BALANCED FUNDS
SEMI-ANNUAL REPORT
IAI BALANCED FUND
SEPTEMBER 30, 1996
(UNAUDITED)
[LOGO] IAI MUTUAL FUNDS
TABLE OF CONTENTS
IAI BALANCED FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1996
(UNAUDITED)
Chairman's Letter...........................................................2
Fund Managers' Review.......................................................4
Fund Portfolio..............................................................7
Notes to Fund Portfolio....................................................12
Statement of Assets and Liabilities........................................14
Statement of Operations....................................................15
Statements of Changes in Net Assets........................................16
Financial Highlights.......................................................17
Notes to Financial Statements..............................................18
IAI Mutual Fund Family.....................................................23
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors....................................................Inside Back Cover
CHAIRMAN'S LETTER
IAI BALANCED FUND
CALM AFTER THE STORM
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The milestones keep coming faster and faster. The Dow Jones Industrial Average
broke the 5,000 barrier last November. Less than a year later, the Dow has now
broken through 6,000. That's pretty remarkable when you consider that the Dow
Jones Industrial Average was under 1,000 as recently as 1982.
There are many reasons to remain optimistic about the financial markets. After a
strong second quarter, the U.S. economy seems to be moderating its pace, growing
fast enough to generate corporate profits, but not so fast to bring back
inflation. Interest rates have stabilized, as the Federal Reserve Board took no
action before the presidential election, calming the market.
Still, the road hasn't always been smooth in 1996. The first half of this summer
was an eye-opener for many investors. After reaching a high of 5780 on May 22,
the Dow Jones Industrial Average fell about 7 percent by the end of July--more,
if you count swings in intra-day trading. And small cap stocks, those that
typically trade on NASDAQ, fell as much as 20 percent. The reason for the
turbulence was investor fears, generated by job growth data and increases in
commodity prices, that the economy was becoming overheated. Corporate profits in
the second quarter rose sharply. According to Business Week, corporate profits
rose 11 percent during the second quarter of 1996, compared to the same period
in 1995. In a pattern that often confounds politicians, good news in the economy
is often bad news on Wall Street.
Just remember, though, that stock market corrections are normal. They're even
healthy, because they allow investors to buy stocks at temporarily depressed
prices. For two months, the Dow fell steadily from 5780 in May to less than 5300
in July before rallying in early August back to the 5700 level. Of course,
nobody knows when the market will hit bottom. Many Wall Street pundits told the
media that the stock market was headed lower, perhaps much lower. But they were
wrong, as is often the case.
We don't recommend that you try to time the market. Even the pros can't get it
right consistently. That's why dollar cost averaging is such a good strategy. By
contributing a fixed amount into the market each month, your money buys more
shares when the market is low and fewer shares when the market is high. This
simple yet time honored method typically allows you to purchase shares at a
lower average cost.
Another way to minimize the impact of market turbulence is to make sure that you
are properly diversified. The fixed income market typically offers stability to
a portfolio, and is particularly appropriate for those investors who rely on
income as opposed to price appreciation. The international equity markets also
offer a way to diversify your portfolio, since the economies in other parts of
the world are in different stages than the U.S. economy.
Over the next six months, the markets will undoubtedly be affected by the
results of the U.S. presidential election as well as uncertainties regarding the
new Congress. And, as we've seen so far in 1996, there is great potential for
volatility. But the markets continue to demonstrate a remarkable resiliency.
CHAIRMAN'S LETTER
IAI BALANCED FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The economy has been stuck in a pattern of mini-cycles where periods of strength
are followed by periods of weakness. After expanding at a rate of about 3.4% in
the first half of this year, growth has slowed to 2.2% in the third quarter and
may be somewhat slower than that pace in the fourth quarter.
Recognizing the ebb and flow of the economy is critical to understanding the
recent behavior of the financial markets. The U.S. economy is operating only
slightly below its non-inflationary capacity. An extended period of real
strength would push resource utilization beyond its limits, producing higher
inflation, a tighter Federal Reserve policy, rising interest rates and an
eventual recession. Pauses, such as the one we are currently experiencing, help
extend the cycle and postpone these events. Thus, the markets respond favorably
to signs of a slowdown, as long as the slowdown does not go too far.
