EQUITY FUNDS
ANNUAL REPORT
IAI GROWTH AND INCOME FUND,
IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
ANNUAL REPORT
MARCH 31, 1998
President'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....................................... 20
Statements of Assets and Liabilities........................... 28
Statements of Operations....................................... 30
Statements of Cash Flows....................................... 32
Statements of Changes in Net Assets............................ 34
Financial Highlights
IAI GROWTH AND INCOME FUND................................ 36
IAI REGIONAL FUND......................................... 37
IAI VALUE FUND............................................ 38
Notes to Financial Statements.................................. 39
Independent Auditors' Report................................... 44
Federal Tax Information........................................ 45
IAI Mutual Fund Family......................................... 46
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors....................................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
[PHOTO]
NOEL P. RAHN
PRESIDENT
COLD MARKETS CAN TURN HOT IN NO TIME
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The current economic backdrop is ideal for financial assets. Strong money growth
is flowing into the markets rather than the real economy. This trend is
bolstered by current demographic conditions. Moreover, low inflation raises
market valuations (P/E ratios and real interest rates) while high consumer and
business optimism raises the willingness to take risk.
What are the risks to the market? Near-term, negative earnings surprises could
stall the equity market, and a weak dollar would not be good for bonds. Over the
intermediate term, if the economic slowdown does not materialize, inflation
concerns will rise and the Fed will tighten. This would hurt valuations in both
stocks and bonds.
Our view is to remain cautiously optimistic on both markets, but watch for the
developing evidence of a slowdown.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on Fund performance and our strategy going forward. We appreciate
your continued trust and confidence in IAI. If there is any way we can serve you
better, please let us know by calling our toll-free Investor Services Hotline at
1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
President
<PAGE>
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
[GRAPH]
TOP FIVE COMMON STOCK
SECTORS
% OF NET ASSETS AS OF 3/31/98
CONSUMER DURABLES 17.2%
FINANCIAL 17.1%
PRODUCER MANUFACTURING 13.7%
CONSUMER NON-DURABLES 11.6%
HEALTH TECHNOLOGY 7.9%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The Fund gained 40.1% during the year ended March 31, 1998, trailing the S&P 500
Index gain of 48.1%. Larger companies outperformed the small cap and midcap
stocks, which negatively impacted the Fund due to the Fund's relative
over-weighting of small and midcap stocks vs. the S&P 500. While all sectors
contributed positively to the performance of the Fund, the financial, consumer
cyclical and consumer staples sectors were the biggest contributors to
performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Berkshire Hathaway and Federal Home Loan Mortgage Corporation (referred to as
Freddie Mac), two holdings within the financial sector, were among the most
successful positions in the Fund. Berkshire Hathaway is the holding company and
investment vehicle for Warren Buffet, while Freddie Mac purchases conventional
residential mortgages from banks and mortgage bankers. Department 56, a company
in the consumer cyclical sector that makes collectibles, and CBS, a company in
the consumer staples sector which is one of the nation's largest radio and
television broadcasters, were also large contributors to performance.
Lagging positions in the Fund included Nike, Readers Digest and Motorola.
Nike declined on a weak retail environment in the Asian Pacific region and
higher inventory levels in the U.S. Readers Digest and Motorola were sold due to
fundamental business concerns.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to focus on companies with solid competitive advantages and
extremely high financial quality at attractive fundamental valuations. Companies
with these characteristics possess the strength and flexibility to weather
downturns in the economy and capital markets that should lead to strong relative
performance in weak markets and outperformance over a full market cycle.
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
[GRAPH]
VALUE OF $10,000 INVESTMENT+
IAI GROWTH & INCOME FUND S&P 500 INDEX
4/1/88 $ 10,000 $ 10,000
3/31/89 $ 11,806 $ 11,790
3/31/90 $ 13,785 $ 14,036
3/31/91 $ 14,808 $ 16,058
3/31/92 $ 16,225 $ 17,831
3/31/93 $ 17,691 $ 20,553
3/31/94 $ 18,234 $ 20,849
3/31/95 $ 19,859 $ 24,099
3/31/96 $ 24,126 $ 31,845
3/31/97 $ 27,343 $ 38,194
3/31/98 $ 38,302 $ 56,572
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
1 Year 5 Years 10 Years
- -----------------------------------------------------------------
IAI GROWTH AND INCOME FUND 40.06% 16.71% 14.37%
- -----------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 18.92%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
<TABLE>
<CAPTION>
% of Net Assets
------------------------
Issue Sector 3/31/98 3/31/97
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Berkshire Hathaway Class A Producer Manufacturing 4.17 2.39
Federal Home Loan Mortgage
Corporation Financial 3.79 3.14
CBS Producer Manufacturing 3.70 --
SLM Holding Financial 3.25 --
Department 56 Consumer Durables 3.19 3.18
Tyco International Producer Manufacturing 3.07 2.41
Parametric Technology Technology Services 3.00 --
Walt Disney Consumer Services 2.99 3.77
Wal-Mart Stores Retail Trade 2.96 2.45
Nabors Industries Industrial Services 2.79 1.60
- ---------------------------------------------------------------------------------------------
TOTAL 32.91 18.94
</TABLE>
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'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.
<PAGE>
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
IAI REGIONAL FUND
[PHOTO]
MARK C. HOONSBEEN,
CFA
IAI REGIONAL FUND MANAGER
TOP FIVE COMMON STOCK
SECTORS
% OF NET ASSETS AS OF 3/31/98
PRODUCER MANUFACTURING 13.2%
FINANCIAL 10.0%
HEALTH TECHNOLOGY 9.6%
CONSUMER DURABLES 7.2%
RETAIL TRADE 6.5%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The IAI Regional Fund gained 31.6% during the year, trailing the S&P 500 Index
gain of 48.1%. The Fund has significant exposure to smaller companies within the
stock market. Unfortunately, smaller stocks underperformed the large blue chip
companies during the year and this detracted from performance. Financial stocks
were one of the top performing sectors in the market. While our stock selection
within financials was generally good, we were underweighted in the financial
sector and this also hurt our relative performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Engineering Animation, which produces animation and graphics products,
contributed strongly to the Fund's return. Recovery Engineering, which produces
drinking water filtration products, also rose sharply during the year. Two
technology companies, ADC Telecommunications and FSI International, were the
biggest disappointments during the year.
WERE THERE ANY SIGNIFICANT CHANGES?
We reduced our exposure in the Capital Goods sector and increased our weighting
in the financial sector. We recently initiated positions in Norwest, one of the
nation's largest banks; Associated Banc Corp., a regional bank holding company;
and Household International, a consumer finance company.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Once again, large stocks led the stock market. Fears over Asia's impact on
corporate earnings in America have receded somewhat with most market
participants now expecting a much milder impact than what was originally
thought. Robust economic growth, low inflation, and corporate profit expansion
led the stock market to strong absolute returns.
WHAT IS YOUR OUTLOOK FOR THE FUND?
There is a risk in the marketplace of slower corporate profit growth and higher
interest rates. The high quality nature of the companies in which we invest
should allow the Fund to deliver good relative returns regardless of the market
environment.
