PRINCIPAL PROTECTION FUNDS
ANNUAL REPORT
IAI RESERVE FUND,
IAI MONEY MARKET FUND
JANUARY 31, 1997
[GLOBE GRAPHIC]
TABLE OF CONTENTS
---------------------------------------
IAI RESERVE FUND, IAI MONEY MARKET FUND
ANNUAL REPORT
JANUARY 31, 1997
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
Independent Auditors' Report ..................25
Federal Tax Information .......................26
IAI Mutual Fund Family ........................27
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors ......................Inside Back Cover
CHAIRMAN'S LETTER
---------------------------------------
IAI RESERVE FUND, IAI MONEY MARKET FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're
just starting your investment program, international equities are a good place
to be for growth. Wherever you are in life, you should make sure that your
investment portfolio generally reflects your long-term investment goals for 1997
and beyond.
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is presented below.
Economic growth in the first three months of the year has exceeded our
expectations. While the risk of higher inflation has risen, we do not expect the
current strength to persist. Major countries around the world, including the
United States, are generally pursuing a policy of high real interest rates and
reduced government spending. Such policies are designed to control inflation and
reduce deficits. So far these policies have been effective.
In 1994, the Federal Reserve raised interest rates in response to a rapid
increase in economic activity. In a series of moves that began in February of
that year, short-term interest rates were raised from 3% to 6%, producing a real
Fed Funds rate of about 3%. Since that time, interest rates have exceeded
inflation by a wide margin, acting as a governor on the economy. During periods
of accelerating growth, rising rates help to slow spending. During periods of
sluggish growth, rates fall and help to re-stimulate demand. This stop-and-go
pattern persists in the economy today. A firm dollar and falling gold prices
attest to the success of this policy in controlling U.S. inflation.
Strength should gradually wane in the months ahead without Fed action. Long-term
interest rates have already risen to almost 7%, accomplishing the Fed's job for
them. The Board is likely to wait until the May meeting to see if higher bond
rates are working. Earlier tax refunds and mortgage refinancing activity are
also adding to the perception of accelerating growth. Both are not sustainable.
Tax refunds will fall off with the passage of time while higher rates will help
to curtail refinancing activity. Real growth should return to its 2-to-2.5%
trend by early summer and inflation, as measured by the consumer price index,
should rise by a rate of less than 3%.
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
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
---------------------
IAI RESERVE FUND
IAI RESERVE FUND
[PHOTO]
TIMOTHY A. PALMER,
CFA
IAI RESERVE FUND
CO-MANAGER
[PHOTO]
LIVINGSTON 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.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
For the year ending January 31, 1997, the IAI Reserve Fund produced a total
return of 4.16%. In contrast, the Salomon Brothers One Year Treasury Bill Index
produced a return of 5.51%.
Although short-term and intermediate yields are primarily determined by market
forces, they are also influenced to some degree by the actions of the Federal
Reserve Board. Acknowledging mixed economic signals, the Fed left the Federal
Funds rate--the amount charged for overnight money to member banks--unchanged
for the entire fiscal year. The last change was made on January 31, 1996, when
the Fed lowered rates by 0.25% to 5.25%.
Because the direction of the economy continued to shift, investors have
magnified the importance of the economic data as it is released by the
government. As a result, interest rates, though remaining in a trading range,
continue to be volatile. After the economy grew at an annual rate of 4.7% in the
fourth quarter, investors continue to be anxious regarding accelerating economic
activity and renewed inflationary pressures.
Due to the volatility in the market, we have continued to manage the IAI Reserve
Fund in line with its benchmark. As of January 31, 1997, the average maturity of
the IAI Reserve Fund was 1.95 years.
OUTLOOK
We believe that the economy will expand at a modest pace of 2% to 2.5% during
the first half of 1997. There is a risk of cyclical inflation pressure in 1997,
but price increases will likely be tempered by a sluggish global economy. The
unemployment rate will likely stay low as the economy expands, but cost
pressures will remain well contained. Federal Reserve Board policy will continue
its "wait and see" approach, responding to signs of expanding inflation. Excess
capacity overseas will act as a brake on U.S. wage inflation. The consumer price
index should increase at a rate of under 3% in the first half of 1997. As a
result, the IAI Reserve Fund is offering a substantial premium over inflation at
this time.