Lower growth rates in the second half of the year should relieve some
inflationary pressures without seriously damaging the expansion. New job
creation has slowed in the last two months, but remains on a upward trend. The
unemployment rate of 5.2% is close to a seven-year low, but labor costs are
still contained. Consumer confidence remains high, but spending has slowed as
consumers re-liquefy. Money and credit growth are providing ample liquidity, but
the excesses of earlier this year are dissipating. Commodity prices (including
the price of gold) appear to be headed lower, the budget deficit is at its
lowest level in 15 years and the U.S. dollar is firm. Overall, the slowdown
helps to preserve a favorable economic background for stocks and bonds.
Eventually this cycle will end in its usual way, with an overheating economy,
higher inflation, tighter monetary policy and a recession. Although this is not
likely to develop in the next six months, investors should remember that the
current pause is sure to be followed by renewed strength along with a pullback
in the markets. With this in mind, it is important to focus on a long-term
financial plan and not react to the emotions of the moment. Instead, periods of
volatility should be used to realign a well diversified portfolio or invest cash
reserves. In the months immediately ahead, we expect the firming trend of stock
and bond prices to continue.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each 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
FUND MANAGERS' REVIEW
IAI BALANCED FUND
IAI BALANCED FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BALANCED FUND
CO-MANAGER
[PHOTO]
DONALD J. HOELTING, 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. The Fund may also invest in other
securities. As the market outlook changes, the Fund's asset allocation is
shifted gradually.
FACTORS AFFECTING THE
PAST SIX-MONTH PERFORMANCE
For the six months ended September 30, 1996, the IAI Balanced Fund produced a
total return of 4.67%. In contrast, the Lehman Brothers Government/Corporate
Bond Index reflected a total return of 2.24% while the Standard & Poor's 500
Index produced a return of 7.76%. For the twelve-month period ended September
30, 1996, the IAI Balanced Fund produced a total return of 8.22% while the
Lehman Brothers Government/Corporate Bond Index was up 4.50% and the S&P 500
Index was up 20.39%.
The bond market remained in a narrow trading range during the third quarter. A
short summer rally pushed the 5-year U.S. Treasury note yield from 6.82% on July
5th down to 6.22% on August 12th. Yields drifted back to the July 5th peak in
late August and early September. Waning fears of a Federal Reserve Board action
to raise interest rates allowed the market to rally over the balance of
September. In the third quarter, the mixture of stocks and bonds was maintained
at a 50/50 ratio, down from 60/40 early in the second quarter. The Fund's
allocation reflects our view that stocks and bonds are equally attractive at
current market levels.
The bond portion of the portfolio is heavily positioned in corporate bonds of
various maturities. These issues have performed quite well in response to strong
investor demand and the additional yield that can be earned from these
securities. Security selection strategies are biased toward financial,
industrial and international issues. The average maturity of roughly 13 years is
structured to benefit from a moderate decline in interest rates.
The equity portion of the portfolio searches for companies with strong business
franchises that generate significant free cash flow. The Fund seeks to purchase
those companies selling below their intrinsic value. Intel, Gillette and Norwest
are three excellent examples. Intel is the leading provider of components for
personal computers. Gillette is another franchise company generating tremendous
amounts of free cash flow. Norwest, a Minneapolis-based financial institution,
continues to exceed earnings expectations.
OUTLOOK
Real economic growth will continue to slow from its rapid pace earlier in 1996,
and reported inflation rates will remain stable through the end of the year.
This is a favorable background for financial assets. The Fund's asset mix and
portfolio holdings reflect our optimistic view.
