PRINCIPAL PROTECTION FUNDS
SEMI-ANNUAL REPORT
IAI RESERVE FUND
IAI MONEY MARKET FUND
JULY 31, 1996
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
- OUTSIDE FRONT COVER -
BLANK
- INSIDE FRONT COVER -
TABLE OF CONTENTS
IAI RESERVE FUND, IAI MONEY MARKET FUND
SEMI-ANNUAL REPORT
JULY 31, 1996
(UNAUDITED)
Chairman's Letter...............................2
Fund Managers' Reviews
IAI RESERVE FUND............................4
IAI MONEY MARKET FUND.......................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
Shareholder Update.............................26
IAI Mutual Fund Family.........................28
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
-1-
CHAIRMAN'S LETTER
IAI RESERVE FUND, IAI MONEY MARKET FUND
CALM AFTER THE STORM
[PHOTO]
NOEL P. RAHN
CHAIRMAN
Despite turbulence in the stock market this past summer, there are many reasons
to remain optimistic about the financial markets between now and the end of the
year. After a strong second quarter, the U.S. economy seems to be moderating its
pace, growing fast enough to generate corporate profits, but not so fast to
bring back inflation. Interest rates have stabilized, causing the bond market to
outperform stocks in June and July. Instead of boosting interest rates in August
as investors had feared, the Federal Reserve Board took no action, calming the
market.
Still, the first half of the summer was an eye-opener for many investors. After
reaching a high of 5780 on May 22, the Dow Jones Industrial Average fell about 7
percent by the end of July--more, if you count swings in intra-day trading. And
small cap stocks, those that typically trade on NASDAQ, fell as much as 20
percent. The reason for the turbulence was investor fears, generated by job
growth data and increases in commodity prices, that the economy was becoming
overheated. Indeed, corporate profits in the second quarter rose sharply.
According to BUSINESS WEEK, corporate profits rose 11 percent during the second
quarter of 1996, compared to the same period in 1995. In a pattern that often
confounds politicians, good news in the economy is often bad news on Wall
Street.
Just remember, though, that stock market corrections are normal. They're even
healthy, because they allow investors to buy stocks at temporarily depressed
prices. For two months, the Dow fell steadily from 5780 in May to less than 5300
in July before rallying in early August back to the 5700 level. Of course,
nobody knows when the market will hit bottom. Many Wall Street pundits told the
media that the stock market was headed lower, perhaps much lower. But they were
wrong, as is often the case.
We don't recommend that you try to time the market. Even the pros can't get it
right consistently. That's why dollar cost averaging is such a good strategy. By
contributing a fixed amount into the market each month, your money buys more
shares when the market is low and fewer shares when the market is high. This
simple yet time honored method allows you to purchase shares at a lower average
cost.
Another way to minimize the impact of market turbulence is to make sure that you
are properly diversified. The fixed income market typically offers stability to
a portfolio, and is particularly appropriate for those investors who rely on
income as opposed to price appreciation. The international equity markets also
offer a way to diversify your portfolio, since the economies in other parts of
the world are in different stages than the U.S. economy.
Over the next six months, the markets will undoubtedly be affected by the U.S.
presidential election. And, as we've seen so far in 1996, there is great
potential for volatility. But the markets also continue to demonstrate a
remarkable resiliency.
-2-
CHAIRMAN'S LETTER
IAI RESERVE FUND, IAI MONEY MARKET FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
Using perfect hindsight, the Fed probably should not have cut rates last January
from 5.50% to 5.25%. Due to bad weather and the government shutdowns, the
economy looked much worse than it actually was. It turns out that the economy
grew 2% in the first quarter, which is certainly not a recession. As a result of
the Fed's action, the economy has more momentum than would otherwise have been
the case.
We expect slower growth and no acceleration in inflation as the economy moves
into the fourth quarter. Slower growth and mild inflation will cause the Fed to
be cautious in raising rates. While this approach is likely to please the
markets, it will put the Fed behind in its fight against higher prices. Real
income is growing at 31/2% and consumer confidence is at the high end of its
four year range. So far this year, new jobs have grown by over 230,000 per
month. The unemployment rate, at 5.1%, is at its lowest level in over six years.
Even a modest slowdown will not offset the trend toward tighter labor markets
and rising final demand.
In the period immediately ahead, we expect to see firming bond and stock prices
as the markets take comfort in moderating growth and the lack of decisive Fed
action. This is already occurring in the stock market where broad averages have
recently set new highs. Although this trend will be reversed when the Fed is
forced to raise rates more aggressively in 1997, we are cautiously optimistic
until the Fed decisively responds.
