IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO
IAI RESERVE PORTFOLIO
DECEMBER 31, 1998
[LOGO-IAI]
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
DECEMBER 31, 1998
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
Independent Auditors' Report........................................... 23
Federal Tax Information................................................ 24
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors...................................................... Back Cover
[LOGO-IAI]
MUTUAL FUNDS
INVESTMENT ADVISERS, INC.
P.O. BOX 357 MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2616
800.945.3863
612.376.2700
<PAGE>
LETTER TO SHAREHOLDERS
IAI RETIREMENT FUNDS, INC.
THE INDESTRUCTIBLE U.S. ECONOMY
Japan is in a decade-long recession. Russia's economy has collapsed. Brazil's
currency is plunging. Even Europe is struggling to grow. But somehow, in this
global economy, none of this seems to affect us. In 1999, America's economy
remains the undisputed leader in the world.
It was just last summer when the latest global crisis had pundits predicting a
recession. The stock market dropped 20%. Suddenly, the Federal Reserve Board
went into action, cut interest rates three times. Confidence returned, the stock
market hit new highs, and Gross Domestic Product grew 5.6% in the fourth quarter
of 1998. Meanwhile, inflation is less than 2%, interest rates are declining,
unemployment is 4.3% and the federal budget is in surplus for the first time in
three decades.
But how is this possible, when our trading partners are having such a tough
time? In some ways, their loss is our gain. When Asia's currencies falter,
imports become cheaper and U.S. companies must keep prices down to compete
domestically. As a result, inflation is held in check. Many countries have
followed the Federal Reserve policy of cutting interest rates in an effort to
stimulate the economy. As a result, money that might be invested locally in
bonds is leaving for higher returns in the U.S. In Japan, interest rates are
close to zero, so Japanese institutions looking for income are buying our
Treasury bonds. Meanwhile, global investors like the direction of our stock
market better than their local markets, and they're increasingly investing here,
thus pumping money into the U.S. economy.
But another reason for America's invincibility is that trade, while important,
is not a huge factor on the U.S. economy. Although it makes up a larger share
than it did a decade ago, exports only amount to 11% of U.S. GDP. Most of that
trade is with Europe, Canada and Mexico, which have suffered much less than Asia
and Latin America. True, some U.S. industries have suffered from declining
exports, such as agriculture, capital equipment and steel. Banks wrote off
millions in losses when Russia defaulted last summer. But cheap imports of oil,
lumber, agricultural products and raw materials have kept costs down for many
American companies.
In addition, we have reasserted our global leadership in a number of industries.
In technology, there's really nothing comparable outside the U.S. to Microsoft
and Intel. The explosive growth of the internet is largely an American-based
phenomenon. Technology has produced hundreds of thousands of jobs in this
country, and technology stocks led the Standard & Poor's 500 Index in 1998.
In the 1970s, it was said that the era of U.S. economic leadership had passed. A
generation later, it certainly looks like that was a premature conclusion.
Indeed, the stock and bond markets are just one indication of that.
Turning to your investments, the following Portfolio Manager Reviews offer a
detailed perspective on the individual funds' performance and strategy. As
always, we appreciate your continued trust and confidence in IAI. If you have
questions or concerns, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
2
<PAGE>
PORTFOLIO MANAGER'S REVIEW
IAI REGIONAL PORTFOLIO
IAI REGIONAL PORTFOLIO
MARK C. HOONSBEEN, CFA
IAI REGIONAL PORTFOLIO MANAGER
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Regional Portfolio gained 1.56% for the year ended December 31, 1998.
This compares to 28.57% for the S&P 500 Index (large companies), 19.12% for the
S&P 400 Index (mid sized companies), and (3.45%) for the Russell 2000 Index
(small companies). As can be seen by the performance of the indicies, large
stocks dominated performance in 1998. However, even that observation hides how
narrow performance was in 1998. Five stocks in the S&P 500 (Microsoft, Intel,
Wal-Mart, Cisco Systems, and Pfizer) accounted for almost 20% of the 28% rise in
the index--now that is concentrated performance. Even among the midcap indices,
results were skewed by a very few of the larger stocks. This basically means the
average stock did not come close to matching the performance of the indices.
As a Midwest Regional Portfolio, we were hampered by the fact that none of
these high flying stocks are in our area. This made it very difficult to match
the performance of the indices. However, we still had a number of successes in
1998. We saw strong performance out of Medtronic, Walgreen, Dayton Hudson, and
Galileo Corp among our mid to large stocks.
