<PAGE>
FIXED INCOME FUND
SEMI-ANNUAL REPORT
IAI Institutional Bond Fund
MAY 31, 1995
(unaudited)
[IAI LOGO]
Mutual Funds
<PAGE>
[WORLD MAP ART]
<PAGE>
TABLE OF CONTENTS
-----------------
IAI Institutional Bond Fund
Semi-Annual Report
May 31, 1995
(unaudited)
<TABLE>
<S> <C> <C>
Chairman's Letter....................................2
Fund Manager's Review................................5
Fund Portfolio.......................................7
Notes to Fund Portfolio.............................12
Statement of Assets and Liabilities.................13
Statement of Operations.............................14
Statements of Changes in Net Assets.................15
Financial Highlights................................16
Notes to Financial Statements.......................17
IAI Mutual Fund Family..............................21
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors............................Inside Back Cover
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Institutional Bond Fund
[PHOTO OF NOEL P. RAHN]
NOEL P. RAHN,
Chairman
Since the early 1980s, there have been some major secular trends that have made
investment planning more important, not only for the wealthy but also for the
broad middle class. Increasingly, American families are being squeezed between
saving for their own retirement, their children's education, and for their aging
parents. And, the country is in the middle of a historic transfer of wealth
between generations which also requires careful planning.
For the last few years, three primary secular trends have been driving economic
growth -- demographics, globalization, and the de-leveraging of the economy. The
aging of America has led to a shift from consumption to savings. Globalization
has resulted in more international trade and foreign investment. And, companies
and consumers have been paying off debt incurred in the 1980s.
Until recently, all of these mega-trends have overshadowed the traditional
economic credit cycle and favored financial assets. As a result, the Federal
Reserve Board (the Fed) was able to add liquidity and lower short-term interest
rates far more than most investors expected. However, near the end of 1994,
these conditions began to recede and a more familiar cyclical pattern emerged.
Now, the traditional cyclical forces of a mature economic recovery have returned
to dominate business activity. The real goods part of the economy remains
strong as measured by industrial production which is running near full capacity.
Labor markets are strengthening and there are signs of rising unit labor costs
and the specter of higher inflation.
Monetary policy is restrictive, and historically once the Fed has started
tightening, they usually do not stop until the end of the economic cycle. Total
reserve growth has declined indicating negative prospects for interest rates,
both long- and short-term. Ultimately, the economy could slip into a recession
as it typically has at the end of past economic cycles, or it could muddle
through a growth recession with positive, but very low growth rates.
While there is short-term risk in the bond market, the major secular trends
favor bonds over the long run. Even after the bond market rally during the first
half of this year, bond yields remain attractive. Compared with the current rate
of inflation, bonds still provide relatively high real rates of return. Compared
with equities, bond yields are much higher than stock yields which are at
historic lows.
Average Annual Returns+
Through 5/31/95
<TABLE>
<S> <C> <C> <C>
Since Inception
Six Months* 1 year 11/01/93
================================================================================
IAI Institutional Bond Fund 10.55% 10.36% 2.65%
................................................................................
Salomon Broad Investment Grade Bond Index 11.57% 10.73% 4.53%
</TABLE>
+ Past performance is not predictive of future performance
. Not annualized
2
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Institutional Bond Fund
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
The myth of an economic soft landing is an attractive idea--growth strong enough
to create new jobs and keep the economy moving forward, and yet slow enough to
prevent inflationary pressures from building. Unfortunately, business cycles
have not been eliminated, and even when a soft landing seems imminent, it is
usually just a temporary phase before moving in one of two different directions.
When the economy pauses, as it has recently in what looks like a soft landing,
it is usually just a temporary phase of continuing growth or slowdown. The key
to which way the economy goes after the pause lies with interest rates. Rising
interest rates lead to slower economic growth, and a recession can follow. On
the other hand, when interest rates fall, as they have recently, there is still
plenty of financial capacity for the economy to grow. Generally, this type of
pause is followed by a reacceleration of economic growth. We expect the
reacceleration to occur in the second half of 1995.
While there are several factors influencing whether, and how much, interest
rates rise or fall, two are key--growth and inflation.
