FIXED INCOME FUNDS
ANNUAL REPORT
IAI BOND FUND
IAI GOVERNMENT BOND
NOVEMBER 30, 1996
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI BOND FUND, IAI GOVERNMENT FUND
ANNUAL REPORT
NOVEMBER 30, 1996
Chairman's Letter...............................2
Fund Managers' Reviews
IAI BOND FUND...............................4
IAI GOVERNMENT FUND.........................6
Fund Portfolios
IAI BOND FUND...............................8
IAI GOVERNMENT FUND........................12
Notes to Fund Portfolios.......................15
Statements of Assets and Liabilities...........16
Statements of Operations.......................18
Statements of Changes in Net Assets............20
Financial Highlights
IAI BOND FUND..............................22
IAI GOVERNMENT FUND........................23
Notes to Financial Statements..................24
Independent Auditors' Report...................30
Federal Tax Information........................31
IAI Mutual Fund Family.........................33
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND
[PHOTO]
NOEL P. RAHN,
CHAIRMAN
BETTER DAYS FOR BONDS
For much of 1996, the bond market endured a bumpy ride, as interest rates rose
steadily, ignited by a spring quarter that was one of the strongest economic
periods in years. Indeed, for much of the spring and summer, the benchmark
30-year Treasury bond traded at about 7% as investors feared inflation and
action by the Federal Reserve Board to slow down the economy.
However, by the fall, the economy slowed down and the Fed chose not to tighten
credit, partly because it did not want to influence the presidential election in
November. Investors seemed to like the election results--a Democratic White
House and a Republican Congress--as the stock market surged to new highs and the
bond market recovered lost ground from earlier in the year.
As we begin 1997, there are many reasons to remain optimistic about the bond
market. Interest rates remain attractive relative to inflation--that is, a
30-year bond trading at 6.5% is a good yield compared to an inflation rate
beneath 3%. The federal budget deficit has fallen significantly for four
consecutive years. The rate of economic growth, although buoyant for a quarter
or two at a time, continues on a moderate course. And interest rates in foreign
countries are falling, particularly in Europe, where the economy is sluggish.
That's helpful to U.S. bond issuers, who don't have to compete quite as hard on
a worldwide basis for capital. As a result, the Federal Reserve Board, which
controls U.S. short-term interest rates, has kept a fairly low profile of late.
To be sure, Chairman Greenspan did manage to upset world markets in late
November with some comments in an after-dinner speech in which he suggested that
the U.S. stock market was overvalued. That incident just confirms a few points
about the markets that we've been stressing over the past several years. First,
global communication is instantaneous. Investors throughout the world reacted to
Greenspan's remarks as soon as exchanges opened in their time zones. Second, the
American markets lead the world; indeed, it is difficult to imagine a scenario
in which a foreign business leader could make a speech and send our markets down
2% in one day. Third, markets are interrelated. A Fed chairman's comments about
the U.S. stock market affects institutional investors around the world, many of
whom have watched in envy as the Dow Jones Industrials have soared past their
local markets. And fourth, volatility is inevitable and often fleeting. The 2%
decline that seemed like a major move around Thanksgiving was virtually
forgotten by Christmas.
If you're a long-term investor, then these news stories should be nothing more
than mildly amusing to you. Instead, you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. And you
should make sure that your investment portfolio generally reflects your
long-term investment goals for 1997 and beyond.
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Economic momentum has slowed appreciably since mid-year. Broad inflation
indicators continue to show little movement, with the GDP price deflator rising
by only 1.9% over the last four quarters. We expect the economy to slow further
and broad inflation to remain subdued. The United States has excess capacity in
just about everything--except labor. Foreign economies are sluggish, adding to
the availability of goods for sale in our markets. Pricing power is scarce at
the retail level and should remain so. Consumer spending will be slow until
spring when lower rates may encourage housing demand. The risk to our forecast
is that a softer economy unfolds early in 1997.
This outlook is generally favorable for the markets. Short-term interest rates
should fall, pulling long bond yields with them, although the drop should be
limited to 4.5% on Treasury bills and 6% on Treasury bonds. Liquidity will
continue to flow to stocks, providing an upward bias to prices. Lower rates and
stable inflation will help market valuations, but earnings uncertainty will
prevent substantial appreciation.
