IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
SEMI-ANNUAL REPORT
JUNE 30, 1996
(unaudited)
TABLE OF CONTENTS
IAI Retirement Funds, Inc.
Semi-Annual Report
June 30, 1996
(unaudited)
Chairman's Letter...............................2
Portfolio Managers' Reviews
IAI Regional Portfolio......................4
IAI Balanced Portfolio......................5
IAI Reserve Portfolio.......................6
Schedules of Investments
IAI Regional Portfolio......................7
IAI Balanced Portfolio.....................10
IAI Reserve Portfolio......................12
Notes to Schedules of Investments..............13
Statements of Assets and Liabilities...........14
Statements of Operations.......................15
Statements of Changes in Net Assets
IAI Regional Portfolio.....................16
IAI Balanced Portfolio.....................17
IAI Reserve Portfolio......................18
Financial Highlights
IAI Regional Portfolio.....................19
IAI Balanced Portfolio.....................20
IAI Reserve Portfolio......................21
Notes to Financial Statements..................22
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors..............................Back Cover
[LOGO]
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700
CHAIRMAN'S LETTER
IAI Retirement Funds, Inc.
INVESTING WITH CAUTION
[PHOTO]
NOEL P. RAHN
Chairman
Just when it appeared that the stock market was getting tired after a five-year
run, the Dow Jones Industrial Average reached more new highs in the first half
of 1996. It is fitting that the Dow would be reaching record levels on the 100th
anniversary of its birth.
How much longer can it go before the inevitable correction? Even though the
pundits on television will give you their best guess, nobody really knows. But
just because this is the longest bull market in history doesn't mean it has to
end tomorrow. In short, when it comes to the stock market, history doesn't
necessarily repeat itself.
Although the Dow gets most of the attention, the real news this year is the
success of smaller companies. With the exception of the month of June, indices
such as NASDAQ and the Russell 2500 have shown sterling returns in 1996. New
stock offerings from emerging growth companies continue to come out in record
numbers. To be sure, this can also be a sign that the top of the market is near.
That's one reason that while we continue to enjoy the market advances, we
continue to invest cautiously. We're doing that by investing in companies that
are priced reasonably, and selling them when they reach our disciplined sell
targets.
ECONOMIC OUTLOOK
A summary of the economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Although we don't expect inflation to rise above 3% in 1996, we are more
concerned about rising prices in 1997. The U.S. economy is now in the sixth year
of a modest, but persistent expansion. A persistent expansion uses up economic
capacity, eventually putting upward pressure on prices. Monetary policy has been
accommodative over the last year, providing ample fuel for higher prices if
capacity limits are exceeded. So far, the economy has not exceeded its capacity
ceiling. However, with a capacity utilization rate of 83% and an unemployment
rate of 5.4%, a modest growth acceleration could push these rates over their
limits. If the economy grows at a 3.5% rate instead of a 2.5% rate, then there
will be pressure on prices and wages.
Corporate downsizing has helped to hold prices and wages in check. However,
these strategies have reached an extreme for this cycle. Management techniques
such as just-in-time deliveries, reengineering, and layoffs have helped to make
US businesses the most competitive in the world. Yet, these practices have
created a business environment with very little cushion in the system to meet
unexpected increases in demand. As the economy grows, businesses eventually have
to hire more employees. If that becomes the case, the unemployment rate over the
next 12 months is going to go a lot lower, and there will be wage pressures--not
because of union demands, but because of supply and demand.
Economic growth in the second and third quarter should average about 3.5%. Much
of this will be inventory replenishment which should subside by the fourth
quarter. For the full year real GDP should expand by slightly under 3%.
Inflation will not be a problem this year, but as the expansion ages in 1997
higher prices are inevitable.
Please read the Portfolio Managers' Reviews, which follow this letter, for a
detailed perspective on the Portfolios' performance and our strategy going
forward. We appreciate your continued trust and confidence in IAI. If there is
any way we can serve you better, please let us know by calling our toll-free
Investor Services Hotline at 1-800-945-3863.
Sincerely,
/s/Noel P. Rahn
Noel P. Rahn
Chairman
PORTFOLIO MANAGER'S REVIEW
IAI Regional Portfolio
IAI REGIONAL PORTFOLIO
The IAI Regional Portfolio, which invests in companies located in the Upper
Midwest, produced a total return of 5.3% during the second quarter of 1996. In
contrast, the Standard & Poor's 500 Index rose 4.5% while the IAI Regional 300
Index, which is a market-cap weighted index created by IAI consisting of the 300
largest companies in the eight state region ranked by market capitalization, was
up 3.0%.
