BALANCED FUND
ANNUAL REPORT
IAI BALANCED FUND
MARCH 31, 1998
[LOGO]
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BALANCED FUND
ANNUAL REPORT
MARCH 31, 1998
President's Letter..............................2
Fund Managers' Review...........................4
Fund Portfolio..................................7
Notes to Fund Portfolio........................14
Statement of Assets and Liabilities............16
Statement of Operations........................17
Statement of Changes in Net Assets.............18
Financial Highlights...........................19
Notes to Financial Statements..................20
Independent Auditors' Report...................25
Federal Tax Information........................26
IAI Mutual Fund Family.........................27
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI BALANCED FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
NOEL P. RAHN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<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.
The current economic backdrop is ideal for financial assets. Strong money growth
is flowing into the markets rather than the real economy. This trend is
bolstered by current demographic conditions. Moreover, low inflation raises
market valuations (P/E ratios and real interest rates) while high consumer and
business optimism raises the willingness to take risk.
What are the risks to the market? Near-term, negative earnings surprises could
stall the equity market, and a weak dollar would not be good for bonds. Over the
intermediate term, if the economic slowdown does not materialize, inflation
concerns will rise and the Fed will tighten. This would hurt valuations in both
stocks and bonds.
Our view is to remain cautiously optimistic on both markets, but watch for the
developing evidence of a slowdown.
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
President
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
[PHOTO]
LARRY R. HILL, CFA
IAI BALANCED FUND
CO-MANAGER
[PHOTO]
DONALD J. HOELTING, CFA
IAI BALANCED FUND
CO-MANAGER
IAI BALANCED FUND
WHAT IS THE FUND'S OBJECTIVE?
IAI Balanced Fund's objective is to maximize total return. This is pursued by
investing in a broadly diversified portfolio consisting primarily of stocks,
bonds, and short-term instruments. As the market outlook changes, the Fund's
asset allocation is shifted gradually.
HOW HAS THE FUND PERFORMED?
The Fund performed in-line with its internally blended benchmark index for the
year ended March 31, 1998 with a return of 29.1% versus 30.3%. The internally
blended benchmark consists of 50% S&P 500 Index, 40% Lehman Aggregate Bond Index
and 10% MSCI EAFE International Stocks.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
In the U.S. equity portion of the Fund, the financial, consumer cyclical and
consumer staples sectors were the biggest contributors to performance. Berkshire
Hathaway and Federal Home Loan Mortgage Corporation (called Freddie Mac), two
holdings within the financial sector, were among the most successful positions
in the Fund. Department 56, CBS and Tyco International were also large
contributors to performance. The Fund's performance was also helped by two
venture capital companies which had successful public launches; Ciena and
Advanced Fibre Communications. Such securities were received as distributions
from the Fund's investment in Vanguard Associates IV, a venture capital
partnership. The Fund includes venture capital as a part of its asset
allocation.
Lagging positions in the Fund included Nike, Readers Digest and Motorola.
Nike declined on a weak retail environment in the Asian Pacific region and
higher inventory levels in the U.S., while Readers Digest and Motorola were sold
due to fundamental business concerns.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The fixed income portion of the Fund weathered the Asian crisis by taking a more
conservative credit stance prior to September 1997. Although the shorter
duration of the Fund reduced returns in the September-October period, the Fund's
rate sensitivity was increased in late October to take advantage of the capital
flight to U.S. Treasuries. Since that extension, the Fund has maintained a
duration that at least equals the benchmark.
The international portion of the Fund saw a decline in Asian markets that
began in the second half of 1997 and continued into early January. However,
those countries seen to be making progress in their negotiations with the IMF
saw sharp recoveries by the end of March 1998. The Japanese economy remained
weak and profits were disappointing. The European markets rose as investors
anticipated the confirmation that all eleven countries would qualify for the
currency union.
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. Companies
with these characteristics possess the strength and flexibility to weather
downturns in the economy and capital markets that should lead to strong relative
performance in weak markets and out performance over a full market cycle.