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
FUND MANAGERS' REVIEW
IAI BOND FUND
IAI BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BOND FUND CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI BOND FUND CO-MANAGER
[PHOTO]
STEPHEN C. COLEMAN, CFA
IAI BOND FUND CO-MANAGER
FUND OBJECTIVE
The IAI Bond Fund's objective is to provide a high level of current income
consistent with preservation of capital. 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.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
In the first half of 1996, erratic economic growth produced volatile bond market
returns. Early weakness in January and February was followed in the second
quarter by one of the strongest periods of growth since the expansion began more
than five years ago. Interest rates began rising in mid-February. For most of
the summer, long Treasury bond yields traded around 7% due to investor fear over
rising inflation and prospective Federal Reserve Bank (the Fed) tightening.
However, the Fed chose not to tighten credit in anticipation of a slower
economy. The Board affirmed its outlook on three separate occasions over the
summer and early fall period. In late September, rates began to fall as
investors grew to accept the Fed's point of view.
Rising rates pushed bond returns lower in the first eight months of the year.
Price gains in September finally pushed the year-to-date returns into positive
territory. Further strong gains in October and November ensured positive returns
for the year.
Although 1996 was a difficult year to make money in bonds, the IAI Bond Fund
benefited from several strategies. The Fund emphasized corporate bonds, both
investment grade and high yield. Corporate bonds outperformed other sectors
during the six-month period ended November 30, 1996. Selected non-dollar bonds,
asset-backed securities and mortgage-backed issues were also used to add yield
to the portfolio.
Issue selection strategies also boosted returns. The Fund continues to invest in
several 100-year maturity bonds. These issues perform well when interest rates
are volatile. Holdings include Dresser Industries and ABN-AMRO Bank, the large
Dutch bank. An overweighting in financial and energy companies benefited from
improving credit quality. Canadian government bonds were also strong performers
in the portfolio.
Portfolio duration was also extended in September as our fundamental benchmarks
indicated slower demand and a stable Fed policy for the remainder of the year.
Falling interest rates boosted the Fund's return after implementing this shift.
OUTLOOK
Economic growth has slowed from its stronger pace of mid-1996. Pricing power
remains scarce so inflation rates are stable. We expect these conditions to
prevail in the early months of 1997, producing a favorable environment for
bonds. Last year was a strong year for stocks and a weak year for bonds. The IAI
Bond Fund is a good investment alternative for those investors who want to cash
in their stock gains, but do not want to raise cash. The Fund is well positioned
to benefit from the positive rate environment we see ahead.
FUND MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[CHART]
IAI Bond Fund Lehman Aggregate Bond Index
----------------------------------------------------------------
11/3O/86 $10,000 $10,000
11/30/87 10,173 10,176
11/30/88 10,907 11,115
11/30/89 12,653 12,711
11/30/90 13,277 13,674
11/30/91 15,176 15,645
11/30/92 16,600 17,031
11/30/93 18,927 18,886
11/30/94 17,992 18,309
11/30/95 20,770 21,539
11/30/96 22,191 22,844
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/96
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI Bond Fund 6.85% 7.90% 8.30%
- --------------------------------------------------------------------------------
Lehman Aggregate Bond Index 6.07% 7.87% 8.61%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 11/30/96
[PIE CHART]
14% U.S. Government Agency Mortgage-Backed
47% Corporate
2% Asset-Backed
5% Preferred Stock
6% Short-Term
22% U.S. Government Obligations
4% Foreign Denominated
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/96
[BAR GRAPH]
YEARS
0-3 15%
3-5 18%
5-10 35%
10-20 3%
20+ 29%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI BOND FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A GUARANTEE
OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL MAY
FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PRO SPECTUS. 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 11/30/96
U.S.
Government..... 41%
Aaa............ 7%
Aa............. 3%
A.............. 14%
Baa............ 25%
Non-Investment
Grade.......... 10%
FUND MANAGERS' REVIEW
IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
[PHOTO]
SCOTT A. BETTIN, CFA
IAI GOVERNMENT FUND
CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI GOVERNMENT FUND
CO-MANAGER
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 seven years or less.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
In the first half of 1996, erratic economic growth produced volatile bond market
returns. Early weakness in January and February was followed in the second
quarter by one of the strongest periods of growth since the expansion began more
than five years ago. Yields began rising in mid-February. For most of the
summer, long Treasury bond yields traded around 7% due to investor fear of
rising inflation and prospective Federal Reserve Bank (the Fed) tightening.
However, the Fed chose not to tighten credit conditions in anticipation of a
slowdown. In mid-September rates began to fall as investors grew to accept the
Fed's point of view.