Among our smaller companies, Engineering Animation doubled and we sold our
position at attractive prices, and Recovery Engineering ran from the single
digit prices to $30/share where we cut back our position. The overall
performance was held down by the fact the average stock in the market did not
perform well in 1998, and without the high flyers you could not keep up.
It's times like these we feel its important you recognize that we are
buying good quality companies, with strong managements, and good growth
prospects. Over time, we believe that the good growth of these businesses will
be reflected in the performance of your Fund.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
Our view is that this performance is an anomaly, and that valuations among these
largest stocks are unsustainable. Conversely, the upside opportunity in stocks
outside this select group have become very attractive. We own a good mix of
large, mid, and small companies with excellent growth prospects and strong
profitability trends.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI REGIONAL
PORTFOLIO S&P 500
(INCEPTION 1/31/94) INDEX*
------------------- ------
01/31/94 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
12/31/98 18,279 28,488
*since 02/01/94
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/98
Since Inception
1 Year 1/31/94
- --------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO 1.56% 13.05%
- --------------------------------------------------------------------------------
S&P 500 Index 28.57% 23.67%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
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 12.11% during the year ended
December 31, 1998. This compares to its benchmarks, the S&P 500 Index which
returned 28.57% and the Lehman Government/Corporate Bond Index which returned
9.47%.
WHAT MARKET FACTORS AFFECTED THE PORTFOLIO'S PERFORMANCE DURING THE LAST FISCAL
YEAR?
Calendar year 1998 was a volatile period for global financial markets. U.S. bond
and stock markets started the year with positive results, but suffered in the
fall before recovering later in the year. In August, the partial default on
Russian debt set off a chain reaction that eventually ended with three interest
rate cuts by the Federal Reserve. Along the way, the massive scramble for
liquidity pushed stock prices down and caused bond market risk premiums to widen
dramatically. The Fund avoided an extreme over allocation in either stocks or
bonds to help control the risk and volatility. Ample liquidity was also
maintained with investments in cash reserves.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE PORTFOLIO? WERE THERE ANY
DISAPPOINTMENTS?
Among the Portfolio's most successful U.S. equity positions were 800-JR Cigar,
Wal-Mart Stores, and Tyco International. Among the Fund's laggards were First
Health Group, which fell after reporting lower than anticipated third quarter
results, and Sturm, Ruger & Company, which traded lower due to a decline in
their golf casting business. The fixed income portion of the portfolio remained
invested primarily in U.S. Treasuries and Federal Agencies. This strategy lagged
the bond market in the early part of the year as riskier bonds outperformed, but
the Portfolio benefited from this strategy during the fall turmoil.
WERE THERE ANY SIGNIFICANT CHANGES?
MCI Worldcom, Ameritech and Citigroup were added to the equity portfolio. The
interest rate sensitivity of the Portfolio's fixed income position remained
longer than the benchmark with a continuing emphasis on U.S. Government
holdings.
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.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI BALANCED LEHMAN GOVERNMENT/
FUND PORTFOLIO S&P 500 CORPORATE BOND
(INCEPTION 02/03/94) INDEX* INDEX*
-------------------- ------- ------------------
02/03/94 10,000 10,000 10,000
12/31/94 10,220 9,803 9,506
12/31/95 11,877 13,479 11,335
12/31/96 13,041 16,613 11,664
12/31/97 15,203 22,158 12,803
12/31/98 17,045 28,488 14,014
*since 02/01/94
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/98
Since Inception
1 Year 2/03/94
- --------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO 12.11% 11.48%
- --------------------------------------------------------------------------------
S&P 500 Index 28.57% 23.67%*
- --------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 9.47% 7.11%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
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 5.46% for the year ended December
31, 1998. This compares to the Salomon Brothers One Year Treasury Bill Index
which had a return of 5.90%.
WHAT MARKET FACTORS EFFECTED THE PORTFOLIO'S PERFORMANCE DURING THE MOST RECENT
FISCAL YEAR?
Calendar 1998 was a volatile year for global fixed income markets, particularly
so for those markets with less liquidity or lower quality such as emerging
market debt and high yield bonds. Economic conditions in the U.S. remained firm
for most of the year. However, overseas events were the catalyst for most of the
financial market volatility. In August, a partial default on Russian debt
started a chain reaction that quickly spread to other markets. Highly leveraged
hedge funds which owned Russian debt were forced to liquidate other assets to
meet margin calls. As asset prices declined, sales intensified. Eventually, the
Federal Reserve was forced to cut short-term interest rates on three separate
occasions to restore confidence and liquidity to the financial system.