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE EQUITY SECTORS
% OF NET ASSETS AS OF 9/30/96
[BAR CHART]
FINANCIAL 11.3%
CONSUMER DURABLES 5.7%
PRODUCER MANUFACTURING 4.9%
CONSUMER NON-DURABLES 4.8%
RETAIL TRADE 4.5%
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 9/30/96
[BAR CHART]
YEARS
0-3 6%
3-5 10%
5-10 48%
10-20 14%
20+ 22%
TOP FIVE EQUITY HOLDINGS
% of Net Assets
- --------------------------------------------------------------------
Issue Sector 9/30/96 3/31/96
- --------------------------------------------------------------------
Federal National Mortgage Association
Financial 1.75 1.94
Philip Morris Consumer Non-Durables 1.70 --
Harcourt General Retail Trade 1.68 --
General Electric Producer Manufacturing 1.57 1.49
Walt Disney Consumer Services 1.48 --
- --------------------------------------------------------------------
Total 8.18 3.43
BOND SECTORS
% OF BOND PORTFOLIO AS OF 9/30/96
[PIE CHART]
Foreign Denominated 3%
U.S. Government Agency
Mortgage-Backed 36%
Asset-backed 2%
U.S. Government &
Government Agency 13%
Corporate 46%
BOND CREDIT RATING
% OF BOND PORTFOLIO AS OF 9/30/96
U.S. Government....46%
Aaa.................8%
Aa..................4%
A..................21%
Baa.................5%
Non-Investment
Grade..............16%
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 ALL 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.
VALUE OF $10,000 INVESTMENT+
[GRAPH]
IAI Balanced Fund Lehman Government/
Inception 4/10/92 S&P 500 Index Corporate Bond Index*
4/10/92 10,000 $10,000 $10,000
3/31/93 11,019 $11,527 $11,362
3/31/94 10,933 $11,693 $11,678
3/31/95 11,963 $13,515 $12,212
3/31/96 13,409 $17,859 $13,546
9/30/96 14,034 $19,245 $13,850
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/96
<TABLE>
<CAPTION>
Since Inception
Six Months** 1 Year 4/10/92
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Balanced Fund 4.67% 8.22% 7.87%
- -------------------------------------------------------------------------------------
S&P 500 Index 7.76% 20.39% 15.66%*
- -------------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 2.24% 4.50% 7.65%*
</TABLE>
+ Past performance is not predictive of future performance.
* Since 4/01/92
** Not annualized
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 47.3%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
Consumer Durables - 5.7%
Bandag 8,300 $ 409,812
Eastman Kodak 6,800 533,800
Hasbro 10,100 374,963
Polaris 16,800 380,100
Sturm Ruger 19,600 384,650
- --------------------------------------------------------------------------------
2,083,325
- --------------------------------------------------------------------------------
Consumer Non-Durables - 4.8%
Coca-Cola 8,600 437,525
Gillette 4,900 353,412
Philip Morris 6,900 619,275
UST 10,900 322,913
- --------------------------------------------------------------------------------
1,733,125
- --------------------------------------------------------------------------------
Consumer Services - 3.1%
Media General Class A 8,900 280,350
Reader's Digest Class A 7,400 302,475
Walt Disney 8,500 538,687
- --------------------------------------------------------------------------------
1,121,512
- --------------------------------------------------------------------------------
Electronic Technology - 3.4%
General Dynamics 5,700 392,587
Intel 5,400 515,363
Motorola 6,600 340,725
- --------------------------------------------------------------------------------
1,248,675
- --------------------------------------------------------------------------------
Energy Minerals - 1.7%
British Petroleum ADR 1,666 208,250
Exxon 5,000 416,250
- --------------------------------------------------------------------------------
624,500
- --------------------------------------------------------------------------------
Financial - 9.6%
Aetna 6,500 457,437
American Express 10,800 499,500
Federal National Mortgage
Association 18,300 638,212
Leucadia National 13,500 327,375
Norwest 8,900 363,788
PMI Group 6,600 350,625
United Assets Management 22,700 536,288
United Dominion Realty Trust 23,800 333,200
- --------------------------------------------------------------------------------
3,506,425
- --------------------------------------------------------------------------------
Health Technology - 3.2%
Bristol-Myers Squibb 4,400 424,050
Merck 2,700 190,012
Pfizer 4,100 324,413
SmithKline Beecham ADR 3,700 225,238
- --------------------------------------------------------------------------------
1,163,713
- --------------------------------------------------------------------------------
Industrial Services - 1.1%
Schlumberger ADR 1,540 130,130
WMX Technologies 8,100 266,287
- --------------------------------------------------------------------------------
396,417
- --------------------------------------------------------------------------------
Non-Energy Minerals - 2.2%
Nucor 5,800 294,350
Schweitzer-Mauduit International 15,400 515,900
- --------------------------------------------------------------------------------
810,250
- --------------------------------------------------------------------------------
Producer Manufacturing - 4.9%
Berkshire Hathaway Class A (b) 15 482,250
General Electric 6,300 573,300