Part of our strategy is to adjust the Fund's allocation between Treasuries and
mortgage- backed securities (MBS) based upon our assessment of relative
valuation between the two sectors and our projections of future total returns.
Early in the period the Fund emphasized MBS. This sector performs better when
interest rates are rising partly because they offer more yield.
Within the MBS sector the Fund's strategy has been to use a combination of high
coupon and low coupon mortgages, avoiding the current, newly issued coupons.
This combination strategy, called a coupon barbell, provides much better price
return when interest rates make volatile swings as they did in 1996. Holdings
have also been biased toward seasoned pools that were originated several years
ago. Prepayment rates on these securities are generally more predictable and
stable than newer issues. The Fund's mortgage holdings are concentrated in
federal agency issues.
The Fund also holds several corporate bond issues that have unique structural
features that reduce price risk when interest rates are volatile. Using these
corporate bonds allows us to offset some of the price risk of mortgages when
rates are volatile. In addition, the corporate bonds increase the portfolio's
yield. The duration of the portfolio is slightly longer than the market
benchmark to take advantage of the trend toward lower interest rates.
OUTLOOK
Looking ahead to 1997, we see further slowing of economic activity in the early
part of the year, led by slower consumer spending. Inflation will remain stable
due to the lack of pricing power caused by the excess of goods and services in
the marketplace. These conditions will result in a moderate drop in interest
rates, particularly short-term rates. By springtime, the drop in rates will
begin to encourage a pick-up in consumer demand for durable goods and housing,
resulting in renewed economic momentum. The Fund is positioned to benefit from
these positive fundamentals.
VALUE OF $10,000 INVESTMENT+
[CHART]
IAI GOVERNMENT FUND SALOMON BROTHERS INTERMEDIATE TREASURY/
(INCEPTION 8/08/91) AGENCY/ MORTGAGE-BACKED INDEX*
- --------------------------------------------------------------------------------
8/01/91 $ 10,000 $10,000
11/30/91 10,464 10,398
11/30/92 11,247 11,182
11/30/93 12,292 12,068
11/30/94 12,010 11,884
11/30/95 13,331 13,684
11/30/96 13,995 14,528
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/96
Since Inception
1 Year 5 Years 8/08/91
- --------------------------------------------------------------------------------
IAI Government Fund 4.99% 5.99% 6.53%
- --------------------------------------------------------------------------------
Salomon Brothers Intermediate Treasury/
Agency/Mortgage-Backed Index 6.17% 6.92% 7.37%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 9/01/91
SECTORS
% OF PORTFOLIO AS OF 11/30/96
[PIE CHART]
41% U.S. Government Agency Mortgage-Backed
7% Corporate
51% U.S. Government
1% Short-Term
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/96
[BAR GRAPH]
YEARS
0-3 16%
3-5 28%
5-10 52%
10-20 0%
20+ 4%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' 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 PRO SPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 46.3%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 16.0%
ABN-AMRO Bank 7.13% 10/15/93 $ 2,600,000 $ 2,536,378
Banc One 7.63 10/15/26 590,000 614,556
Conseco Finance Trust II 8.70 11/15/26 3,200,000 3,289,632
Continental 8.38 08/15/12 2,250,000 2,463,457
Nationwide CSN Trust (e) 9.88 02/15/25 3,000,000 3,465,150
Travelers Capital III 7.63 12/01/36 (b) 1,500,000 1,500,000
--------------
13,869,173
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 16.2%
Buckeye Cellulose 9.25 09/15/08 750,000 772,500
Circus Circus 6.70 11/15/96 200,000 200,764
Dresser Industries 7.60 08/15/96 540,000 572,983
Freeport-McMoran C & G 7.20 11/15/26 2,400,000 2,418,062
HomeSide (e) 11.25 05/15/03 1,000,000 1,115,000
Levi Strauss (e) 6.80 11/01/03 1,000,000 1,014,600
Mitchell Energy 9.25 01/15/02 3,250,000 3,532,393
Newport News Ship (e) 8.63 12/01/06 650,000 661,375
RJR Nabisco 8.00 07/15/01 2,000,000 2,031,560
Tele-Communications International 4.50 02/15/06 250,000 200,000
Triton Energy (STEP BOND) 9.94 (c) 12/15/00 1,500,000 1,556,250
--------------
14,075,487
- -------------------------------------------------------------------------------------------------------------------
UTILITIES - 2.9%
California Energy (STEP BOND) 9.52 (c) 01/15/04 980,000 1,014,300
El Paso Natural Gas 7.50 11/15/26 1,250,000 1,292,438
PSI Energy 6.35 11/15/06 210,000 211,188
--------------
2,517,926
- -------------------------------------------------------------------------------------------------------------------
YANKEE - 11.2%
Banco Nacional 9.63 11/15/03 1,500,000 1,507,500
Gulf Canada Resources 8.35 08/01/06 500,000 526,250
Hydro-Quebec 8.50 12/01/29 2,115,000 2,414,442
Pohang Iron & Steel 7.13 11/01/06 550,000 563,244
Republic of Argentina 11.00 10/09/06 1,500,000 1,565,625
Republic of Indonesia 7.75 08/01/06 800,000 832,048
Tenaga Nasional (e) 7.50 01/15/96 2,300,000 2,284,222
--------------
9,693,331
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $38,893,570)................................................................................$ 40,155,917