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/98
[GRAPHIC]
FINANCIAL 9.7%
CONSUMER DURABLES 7.3%
PRODUCER MANUFACTURING 6.9%
CONSUMER NON-DURABLES 4.8%
HEALTH TECHNOLOGY 2.4%
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 3/31/98
{GRAPHIC]
YEARS
- -----
0-3 8%
3-5 19%
5-10 50%
10-20 8%
20+ 15%
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
------------------------
Issue Sector 3/31/98 3/31/97
- --------------------------------------------------------------------------------
Vanguard Associates IV* Financial 4.24 10.46
Berkshire Hathaway Class A Producer Manufacturing 2.79 1.65
Spectrum Equity Investors* Financial 2.04 1.46
Federal Home Loan
Mortgage Corporation Financial 1.64 -
CBS Producer Manufacturing 1.59 -
- --------------------------------------------------------------------------------
TOTAL 12.30 13.57
*Denotes Restricted Security which is included in "Other Securities" in the
Fund Portfolio.
BOND SECTORS
% OF BOND PORTFOLIO AS OF 3/31/98
[GRAPHIC]
Corporate 29%
U.S. Government
Obligations 18%
Foreign Denominated 1%
U.S. Government
Agency Mortgage-Backed 52%
BOND CREDIT RATING
% OF BOND PORTFOLIO AS OF 3/31/98
U.S. Government... 70%
Aaa................ 1%
Aa................. 1%
A.................. 3%
Baa................13%
Non-Investment
Grade..............12%
<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+
[GRAPHIC]
<TABLE>
<CAPTION>
IAI BALANCED FUND S&P 500 LEHMAN GOVT/CORP LEHMAN BROTHERS AGGREGATE
(INCEPTION 4/10/92) INDEX* BOND INDEX* BOND INDEX*
<S> <C> <C> <C> <C>
4/10/92 $ 10,000 $10,000 $ 10,000 $ 10,000
3/31/93 $ 11,019 $11,527 $ 11,430 $ 11,329
3/31/94 $ 10,933 $11,693 $ 11,747 $ 11,598
3/31/95 $ 11,963 $13,515 $ 12,284 $ 12,176
3/31/96 $ 13,409 $17,859 $ 13,627 $ 13,490
3/31/97 $ 15,897 $21,420 $ 14,234 $ 14,151
3/31/98 $ 20,530 $31,725 $ 15,999 $ 15,847
</TABLE>
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
Since Inception
1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI BALANCED FUND 29.14% 13.26% 12.80%
- --------------------------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 21.22%*
- --------------------------------------------------------------------------------
Lehman Government/
Corporate Bond Index(1) 12.39% 6.96% 8.15%*
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index 11.99% 6.94% 7.98%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
1 THE LEHMAN GOVERNMENT/CORPORATE BOND INDEX WILL BE REPLACED WITH THE LEHMAN
BROTHERS AGGREGATE BOND INDEX AS THE FUND'S MANAGEMENT HAS DETERMINED THE
LEHMAN BROTHERS AGGREGATE BOND INDEX TO BE MORE REPRESENTATIVE OF THE
FUND'S INVESTMENTS, AND THEREFORE A BETTER COMPARISON FOR FUND PERFORMANCE.