[GRAPH]
VALUE OF $10,000 INVESTMENT+
Salomon Brothers One Year
IAI Reserve Fund Treasury Bill Index *
-------------------------------------------------------------------
1/31/87 10,000 10,000
1/31/88 10,609 10,629
1/31/89 11,332 11,257
1/31/90 12,299 12,332
1/31/91 13,355 13,498
1/31/92 14,323 14,592
1/31/93 14,834 15,338
1/31/94 15,346 15,906
1/31/95 15,798 16,423
1/31/96 16,864 17,687
1/31/97 17,565 18,663
[GRAPH]
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/97
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------
IAI RESERVE FUND 4.16% 4.17% 5.80%
............................................................................
Salomon Brothers One Year
Treasury Bill Index 5.51% 5.04% 6.44%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
[PIE CHART]
SECTORS
% OF PORTFOLIO AS OF 1/31/97
U.S. Government & Government Agency ....13%
Corporate ..............................11%
Asset-Backed ...........................33%
U.S. Government Agency Mortgage-Backed .15%
Commercial Paper .......................28%
[GRAPH]
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 1/31/97 (EXCLUDING FUTURES CONTRACTS)
YEARS
- -----
0-1 ......37%
1-3 ......45%
3-5 .......9%
5-10 ......9%
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 1/31/97
U.S. Government...28%
Aaa...............28%
Aa................28%
A..................5%
Baa...............10%
Non-Investment
Grade..............1%
[GLOBE GRAPHIC]
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
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
For the year ending January 31, 1997, the IAI Money Market Fund produced a total
return of 4.89%. In contrast, the average fund as measured by Lipper Analytical
Services produced a return of 4.74%.
Money market fund yields are driven by the supply and demand for short-term
credit. The Federal Reserve Board is a key player in this process because they
control the supply of credit in the financial system. The Fed left short-term
interest rates unchanged for the entire fiscal year. The last change was made on
January 31, 1996, when the Fed lowered rates by 0.25% to 5.25%.
With this stable anchor in overnight yields, money market yields changed little
during the past year. As a result, the IAI Money Market Fund has provided stable
investor returns.
Strategy in the Fund reflects our view that a money fund is meant to provide
liquidity and capital preservation. In the last year we have maintained a high
quality portfolio and have avoided any temptation to reach for higher yields
through investment in lower quality issues.
Instead, we have focused on short-term Federal Agency notes and high-quality,
liquid commercial paper. The average maturity of the Fund generally ranged
between 25 and 45 days. On January 31, 1997, the average maturity of the IAI
Money Market Fund was 45 days.
OUTLOOK
We believe that the economy will expand at a modest pace of 2% to 2.5% during
the first half of 1997. There is a risk of cyclical inflation pressure in 1997,
but price increases will likely be tempered by overseas competition and a lack
of excess money growth in the United States. The unemployment rate will likely
stay low as the economy expands, but cost pressures will remain well contained.
Federal Reserve Board policy will likely continue its "wait and see" approach.
Inflation will remain subdued in the first half of 1997 with the consumer price
index averaging under 3%. As a result, the IAI Money Market Fund is offering a
substantial premium over inflation at this time.
AVERAGE ANNUAL RETURNS(1)+
THROUGH 1/31/97
Since Inception
1 Year 1/05/93
- --------------------------------------------------------------------------------
IAI MONEY MARKET FUND 4.89% 4.23%
................................................................................
Lipper Money Market Instrument Fund Average 4.74% 4.08%(2)
+ 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
SECTORS
% OF PORTFOLIO AS OF 1/31/97
Commercial Paper .............60%
U.S. Government Agency .......28%
U.S. Government Obligations ..12%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 1/31/97
MONTHS
- ------
0-1 ......89%
2-12 .....11%
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.
