IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
JUNE 30, 1997
(UNAUDITED)
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1997
(UNAUDITED)
Chairman's Letter ............................................... 2
Portfolio Managers' Reviews
IAI Regional Portfolio ....................................... 3
IAI Balanced Portfolio ....................................... 4
IAI Reserve Portfolio ........................................ 5
Schedules of Investments
IAI Regional Portfolio ....................................... 6
IAI Balanced Portfolio ....................................... 9
IAI Reserve Portfolio ........................................ 11
Notes to Schedules of Investments ............................... 12
Statements of Assets and Liabilities ............................ 13
Statements of Operations ........................................ 14
Statements of Changes in Net Assets
IAI Regional Portfolio ....................................... 15
IAI Balanced Portfolio ....................................... 16
IAI Reserve Portfolio ........................................ 17
Financial Highlights
IAI Regional Portfolio ....................................... 18
IAI Balanced Portfolio ....................................... 19
IAI Reserve Portfolio ........................................ 20
Notes to Financial Statements ................................... 21
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors ....................................................... Back Cover
[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
<PAGE>
CHAIRMAN'S LETTER
IAI RETIREMENT FUNDS, INC.
[PHOTO]
NOEL P. RAHN
CHAIRMAN
THE DOW LEADS THE WORLD
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13 and 8000 on July 16. As we move through 1997, most of the
conditions which led to that runup are still intact: low inflation, relatively
low interest rates, moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment, it wouldn't be
surprising to see an uptick in inflation in the months ahead. This could cause
interest rates to rise and put the brakes on the stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, you should make sure
that your investment portfolio generally reflects your long-term investment
goals for 1997 and beyond.
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
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
[PHOTO]
MARK C. HOONSBEEN,
CFA
IAI REGIONAL PORTFOLIO
MANAGER
IAI REGIONAL PORTFOLIO
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Regional Portfolio, which invests in companies within the eight states
of the Upper Midwest, gained 8.30% during the past six months, while the S&P 500
Index had a return of 20.53%. Over the past year the IAI Regional Portfolio
produced a total return of 11.72%, while the S&P 500 Index gained 34.75%.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
While the market continues to focus its attention on Alan Greenspan and the
actions of the Federal Reserve, we continue to monitor earnings risk carefully.
Overall, we continue to maintain a broad based, diversified portfolio with our
buy and sell decisions based on our fundamental analysis of the underlying
business. It is our core belief that companies with superior management, high
returns on capital, solid and sustainable cash flow in industries with strong
fundamental growth will outperform over the long term when compared to companies
lacking these same characteristics.
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI Regional Portfolio S & P 500
(Inception 1/31/94) Index*
1/31/94 $10,000 $10,000
12/31/94 10,620 9,803
12/31/95 14,178 13,479
12/31/96 15,862 16,613
6/30/97 17,179 20,023
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/97
Since Inception
6 Months** 1 Year 1/31/94
- -------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO 8.30% 11.72% 17.18%
- -------------------------------------------------------------------------------
S&P 500 Index 20.53% 34.75% 22.53%*
- -------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
** NOT ANNUALIZED
<PAGE>
PORTFOLIO MANAGERS' REVIEW
IAI BALANCED PORTFOLIO
[PHOTO]
LARRY R. HILL, CFA
IAI BALANCED PORTFOLIO
CO-MANAGER
[PHOTO]
DONALD J. HOELTING,
CFA
IAI BALANCED PORTFOLIO
CO-MANAGER
IAI BALANCED PORTFOLIO
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Balanced Portfolio, which seeks to invest in the optimal mixture of
stocks and bonds, earned a return of 9.42% over the past six months. In
contrast, the Lehman Government/Corporate Bond Index and S&P 500 Index had 2.74%
and 20.53% returns, respectively. Over the past year the Balanced Portfolio
earned a return of 16.18%, while the Lehman Government/Corporate Bond and S&P
500 Index were 7.75% and 34.75%, respectively.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
The asset allocation strategy continues to favor stocks over bonds. However,
equity valuations in the United States are rich, so the Portfolio is also
carrying some cash reserves to invest in an equity market correction.
