IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
JUNE 30, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1998
(UNAUDITED)
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...................... 12
Notes to Schedules of Investments............. 13
Statements of Assets and Liabilities.......... 14
Statements of Operations...................... 15
Statements of Changes in Net Assets
IAI Regional Portfolio..................... 16
IAI Balanced Portfolio..................... 17
IAI Reserve Portfolio...................... 18
Financial Highlights
IAI Regional Portfolio..................... 19
IAI Balanced Portfolio..................... 20
IAI Reserve Portfolio...................... 21
Notes to Financial Statements................. 22
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors............................. Back Cover
[LOGO] IAI
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
P.O. BOX 357 MINNEAPOLIS, MINNESOTA 55402 USA FAX 612.376.2737
800.945.3863
612.376.2700
<PAGE>
PRESIDENT'S LETTER
IAI RETIREMENT FUNDS, INC.
[PHOTO]
ROY C. GILLSON
PRESIDENT
WHAT'S RIGHT WITH THIS MARKET
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
We hope that you read the Portfolio Managers' Reviews which follow this letter.
They offer a detailed perspective on the individual funds' performance and
strategy. As always, we appreciate your continued trust and confidence in IAI.
If there is any way that we can serve you better, please let us know by calling
our toll-free Investor Services Hotline at 1-800-945-3863.
SINCERELY,
/s/Roy C. Gillson
Roy C. Gillson
President
2
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
IAI REGIONAL PORTFOLIO
[PHOTO]
MARK C. HOONSBEEN, CFA
IAI REGIONAL PORTFOLIO
MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Regional Portfolio, which invests in companies within the eight states
of the Upper Midwest, gained 4.93% during the six months ended June 30, 1998,
while the S&P 500 Index had a return of 17.71%. 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.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
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
6/30/98 18,885 26,083
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/98
Since Inception
Six months** 1 Year 1/31/94
- -------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO 4.93% 9.92% 15.49%
- -------------------------------------------------------------------------------
S&P 500 Index 17.71% 30.16% 24.18%*
- -------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
** NOT ANNUALIZED
3
<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 7.58% over the six months ended June 30,
1998. In contrast, the Lehman Government/Corporate Bond Index and S&P 500 Index
had returns of 4.17% and 17.71%, respectively. The Portfolio's mix of stocks 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 and 55% in fixed income securities.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI BALANCED PORTFOLIO LEHMAN GOVERNMENT/
(INCEPTION 2/03/94) S&P 500 INDEX* CORPORATE BOND INDEX*
------------------- -------------- ---------------------
2/3/94 $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
6/30/98 16,356 26,083 13,246
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/98
Since Inception
Six months** 1 Year 2/03/94
- -------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO 7.58% 14.64% 11.82%
- -------------------------------------------------------------------------------
S&P 500 Index 17.71% 30.16% 24.18%*
- -------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 4.17% 11.28% 6.74%*
- -------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
** NOT ANNUALIZED
4
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI RESERVE PORTFOLIO
IAI RESERVE PORTFOLIO
[PHOTO]
LARRY R. HILL, CFA
IAI RESERVE PORTFOLIO
MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Reserve Portfolio earned a return of 2.17% for the six months ended June
30, 1998, compared to the Salomon Brothers One Year Treasury Bill Index which
had a 2.84% 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.