Throughout the year the Fund maintained a shorter average maturity, holding high
quality investments and ample cash liquidity. Thus the Fund was able to avoid a
significant amount of the volatility.
WERE THERE ANY SIGNIFICANT CHANGES IN THE PORTFOLIO?
The Portfolio focused on U.S. Treasury and Federal Agency holdings plus cash
reserves to generate returns during the year. This combination provided a good
balance between investment return and principal stability and safety. This
strategy did not change dramatically during the year.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
We expect real growth in the U.S. economy to slow from its strong pace in the
fourth quarter of 1998. Inflation will remain low as a result of economic
weakness overseas and fierce global price competition. For 1999, the U.S.
economy should expand by about 3.5% and inflation will center around 1.5%. The
Federal Reserve will continue to provide ample liquidity, but short-term rates
are unlikely to change in the first half of the year unless instability overseas
or a dramatic deterioration in domestic business conditions forces another
policy shift. Interest rates are biased to move lower, however the path will not
be smooth. Although the Portfolio is well positioned for this environment,
tactical investment decisions will be used to take advantage of adverse market
swings.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI RESERVE SALOMON BROTHERS
PORTFOLIO ONE YEAR TREASURY
(INCEPTION 04/07/94) BILL INDEX*
-------------------- -----------------
10,000 10,000
04/07/94 10,000 9,991
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
12/31/98 12,444 13,130
*since 04/01/94
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/98
Since Inception
1 Year 4/07/94
- --------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO 5.46% 4.72%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 5.90% 5.90%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
5
<PAGE>
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S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.6%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 4.2%
Galileo International 6,200 $ 269,700
HA-LO Industries (b) 6,300 237,038
Manpower 3,000 75,562
W.W. Grainger 1,800 74,925
-----------
657,225
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 7.6%
Excelsior-Henderson
Motorcycle Manufacturing (b) 7,700 71,225
Harley-Davidson 5,000 236,875
Intranet Solutions (b) 25,000 121,875
ITI Technologies (b) 2,700 83,700
Koala (b) 2,000 34,750
Newell 5,000 206,250
Select Comfort (b) 2,900 76,668
Snap-On 10,300 358,569
VirtualFund.com (b) 3,400 7,013
-----------
1,196,925
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 6.8%
Dean Foods 6,600 269,362
Hormel Foods 4,000 131,000
Sara Lee 9,800 276,238
Tootsie Roll Industries 5,400 211,275
Wm. Wrigley Jr 2,000 179,125
-----------
1,067,000
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 1.8%
Lodgenet Entertainment (b) 23,200 159,500
Meredith 3,400 128,775
-----------
288,275
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 5.0%
ADC Telecommunications (b) 4,400 152,900
Computer Network Technology (b) 13,000 162,500
Molex 5,500 209,688
Sundstrand 5,200 269,750
-----------
794,838
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 9.3%
Allstate 5,000 $ 193,125
Heller Financial 8,500 249,687
Horace Mann Educators 3,900 111,150
National Equipment Services (b) 10,100 116,150
Old Republic International 4,800 108,000
ReliaStar Financial 8,300 382,838
Standard & Poor's Depositary Receipts
(SPDR Trust) 2,500 307,500
-----------
1,468,450
- --------------------------------------------------------------------------------
HEALTH SERVICES - 3.0%
Patterson Dental (b) 5,750 250,125
ServiceMaster 9,900 218,419
-----------
468,544
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 11.3%
Abbott Laboratories 8,400 411,600
Baxter International 3,200 205,800
Diametrics Medical (b) 38,900 192,068
Medtronic 5,000 371,250
Northfield Laboratories (b) 19,500 241,313
Possis Medical (b) 9,800 66,150
Sybron International (b) 10,900 296,344
-----------
1,784,525
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 7.4%
AptarGroup 4,800 134,700
Donaldson 10,000 207,500
Ecolab 6,000 217,125
Northland Cranberries Class A 16,100 145,402
Valspar 6,600 246,263
Whitman 8,700 220,763
-----------
1,171,753
- --------------------------------------------------------------------------------
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
DECEMBER 31, 1998
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 9.0%
ABC Rail Products (b) 11,500 $ 140,156
Illinois Tool Works 4,800 278,400
Littlefuse (b) 7,000 134,750
Rayovac (b) 12,900 344,269
Recovery Engineering (b) 19,500 129,188
Tower Automotive (b) 12,000 299,250
Zebra Technologies Class A (b) 3,300 94,875
-----------
1,420,888
- --------------------------------------------------------------------------------
RETAIL TRADE - 10.9%
Casey's General Stores 20,200 263,230
Dayton Hudson 6,800 368,900
Fastenel 3,000 132,000
Kohl's (b) 4,000 245,750
Lands' End (b) 5,500 148,156
