ANNUAL REPORT
IAI BALANCED FUND
MARCH 31, 2000
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
-----------------
IAI BALANCED FUND
ANNUAL REPORT
MARCH 31, 2000
Letter to Shareholders ...................... 2
Fund Managers' Review ....................... 4
Fund Portfolio .............................. 7
Notes to Fund Portfolio ..................... 12
Statement of Assets and Liabilities ......... 14
Statement of Operations ..................... 15
Statements of Changes in Net Assets ......... 16
Financial Highlights ........................ 17
Notes to Financial Statements ............... 18
Independent Auditors' Report ................ 22
Federal Tax Information ..................... 23
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors ..................... Inside Back Cover
<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.
The U.S. economy continued to grow at a strong pace in the first quarter. Over
the past five years, the seasonal impact of year-end bonuses and tax refunds
have combined to boost consumer spending. In addition, a strong stock market
and relatively mild weather provided further incentives for the consumer to
spend money.
Inflation moved higher in the first quarter, sparked primarily by a rise in
the price of oil. Although the core rate of inflation (the consumer price
index less food and energy costs) remained subdued, it certainly appears that
it's only a matter of time before higher energy costs find their way into core
inflation.
The labor markets also expanded in the quarter. While this is certainly good
news for consumers, tight labor markets seem to be a source of concern for the
Federal Reserve. Some anecdotal evidence of rising labor costs are already
creeping into the economic data. The combination of strong economic growth,
tight labor markets and rising inflation should cause the Fed to continue
raising short-term interest rates.
The bond market had a somewhat uneasy tone in the first quarter but still
succeeded in producing positive investment results. The Treasury yield curve
inverted during the quarter as long-term bond prices responded favorably to a
new Treasury buy-back program while short bond prices fell in response to
further Fed tightening. In addition, credit spreads widened. Both events were
generally negative for the market. However, some of this negative contribution
was masked by a dramatic drop in long-term Treasury bond yields. The decline
of 65 basis points in these long rates produced a gain of over 23% for 30 year
Treasury bond holders during the quarter. Corporate bonds were the weakest
performing sector, particularly long-term lower rated issues where stock
market volatility and fear over a tighter Fed policy had the greatest impact.
Looking ahead, the Fed is likely to continue raising short-term interest rates
until they see clear evidence of a slowdown in the economy. Credit spreads are
likely to widen further and stock market volatility will remain high as the
Fed withdraws liquidity from the financial system. We are cautious on the
near-term direction of financial markets, but the long-term trends still
remain favorable.
2
--------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
----------------------
IAI BALANCED FUND
ECONOMIC OUTLOOK (CONT.)
Please read the Fund Managers' 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
FUND MANAGEMENT
IAI BALANCED TEAM
LARRY R. HILL, CFA
JEFFREY C. BEARD
MARK N. MCCALL, CFA
KEITH WIRTZ, CFA
JEFF MALET, CFA
TOP FIVE
DOMESTIC
COMMON STOCK
SECTORS
% OF NET ASSETS AS OF 3/31/00
[BAR CHART]
ELECTRONIC TECHNOLOGY 14.9
TECHNOLOGY SERVICES 7.6
FINANCIAL 7.1
RETAIL TRADE 6.7
HEALTH TECHNOLOGY 6.3
HOW HAS THE FUND PERFORMED?
For the 12 month period ending March 31, 2000, the IAI Balanced Fund had a
return of 3.6% as compared to the benchmark return of 12.3%. 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?
Domestic equities were the best performing asset class and technology holdings
led the way for much of the last year. The best performers were beneficiaries of
the Internet and the movement to rapidly deploy faster communications networks.
Our holdings included Oracle, Sun Microsystems, Nortel Networks and Cisco. The
international component of the Fund represented about 10% of the portfolio
during the year and was adversely impacted by an underexposure in two of the
stronger sectors - telecommunications and technology.
WERE THERE ANY SIGNIFICANT CHANGES?
As we moved into the year 2000, our international holdings were eliminated to
take advantage of the promising U.S. economic environment. As of today, the
portfolio's asset mix is approximately 70% domestic equities and 30% domestic
fixed income. Moreover, several stocks were added and deleted in order to
position the Fund for the future.
