PRINCIPAL PROTECTION FUNDS
ANNUAL REPORT
IAI MONEY MARKET FUND,
IAI RESERVE FUND
JANUARY 31, 1998
[LOGO] IAI MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
ANNUAL REPORT
JANUARY 31, 1998
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
Independent Auditors' Report.................. 25
Federal Tax Information....................... 26
IAI Mutual Fund Family........................ 27
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI MONEY MARKET FUND, IAI RESERVE FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
NOEL P. RAHN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
market down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<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.
A robust economy, low inflation and excess liquidity continue to buoy financial
markets. Certainly the markets have something to worry about. Asia remains a
risk; and U.S. stock market valuations are high while, at the same time, U.S.
interest rates have risen slightly from their earlier lows. However, economic
conditions remain persistently favorable around the world.
The U.S. economy shows surprising strength, after almost seven years of
expansion. Consumer confidence is at a record high, unemployment has dropped to
its lowest level in 24 years and, despite the recent reversal, interest rates
remain low by historical standards. Income gains have boosted tax receipts for
both Federal and state governments. Budget surpluses abound, prompting
widespread talk of tax cuts and new spending initiatives. The Federal Reserve is
contributing ample liquidity to fuel the expansion, with money supply growing in
excess of 9%.
A firm dollar and rising imports continue to restrain pricing power in the
domestic economy. Falling commodity prices reflect the benefits of excess global
capacity. Despite the turmoil in Asia, the price of gold remains below $300. In
the United States, the rate of inflation has fallen to its lowest level since
1986, when the collapse of oil temporarily pulled consumer price inflation below
2%.
At the same time, growth in Europe is poised to accelerate. The monetary union
will bring to Europe the same economic restructuring that led to the low
inflation/high employment conditions that now exist in the United States. Much
of Europe is currently in the midst of the "jobless expansion" phase that was
experienced by the United States in the early 1990s. Many countries have met the
initial guidelines for membership in the union. As a result, economic policies
can become slightly more accommodative. The combination of economic
restructuring and accommodative policies will produce the desired results.
Low inflation, above trend growth and accommodative policies are the ingredients
of bull markets. These factors will overshadow market risks in the months ahead.
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
President
<PAGE>
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
IAI MONEY MARKET FUND
WHAT IS THE FUND'S OBJECTIVE?
The Fund's investment objective is to provide shareholders with a high level of
current income consistent with the preservation of capital and liquidity. The
Fund's goal is to maintain a stable share price of $1.00.
The Fund pursues its objective by investing in a variety of high quality money
market securities, including the following:
* U.S. Treasury Bills
* U.S. Government short-term notes
* Commercial paper issued by large
corporations
* Repurchase agreements
* CDs issued by large banks
HOW HAS THE FUND PERFORMED?
The Fund earned a return of 5.05% during the year ended January 31, 1998. This
compares favorably to the Lipper Money Market Instrument Fund Average which
returned 4.91%.
WERE THERE ANY SIGNIFICANT CHANGES IN PORTFOLIO COMPOSITION?
The Fund continues to invest in high quality commercial paper and short federal
agency issues. The average maturity ranges between 10 and 40 days. No
significant changes were made in this strategy.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
While long-term interest rates declined late in the year to new lows, short-term
interest rates ended the year near the high end of a range of 5.50% to 5.70%
(3-month commercial paper). The rise in short-term rates combined with the
Fund's shorter average maturity helped raise the Fund's yield.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Above-trend economic growth should persist, although expectations will be
dampened by the economic fallout from Asia. As overseas markets stabilize,
cyclical inflationary pressures will re-emerge due to tight labor market
conditions. Short-term interest rates are directly related to actions by the
Federal Reserve. While the current structure of interest rates suggests the
possibility of a cut in rates by the Fed, we believe the Fed is still focused on
controlling domestic inflation. Thus, a rate cut is unlikely unless Asian
problems deteriorate further and spread to other countries outside the region.
In our view, short-term rates will remain stable in the months ahead.
