IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
JUNE 30, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1999
Letter to Shareholders................................ 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............................. 8
IAI Reserve Portfolio.............................. 10
Notes to Schedules of Investments..................... 11
Statements of Assets and Liabilities.................. 12
Statements of Operations.............................. 13
Statements of Changes in Net Assets
IAI Regional Portfolio............................. 14
IAI Balanced Portfolio............................. 15
IAI Reserve Portfolio.............................. 16
Financial Highlights
IAI Regional Portfolio............................. 17
IAI Balanced Portfolio............................. 18
IAI Reserve Portfolio.............................. 19
Notes to Financial Statements......................... 20
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors..................................... Back Cover
[LOGO] IAI
MUTUAL FUNDS
IAI Mutual Funds
c/o Firstar Mutual Fund Services, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 USA
800.945.3863
<PAGE>
LETTER TO SHAREHOLDERS
IAI RETIREMENT FUNDS, INC.
TWO VIEWS ON THE ECONOMY: NEW VS. OLD
The U.S. economy continues to amaze most observers. The economic expansion is
marching toward becoming the longest in post-war history and inflation continues
to show modest increases. Demand, particularly from the consumer, has remained
strong. Productivity gains and generally weak commodity prices have enabled that
demand to be met without a significant rise in inflation. However, there is a
debate within the financial community about future prospects. One group believes
sustainable improvement in productivity growth allows the economy to grow faster
without producing inflationary strains. Others believe a combination of good
performance and good luck (weakness overseas and collapsing commodity prices)
has contributed to the strong, low inflation growth.
These two views, sometimes referred to as the New Economy and the Old Economy,
have very different economic policy implications. If the noninflationary growth
rate of the economy is higher than in the past, monetary and fiscal policies
need to adjust to the new reality. If luck has been the primary contributor to
recent economic success, policies need to remain vigilant for the period when
the luck runs out. The Federal Reserve's action at the end of June indicates
they are taking a middle-of-the-road position. The modest 25 basis point
increase in short-term rates and the shift to a neutral bias taps lightly on the
monetary policy brakes. If continued evidence of rapid economic growth or a
resurgence of inflation appears, they are likely to step harder on the brakes.
Likewise, moderation in growth and an ease in inflation concerns will allow the
Fed to remain neutral.
Bond market investors spent the majority of the second quarter pushing interest
rates higher. This in and of itself will slow economic growth as borrowing costs
for business and consumers, particularly homeowners, moved higher. Equity
valuations also paused as interest rates rose. However, following the Fed's
modest move, stocks raced to new highs.
We expect the economy to cool from the torrid pace of late 1998 / early 1999.
The positive influences of annual bonuses and tax refunds will wane. Mortgage
rate increases are slowing refinancings and cooling the housing sector. Energy
price increases seem to be holding and will also dampen the pace of growth.
Continued excess global capacity, modest growth oversees, the strong dollar and
stable to declining commodity prices will continue to keep a lid on inflation.
The strong rise in the CPI in April now appears to have been an aberration as
releases for both May and June showed no signs of a pickup in inflation. Of some
concern is the emergence of discussions in Washington about what to do with the
projected budgetary surpluses. Substantial tax cuts could help maintain high
consumer demand and keep the pressure on the supply portion of the economy to
meet that demand given the tight labor conditions. The value of the dollar is
also a concern, given the growing size of the deficit. However, a cooling U.S.
economy will lead to market concern as the second half of the year progresses.
2
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
IAI REGIONAL PORTFOLIO
JULIAN P. "BING" CARLIN, CFA
IAI REGIONAL PORTFOLIO MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Regional Portfolio gained 6.36% for the first six months of 1999. The
S&P 500 Index gained 12.38% during the same time period.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE PORTFOLIO'S
PERFORMANCE?
In a reversal of recent market action, cyclical and small stocks led the market
forward. Investments in the basic materials, capital goods, and transportation
sectors benefited from this movement.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE PORTFOLIO? WERE THERE ANY
DISAPPOINTMENTS?
The Portfolio's investments in retailers have significantly outperformed the S&P
500 over the past 12 months. Portfolio holdings in this group included Lands
End, Kohls, and Dayton Hudson. Other standouts were CH Robinson Worldwide,
Ecolab, and Illinois Tool Works.
Secure Computing was the biggest disappointment and was eliminated from the
Portfolio.
WERE THERE ANY SIGNIFICANT CHANGES?
