BALANCED FUND
SEMI-ANNUAL REPORT
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BALANCED FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1998
(UNAUDITED)
President's Letter..............................2
Fund Managers' Review...........................4
Fund Portfolio..................................7
Notes to Fund Portfolio........................15
Statement of Assets and Liabilities............17
Statement of Operations........................18
Statement of Changes in Net Assets.............19
Financial Highlights...........................20
Notes to Financial Statements..................21
IAI Mutual Fund Family.........................25
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI BALANCED FUND
WHAT'S RIGHT WITH THIS MARKET
[PHOTO]
ROY C. GILLSON
PRESIDENT
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the Euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
2
<PAGE>
PRESIDENT'S LETTER
IAI BALANCED FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
Growth in the U.S. economy is likely to slow in the months ahead, but it is hard
to become too negative on the outlook for the coming year. Although past
performance does not guarantee future success, there is little evidence of a
recession on the horizon. A modest slowdown is more likely, with real growth
dropping to about 2.5% for 1999. Inflation should continue to drift downward.
In general, the world has built excess capacity. Even in the United States,
which is one of the best performing economies, capacity utilization rates are
below peak levels and credit is readily available to make further productive
investments. Although labor markets are tight and employment costs are rising,
inflation is not a near-term threat.
To be sure, the economy is losing some of its forward momentum. The manu
facturing sector is clearly showing signs of weakness. This sector is directly
exposed to the global glut of commodity goods. With weakness overseas, exports
are slowing while imports are rising. Layoff announcements have picked-up, and
consumer confidence has dropped sharply in response to stock market volatility.
Disposable income is still growing, but at a slower pace. Corporate profits are
also being squeezed, which is likely to reduce capital spending plans for next
year. These indicators all point to slower growth ahead.
Yet, growing evidence of economic deterioration--if this occurs--will prompt
further rate reduction. Having taken the first step to ease in three years, the
Fed is now sensitive to overseas conditions and the fluid economic environment.
If the economy appears to be stumbling, the Fed has plenty of room to drop rates
and will do so with little hesitation. Likewise, renewed turmoil in the markets
will also prompt Fed action. Thus our outlook for no recession is driven by our
confidence that the Fed can and will act if necessary.
Fed diligence is also a key ingredient for the markets. Subdued inflation and
the prospect for further cuts in short rates--if need be--will provide good
support for bonds. Stock prices remain trapped in a tug-of-war between feeble
earnings and favorable liquidity. The stock market will be pulled up and down
until one force overcomes the other and sets the next trend.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on Fund 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/ Roy C. Gillson
Roy C. Gillson
President
3
<PAGE>
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
HOW HAS THE FUND PERFORMED?
The Fund outperformed its internally blended benchmark index for the six months
ended September 30, 1998 with a return of (2.46%) versus (2.11%). The benchmark
consists of 50% S&P 500 Index, 40% Lehman Brothers Aggregate Bond Index and 10%
MSCI EAFE International Stocks.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Among the Fund's most successful U.S. equity positions were Philip Morris
(1.26%)*, Intel (0.97%)* and Federal Home Loan Mortgage Corporation (1.68%)*.
The U.S. financials sector was hit hard during the period due to the fear of a
global recession. Lagging positions in that sector included Berkshire Hathaway
(1.88%)*, SLM Holding (1.03%)* and American Express (0.78%)*.
International stock performance was mixed, reflecting the turmoil across
world markets. Within Asia, the best relative performance came from Japan and
Singapore, while in Europe, the Fund's holdings in Portugal, France and Italy
generated strong relative returns.
WERE THERE ANY SIGNIFICANT CHANGES?
American Home Products (0.99%)*, Merck & Company (1.02%)*, Sigma-Aldrich
(0.96%)* and United Healthcare (0.78%)* were the U.S. stocks added to the Fund
during the period. A number of international companies were also added,
including BTR (0.25%)*, a UK conglomerate refocusing on engineering, Veba
(0.25%)*, a German utility company, and the Netherlands company, KLM Royal Dutch
Air Lines (0.10%)*, which has recently developed several new airline
partnerships.
