six month period ended May 31, 2000.
This compares with a return for the benchmark, the Lehman Aggregate Bond Index,
of 1.38% for the same time period. The peer group. Lipper A rated Bond Funds,
earned a return of 0.52%.
WERE THERE ANY SIGNIFICANT CHANGES?
We did make some changes to the portfolio in the past six months. These moves
were designed to better position the Fund for an uncertain and volatile market,
yet maintain an exposure to corporate bonds which appear to be attractively
priced on a long term basis. As part of this shift, the portfolio's allocation
to mortgage securities was reduced and the allocation to asset-backed securities
was eliminated. Proceeds from these sales were used to increase both the cash
reserve position and the allocation to longer maturity bonds. This strategy -
commonly referred to as a barbell structure - increased the Fund's liquidity and
better positioned the portfolio to benefit from an inverted yield curve.
Portfolio duration remained relatively neutral to the market, beginning the
period at 5.2 years and ending at 5.1 years.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
In the last six months the U.S. bond market has struggled to
produce positive returns. During this period the Fed has raised short-term
interest rates by 1%, the yield curve has inverted and credit spreads have
widened rather dramatically. This combination of events had a negative impact on
the return generated by both the market and the Fund.
In the IAI Bond Fund, the greatest negative return impact came from wider credit
spreads. The Fund has long followed a strategy of over weighting those sectors
that provide more yield (i.e. investment grade corporate bonds, high yield
issues, mortgage-backed securities and asset- backed securities) while under
weighting Treasury issues. Over the long run this strategy provides more yield
and better value to the shareholders of the Fund. However, during periods when
credit spreads widen, this strategy underperforms the market as it did in the
recent period.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Recent signs of an economic slowdown have helped reduce interest rates and
shrink credit spreads. With the developing slowdown, investors began to
anticipate the end of further rate increases by the Fed. This shift in sentiment
helped produce the rally in bonds. While economic growth is certainly slowing
from its recently unsustainable level, the depth and durability of the slowdown
is still debatable. At current yield levels, market expectations may be ahead of
the economic reality. Thus, we expect yields and credit spreads to remain in a
broad range until more data is available. Market and portfolio returns should
improve in this environment, but it is still too early to get overly bullish on
bonds. In the portfolio, we plan to maintain some liquidity and use market
swings to add selectively to the portfolio.
4
--------------------------------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
LEHMAN BROTHERS
IAI BOND FUND AGGREGATE BOND INDEX
------------- --------------------
10,000 10,000
10,203 10,161
10,317 10,301
9,944 10,164
10,054 10,248
10,255 10,378
10,616 10,601
10,824 10,766
10,954 10,899
11,008 10,992
11,040 11,068
11,162 11,188
11,184 11,253
11,130 11,248
11,287 11,404
11,625 11,650
11,928 11,886
12,019 12,019
12,134 12,129
12,700 12,489
12,324 12,319
12,395 12,399
12,233 12,329
12,293 12,419
12,591 12,653
12,798 12,827
13,192 13,089
13,332 13,221
13,542 13,378
13,285 13,201
13,273 13,204
13,563 13,414
13,916 13,671
14,214 13,910
14,244 13,968
14,326 14,065
14,326 14,083
14,788 14,338
14,901 14,420
15,297 14,672
15,347 14,713
15,433 14,768
15,133 14,642
15,234 14,721
15,609 14,920
15,203 14,661
14,694 14,299
14,584 14,185
14,505 14,183
14,378 14,152
14,543 14,433
14,583 14,451
14,470 14,238
14,468 14,226
14,386 14,194
14,485 14,292
14,670 14,575
15,024 14,921
15,329 15,013
15,559 15,223
15,945 15,812
15,948 15,928
15,965 15,892
16,079 16,084
16,215 16,240
16,373 16,452
16,607 16,698
16,838 16,932
16,892 17,045
16,561 16,749
16,481 16,632
16,369 16,539
16,367 16,505
16,540 16,726
16,576 16,771
16,581 16,743
16,881 17,034
17,311 17,412
17,744 17,710
17,531 17,545
17,690 17,599
17,795 17,643
17,533 17,447
17,747 17,709
17,953 17,876
18,256 18,088
18,866 18,576
18,668 18,417
18,918 18,689
19,069 18,960
19,190 19,048
19,431 19,240
19,655 19,486
19,706 19,471
19,779 19,537
19,884 19,638
20,071 19,825
20,237 19,993
20,270 20,035
20,207 20,362
20,469 20,839
20,087 20,728
20,472 20,846
20,515 20,909
20,624 21,057
20,253 20,689
20,449 20,802
20,560 20,869
20,315 20,685
20,116 20,619
20,160 20,533
20,011 20,522
20,147 20,760
20,022 20,837
19,966 20,835
19,800 20,735
19,670 20,667
19,839 20,917
20,007 21,193
19,955 21,131
19,858 21,121
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/00
6 Months 1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
IAI BOND FUND (0.54)% (2.24)% 4.49% 7.10%
--------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 1.38% 2.11% 5.97% 7.77%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED.