<PAGE>
FUND MANAGER'S REVIEW
IAI MONEY MARKET FUND
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/98
<TABLE>
<CAPTION>
Since Inception
1 Year 5 Year 1/05/93
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI MONEY MARKET FUND 5.05% 4.42% 4.39%
- -----------------------------------------------------------------------------------------
Lipper Money Market Instrument Fund Average 4.91% 4.27% 4.24%*
</TABLE>
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 1/1/93
Sectors
% OF PORTFOLIO AS OF 1/31/98
[PIE CHART]
46% U.S. Government Agency
54% Commercial Paper
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 1/31/98
[BAR CHART]
0-1 MONTHS 80%
2-12 MONTHS 20%
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.
<PAGE>
FUND MANAGER'S REVIEW
IAI RESERVE FUND
IAI RESERVE FUND
WHAT IS THE FUND'S OBJECTIVE?
The IAI Reserve Fund's investment objective is to provide shareholders with high
levels of capital stability and liquidity, and, to the extent consistent with
these primary objectives, a high level of current income. The Fund pursues its
objective primarily through investment in a diversified portfolio of
investment-grade bonds and other debt securities of similar quality.
HOW HAS THE FUND PERFORMED?
The Reserve Fund earned a return of 5.19% for year ended January 31, 1998, while
the Salomon Brothers One Year Treasury Index returned 6.27%.
WERE THERE ANY SIGNIFICANT CHANGES IN PORTFOLIO COMPOSITION?
The Fund maintained a liquid, highly diversified investment strategy. Average
duration was reduced during the year but remained longer than the benchmark. The
weighting in commercial paper was increased while the percentage of
mortgage-backed securities was reduced. Can you point to any specific market
factors that influenced the Fund's performance? While long-term interest rates
declined late in the year to new lows, short-term interest rates ended the year
near the high end of a range of 5.50% to 5.70% (3-month commercial paper). This
rise constrained the Fund's ability to enhance money market-type debt security
returns.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
While long-term interest rates declined late in the year to new lows, short-term
interest rates ended the year near the high end of a range of 5.50% to 5.70%
(3-month commercial paper). This rise constrained the Fund's ability to enhance
money market-type debt security returns.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Above-trend economic growth should persist, although expectations will be
dampened by the economic fallout from Asia. As overseas markets stabilize,
cyclical inflationary pressures will re-emerge due to tight labor market
conditions. Short-term interest rates are directly related to actions by the
Federal Reserve. While the current structure of interest rates suggests the
possibility of a cut in rates by the Fed, we believe the Fed is still focused on
controlling domestic inflation. Thus, a rate cut is unlikely unless Asian
problems deteriorate further and spread to other countries outside the region.
In our view, short-term rates will remain stable in the months ahead.
<PAGE>
FUND MANAGER'S REVIEW
IAI RESERVE FUND
VALUE OF $10,000 INVESTMENT+
[GRAPH]
SALOMON BROTHERS
ONE YEAR TREASURY
IAI RESERVE FUND BILL INDEX
1/31/88 $10,000 $10,000
1/31/89 10,681 10,590
1/31/90 11,593 11,602
1/31/91 12,588 12,699
1/31/92 13,501 13,728
1/31/93 13,982 14,430
1/31/94 14,465 14,964
1/31/95 14,891 15,451
1/31/96 15,896 16,640
1/31/97 16,557 17,557
1/31/98 17,415 18,661
IAI RESERVE FUND
SALOMON BROTHERS ONE YEAR TREASURY BILL INDEX
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/98
1 Year 5 Years 10 Years
================================================================================
IAI RESERVE FUND 5.19% 4.49% 5.71%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 6.27% 5.27% 6.44%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
SECTORS
% OF PORTFOLIO AS OF 1/31/98
[PIE CHART]
Foreign Denominated 2%
Commerical Paper 35%
U.S. Government Obligations 6%
Corporate 13%
Certificates of Deposit 3%
Asset-Backed 35%
U.S. Government Agency 6%
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 1/31/98
[BAR CHART]
0-1 YEARS 53%
1-3 YEARS 24%
3-5 YEARS 23%
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 1/31/98
U.S. Government....6%
Aaa...............77%
Aa................--%
A..................4%
Baa................6%
Non-Investment
Grade..............7%
<PAGE>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JANUARY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT AGENCY SECURITIES - 43.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 43.3%
Federal Home Loan Mortgage Corporation 5.35% 02/12/98 $ 1,000,000 $ 998,514
