<PAGE>
EQUITY FUNDS
ANNUAL REPORT
IAI Emerging Growth Fund, IAI Growth Fund,
IAI Midcap Growth Fund
March 31, 1995
[LOGO]
Mutual Funds
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[MAP]
C2
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TABLE OF CONTENTS
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IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
Annual Report
March 31, 1995
Chairman's Letter....................................2
Fund Managers' Reviews
IAI Emerging Growth Fund..........................4
IAI Growth Fund...................................6
IAI Midcap Growth Fund............................8
Fund Portfolios
IAI Emerging Growth Fund.........................10
IAI Growth Fund..................................13
IAI Midcap Growth Fund...........................15
Notes to Fund Portfolios............................18
Statements of Assets and Liabilities................22
Statements of Operations............................24
Statements of Changes in Net Assets.................26
Financial Highlights
IAI Emerging Growth Fund.........................28
IAI Growth Fund..................................29
IAI Midcap Growth Fund...........................30
Notes to Financial Statements.......................31
Independent Auditors' Report........................36
Federal Tax Information.............................37
IAI Mutual Fund Family..............................38
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors............................Inside Back Cover
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
[PHOTO OF NOEL P. RAHN]
NOEL P. RAHN,
Chairman
STICKING TO BASICS
No matter what the economy or the markets do, we will still need funds to
achieve our financial objectives. That is why it is important to stick with the
basic techniques that have helped long-term investors reach their goals for
decades.
As a long-time investor, I have found four investment fundamentals to be
important keys to building financial security.
1. Create your own investment game plan.
The first, and most important key, is to plan for your specific financial
requirements. You may be investing for different financial goals. It is
important that you know your own situation and how much money you will need to
achieve your objectives. Then, you can prioritize your goals and determine how
to invest to achieve them.
You will probably find that most of your goals are longer-term goals. This fact
is important because it means you have the potential to earn higher returns.
Long-term investment strategies are the most appropriate for long-term goals.
2. Diversify.
Diversification can reduce your risk. Owning shares in several companies makes
you less dependent on just a few to achieve your hopes and dreams. A good way to
gain instant diversification is to invest through mutual funds which usually
hold shares in dozens to hundreds of different companies.
You can also reduce your risk by owning mutual funds with different investment
objectives. That way changing economic conditions which may impact one part of
your portfolio may benefit other parts.
3. Pay attention to the financial media only in proportion to the time frame
they are covering.
Sometimes it is easy to get caught up in the exciting, but transitory, stories
of our time. The fact is, investors who have invested in good businesses have
been well rewarded over the long term, even following periods of war or economic
depression.
4. Buy bargains.
It seems we want our investments to only go up, but sometimes prices can
decline. These discounts may be temporary or extend for a few years, but as long
as you still have several years before you will need your money, market
discounts can be good opportunities to increase your ownership in operating
businesses at bargain prices.
You can achieve a lot using your own common sense. It is our goal, as
professional investment managers, to help take you the rest of the way--to
financial security.
2
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CHAIRMAN'S LETTER
-----------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
While the Federal Reserve Board has recently taken a "wait and see" attitude, it
is not likely to ease interest rates in the next six months. The trend of rising
interest rates and the prospect for further increases are still a negative part
of our economic outlook. While we see no reason to expect a recession this year,
our conclusion is that the economy will slow modestly but remain at an above-
average rate of growth. Growth in U.S. GDP (Gross Domestic Product) will run at
about 3%-3.5% after ending last year at a 5.1% pace.
We anticipate a few inflationary scares in the monthly reports during the second
half of the year. With the Producer Price Index (PPI) in an uptrend and the
Consumer Price Index (CPI) relatively flat, we could experience some monthly
increases of from 0.4% to 0.6% in the CPI. And, even though there are some
favorable secular trends on inflation, and labor costs are still very low for
this part of the cycle, inflation for the year will likely reach 4% compared
with last year's rate of just 2.7%.
In the current economic environment, investment strategy favors conservative and
well diversified portfolios. The rest of the year could be volatile and
frustrating for both stock and bond investors. Financial market strength in the
first quarter has led some to conclude that the worst part of the market cycle
is over. We are more cautious. Our projected returns of 5-10% for stocks in
general in 1995, and 5-7% for bonds and money market funds have already been
achieved. The greatest risk for the period comes from an inflation scare and a
move toward higher interest rates.
Please read the Fund Managers' Reviews which follow this letter for a detailed
perspective on the Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ NOEL P. RAHN
- ----------------
Noel P. Rahn
Chairman
3
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FUND MANAGER'S REVIEW
---------------------
IAI Emerging Growth Fund
[PHOTO OF RICK D. LEGGOTT]
Rick D. Leggott, CFA
IAI Emerging Growth
Fund Manager
"We focus on high quality emerging growth stocks."
IAI EMERGING GROWTH FUND
FUND OBJECTIVE
IAI Emerging Growth Fund's objective is long-term capital appreciation. The Fund
invests primarily in stocks of small and medium-sized companies, with typical
market capitalizations of $1 billion or less. These companies are at an early
stage of their life cycles. While large enough to be established, they are still
small enough to grow faster than the overall economy and the rate of inflation.
FUND POSITIONING FOR THE
PAST YEAR
Despite being challenged significantly by rising interest rates and other
factors, we are proud to report the Emerging Growth Fund performed well on both
an absolute and relative basis. For the fiscal year ended March 31, 1995, total
return for the Fund was 10.23%. This compares favorably with a 8.66% return for
the Russell 2500 index of small-cap stocks.
Since inception of the Fund, we've operated with a simple, focused investment
philosophy. Our goal is to own the highest quality and most rapidly expanding
emerging growth companies. Company fundamentals, i.e., revenue and earnings
growth, return on shareholders' equity and balance sheet strength, drive our
bottom-up stock selection process. Direct contact with company managements,
competitors and customers drives our research process. Last year, we personally
met with over 300 companies. We look for economically motivated management teams
that have a clear vision of how they will grow their companies. In nearly every
case, growth is driven by unit expansion and not a reliance on pricing power. In
sum, the Fund owns companies that are growing revenue and earnings rapidly while
generating above-average profitability. They are accomplishing this without
material reliance on debt, thus maintaining their operating independence.
Throughout last year, we maintained an overweighting in healthcare, technology
and consumer demand driven companies. Following the 1993 paranoia of healthcare
reform, our emphasis on companies that are lowering healthcare costs added
significant performance to the portfolio. Oxford Health Plans, a significant
contributor to the Fund, is growing its enrollment membership rapidly by leading
the NYC metro market into managed care.
While our technology holdings worked decisively against us in the second
calendar quarter of 1994, conviction in our companies' prospects never budged
due to our direct research efforts. By staying true to our discipline, we
captured the significant excess returns generated by this sector for the
remainder of the year. The dramatic changes taking place in the communications
arena are creating many entrepreneurial opportunities. Portfolio company Ascend
Communications is benefiting from the trend toward remote computing and the
exponential growth in the Internet.
Our retail holdings lagged the market for the last half of the year, mostly due
to anticipation of a slowing economy. Despite this, we continue to own many
firms that have opportunities to expand their number of units in operation while
realizing strong incremental returns on investment.
OUTLOOK
Looking forward, we believe that owning emerging growth companies will be
rewarding. As the economy slows to a more sustainable growth rate, our
portfolio's earnings growth rate of 4-5 times the broad market stands out
distinctly. Our philosophy of owning companies which possess superior financial
strength, high levels of profitability and large growth opportunities makes
sense in an increasingly competitive world.
An aging population will drive many future economic decisions. Study after study
points to the need for higher personal savings to support reasonable standards
of living in retirement. We believe Americans will begin to save more,
particularly if the tax code is adjusted to encourage the process. A cut in the
capital gains tax would encourage holding equity in growth companies. Both
higher savings levels and the need for above money market returns will be
conducive to owning emerging growth companies.