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/ Noel P. Rahn
Noel P. Rahn
Chairman
-3-
FUND MANAGERS' REVIEW
IAI RESERVE FUND
IAI RESERVE FUND
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI RESERVE FUND CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI RESERVE FUND CO-MANAGER
FUND OBJECTIVES
The IAI Reserve Fund's investment objective is to provide 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
objective primarily through investment in a diversified portfolio of
investment-grade bonds and other debt securities of similar quality.
FUND POSITIONING FOR THE
PAST SIX MONTHS
The IAI Reserve Fund generally invests in short and intermediate maturity bonds,
maintaining an average maturity of 25 months or less. As a result, the Fund is
less volatile in a period of rising interest rates than fixed income funds with
longer maturities.
Portfolio strategy has focused on corporate notes, asset-backed issues and
mortgage securities to enhance the Fund's total return. Short-term commercial
paper is being used to provide liquidity, while intermediate maturities are
being used to enhance return. The average credit quality is AA and the average
maturity is about 1.8 years.
The IAI Reserve Fund was one of the few fixed income funds to show a positive
return during the six months ended July 31, 1996. The Fund produced a total
return of 1.14%. In contrast, the Fund's benchmark, the Salomon Brothers One
Year Treasury Bill Index, produced a total return of 2.14%.
The U.S. economy shifted into a higher gear during the second quarter of 1996.
The shift was unusually abrupt, coming after a winter in which a partial
government shutdown and severe weather depressed economic activity. The Federal
Reserve Board lowered short-term interest rates from 5.50% to 5.25% on January
31. In response to surprisingly strong job growth, the Federal Reserve Board
took no additional action as of July 31 to stimulate the economy.
FUND POSITIONING GOING
FORWARD
Although economic growth has exceeded market expectations in recent months,
growth should continue at a more modest pace in the third calendar quarter. We
expect the economy to expand by about 3% for 1996. The cyclical inflation threat
is rising as the expansion matures. Currently, the financial system has ample
liquidity to finance growth. In fact, broad money supply growth has been strong
enough to increase our concern. The Federal Reserve Board is waiting to see if
the economy will slow enough for them to avoid raising rates.
Inflationary expectations remain the key to Fed policy. A high level of
liquidity and high quality holdings leave the Fund well positioned in this
environment.
-4-
FUND MANAGERS' REVIEW
IAI RESERVE FUND
[IAI RESERVE FUND PLOT POINTS]
VALUE OF A $10,000 INVESTMENT+
Salomon Brothers
One Year Treasury
IAI Reserve Fund Bill Index *
---------------- -----------------
1/31/86 10,000 10,000
1/31/87 10,265 10,306
1/31/88 10,891 10,965
1/31/89 11,632 11,612
1/31/90 12,625 12,723
1/31/91 13,709 13,926
1/31/92 14,703 15,056
1/31/93 15,228 15,826
1/31/94 15,753 16,412
1/31/95 16,217 16,945
1/31/96 17,311 18,250
7/31/96 17,509 18,640
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/96
Six Months* 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IAI RESERVE FUND 1.14% 4.41% 4.35% 5.76%
- ------------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 2.14% 5.58% 5.26% 6.42%
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 7/31/96
[PIE CHART]
U.S. Government 1%
Corporate 14%
U.S. Government Agency 7%
Asset-Backed 22%
U.S. Government
Agency Mortage-Backed 9%
Commercial Paper 47%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/96
[BAR GRAPH]
YEARS
0-1 61%
1-3 23%
3-5 3%
5-10 13%
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' 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 7/31/96
U.S. Government....9%
Aaa...............25%
Aa................47%
A..................4%
Baa................6%
Non-Investment
Grade..............9%
-5-
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
IAI MONEY MARKET FUND
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI MONEY MARKET
FUND MANAGER
FUND OBJECTIVE
The Fund's investment 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
* Commercial paper issued by large
corporations
* Repurchase agreements
* CDs issued by large banks
FUND POSITIONING FOR THE
PAST SIX MONTHS
The U.S. economy shifted into a higher gear during the second quarter of 1996.
The shift was unusually abrupt, coming after a winter in which a partial
government shutdown and severe weather depressed economic activity. The Federal
Reserve Board lowered short-term interest rates from 5.50% to 5.25% on January
31.