Federal Home Loan Mortgage Corporation 5.35 02/17/98 1,500,000 1,496,656
Federal Home Loan Mortgage Corporation 5.39 02/18/98 1,100,000 1,097,365
Federal Home Loan Mortgage Corporation 5.38 02/26/98 1,400,000 1,394,979
Federal National Mortgage Association 5.35 02/25/98 1,689,000 1,683,227
Federal National Mortgage Association 5.36 03/06/98 1,300,000 1,293,806
Federal National Mortgage Association 5.37 03/10/98 1,800,000 1,790,334
---------
9,754,881
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $9,754,881)................................................................................ $ 9,754,881
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI MONEY MARKET FUND
JANUARY 31, 1998
COMMERCIAL PAPER - 51.5%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 15.5%
General Electric Credit 5.40% 02/27/98 $ 1,200,000 $ 1,195,500
IBM Credit 5.51 02/09/98 1,300,000 1,298,607
Pitney Bowes Credit 5.45 02/20/98 1,000,000 997,275
---------
3,491,382
- ------------------------------------------------------------------------------------------------------------------
FOODS AND FOOD PROCESSING - 5.8%
DuPont (E.I.) de Nemours (d) 5.50 02/03/98 1,300,000 1,299,801
- ------------------------------------------------------------------------------------------------------------------
RETAIL - 6.2%
Proctor & Gamble 5.47 02/04/98 1,400,000 1,399,575
- ------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 5.8%
AT&T 5.41 03/02/98 1,300,000 1,294,530
- ------------------------------------------------------------------------------------------------------------------
UTILITIES - 18.2%
Duke Power 5.43 02/10/98 1,400,000 1,398,311
Emerson Electric 5.44 02/19/98 1,300,000 1,296,660
Wisconsin Electric Fuel 5.43 02/13/98 1,400,000 1,397,677
---------
4,092,648
==================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $11,577,936)............................................................................. $ 11,577,936
==================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $21,332,817) (g)......................................................................... $ 21,332,817
==================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 5.2%
............................................................................................. $ 1,173,891
==================================================================================================================
TOTAL NET ASSETS
............................................................................................. $ 22,506,708
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI RESERVE FUND
JANUARY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT OBLIGATIONS - 6.1%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.3%
5.10% 04/23/98 $ 100,000 (b) $ 98,871
- --------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTE - 5.8%
6.25 01/31/02 2,000,000 2,058,740
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $2,134,195)................................................................................... $2,157,611
===================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 6.2%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTE - 6.2%
Federal Home Loan Mortgage Corporation 5.37% 02/10/98 $ 2,200,000 $2,197,047
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $2,197,047)................................................................................... $2,197,047
===================================================================================================================
CORPORATE BONDS - 12.7%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL - 5.7%
AT&T Capital (MEDIUM-TERM NOTE) 6.41% 08/13/99 $ 1,500,000 $1,510,200
GATX Capital (MEDIUM-TERM NOTE) 6.36 12/16/02 500,000 504,390
----------
2,014,590
- --------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 5.6%
Nabisco (d) 6.30 08/26/99 1,000,000 1,006,140
Time Warner (d) 6.10 12/30/01 1,000,000 991,070
----------
1,997,210
- --------------------------------------------------------------------------------------------------------------------
UTILITIES - 1.4%
CMS Energy (d) 7.38 11/15/00 500,000 505,365
===================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $4,464,941)................................................................................... $4,517,165
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI RESERVE FUND
JANUARY 31, 1998
ASSET-BACKED SECURITIES - 34.2%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 15.7%
AESOP Funding II 97-1 A2 (d) 6.40% 10/20/03 $ 1,000,000 $ 1,021,380
Ford Credit Auto Lease Trust 96-1 A2 5.80 05/15/99 898,833 898,806
National Car Rental Financing 96-1 A2 6.80 04/20/00 1,500,000 1,511,484
Navistar Financial Corporation Owner Trust 96-B A3 6.33 04/21/03 1,100,000 1,110,274
