SEMI-ANNUAL REPORT
IAI BALANCED FUNDS
SEPTEMBER 30, 1999
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI BALANCED FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1999
(UNAUDITED)
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 ................ 25
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors ..................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI BALANCED FUND
OUTLOOK 2000
A summary of the economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
While the U.S. economy continues to show strong growth with modest inflation,
concerns that growth cannot continue without igniting inflationary pressures
have become widespread. In the last half of the 1990s, corporate mergers and
cost reductions have helped to contain wage pressures while a strong dollar,
excess capacity, new technology and fierce competition have helped to suppress
domestic pricing power. Thus, inflation remains surprisingly benign for the
ninth year of an economic expansion. Yet, a shift now appears to be under way.
Labor markets are extremely tight. The unemployment rate is at the lowest level
in almost 30 years and many firms have been forced to offer bonuses to attract
qualified workers. Tight labor markets are threatening to push wage rates, and
ultimately inflation, higher. Commodity prices are also in an upswing. Energy
prices have vaulted ahead 52% from a year ago. Gold also registered a big move.
After languishing below $260 per ounce, gold rocketed to $300 at quarter-end in
response to a decision by central bankers to restrict anticipated sales of gold
over the next 5 years. Other commodities have begun to show signs of
acceleration as well during the past few months. The value of the dollar, which
had been in a major uptrend for nearly 4 years has weakened in 1999. The strong
dollar has had a dampening effect on inflation as U.S. producers have not been
able to increase prices in the face of "cheap" imports. Continued growth in
Europe, recovery in non-Japan Asia and early signs of life from the Japanese
economy suggest that pressure on commodity prices will continue. As excess
overseas capacity is absorbed by growth in foreign economies, pricing power may
emerge for U.S. companies.
While the trend of mega-mergers and cost reductions continues, many of the other
elements of the strong growth, modest inflation era of the 1990's have
deteriorated. As a result, the Fed is on alert. Policy makers have already moved
interest rates higher twice this year and are likely to raise rates again if
compelling evidence of slower growth does not materialize. This tightening bias
is a threat to financial assets.
Another widely discussed unknown for the financial markets is the potential
impact of Y2K. The financial services industry has taken significant steps to
test trading, settlement and other systems for Y2K compliance. However, broker
dealers plan to take a conservative posture toward carrying significant
securities inventories over year-end. This will have an impact on liquidity in
the markets. Couple this with the probable pre-funding of needs by fixed income
borrowers prior to Y2K and the markets are likely to remain volatile through the
remainder of the year.
2
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<PAGE>
LETTER TO SHAREHOLDERS
IAI BALANCED FUND
OUTLOOK 2000 (CONT.)
In our view, the Federal Reserve's actions will have an impact on growth in the
economy. Early indications suggest that rate increases are having an impact as
housing starts have softened in response to higher mortgage rates. As this works
itself through the broader economy, activity will slacken. A recession, however,
remains only a remote possibility. Slowing economic growth and a modest increase
in inflation implies a continuation of this aging economic recovery into the
year 2000.
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
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<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
IAI BALANCED FUND
FUND MANAGEMENT
IAI BALANCED TEAM
LARRY R. HILL, CFA
HILARY J. FANE
KEITH WIRTZ, CFA
DAVID A. MCDONALD
JEFF MALET
PAUL ROACH
TOP FIVE DOMESTIC COMMON STOCK SECTORS
% OF NET ASSETS AS OF 9/30/99
[BAR CHART]
FINANCIAL 9.1%
UTILITIES 7.3%
PRODUCER MANUFACTURING 5.1%
CONSUMER NON-DURABLES 3.6%
PROCESS INDUSTRIES 3.6%
HOW HAS THE FUND PERFORMED?
The returns for the past six months for the IAI Balanced Fund were (4.9%) as
compared to the benchmark 0.8%. The benchmark consists of 50% Russell 1000 Value
Index, 40% Lehman Aggregate Bond Index and 10% MSCI EAFE International Index.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Specific stocks performing well were Eastman Kodak Co. (0.97%)* and First Health
Group (1.17%)*. Eastman Kodak is showing signs of reversing the recent trend of
market share loss to Fuji in 35mm film. First Health Care Group new client list
revealed in September helped its stock price.
Our best performance internationally came from several natural resource
stocks in Australasia where Broken Hill Proprietary (0.50%)* in Australia and
Carter Holt Harvey (0.30%)* in New Zealand rose in excess of 25%, while our
Japanese holding of Hitachi (0.68%)* continued to generate strong absolute and
relative results. In addition, several international small cap and emerging
markets holdings produced significant gains.