The interest rate sensitivity of the Fund's fixed income position remained
longer than the benchmark and sector weightings continued to emphasize Mortgages
and Corporates. Treasury yields declined significantly during both August and
September, while the yields on Corporates and Mortgages declined only modestly.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
This past quarter witnessed some of the sharpest world market declines in recent
history. Initially starting with President Clinton's political problems, the
downtrend continued with worries over the US military response to the terrorist
attacks on its African embassies. The near failure of Long Term Capital
Management led to further concern over credit and investment risk, while the
collapse of the Russian government triggered a rise in risk premiums worldwide.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to focus on companies with solid competitive advantages and
extremely high financial quality at attractive fundamental valuations.
* PERCENTAGE OF NET ASSETS AS OF 9/30/98
4
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC COMMON STOCK SECTORS
% OF NET ASSETS AS OF 9/30/98
[BAR CHART]
FINANCIAL 5.9%
PROCESS INDUSTRIES 4.8%
CONSUMER DURABLES 4.8%
CONSUMER NON-DURABLES 4.1%
HEALTH TECHNOLOGY 3.1%
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 9/30/98
[BAR CHART]
Years
- -----
0-3 20%
3-5 24%
5-10 25%
10-20 7%
20+ 24%
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
-------------------------
Issue Sector 9/30/98 3/31/98
- --------------------------------------------------------------------------------
Berkshire Hathaway Class A Process Industries 1.88 2.79
Federal Home Loan
Mortgage Corporation Financial 1.68 1.64
Spectrum Equity Investors* Financial 1.61 2.04
800 - JR Cigar Consumer Non-Durables 1.43 0.77
Tyco International Producer Manufacturing 1.32 1.34
- --------------------------------------------------------------------------------
TOTAL 7.92 8.58
* DENOTES RESTRICTED SECURITY WHICH IS INCLUDED IN "OTHER SECURITIES" IN THE
FUND PORTFOLIO
BOND SECTORS
% OF BOND PORTFOLIO AS OF 9/30/98
[PIE CHART]
U.S. Government & Government Agency Obligations 17%
Asset-Backed 6%
Foreign Denominated 5%
U.S. Government Agency Mortgage-Backed 38%
Corporate 34%
BOND CREDIT RATING
% OF BOND PORTFOLIO AS OF 9/30/98
U.S. Government... 49%
Aaa............... 21%
Aa................. 2%
A.................. 6%
Baa................10%
Non-Investment
Grade..............12%
5
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
NOTE TO PRESIDENT'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]
Lehman Brothers
Balanced Fund S&P Index Aggregate Bond Index
04/10/92 $10,000 $10,000 $10,000
03/31/93 $11,019 $11,527 $11,329
03/31/94 $10,933 $11,693 $11,598
03/31/95 $11,963 $13,515 $12,176
03/31/96 $13,409 $17,859 $13,490
03/31/97 $15,897 $21,420 $14,151
03/31/98 $20,530 $31,727 $15,731
09/30/98 $20,025 $29,514 $16,780
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
Since Inception
6 Months** 1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI BALANCED FUND (2.46%) 4.62% 11.78% 11.32%
- --------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 18.08%*
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index 6.66% 11.51% 7.21% 8.41%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
** NOT ANNUALIZED
6
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 33.7%
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
CONSUMER DURABLES - 4.8%
Callaway Golf 8,300 $ 89,744
Department 56 (b) 10,800 291,600
Eastman Kodak 3,300 255,131
Harley-Davidson 8,400 246,750
Mattel 6,300 176,400
Polaris Industries 7,600 235,600
Sturm, Ruger & Company 14,400 225,000
--------------
1,520,225
- ---------------------------------------------------------------------------
CONSUMER NON-DURABLES - 4.1%
800 - JR Cigar (b) 40,800 453,900
Gillette 2,200 84,150
Nike Class B 6,100 224,556
Philip Morris 8,700 400,744
UST 4,700 138,944
--------------
1,302,294
- ---------------------------------------------------------------------------
CONSUMER SERVICES - 0.8%
Walt Disney 9,900 250,594
- ---------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.4%
3Com (b) 4,700 141,294
Intel 3,600 308,700
--------------
449,994