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS -- 38.3%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 7.3%
Bandag 3,800 $ 223,962
Callaway Golf 8,300 240,700
Department 56 (b) 11,400 433,200
Eastman Kodak 2,900 188,138
Harley-Davidson 9,900 326,700
Mattel 6,100 241,713
Polaris Industries 7,500 277,500
Sturm, Ruger & Company 16,600 342,375
- --------------------------------------------------------------------------------
2,274,288
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 4.8%
800 - JRCigar (b) 12,100 242,000
Coca-Cola 3,700 286,519
Gillette 2,200 261,113
Nike Class B 5,800 256,650
Philip Morris 8,500 354,343
UST 3,600 116,100
- --------------------------------------------------------------------------------
1,516,725
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 1.2%
Walt Disney 3,600 384,300
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.3%
3Com (b) 4,000 143,750
Intel 3,600 281,025
- --------------------------------------------------------------------------------
424,775
- --------------------------------------------------------------------------------
ENERGY MINERALS - 0.9%
Exxon 4,100 277,263
- --------------------------------------------------------------------------------
FINANCIAL - 7.2%
American Express 3,300 302,981
Federal Home Loan
Mortgage Corporation 10,800 512,325
Leucadia National 5,700 224,438
Norwest 7,600 315,875
PMI Group 2,300 185,725
SLM Holding 10,050 438,431
United Assets Management 10,600 288,850
- --------------------------------------------------------------------------------
2,268,625
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 1.1%
First Health Group (b) 6,100 $ 330,925
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 2.4%
Pfizer 3,300 328,968
R.P. Scherer (b) 3,400 229,500
Symphonix Devices (b) 11,700 197,438
- --------------------------------------------------------------------------------
755,906
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.2%
Nabors Industries (b) 15,300 362,419
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.6%
Nucor 3,600 195,975
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 0.8%
Schweitzer-Mauduit International 6,800 234,600
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 6.9%
Berkshire Hathaway Class A (b) 13 873,600
CBS 14,600 495,487
General Electric 2,600 224,088
Nordson 2,900 144,638
Tyco International 7,600 415,150
- --------------------------------------------------------------------------------
2,152,963
- --------------------------------------------------------------------------------
RETAIL TRADE - 1.3%
Wal-Mart Stores 7,900 401,418
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.3%
Parametric Technology (b) 12,200 406,412
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $9,023,150)................................ $ 11,986,594
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
NON-CONVERTIBLE PREFERRED
STOCKS - 2.5%
Market
Rate Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 2.5%
Capita Trust 2.27% 5,000 $134,685
Community Bank
Series B 3.25 12,000 336,000
SI Financing Trust I 2.38 12,000 323,244
- --------------------------------------------------------------------------------
793,929
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $719,188)....................................................... $793,929
- --------------------------------------------------------------------------------
OTHER SECURITIES - 6.9%
Market
Quantity (i) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 0.5%
PathNet Series C (b) 15,664 $ 166,665
- --------------------------------------------------------------------------------
Ownership Market
Percentage (i) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 6.4%
South Street Corporate
Recovery Fund I (b) 0.69% 39,324
Spectrum Equity Investors (b) 0.46 639,080
Vanguard Associates IV (b) 1.35 1,325,690
- --------------------------------------------------------------------------------
2,004,094
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $549,221) .....................................................$2,170,759
- --------------------------------------------------------------------------------
FOREIGN COMMON STOCKS - 17.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
AUSTRALIA - 1.0%
Boral Limited (Materials) 17,032 $ 42,585
Broken Hill Proprietary (Materials) 9,930 101,681
Commonwealth Bank of
Australia (Financial) 7,147 85,143
M.I.M. Holdings (Materials) 122,000 71,201
- --------------------------------------------------------------------------------
300,610
- --------------------------------------------------------------------------------
BELGIUM - 0.1%
Compagnie Maritime Belge
(Services) 460 36,173
- --------------------------------------------------------------------------------
FINLAND - 0.5%
UPM-Kymmene (Materials) 5,532 140,944
Valmet (Multi-Industry) 2,028 32,519
- --------------------------------------------------------------------------------
173,463
- --------------------------------------------------------------------------------
FRANCE - 3.2%
Compagnie Financiere de Paribas
Class A (Financial) 780 78,933
Danone (Consumer Goods) 750 181,087
Dexia France (Financial) 950 127,262
Eridania Beghin-Say
(Consumer Goods) 770 154,102
Lafarge (Materials) 1,516 128,944