Poorly performing stocks included Banc One Corp. (0.39%)* and
Hillenbrand Industries (0.63%)*. Bank One stock collapsed when they announced a
slow-down in growth from their credit card business. Hillenbrand Industries
stock was hurt by legislation reducing Medicare reimbursements products in their
Hill Rom division.
WERE THERE ANY SIGNIFICANT CHANGES?
Health Management Associates (HMA) (1.22%)* was purchased during the third
quarter after the market significantly over-reacted to a quarterly earnings
shortfall. HMA owns and operates hospitals in less competitive rural areas. HMA
has returns on invested capital significantly in excess of its peers. HMA also
has a strong balance sheet, numerous acquisitions opportunities and a management
team with a proven ability to integrate hospitals.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The signs of cyclical recovery seen during the first six months of 1999
continued throughout the past six months, particularly in Asia and Japan, while
global equity markets took June's modest increase in U.S. interest rates largely
in stride, choosing instead to focus on improving activity and earnings
prospects. Strengthening commodity prices were another important feature of the
quarter. Following announcements by two major copper producers regarding their
intent to reduce capacity, copper futures rallied sharply, making a new high for
the year and clearly benefiting commodity stocks.
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.
* PERCENTAGE OF NET ASSETS AS OF 9/30/99.
4
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<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
-------------------
Issues Sector 9/30/99 3/31/99
- --------------------------------------------------------------------------------
Berkshire Hathaway Class A Process Industries 2.45 2.79
Nabors Industries Industrial Services 1.81 1.61
American Express Financial 1.57 1.48
Bell Atlantic Utilities 1.46 1.04
Exxon Energy Minerals 1.39 0.89
================================================================================
TOTAL
EFFECTIVE MATURITY
% OF PORTFOLIO AS OF 9/30/99
[BAR CHART]
YEARS
- -----
0-3 15%
3-5 11%
5-10 60%
10-20 6%
20+ 8%
BOND SECTORS
% OF PORTFOLIO AS OF 9/30/99
[PIE CHART]
Corporate 46%
Asset-Backed 9%
Foreign Denominated 6%
U.S. Government & Government Agency Obligations 1%
U.S. Government Agency Mortgage-Backed 38%
CREDIT RATING
% OF PORTFOLIO AS OF 9/30/99
U.S. Government ........ 39%
Aaa .................... 7%
Aa ..................... 4%
A ...................... 15%
Baa .................... 14%
Non-Investment
Grade .................. 31%
5
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<PAGE>
FUND MANAGERS' REVIEW
IAI BALANCED FUND
NOTE TO 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
Inception IAI S&P 500 AGGREGATE
4/10/92 BALANCED FUND INDEX BOND INDEX
------- ------------- ----- ----------
10,000 10,000 10,000
Apr-92 9,740 10,292 10,072
May-92 9,960 10,347 10,262
Jun-92 9,870 10,197 10,404
Jul-92 10,280 10,608 10,616
Aug-92 10,210 10,393 10,723
Sep-92 10,400 10,513 10,850
Oct-92 10,541 10,551 10,707
Nov-92 10,761 10,907 10,709
Dec-92 10,887 11,050 10,879
Jan-93 11,009 11,131 11,088
Feb-93 10,796 11,282 11,282
Mar-93 11,019 11,527 11,329
Apr-93 10,654 11,244 11,408
May-93 10,897 11,546 11,422
Jun-93 11,120 11,584 11,629
Jul-93 11,028 11,529 11,695
Aug-93 11,396 11,968 11,900
Sep-93 11,478 11,881 11,933
Oct-93 11,570 12,123 11,977
Nov-93 11,243 12,007 11,876
Dec-93 11,429 12,155 11,940
Jan-94 11,736 12,564 12,101
Feb-94 11,387 12,223 11,891
Mar-94 10,933 11,693 11,598
Apr-94 10,869 11,843 11,505
May-94 11,017 12,037 11,504
Jun-94 10,727 11,738 11,478
Jul-94 11,038 12,127 11,706
Aug-94 11,339 12,620 11,721
Sep-94 11,260 12,315 11,548
Oct-94 11,405 12,600 11,538
Nov-94 11,115 12,138 11,512
Dec-94 11,261 12,317 11,592
Jan-95 11,385 12,636 11,821
Feb-95 11,623 13,126 12,102
Mar-95 11,963 13,515 12,176
Apr-95 11,826 13,913 12,346
May-95 12,052 14,464 12,824
Jun-95 12,450 14,803 12,918
Jul-95 12,773 15,300 12,889
Aug-95 12,830 15,341 13,045
Sep-95 12,969 15,986 13,172
Oct-95 12,808 15,928 13,343
Nov-95 13,337 16,629 13,543
Dec-95 13,351 16,936 13,733
Jan-96 13,492 17,516 13,824
Feb-96 13,421 17,685 13,584
Mar-96 13,409 17,859 13,490
Apr-96 13,537 18,125 13,414
May-96 13,757 18,593 13,387
