FIXED INCOME FUNDS
SEMI-ANNUAL REPORT
IAI BOND FUND,
IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BOND FUND, IAI GOVERNMENT FUND
SEMI-ANNUAL REPORT
MAY 31, 1998
(UNAUDITED)
President's Letter............................. 2
Fund Managers' Reviews
IAI Bond Fund............................... 4
IAI Government Fund......................... 6
Fund Portfolios
IAI Bond Fund............................... 8
IAI Government Fund........................ 13
Notes to Fund Portfolios...................... 16
Statements of Assets and Liabilities.......... 18
Statements of Operations...................... 20
Statements of Changes in Net Assets........... 22
Financial Highlights
IAI Bond Fund.............................. 24
IAI Government Fund........................ 25
Notes to Financial Statements................. 26
IAI Mutual Fund Family........................ 32
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
I.P. "KIP" KNELMAN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI BOND FUND, IAI GOVERNMENT FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The current economic backdrop is ideal for financial assets. Strong money growth
is flowing into the markets rather than the real economy. This trend is
bolstered by current demographic conditions. Moreover, low inflation raises
market valuations (P/E ratios and real interest rates) while high consumer and
business optimism raises the willingness to take risk.
What are the risks to the market? Near-term, negative earnings surprises could
stall the equity market, and a weak dollar would not be good for bonds. Over the
intermediate term, if the economic slowdown does not materialize, inflation
concerns will rise and the Fed will tighten. This would hurt valuations in both
stocks and bonds.
Our view is to remain cautiously optimistic on both markets, but watch for the
developing evidence of a slowdown.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Kip Knelman
I.P. "Kip" Knelman
President
<PAGE>
FUND 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?
The Fund gained 4.59% for the six months ended May 31, 1998. This compares to a
return of 4.09% for the Lehman Brothers Aggregate Bond Index.
WERE THERE ANY SIGNIFICANT CHANGES?
The focus of the Fund on sector and issue selection continued throughout the
first half of 1998. The interest sensitivity of the Fund was extended late in
the first half reflecting our favorable outlook for interest rates in the near
term.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The strongest sector of the bond market in the first half was the treasury
market. Spread sectors such as corporates and mortgages underperformed. Despite
our emphasis on these spread sectors, the Fund return equaled that of the
overall market.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Looking ahead, the near-term trends look favorable for bonds. US economic growth
should moderate this summer in response to slower production, reduced inventory
accumulation and rising imports. Soft commodity prices and Asian instability
will keep inflation expectations in check. Federal Reserve policy will remain on
hold. We have positioned the portfolio to benefit from these factors.
However, we see risks for the market beyond the summer months. Consumer
spending will stay strong, fueled by rising personal income, higher stock
prices, ample job opportunities and a record high level of consumer sentiment.
Inflation isn't dead. Falling commodity prices are currently masking a rising
trend of service-based inflation in such areas as housing rental and medical
care. The Fed may need to take action later in the year. As evidence of these
events materialize, the Fund will be repositioned in a more defensive mode.
<PAGE>
FUND MANAGERS' REVIEW
IAI BOND FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
LEHMAN BROTHERS
AGGREGATE BOND
IAI BOND FUND INDEX
------------- -----
6/1/88 10,000 10,000
11/30/88 10,407 10,513
11/30/89 12,073 12,022
11/30/90 12,669 12,933
11/30/91 14,480 14,797
11/30/92 15,839 16,108
11/30/93 18,059 17,863
11/30/94 17,167 17,316
11/30/95 19,818 20,371
11/30/96 21,174 21,606
11/30/97 22,900 23,238
5/31/98 23,951 24,012
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/98
Six months* 1 Year 5 Years 10 Years
-------------------------------------------------------------------------------
IAI BOND FUND 4.59% 11.80% 6.98% 9.13%
-------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 4.09% 10.91% 7.08% 9.24%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 5/31/98
[PIE CHART]
U.S. Government Agency Mortgage-Backed 32%
Short-Term 7%
Asset-Backed 4%
U.S. Government & Government Agency 10%
Foreign Denominated 1%
Corporate 39%
Preferred Stock 7%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/98
[BAR CHART]
Years
- -----
0-3 7%
3-5 20%
5-10 41%
10-20 13%
20+ 19%
NOTE TO PRESIDENT'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 5/31/98
U.S.
