<PAGE>
----------------------------------------------------
PRINCIPAL PROTECTION FUNDS
ANNUAL REPORT
IAI Reserve Fund, IAI Money Market Fund
JANUARY 31, 1995
----------------------------------------------------
[LOGO OF IAI]
MUTUAL FUNDS
<PAGE>
[MAP]
<PAGE>
TABLE OF CONTENTS
-----------------
IAI Reserve Fund, IAI Money Market Fund
Annual Report
January 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter................................... 2
Reserve Fund Manager's Review....................... 4
Money Market Fund Manager's Review.................. 6
Fund Portfolios
IAI Reserve Fund................................... 8
IAI Money Market Fund..............................11
Notes to Fund Portfolios............................13
Statements of Assets and Liabilities................14
Statements of Operations............................15
Statements of Changes in Net Assets.................16
Financial Highlights
IAI Reserve Fund...................................18
IAI Money Market Fund..............................19
Notes to Financial Statements.......................20
Independent Auditors' Report........................24
Federal Tax Information.............................25
IAI Mutual Fund Family..............................26
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors............................Inside Back Cover
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
-----------------
LAI Reserve Fund, LAI Money Market Fund
[PHOTO OF NOEL P. RAHN]
Noel P. Rahn,
Chairman
NEW PERSPECTIVE ON FIXED-INCOME INVESTING
Recently, there has been a flurry of press reports that might lead you to
believe that 1994's bond market decline measured in historic proportions. While
1994 was a difficult year for fixed-income investors, it wasn't the worst in
history. Furthermore, prospects for 1995 look considerably better, partly
because of 1994's decline.
It is true that in 1994 the bond market, as measured by the Lehman Brothers
Government/Corporate (LBGC) Bond Index, experienced its first calendar year
loss in the 22-year history of the index. However, while there had not
previously been a calendar year of negative returns in bonds, there have been
numerous losing one-year periods. In fact, during the last 22 years, 12-month
returns have been negative 28 times. The worst negative return was -8.6% for the
year ended March 1980. That loss was more than twice as bad as last year's
- -3.5%.
Even though losses are still losses, it is important to take a long-term view
and remember that last year's negative returns follow one of the longest,
strongest bond bull markets in history. In fact, there was only one small
negative one-year return (-0.38%) over the last 13 years since the end of the
last bond bear market in September of 1981. Over the entire period since then,
including all of 1994, the average annualized return from bonds has been high at
12.43%.
There are several reasons to look more favorably on fixed-income investments in
1995. First of all, yields are considerably higher at the start of this year
than they were last year. For example, the yield on a two-year Treasury note has
recently exceeded 7.5% compared with just 4% a year ago. Higher yields create
two advantages: additional income and less sensitivity to further rises in
interest rates.
In addition, the potential for above-average annualized returns has increased
significantly. Over a one-year investment horizon, an interest rate decline of
only 1% will result in an approximate 13% total return for an intermediate-term
bond currently yielding 8%.
Historically since 1973, there have been six times (including 1994) when bond
returns have been near zero or below. Each previous occurrence was followed by
double-digit annualized returns. And, investors didn't have to wait long for
those returns. When bond bear markets have turned, they have moved higher very
quickly. In fact, the time required to recover from bear market losses has
averaged just six weeks.
As you can see, fixed income investors also experience some of the price
volatility normally associated with riskier investments, but those who have had
patience and maintained a long-term perspective have been well rewarded.
2
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Reserve Fund, IAI Money Market Fund
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
The year-over-year growth in real GDP should remain above its long-term trend of
3% but will drop from its current estimated level of 4%; this is likely to occur
toward mid-year; and the Consumer Price Index is expected to rise to about 3.5%
compared to its current rate of 2.7% as measured on a year-over-year basis.
Given this backdrop, the Federal Reserve is unlikely to ease credit conditions
in the next six months. This is an important conclusion in our outlook for
financial assets. The Fed implements policy through its control on liquidity in
the financial system. The initial Fed tightening first affects interest rates,
causing the yield curve to flatten and interest rates to rise. Equity markets
hold-up as corporate earnings continue to rise in an expanding economy. Higher
earnings provide price support to the stock market despite higher interest
rates. Ultimately, liquidity leaves the stock market as well, ushering in a bear
market. In the final phase, liquidity leaves the economy and a recession occurs.
This phase does not end until the Fed begins to ease credit and add liquidity.
Then the sequence reverses with excess liquidity from the Fed flowing first into
bonds, then into stocks, and finally into the real economy. Investors are paid
handsomely to be aggressive toward stocks and bonds during this phase.
Unfortunately, this is not likely to occur in 1995. At the current stage of this
credit cycle, portfolio strategy should be well diversified and conservative. In
the months ahead, investors are likely to be frustrated by false starts and
volatility in returns. However, an easier Fed policy is likely in 1996, and with
this shift will come above-average returns for both stocks and bonds.
