ANNUAL REPORT
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO, IAI BALANCED PORTFOLIO,
IAI RESERVE PORTFOLIO
DECEMBER 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
-----------------
IAI RETIREMENT FUNDS, INC.
ANNUAL REPORT
DECEMBER 31, 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.............................. 11
Notes to Schedules of Investments..................... 12
Statements of Assets and Liabilities.................. 13
Statements of Operations.............................. 14
Statements of Changes in Net Assets
IAI Regional Portfolio............................. 15
IAI Balanced Portfolio............................. 16
IAI Reserve Portfolio.............................. 17
Financial Highlights
IAI Regional Portfolio............................. 18
IAI Balanced Portfolio............................. 19
IAI Reserve Portfolio.............................. 20
Notes to Financial Statements......................... 21
Independent Auditors' Report.......................... 23
Federal Tax Information............................... 24
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors..................................... Back Cover
[LOGO] IAI
MUTUAL FUNDS
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.
WATCHING THE FED IN 2000 . . .
The U.S. economy continues to grow rapidly. Inflation is modest and under
control. Stocks, at least as reflected in the broad averages, keep hitting new
highs. Unfortunately, all that good news was interpreted as bad news by the bond
market. In 1999, bonds declined for only the second time in the history of the
Lehman Aggregate Bond Index, which was created in 1974. Bond investors believe
that growth cannot continue without igniting inflation pressures. Interest rates
will move higher either as the Fed attempts to slow the economy or as inflation
makes investors demand a higher nominal return. There is little hard data
showing a significant increase in price levels, but many of the favorable
secular and cyclical forces dampening inflation in the late 1990's will be less
positive in 2000.
* Industrial commodity prices have stabilized after falling by one-third in
1997-98.
* Energy prices are up more than 80% from one year ago.
* Asian and European expansions are absorbing excess overseas capacity.
* The dollar has moved sideways after gaining 30% in the preceding three years.
* Unemployment is at a 30 year low with shortages in many skilled jobs.
* Consumer spending and confidence are at high levels.
* Equity markets have risen dramatically over the past decade, creating
significant wealth.
As a result, the Fed is on alert. During 1999, policy makers increased rates by
75 basis points in three moves. This really constituted a tapping on the
monetary brakes since it only reversed the 75 basis points of easing the Fed did
during the liquidity crisis of late 1998. Mindful of possible disruptions caused
by the Y2K issue, the Fed moved cautiously. However, Y2K has come and gone
without noticeable disruptions, at least by electronic gadgetry. The Fed is now
free to increase rates in an effort to slow the rate of growth in the U.S.
economy and ease pending inflationary pressures.
Higher interest rates will gradually slow the U.S. economy. The trick will be to
slow, not shrink it. Given Fed Chairman Greenspan's record, one hesitates to bet
against him. Higher interest rates will continue to plague the bond market.
Equities seem to have been able to shake off the stiffer competition from bonds.
However, the advance in the stock market averages has masked the fact that a few
large stocks had a disproportionate impact on the averages. The top 30 companies
in the S&P 500 accounted for all of the return of the index in 1999. As higher
interest rates gradually slow the U.S. economy, corporate profit growth will
come under increasing pressure. While mega-mergers and cost cutting will help
some overcome this pressure, many companies will experience shortfalls to profit
growth expectations. Equity investors have been merciless when earnings don't
match forecasts. Equity markets returns are unlikely to continue the pace of the
past few years.
2
<PAGE>
PORTFOLIO MANAGER'S REVIEW
--------------------------
IAI REGIONAL PORTFOLIO
IAI REGIONAL PORTFOLIO
FUND MANAGMENT
Julian P. "Bing"
Carlin, CFA
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Regional Portfolio gained 18.30% for the year ended December 31, 1999.
The S&P 500 Index gained 21.04% for the same time period.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE PORTFOLIO'S
PERFORMANCE?
The year 1999 was a stock market of "haves" and "have nots" as 60% of stocks
posted negative returns for the year. Telecommunications, the Internet, and
other areas of technology dominated the marketplace. The technology component of
the S&P 500 Index has now reached 30%, up from 12% just three years ago.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE PORTFOLIO? WERE THERE ANY
DISAPPOINTMENTS?
Recovery Engineering, the developer and manufacturer of water filtration
products sold under the PUR brand name, was one of our best performers for 1999
as the company was acquired by Procter & Gamble at nearly a 100% premium to its
current price. Intranet Solutions and ADC Telecommunications also produced
strong results. Companies with disappointing performance included General Mills,
Dean Foods, and McDonald's as the market continued to view the consumer sector
as "out-of-favor."
WERE THERE ANY SIGNIFICANT CHANGES?
We increased our technology weighting early in the fourth quarter by adding
Motorola, Great Plains Software, Tellabs, S 1 Corporation, and Digital Insight.
