BALANCED FUND
ANNUAL REPORT
IAI BALANCED FUND
MARCH 31, 1997
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI BALANCED FUND
ANNUAL REPORT
MARCH 31, 1997
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
Statements of Changes in Net Assets............17
Financial Highlights...........................18
Notes to Financial Statements..................19
Independent Auditors' Report...................24
Federal Tax Information........................25
IAI Mutual Fund Family.........................26
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI BALANCED FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, you should make sure
that your investment portfolio generally reflects your long-term investment
goals for 1997 and beyond.
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The economy was surprisingly strong in the first quarter of 1997. Real growth
will slow from the reported pace of 5.6%. However, the slowdown will need some
help from higher interest rates if the Fed expects to meet its economic growth
targets. Business and labor markets no longer have excess capacity. Money and
liquidity are ample to finance above-trend growth. Furthermore, the value of the
U.S. dollar complicates the outlooks. Over the last two years, a strong dollar
has helped to restrain U.S. output and hold down price increases. This trend may
be coming to an end.
This combination of factors will lead to a modest rise in inflation in the
second half of the year. While increases will be restrained, interest rates are
likely to rise and the yield curve will flatten.
However, a recession is unlikely in the next four quarters. Full employment,
lower federal budget deficits and rising productivity from strong capital
spending are all positive factors in our long-term outlook for the market.
Potential volatility in the months ahead will present good long-term buying
opportunities.
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
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 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.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
The IAI Balanced Fund performed well for the year ended March 31, 1997 with a
total return of 18.55% in comparison to the returns from the S&P 500 index at
19.94%, the Lehman Brothers Government/Corporate bond index at 4.46%, and the
international equity markets as represented by the MSCI EAFE index at 1.75%. The
fund's current allocation structure is approximately 55% Equities and 45% Fixed
Income.
In our bond allocation, we maintained a relatively neutral duration throughout
most of 1996. In the beginning of 1997, with more evidence of increased economic
strength (and the subsequent raising of short-term interest rates by the Federal
Reserve board in late March), we set our bond strategy to a more defensive
structure. Portfolio duration is shorter and we have increased the weighting in
U.S. governments. Throughout the last 12 months, we have focused on the tactical
use of some high yield bonds, international bonds, and asset-backed securities
for added yield. We continue to selectively use these strategies. Despite the
prospect for modest increases in interest rates, we continue to believe that
U.S. bonds offer excellent long-term value.
Clearly, our process of investing in primarily larger stocks, both domestic and
international along with our investment in private equity or venture capital has
aided our performance. There were significant winners from our investment in
both private equity holdings and several large international stocks. Our
tactical use of these two types of stocks has increased these past twelve months
as we seek more value in markets outside of our own. Our investment in large
global companies such as Hitachi Ltd., Glaxo Wellcome, and British Petroleum
will support the fund if domestic stock markets weaken. The general weakness of
the smaller U.S. domestic stocks and overperformance of our larger domestic
issues was a significant positive factor for the fund as well these past 12
months.
OUTLOOK
Investor sentiment has finally turned negative after two years of stock market
performance in excess of twice the average annual returns achieved over the past
50 years. As valuation driven investors, we see the correction in U.S. stocks as
an opportunity to purchase companies with excellent business opportunities which
have been indiscriminately sold down to good long-term values. Modest increase
in interest rates in the second half of 1997 should provide an excellent
long-term buying opportunity for bonds.
