----------------------------------------------
IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
DECEMBER 31, 1997
----------------------------------------------
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
DECEMBER 31, 1997
President'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.
601 SECOND AVENUE SOUTH, SUITE 3600, MINNEAPOLIS, MINNESOTA 55402 USA
FAX 612.376.2737
800.945.3863
612.376.2700
<PAGE>
PRESIDENT'S LETTER
IAI RETIREMENT FUNDS, INC.
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
NOEL P. RAHN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
market down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Today's ice cold markets can turn
hot in no time.
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
President
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
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 13.45% during the past year, while the S&P 500
Index had a return of 33.38%. The S&P consists of 80% large cap stocks vs. 20%
in our Portfolio. Through 1997, large cap stocks outperformed smaller cap
stocks, affecting our performance compared to the index. The Portfolio also had
an underweighted position in banks and financial companies, which did well over
the past year.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
Due to the economic and currency troubles overseas, the U.S. markets have been
very volatile of late. We tend to take a long-term view, however, and we believe
we will be well served by continuing to invest in profitable companies with
strong cash flow and high growth prospects.
[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 $10,000
12/31/94 10,620 9,803
12/31/95 14,178 13,479
12/31/96 15,862 16,613
12/31/97 17,998 22,158
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/97
Since Inception
1 Year 1/31/94
================================================================================
IAI REGIONAL PORTFOLIO 13.45% 16.18%
- --------------------------------------------------------------------------------
S&P 500 Index 33.38% 22.52%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
<PAGE>
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
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 16.60% over the past year. In contrast, the
Lehman Government/Corporate Bond Index and S&P 500 Index had returns of 9.76%
and 33.38%, respectively. The Portfolio's mix of stocks (both U.S. and
International) and bonds generally places the return consistently in the middle
of these two market indicators.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
We continue to focus on companies with solid competitive advantages and
extremely high financial quality at attractive fundamental valuations. Companies
with these characteristics possess the strength and flexibility to weather
downturns in the economy and capital markets. These qualities also should lead
to strong relative performance in weak markets and out-performance over a full
market cycle.
The current asset allocation strategy reflects a well-balanced mix of 45% in
U.S. equities, 15% in international equities and 40% in fixed income.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI BALANCED PORTFOLIO LEHMAN GOVERNMENT
(INCEPTION 2/03/94) S&P 500 INDEX* CORPORATE BOND INDEX*
2/03/94 $10,000 $10,000 $10,000
12/31/94 10,220 9,803 9,506
12/31/95 11,877 13,479 11,335
12/31/96 13,041 16,613 11,664
12/31/97 15,203 22,158 12,802
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/97
Since Inception
1 Year 2/03/94
================================================================================
IAI BALANCED PORTFOLIO 16.60% 11.31%
- --------------------------------------------------------------------------------
S&P 500 Index 33.38% 22.52%*
- --------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 9.76% 6.51%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI RESERVE PORTFOLIO
IAI RESERVE PORTFOLIO
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Reserve Portfolio earned a return of 4.62% over the past year compared
to the Salomon Brothers One Year Treasury Bill Index which had a 6.10% return.
The difference in return reflects the Portfolio's commitment to high quality
assets with a shorter average maturity for much of the year.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
Above-trend economic growth should persist, although expectations will be
dampened by financial market turbulence, particularly in Asia. As overseas
markets stabilize, cyclical inflationary pressures will re-emerge due to tight
labor market conditions. Short-term interest rates are directly related to
actions by the Federal Reserve. While the current structure of interest rates
suggests the possibility of a cut in rates by the Fed, we believe the Fed is
still focused on controlling domestic inflation. Thus, a rate cut is unlikely
unless Asian markets deteriorate further, eroding confidence in the global
financial system.