<PAGE>
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
VALUE OF $10,000 INVESTMENT+
IAI Regional Fund S&P 500 Index
4/1/89 $ 10,000 $ 10,000
3/31/89 $ 11,863 $ 11,790
3/31/90 $ 14,432 $ 14,036
3/31/91 $ 17,029 $ 16,058
3/31/92 $ 19,205 $ 17,831
3/31/93 $ 20,802 $ 20,553
3/31/94 $ 21,481 $ 20,849
3/31/95 $ 23,703 $ 24,099
3/31/96 $ 30,486 $ 31,845
3/31/97 $ 33,124 $ 38,194
3/31/98 $ 43,575 $ 56,572
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------
IAI REGIONAL FUND 31.55% 15.94% 15.86%
- ---------------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 18.92%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
<TABLE>
<CAPTION>
% of Net Assets
-------------------------
Issue Sector 3/31/98 3/31/97
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Berkshire Hathaway Class A Producer Manufacturing 2.64 1.45
Newell Consumer Durables 2.60 2.10
Diametrics Medical Health Technology 2.53 0.48
Snap-On Consumer Durables 2.34 2.93
Hormel Foods Consumer Non-Durables 2.24 --
Reliastar Financial Financial 2.04 1.64
Sears Roebuck Retail Trade 2.04 1.21
Valspar Process Industries 1.92 1.21
Allstate Financial 1.83 1.35
Vanguard Associates IV (1) Financial 1.82 4.82
- -----------------------------------------------------------------------------------------------
TOTAL 22.00 17.19
</TABLE>
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
(1) Denotes Restricted Security which is included in "Other Securities" in the
Fund Portfolio.
NOTE TO PRESIDENT'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.
<PAGE>
FUND MANAGER'S REVIEW
IAI VALUE FUND
IAI VALUE FUND
[PHOTO]
DONALD J. HOELTING,
CFA
IAI VALUE FUND MANAGER
TOP FIVE COMMON STOCK
SECTORS
% OF NET ASSETS AS OF 3/31/98
PRODUCER MANUFACTURING 15.9%
CONSUMER DURABLES 13.7%
FINANCIAL 11.4%
INDUSTRIAL SERVICES 6.1%
HEALTH SERVICES 5.3%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The Fund underperformed its benchmark for the year ending March 31, 1998,
returning 34.2% versus the Russell 2500 Index at 41.9% and the S&P 500 Index at
48.1%. The best performing sectors included consumer cyclicals, energy and
health care. All sectors in the Fund contributed positively to performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
The strongest contributors to performance were the consumer cyclical stocks
Department 56 and Polaris Industries. Department 56 designs, imports and
distributes collectibles while Polaris designs and manufactures personal
recreational vehicles, such as snowmobiles and personal watercraft. R&B Falcon,
a successful energy sector stock, provides marine contract drilling for the
domestic and international oil and gas industry. Performance was also enhanced
by the Fund's average 10% weighting in venture securities, or privately held
companies in early stages of growth. The Fund's portfolio of venture securities
more than doubled in value during the year ended March 31, 1998.
Lagging positions in the Fund include the following consumer cyclical
stocks: Samsonite, Colonial Downs and Dal-Tile. Samsonite declined after
announcing the restructuring charges for its Belgium softside luggage
manufacturing operations. Colonial Downs was sold after experiencing operational
difficulties and disappointing revenues. Dal-Tile experienced difficulties
integrating a major acquisition and was subsequently sold.
WERE THERE ANY SIGNIFICANT CHANGES?
Since its fiscal year end of March 31, 1998, the Fund has experiences a
significant price increase from an investment in a venture security. To protect
existing shareholders from speculators, the Fund has temporarily closed to new
purchases on May 12, 1998. It will reopen when the Fund determines it is in the
best interest of all existing shareholders.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUNDS
PERFORMANCE?
Investors were primarily concerned with the momentum and perceived safety of
larger companies than with strict fundamentals. Relative to the benchmark index,
the Russell 2500, the Fund is more heavily weighted in smaller capitalized
stocks, which detracted from performance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The stocks of smaller companies show better valuation characteristics than those
of large companies. While investors seemed willing to buy large cap companies at
rather optimistic valuations in 1997, markets eventually come around to
fundamentals. We believe the current IPO market represents good opportunities
for high technology companies and that smaller cap stocks, in general, represent
a better value than do the large caps at this time and may outperform going
forward.
<PAGE>
FUND MANAGER'S REVIEW
IAI VALUE FUND
VALUE OF $10,000 INVESTMENT+
IAI Value Fund Russell 2500 Index S&P 500 Index
4/1/88 $ 10,000 $ 10,000 $ 10,000
3/31/89 $ 12,417 $ 11,395 $ 11,790
3/31/90 $ 13,647 $ 12,281 $ 14,036
3/31/91 $ 14,493 $ 13,491 $ 16,058
3/31/92 $ 16,263 $ 16,449 $ 17,831
3/31/93 $ 17,271 $ 19,197 $ 20,553
3/31/94 $ 19,464 $ 20,886 $ 20,849
3/31/95 $ 20,220 $ 22,695 $ 24,099
3/31/96 $ 24,477 $ 29,463 $ 31,845
3/31/97 $ 25,911 $ 32,021 $ 38,194
3/31/98 $ 34,778 $ 45,427 $ 56,572
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------
IAI VALUE FUND 34.21% 15.03% 13.27%
- ------------------------------------------------------------------------------
Russell 2500 Index 41.86% 18.80% 16.34%
- ------------------------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 18.92%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS*
<TABLE>
<CAPTION>
% of Net Assets
- -------------------------------------------------------------------------------------------------
Issue Sector 3/31/98 3/31/97
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PathNet (1) Electronic Technology 5.70 1.59
Tut Systems (1) Electronic Technology 3.93 1.49
NCI Building Systems Producer Manufacturing 3.90 --
Department 56 Consumer Durables 3.54 2.95
R.P. Scherer Health Technology 3.43 3.52
Sturm, Ruger & Company Consumer Durables 3.38 3.13
Leucadia National Financial 3.34 3.83
United Asset Management Financial 3.33 3.48
Consolidation Capital Producer Manufacturing 3.19 --
Holophane Producer Manufacturing 3.07 2.65
- -------------------------------------------------------------------------------------------------
TOTAL 36.81 22.64
</TABLE>
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
(1) Denotes Restricted Security which is included in "Other Securities" in the
Fund Portfolio.
NOTE TO PRESIDENT'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.