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC EQUITY SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR CHART]
FINANCIAL 9.2%
PRODUCER MANUFACTURING 5.0%
CONSUMER DURABLES 4.6%
CONSUMER NON-DURABLES 3.1%
ELECTRONIC TECHNOLOGY 3.0%
TOP FIVE EQUITY HOLDINGS
% of Net Assets
- -------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- -------------------------------------------------------------------------------
Berkshire Hathaway Class A Producer Manufacturing 1.65 --
Intel Electronic Technology 1.27 1.13
Department 56 Consumer Durables 1.26 --
Philip Morris Consumer Non-Durables 1.25 --
Westinghouse Electric Producer Manufacturing 1.12 --
- -------------------------------------------------------------------------------
TOTAL 6.55 1.13
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 3/31/97
[BAR CHART]
YEARS
- -----
0-3 9%
3-5 17%
5-10 25%
10-20 17%
20+ 32%
BOND SECTORS
% OF BOND PORTFOLIO AS OF 3/31/97
[PIE CHART]
U.S. Government Obligations 35%
U.S. Government Agency Mortgage-Backed 32%
Corporate 33%
BOND CREDIT RATING
% OF BOND PORTFOLIO AS OF 3/31/97
U.S. Government.....67%
Aaa.................--%
Aa..................--%
A...................19%
Baa..................7%
Non-Investment
Grade................7%
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+
[PLOT POINTS CHART]
IAI Balanced Fund Lehman Govt/Corp
(Inception 4/10/92) S&P 500 Index* 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
3/31/97 $15,897 $21,420 $14,150
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/97
Since Inception
1 Year 4/10/92
- ---------------------------------------------------------------------------
IAI BALANCED FUND 18.55% 9.77%
- ---------------------------------------------------------------------------
S&P 500 Index 19.94% 16.46%*
- ---------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index 4.46% 7.32%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 33.5%
Market
Quantity Value (a)
- --------------------------------------------------------
CONSUMER DURABLES - 4.6%
Bandag 4,400 $ 221,650
Department 56 (b) 23,800 413,525
Eastman Kodak 3,600 273,150
Hasbro 8,100 221,738
Polaris 9,000 208,125
Sturm Ruger 10,400 165,100
- --------------------------------------------------------
1,503,288
- --------------------------------------------------------
CONSUMER NON-DURABLES - 3.1%
Coca-Cola 4,700 262,612
Gillette 2,700 196,088
Philip Morris 3,600 410,850
UST 5,900 164,462
- --------------------------------------------------------
1,034,012
- --------------------------------------------------------
CONSUMER SERVICES - 1.8%
Media General Class A 4,800 136,200
Reader's Digest Class A 4,000 115,000
Walt Disney 4,600 335,800
- --------------------------------------------------------
587,000
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.0%
3Com (b) 10,700 350,425
Intel 3,000 417,375
Lucent Technologies 1 53
Motorola 3,500 211,312
- --------------------------------------------------------
979,165
- --------------------------------------------------------
ENERGY MINERALS - 1.2%
British Petroleum ADR 789 108,290
Exxon 2,700 290,925
- --------------------------------------------------------
399,215
- --------------------------------------------------------
FINANCIAL - 7.3%
Aetna 3,500 300,563
American Express 5,800 347,275
Fannie Mae 9,800 354,025
Leucadia National 7,200 198,000
Norwest 4,800 222,000
PMI Group 3,500 175,437
Student Loan Marketing
Association 3,200 304,800
United Assets Management 12,200 312,625
United Dominion Realty Trust 12,700 185,737
- --------------------------------------------------------
2,400,462
- --------------------------------------------------------
HEALTH TECHNOLOGY - 2.2%
Bristol-Myers Squibb 4,800 283,200
Merck & Company 1,500 126,375
Pfizer 2,100 176,663
SmithKline Beecham ADR 2,000 140,000
- --------------------------------------------------------
726,238
- --------------------------------------------------------
INDUSTRIAL SERVICES - 1.4%
Nabors Industries (b) 12,000 234,000
Schlumberger ADR 740 79,365
WMX Technologies 4,300 131,688
- --------------------------------------------------------
445,053
- --------------------------------------------------------
NON-ENERGY MINERALS - 1.2%
Nucor 3,100 141,825
Schweitzer-Mauduit International 8,200 248,050
- --------------------------------------------------------
389,875
- --------------------------------------------------------
PRODUCER MANUFACTURING - 5.0%
Berkshire Hathaway Class A (b) 15 543,000
General Electric 2,700 267,975
Nordson 3,000 153,750
Tyco International 5,300 291,500
Westinghouse Electric 20,800 369,200
- --------------------------------------------------------
1,625,425
- --------------------------------------------------------
RETAIL TRADE - 1.7%
Harcourt General 5,900 274,350
Wal-Mart 10,600 295,475
- --------------------------------------------------------
569,825
- --------------------------------------------------------
TECHNOLOGY SERVICES - 0.5%
Electronic Data Systems 4,000 161,500
- --------------------------------------------------------
UTILITIES - 0.5%
FPL Group 3,400 150,025
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $9,906,475)......................$ 10,971,083
========================================================