- ---------------------------------------------------------------------------
ENERGY MINERALS - 1.7%
British Petroleum ADR 2,708 236,273
Exxon 4,200 294,788
--------------
531,061
- ---------------------------------------------------------------------------
FINANCIAL - 5.9%
American Express 3,200 248,400
Federal Home Loan
Mortgage Corporation 10,800 533,925
Leucadia National 5,700 167,081
Norwest 7,600 272,175
PMI Group 2,400 109,800
SLM Holding 10,050 325,997
United Asset Management 10,700 230,050
--------------
1,887,428
- ---------------------------------------------------------------------------
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
HEALTH SERVICES - 2.7%
First Health Group (b) 12,500 $ 303,125
ServiceMaster 14,400 315,000
United Healthcare 7,100 248,500
--------------
866,625
- ---------------------------------------------------------------------------
HEALTH TECHNOLOGY - 3.1%
American Home Products 6,000 314,250
Merck & Company 2,500 323,906
SmithKline Beecham ADR 5,600 306,600
Symphonix Devices (b) 7,500 28,125
--------------
972,881
- ---------------------------------------------------------------------------
INDUSTRIAL SERVICES - 0.8%
Nabors Industries (b) 15,800 239,963
- ---------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.5%
Nucor 3,700 150,312
- ---------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.8%
Berkshire Hathaway Class A (b) 10 596,000
CBS 10,900 264,325
General Electric 2,600 206,863
Schweitzer-Mauduit International 7,300 158,775
Sigma-Aldrich 10,500 303,188
--------------
1,529,151
- ---------------------------------------------------------------------------
PRODUCER MANUFACTURING - 1.3%
Tyco International 7,600 419,900
- ---------------------------------------------------------------------------
RETAIL TRADE - 1.2%
Wal-Mart Stores 7,100 387,837
- ---------------------------------------------------------------------------
TECHNOLOGY SERVICES - 0.6%
Parametric Technology (b) 18,500 186,155
===========================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,493,047)..........................................$ 10,694,420
===========================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
7
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 2.0%
Market
Rate Quantity Value (a)
- ---------------------------------------------------------------------------
FINANCIAL - 2.0%
Community Bank
Series B 3.25% 12,000 $ 322,500
SI Financing Trust I 2.38 12,000 321,000
--------------
643,500
===========================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $589,500)............................................$ 643,500
===========================================================================
OTHER SECURITIES - 6.2%
Market
Quantity (h) Value (a)
- ---------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 3.2%
PathNet Series C (b) 46,992 $ 1,013,082
- ---------------------------------------------------------------------------
Ownership Market
Percentage (h) Value (a)
- ---------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 3.0%
South Street Corporate
Recovery Fund I (b) 0.69% 109,329
Spectrum Equity Investors (b) 0.46 509,998
Vanguard Associates IV (b) 1.35 344,222
--------------
963,549
===========================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $642,606)............................................$ 1,976,631
===========================================================================
FOREIGN COMMON STOCKS - 13.1%
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
AUSTRALIA - 1.0%
Boral Limited (Materials) 29,740 $ 41,395
Broken Hill Proprietary (Materials) 15,250 109,114
Commonwealth Bank
of Australia (Financial) 7,600 89,890
M.I.M. Holdings (Materials) 142,000 66,444
--------------
306,843
- ---------------------------------------------------------------------------
BELGIUM - 0.1%
Compagnie Maritime Belge
(Services) 460 26,941
- ---------------------------------------------------------------------------
FINLAND - 0.4%
UPM-Kymmene (Materials) 5,232 119,269
- ---------------------------------------------------------------------------
FRANCE - 2.2%
Danone (Consumer Goods) 577 151,643
Dexia France (Financial) 1,067 134,593
Eridania Beghin-Say
(Consumer Goods) 720 134,499
Lyonnaise des Eaux-Dumez (Services) 920 156,594
