ANNUAL REPORT
IAI EQUITY FUNDS
IAI GROWTH AND INCOME FUND
IAI REGIONAL FUND * IAI VALUE FUND
MARCH 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
ANNUAL REPORT
MARCH 31, 1999
Letter to Shareholders......................... 2
Fund Managers' Reviews
IAI GROWTH AND INCOME FUND................. 4
IAI REGIONAL FUND.......................... 6
IAI VALUE FUND............................. 8
Fund Portfolios
IAI GROWTH AND INCOME FUND................ 10
IAI REGIONAL FUND......................... 13
IAI VALUE FUND............................ 17
Notes to Fund Portfolios...................... 19
Statements of Assets and Liabilities.......... 28
Statements of Operations...................... 30
Statements of 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
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
WHAT'S RIGHT WITH THIS MARKET
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
grew in the low single digits. A major reason why profits are sluggish is the
economic and currency turmoil in Asia, which hurts U.S. companies doing business
there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1999 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has the value of your house gone up by a factor of ten in
fifteen years? Probably not. The point is that markets do not go up in a
straight line, and there is bound to be volatility. But if you're an investor
for the long term, then you should be able to step back and see the good in this
market.
2
<PAGE>
LETTER TO SHAREHOLDERS
IAI 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.
Robust economic growth and slowing inflationary trends sent analysts to their
history books to identify when past economic data was as positive as recent
statistics. Economic growth in 1998 was at its fastest pace in 15 years while
the inflation rate increased at its lowest rate since 1961. These trends have
carried over to the first quarter. With jobs plentiful and consumers
experiencing favorable real wage increases, consumer confidence is high.
Combined with tax refunds and year-end incentive pay to produce, this is one of
the strongest periods for retail sales in the last 10 years.
During previous economic expansions, conventional wisdom linked strong demand
growth with rising inflation. This normally provoked the Federal Reserve to
tighten monetary policy to reduce demand and prevent an acceleration of
inflation. However, this time even the Fed seems to be skeptical of that
linkage. In a speech in early April, Federal Reserve Vice Chair Alice Rivlin
stated:
"Tight labor markets have long been seen as harbingers of inflation (as higher
wages led to higher prices) and lower productivity (as less skilled and
experienced workers were drawn into the labor market). But recent experience
suggests that, at least in the context of intense global and domestic
competitiveness, as well as a continuing revolution in computers and
telecommunications, tight labor markets can provide incentives for managerial
innovation, skills acquisition and higher productivity, thereby leading to
higher growth with little inflation."
During the quarter, the Fed left rates unchanged and signaled they were
maintaining a neutral policy stance. Fears of a possible tightening, however,
negatively impacted financial markets in February. By quarter-end the equity
market had recovered to push through the 10,000 mark on the Dow and interest
rates, following a steep rise in February, stabilized.
Ms. Rivlin mentioned several of the factors that have allowed strong U.S. growth
with low inflation. While our economy is experiencing good times, weakness
persists in Asia, Russia and Latin America and growth has slowed in Europe. This
has contributed to declining commodity and input prices as global demand remains
soft. The only commodity showing strength has been oil, driven by production
cut-backs by oil producing countries. Another factor favoring low inflation has
been the strength of the dollar. Real interest rate differentials between the
U.S. and our major trading partners widened in favor of the dollar during the
quarter. Strength in the dollar makes imports less expensive, effectively
eliminating the ability of U.S. producers to raise prices.
We expect economic momentum to continue throughout the year. However, the pace
of the expansion will moderate toward a real GDP growth rate of 3%. Over the
past three years the U.S. economy has been unusually robust in the fourth and
first quarters, only to slow significantly in the second and third quarters. The
increase in oil prices, if sustained, will help slow the economy by cutting into
consumers' disposable income. Finally, the rise in interest rates during the
quarter will slow economic growth.
Please read the Fund 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.
3
<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
TOP FIVE COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
FINANCIAL 18.8%
UTILITIES 13.7%
PROCESS INDUSTRIES 8.7%
CONSUMER DURABLES 7.7%
ENERGY MINERALS 6.3%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The Fund underperformed its benchmark, the S&P 500 Index, during the year ended
March 31, 1999, with a return of 1.52% compared to 18.45%.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Tut Systems (4.84%)*, Nabors Industries (3.32%)*, Citigroup (3.17%)* and Nike
(0.89%)* were the largest contributors to performance. Tut Systems, a provider
of high-speed access solutions for the communications market, was well received
by the market in an initial public offering. Nabors Industries, the largest U.S.
driller of land-based oil and natural gas wells, gained as OPEC agreed to slash
production in a bid to lift oil prices. Citigroup shares continued to rise as
analysts predicted that first quarter earnings would likely be higher than
expected. Nike shares gained after the world's top maker of athletic shoes and
clothing said fiscal third-quarter profit rose more than expected.
800-JR Cigar (2.36%)*, Philip Morris (1.72%)* and Bellsouth (2.17%)* were among
the Fund's laggards. 800-JR Cigar fell on lower than expected fourth quarter
earnings. Philip Morris shares fell after an Oregon jury ordered the world's
largest tobacco company to pay a record $81 million to a smoker's family.
Bellsouth declined after the phone company said that its first quarter profits
will be at the lower end of expectations because of increased spending on data
and wireless services.
WERE THERE ANY SIGNIFICANT CHANGES?
There was a net gain of eight common stocks in the Fund during the year. New
companies added to the Fund included AT&T (1.90%)*, Allied Signal (1.89%)*,
International Business Machines (1.97%)* and Motorola (0.48%)*. Stocks sold
during the year included CBS (sold), General Electric (sold), Gillette (sold)
and Wal-Mart Stores (sold).
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Consumer Staples sector, led by 800-JR Cigar and Philip Morris, had the
largest negative impact on performance. The Energy and Health Care sectors had
the largest positive impact on performance. The Fund's overweighting of small
caps compared to the Russell 1000 Value Index contributed to the
underperformance of the Fund.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The "Goldilocks" economy remained intact during the year with economic reports
that were neither too "hot," causing inflation concerns, nor too "cold," causing
concern that a recession is near. It is conceivable that the stock market will
remain healthy as long as the economy continues on a moderate growth, low
inflation trend. As in the past, the risk to the market is when the economy
begins to weaken or inflates. The Fund continues to invest in companies that
have positive long-term business prospects and that are attractively priced.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH AND INCOME FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI GROWTH &
INCOME FUND S&P 500 INDEX
----------- -------------
04/01/89 10,000 10,000
03/31/90 11,677 11,905
03/31/91 12,543 13,620
03/31/92 13,743 15,124
03/31/93 14,985 17,433
03/31/94 15,445 17,684
03/31/95 16,822 20,440
03/31/96 20,436 27,010
03/31/97 23,161 32,396
03/31/98 32,444 47,984
03/31/99 32,935 56,833
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND 1.52% 16.36% 12.66%
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 18.97%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS**
% of Net Assets
-------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Berkshire Hathaway Class A Process Industries 5.06 4.17
Tut Systems* Electronic Technology 4.84 0.69
Nabors Industries Industrial Services 3.32 2.79
Exxon Energy Minerals 3.28 2.11
Citigroup Financial 3.17 --
American Express Financial 2.97 2.46
BankAmerica Financial 2.46 --
800 - JR Cigar Consumer Non-Durables 2.36 1.80
Federal Home Loan Mortgage
Corporation Financial 2.33 3.79
SLM Holding Financial 2.23 3.25
================================================================================
TOTAL 32.02 21.06
* RESTRICTED SECURITY
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO LETTER TO SHAREHOLDERS & 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
5
<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 3/31/99
[BAR CHART]
HEALTH TECHNOLOGY 14.8%
RETAIL TRADE 13.0%
PRODUCER MANUFACTURING 9.5%
PROCESS INDUSTRIES 8.4%
TECHNOLOGY SERVICES 7.4%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The IAI Regional Fund declined (7.74%) during the year ended March 31, 1999. The
S&P 500 Index, weighted toward larger cap stocks, rose 18.45%.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Tut Systems (4.23%)*, a provider of high-speed access solutions for the
communications market, and Dayton Hudson (3.63%)*, a department and specialty
store retailer, were the biggest contributors to the Fund's performance during
the year. Intranet Solutions (1.45%)*, a developer of software for the
management of documents through intranets, was also a strong performer
benefiting from the surge in internet related stocks. After skyrocketing in the
fourth quarter, Secure Computing (2.54%)* retraced its rise and was the biggest
disappointment.