CONVERTIBLE PREFERRED
Stock - 0.2%
Market
Rate Quantity Value (a)
- --------------------------------------------------------
INDUSTRIAL - 0.2%
WHX Series B 3.75% 2,300 $ 80,500
========================================================
TOTAL INVESTMENTS IN
CONVERTIBLE PREFERRED STOCK
(COST: $115,000).......................$ 80,500
========================================================
NON-CONVERTIBLE PREFERRED
STOCKS - 1.9%
Market
Rate Quantity Value (a)
- --------------------------------------------------------
FINANCIAL - 1.9%
Community Bank
Series B 3.25% 12,000 $ 324,000
SI Financing Trust I 2.30 12,000 307,500
- --------------------------------------------------------
631,500
========================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $589,500).......................$ 631,500
========================================================
OTHER SECURITIES - 12.3%
Market
Quantity (h) Value (a)
- --------------------------------------------------------
COMMON STOCK - 0.2%
Network Appliance (b) 2,503 $ 81,348
- --------------------------------------------------------
Ownership Market
Percentage (h) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 12.1%
South Street Corporate
Recovery Fund I (b) 0.67% $ 43,493
Spectrum Equity Investors (b) 0.46 479,689
Vanguard Associates IV (b) 1.35 3,433,093
- --------------------------------------------------------
3,956,275
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $771,460)....................... $ 4,037,623
========================================================
FOREIGN COMMON STOCKS - 8.5%
Market
Quantity Value (a)
- --------------------------------------------------------
AUSTRALIA - 0.9%
Commonwealth Bank of
Australia (Financial) 9,600 95,574
M.I.M. Holdings
(Energy Minerals) 69,100 91,543
Woolworth's
(Commercial Services) 34,301 90,883
- --------------------------------------------------------
278,000
- --------------------------------------------------------
BELGIUM - 0.4%
Compagnie Maritime
Belge (Transportation) 320 24,683
Generale de Banque (Financial) 230 90,038
- --------------------------------------------------------
114,721
- --------------------------------------------------------
FRANCE 1.5%
Compagnie Financiere de Paribas
(Financial) 1,325 92,210
Credit Local de France
(Commercial Services) 1,020 110,001
Eridania Beghin-Say
(Process Industries) 580 91,197
Lafarge (Producer Manufacturing) 1,450 100,419
Lyonnaise des Eaux-Dumez
(Industrial Services) 985 100,626
- --------------------------------------------------------
494,453
- --------------------------------------------------------
GERMANY - 0.5%
Bayer (Process Industries) 1,920 79,866
RWE (Energy Minerals) 1,800 80,322
- --------------------------------------------------------
160,188
- --------------------------------------------------------
HONG KONG - 0.7%
First Pacific (Financial) 42,000 53,388
Hong Kong Telecommunications
(Utilities) 49,600 84,811
Jardine Strategic Holdings
(Financial) 28,000 96,880
- --------------------------------------------------------
235,079
- --------------------------------------------------------
JAPAN - 1.6%
Eisai (Health Technology) 4,000 68,492
Hitachi (Producer Manufacturing) 11,000 97,730
Mitsubishi Heavy Industries
(Producer Manufacturing) 15,000 97,528
Nippon Telegraph & Telephone
(Utilities) 17 119,595
Nippon Yusen Kabushiki Kaish
(Transportation) 17,000 60,141
Toray Industries
(Process Industries) 15,000 87,109
- --------------------------------------------------------
530,595
- --------------------------------------------------------
MALAYSIA - 0.1%
Land & General Holdings
(Process Industries) 13,000 24,120
Malaysian International Shipping,
foreign (Transportation) 7,000 17,364
- --------------------------------------------------------
41,484
- --------------------------------------------------------
NETHERLANDS - 0.6%
ING Groep (Financial) 1,950 76,823
KLM Royal Dutch Air Lines
(Transportation) 209 6,239
Koninklijke PTT Nederland
(Commercial Services) 1,600 59,281
Philips Electronics
(Producer Manufacturing) 1,349 62,926
- --------------------------------------------------------
205,269
- --------------------------------------------------------
NEW ZEALAND - 0.2%
Carter Holt Harvey
(Non-Energy Minerals) 37,300 78,266
- --------------------------------------------------------
SPAIN - 0.2%
Banco Popular Espanol (Financial) 380 68,136
- --------------------------------------------------------
UNITED KINGDOM - 1.8%
B.A.T. Industries
(Consumer Non-Durables) 11,800 100,269
British Steel
(Non-Energy Minerals) 27,300 72,955
Energy Group (Utilities)(b) 2,450 20,477
Glaxo Wellcome
(Health Technology) 4,950 90,748
Hanson (Financial) 3,062 14,382
Imperial Tobacco Group
(Consumer Non-Durables)(b) 7,861 53,825
Peninsular and Oriental Steam
Navigation (Transportation) 7,900 80,231
Rolls-Royce (Electronic
Technology) 19,000 71,131
Tomkins (Producer Manufacturing) 18,850 84,189
- --------------------------------------------------------
588,207
========================================================
TOTAL INVESTMENTS IN FOREIGN COMMON STOCKS
(COST: $2,819,860)........................$2,794,398
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1997
<TABLE>
<CAPTION>
CORPORATE BONDS - 13.0%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 3.4%