The Federal Reserve Board took no additional action during the second quarter to
stimulate the economy. As a result, money market fund yields--which closely
track the current federal funds rate--stayed fairly constant. As of July 31,
1996, the IAI Money Market Fund's 7-day yield was 4.73%, compared to 5.06% on
January 31, 1996.
However, yields on securities beyond one year rose sharply as investors
anticipated that the Federal Reserve Board would have to tighten credit
conditions in the future to slow down the economy. As a result, money market
funds generally outperformed intermediate and long-term bonds, which suffered
price declines in a rising interest rate environment.
During the second quarter, the Fund's strategy was to concentrate investments in
maturities under one month. The advantage of this strategy is that if the Fed
does boost short-term interest rates during the second half of the year, we will
be able to quickly reinvest at higher yields. The Fund continues to focus on
issues with high credit quality and liquidity.
FUND POSITIONING GOING
FORWARD
Although growth will moderate in the second half of the year, the slowdown is
unlikely to be quick enough to appease the Fed. The inflation threat is rising
as the expansion persists. Currently, the financial system has ample liquidity
to finance growth. In fact, broad money supply growth is a concern. With this
short-term, liquid strategy, the Fund is well positioned to benefit from any Fed
rate increases.
-6-
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS(1)+
THROUGH 7/31/96
Since Inception
Six Months* 1 Year 1/05/93
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI MONEY MARKET FUND 2.42% 5.11% 4.14%
- --------------------------------------------------------------------------------------
Lipper Money Market Instrument Fund Average 2.32% 4.92% 3.99%(2)
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
(1) FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO .50% OF AVERAGE DAILY NET
ASSETS THROUGH JUNE 30, 1996.
(2) SINCE 1/1/93
SECTORS
% OF PORTFOLIO AS OF 7/31/96
[PIE CHART]
Commercial Paper 42%
U.S. Government Obligations 10%
U.S. Government Agency 48%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/96
[BAR GRAPH]
0-1 Month 100%
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-
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 0.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.6%
<S> <C> <C> <C> <C>
5.21% 08/08/96 $ 400,000 (b) $ 399,621
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $399,608) ................................................................................... $ 399,621
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES - 7.2%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 4.3%
Federal Home Loan Mortgage Corporation 5.22% 08/06/96 $ 2,000,000 $ 1,998,550
5.23 08/26/96 1,000,000 996,368
- ----------------------------------------------------------------------------------------------------------------------
2,994,918
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.9%
Tennessee Valley Authority 5.98 04/01/36 2,000,000 2,002,500
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $4,994,918).....................................................................................$ 4,997,418
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 8.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 3.2%
5.50% 11/01/98 $ 2,279,634 $ 2,190,569
- ----------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.1%
8.00 11/15/17 2,059,740 2,094,612
9.00 11/15/17 1,361,332 1,445,979
- ----------------------------------------------------------------------------------------------------------------------
3,540,591
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $5,845,841).....................................................................................$ 5,731,160
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
-8-
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 13.9%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 2.9%
Salomon 7.00% 05/15/99 $ 2,000,000 $ 1,997,960
- ----------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 7.4%
Continental Cablevision 8.50 09/15/01 2,000,000 2,085,300
Federated Department Stores 8.50 06/15/03 1,000,000 1,005,000
RJR Nabisco (MEDIUM-TERM NOTE) 6.25 01/31/97 2,000,000 1,999,780
- ----------------------------------------------------------------------------------------------------------------------
5,090,080
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES - 3.6%
El Paso Electric 7.25 02/01/99 500,000 491,600
Long Island Lighting 8.75 02/15/97 2,000,000 2,022,880
- ----------------------------------------------------------------------------------------------------------------------
2,514,480
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS
(Cost: $9,620,603)...................................................................................$ 9,602,520
- ----------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 22.2%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 11.0%
Chase Manhattan Grantor Trust 95-A A 6.00% 09/17/01 $ 1,815,981 $ 1,812,095
General Motors Acceptance Corporation Grantor
Trust 95-A A 7.15 03/15/00 1,884,639 1,902,600
MMCA Automobile Trust 93-1 A 4.00 11/16/98 955,599 946,635
National Car Rental Financing 96-1 A2 (d) 6.80 04/20/00 3,000,000 2,985,000
- -----------------------------------------------------------------------------------------------------------------------
7,646,330
- -----------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 9.4%
Chase Manhattan Credit Card Master Trust 95-2 A (c) 5.63 08/15/01 1,500,000 1,500,465
Chase Manhattan Credit Card Master Trust 96-1 A (c) 5.61 04/15/01 2,500,000 2,500,000
Chemical Master Credit Card Trust I 96-3 A 7.09 02/15/09 2,000,000 1,970,620
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 500,000 496,655
- -----------------------------------------------------------------------------------------------------------------------
6,467,740
- -----------------------------------------------------------------------------------------------------------------------
EQUIPMENT LOAN RELATED - 1.8%
Case Equipment Loan Trust 95-B A2 5.95 09/15/00 1,217,407 1,221,814
