<PAGE>
FIXED INCOME FUNDS
ANNUAL REPORT
IAI Bond Fund, IAI Government Fund,
IAI Minnesota Tax Free Fund
November 30, 1995
[LOGO]
Mutual Funds
<PAGE>
[PHOTO OF GLOBE]
<PAGE>
Table of Contents
-----------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
Annual Report
November 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter.......................................2
Bond Fund Manager's Review..............................4
Government Fund Manager's Review........................7
Minnesota Tax Free Fund Manager's Review...............10
Fund Portfolios
IAI Bond Fund.........................................13
IAI Government Fund...................................17
IAI Minnesota Tax Free Fund...........................20
Notes to Fund Portfolios...............................22
Statements of Assets and Liabilities...................24
Statements of Operations...............................26
Statements of Changes in Net Assets....................28
Financial Highlights
IAI Bond Fund.........................................30
IAI Government Fund...................................31
IAI Minnesota Tax Free Fund...........................32
Notes to Financial Statements..........................33
Independent Auditors' Report...........................39
Federal Tax Information................................40
IAI Mutual Fund Family.................................43
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors...............................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
A Great Time To Diversify
[PHOTO]
Noel P. Rahn,
Chairman
By just about any measure, the six months ended November 30, 1995 was one of the
best periods in my memory for U.S. stocks and bonds. The economy has been
behaving just right; not too fast to bring back inflation, and not too slow to
bring on a recession. In addition, American business is the most productive in
the world. It's a perfect recipe for continued success in the markets.
But just as the investment world was gloomy in 1994, let's not assume that
1995's performance is the norm either. Stocks and bonds can be volatile. That's
particularly important to remember when prices are high. One of the most
important investment principles is diversification--not putting all your eggs in
one basket.
By investing in mutual funds, you have already taken a step toward
diversification. A typical mutual fund invests in dozens of securities, a much
more diversified portfolio than you can generally achieve on your own. But
another way to diversify is to broaden your investment horizon into areas that
haven't done quite as well. One example: international funds.
Developed and developing markets throughout the world have not matched the U.S.
economy during the past year. As a result, their securities markets have lagged
the United States. Since international markets largely move independently of the
United States, an investment overseas is considered an excellent way to
diversify a portfolio. This is particularly true when our markets are nearing or
achieving all-time highs.
If investing internationally is not for you, then there are other ways to
diversify your portfolio. If you've got mutual funds that invest in just one
type of investment objective, then you might want to consider broadening your
investment horizon. Of course, whether you focus on growth, income or a blend of
the two depends on your time horizon. If you're investing for a retirement
that's 30 years down the road, then you can afford to take more risk than if you
need the income from those investments right away.
Regardless of the time frame, the U.S. markets will continue to be impacted by
the performance of the economy, the outlook for inflation, and the level of
interest rates. Over the next six months, the presidential primary season will
also play a role. All of these events are truly unpredictable and uncontrollable
by the average investor. That makes investing a continuing challenge, and
another reason to stay diversified.
2
<PAGE>
Chairman's Letter
-----------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
Economic Outlook
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Economic growth will be sluggish early in the year but a recession is unlikely.
Inflation will not be a threat in the first half. Federal Reserve policy is
reactive and will likely remain on its gradual, go-slow path. However, the Fed
has ample room to aggressively lower short-term rates if the economy
deteriorates rapidly. Politics and the President will play a role this year. The
inability to reach a budget agreement in Washington is a risk to the market.
However, economic fundamentals should remain favorable for the markets.
Please read the Fund Managers' Reviews which follow 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
3
<PAGE>
Fund Manager's Review
---------------------
IAI Bond Fund
IAI Bond Fund
[PHOTO]
Larry R. Hill, CFA
IAI Bond Fund Manager
"This was the
best bond market
in ten years."
Fund Objective
The IAI 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.
The Bond Market--the Best Since 1985
In 1995, intermediate and long-term interest rates fell sharply. As a result,
bond prices--which move inversely to interest rates--rose substantially. For the
year ended November 30, 1995, The Lehman Aggregate Bond Index was up 17.64%.
There were only two years in the past twenty when bonds did better. In 1982, the
market was up 32.6%. In 1985, it was up 22.1%. 1995 was the best bond market for
the past ten years.
For the year ended November 30, 1995, the IAI Bond Fund posted a total return of
15.46%. Although this return is quite strong, the Fund underperformed its
benchmark for one reason: the portfolio's effective duration was shorter than
the benchmark in the first half of the year. In a falling interest rate
environment, portfolios with a shorter duration do not appreciate as rapidly.
IAI's sector and issue strategies added value during the year, particularly our
corporate bond strategy where we emphasized lesser quality investment grade
issues. However, these strategies were not strong enough to offset the shorter
duration. Although a shorter duration portfolio is a more conservative strategy,
the Fund did not fully participate in the early phase of last year's rally.
Currently, the Fund is well diversified with about a quarter of the portfolio
invested in U.S. Treasuries. Another 23% of the portfolio is invested in
mortgage pass-through securities, 21% in investment-grade corporates, 9% in
Triple A-rated asset-backed securities, 8% in international bonds and 5% in
domestic high-yield bonds.
Since September 1995, we have maintained our mortgage-backed securities
allocation in a range between 24% and 35% of the portfolio. In addition, we
have reduced our holdings of current coupon mortgage-backed securities, which
are most likely to be refinanced as interest rates fall.
At the same time, we added more corporate bonds, particularly those with call
protection against falling interest rates. Since the economy continues to do
well, and corporations in general continue to improve their cash flow and
financial condition, we believe that corporate bonds throughout the credit
quality spectrum are
4
<PAGE>
Fund Manager's Review
---------------------
IAI Bond Fund
good investments. Indeed, bonds at the lower end of the quality spectrum offer
substantial yield advantage as well as the possibility of credit upgrading. Of
course, corporate bonds involve "event" risk, so care must be taken in their
selection.
Outlook
We believe that the bond market faces much uncertainty over the next several
months. Economic growth will be sluggish, but we don't expect the economy to go
into a recession. Indeed, the five year expansion could easily extend itself
through 1996, a presidential election year. However, investor sentiment is far
too optimistic, particularly over a budget accord in Washington and further rate
cuts by the Federal Reserve. Lack of progress on either front will disappoint
the market. Strategy in the portfolio continues to lean toward corporates with
an emphasis on single A, BAA and the better quality non-investment grade issues.
Such current holdings include Triton Energy, Gulf Canada Resources, and Columbia
HCA/Healthcare. Assuming that interest rates stay within a narrow trading range,
the bulk of the Fund's return should come from the extra yield offered by
corporate bonds, asset-backed bonds and mortgage-backed securities and from our
ability to take advantage of price opportunities in these sectors.
Because of the economy's potential strength, we remain neutrally positioned with
the duration of the Fund--keeping it in a range between 4-1/2 and 5-1/4 years.
With the 30-year U.S. Treasury bond yielding about 6%, we believe that it would
be a mistake to lock in such a low rate, when in our view, the potential clearly
exists for rates to go higher in the months ahead.
/s/ Larry R. Hill
Larry R. Hill, CFA
Fund Manager
5
<PAGE>
Fund Manager's Review
---------------------
IAI Bond Fund
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Bond Fund includes changes in share price and
reinvestment of dividends and capital gains. Past performance is not a guarantee
of future results. The Fund's investment return, yield and principal may
fluctuate, so that when redeemed, shares may be worth more or less than the
original cost. More complete information about the Fund, including charges and
expenses, is available in the prospectus. Please read the Fund's prospectus
carefully before investing. All indexes cited are unmanaged, and are either
trademarks, registered trademarks or copyrights of their respective sponsoring
companies.
Credit Rating
% of Portfolio as of 11/30/95
U.S.
Government.......53%
AAA..............18%
AA................3%
A................13%
BBB...............8%
Non-Investment
Grade.............5%
Value of $10,000 Investment
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
BOND IAI BOND Lehman Aggregate
FUND FUND Bond Index
-------- ------------ ----------------------
<S> <C> <C> <C>
$10,000.00 $10,000.00
Dec-85 2.5717 $10,257.17 3.057 $10,305.70
Nov-86 0.878 $11,451.61 1.399 $11,834.43
Nov-87 0.8351 $11,649.96 0.801 $12,042.50
Nov-88 -1.0341 $12,490.61 -1.215 $13,154.44
Nov-89 0.8806 $14,489.66 0.953 $15,043.08
Nov-90 3.5197 $15,204.81 2.153 $16,182.68
Nov-91 0.9533 $17,378.60 0.9169 $18,514.99
Nov-92 -0.0967 $19,009.13 0.0226 $20,155.44
Nov-93 -1.9427 $21,674.03 -0.8507 $22,351.08
Nov-94 -0.57 $20,603.44 -0.2221 $21,667.20
Nov-95 1.43 $23,784.65 1.4985 $25,489.68
</TABLE>
<TABLE>
<CAPTION>
Average Annual Returns+
Through 11/30/95
1 Year 5 Years 10 Years
=============================================================
<S> <C> <C> <C>
IAI Bond Fund 15.46% 9.36% 9.05%
.............................................................
Lehman Aggregate Bond Index 17.64% 9.51% 9.81%
</TABLE>
+ Past performance is not predictive of future performance
Sectors
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
Asset-Backed......................9%
Corporate........................26%
Preference Stock..................4%
Short-Term........................5%
U.S. Government
Agency Mortgage Backed...........23%
Foreign Denominated...............8%
U.S. Government..................25%
Effective Maturity
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
Years
- -----
0-3..............19%
3-5...............9%
5-10.............46%
10-20.............4%
20+..............22%
6
<PAGE>
Fund Manager's Review
---------------------
IAI Government Fund
IAI Government Fund
Fund Objective
The Fund seeks to provide shareholders with a high level of current income with
preservation of capital. The Fund invests primarily in U.S. Government
securities with a dollar-weighted average maturity of five years or less.
Bond Market has a Good Year
During the past year, intermediate and long-term interest rates fell sharply,
boosting bond prices. As a result, U.S. Treasury securities appreciated,
particularly those with longer maturities. Mortgage-backed securities also
appreciated, although not as much, because homeowners tend to refinance their
mortgages when interest rates fall.
The performance of a portfolio such as the IAI Government Fund will depend on
one primary factor: its average maturity. For the year ended November 30, 1995,
the IAI Government Fund produced a total return of 10.99%. In comparison, the
Salomon Brothers Intermediate Treasury/Agency/Mortgage-Backed Index was up
14.79%. The IAI Government Fund's underperformance was a result of its
relatively shorter effective maturity.
