FIXED INCOME FUNDS
ANNUAL REPORT
IAI BOND FUND,
IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BOND FUND, IAI GOVERNMENT FUND
ANNUAL REPORT
NOVEMBER 30, 1997
Chairman's Letter.............................. 2
Fund Managers' Reviews
IAI Bond Fund............................... 4
IAI Government Fund......................... 6
Fund Portfolios
IAI Bond Fund............................... 8
IAI Government Fund........................ 12
Notes to Fund Portfolios...................... 15
Statements of Assets and Liabilities.......... 16
Statements of Operations...................... 18
Statements of Changes in Net Assets........... 20
Financial Highlights
IAI Bond Fund.............................. 22
IAI Government Fund........................ 23
Notes to Financial Statements................. 24
Independent Auditors' Report.................. 31
Federal Tax Information....................... 32
IAI Mutual Fund Family........................ 34
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
CHAIRMAN'S LETTER
IAI BOND FUND, IAI GOVERNMENT 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 BOND FUND, IAI GOVERNMENT 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' Reviews, which follow this letter, for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
<PAGE>
FUND MANAGERS' REVIEW
IAI BOND FUND
IAI BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI Bond Fund Co-Manager
[PHOTO]
STEPHEN C. COLEMAN, CFA
IAI BOND FUND CO-MANAGER
WHAT IS THE FUND'S OBJECTIVE?
The IAI Bond Fund's objective is to provide a high level of current income
consistent with preservation of capital. This objective is pursued by investing
in a diversified portfolio of high quality bonds. The Fund invests primarily in
investment-grade bonds and other debt securities of similar high quality. The
Fund invests in a variety of maturities and sectors which are varied depending
on relative values in the marketplace at a given point in time.
HOW HAS THE FUND PERFORMED?
For the year ended November 30, 1997, the IAI Bond Fund had an 8.15% total
return, outperforming its benchmark, the Lehman Brothers Aggregate Bond Index,
which had a 7.55% total return.
WERE THERE ANY SIGNIFICANT CHANGES?
The interest rate sensitivity of the Fund remained longer than the benchmark as
U.S. interest rates declined due to the turmoil in Southeast Asia. The Fund's
exposure to Mortgage-backed securities remained above the benchmark to take
advantage of wider spreads. In addition, the Corporate and international
exposures remained modest due to narrow spreads and increased credit risk
concerns.
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. This led many to the U.S. government bond market. This flow of
funds fueled a significant decline in long bond yields. Supporting the rally was
the continuation of non-inflationary economic growth. The Fund benefited from
its longer duration stance. Moreover, the Fund avoided any direct exposure to
Asian issues.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Above trend 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
concerns will re-emerge in the marketplace. 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 from bonds in 1998 is likely.
<PAGE>
FUND MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
LEHMAN BROTHERS
IAI BOND FUND AGGREGATE BOND INDEX
11/30/87 10,000 10,000
11/30/88 10,722 10,923
11/30/89 12,438 12,492
11/30/90 13,051 13,438
11/30/91 14,917 15,375
11/30/92 16,317 16,737
11/30/93 18,604 18,560
11/30/94 17,685 17,992
11/30/95 20,416 21,166
11/30/96 21,814 22,449
11/30/97 23,591 24,145
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/97
1 Year 5 Years 10 Years
=====================================================================
IAI BOND FUND 8.15% 7.65% 8.96%
- ---------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 7.55% 7.61% 9.22%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 11/30/97
[PIE CHART]
U.S. Government Agency Mortgage-Backed 32%
Short-Term 19%
Asset-Backed 1%
U.S. Government & Government Agency 26%
Corporate 17%
Preferred Stock 5%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/97
[BAR CHART]
YEARS
0-3 9%
3-5 13%
5-10 42%
10-20 20%
20+ 16%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI BOND FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A GUARANTEE
OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL MAY
FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDEXES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
CREDIT RATING
% OF PORTFOLIO AS OF 11/30/97
U.S. Government...........67%
Aaa....................... 7%
Aa........................--%
A......................... 3%
Baa.......................11%
Non-Investment Grade......12%
<PAGE>
FUND MANAGER'S REVIEW
IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
[PHOTO]
SCOTT A. BETTIN, CFA
IAI GOVERNMENT FUND
MANAGER
WHAT IS THE FUND'S OBJECTIVE?