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $15,366,334)...................................................................................$15,335,884
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
-9-
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 47.2%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 16.4%
General Electric Capital 5.27% 08/22/96 $ 1,600,000 $ 1,595,081
Philip Morris Capital 5.30 08/21/96 3,400,000 3,389,989
University of Chicago 5.35 08/09/96 3,000,000 2,996,433
Weyerhauser Mortgage 5.30 08/27/96 3,400,000 3,386,986
- ------------------------------------------------------------------------------------------------------------------
11,368,489
- ------------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 5.5%
Heinz (H.J.) 5.28 08/20/96 2,800,000 2,792,197
Hershey Foods 5.32 08/12/96 1,000,000 998,375
- ------------------------------------------------------------------------------------------------------------------
3,790,572
- ------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 8.0%
Dow Chemical 5.65 08/01/96 2,100,000 2,100,000
Warner-Lambert 5.28 08/19/96 3,400,000 3,391,024
- ------------------------------------------------------------------------------------------------------------------
5,491,024
- ------------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES - 6.6%
PHH 5.32 08/16/96 3,100,000 3,093,128
PHH 5.29 09/03/96 1,500,000 1,492,726
- ------------------------------------------------------------------------------------------------------------------
4,585,854
- ------------------------------------------------------------------------------------------------------------------
PUBLISHING - 2.9%
New York Times 5.33 08/13/96 2,000,000 1,996,447
- ------------------------------------------------------------------------------------------------------------------
RETAIL - 7.8%
Hitachi 5.37 08/15/96 2,000,000 1,995,823
Walt Disney 5.66 08/01/96 3,400,000 3,400,000
- ------------------------------------------------------------------------------------------------------------------
5,395,823
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $32,628,209)................................................................................$ 32,628,209
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $68,855,513) (E)............................................................................$ 68,694,812
- ------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 0.6%
................................................................................................$ 451,412
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
................................................................................................$ 69,146,224
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
-10-
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 9.7%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 9.7%
7.25% 11/30/96 $ 2,000,000 $ 2,014,163
7.50 01/31/97 1,000,000 1,011,720
- ------------------------------------------------------------------------------------------------------------------
3,025,883
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(Cost: $3,025,883)..................................................................................$ 3,025,883
- ------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES - 48.6%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 48.6%
Federal Agricultural Mortgage Corporation 5.35% 08/15/96 $ 2,300,000 $ 2,295,215
Federal Farm Credit Bank 5.23 08/14/96 2,000,000 1,996,223
Federal Home Loan Bank 5.50 08/01/96 4,900,000 4,900,000
Federal Home Loan Mortgage Corporation 5.23 08/06/96 3,000,000 2,997,821
Federal National Mortgage Association 5.26 08/21/96 3,000,000 2,991,233
- ------------------------------------------------------------------------------------------------------------------
15,180,492
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $15,180,492)..................................................................................$ 15,180,492
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
-11-
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 41.8%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 9.9%
General Electric Capital 5.33% 08/26/96 $ 1,500,000 $ 1,494,448
Weyerhauser Mortgage 5.32 08/23/96 1,600,000 1,594,798
- ----------------------------------------------------------------------------------------------------------------
3,089,246
- ----------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 13.7%
Cargill 5.33 08/13/96 1,400,000 1,397,513
Du Pont 5.32 08/08/96 1,400,000 1,398,552
Philip Morris 5.35 08/01/96 1,500,000 1,500,000
- ----------------------------------------------------------------------------------------------------------------
4,296,065
- ----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 5.1%
Motorola 5.27 08/20/96 1,600,000 1,595,550
- ----------------------------------------------------------------------------------------------------------------
RETAIL - 3.8%
Procter & Gamble 5.30 08/29/96 1,200,000 1,195,053
- ----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 4.5%
AT&T 5.35 08/02/96 1,400,000 1,399,792
- ----------------------------------------------------------------------------------------------------------------
UTILITIES - 4.8%
Northern States Power Minnesota 5.35 08/05/96 1,500,000 1,499,108
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $13,074,814)..............................................................................$ 13,074,814
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $31,281,189) (E)..........................................................................$ 31,281,189
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - (0.1%)
..............................................................................................$ (22,907)
- ----------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
..............................................................................................$ 31,258,282
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
-12-
NOTES TO FUND PORTFOLIOS
IAI RESERVE FUND, IAI MONEY MARKET FUND
JULY 31, 1996
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 6 to the financial statements).