4
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FUND MANAGER'S REVIEW
---------------------
IAI Emerging Growth Fund
Value of $10,000 Investment
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
- ---------------------------------------------------
3/31/95
- ---------------------------------------------------
<S> <C>
IAI Emerging Growth Fund (since 8/5/91) $18,492
- ---------------------------------------------------
Russell 2500 Index (since 9/1/91) $15,519
</TABLE>
Average Annual Returns+
Through 3/31/95
<TABLE>
<CAPTION>
- ---------------------------------------------------------
Since Inception
1 Year 8/5/91
- ---------------------------------------------------------
<S> <C> <C>
IAI Emerging Growth Fund 10.23% 18.32%
- ---------------------------------------------------------
Russell 2500 Index 8.66% 13.05%*
- ---------------------------------------------------------
S&P 500 Index 15.59% 9.93%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 9/01/91
Top Ten Holdings
<TABLE>
<CAPTION>
% of Net Assets
-------------------
Issues* Sector 3/31/95 3/31/94
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Oxford Health Plans Consumer Non-Cyclical 3.47 2.75
Medaphis Consumer Non-Cyclical 2.70 0.21
Viking Office Products Technology 2.60 2.43
Linear Technology Technology 2.58 2.78
Chipcom Technology 2.21 2.89
Healthsource Financial 2.10 --
Tellabs Telecommunications 1.96 --
Staples Retail 1.92 1.70
Office Depot Retail 1.91 3.37
Omnicare Consumer Non-Cyclical 1.84 --
- ----------------------------------------------------------------------
Total 23.29 16.13
</TABLE>
* Excludes U.S. Treasury and government obligations
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Emerging Growth Fund includes changes in share
price and reinvestment of 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.
5
<PAGE>
FUND MANAGERS' REVIEW
---------------------
IAI Growth Fund
[PHOTO OF JOHN A. TWELE]
John A. Twele, CFA
IAI Growth Fund
Co-Manager
[PHOTO OF DAVID A. MCDONALD]
David A. McDonald
IAI Growth Fund
Co-Manager
IAI Growth Fund
FUND OBJECTIVE
IAI Growth Fund's primary objective is to earn capital appreciation over the
long term as a result of investing in stocks of established companies which
offer superior growth potential. Many of these high-growth companies provide
strong management, leading market positions, strong balance sheets, well-defined
strategies for future growth, and earnings increasing at above-average rates.
FUND POSITIONING FOR THE
PAST YEAR
IAI Growth Fund trended higher during the fiscal year ended March 31, 1995.
Throughout the year, the Fund closely tracked the broad market as measured by
the S&P 500 Index and earned a total return of 13.31% for the full year.
IAI Growth Fund has traded out of cyclical stocks and into established growth
stocks which show continuing strong earnings. We have avoided large positions in
financial stocks, housing, and utilities, which are most vulnerable to interest
rate increases. The Fund has benefited as investors psychology has now shifted
to favor growth stocks.
Strategically, we apply a bottom-up approach which means that instead of first
looking at the large economic picture and then trying to find stocks that might
benefit from economic trends, we look first for strong growth companies and then
diversify the Fund by investing from our list of the best candidates. However,
in the process of selecting the best of the best, we do notice some important
macro-economic investment themes, including four which prevail currently:
globalization, home technology, wireless communications, and intra-industry
consolidation.
Capitalizing on global markets which are growing faster than the U.S. market, we
have increased our positions in large U.S.-based multi-national companies like
Colgate-Palmolive and Motorola.
In technology, the fastest growing market segment has become home personal
computers where Americans spent more for computer hardware and software last
year than they did for televisions for the first time in history. Some of our
holdings which have benefited from this new trend include component and computer
manufacturers such as Intel and Compaq Computer, software publishers such as
Microsoft, and retailers like Best Buy.
We are also overweighted in telecommunications, particularly in wireless
communications, with holdings in Airtouch Communications, the world's largest
cellular company, as well as Motorola, a provider of portable telephones which
have become a booming business as prices have declined.
The other major investment theme in the portfolio is industry consolidation
where we are investing in companies such as United HealthCare and Columbia/HCA
Healthcare.
OUTLOOK
We are cautiously optimistic for the year ahead. We believe the economy will
continue to slow down during the second half. If the economy stays out of
recession, we could have a nearly ideal environment for growth stocks as
investors in cyclical and small companies increasingly look for solid companies
with sustainable growth such as many of those in the Fund.
Through near year-end 1994, value stocks and small company stocks had generally
outperformed large stocks for the last three to four years. Since then, growth
stocks have been outpacing both other sectors. In the past, when these trends
have reversed, growth stocks have usually outperformed for an average of
approximately four-to-seven years.
6
<PAGE>
FUND MANAGERS' REVIEW
---------------------
IAI Growth Fund
Value of $10,000 Investment
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
- -----------------------------------------------
3/31/95
- -----------------------------------------------
<S> <C>
IAI Growth Fund (since 8/6/93) $10,989
- -----------------------------------------------
S&P 500 (since 9/1/93) $11,292
</TABLE>
Average Annual Returns+
Through 3/31/95
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Since Inception
1 Year 8/6/93
- ------------------------------------------------------------------------------
<S> <C> <C>
IAI Growth Fund 13.31% 5.89%
- ------------------------------------------------------------------------------
S&P 500 Index 15.59% 7.98%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 9/01/93
Top Ten Holdings
<TABLE>
<CAPTION>
% of Net Assets
-------------------
Issues* Sector 3/31/95 7/31/94
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Columbia/HCA Healthcare Consumer Non-Cyclical 4.89 2.02
Dow Chemical Basic Materials 4.44 2.88
Home Depot Retail 4.43 0.91
Microsoft Computer Software/Services 4.29 3.15
Wal-Mart Stores Retail 3.57 --
United HealthCare Consumer Non-Cyclical 3.54 --
Motorola Technology 3.53 2.94
Compaq Computer Technology 3.28 --
McDonald's Consumer Cyclical 2.95 2.22
Federal National
Mortgage Association Financial 2.95 3.13
- ------------------------------------------------------------------------------
Total 37.87 17.25
</TABLE>
* Excludes U.S. Treasury and government obligations
Note to Chairman's Letter & Fund Managers' Review
Performance data for the IAI Growth Fund includes changes in share price and
reinvestment of 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.
7
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI Midcap Growth Fund
[PHOTO OF SUZANNE ZAK]
Suzanne Zak, CFA
IAI Midcap Growth
Fund Manager
"The IAI
Midcap Growth
Fund gained 17.63%
over the year."
IAI Midcap Growth Fund
FUND OBJECTIVE
IAI Midcap Growth Fund seeks long-term capital appreciation by investing in
medium-sized companies with above average growth potential. The Fund typically
invests in companies with market capitalization between $500 million and $5
billion. These companies tend to be larger and better established, and hence
less volatile, than small emerging growth companies, while offering stronger
long-term growth potential than most large cap companies.
FUND POSITIONING FOR
THE PAST YEAR
Through the turbulent market environment of the last twelve months, we have
continued to focus on executing our strategy of investing in high quality growth
companies that sell at reasonable valuations. As a result, the IAI Midcap Growth
Fund gained 17.63% over the past year, well ahead of the relevant midcap indices
as well as the broad market. In the first three months of 1995, the financial
markets were strong across the board as the S&P 500 reached an all-time high and
the bond market rallied sharply from its November lows. Signs of a slowing
economy and an easing of inflationary pressures provided the backdrop for this
rally.
The favorable performance of the Fund was broad based. FIserve surged on the
announcement of the signing of a $480 million item processing contract with
Chase Manhattan Bank, the largest in the company's history. Hospitality
Franchise Systems and Marriott International, our two holdings in the lodging
industry, continued to benefit from increased recognition of the multi-year
recovery cycle that is taking place.
Recently a longtime favorite of ours, Dr. Pepper/Seven-Up Companies, was finally
acquired by Cadbury Schweppes. We also sold our position in Lotus Development,
one of our last holdings in the computer hardware/software industry. The
spectacular performance of this sector in recent quarters has driven the
valuations of these companies beyond the level that current fundamentals would
dictate. Until the components of risk and reward return to a more normal
balance, stocks in this sector will be noticeably absent from the portfolio.