Government...... 43%
Aaa............. 3%
Aa.............. 1%
A............... 26%
Baa............. 18%
Non-Investment
Grade........... 9%
<PAGE>
FUND MANAGER'S REVIEW
IAI GOVERNMENT FUND
IAI GOVERNMENT FUND
[PHOTO]
LARRY R. HILL, 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?
The Fund gained 3.32% for the six months ended May 31, 1998, compared with a
return of 4.14% for its benchmark, the Salomon Brothers Intermediate
Treasury/Agency/Mortgage-Backed Index.
WERE THERE ANY SIGNIFICANT CHANGES?
The interest rate sensitivity of the Fund was maintained in line with the market
during the first half. The allocation to non-government, non-mortgage sectors
was increased as corporate spreads widened, providing better value.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The biggest event during the first half was the inversion of the yield curve
between 2 years and 10 years. two year treasury yields ended the period at 5.49%
while ten year treasuries yielded 5.44%. The underweight position in treasuries
had a negative impact on performance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Near-term trends look favorable for bonds. US economic growth should moderate
this summer in response to slower production, reduced inventory accumulation and
rising imports. Soft commodity prices and Asian instability will keep inflation
expectations in check. Federal Reserve policy will remain on hold. We have
positioned the portfolio to benefit from these factors and from the wider
corporate bond spreads.
However, we see risks for the market beyond the summer months. Consumer
spending will stay strong, fueled by rising personal income, higher stock
prices, ample job opportunities and a record high level of consumer sentiment.
Inflation isn't dead. Falling commodity prices are currently masking a rising
trend of service-based inflation in such areas as housing rental and medical
care. The Fed may need to take action later in the year. As evidence of these
events materialize, the Fund will be repositioned in a more defensive mode.
<PAGE>
FUND MANAGER'S REVIEW
IAI GOVERNMENT FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
SALOMON BROTHERS
INTERMEDIATE
TREASURY/AGENCY/
IAI GOVERNMENT FUND MORTGAGE-BACKED
(INCEPTION 8/08/91) INDEX*
------------- -----
8/8/91 10,000 10,000
11/30/91 10,464 10,398
11/30/92 11,247 11,182
11/30/93 12,292 12,068
11/30/94 12,010 11,884
11/30/95 13,331 13,684
11/30/96 13,995 14,528
11/30/97 14,639 15,520
5/31/98 15,125 16,162
AVERAGE ANNUAL RETURNS+
THROUGH 5/31/98
Since
Inception
Six months** 1 Year 5 Years 8/08/91
- --------------------------------------------------------------------------------
IAI GOVERNMENT FUND 3.32% 7.79% 4.99% 6.26%
- --------------------------------------------------------------------------------
Salomon Brothers Intermediate Treasury/
Agency/Mortgage-Backed Index 4.14% 9.53% 6.60% 7.36%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 9/01/91
** NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 5/31/98
[PIE CHART]
U.S. Government Agency Mortgage-Backed 33%
Foreign Denominated 4%
Asset-Backed 3%
U.S. Government & Government Agency 52%
Short-Term 5%
Corporate 3%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 5/31/98
[BAR CHART]
Years
- -----
0-1 6%
1-3 34%
3-5 29%
5-10 31%
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI GOVERNMENT FUND INCLUDES CHANGES IN SHARE PRICE
AND REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 40.6%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 5.9%
Allstate 6.75% 05/15/18 $ 220,000 $ 221,802
Mercantile Bancorp 6.80 06/15/01 500,000 505,355
MMI Capital Trust I Series B 7.63 12/15/27 1,000,000 1,017,125
Nationsbank 6.38 05/15/05 580,000 584,559
North Fork Capital Trust II 8.00 12/15/27 1,000,000 1,031,163
--------------
3,360,004
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 30.6%
Abitibi-Consolidated (f) 7.50 04/01/28 350,000 356,048
Boyds Collection (e) 9.00 05/15/08 175,000 174,563
Chattem (e) 8.88 04/01/08 275,000 273,625
Chesapeake Energy (e) 9.63 05/01/05 175,000 174,125
Coca - Cola Bottling 7.20 07/01/09 500,000 520,145
Computer Associates International (e) 6.38 04/15/05 690,000 686,143
Corning Consumer Products (e) 9.63 05/01/08 325,000 325,000
CSC Holdings Series B 8.13 08/15/09 1,000,000 1,045,000
Day International Group (e) 9.50 03/15/08 300,000 300,750
Dell Computer 7.10 04/15/28 1,850,000 1,876,270
Falcon Holding Group (e) 8.38 04/15/10 175,000 171,938
Finlay Fine Jewelry 8.38 05/01/08 200,000 201,500
Fred Meyer 7.45 03/01/08 705,000 706,911