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI Balanced Portfolio S & P 500 Lehman Government
(Inception 2/3/94) Index* Corporate Bond Index*
2/3/94 $10,000 $10,000 $10,000
12/31/94 10,221 9,803 9,506
12/31/95 11,879 13,479 11,335
12/31/96 13,044 16,613 11,664
6/30/97 14,270 20,023 11,984
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/97
Since Inception
6 Months** 1 Year 2/03/94
- -------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO 9.42% 16.18% 11.00%
- -------------------------------------------------------------------------------
S&P 500 Index 20.53% 34.75% 22.53%*
- -------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 2.74% 7.75% 5.44%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
** NOT ANNUALIZED
<PAGE>
PORTFOLIO MANAGERS' REVIEW
IAI RESERVE PORTFOLIO
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI RESERVE PORTFOLIO
MANAGER
IAI RESERVE PORTFOLIO
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Reserve Portfolio earned a return of 2.11% over the past six months
compared to the Salomon Brothers One Year Treasury Bill Index which had a 3.00%
return. Over the past year, the Portfolio earned a return of 4.84% while the
Index earned 6.27%.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
Recent economic reports indicated a significant slowdown during the second
quarter, with decelerating inflation. This combination produced lower interest
rates in the second quarter. However, early signs of a third quarter rebound
have already materialized. We expect growth to accelerate in the second half,
resulting in cyclical pressures that will push the inflation rate higher and
challenge the Fed's current "wait and see" policy. Market expectations do not
reflect this scenario. The Portfolio is structured to participate in the current
rally but with an eye toward preserving value when signs of accelerating
inflation and shifting policy become visible.
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI Reserve Portfolio Salomon Brothers One
(Inception 4/7/94) Year Treasury Bill Index*
4/7/94 $10,000 $10,000
12/31/94 10,225 10,232
12/31/95 10,746 11,060
12/31/96 11,278 11,686
6/30/97 11,517 12,036
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/97
Since Inception
6 Months** 1 Year 4/07/94
- -------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO 2.11% 4.84% 4.46%
- -------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 3.00% 6.27% 5.87%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
** NOT ANNUALIZED
<PAGE>
<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI REGIONAL PORTFOLIO
JUNE 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 86.1%
Market Market
Quantity Value (a) Quantity Value (a)
- ------------------------------------------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SERVICES - 5.1% FINANCIAL - 7.6%
Bell & Howell (b) 9,000 $ 277,312 Allstate 2,300 $ 167,900
HA- LO Industries (b) 3,200 75,600 Equitable of Iowa 4,500 252,000
Merrill 3,900 141,862 First Alliance (b) 5,900 172,575
R.R. Donnelley 4,500 164,813 Green Tree Financial 3,500 124,687
Sitel (b) 4,500 92,813 LifeUSA (b) 7,100 101,175
-----------
752,400 Metris 2,800 91,875
- -------------------------------------------------------------
CONSUMER DURABLES - 11.3% MMI Companies 1,000 26,125
Harley-Davidson 3,000 143,812 ReliaStar Financial 2,500 182,812
-----------
ITI Technologies (b) 8,300 189,862 1,119,149
----------------------------------------------------------
Jostens 2,900 77,575 HEALTH SERVICES - 3.2%
Newell 9,500 376,438 Healthcare COMPARE (b) 5,000 261,875
Polaris 9,500 309,344 Patterson Dental (b) 6,000 205,875
-----------
Racing Champions (b) 4,400 68,200 467,750
----------------------------------------------------------
Snap-On 13,000 511,875 HEALTH TECHNOLOGY - 6.8%
-----------
1,677,106 Abbott Laboratories 1,900 126,825
- -------------------------------------------------------------
CONSUMER NON-DURABLES - 1.3% Baxter International 4,000 209,000
Sara Lee 4,500 187,313 CIMA Labs (b) 19,000 78,375
- -------------------------------------------------------------
CONSUMER SERVICES - 2.1% Diametrics Medical (b) 12,000 96,000
Famous Dave's of America (b) 2,000 26,000 Marquette Medical Systems Class A (b) 9,000 198,000
Famous Dave's of America Units (b) 4,000 68,000 Northfield Laboratories (b) 9,000 93,375
Lodgenet Entertainment (b) 21,200 212,000 Nutrition Medical (b) 8,300 24,900
-----------
306,000 Possis Medical (b) 7,500 126,562
- -------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 9.0% Urologix (b) 3,400 57,800
-----------
360 Communications (b) 12,300 210,637 1,010,837