Jun-96 13,775 18,669 13,566
Jul-96 13,479 17,839 13,603
Aug-96 13,541 18,220 13,579
Sep-96 14,034 19,245 13,816
Oct-96 14,884 19,782 14,122
Nov-96 15,267 21,288 14,364
Dec-96 15,320 20,873 14,230
Jan-97 15,523 22,172 14,274
Feb-97 16,704 22,351 14,310
Mar-97 15,897 21,420 14,151
Apr-97 16,401 22,694 14,363
May-97 17,798 24,085 14,499
Jun-97 18,270 25,158 14,671
Jul-97 19,184 27,175 15,066
Aug-97 18,564 25,673 14,938
Sep-97 19,139 27,072 15,158
Oct-97 18,860 26,178 15,378
Nov-97 18,992 27,377 15,449
Dec-97 19,258 27,843 15,605
Jan-98 19,306 28,157 15,805
Feb-98 19,885 30,182 15,678
Mar-98 20,530 31,727 15,731
Apr-98 20,899 32,047 15,813
May-98 22,347 31,496 15,963
Jun-98 22,745 32,775 16,099
Jul-98 21,794 32,424 16,133
Aug-98 19,929 27,736 16,396
Sep-98 20,025 29,514 16,780
Oct-98 21,204 31,851 16,691
Nov-98 21,832 33,781 16,891
Dec-98 22,659 35,727 16,942
Jan-99 22,722 37,220 17,062
Feb-99 22,534 36,063 16,763
Mar-99 22,471 37,505 16,855
Apr-99 23,179 38,957 16,909
May-99 22,824 38,037 16,761
Jun-99 23,374 40,149 16,707
Jul-99 22,245 38,896 16,637
Aug-99 21,916 38,701 16,628
Sep-99 21,374 37,641 16,821
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/99
Since
Inception
Six Months* 1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI BALANCED FUND (4.87)% 6.76% 13.68% 10.70%
- --------------------------------------------------------------------------------
S&P 500 Index 0.36% 27.80 25.03 19.33%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (0.21)% (37.00)% 7.84% 7.20%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED.
6
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<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 45.5%
Market
Quantity Value (a)
- --------------------------------------------------------------------
CONSUMER DURABLES - 3.2%
Department 56 (b) 6,600 $ 157,988
Eastman Kodak 2,300 173,506
Mattel 7,400 140,600
Newell Rubbermaid 3,700 105,681
----------
577,775
- --------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.6%
Clorox 4,800 183,600
800-JR Cigar (b) 21,000 223,125
NIKE Class B 1,500 85,313
Philip Morris Companies 4,500 153,844
----------
645,882
- --------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 2.2%
International Business Machines 1,400 169,925
SBC Communications 4,400 224,675
----------
394,600
- --------------------------------------------------------------------
ENERGY MINERALS - 3.1%
Chevron 1,100 97,625
Exxon 3,300 250,594
Mobil 1,400 141,050
Texaco 1,100 69,438
----------
558,707
- --------------------------------------------------------------------
FINANCIAL - 9.1%
American Express 2,100 282,712
Bank of America 3,100 172,631
Bank One 2,000 69,625
Chase Manhattan 2,100 158,288
Citigroup 5,550 244,200
Freddie Mac 4,600 239,200
First Union 1,700 60,456
SLM Holding 5,450 234,350
Wells Fargo 4,300 170,387
----------
1,631,849
- --------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------
HEALTH SERVICES - 3.3%
First Health Group (b) 9,400 $ 210,912
Health Management Associates
Class A (b) 29,700 219,037
United HealthCare 3,200 155,800
----------
585,749
- --------------------------------------------------------------------
HEALTH TECHNOLOGY - 1.5%
Hillenbrand Industries 4,300 113,412
Watson Pharmaceuticals (b) 6,000 183,375
----------
296,787
- --------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.8%
Nabors Industries (b) 13,000 325,000
- --------------------------------------------------------------------
NON-ENERGY MINERALS - 0.5%
Nucor 1,900 90,488
- --------------------------------------------------------------------
PROCESS INDUSTRIES - 3.6%
Bemis Company 2,100 71,137
Berkshire Hathaway Class A (b) 8 440,000
Sigma-Aldrich 4,200 133,350
----------
644,487
- --------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.1%
AlliedSignal 3,700 221,769
Emerson Electric 2,900 183,244
HON INDUSTRIES 7,400 142,450
Tyco International 1,800 185,850
Xerox 4,200 176,137
----------
909,450
- --------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.2%
Keane (b) 4,500 102,656
Parametric Technology (b) 8,700 117,450
----------
220,106
- --------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
7
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<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------
UTILITIES - 7.3%
AT&T 3,600 $ 156,600
Bell Atlantic 3,900 262,519