[PHOTO]
TIMOTHY A. PALMER, CFA
IAI RESERVE PORTFOLIO
MANAGER
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI RESERVE PORTFOLIO SALOMON BROTHERS ONE
(INCEPTION 4/07/94) YEAR TREASURY BILL INDEX*
4/07/94 $10,000 $10,000
12/31/94 10,225 10,232
12/31/95 10,746 11,060
12/31/96 11,277 11,686
12/31/97 11,798 12,400
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/97
Since Inception
1 Year 4/07/94
================================================================================
IAI RESERVE PORTFOLIO 4.62% 4.52%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 6.10% 5.90%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
COMMON STOCKS - 89.3%
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SERVICES - 5.7% FINANCIAL - 7.8%
Bell & Howell (b) 9,300 $ 224,944 Allstate 3,500 $ 318,063
G & K Services Class A 400 16,800 First Alliance (b) 13,950 256,331
HA- LO Industries (b) 3,500 91,000 LifeUSA (b) 12,300 207,563
Merrill 10,000 232,500 MMI Companies 3,300 82,912
R.R. Donnelley 5,000 186,250 ReliaStar Financial 7,300 300,669
United Stationers (b) 3,000 144,375 St. Paul Companies 2,100 172,331
Wallace Computer Services 1,900 73,862 -------------
------------- 1,337,869
969,731 --------------------------------------------------------------
- ---------------------------------------------------------------- HEALTH SERVICES - 3.7%
CONSUMER DURABLES - 10.0% First Health Group (b) 6,000 306,750
Excelsior-Henderson Motorcycle (b) 7,300 40,378 Patterson Dental (b) 7,300 330,325
ITI Technologies (b) 11,700 254,475 -------------
LaserMaster Technologies (b) 3,200 14,400 637,075
Newell 8,800 374,000 --------------------------------------------------------------
Polaris 13,000 397,313 HEALTH TECHNOLOGY - 6.7%
Snap-On 14,500 632,562 Abbott Laboratories 4,000 262,250
------------- Baxter International 3,000 151,313
1,713,128 CIMA Labs (b) 24,300 103,275
- ---------------------------------------------------------------- Diametrics Medical (b) 36,800 204,700
CONSUMER NON-DURABLES - 5.1% Northfield Laboratories (b) 19,500 177,937
General Mills 3,500 250,687 Nutrition Medical (b) 9,000 9,000
Hormel Foods 7,500 245,625 Possis Medical (b) 11,000 121,000
Sara Lee 6,500 366,031 Urologix (b) 6,500 117,813
------------- -------------
862,343 1,147,288
- ---------------------------------------------------------------- --------------------------------------------------------------
CONSUMER SERVICES - 1.4% PROCESS INDUSTRIES - 6.1%
Lodgenet Entertainment (b) 22,000 242,000 AptarGroup 5,300 294,150
- ---------------------------------------------------------------- Bemis 7,500 330,469
ELECTRONIC TECHNOLOGY - 8.0% Mycogen (b) 4,000 75,000
ACI Telecentrics (b) 8,700 30,450 Northland Cranberries Class A 7,300 113,150
ADC Telecommunications (b) 6,200 258,850 Valspar 7,300 232,687
Aetrium (b) 19,700 354,600 -------------
Andrew (b) 3,000 72,000 1,045,456
Ault (b) 100 588 --------------------------------------------------------------
FSI International (b) 26,500 311,375
Galileo International 6,000 165,750
Norstan (b) 1,500 35,625
Sheldahl (b) 9,700 135,800
-------------
1,365,038
- ----------------------------------------------------------------
ENERGY MINERALS - 1.5%
Amoco 2,900 246,863
- ----------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Market Market
Quantity Value (a) Quantity Value (a)
- ----------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCER MANUFACTURING - 12.8% TECHNOLOGY SERVICES - 6.4%
ABC Rail Products (b) 16,500 $ 330,000 Anicom (b) 2,500 $ 39,687
HON Industries 3,400 200,600 Engineering Animation (b) 5,000 230,000
IDEX 9,300 324,338 Platinum Technology (b) 16,100 454,825
Illinois Tool Works 4,500 270,562 Richardson Electronics 17,700 196,913
Juno Lighting 3,000 52,500 Secure Computing (b) 14,500 171,281
Pentair 8,000 287,500 -------------
Rayovac (b) 7,300 140,525 1,092,706
Recovery Engineering (b) 14,000 343,000 -----------------------------------------------------------
Zebra Technologies Class A (b) 8,000 238,000 TRANSPORTATION - 2.9%
------------- Hub Group Class A (b) 2,800 83,300
2,187,025 Illinois Central 8,000 272,500
- ----------------------------------------------------------- USFreightways 4,100 133,250
RETAIL TRADE - 5.5% -------------
Dayton Hudson 1,800 121,500 489,050
Famous Dave's of America (b) 10,500 93,844 -----------------------------------------------------------