We have increased the percentage of permissible non-regional holdings from 20%
to 35% to better reflect industry changes over the past 20 years. Although we
continue to focus on the Midwest region, this change provides us with the
ability to invest in businesses important to the overall economy which are not
headquartered in the eight state area, particularly telecommunications and the
Internet, as well as companies in the healthcare sector.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
Looking forward, we feel optimistic about the U.S. economy. This bodes well for
continued growth and prosperity. Employment is solid and people spend when they
have a job. Money supply growth here and abroad remains strong, thus, it is hard
to envision a recession near term. Markets will become more cautious due to Y2K
concerns as the fourth quarter approaches.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Regional Portfolio
(Inception 1/31/94) S & P 500 Index*
----------------------- ----------------
Jan-94 $ 10,000 $ 10,000
Feb-94 0 10,000 -2.7160 9,728
Mar-94 0 10,000 -4.3390 9,306
Apr-94 0 10,000 1.2900 9,426
May-94 0 10,000 1.6340 9,580
Jun-94 0.2 10,020 -2.4820 9,343
Jul-94 1 10,120 3.3090 9,652
Aug-94 7.61 10,890 4.0710 10,045
Sep-94 -2.3 10,640 -2.4170 9,802
Oct-94 1.69 10,820 2.3130 10,029
Nov-94 -4.53 10,330 -3.6680 9,661
Dec-94 2.81 10,620 1.4720 9,803
Jan-95 0 10,620 2.5920 10,057
Feb-95 3.39 10,980 3.8780 10,447
Mar-95 1.46 11,140 2.9650 10,757
Apr-95 2.51 11,420 2.9480 11,074
May-95 2.28 11,680 3.9550 11,512
Jun-95 2.62 11,986 2.3470 11,782
Jul-95 5.01 12,587 3.3560 12,177
Aug-95 0.08 12,597 0.2710 12,210
Sep-95 2.94 12,967 4.2010 12,723
Oct-95 -0.93 12,846 -0.3640 12,677
Nov-95 6.78 13,717 4.4010 13,235
Dec-95 3.36 14,178 1.8470 13,479
Jan-96 1.13 14,339 3.4260 13,941
Feb-96 1.47 14,549 0.9650 14,076
Mar-96 0.34 14,599 0.9840 14,214
Apr-96 5.01 15,330 1.4910 14,426
May-96 3.33 15,841 2.5780 14,798
Jun-96 -2.93 15,377 0.4130 14,859
Jul-96 -6.32 14,405 -4.4480 14,198
Aug-96 3.96 14,975 2.1350 14,501
Sep-96 1.55 15,207 5.6270 15,317
Oct-96 -0.9 15,070 2.7910 15,745
Nov-96 3.78 15,640 7.6090 16,943
Dec-96 1.42 15,862 -1.9470 16,613
Jan-97 1.2 16,053 6.2210 17,647
Feb-97 -0.99 15,894 0.8080 17,789
Mar-97 -4.98 15,102 -4.1630 17,049
Apr-97 1.19 15,282 5.9460 18,062
May-97 8.78 16,624 6.1310 19,170
Jun-97 3.34 17,179 4.4520 20,023
Jul-97 6.62 18,316 8.02 21,629
Aug-97 -0.78 18,173 -5.528 20,433
Sep-97 6.8 19,409 5.448 21,547
Oct-97 -5.34 18,373 -3.304 20,835
Nov-97 -1.26 18,141 4.577 21,788
Dec-97 -0.79 17,998 1.696 22,158
Jan-98 -1.66 17,699 1.1300 22,408
Feb-98 5.8 18,726 7.1900 24,019
Mar-98 3.42 19,366 5.1200 25,249
Apr-98 -0.28 19,312 1.0100 25,504
May-98 -2.23 18,881 -1.7200 25,066
Jun-98 0.02 18,885 4.0600 26,083
Jul-98 -4.88 17,963 -1.0700 25,804
Aug-98 -17.26 14,863 -14.4600 22,073
Sep-98 6.75 15,866 6.4100 23,488
Oct-98 3.97 16,496 8.1300 25,397
Nov-98 6.08 17,499 6.0600 26,936
Dec-98 4.46 18,279 5.7600 28,488
Jan-99 0.38 18,349 4.1800 29,679
Feb-99 -2.29 17,929 -3.1100 28,756
Mar-99 -0.65 17,812 4.0000 29,906
Apr-99 3.6 18,453 3.8700 31,063
May-99 1.33 18,699 -2.3600 30,330
Jun-99 3.97 19,441 5.5500 32,014
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/99
Since Inception
Six months** 1 Year 1/31/94
- --------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO 6.36% 2.94% 13.06%
- --------------------------------------------------------------------------------
S&P 500 Index 12.38% 22.75% 23.91%*
- --------------------------------------------------------------------------------
+ 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
LARRY R. HILL, CFA
IAI BALANCED PORTFOLIO CO-MANAGER
DONALD J. HOELTING, CFA
IAI BALANCED PORTFOLIO CO-MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Balanced Portfolio generated a return of 2.65% for the first six months
of 1999, underperforming its benchmarks, the S&P 500 Index which returned 12.38%
and the Lehman Government/Corporate Bond Index which returned (2.28)%.
WHAT MARKET FACTORS EFFECTED THE PORTFOLIO'S PERFORMANCE DURING THE LAST FISCAL
YEAR?
The signs of cyclical recovery seen continued, particularly in Asia and Japan,
while global equity markets took modest increase in U.S. interest rates largely
in stride, choosing instead to focus on improving activity and earnings
prospects. Strengthening commodity prices were another important feature.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE PORTFOLIO? WERE THERE ANY
DISAPPOINTMENTS?
The biggest contributors to the Portfolio were Nabors Industries, First Health
Group and Hon Industries. Nabors Industries, an oil and gas land drilling
contractor, was the beneficiary of rising oil prices during the quarter. Better
pricing in managed care helped boost First Health Care Group's stock price. Hon
Industries announced an impressive array of new products and expressed optimism
regarding its outlook for the furniture business.
The worst performing stocks were Parametric Technology and Department 56, both
down due to management guidance of lower earnings than was expected by Wall
Street analysts. We remain confident in the long-term prospects for both of
these companies.
WERE THERE ANY SIGNIFICANT CHANGES?
Keane Inc., a provider of technical outsourcing, development and consulting for
large corporate clients and government agencies, was purchased. The market's
over-reaction to the slowing Year 2000 business provided an excellent
opportunity to buy a company with an excellent brand name, quality management
team, and high returns on capital and free cash flow, at a good valuation.