----------------------------------------------------------
ACI Telecentrics (b) 7,500 43,125 PROCESS INDUSTRIES - 9.1%
ADC Telecommunications (b) 1,800 60,075 AptarGroup 6,000 271,500
Aetrium (b) 19,000 351,500 Bemis 5,500 237,875
Andrew (b) 2,500 70,312 BMC Industries 9,600 328,800
Ault (b) 14,000 120,750 IMC Global 5,620 196,700
FSI International (b) 20,000 320,000 Mycogen (b) 2,000 39,250
Sheldahl (b) 8,000 165,000 Northland Cranberries Class A 5,000 80,625
-----------
1,341,399 Valspar 6,500 192,563
- ------------------------------------------------------------- -----------
ENERGY MINERALS - 2.9% 1,347,313
----------------------------------------------------------
Amoco 5,000 434,687
- -------------------------------------------------------------
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
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<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI REGIONAL PORTFOLIO
JUNE 30, 1997
(UNAUDITED)
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCER MANUFACTURING - 13.5% TECHNOLOGY SERVICES - 4.5%
ABC Rail Products (b) 14,500 $ 248,312 Control Data Systems (b) 7,000 $ 104,125
Borg-Warner Automotive 3,800 205,437 Engineering Animation (b) 9,000 303,750
IDEX 10,500 346,500 Racotek (b) 22,000 49,500
Illinois Tool Works 4,000 199,750 Richardson Electronics 17,700 147,131
Johnson Controls 5,000 205,313 Secure Computing (b) 10,300 60,513
-----------
Juno Lighting 2,000 32,500 665,019
------------------------------------------------------------
Pentair 11,500 378,063 TRANSPORTATION - 2.4%
Recovery Engineering (b) 7,100 117,150 Illinois Central 6,500 227,094
Thermo Sentron (b) 12,500 139,063 USFreightways 5,000 129,375
-----------
Woodhead 1,000 18,875 356,469
------------------------------------------------------------
Zebra Technologies Class A (b) 4,000 111,500 UTILITIES - 1.2%
----------
2,002,463 Ameritech 2,600 176,638
- --------------------------------------------------------- ============================================================
RETAIL TRADE - 6.1% TOTAL INVESTMENTS IN COMMON STOCKS
Dayton Hudson 4,500 239,344 (COST: $11,241,410) $12,751,356
============================================================
Lands' End (b) 6,000 177,750 TOTAL INVESTMENTS IN LONG-TERM
Sears Roebuck 4,000 215,000 SECURITIES
Shopko Stores 3,000 76,500 (COST: $11,241,410) $12,751,356
============================================================
Video Update Class A (b) 20,500 90,969
Walgreen 2,000 107,250
----------
906,813
- ---------------------------------------------------------
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI REGIONAL PORTFOLIO
JUNE 30, 1997
(UNAUDITED)
SHORT-TERM SECURITIES - 10.1%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 10.1%
Federal Home Loan Bank (DISCOUNT NOTE) 5.41% 07/18/97 $ 1,500,000 $ 1,496,168
========================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,496,168) $ 1,496,168
========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $12,737,578) (C) $14,247,524
========================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 3.8%
$ 567,037
========================================================================================================================
TOTAL NET ASSETS
$14,814,561
========================================================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI BALANCED PORTFOLIO
JUNE 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 55.1%
Market Market
Quantity Value (a) Quantity Value (a)
- -------------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER DURABLES - 8.9% HEALTH SERVICES - 1.7%
Bandag 400 $ 19,600 Healthcare COMPARE (b) 600 $ 31,425
----------------------------------------------------------
Department 56 (b) 1,900 42,156 HEALTH TECHNOLOGY - 3.6%
Eastman Kodak 300 23,025 Pfizer 150 17,925
Harley-Davidson 600 28,763 Scherer (R.P.) (b) 350 18,069
Polaris 700 22,794 SmithKline Beecham ADR 350 32,069
----------
Sturm Ruger 1,600 31,400 68,063
--------- ----------------------------------------------------------
167,738 INDUSTRIAL SERVICES - 2.2%
- --------------------------------------------------------------
CONSUMER NON-DURABLES - 5.3% Nabors Industries (b) 1,250 31,250
Coca-Cola 420 28,350 Waste Management 300 9,638
----------
Gillette 200 18,950 40,888
----------------------------------------------------------
Philip Morris 900 39,938 NON-ENERGY MINERALS - 2.6%
UST 500 13,875 Nucor 350 19,775
---------
101,113 Schweitzer-Mauduit International 800 30,000
- -------------------------------------------------------------- ----------
CONSUMER SERVICES - 1.9% 49,775