Michelin Class B (Consumer Goods) 2,600 102,055
Paribas (Financial) 400 21,553
--------------
700,937
- ---------------------------------------------------------------------------
GERMANY - 1.4%
BASF (Materials) 1,100 41,660
Bayer (Materials) 2,677 101,064
BHF-Bank (Financial) 1,740 56,216
Deutsche Bank (Financial) 490 25,300
Deutsche Telekom (Services) 4,130 128,244
VEBA (Energy) 1,550 80,681
--------------
433,165
- ---------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
8
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
FOREIGN COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
HONG KONG - 0.2%
Jardine Strategic (Multi-Industry) 47,921 $ 52,714
- ---------------------------------------------------------------------------
ITALY 0.5%
Banca Popolare di Milano
(Financial) 742 5,316
Telecom Italia (Services) 33,830 157,783
--------------
163,099
- ---------------------------------------------------------------------------
JAPAN - 2.3%
Eisai (Consumer Goods) 10,000 121,658
Hitachi (Capital Equipment) 27,000 119,013
Mazda Motor (Consumer Goods) 31,000 112,731
Namco (Consumer Goods) 3,000 69,424
Nippon Telegraph &
Telephone (Services) 11 80,407
Nippon Yusen Kabushiki
Kaish (Services) 36,000 106,053
Sekisui Chemical (Materials) 26,810 102,025
Toray Industries (Materials) 8,000 32,618
--------------
743,929
- ---------------------------------------------------------------------------
NETHERLANDS - 0.1%
KLM Royal Dutch Air Lines
(Services) 1,300 32,757
- ---------------------------------------------------------------------------
NEW ZEALAND - 0.1%
Carter Holt Harvey
(Materials) 43,666 28,848
- ---------------------------------------------------------------------------
Market
Quantity Value (a)
- ---------------------------------------------------------------------------
PORTUGAL - 0.5%
Banco Pinto & Sotto Mayor
(Financial) 6,177 $ 100,246
Brisa-Auto Estradas de Portugal
(Capital Equipment) 1,304 59,368
--------------
159,614
- ---------------------------------------------------------------------------
SINGAPORE - 0.7%
Singapore Airlines (Services) 25,635 140,751
United Overseas Bank (Financial) 32,971 96,289
--------------
237,040
- ---------------------------------------------------------------------------
SPAIN - 0.8%
Fuerzas Electricas de Cataluna
Class A (Energy) 11,481 111,929
Iberdrola (Energy) 8,250 137,340
--------------
249,269
- ---------------------------------------------------------------------------
SWITZERLAND 0.4%
Swatch Group (Consumer Goods) 235 141,071
- ---------------------------------------------------------------------------
UNITED KINGDOM - 2.4%
Blue Circle Industries (Materials) 17,700 82,418
British Steel (Materials) 41,000 74,553
BTR (Consumer Goods) 43,530 78,598
Cookson Group (Materials) 5,892 10,914
Enterprise Oil (Energy) 9,550 64,917
Greenalls Group (Services) 11,060 54,507
Imperial Tobacco Group
(Consumer Goods) 15,850 167,673
Rolls-Royce (Capital Equipment) 32,950 113,670
Sedgwick (Financial) 3,781 12,722
Tomkins (Multi - Industry) 18,550 87,006
--------------
746,978
===========================================================================
TOTAL INVESTMENTS IN FOREIGN COMMON STOCKS
(COST: $4,903,503)..........................................$ 4,142,474
===========================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
9
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS - 11.6%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER SERVICES - 0.3%
Radio Unica (STEP BOND) (e) (f) 10.44%(f) 08/01/06 $ 175,000 $ 96,250
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL - 1.7%
Abbey National (yankee) (i) 6.70 06/29/49 145,000 135,533
Allstate 6.75 05/15/18 40,000 41,008
Arcadia Financial 11.50 03/15/07 75,000 54,750
Associates 6.00 07/15/05 60,000 61,867
Deut Ausgleichbk (yankee) (i) 5.13 09/22/03 95,000 96,273
Ikon Capital 6.94 05/21/01 35,000 36,146
Lehman Brothers 7.38 05/15/04 60,000 60,541
Nationsbank 6.13 07/15/04 70,000 72,044
----------------
558,162
- -------------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 9.0%
Albecca (e) 10.75 08/15/08 100,000 96,000
Bell Sports (e) 11.00 08/15/08 100,000 98,000
Chattem 8.88 04/01/08 50,000 48,500
Classic Cable (e) 9.88 08/01/08 100,000 101,500
