ANNUAL REPORT
IAI BOND FUND
NOVEMBER 30, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BOND FUND
ANNUAL REPORT
NOVEMBER 30, 1999
Letter to Shareholders ...................... 2
Fund Managers' 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, 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.
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 the 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 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 Managers' 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 MANAGERS' REVIEW
IAI BOND FUND
IAI BOND FUND
FUND MANAGEMENT
LARRY R. HILL, CFA
STEPHEN C. COLEMAN, CFA
HOW HAS THE FUND PERFORMED?
The IAI Bond Fund declined (2.46)% 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. The corporate
and mortgage sectors outperformed Treasuries for the full 12 months. Select high
yield issues performed poorly. Concerns about potential inflationary pressures
moved interest rates higher in 10 of the last 12 months.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The U.S. economy continues to provide more of the same - strong growth with
modest inflation. However, fears of accelerating inflation and expectations of
Federal Reserve rate increases have the market on the defensive. We expect the
Federal Reserve to raise rates early in 2000 in an effort to slow economic
activity and reduce potential inflation. Given the lag between policy actions
and impact on the economy, we believe growth will continue in early 2000 and
inflation will remain modest. However, many of the positives that helped control
inflation in the late 1990's have been reduced or eliminated: commodity prices
have stopped falling, energy prices have risen dramatically, the dollar has
leveled off, foreign economies have started to grow more rapidly and labor
markets have tightened even further. These changes heighten the concern about
further inflation. During 1999, the Fed raised rates three times but to date
there has been little impact on final demand. Further rate increases will be
needed to slow the economy.
However, yields are attractive, assuming inflation rises only modestly from
current levels. Moreover, any sign of an economic slowdown could easily
eliminate the upward rate bias. 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. Overall interest
rate sensitivity is less than the market indices. Corporate and Agency issues
are overweighted while mortgage exposure is neutral.
4
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<PAGE>
FUND MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
LEHMAN BROTHERS
IAI BOND FUND AGGREGATE BOND INDEX
10,000 10,000
Dec-89 9,994 10,027
Jan-90 9,736 9,908
Feb-90 9,726 9,939
Mar-90 9,694 9,947
Apr-90 9,483 9,856
May-90 9,884 10,148
Jun-90 10,085 10,310
Jul-90 10,198 10,453
Aug-90 9,829 10,313
Sep-90 9,937 10,399
Oct-90 10,137 10,531
Nov-90 10,494 10,758
Dec-90 10,699 10,925
Jan-91 10,828 11,060
Feb-91 10,881 11,155
Mar-91 10,913 11,231
Apr-91 11,033 11,353
May-91 11,054 11,419
Jun-91 11,001 11,414
Jul-91 11,157 11,572
Aug-91 11,491 11,822
Sep-91 11,790 12,062
Oct-91 11,881 12,196
Nov-91 11,994 12,308
Dec-91 12,553 12,673
Jan-92 12,182 12,501
Feb-92 12,252 12,582
Mar-92 12,092 12,511
Apr-92 12,151 12,602
May-92 12,446 12,840
Jun-92 12,650 13,016
Jul-92 13,040 13,282
Aug-92 13,178 13,416
Sep-92 13,386 13,575
Oct-92 13,132 13,395
Nov-92 13,119 13,398
Dec-92 13,406 13,612
Jan-93 13,755 13,873
Feb-93 14,050 14,115
Mar-93 14,079 14,174
Apr-93 14,160 14,273
May-93 14,160 14,291
Jun-93 14,617 14,550
Jul-93 14,729 14,632
Aug-93 15,120 14,889
Sep-93 15,170 14,930
Oct-93 15,255 14,986
Nov-93 14,958 14,858
Dec-93 15,058 14,939
Jan-94 15,428 15,140
Feb-94 15,027 14,877
Mar-94 14,524 14,510
Apr-94 14,415 14,395
May-94 14,337 14,393
Jun-94 14,211 14,361
Jul-94 14,375 14,646
Aug-94 14,415 14,664
Sep-94 14,302 14,448
Oct-94 14,301 14,435
Nov-94 14,219 14,403
Dec-94 14,318 14,503
Jan-95 14,501 14,790
Feb-95 14,850 15,142
Mar-95 15,152 15,234
Apr-95 15,379 15,447
May-95 15,760 16,045
Jun-95 15,764 16,163
Jul-95 15,781 16,127
Aug-95 15,893 16,321
Sep-95 16,028 16,480
Oct-95 16,183 16,694
Nov-95 16,415 16,944
Dec-95 16,643 17,182
Jan-96 16,696 17,296
Feb-96 16,369 16,996
Mar-96 16,291 16,878
Apr-96 16,180 16,783
May-96 16,178 16,749
Jun-96 16,349 16,973
Jul-96 16,384 17,019
Aug-96 16,389 16,990
Sep-96 16,686 17,286
Oct-96 17,111 17,669
Nov-96 17,539 17,971
Dec-96 17,328 17,804
Jan-97 17,486 17,859
Feb-97 17,589 17,903
Mar-97 17,330 17,705
Apr-97 17,542 17,970
May-97 17,745 18,140
Jun-97 18,045 18,355
Jul-97 18,648 18,850
Aug-97 18,452 18,689
Sep-97 18,699 18,965
Oct-97 18,849 19,240
Nov-97 18,968 19,329
