BALANCED FUND
SEMI-ANNUAL REPORT
IAI Balanced Fund
September 30, 1997
(unaudited)
[LOGO] IAI MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BALANCED FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1997
(UNAUDITED)
Chairman's Letter...............................2
Fund Managers' Review...........................4
Fund Portfolio..................................7
Notes to Fund Portfolio........................13
Statement of Assets and Liabilities............15
Statement of Operations........................16
Statement of Changes in Net Assets.............17
Financial Highlights...........................18
Notes to Financial Statements..................19
IAI Mutual Fund Family.........................24
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
CHAIRMAN'S LETTER
IAI BALANCED FUND
A DAY FOR BUYING OPPORTUNITIES
[PHOTO]
NOEL P. RAHN
CHAIRMAN
In life, traumatic events grip our attention, sometimes compelling us to make
quick decisions, often rewarding us for remaining calm. As time passes, we
collect ourselves and attain a perspective.
The stock market is a case in point. The last few days of October broke records
for points lost and gained--and for trading volume, which reached a billion
shares per day. But now that we've had some time to reflect, what really
happened? And what does it mean over the long term?
The problem began in Southeast Asia, as those booming economies increasingly
became overbuilt. Investors, seeing trouble ahead, withdrew their money, causing
downward pressure on currencies in Thailand and Malaysia. The governments
attempted to boost their currencies by raising interest rates. That caused
investors in these fragile stock markets to flee. Once the panic spread to Hong
Kong, investors throughout the world reacted.
In the United States, investors who were having a good year so far in 1997
decided to lock in their profits. Many of the best performers in recent years,
such as technology companies which do a great deal of business in Asia, were hit
hard. Small capitalization stocks held up better, as did large cap companies
like retailers who do their business exclusively in the United States.
The October 27 sell-off was inevitably compared with the stock market of 1987.
But there really was no comparison. In percentage terms, this year's fireworks
amounted to a 7% drop. In comparison, the 1987 sell-off was 22% in one day.
But there are other fundamental differences too, which make the events of
October 27, 1997, much less worrisome. Ten years ago, inflation was in the
mid-single digits and rising. Today, some economists would argue that there is
no inflation at all--in fact, there may even be deflation. In 1987, interest
rates were in the double digits and rising. Today, the 30-year U.S. Treasury
bond yields about 6%. In 1987, the federal budget deficit was mushrooming.
Today, the deficit has virtually been wiped out, and there's talk of a surplus.
The American economy is much stronger today than it was a decade ago.
Perhaps most importantly, investors, rather than running scared and selling at
the bottom, increasingly look at days like October 27 as a buying opportunity.
Even with the events of late October, the stock market has turned in an
above-average performance for 1997. Historically, stocks have produced average
annual returns of 10-12%. Viewed over this decade, and since the bull market
began in 1982, investors have truly enjoyed excellent results.
We believe the turmoil that occurred on October 27 will prove to be a relatively
minor event. True, it was a very strong reaction to external events. But the
environment continues to be a good one for U.S. investors. The economy continues
to grow at a 3-4% rate without inflation. Interest rates are low and corporate
profits continue to grow, although more slowly than in recent years. And the
markets in Asia appear to have stabilized for now.
The recent volatility is a great reminder to dollar-cost average into the
markets. Mutual funds make it easy to invest a fixed amount of money
periodically. When the market is down, that fixed investment buys more shares at
bargain prices. Such an automatic process allows you to keep your long-term
perspective when days like October 27th inevitably occur.
<PAGE>
CHAIRMAN'S LETTER
IAI BALANCED FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Fundamentally, the U.S. economy is in good shape. The expansion continued at a
3.6% pace in the third quarter, making this the first time since 1983 that
inflation-adjusted growth has been above 3% for four consecutive quarters.
During this same time, prices rose at an annualized rate of only 1.4%--the
slowest quarterly increase since 1964.