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. Fixed
income strategy is positioned for gradually falling rates and narrowing spreads.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Balanced Portfolio Lehman Government/
(Inception 2/3/94) S & P 500 Index* Corporate Bond Index*
------------------ ---------------- ---------------------
Feb-94 $ 10,000 $ 10,000 $ 10,000
Feb-94 0.00 10000 -2.7160 9728 -2.1751 9782
Mar-94 0.00 10000 -4.3390 9306 -2.4456 9543
Apr-94 0.00 10000 1.2900 9426 -0.8280 9464
May-94 0.00 10000 1.6340 9580 -0.1848 9447
Jun-94 -1.00 9900 -2.4820 9343 -0.2346 9425
Jul-94 2.63 10160 3.3090 9652 1.9986 9613
Aug-94 2.07 10370 4.0710 10045 0.0409 9617
Sep-94 -0.77 10290 -2.4170 9802 -1.5144 9471
Oct-94 0.68 10360 2.3130 10029 -0.1108 9461
Nov-94 -2.51 10100 -3.6680 9661 -0.1788 9444
Dec-94 1.19 10,220 1.4720 9,803 0.6592 9,506
Jan-95 1.57 10,380 2.5920 10,057 1.9201 9,689
Feb-95 2.12 10,600 3.8780 10,447 2.3188 9,913
Mar-95 1.89 10,800 2.9650 10,757 0.6706 9,980
Apr-95 -0.56 10,740 2.9480 11,074 1.3951 10,119
May-95 2.61 11,020 3.9550 11,512 4.1911 10,543
Jun-95 2.37 11,282 2.3470 11,782 0.7992 10,627
Jul-95 1.97 11,503 3.3560 12,177 -0.3855 10,586
Aug-95 0.88 11,605 0.2710 12,210 1.2793 10,722
Sep-95 1.04 11,725 4.2010 12,723 1.0157 10,831
Oct-95 -0.69 11,644 -0.3640 12,677 1.4686 10,990
Nov-95 2.60 11,947 4.4010 13,235 1.6463 11,171
Dec-95 -0.59 11,877 1.8470 13,479 1.4734 11,335
Jan-96 1.70 12,079 3.4260 13,941 0.6225 11,406
Feb-96 -0.33 12,039 0.9650 14,076 -2.1218 11,164
Mar-96 -0.25 12,009 0.9840 14,214 -0.8397 11,070
Apr-96 1.09 12,140 1.4910 14,426 -0.6861 10,994
May-96 1.16 12,280 2.5780 14,798 -0.1684 10,976
Jun-96 0.01 12,282 0.4130 14,859 1.3349 11,122
Jul-96 -2.17 12,015 -4.4480 14,198 0.2333 11,148
Aug-96 0.17 12,035 2.1350 14,501 -0.2459 11,121
Sep-96 3.32 12,436 5.6270 15,317 1.7777 11,318
Oct-96 1.49 12,620 2.7910 15,745 2.3340 11,583
Nov-96 4.15 13,144 7.6090 16,943 1.8415 11,796
Dec-96 -0.78 13,041 -1.9470 16,613 -1.1148 11,664
Jan-97 2.36 13,349 6.2210 17,647 0.1187 11,678
Feb-97 -0.54 13,277 0.8080 17,789 0.2110 11,703
Mar-97 -2.86 12,897 -4.1630 17,049 -1.1884 11,564
Apr-97 2.78 13,255 5.9460 18,062 1.4625 11,733
May-97 4.72 13,881 6.1310 19,170 0.9332 11,842
Jun-97 2.78 14,267 4.4520 20,023 1.2003 11,984
Jul-97 5.07 14,990 8.02 21,629 3.0594 12,351
Aug-97 -2.56 14,607 -5.528 20,433 -1.1225 12,212
Sep-97 2.84 15,021 5.448 21,547 1.5722 12,404
Oct-97 -1.13 14,852 -3.304 20,835 1.6019 12,603
Nov-97 1.43 15,064 4.577 21,788 0.5263 12,670
Dec-97 0.92 15,203 1.696 22,158 1.05 12,803
Jan-98 0.56 15,288 1.1300 22,408 1.4100 12,983
Feb-98 3.41 15,809 7.1900 24,019 -0.2000 12,957
Mar-98 2.56 16,214 5.1200 25,249 0.3100 12,997
Apr-98 0.66 16,321 1.0100 25,504 0.5000 13,062
May-98 -1.37 16,097 -1.7200 25,066 1.0700 13,202
Jun-98 1.61 16,356 4.0600 26,083 1.0200 13,337
Jul-98 -1.94 16,039 -1.0700 25,804 0.0800 13,347
Aug-98 -5.38 15,176 -14.4600 22,073 1.9500 13,608
Sep-98 2.88 15,613 6.4100 23,488 2.8600 13,997
Oct-98 4.69 16,345 8.1300 25,397 -0.7100 13,897
Nov-98 1.34 16,565 6.0600 26,936 0.6000 13,981
Dec-98 2.90 17,045 5.7600 28,488 0.2400 14,014
Jan-99 -1.86 16,728 4.1800 29,679 0.7100 14,114
Feb-99 -1.24 16,520 -3.1100 28,756 -2.3800 13,778
Mar-99 0.40 16,586 4.0000 29,906 0.5000 13,847
Apr-99 4.15 17,275 3.8700 31,063 0.2500 13,881
May-99 -0.89 17,121 -2.3600 30,330 -1.0300 13,738
Jun-99 2.19 17,496 5.5500 32,014 -0.3100 13,696
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/99
Since Inception
Six months** 1 Year 2/03/94
- --------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO 2.65% 6.97% 10.90%
- --------------------------------------------------------------------------------
S&P 500 Index 12.38% 22.75% 23.91%*
- --------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index (2.28)% 2.70% 5.98%*
+ 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
LARRY R. HILL, CFA
IAI RESERVE PORTFOLIO MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Reserve Portfolio earned a return of 0.95% for the six months ended
6/30/99. This compares to the Solomon Brothers One Year Treasury Bill Index
which had a return of 2.26%.
WHAT MARKET FACTORS EFFECTED THE PORTFOLIO'S PERFORMANCE DURING THE MOST RECENT
FISCAL YEAR?
Persistent economic strength in the U.S and improving economic results overseas
had a negative impact on bond investor sentiment during the quarter.