OUTLOOK
We remain optimistic that the stocks in the portfolio will continue to
participate fully in the strong equity markets that we have seen thus far.
Virtually all the earnings surprises that we have experienced thus far have been
positive despite the slowing economy, reinforcing the belief that these
companies control their own destiny. In addition, the P/E ratio of the stocks in
the portfolio is still essentially equal to the broad market, suggesting some
protection on the downside should the current strong equity market reverse
itself.
Recent additions to the portfolio are representative of our quest to identify
attractive mid-sized growth companies before they are popular among investors.
For example, Sybron International is a leader in the sales and distribution of
laboratory and dental supplies. Both markets are highly fragmented which leads
to a plethora of acquisition opportunities. These acquisitions are easily
integrated into the company's existing distribution system providing highly
profitable growth.
Another recent addition is Trimas Corporation which enjoys leadership positions
in various commercial, industrial, and consumer niche markets. The company has
demonstrated growth of roughly 18% per year in seemingly mundane businesses.
Advanced manufacturing technologies coupled with proprietary products and
aggressive marketing initiatives have enabled Trimas to grow rapidly.
As this last example demonstrates, growing companies can sometimes be found in
unlikely industries. Thus, we will continue to search widely for stable mid-
sized companies able to achieve high earnings growth at attractive prices.
8
<PAGE>
FUND MANAGER'S REVIEW
----------------------
IAI Midcap Growth Fund
Value of $10,000 Investment
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
- ---------------------------------------------------
3/31/95
- ---------------------------------------------------
<S> <C>
IAI Midcap Growth Fund (since 4/10/92) $16,304
- ---------------------------------------------------
Callan Midcap Index (since 4/1/92) $13,796
</TABLE>
<TABLE>
<CAPTION>
Average Annual Returns+
Through 3/31/95
<S> <C> <C>
- --------------------------------------------------------------------------------
Since Inception
1 Year 4/10/92
- --------------------------------------------------------------------------------
IAI Midcap Growth Fund 17.63% 17.88%
- --------------------------------------------------------------------------------
Callan Midcap Index 10.61% 11.32%*
- --------------------------------------------------------------------------------
S&P 400 Midcap Index (unadjusted) 8.43% 10.17%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 4/01/92
<TABLE>
<CAPTION>
Top Ten Holdings
- -------------------------------------------------------------------------------
% of Net Assets
------------------
Issues* Sector 3/31/95 3/31/94
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Alco Standard Basic Materials 4.44 2.50
Minerals Technologies Basic Materials 3.75 3.05
Harcourt General Retail 3.55 1.11
Danka Business Systems, ADR Technology 3.18 2.54
Hospitality Franchise Systems Consumer Cyclical 2.91 2.27
Century Telephone Enterprises Utilities 2.74 2.65
Barnes & Noble Retail 2.67 2.21
Unifi Industrial 2.64 1.60
Scholastic Publishing/Printing 2.62 1.97
FIserve Technology 2.60 2.43
- -------------------------------------------------------------------------------
Total 31.10 22.33
</TABLE>
* Excludes U.S. Treasury and government obligations
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Midcap Growth Fund includes changes in share price
and reinvestment of 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.
9
<PAGE>
Fund Portfolio
------------------------
IAI Emerging Growth Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Common Stocks -- 88.9%
Market
Quantity Value (a)
- ------------------------------------------------------------
<S> <C> <C>
Computer Software Services -- 12.1%
Atria Software (b) 40,200 $ 1,879,350
Avid Technology (b) 99,900 2,972,025
Broderbund Software (b) 108,900 5,635,575
FTP Software (b) 183,600 5,783,400
Hyperion Software (b) 71,700 3,316,125
InfoSoft International (b) 59,700 2,835,750
Parametric Technology (b) 152,400 6,057,900
SPS Transaction Services (b) 55,200 1,932,000
Sybase (b) 36,200 1,448,000
Synopsys (b) 114,800 5,453,000
TGV Software (b) 45,300 985,275
Wall Data (b) 28,400 1,299,300
Wonderware (b) 58,000 1,812,500
-----------
41,410,200
- ------------------------------------------------------------
Consumer Cyclical -- 10.8%
Alternative Resource (b) 53,500 2,086,500
Apple South 171,300 2,676,563
Catalina Marketing (b) 126,500 6,277,563
Franklin Quest (b) 96,900 3,052,350
Gartner Group Class A (b) 88,300 3,774,825
Loewen Group 112,100 3,054,725
Outback Steakhouse (b) 231,350 5,870,506
Papa John's International (b) 55,300 1,963,150
Starbucks (b) 251,500 6,004,563
Sun Glass Hut International (b) 81,900 2,395,575
-----------
37,156,320
- ------------------------------------------------------------
Consumer Non-Cyclical -- 18.7%
America Online (b) 57,000 4,232,250
Coventry (b) 188,800 5,451,600
Gulf South Medical Supply (b) 76,700 3,087,175
Health Care & Retirement (b) 96,000 3,024,000
Medaphis (b) 148,500 9,281,250
Omnicare 120,700 6,336,750
Oxford Health Plans (b) 213,800 11,919,350
Phycor (b) 136,350 4,635,900
Market
Quantity Value (a)
- ------------------------------------------------------------
Pyxis (b) 42,700 $ 880,688
R.P. Scherer (b) 105,100 5,281,275
Steris (b) 124,600 4,952,850
Surgical Care Affiliates 23,700 551,025
Vencor (b) 59,000 2,101,875
Watson Pharmaceutical (b) 84,100 2,459,925
-----------
64,195,913
- ------------------------------------------------------------
Financial -- 5.6%
Credit Acceptance (b) 191,100 4,204,200
Healthsource (b) 152,600 7,229,425
Mercury Financial 344,966 5,562,577
Prime Retail 50,000 625,000
Roosevelt Financial Group 113,000 1,765,625
-----------
19,386,827
- ------------------------------------------------------------
Industrial -- 1.6%
American Freightways (b) 108,700 2,445,750
Covenant Transport Class A (b) 62,200 1,010,750
Heartland Express (b) 68,391 1,897,850
-----------
5,354,350
- ------------------------------------------------------------
Retail -- 14.9%
Baby Superstore (b) 71,800 2,782,250
Bed Bath & Beyond (b) 177,000 4,380,750
Books-A-Million (b) 231,800 3,332,125
CDW Computer Centers (b) 36,000 1,287,000
Corporate Express (b) 124,200 3,260,250
Fastenal 216,000 5,292,000
Gymboree (b) 200,000 5,075,000
Hollywood Entertainment (b) 29,300 1,018,175
Kohl's (b) 38,700 1,712,475
Micro Warehouse (b) 120,300 3,729,300
Office Depot (b) 269,850 6,577,594
PetSmart (b) 173,500 5,985,750
Staples (b) 253,500 6,591,000
-----------
51,023,669
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
10
<PAGE>
FUND PORTFOLIO
--------------
IAI Emerging Growth Fund
March 31, 1995
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------------
<S> <C> <C>
Technology -- 16.1%
American Power Conversion (b) 320,000 $ 5,200,000
Bay Networks (b) 61,400 2,264,125
Chipcom (b) 201,600 7,610,400
Linear Technology 160,000 8,880,000
Maxim Integrated Products (b) 1,900 68,875
Microchip Technology (b) 106,000 2,968,000
NetManage (b) 80,900 3,357,350
Network General (b) 54,900 1,550,925
Phamis (b) 40,800 877,200
Quantum Health Resources (b) 13,500 280,124
Stratacom (b) 126,200 5,426,600
Ventritex (b) 84,900 1,613,100
Viking Office Products (b) 292,500 8,921,250
Xilinx (b) 92,600 6,250,500
------------
55,268,449
- -----------------------------------------------------------------
Telecommunications -- 8.9%
ADC Telecommunications (b) 186,600 5,510,600
Applied Digital Access (b) 107,800 1,724,800
