PRINCIPAL PROTECTION FUNDS
SEMI-ANNUAL REPORT
IAI MONEY MARKET FUND,
IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
SEMI-ANNUAL REPORT
JULY 31, 1997
(UNAUDITED)
Chairman's letter.............................. 2
Fund Manager's Reviews
IAI MONEY MARKET FUND...................... 4
IAI RESERVE FUND........................... 6
Fund Portfolios
IAI MONEY MARKET FUND...................... 8
IAI RESERVE FUND.......................... 10
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 MONEY MARKET FUND..................... 18
IAI RESERVE FUND.......................... 19
Notes to Financial Statements................. 20
IAI Mutual Fund Family........................ 25
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
[GLOBE GRAPHIC]
CHAIRMAN'S LETTER
IAI MONEY MARKET FUND, IAI RESERVE FUND
[PHOTO]
NOEL P. RAHN
CHAIRMAN
AN ELEVEN FOLD RISE IN 15 YEARS
On August 12, 1997, the U.S. stock market celebrated the fifteenth anniversary
of the great bull market. Indeed, it's hard to believe that on August 12, 1982,
the Dow Jones Industrial Average closed the day at just 777. In fifteen years,
the U.S. stock market has risen from $1 trillion to $10 trillion in valuation,
generating a total annual return of about 20%, the best 15-year stretch in
history.
The American economic model, emphasizing capitalism, free trade, productivity
and high technology, is now the envy of the world. Unemployment is at 4.8%,
inflation is 2%, corporate profits continue to expand at a steady, though
slowing rate, and there's nothing on the horizon to cause concern.
To be sure, the stock market is still a volatile place to be, with the month of
August 1997 erasing the Dow gains of July 1997. Meanwhile, investor interest has
recently shifted to some markets that have underperformed in recent years--small
capitalization domestic stocks and international markets. One of the best
performing markets in the world over the past twelve months was Russia, a
country that is still making a wrenching transition from the old Soviet Union's
planned economy. Another strong market for much of the year was in Hong Kong,
which was transferred to Chinese control after years of British rule. Investing
in Russia, Hong Kong and other emerging markets is not for the faint of heart,
however, and that's why it is especially wise to let professional investment
managers evaluate the risks and returns there and in other volatile countries.
Meanwhile, the U.S. bond market has posted better returns in recent months, as
the news on inflation remains benign and interest rates trend downward. The
Federal Reserve Board has stayed on the sidelines, raising interest rates just
once last March. But you can be sure that the Fed will be ready to make a move
if inflation fears return--and that's always a possibility. After all, the
economy is at full employment. As the economy continues to grow, workers will
have more leverage in negotiating their salaries and wages.
If you're an investor approaching retirement, then the income offered by bonds
is particularly attractive in these days of low inflation. Even with a
relatively low 6.5% yield offered by U.S. Treasury securities, the real returns
offered by bonds are historically high compared to inflation. In addition, bond
prices are typically less volatile than stocks, and that's another reason to
invest in bonds if your investment time horizon is relatively short.
As for stocks, 1997 is turning out to be a very good year, notwithstanding two
significant pullbacks in March and August. Most analysts did not expect the
market to do this well after posting such solid returns in 1995 and 1996. But
the U.S. stock market continues to surprise us.
The Dow Jones Industrial Average would have to go to nearly 100,000 by the year
2012 to match the performance of the past fifteen years. But then again, an
8,000 Dow was unthinkable in 1982.
<PAGE>
[GLOBE GRAPHIC]
CHAIRMAN'S LETTER
IAI MONEY MARKET FUND, IAI RESERVE FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
The risk in the second half of the year is biased toward higher growth and an
upturn in inflation. First half economic results were erratic, with a strong
quarter followed by a weak quarter. Neither reflects a true picture of the
underlying expansion. Instead the pattern reflects statistically choppy
spending. Consumer spending in the first half was influenced by seasonality
(warmer winter, cooler spring), early tax refunds, and a growing trend toward
employee bonuses/stock options (paid in lump sums in the first months of the
year) instead of salary increases (paid in smaller monthly increments throughout
the year). These conditions will not be repeated in the second half of the year.
A third quarter rebound to about 3% real growth should follow the anemic second
quarter results.
Our concern is that the apparent pause in the second quarter has done little to
relieve rising economic pressures. Labor markets are operating at full capacity.
