<PAGE>
BALANCED FUND
ANNUAL REPORT
IAI Balanced Fund
March 31, 1995
[LOGO]
Mutual Funds
<PAGE>
[MAP]
<PAGE>
TABLE OF CONTENTS
-----------------
IAI Balanced Fund
Annual Report
March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter.................................2
Fund Managers' Review.............................4
Fund Portfolio....................................7
Notes to Fund Portfolio..........................11
Statement of Assets and Liabilities..............12
Statement of Operations..........................13
Statements of Changes in Net Assets..............14
Financial Highlights.............................15
Notes to Financial Statements....................16
Independent Auditors' Report.....................21
Federal Tax Information..........................22
IAI Mutual Fund Family...........................23
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors.........................Inside Back Cover
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Balanced Fund
Sticking to Basics
[PHOTO APPEARS HERE]
NOEL P. RAHN,
Chairman
No matter what the economy or the markets do, we will still need funds to
achieve our financial objectives. That is why it is important to stick with the
basic techniques that have helped long-term investors reach their goals for
decades.
As a long-time investor, I have found four investment fundamentals to be
important keys to building financial security.
1. Create your own investment game plan.
The first, and most important key, is to plan for your specific financial
requirements. You may be investing for different financial goals. It is
important that you know your own situation and how much money you will need to
achieve your objectives. Then, you can prioritize your goals and determine how
to invest to achieve them.
You will probably find that most of your goals are longer-term goals. This fact
is important because it means you have the potential to earn higher returns.
Long-term investment strategies are the most appropriate for long-term goals.
2. Diversify.
Diversification can reduce your risk. Owning shares in several companies makes
you less dependent on just a few to achieve your hopes and dreams. A good way to
gain instant diversification is to invest through mutual funds which usually
hold shares in dozens to hundreds of different companies.
You can also reduce your risk by owning mutual funds with different investment
objectives. That way changing economic conditions which may impact one part of
your portfolio may benefit other parts.
3. Pay attention to the financial media only in proportion to the time frame
they are covering.
Sometimes it is easy to get caught up in the exciting, but transitory, stories
of our time. The fact is, investors who have invested in good businesses have
been well rewarded over the long term, even following periods of war or economic
depression.
4. Buy bargains.
It seems we want our investments to only go up, but sometimes prices can
decline. These discounts may be temporary or extend for a few years, but as long
as you still have several years before you will need your money, market
discounts can be good opportunities to increase your ownership in operating
businesses at bargain prices.
You can achieve a lot using your own common sense. It is our goal, as
professional investment managers, to help take you the rest of the way--to
financial security.
2
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Balanced Fund
Economic Outlook
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
While the Federal Reserve Board has recently taken a "wait and see" attitude, it
is not likely to ease interest rates in the next six months. The trend of rising
interest rates and the prospect for further increases are still a negative part
of our economic outlook. While we see no reason to expect a recession this year,
our conclusion is that the economy will slow modestly but remain at an above-
average rate of growth. Growth in U.S. GDP (Gross Domestic Product) will run at
about 3%-3.5% after ending last year at a 5.1% pace.
We anticipate a few inflationary scares in the monthly reports during the second
half of the year. With the Producer Price Index (PPI) in an uptrend and the
Consumer Price Index (CPI) relatively flat, we could experience some monthly
increases of from 0.4% to 0.6% in the CPI. And, even though there are some
favorable secular trends on inflation, and labor costs are still very low for
this part of the cycle, inflation for the year will likely reach 4% compared
with last year's rate of just 2.7%.
In the current economic environment, investment strategy favors conservative and
well diversified portfolios. The rest of the year could be volatile and
frustrating for both stock and bond investors. Financial market strength in the
first quarter has led some to conclude that the worst part of the market cycle
is over. We are more cautious. Our projected returns of 5-10% for stocks in
general in 1995, and 5-7% for bonds and money market funds have already been
achieved. The greatest risk for the period comes from an inflation scare and a
move toward higher interest rates.