Rental Car Finance 97-1 A2 (d) 6.45 08/25/04 1,000,000 1,012,813
----------
5,554,757
- --------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 9.9%
Citibank Credit Card Master Trust II 98-1 A 5.75 01/15/03 1,000,000 999,844
Dayton Hudson Credit Card Master Trust 97-1 A 6.25 08/25/05 1,000,000 1,017,540
Dayton Hudson Credit Card Master Trust 95-1 A 6.10 02/25/02 500,000 501,085
First Chicago Master Trust II 95-N A 5.75 (f) 12/15/00 1,000,000 1,000,620
----------
3,519,089
- --------------------------------------------------------------------------------------------------------------------
HOME EQUITY LOANS - 5.7%
Associates Manufactured Housing 97-2 A3 6.28 03/15/28 1,000,000 1,007,344
Contimortgage Home Equity Loan Trust 97-3 A5 7.01 08/15/13 1,000,000 1,020,310
----------
2,027,654
- --------------------------------------------------------------------------------------------------------------------
UTILITIES - 2.9%
Southern California Edison 97-1 A2 6.14 03/25/02 1,000,000 1,008,450
===================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $11,993,868)..................................................................................$ 12,109,950
- --------------------------------------------------------------------------------------------------------------------
FOREIGN DENOMINATED BONDS - 1.8%
Principal Market
Rate Maturity Amount (c) Value (a)
- --------------------------------------------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS - 1.8%
Australian Government (AUSTRALIAN DOLLARS) 10.00% 10/15/02 800,000 $ 648,575
===================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $627,224).......................................................................................$ 648,575
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO
IAI RESERVE FUND
JANUARY 31, 1998
CERTIFICATE OF DEPOSIT - 2.8%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 2.8%
Banco Latinoamericano (d)(e) 6.20% 03/12/98 $ 1,000,000 $ 999,710
===================================================================================================================
TOTAL INVESTMENTS IN CERTIFICATE OF DEPOSITS
(COST: $999,657).....................................................................................$ 999,710
===================================================================================================================
Commercial Paper - 34.9%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL - 19.4%
Bell Atlantic Network Funding 5.46% 02/06/98 $ 1,000,000 $ 999,242
Bell Atlantic Financial Services 5.45 03/17/98 1,700,000 1,688,676
Ford Motor Credit 5.49 02/20/98 1,700,000 1,695,074
General Electric Capital 5.52 02/02/98 1,500,000 1,499,770
Motorola Credit 5.48 02/04/98 1,000,000 999,543
--------------
6,882,305
- --------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 2.8%
Gannett (d) 5.45 02/05/98 1,000,000 999,394
- --------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 4.8%
BellSouth Telecommunications 5.40 03/03/98 1,700,000 1,692,350
- --------------------------------------------------------------------------------------------------------------------
UTILITIES - 7.9%
Southern California Edison 5.45 02/12/98 1,300,000 1,297,835
Wisconsin Electric Fuel 5.45 02/09/98 1,500,000 1,498,183
--------------
2,796,018
===================================================================================================================
TOTAL INVESTMENTS IN COMMERCIAL PAPER
(COST: $12,370,067)............................................................................... $ 12,370,067
===================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $34,786,999) (g)........................................................................... $ 35,000,125
===================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.3%
............................................................................................... $ 449,732
===================================================================================================================
TOTAL NET ASSETS
............................................................................................... $ 35,449,857
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 13
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Security is pledged to cover initial margin on open futures contracts (see Note
6 to the financial statements).
(c)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(d)
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.
(e)
Yankee represents dollar-denominated bonds issued in United States by foreign
banks and corporations.
(f)
Interest rate varies to reflect current market conditions; rate shown is the
effective rate on January 31, 1998.
