FIXED INCOME FUNDS
SEMI-ANNUAL REPORT
IAI BOND FUND,
IAI GOVERNMENT FUND
MAY 31, 1997
(UNAUDITED)
IAI
[LOGO]
MUTUAL FUNDS
TABLE OF CONTENTS
IAI BOND FUND, IAI GOVERNMENT FUND
SEMI-ANNUAL REPORT
MAY 31, 1997
(UNAUDITED)
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
IAI Mutual Fund Family........................30
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors......................Inside Back Cover
CHAIRMAN'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
Chairman
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13 and 8000 on July 16. As we move through 1997, most of the
conditions which led to that runup are still intact: low inflation, relatively
low interest rates, moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment, it wouldn't be
surprising to see an uptick in inflation in the months ahead. This could cause
interest rates to rise and put the brakes on the stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, you should make sure
that your investment portfolio generally reflects your long-term investment
goals for 1997 and beyond.
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
The risk in the second half of the year is biased toward higher growth and an
upturn in inflation. First half economic results were erratic, with a strong
quarter followed by a weak quarter. Neither reflects a true picture of the
underlying expansion. Instead the pattern reflects statistically choppy
spending. Consumer spending in the first half was influenced by seasonality
(warmer winter, cooler spring), early tax refunds, and a growing trend toward
employee bonuses/stock options (paid in lump sums in the first months of the
year) instead of salary increases (paid in smaller monthly increments throughout
the year). These conditions will not be repeated in the second half of the year.
A third quarter rebound to about 3% real growth should follow the anemic second
quarter results.
Our concern is that the apparent pause in the second quarter has done little to
relieve rising economic pressures. Labor markets are operating at full capacity.
In fact, we suspect businesses are beginning to miss opportunities because they
are unable to find experienced help. Capacity utilization rates also reflect a
lack of excess capacity. The U.S. has been able to use excess capacity from
overseas to meet demand. However, growth now appears to be on the rise in other
G7 countries. The results of recent elections in the U.K. and France have a
clear pro-growth bias. Fiscal austerity and low inflation have less appeal to
voters when unemployment rates are persistently high. A coordinated global
expansion will help lift our exports but will remove some of the price
competition that has helped restrain domestic inflation.
Monetary liquidity is ample to finance both economic growth and modest price
increases. Domestically, broad money growth is expanding at a rate of about 7%.
Globally, U.S. dollar-based credit has been growing at a double-digit rate for
the last year. However, the Fed is likely to tolerate broad money growth and
tight economic capacity until inflation begins to accelerate.
Please read the Fund Managers' Reviews which follow this letter for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/S/ Noel P. Rahn
Noel P. Rahn
Chairman
FUND MANAGERS' REVIEW
IAI 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?
During the first quarter of 1997, interest rates rose in each month, resulting
in negative returns for most longer-term bond indexes. However, the IAI Bond
Fund had a 0.02% total return, beating its benchmark, the Lehman Brothers
Aggregate Bond Index that fell (0.56)%. For the past six months, the Fund had a
1.18% total return while the Lehman Brothers Aggregate Bond Index had a 0.94%
total return.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
The Fund's interest rate exposure was reduced in the six-month period ending in
May. However, the Fund is still positioned to benefit from lower interest rates
and a flatter yield curve. On a sector basis, corporates are overweighted and a
modest amount of preferred stock and high yield bonds are being used to enhance
returns. Non-dollar exposure, while remaining at about the same weighting (6%)
for the last six months, was moved into German and Australian bonds which are
alternatives to U.S. issues.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Non-U.S. Treasury sectors outperformed their U.S. Treasury counterparts in the
most recent six-month period as bond investors searched for ways to add yield to
their portfolios. The Fund benefited from this trend because of the overweight
positions in non-Treasury sectors. The Fund also benefited from an improved
interest rate backdrop. A second quarter economic pause, persistently low
inflation, strong improvement in the budget deficit and the lack of Fed
tightening all contributed to a better tone in the bond market.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Near-term market trends still favor bonds. However, market risks increase with
the age of the economic expansion. Cyclically, the lack of excess capacity and
an accommodative monetary policy point toward rising inflationary pressures.
