FIXED INCOME FUNDS
SEMI-ANNUAL REPORT
IAI BOND FUND, IAI GOVERNMENT FUND,
IA MINNESOTA TAX FREE FUND
MAY 31, 1996
[LOGO] IAI
MUTUAL FUNDS
- OUTSIDE FRONT COVER -
BLANK
- INSIDE FRONT COVER -
TABLE OF CONTENTS
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
<TABLE>
<CAPTION>
SEMI-ANNUAL REPORT
MAY 31, 1996
<S> <C>
Chairman's Letter .................. 2
Fund Managers' Reviews
IAI BOND FUND .................. 4
IAI GOVERNMENT FUND ............ 6
IAI MINNESOTA TAX FREE FUND .... 8
Fund Portfolios
IAI BOND FUND .................. 10
IAI GOVERNMENT FUND ............ 14
IAI MINNESOTA TAX FREE FUND .... 17
Notes to Fund Portfolios ........... 19
Statements of Assets and Liabilities 20
Statements of Operations ........... 22
Statements of Changes in Net Assets 24
Financial Highlights
IAI BOND FUND .................. 26
IAI GOVERNMENT FUND ............ 27
IAI MINNESOTA TAX FREE FUND .... 28
Notes to Financial Statements ...... 29
Shareholder Update ................. 35
IAI Mutual Fund Family ............. 37
Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors.................Inside Back Cover
</TABLE>
-1-
CHAIRMAN'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
[PHOTO] NOEL P. RAHN, CHAIRMAN
INVESTING FOR INCOME
Because of rising interest rates, the bond market has been volatile during the
past six months. But we think that the future looks promising for bonds.
As I write this letter, the yield on the benchmark 30-year U.S. Treasury bond
has risen above 7 percent. Corporate bonds and mortgage-backed securities offer
even more. But inflation is still just 3 percent. Historically, that's
considered a very healthy "real" return.
To be sure, inflation is not dead. The economy has accelerated rapidly since
last winter. The Gross Domestic Product advanced from less than one percent in
the fourth quarter of 1995 to nearly 4 percent by the second quarter of 1996.
The economy is fast approaching full capacity. Upward pressure on wages is
building. And, as you probably are aware, gasoline and food prices increased
sharply. If the economy continues to accelerate and inflation fears stay
kindled, then there will continue to be pressure on the bond market.
Keep in mind that your bond fund's total return is really the sum of two
parts--its income and its change in Net Asset Value (NAV). In a period of rising
interest rates, a bond fund's NAV usually falls. So if you're holding a bond
that pays 7 percent and interest rates rise to 8 percent, then the value of your
bond has diminished, at least temporarily. And the longer your bond's maturity,
the more the bond goes down in value. We've been managing our bond portfolios in
such a way as to minimize price declines when interest rates rise. But even
though your fund's net asset value goes down, the income paid to you may remain
constant or actually increase.
In contrast, when interest rates fall, your fund's NAV goes up. Since movements
in interest rates tend to be cyclical, so too will your fund's NAV. That's why
it's important not to sell just because of a fall in NAV.
Although the stock market gets all the attention of investors, bonds still have
an important place in the portfolios of a substantial segment of the investing
public, particularly those who are approaching retirement. And these days, bonds
are offering more income than they have in a long time.
-2-
CHAIRMAN'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
Although we don't expect inflation to rise above 3% in 1996, we are more
concerned about rising prices in 1997. We are now in the sixth year of a modest,
but persistent expansion. A persistent expansion uses up economic capacity,
eventually putting upward pressure on prices. Monetary policy has been
accommodative over the last year, providing ample fuel for higher prices if the
economy runs out of adequate capacity. So far, the economy has not exceeded its
capacity ceiling. However, with a capacity utilization rate of 83% and an
unemployment rate of 5.3%, a modest growth acceleration could push these rates
over their limits. If the economy grows at a 3.5% rate instead of a 2.5% rate,
then there will be pressure on capacity and wages.
Another reason that we are concerned about inflation is that we have reached the
end of the trend toward corporate downsizing. Management techniques such as
just-in-time deliveries, reengineering, and layoffs have helped to make US
businesses the most competitive in the world. However, these practices have
created a business environment with very little cushion in the system to meet
unexpected increases in demand. As the economy grows, businesses eventually have
to hire more employees. If that becomes the case, the unemployment rate over the
next 12 months is going to go a lot lower, and there will be wage pressures--not
because of union demands, but because of supply and demand.
Economic growth in the second and third quarter should average about 3.5%. Much
of this will be inventory replenishment which should subside by the fourth
quarter. For the full year real GDP should expand by slightly under 3%.
Inflation will not be a problem this year, but as the expansion ages in 1997
higher prices are inevitable.
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
-3-
FUND MANAGERS' REVIEW
IAI BOND FUND
IAI BOND FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BOND FUND CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI BOND FUND CO-MANAGER
[PHOTO]
STEPHEN C. COLEMAN, CFA
IAI BOND FUND CO-MANAGER
FUND OBJECTIVE
The IAI Bond Fund's objective is to provide a high level of current income
consistent with capital preservation. This objective is pursued by investing in
a diversified portfolio of high quality bonds. 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.
FUND POSITIONING FOR THE PAST SIX MONTHS
For the six months ended May 31, 1996, the IAI Bond Fund realized a total return
of (1.44%). In contrast, the Lehman Aggregate Bond Index, an unmanaged
benchmark, realized a total return of (1.16%).
These total return results reflect the impact of rising interest rates on a bond
portfolio. Total return is the sum of the Fund's dividends
reinvested--$0.3716/share--and its change in Net Asset Value (NAV) from $9.34 to
$8.84 during the six months. The Fund's yield reflects the income paid to you,
NAV fluctuates with changes in interest rates and other factors. Interest rate
volatility has been extreme during the past six months, closely following the
swings from weakness to strength in economic activity.
In the beginning of 1996, the economy was mired in a midcycle pause. A partial
government shutdown combined with severe winter weather depressed economic
activity. Some analysts were even forecasting a recession. On January 31, 1996,
the Federal Reserve Board lowered short-term interest rates from 5.50% to 5.25%
in response to recession fears.
However, the economy had regained most of its momentum by the end of the first
quarter, and bond prices sagged in response to this shift. Intermediate and
long-term interest rates began rising sharply. Between November 30, 1995 and May
31, 1996, the yield on five-year Treasury notes rose from 5.52% to 6.63%. The
yield on ten-year Treasury notes rose from 6.13% to 7.00%. During this period of
steadily rising interest rates, virtually all bond prices fell. In fact, market
returns were negative in four out of those six months.
To be sure, certain sectors of the bond market have held their value better than
other sectors. Corporate bonds, mortgage-backed securities and asset-backed
issues have all outperformed Treasuries in the first part of 1996. Over the past
six months, we have biased the portfolio away from Treasuries and toward
corporate bond holdings.