(g)
At January 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 $ 21,332,817 $ 34,786,999
==============================================================================
Gross unrealized appreciation $ -- $ 214,159
Gross unrealized depreciation -- (1,033)
- ------------------------------------------------------------------------------
Net unrealized appreciation $ -- $ 213,126
==============================================================================
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
================================================================================================================
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $21,332,817 and $34,786,999) (see Fund Portfolios) $ 21,332,817 $ 35,000,125
Cash in bank on demand deposit 1,255,982 154,484
Accrued interest receivable 25,000 280,638
Other assets -- 27,189
------------ ------------
TOTAL ASSETS 22,613,799 35,462,436
------------ ------------
LIABILITIES
Unrealized depreciation on foreign currency contracts held,
at value (Note 8) -- 11,329
Dividends payable ($.0043 per share) 107,091 --
Variation margin payable -- 1,250
------------ ------------
TOTAL LIABILITIES 107,091 12,579
------------ ------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 22,506,708 $ 35,449,857
============ ============
REPRESENTED BY:
Capital stock $ 225,154 $ 35,922
Additional paid-in capital 22,281,554 37,423,642
Undistributed net investment income 42 50,179
Accumulated net realized losses on investments (42) (2,246,054)
Unrealized appreciation or depreciation on:
Investment securities $ -- $ 196,957
Other assets & liabilities denominated in foreign currency -- (10,789)
---------- ------------
-- 186,168
------------ ------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 22,506,708 $ 35,449,857
------------
Shares of capital stock outstanding; authorized 10 billion
shares of $.01 par value stock 22,515,448 3,592,194
------------ ------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 1.00 $ 9.87
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
STATEMENTS OF OPERATIONS
IAI MONEY MARKET FUND, IAI RESERVE FUND
YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
IAI MONEY IAI
MARKET FUND RESERVE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest $ 1,633,174 $ 3,215,558
----------- -----------
TOTAL INCOME 1,633,174 3,215,558
----------- -----------
EXPENSES (NOTE 3)
Management fees 176,847 456,072
Compensation of Directors 3,005 6,342
----------- -----------
TOTAL EXPENSES 179,852 462,414
Less fees reimbursed by Advisers (3,005) (6,342)
----------- -----------
NET EXPENSES 176,847 456,072
----------- -----------
NET INVESTMENT INCOME 1,456,327 2,759,486
----------- -----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 805 $ 25,113
Futures contracts -- (487,083)
Written option contracts -- 5,083
Foreign currency transactions -- (13,195)
805 (470,082)
Net change in unrealized appreciation or depreciation on:
Investment securities $ -- $ 268,215
Futures contracts -- (27,238)
Other assets and liabilities denominated
in foreign currency -- (10,789)
-- 230,188
----------- -----------
NET GAIN (LOSS) ON INVESTMENTS 805 (239,894)
----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,457,132 $ 2,519,592
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI MONEY MARKET FUND, IAI RESERVE FUND
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND IAI RESERVE FUND
Year ended Year ended Year ended Year ended
January 31, 1998 January 31, 1997 January 31, 1998 January 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 1,456,327 $ 1,469,404 $ 2,759,486 $ 3,392,145
Net realized gains (losses) 805 (847) (470,082) (400,962)
Net change in unrealized
appreciation or depreciation -- -- 230,188 (305,113)
------------- ------------- ------------- -------------
Net increase in net assets
resulting from operations 1,457,132 1,468,557 2,519,592 2,686,070
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,465,067) (1,469,404) (2,714,928) (3,394,308)
------------- ------------- ------------- -------------
Total distributions (1,465,067) (1,469,404) (2,714,928) (3,394,308)
------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 209,446,323 360,228,039 85,217,706 168,048,225
Net asset value of shares issued in
reinvestment of distributions 1,303,891 1,386,884 2,667,968 3,325,018
Cost of shares redeemed (214,375,468) (362,869,212) (112,364,111) (165,515,792)
------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET
ASSETS FROM CAPITAL
SHARE TRANSACTIONS (3,625,254) (1,254,289) (24,478,437) 5,857,451
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE)
IN NET ASSETS (3,633,189) (1,255,136) (24,673,773) 5,149,213
NET ASSETS AT BEGINNING OF PERIOD 26,139,897 27,395,033 60,123,630 54,974,417
------------- ------------- ------------- -------------
NET ASSETS AT END OF PERIOD $ 22,506,708 $ 26,139,897 $ 35,449,857 $ 60,123,630