As further evidence of strength, the unemployment rate dropped to 4.7% in
October, its lowest level in 24 years. Job gains were widespread throughout a
majority of industries. So far in 1997, over 2.1 million new jobs have been
created.
On the fiscal policy side, the federal budget deficit has declined dramatically.
Tax receipts have exceeded expectations, hinting that income growth is even
higher than current statistics indicate. Low inflation has allowed the Fed to
follow a neutral monetary policy. The last time the Fed acted was in March of
this year when the overnight rate was raised by 0.25%. A shrinking deficit and
neutral monetary policy has helped long-term interest rates to drop by 1% in the
last six months.
Given this favorable backdrop, U.S. financial markets have experienced
above-average returns. For the 10 months through October, the stock market was
up 28% and bonds had returned about 8%.
Unfortunately, this good news has recently been overshadowed by turmoil
overseas. Currency devaluation and falling stock prices in the Asian Pacific
region quickly became a global event. In typical fashion, markets have led
economics. The events in October were a dramatic reintroduction of risk premiums
into the global investment equation. While some investors clearly suffered
substantial losses, the impact so far has been more psychological than
fundamental. Falling markets are likely to lead to slower growth and rising
financial problem in the afflicted economies. Although market volatility will
continue, the economic impact will be less invasive for the major economies of
Europe and North America. Global growth and inflation may be mildly lower.
However, as markets stabilize, investors are likely to refocus on positive
fundamentals.
Please read the Fund Managers' Review, which follows 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
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
IAI BALANCED FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BALANCED FUND
CO-MANAGER
DONALD J. HOELTING, CFA
IAI BALANCED FUND
CO-MANAGER
WHAT IS THE FUND'S OBJECTIVE?
IAI Balanced Fund's objective is to maximize 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.
HOW HAS THE FUND PERFORMED?
Year-to-date the Fund is up 24.92%. The Fund returned 4.76% this past quarter
which was in line with most balanced portfolios. For the past six months, the
Fund had a 20.39% total return while the S&P 500 and the Lehman
Government/Corporate Bond index returned 26.38% and 7.27%, respectively.
Considering the allocation of the Fund to 45% U.S. Domestic Equities, 15%
International Equities, and 40% Fixed Income investments, our returns were
comparable to what the market environment provided. U.S. Domestic Equities and
the Venture Capital investments helped performance while the Fixed Income and
International investments brought down composite performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND?
Were there any disappointments? Our holdings in the energy sector were
particularly successful this quarter. Strong performing stocks in the Fund
included Department 56 (1.27%)*, Intel (0.92%)*, Harley-Davidson (0.87%)*,
Healthcare COMPARE (0.93%)*, and SLM Holding (1.03%)*. From our venture capital
investment, our investment in Advanced Fibre Communications (1.22%)*, a
communications company that makes systems that link telephone users with global
networks, was another strong performer. The worst performing stocks this past
quarter were Aetna (0.65%)*, Eastman Kodak (0.56%)*, and Electronic Data Systems
(0.24%)*.
* PERCENTAGE OF NET ASSETS AS OF 9/30/97
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
From our international equity investments, the international markets were
especially volatile. The Japanese market was down 8% in local currency terms and
due to the strength of the U.S. dollar, down 12.8% in U.S. terms. Slowing
domestic demand in Japan and further troubles in their banking system
contributed to this negative environment. Other Far Eastern markets were hurt by
currency and growth rate worries. The troubles afflicting Thailand spread to
Singapore and Malaysia.
In our fixed income allocation, portfolio duration is slightly shorter than
the market. This modestly reduced performance as interest rates fell in the
second half of September. Sector and issue selection helped bond returns. The
drop in long-term global interest rates provided positive price appreciation for
the quarter.
WERE THERE ANY SIGNIFICANT CHANGES?