Clear Channel Communications 6.88 06/15/18 100,000 98,425
CSC Holdings Series M (PIK bond) (j) 11.13 04/01/08 1,000 107,750
Day International 9.50 03/15/08 75,000 68,625
Entex Information Services (e) 12.50 08/01/06 100,000 95,000
Evenflow (e) 11.75 08/15/06 75,000 70,875
Grove Worldwide (e) 9.25 05/01/08 25,000 22,000
Level 3 Communications 9.13 05/01/08 50,000 47,375
Lowe's Companies 6.88 02/15/28 35,000 36,418
NE Restaurant (e) 10.75 07/15/08 100,000 97,000
NGC 7.13 05/15/18 200,000 197,734
Pharmerica 8.38 04/01/08 50,000 46,555
Queens Sand Resources (e) 12.50 07/01/08 150,000 120,000
Revlon Consumer Products 8.63 02/01/08 75,000 73,688
Sonic Automotive (e) 11.00 08/01/08 125,000 111,250
Styling Technology (e) 10.88 07/01/08 100,000 93,500
Time Warner Entertainment 8.38 03/15/23 530,000 637,882
Transamerica Capital III 7.63 11/15/37 250,000 259,330
Union Pacific Resources 7.05 05/15/18 120,000 115,703
Williams Companies 6.50 08/01/06 110,000 113,592
Windmere-Durable Holdings 10.00 07/31/08 100,000 86,000
----------------
2,842,702
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
10
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CORPORATE BONDS (CON'T)
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES - 0.6%
GTE 6.94% 04/15/28 $ 80,000 $ 85,226
Israel Electric (yankee) (e) (i) 8.10 12/15/96 30,000 27,570
KN Energy 7.25 03/01/28 80,000 79,150
----------------
191,946
===================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $3,742,255).................................................................................$ 3,689,060
===================================================================================================================
<CAPTION>
FOREIGN DENOMINATED BONDS - 1.7%
Principal Market
Rate Maturity Amount (d) Value (a)
- -------------------------------------------------------------------------------------------------------------------
GOVERNMENT 1.1%
Australian Government (Australian Dollar) 9.50% 08/15/03 300,000 $ 213,718
International Bank for Reconstruction and
Development (Polish Zlotty) 16.50 03/09/05 400,000 120,627
----------------
334,345
- -------------------------------------------------------------------------------------------------------------------
CORPORATE - 0.6%
Colt Telecom Group DBC (German Deutschemark) 7.63 07/31/08 175,000 93,709
Hellenic Republic (Greek Drachma) 8.90 03/21/04 31,000,000 105,893
----------------
199,602
===================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $514,462) $ 533,947
===================================================================================================================
<CAPTION>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 5.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 0.8%
6.38% 09/30/01 $ 105,000 $ 110,775
6.50 05/15/05 95,000 106,445
6.50 08/15/05 17,000 19,108
----------------
236,328
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
11
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS (CON'T)
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BONDS - 3.0%
7.50% 11/15/16 $ 200,000 $ 254,594
8.13 08/15/21 235,000 325,879
6.75 08/15/26 305,000 374,577
----------------
955,050
- -------------------------------------------------------------------------------------------------------------------
U.S. TREASURY STRIPS - 0.9%
5.54 (g) 02/15/19 520,000 174,403
5.54 (g) 11/15/21 390,000 111,856
----------------
286,259
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.2%
Federal National Mortgage Association 5.63 03/15/01 130,000 133,128
Federal National Mortgage Association 6.21 08/06/38 225,000 244,863
----------------
377,991
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $1,756,520) $ 1,855,628
===================================================================================================================
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 13.2%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 4.4%
6.00% 04/01/11 $ 240,810 $ 244,270
6.50 04/01/13 77,688 79,387
6.50 05/01/13 127,157 129,938
6.50 09/01/28 930,601 947,463
----------------
1,401,058
- -------------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.4%
6.11 08/01/08 201,824 209,834
9.50 02/01/25 125,606 134,728
6.50 03/01/28 253,907 258,191
7.50 04/01/28 93,621 96,576