Video Update Class A (b) 57,600 111,600
Walgreen 7,500 439,219
-----------
1,708,855
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 9.8%
Anicom (b) 13,200 121,275
FIserv (b) 4,200 216,038
Great Plains Software (b) 3,900 188,175
Platinum Technology (b) 15,500 296,437
Richardson Electronics 18,700 179,988
Secure Computing (b) 28,000 533,750
-----------
1,535,663
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
TRANSPORTATION - 1.4%
C.H. Robinson Worldwide 8,400 $ 217,875
- --------------------------------------------------------------------------------
UTILITIES - 4.1%
Ameritech 6,400 405,600
Northern States Power 8,400 233,100
-----------
638,700
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $13,088,116)..................................................$14,419,516
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $13,088,116) (d)..............................................$14,419,516
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 8.4%
.....................................................................$ 1,318,581
================================================================================
TOTAL NET ASSETS
.....................................................................$15,738,097
================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
7
<PAGE>
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S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 42.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 4.8%
Callaway Golf 1,000 $ 10,250
Department 56 (b) 1,300 48,831
Eastman Kodak 400 28,800
Harley-Davidson 900 42,638
Mattel 700 15,969
Sturm, Ruger & Company 1,900 22,681
-----------
169,169
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 6.3%
800 - JR Cigar (b) 4,900 113,925
Gillette 200 9,663
Nike Class B 700 28,393
Philip Morris 1,000 53,500
UST 500 17,438
-----------
222,919
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 0.9%
Walt Disney 1,050 31,500
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.3%
Intel 380 45,054
- --------------------------------------------------------------------------------
ENERGY MINERALS - 1.9%
British Petroleum ADR 310 29,450
Exxon 500 36,563
-----------
66,013
- --------------------------------------------------------------------------------
FINANCIAL - 9.0%
American Express 400 40,900
Citigroup 900 44,550
Federal Home Loan Mortgage
Corporation 1,200 77,325
Leucadia National (b) 700 22,050
PMI Group 300 14,812
SLM Holding 1,050 50,400
United Asset Management 1,200 31,200
Wells Fargo 840 33,548
-----------
314,785
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 2.5%
First Health Group (b) 3,000 $ 49,688
United Healthcare 900 38,756
-----------
88,444
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 2.9%
American Home Products 500 28,157
Merck & Company 300 44,306
SmithKline Beecham ADR 400 27,800
-----------
100,263
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 0.8%
Nabors Industries (b) 1,950 26,447
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.6%
Nucor 450 19,463
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.6%
Berkshire Hathaway Class B (b) 15 35,250
CBS 1,400 45,850
General Electric 320 32,660
Schweitzer-Mauduit International 800 12,350
Sigma-Aldrich 1,200 35,250
-----------
161,360
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 2.4%
Tyco International 1,100 82,980
- --------------------------------------------------------------------------------
RETAIL TRADE - 1.3%
Wal-Mart Stores 580 47,233
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.2%
Parametric Technology (b) 2,600 42,574
- --------------------------------------------------------------------------------
UTILITIES - 1.9%
Ameritech 500 31,688
MCI Worldcom 500 35,875
-----------
67,563
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $1,134,861)...................................................$ 1,485,767
================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
8
<PAGE>
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S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1998
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 38.6%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 15.0%
7.50% 10/31/99 $ 50,000 $ 51,117
6.13 09/30/00 25,000 25,613
8.00 05/15/01 25,000 26,848
7.50 11/15/01 50,000 53,765
6.25 01/31/02 75,000 78,328
7.50 05/15/02 70,000 76,005
5.63 12/31/02 75,000 77,496
6.25 02/15/03 75,000 79,312
7.00 07/15/06 50,000 56,930
--------
525,414
- ------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 8.3%
12.00 05/15/05 40,000 55,650
6.75 08/15/26 25,000 29,949
6.50 11/15/26 100,000 116,281
6.63 02/15/27 75,000 88,711
--------
290,591
- ------------------------------------------------------------------------------------------
U.S. TREASURY STRIPS - 1.3%
U.S. Treasury STRIP (zero coupon) 5.69(c) 11/15/10 50,000 27,134
U.S. Treasury STRIP (zero coupon) 5.54(c) 02/15/19 60,000 19,678
--------
46,812
- ------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 14.0%
Federal Farm Credit Bank 5.57 03/23/01 110,000 111,341
Federal Home Loan Bank 5.80 09/02/08 40,000 41,400