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1996
U.S. GOVERNMENT OBLIGATIONS - 21.4%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 17.9%
7.75% 01/31/00 $ 900,000 $ 951,894
6.50 05/31/01 500,000 513,205
6.25 02/15/03 2,730,000 2,778,621
5.75 08/15/03 3,750,000 3,711,338
7.88 11/15/04 3,750,000 4,185,937
7.50 02/15/05 1,500,000 1,641,330
7.00 07/15/06 1,690,000 1,801,439
----------------
15,583,764
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 3.5%
9.25 02/15/16 845,000 1,105,632
8.88 08/15/17 1,070,000 1,362,581
8.13 08/15/19 455,000 542,728
----------------
3,010,941
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $17,974,460) $ 18,594,705
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 13.3%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 13.3%
8.00% 09/15/08 $ 388,515 $ 403,217
9.00 05/15/16 614,696 662,667
8.00 09/15/17 2,298,136 2,398,380
9.00 11/15/17 1,889,150 2,046,761
9.00 12/15/17 2,653,557 2,863,321
7.00 12/15/23 1,035,798 1,034,172
6.50 05/15/24 242,193 236,591
6.50 08/15/26 1,938,016 1,893,190
----------------
11,538,299
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $11,254,272) $ 11,538,299
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 2.4%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 1.3%
Ford Credit Grantor Trust 95-B A 5.90% 10/15/00 $ 1,123,098 $ 1,122,739
- -------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 1.1%
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,000,000 1,006,360
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $2,121,358) $ 2,129,099
- -------------------------------------------------------------------------------------------------------------------
FOREIGN DENOMINATED BONDS - 4.5%
PRINCIPAL MARKET
RATE MATURITY AMOUNT (d) VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS - 4.5%
Canadian Government (CANADIAN DOLLAR) 8.00% 06/01/23 4,500,000 $ 3,881,613
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $3,663,750) $ 3,881,613
- -------------------------------------------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 4.6%
MARKET
RATE QUANTITY VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL - 4.6%
SI Financing Trust I 2.30% 150,000 $ 3,956,250
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(COST: $3,810,938) $ 3,956,250
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $77,718,348) $ 80,255,883
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 6.0%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 6.0%
Federal Home Loan Bank (DISCOUNT NOTE) 5.33% 12/02/96 $ 4,300,000 $ 4,299,363
U.S. Treasury Bill 5.18 03/06/97 900,000 888,246
---------------
5,187,609
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $5,187,429)................................................................................$ 5,187,609
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $82,905,777) (f)...........................................................................$ 85,443,492
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS & LIABILITIES (NET) - 1.5%
.............................................................................................$ 1,359,759
- -------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
.............................................................................................$ 86,803,251
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 6.9%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL - 6.9%
Circus Circus 6.70% 11/15/96 $ 500,000 $ 501,910
Citgo Petroleum 7.88 05/15/06 900,000 939,654
Freeport-McMoran C & G 7.20 11/15/26 600,000 604,516
--------------
2,046,080
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $1,996,866).................................................................................$ 2,046,080
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 50.0%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 35.7%
6.25% 06/30/98 $ 1,200,000 $ 1,212,744
5.88 08/15/98 1,800,000 1,809,000
7.75 11/30/99 1,000,000 1,055,310
6.25 08/31/00 2,300,000 2,336,294
6.50 05/31/01 1,000,000 1,026,410
7.50 11/15/01 1,000,000 1,070,310
6.88 05/15/06 2,000,000 2,113,740
--------------
10,623,808
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BOND - 14.3%
10.75 05/15/03 3,400,000 4,263,804
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $14,838,611) $ 14,887,612
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 41.2%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.2%
5.50% 07/01/98 $ 10,947 $ 10,829
7.00 01/01/99 17,089 17,324
6.00 07/01/09 34,103 33,740
-----------------
61,893
- -------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 21.5%
6.00 11/01/98 1,980,648 1,970,110
6.00 01/01/09 1,858,854 1,826,900
6.00 08/01/24 764,601 728,757
6.50 08/01/25 1,919,413 1,867,819
-----------------
6,393,586
- -------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 0.1%
11.50 01/01/01 16,549 17,992
11.50 01/01/13 11,620 13,227
-----------------
31,219
- -------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARFS - 1.4%
10.00 02/01/01 20,536 21,865
10.00 01/01/03 350,210 372,862
-----------------
394,727
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 18.0%
8.00 09/15/08 451,762 468,857
11.00 06/15/13 12,572 14,141
9.00 06/15/17 1,679,148 1,819,239