----------------------------------------------------------
Walt Disney 450 36,113 PRODUCER MANUFACTURING - 6.9%
- --------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.8% Berkshire Hathaway Class B (b) 16 23,700
3 Com (b) 500 22,500 General Electric 320 20,920
Intel 190 26,944 Nordson 300 19,275
Motorola 300 22,800 Tyco International 400 27,825
---------
72,244 Westinghouse Electric 1,700 39,310
- -------------------------------------------------------------- ----------
ENERGY MINERALS - 2.1% 131,030
----------------------------------------------------------
British Petroleum ADR 200 14,975 RETAIL TRADE - 1.7%
Exxon 400 24,600 Wal-Mart 980 33,136
--------- ----------------------------------------------------------
39,575 TECHNOLOGY SERVICES - 1.8%
- --------------------------------------------------------------
FINANCIAL - 11.9% Electronic Data Systems 300 12,300
Aetna 300 30,710 Parametric Technology (b) 500 21,281
----------
American Express 400 29,800 33,581
----------------------------------------------------------
Federal Home Loan Mortgage UTILITIES - 0.7%
Corporation 1,100 37,814 FPL Group 300 13,819
==========================================================
Leucadia National 700 21,656 TOTAL INVESTMENTS IN COMMON STOCKS
Norwest 370 20,813 (COST: $856,954) $1,044,419
==========================================================
PMI Group 300 18,713
Student Loan Marketing Association 300 38,100
United Assets Management 1,000 28,313
---------
225,919
- --------------------------------------------------------------
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI BALANCED PORTFOLIO
JUNE 30, 1997
(UNAUDITED)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 35.6%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 27.8%
6.00% 11/30/97 20,000 $ 20,034
5.88 10/31/98 25,000 24,972
7.50 10/31/99 50,000 51,422
6.13 09/30/00 25,000 24,891
8.00 05/15/01 25,000 26,406
7.50 11/15/01 50,000 52,102
7.50 05/15/02 70,000 73,249
6.25 02/15/03 75,000 74,414
7.88 11/15/04 50,000 53,961
7.00 07/15/06 50,000 51,438
6.25 02/15/07 75,000 73,383
---------
526,272
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS -7.8%
9.25 02/15/16 50,000 62,554
8.13 08/15/19 25,000 28,520
7.88 02/15/21 50,000 55,750
---------
146,824
======================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $673,380) $ 673,096
======================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $1,530,334) (C) $1,717,515
======================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 9.3%
$ 176,473
======================================================================================================================
TOTAL NET ASSETS
$1,893,988
======================================================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S C H E D U L E O F I N V E S T M E N T S
IAI RESERVE PORTFOLIO
JUNE 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
U.S. GOVERNMENT OBLIGATIONS - 17.7%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 17.7%
5.38% 05/31/98 $100,000 $ 99,641
=========================================================================================================================
TOTAL INVESTMENTS IN U.S GOVERNMENT OBLIGATIONS
(COST: $99,228) $ 99,641
=========================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 75.3%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 75.3%
Federal Farm Credit Bank 5.40% 07/08/97 $100,000 $ 99,895
Federal Home Loan Bank 5.41 08/06/97 150,000 149,188
Federal Home Loan Mortgage Corporation 5.46 07/22/97 100,000 99,682
Federal National Mortgage Association 5.72 07/11/97 75,000 74,885
-------
423,650
=========================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $423,654) $423,650
=========================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $522,882) (C) $523,291
=========================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - 7.0%
$ 39,623
=========================================================================================================================
TOTAL NET ASSETS
$562,914
=========================================================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULE OF INVESTMENTS ON PAGE 12
</TABLE>
<PAGE>
N O T E S T O S C H E D U L E S O F I N V E S T M E N T S
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1997
(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, 1997, the cost of securities for federal income tax
purposes and the aggregate gross unrealized appreciation and
depreciation based on that cost were as follows:
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal income tax purposes $12,762,941 $1,530,400 $522,882