Please read the Fund Managers' Reviews which follow this letter for a detailed
perspective on the Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
3
<PAGE>
IAI Balanced Fund
[PHOTO]
David A. McDonald
IAI Balanced Fund Co-Manager
[PHOTO]
John A. Twele, CFA
IAI Balanced Fund Co-Manager
[PHOTO]
Mark L. Simenstad, CFA
IAI Balanced Fund Co-Manager
Fund Objective
IAI Balanced Fund's objective is to deliver maximum total return. This is
pursued by investing in a broadly diversified portfolio consisting primarily of
stocks, bonds, and short-term instruments. We may also invest in other
securities. As the market outlook changes, the Fund's asset allocation is
shifted gradually.
Fund Positioning For the Past Year
IAI Balanced Fund trended higher during the fiscal year ended March 31, 1995,
earning a total return of 9.44%.
We have also taken a conservative position in the bond portion of the portfolio
due to concerns about interest rate increases. The recent duration of the Fund's
fixed-income assets was 3.5 years compared with a duration of 4.9 years in the
broad bond market.
The stock portion of the portfolio has traded out of cyclical stocks and into
established growth stocks which show continuing strong earnings. We have avoided
large positions in financial stocks, housing, and utilities, which are most
vulnerable to interest rate increases. The Fund has benefited as investors
psychology has now shifted to favor growth stocks.
Capitalizing on global markets, which are growing faster than the U.S. market,
we have increased our positions in large U.S.-based multi-national companies
like Colgate-Palmolive and Motorola.
In technology, the fastest growing market segment has become home personal
computers where Americans spent more for computer hardware and software last
year than they did for televisions for the first time in history. Some of our
holdings which have benefited from this new trend include component and computer
manufactures such as Intel and Compaq Computer, software publishers such as
Microsoft, and retailers like Best Buy.
We are also overweighted in telecommunications, particularly in wireless
communications, with holdings in Airtouch Communications, the world's largest
cellular company, as well Motorola, a provider of portable telephones, which
have become a booming business as prices have declined.
The other major investment theme in the portfolio is industry consolidation
where we are investing in companies such as United HealthCare and Columbia/HCA
HealthCare.
Two things that benefited the income portion of the portfolio were
diversification into other asset classes and specific security selection. The
Fund's diversification into preferred stocks, high yield and international
bonds, and some unique situations that have arisen in the corporate market have
worked well over the last year and have benefited performance despite our
conservative duration. We have maintained our positions in high yield bonds
(about 5% of the portfolio), international bonds (about 5%) and preferred stocks
(about 4% of the portfolio).
Outlook
We are cautiously optimistic for the year ahead. We believe the economy will
continue to slow down during the second half. If the economy stays out of
recession, we could have a nearly ideal environment for growth stocks as
investors in cyclical and small companies increasingly look for solid companies
with sustainable growth such as many of those in the Fund. The same environment
should also benefit our preferred stock and high yield bond positions.
4
<PAGE>
Fund Managers' Review
- ---------------------
IAI Balanced Fund
Top Five Common Stock Sectors
% of Net Assets as of 3/31/95
[GRAPH APPEARS HERE]
Consumer Cyclical 16.1%
Technology 15.3%
Consumer Non-Cyclical 8.6%
Basic Materials 6.2%
Financial 4.3%
Effective Maturity
% of Fund Portfolio as of 3/31/95
[GRAPH APPEARS HERE]
Years
- -----
1-3 7.4%
3-5 2.2%
5-10 51.3%
10-20 18.0%
20+ 21.1%
Top Five Common Stock Holdings
<TABLE>
<CAPTION>
% of Net Assets
----------------------
Issues Sector 3/31/95 3/31/94
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Columbia/HCA Healthcare Consumer
Non-Cyclical 2.77 --
Home Depot Consumer Cyclical 2.72 .60
Microsoft Technology 2.69 1.26
Dow Chemical Basic Materials 2.48 --
Wal-Mart Consumer Cyclical 2.19 --
- ------------------------------------------------------------------------
Total 12.85 1.86
</TABLE>
Bond Sectors
% of Portfolio as of 3/31/95
[PIE CHART APPEARS HERE]
Corporate 60%
Foreign Denominated 14%
U.S. Government Agency 26%
Bond Credit Rating*
% of Bond Portfolio
U.S. Government........... 26%
AAA....................... 14%
AA........................ 16%
A......................... 5%
BBB....................... 24%
Non-Rated................. --
Non-Investment Grade...... 15%
*As of 3/31/95
5
<PAGE>
FUND MANAGERS' REVIEW
---------------------
IAI Balanced Fund
Note to Chairman's Letter & Fund Managers' Review
Performance data for the IAI Balanced Fund includes changes in share price and
reinvestment of dividends and capital gains. Past performance is not a guarantee
of future results. The Fund's investment return and principal may fluctuate so
that, when redeemed, shares may be worth more or less than the original cost.