With respect to fixed income, average duration, a measure of interest rate
sensitivity, was shortened to an intermediate maturity stance reducing
volatility risk marginally.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The equity markets moved to a higher level during the last 12 months - up more
than 15%. However, volatility was high and performance results were uneven for
investors. Growth strategies outperformed value both domestically and outside
the U.S. and this helps explain our underperformance in the international
holdings. Fixed income returns, more or less flat during the last year, were
unattractive relative to domestic equity results but did dampen the level of
volatility that the pure equity funds endured. Problems for bond investors were
more of a `macro' nature and included changing attitudes about inflation,
monetary policy and employment conditions.
WHAT IS YOUR OUTLOOK FOR THE FUND?
U.S. economic activity remains surprisingly strong and conditions seem almost
perfect. Unemployment is at a 30 year low of 3.90% and welfare requests are down
almost 50% nationally since the 1996 Welfare Reform Act. However, the Federal
Reserve has signaled its desire to slow the expansionary pace of our economy to
prevent the possibility of inflationary build-up. Expect short-term rates to
rise during the next few months. Today's volatile stock market reflects this
monetary uncertainty. However, we remain constructive and are looking for
improved signs during the second half of 2000. For the next year, we anticipate
improving inflationary figures, moderating growth in our economy, attractive
corporate profit results, and an interesting Presidential election in the fall.
In summary, a decent environment for investors, particularly equity investors.
We plan to remain over-weighted in stocks relative to bonds - 70%/30%.
4
--------------------------------------------------------------------------------
<PAGE>
FUND MANAGERS' REVIEW
---------------------
IAI BALANCED FUND
TOP FIVE DOMESTIC EQUITY HOLDINGS
% of Net Assets
---------------
Issue Sector 3/31/00
------------------------------------------------------------------------
Microsoft Technology Services 3.19
Intel Electronic Technology 2.99
Flextronics International Electronic Technology 2.85
General Electric Process Industries 2.64
Cisco Systems Electronic Technology 2.39
========================================================================
TOTAL 14.06
EFFECTIVE MATURITY
% OF BOND PORTFOLIO AS OF 3/31/00
[BAR CHART]
YEARS
-----
0-3 26%
3-5 31%
5-10 35%
10+ 8%
BOND SECTORS
% OF BOND PORTFOLIO AS OF 3/31/00
[PIE CHART]
U.S. Government Agency
Mortgage-Backed Securities 34%
Corporate Bonds 56%
U.S. Government Securities 10%
CREDIT RATING
% OF BOND PORTFOLIO AS OF 3/31/00
U.S.
Government ......... 44%
Aaa ................ 0%
Aa ................. 7%
A .................. 11%
Baa ................ 11%
Non-Investment
Grade .............. 27%
5
--------------------------------------------------------------------------------
<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]
IAI BALANCED S&P 500 LEHMAN BROTHERS
FUND INDEX AGGREGATE BOND INDEX
10,000 10,000 10,000
9,740 10,292 10,072
9,960 10,347 10,262
9,871 10,197 10,404
10,280 10,608 10,616
10,210 10,393 10,723
10,400 10,513 10,850
10,541 10,551 10,707
10,761 10,907 10,709
10,887 11,050 10,879
11,009 11,131 11,088
10,796 11,282 11,282
11,019 11,527 11,329
10,654 11,244 11,408
10,897 11,546 11,422
11,120 11,584 11,629
11,028 11,529 11,695
11,396 11,968 11,900
11,478 11,881 11,933
11,570 12,123 11,978
11,243 12,007 11,876
11,429 12,155 11,940
11,736 12,564 12,101
11,387 12,223 11,891
10,933 11,693 11,598
10,869 11,843 11,505
11,017 12,037 11,504
10,727 11,738 11,478
11,038 12,127 11,706
11,339 12,620 11,721
11,260 12,315 11,548
11,405 12,600 11,538
11,115 12,138 11,512
11,261 12,317 11,592
11,386 12,636 11,821
11,624 13,126 12,102
11,963 13,515 12,176
11,827 13,913 12,347
12,052 14,464 12,824
12,450 14,803 12,918
12,773 15,300 12,890
12,830 15,341 13,045
12,969 15,986 13,172
12,808 15,928 13,343