Lands' End (b) 6,200 217,388 UTILITIES - 5.7%
Sears Roebuck 6,200 280,550 Ameritech 3,000 241,500
Video Update Class A (b) 43,700 87,400 Minnesota Power & Light 2,500 108,906
Walgreen 4,500 141,187 Montana Power 6,400 203,600
------------- Northern States Power 4,000 233,000
941,869 Unicom 3,000 92,250
- ----------------------------------------------------------- Wisconsin Energy 3,200 92,000
-------------
971,256
===========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $13,735,079) ...................... $ 15,248,697
===========================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $13,735,079) ...................... $ 15,248,697
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 9.3%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 9.3%
Federal National Mortgage Association (DISCOUNT NOTE) 5.71% 01/16/98 $ 1,600,000 $ 1,596,193
==========================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,596,193)........................................................................... $ 1,596,193
==========================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $15,331,272) (c)...................................................................... $ 16,844,890
==========================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.4%
............................................................................................. $ 239,926
==========================================================================================================
TOTAL NET ASSETS
............................................................................................. $ 17,084,816
==========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
COMMON STOCKS - 51.1%
Market Market
Quantity Value (a) Quantity Value (a)
- ------------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER DURABLES - 7.8% HEALTH SERVICES - 1.5%
Bandag 500 $ 26,719 First Health Group (b) 700 $ 35,788
Department 56 (b) 1,500 43,125 -------------------------------------------------------------
Eastman Kodak 400 24,325 HEALTH TECHNOLOGY - 3.6%
Harley-Davidson 1,200 32,850 Pfizer 400 29,825
Polaris 900 27,506 R.P. Scherer (b) 350 21,350
Sturm Ruger 1,900 35,031 SmithKline Beecham ADR 700 36,006
------------ -----------
189,556 87,181
- ------------------------------------------------------------- -------------------------------------------------------------
CONSUMER NON-DURABLES - 6.1% INDUSTRIAL SERVICES - 1.9%
Coca-Cola 420 27,983 Nabors Industries (b) 1,150 36,153
Gillette 300 30,131 Waste Management 400 11,000
Nike Class B 700 27,475 -----------
Philip Morris 1,000 45,313 47,153
UST 500 18,468 -------------------------------------------------------------
------------ NON-ENERGY MINERALS - 2.1%
149,370 Nucor 450 21,741
- ------------------------------------------------------------- Schweitzer-Mauduit International 800 29,800
CONSUMER SERVICES - 1.8% -----------
Walt Disney 450 44,578 51,541
- ------------------------------------------------------------- -------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 2.5% PRODUCER MANUFACTURING - 6.5%
3Com (b) 500 17,469 Berkshire Hathaway Class B (b) 15 23,085
Intel 380 26,695 CBS 1,800 52,988
Motorola 300 17,119 General Electric 320 23,480
------------ Nordson 300 13,763
61,283 Tyco International 1,000 45,062
- ------------------------------------------------------------- -----------
ENERGY MINERALS - 2.2% 158,378
British Petroleum ADR 302 24,066 -------------------------------------------------------------
Exxon 500 30,593 RETAIL TRADE - 1.7%
------------ Wal-Mart Stores 1080 42,593
54,659 -------------------------------------------------------------
- ------------------------------------------------------------- TECHNOLOGY SERVICES - 1.9%
FINANCIAL - 10.5% Electronic Data Systems 300 13,181
Aetna 300 21,169 Parametric Technology (b) 700 33,163
American Express 400 35,700 -----------
Federal Home Loan Mortgage 46,344
Corporation 1,200 50,325 -------------------------------------------------------------
Leucadia National 700 24,150 UTILITIES - 1.0%
Norwest 840 32,445 FPL Group 400 23,675
PMI Group 300 21,694 =============================================================
SLM Holding 300 41,738 TOTAL INVESTMENTS IN COMMON STOCKS