More complete information about the Fund, including charges and expenses, is
available in the prospectus. Please read the Fund's prospectus carefully before
investing. All indices cited are unmanaged, and are either trademarks,
registered trademarks or copyrights of their respective sponsoring companies.
Average Annual Returns+
Through 3/31/95
<TABLE>
<CAPTION>
Since Inception
1 Year 4/10/92
- -----------------------------------------------------------------------------
<S> <C> <C>
IAI Balanced Fund 9.44% 6.22%
- -----------------------------------------------------------------------------
S&P 500 Index 15.59% 9.79%*
- -----------------------------------------------------------------------------
Lehman Gov't/Corp. Bond Index 4.57% 7.09%
</TABLE>
+ Past performance is not predictive of future performance
* Since 05/01/92
Value of $10,000 Investment
[GRAPH APPEARS HERE]
3/31/95
IAI Balanced Fund (Inception 4/10/92) $11,964
S&P 500 Index $13,131
Lehman Gov't/Corp. Bond Index $12,212
6
<PAGE>
FUND PORTFOLIO
--------------
IAI Balanced Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
Common Stocks - 54.9%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ------------------------------------------------------
<S> <C> <C>
Basic Materials -- 6.2%
Dow Chemical 14,100 $1,029,300
Georgia-Pacific 5,300 422,675
Great Lakes Chemical 9,200 573,850
Lyondell Petrochemical 9,600 232,800
Morton International 11,500 333,500
-----------
2,592,125
- ------------------------------------------------------
Consumer Cyclical -- 16.1%
American Greetings 17,400 517,650
Best Buy (b) 15,100 326,538
Cardinal Health 5,400 257,175
Home Depot 25,500 1,128,375
Lowe's 12,700 438,150
Mattel 18,943 466,471
McDonald's 20,700 706,387
Newell 15,300 390,150
Tandy 8,700 415,425
Viacom Class B (b) 12,998 581,661
Walgreen 10,800 519,750
Wal-Mart 35,700 910,350
-----------
6,658,082
- ------------------------------------------------------
Consumer Non-cyclical -- 8.6%
Colgate-Palmolive 4,000 264,000
Columbia/HCA Healthcare 26,700 1,148,100
Medtronic 4,000 277,500
Philip Morris 8,100 528,525
US Healthcare 10,100 444,400
United HealthCare 19,100 892,925
-----------
3,555,450
- ------------------------------------------------------
Energy -- 2.4%
Anadarko Petroleum 6,500 284,375
Enron 12,700 419,100
Enron Oil & Gas 11,100 273,338
-----------
976,813
- ------------------------------------------------------
Financial -- 4.3%
Community Bank Warrants 5,000 $ 10,000
Federal National Mortgage
Association 7,800 634,725
Franklin Resources 10,900 423,737
Norwest 16,200 411,075
UNUM 7,100 321,275
-----------
1,800,812
- ------------------------------------------------------
Industrial -- 0.6%
Hanson PLC, ADR 13,600 256,700
- ------------------------------------------------------
Technology -- 15.3%
CUC International (b) 12,000 466,500
Cabletron Systems (b) 9,900 444,263
Cisco Systems (b) 10,600 402,800
Compaq Computer (b) 21,500 741,750
Compuware Software (b) 13,300 485,450
First Data 8,100 420,187
Intel 8,600 728,850
Microsoft (b) 15,700 1,114,700
Motorola 13,900 759,287
Sensormatic Electronics 7,200 201,600
Sybase (b) 14,200 568,000
-----------
6,333,387
- ------------------------------------------------------
Utilities -- 1.4%
Airtouch Communications (b) 12,000 327,000
NYNEX 6,500 257,563
-----------
584,563
======================================================
Total Investments in Common Stocks
(Cost: $20,142,630) $22,757,932
======================================================
</TABLE>
See accompanying Notes to Fund Portfolio
7
<PAGE>
FUND PORTFOLIO
--------------
IAI Balanced Fund
March 31, 1995
Preferred Stocks -- 4.0%
<TABLE>
<CAPTION>
Market
Rate Quantity Value (a)
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible -- 0.3%
WHX Series B (b) 3.75% 3,000 $ 126,000
- -------------------------------------------------------------------------
Nonconvertible -- 3.7%
Community Bank Units,
Series B (b) 13.00% 12,000 258,000
Grand Metro Delaware
Series A (b) 9.42% 15,000 395,625
Nokia, ADR (b) -- 6,300 463,050
UAL Series B (b) 12.25% 15,000 427,500
-----------
1,544,175
=========================================================================
Total Investments in
Preferred Stocks
(Cost: $1,501,551)............................................$1,670,175
=========================================================================
</TABLE>
Other Securities -- 4.5%
<TABLE>
<CAPTION>
Market
Quantity (h) Value (a)
- -------------------------------------------------------------------------
<S> <C> <C>
South Street Corporate
Recovery Fund I L.P. (.61%) (b) -- $1,454,375
Spectrum Equity
Investors, L.P. (.46%) (b) -- 87,369
Vanguard Associates
IV L.P. (1.36%) (b) -- 305,690
=========================================================================
Total Investments in
Other Securities
(Cost: $1,382,990)............................................$1,847,434
=========================================================================
</TABLE>