8.00 11/15/17 899,718 940,205
9.00 11/15/17 98,751 106,990
7.00 12/15/23 1,129,962 1,128,188
6.50 08/15/26 905,035 884,102
-----------------
5,361,722
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES
(COST: $11,954,464) $ 12,243,147
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $28,789,941) $ 29,176,839
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1996
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 0.3%
PRINCIPAL MARKET
RATE MATURITY AMOUNT VALUE (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATION - 0.3%
U.S. Treasury Bill 5.18% 03/06/97 $ 100,000 $ 98,694
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $98,674) $ 98,694
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $28,888,615) (f) $ 29,275,533
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 1.6%
$ 475,181
- -------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
$ 29,750,714
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
NOTES TO FUND PORTFOLIOS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1996
(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, 1996 the total cost of
securities purchased on a when-issued basis in the IAI Bond Fund portfolio was
$1,500,000.
(c)
The interest rate shown for step bonds represents effective yield at November
30, 1996, based upon the estimated timing and amount of future interest and
principal payments.
Step bond - Security that remains zero-coupon until a predetermined
date at which time the stated coupon rate becomes payable at
regular intervals.
(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 1933. This issue
may only be sold to other qualified institutional buyers, and is considered
liquid under guidelines established by the Board of Directors.
(f)
At November 30, 1996, 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
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal income tax purposes $ 83,061,247 $ 28,888,615
- ----------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 2,466,526 $ 556,222
Gross unrealized depreciation (84,281) (169,304)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 2,382,245 $ 386,918
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1996
IAI BOND FUND IAI GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $82,905,777; and $28,888,615, respectively)
(see Fund Portfolios) $ 85,443,492 $ 29,275,533
Cash in bank on demand deposit 78,078 201,617
Receivable for investment securities sold 3,616,888 --
Accrued interest and dividends receivable 1,141,106 273,564
Other 19,966 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 90,299,530 29,750,714
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 3,496,279 --
TOTAL LIABILITIES 3,496,279 --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 86,803,251 $ 29,750,714
- ---------------------------------------------------------------------------------------------------------------------------------
REPRESENTED BY:
Capital stock $ 93,129 $ 29,901
Additional paid-in capital 88,658,113 31,193,416
Undistributed net investment income 210,296 50,296
Accumulated net realized losses on investments) (4,695,731) (1,909,817)
Unrealized appreciation (depreciation) on:
Investment securities $2,537,715 $386,918
Other assets and liabilities denominated in foreign currency (271) --
---------- ---------
2,537,444 386,918
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO
OUTSTANDING CAPITAL STOCK $ 86,803,251 $ 29,750,714
- ---------------------------------------------------------------------------------------------------------------------------------
Shares of capital stock outstanding; authorized
10 billion shares of $0.01 par value stock 9,312,923 2,990,139
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.32 $ 9.95
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements on page 24
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI BOND FUND, IAI GOVERNMENT FUND
YEAR ENDED NOVEMBER 30, 1996
IAI BOND FUND IAI GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest (net of foreign income taxes withheld of $9,985
and $0, respectively) $ 5,559,718 $ 2,769,386
Dividends 150,553 --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 5,710,271 2,769,386
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees 575,304 274,977
Investment advisory fees 141,722 84,410
Distribution fees 64,419 38,368
Dividend-disbursing, administrative, and accounting fees 51,535 30,695
Legal fees -- 800
Custodian fees 4,800 3,000
Amortization of organization costs -- 1,973
Compensation of Directors 6,426 3,655
Audit fees 3,282 3,104
Printing and shareholder reporting 6,000 1,200
Registration fees 12,000 --
Other expenses 6,593 3,827
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 872,081 446,009
Less fees reimbursed or waived by Advisers or Distributor (14,432) (2,459)
- ----------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 857,649 443,550
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,852,622 2,325,836
- ----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 268,727 $ (202,868)
Foreign currency transactions 8,945 --
Futures contracts (98,746) 3,778
----------- -----------
178,926 (199,090)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (39,184) $ (492,074)
Other assets and liabilities denominated in foreign currency 30,316 --
