IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
DECEMBER 31, 1996
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
DECEMBER 31, 1996
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
Independent Auditors' Report 23
Federal Tax Information 24
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
CHAIRMAN'S LETTER
IAI RETIREMENT FUNDS, INC.
ENJOYING THE GOOD TIMES
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 75% during the past two years. 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.
For much of 1996, the 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 down the economy.
However, by the fall, the economy slowed down and the Fed chose not to tighten
credit, partly because it didn't want to influence the presidential election in
November. Investors seemed to like the election results--a Democratic White
House and a Republican Congress--as the stock market surged to new highs and the
bond market recovered lost ground from earlier in the year.
The federal budget deficit has fallen significantly for four consecutive years.
The rate of economic growth, although buoyant for a quarter or two at a time,
continues on a moderate course. And interest rates in foreign countries are
falling, particularly in Europe, where the economy is sluggish. That's helpful
to U.S. bond issuers, who don't have to compete quite as hard on a worldwide
basis for capital. As a result, the Federal Reserve Board, which controls U.S.
short-term interest rates, has kept a fairly low profile of late.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. And 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
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
IAI REGIONAL PORTFOLIO
The IAI Regional Portfolio invests in a broad array of companies based in the
eight-state Upper Midwest region of the United States. By and large, these
companies do not include the largest stocks in the S & P 500 Index, the
strongest performers during much of 1996. For the year ended December 31, 1996,
the Portfolio produced a total return of 11.88%, compared to 17.48% for the IAI
Regional 300 Index and 23.25% for the S&P 500 Index. We continue to hold a
number of very strong, high-quality companies in the capital goods, agriculture
and financial services sectors.
Investors are currently enjoying the best of all possible worlds--benign
inflation, low interest rates and moderate economic growth. Judging from current
market levels, however, the market also appears to be expecting high rates of
earnings growth as well. At the current pace of economic growth, corporate
earnings cannot continue to grow at the current pace. Therefore, it is important
that we redouble our efforts to focus on companies with strong cash flows which
can support these high stock prices.
[PHOTO]
MARK C. HOONSBEEN, CFA
IAI REGIONAL PORTFOLIO
MANAGER
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI Regional Portfolio
(Inception 1/31/94) S&P 500 Index*
1/31/94 $10,000 $ 9,728
12/31/94 $10,620 $ 9,803
12/31/95 $14,178 $13,479
12/31/96 $15,862 $16,613
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/96
Since Inception
1 Year 1/31/94
- ------------------------------------------------------------
IAI REGIONAL PORTFOLIO 11.88% 17.13%
............................................................
S&P 500 Index 23.25% 19.01%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
PORTFOLIO MANAGERS' REVIEW
IAI BALANCED PORTFOLIO
IAI BALANCED PORTFOLIO
[PHOTO]
LARRY R. HILL, CFA
IAI BALANCED PORTFOLIO
CO-MANAGER
[PHOTO]
DONALD J. HOELTING, CFA
IAI BALANCED PORTFOLIO
CO-MANAGER
The IAI Balanced Portfolio, which seeks to invest in the optimal mixture of
stocks and bonds, produced a fourth quarter return of 4.87% compared to 5.57%
for the average balanced fund as measured by Lipper Analytical Services Inc.,
8.46% for the S&P 500 Index and 3.06% for the Lehman Government/Corporate Bond
Index. During the fourth quarter, the IAI Balanced Portfolio ratio of stocks and
bonds was 50/50. For 1996, the IAI Balanced Portfolio rose 9.80% compared to
23.25% for the S&P 500 Index and 2.90% for the Lehman Government/Corporate Bond
Index.
Our strategy continues to focus on corporates and asset-backed securities for
extra yield. We believe that U.S. bonds offer excellent relative value given the
low level of U.S. inflation and foreign short-term interest rates. The equity
portion of the portfolio includes such excellent companies as Intel, Motorola
and Student Loan Marketing Association ("Sallie Mae").
