EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI CAPITAL APPRECIATION FUND,
IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
[LOGO]
IAI MUTUAL FUNDS
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND SEMI-ANNUAL REPORT
SEPTEMBER 30, 1996
(UNAUDITED)
Chairman's Letter...............................2
Fund Managers' Reviews
IAI CAPITAL APPRECIATION FUND...............4
IAI EMERGING GROWTH FUND....................6
IAI GROWTH FUND.............................8
IAI MIDCAP GROWTH FUND.....................10
Fund Portfolios
IAI CAPITAL APPRECIATION FUND..............12
IAI EMERGING GROWTH FUND...................14
IAI GROWTH FUND............................17
IAI MIDCAP GROWTH FUND.....................19
Notes to Fund Portfolios.......................21
Statements of Assets and Liabilities...........26
Statements of Operations.......................28
Statements of Changes in Net Assets............30
Financial Highlights
IAI CAPITAL APPRECIATION FUND..............32
IAI EMERGING GROWTH FUND...................33
IAI GROWTH FUND............................34
IAI MIDCAP GROWTH FUND.....................35
Notes to Financial Statements..................36
IAI Mutual Fund Family.........................42
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
CALM AFTER THE STORM
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The milestones keep coming faster and faster. The Dow Jones Industrial Average
broke the 5,000 barrier last November. Less than a year later, the Dow has now
broken through 6,000. That's pretty remarkable when you consider that the Dow
Jones Industrial Average was under 1,000 as recently as 1982.
There are many reasons to remain optimistic about the financial markets. After a
strong second quarter, the U.S. economy seems to be moderating its pace, growing
fast enough to generate corporate profits, but not so fast to bring back
inflation. Interest rates have stabilized, as the Federal Reserve Board took no
action before the presidential election, calming the market.
Still, the road hasn't always been smooth in 1996. The first half of this summer
was an eye-opener for many investors. After reaching a high of 5780 on May 22,
the Dow Jones Industrial Average fell about 7 percent by the end of July--more,
if you count swings in intra-day trading. And small cap stocks, those that
typically trade on NASDAQ, fell as much as 20 percent. The reason for the
turbulence was investor fears, generated by job growth data and increases in
commodity prices, that the economy was becoming overheated. Corporate profits in
the second quarter rose sharply. According to Business Week, corporate profits
rose 11 percent during the second quarter of 1996, compared to the same period
in 1995. In a pattern that often confounds politicians, good news in the economy
is often bad news on Wall Street.
Just remember, though, that stock market corrections are normal. They're even
healthy, because they allow investors to buy stocks at temporarily depressed
prices. For two months, the Dow fell steadily from 5780 in May to less than 5300
in July before rallying in early August back to the 5700 level. Of course,
nobody knows when the market will hit bottom. Many Wall Street pundits told the
media that the stock market was headed lower, perhaps much lower. But they were
wrong, as is often the case.
We don't recommend that you try to time the market. Even the pros can't get it
right consistently. That's why dollar cost averaging is such a good strategy. By
contributing a fixed amount into the market each month, your money buys more
shares when the market is low and fewer shares when the market is high. This
simple yet time honored method typically allows you to purchase shares at a
lower average cost.
Another way to minimize the impact of market turbulence is to make sure that you
are properly diversified. The fixed income market typically offers stability to
a portfolio, and is particularly appropriate for those investors who rely on
income as opposed to price appreciation. The international equity markets also
offer a way to diversify your portfolio, since the economies in other parts of
the world are in different stages than the U.S. economy.
Over the next six months, the markets will undoubtedly be affected by the
results of the U.S. presidential election as well as uncertainties regarding the
new Congress. And, as we've seen so far in 1996, there is great potential for
volatility. But the markets continue to demonstrate a remarkable resiliency.
CHAIRMAN'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The economy has been stuck in a pattern of mini-cycles where periods of strength
are followed by periods of weakness. After expanding at a rate of about 3.4% in
the first half of this year, growth has slowed to 2.2% in the third quarter and
may be somewhat slower than that pace in the fourth quarter.
Recognizing the ebb and flow of the economy is critical to understanding the
recent behavior of the financial markets. The U.S. economy is operating only
slightly below its non-inflationary capacity. An extended period of real
strength would push resource utilization beyond its limits, producing higher
inflation, a tighter Federal Reserve policy, rising interest rates and an
eventual recession. Pauses, such as the one we are currently experiencing, help
extend the cycle and postpone these events. Thus, the markets respond favorably
to signs of a slowdown, as long as the slowdown does not go too far.
Lower growth rates in the second half of the year should relieve some
inflationary pressures without seriously damaging the expansion. New job
creation has slowed in the last two months, but remains on a upward trend. The
unemployment rate of 5.2% is close to a seven-year low, but labor costs are
still contained. Consumer confidence remains high, but spending has slowed as
consumers re-liquefy. Money and credit growth are providing ample liquidity, but
the excesses of earlier this year are dissipating. Commodity prices (including
the price of gold) appear to be headed lower, the budget deficit is at its
lowest level in 15 years and the U.S. dollar is firm. Overall, the slowdown
helps to preserve a favorable economic background for stocks and bonds.
Eventually this cycle will end in its usual way, with an overheating economy,
higher inflation, tighter monetary policy and a recession. Although this is not
likely to develop in the next six months, investors should remember that the
current pause is sure to be followed by renewed strength along with a pullback
in the markets. With this in mind, it is important to focus on a long-term
financial plan and not react to the emotions of the moment. Instead, periods of
volatility should be used to realign a well diversified portfolio or invest cash
reserves. In the months immediately ahead, we expect the firming trend of stock
and bond prices to continue.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/S/ NOEL P. RAHN
NOEL P. RAHN
CHAIRMAN
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
IAI CAPITAL APPRECIATION FUND
[PHOTO]
MARTIN J. CALIHAN, CFA
IAI CAPITAL APPRECIATION
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/96
[BAR CHART]
COMMERCIAL SERVICES 16.5%
ELECTRONIC TECHNOLOGY 13.2%
TECHNOLOGY SERVICES 11.2%
FINANCIAL 9.9%
NON-ENERGY MINERALS 8.1%
FUND OBJECTIVE
The investment objective of the IAI Capital Appreciation Fund is long-term
capital appreciation. It is designed for investors seeking the opportunity for
substantial long-term growth who can accept above-average stock market risk and
little or no current income. In general, the IAI Capital Appreciation Fund will
concentrate on companies that have superior performance records, solid market
positions, strong balance sheets and a management team capable of sustaining
growth. Although the Fund will typically invest in common stocks of smaller
emerging and mid-sized companies, it may invest in companies of any size
offering strong earnings growth potential.
FACTORS AFFECTING THE PAST SIX-MONTH PERFORMANCE
For the six months ended September 30, 1996, the IAI Capital Appreciation Fund
produced a total return of 32.04%. In contrast, the Russell 2500 Index reflected
a total return of 6.51% while the Standard & Poor's 500 Index generated a return
of 7.76%. Since inception on February 1, the IAI Capital Appreciation Fund
produced a total return of 48.41% while the Russell 2500 Index reflected a total
return of 11.96% and the S&P 500 Index was up 9.87%.
In strong markets and weak markets, the IAI Capital Appreciation Fund generally
continues to outperform its benchmarks. For example, in the strong months of
August and September, the IAI Capital Appreciation Fund produced a combined
total return of 15.0%. In contrast, the Russell 2500 was up 10.3% while the
Standard & Poors 500 Index was up 7.9%. In the very weak months of June and
July, the IAI Capital Appreciation Fund was down 4.7%, while the S&P 500 was
down 4.1% and the Russell 2500 was down 10.2%. Of course, past performance is
not predictive of future results.
One way we attempt to limit a source of underperformance is by diversifying
widely among industry sectors. The goal is to never be caught with big
weightings in the wrong sectors--earning gains when a sector becomes "hot" and
suffering less when a sector turns "cold." Another way we limit a source of
underperformance is by employing a "great companies at good prices" approach to
stock selection. Because it is neither "pure growth" nor "pure value," this
style should never be extremely out of favor. Furthermore, stocks of high
quality companies have historically had less volatility.
OUTLOOK
With the June/July correction behind us, we are more optimistic about the stock
market's direction over the next few months. The domestic economy continues to
grow moderately, which is providing a favorable backdrop for the market. As
always, the Fund's holdings do not reflect economic bets. We believe that the
Fund continues to hold pieces of well-managed, underappreciated, high-quality
businesses, whose stocks should perform well in most market environments.