13,337 16,629 13,543
13,351 16,936 13,733
13,492 17,516 13,824
13,421 17,685 13,584
13,409 17,859 13,490
13,537 18,125 13,414
13,757 18,593 13,387
13,775 18,670 13,566
13,479 17,839 13,603
13,541 18,220 13,580
14,034 19,245 13,816
14,885 19,782 14,123
15,267 21,288 14,364
15,321 20,873 14,230
15,523 22,172 14,274
16,704 22,351 14,310
15,897 21,420 14,151
16,401 22,694 14,363
17,799 24,085 14,499
18,270 25,158 14,671
19,184 27,175 15,066
18,564 25,673 14,938
19,140 27,072 15,158
18,860 26,178 15,378
18,992 27,377 15,449
19,258 27,843 15,605
19,306 28,157 15,805
19,885 30,182 15,678
20,530 31,727 15,731
20,899 32,048 15,813
22,347 31,496 15,963
22,745 32,775 16,099
21,794 32,424 16,133
19,929 27,736 16,396
20,025 29,514 16,780
21,204 31,851 16,691
21,832 33,781 16,891
22,659 35,727 16,942
22,722 37,221 17,062
22,534 36,063 16,763
22,471 37,505 16,856
23,179 38,957 16,909
22,824 38,038 16,761
23,374 40,149 16,707
22,245 38,896 16,637
21,916 38,702 16,629
21,375 37,641 16,821
21,516 40,024 16,884
21,821 40,836 16,882
22,541 43,241 16,801
21,998 41,071 16,746
21,928 40,295 16,948
23,274 44,235 17,172
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/00
Since
Inception
1 Year 5 Years 4/10/92
================================================================================
IAI BALANCED FUND 3.58% 14.24% 11.17%
--------------------------------------------------------------------------------
S&P 500 Index 17.94% 26.76% 20.42%
--------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 1.87% 7.14% 7.01%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
6
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
--------------
IAI BALANCED FUND
MARCH 31, 2000
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 70.4%
Market
Quantity Value (a)
------------------- ------------
COMMERCIAL SERVICES - 0.9%
Amdocs (b) 1,450 $ 106,847
---------------------------------- ----- ---------
CONSUMER DURABLES - 1.6%
Electronic Arts (b) 2,600 185,088
---------------------------------- ----- ---------
CONSUMER NON-DURABLES - 1.7%
Colgate-Palmolive 1,300 73,288
PepsiCo 3,400 117,512
---------
190,800
---------
CONSUMER SERVICES - 2.6%
Clear Channel Communications (b) 1,750 120,859
Time Warner 1,800 180,000
---------
300,859
---------
ELECTRONIC TECHNOLOGY - 14.9%
Analog Devices (b) 1,700 136,956
Cisco Systems (b) 3,550 274,459
EMC (b) 750 93,750
Flextronics International (b) 4,650 327,534
Intel 2,600 343,037
JDS Uniphase (b) 400 48,225
Palm (b) 2,700 121,163
Sun Microsystems (b) 1,500 140,555
Synopsys (b) 4,700 229,125
---------
1,714,804
---------
ENERGY MINERALS - 4.5%
Chevron 850 78,572
Exxon Mobil 2,600 202,313
Halliburton 2,000 82,000
Schlumberger 1,300 99,450
Texaco 950 50,944
---------
513,279
---------
FINANCIAL - 7.1%
American International Group 950 104,025
Bank of America 1,650 86,522
Charles Schwab 2,300 130,669
Chase Manhattan 850 74,109
Citigroup 2,750 163,109
Market
Quantity Value (a)
------------------- -----------------
FINANCIAL (CONT.) - 7.1%
Freddie Mac 2,250 $ 99,422
Mellon Financial 2,050 60,475
Wells Fargo 2,300 94,156
---------
812,487
---------
HEALTH SERVICES - 1.4%
Cardinal Health 3,450 158,269
---------------------------------- ----- ---------
HEALTH TECHNOLOGY - 6.3%
Baxter International 1,350 84,628
Bristol-Myers Squibb 1,700 98,175
Medtronic 4,600 236,613
Schering-Plough 3,450 126,788
Warner-Lambert 1,850 180,375
---------
726,579
---------
NON-ENERGY MINERALS - 0.4%
Weyerhaeuser 850 48,450
---------------------------------- ----- ---------
PROCESS INDUSTRIES - 3.4%
General Electric 1,950 302,616
Praxair 2,250 93,656
---------
396,272
---------
PRODUCER MANUFACTURING - 2.7%
Tyco International, foreign 6,300 314,213
---------------------------------- ----- ---------
RETAIL TRADE - 6.7%
CVS 2,550 95,784
Dollar General 6,400 172,000
The Gap 2,650 132,003
Lowe's Companies 2,150 125,506
Target 1,750 130,812
Wal-Mart Stores 2,000 111,000
---------
767,105
---------
TECHNOLOGY SERVICES - 7.6%
America Online (b) 2,950 198,387
Citrix Systems (b) 900 59,625
Global Crossing, foreign (b) 1,850 75,734
