FIXED INCOME FUND
SEMI-ANNUAL REPORT
IAI INSTITUTIONAL BOND FUND
MAY 31, 1997
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI INSTITUTIONAL BOND FUND
SEMI-ANNUAL REPORT
MAY 31, 1997
(UNAUDITED)
Chairman's Letter ............................ 2
Fund Managers' Review ........................ 4
Fund Portfolio ............................... 6
Notes to Fund Portfolio ...................... 11
Statement of Assets and Liabilities .......... 12
Statement of Operations ...................... 13
Statement of Changes in Net Assets ........... 14
Financial Highlights ......................... 15
Notes to Financial Statements ................ 16
IAI Mutual Fund Family ....................... 21
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors ..................... Inside Back Cover
CHAIRMAN'S LETTER
IAI INSTITUTIONAL BOND FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13 and 8000 on July 16. As we move through 1997, most of the
conditions which led to that runup are still intact: low inflation, relatively
low interest rates, moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. 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 the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment, it wouldn't be
surprising to see an uptick in inflation in the months ahead. This could cause
interest rates to rise and put the brakes on the stock and bond markets.
If you're a long-term investor, then 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. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, 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.
The risk in the second half of the year is biased toward higher growth and an
upturn in inflation. First half economic results were erratic, with a strong
quarter followed by a weak quarter. Neither reflects a true picture of the
underlying expansion. Instead the pattern reflects statistically choppy
spending. Consumer spending in the first half was influenced by seasonality
(warmer winter, cooler spring), early tax refunds, and a growing trend toward
employee bonuses/stock options (paid in lump sums in the first months of the
year) instead of salary increases (paid in smaller monthly increments throughout
the year). These conditions will not be repeated in the second half of the year.
A third quarter rebound to about 3% real growth should follow the anemic second
quarter results.
Our concern is that the apparent pause in the second quarter has done little to
relieve rising economic pressures. Labor markets are operating at full capacity.
In fact, we suspect businesses are beginning to miss opportunities because they
are unable to find experienced help. Capacity utilization rates also reflect a
lack of excess capacity. The U.S. has been able to use excess capacity from
overseas to meet demand. However, growth now appears to be on the rise in other
G7 countries. The results of recent elections in the U.K. and France have a
clear pro-growth bias. Fiscal austerity and low inflation have less appeal to
voters when unemployment rates are persistently high. A coordinated global
expansion will help lift our exports but will remove some of the price
competition that has helped restrain domestic inflation.
Monetary liquidity is ample to finance both economic growth and modest price
increases. Domestically, broad money growth is expanding at a rate of about 7%.
Globally, U.S. dollar-based credit has been growing at a double-digit rate for
the last year. However, the Fed is likely to tolerate broad money growth and
tight economic capacity until inflation begins to accelerate.
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 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]
SCOTT A. BETTIN, CFA
IAI INSTITUTIONAL BOND
FUND CO-MANAGER
WHAT IS THE FUND'S 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 pursued 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.
HOW HAS THE FUND PERFORMED?
During the first quarter of 1997, interest rates rose each month, resulting in
negative returns for most longer-term bond indexes. The IAI Institutional Bond
Fund had a (0.46)% total return, beating its benchmark, the Salomon Broad
Investment Grade Bond Index which fell by (0.52%). For the past six months, the
Fund had a 0.28% total return while the Salomon Broad Investment Grade Bond
Index had a 0.95% total return.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
In the past six months, the Fund reduced its interest rate exposure but
maintained a longer-than-market effective duration. The portfolio is structured
for a flatter yield curve by reducing positions in the middle of the yield curve
in favor of short-term notes and long-term Treasuries. Asset-backed, Corporate
and Mortgage holdings were reduced slightly during the quarter based on the
tightness of spreads. Non-dollar bond positions were established in Germany and
Australia as attractive alternatives to U.S. holdings.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Non-U.S. Treasury sectors outperformed their U.S. Treasury counterparts in the
most recent six-month period as bond investors searched for ways to add yield to
their portfolios. The Fund benefited from this trend because of the overweight
positions in non-Treasury sectors. The Fund also benefited from an improved
interest rate backdrop. A second quarter economic pause, persistently low
inflation, strong improvement in the budget deficit and the lack of Fed
tightening all contributed to the improvement.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Near-term market trends still favor bonds. However, market risks increase with
the age of the economic expansion. Cyclically, the lack of excess capacity and
an accommodative monetary policy point toward rising inflationary pressures.
Yet, current pricing power is being constrained by the secular forces of foreign
competition and business restructuring. Eventually, the cyclical forces will
drive prices and interest rates higher. Until signs of this shift emerge, the
Fund will continue to be positioned for a favorable market environment.
