FIXED INCOME FUND
SEMI-ANNUAL REPORT
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI INSTITUTIONAL BOND FUND
SEMI-ANNUAL REPORT
MAY 31, 1998
(UNAUDITED)
President's Letter............................. 2
Fund Manager's 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........................ 20
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI INSTITUTIONAL BOND FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
I.P. "KIP" KNELMAN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI INSTITUTIONAL BOND FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The current economic backdrop is ideal for financial assets. Strong money growth
is flowing into the markets rather than the real economy. This trend is
bolstered by current demographic conditions. Moreover, low inflation raises
market valuations (P/E ratios and real interest rates) while high consumer and
business optimism raises the willingness to take risk.
What are the risks to the market? Near-term, negative earnings surprises could
stall the equity market, and a weak dollar would not be good for bonds. Over the
intermediate term, if the economic slowdown does not materialize, inflation
concerns will rise and the Fed will tighten. This would hurt valuations in both
stocks and bonds.
Our view is to remain cautiously optimistic on both markets, but watch for the
developing evidence of a slowdown.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on the Fund's 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/ Kip Knelman
I.P. "Kip" Knelman
President
<PAGE>
FUND MANAGER'S REVIEW
IAI INSTITUTIONAL BOND FUND
IAI INSTITUTIONAL BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI INSTITUTIONAL BOND
FUND 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 Fund returned 4.71% for the six months ended May 31, 1998. This compares
with market returns, as measured by the Lehman Brothers Aggregate Bond Index of
4.09% and the Salomon Broad Investment Grade Bond Index of 4.17%.
WERE THERE ANY SIGNIFICANT CHANGES?
Late in the first half, the allocation to spread sectors, mortgages and
corporates, was increased as spreads for these sectors versus treasuries had
widened, providing better value. The exposure to non-US dollar bonds was reduced
reflecting renewed concerns about most Asian economies and strong performance in
most European markets. The interest sensitivity of the Fund was extended near
the end of the period reflecting our favorable outlook for interest rates in the
near term.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Fund benefited from sector and individual issue decisions during the first
half. Early in the year the emphasis on corporates and mortgages added
incremental return. The decision to reduce these areas in April and the strong
performance of individual non-dollar holdings enabled the Fund to exceed its
benchmark. In addition, the Fund benefited from positioning for a flattening
yield curve throughout most of the first half.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Looking ahead, the near-term trends look favorable for bonds. US economic growth
should moderate this summer in response to slower production, reduced inventory
accumulation and rising imports. Soft commodity prices and Asian instability
will keep inflation expectations in check. Federal Reserve policy will remain on
hold. We have positioned the portfolio to benefit from these factors.
However, we see risks for the market beyond the summer months. Consumer
spending will stay strong, fueled by rising personal income, higher stock
prices, ample job opportunities and a record high level of consumer sentiment.
Inflation isn't dead. Falling commodity prices are currently masking a rising
trend of service-based inflation in such areas as housing rental and medical
care. The Fed may need to take action later in the year. As evidence of these
events materialize, the Fund will be repositioned in a more defensive mode.