Federal Reserve Board Achieves Soft Landing
During 1995, economic growth slowed down considerably compared to the prior
year. The Federal Reserve Board engineered an economic growth rate that was not
too fast to rekindle inflation, yet not too slow to bring on a recession. It
accomplished this through a series of interest rate increases in 1994. The last
rate increase was in February 1995. Soon afterward, investors began to
anticipate that the Fed would lower short-term interest rates, which it did in
July 1995. Much of the demand for U.S. Government securities came as foreign
central banks attempted to prop up the U.S. dollar; this led to a powerful bond
market rally.
Although we expect the news on inflation to continue to be good, we don't
believe that inflation will drop below the current 2-3% rate. The Consumer Price
Index is an average of many different consumer items. For the average to go to
1%, there would have to be areas in the economy experiencing price declines. For
example, in 1990, savings & loans were liquidating their real estate portfolios,
creating a deflationary component in the economy. No deflationary activity of
similar magnitude exists today.
[PHOTO]
Scott A. Bettin, CFA
IAI Government Fund Manager
"During the past year, intermediate and
long-term interest rates fell sharply, boosting bond prices."
7
<PAGE>
Fund Manager's Review
---------------------
IAI Government Fund
Currently, the IAI Government Fund is very close to the benchmark with respect
to maturity and the proportion of mortgage-backed securities. If interest rates
were to drift higher, then mortgage-backed securities--which offer substantially
higher yields than U.S. Treasuries--would outperform their Treasury
counterparts. We are also focusing on mortgage-backed securities trading at a
discount. The reason: when homeowners refinance, these bonds are called at
"par," or 100 cents on the dollar. As a result, we are able to generate a profit
when the bonds are called.
Outlook
The bond market's fortunes in 1996 could depend in large measure on politics. In
a presidential election year, there will be some pressure to keep the economy
strong, which could put upward pressure on interest rates. In addition, there is
no way to know how investors will react if the President and Congress cannot
agree on a balanced budget in seven years. We will be watching the political
developments very closely in the year ahead.
/s/ Scott A. Bettin
Scott A. Bettin, CFA
Fund Manager
8
<PAGE>
Fund Manager's Review
---------------------
IAI Government Fund
Value of $10,000 Investment+
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
SALOMON SALOMON
BROTHERS BROTHERS
INTERMEDIATE INTERMEDIATE
TREASURY/ TREASURY/
AGENCY/ AGENCY/
IAI GOVERNMENT IAI GOVERNMENT MORTGAGE-BACKED MORTGAGE-BACKED
FUND FUND INDEX INDEX
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
$10,000.00
Aug-91 0.4 $10,040.00 $10,000.00
Nov-92 -0.38 $11,246.97 -0.27 $11,182.31
Nov-93 -0.47 $12,291.97 -0.35 $12,068.43
Nov-94 -0.31 $12,010.18 -0.41 $11,883.83
Nov-95 1.18 $13,330.53 1.18 $13,683.52
</TABLE>
<TABLE>
<CAPTION>
Average Annual Returns+
Through 11/30/95
Since Inception
1 Year 8/08/91
===============================================================================
<S> <C> <C>
IAI Government Fund 10.99% 6.89%
...............................................................................
Salomon Brothers Intermediate Treasury/Agency/
Mortgage-Backed Index 14.79% 7.66%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 9/01/91
Sectors
% of Portfolio as of 11/30/95
U.S. Government Agency Mortgage-Backed 35%
U.S. Government 64%
Short-Term 1%
[GRAPH APPEARS HERE]
Effective Maturity
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
Years
-----
0-1 3%
1-3 33%
3-5 32%
5-10 32%
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Government 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.
9
<PAGE>
Fund Manager's Review
---------------------
IAI Minnesota Tax Free Fund
IAI Minnesota Tax Free Fund
[PHOTO]
Stephen C. Coleman, CFA
IAI Minnesota Tax Free
Fund Manager
"Like most fixed income investments, the IAI Minnesota Tax Free Fund was
favorably impacted by falling interest rates."
Fund Objective
The objective of the IAI Minnesota Tax Free Fund is to provide shareholders with
as high a level of current income exempt from federal income tax as is
consistent with the preservation of capital. The Fund will seek to achieve this
goal by investing primarily in high quality investment grade municipal bonds
from Minnesota issuers--bonds rated BBB or better by Standard & Poor's or Baa or
better by Moody's.
A Sharp Drop in Interest Rates Boosts Municipal Bonds
Like most fixed income investments, the IAI Minnesota Tax Free Fund was
favorably impacted by falling interest rates. During the fiscal year ended
November 30, 1995, the Federal Reserve Board shifted its actions from one of
restricting the money supply to a posture of easing. In February 1995, the Fed
raised short-term interest rates for the seventh and last time in a twelve month
period. As the economy slowed in the spring of 1995, investors began to
anticipate that the Fed would cut short-term rates. As a result, intermediate
and long-term interest rates fell sharply. In July 1995, the Fed did in fact
reduce short-term rates, but only by 0.25%.
For the year ended November 30, 1995, the IAI Minnesota Tax Free Fund generated
a total return of 13.17%. In comparison, the Lehman Brothers Municipal Bond/Long
Bond Index returned 25.69%. The IAI Minnesota Tax Free Fund's average duration
and maturity was shorter than its benchmark, which means that when interest
rates fell, the Fund's securities didn't appreciate as rapidly. We believe that
our strategy of keeping the portfolio shorter than average is prudent, given the
current level of interest rates and the possibility of tax legislation that
could impact the municipal bond industry.
Investors anticipate Tax Reform
The IAI Minnesota Tax Free Fund's current yield is 5.25%, about 90% of the yield
offered by a comparable U.S. Treasury security. Typically, this yield
relationship is closer to 80%. The primary reason that tax free bonds are
offering such compelling yields is the concern in the marketplace over tax
legislation that would minimize or remove the tax advantage of municipal bonds.
For example, a "flat" tax would reduce or possibly even eliminate the tax paid
on competing investments such as interest on Treasury bonds.
Meanwhile, until such tax legislation becomes a reality--and that is far from
certain--municipal bond yields are attractive, especially for investors in high
tax bracket. A Minnesota resident in the top federal and state income tax
brackets would have to earn the equivalent of roughly 10% on a comparable
taxable investment. Such a high return would be extremely
10
<PAGE>
Fund Manager's Review
---------------------
IAI Minnesota Tax Free Fund
rare in today's interest rate environment--especially considering the credit
quality offered by municipal bonds.
Currently, the IAI Minnesota Tax Free Fund's average credit quality is AAA.
About 27% of the portfolio is invested in "pre-refunded" issues, in which the
issuer has already set aside funds to service the debt. Other bonds include
general obligations of the state of Minnesota, hospital revenue bonds as well as
electric utilities. About 40% of the bonds in the portfolio are insured.
Outlook
Intermediate and long-term interest rates have fallen substantially in the past
year. Currently, the ten-year U.S. Treasury bond is yielding about 5.70% while
the 30-year U.S. Treasury is yielding roughly 6.00%. Inflation is subdued and
the economy continues to grow slowly. But it doesn't appear to us that interest
rates are likely to fall much further. As a result, we believe that a shorter
duration is a prudent strategy in the event that interest rates rise. In
addition, we believe that this is a good way to position the portfolio in the
event of tax legislation impacting the municipal bond industry.
/s/ Stephen C. Coleman
Stephen C. Coleman, CFA
Fund Manager
11
<PAGE>
Fund Manager's Review
---------------------
IAI Minnesota Tax Free Fund
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Minnesota Tax Free 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 11/30/95
AAA........... 79%
AA............ 21%
A............. -
Value of $10,000 Investment+
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
IAI MINNESOTA IAI MINNESOTA LEHMAN BROTHERS
TAX-FREE TAX FREE MUNICIPAL BOND--
FUND FUND LONG BOND INDEX
------------- ------------- ----------------
<S> <C> <C> <C>
$10,000
Apr-92 -0.2 $ 9,980 $ 0.95 $10,095
Nov-92 2.58 $10,555 $ 2.81 $10,842
Nov-93 -1.33 $11,912 $(1.21) $12,287
Nov-94 -2.19 $10,961 $(2.64) $11,065
Nov-95 1.15 $12,405 $ 2.58 $13,908
</TABLE>
<TABLE>
<CAPTION>
Average Annual Returns+
Through 11/30/95
Since Inception
1 Year 4/06/92
============================================================================
<S> <C> <C>
IAI Minnesota Tax Free Fund 13.17% 6.07%
............................................................................