In fact, we suspect businesses are beginning to miss opportunities because they
are unable to find experienced help. Capacity utilization rates also reflect a
lack of excess capacity. The U.S. has been able to use excess capacity from
overseas to meet demand. However, growth now appears to be on the rise in other
G7 countries. The results of recent elections in the U.K. and France have a
clear pro-growth bias. Fiscal austerity and low inflation have less appeal to
voters when unemployment rates are persistently high. A coordinated global
expansion will help lift our exports but will remove some of the price
competition that has helped restrain domestic inflation.
Monetary liquidity is ample to finance both economic growth and modest price
increases. Domestically, broad money growth is expanding at a rate of about 7%.
Globally, U.S. dollar-based credit has been growing at a double-digit rate for
the last year. However, the Fed is likely to tolerate broad money growth and
tight economic capacity until inflation begins to accelerate.
Please read the Fund Managers' Reviews which follow this letter for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/S/ Noel P. Rahn
Noel P. Rahn
Chairman
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
[PHOTO]
TIMOTHY A. PALMER,
CFA
IAI MONEY MARKET
FUND MANAGER
IAI MONEY MARKET FUND
WHAT IS THE FUND'S 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
HOW HAS THE FUND PERFORMED?
The Fund earned returns of 1.25% and 2.42% for the second quarter and six months
ended July 31, 1997, respectively. Both periods slighly exceeded the Lipper
Money Market Fund Average which earned returns of 1.22% for the second quarter
and 2.38% for the six month period.
Issue selection enabled the Fund to exceed the average Fund.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
There were no major changes in
strategy during the quarter.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Following evidence of an economic slowdown, the Federal Reserve chose not to
raise the Fed Funds rate in May. This kept short-term rates quite stable during
the quarter.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Recent economic reports showed mixed economic strength during the second
quarter. Inflation reports have remained very constructive. However, we expect
growth to accelerate in the second half resulting in cyclical pressures that
will push the inflation rate 0.5% to 1% higher. Market expectations do not
reflect this scenario. The Fund is structured to participate in the current
rally but with an eye toward preserving value when signs of capacity constraints
or accelerating inflation become visible.
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
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.
AVERAGE ANNUAL RETURNS 1+
THROUGH 7/31/97
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Six Since Inception
Months* 1 Year 1/05/93
======================================================================================
IAI MONEY MARKET FUND 2.42% 4.89% 4.31%
- --------------------------------------------------------------------------------------
Lipper Money Market Instrument Fund Average 2.38% 4.80% 4.16% 2
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
1 FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO .50% OF AVERAGE DAILY NET ASSETS
THROUGH JUNE 30, 1996.
2 SINCE 1/1/93
* NOT ANNUALIZED
[PIE CHART]
SECTORS
% OF PORTFOLIO AS OF 7/31/97
U.S. Government U.S. Government
Commercial Paper Agency Obligations
---------------- --------------- ---------------
48% 41% 11%
[BAR GRAPH]
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/97
MONTHS
---------------
0-1 2-12
--- ----
87% 13%
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGER'S REVIEW
IAI RESERVE FUND
[PHOTO]
TIMOTHY A. PALMER,
CFA
IAI RESERVE FUND
MANAGER
IAI RESERVE FUND
WHAT IS THE FUND'S OBJECTIVE?
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.
HOW HAS THE FUND PERFORMED?
The Reserve Fund earned a return of 1.60% during the second
quarter and 2.32% for the past six months ended July 31, 1997, while the Salomon
Brothers One Year Treasury Bill Index earned returns of 1.95% and 3.22%,
respectively.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
There were no major changes in strategy for the Fund.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Federal Reserve's decision to "pass" on raising the Fed Funds rate in May
and July allowed the longer end of the maturity curve to rally.
The Fund was conservatively postured following the March interest rate hike by
the Federal Reserve. Following evidence during May of a slowing economy, the
Fund was extended slightly and participated in the late quarter rally.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Recent economic reports showed mixed economic strength during the second
quarter. Inflation reports have remained very constructive. However, we expect
growth to accelerate in the second half resulting in cyclical pressures that
will push the inflation rate 0.5% to 1% higher. Market expectations do not
reflect this scenario. The Fund is structured to participate in the current
rally but with an eye toward preserving value when signs of capacity constraints
or accelerating inflation become visible.