We believe that the Portfolio outperformed its benchmarks, in part, because of
the nature of the stocks that we select. We tend to avoid "hot names,"
concentrating instead on companies that are not widely followed by Wall Street.
Examples of strong performers include Merrill, a financial printer, Land's End,
the catalog company, and Northland Cranberries, an agricultural concern moving
into consumer products.
The IAI Regional Portfolio owns a collection of stocks in companies which should
continue to generate strong growth regardless of the fortunes of the overall
U.S. economy. We believe that our discipline in valuing companies and our direct
research would serve us well under any stock market scenario.
[PHOTO]
MARK C. HOONSBEEN, CFA
IAI Regional Portfolio
Manager
VALUE OF $10,000 INVESTMENT+
[GRAPH'S PLOT POINTS]
IAI Regional Portfolio S&P 500 Index*
(Inception 1/31/94)
1/31/94 $10,000 $10,000
6/30/94 $10,020 $ 9,343
12/31/94 $10,620 $ 9,803
6/30/95 $11,986 $11,782
12/31/95 $14,178 $13,479
6/30/96 $15,377 $14,859
AVERAGE ANNUAL RETURNS+
Through 6/30/96
Since Inception
6 Months** 1 Year 1/31/94
- ----------------------------------------------------------------------
IAI Regional Portfolio 8.45% 28.30% 19.52%
- ----------------------------------------------------------------------
S&P 500 Index 10.24% 26.12% 17.81%*
+ Past performance is not predictive of future performance
* Since 2/01/94
** Not annualized
PORTFOLIO MANAGERS' REVIEW
IAI Balanced Portfolio
IAI BALANCED PORTFOLIO
The IAI Balanced Portfolio seeks to invest in the optimal mixture of stocks and
bonds. Late in the quarter, this asset allocation mix was shifted from a ratio
of 60% stocks/40% bonds to a 50/50 ratio. The shift reflects our view that bonds
became increasingly attractive as bond yields rose above 7%.
The Portfolio produced a total return of 2.3% during the quarter. This matches
the performance for the average balanced fund, which generated a return of 2.3%,
according to Lipper Analytical Services Inc.* The Portfolio's performance
reflects the differing fortunes of stocks and bonds as an asset class. During
the quarter, the Standard & Poor's 500 Index rose 4.5%, while the bond market
was essentially flat.
Within the bond portion, we biased the Portfolio away from U.S. Treasuries and
toward corporate bond holdings. Within the equity portion, the Portfolio
includes companies with strong economic franchises that generate high levels of
free cash flow.
*Source: 7/3/96 The Wall Street Journal, pg. R2
[PHOTO]
LARRY R. HILL, CFA
IAI Balanced Portfolio
Co-Manager
VALUE OF $10,000 INVESTMENT+
[GRAPH'S PLOT POINTS]
IAI Balanced Portfolio S&P 500 Index* Lehman Government/
(Inception 2/03/94) Corporate Bond Index*
2/03/94 $10,000 $10,000 $10,000
6/30/94 $ 9,900 $ 9,343 $ 9,425
12/31/94 $10,220 $ 9,803 $ 9,506
6/30/95 $11,282 $11,782 $10,627
12/31/95 $11,877 $13,479 $11,335
6/30/96 $12,282 $14,859 $11,122
[PHOTO]
DON J. HOELTING, CFA
IAI Balanced Portfolio
Co-Manager
AVERAGE ANNUAL RETURNS+
Through 6/30/96
Since Inception
6 Months** 1 Year 2/03/94
- ----------------------------------------------------------------------
IAI Balanced Portfolio 3.41% 8.86% 8.92%
- ----------------------------------------------------------------------
S&P 500 Index 10.24% 26.12% 17.81%*
- ----------------------------------------------------------------------
Lehman Government/
Corporate Bond Index (1.88%) 4.66% 4.50%*
+ Past performance is not predictive of future performance
* Since 2/01/94
** Not annualized
PORTFOLIO MANAGERS' REVIEW
IAI Reserve Portfolio
IAI RESERVE PORTFOLIO
The U.S. economy shifted into a higher gear during the second quarter of 1996.
The shift was unusually abrupt, coming after a winter in which a partial
government shutdown and severe weather depressed economic activity. Despite
strong job growth, the Federal Reserve Board took no action during the second
quarter to slow the economy. As a result, yields on short-term investments such
as U.S. government securities stayed fairly constant. For the six-month period
ended June 30, 1996, the IAI Reserve Portfolio produced a total return of 2.2%.
Yields on securities beyond one year rose sharply, as investors anticipated that
the Federal Reserve Board would have to tighten the money supply to slow down
the economy. As a result, short-term investments generally outperformed
intermediate and long-term bonds, which suffer price declines in a rising
interest rate environment. Given this environment, we are maintaining a cautious
position, keeping the Portfolio's average maturity under two years.