VALUE OF $10,000 INVESTMENT+ AVERAGE
[PLOT POINTS CHART]
IAI RESERVE PORTFOLIO SALOMON ROTHERS ONE
(INCEPTION 4/07/94) YEAR TREASURY BILL INDEX*
------------------- -------------------------
4/7/94 $10,000 $10,000
12/31/94 10,225 10,232
12/31/95 10,746 11,060
12/31/96 11,277 11,686
12/31/97 11,798 12,400
6/30/98 12,054 12,752
ANNUAL AVERAGE RETURNS+
THROUGH 6/30/98
Since Inception
Six months** 1 Year 4/07/94
- -------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO 2.17% 4.68% 4.51%
- -------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 2.84% 5.95% 5.90%*
- -------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
** NOT ANNUALIZED
5
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI REGIONAL PORTFOLIO
JUNE 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS - 91.5%
Market Market
Quantity Value (a) Quantity Value (a)
- -------------------------------------------------------------- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL SERVICES - 6.1% FINANCIAL - 11.2%
Bell & Howell (b) 500 $ 12,906 Allstate 3,700 $ 338,781
G & K Services Class A 1,300 56,713 Associated Banc-Corp 2,125 79,953
Galileo International 10,300 464,144 First Alliance (b) 9,350 65,450
HA-LO Industries (b) 6,200 192,975 Heller Financial (b) 14,000 420,000
Manpower 3,000 86,063 Horace Mann Educators 3,900 134,550
R.R. Donnelley 3,100 141,824 Household Internationl 4,200 208,950
W.W. Grainger 1,800 89,662 Norwest 4,500 168,188
Wallace Computer Services 2,600 61,750 Old Republic International 4,800 140,700
----------- ReliaStar Financial 8,300 398,400
1,106,037 TCF Financial 2,700 79,650
- -------------------------------------------------------------- ------------
CONSUMER DURABLES - 5.8% 2,034,622
Excelsior-Henderson Motorcycle (b) 7,700 51,013 -------------------------------------------------------------
ITI Technologies (b) 12,700 359,569 HEALTH SERVICES - 4.5%
Newell 5,000 249,062 Patterson Dental (b) 9,750 357,094
Snap-On 10,300 373,374 Servicemaster 6,600 251,212
VirtualFund.com (b) 3,400 15,512 United Healthcare 3,300 209,550
----------- ------------
1,048,530 817,856
- -------------------------------------------------------------- -------------------------------------------------------------
CONSUMER NON-DURABLES - 3.4% HEALTH TECHNOLOGY - 10.2%
Hormel Foods 4,000 138,250 Abbott Laboratories 8,400 343,350
Sara Lee 4,900 274,094 Baxter International 3,200 172,200
Tootsie Roll Industries 2,700 207,225 CIMA Labs (b) 25,700 85,934
----------- Diametrics Medical (b) 38,900 296,613
619,569 Medtronic 7,300 465,375
- -------------------------------------------------------------- Northfield Laboratories (b) 21,200 312,700
CONSUMER SERVICES - 2.2% Possis Medical (b) 9,800 122,500
Lodgenet Entertainment (b) 23,200 234,900 Urologix (b) 7,800 66,300
Meredith 3,400 159,588 ------------
----------- 1,864,972
394,488 -------------------------------------------------------------
- -------------------------------------------------------------- PROCESS INDUSTRIES - 7.3% 1,864,972
ELECTRONIC TECHNOLOGY - 5.0% AptarGroup 2,400 149,250
ADC Telecommunications (b) 4,400 160,738 Bemis 4,100 167,588
Aetrium (b) 16,500 142,313 Ecolab 5,000 155,000
Ault (b) 100 513 Fort James 7,700 342,650
Digi International 5,100 103,275 Northland Cranberries Class A 13,000 200,688
FSI International (b) 12,600 122,063 Valspar 7,700 305,112
Norstan (b) 6,600 165,412 ------------
Sheldahl (b) 3,700 32,605 1,320,288
Sundstrand 3,200 183,200 -------------------------------------------------------------
-----------
910,119
- --------------------------------------------------------------
ENERGY MINERALS - 1.4%
Amoco 6,200 258,075
- --------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
6
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI REGIONAL PORTFOLIO
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Market Market
Quantity Value (a) Quantity Value (a)
- ------------------------------------------------------------ -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PRODUCER MANUFACTURING - 12.6% TECHNOLOGY SERVICES - 7.6%
ABC Rail Products (b) 17,400 $ 300,150 Anicom (b) 13,200 $ 196,350
HON Industries (b) 3,100 105,400 Engineering Animation (b) 6,350 387,350
IDEX 7,600 262,200 Great Plains Software (b) 2,000 67,750
Illinois Tool Works 4,800 320,100 Platinum Technology (b) 10,500 299,906
Juno Lighting 3,200 75,600 Richardson Electronics 18,700 252,450
Pentair 8,500 361,250 Secure Computing (b) 18,000 177,750
Rayovac (b) 8,400 190,575 -------------
Recovery Engineering (b) 9,500 200,094 1,381,556
Tower Automotive (b) 6,000 257,250 -------------------------------------------------------------
Zebra Technologies Class A (b) 5,100 218,025 TRANSPORTATION - 2.3%
------------ C.H. Robinson Worldwide 8,400 208,950
2,290,644 Hub Group Class A (b) 3,000 63,375