(c)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on July 31, 1996.
(d)
Represents security sold within terms of a private placement memorandum exempt
from registration under section 144A of the Securities Act of 1933. This issue
may only be sold to other qualified institutional buyers, and is considered
liquid under guidelines established by the Board of Directors.
(e)
At July 31, 1996, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
IAI RESERVE FUND IAI MONEY MARKET FUND
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $ 68,855,513 $ 31,281,189
- -------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 51,754 $ -
Gross unrealized depreciation (212,455) -
- -------------------------------------------------------------------------------------------
Net unrealized appreciation $ (160,701) $ -
- -------------------------------------------------------------------------------------------
</TABLE>
-13-
STATEMENTS OF ASSETS AND LIABILITIES
IAI RESERVE FUND, IAI MONEY MARKET FUND
JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
IAI IAI MONEY
RESERVE FUND MARKET FUND
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $68,855,513 and $31,281,189) (see Fund Portfolios) $ 68,694,812 $ 31,281,189
Cash in bank on demand deposit 29,298 26,410
Accrued interest receivable 399,694 63,047
Other 27,915 278
------------ ------------
TOTAL ASSETS 69,151,719 31,370,924
------------ ------------
LIABILITIES
Dividends payable ($.0040 per share) -- 109,008
Other accrued expenses 5,495 3,634
------------ ------------
TOTAL LIABILITIES 5,495 112,642
------------ ------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 69,146,224 $ 31,258,282
============ ============
REPRESENTED BY:
Capital stock $ 70,076 $ 312,584
Additional paid-in capital 71,052,257 30,945,771
Undistributed net investment income 78,229 --
Accumulated net realized gains (losses) on investments (1,876,649) (73)
Unrealized depreciation on investment securities (177,689) --
------------ ------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 69,146,224 $ 31,258,282
============ ============
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 7,007,592 31,258,355
------------ ------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.87 $ 1.00
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
-14-
STATEMENTS OF OPERATIONS
IAI RESERVE FUND, IAI MONEY MARKET FUND
SIX MONTHS ENDED JULY 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
IAI IAI MONEY
RESERVE FUND MARKET FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME
INTEREST $ 1,917,897 $ 853,858
---------- -----------
TOTAL INCOME 1,917,897 853,858
---------- -----------
EXPENSES
Management fees (Note 3) 187,712 62,313
Investment advisory fees 50,069 16,699
Distribution fees 10,014 -
Dividend-disbursing, administrative, and accounting fees 20,028 11,133
Custodian fees - 300
Amortization of organization costs - 1,733
Compensation of Directors 2,092 1,357
Audit fees 1,740 1,200
Printing and shareholder reporting 6,380 6,000
Registration fees 2,900 3,000
Other expenses 1,998 1,008
---------- -----------
TOTAL EXPENSES 282,933 104,743
Less fees reimbursed by Advisers or Distributor (10,102) (22,367)
---------- -----------
NET EXPENSES 272,831 82,376
---------- -----------
NET INVESTMENT INCOME 1,645,066 771,482
---------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (395,362) $ (115)
Futures contracts (94,072) --
(489,434) (115)
Net change in unrealized appreciation or depreciation on:
Investment securities $ (438,268) $ --
Futures contracts (514) --
---------- --------
(438,782) -
---------- -----------
NET GAIN (LOSS) ON INVESTMENTS (928,216) (115)
---------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 716,850 $ 771,367
========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
-15-
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI RESERVE FUND, IAI MONEY MARKET FUND
IAI RESERVE FUND
Six months ended Year ended
July 31, 1996 January 31, 1996
- --------------------------------------------------------------------------------------------------------------
OPERATIONS (UNAUDITED)
<S> <C> <C>
Net investment income $ 1,645,066 $ 4,135,069
Net realized gains (losses) (489,434) (155,360)
Net change in unrealized appreciation or depreciation (438,782) 982,137
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 716,850 4,961,846
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,586,826) (4,076,189)
------------- -------------
TOTAL DISTRIBUTIONS (1,586,826) (4,076,189)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 100,660,139 188,582,912
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,550,773 4,017,210