Corporate Bonds -- 19.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial -- 6.5%
ABN-AMRO Bank 7.13% 10/15/93 $ 600,000 $ 501,072
NBD Bank National Association 8.25 11/01/24 600,000 625,500
Nationwide CSN Trust (g) 9.88 02/15/25 1,500,000 1,558,125
-----------
2,684,697
- ------------------------------------------------------------------------------------------
Industrial -- 12.0%
Cablevision Industry 10.75 01/30/02 750,000 791,250
Ferrellgas LP 10.00 08/01/01 500,000 512,500
Gulf Canada Resources (Yankee) 9.25 01/15/04 500,000 475,000
RJR Nabisco 7.63 09/15/03 2,000,000 1,835,000
Triton Energy (zero coupon bond) 10.37(d) 11/01/97 400,000 309,500
Valassiss Communication 9.55 12/01/03 1,000,000 1,039,927
-----------
4,963,177
- ------------------------------------------------------------------------------------------
Utilities -- 0.7%
Long Island Lighting 7.85 05/15/99 300,000 296,427
- ------------------------------------------------------------------------------------------
Regional Government -- 0.3%
Hydro-Quebec (Yankee) 8.00 02/01/13 150,000 143,813
==========================================================================================
Total Investments in Corporate Bonds
(Cost: $7,959,764)........................................................... $8,088,114
==========================================================================================
</TABLE>
See accompanying Notes to Fund Portfolio
8
<PAGE>
FUND PORTFOLIO
--------------
IAI Balanced Fund
March 31, 1995
U.S. Government Agency Mortgage-Backed Securities -- 8.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home loan Mortgage
Corporation -- 1.1%
6.50% 04/01/99(c) $ 480,000 $ 469,047
- ------------------------------------------------------------------------------------------------
Federal National Mortgage
Association -- 4.6%
9.00 03/01/25 1,862,000 1,912,609
- ------------------------------------------------------------------------------------------------
Government National Mortgage
Association -- 2.7%
6.50 08/15/23 254,395 229,671
6.50 01/15/24 453,230 409,181
6.50 01/15/24 490,290 442,639
------------
1,081,491
================================================================================================
Total Investments in U.S. Government Agency
Mortgage-Backed Securities
(Cost: $3,425,776) $ 3,463,147
================================================================================================
</TABLE>
Foreign Denominated Bonds -- 4.6%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount (f) Value (a)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian Government (Canadian dollar)
9.75% 12/01/01 500,000 $ 381,072
- ------------------------------------------------------------------------------------------------
German Government (German mark)
7.50 10/20/97 350,000 264,071
- ------------------------------------------------------------------------------------------------
Japanese Government (Japanese yen)
4.20 09/20/04 105,000,000 1,254,058
================================================================================================
Total Investments in Foreign Denominated Bonds
(Cost: $1,858,679).................................................................$ 1,899,201
================================================================================================
Total Investments in Bonds
(Cost: $13,244,219)................................................................$13,450,462
================================================================================================
Total Investments in Long-Term Securities
(Cost: $36,271,390)................................................................$39,726,003
================================================================================================
</TABLE>
9
<PAGE>
FUND PORTFOLIO
--------------
IAI Balanced Fund
March 31, 1995
Short-Term Securities -- 1.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Obligation -- 1.2%
U.S. Treasury Bill 5.76% 05/04/95 $500,000(e) $497,415
===============================================================================
Total Investments in
Short-Term Securities
(Cost: $497,415)...................................................$ 497,415
===============================================================================
Total Investments in Securities
(Cost: $36,768,805) (i)............................................$40,223,418
===============================================================================
Other Assets and Liabilities (Net) -- 2.9%
.................................................................$ 1,195,372
===============================================================================
Total Net Assets
.................................................................$41,418,790
===============================================================================
</TABLE>
10
<PAGE>
NOTES TO FUND PORTFOLIO
-----------------------
IAI Balanced Fund
March 31, 1995
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing securities.