Although price momentum has been the "in thing," we maintain our balanced
approach for the Portfolio with sector representation in healthcare, capital
goods, and consumer staples in addition to our technology and telecommunication
weightings.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
With Y2K behind us, the Federal Reserve will have to drain excess reserves,
forcing interest rates to explore the 7%+ range. Volatility remains high and
valuations in some areas continue to look excessive. The key will be stock
selection this year as strong economic expansion and higher interest rates will
put additional pressure on the economy. The year 2000 will present an
interesting challenge, but we feel the numbers posted in the fourth quarter of
1999 give us a solid start for the next millennium.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Regional Portfolio
(Inception 01/31/94) S&P 500 Index*
-------------------- --------------
Jan-94 $ 10,000 $ 10,000
Feb-94 10,000 9,728
Mar-94 10,000 9,306
Apr-94 10,000 9,426
May-94 10,000 9,580
Jun-94 10,020 9,343
Jul-94 10,120 9,652
Aug-94 10,890 10,045
Sep-94 10,640 9,802
Oct-94 10,820 10,029
Nov-94 10,330 9,661
Dec-94 10,620 9,803
Jan-95 10,620 10,057
Feb-95 10,980 10,447
Mar-95 11,140 10,757
Apr-95 11,420 11,074
May-95 11,680 11,512
Jun-95 11,986 11,782
Jul-95 12,587 12,177
Aug-95 12,597 12,210
Sep-95 12,967 12,723
Oct-95 12,846 12,677
Nov-95 13,717 13,235
Dec-95 14,178 13,479
Jan-96 14,339 13,941
Feb-96 14,549 14,076
Mar-96 14,599 14,214
Apr-96 15,330 14,426
May-96 15,841 14,798
Jun-96 15,377 14,859
Jul-96 14,405 14,198
Aug-96 14,975 14,501
Sep-96 15,207 15,317
Oct-96 15,070 15,745
Nov-96 15,640 16,943
Dec-96 15,862 16,613
Jan-97 16,053 17,647
Feb-97 15,894 17,789
Mar-97 15,102 17,049
Apr-97 15,282 18,062
May-97 16,624 19,170
Jun-97 17,179 20,023
Jul-97 18,316 21,629
Aug-97 18,173 20,433
Sep-97 19,409 21,547
Oct-97 18,373 20,835
Nov-97 18,141 21,788
Dec-97 17,998 22,158
Jan-98 17,699 22,408
Feb-98 18,726 24,019
Mar-98 19,366 25,249
Apr-98 19,312 25,504
May-98 18,881 25,066
Jun-98 18,885 26,083
Jul-98 17,963 25,804
Aug-98 14,863 22,073
Sep-98 15,866 23,488
Oct-98 16,496 25,397
Nov-98 17,499 26,936
Dec-98 18,279 28,488
Jan-99 18,349 29,679
Feb-99 17,929 28,756
Mar-99 17,812 29,906
Apr-99 18,453 31,063
May-99 18,699 30,330
Jun-99 19,441 32,014
Jul-99 19,120 31,015
Aug-99 18,799 30,860
Sep-99 18,573 30,014
Oct-99 19,677 31,914
Nov-99 20,045 32,562
Dec-99 21,635 34,480
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/99
Since Inception
1 Year 5 Years 1/31/94
- --------------------------------------------------------------------------------
IAI REGIONAL PORTFOLIO 18.37% 15.29% 13.93%
- --------------------------------------------------------------------------------
S&P 500 Index 21.04% 28.55% 23.22%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
3
<PAGE>
PORTFOLIO MANAGER'S REVIEW
--------------------------
IAI BALANCED PORTFOLIO
IAI BALANCED PORTFOLIO
FUND MANAGEMENT
Larry R. Hill, CFA
Dave McDonald
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Balanced Portfolio increased 3.60% in 1999. This compares to a (2.l5)%
decline in the Lehman Government/ Corporate Bond Index and a 21.04% rise in the
S&P 500 Index.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE PORTFOLIO'S
PERFORMANCE?
The leadership in the equity market continued to narrow in 1999, making it
difficult for diversified portfolios to generate index beating returns. A
limited number of technology stocks generated huge returns which buoyed the
overall averages, offsetting the more than 50% of the stocks in the S&P 500 that
actually declined.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE PORTFOLIO? WERE THERE ANY
DISAPPOINTMENTS?
Technology holdings drove returns in 1999. Companies associated with wireless
communications and deployment of the Internet did particularly well. This list
includes Amdocs, Comverse Technology, Cisco Systems, Oracle, Nortel Networks,
and Sun Microsystems. On the flip side, Mattel and Philip Morris were the worst
performing stocks. Both suffered from deteriorating growth prospects and were
eliminated from the Portfolio.
WERE THEIR ANY SIGNIFICANT CHANGES?
The equity component of the Portfolio was restructured in the fall to improve
the quality and diversification of the Portfolio. Exposure to technology
holdings such as Microsoft and Cisco were increased, while exposure to
financials and consumer staples declined.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
We remain cautious on equities due to signs of escalating inflation and the
Federal Reserve Board's predisposition to further increase interest rates.
Individual stocks will require strong earnings growth and increased
profitability to outperform in such an environment. Overall, we envision equity
returns more consistent with historical norms of 10-11%.
The bond market lost money in 1999, producing the second calendar-year loss for
the market in the last 25 years. Bond investors were concerned about
persistently strong economic growth and early signs of accelerating inflation.