Lafarge-Rights (Materials) 1,516 1,982
Lyonnaise des Eaux-Dumez
(Services) 1,205 174,063
Michelin Class B (Consumer Goods) 790 47,164
Societe Television Franchaise
(Services) 867 107,747
- --------------------------------------------------------------------------------
1,001,284
- --------------------------------------------------------------------------------
GERMANY - 1.4%
Bayer (Materials) 4,120 188,468
BHF-Bank (Financial) 1,680 52,687
Deutsche Telekom (Services) 8,580 187,661
- --------------------------------------------------------------------------------
428,816
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
FOREIGN COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HONG KONG - 1.0%
Jardine Strategic (Multi-Industry) 50,421 $ 138,154
South China Morning Post
(Services) 11,000 7,382
Swire Pacific Class A
(Multi-Industry) 22,000 116,413
Swire Pacific Class B
(Multi-Industry) 27,500 26,441
- --------------------------------------------------------------------------------
288,390
- --------------------------------------------------------------------------------
ITALY 0.1%
Banca Popolare di Milano
(Financial) 742 6,816
Telecom Italia (Services) 2,025 12,366
- --------------------------------------------------------------------------------
19,182
- --------------------------------------------------------------------------------
JAPAN - 2.9%
Aiwa (Consumer Goods) 2,600 72,918
Eisai (Consumer Goods) 10,000 137,228
Hitachi (Capital Equipment) 23,000 167,298
Mazda Motor
(Consumer Goods) (b) 42,000 107,713
Namco (Consumer Goods) 3,000 66,139
Nippon Telegraph & Telephone
(Services) 11 91,560
Nippon Yusen Kabushiki Kaish
(Services) 36,000 129,309
Sekisui Chemical (Materials) 21,810 123,479
Toray Industries (Materials) 5,000 26,058
- --------------------------------------------------------------------------------
921,702
- --------------------------------------------------------------------------------
MALAYSIA - 0.0%
Land & General
(Multi-Industry) 28,000 10,154
- --------------------------------------------------------------------------------
NETHERLANDS - 0.3%
Koninklijke PTT Nederland
(Services) 1,985 102,835
- --------------------------------------------------------------------------------
NEW ZEALAND - 0.2%
Carter Holt Harvey
(Materials) 53,000 72,380
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PORTUGAL - 0.6%
Banco Comercial Portugues
(Financial) 1,208 $ 39,003
Banco Totta y Acores
(Financial) 2,950 109,343
Brisa-Auto (Capital Equipment) (b) 655 29,915
- --------------------------------------------------------------------------------
178,261
- --------------------------------------------------------------------------------
SINGAPORE - 0.5%
Singapore Airlines (Services) 17,612 125,410
United Overseas Bank (Financial) 6,751 37,413
- --------------------------------------------------------------------------------
162,823
- --------------------------------------------------------------------------------
SPAIN - 0.7%
Fuerzas Electricas de Cataluna
Class A (Energy) 671 6,967
Iberdrola (Energy) 12,940 196,553
- --------------------------------------------------------------------------------
203,520
- --------------------------------------------------------------------------------
SWITZERLAND 0.5%
S.M.H. (Consumer Goods) 240 154,122
- --------------------------------------------------------------------------------
UNITED KINGDOM - 4.1%
British Petroleum ADR
(Energy Minerals) (b) 2,668 229,615
British Steel (Materials) 41,300 98,209
Cookson Group (Materials) 11,373 43,804
FKI (Capital Equipment) 17,900 60,700
Greenalls Group (Services) 7,356 55,864
Imperial Tobacco Group
(Consumer Goods) 16,400 120,565
Rolls-Royce (Capital Equipment) 27,700 129,745
Sears (Services) 71,350 68,105
SmithKline Beecham ADR
(Health Technology) (b) 5,700 356,606
Tomkins (Multi-Industry) 17,500 106,598
- --------------------------------------------------------------------------------
1,269,811
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FOREIGN COMMON STOCKS
(COST: $5,075,957) .................................................. $5,323,526
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
CORPORATE BONDS - 8.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 0.9%
FCB/NC Capital Trust I (f) 8.05% 03/01/28 $ 100,000 $ 100,875
Lehman Brothers 7.38 05/15/04 60,000 62,491
Travelers Group 6.63 01/15/28 130,000 126,434
- ----------------------------------------------------------------------------------------------------------------
289,800
- ----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 7.0%
Boston Scientific 6.63 03/15/05 150,000 150,845
Chattem (f) 8.88 04/01/08 50,000 50,625
CSC Holdings Series B 8.13 08/15/09 75,000 78,563
Day International Group (f) 9.50 03/15/08 75,000 76,031
Fred Meyer 7.45 03/01/08 100,000 100,232
Lin Television (f) 8.38 03/01/08 75,000 75,375
Nextlink Communications (f) 9.00 03/15/08 50,000 51,250
Paragon (f) 9.63 04/01/08 50,000 49,625
Perkins Family Restaurants (f) 10.13 12/15/07 125,000 131,250
Pharmerica (f) 8.38 04/01/08 50,000 50,125
Pillotex (f) 9.00 12/15/07 125,000 130,313
Raytheon 6.30 03/15/05 60,000 59,594
Raytheon 6.75 03/15/18 60,000 59,596
RCN (step bond) (f) 8.70 (g) 02/15/08 120,000 75,300
Revlon Consumer Products (f) 8.63 02/01/08 75,000 76,031