[GLOBE GRAPHIC]
FUND PORTFOLIO
----------------
IAI RESERVE FUND
JANUARY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 8.9%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.6%
5.23% 05/08/97 $ 400,000 (b)$ 394,756
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTE - 8.3%
5.63 11/30/98 5,000,000 4,976,550
===========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $5,364,482) ..................................................................................$ 5,371,306
===========================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 3.9%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 3.9%
Federal Home Loan Mortgage Corporation 5.21% 02/10/97 $ 1,100,000 $ 1,098,567
5.22 02/13/97 1,225,000 1,222,869
------------
2,321,436
===========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $2,321,436) .................................................................................$ 2,321,436
===========================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 15.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 6.4%
6.00% 11/01/98 $ 3,865,284 $ 3,810,899
- ---------------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.3%
7.07 02/07/04 (d) 2,000,000 2,008,125
- ---------------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 5.6%
8.00 11/15/17 1,940,670 2,007,856
9.00 11/15/17 1,255,753 1,357,381
------------
3,365,237
===========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $9,222,599) ..................................................................................$ 9,184,261
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
CORPORATE BONDS - 11.0%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL - 3.3%
Salomon 7.00% 05/15/99 $ 2,000,000 $ 2,014,040
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 3.5%
Continental Cablevision 8.50 09/15/01 2,000,000 2,131,540
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES - 4.2%
El Paso Electric 7.25 02/01/99 500,000 498,685
Long Island Lighting 8.75 02/15/97 2,000,000 2,001,240
- ---------------------------------------------------------------------------------------------------------------------------
2,499,925
===========================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $6,644,780) $6,645,505
===========================================================================================================================
ASSET-BACKED SECURITIES - 32.7%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 21.4%
Ford Credit Auto Lease Trust 96-1 A2 5.80% 05/15/99 $ 1,000,000 $ 995,000
MMCA Automobile Trust 93-1 A 4.00 11/16/98 523,215 520,923
National Car Rental Financing 96-1 A2 (c) 6.80 04/20/00 3,000,000 3,009,844
Navistar Financial Corporation Owner Trust 96-B A3 6.33 04/21/03 2,100,000 2,105,103
Norwest Automobile Trust 96-A A3 5.90 03/15/00 3,000,000 2,989,290
World Omni Automobile Lease Securitization Trust 96-B A36.25 11/15/02 3,250,000 3,252,990
- ---------------------------------------------------------------------------------------------------------------------------
12,873,150
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 0.8%
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 500,000 500,975
- ---------------------------------------------------------------------------------------------------------------------------
Equipment Loan Related - 5.3%
Capital Equipment Receivables Trust 96-1 A3 6.11 07/15/99 3,000,000 3,001,290
Case Equipment Loan Trust 95-B A2 5.95 09/15/00 159,191 159,348
- ---------------------------------------------------------------------------------------------------------------------------
3,160,638
- ---------------------------------------------------------------------------------------------------------------------------
HOME LOANS - 5.2%
Associates Manufactured Housing 96-2 A3 6.35 06/15/27 3,200,000 3,151,500
===========================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $19,710,563) $19,686,263
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
COMMERCIAL PAPER - 28.6%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL - 17.9%
Merrill Lynch 5.25% 02/03/97 $ 2,900,000 $ 2,899,154
Bell Atlantic Financial Services 5.30 02/07/97 1,000,000 999,117
CSW Credit 5.30 02/11/97 2,000,000 1,997,056
Ford Motor Credit 5.34 02/10/97 1,900,000 1,897,463
IBM Credit 5.28 02/20/97 2,000,000 1,994,427
Nordstrom Credit 5.30 02/28/97 1,000,000 996,025
- ---------------------------------------------------------------------------------------------------------------------------
10,783,242
- ---------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 3.5%
Siemens Capital 5.45 02/05/97 2,100,000 2,098,728
- ---------------------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES - 2.2%
Weyerhauser Mortgage 5.33 02/25/97 1,300,000 1,295,381
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES - 5.0%
General Electric 5.26 02/27/97 1,500,000 1,494,301
Wisconsin Electric Fuel 5.30 02/18/97 1,500,000 1,496,246
- ---------------------------------------------------------------------------------------------------------------------------
2,990,547
===========================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $17,167,898) $ 17,167,898
===========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $60,431,758) (e) $ 60,376,669
===========================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.4%)
$ (253,039)
===========================================================================================================================
TOTAL NET ASSETS
$ 60,123,630
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
FUND PORTFOLIO
IAI MONEY MARKET FUND
JANUARY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT OBLIGATIONS - 11.5%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 11.5%
6.50% 04/30/97 $ 1,000,000 $ 1,002,100
6.00 12/31/97 1,000,000 1,004,354
5.00 01/31/98 1,000,000 993,166
- ---------------------------------------------------------------------------------------------------------------------------