The Fund seeks to provide shareholders with a high level of current income with
preservation of capital. The Fund invests primarily in U.S. Government
securities with dollar-weighted average maturity of seven years or less.
HOW HAS THE FUND PERFORMED?
For the year ended November 30, 1997, the IAI Government Fund had a total return
of 4.60% while the Salomon Brothers Intermediate Treasury/Agency/Mortgage-Backed
Index had a total return of 7.09%.
WERE THERE ANY SIGNIFICANT CHANGES?
The interest rate sensitivity of the Fund was reduced in August based on our
view that lack of excess production and labor capacity combined with persistent
economic strength would lead to a tighter monetary policy and higher interest
rates. This position was reversed in late October. In addition, the Fund's
exposure to Mortgage-backed securities was reduced as spreads narrowed and
concerns about prepayments increased.
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 bond rally was the continuation of non-inflationary
economic growth. From the end of August to the end of October, interest rates
fell by 1/2% in response to this flight-to-quality. The Fund's more conservative
duration posture during this period caused performance to lag the market.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Above trend 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
concerns will re-emerge in the marketplace. 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 for
the near-term horizon. However, the next major move in rates could be higher
rather than lower as the Asian turmoil subsides.
<PAGE>
FUND MANAGER'S REVIEW
IAI GOVERNMENT FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
SALOMON BROTHERS INTERMEDIATE
IAI GOVERNMENT FUND TREASURY/AGENCY
(Inception 8/08/91) MORTGAGE-BACKED INDEX*
8/8/91 10,000 10,000
11/30/91 10,464 10,398
11/30/92 11,247 11,182
11/30/93 12,292 12,068
11/30/94 12,010 11,884
11/30/95 13,331 13,684
11/30/96 13,995 14,528
11/30/97 14,639 15,520
AVERAGE ANNUAL RETURNS+
THROUGH 11/30/97
Since Inception
1 Year 5 Years 8/08/91
================================================================================
IAI GOVERNMENT FUND 4.60% 5.42% 6.22%
- --------------------------------------------------------------------------------
Salomon Brothers Intermediate Treasury/
Agency/Mortgage-Backed Index 7.09% 6.83% 7.28%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 9/01/91
SECTORS
% OF PORTFOLIO AS OF 11/30/97
[PIE CHART]
Corporate 3%
U.S. Government Agency Mortgage-Backed 42%
Foreign Denominated 4%
U.S. Government & Government Agency 40%
Short-Term 11%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 11/30/97
[BAR CHART]
YEARS
0-3 14%
3-5 24%
5-10 47%
10-20 1%
20+ 14%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI GOVERNMENT FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A GUARANTEE
OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL MAY
FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 18.8%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL - 17.0%
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
Coca-Cola Bottling 7.20 07/01/09 500,000 513,435
Desain International (e) 9.88 12/15/07 500,000 503,125
Jitney-Jungle Stores (e) 10.38 09/15/07 500,000 517,500
Kevco (e) 10.38 12/01/07 500,000 505,000
Kitty Hawk (e) 9.95 11/15/04 250,000 251,250
Nextlink Communications 9.63 10/01/07 350,000 352,625
Speedway Motorsports 8.50 08/15/07 500,000 505,000
T/SF Communications (e) 10.38 11/01/07 600,000 588,000
Tele-Communications International 4.50 02/15/06 250,000 207,813
Time Warner (e) 6.10 12/30/01 1,000,000 974,530
Time Warner Entertainment 8.38 07/15/33 2,300,000 2,574,895
Transamerica Capital III (e) 7.63 11/15/37 1,750,000 1,784,668
Worldtex (e) 9.63 12/15/07 150,000 151,125
------------
11,659,158
- ----------------------------------------------------------------------------------------------------
FINANCIAL - 1.8%
PYCSA Panama (YANKEE) (e) (f) 10.28 12/15/12 1,300,000 1,241,578
====================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $12,890,247) .................................................................. $ 12,900,736
====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 29.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 8.0%
6.25 06/30/98 $ 1,400,000 $ 1,405,250
7.50 02/15/05 2,040,000 2,229,026
6.50 08/15/05 1,800,000 1,864,962
-------------
5,499,238
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 12.5%
9.25 02/15/16 845,000 1,134,674
7.50 11/15/16 1,170,000 1,348,425
8.75 05/15/17 500,000 647,970
7.63 02/15/25 500,000 598,985
6.13 11/15/27 4,790,000 4,843,888
-------------
8,573,942
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY STRIP - 7.1%