General Motors 6.75 05/01/28 470,000 470,851
Grove Worldwide (e) 9.25 05/01/08 150,000 150,000
Level 3 Communications (e) 9.12 05/01/08 300,000 291,375
Lin Television (e) 8.38 03/01/08 350,000 348,250
Litton Industries 6.75 04/15/18 310,000 309,117
Nextlink Communications (e) 9.00 03/15/08 150,000 151,500
NGC 7.13 05/15/18 1,600,000 1,622,128
Pharmerica (e) 8.38 04/01/08 150,000 150,375
Pierce Leahy Command (e) 8.13 05/15/08 300,000 291,000
R&B Falcon (e) 7.38 04/15/18 400,000 404,484
Raytheon 6.30 03/15/05 330,000 329,716
Revlon Consumer Products 8.63 02/01/08 300,000 297,750
Time Warner (e) 6.10 12/30/01 1,000,000 993,430
Time Warner Entertainment 8.38 03/15/23 1,300,000 1,511,432
Transamerica Capital III Series AI 7.63 11/15/37 1,750,000 1,858,880
Union Pacific Resources 7.05 05/15/18 680,000 685,410
Watson Pharmaceuticals 7.13 05/15/08 700,000 698,950
--------------
17,376,666
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS (CONT.)
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES 4.1%
GTE 6.94% 04/15/28 $ 680,000 $ 681,095
Israel Electric (Yankee) (e) (f) 7.75 12/15/27 590,000 596,154
Israel Electric (Yankee) (e) (f) 8.10 12/15/96 150,000 154,644
KN Energy 7.25 03/01/28 290,000 295,133
MCI Communications 6.13 04/15/02 630,000 628,236
-------------
2,355,262
=================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $22,739,045) $ 23,091,932
=================================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 9.7%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 3.7%
5.88% 09/30/02 $ 780,000 $ 787,558
6.50 08/15/05 1,260,000 1,322,609
-------------
2,110,167
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 3.5%
9.25 02/15/16 845,000 1,156,729
6.63 02/15/27 165,000 181,913
6.13 11/15/27 580,000 606,007
-------------
1,944,649
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.5%
Federal National Mortgage Association 6.00 05/15/08 600,000 603,750
U.S. Treasury STRIP (ZERO COUPON) 6.12 (g) 11/15/10 1,700,000 827,050
-------------
1,430,800
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $5,310,284) $ 5,485,616
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 33.4%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 5.3%
6.00% 04/01/11 $ 999,577 $ 994,260
6.50 04/01/13 448,443 451,385
6.50 05/01/13 669,933 674,327
6.50 03/01/28 878,871 874,750
-------------
2,994,722
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 9.7%
9.00 06/01/17 940,815 1,009,015
7.50 01/01/28 (b) 550,000 565,296
6.50 03/01/28 991,722 985,830
6.50 04/01/28 332,593 330,618
7.00 05/01/28 830,000 841,670
7.00 06/01/28 (b) 1,730,000 1,754,324
-------------
5,486,753
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 5.4%
6.50 12/01/12 369,952 372,032
6.00 03/01/13 1,359,304 1,343,155
6.50 03/01/13 1,332,228 1,339,715
-------------
3,054,902
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 12.4%
9.00 11/15/17 259,218 280,277
7.00 12/15/23 236,967 241,187
8.00 12/15/23 852,821 893,057
7.00 10/15/26 1,280,799 1,302,419
7.00 11/15/26 349,355 355,252
7.50 12/15/27 2,455,151 2,530,328
7.00 03/15/28 833,239 846,255
7.50 05/15/28 570,000 587,453
-------------
7,036,228
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION MIDGET - 0.6%
7.00 01/15/08 357,749 367,697
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $18,826,315) $ 18,940,302
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 3.5%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CREDIT CARD RELATED - 3.5%
First Chicago Master Trust II 95-O A 5.89% (h) 02/15/04 $ 250,000 $ 250,858
Fleet Credit Card Master Trust 96-D A 5.81 (h) 06/15/05 750,000 749,760
MBNA Master Credit Card Trust 96-J A 5.81 (h) 02/15/06 1,000,000 1,002,180
-------------
2,002,798
=================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $2,005,724) $ 2,002,798
=================================================================================================================
FOREIGN DENOMINATED BONDS-1.4%
Principal Market
Rate Maturity Amount(d) Value(a)
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY OBLIGATION -1.4%
Federal National Mortgage Association Global
(NEW ZEALAND DOLLAR) 7.00% 09/26/00 1,500,000 $ 791,543
=================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $804,709) .............................................................................. $ 791,543
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI BOND FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED STOCK - 7.2%
Market
Rate Quantity Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 7.2%
