PRINCIPAL PROTECTION FUNDS
SEMI-ANNUAL REPORT
IAI MONEY MARKET FUND,
IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
SEMI-ANNUAL REPORT
JULY 31, 1998
(UNAUDITED)
President'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>
PRESIDENT'S LETTER
IAI MONEY MARKET FUND, IAI RESERVE FUND
WHAT'S RIGHT WITH THIS MARKET
[PHOTO]
ROY C. GILLSON
PRESIDENT
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the Euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
2
<PAGE>
PRESIDENT'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 presented below.
U.S. economic growth is likely to remain subdued during the remainder of the
summer. Final demand should stay persistently strong, but some inventory runoff
may reduce the rate of overall GDP expansion. Imports relative to exports will
continue to expand, erasing some top-line growth from the U.S. economy. However,
the underlying fundamentals are still favorable which means the real growth rate
should not dip below 3% on a year-over-year basis.
Current financial market risk comes from high valuations rather than a failing
U.S. economy. By almost any traditional measure of value, U.S. stock prices are
too high. However, the market has been driven by strong cash flow and positive
investor sentiment rather than cheap valuation. Foreign demand for U.S. stocks
has been particularly strong. Temporary price declines may reduce over
valuation, but a true bear market is unlikely to develop.
For U.S. fixed income markets, the Federal Reserve remains a key player. Policy
is unlikely to change in the near-term as they wait to see the full effects of
Asia. The Fed can afford to be patient because inflationary expectations are
low. A softer economy in the second quarter adds to the Fed's ability to wait.
As a result, interest rates should remain low and the yield curve should
continue to flatten.
We hope that you read the Portfolio Managers' Reviews which follow this letter.
They offer a detailed perspective on the individual funds' performance and
strategy. As always, we appreciate your continued trust and confidence in IAI.
If there is any way that we can serve you better, please let us know by calling
our toll-free Investor Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Roy C. Gillson
Roy C. Gillson
President
3
<PAGE>
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
IAI MONEY MARKET FUND
HOW HAS THE FUND PERFORMED?
The Fund earned a return of 2.51% for the six months ended July 31, 1998. This
compares favorably with the Lipper Money Market Instrument Fund Average which
returned 2.43%.
WERE THERE ANY SIGNIFICANT CHANGES?
There were no major changes during the past six months.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Short-term interest rates increased slightly during the past quarter. One month
commercial paper is now earning annualized returns of about 5.54%.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Near-term trends look favorable for long bonds. U.S. economic growth should
moderate this summer in response to slower production, reduced inventory
accumulation and rising imports. Soft commodity prices and Asian instability
will keep inflation expectations in check. Federal Reserve policy will remain on
hold. However, we see risks for the market beyond the summer months. Consumer
spending will stay strong, fueled by rising personal income, higher stock
prices, ample job opportunities and a record high level of consumer sentiment.
Inflation isn't dead. Falling commodity prices are currently masking a rising
trend of service-based inflation in such areas as housing rental and medical
care. The Fed may need to take action later in the year. The Fund should
continue to earn returns similar to those shown above until the Fed is forced to
raise rates.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/98
Since Inception
Six months** 1 Year 5 Year 1/05/93
- --------------------------------------------------------------------------------
IAI MONEY MARKET FUND 2.51% 5.14% 4.64% 4.45%
- --------------------------------------------------------------------------------
Lipper Money Market 2.43% 4.95% 4.51% 4.30%*
Instrument Fund Average
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 1/1/93
** NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 7/31/98
[PIE CHART]
Commercial Paper 82%
U.S. Government Agency 18%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/98
[BAR CHART]
MONTHS
- ------
0-1 100%
NOTE TO PRESIDENT'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.
5
<PAGE>
FUND MANAGER'S REVIEW
IAI RESERVE FUND
IAI RESERVE FUND
HOW HAS THE FUND PERFORMED?
The Reserve Fund earned a return of 2.32% for the six months ended July 31,
1998, while the Salomon Brothers One Year Treasury Bill Index returned 2.67%.
WERE THERE ANY SIGNIFICANT CHANGES?