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
VALUE OF $10,000 INVESTMENT+
IAI Capital Appreciation Fund*
Inception 2/01/96 Russell 2500 Index S&P Index
2/1/96 $10,000 $10,000 $10,000
3/31/96 $11,240 $10,513 $10,196
6/30/96 $13,451 $10,950 $10,658
9/30/96 $14,841 $11,198 $10,987
CUMULATIVE TOTAL RETURNS+
THROUGH 9/30/96
Since Inception
6 Months** 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND* 32.04% 48.41%
- --------------------------------------------------------------------------------
Russell 2500 Index 6.51% 11.96%
- --------------------------------------------------------------------------------
S&P 500 Index 7.76% 9.87%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* FEES AND EXPENSES ARE CURRENTLY BEING VOLUNTARILY WAIVED TO 1.25% OF AVERAGE
DAILY NET ASSETS.
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 9/30/96 3/31/96
- --------------------------------------------------------------------------------
Universal Outdoor Holdings Commercial Services 4.33 --
Petroleum Geo-Services ADR Industrial Services 3.63 4.71
Minerals Technologies Non-Energy Minerals 3.27 4.53
IMPATH Health Services 3.21 3.13
Coach USA Consumer Services 3.11 --
RISCORP Class A Financial 2.96 --
Heilig-Meyers Retail Trade 2.83 1.21
AptarGroup Process Industries 2.81 3.13
Enhance Financial Services Financial 2.74 --
Allen Group Electronic Technology 2.71 1.67
- --------------------------------------------------------------------------------
Total 31.60 18.38
1 EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI CAPITAL APPRECIATION FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND
[PHOTO]
RICK D. LEGGOTT, CFA
IAI EMERGING GROWTH
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/96
[BAR CHART]
COMPUTER SOFTWARE 23.8%
ELECTRONIC TECHNOLOGY 11.6%
COMMERCIAL SERVICES 10.3%
HEALTH SERVICES 10.3%
HEALTH TECHNOLOGY 5.7%
FUND OBJECTIVE
The IAI Emerging Growth Fund is designed for investors who seek long-term
capital appreciation. It pursues its objective of long-term capital appreciation
by investing primarily in equity securities of small- and medium-sized
companies. These companies are in the early stages of their life cycles and have
demonstrated or have the potential for above-average capital growth.
The Fund closed to new investors on February 1, 1996. Emerging Growth Fund's
current shareholders may add to an existing account and certain others may make
an initial investment in the Fund.
FACTORS AFFECTING THE PAST SIX-MONTH PERFORMANCE
For the six months ended September 30, 1996, the IAI Emerging Growth Fund
produced a total return of 9.90%. In contrast, the Russell 2500 Index reflected
a total return of 6.51% while the Standard & Poor's 500 Index generated a return
of 7.76%. For the twelve months ended September 30, 1996, the IAI Emerging
Growth Fund produced a total return of 30.75% while the Russell 2500 Index
reflected a total return of 15.83% and the S&P 500 Index was up 20.39%.
The IAI Emerging Growth Fund took advantage of the recent turbulence in the
small capitalization stock market by upgrading the quality and the growth rate
of the companies in the portfolio. The Fund added nine new stocks to the
portfolio during the third quarter, including companies doing business in the
financial, health care, retailing and service industries.
Among the more interesting companies in the portfolio are Employee Solutions,
Stein Mart, OccuSystems and Acxiom. Employee Solutions is an employee leasing
company which brings economies of scale available at a large employer to that of
a small organization. Employee Solutions offers a small employer an opportunity
to provide full benefit packages and better workman's compensation management.
We believe the market for this service is very large, since most new jobs
created in the United States are created by small businesses. In retailing, we
added Stein Mart, which sells brand name merchandise in the Southeastern United
States at 25% to 35% discounts, primarily by keeping their overhead lower than
the typical department store. In health care, we've added OccuSystems, a
physician's practice management company specializing in workman's compensation.
And Acxiom, another new stock, provides direct marketing organizations with
specialized customer data.
OUTLOOK
After a difficult July for most small cap stocks, the IAI Emerging Growth Fund
bounced back strongly in August and September. Our current outlook is positive,
as the inflation backdrop appears benign, the economy continues to grow
moderately, the election polls indicate not much change in the status quo, and
mutual fund industry inflows are picking up again, fueling the demand for
stocks.
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
VALUE OF $10,000 INVESTMENT+
IAI Emerging Growth Fund
Inception 8/05/91 Russell 2500 Index S&P 500 Index*
8/5/91 $10,000 $10,000 $10,000
3/31/92 $11,923 $11,670 $10,631
3/31/93 $14,534 $13,619 $12,255
3/31/94 $16,776 $14,817 $12,431
3/31/95 $18,489 $16,101 $14,368
3/31/96 $28,703 $20,902 $18,987
9/30/96 $31,546 $22,264 $20,460
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/96
Since Inception
6 Months** 1 Year 5 Years 8/05/91
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND 9.90% 30.75% 24.75% 24.94%
- --------------------------------------------------------------------------------
Russell 2500 Index 6.51% 15.83% 16.50% 16.76%*
- --------------------------------------------------------------------------------
S&P 500 Index 7.76% 20.39% 15.24% 14.86%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 9/30/96 3/31/96
- --------------------------------------------------------------------------------
Pure Atria Computer Software 3.54 --
Oxford Health Plans Health Services 3.04 2.98
Cascade Communications Electronic Technology 2.92 2.31
Inso Computer Software 2.92 2.84
PairGain Technologies Electronic Technology 2.92 1.55
Omnicare Health Services 2.73 2.40
Corporate Express Producer Manufacturing 2.51 2.11
Viking Office Products Retail Trade 2.40 2.40
Citrix Systems Computer Software 2.37 0.77
ABR Information Services Commercial Services 2.33 0.98
- --------------------------------------------------------------------------------
TOTAL 27.68 18.34
1 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 ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
FUND MANAGERS' REVIEW
IAI GROWTH FUND
IAI GROWTH FUND
[PHOTO]
SUZANNE ZAK, CFA
IAI GROWTH FUND
CO-MANAGER
[PHOTO]
DAVID A. MCDONALD
IAI GROWTH FUND
CO-MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/96
[BAR CHART]
FINANCIAL 12.1%
CONSUMER SERVICES 10.2%
PRODUCER MANUFACTURING 6.1%
RETAIL TRADE 6.0%
HEALTH TECHNOLOGY 5.9%
FUND OBJECTIVE
The IAI Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of established companies.
FACTORS AFFECTING THE PAST SIX-MONTH PERFORMANCE
For the six months ended September 30, 1996, the IAI Growth Fund produced a
total return of 8.24%. In contrast, the Standard & Poor's 500 Index generated a
return of 7.76%. For the twelve-month period ended September 30, 1996, the IAI
Growth Fund produced a total return of 12.70% while the S&P 500 Index was up
20.39%.
The six-month period continues to be characterized by takeover activity. Office
Depot and Staples announced a merger that would combine the two largest
companies in the retail office supply business. Instead of waiting to receive
Staples stock, we liquidated our position of Office Depot because of our concern
that the transaction will receive greater antitrust scrutiny than expected. In
addition, we believe that investors are underestimating the challenge of
integrating two very different distribution models.
The landmark Telecommunications Act of 1996 has created a great deal of
confusion and uncertainty in media stocks, both cable and broadcast. But
confusion and uncertainty often leads to investment opportunity. During the
third quarter, we initiated positions in Cox Communications and US West Media,
both large operators of cable television systems. These companies are well
positioned to thrive in the new environment because of their technological
leadership, superior customer service and upgraded networks. Both will be among
the fastest growing media companies over the next five years as they introduce a
bevy of new services.
Danka Business Systems was a major contributor to performance in the third
quarter. The catalyst to the stock's resurgence was the company's announcement
that they are buying the copier division of Eastman Kodak. Another positive
development was the acquisition of Duracell by Gillette, two superb consumer
franchises which will both benefit from each other's marketing and distribution
strengths.
OUTLOOK
The IAI Growth Fund invests in U.S. companies with growth prospects that exceed
the market as a whole. Our goal is to assemble a portfolio of stocks that sell
at an average stock market multiple of earnings, yet offer greater growth
prospects than the average company.
Although we focus on bottom-up stock selection, we are very concerned with one
particular economic statistic--inflation--the greatest threat to the value of
financial assets. Despite periodic concerns, especially in the bond market, of a
resurgence in inflation, we remain optimistic that this important economic
statistic will remain low.