In a growing economy, corporate cash flow and profits have improved, thus
strengthening the general credit quality of corporate bonds. Corporate issues
provide additional income for the Fund and also provide better price performance
in response to strong investor demand. Within the corporate sector, we increased
the proportion of both investment grade and high yield holdings. Toward the end
of the quarter, we began lightening our corporate exposure and upgrading credit
quality because the recent strong performance of these issues made them less
attractive. The average credit quality of the Fund remains strong at AA. Our
high yield strategy, which is limited to no more than 15% of the portfolio, is
focused on the higher quality tier in this market.
The IAI Bond Fund includes an overweighting in insurance and
media/telecommunications companies such as Prudential Insurance and Continental
Cable. In addition, we have invested in 100-year bonds such as Columbia/HCA, the
large hospital management company and ABN Amro, the largest bank in the
Netherlands. These super-long bonds offer a substantial amount of additional
yield and very favorable price characteristics with only limited incremental
risk.
FUND POSITIONING GOING FORWARD
For 1996, the Consumer Price Index should increase by about 3%, with some
possible acceleration in 1997. Interest rates will be volatile for the remainder
of the year. Given the sharp rise in rates so far this year, a strong rally is
likely this summer before yields resume their upward trend.
The IAI Bond Fund remains structured for income rather than price
appreciation.The Fund's "duration" or sensitivity to interest rates is only
modestly longer than its benchmark, the Lehman Brothers Aggregate Bond Index.
Because of our view that economic growth will persist, we continue to overweight
the Fund's position in corporate bonds.
-4-
FUND MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[CHART]
IAI BOND FUND LEHMAN AGGREGATE BOND INDEX
6/01/86 $10,157 $10,262
11/30/87 $10,792 $10,966
11/30/88 $11,571 $12,012
11/30/89 $13,423 $13,736
11/30/90 $14,085 $14,777
11/30/91 $16,099 $16,907
11/30/92 $17,609 $18,405
11/30/93 $20,078 $20,410
11/30/94 $19,086 $19,785
11/30/95 $22,033 $23,276
5/31/96 $21,715 $23,007
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/96
Six Months* 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
IAI Bond Fund (1.44%) 2.65% 7.92% 8.06%
...............................................................................
Lehman Aggregate Bond Index (1.16%) 4.38% 7.96% 8.69%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
* NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 5/31/96
[PIE CHART]
ASSET-BACKED 3%
U.S. GOVERNMENT &
GOVERNMENT AGENCY 16%
PREFERRED STOCK 2%
U.S. GOVERNMENT
AGENCY
MORTGAGE-BACKED 18%
FOREIGN
DENOMINATED 3%
SHORT-TERM 6%
CORPORATE 52%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/96
[BAR CHART]
YEARS
0-3 7%
3-5 3%
5-10 41%
10-20 24%
20+ 25%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI 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 5/31/96
U.S.
Government..... 35%
Aaa............ 8%
Aa............. 8%
A.............. 16%
Baa............ 18%
Non-Investment
Grade.......... 15%
-5-
FUND MANAGERS' REVIEW
IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
[PHOTO]
SCOTT A. BETTIN, CFA
IAI GOVERNMENT FUND
CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI GOVERNMENT FUND
CO-MANAGER
FUND OBJECTIVE
The Fund seeks to provide shareholders with a high level of current income with
preservation of capital. The Fund invests primarily in U.S. Government
Securities with a weighted average maturity of five years or less.
FUND POSITIONING FOR THE
PAST SIX MONTHS
For the six months ended May 31, 1996, the IAI Government Fund realized a total
return of (1.10%). In contrast, the Salomon Brothers Intermediate
Treasury/Agency/Mortgage-Backed Index, an unmanaged benchmark, generated a total
return of 0.10%.
These total return results reflect the impact of rising interest rates on a bond
portfolio. Total return is the sum of the Fund's dividends
reinvested--$0.2934/share--and its change in Net Asset Value (NAV) from $10.06
to $9.66 during the six months. The Fund's yield reflects the income paid to
you. NAV fluctuates with changes in interest rates and other market factors.
Extreme swings in the bond market have impacted the Fund's return over the last
six months.
In the beginning of 1996, the economy was mired in a midcycle pause. A partial
government shutdown, combined with severe winter weather, depressed economic
activity. Some analysts were even forecasting a recession. On January 31, 1996,
the Federal Reserve Board lowered short-term interest rates from 5.50% to 5.25%
in response to recession fears.
However, the economy had regained most of its momentum by the end of the first
quarter, and bond prices sagged in response to this shift. Intermediate and
long-term interest rates began rising sharply in February. Between November 30,
1995 and May 31, 1996, the yield on the five-year Treasury bond rose from 5.52%
to 6.63%. The yield on the ten-year Treasury bond rose from 6.13% to 7.00%.
During this period of steadily rising interest rates, virtually all bond prices
fell. In fact, market returns were negative in four out of the six months.
The IAI Government Fund has emphasized mortgage-backed securities, which tend to
hold up better in a rising rate environment for a number of reasons. They
typically offer a higher yield than Treasuries. Moreover, regular monthly
payments of principal and interest help to cushion against rising rates because
the Fund can reinvest these payments at higher yields as interest rates rise.
The Fund's mortgage strategy has employed a combination of low coupon and high
coupon issues rather than current coupons. Avoiding the middle coupons helped
reduce the higher prepayment risk associated with mortgages in a volatile
interest rate environment. Mortgage holdings are also biased toward seasoned
issues which were originated several years ago. This strategy has greater
prepayment predictability and better price performance for the fund.
In addition, the Fund has selectively used "putable" Federal agency bonds to
improve the overall price performance. A putable bond can be retired early at
the investor's option if interest rates rise or it can be held for a longer
period if interest rates fall. Short-maturity high yield corporate issues were
also used to enhance yield in the Fund.
FUND POSITIONING GOING FORWARD
As we head toward the second half of 1996 and the presidential election, the
economy is growing faster than expected. Job growth is strong and consumer
sentiment remains firm. Investors are awaiting action by the Federal Reserve
Board, which has maintained a steady stance since they lowered rates in January.
In response to the strong economic data, we expect the Fed to raise short-term
interest rates later in the year, and that is likely to create further
short-term volatility in the bond market.
To be sure, the economic data suggests the potential for inflationary pressures.
Labor markets and manufacturing capacity are approaching critical levels.
Despite these cyclical pressures, the secular forces at work in our economy such
as demographics, technological change and globalization point to good long-term
value for the U.S. bond market.
-6-
FUND MANAGERS' REVIEW
IAI GOVERNMENT FUND
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI GOVERNMENT 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.
VALUE OF $10,000 INVESTMENT+
[CHART]
IAI GOVERNMENT SALOMON BROTHERS INTERMEDIATE
FUND (INCEPTION 8-08-91) TREASURY/AGENCY MORTGAGE BACKED INDEX*
8/08/91 $10,040 $10,000
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
5/31/96 $13,183 $13,697
AVERAGE ANNUAL RETURNS+
Through 5/31/96
<TABLE>
<CAPTION>
Since Inception
Six Months** 1 Year 8/08/91
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Government Fund (1.10%) 2.99% 5.91%
...............................................................................
