EQUITY FUNDS
ANNUAL REPORT
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND,
IAI VALUE FUND
MARCH 31, 1997
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
ANNUAL REPORT
MARCH 31, 1997
Chairman's Letter...............................2
Fund Managers' Reviews
IAI GROWTH AND INCOME FUND..................4
IAI REGIONAL FUND...........................6
IAI VALUE FUND..............................8
Fund Portfolios
IAI GROWTH AND INCOME FUND.................10
IAI REGIONAL FUND..........................13
IAI VALUE FUND.............................17
Notes to Fund Portfolios.......................19
Statements of Assets and Liabilities...........28
Statements of Operations.......................30
Statements of Changes in Net Assets............32
Financial Highlights
IAI GROWTH AND INCOME FUND.................34
IAI REGIONAL FUND..........................35
IAI VALUE FUND.............................36
Notes to Financial Statements..................37
Independent Auditors' Report...................42
Federal Tax Information........................43
IAI Mutual Fund Family.........................44
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, you should make sure
that your investment portfolio generally reflects your long-term investment
goals for 1997 and beyond.
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The economy was surprisingly strong in the first quarter of 1997. Real growth
will slow from the reported pace of 5.6%. However, the slowdown will need some
help from higher interest rates if the Fed expects to meet its economic growth
targets. Business and labor markets no longer have excess capacity. Money and
liquidity are ample to finance above-trend growth. Furthermore, the value of the
U.S. dollar complicates the outlooks. Over the last two years, a strong dollar
has helped to restrain U.S. output and hold down price increases. This trend may
be coming to an end.
This combination of factors will lead to a modest rise in inflation in the
second half of the year. While increases will be restrained, interest rates are
likely to rise and the yield curve will flatten.
However, a recession is unlikely in the next four quarters. Full employment,
lower federal budget deficits and rising productivity from strong capital
spending are all positive factors in our long-term outlook for the market.
Potential volatility in the months ahead will present good long-term buying
opportunities.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
IAI GROWTH AND INCOME FUND
[PHOTO]
DONALD J. HOELTING, CFA
IAI GROWTH AND INCOME FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR CHART]
FINANCIAL 20.6%
CONSUMER DURABLES 12.9%
PRODUCER MANUFACTURING 10.8%
CONSUMER NON-DURABLES 8.8%
ELECTRONIC TECHNOLOGY 7.8%
FUND OBJECTIVE
The IAI Growth and Income Fund is designed for investors who seek long-term
capital appreciation, with income as a secondary objective. It pursues its
objectives by investing in a broadly diversified portfolio of common stocks.
While dividends are a factor in stock selection, the dominant criteria is the
potential for long-term growth.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
A strong economy and low interest rates have propelled stocks through two years
of extraordinary returns. The market's momentum has been driven primarily by the
stocks of the largest companies in the US economy, whereas the shares of smaller
firms have performed relatively poorly. The correction in those smaller stocks
in the portfolio (under $5 billion in market capitalization) contributed
significantly to the negative 1.2% return of the fund for the quarter ended
3/31/97. This factor also contributed significantly to the 13.34% return for the
past twelve months.
For the time period of April 1, 1996 and continuing into 1997, the dramatic
departure of investor sentiment away from smaller growth issues makes these past
12 months one of the most volatile investment periods in recent memory. This
change in investor perception created wide swings in sentiment toward
significantly larger companies. Although the Growth and Income fund does
purchase companies of substantial size, we will also invest in smaller or
midsize companies. These smaller companies still possess the same
characteristics as our larger holdings with strong franchise characteristics,
stable growth patterns, and significant free cash flow.
In the fund itself, the flow of investment sentiment toward our larger issues
(Walt Disney, General Electric) aided the portfolio in late 1996 but then the
smaller issues and rate sensitive issues, such as FPL Group, dampened
performance in the fund more recently. FPL Group, which is an electric utility
in southern and eastern Florida, has tremendous free cash flow, is very strong
financially, and is extremely well positioned for increased competition in the
electric utility industry. With characteristics like these, we believe that the
stock represents a great store of value and will perform well over a whole
market cycle regardless of the short term whims of Wall Street. The significant
short term performance difference between this company and another we hold,
Intel, shows us that although the rationale behind our investment in these two
companies is similar, the short term investor sentiment has been substantially
different.
OUTLOOK
After a strong start in 1997, stocks experi-enced considerable difficulties as
the quarter wore on. Much of the downward pressure was the result of Federal
Reserve Chairman Greenspan's cautionary comments about "overly exuberant"
valuations in the stock market and the Fed's ultimate raising of short term
interest rates. The Fed Governors increased rates out of concern that the
economy was growing at an unsustainable pace, which could re-ignite inflation.
One of our primary investment criteria is to buy companies with an "economic
franchise." An economic franchise is a durable competitive advantage such as a
brand name, a patent, a proprietary manufacturing process, etc. These
advan-tages result in higher profit margins and resistance to competitive
threats and economic cycles. The businesses of companies that possess an
economic franchise perform well in good times and bad, whether the stock is up
or down. Investors can reap significant rewards if they buy these types of
companies at appropriate valuations, and then hold on for the long term.
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
VALUE OF $10,000 INVESTMENT+
IAI GROWTH & INCOME FUND S&P 500 INDEX
------------------------ -------------
3/31/87 $10,000 $10,000
3/31/88 $ 9,511 $ 9,168
3/31/89 $11,228 $10,809
3/31/90 $13,111 $12,869
3/31/91 $14,084 $14,723
3/31/92 $15,430 $16,348
3/31/93 $16,825 $18,844
3/31/94 $17,341 $19,115
3/31/95 $18,887 $22,094
3/31/96 $22,945 $29,196
3/31/97 $26,004 $35,018
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/97
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND 13.34% 11.01% 10.03%
- --------------------------------------------------------------------------------
S&P 500 Index 19.94% 16.46% 13.35%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- --------------------------------------------------------------------------------
Walt Disney Consumer Services 3.77 3.71
Philip Morris Consumer Non-Durables 3.66 4.36
Intel Electronic Technology 3.57 --
Department 56 Consumer Durables 3.18 --
Federal Home Loan Mortgage
Corporation Financial 3.14 2.24
Aetna Financial 2.80 --
American Express Financial 2.75 --
Student Loan Marketing Association Financial 2.75 --
SmithKline Beecham ADR Health Technology 2.75 2.33
United Assets Management Financial 2.73 --
- --------------------------------------------------------------------------------
TOTAL 31.10 12.64
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI GROWTH AND INCOME 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, YIELD 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.
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
IAI REGIONAL FUND
[PHOTO]
MARK C. HOONSBEEN, CFA
IAI REGIONAL FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR CHART]
PRODUCER MANUFACTURING 14.2%
PROCESS INDUSTRIES 9.1%
FINANCIAL 8.8%
CONSUMER DURABLES 8.6%
ELECTRONIC TECHNOLOGY 7.5%
FUND OBJECTIVE
The IAI Regional Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of companies headquartered in
Minnesota, Wisconsin, Iowa, Illinois, Nebraska, Montana, North Dakota and South
Dakota.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
The IAI Regional Fund invests in a broad array of companies in eight states of
the Upper Midwest.
The discrepency between large and small cap stock performance, which began in
1996, became more intense in 1997 as the smaller stocks posted a difficult
quarter. Even within sectors of the economy, the differences due to size were
dramatic. For example, the technology and com-munications companies in the S&P
500 were flat to slightly positive for the quarter. The same types of companies
in the Russell 2000 Index had negative returns approaching 20%.
This type of performance spread had its effect on your regional investment. The
large cap names in the portfolio were up 5% for the quarter while the small cap
names, were negative by 12.3%. Although momentum has favored the larger names we
find much better opportunities among the mid-to small-cap names. Almost all of
the larger companies in the region are at or near peak valuations. Most are also
well above their average profitability levels of the last five years.