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS 92.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 17.2%
Bandag 28,000 $1,650,250
Callaway Golf 59,200 1,716,800
Department 56 (b) 81,100 3,081,800
Eastman Kodak 23,600 1,531,050
Harley-Davidson 72,100 2,379,300
Mattel 43,800 1,735,574
Polaris Industries 54,300 2,009,100
Sturm, Ruger & Company 128,000 2,640,000
- --------------------------------------------------------------------------------
16,743,874
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 11.6%
800 - JR Cigar (b) 87,000 1,740,000
Coca-Cola 27,500 2,129,531
Gillette 15,900 1,887,131
Nike Class B 42,000 1,858,500
Philip Morris 62,300 2,597,131
UST 33,600 1,083,600
- --------------------------------------------------------------------------------
11,295,893
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 3.0%
Walt Disney 27,100 2,892,925
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.3%
3Com (b) 33,800 1,214,688
Intel 25,800 2,014,012
- --------------------------------------------------------------------------------
3,228,700
- --------------------------------------------------------------------------------
ENERGY MINERALS - 3.8%
British Petroleum ADR 19,099 1,643,708
Exxon 30,200 2,042,275
- --------------------------------------------------------------------------------
3,685,983
- --------------------------------------------------------------------------------
FINANCIAL - 17.1%
American Express 25,900 2,377,944
Federal Home Loan Mortgage
Corporation 77,300 3,666,919
Leucadia National 40,700 1,602,563
Norwest 54,600 2,269,313
PMI Group 16,800 1,356,600
SLM Holding 72,050 3,143,181
United Asset Management 76,500 2,084,624
- --------------------------------------------------------------------------------
16,501,144
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 2.5%
First Health Group (b) 44,800 $2,430,400
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 7.9%
Pfizer 24,900 2,482,219
R.P. Scherer (b) 24,000 1,620,000
SmithKline Beecham ADR 40,358 2,524,897
Symphonix Devices (b) 58,300 983,813
- --------------------------------------------------------------------------------
7,610,929
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 2.8%
Nabors Industries 113,900 2,698,006
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 1.5%
Nucor (b) 26,900 1,464,369
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 1.9%
Schweitzer-Mauduit International 52,400 1,807,800
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 13.7%
Berkshire Hathaway Class A (b) 60 4,032,000
CBS 105,600 3,583,800
General Electric 18,800 1,620,325
Nordson 20,300 1,012,463
Tyco International 54,400 2,971,600
- --------------------------------------------------------------------------------
13,220,188
- --------------------------------------------------------------------------------
RETAIL TRADE - 3.0%
Wal-Mart Stores 56,300 2,860,744
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 3.1%
Parametric Technology (b) 87,200 2,904,850
Racotek (b) 29,487 93,990
- --------------------------------------------------------------------------------
2,998,840
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $56,693,139) .............................. $89,439,795
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1998
OTHER SECURITIES - 3.3%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 0.4%
Advanced Recognition
Technologies (b) 2,109 $ 1,242
GalaGen (b) (d) 54,168 79,248
MatrixOne Class A (b) 12,243 71,009
Oren (b) 24 5
PACE Health
Management Systems (b) (d) 121,220 34,063
Surmodics (b) 26,668 215,343
- --------------------------------------------------------------------------------
400,910
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.9%
Advanced Recognition
Technologies Series A (b) 19,119 11,255
Advanced Recognition
Technologies Series B (b) 74,871 44,077
Advanced Recognition
Technologies Series C (b) 8,005 4,713
MatrixOne Series D (b) 14,964 86,791
Myriad Ultrasound Systems
Series A (b) 13,068 16,531
Myriad Ultrasound Systems
Series B (b) 14,491 18,331
Myriad Ultrasound Systems
Series C (b) 14,351 18,154
Oren Series I (b) 132 211
Oren Series K (b) 220 352
Oren Series L (b) 256 307
ServiceSoft Series F (b) 5,413 6,928
Tut Systems Series D (b) (d) 222,222 666,666
- --------------------------------------------------------------------------------
874,316
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.0%
Alta Berkeley III, foreign (b) 1.78% $ 354,100
Ampersand Specialty
Materials & Chemicals II (b) 1.82 583,712
Broad Street Investment Fund I (b) 0.29 196,290
South Street Corporate Recovery
Fund I (b) 1.44 74,502
Vanguard Associates II (b) 3.72 114,327
Vanguard Associates III (b) 6.55 623,545
- --------------------------------------------------------------------------------
1,946,476
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (d) 1,625 --
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
Myriad Ultrasound Systems
03/06/99 1,577 --
Myriad Ultrasound Systems
06/15/99 457 --
- --------------------------------------------------------------------------------
--
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $2,825,691) ............................... $ 3,221,702
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $59,518,830) .............................. $92,661,497
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1998
SHORT-TERM SECURITIES - 4.2%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS - 4.2%
Federal Home Loan Bank (DISCOUNT NOTE) 5.90% 04/01/98 $ 545,000 $ 545,000
Federal Home Loan Mortgage
Corporation (DISCOUNT NOTE) 5.45 04/03/98 3,500,000 3,498,941
- ------------------------------------------------------------------------------------------------------
4,043,941
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $4,043,941)........................................................................$ 4,043,941
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $63,562,771) (e)...................................................................$ 96,705,438
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 0.1%
.......................................................................................$ 48,651
- ------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
.......................................................................................$ 96,754,089
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 87.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 4.1%
Bell & Howell (b) 122,700 $3,366,581
G & K Services Class A 36,400 1,597,050
Galileo International 158,200 6,140,138
HA-LO Industries 115,500 4,035,281
R.R. Donnelley 81,400 3,342,488
Wallace Computer Services 66,100 2,288,713
- --------------------------------------------------------------------------------
20,770,251
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 7.2%
Excelsior-Henderson
Motorcycle Manufacturing (b) 290,000 2,247,500
ITI Technologies (b) 357,500 9,295,000
Newell 273,500 13,247,656
Snap-On 261,800 11,944,625
- --------------------------------------------------------------------------------
36,734,781
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 6.0%
Fort James 58,700 2,689,194
General Mills 113,800 8,648,800
Hormel Foods 294,300 11,422,518
Sara Lee 130,700 8,054,388
- --------------------------------------------------------------------------------
30,814,900
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 1.2%
Lodgenet Entertainment (b) 529,000 6,166,156
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 5.3%
ACI Telecentrics (b) 233,000 466,000
Advanced Fibre Communications (b) 109,064 3,967,203
Aetrium (b) (d) 473,500 6,865,750
Andrew (b) 91,500 1,812,844
FSI International (b) 628,800 6,916,800
Norstan (b) 147,700 3,655,575
Sheldahl (b) 292,000 3,248,500
- --------------------------------------------------------------------------------
26,932,672
- --------------------------------------------------------------------------------
ENERGY MINERALS - 1.4%
Amoco 84,100 7,264,138
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 10.0%
Allstate 101,500 $9,331,655
Associated Banc-Corp 43,300 2,335,494
First Alliance (b) 426,900 6,696,994
Household International 11,900 1,639,225
LifeUSA Holding (b) 367,000 5,619,688
MMI Companies 101,500 2,442,344
Norwest 118,200 4,912,688
ReliaStar Financial 226,100 10,414,730
St. Paul Companies 60,300 5,374,238
TCF Financial 70,500 2,392,594
- --------------------------------------------------------------------------------
51,159,650
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.5%
Brookdale Living Communities (b) 145,000 3,661,250
First Health Group (b) 111,000 6,021,750
Patterson Dental (b) 254,650 7,894,150
United Healthcare 87,100 5,639,725
- --------------------------------------------------------------------------------
23,216,875
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 9.6%
Abbott Laboratories 110,300 8,306,969
Baxter International 95,000 5,236,875
CardioGenesis (b) 594,793 4,163,551
Cerus (b) 105,800 1,745,700
CIMA Labs (b) 471,000 2,340,281
Diametrics Medical (b) 1,609,300 12,874,400
Mentor 10,000 276,250
Northfield Laboratories (b) 615,800 6,158,000
Possis Medical (b) 296,200 4,729,944
Symphonix Devices (b) 70,000 1,181,250
Urologix (b) 206,663 1,918,091
- --------------------------------------------------------------------------------
48,931,311
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.6%
AptarGroup 64,200 3,856,013
Bemis 157,000 7,084,625
Northland Cranberries Class A 158,500 2,496,375
Valspar 248,800 9,765,400
- --------------------------------------------------------------------------------
23,202,413
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 13.2%
ABC Rail Products (b) (d) 484,400 $8,658,650
Berkshire Hathaway Class A (b) 200 13,440,000
HON Industries 201,800 7,416,150
IDEX 201,800 7,340,475
Illinois Tool Works 99,500 6,442,625
Pentair 153,700 6,878,075
Rayovac (b) 210,000 4,948,125
Recovery Engineering (b) (d) 235,100 6,935,450
Zebra Technologies Class A (b) 130,100 5,008,850
- --------------------------------------------------------------------------------
67,068,400
- --------------------------------------------------------------------------------
RETAIL TRADE - 6.5%
Casey's General Stores 149,600 2,393,600
Dayton Hudson 53,000 4,664,000
Lands' End (b) 144,300 5,321,063
Sears, Roebuck & Co. 180,700 10,378,955
Video Update Class A (b) 1,336,600 4,594,563
Walgreen 163,000 5,735,563
- --------------------------------------------------------------------------------
33,087,744
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 5.2%
Anicom (b) 342,992 4,887,635
Engineering Animation (b) 162,500 6,743,750
Platinum Technology (b) 308,800 7,951,600
Racotek (b) 27,893 88,909
Richardson Electronics 255,600 3,418,650
Secure Computing (b) 237,900 3,181,913
- --------------------------------------------------------------------------------
26,272,457
- --------------------------------------------------------------------------------
TRANSPORTATION - 2.6%
C.H. Robinson Worldwide 248,100 6,450,600
Hub Group Class A (b) 81,500 2,276,905
Illinois Central Series A 4,320 169,830
USFreightways 118,700 4,273,200
- --------------------------------------------------------------------------------
13,170,535
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
UTILITIES - 6.0%
Ameritech 186,000 $9,195,374
Minnesota Power & Light 66,000 2,805,000
Montana Power 155,400 5,604,113
Northern States Power 117,000 6,903,000
Unicom 86,000 3,010,000
Wisconsin Energy 92,200 2,829,388
- --------------------------------------------------------------------------------
30,346,875
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $341,653,562) ............................. $445,139,158
- --------------------------------------------------------------------------------
OTHER SECURITIES - 6.7%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 0.4%
AccessLine Technologies
Class A (b) 41,666 $ 62,499
Advanced Recognition
Technologies (b) 2,315 1,363
Anglo Chinese Investment
Company, foreign (b) (d) 1,600 251,908
BEI Medical (b) 3,596 14,093
GalaGen (b) (d) 291,733 426,805
NEI Webworld (b) 134,703 335,949
Oren (b) 27 5
PACE Health
Management Systems (b) (d) 340,705 94,717
Pacific Monolithics (b) 9,865 5,919
Soane BioSciences (b) 4,383 701
Surmodics (b) 138,080 1,114,996
- --------------------------------------------------------------------------------
2,308,955
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1998
OTHER SECURITIES (CONT.)