Ford Motor Credit 7.00% 09/25/01 $ 50,000 $ 49,702
Nationwide CSN Trust (f) 9.88 02/15/25 1,000,000 1,062,470
- ----------------------------------------------------------------------------------------------------
1,112,172
- ----------------------------------------------------------------------------------------------------
INDUSTRIAL - 6.4%
American General (f) 7.57 12/01/45 500,000 449,824
Circus Circus 6.70 11/15/96 50,000 47,820
Federated Department Stores 8.50 06/15/03 350,000 361,497
J. C. Penney 7.63 03/01/97 235,000 219,471
RJR Nabisco 8.00 07/15/01 500,000 496,935
Triton Energy (step bond) 9.03 (c) 12/15/00 500,000 521,250
- ----------------------------------------------------------------------------------------------------
2,096,797
- ----------------------------------------------------------------------------------------------------
YANKEE - 3.2%
Empresa Nacional Electric (g) 8.13 02/01/97 250,000 244,580
Reliance Industries (f) (g) 10.25 01/15/97 350,000 348,530
Tenaga Nasional (f) (g) 7.50 01/15/96 500,000 457,610
- ----------------------------------------------------------------------------------------------------
1,050,720
====================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $4,391,102)....................................................................$ 4,259,689
====================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1997
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS - 13.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 5.8%
5.63% 10/31/97 $ 400,000 $ 399,500
6.00 09/30/98 250,000 248,905
6.88 07/31/99 400,000 403,000
5.50 12/31/00 900,000 864,144
- -----------------------------------------------------------------------------------------------------------------
1,915,549
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 7.8%
10.38 11/15/12 125,000 154,980
12.00 08/15/13 180,000 247,471
9.25 02/15/16 500,000 604,375
6.88 08/15/25 1,520,000 1,460,629
6.50 11/15/26 100,000 92,062
- -----------------------------------------------------------------------------------------------------------------
2,559,517
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $4,581,198).................................................................................$ 4,475,066
=================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 12.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION - 2.0%
6.50% 05/15/21 $ 423,276 $ 388,620
6.50 11/15/21 270,000 253,968
- -----------------------------------------------------------------------------------------------------------------
642,588
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 2.7%
6.00 04/01/11 290,834 274,928
6.50 04/01/26 467,191 435,800
7.50 11/01/26 191,900 188,720
- -----------------------------------------------------------------------------------------------------------------
899,448
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.9%
9.00 06/01/17 885,346 935,696
6.00 10/01/23 79,919 72,651
9.50 02/01/25 217,852 234,381
7.00 11/01/25 373,169 357,425
- -----------------------------------------------------------------------------------------------------------------
1,600,153
- -----------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.0%
8.00 09/15/08 67,422 69,002
7.00 04/15/23 478,764 459,466
6.00 05/01/27 460,000 (d) 455,903
- -----------------------------------------------------------------------------------------------------------------
984,371
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $4,187,086)...............................................................................$ 4,126,560
=================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $27,361,681)..............................................................................$ 31,376,419
=================================================================================================================
SHORT TERM SECURITIES - 3.3%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS - 3.3%
5.26% 04/17/97 $ 100,000 (e) $ 99,771
5.32 05/29/97 1,000,000 991,610
- -----------------------------------------------------------------------------------------------------------------
1,091,381
=================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,091,393)...............................................................................$ 1,091,381
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $28,453,074) (i)..........................................................................$ 32,467,800
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) -- 1.1%
..............................................................................................$ 353,752
=================================================================================================================
TOTAL NET ASSETS
..............................................................................................$ 32,821,552
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 13
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1997
(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)
Step bonds represent securities that remain zero-coupon until a predetermined
date at which time the stated coupon rate becomes payable at regular intervals.