Salomon Brothers Intermediate
Treasury/Agency/Mortgage-Backed Index 0.10% 4.81% 6.85%*
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
* AS OF 9/1/91
** NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 5/31/96
[PIE CHART]
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED 44%
CORPORATE 2%
SHORT-TERM 1%
U.S. GOVERNMENT &
GOVERNMENT AGENCY 53%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/96
[BAR CHART]
YEARS
0-3 21%
3-5 26%
5-10 48%
10+ 5%
-7-
FUND MANAGERS' REVIEW
IAI MINNESOTA TAX FREE FUND
IAI MINNESOTA TAX FREE FUND
[PHOTO]
STEPHEN C. COLEMAN, CFA
IAI MINNESOTA TAX FREE
FUND CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI MINNESOTA TAX FREE
FUND CO-MANAGER
FUND OBJECTIVE
The objective of the IAI Minnesota Tax Free Fund is to provide shareholders with
as high a level of current income exempt from federal income tax as is
consistent with the preservation of capital. The Fund will seek to achieve this
goal by investing primarily in high quality investment grade municipal bonds
from Minnesota issuers--bonds rated BBB or better by Standard & Poor's or Baa or
better by Moody's.
It's anticipated that Management intends to dissolve the Fund by year end.
Shareholders will be receiving additional information regarding its closing in
the coming months.
FUND POSITIONING FOR THE
PAST SIX MONTHS
For the six months ended May 31, 1996, the IAI Minnesota Tax Free Fund realized
a total return of (0.48%). In contrast, the Lehman Brothers Municipal Bond-Long
Bond Index realized a total return of (1.45%).
These total return results reflect the impact of rising interest rates on a bond
portfolio. Total return is the sum of the Fund's dividends reinvested--
$0.2730/share--and its change in Net Asset Value (NAV) from $10.24 to $9.92
during the six months. The Fund's yield reflects the income paid to you. NAV
fluctuates with changes in interest rates and other factors.
Because the income from the Fund is generally exempt from federal and state
income taxes, the Fund's yield of 5.33% is equivalent to a taxable investment
paying 41.4%, assuming the investor is in a combined 9.10% tax bracket.
In the beginning of 1996, a partial government shutdown combined with severe
winter weather depressed economic activity. On January 31, 1996, the Federal
Reserve Board lowered short-term interest rates from 5.50% to 5.25% in response
to recession fears.
However, the economy had regained most of its momentum by the end of the first
quarter, and bond prices sagged in response to this shift. Intermediate and
long-term interest rates began rising sharply. During this period of steadily
rising interest rates, virtually all bond prices including municipals fell.
Because of the rising interest rate environment, the Fund has emphasized more
intermediate-term bonds which are less sensitive to changes in interest rates
than the longest maturity issues. This lower risk strategy was very successful
during the period.
The Fund contains very high quality holdings such as "pre-refunded" issues that
are backed by a trust of U.S. Treasury securities. The Fund's average credit
quality is AAA.
During the six month period, the issue of tax reform became very prominent. As
you may recall, it was a major issue in the presidential primary season. A flat
tax that doesn't tax interest and dividends would have removed the tax
advantages of municipal bonds. In December and January, municipal bond prices
were adversely affected by the political discussions.
The issue of a flat tax has since diminished in prominence.
FUND POSITIONING GOING FORWARD
Since the issue of tax reform was sidelined, the historic price relationship
that municipal bonds have with U.S. Treasuries has more or less been restored.
When the debate was at its most heated last January, municipal bond yields were
more than 90% of Treasury yields. Since that time, the relationship has resumed
its more typical ratio of 80-85%.
Another factor positively affecting the municipal bond market is the diminishing
supply of bonds. Ten years ago, billions of dollars worth of bonds were issued
just prior to the Tax Reform Act of 1986. These bonds could be called in ten
years--and many of them are now being called because interest rates are much
lower today than they were in the mid-1980s. An additional factor reducing the
supply of securities is the downsizing of government, which has generally
reduced the need to issue debt.
As with all bond funds, municipal bond prices would be adversely affected by
interest rate volatility in the second half of the year. Nevertheless, with the
sharp back-up in rates this year municipal bonds now offer compelling tax-free
income, particularly to investors in high income tax brackets.
-8-
FUND MANAGERS' REVIEW
IAI MINNESOTA TAX FREE FUND
VALUE OF $10,000 INVESTMENT+
IAI MINNESOTA TAX FREE LEHMAN BROTHERS MUNICIPAL
FUND (INCEPTION 4-06-92) BOND-LONG BOND INDEX*
4/06/92 $9,980 $10,095
11/30/93 $11,912 $12,287
11/30/94 $10,961 $11,065
11/30/95 $12,405 $13,908
5/31/96 $12,345 $13,640
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/96
Since Inception
Six Months** 1 Year 4/06/92
- ------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund (0.48%)*** 3.19%*** 5.20%
..............................................................................
Lehman Brothers Municipal Bond--
Long Bond Index (1.45%) 4.41% 7.86%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE
* AS OF 4/1/92
** NOT ANNUALIZED
*** FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO 0.25% OF AVERAGE DAILY NET
ASSETS THROUGH MAY 31, 1996.
SECTORS
% OF PORTFOLIOS AS OF 5/31/96
[PIE CHART]
REVENUE BONDS 40%
SHORT-TERM 6%
GENERAL OBLIGATION
BONDS 54%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/96
[BAR CHART]
YEARS
0-3 6%
3-5 20%
5-10 61%
10-20 5%
20+ 8%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI MINNESOTA TAX FREE 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 5/31/96
Aaa............. 78%
Aa.............. 22%
-9-
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 53.8%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
ENERGY MINERALS - 8.0%
Ferrellgas Partners (e) 9.38% 06/15/06 $1,000,000 $ 977,500
Mitchell Energy 9.25 01/15/02 3,250,000 3,399,045
Triton Energy (step bond) 9.94 (b) 12/15/00 1,500,000 1,443,750
-----------
5,820,295
- ------------------------------------------------------------------------------------------
FINANCIAL - 16.4%
ABN-AMRO Bank 7.12 10/15/93 2,600,000 2,328,352
Continental 8.38 08/15/12 2,250,000 2,304,247
Nationwide Trust (e) 9.88 02/15/25 3,000,000 3,252,780
Prudential Insurance (e) 8.30 07/01/25 2,000,000 1,974,840
Salomon 6.75 02/15/03 2,250,000 2,132,212
-----------
11,992,431
- ------------------------------------------------------------------------------------------
INDUSTRIAL - 20.1%
360 Communications 7.50 03/01/06 115,000 108,168
Auburn Hills Trust 12.00 05/01/20 1,420,000 2,036,436
Columbia/HCA Healthcare 7.50 11/15/95 1,875,000 1,755,675
Continental Cablevision 8.88 09/15/05 1,750,000 1,828,750
Dayton Hudson 10.00 01/01/11 2,070,000 2,422,211
Dimon 8.88 06/01/06 750,000 760,312
HomeSide (e) 11.25 05/15/03 1,000,000 1,012,500
RJR Nabisco 8.00 07/15/01 2,000,000 1,974,860
Tele-Communications International 4.50 02/15/06 250,000 225,312
Tenneco Credit 9.63 08/15/01 1,500,000 1,649,565
Valassis Communication 9.55 12/01/03 900,000 904,486
-----------
14,678,275
- ------------------------------------------------------------------------------------------
UTILITIES - 4.7%
Commonwealth Edison 8.38 10/15/06 2,000,000 2,076,060
Long Island Lighting 7.85 05/15/99 1,350,000 1,337,243
-----------
3,413,303
- ------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-10-
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS (CONT.)