BellSouth 5,300 238,500
Duke Energy 1,900 104,738
Enron 4,000 165,000
FPL Group 2,100 105,787
MCI WorldCom (b) 900 64,688
PG&E 4,200 108,675
Texas Utilities 2,700 100,744
---------
1,307,251
====================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $7,798,502)...................................... $8,188,131
====================================================================
RESTRICTED SECURITIES - 0.0%
Ownership Market
Percentage (k) Value (a)
- --------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.0%
South Street Corporate Recovery
Fund I (b) 0.69% $ --
====================================================================
TOTAL INVESTMENTS IN RESTRICTED
SECURITIES
(COST: $0).............................................. $ --
====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
8
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<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
FOREIGN COMMON STOCKS - 15.7%
Market
Quantity Value (a)(e)
- --------------------------------------------------------------------
AUSTRALIA - 1.4%
Australia & New Zealand Banking
Group (FINANCIAL) 3,960 $ 26,490
Boral (MATERIALS) 35,887 54,944
Broken Hill Proprietary
Company (MATERIALS) 7,775 89,557
Goodman Fielder (CONSUMER GOODS) 90,639 83,996
----------
254,987
- --------------------------------------------------------------------
BELGIUM - 0.3%
Agfa Gevaert (CONSUMER GOODS) (b) 1,620 32,455
Compagnie Maritime Belge
(SERVICES) 315 14,581
----------
47,036
- --------------------------------------------------------------------
FINLAND - 1.0%
Fortum (ENERGY) 11,903 58,063
Instrumentarium Class A
(CAPITAL EQUIPMENT) 118 3,959
Orion-Yhtyma Class B
(CONSUMER GOODS) 2,163 51,604
UPM-Kymmene (MATERIALS) 1,965 66,972
----------
180,598
- --------------------------------------------------------------------
FRANCE - 2.2%
CNP Assurances (FINANCIAL) 2,560 75,418
Credit Lyonnais (FINANCIAL) (b) 360 10,586
Dexia France (FINANCIAL) 556 82,906
Eridania Beghin-Say
(CONSUMER GOODS) 573 69,451
Danone (CONSUMER GOODS) 322 78,365
Suez Lyonnaise des Eaux (SERVICES) 471 76,251
----------
392,977
- --------------------------------------------------------------------
GERMANY - 1.3%
BASF (MATERIALS) 1,067 45,457
Bayer (MATERIALS) 1,391 55,483
Deutsche Bank (FINANCIAL) 1,356 90,771
Veba (ENERGY) 855 46,852
----------
238,563
- --------------------------------------------------------------------
Market
Quantity Value (a)(e)
- --------------------------------------------------------------------
HONG KONG - 0.4%
Axa China Region (FINANCIAL) 46,000 $ 30,202
Dairy Farm International Holdings
(CONSUMER GOODS) 48,652 48,409
----------
78,611
- --------------------------------------------------------------------
ITALY - 0.4%
Telecom Italia (SERVICES) 15,117 75,996
- --------------------------------------------------------------------
JAPAN - 4.0%
Eisai Company (CONSUMER GOODS) 4,000 101,437
Hitachi (CAPITAL EQUIPMENT) 11,000 121,912
Japan Airlines Company (SERVICES) 25,000 96,271
Minolta Co. (CONSUMER GOODS) 11,000 53,827
Mitsubishi Heavy Industries
(CAPITAL EQUIPMENT) 20,000 77,017
Nippon Mitsubishi Oil (ENERGY) 14,000 57,462
Nippon Yusen Kabushiki Kaisha
(SERVICES) 23,000 84,465
Sekisui Chemical Co. (MATERIALS) 20,500 115,718
----------
708,109
- --------------------------------------------------------------------
NETHERLANDS - 0.5%
Koninklijke Luchtvaart
Maatschappij (SERVICES) 3,117 81,170
- --------------------------------------------------------------------
NEW ZEALAND - 0.3%
Carter Holt Harvey (MATERIALS) 45,035 54,189
- --------------------------------------------------------------------
PORTUGAL - 0.9%
Banco Pinto & Sotto Mayor
(FINANCIAL) 4,039 80,014
Brisa-Auto Estradas de Portugal
(CAPITAL EQUIPMENT) 2,309 88,214
----------
168,228
- --------------------------------------------------------------------
SINGAPORE - 0.2%
Neptune Orient Lines, foreign
(SERVICES) (b) 35,000 41,988
- --------------------------------------------------------------------
SPAIN - 0.5%
Endesa (ENERGY) 2,415 45,887
Iberdrola (ENERGY) 3,170 46,998
----------
92,885
- --------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
9
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<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
FOREIGN COMMON STOCKS (CONT.)