Federal National Mortgage Association 5.63 03/15/01 25,000 25,367
Federal National Mortgage Association 5.75 06/15/05 75,000 77,438
Federal National Mortgage Association 6.00 05/15/08 175,000 184,733
Federal National Mortgage Association 6.21 08/06/38 50,000 52,437
--------
492,716
==========================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $1,297,348) .............................................................$1,355,533
==========================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $2,432,209) (d) ........................................................$2,841,300
==========================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 19.0%
................................................................................$ 668,123
==========================================================================================
TOTAL NET ASSETS
................................................................................$3,509,423
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
9
<PAGE>
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S C H E D U L E O F I N V E S T M E N T S
================================================================================
IAI RESERVE PORTFOLIO
DECEMBER 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 46.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 32.1%
5.75% 11/15/00 $200,000 $ 203,874
- ------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 14.4%
Federal National Mortgage Association 5.63 03/15/01 90,000 91,322
==========================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $290,975)................................................................$ 295,196
==========================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $290,975)(d).............................................................$ 295,196
==========================================================================================
OTHER ASSETS & LIABILITIES (NET) - 53.5%
................................................................................$ 339,080
==========================================================================================
TOTAL NET ASSETS
................................................................................$ 634,276
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 11
10
<PAGE>
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N O T E S T O S C H E D U L E S O F I N V E S T M E N T S
================================================================================
IAI RETIREMENT FUNDS, INC.
DECEMBER 31, 1998
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation".
(b)
Currently non-income producing security.
(c)
Interest rate shown represents yield-to-maturity at date of purchase.
(d)
At December 31, 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 $ 13,088,961 $ 2,433,932 $ 290,975
======================================================
Gross unrealized appreciation $ 2,490,817 $ 512,772 $ 4,221
Gross unrealized depreciation (1,160,262) (105,404) --
------------------------------------------------------
Net unrealized appreciation $ 1,330,555 $ 407,368 $ 4,221
======================================================
- --------------------------------------------------------------------------------------------------
</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.
DECEMBER 31, 1998
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $13,088,116; $2,432,209; and $290,975, respectively) $14,419,516 $ 2,841,300 $ 295,196
Cash in bank on demand deposit 773,080 651,853 338,613
Receivable for investment securities sold 557,377 -- --
Dividends and accrued interest receivable 13,223 21,513 3,003
Organization costs 232 252 656
Other -- 3,919 2,166
---------------------------------------------
TOTAL ASSETS 15,763,428 3,518,837 639,634
---------------------------------------------
LIABILITIES
Payable for Fund shares redeemed 12,816 295 15
Accrued investment advisory fee -- 1,885 242
Accrued custody fees 4,918 3,288 1,371
Accrued audit fees 4,301 3,128 3,128
Other accrued expenses 3,296 818 602
---------------------------------------------
TOTAL LIABILITIES 25,331 9,414 5,358
---------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $15,738,097 $ 3,509,423 $ 634,276
=============================================
REPRESENTED BY:
Capital stock $ 10,037 $ 2,250 $ 629
Additional paid-in capital 14,155,775 2,887,685 625,243
Undistributed net investment income 85,155 81,577 2,992
Accumulated net realized gains on investments 155,730 128,820 1,191
Unrealized appreciation on investments 1,331,400 409,091 4,221
---------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK
$15,738,097 $ 3,509,423 $ 634,276
=============================================
Shares of common stock outstanding; authorized 10 billion
shares of $.01 par value stock 1,003,688 224,966 62,944
---------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 15.68 $ 15.60 $ 10.08
=============================================
</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.