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
YANKEE - 4.6%
Korea Electric Power (STEP BOND) 7.23% (b) 04/01/96 $2,656,000 $ 362,305
Philips Electronics 7.20 06/01/26 1,000,000 981,902
Tenaga Nasional 7.50 01/15/96 2,300,000 2,064,917
- ------------------------------------------------------------------------------------------------------------
3,409,124
============================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $40,397,350) $39,313,428
============================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 15.5%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 7.7%
7.75% 01/31/00 $ 750,000 $ 778,478
6.25 02/15/03 655,000 637,498
5.75 08/15/03 2,250,000 2,118,870
7.50 02/15/05 2,000,000 2,081,880
- ------------------------------------------------------------------------------------------------------------
5,616,726
- ------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 7.8%
9.25 02/15/16 1,545,000 1,881,285
8.88 08/15/17 1,070,000 1,265,446
8.13 08/15/19 2,300,000 2,540,419
- ------------------------------------------------------------------------------------------------------------
5,687,150
============================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $11,523,963) $11,303,876
============================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-11-
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 18.8%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.9%
6.50% 02/01/26 $ 3,843,866 $ 3,561,572
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 13.9%
8.00 09/15/08 425,700 436,875
9.00 11/15/17 2,068,146 2,196,185
9.00 12/15/17 5,234,176 5,558,226
7.00 12/15/23 1,089,000 1,036,251
6.50 12/15/23 758,259 699,964
6.50 05/15/24 249,630 230,439
--------------
10,157,940
==================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $13,932,455) $13,719,512
==================================================================================================================
ASSET-BACKED SECURITIES - 3.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 1.9%
Ford Credit Grantor Trust 95-B A 5.90% 10/15/00 $ 1,420,028 $ 1,410,642
- ---------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 1.4%
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 1,000,000 991,170
===============================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $2,418,035) $ 2,401,812
===============================================================================================================
FOREIGN DENOMINATED BONDS - 3.0%
Principal Market
Rate Maturity Amount (d) Value (a)
- ---------------------------------------------------------------------------------------------------------------
SUPRA-NATIONAL BOND - 3.0%
International Bank for Reconstruction
and Development (Japanese yen) 4.75% 12/20/04 215,000,000 $ 2,241,290
===============================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $2,487,530) $ 2,241,290
===============================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-12-
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED STOCK - 1.8%
Market
Rate Quantity Value (a)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL - 0.5%
Grand Metro Delaware Series A 9.42% 14,380 $ 391,855
- ----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 1.3%
Cablevision Systems Series L (PIK) (e) 11.13 (b) 10,000 970,000
================================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCK
(COST: $1,357,829) $ 1,361,855
================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $72,117,162) $70,341,773
================================================================================================================
SHORT-TERM SECURITIES - 5.9%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 4.5%
Pacific Bell 5.35% 06/03/96 $3,300,000 $74,631,662
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATION - 1.4
U.S. Treasury Bill 5.21% 08/08/96 1,000,000(c) 990,870
================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $4,289,490) $ 4,289,889
================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $76,406,652) (B) $74,631,662
================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - (2.1%)
$(1,567,859)
================================================================================================================
TOTAL NET ASSETS
$73,063,803
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-13-
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 2.2%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 2.2%
Citgo Petroleum 7.88% 05/15/06 $ 900,000 $ 889,165
=============================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $898,623) $ 889,165
=============================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 51.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 36.5%
6.13% 05/15/98 $ 400,000 $ 399,248
5.88 08/15/98 2,200,000 2,180,750
5.13 11/30/98 1,150,000 1,117,651
6.75 05/31/99 1,000,000 1,007,810
7.75 11/30/99 1,150,000 1,192,941
6.25 05/31/00 3,750,000 3,706,050
5.75 10/31/00 4,050,000 3,916,471
7.50 11/15/01 1,000,000 1,036,410
-----------
14,557,331
- -------------------------------------------------------------------------------------------------------------
U.S. TREASURY BOND - 10.4%
10.75 05/15/03 3,400,000 4,129,946
- -------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 5.0%
Tennessee Valley Authority 5.98 04/01/36 2,000,000 2,006,000
=============================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $21,383,129) $20,693,277
=============================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-14-
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 43.5%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 2.5%
5.50% 07/01/98 $ 17,134 $ 16,886
7.00 01/01/99 26,685 26,983
10.50 11/01/00 657,444 691,750
5.00 10/01/01 8,588 8,495
10.50 02/01/04 201,900 213,259
6.00 07/01/09 48,235 46,747
-----------
1,004,120
- -------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 4.7%
6.00 01/01/09 1,978,632 1,868,560
- -------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 9.6%
11.50 01/01/01 19,323 20,398
11.50 01/01/13 13,077 14,617
11.50 11/01/15 72,133 80,879
11.50 12/01/15 45,098 50,409
11.50 01/01/16 38,399 41,369
6.50 02/01/26 3,902,402 3,615,810
-----------
3,823,482
- -------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARFS - 2.5%
10.00 02/01/01 22,394 23,689
10.00 01/01/03 393,944 416,718
6.00 05/01/11 594,000 556,875
-----------
997,282
- -------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 23.9%
6.50 07/15/08 177,507 171,128
6.50 08/15/08 653,335 629,854
8.00 09/15/08 495,000 507,994
6.50 10/15/08 283,050 272,878
6.50 11/15/08 369,060 355,796
6.50 03/15/09 176,306 169,969
11.00 06/15/13 12,761 14,144
9.00 06/15/17 1,833,663 1,947,185
8.00 11/15/17 2,019,135 2,044,798
9.00 11/15/17 108,108 114,801
- -------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-15-
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONT.)
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (CONT.)