<PAGE>
FUND MANAGER'S REVIEW
IAI INSTITUTIONAL BOND FUND
VALUE OF $2,000,000 INVESTMENT+
[PLOT POINTS CHART]
IAI INSTITUTIONAL BOND SALOMON BROAD
FUND (INCEPTION INVESTMENT GRADE LEHMAN BROTHERS
11/01/93) BOND INDEX AGGREGATE BOND INDEX
--------- ---------- --------------------
11/1/93 2,000,000 2,000,000 2,000,000
11/30/94 1,885,303 1,922,902 1,922,313
11/30/95 2,167,191 2,265,744 2,261,442
11/30/96 2,328,322 2,401,191 2,398,501
11/30/97 2,467,753 2,582,697 2,579,636
5/31/98 2,583,864 2,690,516 2,665,576
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/98
Since Inception
Six months* 1 Year 11/01/93
- --------------------------------------------------------------------------------
IAI INSTITUTIONAL BOND FUND 4.71% 10.66% 5.75%
- --------------------------------------------------------------------------------
Salomon Broad Investment
Grade Bond Index(1) 4.17% 10.91% 6.68%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 4.09% 10.91% 6.64%
(1) SALOMON BROAD INVESTMENT GRADE BOND INDEX WILL BE REPLACED WITH THE LEHMAN
BROTHERS AGGREGATE BOND INDEX AS THE FUND'S MANAGEMENT HAS DETERMINED THE
LEHMAN BROTHERS AGGREGATE BOND INDEX TO BE MORE REPRESENTATIVE OF THE FUND'S
INVESTMENTS, AND THEREFORE A BETTER COMPARISON FOR FUND PERFORMANCE.
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 5/31/98
[PIE CHART]
U.S. Government Agency Mortgage-Backed 39%
Short-Term 7%
Corporate 28%
U.S. Government & Government Agency 7%
Preferred Stock 3%
Asset-Backed 13%
Foreign Denominated 3%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/98
{BAR CHART]
YEARS
- -----
0-3 10%
3-5 24%
5-10 42%
10-20 11%
20+ 13%
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S 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 5/31/98
U.S.
Government............. 48%
Aaa.................... 8%
Aa..................... 7%
A...................... 17%
Baa.................... 12%
Non-Investment
Grade.................. 8%
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 29.2%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 4.4%
Allstate 6.75% 05/15/18 $ 360,000 $ 362,948
Associates (d) 6.45 09/15/00 450,000 454,307
AT&T Capital (MEDIUM-TERM NOTE) 6.41 08/13/99 1,000,000 1,003,490
Lehman Brothers 7.38 05/15/04 250,000 262,215
Mercantile Bancorp 6.80 06/15/01 1,000,000 1,010,710
Nationsbank 6.38 05/15/05 940,000 947,388
-----------
4,041,058
- ----------------------------------------------------------------------------------------------
INDUSTRIAL - 21.7%
Abitibi-Consolidated (e) 7.50 04/01/28 550,000 559,504
Boyds Collection (e) (d) 9.00 05/15/08 285,000 284,288
Chattem (d) 8.88 04/01/08 350,000 348,250
Chesapeake Energy (d) 9.63 05/01/05 200,000 199,000
Computer Associates International (d) 6.38 04/15/05 1,100,000 1,093,851
Corning Consumer Products (d) 9.63 05/01/08 500,000 500,000
CSC Holdings Series B 8.13 08/15/09 1,500,000 1,567,500
Dell Computer 7.10 04/15/28 2,000,000 2,028,400
Falcon Holding Group (d) 8.38 04/15/10 300,000 294,750
Finlay Fine Jewelry 8.38 05/01/08 250,000 251,875
Fred Meyer 7.45 03/01/08 850,000 852,304
General Motors 6.75 05/01/28 750,000 751,358
Grove Worldwide (d) 9.25 05/01/08 200,000 200,000
Level 3 Communications (d) 9.13 05/01/08 475,000 461,344
Lin Television (d) 8.38 03/01/08 600,000 597,000
Litton Industries 6.75 04/15/18 520,000 518,518
Nextlink Communications (d) 9.00 03/15/08 250,000 252,500
NGC 7.13 05/15/18 2,000,000 2,027,660
Pharmerica (d) 8.38 04/01/08 175,000 175,438
Pierce Leahy Command (d) 8.13 05/15/08 450,000 436,500
R&B Falcon (d) 7.38 04/15/18 620,000 626,950
Raytheon 6.30 03/15/05 520,000 519,553
Revlon Consumer Products 8.13 02/01/06 700,000 696,500
Time Warner Entertainment 8.38 03/15/23 1,500,000 1,743,960
Transamerica Capital III Series AI 7.63 11/15/37 1,000,000 1,062,216
Union Pacific Resources 7.05 05/15/18 1,100,000 1,108,755
Watson Pharmaceuticals 7.13 05/15/08 1,000,000 998,500
-----------
20,156,474
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES - 3.1%
GTE 6.94% 04/15/28 $1,090,000 $ 1,091,755
KN Energy 7.25 03/01/28 480,000 488,496
MCI Communications 6.13 04/15/02 1,020,000 1,017,144
Israel Electric (Yankee) (d) (e) 8.10 12/15/96 250,000 257,740
-----------
2,855,135
==============================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $29,139,125) ............................................................ $27,052,667
==============================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 7.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 6.7%
7.50% 11/15/16 $2,490,000 $ 2,937,030
7.50 11/15/24 1,980,000 2,400,750
6.63 02/15/27 475,000 523,687
6.13 11/15/27 300,000 313,452
------------
6,174,919
- ----------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 0.6%