FUND MANAGERS' REVIEW
IAI GROWTH FUND
VALUE OF $10,000 INVESTMENT+
IAI Growth Fund
Inception 8/06/93 S&P 500 Index*
8/6/93 $10,000 $10,000
3/31/94 $ 9,700 $10,142
3/31/95 $10,990 $11,723
3/31/96 $12,970 $15,491
9/30/96 $14,037 $16,693
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/96
Since Inception
6 Months** 1 Year 8/06/93
- --------------------------------------------------------------------------------
IAI Growth Fund 8.24% 12.70% 11.35%
- --------------------------------------------------------------------------------
S&P 500 Index 7.76% 20.39% 17.56%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 9/30/96 3/31/96
- --------------------------------------------------------------------------------
Danka Business Systems ADR Producer Manufacturing 3.68 --
Harcourt General Retail Trade 3.47 --
HFS Consumer Services 3.39 --
Alco Standard Commercial Services 3.16 --
Minerals Technologies Non-Energy Minerals 2.86 --
Aetna Financial 2.84 --
Tyco International Producer Manufacturing 2.73 --
Norwest Financial 2.42 2.82
CUC International Consumer Services 2.35 2.29
MedPartners Health Services 2.30 --
- --------------------------------------------------------------------------------
TOTAL 29.20 5.11
1 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 ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
IAI MIDCAP GROWTH FUND
[PHOTO]
SUZANNE ZAK, CFA
IAI MIDCAP GROWTH
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/96
[BAR CHART]
CONSUMER SERVICES 12.5%
FINANCIAL 10.1%
TECHNOLOGY SERVICES 9.7%
RETAIL TRADE 9.3%
PRODUCER MANUFACTURING 9.2%
FUND OBJECTIVE
The IAI Midcap Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of medium-sized companies. The Fund
defines "medium" as companies with market capitalizations (stock price
multiplied by the number of shares outstanding) between $500 million and $5
billion.
FACTORS AFFECTING THE PAST SIX-MONTH PERFORMANCE
For the six months ended September 30, 1996, the IAI Midcap Growth Fund produced
a total return of 6.74%. In contrast, the Standard & Poor's Midcap Index
generated a return of 5.88% while the S&P 500 Index produced a return of 7.76%.
For the twelve-month period ended September 30, 1996, the IAI Midcap Growth Fund
produced a total return of 17.10% while the S&P Midcap Index was up 14.00% and
the S&P 500 Index was up 20.39%.
During 1996, merger and acquisition activity has had a very positive impact on
the portfolio. One of our holdings, Office Depot, received and accepted a
takeover bid from Staples, which is making an attempt to become the undisputed
leader in office supply retailing. We elected to liquidate our position because
of our concern that the transaction will be scrutinized for antitrust problems,
as well as our belief that integrating the two companies will be more difficult
than anticipated.
As a result of Wall Street's pre-occupation with M&A activity, there are a
number of excellent midsized companies that we were able to purchase at
attractive prices. One such company is Lexmark International, formerly IBM's
printer and typewriter division. Lexmark International is thought to be the
technological leader in laser printers, carving out a very profitable niche in
the market. Laser and ink jet printers now comprise 80% of the company's
revenues. The company has been able to compete with industry-leader
Hewlett-Packard by targeting specific industries such as financial institutions,
retailing and pharmacies.
JLG Industries manufactures and distrib-utes mobile elevating work platforms for
maintenance and construction crews. Increasing safety regulations for
con-struction projects around the world are helping to fuel growth, particularly
in Latin America and the Pacific Rim. The company competes very effectively in a
narrow market niche which is expected to grow at an annual rate of 15% for the
next five to seven years.
OUTLOOK
Although we focus on bottom-up stock selection, the one economic statistic that
gets our attention is inflation--the greatest threat to the value of financial
assets. Despite periodic concerns, especially in the bond market, of a
resurgence in inflation, we remain optimistic that this important economic
statistic will remain low.
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
VALUE OF $10,000 INVESTMENT+
IAI Midcap Growth Fund
Inception 4/10/92 S&P Midcap Index* S&P 500 Index*
4/10/92 $10,000 $10,000 $10,000
3/31/93 $11,909 $11,617 $11,527
3/31/94 $13,862 $12,331 $11,693
3/31/95 $16,305 $13,370 $13,515
3/31/96 $20,139 $17,179 $17,859
9/30/96 $21,499 $18,189 $19,245
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/96
Since Inception
6 Months** 1 Year 4/10/92
- --------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND 6.74% 17.10% 18.64%
- --------------------------------------------------------------------------------
S&P Midcap Index (unadjusted) 5.88% 14.00% 14.22%*
- --------------------------------------------------------------------------------
S&P 500 Index 7.76% 20.39% 15.66%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 9/30/96 3/31/96
- --------------------------------------------------------------------------------
Danka Business Systems ADR Producer Manufacturing 3.99 4.42
Harcourt General Retail Trade 3.61 3.16
Alco Standard Commercial Services 3.56 3.79
HFS Consumer Services 3.49 3.44
Barnes & Noble Retail Trade 3.22 3.31
Minerals Technologies Non-Energy Minerals 3.11 3.00
FIserv Technology Services 2.92 2.46
MedPartners Health Services 2.59 0.64
Petroleum Geo-Services ADR Industrial Services 2.57 2.42
LCI International Utilities 2.48 2.84
- --------------------------------------------------------------------------------
TOTAL 31.54 29.48
1 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 ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
SEPTEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 96.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 16.5%
Affiliated Computer Services
Class A (b) 11,000 $ 646,250
G&K Services Class A 27,000 789,750
Heritage Media Class A (b) 23,000 434,125
Peak Technologies (b) 31,000 674,250
Strayer Education (b) 58,000 949,750
Superior Services (b) 44,000 704,000
True North Communications 24,000 555,000
Universal Outdoor Holdings (b) 55,000 1,980,000
Valassis Communications (b) 52,100 814,062
----------
7,547,187
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 4.3%
Coleman (b) 19,000 280,250
Cross-Continent Auto Retailers(b)50,000 1,150,000
Oakwood Homes 20,000 550,000
----------
1,980,250
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 6.5%
Coach USA (b) 53,200 1,423,100
John Q Hammons Hotels (b) 32,700 322,913
Platinum Entertainment (b) 30,000 457,500
Trump Hotels & Casino
Resorts (b) 33,000 767,250
----------
2,970,763
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 13.2%
Allen Group 67,000 1,239,500
Centennial Cellular Class A (b) 31,000 422,375
Checkpoint Systems (b) 33,400 885,100
CommNet Cellular (b) 13,000 375,375
Computer Products (b) 31,000 678,125
Microchip Technology (b) 25,000 934,375
PPT Vision (b) 100,000 1,000,000
Tollgrade Communications (b) 22,100 497,250
----------
6,032,100
- --------------------------------------------------------------------------------
ENERGY MINERALS - 2.2%
Forcenergy Gas Exploration (b) 39,800 $ 985,050
- --------------------------------------------------------------------------------
FINANCIAL - 9.9%
CapMAC 16,000 532,000
CMAC Investment 11,500 730,250
Enhance Financial Services 38,000 1,254,000
RISCORP Class A (b) 78,000 1,355,250
United Assets Management 27,000 637,875
----------
4,509,375
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.6%
Arrow International 10,000 345,000
Collaborative Clinical
Research (b) 20,000 270,000
IMPATH (b) 120,000 1,470,000
----------
2,085,000
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 1.2%
InControl (b) 60,000 562,500
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.5%
Camco International 4,000 149,500
Petroleum Geo-Services ADR (b) 61,000 1,662,250
Teekay Shipping 25,000 721,875
----------
2,533,625
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 8.1%
Advanced Lighting
Technologies (b) 62,000 1,224,500
Buckeye Cellulose (b) 25,000 650,000
Minerals Technologies 40,000 1,495,000
Watsco 16,000 326,000
----------
3,695,500
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 5.3%
AptarGroup 40,000 1,285,000
Polymer Group (b) 80,000 1,120,000
----------
2,405,000
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.8%
Dura Automotive Systems (b) 15,000 $ 279,375
Exide 15,000 388,125
Kennametal 20,000 687,500
Special Devices (b) 10,000 147,500
Zebra Technologies Class A (b) 28,000 717,500
----------
2,220,000
- --------------------------------------------------------------------------------
RETAIL TRADE - 2.8%
Heilig-Meyers 83,000 1,296,875
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 11.2%
American Management
Systems (b) 21,000 588,000
Black Box (b) 25,000 825,000
Carnegie Group (b) 89,000 723,125
Cylink (b) 15,000 215,625
GTECH (b) 35,000 1,124,375
Integrated Systems Consulting
Group (b) 10,000 201,250
Maxis (b) 15,000 210,000
Reptron Electronics (b) 33,000 585,750
Safeguard Scientifics (b) 17,000 677,875
----------
5,151,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $38,892,757)......................$ 43,974,225