Lehman Brothers Municipal Bond--Long Bond Index 25.69% 9.41%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 4/01/92
Sectors
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
General Obligation Bonds.........30%
Revenue Bonds....................66%
Short-Term........................4%
Effective Maturity
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
Years
- -----
0-3..............31%
3-5..............10%
5-10.............48%
10-20.............6%
20+...............5%
12
<PAGE>
Fund Portfolio
--------------
IAI Bond Fund
November 30, 1995
(percentage figures indicate percentage of total net assets)
Non-convertible Preferred Stock - 3.7%
<TABLE>
<CAPTION>
Market
Rate Quantity Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance -- 3.7%
Grand Metro Delaware Series A 9.42% 102,180 $ 2,873,812
=======================================================================================================
Total Investments in Non-convertible Preferred Stock
(Cost: $2,755,795).........................................................................$ 2,873,812
=======================================================================================================
Corporate Bonds - 26.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
Finance -- 7.3%
ABN-AMRO Bank 7.13% 10/15/93 $ 2,600,000 $ 2,523,222
Prudential Insurance (f) 8.30 07/01/25 3,000,000 3,142,620
------------
5,665,842
- -------------------------------------------------------------------------------------------------------
Industrial -- 13.4%
Century Communications 9.75 02/15/02 1,000,000 1,035,000
Coca Cola Enterprises (zero-coupon bond) 7.88 (c) 06/20/20 15,200,000 2,911,864
Columbia HCA/Healthcare (medium-term note) 6.63 07/15/45 1,500,000 1,592,580
Flagstar 10.75 09/15/01 500,000 461,250
Gulf Canada Resources (yankee) 9.63 07/01/05 1,000,000 1,030,000
RJR Nabisco 7.63 09/15/03 2,000,000 1,938,900
Triton Energy (step bond) 9.94 (c) 12/15/00 1,500,000 1,391,250
------------
10,360,844
- -------------------------------------------------------------------------------------------------------
Utilities -- 5.4%
Commonwealth Edison 8.38 10/15/06 2,500,000 2,816,325
Long Island Lighting 7.85 05/15/99 1,350,000 1,383,925
------------
4,200,250
=======================================================================================================
Total Investments in Corporate Bonds
(Cost: $18,962,483)........................................................................$20,226,936
=======================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
13
<PAGE>
Fund Portfolio
--------------
IAI Bond Fund
November 30, 1995
<TABLE>
<CAPTION>
U.S. Government Obligations - 26.1%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes -- 13.1%
6.00% 11/30/97 $1,600,000 $ 1,618,752
4.75 09/30/98 1,100,000 1,080,750
7.88 08/15/01 3,200,000 3,549,984
6.25 02/15/03 3,790,000 3,914,956
-----------
10,164,442
- ---------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds -- 13.0%
10.75 05/15/03 1,590,000 2,068,987
9.25 02/15/16 3,620,000 4,873,425
7.50 11/15/24 2,700,000 3,156,894
-----------
10,099,306
=====================================================================================================================
Total Investments in U.S. Government Obligations
(Cost: $19,450,035).......................................................................................$20,263,748
=====================================================================================================================
U.S. Government Agency Mortgage-Backed Securities - 24.2%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation Gold -- 4.1%
7.00% 12/01/09 (b) $3,150,000 $ 3,188,367
- ---------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association -- 20.1%
9.00 12/15/17 5,810,293 6,188,373
10.00 12/15/20 918,087 1,004,442
6.50 10/15/23 968,601 951,041
6.50 12/15/23 762,974 749,143
7.00 01/15/24 6,408,820 6,422,792
6.50 05/15/24 257,741 253,069
-----------
15,568,860
=====================================================================================================================
Total Investments in U.S. Government Agency Mortgage-Backed Securities
(Cost: $18,387,017).......................................................................................$18,757,227
=====================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
14
<PAGE>
Fund Portfolio
--------------
IAI Bond Fund
November 30, 1995
<TABLE>
<CAPTION>
Asset-Backed Securities - 9.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Related - 4.7%
Chase Manhattan Grantor Trust 95-A A 6.00% 09/17/01 $ 930,003 $ 933,436
Chase Manhattan Grantor Trust 95-B A 5.90 11/15/01 1,000,000 1,002,430
Ford Credit Grantor Trust 95-B A 5.90 10/15/00 1,720,000 1,724,386
-----------
3,660,252
- ----------------------------------------------------------------------------------------------------
Credit Card Related -- 4.9%
Chemical Master Credit Card Trust I 95-2 A 6.23 06/15/03 1,310,000 1,331,710
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,000,000 1,010,850
NationsBank Credit Card Master Trust 95-1 A 6.45 04/15/03 1,400,000 1,431,052
-----------
3,773,612
====================================================================================================
Total Investments in Asset-Backed Securities
(Cost: $7,351,486).......................................................................$ 7,433,864
====================================================================================================
Foreign Denominated Bonds - 8.1%
Principal Market
Rate Maturity Amount (e) Value (a)
- ----------------------------------------------------------------------------------------------------
Foreign Government Bonds -- 4.9%
German Government (German mark) 6.50% 07/15/03 3,300,000 $ 2,349,934
7.50 11/11/04 1,950,000 1,465,636
-----------
3,815,570
- ----------------------------------------------------------------------------------------------------
Supra-National Bonds -- 3.2%
International Bank for Reconstruction
& Development (Japanese yen) 4.75 12/20/04 215,000,000 2,450,487
=====================================================================================================
Total Investments in Foreign Denominated Bonds
(Cost: $6,338,016).......................................................................$ 6,266,057
=====================================================================================================
Total Investments in Long-Term Securities
(Cost: $73,244,832)......................................................................$75,821,644
=====================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
15
<PAGE>
Fund Portfolio
--------------
IAI Bond Fund
November 30, 1995
<TABLE>
<CAPTION>
Short-Term Securities - 5.4%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
U.S. Government & Government Agency Obligations -- 5.4%
U.S. Treasury Bill 5.62% 01/11/96 $ 700,000 (d) $ 695,782
Federal Home Loan Bank (discount note) 5.80 12/01/95 3,500,000 3,500,000
-----------
4,195,782
=============================================================================================================
Total Investments in Short-term Securities
(Cost: $4,195,695)................................................................................$ 4,195,782
=============================================================================================================
Total Investments in Securities
(Cost: $77,440,527) (j)...........................................................................$80,017,426
=============================================================================================================
Other Assets & Liabilities (Net) -- (3.2)%
.................................................................................................$(2,491,760)
=============================================================================================================
Total Net Assets
.................................................................................................$77,525,666
=============================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
16
<PAGE>
Fund Portfolio
--------------
IAI Government Fund
November 30, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
U.S. Government Obligations - 62.6%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes -- 41.6%
5.88% 07/31/97 $6,500,000 $ 6,548,750
6.13 05/15/98 1,000,000 1,016,560
5.88 08/15/98 3,000,000 3,034,230
6.75 05/31/99 1,000,000 1,039,220
6.25 05/31/00 6,000,000 6,167,820
7.50 05/15/02 2,000,000 2,198,740
-----------
20,005,320
- -------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds -- 21.0%
10.75 05/15/03 3,750,000 4,879,687
11.63 11/15/04 1,000,000 1,402,340
10.75 08/15/05 2,800,000 3,807,552
-----------
10,089,579
=======================================================================================================
Total Investments in U.S. Government Obligations
(Cost: $29,483,846).........................................................................$30,094,899
=======================================================================================================
</TABLE>
U.S. Government Agency Mortgage-Backed Securities - 33.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation -- 2.5%
5.50% 07/01/98 $ 26,970 $ 26,619
7.00 01/01/99 36,046 36,587
10.50 11/01/00 800,745 838,781
10.50 02/01/04 221,327 240,003
6.00 07/01/09 66,809 64,830
----------
1,206,820
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation Gold -- 6.6%
5.00 03/01/01 888,265 844,679
5.00 10/01/01 37,419 36,970
6.00 08/01/02 977,821 972,013
7.00 12/01/09 (b) 1,300,000 1,315,834
----------
3,169,496
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
17
<PAGE>
Fund Portfolio
--------------
IAI Government Fund
November 30, 1995
U.S. Government Agency Mortgage-Backed Securities (Cont.)
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage Association -- 7.1%
11.50% 01/01/01 $ 23,852 $ 25,328
6.00 11/01/02 3,200,000 3,177,984
11.50 01/01/13 14,370 16,237
11.50 11/01/15 83,026 94,158
11.50 12/01/15 46,057 51,916
11.50 01/01/16 41,706 45,192
----------
3,410,815
- -------------------------------------------------------------------------------------------
Federal National Mortgage Association Dwarfs -- 1.0%
10.00 02/01/01 24,155 25,386
10.00 01/01/03 438,853 461,204
----------
486,590
- -------------------------------------------------------------------------------------------
Government National Mortgage Association -- 16.0%
6.50 07/15/08 191,045 191,285
6.50 08/15/08 698,383 699,257
6.50 10/15/08 317,836 318,234
6.50 11/15/08 387,129 387,613
6.50 03/15/09 219,130 219,405
11.00 06/15/13 22,413 25,212
9.00 06/15/17 2,045,581 2,173,103
8.50 08/15/17 952,858 1,008,753
10.00 12/15/20 262,311 286,984
9.00 06/15/21 1,351,116 1,442,722
6.50 11/15/23 978,851 961,105
----------
7,713,673
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
18
<PAGE>
Fund Portfolio
--------------
IAI Government Fund
November 30, 1995
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association Midgets -- 0.3%
10.50% 03/15/01 $ 78,016 $ 82,234
9.00 11/15/01 5,642 5,956
9.00 08/15/02 38,372 40,507
9.00 01/15/04 12,169 12,847
---------------
141,544
=====================================================================================================================
Total Investments in U.S. Government Agency
Mortgage-Backed Securities
(Cost: $15,861,056)................................................................................... $16,128,938
=====================================================================================================================
Total Investments in Long-Term Securities
(Cost: $45,344,902)................................................................................... $46,223,837
=====================================================================================================================
Short-Term Securities - 1.0%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations -- 1.0%
U.S. Treasury Bill 5.64% 01/11/96 $ 500,000 $ 496,988
=====================================================================================================================
Total Investments in Short-Term Securities
(Cost: $496,931)...................................................................................... $ 496,988
=====================================================================================================================
Total Investments in Securities
(Cost: $45,841,833) (j)............................................................................... $46,720,825
=====================================================================================================================
Other Assets and Liabilities (Net) - 2.9%
.................................................................................................... $ 1,400,647
=====================================================================================================================
Total Net Assets
.................................................................................................... $48,121,472
=====================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
19
<PAGE>
Fund Portfolio
--------------
IAI Minnesota Tax Free Fund
November 30, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Municipal Bonds - 93.6%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Obligation Bonds -- 28.8%
Anoka-Hennepin Minnesota Independent School
District Number 11 Series B (MBIA insured) 5.90% 02/01/08 $ 300,000 $ 319,767
Chaska Minnesota Independent School District
Number 112 Series B (FGIC insured) 5.38 02/01/14 250,000 251,383
Fairbault Minnesota Independent School District
Number 656 6.10 06/01/09 350,000 372,911
Minneapolis Minnesota (g) 6.75 12/01/99 325,000 335,150
Minnesota State Duluth Airport Refunding Series 95B (h) 6.25 08/01/14 300,000 316,443
St. Paul Minnesota Urban Renewal Series A 5.75 03/01/02 300,000 314,937
-------------
1,910,591
- ---------------------------------------------------------------------------------------------------------------------
Revenue Bonds -- 64.8%
Dakota County Minnesota Housing &
Redevelopment Authority Multifamily 3.85 (i) 12/01/16 300,000 300,000
Duluth Minnesota Economic Development Authority
Healthcare Facility (AMBAC insured) 6.20 11/01/12 350,000 370,356
Minneapolis & St. Paul Minnesota Housing &
Redevelopment Authority Healthcare System
Series A (MBIA insured) 7.40 08/15/11 300,000 336,615
Minneapolis Minnesota Hospital Series A (MBIA insured) 6.50 01/01/11 350,000 378,963
Minnesota State Housing Finance Agency Series L (h) 6.70 07/01/20 350,000 362,421
St. Cloud Minnesota Hospital Facility
Series C (AMBAC insured) 6.75 07/01/15 350,000 384,104
St. Paul Minnesota Sewer Refunding (AMBAC insured) 5.60 12/01/08 350,000 362,561
Southern Minnesota Municipal Power Agency Power
Supply System (g) 9.50 01/01/17 400,000 409,976
Southern Minnesota Municipal Power Agency Power
Supply System Series A (g) 5.75 01/01/18 350,000 367,997
Southern Minnesota Municipal Power Agency Power
Supply System Series C (g) 7.13 01/01/15 1,000,000 1,022,960
-------------
4,295,953
=====================================================================================================================
Total Investments in Municipal Bonds
(Cost: $5,778,031).......................................................................................$6,206,544
=====================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
20
<PAGE>
Fund Portfolio
--------------
IAI Minnesota Tax Free Fund
November 30, 1995
<TABLE>
<CAPTION>
Short-Term Securities - 4.1%
Principal Market
Amount Value (a)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Money Market Fund -- 4.1%
Federated Minnesota Tax Exempt Cash Fund $269,234 $ 269,234
===============================================================================================
Total Investments in Short-Term Securities
(Cost: $269,234)................................................................. $ 269,234
===============================================================================================
Total Investments in Securities
(Cost: $6,047,265) (j)........................................................... $6,475,778
===============================================================================================
Other Assets and Liabilities (net) - 2.3%
............................................................................... $ 153,898
===============================================================================================
Total Net Assets
............................................................................... $6,629,676
===============================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 22
21
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At November 30, 1995 the total cost of
securities purchased on a when-issued basis in the IAI Bond Fund and the IAI
Government Fund was $3,178,547 and $1,311,406, respectively.
