ANNUAL REPORT
IAI INSTITUTIONAL
BOND FUND
NOVEMBER 30, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI INSTITUTIONAL BOND FUND
ANNUAL REPORT
NOVEMBER 30, 1999
Letter to Shareholders ...................... 2
Fund Manager's Review ....................... 4
Fund Portfolio .............................. 6
Notes to Fund Portfolio ..................... 11
Statement of Assets and Liabilities ......... 12
Statement of Operations ..................... 13
Statements of Changes in Net Assets ......... 14
Financial Highlights ........................ 15
Notes to Financial Statements ............... 16
Independent Auditors' Report ................ 20
Federal Tax Information ..................... 21
Adviser, Legal Counsel,
Independent Auditors,
Directors .................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI INSTITUTIONAL BOND FUND
ECONOMIC OUTLOOK
A summary of the economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The U.S. economy continues to grow rapidly. Inflation is modest and under
control. Stocks, at least as reflected in the broad averages, keep hitting new
highs. Unfortunately, all that good news was interpreted as bad news by the
bond market. In 1999, bonds declined for only the second time in the history
of the Lehman Aggregate Bond Index. Bond investors believe that growth cannot
continue without igniting inflationary pressures. Interest rates will move
higher either as the Fed attempts to slow the economy or as inflation makes
investors demand a higher nominal return. There is little hard data showing a
significant increase in price levels, but many of the favorable secular and
cyclical forces dampening inflation in the late 1990's will be less positive
in 2000.
* Industrial commodity prices have stabilized after falling by one-third in
1997-98.
* Energy prices are up more than 80% from one year ago.
* Asian and European expansions are absorbing excess overseas capacity.
* The dollar has moved sideways after gaining 30% in the preceding three
years.
* Unemployment is at a 30 year low with shortages in many skilled jobs.
* Consumer spending and confidence are at high levels.
* Equity markets have risen dramatically over the past decade, creating
significant wealth.
As a result, the Fed is on alert. During 1999, policy makers increased rates
by 75 basis points in three moves. This really constituted a tapping on the
monetary brakes since it only reversed the 75 basis points of easing the Fed
did during the liquidity crisis of late 1998. Mindful of possible disruptions
caused by the Y2K issue, the Fed moved cautiously. However, Y2K has come and
gone without noticeable disruptions, at least by electronic gadgetry. The Fed
is now free to increase rates in an effort to slow the rate of growth in the
U.S. economy and ease pending inflationary pressures.
Higher interest rates will gradually slow the U.S. economy. The trick will be
to slow, not shrink it. Given Fed Chairman Greenspan's record, one hesitates
to bet against him. Higher interest rates will continue to plague the bond
market. Equities seem to have been able to shake off the stiffer competition
from bonds. However, the advance in the stock market averages has masked the
fact that a few large stocks had a
2
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
IAI INSTITUTIONAL BOND FUND
ECONOMIC OUTLOOK (CONT.)
disproportionate impact on the averages. As higher interest rates gradually
slow the U.S. economy, corporate profit growth will come under increasing
pressure. While mega-mergers and cost cutting will help some overcome this
pressure, many companies will experience shortfalls to profit growth
expectations. Equity investors have been merciless when earnings don't match
forecasts. Equity market returns are unlikely to continue the pace of the past
few years.
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
FUND MANAGEMENT
Larry R. Hill, CFA
HOW HAS THE FUND PERFORMED?
The IAI Institutional Bond Fund declined (1.97)% for the 12 months ended
November 30, 1999. This compares with a return for the benchmark, the Lehman
Aggregate Bond Index, of (0.04)% for the same time period. The Fund's peer
group, Lipper A rated Bond Funds, earned a return of (1.34)%.
WERE THERE ANY SIGNIFICANT CHANGES?
Late in 1999, the interest rate sensitivity of the Fund was reduced as continued
strong economic growth led to expectations of higher interest rates. Sector
weightings continue to emphasize higher yielding corporate and mortgage-backed
securities.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Interest rates moved higher throughout 1999 as strong economic growth led the
Federal Reserve to increase short-term rates by 75 basis points. Concerns about
potential inflationary pressures moved interest rates higher in 10 of the last
12 months. The corporate and mortgage sectors outperformed Treasuries for the
full 12 months. Withdrawals during the year increased the concentration in
select, less liquid high yield securities that performed poorly.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The U.S. economy continues to provide more of the same - strong growth with
modest inflation. Fears of inflation have pushed interest rates toward 6.75% on
the 30 year Treasury. Investors are anticipating several rate hikes by the
Federal Reserve in 2000. We agree that the Federal Reserve will raise rates
early in 2000. During 1999, the bond market discounted about three one-quarter
percent rate increases before mid-year. Given the lag between policy actions and
the impact on the economy, we believe strong growth will continue in early 2000.