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI Reserve Portfolio
Co-Manager
VALUE OF $10,000 INVESTMENT+
[GRAPH'S PLOT POINTS]
IAI Reserve Portfolio Salomon Brothers One
(Inception 4/07/94) Year Treasury Bill*
4/07/94 $10,000 $10,000
6/30/94 $10,044 $10,046
12/31/94 $10,225 $10,232
6/30/95 $10,496 $10,716
12/31/95 $10,746 $11,060
6/30/96 $10,983 $11,326
(PHOTO)
LIVINGSTON G. DOUGLAS, CFA
IAI Reserve Portfolio
Co-Manager
AVERAGE ANNUAL RETURNS+
Through 6/30/96
Since Inception
6 Months** 1 Year 4/07/94
- ----------------------------------------------------------------------
IAI Reserve Portfolio 2.20% 4.63% 4.29%
- ----------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 2.40% 5.69% 5.69%*
+ Past performance is not predictive of future performance
* Since 4/01/94
** Not annualized
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
IAI REGIONAL PORTFOLIO
June 30, 1996
(percentage figures indicate percentage of total net assets)
(unaudited)
COMMON STOCKS - 73.1%
Market Market
Quantity Value (a) Quantity Value (a)
<S> <C> <C> <C> <C> <C>
COMMERCIAL SERVICES - 5.0%
Banta 1,050 $ 26,512 FCB Financial 1,000 $ 17,500
Bell & Howell (b) 1,300 42,413 Green Tree Financial 2,400 75,000
Castle (A.M.) 4,000 94,500 Guarantee Life 5,300 93,413
Data Documents (b) 3,000 36,750 Life USA (b) 1,800 15,975
Manpower 2,400 94,200 Olympic Financial (b) 2,000 46,000
Merrill 5,000 125,000 ReliaStar Financial 1,800 77,625
419,375 Roosevelt Financial 2,000 38,500
CONSUMER DURABLES - 6.2% Winthrop Resources 2,000 40,500
Clarcor 1,600 39,600 687,088
ITI Technologies (b) 3,800 125,400 HEALTH SERVICES - 1.3%
Newell 4,300 131,688 InStent (b) 1,600 34,800
Polaris 3,400 116,025 Patterson Dental (b) 2,000 72,500
Snap-On 2,200 104,225 107,300
516,938 HEALTH TECHNOLOGY - 7.4%
CONSUMER NON-DURABLES - 0.5% Abbott Laboratories 3,600 156,600
Sara Lee 1,400 45,325 Aksys (b) 2,200 33,550
CONSUMER SERVICES - 1.5% Baxter International 3,200 151,200
Buffets (b) 6,400 78,400 CIMA Labs (b) 10,000 75,000
Lodgenet Entertainment (b) 900 12,375 Diametrics Medical (b) 10,000 50,000
McDonald's 800 37,400 Empi (b) 500 6,500
128,175 Northfield Laboratories (b) 400 5,900
ELECTRONIC TECHNOLOGY - 6.7% Possis Medical (b) 1,000 16,625
360 Communications (b) 5,000 120,000 Sybron International - 3,100 77,500
Aetrium (b) 5,100 91,800 Wisconsin (b)
ANTEC (b) 5,000 79,375 Urologix (b) 2,900 39,150
Cyberoptics (b) 3,000 46,500 612,025
FSI International (b) 7,700 97,212 NON-ENERGY MINERALS - 1.8%
Lucent Technologies 1,200 45,450 USG 5,200 144,950
Rural Cellular Class A (b) 1,400 17,850 PROCESS INDUSTRIES - 6.9
Sheldahl (b) 1,800 37,575 AptarGroup 4,500 136,125
United States Satellite 600 22,650 Bemis 1,000 35,000
Broadcasting (b) BMC 3,800 109,250
558,412 Fort Howard (b) 5,700 113,288
ENERGY MINERALS - 0.9% IMC Global 1,620 60,952
Amoco 1,000 72,375 Mycogen (b) 2,000 30,000
FINANCIAL - 8.3% Northland Cranberries 1,500 45,000
Allstate 2,000 91,250 Class A
Amerin (b) 4,100 109,675 Valspar 400 18,400
Equitable of Iowa 2,300 81,650 Wausau Paper Mills 1,300 25,675
573,690
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
<TABLE>
<CAPTION>
Market Market
Quantity Value (a) Quantity Value (a)
<S> <C> <C> <C> <C> <C>
PRODUCER MANUFACTURING - 11.0% TECHNOLOGY SERVICES - 5.5%
ABC Rail Products (b) 5,500 $ 118,938 Engineering Animation (b) 5,800 $ 116,000
Anixter International (b) 9,000 133,875 FIserv (b) 1,700 51,000
Borg-Warner Automotive 1,400 55,300 Metromail (b) 2,000 44,750
Case 2,100 100,800 Racotek (b) 6,200 29,062
Deere 2,100 84,000 Reality Interactive (b) 10,000 45,000
Diamond Home Services (b) 1,000 16,750 Secure Computing (b) 4,600 105,800
IDEX 3,500 133,000 Spyglass (b) 600 12,863
Illinois Tool Works 900 60,862 TRO Learning (b) 3,000 48,750
Juno Lighting 500 8,500 453,225
Lindsay Manufacturing 1,500 60,375 TRANSPORTATION - 4.0%
Littlefuse (b) 100 3,750 Heartland Express (b) 923 24,690
Minnesota Mining & 300 20,700 Illinois Central 4,600 130,525
Manufacturing USFreightways 4,600 89,700