We increased our investment in international equities by 5% late in the third
quarter. Much of this came from our fixed income allocation. In the U.S. market,
the shift from large cap to smaller cap stocks benefited the Fund, given that
the Fund holds a somewhat larger percentage of smaller cap stocks than the S&P
500 index. The generally negative international investment climate also hurt
that portion of our portfolio invested in overseas markets.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We believe U.S. equity and fixed income markets fully reflect an economic
environment of strong growth and low inflation, leaving little room for negative
news. More than ever, our focus on companies with solid competitive advantages
generating a high level of free cash flow at attractive valuations positions us
well for what will very likely be a less stable economic environment in the
future. Our growing conviction is that some overseas markets may also provide
better fundamental valuations than our own at this time.
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC EQUITY SECTORS
% OF NET ASSETS AS OF 9/30/97
[BAR CHART]
FINANCIAL 6.9%
CONSUMER DURABLES 4.5%
PRODUCER MANUFACTURING 4.2%
CONSUMER NON-DURABLES 2.5%
ELECTRONIC TECHNOLOGY 2.1%
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 9/30/97
[BAR CHART]
YEARS
0-3 26%
3-5 17%
5-10 42%
10-20 8%
20+ 7%
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
------------------
Issue Sector 9/30/97 3/31/97
- -----------------------------------------------------------------------
Department 56 Consumer Durables 1.27 1.26
Westinghouse Electric Producer Manufacturing 1.23 1.12
Nabors Industries Industrial Services 1.21 0.71
Berkshire Hathaway Class A Producer Manufacturing 1.11 1.65
SLM Holding Financial 1.03 0.93
- -----------------------------------------------------------------------
TOTAL 5.85 5.67
BOND SECTORS
% OF BOND PORTFOLIO AS OF 9/30/97
[PIE CHART]
47% U.S. Government Agency Mortgage-Backed
32% U.S. Government Obligations
20% Corporate
1% Asset-Backed
BOND CREDIT
RATING
% OF BOND PORTFOLIO AS OF 9/30/97
U.S. Government... 45%
Aaa............... 18%
Aa.................--%
A..................--%
Baa............... 17%
Non-Investment
Grade............. 20%
<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 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+
[LINE GRAPH]
IAI Balanced Fund Lehman Govt/
(Inception 4/10/92) S&P 500 Index* Corp Bond Index*
4/10/92 $ 10,000 $ 10,000 $ 10,000
3/31/93 $ 11,019 $ 11,527 $ 11,430
3/31/94 $ 10,933 $ 11,693 $ 11,747
3/31/95 $ 11,963 $ 13,515 $ 12,284
3/31/96 $ 13,409 $ 17,859 $ 13,627
3/31/97 $ 15,897 $ 21,420 $ 14,234
9/30/97 $ 19,139 $ 27,072 $ 15,269
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/97
Since Inception
Six Months** 1 Year 5 Years 4/10/92
- -------------------------------------------------------------------------------
IAI BALANCED FUND 20.39% 36.36% 12.98% 12.59%
- -------------------------------------------------------------------------------
S&P 500 Index 26.38% 40.67% 20.83% 19.85%*
- -------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 7.27% 9.60% 6.95% 8.00%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
** NOT ANNUALIZED
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 29.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 4.5%
Bandag 5,500 $ 291,155
Department 56 (b) 23,000 665,563
Eastman Kodak 4,500 292,219
Harley-Davidson 15,600 455,325
Polaris 9,300 273,769
Sturm Ruger 18,600 352,238
----------
2,330,269
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.5%
Coca-Cola 5,000 304,688
Gillette 3,000 258,938
Philip Morris 11,900 494,594
UST 7,300 223,105
----------
1,281,325
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 0.9%
Walt Disney 6,100 491,813
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 2.1%
3Com (b) 7,100 363,875
Intel 5,200 480,025
Lucent Technologies 1 81
Motorola 3,600 258,750
- --------------------------------------------------------------------------------
1,102,731
- --------------------------------------------------------------------------------
ENERGY MINERALS - 1.4%
British Petroleum ADR 3,805 345,542