Dec-98 19,207 19,524
Jan-98 19,428 19,774
Feb-98 19,478 19,758
Mar-98 19,550 19,825
Apr-98 19,654 19,928
May-98 19,839 20,117
Jun-98 20,003 20,288
Jul-98 20,035 20,331
Aug-98 19,973 20,662
Sep-98 20,233 21,146
Oct-98 19,854 21,034
Nov-98 20,236 21,154
Dec-98 20,278 21,217
Jan-99 20,386 21,368
Feb-99 20,019 20,994
Mar-99 20,213 21,109
Apr-99 20,322 21,177
May-99 20,080 20,991
Jun-99 19,883 20,923
Jul-99 19,927 20,836
Aug-99 19,780 20,825
Sep-99 19,914 21,067
Oct-99 19,791 21,145
Nov-99 19,735 21,143
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/99
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI BOND FUND (2.46)% 6.78% 7.04%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (0.04)% 7.99% 7.78%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 11/30/99
[PIE CHART]
U.S. Government Agency Mortgage-Backed 43%
Short-Term 1%
Asset-Backed 8%
U.S. Government & Government Agency 1%
Corporate 44%
Foreign-Denominated 3%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/99
[BAR CHART]
Years
- -----
0-3 1%
3-5 16%
5-10 58%
10-20 18%
20+ 7%
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 11/30/99
U.S.
Government ......... 45%
Aaa ................ 7%
Aa ................. 4%
A ................ 12%
Baa ................ 16%
Non-Investment
Grade .............. 16%
5
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<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
CORPORATE BONDS - 44.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BROADCASTING - 2.5%
Radio Unica (STEP BOND) (g) 13.86% 08/01/06 $715,000 $ 466,537
- ------------------------------------------------------------------------------------------------------
FINANCIAL - 10.9%
Bear Stearns 6.15 03/02/04 115,000 110,486
Finova Capital 7.63 09/21/09 220,000 220,470
Goldman Sachs 7.35 10/01/09 190,000 189,240
HSBC Americas 6.63 03/01/09 265,000 250,318
Heller Financial (c) 7.38 11/01/09 115,000 113,732
Lehman Brothers 6.63 02/05/06 485,000 464,807
Nationsbank 6.13 07/15/04 215,000 208,245
Newcourt Credit Group (c) 6.88 02/16/05 215,000 212,630
Royal & Sun Alliance Insurance (YANKEE) (c) (d) 8.95 10/15/29 175,000 177,355
Toyota Motor Credit 5.63 11/13/03 140,000 133,953
----------
2,081,236
- ------------------------------------------------------------------------------------------------------
INDUSTRIAL - 22.8%
Biovail (c) 10.88 11/15/05 100,000 104,500
CMS Energy 8.38 07/01/03 250,000 245,992
Charles River Labs 13.50 10/01/09 75,000 77,250
Entex Information Services (c) (j) 12.50 08/01/06 950,000 369,313
Integrated Electrical Services (c) 9.38 02/01/09 75,000 73,313
J. Seagram & Sons 6.63 12/15/05 465,000 443,750
Laidlaw (YANKEE) (d) 7.65 05/15/06 310,000 289,514
Lockheed Martin 8.20 12/01/09 195,000 193,677
Mack-Cali Realty 7.25 03/15/09 185,000 172,724
NE Restaurant 10.75 07/15/08 250,000 226,250
Noble Drilling 7.50 03/15/19 260,000 251,941
Northwest Airlines 7.58 03/01/19 240,000 231,619
Owens Corning 7.00 03/15/09 240,000 209,977
Petro-Canada (YANKEE) (d) 7.00 11/15/28 420,000 375,035
Providian Capital I (c) 9.53 02/01/27 200,000 166,467
Province of Manitoba (YANKEE) (d) 6.75 03/01/03 145,000 144,771
Queen Sand Resources 12.50 07/01/08 250,000 147,500
Saks 7.25 12/01/04 250,000 237,483
Sonic Automotive Series B 11.00 08/01/08 125,000 122,188
Speedway Motorsports (c) 8.50 08/15/07 100,000 97,500
Styling Technology 10.88 07/01/08 75,000 48,750
Thermolase (c) 4.38 08/05/04 145,000 115,094
----------
4,344,608
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
6
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<PAGE>
FUND PORTFOLIO
IAI 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 - 5.4%
AT&T Capital Series F (MEDIUM-TERM NOTE) 7.50% 11/15/00 $375,000 $ 377,761
COVAD Comm Group (c) 12.50 02/15/09 225,000 231,750
Global Crossing (PIK PREFERRED) (f) 10.50 12/01/08 1,250(h) 124,844
Sprint Capital 6.90 05/01/19 235,000 217,697
Tritel PCS (c) 12.75 05/15/09 90,000 57,825
Voicestream Wire (c) 10.38 11/15/09 20,000 20,850
----------
1,030,727
- ----------------------------------------------------------------------------------------------
UTILITIES - 2.8%
Enron 7.38 05/15/19 280,000 265,489
NRG Energy 8.00 11/01/03 100,000 98,168
Southern Union 8.25 11/15/29 65,000 65,900
Williams Gas Pipeline (c) 7.38 11/15/06 115,000 113,792
----------
543,349
==============================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $9,473,279)................................................................. $8,466,457
==============================================================================================
</TABLE>
FOREIGN BONDS - 3.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN CORPORATE BOND - 1.8%