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 1.0%
AccessLine Technologies
Series A (b) 71,420 $ 107,130
Advanced Recognition
Technologies Series A (b) 20,985 12,354
Advanced Recognition
Technologies Series B (b) 82,181 48,380
Advanced Recognition
Technologies Series C (b) 8,787 5,173
Intellon Series A (b) 600,000 1,116,000
Intellon Series B (b) 192,921 358,833
Myriad Ultrasound
Systems Series A (b) 14,344 18,145
Myriad Ultrasound
Systems Series B (b) 15,905 20,120
Myriad Ultrasound
Systems Series C (b) 15,752 19,926
Oren Series I (b) 145 232
Oren Series K (b) 242 387
Oren Series L (b) 281 337
PACE Health Management
Systems Series A (b) (d) 125,000 62,500
ServiceSoft Series F (b) 5,941 7,605
Tut Systems Series D (b) (d) 478,416 1,435,248
Tut Systems Series E (b) (d) 217,391 652,173
Tut Systems Series F (b) (d) 260,000 780,000
Tut Systems Series G (b) (d) 78,980 236,940
- --------------------------------------------------------------------------------
4,881,483
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 5.3%
Agio Capital Partners I (b) 10.66% $ 675,000
Alta Berkeley III, foreign (b) 3.55 708,219
Ampersand Specialty
Materials & Chemicals II (b) 2.72 875,552
Anglo Chinese Selections (b) 2.80 649,000
Conrad/Collins Merchant
Banking Fund (b) 8.45 278,815
Greenwich Street
Capital Partners (b) 3.00 8,678,594
Pathfinder Venture
Capital Fund III (b) 3.99 1,107,890
South Street Corporate
Recovery Fund I (b) 3.08 158,102
South Street Leveraged
Corporate Recovery Fund I (b) 3.85 66,544
Spectrum Equity Investors (b) 2.76 3,834,594
Spell Capital Partners (b) 4.00 20,000
Vanguard Associates II (b) 3.72 114,327
Vanguard Associates III (b) 6.20 621,979
Vanguard Associates IV (b) 9.44 9,276,049
- --------------------------------------------------------------------------------
27,064,665
- --------------------------------------------------------------------------------
Principal Market
Rate Maturity Amount (c) Value (a)
- ------------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.0%
Air Communications Series B (b) (d)
10.00% 02/28/97 $ 258,332 --
- ------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1998
OTHER SECURITIES (CONT.)
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (d) 6,500 $ --
GalaGen, $11.07, 03/27/01 (d) 541 --
- --------------------------------------------------------------------------------
--
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies,
$0.01, 06/03/99 10,713 --
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 --
Myriad Ultrasound Systems
03/06/99 1,731 --
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
Myriad Ultrasound Systems
06/15/99 501 $ --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
PACE Health Management
Systems, $0.50, 07/07/02 (d) 125,000 --
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
- --------------------------------------------------------------------------------
--
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $22,267,742) .............................. $34,255,103
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
Securities
(COST: $363,921,304) ............................. $479,394,261
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 5.4%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government & Government Agency Obligations - 5.4%
Federal National Mortgage
Association (discount note) 5.90% 04/01/98 $25,835,000 $25,835,000
U.S. Treasury Bill 5.10 04/23/98 1,500,000 1,495,110
- ------------------------------------------------------------------------------------------------------
27,330,110
- ------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
(COST: $27,330,449) .................................................................... $ 27,330,110
- ------------------------------------------------------------------------------------------------------
Total Investments in Securities
(COST: $391,251,753) (e) ............................................................... $ 506,724,371
- ------------------------------------------------------------------------------------------------------
Other Assets and Liabilities (Net) 0.5%
.............................................................................. $ 2,831,582
- ------------------------------------------------------------------------------------------------------
Total Net Assets
.............................................................................. $ 509,555,953
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 78.9%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 4.2%
M/A/R/C 22,350 $ 333,853
Scientific Games (b) 37,700 789,344
- --------------------------------------------------------------------------------
1,123,197
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 13.7%
Bandag 11,400 671,888
Department 56 (b) 24,900 946,200
Polaris Industries 20,300 751,100
Samsonite (b) 13,600 399,500
Sturm, Ruger & Company 43,800 903,375
- --------------------------------------------------------------------------------
3,672,063
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 4.8%
800 - JR Cigar (b) 35,900 718,000
Swisher International Class A (b) 43,400 564,200
- --------------------------------------------------------------------------------
1,282,200
- --------------------------------------------------------------------------------
FINANCIAL - 11.4%
Friedman, Billings, Ramsey
Group Class A (b) 40,700 681,725
Leucadia National 22,700 893,812
LifeUSA Holding (b) 37,832 579,303
United Asset Management 32,700 891,075
- --------------------------------------------------------------------------------
3,045,915
- --------------------------------------------------------------------------------
HEALTH SERVICES - 5.3%
First Health Group (b) 12,800 694,400
Trigon Health Care (b) 24,100 724,506
- --------------------------------------------------------------------------------
1,418,906
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 3.4%
R.P. Scherer (b) 13,600 918,000
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 6.1%
Nabors Industries (b) 19,000 450,062
Petroleum Geo-Services ADR (b) 11,000 653,125
R&B Falcon (b) 17,300 512,513
- --------------------------------------------------------------------------------
1,615,700
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 2.6%
Nucor 12,900 702,243
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 2.6%
Schweitzer-Mauduit International 20,300 $ 700,350
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 15.9%
CompX International Class A (b) 12,000 280,500
Consolidation Capital (b) 33,900 851,738
Holophane (b) 34,200 820,800
NCI Building Systems (b) 21,500 1,042,750
Nordson 15,400 768,075
Rayovac 21,000 494,813
- --------------------------------------------------------------------------------
4,258,676
- --------------------------------------------------------------------------------
RETAIL TRADE - 4.2%
Pizza Inn 136,200 736,331
SkyMall (b) 85,600 374,500
- --------------------------------------------------------------------------------
1,110,831
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 4.7%
Audre Recognition Systems (b) 1,365,350 1,365
Black Box (b) 18,500 682,188
Phoenix International (b) 23,500 540,500
Racotek (b) 6,375 20,320
- --------------------------------------------------------------------------------
1,244,373
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $18,203,461) .............................. $21,092,454
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1998
OTHER SECURITIES - 17.4%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 3.5%
Advanced Recognition
Technologies (b) 720 $ 424
NEI Webworld (b) 134,703 335,949
Oren (b) 8 2
Pacific Monolithics (b) 9,865 5,919
Surmodics (b) 74,080 598,196
- --------------------------------------------------------------------------------
940,490
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 11.2%
Advanced Recognition
Technologies Series A (b) 6,529 3,844
Advanced Recognition
Technologies Series B (b) 25,569 15,052
Advanced Recognition