- ------------------------------------------------------------ USFreightways 4,300 141,228
RETAIL TRADE - 7.2% -------------
Casey's General Stores 9,700 160,656 413,553
Dayton Hudson 3,800 184,300 -------------------------------------------------------------
Lands' End (b) 5,500 173,938 UTILITIES - 4.7%
Sears Roebuck 6,500 396,906 Ameritech 6,400 287,200
Video Update Class A (b) 57,600 82,800 Minnesota Power & Light 2,600 103,350
Walgreen 7,500 309,844 Northern States Power 8,400 240,450
------------ Unicom 3,200 112,200
1,308,444 Wisconsin Energy 3,400 103,275
- ------------------------------------------------------------ -------------
846,475
=============================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $14,880,212) .......................... $ 16,615,228
=============================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $14,880,212) .......................... $ 16,615,228
=============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
7
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI REGIONAL PORTFOLIO
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 7.8%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 7.8%
Associates Commercial Paper (FINANCIAL) 6.23% 07/01/98 $900,000 $900,000
General Electric Credit (FINANCIAL) 6.15 07/01/98 520,000 520,000
---------------
1,420,000
====================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,420,000).................................................................... $ 1,420,000
====================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $16,300,212) (c)............................................................... $ 18,035,228
====================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 0.7%
...................................................................................... $ 135,687
====================================================================================================
TOTAL NET ASSETS
...................................................................................... $ 18,170,915
====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
8
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
JUNE 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS - 44.3%
Market Market
Quantity Value (a) Quantity Value (a)
- ------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER DURABLES - 8.2% HEALTH SERVICES - 2.7%
Bandag 500 $ 19,500 First Health Group (b) 1,400 $ 39,900
Callaway Golf 1,000 19,687 Servicemaster 1,200 45,675
Department 56 (b) 1,300 46,150 --------------
Eastman Kodak 400 29,225 85,575
Harley-Davidson 1,200 46,500 ------------------------------------------------------------
Mattel 700 29,619 HEALTH TECHNOLOGY - 3.1%
Polaris 900 33,863 Pfizer 300 32,607
Sturm Ruger 1,900 31,825 R.P. Scherer (b) 250 22,156
------------- SmithKline Beecham ADR 700 42,350
256,369 --------------
- ------------------------------------------------------- 97,113
CONSUMER NON-DURABLES - 5.6% ------------------------------------------------------------
800-JR Cigar 2,100 41,475 INDUSTRIAL SERVICES - 1.2%
Coca-Cola 420 35,910 Nabors Industries (b) 1,950 38,634
Gillette 200 11,338 ------------------------------------------------------------
Nike Class B 700 34,081 NON-ENERGY MINERALS - 0.7%
Philip Morris 1,000 39,375 Nucor 450 20,700
UST 500 13,500 ------------------------------------------------------------
------------- PROCESS INDUSTRIES - 0.7%
175,679 Schweitzer-Mauduit International 800 23,200
- ------------------------------------------------------- ------------------------------------------------------------
CONSUMER SERVICES - 1.5% PRODUCER MANUFACTURING - 5.9%
Walt Disney 450 47,278 Berkshire Hathaway Class B (b) 15 39,195
- ------------------------------------------------------- CBS 1,400 44,450
ELECTRONIC TECHNOLOGY - 1.4% General Electric 320 29,120
3Com (b) 500 15,343 Nordson 300 14,100
Intel 380 28,168 Tyco International 900 56,700
------------- --------------
43,511 183,565
- ------------------------------------------------------- ------------------------------------------------------------
ENERGY MINERALS - 2.0% RETAIL TRADE - 1.7%
British Petroleum ADR 306 27,005 Wal-Mart Stores 880 53,460
Exxon 500 35,656 ------------------------------------------------------------
------------- TECHNOLOGY SERVICES - 1.2%
62,661 Parametric Technology (b) 1,400 37,975
- ------------------------------------------------------- ============================================================
FINANCIAL - 8.4% TOTAL INVESTMENTS IN COMMON STOCKS
American Express 400 45,600 (COST: $1,027,212) ......................... $ 1,387,071
Federal Home Loan Mortgage ============================================================
Corporation 1,200 56,475
Leucadia National (b) 700 23,143
Norwest 840 31,395
PMI Group 300 22,013
SLM Holding 1,050 51,450
United Asset Management 1,200 31,275