Exxon 5,900 377,968
----------
723,510
- --------------------------------------------------------------------------------
FINANCIAL - 5.7%
Aetna 4,200 342,038
American Express 4,900 401,188
Federal Home Loan
Mortgage Corporation 14,300 504,075
Leucadia National 9,000 309,375
Norwest 5,000 306,250
PMI Group 3,700 212,056
SLM Holding 3,500 540,750
United Assets Management 13,100 375,806
----------
2,991,538
- --------------------------------------------------------------------------------
HEALTH SERVICES - 0.9%
Healthcare COMPARE (b) 7,600 $ 485,450
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 2.0%
Pfizer 4,600 276,288
R.P. Scherer (b) 4,800 297,300
SmithKline Beecham ADR 9,200 449,650
----------
1,023,238
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.5%
Nabors Industries (b) 16,300 634,681
Waste Management 4,300 150,231
----------
784,912
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 1.3%
Nucor 4,700 247,631
Schweitzer-Mauduit International 9,900 420,750
----------
668,381
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.2%
Berkshire Hathaway Class A (b) 13 582,400
General Electric 4,400 299,475
Nordson 3,900 228,638
Tyco International 5,700 467,755
Westinghouse Electric 23,800 644,088
----------
2,222,356
- --------------------------------------------------------------------------------
RETAIL TRADE - 0.9%
Wal-Mart Stores 13,300 487,113
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 0.8%
Electronic Data Systems 3,600 127,800
Parametric Technology (b) 7,000 308,875
----------
436,675
- --------------------------------------------------------------------------------
UTILITIES - 0.4%
FPL Group 4,400 225,500
----------
Total Investments in COMMON STOCKS
(Cost: $12,004,545)......................................$ 15,254,811
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 1.2%
Principal Market
Rate Amount Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 1.2%
Community Bank
Series B 3.25% $12,000 $330,000
SI Financing Trust I 2.30 12,000 321,744
--------
651,744
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $589,500)......................................................$651,744
--------
- --------------------------------------------------------------------------------
OTHER SECURITIES - 8.9%
Market
Quantity (h) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCK - 1.2%
Advanced Fibre
Communications (b) 15,584 $ 638,944
- --------------------------------------------------------------------------------
Ownership Market
Percentage (h) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 7.7%
South Street Corporate
Recovery Fund I (b) 0.67% $ 39,324
Spectrum Equity Investors (b) 0.46 517,545
Vanguard Associates IV (b) 1.35 3,463,890
-------------
4,020,759
- --------------------------------------------------------------------------------
Total Investments in Other Securities
(Cost: $399,556).....................................$ 4,659,703
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
FOREIGN COMMON STOCKS - 6.0%
- --------------------------------------------------------------------------------
AUSTRALIA - 0.6%
Commonwealth Bank of
Australia (Financial) 9,600 $ 118,468
M.I.M. Holdings (Materials) 83,300 101,951
Woolworth's (Services) 34,301 111,461
-------------
331,880
- --------------------------------------------------------------------------------
BELGIUM - 0.1%
Compagnie Maritime Belge
(Services) 320 24,368
- --------------------------------------------------------------------------------
Finland - 0.1%
UPM-Kymmene (Materials) 2,439 67,823
- --------------------------------------------------------------------------------
FRANCE - 1.0%
Compagnie Financiere de Paribas
(Financial) 1,323 98,128
Dexia France (Financial) 856 81,095
Eridania Beghin-Say
(Consumer Goods) 487 75,526
Lafarge (Materials) 1,271 93,158
Lyonnaise des Eaux-Dumez
(Services) 825 92,065
Societe Television Franchaise
(Services) 730 63,128
-------------
503,100
- --------------------------------------------------------------------------------
GERMANY - 0.6%
Bayer (Materials) 2,770 110,333
RWE (Energy) 2,483 120,270
Deutsche Telekom (Services) 4,710 91,202