WERE THERE ANY SIGNIFICANT CHANGES?
A handful of stocks were added to the Fund during the year. They included
Superior Services (1.26%), a solid waste management company; Commercial Federal
(0.73%)*, a bank holding company; Metzler Group (0.65%)*, a consultant to the
utilities industry; and Spyglass (0.24%)*, an internet software provider.
Sunstrand (sold) was acquired during the year and a few other stocks were sold
as a function of our ongoing portfolio review process including Ameritech
(sold), Manpower (sold), Anicom (sold), Possis Medical (sold), and Northern
States Power (sold).
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
In a continuation of the market conditions of 1998, the first quarter was
dominated by the very largest stocks in the overall market. As evidence of this
phenomenon, the S&P 500 Index gained 5.0% during the quarter while the S&P
Midcap 400 Index lost (6.4%) and the Russell 2000 Index fell (5.4%). The eight
state region in which the Fund invests followed the broader market. Stocks
within the region with over $5 billion in market cap delivered strong positive
performance on average while stocks under $2.5 billion fell sharply.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to maintain a well diversified, high quality portfolio exhibiting
strong earnings growth. As a result of the disparity in performance between the
large cap stocks and the rest of the market, the small and midcap stocks within
the Fund are trading at very attractive valuations. With the domestic economy
growing strongly, we may be nearer the point where investors start to look at
the attractive fundamentals of the smaller stocks in the market.
6
<PAGE>
FUND MANAGER'S REVIEW
IAI REGIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI REGIONAL FUND S&P 500 INDEX
----------------- -------------
04/01/89 10,000 10,000
03/31/90 12,165 11,905
03/31/91 14,355 13,620
03/31/92 16,189 15,124
03/31/93 17,536 17,433
03/31/94 18,108 17,684
03/31/95 19,981 20,440
03/31/96 25,699 27,010
03/31/97 27,923 32,396
03/31/98 36,732 47,984
03/31/99 33,890 56,833
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI REGIONAL FUND (7.74%) 13.36% 12.98%
- -------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 18.97%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS**
% of Net Assets
---------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Tut Systems* Electronic Technology 4.23 0.61
Abbott Laboratories Health Technology 3.75 1.63
Dayton Hudson Retail Trade 3.63 0.92
ReliaStar Financial Financial 3.50 2.04
Walgreen Retail Trade 3.34 1.13
Rayovac Producer Manufacturing 2.85 0.97
Diametrics Medical Health Technology 2.84 2.53
Greenwich Street
Capital Partners L.P.* Financial 2.71 1.70
Secure Computing Technology Services 2.54 0.62
Tootsie Roll Industries Consumer Non-Durables 2.44 --
================================================================================
TOTAL 31.83 12.15
* RESTRICTED SECURITY
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO LETTER TO SHAREHOLDERS & 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
7
<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 3/31/99
[BAR CHART]
PRODUCER MANUFACTURING 4.8%
CONSUMER NON-DURABLES 3.5%
FINANCIAL 3.4%
CONSUMER DURABLES 2.9%
COMMERCIAL SERVICES 2.9%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The Fund significantly outperformed one of its benchmarks during the year ended
March 31, 1999, returning 8.47% vs. the Russell 2500 Index, which declined
(13.26%). The S&P 500 Index rose 18.45% for the same period.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Tut Systems (29.15%)* significantly contributed to the Fund's strong results for
the year. Tut, a provider of high-speed access solutions for the communications
market, sold stock in an initial public offering and was well received by the
market. Towne Services (1.28%)*, Nabors Industries (1.05%)*, Nordson (0.90%)*,
and Pathnet (35.65%)* each positively impacted performance this year. Towne
Services, which develops and delivers electronic processing systems that help
community banks compete with larger financial institutions, rose after
announcing record fourth quarter and annual revenues. Nabors Industries, the
largest U.S. driller of land-based oil and natural gas wells, gained as OPEC
agreed to slash production in a bid to lift oil prices. Nordson, which designs
and manufactures adhesive and sealant systems, gained on strong fiscal first
quarter results. Pathnet is a privately-held security providing high capacity,
fiber, and wireless bandwidth to under-served U.S. markets.
CompX International (0.57%)*, Phoenix International (0.49%)* and 800-JR Cigar
(1.70%)* had the largest negative impact on the Fund. CompX International, which
sells ergonomic computer support systems for office furniture, declined during
the quarter as the commercial furniture industry experienced softening sales.
Phoenix International and 800-JR Cigar declined after reporting lower than
expected fourth quarter earnings.
WERE THEIR ANY SIGNIFICANT CHANGES?
The Fund's portfolio of restricted securities represents 71.1% of net assets.
Tut Systems and Pathnet account for more than half of the portfolio. As a result
of the increase in valuation of these securities, Value Fund's net assets
significantly exceed the15% limitation in illiquid restricted securities. The
Fund remains closed to new investors.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Basic Materials and Energy sectors contributed positively to performance,
while the Consumer Cyclicals and Consumer Staples sectors had the largest
negative impact on performance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to believe that the smaller company stocks show better valuation
characteristics than those of large companies. Our long-term objective is to
invest in small cap stocks that have strong competitive positions, generating
significant free cash flow and selling at attractive valuation levels.
The Fund is actively seeking liquidation opportunities which would reduce the
percentage of the Fund's investment portfolio comprised of restricted
securities. The Fund's ability to liquidate such securities may be limited by
legal or contractual provisions. The Fund intends to pursue such opportunities
when deemed in the best interest of the shareholders.