Nordson 5,700 317,775
Tyco International 9,900 426,938
- --------------------------------------------------------------------------------
1,800,263
- --------------------------------------------------------------------------------
Retail Trade - 4.5%
Circuit City 13,600 491,300
Harcourt General 11,100 613,275
Wal-Mart 19,800 522,225
- --------------------------------------------------------------------------------
1,626,800
- --------------------------------------------------------------------------------
Technology Services - 1.3%
Electronic Data Systems 7,400 454,175
- --------------------------------------------------------------------------------
Utilities - 1.8%
AT&T 2,900 151,525
FPL Group 6,400 276,800
MCI Communications 9,400 240,875
- --------------------------------------------------------------------------------
669,200
- --------------------------------------------------------------------------------
Total Investments in COMMON STOCKS
(Cost: $16,113,245).....................$ 17,238,380
- --------------------------------------------------------------------------------
See accompanying Notes to Fund Portfolio on page 12
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1996
(UNAUDITED)
CONVERTIBLE PREFERRED STOCK - 0.3%
Market
Rate Quantity Value (a)
- --------------------------------------------------------------------------------
Industrial - 0.3%
WHX Series B 3.75% 2,500 $ 102,188
- --------------------------------------------------------------------------------
Total Investments in
Convertible Preferred Stock
(Cost: $125,000).......................$ 102,188
- --------------------------------------------------------------------------------
Non-Convertible Preferred
Stocks - 1.7%
Market
Rate Quantity Value (a)
- --------------------------------------------------------------------------------
Financial - 1.7%
Community Bank
Series B 3.25%12,000 $ 327,000
SI Financing Trust I 2.30 12,000 309,000
- --------------------------------------------------------------------------------
636,000
- --------------------------------------------------------------------------------
Total Investments in Non-Convertible
Preferred Stocks
(Cost: $589,500).......................$ 636,000
- --------------------------------------------------------------------------------
OTHER SECURITIES - 3.6%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
Common Stock - 0.4%
Network Appliance (b) 5,298 $ 158,940
- --------------------------------------------------------------------------------
Ownership Market
Percentage (g) Value (a)
- --------------------------------------------------------------------------------
Limited Partnerships - 3.2%
South Street Corporate
Recovery Fund I (b) 0.50% 64,299
Spectrum Equity Investors (b) 0.46 405,111
Vanguard Associates IV (b) 1.36 697,709
- --------------------------------------------------------------------------------
1,167,119
- --------------------------------------------------------------------------------
Total Investments in
Other Securities
(Cost: $767,670).......................$ 1,326,059
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Corporate Bonds - 21.1%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
Financial - 8.5%
<S> <C> <C> <C> <C>
ABN-AMRO Bank 7.13% 10/15/93 $ 600,000 $ 542,754
Aetna Services 7.13 08/15/06 10,000 9,888
Ford Motor Credit 7.00 09/25/01 90,000 90,220
NationsBank 7.80 09/15/16 500,000 501,680
Nationwide Trust (f) 9.88 02/15/25 1,000,000 1,085,940
Prudential Insurance (f) 8.30 07/01/25 500,000 498,300
Salomon 6.75 02/15/03 250,000 239,907
Swiss Bank 7.75 09/01/26 110,000 110,416
- -------------------------------------------------------------------------------------------------------------------
3,079,105
- -------------------------------------------------------------------------------------------------------------------
Industrial - 6.3%
Columbia\ HCA Healthcare 7.50% 11/15/95 65,000 62,280
Dresser 7.60 08/15/96 60,000 58,930
Federated Department Stores 8.50 06/15/03 350,000 359,604
Harris 6.65 08/01/06 50,000 49,622
Lasmo 7.50 06/30/06 250,000 251,765
Mitchell Energy 9.25 01/15/02 250,000 262,293
News America Holdings 7.43 10/01/26 50,000 49,914
RJR Nabisco 8.00 07/15/01 500,000 496,395
Triton Energy (step bond) 9.03(c) 12/15/00 500,000 505,000
Valassis Communication 9.55 12/01/03 200,000 202,928
- -------------------------------------------------------------------------------------------------------------------
2,298,731
- -------------------------------------------------------------------------------------------------------------------
Utilities - 0.8%
Long Island Lighting 8.75 02/15/97 300,000 302,667
- -------------------------------------------------------------------------------------------------------------------
Yankee - 5.5%
Anz Banking Group 7.55 09/15/06 70,000 71,046
CSW Investments (f) 7.45 08/01/06 250,000 248,125
Gulf Canada Resources 8.35 08/01/06 250,000 251,875
Hydro-Quebec 8.50 12/01/29 235,000 248,611
Korea Electric Power 7.40 04/01/16 500,000 488,770
Sociedad Quimica (f) 7.70 09/15/06 250,000 250,703
Tenaga Nasional (f) 7.50 01/15/96 500,000 450,285