Cost of shares redeemed (87,169,129) (215,784,491)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 15,041,783 (23,184,369)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 14,171,807 (22,298,712)
NET ASSETS AT BEGINNING OF PERIOD 54,974,417 77,273,129
------------- -------------
NET ASSETS AT END OF PERIOD $ 69,146,224 $ 54,974,417
============= =============
(including undistributed net investment income
of $78,229 and $19,989 for Reserve Fund)
</TABLE>
- WIDE TABLE CONTINUED FROM ABOVE -
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND
Six months ended Year ended
July 31, 1996 January 31, 1996
---------------------------------
OPERATIONS (UNAUDITED)
<S> <C> <C>
Net investment income $ 771,482 $ 1,715,387
Net realized gains (losses) (115) 1,952
Net change in unrealized appreciation or depreciation -- --
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 771,367 1,717,339
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (771,482) (1,715,387)
------------- -------------
TOTAL DISTRIBUTIONS (771,482) (1,715,387)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 251,982,088 415,404,027
Net asset value of shares issued to shareholders in
reinvestment of distributions 736,764 1,629,448
Cost of shares redeemed (248,855,488) (422,815,177)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 3,863,364 (5,781,702)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,863,249 (5,779,750)
NET ASSETS AT BEGINNING OF PERIOD 27,395,033 33,174,783
------------- -------------
NET ASSETS AT END OF PERIOD $ 31,258,282 $ 27,395,033
============= =============
(including undistributed net investment income
of $78,229 and $19,989 for Reserve Fund)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
-16- AND -17-
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:
<TABLE>
<CAPTION>
Six months Year ended Period from Years ended March 31,
ended January 31, April 1, 1994 to -----------------------
July 31, 1996 1996 January 31, 1995+ 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $10.00 $ 9.89 $ 9.98 $10.10 $10.16 $10.17
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .25 .56 .40 .39 .36 .57
Net realized and unrealized gains (losses) (.14) .09 (.08) (.13) .02 .08
- -----------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .11 .65 .32 .26 .38 .65
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.24) (.54) (.41) (.37) (.36) (.58)
Net realized gains - - - (.01) (.08) (.08)
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.24) (.54) (.41) (.38) (.44) (.66)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.87 $10.00 $ 9.89 $ 9.98 $10.10 $10.16
=================================================================================================================
Total investment return* 1.14% 6.76% 3.21% 2.60% 3.81% 6.54%
Net assets at end of period (000's omitted) $69,146 $54,974 $77,273 $98,813 $82,085 $108,373
RATIOS
Expenses to average net assets 0.85%** 0.85% 0.85%** 0.85% 0.85% 0.85%
Net investment income to average net assets 5.12%** 5.48% 4.77%** 3.95% 3.49% 5.63%
Portfolio turnover rate
(excluding short-term securities) 114.4% 261.1% 170.0% 235.0% 538.7% 218.1%
</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 JANUARY 31
-18-
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:
<TABLE>
<CAPTION>
Six months Year ended Period from Year ended
ended January 31, April 1, 1994 to March 31, January 5, 1993***
July 31, 1996 1996 January 31, 1995+ 1994 to March 31, 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .02 .05 .03 .03 .01
- -----------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .02 .05 .03 .03 .01
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.02) (.05) (.03) (.03) (.01)
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.02) (.05) (.03) (.03) (.01)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=================================================================================================================
Total investment return* 2.42% 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period (000's omitted) $31,258 $27,395 $33,175 $29,788 $25,877
RATIOS
Expenses to average daily net assets**** 0.51%** 0.50% 0.50%** 0.45% 0.29%**
Net investment income to average
daily net assets**** 4.82%** 5.34% 4.12%** 2.73% 2.96%**
</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
*** COMMENCEMENT OF OPERATIONS
**** THE FUND'S ADVISER VOLUNTARILY WAIVED $22,367, $76,386, $81,895, $147,924
AND $18,494 IN EXPENSES FOR THE SIX MONTHS ENDED JULY 31, 1996, THE YEAR
ENDED JANUARY 31, 1996, THE PERIOD ENDED JANUARY 31, 1995, THE YEAR ENDED
MARCH 31, 1994, AND THE PERIOD 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 .65%, .74%, .88%, .88% AND .69%,
RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET
ASSETS WOULD HAVE BEEN 4.68%, 5.10%, 3.74%, 2.30% AND 2.56%, RESPECTIVELY.