Technologies Series C (b) 2,734 1,610
Intellon Series A (b) 200,000 372,000
Myriad Ultrasound
Systems Series A (b) 4,463 5,646
Myriad Ultrasound
Systems Series B (b) 4,949 6,260
Myriad Ultrasound
Systems Series C (b) 4,901 6,200
Oren Series I (b) 45 72
Oren Series K (b) 75 120
Oren Series L (b) 87 104
PathNet Series A (b) 100,000 1,064,000
PathNet Series B (b) 43,153 459,148
ServiceSoft Series F (b) 1,849 2,366
Tut Systems Series D (b) (d) 350,319 1,050,957
- --------------------------------------------------------------------------------
2,987,379
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.7%
Ampersand Specialty
Materials & Chemicals II (b) 0.91% $ 291,858
Conrad/Collins Merchant Banking
Fund (b) 8.45 278,813
South Street Leveraged
Corporate Recovery Fund I (b) 1.10 19,013
Vanguard Associates III (b) 1.42 138,394
- --------------------------------------------------------------------------------
728,078
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
Intellon, $2.50, 03/23/99 30,000 --
Myriad Ultrasound
Systems 03/06/99 538 --
Myriad Ultrasound
Systems 06/15/99 156 --
- --------------------------------------------------------------------------------
--
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $1,637,870) ............................... $4,655,947
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
Securities
(COST: $19,841,331) .............................. $25,748,401
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1998
SHORT-TERM SECURITIES - 3.7%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 3.7%
Federal Home Loan Bank (DISCOUNT NOTE) 5.45% 04/03/98 $ 500,000 $ 499,849
Federal National Mortgage Association (DISCOUNT NOTE) 5.90 04/01/98 390,000 390,000
U.S. Treasury Bill 5.10 04/23/98 100,000 99,674
- ------------------------------------------------------------------------------------------------------
989,523
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $989,545) ..........................................................................$ 989,523
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $20,830,876) (e) ...................................................................$26,737,924
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 0.0%
.................................................................................$ 1,201
- ------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS
.................................................................................$26,739,125
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
(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, 1998, the Fund held
no unrestricted securities of the same issuer as of either the date the purchase
price was agreed to or the date the Fund first obtained an enforceable right to
obtain the securities. Information concerning each restricted security held at
March 31, 1998 is shown on 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, 1998. A summary of transactions during the
period with affiliated issuers of the Funds follows: March 31, 1998
IAI GROWTH AND INCOME FUND AFFILIATED ISSUERS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
----------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Options 05/22/98 325 $ -- -- $ -- $ -- $ --
</TABLE>
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
<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>
IAI Regional Fund Affiliated Issuers
ABC Rail Products 31,100 $ 593,589 83,400 $1,730,011 $ 18,911 $ --
Aetrium 41,000 $ 961,450 122,500 $2,010,219 $ 174,529 $ --
*Cardio Genesis -- $ -- 15,000 $ 118,608 $ 82,016 $ --
*First Alliance+ 22,400 $ 639,748 11,400 $ 186,669 $ 44,799 $ --
Galagen Options 05/22/98 1,300 $ -- -- $ -- $ -- $ --
Galagen Options 03/27/01 271 $ -- -- $ -- $ -- $ --
*ITI Technologies 19,500 $ 519,189 156,000 $2,521,264 $(1,277,828) $ --
PACE Health Management
Systems Warrants 07/07/02 125,000 $ -- -- $ -- $ -- $ --
PACE Health Management
Systems Series A PFD 125,000 $ 125,000 -- $ -- $ -- $ --
Recovery Engineering 21,900 $ 614,475 131,800 $3,873,598 $ 2,020,959 $ --
*Secure Computing 123,800 $1,350,458 346,900 $3,616,410 $(6,601,282) $ --
Seurat Analytical
Series B PFD -- $ -- 114,973 $ 1,762 $ (228,852) $ --
Seurat Analytical
Series C PFD -- $ -- 37,414 $ 587 $ (299,034) $ --
Seurat Analytical
Class B -- $ -- 35,102 $ 560 $ 560 $ --
Tut Systems Series G PFD 78,980 $ 236,940 -- $ -- $ -- $
VasoMedx
Series A PFD -- $ -- 500,000 $ -- $ (250,000) $ --
VasoMedx
Series B PFD -- $ -- 39,599 $ -- $ (675,872) $ --
VasoMedx
Series C Convertible Note -- $ -- 113,000 $ -- $ (113,000) $ --
*Video Update Class A 651,600 $2,778,073 -- $ -- $ -- $ --
</TABLE>
+3 FOR 2 STOCK SPLIT OCCURRED ON 11/03/97. RECEIVED 143,900 ADDITIONAL SHARES.
*SECURITIES THAT WERE AFFILIATED DURING THE TWELVE MONTH PERIOD ENDING ON
3/31/98 BUT NOT AT 3/31/98.
(e)
At March 31, 1998, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $ 64,589,675 $ 398,383,761 $ 21,079,564
----------------------------------------------------------------------------------------
Gross unrealized appreciation $ 34,395,527 $ 127,029,994 $ 7,609,245
Gross unrealized depreciation (2,279,764) (18,689,384) (1,950,885)
----------------------------------------------------------------------------------------
Net unrealized appreciation $ 32,115,763 $ 108,340,610 $ 5,658,360
----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI GROWTH AND INCOME FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 47
GalaGen 02/26/93 300,000
11/29/93 150,031
MatrixOne Class A 10/20/88 139,353
09/29/92 1,545
Oren 06/16/97 5
PACE Health
Management Systems 01/11/94 499,996
Surmodics 12/28/90 100,005
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Advanced Recognition
Technologies Series A 06/16/97 $ 7,208
Advanced Recognition
Technologies Series B 06/16/97 14,845
Advanced Recognition
Technologies Series C 06/16/97 4,713
MatrixOne Series D 10/20/88 179,842
Myriad Ultrasound Systems
Series A 06/16/97 6,743
Myriad Ultrasound Systems
Series B 06/16/97 16,375
Myriad Ultrasound Systems
Series C 06/16/97 18,154
Oren Series I 06/16/97 211
Oren Series K 06/16/97 352
Oren Series L 06/16/97 307
ServiceSoft Series F 06/16/97 52,494
Tut Systems Series D 02/17/94 200,147
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Alta Berkeley III, foreign 09/25/96 $ 46,010
06/06/97 23,135
11/05/97 23,396
Ampersand Specialty Materials
& Chemicals II 12/05/96 28,848
03/05/98 100,000
Broad Street Investment
Fund I 05/08/91 12,408
South Street Corporate
Recovery Fund I 10/03/95 --
Vanguard Associates II 12/10/84 89,887
10/31/86 138,197
Vanguard Associates III 02/28/91 26,809
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 --
02/23/98 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Myriad Ultrasound Systems
03/06/99 10/15/96 $ --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI REGIONAL FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
Advanced Recognition
Technologies 06/16/97 52
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 19,694
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
NEI Webworld 02/28/94 50,298
Oren 06/16/97 5
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
Soane BioSciences 12/31/97 --
Surmodics 05/08/89 250,020
12/28/90 240,000
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
Advanced Recognition
Technologies Series A 06/16/97 7,912
Advanced Recognition
Technologies Series B 06/16/97 16,294
Advanced Recognition
Technologies Series C 06/16/97 5,173
Intellon Series A 03/24/94 600,489
Intellon Series B 04/03/96 358,892
Myriad Ultrasound Systems
Series A 06/16/97 7,403
Myriad Ultrasound Systems
Series B 06/16/97 17,973
Myriad Ultrasound Systems
Series C 06/16/97 19,926
Oren Series I 06/16/97 231
Oren Series K 06/16/97 387
Oren Series L 06/16/97 337
PACE Health Management
Systems Series A 02/19/98 125,000
ServiceSoft Series F 06/16/97 57,621
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
Tut Systems Series G 12/16/97 236,940
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI REGIONAL FUND (CONT.)