(c)
Interest rate shown represents yield-to-maturity at date of purchase.
(d)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 7 to the financial statements).
(e)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(f)
Represents security sold within terms of a private placement memorandum exempt
from registration under section 144A of the Securities Act of 1933. This issue
may only be sold to other qualified institutional buyers, and is considered
liquid under guidelines established by the Board of Directors.
(g)
Prerefunded to a date prior to its final maturity.
(h)
Security from which the income is treated as a tax preference that is included
in alternative minimum taxable income for purposes of computing federal
alternative minimum tax (AMT). At November 30, 1995, approximately 10.5% of the
IAI Minnesota Tax-Free Fund portfolio was invested in such securities.
(i)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on November 30, 1995.
22
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
(j)
At November 30, 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>
<CAPTION>
- -----------------------------------------------------------------------------------------------
IAI Bond Fund IAI Government Fund IAI Minnesota
Tax Free Fund
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal income tax purposes $77,440,527 $45,841,833 $6,047,265
===========================================================
Gross unrealized appreciation $ 2,667,296 $ 900,233 $ 428,513
Gross unrealized depreciation (90,397) (21,241) ---
-----------------------------------------------------------
Net unrealized appreciation $ 2,576,899 $ 878,992 $ 428,513
===========================================================
</TABLE>
23
<PAGE>
Statements of Assets and Liabilities
------------------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
<TABLE>
<CAPTION>
IAI Bond Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Investments in securities, at market
(Cost: $77,440,527; $45,841,833; and $6,047,265, respectively) (see Fund Portfolios) $80,017,426
Cash in bank on demand deposit ---
Accrued interest receivable 845,602
Receivable for investment securities sold ---
Receivable for foreign currency contracts held, at value (Note 6) 1,500,000
Organization costs ---
Other 25,208
-----------------------------
Total assets 82,388,236
-----------------------------
Liabilities
Disbursements in excess of cash on demand deposit 6,927
Variation margin payable 80,125
Payable for investment securities purchased 3,178,547
Payable for foreign currency contracts held, at value (Note 6) 1,528,195
Accrued investment advisory fees 34,908
Accrued distribution fees 15,867
Accrued dividend-disbursing, administrative, and accounting fees 12,693
Other accrued expenses 5,308
-----------------------------
Total liabilities 4,862,570
-----------------------------
Net assets applicable to outstanding capital stock $77,525,666
=============================
Represented by:
Capital stock $ 83,025
Additional paid-in capital 79,527,315
Undistributed net investment income 1,116,490
Accumulated net realized losses on investments (5,295,881)
Unrealized appreciation (depreciation) on:
Investment securities $ 2,125,304
Other assets and liabilities denominated in foreign currency (30,587)
----------------
2,094,717
-----------------------------
Total -- representing net assets applicable to outstanding capital stock $77,525,666
=============================
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 8,302,499
-----------------------------
Net asset value per share of outstanding capital stock $ 9.34
=============================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
IAI Government Fund IAI Minnesota Tax Free Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C>
$46,720,825 $6,475,778
364,773 ---
540,436 144,375
1,869,631 ---
--- ---
4,737 4,858
1,774 5,764
- -----------------------------------------------------------------------------------------------------------------------------------
49,502,176 6,630,775
- -----------------------------------------------------------------------------------------------------------------------------------
--- ---
--- ---
1,311,406 ---
--- ---
21,137 ---
10,056 ---
7,900 ---
30,205 1,099
- -----------------------------------------------------------------------------------------------------------------------------------
1,380,704 1,099
- -----------------------------------------------------------------------------------------------------------------------------------
$48,121,472 $6,629,676
===================================================================================================================================
$ 47,834 $ 6,473
48,797,599 6,886,570
107,774 11,211
(1,710,727) (703,091)
$ 878,992 $ 428,513
--- ---
--------------- --------------
878,992 428,513
- -----------------------------------------------------------------------------------------------------------------------------------
$48,121,472 $6,629,676
===================================================================================================================================
4,783,448 647,266
- -----------------------------------------------------------------------------------------------------------------------------------
$ 10.06 $ 10.24
===================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 33
25
<PAGE>
Statements of Operations
------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
Year ended November 30, 1995
<TABLE>
<CAPTION>
IAI Bond Fund
- -------------------------------------------------------------------------------------------------
<S> <C>
Net Investment Income
Income:
Interest $ 5,765,832
Dividends 180,475
------------------------------
Total income 5,946,307
------------------------------
Expenses:
Investment advisory fees 441,516
Distribution fees 200,689
Dividend-disbursing, administrative, and accounting fees 160,551
Legal fees ---
Custodian fees 7,740
Amortization of organization costs ---
Compensation of Directors 3,650
Audit fees 11,473
Printing and shareholder reporting 26,350
Registration fees 15,590
Other expenses 8,291
------------------------------
Total expenses 875,850
Less fees reimbursed or waived by Advisers or Distributor -
------------------------------
Net investment income 5,070,457
------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 4,068,757
Foreign currency transactions 115,604
Futures contracts (2,303,408)
-----------
1,880,953
Net change in unrealized appreciation (depreciation) on:
Investment securities $ 5,105,628
Other assets and liabilities denominated in foreign
currency 24,436
Futures contracts (436,394)
-----------
4,693,670
------------------------------
Net gain on investments and foreign currency 6,574,623
------------------------------
Net increase in net assets resulting from operations $11,645,080
==============================
</TABLE>
26
<PAGE>
IAI Government Fund IAI Minnesota Tax Free Fund
- ------------------------------------------------------------
[C] [C]
$3,068,167 $382,961
--- ---
- ------------------------------------------------------------
3,068,167 382,961
- ------------------------------------------------------------
238,633 39,038
108,470 7,098
86,776 14,196
150 8,189
9,169 4,068
6,168 3,391
3,650 10,659
11,871 6,023
10,310 7,687
9,670 ---
5,397 2,938
- ------------------------------------------------------------
490,264 103,287
(13,035) (85,542)
- ------------------------------------------------------------
2,590,938 365,216
- ------------------------------------------------------------
$ (46,859) $ (7,141)
(42,792) ---
(369,851) ---
- ---------- --------
(459,502) (7,141)
$2,349,123 $537,377
--- ---
--- ---
- ---------- --------
2,349,123 537,377
- ------------------------------------------------------------
1,889,621 530,236
- ------------------------------------------------------------
$4,480,559 $895,452
============================================================
See accompanying Notes to Financial Statements on page 33
27
<PAGE>
Statements of Changes in Net Assets
-----------------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
<TABLE>
<CAPTION>
IAI Bond Fund
Year ended Period from April 1, 1994
November 30, 1995 to November 30, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 5,070,457 $ 3,589,656
Net realized gains (losses) 1,880,953 (6,088,410)
Net change in unrealized appreciation (depreciation) 4,693,670 534,529
-----------------------------------------------
Net increase (decrease) in net assets resulting from operations 11,645,080 (1,964,225)
-----------------------------------------------
Distributions to Shareholders from:
Net investment income (5,392,040) (3,424,716)
Net realized gains --- (1,319,750)
-----------------------------------------------
Total distributions (5,392,040) (4,744,466)
-----------------------------------------------
Capital Share Transactions (note 4)
Net proceeds from sale of shares 30,801,916 15,848,360
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,159,258 4,584,528
Cost of shares redeemed (45,310,597) (30,240,799)
-----------------------------------------------
Increase (decrease) in net assets from capital share transactions (9,349,423) (9,807,911)
-----------------------------------------------
Total increase (decrease) in net assets (3,096,383) (16,516,602)
Net assets at beginning of period 80,622,049 97,138,651
-----------------------------------------------
Net assets at end of period $ 77,525,666 $ 80,622,049
===============================================
</TABLE>
(including undistributed net investment income of:
Bond--$1,116,490 and $744,848; Government--$107,774 and $83,710;
Minnesota Tax Free-$11,211 and $13,487, respectively)
28
<PAGE>
<TABLE>
<CAPTION>
IAI Minnesota
IAI Government Fund Tax Free Fund
Year ended Period from April 1, 1994 Year ended Period from April 1, 1994
November 30, 1995 to November 30, 1994 November 30, 1995 to November 30, 1994
- ----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$ 2,590,938 $ 1,349,524 $ 365,216 $ 290,088
(459,502) (934,618) (7,141) (700,925)
2,349,123 (446,812) 537,377 180,719
- ----------------------------------------------------------------------------------------------------------
4,480,559 (31,906) 895,452 (230,118)
- ----------------------------------------------------------------------------------------------------------
(2,527,368) (1,312,183) (365,906) (291,185)
--- (114,249) --- (35,171)
- ----------------------------------------------------------------------------------------------------------
(2,527,368) (1,426,432) (365,906) (326,356)
- ----------------------------------------------------------------------------------------------------------
25,685,178 13,323,314 2,968,427 1,523,509
2,472,730 1,382,769 346,353 309,174
(20,427,646) (15,837,048) (4,156,698) (2,071,786)
- ----------------------------------------------------------------------------------------------------------
7,730,262 (1,130,965) (841,918) (239,103)
- ----------------------------------------------------------------------------------------------------------
9,683,453 (2,589,303) (312,372) (795,577)
38,438,019 41,027,322 6,942,048 7,737,625
- ----------------------------------------------------------------------------------------------------------
$ 48,121,472 $ 38,438,019 $ 6,629,676 $ 6,942,048
==========================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 33
29
<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 indicated are as follows:
<TABLE>
<CAPTION>
IAI Bond Fund
<S> <C> <C> <C> <C> <C>
Year ended Period from Years ended March 31,
November 30, April 1, 1994+ to ------------------------------------
1995 November 30, 1994 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value
Beginning of period $ 8.65 $ 9.32 $ 10.42 $ 10.25 $ 10.02
----------------------------------------------------------------------
Operations
Net investment income .58 .36 .62 .64 .73
Net realized and unrealized gains (losses) .72 (.55) (.25) .93 .34
----------------------------------------------------------------------
Total from operations 1.30 (.19) .37 1.57 1.07
----------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.61) (.35) (.66) (.64) (.74)
Net realized gains --- (.13) (.81) (.76) (.10)
----------------------------------------------------------------------
Total distributions (.61) (.48) (1.47) (1.40) (.84)
----------------------------------------------------------------------
Net Asset Value
End of period $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25
======================================================================
Total investment return* 15.46% (2.10%) 3.16% 16.44% 10.80%
Net assets at end of period (000's omitted) $77,526 $ 80,622 $97,139 $119,371 $107,634
Ratios
Expenses to average net assets 1.09% 1.10%** 1.09% 1.10% 1.10%
Net investment income to average net assets 6.32% 6.03%** 5.63% 6.03% 7.43%
Portfolio turnover rate
(excluding short-term securities) 424.7% 226.7% 333.1% 160.8% 126.2%
</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
+ Reflects fiscal year-end change from March 31 to November 30.