United Asset Management 1,200 29,324 (COST: $990,299) .............................. $ 1,248,644
------------ =============================================================
256,545
- -------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1997
U.S. GOVERNMENT OBLIGATIONS - 30.4%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES - 19.5%
5.88 % 10/31/98 $ 25,000 $ 25,042
7.50 10/31/99 50,000 51,546
6.13 09/30/00 25,000 25,262
8.00 05/15/01 25,000 26,707
7.50 11/15/01 50,000 53,008
7.50 05/15/02 70,000 74,703
6.25 02/15/03 75,000 76,700
7.88 11/15/04 50,000 55,899
7.50 02/15/05 30,000 32,972
7.00 07/15/06 50,000 53,969
-----------
475,808
- --------------------------------------------------------------------------------
U.S. TREASURY BONDS -10.9%
9.25 02/15/16 50,000 67,843
8.13 08/15/19 25,000 31,281
7.88 02/15/21 50,000 61,390
6.50 11/15/26 100,000 106,750
-----------
267,264
================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $715,537) ................................................... $ 743,072
================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $1,705,836).................................................. $1,991,716
================================================================================
SHORT-TERM SECURITIES - 16.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 16.3%
Federal National Mortgage Association (DISCOUNT NOTE) 5.71% 01/16/98 $ 400,000 $ 399,048
======================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $399,048) ........................................................................ $ 399,048
======================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $2,104,884) (c) .................................................................. $2,390,764
======================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 2.2%
.......................................................................................... $ 54,891
======================================================================================================
TOTAL NET ASSETS
.......................................................................................... $2,445,655
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<PAGE>
================================================================================
S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI RESERVE PORTFOLIO
DECEMBER 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 9.8%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 9.8%
5.38% 05/31/98 $ 100,000 $ 99,922
======================================================================================================
TOTAL INVESTMENTS IN U.S GOVERNMENT OBLIGATIONS
(COST: $99,644) ........................................... $ 99,922
======================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 85.9%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 85.9%
Federal Farm Credit Bank 5.63% 02/12/98 $ 100,000 $ 99,343
Federal Farm Credit Bank 6.35 04/07/98 100,000 98,563
Federal Home Loan Bank 5.41 01/05/98 150,000 149,925
Federal Home Loan Mortgage Corporation 6.35 04/17/98 135,000 132,814
Federal National Mortgage Association 5.75 01/16/98 131,000 130,686
Federal National Mortgage Association 5.75 01/21/98 100,000 99,681
Federal National Mortgage Association 6.40 04/27/98 68,000 66,776
World Bank 5.65 02/17/98 100,000 99,262
-----------
877,050
======================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $876,978) ........................................................................ $ 877,050
======================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $976,622) (c) ..................................................................... $ 976,972
======================================================================================================
OTHER ASSETS & LIABILITIES (NET) - 4.3%
.......................................................................................... $ 44,343
======================================================================================================
TOTAL NET ASSETS
.......................................................................................... $1,021,315
======================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
<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.