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $38,892,757)......................$ 43,974,225
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 7.2%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
U.S. TREASURY BILL -- 2.2%
5.25% 12/12/96 $ 1,000,000 $ 990,060
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITY -- 5.0%
Federal Home Loan Bank (DISCOUNT NOTE)
5.70 10/01/96 2,300,000 2,300,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $3,289,780)......................$ 3,290,060
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $42,182,537) (E).................$ 47,264,285
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) (3.3%)
........................................$.(1,507,861)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS
........................................$..45,756,424
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 89.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 10.3%
ABR Information Services (b) 232,500 $ 16,740,000
AccuStaff (b) 146,700 3,795,863
Apollo Group Class A (b) 399,600 10,689,300
Cambridge Technology
Partners (b) 166,600 5,039,650
Career Horizons (b) 113,400 4,408,425
Desktop Data (b) 209,200 6,066,800
Employee Solutions (b) 365,700 6,308,325
NOVA (b) 227,600 7,510,800
Sitel (b) 167,000 7,431,500
Snyder Communications (b) 122,400 2,325,600
TeleTech Holdings (b) 102,600 3,744,900
----------
74,061,163
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE - 23.8%
Acxiom (b) 174,100 7,159,862
Arbor Software (b) 76,000 3,249,000
Avant! (b) 155,200 4,656,000
Baan (b) 223,600 7,462,650
CBT Group ADR (b) 291,500 13,700,500
Citrix Systems (b) 332,200 17,025,250
Epic Design Technology (b) 152,600 3,815,000
Forte Software (b) 55,700 2,186,225
HNC Software (b) 347,800 13,912,000
HPR (b) 360,500 5,768,000
Inso (b) 386,600 20,973,050
Legato Systems (b) 18,100 859,750
Macromedia (b) 247,900 5,143,925
Medic Computer Systems (b) 171,000 6,220,125
Pure Atria (b) 674,680 25,469,170
Red Brick Systems (b) 176,400 4,233,600
Security Dynamics
Technologies (b) 141,800 10,174,150
Synopsys (b) 312,000 14,391,000
Veritas Software (b) 12,700 898,525
Xylan (b) 71,600 3,884,300
----------
171,182,082
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 0.9%
USA Detergents (b) 167,050 $ 6,640,237
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.2%
Starbucks (b) 465,500 15,361,500
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 4.1%
Apple South 425,800 5,695,075
Outback Steakhouse (b) 218,250 5,265,281
Papa John's International (b) 163,000 8,557,500
Quality Dining (b) 356,963 10,173,445
----------
29,691,301
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 11.6%
Ascend Communications (b) 246,400 16,293,200
Cascade Communications (b) 257,800 21,010,700
Maxim Integrated Products (b) 201,100 7,113,912
Pairgain Technologies (b) 268,300 20,960,938
Premisys Communications (b) 266,600 9,797,550
Westell Technologies (b) 88,400 3,911,700
Xilinx (b) 125,500 4,267,000
----------
83,355,000
- --------------------------------------------------------------------------------
FINANCIAL - 2.3%
Credit Acceptance (b) 176,800 4,862,000
First USA Paymentech (b) 141,500 5,748,438
Olympic Financial (b) 244,000 6,008,500
----------
16,618,938
- --------------------------------------------------------------------------------
Health Services - 10.3%
Gulf South Medical Supply (b) 116,800 3,007,600
NCS Healthcare Class A (b) 112,200 3,520,275
OccuSystems (b) 229,700 6,891,000
Omnicare 644,200 19,648,100
Oxford Health Plans (b) 439,800 21,880,050
PhyCor (b) 360,862 13,735,310
Total Renal Care (b) 139,500 5,545,125
----------
74,227,460
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 5.7%
Arterial Vascular
Engineering (b) 147,900 $ 3,956,325
Biovail (b) 74,100 2,649,075
IDEXX Laboratories (b) 236,300 10,692,575
Jones Medical 138,000 6,693,000
Target Therapeutics (b) 187,000 7,994,250
Watson Pharmaceuticals (b) 228,900 8,583,750
----------
40,568,975
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 2.5%
Corporate Express (b) 463,450 18,016,619
- --------------------------------------------------------------------------------
RETAIL TRADE - 13.6%
Bed Bath & Beyond (b) 410,900 11,248,387
Express Scripts Class A (b) 124,500 4,513,125
Fastenal 283,900 14,053,050
Henry Schein (b) 241,350 9,291,975
Just For Feet (b) 165,400 8,290,675
Petco Animal Supplies (b) 321,500 8,760,875
PetSmart (b) 542,100 14,026,838
Stein Mart (b) 154,000 3,407,250
The Men's Warehouse (b) 285,150 7,128,750
Viking Office Products (b) 574,600 17,238,000
----------
97,958,925
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 2.1%
Alternative Resources (b) 143,200 4,027,500
Gartner Group Class A (b) 325,300 11,060,200
----------
15,087,700
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $426,124,585)...................$ 642,769,900
- --------------------------------------------------------------------------------
OTHER SECURITIES - 3.0%
- --------------------------------------------------------------------------------
COMMON STOCKS - 2.0%
AccessLine Technologies
Class A (b) 41,666 $ 249,996
BEI Medical (b) 1,029 30,860
CardioGenesis (b) 609,793 5,916,212
GalaGen (b) (d) 235,309 1,157,250
Imnet Systems (b) 42,637 784,265
Indigo Medical (b) 108,032 482,039
Network Appliance (b) 5,298 158,940
OncorMed Class A (b) 6,625 23,996
PACE Health Management
Systems (b) (d) 471,473 1,661,471
PriCellular Class B (b) 168,153 2,296,297
Seurat Analytical Systems
Class B (b) (d) 39,898 31,918
Urologix (b) 97,374 1,422,244
----------
14,215,488
- --------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 0.7%
AccessLine Technologies
Series A (b) 71,420 571,360
Air Communications
Series B (b) (d) 875,001 --
Intellon Series A (b) 200,000 372,000
Intellon Series B (b) 578,763 1,076,499
Myelos Neurosciences
Series A (b) (d) 500,000 500,000
Seurat Analytical Systems
Series B (b) (d) 114,973 229,946
Seurat Analytical Systems
Series C (b) (d) 54,136 433,097
Tut Systems Series D (b) (d) 467,092 583,865
Tut Systems Series E (b) (d) 217,391 271,739
Tut Systems Series F (b) (d) 780,000 975,000
----------
5,013,506
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.3%
Alta Berkeley III (b) 1.76% $ 621,687
South Street Corporate Recovery
Fund I (b) 0.50 64,286
South Street Leveraged Corporate
Recovery Fund I (b) 1.13 29,721
Spectrum Equity Investors (b) 0.92 810,234
Vanguard Associates IV (b) 1.36 697,709
----------
2,223,637
- --------------------------------------------------------------------------------
Principal Market
Rate Maturity Amount (c) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.0%
Air Communications Series B (b) (d)
10.00% 10/31/96 $ 258,332 --
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
STOCK OPTIONS - 0.0%
GalaGen (b) (d) 2,438 2,994
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies 10,713 --
GalaGen 06/16/99 (d) 5,691 --
GalaGen 03/24/00 (d) 2,258 --
GalaGen 07/09/00 (d) 1,807 --
GalaGen 01/29/01 (d) 22,500 --
Intellon 30,000 --
PACE Health Management
Systems (d) 21,820 11,434
- --------------------------------------------------------------------------------
PACE Health Management
Systems 08/31/05 (d) 35,000 18,340
----------
29,774
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $13,844,072)...................$ 21,485,399
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $439,968,657)..................$ 664,255,299
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 8.4%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS -- 8.4%
5.13% 11/14/96 $ 46,000,000 $ 45,722,620
5.26 12/12/96 15,000,000 14,850,900
----------
60,573,520
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $60,565,753)...................$ 60,573,520
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $500,534,410) (e)..............$ 724,828,819
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - (0.8%)
...................................$ (5,894,725)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS
...................................$ 718,934,094
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(AUDITED)
COMMON STOCKS - 84.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 5.5%
Alco Standard 11,000 $ 548,625
Reynolds & Reynolds Class A 9,900 258,638
Sysco 4,400 147,950
----------
955,213
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 4.2%
Eastman Kodak 4,000 314,000
Harley-Davidson 5,300 227,900
Newell 6,500 195,000
----------
736,900
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 4.0%
Colgate-Palmolive 3,100 269,312
Seagram 4,600 171,925
Warnaco Class A 10,500 249,375
----------
690,612
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 10.2%
Cox Communications Class A (b) 14,900 273,787
CUC International (b) 10,250 408,719
HFS (b) 8,800 588,500
Marriott International 6,500 358,313
U.S. West Media (b) 8,400 141,750
----------
1,771,069
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.9%
Hewlett-Packard 3,400 165,750
International Business Machines 1,300 161,850
----------
327,600
- --------------------------------------------------------------------------------
ENERGY MINERALS - 1.1%
Anadarko Petroleum 3,550 198,356
- --------------------------------------------------------------------------------
FINANCIAL - 12.4%
Aetna 7,000 $ 492,625
First USA 5,600 310,100
MBNA 5,000 173,750
Norwest 10,300 421,013
PMI Group 2,200 116,875
Progressive 6,100 349,225