There were no major changes during the past six months.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Short-term interest rates moved slightly lower during the past quarter. Three
month Treasury Bill yields end the quarter at slightly under 5% vs. being
slightly above 5% at the end of the first quarter.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Near-term trends look favorable for long bonds. U.S. economic growth should
moderate this summer in response to slower production, reduced inventory
accumulation and rising imports. Soft commodity prices and Asian instability
will keep inflation expectations in check. Federal Reserve policy will remain on
hold. However, we see risks for the market beyond the summer months. Consumer
spending will stay strong, fueled by rising personal income, higher stock
prices, ample job opportunities and a record high level of consumer sentiment.
Inflation isn't dead. Falling commodity prices are currently masking a rising
trend of service-based inflation in such areas as housing rental and medical
care. The Fed may need to take action later in the year. The Fund should
continue to earn returns similar to those shown above until the Fed is forced to
raise rates.
6
<PAGE>
FUND MANAGER'S REVIEW
IAI RESERVE FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
SALOMON BROTHERS
ONE YEAR
TREASURY BILL
IAI RESERVE FUND INDEX
---------------- ----------------
08/01/88 $10,000 $10,000
01/31/89 10,371 10,316
01/31/90 11,256 11,302
01/31/91 12,222 12,370
01/31/92 13,109 13,373
01/31/93 13,576 14,057
01/31/94 14,044 14,577
01/31/95 14,458 15,051
01/31/96 15,434 16,209
01/31/97 16,076 17,103
01/31/98 16,909 18,177
07/31/98 17,304 18,663
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/98
Six months* 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI RESERVE FUND 2.32% 5.19% 4.63% 5.64%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 2.67% 5.70% 5.46% 6.44%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
SECTORS
% OF PORTFOLIO AS OF 7/31/98
[PIE CHART]
Asset-Backed 45%
Commercial Paper 15%
U.S. Government & Government Agency Obligations 7%
Corporate 30%
Foreign Denominated 3%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 7/31/98
[BAR CHART]
YEARS
- -----
0-1 37%
1-3 46%
3-5 16%
5-10 1%
NOTE TO PRESIDENT'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 7/31/98
U.S. Government....9%
Aaa...............33%
Aa.................5%
A.................29%
Baa...............19%
Non-Investment
Grade............5%
7
<PAGE>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1998
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY SECURITIES - 18.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 18.1%
Federal Home Loan Mortgage Corporation 5.46% 08/06/98 $ 750,000 $ 749,659
Federal Home Loan Mortgage Corporation 5.46 08/07/98 1,380,000 1,379,162
Federal Home Loan Mortgage Corporation 5.46 08/14/98 166,000 165,723
Federal Home Loan Mortgage Corporation 5.46 08/20/98 2,000,000 1,994,844
Federal Home Loan Mortgage Corporation 5.46 08/24/98 133,000 132,576
Federal National Mortgage Association 5.46 08/14/98 174,000 173,710
--------------
4,595,674
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $4,595,674)................................................................................ $ 4,595,674
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
8
<PAGE>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 82.4%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DRUGS - 5.0%
Pfizer (c) 5.50% 08/20/98 $ 1,275,000 $ 1,271,689
- -------------------------------------------------------------------------------------------------------------------
FINANCE AND CREDIT - 23.8%
Associates 5.66 08/03/98 625,000 625,000
Bell Atlantic Financial Services 5.52 08/06/98 1,430,000 1,429,342
Ford Motor Credit 5.51 08/07/98 1,600,000 1,599,021
IBM Credit 5.47 08/04/98 810,000 809,877
Pitney Bowes Credit 5.49 08/17/98 1,590,000 1,586,605
--------------
6,049,845
- -------------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 11.8%
Coca-Cola 5.46 08/19/98 1,450,000 1,446,481
DuPont 5.50 08/17/98 1,545,000 1,541,695
--------------
2,988,176
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 6.0%
Xerox 5.50 08/05/98 1,520,000 1,519,536
- -------------------------------------------------------------------------------------------------------------------
RETAIL - 17.5%
Proctor & Gamble 5.50 08/03/98 1,275,000 1,275,000
Wal-Mart 5.55 08/03/98 1,580,000 1,580,000
Walt Disney 5.52 08/10/98 1,590,000 1,588,293
--------------
4,443,293
- -------------------------------------------------------------------------------------------------------------------
UTILITIES - 18.3%
Duke Power 5.47 08/18/98 1,545,000 1,541,479
Emerson Electric 5.48 08/25/98 1,500,000 1,494,977
Wisconsin Electric Fuel 5.52 08/27/98 1,600,000 1,594,112
--------------
4,630,568
===================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $20,903,107)............................................................................. $ 20,903,107
===================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $25,498,781) (f)......................................................................... $ 25,498,781
===================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.5)%
............................................................................................. $ (116,357)
===================================================================================================================