- -------------------------------------------------------------------------------------------------------------------
2,009,415
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Corporate Bonds
(Cost: $7,774,034).................................................................................$ 7,689,918
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
<TABLE>
<CAPTION>
U.S. Government & Government Agency Obligations - 5.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes - 3.8%
6.50% 05/31/01 $ 250,000 $ 250,312
6.25 02/15/03 200,000 196,812
5.75 08/15/03 500,000 476,955
7.88 11/15/04 410,000 440,623
- -------------------------------------------------------------------------------------------------------------------
1,364,702
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond - 2.1%
7.50 11/15/24 730,000 771,406
- -------------------------------------------------------------------------------------------------------------------
Total Investments in U.S. Government & Government Agency Obligations
(Cost: $2,124,890)................................................................................$ 2,136,108
- -------------------------------------------------------------------------------------------------------------------
U.S. Government Agency Mortgage-Backed Securities - 16.5%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 2.9%
9.50% 02/01/25 $ 972,477 $ 1,038,722
- -------------------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 13.6%
8.00 09/15/08 74,469 76,433
8.00 11/15/16 397,079 406,283
8.00 03/15/17 979,730 1,002,440
8.00 09/15/17 550,000 562,749
9.00 11/15/17 352,690 375,725
9.00 12/15/17 926,906 987,442
7.00 04/15/23 692,215 670,362
6.50 01/15/24 716,588 674,787
6.50 08/15/26 228,314 213,688
- -------------------------------------------------------------------------------------------------------------------
4,969,909
- -------------------------------------------------------------------------------------------------------------------
Total Investments in U.S. Government Agency Mortgage-Backed Securities
(Cost: $5,944,634).................................................................................$ 6,008,631
- -------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Fund Portfolio on page 12
Asset-Backed Securities - 0.8%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
Auto Loan Related - 0.8%
Ford Credit Grantor Trust 95-B A 5.90% 10/15/00 $ 297,601 $ 296,018
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Asset-Backed Securities
(Cost: $297,347)..................................................................................$ 296,018
- -------------------------------------------------------------------------------------------------------------------
Foreign Denominated Bonds - 1.4%
Principal Market
Rate Maturity Amount (e) Value (a)
- -------------------------------------------------------------------------------------------------------------------
Foreign Government - 1.4%
Canadian Government (Canadian dollar) 6.50% 06/01/04 700,000 $ 501,602
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Foreign Denominated Bonds
(Cost: $486,146)................................................................................$ 501,602
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Long-Term Securities
(Cost: $34,222,466).............................................................................$ 35,934,904
- -------------------------------------------------------------------------------------------------------------------
Short-Term Securities - 0.3%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.3%
5.11% 11/14/96 $ 100,000 (d) $ 99,389
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
(Cost: $99,389).................................................................................$ 99,389
- -------------------------------------------------------------------------------------------------------------------
Total Investments in Securities
(Cost: $34,321,855) (h).........................................................................$ 36,034,293
- -------------------------------------------------------------------------------------------------------------------
Other Assets and Liabilities (Net) - 1.1%
..........................................................................................$ 401,330
- -------------------------------------------------------------------------------------------------------------------
Total Net Assets
.........................................................................................$ 36,435,623
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolio on page 12
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1996
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
The interest rate shown for step bonds represents effective yield at September
30, 1996, based upon the estimated timing and amount of future interest and
principal payments.
Step bond - Security that remains zero-coupon until a predetermined
date at which time the stated coupon rate becomes payable at
regular intervals.
(d)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 5 to financial statements).
(e)
Foreign security whose cost and market value is stated in U.S. dollars.