TIG 9,900 297,000
----------
2,160,588
- --------------------------------------------------------------------------------
HEALTH SERVICES - 5.3%
Columbia/HCA Healthcare 7,000 398,125
Foundation Health (b) 3,800 128,725
MedPartners (b) 17,549 399,240
----------
926,090
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 5.9%
Pharmacia & Upjohn 7,000 288,750
Scherer (R.P.) (b) 4,500 219,375
SmithKline Beecham ADR 5,700 346,988
Sybron International -
Wisconsin (b) 6,100 176,900
----------
1,032,013
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.3%
Camco International 4,500 168,187
Petroleum Geo-Services
ADR (b) 10,000 272,500
Schlumberger ADR 2,100 177,450
USA Waste Services (b) 9,620 303,030
----------
921,167
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 4.1%
Minerals Technologies 13,300 497,087
Worthington 10,400 208,000
----------
705,087
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 3.0%
Bemis 3,800 $ 128,725
Corning 8,400 327,600
Sigma-Aldrich 1,100 62,700
----------
519,025
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING- 6.4%
Danka Business Systems ADR 16,100 639,975
Tyco International 11,000 474,375
----------
1,114,350
- --------------------------------------------------------------------------------
RETAIL TRADE - 6.0%
Barnes & Noble (b) 8,300 285,312
Harcourt General 10,900 602,225
Wal-Mart 5,800 152,975
----------
1,040,512
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 4.9%
FIserv (b) 10,400 397,800
GTECH (b) 5,300 170,263
Intuit (b) 5,800 182,700
Sybase (b) 6,500 96,687
----------
847,450
- --------------------------------------------------------------------------------
UTILITIES - 3.9%
Century Telephone Enterprises 10,400 357,500
LCI International (b) 10,000 315,000
----------
672,500
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $13,231,677)...................$ 14,618,532
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $13,231,677)...................$ 14,618,532
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 16.1%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 16.1%
Federal Home Loan Bank (discount note)
5.70% 10/01/96 $ 2,800,000 $ 2,800,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES
(COST: $2,800,000)....................$ 2,800,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $16,031,677) (e)...............$ 17,418,532
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - (0.2%)
...................................$ (43,079)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS
...................................$ 17,375,453
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
September 30, 1996
(percentage figures indicate percentage of total net assets)
(unaudited)
COMMON STOCKS - 92.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 6.1%
Alco Standard 104,000 $ 5,187,000
Reynolds & Reynolds Class A 88,600 2,314,675
Sensormatic Electronics 49,050 876,769
Valassis Communications (b) 24,300 379,687
----------
8,758,131
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 5.2%
Cooper Tire and Rubber 84,300 1,822,988
Harley-Davidson 50,900 2,188,700
Lennar 81,850 1,821,162
Newell 53,800 1,614,000
----------
7,446,850
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.0%
Warnaco Class A 123,600 2,935,500
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 12.5%
CUC International (b) 87,150 3,475,106
HFS (b) 76,000 5,082,500
La Quinta Inns 121,050 2,360,475
Marriott International 36,000 1,984,500
Scholastic (b) 21,000 1,522,500
Stewart Enterprises Class A 62,100 2,095,875
Trump Hotels & Casino
Resorts (b) 75,200 1,748,400
----------
18,269,356
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 1.5%
Wang Laboratories (b) 115,400 2,250,300
- --------------------------------------------------------------------------------
ENERGY MINERALS - 2.1%
Anadarko Petroleum 32,400 1,810,350
Nuevo Energy (b) 32,200 1,308,125
----------
3,118,475
- --------------------------------------------------------------------------------
FINANCIAL - 10.1%
Credit Acceptance (b) 73,200 2,013,000
Finova Group 19,800 1,188,000
First USA 49,400 2,735,525
Old Republic International 20,800 514,800
- --------------------------------------------------------------------------------
PMI Group 43,400 $ 2,305,625
Progressive 54,500 3,120,125
TIG 93,900 2,817,000
----------
14,694,075
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.2%
Foundation Health (b) 69,100 2,340,763
MedPartners (b) 165,727 3,770,289
----------
6,111,052
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 2.4%
Scherer (R.P.) (b) 40,100 1,954,875
Sybron International -
Wisconsin (b) 52,800 1,531,200
----------
3,486,075
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.5%
Camco International 38,900 1,453,888
Petroleum Geo-Services
ADR (b) 137,400 3,744,150
USA Waste Services (b) 90,100 2,838,150
----------
8,036,188
- --------------------------------------------------------------------------------
NON-ENERGY MINERALS - 4.3%
Minerals Technologies 121,100 4,526,113
Worthington 89,200 1,784,000
----------
6,310,113
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 3.3%
Bemis 31,100 1,053,513
Brady (W.H.) 29,900 751,237
Sigma-Aldrich 9,400 535,800
Unifi 91,000 2,502,500
----------
4,843,050
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 9.2%
Danka Business Systems ADR 146,100 5,807,475
JLG Industries 64,800 1,215,000
Nordson 9,400 524,050
Roper 62,600 2,957,850
Tyco International 68,000 2,932,500
----------
13,436,875
- --------------------------------------------------------------------------------
RETAIL TRADE - 9.3%
Barnes & Noble (b) 136,400 $ 4,688,750
Harcourt General 95,300 5,265,325
Heilig-Meyers 104,300 1,629,688
Nordstrom 50,700 1,926,600
----------
13,510,363
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 9.7%
Autodesk 29,200 755,550
FIserv (b) 111,400 4,261,050
GTECH (b) 101,500 3,260,688
Intuit (b) 87,700 2,762,550
Lexmark International
Class A (b) 106,000 2,159,750
Sybase (b) 60,500 899,937
----------
14,099,525
- --------------------------------------------------------------------------------
TRANSPORTATION - 0.3%
Illinois Central 15,750 498,093
- --------------------------------------------------------------------------------
UTILITIES - 4.7%
Century Telephone Enterprises 94,500 3,248,438
LCI International (b) 114,800 3,616,199
----------
6,864,637
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $106,260,630)...................$ 134,668,658
- --------------------------------------------------------------------------------
OTHER SECURITIES - 1.6%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 1.1%
GalaGen (b) (d) 47,398 $ 241,398
Urologix (b) 97,374 1,422,245
----------
1,663,643
- --------------------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCK - 0.2%
Tut Systems Series D (b) (d) 233,546 291,933
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.3%
South Street Leveraged Corporate
Recovery Fund I (b) 0.75% $ 19,817
Spectrum Equity Investors (b) 0.46 405,111
----------
424,928
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
STOCK OPTIONS - 0.0%
GalaGen (b) (d) 813 1,140
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER
SECURITIES
(COST: $1,209,182).....................$ 2,381,644
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $107,469,812)...................$ 137,050,302
- --------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 6.1%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
U.S. TREASURY BILLS - 6.1%
5.13% 11/14/96 $ 5,000,000 $ 4,969,850
5.29 12/12/96 4,000,000 3,960,240
----------
8,930,090
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $8,928,257)......................$ 8,930,090
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $116,398,069) (e)................$ 145,980,392
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - (0.1%)
........................................$ (302,632)
- --------------------------------------------------------------------------------
TOTAL NET ASSETS
.....................................$ 145,677,760
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
(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 September 30, 1996, 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 September 30, 1996 is shown on pages 23-24.
(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 September 30, 1996. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
IAI EMERGING GROWTH FUND AFFILIATED ISSUERS
- --------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
- --------------------------------------------------------------------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Air Communications
Series A PFD -- $ -- 1,000,000 $ 1 $ (63,473) $--
Air Communications
Series B PFD -- $ -- 300,000 $ -- $ (375,472) $--
Air Communications
Warrants -- $ -- 75,000 $ -- $ (75) $--
Air Communications Series B
Convertible Note 10/31/96 24,999 $ 25,055 -- $ -- $ -- $--
CardioGenesis
Series B PFD1 -- $ -- 410,000 $ -- $ -- $--
CardioGenesis
Series C PFD1 -- $ -- 199,793 $ -- $ -- $--
CardioGenesis
Common Stock1 609,793 $1,670,486 -- $ -- $ -- $--
GalaGen Series E
Convertible Note 03/31/97 -- $ -- 375,000 $ 375,000 $ -- $ 18
PACE Health Management
Systems 196,154 $ 637,501 -- $ -- $ -- $--
-- CONTINUED ON NEXT PAGE --
</TABLE>
<TABLE>
<CAPTION>
IAI EMERGING GROWTH FUND AFFILIATED ISSUERS (CONT.)