30
<PAGE>
Financial Highlights
--------------------
IAI Government 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>
IAI Government Fund
Year ended Period from Year ended Year ended Period from
November 30, April 1, 1994+ to March 31, March 31, August 8, 1991***
1995 November 30, 1994 1994 1993 to March 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 9.62 $ 9.98 $ 10.46 $ 10.22 $ 10.00
----------------------------------------------------------------------------------
Operations
Net investment income .60 .33 .47 .57 .30
Net realized and unrealized
gains (losses) .43 (.34) (.24) .59 .24
----------------------------------------------------------------------------------
Total from operations 1.03 (.01) .23 1.16 .54
----------------------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.59) (.32) (.49) (.58) (.30)
Net realized gains --- (.03) (.22) (.34) (.02)
----------------------------------------------------------------------------------
Total distributions (.59) (.35) (.71) (.92) (.32)
----------------------------------------------------------------------------------
Net Asset Value
End of period $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
==================================================================================
Total investment return* 10.99% (.09%) 2.02% 11.70% 5.51%
Net assets at end of period
(000's omitted) $48,121 $ 38,438 $41,027 $43,704 $ 30,707
Ratios
Expenses to average net assets 1.10% 1.10%** 1.10% 1.10% 1.10%**
Net investment income to
average net assets 5.97% 5.12%** 4.40% 5.40% 5.16%**
Portfolio turnover rate
(excluding short-term securities) 284.1% 121.5% 641.0% 236.3% 169.6%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
+ Reflects fiscal year-end change from March 31 to November 30.
31
<PAGE>
Financial Highlights
--------------------
IAI Minnesota Tax Free 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>
IAI Minnesota Tax Free Fund
<S> <C> <C> <C> <C> <C>
Year ended Period from Year ended Period from
November 30, April 1, 1994+ to March 31, April 6, 1992***
1995 November 30, 1994 1994 to March 31, 1993
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value
Beginning of period $ 9.53 $ 10.27 $10.67 $ 10.00
---------------------------------------------------------------------------
Operations
Net investment income .52 .39 .58 .41
Net realized and
unrealized gains (losses) .71 (.69) (.35) .67
---------------------------------------------------------------------------
Total from operations 1.23 (.30) .23 1.08
---------------------------------------------------------------------------
Distributions to shareholders From:
Net investment income (.52) (.39) (.56) (.41)
Net realized gains --- (.05) (.07) ---
---------------------------------------------------------------------------
Total distributions (.52) (.44) (.63) (.41)
---------------------------------------------------------------------------
Net Asset Value
End of period $10.24 $ 9.53 $10.27 $ 10.67
===========================================================================
Total investment return* 13.17% (3.10)% 1.89% 11.00%
Net assets at end of
period (000's omitted) $6,630 $ 6,942 $7,738 $ 5,045
Ratios
Expenses to average net
assets**** .25% .25%** .25% .95%**
Net investment income to
average net assets**** 5.15% 5.76%** 5.28% 4.36%**
Portfolio turnover rate
(excluding short-term
securities) 94.0% 57.8% 16.0% 4.8%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
**** The Fund's adviser voluntarily waived $49,686, $35,252 and $53,108 in
expenses for the year ended November 30, 1995, the period ended November
30, 1994 and the year ended March 31, 1994, respectively. If the Fund had
been charged for these expenses, the ratio of expenses to average net
assets would have been .95%, .95% and .95% respectively, and the ratio of
net investment income to average net assets would have been 4.45%, 5.06%
and 4.58%, respectively.
+ Reflects fiscal year-end change from March 31 to November 30.
32
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[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, or series
thereof. IAI Bond Fund (Bond Fund) is a separate portfolio of IAI Investment
Funds I, Inc. IAI Government Fund (Government Fund) and IAI Minnesota Tax Free
Fund (Minnesota Tax Free Fund) are separate portfolios of IAI Investment Funds
VI, Inc. This report covers only the Bond Fund, Government Fund, and Minnesota
Tax Free Fund (the Funds).
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the Funds from March 31 to November 30. Accordingly, these financial
statements include an eight-month period from April 1, 1994 to November 30,
1994.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
Investments in securities traded on national 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
is used.
The values of debt securities are determined using pricing services or prices
quoted by independent brokers. Short-term securities with maturities of 60 days
or less from the date of acquisition are valued at amortized cost. Short-term
securities with maturities greater than 60 days from the date of 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 Funds 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 Funds maintain, in segregated accounts with their
custodian, assets with a market value equal to the amount of their purchase
commitments.
The Funds may enter into transactions to sell their 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 funds to "rollover" their purchase
commitments, the Funds receive negotiated fees. For the year ended November 30,
1995, the Funds did not earn any fees from dollar-rolls.
Foreign Currency Translations and Foreign Currency Contracts
Bond Fund and Government 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 and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and foreign
currency contract transactions.
33
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[1] Summary of Significant Accounting Policies (Cont.)
The Funds do not isolate that portion of the result 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 Funds may enter into 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 Funds and the resulting unrealized appreciation or depreciation are
determined using foreign currency exchange rates from an independent pricing
service. The Funds are subject to the credit risk that the other party will not
complete the obligations of the contract.
Futures and Options Contracts
In order to increase exposure to and hedge against changes in the market and
produce incremental earnings, the Funds may buy and sell futures contracts and
options. These investments involve risks caused by the possibility of an
imperfect correlation between movements in the value of the contract or option
and 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 Funds are 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 each 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 shareholders, no provision for income taxes is required. In
order to avoid the payment of any federal excise taxes, the Funds are required
to distribute substantially all of their 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 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.
34
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[1] Summary of Significant Accounting Policies (Cont.)
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in
reclassification adjustments to additional paid-in capital as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
IAI Minnesota
IAI Bond Fund IAI Government Fund Tax Free Fund
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income $ 693,225 $(39,506) $(1,586)
Accumulated net realized gains (losses) $(693,225) $ 43,488 $ 4,977
Additional paid-in capital $ -- $ (3,982) $(3,391)
</TABLE>
For federal income tax purposes, the Bond Fund, Government Fund and Minnesota
Tax Free Fund have capital loss carryovers of approximately $5,747,000,
$1,711,000, and $703,000, respectively at November 30, 1995 which, if not offset
by subsequent capital gains, will expire in 2002 and 2003. 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 Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income, including level yield amortization of discount for the Funds,
and premium for the Minnesota Tax Free Fund, are accrued daily. 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. Cash payments or
reinvestments in additional shares are made at the net asset value at the close
of business on the payable 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.
Organization Costs
Organization costs are being amortized over 60 months on a straight-line basis.
In the event Investment Advisers, Inc. (Advisers) redeems any or all of its
shares representing initial capital in the Funds prior to the date such costs
are fully amortized, Advisers will bear such portion of the unamortized
organization costs of the Fund as the number of shares redeemed bears to the
initial purchase of shares.
35
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[2] Commitments & Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an industry-
sponsored mutual insurance company (the Company). In connection with their
obligation as policyholders, the Funds have made payments to the Company which
have been capitalized. Also, the Funds are committed to make future capital
contributions, if requested by the Company.
Bond Fund, Government Fund, and Minnesota Tax Free Fund have available lines of
credit of $14,993,000, $13,375,000 and $2,800,000, respectively, with a bank at
the prime interest rate. 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 lines of credit. There were no borrowings
outstanding at November 30, 1995 for Government and Minnesota Tax Free Funds.
Advances under the line of credit for Bond Fund totaled $7,000 at November 30,
1995, which is included in "Disbursements in excess of cash on demand deposit"
on the Statements of Assets and Liabilities.
[3] Fees and Expenses
Under the terms of an investment advisory agreement, each Fund pays Investment
Advisers, Inc. (Advisers) a monthly management fee computed at an annual rate of
.55% of the average month-end net asset value.
Each Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets at an annual rate of .20%.
The Funds have adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Funds' distributor. Under the Plan, the Funds pay Distributor
a monthly fee to cover expenses incurred in the distribution and promotion of
the Funds' shares. The distribution fee for Bond Fund and Government Fund is
equal to an annual rate of .25% of the Funds' average month-end net assets; for
Minnesota Tax Free Fund, the fee is equal to an annual rate of .10% of average
month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds are responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor have contractually agreed to reimburse
those Funds to the extent total expenses, excluding costs incurred in the
purchase and sale of assets, exceed, on an annual basis, 1.10% of average month-
end net assets for Bond Fund and Government Fund, and .95% of average month-end
net assets for Minnesota Tax Free Fund.
Additionally, since April 1, 1993, Advisers has voluntarily agreed to further
waive expenses for Minnesota Tax Free Fund in excess of .25% of its average
month-end net assets.