These fears were reflected in higher bond yields and lower bond prices. The
Federal Reserve responded to strong domestic demand by boosting interest rates,
a move that further raised investor apprehension. Bond strategy in the Fund
emphasized the corporate bond sector to improve yield and a shorter average
maturity to reduce interest rate risk. This strategy reflects our optimistic
outlook for the economy and cautious outlook for higher rates in the months
ahead.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Balanced Portfolio Lehman Government
(Inception 02/03/94) S&P 500 Index* Corporate Bond Index*
-------------------- -------------- ---------------------
Feb-94 $ 10,000 $ 10,000 $ 10,000
Feb-94 10,000 9,728 9,782
Mar-94 10,000 9,306 9,543
Apr-94 10,000 9,426 9,464
May-94 10,000 9,580 9,447
Jun-94 9,900 9,343 9,425
Jul-94 10,160 9,652 9,613
Aug-94 10,370 10,045 9,617
Sep-94 10,290 9,802 9,471
Oct-94 10,360 10,029 9,461
Nov-94 10,100 9,661 9,444
Dec-94 10,220 9,803 9,506
Jan-95 10,380 10,057 9,689
Feb-95 10,600 10,447 9,913
Mar-95 10,800 10,757 9,980
Apr-95 10,740 11,074 10,119
May-95 11,020 11,512 10,543
Jun-95 11,282 11,782 10,627
Jul-95 11,503 12,177 10,586
Aug-95 11,605 12,210 10,722
Sep-95 11,725 12,723 10,831
Oct-95 11,644 12,677 10,990
Nov-95 11,947 13,235 11,171
Dec-95 11,877 13,479 11,335
Jan-96 12,079 13,941 11,406
Feb-96 12,039 14,076 11,164
Mar-96 12,009 14,214 11,070
Apr-96 12,140 14,426 10,994
May-96 12,280 14,798 10,976
Jun-96 12,282 14,859 11,122
Jul-96 12,015 14,198 11,148
Aug-96 12,035 14,501 11,121
Sep-96 12,436 15,317 11,318
Oct-96 12,620 15,745 11,583
Nov-96 13,144 16,943 11,796
Dec-96 13,041 16,613 11,664
Jan-97 13,349 17,647 11,678
Feb-97 13,277 17,789 11,703
Mar-97 12,897 17,049 11,564
Apr-97 13,255 18,062 11,733
May-97 13,881 19,170 11,842
Jun-97 14,267 20,023 11,984
Jul-97 14,990 21,629 12,351
Aug-97 14,607 20,433 12,212
Sep-97 15,021 21,547 12,404
Oct-97 14,852 20,835 12,603
Nov-97 15,064 21,788 12,670
Dec-97 15,203 22,158 12,803
Jan-98 15,288 22,408 12,983
Feb-98 15,809 24,019 12,957
Mar-98 16,214 25,249 12,997
Apr-98 16,321 25,504 13,062
May-98 16,097 25,066 13,202
Jun-98 16,356 26,083 13,337
Jul-98 16,039 25,804 13,347
Aug-98 15,176 22,073 13,608
Sep-98 15,613 23,488 13,997
Oct-98 16,345 25,397 13,897
Nov-98 16,565 26,936 13,981
Dec-98 17,045 28,488 14,014
Jan-99 16,728 29,679 14,114
Feb-99 16,520 28,756 13,778
Mar-99 16,586 29,906 13,847
Apr-99 17,275 31,063 13,881
May-99 17,121 30,330 13,738
Jun-99 17,496 32,014 13,696
Jul-99 17,253 31,015 13,658
Aug-99 16,985 30,860 13,647
Sep-99 16,661 30,014 13,769
Oct-99 16,836 31,914 13,805
Nov-99 17,184 32,562 13,797
Dec-99 17,706 34,480 13,713
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/99
Since Inception
1 Year 5 Years 2/03/94
- --------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO 3.87% 11.62% 10.15%
- --------------------------------------------------------------------------------
S&P 500 Index 21.04% 28.55% 23.22%*
- --------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index (2.15)% 7.61% 5.48%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/01/94
4
<PAGE>
PORTFOLIO MANAGER'S REVIEW
--------------------------
IAI RESERVE PORTFOLIO
IAI RESERVE PORTFOLIO
FUND MANAGEMENT
Larry R. Hill, CFA
HOW HAS THE PORTFOLIO PERFORMED?
The IAI Reserve Portfolio earned a return of 1.86% for the year ended December
31, 1999. This compares to the Salomon Brothers One Year Treasury Bill Index
which had a return of 4.04%
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE PORTFOLIO'S
PERFORMANCE?
The final year of the 1900's was very difficult for bond investors. Interest
rates moved higher in 10 of the 12 months as strong economic growth and tight
labor markets produced concerns about accelerating inflation. The Federal
Reserve raised short-term rates three times during the year. Each increase was
25 basis points.
WERE THERE ANY SIGNIFICANT CHANGES IN THE PORTFOLIO?
During the second half of 1999, the interest rate sensitivity of the Portfolio
was reduced as continued strong economic growth led to expectations that
interest rates would continue to move higher. To maintain yield, the sector
allocation of the Portfolio moved toward Agencies from U.S. Treasuries.
WHAT IS YOUR OUTLOOK FOR THE PORTFOLIO?
The U.S. economy continues to provide strong growth with modest inflation.
However, fears of accelerating inflation and expectations of Fed rate increases
have the market on the defensive. The Federal Reserve will raise rates early in
2000 in an effort to slow economic activity and reduce potential inflation.
Given the lag between policy action and impact on the economy, above-average
growth will continue in early 2000 and inflation will remain modest. However,
many of the positives that helped control inflation in the late 1990's have been
reduced or eliminated: commodity prices have stopped falling, energy prices
reversed direction and have risen dramatically, the dollar has leveled off
following significant gains, foreign economies have started to grow more rapidly
and labor markets have continued to tighten. These changes heighten the concern
about future inflation.
