ANNUAL REPORT
IAI BALANCED FUND
MARCH 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BALANCED FUND
ANNUAL REPORT
MARCH 31, 1999
Letter to Shareholders..........................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
Independent Auditors' Report...................26
Federal Tax Information........................27
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI BALANCED FUND
WHAT'S RIGHT WITH THIS MARKET
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
grew 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.
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 1999 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 the value of 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>
LETTER TO SHAREHOLDERS
IAI BALANCED FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
Robust economic growth and slowing inflationary trends sent analysts to their
history books to identify when past economic data was as positive as recent
statistics. Economic growth in 1998 was at its fastest pace in 15 years while
the inflation rate increased at its lowest rate since 1961. These trends have
carried over to the first quarter. With jobs plentiful and consumers
experiencing favorable real wage increases, consumer confidence is high.
Combined with tax refunds and year-end incentive pay to produce, this is one of
the strongest periods for retail sales in the last 10 years.
During previous economic expansions, conventional wisdom linked strong demand
growth with rising inflation. This normally provoked the Federal Reserve to
tighten monetary policy to reduce demand and prevent an acceleration of
inflation. However, this time even the Fed seems to be skeptical of that
linkage. In a speech in early April, Federal Reserve Vice Chair Alice Rivlin
stated:
"Tight labor markets have long been seen as harbingers of inflation (as higher
wages led to higher prices) and lower productivity (as less skilled and
experienced workers were drawn into the labor market). But recent experience
suggests that, at least in the context of intense global and domestic
competitiveness, as well as a continuing revolution in computers and
telecommunications, tight labor markets can provide incentives for managerial
innovation, skills acquisition and higher productivity, thereby leading to
higher growth with little inflation."
During the quarter, the Fed left rates unchanged and signaled they were
maintaining a neutral policy stance. Fears of a possible tightening, however,
negatively impacted financial markets in February. By quarter-end the equity
market had recovered to push through the 10,000 mark on the Dow and interest
rates, following a steep rise in February, stabilized.
Ms. Rivlin mentioned several of the factors that have allowed strong U.S. growth
with low inflation. While our economy is experiencing good times, weakness
persists in Asia, Russia and Latin America and growth has slowed in Europe. This
has contributed to declining commodity and input prices as global demand remains
soft. The only commodity showing strength has been oil, driven by production
cut-backs by oil producing countries. Another factor favoring low inflation has
been the strength of the dollar. Real interest rate differentials between the
U.S. and our major trading partners widened in favor of the dollar during the
quarter. Strength in the dollar makes imports less expensive, effectively
eliminating the ability of U.S. producers to raise prices.
We expect economic momentum to continue throughout the year. However, the pace
of the expansion will moderate toward a real GDP growth rate of 3%. Over the
past three years the U.S. economy has been unusually robust in the fourth and
first quarters, only to slow significantly in the second and third quarters. The
increase in oil prices, if sustained, will help slow the economy by cutting into
consumers' disposable income. Finally, the rise in interest rates during the
quarter will slow economic growth.
Please read the Fund Manager's Review, which follows 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.
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
* PERCENTAGE OF NET ASSETS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The Fund underperformed its internally blended benchmark index for the year
ended March 31, 1999, with a return of 9.46% versus 12.38%. 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?
Nabors Industries (1.61%)*, Citigroup (1.58%)* and Nike (0.43%)* were among the
largest contributors to performance. Nabors Industries, the largest U.S. driller
of land-based oil and natural gas wells, gained as OPEC agreed to slash
production in a bid to lift oil prices. Citigroup shares continued to rise as
analysts predicted that earnings would likely be higher than expected. Nike
shares gained after reporting higher than expected profits. The strongest
performing international companies came from the Pacific Basin. In Japan, Namco
(0.27%)*, Nippon Telegraph & Telephone (0.54%)* and Nippon Yusen Kabushiki
Kaisha (0.48%)* rose significantly during the period, while in Australia, Broken
Hill Proprietary (0.40%)* was also a large contributor to performance.
Philip Morris (0.86%)*, 800-JR Cigar (1.10%)*, and Bellsouth (1.06%)* were among
the Fund's laggards. Philip Morris shares fell after an Oregon jury ordered the
world's largest tobacco company to pay a record $81 million to a smoker's
family. 800-JR Cigar and Bellsouth fell on disappointed earnings.