(c)
Purchased on a when-issued basis. At March 31, 1995, the total cost of
securities purchased on a when-issued basis was $468,000.
(d)
For zero coupon bonds, the interest rate disclosed represents yield-to-maturity
at date of acquisition.
(e)
Security is pledged to cover initial margin on open futures contracts (see Note
5 to financial statements).
(f)
Foreign security market values are stated in U.S. dollars. Principal amounts are
denominated in the foreign currency indicated parenthetically.
(g)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. These issues
may only be sold to other qualified institutional buyers, and are considered
liquid under guidelines established by the Board of Directors.
(h)
Restricted securities represent ownership in a security which has not been
registered with the Securities and Exchange Commission under the Securities Act
of 1933. For each of the restricted security issues held at March 31, 1995,
there were no unrestricted securities of the same class as of either the date
the purchase price was agreed to or the date the Fund first obtained an
enforceable right to obtain the securities. The percentage ownership for limited
partnerships is indicated parenthetically. Information concerning each
restricted security holding on March 31, 1995 is shown below.
Restricted Securities
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Security Acquisition Date Cost
- -------------------------------------------------------------------------------
<S> <C> <C>
South Street Corporate Recovery Fund I L.P. 12/30/92 $783,346
02/17/93 150,000
Spectrum Equity Investors L.P. 05/12/94 74,644
01/03/95 25,000
Vanguard Associates IV L.P. 08/10/92 50,000
02/11/93 50,000
08/12/93 50,000
11/01/93 50,000
04/19/94 50,000
09/19/94 50,000
01/17/95 50,000
</TABLE>
(i)
At March 31, 1995, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as shown on right:
Cost for federal income tax purposes................................$37,228,830
============
Gross unrealized appreciation.......................................$ 3,377,950
Gross unrealized depreciation....................................... (383,362)
------------
Net unrealized appreciation.........................................$ 2,994,588
============
11
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------
IAI Balanced Fund
March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments in securities, at market
(Cost: $36,768,805) (see Fund Portfolio) $40,223,418
Cash denominated in foreign currency (Cost: $447,570) 453,070
Dividends and accrued interest receivable 224,407
Receivable for investment securities sold 2,650,998
Organization costs 7,074
Receivable for foreign currency contracts held, at value (Note 6) 535,097
Other 36,774
------------
Total assets 44,130,838
------------
Liabilities
Disbursements in excess of cash on demand deposit 211,913
Accrued investment advisory fee 26,454
Accrued distribution fee 5,268
Accrued dividend-disbursing, administrative, and accounting fees 7,054
Other accrued expenses 20,205
Payable for investment securities purchased 1,904,392
Payable for foreign currency contracts held, at value 536,762
------------
Total liabilities 2,712,048
------------
Net assets applicable to outstanding capital stock $41,418,790
============
Represented by:
Capital stock $ 39,174
Additional paid-in capital 38,854,870
Undistributed net investment income 523,114
Accumulated net realized losses (1,273,367)
Unrealized appreciation (depreciation) on:
Investment securities $ 3,270,252
Other assets and liabilities denominated in foreign currency 4,747
-----------
3,274,999
------------
Total -- representing net assets applicable to outstanding capital stock $41,418,790
============
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 3,917,391
------------
Net asset value per share of outstanding capital stock $10.57
============
</TABLE>
See accompanying Notes to Financial Statements
12
<PAGE>
STATEMENT OF OPERATIONS
-----------------------
IAI Balanced Fund
Year Ended March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Net Investment Income
Income
Dividends $ 425,369
Interest (Note 1) 1,292,247
-----------
Total income 1,717,616
-----------
Expenses
Investment advisory fees 327,630
Distribution fees 109,210
Dividend-disbursing, administrative, and accounting fees 87,368
Legal fees 6,625
Custodian fees 19,265
Amortization of organization costs 3,432