8
<PAGE>
FUND MANAGER'S REVIEW
IAI VALUE FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI VALUE FUND RUSSELL 2500 INDEX S&P 500 INDEX
-------------- ------------------ -------------
04/01/89 10,000 10,000 10,000
03/31/90 10,991 10,778 11,905
03/31/91 11,672 11,840 13,620
03/31/92 13,097 14,436 15,124
03/31/93 13,909 16,847 17,433
03/31/94 15,675 18,329 17,684
03/31/95 16,284 19,917 20,440
03/31/96 19,712 25,857 27,010
03/31/97 20,867 28,101 32,396
03/31/98 28,008 39,866 47,984
03/31/99 30,382 34,583 56,833
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
IAI VALUE FUND 8.47% 14.15% 11.75%
- --------------------------------------------------------------------------------
Russell 2500 Index (13.26%) 13.54% 13.21%
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 18.97%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS**
% of Net Assets
-----------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Pathnet Preferred Stock* Electronic Technology 35.65 5.70
Tut Systems* Electronic Technology 29.15 3.93
Intellon Preferred Stock* Electronic Technology 2.72 1.39
Ampersand Specialty Materials
& Chemicals II L.P.* Process Industries 2.36 1.09
800 - JR Cigar Consumer Non-Durables 1.70 2.69
Towne Services Commercial Services 1.28 --
Leucadia National Financial 1.24 3.34
NCI Building Systems Producer Manufacturing 1.17 3.90
Building One Services Process Industries 1.13 --
Black Box Electronic Technology 1.11 2.55
================================================================================
TOTAL 77.51 24.59
* RESTRICTED SECURITY
** EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO LETTER TO SHAREHOLDERS & 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
9
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS 81.8%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 7.7%
Department 56 (b) 36,600 $ 1,114,012
Eastman Kodak 13,600 868,700
Mattel 40,100 997,488
Newell Rubbermaid 21,600 1,026,000
-------------
4,006,200
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 5.0%
800 - JR Cigar (b) 159,300 1,234,575
Nike Class B 8,100 467,269
Philip Morris 25,500 897,281
-------------
2,599,125
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 4.9%
Hewlett-Packard 3,100 210,218
International Business Machines 5,800 1,028,050
Motorola 3,400 249,050
SBC Communications 23,100 1,088,588
-------------
2,575,906
- --------------------------------------------------------------------------------
ENERGY MINERALS - 6.3%
Chevron 6,400 566,000
Exxon 24,300 1,714,669
Mobil 7,500 660,000
Texaco 5,800 329,150
-------------
3,269,819
- --------------------------------------------------------------------------------
FINANCIAL - 18.8%
American Express 13,200 1,551,000
Bank One 12,800 704,800
BankAmerica 18,200 1,285,375
Chase Manhattan 12,200 992,012
Citigroup 25,900 1,654,362
Federal Home Loan
Mortgage Corporation 21,300 1,216,763
First Union 9,100 486,281
SLM Holding 27,950 1,166,913
Wells Fargo 22,200 778,388
-------------
9,835,894
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 3.6%
First Health Group (b) 53,400 $ 857,738
United Healthcare 19,300 1,015,662
-------------
1,873,400
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 1.7%
GalaGen (b) 54,168 104,951
Watson Pharmaceuticals (b) 18,000 794,250
-------------
899,201
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 3.3%
Nabors Industries (b) 95,300 1,733,268
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.8%
Nucor 9,700 427,406
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 8.7%
Bemis 11,500 357,219
Berkshire Hathaway Class A (b) 37 2,641,800
Du Pont (E.I.) de Nemours 15,500 899,969
Sigma-Aldrich 22,200 649,350
-------------
4,548,338
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.8%
Allied Signal 20,100 988,669
Emerson Electric 10,800 571,725
HON Industries 37,900 831,431
Tyco International 8,800 631,400
-------------
3,023,225
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 1.5%
Parametric Technology (b) 39,800 786,050
- --------------------------------------------------------------------------------
UTILITIES - 13.7%
AT&T 12,400 989,675
Bell Atlantic 21,800 1,126,788
Bellsouth 28,300 1,133,769
Duke Energy 10,400 568,100
Enron 11,100 713,175
FPL Group 10,800 575,100
MCI Worldcom (b) 8,800 779,350
PG&E 21,700 674,056
Texas Utilities 14,500 604,468
-------------
7,164,481
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $38,526,095)..............................................$ 42,742,313
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
10
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1999
RESTRICTED SECURITIES - 8.2%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 4.9%
Advanced Recognition
Technologies (b) 2,109 $ 5,273
MatrixOne Class A (b) 12,243 71,009
Oren (b) 24 5
PACE Health
Management Systems (b) 121,220 4,364
Tut Systems (b) 55,556 2,487,520
-------------
2,568,171
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.7%
Advanced Recognition
Technologies Series A (b) 19,119 47,798
Advanced Recognition
Technologies Series B (b) 74,871 187,178
Advanced Recognition
Technologies Series C (b) 8,005 20,013
MatrixOne Series D (b) 14,964 86,791
Myriad UltraSound
Systems Series A (b) 13,068 --
Myriad UltraSound
Systems Series B (b) 14,491 --
Myriad UltraSound
Systems Series C (b) 14,351 --
Oren Series I (b) 132 211
Oren Series K (b) 220 352
Oren Series L (b) 256 307
ServiceSoft Series F (b) 5,414 6,929
-------------
349,579
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.5%
Alta Berkeley III, foreign (b) 1.78% $ 325,940
Ampersand Specialty
Materials & Chemicals II (b) 1.82 645,761
Broad Street Investment Fund I (b) 0.29 6,126
South Street Corporate Recovery
Fund I (b) 1.44 --
Vanguard Associates II (b) 3.72 23,192
Vanguard Associates III (b) 6.55 308,347
-------------
1,309,366
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.1%
GalaGen, $2.56, 02/22/03 1,625 --
Tut Systems, $0.36, 01/31/04 952 42,283
-------------
42,283
- --------------------------------------------------------------------------------
WARRANT - 0.0%
Myriad UltraSound
Systems, $1.27, 06/15/99 457 --
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $2,134,968).................................................$ 4,269,399
================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $40,661,063)................................................$ 47,011,712
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
11
<PAGE>
FUND PORTFOLIO
IAI GROWTH AND INCOME FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 9.0%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 9.0%
Pitney Bowes Credit (FINANCIAL) 5.00% 04/01/99 $ 2,100,000 $ 2,100,000
Xerox (INDUSTRIAL) 5.00 04/01/99 2,600,000 2,600,000
-------------
4,700,000
==================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $4,700,000).................................................................................$ 4,700,000
==================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $45,361,063) (e)............................................................................$ 51,711,712
==================================================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.0%
................................................................................................$ 508,343
==================================================================================================================
TOTAL NET ASSETS
................................................................................................$ 52,220,055
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
12
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 87.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 4.2%
Galileo International 135,100 $ 6,535,463
HA-LO Industries (b) 257,950 3,176,009
Metzler Group (b) 57,000 1,788,375
-------------
11,499,847
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 6.4%
Excelsior-Henderson
Motorcycle Manufacturing (b) 290,000 2,247,500
Harley-Davidson 115,000 6,612,500
Intranet Solutions (b) 485,000 4,001,250
ITI Technologies (b) 51,800 1,554,000
Koala (b) 19,200 398,400
Newell Rubbermaid 62,200 2,954,500
-------------