Yet, current pricing power is being constrained by the secular forces of foreign
competition and business restructuring. Eventually, the cyclical forces will
drive prices and interest rates higher. Until signs of this shift emerge, the
Fund will continue to be positioned for a favorable market environment.
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI BOND FUND LEHMAN AGGREGATE BOND INDEX
6/1/87 $ 10,000 $ 10,000
11/30/87 $ 10,271 $ 10,294
11/30/88 $ 11,012 $ 11,245
11/30/89 $ 12,775 $ 12,859
11/30/90 $ 13,405 $ 13,833
11/30/91 $ 15,322 $ 15,827
11/30/92 $ 16,759 $ 17,229
11/30/93 $ 19,109 $ 19,106
11/30/94 $ 18,165 $ 18,522
11/30/95 $ 20,970 $ 21,789
11/30/96 $ 22,405 $ 23,110
5/31/97 $ 22,669 $ 23,326
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/97
6 Months 1 Year 5 Years 10 Years
=============================================================================
IAI BOND FUND 1.18% 9.69% 7.36% 8.53%
Lehman Brothers Aggregate Bond Index 0.94% 8.32% 7.16% 8.84%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 5/31/97
[PIE GRAPH]
Asset-Backed 1%
U.S. Government
Agency Mortgage-Backed 20%
Foreign Denominated 6%
U.S. Government
Obligations 22%
Preferred Stock 5%
Short-Term 9%
Corporate 37%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/97
[BAR GRAPH]
YEARS
0-3 14%
3-5 16%
5-10 31%
10-20 11%
20+ 28%
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 5/31/97
U.S.
Government .... 45%
Aaa ........... 11%
Aa ............ 2%
A ............. 9%
Baa ........... 21%
Non-Investment
Grade ......... 12%
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?
During the first quarter of 1997, interest rates rose in each month, resulting
in negative returns. The IAI Government Fund declined (0.47)% for the first
quarter, while its benchmark, the Salomon Brothers Intermediate
Treasury/Agency/Mortgage-Backed Index, was flat at 0.07%. For the past six
months, the Fund had a 0.38% total return while the Salomon Brothers
Intermediate Treasury/Agency/Mortgage-Backed Index had a 1.70% total return.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
During the quarter, the Fund reduced its interest rate exposure by increasing
short-term holdings. In addition, the structure of mortgage-backed holdings was
modified to take advantage of improved return opportunities in the CMO part of
the market.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Anxiety over accelerating economic activity and, in particular, the strength of
the labor market fueled renewed concerns about inflationary pressures in the
first quarter. The unemployment rate fell to 5.2%, despite a record high 67.3%
of the population participating in the labor force. In addition, the March
employment data showed wage inflation running at a 4.0% year over year rate, the
highest in more than seven years. The tight labor market and rising wage
pressures suggest that labor costs will grow at an accelerating pace. Since
labor costs account for nearly two-thirds of total production cost of
manufactured goods, more rapidly escalating labor costs will ultimately lead to
higher consumer prices. As a result of these concerns, the Fed increased the Fed
Funds rate to 5.5% at its March 25th meeting.
The bond market initially sold off in anticipation of the Fed's move. However,
price support developed early in the second quarter as signs of an economic
slowdown began to remove pressure for additional Fed action. The price swings
from negative to positive presented a difficult market for investors, despite
the positive market tone that developed late in the period.
WHAT IS YOUR OUTLOOK FOR THE FUND?
While economic and labor capacity is tight, many indicators continue to point
toward a benign environment for bonds. A firm dollar has allowed us to import
excess capacity from overseas. Moreover, the economic pace has slowed, inflation
is decelerating, the budget deficit has improved dramatically and the Fed is
presently on hold. Despite this favorable background, market risks are rising as
the expansion ages. Money growth is expanding, providing ample liquidity to
finance economic growth and price increases. Job growth, rising stock prices and
high consumer confidence provide a strong foundation for increased consumption.
These cyclical forces will eventually push inflation and interest rates higher.
Yet until signs of this cyclical shift emerge, the Fund will remain positioned
for favorable near-term trends.