Compensation of Directors 9,545
Audit fees 6,329
Printing and shareholder reporting 23,150
Registration fees 6,850
Other expenses 5,836
-----------
Total expenses 605,240
Less fees reimbursed by Advisers or Distributor (59,146)
-----------
Net expenses 546,094
-----------
Net investment income 1,171,522
-----------
Net Realized and Unrealized Gains (Losses)
Net realized losses on:
Investment securities $ (688,905)
Foreign currency transactions (16,860)
Futures contracts (346,258)
-----------
(1,052,023)
Net change in unrealized appreciation (depreciation) on:
Investment securities $ 3,847,490
Other assets and liabilities denominated in foreign currency 4,747
Futures contracts (217,886)
-----------
3,634,351
-----------
Net gain on investments and foreign currency 2,582,328
-----------
Net increase in net assets resulting from operations $ 3,753,850
===========
</TABLE>
See accompanying Notes to Financial Statements
13
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI Balanced Fund
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 1,171,522 $ 1,587,557
Net realized gains (losses) (1,052,023) 2,882,043
Net change in unrealized appreciation or depreciation 3,634,351 (4,140,044)
--------------------------------
Net increase in net assets resulting from operations 3,753,850 329,556
--------------------------------
Distributions to Shareholders From:
Net investment income (1,383,177) (1,614,827)
Net realized gains (1,662,889) (1,257,699)
--------------------------------
Total distributions (3,046,066) (2,872,526)
--------------------------------
Capital Share Transactions
Net proceeds from 808,462 and 2,820,842 shares 8,191,596 30,780,170
Net asset value of 309,910 and 263,736 shares issued
to shareholders in reinvestment of distributions 3,029,699 2,848,185
Cost of 2,257,774 and 4,460,361 shares redeemed (22,879,376) (48,784,525)
--------------------------------
Decrease in net assets from capital share transactions (11,658,081) (15,156,170)
--------------------------------
Total decrease in net assets (10,950,297) (17,699,140)
Net assets at beginning of period 52,369,087 70,068,227
--------------------------------
Net assets at end of period $ 41,418,790 $ 52,369,087
(including undistributed net investment income ================================
of $523,114 and $378,566)
</TABLE>
See accompanying Notes to Financial Statements
14
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Balanced Fund
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 March 31, Period from
------------------------ April 10, 1992*
1995 1994 March 31, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of period $ 10.36 $ 10.89 $ 10.00
--------------------------------------------------
Operations
Net investment income .29 .27 .18
Net realized and unrealized gains (losses) .62 (.34) .84
--------------------------------------------------
Total from operations .91 (.07) 1.02
--------------------------------------------------
Distributions to
Shareholders From:
Net investment income (.32) (.26) (.13)
Net realized gains (.38) (.20) -
--------------------------------------------------
Total distributions (.70) (.46) (.13)
--------------------------------------------------
Net Asset Value
End of period $ 10.57 $ 10.36 $ 10.89
==================================================
Total investment return** 9.44% (.77%) 10.18%
Net assets at end of period (000's omitted) $41,419 $52,369 $70,068
Ratios
Expenses to average net assets 1.25% 1.25% 1.25%***
Net investment income to average net assets 2.68% 2.35% 2.18%***
Portfolio turnover rate
(excluding short-term securities) 256.9% 211.9% 83.4%
</TABLE>
* Commencement of operations
** 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.
***Annualized
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Balanced Fund
March 31, 1995
(1) Summary of Significant Accounting Policies
IAI Investment Funds VI, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. The
IAI Balanced Fund is a separate portfolio of IAI Investment Funds VI, Inc. This
report covers only the IAI Balanced Fund (the Fund).
Significant accounting policies followed by the Fund are summarized below:
Security Valuation
Investments in securities traded on national securities exchanges are valued at
the last reported sales price at the close of each business day; securities
traded on the over-the-counter market are valued at the last reported bid price.