- --------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
- --------------------------------------------------------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Seurat Analytical Systems
Series C Convertible
Note 07/08/962 -- $ -- 325,000 $ -- $ -- $ 18,099
Seurat Analytical Systems
Series C PFD2 54,136 $433,406 -- $ -- $ -- $ --
Seurat Analytical Systems
Series B Common Stock 39,898 $ -- -- $ -- $ -- $ --
Tut Systems
Series F Convertible
Note 03/23/97 251,250 $251,250 251,250 $251,250 $ -- $ 2,478
Tut Systems Series F PFD 780,000 $975,000 -- $ -- $ -- $ --
DURING THE PERIOD ENDED SEPTEMBER 30, 1996: (1) CARDIOGENESIS PREFERRED STOCKS
WITH A COST OF $1,670,486 CONVERTED INTO CARDIOGENESIS COMMON STOCK. (2) SEURAT
CONVERTIBLE NOTE WITH A COST OF $325,310 WAS CONVERTED INTO SERIES C PREFERRED
STOCK.
</TABLE>
(e)
At September 30, 1996, 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:
NOTES TO FUND PORTFOLIOS
<TABLE>
<CAPTION>
IAI Capital IAI Emerging IAI Growth IAI Midcap
Appreciation Fund Growth Fund Fund Growth Fund
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost for federal tax purposes $ 42,182,537 $ 500,496,813 $ 16,048,544 $116,614,168
- ----------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 6,046,097 $ 241,658,251 $ 1,540,702 $ 33,897,105
Gross unrealized depreciation (964,349) (17,326,244) (170,714) (4,530,881)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 5,081,748 $ 224,332,007 $ 1,369,988 $ 29,366,224
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
September 30, 1996
(unaudited)
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
BEI Medical 02/05/96 30,859
CardioGenesis 06/09/94 1,000,201
12/05/95 670,285
GalaGen 02/26/93 750,000
11/29/93 250,099
06/17/94 351,839
03/22/95 133,236
07/07/95 104,684
12/14/95 124,999
Imnet Systems 02/16/95 320,323
Indigo Medical 02/07/95 100
05/26/93 50,001
12/27/94 76,352
Network Appliance 09/07/93 6,728
OncorMed Class A 12/13/93 50,516
PACE Health Management
Systems 01/11/94 750,000
01/31/95 201,520
04/27/95 150,625
06/20/95 75,000
09/17/96 637,501
PriCellular Class B 05/16/94 750,574
Seurat Analytical Systems
Class B 06/28/96 --
Urologix 08/14/92 200,000
03/22/94 131,148
NON-CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
Air Communications
Series B 11/24/93 400,000
04/25/94 168,751
NON-CONVERTIBLE
PREFERRED STOCKS (CONT.)
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Intellon Series A 03/24/94 $ 200,163
Intellon Series B 04/03/96 1,076,676
Myelos Neurosciences
Series A 07/05/95 500,000
Seurat Analytical Systems
Series B 04/29/94 100,000
07/05/95 130,614
Seurat Analytical Systems
Series C 07/05/95 125,186
11/08/95 50,124
01/22/96 75,000
06/28/96 108,096
03/19/96 75,000
Tut Systems Series D 02/17/94 400,293
04/08/94 20,384
Tut Systems Series E 12/21/94 250,563
Tut Systems Series F 07/30/96 975,000
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Alta Berkeley III 03/31/93 $ 14,048
04/27/93 50,317
08/25/94 50,487
09/21/94 50,508
06/20/95 53,837
10/20/95 53,451
07/19/96 51,563
09/25/96 51,531
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
RESTRICTED SECURITIES IAI EMERGING GROWTH FUND
LIMITED PARTNERSHIPS (CONT.)
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Spectrum Equity Investors 05/12/94 $ 149,286
01/03/95 50,000
05/11/95 11,050
05/22/95 70,000
11/16/95 85,000
12/13/95 35,000
04/17/96 25,000
05/15/96 70,000
08/14/96 40,000
Vanguard Associates IV 08/10/92 43,273
02/11/93 50,000
08/12/93 50,000
11/01/93 50,000
04/19/94 50,000
09/19/94 50,000
01/17/95 50,000
07/17/95 50,000
12/13/95 50,000
07/26/96 50,000
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Air Communications
Series B 10/31/96 11/21/95 $ 75,000
11/30/95 50,000
02/26/96 50,000
03/22/96 58,333
05/21/96 16,666
06/25/96 8,333
STOCK OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
GalaGen 03/24/94 $ --
02/22/95 --
02/22/96 --
WARRANTS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
AccessLine Technologies 06/03/94 $ --
GalaGen 06/16/99 12/05/94 --
GalaGen 03/24/00 04/13/95 --
GalaGen 07/09/00 07/07/95 --
GalaGen 01/29/01 01/30/96 --
Intellon 04/12/94 --
PACE Health Management
Systems 03/30/95 --
PACE Health Management
Systems 08/31/05 01/16/96 --
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
RESTRICTED SECURITIES IAI MIDCAP GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
GalaGen 02/26/93 $ 250,000
11/29/93 150,027
Urologix 08/14/92 200,000
03/22/94 131,147
NON-CONVERTIBLE
PREFERRED STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
Tut Systems Series D 02/17/94 $ 200,147
04/08/94 10,192
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
South Street Leveraged
Corporate Recovery
Fund I 10/03/95 $ --
Spectrum Equity Investors 05/12/94 74,644
01/03/95 25,000
05/11/95 5,525
05/22/95 35,000
11/16/95 42,500
12/13/95 17,500
04/17/96 12,500
05/15/96 35,000
08/14/96 20,000
STOCK OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
TGalaGen 03/24/94 $ --
02/22/95 --
02/22/96 --
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
IAI Capital IAI Emerging
Appreciation Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $42,182,537, $493,367,564, $16,031,677, and
$115,787,703, respectively) $ 47,264,285 $ 718,951,765
Investments in securities of affiliated issuers, at market
(Cost: $0, $7,166,846, $0 and $610,366, respectively) -- 5,877,054
- ---------------------------------------------------------------------------------------------------------------
Total investments in securities (see Fund Portfolios) 47,264,285 724,828,819
Cash in bank on demand deposit 17,091 --
Receivable for investment securities sold -- 748,850
Dividends and accrued interest receivable 8,663 2,760
Other -- 4,285
- ---------------------------------------------------------------------------------------------------------------
Total assets 47,290,039 725,584,714
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Disbursements in excess of cash on demand deposit -- 148,711
Payable for investment securities purchased 1,533,615 6,501,909
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,533,615 6,650,620
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 45,756,424 $ 718,934,094
- ---------------------------------------------------------------------------------------------------------------
REPRESENTED BY:
Capital stock $ 30,840 $ 287,846
Additional paid-in capital 39,045,067 432,486,319
Undistributed net investment income (loss) (79,490) (2,053,516)
Accumulated net realized gain 1,678,259 63,919,036
Unrealized appreciation on investments 5,081,748 224,294,409
- ---------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 45,756,424 $ 718,934,094
- ---------------------------------------------------------------------------------------------------------------
Shares of capital stock outstanding; authorized 10 billion shares each
of $.01 par value stock 3,084,005 28,784,584
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 14.84 $ 24.98
- ---------------------------------------------------------------------------------------------------------------
[WIDE TABLE CONTINUED FROM ABOVE]
IAI Growth IAI Midcap
Fund Growth Fund
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $42,182,537, $493,367,564, $16,031,677, and
$115,787,703, respectively) $ 17,418,532 $ 145,445,921
Investments in securities of affiliated issuers, at market
(Cost: $0, $7,166,846, $0 and $610,366, respectively) -- 534,471
- ---------------------------------------------------------------------------------------------------------------
Total investments in securities (see Fund Portfolios) 17,418,532 145,980,392
Cash in bank on demand deposit -- 430,584
Receivable for investment securities sold 23,657 --
Dividends and accrued interest receivable 6,791 16,152
Other -- 99
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 17,448,980 146,427,227
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Disbursements in excess of cash on demand deposit 11,578 --
Payable for investment securities purchased 61,949 749,467
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 73,527 749,467
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 17,375,453 $ 145,677,760
- ---------------------------------------------------------------------------------------------------------------
REPRESENTED BY:
Capital stock $ 14,828 $ 78,012
Additional paid-in capital 13,502,899 109,066,120
Undistributed net investment income (loss) (21,716) (273,928)
Accumulated net realized gain 2,492,587 7,225,233
Unrealized appreciation on investments 1,386,855 29,582,323
- ---------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 7,375,453 $ 145,677,760
- ---------------------------------------------------------------------------------------------------------------
Shares of capital stock outstanding; authorized 10 billion shares each
of $.01 par value stock 1,482,840 7,801,169
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.72 $ 18.67
- ---------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements on page 36
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
SIX MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
IAI CAPITAL IAI EMERGING
APPRECIATION FUND GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $0, $0, $0,
and $1,679, respectively) $ 40,089 $ 30,640
Interest (including $0, $20,595, $0, and $0, respectively, from
affiliated issuers) 34,534 2,099,903
- -------------------------------------------------------------------------------------------------------------------
Total income 74,623 2,130,543
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees (Note 3) 172,400 4,184,059
Compensation of Directors 816 24,552
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 173,216 4,208,611
Less fees reimbursed by Advisers or Distributor (19,290) (24,552)