Of the current larger positions in the portfolio, the best performers for the
quarter and over the last year have been Sara Lee (2.22%)*, Bemis Company
(1.79%)*, Snap-On (2.93%)*, Amoco (2.45%)* and Newell (2.10%)*. Notable
underperformers have been 360 Communications (1.86%)* and ABC Rail Products
(1.87%)*.
OUTLOOK
With one Fed rate increase in hand and more anticipated by the market, the
market should discount earnings at a higher rate than it has the last two years.
As a result, we will be watching earnings risk very closely over the next few
quarters.
We will also continue to maintain a broad based, diversified portfolio with buy
and sell decisions based on our fundamental analysis of the business. Companies
with superior management, high returns on capital, solid and sustainable cash
flow in industries with strong fundamental growth will outperform companies
lacking these same characteristics.
*PERCENTAGE OF NET ASSETS AS OF 3/31/97
VALUE OF $10,000 INVESTMENT+
IAI REGIONAL FUND S&P 500 INDEX
----------------- -------------
3/31/87 $10,000 $10,000
3/31/88 $ 9,860 $ 9,168
3/31/89 $11,696 $10,809
3/31/90 $14,229 $12,869
3/31/91 $16,790 $14,723
3/31/92 $18,936 $16,348
3/31/93 $20,511 $18,844
3/31/94 $21,179 $19,115
3/31/95 $23,370 $22,094
3/31/96 $30,059 $29,196
3/31/97 $32,659 $35,018
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/97
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI REGIONAL FUND 8.65% 11.52% 12.57%
- --------------------------------------------------------------------------------
S&P 500 Index 19.94% 16.46% 13.35%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- --------------------------------------------------------------------------------
Snap-On Consumer Durables 2.93 0.97
AptarGroup Process Industries 2.50 2.02
Amoco Energy Minerals 2.45 1.46
Sara Lee Consumer Non-Durables 2.22 1.39
Newell Consumer Durables 2.10 1.80
Pentair Producer Manufacturing 1.90 1.25
ABCRail Products Producer Manufacturing 1.87 1.42
360 Communications Electronic Technology 1.86 0.98
USFreightways Transportation 1.85 -
Bemis Process Industries 1.79 1.09
- --------------------------------------------------------------------------------
TOTAL 21.47 12.38
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI REGIONAL 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, YIELD 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.
FUND MANAGER'S REVIEW
IAI VALUE FUND
IAI VALUE FUND
[PHOTO]
DONALD J. HOELTING, CFA
IAI VALUE FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR CHART]
FINANCIAL 21.3%
CONSUMER DURABLES 13.2%
PRODUCER MANUFACTURING 10.0%
INDUSTRIAL SERVICES 9.1%
NON-ENERGY MINERALS 8.7%
FUND OBJECTIVE
The IAI Value Fund is designed for investors who seek long-term capital
appreciation. It pursues this objective by investing primarily in equity
securities believed by management to be under-valued and which are considered to
offer unusual opportunities for capital growth.
FACTORS AFFECTING THE
PAST YEAR'S PERFORMANCE
Our current investment focus has been to invest in companies with high levels of
discretionary cash flow, very strong financial characteristics and market
capitalization of typically less than $1 billion (also known as "small cap"
stocks). The apparent strength of the stock market has been primarily driven by
the stocks of the largest companies in the US economy. Smaller companies have
been relatively weak which was reflected in the fund's (7.2%) return for the
recent past quarter, with 5.85% returns for the past year.
The weakness in small cap stocks has been frustrating, particularly given the
fact that market indices--which are dominated by large company stocks--are near
record highs. However, we are currently finding more value in smaller companies
than in large ones. We continue to invest in small companies with high quality
financial characteristics that can determine their own destinies. While the
attention of Wall Street is on large companies, we are able to buy small
companies at attractive valuations that will perform well over a whole market
cycle.
One of our primary investment criteria is to buy companies with an "economic
franchise." An economic franchise is a durable competitive advantage such as a
brand name, a patent, a proprietary manufacturing process, etc. These advantages
result in higher profit margins and resistance to competitive threats and
economic cycles. The businesses of companies that possess an economic franchise
perform well in good times and bad, whether the stock is up or down. Investors
can reap significant rewards if they buy these types of companies at appropriate
valuations, and then hold on for the long term. One example of this would be
Department 56. This company designs and distributes collectibles and gifts; most
notable is its Village Series ceramics. Due to its recent focus on
re-establishing the integrity of its distribution channels, the stock is
representing significant value at this time.
OUTLOOK
After a strong start in 1997, stocks experienced considerable difficulties as
the quarter wore on. Much of the downward pressure was the result of Federal
Reserve Chairman Greenspan's cautionary comments about "overly exuberant"
valuations in the stock market and the Fed's ultimate raising of short term
interest rates. The Fed Governors increased rates out of concern that the
economy was growing at an unsustainable pace, which could re-ignite inflation.
Our intention is to focus our investment in companies that represent true
intrinsic value. With the recent values of some of the smaller companies at
historic low levels, we believe this is an opportunity to purchase strong
businesses at attractive prices. As investors focus on the fundamental values of
companies in an increasingly volatile market, we believe our investments will
weather times of uncertainty fairly well. As in the past, investors will be
rewarded by true value over a full market cycle.
VALUE OF $10,000 INVESTMENT+
IAI VALUE FUND RUSSELL 2500 INDEX S&P 500 INDEX
-------------- ------------------ -------------
3/31/87 $10,000 $10,000 $10,000
3/31/88 $10,111 $ 9,063 $ 9,168
3/31/89 $12,555 $10,327 $10,809
3/31/90 $13,799 $11,131 $12,869
3/31/91 $14,654 $12,227 $14,723
3/31/92 $16,444 $14,908 $16,348
3/31/93 $17,463 $17,398 $18,844
3/31/94 $19,679 $18,929 $19,115
3/31/95 $20,444 $20,568 $22,094
3/31/96 $24,748 $26,702 $29,196
3/31/97 $26,199 $29,021 $35,018
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/97
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI VALUE FUND 5.85% 9.76% 10.11%
- --------------------------------------------------------------------------------
Russell 2500 Index 8.68% 14.25% 11.24%
- --------------------------------------------------------------------------------
S&P 500 Index 19.94% 16.46% 13.35%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- --------------------------------------------------------------------------------
M/A/R/C Commercial Services 4.35 2.31
Leucadia National Financial 3.83 --
Bandag Consumer Durables 3.68 --
Petroleum Geo-Services ADR Industrial Services 3.65 1.50
Scientific Games Commercial Services 3.56 --
Scherer (R.P.) Health Technology 3.52 --
United Assets Management Financial 3.48 --
Polaris Consumer Durables 3.46 --
Falcon Drilling Industrial Services 3.39 3.71
Zeigler Coal Energy Minerals 3.34 2.73
- --------------------------------------------------------------------------------
TOTAL 36.26 10.25
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI VALUE 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, YIELD 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.