VALUE OF $2,000,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI INSTITUTIONAL BOND FUND SALOMON BROAD INVESTMENT
(Inception 11/01/93) Grade Bond Index
11/1/93 $2,000,000 $2,000,000
11/30/94 $1,885,303 $1,922,902
11/30/95 $2,167,191 $2,265,744
11/30/96 $2,328,322 $2,401,191
5/31/97 $2,334,860 $2,424,006
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/97
SINCE INCEPTION
6 Months 1 Year 11/01/93
- --------------------------------------------------------------------------------
IAI INSTITUTIONAL
BOND FUND 0.28% 9.44% 4.42%
- --------------------------------------------------------------------------------
Salomon Broad Investment
Grade Bond Index 0.95% 8.26% 5.51%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 5/31/97
[PIE CHART]
U.S. Government & Government Agency 30%
Foreign Denominated 8%
Corporate 18%
Preferred Stock 3%
U.S. Government Agency Mortgage-Backed 28%
Short-Term 7%
Asset-Backed 6%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/97
[BAR CHART]
YEARS
0-3 19%
3-5 18%
5-10 27%
10-20 17%
20+ 19%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI INSTITUTIONAL BOND FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
CREDIT RATING
% OF PORTFOLIO AS OF 5/31/97
U.S.
Government.........59%
Aaa................23%
Aa..................1%
A...................5%
Baa.................8%
Non-Investment
Grade...............4%
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
MAY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
CORPORATE BONDS - 18.5%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 10.1%
Delphi Funding 9.31% 03/25/27 $ 500,000 $ 502,394
Equitable 9.00 12/15/04 30,000 32,952
Greenpoint 9.10 06/01/27 (b) 1,000,000 1,008,580
IBM 7.13 12/01/96 50,000 46,077
Imperial Capital Trust I (e) 9.98 12/31/26 1,000,000 1,001,744
Nationwide CSN Trust (e) 9.88 02/15/25 2,000,000 2,150,060
Railcar Leasing (e) 6.75 07/15/06 3,836,959 3,791,913
Salomon 7.20 02/01/04 80,000 78,976
Sun Life Capital (e) 8.53 05/29/49 500,000 506,789
- -----------------------------------------------------------------------------------------------------------------
9,119,485
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 2.9%
Chrysler 7.45 02/01/97 30,000 28,519
Comcast Cable Communications (e) 8.38 05/01/07 1,000,000 1,026,670
Ford Motor 7.40 11/01/46 80,000 76,155
IMC Fertilizer Group 9.45 12/15/11 30,000 34,719
J.C. Penney 7.95 04/01/17 80,000 81,562
Levi Strauss (e) 6.80 11/01/03 1,000,000 987,140
Newport News Shipping 8.63 12/01/06 350,000 357,000
- -----------------------------------------------------------------------------------------------------------------
2,591,765
- -----------------------------------------------------------------------------------------------------------------
UTILITIES - 1.1%
U.S. West Capital Funding 7.95 02/01/97 1,050,000 1,033,935
- -----------------------------------------------------------------------------------------------------------------
YANKEE - 4.4%
Athabasca Oil Sands (e) 8.20 04/01/27 1,000,000 998,000
Empresa Nacional Electric 8.13 02/01/97 1,350,000 1,337,080
Hydro-Quebec 8.50 12/01/29 65,000 69,871
Republic of Colombia 7.63 02/15/07 30,000 28,914
Republic of Indonesia 7.75 08/01/06 150,000 148,445
Tenaga Nasional (e) 7.50 01/15/96 1,500,000 1,396,560
- -----------------------------------------------------------------------------------------------------------------
3,978,870
=================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $16,836,843).............................................................................. $ 16,724,055
=================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1997
(UNAUDITED)
U.S. GOVERNMENT OBLIGATIONS - 30.1%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 18.5%
5.63% 10/31/97 $ 3,010,000 $ 3,011,866
5.88 10/31/98 230,000 229,462
5.63 11/30/98 5,000,000 4,969,550
7.13 09/30/99 160,000 162,950
5.50 12/31/00 2,000,000 1,941,240
6.63 07/31/01 4,600,000 4,624,426
7.25 05/15/04 1,660,000 1,719,395
- -----------------------------------------------------------------------------------------------------------------
16,658,889
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 11.6%
10.38 11/15/12 1,460,000 1,839,366
12.00 08/15/13 1,110,000 1,550,526
9.25 02/15/16 1,370,000 1,692,799
7.88 02/15/21 1,420,000 1,560,892
7.63 02/15/25 570,000 614,443
6.88 08/15/25 2,240,000 2,212,359
6.50 11/15/26 1,080,000 1,018,235
- -----------------------------------------------------------------------------------------------------------------
10,488,620
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $27,105,556).............................................................................. $ 27,147,509
=================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 28.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 5.7%
8.00% 08/01/08 $ 58,090 $ 59,413
6.50 05/15/21 2,065,598 1,932,625
6.50 09/15/21 2,020,000 1,907,628
6.50 11/15/21 1,270,000 1,218,006
- -----------------------------------------------------------------------------------------------------------------
5,117,672
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 4.8%
6.50 03/02/11 944,041 922,498
6.00 04/01/11 1,377,460 1,321,494
6.50 04/01/26 2,222,017 2,113,005
- -----------------------------------------------------------------------------------------------------------------
4,356,997
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.5%
6.60 12/01/03 1,188,439 1,162,070
7.00 08/01/11 662,555 659,309
9.00 06/01/17 2,338,418 2,489,035
6.00 10/01/23 376,975 349,882
6.00 09/01/24 353,495 328,697
7.00 11/01/25 1,764,063 1,719,961