Dramatically higher oil prices and tight domestic labor markets added to
investor concern. The negative feelings in the market were reinforced on several
occasions by Federal Reserve officials, whose comments clearly signaled a move
to a tighter policy bias. On the last day of the quarter the Fed boosted
interest rates by 25 basis points.
Interest rates rose in every month during the quarter as the market widely
anticipated the shift in policy. In addition to rising interest rates, the
market suffered from falling risk appetite and wider yield spreads. Corporate
bonds and other risk assets underperformed U.S. governments.
The Portfolio was negatively impacted by rising interest rates, but benefited
from wider spreads because the entirely portfolio is invested in money market
instruments and U.S. governments.
WERE THERE ANY SIGNIFICANT CHANGES IN THE PORTFOLIO?
The Portfolio remained focused on U.S. governments. The average maturity was
extended in June to take advantage of higher rate levels.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
The Fed is expected to raise interest rates again before the end of the year.
Inflation will remain a risk for the market as higher oil prices work their way
through the system. Tight labor conditions are also a concern for the markets.
At the same time we expect U.S. economic growth to slow moderately. This should
have a positive impact. Interest rates will remain stubbornly high in the third
quarter, but trend downward as year-end approaches. The impact of Y2K is hard to
predict, but investors will likely remain cautious through the end of the year.
Lower interest rates and investor caution favors the Portfolio's current
strategy of high quality and a slightly longer maturity.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Reserve Portfolio Salomon Brothers One
(Inception 4/7/94) Year Treasury Bill Index*
------------------ -------------------------
$ 10,000 $ 10,000
Feb-94 0.0000 10,000 0.00 10,000
Apr-94 0.0000 10,000 0.00 10,000
Apr-94 0.0000 10,000 -0.09 9,991
May-94 0.1190 10,012 0.20 10,011
Jun-94 0.3240 10,044 0.35 10,046
Jul-94 0.2997 10,074 0.63 10,109
Aug-94 0.2657 10,101 0.34 10,144
Sep-94 0.3499 10,137 0.16 10,160
Oct-94 0.2395 10,161 0.41 10,202
Nov-94 0.3545 10,197 -0.06 10,195
Dec-94 0.2792 10,225 0.36 10,232
Jan-95 0.4500 10,271 1.01 10,335
Feb-95 0.4432 10,317 0.88 10,426
Mar-95 0.4437 10,363 0.59 10,488
Apr-95 0.4487 10,409 0.69 10,560
May-95 0.4287 10,454 0.89 10,654
Jun-95 0.4084 10,496 0.58 10,716
Jul-95 0.3884 10,537 0.49 10,769
Aug-95 0.3900 10,578 0.49 10,821
Sep-95 0.3600 10,616 0.44 10,869
Oct-95 0.4600 10,665 0.56 10,930
Nov-95 0.3900 10,707 0.60 10,995
Dec-95 0.3700 10,746 0.59 11,060
Jan-96 0.4382 10,794 0.64 11,131
Feb-96 0.3985 10,837 0.12 11,144
Mar-96 0.3088 10,870 0.32 11,180
Apr-96 0.2891 10,901 0.34 11,218
May-96 0.4495 10,950 0.41 11,264
Jun-96 0.2981 10,983 0.55 11,326
Jul-96 0.4495 11,032 0.38 11,369
Aug-96 0.3493 11,071 0.48 11,424
Sep-96 0.3693 11,112 0.67 11,500
Oct-96 0.6487 11,184 0.76 11,588
Nov-96 0.4391 11,233 0.51 11,647
Dec-96 0.3892 11,277 0.34 11,686
Jan-97 0.3500 11,316 0.50 11,745
Feb-97 0.3000 11,350 0.36 11,787
Mar-97 0.3300 11,388 0.27 11,819
Apr-97 0.3500 11,428 0.61 11,891
May-97 0.4500 11,479 0.63 11,966
Jun-97 0.3200 11,516 0.59 12,036
Jul-97 0.5000 11,573 0.72 12,123
Aug-97 0.3000 11,608 0.35 12,166
Sep-97 0.4700 11,663 0.54 12,231
Oct-97 0.4000 11,709 0.56 12,300
Nov-97 0.3300 11,748 0.34 12,342
Dec-97 0.4300 11,798 0.47 12,400
Jan-98 0.4000 11,846 0.66 12,481
Feb-98 0.3000 11,881 0.27 12,515
Mar-98 0.3500 11,923 0.50 12,578
Apr-98 0.4000 11,970 0.46 12,636
May-98 0.3700 12,015 0.44 12,691
Jun-98 0.3300 12,054 0.48 12,752
Jul-98 0.3400 12,095 0.49 12,815
Aug-98 1.0000 12,216 0.80 12,917
Sep-98 0.8500 12,320 0.79 13,019
Oct-98 0.4500 12,375 0.53 13,088
Nov-98 0.1000 12,388 0.01 13,089
Dec-98 0.4500 12,444 0.31 13,130
Jan-99 0.3000 12,481 0.38 13,180
Feb-99 -0.2000 12,456 0.11 13,194
Mar-99 0.6000 12,531 0.62 13,276
Apr-99 0.2000 12,556 0.37 13,325
May-99 -0.2000 12,531 0.28 13,363
Jun-99 0.2500 12,562 0.47 13,425
AVERAGE ANNUAL RETURNS+
THROUGH 6/30/99
Since Inception
Six months** 1 Year 4/07/94
- --------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO 0.95% 4.20% 4.45%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 2.26% 5.29% 5.77%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
** NOT ANNUALIZED
5
<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
JUNE 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 94.0%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMERCIAL SERVICES - 4.5%
Galileo International 3,300 $ 176,344
HA-LO Industries (b) 18,550 183,181
Metzler Group (b) 6,300 174,038
W.W. Grainger 1,800 96,863
------------
630,426
- ----------------------------------------------------------------------
CONSUMER DURABLES - 6.0%
Excelsior-Henderson
Motorcycle Manufacturing (b) 7,700 46,200
Harley-Davidson 5,000 271,875
IntraNet Solutions (b) 21,900 184,781
ITI Technologies (b) 2,400 54,300
Snap-on 7,800 282,263
VirtualFund.com (b) 3,400 5,312
------------
844,731
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 7.9%
Dean Foods 7,800 324,187
Hormel Foods 4,000 161,000
Sara Lee 9,800 222,338
Tootsie Roll Industries 5,562 214,832
Wm. Wrigley Jr. 2,000 180,000
------------
1,102,357
- ----------------------------------------------------------------------
CONSUMER SERVICES - 3.7%
LodgeNet Entertainment (b) 23,200 323,350
Meredith 3,400 117,725
Shuffle Master (b) 8,900 74,538
------------
515,613
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 6.6%
ADC Telecommunications (b) 4,400 200,475
Computer Network Technology (b) 8,600 185,975
Honeywell 2,900 336,037
Molex 5,500 203,500
------------
925,987
- ----------------------------------------------------------------------
Market
Quantity Value (a)
- ----------------------------------------------------------------------