Market
Quantity Value (a)(e)
- --------------------------------------------------------------------
UNITED KINGDOM - 2.3%
Britannic (FINANCIAL) 1,896 $ 32,537
Greenalls Group (SERVICES) 7,254 38,110
Hyder (MULTI-INDUSTRY) 6,324 56,345
Rank Group (SERVICES) 8,211 28,972
Rolls-Royce (CAPITAL EQUIPMENT) 16,022 55,610
Royal & Sun Alliance Insurance
Group (FINANCIAL) 3,540 27,926
Safeway (SERVICES) 18,557 67,618
Tomkins (MULTI-INDUSTRY) 18,150 75,999
United Biscuits (SERVICES) 9,108 27,450
----------
410,567
====================================================================
TOTAL INVESTMENTS IN FOREIGN
COMMON STOCKS
(COST: $2,860,900) (e).................................. $2,825,904
====================================================================
FOREIGN NON-CONVERTIBLE
PREFERRED - 0.4%
Market
Quantity Value (a)(e)
- --------------------------------------------------------------------
GERMANY - 0.4%
ProSieben Media (SERVICES) 1,628 $ 70,225
====================================================================
TOTAL INVESTMENTS IN FOREIGN
NON-CONVERTIBLE PREFERRED STOCK
(COST: $75,820) (e)..................................... $70,225
====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
10
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<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 13.2%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 2.5%
Arcadia Financial 11.50% 03/15/07 $ 80,000 $ 60,400
Associates 5.50 02/15/04 45,000 42,776
Bear Stearns 6.15 03/02/04 25,000 24,074
Finova Capital 7.63 09/21/09 60,000 59,793
HSBC Americas 6.63 03/01/09 60,000 56,457
Bank of America 6.13 07/15/04 35,000 33,801
Newcourt Credit Group (f) 6.88 02/16/05 55,000 53,898
Providian Capital I (f) 9.53 02/01/27 100,000 87,803
Toyota Motor Credit 5.63 11/13/03 30,000 28,910
----------
447,912
- ----------------------------------------------------------------------------------------------
INDUSTRIAL - 9.1%
Biovail International 10.88 11/15/05 100,000 103,250
Calpine 7.75 04/15/09 75,000 70,688
Entex Information Services (f) 12.50 08/01/06 125,000 75,000
Evenflow 11.75 08/15/06 75,000 73,500
Grove Worldwide (STEP BOND) (i) 24.10 05/01/09 25,000 4,875
Insight Midwest (f) 9.75 10/01/09 50,000 50,500
Integrated Electronic Services (f) 9.38 02/01/09 50,000 49,000
J Seagram & Sons 6.63 12/15/05 95,000 90,847
Just for Feet (f) 11.00 05/01/09 75,000 15,750
Laidlaw (YANKEE) (g) 7.65 05/15/06 70,000 66,612
Mack-Cali Realty 7.25 03/15/09 45,000 42,092
NE Restaurant 10.75 07/15/08 100,000 90,500
Noble Drilling 7.50 03/15/19 60,000 57,977
Northwest Airlines 7.58 03/01/19 60,000 58,058
Owens Corning 7.00 03/15/09 55,000 50,675
Petro-Canada (YANKEE) (g) 7.00 11/15/28 85,000 74,676
Premier Graphics 11.50 12/01/05 100,000 92,500
Province of Manitoba (YANKEE) (g) 6.75 03/01/03 35,000 35,198
Queen Sand Resources 12.50 07/01/08 100,000 59,000
Radio Unica Corporation (STEP BOND) (i) 13.52 08/01/06 225,000 136,688
Sonic Automotive 11.00 08/01/08 100,000 95,750
Speedway Motorsports 8.50 08/15/07 100,000 98,000
Styling Technology 10.88 07/01/08 100,000 95,000
Temple-Inland (MEDIUM-TERM NOTES) 6.75 03/01/09 35,000 33,040
Williams Communications Group 10.88 10/01/09 25,000 24,888
----------
1,644,064
- ----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
11
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES - 1.6%
AT&T Capital (MEDIUM-TERM NOTE) 7.50 11/15/00 $80,000 $ 80,529
CMS Energy 8.38 07/01/03 100,000 99,375
Enron 7.38 05/15/19 70,000 66,369
Global Crossing (PIK BOND) (f) (h) 9.95 12/01/08 250(j) 26,375
Sprint Capital 6.90 05/01/19 10,000 9,289
----------
281,937
==================================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $2,608,721).................................................................................... $2,373,913
==================================================================================================================
CONVERTIBLE CORPORATE BOND - 0.1%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
Thermolase (Industrial) (f) 4.38 08/05/04 $30,000 $ 25,200
==================================================================================================================
TOTAL INVESTMENTS IN CONVERTIBLE CORPORATE BOND
(COST: $25,704)......................................................................................... $25,200
==================================================================================================================
FOREIGN DENOMINATED BONDS - 1.7%
Principal Market
Rate Maturity Amount Value (a)(e)
- ------------------------------------------------------------------------------------------------------------------
FOREIGN CORPORATE BOND - 1.1%
AB Spintab (Swedish Krona) (FINANCIAL) 5.50% 09/17/03 $ 500,000 $ 60,045