The values of debt securities are determined using pricing services or prices
quoted by independent brokers. Restricted securities for which there is no
public market are valued at fair value in good faith as determined by the Board
of Directors. Short-term securities with a maturity of 60 days or less from the
date of purchase are valued at amortized cost. Short-term securities with a
maturity greater than 60 days from the date of purchase are marked to market on
a daily basis.
Securities Purchased on a When-Issued Basis
Delivery and payment for securities which have been purchased by the Fund on a
forward commitment or when-issued basis can take place a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Fund maintains, in a segregated account with its custodian,
assets with a market value equal to the amount of its purchase commitments.
The Fund may enter into transactions to sell its purchase commitments to third
parties at the current market values and concurrently acquire other purchase
commitments for similar securities at later dates, commonly referred to as
"dollar-rolls." As an inducement for a fund to "rollover" its purchase
commitments, the Fund receives negotiated fees. For the year ended March 31,
1995, such fees earned by the Fund are included in interest income and amounted
to $4,299.
Futures and Options Contracts
In order to protect gains, facilitate buying and selling of securities, and
produce incremental earnings, the Fund may buy and sell futures contracts and
options. These investments involve risks caused by the possibility of an
imperfect correlation between movements in the value of the contract or option
and the price of the underlying securities and interest rates. Risks may also
arise if there is an illiquid secondary market for the instruments, or due to
the inability of counterparties to perform. Futures contracts are valued at the
settlement price of the exchange on which they are traded. Options traded on an
exchange are valued using the last sale price. Options traded over-the-counter
are valued using dealer-supplied valuations.
Upon entering into a futures contract, the Fund is required to deposit either
cash or securities, representing the initial margin, equal to a certain
percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded as unrealized gains and losses. The
variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Balanced Fund
March 31, 1995
Foreign Currency Translations and Forward Foreign Currency Contracts
The Fund invests in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation or
depreciation on foreign currency transactions. Exchange gains (losses) may also
be realized between the trade and settlement dates on security and foreign
currency contract transactions. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
Federal Taxes
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of recognition of limited partnership income,
certain foreign currency gains and losses treated as ordinary income and 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 by $356,203
and accumulated net realized losses have been increased by $352,377, resulting
in a net reclassification adjustment to decrease additional paid-in capital by
$3,826.
For federal income tax purposes, the Fund has a capital loss carryover of
approximately $1,367,000 at March 31, 1995 which, if not offset by subsequent
capital gains, will expire in 2003. It is unlikely the Board of Directors will
authorize a distribution of any net realized gains until the available capital
loss carryover is offset or expires.
Security Transactions and Investment Income
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is recorded on the accrual basis. The Fund amortizes discount
purchased on long-term bonds using the level
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Balanced Fund
March 31, 1995
yield method of amortization. Security gains and losses are determined on the
basis of identified cost, which is the same basis used for federal income tax
purposes.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made semi-annually. Capital gains, if any, are
primarily distributed at the end of the calendar year. 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.
In the event Investment Advisers, Inc. (Advisers) redeems any or all of its
shares representing initial capital in the Fund prior to the date such costs are
fully amortized, it will bear such portion of the unamortized organization costs
as the number of shares redeemed bears to the initial purchase of shares.
(2) Commitments and Contingencies
At March 31, 1995 the Fund is committed to invest additional amounts in certain
limited partnership investments held. The following schedule identifies
outstanding commitments:
<TABLE>
<CAPTION>
Limited Partnership Investment Commitments
<S> <C>
Spectrum Equity Investors L.P. $400,000
Vanguard IV L.P. 150,000
--------
Total commitments $550,000
========
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profit and loss in the partnership and removal
from the limited partnership.
The Fund's management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. The Fund maintains a "segregated account" in an amount equal to its
aggregate unpaid commitments.
For purposes of obtaining certain types of insurance coverage for the Fund and
its officers and directors, the Fund is a policyholder in an industry-sponsored
mutual insurance company (the Company). In connection with its obligation as a
policyholder, the Fund has made payments to the Company which have been
capitalized. Also, the Fund is committed to make future capital contributions,
if requested by the Company.
The Fund has available a $14,666,000 line of credit with a bank at prime
interest rates. 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. Advances under the line of credit totaled
$84,000 at March 31, 1995 which are included in "disbursements in excess of cash
on demand deposit" in the Statement of Assets and Liabilities.