Microsoft (b) 3,450 366,563
Oracle (b) 2,200 171,738
---------
872,047
---------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 12
7
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
--------------
IAI BALANCED FUND
MARCH 31, 2000
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.) - 70.4%
Market
Quantity Value (a)
------------------- -----------------
TELECOMMUNICATION TECHNOLOGY - 3.6%
Lucent Technologies 3,600 $218,700
Motorola 600 85,425
Nortel Networks 850 107,100
--------
411,225
--------
UTILITIES - 5.0%
AT&T 2,450 137,812
Bell Atlantic 2,350 143,644
Enron 1,450 108,569
MCI WorldCom (b) 2,350 106,484
Sprint 1,150 72,450
--------
568,959
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $6,896,093)............................. $8,087,283
RESTRICTED SECURITY - 0.0%
Ownership Market
Percentage (i) Value (a)
---------------- ----------
LIMITED PARTNERSHIP - 0.0%
South Street Corporate Recovery
Fund I (b) 0.69% $ -
========
TOTAL INVESTMENT IN RESTRICTED
SECURITY
(Cost: $0)...................................................... $ -
========
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 12
8
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
--------------
IAI BALANCED FUND
MARCH 31, 2000
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
CORPORATE BONDS - 13.5%
Principal Market
Rate Maturity Amount Value (a)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL - 3.8%
Associates 5.50% 02/15/04 $ 45,000 $ 41,978
Bank of America 6.13 07/15/04 35,000 33,213
Bear Stearns 6.15 03/02/04 25,000 23,703
CIT Holdings Series B (YANKEE) (e) 6.88 02/16/05 55,000 53,444
HSBC USA 6.63 03/01/09 60,000 55,677
Heller Financial (d) 7.38 11/01/09 30,000 28,999
Household Finance 5.88 02/01/09 45,000 39,612
Providian Capital I (d) 9.53 02/01/27 150,000 128,408
Toyota Motor Credit 5.63 11/13/03 30,000 28,516
--------
433,550
------------------------------------------------------------------------------------------------
INDUSTRIAL - 7.1%
Calpine 7.75 04/15/09 75,000 69,281
Insight Midwest (d) 9.75 10/01/09 50,000 49,875
Lockheed Martin 8.20 12/01/09 50,000 49,945
Mack-Cali Realty 7.25 03/15/09 45,000 41,043
NE Restaurant 10.75 07/15/08 100,000 85,000
Noble Drilling 7.50 03/15/19 50,000 47,240
Northwest Airlines Series 1999-2A 7.58 03/01/19 59,690 57,769
Petro-Canada (YANKEE) (e) 7.00 11/15/28 35,000 30,873
Province of Manitoba (YANKEE) (e) 6.75 03/01/03 35,000 34,587
Radio Unica (STEP BOND) (g) 16.17 08/01/06 150,000 91,125
Sonic Automotive Series B 11.00 08/01/08 100,000 93,000
Speedway Motorsports 8.50 08/15/07 100,000 93,500
Tyco International Group (YANKEE) (e) 6.88 01/15/29 50,000 43,008
Williams Gas Pipeline (d) 7.38 11/15/06 30,000 29,231
--------
815,477
------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 1.0%
AT&T Capital Series F (MEDIUM-TERM NOTE) 7.50 11/15/00 80,000 80,219
Global Crossing (PIK BOND) (f) 11.43 12/01/08 250(h) 24,375
Sprint Capital 6.90 05/01/19 10,000 9,139
--------
113,733
------------------------------------------------------------------------------------------------
UTILITIES - 1.6%
CMS Energy 8.38 07/01/03 100,000 96,681
Enron 7.38 05/15/19 70,000 64,706
NRG Energy 8.00 11/01/03 25,000 24,794
--------
186,181
================================================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $1,645,389)................................................................... $1,548,941
================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 12
9
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 2000
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
U.S. GOVERNMENT SECURITIES - 2.5%
Principal Market
Rate Maturity Amount Value (a)
-------------------------------------------------------------------------------
U.S. TREASURY BONDS - 2.5%
7.50% 11/15/16 $90,000 $ 101,981
8.88 02/15/19 15,000 19,397
7.63 02/15/25 80,000 95,325
5.25 02/15/29 80,000 71,675
----------
288,378
===============================================================================
TOTAL INVESTMENTS U.S. GOVERNMENT SECURITIES
