EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI CAPITAL APPRECIATION FUND,
IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1997
(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
<PAGE>
CHAIRMAN'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
A DAY FOR BUYING OPPORTUNITIES ECONOMIC OUTLOOK
[PHOTO]
NOEL P. RAHN
CHAIRMAN
In life, traumatic events grip our attention, sometimes compelling us to make
quick decisions, often rewarding us for remaining calm. As time passes, we
collect ourselves and attain a perspective.
The stock market is a case in point. The last few days of October broke records
for points lost and gained--and for trading volume, which reached a billion
shares per day. But now that we've had some time to reflect, what really
happened? And what does it mean over the long term?
The problem began in Southeast Asia, as those booming economies increasingly
became overbuilt. Investors, seeing trouble ahead, withdrew their money, causing
downward pressure on currencies in Thailand and Malaysia. The governments
attempted to boost their currencies by raising interest rates. That caused
investors in these fragile stock markets to flee. Once the panic spread to Hong
Kong, investors throughout the world reacted.
In the United States, investors who were having a good year so far in 1997
decided to lock in their profits. Many of the best performers in recent years,
such as technology companies which do a great deal of business in Asia, were hit
hard. Small capitalization stocks held up better, as did large cap companies
like retailers who do their business exclusively in the United States.
The October 27 sell-off was inevitably compared with the stock market of 1987.
But there really was no comparison. In percentage terms, this year's fireworks
amounted to a 7% drop. In comparison, the 1987 sell-off was 22% in one day.
But there are other fundamental differences too, which make the events of
October 27, 1997, much less worrisome. Ten years ago, inflation was in the
mid-single digits and rising. Today, some economists would argue that there is
no inflation at all--in fact, there may even be deflation. In 1987, interest
rates were in the double digits and rising. Today, the 30-year U.S. Treasury
bond yields about 6%. In 1987, the federal budget deficit was mushrooming.
Today, the deficit has virtually been wiped out, and there's talk of a surplus.
The American economy is much stronger today than it was a decade ago.
Perhaps most importantly, investors, rather than running scared and selling at
the bottom, increasingly look at days like October 27 as a buying opportunity.
Even with the events of late October, the stock market has turned in an
above-average performance for 1997. Historically, stocks have produced average
annual returns of 10-12%. Viewed over this decade, and since the bull market
began in 1982, investors have truly enjoyed excellent results.
We believe the turmoil that occurred on October 27 will prove to be a relatively
minor event. True, it was a very strong reaction to external events. But the
environment continues to be a good one for U.S. investors. The economy continues
to grow at a 3-4% rate without inflation. Interest rates are low and corporate
profits continue to grow, although more slowly than in recent years. And the
markets in Asia appear to have stabilized for now.
The recent volatility is a great reminder to dollar-cost average into the
markets. Mutual funds make it easy to invest a fixed amount of money
periodically. When the market is down, that fixed investment buys more shares at
bargain prices. Such an automatic process allows you to keep your long-term
perspective when days like October 27th inevitably occur.
<PAGE>
CHAIRMAN'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
Fundamentally, the U.S. economy is in good shape. The expansion continued at a
3.6% pace in the third quarter, making this the first time since 1983 that
inflation-adjusted growth has been above 3% for four consecutive quarters.
During this same time, prices rose at an annualized rate of only 1.4%--the
slowest quarterly increase since 1964.
As further evidence of strength, the unemployment rate dropped to 4.7% in
October, its lowest level in 24 years. Job gains were widespread throughout a
majority of industries. So far in 1997, over 2.1 million new jobs have been
created.
On the fiscal policy side, the federal budget deficit has declined dramatically.
Tax receipts have exceeded expectations, hinting that income growth is even
higher than current statistics indicate. Low inflation has allowed the Fed to
follow a neutral monetary policy. The last time the Fed acted was in March of
this year when the overnight rate was raised by 0.25%. A shrinking deficit and
neutral monetary policy has helped long-term interest rates to drop by 1% in the
last six months.
Given this favorable backdrop, U.S. financial markets have experienced
above-average returns. For the 10 months through October, the stock market was
up 28% and bonds had returned about 8%.
Unfortunately, this good news has recently been overshadowed by turmoil
overseas. Currency devaluation and falling stock prices in the Asian Pacific
region quickly became a global event. In typical fashion, markets have led
economics. The events in October were a dramatic reintroduction of risk premiums
into the global investment equation. While some investors clearly suffered
substantial losses, the impact so far has been more psychological than
fundamental. Falling markets are likely to lead to slower growth and rising
financial problem in the afflicted economies. Although market volatility will
continue, the economic impact will be less invasive for the major economies of
Europe and North America. Global growth and inflation may be mildly lower.
However, as markets stabilize, investors are likely to refocus on positive
fundamentals.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on Fund performance and our strategy going forward. We appreciate
your continued trust and confidence in IAI. If there is any way we can serve you
better, please let us know by calling our toll-free Investor Services Hotline at
1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
<PAGE>
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 9/30/97
[BAR CHART]
TECHNOLOGY SERVICES 16.5%
COMMERCIAL SERVICES 14.1%
FINANCIAL 13.9%
ELECTRONIC TECHNOLOGY 11.6%
PROCESS INDUSTRIES 7.0%
WHAT IS THE FUND'S 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 small-capitalization companies that have superior performance
records, solid market positions, strong balance sheets and a management team
capable of sustaining growth.
HOW HAS THE FUND PERFORMED?
