FIXED INCOME FUND
ANNUAL REPORT
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI INSTITUTIONAL BOND FUND
ANNUAL REPORT
NOVEMBER 30, 1997
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
Independent Auditors' Report.................. 22
Federal Tax Information....................... 23
IAI Mutual Fund Family........................ 24
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
CHAIRMAN'S LETTER
IAI INSTITUTIONAL BOND FUND
A DAY FOR BUYING OPPORTUNITIES
[PHOTO]
NOEL P. RAHN
CHAIRMAN
In life, traumatic events grip our attention, sometimes compelling us to make
quick decisions, often rewarding us for remaining calm. As time passes, we
collect ourselves and attain a perspective.
The stock market is a case in point. The last few days of October broke records
for points lost and gained--and for trading volume, which reached a billion
shares per day. But now that we've had some time to reflect, what really
happened? And what does it mean over the long term?
The problem began in Southeast Asia, as those booming economies increasingly
became overbuilt. Investors, seeing trouble ahead, withdrew their money, causing
downward pressure on currencies in Thailand and Malaysia. The governments
attempted to boost their currencies by raising interest rates. That caused
investors in these fragile stock markets to flee. Once the panic spread to Hong
Kong, investors throughout the world reacted.
In the United States, investors who were having a good year so far in 1997
decided to lock in their profits. Many of the best performers in recent years,
such as technology companies which do a great deal of business in Asia, were hit
hard. Small capitalization stocks held up better, as did large cap companies
such as retailers who do their business exclusively in the United States.
The October 27 sell-off was inevitably compared with the stock market of 1987.
But there really was no comparison. In percentage terms, this year's fireworks
amounted to a 7% drop. In comparison, the 1987 sell-off was 22% in one day.
But there are other fundamental differences too, which make the events of
October 27, 1997, much less worrisome. Ten years ago, inflation was in the
mid-single digits and rising. Today, some economists would argue that there is
no inflation at all--in fact, there even may be deflation. In 1987, interest
rates were in the double digits and rising. Today, the 30-year U.S. Treasury
bond yields about 6%. In 1987, the federal budget deficit was mushrooming.
Today, the deficit has virtually been wiped out, and there's talk of a surplus.
The American economy is much stronger today than it was a decade ago.
Perhaps most importantly, investors, rather than running scared and selling at
the bottom, increasingly look at days like October 27 as a buying opportunity.
Even with the events of late October, the stock market has turned in an
above-average performance for 1997. Historically, stocks have produced average
annual returns of 10-12%. Viewed over this decade, and since the bull market
began in 1982, investors have enjoyed truly excellent results.
We believe the turmoil that occurred on October 27 will prove to be a relatively
minor event. True, it was a very strong reaction to external events. But the
environment continues to be a good one for U.S. investors. The economy continues
to grow at a 3-4% rate without inflation. Interest rates are low and corporate
profits continue to grow, although more slowly than in recent years. And the
markets in Asia appear to have stabilized for now.
The recent volatility is a great reminder to dollar-cost average into the
markets. Mutual funds make it easy to invest a fixed amount of money
periodically. When the market is down, that fixed investment buys more shares at
bargain prices. Such an automatic process allows you to keep your long-term
perspective when days like October 27 inevitably occur.
<PAGE>
CHAIRMAN'S LETTER
IAI INSTITUTIONAL BOND FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is presented below.
Fundamentally, the U.S. economy remains in good shape. Growth is relatively
high, inflation is low, interest rates have fallen, the unemployment rate is at
its lowest level since the early 1970s and consumer confidence is near a record
high. Moreover, above trend growth and low inflation have essentially eliminated
the federal budget deficit. In addition, many states are experiencing surpluses
which are likely to be spent or rebated to taxpayers. The Fed is providing ample
liquidity and is unlikely to change this stance in the near future.