TOTAL NET ASSETS
............................................................................................. $ 25,382,424
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
9
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 30.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 16.3%
AT&T Capital (MEDIUM-TERM NOTE) 6.41% 08/13/99 $ 1,500,000 $ 1,504,500
GATX Capital (MEDIUM-TERM NOTE) 6.36 12/16/02 500,000 500,320
Mercantile Bancorp 6.80 06/15/01 1,500,000 1,527,045
--------------
3,531,865
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 9.2%
Nabisco (c) 6.30 08/26/99 1,000,000 1,000,750
Time Warner (c) 6.10 12/30/01 1,000,000 994,870
--------------
1,995,620
- -------------------------------------------------------------------------------------------------------------------
UTILITIES - 4.6%
Niagra Mohawk Power Series A 6.50 07/01/99 1,000,000 997,560
===================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $6,493,536).................................................................................. $ 6,525,045
===================================================================================================================
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 6.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 4.6%
Federal National Mortgage Association 5.63% 03/15/01 $ 1,000,000 $ 998,910
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY INFLATION INDEX NOTE - 2.3%
3.63 07/15/02 508,230 (d) 503,227
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $1,500,507).................................................................................. $ 1,502,137
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
10
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 44.7%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 20.7%
Arcadia Automobile Receivables Trust 97-C A3 6.25% 11/15/01 $ 195,000 $ 196,193
First Security Auto Grantor Trust 98-A A 5.97 04/15/04 879,230 881,156
National Car Rental Financing 96-1 A2 6.80 04/20/00 1,500,000 1,506,328
Navistar Financial Corporation Owner Trust 96-B A3 6.33 04/21/03 897,895 902,052
Rental Car Finance 97-1 A2 6.45 08/25/05 1,000,000 1,007,969
--------------
4,493,698
- -------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 16.5%
Citibank Credit Card Master Trust I 98-1 A 5.75 01/15/03 1,000,000 996,560
Dayton Hudson Credit Card Master Trust 97-1 A 6.25 08/25/05 1,000,000 1,014,880
Fingerhut Master Trust 98-1 A 6.07 02/15/05 300,000 302,118
First Chicago Master Trust II 95-N A 5.82 (e) 12/15/00 1,000,000 1,000,620
Standard Credit Card Master Trust 93-2 A 5.95 10/07/04 280,000 279,037
--------------
3,593,215
- -------------------------------------------------------------------------------------------------------------------
HOME EQUITY LOANS - 7.5%
Contimortgage Home Equity Loan Trust 97-3 A5 7.01 08/15/13 1,000,000 1,013,750
EQCC Home Equity Loan Trust 98-1 A3F 6.23 12/15/12 100,000 100,000
EQCC Home Equity Loan Trust 98-2 A6F 6.16 04/15/08 215,000 214,563
Residential Asset Securities 98-KS2 AI3 6.24 07/25/29 295,000 294,678
--------------
1,622,991
===================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $9,658,614) $ 9,709,904
===================================================================================================================
FOREIGN DENOMINATED BONDS - 2.3%
Principal Market
Rate Maturity Amount (b) Value (a)
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY OBLIGATION - 2.3%
Federal National Mortgage Association Global 7.00% 09/26/00 1,000,000 $ 509,016
(NEW ZEALAND DOLLAR)
===================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $537,379).................................................................................. $ 509,016
===================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $18,190,036)............................................................................... $ 18,246,102
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
11
<PAGE>
FUND PORTFOLIO
IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMERCIAL PAPER - 15.0%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE AND CREDIT - 10.1%
Associates 5.66% 08/03/98 $ 1,095,000 $ 1,094,656
Ford Motor Credit 5.58 08/04/98 1,095,000 1,094,491
--------------
2,189,147
- -------------------------------------------------------------------------------------------------------------------
RETAIL - 4.9%
Wal-Mart 5.55 08/03/98 290,000 289,910
Walt Disney 5.65 08/03/98 765,000 764,760
--------------
1,054,670
===================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $3,243,817)................................................................................ $ 3,243,817
===================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $21,433,853) (f)........................................................................... $ 21,489,919
===================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.0%
............................................................................................... $ 220,269
===================================================================================================================
TOTAL NET ASSETS
............................................................................................... $ 21,710,188
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
12
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(c)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A or 4(2) of the Securities Act of 1933.