SECTORS
% OF PORTFOLIO AS OF 5/31/00
[PIE CHART]
U.S. GOVERNMENT
AGENCY MORTGAGE-BACKED 30%
SHORT-TERM 22%
ASSET-BACKED 2%
U.S. GOVERNMENT 5%
CORPORATE 41%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/00
[BAR CHART]
YEARS
-----
0-3 22%
3-5 15%
5-10 37%
10-20 14%
20+ 12%
NOTE TO FUND MANAGER'S 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 BOND PORTFOLIO AS OF 5/31/00
U.S.
Government ......... 45%
Aaa ................ 3%
Aa ................. 7%
A .................. 13%
Baa ................ 15%
Non-Investment
Grade .............. 17%
5
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<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 40.4%
Principal Market
Rate Maturity Amount Value (a)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BROADCASTING - 4.1%
Radio Unica (STEP BOND) (f) 16.61% 08/01/06 $600,000 $ 366,000
Time Warner 6.63 05/15/29 180,000 143,489
----------
509,489
------------------------------------------------------------------------------------------------------
FINANCIAL - 11.3%
Bank of America 6.13 07/15/04 215,000 201,770
Bear Stearns 6.15 03/02/04 115,000 107,232
CIT Holdings Series B (YANKEE) (d) 6.88 02/16/05 215,000 204,697
Goldman Sachs Series B 7.35 10/01/09 190,000 177,446
Heller Financial 7.38 11/01/09 115,000 106,106
Household Finance 5.88 02/01/09 180,000 152,733
Lehman Brothers 6.63 02/05/06 185,000 169,150
Royal & Sun Alliance Insurance (c) (YANKEE) (d) 8.95 10/15/29 175,000 165,994
Toyota Motor Credit 5.63 11/13/03 140,000 132,075
----------
1,417,203
------------------------------------------------------------------------------------------------------
INDUSTRIAL - 18.4%
CMS Energy 8.38 07/01/03 250,000 239,200
Charles River Labs 13.50 10/01/09 75,000 77,156
J. Seagram & Sons 6.63 12/15/05 160,000 147,405
Lockheed Martin 8.20 12/01/09 195,000 190,682
Mack-Cali Realty 7.25 03/15/09 185,000 165,396
NE Restaurant 10.75 07/15/08 250,000 200,000
Noble Drilling 7.50 03/15/19 210,000 189,070
Northwest Airlines Series 1999-2A 7.58 03/01/19 238,762 221,063
Petro-Canada (YANKEE) (d) 7.00 11/15/28 220,000 181,397
Providian Capital I (c) 9.53 02/01/27 200,000 166,579
Province of Manitoba (YANKEE) (d) 6.75 03/01/03 145,000 142,298
Sonic Automotive Series B 11.00 08/01/08 125,000 113,750
Speedway Motorsports 8.50 08/15/07 100,000 91,500
Tyco International Group (YANKEE) (d) 6.88 01/15/29 205,000 165,923
----------
2,291,419
------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
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<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 40.4%
Principal Market
Rate Maturity Amount Value (a)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TELECOMMUNICATIONS - 4.9%
COVAD Comm Group 12.50% 02/15/09 $225,000 $211,500
Global Crossing (PIK preferred) (e) 10.50 12/01/08 1,250(g) 116,875
Sprint Capital 6.90 05/01/19 235,000 202,473
Tritel PCS 12.75 05/15/09 90,000 59,850
Voicestream Wire (c) 10.38 11/15/09 20,000 20,500
--------
611,198
------------------------------------------------------------------------------------------
UTILITIES - 1.7%
NRG Energy 8.00 11/01/03 100,000 98,188
Williams Gas Pipeline (c) 7.38 11/15/06 115,000 109,779
--------
207,967
==========================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST $5,522,200) ............................................................. $5,037,276
==========================================================================================
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 4.7%
Principal Market
Rate Maturity Amount Value (a)
------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 4.7%
7.50% 11/15/16 $160,000 $177,300
8.13 08/15/19 130,000 154,375
7.63 02/15/25 135,000 156,600
5.25 02/15/29 115,000 100,445