British Sky Broadcasting (c) 8.20% 07/15/09 $125,000 $ 118,849
Telecom Argent (c) 9.75 07/12/01 225,000 225,000
----------
343,849
- ----------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT - 1.4%
Bundesrepub. Deutschland (Eurodollars) 6.75 04/22/03 240,000(i) 258,811
==============================================================================================
TOTAL INVESTMENTS IN FOREIGN BONDS
(COST: $620,804)................................................................... $ 602,660
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
7
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<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
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 $110,000 $ 87,911
==============================================================================================
TOTAL INVESTMENT IN TAX-EXEMPT MUNICIPAL BOND
(COST: $85,624).................................................................... $ 87,911
==============================================================================================
</TABLE>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 0.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BOND - 0.4%
U.S. Treasury Bond 5.25% 02/15/29 $ 80,000 $ 67,850
- ----------------------------------------------------------------------------------------------
U.S. TREASURY STRIP - 0.5%
U.S. Treasury STRIP (zero coupon) 6.91(e) 11/15/18 350,000 100,537
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $178,281)................................................................... $ 168,387
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
8
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 43.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FREDDIE MAC - 1.7%
6.00% 01/15/28 $ 355,000 $ 326,286
- ----------------------------------------------------------------------------------------------
FREDDIE MAC GOLD - 11.1%
6.00 04/01/11 745,153 718,558
6.00 04/01/29 196,201 182,095
6.00 01/01/29 215,975 200,538
6.50 05/01/29 1,056,315 1,007,870
----------
2,109,061
- ----------------------------------------------------------------------------------------------
FANNIE MAE - 20.4%
6.00 10/01/28 247,604 229,671
6.50 05/01/13 687,027 672,244
6.50 11/01/28 882,352 841,754
6.50 03/01/29 297,238 283,562
7.00 05/01/28 225,391 220,448
7.00 08/01/28 614,720 601,082
7.00 09/01/29 519,004 507,254
7.50 04/01/28 378,470 377,586
9.00 06/01/17 152,554 160,301
----------
3,893,902
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 10.7%
7.00 08/15/28 306,047 298,822
7.00 12/15/23 178,025 175,008
7.00 01/15/08 114,934 115,309
7.50 12/15/27 798,456 797,048
8.00 12/15/23 492,005 501,504
9.00 11/15/17 148,984 157,324
----------
2,045,015
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $8,612,842)................................................................. $8,374,264
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
9
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
ASSET-BACKED SECURITIES - 7.9%
<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 $100,000 $ 100,563
- -------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGES - 3.0%
Morgan Stanley Capital I, 1998-XL1, Class A3 6.48 06/03/30 325,000 311,305
Morgan Stanley Capital I, 1998-HF2, Class A2 6.48 11/15/30 275,000 262,177
----------
573,482
- -------------------------------------------------------------------------------------------------------
HOME EQUITY - 4.4%
EQCC Home Equity Loan Trust, 1998-2, Class A6F 6.16 04/15/08 560,000 542,534
Residential Asset Securities, 1999-KS2, Class AI5 6.99 12/25/25 305,000 302,902
----------
845,436
=======================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $1,565,619).......................................................................... $1,519,481
=======================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $20,536,449)........................................................................ $19,219,160
=======================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 0.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount/Shares Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.2%
6.13% 04/20/00 $ 50,000(b) $ 48,972
- -------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 0.6%
Firstar Institutional Money Market Fund 5.41 114,117 114,117
=======================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $163,134)............................................................................ $ 163,089
=======================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $20,699,583)(k)..................................................................... $19,382,249