As it has for the past several years, the economy continues to grow moderately
with low inflation. That environment bodes well for stocks and bonds in 1997.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI Balanced Portfolio Lehman Government/Corporate
(Inception 2/03/94) S&P 500 Index* Bond Index*
2/3/94 $10,000 $ 9,728 $ 9,782
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
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/96
Since Inception
1 Year 2/3/94
- -------------------------------------------------------------------
IAI BALANCED PORTFOLIO 9.80% 9.55%
...................................................................
S&P 500 Index 23.25% 19.01%*
...................................................................
Lehman Government/Corporate Bond Index 2.90% 5.42%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
PORTFOLIO MANAGERS' REVIEW
IAI RESERVE PORTFOLIO
IAI RESERVE PORTFOLIO
The Portfolio pursues its objective of stability, liquidity and income by
investing in a variety of high quality money market securities, including U.S.
Treasury Bills, U.S. Government short-term notes, commercial paper issued by
large corporations, repurchase agreements and CDs issued by large banks. For
1996, the Portfolio provided a total return of 4.93%. As of December 31, 1996,
the Portfolio's average maturity was 175 days.
Money market fund yields are in large measure determined by the actions of the
Federal Reserve Board. Acknowledging mixed economic signals, the Fed left
short-term interest rates unchanged during the fourth quarter. Indeed, during
1996, the Fed made only one move on interest rates, and that came one year ago,
when rates were lowered by 0.25%. Although economic growth exceeded market
expectations in the first half of 1996, activity slowed in the second half of
the year. We expect growth for the first half of 1997 to remain in the 2%-2.5%
range. Inflation, as measured by the GDP deflator, should increase at a rate of
about 2% in the first half of 1997.
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI RESERVE PORTFOLIO
CO-MANAGER
[PHOTO]
LIVINGSTON G. DOUGLAS, CFA
IAI RESERVE PORTFOLIO
CO-MANAGER
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI Reserve Portfolio Salomon Brothers One
(Inception 4/07/94) Year Treasury Bill Index*
4/7/94 $10,000 $ 9,991
12/31/94 $10,225 $10,232
12/31/95 $10,746 $11,060
12/31/96 $11,278 $11,686
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/96
Since Inception
1 Year 4/07/94
- -------------------------------------------------------------------
IAI Reserve Portfolio 4.93% 4.48%
...................................................................
Salomon Brothers One Year
Treasury Bill Index 5.66% 5.83%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
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S C H E D U L E O F I N V E S T M E N T S
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IAI REGIONAL PORTFOLIO
DECEMBER 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 68.5%
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SERVICES - 2.6%
Bell & Howell (b) 4,700 $ 111,625 First Alliance (b) 5,200 $ 157,300
Castle (A.M.) 4,000 77,000 Green Tree Financial 2,400 92,700
Merrill 4,900 112,700 LifeUSA (b) 6,000 72,000
-----------
301,325 Metris (b) 2,400 57,600
- ---------------------------------------------------------
CONSUMER DURABLES - 7.0% Reliastar Financial 2,500 144,375
Harley-Davidson 2,000 94,000 Winthrop Resources 2,000 57,500
-----------
ITI Technologies (b) 10,400 157,300 908,312
---------------------------------------------------------
Newell 8,000 252,000 HEALTH SERVICES - 1.2%
Polaris 4,400 104,500 Healthcare Compare (b) 2,000 84,750
Snap-On 6,150 219,094 Patterson Dental (b) 2,000 56,500
----------- -----------
826,894 141,250
- --------------------------------------------------------- ---------------------------------------------------------
CONSUMER NON-DURABLES - 0.8% HEALTH TECHNOLOGY - 6.9%
Sara Lee 2,600 96,850 Abbott Laboratories 2,100 106,575
- ---------------------------------------------------------
CONSUMER SERVICES - 2.0% Baxter International 2,000 82,000