WERE THERE ANY SIGNIFICANT CHANGES?
New companies added to the Fund included AT&T (0.94%)*, Allied Signal (0.95%)*,
International Business Machines (0.98%)* and Motorola (0.23%)*. Stocks sold
during the year included CBS (sold), General Electric (sold), Gillette (sold)
and Wal-Mart Stores (sold). The Fund established a market weight position in
Japan by adding to existing holdings and introducing new ones, which increased
its overall exposure to the Pacific Basin. In contrast, the allocation to Europe
decreased. The interest rate sensitivity of the Fund's fixed income position
remained longer than the benchmark and sector weightings continued to overweight
mortgages and corporates.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Consumer Staples sector, led by 800-JR Cigar and Philip Morris, had a large
negative impact on performance. The Energy and Health Care sectors contributed
positively to performance. International market performance was driven by two
dominant factors: strength in Japanese equities, offset by weakness in the Euro.
Interest rates experienced a steep rise during February as economic reports
showed continued strong economic growth in late 1998 and early 1999. Investors
became concerned that the rapid growth would increase inflationary pressures
that, in turn, would force the Federal Reserve to raise interest rates in an
effort to slow the domestic economy.
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. Fixed
income strategy is positioned for gradually falling rates and narrowing spreads.
4
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
FINANCIAL 9.4%
UTILITIES 6.8%
PROCESS INDUSTRIES 4.1%
CONSUMER DURABLES 3.6%
ENERGY MINERALS 3.2%
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 3/31/99
[BAR CHART]
YEARS
- -----
0-3 9%
3-5 16%
5-10 61%
10-20 3%
20+ 11%
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
---------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Pathnet Preferred Stock* Electronic Technology 6.31 0.53
Spectrum Equity Investors L.P.* Financial 2.60 2.04
Vanguard Associates IV L.P.* Financial 2.58 4.24
Berkshire Hathaway Class A Process Industries 2.25 2.79
Exxon Energy Minerals 1.67 0.89
================================================================================
TOTAL 15.41 10.49
*RESTRICTED SECURITY
BOND SECTORS
% OF BOND PORTFOLIO AS OF 3/31/99
[PIE CHART]
Corporate 44%
U.S. Government Agency Mortgage-Backed 38%
U.S. Government & Government Agency Obligations 9%
Asset-Backed 7%
Foreign Denominated 2%
BOND CREDIT RATING
% OF BOND PORTFOLIO AS OF 3/31/99
U.S. Government... 48%
Aaa.................5%
Aa................. 4%
A................. 10%
Baa.................9%
Non-Investment
Grade..............24%
5
<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
NOTE TO LETTER TO SHAREHOLDERS & 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
LEHMAN BROTHERS
IAI BALANCED FUND S&P 500 AGGREGATE
(INCEPTION 4/10/92) INDEX BOND INDEX
------------------- ----- ----------
4/10/92 10,000 10,000 10,000
3/31/93 11,019 11,527 11,329
3/31/94 10,933 11,693 11,598
3/31/95 11,963 13,515 12,176
3/31/96 13,409 17,859 13,490
3/31/97 15,897 21,420 14,151
3/31/98 20,530 31,727 15,731
3/31/99 22,471 37,505 16,855
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
Since Inception
1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI BALANCED FUND 9.46% 15.50% 12.31%
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 20.78%*
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index 6.49% 7.79% 7.76%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
6
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 40.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 3.6%
Department 56 (b) 8,000 $ 243,500
Eastman Kodak 3,200 204,400
Mattel 9,300 231,338
Newell Rubbermaid 5,200 247,000
------------
926,238
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.4%
800 - JR Cigar (b) 36,000 279,000
Nike Class B 1,900 109,606
Philip Morris 6,200 218,163
------------
606,769
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 2.4%
Hewlett-Packard 800 54,250
International Business Machines 1,400 248,150
Motorola 800 58,600
SBC Communications 5,400 254,475
-------------
615,475
- --------------------------------------------------------------------------------