Please read the Fund Manager's 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,
[Signature of Noel P. Rahn]
Noel P. Rahn
Chairman
3
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Reserve Fund
IAI RESERVE FUND
[PHOTO OF TIMOTHY A. PALMER]
Timothy A. Palmer
CFA
IAI Reserve Fund Manager
"The Fund
has been well
positioned to withstand
multiple Federal Reserve
Board interest rate
increases."
Fund Objectives
The Fund's investment objectives are to provide its shareholders with high
levels of capital stability and liquidity and, to the extent consistent with
these primary objectives, a high level of current income. The Fund pursues its
objectives primarily through investment in a diversified portfolio of investment
grade bonds and other debt securities of similar quality.
Fund Positioning for the Past Year
The IAI Reserve Fund focuses on investing in high quality fixed-income
securities which have low sensitivity to interest rate changes. The Fund has
been well positioned to withstand multiple Federal Reserve Board interest rate
increases and finished the year with positive returns while many fixed-income
sectors posted losses.
The Fund has the flexibility to adjust the portfolio three primary ways: by
managing interest rate sensitivity, by adjusting yield curve positioning and by
altering sector weightings. All three of these primary techniques were used over
the last year.
Throughout the year, the Fund has shifted its emphasis to a more conservative
position due to the continued economic expansion and the associated pressures in
the bond market.
In late 1993, when interest rates first began increasing, we began shortening
the average maturity of the Fund to reduce price volatility. By the beginning of
this fiscal year, we had significantly shortened the maturity of the portfolio,
and we have since made additional adjustments. The average duration, or interest
rate sensitivity, of the Fund is currently about 4 1/2 months. We believe that
the Federal Reserve Board will continue to raise short-term interest rates, due
to incipient inflation pressures in the economy. As a result, we continue to
emphasize shorter maturity and duration to reduce the Fund's price sensitivity
to rising interest rates.
During the year, we also adjusted our sector weightings. For example, we added
high-quality corporate bonds, increased the weighting in top-tier commercial
paper, and increased the weighting in AAA-rated asset-backed securities.
Corporate holdings are all rated investment grade and reflect company and
industry weightings based on IAI's fundamental research. The position in
corporate bonds accounts for about one-quarter of the portfolio. Commercial
paper and short maturity government agency securities add liquidity to the Fund.
At year-end, the Fund's average credit quality was AA.
Fund Positioning Going Forward
It is likely that the Federal Reserve will continue to increase short-term
interest rates to slow the rate of economic growth and to head off the cyclical
rise in inflation. The secular trend toward lower inflation remains intact yet
will continue to take a back seat to cyclical pressures. Interest rates are
likely to remain volatile. Your portfolio will be positioned accordingly.
/s/ [Signature of Timothy A. Palmer]
- ------------------------------------
Timothy A. Palmer, CFA
Fund Manager
4
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Reserve Fund
Value of $10,000 Investment
[Performance chart appears here]
<TABLE>
<CAPTION>
1/31/95
- ----------------------------------------------
<S> <C>
IAI Reserve Fund (Inception 1/31/86) $16,679
Salomon Brothers One
Year Treasury Bill Index $17,736
Past performance is not predictive of future performance.
</TABLE>
Average Annual Returns+
Through 1/31/95
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Years 1/31/86
- ------------------------------------------------------------------
<S> <C> <C> <C>
IAI Reserve Fund 2.95% 5.13% 5.85%
- ------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 3.25% 5.90% 6.57%
</TABLE>
+ Past performance is not predictive of future performance
Sectors
% of Portfolio as of 1/31/95
<TABLE>
<CAPTION>
<S> <C>
U.S. Government 1%
U.S. Government Agency 30%
Asset-Backed 24%
Corporate 22%
Commercial Paper 23%
</TABLE>
Effective Maturity
% of Portfolio as of 1/31/95
Months
- -----------------------------
0-1 53%
1-6 7%
6-12 6%
Years
- -----------------------------
1-3 27%
3-5 7%
Note to chairman's letter & Fund Manager's Review
Performance data for the IAI Reserve 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.
Credit Rating
% of Portfolio as of 1/31/95
U.S. Gov't and
Gov't Agency........31%
AAA.................29%
AA..................23%
A...................12%
BAA..................5%
Non-Rated............-
Non-Investment
Grade................-
5
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Money Market Fund
IAI Money Market Fund
[PHOTO OF TIMOTHY A. PALMER, CFA]
Timothy A. Palmer, CFA
IAI Money Market Fund Manager
Fund Objective
The Fund's objective is to provide shareholders with a high level of current
income consistent with the preservation of capital and liquidity. The Fund's
goal is to maintain a stable share price of $1.00.