FINANCIAL - 9.6%
Allstate 5,000 $ 179,375
Commercial Federal 6,200 143,762
Horace Mann Educators 3,900 106,031
National Equipment Services (b) 10,100 121,200
Old Republic International 4,800 83,100
ReliaStar Financial 8,300 363,125
Standard & Poor's Depositary Receipts
(SPDR Trust) 2,500 342,500
------------
1,339,093
- ----------------------------------------------------------------------
HEALTH SERVICES - 2.5%
Patterson Dental (b) 5,750 199,813
Brookdale Living Communities (b) 10,000 148,125
------------
347,938
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 10.7%
Abbott Laboratories 8,400 382,200
Baxter International 3,200 194,000
Diametrics Medical (b) 25,800 154,800
Medtronic 2,900 225,837
Northfield Laboratories (b) 19,300 235,219
Sybron International (b) 10,900 300,431
------------
1,492,487
- ----------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.9%
Superior Services (b) 10,000 266,875
- ----------------------------------------------------------------------
PROCESS INDUSTRIES - 6.4%
Donaldson Company 10,000 245,000
Ecolab 6,000 261,750
Northland Cranberries Class A 16,100 135,844
Valspar 6,600 250,800
------------
893,394
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
6
<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
JUNE 30, 1999
(UNAUDITED)
Market
Quantity Value (a)
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 13.6%
ABC-NACO (b) 11,500 $ 235,750
Illinois Tool Works 4,800 393,600
Littlefuse (b) 7,000 134,750
Rayovac (b) 12,900 292,669
Recovery Engineering (b) 24,200 411,400
Tower Automotive (b) 12,000 305,250
Zebra Technologies Class A (b) 3,300 126,844
------------
1,900,263
- ----------------------------------------------------------------------
RETAIL TRADE - 12.7%
Casey's General Stores 16,700 250,500
Dayton Hudson 6,800 442,000
Fastenal 3,000 157,312
Kohl's (b) 3,400 262,437
Lands' End (b) 3,700 179,450
Video Update Class A (b) 57,600 46,800
Walgreen 15,000 440,625
------------
1,779,124
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 5.7%
Fiserv (b) 6,300 197,269
Fourth Shift (b) 12,000 44,250
Great Plains Software (b) 3,900 184,031
Net Perceptions (b) 1,700 37,081
Richardson Electronics 18,700 127,394
Secure Computing (b) 23,700 57,769
Spyglass (b) 7,600 152,950
------------
800,744
- ----------------------------------------------------------------------
TRANSPORTATION - 2.2%
C.H. Robinson Worldwide 8,400 308,700
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $11,291,282) ..................................... $ 13,147,732
======================================================================
Principal Market
Rate Amount Value (a)
- ----------------------------------------------------------------------
SHORT-TERM SECURITIES - 6.1%
DEMAND NOTE - 2.7%
Pitney Bowes 4.83% $ 377,375 $ 377,375
- ----------------------------------------------------------------------
INVESTMENT COMPANY - 3.4%
Firstar Institutional
Money Market Fund 4.66% 474,330 474,330
======================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $851,705) (d) .................................... $ 851,705
======================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $12,142,987) (d) ................................. $ 13,999,437
======================================================================
OTHER ASSETS AND LIABILITIES (NET) - (.1%)
......................................................... $ (9,576)
======================================================================
TOTAL NET ASSETS
......................................................... $ 13,989,861
======================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
7
<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
JUNE 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 51.2%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
CONSUMER DURABLES - 4.5%
Department 56 (b) 1,150 $ 30,906
Eastman Kodak 575 38,956
Mattel 2,150 56,841
Newell Rubbermaid 875 40,688
------------
167,391
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.1%
800 - JR Cigar (b) 4,350 53,831
NIKE Class B 375 23,742
Philip Morris Companies 975 39,183
------------
116,756
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.4%
Hewlett-Packard 100 10,050
International Business Machines 400 51,700
Motorola 100 9,475
SBC Communications 975 56,550
------------
127,775
- ----------------------------------------------------------------------
ENERGY MINERALS - 3.6%
Chevron 300 28,556
Exxon 775 59,772
Mobil 300 29,700
Texaco 300 18,750
------------
136,778
- ----------------------------------------------------------------------
FINANCIAL - 11.6%
American Express 575 74,822
Bank of America 675 49,486
Bank One 475 28,292
The Chase Manhattan 475 41,147
Citigroup 1,275 60,563
Federal Home Loan Mortgage
Corporation 1,075 62,350
First Union 375 17,625
SLM Holding 1,500 68,719
Wells Fargo 815 34,841
------------
437,845
- ----------------------------------------------------------------------
HEALTH SERVICES - 2.5%
First Health Group (b) 2,125 45,820
United HealthCare 775 48,534
------------
94,354
- ----------------------------------------------------------------------
Market
Quantity Value (a)
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 2.5%
Hillenbrand Industries 1,000 $ 43,250
Watson Pharmaceuticals (b) 1,400 49,088
------------
92,338
- ----------------------------------------------------------------------
INDUSTRIAL SERVICES - 2.1%
Nabors Industries (b) 3,200 78,200
- ----------------------------------------------------------------------
NON-ENERGY MINERALS - 0.5%
Nucor 425 20,161
- ----------------------------------------------------------------------
PROCESS INDUSTRIES - 2.9%
Bemis Company 475 18,881
Berkshire Hathaway Class B (b) 15 33,600
E. I. du Pont de Nemours
and Company 375 25,617
General Electric 20 2,260
Sigma-Aldrich 875 30,133
------------
110,491