Inflation will accelerate slightly.
However, yields are attractive, assuming our inflation forecast is correct.
Moreover, any sign of an economic slowdown could easily ease the upward pressure
on rates. On a longer-term basis, corporate, mortgage, asset-backed and Federal
agency issues remain attractive compared to Treasuries. Our strategy is set up
to perform well in this environment. We remain defensive with respect to
interest rates but with an emphasis on higher yielding corporate and agency
issues.
4
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<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 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 1,936,597
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 2,271,369
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 2,567,812
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 2,583,864 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 2,687,861 2,851,808
Feb-99 2,628,997 2,801,901
Mar-99 2,654,235 2,817,312
Apr-99 2,664,587 2,826,327
May-99 2,634,477 2,801,456
Jun-99 2,606,815 2,792,491
Jul-99 2,608,379 2,780,763
Aug-99 2,594,294 2,779,372
Sep-99 2,613,751 2,811,613
Oct-99 2,613,489 2,822,016
Nov-99 2,610,615 2,821,734
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/99
Since
Inception
1 Year 5 Years 11/01/93
- --------------------------------------------------------------------------------
IAI INSTITUTIONAL BOND FUND (1.97)% 6.73% 4.48%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (0.04)% 7.99% 5.83%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 11/30/99
[PIE CHART]
U.S. Government Agency Mortgage-Backed 34%
Municipal 1%
Short-Term 5%
Asset-Backed 7%
U.S. Government & Government Agency 13%
Corporate 38%
Foreign-Denominated 2%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/99
[BAR CHART]
YEARS
- -----
0-3 4%
3-5 19%
5-10 49%
10-20 17%
20+ 11%
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 11/30/99
U.S.
Government ......... 47%
Aaa ................ 12%
Aa ................. 5%
A ................ 4%
Baa ................ 14%
Non-Investment
Grade .............. 18%
5
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<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
CORPORATE BONDS - 38.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BROADCASTING - 1.7%
Radio Unica (STEP BOND) (g) 13.86% 08/01/06 $ 615,000 $ 401,287
- -------------------------------------------------------------------------------------------------------
FINANCIAL - 6.7%
Associates 5.50 02/15/04 235,000 222,506
Bear Stearns 6.15 03/02/04 135,000 129,701
Finova Capital 7.63 09/21/09 110,000 110,235
Goldman Sachs 7.35 10/01/09 140,000 139,440
HSBC Americas 6.63 03/01/09 100,000 94,460
Heller Financial (d) 7.38 11/01/09 130,000 128,567
Lehman Brothers 6.63 02/05/06 65,000 62,294
Nationsbank 6.13 07/15/04 230,000 222,773
Newcourt Credit Group (d) 6.88 02/16/05 110,000 108,787
Royal & Sun Alliance Insurance (YANKEE) (d)(e) 8.95 10/15/29 200,000 202,691
Toyota Motor Credit 5.63 11/13/03 130,000 124,385
----------
1,545,839
- -------------------------------------------------------------------------------------------------------
INDUSTRIAL - 23.5%
Biovail (d) 10.88 11/15/05 150,000 156,750
Entex Information Services (d)(j) 12.50 08/01/06 1,150,000 447,062
Integrated Electrical Services (d) 9.38 02/01/09 125,000 122,187
Laidlaw (YANKEE) (e) 7.65 05/15/06 475,000 443,614
Lockheed Martin 8.20 12/01/09 230,000 228,439
Mack-Cali Realty 7.25 03/15/09 255,000 238,079
Noble Drilling 7.50 03/15/19 355,000 343,996
Northwest Airlines 7.58 03/01/19 335,000 323,302
Owens Corning 7.00 03/15/09 325,000 284,343
Petro-Canada (YANKEE) (e) 7.00 11/15/28 150,000 133,941
Providian Capital I (d) 9.53 02/01/27 475,000 395,360
Province of Manitoba (YANKEE) (e) 6.75 03/01/03 210,000 209,668
Queen Sand Resources 12.50 07/01/08 500,000 295,000
Saks 7.25 12/01/04 250,000 237,483
J. Seagram & Sons 6.63 12/15/05 300,000 286,290
Sonic Automotive Series B 11.00 08/01/08 625,000 610,938
Speedway Motorsports (d) 8.50 08/15/07 475,000 463,125
Styling Technology 10.88 07/01/08 75,000 48,750
Thermolase (d) 4.38 08/05/04 225,000 178,594
----------
5,446,921
- -------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(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 - 3.0%
COVAD Comm Group (d) 12.50% 02/15/09 $450,000 $ 463,500
Global Crossing (PIK PREFERRED) (f) 10.51 12/01/08 1,250(h) 124,844
Sprint Capital 6.90 05/01/19 110,000 101,901
---------
690,245
- ---------------------------------------------------------------------------------------------
UTILITIES - 3.1%
Calpine 7.75 04/15/09 200,000 188,500
Enron 7.38 05/15/19 235,000 222,821
NRG Energy 8.00 11/01/03 115,000 112,894
Southern Union 8.25 11/15/29 75,000 76,038
Williams Gas Pipeline (d) 7.38 11/15/06 130,000 128,634
---------
728,887
=============================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST $10,066,848)................................................................ $8,813,179
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
FOREIGN BONDS - 2.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN CORPORATE BOND - 0.7%
British Sky Broadcasting (d) 8.20% 07/15/09 $165,000 $ 156,880
- ----------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT - 1.8%
Bundesrepublic Deutschland (EURODOLLAR) 6.75 04/22/03 390,000(i) 420,568