17,768,150
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 7.4%
Dean Foods 157,300 5,603,813
Hormel Foods 99,200 3,534,000
Tootsie Roll Industries 146,054 6,727,612
Wm. Wrigley Jr 50,000 4,521,875
-------------
20,387,300
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 1.5%
Lodgenet Entertainment (b)(d) 607,700 3,988,030
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.5%
Computer Network
Technology (b) 373,000 6,014,625
Molex 127,600 3,748,250
-------------
9,762,875
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 7.3%
Allstate 107,300 $ 3,976,806
Commercial Federal 87,300 2,024,269
Horace Mann Educators 100,000 2,318,750
National Equipment Services (b) 232,300 2,148,775
ReliaStar Financial 226,100 9,637,513
-------------
20,106,113
- --------------------------------------------------------------------------------
HEALTH SERVICES - 2.4%
Patterson Dental (b) 134,650 5,823,613
ServiceMaster 32,350 657,109
-------------
6,480,722
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 14.8%
Abbott Laboratories 220,600 10,326,838
Baxter International 95,000 6,270,000
Diametrics Medical (b) 1,319,300 7,833,812
GalaGen (b) 291,733 565,233
Medtronic 67,600 4,850,300
Northfield Laboratories (b) 442,800 4,870,800
Sybron International (b) 239,400 5,985,000
-------------
40,701,983
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.3%
Superior Services (b) 175,000 3,467,188
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 8.4%
AptarGroup 112,800 2,932,800
Berkshire Hathaway Class A (b) 50 3,570,000
Donaldson 210,000 3,780,000
Ecolab 140,000 4,970,000
Northland Cranberries Class A 457,800 3,319,050
Valspar 149,200 4,709,125
-------------
23,280,975
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
13
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1999
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 9.5%
ABC Rail Products (b) 253,400 $ 3,199,175
Illinois Tool Works 99,500 6,156,562
Littlefuse (b) 155,000 2,848,125
Rayovac (b) 285,000 7,855,313
Recovery Engineering (b)(d) 453,200 4,248,750
Zebra Technologies Class A (b) 82,400 1,957,000
-------------
26,264,925
- --------------------------------------------------------------------------------
RETAIL TRADE - 13.0%
Casey's General Stores 437,700 6,456,075
Dayton Hudson 150,000 9,993,750
Fastenal 60,000 2,103,750
Kohl's (b) 62,200 4,408,425
Lands' End (b) 72,400 2,506,850
Video Update Class A (b)(d) 1,474,700 1,244,278
Walgreen 326,000 9,209,500
-------------
35,922,628
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 7.4%
Anicom (b) 307,692 2,692,305
Fiserv (b) 94,700 5,078,287
Fourth Shift (b) 20,000 107,500
Great Plains Software (b) 88,900 3,439,319
Information Advantage (b) 21,344 141,404
Richardson Electronics 255,600 1,325,925
Secure Computing (b) 668,000 7,014,000
Spyglass (b) 74,100 666,900
------------
20,465,640
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $205,715,442).............................................$ 240,096,376
================================================================================
RESTRICTED SECURITIES - 12.3%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 4.3%
AccessLine Technologies Class A (b) 440 $ 264
Aclara BioSciences (b) 4,383 701
Advanced Recognition
Technologies (b) 2,315 5,788
Anglo Chinese Investment
Company, foreign (b) 1,600 252,448
Oren (b) 27 5
PACE Health Management
Systems (b) 340,705 12,265
Pacific Monolithics (b) 9,865 100
Tut Systems (b) 258,697 11,583,158
Westgate Acquisitions (b) 42,272 --
-------------
11,854,729
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 0.7%
Advanced Recognition
Technologies Series A (b) 20,985 52,462
Advanced Recognition
Technologies Series B (b) 82,181 205,453
Advanced Recognition
Technologies Series C (b) 8,787 21,968
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 --
Myriad UltraSound
Systems Series B (b) 15,905 --
Myriad UltraSound
Systems Series C (b) 15,752 --
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) 125,000 62,500
ServiceSoft Series F (b) 5,941 7,605
-------------
1,825,777
- --------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCK - 0.0%
Westgate Acquisitions Series A (b) 86,198 1
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
14
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1999
RESTRICTED SECURITIES (CONT.)
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 7.3%
Agio Capital Partners I (b) 10.66% $ 975,038
Alta Berkeley III, foreign (b) 3.56 651,897
Ampersand Specialty
Materials & Chemicals II (b) 2.72 968,629
Greenwich Street
Capital Partners (b) 3.00 7,467,292
Pathfinder Venture
Capital Fund III (b) 3.99 761,102
South Street Corporate
Recovery Fund I (b) 3.08 1
South Street Leveraged Corporate
Recovery Fund I (b) 3.85 --
Spectrum Equity Investors (b) 2.76 3,965,246
Spell Capital Partners (b) 4.00 366,992
Vanguard Associates II (b) 3.72 23,191
Vanguard Associates III (b) 6.20 323,808
Vanguard Associates IV (b) 9.44 4,573,295
-------------
20,076,491
- --------------------------------------------------------------------------------
Principal Market
Rate Maturity Amount (c) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURE - 0.0%
Air Communications Series B (b)
10.00% 02/28/97 258,332 --
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $2.56, 02/22/03 6,500 --
GalaGen, $2.56, 12/27/05 812 --
Tut Systems, $0.36, 01/31/04 2,049 91,006
-------------
91,006
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine
Technologies, $0.60, 10/15/99
71,420 $ 1
GalaGen, $11.08, 06/16/99 5,687 --
GalaGen, $11.08, 03/24/00 2,256 --
GalaGen, $11.08, 07/09/00 1,805 --
GalaGen, $7.00, 01/29/01 7,500 --
Myriad UltraSound
Systems, $1.27, 06/15/99 501 --
PACE Health Management
Systems, $4.12, 01/31/00 21,820 --
PACE Health Management
Systems, $0.50, 07/07/02 62,500 --
PACE Health Management
Systems, $3.00, 08/31/05 35,000 --
1
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $14,749,044)..............................................$ 33,848,005
================================================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $220,464,486).............................................$ 273,944,381
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
15
<PAGE>
FUND PORTFOLIO
IAI REGIONAL FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
SHORT-TERM SECURITIES - 1.7%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER - 1.7%
Xerox (INDUSTRIAL) 5.00% 04/01/99 $ 4,700,000 $ 4,700,000
==================================================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $4,700,000).................................................................................$ 4,700,000
==================================================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $225,164,486) (e)...........................................................................$ 278,644,381
==================================================================================================================
OTHER ASSETS AND LIABILITIES (NET)-(1.1%)
...................................................................................................$ (2,966,632)
==================================================================================================================
TOTAL NET ASSETS
...................................................................................................$ 275,677,749
==================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
16
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 27.0%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 2.9%
Phoenix International (b) 13,650 $ 66,544
Scientific Games (b) 8,500 150,875
Towne Services (b) 17,800 174,662
-------------
392,081
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 2.9%
Department 56 (b) 4,500 136,969
Polaris Industries 4,300 136,525
Sturm, Ruger & Company 12,200 122,000
-------------
395,494
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.5%
800 - JR Cigar (b) 30,000 232,500
St. John Knits 4,600 121,325
Swisher International Class A (b) 14,700 131,381
-------------
485,206
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.9%
Belden 6,000 102,375
Black Box (b) 4,900 151,900