-------------
261,351
- -------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
9
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 34.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 18.9%
5.88% 10/31/9 $25,000 $ 25,038
7.50 10/31/99 50,000 51,242
6.13 09/30/00 25,000 25,309
8.00 05/15/01 25,000 26,617
7.50 11/15/01 50,000 52,961
6.25 01/31/02 75,000 76,676
7.50 05/15/02 70,000 74,703
5.63 12/31/02 75,000 75,328
6.25 02/15/03 75,000 77,180
5.75 08/15/03 50,000 50,531
7.00 07/15/06 50,000 54,602
---------------
590,187
- ------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 8.0%
12.00 05/15/05 40,000 54,543
6.50 11/15/26 100,000 111,046
6.63 05/15/27 75,000 84,692
---------------
250,281
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 7.2%
Federal National Mortgage Association 5.75 06/15/05 125,000 124,864
6.00 05/15/08 75,000 76,031
U.S. Treasury STRIP (zero coupon) 5.69 11/15/10 50,000 24,945
---------------
225,840
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $1,046,183) ................................................................................ $ 1,066,308
===================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $2,073,395)................................................................................. $ 2,453,379
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
10
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 20.5%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.6%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE) 5.60% 07/01/98 $ 80,000 $ 80,000
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 17.9%
Associates Commercial Paper (Financial) 6.23 07/01/98 155,000 155,000
General Electric Credit (Financial) 6.15 07/01/98 155,000 155,000
Pepsico (Foods and Foods Processing) 6.00 07/01/98 250,000 250,000
--------------
560,000
==============================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $640,000) .............................................................................. $ 640,000
==============================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $2,713,395) (c) ........................................................................ $ 3,093,379
==============================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.1%
................................................................................................ $ 35,596
==============================================================================================================
TOTAL NET ASSETS
................................................................................................ $ 3,128,975
==============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
11
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI RESERVE PORTFOLIO
JUNE 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 49.4%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 49.4%
5.75% 11/15/00 $ 200,000 $ 201,000
5.38 02/15/01 180,000 179,381
-------------
380,381
=================================================================================================================
TOTAL INVESTMENTS IN U.S GOVERNMENT OBLIGATIONS
(COST: $380,203) ................................................................................... $ 380,381
=================================================================================================================
U.S. GOVERNMENT AGENCY SECURITIES - 29.2%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES - 29.2%
Federal Home Loan Mortgage Corporation 5.75% 07/06/98 $ 125,000 $ 124,904
Federal National Mortgage Association 5.75 07/07/98 100,000 99,906
------------
224,810
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY SECURITIES
(COST: $224,821) ................................................................................... $ 224,810
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $605,024) (c) ................................................................................ $ 605,191
=================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - 21.4%
..................................................................................................... $ 164,894
=================================================================================================================
TOTAL NET ASSETS
..................................................................................................... $ 770,085
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 13
12
<PAGE>
================================================================================
NOTES TO SCHEDULES OF INVESTMENTS
================================================================================
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1998
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation".
(b)
Currently non-income producing security.