Despite these favorable domestic trends, Asian turmoil remains a major
uncertainty facing the economy in the first half of 1998. The worst of the
liquidity crises in that region is probably over. Yet the economic fallout
within the region still lies ahead. While many analysts fear these problems will
seriously impact the global economy, we believe the results will be much less
severe. For the U.S. economy, final demand should remain firm. Thus, we expect
growth to slow only marginally as a result of Asian events. However, distressed
Asian sellers will put fierce competitive pressures on manufacturing and
commodity based industries around the world. As a result, inflation in the U.S.
will remain below 2% for the first half of the year. Further growth, low
inflation and low interest rates will continue to provide a favorable background
for the financial markets in the months ahead.
Please read the Fund Managers' Review, which follows this letter, for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
<PAGE>
FUND MANAGERS' REVIEW
IAI INSTITUTIONAL BOND FUND
IAI INSTITUTIONAL BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI INSTITUTIONAL BOND
FUND CO-MANAGER
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI INSTITUTIONAL BOND
FUND CO-MANAGER
[PHOTO]
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?
The IAI Institutional Bond Fund gained 5.97% for the year ended November 30,
1997, while the Salomon Broad Investment Grade Bond Index, its benchmark,
returned 7.56% for the same period.
WERE THERE ANY SIGNIFICANT CHANGES?
The interest rate sensitivity of the Fund was reduced in August, but increased
in October following the flight-to-quality precipitated by the turmoil in
Southeast Asian markets. The Fund's exposure to Mortgage-backed securities
remained above the benchmark to take advantage of wider spreads. In addition,
the Corporate bond positions were reduced in the final quarter and non-dollar
bond exposure remained modest.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The biggest event during the past year was the collapse of several Asian
markets. Investors fled these countries in search of more stable and secure
investments. Supporting the rally was the continuation of non-inflationary
economic growth. From the end of August to the end of October, interest rates
fell 1/2% in response to this flight-to-quality. The Fund's shorter, more
conservative duration strategy and the underperformance of the Fund's corporate
bond holdings contributed to the Fund's underperformance during this period.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Above average economic growth should persist, although expectations will be
dampened by financial market turbulence, particularly in Asia. Asian markets
continue to be volatile and recovery in those economies will be several quarters
in the future. However, as overseas markets stabilize, cyclical inflationary
pressures will re-emerge. Tight labor market conditions will continue to be a
concern for the market. Fed policy is still focused on controlling inflation. We
remain neutral to constructive on the bond market but are very conscious that
the next major move in rates is likely to be higher rather than lower. Given
today's lower yields and the probable direction of interest rates, a lower
return in 1998 is likely.
<PAGE>
FUND MANAGERS' REVIEW
IAI INSTITUTIONAL BOND FUND
VALUE OF $2,000,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI INSTITUTIONAL BOND SALOMON BROAD INVESTMENT
FUND (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
11/30/97 2,467,753 2,582,697
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/97
Since Inception
1 Year 11/01/93
================================================================================
IAI INSTITUTIONAL
BOND FUND 5.97% 5.28%
- --------------------------------------------------------------------------------
Salomon Broad Investment
Grade Bond Index 7.56% 6.46%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 11/30/97
[PIE CHART]
U.S. Government & Government Agency 23%
Preferred Stock 2%
U.S. Government Agency Mortgage-Backed 38%
Short-Term 7%
Corporate 11%
Asset-Backed 14%
Foreign Denominated 5%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/97
[BAR CHART]
YEARS
0-3 19%
3-5 15%
5-10 40%
10-20 12%
20+ 14%
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 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.