While we anticipate an acceleration of growth, we are not looking for a robust
burst of economic activity. The fourth quarter of 1994 was much stronger than
the long-term trend, and typically when that happens, succeeding quarters are
slower. First quarter 1995 real GDP growth was only 2.7%, and the second quarter
is likely to be weaker. Looking at the second half of the year, we anticipate a
recovery to about 3% growth in real GDP. With this increase in growth, we expect
rising credit demands, and upward pressure on interest rates.
Inflationary pressures will also increase in the second half of 1995. Price
increases have entered the economic pipeline at the producers' end, but have not
yet flowed into the retail market. Consumers are very price conscious and
businesses have cut costs to compete. However, at some point they will not be
able to cut further, and they will be forced to pass along their higher costs.
The year-over-year increase in the Consumer Price Index has already established
a clear up trend, rising by 3.1% over the last 12 months. We anticipate as much
as a 3.5%-4% increase in inflation on consumer prices which is higher than the
consensus expectation of approximately 3%.
In addition to growth and inflation, several other factors earlier this year
will influence interest rates in the months ahead. The moves in the U.S.
Congress to cut expenditures and balance the budget are gathering momentum, and
that has helped the U.S. bond market. However, the failure
VALUE OF $2,000,000 INVESTMENT
11/01/93 3/94 11/94 5/31/95
- --------------------------------------------------------------------------------
IAI INSTITUTIONAL BOND FUND $2,000,000 $2,084,100
(Inception 11/01/93)
SALOMON BROAD
INVESTMENT GRADE BOND INDEX $1,750,000 $2,145,448
3
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Institutional Bond Fund
of the balanced budget amendment sparked a substantial decline in the value of
the U.S. dollar. Ironically, this decline helped the U.S. bond market.
As the dollar declined, compared with major currencies, foreign central banks
became large buyers of U.S. bonds in their dollar-support effort which helped
fuel the recent rally in the bond market. However, foreign governments are not
economic buyers, and if the dollar stabilizes or strengthens, they could become
large sellers which could adversely impact U.S. bond prices. Furthermore, cash
flows into bond mutual funds have been a negative for bonds indicating
continuing weak demand from individual investors.
Both bonds and stocks have recently been appreciating together which is very
unusual for this latter stage of the cycle. This kind of market behavior is more
typical of the period immediately following a recession, when the Federal
Reserve Board (the Fed) is lowering interest rates and profit growth is
accelerating. The stock market, like the bond market, is also overextended, and
there is a cyclical risk of a relatively strong pullback which could be
triggered by the fear of decelerating earnings.
The larger economic picture is still very positive for financial assets and
should continue over the long term. However, economic cycles still dominate
financial markets, and the current cycle has not yet ended.
We do not anticipate a recession this year. Typically, rates rise into a
recession, and they have been declining during the first half of the year. Those
lower rates will fuel a new burst of economic activity and higher consumer
prices, both of which will put upward pressure on interest rates.
Thus, we are cautious on both bonds and stocks for the second half of this year.
The equity market appears to be more overextended than the bond market, although
both are running well above their average total return trends. We believe the
high rates of return earned in the first half are not sustainable for the full
year.
The Fed has been holding short-term rates steady; however, higher growth and
inflation will begin to push market interest rates up. We believe the Fed is
falling behind the trend toward higher prices, and will be forced to raise
interest rates again as the inflation rate increases later this year.
Strategically, we would remain cautious now, and average in new investments on
significant pullbacks. The conservative investment virtues of patience and
discipline are those most likely to be rewarded during the remainder of the
year.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on the Funds' 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.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
4
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Institutional Bond Fund
IAI Institutional Bond Fund
Fund Objective
The IAI Institutional Bond Fund's objective is to provide a high level of
current income consistent with capital preservation. This objective is pursued
by investing in a diversified portfolio of high quality bonds. The Fund invests
primarily in investment-grade bonds and other debt securities of similar high
quality. The Fund invests in a variety of maturities and sectors which are
varied depending on relative values in the marketplace at a given point in time.
Fund Positioning for
the Past Six Months
Since last November, interest rates have declined and bond prices have
appreciated. The total return for the IAI Institutional Bond Fund has been
10.55% over the past six months.
There have been four primary factors driving the bond market higher. First,
there are numerous signs that economic growth has slowed from above to below the
average long-term trend rate of approximately 3%. Slower growth favors bonds
because it reduces the likelihood of rising interest rates. Second, inflation
has remained relatively stable below a 3% level. This also favors bonds because
lower inflation helps preserve the purchasing power of fixed-income assets. As
these factors have helped push bond prices up, trend-following investors have
become buyers and provided additional support to the market. And finally,
foreign central banks have become major buyers of U.S. debt which has also
fueled demand and raised bond prices.