9.00% 06/15/21 $1,236,717 $ 1,306,530
6.50 11/15/23 952,130 878,930
7.00 12/15/23 1,188,000 1,130,456
-----------
9,544,463
- -----------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MIDGETS - 0.3%
10.50 03/15/01 72,051 76,216
9.00 11/15/01 4,939 5,172
9.00 08/15/02 24,816 25,987
9.00 01/15/04 10,368 10,857
-----------
118,232
===========================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $17,598,366) $17,356,139
===========================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $39,880,118) $38,938,581
===========================================================================================================
SHORT-TERM SECURITIES - 1.2%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 1.2%
U.S. Treasury Bill 5.16% 08/08/96 $ 500,000 $ 495,435
===========================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $495,278) $ 495,435
===========================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $40,375,396) (h) $39,434,016
===========================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.2%
$ 470,939
===========================================================================================================
TOTAL NET ASSETS
$39,904,955
===========================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-16-
FUND PORTFOLIO
IAI MINNESOTA TAX FREE FUND
MAY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
MUNICIPAL BONDS - 92.5%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
GENERAL OBLIGATION - 53.4%
Anoka-Hennepin Minnesota Independent School District
Number 11 Series B (MBIA insured) 5.90% 02/01/08 $ 300,000 $ 308,532
Chaska Minnesota Independent School District
Number 112 Series B (FGIC insured) 5.38 02/01/14 250,000 234,653
Minnesota State (f) 6.25 08/01/10 1,200,000 1,287,204
Minnesota State Duluth Airport Refunding Series 95B (g) 6.25 08/01/14 300,000 306,258
St. Paul Minnesota Urban Renewal Series A 5.75 03/01/02 300,000 309,234
----------
2,445,881
- -------------------------------------------------------------------------------------------------------
REVENUE - 39.1%
Duluth Minnesota Economic Development Authority
Healthcare Facility (AMBAC insured) (f) 6.20 11/01/12 100,000 107,744
Minneapolis & St. Paul Minnesota Housing &
Redevelopment Authority Healthcare System
Series A (MBIA insured) 7.40 08/15/11 300,000 328,014
Minneapolis Minnesota Hospital Series A
(MBIA insured) 6.50 01/01/11 350,000 368,123
Minnesota State Housing Finance Agency
Series L (g) 6.70 07/01/20 350,000 356,657
St. Paul Minnesota Housing & Redevelopment
Authority Healthcare System (f) 7.00 12/01/19 250,000 273,970
St. Paul Minnesota Sewer Refunding (AMBAC insured) 5.60 12/01/08 350,000 352,982
----------
1,787,490
=======================================================================================================
TOTAL INVESTMENTS IN MUNICIPAL BONDS
(COST: $4,097,953) $4,233,371
=======================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
</TABLE>
-17-
FUND PORTFOLIO
IAI MINNESOTA TAX FREE FUND
MAY 31, 1996
(UNAUDITED)
SHORT-TERM SECURITIES - 5.6%
Principal Market
Amount Value (a)
- -----------------------------------------------------------------------------
MONEY MARKET FUNDS - 5.6%
Federated Tax Exempt Cash Fund $254,220 $ 254,220
=============================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $254,220) $ 254,220
=============================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $4,352,173) (h) $4,487,591
=============================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.9%
$ 89,740
=============================================================================
TOTAL NET ASSETS
$4,577,331
=============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
-18-
NOTES TO FUND PORTFOLIOS
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
MAY 31, 1996
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
The interest rate shown for step bonds and payment-in-kind securities represents
effective yield at May 31, 1996, based upon the estimated timing and amount of
future interest and principal payments.
PIK - Payment-in-Kind income is generally paid by issuing additional
par or shares of the security rather than paying cash.
Step bond - Securities that remain zero-coupon until a predetermined date at
which time the stated coupon rate becomes payable at regular
intervals.
(c)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 6 to the 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)
Prerefunded to a date prior to its final maturity.
(g)
Security from which the income is treated as a tax preference that is included
in alternative minimum taxable income for purposes of computing federal
alternative minimum tax (AMT). At May 31, 1996, approximately 14.8% of the IAI
Minnesota Tax-Free Fund portfolio was invested in such securities.
(h)
At May 31, 1996, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
IAI IAI IAI MINNESOTA
BOND FUND GOVERNMENT FUND TAX FREE FUND
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $76,406,652 $40,375,396 $4,352,173
===================================================
Gross unrealized appreciation $ 205,907 $ 91,748 $ 177,682
Gross unrealized depreciation (1,980,897) (1,033,128) (42,264)
---------------------------------------------------
Net unrealized appreciation
(depreciation) $(1,774,990) $ (941,380) $ 135,418
===================================================
</TABLE>
-19-
STATEMENTS OF ASSETS AND LIABILITIES
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
MAY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Investments in securities, at market
(Cost: $76,406,652; $40,375,396; and $4,352,173, respectively)
(see Fund Portfolios) $74,631,662 $39,434,016
Cash in bank on demand deposit -- 2,633
Cash denominated in foreign currency (Cost: $105; $0; and $0,
respectively) 105 --
Receivable for investment securities sold 2,959,317 3,320,089
Accrued interest and dividends receivable 1,175,169 481,385
Variation margin receivable 86,938 --
Other 20,499 --
----------- -----------
TOTAL ASSETS 78,873,690 43,238,123
----------- -----------
LIABILITIES
Disbursements in excess of cash on demand deposit 185,611 --
Payable for investment securities purchased 5,556,126 3,294,321
Accrued management fee 68,150 38,847
----------- -----------
TOTAL LIABILITIES 5,809,887 3,333,168
----------- -----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $73,063,803 $39,904,955
=========== ===========
REPRESENTED BY:
Capital stock $ 82,612 $ 41,325
Additional paid-in capital 79,214,400 42,358,514
Undistributed net investment income 310,213 56,783
Accumulated net realized losses (5,167,888) (1,610,287)
Unrealized appreciation (depreciation) on:
Investment securities $(1,374,624) $(941,380)
Other assets and liabilities denominated in foreign currency (910) --
----------- ---------
(1,375,534) (941,380)
----------- -----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL
STOCK $73,063,803 $39,904,955
=========== ===========
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 8,261,168 4,132,542
----------- -----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 8.84 $ 9.66
=========== ===========
</TABLE>
-20-
WIDE TABLE CONTINUED
IAI MINNESOTA TAX FREE FUND
- ---------------------------
$4,487,591
--
--
--
90,717
--
--
----------
4,578,308
----------
--
--
977
----------
977
----------
$4,577,331
==========
$ 4,615
5,003,800
6,471
(572,973)
$135,418
--
--------
135,418
----------
$4,577,331
==========
461,507
----------
$ 9.92
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 29
-21-
STATEMENTS OF OPERATIONS
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, 1996
(UNAUDITED)
IAI BOND FUND
------------------------------
<S> <C> <C>
NET INVESTMENT INCOME:
INCOME:
Interest (net of foreign income taxes withheld of
$5,162, $0, and $0, respectively) $ 2,631,014
Dividends 107,507
-----------
TOTAL INCOME 2,738,521
-----------
EXPENSES:
Management fees (Note 3) 137,235
Investment advisory fees 141,722
Distribution fees 64,419
Dividend-disbursing, administrative, and accounting fees 51,535
Legal fees --
Custodian fees 4,800
Amortization of organization costs --
Compensation of Directors 2,294
Audit fees 3,282