Famous Dave's of America (b) 4,000 39,000 CIMA Labs (b) 10,000 61,250
Lodgenet Entertainment (b) 6,400 113,600 CNS (b) 4,700 67,563
McDonald's 1,900 85,975 Diametrics Medical (b) 12,000 52,500
-----------
238,575 Marquette Medical Class A (b) 6,200 137,175
- ---------------------------------------------------------
ELECTRONIC TECHNOLOGY - 7.4% Northfield Laboratories (b) 5,000 53,750
360 Communications (b) 8,300 191,937 Nutrition Medical (b) 7,000 26,250
ACI Telecentrics (b) 2,000 12,250 Possis Medical (b) 4,000 83,500
Aetrium (b) 11,000 145,750 Sybron International - Wisconsin (b) 2,900 95,700
ANTEC (b) 5,000 45,000 Urologix (b) 2,900 47,125
-----------
Ault (b) 8,000 54,000 813,388
---------------------------------------------------------
FSI International (b) 13,600 204,000 NON-ENERGY MINERALS - 1.5%
HEI (b) 5,400 51,975 USG (b) 5,200 176,150
---------------------------------------------------------
Motorola 2,300 141,163 PROCESS INDUSTRIES - 7.1%
Sheldahl (b) 1,800 33,750 AptarGroup 5,900 207,975
-----------
879,825 Bemis 2,500 92,187
- ---------------------------------------------------------
ENERGY MINERALS - 1.5% BMC Industries 4,000 126,000
Amoco 2,200 177,100 IMC Global 2,020 79,033
- ---------------------------------------------------------
FINANCIAL - 7.7% Mycogen (b) 2,000 43,000
Allstate 2,000 115,750 Northland Cranberries Class A 5,800 133,400
Amerin (b) 4,100 105,575 Pioneer Hi-Bred International 1,200 84,000
Equitable of Iowa 2,300 105,512 Valspar 1,300 73,613
-----------
839,208
---------------------------------------------------------
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S C H E D U L E O F I N V E S T M E N T S
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IAI REGIONAL PORTFOLIO
DECEMBER 31, 1996
Market Market
Quantity Value (a) Quantity Value (a)
- ---------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCER MANUFACTURING - 11.7% TECHNOLOGY SERVICES - 4.5%
ABC Rail Products (b) 10,000 $ 198,750 Alternative Resources (b) 3,000 $ 52,125
Borg-Warner Automotive 2,200 84,700 Control Data Systems (b) 5,000 110,000
Case 1,800 98,100 Engineering Animation (b) 5,800 140,650
Dura Automotive Systems (b) 800 18,000 Metromail (b) 700 12,775
IDEX 4,000 159,500 Racotek (b) 12,400 53,475
Illinois Tool Works 1,300 103,837 Richardson Electronics 12,500 103,125
Johnson Controls 2,000 165,750 Secure Computing (b) 7,000 63,875
-----------
Juno Lighting 500 8,000 536,025
---------------------------------------------------------
Lindsay Manufacturing 1,500 70,125 TRANSPORTATION - 2.4%
Littlefuse (b) 1,400 67,900 Illinois Central 3,500 112,000
Pentair 6,100 196,725 USFreightways 6,300 172,856
-----------
Recovery Engineering (b) 6,000 42,000 284,856
---------------------------------------------------------
Thermo Sentron (b) 7,200 97,200 TOTAL INVESTMENTS IN COMMON STOCKS
Valmont 600 24,750 (COST: $7,442,225) ........................ $ 8,102,783
---------------------------------------------------------
Woodhead 300 4,125 TOTAL INVESTMENTS IN LONG-TERM
Zebra Technologies Class A (b) 2,100 49,088 SECURITIES
-----------
1,388,550 (COST: $7,442,225) ........................ $ 8,102,783
- ---------------------------------------------------------- ---------------------------------------------------------
RETAIL TRADE - 4.2%
Dayton Hudson 3,000 117,750
Fingerhut 5,400 66,150
Lands' End (b) 3,500 92,750
Sears Roebuck 2,400 110,700
Video Update Class A (b) 14,000 55,125
Walgreen 1,300 52,000
-----------
494,475
- ----------------------------------------------------------
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S C H E D U L E O F I N V E S T M E N T S
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IAI REGIONAL PORTFOLIO
DECEMBER 31, 1996
SHORT-TERM SECURITIES - 24.9%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT OBLIGATIONS - 24.9%
U.S. Treasury Bill 5.21% 05/08/97 $3,000,000 2,946,870
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $2,946,625)................................................................................... $ 2,946,870
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $10,388,850) (d).............................................................................. $ 11,049,653