7.50 06/12/27 (b) 2,780,000 2,768,685
- -----------------------------------------------------------------------------------------------------------------
9,477,639
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 7.6%
8.00 09/15/08 537,185 556,658
9.00 11/15/17 379,950 406,543
7.00 12/15/23 886,969 868,945
6.50 10/15/24 1,280,229 1,221,018
7.50 01/15/26 901,016 897,403
6.00 07/01/27 (b) 2,922,900 2,918,333
- -----------------------------------------------------------------------------------------------------------------
6,868,900
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $25,849,910).............................................................................. $ 25,821,208
=================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
ASSET-BACKED SECURITIES - 6.3%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 4.0%
Ford Credit Auto Lease Trust 96-1 A2 5.80% 05/15/99 $ 1,260,000 $ 1,260,252
Ford Credit Auto Loan Master Trust 96-1 A 5.50 02/15/03 230,000 220,800
Ford Credit Auto Owner Trust 96-B A4 6.30 01/15/01 40,000 39,832
Norwest Automobile Trust 96-A A3 5.90 03/15/00 2,000,000 1,991,900
Premier Auto Trust 96-4 A3 6.20 11/06/00 60,000 59,944
- -----------------------------------------------------------------------------------------------------------------
3,572,728
- -----------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 2.2%
Chase Manhattan Credit Card Trust 96-4 A 6.73 02/15/02 150,000 150,890
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,760,000 1,760,809
First Bank Corporate Card Master Trust 97-1 A 6.40 02/15/03 50,000 49,201
Sears Credit Account Master Trust 96-2 A 6.50 10/15/03 60,000 60,075
- -----------------------------------------------------------------------------------------------------------------
2,020,975
- -----------------------------------------------------------------------------------------------------------------
EQUIPMENT LOAN RELATED - 0.1%
Capital Equipment Receivables Trust 96-1 A3 6.11 07/15/99 40,000 39,969
=================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $5,632,783)............................................................................... $ 5,633,672
=================================================================================================================
FOREIGN DENOMINATED BONDS - 8.3%
Principal Market
Rate Maturity Amount (d) Value (a)
- -----------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS - 8.3%
Australian Government (Australian dollar) 7.50% 07/15/05 4,400,000 $ 3,379,633
German Government (German deutschemark) 6.00 01/04/07 7,000,000 4,127,111
- -----------------------------------------------------------------------------------------------------------------
7,506,744
=================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $7,588,236)................................................................................ $ 7,506,744
=================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
</TABLE>
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED STOCKS - 2.6%
Market
Rate Quantity Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL - 2.6%
SI Financing Trust I 2.38% 90,000 $ 2,373,750
=================================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(COST: $2,288,188)............................................................................... $ 2,373,750
=================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $85,301,516).............................................................................. $ 85,206,938
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 7.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 7.6%
Federal Home Loan Bank (discount note) 5.40% 06/19/97 $ 6,500,000 $ 6,482,450
U.S. Treasury Bill 5.26 09/18/97 400,000 (c) 393,964
- -----------------------------------------------------------------------------------------------------------------
6,876,414
=================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $6,876,267)............................................................................... $ 6,876,414
=================================================================================================================
PURCHASED OPTIONS - 0.0%
Market
Quantity Value (a)
- -----------------------------------------------------------------------------------------------------------------
PUT OPTION - 0.0%
U.S. Treasury Bond, exercise price $108, expires September 1997 40,000 $ 43,125
=================================================================================================================
TOTAL INVESTMENTS IN PURCHASED OPTIONS
(COST: $50,925).................................................................................. $ 43,125
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $92,228,708) (f).......................................................................... $ 92,126,477
=================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - (2.0%)
.......................................................................................... $ (1,883,901)
=================================================================================================================
TOTAL NET ASSETS
.......................................................................................... $ 90,242,576
=================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
</TABLE>
NOTES TO FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1997
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At May 31, 1997, the total cost of securities
purchased on a when-issued basis was $6,678,546.