Ascend Communications (b) 61,700 3,995,074
Cascade Communications (b) 71,200 4,912,800
Mobile Telecommunication
Technologies (b) 133,000 3,075,624
Paging Network (b) 138,300 4,563,900
Tellabs (b) 116,200 6,739,600
------------
30,522,398
- -----------------------------------------------------------------
Utilities -- 0.2%
Intermedia Communications
of Florida (b) 58,200 669,300
=================================================================
Total Investments
in Common Stocks
(Cost: $239,492,141) $304,987,426
=================================================================
</TABLE>
Other Securities -- 3.6%
<TABLE>
<CAPTION>
Market
Quantity (d) Value (a)
- -----------------------------------------------------------------
<S> <C> <C>
Accessline Class A (b) 41,666 $ 208,330
Accessline Series A PFD (b) 71,420 499,940
Accessline Tech Warrants (b) 10,713 -
Air Communications (b)(c) 875,001 -
AirCom Holdings Series B
Convertible Note, 10.00% (c) 37,500 37,500
AirCom Holdings Series D PFD (b)(c) 1,000,000 62,500
Alta Berkeley L.P. (1.75%) (b) - 182,770
CardioGenesis Series B PFD (b)(c) 500,000 1,000,000
GalaGen, Convertible Note 6.50% (c) 440,000 440,000
GalaGen Series B PFD (b)(c) 230,769 1,124,999
GalaGen Series C PFD (b)(c) 50,000 250,000
GalaGen Warrants (b)(c) 21,000 -
Imnet Systems Series II PFD (b) 4,857 679,980
Indigo Medical Series B PFD (b)(c) 181,818 173,254
Indigo Medical Series C PFD (b)(c) 898,496 856,177
Intellon Series A PFD (b) 200,000 200,000
Intellon Warrants (b) 30,000 -
OncorMed (b) 66,667 593,336
Ovamed Convertible Note, 9.50% 50,000 50,000
Ovamed Series D PFD (b) 214,286 375,001
Pace Health Management
Systems (b)(c) 230,320 950,072
Pace Health Management
Systems Warrants (b)(c) 190,000 -
Pricellular PFD (b) 103,480 589,836
Seurat Analytical
Convertible Note, 9.50% (c) 125,000 125,000
Seurat Analytical Systems PFD (b)(c) 50,000 100,000
South Street Corporate Recovery
Fund I L.P. (.61%)(b) - 1,454,327
South Street Leveraged Corporate
Recovery Fund I L.P. (1.45%) (b) - 522,075
Spectrum Equity Investors
L.P. (.92%)(b) - 174,733
Tut Systems Series D PFD (b)(c) 467,092 537,156
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
11
<PAGE>
FUND PORTFOLIO
--------------
IAI Emerging Growth Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ----------------------------------------------------------
<S> <C> <C>
Tut Systems Series E PFD (b)(c) 217,391 $ 250,000
Urologix Series B PFD (b) 100,000 297,300
Urologix Series C PFD (b) 59,613 131,148
Vanguard IV L.P. (1.36%)(b) - 305,690
------------
12,171,124
==========================================================
Total Investments in
Other Securities
(Cost: $11,472,401).......................... $ 12,171,124
==========================================================
Total Investments in
Long-term Securities
(Cost: $250,964,542)......................... $317,158,550
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Short-Term Securities -- 7.8%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bills - 7.8%
5.47% 04/13/95 $12,000,000 $ 11,981,268
5.84% 05/25/95 15,000,000 14,878,020
------------
26,859,288
========================================================================
Total Investments
in Short-Term Securities
(Cost: $26,850,472)........................................ $ 26,859,288
========================================================================
Total Investments in Securities
(Cost: $277,815,014) (e)................................... $344,017,838
========================================================================
Other Assets and Liabilities
(Net) (0.3)%
........................................................... $ (1,143,933)
========================================================================
Total Net Assets
........................................................... $342,873,905
========================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
12
<PAGE>
FUND PORTFOLIO
--------------
IAI Growth Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Common Stocks -- 98.9%
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
Basic Materials -- 11.3%
Dow Chemical 16,300 $ 1,189,900
Georgia-Pacific 6,500 518,375
Great Lakes Chemical 10,800 673,650
Lyondell Petrochemical 10,600 257,050
Morton International 13,400 388,600
-----------
3,027,575
- -----------------------------------------------------------
Computer Software/Services -- 8.2%
Compuware Software (b) 14,100 514,650
Microsoft (b) 16,200 1,150,200
Sybase (b) 13,500 540,000
-----------
2,204,850
- -----------------------------------------------------------
Consumer Cyclical -- 12.1%
American Greetings, Class A 17,200 511,700
Cardinal Health 6,400 304,800
Mattel 21,405 527,098
McDonald's 23,200 791,700
Newell 17,000 433,500
Viacom, Class B (b) 14,961 669,505
-----------
3,238,303
- -----------------------------------------------------------
Consumer Non-Cyclical -- 16.3%
Colgate-Palmolive 4,500 297,000
Columbia/HCA Healthcare 30,500 1,311,500
Medtronic 4,500 312,188
Philip Morris 9,300 606,825
United HealthCare 20,300 949,025
US Healthcare 12,500 550,000
UST 10,400 330,200
-----------
4,356,738
- -----------------------------------------------------------
Energy -- 5.3%
Anadarko Petroleum 10,250 448,437
Enron 11,600 382,800
Enron Oil & Gas 12,100 297,963
Schlumberger, ADR 4,900 292,162
-----------
1,421,362
Market
Quantity Value (a)
- -----------------------------------------------------------
Financial -- 9.0%
Federal National
Mortgage Association 9,700 $ 789,338
Franklin Resources 10,200 396,525
NationsBank 7,500 380,625
Norwest 19,600 497,350
UNUM 7,700 348,425
-----------
2,412,263
- -----------------------------------------------------------
Industrial -- 1.1%
Hanson PLC, ADR 16,000 302,000
- -----------------------------------------------------------
Retail -- 16.8%
Best Buy (b) 22,700 490,887
CUC International (b) 12,000 466,500
Home Depot 26,800 1,185,900
Lowe's Companies 13,400 462,300
Tandy 8,900 424,975
Wal-Mart Stores 37,500 956,250
Walgreen 10,800 519,750
-----------
4,506,562
- -----------------------------------------------------------
Technology -- 15.2%
Cabletron Systems (b) 9,500 426,312
Cisco Systems (b) 12,400 471,200
Compaq Computer (b) 25,500 879,750
First Data 7,500 389,063
Intel 8,500 720,375
Motorola 17,300 945,012
Sensormatic Electronics 8,300 232,400
-----------
4,064,112
- -----------------------------------------------------------
Utilities-- 3.6%
Airtouch Communications (b) 26,500 722,125
NYNEX 6,500 257,563
-----------
979,688
===========================================================
Total Investments in Common Stocks
(Cost: $24,225,169) $26,513,453
===========================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
13
<PAGE>
FUND PORTFOLIO
--------------
IAI Growth Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Preferred Stocks -- 2.0%
Market
Quantity Value (a)
- ----------------------------------------------------------
<S> <C> <C>
Non-Convertible - 2.0%
Electronics & Information -- 2.0%
Nokia, ADR (b) 7,300 $ 536,550
===========================================================
Total Investments in
Preferred Stocks
(Cost: $396,633)............................... $ 536,550
===========================================================
Total Investments in Securities
(Cost: $24,621,802) (e)........................ $27,050,003
===========================================================
Other Assets and Liabilities
(Net) - (0.9)%................................ $ (256,240)
===========================================================
Total Net Assets............................... $26,793,763
===========================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
14
<PAGE>