British Sky Broadcasting (United Kingdom) (INDUSTRIAL) (f) 8.20 07/15/09 30,000 29,711
Telecom Argent (Argentina) (UTILITIES) (f) 9.75 07/12/01 100,000 99,750
----------
189,506
- ------------------------------------------------------------------------------------------------------------------
FOREIGN GOVERNMENT - 0.6%
Hellenic Republic (GREEK DRACHMA) 8.90 03/21/04 31,000,000 108,136
==================================================================================================================
TOTAL INVESTMENTS IN FOREIGN DENOMINATED BONDS
(COST: $291,090) (e).................................................................................... $297,642
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
12
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
U.S. GOVERNMENT - 0.3%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY NOTE - 0.2%
7.00% 07/15/06 $ 35,000 $ 36,750
- ------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BONDS - 0.1%
5.25 11/15/28 15,000 13,003
==================================================================================================================
TOTAL INVESTMENTS U.S. GOVERNMENTS
(COST: $50,203)......................................................................................... $49,753
==================================================================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 11.1%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
FREDDIE MAC - 0.5%
6.00 01/15/28 $ 90,000 $ 83,328
- ------------------------------------------------------------------------------------------------------------------
FREDDIE MAC GOLD - 2.7%
6.00 04/01/11 78,052 75,537
6.50 07/01/14 186,742 183,337(c)
6.50 05/01/29 239,781 230,164
----------
489,038
- ------------------------------------------------------------------------------------------------------------------
FANNIE MAE - 5.1%
6.00 11/01/13 82,738 79,589
9.50 02/01/25 76,839 81,790
7.50 04/01/28 70,190 70,458
6.00 10/01/28 93,604 87,324
6.50 11/01/28 234,406 224,925
7.00 08/01/29 155,000 152,388
7.50 08/01/29 59,955 60,170
7.00 09/01/29 129,987 127,796
7.50 09/01/29 35,000 35,126
----------
919,566
- ------------------------------------------------------------------------------------------------------------------
FANNIE MAE-DWARF - 0.2%
7.00 10/01/14 30,000 29,963(c)
- ------------------------------------------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.6%
7.00 04/15/23 67,050 66,223
8.00 12/15/23 106,997 109,785
7.50 05/15/28 73,723 73,997
7.00 08/15/28 112,876 110,859
6.50 09/15/28 109,967 105,178
----------
466,042
==================================================================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $2,020,918).................................................................................... $1,987,937
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
13
- --------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
ASSET-BACKED SECURITIES - 2.8%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AUTO LOAN RELATED - 0.9%
Arcadia Automobile Receivables Trust 99-A A4 5.94% 08/15/03 $ 30,000 $ 29,679
Ford Credit Auto Owner Trust 98-C B 6.06 02/15/03 140,000 138,002
--------
167,681
- ------------------------------------------------------------------------------------------------------------------
EQUIPMENT LOAN RELATED - 0.6%
Newcourt Equipment Trust Securities 98-2 A4 5.45 10/15/03 105,000 101,640
- ------------------------------------------------------------------------------------------------------------------
HOME EQUITY LOAN RELATED - 1.3%
EQCC Home Equity Loan Trust 98-2 A6F 6.16 04/15/08 90,000 87,289
Morgan Stanley Capital 98-HF2 A2 6.48 11/15/30 70,000 67,309
Residential Asset Securities 99-KS2 AI5 6.99 12/25/25 75,000 74,697
--------
229,295
==================================================================================================================
TOTAL INVESTMENTS IN ASSET-BACKED SECURITIES
(COST: $509,007)....................................................................................... $498,616
==================================================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $16,240,865).................................................................................. $16,317,321
==================================================================================================================
SHORT-TERM SECURITIES - 9.6%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILL - 0.3%
4.35% 10/21/99 $ 50,000(d) $ 49,879
- ------------------------------------------------------------------------------------------------------------------
DEMAND NOTES - 5.6%
Pitney Bowes (COMMERCIAL SERVICES) 4.99(l) 413,240 413,239
Warner Lambert (HEALTH TECHNOLOGY) 5.02(l) 400,000 400,000