(COST: $282,542)................................................... $288,378
===============================================================================
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES - 8.3%
Principal Market
Rate Maturity Amount Value (a)
-------------------------------------------------------------------------------
FREDDIE MAC GOLD - 3.1%
6.00% 04/01/11 $ 72,764 $ 68,805
6.50 07/01/14 62,669 60,308
6.50 05/01/29 236,499 222,067
----------
351,180
-------------------------------------------------------------------------------
FANNIE MAE - 3.5%
9.50 02/01/25 66,741 69,822
7.50 04/01/28 66,483 65,491
6.00 10/01/28 90,600 82,569
7.00 08/01/29 150,330 144,521
7.50 09/01/29 33,448 32,903
----------
395,306
-------------------------------------------------------------------------------
FANNIE MAE-DWARF - 0.2%
7.00 10/01/14 29,085 28,563
-------------------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.5%
7.00 04/15/23 63,338 61,759
8.00 12/15/23 49,604 50,368
7.50 05/15/28 39,841 39,510
6.50 09/15/28 26,042 24,583
----------
176,220
===============================================================================
TOTAL INVESTMENTS IN U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(COST: $982,348)................................................. $951,269
===============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 12
10
--------------------------------------------------------------------------------
<PAGE>
FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 2000
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 5.5%
Principal Market
Rate Maturity Amount/Shares Value (a)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILL - 0.2%
4.77% 04/20/00 $ 25,000 $ 24,935
---------------------------------------------------------------------------------------------
DEMAND NOTE - 1.2%
Wisconsin Electric 5.77(c) 129,776 129,776
---------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 4.1%
Firstar Institutional Money Market Fund 5.69 472,706 472,706
=============================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $627,417).................................................................... $627,417
=============================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $10,433,789) (j)......................................................... $11,503,288
=============================================================================================
OTHER ASSETS AND LIABILITIES (NET) - (0.2%)..................................... $(26,080)
=============================================================================================
TOTAL NET ASSETS................................................................ $11,477,208
=============================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO ON PAGE 12
11
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 2000
(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)
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 March 31, 2000.
(d)
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 $236,513 (2.1% of net assets) at March 31, 2000.
(e)
Yankee represents dollar-denominated bonds issued in the United States by
foreign banks and corporations.
(f)
The interest rate shown for Payment-in-Kind securities (PIK securities)
represents effective yield at March 31, 2000. PIK securities' income is
generally paid by issuing additional par or shares of the security rather than
paying cash.
(g)
A step bond is a security that remains zero-coupon until a predetermined date at
which time the stated coupon rate becomes payable at regular intervals. The
interest rate shown for step bonds represents the effective yield at March 31,
2000, based upon the estimated timing of future interest and principal payments.
(h)
Represents a preferred security. Quantity is disclosed in units. One unit
represents 100 par.
(i)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security issue held at March 31, 2000, 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, 2000 is shown below.