ENERGY MINERALS - 3.2%
Chevron 1,600 141,500
Exxon 6,000 423,375
Mobil 1,800 158,400
Texaco 1,400 79,450
-------------
802,725
- --------------------------------------------------------------------------------
FINANCIAL - 9.4%
American Express 3,200 376,000
Bank One 3,100 170,694
BankAmerica 4,400 310,750
Chase Manhattan 2,900 235,806
Citigroup 6,300 402,413
Federal Home Loan
Mortgage Corporation 5,100 291,338
First Union 2,200 117,563
SLM Holding 6,750 281,813
Wells Fargo 5,400 189,338
-------------
2,375,715
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 1.8%
First Health Group (b) 13,000 $ 208,812
United Healthcare 4,700 247,338
-------------
456,150
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 0.8%
Watson Pharmaceuticals (b) 4,300 189,738
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.6%
Nabors Industries (b) 22,500 409,219
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.4%
Nucor 2,400 105,750
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.1%
Bemis 2,800 86,975
Berkshire Hathaway Class A (b) 8 571,200
Du Pont (E.I.) de Nemours 3,800 220,638
Sigma-Aldrich 5,400 157,950
-------------
1,036,763
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 2.9%
Allied Signal 4,900 241,019
Emerson Electric 2,700 142,931
HON Industries 9,300 204,019
Tyco International 2,200 157,850
-------------
745,819
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 0.7%
Parametric Technology (b) 9,400 185,650
- --------------------------------------------------------------------------------
UTILITIES - 6.8%
AT&T 3,000 239,438
Bell Atlantic 5,100 263,606
Bellsouth 6,700 268,419
Duke Energy 2,600 142,025
Enron 2,700 173,475
FPL Group 2,700 143,775
MCI Worldcom (b) 2,200 194,838
PG&E 5,200 161,525
Texas Utilities 3,500 145,905
-------------
1,733,006
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $9,685,204) ..............................................$ 10,189,017
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
7
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
NON-CONVERTIBLE PREFERRED STOCK - 0.9%
Market
Rate Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 0.9%
SI Financing Trust I 2.38% 9,000 $ 238,500
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCK
(COST: $225,000).................................................$ 238,500
================================================================================
RESTRICTED SECURITIES - 11.5%
Market
Quantity (k) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 6.3%
Pathnet Series C (b) 46,992 $ 1,601,252
- --------------------------------------------------------------------------------
Ownership Market
Percentage (k) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 5.2%
South Street Corporate Recovery
Fund I (b) 0.69% --
Spectrum Equity Investors (b) 0.46 660,892
Vanguard Associates IV (b) 1.35 653,983
-------------
1,314,875
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $652,735).................................................$ 2,916,127
================================================================================
FOREIGN COMMON STOCKS - 14.0%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
AUSTRALIA - 1.0%
Boral (MATERIALS) 41,604 $ 59,929
Broken Hill Proprietary (MATERIALS) 12,094 102,722
Goodman Fielder (CONSUMER GOODS) 45,288 46,703
M.I.M. Holdings (MATERIALS) 101,300 45,419
-------------
254,773
- --------------------------------------------------------------------------------
BELGIUM - 0.1%
Compagnie Maritime Belge (SERVICES) 460 17,538
- --------------------------------------------------------------------------------
FINLAND - 0.9%
Fortum OYJ (ENERGY) (b) 16,300 79,365
Orion-Yhtyma Class B
(CONSUMER GOODS) 1,540 33,202
UPM-Kymmene (MATERIALS) 3,867 106,457
-------------
219,024
- --------------------------------------------------------------------------------
FRANCE - 2.1%
CNP Assurances (FINANCIAL) (b) 3,013 79,207
Dexia France (FINANCIAL) 755 105,555
Eridania Beghin-Say (CONSUMER GOODS) 757 112,128
Groupe Danone (CONSUMER GOODS) 451 113,495
Suez Lyonnaise des Eaux (SERVICES) 639 118,243
-------------
528,628
- --------------------------------------------------------------------------------
GERMANY - 1.1%
BASF (MATERIALS) 870 31,841