DECEMBER 31, 1997
(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 December 31, 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:
- --------------------------------------------------------------------------------
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Cost for federal income tax purposes $15,357,027 $2,106,606 $976,622
=========================================
Gross unrealized appreciation $ 2,133,229 $ 311,280 $ 350
Gross unrealized depreciation (645,366) (27,122) -
----------------------------------------
Net unrealized appreciation $ 1,487,863 $ 284,158 $ 350
=========================================
- --------------------------------------------------------------------------------
<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.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $15,331,272; $2,104,884; and $976,622, respectively) $ 16,844,890 $ 2,390,764 $ 976,972
Cash in bank on demand deposit 258,612 48,488 33,341
Receivable for Fund shares sold 10,591 3,677 --
Dividends and accrued interest receivable 17,173 14,077 475
Organization costs 2,750 2,770 3,174
Receivable from Advisers -- 1,325 12,610
----------------------------------------------
TOTAL ASSETS 17,134,016 2,461,101 1,026,572
----------------------------------------------
LIABILITIES
Payable for investment securities purchased 46,925 -- --
Accrued investment advisory fees -- 11,334 2,737
Accrued dividend-disbursing, administrative, and accounting fees -- 1,681 609
Accrued custody fees 23 1,780 1,248
Other accrued expenses 2,252 651 663
----------------------------------------------
TOTAL LIABILITIES 49,200 15,446 5,257
----------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 17,084,816 $ 2,445,655 $ 1,021,315
==============================================
REPRESENTED BY:
Capital stock $ 10,473 $ 1,711 $ 1,022
Additional paid-in capital 14,634,869 2,077,913 1,018,021
Undistributed net investment income 96,455 51,876 1,925
Accumulated net realized gains (losses) on investments 829,401 28,275 (3)
Unrealized appreciation on investments 1,513,618 285,880 350
----------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 17,084,816 $ 2,445,655 $ 1,021,315
==============================================
Shares of common stock outstanding; authorized 10 billion shares
of $.01 par value stock of each Portfolio 1,047,317 171,087 102,174
----------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 16.31 $ 14.29 $ 10.00
==============================================
</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.
DECEMBER 31, 1997
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 106,514 $ 61,120 $ 32,959
Dividends 122,013 14,126 --
--------------------------------------------
TOTAL INCOME 228,527 75,246 32,959
--------------------------------------------
Expenses:
Investment advisory fees 95,467 12,589 2,737
Dividend-disbursing, administrative, and accounting fees 14,687 1,937 609
Legal fees 395 395 395
Custodian fees 10,359 2,714 1,713
Amortization of organization costs 2,519 2,519 2,519
Compensation of Directors 1,566 204 97
Audit fees 6,126 4,197 4,197
Printing and shareholder reporting 1,460 1,382 1,382
Other expenses 331 48 21
--------------------------------------------
TOTAL EXPENSES 132,910 25,985 13,670
Less fees reimbursed or waived by Advisers -- (1,753) (8,479)
--------------------------------------------
NET EXPENSES 132,910 24,232 5,191
--------------------------------------------
NET INVESTMENT INCOME 95,617 51,014 27,768
--------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investments 854,786 28,354 (3)
Net change in unrealized appreciation or depreciation on
investment securities 852,815 208,949 (335)
--------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 1,707,601 237,303 (338)
--------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,803,218 $ 288,317 $ 27,430
============================================
</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>
Year ended Year ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 95,617 $ 61,238
Net realized gains 854,786 546,238
Net change in unrealized appreciation or depreciation 852,815 261,886
-----------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,803,218 869,362
-----------------------------------
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 354,778 and 494,528 shares 5,590,877 7,251,048
Net asset value of 41,012 and 29,614 shares issued
in reinvestment of distributions 632,489 428,283
Cost of 135,923 and 97,088 shares redeemed (2,140,268) (1,394,032)
-----------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 4,083,098 6,285,299
-----------------------------------
TOTAL INCREASE IN NET ASSETS 5,253,827 6,726,378
NET ASSETS AT BEGINNING OF PERIOD 11,830,989 5,104,611