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31
-19-
NOTES TO FINANCIAL STATEMENTS
IAI RESERVE FUND, IAI MONEY MARKET FUND
JULY 31, 1996
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI 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). The Funds' objectives are to provide
shareholders with a high level of current income consistent with the
preservation of capital and liquidity.
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
maturities of 60 days or less from the date of acquisition are valued at
amortized cost. Short-term securities with maturities greater than 60 days from
the date of acquisition 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.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Reserve
Fund 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 Fund maintains in a segregated account with its
custodian, assets with a market value equal to the amount of its purchase
commitments.
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, the Fund is required to
deposit either cash or securities in a segregated account, which represents the
initial margin, which is equal to a certain percentage of the contract value.
Subsequent changes in the value of the contract, or variation margin, are
recorded daily as unrealized gains and 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.
-20-
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. 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 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 $1,404,000 at January 31, 1996, which, if not offset by subsequent
capital gains, will expire in 2002 and 2003. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryover is offset or expires.
-21-
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
Through March 31, 1996, organization costs for Money Market Fund were being
amortized over 60 months on a straight-line basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[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 $15,000,000 and $9,000,000
lines of credit, 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 line
of credit. During the six months ended July 31, 1996, the Funds paid $672 and
$442, respectively, in interest on the line of credit at an average annual rate
of 8.25%. There were no borrowings outstanding at July 31, 1996.
-22-
[3] FEES AND EXPENSES
Under the terms of an investment advisory agreement, the Funds paid Investment
Advisers, Inc. (Advisers) a monthly management fee computed at an annual rate of
.50% of the average month-end net assets for Reserve Fund and .30% of average
daily net assets for Money Market Fund.
Each Fund also paid an annual fee to Advisers for acting as the Fund's
dividend-disbursing, administrative, and accounting services agent. The fee was
computed monthly on the average month-end net assets for Reserve Fund and
average daily net assets for Money Market Fund at an annual rate of .20%.
Reserve Fund had adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Fund's distributor. Under the Plan, Reserve Fund paid
Distributor a monthly fee to cover expenses incurred in the distribution and
promotion of Reserve Fund's shares. The fee was 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 was responsible for
paying its operating expenses, including costs incurred in the purchase and sale
of assets. Advisers and Distributor had contractually 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, Advisers had voluntarily agreed to waive fees and expenses for
Money Market Fund in excess of .50% of average daily net assets through June 30,
1996.
New Management Agreements for the Funds were approved by majority of each Funds'
shareholders at a special meeting held March 21, 1996, and replaced the prior
Advisory, Administrative, and Distribution Agreements with Advisers and
Distributors. These new agreements, effective April 1, 1996, require Advisers to
pay for all expenses of each Fund, except certain costs (primarily those
incurred in the purchase and sale of assets, taxes and interest and
extraordinary expenses) in return for each Fund paying an all-inclusive
management fee to Adviser. For Reserve Fund the fee is equal to an annual rate
of .85% of average daily net assets. For Money Market Fund the fee is equal to
an annual rate of .60% of daily net assets, with the fee declining to .50% as
the Fund's assets increase. This fee is paid monthly.
Pursuant to the new agreements Reserve and Money Market Funds paid Advisers to
assume certain unpaid liabilities, and received amounts from Advisers in
exchange for transferring prepaid expenses to Advisers. As a result of these
transactions, Reserve and Money Market Funds received net amounts of $4,761 and
$18,579, respectively.
-23-
[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 indicated were as
follows:
<TABLE>
<CAPTION>
IAI RESERVE FUND IAI MONEY MARKET FUND
Six months Year ended Six months Year ended
ended January 31, ended January 31,
July 31,1996 1996 July 31, 1996 1996
<S> <C> <C> <C> <C>
SOLD 10,133,774 18,896,381 251,982,088 415,404,027
ISSUED FOR REINVESTED DISTRIBUTIONS 156,875 403,515 736,764 1,629,448
REDEEMED (8,777,839) (21,617,432) (248,855,488) (422,815,177)
---------- ----------- ------------ ------------
INCREASE (DECREASE) IN SHARES OUTSTANDING 1,512,810 (2,317,536) 3,863,364 (5,781,702)
========== =========== ============ ============
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the year ended January 31, 1996, purchases of securities and sales proceeds
for the Funds were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
IAI RESERVE FUND (EXCLUDES SHORT-TERM SECURITIES) $ 42,410,489 $ 39,260,988
IAI MONEY MARKET FUND $ 920,189,525 $ 917,014,549
</TABLE>
-24-
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of July 31, 1996, for
the IAI Reserve Fund. The market value of securities deposited to cover initial
margin requirements for the open positions at July 31, 1996, was $49,953. The
unrealized loss of $16,988 for the following contracts is included in unrealized
appreciation on investment securities.