Federal National Mortgage Association 6.00 05/15/08 580,000 583,625
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $6,652,915).............................................................. $ 6,758,544
==============================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 40.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 8.3%
6.00 04/01/11 $1,602,628 $ 1,594,102
7.50 06/01/12 1,907,420 1,967,313
7.50 07/01/12 1,706,296 1,759,874
6.50 04/01/13 717,509 722,216
6.50 05/01/13 399,960 402,583
6.50 03/01/28 1,294,199 1,288,129
------------
7,734,217
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONT.)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 9.5%
9.00% 06/01/17 $1,759,808 $ 1,887,376
7.50 01/01/28(b) 660,000 678,355
6.50 03/01/28 1,994,002 1,982,157
6.50 04/01/28 70,550 70,131
7.00 05/01/28 1,340,000 1,358,840
7.00 06/01/28(b) 2,780,000 2,819,087
------------
8,795,946
- ----------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 3.6%
6.50 12/01/12 417,153 419,497
6.00 03/01/13 788,106 778,743
6.50 03/01/13 2,147,803 2,159,874
------------
3,358,114
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 18.6%
9.00 11/15/17 617,184 667,324
7.00 12/15/23 947,537 964,413
8.00 12/15/23 1,389,273 1,454,819
6.50 10/15/24 1,224,900 1,224,067
7.00 10/15/26 2,076,724 2,111,779
7.00 11/15/26 570,001 579,622
7.50 12/15/27 2,873,137 2,961,113
7.00 02/15/28 4,936,641 5,013,751
7.00 03/15/28 1,342,163 1,363,129
7.50 05/15/28 920,000 948,170
------------
17,288,187
- ----------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MIDGET - 0.6%
7.00 01/15/08 583,695 599,928
==============================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $37,434,935) ............................................................ $37,776,392
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 13.0%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 6.0%
AESOP Funding II 97-1 A2 (d) 6.40% 10/20/03 $ 1,500,000 $ 1,524,435
Rental Car Finance 97-1 A2 6.45 08/25/05 4,000,000 4,026,875
-----------
5,551,310
- ----------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 2.8%
Discover Card Master Trust I 94-2 A 6.01 10/16/04 520,000 524,222
First Chicago Master Trust II 95-O A 5.89 02/15/04 830,000 832,847
Fleet Credit Card Master Trust 96-D A 5.81 06/15/05 1,250,000 1,249,600
-----------
2,606,669
- ----------------------------------------------------------------------------------------------
HOME LOANS - 4.2%
Associates Manufactured Housing 97-2 A3 6.28 03/15/28 3,860,000 3,885,824
==============================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $11,965,574) ............................................................ $12,043,803
==============================================================================================
FOREIGN DENOMINATED BONDS - 3.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
GOVERNMENT & GOVERNMENT AGENCY - 2.5%
Federal National Mortgage Association Global
(NEW ZEALAND DOLLAR) 7.00% 09/26/00 2,500,000 $ 1,319,239
International Bank for Reconstruction and
Development (POLAND ZLOTTY) 16.50 03/09/05 3,300,000 964,194
-----------
2,283,433
- ----------------------------------------------------------------------------------------------
CORPORATE - 0.8%
Ontario Province (CANADIAN DOLLAR) 6.50 03/08/29 1,000,000 744,618
==============================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $923,887) ............................................................... $ 3,028,051
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
<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 $ 2,458,080
==============================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(COST: $2,288,188) ............................................................. $ 2,458,080
==============================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $88,404,624) ............................................................ $89,117,537
==============================================================================================
SHORT-TERM SECURITIES - 7.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 7.4%
General Electric Credit (Financial) 5.65% 06/01/98 $ 4,100,000 $ 4,100,000
General Electric (Utilities) 5.51 06/09/98 2,775,000 2,771,602
-----------
6,871,602
==============================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $6,871,602) ............................................................. $ 6,871,602
==============================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $95,276,226) (f) ........................................................ $95,989,139