-------------
321,805
- --------------------------------------------------------------------------------
HONG KONG - 0.4%
First Pacific (Multi-Industry) 51,000 51,076
Jardine Strategic (Multi-Industry) 28,000 109,760
Swire Pacific Class A
(Multi-Industry) 6,000 45,940
Swire Pacific Class A
(Multi-Industry) 10,000 14,796
-------------
221,572
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
FOREIGN COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
JAPAN - 1.2%
Aiwa (Consumer Goods) 2,000 $ 43,072
Eisai (Consumer Goods) 5,000 89,455
Hitachi (Producer Manufacturing) 13,000 113,063
Mazda Motor
(Consumer Durables) (b) 17,000 60,266
Namco (Consumer Goods) 2,000 73,553
Nippon Telegraph & Telephone
(Services) 12 110,328
Nippon Yusen Kabushiki Kaish
(Services) 24,000 80,510
Toray Industries (Materials) 12,000 70,868
-------------
641,115
- --------------------------------------------------------------------------------
MALAYSIA - 0.0%
Land & General Holdings
(Multi-Industry) 13,000 8,383
Malaysian International Shipping,
foreign (Services) 6,000 11,476
-------------
19,859
- --------------------------------------------------------------------------------
NETHERLANDS - 0.2%
Koninklijke PTT Nederland
(Materials) 2,255 88,642
- --------------------------------------------------------------------------------
NEW ZEALAND - 0.2%
Carter Holt Harvey
(Materials) 37,300 80,700
- --------------------------------------------------------------------------------
PORTUGAL - 0.1%
Banco Comercial Portugues
(Financial) 1,208 25,520
Banco Totta & Acores
(Financial) 1,745 36,814
Electricidade de Portugual
(Energy) 235 4,036
-------------
66,370
- --------------------------------------------------------------------------------
SPAIN - 0.2%
Iberdrola (Energy) 8,490 104,440
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
UNITED KINGDOM - 1.3%
B.A.T. Industries
(Multi-Industry) 11,517 $ 101,022
British Steel
(Materials) 15,486 45,154
Energy Group (Utilities) 10,028 105,699
FKI (Capital Equipment) 11,185 37,220
Hanson (Multi-Industry) 720 3,433
Imperial Tobacco Group
(Consumer Goods) 10,451 62,718
Peninsular and Oriental Steam
Navigation (Services) 7,900 84,546
Rolls-Royce (Capital Equipment) 19,000 78,573
Sears (Services) 49,530 48,006
Tomkins (Multi-Industry) 18,850 106,423
- --------------------------------------------------------------------------------
672,794
-------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FOREIGN COMMON STOCKS
(COST: $3,086,566)......................................$3,144,468
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 5.9%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 1.6%
AT&T Capital (medium-term note) 6.41% 08/13/99 $ 200,000 $ 200,573
Emergent Group (e) 10.75 09/15/04 50,000 50,688
GMAC 6.63 10/01/02 50,000 50,378
Webster Financial 8.75 06/30/00 500,000 525,345
-----------
826,984
- ---------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 3.6%
Anker Coal Group (e) 9.75 10/01/07 250,000 253,750
Belo (A.H.) 7.25 09/15/27 100,000 98,628
Bucyrus International (e) 9.75 09/15/07 350,000 353,063
Fort James 6.88 09/15/07 200,000 198,926
LTV (e) 8.20 09/15/07 150,000 148,884
Nextlink Communications 9.63 10/01/07 150,000 155,250
Speedway Motorsports (e) 8.50 08/15/07 150,000 151,500
Time Warner 8.38 03/15/23 500,000 537,000
-----------
1,897,001
- ---------------------------------------------------------------------------------------------------------------
UTILITIES - 0.5%
U.S. West Capital Funding 7.95 02/01/97 235,000 247,554
- ---------------------------------------------------------------------------------------------------------------
YANKEE - 0.2%
Canadian Forest Oil (e) (f) 8.75 09/15/07 100,000 99,618
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $3,034,656).................................................................................$ 3,071,157
- ---------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS - 9.5%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
U.S. INFLATION INDEX NOTE - 0.3%
3.38% 01/15/07 $142,080(g) $ 139,160
- ---------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 4.4%