Time Warner Entertainment 8.38 07/15/33 500,000 573,535
Transamerica Capital III (f) 7.63 11/15/37 250,000 259,760
Walbro (f) 10.13 12/15/07 125,000 122,500
- ----------------------------------------------------------------------------------------------------------------
2,170,550
- ----------------------------------------------------------------------------------------------------------------
UTILITIES - 0.6%
KN Energy 7.25 03/01/28 120,000 120,701
Utilicorp United 6.88 10/01/04 70,000 71,029
- ----------------------------------------------------------------------------------------------------------------
191,730
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $2,604,646).................................................................................$ 2,652,080
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
FOREIGN DENOMINATED BONDS - 0.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount (e) Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE - 0.4%
International Bank for Reconstruction
and Development (POLISH ZLOTTY) 16.50% 03/09/05 400,000 $ 112,366
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $112,146) $ 112,366
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
U.S. GOVERNMENT OBLIGATIONS - 5.3%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTES - 2.7%
5.38% 02/15/01 $ 490,000 $ 487,090
5.88 09/03/02 330,000 332,576
6.13 08/15/07 10,000 10,285
- ----------------------------------------------------------------------------------------------------------------
829,951
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 1.3%
7.50 11/15/16 30,000 34,983
6.63 02/15/27 285,000 309,224
6.13 11/15/27 50,000 51,274
- ----------------------------------------------------------------------------------------------------------------
395,481
- ----------------------------------------------------------------------------------------------------------------
U.S. TREASURY STRIPS - 1.3%
5.66 (h) 11/15/09 490,000 247,754
5.69 (h) 11/15/10 350,000 165,865
- ----------------------------------------------------------------------------------------------------------------
413,619
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT OBLIGATIONS
(COST: $1,658,361) $ 1,639,051
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 15.5%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.3%
Series 1921 Class J
(COLLATERALIZED MORTGAGE OBLIGATION) 6.50% 09/15/24 $ 110,000 $ 108,212
- ---------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 5.2%
6.50 03/02/11 130,251 131,269
6.00 04/01/11 262,486 259,862
6.50 04/15/13 (c) 130,000 130,446
6.50 03/01/28 1,109,450 1,098,355
- ---------------------------------------------------------------------------------------------------------------
1,619,932
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.4%
9.00 06/01/17 710,996 762,984
Series 1996-39 Class C (COLLATERALIZED MORTGAGE
OBLIGATION) 6.00 12/25/24 190,000 181,984
9.50 02/01/25 160,192 171,505
6.50 03/01/28 262,600 259,645
- ---------------------------------------------------------------------------------------------------------------
1,376,118
- ---------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 0.8%
6.00 03/01/13 260,000 255,855
- ---------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.8%
7.00 04/15/23 429,090 434,454
8.00 12/15/23 175,172 182,397
7.50 01/15/26 121,918 125,061
7.00 10/15/26 408,740 412,954
7.00 11/15/26 337,118 340,594
- ---------------------------------------------------------------------------------------------------------------
1,495,460
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $4,795,323)...............................................................................$ 4,855,577
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $24,537,992)..............................................................................$ 29,533,882
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
SHORT TERM SECURITIES - 4.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 4.4%
Federal Home Loan Bank (DISCOUNT NOTE) 5.85% 04/01/98 $ 100,000 $ 100,000
Federal Home Loan Bank (DISCOUNT NOTE) 5.45 04/03/98 1,180,000 1,179,643
U.S. Treasury Bill 5.10 04/23/98 100,000 (d) 99,674
- ---------------------------------------------------------------------------------------------------------------
1,379,317
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,379,339)...............................................................................$ 1,379,317
- ---------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $25,917,331) (j)..........................................................................$ 30,913,199
- ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 1.1%
..............................................................................................$ 347,357
- ---------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
..............................................................................................$ 31,260,556
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 14
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
(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 March 31, 1998, the cost of securities
purchased on a when-issued basis totalled $130,081.