SI Financing Trust I 2.38% 150,000 $ 4,096,800
=================================================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE PREFERRED STOCK
(COST: $3,810,939) ............................................................................ $ 4,096,800
=================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $53,497,016) ........................................................................... $54,408,991
=================================================================================================================
SHORT-TERM SECURITIES - 7.5%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 0.3%
U.S. Treasury Bills 5.24% 10/22/98 $ 175,000(c) $ 171,482
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 7.2%
General Electric Credit (Financial) 5.65 06/01/98 2,350,000 2,350,000
General Electric (Utilities) 5.51 06/09/98 1,725,000 1,722,888
-------------
4,072,888
=================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $4,244,384) ............................................................................ $ 4,244,370
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $57,741,400) (i) ....................................................................... $ 58,653,361
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (3.3%)
............................................................................................. $ (1,849,036)
=================================================================================================================
TOTAL NET ASSETS
............................................................................................. $ 56,804,325
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 3.3%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL -3.3%
AT&T Capital (MEDIUM-TERM NOTE) 6.41% 08/13/99 $ 500,000 $ 501,745
=================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $500,000) .............................................................................. $ 501,745
=================================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 50.7%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 36.4%
6.00% 06/30/99 $ 150,000 $ 150,725
5.63 11/30/99 500,000 500,470
6.38 05/15/00 700,000 710,388
5.63 11/30/00 300,000 300,468
6.63 07/31/01 500,000 514,765
6.13 12/31/01 500,000 508,045
6.63 04/30/02 400,000 413,876
5.63 12/31/02 750,000 750,585
5.50 03/31/03 250,000 249,103
5.75 08/15/03 750,000 755,393
6.88 05/15/06 150,000 161,367
6.63 05/15/07 500,000 532,655
-------------
5,547,840
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 5.6%
11.63 11/15/04 640,000 844,301
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 8.7%
Federal Home Loan Mortgage Association 5.63 03/15/01 1,000,000 997,660
6.00 05/15/08 320,000 322,000
-------------
1,319,660
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $7,702,728) ............................................................................ $ 7,711,801
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 32.5%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 9.9%
5.50% 07/01/98 $ 225 $ 223
7.00 01/01/99 1,295 1,290
6.25 12/01/03 62,545 62,637
5.35 02/15/06 383,734 381,336
6.00 07/01/09 21,922 21,906
7.00 08/15/21 1,015,000 1,033,392
-------------
1,500,784
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 2.6%
6.50 08/01/25 389,166 388,192
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 5.7%
11.50 01/01/01 2,503 2,571
11.50 01/01/13 7,956 8,968
9.50 12/25/18 160,717 173,575
6.50 03/01/28 694,205 690,081
-------------
875,195
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARFS - 3.5%
10.00 02/01/01 14,327 14,733
10.00 01/01/03 229,368 241,168
6.50 12/01/12 278,263 279,828
-------------
535,729
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 10.8%
8.00 09/15/08 326,393 340,042
11.00 06/15/13 11,937 13,343
9.00 11/15/17 645,323 697,750
7.00 11/15/26 588,388 598,320
-------------
1,649,455
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $4,857,908) ............................................................................ $ 4,949,355
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
FUND PORTFOLIO
IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 3.1%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 3.1%
First Security Auto Grantor Trust 98-A 5.97% 04/15/04 $ 477,755 $ 478,405
=================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $477,611)............................................................................... $ 478,405