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 6.6%
..................................................................................................... $ 781,336
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
..................................................................................................... $ 11,830,989
- ----------------------------------------------------------------------------------------------------------------------
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S C H E D U L E O F I N V E S T M E N T S
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IAI BALANCED PORTFOLIO
DECEMBER 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 45.5%
Market Market
Quantity Value (a) Quantity Value (a)
- ---------------------------------------------------------- ---------------------------------------------------------
CONSUMER DURABLES - 7.0% HEALTH TECHNOLOGY - 2.7%
<S> <C> <C> <C> <C> <C>
Bandag 300 $ 14,213 Bristol-Myers Squibb 130 $ 14,138
Department 56 (b) 1,200 29,700 Merck 100 7,925
Eastman Kodak 300 24,075 Pfizer 150 12,431
Hasbro 300 11,662 SmithKline Beecham ADR 100 6,800
------------
Polaris 700 16,625 41,294
---------------------------------------------------------
Sturm Ruger 600 11,625 INDUSTRIAL SERVICES - 0.9%
------------
107,900 Schlumberger ADR 40 3,995
- --------------------------------------------------------
CONSUMER NON-DURABLES - 5.0% WMX Technologies 300 9,787
------------
Coca-Cola 320 16,840 13,782
---------------------------------------------------------
Gillette 200 15,550 NON-ENERGY MINERALS - 1.7%
Philip Morris 300 33,788 Nucor 200 10,200
UST 300 9,712 Schweitzer-Mauduit International 500 15,813
------------ ------------
75,890 26,013
- -------------------------------------------------------- ---------------------------------------------------------
CONSUMER SERVICES - 2.8% PRODUCER MANUFACTURING - 4.6%
Media General Class A 300 9,075 Berkshire Hathaway Class B (b) 15 16,680
Reader's Digest Class A 300 12,075 General Electric 260 25,708
Walt Disney 300 20,888 Nordson 200 12,750
------------
42,038 Tyco International 300 15,862
- -------------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY - 4.3% 71,000
---------------------------------------------------------
General Dynamics 200 14,100 RETAIL TRADE - 2.7%
Intel 220 28,806 Circuit City 400 12,050
Lucent Technologies 97 4,486 Harcourt General 300 13,837
Motorola 300 18,413 Wal-Mart 650 14,869
------------ ------------
65,805 40,756
- -------------------------------------------------------- ---------------------------------------------------------
ENERGY MINERALS - 1.9% TECHNOLOGY SERVICES - 0.6%
British Petroleum ADR 70 9,896 Electronic Data Systems 200 8,650
---------------------------------------------------------
Exxon 200 19,600 UTILITIES - 1.2%
------------
29,496 FPL Group 200 9,200
- --------------------------------------------------------
FINANCIAL - 10.1% MCI Communications 300 9,806
------------
Aetna 300 24,000 19,006
---------------------------------------------------------
American Express 300 16,950 TOTAL INVESTMENTS IN COMMON STOCKS
Federal National Mortgage Association 600 22,350 (COST: $624,270) ............................ $ 697,130
---------------------------------------------------------
Leucadia National 400 10,700
Norwest 350 15,225
PMI Group 300 16,612
Student Loan Marketing Association 200 18,625
United Assets Management 700 18,638
United Dominion Realty Trust 800 12,400
------------
155,500
- --------------------------------------------------------
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S C H E D U L E O F I N V E S T M E N T S
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IAI BALANCED PORTFOLIO
DECEMBER 31, 1996
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 41.9%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 21.4%
6.00% 11/30/97 $ 20,000 $ 20,062
6.13 09/30/00 25,000 24,984
8.00 05/15/01 25,000 26,715
7.50 11/15/01 50,000 52,633
7.50 05/15/02 70,000 74,014
6.25 02/15/03 75,000 74,906
7.88 11/15/04 50,000 54,563
------------
327,877