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Agio Capital Partners I 01/26/96 $ 75,000
01/03/97 300,000
10/15/97 300,000
Alta Berkeley III, foreign 09/25/96 92,022
06/06/97 46,273
11/05/97 46,793
Ampersand Specialty
Materials & Chemicals II 12/05/96 43,270
03/05/98 150,000
Anglo Chinese Selections 12/27/90 1,042,724
Conrad/Collins Merchant
Banking Fund 05/11/89 218,574
Greenwich Street
Capital Partners 01/23/96 178,685
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
04/28/97 1,923,808
08/22/97 351,787
12/12/97 82,319
01/02/98 1,718,344
01/15/98 1,080,130
Pathfinder Venture
Capital Fund III 10/29/92 91,677
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
09/17/97 50,000
Security Acquisition Date Cost
- --------------------------------------------------------------------------
South Street Corporate
Recovery Fund I 10/03/95 $ --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 01/03/95 102,570
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
05/05/97 120,000
06/10/97 75,000
09/30/97 75,000
12/09/97 60,000
01/20/98 180,000
Spell Capital Partners 10/17/97 20,000
Vanguard Associates II 12/10/84 89,887
10/31/86 138,197
Vanguard Associates III 02/28/91 25,360
01/10/92 288,750
01/11/93 288,750
09/30/93 32,284
Vanguard Associates IV 07/26/96 24,733
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI REGIONAL FUND (CONT.)
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Air Communications
Series B 02/28/97 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
CALL OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/23/98 --
GalaGen 03/27/01 12/26/96 --
12/26/97 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
AccessLine Technologies
06/03/99 06/03/94 $ --
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 --
Myriad Ultrasound Systems
03/06/99 10/15/96 --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
PACE Health Management
Systems 01/31/00 03/30/95 --
PACE Health Management
Systems 07/07/02 02/19/98 --
PACE Health Management
Systems 08/31/05 01/16/96 28
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI VALUE FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 16
NEI Webworld 02/28/94 50,298
Oren 06/16/97 2
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,990
Surmodics 05/04/89 250,020
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Advanced Recognition
Technologies Series A 06/16/97 $ 2,461
Advanced Recognition
Technologies Series B 06/16/97 5,069
Advanced Recognition
Technologies Series C 06/16/97 1,610
Intellon Series A 03/24/94 200,163
Myriad Ultrasound Systems
Series A 06/16/97 2,303
Myriad Ultrasound Systems
Series B 06/16/97 5,592
Myriad Ultrasound Systems
Series C 06/16/97 6,200
Oren Series I 06/16/97 72
Oren Series K 06/16/97 120
Oren Series L 06/16/97 105
Security Acquisition Date Cost
- --------------------------------------------------------------------------
PathNet Series A 08/28/95 $ 50,567
02/09/96 50,033
PathNet Series B 08/05/96 70,078
12/23/96 33,562
ServiceSoft Series F 06/16/97 17,928
Tut Systems Series D 02/17/94 300,220
04/08/94 15,288
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------
Ampersand Specialty Materials
& Chemicals II 12/05/96 $ 14,425
03/05/98 50,000
Conrad/Collins Merchant
Banking Fund 05/11/89 218,574
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Vanguard Associates III 02/28/91 5,796
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 $ --
Myriad Ultrasound Systems
03/06/99 10/15/96 --
Myriad Ultrasound Systems
06/15/99 10/15/96 --
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $62,412,597, $363,639,936, $20,515,368, respectively) $ 95,925,461
Investments in securities of affiliated issuers, at market
(Cost: $1,150,174, $27,611,817, $315,508) 779,977
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 96,705,438
Receivable for investment securities sold --
Receivable for Fund shares sold --
Dividends and accrued interest receivable 105,059
Other assets (Note 2) 48,795
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 96,859,292
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
Line of credit 105,203
Payable for investment securities purchased --
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 105,203
- -------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 96,754,089
- -------------------------------------------------------------------------------------------------------------
REPRESENTED BY:
Capital stock $ 49,053
Additional paid-in capital 53,650,816
Undistributed (overdistributed) net investment income --
Accumulated net realized gains 9,911,553
Unrealized appreciation on investment securities 33,142,667
- -------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 96,754,089
- -------------------------------------------------------------------------------------------------------------
Shares of capital stock outstanding;
authorized 10 billion shares each of $.01 par value stock 4,905,292
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 19.72
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $62,412,597, $363,639,936, $20,515,368, respectively) $ 480,324,230 $ 25,686,967
Investments in securities of affiliated issuers, at market
(Cost: $1,150,174, $27,611,817, $315,508) 26,400,141 1,050,957
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 506,724,371 26,737,924
Receivable for investment securities sold 3,674,646 --
Receivable for Fund shares sold 9,643 --
Dividends and accrued interest receivable 322,421 14,397
Other assets (Note 2) 957,099 10,713
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 511,688,180 26,763,034
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES
Line of credit 537,364 23,909
Payable for investment securities purchased 1,594,863 --
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,132,227 23,909
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 509,555,953 $ 26,739,125
- --------------------------------------------------------------------------------------------------------------------
REPRESENTED BY:
Capital stock $ 193,344 $ 21,035
Additional paid-in capital 342,166,620 19,967,611
Undistributed (overdistributed) net investment income (29,993) 1
Accumulated net realized gains 51,753,364 843,430
Unrealized appreciation on investment securities 115,472,618 5,907,048
- --------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 509,555,953 $ 26,739,125
- ----------------------------------------------------------------------------------------------------- -------------
Shares of capital stock outstanding;
authorized 10 billion shares each of $.01 par value stock 19,334,434 2,103,535
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 26.35 $ 12.71
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
STATEMENTS OF OPERATIONS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $4,742, $0 and $0, respectively) $ 1,261,681
Interest 247,933
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 1,509,614
- ------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 1,272,892
Compensation of Directors 11,790
Interest 23,390
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 1,308,072
Less fees reimbursed by Advisers (11,790)
- ------------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 1,296,282
- ------------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 213,332
- ------------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities (Note 2)
(including $0, $(7,104,094) and $0, respectively, from affiliated issuers) $ 12,514,136
Futures contracts --
-------------
12,514,136
Net change in unrealized appreciation or depreciation on
investment securities
20,456,069
- ------------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 32,970,205
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 33,183,537
- ------------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
[WIDE TABLE CONTINUED FROM ABOVE]
IAI REGIONAL FUND IAI VALUE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $4,742, $0 and $0, respectively) $ 4,306,370 $ 263,140
Interest 1,968,822 28,569
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 6,275,192 291,709
- -------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 6,500,728 353,321
Compensation of Directors 62,115 3,301
Interest 35,590 7,282
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 6,598,433 363,904
Less fees reimbursed by Advisers (62,115) (3,301)
- -------------------------------------------------------------------------------------------------------------------------------
NET EXPENSES 6,536,318 360,603
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (261,126) (68,894)