-------------
254,275
- --------------------------------------------------------------------------------
FINANCIAL - 3.4%
Friedman, Billings, Ramsey
Group Class A (b) 15,300 102,318
Leucadia National (b) 5,600 169,400
LifeUSA Holding 6,632 70,880
United Asset Management 4,400 99,550
Wilshire Real Estate
Investment Trust 6,400 22,800
-------------
464,948
- --------------------------------------------------------------------------------
HEALTH SERVICES - 1.9%
First Health Group (b) 6,900 110,831
Trigon Healthcare (b) 4,300 147,275
-------------
258,106
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 2.1%
Nabors Industries (b) 7,900 $ 143,681
Petroleum Geo-Services ADR (b) 6,200 94,550
R&B Falcon (b) 6,300 55,519
-------------
293,750
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 0.9%
Nucor 2,900 127,782
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 1.7%
Building One Services (b) 9,000 154,688
Schweitzer-Mauduit International 6,400 73,600
-------------
228,288
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.8%
CompX International Class A (b) 6,100 77,775
Holophane (b) 6,900 151,800
NCI Building Systems (b) 6,800 159,800
Nordson 2,200 122,650
Rayovac (b) 5,200 143,325
-------------
655,350
- --------------------------------------------------------------------------------
RETAIL TRADE - 1.0%
Pizza Inn 47,900 143,700
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $4,734,049)...............................................$ 3,698,980
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
17
<PAGE>
FUND PORTFOLIO
IAI VALUE FUND
MARCH 31, 1999
RESTRICTED SECURITIES - 71.1%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 28.7%
Advanced Recognition
Technologies (b) 720 $ 1,800
Oren (b) 8 2
Pacific Monolithics (b) 9,865 99
Tut Systems (b) 87,580 3,921,394
Westgate Acquisitions (b) 42,272 --
-------------
3,923,295
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 39.0%
Advanced Recognition
Technologies Series A (b) 6,529 16,323
Advanced Recognition
Technologies Series B (b) 25,569 63,923
Advanced Recognition
Technologies Series C (b) 2,734 6,835
Intellon Series A (b) 200,000 372,000
Myriad UltraSound
Systems Series A (b) 4,463 --
Myriad UltraSound
Systems Series B (b) 4,949 --
Myriad UltraSound
Systems Series C (b) 4,901 --
Oren Series I (b) 45 72
Oren Series K (b) 75 120
Oren Series L (b) 87 104
Pathnet Series A (b) 100,000 3,407,500
Pathnet Series B (b) 43,153 1,470,438
ServiceSoft Series F (b) 1,850 2,367
-------------
5,339,682
- --------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCK - 0.0%
Westgate Acquisitions Series A (b) 86,198 1
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.9%
Ampersand Specialty
Materials & Chemicals II (b) 0.91% $ 322,882
South Street Leveraged
Corporate Recovery Fund I (b) 1.10 --
Vanguard Associates III (b) 1.42 70,245
-------------
393,127
- -------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTION - 0.5%
Tut Systems, $0.36, 01/31/04 1,500 66,623
- --------------------------------------------------------------------------------
WARRANT - 0.0%
Myriad UltraSound
Systems, $1.27, 06/15/99 156 --
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $1,186,134)...............................................$ 9,722,728
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $5,920,183) (e)...........................................$ 13,421,708
================================================================================
OTHER ASSETS AND LIABILITIES (NET)-1.9%
..............................................................$ 261,335
================================================================================
TOTAL NET ASSETS
..............................................................$ 13,683,043
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 19
18
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
(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, 1999, the Fund held
no unrestricted securities of the same issuer as of either the date the purchase
price was agreed to or the date the Fund first obtained an enforceable right to
obtain the securities. Information concerning each restricted security held at
March 31, 1999 is shown on 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, 1999. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND AFFILIATED ISSUERS
- -----------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-----------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
* GalaGen Options 05/22/98 -- $ -- 1,625 $ -- $ -- $ --
* GalaGen Options 02/22/03 1,625 $ -- -- $ -- $ -- $ --
*^ Tut Common Stock 55,556 $200,157 -- $ -- $ -- $ --
*^ Tut series D Preferred Stock -- $ -- 222,222 $200,157 $ -- $ --
* Tut Options 1/31/04 952 $ -- -- $ -- $ -- $ --
</TABLE>
* SECURITIES THAT WERE AFFILIATED DURING THE YEAR ENDING ON 3/31/99 BUT NOT AT
3/31/99
^ TUT PREFERRED STOCK WITH A TOTAL COST OF $200,157 CONVERTED 1 FOR 4 INTO
COMMON STOCK
19
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
<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>
*ABC Rail Products 30,000 $ 461,493 261,000 $3,528,957 $(2,314,583) $ --
*Aetrium -- $ -- 473,500 $2,933,035 $(5,466,618) $ --
*Galagen Options 05/22/98 -- $ -- 6,500 $ -- $ -- $ --
*Galagen Options 02/22/03 6,500 $ -- -- $ -- $ -- $ --
*Galagen Options 12/27/05 812 $ -- -- $ -- $ -- $ --
*Galagen Options 03/27/01 271 $ -- 812 $ -- $ -- $ --
Lodgenet Entertainment 108,200 $1,080,333 29,500 $ 168,132 $ (215,368) $ --
*PACE Health Management
Systems Warrants 07/07/02 -- $ -- 62,500 $ -- $ -- $ --
Recovery Engineering 218,100 $1,937,638 -- $ -- $ -- $ --
*^Tut Common Stock 258,697 $1,243,556 -- $ -- $ -- $ --
*Tut Options 01/31/04 2,049 $ -- -- $ -- $ -- $ --
*^Tut Series D Preferred Stock -- $ -- 478,416 $ 430,916 $ -- $ --
*^Tut Series E Preferred Stock -- $ -- 217,391 $ 250,563 $ -- $ --
*^Tut Series F Preferred Stock -- $ -- 260,000 $ 325,095 $ -- $ --
*^Tut Series G Preferred Stock -- $ -- 78,980 $ 236,982 $ -- $ --
Video Update Class A 138,100 $ 409,906 -- $ -- $ -- $ --
</TABLE>
* SECURITIES THAT WERE AFFILIATED DURING THE YEAR ENDING ON 3/31/99 BUT NOT AT
3/31/99
^ TUT PREFERRED STOCK WITH A TOTAL COST OF $1,243,556 CONVERTED 1 FOR 4 INTO
COMMON STOCK
<TABLE>
<CAPTION>
IAI VALUE FUND AFFILIATED ISSUERS
- -------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-------------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
*^Tut Common Stock 87,580 $ 315,524 -- $ -- $ -- $ --
*^Tut Series D Preferred Stock -- $ -- 350,319 $ 315,524 $ -- $ --
*Tut Options 01/31/04 1,500 $ -- -- $ -- $ -- $ --
</TABLE>
* SECURITIES THAT WERE AFFILIATED DURING THE YEAR ENDING ON 3/31/99 BUT NOT AT
3/31/99
^ TUT PREFERRED STOCK WITH A TOTAL COST OF $315,524 CONVERTED 1 FOR 4 INTO
COMMON STOCK
20
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
(e)
At March 31, 1999, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND IAI REGIONAL FUND IAI VALUE FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $ 47,233,620 $ 235,464,960 $ 6,312,165
=======================================================================
Gross unrealized appreciation $ 9,081,970 $ 70,464,268 $ 8,894,464
Gross unrealized depreciation (4,603,878) (27,284,847) (1,784,921)
-----------------------------------------------------------------------
Net unrealized appreciation
(depreciation) $ 4,478,092 $ 43,179,421 $ 7,109,543
=======================================================================
</TABLE>
21
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI GROWTH AND INCOME FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 47
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
Tut Systems 02/17/94 200,157
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
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
07/27/98 22,647
02/09/99 23,179
Ampersand Specialty Materials
& Chemicals II 12/05/96 28,848
03/05/98 100,000
Broad Street Investment
Fund I 05/08/91 9,008
South Street Corporate
Recovery Fund I 10/03/95 --
Vanguard Associates II 12/10/84 65,476
10/31/86 112,672
Vanguard Associates III 01/10/92 198,872
01/11/93 305,250
09/30/93 34,128
CALL OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