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGER'S REVIEW
IAI RESERVE FUND
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 7/31/97
U.S. Government................................6%
Aaa...........................................82%
Aa.............................................0%
A..............................................5%
Baa............................................6%
Non-Investment
Grade..........................................1%
VALUE OF $10,000 INVESTMENT+
Salomon Brothers
One Year Treasury
Iai Reserve Fund Bill Index
----------------------------------------------------------
8/1/87 $10,000 $10,000
1/31/88 $10,323 $10,374
1/31/89 $11,026 $10,986
1/31/90 $11,967 $12,036
1/31/91 $12,994 $13,174
1/31/92 $13,936 $14,241
1/31/93 $14,434 $14,970
1/31/94 $14,931 $15,524
1/31/95 $15,371 $16,028
1/31/96 $16,408 $17,262
1/31/97 $17,091 $18,214
7/31/97 $17,488 $18,801
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/97
Six Months* 1 Year 5 Years 10 Years
===============================================================================
IAI RESERVE FUND 2.32% 5.38% 4.22% 5.75%
- -------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 3.22% 6.63% 5.12% 6.52%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
[PIE CHART]
SECTORS
% OF PORTFOLIO AS OF 7/31/97
<TABLE>
<CAPTION>
U.S. Government
Agency U.S. Government U.S. Government Commercial
Mortgage-Backed Agency Asset-Backed Corporate Obligations Paper
- --------------- --------------- ------------ --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
3% 12% 26% 13% 3% 43%
</TABLE>
[BAR GRAPH]
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/97
YEARS
-------------------------------------
0-1 1-3 3-5 5-10
--- --- --- ----
53% 23% 18% 6%
<PAGE>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 11.4%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 11.4%
6.00% 11/30/97 $ 1,000,000 $ 1,001,494
6.00 12/31/97 1,000,000 1,002,000
5.00 01/31/98 1,000,000 996,545
------------
3,000,039
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $3,000,039)................................................................................... $ 3,000,039
=================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 41.0%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION MEDIUM TERM NOTE - 1.9%
5.42% 12/16/97 $ 500,000 $ 499,799
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 39.1%
Federal Farm Credit 5.40 08/07/97 1,300,000 1,298,830
Federal Home Loan Bank 5.37 08/08/97 1,400,000 1,398,538
Federal Home Loan Mortgage Corporation 5.75 08/01/97 2,400,000 2,400,000
Federal Home Loan Mortgage Corporation 5.37 08/22/97 1,400,000 1,395,615
Federal Home Loan Mortgage Corporation 5.42 08/28/97 3,800,000 3,784,553
10,277,536
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $10,777,335).................................................................................. $10,777,335
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 47.8%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DRUGS - 9.1%
Pfizer (c) 5.44% 08/14/97 $ 1,000,000 $ 998,037
Warner-Lambert (c) 5.46 08/18/97 1,400,000 1,396,390
-----------
2,394,427
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL - 14.4%
Bell Atlantic Financial Services 5.46 08/05/97 1,400,000 1,399,150
General Electric Credit 5.47 08/15/97 1,000,000 997,873
Motorola 5.46 08/20/97 1,400,000 1,395,966
-----------
3,792,989
- -----------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 9.5%
Cargill 5.47 08/11/97 1,300,000 1,298,025
DuPont (E.I.) de Nemours (c) 5.47 08/20/97 1,200,000 1,196,535
-----------
2,494,560
- -----------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES - 4.5%
Weyerhauser Mortgage 5.48 08/26/97 1,200,000 1,195,433
- -----------------------------------------------------------------------------------------------------------------
RETAIL - 5.0%
Procter & Gamble 5.45 08/01/97 1,300,000 1,300,000
- -----------------------------------------------------------------------------------------------------------------
UTILITIES - 5.3%
Emerson Electric 5.45 08/18/97 1,400,000 1,396,397
=================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $12,573,806)............................................................................... $12,573,806
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $26,351,180) (E)........................................................................... $26,351,180
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.2%)
............................................................................................... $ (60,262)
=================================================================================================================
TOTAL NET ASSETS
............................................................................................... $26,290,918
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 3.0%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.7%
5.26% 09/18/97 $ 400,000(b) $ 397,148
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTE - 2.3%
6.38 05/15/00 1,300,000 1,319,292
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $1,711,090)................................................................................... $ 1,716,440