- -------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities (Note 2) $81,986,396 $5,223,885
(including $0, $(7,104,094)
and $0, respectively, from affiliated issuers) 96,875 --
Futures contracts ----------- ----------
82,083,271 5,223,885
Net change in unrealized appreciation or depreciation on
investment securities
63,099,012 3,182,298
- -------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 145,182,283 8,406,183
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $144,921,157 $8,337,289
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
STATEMENTS OF CASH FLOWS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
IAI GROWTH IAI
AND INCOME FUND REGIONAL FUND IAI VALUE FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING EXPENSES:
Interest and dividend income $ 1,509,614 $ 6,275,192 $ 291,709
Net expenses (1,296,282) (6,536,318) (360,603)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) 213,332 (261,126) (68,894)
- ---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net investment income (loss) to net cash provided
(used) by operating activities:
Change in dividend and interest receivable and other assets 26,582 34,716 19,272
Net amortization of bond discount (224,648) (1,856,741) (15,233)
- ---------------------------------------------------------------------------------------------------------------------------------
(198,066) (1,822,025) 4,039
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,266 (2,083,151) (64,855)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 53,754,674 340,115,513 19,787,555
Purchases of investments (26,386,812) (226,517,431) (7,469,405)
Net purchases of short-term securities (340,998) 21,359,566 (974,383)
Net variation margin received for futures contracts -- 96,875 --
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 27,026,864 135,054,523 11,343,767
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of shares 28,554,909 40,988,016 11,799,492
Net asset value of shares issued in reinvestment of distributions 5,141,082 61,044,640 5,078,750
Cost of shares redeemed (55,398,375) (172,888,525) (22,573,576)
Distributions paid to shareholders (5,467,679) (62,697,451) (5,341,611)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (27,170,063) (133,553,320) (11,036,945)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (127,933) (581,948) 241,967
CASH AT BEGINNING OF YEAR 22,730 44,584 (265,876)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ (105,203) $ (537,364) $ (23,909)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
Year ended Year ended
March 31, March 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income (loss) $ 213,332 $ 447,997
Net realized gains 12,514,136 9,983,503
Net change in unrealized appreciation or depreciation 20,456,069 40,277
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 33,183,537 10,471,777
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (512,361)
Excess distribution from net investment income (435,034) (545,591)
From net realized gains (5,032,645) (12,410,890)
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (5,467,679) (13,468,842)
- -----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 28,554,909 35,274,494
Net asset value of shares issued in reinvestment of distributions 5,141,082 12,953,084
Cost of shares redeemed (55,398,375) (39,151,495)
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (21,702,384) 9,076,083
- -----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 6,013,474 6,079,018
NET ASSETS AT BEGINNING OF PERIOD 90,740,615 84,661,597
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 96,754,089 $ 90,740,615
- -----------------------------------------------------------------------------------------------------------------
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ -- $ (545,591)
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
[WIDE TABLE CONTINUED FROM ABOVE]
IAI REGIONAL FUND IAI VALUE FUND
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (261,126) $ 816,077 $ (68,894) $ 227,574
Net realized gains 82,083,271 90,243,072 5,223,885 3,790,947
Net change in unrealized appreciation or depreciation 63,099,012 (41,343,059) 3,182,298 (1,893,898)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 144,921,157 49,716,090 8,337,289 2,124,623
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (960,706) (101,383) (362,139)
Excess distribution from net investment income (103,657) (1,307,272) (154,746) --
From net realized gains (62,593,794) (88,807,982) (5,085,482) (3,825,316)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (62,697,451) (91,075,960) (5,341,611) (4,187,455)
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 40,997,659 66,024,812 11,799,492 18,415,875
Net asset value of shares issued in reinvestment of distributions 61,044,640 88,548,881 5,078,750 4,123,935
Cost of shares redeemed (172,888,525) (190,191,836) (22,573,576) (33,047,689)
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (70,846,226) (35,618,143) (5,695,334) (10,507,879)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 11,377,480 (76,978,013) (2,699,656) (12,570,711)
NET ASSETS AT BEGINNING OF PERIOD 498,178,473 575,156,486 29,438,781 42,009,492
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 509,555,953 $ 498,178,473 $ 26,739,125 $ 29,438,781
- ---------------------------------------------------------------------------------------------------------------------------------
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF:$ (29,993) $ (1,341,758) $ 1 $ 170,277
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
<PAGE>
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:
<TABLE>
<CAPTION>
Years ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 14.83 $ 15.30 $ 14.32 $ 13.91 $ 15.19
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.04+ 0.10 0.10 0.12 0.09
Net realized and unrealized gains 5.75 1.88 2.86 1.04 0.38
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 5.79 1.98 2.96 1.16 0.47
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.10) (0.13) (0.10) (0.06)
Excess distribution from
net investment income (0.07) (0.10) -- -- --
From net realized gains (0.83) (2.25) (1.85) (0.65) (1.69)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.90) (2.45) (1.98) (0.75) (1.75)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 19.72 $ 14.83 $ 15.30 $ 14.32 $ 13.91
- ------------------------------------------------------------------------------------------------------------------------------
Total investment return* 40.06% 13.34% 21.51% 8.92% 3.07%
Net assets at end of period (000's omitted) $ 96,754 $ 90,741 $ 84,662 $ 101,256 $ 119,102
RATIOS
Expenses to average net assets
(including interest expense) 1.27% 1.26% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets 0.21% 0.51% 0.62% 0.80% 0.60%
Average brokerage commission rate** $ 0.0599 $ 0.0623 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 23.2% 51.2% 89.1% 79.1% 205.6%
</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.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
<PAGE>
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:
<TABLE>
<CAPTION>
Years ended March 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 22.59 $ 24.57 $ 21.56 $ 20.94 $ 22.23
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.02) 0.03 0.14 0.17 0.21
Net realized and unrealized gains 6.79 2.08 5.77 1.84 0.51
- -------------------------------------------------------------------------------------------------------------------------------
Total from operations 6.77 2.11 5.91 2.01 0.72
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.04) (0.18) (0.20) (0.18)
Excess distribution from net
investment income -- (0.06) (0.02) -- --
From net realized gains (3.01) (3.99) (2.70) (1.19) (1.83)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (3.01) (4.09) (2.90) (1.39) (2.01)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 26.35 $ 22.59 $ 24.57 $ 21.56 $ 20.94
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return* 31.55% 8.65% 28.62% 10.35% 3.26%
Net assets at end of period
(000's omitted) $ 509,556 $ 498,178 $ 575,156 $ 523,364 $ 596,572
RATIOS
Expenses to average net assets
(including interest expense) 1.22% 1.21% 1.25% 1.23% 1.25%
Expenses to average net assets
(excluding interest expense) 1.22% 1.21% 1.25% 1.23% 1.25%
Net investment income to
average net assets (0.05%) 0.14% 0.58% 0.74% 0.94%
Average brokerage commission rate** $ 0.0590 $ 0.0581 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 46.0% 61.1% 89.7% 150.0% 163.0%
</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.