7.00 05/01/28 149,159 153,307
6.00 10/01/28 225,000 (c) 224,719
----------------
1,077,355
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
12
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (C0N'T)
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 0.8%
6.00% 03/01/13 $ 248,940 $ 251,507
- ---------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.6%
7.50 05/15/28 98,188 101,870
7.00 04/15/23 405,054 418,344
8.00 12/15/23 149,527 156,302
7.00 10/15/26 385,793 398,331
7.00 03/15/28 155,143 160,135
7.00 06/15/28 99,577 102,781
6.50 09/15/28 113,850 116,375
----------------
1,454,138
===================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $4,080,742)................................................................................$ 4,184,058
===================================================================================================================
<CAPTION>
ASSET-BACKED SECURITIES - 2.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 0.8%
Arcadia Automobile Receivables Trust 97-C A3 6.25% 11/15/01 $ 105,000 $ 106,134
Ford Credit Auto Owner Trust 98-C B 6.06 02/15/03 140,000 143,207
----------------
249,341
- -------------------------------------------------------------------------------------------------------------------
CREDIT CARD RELATED - 0.4%
Standard Credit Card Master Trust 93-2 A 5.95 10/07/04 125,000 129,375
- -------------------------------------------------------------------------------------------------------------------
HOME EQUITY LOAN RELATED - 0.9%
EQCC Home Equity Loan Trust 98-2 A6F 6.16 04/15/08 90,000 91,899
Money Store Home Equity Trust 98-B AF4 6.12 06/15/21 60,000 60,684
Residential Asset Securities 98-KS2 AI3 6.24 07/25/29 125,000 125,648
----------------
278,231
===================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $645,175)..................................................................................$ 656,947
===================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $27,367,810)...............................................................................$ 28,376,665
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT TERM SECURITIES - 5.3%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL 0.2%
5.24% 10/22/98 $ 75,000 $ 74,858
- -------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 5.1%
Duke Power (Utilities) 5.75 10/01/98 1,600,000 1,600,000
===================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,674,780)................................................................................$ 1,674,858
===================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $29,042,590) (k)...........................................................................$ 30,051,523
===================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 5.2%
...............................................................................................$ 1,640,050
===================================================================================================================
TOTAL NET ASSETS
...............................................................................................$ 31,691,573
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
14
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Purchased on a when-issued basis. At September 30, 1998, the cost of securities
purchased on a when-issued basis totalled $222,675.
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(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)
A step bond is a security that remains 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 the effective yield at September
30, 1998, based upon the estimated timing and amount of future interest and
principal payments.
(g)
Interest rate shown represents yield-to-maturity at date of purchase.
(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, 1998, 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, 1998, is shown on the next page.
(i)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(j)
The interest rate shown for Payment-in-Kind bonds (PIK bonds) represents
effective yield at September 30, 1998. PIK--Payment-in-Kind income is generally
paid by issuing additional par or shares of the security rather than paying
cash.