U.S. Treasury STRIP (ZERO COUPON) 6.22 (g) 11/15/09 10,000,000 4,875,300
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.0%
Federal National Mortgage Association (MEDIUM-TERM NOTE) 7.02% 07/03/07 1,130,000 1,153,662
Federal National Mortgage Association (MEDIUM-TERM NOTE) 6.90 08/21/07 240,000 243,639
-------------
1,397,301
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $20,014,374) .............................................................................. $ 20,345,781
================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 36.1%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 1.1%
Series 1228 Class E (COLLATERALIZED MORTGAGE OBLIGATION) 6.50% 09/15/15 $ 186,189 $ 185,839
Series 1921 Class J (COLLATERALIZED MORTGAGE OBLIGATION) 6.50 09/15/24 550,000 534,699
-------------
720,538
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 8.2%
6.50 03/02/11 709,098 710,204
6.00 04/01/11 1,061,854 1,045,587
6.50 04/01/26 1,788,123 1,758,512
7.00 11/01/26 2,083,540 2,094,602
-------------
5,608,905
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 21.6%
9.00% 06/01/17 $ 2,202,688 $ 2,369,586
Series 1996-39 Class C (COLLATERALIZED MORTGAGE OBLIGATION) 6.00 12/25/24 960,000 906,893
6.50 05/01/26 1,477,890 1,451,569
7.00 09/01/27 2,285,613 2,289,888
7.50 12/01/27(b) 4,280,000 4,365,600
8.00 12/11/27(b) 3,320,000 3,433,079
-------------
14,816,615
- ----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 1.9%
7.00 08/01/11 507,507 513,744
6.50 12/15/12(b) 830,000 827,145
-------------
1,340,889
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.3%
9.00 11/15/17 301,995 327,284
7.00 12/15/23 251,405 252,896
8.00 12/15/23 966,792 1,005,463
7.50 01/15/26 675,536 689,135
-------------
2,274,778
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $24,464,489) ............................................................................. $ 24,761,725
================================================================================================================
ASSET-BACKED SECURITIES - 1.5%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 1.5%
Dayton Hudson Credit Card Master Trust 95-1 A 6.10% 02/25/02 $ 1,000,000 $ 1,000,750
================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $999,219) ................................................................................ $ 1,000,750
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED STOCK - 5.9%
Market
Rate Quantity Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL - 5.9%
SI Financing Trust I 2.38% 150,000 $ 4,068,750
================================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCK
(COST: $3,810,937) .............................................................................. $ 4,068,750
================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $62,179,266) ............................................................................. $ 63,077,742
================================================================================================================
SHORT-TERM SECURITIES - 20.8%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 12.7%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE) 5.60% 12/01/97 $ 3,200,000 $ 3,200,000
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE) 5.45 12/08/97 1,600,000 1,598,304
Federal National Mortgage Association (DISCOUNT NOTE) 5.49 12/19/97 3,000,000 2,991,765
U.S. Treasury Bill 5.05 12/04/97 900,000(c) 899,622
-------------
8,689,691
- ----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 8.1%
GTE Funding (Telecommunications) 5.61 12/10/97 2,200,000 2,196,914
PHH (Professional Services) 5.54 12/12/97 3,400,000 3,394,245
-------------
5,591,159
================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $14,280,859) ............................................................................. $ 14,280,850
================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $76,460,125) (h) ......................................................................... $ 77,358,592
================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (12.7%)
................................................................................................ $ (8,738,231)
================================================================================================================
TOTAL NET ASSETS
................................................................................................ $ 68,620,361
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 2.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 2.6%
AT&T Capital (MEDIUM-TERM NOTE) 6.41% 08/13/99 $ 500,000 $ 501,260
================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $500,000) ................................................................................ $ 501,260