==============================================================================================
TOTAL INVESTMENTS IN FOREIGN BONDS
(COST $605,722)...................................................................... $577,448
==============================================================================================
</TABLE>
TAX-EXEMPT MUNICIPAL BOND - 0.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Harris County Texas 4.50% 10/01/23 $130,000 $ 103,895
==============================================================================================
TOTAL INVESTMENT IN TAX-EXEMPT MUNICIPAL BOND
(COST $101,192).................................................................... $ 103,895
==============================================================================================
</TABLE>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 12.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN BANK BOND - 1.2%
5.13% 09/15/03 $280,000 $ 266,880
- ----------------------------------------------------------------------------------------------
FANNIE MAE - 2.8%
6.21 08/06/38 750,000 659,817
- ----------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 5.5%
11.13 08/15/03 385,000 446,359
12.38 05/15/04 300,000 370,219
6.38 08/15/27 375,000 368,438
5.25 02/15/29 95,000 80,572
----------
1,265,588
- ----------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 3.3%
4.63 12/31/00 125,000 123,320
6.50 05/15/05 210,000 212,691
6.50 08/15/05 200,000 202,500
7.00 07/15/06 50,000 51,938
6.63 05/15/07 180,000 183,487
----------
773,936
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST $3,253,561).................................................................. $2,966,221
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 34.6%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FREDDIE MAC - 2.0%
6.00% 01/15/28 $ 500,000 $ 459,558
- ----------------------------------------------------------------------------------------------
FREDDIE MAC GOLD - 12.7%
6.00 04/01/11 575,800 555,249
6.50 07/01/14 160,961 157,336
6.00 01/01/29 259,169 240,646
6.50 05/01/29 200,950(b) 191,734
6.50 05/01/29 1,807,848 1,724,936
7.00 12/01/29 80,000(b) 76,700
----------
2,946,601
- ----------------------------------------------------------------------------------------------
FANNIE MAE - 12.2%
6.50 03/01/13 438,185 429,189
7.00 10/01/14 65,001 64,707
7.00 11/01/14 65,000 64,678
7.00 12/01/14 115,000(b) 114,766
7.50 04/01/28 454,164 453,103
7.00 05/01/28 463,658 453,491
7.50 05/01/28 129,322 129,020
7.00 08/01/28 132,962 130,012
6.00 10/01/28 178,127 165,226
7.00 09/01/29 267,991 261,924
7.00 09/01/29 299,381 292,603
7.50 09/01/29 201,847 201,377
7.50 12/01/29 75,000(b) 75,100
----------
2,835,196
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 7.7%
7.00 01/15/08 155,079 155,585
9.00 11/15/17 354,721 374,577
8.00 12/15/23 221,596 225,875
7.50 12/15/27 384,912 384,233
7.00 02/15/28 181,909 177,614
7.00 01/15/29 468,043 456,816
----------
$1,774,700
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST $8,222,907).................................................................. $8,016,055
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
ASSET-BACKED SECURITIES - 7.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOANS - 0.5%
ANRC Auto Owner Trust 6.94% 04/17/06 $120,000 $ 120,675
- -------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGES - 2.0%
Morgan Stanley Capital I, 1998-XL1, Class A3 6.48 06/03/30 485,000 464,562
- -------------------------------------------------------------------------------------------------------
HOME EQUITY - 4.8%
EQCC Home Equity Loan Trust, 1998-2, Class A6F 6.16 04/15/08 595,000 576,442
Residential Asset Securities, 1999-KS2, Class AI5 6.99 12/25/25 550,000 546,216
----------
1,122,658
=======================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST $1,756,707)........................................................................... $1,707,895
=======================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST $24,006,937)......................................................................... $22,184,693
=======================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 4.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 4.3%
Associates (FINANCIAL) 5.68% 12/01/99 $1,000,000 $1,000,000
- -------------------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.6%
5.21 04/20/00 140,000(c) 137,121
=======================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST $1,137,247)........................................................................... $1,137,121
=======================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST $25,144,184) (k)..................................................................... $23,321,814
=======================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.6)%.................................................. $(132,245)
=======================================================================================================
TOTAL NET ASSETS........................................................................... $23,189,569
=======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
10
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
(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 November 30, 1999, the total cost of
securities purchased on a when-issued basis was $461,473.