2,999,620
===========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $2,999,620) $ 2,999,620
===========================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 28.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 28.3%
Federal Home Loan Mortgage Corporation 5.48% 02/03/97 $ 500,000 $ 500,000
5.28 02/06/97 1,400,000 1,399,384
5.21 02/10/97 900,000 899,088
5.25 02/13/97 1,400,000 1,397,958
5.23 02/19/97 1,400,000 1,396,749
Federal National Mortgage Association 5.45 02/10/97 405,000 404,571
5.23 02/18/97 1,400,000 1,396,952
- ---------------------------------------------------------------------------------------------------------------------------
7,394,702
===========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $7,394,702) $ 7,394,702
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
FUND PORTFOLIO
IAI MONEY MARKET FUND
JANUARY 31, 1997
COMMERCIAL PAPER - 60.3%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL - 15.7%
Bell Atlantic Financial Services 5.30% 02/07/97 $ 1,300,000 $ 1,299,234
Motorola 5.28 02/19/97 1,400,000 1,396,715
Pitney Bowes Credit 5.30 02/03/97 1,400,000 1,400,000
- ---------------------------------------------------------------------------------------------------------------------------
4,095,949
- ---------------------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 21.0%
Cargill 5.24 02/21/97 1,400,000 1,396,332
DuPont 5.25 02/26/97 1,300,000 1,295,640
Pepsico 5.25 02/14/97 1,400,000 1,397,754
Philip Morris 5.27 02/28/97 1,400,000 1,394,876
- ---------------------------------------------------------------------------------------------------------------------------
5,484,602
- ---------------------------------------------------------------------------------------------------------------------------
PROFESSIONAL SERVICES - 3.8%
Weyerhauser Mortgage 5.33 02/25/97 1,000,000 996,743
- ---------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 5.3%
Southwestern Bell Capital 5.28 02/25/97 1,400,000 1,395,483
- ---------------------------------------------------------------------------------------------------------------------------
UTILITIES - 14.5%
Duke Power 5.28 02/12/97 1,400,000 1,398,152
General Electric 5.26 02/27/97 1,000,000 996,494
Wisconsin Electric Fuel 5.30 02/18/97 1,400,000 1,396,908
- ---------------------------------------------------------------------------------------------------------------------------
3,791,554
===========================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $15,764,331) $ 15,764,331
===========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $26,158,653) (e) $ 26,158,653
===========================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.1%)
$ 18,756)
===========================================================================================================================
TOTAL NET ASSETS
$ 26,139,897
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
</TABLE>
NOTES TO FUND PORTFOLIOS
IAI RESERVE FUND, IAI MONEY MARKET FUND
JANUARY 31, 1997
(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 January 31, 1997 the total cost of the
security purchased on a when-issued basis in the IAI Reserve Fund portfolio was
$2,015,313.
(e)
At January 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:
<TABLE>
<CAPTION>
IAI RESERVE IAI MONEY MARKET
FUND FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $ 60,431,758 $ 26,158,653
=========================================================================================================================
Gross unrealized appreciation $ 105,783 $ --
Gross unrealized depreciation (160,872) --
- -------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $ (55,089) $ --
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI RESERVE FUND, IAI MONEY MARKET FUND
JANUARY 31, 1997
IAI IAI MONEY
RESERVE FUND MARKET FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $60,431,758 and $26,158,653) (see Fund Portfolios) $ 60,376,669 $ 26,158,653
Cash in bank on demand deposit 15,429 72,308
Receivable for investment securities sold 1,360,336 --
Accrued interest receivable 340,815 18,262
Variation margin receivable 17,656 --
Other 28,037 286
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 62,138,942 26,249,509
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 2,015,312 --
Dividends payable ($.0042 per share) -- 109,612
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,015,312 109,612
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 60,123,630 $ 26,139,897
===========================================================================================================================
REPRESENTED BY:
Capital stock $ 60,823 $ 261,407
Additional paid-in capital 61,877,178 25,879,295
Undistributed net investment income 17,826 --
Accumulated net realized gains (losses) on investments (1,788,177) (805)
Unrealized depreciation on investment securities (44,020) --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 60,123,630 $ 26,139,897
===========================================================================================================================
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 6,082,324 26,140,702
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 9.88 $ 1.00
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI RESERVE FUND, IAI MONEY MARKET FUND
YEAR ENDED JANUARY 31, 1997
IAI IAI MONEY
RESERVE FUND MARKET FUND
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest $ 3,943,318 $1,640,091
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 3,943,318 1,640,091
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES (Note 3)
Management fees 467,069 150,929
Investment advisory fees 50,069 16,699
Distribution fees 10,014 --
Dividend-disbursing, administrative, and accounting fees 20,028 11,133
Custodian fees -- 300
Compensation of Directors 5,484 2,906
Audit fees 1,740 1,200
Printing and shareholder reporting 6,380 6,000
Registration fees 2,900 3,000