================================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 41.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 4.9%
6.25% 05/31/99 $ 140,000 $ 140,941
6.50 05/31/01 400,000 408,124
7.50 02/15/05 350,000 382,431
-------------
931,496
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 27.0%
11.13 08/15/03 1,500,000 1,875,465
11.63 11/15/04 640,000 845,900
6.13 11/15/27 2,350,000 2,376,438
-------------
5,097,803
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 9.5%
Federal Home Loan Mortgage Corporation 5.74 09/17/03 500,000 484,685
Federal Home Loan Mortgage Corporation 7.10 04/10/07 1,000,000 1,061,090
Private Export Funding 6.62 10/01/05 250,000 256,895
-------------
1,802,670
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $7,672,802) .............................................................................. $ 7,831,969
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 42.8%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 9.4%
5.50% 07/01/98 $ 1,561 $ 1,546
7.00 01/01/99 2,972 2,959
6.25 12/01/03 73,777 73,470
Series 1662 Class A (COLLATERALIZED MORTGAGE OBLIGATION) 5.35 02/15/06 473,219 469,079
6.00 07/01/09 26,500 26,251
Series 1128 Class IB (COLLATERALIZED MORTGAGE OBLIGATION) 7.00 08/15/21 1,015,000 1,020,390
Series 1921 Class J (COLLATERALIZED MORTGAGE OBLIGATION) 6.50 09/15/24 180,000 174,992
------------
1,768,687
- ---------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 5.3%
6.50 08/01/25 406,337 400,498
7.00 11/01/26 596,629 599,797
------------
1,000,295
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 15.5%
11.50 01/01/01 9,212 9,471
6.60 12/01/03 1,183,484 1,195,504
11.50 01/01/13 9,159 10,398
Series 1988-29 Class B (COLLATERALIZED MORTGAGE OBLIGATION) 9.50 12/25/18 189,801 204,036
Series 1996-39 Class C (COLLATERALIZED MORTGAGE OBLIGATION) 6.00 12/25/24 300,000 283,404
6.50 05/01/26 718,424 705,629
8.00 12/11/27(b) 500,000 517,030
------------
2,925,472
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARFS - 3.2%
10.00 02/01/01 16,509 17,168
10.00 01/01/03 282,566 296,742
6.50 12/15/12(b) 290,000 289,002
------------
602,912
- ---------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 9.4%
8.00 09/15/08 366,831 381,097
11.00 06/15/13 12,161 13,712
9.00 11/15/17 1,102,176 1,194,472
9.00 12/15/17 181,501 196,700
------------
1,785,981
===============================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $7,947,741) .............................................................................. $ 8,083,347
===============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
FOREIGN DENOMINATED BONDS - 4.4%
Principal Market
Rate Maturity Amount (d) Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT OBLIGATIONS - 4.4%
New Zealand Government (NEW ZEALAND DOLLAR) 8.00% 02/15/01 1,300,000 $ 827,955
================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $857,828) ................................................................................ $ 827,955
================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $16,978,371) ............................................................................. $ 17,244,531
================================================================================================================
SHORT-TERM SECURITIES - 11.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 6.9%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE) 5.60% 12/01/97 $ 1,200,000 $ 1,200,000
U.S. Treasury Bill 5.05 12/04/97 100,000(c) 99,958
-------------
1,299,958
- ----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 4.7%
GTE Funding (Telecommunications) 5.61 12/10/97 900,000 898,738
================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $2,198,697) .............................................................................. $ 2,198,696
================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $19,177,068) (h) ......................................................................... $ 19,443,227
================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (2.8%)
................................................................................................ $ (530,360)
================================================================================================================
TOTAL NET ASSETS
................................................................................................ $ 18,912,867
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI BOND FUND, IAI GOVERNMENT 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 in the IAI Bond Fund portfolio was
$8,599,206 and in the IAI Government Portfolio was $801,253.