Bayer (MATERIALS) 2,017 75,561
BHF-Bank (FINANCIAL) 1,250 51,281
Deutsche Bank (FINANCIAL) 1,410 72,535
Veba (ENERGY) 1,140 59,937
-------------
291,155
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
8
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
FOREIGN COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HONG KONG - 0.5%
Axa China Region (FINANCIAL) 54,000 $ 37,976
Dairy Farm International
(CONSUMER GOODS) 27,972 32,448
Jardine Strategic (MULTI - INDUSTRY) 31,921 53,946
-------------
124,370
- --------------------------------------------------------------------------------
ITALY 0.5%
Telecom Italia (SERVICES) 19,550 116,273
- --------------------------------------------------------------------------------
JAPAN - 3.5%
Eisai (CONSUMER GOODS) 8,000 167,187
Hitachi (CAPITAL EQUIPMENT) 20,000 148,105
Japan Airlines (SERVICES) 9,000 29,410
Mazda Motor (CONSUMER GOODS) 19,000 73,800
Namco (CONSUMER GOODS) 2,600 68,496
Nippon Oil (ENERGY) 1,000 3,909
Nippon Telegraph & Telephone
(SERVICES) 14 137,127
Nippon Yusen Kabushiki Kaisha
(SERVICES) 31,000 123,026
Sekisui Chemical (MATERIALS) 19,810 141,010
-------------
892,070
- --------------------------------------------------------------------------------
NETHERLANDS - 0.3%
KLM Royal Dutch
Air Lines (SERVICES) 3,100 87,015
- --------------------------------------------------------------------------------
NEW ZEALAND - 0.2%
Carter Holt Harvey (MATERIALS) 41,836 39,267
- --------------------------------------------------------------------------------
PORTUGAL - 0.6%
Banco Pinto & Sotto Mayor
(FINANCIAL) 3,722 73,414
Brisa-Auto Estradas
(CAPITAL EQUIPMENT) 1,919 88,878
-------------
162,292
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
SINGAPORE - 0.2%
Singapore Airlines, foreign
(SERVICES) 1,945 $ 14,065
United Overseas Bank, foreign
(FINANCIAL) 6,191 38,683
-------------
52,748
- --------------------------------------------------------------------------------
SPAIN - 0.5%
Fuerzas Electricas de
Cataluna Class A (ENERGY) 4,401 47,038
Iberdrola (ENERGY) 4,470 66,210
-------------
113,248
- --------------------------------------------------------------------------------
SWITZERLAND 0.5%
Swatch Group Class B
(CONSUMER GOODS) 204 129,558
- --------------------------------------------------------------------------------
UNITED KINGDOM - 2.0%
Blue Circle Industries (MATERIALS) 18,500 107,811
BRITANNIC (FINANCIAL) 1,820 28,470
BTR Siebe (CONSUMER GOODS) 13,606 60,731
Enterprise Oil (ENERGY) 6,355 36,586
Greenalls Group (SERVICES) 11,020 59,417
Hyder (MULTI - INDUSTRY) 2,940 37,256
Rolls-Royce (CAPITAL EQUIPMENT) 21,535 91,951
Safeway (SERVICES) 9,420 37,066
Tomkins (MULTI - INDUSTRY) 13,510 50,026
United Biscuits (SERVICES) 3,290 9,985
-------------
519,299
================================================================================
TOTAL INVESTMENTS IN FOREIGN COMMON STOCKS
(COST: $3,681,481)...............................................$ 3,547,258
================================================================================
FOREIGN NON-CONVERTIBLE PREFERRED STOCK - 0.0%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
GERMANY - 0.0%
Prosieben Media (SERVICES) 231 $ 11,098
================================================================================
TOTAL INVESTMENTS IN FOREIGN NON-
CONVERTIBLE PREFERRED STOCK
(COST: $10,743)..................................................$ 11,098
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
9
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
CORPORATE BONDS - 12.1%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 2.8%
Arcadia Financial 11.50% 03/15/07 $ 100,000 $ 78,000
Associates 5.50 02/15/04 45,000 44,116
Bear Stearns 6.15 03/02/04 25,000 24,716
CIT Group 5.50 02/15/04 45,000 43,705
Ford Motor Credit 5.80 01/12/09 85,000 81,652
Household Finance (MEDIUM-TERM NOTE) 5.88 02/01/09 75,000 71,426
HSBC Americas 6.63 03/01/09 60,000 60,456
Midamerican Funding (f) 6.93 03/01/29 55,000 54,497
Nationsbank 6.13 07/15/04 35,000 35,132
Providian Capital I (f) 9.53 02/01/27 100,000 97,000
RBF Finance (f) 11.00 03/15/06 75,000 78,750
Toyota Motor Credit 5.63 11/13/03 30,000 29,817
------------
699,267
- -----------------------------------------------------------------------------------------------------------------