These issues may only be sold to other qualified institutional buyers, and are
considered liquid under guidelines established by the Board of Directors.
(d)
Principal amounts of inflation index notes change based on increase or decrease
of the consumer price index.
(e)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on July 31, 1998.
(f)
At July 31, 1998, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
IAI MONEY MARKET IAI RESERVE
FUND FUND
------------------------------------------------------------------------------
Cost for federal tax purposes $ 25,498,781 $ 21,433,853
==========================================
Gross unrealized appreciation $ -- $ 89,771
Gross unrealized depreciation -- (33,705)
------------------------------------------
Net unrealized appreciation $ -- $ 56,066
==========================================
13
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $25,498,781 and $21,433,853) (see Fund Portfolios) $ 25,498,781 $ 21,489,919
Cash in bank on demand deposit 4,541 9,666
Dividends and accrued interest receivable -- 171,880
Unrealized appreciation on foreign currency contracts held, at value (Note 6) -- 11,475
Other assets 482 27,248
---------------------------------------------------------
TOTAL ASSETS 25,503,804 21,710,188
---------------------------------------------------------
LIABILITIES
Dividends payable ($.0045 per share) 121,380 --
---------------------------------------------------------
TOTAL LIABILITIES 121,380 --
---------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 25,382,424 $ 21,710,188
=========================================================
REPRESENTED BY:
Capital stock $ 253,965 $ 22,096
Additional paid-in capital 25,128,459 23,806,965
Undistributed net investment income 42 29,463
Accumulated net realized losses on investments (42) (2,215,387)
Unrealized appreciation or depreciation on:
Investment securities $ -- $ 56,066
Other assets & liabilities denominated in foreign currency -- 10,985
-- 67,051
------------- ------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 25,382,424 $ 21,710,188
=========================================================
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 25,396,544 2,209,618
---------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 1.00 $ 9.83
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
14
<PAGE>
STATEMENTS OF OPERATIONS
IAI MONEY MARKET FUND, IAI RESERVE FUND
SIX MONTHS ENDED JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest $ 773,899 $ 930,432
----------------------------------------------
TOTAL INCOME 773,899 930,432
----------------------------------------------
EXPENSES (NOTE 3)
Management fees 83,510 131,142
Compensation of Directors 1,900 2,428
Interest 2,185 47
----------------------------------------------
TOTAL EXPENSES 87,595 133,617
Less fees reimbursed by Advisers (1,900) (2,428)
----------------------------------------------
NET EXPENSES 85,695 131,189
----------------------------------------------
NET INVESTMENT INCOME 688,204 799,243
----------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ -- $ 9,440
Futures contracts -- (8,361)
Foreign currency transactions -- 29,588
------------- --------------
-- 30,667
Net change in unrealized appreciation or depreciation on:
Investment securities $ -- $ (157,060)
Futures contracts -- 16,169
Other assets and liabilities denominated
in foreign currency -- 21,774
------------- --------------
-- (119,117)
----------------------------------------------
NET LOSS ON INVESTMENTS -- (88,450)
----------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 688,204 $ 710,793
================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
15
<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 ended Year ended Six months ended Year ended
July 31, 1998 January 31, 1998 July 31, 1998 January 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS (UNAUDITED) (UNAUDITED)
Net investment income $ 688,204 $ 1,456,327 $ 799,243 $ 2,759,486
Net realized gains (losses) -- 805 30,667 (470,082)
Net change in unrealized appreciation or depreciation -- -- (119,117) 230,188
----------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 688,204 1,457,132 710,793 2,519,592
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (693,584) (1,465,067) (819,959) (2,714,928)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (693,584) (1,465,067) (819,959) (2,714,928)
----------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 169,818,002 209,446,323 42,749,413 85,217,706
Net asset value of shares issued in