FUND PORTFOLIO
--------------
IAI Midcap Growth Fund
March 31, 1995
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Common Stocks -- 91.9%
Market
Quantity Value (a)
- ----------------------------------------------------------
<S> <C> <C>
Basic Materials -- 11.0%
Alco Standard 53,900 $ 3,907,750
Martin Marietta Materials 72,200 1,389,850
Minerals Technologies 102,500 3,305,625
Schulman Class A 35,650 1,087,325
-----------
9,690,550
- ----------------------------------------------------------
Consumer Cyclical -- 18.7%
Carnival Class A 34,300 801,763
Cooper Tire and Rubber 68,400 1,940,850
Hospitality Franchise Systems (b) 80,300 2,569,600
International Family
Entertainment Class B (b) 43,100 662,663
Jones Apparel Group (b) 74,800 2,019,600
Lennar 71,850 1,158,581
Marriott International 58,100 2,018,975
Mattel 26,300 647,638
Newell 46,600 1,188,300
Reebok International 57,600 2,052,000
Warnaco Class A (b) 79,000 1,412,125
-----------
16,472,095
- ----------------------------------------------------------
Consumer Non-Cyclical -- 4.8%
First Financial Management 9,100 657,475
Medtronic 8,900 617,438
R.P. Scherer (b) 30,200 1,517,550
Stewart Enterprises Class A 37,700 1,008,475
Sybron International (b) 11,700 421,200
-----------
4,222,138
- ----------------------------------------------------------
Energy -- 4.5%
Andarko Petroleum 29,000 1,268,750
Petroleum Geo-Services, ADR (b) 82,500 1,825,313
Valero 47,400 870,975
-----------
3,965,038
- ----------------------------------------------------------
Financial -- 5.7%
First USA 10,800 $ 453,600
MGIC Investment 36,400 1,483,300
Progressive 33,900 1,377,188
TIG Holdings 74,900 1,685,250
-----------
4,999,338
- ----------------------------------------------------------
Industrial -- 10.4%
Bemis 27,100 796,062
Camco International 87,100 1,796,437
Trimas 93,200 2,073,700
Tyco Labs International 40,800 2,157,300
Unifi 86,400 2,332,800
-----------
9,156,299
- ----------------------------------------------------------
Publishing/Printing -- 8.7%
American Greetings 57,700 1,716,575
Heritage Media Class A (b) 60,500 1,557,875
Houghton Mifflin 25,000 1,162,500
Scholastic (b) 42,600 2,311,050
Valassis Communications (b) 53,000 967,250
-----------
7,715,250
- ----------------------------------------------------------
Retail -- 10.1%
Barnes & Noble (b) 77,500 2,354,062
Dillard Department Stores Class A 24,300 671,287
Harcourt General 80,300 3,131,700
Michaels Stores (b) 44,600 1,460,650
Nordstrom 31,100 1,251,775
-----------
8,869,474
- ----------------------------------------------------------
Technology -- 11.2%
CUC International (b) 52,700 2,048,712
Danka Business Systems, ADR 107,400 2,805,825
FIserve (b) 86,700 2,297,550
Sensormatic Electronics 69,950 1,958,600
Tech Data (b) 76,200 771,525
-----------
9,882,212
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
15
<PAGE>
FUND PORTFOLIO
--------------
IAI Midcap Growth Fund
March 31, 1995
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Utilities -- 6.8%
ALC Communications (b) 50,200 $ 1,713,075
Century Telephone Enterprises 79,500 2,414,812
LCI International (b) 75,600 1,880,550
-----------
6,008,437
=================================================================================
Total Investments in Common Stocks
(Cost: $70,717,898).................................................. $80,980,831
=================================================================================
Other Securities -- 1.9%
Market
Quantity (d) Value (a)
- ---------------------------------------------------------------------------------
GalaGen Series B PFD (b) 76,923 $ 375,000
GalaGen Series C PFD (b) 30,000 150,000
South Street Leveraged
Corporate Recovery Fund
L.P. (1.00%) (b) - 348,049
Spectrum Equity Investors,
L.P. (0.50%) (b) - 87,369
Tut Systems Series D PFD (b) 233,546 268,578
Urologix Series B PFD (b) 100,000 297,300
Urologix Series C PFD (b) 59,613 131,149
-----------
1,657,445
=================================================================================
Total investments in Other
Securities
(Cost: $1,221,261)................................................... $ 1,657,445
=================================================================================
Total investments in Long-Term
Securities
(Cost: $71,939,159).................................................. $82,638,276
=================================================================================
Short-term Securities -- 3.4%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------------------
U.S. Treasury Bill -- 3.4%
5.80% 05/25/95 $3,000,000 $ 2,975,604
=================================================================================
Total Investments in
Short-term Securities
(Cost: $2,974,538)................................................... $ 2,975,604
=================================================================================
Total Investments in Securities
(Cost: $74,913,697) (e).............................................. $85,613,880
=================================================================================
Other Assets and Liabilities (Net) - 2.8%
..................................................................... $ 2,461,567
=================================================================================
Total Net Assets
..................................................................... $88,075,447
=================================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 18
16
<PAGE>
(This page intentionally left blank)
<PAGE>
NOTES TO FUND PORTFOLIOS
------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
March 31, 1995
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing securities.
(c)
Investments representing 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, 1995. A summary of transactions
during the period with affiliated issuers of the Emerging Growth Fund follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
IAI Emerging Growth Fund Affiliated Issuers
- ----------------------------------------------------------------------------------------
PURCHASES SALES
----------------------------------- REALIZED DIVIDEND
ISSUER QUANTITY COST QUANTITY COST GAIN (LOSS) INCOME
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AirCom Holdings
Series D PFD 1,000,000 $ 63,474 - - - -
AirCom Holdings Series B
Convertible Note 10.00% 37,500 $ 37,500
CardioGenesis
Series B PFD 500,000 $1,000,000 - - - -
GalaGen Convertible
Note 6.50% 440,000 $ 440,489 - - - -
GalaGen Warrants 21,000 - - - - -
Indigo Medical Series B PFD 181,818 $ 173,254
Indigo Medical Series C PFD 898,496 $ 763,844 - - - -
Pace Health Management
Systems(1) 230,320 $ 950,763 - - - -
Pace Health
Management
Systems Warrants 21,890 - - - - -
Seurat Analytical
Systems Convertible Note 125,000 $ 125,666 - - - -
Seurat Analytical
Systems, PFD 50,000 $ 100,000 - - - -
Tut System Series D PFD 467,092 $ 420,677 - - - -
Tut System Series E PFD 217,391 $ 250,398 - - - -
</TABLE>
(1) During the year ended March 31, 1995, 333,333 Series G and 88,888 Series H
common shares and 190,000 warrants of Health Care Expert Systems were converted
into 230,320 common shares of Pace Health Management Systems.
(d)
Restricted securities represent ownership in a security which has not been
registered with the Securities and Exchange Commission under the Securities Act
of 1933. For each of the restricted security issues held at March 31, 1995,
there were no unrestricted securities of the same class 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. The percentage ownership of limited
partnerships is indicated parenthetically. Information concerning each
restricted security holding on March 31, 1995 is shown on pages 20-21.