CREDIT RATING
% OF PORTFOLIO AS OF 11/30/97
U.S. Government..............65%
Aaa..........................21%
Aa............................1%
A.............................2%
Baa...........................7%
Non-Investment Grade..........4%
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 11.1%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 3.6%
Associates (e) 6.45% 09/15/00 $ 900,000 $ 904,203
AT&T Capital (MEDIUM-TERM NOTE) 6.41 08/13/99 1,000,000 1,002,520
Gatx Capital 6.88 11/01/04 160,000 160,696
Green Tree Financial Series A (MEDIUM-TERM NOTE) 6.50 09/26/02 650,000 642,688
Lehman Brothers 7.38 05/15/04 250,000 257,072
PYCSA Panama (YANKEE) (e) (f) 10.28 12/15/12 1,000,000 955,060
-------------
3,922,239
- ------------------------------------------------------------------------------------------------------
INDUSTRIAL - 6.5%
Ameriserv Food Distributor (e) 8.88 10/15/06 300,000 300,000
Cablevision Systems (e) 8.13 08/15/09 1,500,000 1,526,250
Canadian Forest Oil (YANKEE) (e) (f) 8.75 09/15/07 700,000 703,942
Fort James 6.88 09/15/07 620,000 621,612
IMC Global 9.45 12/15/11 30,000 37,229
Kitty Hawk (e) 9.95 11/15/04 290,000 291,450
Lasmo 7.30 11/15/27 250,000 253,400
Nextlink Communications 9.63 10/01/07 350,000 352,625
Time Warner Entertainment 8.38 07/15/33 1,500,000 1,679,280
Transamerica Capital III (e) 7.63 11/15/37 1,000,000 1,019,810
Ultramar Diamond Shamrock 7.20 10/15/17 250,000 253,458
-------------
7,039,056
- ------------------------------------------------------------------------------------------------------
UTILITIES - 1.0%
SBC Communications 6.63 11/01/09 840,000 839,832
Utilicorp United 6.88 10/01/04 290,000 290,351
-------------
1,130,183
======================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $12,051,313) ................................................................... $ 12,091,478
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 24.2%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 7.3%
6.38% 04/30/99 $2,180,000 $ 2,198,050
7.75 01/31/00 1,400,000 1,454,250
5.75 08/15/03 1,100,000 1,093,125
6.50 08/15/05 1,350,000 1,398,722
5.63 02/15/06 1,790,000 1,756,992
-------------
7,901,139
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 9.5%
7.50 11/15/16 2,230,000 2,570,075
6.13 11/15/27 7,620,000 7,705,725
-------------
10,275,800
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY STRIP - 4.8%
U.S. Treasury STRIP (ZERO COUPON) 6.19(h) 11/15/09 10,800,000 5,265,325
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY INFLATION INDEX NOTE - 1.1%
3.38 01/15/07 1,179,952(g) 1,164,649
- ---------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.5%
Federal National Mortgage Association (MEDIUM-TERM NOTE) 7.02 07/03/07 1,300,000 1,327,222
Federal National Mortgage Association (MEDIUM-TERM NOTE) 6.90 08/21/07 270,000 274,093
-------------
1,601,315
=========================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $26,111,164) ..................................................................... $ 26,208,228
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 40.3%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.8%
8.00% 08/01/08 $ 609 $ 623
Series 1921 Class J (COLLATERALIZED MORTGAGE OBLIGATION) 6.50 09/15/24 900,000 874,962
------------
875,585
- --------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 12.2%
6.50 03/02/11 1,153,352 1,155,150
6.00 04/01/11 1,702,477 1,676,395
7.50 06/01/12 1,967,471 2,012,959
7.50 07/01/12 1,937,236 1,982,025
9.50 12/01/22 102,426 111,163
6.50 04/01/26 2,747,376 2,701,880
7.00 11/01/26 3,542,484 3,561,295
------------
13,200,867
- --------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 20.3%
6.60 12/01/03 1,182,926 1,194,941
9.00 06/01/17 2,060,079 2,216,171
Series 1996-39 Class C (COLLATERALIZED MORTGAGE OBLIGATION) 6.00 12/25/24 1,540,000 1,454,807
6.50 05/01/26 2,373,861 2,331,583
7.50 12/01/27(b) 5,250,000 5,355,000
7.00 09/01/27 4,295,119 4,303,151
8.00 11/01/27 4,950,000 5,118,597
------------
21,974,250
- --------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 1.6%
7.00 08/01/11 813,760 823,761
6.50 12/15/12(b) 960,000 956,698
------------
1,780,459
- --------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.4%
9.00 11/15/17 719,033 779,245
7.00 12/15/23 1,005,270 1,011,232
8.00 12/15/23 1,574,935 1,637,932
6.50 10/15/24 1,282,192 1,265,369
7.50 01/15/26 1,105,423 1,127,675
------------
5,821,453
==============================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE=BACKED SECURITIES
(COST: $43,147,817) ........................................................................... $ 43,652,614
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 14.5%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 7.1%