Other expenses 1,913 2,435
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 565,597 194,602
Less fees reimbursed by Advisers or Distributor (14,424) (23,915)
- ---------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 551,173 170,687
- ---------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,392,145 1,469,404
- ---------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (130,935) $ (847)
Futures contracts (270,027) --
----------- -------
(400,962) (847)
Net change in unrealized appreciation or
depreciation on:
Investment securities $ (332,656) $ --
Futures contracts 27,543 --
----------- -------
(305,113) --
- ---------------------------------------------------------------------------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS (706,075) (847)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,686,070 $1,468,557
===========================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI RESERVE FUND IAI MONEY MARKET FUND
IAI RESERVE FUND IAI MONEY MARKET FUND
Years ended Years ended
January 31, January 31,
----------- -----------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 3,392,145 $ 4,135,069 $ 1,469,404 $ 1,715,387
Net realized gains (losses) (400,962) (155,360) (847) 1,952
Net change in unrealized appreciation or depreciation (305,113) 982,137 -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,686,070 4,961,846 1,468,557 1,717,339
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,394,308) (4,076,189) (1,469,404) (1,715,387)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3,394,308) (4,076,189) (1,469,404) (1,715,387)
- --------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 168,048,225 188,582,912 360,228,039 415,404,027
Net asset value of shares issued to shareholders in
reinvestment of distributions 3,325,018 4,017,210 1,386,884 1,629,448
Cost of shares redeemed (165,515,792) (215,784,491) (362,869,212) (422,815,177)
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL SHARE TRANSACTIONS 5,857,451 (23,184,369) (1,254,289) (5,781,702)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 5,149,213 (22,298,712) (1,255,136) (5,779,750)
NET ASSETS AT BEGINNING OF PERIOD 54,974,417 77,273,129 27,395,033 33,174,783
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 60,123,630 $ 54,974,417 $ 26,139,897 $ 27,395,033
================================================================================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 17,826 $ 19,989 $ -- $ --
================================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
</TABLE>
<TABLE>
<CAPTION>
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:
Years ended Period from Years ended
January 31, April 1, 1994 tO March 31,
1997 1996 January 31, 1995+ 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.00 $ 9.89 $ 9.98 $ 10.10 $ 10.16
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .52 .56 .40 .39 .36
Net realized and unrealized gains (losses) (.12) .09 (.08) (.13) .02
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .40 .65 .32 .26 .38
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.52) (.54) (.41) (.37) (.36)
Net realized gains -- -- -- (.01) (.08)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.52) (.54) (.41) (.38) (.44)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value
End of period $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10
===========================================================================================================================
Total investment return* 4.16% 6.76% 3.21% 2.60% 3.81%
Net assets at end of period (000's omitted) $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%
Net investment income to average net assets 5.22% 5.48% 4.77%** 3.95% 3.49%
Portfolio turnover rate
(excluding short-term securities) 231.0% 261.1% 170.0% 235.0% 538.7%
* 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.
</TABLE>
<TABLE>
<CAPTION>
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:
Years ended
January 31, Period from Year ended Period from
----------- April 1, 1994 to March 31, January 5, 1993***
1997 1996 January 31, 1995+ 1994 to March 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .05 .05 .03 .03 .01
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .05 .05 .03 .03 .01
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.05) (.05) (.03) (.03) (.01)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.05) (.05) (.03) (.03) (.01)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===========================================================================================================================
Total investment return* 4.89% 5.46% 3.47% 2.88% 2.85%**
Net assets at end of period
(000's omitted) $ 26,140 $ 27,395 $ 33,175 $ 29,788 $ 25,877
RATIOS
Expenses to average daily net assets** 0.56% 0.50% 0.50% 0.45% 0.29%
Net investment income to average
daily net assets** 4.80% 5.34% 4.12% 2.73% 2.96%
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** 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. RATIOS FOR THE PERIODS ENDING JANUARY
31, 1995 AND MARCH 31, 1993 ARE ANNUALIZED.
*** COMMENCEMENT OF OPERATIONS
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
IAI RESERVE FUND, IAI MONEY MARKET FUND
JANUARY 31, 1997
[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
Investments in 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. The cost of securities purchased on a when-issued basis at January
31, 1997 totalled $2,015,313 for Reserve Fund.
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 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 has 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.
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 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
its obligations as policyholders, 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 $11,000,000
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. There were no borrowings outstanding at January 31, 1997.