--------
588,720
==========================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST $583,891).................................................................. $588,720
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
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<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 29.8%
Principal Market
Rate Maturity Amount Value (a)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FREDDIE MAC GOLD - 6.7%
6.00% 04/01/11 $292,001 $ 273,979
6.00 01/01/29 140,005 125,981
6.00 01/01/29 47,650 42,877
6.00 04/01/29 191,954 172,634
6.50 05/01/29 236,617 219,352
----------
834,823
------------------------------------------------------------------------------------------
FANNIE MAE - 16.2%
6.50 05/01/13 284,978 270,846
9.00 06/01/17 138,809 143,013
7.50 04/01/28 358,252 348,815
7.00 05/01/28 214,580 204,021
7.00 08/01/28 392,066 372,289
6.50 11/01/28 452,084 418,677
6.50 03/01/29 284,437 263,419
----------
2,021,080
------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 6.9%
9.00 11/15/17 134,307 138,816
7.00 12/15/23 167,900 161,867
8.00 12/15/23 289,526 291,045
7.50 12/15/27 160,328 157,673
7.00 08/15/28 119,525 114,762
----------
864,163
==========================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST $3,932,023).............................................................. $3,720,066
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITY - 2.4%
Principal Market
Rate Maturity Amount Value (a)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGES - 2.4%
Morgan Stanley Capital I, 1998-XL1, Class A3 6.48% 06/03/30 $325,000 $299,669
=============================================================================================
TOTAL INVESTMENT IN ASSET-BACKED SECURITY
(COST $329,325)..................................................................... $299,669
=============================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST $10,367,439)................................................................ $9,645,731
=============================================================================================
<CAPTION>
SHORT-TERM SECURITIES - 21.4%
Principal Market
Rate Maturity Amount/Shares Value (a)
---------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 18.2%
Associates (Financial) 6.74% 06/01/00 $620,000 $ 620,000
National Rural Utilities (Financial) 6.47 06/05/00 405,000 404,709
Pitney Bowes Credit (Financial) 6.48 06/05/00 620,000 619,554
Washington Post (Publishing) (c) 6.46 06/05/00 625,000 624,551
----------
2,268,814
---------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.4%
5.86 10/19/00 50,000(b) 48,853
---------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 2.8%
Firstar Institutional Money Market Fund 6.04 345,510 345,510
=============================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST $2,663,205)................................................................. $2,663,177
=============================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST $13,030,644) (h)........................................................... $12,308,908
=============================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.3%........................................... $160,439
=============================================================================================
TOTAL NET ASSETS ................................................................ $12,469,347
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Security is pledged to cover initial margin on open futures contracts (see Note
5 to financial statements).
(c)
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 $1,087,408 (8.7% of net assets) at May 31, 2000.