ACQUISITION
SECURITY DATE COST
--------------------------------------------------------------------------------
South Street Corporate Recovery Fund I .................. 10/03/95 $ --
12
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FUND PORTFOLIO
IAI BALANCED FUND
MARCH 31, 2000
(j)
At March 31, 2000, 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 ........................... $10,584,103
-----------
Gross unrealized appreciation .................................. $ 1,311,615
Gross unrealized depreciation .................................. (392,430)
-----------
Net unrealized appreciation .................................... $ 919,185
===========
13
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI BALANCED FUND
MARCH 31, 2000
<TABLE>
<S> <C> <C>
ASSETS
Investments in securities, at market (cost: $10,433,789) $ 11,503,288
Receivable for investment securities sold 1,243,775
Dividends and accrued interest receivable 53,643
------------
TOTAL ASSETS 12,800,706
------------
LIABILITIES
Bank overdraft 140,884
Payable for investment securities purchased 1,168,289
Payable for Fund shares redeemed 1,763
Accrued management fee 12,562
------------
TOTAL LIABILITIES 1,323,498
------------
NET ASSETS $ 11,477,208
============
NET ASSETS REPRESENTED BY:
Paid in capital $ 9,612,880
Undistributed net investment income 303,494
Accumulated net realized gain on investments 492,531
Unrealized appreciation (depreciation) on:
Investment securities $1,069,499
Other assets and liabilities denominated in foreign currency (1,196)
----------
1,068,303
------------
NET ASSETS $ 11,477,208
============
Shares of capital stock outstanding; 10 billion shares authorized, $0.01 par value 1,165,531
------------
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE $ 9.85
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 18.
14
--------------------------------------------------------------------------------
<PAGE>
STATEMENT OF OPERATIONS
IAI BALANCED FUND
YEAR ENDED MARCH 31, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME
INCOME:
Dividends (net of foreign income taxes withheld of $14,091) $ 205,771
Interest 468,946
------------
TOTAL INCOME 674,717
------------
EXPENSES:
Management fees 223,972
Compensation of Directors 7,438
Interest expense 1,725
------------
TOTAL EXPENSES 233,135
Less fees reimbursed by Advisers (7,438)
------------
NET EXPENSES 225,697
------------
NET INVESTMENT INCOME 449,020
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities 1,381,597
Futures contracts (73,338)
Foreign currency transactions (59,880)
------------
Net realized gain 1,248,379
------------
Net change in unrealized appreciation or depreciation on:
Investment securities (1,429,150)
Other assets and liabilities denominated in foreign currency 275
------------
Net unrealized depreciation (1,428,875)
------------
NET LOSS ON INVESTMENTS, FUTURES CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS (180,496)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 268,524
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 18.
15
--------------------------------------------------------------------------------
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI BALANCED FUND
<TABLE>
<CAPTION>
Year ended Year ended
March 31, 2000 March 31, 1999
---------------- ---------------
<S> <C> <C>
OPERATIONS
Net investment income $ 449,020 $ 705,329
Net realized gains 1,248,379 4,308,982
Net change in unrealized appreciation or depreciation (1,428,875) (2,514,727)
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 268,524 2,499,584
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (527,623) (520,998)
Net realized gains (2,008,149) (7,382,896)
------------- -------------
TOTAL DISTRIBUTIONS (2,535,772) (7,903,894)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of 194,153 and 2,100,920 shares 1,967,018 24,404,967
Net asset value of 254,807 and 685,461 shares issued in reinvestment
of distributions 2,478,711 7,831,537
Cost of 1,638,214 and 2,881,943 shares redeemed (16,097,248) (32,696,775)
------------- -------------
DECREASE IN NET ASSETS FROM CAPITAL SHARES TRANSACTIONS (11,651,519) (460,271)
------------- -------------
TOTAL DECREASE IN NET ASSETS (13,918,767) (5,864,581)
NET ASSETS AT BEGINNING OF PERIOD 25,395,975 31,260,556
------------- -------------
NET ASSETS AT END OF PERIOD $ 11,477,208 $ 25,395,975
------------- -------------
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 303,494 $ 436,478
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 18.