The Fund pursues its objective by investing in a variety of high quality money
market securities, including the following:
. U.S. Treasury Bills
. U.S. Government short-term notes
. CDs issued by large banks
. Commercial paper issued by large corporations
. Repurchase agreements
Fund Positioning for the Past Year
In response to on-going short-term interest rate increases, we have maintained a
short average maturity of the securities in the IAI Money Market Fund. In recent
months, the average weighted maturity of the Fund has ranged between 5 and 20
days, substantially shorter than the approximately 50-day weighted average
maturity of the Fund at the beginning of last fiscal year.
The Fund remains highly liquid with a large percentage of the portfolio maturing
within a few days. This shorter maturity enables the Fund to take advantage of
rising interest rates and provides substantial liquidity to the Fund. The real
rate of return for the Fund (the yield minus the current inflation rate)
continues to be positive.
The IAI Money Market Fund is conservatively structured. We do not believe in
sacrificing overall quality in search of a small addition to the Fund's yield.
The average credit quality of the Fund remains high as we continue to emphasize
Government agency securities and top-tier commercial paper. Currently, more than
half of the Fund is invested in United States Government agency securities,
which provide both liquidity and credit-risk safety for the Fund. This weighting
is adjusted over time based on opportunities in the market.
Fund Positioning Going Forward
It is likely that the Federal Reserve will continue to increase short-term
interest rates to slow the rate of economic growth and to head off the cyclical
rise in inflation. The secular trend toward lower inflation remains intact yet
will continue to take a back seat to cyclical pressures. Interest rates are
likely to remain volatile. Your portfolio will be positioned accordingly.
[SIGNATURE OF TIMOTHY A. PALMER, CFA]
Timothy A. Palmer, CFA
Fund Manager
6
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Money Market Fund
Average Annual Returns+
Through 1/31/95
<TABLE>
<CAPTION>
Yield/2/ Since
----------------------- Inception
Current Effective/3/ 1 Year 1/05/93
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IAI Money Market Fund 5.13% 5.26% 3.87% 3.36%
- -------------------------------------------------------------------------------------------------
Lipper Money Market Instrument Fund Average 5.27% NA 3.95% 3.28%/4/
</TABLE>
+ Past performance is not predictive of future performance.
1 Through 1/31/95. Fees and expenses are currently being waived to .50% of
average daily net assets.
2 Past 7 days through 1/31/95
3 With dividends reinvested
4 Since 1/1/93
Sectors
% of Portfolio as of 1/31/95
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1/31/95
- ------------------------------
<S> <C>
Commercial Paper 12%
U.S. Government Agency 88%
</TABLE>
Effective Maturity
% of Portfolio as of 1/31/95
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1/31/95
- ------------------------------
<S> <C>
0-1 Month 100%
</TABLE>
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Money Market Fund assumes reinvestment of all
dividends. The IAI Money Market Fund is managed to maintain a stable share value
of $1.00 and historically has always achieved this objective. But, unlike bank
deposits and CDs, money market funds are not guaranteed, and there can be no
assurance that a stable share value will be maintained. Past performance is not
a guarantee of future results. 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.
7
<PAGE>
FUND PORTFOLIO
--------------
IAI Reserve Fund
January 31, 1995
(percentage figures indicate percentage of total net assets)
U.S. Government Obligations -- 1.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bill -- 1.3%
4.77% 05/04/95 $1,000,000 (b) $985,152
===============================================================================================
Total Investments in U.S. Government Obligations
(Cost: $987,260)..................................................................... $985,152
</TABLE>
U.S. Government Agency Securities -- 29.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association -- 0.8%
Federal National Mortgage Association (discount note) 5.55% 02/06/95 $ 650,000 $ 649,499
- ----------------------------------------------------------------------------------------------------
Federal Home Loan Bank -- 10.5%
Federal Home Loan Bank (discount note) 5.72% 02/01/95 8,100,000 8,100,000
- ----------------------------------------------------------------------------------------------------
Federal Home Loan
Mortgage Corporation -- 18.6%
Federal Home Loan Mortgage Corporation (discount notes) 5.25% 02/02/95 2,500,000 2,499,635
5.65% 02/02/95 4,800,000 4,799,247
5.40% 02/03/95 2,000,000 1,999,400
5.65% 02/09/95 5,100,000 5,093,597
-----------
14,391,879
====================================================================================================
Total Investments in U.S. Government
Agency Securities
(Cost: $23,141,378)..................................................................... $23,141,378
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
8
<PAGE>
FUND PORTFOLIO
--------------
IAI Reserve Fund
January 31, 1995
Corporate Bonds -- 22.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services -- 12.4%
Ford Motor Credit (medium-term note) 8.88% 03/13/95 $2,500,000 $ 2,506,200
GE Capital (medium-term note) 6.52% (c) 07/21/97 4,000,000 4,000,000
Salomon (medium-term note) 5.32% 09/16/96 3,200,000 3,068,256
-----------
9,574,456
- ------------------------------------------------------------------------------------------
Industrial -- 2.5%
RJR Nabisco (medium-term note) 6.25% 01/31/97 2,000,000 1,928,400
- ------------------------------------------------------------------------------------------
Utilities -- 7.1%
Commonwealth Edison 6.00% 03/15/98 2,000,000 1,869,960
Florida Power & Light 4.63% 03/01/95 1,790,000 1,787,315
Pacific Gas & Electric 5.38% 08/01/98 2,000,000 1,831,260
-----------
5,488,535
==========================================================================================
Total Investments in Corporate Bonds
(Cost: $17,545,120)........................................................... $16,991,391
</TABLE>