The interest rate shown for step bonds represents effective yield at March 31,
1997, based upon the estimated timing and amount of future interest and
principal payments.
(d)
Purchased on a when-issued basis. At March 31, 1997 the cost of securities
purchased on a when-issued basis totalled $458,185.
(e)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 5 to financial statements).
(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)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(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 March 31, 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
March 31, 1997 is shown on the next page.
COMMON STOCK
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
Network Appliance 09/23/94 $ 3,058
12/30/96 1,792
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
Spectrum Equity Investors 05/12/94 53,242
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
Vanguard Associates IV 02/11/93 11,448
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
(i)
At March 31, 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........................... $ 28,418,911
==============
Gross unrealized appreciation.................................. $ 5,301,246
Gross unrealized depreciation.................................. (1,252,357)
--------------
Net unrealized appreciation.................................... $ 4,048,889
==============
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCE FUND
MARCH 31, 1997
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $28,453,074) $ 32,467,800
Cash in bank on demand deposit 323,922
Receivable for investment securities sold 927,795
Dividends and accrued interest receivable 198,498
Unrealized appreciation on foreign currency contracts held, at value (Note 6) 2,018
Variation margin receivable 313
- ----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 33,920,346
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 1,096,121
Unrealized depreciation on foreign currency contracts held, at value (Note 6) 1,538
Other accrued expenses 1,135
- ----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,098,794
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 32,821,552
================================================================================================================
REPRESENTED BY:
Capital stock $ 29,738
Additional paid-in capital 27,695,923
Undistributed (overdistributed) net investment income (59,184)
Accumulated net realized gains 1,129,376
Unrealized appreciation on:
Investment securities $ 4,025,470
Other assets and liabilities denominated in foreign currency 229
- ----------------------------------------------------------------------------------------------------------------
4,025,699
- ----------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 32,821,552
================================================================================================================
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 2,973,845
- ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.04
================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 19
STATEMENT OF OPERATIONS
IAI BALANCED FUND
YEAR ENDED MARCH 31, 1997
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $3,867) $ 383,048
Dividends (net of foreign income taxes withheld of $3,626) 1,097,821
- ----------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,480,869
- ----------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 443,596
Compensation of Directors 3,028
- ----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 446,624
Less fees reimbursed by Advisers (3,028)
- ----------------------------------------------------------------------------------------------------------------
NET EXPENSES 443,596
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,037,273
- ----------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on:
Investment securities $ 4,576,908
Foreign currency transactions 1,884
Futures contracts 131,804
- ----------------------------------------------------------------------------------------------------------------
4,710,596
Net change in unrealized appreciation or depreciation on:
Investment securities $ 110,419
Other assets and liabilities denominated in foreign currency (5,205)
Futures contracts (58,694)
- ----------------------------------------------------------------------------------------------------------------
46,520
- ----------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 4,757,116
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,794,389
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BALANCED FUND
Years ended March 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 1,037,273 $ 1,017,056
Net realized gains 4,710,596 3,005,275
Net change in unrealized appreciation or depreciation 46,520 704,180
- ---------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 5,794,389 4,726,511
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,454,148) (1,132,510)
Net realized gains (5,366,081) --
- ---------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (6,820,229) (1,132,510)
- ---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from 1,002,358 and 628,648 shares sold 11,615,277 6,993,925
Net asset value of 620,444 and 101,053 shares issued
for reinvestment of distributions 6,699,334 1,117,011
Cost of 2,013,573 and 1,282,476 shares redeemed (23,266,327) (14,324,619)
- ---------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (4,951,716) (6,213,683)
- ---------------------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (5,977,556) (2,619,682)
NET ASSETS AT BEGINNING OF PERIOD 38,799,108 41,418,790
- ---------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 32,821,552 $ 38,799,108
=========================================================================================================