16
--------------------------------------------------------------------------------
<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,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.78 $ 12.76 $ 11.04 $ 11.53 $ 10.57
------- ------- ------- ------- -------
OPERATIONS
Net investment income 0.25** 0.28 0.25 0.37 0.29
Net realized and unrealized gains 0.11 0.93 2.84 1.60 0.97
------- ------- ------- ------- -------
TOTAL FROM OPERATIONS 0.36 1.21 3.09 1.97 1.26
------- ------- ------- ------- -------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (0.27) (0.20) (0.28) (0.49) (0.30)
Excess distribution from net
investment income -- -- (0.09) -- --
Net realized gains (1.02) (2.99) (1.00) (1.97) --
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS (1.29) (3.19) (1.37) (2.46) (0.30)
------- ------- ------- ------- -------
NET ASSET VALUE
End of period $ 9.85 $ 10.78 $ 12.76 $ 11.04 $ 11.53
======= ======= ======= ======= =======
Total investment return* 3.58% 9.46% 29.14% 18.55% 12.09%
Net assets at end of period
(000's omitted) $11,477 $25,396 $31,261 $32,822 $38,799
RATIOS
Expenses to average net assets
(including interest expense) 1.26% 1.27%+ 1.28% 1.26% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.27%+ 1.25% 1.25% 1.25%
Net investment income to average
net assets 2.51% 2.26% 2.57% 2.92% 2.48%
Portfolio turnover rate
(excluding short-term securities) 109.0% 138.8% 237.0% 190.6% 193.8%
</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.
**CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
+THIS RATIO INCLUDES A 2 BASIS POINT EXPENSE APPROVED BY THE BOARD OF
DIRECTORS RELATED TO AN INDEPENDENT VALUATION OF A RESTRICTED SECURITY.
17
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 2000
[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. 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 that 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.
18
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 2000
[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 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 decreased by $54,381,
accumulated net realized gains have been increased by $55,908 and paid in
capital has been decreased by $1,527.
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.
19
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 2000
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 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.
LINE OF CREDIT
The Fund, together with other funds advised by Advisers, have an available joint
line of credit of $25,000,000 with Firstar Bank, N.A. at the prime interest rate
less 2%. To the extent funds are drawn against the line, securities are
segregated by the Fund. No compensating balances are required under the line of
credit, however, a commitment fee of .10% per annum on the commitment amount of
the line is payable quarterly in arrears. Advisers has agreed to pay the
commitment fee on behalf of the Fund. There were no borrowings outstanding for
the Fund at March 31, 2000.
CONTINGENT LIABILITY
The Balanced Fund received cash distributions of approximately $300,000 in
November 1998 and May 2000 from the South Street Corporate Recovery Fund L.P.
According to various agreements, proceeds received may be required to be
returned to the limited partnership due to ongoing litigation. Management, after
review with third parties, believes the likelihood of returning such
distributions to the partnership is not probable.
[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.
20
--------------------------------------------------------------------------------
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI BALANCED FUND
MARCH 31, 2000
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 2000, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated:
U.S. GOVERNMENT OTHER
--------------- -----------
Purchases $1,738,064 $16,778,594
Sales $3,680,121 $27,755,420
RESTRICTED SECURITIES
Included in the Fund's portfolios of investments in securities at March 31,
2000, 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.
21
--------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI BALANCED FUND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
IAI INVESTMENT FUNDS IV, 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 IV, Inc.) as of March 31, 2000, 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 auditing standards generally accepted
in the United States of America. 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. Our procedures included confirmation of
securities owned as of March 31, 2000, by correspondence with the custodian and
brokers. 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 as of March 31, 2000, and the results of its operations for the
year then ended, the changes in its 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, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
May 19, 2000
22
--------------------------------------------------------------------------------
<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
<TABLE>
<CAPTION>
Ordinary Long-Term
Payable Date Income (A) Capital Gain
--------------------------------------------------------------------------------------------------
<S> <C> <C>
JUNE 1999 $ 0.3247 $ 0.9231
DECEMBER 1999 0.0450 --
==================================================================================================
15.63% of ordinary income qualify for deductions by corporations. $ 0.3697 $ 0.9231
</TABLE>
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
23
--------------------------------------------------------------------------------
<PAGE>
(THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.)
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, N.A.
425 Walnut Street
Cincinnati, OH 45202
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG LLP
4200 Norwest Center
Minneapolis, MN55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
C/O FIRSTAR MUTUAL FUND SERVICES, LLC, P.O. BOX 701,
MILWAUKEE, WISCONSIN 53201-0701 USA
800.945.3863