(c)
Security is fully or partially pledged to cover initial margin on open futures
contracts (see Note 6 to financial statements).
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(e)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 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)
Interest rate shown represents yield-to-maturity at date of purchase.
(h)
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:
IAI IAI
BOND FUND GOVERNMENT FUND
----------------------------------------------------------------------------
Cost for federal income tax purposes $ 76,461,951 $ 19,193,205
===================================
Gross unrealized appreciation $ 1,010,698 $ 290,637
Gross unrealized depreciation (114,057) (40,615)
-----------------------------------
Net unrealized appreciation $ 896,641 $ 250,022
===================================
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $76,460,125; and $19,177,068, respectively) (see Fund Portfolios) $77,358,592 $19,443,227
Cash in bank on demand deposit -- 79,656
Receivable for investment securities sold 1,188,371 448,304
Accrued interest and dividends receivable 561,218 188,925
Unrealized appreciation on foreign currency contracts held, at value (Note 8) 25 12,821
Other 17,942 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 79,126,148 20,172,933
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Bank overdraft 38,707 --
Payable for investment securities purchased 1,864,874 457,313
Payable for investment securities purchased on a when-issued basis 8,599,206 801,253
Variation margin payable 3,000 1,500
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 10,505,787 1,260,066
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $68,620,361 $18,912,867
=================================================================================================================================
REPRESENTED BY:
Capital stock $ 72,295 $ 19,293
Additional paid-in capital 69,421,772 20,812,320
Undistributed net investment income 376,711 78,355
Accumulated net realized losses on investments (1,882,049) (2,258,689)
Unrealized appreciation (depreciation) on:
Investment securities (Note 6) $ 631,302 $258,914
Other assets and liabilities denominated in foreign currency 330 2,674
--------- --------
631,632 261,588
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $68,620,361 $18,912,867
=================================================================================================================================
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 7,229,457 1,929,269
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $9.49 $ 9.80
=================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
STATEMENTS OF OPERATIONS
IAI BOND FUND, IAI GOVERNMENT FUND
YEAR ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest (net of foreign income taxes withheld of $20,681
and $216, respectively) $ 4,693,100 $ 1,645,061
Dividends 356,250 --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 5,049,350 1,645,061
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees 812,134 261,333
Compensation of Directors 7,772 2,445
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 819,906 263,778
Less fees reimbursed by Advisers (7,772) (2,445)
- ---------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 812,134 261,333
- ---------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,237,216 1,383,728
- ---------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 2,897,923 $ (101,401)
Foreign currency transactions 460,412 77,890
Futures contracts (204,298) (277,554)
Written option contracts closed or expired -- 21,256
----------- ----------
3,154,037 (279,809)
Net change in unrealized appreciation or depreciation on:
Investment securities $(1,639,248) $ (120,759)
Other assets and liabilities denominated in foreign currency 601 2,674
Futures contracts (267,165) (7,245)
----------- ----------
(1,905,812) (125,330)
- ---------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY 1,248,225 (405,139)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,485,441 $ 978,589
===========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND, IAI GOVERNMENT FUND
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
Years ended Years ended
---------------------------- ----------------------------
November 30, November 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 4,237,216 $ 4,852,622 $ 1,383,728 $ 2,325,836
Net realized gains (losses) 3,154,037 178,926 (279,809) (199,090)
Net change in unrealized appreciation or depreciation (1,905,812) 442,727 (125,330) (492,074)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,485,441 5,474,275 978,589 1,634,672
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,411,156) (5,337,592) (1,424,732) (2,384,545)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (4,411,156) (5,337,592) (1,424,732) (2,384,545)
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 19,823,156 41,786,065 6,086,177 10,438,023
Net asset value of shares issued to shareholders in
reinvestment of distributions 4,206,938 5,091,444 1,405,217 2,355,866
Cost of shares redeemed (43,287,269) (37,736,607) (17,883,098) (30,414,774)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (19,257,175) 9,140,902 (10,391,704) (17,620,885)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (18,182,890) 9,277,585 (10,837,847) (18,370,758)