36
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[4] Capital Stock
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the year ended November 30, 1995
and the period ended November 30, 1994, were as follows:
<TABLE>
<CAPTION>
IAI Minnesota
IAI Bond Fund IAI Government Fund Tax Free Fund
- -------------------------------------------------------------------------------------------------------------------------------
Year ended Period from Year ended Period from Year ended Period from
November 30, April 1, 1994 to November 30, April 1, 1994 to November 30, April 1, 1994 to
1995 November 30, 1994 1995 November 30, 1994 1995 November 30, 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 3,403,715 1,758,099 2,614,072 1,353,148 299,907 150,799
Issued for reinvested
distributions 572,274 517,374 251,178 141,583 34,639 30,604
Redeemed (4,994,513) (3,375,013) (2,076,068) (1,612,383) (416,081) (206,114)
---------------------------------------------------------------------------------------------------------
Increase (decrease)
in shares outstanding (1,018,524) (1,099,540) 789,182 (117,652) (81,535) (24,711)
---------------------------------------------------------------------------------------------------------
</TABLE>
[5] Purchases and Sales of Securities
For the year ended November 30, 1995, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Purchases Sales
-------------------------------------------------------------
<S> <C> <C>
IAI Bond Fund $324,002,576 $334,999,991
IAI Government Fund $115,058,556 $106,857,700
IAI Minnesota Tax Free Fund $ 6,823,459 $ 5,888,177
</TABLE>
37
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
November 30, 1995
[6] Foreign Currency Commitments
At November 30, 1995, the Bond Fund had entered into a foreign currency exchange
contract. The unrealized depreciation of $28,195 for this contract at November
30, 1995 is included in unrealized appreciation (depreciation) on other assets
and liabilities denominated in foreign currency in the Statement of Operations.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Exchange Currency U.S. $ Value as of Currency U.S. $ Value as of
Fund Date to be Delivered November 30, 1995 to be Received November 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IAI Bond Fund 12/07/95 155,010,000 Japanese Yen $1,528,195 1,500,000 U.S. Dollars $1,500,000
</TABLE>
[7] Open Futures Contracts
The financial futures contracts shown below were open as of November 30, 1995.
The market value of securities deposited to cover initial margin requirements
for the open position at November 30, 1995 was $248,493.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Fund Type Contracts Month Position Value Loss
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IAI Bond Fund U.S. Treasury Note 22 December 1995 Short $2,490,813 $ 73,040
U.S. Treasury Bond 74 December 1995 Short 8,836,063 378,555
--------
$451,595
========
</TABLE>
38
<PAGE>
Independent Auditors' Report
----------------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
The Board of Directors and Shareholders
IAI Investment Funds I, Inc.
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios of IAI Bond Fund (a portfolio within IAI Investment Funds I,
Inc.) and IAI Government Fund and IAI Minnesota Tax Free Fund (formerly IAI Tax
Free Fund) (separate portfolios within IAI Investment Funds VI, Inc.) as of
November 30, 1995 and the related statements of operations for the year then
ended, the statements of changes in net assets for the year ended November 30,
1995 and the period from April 1, 1994 to November 30, 1994, and the financial
highlights for the periods presented on pages 30, 31 and 32 of the annual
report. These financial statements and the financial highlights are the
responsibility of the Funds' 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. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. 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, IAI Government Fund and IAI Minnesota Tax Free Fund at November 30,
1995, and the results of their operations, the changes in their net assets, and
the financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 12, 1996
39
<PAGE>
Federal Tax Information
-----------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free 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 information 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.
IAI Bond Fund
- ----------------------------------------------------
Payable Date Ordinary Income (A)
- ----------------------------------------------------
December 1994 $.0500
January 1995 .0600
February 1995 .0600
March 1995 .0600
April 1995 .0550
May 1995 .0550
June 1995 .0520
July 1995 .0500
August 1995 .0450
September 1995 .0380
October 1995 .0390
November 1995 .0420
- ----------------------------------------------------
$.6060
(A) Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
For the year ended December 31, 1995, 2.85% of ordinary income distributions
qualify for deduction by corporations.
40
<PAGE>
Federal Tax Information
-----------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
IAI Government Fund
- ----------------------------------------------------
Payable Date Ordinary Income (A)
- ----------------------------------------------------
December 1994 $.0706
January 1995 .0475
February 1995 .0450
March 1995 .0450
April 1995 .0465
May 1995 .0490
June 1995 .0490
July 1995 .0500
August 1995 .0470
September 1995 .0450
October 1995 .0450
November 1995 .0480
- ----------------------------------------------------
$.5876
(A) Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
41
<PAGE>
Federal Tax Information
-----------------------
IAI Bond Fund, IAI Government Fund, IAI Minnesota Tax Free Fund
IAI Minnesota Tax Free Fund
- -------------------------------------------------
Payable Date Ordinary Income (A)
- -------------------------------------------------
December 1994 $.0460
January 1995 .0460
February 1995 .0460
March 1995 .0400
April 1995 .0375
May 1995 .0375
June 1995 .0375
July 1995 .0400
August 1995 .0450
September 1995 .0480
October 1995 .0500
November 1995 .0470
- -------------------------------------------------
$.5205
(A) Includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
For the year ended December 31, 1995, 95.3% of distributions were derived from
interest on tax-exempt securities.
42
<PAGE>
<TABLE>
<CAPTION>
IAI Mutual Fund Family
----------------------
To diversify your portfolio, please consider all of the mutual funds in our fund family
===================================================================================================================================
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Capital Appreciation --- Equity securities of companies in developing countries
Countries Fund
- -----------------------------------------------------------------------------------------------------------------------------------
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
[Exempt from Federal
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>
43
<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>
[LOGO]
Mutual Funds
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA fax
612.376.2737
800.945.3863
612.376.2700
<PAGE>
FIXED INCOME FUND
ANNUAL REPORT
IAI Institutional Bond Fund
November 30, 1995
[LOGO]
Mutual Funds
<PAGE>
[PHOTO OF GLOBE]
<PAGE>
Table of Contents
-----------------
IAI Institutional Bond Fund
Annual Report
November 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter............................ 2
Fund Managers' Review........................ 4
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
Independent Auditors' Report.................21
Federal Tax Information......................22
IAI Mutual Fund Family.......................23
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors.....................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Institutional Bond Fund
A Great Time To Diversify
[PHOTO]
Noel P. Rahn,
Chairman
By just about any measure, the six months ended November 30, 1995 was one of the
best periods in my memory for U.S. stocks and bonds. The economy has been
behaving just right; not too fast to bring back inflation, and not too slow to
bring on a recession. In addition, American business is the most productive in
the world. It's a perfect recipe for continued success in the markets.
But just as the investment world was gloomy in 1994, let's not assume that
1995's performance is the norm either. Stocks and bonds can be volatile. That's
particularly important to remember when prices are high. One of the most
important investment principles is diversification--not putting all your eggs in
one basket.
By investing in mutual funds, you have already taken a step toward
diversification. A typical mutual fund invests in dozens of securities, a much
more diversified portfolio than you can generally achieve on your own. But
another way to diversify is to broaden your investment horizon into areas that
haven't done quite as well. One example: international funds.
Developed and developing markets throughout the world have not matched the U.S.
economy during the past year. As a result, their securities markets have lagged
the United States. Since international markets largely move independently of the
United States, an investment overseas is considered an excellent way to
diversify a portfolio. This is particularly true when our markets are nearing or
achieving all-time highs.
If investing internationally is not for you, then there are other ways to
diversify your portfolio. If you've got mutual funds that invest in just one
type of investment objective, then you might want to consider broadening your
investment horizon. Of course, whether you focus on growth, income or a blend of
the two depends on your time horizon. If you're investing for a retirement
that's 30 years down the road, then you can afford to take more risk than if you
need the income from those investments right away.
Regardless of the time frame, the U.S. markets will continue to be impacted by
the performance of the economy, the outlook for inflation, and the level of
interest rates. Over the next six months, the presidential primary season will
also play a role. All of these events are truly unpredictable and uncontrollable
by the average investor. That makes investing a continuing challenge, and
another reason to stay diversified.
2
<PAGE>
Chairman's Letter
-----------------
IAI Institutional Bond Fund
Economic Outlook
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Economic growth will be sluggish early in the year but a recession is unlikely.
Inflation will not be a threat in the first half. Federal Reserve policy is
reactive and will likely remain on its gradual, go-slow path. However, the Fed
has ample room to aggressively lower short-term rates if the economy
deteriorates rapidly. Politics and the President will play a role this year. The
inability to reach a budget agreement in Washington is a risk to the market.
However, economic fundamental should remain favorable for the markets.
Please read the Fund Managers' 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
3
<PAGE>
Fund Managers' Review
---------------------
IAI Institutional Bond Fund
IAI Institutional Bond Fund
[PHOTO]
Larry R. Hill, CFA
IAI Institutional Bond
Fund Co-Manager
[PHOTO]
Timothy A. Palmer, CFA
IAI Institutional Bond
Fund Co-Manager
[PHOTO]
Mark L. Simenstad, CFA
IAI Institutional Bond
Fund Co-Manager
Fund Objective
The IAI Institutional Bond Fund seeks to provide a high level of total return
derived from a combination of capital appreciation and current income. This
objective is achieved by investing primarily in a diversified portfolio of U.S.
Government securities and investment- and non-investment-grade bonds and other
debt securities of similar quality. 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.
The Bond Market--Up Sharply in 1995
In fiscal 1995, the bond market was driven by substantially lower interest
rates--quite a reversal from the year before. In February 1995, the Federal
Reserve Board raised short-term interest rates for the seventh and last time
within a twelve-month period, having doubled short-term interest rates to 6%.
However, by early spring of 1995, it became apparent that the economy was
slowing down and the Fed could begin to ease credit conditions. Although the Fed
didn't actually cut interest rates until July 1995, investors began bidding up
the prices of intermediate to long-term bonds to lock in yields in anticipation
of a Fed rate cut. The result: while short-term rates fell just 0.25%,
intermediate and long-term rates fell by as much as two full percentage points.
For the year ended November 30, 1995, the IAI Institutional Bond Fund produced a
total return of 14.95%. In contrast, the Salomon Broad Investment Grade Bond
Index was up 17.83%. The primary reason for our moderate underperformance
compared to the benchmark index was because our portfolio's duration was shorter
in the early part of 1995. During periods of falling interest rates, portfolios
with shorter duration do not appreciate as rapidly. We were more cautious--
particularly early in the year--when it appeared that inflation might
accelerate, boosting interest rates.
An Emphasis on Corporate and International Bonds
The IAI Institutional Bond Fund invests in a mixture of U.S. Treasury
securities, asset-backed securities, mortgage pass-throughs, investment-grade
and non-investment grade corporate bonds, and international securities.