AESOP Funding II 97-1 A2 (e) 6.40% 10/20/03 $ 1,500,000 $ 1,512,090
Chase Manhattan Auto Owner Trust 97-B A3 6.35 02/15/01 820,000 823,879
Ford Credit Auto Lease Trust 96-1 A2 5.80 05/15/99 1,375,215 1,371,832
Premier Auto Trust 97-2 A5 6.32 03/06/02 4,000,000 4,002,480
------------
7,710,281
- --------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 3.4%
Citibank Credit Card Master Trust I 97-6 A (ZERO COUPON) 4.97(h) 08/16/06 2,000,000 1,291,808
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,940,000 1,941,455
Discover Card Master Trust I 94-2 A 5.98 10/16/04 520,000 523,411
------------
3,756,674
- --------------------------------------------------------------------------------------------------------------
EQUIPMENT LOAN RELATED - 0.4%
Capital Equipment Receivables Trust 96-1 A3 6.11 07/15/99 410,000 410,279
- --------------------------------------------------------------------------------------------------------------
HOME LOANS - 3.6%
Associates Manufactured Housing 97-2 A3 6.28 03/15/28 3,860,000 3,850,350
==============================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $15,726,278) ........................................................................... $ 15,727,584
==============================================================================================================
FOREIGN DENOMINATED BONDS - 5.2%
Principal Market
Rate Maturity Amount (d) Value (a)
- --------------------------------------------------------------------------------------------------------------
GOVERNMENT & GOVERNMENT AGENCY - 2.7%
Federal National Mortgage Association
Global (New Zealand Dollar) 7.00% 09/26/00 2,500,000 $ 1,523,496
New Zealand Government (NEW ZEALAND DOLLAR) 6.50 02/15/00 1,600,000 979,498
New Zealand Government (NEW ZEALAND DOLLAR) 8.00 02/15/01 700,000 445,822
------------
2,948,816
- --------------------------------------------------------------------------------------------------------------
CORPORATE - 2.5%
Greater Toronto Airport (CANADIAN DOLLAR) 6.45 12/03/27 3,900,000 2,717,808
==============================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $5,847,742) ............................................................................ $ 5,666,624
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED STOCKS - 2.3%
Market
Rate Quantity Value (a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL - 2.3%
SI Financing Trust I 2.38% 90,000 $ 2,441,250
==============================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(COST: $2,288,187) ............................................................................ $ 2,441,250
==============================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $105,172,501) .......................................................................... $105,787,778
==============================================================================================================
SHORT-TERM SECURITIES - 7.4%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 6.3%
Federal Home Loan Mortgage (DISCOUNT NOTE) 5.60% 12/01/97 $ 2,100,000 $ 2,100,000
Federal National Mortgage Association (DISCOUNT NOTE) 5.55 12/15/97 4,300,000 4,290,719
U.S. Treasury Bill 5.05 12/04/97 400,000(c) 399,832
- --------------------------------------------------------------------------------------------------------------
6,790,551
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 1.1%
Allied Signal (Industrial) (e) 5.57 12/19/97 1,200,000 1,196,658
==============================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $7,987,213)............................................................................. $ 7,987,209
==============================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $113,159,714) (i)....................................................................... $113,774,987
==============================================================================================================
OTHER ASSETS & LIABILITIES (NET) - (5.0%)
.............................................................................................. $ (5,408,035)
==============================================================================================================
TOTAL NET ASSETS
.............................................................................................. $108,366,952
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
NOTES TO FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
(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, 1997, the total cost of
securities purchased on a when-issued basis was $6,284,109.
(c)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 5 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 or 4(2) of the Securities Act of 1933.