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.0%
Market
Quantity Value (a)
- --------------------------------------------------------
CONSUMER DURABLES - 12.9%
Bandag 35,700 $ 1,798,388
Department 56 (b) 166,300 2,889,463
Eastman Kodak 28,900 2,192,787
Hasbro 66,150 1,810,856
Polaris 73,100 1,690,437
Sturm Ruger 79,400 1,260,475
- --------------------------------------------------------
11,642,406
- --------------------------------------------------------
CONSUMER NON-DURABLES - 8.8%
Coca-Cola 34,600 1,933,275
Gillette 19,700 1,430,712
Philip Morris 29,100 3,321,038
UST 47,600 1,326,850
- --------------------------------------------------------
8,011,875
- --------------------------------------------------------
CONSUMER SERVICES - 5.9%
Media General Class A 35,900 1,018,663
Reader's Digest Class A 32,700 940,125
Walt Disney 46,800 3,416,400
- --------------------------------------------------------
5,375,188
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 7.8%
3Com (b) 68,200 2,233,550
Intel 23,300 3,241,613
Motorola 26,400 1,593,900
- --------------------------------------------------------
7,069,063
- --------------------------------------------------------
ENERGY MINERALS - 3.5%
British Petroleum ADR 6,931 951,280
Exxon 20,100 2,165,775
- --------------------------------------------------------
3,117,055
- --------------------------------------------------------
FINANCIAL - 20.6%
Aetna 29,600 2,541,900
American Express 41,700 2,496,788
Federal Home Loan Mortgage
Corporation 104,400 2,844,900
Leucadia National 54,100 1,487,750
Norwest 35,600 1,646,500
PMI Group 26,400 1,323,300
Student Loan Marketing
Association 26,200 2,495,550
United Assets Management 96,600 2,475,375
United Dominion Realty Trust 95,700 1,399,612
- --------------------------------------------------------
18,711,675
- --------------------------------------------------------
HEALTH TECHNOLOGY - 6.3%
Pfizer 16,400 1,379,650
Scherer (R.P.) (b) 35,500 1,841,563
SmithKline Beecham ADR 35,629 2,494,030
- --------------------------------------------------------
5,715,243
- --------------------------------------------------------
INDUSTRIAL SERVICES - 3.5%
Nabors Industries (b) 74,400 1,450,800
Schlumberger ADR 6,400 686,400
WMX Technologies 32,600 998,375
- --------------------------------------------------------
3,135,575
- --------------------------------------------------------
NON-ENERGY MINERALS - 3.5%
Nucor 26,200 1,198,650
Schweitzer-Mauduit
International 66,500 2,011,625
- --------------------------------------------------------
3,210,275
- --------------------------------------------------------
PRODUCER MANUFACTURING - 10.8%
Berkshire Hathaway Class A (b) 60 2,172,000
Berkshire Hathaway Class B (b) 107 129,470
General Electric 17,300 1,717,025
Nordson 22,800 1,168,500
Tyco International 39,800 2,189,000
Westinghouse Electric 136,700 2,426,425
- --------------------------------------------------------
9,802,420
- --------------------------------------------------------
RETAIL TRADE - 4.7%
Harcourt General 44,700 2,078,550
Wal-Mart 79,800 2,224,425
- --------------------------------------------------------
4,302,975
- --------------------------------------------------------
TECHNOLOGY SERVICES 1.3%
Electronic Data Systems 29,700 1,199,137
- --------------------------------------------------------
- --------------------------------------------------------
UTILITIES - 1.4%
FPL Group 28,900 1,275,212
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $70,322,969)....................$ 82,568,099
========================================================
OTHER SECURITIES - 4.6%
Market
Quantity (c) Value (a)
- --------------------------------------------------------
COMMON STOCKS - 1.4%
ADFlex Solutions (b) 5,226 $ 62,059
Adra Systems Class A (b) 12,243 24,486
GalaGen (b) (d) 54,168 124,911
PACE Health Management
Systems (b) (d) 121,220 294,686
Urologix (b) 44,709 760,053
- --------------------------------------------------------
1,266,195
- --------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 0.1%
Biometric Systems Series A (b) 6,667 133,340
- --------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 0.5%
Adra Systems Series D (b) 14,964 149,640
Tut Systems Series D (b) (d) 222,222 277,777
VasoMedx Series B (b) 9,733 --
- --------------------------------------------------------
427,417
- --------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 2.6%
Alta Berkeley III, foreign (b) 1.58% $ 390,767
Ampersand Specialty Materials &
Chemicals II (b) 1.82 550,049
Athena Venture Partners (b) 2.29 107,283
Broad Street Investment
Fund I (b) 0.12 197,321
South Street Corporate
Recovery Fund I (b) 1.26 83,420
Vanguard Associates II (b) 3.72 171,348
Vanguard Associates III (b) 6.55 860,167
- --------------------------------------------------------
2,360,355
- --------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (b) (d) 1,300 --
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $3,745,468).....................$ 4,187,307
========================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $74,068,437)....................$ 86,755,406
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 3.8%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS - 3.8%
5.20% 04/10/97 $ 500,000 $ 499,405
5.26 04/17/97 2,000,000 1,995,418
5.31 07/24/97 1,000,000 983,310
- ------------------------------------------------------------------------------------------------------------------
3,478,133
==================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $3,478,504)................................................................................$ 3,478,133
==================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $77,546,941) (e)...........................................................................$ 90,233,539
==================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 0.6%
.............................................................................................$ 507,076
==================================================================================================================
TOTAL NET ASSETS
.............................................................................................$ 90,740,615
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 78.6%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 3.8%
Bell & Howell (b) 251,000 $ 5,239,625
Castle (A.M.) 230,200 3,999,725
Merrill 264,000 6,336,000
R.R. Donnelley 95,000 3,313,125
- --------------------------------------------------------
18,888,475
- --------------------------------------------------------
CONSUMER DURABLES - 8.6%
Harley-Davidson 116,000 3,929,500
ITI Technologies (b) (d) 494,000 7,039,500
Newell 312,000 10,452,000
Polaris 291,000 6,729,375
Snap-On 377,300 14,620,375
- --------------------------------------------------------
42,770,750
- --------------------------------------------------------
CONSUMER NON-DURABLES - 2.2%
Sara Lee 273,000 11,056,500
- --------------------------------------------------------
CONSUMER SERVICES - 1.3%
Lodgenet Entertainment (b) 447,700 4,700,850
McDonald's 32,000 1,512,000
- --------------------------------------------------------
6,212,850
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 7.5%
360 Communications (b) 538,000 9,280,500
ACI Telecentrics (b) 200,100 1,150,575
Aetrium (b) (d) 555,000 7,284,375
Ault (b) 20,000 152,500
FSI International (b) 705,000 7,931,250
Motorola 100,000 6,037,500
Sheldahl (b) 251,000 5,176,875
- --------------------------------------------------------
37,013,575
- --------------------------------------------------------
ENERGY MINERALS - 2.5%
Amoco 141,000 12,214,125
- --------------------------------------------------------
FINANCIAL - 8.8%
Allstate 113,000 6,709,375