Futures contracts 451,595 --
----------- -----------
442,727 (492,074)
- ----------------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY 621,653 (691,164)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,474,275 $ 1,634,672
- ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND, IAI GOVERNMENT FUND
IAI Bond Fund IAI Government Fund
Year ended Year ended Year ended Year ended
November 30, November 30, November 30, November 30,
1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 4,852,622 $ 5,070,457 $ 2,325,836 $ 2,590,938
Net realized gains (losses) 178,926 1,880,953 (199,090) (459,502)
Net change in unrealized appreciation or depreciation 442,727 4,693,670 (492,074) 2,349,123
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,474,275 11,645,080 1,634,672 4,480,559
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,337,592) (5,392,040) (2,384,545) (2,527,368)
Net realized gains -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (5,337,592) (5,392,040) (2,384,545) (2,527,368)
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 41,786,065 30,801,916 10,438,023 25,685,178
Net asset value of shares issued to shareholders in
reinvestment of distributions 5,091,444 5,159,258 2,355,866 2,472,730
Cost of shares redeemed (37,736,607) (45,310,597) (30,414,774) (20,427,646)
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 9,140,902 (9,349,423) (17,620,885) 7,730,262
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 9,277,585 (3,096,383) (18,370,758) 9,683,453
NET ASSETS AT BEGINNING OF PERIOD 77,525,666 80,622,049 48,121,472 38,438,019
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 86,803,251 $ 77,525,666 $ 29,750,714 $ 48,121,472
- ----------------------------------------------------------------------------------------------------------------------------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 210,296 $ 1,116,490 $ 50,296 $ 107,774
- ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
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>
YEARS ENDED PERIOD FROM YEARS ENDED
NOVEMBER 30, APRIL 1, 1994 TO MARCH 31,
1996 1995 NOVEMBER 30, 1994+ 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .56 .58 .36 .62 .64
Net realized and unrealized gains (losses) .04 .72 (.55) (.25) .93
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .60 1.30 (.19) .37 1.57
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.62) (.61) (.35) (.66) (.64)
Net realized gains -- -- (.13) (.81) (.76)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.62) (.61) (.48) (1.47)
(1.40)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42
- ----------------------------------------------------------------------------------------------------------------------------
Total investment return* 6.85% 15.46% (2.10%) 3.16% 16.44%
Net assets at end of period (000's omitted) $ 86,803 $ 77,526 $ 80,622 $ 97,139 $ 119,371
RATIOS
Expenses to average net assets 1.10% 1.09% 1.10%** 1.09% 1.10%
Net investment income to average net assets 6.20% 6.32% 6.03%** 5.63% 6.03%
Portfolio turnover rate
(excluding short-term securities) 342.4% 424.7% 226.7% 333.1% 160.8%
* 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.
</TABLE>
<TABLE>
<CAPTION>
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:
YEARS ENDED YEARS ENDED
NOVEMBER 30, PERIOD FROM MARCH 31,
---------------------- APRIL 1, 1994 TO ----------------------
1996 1995 NOVEMBER 30, 1994+ 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
---------- ---------- ---------- ---------- ----------
OPERATIONS
Net investment income .58 .60 .33 .47 .57
Net realized and unrealized
gains (losses) (.10) .43 (.34) (.24) .59
---------- ---------- ---------- ---------- ----------
TOTAL FROM OPERATIONS .48 1.03 (.01) .23 1.16
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.59) (.59) (.32) (.49) (.58)
Net realized gains -- -- (.03) (.22) (.34)
---------- ---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS (.59) (.59) (.35) (.71) (.92)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE
End of period $ 9.95 $ 10.06 $ 9.62 $ 9.98 $ 10.46
========== ========== ========== ========== ==========
Total investment return* 4.99% 10.99% (0.09%) 2.02% 11.70%
Net assets at end of period
(000's omitted) $ 29,751 $ 48,121 $ 38,438 $ 41,027 $ 43,704
RATIOS
Expenses to average net assets 1.10% 1.10% 1.10%** 1.10% 1.10%
Net investment income to
average net assets 5.78% 5.97% 5.12%** 4.40% 5.40%
Portfolio turnover rate
(excluding short-term securities) 152.0% 284.1% 121.5% 641.0% 236.3%
* 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
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1996
[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) is a separate portfolio of
IAI Investment Funds VI, Inc. The Bond Fund's primary objective is to provide a
high level of current income consistent with capital preservation, through
investments in primarily investment grade bonds and other debt securities of
similar high quality. The Government Fund seeks to provide shareholders with a
high level of current income and with preservation of capital by investing
primarily in U.S. Government securities. This report covers only Bond Fund and
Government Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price.