The Portfolio, with its high quality, short maturity mandate, should perform
well in what will be a difficult environment for bonds.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Reserve Portfolio Salomon Brothers One
(Inception 04/07/94) Year Treasury Bill Index*
-------------------- -------------------------
Feb-94 10,000 10,000
Apr-94 $ 10,000 $ 10,000
Apr-94 10,000 9,991
May-94 10,012 10,011
Jun-94 10,044 10,046
Jul-94 10,074 10,109
Aug-94 10,101 10,144
Sep-94 10,137 10,160
Oct-94 10,161 10,202
Nov-94 10,197 10,195
Dec-94 10,225 10,232
Jan-95 10,271 10,335
Feb-95 10,317 10,426
Mar-95 10,363 10,488
Apr-95 10,409 10,560
May-95 10,454 10,654
Jun-95 10,496 10,716
Jul-95 10,537 10,769
Aug-95 10,578 10,821
Sep-95 10,616 10,869
Oct-95 10,665 10,930
Nov-95 10,707 10,995
Dec-95 10,746 11,060
Jan-96 10,794 11,131
Feb-96 10,837 11,144
Mar-96 10,870 11,180
Apr-96 10,901 11,218
May-96 10,950 11,264
Jun-96 10,983 11,326
Jul-96 11,032 11,369
Aug-96 11,071 11,424
Sep-96 11,112 11,500
Oct-96 11,184 11,588
Nov-96 11,233 11,647
Dec-96 11,277 11,686
Jan-97 11,316 11,745
Feb-97 11,350 11,787
Mar-97 11,388 11,819
Apr-97 11,428 11,891
May-97 11,479 11,966
Jun-97 11,516 12,036
Jul-97 11,573 12,123
Aug-97 11,608 12,166
Sep-97 11,663 12,231
Oct-97 11,709 12,300
Nov-97 11,748 12,342
Dec-97 11,798 12,400
Jan-98 11,846 12,481
Feb-98 11,881 12,515
Mar-98 11,923 12,578
Apr-98 11,970 12,636
May-98 12,015 12,691
Jun-98 12,054 12,752
Jul-98 12,095 12,815
Aug-98 12,216 12,917
Sep-98 12,320 13,019
Oct-98 12,375 13,088
Nov-98 12,388 13,089
Dec-98 12,444 13,130
Jan-99 12,481 13,180
Feb-99 12,456 13,194
Mar-99 12,531 13,276
Apr-99 12,556 13,325
May-99 12,531 13,363
Jun-99 12,562 13,425
Jul-99 12,562 13,485
Aug-99 12,562 13,525
Sep-99 12,612 13,594
Oct-99 12,663 13,629
Nov-99 12,688 13,629
Dec-99 12,850 13,661
AVERAGE ANNUAL RETURNS+
THROUGH 12/31/99
Since Inception
1 Year 5 Years 4/07/94
- --------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO 2.89% 4.60% 4.40%
- --------------------------------------------------------------------------------
Salomon Brothers One Year
Treasury Bill Index 4.04% 5.95% 5.58%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/94
5
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 87.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 6.6%
Anheuser-Busch Companies 4,500 $ 318,937
Dean Foods 7,800 310,050
General Mills 7,000 250,250
---------------
879,237
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 12.0%
Gannett Co. 4,300 350,719
McDonald's 7,000 282,188
McGraw-Hill Companies 4,500 277,312
Time Warner 5,000 362,188
United States Cellular (b) 3,300 333,094
---------------
1,605,501
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 12.7%
ADC Telecommunications (b) 7,000 507,937
Lucent Technologies 4,700 351,619
Motorola 3,400 500,650
Tellabs (b) 5,400 346,613
---------------
1,706,819
- --------------------------------------------------------------------------------
ENERGY MINERALS - 2.5%
Exxon Mobil 4,200 338,362
- --------------------------------------------------------------------------------
FINANCIAL - 7.4%
Household International 7,000 260,750
MGIC Investment 5,500 331,031
Standard & Poor's Depositary Receipts (SPDR TRUST) 2,700 396,563
---------------
988,344
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 7.1%
Baxter International 5,000 314,062
Diametrics Medical (b) 39,800 340,787
Medtronic 8,000 291,500
---------------
946,349
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 1.7%
AptarGroup 9,000 226,125
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 11.4%
Corning 3,300 425,494
General Electric 2,100 324,975
Minnesota Mining and Manufacturing 4,000 391,500
Pentair 10,000 385,000
---------------
1,526,969
- --------------------------------------------------------------------------------
RETAIL TRADE - 3.9%
Dayton Hudson 3,800 279,063
Lands' End (b) 2,600 90,350
Walgreen 5,300 155,025
---------------
524,438
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 12.3%
DST Systems (b) 5,700 $ 434,981
Diamond Technology Partners (b) 2,900 249,219
Digital Insight (b) 4,200 152,775
Great Plains Software (b) 5,000 373,750
IntraNet Solutions (b) 5,400 199,800
S1 (b) 3,100 242,188
---------------
1,652,713
- --------------------------------------------------------------------------------
TRANSPORTATION - 4.4%
C.H. Robinson Worldwide 6,900 274,275
United Parcel Service Class B 4,500 310,500
---------------
584,775
- --------------------------------------------------------------------------------
UTILITIES - 5.1%
MCI WorldCom (b) 6,600 350,212
Telephone and Data Systems 2,700 340,200
---------------
690,412
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $9,952,378)............................................. $ 11,670,044
================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
6
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI REGIONAL PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
Principal Market
Maturity Rate Amount/Shares Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM SECURITIES - 12.9%
DEMAND NOTES - 8.3% (d)
General Mills (CONSUMER NON-DURABLES) 12/31/31 6.10 % $ 460,640 $ 460,640
Pitney Bowes (COMMERCIAL SERVICES) 12/31/31 6.10 438,661 438,661
Warner Lambert (HEALTH TECHNOLOGY) 12/31/31 6.04 213,167 213,167
---------------
1,112,468
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 4.6%
Firstar Institutional
Money Market Fund 5.52 474,441 474,441
Firstar U.S. Government
Money Market Fund 4.61 148,170 148,170
---------------
622,611
===============================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,735,079) ........................................................................... $ 1,735,079
===============================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $11,687,457) (e)....................................................................... $ 13,405,123
===============================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 0.0%
.............................................................................................. $ (23)
===============================================================================================================