- -------------------------------------------------------------------------------------------------------------------
NET EXPENSES 153,926 4,184,059
- -------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (79,303) (2,053,516)
- -------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investment securities (including $0, ($439,020),
$0, and $0, respectively, from affiliated issuers) 1,700,207 63,865,424
Net change in unrealized appreciation or depreciation on investment securities 4,723,497 959,480
- -------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 6,423,704 64,824,904
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,344,401 $ 62,771,388
- -------------------------------------------------------------------------------------------------------------------
[WIDE TABLE CONTINUED FROM ABOVE]
IAI GROWTH IAI MIDCAP
FUND GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
Income
Dividends (net of foreign income taxes withheld of $0, $0, $0,
and $1,679, respectively) $ 68,327 $ 332,453
Interest (including $0, $20,595, $0, and $0, respectively, from
affiliated issuers) 14,941 233,785
- --------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 83,268 566,238
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees (Note 3) 104,984 840,166
Compensation of Directors 601 4,756
- --------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 105,585 844,922
Less fees reimbursed by Advisers or Distributor (601) (4,756)
- --------------------------------------------------------------------------------------------------------------------
NET EXPENSES 104,984 840,166
- --------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (21,716) (273,928)
- --------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investment securities (including $0, ($439,020),
$0, and $0, respectively, from affiliated issuers) 2,509,587 7,441,678
Net change in unrealized appreciation or depreciation on investment securities (1,176,543) 1,325,834
- --------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 1,333,044 8,767,512
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,311,328 $ 8,493,584
- --------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Financial Statements on page 36
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
IAI CAPITAL
APPRECIATION FUND
Period from
Six months ended February 1, 1996*
September 30, 1996 to March 31, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income (loss) $ (79,303) $ 1,281
Net realized gains (losses) 1,700,207 (21,948)
Net change in unrealized appreciation or depreciation 4,723,497 358,251
- --------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 6,344,401 337,584
- --------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,468) --
Net realized gains -- --
- --------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1,468) --
- --------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 52,929,127 9,405,842
Net asset value of shares issued to shareholders in reinvestment
of distributions 1,407 --
Cost of shares redeemed (22,928,430) (332,039)
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 30,002,104 9,073,803
- --------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 36,345,037 9,411,387
NET ASSETS AT BEGINNING OF PERIOD 9,411,387 --
- --------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 45,756,424 $ 9,411,387
- --------------------------------------------------------------------------------------------------------------------
[including undistributed net investment income (loss) of ($79,490) and
$1,281 for Capital Appreciation Fund, ($2,053,516) and $0 for Emerging
Growth Fund, ($21,716) and $0 for GrowthFund, ($273,928) and $0 for
Midcap Growth Fund]
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
IAI EMERGING GROWTH FUND
Six months ended Year ended
September 30, 1996 March 31, 1996
- --------------------------------------------------------------------------------------------------------- ---
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income (loss) $ (2,053,516) $ (2,566,996)
Net realized gains (losses) 63,865,424 57,738,831
Net change in unrealized appreciation or depreciation 959,480 157,132,105
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 62,771,388 212,303,940
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (40,957,058) (11,559,601)
- -------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (40,957,058) (11,559,601)
- -------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 297,825,137 881,980,833
Net asset value of shares issued to shareholders in reinvestment
of distributions 39,859,387 11,213,745
Cost of shares redeemed (294,452,954) (782,924,628)
- -------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 43,231,570 110,269,950
- -------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 65,045,900 311,014,289
NET ASSETS AT BEGINNING OF PERIOD 653,888,194 342,873,905
- -------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 718,934,094 $ 653,888,194
- -------------------------------------------------------------------------------------------------------------
[including undistributed net investment income (loss) of ($79,490) and
$1,281 for Capital Appreciation Fund, ($2,053,516) and $0 for Emerging
Growth Fund, ($21,716) and $0 for GrowthFund, ($273,928) and $0 for
Midcap Growth Fund]
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
IAI GROWTH FUND
Six months ended Year ended
September 30, 1996 March 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income (loss) $ (21,716) $ (8,751)
Net realized gains (losses) 2,509,587 3,286,766
Net change in unrealized appreciation or depreciation (1,176,543) 135,197
- -----------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,311,328 3,413,212
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (49,876)
Net realized gains (1,421,734) (1,584,209)
- -----------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1,421,734) (1,634,085)
- -----------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 7,200,015 6,914,431
Net asset value of shares issued to shareholders in reinvestment
of distributions 1,415,562 1,618,691
Cost of shares redeemed (8,209,187) (20,026,543)
- -----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 406,390 (11,493,421)
- -----------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 295,984 (9,714,294)
NET ASSETS AT BEGINNING OF PERIOD 17,079,469 26,793,763
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 17,375,453 $ 17,079,469
- -----------------------------------------------------------------------------------------------------------------
[including undistributed net investment income (loss) of ($79,490) and
$1,281 for Capital Appreciation Fund, ($2,053,516) and $0 for Emerging
Growth Fund, ($21,716) and $0 for GrowthFund, ($273,928) and $0 for
Midcap Growth Fund]
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
IAI MIDCAP GROWTH FUND
Six months ended Year ended
September 30, 1996 March 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income (loss) $ (273,928) $ (369,422)
Net realized gains (losses) 7,441,678 4,572,382
Net change in unrealized appreciation or depreciation 1,325,834 17,556,306
- -------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 8,493,584 21,759,266
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (1,641,033) (6,609,822)
- -------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1,641,033) (6,609,822)
- -------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 48,742,457 83,519,076
Net asset value of shares issued to shareholders in reinvestment
of distributions 1,583,357 6,260,134
Cost of shares redeemed (33,875,401) (70,629,305)
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets from capital share transactions 16,450,413 19,149,905
- -------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 23,302,964 34,299,349
NET ASSETS AT BEGINNING OF PERIOD 122,374,796 88,075,447
- -------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 145,677,760 $ 122,374,796
- -------------------------------------------------------------------------------------------------------------
[including undistributed net investment income (loss) of ($79,490) and
$1,281 for Capital Appreciation Fund, ($2,053,516) and $0 for Emerging
Growth Fund, ($21,716) and $0 for GrowthFund, ($273,928) and $0 for
Midcap Growth Fund]
</TABLE>
*Commencement of Operations
FINANCIAL HIGHLIGHTS
IAI CAPITAL APPRECIATION FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD
AND SELECTED INFORMATION FOR THE PERIOD INDICATED IS AS FOLLOWS:
IAI CAPITAL APPRECIATION FUND
Period
from February 1,
Six months ended 1996**** to
September 30, 1996 March 31, 1996
- -----------------------------------------------------------------------------
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 11.24 $ 10.00
------------- ------------
OPERATIONS
Net investment income (loss) (.03) --
Net realized and unrealized gains 3.63 1.24
------------- ------------
TOTAL FROM OPERATIONS 3.60 1.24
------------- ------------
NET ASSET VALUE
End of period $ 14.84 $ 11.24
------------- ------------
Total investment return* 32.04% 12.40%
Net assets at end of period (000's omitted) $ 45,756 $ 9,411
RATIOS
Expenses to average net assets*** 1.25%** 1.25%**
Net investment income (loss)
to average net assets*** (0.64%)** 0.23%**
Portfolio turnover rate
(excluding short-term securities) 57.0% 1.2%
* 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
*** The Fund's adviser voluntarily waived $19,290 and $827 in expenses for the
six months ended September 30, 1996 and the period ended March 31, 1996,
respectively. If the Fund had been charged these expenses, the ratio of
expenses to average daily net assets would have been 1.40% and 1.40%,
respectively, and the ratio of net investment income to average daily net
assets would have been (.79%) and .08%, respectively.