Equitable of Iowa 139,000 6,950,000
First Alliance (b) (d) 272,000 6,392,000
Green Tree Financial 195,000 6,581,250
LifeUSA (b) 367,000 3,670,000
Reliastar Financial 138,000 8,159,250
Winthrop Resources 186,700 5,554,325
- --------------------------------------------------------
44,016,200
- --------------------------------------------------------
HEALTH SERVICES - 2.4%
Healthcare COMPARE (b) 163,000 6,621,875
Patterson Dental (b) 159,200 5,412,800
- --------------------------------------------------------
12,034,675
- --------------------------------------------------------
HEALTH TECHNOLOGY - 5.9%
Abbott Laboratories 148,600 8,340,175
Baxter International 133,200 5,744,250
Cerus (b) 100,000 1,087,500
CIMA Labs (b) 259,000 1,554,000
Diametrics Medical (b) 685,000 2,397,500
Marquette Medical Systems
Class A (b) 66,000 1,328,250
Northfield Laboratories (b) 271,000 3,014,875
Possis Medical (b) 250,500 3,350,438
Urologix (b) 157,198 2,672,366
- --------------------------------------------------------
29,489,354
- --------------------------------------------------------
NON-ENERGY MINERALS - 1.3%
USG (b) 203,000 6,369,125
- --------------------------------------------------------
PROCESS INDUSTRIES - 9.1%
AptarGroup 325,000 12,431,250
Bemis 223,000 8,920,000
BMC Industries 257,500 7,274,375
IMC Global 240,000 8,670,000
Mycogen (b) 25,000 581,250
Northland Cranberries Class A 86,700 1,571,437
Valspar 210,200 6,043,250
- --------------------------------------------------------
45,491,562
- --------------------------------------------------------
PRODUCER MANUFACTURING - 14.2%
ABC Rail Products (b) (d) 536,700 9,325,163
Berkshire Hathaway Class A (b) 200 7,240,000
Borg-Warner Automotive 155,000 6,606,875
IDEX 330,000 7,755,000
Illinois Tool Works 47,000 3,836,375
OmniQuip International (b) 184,300 2,672,350
Johnson Controls 95,000 7,647,500
Lindsay Manufacturing 97,500 3,193,125
Littlefuse (b) 94,000 4,347,500
Pentair 328,000 9,471,000
Recovery Engineering (b) (d) 345,000 2,544,375
Thermo Sentron (b) 298,300 2,610,125
Valmont 19,100 744,900
Zebra Technologies Class A (b) 126,000 2,898,000
- --------------------------------------------------------
70,892,288
- --------------------------------------------------------
RETAIL TRADE - 4.8%
Dayton Hudson 83,000 3,465,250
Fingerhut 254,200 3,558,800
Lands' End (b) 159,900 4,237,350
Sears Roebuck 120,000 6,030,000
Video Update Class A (b) 685,000 3,467,812
Walgreen 77,000 3,224,375
- --------------------------------------------------------
23,983,587
- --------------------------------------------------------
TECHNOLOGY SERVICES - 3.0%
Anicom (b) 307,692 2,605,767
Control Data Systems (b) 265,000 4,008,125
Engineering Animation (b) 162,300 3,773,475
Racotek (b) 705,300 2,292,225
Secure Computing (b) (d) 461,000 2,420,250
- --------------------------------------------------------
15,099,842
- --------------------------------------------------------
TRANSPORTATION - 3.2%
Illinois Central 213,000 6,709,500
USFreightways 357,000 9,237,375
- --------------------------------------------------------
15,946,875
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $366,750,812).....................$ 391,479,783
========================================================
OTHER SECURITIES - 11.4%
Market
Quantity (c) Value (a)
- --------------------------------------------------------
COMMON STOCKS - 2.7%
AccessLine Technologies
Class A (b) 41,666 $ 208,330
ADFlex Solutions (b) 7,839 93,088
Anglo Chinese Investment
Company, foreign (d) 1,600 506,978
BEI Medical (b) 1,029 30,860
Biomedical Waste Systems
Class B (b) 400,000 4,000
CardioGenesis (b) 609,793 7,797,423
GalaGen (b) (d) 291,733 668,360
Network Appliance (b) 17,522 569,465
PACE Health Management
Systems (b) (d) 340,705 828,254
Pacific Monolithics (b) 9,865 5,919
PriCellular Class B (b) 210,325 1,735,181
Seurat Analytical Systems
Class B (b) (d) 35,102 351
Urologix (b) 67,065 1,140,105
- --------------------------------------------------------
13,588,314
- --------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.8%
Biometric Systems Series A (b) 34,520 690,400
Diametrics Medical Series I (b)187,500 3,000,000
- --------------------------------------------------------
3,690,400
- --------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 0.6%
AccessLine Technologies
Series A (b) 71,420 357,100
Intellon Series A (b) 600,000 1,116,000
Intellon Series B (b) 192,921 358,833
Seurat Analytical Systems
Series B (b) (d) 114,973 1,150
Seurat Analytical Systems
Series C(b) (d) 37,414 374
Tut Systems Series D (b) (d) 478,416 598,020
Tut Systems Series E (b) (d) 217,391 271,739
Tut Systems Series F (b) (d) 260,000 325,000
VasoMedx Series A (b) (d) 500,000 5
VasoMedx Series B (b) (d) 39,599 -
- --------------------------------------------------------
3,028,221
- --------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 7.3%
Agio Capital Partners I (b) 11.11% $ 326,588
Alta Berkeley III, foreign (b) 3.15 781,542
Ampersand Specialty Materials &
Chemicals II (b) 2.72 825,086
Anglo Chinese Selections (b) 3.28 905,000
Athena Venture Partners (b) 2.51 117,741
Conrad/Collins Merchant
Banking Fund (b) 8.45 358,235
Greenwich Street Capital
Partners (b) 2.99 4,270,895
Pathfinder Venture
Capital Fund III (b) 3.99 784,814
South Street Corporate
Recovery Fund I (b) 2.68 177,257
South Street Leveraged Corporate
Recovery Fund I (b) 2.35 70,211
Spectrum Equity Investors (b) 2.76 2,878,223
Vanguard Associates II (b) 3.72 171,348
Vanguard Associates III (b) 6.20 845,727
Vanguard Associates IV (b) 9.44 24,032,810
- --------------------------------------------------------
36,545,477
Principal Market
Rate Maturity Amount (c) Value (a)
- --------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.0%
Air Communications Series B (b) (d)
10.00% 10/31/96 $ 258,332 --
VasoMedx Series C (b) (d)
12.00 02/28/97 113,000 --
- --------------------------------------------------------
--
- --------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (b) (d) 5,200 $ --
GalaGen, $11.07, 03/27/01 (b) (d) 270 --
- --------------------------------------------------------
--
- --------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies,
$7.00, 06/03/99 10,713 --
Diametrics Medical,
$5.06, 01/30/02 187,500 --
GalaGen, $11.07, 06/16/99 (d) 5,687 --
GalaGen, $11.07, 03/24/00 (d) 2,256 --
GalaGen, $11.07, 07/09/00 (d) 1,805 --
GalaGen, $7.00, 01/29/01 (d) 7,500 --
Intellon, $2.50, 03/23/99 90,000 --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
- --------------------------------------------------------
--
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $29,560,933)..................... $ 56,852,412
========================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $396,311,745).................... $ 448,332,195
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 9.4%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS - 9.4%
5.26% 04/17/97 $ 4,000,000 $ 3,933,240
5.25 07/24/97 43,000,000 42,901,482
- -------------------------------------------------------------------------------------------------------------------
46,834,722
===================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $46,837,151).............................................................................. $ 46,834,722
===================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $443,148,896) (e)......................................................................... $ 495,166,917
===================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) 0.6%
........................................................................................ $ 3,011,556
===================================================================================================================
TOTAL NET ASSETS