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 17.4%
10.75 05/15/03 75,000 92,273
9.25 02/15/16 50,000 63,477
8.13 08/15/19 25,000 28,918
7.88 02/15/21 25,000 28,258
7.50 11/15/24 50,000 54,687
-----------
267,613
- ----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 3.1%
U.S. Treasury Strip (ZERO-COUPON BOND) 6.77(c) 02/15/04 75,000 48,009
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $639,428) ................................................................................ $ 643,499
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $1,263,698) (d) .......................................................................... $ 1,340,629
- ----------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 12.6%
................................................................................................. $ 193,417
- ----------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
................................................................................................. $ 1,534,046
- ----------------------------------------------------------------------------------------------------------------
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S C H E D U L E O F I N V E S T M E N T S
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IAI RESERVE PORTFOLIO
DECEMBER 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT OBLIGATIONS - 18.8%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTE - 18.8%
<S> <C> <C> <C> <C>
5.38% 05/31/98 $ 100,000 $ 99,484
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S GOVERNMENT OBLIGATIONS
(COST: $98,826) ......................................................................................... $ 99,484
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES - 73.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 73.3%
Federal Farm Credit Bank 6.52% 03/11/97 50,000 $ 49,497
Federal Farm Credit Bank 6.91 04/09/97 45,000 44,351
Federal Home Loan Mortgage Corporation 6.57 01/15/97 72,000 71,857
Federal Home Loan Mortgage Corporation 8.61 05/06/97 50,000 49,100
Federal National Mortgage Association 5.72 07/11/97 75,000 72,894
World Bank 5.36 02/18/97 50,000 49,643
World Bank 6.79 02/18/97 50,000 49,647
----------
386,989
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $386,962) ....................................................................................... $ 386,989
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $485,788) (d) .................................................................................... $ 486,473
- ----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS & LIABILITIES (NET) - 7.9%
......................................................................................................... $ 41,443
- ----------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
......................................................................................................... $ 527,916
- ----------------------------------------------------------------------------------------------------------------------
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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
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IAI RETIREMENT FUNDS, INC.
DECEMBER 31, 1996
(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)
Interest rate shown represents yield-to-maturity at date of purchase.
(d)
At December 31, 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:
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IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal income tax purposes $ 10,414,213 $ 1,263,764 $ 485,788
------------------------------------------------------------
Gross unrealized appreciation $ 1,033,235 $ 102,866 $ 696
Gross unrealized depreciation (397,795) (26,001) (11)
------------------------------------------------------------
Net unrealized appreciation $ 635,440 $ 76,865 $ 685
------------------------------------------------------------
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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
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IAI RETIREMENT FUNDS, INC.