GalaGen 02/22/03 02/22/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/22/98 --
Tut Systems 01/31/04 02/16/94 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Myriad UltraSound Systems
06/15/99 02/16/94 $ --
22
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI REGIONAL FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 709,169
Aclara BioSciences 12/30/97 --
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
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
Tut Systems 02/17/94 400,293
04/08/94 30,623
12/21/94 250,563
07/30/96 325,095
12/16/97 236,981
Westgate Acquisitions 11/30/91 42,272
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
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 02/19/98 125,207
ServiceSoft Series F 06/16/97 57,621
NON-CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Westgate Acquisitions Series A 11/30/91 $ 52,876
23
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
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
10/29/98 450,000
Alta Berkeley III, foreign 09/25/96 92,022
06/06/97 46,273
11/05/97 46,793
07/27/98 45,293
02/09/99 46,358
Ampersand Specialty
Materials & Chemicals II 12/05/96 43,270
03/05/98 150,000
Greenwich Street
Capital Partners 04/28/97 1,070,379
08/22/97 351,787
12/12/97 82,319
01/02/98 1,718,344
01/15/98 1,080,130
12/17/98 641,287
Pathfinder Venture
Capital Fund III 10/29/92 50,389
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
10/15/98 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 02/12/97 87,136
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
07/24/98 90,000
02/10/99 60,000
Spell Capital Partners 10/17/97 20,000
12/21/98 367,000
Vanguard Associates II 12/10/84 65,475
10/31/86 112,672
Vanguard Associates III 01/10/92 188,122
01/11/93 288,750
09/30/93 32,284
Vanguard Associates IV 07/26/96 19,612
24
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI REGIONAL FUND (CONT.)
CONVERTIBLE DEBENTURE
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
- --------------------------------------------------------------------------------
Gala Gen 02/22/03 02/22/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/22/98 --
GalaGen 12/27/05 12/26/96 --
12/26/97 --
12/28/98 --
Tut Systems 01/31/04 02/16/94 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
AccessLine Technologies
10/15/99 12/27/98 $ --
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 --
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
25
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI VALUE FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Advanced Recognition
Technologies 06/16/97 $ 16
Oren 06/16/97 2
Pacific Monolithics 04/24/85 24,999
08/06/85 75,000
08/19/86 47,990
Tut Systems 02/17/94 300,220
04/08/94 15,303
Westgate Acquisitions 11/30/91 42,272
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
PathNet Series A 08/28/95 50,567
02/09/96 50,732
PathNet Series B 08/05/96 70,078
12/23/96 33,652
ServiceSoft Series F 06/16/97 17,928
NON-CONVERTIBLE PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Westgate Acquisitions Series A 11/30/91 $ 52,876
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Ampersand Specialty Materials
& Chemicals II 12/05/96 $ 14,425
03/05/98 50,000
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Vanguard Associates III 01/10/92 43,000
01/11/93 66,000
09/30/93 7,379
CALL OPTION
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Tut Systems 01/31/04 02/16/94 $ --
WARRANT
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Myriad Ultrasound Systems
06/15/99 10/15/96 $ --
26
<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, 1999
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- ----------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $45,361,063, $206,138,302 and $5,920,183, respectively) $ 51,711,712
Investments in securities of affiliated issuers, at market
(Cost: $0, $19,026,184 and $0, respectively) --
---------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 51,711,712
Cash in bank on demand deposit 121,525
Receivable for investment securities sold 274,376
Receivable for Fund shares sold 890
Dividends and accrued interest receivable 58,759
Other assets (Note 2) 53,323
---------------------------
TOTAL ASSETS 52,220,585
---------------------------
LIABILITIES
Payable for investment securities purchased --
Other accrued expenses 530
---------------------------
TOTAL LIABILITIES 530
---------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 52,220,055
===========================
REPRESENTED BY:
Capital stock $ 35,897
Additional paid-in capital 32,663,295
Undistributed net investment income 570,658
Accumulated net realized gains (losses) 12,599,556
Unrealized appreciation on investment securities 6,350,649
---------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 52,220,055
===========================
Shares of capital stock outstanding;
authorized 10 billion shares each of $.01 par value stock 3,589,734
---------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 14.55
===========================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
28
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- ----------------------------------------------
<S> <C>
$269,163,323 $ 13,421,708
9,481,058 --
- ----------------------------------------------
278,644,381 13,421,708
136,644 247,960
272,986 --
5,739 --
99,882 1,852
65,773 11,766
- ----------------------------------------------
279,225,405 13,683,286
- ----------------------------------------------
3,547,656 --
-- 243
- ----------------------------------------------
3,547,656 243
- ----------------------------------------------
$275,677,749 $ 13,683,043
==============================================
$ 129,708 $ 11,212
207,535,994 7,434,097
902,655 --
13,629,497 (1,263,791)
53,479,895 7,501,525
- ----------------------------------------------
$275,677,749 $ 13,683,043
==============================================
12,970,778 1,121,174
- ----------------------------------------------
$ 21.25 $ 12.20
==============================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
29
<PAGE>
STATEMENTS OF OPERATIONS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $4,064, $0 and $0, respectively) $ 771,975
Interest 277,805
---------------------------
TOTAL INCOME 1,049,780
---------------------------
EXPENSES
Management fees 941,776
Compensation of Directors 18,589
Interest 6,386
Other expenses --
---------------------------
TOTAL EXPENSES 966,751
Less fees reimbursed by Advisers (18,589)
---------------------------
NET EXPENSES 948,162
---------------------------
NET INVESTMENT INCOME (LOSS) 101,618
---------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investment securities
(including $0, ($7,996,569) and $0, respectively, from affiliated issuers) 26,243,639
Net change in unrealized appreciation or depreciation on
investment securities (26,792,018)
---------------------------
NET GAIN (LOSS) ON INVESTMENTS (548,379)
---------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (446,761)
===========================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
30
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- -----------------------------------------------
<S> <C>
$ 3,143,097 $ 97,818
792,123 23,732
- -----------------------------------------------
3,935,220 121,550
- -----------------------------------------------
4,694,445 241,269
94,602 4,849
53,754 6,457
3,149 14,871
- -----------------------------------------------
4,845,950 267,446
(94,602) (4,849)
- -----------------------------------------------
4,751,348 262,597
- -----------------------------------------------
(816,128) (141,047)
- -----------------------------------------------
22,509,903 201,631
(61,992,723) 1,594,477
- -----------------------------------------------
(39,482,820) 1,796,108
- -----------------------------------------------
$(40,298,948) $ 1,655,061
===============================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
31
<PAGE>
STATEMENTS OF CASH FLOWS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
IAI GROWTH AND INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING EXPENSES:
Interest and dividend income $ 1,049,780