**** Commencement of operations
<TABLE>
<CAPTION>
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:
IAI EMERGING GROWTH FUND
Six months Period from
ended Years ended March 31, August 5, 1991***
September 30, 1996 1996 1995 1994 1993 to March 31, 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 24.08 $ 15.83 $ 15.20 $ 13.47 $ 11.91 $ 10.00
----------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.07) (.09) (.07) (.10) (.05) .01
Net realized and unrealized gains 2.41 8.77 1.42 2.18 2.37 1.91
TOTAL FROM OPERATIONS 2.34 8.68 1.35 2.08 2.32 1.92
----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- -- -- (.01)
Net realized gains (1.44) (.43) (.72) (.35) (.76) --
----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.44) (.43) (.72) (.35) (.76) (.01)
----------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 24.98 $ 24.08 $ 15.83 $ 15.20 $ 13.47 $ 11.91
----------------------------------------------------------------------------------
Total investment return* 9.90% 55.20% 10.23% 15.43% 21.90% 19.23%
Net assets at end of period (000's omitted) $718,934 $ 653,888 $ 342,874 $ 225,510 $ 131,514 $ 38,110
RATIOS
Expenses to average net assets 1.19%** 1.24% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.58%)** (0.52%) (0.54%) (0.77%) (0.72%) 0.14%**
Portfolio turnover rate
(excluding short-term securities) 31.3% 62.8% 58.1% 76.3% 96.1% 126.6%
* 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
</TABLE>
<TABLE>
<CAPTION>
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:
IAI GROWTH FUND
Six month Period from Period from
ended Year ended August 1, 1994 to August 6, 1993***
September 30, 1996 March 31, 1996 March 31, 1995 to July 31, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 11.89 $ 10.95 $ 9.87 $ 10.00
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.01) -- .04 .01
Net realized and unrealized gains (losses) .93 1.93 1.07 (.13)
- -------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .92 1.93 1.11 (.12)
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (.03) (.03) (.01)
Net realized gains (1.09) (.96) -- --
- -------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.09) (.99) (.03) (.01)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.72 $ 11.89 $ 10.95 $ 9.87
- -------------------------------------------------------------------------------------------------------------------
Total investment return* 8.24% 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $17,375 $ 17,079 $ 26,794 $14,408
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25%** 1.25%**
Net investment income (loss) to average
net assets (0.26%)** (0.04%) 0.61%** 0.16%**
Portfolio turnover rate
(excluding short-term securities) 101.2% 92.8% 68.7% 105.4%
* 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
</TABLE>
<TABLE>
<CAPTION>
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:
IAI MIDCAP GROWTH FUND
Six months Period from
ended Years ended March 31, April 10, 1992***
September 30, 1996 1996 1995 1994 to March 31, 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 17.70 $ 15.35 $ 13.67 $ 11.88 $ 10.00
- -------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.04) (.05) (.04) (.04) .02
Net realized and unrealized gains 1.23 3.50 2.35 1.99 1.89
- -------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.19 3.45 2.31 1.95 1.91
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- -- (.03)
Net realized gains (.22) (1.10) (.63) (.16) --
- -------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.22) (1.10) (.63) (.16) (.03)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 18.67 $ 17.70 $ 15.35 $ 13.67 $ 11.88
- -------------------------------------------------------------------------------------------------------------------
Total investment return* 6.74% 23.51% 17.63% 16.40% 19.09%
Net assets at end of period (000's omitted) $145,678 $ 122,375 $ 88,075 $ 56,618 $ 22,070
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.41%)** (0.36%) (0.33%) (0.45%) 0.24%**
Portfolio turnover rate
(excluding short-term securities) 24.1% 29.8% 51.3% 49.7% 57.6%
* 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
</TABLE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH
FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1996
(UNAUDITED)
[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 Capital Appreciation Fund (Capital Appreciation Fund), IAI Emerging
Growth Fund (Emerging Growth Fund) and IAI Midcap Growth Fund (Midcap Growth
Fund) are separate portfolios of IAI Investment Funds VI, Inc. and IAI Growth
Fund (Growth Fund) is a separate portfolio of IAI Investment Funds II, Inc.
Capital Appreciation Fund commenced operations on February 1, 1996. The Funds
have an overall objective of long-term appreciation through investment in equity
securities. This report covers only the Capital Appreciation Fund, 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, certain information
for the Growth Fund is presented for the eight-month period from August 1, 1994
to March 31, 1995.
Emerging Growth Fund has closed to new investors as of February 1, 1996.
Emerging Growth Fund's current shareholders and certain others may continue to
add to an existing account. The Fund may resume sales to new investors at some
future date, but it has no present intention to do so.
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 sales
price or if the last sales price is not available, the last reported bid price
is used. Securities, including debt securities and restricted securities, for
which quotations are not readily available are valued primarily using
dealer-supplied valuations or at their fair value as determined in good faith
using consistently applied procedures under the general supervision of the Board
of Directors. Short-term securities with maturities of 60 days or less from the
date of initial acquisition are valued at amortized cost. Short-term securities
with maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
Restricted securities for which there is no public market are valued at fair
value in good faith as determined by the Board of Directors.
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 risk of entering into
future and option contracts include the possibility that changes in the value of
these contracts may not correlate with changes in the underlying security.
Futures contracts are valued at the settlement price of the exchange on which
they are traded. Upon entering into a futures contract, 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.
Variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchased 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.
The Fund is subject to credit risk that the other party will not complete
obligations of the contract.
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.
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.
For federal income tax purposes Capital Appreciation Fund has a capital loss
carryover of approximately $22,000, at March 31, 1996 which, if not offset by
subsequent capital gains, will expire in 2005. 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 accrued daily. The Funds amortize discount purchased on
long-term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes. The Funds use the equity method of
accounting for limited partnerships.
DISTRIBUTIONS TO
SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made semi-annually. Capital gains, if any, are
primarily distributed as of the end of the calendar year. Additional capital
gains distributions as needed to comply with federal tax regulations are
distributed during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds 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.
Capital Appreciation Fund, Emerging Growth Fund, Growth Fund, and Midcap Growth
Fund have available lines of credit of $8,000,000, $14,851,289, $5,738,422 and
$15,000,000, 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. During the year ended March 31, 1996, the Funds paid $139, $2,094, $539,
and $131, respectively, in interest on the line of credit at an average rate of
8.25%. Advances under the line of credit totalled $148,711 and $11,578 for the
Emerging Growth Fund and the Growth Fund, respectively. There were no borrowings
outstanding at September 30, 1996 for the Capital Appreciation Fund and the
Midcap Growth Fund.
At September 30, 1996, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND MIDCAP GROWTH FUND
- --------------------------------------------------------------------------------
Alta Berkeley III L.P. $ 80,000 $ --
Spectrum Equity Investors L.P. 464,000 232,000
- --------------------------------------------------------------------------------
Total commitments $ 544,000 $ 232,000
- --------------------------------------------------------------------------------
[2] COMMITMENTS AND CONTINGENCIES (CONT.)
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership. The Funds' management intends to finance the
aforementioned commitments with available cash or with proceeds from the sale of
investments in short-term securities. Each Fund maintains in a segregated
account an amount equal to its aggregate unpaid commitments.
[3] FEES AND EXPENSES
Under terms of each Funds' Management Agreements, Adviser 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, extraordinary expenses and
compensation of Directors), in return for each Fund paying an all inclusive
management fee to Advisers. This fee is paid monthly and is equal to an annual
rate of 1.25% (1.40% for Capital Appreciation Fund) of each Funds' average daily
net assets, which declines to 1.10% (1.30% for Capital Appreciation Fund and
1.00% for Growth Fund) as each Fund's assets increase.
<TABLE>
<CAPTION>
[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:
CAPITAL EMERGING
APPRECIATION GROWTH
FUND FUND
- ------------------------------------------------------------------------------------------------------------
Six months Period from Six months Year ended
ended February 1, 1996* ended March 31,
September 30, 1996 to March 31, 1996 September 30, 1996 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 3,965,984 868,372 11,998,367 44,205,393
Issued for reinvested
distributions 106 -- 1,638,955 532,973
Redeemed (1,719,760) (30,697) (12,005,292) (39,239,973)
- ------------------------------------------------------------------------------------------------------------
Increase in
shares outstanding 2,246,330 837,675 1,632,030 5,498,393
- ------------------------------------------------------------------------------------------------------------
MIDCAP
GROWTH GROWTH
FUND FUND
- ----------------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended March 31, ended March 31,
September 30, 1996 1996 September 30, 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 630,293 583,267 2,672,994 5,168,818
Issued for reinvested
distributions 127,184 141,851 86,664 399,203
Redeemed (710,805) (1,736,639) (1,873,915) (4,388,825)
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in
shares outstanding 46,672 (1,011,521) 885,743 1,179,196
- ----------------------------------------------------------------------------------------------------------
* Commencement of operations
</TABLE>
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended September 30, 1996, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
Purchases Sales
- --------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND $ 42,932,084 $ 13,841,559
EMERGING GROWTH FUND $ 198,402,533 $195,403,885
GROWTH FUND $ 15,954,436 $ 19,501,170
MIDCAP GROWTH FUND $ 43,250,818 $ 30,163,995
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at September 30,
1996, 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 percent 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 September 30, 1996 the Funds held restricted securities as follows:
Market % of
Value Net Assets
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND $ 21,485,399 3.0%
IAI MIDCAP GROWTH FUND $ 2,381,644 1.6%
<TABLE>
<CAPTION>
IAI MUTUAL FUND FAMILY
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
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(CLOSED TO NEW INVESTORS AS OF 2/1/96) emerging growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[Capital Appreciation + Income] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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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
http://networth.galt.com/iai
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700