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI GOVERNMENT FUND SALOMON BROTHERS INTERMEDIATE
(Inception 8/08/91) TREASURY/AGENCY/MORTGAGE-BACKED INDEX*
8/1/91 $ 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
5/31/97 $ 14,049 $ 14,775
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/97
Since Inception
6 Months 1 Year 5 Years 8/08/91
================================================================================
IAI GOVERNMENT FUND 0.38% 6.57% 5.39% 6.02%
Salomon Brothers Intermediate Treasury/
Agency/Mortgage-Backed Index 1.70% 7.88% 6.51% 6.98%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 9/01/91
SECTORS
% OF PORTFOLIO AS OF 5/31/97
[PIE GRAPH]
U.S. Government
Agency Mortgage-Backed 38%
U.S. Government &
Government Agency
Obligations 61%
Short-Term 1%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/97
[BAR GRAPH]
YEARS
0-3 22%
3-5 18%
5-10 55%
10+ 5%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' 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.
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
CORPORATE BONDS - 38.8%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 11.0%
Delphi Funding 9.31% 03/25/27 $ 500,000 $ 502,394
Greenpoint 9.10 06/01/27 (b) 2,000,000 2,017,160
Imperial Capital Trust I (e) 9.98 12/31/26 1,000,000 1,001,744
Nationwide CSN Trust (e) 9.88 02/15/25 3,000,000 3,225,090
Sun Life Capital (e) 8.53 05/29/49 1,200,000 1,216,295
------------
7,962,683
- -------------------------------------------------------------------------------------------------
INDUSTRIAL - 10.3%
Comcast Cable Communications (e) 8.38 05/01/07 2,000,000 2,053,340
Hilton Hotels 7.38 06/01/02 3,000,000 3,007,020
Newport News Shipping 8.63 12/01/06 650,000 663,000
Pogo Producing (e) 8.75 05/15/07 500,000 498,750
Tele-Communications 9.25 04/15/02 1,000,000 1,065,440
Tele-Communications International 4.50 02/15/06 250,000 184,687
------------
7,472,237
- -------------------------------------------------------------------------------------------------
UTILITIES - 3.7%
Phillippine Long Distance Telephone 8.35 03/06/17 1,000,000 933,670
U.S. West Capital Funding 7.95 02/01/97 1,765,000 1,737,995
------------
2,671,665
- -------------------------------------------------------------------------------------------------
YANKEE - 13.8%
Athabasca Oil Sands (e) 8.20 04/01/27 1,500,000 1,497,000
Empresa Nacional Electric 8.13 02/01/97 2,550,000 2,525,596
Guandong Enterprises (e) 8.88 05/22/07 1,000,000 1,006,250
IBP Finance Company of Canada (e) 7.45 06/01/07 (b) 2,000,000 1,998,620
Republic of Indonesia 7.75 08/01/06 800,000 791,704
Tenaga Nasional (e) 7.50 01/15/96 2,300,000 2,141,392
------------
9,960,562
=================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $28,434,660) ............................................................. $ 28,067,147
=================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1997
(UNAUDITED)
U.S. GOVERNMENT OBLIGATIONS - 23.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 16.4%
5.63% 10/31/97 $ 3,100,000 $ 3,101,922
6.25 06/30/98 1,400,000 1,405,026
6.00 09/30/98 1,000,000 999,840
7.75 01/31/00 900,000 930,654
6.63 07/31/01 3,700,000 3,719,647
7.25 05/15/04 820,000 849,340
7.00 07/15/06 880,000 898,973
------------
11,905,402
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 7.0%
12.00 08/15/13 600,000 838,122
9.25 02/15/16 845,000 1,044,099
8.88 08/15/17 1,070,000 1,285,840
8.13 08/15/19 430,000 483,548
7.63 02/15/25 500,000 538,985
6.88 08/15/25 70,000 69,136
6.75 08/15/26 610,000 593,701
6.50 11/15/26 200,000 188,562
------------
5,041,993
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $16,906,417) ........................................................................... $ 16,947,395
================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 21.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 1.8%
6.50% 05/15/21 $ 811,485 $ 759,246
6.50 11/15/21 530,000 508,302
------------
1,267,548
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 4.9%
6.50 03/02/11 753,418 736,225
6.00 04/01/11 1,118,608 1,073,159
6.50 04/01/26 1,854,901 1,763,900
------------
3,573,284
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 8.8%
7.00% 08/01/11 $ 541,242 $ 538,590
9.00 06/01/17 2,500,296 2,661,340
6.00 10/01/23 298,073 276,650
7.00 11/01/25 698,275 680,818
7.50 06/12/27 (b) 2,220,000 2,210,965
------------
6,368,363
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.8%
8.00% 09/15/08 349,984 362,671
9.00 11/15/17 332,458 355,727
7.00 12/15/23 264,154 258,786
7.50 01/15/26 715,240 712,372
6.00 07/01/27 (b) 2,484,800 2,480,917
------------
4,170,473
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $15,420,042) ........................................................................... $ 15,379,668
================================================================================================================
ASSET-BACKED SECURITIES - 1.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 1.4%
Dayton Hudson Credit Card Master Trust 95-1 A 6.10% 02/25/02 $ 1,000,000 $ 1,000,460
================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $999,219) .............................................................................. $ 1,000,460
================================================================================================================
FOREIGN DENOMINATED BONDS - 6.1%
Principal Market
Rate Maturity Amount (d) Value (a)
- -----------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT BONDS - 6.1%
Australian Government (AUSTRALIAN DOLLAR) 7.50% 07/15/05 3,000,000 $ 2,304,295
German Government (GERMAN DEUTSCHEMARK) 6.00 01/04/07 3,600,000 2,122,514
------------
4,426,809