including undistributed (overdistributed)
net investment income of: $ (59,184) $ 423,569
=========================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 19
<TABLE>
<CAPTION>
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:
Years ended March 31, Period from
--------------------------------------------- April 10, 1992***
1997 1996 1995 1994 to March 31,1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.53 $ 10.57 $ 10.36 $ 10.89 $ 10.00
- --------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .37 .29 .29 .27 .18
Net realized and unrealized gains (losses) 1.60 .97 .62 (.34) .84
- --------------------------------------------------------------------------------------------------------------------
Total from operations 1.97 1.26 .91 (.07) 1.02
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.49) (.30) (.32) (.26) (.13)
Net realized gains (1.97) -- (.38) (.20) --
- --------------------------------------------------------------------------------------------------------------------
Total distributions (2.46) (.30) (.70) (.46) (.13)
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.04 $ 11.53 $ 10.57 $ 10.36 $ 10.89
====================================================================================================================
Total investment return* 18.55% 12.09% 9.44% (0.77%) 10.18%
Net assets at end of period (000's omitted) $ 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%**
Net investment income to average net assets 2.92% 2.48% 2.68% 2.35% 2.18%**
Average brokerage commission rate**** $ 0.0468 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 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.
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED
MARCH 31, 1997
[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 $4,037,623 (12.3% 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. The
cost of securities purchased on a when-issued basis at March 31, 1997 totalled
$458,185 for the Fund.
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. 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed (overdistributed) net investment income has been
decreased by $65,878 and accumulated net realized gains have been increased by
$65,878.
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 in the financial statements. 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 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. There are no borrowings outstanding at March
31, 1997.
At March 31, 1997, the Fund is committed to invest an additional $123,000 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.
[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 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. 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.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF
SECURITIES
For the year ended March 31, 1997, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$64,966,000 and $76,563,723, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at March 31, 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 March 31, 1997. The
market value of securities deposited to cover initial margin requirements for
the open positions at March 31, 1997 was $74,828. The unrealized appreciation of
$10,744 on these contracts at March 31, 1997 is included in unrealized
appreciation on investment securities.
<TABLE>
<CAPTION>
Number of Expiration Market Unrealized
Type Contracts Month Position Value Appreciation
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Note 5 June 1997 Short $ 527,500 $ 10,744
</TABLE>
[6] FOREIGN CURRENCY EXCHANGE CONTRACTS
At March 31, 1997 the Balanced Fund had entered into foreign currency exchange
contracts. The unrealized appreciation on those contracts at March 31, 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>
04/01/97 1,356 U.S. Dollars 10,468 Hong Kong Dollars $ - $ 5
04/01/97 6,081 U.S. Dollars 11,438 Dutch Guilders 17 --
04/01/97 4,322 U.S. Dollars 8,129 Dutch Guilders 12 --
05/13/97 95,018 U.S. Dollars 11,500,000 Japanese Yen - 1,533
07/10/97 53,682 British Pounds 90,000 U.S. Dollars 1,989 --
- -------------------------------------------------------------------------------------------------------
$ 2,018 $ 1,538
</TABLE>
INDEPENDENT AUDITORS' REPORT
IAI BALANCED FUND
The Board of Directors and Shareholders
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolio, of IAI Balanced Fund (a portfolio within IAI Investment
Funds VI, Inc.) as of March 31, 1997, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for the
periods presented on page 18 of the annual report. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Balanced Fund at March 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the periods stated in the
first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 9, 1997
FEDERAL TAX INFORMATION
IAI BALANCED FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
TAX INFORMATION:
- -----------------------------------------------------------------------------
Ordinary Long-Term
Payable Date Income (A) Capital Gain
- -----------------------------------------------------------------------------
JUNE 1996 $ 0.2660 $ 0.3981
DECEMBER 1996 0.2254 1.5677
=============================================================================
$ 0.4914 $ 1.9658
22.97% of ordinary income distributions qualify for deduction by corporations.
(A) INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME.
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
(CLOSED TO NEW INVESTORS AS OF 2/1/96) 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 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>
(THIS PAGE INTENTIONALLY LEFT BLANK)
(THIS PAGE INTENTIONALLY LEFT BLANK)
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
[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