=================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 12.9%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 12.9%
Federal Home Loan Mortgage Corporation (discount note) 5.75% 08/01/97 $1,100,000 $ 1,100,000
5.37 08/21/97 2,800,000 2,791,647
5.40 08/26/97 1,500,000 1,494,375
5.42 08/28/97 2,100,000 2,091,463
-----------
7,477,485
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $7,477,485)................................................................................... $ 7,477,485
=================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 3.5%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 3.5%
7.50% 09/01/27(d) $1,980,000 $ 2,015,264
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $2,001,656)................................................................................... $ 2,015,264
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 12.9%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 8.4%
Railcar Leasing (c) 6.75% 07/15/06 $ 2,819,673 $ 2,870,991
Salomon 6.50 03/01/00 2,000,000 2,010,180
-----------
4,881,171
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 1.9%
Tele-Communications 9.25 04/15/02 1,000,000 1,095,870
- -----------------------------------------------------------------------------------------------------------------
UTILITIES - 0.9%
El Paso Electric Series A 7.25 02/01/99 500,000 503,200
- -----------------------------------------------------------------------------------------------------------------
YANKEE - 1.7%
Banco Latinoamericano Series CD 6.20 03/12/98 1,000,000 1,000,590
=================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $7,376,920)................................................................................... $ 7,480,831
=================================================================================================================
ASSET-BACKED SECURITIES - 26.4%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 15.1%
Ford Credit Auto Lease Trust 96-1 A2 5.80% 05/15/99 $ 1,000,000 $ 1,001,380
MMCA Automobile Trust 93-1 A 4.00 11/16/98 241,533 241,255
National Car Rental Financing 96-1 A2 (c) 6.80 04/20/00 3,000,000 3,022,500
Navistar Financial Corporation Owner Trust 96-B A3 6.33 04/21/03 2,100,000 2,115,246
World Omni Automobile Lease Securitization Trust 97-A A3 6.85 06/25/03 2,380,000 2,419,413
-----------
8,799,794
- -----------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 6.1%
AESOP Funding II 97-1 A2 6.40 10/20/03(d) 3,000,000 3,016,875
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 500,000 502,555
-----------
3,519,430
- -----------------------------------------------------------------------------------------------------------------
HOME EQUITY - 5.2%
Contimortgage Home Equity Loan Trust 97-3 A5 7.01 08/15/13 3,000,000 3,052,500
=================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $15,215,484).................................................................................. $15,371,724
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 44.3%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 19.8%
CSW Credit 5.55% 08/04/97 $ 1,100,000 $ 1,099,491
Ford Motor Credit 5.49 08/11/97 3,000,000 2,995,425
General Electric Credit 5.47 08/15/97 1,400,000 1,397,022
Motorola Credit 5.46 08/20/97 3,000,000 2,991,355
University of Chicago 5.49 08/14/97 3,000,000 2,994,053
-----------
11,477,346
- -----------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 3.4%
Cargill 5.47 08/08/97 2,000,000 1,997,873
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 9.1%
Becton Dickinson 5.48 08/05/97 2,420,000 2,418,526
Montsanto 5.50 08/06/97 2,900,000 2,897,785
-----------
5,316,311
- -----------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 5.1%
GTE Funding 5.49 08/26/97 3,000,000 2,988,562
- -----------------------------------------------------------------------------------------------------------------
UTILITIES - 6.9%
Idaho Power 5.48 08/18/97 2,200,000 2,194,307
Potomac Electric Power 5.49 08/19/97 1,800,000 1,795,059
-----------
3,989,366
=================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $25,769,458) .............................................................................. $25,769,458
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $59,552,093) (E) .......................................................................... $59,831,202
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (3.0%)
............................................................................................... $(1,754,732)
=================================================================================================================
TOTAL NET ASSETS
............................................................................................... $58,076,470
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FUND PORTFOLIOS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(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)
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 be only sold to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
Purchased on a when-issued basis. At July 31, 1997 the total cost of securities
purchased on a when-issued basis in the IAI Reserve Fund portfolio was
$4,989,431.