=========================================================
Gross unrealized appreciation $ 1,997,781 $ 198,669 $ 413
Gross unrealized depreciation (513,198) (11,554) (4)
---------------------------------------------------------
Net unrealized appreciation $ 1,484,583 $ 187,115 $ 409
=========================================================
</TABLE>
<PAGE>
S T A T E M E N T S O F A S S E T S A N D L I A B I L I T I E S
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $12,737,578; $1,530,334; and $522,882, respectively) $14,247,524 $1,717,515 $ 523,291
Cash in bank on demand deposit 573,688 168,777 33,730
Receivable for investment securities sold 63,276 - -
Dividends and accrued interest receivable 7,917 13,584 467
Organization costs 4,020 4,040 4,444
Other - 1,926 8,850
--------------------------------------------------
TOTAL ASSETS 14,896,425 1,905,842 570,782
--------------------------------------------------
LIABILITIES
Payable for investment securities purchased 72,025 - -
Accrued investment advisory fee - 4,121 1,246
Accrued dividend-disbursing, administrative and
accounting fee - 572 277
Other accrued expenses 9,839 7,161 6,345
--------------------------------------------------
TOTAL LIABILITIES 81,864 11,854 7,868
--------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $14,814,561 $1,893,988 $ 562,914
==================================================
REPRESENTED BY:
Capital stock $ 9,514 $ 1,412 $ 564
Additional paid-in capital 13,037,028 1,658,714 561,414
Undistributed net investment income 48,367 23,896 596
Accumulated net realized gains (losses) on investments 209,706 22,785 (69)
Unrealized appreciation on investments 1,509,946 187,181 409
---------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK
$14,814,561 $1,893,988 $ 562,914
==================================================
Shares of common stock outstanding; authorized 10 billion shares
of $.01 par value stock of each Portfolio 951,398 141,211 56,378
--------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 15.57 $ 13.41 $ 9.98
==================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
S T A T E M E N T S O F O P E R A T I O N S
IAI RETIREMENT FUNDS, INC.
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 53,556 $ 27,833 $ 14,597
Dividends 51,220 6,412 -
-------------------------------------------------------
TOTAL INCOME 104,776 34,245 14,597
-------------------------------------------------------
Expenses:
Investment advisory fees 40,676 5,375 1,246
Dividend-disbursing, administrative, and accounting fees 6,258 827 277
Legal fees 49 49 49
Custodian fees 3,620 2,715 1,810
Amortization of organization costs 1,249 1,249 1,249
Compensation of Directors 912 123 63
Audit fees 2,896 1,991 1,991
Printing and shareholder reporting 724 362 362
-------------------------------------------------------
TOTAL EXPENSES 56,384 12,691 7,047
Less fees reimbursed or waived by Advisers - (2,343) (4,718)
-------------------------------------------------------
NET EXPENSES 56,384 10,348 2,329
-------------------------------------------------------
NET INVESTMENT INCOME 48,392 23,897 12,268
-------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investments 235,091 22,864 (3)
Net change in unrealized appreciation or depreciation on
investment securities 849,143 110,250 (276)
-------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 1,084,234 133,114 (279)
-------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,132,626 $ 157,011 $ 11,989
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
S T A T E M E N T S O F C H A N G E S I N N E T A S S E T S
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
July 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 48,392 $ 61,238
Net realized gains 235,091 546,238
Net change in unrealized appreciation or depreciation 849,143 261,886
-----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,132,626 869,362
-----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (62,116) (28,335)
Net realized gains (570,373) (399,948)
-----------------------------------------
TOTAL DISTRIBUTIONS (632,489) (428,283)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 193,268 and 494,528 shares 2,900,403 7,251,048
Net asset value of 41,012 and 29,614 shares issued to shareholders
in reinvestment of distributions 634,863 428,283
Cost of 70,332 and 97,088 shares redeemed (1,051,831) (1,394,032)
-----------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 2,483,435 6,285,299
-----------------------------------------
TOTAL INCREASE IN NET ASSETS 2,983,572 6,726,378
NET ASSETS AT BEGINNING OF PERIOD 11,830,989 5,104,611