Asset-Backed Securities -- 23.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto Loan Related -- 14.5%
Carco Auto Loan Master Trust 94-1 A 6.32% 09/15/01 $3,000,000 $ 2,997,660
Carco Auto Loan Master Trust 94-2 A 7.88% 07/15/99 3,000,000 2,998,350
Case Equipment Loan Trust 94-C A1 7.60% 12/15/97 2,694,314 2,701,481
Ford Credit Grantor Trust 94-A A 6.35% 05/15/99 1,613,717 1,586,477
Ford Credit Grantor Trust 94-B A 7.30% 10/15/99 946,519 944,011
-----------
11,227,979
- --------------------------------------------------------------------------------------------------------
Credit Card -- 8.9%
Discover Card Master Trust I 94-1 A 6.70% 02/16/00 4,000,000 3,903,720
Household Affinity Credit Card Master Trust I 94-2 A 7.00% 12/15/99 1,000,000 984,680
Sears Credit Account Master Trust I 94-1 7.00% 01/15/04 2,000,000 1,935,580
-----------
6,823,980
========================================================================================================
Total Investments in Asset-Backed Securities
(Cost: $18,170,103)......................................................................... $18,051,959
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
9
<PAGE>
FUND PORTFOLIO
--------------
IAI Reserve Fund
January 31, 1995
Commercial Paper -- 22.7%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial -- 7.8%
Bellsouth Capital 5.67% 02/03/95 $3,000,000 $ 2,999,055
Weyerhauser Mortgage 5.72% 02/06/95 3,000,000 2,997,617
-----------
5,996,672
- ----------------------------------------------------------------------------------------
Industrial -- 6.0%
Anheuser Busch 5.55% 02/13/95 2,000,000 1,996,300
Emerson Electric 5.50% 02/08/95 2,000,000 1,997,861
General Mills 5.68% 02/07/95 700,000 699,337
-----------
4,693,498
- ----------------------------------------------------------------------------------------
Utilities -- 8.9%
Interstate Power............................ 5.73% 02/02/95 2,665,000 2,664,576
New England Power........................... 5.50% 02/03/95 3,200,000 3,199,023
Northern States Power....................... 5.58% 02/08/95 1,000,000 998,916
-----------
6,862,515
========================================================================================
Total Investments in Commercial Paper
(Cost: $17,552,683)........................................................ $17,552,685
========================================================================================
Total Investments in Securities
(Cost: $77,396,546) (d).................................................... $76,722,565
========================================================================================
Other Assets and Liabilities (net) -- 0.7%
........................................................................... $ 550,564
========================================================================================
Total Net Assets
........................................................................... $77,273,129
========================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio on page 13
10
<PAGE>
FUND PORTFOLIO
--------------
IAI Money Market Fund
January 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY SECURITIES -- 2.7%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Farm Credit Bank -- 2.7%
Federal Farm Credit Bank (discount notes) 5.40% 02/02/95 $ 10,000 $ 9,999
5.65% 02/09/95 900,000 898,870
-----------------
908,869
- -------------------------------------------------------------------------------------------------------
Federal Home Loan Bank -- 10.6%
Federal Home Loan Bank (discount note) 5.72% 02/01/95 3,500,000 3,500,000
- -------------------------------------------------------------------------------------------------------
Federal Home Loan
Mortgage Corporation -- 44.5%
Federal Home Loan Mortgage Corporation
(discount notes) 5.25% 02/02/95 2,400,000 2,399,650
5.45% 02/02/95 2,850,000 2,849,569
5.60% 02/02/95 800,000 799,876
5.60% 02/02/95 1,000,000 999,844
5.40% 02/03/95 2,000,000 1,999,400
5.65% 02/09/95 5,700,000 5,692,843
-----------------
14,741,182
- -------------------------------------------------------------------------------------------------------
Federal National
Mortgage Association -- 30.5%
Federal National Mortgage
Association (discount notes) 5.30% 02/01/95 2,900,000 2,900,000
5.50% 02/03/95 1,785,000 1,784,454
5.50% 02/06/95 1,000,000 999,236
5.55% 02/06/95 3,195,000 3,192,537
5.78% 02/07/95 1,250,000 1,248,796
-----------------
10,125,023
- -------------------------------------------------------------------------------------------------------
Total Investments in U.S. Government Agency Securities
(Cost: $29,275,074).................................................................... $29,275,074
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
11
<PAGE>
FUND PORTFOLIO
--------------
IAI Money Market Fund
January 31, 1995
Commercial Paper -- 12.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial -- 9.0%
Emerson Electric 5.50% 02/08/95 $1,000,000 $ 998,931
Pfizer 5.85% 02/03/95 1,000,000 999,675
PHH 5.65% 02/17/95 1,000,000 997,489
-----------
2,996,095
- ------------------------------------------------------------------------------------------
Utility -- 3.0%
Wisconsin Electric Fuel 5.82% 02/16/95 1,000,000 997,575
==========================================================================================
Total Investments in Commercial Paper
(Cost: $3,993,670)............................................................ $ 3,993,670
==========================================================================================
Total Investments in Securities
(Cost: $33,268,744) (d)....................................................... $33,268,744
==========================================================================================
Other Assets and Liabilities (NET) -- (0.3)%
.............................................................................. $ (93,961)
==========================================================================================
Total Net Assets
.............................................................................. $33,174,783
==========================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 13
12
<PAGE>
NOTES TO FUND PORTFOLIOS
------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1995
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Security is pledged to cover initial margin on open futures contract (see Note 6
to the financial statements).