Pentair 1,800 54,000 Wisconsin Central 2,800 91,000
Recovery Engineering (b) 1,600 21,200 Transportation (b)
Thermo Sentron (b) 2,700 43,200 335,915
Woodhead 300 3,525 UTILITIES - 1.7%
918,775 MFS Communications (b) 3,800 142,975
RETAIL TRADE - 4.4% TOTAL INVESTMENTS IN COMMON STOCKS
Land's End (b) 5,700 141,075 (Cost: $5,591,465) .................. $6,084,755
Sears Roebuck 3,500 170,187 TOTAL INVESTMENTS IN LONG-TERM
Walgreen 1,700 56,950 SECURITIES
368,212 (Cost: $5,591,465) .................. $6,084,755
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 23.8%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 23.8%
U.S. Treasury Bills
5.21% 08/08/96 $ 1,000,000 $ 994,944
5.25 09/19/96 1,000,000 988,667
----------
1,983,611
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(Cost: $1,983,319) ........................................................ $1,983,611
TOTAL INVESTMENTS IN SECURITIES
(Cost: $7,574,784) (c) ..................................................... $8,068,366
OTHER ASSETS AND LIABILITIES (NET) - 3.1%
............................................................................ $ 260,540
TOTAL NET ASSETS
............................................................................ $8,328,906
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
IAI BALANCED PORTFOLIO
June 30, 1996
(percentage figures indicate percentage of total net assets)
(unaudited)
COMMON STOCKS - 52.6%
Market Market
Quantity Value (a) Quantity Value (a)
<S> <C> <C> <C> <C> <C>
CONSUMER DURABLES - 5.5% HEALTH TECHNOLOGY - 3.0%
Bandag 300 $ 14,40 Bristol-Myers Squibb 130 $11,700
Eastman Kodak 300 23,325 Merck 100 6,463
Hasbro 300 10,725 Pfizer 150 10,706
Sturm Ruger 300 13,950 SmithKline Beecham ADR 100 5,437
62,400 34,306
CONSUMER NON-DURABLES - 6.2% INDUSTRIAL SERVICES - 1.2%
Coca-Cola 320 15,640 Schlumberger ADR 40 3,370
Gillette 200 12,475 WMX Technologies 300 9,825
Phillip Morris 300 31,200 13,195
UST 300 10,275 NON-ENERGY MINERALS - 2.1%
69,590 Nucor 200 10,125
CONSUMER SERVICES - 3.8% Schweitzer-Maudit 500 14,063
Media General Class A 300 11,175 24,188
Reader's Digest Class A 300 12,750 PRODUCER MANUFACTURING - 4.1%
Walt Disney 300 18,862 General Electric 260 22,490
42,787 Nordson 200 11,300
ELECTRONIC TECHNOLOGY - 4.2% Tyco International 300 12,225
General Dynamics 200 12,400 46,015
Intel 220 16,156 RETAIL TRADE - 4.1%
Motorola 300 18,863 Circuit City 400 14,450
47,419 Harcourt General 300 15,000
ENERGY MINERALS - 2.2% Wal-Mart 650 16,494
British Petroleum ADR 70 7,481 45,944
Exxon 200 17,375 TECHNOLOGY SERVICES - 1.0%
24,856 Electronic Data Systems 200 10,750
FINANCIAL - 11.1%
Aetna Life & Casualty 200 14,300 UTILITIES - 4.1%
American Express 300 13,388 AT&T 300 18,600
Federal National 600 20,100 Cellular Communications 200 10,625
Mortgage Association Class A (b)
First USA 100 5,500 FPL Group 200 9,200
Leucadia National 400 9,800 MCI Communications 300 7,687
MBNA 300 8,550 46,112
Norwest 350 12,206 TOTAL INVESTMENTS IN COMMON STOCKS
PMI Group 300 12,750 (Cost: $579,731) ............... $592,806
United Assets Management 700 17,150
United Dominion Realty 800 11,500
Trust
125,244
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 29.8%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 21.7%
6.00 % 11/30/97 $20,000 $ 20,003
6.13 09/30/00 25,000 24,707
8.00 05/15/01 25,000 26,578
7.50 11/15/01 25,000 26,098
7.50 05/15/02 70,000 73,281
6.25 02/15/03 75,000 73,676
----------
244,343
U.S. TREASURY BOND - 8.1%
10.75 05/15/03 75,000 91,887
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(Cost: $339,715) ....................................................... $ 336,230
TOTAL INVESTMENTS IN LONG - TERM SECURITIES
(Cost: $919,446) ....................................................... $ 929,036
TOTAL INVESTMENTS IN SECURITIES
(Cost: $919,446) (c) ................................................... $ 929,036
OTHER ASSETS AND LIABILITIES (NET) - 17.6%
........................................................................ $ 198,953