Strategically, our view remains that we are in the latter stages of the credit
cycle which has historically been a risky phase for fixed income investments.
Thus, the IAI Institutional Bond Fund has been conservatively positioned
relative to the broad market. The effective duration of the Fund is currently at
3.65 years compared with 4.64 years for the Salomon Broad Investment Grade Bond
Index. ("SBIGB Index").
With our shorter duration, we have emphasized market sector strategies to invest
for better relative value and higher yield. This has enabled the Fund to earn
near market returns in a rising market, when its shorter duration would
otherwise cause it to underperform more significantly.
The two best contributors to the Fund's performance in the past six months have
been high yield corporate bonds which have comprised 4% of the portfolio and
foreign bonds which have comprised 11%. Most of the currency risk has been
hedged out of the foreign bond holdings and our currency risk is now
approximately 4%.
We continue to emphasize asset-backed securities to increase yield on our
short-term holdings. The Fund is currently overweighted in higher yielding
asset-backed, foreign, and high-yield corporate bonds as compared with the SBIGB
Index, and underweighted in Treasury bonds and mortgage pass-throughs. Fund
credit quality is very high with more than 85% of the holdings in the portfolio
rated AAA or better.
Fund Positioning Going Forward
None of the four forces which have driven bond prices higher this year are
sustainable. We expect the economy to reaccelerate in the second half of the
year, in large part due to the lower interest rates experienced in the first
half. We expect inflation to increase due to faster economic growth and high
levels of capacity utilization. Higher inflation has already impacted raw
materials and we expect more of these increases will be passed on to consumers.
With regard to investor demand for bonds, if the U.S. dollar stabilizes or
strengthens, foreign central banks will reduce their purchases and perhaps
become net sellers of U.S. securities. This would put pressure on bond prices
which would only be exacerbated by continuing negative cash flows from bond
mutual funds and selling by momentum investors in a declining market.
The IAI Institutional Bond Fund remains conservatively positioned with a
shorter-than-market duration which will help the Fund outperform the broad
market if interest rates rise, as we expect they will. We are maintaining modest
cash reserves to capitalize on new opportunities as rates move higher.
[PHOTO OF TIMOTHY A. PALMER]
TIMOTHY A. PALMER,
CFA
IAI Institutional Bond
Fund Manager
"The Fund now reflects our more cautious view of the market."
5
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Institutional Bond Fund
CREDIT RATING
% of Portfolio of 5/31/95
U.S.
Government.......45%
AAA..............33%
AA................5%
A.................9%
BBB...............4%
Non-Investment
Grade.............4%
SECTORS
% of Portfolio of 5/31/95
Preferred Stock................................3%
Corporate.....................................20%
U.S. Government & Government Agency...........17%
U.S. Government Agency Mortgage-Backed........17%
Asset-Backed..................................15%
Foreign Denominated...........................11%
Short-Term.....................................9%
Note to Chairman's Letter
and Fund Manager's Review
Performance data for the IAI Institutional 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.