================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $4,472,811) ............................................................................ $ 4,426,809
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
NON-CONVERTIBLE PREFERRED STOCKS - 5.5%
Market
Rate Quantity Value (a)
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL - 5.5%
SI Financing Trust I 2.38% 150,000 $ 3,956,250
================================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCKS
(COST: $3,810,937) ............................................................................ $ 3,956,250
================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $70,044,086) ........................................................................... $ 69,777,729
================================================================================================================
SHORT-TERM SECURITIES - 9.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 1.2%
U.S. Treasury Bill 5.26% 09/18/97 $ 900,000(c) $ 886,419
- ----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 8.1%
Southwestern Bell Capital (Utilities) 5.47 06/24/97 3,200,000 3,188,817
Dow Chemical (Industrial) 5.62 06/02/97 2,700,000 2,699,579
------------
5,888,396
================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $6,774,484) ............................................................................ $ 6,774,815
================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $76,818,570) (f) ....................................................................... $ 76,552,544
================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - (5.8%)
.............................................................................................. $ (4,193,332)
================================================================================================================
TOTAL NET ASSETS
.............................................................................................. $ 72,359,212
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 60.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 38.6%
5.63% 11/30/98 $ 3,600,000 $ 3,578,075
7.75 11/30/99 500,000 516,405
6.25 08/31/00 850,000 846,413
5.50 12/31/00 750,000 727,965
6.50 05/31/01 800,000 801,000
7.50 11/15/01 800,000 830,496
7.25 05/15/04 1,510,000 1,564,028
------------
8,864,382
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 11.5%
11.13 08/15/03 1,500,000 1,843,125
10.38 11/15/12 640,000 806,298
------------
2,649,423
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 10.3%
Federal Home Loan Mortgage Corporation 5.74 09/17/03 500,000 470,625
6.27 01/27/04 340,000 326,029
7.10 04/10/07 1,000,000 1,013,440
Federal National Mortgage Association 6.14 01/21/04 335,000 318,039
Private Export Funding 6.62 10/01/05 250,000 244,188
------------
2,372,321
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $13,901,472) ........................................................................... $ 13,886,126
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1997
(UNAUDITED)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 36.8%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 7.4%
5.50% 07/01/98 $ 4,917 $ 4,875
7.00 01/01/99 7,280 7,269
6.25 12/01/03 89,841 88,414
6.00 07/01/09 30,161 29,362
6.50 05/15/21 357,998 334,952
7.00 08/15/21 1,015,000 1,003,256
6.50 11/15/21 250,000 239,766
------------
1,707,894
- ----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 10.7%
6.00 08/01/24 745,896 692,751
6.50 08/01/25 1,867,974 1,776,331
------------
2,469,082
- ----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 7.6%
11.50 01/01/01 13,257 13,867
6.60 12/01/03 1,188,999 1,162,618
11.50 01/01/13 10,599 11,866
9.50 12/25/18 216,077 224,247
7.00 11/01/25 336,048 327,647
------------
1,740,245
- ----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARFS - 1.5%
10.00 02/01/01 18,576 19,345
10.00 01/01/03 307,311 324,674
------------
344,019
- ----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 9.6%
8.00 09/15/08 406,958 421,711
11.00 06/15/13 12,372 13,748
9.00 11/15/17 1,222,907 1,308,498
6.00 07/01/27 (b) 465,300 464,573
------------
2,208,530
================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $8,441,126) ............................................................................ $ 8,469,770
================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $22,342,598) ........................................................................... $ 22,355,896
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 0.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 0.4%
U.S. Treasury Bill 5.26% 09/18/97 $ 100,000(c) $ 98,491
================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $98,454) ............................................................................... $ 98,491
================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $22,441,052) (f) ....................................................................... $ 22,454,387
================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 2.4%
.............................................................................................. $ 548,485
================================================================================================================
TOTAL NET ASSETS
.............................................................................................. $ 23,002,872
================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 15
</TABLE>
NOTES TO FUND PORTFOLIOS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1997
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At May 31, 1997 the total cost of securities
purchased on a when-issued basis in the IAI Bond Fund portfolio was $8,681,901
and in the IAI Government Portfolio was $464,173.