(c)
At June 30 1998, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
============================================
- --------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
================================================================================
STATEMENTS OF ASSETS AND LIABILITIES
================================================================================
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $16,300,212; $2,713,395; and $605,024,
respectively) $18,035,228 $ 3,093,379 $ 605,191
Cash in bank on demand deposit 105,606 3,186 161,152
Receivable for Investment securities sold 15,632 -- --
Receivable for Fund shares sold 4,890 15,854 --
Dividends and accrued interest receivable 12,193 17,366 5,104
Organization costs 1,501 1,522 1,926
---------------------------------------
TOTAL ASSETS 18,175,050 3,131,307 773,373
---------------------------------------
LIABILITIES
Payable for Funds shares purchased -- -- 603
Accrued custody fees -- -- 239
Other accrued expenses 4,135 2,332 2,446
---------------------------------------
TOTAL LIABILITIES 4,135 2,332 3,288
---------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $18,170,915 $ 3,128,975 $ 770,085
=======================================
REPRESENTED BY:
Capital stock $ 11,217 $ 2,090 $ 772
Additional paid-in capital 15,811,491 2,647,779 768,783
Undistributed net investment income 50,056 36,092 353
Accumulated net realized gains (losses) on investments 563,135 63,030 10
Unrealized appreciation on investments 1,735,016 379,984 167
---------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO
OUTSTANDING CAPITAL STOCK
$18,170,915 $ 3,128,975 $ 770,085
=======================================
Shares of common stock outstanding; authorized
10 billion shares of $.01 par value stock
of each Portfolio 1,121,678 209,023 77,213
---------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 16.20 $ 14.97 $ 9.97
=======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 22
14
<PAGE>
================================================================================
STATEMENTS OF OPERATIONS
================================================================================
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 45,156 $ 43,047 $ 24,411
Dividends 84,407 7,744 --
-------------------------------------
TOTAL INCOME 129,563 50,791 24,411
-------------------------------------
Expenses:
Investment advisory fees 57,984 8,980 2,036
Dividend-disbursing, administrative, and accounting fees 8,921 1,382 452
Legal fees 49 49 49
Custodian fees 5,721 767 619
Amortization of organization costs 1,249 1,248 1,248
Compensation of Directors 861 143 33
Audit fees 1,991 1,448 1,448
Printing and shareholder reporting 976 388 388
Registration fees 1,205 204 146
Other expenses 487 72 29
-------------------------------------
TOTAL EXPENSES 79,444 14,681 6,448
Less fees reimbursed or waived by Advisers -- -- (2,603)
-------------------------------------
NET EXPENSES 79,444 14,681 3,845
-------------------------------------
NET INVESTMENT INCOME 50,119 36,110 20,566
-------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investments 589,005 64,783 13
Net change in unrealized appreciation or depreciation on
investment securities 221,398 94,104 (183)
-------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 810,403 158,887 (170)
-------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 860,522 $194,997 $ 20,396
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 22
15
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
June 30,1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 50,119 $ 95,617
Net realized gains 589,005 854,786
Net change in unrealized appreciation or depreciation 221,398 852,815
-----------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 860,522 1,803,218
-----------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (96,518) (62,116)
Net realized gains (855,271) (570,373)
-----------------------------------
TOTAL DISTRIBUTIONS (951,789) (632,489)
-----------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 78,277 and 354,778 shares 1,311,310 5,590,877
Net asset value of 59,974 and 41,012 shares issued
in reinvestment of distributions 951,789 632,489
Cost of 63,890 and 135,923 shares redeemed (1,085,733) (2,140,268)
-----------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 1,177,366 4,083,098
-----------------------------------
TOTAL INCREASE IN NET ASSETS 1,086,099 5,253,827
NET ASSETS AT BEGINNING OF PERIOD 17,084,816 11,830,989
-----------------------------------
NET ASSETS AT END OF PERIOD $ 18,170,915 $ 17,084,816
===================================
Including undistributed net investment income of: $ 50,056 $ 96,455
===================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 22
16
<PAGE>
===============================================================================
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
June 30,1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 36,110 $ 51,014