reinvestment of distributions 658,659 1,303,891 789,673 2,667,968
Cost of shares redeemed (167,595,565) (214,375,468) (57,169,589) (112,364,111)
----------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE
TRANSACTIONS 2,881,096 (3,625,254) (13,630,503) (24,478,437)
----------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,875,716 (3,633,189) (13,739,669) (24,673,773)
NET ASSETS AT BEGINNING OF PERIOD 22,506,708 26,139,897 35,449,857 60,123,630
----------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 25,382,424 $ 22,506,708 $ 21,710,188 $ 35,449,857
======================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 42 $ 42 $ 29,463 $ 50,179
======================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
16 17
<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
January 31, Period from Year ended
Six months ended --------------------------------- April 1, 1994 to March 31,
July 31, 1998 1998 1997 1996 January 31, 1995+ 1994
- ---------------------------------------------------------------------------------------------------------------------
<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 0.05 0.03 0.03
-----------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.02 0.05 0.05 0.05 0.03 0.03
-----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.02) (0.05) (0.05) (0.05) (0.03) (0.03)
-----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.02) (0.05) (0.05) (0.05) (0.03) (0.03)
-----------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===================================================================================
Total investment return* 2.51% 5.05% 4.89% 5.46% 3.47% 2.88%
Net assets at end of period
(000's omitted) $ 25,382 $ 22,507 $ 26,140 $ 27,395 $ 33,175 $ 29,788
RATIOS
Expenses to average daily net assets
(including interest expense)*** 0.62%** 0.60% 0.56% 0.50% 0.50%** 0.45%
Expenses to average daily net assets
(excluding interest expense)*** 0.60%** 0.60% 0.56% 0.50% 0.50%** 0.45%
Net investment income
to average daily net assets*** 4.97%** 4.93% 4.80% 5.34% 4.12%** 2.73%
</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 AND
$147,924 IN EXPENSES FOR THE YEARS ENDED JANUARY 31, 1997 AND 1996, THE
PERIOD ENDED JANUARY 31, 1995 AND THE YEAR ENDED MARCH 31, 1994. IF THE
FUND HAD BEEN CHARGED FOR THESE EXPENSES, THE RATIO OF EXPENSES TO AVERAGE
DAILY NET ASSETS WOULD HAVE BEEN .63%, .74%, .88% AND .88%, RESPECTIVELY,
AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD
HAVE BEEN 4.73%, 5.10%, 3.74% AND 2.30%, RESPECTIVELY.
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
18
<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
January 31, Period from Year ended
Six months ended --------------------------------- April 1, 1994 to March 31,
July 31, 1998 1998 1997 1996 January 31, 1995+ 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 9.87 $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10
-----------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.27 0.52 0.52 0.56 0.40 0.39
Net realized and
unrealized gains (losses) (0.04) (0.02) (0.12) 0.09 (0.08) (0.13)
-----------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.23 0.50 0.40 0.65 0.32 0.26
-----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.27) (0.51) (0.52) (0.54) (0.41) (0.37)
Net realized gains -- -- -- -- -- (0.01)
-----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.27) (0.51) (0.52) (0.54) (0.41) (0.38)
-----------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.83 $ 9.87 $ 9.88 $ 10.00 $ 9.89 $ 9.98
===================================================================================
Total investment return* 2.32% 5.19% 4.16% 6.76% 3.21% 2.60%
Net assets at end of period
(000's omitted) $ 21,710 $ 35,450 $ 60,124 $ 54,974 $ 77,273 $ 98,813
RATIOS
Expenses to average daily net assets
(including interest expense) 0.85%** 0.86% 0.85% 0.85% 0.85%** 0.85%
Expenses to average daily net assets
(excluding interest expense) 0.85%** 0.85% 0.85% 0.85% 0.85%** 0.85%
Net investment income to
average net assets 5.18%** 5.14% 5.22% 5.48% 4.77%** 3.95%
Portfolio turnover rate
(excluding short-term
securities) 81.1% 254.2% 231.0% 261.1% 170.0% 235.0%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI 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
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Such securities which
cannot be valued by the portfolio pricing service are valued using
dealer-supplied valuations, or are valued under consistently applied procedures
established by the Board of Directors to determine fair value in good faith.