(d)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(e)
The interest rate shown for Payment-in-Kind securities (PIK securities)
represents effective yield at May 31, 2000. PIK securities' income is generally
paid by issuing additional par or shares of the security rather than paying
cash.
(f)
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,
2000, based upon the estimated timing and amount of future interest and
principal payments.
(g)
Represents a preferred security. Quantity is disclosed in units. One unit
represents 100 par.
(h)
At May 31, 2000, 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 ............................. $13,030,644
===========
Gross unrealized appreciation .................................... $ 11,500
Gross unrealized depreciation .................................... $ (733,236)
-----------
Net unrealized depreciation ...................................... $ (721,736)
===========
10
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at market (Cost: $13,030,644) $ 12,308,908
Cash 217
Accrued interest receivable 136,600
Variation margin receivable (Note 5) 7,580
Other 24,582
------------
TOTAL ASSETS 12,477,887
LIABILITIES
Accrued management fee 8,540
------------
TOTAL LIABILITIES 8,540
------------
NET ASSETS $ 12,469,347
============
NET ASSETS REPRESENTED BY:
Paid in capital $ 16,623,365
Undistributed net investment income 9,907
Accumulated net realized losses on investments, futures contracts, and
foreign currency transactions (3,451,100)
Unrealized appreciation (depreciation) on:
Investment securities $ (721,736)
Futures contracts (Note 5) 8,911
----------
(712,825)
------------
NET ASSETS $ 12,469,347
============
Shares of capital stock outstanding (authorized 10 billion shares, $0.01
par value) 1,505,249
------------
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER SHARE $ 8.28
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
11
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI BOND FUND
SIX MONTHS ENDED MAY 31, 2000
(UNAUDITED)
<TABLE>
<S> <C> <C>
----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME:
Interest $ 571,946
Dividends 6,563
------------
TOTAL INCOME 578,509
------------
EXPENSES:
Management fees 69,335
Compensation of Directors 4,919
Interest Expense 292
------------
TOTAL EXPENSES 74,546
Less fees reimbursed by Advisers (4,919)
------------
NET EXPENSES 69,627
------------
NET INVESTMENT INCOME 508,882
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (1,291,831)
Futures contracts 41,122
Foreign currency transactions 22,272
------------
Net realized loss (1,228,437)
Net change in unrealized appreciation or depreciation on:
Investment securities $ 595,598
Futures contracts 12,542
Other assets and liabilities denominated in foreign currency (3,742)
------------
Net unrealized gain 604,398
------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (624,039)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (115,157)
============
</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, 2000 Year ended
(unaudited) November 30, 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 508,882 $ 2,112,670
Net realized loss (1,228,437) (1,468,258)
Net change in unrealized appreciation or depreciation 604,398 (1,266,503)
------------ -------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS (115,157) (622,091)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (542,283) (2,344,002)
------------ -------------
TOTAL DISTRIBUTIONS (542,283) (2,344,002)
------------ -------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 278,525 and 579,096 shares 2,341,772 5,433,497
Net asset value of 61,214 and 243,398 shares issued in
reinvestment of distributions 516,649 2,224,422
Cost of 1,047,397 and 3,997,848 shares redeemed (8,814,148) (36,967,999)
------------ -------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (5,955,727) (29,310,080)
------------ -------------
TOTAL DECREASE IN NET ASSETS (6,613,167) (32,276,173)
NET ASSETS AT BEGINNING OF PERIOD 19,082,514 51,358,687
------------ -------------
NET ASSETS AT END OF PERIOD $ 12,469,347 $ 19,082,514
------------ -------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 9,907 $ 43,308
============ =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
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<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>
Six months ended Years ended November 30,
May 31, 2000 ------------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 8.62 $ 9.53 $ 9.49 $ 9.32 $ 9.34 $ 8.65
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income 0.28 0.61*** 0.58 0.54 0.56 0.58
Net realized and unrealized
gains (losses) (0.33) (0.83) 0.04 0.19 0.04 0.72
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS (0.05) (0.22) 0.62 0.73 0.60 1.30