Corporate and international bonds in particular added significant value to the
portfolio during 1995. In the international area, we invested in bonds issued by
governments of countries such as Japan, Germany and Canada. International
investing provides a greater degree of diversification to the portfolio, as
international markets often move in a noncorrelated fashion to the U.S. bond
market.
In the corporate bond area, we seek investments in companies that are in
improving economic circumstances. When we own a lower-rated bond (which provide
higher yields), we want to make sure that the company is strong and improving
its financial position. For instance, we own some bonds issued by cable
television companies which, due to their degree of leverage, are not rated
investment grade. However, these companies generate substantial cash flow. In
addition, the cable industry is consolidating, which
4
<PAGE>
Fund Managers' Review
---------------------
IAI Institutional Bond Fund
tends to lead to credit upgrades. Other non-investment grade bonds we own are in
the energy area. Companies such as Triton Energy and Gulf Canada Resources offer
strong asset value protection and solid cash flow.
Outlook
By cutting short-term interest rates, the Federal Reserve Board has added
liquidity to the economy. The inflation data indicates little upward pressure in
commodity prices or labor costs in the near-term. As a result, we don't
anticipate an increase in interest rates in the near term. In the event that
interest rates fall, we have trimmed our weightings in mortgage-backed
securities. In a falling rate environment, homeowners tend to refinance their
mortgages. Thus, mortgage-backed securities do not appreciate as rapidly as U.S.
Treasury securities in a falling interest rate environment. Although the economy
is growing slowly, corporate cash flows continue to be strong, and we don't see
a recession looming. As a result, we have increased our weightings in corporate
bonds for the extra yield.
Many have suggested that a major reason for the bond market's strong performance
in 1995 was the apparent commitment by the Congress and the President to balance
the federal budget within seven years. A failure to complete this mission could
have adverse consequences for fixed income investors. To be sure, it would be in
everyone's interest to come to an agreement on the budget before the 1996
election season heats up.
/s/Larry R. Hill
Larry R. Hill, CFA
Fund Co-Manager
/s/Timothy A. Palmer
Timothy A. Palmer, CFA
Fund Co-Manager
/s/ Mark L. Simenstad
Mark L. Simenstad, CFA
Fund Co-Manager
5
<PAGE>
Fund Managers' Review
---------------------
IAI Institutional Bond Fund
Note to Chairman's Letter & Fund Managers' 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.
Credit Rating
% of Portfolio as of 11/30/95
U.S.
Government.............. 51%
AAA..................... 21%
AA...................... 3%
A....................... 9%
BBB..................... 4%
Non-Investment
Grade................... 12%
Value of $2,000,000 investment
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Salomon Broad Salomon Broad
IAI Institutional IAI Institutional Investment Grade Investment Grade
Bond Fund Bond Fund Bond Index Bond Index
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$2,000,000.00 $2,000,000.00
Nov-93 -1.5043 1,969,914.00 -0.84 1,983,200.00
Nov-94 -0.36 1,885,302.63 -0.27 1,922,902.14
Nov-95 1.47 2,167,191.44 1.56 2,265,743.70
</TABLE>
Average Annual Returns+
Through 11/30/95
Since Inception
1 year 11/01/93
================================================================================
IAI Institutional Bond Fund 14.95% 3.94%
- --------------------------------------------------------------------------------
Salomon Broad Investment Grade Bond Index 17.83% 6.17%
+ Past performance is not predictive of future performance
Sectors
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
Foreign Denominated 8%
Short-Term 2%
Corporate 24%
Preferred Stock 3%
U.S. Government
Agency Mortgage-Backed 26%
Municipal 3%
Asset-Backed 11%
U.S. Government &
Governmental Agency 23%
Effective Maturity
% of Portfolio as of 11/30/95
[GRAPH APPEARS HERE]
23% 20% 41% 8% 8%
- -------------------------------------------------------
0-3 3-5 5-10 10-20 20+
Years
6
<PAGE>
Fund Portfolio
--------------
IAI Institutional Bond Fund
November 30, 1995
(percentage figures indicate percentage of total net assets)
Non-Convertible Preferred Stock -- 2.8%
<TABLE>
<CAPTION>
Market
Rate Quantity Value (a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Finance -- 2.8%
Grand Metro Delaware Series A 9.42% 102,180 $ 2,873,813
=========================================================================================================================
Total Investments in Non-Convertible Preferred Stock
(Cost: $2,755,795).........................................................................................$ 2,873,813
=========================================================================================================================
Corporate Bonds -- 25.4%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------------
Finance -- 4.7%
ABN-AMRO Bank 7.13% 10/15/93 $ 2,700,000 $ 2,620,269
Prudential Insurance (e) 8.30 07/01/25 2,000,000 2,095,080
----------------
4,715,349
- -------------------------------------------------------------------------------------------------------------------------
Industrial -- 17.1%
Archer Daniels Midland 8.88 04/15/11 40,000 48,049
Cablevision Industries 10.75 01/30/02 1,000,000 1,082,500
Century Communications 9.75 02/15/02 2,000,000 2,070,000
Coca Cola Enterprises (zero-coupon bond) 7.88 (c) 06/20/20 16,935,000 3,244,238
Columbia/HCA Healthcare (medium-term note) 6.63 07/15/45 1,420,000 1,507,642
Container 9.75 04/01/03 1,500,000 1,473,750
Flagstar 10.75 09/15/01 500,000 461,250
Gulf Canada Resources (Yankee) 9.63 07/01/05 1,000,000 1,030,000
Lenfest Communications 8.38 11/01/05 2,250,000 2,244,375
Penn Traffic 10.65 11/01/04 2,000,000 1,847,500
RJR Nabisco 7.63 09/15/03 1,000,000 969,450
Triton Energy (step bond) 9.33 (c) 12/15/00 1,500,000 1,391,250
----------------
17,370,004
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
7
<PAGE>
Fund Portfolio
--------------
IAI Institutional Bond Fund
November 30, 1995
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utilities -- 3.6%
Commonwealth Edison 8.38% 10/15/06 $2,000,000 $ 2,253,060
Long Island Lighting 7.85 05/15/99 1,350,000 1,383,926
---------------
3,636,986
=============================================================================================================================
Total Investments in Corporate Bonds
(Cost: $24,813,596)............................................................................................$25,722,339
=============================================================================================================================
U.S. Government & Government Agency Obligations -- 23.4%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes -- 17.0%
4.63% 02/15/96 $ 150,000 $ 149,695
6.13 07/31/96 440,000 441,857
6.00 11/30/97 3,000,000 3,035,160
7.88 04/15/98 1,420,000 1,496,765
5.13 11/30/98 4,670,000 4,629,138
7.13 09/30/99 480,000 506,323
6.25 05/31/00 1,670,000 1,716,710
7.88 08/15/01 3,170,000 3,516,703
6.25 02/15/03 1,700,000 1,756,049
---------------
17,248,400
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds -- 3.3%
10.75 05/15/03 2,000,000 2,602,500
11.63 11/15/04 150,000 210,351
12.00 08/15/13 50,000 75,985
7.13 02/15/23 200,000 222,624
7.50 11/15/24 190,000 222,152
---------------
3,333,612
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Obligations -- 3.1%
Financing Corporation STRIPS (zero-coupon bond) 6.71 (c) 05/11/05 4,175,000 2,345,891
Resolution Funding Corporation 8.13 10/15/19 685,000 826,493
---------------
3,172,384
=============================================================================================================================
Total Investments in U.S. Government & Government Agency Obligations
(Cost: $23,221,714)............................................................................................$23,754,396
=============================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
8
<PAGE>
Fund Portfolio
--------------
IAI Institutional Bond Fund
November 30, 1995
U.S. Government Agency Mortgage-Backed Securities -- 27.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation -- 2.4%
10.50% 11/01/00 $1,646,064 $ 1,724,252
10.50 02/01/04 493,354 534,983
8.00 08/01/08 72,262 74,390
---------------
2,333,625
- ------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation Gold -- 3.6%
7.00 12/01/09 (b) 3,660,000 3,704,579
- ------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association -- 4.5%
6.00 11/01/02 4,650,000 4,618,008
- ------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association -- 16.5%
8.50 08/15/17 1,351,727 1,431,020
9.00 12/15/17 5,714,344 6,085,007
10.00 12/15/20 406,588 444,832
6.50 09/15/23 65,060 63,881
6.50 10/15/23 599,149 588,288
6.50 11/15/23 989,100 971,619
6.50 12/15/23 2,351,072 2,308,449
6.50 01/15/24 3,102,527 3,046,279
6.50 04/15/24 823,269 808,344
6.50 06/15/24 1,037,041 1,018,241
---------------
16,765,960
========================================================================================================================
Total Investments in U.S. Government Agency Mortgage-Backed Securities
(Cost: $26,598,049).......................................................................................$27,422,172
========================================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
9
<PAGE>
Fund Portfolio
--------------
IAI Institutional Bond Fund
November 30, 1995
Asset-Backed Securities -- 11.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Related -- 5.9%
Chase Manhattan Grantor Trust 95-A A 6.00% 09/17/01 $ 930,003 $ 933,436
Chase Manhattan Grantor Trust 95-B A 5.90 11/15/01 3,000,000 3,007,290
Ford Credit Grantor Trust 95-B A 5.90 10/15/00 2,020,000 2,025,151
-------------
5,965,877
- -------------------------------------------------------------------------------------------------------
Credit Card Related -- 5.1%
Chemical Master Credit Card Trust I 95-2 A 6.23 06/15/03 1,540,000 1,565,518
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,000,000 1,010,850
Nationsbank Credit Card Master Trust 95-1 A 6.45 04/15/03 2,500,000 2,555,450
Private Label Credit Card Master Trust II 94-2 A 7.80 09/20/03 50,000 52,612
-------------
5,184,430
=======================================================================================================
Total Investments in Asset-Backed Securities
(Cost: $11,031,332).......................................................................$11,150,307
=======================================================================================================
</TABLE>
Foreign Denominated Bonds -- 8.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Government Bonds -- 5.4%
German Government (German mark) 7.50% 10/20/97 1,250,000 $ 919,195
6.50 07/15/03 3,900,000 2,777,195
7.50 11/11/04 2,350,000 1,766,280
------------
5,462,670
- -------------------------------------------------------------------------------------------------------
Supra-National Bonds -- 2.9%
International Bank for Reconstruction
& Development (Japanese yen) 4.75 12/20/04 260,000,000 2,963,380
=======================================================================================================
Total Investments in Foreign Denominated Bonds
(Cost: $8,519,121).........................................................................$8,426,050
=======================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
10
<PAGE>
Fund Portfolio
--------------
IAI Institutional Bond Fund
November 30, 1995
Municipal Bonds -- 2.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue Bond -- 2.9%
Massachusetts State Water Resource 5.00% 03/01/22 $3,100,000 $ 2,902,065
==============================================================================================================
Total Investments in Municipal Bonds
(Cost: $2,741,091)..............................................................................$ 2,902,065
==============================================================================================================
Total Investments in Long-Term Securities
(Cost: $99,680,698).............................................................................$102,251,142
==============================================================================================================
</TABLE>
Short-Term Securities -- 1.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government & Government Agency Obligations -- 1.8%
U.S. Treasury Bill 5.46% 01/25/96 $ 250,000 $ 247,976
Federal Home Loan Bank (discount note) 5.80 12/01/95 1,600,000 1,600,000
--------------
1,847,976
==============================================================================================================
Total Investments in Short-Term Securities
(Cost: $1,847,976)..............................................................................$ 1,847,976
==============================================================================================================
Total Investments in Securities
(Cost: $101,528,674) (f)........................................................................$104,099,118
==============================================================================================================
Other Assets & Liabilities (Net) - (2.6%)
..............................................................................................$ (2,670,206)
==============================================================================================================
Total Net Assets
..............................................................................................$101,428,912
==============================================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
11
<PAGE>
Notes to Fund Portfolio
-----------------------
IAI Institutional Bond Fund
November 30, 1995
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At November 30, 1995, the total cost of
securities purchased on a when-issued basis was $3,693,185.