(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 $2,952,137 (12.7% of net assets) at November 30, 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 the effective yield at November 30, 1999. PIK securities' 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 November
30, 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)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(j)
This security has been deemed illiquid by Advisers per procedures approved by
the Board of Directors.
(k)
At November 30, 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 .......................... $ 25,153,480
============
Gross unrealized appreciation ................................. $ 38,992
Gross unrealized depreciation ................................. $ (1,870,658)
------------
Net unrealized depreciation ................................... $ (1,831,666)
============
11
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $25,144,184) $ 23,321,814
Accrued interest receivable 356,200
Variation margin receivable (Note 5) 1,641
Unrealized appreciation on forward foreign currency contract (Note 6) 6,865
------------
TOTAL ASSETS 23,686,520
LIABILITIES
Bank overdraft 27,636
Accrued management fee 7,842
Payable for investment securities purchased on a
when-issued basis 461,473
------------
TOTAL LIABILITIES 496,951
------------
NET ASSETS $ 23,189,569
============
NET ASSETS REPRESENTED BY:
Paid in capital 27,110,386
Undistributed net investment income 68,033
Accumulated net realized losses on investments (2,176,356)
Unrealized appreciation or depreciation on:
Investment securities $ (1,822,370)
Futures contracts (Note 5) 3,675
Other assets and liabilities denominated
in foreign currency 6,201 (1,812,494)
------------ ------------
NET ASSETS $ 23,189,569
============
Shares of capital stock outstanding; authorized 10 billion
shares of $0.01 par value stock 2,777,966
------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 8.35
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest $ 3,091,213
Dividends 65,323
------------
TOTAL INCOME 3,156,536
------------
EXPENSES:
Management fees 208,965
Compensation of Directors 14,391
------------
TOTAL EXPENSES 223,356
Less fees reimbursed by Advisers (14,391)
------------
NET EXPENSES 208,965
------------
NET INVESTMENT INCOME 2,947,571
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (1,866,641)
Futures contracts (301,312)
Foreign currency transactions 48,421
------------
(2,119,532)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (1,943,610)
Futures contracts 30,819
Other assets and liabilities denominated in foreign currency 10,890
------------
(1,901,901)
------------
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY (4,021,433)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,073,862)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
- --------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
Year ended Year ended
November 30, 1999 November 30, 1998
------------------- ------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 2,947,571 $ 5,035,795
Net realized gains (losses) (2,119,532) 2,075,932
Net change in unrealized appreciation or depreciation (1,901,901) (537,061)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (1,073,862) 6,574,666
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,188,319) (5,187,365)
Capital gains (2,041,928) --
------------- -------------
TOTAL DISTRIBUTIONS (5,230,247) (5,187,365)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 544,202 and 1,348,084 shares 4,930,731 12,829,367
Net asset value of 586,919 and 542,957 shares issued in
reinvestment of distributions 5,223,622 5,179,038
Cost of 3,483,453 and 8,175,947 shares redeemed (29,956,272) (78,467,061)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARES
TRANSACTIONS (19,801,919) (60,458,656)
------------- -------------
TOTAL DECREASE IN NET ASSETS (26,106,028) (59,071,355)
NET ASSETS AT BEGINNING OF PERIOD 49,295,597 108,366,952
------------- -------------
NET ASSETS AT END OF PERIOD $ 23,189,569 $ 49,295,597
============= =============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 79,317 $ 261,734
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
- --------------------------------------------------------------------------------
<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 November 30,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.61 $ 9.49 $ 9.54 $ 9.50 $ 8.85
-------- -------- -------- -------- --------
OPERATIONS
Net investment income 0.64** 0.64 0.58 0.63 0.62
Net realized and unrealized
gains (losses) (0.82) 0.09 (0.04) 0.04 0.66
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS (0.18) 0.73 0.54 0.67 1.28
-------- -------- -------- -------- --------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.68) (0.61) (0.59) (0.63) (0.63)
Capital gains (0.40) -- -- -- --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (1.08) (0.61) (0.59) (0.63) (0.63)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 8.35 $ 9.61 $ 9.49 $ 9.54 $ 9.50
======== ======== ======== ======== ========
Total investment return* (1.97)% 7.92% 5.97% 7.44% 14.95%
Net assets at end of period
(000's omitted) $ 23,190 $ 49,296 $108,367 $ 97,085 $101,429
RATIOS
Expenses to average daily net
assets 0.50% 0.50% 0.50% 0.50% 0.50%
Net investment income to
average daily net assets 7.05% 6.24% 6.19% 6.75% 6.76%
Portfolio turnover rate
(excluding short-term
securities) 162.1% 333.3% 511.0% 323.0% 358.8%
</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.