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 77,820 $ 95,659 $ 41,410
Dividends (net of foreign withholding tax of $0,
$72 and $0, respectively) 163,772 15,714 --
---------------------------------------------
TOTAL INCOME 241,592 111,373 41,410
---------------------------------------------
Expenses:
Investment advisory fees 108,792 19,519 3,546
Dividend-disbursing, administrative, and accounting fees 16,737 3,003 788
Custodian fees 17,890 12,100 2,772
Amortization of organization costs 2,518 2,518 2,518
Compensation of Directors 3,104 469 187
Audit/legal fees 4,064 2,969 2,969
Printing and shareholder reporting 2,264 388 388
Registration fees 1,205 204 146
Other expenses 659 97 39
---------------------------------------------
TOTAL EXPENSES 157,233 41,267 13,353
Less fees reimbursed or waived by Advisers -- (10,627) (7,960)
---------------------------------------------
NET EXPENSES 157,233 30,640 5,393
---------------------------------------------
NET INVESTMENT INCOME 84,359 80,733 36,017
---------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on investments 181,596 130,571 1,194
Net change in unrealized appreciation or depreciation on
investment securities (182,218) 123,211 3,871
---------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS (622) 253,782 5,065
---------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 83,737 $ 334,515 $ 41,082
=============================================
</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 S S E T S
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 84,359 $ 95,617
Net realized gains 181,596 854,786
Net change in unrealized appreciation or depreciation (182,218) 852,815
-------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 83,737 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 140,405 and 354,778 shares 2,232,464 5,590,877
Net asset value of 59,974 and 41,012 shares issued
in reinvestment of distributions 951,789 632,489
Cost of 244,008 and 135,923 shares redeemed (3,662,920) (2,140,268)
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (478,667) 4,083,098
-------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,346,719) 5,253,827
NET ASSETS AT BEGINNING OF PERIOD 17,084,816 11,830,989
-------------------------------
NET ASSETS AT END OF PERIOD $ 15,738,097 $ 17,084,816
===============================
Including undistributed net investment income of: $ 85,155 $ 96,455
===============================
</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 S S E T S
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 80,733 $ 51,014
Net realized gains 130,571 28,354
Net change in unrealized appreciation or depreciation 123,211 208,949
-------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 334,515 288,317
-------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (51,895) (32,873)
Net realized gains (30,026) (34,912)
-------------------------------
TOTAL DISTRIBUTIONS (81,921) (67,785)
-------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 87,724 and 65,491 shares 1,302,795 898,051
Net asset value of 5,480 and 5,042 shares issued
in reinvestment of distributions 81,921 67,785
Cost of 39,325 and 20,162 shares redeemed (573,542) (274,759)
-------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 811,174 691,077
-------------------------------
TOTAL INCREASE IN NET ASSETS 1,063,768 911,609
NET ASSETS AT BEGINNING OF PERIOD 2,445,655 1,534,046
-------------------------------
NET ASSETS AT END OF PERIOD $ 3,509,423 $ 2,445,655
===============================
Including undistributed net investment income of: $ 81,577 $ 51,876
===============================
</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 S S E T S
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 36,017 $ 27,768
Net realized gains (losses) 1,194 (3)
Net change in unrealized appreciation or depreciation 3,871 (335)
-------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 41,082 27,430
-------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (35,813) (28,483)
Net realized gains -- (890)
-------------------------------
TOTAL DISTRIBUTIONS (35,813) (29,373)
-------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 19,622 and 81,587 shares 196,760 816,450
Net asset value of 3,579 and 2,955 shares issued
in reinvestment of distributions 35,813 29,373
Cost of 62,431 and 35,024 shares redeemed (624,881) (350,481)
-------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (392,308) 495,342
-------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (387,039) 493,399
NET ASSETS AT BEGINNING OF PERIOD 1,021,315 527,916
-------------------------------
NET ASSETS AT END OF PERIOD $ 634,276 $ 1,021,315
===============================
Including undistributed net investment income of: $ 2,992 $ 1,925
===============================
</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
-------------------------------------------------- January 31, 1994***
1998 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 16.31 $ 15.02 $ 14.16 $ 10.62 $ 10.00
------------------------------------------------------------------
OPERATIONS
Net investment income 0.08 0.08 0.05 0.06 0.03
Net realized and unrealized gains 0.18 1.90 1.60 3.50 0.59
------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.26 1.98 1.65 3.56 0.62