(d)
Security is partially pledged to cover initial margin on open futures contracts
(see Note 5 to financial statements).
(e) Foreign security cost and market values are stated in U.S. dollars.
Principal amounts are denominated in the foreign currency indicated
parenthetically.
(f)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. These issues
may only be sold to other qualified institutional buyers and are considered
liquid under guidelines established by the Board of Directors.
(g)
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 March 31,
1998, based upon the estimated timing and amount of future interest and
principal payments.
(h)
Interest rate shown represents yield-to-maturity at date of purchase.
(i)
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, 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
March 31, 1998, is shown on the next page.
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1998
CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
Security Acquisition Date Cost
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
PathNet Series C 11/04/97 $ 166,665
</TABLE>
LIMITED PARTNERSHIPS
<TABLE>
<CAPTION>
Security Acquisition Date Cost
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
South Street Corporate
Recovery Fund I 10/03/95 $ --
Spectrum Equity Investors 01/03/95 17,095
05/11/95 5,525
05/22/95 35,000
11/16/95 42,500
12/13/95 17,500
04/17/96 12,500
05/15/96 35,000
08/14/96 20,000
10/22/96 50,000
12/12/96 12,500
02/12/97 21,395
02/26/97 25,000
05/05/97 20,000
06/10/97 12,500
09/30/97 12,500
12/09/97 10,000
01/20/98 30,000
Vanguard Associates IV 07/26/96 3,541
</TABLE>
(j)
At March 31, 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.................. $ 26,493,602
-----------------
Gross unrealized appreciation......................... $ 4,995,269
Gross unrealized depreciation......................... (575,672)
-----------------
Net unrealized appreciation........................... $ 4,419,597
-----------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
MARCH 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $25,917,331) $30,913,199
Cash in bank on demand deposit 137,972
Receivable for investment securities sold 280,932
Receivable for Fund shares sold 901
Dividends and accrued interest receivable 122,150
Unrealized appreciation on foreign currency contracts held, at value (Note 6) 13,813
-----------
TOTAL ASSETS 31,468,967
-----------
LIABILITIES
Payable for investment securities purchased 69,007
Payable for investment securities purchased on a when-issued basis 130,081
Unrealized depreciation on foreign currency contracts held, at value (Note 6) 4,854
Variation margin payable 4,469
-----------
TOTAL LIABILITIES 208,411
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $31,260,556
===========
REPRESENTED BY:
Capital stock $ 24,503
Additional paid-in capital 21,701,694
Undistributed net investment income 112,022
Accumulated net realized gains 4,410,432
Unrealized appreciation on:
Investment securities (Note 5) $ 5,004,677
Other assets and liabilities denominated in foreign currency 7,228
-----------
5,011,905
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $31,260,556
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 2,450,347
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 12.76
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest (net of foreign income taxes withheld of $43) $ 1,270,615
Dividends (net of foreign income taxes withheld of $12,724) 378,635
-----------
TOTAL INCOME 1,649,250
-----------
EXPENSES
Management fees 535,824
Compensation of Directors 4,922
Interest 12,517
-----------
TOTAL EXPENSES 553,263
Less fees reimbursed by Advisers (4,922)
-----------
NET EXPENSES 548,341
-----------
NET INVESTMENT INCOME 1,100,909
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 7,638,026
Future contracts (20,375)
Written option contracts 9,613
Foreign currency transactions (50,937)
-----------
7,576,327
Net change in unrealized appreciation or depreciation on:
Investment securities $ 981,142
Future contracts (1,935)
Other assets and liabilities denominated in foreign currency 6,999
-----------
986,206
-----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 8,562,533