Printing and shareholder reporting 6,000
Registration fees 12,000
Other expenses 6,593
-----------
TOTAL EXPENSES 429,880
Less fees reimbursed or waived by Advisers or Distributor (9,200)
-----------
NET EXPENSES 420,680
-----------
NET INVESTMENT INCOME 2,317,841
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gains (losses) on:
Investment securities $ 319,557
Foreign currency transactions 22,292
Futures contracts (213,856)
-----------
127,993
Net change in unrealized appreciation or depreciation on:
Investment securities $(4,351,889)
Other assets and liabilities denominated in foreign currency 29,677
Futures contracts 851,961
-----------
(3,470,251)
------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (3,342,258)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,024,417)
============
</TABLE>
-22-
WIDE TABLE CONTINUED
IAI GOVERNMENT FUND IAI MINNESOTA TAX FREE FUND
------------------------ ---------------------------
$ 1,513,237 $ 155,360
-- --
----------- ---------
1,513,237 155,360
----------- ---------
78,501 8,082
84,410 8,742
38,368 2,057
30,695 4,114
800 896
3,000 983
1,973 1,115
1,837 --
3,104 7,000
1,200 1,982
-- --
3,827 566
----------- ---------
247,715 35,537
(637) (28,260)
----------- ---------
247,078 7,277
----------- ---------
1,266,159 148,083
----------- ---------
$ 170,390 $ 130,118
-- --
(69,950) --
----------- ---------
100,440 130,118
$(1,820,372) $(293,095)
-- --
-- --
----------- ---------
(1,820,372) (293,095)
----------- ---------
(1,719,932) (162,977)
----------- ---------
$ (453,773) $ (14,894)
=========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 29
-23-
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
<TABLE>
<CAPTION>
IAI BOND FUND
Six months Year ended
ended May 31, 1996 November 30, 1995
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,317,841 $ 5,070,457
Net realized gains (losses) 127,993 1,880,953
Net change in unrealized appreciation or depreciation (3,470,251) 4,693,670
----------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,024,417) 11,645,080
----------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,124,118) (5,392,040)
----------------------------------------------
TOTAL DISTRIBUTIONS (3,124,118) (5,392,040)
----------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4):
Net proceeds from sale of shares 14,924,356 30,801,916
Net asset value of shares issued to shareholders in
reinvestment of distributions 2,980,359 5,159,258
Cost of shares redeemed (18,218,043) (45,310,597)
----------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (313,328) (9,349,423)
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,461,863) (3,096,383)
NET ASSETS AT BEGINNING OF PERIOD 77,525,666 80,622,049
----------------------------------------------
NET ASSETS AT END OF PERIOD $ 73,063,803 $ 77,525,666
==============================================
(including undistributed net investment income of:
Bond--$310,213 and $1,116,490; Government--$56,783
and $107,774; Minnesota Tax Free--$6,471 and $11,211,
respectively)
</TABLE>
-24-
WIDE TABLE CONTINUED FROM ABOVE
<TABLE>
<CAPTION>
IAI GOVERNMENT FUND IAI MINNESOTA TAX FREE FUND
Six months Year ended Six months Year ended
ended May 31, 1996 November 30, 1995 ended May 31, 1996 November 30, 1995
(unaudited) (unaudited)
<S> <C> <C> <C>
$ 1,266,159 $ 2,590,938 $ 148,083 $ 365,216
100,440 (459,502) 130,118 (7,141)
(1,820,372) 2,349,123 (293,095) 537,377
- ---------------------------------------------------------------------------------------------------------------
(453,773) 4,480,559 (14,894) 895,452
- ---------------------------------------------------------------------------------------------------------------
(1,317,150) (2,527,368) (152,823) (365,906)
- ---------------------------------------------------------------------------------------------------------------
(1,317,150) (2,527,368) (152,823) (365,906)
- ---------------------------------------------------------------------------------------------------------------
3,636,382 25,685,178 909,409 2,968,427
1,303,366 2,472,730 119,806 346,353
(11,385,342) (20,427,646) (2,913,843) (4,156,698)
- ---------------------------------------------------------------------------------------------------------------
(6,445,594) 7,730,262 (1,884,628) (841,918)
- ---------------------------------------------------------------------------------------------------------------
(8,216,517) 9,683,453 (2,052,345) (312,372)
48,121,472 38,438,019 6,629,676 6,942,048
- ---------------------------------------------------------------------------------------------------------------
$ 39,904,955 $ 48,121,472 $ 4,577,331 $ 6,629,676
================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 29
-25-
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:
IAI BOND FUND
<TABLE>
<CAPTION>
Six months Year ended Period from Years ended March 31,
ended November 30, April 1, 1994 to -------------------------------
May 31, 1996 1995 November 30, 1994+ 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25 $ 10.02
-----------------------------------------------------------------------------
OPERATIONS:
Net investment income .27 .58 .36 .62 .64 .73
Net realized and unrealized
gains (losses) (.40) .72 (.55) (.25) .93 .34
- --------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (.13) 1.30 (.19) .37 1.57 1.07
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.37) (.61) (.35) (.66) (.64) (.74)
Net realized gains -- -- (.13) (.81) (.76) (.10)
- --------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.37) (.61) (.48) (1.47) (1.40) (.84)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 8.84 $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25
====================================================================================================================
Total investment return* (1.44%) 15.46% (2.10%) 3.16% 16.44% 10.80%
Net assets at end of period
(000's omitted) $73,064 $77,526 $80,622 $97,139 $119,371 $107,634
RATIOS:
Expenses to average net assets*** 1.10%** 1.09% 1.10%** 1.09% 1.10% 1.10%
Net investment income to
average net assets*** 5.98%** 6.32% 6.03%** 5.63% 6.03% 7.43%
Portfolio turnover rate
(excluding short-term securities) 221.0% 424.7% 226.7% 333.1% 160.8% 126.2%
</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
*** In accordance with a new management agreement effective April 1, 1996,
these ratios are based on average daily net assets rather than average
month-end net assets. Prior period ratios have not been adjusted.
+ Reflects fiscal year-end change from March 31 to November 30
-26-
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:
IAI GOVERNMENT FUND
<TABLE>
<CAPTION>
Years ended
Six months Year ended Period from March 31, Period from
ended November 30, April 1, 1994 to ----------- August 8, 1991***
May 31, 1996 1995 November 30, 1994+ 1994 1993 to March 31, 1992
- ---------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income .28 .60 .33 .47 .57 .30
Net realized and unrealized gains (.39) .43 (.34) (.24) .59 .24
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (.11) 1.03 (.01) .23 1.16 .54
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.29) (.59) (.32) (.49) (.58) (.30)
Net realized gains -- -- (.03) (.22) (.34) (.02)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.29) (.59) (.35) (.71) (.92) (.32)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 9.66 $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
===========================================================================================================================
Total investment return* (1.10%) 10.99% (.09%) 2.02% 11.70% 5.51%
Net assets at end of period
(000's omitted) $39,905 $48,121 $38,438 $41,027 $43,704 $30,707
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**** 5.63%** 5.97% 5.12%** 4.40% 5.40% 5.16%**
Portfolio turnover rate
(excluding short-term securities) 80.8% 284.1% 121.5% 641.0% 236.3% 169.6%
</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
*** Commencement of operations
**** In accordance with a new management agreement effective April 1, 1996,
these ratios are based on average daily net assets rather than average
month-end net assets. Prior period ratios have not been adjusted.