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.29) (0.69) (0.58) (0.56) (0.62) (0.61)
Net realized gains -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.29) (0.69) (0.58) (0.56) (0.62) (0.61)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 8.28 $ 8.62 $ 9.53 $ 9.49 $ 9.32 $ 9.34
======== ======== ======== ======== ======== ========
Total investment return* (0.54)% (2.46)% 6.68% 8.15% 6.85% 15.46%
Net assets at end of period
(000s omitted) $ 12,469 $ 19,083 $ 51,359 $ 68,620 $ 86,803 $ 77,526
RATIOS **
Expenses to average net assets 0.90%**** 1.07%**** 1.10% 1.10% 1.10% 1.09%
Net investment income to
average net assets 6.63%** 6.76% 5.85% 5.74% 6.20% 6.32%
Portfolio turnover rate
(excluding short-term
securities) 22.1% 147.8% 280.3% 482.2% 342.4% 424.7%
</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
***NET INVESTMENT INCOME PER SHARE REPRESENTS NET INVESTMENT INCOME DIVIDED BY
THE AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
****EFFECTIVE SEPTEMBER 1, 1999, ADVISERS HAS AGREED TO LIMIT THE FEE TO 0.90%
OF AVERAGE NET ASSETS THROUGH MARCH 31, 2001. ABSENT THIS VOLUNTARY
LIMITATION THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN
1.10%.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 2000
(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 and non-investment grade bonds and other debt securities.
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 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 realize
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 purchased
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
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
For federal income tax purposes, the Fund had capital loss carryovers of
approximately $2,226,297 at November 30, 1999 which, if not offset by subsequent
capital gains, will expire in 2002 and 2007. 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
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 2000
(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, together with other funds advised by Advisers, have an available joint
line of credit of $25,000,000 with Firstar Bank, N.A. at the prime interest rate
less 2%. To the extent funds are drawn against the line, securities are
segregated by the Fund. No compensating balances are required under the line of
credit, however, a commitment fee of .10% per annum on the commitment amount of
the line is payable quarterly in arrears. Advisers has agreed to pay the
commitment fee on behalf of the Fund. There were no borrowings outstanding for
the Fund at May 31, 2000.
[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 sale 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. Effective September 1,
1999, Advisers has agreed to limit the fee to 0.90% of average net assets
through March 31, 2001. 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, 2000, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund were as
follows:
U.S. Government Other
--------------- ----------
Purchases $1,988,419 $ 909,982
Sales $6,937,354 $4,865,067
17
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
MAY 31, 2000
(UNAUDITED)
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of May 31, 2000. The
market value of securities deposited to cover initial margin requirements for
the open positions at May 31, 2000 was $48,853. The unrealized appreciation on
these contracts is included in unrealized appreciation on futures contracts.
FUTURES
Number of Expiration Market Unrealized
Type Contracts Month Position Value Appreciation
--------------------------------------------------------------------------------
U.S. Treasury Bond 5 September 2000 Long $478,125 $5,120
U.S. Treasury Note 5 September 2000 Long $483,906 3,791
[6] SUBSEQUENT EVENT
On June 12, 2000, the Fund's board of directors recommended that the IAI Funds
be reorganized into comparable mutual funds advised by a subsidiary of Federated
Investors, Inc. (Federated Investors). On June 16, 2000, Investment Advisers,
Inc. (Advisers), the IAI Funds' Investment adviser, announced they had entered
into an agreement with Federated Investors to sell the IAI Funds, including the
IAI Bond Fund, to Federated Investors. The proposed acquisition must be approved
by the IAI Funds' shareholders. Proxy statements requesting shareholder votes
will be mailed in July 2000. If approved, the acquisition is expected to occur
in September 2000.
18
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19
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20
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Firstar Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
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
c/o FIRSTAR MUTUAL FUND SERVICES, LLC, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701 USA
800.945.3863