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,663,442
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI BALANCED FUND
<TABLE>
<CAPTION>
Year ended Year ended
March 31, March 31,
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 1,100,909 $ 1,037,273
Net realized gains 7,576,327 4,710,596
Net change in unrealized appreciation or depreciation 986,206 46,520
------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 9,663,442 5,794,389
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,041,725) (1,454,148)
Excess distribution from net investment income (333,421) --
From net realized gains (3,849,828) (5,366,081)
------------------------------
TOTAL DISTRIBUTIONS (5,224,974) (6,820,229)
------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 2,196,828 and 1,002,358 shares 27,242,204 11,615,277
Net asset value of 436,950 and 620,444 shares issued
in reinvestment of distributions 5,199,315 6,699,334
Cost of 3,157,276 and 2,013,573 shares redeemed (38,440,983) (23,266,327)
------------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (5,999,464) (4,951,716)
------------------------------
TOTAL DECREASE IN NET ASSETS (1,560,996) (5,977,556)
NET ASSETS AT BEGINNING OF PERIOD 32,821,552 38,799,108
------------------------------
NET ASSETS AT END OF PERIOD $ 31,260,556 $ 32,821,552
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) ==============================
NET INVESTMENT INCOME OF: $ 112,022 $ (59,184)
==============================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<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,
----------------------------
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.04 $ 11.53
----------------------------
OPERATIONS
Net investment income 0.25 0.37
Net realized and unrealized gains (losses) 2.84 1.60
----------------------------
TOTAL FROM OPERATIONS 3.09 1.97
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.28) (0.49)
Excess distribution from net investment income (0.09) --
From net realized gains (1.00) (1.97)
----------------------------
TOTAL DISTRIBUTIONS (1.37) (2.46)
----------------------------
NET ASSET VALUE
End of period $ 12.76 $ 11.04
============================
Total investment return* 29.14% 18.55%
Net assets at end of period (000's omitted) $ 31,261 $ 32,822
RATIOS
Expenses to average net assets
(including interest expense) 1.28% 1.26%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25%
Net investment income to average net assets 2.57% 2.92%
Average brokerage commission rate** $ 0.0289 $ 0.0468
Portfolio turnover rate
(excluding short-term securities) 237.0% 190.6%
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.57 $ 10.36 $ 10.89
--------------------------------------------
OPERATIONS
Net investment income 0.29 0.29 0.27
Net realized and unrealized gains (losses) 0.97 0.62 (0.34)
--------------------------------------------
TOTAL FROM OPERATIONS 1.26 0.91 (0.07)
--------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.30) (0.32) (0.26)
Excess distribution from net investment income -- -- --
From net realized gains -- (0.38) (0.20)
--------------------------------------------
TOTAL DISTRIBUTIONS (0.30) (0.70) (0.46)
--------------------------------------------
NET ASSET VALUE
End of period $ 11.53 $ 10.57 $ 10.36
============================================
Total investment return* 12.09% 9.44% (0.77%)
Net assets at end of period (000's omitted) $ 38,799 $ 41,419 $ 52,369
RATIOS
Expenses to average net assets
(including interest expense) 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25%
Net investment income to average net assets 2.48% 2.68% 2.35%
Average brokerage commission rate** n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 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.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE. THE COMPARABILITY OF RATES BETWEEN DOMESTIC AND
FOREIGN EQUITIES MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES PER
SHARE CAN VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1998
[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 $2,170,759 (6.9% of net
assets). Because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material.