------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.09) (0.07) (0.05) (0.02) --
Net realized gains (0.80) (0.62) (0.74) -- --
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.89) (0.69) (0.79) (0.02) --
------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62
==================================================================
Total investment return* 1.56% 13.45% 11.88% 33.51% 6.20%
Net assets at end of period (000's omitted) $ 15,738 $ 17,085 $ 11,831 $ 5,105 $ 865
RATIOS:
Expenses to average daily net assets 0.94% 0.90% 1.03% 1.37%** 1.13%+**
Net investment income to average daily net assets 0.50% 0.65% 0.77% 1.12%** 0.81%+**
Portfolio turnover rate (excluding short-term securities) 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
-------------------------------------------------- February 3, 1994***
1998 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 14.29 $ 12.71 $ 11.78 $ 10.22 $ 10.00
------------------------------------------------------------------
OPERATIONS
Net investment income 0.31 0.27 0.22 0.09 0.10
Net realized and unrealized gains 1.40 1.81 0.92 1.56 0.12
------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.71 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 (0.14) (0.26) (0.11) -- --
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.40) (0.50) (0.21) (0.09) --
------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.60 $ 14.29 $ 12.71 $ 11.78 $ 10.22
==================================================================
Total investment return* 12.11% 16.60% 9.80% 16.21% 2.20%
Net assets at end of period (000's omitted) $ 3,509 $ 2,446 $ 1,534 $ 764 $ 206
RATIOS:
Expenses to average daily net assets** 1.02% 1.25% 1.25% 1.70% 1.25%+
Net investment income to average daily net assets** 2.69% 2.63% 2.84% 2.34% 2.28%+
Portfolio turnover rate (excluding short-term securities) 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 $10,627, $1,753, $8,031, $13,428
AND $7,756 IN EXPENSES FOR 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 1.37%, 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 2.34%, 2.54%, 2.13%, (1.25%) AND (6.80%), RESPECTIVELY.
*** COMMENCEMENT OF OPERATIONS
+ ANNUALIZED
18
<PAGE>
================================================================================
F I N A N C I A L H I G H L I G H T S
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31, Period from
-------------------------------------------------- April 7, 1994***
1998 1997 1996 1995 to December 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.00 $ 10.03 $ 10.05 $ 10.03 $ 10.00
------------------------------------------------------------------
OPERATIONS
Net investment income 0.47 0.43 0.49 0.48 0.20
Net realized and unrealized gains (losses) 0.06 0.02 (0.01) 0.02 0.02
------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.53 0.45 0.48 0.50 0.22
------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.45) (0.46) (0.50) (0.48) (0.19)
Net realized gains -- (0.02) -- -- --
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.45) (0.48) (0.50) (0.48) (0.19)
------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.08 $ 10.00 $ 10.03 $ 10.05 $ 10.03
==================================================================
Total investment return* 5.46% 4.62% 4.93% 5.09% 2.25%
Net assets at end of period (000's omitted) $ 634 $ 1,021 $ 528 $ 844 $ 544
RATIOS:
Expenses to average daily net assets** 0.68% 0.85% 0.85% 1.03% 0.85%+
Net investment income to average daily net assets** 4.57% 4.57% 4.54% 4.84% 3.56%+
Portfolio turnover rate (excluding short-term securities) 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 $7,960, $8,479, $9,034, $11,528
AND $6,930 IN EXPENSES FOR 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 1.69%, 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 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.
DECEMBER 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Retirement Funds, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Regional Portfolio (Regional Portfolio), IAI Balanced Portfolio (Balanced
Portfolio) and IAI Reserve Portfolio (Reserve Portfolio) are separate portfolios
of IAI Retirement Funds, Inc. Portfolio shares are not offered directly to the
public, but sold only to selected insurance companies' separate accounts in
connection with variable life insurance policies or variable annuity contracts.
The Regional Portfolio has a primary objective of long-term appreciation through
investments in equity securities. The Balanced Portfolio has a primary objective
of maximum total return through investment in stocks, bonds and short-term
instruments. The Reserve Portfolio has a primary objective of providing a high
level of current income consistent with the preservation of capital and
liquidity. This report covers only the Regional Portfolio, Balanced Portfolio
and Reserve Portfolio (the Portfolios).
Significant accounting policies followed by the Portfolios are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Such securities which
cannot be valued by the portfolio pricing service are valued using
dealer-supplied valuations, or are valued under consistently applied procedures
established by the Board of Directors to determine fair value in good faith.