=======================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (1.6)%.................................................. $(299,735)
=======================================================================================================
TOTAL NET ASSETS........................................................................... $19,082,514
=======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO.
10
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI 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)
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 $2,197,970 (11.5% of net assets) at November 30, 1999.
(d)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(e)
Interest rate shown represents yield-to-maturity at date of purchase. This
security pays no coupon interest and the principal amount is paid at maturity.
(f)
The interest rate shown for Payment-in-Kind securities (PIK securities)
represents 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 the Adviser 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 .......................... $ 20,706,146
============
Gross unrealized appreciation ................................. $ 42,634
Gross unrealized depreciation ................................. $ (1,366,531)
------------
Net unrealized depreciation ................................... $ (1,323,897)
============
11
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BOND FUND
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at market (cost: $20,699,583) $ 19,382,249
Cash 22,152
Receivable for Fund shares sold 5,191
Accrued interest receivable 273,092
Variation margin receivable (Note 5) 1,718
Unrealized appreciation on foreign currency forward contract (Note 6) 4,151
Other 24,582
------------
TOTAL ASSETS 19,713,135
------------
LIABILITIES
Accrued management fee 13,251
Payable for Fund shares redeemed 617,370
------------
TOTAL LIABILITIES 630,621
------------
NET ASSETS $ 19,082,514
============
NET ASSETS REPRESENTED BY:
Paid in capital $ 22,579,092
Undistributed net investment income 43,308
Accumulated net realized losses on investments, futures
contracts, and foreign currency transactions (2,222,663)
Unrealized appreciation (depreciation) on:
Investment securities $ (1,317,334)
Futures contracts (Note 5) (3,631)
Other assets and liabilities denominated in foreign currency 3,742 (1,317,223)
------------ ------------
NET ASSETS $ 19,082,514
============
Shares of capital stock outstanding (authorized 10 billion
shares, $0.01 par value) 2,212,907
------------
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER SHARE $ 8.62
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI BOND FUND
YEAR ENDED NOVEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME:
Interest $ 2,322,189
Dividends 123,751
------------
TOTAL INCOME 2,445,940
------------
EXPENSES:
Management fees 343,615
Compensation of Directors 10,713
------------
TOTAL EXPENSES 354,328
Less fees reimbursed by Advisers (21,058)
------------
NET EXPENSES 333,270
------------
NET INVESTMENT INCOME 2,112,670
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (1,219,228)
Futures contracts (285,852)
Foreign currency transactions 36,822
------------
(1,468,258)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (1,297,956)
Futures contracts 23,513
Other assets and liabilities denominated in foreign currency 7,940
------------
(1,266,503)
------------
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY (2,734,761)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (622,091)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
- --------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND
<TABLE>
<CAPTION>
Year ended Year ended
November 30, 1999 November 30, 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 2,112,670 $ 3,469,387
Net realized gain (loss) (1,468,258) 1,120,153
Net change in unrealized appreciation or depreciation (1,266,503) (682,352)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS (622,091) 3,907,188
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,344,002) (3,563,967)
------------- -------------
TOTAL DISTRIBUTIONS (2,344,002) (3,563,967)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 579,096 and 2,928,073 shares 5,433,497 28,071,182
Net asset value of 243,398 and 357,698 shares issued in
reinvestment of distributions 2,224,422 3,415,929
Cost of 3,997,848 and 5,126,967 shares redeemed (36,967,999) (49,092,006)
------------- -------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (29,310,080) (17,604,895)
------------- -------------