==============================================================================================
OTHER ASSETS & LIABILITIES (NET) - (3.4%)
.............................................................................. $(3,187,952)
==============================================================================================
TOTAL NET ASSETS
.............................................................................. $92,801,187
==============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
NOTES TO FUND PORTFOLIO
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(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, 1998, the total cost of securities
purchased on a when-issued basis was $3,486,654.
(c)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(d)
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.
(e)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(f)
At May 31, 1998, 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........................... $ 95,295,108
---------------
Gross unrealized appreciation.................................. $ 1,027,132
Gross unrealized depreciation.................................. (333,101)
---------------
Net unrealized appreciation.................................... $ 694,031
---------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities, at market
(Cost: $95,276,226) (see Fund Portfolio) $ 95,989,139
Cash in bank on demand deposit 111,755
Receivable for investment securities sold 507,238
Dividends and accrued interest receivable 627,898
Unrealized appreciation on foreign currency contracts held, at value (Note 5) 9,854
-------------
TOTAL ASSETS 97,245,884
-------------
LIABILITIES
Payable for investment securities purchased 4,438,122
Unrealized depreciation on foreign currency contracts held, at value (Note 5) 4,033
Accrued management fee 2,542
-------------
TOTAL LIABILITIES 4,444,697
-------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 92,801,187
=============
REPRESENTED BY:
Capital stock $ 96,626
Additional paid-in capital 90,469,115
Undistributed net investment income 170,381
Accumulated net realized gains 1,347,633
Unrealized appreciation or depreciation on:
Investment securities $ 712,913
Other assets and liabilities denominated in foreign currency 4,519
------------
717,432
-------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 92,801,187
=============
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 9,662,619
-------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.60
=============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF OPERATIONS
IAI INSTITUTIONAL BOND FUND
SIX MONTHS ENDED MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $741) $ 3,272,648
Dividends 106,875
-------------
TOTAL INCOME 3,379,523
-------------
EXPENSES
Management fees 255,341
Compensation of Directors 6,293
-------------
TOTAL EXPENSES 261,634
Less fees reimbursed by Advisers (6,293)
-------------
NET EXPENSES 255,341
-------------
NET INVESTMENT INCOME 3,124,182
-------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 1,443,730
Futures contracts (95,641)
Written option contracts 59,788
Foreign currency transactions 155,651
-------------
1,563,528
Net change in unrealized appreciation or depreciation on:
Investment securities $ 97,640
Futures contracts (3,719)
Other assets and liabilities denominated in foreign currency (2,957)
-------------
90,964
-------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 1,654,492
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,778,674
=============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI INSTITUTIONAL BOND FUND
<TABLE>
<CAPTION>
Six months ended Year ended
May 31, 1998 November 30, 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 3,124,182 $ 5,409,331
Net realized gains 1,563,528 2,527,322
Net change in unrealized appreciation or depreciation 90,964 (2,818,292)
-------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 4,778,674 5,118,361
-------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,539,219) (5,586,340)
-------------------------------------
TOTAL DISTRIBUTIONS (3,539,219) (5,586,340)
-------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 1,316,499 and 6,170,385 shares 12,526,611 57,996,609
Net asset value of 371,021 and 594,437 shares
issued in reinvestment of distributions 3,532,066 5,564,118
Cost of 3,440,105 and 5,521,433 share redeemed (32,863,897) (51,810,405)
-------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (16,805,220) 11,750,322
-------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (15,565,765) 11,282,343
NET ASSETS AT BEGINNING OF PERIOD 108,366,952 97,084,609
-------------------------------------
NET ASSETS AT END OF PERIOD $92,801,187 $ 108,366,952