Short-term "money market type" debt securities having a remaining maturity of 60
days or less at acquisition are valued at cost adjusted for amortization to
maturity of any premium or discount.
FEDERAL TAXES
Since it is each Portfolio's policy to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all taxable income to shareholders, no provision for income taxes is
required.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income and accumulated net realized
gains have been increased, resulting in reclassification adjustments to
additional paid-in capital as follows:
- --------------------------------------------------------------------------------
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------
Undistributed net investment income $ 859 $ 863 $ 863
Accumulated net realized gains $ 4 $ -- $ --
Additional paid-in capital $(863) $(863) $(863)
- --------------------------------------------------------------------------------
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.
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.
DECEMBER 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made annually for Regional Portfolio and Balanced
Portfolio and monthly for Reserve Portfolio. Capital gains, if any, are
primarily distributed in June. Additional capital gains distributions as needed
to comply with federal tax regulations are distributed during the year.
ORGANIZATION COSTS
Organization costs are being amortized over 60 months on a straight-line basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
Regional Portfolio, Balanced Portfolio and Reserve Portfolio have available
lines of credit of $2,580,000, $473,000 and $101,000, respectively, with a bank
at the prime interest rate. To the extent funds are drawn against the line,
securities are held in a segregated account. No compensating balances or
commitment fees are required under the line of credit. During the year ended
December 31, 1998, the Portfolio's paid $3, $8 and $16, respectively in interest
on the line of credit at an average rate of 8.50%. This interest expense is
included as a reduction of interest income on the Statement of Operations. There
were no borrowings outstanding at December 31, 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
Balanced Portfolio and Reserve Portfolio in excess of 1.25% and .85%,
respectively, of average daily net assets through May 1, 1999.
21
<PAGE>
================================================================================
N O T E S T O F I N A N C I A L S T A T E M E N T S
================================================================================
IAI RETIREMENT FUNDS INC.
DECEMBER 31, 1998
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities for the Portfolios,
were as follows:
- --------------------------------------------------------------------------------
PURCHASES SALES
- --------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO $ 11,247,236 $ 12,027,271
IAI BALANCED PORTFOLIO $ 1,592,579 $ 1,000,132
IAI RESERVE PORTFOLIO $ 470,272 $ 280,478
- --------------------------------------------------------------------------------
Net realized gains on investments for IAI Regional Portfolio include a
reimbursement by Advisers of $28,669 for a loss incurred on an investment.
22
<PAGE>
================================================================================
I N D E P E N D E N T A U D I T O R S ` R E P O R T
================================================================================
IAI RETIREMENT FUNDS, INC.
The Board of Directors and Shareholders
IAI Retirement Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of IAI Regional Portfolio, IAI Balanced Portfolio
and IAI Reserve Portfolio (portfolios within IAI Retirement Funds, Inc.) as of
December 31, 1998, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for the periods
presented on pages 17-19 of the annual report. These financial statements and
the financial highlights are the responsibility of the portfolios' management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities sold but not delivered, we request confirmations
from brokers and where replies are not received, we carry out other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Regional Portfolio, IAI Balanced Portfolio and IAI Reserve Portfolio at December
31, 1998, and the results of their operations, the changes in their net assets
and their financial highlights for the periods stated in the first paragraph
above, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 5, 1999
23
<PAGE>
================================================================================
F E D E R A L T A X I N F O R M A T I O N
================================================================================
IAI RETIREMENT FUNDS, INC.
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI REGIONAL PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- --------------------------------------------------------------------------------
JUNE 1998 $ 0.2215 $ 0.6739
51.87% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- --------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- --------------------------------------------------------------------------------
JUNE 1998 $ 0.2932 $ 0.1095
23.06% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- --------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
JANUARY 1998 $ 0.0400
FEBRUARY 1998 0.0400
MARCH 1998 0.0450
APRIL 1998 0.0400
MAY 1998 0.0370
JUNE 1998 0.0426
JULY 1998 0.0240
AUGUST 1998 0.0300
SEPTEMBER 1998 0.0450
OCTOBER 1998 0.0450
NOVEMBER 1998 0.0300
DECEMBER 1998 0.0350
- --------------------------------------------------------------------------------
$ 0.4536
- --------------------------------------------------------------------------------
24
<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 554440-0357 USA FAX 612.376.2616
800.945.3863
612.376.2700