INDUSTRIAL - 8.9%
Albecca (f) 10.75 08/15/08 100,000 85,000
Baker Hughes(f) 6.88 01/15/29 85,000 83,413
Biovail International 10.88 11/15/05 100,000 102,750
Calpine 7.75 04/15/09 75,000 75,030
Cendant 7.75 12/01/03 105,000 107,774
Chesapeake Energy 9.13 04/15/06 100,000 80,000
Continental Airlines 6.55 02/02/19 40,000 39,766
Entex Information Services 12.50 08/01/06 125,000 88,906
Evenflow (f) 11.75 08/15/06 75,000 76,500
Grove Worldwide (STEP BOND) (i) 7.56 05/01/09 25,000 9,000
Integrated Electronic Services (f) 9.38 02/01/09 50,000 51,000
J Seagram & Sons 6.63 12/15/05 150,000 148,754
Level 3 Communications 9.13 05/01/08 25,000 25,063
Loewen Group International Series 2 8.25 04/15/03 100,000 53,500
Mack-Cali Realty 7.25 03/15/09 45,000 44,335
NE Restaurant 10.75 07/15/08 100,000 96,500
Noble Drilling 7.50 03/15/19 60,000 60,906
Owens Corning 7.00 03/15/09 55,000 53,968
Petro-Canada (YANKEE) (g) 7.00 11/15/28 85,000 82,175
Premier Graphics (f) 11.50 12/01/05 100,000 98,500
Province of Alberta (YANKEE) (G) 4.88 10/29/03 75,000 72,314
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
10
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
CORPORATE BONDS (CON'T)
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL (CONT.)
Queen Sand Resources 12.50% 07/01/08 $ 150,000 $ 100,500
Radio Unica (STEP BOND) (f)(i) 10.84 08/01/06 225,000 126,000
Safelite Glass (f) 9.88 12/15/06 100,000 93,250
Sonic Automotive 11.00 08/01/08 100,000 98,750
Styling Technology 10.88 07/01/08 100,000 96,500
Temple-Inland (MEDIUM-TERM NOTE) 6.75 03/01/09 50,000 50,032
True Temper Sports (f) 10.88 12/01/08 50,000 46,250
Williams Companies 6.50 08/01/06 110,000 109,520
------------
2,255,956
- -----------------------------------------------------------------------------------------------------------------
UTILITIES - 0.4%
AT&T Capital (MEDIUM-TERM NOTE) 7.50 11/15/00 80,000 82,042
Global Crossing (PIK BOND) (f)(h) 10.50 12/01/08 250 (j) 28,813
------------
110,855
=================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $3,203,301).................................................................................$ 3,066,078
=================================================================================================================
<CAPTION>
FOREIGN DENOMINATED BOND - 0.4%
Principal Market
Rate Maturity Amount (e) Value (a)
- -----------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT - 0.4%
Hellenic Republic (GREEK DRACHMA) 8.90% 03/21/04 31,000,000 $ 113,329
=================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BOND
(COST: $103,095)...................................................................................$ 113,329
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
11
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 2.5%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 0.5%
4.75% 02/15/04 $ 115,000 $ 113,239
- -----------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 0.4%
7.50 11/15/16 65,000 76,324
6.63 02/15/27 20,000 22,047
------------
98,371
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.6%
Federal Home Loan Mortgage Corporation 5.13 09/15/03 65,000 63,944
Federal National Mortgage Association 5.63 03/15/01 130,000 130,996
Federal National Mortgage Association 6.21 08/06/38 225,000 218,849
------------
413,789
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS
(COST: $637,726)...................................................................................$ 625,399
=================================================================================================================
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 10.5%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION GOLD - 3.1%
6.00% 04/01/11 $ 87,125 $ 86,799
6.00 12/01/13 103,368 102,722
6.50 05/01/14 190,000 (c) 191,839
6.50 04/01/29 400,000 (c) 398,500
------------
779,860
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.1%
9.50 02/01/25 99,074 105,785
7.50 04/01/28 78,036 80,182
7.00 05/01/28 144,838 146,830
6.00 10/01/28 223,649 217,357
6.50 11/01/28 243,255 242,114
------------
792,268
- -----------------------------------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION DWARF - 0.4%