........................................................................................ $ 498,178,473
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 92.0%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 7.9%
M/A/R/C 78,750 $ 1,279,687
Scientific Games (b) 49,300 1,047,625
- --------------------------------------------------------
2,327,312
- --------------------------------------------------------
CONSUMER DURABLES - 13.2%
Bandag 21,500 1,083,063
Department 56 (b) 49,900 867,012
Polaris 44,000 1,017,500
Sturm Ruger 58,000 920,750
- --------------------------------------------------------
3,888,325
- --------------------------------------------------------
CONSUMER SERVICES - 1.3%
Colonial Downs Class A (b) 50,000 368,750
- --------------------------------------------------------
ENERGY MINERALS - 3.3%
Zeigler Coal 41,400 983,250
- --------------------------------------------------------
FINANCIAL - 21.3%
Ambassador Apartments 28,000 700,000
Home Beneficial Class B 25,000 953,125
Leucadia National 41,000 1,127,500
Liberty Property Trust 31,500 771,750
LifeUSA (b) 95,532 955,320
United Assets Management 40,000 1,025,000
United Dominion Realty Trust 50,000 731,250
- --------------------------------------------------------
6,263,945
- --------------------------------------------------------
HEALTH SERVICES - 2.6%
Trigon Healthcare 43,500 766,688
- --------------------------------------------------------
HEALTH TECHNOLOGY - 5.1%
Endosonics (b) 50,000 475,000
Scherer (R.P.) (b) 20,000 1,037,500
- --------------------------------------------------------
1,512,500
- --------------------------------------------------------
INDUSTRIAL SERVICES - 9.1%
Dawson Production Services (b) 50,000 612,500
Falcon Drilling (b) 27,000 999,000
Petroleum Geo-Services ADR (b) 25,000 1,075,000
- --------------------------------------------------------
2,686,500
- --------------------------------------------------------
NON-ENERGY MINERALS - 8.7%
Dal-Tile International (b) 59,000 921,875
Nucor 15,000 686,250
Schweitzer-Mauduit
International 31,000 937,750
- --------------------------------------------------------
2,545,875
- --------------------------------------------------------
PRODUCER MANUFACTURING - 10.0%
Holophane (b) 40,000 780,000
NCI Building Systems (b) 15,000 485,625
Nordson 18,000 922,500
Trinity Industries 25,000 759,375
- --------------------------------------------------------
2,947,500
- --------------------------------------------------------
RETAIL TRADE - 6.2%
Pizza Inn (b) 226,000 974,625
SkyMall (b) 100,000 850,000
- --------------------------------------------------------
1,824,625
- --------------------------------------------------------
TECHNOLOGY SERVICES - 0.7%
Audre Recognition
Systems (b) 1,365,350 14
Racotek (b) 65,000 211,250
- --------------------------------------------------------
211,264
- --------------------------------------------------------
TRANSPORTATION - 2.6%
Canadian National Railway 21,600 764,100
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $24,955,499).......................$ 27,090,634
========================================================
OTHER SECURITIES - 8.7%
Market
Quantity (c) Value (a)
- --------------------------------------------------------
COMMON STOCKS - 0.1%
ADFlex Solutions (b) 2,613 $ 31,029
Pacific Monolithics (b) 9,865 5,919
- --------------------------------------------------------
36,948
- --------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 1.3%
Biometric Systems Series A (b) 18,520 370,400
- --------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 4.3%
Intellon Series A (b) 200,000 372,000
PathNet Series A (b) 100,000 328,000
PathNet Series B (b) 43,153 141,542
Tut Systems Series D (b) (d) 350,319 437,899
VasoMedx Series B (b) 4,867 --
- --------------------------------------------------------
1,279,441
- --------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 3.0%
Ampersand Specialty Materials &
Chemicals II (b) 0.91% 275,029
Athena Venture Partners (b) 0.78 39,989
Conrad/Collins Merchant
Banking Fund (b) 8.45 358,235
South Street Leveraged
Corporate Recovery Fund I (b) 0.67 20,061
Vanguard Associates III (b) 1.42 189,538
- --------------------------------------------------------
882,852
- --------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------
WARRANTS - 0.0%
Intellon, $2.50, 03/23/99 30,000 $ --
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $1,980,026).....................$ 2,569,641
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $26,935,525) (e)................$ 29,660,275
========================================================
OTHER ASSETS AND LIABILITIES
(NET) - (0.7%)
.......................................$ (221,494)
========================================================
TOTAL NET ASSETS
.......................................$ 29,438,781
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1997
(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)
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, 1997, 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, 1997 is shown on pages 22-26.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at March 31, 1997. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND AFFILIATED ISSUERS
- ----------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
---------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Stock Options 325 $ -- -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND AFFILIATED ISSUERS
- --------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-----------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Air Communications
Series A PFD -- $ -- 1,000,000 $ 1 $ (63,473) $ --
Air Communications
Series B PFD -- $ -- 1,175,001 $ 1 $ (944,221) $ --
Air Communications Warrants -- $ -- 75,000 $ -- $ (75) $ --
Air Communications Series B
Convertible Note 10/31/96 24,998 $ 25,055 -- $ -- $ -- $ --
ABC Rail Products 209,800 $ 4,317,825 6,100 $ 151,127 $ 19,977 $ --
Aetrium 87,000 $ 1,019,883 -- $ -- $ -- $ --
Anglo Chinese Investment
Company, foreign -- $ -- -- $ -- $ -- $ 54,261
CardioGenesis Series B PFD1 -- $ -- 410,000 $ -- $ -- $ --
CardioGenesis Series C PFD1 -- $ -- 199,793 $ -- $ -- $ --
CardioGenesis1 609,793 $ 1,670,486 -- $ -- $ -- $ --
FCB Financial -- $ -- 150,000 $2,513,200 $ 327,263 $ 54,000
First Alliance 349,900 $ 7,622,875 77,900 $2,097,612 $ 730,123 $ --
GalaGen Options 05/22/98 1,300 $ -- -- $ -- $ -- $ --
GalaGen Options 03/27/01 270 $ -- -- $ -- $ -- $ --
GalaGen Series E
Convertible Note 03/31/97 -- $ -- 125,000 $ 125,000 $ -- $ 18
Indigo Medical Series B PFD -- $ -- 181,818 $ 912,781 $ 462,781 $ --
Indigo Medical Series C PFD -- $ -- 798,496 $4,008,688 $3,322,004 $ --
Indigo Medical -- $ -- 100,000 $ 502,030 $ 501,130 $ --
ITI Technologies 309,000 $ 5,966,243 24,000 $ 396,827 $ (179,173) $ --
PACE Health Management
Systems 65,385 $ 212,501 -- $ -- $ -- $ --
Recovery Engineering 132,200 $ 1,452,763 -- $ -- $ -- $ --
Secure Computing 175,900 $ 3,258,515 7,900 $ 241,720 $ (108,645) $ --
Seurat Analytical Systems
Series C Convertible
Note 07/08/962 -- $ -- 225,000 $ -- $ -- $ 15,485
Seurat Analytical Systems
Series C PFD2 37,414 $ 299,622 -- $ -- $ -- $ --
Seurat Analytical Systems
Class B 35,102 $ -- -- $ -- $ -- $ --
Tut Systems Series F
Convertible Note 03/23/97 83,750 $ 83,750 83,750 $ 83,750 $ -- $ 826
Tut Systems Series F PFD 260,000 $ 325,095 -- $ -- $ -- $ --
VasoMedx Series C
Convertible Note 02/28/97 113,000 $ 113,000 -- $ -- $ -- $ --
VasoMedx Series A PFD -- $ -- 5,884 $ -- $ (2,942) $ --
</TABLE>
DURING THE YEAR ENDED MARCH 31, 1997:
1 CARDIOGENESIS PREFERRED STOCKS WITH A A COST OF $1,670,486 CONVERTED INTO
CARDIOGENESIS COMMON STOCK.
2 SEURAT CONVERTIBLE NOTE WITH A COST OF $225,310 WAS CONVERTED INTO SERIES C
PREFERRED STOCK.