+ Reflects fiscal year-end change from March 31 to November 30
-27-
FINANCIAL HIGHLIGHTS
IAI MINNESOTA TAX FREE FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD AND SELECTED
INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
IAI MINNESOTA TAX FREE FUND
<TABLE>
<CAPTION>
Six months Year ended Period from Year ended Period from
ended November 30, April 1, 1994 to March 31, April 6, 1992***
May 31, 1996 1995 November 30, 1994+ 1994 to March 31, 1993
- --------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE:
Beginning of period $10.24 $ 9.53 $10.27 $10.67 $10.00
------------------------------------------------------------------
OPERATIONS:
Net investment income .27 .52 .39 .58 .41
Net realized and unrealized gains (losses) (.32) .71 (.69) (.35) .67
------------------------------------------------------------------
TOTAL FROM OPERATIONS (.05) 1.23 (.30) .23 1.08
------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.27) (.52) (.39) (.56) (.41)
Net realized gains -- -- (.05) (.07) --
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.27) (.52) (.44) (.63) (.41)
------------------------------------------------------------------
NET ASSET VALUE:
End of period $ 9.92 $10.24 $ 9.53 $10.27 $10.67
==================================================================
Total investment return* (0.48%) 13.17% (3.10%) 1.89% 11.00%
Net assets at end of period (000's omitted) $4,577 $6,630 $6,942 $7,738 $5,045
RATIOS:
Expenses to average net assets**** 0.25%** 0.25% 0.25%** 0.25% 0.95%**
Net investment income to average
net assets**** 5.10%** 5.15% 5.76%** 5.28% 4.36%**
Portfolio turnover rate
(excluding short-term securities) 29.5% 94.0% 57.8% 16.0% 4.8%
</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
*** Commencement of operations
**** In accordance with a new management agreement effective April 1, 1996,
these ratios are based on average daily net assets rather than average
month-end net assets. Prior period ratios have not been adjusted. The
Fund's adviser voluntarily waived $20,333, $49,686, $35,252 and $53,108
in expenses for the period ended May 31, 1996, the year ended November
30, 1995, the period ended November 30, 1994, and the year ended March
31, 1994, respectively. If the Fund had been charged for these
expenses, the ratio of expenses to average net assets would have been
.95%, .95%, .95% and .95% respectively, and the ratio of net investment
income to average net assets would have been 4.40%, 4.45%, 5.06% and
4.58%, respectively.
+ Reflects fiscal year-end change from March 31 to November 30
-28-
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND, IAI MINNESOTA TAX FREE FUND
MAY 31, 1996
(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, or series
thereof. IAI Bond Fund (Bond Fund) is a separate portfolio of IAI Investment
Funds I, Inc. IAI Government Fund (Government Fund) and IAI Minnesota Tax Free
Fund (formerly IAI Tax Free Fund) are separate portfolios of IAI Investment
Funds VI, Inc. The Funds' primary objective is to provide a high level of
current income consistent with capital preservation, through investment in
primarily investment grade bonds and other debt securities of similar high
quality. This report covers only the Bond Fund, Government Fund, and Minnesota
Tax Free 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 is used.
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 of less from the date of
initial acquisition are valued at amortized cost. Short-term securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Funds on a
forward commitment or when-issued basis may occur a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Funds maintain, in segregated accounts with their
custodian, assets with a market value equal to the amount of their purchase
commitments.
The Funds may enter into transactions to sell purchase commitments to third
parties at the current market values and concurrently acquire other purchase
commitments for similar securities at later dates, commonly referred to as
"dollar-rolls." As an inducement for a fund to "rollover" purchase commitments,
the Funds receive negotiated fees. During the period ended May 31, 1996, the
Funds did not enter into any dollar-roll transactions.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market and
produce incremental earnings, the Funds 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.
-29-
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Funds are required
to deposit either cash or securities in 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 or the cost of a security for a purchased put or
call option is adjusted by the amount of premium received or paid. The Fund is
subject to the credit risk that the other party will not complete the
obligations of the contract.
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
Bond Fund and Government Fund may invest in foreign securities. The market value
of securities and other assets and liabilities denominated in foreign currencies
is translated daily into U.S. dollars at the closing rate of exchange. Purchases
and sales of securities, income and expenses are translated at the exchange rate
on the transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and foreign
currency contract transactions.
The Funds do not isolate that portion of the result of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with net realized and unrealized gains (losses) from investments.
The Funds may enter into 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.
-30-
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 for net
investment income or net realized gains may also differ from its ultimate
characterization for tax purposes.
For federal income tax purposes, Bond Fund, Government Fund and Minnesota Tax
Free Fund have capital loss carryovers of approximately $5,747,000, $1,711,000
and $703,000, respectively at November 30, 1995 which, if not offset by
subsequent capital gains, will expire in 2002 and 2003. 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 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,
and premium for the Tax Free Fund, are accrued daily. Security gains and losses
are determined on the basis of identified cost, which is the same basis used for
federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. Cash payments or
reinvestments in additional shares are made at the net asset value at the close
of business on the payable date. Distributions from net investment income are
made monthly. Capital gains, if any, are primarily distributed at the end of the
calendar year. Additional capital gains distributions as needed to comply with
federal tax regulations are distributed during the year.
ORGANIZATION COSTS
Through March 31, 1996, organization costs were being amortized over 60 months
on a straight-line basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
-31-
(2) COMMITMENTS & CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). In connection with
their obligation as policyholders, the Funds have made payments to the Company
which have been capitalized. Also, the Funds are committed to make future
capital contributions, if requested by the Company.
Bond Fund, Government Fund, and Tax Free Fund have available lines of credit of
$14,814,389, $13,250,000 and $2,250,000, 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 period ended May 31, 1996, the
Funds paid $1,972, $795, and $111, respectively, in interest on the line of
credit at an average annual rate ranging from 8.25% to 8.50%. Advances under the
line of credit totalled $185,611 for the Bond Fund at May 31, 1996. There were
no borrowings outstanding at May 31, 1996 for the Government Fund and the
Minnesota Tax Free Fund.
(3) FEES AND EXPENSES
Under the terms of an investment advisory agreement, each Fund paid Investment
Advisers, Inc. (Advisers) a monthly management fee computed at an annual rate of
.55% of the average month-end net asset value.
Each Fund also paid an annual fee to Advisers for acting as the Fund's
dividend-disbursing, administrative, and accounting services agent. The fee was
computed monthly on the average month-end net assets at an annual rate of .20%.