(c)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 6 to financial statements).
(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 May 31, 1997, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
Cost for federal income tax purposes ................... $ 92,235,287
==============================================================================
Gross unrealized appreciation .......................... $ 335,105
Gross unrealized depreciation .......................... (435,765)
- ------------------------------------------------------------------------------
Net unrealized depreciation ............................ $ (100,660)
==============================================================================
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
IAI INSTITUTIONAL BOND FUND
MAY 31, 1997
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $92,228,708) (see Fund Portfolio) $ 92,126,477
Cash in bank on demand deposit 5,756
Receivable for investment securities sold 5,524,131
Accrued interest and dividends receivable 1,106,979
Unrealized appreciation on foreign currency contracts held, at value 122,071
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 98,885,414
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 8,504,232
Accrued management fee 1,236
Variation margin payable 82,531
Other accrued expenses 11,089
Covered put options written, at market 43,750
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,642,838
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 90,242,576
================================================================================================================
REPRESENTED BY:
Capital stock $ 97,335
Additional paid-in capital 91,221,573
Undistributed net investment income 193,221
Accumulated net realized losses on investments (1,224,280)
Unrealized appreciation or depreciation on:
Investment securities $ (163,829)
Other assets and liabilities denominated in foreign currency 118,556
- ----------------------------------------------------------------------------------------------------------------
(45,273)
- ----------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 90,242,576
================================================================================================================
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 9,733,465
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.27
================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
IAI INSTITUTIONAL BOND FUND
SIX MONTHS ENDED MAY 31, 1997
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $24,796) $ 2,866,986
Dividends 106,875
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCOME 2,973,861
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 221,067
Compensation of Directors 4,921
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 225,988
Less fees reimbursed by Advisers (4,921)
- ----------------------------------------------------------------------------------------------------------------
NET EXPENSES 221,067
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,752,794
- ----------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 1,401,798
Foreign currency transactions 110,102
Futures contracts (536,031)
Written option contracts closed or expired 21,703
- --------------------------------------------------------------------------------------------
997,572
Net change in unrealized appreciation or depreciation on:
Investment securities $ (3,546,698)
Other assets and liabilities denominated in foreign currency 118,263
Futures contracts (69,748)
Written option contracts 8,150
- ---------------------------------------------------------------------------------------------
(3,490,033)
- ----------------------------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (2,492,461)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 260,333
================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
IAI INSTITUTIONAL BOND FUND
Six months ended Year ended
May 31, 1997 November 30, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 2,752,794 $ 6,698,324
Net realized gains (losses) 997,572 (492,962)
Net change in unrealized appreciation or depreciation (3,490,033) 911,061
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 260,333 7,116,423
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,800,635) (6,725,675)
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2,800,635) (6,725,675)
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 2,274,401 and 2,647,688 shares 21,075,646 24,310,364
Net asset value of 300,862 and 727,591 shares issued to
shareholders in reinvestment of distributions 2,792,620 6,725,675
Cost of 3,013,613 and 3,880,061 shares redeemed (28,169,997) (35,771,090)
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (4,301,731) (4,735,051)
- --------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (6,842,033) (4,344,303)
NET ASSETS AT BEGINNING OF PERIOD 97,084,609 101,428,912
- --------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 90,242,576 $ 97,084,609
==============================================================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 193,221 $ 241,062
==============================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
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:
Years ended
Six months November 30, Period from Period from
ended ------------------- April 1, 1994 to November 1, 1993***
May 31, 1997 1996 1995 November 30, 1994+ to March 31, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.54 $ 9.50 $ 8.85 $ 9.36 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .29 .63 .62 .38 .22
Net realized and unrealized gains (losses) (.27) .04 .66 (.51) (.65)
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TOTAL FROM OPERATIONS .02 .67 1.28 (.13) (.43)
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.29) (.63) (.63) (.38) (.21)
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TOTAL DISTRIBUTIONS (.29) (.63) (.63) (.38) (.21)
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NET ASSET VALUE
End of period $ 9.27 $ 9.54 $ 9.50 $ 8.85 $ 9.36
========================================================================================================================
Total investment return* 0.28% 7.44% 14.95% (1.44%) (4.35%)
Net assets at end of period (000's omitted) $90,243 $97,085 $101,429 $ 73,724 $ 31,478
RATIOS
Expenses to average daily net assets 0.50%** 0.50% 0.50% 0.50%** 0.50%**
Net investment income to average
daily net assets 6.26%** 6.75% 6.76% 6.42%** 5.84%**
Portfolio turnover rate
(excluding short-term securities) 201.4% 323.0% 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.