Net realized gains 64,783 28,354
Net change in unrealized appreciation or depreciation 94,104 208,949
-------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 194,997 288,317
-------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (51,894) (32,873)
Net realized gains (30,028) (34,912)
-------------------------------
TOTAL DISTRIBUTIONS (81,922) (67,785)
-------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 42,644 and 65,491 shares 640,554 898,051
Net asset value of 5,480 and 5,042 shares issued
in reinvestment of distributions 81,921 67,785
Cost of 10,188 and 20,162 shares redeemed (152,230) (274,759)
-------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 570,245 691,077
-------------------------------
TOTAL INCREASE IN NET ASSETS 683,320 911,609
NET ASSETS AT BEGINNING OF PERIOD 2,445,655 1,534,046
-------------------------------
NET ASSETS AT END OF PERIOD $ 3,128,975 $ 2,445,655
===============================
Including undistributed net investment income of: $ 36,092 $ 51,876
===============================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 22
17
<PAGE>
===============================================================================
STATEMENTS OF CHANGES IN NET ASSETS
===============================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
<TABLE>
<CAPTION>
Six months ended Year ended
June 30,1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 20,566 $ 27,768
Net realized gains (losses) 13 (3)
Net change in unrealized appreciation or depreciation (183) (335)
--------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 20,396 27,430
--------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (22,138) (28,483)
Net realized gains -- (890)
--------------------------------
TOTAL DISTRIBUTIONS (22,138) (29,373)
--------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 13,210 and 81,587 shares 132,198 816,450
Net asset value of 2,218 and 2,955 shares issued
in reinvestment of distributions 22,138 29,373
Cost of 40,389 and 35,024 shares redeemed (403,824) (350,481)
--------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (249,488) 495,342
--------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (251,230) 493,399
NET ASSETS AT BEGINNING OF PERIOD 1,021,315 527,916
--------------------------------
NET ASSETS AT END OF PERIOD $ 770,085 $ 1,021,315
================================
Including undistributed net investment income of: $ 353 $ 1,925
================================
</TABLE>
SEE ACCOMPANY NOTES TO FINANCIAL STATEMENTS ON PAGE 22
18
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31, Period from
Six months ended ------------------------------- January 31, 1994 ***
June 30, 1998 1997 1996 1995 to December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $16.31 $15.02 $14.16 $10.62 $10.00
-------------------------------------------------------------------------
OPERATIONS
Net investment income 0.04 0.08 0.05 0.06 0.03
Net realized and unrealized gains (losses) (0.06) 1.90 1.60 3.50 0.59
-------------------------------------------------------------------------
TOTAL FROM OPERATIONS (0.02) 1.98 1.65 3.56 0.62
-------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (0.07) (0.05) (0.02) -
Net realized gains (0.09) (0.62) (0.74) - -
-------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.09) (0.69) (0.79) (0.02) -
-------------------------------------------------------------------------
NET ASSET VALUE
End of period $16.20 $16.31 $15.02 $14.16 $10.62
=========================================================================
Total investment return* 4.93% 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $18,171 $17,085 $11,831 $5,105 $865
RATIOS:
Expenses to average daily net assets 0.89%+ 0.90% 1.03% 1.37%** 1.13%+**
Net investment income to average daily net assets 0.56%+ 0.65% 0.77% 1.12%** 0.81%+**
Average brokerage commission rate**** $0.0509 $0.0583 $0.0513 n/a n/a
Portfolio turnover rate (excluding short-term
securities 31.1% 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
19
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31, Period from
Six months ended ---------------------------- February 3, 1994 ***
June 30,199 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $14.29 $12.71 $11.78 $10.22 $10.00
-----------------------------------------------------------------------
OPERATIONS
Net investment income 0.12 0.27 0.22 0.09 0.10
Net realized and unrealized gains 0.97 1.81 0.92 1.56 0.12
-----------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.09 2.08 1.14 1.65 0.22
-----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.26) (0.24) (0.10) (0.09) -
Net realized gains (0.15) (0.26) (0.11) - -
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.41) (0.50) (0.21) (0.09) -
-----------------------------------------------------------------------
NET ASSET VALUE
End of period $14.97 $14.29 $12.71 $11.78 $10.22
=======================================================================