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.6%
AlliedSignal Inc. 775 48,825
Emerson Electric 675 42,441
HON Industries 1,550 45,241
Tyco International 375 35,531
------------
172,038
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.2%
Keane (b) 900 20,363
Parametric Technology (b) 1725 23,934
------------
44,297
- ----------------------------------------------------------------------
UTILITIES - 8.7%
AT&T 862 48,110
Bell Atlantic 875 57,203
BellSouth 1,175 55,078
Duke Energy 475 25,828
Enron 475 38,831
FPL Group 475 25,947
MCI WorldCom (b) 275 23,667
PG&E 875 28,438
Texas Utilities 575 23,719
------------
326,821
======================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $1,637,465) ...................................... $ 1,925,245
======================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
8
<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
JUNE 30, 1999
(UNAUDITED)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 39.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 14.8%
7.50% 10/31/99 $ 50,000 $ 50,406
6.13 09/30/00 25,000 25,195
5.38 02/15/01 50,000 49,906
8.00 05/15/01 25,000 26,078
7.50 11/15/01 50,000 52,078
6.25 01/31/02 75,000 76,102
7.50 05/15/02 70,000 73,391
5.63 12/31/02 75,000 74,836
6.25 02/15/03 75,000 76,266
7.00 07/15/06 50,000 52,969
--------
557,227
- -------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 4.8%
12.00 05/15/05 40,000 51,875
6.75 08/15/26 25,000 26,672
6.50 11/15/26 100,000 103,500
--------
182,047
--------
U.S. TREASURY STRIPS - 3.7%
U.S. Treasury STRIP (zero coupon) 5.69 (c) 11/15/10 50,000 24,805
U.S. Treasury STRIP (zero coupon) 6.26 (c) 11/15/18 325,000 95,732
U.S. Treasury STRIP (zero coupon) 5.54 (c) 02/15/19 60,000 17,395
--------
137,932
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 16.2%
Federal Farm Credit Bank 5.57 03/23/01 110,000 109,510
Federal Home Loan Bank 5.13 04/17/01 180,000 177,884
Federal National Mortgage Association 5.63 03/15/01 25,000 24,943
Federal National Mortgage Association 6.40 05/14/09 50,000 48,240
Federal National Mortgage Association 6.21 08/06/38 50,000 46,247
Inter - American Development Bank 5.63 04/16/09 215,000 201,041
--------
607,865
=================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $1,517,742) ................................................................... $1,485,071
=================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 9.0%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEMAND NOTES - 5.0%
Pitney Bowes 4.83% $ 170,000 $ 170,000
Wisconsin Electric 4.70 17,943 17,943
--------
187,943
- -------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 4.0%
Firstar Institutional Money Market 4.66 149,140 149,140
=================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $337,083) (d) ................................................................ $ 337,083
=================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $3,492,290) (d) .............................................................. $ 3,747,399
=================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - .3%
..................................................................................... $ 11,697
=================================================================================================
TOTAL NET ASSETS
.....................................................................................$ 3,759,096
=================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
9
<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
JUNE 30, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 81.7%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 38.9%
6.38% 08/15/02 $ 270,000 $ 275,147
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 42.8%
Federal Farm Credit Bank 5.13 04/02/01 75,000 74,147
Federal National Mortgage Association 5.63 03/15/01 90,000 89,796
Federal Home Loan Bank 5.13 04/17/01 140,000 138,354
--------
302,297
=================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $579,179) ..................................................................... $ 577,444
=================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 17.7%
<TABLE>
<CAPTION>
Principal Market
Rate Amount Value (a)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEMAND NOTES - 13.5%
General Mills 4.83% $ 29,479 $ 29,479
Pitney Bowes 4.83 31,118 31,118
Sara Lee 4.82 4,511 4,511
Warner Lambert 4.70 28 28
Wisconsin Electric 4.70 30,038 30,038
--------
95,174
- -------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 4.2%
Firstar Institutional Money Market 4.66 30,001 30,001
=================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $125,175) (d) ................................................................. $ 125,175
=================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $704,354) (d) ................................................................. $ 702,619
=================================================================================================
OTHER ASSETS & LIABILITIES (NET) - .6%
...................................................................................... $ 4,074
=================================================================================================
TOTAL NET ASSETS
...................................................................................... $ 706,693
=================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
10
<PAGE>
================================================================================
N O T E S T O S C H E D U L E S O F I N V E S T M E N T S
================================================================================
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1999
(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)
Interest rate shown represents yield-to-maturity at date of purchase.