TOTAL NET ASSETS
.............................................................................................. $ 13,405,100
===============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
7
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 52.6%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 3.0%
Amdocs (b) 655 $ 22,598
Cendant (b) 2,600 69,062
Ecolab 555 21,714
---------------
113,374
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.6%
Coca-Cola 340 19,805
Colgate-Palmolive 315 20,475
Dial 885 21,517
PepsiCo 530 18,683
Procter & Gamble 165 18,078
---------------
98,558
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 1.3%
Clear Channel Communications (b) 250 22,312
McDonald's 340 13,706
Time Warner 190 13,763
---------------
49,781
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 8.2%
Analog Devices (b) 290 26,970
Cisco Systems (b) 430 46,064
Comverse Technology (b) 165 23,884
EMC (b) 265 28,951
Flextronics International (b) 960 44,160
Intel 630 51,857
Lucent Technologies 505 37,780
Nortel Networks 315 31,815
Tellabs (b) 315 20,219
---------------
311,700
- --------------------------------------------------------------------------------
ENERGY MINERALS - 3.1%
Chevron 190 16,459
Exxon Mobil 630 50,754
Halliburton 480 19,320
Schlumberger 315 17,719
Texaco 215 11,677
Transocean Sedco Forex 60 2,021
---------------
117,950
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 5.0%
American Express 125 $ 20,781
American International Group 215 23,247
Bank of America 440 22,082
Charles Schwab 640 24,560
Chase Manhattan 190 14,761
Citigroup 655 36,393
Freddie Mac 240 11,295
Mellon Financial 480 16,350
Wells Fargo 570 23,049
---------------
192,518
- --------------------------------------------------------------------------------
HEALTH SERVICES - 1.7%
Cardinal Health 630 30,161
Patterson Dental (b) 820 34,953
---------------
65,114
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 5.7%
Bristol-Myers Squibb 415 26,638
Johnson & Johnson 365 33,991
Medtronic 1,935 70,507
Merck & Co. 290 19,448
Pfizer 580 18,814
Schering-Plough 555 23,414
Warner-Lambert 290 23,762
---------------
216,574
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 0.4%
E. I. du Pont de Nemours 240 15,810
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 2.8%
General Electric 475 73,506
Tyco International 845 32,849
---------------
106,355
- --------------------------------------------------------------------------------
RETAIL TRADE - 4.4%
Abercrombie & Fitch (b) 995 26,554
Costco Wholesale (b) 250 22,812
CVS 430 17,173
Dollar General 730 16,608
Home Depot 472 32,362
Wal-Mart Stores 480 33,180
Walgreen 725 21,206
---------------
169,895
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
8
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 9.8%
America Online (b) 595 $ 44,885
Citrix Systems (b) 165 20,295
Electronic Arts (b) 1,030 86,520
Microsoft (b) 820 95,735
Oracle (b) 505 56,592
Sun Microsystems (b) 365 28,265
Synopsys (b) 605 40,384
---------------
372,676
- --------------------------------------------------------------------------------
UTILITIES - 4.6%
AT&T 592 30,044
Bell Atlantic 580 35,706
BellSouth 605 28,321
Enron 580 25,738
MCI WorldCom (b) 585 31,042
SBC Communications 530 25,838
---------------
176,689
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $1,766,117) ........................................... $ 2,006,994
================================================================================
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
9
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI BALANCED PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 32.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 13.0%
6.13 % 09/30/00 $ 25,000 $ 25,023
5.38 02/15/01 50,000 49,594
8.00 05/15/01 25,000 25,570
7.50 11/15/01 50,000 51,094
6.25 01/31/02 75,000 75,000
7.50 05/15/02 70,000 71,859
5.63 12/31/02 75,000 73,570
6.25 02/15/03 75,000 74,766
7.00 07/15/06 50,000 51,219
---------------
497,695
- ---------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 5.0%
12.00 05/15/05 40,000 49,738
6.00 08/15/09 50,000 48,438
6.75 08/15/26 25,000 25,109
6.13 08/15/29 70,000 66,741
---------------
190,026
- ---------------------------------------------------------------------------------------------------------------
U.S. TREASURY STRIPS - 3.0%
U.S. Treasury STRIP (ZERO COUPON) 6.84 (c) 11/15/10 50,000 24,077
U.S. Treasury STRIP (ZERO COUPON) 6.90 (c) 11/15/18 325,000 90,382
---------------
114,459
- ---------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.9%
Fannie Mae 5.63 03/15/01 25,000 24,760
Fannie Mae 6.40 05/14/09 50,000 46,755
Fannie Mae 6.21 08/06/38 35,000 30,122
Federal Farm Credit Bank 5.57 03/23/01 110,000 108,889
Freddie Mac 6.25 10/15/02 50,000 49,483
Inter - American Development Bank 5.63 04/16/09 215,000 193,294
--------------
453,303
===============================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $1,321,261) ........................................................................... $ 1,255,483
===============================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 13.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount/Shares Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEMAND NOTES - 10.1% (d)
Pitney Bowes (COMMERCIAL SERVICES) 6.10 % 12/31/31 $ 133,891 $ 133,891
Sara Lee (CONSUMER NON-DURABLES) 6.09 12/31/31 85,016 85,016
Warner Lambert (HEALTH TECHNOLOGY) 6.04 12/31/31 139,461 139,461
Wisconsin Electric (UTILITIES) 6.04 12/31/31 26,249 26,249
--------------
384,617
- ---------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 3.7%
Firstar Institutional Money Market 5.52 143,290 143,290
===============================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $527,907) ............................................................................. $ 527,907
===============================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $3,615,285) (e) ........................................................................ $ 3,790,384