Each Fund had a plan of distribution with IAI Securities, Inc. (Distributor),
the Funds' distributor. Under the Plan, each Fund pays Distributor a monthly fee
to cover expenses incurred in the distribution and promotion of the Funds'
shares. The distribution fee for Bond Fund and Government Fund is equal to an
annual rate of .25% of the Funds' average month-end net assets, for Minnesota
Tax Free Fund, the fee is equal to an annual rate of .10% of average month-end
net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds were responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor had agreed to reimburse those Funds to
the extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceed, on an annual basis, 1.10% of average month-end net assets for
Bond Fund and Government Fund, and .95% of average month-end net assets for
Minnesota Tax Free Fund.
-32
Additionally, from April 1, 1993 through June 30, 1996, Advisers had voluntarily
agreed to further waive expenses for Minnesota Tax Free Fund in excess of .25%
of its average month-end net assets.
New Management Agreements for the Funds were approved by majority of each Funds'
shareholders at a special meeting held March 21, 1996, and replaced the prior
Advisory, Administrative, and Distribution Agreements with Advisers and
Distributors. These new agreements, effective April 1, 1996, require Advisers to
pay for all expenses of each Fund, except certain costs (primarily those
incurred in the purchase and sale of assets, taxes and interest and
extraordinary expenses) in return for each Fund paying an all inclusive
management fee to Advisor. This fee is equal to an annual rate of 1.10% of each
Funds' average daily net assets (0.95% for Minnesota Tax Free Fund), and will be
paid monthly. This fee declines to 1.00% (0.85% for the Minnesota Tax Free fund)
as each Fund's assets increase.
Pursuant to these new agreements Bond, Government and Minnesota Tax Free Funds
paid Advisers to assume certain unpaid liabilities, and received amounts from
Advisors in exchange for transferring prepaid expenses to Advisers. As a result
of these transactions, Bond, Government and Minnesota Tax Free Funds received
(paid) net amounts of $12,089, $(5,299), and $4,329, respectively.
(4) CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the six months ended May 31,
1996, and the year ended November 30, 1995 were as follows:
<TABLE>
<CAPTION>
IAI BOND IAI GOVERNMENT IAI MINNESOTA TAX FREE
FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended Six months Year ended
ended November 30, ended November 30, ended November 30,
May 31, 1996 1995 May 31, 1996 1995 May 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 1,626,971 3,403,715 366,941 2,614,072 90,106 299,907
Issued for reinvested
dividends 326,422 572,274 131,438 251,178 11,825 34,639
Redeemed (1,994,724) (4,994,513) (1,149,285) (2,076,068) (287,690) (416,081)
---------------------------------------------------------------------------------------------
Increase (decrease) in
shares outstanding (41,331) (1,018,524) (650,906) 789,182 (185,759) (81,535)
=============================================================================================
</TABLE>
-33-
(5) PURCHASES AND SALES OF SECURITIES
For the period ended May 31, 1996, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- ---------------------------------------------------------------------------
IAI BOND FUND $162,911,993 $164,473,975
IAI GOVERNMENT FUND $ 35,441,347 $ 41,063,198
IAI MINNESOTA TAX FREE FUND $ 1,610,334 $ 3,410,075
(6) OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of May 31, 1996. The
market value of securities deposited to cover initial margin requirements for
the open positions at May 31, 1996 was $297,261 for Bond Fund. The net
unrealized appreciation of $400,366 on these contracts at May 31, 1996 is
included in unrealized appreciation (depreciation) on investment securities.
<TABLE>
<CAPTION>
FUTURES
- ----------------------------------------------------------------------------------------------------------------------
Number Unrealized
of Expiration Market Appreciation
Fund Type Contracts Month Position Value (Depreciation)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IAI BOND FUND U.S. Treasury Note 15 June 1996 Short $ 1,597,500 $ (1,519)
U.S. Treasury Bond 82 June 1996 Short $ 8,861,125 401,885
---------------
$ 400,366
===============
</TABLE>
-34-
SPECIAL MEETING RESULTS
A special meeting of the Funds' shareholders was held on March 21, 1996. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below.
1. The Funds' shareholders re-elected the following directors:
- ----------------------------------------------------------------
Shares Voted Shares Withheld
IAI Bond Fund "For" Authority
- ----------------------------------------------------------------
Madeline Betsch 5,810,106 78,348
W. William Hodgson 5,819,423 69,031
Richard E. Struthers 5,820,423 68,031
J. Peter Thompson 5,817,173 71,281
George R. Long 5,808,293 80,161
Noel P. Rahn 5,812,751 75,703
Charles H. Withers 5,816,003 72,451
- ----------------------------------------------------------------
Shares Voted Shares Withheld
IAI Government Fund "For" Authority
- ----------------------------------------------------------------
Madeline Betsch 2,978,598 8,102
W. William Hodgson 2,978,208 8,492
Richard E. Struthers 2,978,598 8,102
J. Peter Thompson 2,977,895 8,805
George R. Long 2,976,958 9,742
Noel P. Rahn 2,978,598 8,102
Charles H. Withers 2,978,598 8,102
- ----------------------------------------------------------------
Shares Voted Shares Withheld
IAI Minnesota Tax Free Fund "For" Authority
- ----------------------------------------------------------------
Madeline Betsch 329,424 2,637
W. William Hodgson 329,424 2,637
Richard E. Struthers 329,424 2,637
J. Peter Thompson 329,424 2,637
George R. Long 327,866 4,195
Noel P. Rahn 324,243 7,818
Charles H. Withers 329,424 2,637
-35-
2. The Funds' shareholders ratified the selection of KPMG Peat Marwick LLP as
the independent public accountants for each of the funds for each of their
fiscal years. The following votes were cast regarding the matter:
- ------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------------------------------------------------------------------------
IAI Bond Fund 5,811,789 13,192 63,472
IAI Government Fund 2,976,922 126 9,651
IAI Minnesota Tax Free Fund 327,782 641 3,637
3. The Funds' shareholders ratified each Funds' Management Agreements. The
following votes were cast regarding the matter:
- -------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- -------------------------------------------------------------------------------
IAI Bond Fund 5,726,635 76,551 85,267
IAI Government Fund 2,954,554 19,999 12,146
IAI Minnesota Tax Free Fund 315,206 6,361 10,493
4. The Funds' shareholders ratified the new Management Agreement between
Investment Advisers, Inc. and each of the the funds. The following votes were
cast regarding the matter:
- -------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- -------------------------------------------------------------------------------
IAI Bond Fund 5,713,435 83,431 91,587
IAI Government Fund 2,953,089 20,112 13,498
IAI Minnesota Tax Free Fund 308,102 17,648 6,310
-36-
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
(closed to new investors as of 2/1/96) growth companies
- ------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND Capital Appreciation -- Common stocks of small to medium-sized growth
companies
- ------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term appreciation,
and common stocks that are expected to produce income
- ---------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + Income] short-term instruments
- ---------------------------------------------------------------------------------------------------------------------------
Capital
IAI BOND FUND Income Preservation Investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------
Capital
IAI GOVERNMENT FUND Income 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>
-37-
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
-INSIDE BACK COVER-
[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
-BACK COVER-