15
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
PathNet Series C 11/04/97 $ 166,665
04/01/98 333,335
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
Spectrum Equity Investors 02/12/97 14,526
02/26/97 25,000
05/05/97 20,000
06/10/97 12,500
09/30/97 12,500
12/09/97 10,000
01/20/98 30,000
07/24/98 15,000
Vanguard Associates IV 07/26/96 3,080
(k)
At September 30, 1998, 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........................ $ 29,618,861
------------------
Gross unrealized appreciation............................... $ 2,810,589
Gross unrealized depreciation............................... (2,377,927)
------------------
Net unrealized appreciation................................. $ 432,662
==================
16
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $29,042,590) $ 30,051,523
Cash in bank on demand deposit 1,651,946
Receivable for investment securities sold 67,182
Receivable for Fund shares sold 2,045
Dividends and accrued interest receivable 170,019
Unrealized appreciation on foreign currency contracts held, at value (Note 5) 190
-------------------
TOTAL ASSETS 31,942,905
-------------------
LIABILITIES
Payable for investment securities purchased 16,079
Payable for investment securities purchased on a when-issued basis 222,675
Unrealized depreciation on foreign currency contracts held, at value (Note 5) 6,421
Other accrued expenses 6,157
-------------------
TOTAL LIABILITIES 251,332
-------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 31,691,573
===================
REPRESENTED BY:
Capital stock $ 30,121
Additional paid-in capital 28,439,545
Undistributed net investment income 318,054
Accumulated net realized gains 1,900,684
Unrealized appreciation or depreciation on:
Investment securities $ 1,008,933
Other assets and liabilities denominated in foreign currency (5,764)
-------------------
1,003,169
-------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 31,691,573
===================
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 3,012,095
-------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 10.52
===================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
17
<PAGE>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $212) $ 399,437
Dividends (net of foreign income taxes withheld of $11,987) 184,267
------------------
TOTAL INCOME 583,704
------------------
EXPENSES
Management fees 203,053
Compensation of Directors 3,240
Other expenses 5,406
------------------
TOTAL EXPENSES 211,699
Less fees reimbursed by Advisers (3,240)
------------------
NET EXPENSES 208,459
------------------
NET INVESTMENT INCOME 375,245
------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 2,468,886
Future contracts (5,383)
Foreign currency transactions (14,376)
------------------
2,449,127
Net change in unrealized appreciation or depreciation on:
Investment securities $ (3,986,935)
Future contracts (8,809)
Other assets and liabilities denominated in foreign currency (12,992)
------------------
(4,008,736)
------------------
NET LOSS ON INVESTMENTS AND FOREIGN CURRENCY (1,559,609)
------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,184,364)
==================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI BALANCED FUND
<TABLE>
<CAPTION>
Six months ended Year ended
September 30, March 31,
1998 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 375,245 $ 1,100,909
Net realized gains 2,449,127 7,576,327
Net change in unrealized appreciation or depreciation (4,008,736) 986,206
--------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (1,184,364) 9,663,442
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (169,213) (1,041,725)
Excess distribution from net investment income -- (333,421)
From net realized gains (4,958,875) (3,849,828)
--------------------------------------
TOTAL DISTRIBUTIONS (5,128,088) (5,224,974)
--------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 1,477,265 and 2,196,828 shares 17,574,354 27,242,204
Net asset value of 426,564 and 436,950 shares issued
in reinvestment of distributions 5,084,639 5,199,315
Cost of 1,342,081 and 3,157,276 shares redeemed (15,915,524) (38,440,983)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 6,743,469 (5,999,464)
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 431,017 (1,560,996)
NET ASSETS AT BEGINNING OF PERIOD 31,260,556 32,821,552
--------------------------------------
NET ASSETS AT END OF PERIOD $ 31,691,573 $ 31,260,556
======================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 318,054 $ 112,022
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
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>
Years ended March 31,
Six months ended ------------------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 12.76 $ 11.04 $ 11.53 $ 10.57 $ 10.36 $ 10.89
-----------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.13 0.25 0.37 0.29 0.29 0.27
Net realized and unrealized gains (losses) (0.19) 2.84 1.60 0.97 0.62 (0.34)
-----------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (0.06) 3.09 1.97 1.26 0.91 (0.07)
-----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.07) (0.28) (0.49) (0.30) (0.32) (0.26)
Excess distribution from
net investment income -- (0.09) -- -- -- --
From net realized gains (2.11) (1.00) (1.97) -- (0.38) (0.20)
-----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.18) (1.37) (2.46) (0.30) (0.70) (0.46)
-----------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.52 $ 12.76 $ 11.04 $ 11.53 $ 10.57 $ 10.36
===================================================================================
Total investment return* (2.46%) 29.14% 18.55% 12.09% 9.44% (0.77%)
Net assets at end of period (000's omitted) $ 31,692 $ 31,261 $ 32,822 $ 38,799 $ 41,419 $ 52,369
RATIOS
Expenses to average net assets
(including interest expense) 1.28%** 1.28% 1.26% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.28%** 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 2.31%** 2.57% 2.92% 2.48% 2.68% 2.35%
Average brokerage commission rate*** $ 0.0269 $ 0.0289 $ 0.0468 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 68.8% 237.0% 190.6% 193.8% 256.9% 211.9%
</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
*** 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.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1998
(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. IAI
Balanced Fund is a separate portfolio of IAI Investment Funds VI, Inc. The Fund
has a primary objective of maximum total return through investment in stocks,
bonds and short-term instruments.