===============================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 0.7%
............................................................................................... $ 24,936
===============================================================================================================
TOTAL NET ASSETS
............................................................................................... $ 3,815,320
===============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
10
<PAGE>
================================================================================
SCHEDULE OF INVESTMENTS
================================================================================
IAI RESERVE PORTFOLIO
DECEMBER 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 81.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 15.6%
6.38 % 08/15/02 $ 100,000 $ 100,187
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 66.2%
Fannie Mae 5.63 03/15/01 90,000 89,137
Federal Farm Credit Bank 5.13 04/02/01 75,000 73,785
Federal Home Loan Bank 5.13 04/17/01 140,000 137,747
Freddie Mac 6.00 07/20/01 125,000 123,866
--------------
424,535
=================================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $531,150) ............................................................................................... $ 524,722
=================================================================================================================================
</TABLE>
SHORT-TERM SECURITIES - 16.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount/Shares Value (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEMAND NOTES - 12.9% (d)
General Mills (CONSUMER NON-DURABLES) 6.10 % 12/31/31 $ 21,380 $ 21,380
Pitney Bowes (COMMERCIAL SERVICES) 6.10 12/31/31 25,455 25,455
Sara Lee (CONSUMER NON-DURABLES) 6.09 12/31/31 10,668 10,668
Wisconsin Electric (UTILITIES) 6.04 12/31/31 25,500 25,500
--------------
83,003
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 4.0%
Firstar Institutional Money Market 5.52 25,562 25,562
=================================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $108,565) ............................................................................................... $ 108,565
=================================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $639,715) (e) ........................................................................................... $ 633,287
=================================================================================================================================
OTHER ASSETS & LIABILITIES (NET) - 1.3%
................................................................................................................ $ 8,629
=================================================================================================================================
TOTAL NET ASSETS
................................................................................................................ $ 641,916
=================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS ON PAGE 12
11
<PAGE>
================================================================================
NOTES TO SCHEDULES OF INVESTMENTS
================================================================================
IAI RETIREMENT FUNDS, INC.
DECEMBER 31, 1999
(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)
This security pays no coupon interest and the principal amount is paid at
maturity. Interest rate shown represents yield-to-maturity at date of purchase.
(d)
Variable rate demand notes are considered short-term obligations and are payable
on demand. Interest rates change periodically on specified dates. The rates
listed are as of December 31, 1999.
(e)
At December 31, 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 $ 11,687,912 $ 3,618,915 $ 639,715
======================================================
Gross unrealized appreciation $ 1,948,990 $ 282,582 $ --
Gross unrealized depreciation (231,779) (111,113) (6,428)
------------------------------------------------------
Net unrealized appreciation (depreciation) $ 1,717,211 $ 171,469 $ (6,428)
======================================================
- --------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
================================================================================
STATEMENTS OF ASSETS AND LIABILITIES
================================================================================
IAI RETIREMENT FUNDS, INC.
DECEMBER 31, 1999
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $11,687,457; $3,615,285; and $639,715, respectively) $ 13,405,123 $ 3,790,384 $ 633,287
Cash -- 4,607 --
Dividends and accrued interest receivable 14,023 21,590 10,483
Receivable from Advisers -- 3,230 2,527
---------------------------------------------------
TOTAL ASSETS 13,419,146 3,819,811 646,297
---------------------------------------------------
LIABILITIES
Payable to Advisers 3,780 -- --
Accrued other expenses 10,266 4,491 4,381
---------------------------------------------------
TOTAL LIABILITIES 14,046 4,491 4,381
---------------------------------------------------
NET ASSETS $ 13,405,100 $ 3,815,320 $ 641,916
===================================================
REPRESENTED BY:
Paid in capital $ 9,897,444 $ 3,268,058 $ 640,066
Undistributed net investment income 40,319 97,747 8,297
Accumulated net realized gains (losses) on investments 1,749,671 274,416 (19)
Unrealized appreciation (depreciation) on investments 1,717,666 175,099 (6,428)
---------------------------------------------------
NET ASSETS $ 13,405,100 $ 3,815,320 $ 641,916
===================================================
Shares of common stock outstanding; authorized 10 billion
shares of $.01 par value stock 735,263 250,209 64,276
---------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 18.23 $ 15.25 $ 9.99
===================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
13
<PAGE>
================================================================================
STATEMENTS OF OPERATIONS
================================================================================
IAI RETIREMENT FUNDS, INC.