-----------------------------------
NET ASSETS AT END OF PERIOD $ 17,084,816 $ 11,830,989
===================================
Including undistributed net investment income of: $ 96,455 $ 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>
Year ended Year ended
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 51,014 $ 32,015
Net realized gains 28,354 34,844
Net change in unrealized appreciation or depreciation 208,949 48,573
------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 288,317 115,432
------------------------------------
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 65,491 and 60,953 shares 898,051 736,701
Net asset value of 5,042 and 1,644 shares issued
in reinvestment of distributions 67,785 19,618
Cost of 20,162 and 6,756 shares redeemed (274,759) (82,199)
------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 691,077 674,120
------------------------------------
TOTAL INCREASE IN NET ASSETS 911,609 769,934
NET ASSETS AT BEGINNING OF PERIOD 1,534,046 764,112
------------------------------------
NET ASSETS AT END OF PERIOD $ 2,445,655 $ 1,534,046
====================================
Including undistributed net investment income of: $ 51,876 $ 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>
Year ended Year ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 27,768 $ 42,572
Net realized gains (losses) (3) 897
Net change in unrealized appreciation or depreciation (335) 470
-----------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 27,430 43,939
-----------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,483) (44,274)
Net realized gains (890) (385)
-----------------------------------
TOTAL DISTRIBUTIONS (29,373) (44,659)
-----------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 81,587 and 177,334 shares 816,450 1,778,387
Net asset value of 2,955 and 4,449 shares issued
in reinvestment of distributions 29,373 44,659
Cost of 35,024 and 213,085 shares redeemed (350,481) (2,138,514)
-----------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 495,342 (315,468)
-----------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 493,399 (316,188)
NET ASSETS AT BEGINNING OF PERIOD 527,916 844,104
-----------------------------------
NET ASSETS AT END OF PERIOD $ 1,021,315 $ 527,916
===================================
Including undistributed net investment income of: $ 1,925 $ 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 December 31, Period from
------------------------------------------- January 31, 1994 ***
1997 1996 1995 to December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.02 $ 14.16 $ 10.62 $ 10.00
-----------------------------------------------------------------
OPERATIONS
Net investment income 0.08 0.05 0.06 0.03
Net realized and unrealized gains 1.90 1.60 3.50 0.59
-----------------------------------------------------------------
TOTAL FROM OPERATIONS 1.98 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 $ 16.31 $ 15.02 $ 14.16 $ 10.62
=================================================================
Total investment return* 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 17,085 $ 11,831 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets 0.90% 1.03% 1.37% ** 1.13% +**
Net investment income to average daily net assets 0.65% 0.77% 1.12% ** 0.81% +**
Average brokerage commission rate**** $ 0.0583 $ 0.0513 n/a n/a
Portfolio turnover rate (excluding short-term securities) 62.1% 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.
*** 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 December 31, Period from
------------------------------------------ February 3, 1994 ***
1997 1996 1995 to December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.71 $ 11.78 $ 10.22 $ 10.00
----------------------------------------------------------------
OPERATIONS
Net investment income 0.27 0.22 0.09 0.10
Net realized and unrealized gains 1.81 0.92 1.56 0.12
----------------------------------------------------------------
TOTAL FROM OPERATIONS 2.08 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 $ 14.29 $ 12.71 $ 11.78 $ 10.22
================================================================
Total investment return* 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 2,446 $ 1,534 $ 764 $ 206
RATIOS:
Expenses to average daily net assets** 1.25% 1.25% 1.70% 1.25% +
Net investment income to average daily net assets** 2.63% 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) 38.8% 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 $1,753, $8,031, $13,428 AND
$7,756 IN EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 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 1.34%, 1.96%, 5.29% AND 10.33%, RESPECTIVELY, AND THE RATIO
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
2.54%, 2.13%, (1.25%) AND (6.80%), RESPECTIVELY.