(e)
At March 31, 1997, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $ 78,121,244 $ 445,858,726 $ 27,211,136
=============================================================================================================
Gross unrealized appreciation $ 16,771,895 $ 96,936,271 $ 5,085,484
Gross unrealized depreciation (4,659,600) (47,628,080) (2,636,345)
- -------------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 12,112,295 $ 49,308,191 $ 2,449,139
=============================================================================================================
</TABLE>
RESTRICTED SECURITIES
IAI GROWTH AND INCOME FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
ADFlex Solutions 06/28/93 $ 2,622
Adra Systems Class A 10/20/88 139,353
09/29/92 1,545
GalaGen 02/26/93 300,000
11/29/93 150,031
PACE Health
Management Systems 01/11/94 499,996
Urologix 03/22/94 196,720
CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------
Biometric Systems Series A 12/28/90 $ 100,006
NON-CONVERTIBLE
PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
Adra Systems Series D 10/20/88 $ 179,842
Tut Systems Series D 02/17/94 200,147
VasoMedx Series B 06/25/92 199,998
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------
Alta Berkeley III, foreign 09/25/96 $ 46,010
Ampersand Specialty Materials
& Chemicals II 06/10/96 95,646
12/05/96 100,000
Athena Venture Partners 05/15/86 329,662
Broad Street Investment
Fund I 05/08/91 12,408
South Street Corporate
Recovery Fund I 10/03/95 --
Vanguard Associates II 07/28/83 18,263
12/10/84 270,112
10/31/86 138,197
Vanguard Associates III 02/28/91 120,282
01/10/92 305,250
01/11/93 305,250
09/30/93 34,128
CALL OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
RESTRICTED SECURITIES
IAI REGIONAL FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
ADFlex Solutions 06/28/93 3,933
Anglo Chinese Investment
Company, foreign 12/27/90 157,263
02/07/94 343,001
02/09/94 6,311
BEI Medical 02/05/96 30,860
Biomedical Waste Systems
Class B 11/08/93 1,001,804
CardioGenesis 06/09/94 1,000,202
12/05/95 670,285
GalaGen 02/26/93 1,200,000
11/29/93 200,126
06/17/94 351,839
03/22/95 133,236
07/07/95 104,684
12/14/95 125,002
Network Appliance 09/23/94 21,403
12/30/96 12,545
PACE Health
Management Systems 01/11/94 750,000
01/31/95 201,525
04/27/95 150,625
06/20/95 75,000
09/17/96 212,502
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,989
PriCellular Class B 05/16/94 751,049
Seurat Analytical Systems
Class B 06/28/96 --
Urologix 03/22/94 295,087
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
Biometric Systems
Series A 05/04/89 $ 250,020
12/28/90 240,000
Diametrics Medical Series I 01/29/97 3,000,000
NON-CONVERTIBLE
PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
Intellon Series A 03/24/94 600,489
Intellon Series B 04/03/96 358,892
Seurat Analytical Systems
Series B 04/29/94 100,000
07/05/95 130,614
Seurat Analytical Systems
Series C 07/05/95 125,186
11/08/95 50,124
01/22/96 25,000
03/19/96 40,485
06/28/96 29,995
10/18/96 28,832
Tut Systems Series D 02/17/94 400,293
04/08/94 30,575
Tut Systems Series E 12/21/94 250,563
Tut Systems Series F 07/30/96 325,095
VasoMedx Series A 10/12/95 48,794
11/14/95 51,206
01/26/96 150,000
VasoMedx Series B 06/25/92 300,001
07/13/94 375,871
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------
Agio Capital Partners I 01/26/96 $ 75,000
01/03/97 300,000
Alta Berkeley III, foreign 09/25/96 92,022
Ampersand Specialty
Materials & Chemicals II 06/10/96 143,468
12/05/96 150,000
Anglo Chinese Selections 12/27/90 1,042,724
Athena Venture Partners 05/15/86 361,799
Conrad/Collins Merchant
Banking Fund 05/11/89 373,706
Greenwich Street
Capital Partners 12/30/94 104,997
05/15/95 303,264
06/15/95 31,513
08/21/95 34,092
08/29/95 378,800
10/27/95 340,920
01/23/96 487,783
05/10/96 439,785
05/24/96 397,680
08/22/96 76,998
09/16/96 193,879
11/07/96 234,214
01/28/97 1,304,156
Pathfinder Venture
Capital Fund III 10/29/92 94,301
04/20/93 100,000
08/24/93 100,000
03/24/94 100,000
12/08/94 100,000
11/01/95 50,000
08/14/96 50,000
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 05/12/94 319,458
01/03/95 150,000
05/11/95 33,149
05/22/95 210,000
11/16/95 255,000
12/13/95 105,000
04/17/96 75,000
05/15/96 210,000
08/14/96 120,000
10/22/96 300,000
12/12/96 75,000
02/12/97 128,360
02/26/97 150,000
Vanguard Associates II 07/28/83 18,263
12/10/84 270,112
10/31/86 138,197
Vanguard Associates III 02/28/91 113,780
01/10/92 288,750
01/11/93 288,750
09/30/93 32,284
Vanguard Associates IV 02/11/93 80,115
08/12/93 350,000
11/01/93 350,000
04/19/94 350,000
09/19/94 350,000
01/17/95 350,000
07/17/95 350,000
12/13/95 350,000
07/26/96 350,000
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- --------------------------------------------------------
Air Communications
Series B 10/31/96 11/21/95 $ 75,000
11/30/95 50,000
02/26/96 50,000
03/22/96 58,333
05/21/96 16,666
06/25/96 8,333
VasoMedx Series C 02/28/97 07/17/96 75,000
12/04/96 30,000
01/13/97 8,000
CALL OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
GalaGen 03/27/01 12/26/96 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------
AccessLine Technologies
06/03/99 06/03/94 $ --
Diametrics Medical 01/30/02 01/30/97 --
GalaGen 06/16/99 12/05/94 --
GalaGen 03/24/00 04/13/95 --
GalaGen 07/09/00 07/07/95 --
GalaGen 01/29/01 01/30/96 --
Intellon 03/23/99 04/12/94 --
PACE Health Management
Systems 01/31/00 03/30/95 --
PACE Health Management
Systems 08/31/05 01/16/96 28
RESTRICTED SECURITIES
IAI VALUE FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
ADFlex Solutions 06/28/93 $ 1,311
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,990
CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------
Biometric Systems Series A 05/04/89 $ 250,020
NON-CONVERTIBLE
PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
Intellon Series A 03/24/94 $ 200,163
PathNet Series A 08/28/95 50,567
02/09/96 50,033
PathNet Series B 08/05/96 70,078
12/23/96 33,326
Tut Systems Series D 02/17/94 300,220
04/08/94 15,288
VasoMedx Series B 06/25/92 99,999
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------
Ampersand Specialty Materials
& Chemicals II 06/10/96 $ 47,822
12/05/96 50,000
Athena Venture Partners 05/15/86 124,120
Conrad/Collins Merchant
Banking Fund 05/11/89 373,706
South Street Leveraged
Corporate Recovery Fund I10/03/95 --
Vanguard Associates III 02/28/91 26,005
01/10/92 66,000
01/11/93 66,000
09/30/93 7,379
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------
Intellon 03/23/99 04/12/94 $ --
(THIS PAGE INTENTIONALLY LEFT BLANK)
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1997
IAI GROWTH IAI IAI
AND INCOME FUND REGIONAL FUND VALUE FUND
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $76,396,767, $382,431,599 and $26,620,017, respectively) $ 89,536,165 $ 456,961,023 $ 29,222,376
Investments in securities of affiliated issuers, at market
(Cost: $1,150,174, $60,717,297 and $315,508, respectively) 697,374 38,205,894 437,899
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 90,233,539 495,166,917 29,660,275
Cash in bank on demand deposit 22,730 44,584 --
Receivable for investment securities sold 4,163,511 2,169,947 --
Dividends and accrued interest receivable 132,038 267,744 33,844
Other assets (Note 2) 48,398 529,281 10,538
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 94,600,216 498,178,473 29,704,657
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Disbursements in excess of cash on demand deposit -- -- 265,876
Payable for investment securities purchased 3,859,601 -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,859,601 -- 265,876
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 90,740,615 $ 498,178,473 $ 29,438,781
==============================================================================================================================
REPRESENTED BY:
Capital stock $ 611,730 $ 220,513 $ 25,243
Additional paid-in capital 74,790,523 412,985,677 25,658,737
Undistributed (overdistributed) net investment income (545,591) (1,341,758) 170,277
Accumulated net realized gains 3,197,355 33,940,435 859,774
Unrealized appreciation on investments 12,686,598 52,373,606 2,724,750
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 90,740,615 $ 498,178,473 $ 29,438,781
==============================================================================================================================
Shares of capital stock outstanding (Note 4) 6,117,295 22,051,268 2,524,279
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 14.83 $ 22.59 $ 11.66
==============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
YEAR ENDED MARCH 31, 1997
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (including $0, $108,261 and $0,
respectively, from affiliated issuers) $ 1,358,923 $ 4,372,705 $ 410,951
(net of foreign income taxes withheld
of $5,370, $0 and $5,763, respectively)
Interest (including $0, $16,329 and $0,
respectively, from affiliated issuers) 184,413 3,284,863 279,925
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,543,336 7,657,568 690,876