(c)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on January 31, 1995.
(d)
At January 31, 1995, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
IAI Reserve Fund IAI Money Market Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $77,396,546 $33,268,744
=============================================
Gross unrealized appreciation $ 15,310 $ --
Gross unrealized depreciation (689,291) --
---------------------------------------------
Net unrealized appreciation
(depreciation) $ (673,981) $ --
=============================================
</TABLE>
13
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
------------------------------------
IAI Reserve Fund, IAI Money Market Fund
January 31, 1995
<TABLE>
<CAPTION>
IAI IAI Money
Reserve Fund Market Fund
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $77,396,546 and $33,268,744) (see Fund Portfolios) $76,722,565 $33,268,744
Cash in bank on demand deposit 98,260 75,626
Accrued interest receivable 512,375 -
Organization costs - 30,717
Other 28,339 113
--------------------------------
Total assets 77,361,539 33,375,200
--------------------------------
Liabilities
Accrued investment advisory fee 31,201 -
Accrued distribution fee 17,521 -
Accrued dividend-disbursing, administrative, and accounting fees 12,481 25,273
Other accrued expenses 27,207 43,375
Dividends payable ($ 0.0045 per share) - 131,769
--------------------------------
Total liabilities 88,410 200,417
--------------------------------
Net assets applicable to outstanding capital stock $77,273,129 $33,174,783
================================
Represented By:
Capital stock $ 78,123 $ 331,767
Additional paid-in capital 79,186,796 32,844,926
Undistributed net investment income 33,609 -
Accumulated net realized losses (1,304,355) (1,910)
Unrealized appreciation (depreciation) on investment securities (721,044) -
--------------------------------
Total -- representing net assets applicable
to outstanding capital stock $77,273,129 $33,174,783
================================
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 7,812,318 33,176,693
--------------------------------
Net asset value per share of outstanding capital stock $ 9.89 $ 1.00
================================
</TABLE>
See accompanying Notes to Financial Statements on page 20
14
<PAGE>
STATEMENTS OF OPERATIONS
------------------------
IAI Reserve Fund, IAI Money Market Fund
Period from April 1, 1994 to January 31, 1995
<TABLE>
<CAPTION>
IAI IAI Money
Reserve Fund Market Fund
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Investment Income
Income
Interest $3,926,182 $994,524
-------------------------------------
Total income 3,926,182 994,524
-------------------------------------
Expenses
Investment advisory fees 348,495 64,516
Distribution fees 69,699 -
Dividend-disbursing, administrative, and accounting fees 139,398 43,010
Legal fees - 6,800
Custodian fees 3,130 3,380
Amortization of organization costs - 8,788
Compensation of Directors 6,830 4,801
Audit fees 13,332 13,770
Printing and shareholder reporting 22,871 15,300
Registration fees 15,300 26,095
Other expenses 4,612 2,962
-------------------------------------
Total expenses 623,667 189,422
Less fees reimbursed by Advisers or Distributor (31,225) (81,895)
-------------------------------------
Net expenses 592,442 107,527
-------------------------------------
Net investment income 3,333,740 886,997
-------------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ (846,762) $ 3,441
Futures contracts 275,976 -
---------- --------
(570,786) 3,441
Net change in unrealized appreciation or depreciation on:
Investment securities $ (76,967) $ -
Futures contracts (47,063) -
---------- --------
(124,030) -
-------------------------------------
Net gain (loss) on investments (694,816) 3,441
-------------------------------------
Net increase in net assets resulting
from operations $2,638,924 $890,438
-------------------------------------
</TABLE>
See accompanying Notes to Financial Statements on page 20
15
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI Reserve Fund, IAI Money Market Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income
Net realized gains (losses)
Net change in unrealized
appreciation or depreciation
-----------------------------
Net increase in net
assets resulting from
operations
-----------------------------
Distributions to Shareholders From:
Net investment income
Net realized gains
-----------------------------
Total distributions
-----------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of
shares
Net asset value of shares
issued to shareholders in
reinvestment of distributions
Cost of shares redeemed
-----------------------------
Increase (decrease) in
net assets from capital
share transactions
-----------------------------
Total increase (decrease)
in net assets
Net assets at beginning of
period
-----------------------------
Net assets at end of period