Debt securities for which quotations are not readily available are valued
primarily using dealer-supplied valuations or at their fair value as determined
in good faith using consistently applied procedures under the general
supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those with maturities greater
than 60 days from the date of initial acquisition are marked-to-market on a
daily basis.
SECURITIES PURCHASED ON A
WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the 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 cost of securities purchased on a when-issued basis at November
30, 1996 totalled $1,500,000 for Bond Fund.
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 a "dollar-roll." As an inducement for the funds to "rollover" their purchase
commitments, the Funds receive negotiated fees. For the year ended November 30,
1996, the Funds did not enter into any dollar-roll transactions.
FUTURES AND OPTIONS
CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Funds may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities, representing the initial margin, equal to a
certain percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded daily as unrealized gains or losses.
Variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
FOREIGN CURRENCY
TRANSLATIONS AND FOREIGN
CURRENCY CONTRACTS
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.
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 forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the 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.
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 from net
investment income or net realized gains may differ from its ultimate
characterization for tax purposes.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in
reclassification adjustments to additional paid-in capital as follows:
IAI BOND FUND IAI GOVERNMENT FUND
- --------------------------------------------------------------------------------
Undistributed net investment income ($ 421,224) $ 1,231
Accumulated net realized gains (losses) $ 421,224 $ --
Additional paid-in capital $ -- ($ 1,231)
For federal income tax purposes, the Bond Fund and Government Fund have capital
loss carryovers of approximately $4,540,000, and $1,910,000, respectively at
November 30, 1996 which, if not offset by subsequent capital gains, will expire
in 2002 and 2004, respectively. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryovers are offset or expire.
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,
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. 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
Through March 31, 1996, organization costs were being amortized over 60 months
on a straight-line basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported results of operations during the reporting period. Actual results could
differ from those estimates.
[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). Also, the Funds are
committed to make capital contributions, if requested by the Company.
Bond Fund and Government Fund have available lines of credit of $15,000,000 and
$12,000,000, 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. During the year ended November 30, 1996, the Funds paid $2,672 and $811,
respectively, in interest on the line of credit at an average annual rate
ranging from 8.25% to 8.75% and is included in interest income on the Statement
of Operations. There were no borrowings outstanding at November 30, 1996.
[3] FEES AND EXPENSES
PRIOR TO APRIL 1, 1996
Under the terms of an investment advisory agreement, each Fund paid Investment
Advisers, Inc. (Adviser) a monthly management fee computed at an annual rate of
.55% of the average month-end net asset value.
Each Fund also paid an annual fee to Advisers for acting as the Fund's
dividend-disbursing, administrative, and accounting services agent. The fee was
computed monthly on the average month-end net assets at an annual rate of .20%.
Each Fund had a plan of distribution with IAI Securities, Inc. (Distributor),
the Funds' distributor. Under the Plan, each Fund paid 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 was equal to an
annual rate of .25% of each Fund's average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds were responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor had agreed to reimburse those Funds to
the extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceeded, on an annual basis, 1.10% of average month-end net assets for
Bond Fund and Government Fund.
SUBSEQUENT TO MARCH 31, 1996
New Management Agreements for the Funds were approved by a majority of each
Funds' shareholders at a special meeting held March 21, 1996, and replaced the
prior Advisory, Administrative, and Distribution Agreements with Adviser and
Distributor. These new agreements, effective April 1, 1996, require Advisers to
pay for all expenses of each Fund, except certain costs (primarily those
incurred in the purchase and sale of assets, taxes and interest and
extraordinary expenses) in return for each Fund paying an all inclusive
management fee (unified fee) to Adviser. The Management Agreement further
provides that IAI will either reimburse the Fund for the fees and expenses it
pays to directors who are not "interested persons" of the Fund or reduce its fee
by an equivalent amount. This fee is equal to an annual rate of 1.10% declining
to 1.00% of each Funds' average daily net assets, and is paid monthly.