Wisconsin Electric (UTILITIES) 5.02(l) 189,424 189,424
---------
1,002,663
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 3.7%
Firstar Institutional Money Market Fund 5.02 671,340 671,340
==================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,723,882)................................................................................... $1,723,882
==================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $17,964,747) (m).............................................................................. $18,041,203
==================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.4%)............................................................ $(65,856)
==================================================================================================================
TOTAL NET ASSETS . .................................................................................. $17,975,347
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 15
14
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Purchased on a when-issued basis. At September 30, 1999, the total cost of
securities purchased on a when-issued basis totaled $213,300. Collateral for the
securities purchased on a when-issued basis has been secured by Pitney Bowes
Demand Note, 4.985%, maturing December 31, 2031 valued at $413,239.
(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 $512,987 (2.9% of net assets) at September 30, 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 September 30, 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 September
30, 1999, based upon the estimated timing 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 issue held at September 30, 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 September 30, 1999 is shown below.
LIMITED PARTNERSHIP
ACQUISITION
SECURITY DATE COST
- -------------------------------------------------------------------------
South Street Corporate Recovery Fund I ............ 10/03/95 $ --
15
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
(l)
Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates. The
rates listed are as of September 30, 1999.
(m)
At September 30, 1999 the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
Cost for federal income tax purposes ....................... $17,964,747
-----------
Gross unrealized appreciation .............................. $ 1,395,669
Gross unrealized depreciation .............................. (1,319,123)
-----------
Net unrealized appreciation ................................ $ 76,546
===========
16
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $17,964,747) $ 18,041,203
Foreign currency (cost: $25,969) 24,805
Cash 179,186
Receivable for investment securities sold 135,100
Dividends and accrued interest receivable 116,933
Variation margin receivable 3,906
------------
TOTAL ASSETS 18,501,133
------------
LIABILITIES
Payable for investment securities purchased 186,479
Payable for Fund shares redeemed 321,876
Accrued management fee 17,431
------------
TOTAL LIABILITIES 525,786
------------
NET ASSETS $ 17,975,347
============
NET ASSETS REPRESENTED BY:
Capital stock 19,775
Additional Paid-In-Capital 17,172,838
Undistributed net investment income 260,808
Accumulated net realized gain on investments 442,548
Unrealized appreciation (depreciation) on:
Investment securities $76,456
Other assets and liabilities denominated in foreign currency (947)
Futures 3,869
-------
NET ASSETS 79,378
============
Shares of capital stock outstanding; 10 billion shares authorized, $0.01 par value $ 17,975,347
------------
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE 1,977,498
============
$ 9.09
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21.
17
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
SIX MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME:
Dividends (net of foreign income taxes withheld of $8,829) $ 132,657
Interest 278,907
------------
TOTAL INCOME 411,564
EXPENSES
Management fees 133,161
Compensation of Directors 3,367
Interest expense 812
------------
TOTAL EXPENSES 137,340
Less fees reimbursed by Advisers (3,367)
------------
NET EXPENSES 133,973
------------
NET INVESTMENT INCOME 277,591
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities 1,320,014
Futures contracts (65,688)
Foreign currency transactions (22)
------------
Net realized gain 1,254,304
Net change in unrealized appreciation or depreciation on:
Investment securities (2,422,193)
Other assets and liabilities denominated in foreign currency 524
Futures contracts 3,869
------------
Net unrealized depreciation (2,417,800)
------------
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS (1,163,496)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (885,905)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 21.