=================================================================================================================
FOREIGN DENOMINATED BONDS - 3.7%
Principal Market
Rate Maturity Amount(d) Value(a)
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 3.7%
New Zealand Government (NEW ZEALAND DOLLAR) 8.00% 02/15/01 $7,000,000 $ 383,291
International Bank for Reconstruction and Development
(POLAND ZLOTTY) 16.50 03/09/05 6,000,000 175,308
-------------
558,599
=================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $629,887) .............................................................................. $ 558,599
=================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $14,168,134) ........................................................................... $ 14,199,905
=================================================================================================================
SHORT-TERM SECURITIES - 5.0%
Principal Market
Rate Maturity Amount Value(a)
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 5.0%
General Electric Credit (Financial) 5.65% 06/01/98 $ 760,000 $ 760,000
=================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $760,000) .............................................................................. $ 760,000
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $14,928,136) (i) ....................................................................... $ 14,959,905
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.7%
............................................................................................. $ 262,365
=================================================================================================================
TOTAL NET ASSETS
............................................................................................. $ 15,222,270
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Purchased on a when-issued basis. At May 31, 1998, the total cost of securities
purchased on a when-issued basis in the IAI Bond Fund portfolio was $2,313,378.
(c)
Security is fully or partially pledged to cover initial margin on open futures
contracts (see Note 6 to financial statements).
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(e)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. These issues
may only be sold to other qualified institutional buyers, and are considered
liquid under guidelines established by the Board of Directors.
(f)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(g)
Interest rate shown represents yield-to-maturity at date of purchase.
(h)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on May 31, 1998.
(i)
At May 31, 1998, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
IAI IAI
BOND FUND GOVERNMENT FUND
- --------------------------------------------------------------------------------
Cost for federal income tax purposes $ 57,743,226 $ 14,944,273
==========================================
Gross unrealized appreciation $ 961,534 $ 104,402
Gross unrealized depreciation (51,399) (88,770)
------------------------------------------
Net unrealized appreciation $ 910,135 $ 15,632
==========================================
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities unaffiliated issuers, at market
(Cost: $57,741,400 and $14,928,136, respectively) $ 58,653,361 $ 14,959,905
Cash in bank on demand deposit 110,770 101,693
Receivable for investment securities sold 775,101 --
Dividends and accrued interest receivable 506,916 162,933
Other 21,029 --
------------------------------------------------------------
TOTAL ASSETS 60,067,177 15,224,531
------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 3,247,614 --
Unrealized depreciation on foreign currency contracts held,
at value (Note 8) 3,815 1,178
Accrued management fee 3,423 917
Variation margin payable 8,000 166
------------------------------------------------------------
TOTAL LIABILITIES 3,262,852 2,261
------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 56,804,325 $ 15,222,270
============================================================
REPRESENTED BY:
Capital stock $ 59,176 $ 15,501
Additional paid-in capital 56,845,789 17,084,405
Undistributed net investment income 117,109 15,268
Accumulated net realized (losses) (1,034,016) (1,922,974)
Unrealized appreciation (depreciation) on:
Investment securities $ 820,308 $ 31,769
Other assets and liabilities denominated in foreign currency (4,041) (1,699)
-------------- -------------
816,267 30,070
------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING
CAPITAL STOCK $ 56,804,325 $ 15,222,270
============================================================
Shares of capital stock outstanding; authorized 10 billion
shares of $0.01 par value stock 5,917,572 1,550,057
------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.60 $ 9.82
============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 26
<PAGE>
STATEMENTS OF OPERATIONS
IAI BOND FUND, IAI GOVERNMENT FUND
SIX MONTHS ENDED MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI BOND FUND IAI GOVERNMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME:
Interest (net of foreign income taxes withheld
of $0 and 343, respectively) $ 1,961,121 $ 548,035
Dividends 178,125 --
----------------------------------------------------------
TOTAL INCOME 2,139,246 548,035
EXPENSES:
Management fees 345,200 92,698
Compensation of Directors 3,871 1,036
----------------------------------------------------------
TOTAL EXPENSES 349,071 93,734
Less fees reimbursed by Advisers (3,871) (1,036)
----------------------------------------------------------
NET EXPENSES 345,200 92,698
----------------------------------------------------------
NET INVESTMENT INCOME 1,794,046 455,337
----------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 1,202,067 $ 263,081
Futures contracts (328,185) (16,497)
Written option contracts -- 21,215
Foreign currency transactions (25,849) 67,916
----------- ----------
848,033 335,715
Net change in unrealized appreciation or depreciation on:
Investment securities $ 13,494 $ (234,390)
Futures contracts 175,512 7,245
Other assets and liabilities denominated in foreign currency (4,371) (4,373)
----------- ----------
184,635 (231,518)
----------------------------------------------------------
NET GAIN ON INVESTMENTS 1,032,668 104,197
----------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,826,714 $ 559,534
==========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 26
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BOND FUND, IAI GOVERNMENT FUND
<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,
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,794,046 $ 4,237,216 $ 455,337 $ 1,383,728
Net realized gains (losses) 848,033 3,154,037 335,715 (279,809)
Net change in unrealized appreciation or depreciation 184,635 (1,905,812) (231,518) (125,330)
---------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,826,714 5,485,441 559,534 978,589
---------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,053,648) (4,411,156) (518,424) (1,424,732)
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2,053,648) (4,411,156) (518,424) (1,424,732)
---------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 9,819,505 19,823,156 981,790 6,086,177
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,960,204 4,206,938 493,132 1,405,217
Cost of shares redeemed (24,368,811) (43,287,269) (5,206,629) (17,883,098)
---------------------------------------------------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (12,589,102) (19,257,175) (3,731,707) (10,391,704)
---------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (11,816,036) (18,182,890) (3,690,597) (10,837,847)
NET ASSETS AT BEGINNING OF PERIOD 68,620,361 86,803,251 18,912,867 29,750,714
---------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 56,804,325 $ 68,620,361 $ 15,222,270 $ 18,912,867
=====================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 117,109 $ 376,711 $ 15,268 $ 78,355
=====================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 26
<PAGE>
FINANCIAL HIGHLIGHTS
IAI BOND FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Year ended
Six months November 30, Period from March 31,
ended -------------------------- April 1, 1994 to ----------
May 31, 1998 1997 1996 1995 November 30, 1994+ 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $9.49 $9.32 $9.34 $8.65 $9.32 $10.42
------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.29 0.54 0.56 0.58 0.36 0.62
Net realized and unrealized gains (losses) 0.14 0.19 0.04 0.72 (0.55) (0.25)
------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.43 0.73 0.60 1.30 (0.19) 0.37
------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.32) (0.56) (0.62) (0.61) (0.35) (0.66)
Net realized gains -- -- -- -- (0.13) (0.81)
------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.32) (0.56) (0.62) (0.61) (0.48) (1.47)
------------------------------------------------------------------------------
NET ASSET VALUE
End of period $9.60 $9.49 $9.32 $9.34 $8.65 $9.32