**NET INVESTMENT INCOME PER SHARE IS CALCULATED USING THE ENDING BALANCE PRIOR
TO CONSIDERATION OF ADJUSTMENTS FOR PERMANENT BOOK AND TAX DIFFERENCES.
15
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
[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 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
16
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
[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.
The Fund may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Fund accrues such taxes as applicable.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $47,047
and accumulated net realized losses have been increased by $47,047.
For federal income tax purposes, the Fund has a capital loss carryover of
approximately $2,169,950, at November 30, 1999, which, if not offset by
subsequent capital gains, will expire in 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 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.
17
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
[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.
[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
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 year ended November 30, 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 33,245,630 29,979,894
Sales 49,517,009 34,661,285
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of November 30, 1999.
The market value of securities deposited to cover initial margin requirements
for the open positions at November 30, 1999 was $137,121. The unrealized
appreciation on these contracts is included in unrealized appreciation on
futures contracts.
FUTURES
<TABLE>
<CAPTION>
Number Unrealized
of Market Appreciation
Type Contracts Expiration Month Position Value (Depreciation)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note Five Year 5 December 1999 Long $536,797 $ (506)
U.S. Treasury Note Ten Year 5 December 1999 Long $546,250 $4,181
</TABLE>
18
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1999
[6] FOREIGN CURRENCY COMMITMENT
At November 30, 1999, the Fund had entered into a foreign currency exchange
contract. The unrealized appreciation on this contract at November 30, 1999 is
included in unrealized appreciation on other assets and liabilities denominated
in foreign currency. The terms of the open contract are as follows:
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Appreciation
- --------------------------------------------------------------------------------
12/3/99 430,000 European Monetary Unit 439,890 U.S. Dollar $6,865
19
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI INSTITUTIONAL BOND FUND
The Board of Directors and Shareholders
IAI Investment Funds I, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Institutional Bond Fund (a portfolio within IAI
Investment Funds I, Inc.) as of November 30, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and the financial highlights are the responsibility of the fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Institutional Bond Fund as of November 30, 1999, and the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
January 25, 2000
20
- --------------------------------------------------------------------------------
<PAGE>
FEDERAL TAX INFORMATION
IAI INSTITUTIONAL BOND FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for informational purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
TAX INFORMATION
- --------------------------------------------------------------------------------
Long-Term
Payable Date Ordinary Income (A) Capital Gain
- --------------------------------------------------------------------------------
December 1998 $ 0.4845 $ 0.0155
January 1999 0.0450 --
February 1999 0.0500 --
March 1999 0.0550 --
April 1999 0.0550 --
May 1999 0.0500 --
June 1999 0.0571 --
July 1999 0.0550 --
August 1999 0.0540 --
September 1999 0.0534 --
October 1999 0.0488 --
November 1999 0.0610 --
- --------------------------------------------------------------------------------
$ 1.0688 $ 0.0155
================================================================================
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME. 2.46% OF ORDINARY INCOME DISTRIBUTION QUALIFIES
FOR DEDUCTION BY CORPORATIONS.
21
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22
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<PAGE>
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23
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<PAGE>
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24
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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
DISTRIBUTOR
Rafferty Capital Markets, Inc.
1311 Mamaroneck Avenue
White Plains, NY 10605
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
David Koehler
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