Principal amount is denominated in the foreign currency indicated
parenthetically.
(f)
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.
(g)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security held at September 30, 1996, the Fund held
no unrestricted securities of the same issuer 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. Information concerning each restricted security held at
September 30, 1996 is shown on the next page.
Common Stock
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Network Appliance 09/07/93 $ 6,728
Limited Partnerships
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
Spectrum Equity Investors 05/12/94 74,644
01/03/95 25,000
05/11/95 5,525
05/22/95 35,000
11/16/95 42,500
12/13/95 17,500
04/17/96 12,500
05/15/96 35,000
08/14/96 20,000
Vanguard Associates IV 08/10/92 43,273
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
07/17/95 50,000
12/13/95 50,000
07/26/96 50,000
(h)
At September 30, 1996, the cost of securities for federal in come tax purposes
and the aggregate gross unrealized appreciation and depreciation based on that
cost were as follows:
Cost for federal income tax purposes........................... $ 34,275,130
============
Gross unrealized appreciation.................................. $ 2,733,780
Gross unrealized depreciation.................................. (974,617)
--------
Net unrealized appreciation.................................... $ 1,759,163
===========
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<S> <C>
Investments in securities, at market
(Cost: $34,321,855) $36,034,293
Cash in bank on demand deposit 451,433
Dividends and accrued interest receivable 254,942
Other 1,140
-----------
TOTAL ASSETS 36,741,808
-----------
LIABILITIES
Payable for investment securities purchased 306,185
-----------
TOTAL LIABILITIES 306,185
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $36,435,623
===========
REPRESENTED BY:
Capital stock $ 31,981
Additional paid-in capital 30,761,673
Undistributed net investment income 114,598
Accumulated net realized gains 3,821,291
Unrealized appreciation on:
Investment securities $ 1,705,994
Other assets and liabilities denominated in foreign currency 86
-----------
1,706,080
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $36,435,623
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 3,198,052
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.39
===========
See accompanying Notes to Financial Statements on page 18
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
SIX MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<S> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $1,121) $ 585,287
Dividends (net of foreign income taxes withheld of $555) 212,304
-----------
TOTAL INCOME 797,591
-----------
EXPENSES
Management fees 236,775
Compensation of Directors 1,389
-----------
TOTAL EXPENSES 238,164
Less fees reimbursed by Advisers or Distributor (1,389)
-----------
NET EXPENSES 236,775
-----------
NET INVESTMENT INCOME 560,816
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 3,266,967
Foreign currency transactions (494)
Futures contracts 137,573
-----------
3,404,046
Net change in unrealized appreciation or depreciation on:
Investment securities $(2,191,870)
Other assets and liabilities denominated in foreign currency (5,348)
Futures contracts (75,881)
-----------
(2,273,099)
-----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 1,130,947
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,691,763
===========
See accompanying Notes to Financial Statements on page 18
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BALANCED FUND
Six months ended Year ended
September 30, March 31,
1996 1996
------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 560,816 $ 1,017,056
Net realized gains 3,404,046 3,005,275
Net change in unrealized appreciation or depreciation (2,273,099) 704,180
------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,691,763 4,726,511
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (869,787) (1,132,510)
Net realized gains (1,301,738) --
------------------------------
TOTAL DISTRIBUTIONS (2,171,525) (1,132,510)
------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from 217,123 and 628,648 shares 2,466,143 6,993,925
Net asset value of 191,786 and 101,053 shares issued
to shareholders in reinvestment of distributions 2,138,419 1,117,011
Cost of 575,473 and 1,282,476 shares redeemed (6,488,285) (14,324,619)
------------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (1,883,723) (6,213,683)
------------------------------
TOTAL DECREASE IN NET ASSETS (2,363,485) (2,619,682)
NET ASSETS AT BEGINNING OF PERIOD 38,799,108 41,418,790
------------------------------
NET ASSETS AT END OF PERIOD $ 36,435,623 $ 38,799,108
(including undistributed net investment income ==============================
of $114,598 and $423,569)
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 18
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>
Six months Period from
ended Years ended March 31, April 10, 1992***
September 30, 1996 1996 1995 1994 March 31,1993
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Beginning of period $ 11.53 $ 10.57 $ 10.36 $ 10.89 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .18 .29 .29 .27 .18
Net realized and unrealized gains (losses) .35 .97 .62 (.34) .84
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .53 1.26 .91 (.07) 1.02
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.27) (.30) (.32) (.26) (.13)
Net realized gains (.40) -- (.38) (.20) --
- ------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.67) (.30) (.70) (.46) (.13)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.39 $ 11.53 $ 10.57 $ 10.36 $ 10.89
========================================================================================================================
Total investment return* 4.67% 12.09% 9.44% (0.77%) 10.18%
Net assets at end of period (000's omitted) $ 36,436 $ 38,799 $ 41,419 $ 52,369 $ 70,068
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25% 1.25% 1.25%**
Net investment income to average net assets 2.96%** 2.48% 2.68% 2.35% 2.18%**
Portfolio turnover rate
(excluding short-term securities) 117.0% 193.8% 256.9% 211.9% 83.4%
</TABLE>
See accompanying Notes to Financial Statements on page 18
* 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
*** Commencement of operations
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1996
(UNAUDITED)
[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. The
Fund has a primary objective of maximum total return through investment in
stocks, bonds and short-term instruments. 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 or international 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 sales price or if the last sales price is not available, the last
reported bid price is used.