(c)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 6 to financial statements).
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(e)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1993. These issues
may only be sold to other qualified institutional buyers, and are considered
liquid under guidelines established by the Board of Directors.
(f)
At May 31, 1997, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
IAI IAI
BOND FUND GOVERNMENT FUND
- ------------------------------------------------------------------------------
Cost for federal income tax purposes $76,974,040 $22,441,052
=========== ===========
Gross unrealized appreciation $ 278,518 $ 127,606
Gross unrealized depreciation (700,014) (114,271)
----------- -----------
Net unrealized appreciation or depreciation $ (421,496) $ 13,335
=========== ===========
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1997
(UNAUDITED)
IAI BOND FUND IAI GOVERNMENT FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $76,818,570; and $22,441,052, respectively)
(see Fund Portfolios) $ 76,552,544 $ 22,454,387
Cash in bank on demand deposit -- 235,765
Receivable for investment securities sold 9,034,784 467,520
Accrued interest and dividends receivable 915,618 322,513
Unrealized appreciation on foreign currency contracts
held, at value 83,577 --
Other 8,096 --
------------ ------------
TOTAL ASSETS 86,594,619 23,480,185
------------ ------------
LIABILITIES
Disbursements in excess of cash on demand deposit 6,897 --
Payable for investment securities purchased 14,196,354 464,173
Variation margin payable 32,156 13,140
------------ ------------
TOTAL LIABILITIES 14,235,407 477,313
------------ ------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 72,359,212 $ 23,002,872
============ ============
REPRESENTED BY:
Capital stock $ 79,021 $ 23,748
Additional paid-in capital 75,715,005 25,180,084
Undistributed net investment income 155,035 38,180
Accumulated net realized losses on investments (3,366,785) (2,218,946)
Unrealized appreciation (depreciation) on:
Investment securities $ (304,391) $ (20,194)
Other assets and liabilities denominated in foreign
currency 81,327 --
------------ ------------
(223,064) (20,194)
------------ ------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO
OUTSTANDING CAPITAL STOCK $ 72,359,212 $ 23,002,872
============ ============
Shares of capital stock outstanding; authorized
10 billion shares of $0.01 par value stock 7,902,117 2,374,816
------------ ------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.16 $ 9.69
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI BOND FUND, IAI GOVERNMENT FUND
SIX MONTHS ENDED MAY 31, 1997
(UNAUDITED)
IAI BOND FUND IAI GOVERNMENT FUND
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest (net of foreign income taxes withheld of $20,118
and $0, respectively) $ 2,399,968 $ 905,542
Dividends 178,125 --
----------- -----------
TOTAL INCOME 2,578,093 905,542
----------- -----------
EXPENSES:
Management fees 422,511 141,457
Compensation of Directors 4,031 1,365
----------- -----------
TOTAL EXPENSES 426,542 142,822
Less fees reimbursed by Advisers (4,031) (1,365)
----------- -----------
NET EXPENSES 422,511 141,457
----------- -----------
NET INVESTMENT INCOME 2,155,582 764,085
----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 1,239,463 $ (254,748)
Foreign currency transactions 95,314 --
Futures contracts (5,831) (61,615)
Written option contracts closed or expired -- 7,234
----------- -----------
1,328,946 (309,129)
Net change in unrealized appreciation or depreciation on:
Investment securities $(2,803,741) $ (373,583)
Other assets and liabilities denominated in foreign currency 81,598 --
Futures contracts (38,365) (33,529)
----------- -----------
(2,760,508) (407,112)
----------- -----------
NET GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY (1,431,562) (716,241)
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 724,020 $ 47,844
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND, IAI GOVERNMENT FUND
IAI BOND FUND IAI GOVERNMENT FUND
Six months ended Year ended Six months ended Year ended