6.00 11/01/13 112,423 111,580
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
12
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CON'T)
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.9%
7.00% 04/15/23 $ 73,569 $ 74,834
8.00 12/15/23 124,613 130,299
7.50 05/15/28 83,124 85,695
7.00 06/15/28 94,664 96,113
7.00 08/15/28 337,911 343,084
6.50 09/15/28 112,420 111,928
7.00 01/15/29 143,993 146,192
------------
988,145
=================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $2,671,463).................................................................................$ 2,671,853
=================================================================================================================
<CAPTION>
ASSET-BACKED SECURITIES - 1.9%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
AUTO LOAN RELATED - 0.7%
Arcadia Automobile Receivables Trust 99-A A4 5.94% 08/15/03 $ 30,000 $ 30,038
Ford Credit Auto Owner Trust 98-C B 6.06 02/15/03 140,000 139,801
------------
169,839
- -----------------------------------------------------------------------------------------------------------------
EQUIPMENT LOAN RELATED - 0.4%
Newcourt Equipment Trust Securities 98-2 A4 5.45 10/15/03 105,000 103,819
- -----------------------------------------------------------------------------------------------------------------
HOME EQUITY LOAN RELATED - 0.8%
EQCC Home Equity Loan Trust 98-2 A6F 6.16 04/15/08 90,000 89,611
Residential Asset Securities 99-KS1 AI3 6.11 05/25/24 105,000 105,098
- -----------------------------------------------------------------------------------------------------------------
194,709
=================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $470,014)...................................................................................$ 468,367
=================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $21,340,762)................................................................................$ 23,847,026
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
13
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 2.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.3%
4.05% 04/22/99 $ 75,000 (d) $ 74,789
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER - 2.3%
Ford Motor Credit (FINANCIAL) 4.84 04/19/99 190,000 189,540
General Electric Credit (FINANCIAL) 4.81 04/14/99 390,000 389,323
------------
578,863
=================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $653,692)...................................................................................$ 653,652
=================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $21,994,454) (l)............................................................................$ 24,500,678
=================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 3.5%
...............................................................................................$ 895,297
=================================================================================================================
TOTAL NET ASSETS
...............................................................................................$ 25,395,975
=================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
14
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
(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, 1999, the cost of securities
purchased on a when-issued basis totalled $588,094.
(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. The market value
of such securities was $918,973 (3.6% of net assets) at March 31, 1999.
(g)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(h)
The interest rate shown for Payment-in-Kind bonds (PIK bonds) represents
effective yield at March 31, 1999. PIK--Payment-in-Kind income is generally paid
by issuing additional par or shares of the security rather than paying cash.
(i)
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,
1999, based upon the estimated timing and amount of future interest and
principal payments.
(j)
Represents a preferred security. Quantity is disclosed in units. One unit
represents 100 par.
(k)
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, 1999, 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, 1999, is shown on the next page.