- ----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 1,095,339 6,841,491 463,302
Compensation of Directors 7,506 48,381 3,220
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,102,845 6,889,872 466,522
Less fees reimbursed by Advisers (7,506) (48,381) (3,220)
- ----------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 1,095,339 6,841,491 463,302
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 447,997 816,077 227,574
- ----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
NET REALIZED GAINS (LOSSES) ON:
Investment securities (including $0, $4,064,749
and $0, respectively, from affiliated issuers) $9,983,503 $ 88,781,093 $ 3,790,947
Futures contracts -- 1,466,030 --
Written option contracts -- (4,051) --
---------- ------------ -----------
9,983,503 90,243,072 3,790,947
Net change in unrealized appreciation or depreciation
on:
Investment securities $ 40,277 $(41,415,159) $(1,893,898)
Futures contracts -- 72,100 --
---------- ------------ -----------
40,277 (41,343,059) (1,893,898)
- ----------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 10,023,780 48,900,013 1,897,049
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 10,471,777 $ 49,716,090 $ 2,124,623
==================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
Years ended Years ended Years ended
March 31, March 31, March 31,
--------------------------- -------------------------- -------------------------
1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 447,997 $ 549,098 $ 816,077 $ 3,195,732 $ 227,574 $ 272,784
Net realized gains (losses) 9,983,503 17,293,074 90,243,072 81,548,493 3,790,947 4,170,114
Net change in unrealized appreciation or
depreciation 40,277 (590,566) (41,343,059) 53,036,681 (1,893,898) 3,566,963
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS 10,471,777 17,251,606 49,716,090 137,780,906 2,124,623 8,009,861
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (512,361) (763,346) (960,706) (3,998,220) (362,139) (32,696)
Excess distribution from net investment
income (545,591) -- (1,307,272) (485,875) -- --
From net realized gains (12,410,890) (9,537,722) (88,807,982) (60,785,490) (3,825,316) (3,345,740)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (13,468,842) (10,301,068) (91,075,960) (65,269,585) (4,187,455) (3,378,436)
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares sold 35,274,494 17,287,097 66,024,812 71,313,378 18,415,875 12,377,130
Net asset value of shares issued for
reinvestment of distributions 12,953,084 9,969,833 88,548,881 63,289,191 4,123,935 3,343,336
Cost of shares redeemed (39,151,495) (50,801,710) (190,191,836) (155,321,634) (33,047,689) (18,943,353)
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS 9,076,083 (23,544,780) (35,618,143) (20,719,065) (10,507,879) (3,222,887)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 6,079,018 (16,594,242) (76,978,013) 51,792,256 (12,570,711) 1,408,538
NET ASSETS AT BEGINNING OF PERIOD 84,661,597 101,255,839 575,156,486 523,364,230 42,009,492 40,600,954
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 90,740,615 $ 84,661,597 $498,178,473 $575,156,486 $ 29,438,781 $42,009,492
===================================================================================================================================
including undistributed (overdistributed)
net investment income of: $ (545,591) $ 64,364 $ (1,341,758) $ 144,629 $ 170,277 $ 304,842
===================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 37
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI GROWTH AND INCOME FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
IAI GROWTH AND INCOME FUND
Years ended
March 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.30 $ 14.32 $ 13.91 $ 15.19 $ 14.73
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .10 .10 .12 .09 .07
Net realized and unrealized gains 1.88 2.86 1.04 .38 1.17
- -----------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.98 2.96 1.16 .47 1.24
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.10) (.13) (.10) (.06) (.07)
Excess distribution from
net investment income (.10) -- -- -- --
From net realized gains (2.25) (1.85) (.65) (1.69) (.71)
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.45) (1.98) (.75) (1.75) (.78)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 14.83 $ 15.30 $ 14.32 $ 13.91 $ 15.19
=================================================================================================================
Total investment return* 13.34% 21.51% 8.92% 3.07% 9.04%
Net assets at end of period (000's omitted) $ 90,741 $ 84,662 $ 101,256 $ 119,102 $ 134,308
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 0.51% 0.62% 0.80% 0.60% 0.61%
Average brokerage commission rate** $ 0.0623 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 51.2% 89.1% 79.1% 205.6% 175.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI REGIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
IAI REGIONAL FUND
Years ended
March 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 24.57 $ 21.56 $ 20.94 $ 22.23 $ 21.29
- -----------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .03 .14 .17 .21 .21
Net realized and unrealized gains 2.08 5.77 1.84 .51 1.48
- -----------------------------------------------------------------------------------------------------------------
Total from operations 2.11 5.91 2.01 .72 1.69
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (.04) (.18) (.20) (.18) (.23)
Excess distribution from net
investment income (.06) (.02) -- -- --
Net realized gains (3.99) (2.70) (1.19) (1.83) (.52)
- -----------------------------------------------------------------------------------------------------------------
Total distributions (4.09) (2.90) (1.39) (2.01) (.75)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 22.59 $ 24.57 $ 21.56 $ 20.94 $ 22.23
=================================================================================================================
Total investment return* 8.65% 28.62% 10.35% 3.26% 8.31%
Net assets at end of period (000's omitted) $ 498,178 $ 575,156 $ 523,364 $ 596,572 $ 659,904
RATIOS
Expenses to average net assets 1.21% 1.25% 1.23% 1.25% 1.25%
Net investment income to
average net assets 0.14% 0.58% 0.74% 0.94% 1.09%
Average brokerage commission rate** $ 0.0581 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 61.1% 89.7% 150.0% 163.0% 139.7%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI VALUE FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
IAI VALUE FUND
Years ended
March 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.42 $ 11.17 $ 11.63 $ 11.63 $ 11.06
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .09 .08 .03 .05 .11
Net realized and unrealized gains .68 2.19 .38 1.45 .56
- ------------------------------------------------------------------------------------------------------------------
Total from operations .77 2.27 .41 1.50 .67
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.12) (.01) (.03) (.13) --
Net realized gains (1.41) (1.01) (.84) (1.37) (.10)
- ------------------------------------------------------------------------------------------------------------------
Total distributions (1.53) (1.02) (.87) (1.50) (.10)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.66 $ 12.42 $ 11.17 $ 11.63 $ 11.63
==================================================================================================================
Total investment return* 5.85% 21.07% 3.88% 12.70% 6.20%
Net assets at end of period (000's omitted) $ 29,439 $ 42,009 $ 40,601 $ 35,282 $ 24,643
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 0.61% 0.65% 0.31% 0.35% 0.68%
Average brokerage commission rate** $ 0.0600 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 61.3% 73.4% 102.1% 191.9% 118.3%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Growth and Income Fund (Growth and Income Fund) is a separate
portfolio of IAI Investment Fund VII, Inc., IAI Regional Fund (Regional Fund) is
a separate portfolio of IAI Investment Funds IV, Inc. and IAI Value Fund (Value
Fund) is a separate portfolio of IAI Investment Funds VIII, Inc. The Funds have
a primary objective of long-term appreciation through investments in equity
securities. This report covers only the Growth and Income Fund, Regional Fund,
and Value Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Securities traded on national or inter-national securities exchanges are valued
at the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported sales
price or if the last sales price is not available, the last reported bid price
is used. Such valuations are obtained from pricing services or are supplied by
dealers.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
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
securities represent $4,187,307 (4.6% of net assets) for Growth and Income Fund,
$56,852,412 (11.4% of net assets) for Regional Fund and $2,569,641 (8.7% of net
assets) for Value Fund. 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.