18
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI BALANCED FUND
<TABLE>
<CAPTION>
Six months ended
September 30, 1999 Year ended
(UNAUDITED) March 31, 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $ 277,591 $ 705,329
Net realized gains 1,254,304 4,308,982
Net change in unrealized depreciation (2,417,800) (2,514,727)
------------ -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (885,905) 2,499,584
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (453,261) (520,998)
Net realized gains (2,008,149) (7,382,896)
------------ -------------
TOTAL DISTRIBUTIONS (2,461,410) (7,903,894)
------------ -------------
CAPITAL SHARES TRANSACTIONS
Net proceeds from sale of 131,432 and 487,155 shares 1,388,557 24,404,967
Net asset value of 247,036 and 434,126 shares issued in reinvestment
of distributions 2,406,131 7,831,537
Cost of 755,755 and 518,637 shares redeemed (7,868,002) (32,696,775)
------------ -------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (4,073,314) (460,271)
------------ -------------
TOTAL DECREASE IN NET ASSETS (7,420,629) (5,864,581)
NET ASSETS AT BEGINNING OF PERIOD 25,395,975 31,260,556
------------ -------------
NET ASSETS AT END OF PERIOD $ 17,975,347 $ 25,395,975
------------ -------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 260,808 $ 436,478
============ =============
</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>
Six months ended Years ended March 31,
September 30, 1999 -----------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.78 $ 12.76 $ 11.04 $ 11.53 $ 10.57 $ 10.36
--------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.18 0.28 0.25 0.37 0.29 0.29
Net realized and unrealized
gains (losses) (0.62) 0.93 2.84 1.60 0.97 0.62
--------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (0.44) 1.21 3.09 1.97 1.26 0.91
--------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.23) (0.20) (0.28) (0.49) (0.30) (0.32)
Excess distribution from net
investment income -- -- (0.09) -- -- --
Net realized gains (1.02) (2.99) (1.00) (1.97) -- (0.38)
--------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.25) (3.19) (1.37) (2.46) (0.30) (0.70)
--------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.09 $ 10.78 $ 12.76 $ 11.04 $ 11.53 $ 10.57
======================================================================================
Total investment return* (4.87)% 9.46% 29.14% 18.55% 12.09% 9.44%
Net assets at end of period
(000's omitted) $ 17,975 $ 25,396 $ 31,261 $ 32,822 $ 38,799 $ 41,419
RATIOS
Expenses to average net assets
(including interest expense) 1.26%** 1.27%+ 1.28% 1.26% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25%** 1.27%+ 1.25% 1.25% 1.25% 1.25%
Net investment income to average
net assets 2.51%** 2.26% 2.57% 2.92% 2.48% 2.68%
Portfolio turnover rate
(excluding short-term securities) 57.2% 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.
** ANNUALIZED.
+ 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
SEPTEMBER 30, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The 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 a 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 the 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 $0 (0% 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
future 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.
21
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of a security for a purchased
put or call option is adjusted by the amount of premium received or paid.
FOREIGN CURRENCY TRANSLATIONS AND FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may invest in foreign securities. The market value of securities and
other assets and liabilities denominated in foreign currencies is translated
daily into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation or
depreciation on foreign currency transactions. Exchange gains or losses may also
be realized between the trade and settlement dates on security and forward
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 the 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 hedge 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 each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis. Net investment income and net realized
gains may differ for financial statement and tax purposes primarily because of
recognition of limited partnership income, certain foreign currency gains and
losses treated as ordinary income and the deferral of "wash sale" losses for tax
purposes. The character of distributions made during the year from net
investment income or net realized gains may also differ from its ultimate
characterization for tax purposes.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest Income is recorded on the accrual basis. 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 paid semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year.
Additional capital gains distributions, as needed to
22
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 their obligations as policyholder, the Fund is committed to
make capital contributions, if requested by the Company.
[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 Funds for the fees and expenses it pays
to Directors who are not "interested persons" of the Funds or reduce its fee by
an equivalent amount.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended September 30, 1999, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $11,490,016 and $15,893,364, respectively.
RESTRICTED SECURITIES
Included in the Fund's portfolios of investments in securities at September 30,
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 which 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.
23
- --------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
SEPTEMBER 30, 1999
(UNAUDITED)
[5] OPEN FUTURES CONTRACTS
The financial futures contracts shown below were open as of September 30, 1999.
The market value of securities deposited to cover initial margin requirements
for the open positions at September 30, 1999 was $49,879.
The unrealized appreciation on those contracts is included in unrealized
appreciation or depreciation on investment securities.
<TABLE>
<CAPTION>
NUMBER EXPIRATION MARKET UNREALIZED
TYPE OF CONTRACTS MONTH POSITION VALUE APPRECIATION
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Bond 5 March 2000 Long $471,406 $3,869
</TABLE>
24
- --------------------------------------------------------------------------------
<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 LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
500-0019-0599