15
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 1999
CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
PathNet Series C 11/04/97 $ 166,665
04/01/98 333,733
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
02/10/99 10,000
Vanguard Associates IV 07/26/96 2,811
(l)
At March 31, 1999, 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.................... $ 22,829,901
===================
Gross unrealized appreciation........................... $ 3,007,208
Gross unrealized depreciation........................... (1,336,431)
-------------------
Net unrealized appreciation............................. $ 1,670,777
===================
16
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
MARCH 31, 1999
<TABLE>
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $21,994,454) $24,500,678
Cash in bank on demand deposit 1,268,184
Receivable for investment securities sold 899,298
Receivable for Fund shares sold 18,959
Dividends and accrued interest receivable 127,026
Unrealized appreciation on foreign currency contracts held, at value (Note 6) 62
-----------
TOTAL ASSETS 26,814,207
-----------
LIABILITIES
Payable for investment securities purchased 823,231
Payable for investment securities purchased on a when-issued basis 588,094
Unrealized depreciation on foreign currency contracts held, at value (Note 6) 1,392
Variation margin payable 5,312
Other accrued expenses 203
-----------
TOTAL LIABILITIES 1,418,232
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $25,395,975
===========
REPRESENTED BY:
Capital stock $ 23,548
Additional paid-in capital 21,242,378
Undistributed net investment income 436,478
Accumulated net realized gains 1,196,393
Unrealized appreciation or depreciation on:
Investment securities $ 2,498,649
Other assets and liabilities denominated in foreign currency (1,471)
-----------
2,497,178
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $25,395,975
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 2,354,785
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 10.78
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
17
<PAGE>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
YEAR ENDED MARCH 31, 1999
<TABLE>
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Interest $ 779,130
Dividends (net of foreign income taxes withheld of $13,726) 321,153
-----------
TOTAL INCOME 1,100,283
-----------
EXPENSES
Management fees 389,548
Compensation of Directors 8,045
Other expenses 5,406
-----------
TOTAL EXPENSES 402,999
Less fees reimbursed by Advisers (8,045)
-----------
NET EXPENSES 394,954
-----------
NET INVESTMENT INCOME 705,329
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 4,549,074
Futures contracts (122,073)
Foreign currency transactions (118,019)
------------
4,308,982
Net change in unrealized appreciation or depreciation on:
Investment securities $ (2,489,644)
Futures contracts (16,384)
Other assets and liabilities denominated in foreign currency (8,699)
------------
(2,514,727)
-----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 1,794,255
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,499,584
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI BALANCED FUND
<TABLE>
<CAPTION>
Year ended Year ended
March 31, March 31,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 705,329 $ 1,100,909
Net realized gains 4,308,982 7,576,327
Net change in unrealized appreciation or depreciation (2,514,727) 986,206
-----------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 2,499,584 9,663,442
-----------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (520,998) (1,041,725)
Excess distribution from net investment income -- (333,421)
From net realized gains (7,382,896) (3,849,828)
-----------------------------
TOTAL DISTRIBUTIONS (7,903,894) (5,224,974)
-----------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 2,100,920 and 2,196,828 shares 24,404,967 27,242,204
Net asset value of 685,461 and 436,950 shares issued
in reinvestment of distributions 7,831,537 5,199,315
Cost of 2,881,943 and 3,157,276 shares redeemed (32,696,775) (38,440,983)
-----------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (460,271) (5,999,464)
-----------------------------
TOTAL DECREASE IN NET ASSETS (5,864,581) (1,560,996)
NET ASSETS AT BEGINNING OF PERIOD 31,260,556 32,821,552
-----------------------------
NET ASSETS AT END OF PERIOD $ 25,395,975 $ 31,260,556
=============================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 436,478 $ 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,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.76 $ 11.04 $ 11.53 $ 10.57 $ 10.36
-----------------------------------------------------------------------
OPERATIONS
Net investment income 0.28 0.25 0.37 0.29 0.29
Net realized and unrealized gains 0.93 2.84 1.60 0.97 0.62
-----------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.21 3.09 1.97 1.26 0.91
-----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.20) (0.28) (0.49) (0.30) (0.32)
Excess distribution from
net investment income -- (0.09) -- -- --
Net realized gains (2.99) (1.00) (1.97) -- (0.38)
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.19) (1.37) (2.46) (0.30) (0.70)
-----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.78 $ 12.76 $ 11.04 $ 11.53 $ 10.57
=======================================================================
Total investment return* 9.46% 29.14% 18.55% 12.09% 9.44%
Net assets at end of period (000's omitted) $ 25,396 $ 31,261 $ 32,822 $ 38,799 $ 41,419
RATIOS
Expenses to average net assets
(including interest expense) 1.27%+ 1.28% 1.26% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.27%+ 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 2.26% 2.57% 2.92% 2.48% 2.68%
Portfolio turnover rate
(excluding short-term securities) 138.8% 237.0% 190.6% 193.8% 256.9%
</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.