6.25 06/30/98 400,000 402,000
6.00 09/30/98 250,000 250,820
5.88 10/31/98 600,000 600,935
5.50 12/31/00 190,000 187,595
6.38 09/30/01 250,000 253,360
6.88 05/15/06 250,000 261,405
6.25 02/15/07 350,000 351,806
-----------
2,307,921
- ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
U.S. GOVERNMENT OBLIGATIONS (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 4.8%
12.00% 08/15/13 $ 220,000 $ 316,800
9.25 02/15/16 500,000 649,454
7.50 11/15/16 250,000 278,165
8.75 05/15/17 250,000 313,008
7.88 02/15/21 200,000 233,000
6.88 08/15/25 30,000 31,528
6.50 11/15/26 450,000 452,741
6.63 02/15/27 220,000 225,260
-----------
2,499,956
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $4,875,540)..................................................................................$ 4,947,037
- ---------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 13.6%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.2%
6.50% 09/15/24 $ 110,000 $ 105,050
- ---------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 2.7%
6.50 03/02/11 139,631 138,845
6.00 04/01/11 277,685 271,437
6.50 04/01/26 453,191 442,142
7.00 11/01/26 558,583 557,885
-----------
1,410,309
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 8.7%
9.00 06/01/17 795,423 856,751
6.00 12/25/24 190,000 176,255
9.50 02/01/25 190,411 205,285
6.50 05/01/26 413,452 402,855
7.50 10/01/27 1,860,000 1,890,801
8.00 10/01/27 1,000,000 1,031,870
-----------
4,563,817
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 0.5%
6.50 10/15/11 260,000 258,131
- ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.5%
7.00% 04/15/23 $ 460,453 $ 462,033
8.00 12/15/23 192,893 200,186
7.50 01/15/26 136,291 138,640
-------------
800,859
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $7,062,479)................................................................................$ 7,138,166
- ---------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES - 0.2%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 0.2%
CHASE MANHATTAN AUTO OWNER TRUST 97-B A3 6.35% 02/15/01 $ 130,000 $ 130,894
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN ASSET BACKED SECURITIES
(COST: $129,939)..................................................................................$ 130,894
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $31,182,781)...............................................................................$ 38,997,980
- ---------------------------------------------------------------------------------------------------------------
SHORT TERM SECURITIES - 28.7%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 28.7%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE) 5.40% 10/24/97 $ 15,000,000 $ 14,948,250
U.S. Treasury Bill 5.05 12/04/97 100,000(d) 99,125
-------------
15,047,375
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $15,047,374)...............................................................................$ 15,047,375
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $46,230,155) (I)...........................................................................$ 54,045,355
- ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - (3.1%)
...............................................................................................$ (1,612,446)
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
...............................................................................................$ 52,432,909
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial state-ments, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Purchased on a when-issued basis. At September 30, 1997 the cost of securities
purchased on a when-issued basis totalled $3,171,526.
(d)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 5 to financial statements).
(e)
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.
(f)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(g)
Principal amounts of Inflation Index Notes change based on increase or decrease
of the Consumer Price Index.
(h)
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, 1997, 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, 1997 is shown on the next page.