May 31, 1997 November 30, 1996 May 31, 1997 November 30, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS (UNAUDITED) (UNAUDITED)
Net investment income $ 2,155,582 $ 4,852,622 $ 764,085 $ 2,325,836
Net realized gains (losses) 1,328,946 178,926 (309,129) (199,090)
Net change in unrealized appreciation or depreciation (2,760,508) 442,727 (407,112) (492,074)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 724,020 5,474,275 47,844 1,634,672
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,210,843) (5,337,592) (776,201) (2,384,545)
------------ ------------ ------------ ------------
TOTAL DISTRIBUTIONS (2,210,843) (5,337,592) (776,201) (2,384,545)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 10,355,287 41,786,065 4,556,858 10,438,023
Net asset value of shares issued to shareholders in
reinvestment of distributions 2,108,382 5,091,444 765,610 2,355,866
Cost of shares redeemed (25,420,885) (37,736,607) (11,341,953) (30,414,774)
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (12,957,216) 9,140,902 (6,019,485) (17,620,885)
------------ ------------ ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (14,444,039) 9,277,585 (6,747,842) (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 $ 72,359,212 $ 86,803,251 $ 23,002,872 $ 29,750,714
============ ============ ============ ============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 155,035 $ 210,296 $ 38,180 $ 50,296
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
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
Six months November 30, Period from March 31,
ended --------------------- April 1, 1994 to ---------------------
May 31, 1997 1996 1995 November 30, 1994+ 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42 $ 10.25
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income .26 .56 .58 .36 .62 .64
Net realized and unrealized gains (losses) (.15) .04 .72 (.55) (.25) .93
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS .11 .60 1.30 (.19) .37 1.57
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.27) (.62) (.61) (.35) (.66) (.64)
Net realized gains -- -- -- (.13) (.81) (.76)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.27) (.62) (.61) (.48) (1.47) (1.40)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 9.16 $ 9.32 $ 9.34 $ 8.65 $ 9.32 $ 10.42
======== ======== ======== ======== ======== ========
Total investment return* 1.18% 6.85% 15.46% (2.10%) 3.16% 16.44%
Net assets at end of period (000's omitted) $ 72,359 $ 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 5.61%** 6.20% 6.32% 6.03%** 5.63% 6.03%
Portfolio turnover rate
(excluding short-term securities) 186.8% 342.4% 424.7% 226.7% 333.1% 160.8%
* 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.
</TABLE>
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
Six months November 30, Period from March 31,
ended --------------------- April 1, 1994 to ---------------------
May 31, 1997 1996 1995 November 30, 1994+ 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.95 $ 10.06 $ 9.62 $ 9.98 $ 10.46 $ 10.22
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income .29 .58 .60 .33 .47 .57
Net realized and unrealized
gains (losses) (.25) (.10) .43 (.34) (.24) .59
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS .04 .48 1.03 (.01) .23 1.16
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.30) (.59) (.59) (.32) (.49) (.58)
Net realized gains -- -- -- (.03) (.22) (.34)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.30) (.59) (.59) (.35) (.71) (.92)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 9.69 $ 9.95 $ 10.06 $ 9.62 $ 9.98 $ 10.46
======== ======== ======== ======== ======== ========
Total investment return* 0.38% 4.99% 10.99% (0.09%) 2.02% 11.70%
Net assets at end of period
(000's omitted) $ 23,003 $ 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 5.94%** 5.78% 5.97% 5.12%** 4.40% 5.40%
Portfolio turnover rate
(excluding short-term securities) 111.7% 152.0% 284.1% 121.5% 641.0% 236.3%
* 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.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, 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 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 and 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.