+ THIS RATIO INCLUDES A 2 BASIS POINT EXPENSE APPROVED BY THE BOARD OF
DIRECTORS RELATED TO AN INDEPENDENT VALUATION OF A RESTRICTED SECURITY.
20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1999
[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, prices of unrestricted securities of the same
class discounted to reflect 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 $2,916,127 (11.5% 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
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1999
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
using dealer-supplied valuations, resulting in unrealized appreciation or
depreciation being recorded. The Fund will realize a gain or loss upon
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option or the cost of a security for a purchased put or call option is
adjusted by the amount of premium received or paid.
FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may invest in foreign securities. The market value of securities and
other assets and liabilities denominated in foreign currencies is translated
daily into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation or
depreciation on foreign currency transactions. Exchange gains 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 $140,125
and accumulated net realized gains have been decreased by $140,125.
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
MARCH 31, 1999
[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 has available a $5,010,000 line of credit with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. During the year ended March 31, 1999, the
Fund paid $857 in interest on the line of credit at an average rate of 8.50%.
This interest expense is included as a reduction of interest income on the
Statement of Operations. There are no borrowings outstanding at March 31, 1999.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1999, the Fund is committed to invest an additional $13,000 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.
During the year ended March 31, 1999, the Fund paid $5,406 for an independent
valuation of a restricted security. This expense was approved by the Fund's
board of directors and is included in other expenses on the statement of
operations.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1999
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 1999, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$40,027,016 and $47,784,104, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolio of investments in securities at March 31, 1999
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, 1999. The
market value of securities deposited to cover initial margin requirements for
the open positions at March 31, 1999 was $49,859. The unrealized depreciation on
these contracts is included in unrealized appreciation or depreciation on
investment securities.
<TABLE>
<CAPTION>
Number Expiration Market Unrealized
Type of Contracts Month Position Value Depreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S Treasury Bond 10 June 1999 Long $ 1,205,625 $ 7,575
========================================================================================
</TABLE>
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 1999
[6] FOREIGN CURRENCY EXCHANGE CONTRACTS
At March 31, 1999, the Fund had entered into foreign currency exchange
contracts. The unrealized appreciation or depreciation on those contracts at
March 31, 1999, 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>
04/01/99 4,012 U.S. Dollars 6,295 Australian Dollars $ -- $ 37
04/01/99 12,980 Australian Dollars 8,259 U.S. Dollars 62 --
04/01/99 7,781 Euro 8,296 U.S. Dollars -- 104
04/01/99 955,605 Japanese Yen 7,924 U.S. Dollars -- 145
04/01/99 18,251 Singapore Dollars 10,507 U.S. Dollars -- 52
04/05/99 869,452 Japanese Yen 7,203 U.S. Dollars -- 138
04/05/99 125 Singapore Dollars 72 U.S. Dollars -- --
04/06/99 4,081 U.S. Dollars 6,448 Australian Dollars -- 9
04/06/99 2,091 Singapore Dollars 1,203 U.S. Dollars -- 7
04/07/99 7,390 Euro 7,880 U.S. Dollars -- 99
04/07/99 10,073 Singapore Dollars 5,810 U.S. Dollars -- 18
04/08/99 4,894 British Pound 7,887 U.S. Dollars -- 14
04/08/99 4,434 British Pound 7,145 U.S. Dollars -- 12
04/30/99 8,389 Euro 8,980 U.S. Dollars -- 77
04/30/99 7,533 Euro 8,063 U.S. Dollars -- 70
04/30/99 7,272 Euro 7,784 U.S. Dollars -- 67
06/02/99 22,164,314 Japanese Yen 188,200 U.S. Dollars -- 543
- -----------------------------------------------------------------------------------------------------------
$ 62 $ 1,392
</TABLE>
25
<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, 1999, 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, 1999, 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 14, 1999
26
<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 informational 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
- --------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
- --------------------------------------------------------------------------
JUNE 1998 $ 0.3745 $ 1.8075
DECEMBER 1998 0.2420 0.7680
==========================================================================
$ 0.6165 $ 2.5755
11.91% of ordinary income distributions qualify for deduction by corporations.
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
27
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
http://www.iaifunds.com
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 510
Milwaukee, WI 53201-0510
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
David Koehler
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
500-0023-0599
800.945.3863
612.376.2700