EFFECTIVE MATURITY
% of Portfolio of 5/31/95
Years
- ----------------------------------------
0-5 5-10 10-20 20+
32% 44% 13% 11%
6
<PAGE>
FUND PORTFOLIO
--------------
IAI Institutional Bond Fund
May 31, 1995
(percentage figures indicate percentage of total new assets)
(unaudited)
Preferred Stock - 2.9%
<TABLE>
<CAPTION>
Market
Rate Quantity Value(a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non Convertible - 2.9%
Grand Metro Delaware 9.42% 102,180 $ 2,784,405
==============================================================================================
TOTAL INVESTMENTS IN PREFERRED STOCK
(Cost: $2,755,795) ................................................................$ 2,784,405
==============================================================================================
Corporate Bonds - 21.2%
Principal Market
Rate Maturity Amount Value(a)
- ----------------------------------------------------------------------------------------------
Finance/Financial Services - 11.2%
ABN-AMRO Bank 7.13% 10/15/93 $2,700,000 $ 2,470,500
Chase Manhattan 8.00% 05/01/05 3,750,000 3,788,550
GE Capital 5.99% (f) 07/21/97 1,000,000 998,995
Nationwide (g) 9.88% 02/15/25 2,000,000 2,212,340
Westinghouse Credit 8.88% 06/14/14 1,000,000 1,097,500
-----------
10,567,885
- ----------------------------------------------------------------------------------------------
Industrial - 7.3%
Cablevision 10.75% 01/30/02 1,125,000 1,226,250
Coca Cola Enterprises (zero-coupon bond) 7.54% (c) 06/20/20 (b) 16,800,000 2,721,600
General Motors 8.80% 03/01/21 115,000 130,698
Gulf Canada Resources (Yankee) 9.25% 01/15/04 1,000,000 990,000
RJR Nabisco 7.63% 09/15/03 1,000,000 960,000
Triton Energy (zero-coupon bond) 10.44% (c) 11/01/97 600,000 489,000
Triton Energy (step bond) 9.94% (c) 12/15/00 500,000 440,000
-----------
6,957,548
- ----------------------------------------------------------------------------------------------
Utilities - 2.7%
Commonwealth Edison 7.50% 07/01/13 1,250,000 1,214,775
Long Island Lighting 7.85% 05/15/99 1,350,000 1,380,591
-----------
2,595,366
==============================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(Cost: $19,281,438) ...............................................................$20,120,799
==============================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio
7
<PAGE>
FUND PORTFOLIO
--------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
<TABLE>
<CAPTION>
U.S. Government & Government Agency Obligations - 17.9%
Principal Market
Rate Maturity Amount Value(a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Obligations - 12.1%
U.S. Treasury Notes 6.13% 07/13/96 $1,500,000 $1,503,990
8.75% 10/15/97 2,250,000 2,389,208
7.88% 04/15/98 2,400,000 2,520,384
5.13% 11/30/98 2,520,000 2,451,103
U.S. Treasury Bonds 10.75% 08/15/05 250,000 330,665
9.25% 02/15/16 1,800,000 2,293,038
-----------
11,488,388
- ---------------------------------------------------------------------------------------------------
Government Agency Obligations - 5.8%
Financing Corporation STRIPS (zero-coupon bond) 7.66% (c) 04/06/03 2,000,000 1,195,160
Resolution Funding Corporation 8.13% 10/15/19 3,750,000 4,263,863
-----------
5,459,023
===================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT &
GOVERNMENT AGENCY OBLIGATIONS
(Cost: $16,155,494) ....................................................................$16,947,411
===================================================================================================
U.S. Government Agency Mortgage-Backed Securities - 26.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 6.3%
7.50% 06/01/00 (b) $3,250,000 $3,311,945
10.50% 11/01/00 1,933,437 2,031,907
10.50% 02/01/04 526,008 566,185
8.00% 08/01/08 80,646 82,266
-----------
5,992,303
- ---------------------------------------------------------------------------------------------------
Government National Mortgage Association - 20.0%
9.00% 07/15/09 297,001 318,854
9.00% 12/15/09 750,430 805,647
9.00% 06/01/17 (b) 2,680,000 2,880,893
9.00% 12/15/17 (b) 2,696,476 2,898,604
</TABLE>
See accompanying Notes to Fund Portfolio
8
<PAGE>
FUND PORTFOLIO
--------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
<TABLE>
<CAPTION>
U.S. Government Agency Mortgage-Backed Securities (Cont.)
Principal Market
Rate Maturity Amount Value(a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National
Mortgage Association (Cont.)