Total investment return* 7.58% 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $3,129 $2,446 $1,534 $764 $206
RATIOS:
Expenses to average daily net assets** 1.06%+ 1.25% 1.25% 1.70% 1.25%+
Net investment income to average daily net
assets** 2.61%+ 2.63% 2.84% 2.34% 2.28%+
Average brokerage commission rate**** $0.0637 $0.0594 $0.0555 n/a n/a
Portfolio turnover rate (excluding
short-term securities) 27.2% 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 $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
20
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31, Period from
Six months ended ----------------------------- April 7, 1994 ***
June 30,1998 1997 1996 1995 to December 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $10.00 $10.03 $10.05 $10.03 $10.00
----------------------------------------------------------------------
OPERATIONS
Net investment income 0.19 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) (0.02) 0.02 (0.01) 0.02 0.02
----------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.17 0.45 0.48 0.50 0.22
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.46) (0.50) (0.48) (0.19)
Net realized gains - (0.02) - - -
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.20) (0.48) (0.50) (0.48) (0.19)
----------------------------------------------------------------------
NET ASSET VALUE
End of period $9.97 $10.00 $10.03 $10.05 $10.03
======================================================================
Total investment return* 2.17% 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $770 $1,021 $528 $844 $544
RATIOS:
Expenses to average daily net assets** 0.85%+ 0.85% 0.85% 1.03% 0.85%+
Net investment income to average daily net assets** 4.55%+ 4.57% 4.54% 4.84% 3.56%+
Portfolio turnover rate (excluding short-term
securities) 71.4% 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 $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
21
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS
===============================================================================
IAI RETIREMENT FUNDS INC.
JUNE 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Retirement Funds, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Regional Portfolio (Regional Portfolio), IAI Balanced Portfolio (Balanced
Portfolio) and IAI Reserve Portfolio (Reserve Portfolio) are separate portfolios
of IAI Retirement Funds, Inc. Portfolio shares are not offered directly to the
public, but sold only to selected insurance companies' separate accounts in
connection with variable life insurance policies or variable annuity contracts.
The Regional Portfolio has a primary objective of long-term appreciation through
investments in equity securities. The Balanced Portfolio has a primary objective
of maximum total return through investment in stocks, bonds and short-term
instruments. The Reserve Portfolio has a primary objective of providing a high
level of current income consistent with the preservation of capital and
liquidity. This report covers only the Regional Portfolio, Balanced Portfolio
and Reserve Portfolio (the Portfolios).
Significant accounting policies followed by the Portfolios are summarized below:
SECURITY VALUATION
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.
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.
22
<PAGE>
===============================================================================
NOTES TO FINANCIAL STATEMENTS
===============================================================================
IAI RETIREMENT FUNDS INC.
JUNE 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
Regional Portfolio, Balanced Portfolio and Reserve Portfolio have available
lines of credit of $2,605,000, 385,000 and $160,000, respectively, with a bank
at the prime interest rate. To the extent funds are drawn against the line,
securities are held in a segregated account. No compensating balances or
commitment fees are required under the line of credit. During the six months
ended June 30, 1998, the Portfolio's paid no interest on the line of credit.
There were no borrowings outstanding at June 30, 1998.
[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
Reserve Portfolio in excess of .85%, of average daily net assets through August
31, 1998.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 1998, purchases of securities and sales
proceeds, including maturities, for the Reserve Portfolio aggregated $380,203
and $100,000 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 $ 5,789,486 $ 5,014,639
IAI BALANCED PORTFOLIO $ 901,676 $ 601,024
-------------------------------------------------------------------
[5] SUBSEQUENT EVENT
On May 13, 1998, the Board of Directors approved a plan to liquidate the
Regional Portfolio, Balanced Portfolio and Reserve Portfolio.
23
<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
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55402 USA FAX 612.376.2737
800.945.3863
612.376.2700