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1997
(UNAUDITED)
[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.
The Fund's investment objective is to provide shareholders with a high level of
total return derived from a combination of capital appreciation and current
income. The Fund pursues its objective by investing primarily in a diversified
portfolio of investment grade bonds and other debt securities of similar
quality. This report covers only the IAI Institutional Bond Fund (the Fund).
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Investments in securities traded on national securities or international
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 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 a
"dollar-roll." As an inducement for the Fund to "rollover" its purchase
commitments, the Fund receives negotiated fees. For the period ended May 31,
1997 the Fund 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
Fund may buy and sell futures contracts and options. The risk of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities into a segregated account, which represents
the initial margin, which is 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
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 and are recorded in realized and unrealized appreciation or
depreciation on foreign currency contracts.
Exchange gains (losses) may also be realized between the trade and settlement
dates on security and foreign currency contract transactions. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains differ for financial statement and
tax purposes primarily because of recognition of certain foreign currency gains
and losses as ordinary income and the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes.
For federal income tax purposes, the Fund has a capital loss carryover of
approximately $2,215,000 at November 30, 1996 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 accrued daily. The Fund amortizes discount purchased on
long-term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. Distributions
from net investment income are made monthly. Capital gains, if any, are
primarily distributed 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[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). Also, the Fund is committed to make
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 May
31, 1997.
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sale of assets, taxes, interest
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. The fee is equal to an annual rate of
0.50% of average daily net assets and is paid monthly. The Management Agreement
further provides that Advisers will reimburse the Fund for the fees and expenses
it pays to Directors who are not "interested persons" of the Fund or reduce its
fee by an equivalent amount.
[4] PURCHASES AND SALES OF SECURITIES
For the period ended May 31, 1997, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$168,046,750 and $173,680,153, respectively.
[5] Open Futures Contracts
The financial futures contracts shown below were open as of May 31, 1997. The
market value of securities deposited to cover initial margin requirements for
the open positions at May 31, 1997 was $295,473. The unrealized gain (loss) of
($69,748) for the following contracts is included in unrealized appreciation or
depreciation on investment securities.
<TABLE>
<CAPTION>
INSTITUTIONAL BOND FUND FUTURES
- -------------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized Appreciation
Type Contracts Month Position Value (Depreciation)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 93 June 1997 Short $10,000,406 $ (59,323)
U.S. Treasury Bond 40 June 1997 Short $ 4,401,250 (18,425)
Eurodollar 50 September 1997 Long $11,750,625 15,875
Eurodollar 50 September 1998 Short $11,678,750 (7,875)
-------------------
$ (69,748)
</TABLE>
[6] OPTIONS CONTRACTS WRITTEN
During the period ended May 31, 1997, Institutional Bond Fund wrote the
following options on futures.
CALL OPTIONS
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Number of Contracts Premium
- ----------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 75 21,703
Expired (75) (21,703)
Closed -- --
Exercised -- --
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Outstanding at 5/31/97 -- $ --
============================================================================
PUT OPTIONS
- ----------------------------------------------------------------------------
Number of Contracts Premium
- ----------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 80 51,900
Expired -- --
Closed -- --
Exercised -- --
- ----------------------------------------------------------------------------
Outstanding at 5/31/97 80 $ 51,900
============================================================================
[7] FOREIGN CURRENCY EXCHANGE CONTRACTS
At May 31, 1997, the Fund had entered into foreign currency exchange contracts.
The unrealized appreciation on those contracts at May 31, 1997 is included in
unrealized appreciation or depreciation on other assets and liabilities
denominated in foreign currency. The terms of the open contracts are as
follows:
<TABLE>
<CAPTION>
Exchange Date Currency to be Delivered Currency to be Received Unrealized Appreciation
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
06/04/97 3,900,000 German Deutschemark 2,302,243 U.S. Dollars $ 14,858
06/06/97 4,400,000 Australian Dollars 3,467,200 U.S. Dollars 107,213
- -----------------------------------------------------------------------------------------------------------------
$ 122,071
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
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
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