10.00% 12/15/20 $ 372,401 $ 403,590
6.50% 09/15/23 67,461 64,742
6.50% 10/15/23 516,018 495,214
6.50% 11/15/23 917,531 880,538
6.50% 12/15/23 2,438,036 2,339,736
6.50% 01/15/24 3,653,898 3,506,575
6.50% 02/15/24 716,932 688,026
6.50% 03/15/24 213,592 204,980
6.50% 04/15/24 1,475,247 1,415,766
7.00% 06/01/24 (b) 1,030,000 1,013,582
6.50% 06/15/24 1,043,398 1,001,329
-----------
18,918,076
===================================================================================================
Total Investments in U.S. Government
Agency Mortgage-Backed Securities
(Cost: $24,061,773) ....................................................................$24,910,379
- ---------------------------------------------------------------------------------------------------
Asset-Backed Securities - 16.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------
Auto Related - 3.5%
Banc One Auto Trust 95-A A3 6.85% 11/15/97 $ 380,000 $ 385,278
Ford Credit Grantor Trust 94-B A 7.30% 10/15/99 442,297 448,720
Ford Credit Grantor Trust 95-1 A2 6.35% 10/15/98 2,500,000 2,501,550
-----------
3,335,548
- ---------------------------------------------------------------------------------------------------
Equipment Related - 1.5%
Case Equipment Loan Trust 92-A A2 5.40% 06/15/98 22,924 23,603
Case Equipment Loan Trust 94-C A1 7.60% 12/15/97 823,938 840,343
Case Equipment Loan Trust 95-A A 7.30% 03/15/02 507,702 517,136
-----------
1,381,082
- ---------------------------------------------------------------------------------------------------
Credit Card Related - 11.3%
Chase Manhattan Credit Card Master Trust 91-2 A 7.65% 11/15/98 483,333 485,146
First Chicago Master Trust II 94-L A 7.15% 04/15/01 630,000 647,703
</TABLE>
See accompanying Notes to Fund Portfolio
9
<PAGE>
FUND PORTFOLIO
--------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Asset-Backed Securities (Continued)
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Credit Card Related (continued)
First Chicago Master Trust II 95-N A 6.29% 12/15/00 $ 1,000,000 $ 1,001,410
First Deposit Master Trust 94-1 A 6.90% 08/15/01 160,000 162,354
Nationsbank Credit Card Master Trust 93-1 A 4.75% 09/15/98 3,130,000 3,068,370
Private Label Credit Card Master Trust II 94-2 A 7.80% 09/20/03 1,170,000 1,221,901
Sears Credit Account Master Trust 95-3 A 7.00% 10/15/04 4,000,000 4,107,080
-----------
10,693,964
===================================================================================================
Total Investments in Asset-Backed Securities
(Cost: $15,133,899) ....................................................................$15,410,594
===================================================================================================
Foreign Denominated Bonds -- 11.3%
Principal Market
Rate Maturity Amount (e) Value (a)
- ---------------------------------------------------------------------------------------------------
Government Bonds - 11.3%
German Government (German mark) 7.50% 10/20/97 4,700,000 $ 3,501,732
8.50% 09/20/96 1,200,000 889,561
Japanese Government (Japanese yen) 4.20% 09/20/04 485,000,000 6,304,253
-----------
10,695,546
===================================================================================================
Total Investments in Foreign Denominated Bonds
(Cost: $9,573,900) .....................................................................$10,695,546
===================================================================================================
Total Investments in Long-Term Securities
(Cost: $86,962,299) ....................................................................$90,869,134
===================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio
10
<PAGE>
FUND PORTFOLIO
--------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 9.5%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
U. S. Government and Government Agency Securities - 9.5%
U. S. Treasury Bills 6.03% (d) 07/13/95 $2,000,000 $ 1,987,096
6.45% (d) 11/16/95 2,700,000 2,629,819
6.75% 01/11/96 1,700,000 1,641,399
Federal Home Loan Bank (discount note) 6.10% 06/01/95 2,700,000 2,700,000
-----------
8,958,314
===================================================================================================
Total Investments in Short-Term Securities
(Cost: $8,943,402) ....................................................................$ 8,958,314
===================================================================================================
Total Investments in Securities
(Cost: $95,905,701) (h) ...............................................................$99,827,448
===================================================================================================
Other Assets & Liabilities (Net) - (5.4%)
.....................................................................................$(5,149,424)
===================================================================================================
Total Net Assets
.....................................................................................$94,678,024
===================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio
11
<PAGE>
NOTES TO FUND PORTFOLIO
-----------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
Notes to Fund Portfolio
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At May 31, 1995, the total cost of securities
purchased on a when-issued basis was $12,631,171.
(c)
Interest rate shown represents yield to maturity at date of purchase.
(d)
Security is pledged to cover initial margin on open futures contracts (see Note
6 to the financial statements).
(e)
Foreign security market values are stated in U.S. dollars. Principal amounts are
denominated in the foreign currency indicated parenthetically.
(f)
Interest rate varies to reflect current market conditions. Rate shown is the
effective rate on May 31, 1995.
(g)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1993. These issues
may only be sold to other qualified institutional buyers, and are considered
liquid under guidelines established by the Board of Directors.