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 with their
custodian, assets with a market value equal to the amount of their purchase
commitments.
The Funds may enter into transactions to sell their purchase commitments to
third parties at the current market values and concurrently acquire other
purchase commitments for similar securities at later dates, commonly referred to
as a "dollar-roll." As an inducement for the Funds to "rollover" their purchase
commitments, the Funds receive negotiated fees. For the period ended May 31,
1997, 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, 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 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 (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.
For federal income tax purposes, the Bond Fund and Government Fund have capital
loss carryovers of approximately $4,540,000, and $1,910,000, respectively at
November 30, 1996 which, if not offset by subsequent capital gains, will expire
in 2002 and 2004, 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,
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. 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.
[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 $14,993,103 and
$12,000,000, 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. Advances under the line of credit totalled $6,897 for the Bond Fund at
May 31, 1997. There were no borrowings outstanding at May 31, 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.
[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 May 31, 1997
and November 30, 1996, were as follows:
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- --------------------------------------------------------------------------------------
Six months ended Year ended Six months ended Year ended
May 31, November 30, May 31, November 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 1,134,047 4,627,561 464,569 1,067,073
ISSUED FOR REINVESTED
DISTRIBUTIONS 230,822 561,270 78,834 239,818
REDEEMED (2,775,675) (4,178,407) (1,158,726) (3,100,200)
---------- ---------- ---------- ----------
INCREASE (DECREASE)
IN SHARES OUTSTANDING (1,410,806) 1,010,424 (615,323) (1,793,309)
========== ========== ========== ==========
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the year ended May 31, 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 $133,974,285 $142,576,212
IAI GOVERNMENT FUND $ 26,433,229 $ 32,613,182
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of May 31, 1997. The
market value of securities deposited to cover initial margin requirements for
the open positions at May 31,1997 was $123,114 and $73,868 for the Bond Fund and
the Government Fund, respectively.
The unrealized gain (loss) of ($38,365) and ($33,529) for the Bond Fund and the
Government Fund, respectively, for the following 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 27 June 1997 Short $ 2,903,344 $(10,328)
U.S. Treasury Bond 10 June 1997 Short $ 1,100,313 (16,637)
U.S. Treasury Note 20 September 1997 Short $ 2,140,625 (11,400)
--------
$(38,365)
========
GOVERNMENT FUND FUTURES
- ---------------------------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized Appreciation
Type Contracts Month Position Value (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Note 45 June 1997 Short $ 4,751,719 $(31,119)
U.S. Treasury Bond 8 June 1997 Long $ 880,250 (4,060)
Eurodollar 15 September 1997 Long $ 3,525,188 4,013
Eurodollar 15 September 1998 Short $ 3,503,625 (2,363)
--------
$(33,529)
========
</TABLE>
[7] OPTIONS CONTRACTS WRITTEN
During the six months ended May 31, 1997, Government Fund wrote the following
options on futures. There were no outstanding contracts at May 31, 1997.
IAI GOVERNMENT FUND CALL OPTIONS
- -------------------------------------------------------------------------------
Number of Contracts Premium
- -------------------------------------------------------------------------------
Outstanding at 11/30/96 -- $ --
Opened 25 7,234
Expired (25) (7,234)
Closed -- --
Exercised -- --
- -------------------------------------------------------------------------------
Outstanding at 5/31/97 -- $ --
===============================================================================
[8] FOREIGN CURRENCY EXCHANGE CONTRACTS
At May 31, 1997, the Bond Fund had entered into foreign currency exchange
contracts. The unrealized appreciation on those contracts at May 31, 1997 is
included in unrealized appreciation or depreciation on other assets and
liabilities denominated in foreign currency. The terms of the open contracts are
as follows:
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Appreciation
- --------------------------------------------------------------------------------
06/04/97 2,750,000 German Deutschemark 1,623,377 U.S. Dollars $ 10,477
06/06/97 3,000,000 Australian Dollars 2,364,000 U.S. Dollars 73,100
- --------------------------------------------------------------------------------
$ 83,577
================================================================================
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 FUND countries
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 + INCOME] short-term instruments
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>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
[LOGO]
IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357
USA FAX 612.376.2737
800.945.3863
612.376.2700