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS
Delivery and payment for securities which have been purchased by the Fund on a
forward commitment or when-issued basis may occur a month or more after the
transaction date. During this period, such securities are subject to market
fluctuations and the Fund maintains, in a segregated account with its custodian,
assets with a market value equal to the amount of its purchase commitments.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Fund may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, the Fund is required to
deposit either cash or securities, representing the initial margin, equal to a
certain percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded daily as unrealized gains or losses.
The variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1998
[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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been increased by $445,443
and accumulated net realized gains have been decreased by $445,443.
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
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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
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 March
31, 1998.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1998, the Fund is committed to invest an additional $38,000 in
Spectrum Equity Investors limited partnership and $333,000 in PathNet private
placement.
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1998
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 1998, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$84,070,605 and $94,547,486, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at March 31, 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] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of March 31, 1998. The
market value of securities deposited to cover initial margin requirements for
the open positions at March 31, 1998, was $74,756.
The unrealized appreciation of $8,809 on these contracts at March 31, 1998 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 13 June 1998 Short $ 1,460,875 $ 8,809
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1998
[6] FOREIGN CURRENCY EXCHANGE CONTRACTS
At March 31, 1998, the Balanced Fund had entered into foreign currency exchange
contracts. The unrealized appreciation or depreciation on those contracts at
March 31, 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>
04/01/98 8,258 U.S. Dollars 12,064 Australian Dollars $ -- $ 257
04/01/98 5,478 U.S. Dollars 728,056 Japanese Yen -- 18
04/03/98 3,067 U.S. Dollars 4,870 Singapore Dollars -- 52
04/03/98 55,463 British Pounds 92,646 U.S. Dollars -- 233
04/15/98 721,791 Belgian Francs 19,136 U.S. Dollars 216 --
04/30/98 84,807 French Francs 13,824 U.S. Dollars 136 --
04/30/98 75,205 British Pounds 121,531 U.S. Dollars -- 4,199
05/06/98 25,571,750 Japanese Yen 206,257 U.S. Dollars 13,461 --
10/07/98 1,023,424 Hong Kong Dollars 130,719 U.S. Dollars -- 95
- -----------------------------------------------------------------------------------------------------------
$13,813 $4,854
- -----------------------------------------------------------------------------------------------------------
</TABLE>
[7] OPTIONS CONTRACTS WRITTEN
During the year ended March 31, 1998, Balanced Fund wrote the following options
on equity securities.
CALL OPTIONS
- --------------------------------------------------------------------------------
Number of
Contracts Premium
- --------------------------------------------------------------------------------
Outstanding at 3/31/97 -- $ --
Opened 10 9,613
Expired (10) (9,613)
Closed -- --
Exercised -- --
========== =============
Outstanding at 3/31/98 -- --
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI BALANCED FUND
The Board of Directors and Shareholders
IAI Investment Funds VI, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Balanced Fund (a portfolio within IAI Investment
Funds VI, Inc.) as of March 31, 1998, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended and the financial highlights for each of
the years in the five-year period then ended. 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, 1998, 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 8, 1998
<PAGE>
FEDERAL TAX INFORMATION
IAI BALANCED FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
TAX INFORMATION:
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Ordinary 28% Rate Long-Term
Payable Date Income (A) Gain Capital Gain
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JUNE 1997 $ 0.2986 $0.0000 $ 0.0000
DECEMBER 1997 0.4287 0.0150 0.6289
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$ 0.7273 $0.0150 $ 0.6289
12.95% 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.
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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
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<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing countries
COUNTRIES FUND
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IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
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IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
emerging growth companies
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IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
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IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
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IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
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IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
GROWTH AND APPRECIATION
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IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
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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
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IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + INCOME] short-term instruments
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IAI BOND FUND Income Capital Investment-grade bonds
Preservation
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IAI GOVERNMENT FUND Income Capital U.S. Government securities
Preservation
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IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25 months,
investing primarily in investment-grade bonds
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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
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</TABLE>
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://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
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[LOGO]
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