=============================
(including undistributed
net investment income
of $33,609 and $106,506
for Reserve Fund)
</TABLE>
See accompanying Notes to Financial Statements on page 20
16
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI Reserve Fund, IAI Money Market Fund
IAI Reserve Fund IAI Money Market Fund
Period from Period from
April 1, 1994 April 1, 1994
to January 31, Year Ended to January 31, Year Ended
1995 March 31, 1994 1995 March 31, 1994
- ---------------------------------------------------------------
[C] [C] [C] [C]
$ 3,333,740 $ 3,492,954 $ 886,997 $ 938,183
(570,786) (740,148) 3,441 (5,351)
(124,030) (515,470) - -
- ---------------------------------------------------------------
2,638,924 2,237,336 890,438 932,832
- ---------------------------------------------------------------
(3,406,637) (3,288,776) (886,997) (938,183)
- (102,549) - -
- ---------------------------------------------------------------
(3,406,637) (3,391,325) (886,997) (938,183)
- ---------------------------------------------------------------
121,503,576 220,091,675 130,873,884 477,848,022
3,357,074 3,347,087 793,295 962,685
(145,633,109) (205,556,497) (128,283,703) (474,894,671)
- ---------------------------------------------------------------
(20,772,459) 17,882,265 3,383,476 3,916,036
- ---------------------------------------------------------------
(21,540,172) 16,728,276 3,386,917 3,910,685
98,813,301 82,085,025 29,787,866 25,877,181
- ---------------------------------------------------------------
$ 77,273,129 $ 98,813,301 $ 33,174,783 $ 29,787,866
===============================================================
17
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Reserve Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
IAI Reserve Fund
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------------------
Period from April 1, 1994
to January 31, 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 9.98 $ 10.10 $ 10.16 $ 10.17 $ 10.08
-------------------------------------------------------------------
Operations
Net investment income .40 .39 .36 .57 .72
Net realized and unrealized gains (losses) (.08) (.13) .02 .08 .10
-------------------------------------------------------------------
Total from operations .32 .26 .38 .65 .82
-------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.41) (.37) (.36) (.58) (.73)
Net realized gains - (.01) (.08) (.08) -
-------------------------------------------------------------------
Total distributions (.41) (.38) (.44) (.66) (.73)
-------------------------------------------------------------------
Net Asset Value
End of period $ 9.89 $ 9.98 $ 10.10 $ 10.16 $ 10.17
===================================================================
Total investment return* 3.21% 2.60% 3.81% 6.54% 8.49%
Net assets at end of period (000's omitted) $77,273 $98,813 $82,085 $108,373 $104,300
Ratios
Expenses to average net assets .85%** .85% .85% .85% .85%
Net investment income to average net assets 4.77%** 3.95% 3.49% 5.63% 7.09%
Portfolio turnover rate
(excluding short-term securities) 170.0% 235.0% 538.7% 218.1% 87.0%
</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
18
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Money Market Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
IAI MONEY MARKET FUND
<TABLE>
<CAPTION>
Period from
Period from April 1, 1994 Year Ended January 5, 1993***
to January 31, 1995 March 31, 1994 to March 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of period $ 1.00 $ 1.00 $ 1.00
------------------------------------------------------
Operations
Net investment income .03 .03 .01
------------------------------------------------------
Total from operations .03 .03 .01
------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.03) (.03) (.01)
------------------------------------------------------
Total distributions (.03) (.03) (.01)
------------------------------------------------------
Net Asset Value
End of period $ 1.00 $ 1.00 $ 1.00
======================================================
Total investment return* 3.47% 2.88% 2.85%**
Net assets at end of period (000's omitted) $ 33,175 $29,788 $ 25,877
Ratios
Expenses to average daily net assets**** .50%** .45% .29%**
Net investment income to average daily net assets**** 4.12%** 2.73% 2.96%**
* Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of all distributions at net asset
value.
** Annualized
*** Commencement of operations
**** The Fund's adviser voluntarily waived $81,895, $147,924 and $18,494 in
expenses for the ten months ended January 31, 1995, the year ended March 31,
1994, and the three months ended March 31, 1993, respectively. If the Fund had
been charged for these expenses, the ratio of expenses to average daily net
assets would have been .88%, .88% and .69%, respectively, and the ratio of net
investment income to average daily net assets would have been 3.74%, 2.30% and
2.56%, respectively.