TOTAL DECREASE IN NET ASSETS (32,276,173) (17,261,674)
NET ASSETS AT BEGINNING OF PERIOD 51,358,687 68,620,361
------------- -------------
NET ASSETS AT END OF PERIOD $ 19,082,514 $ 51,358,687
------------- -------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 43,308 $ 241,063
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
- --------------------------------------------------------------------------------
<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 November 30,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.53 $ 9.49 $ 9.32 $ 9.34 $ 8.65
------- ------- ------- ------- -------
OPERATIONS
Net investment income 0.61** 0.58 0.54 0.56 0.58
Net realized and unrealized
gains (losses) (0.83) 0.04 0.19 0.04 0.72
------- ------- ------- ------- -------
TOTAL FROM OPERATIONS (0.22) 0.62 0.73 0.60 1.30
------- ------- ------- ------- -------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.69) (0.58) (0.56) (0.62) (0.61)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS (0.69) (0.58) (0.56) (0.62) (0.61)
------- ------- ------- ------- -------
NET ASSET VALUE
End of period $ 8.62 $ 9.53 $ 9.49 $ 9.32 $ 9.34
======= ======= ======= ======= =======
Total investment return* (2.46)% 6.68% 8.15% 6.85% 15.46%
Net assets at end of period
(000s omitted) $19,083 $51,359 $68,620 $86,803 $77,526
RATIOS
Expenses to average net assets 1.07%*** 1.10% 1.10% 1.10% 1.09%
Net investment income to
average net assets 6.76% 5.85% 5.74% 6.20% 6.32%
Portfolio turnover rate
(excluding short-term
securities) 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.
**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, 2000. ABSENT THIS VOLUNTARY
LIMITATION THE RATIO OF EXPENSES TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.10%.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI 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 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
16
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
NOVEMBER 30, 1999
[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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $33,577
and accumulated net realized losses have been increased by $33,577.
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.
17
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI 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
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, 2000. 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 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 25,156,975 19,909,508
Sales 39,371,727 33,487,999
[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 $48,972. The unrealized
depreciation on these contracts is included in unrealized depreciation on
futures contracts.
FUTURES
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- --------------------------------------------------------------------------------
U.S. Treasury Bond 5 March 2000 Long $465,312 $ (3,631)
18
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND
NOVEMBER 30, 1999
[6] FOREIGN CURRENCY COMMITMENTS
At November 30, 1999, the Fund had entered into a foreign currency exchange
contract. The unrealized depreciation on this contract at November 30, 1999 is
included in unrealized depreciation 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
- --------------------------------------------------------------------------------
12/03/99 260,000 European Monetary Unit 265,980 U.S. Dollar $4,151
19
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI 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 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
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 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
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
December 1998 $ 0.0900
January 1999 0.0500
February 1999 0.0600
March 1999 0.0600
April 1999 0.0600
May 1999 0.0500
June 1999 0.0500
July 1999 0.0500
August 1999 0.0550
September 1999 0.0500
October 1999 0.0550
November 1999 0.0560
- --------------------------------------------------------------------------------
$ 0.6860
================================================================================
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME. 6.38% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY
FOR DEDUCTION BY CORPORATIONS.
21
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22
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<PAGE>
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23
- --------------------------------------------------------------------------------
<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