==============================================================================
Total investment return* 4.59% 8.15% 6.85% 15.46% (2.10%) 3.16%
Net assets at end of period (000's omitted) $56,804 $68,620 $86,803 $77,526 $80,622 $97,139
RATIOS
Expenses to average net assets 1.10%** 1.10% 1.10% 1.09% 1.10%** 1.09%
Net investment income to
average net assets 5.71%** 5.74% 6.20% 6.32% 6.03%** 5.63%
Portfolio turnover rate
(excluding short-term securities) 178.0% 482.2% 342.4% 424.7% 226.7% 333.1%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
<PAGE>
FINANCIAL HIGHLIGHTS
IAI GOVERNMENT FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Year ended
Six months November 30, Period from March 31,
ended -------------------------- April 1, 1994 to ----------
May 31, 1998 1997 1996 1995 November 30, 1994+ 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $9.80 $9.95 $10.06 $9.62 $9.98 $10.46
------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.27 0.58 0.58 0.60 0.33 0.47
Net realized and unrealized
gains (losses) 0.05 (0.14) (0.10) 0.43 (0.34) (0.24)
------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.32 0.44 0.48 1.03 (0.01) 0.23
------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.30) (0.59) (0.59) (0.59) (0.32) (0.49)
Net realized gains -- -- -- -- (0.03) (0.22)
------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.30) (0.59) (0.59) (0.59) (0.35) (0.71)
------------------------------------------------------------------------------
NET ASSET VALUE
End of period $9.82 $9.80 $9.95 $10.06 $9.62 $9.98
==============================================================================
Total investment return* 3.32% 4.60% 4.99% 10.99% (0.09%) 2.02%
Net assets at end of period
(000's omitted) $15,222 $18,913 $29,751 $48,121 $38,438 $41,027
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 5.40%** 5.82% 5.78% 5.97% 5.12%** 4.40%
Portfolio turnover rate
(excluding short-term securities) 226.5% 349.5% 152.0% 284.1% 121.5% 641.0%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET ASSET
VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO NOVEMBER 30.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Bond Fund (Bond Fund) is a separate portfolio of IAI Investment
Funds I, Inc. IAI Government Fund (Government Fund) is a separate portfolio of
IAI Investment Funds VI, Inc. The Bond Fund's primary objective is to provide a
high level of current income consistent with capital preservation, through
investments in a diversified portfolio of primarily investment grade bonds and
other debt securities of similar high quality. The Government Fund seeks to
provide shareholders with a high level of current income with preservation of
capital by investing primarily in U.S. Government securities. This report covers
only Bond Fund and Government Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Funds on a
forward commitment or when-issued basis may occur a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Funds maintain, in segregated accounts, assets with a
market value equal to the amount of their purchase commitments.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
FOREIGN CURRENCY TRANSLATIONS AND FOREIGN CURRENCY CONTRACTS
Bond Fund and Government Fund may invest in foreign securities. The market value
of securities and other assets and liabilities denominated in foreign currencies
is translated daily into U.S. dollars at the closing rate of exchange. Purchases
and sales of securities, income and expenses are translated at the exchange rate
on the transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions.
Exchange gains and losses may also be realized between the trade and settlement
dates on security and foreign currency contract transactions. The Funds do not
isolate that portion of the result of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Funds may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Funds are subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
taxable income to shareholders, no provision for income taxes is required. In
order to avoid the payment of any federal excise taxes, the Funds are required
to distribute substantially all of their net investment income and net realized
gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of recognition of certain foreign currency
gains and losses as ordinary income and the deferral of "wash sale" losses for
tax purposes. The character of distributions made during the year from net
investment income or net realized gains may differ from its ultimate
characterization for tax purposes.