(e)
At July 31, 1997, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
IAI MONEY MARKET IAI RESERVE
FUND FUND
- -------------------------------------------------------------------------------
Cost for federal tax purposes $ 26,351,180 $ 59,552,093
================================================
Gross unrealized appreciation $ -- $ 279,238
Gross unrealized depreciation -- (129)
------------------------------------------------
Net unrealized appreciation $ -- $ 279,109
================================================
<PAGE>
[GLOBE GRAPHIC]
STATEMENTS OF ASSETS AND LIABILITIES
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $26,351,180 and $59,552,093)
(see Fund Portfolios) $ 26,351,180 $ 59,831,202
Cash in bank on demand deposit 4,360 50,524
Receivable for investment securities sold -- 2,035,069
Accrued interest receivable 43,952 194,972
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 26,399,492 62,111,767
- ------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased -- 4,024,969
Dividends payable ($.0042 per share) 108,574 --
Variation margin payable -- 10,328
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 108,574 4,035,297
- ------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 26,290,918 $ 58,076,470
============================================================================================================
REPRESENTED BY:
Capital stock $ 262,939 $ 58,919
Additional paid-in capital 26,030,949 60,012,076
Undistributed (distribution in excess of) net investment income (2,970) 45,062
Accumulated net realized gains (losses) on investments -- (2,206,953)
Unrealized appreciation on investment securities -- 167,366
- ------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 26,290,918 $ 58,076,470
============================================================================================================
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 26,293,888 5,891,852
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 1.00 $ 9.86
============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
[GLOBE GRAPHIC]
STATEMENTS OF OPERATIONS
IAI MONEY MARKET FUND, IAI RESERVE FUND
SIX MONTHS ENDED JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
============================================================================================================
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest $ 837,547 $ 1,775,933
- ------------------------------------------------------------------------------------------------------------
TOTAL INCOME 837,547 1,775,933
- ------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 91,278 254,966
Compensation of Directors 1,618 3,294
- ------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 92,896 258,260
Less fees reimbursed by Advisers (1,618) (3,294)
- ------------------------------------------------------------------------------------------------------------
NET EXPENSES 91,278 254,966
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 746,269 1,520,967
- ------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 805 $(146,295)
Futures contracts -- (272,481)
-------- ---------
805 (418,776)
Net change in unrealized appreciation or depreciation on:
Investment securities $ -- $ 334,197
Futures contracts -- (122,811)
-------- ---------
-- 211,386
- ------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 805 (207,390)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 747,074 $ 1,313,577
============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI MONEY MARKET FUND, IAI RESERVE FUND
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND IAI RESERVE FUND
Six months Six months
ended Year ended ended Year ended
July 31, January 31, July 31, January 31,
1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS (UNAUDITED) (UNAUDITED)
Net investment income $ 746,269 $ 1,469,404 $ 1,520,967 $ 3,392,145
Net realized gains (losses) 805 (847) (418,776) (400,962)
Net change in unrealized appreciation or depreciation -- -- 211,386 (305,113)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 747,074 1,468,557 1,313,577 2,686,070
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (749,239) (1,469,404) (1,493,731) (3,394,308)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (749,239) (1,469,404) (1,493,731) (3,394,308)
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 69,771,166 360,228,039 44,527,164 168,048,225
Net asset value of shares issued to shareholders in
reinvestment of distributions 643,155 1,386,884 1,466,576 3,325,018
Cost of shares redeemed (70,261,135) (362,869,212) (47,860,746) (165,515,792)
- ----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 153,186 (1,254,289) (1,867,006) 5,857,451
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 151,021 (1,255,136) (2,047,160) 5,149,213
NET ASSETS AT BEGINNING OF PERIOD 26,139,897 27,395,033 60,123,630 54,974,417
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 26,290,918 $ 26,139,897 $58,076,470 $ 60,123,630
==================================================================================================================================
INCLUDING UNDISTRIBUTED (DISTRIBUTION IN EXCESS OF)
NET INVESTMENT INCOME OF: $ (2,970) $ -- $ 45,062 $ 17,826
==================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<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:
<TABLE>
<CAPTION>
Years ended
Six months January 31, Period from Year ended Period from
ended ------------ April 1, 1994 to March 31, January 5, 1993****
July 31, 1997 1997 1996 January 31, 1995+ 1994 to March 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.02 0.05 0.05 0.03 0.03 0.01
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.02 0.05 0.05 0.03 0.03 0.01
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.02) (0.05) (0.05) (0.03) (0.03) (0.01)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.05) (0.05) (0.03) (0.03) (0.01)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===========================================================================================================================
Total investment return* 2.42% 4.89% 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period
(000's omitted) $26,291 $26,140 $27,395 $33,175 $29,788 $25,877
RATIOS
Expenses to average daily net assets*** 0.60%** 0.56% 0.50% 0.50%** 0.45% 0.29%**
Net investment income to average
daily net assets*** 4.90%** 4.80% 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
*** THE FUND'S ADVISER VOLUNTARILY WAIVED $21,950, $76,386, $81,895,
$147,924 AND $18,494 IN EXPENSES FOR THE YEARS ENDED JANUARY 31, 1997,
AND 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 .63%, .74%, .88%, .88% AND .69%,
RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY
NET ASSETS WOULD HAVE BEEN 4.73%, 5.10%, 3.74%, 2.30% AND 2.56%,
RESPECTIVELY.