DECEMBER 31, 1996
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $10,388,850; $1,263,698; and $485,788, respectively) $ 11,049,653 $ 1,340,629 $ 486,473
Cash in bank on demand deposit 764,129 180,136 33,354
Receivable for investment securities sold 73,064 - -
Dividends and accrued interest receivable 4,876 10,525 475
Organization costs 5,269 5,289 5,693
Other 2,602 - 4,070
-------------------------------------------------------
TOTAL ASSETS 11,899,593 1,536,579 530,065
-------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 66,253 - -
Other accrued expenses 2,351 2,533 2,149
-------------------------------------------------------
TOTAL LIABILITIES 68,604 2,533 2,149
-------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 11,830,989 $ 1,534,046 $ 527,916
-------------------------------------------------------
REPRESENTED BY:
Capital stock $ 7,875 $ 1,207 $ 527
Additional paid-in capital 10,555,232 1,388,203 524,037
Undistributed net investment income 62,091 32,872 1,777
Accumulated net realized gains on investments 544,988 34,833 890
Unrealized appreciation on investments 660,803 76,931 685
-------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING
CAPITAL STOCK $ 11,830,989 $ 1,534,046 $ 527,916
-------------------------------------------------------
Shares of common stock outstanding; authorized 10 billion
shares of $.01 par value stock of each Portfolio 787,450 120,716 52,656
-------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 15.02 $ 12.71 $ 10.03
-------------------------------------------------------
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===============================================================================================================
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.
YEAR ENDED DECEMBER 31, 1996
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 87,787 $ 35,895 $ 50,512
Dividends 55,465 10,189 -
---------------------------------------------------
TOTAL INCOME 143,252 46,084 50,512
---------------------------------------------------
Expenses:
Investment advisory fees 51,843 7,333 4,218
Dividend-disbursing, administrative, and accounting fees 7,977 1,128 938
Legal fees 185 186 185
Custodian fees 7,770 5,490 3,660
Amortization of organization costs 2,525 2,525 2,525
Compensation of Directors 779 108 102
Audit fees 8,856 4,026 4,026
Printing and shareholder reporting 1,469 737 737
Registration fees 554 554 554
Other expenses 56 13 29
---------------------------------------------------
TOTAL EXPENSES 82,014 22,100 16,974
Less fees reimbursed or waived by Advisers - (8,031) (9,034)
---------------------------------------------------
NET EXPENSES 82,014 14,069 7,940
---------------------------------------------------
NET INVESTMENT INCOME 61,238 32,015 42,572
---------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on investments 546,238 34,844 897
Net change in unrealized appreciation or depreciation on
investment securities 261,886 48,573 470
---------------------------------------------------
NET GAIN ON INVESTMENTS 808,124 83,417 1,367
---------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 869,362 $ 115,432 $ 43,939
---------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<TABLE>
<CAPTION>
==================================================================================================================
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
Year ended Year ended
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 61,238 $ 27,460
Net realized gains 546,238 402,797
Net change in unrealized appreciation or depreciation 261,886 377,323
-------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 869,362 807,580
-------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,335) (2,961)
Net realized gains (399,948) -
-------------------------------------------
TOTAL DISTRIBUTIONS (428,283) (2,961)
-------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 494,528 and 284,186 shares 7,251,048 3,496,985
Net asset value of 29,614 and 250 shares issued to shareholders
in reinvestment of distributions 428,283 2,976
Cost of 97,088 and 5,480 shares redeemed (1,394,032) (65,151)
-------------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 6,285,299 3,434,810
-------------------------------------------
TOTAL INCREASE IN NET ASSETS 6,726,378 4,239,429
NET ASSETS AT BEGINNING OF PERIOD 5,104,611 865,182
-------------------------------------------
NET ASSETS AT END OF PERIOD $ 11,830,989 $ 5,104,611
-------------------------------------------
Including undistributed net investment income of: $ 62,091 $ 28,323
-------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<TABLE>
<CAPTION>
=================================================================================================================
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
Year ended Year ended
December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C>
Net investment income $ 32,015 $ 8,739
Net realized gains 34,844 10,667
Net change in unrealized appreciation or depreciation 48,573 28,015
------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 115,432 47,421