============= ============= ============= =============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 42 $ -- $ 50,179 $ 17,826
============= ============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
FINANCIAL HIGHLIGHTS
IAI MONEY MARKET FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD AND
SELECTED INFORMATION FOR EACH PERIOD
INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Period from Year ended Period from
January 31, April 1, 1994 to March 31, Jan. 5, 1993****
1998 1997 1996 January 31, 1995+ 1994 to March 31, 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- ---------- ----------
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03 0.01
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM OPERATIONS 0.05 0.05 0.05 0.03 0.03 0.01
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.05) (0.05) (0.05) (0.03) (0.03) (0.01)
---------- ---------- ---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.03) (0.03) (0.01)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE
End of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ==========
Total investment return (%)* 5.05 4.89 5.46 3.47 2.88 2.85
Net assets at end of period
(000's omitted) $ 22,507 $ 26,140 $ 27,395 $ 33,175 $ 29,788 $ 25,877
RATIOS
Expenses to average daily net assets (%)*** 0.60 0.56 0.50 0.50** 0.45 0.29**
Net investment income to average
daily net assets (%)*** 4.93 4.80 5.34 4.12** 2.73 2.96**
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
*** THE FUND'S ADVISER VOLUNTARILY WAIVED $21,950, $76,386, $81,895, $147,924
AND $18,494 IN EXPENSES FOR THE YEARS ENDED JANUARY 31, 1997, AND 1996, THE
PERIOD ENDED JANUARY 31, 1995, THE YEAR ENDED MARCH 31, 1994, AND THE
PERIOD ENDED JANUARY 5, 1993, RESPECTIVELY. IF THE FUND HAD BEEN CHARGED
FOR THESE EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD
HAVE BEEN .63%, .74%, .88%, .88% AND .69%, RESPECTIVELY, AND THE RATIO OF
NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 4.73%,
5.10%, 3.74%, 2.30% AND 2.56%, RESPECTIVELY.
**** COMMENCEMENT OF OPERATIONS
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
<PAGE>
FINANCIAL HIGHLIGHTS
IAI RESERVE FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD AND
SELECTED INFORMATION FOR EACH PERIOD
INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Years ended
January 31, Period from March 31,
------------ April 1, 1994 to -----------
1998 1997 1996 January 31, 1995+ 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10 $ 10.16
---------- ---------- ---------- ---------- ---------- ----------
OPERATIONS
Net investment income 0.52 0.52 0.56 0.40 0.39 0.36
Net realized and unrealized gains (losses) (0.02) (0.12) 0.09 (0.08) (0.13) 0.02
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FROM OPERATIONS 0.50 0.40 0.65 0.32 0.26 0.38
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.51) (0.52) (0.54) (0.41) (0.37) (0.36)
Net realized gains -- -- -- -- (0.01) (0.08)
---------- ---------- ---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS (0.51) (0.52) (0.54) (0.41) (0.38) (0.44)
---------- ---------- ---------- ---------- ---------- ----------
NET ASSET VALUE
End of period $ 9.87 $ 9.88 $ 10.00 $ 9.89 $ 9.98 $ 10.10
========== ========== ========== ========== ========== ==========
Total investment return (%)* 5.19 4.16 6.76 3.21 2.60 3.81
Net assets at end of period (000's omitted) $ 35,450 $ 60,124 $ 54,974 $ 77,273 $ 98,813 $ 82,085
RATIOS
Expenses to average net assets (%) 0.85 0.85 0.85 0.85** 0.85 0.85
Net investment income to average
net assets (%) 5.14 5.22 5.48 4.77** 3.95 3.49
Portfolio turnover rate
(excluding short-term securities) (%) 254.2 231.0 261.1 170.0 235.0 538.7
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
[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
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income and
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
accumulated net realized gains (losses) have been increased (decreased)
resulting in reclassification adjustments to additional paid-in capital as
follows:
IAI MONEY MARKET IAI RESERVE
FUND FUND
- --------------------------------------------------------------------------------
Undistributed net investment income $ 8,782 $ (12,205)
Accumulated net realized gains (losses) $ (42) $ 12,205
Additional paid-in capital $ (8,740) --
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.
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.
<PAGE>
[2] COMMITMENTS AND CONTINGENCIES (CON'T)
Money Market Fund and Reserve Fund have available lines of credit of $9,200,000
and $15,000,000, 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. During the year ended January 31, 1998, the Funds paid $1,633 and
$5,952, respectively, in interest on such lines of credit at an average rate of
8.50%. This interest is included in interest income on the Statement of
Operations. There were no borrowings outstanding at January 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.