**** COMMENCEMENT OF OPERATIONS
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
<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:
<TABLE>
<CAPTION>
Years ended Years ended
Six months January 31, Period from March 31,
ended ----------------- April 1, 1994 to ------------------
July 31, 1997 1997 1996 January 31, 1995+ 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10 $ 10.16
- -------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.25 0.52 0.56 0.40 0.39 0.36
Net realized and unrealized gains (losses) (0.02) (0.12) 0.09 (0.08) (0.13) 0.02
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.23 0.40 0.65 0.32 0.26 0.38
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.25) (0.52) (0.54) (0.41) (0.37) (0.36)
Net realized gains -- -- -- -- (0.01) (0.08)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.25) (0.52) (0.54) (0.41) (0.38) (0.44)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.86 $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10
=========================================================================================================================
Total investment return* 2.32% 4.16% 6.76% 3.21% 2.60% 3.81%
Net assets at end of period (000's omitted) $ 58,076 $ 60,124 $ 54,974 $ 77,273 $ 98,813 $ 82,085
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 5.07%** 5.22% 5.48% 4.77%** 3.95% 3.49%
Portfolio turnover rate
(excluding short-term securities) 110.2% 231.0% 261.1% 170.0% 235.0% 538.7%
</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.
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI 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. The Funds' objectives are to provide
shareholders with a high level of current income consistent with the
preservation of capital and liquidity. This report covers only the Reserve Fund
and Money Market Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Securities in the Reserve Fund traded on national exchanges are valued at the
last reported sales price at the close of each business day. Securities traded
on the over-the-counter market are valued at the last reported sales price or if
the last sales price is not available, the last reported bid price is used. Such
valuations are obtained from pricing services or are supplied by dealers.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial 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 these
contracts 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
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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) on foreign currency transactions. 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 had a capital loss carryover of
approximately $1,777,000 at January 31, 1997 which, if not offset by subsequent
capital gains, will expire in 2002 through 2005. 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.
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). The Funds are
committed to make capital contributions, if requested by the Company.
Reserve Fund and Money Market Fund have available $15,000,000 and $9,200,000
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. There were no borrowings outstanding at July 31, 1997.
[3] FEES AND EXPENSES
Under terms of each Funds' Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. For Reserve Fund this fee is
equal to an annual rate of 0.85% of average daily net assets. For Money Market
Fund this fee is equal to an annual rate of 0.60% declining to 0.50% of average
daily net assets. This fee is paid monthly. The Management Agreements further
provide that Advisers will reimburse the Funds for the fees and expenses it pays
to Directors who are not "interested persons" of the Funds or reduce its fee by
an equivalent amount.
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods ended July 31, 1997
and January 31, 1997 were as follows:
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND IAI RESERVE FUND
- -----------------------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended January 31, ended January 31,
July 31, 1997 1997 July 31, 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 69,771,166 360,228,039 4,510,076 16,939,554
ISSUED FOR REINVESTED DISTRIBUTIONS 643,155 1,386,884 148,979 336,417
REDEEMED (70,261,135) (362,869,212) (4,849,527) (16,688,429)
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING 153,186 (1,254,289) (190,472) 587,542
=================================================================================================================
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1997
(UNAUDITED)
[5] PURCHASES AND SALES OF SECURITIES
For the six months ended July 31, 1997, purchases of securities and sales
proceeds for the Funds were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- --------------------------------------------------------------------------------------
<S> <C> <C>
IAI MONEY MARKET FUND $741,308,063 $741,856,355
IAI RESERVE FUND (EXCLUDES SHORT-TERM SECURITIES) $ 34,505,234 $ 48,981,599
</TABLE>
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of July 31, 1997 for
the IAI Reserve Fund. The market value of securities deposited to cover initial
margin requirements for the open positions at July 31, 1997 was $124,109.
<TABLE>
<CAPTION>
FUTURES
- ---------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 31 September 1997 Short $ 3,347,516 $ (37,843)
U.S. Treasury Note 20 September 1997 Short 2,146,250 (73,900)
-------------
$ (111,743)
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
IAI MUTUAL FUND FAMILY
----------------------
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing countries
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
emerging growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + 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
investing 25 months, primarily in investment-grade
bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
90 days, less than investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357,
MINNEAPOLIS, MINNESOTA 55440-0357
USA FAX 612.376.2737
800.945.3863
612.376.2700