(h)
At May 31, 1995, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
<TABLE>
<S> <C>
Cost for federal income tax purposes.... $95,905,895
===========
Gross unrealized appreciation........... $ 3,929,747
Gross unrealized depreciation........... (8,194)
-----------
Net unrealized appreciation............. $ 3,921,553
===========
</TABLE>
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Investments in securities, at market
(Cost: $95,905,701) (see Fund Portfolio) $ 99,827,448
Cash denominated in foreign currency (cost: $138,812) 34,839
Accrued interest receivable 1,006,402
Receivable for investment securities sold 6,677,902
Receivable for foreign currency contracts held, at value (Note 5) 7,962,906
Other 99,137
------------
Total assets 115,608,634
============
Liabilities
Disbursements in excess of cash on demand deposit 90,406
Accrued investment advisory fee 41,376
Variation margin payable 40,968
Payable for investment securities purchased 12,631,171
Payable for foreign currency contracts held, at value (Note 5) 8,109,334
Other 17,355
------------
Total liabilities 20,930,610
------------
Net assets applicable to outstanding capital stock $ 94,678,024
============
Represented by:
Capital stock $ 100,308
Additional paid-in capital 94,159,621
Undistributed net investment income 290,495
Accumulated net realized losses on investments (2,627,378)
Unrealized appreciation (depreciation) on:
Investment securities $ 2,995,383
Other assets and liabilities denominated in foreign currency (240,405)
------------
2,754,978
------------
Total--representing net assets applicable to outstanding capital stock $ 94,678,024
============
Shares of capital stock outstanding; authorized 10 billion shares of $0.01 par value stock 10,030,801
------------
Net asset value per share of outstanding capital stock $ 9.44
============
</TABLE>
See accompanying Notes to Financial Statements
13
<PAGE>
STATEMENT OF OPERATIONS
-----------------------
IAI Institutional Bond Fund
Six Months Ended May 31, 1995
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Net Investment Income:
Investment income $3,095,364
Less: Investment advisory fee (211,410)
----------
Net investment income 2,883,954
----------
Net Realized and Unrealized Gains (Losses):
Net realized gains (losses) on:
Investment securities $1,107,226
Foreign currency transactions 198,897
Futures contracts (794,908)
Written option contracts (10,344)
----------
500,871
Net change in unrealized appreciation (depreciation) on:
Investment securities $6,334,464
Foreign currency transactions (192,914)
Futures contracts (927,175)
----------
5,214,375
----------
Net gain on investments and foreign currency 5,715,246
----------
Net increase in net assets resulting from operations $8,599,200
==========
</TABLE>
See accompanying Notes to Financial Statements
14
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI Institutional Bond Fund
<TABLE>
<CAPTION>
Six Months Ended Period from April 1, 1994
May 31, 1995 to November 30, 1994
- -----------------------------------------------------------------------------------------------------------------------
Operations: (unaudited)
<S> <C> <C>
Net investment income $ 2,883,954 $ 3,111,944
Net realized gains (losses) 500,871 (2,526,349)
Net change in unrealized appreciation or depreciation 5,214,375 (962,159)
----------------------------------
Net increase (decrease) in net assets resulting from operations 8,599,200 (376,564)
----------------------------------
Distributions to Shareholders from:
Net investment income (2,967,812) (3,053,720)
----------------------------------
Total distributions (2,967,812) (3,053,720)
----------------------------------
Capital Share Transactions:
Net proceeds from sale of 1,798,120 and 7,639,517 shares 16,234,110 69,983,495
Net asset value of 326,491 and 336,579 shares issued to shareholders
in reinvestment of distributions 2,949,960 3,040,478
Cost of 424,294 and 3,009,622 shares redeemed (3,861,077) (27,348,332)
----------------------------------
Increase in net assets from capital share transactions 15,322,993 45,675,641
----------------------------------
Total increase in net assets 20,954,381 42,245,357
Net assets at beginning of period 73,723,643 31,478,286
----------------------------------
Net assets at end of period $94,678,024 $ 73,723,643
(including undistributed net investment income ==================================
of $290,495 and $374,353)
</TABLE>
See accompanying Notes to Financial Statements
15
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Institutional Bond Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
Period from Period From
Six Months Ended April 1, 1994+ November 1, 1993***
May 31, 1995 to November 30, 1994 to March 31, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value: (unaudited)
Beginning of period $ 8.85 $ 9.36 $ 10.00
---------------------------------------------------------------------
Operations:
Net investment income .31 .38 .22
Net realized and unrealized losses .60 (.51) (.65)
---------------------------------------------------------------------
Total from operations .91 (.13) (.43)
---------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.32) (.38) (.21)
---------------------------------------------------------------------
Total distributions (.32) (.38) (.21)
---------------------------------------------------------------------
Net Asset Value:
End of period $ 9.44 $ 8.85 $ 9.36
=====================================================================
Total investment return* 10.55% (1.44%) (4.35%)
Net assets at end of period (000's omitted) $94,678 $73,724 $31,478
Ratios:
Expenses to average daily net assets** 0.50% 0.50% 0.50%
Net investment income to average
daily net assets** 6.97% 6.42% 5.84%
Portfolio turnover rate
(excluding short-term securities) 186.4% 235.1% 127.1%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized
*** Commencement of operations
+ Reflects year-end change from March 31 to November 30.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
[1] Summary of Significant Accounting Policies
IAI Investment Funds I, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. The
IAI Institutional Bond Fund, a separate portfolio of IAI Investment Funds I,
Inc., commenced operations on November 1, 1993. This report covers only the IAI
Institutional Bond Fund (the Fund).