[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, 1998,
and January 31, 1997, were as follows:
<TABLE>
<CAPTION>
IAI MONEY MARKET FUND IAI RESERVE FUND
- ------------------------------------------------------------------------------------------------------------
Years ended Years ended
January 31, January 31,
----------- -----------
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
SOLD 209,446,323 360,228,039 8,638,509 16,939,554
ISSUED FOR REINVESTED DISTRIBUTIONS 1,303,891 1,386,884 271,273 336,417
REDEEMED (214,375,468) (362,869,212) (11,399,912) (16,688,429)
------------ ------------ ----------- -----------
INCREASE (DECREASE) IN SHARES OUTSTANDING (3,625,254) (1,254,289) (2,490,130) 587,542
------------ ------------ ----------- -----------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI MONEY MARKET FUND, IAI RESERVE FUND
JANUARY 31, 1998
[5] PURCHASES AND SALES OF SECURITIES
For the year ended January 31, 1998, purchases of securities and sales proceeds
for the Funds were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
IAI MONEY MARKET FUND $1,297,000,402 $ 1,302,286,904
IAI RESERVE FUND (EXCLUDES SHORT-TERM SECURITIES) $ 71,813,291 $ 93,281,960
</TABLE>
[6] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of January 31, 1998,
for the IAI Reserve Fund. The market value of securities deposited to cover
initial margin requirements for the open positions at January 31, 1998, was
$98,871.
<TABLE>
<CAPTION>
FUTURES
- ----------------------------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 10 March 1998 Short $ 1,099,688 $ 16,169
</TABLE>
[7] OPTIONS CONTRACTS WRITTEN
During the year ended January 31, 1998, Reserve Fund wrote the following options
on futures. There were no outstanding contracts at January 31, 1998.
<TABLE>
<CAPTION>
CALL OPTIONS
- -----------------------------------------------------------------------------------------
Number of Contracts Premium
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at 1/31/97 -- $ --
Opened 32 12,010
Expired -- --
Closed (32) (12,010)
Exercised -- --
- -----------------------------------------------------------------------------------------
Outstanding at 1/31/98 -- $ --
- -----------------------------------------------------------------------------------------
</TABLE>
[8] FOREIGN CURRENCY EXCHANGE CONTRACTS
At January 31, 1998, the Reserve Fund had entered into a foreign currency
exchange contract. The unrealized depreciation on that contract at January 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:
<TABLE>
<CAPTION>
Currency to be Currency to be Unrealized
Exchange Date Delivered Received Depreciation
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
02/27/98 950,000 Australian Dollars 642,461 U.S. Dollars $ 11,329
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 Money Market Fund (a portfolio within IAI Investment
Funds VI, Inc.) and IAI Reserve Fund (a portfolio within IAI Investment Funds V,
Inc.) as of January 31, 1998, 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. 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
Money Market Fund and IAI Reserve Fund at January 31, 1998, 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 13, 1998
<PAGE>
FEDERAL TAX INFORMATION
IAI MONEY MARKET FUND, IAI RESERVE FUND
IAI MONEY MARKET FUND
TAX INFORMATION:
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
FEBRUARY 1997 $ 0.0037
MARCH 1997 0.0038
APRIL 1997 0.0041
MAY 1997 0.0043
JUNE 1997 0.0039
JULY 1997 0.0042
AUGUST 1997 0.0044
SEPTEMBER 1997 0.0039
OCTOBER 1997 0.0045
NOVEMBER 1997 0.0038
DECEMBER 1997 0.0045
JANUARY 1998 0.0043
- --------------------------------------------------------------------------------
$ 0.0494
IAI RESERVE FUND
TAX INFORMATION:
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
FEBRUARY 1997 $ 0.0340
MARCH 1997 0.0360
APRIL 1997 0.0400
MAY 1997 0.0470
JUNE 1997 0.0470
JULY 1997 0.0420
AUGUST 1997 0.0420
SEPTEMBER 1997 0.0470
OCTOBER 1997 0.0420
NOVEMBER 1997 0.0440
DECEMBER 1997 0.0873
JANUARY 1998 0.0000
- --------------------------------------------------------------------------------
$ 0.5083
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
<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 DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND 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
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 short-term instruments
+ INCOME]
- -----------------------------------------------------------------------------------------------------------------------------------
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
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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
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://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
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[LOGO] IAI MUTUAL FUNDS
601 SECOND AVENUE SOUTH, SUITE 3600, MINNEAPOLIS,
MINNESOTA 55402 USA FAX 612.376.2737
800.945.3863
612.376.2700