NET ASSETS AT BEGINNING OF PERIOD 86,803,251 77,525,666 29,750,714 48,121,472
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 68,620,361 $ 86,803,251 $ 18,912,867 $ 29,750,714
====================================================================================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 376,711 $ 210,296 $ 78,355 $ 50,296
====================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
FINANCIAL HIGHLIGHTS
IAI BOND FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Years ended
November 30, Period from March 31,
----------------------------------- April 1, 1994 to ----------------------
1997 1996 1995 November 30, 1994+ 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.54 0.56 0.58 0.36 0.62 0.64
Net realized and unrealized gains (losses) 0.19 0.04 0.72 (0.55) (0.25) 0.93
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.73 0.60 1.30 (0.19) 0.37 1.57
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.56) (0.62) (0.61) (0.35) (0.66) (0.64)
Net realized gains -- -- -- (0.13) (0.81) (0.76)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.56) (0.62) (0.61) (0.48) (1.47) (1.40)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.49 $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42
===============================================================================================================================
Total investment return* 8.15% 6.85% 15.46% (2.10%) 3.16% 16.44%
Net assets at end of period (000's omitted) $ 68,620 $ 86,803 $ 77,526 $ 80,622 $ 97,139 $119,371
RATIOS
Expenses to average net assets 1.10% 1.10% 1.09% 1.10%** 1.09% 1.10%
Net investment income to
average net assets 5.74% 6.20% 6.32% 6.03%** 5.63% 6.03%
Portfolio turnover rate
(excluding short-term securities) 482.2% 342.4% 424.7% 226.7% 333.1% 160.8%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
<PAGE>
FINANCIAL HIGHLIGHTS
IAI GOVERNMENT FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Years ended
November 30, Period from March 31,
----------------------------------- April 1, 1994 to ----------------------
1997 1996 1995 November 30, 1994+ 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.95 $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.58 0.58 0.60 0.33 0.47 0.57
Net realized and unrealized
gains (losses) (0.14) (0.10) 0.43 (0.34) (0.24) 0.59
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.44 0.48 1.03 (0.01) 0.23 1.16
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.59) (0.59) (0.59) (0.32) (0.49) (0.58)
Net realized gains -- -- -- (0.03) (0.22) (0.34)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.59) (0.59) (0.59) (0.35) (0.71) (0.92)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.80 $ 9.95 $ 10.06 $ 9.62 $ 9.98 $ 10.46
===============================================================================================================================
Total investment return* 4.60% 4.99% 10.99% (0.09%) 2.02% 11.70%
Net assets at end of period
(000's omitted) $ 18,913 $ 29,751 $ 48,121 $ 38,438 $ 41,027 $ 43,704
RATIOS
Expenses to average net assets 1.10% 1.10% 1.10% 1.10%** 1.10% 1.10%
Net investment income to
average net assets 5.82% 5.78% 5.97% 5.12%** 4.40% 5.40%
Portfolio turnover rate
(excluding short-term securities) 349.5% 152.0% 284.1% 121.5% 641.0% 236.3%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET
VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT 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, or series
thereof. IAI Bond Fund (Bond Fund) is a separate portfolio of IAI Investment
Funds I, Inc. IAI Government Fund (Government Fund) is a separate portfolio of
IAI Investment Funds VI, Inc. The Bond Fund's primary objective is to provide a
high level of current income consistent with capital preservation, through
investments in a diversified portfolio of primarily investment grade bonds and
other debt securities of similar high quality. The Government Fund seeks to
provide shareholders with a high level of current income with preservation of
capital by investing primarily in U.S. Government securities. This report covers
only Bond Fund and Government Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price. 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 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
Funds may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities, representing the initial margin, equal to a
certain percentage of the contract value. Subsequent changes in the value of the
contract, or variation
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
margin, are recorded daily as unrealized gains or losses. Variation margin is
paid or received in cash daily by the Fund. The Fund realizes a gain or loss
when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
Bond Fund and Government Fund may invest in foreign securities. The market value
of securities and other assets and liabilities denominated in foreign currencies
is translated daily into U.S. dollars at the closing rate of exchange. Purchases
and sales of securities, income and expenses are translated at the exchange rate
on the transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions.