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
IAI REGIONAL IAI BALANCED IAI RESERVE
PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Income:
Interest $ 71,914 $ 108,921 $ 36,532
Dividends 88,381 23,801 --
----------------------------------------------------
TOTAL INCOME 160,295 132,722 36,532
----------------------------------------------------
Expenses:
Investment advisory fees 88,726 23,539 3,086
Dividend-disbursing, administrative, and accounting fees 13,651 3,622 686
Custodian fees 4,310 4,040 2,820
Amortization of organization costs 232 252 656
Compensation of Directors 5,386 1,603 755
Professional fees 6,135 2,400 2,851
Printing and shareholder reporting 413 92 300
Other expenses 1,200 291 246
----------------------------------------------------
TOTAL EXPENSES 120,053 35,839 11,400
Less fees reimbursed or waived by Advisers -- (793) (4,474)
----------------------------------------------------
NET EXPENSES 120,053 35,046 6,926
----------------------------------------------------
NET INVESTMENT INCOME 40,242 97,676 29,606
----------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investments 1,750,580 276,158 (19)
Net change in unrealized appreciation or depreciation on
investment securities 386,266 (233,992) (10,649)
----------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS 2,136,846 42,166 (10,668)
----------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,177,088 $ 139,842 $ 18,938
====================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
14
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 40,242 $ 84,359
Net realized gains 1,750,580 181,596
Net change in unrealized appreciation or depreciation 386,266 (182,218)
----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,177,088 83,737
----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (85,157) (96,518)
Net realized gains (156,639) (855,271)
----------------------------------------
TOTAL DISTRIBUTIONS (241,796) (951,789)
----------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 26,934 and 140,405 shares 434,657 2,232,464
Net asset value of 15,188 and 59,974 shares issued
in reinvestment of distributions 241,796 951,789
Cost of 310,547 and 244,008 shares redeemed (4,944,742) (3,662,920)
----------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (4,268,289) (478,667)
----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (2,332,997) (1,346,719)
NET ASSETS AT BEGINNING OF PERIOD 15,738,097 17,084,816
----------------------------------------
NET ASSETS AT END OF PERIOD $ 13,405,100 $ 15,738,097
========================================
Including undistributed net investment income of: $ 40,319 $ 85,155
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
15
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 97,676 $ 80,733
Net realized gains 276,158 130,571
Net change in unrealized appreciation or depreciation (233,992) 123,211
----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 139,842 334,515
----------------------------------------
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 66,993 and 87,724 shares 1,017,054 1,302,795
Net asset value of 14,403 and 5,480 shares issued
in reinvestment of distributions 212,154 81,921
Cost of 56,153 and 39,325 shares redeemed (850,999) (573,542)
----------------------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 378,209 811,174
----------------------------------------
TOTAL INCREASE IN NET ASSETS 305,897 1,063,768
NET ASSETS AT BEGINNING OF PERIOD 3,509,423 2,445,655
----------------------------------------
NET ASSETS AT END OF PERIOD $ 3,815,320 $ 3,509,423
========================================
Including undistributed net investment income of: $ 97,747 $ 81,577
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
16
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 29,606 $ 36,017
Net realized gains (losses) (19) 1,194
Net change in unrealized appreciation or depreciation (10,649) 3,871
----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 18,938 41,082
----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (24,455) (35,813)
Net realized gains (1,262) --
----------------------------------------
TOTAL DISTRIBUTIONS (25,717) (35,813)
----------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 28,001 and 19,622 shares 280,059 196,760
Net asset value of 2,580 and 3,579 shares issued
in reinvestment of distributions 25,717 35,813
Cost of 29,249 and 62,431 shares redeemed (291,357) (624,881)
----------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 14,419 (392,308)
----------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 7,640 (387,039)
NET ASSETS AT BEGINNING OF PERIOD 634,276 1,021,315
----------------------------------------
NET ASSETS AT END OF PERIOD $ 641,916 $ 634,276
========================================
Including undistributed net investment income of: $ 8,297 $ 2,992
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
17
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI REGIONAL PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.68 $ 16.31 $ 15.02 $ 14.16 $ 10.62
----------------------------------------------------------------------
OPERATIONS
Net investment income 0.05 *** 0.08 0.08 0.05 0.06
Net realized and unrealized gains 2.79 0.18 1.90 1.60 3.50
----------------------------------------------------------------------
TOTAL FROM OPERATIONS 2.84 0.26 1.98 1.65 3.56
----------------------------------------------------------------------
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 $ 18.23 $ 15.68 $ 16.31 $ 15.02 $ 14.16
======================================================================
Total investment return* 18.37% 1.56% 13.45% 11.88% 33.51%
Net assets at end of period (000's omitted) $ 13,405 $ 15,738 $ 17,085 $ 11,831 $ 5,105
RATIOS:
Expenses to average daily net assets** 0.88% 0.94% 0.90% 1.03% 1.37%
Net investment income to average daily net assets** 0.29% 0.50% 0.65% 0.77% 1.12%
Portfolio turnover rate (excluding short-term securities) 123.4% 74.3% 62.1% 78.4% 156.0%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** THE PORTFOLIO'S ADVISER VOLUNTARILY WAIVED $6,737 IN EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 1995. IF THE PORTFOLIO HAD BEEN CHARGED THESE EXPENSES,
THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 1.64% AND
THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE
BEEN 0.85%.
*** NET INVESTMENT INCOME PER SHARE REPRESENTS NET INVESTMENT INCOME DIVIDED BY
THE AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
18
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI BALANCED PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $15.60 $14.29 $12.71 $11.78 $10.22
------------------------------------------------------------
OPERATIONS
Net investment income 0.41 *** 0.31 0.27 0.22 0.09
Net realized and unrealized gains 0.16 1.40 1.81 0.92 1.56
------------------------------------------------------------
TOTAL FROM OPERATIONS 0.57 1.71 2.08 1.14 1.65
------------------------------------------------------------
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 $15.25 $15.60 $14.29 $12.71 $11.78
============================================================
Total investment return* 3.87% 12.11% 16.60% 9.80% 16.21%
Net assets at end of period (000's omitted) $3,815 $3,509 $2,446 $1,534 $ 764
RATIOS:
Expenses to average daily net assets** 0.97% 1.02% 1.25% 1.25% 1.70%
Net investment income to average daily net assets** 2.70% 2.69% 2.63% 2.84% 2.34%
Portfolio turnover rate (excluding short-term securities) 126.1% 40.9% 38.8% 67.4% 56.0%
</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 $793, $10,627, $1,753, $8,031,
AND $13,428 IN EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997,
1996, AND 1995, RESPECTIVELY. IF THE PORTFOLIO HAD BEEN CHARGED THESE
EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
0.99%, 1.37%, 1.34%, 1.96% AND 5.29%, RESPECTIVELY, AND THE RATIO OF NET
INVESTMENT INCOME (LOSS) TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 2.68%,
2.34%, 2.54%, 2.13%, AND (1.25%), RESPECTIVELY.
*** NET INVESTMENT INCOME PER SHARE REPRESENTS NET INVESTMENT INCOME DIVIDED BY
THE AVERAGE SHARES OUTSTANDING THROUGHOUT THE YEAR.