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
COMMON STOCK
Security Acquisition Date Cost
- -------------------------------------------------------------------------------
Advanced Fibre Communications 10/31/96 $ 7,435
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- -------------------------------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
Spectrum Equity Investors 05/12/94 31,841
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
10/22/96 50,000
12/12/96 12,500
02/12/97 21,395
02/26/97 25,000
05/05/97 20,000
06/10/97 12,500
09/30/97 12,500
Vanguard Associates IV 07/26/96 13,360
(i)
At September 30, 1997, 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......................... $ 46,195,992
=============
Gross unrealized appreciation................................ $ 8,142,545
Gross unrealized depreciation................................ (293,182)
-------------
Net unrealized appreciation.................................. $ 7,849,363
=============
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C>
ASSETS
Investments in securities, at market
(Cost: $46,230,155) $54,045,355
Cash in bank on demand deposit 1,712,895
Receivable for investment securities sold 7,807,114
Dividends and accrued interest receivable 182,781
Unrealized appreciation on foreign currency contracts held, at value (Note 6) 3,795
Variation margin receivable 625
-----------
TOTAL ASSETS 63,752,565
-----------
LIABILITIES
Payable for investment securities purchased 11,319,525
Unrealized depreciation on foreign currency contracts held, at value (Note 6) 131
-----------
TOTAL LIABILITIES 11,319,656
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $52,432,909
-----------
REPRESENTED BY:
Capital stock $ 40,381
Additional paid-in capital 40,919,727
Undistributed net investment income 100,570
Accumulated net realized gains 3,559,543
Unrealized appreciation on:
Investment securities $ 7,809,538
Other assets and liabilities denominated in foreign currency 3,150
-----------
7,812,688
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $52,432,909
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 4,038,083
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 12.98
===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
SIX MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
NET INVESTMENT INCOME
INCOME
<S> <C> <C>
Interest $ 685,438
Dividends (net of foreign income taxes withheld of $6,662) 195,149
-----------
TOTAL INCOME 880,587
-----------
EXPENSES
Management fees 275,962
Compensation of Directors 2,290
-----------
TOTAL EXPENSES 278,252
Less fees reimbursed by Advisers (2,290)
-----------
NET EXPENSES 275,962
-----------
NET INVESTMENT INCOME 604,625
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 3,044,696
Foreign currency transactions 3,770
Futures contracts (11,400)
-----------
3,037,066
Net change in unrealized appreciation or depreciation on:
Investment securities $ 3,800,474
Other assets and liabilities denominated in foreign currency 2,921
Futures contracts (16,406)
-----------
3,786,989
-----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 6,824,055
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,428,680
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 19
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
IAI BALANCED FUND
Six months ended Year ended
September 30, March 31,
1997 1997
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS (UNAUDITED)
<S> <C> <C>
Net investment income $ 604,625 $ 1,037,273
Net realized gains 3,037,066 4,710,596
Net change in unrealized appreciation or depreciation 3,786,989 46,520
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 7,428,680 5,794,389
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (444,871) (1,454,148)
Net realized gains (606,899) (5,366,081)
----------- -----------
TOTAL DISTRIBUTIONS (1,051,770) (6,820,229)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Net proceeds from 1,653,854 and 1,002,358 shares sold 20,400,694 11,615,277
Net asset value of 84,196 and 620,444 shares issued
for reinvestment of distributions 1,047,393 6,699,334
Cost of 673,812 and 2,013,573 shares redeemed (8,213,640) (23,266,327)
----------- -----------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 13,234,447 (4,951,716)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 19,611,357 (5,977,556)
NET ASSETS AT BEGINNING OF PERIOD 32,821,552 38,799,108
----------- -----------
NET ASSETS AT END OF PERIOD $52,432,909 $32,821,552
=========== ===========
including undistributed (overdistributed)
net investment income of: $ 100,570 $ (59,184)
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 19
<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>
Six months Years ended March 31, Period from
ended ---------------------------------- April 10, 1992***
September 30, 1997 1997 1996 1995 1994 to March 31,1993
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $11.04 $11.53 $10.57 $10.36 $10.89 $10.00
----------------------------------------------------------------
OPERATIONS
Net investment income 0.17 0.37 0.29 0.29 0.27 0.18
Net realized and unrealized gains (losses) 2.07 1.60 0.97 0.62 (0.34) 0.84
----------------------------------------------------------------
TOTAL FROM OPERATIONS 2.24 1.97 1.26 0.91 (0.07) 1.02
----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.13) (0.49) (0.30) (0.32) (0.26) (0.13)
Net realized gains (0.17) (1.97) -- (0.38) (0.20) --
----------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.30) (2.46) (0.30) (0.70) (0.46) (0.13)
----------------------------------------------------------------
NET ASSET VALUE
End of period $12.98 $11.04 $11.53 $10.57 $10.36 $10.89
================================================================
Total investment return* 20.39% 18.55% 12.09% 9.44% (0.77%) 10.18%
Net assets at end of period (000's omitted) $52,433 $32,822 $38,799 $41,419 $52,369 $70,068
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25% 1.25% 1.25% 1.25%**
Net investment income to average net assets 2.74%** 2.92% 2.48% 2.68% 2.35% 2.18%**
Average brokerage commission rate**** $0.0436 $0.0468 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 112.0% 190.6% 193.8% 256.9% 211.9% 83.4%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE. THE COMPARABILITY OF RATES BETWEEN DOMESTIC AND
FOREIGN EQUITIES MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES PER
SHARE CAN VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1997
(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 instru-ments. This report covers only the IAI
Balanced Fund (the Fund).