Net expenses (948,162)
----------------------------
NET INVESTMENT INCOME (LOSS) 101,618
----------------------------
Adjustments to reconcile net investment income (loss) to net cash
used by operating activities:
Change in dividend and interest receivable, other assets
and accrued expenses 42,302
Net amortization of bond discount (237,453)
----------------------------
(195,151)
----------------------------
NET CASH USED BY OPERATING ACTIVITIES (93,533)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 90,891,909
Purchases of investments (46,064,878)
Net purchases of short-term securities (418,607)
----------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 44,408,424
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of shares 13,982,248
Net asset value of shares issued in reinvestment of distributions 22,240,765
Cost of shares redeemed (57,224,580)
Distributions paid to shareholders (23,086,596)
Net payment on line of credit (105,203)
----------------------------
NET CASH USED BY FINANCING ACTIVITIES (44,193,366)
----------------------------
NET INCREASE IN CASH 121,525
CASH AT BEGINNING OF YEAR --
----------------------------
CASH AT END OF YEAR $ 121,525
============================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest on line of credit $ 6,386
============================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
32
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
- -------------------------------------------------
<S> <C>
$ 3,935,220 $ 121,550
(4,751,348) (262,597)
- -------------------------------------------------
(816,128) (141,047)
- -------------------------------------------------
1,113,865 11,735
(717,338) (14,517)
- -------------------------------------------------
396,527 (2,782)
- -------------------------------------------------
(419,601) (143,829)
- -------------------------------------------------
362,277,101 15,680,641
(190,955,927) (1,557,862)
23,347,787 1,004,062
- -------------------------------------------------
194,668,961 15,126,841
- -------------------------------------------------
138,447,522 2,257,507
57,189,214 2,164,302
(330,327,094) (16,872,394)
(58,884,994) (2,260,558)
(537,364) (23,909)
- -------------------------------------------------
(194,112,716) (14,735,052)
- -------------------------------------------------
136,644 247,960
-- --
- -------------------------------------------------
$ 136,644 $ 247,960
=================================================
$ 53,754 $ 6,457
=================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
33
<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,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income (loss) $ 101,618 $ 213,332
Net realized gains 26,243,639 12,514,136
Net change in unrealized appreciation or depreciation (26,792,018) 20,456,069
--------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (446,761) 33,183,537
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (94,984) --
Excess distribution from net investment income -- (435,034)
From net realized gains (22,991,612) (5,032,645)
--------------------------------------
TOTAL DISTRIBUTIONS (23,086,596) (5,467,679)
--------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 13,983,138 28,554,909
Net asset value of shares issued in reinvestment of distributions 22,240,765 5,141,082
Cost of shares redeemed (57,224,580) (55,398,375)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (21,000,677) (21,702,384)
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (44,534,034) 6,013,474
NET ASSETS AT BEGINNING OF PERIOD 96,754,089 90,740,615
--------------------------------------
NET ASSETS AT END OF PERIOD $ 52,220,055 $ 96,754,089
======================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ 570,658 $ --
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
34
<PAGE>
<TABLE>
<CAPTION>
IAI REGIONAL FUND IAI VALUE FUND
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
$ (816,128) $ (261,126) $ (141,047) $ (68,894)
22,509,903 82,083,271 201,631 5,223,885
(61,992,723) 63,099,012 1,594,477 3,182,298
- ------------------------------------------------------------------------------
(40,298,948) 144,921,157 1,655,061 8,337,289
- ------------------------------------------------------------------------------
-- -- -- (101,383)
-- (103,657) -- (154,746)
(58,884,994) (62,593,794) (2,260,558) (5,085,482)
- ------------------------------------------------------------------------------
(58,884,994) (62,697,451) (2,260,558) (5,341,611)
- ------------------------------------------------------------------------------
138,443,618 40,997,659 2,257,507 11,799,492
57,189,214 61,044,640 2,164,302 5,078,750
(330,327,094) (172,888,525) (16,872,394) (22,573,576)
- ------------------------------------------------------------------------------
(134,694,262) (70,846,226) (12,450,585) (5,695,334)
- ------------------------------------------------------------------------------
(233,878,204) 11,377,480 (13,056,082) (2,699,656)
509,555,953 498,178,473 26,739,125 29,438,781
- ------------------------------------------------------------------------------
$ 275,677,749 $ 509,555,953 $ 13,683,043 $ 26,739,125
==============================================================================
$ 902,655 $ (29,993) $ -- $ 1
==============================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 39
35
<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,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 19.72 $ 14.83 $ 15.30 $ 14.32 $ 13.91
----------------------------------------------------------------------
OPERATIONS
Net investment income 0.02+ 0.04+ 0.10 0.10 0.12
Net realized and unrealized gains 0.19 5.75 1.88 2.86 1.04
----------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.21 5.79 1.98 2.96 1.16
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.02) -- (0.10) (0.13) (0.10)
Excess distribution from
net investment income -- (0.07) (0.10) -- --
Net realized gains (5.36) (0.83) (2.25) (1.85) (0.65)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (5.38) (0.90) (2.45) (1.98) (0.75)
----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 14.55 $ 19.72 $ 14.83 $ 15.30 $ 14.32
======================================================================
Total investment return* 1.52% 40.06% 13.34% 21.51% 8.92%
Net assets at end of period (000's omitted) $ 52,220 $ 96,754 $ 90,741 $ 84,662 $101,256
RATIOS
Expenses to average net assets
(including interest expense) 1.26% 1.27% 1.26% 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 0.13% 0.21% 0.51% 0.62% 0.80%
Portfolio turnover rate
(excluding short-term securities) 66.1% 23.2% 51.2% 89.1% 79.1%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
36
<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,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 26.35 $ 22.59 $ 24.57 $ 21.56 $ 20.94
---------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.06) (0.02) 0.03 0.14 0.17
Net realized and unrealized gains (losses) (1.81) 6.79 2.08 5.77 1.84
---------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (1.87) 6.77 2.11 5.91 2.01
---------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (0.04) (0.18) (0.20)
Excess distribution from net
investment income -- -- (0.06) (0.02) --
Net realized gains (3.23) (3.01) (3.99) (2.70) (1.19)
---------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.23) (3.01) (4.09) (2.90) (1.39)
---------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 21.25 $ 26.35 $ 22.59 $ 24.57 $ 21.56
=================================================================================
Total investment return* (7.74%) 31.55% 8.65% 28.62% 10.35%
Net assets at end of period
(000's omitted) $ 275,678 $ 509,556 $ 498,178 $ 575,156 $ 523,364
RATIOS
Expenses to average net assets
(including interest expense) 1.25% 1.22% 1.21% 1.25% 1.23%
Expenses to average net assets
(excluding interest expense) 1.23% 1.22% 1.21% 1.25% 1.23%
Net investment income to
average net assets (0.21%) (0.05%) 0.14% 0.58% 0.74%
Portfolio turnover rate
(excluding short-term securities) 53.2% 46.0% 61.1% 89.7% 150.0%
</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.