18
<PAGE>
NOTES TO FUND PORTFOLIOS
------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
(e)
At March 31, 1995, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund IAI Growth Fund IAI Midcap Growth Fund
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost for federal tax purposes $277,505,257 $24,624,460 $75,300,091
=============================================================
Gross unrealized appreciation $ 72,399,951 $ 2,686,537 $11,479,623
Gross unrealized depreciation (5,887,370) (260,994) (1,165,834)
-------------------------------------------------------------
Net unrealized appreciation $ 66,512,581 $ 2,425,543 $10,313,789
=============================================================
</TABLE>
19
<PAGE>
NOTES TO FUND PORTFOLIOS
========================
IAI Emerging Growth Fund
Restricted Securities (IAI Emerging Growth Fund)
<TABLE>
<CAPTION>
Security Acquisition Date Cost
<S> <C> <C>
Accessline Class A 06/30/94 $ 208,803
Accessline Series D PFD 06/03/94 499,940
Accessline Tech Warrants 06/03/94 0
AirCom Holdings Series D PFD 11/15/94 63,474
AirCom Holdings Series B Convertible Note 03/17/95 37,500
Air Communications 11/24/93 568,751
Alta Berkeley L.P. 03/31/93 48,668
04/27/93 50,317
08/24/94 50,487
09/21/94 50,508
CardioGenesis Series B PFD 06/09/94 1,000,000
GalaGen Convertible Note 06/17/94 315,489
03/22/95 125,000
GalaGen Series B PFD 02/26/93 750,000
GalaGen Series C PFD 11/29/93 250,000
GalaGen Warrants 12/05/94 --
Imnet Systems Series II PFD 02/16/95 682,331
Indigo Medical Series B PFD 05/26/93 500,000
Indigo Medical Series C PFD 09/30/94 256,254
12/27/94 506,590
02/07/95 1,000
Intellon Series A PFD 03/24/94 200,000
Intellon Warrants 04/12/94 0
OncorMed 12/13/93 200,050
Ovamed Convertible Note 02/01/95 50,208
Ovamed Series D PFD 05/27/94 375,000
Pace Health Management Systems 01/11/94 750,000
01/31/95 200,763
Pace Health Management Systems Warrants 03/30/95 --
Pricellular PFD 05/16/94 750,581
Seurat Analytical System Convertible Notes 01/31/95 125,666
Seurat Analytical System PFD 04/29/94 100,000
South Street Corporate Recovery Fund I L.P. 12/30/92 783,316
02/17/93 150,000
South Street Leveraged Corporate Recovery Fund I L.P. 12/30/92 225,197
02/17/93 45,000
Spectrum Equity Investors L.P. 05/12/94 149,286
01/03/95 50,000
Tut Systems Series D PFD 02/17/94 400,293
04/08/94 20,384
</TABLE>
20
<PAGE>
NOTES TO FUND PORTFOLIOS
========================
IAI Emerging Growth Fund & IAI Midcap Growth Fund
Restricted Securities (IAI Emerging Growth Fund continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Security Acquisition Date Cost
- ------------------------------------------------------------------------------------
<S> <C> <C>
Tut Systems Series E PFD 12/21/94 250,398
Urologix Series B PFD 08/14/92 $200,000
Urologix Series C PFD 03/22/94 131,148
Vanguard IV L.P. 08/10/92 50,000
02/11/93 50,000
08/12/93 50,000
11/01/93 50,000
01/17/95 50,000
Restricted Securities (IAI Midcap Growth Fund)
- ------------------------------------------------------------------------------------
Security Acquisition Date Cost
- ------------------------------------------------------------------------------------
GalaGen Series B PFD 02/26/93 $250,000
GalaGen Series C PFD 11/29/93 150,000
South Street Leveraged Corporate Recovery Fund L.P. 12/30/92 150,131
02/17/93 30,000
Spectrum Equity Investors, L.P. 05/12/94 74,644
01/03/95 25,000
Tut Systems Series D PFD 02/17/94 200,147
04/08/94 10,192
Urologix Series B PFD 08/14/92 200,000
Urologix Series C PFD 03/22/94 131,147
</TABLE>
21
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
====================================
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
March 31, 1995
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
- ------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Investments in securities of unaffiliated issuers, at market
(Cost: $ 271,593,442, $24,621,802, and $74,913,697, respectively) $338,111,180
Investments in securities of affiliated issuers, at market
(Cost: $ 6,221,572, $0, and $0, respectively) 5,906,658
------------------
Total investments in securities (see Fund Portfolios) 344,017,838
Cash in bank on demand deposit 77,019
Dividends and accrued interest receivable --
Receivable for investment securities sold 3,391,012
Organization costs 9,040
Other 6,781
------------------
Total assets 347,501,690
------------------
Liabilities
Disbursements in excess of cash on demand deposit --
Accrued investment advisory fee 212,441
Accrued distribution fee 79,260
Accrued dividend-disbursing, administrative, and accounting fee 58,270
Other accrued expenses 9,840
Payable for investment securities purchased 4,267,974
------------------
Total liabilities 4,627,785
------------------
Net assets applicable to outstanding capital stock $342,873,905
==================
Represented by:
Capital stock $ 216,542
Additional paid-in capital 279,060,496
Undistributed net investment income (loss) (203,089)
Accumulated net realized gain (loss) (2,402,868)
Unrealized appreciation on investments 66,202,824
------------------
Total -- representing net assets applicable to outstanding capital stock $342,873,905
==================
Shares of capital stock outstanding; authorized 10 billion shares each
of $.01 par value stock 21,654,161
------------------
Net asset value per share of outstanding capital stock $ 15.83
==================
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
IAI Growth Fund IAI Midcap Growth Fund
- ----------------------------------------------------------------------------------------------
<S> <C>
$27,050,003 $85,613,880
- -
- ----------------------------------------------------------------------------------------------
27,050,003 85,613,880
- 2,550,461
45,017 14,774
185,077 -
16,893 7,084
704 2,271
- ----------------------------------------------------------------------------------------------
27,297,694 88,188,470
- ----------------------------------------------------------------------------------------------
298,860 -
17,076 55,197
2,270 16,572
4,554 14,719
20,296 26,535
160,875 -
- ----------------------------------------------------------------------------------------------
503,931 113,023
- ----------------------------------------------------------------------------------------------
$26,793,763 $88,075,447
==============================================================================================
$ 24,477 57,362
24,584,628 73,489,834
49,821 -
(293,364) 3,828,068
2,428,201 10,700,183
- ----------------------------------------------------------------------------------------------
$26,793,763 $88,075,447
==============================================================================================
2,447,689 5,736,230
- ----------------------------------------------------------------------------------------------
$ 10.95 $ 15.35
==============================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 31
23
<PAGE>
STATEMENTS OF OPERATIONS
------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
Year ended March 31, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C>
Net investment Income
Income
Dividends $ 267,724
Interest 1,706,442
---------------------------
Total income 1,974,166
---------------------------
Expenses
Investment advisory fees 2,049,484
Distribution fees 696,244
Dividend-disbursing, administrative, and accounting fees 556,995
Legal fees 13,575
Custodian fees 11,940
Amortization of organization costs 5,720
Compensation of Directors 8,940
Audit fees 17,264
Printing and shareholder reporting 73,000
Registration fees 31,155
Other expenses 18,555
---------------------------
Total expenses 3,482,872
Less fees reimbursed by Advisers or Distributor (1,652)
---------------------------
Net expenses 3,481,220
---------------------------
Net investment income (loss) (1,507,054)
---------------------------
Net Realized and Unrealized Gains (losses)
Net realized gains (losses) on investment securities (1,939,184)
Net change in unrealized appreciation or depreciation 39,586,345
---------------------------
Net gain on investments 37,647,161
---------------------------
Net increase in net assets resulting from operations $36,140,107
===========================
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
IAI Growth Fund IAI Midcap Growth Fund
Period from August 1, 1994 to March 31, 1995 Year ended March 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C>
$ 230,058 $ 430,173
64,893 237,229
- ----------------------------------------------------------------------------------------
294,951 667,402
- ----------------------------------------------------------------------------------------
119,142 543,698
39,714 181,233
31,771 144,986
2,450 6,315
2,610 7,840
3,418 3,432
7,600 9,304
7,384 5,675
6,713 29,925
13,021 16,420
1,403 5,123
- ----------------------------------------------------------------------------------------
235,226 953,951
(36,623) (47,746)
- ----------------------------------------------------------------------------------------
198,603 906,205
- ----------------------------------------------------------------------------------------
96,348 (238,803)
- ----------------------------------------------------------------------------------------
140,742 6,163,154
2,214,048 6,609,145
- ----------------------------------------------------------------------------------------
2,354,790 12,772,299
- ----------------------------------------------------------------------------------------
$2,451,138 $12,533,496
========================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 31
25
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
Years Ended March 31,
----------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income (loss) $ (1,507,054) $ (1,545,363)
Net realized gains (losses) (1,939,184) 15,942,246
Net change in unrealized appreciation or
depreciation 39,586,345 9,561,682
----------------------------------
Net increase in net assets resulting
from operations 36,140,107 23,958,565
----------------------------------