</TABLE>
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Investment Funds V, Inc. and IAI Investment Funds VI, Inc. are registered
under the Investment Company Act of 1940 (as amended) as diversified, open-end
management investment companies. IAI Reserve Fund (Reserve Fund) is a separate
portfolio of IAI Investment Funds V, Inc. IAI Money Market Fund (Money Market
Fund) is a separate portfolio of IAI Investment Funds VI, Inc. This report
covers only the Reserve Fund and Money Market Fund (The Funds).
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the Funds from March 31 to January 31. Accordingly, these financial
statements are presented for the ten-month period from April 1, 1994 to January
31, 1995. Significant accounting policies followed by the Funds are summarized
below:
Security Valuation
The values of debt securities for Reserve Fund are determined using pricing
services or prices quoted by independent brokers. Short-term securities with a
maturity of 60 days or less from the date of purchase are valued at amortized
cost. Short-term securities with a maturity greater than 60 days from the date
of purchase are marked-to-market on a daily basis.
Pursuant to Rule 2a-7 of the Investment Company Act of 1940 (as amended), all
securities in Money Market Fund are valued daily at amortized cost, which
approximates market value, in order to maintain a constant net asset value of $1
per share.
Repurchase Agreements
Securities pledged as collateral for repurchase agreements are held by the
custodian bank until maturity of the repurchase agreement. Provisions of the
agreement ensure that the market value of the collateral, including accrued
interest, is sufficient in the event of default; however, in the event of
default or bankruptcy by the other party to the agreement, realization of the
collateral may be delayed or limited.
Futures Contracts
In order to increase exposure to and hedge against changes in the market,
Reserve Fund may buy and sell futures contracts. The risks of entering into
futures contracts include the possibility that changes in the value of the
contract may not correlate with changes in the value of the underlying
securities. Futures contracts are valued at the settlement price of the exchange
on which they are traded.
Upon entering into a futures contract, Reserve 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 as unrealized gains and losses. The
variation margin is paid or received in cash daily by Reserve Fund. Reserve Fund
realizes a gain or loss when the contract is closed or expires.
Foreign Currency Translations and Foreign Currency Contracts
Reserve 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). Exchange gains (losses) may also be realized between the trade
and settlement dates on security and foreign currency contract transactions.
Reserve Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
prices of securities held. Such fluctuations are included with the net realized
and unrealized gain or loss from investments.
Reserve Fund may enter into foreign currency exchange contracts for operational
purposes and to protect against adverse exchange rate fluctuations. The net U.S.
dollar value of foreign currency underlying all contractual commitments held by
Reserve Fund and the resulting unrealized appreciation or depreciation are
determined using foreign currency exchange rates from an independent pricing
service. Reserve Fund is 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
their 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 the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes.
For federal income tax purposes, Reserve Fund has a capital loss carryover of
approximately $1,144,000, at January 31, 1995 which, if not offset by subsequent
capital gains, will expire in 2002. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryover is offset or expires.
Security Transactions and Investment Income
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Interest income is accrued daily. Reserve Fund amortizes
discount purchased on long-term bonds using the level yield method of
amortization. For Money Market Fund, discounts and premiums are accreted and
amortized, respectively, to interest income over the lives of the respective
securities. 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 Reserve Fund shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid monthly. For Money Market
Fund, distributions from net investment income are declared daily and paid on
the first business day of the following month. Capital gains for the Funds, if
any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
Organization Costs
Organization costs are being amortized over 60 months on a straight-line basis.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Reserve Fund, IAI Money Market Fund
[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). In connection with their
obligations as policyholders, the Funds have made payments to the Company which
have been capitalized. Also, the Funds are committed to make future capital
contributions, if requested by the Company.
Reserve Fund and Money Market Fund have available a $15,000,000 and $7,150,000,
respectively, line of credit with a bank at prime interest rates. No
compensating balances or commitment fees are required under the line of credit.
There were no borrowings outstanding at January 31, 1995. To the extent funds
are drawn against the line, securities are held in a segregated account.
[3] Fees and Expenses
Under the terms of an investment advisory agreement, the Funds pay Investment
Advisers, Inc. (Advisers) a monthly management fee computed at an annual rate of
.50% of the average month-end net asset value for Reserve Fund and .30% of
average daily net assets for Money Market Fund.
Each Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets for Reserve Fund and average daily
net assets for Money Market Fund at an annual rate of .20%.
Reserve Fund has adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Fund's distributor. Under the Plan, Reserve Fund pays
Distributor a monthly fee to cover expenses incurred in the distribution and
promotion of Reserve Fund's shares. The fee is equal to an annual rate of .10%
of Reserve Fund's average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, each Fund is responsible for
paying its operating expenses, including costs incurred in the purchase and sale
of assets. Advisers and Distributor have agreed to reimburse Reserve Fund to the
extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceed, on an annual basis, .85% of average month-end net assets.