FUTURES AND OPTIONS
CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Funds may buy and sell futures contracts and options. The risks of entering into
futures and option contracts include the possibility that changes in the value
of these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, a Fund is required to
deposit either cash or securities, representing the initial margin, equal to a
certain percentage of the contract value. Subsequent changes in the value of the
contract, or variation margin, are recorded daily as unrealized gains or losses.
The variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized 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.
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, each Fund
is required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis. Distributions in excess of book basis
net investment income (but which are not tax returns of capital) are presented
as "excess distributions" in the statement of changes in net assets and the
financial highlights.
Net investment income and net realized gains differ for financial statement and
tax purposes primarily because of recognition of limited partnership 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 (overdistributed) net investment income, and
accumulated net realized gains (losses) have been increased or decreased,
resulting in a net reclassification adjustment to additional paid-in capital as
follows:
GROWTH
AND INCOME REGIONAL VALUE
FUND FUND FUND
- ------------------------------------------------------------------------------
Undistributed net investment income (loss) $ -- $ (34,486) $ --
Accumulated net realized gains (losses) $ (938) $ 34,486 $ --
Additional paid-in capital $ 938 $ -- $ --
SECURITY TRANSACTIONS AND
INVESTMENT INCOME
The Funds record 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 Funds amortize 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 Funds use the equity
method of accounting for limited partnerships.
DISTRIBUTIONS TO
SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made 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
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds are committed to make future capital contributions, if
requested by the Company.
Growth and Income Fund, Regional Fund, and Value Fund have available lines of
credit of $15,000,000, $15,000,000 and $13,484,124, respectively, with a bank at
the prime interest rate. To the extent funds are drawn against the line,
securities are held in a segregated account. No compensating balances or
commitment fees are required under the line of credit. Advances under the line
of credit totalled $265,876 for the Value Fund at March 31, 1997. There were no
borrowings outstanding at March 31, 1997 for the Growth and Income Fund and the
Regional Fund.
Included in other assets for Regional Fund is $482,039 related to the sale of
Indigo Medical common stock. Ten percent of the proceeds ($600,000) from the
sale of this restricted security is being held in escrow until August 27, 1997
to cover potential expenses associated with the transaction. At March 31, 1997,
Regional Fund had reserved $117,961 to cover potential expenses. The estimated
gain of $355,585 related to the proceeds held in escrow has not been recognized
for book or tax purposes.
At March 31, 1997, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
<TABLE>
<CAPTION>
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- -------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND REGIONAL FUND VALUE FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Agio Capital Partners I L.P. $ -- $ 1,125,000 $ --
Alta Berkeley III L.P. 80,000 159,000 --
Ampersand Specialty Materials & Chemicals II L.P. 100,000 150,000 50,000
Greenwich Street Capital Partners L.P. -- 5,430,000 --
Pathfinder Venture Capital Fund III L.P. -- 100,000 --
Spectrum Equity Investors L.P. -- 739,000 --
- -------------------------------------------------------------------------------------------------------------
Total commitments $ 180,000 $ 7,703,000 $ 50,000
=============================================================================================================
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[3] FEES AND EXPENSES
Under the terms of each Fund's Manage-ment Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses ), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. The Manage-ment Agreements
further provide 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. The fee is equal to an annual rate of
1.25% declining to 1.10% (1.00% for Growth and Income Fund) of average daily net
assets. This fee is paid monthly.
[4] CAPITAL STOCK
Growth and Income Fund has authorized 10 billion shares of $.10 par value stock;
Regional Fund and Value Fund each have authorized 10 billion shares of $.01 par
value stock. Transactions in shares of capital stock during the periods
indicated were as follows:
<TABLE>
<CAPTION>
GROWTH AND INCOME REGIONAL VALUE
FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------------
Years ended Years ended Years ended
March 31, March 31, March 31,
-------------------------- --------------------------- ---------------------------
1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOLD 2,284,028 1,133,461 2,707,762 3,012,767 1,484,142 1,036,630
ISSUED FOR REINVESTED
DISTRIBUTIONS 860,881 689,692 3,783,653 2,749,024 335,216 289,094
REDEEMED (2,561,834) (3,361,275) (7,853,235) (6,621,171) (2,676,973) (1,579,960)
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 583,075 (1,538,122) (1,361,820) (859,380) (857,615) (254,236)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
FEDERAL TAX INFORMATION
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1997
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF
SECURITIES
For the year ended March 31, 1997, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- --------------------------------------------------------------------
Growth and Income Fund $ 42,562,806 $ 43,633,092
Regional Fund $ 304,366,285 $ 407,093,393
Value Fund $ 19,447,486 $ 27,644,553
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at March 31, 1997
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.
Each 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 Funds' Board of Directors.
[6] OPTION CONTRACTS WRITTEN
During the year ended March 31, 1997, Regional Fund wrote the following options
on equity securities:
CALL OPTIONS
- ------------------------------------------------------------------------------
Number of Contracts Premium
- ------------------------------------------------------------------------------
Outstanding at 3/31/96 -- $ --
Opened 2,125 309,396
Expired (815) (83,833)
Closed (50) (3,600)
Exercised (1,260) (221,963)
- ------------------------------------------------------------------------------
Outstanding at 3/31/97 -- $ --
==============================================================================
INDEPENDENT AUDITORS' REPORT
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
The Board of Directors and Shareholders
IAI Investment Funds IV, Inc.
IAI Investment Funds VII, Inc.
IAI Investment Funds VIII, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Regional Fund (a portfolio within IAI Investment
Funds IV, Inc.), IAI Growth and Income Fund (a portfolio within IAI Investment
Funds VII, Inc.) and IAI Value Fund (a portfolio within IAI Investment Funds
VIII, Inc.) as of March 31, 1997 and the related statements 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
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Regional Fund, IAI Growth and Income Fund and IAI Value Fund at March 31, 1997,
and the results of their operations, the changes in their net assets and the
financial highlights for the periods stated in the first paragraph in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 9, 1997
FEDERAL TAX INFORMATION
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distribu-tions, in January of
each year.
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -------------------------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- -------------------------------------------------------------------------------------
<S> <C> <C>
June 1996 $ 0.2324 $ 0.9151
December 1996 0.1423 1.1577
=====================================================================================
$ 0.3747 $ 2.0728
78.28% of ordinary income distributions qualify for deduction by corporations.
IAI REGIONAL FUND
- -------------------------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- -------------------------------------------------------------------------------------
June 1996 $ 0.7339 $ 0.7398
December 1996 1.1050 1.5094
=====================================================================================
$ 1.8389 $ 2.2492
12.41% of ordinary income distributions qualify for deduction by corporations.
IAI VALUE FUND
- -------------------------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- -------------------------------------------------------------------------------------
June 1996 $ 0.4304 $ 0.0222
December 1996 0.2782 0.7990
=====================================================================================
$ 0.7086 $ 0.8212
16.44% of ordinary income distributions qualify for deduction by corporations.
</TABLE>
<TABLE>
<CAPTION>
IAI MUTUAL FUND FAMILY
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND
FAMILY
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND countries
- -----------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(CLOSED TO NEW INVESTORS AS OF 2/1/96) emerging growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- -----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUN Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- -----------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term instruments
+ INCOME]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- -----------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of
25 months, investing primarily in investment-grade
bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
[LOGO] IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA
55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