[3] FEES AND EXPENSES
CURRENT AGREEMENT EFFECTIVE MARCH 31, 1996
New Management Agreements for the Funds were approved by a majority of each
Funds' shareholders at a special meeting held March 21, 1996, and replaced the
prior Advisory, Administrative, and Distribution Agreements with Adviser and
Distributor. 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, interest and extraordinary
expenses) in return for each Fund paying an all inclusive management fee
(unified fee) to Advisers. The Management Agreement further provides that IAI
will either reimburse each Fund for the fees and expenses it pays to Directors
who are not "interested persons" of the Fund or reduce its fee by an equivalent
amount. 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% declining to .50% of average daily net assets. This fee is paid monthly.
Pursuant to these 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.
PRIOR TO APRIL 1, 1996
Under the terms of an investment advisory agreement, each Fund paid Investment
Advisers, Inc. (Adviser) a monthly management fee computed at an annual rate of
.50% of the average month-end net asset value for Reserve Fund and .30% of
average daily net assets for Money Market Fund.
Each Fund also 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 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 distribution 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, the Funds were responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor had agreed to reimburse Reserve Fund to
the extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceeded, 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.
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the years ended January 31, 1997,
and 1996 were as follows:
<TABLE>
<CAPTION>
IAI RESERVE FUND IAI MONEY MARKET FUND
- ---------------------------------------------------------------------------------------------------------------------------
Years ended Years ended
January 31, January 31,
----------- -----------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 16,939,554 18,896,381 360,228,039 415,404,027
Issued for reinvested distributions 336,417 403,515 1,386,884 1,629,448
Redeemed (16,688,429) (21,617,432) (362,869,212) (422,815,177)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in shares outstanding 587,542 (2,317,536) (1,254,289) (5,781,702)
===========================================================================================================================
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the year ended January 31, 1997, 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) $ 97,472,516 $ 86,886,397
IAI MONEY MARKET FUND $1,505,262,686 $1,507,911,060
</TABLE>
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of January 31, 1997 for
the IAI Reserve Fund. The market value of securities deposited to cover initial
margin requirements for the open positions at January 31, 1997 was $73,982.
<TABLE>
<CAPTION>
FUTURES
- ---------------------------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Gains
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5 year U.S. Treasury Note 35 March 1997 Long $ 3,726,953 $ 10,206
10 year U.S. Treasury Note 10 March 1997 Long 1,087,813 863
- ---------------------------------------------------------------------------------------------------------------------------
$ 11,069
</TABLE>
INDEPENDENT AUDITORS' REPORT
IAI MONEY MARKET FUND, IAI RESERVE FUND
The Board of Directors and Shareholders
IAI Investment Funds V, Inc.
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Reserve Fund (a portfolio within IAI Investment
Funds V, Inc.) and IAI Money Market Fund (a portfolio within IAI Investment
Funds VI, Inc.) as of January 31, 1997, and the related statements of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for the
periods presented on pages 18 and 19 of the annual report. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Reserve Fund and IAI Money Market Fund at January 31, 1997, and the results of
their operations, the changes in their net assets and the financial highlights
for the periods stated in the first paragraph above, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 7, 1997
FEDERAL TAX INFORMATION
IAI RESERVE FUND, IAI MONEY MARKET FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distribu-tions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI RESERVE FUND
Ordinary
Payable Date Income (A)
- --------------------------------------------------------------------------------
February 1996 $ .0340
March 1996 .0340
April 1996 .0450
May 1996 .0430
June 1996 .0430
July 1996 .0430
August 1996 .0430
September 1996 .0440
October 1996 .0450
November 1996 .0440
December 1996 .0990
January 1997 .0070
================================================================================
$ .5240
IAI MONEY MARKET FUND
Ordinary
Payable Date Income (A)
- --------------------------------------------------------------------------------
February 1996 $ .0039
March 1996 .0041
April 1996 .0040
May 1996 .0043
June 1996 .0037
July 1996 .0040
August 1996 .0042
September 1996 .0036
October 1996 .0040
November 1996 .0040
December 1996 .0041
January 1997 .0042
================================================================================
$ .0481
IAI MUTUAL FUND FAMILY
IAI MONEY MARKET FUND, IAI RESERVE FUND
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
COUNTRIES FUND developing countries
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(closed to new investors as of 2/1/96) 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 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>
(THIS PAGE INTENTIONALLY LEFT BLANK)
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
[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