------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (9,610) (2,721)
Net realized gains (10,008) -
------------------------------------------
TOTAL DISTRIBUTIONS (19,618) (2,721)
------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 60,953 and 51,989 shares 736,701 595,671
Net asset value of 1,644 and 243 shares issued to shareholders
in reinvestment of distributions 19,618 2,721
Cost of 6,756 and 7,482 shares redeemed (82,199) (84,648)
------------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 674,120 513,744
------------------------------------------
TOTAL INCREASE IN NET ASSETS 769,934 558,444
NET ASSETS AT BEGINNING OF PERIOD 764,112 205,668
------------------------------------------
NET ASSETS AT END OF PERIOD $ 1,534,046 $ 764,112
------------------------------------------
Including undistributed net investment income of: $ 32,872 $ 9,602
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<TABLE>
<CAPTION>
=================================================================================================================
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
Year ended Year ended
December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 42,572 $ 35,152
Net realized gains 897 391
Net change in unrealized appreciation or depreciation 470 215
------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 43,939 35,758
------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (44,274) (34,624)
Net realized gains (385) -
------------------------------------------
TOTAL DISTRIBUTIONS (44,659) (34,624)
------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 177,334 and 110,373 shares 1,778,387 1,109,346
Net asset value of 4,449 and 3,456 shares issued to shareholders
in reinvestment of distributions 44,659 34,694
Cost of 213,085 and 84,066 shares redeemed (2,138,514) (844,916)
------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE
TRANSACTIONS (315,468) 299,124
------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (316,188) 300,258
NET ASSETS AT BEGINNING OF PERIOD 844,104 543,846
------------------------------------------
NET ASSETS AT END OF PERIOD $ 527,916 $ 844,104
------------------------------------------
Including undistributed net investment income of: $ 1,777 $ 2,614
------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<TABLE>
<CAPTION>
=====================================================================================================================
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:
Years ended
December 31, Period from
-------------------------------- January 31, 1994 ***
1996 1995 to December 31, 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 14.16 $ 10.62 $ 10.00
---------------------------------------------------------
OPERATIONS
Net investment income 0.05 0.06 0.03
Net realized and unrealized gains 1.60 3.50 0.59
---------------------------------------------------------
TOTAL FROM OPERATIONS 1.65 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 $ 15.02 $ 14.16 $ 10.62
---------------------------------------------------------
Total investment return* 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 11,831 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets 1.03% 1.37%** 1.13%**
Expenses to average daily net assets (NET OF
EXPENSES PAID INDIRECTLY) 1.03% 1.25% n/a
Net investment income to average daily net assets 0.77% 1.12%** 0.81%**
Average brokerage commission rate**** $ 0.0513 n/a n/a
Portfolio turnover rate (excluding short-term securities) 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. THE RATIO FOR THE PERIOD ENDED DECEMBER 31,
1994 IS ANNUALIZED.
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1996, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
<TABLE>
<CAPTION>
====================================================================================================================
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:
Years ended
December 31, Period from
------------------------------ February 3, 1994 ***
1996 1995 to December 31, 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.78 $ 10.22 $ 10.00
------------------------------------------------------
OPERATIONS
Net investment income 0.22 0.09 0.10
Net realized and unrealized gains 0.92 1.56 0.12
------------------------------------------------------
TOTAL FROM OPERATIONS 1.14 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 $ 12.71 $ 11.78 $ 10.22
------------------------------------------------------
Total investment return* 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 1,534 $ 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) 1.25% 1.25% n/a
Net investment income to average daily net assets** 2.84% 2.34% 2.28%
Average brokerage commission rate**** $ 0.0555 n/a n/a
Portfolio turnover rate (excluding short-term securities) 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 $8,031, $13,428 AND $7,756 IN
EXPENSES FOR 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 1.96%, 5.29% AND 10.33%, RESPECTIVELY, AND THE RATIO
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
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. THE
RATIO FOR THE PERIOD ENDED DECEMBER 31, 1994 IS ANNUALIZED.