(3) Fees and Expenses
Under terms of an investment advisory agreement, the Fund pays Advisers a
monthly management fee based upon month-end net assets equal on an annual basis
to .75% of the first $200 million in net assets, .70% of the next $300
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Balanced Fund
March 31, 1995
million in net assets and .65% of net assets in excess of $500 million.
The Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets at an annual rate of .20%.
The Fund has adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Fund's distributor. Under the Plan, the Fund pays Distributor
a monthly fee to cover expenses incurred in the distribution and promotion of
the Fund's shares. The fee is equal to an annual rate of .25% of the Fund's
average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Fund is responsible for paying
its operating expenses, including costs incurred in the purchase and sale of
assets. Advisers and Distributor have agreed to reimburse the Fund to the extent
total expenses, excluding costs incurred in the purchase and sale of assets,
exceed, on an annual basis, 1.25% of average month-end net assets.
(4) Investment Transactions
Purchases and Sales of Securities
For the year ended March 31, 1995, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$112,016,437 and $128,078,806, respectively.
Restricted Securities
Included in the Fund's portfolio of investments in securities at March 31, 1995
are issues which generally cannot be offered for sale to the public without
first being registered under the Securities Act of 1933 ("restricted
securities").
The Fund limits investments in securities that are not readily marketable to 15
percent of its total assets at the time of purchase. This limitation does not
include Rule 144A securities that have been determined to be liquid based upon
guidelines approved by the Fund's Board of Directors.
(5) Open Futures Contracts
The following futures contracts were open as of March 31, 1995:
Futures
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Number of Expiration Market Unrealized
Type Contracts Month Position Value Loss
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
S&P 500 22 June 1995 Short $ 5,548,400 $ 171,820
U.S. Treasury Bond 43 June 1995 Short 4,467,969 12,541
-----------------------------
$10,016,369 $ 184,361
=============================
</TABLE>
The market value of securities deposited to cover initial margin requirements
for the open position at March 31, 1995 was $497,415.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Balanced Fund
March 31, 1995
(6) Foreign Currency Contracts
At March 31, 1995, the Fund had entered into foreign currency exchange
contracts. The unrealized depreciation of $1,665 for these contracts at March
31, 1995 is included in unrealized appreciation (depreciation) on other assets
and liabilities denominated in foreign currency.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Exchange Currency to be U.S. Dollar Value as Currency to be U.S. Dollar Value as
Date Delivered of March 31, 1995 Reserved of March 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
04/28/95 650,000 Canadian Dollar $ 464,098 462,633 U.S. Dollars $ 462,633
04/28/95 100,000 German Marks 72,664 72,464 U.S. Dollars 72,464
----------- -----------
$ 536,762 $ 535,097
==========================================================================================================
</TABLE>
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
IAI Balanced Fund
The Board of Directors and Shareholders
IAI Investment Funds VI, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Balanced Fund (a portfolio within IAI Investment
Funds VI, Inc.) as of March 31, 1995 and the related statement 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 two-year period ended March 31, 1995, and the period from April
10, 1992 (commencement of operations) to March 31, 1993. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or 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
Balanced Fund at March 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the years in the two-year
period then ended and the financial highlights for the periods stated in the
first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 12, 1995
21
<PAGE>
FEDERAL TAX INFORMATION
-----------------------
IAI Balanced Fund
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.
Tax Information:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- ---------------------------------------------------------------------------
<S> <C> <C>
June 1994 $.1524 $.3783
December 1994 .1710 --
===========================================================================
$.3234 $.3783
</TABLE>
31.66% of ordinary income distributions qualifying for deduction by corporations
(A) includes distributions of short-term capital gains, if any, which are
taxable as ordinary income.
22
<PAGE>
IAI MUTUAL FUND FAMILY
----------------------
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Developing Capital Appreciation - Equity securities of companies in developing
Countries Fund countries
- ------------------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation - Common stocks of small to medium-sized emerging
growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation - Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation - Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation - Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation - Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected
to produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + Income] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
(formerly IAI Tax Free Fund) [Exempt from Federal and Minnesota State Income Taxes]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
(This page intentionally left blank)
<PAGE>
Distributor
IAI Securities, Inc.
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 P.L.L.P.
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
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
Mutual Funds
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA
Fax 612.376.2737
800.945.3863
612.376.2700