=====================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 170,381 $ 585,418
=====================================
</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
Six months November 30, Period from Period from
ended ------------------------------- April 1, 1994 to November 1, 1993***
May 31, 1998 1997 1996 1995 November 30, 1994+ to March 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36 $ 10.00
---------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.30 0.58 0.63 0.62 0.38 0.22
Net realized and unrealized gains (losses) 0.14 (0.04) 0.04 0.66 (0.51) (0.65)
---------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.44 0.54 0.67 1.28 (0.13) (0.43)
---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.33) (0.59) (0.63) (0.63) (0.38) (0.21)
---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.33) (0.59) (0.63) (0.63) (0.38) (0.21)
---------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.60 $ 9.49 $ 9.54 $ 9.50 $ 8.85 $ 9.36
=======================================================================================
Total investment return* 4.71% 5.97% 7.44% 14.95% (1.44%) (4.35%)
Net assets at end of period (000's omitted) $92,801 $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%** 0.50%**
Net investment income to average
daily net assets 6.11%** 6.19% 6.75% 6.76% 6.42%** 5.84%**
Portfolio turnover rate
(excluding short-term securities) 194.8% 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
MAY 31, 1998
(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 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
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Funds on a
forward commitment or when-issued basis may occur a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Funds maintain, in segregated accounts, assets with a
market value equal to the amount of their 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.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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 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
MAY 31, 1998
(UNAUDITED)
[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. During the six month period ended May 31,
1998, the Fund paid $3,990 in interest on the line of credit at an average rate
of 8.50%. There were no borrowings outstanding at May 31, 1998.
[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] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $195,343,345 and $213,731,810, respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI INSTITUTIONAL BOND FUND
MAY 31, 1998
(UNAUDITED)
[5] FOREIGN CURRENCY EXCHANGE CONTRACTS
At May 31, 1998, the Fund had entered into foreign currency exchange contracts.
The unrealized appreciation (depreciation) on those contracts at May 31, 1998,
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 Unrealized Depreciation
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6/11/98 1,050,000 Canadian Dollars 731,707 U.S. Dollars $ 9,854 $ --
6/18/98 2,500,000 New Zealand Dollars 1,332,500 U.S. Dollars -- 4,033
- -----------------------------------------------------------------------------------------------------------------------------
$ 9,854 $ 4,033
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
[6] OPTIONS CONTRACTS WRITTEN
During the six months ended May 31, 1998, Institutional Bond Fund wrote the
following options on futures. There were no outstanding contracts at May 31,
1998.
CALL OPTIONS
- --------------------------------------------------------------------------------
Number of Contracts Premium
- --------------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
Opened 240 144,450
Expired (240) (144,450)
Closed -- --
Exercised -- --
- --------------------------------------------------------------------------------
Outstanding at 5/31/98 -- $ --
================================================================================
PUT OPTIONS
- --------------------------------------------------------------------------------
Number of Contracts Premium
- --------------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
Opened 45 19,913
Expired (45) (19,913)
Closed -- --
Exercised -- --
- --------------------------------------------------------------------------------
Outstanding at 5/31/98 -- $ --
================================================================================
<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
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average growth
and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term 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>
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
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