TOTAL NET ASSETS
........................................................................ $1,127,989
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
SCHEDULE OF INVESTMENTS
IAI RESERVE PORTFOLIO
June 30, 1996
(percentage figures indicate percentage of total net assets)
(unaudited)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 22.4%
Principal Market
Rate Maturity Amount Value (a)
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS - 22.4%
5.56% 08/22/96 $ 80,000 $ 79,430
5.54 02/06/97 100,000 96,822
--------
176,252
TOTAL INVESTMENTS IN U.S GOVERNMENT OBLIGATIONS
(Cost: $176,186) ......................................................... $176,252
U.S. GOVERNMENT AGENCY SECURITIES - 69.1%
Principal Market
Rate Maturity Amount Value (a)
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 69.1%
Federal Farm Credit Bank 5.36% 09/05/96 $150,000 $148,542
Federal Home Loan Bank 7.29 03/20/97 100,000 96,216
Federal Home Loan Mortgage Corporation 6.18 09/11/96 150,000 148,410
Federal National Mortgage Association 6.28 07/09/96 150,000 149,825
542,993
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(Cost: $542,881) ........................................................ $542,993
TOTAL INVESTMENTS IN SECURITIES
(Cost: $719,067) (c) ..................................................... $719,245
OTHER ASSETS & LIABILITIES (NET) - 8.5%
.......................................................................... $ 67,129
TOTAL NET ASSETS
.......................................................................... $ 786,374
See Accompanying Notes to Schedule of Investments on page 13
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
IAI RETIREMENT FUNDS, INC.
June 30, 1996
(unaudited)
(a)
Market value of securities is determined as described in Note 1 to the
financial statements, under "Security Valuation".
(b)
Currently non-income producing security.
(c)
At June 30, 1996, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ------------ -----------
Cost for federal income tax $7,575,939 $919,448 $719,067
Gross unrealized appreciation $ 668,629 $ 25,506 $ 232
Gross unrealized depreciation (176,202) (15,918) (54)
Net unrealized appreciation $ 492,427 $ 9,588 $ 178
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI RETIREMENT FUNDS, INC.
June 30, 1996
(Unaudited)
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $7,574,784, $919,446, and $719,067 respectively) $8,068,366 $ 929,036 $ 719,245
Cash in bank on demand deposit 235,128 133,057 57,002
Receivable for investment securities sold 17,318 52,704 --
Dividends and accrued interest receivable 4,194 5,538 --
Organization costs (Note 1) 6,538 6,558 6,962
Other 2,808 1,494 3,489
---------- ---------- ----------
TOTAL ASSETS 8,334,352 1,128,387 786,698
---------- ---------- ----------
LIABILITIES
Payable for investment securities purchased 4,519 -- --
Accrued dividend-disbursing, administrative, and
accounting fees 46 257 200
Other accrued expenses 881 141 124
---------- ---------- ----------
TOTAL LIABILITIES 5,446 398 324
---------- ---------- ----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $8,328,906 $1,127,989 $ 786,374
========== ========== ==========
REPRESENTED BY:
Capital stock $ 5,720 $ 942 $ 785
Additional paid-in capital 7,440,820 1,067,673 784,600
Undistributed net investment income 20,012 10,287 780
Accumulated net realized gains on investments 368,772 39,497 31
Unrealized appreciation on investments 493,582 9,590 178
---------- ---------- ----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $8,328,906 $1,127,989 $ 786,374
========== ========== ==========
Shares of common stock outstanding; authorized 10 billion shares
of $.01 par value stock of each Portfolio 572,007 94,241 78,456
---------- ---------- ----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 14.56 $ 11.97 $ 10.02
========== ========== ==========
See Accompanying Notes to Financial Statements on page 22
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI RETIREMENT FUNDS, INC.