(c)
Interest rate shown represents yield-to-maturity at date of purchase.
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(e)
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.
(f)
At November 30, 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>
<CAPTION>
<S> <C>
Cost for federal income tax purposes................ $101,528,674
==================
Gross unrealized appreciation....................... $ 2,972,926
Gross unrealized depreciation....................... (402,482)
------------------
Net unrealized appreciation......................... $ 2,570,444
==================
</TABLE>
12
<PAGE>
Statement of Assets and Liabilities
-----------------------------------
IAI Institutional Bond Fund
November 30, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $101,528,674) (see Fund Portfolio) $104,099,118
Cash in bank on demand deposit 54,108
Accrued interest receivable 929,473
Receivable for investment securities sold 98,521
Receivable for foreign currency contracts held, at value (Note 5) 1,800,000
Other 16,058
--------------
Total assets 106,997,278
--------------
Liabilities
Payable for investment securities purchased 3,693,185
Payable for foreign currency contracts held, at value (Note 5) 1,833,834
Accrued investment advisory fee 41,347
--------------
Total liabilities 5,568,366
--------------
Net assets applicable to outstanding capital stock $101,428,912
==============
Represented by:
Capital stock $ 106,766
Additional paid-in capital 100,248,924
Undistributed net investment income 900,679
Accumulated net realized losses on investments (2,361,156)
Unrealized appreciation (depreciation) on:
Investment securities $ 2,570,444
Other assets and liabilities denominated in foreign currency (36,745)
---------------
2,533,699
--------------
Total -- representing net assets applicable to outstanding capital stock $101,428,912
==============
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 10,676,597
--------------
Net asset value per share of outstanding capital stock $ 9.50
==============
</TABLE>
See accompanying Notes to Financial Statements on page 17
13
<PAGE>
Statement of Operations
-----------------------
IAI Institutional Bond Fund
Year ended November 30, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Investment Income
Income
Interest $ 6,311,895
Dividends 180,475
--------------
Total Income 6,492,370
--------------
Expenses
Investment advisory fee 446,744
--------------
Net investment income 6,045,626
--------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 3,521,855
Foreign currency transactions 96,973
Futures contracts (2,293,229)
--------------
1,325,599
Net change in unrealized appreciation (depreciation) on:
Investment securities $ 4,983,161
Other assets and liabilities denominated in foreign currency 10,746
Futures contracts (811)
-------------
4,993,096
--------------
Net gain on investments and foreign currency 6,318,695
--------------
Net increase in net assets resulting from operations $12,364,321
==============
</TABLE>
See accompanying Notes to Financial Statements on page 17
14
<PAGE>
Statements of Changes in Net Assets
-----------------------------------
IAI Institutional Bond Fund
<TABLE>
<CAPTION>
Period from
Year ended April 1, 1994 to
November 30, 1995 November 30, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 6,045,626 $ 3,111,944
Net realized gains (losses) 1,325,599 (2,526,349)
Net change in unrealized appreciation (depreciation) 4,993,096 (962,159)
----------------------------------------
Net increase (decrease) in net assets resulting from operations 12,364,321 (376,564)
----------------------------------------
Distributions to Shareholders from:
Net investment income (6,077,806) (3,053,720)
----------------------------------------
Total distributions (6,077,806) (3,053,720)
----------------------------------------
Capital Share Transactions
Net proceeds from sale of 3,431,177 and 7,639,517 shares 31,579,054 69,983,495
Net asset value of 657,760 and 336,579 shares issued to
shareholders in reinvestment of distributions 6,059,953 3,040,478
Cost of 1,742,824 and 3,009,622 shares redeemed (16,220,253) (27,348,332)
----------------------------------------
Increase in net assets from capital share transactions 21,418,754 45,675,641
----------------------------------------
Total increase in net assets 27,705,269 42,245,357
Net assets at beginning of period 73,723,643 31,478,286
----------------------------------------
Net assets at end of period $101,428,912 $ 73,723,643
========================================
(including undistributed net investment income
of $900,679 and $374,353)
</TABLE>
See accompanying Notes to Financial Statements on page 17
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
Year ended April 1, 1994+ to November 1, 1993***
November 30, 1995 November 30, 1994 to March 31, 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of period $ 8.85 $ 9.36 $ 10.00
---------------------------------------------------------------
Operations
Net investment income .62 .38 .22
Net realized and unrealized gains (losses) .66 (.51) (.65)
---------------------------------------------------------------
Total from operations 1.28 (.13) (.43)
---------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.63) (.38) (.21)
---------------------------------------------------------------
Total distributions (.63) (.38) (.21)
---------------------------------------------------------------
Net Asset Value
End of period $ 9.50 $ 8.85 $ 9.36
===============================================================
Total investment return* 14.95% (1.44%) (4.35%)
Net assets at end of period (000's omitted) $101,429 $ 73,724 $ 31,478
Ratios
Expenses to average daily net assets .50% .50%** .50%**
Net investment income to average
daily net assets 6.76% 6.42%** 5.84%**
Portfolio turnover rate
(excluding short-term securities) 358.8% 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 fiscal year-end change from March 31 to November 30.
16
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Institutional Bond Fund
November 30, 1995
[1] Summary of Significant Accounting Policies
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies. IAI
Institutional Bond Fund is a separate portfolio of IAI Investment Funds I, Inc.
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 an eight-month period from April
1, 1994 to November 30, 1994.
Significant accounting policies followed by the Fund are summarized below:
Security Valuation
Investments in securities traded on national 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
is used.
The values of debt securities are determined using pricing services or prices
quoted by independent brokers. Short-term securities with maturities of 60 days
or less from the date of purchase are valued at amortized cost. Short-term
securities with maturities 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 a fund to "rollover" its purchase
commitments, the Fund receives negotiated fees. For the year ended November 30,
1995 the Fund did not earn any fees from dollar-rolls.
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.
17
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Institutional Bond Fund
November 30, 1995
[1] Summary of Significant Accounting Policies (Cont.)
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 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.
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.
18
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Institutional Bond Fund
[1] Summary of Significant Accounting Policies (Cont.)
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $558,506
and accumulated net realized losses have been increased by $558,506.
For federal income tax purposes, the Fund has a capital loss carryover of
approximately $2,361,000 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. Dividend income is recorded on the ex-dividend date.
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.
Distributions to Shareholders
Distributions to shareholders are recorded on the record date. Cash payments or
reinvestments in additional shares are made at the net asset value at the close
of business on the payable 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 the prime
interest rate. 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. There were no borrowings outstanding at
November 30, 1995.
19
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Institutional Bond Fund
November 30, 1995
[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 year ended November 30, 1995, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $327,744,840 and $305,137,514, respectively.
[5] Foreign Currency Commitments
At November 30, 1995, the Fund had entered into a foreign currency exchange
contract. The unrealized depreciation of $33,834 for that contract at November
30, 1995 is included in unrealized appreciation (depreciation) on other assets
and liabilities denominated in foreign currency in the Statement of Operations.
<TABLE>
<CAPTION>
Exchange Currency to U.S. $ Value as of Currency to U.S. $ Value as of
Date be Delivered November 30, 1995 be Received November 30, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12/07/95 182,012,000 Japanese Yen $1,833,834 1,800,000 U.S. Dollars $1,800,000
</TABLE>
20
<PAGE>
Independent Auditors' Report
----------------------------
IAI Institutional Bond Fund
The Board of Directors and Shareholders
IAI Investment Funds I, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Institutional Bond Fund (a portfolio within IAI
Investment Funds I, Inc.) as of November 30, 1995 and the related statement of
operations for the year then ended, the statements of changes in net assets for
the year ended November 30, 1995 and the period from April 1, 1994 to November
30, 1994 and the financial highlights for the periods presented on page 16 of
the annual report. 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. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received or
delivered, we carry out other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Institutional Bond Fund at November 30, 1995, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
stated in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 12, 1996
21
<PAGE>
Federal Tax Information
-----------------------
IAI Institutional Bond Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information 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 1994 $.0935
January 1995 .0500
February 1995 .0500
March 1995 .0450
April 1995 .0400
May 1995 .0450
June 1995 .0470
July 1995 .0500
August 1995 .0500
September 1995 .0500
October 1995 .0530
November 1995 .0580
====================================================
$.6315
(A) Includes distributions of short-term capital gains, if any, which are
taxable as ordinary income.
For the year ended December 31, 1995, 2.71% of ordinary income distributions
qualify for deduction by corporations.
22
<PAGE>
<TABLE>
<CAPTION>
IAI Mutual Fund Family
----------------------
To diversify your portfolio, please consider all of the mutual funds in our fund family
===================================================================================================================================
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Capital Appreciation --- Equity securities of companies in developing countries
Countries Fund
- -----------------------------------------------------------------------------------------------------------------------------------
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 + Income] short-term instruments
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
[Exempt from Federal 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>
23
<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>
[LOGO]
Mutual Funds
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA fax
612.376.2737
800.945.3863
612.376.2700