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1996, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
<TABLE>
<CAPTION>
====================================================================================================================
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:
Years ended
December 31, Period from
----------------------------------- April 7, 1994 ***
1996 1995 to December 31, 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.05 $ 10.03 $ 10.00
---------------------------------------------------------
OPERATIONS
Net investment income 0.49 0.48 0.20
Net realized and unrealized gains (0.01) 0.02 0.02
---------------------------------------------------------
TOTAL FROM OPERATIONS 0.48 0.50 0.22
---------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.50) (0.48) (0.19)
---------------------------------------------------------
TOTAL DISTRIBUTIONS (0.50) (0.48) (0.19)
---------------------------------------------------------
NET ASSET VALUE
End of period $ 10.03 $ 10.05 $ 10.03
---------------------------------------------------------
Total investment return* 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 528 $ 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) 0.85% 0.85% n/a
Net investment income to average daily net assets** 4.54% 4.84% 3.56%
</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 $9,034, $11,528 AND $6,930 IN
EXPENSES FOR 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 1.81%, 2.62% AND 4.62%, RESPECTIVELY, AND THE RATIO
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
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. THE
RATIO FOR THE PERIOD ENDED DECEMBER 31, 1994 IS ANNUALIZED.
*** COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
================================================================================
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.
DECEMBER 31, 1996
[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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased, resulting
in reclassification adjustments to additional paid-in capital as follows:
<TABLE>
<CAPTION>
- ------------------------------------ ----------------------------- -------------------------- -----------------------
IAI REGIONAL PORTFOLIO IAI BALANCED PORTFOLIO IAI RESERVE PORTFOLIO
- ------------------------------------ ----------------------------- -------------------------- -----------------------
<S> <C> <C> <C>
Undistributed net investment income $ 865 $ 865 $ 865
Additional paid-in capital $ (865) $ (865) $ (865)
- ------------------------------------ ----------------------------- -------------------------- -----------------------
</TABLE>
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 year ended
December 31, 1996, the Portfolios paid no interest on the line of credit. There
were no borrowings outstanding at December 31, 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.
Additionally, Advisers has voluntarily agreed to waive fees and expenses for
Balanced Portfolio and Reserve Portfolio in excess of 1.25% and .85%,
respectively, of average daily net assets through May 1, 1997.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended December 31, 1996, purchases of securities and sales
proceeds, including maturities, for the Reserve Portfolio aggregated $3,528,109
and $3,897,391 , 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 $ 8,122,508 $ 4,851,489
IAI BALANCED PORTFOLIO $ 1,258,512 $ 656,039
- ---------------------------- -------------------------- ------------------------
================================================================================
I N D E P E N D E N T A U D I T O R S` R E P O R T
================================================================================
IAI RETIREMENT FUNDS, INC.
The Board of Directors and Shareholders
IAI Retirement Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of IAI Regional Portfolio, IAI Balanced Portfolio
and IAI Reserve Portfolio (portfolios within IAI Retirement Funds, Inc.) as of
December 31, 1996, 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 19-21 of the annual report. These financial statements and
the financial highlights are the responsibility of the portfolios' 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 accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Regional Portfolio, IAI Balanced Portfolio and IAI Reserve Portfolio at December
31, 1996, 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
January 31, 1997
================================================================================
F E D E R A L T A X I N F O R M A T I O N
================================================================================
IAI RETIREMENT FUNDS, INC.
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JUNE 1996 $ .7468 $ .0498
7.03% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- ----------------------------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO
- ----------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- ----------------------------------------------------------------------------------------------------
JUNE 1996 $ .1458 $ .0653
16.12% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- ----------------------------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO
- ----------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- ----------------------------------------------------------------------------------------------------
JANUARY 1996 $ .0440
FEBRUARY 1996 .0500
MARCH 1996 .0410
APRIL 1996 .0390
MAY 1996 .0350
JUNE 1996 .0399
JULY 1996 .0350
AUGUST 1996 .0350
SEPTEMBER 1996 .0370
OCTOBER 1996 .0650
NOVEMBER 1996 .0440
DECEMBER 1996 .0390
- ----------------------------------------------------------------------------------------------------
$ .5039
- ----------------------------------------------------------------------------------------------------
</TABLE>
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