(d)
At June 30, 1999, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal income tax purposes $ 12,143,831 $ 3,494,013 $ 704,354
=========================================================
Gross unrealized appreciation $ 2,826,875 $ 359,326 $ 802
Gross unrealized depreciation (971,269) (105,941) (2,537)
---------------------------------------------------------
Net unrealized appreciation (depreciation) $ 1,855,606 $ 253,385 $ (1,735)
=========================================================
- ----------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
================================================================================
S T A T E M E N T S O F A S S E T S A N D L I A B I L I T I E S
================================================================================
IAI RETIREMENT FUNDS, INC.
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $12,142,987; $3,492,290; and $704,354, respectively) $ 13,999,437 $ 3,747,399 $ 702,619
Dividends and accrued interest receivable 11,438 22,506 10,067
Prepaid Expenses -- -- 21
-----------------------------------------------
TOTAL ASSETS 14,010,875 3,769,905 712,707
-----------------------------------------------
LIABILITIES
Payable to Advisers 7,326 1,982 261
Accrued other expenses 13,688 8,827 5,753
-----------------------------------------------
TOTAL LIABILITIES 21,014 10,809 6,014
-----------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 13,989,861 $ 3,759,096 $ 706,693
===============================================
REPRESENTED BY:
Capital stock $ 8,539 $ 2,494 $ 711
Additional paid-in capital 11,827,196 3,253,420 707,051
Undistributed net investment income 9,412 45,885 363
Accumulated net realized gains on investments 288,264 202,188 303
Unrealized appreciation (depreciation) on investments 1,856,450 255,109 (1,735)
-----------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK
$ 13,989,861 $ 3,759,096 $ 706,693
===============================================
Shares of common stock outstanding; authorized 10 billion
shares of $.01 par value stock 853,862 249,414 71,106
-----------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 16.38 $ 15.07 $ 9.94
===============================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
12
<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.
PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 28,588 $ 53,871 $ 16,095
Dividends 45,705 13,205 --
------------------------------------------------
TOTAL INCOME 74,293 67,076 16,095
------------------------------------------------
Expenses:
Investment advisory fees 46,323 11,480 1,527
Dividend-disbursing, administrative, and accounting fees 10,361 4,590 1,157
Custodian fees 1,395 1,240 1,810
Amortization of organization costs 232 252 656
Compensation of Directors 1,914 487 72
Professional fees 4,040 3,820 3,320
Printing and shareholder reporting 413 -- --
Other expenses 200 100 --
------------------------------------------------
TOTAL EXPENSES 64,878 21,969 8,542
Less fees reimbursed or waived by Advisers -- (793) (4,474)
------------------------------------------------
NET EXPENSES 64,878 21,176 4,068
------------------------------------------------
NET INVESTMENT INCOME 9,415 45,900 12,027
------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on investments 289,173 203,930 374
Net change in unrealized appreciation or depreciation on
investment securities 525,050 (153,982) (5,956)
------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 814,223 49,948 (5,582)
------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 823,638 $ 95,848 $ 6,445
================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
13
<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>
Period ended Year ended
June 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 9,415 $ 84,359
Net realized gains 289,173 181,596
Net change in unrealized appreciation (depreciation) 525,050 (182,218)
------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 823,638 83,737
------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (85,158) (96,518)
Net realized gains (156,639) (855,271)
------------------------------------
TOTAL DISTRIBUTIONS (241,797) (951,789)
------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 14,285 and 140,405 shares 226,129 2,232,464
Net asset value of 15,188 and 59,974 shares issued
in reinvestment of distributions 241,796 951,789
Cost of 179,299 and 244,008 shares redeemed (2,798,002) (3,662,920)
------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (2,330,077) (478,667)
------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,748,236) (1,346,719)
NET ASSETS AT BEGINNING OF PERIOD 15,738,097 17,084,816
------------------------------------
NET ASSETS AT END OF PERIOD $ 13,989,861 $ 15,738,097
====================================
Including undistributed net investment income of: $ 9,412 $ 85,155
====================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
14
<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>
Period ended Year ended
June 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 45,900 $ 80,733
Net realized gains 203,930 130,571
Net change in unrealized appreciation (depreciation) (153,982) 123,211
------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 95,848 334,515
------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (81,592) (51,895)
Net realized gains (130,562) (30,026)
------------------------------------
TOTAL DISTRIBUTIONS (212,154) (81,921)
------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 40,741 and 87,724 shares 632,112 1,302,795
Net asset value of 14,403 and 5,480 shares issued
in reinvestment of distributions 212,154 81,921
Cost of 30,696 and 39,325 shares redeemed (478,287) (573,542)
------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 365,979 811,174
------------------------------------
TOTAL INCREASE IN NET ASSETS 249,673 1,063,768
NET ASSETS AT BEGINNING OF PERIOD 3,509,423 2,445,655
------------------------------------
NET ASSETS AT END OF PERIOD $ 3,759,096 $ 3,509,423
====================================
Including undistributed net investment income of: $ 45,885 $ 81,577
====================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
15
<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>
Period ended Year ended
June 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 12,027 $ 36,017
Net realized gains 374 1,194
Net change in unrealized appreciation (depreciation) (5,956) 3,871
------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 6,445 41,082
------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (14,656) (35,813)
Net realized gains (1,262) --
------------------------------------
TOTAL DISTRIBUTIONS (15,918) (35,813)
------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 15,865 and 19,622 shares 159,434 196,760
Net asset value of 1,592 and 3,579 shares issued
in reinvestment of distributions 15,918 35,813
Cost of 9,295 and 62,431shares redeemed (93,462) (624,881)
------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 81,890 (392,308)
------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 72,417 (387,039)