Distributions to Shareholders from:
Net investment income -- --
Net realized gains (11,827,295) (4,716,052)
----------------------------------
Total distributions (11,827,295) (4,716,052)
----------------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares 323,906,877 497,746,842
Net asset value of shares issued to
shareholders in reinvestment
of distributions 11,763,429 4,673,532
Cost of shares redeemed (242,619,237) (427,667,135)
----------------------------------
Increase in net assets from capital
share transactions 93,051,069 74,753,239
----------------------------------
Total increase in net assets 117,363,881 93,995,752
Net assets at beginning of period 225,510,024 131,514,272
----------------------------------
Net assets at end of period $ 342,873,905 $ 225,510,024
[including undistributed net investment ==================================
income (loss) of ($203,089) and
($103,975) for Emerging Growth Fund,
$49,821 and $12,925 for Growth Fund,
$0 and $0 for Midcap Growth Fund]
</TABLE>
*Commencement of Operations
26
<PAGE>
<TABLE>
<CAPTION>
IAI Growth Fund IAI Midcap Growth Fund
Periods from Years Ended March 31,
- --------------------------------- ---------------------
August 1, 1994 August 6, 1993*
to to
March 31, 1995 July 31, 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 96,348 $ 18,767 $ (238,803) $ (157,981)
140,742 (434,106) 6,163,154 1,845,291
2,214,048 214,153 6,609,145 2,238,723
- --------------------------------------------------------------------------------
2,451,138 (201,186) 12,533,496 3,926,033
- --------------------------------------------------------------------------------
(62,390) (10,066) -- --
-- -- (3,289,143) (476,171)
- --------------------------------------------------------------------------------
(62,390) (10,066) (3,289,143) (476,171)
- --------------------------------------------------------------------------------
15,977,013 18,873,912 70,389,940 63,537,732
61,473 9,947 3,205,326 469,781
(6,041,735) (4,364,343) (51,382,552) (32,908,582)
- --------------------------------------------------------------------------------
9,996,751 14,519,516 22,212,714 31,098,931
- --------------------------------------------------------------------------------
12,385,499 14,308,264 31,457,067 34,548,793
14,408,264 100,000 56,618,380 22,069,587
- --------------------------------------------------------------------------------
$26,793,763 $14,408,264 $ 88,075,447 $ 56,618,380
================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 31
27
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Emerging Growth 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>
IAI Emerging Growth Fund
Years Ended March 31, Period from
------------------------------------ August 5, 1991***
1995 1994 1993 to March 31, 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 15.20 $ 13.47 $ 11.91 $ 10.00
---------------------------------------------------------
Operations
Net investment income (loss) (.07) (.10) (.05) .01
Net realized and unrealized gains 1.42 2.18 2.37 1.91
---------------------------------------------------------
Total from operations 1.35 2.08 2.32 1.92
---------------------------------------------------------
Distributions to
Shareholders From:
Net investment income -- -- -- (.01)
Net realized gains (.72) (.35) (.76) --
---------------------------------------------------------
Total distributions (.72) (.35) (.76) (.01)
---------------------------------------------------------
Net Asset Value
End of period $ 15.83 $ 15.20 $ 13.47 $ 11.91
=========================================================
Total investment return* 10.23% 15.43% 21.90% 19.23%
Net assets at end of period (000's omitted) $342,874 $225,510 $131,514 $ 38,110
Ratios
Expenses to average net assets 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.54%) (0.77%) (0.72%) 0.14%**
Portfolio turnover rate
(excluding short-term securities) 58.1% 76.3% 96.1% 126.6%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of all distributions at
net asset value.
** Annualized
*** Commencement of operations
28
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------
IAI Growth 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>
IAI Growth Fund
Period from Period from
August 1, 1994 to August 6, 1993*** to
March 31, 1995 July 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value
Beginning of period $ 9.87 $ 10.00
----------------------------------------
Operations
Net investment income .04 .01
Net realized and unrealized gains (losses) 1.07 (.13)
----------------------------------------
Total from operations 1.11 (.12)
----------------------------------------
Distributions to Shareholders From:
Net investment income (.03) (.01)
----------------------------------------
Total distributions (.03) (.01)
----------------------------------------
Net Asset Value
End of period $ 10.95 $ 9.87
========================================
Total investment return* 11.24% (1.21%)
Net assets at end of period (000's omitted) $26,794 $14,408
Ratios
Expenses to average net assets** 1.25% 1.25%
Net investment income to average net assets** 0.61% 0.16%
Portfolio turnover rate (excluding short-term securities) 68.7% 105.4%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
29
<PAGE>
FINANCIAL HIGHLIGHTS
----------------------
IAI Midcap Growth 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>
IAI Midcap Growth Fund
Years Ended March 31, Period from
--------------------- April 10, 1992***
1995 1994 to March 31, 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of period $ 13.67 $ 11.88 $ 10.00
--------------------------------------------
Operations
Net investment income (loss) (.04) (.04) .02
Net realized and unrealized gains 2.35 1.99 1.89
--------------------------------------------
Total from operations 2.31 1.95 1.91
--------------------------------------------
Distributions to Shareholders From:
Net investment income - - (.03)
Net realized gains (.63) (.16) -
--------------------------------------------
Total distributions (.63) (.16) (.03)
--------------------------------------------
Net Asset Value
End of period $ 15.35 $ 13.67 $ 11.88
============================================
Total investment return* 17.63% 16.40% 19.09%
Net assets at end of period (000's omitted) $88,075 $56,618 $22,070
Ratios
Expenses to average net assets 1.25% 1.25% 1.25%**
Net investment income (loss) to average net assets (0.33%) (0.45%) 0.24%**
Portfolio turnover rate (excluding short-term securities) 51.3% 49.7% 57.6%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
[1] Summary of Significant Accounting Policies
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. The IAI Emerging Growth Fund (Emerging Growth Fund) and IAI Midcap
Growth Fund (Midcap Growth Fund) are separate portfolios of IAI Investment Fund
VI, Inc. and IAI Growth Fund (Growth Fund) is a separate portfolio of IAI
Investment Funds II. This report covers only the Emerging Growth Fund, Growth
Fund, and Midcap Growth Fund (the Funds).
On November 9, 1994 the Board of Directors elected to change the fiscal year end
of the Growth Fund from July 31 to March 31. Accordingly, the financials
statements for the Growth Fund are presented for eight month period from
August 1, 1994 to March 31, 1995.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
Investments in securities traded on national securities exchanges are valued at
the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported bid price.
Restricted securities for which there is no public market are valued at fair
value in good faith as determined by the Board of Directors.
Short-term securities with a maturity of 60 days or less from the date of
purchase are valued at amortized cost. Short-term securities with a maturity
greater than 60 days from the date of purchase are marked-to-market on a daily
basis.
Futures and Options Contracts
In order to produce incremental earnings, protect gains, and facilitate buying
and selling of securities, the Funds may buy and sell futures contracts and
options. These investments involve risks caused by the possibility of an
imperfect correlation between movements in the value of the contract or option
and the price of the underlying securities and interest rates. Risks may also
arise if there is an illiquid secondary market for the instruments, or due to
the inability of counterparties to perform. Futures contracts are valued at the
settlement price of the exchange on which they are traded. Options traded on an
exchange are valued using the last sale price. Options traded over-the-counter
are valued using dealer-supplied valuations.
Upon entering into a futures contract, the Funds are 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 as unrealized gains and losses. The
variation margin is paid or received in cash daily by the Funds. The Funds
realize a gain or loss when the contract is closed or expires.
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.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
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 for 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 (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in a net
reclassification adjustment to additional paid-in capital as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
IAI Emerging IAI Growth IAI Midcap
Growth Fund Fund Growth Fund
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income (loss) $ 1,407,940 $ 2,938 $ 238,803
Accumulated net realized gains (losses) $ 1,480 - $(235,371)
----------------------------------------
Additional paid-in capital $(1,409,420) $(2,938) $ (3,432)
</TABLE>
For federal income tax purposes Emerging Growth Fund and Growth Fund have
capital loss carryovers of approximately $2,327,000 and $291,000, respectively,
at March 31, 1995 which, if not offset by subsequent capital gains, will expire
in 2002 and 2003. It is unlikely the Board of Directors will authorize a
distribution of any net realized gains until the available capital loss
carryover is offset or expires.