37
<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,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.71 $ 11.66 $ 12.42 $ 11.17 $ 11.63
----------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.09)+ (0.03) 0.09 0.08 0.03
Net realized and unrealized gains 1.07 3.79 0.68 2.19 0.38
----------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.98 3.76 0.77 2.27 0.41
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.04) (0.12) (0.01) (0.03)
Excess distribution from
net investment income -- (0.07) -- -- --
Net realized gains (1.49) (2.60) (1.41) (1.01) (0.84)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.49) (2.71) (1.53) (1.02) (0.87)
----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.20 $ 12.71 $ 11.66 $ 12.42 $ 11.17
======================================================================
Total investment return* 8.47% 34.21% 5.85% 21.07% 3.88%
Net assets at end of period
(000's omitted) $ 13,683 $ 26,739 $ 29,439 $ 42,009 $ 40,601
RATIOS
Expenses to average net assets
(including interest expense) 1.36%** 1.28% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.33%** 1.25% 1.25% 1.25% 1.25%
Net investment income to
average net assets (0.73%) (0.24%) 0.61% 0.65% 0.31%
Portfolio turnover rate
(excluding short-term securities) 8.2% 27.0% 61.3% 73.4% 102.1%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** THIS RATIO INCLUDES AN 8 BASIS POINT EXPENSE APPROVED BY THE BOARD OF
DIRECTORS RELATED TO AN INDEPENDENT VALUATION OF A RESTRICTED SECURITY.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
[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.
As of May 12, 1998, Value Fund was closed to new purchases (other than
systematic purchases.) Value Fund's Board of Directors and Advisers determined
it to be in the best interest of the Fund's shareholders to close the Fund due
to an investment in a restricted security. Closing the Fund was intended to
protect existing shareholders by preventing individuals from speculating on
short-term purchases and sales of the Fund's shares.
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, prices of unrestricted securities of the same
class discounted to reflect the nature and duration of restrictions on
disposition, pending public offerings with respect to the security, changes in
economic conditions and industry developments affecting the issuer, and other
relevant matters. Restricted securities represent $4,269,399 (8.2% of net
assets) for Growth and Income Fund, $33,848,005 (12.3% of net assets) for
Regional Fund and $9,722,728 (71.1% 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.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option,
the purchase cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received or
paid.
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 net investment income and accumulated net realized
gains (losses) have been increased or decreased as follows:
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND REGIONAL FUND VALUE FUND
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed
net investment income $ 564,024 $ 1,748,776 $ 141,046
Accumulated net realized gains (losses) $ (564,024) $ (1,748,776) $ (48,294)
Additional paid-in capital $ -- $ -- $ (92,752)
</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.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are made semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
For purposes of obtaining certain types of insurance coverage for the Funds and
their 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, 1999, Growth and Income Fund, Regional Fund, and Value Fund had
available lines of credit of $13,340,000, $15,000,000 and $4,230,000,
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.There were no borrowings outstanding for the Funds at March 31, 1999.
LITIGATION
In July 1998, a lawsuit was filed against Value Fund, Advisers and certain of
their officers and directors relating to the pricing of a restricted security
held by the Fund. Management, after review with legal counsel, believes the
ultimate disposition of this matter will not have a material effect on the
Fund's financial condition.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1999, the Regional Fund is committed to invest additional amounts
in certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- --------------------------------------------------------------------------------
REGIONAL FUND
- --------------------------------------------------------------------------------
Agio Capital Partners I L.P. $ 375,000
Spectrum Equity Investors L.P. 78,000
Spell Capital Partners 613,000
================================================================================
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. Regional Fund maintains in a segregated account an amount equal to
its aggregate unpaid commitments.
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
[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.
During the year ended March 31, 1999, Regional Fund and Value Fund paid $3,149
and $14,871, respectively, for an independent valuation of a restricted
security. This expense was approved by the Funds' board of directors and is
included in other expenses on the statement of operations.
[4] CAPITAL 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 FUND REGIONAL FUND VALUE FUND
- --------------------------------------------------------------------------------------------------------------
Year Year Year Year Year Year
ended ended ended ended ended ended
March 31, March 31, March 31, March 31, March 31, March 31,
1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOLD 861,648 1,648,867 6,565,416 1,624,442 176,175 893,948
ISSUED FOR REINVESTED
DISTRIBUTIONS 1,424,886 301,798 2,553,090 2,517,461 177,661 418,236
REDEEMED (3,602,092) (3,162,668) (15,482,162) (6,858,737) (1,336,197) (1,732,928)
------------------------------------------------------------------------------------
DECREASE IN
SHARES OUTSTANDING (1,315,558) (1,212,003) (6,363,656) (2,716,834) (982,361) (420,744)
====================================================================================
</TABLE>
42
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI GROWTH AND INCOME FUND, IAI REGIONAL FUND, IAI VALUE FUND
MARCH 31, 1999
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 1999, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- --------------------------------------------------------------------------------
GROWTH AND INCOME FUND $ 46,064,878 $ 91,166,285
REGIONAL FUND $ 192,908,720 $ 358,875,441
VALUE FUND $ 1,557,862 $ 15,680,641
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at March 31,
1999, are issues which generally cannot be offered for sale to the public
without first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid.
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, 1999, 71.1% of Value Fund's net assets were invested in restricted
securities. At March 31, 1999, Advisers was actively seeking liquidation
opportunities which would reduce the percentage of the Fund's investment
portfolio comprised of restricted securities. Advisers, under the direction of
the Board of Directors, intends to pursue such opportunities when deemed in the
best interest of the shareholders.
43
<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, 1999, 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 the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Regional Fund, IAI Growth and Income Fund, and IAI Value Fund at March 31, 1999,
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 above, in conformity with generally accepted accounting principles.
As described in notes 1 and 5 to the financial statements, Value Fund held 71.1%
of its net assets in illiquid, restricted securities as of March 31, 1999.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 14, 1999
44
<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 informational purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
IAI GROWTH AND INCOME FUND
TAX INFORMATION
------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
------------------------------------------------------------------------------
JUNE 1998 $ 0.4085 $ 2.0904
DECEMBER 1998 0.0233 2.8600
==============================================================================
$ 0.4318 $ 4.9504
58.23% of ordinary income qualify for deduction by corporations.
IAI REGIONAL FUND
TAX INFORMATION
------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
------------------------------------------------------------------------------
JUNE 1998 $ 0.0000 $ 3.2255
DECEMBER 1998 $ 0.0000 $ 0.0000
==============================================================================
$ 0.0000 $ 3.2255
IAI VALUE FUND
TAX INFORMATION
------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
------------------------------------------------------------------------------
JUNE 1998 $ 0.0534 $ 0.5857
DECEMBER 1998 $ 0.0000 $ 0.8550
==============================================================================
$ 0.0534 $ 1.4407
25.15% of ordinary income qualify for deduction by corporations.
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
45
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
http://www.iaifunds.com
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 510
Milwaukee, WI 53201-0510
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
David Koehler
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
500-0019-0599
800.945.3863
612.376.2700