*** 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 December 31, Period from
------------------------------------------ April 7, 1994 ***
1997 1996 1995 to December 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.03 $ 10.05 $ 10.03 $ 10.00
-----------------------------------------------------------------
OPERATIONS
Net investment income 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) 0.02 (0.01) 0.02 0.02
-----------------------------------------------------------------
TOTAL FROM OPERATIONS 0.45 0.48 0.50 0.22
-----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.46) (0.50) (0.48) (0.19)
Net realized gains (0.02) - - -
-----------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.48) (0.50) (0.48) (0.19)
-----------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.00 $ 10.03 $ 10.05 $ 10.03
=================================================================
Total investment return* 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 1,021 $ 528 $ 844 $ 544
RATIOS:
Expenses to average daily net assets** 0.85% 0.85% 1.03% 0.85% +
Net investment income to average daily net assets** 4.57% 4.54% 4.84% 3.56% +
Portfolio turnover rate (excluding short-term securities) 0.0% 185.3% 0.0% 0.0%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** THE PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $8,479, $9,034, $11,528 AND
$6,930 IN EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, 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 2.25%, 1.81%, 2.62% AND 4.62%, RESPECTIVELY, AND THE RATIO
OF NET INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
3.17%, 3.58%, 3.25% AND (.21%), RESPECTIVELY.
*** 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.
DECEMBER 31, 1997
[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
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Such securities which
cannot be valued by the portfolio pricing service are valued using
dealer-supplied valuations, or are valued under consistently applied procedures
established by the Board of Directors to determine fair value in good faith.
Short-term "money market type" debt securities having a remaining maturity of 60
days or less at acquisition are valued at cost adjusted for amortization to
maturity of any premium or discount.
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 $ 863 $ 863 $ 863
Additional paid-in capital $ (863) $ (863) $ (863)
-------------------------------------------------------------------------------------------------------------------
</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.
<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.
DECEMBER 31, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 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 $4,900,000, $600,000 and $175,000, 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, 1997, the Regional Portfolio paid $535 in interest on the line of
credit at an average rate of 8.50% and the Balanced Portfolio and the Reserve
Portfolio paid no interest on the line of credit. There were no borrowings
outstanding at December 31, 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
Balanced Portfolio and Reserve Portfolio in excess of 1.25% and .85%,
respectively, of average daily net assets through May 1, 1998.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1997, purchases of securities and sales
proceeds, including maturities, for the Reserve Portfolio aggregated $3,706,943
and $3,241,016, 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 $ 13,228,515 $ 7,790,931
IAI BALANCED PORTFOLIO $ 1,045,895 $ 633,486
--------------------------------------------------------------------------
<PAGE>
================================================================================
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, 1997, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for the periods
presented on pages 18-20 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 auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased but not received, 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, 1997, and the results of their operations, the changes in their net assets
and their 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 30, 1998
<PAGE>
================================================================================
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.
<TABLE>
<CAPTION>
IAI REGIONAL PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
JUNE 1997 $ 0.6108 $ 0.0816
9.94% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- -----------------------------------------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- -----------------------------------------------------------------------------------------------------------------
JUNE 1997 $ 0.3863 $ 0.1123
19.42% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- -----------------------------------------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- -----------------------------------------------------------------------------------------------------------------
JANUARY 1997 $ 0.0050
FEBRUARY 1997 0.0600
MARCH 1997 0.0630
APRIL 1997 0.0450
MAY 1997 0.0350
JUNE 1997 0.0515
JULY 1997 0.0400
AUGUST 1997 0.0400
SEPTEMBER 1997 0.0370
OCTOBER 1997 0.0400
NOVEMBER 1997 0.0330
DECEMBER 1997 0.0330
- -----------------------------------------------------------------------------------------------------------------
$ 0.4825
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<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
J. Peter Thompson
Charles H. Withers
[LOGO]
IAI
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
601 SECOND AVENUE SOUTH, SUITE 3600, MINNEAPOLIS, MINNESOTA 55402 USA
FAX 612.376.2737
800.945.3863
612.376.2700