<TABLE>
<CAPTION>
FUTURES
Number of Expiration Market Unrealized
Type Contracts Month Position Value Loss
<S> <C> <C> <C> <C> <C>
5 Year U.S. Treasury Note 15 September 1996 Short $1,581,328 ($16,988)
</TABLE>
-25-
SHAREHOLDER UPDATE
IAI RESERVE FUND, IAI MONEY MARKET FUND
SPECIAL MEETING RESULTS
A special meeting of the Funds' shareholders was held on March 21, 1996. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below.
1. The Funds' shareholders re-elected the following directors:
<TABLE>
<CAPTION>
Shares Voted Shares Withheld
IAI Reserve Fund "For" Authority
<S> <C> <C>
Madeline Betsch 4,557,454 44,884
W. William Hodgson 4,555,360 46,978
Richard E. Struthers 4,548,228 54,110
J. Peter Thompson 4,557,369 44,969
George R. Long 4,552,298 50,040
Noel P. Rahn 4,557,752 44,586
Charles H. Withers 4,557,752 44,586
</TABLE>
<TABLE>
<CAPTION>
Shares Voted Shares Withheld
IAI Money Market Fund "For" Authority
<S> <C> <C>
Madeline Betsch 21,941,855 989,079
W. William Hodgson 21,936,484 994,450
Richard E. Struthers 21,941,855 989,079
J. Peter Thompson 21,923,736 1,007,198
George R. Long 21,927,672 1,003,262
Noel P. Rahn 21,944,773 986,161
Charles H. Withers 21,956,217 974,717
</TABLE>
-26-
2. The Funds' shareholders ratified the selection of KPMG Peat Marwick LLP as
the independent public accountants for each of the funds for each of their
fiscal years. The following votes were cast regarding the matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
<S> <C> <C> <C>
IAI Reserve Fund 4,555,663 3,796 42,878
IAI Money Market Fund 21,770,271 183,428 977,234
</TABLE>
3. The Funds' shareholders ratified each Funds' Management Agreements. The
following votes were cast regarding the matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Reserve Fund 4,532,361 16,041 53,935
IAI Money Market Fund 21,491,489 237,818 1,201,626
</TABLE>
4. The Funds' shareholders ratified the new Management Agreement between
Investment Advisers, Inc. and each of the the funds. The following votes were
cast regarding the matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
<S> <C> <C> <C>
IAI Reserve Fund 4,538,846 7,437 56,053
IAI Money Market Fund 21,383,224 205,383 1,342,326
</TABLE>
-27-
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
<S> <C> <C> <C>
IAI Developing Capital Appreciation -- Equity securities of companies in developing countries
Countries Fund
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
IAI Emerging Growth Fund Capital Appreciation -- Common stocks of small- to medium-sized emerging
(closed to new investors as of 2/1/96) growth companies
IAI Capital Appreciation Fund Capital Appreciation -- Common stocks of medium-sized growth companies
IAI Midcap Growth Fund Capital Appreciation -- Common stocks of medium-sized growth companies
IAI Regional Fund Capital Appreciation -- Common stocks of Upper Midwest companies
IAI Growth Fund Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
IAI Value Fund Capital Appreciation -- Common stocks which are considered to be undervalued
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term appreciation,
and common stocks that are expected to produce income
IAI Balanced Fund Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + INCOME] short-term instruments
IAI Bond Fund Income Capital Preservation Investment-grade bonds
IAI Government Fund Income Capital Preservation U.S. Government securities
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average maturity of 25 months,
investing primarily in investment-grade bonds
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted maturity is less
than 90 days, investing in high quality, money market
securities
</TABLE>
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://networth.galt.com/iai
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
- INSIDE BACK COVER -
[LOGO] IAI
MUTUTAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357
USA FAX 612.376.2737
800.945.3863
612.376.2700
- BACK COVER -