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.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made semi-annually. Capital gains, if any, are
primarily distributed as of the end of the calendar year. Additional capital
gains distributions as needed to comply with federal tax regulations are
distributed during the year.
Organization Costs
Organization costs are being amortized over 60 months on a straight-line basis.
In the event Investment Advisers, Inc. (Advisers) redeems any or all of its
shares representing initial capital in the Funds prior to the date such costs
are fully amortized, it will bear such portion of the unamortized organization
cost of the Funds as the number of shares redeemed bears to the initial purchase
of shares.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
[2] Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds have made payments to the Company which have been
capitalized. Also, the Funds are committed to make future capital contributions,
if requested by the Company.
Emerging Growth Fund, Growth Fund, and Midcap Growth Fund have available lines
of credit of $15,000,000, $4,334,000 and $15,000,000, respectively, with a bank
at prime interest rates. 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 at March 31, 1995 for Emerging Growth and Midcap Growth Funds.
Advances under the line of credit for Growth Fund totaled $216,000 at March 31,
1995, which is included in "disbursements in excess of cash on deposit" on the
Statement of Assets and Liabilities.
At March 31, 1995, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
<TABLE>
<CAPTION>
Limited Partnership Investment Commitments
- ------------------------------------------------------------------------------------
IAI Emerging Growth Fund IAI Midcap Growth Fund
- ------------------------------------------------------------------------------------
<S> <C> <C>
Alta Berkeley L.P. $ 251,000 $ -
Spectrum Equity Investors L.P. 800,000 400,000
Vanguard IV L.P. 150,000 -
------------------------------------------------
Total Commitments $1,201,000 $400,000
================================================
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of temporary investments in short-
term securities. The Funds maintain a "segregated account" in an amount equal to
its aggregate unpaid commitments.
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
[3] Fees and Expenses
Under terms of an investment advisory agreement, each Fund pays Advisers an
annual management fee computed monthly on the average month-end net asset value
using the following annual fee schedule:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Month-End Net Asset Value Annual Rate
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
IAI Emerging Growth Fund & IAI Midcap Growth Fund
For the first $200,000,000 .75%
For the next $300,000,000 .70%
Above $500,000,000 .65%
IAI Growth Fund
For the first $100,000,000 .75%
For the next $100,000,000 .65%
Above $200,000,000 .55%
</TABLE>
Each Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets at an annual rate of .20%.
The Funds have adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Funds' distributor. Under the Plan, each Fund pays
Distributor a monthly fee to cover expenses incurred in the distribution and
promotion of Fund shares. The fee is equal to an annual rate of .25% of each
Fund's average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds are responsible for
paying operating expenses, including costs incurred in the purchase and sale of
assets. Advisers and Distributor have agreed to reimburse the Funds to the
extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceed, on an annual basis, 1.25% of each Fund's respective average
month-end net assets.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
[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>
Emerging Growth Fund Growth Fund Midcap Growth Fund
- -------------------------------------------------------------------------------------------------------------------------------
Period from
Years ended March 31, --------------------------------------- Years ended March 31,
--------------------- August 1, 1994 to August 6, 1994* to ------------------------
1995 1994 March 31, 1995 July 31, 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sold 22,550,381 32,800,557 1,559,588 1,891,878 4,991,776 4,743,285
Issued for reinvested
distributions 949,429 305,506 6,062 990 236,681 34,824
Redeemed (16,680,719) (28,031,063) (577,136) (433,693) (3,632,875) (2,495,579)
--------------------------------------------------------------------------------------------------
Increase in
shares outstanding 6,819,091 5,075,000 988,514 1,459,175 1,595,582 2,282,530
--------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
[5] Investment Transactions
Purchases and Sales of Securities
For the period ended March 31, 1995, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Purchases Sales
- -------------------------------------------------------------------
<S> <C> <C>
IAI Emerging Growth Fund $207,060,127 $141,026,055
IAI Growth Fund $ 25,288,738 $ 14,802,271
IAI Midcap Growth Fund $ 51,046,505 $ 34,466,603
</TABLE>
Restricted Securities
Included in the Funds' portfolios of investments in securities at March 31, 1995
are issues which generally cannot be offered for sale to the public without
first being registered under the Securities Act of 1933 ("restricted
securities"). Each Fund limits investments in securities which are not readily
marketable to 15 percent of its total assets at the time of purchase. This
limitation does not include Rule 144A securities that have been determined to be
liquid based upon guidelines approved by the Fund's Board of Directors.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
The Board of Directors and Shareholders
IAI Investment Funds II, Inc.
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Growth Fund (a portfolio within IAI Investment Funds
II, Inc.) and IAI Emerging Growth Fund and IAI Midcap Growth Fund (separate
portfolios within IAI Investment Funds VI, Inc.) as of March 31, 1995 and the
related statements of operations for the period from August 1, 1994 to March 31,
1995 (IAI Growth Fund) and for the year ended March 31, 1995 (IAI Emerging
Growth Fund and IAI Midcap Growth Fund), the statements of changes in net assets
for the period from August 1, 1994 to March 31, 1995 and August 6, 1993
(commencement of operations) to July 31, 1994 (IAI Growth Fund) and for each of
the years in the two-year period ended March 31, 1995 (IAI Emerging Growth Fund
and IAI Midcap Growth Fund), and the financial highlights for the period from
August 1, 1994 to March 31, 1995 and August 6, 1993 (commencement of operations)
to July 31, 1994 (IAI Growth Fund), for each of the years in the two-year period
ended March 31, 1995 (IAI Emerging Growth Fund and IAI Midcap Growth Fund), for
the year ended March 31, 1993 (IAI Emerging Growth Fund), for the period from
April 10, 1992 (commencement of operations) to March 31, 1993 (Midcap Growth
Fund) and for the period from August 5, 1991 (commencement of operations) to
March 31, 1992 (IAI Emerging Growth Fund). These financial statements and the
financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Growth Fund, IAI Emerging Growth Fund and IAI Midcap Growth Fund at March 31,
1995, the results of their operations, 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.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 12, 1995
36
<PAGE>
FEDERAL TAX INFORMATION
-----------------------------------------------------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
<S> <C> <C>
- ---------------------------------------------------------
Payable Date Ordinary Long-Term
Income Capital Gain
- ---------------------------------------------------------
June 1994 - $ .7237
=========================================================
IAI Growth Fund
- ---------------------------------------------------------
Payable Date Ordinary Long-Term
Income Capital Gain
- ---------------------------------------------------------
December 1994 $ .0271 -
=========================================================
100.0% of ordinary income distribution qualifying for deduction by corporations.
IAI Midcap Growth Fund
- ---------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- ---------------------------------------------------------
June 1994 $ 1979 $.0771
December 1994 .1026 .2556
=========================================================
$.3005 $.3327
</TABLE>
16.48% of ordinary income distribution qualifying for deduction by corporations.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
37
<PAGE>
IAI MUTUAL FUND FAMILY
----------------------
<TABLE>
<CAPTION>
To diversify your portfolio, please consider all of the
mutual funds in our fund family
- -----------------------------------------------------------------------------------------------------------------------------------
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Capital Appreciation - Equity securities of companies in developing
Countries Fund countries
- -----------------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S. companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation - Common stocks of small to medium-sized
emerging growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation - Common stocks of medium-sized growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation - Common stocks of Upper Midwest companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation - Common stocks with potential for above-average
growth and appreciation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation - Common stocks which are considered to be undervalued
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth & Income Fund Capital Appreciation Income Common stocks with potential for long-term appreciation,
and common stocks that are expected to produce income
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds
[Capital Appreciation + Income] and short-term instruments
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
(formerly IAI Tax Free Fund) [Exempt from Federal and Minnesota State Income Taxes]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average
maturity of 25 months, investing primarily in
investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
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<PAGE>
(This page intentionally left blank)
<PAGE>
Distributor
IAI Securities, Inc.
Investment Adviser
and Manager
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Custodian
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Legal Counsel
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
Independent Auditors
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
Mutual Funds
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357
USA fax 612.376.2737
800.945.3863
612.376.2700