Pursuant to these new agreements, Bond and Government Funds paid Advisers to
assume certain unpaid liabilities, and received amounts from Advisers in
exchange for transferring prepaid expenses to Advisers. As a result of these
transactions, Bond and Government Funds received (paid) net amounts of $12,089
and ($5,299), respectively.
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the years ended November 30, 1996
and 1995, were as follows:
IAI BOND FUND IAI GOVERNMENT FUND
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
SOLD 4,627,561 3,403,715 1,067,073 2,614,072
ISSUED FOR REINVESTED
DISTRIBUTIONS 561,270 572,274 239,818 251,178
REDEEMED (4,178,407) (4,994,513) (3,100,200) (2,076,068)
- --------------------------------------------------------------------------------
INCREASE (DECREASE)
IN SHARES OUTSTANDING 1,010,424 (1,018,524) (1,793,309) 789,182
- --------------------------------------------------------------------------------
[5] PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 1996, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
- -----------------------------------------------------------------
PURCHASES SALES
- -----------------------------------------------------------------
IAI BOND FUND $260,678,617 $256,716,154
IAI GOVERNMENT FUND $ 58,936,484 $ 75,258,717
[6] OPTIONS CONTRACTS WRITTEN
During the year ended November 30, 1996, Bond Fund and Government Fund wrote the
following options on futures. There were no outstanding contracts at November
30, 1996.
IAI BOND FUND CALL OPTIONS
- -----------------------------------------------------------------------------
NUMBER OF CONTRACTS PREMIUM
- -----------------------------------------------------------------------------
Outstanding at 11/30/95 -- $ --
Opened 50 16,813
Expired -- --
Closed -- --
Exercised (50) (16,813)
- -----------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
- -----------------------------------------------------------------------------
IAI GOVERNMENT FUND CALL OPTIONS
- -----------------------------------------------------------------------------
NUMBER OF CONTRACTS PREMIUM
- -----------------------------------------------------------------------------
Outstanding at 11/30/95 -- $ --
Opened 30 10,556
Expired -- --
Closed -- --
Exercised (30) (10,556)
- -----------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
- -----------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
IAI BOND FUND, IAI GOVERNMENT 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 (a portfolio within IAI Investment Funds VI,
Inc.) as of November 30, 1996 and the related statements of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for the periods
presented on pages 22 and 23 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 and IAI Government Fund at November 30, 1996, 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 8, 1997
FEDERAL TAX INFORMATION
IAI BOND FUND, IAI GOVERNMENT FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for informational purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
IAI BOND FUND
- --------------------------------------------------
PAYABLE DATE ORDINARY INCOME (A)
- --------------------------------------------------
DECEMBER 1995 $ .1686
JANUARY 1996 .0400
FEBRUARY 1996 .0480
MARCH 1996 .0370
APRIL 1996 .0390
MAY 1996 .0390
JUNE 1996 .0430
JULY 1996 .0190
AUGUST 1996 .0430
SEPTEMBER 1996 .0500
OCTOBER 1996 .0480
NOVEMBER 1996 .0480
- --------------------------------------------------
$ .6226
(A) INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME. 3.32% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTION
BY CORPORATIONS.
FEDERAL TAX INFORMATION
IAI BOND FUND, IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
- ---------------------------------------------------
PAYABLE DATE ORDINARY INCOME (A)
- ---------------------------------------------------
DECEMBER 1995 $ .0724
JANUARY 1996 .0350
FEBRUARY 1996 .0450
MARCH 1996 .0430
APRIL 1996 .0490
MAY 1996 .0490
JUNE 1996 .0490
JULY 1996 .0490
AUGUST 1996 .0490
SEPTEMBER 1996 .0490
OCTOBER 1996 .0490
NOVEMBER 1996 .0490
- --------------------------------------------------
$ .5874
(A) INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME.
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in
COUNTRIES FUND developing countries
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(CLOSED TO NEW INVESTORS AS OF 2/1/96) emerging growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND 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 AND 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 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>
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://networth.galt.com/iai
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
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
[LOGO] IAI
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