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 32,922 $ 12,485 $ 20,671
Dividends (net of foreign income taxes withheld
of $0, $11, and $0 respectively) 21,129 3,660 --
-------- -------- --------
TOTAL INCOME 54,051 16,145 20,671
-------- -------- --------
Expenses:
Investment advisory fees 20,827 3,038 1,773
Dividend-disbursing, administrative, and accounting fees 3,205 468 394
Legal fees 185 185 185
Custodian fees 4,090 2,730 1,820
Amortization of organization costs 1,256 1,256 1,256
Compensation of directors 249 35 33
Audit fees 2,912 2,002 2,002
Printing and shareholder reporting 733 369 369
Registration fees 530 530 530
Other expenses 42 9 22
-------- -------- --------
TOTAL EXPENSES 34,029 10,622 8,384
-------- -------- --------
Less fees reimbursed or waived by Advisers -- (4,771) (5,016)
-------- -------- --------
NET EXPENSES 34,029 5,851 3,368
-------- -------- --------
NET INVESTMENT INCOME 20,022 10,294 17,303
-------- -------- --------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on investments 370,022 39,509 38
Net change in unrealized appreciation or depreciation on
investment securities 94,665 (18,768) (37)
-------- -------- --------
NET GAIN ON INVESTMENTS 464,687 20,741 1
-------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $484,709 $ 31,$35 $17,304
======== ======== =======
See Accompanying Notes to Financial Statements on page 22
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
Six months ended Year ended
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 20,022 $ 27,460
Net realized gains 370,022 402,797
Net change in unrealized appreciation or depreciation 94,665 377,323
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 484,709 807,580
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,333) (2,961)
Net realized gains (399,948) --
----------- -----------
TOTAL DISTRIBUTIONS (428,281) (2,961)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 242,649 and 284,186 shares 3,620,008 3,496,985
Net asset value of 29,614 and 250 shares issued to shareholders
in reinvestment of distributions 430,883 2,976
Cost of 60,652 and 5,480 shares redeemed (883,024) (65,151)
----------- -----------
Increase in net assets from capital share transactions 3,167,867 3,434,810
----------- -----------
Total increase in net assets 3,224,295 4,239,429
Net assets at beginning of period 5,104,611 865,182
----------- -----------
Net assets at end of period $ 8,328,906 $ 5,104,611
=========== ===========
(including undistributed net investment income of
$20,012 and $28,323)
See Accompanying Notes to Financial Statements on page 22
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
Six months ended Year ended
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 10,294 $ 8,739
Net realized gains 39,509 10,667
Net change in unrealized appreciation or depreciation (18,768) 28,015
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 31,035 47,421
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (9,609) (2,721)
Net realized gains (10,009) --
----------- -----------
TOTAL DISTRIBUTIONS (19,618) (2,721)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 32,046 and 51,989 shares 384,961 595,671
Net asset value of 1,644 and 243 shares issued to shareholders
in reinvestment of distributions 19,608 2,721
Cost of 4,324 and 7,482 shares redeemed (52,109) (84,648)
----------- -----------
Increase in net assets from capital share transactions 352,460 513,744
----------- -----------
Total increase in net assets 363,877 558,444
Net assets at beginning of period 764,112 205,668
----------- -----------
Net assets at end of period $ 1,127,989 $ 764,112
=========== ===========
(including undistributed net investment income of
$10,287 and $9,602)
See Accompanying Notes to Financial Statements on page 22
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
Six months ended Year ended
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 17,303 $ 35,152
Net realized gains 38 391
Net change in unrealized appreciation or depreciation (37) 215
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 17,304 35,758
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (19,137) (34,624)
Net realized gains (385) --
----------- -----------
TOTAL DISTRIBUTIONS (19,522) (34,624)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 26,677 and 110,373 shares 267,892 1,109,346
Net asset value of 1,943 and 3,456 shares issued to shareholders
in reinvestment of distributions 19,483 34,694
Cost of 34,122 and 84,066 shares redeemed (342,887) (844,916)
----------- -----------
Increase (decrease) in net assets from capital share transactions (55,512) 299,124
----------- -----------
Total increase (decrease) in net assets (57,730) 300,258
Net assets at beginning of period 844,104 543,846
----------- -----------
Net assets at end of period $ 786,374 $ 844,104
=========== ===========
(including undistributed net investment income of
$780 and $2,614)
See Accompanying Notes to Financial Statements on page 22
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR
EACH PERIOD INDICATED ARE AS FOLLOWS:
Period from
Six months ended Year ended January 31, 1994 * to
June 30, 1996 December 31,1995 December 31, 1994
------------- ---------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 14.16 $ 10.62 $ 10.00
------------ ------------ ----------
OPERATIONS
Net investment income 0.01 0.06 0.03
Net realized and unrealized gains 1.18 3.50 0.59