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by the portfolio pricing service. Securities which cannot
be valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer.
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
procedures consider various factors including, but not limited to, the cost of
the security at date of purchase, the current financial statements of the issuer
and special reports prepared by analysts, the size of the position held, recent
purchases or sales of securities of the company, prices and public trading
activity of comparable companies, the nature and duration of restrictions on
disposition, pending public offerings with respect to the security, changes in
economic conditions and industry developments affecting the issuer, and other
relevant matters. Restricted securities represent $1,976,631 (6.2% 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
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 and losses may
also be realized between the trade and settlement dates on security and foreign
currency contract transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to protect against adverse exchange rate fluctuation.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains may differ for financial statement
and tax purposes primarily because of recognition of limited partnership income,
certain foreign currency gains and losses treated as ordinary income and the
deferral of "wash sale" losses for tax purposes. The character of distributions
made during the year from net investment income or net realized gains may also
differ from its ultimate characterization for tax purposes.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily. The Fund amortizes discount purchased on
long-term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes.
The Fund uses the equity method of accounting for limited partnerships.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend 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.
22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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
INSURANCE
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.
LINE OF CREDIT
The Fund had available a $4,729,000 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, 1998.
LIMITED PARTNERSHIP COMMITMENTS
At September 30, 1998, the Fund is committed to invest an additional $23,000 in
Spectrum Equity Investors limited partnership.
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profit and loss in the partnership and removal
from the limited partnership.
The Fund's management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. The Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[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.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $20,894,912 and $20,533,160, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at September 30,
1998 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] FOREIGN CURRENCY EXCHANGE CONTRACTS
At September 30, 1998, the Balanced Fund had entered into foreign currency
exchange contracts. The unrealized appreciation or depreciation on those
contracts at September 30, 1998, 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>
10/01/98 488,216 Japanese Yen 3,633 U.S. Dollars $ 46 $ --
10/02/98 16,036 U.S. Dollars 26,861 German Deutschemark 35 --
10/02/98 486,982 Japanese Yen 3,618 U.S. Dollars 40 --
10/05/98 13,924 British Pounds 23,731 U.S. Dollars 69 --
10/06/98 1,750 British Pounds 2,967 U.S. Dollars -- 8
10/22/98 350,000 Australian Dollars 206,413 U.S. Dollars -- 1,405
10/28/98 176,750 German Deutschemark 105,759 U.S. Dollars -- 158
10/30/98 122,754 French Francs 21,835 U.S. Dollars -- 67
12/02/98 14,835,678 Japanese Yen 109,130 U.S. Dollars 858
12/02/98 62,331,810 Japanese Yen 461,000 U.S. Dollars 1,112
03/19/99 154,237 Singapore Dollars 89,000 U.S. Dollars -- 2,813
- --------------------------------------------------------------------------------------------------------
$ 190 $ 6,421
- --------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
IAI MUTUAL FUND FAMILY
IAI BALANCED FUND
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 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 short-term instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation 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>
25
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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
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