-----------------------------------------
NET ASSETS AT END OF PERIOD $14,814,561 $11,830,989
=========================================
Including undistributed net investment income of: $ 48,367 $ 62,091
=========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
S T A T E M E N T S O F C H A N G E S I N N E T A S S E T S
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
July 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 23,897 $ 32,015
Net realized gains 22,864 34,844
Net change in unrealized appreciation or depreciation 110,250 48,573
-----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 157,011 115,432
-----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (32,873) (9,610)
Net realized gains (34,912) (10,008)
-----------------------------------------
TOTAL DISTRIBUTIONS (67,785) (19,618)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 24,908 and 60,953 shares 326,685 736,701
Net asset value of 5,042 and 1,644 shares issued to shareholders
in reinvestment of distributions 67,862 19,618
Cost of 9,455 and 6,756 shares redeemed (123,831) (82,199)
-----------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 270,716 674,120
-----------------------------------------
TOTAL INCREASE IN NET ASSETS 359,942 769,934
NET ASSETS AT BEGINNING OF PERIOD 1,534,046 764,112
-----------------------------------------
NET ASSETS AT END OF PERIOD $ 1,893,988 $ 1,534,046
=========================================
Including undistributed net investment income of: $ 23,896 $ 32,872
=========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
S T A T E M E N T S O F C H A N G E S I N N E T A S S E T S
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
July 30, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 12,268 $ 42,572
Net realized gains (losses) (3) 897
Net change in unrealized appreciation or depreciation (276) 470
-----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 11,989 43,939
-----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (13,449) (44,274)
Net realized gains (956) (385)
-----------------------------------------
TOTAL DISTRIBUTIONS (14,405) (44,659)
-----------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 20,834 and 177,334 shares 208,863 1,778,387
Net asset value of 1,456 and 4,449 shares issued to shareholders
in reinvestment of distributions 14,549 44,659
Cost of 18,568 and 213,085 shares redeemed (185,998) (2,138,514)
-----------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 37,414 (315,468)
-----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 34,998 (316,188)
NET ASSETS AT BEGINNING OF PERIOD 527,916 844,104
-----------------------------------------
NET ASSETS AT END OF PERIOD $ 562,914 $ 527,916
=========================================
Including undistributed net investment income of: $ 596 $ 1,777
=========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
F I N A N C I A L H I G H L I G H T S
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:
<TABLE>
<CAPTION>
Years ended Period from
Six months December 31, January 31, 1994 ***
ended --------------------- to
June 30,1997 1996 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 15.02 $ 14.16 $ 10.62 $ 10.00
-----------------------------------------------------------
OPERATIONS
Net investment income 0.04 0.05 0.06 0.03
Net realized and unrealized gains 1.20 1.60 3.50 0.59
-----------------------------------------------------------
TOTAL FROM OPERATIONS 1.24 1.65 3.56 0.62
-----------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.07) (0.05) (0.02) --
Net realized gains (0.62) (0.74) -- --
-----------------------------------------------------------
TOTAL DISTRIBUTIONS (0.69) (0.79) (0.02) --
-----------------------------------------------------------
NET ASSET VALUE
End of period $ 15.57 $ 15.02 $ 14.16 $ 10.62
===========================================================
Total investment return* 8.30% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $14,815 $11,831 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets** 0.94% 1.03% 1.37% 1.13%
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY)** 0.94% 1.03% 1.25% n/a
Net investment income to average daily net assets 0.77% 0.77% 1.12% 0.81%
Average brokerage commission rate**** $0.0584 $0.0513 n/a n/a
Portfolio turnover rate (excluding short-term securities) 29.5% 78.4% 156.0% 127.6%
</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.
** 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.
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1996, THE PORTFOLIO IS REQUIRED TO DISCLOSE AN
AVERAGE BROKERAGE COMMISSION RATE.