These issues may only be sold to other qualified institutional buyers, and are
considered liquid under guidelines established by the Board of Directors.
(f)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(g)
Principal amounts of Inflation Index Notes change based on increase or decrease
of the Consumer Price Index.
(h)
Interest rate shown represents yield-to-maturity at date of purchase.
(i)
At November 30, 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.............. $ 113,178,596
===================
Gross unrealized appreciation..................... $ 852,228
Gross unrealized depreciation..................... (255,837)
-------------------
Net unrealized appreciation....................... $ 596,391
===================
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $113,159,714) (see Fund Portfolio) $ 113,774,987
Cash in bank on demand deposit 85,631
Cash denominated in foreign currency (Cost: $2,734,785) 2,727,899
Receivable for investment securities sold 2,456,327
Accrued interest and dividends receivable 758,387
Unrealized appreciation on foreign currency contracts held, at value (Note 7) 59,855
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 119,863,086
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 5,204,991
Payable for investment securities purchased on a when-issued basis 6,284,109
Variation margin payable 2,344
Other accrued expenses 4,690
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 11,496,134
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 108,366,952
===============================================================================================================
REPRESENTED BY:
Capital stock $ 114,152
Additional paid-in capital 107,256,809
Undistributed net investment income 585,418
Accumulated net realized gains on investments (215,895)
Unrealized appreciation or depreciation on:
Investment securities (Note 5) $ 618,992
Other assets and liabilities denominated in foreign currency 7,476
---------
626,468
- ---------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 108,366,952
===============================================================================================================
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 11,415,204
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.49
===============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF OPERATIONS
IAI INSTITUTIONAL BOND FUND
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $27,432) $ 5,633,170
Dividends 213,750
- ---------------------------------------------------------------------------------------------------------
TOTAL INCOME 5,846,920
- ---------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 437,589
Compensation of Directors 9,400
- ---------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 446,989
Less fees reimbursed by Advisers (9,400)
- ---------------------------------------------------------------------------------------------------------
NET EXPENSES 437,589
- ---------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,409,331
- ---------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 2,937,786
Foreign currency transactions 716,953
Futures contracts (1,297,471)
Written option contracts closed or expired 170,054
-------------
2,527,322
Net change in unrealized appreciation or depreciation on:
Investment securities $ (2,829,194)
Other assets and liabilities denominated in foreign currency 7,183
Futures contracts 3,719
-------------
(2,818,292)
- ---------------------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (290,970)
- ---------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,118,361
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
Year ended Year ended
November 30, 1997 November 30, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 5,409,331 $ 6,698,324
Net realized gains (losses) 2,527,322 (492,962)
Net change in unrealized appreciation or depreciation (2,818,292) 911,061
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 5,118,361 7,116,423
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,586,340) (6,725,675)
- --------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (5,586,340) (6,725,675)
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 6,170,385 and 2,647,688 shares 57,996,609 24,310,364
Net asset value of 594,437 and 727,591 shares issued to
shareholders in reinvestment of distributions 5,564,118 6,725,675
Cost of 5,521,433 and 3,880,061 shares redeemed (51,810,405) (35,771,090)
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 11,750,322 (4,735,051)
- --------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 11,282,343 (4,344,303)
NET ASSETS AT BEGINNING OF PERIOD 97,084,609 101,428,912
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 108,366,952 $ 97,084,609
=============================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 585,418 $ 241,062
====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL HIGHLIGHTS
IAI INSTITUTIONAL BOND FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended
November 30, Period from Period from
----------------------------------- April 1, 1994 to November 1, 1993***
1997 1996 1995 November 30, 1994+ to March 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.54 $ 9.50 $ 8.85 $ 9.36 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.58 0.63 0.62 0.38 0.22
Net realized and unrealized gains (losses) (0.04) 0.04 0.66 (0.51) (0.65)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.54 0.67 1.28 (0.13) (0.43)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.59) (0.63) (0.63) (0.38) (0.21)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.59) (0.63) (0.63) (0.38) (0.21)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36
============================================================================================================================
Total investment return* 5.97% 7.44% 14.95% (1.44%) (4.35%)
Net assets at end of period (000's omitted) $ 108,367 $ 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 6.19% 6.75% 6.76% 6.42%** 5.84%**
Portfolio turnover rate
(excluding short-term securities) 511.0% 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
[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 U.S. Government securities and investment- and non-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. Such valuations are obtained from pricing services or are
supplied by dealers.