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
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. Such valuations are obtained from pricing services or are supplied by
dealers.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those 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 under procedures established by the Board of Directors. Such
securities represent $4,659,703 (8.9% of net assets). Because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the securities
existed, and the differences could be material.
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 may occur 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.
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 risks 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.
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.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTIGENCIES
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 is committed to make future capital contributions, if
requested by the Company.
The Fund has available a $13,200,000 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. There are no borrowings outstanding at
September 30, 1997.
At September 30, 1997, the Fund is committed to invest an additional $78,000 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 deter-mination 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) 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
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. The fee is equal to an annual rate of
1.25% declining to 1.10% of average daily net assets. This fee is paid monthly.
The Management Agreement further provides that Advisers will either reimburse
the Fund for the fees and expenses it pays to Directors who are not "interested
persons" of the Fund or reduce its fee by an equivalent amount.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF
SECURITIES
For the six months ended September 30, 1997, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $40,428,856 and $39,660,048, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at September 30,
1997 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%
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.
[5] Open Futures Contracts
The financial futures contracts shown below were open as of September 30, 1997.
The market value of securities deposited to cover initial margin requirements
for the open positions at September 30, 1997 was $74,344. The unrealized
depreciation of $5,662 on these contracts at September 30, 1997 is included in
unrealized appreciation on investment securities.
Number of Expiration Market Unrealized
Type Contracts Month Position Value Depreciation
- --------------------------------------------------------------------------------
U.S. Treasury Note 5 December 1997 Short $550,625 $5,662
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[6] FOREIGN CURRENCY EXCHANGE CONTRACTS
At September 30, 1997 the Balanced Fund had entered into foreign currency
exchange contracts. The unrealized appreciation or depreciation on those
contracts at September 30, 1997 is included in unrealized appreciation or
depreciation on other assets and liabilities denominated in foreign currency.
The terms of the open contracts are as follows:
<TABLE>
<CAPTION>
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/01/97 4,913 U.S. Dollars 9,697 Dutch Guilder $ -- $ 39
10/01/97 731,135 Japanese Yen 6,005 U.S. Dollars -- 51
10/02/97 715,298 Japanese Yen 5,890 U.S. Dollars -- 35
10/03/97 6,281 Malaysian Ringgit 1,960 U.S. Dollars 22 --
10/03/97 1,322 U.S. Dollars 236,799 Portuguese Escudo -- 6
10/10/97 54,000 British Pounds 90,968 U.S. Dollars 3,773 --
- --------------------------------------------------------------------------------------------------------------
$3,795 $ 131
</TABLE>
<PAGE>
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 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 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 + INCOME] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Investment-grade bonds
Preservation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital U.S. Government securities
Preservation
- ------------------------------------------------------------------------------------------------------------------------------------
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>
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
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
J. Peter Thompson
Charles H. Withers
<PAGE>
[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