NET ASSETS AT BEGINNING OF PERIOD 634,276 1,021,315
------------------------------------
NET ASSETS AT END OF PERIOD $ 706,693 $ 634,276
====================================
Including undistributed net investment income of: $ 363 $ 2,992
====================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
16
<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
Period ended ---------------------------------------- January 31, 1994 ***
June 30,1999 1998 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62 $ 10.00
-----------------------------------------------------------------------------
OPERATIONS
Net investment income 0.03 0.08 0.08 0.05 0.06 0.03
Net realized and unrealized gains 0.96 0.18 1.90 1.60 3.50 0.59
-----------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.99 0.26 1.98 1.65 3.56 0.62
-----------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.10) (0.09) (0.07) (0.05) (0.02) --
Net realized gains (0.19) (0.80) (0.62) (0.74) -- --
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.29) (0.89) (0.69) (0.79) (0.02) --
-----------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 16.38 $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62
=============================================================================
Total investment return* 6.36% 1.56% 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $13,990 $15,738 $17,085 $11,831 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets 0.91%+ 0.94% 0.90% 1.03% 1.37%** 1.13%+**
Net investment income to average daily net assets 0.13%+ 0.50% 0.65% 0.77% 1.12%** 0.81%+**
Portfolio turnover rate (excluding short-term
securities) 13.7% 74.3% 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
+ ANNUALIZED
17
<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
Period ended ---------------------------------------- February 3, 1994 ***
June 30,1999 1998 1997 1996 1995 to December 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 15.60 $ 14.29 $ 12.71 $ 11.78 $ 10.22 $ 10.00
------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.18 0.31 0.27 0.22 0.09 0.10
Net realized and unrealized gains 0.21 1.40 1.81 0.92 1.56 0.12
------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.39 1.71 2.08 1.14 1.65 0.22
------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.35) (0.26) (0.24) (0.10) (0.09) --
Net realized gains (0.57) (0.14) (0.26) (0.11) -- --
------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.92) (0.40) (0.50) (0.21) (0.09) --
------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.07 $ 15.60 $ 14.29 $ 12.71 $ 11.78 $ 10.22
==============================================================================
Total investment return* 2.65% 12.11% 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $3,759 $3,509 $2,446 $1,534 $764 $206
RATIOS:
Expenses to average daily net assets** 1.20%+ 1.02% 1.25% 1.25% 1.70% 1.25%+
Net investment income to average daily net assets** 2.60%+ 2.69% 2.63% 2.84% 2.34% 2.28%+
Portfolio turnover rate (excluding short-term
securities) 51.8% 40.9% 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 $793, $10,627, $1,753, $8,031,
$13,428 AND $7,756 IN EXPENSES FOR THE PERIOD ENDED JUNE 30, 1999 AND THE
YEARS ENDED DECEMBER 31, 1998, 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
1.24%, 1.37%, 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
2.55%, 2.34%, 2.54%, 2.13%, (1.25%) AND (6.80%), RESPECTIVELY.
*** COMMENCEMENT OF OPERATIONS
+ ANNUALIZED
18
<PAGE>
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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
Period ended --------------------------------------- April 7, 1994 ***
June 30,1999 1998 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.08 $ 10.00 $ 10.03 $ 10.05 $ 10.03 $ 10.00
-----------------------------------------------------------------------------
OPERATIONS
Net investment income 0.18 0.47 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) (0.08) 0.06 0.02 (0.01) 0.02 0.02
-----------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.10 0.53 0.45 0.48 0.50 0.22
-----------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.22) (0.45) (0.46) (0.50) (0.48) (0.19)
Net realized gains (0.02) -- (0.02) -- -- --
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.24) (0.45) (0.48) (0.50) (0.48) (0.19)
-----------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.94 $ 10.08 $ 10.00 $ 10.03 $ 10.05 $ 10.03
=============================================================================
Total investment return* 0.95% 5.46% 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $707 $634 $1,021 $528 $844 $544
RATIOS:
Expenses to average daily net assets** 1.20%+ 0.68% 0.85% 0.85% 1.03% 0.85%+
Net investment income to average daily net assets** 3.54%+ 4.57% 4.57% 4.54% 4.84% 3.56%+
Portfolio turnover rate (excluding short-term
securities) 96.9% 129.0% 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 $4,474, $7,960, $8,479, $9,034,
$11,528 AND $6,930 IN EXPENSES FOR THE PERIOD ENDED JUNE 30,1999 AND THE
YEARS ENDED DECEMBER 31, 1998, 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
2.52%, 1.69%, 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
2.22%, 3.56%, 3.17%, 3.58%, 3.25% AND (0.21%), RESPECTIVELY.
*** COMMENCEMENT OF OPERATIONS
+ ANNUALIZED
19
<PAGE>
================================================================================
N O T E S T O F I N A N C I A L S T A T E M E N T S
================================================================================
IAI RETIREMENT FUNDS INC.
JUNE 30, 1999
(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.
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.
20
<PAGE>
================================================================================
N O T E S T O F I N A N C I A L S T A T E M E N T S
================================================================================
IAI RETIREMENT FUNDS INC.
JUNE 30, 1999
(UNAUDITED)
[2] 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 fees, the Portfolios are responsible for paying
their operating expenses, including costs incurred in the purchase and sale of
assets. Additionally, Advisers had 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, 1999.
[3] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended June 30, 1999, purchases of securities and sales
proceeds, other than investments in short-term securities for the Portfolios,
were as follows:
- --------------------------------------------------------------------------------
PURCHASES PURCHASES SALES SALES
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- --------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO $ 0 $1,806,025 $ 0 $3,892,031
IAI BALANCED PORTFOLIO $905,906 $1,238,640 $693,220 $ 934,430
IAI RESERVE PORTFOLIO $729,913 $ 0 $442,084 $ 0
- --------------------------------------------------------------------------------
21
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 510
Milwaukee, Wisconsin 53201-0510
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
IAI Mutual Funds
c/o Firstar Mutual Fund Services, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 USA
800.945.3863