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, assets with a
market value equal to the amount of its purchase commitments.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Fund may buy and sell futures contracts and options. The 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 and losses may also be realized between the trade and settlement
dates on security and foreign currency contract transactions. The Fund does not
isolate that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $521,365
and accumulated net realized gains have been decreased by $521,365.
For federal income tax purposes, the Fund has a capital loss carry-over of
approximately $193,000 at November 30, 1997, 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
NOVEMBER 30, 1997
[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 $30,000,000 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. During the year ended November 30, 1997, the
Fund paid $5,692 in interest on the line of credit at an average rate of 8.50%.
There were no borrowings outstanding at November 30, 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
[4] PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 1997, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $451,159,137 and $438,634,025, respectively.
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of November 30, 1997.
The market value of securities deposited to cover initial margin requirements
for the open positions at November 30, 1997, was $299,874. The unrealized
appreciation on these contracts is included in unrealized appreciation or
depreciation on investment securities.
<TABLE>
<CAPTION>
INSTITUTIONAL BOND FUND FUTURES
- -------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Appreciation
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond 25 December 1997 Short $ 2,979,688 $ 3,719
===========================================================================================
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
[6] OPTIONS CONTRACTS WRITTEN
During the year ended November 30, 1997, Institutional Bond Fund wrote the
following options on futures:
CALL OPTIONS
- ---------------------------------------------------------------------------
Number of Contracts Premium
- ---------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 270 105,872
Expired (225) (83,078)
Closed (45) (22,794)
Exercised -- --
- ---------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
===========================================================================
PUT OPTIONS
- ---------------------------------------------------------------------------
Number of Contracts Premium
- ---------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 160 70,988
Expired (160) (70,988)
Closed -- --
Exercised -- --
- ---------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
===========================================================================
[7] FOREIGN CURRENCY EXCHANGE CONTRACTS
At November 30, 1997, the Fund had entered into foreign currency exchange
contracts. The unrealized appreciation on those contracts at November 30, 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>
12/01/97 2,573,540 Canadian Dollars 1,807,934 U.S. Dollars $ 38
12/02/97 4,800,000 New Zealand Dollars 3,005,760 U.S. Dollars 45,549
12/22/97 3,900,000 Canadian Dollars 2,758,065 U.S. Dollars 14,268
- ----------------------------------------------------------------------------------------------------
$ 59,855
====================================================================================================
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI INSTITUTIONAL BOND FUND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
IAI INVESTMENT FUNDS I, INC.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Institutional Bond Fund (a portfolio within IAI
Investment Funds I, Inc.) as of November 30, 1997, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for the periods presented on page 15 of the annual report. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Institutional Bond Fund at November 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
stated in the first paragraph above, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 9, 1998
<PAGE>
FEDERAL TAX INFORMATION
IAI INSTITUTIONAL BOND FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for 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 INSTITUTIONAL BOND FUND
TAX INFORMATION:
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
DECEMBER 1996 $ .0971
JANUARY 1997 .0480
FEBRUARY 1997 .0400
MARCH 1997 .0300
APRIL 1997 .0350
MAY 1997 .0430
JUNE 1997 .0530
JULY 1997 .0630
AUGUST 1997 .0550
SEPTEMBER 1997 .0520
OCTOBER 1997 .0380
NOVEMBER 1997 .0400
================================================================================
$ .5941
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME. 3.50% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR
DEDUCTION BY CORPORATIONS.
<PAGE>
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 developing countries
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized emerging
growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized growth
APPRECIATION FUND 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 short-term
[CAPITAL APPRECIATION instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------------
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>
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
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
<PAGE>
[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