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the IAI Institutional Bond Fund from March 31 to November 30.
Accordingly, these financial statements include the eight-month period from
April 1, 1994 to November 30, 1994.
Significant accounting policies followed by the Fund are summarized below:
Security Valuation
The values of debt securities are determined using pricing services or prices
quoted by independent brokers. Short-term securities with a maturity of 60 days
or less from the date of purchase are valued at amortized cost. Short-term
securities with a maturity greater than 60 days from the date of purchase 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 can take place 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 with its custodian,
assets with a market value equal to the amount of its purchase commitments.
The Fund may enter into transactions to sell its purchase commitments to third
parties at the current market values and concurrently acquire other purchase
commitments for similar securities at later dates, commonly referred to as
"dollar-rolls." As an inducement for the fund to "rollover" its purchase
commitments, the Fund receives negotiated fees.
Foreign Currency
Translations and Foreign
Currency Contracts
The Fund invests 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. Exchange gains (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 foreign currency exchange contracts for operational
purposes and to protect against adverse exchange rate fluctuation. 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.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
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. These investments involve
risks caused by an imperfect correlation between movements in the price of the
underlying securities and interest rates. Risks may also arise if there is an
illiquid secondary market for the instruments, or due to the inability of
counterparties to perform. Futures contracts are valued at the settlement price
of the exchange on which they are traded. Options traded on an exchange are
valued using the last sale price. Options traded over-the-counter are valued
using dealer-supplied valuations.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities, 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 as unrealized gains and 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.
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
of its 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 differ for financial statement and
tax purposes primarily because of recognition of certain foreign currency gains
and losses as ordinary income and the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes.
For federal income tax purposes, the Fund has a capital loss carryover of
approximately $3,083,000 at November 30, 1995 which, if not offset by subsequent
capital gains, will expire in 2002. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryover is offset or expires.
Security Transactions and Investment Income
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Interest income is recorded on the accrual basis. 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.
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
[1] Summary of Significant Accounting Policies (Cont.)
Distributions to Shareholders
Distributions to shareholders are recorded on the Ex-date. Distributions from
net investment income are made monthly. Capital gains, if any, are primarily
distributed as of the end of the calendar year. Additional capital gains
distributions as needed to comply with federal tax regulations are distributed
during the year.
[2] Commitments and Contingencies
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 obligations as a
policyholder, the Fund has made payments to the Company which have been
capitalized. Also, the Fund is committed to make future capital contributions,
if requested by the Company.
The Fund has available a $15,000,000 line of credit with a bank at prime
interest rates. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. Advances under the line of credit totalled
$90,000 at May 31, 1995, which is included in "Disbursements in excess of cash
on demand deposit" in the Statements of Assets and Liabilities.
[3] Fees and Expenses
Under the terms of an investment advisory and administrative services agreement,
the Fund pays Investment Advisers, Inc. (Advisers) a monthly management fee
computed at an annual rate of .50% of average daily net assets. The fee covers
all of the Fund's operating expenses other than interest, taxes, and other
extraordinary expenses.
[4] Purchases and Sales of Securities
For the period ended May 31, 1995, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$158,730,281 and $146,471,289, respectively.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Institutional Bond Fund
May 31, 1995
(unaudited)
[5] Foreign Currency Commitments
At May 31, 1995, the Fund had entered into a foreign currency exchange contract.