<PAGE>
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:
<TABLE>
<CAPTION>
Years ended March 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.66 $ 12.42 $ 11.17 $ 11.63 $ 11.63
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.03) 0.09 0.08 0.03 0.05
Net realized and unrealized gains 3.79 0.68 2.19 0.38 1.45
- -------------------------------------------------------------------------------------------------------------------------------
Total from operations 3.76 0.77 2.27 0.41 1.50
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.04) (0.12) (0.01) (0.03) (0.13)
Excess distribution from
net investment income (0.07) -- -- -- --
From net realized gains (2.60) (1.41) (1.01) (0.84) (1.37)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (2.71) (1.53) (1.02) (0.87) (1.50)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.71 $ 11.66 $ 12.42 $ 11.17 $ 11.63
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return* 34.21% 5.85% 21.07% 3.88% 12.70%
Net assets at end of period (000's omitted) $ 26,739 $ 29,439 $ 42,009 $ 40,601 $ 35,282
RATIOS
Expenses to average net assets
(including interest expense) 1.28% 1.25% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets (0.24%) 0.61% 0.65% 0.31% 0.35%
Average brokerage commission rate** $ 0.0591 $ 0.0600 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 27.0% 61.3% 73.4% 102.1% 191.9%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET
ASSET VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[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 Funds 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.
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
procedures consider various factors including, but not limited to, the cost of
the security at date of purchase, the current financial statements of the issuer
and special reports prepared by analysts, the size of the position held, recent
purchases or sales of securities of the company, prices and public trading
activity of comparable companies, the nature and duration of restrictions on
disposition, pending public offerings with respect to the security, changes in
economic conditions and industry developments affecting the issuer, and other
relevant matters. Restricted securities represent $3,221,702 (3.3% of net
assets) for Growth and Income Fund, $34,255,103 (6.7% of net assets) for
Regional Fund and $4,655,947 (17.4% 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
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
appreciation or depreciation being recorded. The Fund will realize a gain or
loss upon expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option,
the purchase cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received or
paid.
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 as
follows:
<TABLE>
<CAPTION>
GROWTH
AND INCOME REGIONAL VALUE
FUND FUND FUND
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed (overdistributed)
net investment income $ 767,293 $ 1,676,548 $ 154,747
Accumulated net realized gains (losses) $ (767,293) $ (1,676,548) $ (154,747)
Additional paid-in capital $ -- $ -- $ --
</TABLE>
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-dividend 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
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.
LINE OF CREDIT
At March 31, 1998, Growth and Income Fund, Regional Fund, and Value Fund had
available lines of credit of $13,277,194, $14,462,668 and $3,755,856,
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 $105,806, $537,332 and $24,144,
respectively, for the Funds at March 31, 1998.
LITIGATION
Included in other assets and realized gains is $909,805 of net proceeds from a
litigation proceeding concerning a security previously held by the Regional Fund
and for which Regional Fund is one of several plaintiffs. A settlement agreement
has been entered into which resulted in the payment of the aforementioned net
proceeds on May 4, 1998.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1998, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- ------------------------------------------------------------------------
GROWTH AND
INCOME FUND REGIONAL FUND
- ------------------------------------------------------------------------
Agio Capital Partners I L.P. $ -- $ 825,000
Alta Berkeley III L.P. 33,000 66,000
Greenwich Street Captial Partners L.P. -- 335,000
Pathfinder Venture Capital Fund III L.P. -- 50,000
Spectrum Equity Investors L.P. -- 228,000
Spell Capital Partners -- 980,000
- ------------------------------------------------------------------------
Total commitments $ 33,000 $ 2,484,000
- ------------------------------------------------------------------------
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[3] FEES AND EXPENSES
Under the terms of each Fund's Management 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 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. The Management 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.
[4] CAPTIAL STOCK
The Funds 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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31, March 31,
1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOLD 1,648,867 2,284,028 1,624,442 2,707,762 893,948 1,484,142
ISSUED FOR REINVESTED
DISTRIBUTIONS 301,798 860,881 2,517,461 3,783,653 418,236 335,216
REDEEMED (3,162,668) (2,561,834) (6,858,737) (7,853,235) (1,732,928) (2,676,973)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING (1,212,003) 583,075 (2,716,834) (1,361,820) (420,744) (857,615)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1998
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF
SECURITIES
For the year ended March 31, 1998, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- -------------------------------------------------------------------------------
GROWTH AND INCOME FUND $ 22,527,211 $ 49,591,163
REGIONAL FUND $ 228,112,294 $ 341,620,212
VALUE FUND $ 7,469,405 $ 19,787,555
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at March 31, 1998
are issues which generally cannot be offered for sale to the public without
first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid.
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.
At March 31, 1998, 17.4% of Value Fund's net assets were invested in restricted
securities. At March 31, 1998, Advisers was actively seeking liquidation
opportunities which would reduce the percentage of the Fund's investment
portfolio comprised of restricted securities. Advisers intends to pursue such
opportunities when deemed in the best interest of the Shareholders.
[6] SUBSEQUENT EVENT
In May 1998, the issuer of a restricted security (the Restricted Security) held
by Value Fund filed a registration statement with the Securities and Exchange
Commission for the purpose of offering its securities for public sale, also
known as an initial public offering (IPO). In accordance with Value Fund's
restricted security valuation policies, concurrent with the filing of the
registration statement, Advisers and the Board of Directors approved a
significant increase in the valuation of the Restricted Security resulting in a
substantial increase in Value Fund's net asset value.
Value Fund's Board of Directors and Advisers have determined it to be in the
best interest of Value Fund shareholders to temporarily close Value Fund
effective May 12, 1998 to new purchases (other than systematic purchases).
Closing Value Fund is intended to protect existing shareholders by preventing
individuals from speculating on short-term purchases and sales of Value Fund
shares.
As a result of the increase in valuation of the Restricted Security, 36% of
Value Fund's net assets were invested in illiquid restricted securities,
significantly exceeding the Fund's 15% limitation. Advisers is actively seeking
liquidation opportunities which would reduce the percentage of the Fund's
investment portfolio comprised of restricted securities. Advisers ability to
liquidate such securities may be limited by legal or contractual provisions.
Advisers intends to pursue such opportunities when deemed in the best interest
of the Shareholders.
<PAGE>
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, 1998, and the related statements of operations and
cash flows 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, 1998,
and the results of their operations, and their cash flows, 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 14, 1998
<PAGE>
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 Distributions, in January of
each year.
IAI GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------
Payable Date Ordinary 28% Rate Long-Term
Income (A) Gain Capital Gain
- -----------------------------------------------------------------------------
June 1997 $ 0.1800 $ 0.3816 $ 0.0000
December 1997 0.0401 0.0000 0.2950
- -----------------------------------------------------------------------------
$ 0.2201 $ 0.3816 $ 0.2950
66.09% of ordinary income distributions qualify for deduction by corporations.
IAI REGIONAL FUND
- -----------------------------------------------------------------------------
Payable Date Ordinary 28% Rate Long-Term
Income (A) Gain Capital Gain
- -----------------------------------------------------------------------------
June 1997 $ 0.5479 $ 1.1209 $ 0.0000
December 1997 0.1686 0.3519 0.8168
- -----------------------------------------------------------------------------
$ 0.7165 $ 1.4728 $ 0.8168
33.46% of ordinary income distributions qualify for deduction by corporations.
IAI VALUE FUND
- -----------------------------------------------------------------------------
Payable Date Ordinary 28% Rate Long-Term
Income (A) Gain Capital Gain
- -----------------------------------------------------------------------------
June 1997 $ 0.5291 $ 0.0537 $ 0.0000
December 1997 0.5000 0.3299 1.2923
- -----------------------------------------------------------------------------
$ 1.0291 $ 0.3836 $ 1.2923
22.88% of ordinary income distributions qualify for deduction by corporations.
(A) INCLUDES DISTRIBUTION OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE TAXABLE
AS ORDINARY INCOME.
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing countries
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
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
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 FUND 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 + INCOME] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
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>
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