------------ ------------ ----------
TOTAL FROM OPERATIONS 1.19 3.56 0.62
------------ ------------ ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.05) (0.02) --
Net realized gains (0.74) -- --
------------ ------------ ----------
TOTAL DISTRIBUTIONS (0.79) (0.02) --
------------ ------------ ----------
NET ASSET VALUE
End of period $ 14.56 $ 14.16 $ 10.62
------------ ------------ ----------
Total investment return** 8.45% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 8,329 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets 1.07%*** 1.37%+ 1.13%***+
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) n/a 1.25% n/a
Net investment income to average daily net assets 0.63%*** 1.12%+ 0.81%***+
Portfolio turnover rate (excluding short-term securities) 40.1% 156.0% 127.6%
* COMMENCEMENT OF OPERATIONS
** 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 PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $6,737, AND $7,455 IN
EXPENSES FOR THE YEAR ENDED DECEMBER 31, 1995, AND THE PERIOD ENDED
DECEMBER 31, 1994, RESPECTIVELY. IF THE PORTFOLIO HAD BEEN CHARGED
THESE EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD
HAVE BEEN 1.64%, AND 3.90%, RESPECTIVELY, AND THE RATIO OF NET
INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
.85%, AND (1.96%), RESPECTIVELY. IN FISCAL YEAR 1995 THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY
BY THE PORTFOLIO. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
</TABLE>
See Accompanying Notes to Financial Statements on page 22
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR
EACH PERIOD INDICATED ARE AS FOLLOWS:
Period from
Six months ended Year ended February 3, 1994 * to
June 30, 1996 December 31,1995 December 31, 1994
------------- ---------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 11.78 $ 10.22 $ 10.00
------------ ---------- ----------
OPERATIONS
Net investment income 0.06 0.09 0.10
Net realized and unrealized gains 0.34 1.56 0.12
------------ ---------- ----------
TOTAL FROM OPERATIONS 0.40 1.65 0.22
------------ ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.10) (0.09) --
Net realized gains (0.11) -- --
------------ ---------- ----------
TOTAL DISTRIBUTIONS (0.21) (0.09) --
------------ ---------- ----------
NET ASSET VALUE
End of period $ 11.97 $ 11.78 $ 10.22
------------ ---------- ----------
Total investment return** 3.41% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 1,128 $ 764 $ 206
RATIOS:
Expenses to average daily net assets**** 1.25%*** 1.70% 1.25%***
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) n/a 1.25% n/a
Net investment income to average daily net assets**** 2.21%*** 2.34% 2.28%***
Portfolio turnover rate (excluding short-term securities) 79.0% 56.0% 21.6%
* COMMENCEMENT OF OPERATIONS
** 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 PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $4,771, $13,428, AND $7,756
IN EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 1996, THE YEAR ENDED
DECEMBER 31, 1995, AND THE PERIOD ENDED DECEMBER 31, 1994,
RESPECTIVELY. IF THE PORTFOLIO HAD BEEN CHARGED THESE EXPENSES, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 2.28%,
5.29%, AND 10.33%, RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME
(LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 1.18%, (1.25%), AND
(6.80%), RESPECTIVELY. IN FISCAL YEAR 1995 THE RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE
PORTFOLIO. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
</TABLE>
See Accompanying Notes to Financial Statements on page 22
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR
EACH PERIOD INDICATED ARE AS FOLLOWS:
Period from
Six months ended Year ended April 7, 1994 * to
June 30, 1996 December 31,1995 December 31, 1994
------------- ---------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.05 $ 10.03 $ 10.00
---------- ---------- ----------
OPERATIONS
Net investment income 0.22 0.48 0.20
Net realized and unrealized gains (losses) (0.01) 0.02 0.02
---------- ---------- ----------
TOTAL FROM OPERATIONS 0.21 0.50 0.22
---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.48) (0.19)
---------- ---------- ----------
TOTAL DISTRIBUTIONS (0.24) (0.48) (0.19)
---------- ---------- ----------
NET ASSET VALUE
End of period $ 10.02 $ 10.05 $ 10.03
========== ========== ==========
Total investment return** 2.20% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 786 $ 844 $ 544
RATIOS:
Expenses to average daily net assets**** 0.85%*** 1.03% 0.85%***
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) n/a 0.85% n/a
Net investment income to average daily net assets**** 4.39%*** 4.84% 3.56%***
* COMMENCEMENT OF OPERATIONS
** 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 PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $5,016, $11,528, AND $6,930
IN EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 1996, THE YEAR ENDED
DECEMBER 31, 1995, AND THE PERIOD ENDED DECEMBER 31, 1994,
RESPECTIVELY. IF THE PORTFOLIO HAD BEEN CHARGED THESE EXPENSES, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 2.13%,
2.62%, AND 4.62%, RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME
(LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 3.11%, 3.25%, AND
(.21%), RESPECTIVELY. IN FISCAL YEAR 1995 THE RATIO OF EXPENSES TO
AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE
PORTFOLIO. PRIOR PERIOD EXPENSE RATIOS HAVE NOT BEEN ADJUSTED.