Short-term "money market type" debt securities having a remaining maturity of 60
days or less at acquisition are valued at cost adjusted for amortization to
maturity of any premium or discount. Forward foreign currency exchange contracts
are valued based on the closing prices of the forward currency contract rates in
the London foreign exchange markets on a daily basis as provided by a reliable
bank or dealer.
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 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.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 or
depreciation on foreign currency transactions. Exchange gains and losses may
also be realized between the trade and settlement dates on security and foreign
currency contract transactions.
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 $2,262,000 at January 31, 1998, which, if not offset by subsequent
capital gains, will expire in 2002 through 2006. 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.
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
Money Market Fund and Reserve Fund have available lines of credit of $3,301,000
and $5,265,000, respectively, with a bank at the prime interest rate. To the
extent funds are drawn against the line, securities are held in a segregated
account. No compensating balances or commitment fees are required under the line
of credit. There were no borrowings outstanding at July 31, 1998.
[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 Money Market Fund this
fee is equal to an annual rate of 0.60% declining to 0.50% of average daily net
assets. For Reserve Fund this fee is equal to an annual rate of 0.85% 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.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods ended July 31, 1998,
and January 31, 1998, were as follows:
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND IAI RESERVE FUND
- ----------------------------------------------------------------------------------------------------------------
Six months ended Year ended Six months ended Year ended
July 31, January 31, July 31, January 31,
1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 169,818,002 209,446,323 4,343,319 8,638,509
ISSUED FOR REINVESTED DISTRIBUTIONS 658,659 1,303,891 80,419 271,273
REDEEMED (167,595,565) (214,375,468) (5,806,314) (11,399,912)
-------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING 2,881,096 (3,625,254) (1,382,576) (2,490,130)
=====================================================================
</TABLE>
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JULY 31, 1998
(UNAUDITED)
[5] PURCHASES AND SALES OF SECURITIES
For the period ended July 31, 1998, purchases of securities and sales proceeds
for the Funds were as follows:
Purchases Sales
- --------------------------------------------------------------------------------
IAI MONEY MARKET FUND $854,987,289 $852,591,055
IAI RESERVE FUND (EXCLUDES SHORT-TERM SECURITIES) $ 18,569,046 $ 19,515,375
[6] FOREIGN CURRENCY EXCHANGE CONTRACTS
At July 31, 1998, the Reserve Fund had entered into a foreign currency exchange
contract. The unrealized appreciation on that contract at July 31, 1998, is
included in unrealized appreciation or depreciation on other assets and
liabilities denominated in foreign currency. The terms of the open contract is
as follows:
Unrealized
Exchange Date Currency to be Delivered Currency to be Received Appreciation
- -------------------------------------------------------------------------------
08/06/98 970,000 New Zealand Dollars 508,280 U.S. Dollars $ 11,475
================================================================================
[7] SUBSEQUENT EVENT
On May 13, 1998, the Board of Directors approved a plan to liquidate the Reserve
Fund. It is anticipated that the shareholders will vote on this proposal in the
Fall of 1998.
24
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR
FUND FAMILY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
....................................................................................................................................
<S> <C> <C> <C>
IAI 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 growth
APPRECIATION FUND companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI 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>
25
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440 USA FAX 612.376.2737
800.945.3863
612.376.2700