Exchange gains and losses may also be realized between the trade and settlement
dates on security and foreign currency contract transactions. The Funds do not
isolate that portion of the result of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Funds may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Funds are subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
taxable income to shareholders, no provision for income taxes is required. In
order to avoid the payment of any federal excise taxes, the Funds are required
to distribute substantially all of their net investment income and net realized
gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of recognition of certain foreign currency
gains and losses as ordinary income and the deferral of "wash sale" losses for
tax purposes. The character of distributions made during the year from net
investment income or net realized gains may differ from its ultimate
characterization for tax purposes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in
reclassification adjustments to additional paid-in capital as follows:
IAI BOND IAI GOVERNMENT
FUND FUND
- --------------------------------------------------------------------------------
Undistributed net investment income $ 340,355 $ 69,063
Accumulated net realized losses $ (340,355) $ (69,063)
Additional paid-in capital $ -- $ --
For federal income tax purposes, the Bond Fund and Government Fund have capital
loss carryovers of approximately 2,102,000 and $2,266,000, respectively at
November 30, 1997, which, if not offset by subsequent capital gains, will expire
in 2002 and 2002 through 2005, respectively. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryovers are offset or expire.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income, including level yield amortization of discount for the Funds,
is accrued daily. Security gains and losses are determined on the basis of
identified cost, which is the same basis used for federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. Distributions
from net investment income are made monthly. Capital gains, if any, are
primarily distributed at the end of the calendar year. Additional capital gains
distributions as needed to comply with federal tax regulations are distributed
during the year.
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 BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). The Funds are
committed to make capital contributions, if requested by the Company.
Bond Fund and Government Fund have available lines of credit of $14,961,293 and
$7,500,000, respectively, with a bank at the prime interest rate. To the extent
funds are drawn against the line, securities are held in a segregated account.
No compensating balances or commitment fees are required under the lines of
credit. During the year ended November 30, 1997, the Funds paid $2,715 and $543,
respectively, in interest on the line of credit at an average rate of 8.50%.
Advances under the line of credit totalled $38,707 for the Bond Fund at November
30, 1997. There were no borrowings outstanding at November 30, 1997 for the
Government Fund.
[3] FEES AND EXPENSES
Under terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. This fee is equal to an
annual rate of 1.10% declining to 1.00% of average daily net assets and is paid
monthly. The Management Agreements further provide that Advisers will reimburse
the Funds for the fees and expenses it pays to Directors who are not "interested
persons" of the Funds or reduce its fee by an equivalent amount.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods ended November 30,
1997 and November 30, 1996, were as follows:
IAI BOND FUND IAI GOVERNMENT FUND
- --------------------------------------------------------------------------------
Years ended Years ended
November 30, November 30,
------------------------- -------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
SOLD 2,139,386 4,627,561 620,340 1,067,073
ISSUED FOR REINVESTED
DISTRIBUTIONS 454,281 561,270 144,144 239,818
REDEEMED (4,677,133) (4,178,407) (1,825,354) (3,100,200)
------------------------------------------------------
INCREASE (DECREASE)
IN SHARES OUTSTANDING (2,083,466) 1,010,424 (1,060,870) (1,793,309)
======================================================
[5] 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 Funds were as
follows:
Purchases Sales
- --------------------------------------------------------------------------------
IAI BOND FUND $332,690,873 $350,869,773
IAI GOVERNMENT FUND $ 76,981,851 $ 88,728,456
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[6] 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 $174,927 and $99,958 for the
Bond Fund and the Government Fund, respectively. The unrealized depreciation on
these contracts is included in unrealized appreciation or depreciation on
investment securities.