Additionally, since July 1, 1993, Advisers has voluntarily agreed to waive
expenses for Money Market Fund in excess of .50% of average daily net assets.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONT.)
-------------------------------------
IAI Reserve Fund, IAI Money Market Fund
[4] Capital Stock
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the period ended January 31,
1995, and the year ended March 31, 1994 were as follows:
<TABLE>
<CAPTION>
IAI Reserve Fund IAI Money Market Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Period from April 1, 1994 Year ended Period from April 1, 1994 Year ended
to January 31,1995 March 31, 1994 to January 31,1995 March 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 12,212,854 21,842,797 130,873,884 477,848,022
Issued for reinvested distributions 338,618 332,690 793,295 962,685
Redeemed (14,636,560) (20,404,889) (128,283,703) (474,894,671)
----------------------------------------------------------------------------------------
Increase (decrease) in shares outstanding (2,085,088) 1,770,598 3,383,476 3,916,036
========================================================================================
</TABLE>
[5] Purchases and Sales of Securities
For the period ended January 31, 1995, purchases of securities and sales
proceeds for the Funds were as follows:
- --------------------------------------------------------------------------------
Purchases Sales
- --------------------------------------------------------------------------------
IAI Reserve Fund $1,259,905,495 $1,279,677,969
IAI Money Market Fund $ 892,213,781 $ 889,505,767
[6] Open Futures Contracts
The financial futures contracts shown below were open in Reserve Fund as of
January 31, 1995. The market value of securities deposited to cover initial
margin requirements for the open positions at January 31, 1995 was $985,152.
<TABLE>
<CAPTION>
Futures
- -----------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Fund Type Contracts Month Position Value Loss
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IAI Reserve Fund 90 Day Euro Dollar 30 June 1995 Short $ 6,963,750 $ 1,725
U.S. Treasury Note 45 March 1995 Short 4,561,875 45,338
--------------------------
$11,525,625 $47,063
==========================
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
IAI Reserve Fund, IAI Money Market Fund
The Board of Directors and Shareholders
IAI Investments Funds V, Inc.
IAI Investments Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios of IAI Reserve Fund (a portfolio within IAI Investment Funds
V, Inc.) and IAI Money Market Fund (a portfolio within IAI Investment Funds VI,
Inc.) as of January 31, 1995 and the related statements of operations for the
period from April 1, 1994 to January 31, 1995, the statements of changes in net
assets for the period from April 1, 1994 to January 31, 1995, and the year ended
March 31, 1994, and the financial highlights for the period from April 1, 1994
to January 31, 1995 (both Funds), year ended March 31, 1994 (both Funds), period
from January 5, 1993 (commencement of operations) to March 31, 1993 (IAI Money
Market Fund) and for each of the years in the three-year period ended March 31,
1993 (IAI Reserve Fund). These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Reserve Fund and IAI Money Market Fund at January 31, 1995 and the results of
their operations, the changes in their net assets, and the financial highlights
for the periods stated in the first paragraph above, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 10, 1995
24
<PAGE>
FEDERAL TAX INFORMATION
-----------------------
IAI Reserve Fund, IAI Money Market Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
IAI Reserve Fund
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Payable Date Ordinary
Income (A)
- --------------------------------------------------------------------------------
<S> <C>
April 1994 $.0350
May 1994 .0375
June 1994 .0326
July 1994 .0340
August 1994 .0384
September 1994 .0420
October 1994 .0430
November 1994 .0433
December 1994 .0778
January 1995 .0240
================================================================================
$.4076
</TABLE>
IAI Money Market Fund
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Payable Date Ordinary
Income (A)
- --------------------------------------------------------------------------------
<S> <C>
April 1994 $.0025
May 1994 .0029
June 1994 .0029
July 1994 .0029
August 1994 .0034
September 1994 .0033
October 1994 .0038
November 1994 .0037
December 1994 .0042
January 1995 .0046
================================================================================
$.0342
</TABLE>
(A) includes distribution of short-term capital gains, if any, which are
taxable as ordinary income.
25
<PAGE>
IAI MUTUAL FUND FAMILY
----------------------
To Diversify Your Portfolio, Please Consider All of the Mutual Funds in Our
Fund Family
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- ----------------------------------------------------------------------------------------------------------------------------------
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 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 & 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 Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
(formerly IAI Tax Free Fund) [Exempt from Federal and Minnesota State Income Taxes]
- ----------------------------------------------------------------------------------------------------------------------------------
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>
26
<PAGE>
(This page intentionally left blank)
<PAGE>
(This page intentionally left blank)
<PAGE>
Distributor
IAI Securities, Inc.
Investment Adviser
and Manager
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Custodian
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Legal Counsel
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
Independent Auditors
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO OF IAI]
MUTUAL FUNDS
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55140-0357
USA XXXXX 612-376-2737
800-945-3863
612-376-2700