The unrealized depreciation of $146,428 for these contracts at May 31, 1995 is
included in unrealized appreciation (depreciation) on other assets and
liabilities denominated in foreign currency.
<TABLE>
<CAPTION>
======================================================================================================
Exchange Currency to U.S. $ Value as of Currency to U.S. $ Value as of
Date be Delivered May 31, 1995 be Received May 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
06/16/95 250,000,000 Japanese Yen $2,994,858 2,989,820 U.S. Dollars $2,898,820
06/19/95 250,000,000 Japanese Yen 2,989,980 2,890,173 U.S. Dollars 2,890,173
06/30/95 3,000,000 German Mark 2,124,496 2,173,913 U.S. Dollars 2,173,913
===============================================================
$8,109,334 $7,962,906
</TABLE>
[6] Open Futures Contracts
The financial futures contracts shown below were open as of May 31, 1995. The
market value of securities deposited to cover initial margin requirements for
the open positions at May 31, 1995 was $2,769,204.
<TABLE>
<CAPTION>
Futures
- ------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Loss
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. 10 Yr. Treasury Note 158 June 1995 Short $ 17,419,500 $846,829
U.S. 20 Yr. Treasury Bond 35 June 1995 Short $ 3,956,094 73,544
German 10 Year Note 18 Sept 1995 Long $ 3,066,047 5,991
================
$926,364
</TABLE>
20
<PAGE>
IAI MUTUAL FUND FAMILY
----------------------
To diversify your portfolio, please consider all of the mutual funds in our fund
family
<TABLE>
<CAPTION>
===================================================================================================================================
<S> <C> <C> <C>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Developing Capital Appreciation -- Equity securities of companies in developing
Countries Fund countries
- -----------------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation -- Common stocks of small to medium-sized
emerging growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation -- Common stocks of medium-sized growth
companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation -- Common stocks of Upper Midwest companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation -- Common stocks with potential for
above-average growth and appreciation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation -- Common stocks which are considered to be
undervalued
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are
expected to produce income
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + short-term instruments
Income]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
(formerly IAI Tax Free Fund) [Exempt from Federal and
Minnesota State Income Taxes]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average maturity
of 25 months, investing primarily in
investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted
maturity is less than 90 days, investing in
high quality, money market securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Distributor
IAI Securities, Inc.
Investment Adviser
and Manager
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Custodian
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Legal Counsel
Dorsey & Whitney, P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
Independent Auditors
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[IAI LOGO]
Mutual Funds
Investment Advisers, Inc.
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357
USA fax 612.376.2737
800.945.3863
612.376.2700
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> IAI Institutional Bond Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1994
<PERIOD-END> MAY-31-1995
<INVESTMENTS-AT-COST> 95,906
<INVESTMENTS-AT-VALUE> 99,827
<RECEIVABLES> 7,684
<ASSETS-OTHER> 134
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 107,645
<PAYABLE-FOR-SECURITIES> 12,631
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 336
<TOTAL-LIABILITIES> 12,967
<SENIOR-EQUITY> 100
<PAID-IN-CAPITAL-COMMON> 94,160
<SHARES-COMMON-STOCK> 10,031
<SHARES-COMMON-PRIOR> 8,330
<ACCUMULATED-NII-CURRENT> 290
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 2,627
<ACCUM-APPREC-OR-DEPREC> 2,755
<NET-ASSETS> 94,678
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,095
<OTHER-INCOME> 0
<EXPENSES-NET> 211
<NET-INVESTMENT-INCOME> 2,884
<REALIZED-GAINS-CURRENT> 501
<APPREC-INCREASE-CURRENT> 5,214
<NET-CHANGE-FROM-OPS> 8,599
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,968
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,798
<NUMBER-OF-SHARES-REDEEMED> 424
<SHARES-REINVESTED> 326
<NET-CHANGE-IN-ASSETS> 20,954
<ACCUMULATED-NII-PRIOR> 3,112
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 2,526
<GROSS-ADVISORY-FEES> 211
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 211
<AVERAGE-NET-ASSETS> 84,110
<PER-SHARE-NAV-BEGIN> 8.85
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .60
<PER-SHARE-DIVIDEND> .32
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.44
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