<TABLE>
<CAPTION>
BOND FUND FUTURES
- ---------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 40 December 1997 Short $ 4,465,000 $ (93,425)
U.S. Treasury Bond 32 December 1997 Short $ 3,814,000 (173,740)
-----------
$ (267,165)
===========
GOVERNMENT FUND FUTURES
- ---------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- ---------------------------------------------------------------------------------------------
U.S. Treasury Bond 16 December 1997 Short $ 1,907,000 $ (7,245)
</TABLE>
[7] OPTIONS CONTRACTS WRITTEN
During the year ended November 30, 1997, Government Fund wrote the following
options on futures. There were no outstanding contracts at November 30, 1997.
IAI GOVERNMENT FUND CALL OPTIONS
- --------------------------------------------------------------------------------
Number of Contracts Premium
- --------------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 60 22,472
Expired (50) (17,672)
Closed (10) (4,800)
Exercised -- --
- --------------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
================================================================================
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
NOVEMBER 30, 1997
[8] FOREIGN CURRENCY EXCHANGE CONTRACTS
At November 30, 1997, the Funds 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:
IAI BOND FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Appreciation
- --------------------------------------------------------------------------------
12/01/97 1,672,801 Canadian Dollars 1,175,157 U.S. Dollars $ 25
================================================================================
IAI GOVERNMENT FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Appreciation
- --------------------------------------------------------------------------------
12/01/97 643,385 Canadian Dollars 451,984 U.S. Dollars $ 10
12/02/97 1,350,000 New Zealand Dollars 845,370 U.S. Dollars 12,811
- --------------------------------------------------------------------------------
$ 12,821
================================================================================
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI BOND FUND, IAI GOVERNMENT FUND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
IAI INVESTMENT FUNDS I, INC.
IAI INVESTMENT FUNDS VI, INC.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Bond Fund (a portfolio within IAI Investment Funds
I, Inc.) and IAI Government Fund (a portfolio within IAI Investment Funds VI,
Inc.) as of November 30, 1997, and the related statements of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for the periods
presented on pages 22 and 23 of the annual report. These financial statements
and the financial highlights are the responsibility of the Funds' management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Bond Fund and IAI Government Fund at November 30, 1997, and the results of their
operations, the changes in their net assets and the financial highlights for the
periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 9, 1998
<PAGE>
FEDERAL TAX INFORMATION
IAI BOND FUND, IAI GOVERNMENT FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for informational purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
IAI BOND FUND
TAX INFORMATION:
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
DECEMBER 1996 $ .0480
JANUARY 1997 .0530
FEBRUARY 1997 .0450
MARCH 1997 .0350
APRIL 1997 .0400
MAY 1997 .0450
JUNE 1997 .0550
JULY 1997 .0590
AUGUST 1997 .0500
SEPTEMBER 1997 .0550
OCTOBER 1997 .0350
NOVEMBER 1997 .0400
================================================================================
$ .5600
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME. 7.57% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR
DEDUCTION BY CORPORATIONS.
<PAGE>
FEDERAL TAX INFORMATION
IAI BOND FUND, IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
TAX INFORMATION:
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
DECEMBER 1996 $ .0720
JANUARY 1997 .0450
FEBRUARY 1997 .0400
MARCH 1997 .0400
APRIL 1997 .0450
MAY 1997 .0530
JUNE 1997 .0530
JULY 1997 .0480
AUGUST 1997 .0450
SEPTEMBER 1997 .0500
OCTOBER 1997 .0470
NOVEMBER 1997 .0500
================================================================================
$ .5880
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
<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
[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>
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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