+ ANNUALIZED
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
F I N A N C I A L H I G H L I G H T S
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:
<TABLE>
<CAPTION>
Years ended Period from
Six months December 31, February 3, 1994 ***
ended --------------------- to
June 30,1997 1996 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 12.71 $ 11.78 $ 10.22 $ 10.00
---------------------------------------------------------
OPERATIONS
Net investment income 0.14 0.22 0.09 0.10
Net realized and unrealized gains 1.06 0.92 1.56 0.12
---------------------------------------------------------
TOTAL FROM OPERATIONS 1.20 1.14 1.65 0.22
---------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.10) (0.09) --
Net realized gains (0.26) (0.11) -- --
---------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.21) (0.09) --
---------------------------------------------------------
NET ASSET VALUE
End of period $ 13.41 $ 12.71 $ 11.78 $ 10.22
=========================================================
Total investment return* 9.42% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 1,894 $ 1,534 $ 764 $ 206
RATIOS:
Expenses to average daily net assets** 1.25% 1.25% 1.70% 1.25%
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) 1.25% 1.25% 1.25% n/a
Net investment income to average daily net assets** 2.89% 2.84% 2.34% 2.28%
Average brokerage commission rate**** $ 0.0594 $ 0.0555 n/a n/a
Portfolio turnover rate (excluding short-term securities) 35.7% 67.4% 56.0% 21.6%
</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.
** THE PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $2,343, $8,031, $13,428 AND
$7,756 IN EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 1997, THE YEAR
ENDED DECEMBER 31, 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 1.53%, 1.96%, 5.29% AND 10.33%, RESPECTIVELY,
AND THE RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET
ASSETS WOULD HAVE BEEN 2.61%, 2.13%, (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.
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1996, THE PORTFOLIO IS REQUIRED TO DISCLOSE AN
AVERAGE BROKERAGE COMMISSION RATE.
+ ANNUALIZED
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
F I N A N C I A L H I G H L I G H T S
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:
<TABLE>
<CAPTION>
Years ended Period from
Six months December 31, April 7, 1994 ***
ended --------------------- to
June 30,1997 1996 1995 December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.03 $ 10.05 $ 10.03 $ 10.00
-----------------------------------------------------------
OPERATIONS
Net investment income 0.22 0.49 0.48 0.20
Net realized and unrealized gains (losses) (0.01) (0.01) 0.02 0.02
-----------------------------------------------------------
TOTAL FROM OPERATIONS 0.21 0.48 0.50 0.22
-----------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.24) (0.50) (0.48) (0.19)
Net realized gains (0.02) -- -- --
-----------------------------------------------------------
TOTAL DISTRIBUTIONS (0.26) (0.50) (0.48) (0.19)
-----------------------------------------------------------
NET ASSET VALUE
End of period $ 9.98 $ 10.03 $ 10.05 $ 10.03
===========================================================
Total investment return* 2.11% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 563 $ 528 $ 844 $ 544
RATIOS:
Expenses to average daily net assets** 0.85% 0.85% 1.03% 0.85%
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) 0.85% 0.85% 0.85% n/a
Net investment income to average daily net assets** 4.44% 4.54% 4.84% 3.56%
Portfolio turnover rate (excluding short-term securities) 0.0% 185.3% n/a n/a
</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.
** THE PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $4,718, $9,034, $11,528 AND
$6,930 IN EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 1997, THE YEAR
ENDED DECEMBER 31, 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 2.56%, 1.81%, 2.62% AND 4.62%, RESPECTIVELY, AND
THE RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS
WOULD HAVE BEEN 2.73%, 3.58%, 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.
*** COMMENCEMENT OF OPERATIONS
+ ANNUALIZED
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<PAGE>
N O T E S T O F I N A N C I A L S T A T E M E N T S
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1997
(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.
Debt securities for which quotations are not readily available are valued
primarily using dealer-supplied valuations or at their fair value as determined
in good faith using consistently applied procedures under the general
supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those 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.
<PAGE>
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
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, 1997, the Portfolios paid no interest on the line of credit.
There were no borrowings outstanding at June 30, 1997.
[3] FEES AND EXPENSES
Under the terms of an investment advisory agreement, Regional Portfolio,
Balanced Portfolio and Reserve Portfolio pay Investment Advisers, Inc.
(Advisers) an advisory 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.
Additionally, Advisers has voluntarily agreed to waive fees and expenses for
Regional Portfolio, Balanced Portfolio and Reserve Portfolio in excess of 1.25%,
1.25% and .85%, respectively, of average daily net assets through May 1, 1998.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 1997, purchases of securities and sales
proceeds, including maturities, for the Reserve Portfolio aggregated $1,457,424
and $1,431,016, 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 $ 6,606,029 $ 3,042,382
IAI BALANCED PORTFOLIO $ 765,452 $ 522,861
- ----------------------------------------------------------------------
<PAGE>
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
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