Securities, including debt securities and restricted securities, for which
quotations are not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith using consistently
applied procedures under the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Short-term securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
Restricted securities for which there is no public market are valued at fair
value in good faith as determined by the Board of Directors.
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. During the period ended
September 30, 1996, the Fund did not enter into any dollar-roll transactions.
FUTURES AND OPTIONS
CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Fund may buy and sell futures contracts and options. The risk of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. 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 daily as unrealized gains or losses.
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.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid. The
Fund is subject to the credit risk that the other party will not complete the
obligations of the contract.
FOREIGN CURRENCY
TRANSLATIONS AND FORWARD
FOREIGN CURRENCY
CONTRACTS
The Fund may invest 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 from net investment income or net realized gains may also
differ from its ultimate characterization for tax purposes.
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 accrued daily. The Fund amortizes discount purchased on
long-term bonds using the level 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.
The Fund uses the equity method of accounting for limited partnerships.
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.
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 of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
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.
At September 30, 1996, the Fund is committed to invest an additional $232,000 in
Spectrum Equity Investors limited partnership.
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 in a segregated account 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 $12,750,000 line of credit with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. During the period ended September 30, 1996,
the Fund paid $324 in interest on the line of credit at an average annual rate
of 8.25%. There were no borrowings outstanding at September 30, 1996.
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Adviser is required to pay for
all expenses of the Fund, except certain costs (primarily those incurred in the
purchase and sale of assets, taxes, interest, extraordinary expenses and
compensation of Directors), in return for the Fund paying an all inclusive
management fee to Advisers. This fee is paid monthly and is equal to an annual
rate of 1.25% of the Fund's average daily net assets, which declines to 1.10% as
the Fund's assets increase.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF
SECURITIES
For the year ended September 30, 1996, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $42,845,762 and $46,327,423, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at September 30,
1996 are issues which generally cannot be offered for sale to the public without
first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid.
The Fund limits investments in securities that are not readily marketable to 15
percent of its net 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. At September 30, 1996,
restricted securities total $1,326,059 which comprises 3.6% of net assets.
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of September 30, 1996
for the Fund. The market value of securities deposited to cover initial margin
requirements for the open positions at September 30, 1996 was $24,847. The
unrealized depreciation of $6,444 on these contracts at September 30, 1996 is
included in unrealized appreciation on investment securities.
<TABLE>
<CAPTION>
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 5 December 1996 Short $ 536,406 $ 6,444
</TABLE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Capital Appreciation -- Equity securities of companies in developing countries
Countries Fund
- --------------------------------------------------------------------------------------------------------------------------------
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
(closed to new investors emerging growth companies
as of 2/1/96)
- --------------------------------------------------------------------------------------------------------------------------------
IAI Capital Capital Appreciation -- Common stocks of small- to medium-sized
Appreciation Fund 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 and 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 short-term instruments
+ Income]
- --------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment-grade bonds
- --------------------------------------------------------------------------------------------------------------------------------
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>
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://networth.galt.com/iai
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
[LOGO] IAI
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