19
<PAGE>
================================================================================
FINANCIAL HIGHLIGHTS
================================================================================
IAI RETIREMENT FUNDS, INC.
IAI RESERVE PORTFOLIO
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $10.08 $10.00 $10.03 $10.05 $10.03
------------------------------------------------------------------
OPERATIONS
Net investment income 0.44 0.47 0.43 0.49 0.48
Net realized and unrealized gains (losses) (0.16) 0.06 0.02 (0.01) 0.02
------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.28 0.53 0.45 0.48 0.50
------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.35) (0.45) (0.46) (0.50) (0.48)
Net realized gains (0.02) -- (0.02) -- --
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.37) (0.45) (0.48) (0.50) (0.48)
------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.99 $10.08 $10.00 $10.03 $10.05
==================================================================
Total investment return* 2.89% 5.46% 4.62% 4.93% 5.09%
Net assets at end of period (000's omitted) $ 642 $ 634 $1,021 $ 528 $ 844
RATIOS:
Expenses to average daily net assets** 1.01% 0.68% 0.85% 0.85% 1.03%
Net investment income to average daily net assets** 4.32% 4.57% 4.57% 4.54% 4.84%
Portfolio turnover rate (excluding short-term securities) 120.9% 129.0% 0.0% 185.3% 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
AND $11,528 IN EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997,
1996, AND 1995, RESPECTIVELY. IF THE PORTFOLIO HAD BEEN CHARGED THESE
EXPENSES, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
1.66%, 1.69%, 2.25%, 1.81% AND 2.62%, RESPECTIVELY, AND THE RATIO OF NET
INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 3.66%, 3.56%,
3.17%, 3.58% AND 3.25%, RESPECTIVELY.
20
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
================================================================================
IAI RETIREMENT FUNDS INC.
DECEMBER 31, 1999
[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. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount.
FEDERAL TAXES
Since it is each Portfolio's policy to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all taxable income to shareholders, no provision for income taxes is
required.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year for net investment
income or net realized gains may also differ from its ultimate characterization
for tax purposes.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased, resulting
in reclassification adjustments to paid-in-capital as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
IAI Regional IAI Balanced IAI Reserve
Portfolio Portfolio Portfolio
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income $ 79 $ 86 $ 154
Accumulated net realized gains (losses) on investments $ -- $ -- $ 71
Paid-in-capital $ (79) $ (86) $ (225)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Portfolios record security transactions on trade date, the date the
securities are purchased or sold. Dividend income is recorded on the ex-dividend
date. Interest income, including level yield amortization of discount, is
accrued daily. Security gains and losses are determined on the basis of
identified cost, which is the same basis used for federal income tax purposes.
21
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
================================================================================
IAI RETIREMENT FUNDS INC.
DECEMBER 31, 1999
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.
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 an available
line of credit of $25,000,000 with Firstar Bank, N.A at the prime interest rate
less 2%. To the extent funds are drawn against the line, securities are
segregated by the Portfolios. No compensating balances are required under the
line of credit, however, a commitment fee of .10% per annum on the commitment
amount of the line is payable quarterly in arrears. Advisers has agreed to pay
the commitment fee on behalf of the Portfolios. During the year ended December
31, 1999, the Portfolios did not access the line of credit.
[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 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.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1999, purchases of securities and sales
proceeds, other than investments in short-term securities for the Portfolios,
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PURCHASES PURCHASES SALES SALES
U.S. GOVERNMENT OTHER U.S. GOVERNMENT OTHER
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IAI REGIONAL PORTFOLIO $ -- $15,053,019 $ -- $19,939,337
IAI BALANCED PORTFOLIO $ 1,126,824 $ 3,274,858 $ 1,101,405 $ 2,927,882
IAI RESERVE PORTFOLIO $ 854,552 $ -- $ 614,428 $ --
- ------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
================================================================================
INDEPENDENT AUDITORS' REPORT
================================================================================
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, 1999, 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 each of the years in
the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the funds' 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. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian. 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 as of
December 31, 1999, and the results of their operations for the year then ended,
the changes in their net assets for each of the years in the two-year period
then ended and their financial highlights for each of the years in the five-year
period then ended, in conformity with generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
February 18, 2000
23
<PAGE>
================================================================================
FEDERAL TAX INFORMATION
================================================================================
IAI RETIREMENT FUNDS, INC.
(UNAUDITED)
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.
IAI REGIONAL PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- --------------------------------------------------------------------------------
JUNE 1999 $ 0.1015 $ 0.1867
100% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- --------------------------------------------------------------------------------
IAI BALANCED PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- --------------------------------------------------------------------------------
JUNE 1999 $ 0.4032 $ 0.5183
17.2% OF ORDINARY INCOME DISTRIBUTIONS QUALIFY FOR DEDUCTIONS BY CORPORATIONS.
- --------------------------------------------------------------------------------
IAI RESERVE PORTFOLIO
- --------------------------------------------------------------------------------
Payable Date Ordinary Income (A)
- --------------------------------------------------------------------------------
JANUARY 1999 $ 0.0300
FEBRUARY 1999 0.0300
MARCH 1999 0.0500
APRIL 1999 0.0500
MAY 1999 0.0300
JUNE 1999 0.0445
JULY 1999 0.0200
AUGUST 1999 0.0200
SEPTEMBER 1999 0.0200
OCTOBER 1999 0.0300
NOVEMBER 1999 0.0300
DECEMBER 1999 0.0200
- --------------------------------------------------------------------------------
$ 0.3745
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
24
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2600
CUSTODIAN
Firstar Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
DISTRIBUTOR
Rafferty Capital Markets, Inc.
1311 Mamaroneck Avenue
White Plains, NY 10605
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG 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