For federal income tax purposes, the Bond Fund and Government Fund have capital
loss carryovers of approximately 2,102,000 and $2,266,000, respectively at
November 30, 1997, which, if not offset by subsequent capital gains, will expire
in 2002 and 2002 through 2005, respectively. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryovers are offset or expire.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income, including level yield amortization of discount for the Funds,
is accrued daily. Security gains and losses are determined on the basis of
identified cost, which is the same basis used for federal income tax purposes.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the record date. Distributions
from net investment income are made monthly. Capital gains, if any, are
primarily distributed at the end of the calendar year. Additional capital gains
distributions as needed to comply with federal tax regulations are distributed
during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[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 $10,207,000 and
$2,683,000, 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 six months ended May 31, 1998, the Funds paid $2,009 and
$487, respectively, in interest on the line of credit at an average rate of
8.50%. There were no borrowings outstanding at May 31, 1998.
[3] FEES AND EXPENSES
Under terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. This fee is equal to an
annual rate of 1.10% declining to 1.00% of average daily net assets and is paid
monthly. The Management Agreements further provide that Advisers will reimburse
the Funds for the fees and expenses it pays to Directors who are not "interested
persons" of the Funds or reduce its fee by an equivalent amount.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[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, 1998
and November 30, 1997, 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,
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 1,023,618 2,139,386 99,821 620,340
ISSUED FOR REINVESTED
DISTRIBUTIONS 205,177 454,281 50,454 144,144
REDEEMED (2,540,680) (4,677,133) (529,487) (1,825,354)
-------------------------------------------------------------------------
INCREASE (DECREASE)
IN SHARES OUTSTANDING (1,311,885) (2,083,466) (379,212) (1,060,870)
=========================================================================
</TABLE>
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
Purchases Sales
- --------------------------------------------------------------------------------
IAI BOND FUND $ 103,948,749 $ 113,788,588
IAI GOVERNMENT FUND $ 35,577,865 $ 38,665,464
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of May 31, 1998 in the
Bond Fund. The market value of securities deposited to cover initial margin
requirements for the open positions at May 31, 1998, was $171,483. The
unrealized depreciation on these contracts is included in unrealized
appreciation or depreciation on investment securities.
<TABLE>
<CAPTION>
IAI BOND FUND FUTURES
- ----------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 40 June 1998 Short $ 4,518,750 $ 33,738
U.S. Treasury Bond 22 June 1998 Short $ 2,677,813 57,915
--------------
$ 91,653
==============
</TABLE>
[7] OPTIONS CONTRACTS WRITTEN
During the six months ended May 31, 1998, Government Fund wrote the following
options on futures. There were no outstanding contracts at May 31, 1998.
IAI GOVERNMENT FUND CALL OPTIONS
- --------------------------------------------------------------------------------
Number of Contracts Premium
- --------------------------------------------------------------------------------
Outstanding at 11/30/97 -- $ --
Opened 38 21,215
Expired (38) (21,215)
Closed -- --
Exercised -- --
- --------------------------------------------------------------------------------
Outstanding at 5/31/98 -- $ --
================================================================================
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BOND FUND, IAI GOVERNMENT FUND
MAY 31, 1998
(UNAUDITED)
[8] FOREIGN CURRENCY EXCHANGE CONTRACTS
At May 31, 1998, the Funds had entered into foreign currency exchange contracts.
The unrealized appreciation (depreciation) on those contracts at May 31, 1998,
is included in unrealized appreciation or depreciation on other assets and
liabilities denominated in foreign currency. The terms of the open contracts are
as follows:
<TABLE>
<CAPTION>
IAI BOND FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Depreciation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6/18/98 1,460,000 New Zealand Dollars 776,720 U.S. Dollars $ 3,815
- ------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Appreciation
- ------------------------------------------------------------------------------------------------
6/18/98 730,000 New Zealand Dollars 389,090 U.S. Dollars $ 1,178
- ------------------------------------------------------------------------------------------------
</TABLE>
[9] SUBSEQUENT EVENT
On May 13, 1998, the Board of Directors approved a plan to liquidate Government
Fund. It is anticipated that the shareholders will vote on this proposal in the
fall of 1998.
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND
FAMILY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
...................................................................................................................................
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing countries
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized emerging
growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