</TABLE>
See Accompanying Notes to Financial Statements on page 22
NOTES TO FINANCIAL STATEMENTS
IAI RETIRMENT FUNDS, INC.
JUNE 30, 1996
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Retirement Funds, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Regional Portfolio (Regional Portfolio), IAI Balanced Portfolio (Balanced
Portfolio) and IAI Reserve Portfolio (Reserve Portfolio) are separate portfolios
of IAI Retirement Funds, Inc. Portfolio shares are not offered directly to the
public, but sold only to selected insurance companies' separate accounts in
connection with variable life insurance policies or variable annuity contracts.
The Regional Portfolio has a primary objective of long-term appreciation through
investments in equity securities. The Balanced Portfolio has a primary objective
of maximum total return through investment in stocks, bonds and short-term
instruments. The Reserve Portfolio has a primary objective of providing a high
level of current income consistent with the preservation of capital and
liquidity. This report covers only the Regional Portfolio, Balanced Portfolio
and Reserve Portfolio (the Portfolios).
Significant accounting policies followed by the Portfolios are summarized below:
SECURITY VALUATION
Investments in securities traded on national securities exchanges are valued at
the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported sales
price or if the last reported sales price is not available, the last reported
bid price is used.
The values of debt securities are determined using pricing services or prices
quoted by independent brokers. Short-term securities with maturities of 60 days
or less from the date of initial acquisition are valued at amortized cost.
Short-term securities with maturities greater than 60 days from the date of
initial acquisition are marked-to-market on a daily basis.
FEDERAL TAXES
Since it is each Portfolio's policy to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all taxable income to shareholders, no provision for income taxes is
required.
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.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Portfolios record security transactions on trade date, the date the
securities are purchased or sold. Dividend income is recorded on the ex-dividend
date. Interest income, including level yield amortization of discount, is
accrued daily. 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 shareholders are recorded on the ex-date. Distributions from
net investment income are made annually for Regional Portfolio and Balanced
Portfolio and monthly for Reserve Portfolio. Capital gains, if any, are
primarily distributed in June. Additional capital gains distributions as needed
to comply with federal tax regulations are distributed during the year.
ORGANIZATION COSTS
Organization costs are being amortized over 60 months on a straight-line basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
Regional Portfolio, Balanced Portfolio and Reserve Portfolio have available
lines of credit of $750,000, $100,000 and $200,000, 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 six months
ended June 30, 1996, the Portfolios paid no interest on the line of credit.
There were no borrowings outstanding at June 30, 1996.
[3] FEES AND EXPENSES
Under the terms of an investment advisory agreement, Regional Portfolio,
Balanced Portfolio and Reserve Portfolio pay Investment Advisers, Inc.
(Advisers) a management fee based upon average daily net assets equal, on an
annual basis, to .65%, .65% and .45%, respectively.
Each Portfolio also pays an annual fee to Advisers for acting as the Portfolios'
dividend-disbursing, administrative, and accounting services agent. The fee is
based on an annual rate of .10% of average daily net assets for each Portfolio.
In addition to the advisory and dividend-disbursing, administrative, and
accounting services fees, the Portfolios are responsible for paying their
operating expenses, including costs incurred in the purchase and sale of assets.
Advisers has currently voluntarily agreed to waive expenses for Balanced
Portfolio and Reserve Portfolio in excess of 1.25% and .85%, respectively, of
average daily net assets.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended June 30, 1996, purchases of securities and sales proceeds,
including maturities, for the Reserve Portfolio aggregated $1,129,639 and
$1,239,120, respectively. Purchases of securities and sales proceeds, other than
investments in short-term securities for Regional Portfolio and Balanced
Portfolio, were as follows:
PURCHASES SALES
IAI REGIONAL PORTFOLIO $3,612,475 $2,016,015
IAI BALANCED PORTFOLIO $ 876,382 $ 621,320
DISTRIBUTOR
IAI Securities, Inc.
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
[LOGO] IAI
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700