The IAI Capital Appreciation Fund returned 15.48% in the third quarter, trailing
the 16.92% return delivered by its benchmark Russell 2000 Growth Index. For the
six months ended September 30, 1997, the Portfolio is up 41.59%, compared to the
Russell 2500 Growth Index and the S&P 500 which had returns of 35.59% and 26.38%
respectively.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
We are pleased that the Fund has delivered strong performance this year. Our
style is based on investing in well-managed companies with attractive business
models that can deliver strong earnings growth regardless of the economic
environment. This style served us very well in 1996 when investors were
concerned about an economic slowdown. On the other hand, small cap investors
have favored economically cyclical issues thus far in 1997; this bias was
especially prevalent in July and August. Thus, the Fund has been fighting a
headwind, so we are pleased with its performance. During the third quarter, nine
stocks in the Fund rose more than 30%. The best performer was Mastech (4.05%)*,
a Pittsburgh-based provider of customized software programming services. In a
strong technology sector, investors obviously recognized Mastech's compelling
prospects. The second-best performer was Emergent Group (2.83)%*, which
originates and packages home equity loans from its base in Greenville, South
Carolina. Emergent possesses an excellent business model, spectacular management
strength, a strong balance sheet, and is growing at a rapid rate.
On the other hand, three stocks in the Fund fell by 20% or more during the
quarter. In each of the three cases, further research has made us confident that
the setbacks are temporary, so we have added to the positions.
* PERCENTAGE OF NET ASSETS AS OF 9/30/97
WHAT IS YOUR OUTLOOK FOR THE FUND?
Over the long term, we are very bullish about the prospects for the Fund. We
believe that attractive long-term returns can be achieved by owning a
diversified group of high-quality small-cap companies able to sustain rapid
growth.
Over the short term, the factors which have driven the recent rally in the
small-cap market should remain in place. Corporate earnings should be strong,
inflation should remain subdued, and the tidal wave of money flowing into the
stock market shows no signs of slowing.
We also believe that the Fund has performed reasonably well in 1997 despite
facing some headwinds. Knowing that the emphasis in the market always rotates,
we do not think we will have to wait long for it to rotate back toward our
style.
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
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.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
CAPITAL APPRECIATION FUND* RUSSELL 2500 RUSSELL 2000
(Inception 2/01/96) S&P 500 INDEX GROWTH INDEX GROWTH INDEX
- --------------------------------------------------------------------------------
2/1/96 $ 10,000 $ 10,000 $ 10,000 $ 10,000
3/31/96 $ 11,240 $ 10,196 $ 10,667 $ 10,663
9/30/96 $ 14,841 $ 10,987 $ 11,366 $ 11,190
3/31/97 $ 13,900 $ 12,229 $ 10,554 $ 10,042
9/30/97 $ 19,683 $ 15,455 $ 14,310 $ 13,803
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/97
Since Inception
Six Months** 1 Year 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND* 41.59% 32.62% 50.26%
- --------------------------------------------------------------------------------
Russell 2500 Growth Index(1) 35.59% 25.91% 23.99%
- --------------------------------------------------------------------------------
Russell 2000 Growth Index 37.44% 23.35% 21.33%
- --------------------------------------------------------------------------------
S&P 500 Index 26.38% 40.67% 29.85%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO 1.25% OF AVERAGE DAILY NET
ASSETS, THROUGH MARCH 31,1997.
** NOT ANNUALIZED
(1) THE RUSSELL 2500 GROWTH INDEX WILL BE REPLACED WITH THE RUSSELL 2000
GROWTH INDEX AS THE FUND'S MANAGEMENT HAS DETERMINED THE RUSSELL 2000
GROWTH INDEX TO BE MORE REPRESENTATIVE OF THE FUND'S INVESTMENTS, AND
THEREFORE A BETTER COMPARISON FOR FUND PERFORMANCE.
TOP TEN HOLDINGS(2)
% of Net Assets
-------------------
Issue Sector 9/30/97 3/31/97
- -------------------------------------------------------------------------------
Strayer Education Commercial Services 4.81 3.11
Computer Products Electronic Technology 4.27 2.41
Mastech Technology Services 4.05 2.77
Aftermarket Technology Consumer Durables 3.84 4.36
Coach USA Consumer Services 3.58 6.23
Advanced Lighting Technologies Non-Energy Minerals 3.28 4.73
Zebra Technologies Class A Producer Manufacturing 3.22 1.82
Black Box Technology Services 3.14 2.28
Xomed Surgical Products Health Technology 3.11 2.98
CCC Information Services Technology Services 3.00 2.59
- -------------------------------------------------------------------------------
TOTAL 36.30 33.28
(2) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND
[PHOTO]
DAVID M. HIMEBROOK,
CFA
IAI EMERGING GROWTH
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/97
[BAR CHART]
TECHNOLOGY SERVICES 22.0%
COMMERCIAL SERVICES 14.5%
HEALTH SERVICES 13.9%
ELECTRONIC TECHNOLOGY 13.5%
RETAIL TRADE 12.0%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The IAI Emerging Growth Fund gained 7.13% for the third quarter, compared to the
Russell 2500 Index return of 14.35%. For the six months ending September 30,
1997, the Fund returned 28.64% while the Russell 2500 and the S&P 500 indexes
had returns of 31.63% and 26.38%, respectively.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND?
Were there any disappointments? The biggest contributor to the portfolio's
performance was CBT Group ADR (3.55%)*, a leader in developing interactive
educational and training software for the information technology industry.
Watson Pharmaceuticals (2.26%)* and Vitesse Semiconductor (1.45%)* were also
strong contributors to performance. Positions in Sitel (0.00%)* and Teletech
Holdings (0.00%)* hurt performance during the quarter. Both companies provide
telephone-based customer service programs for businesses and they announced
slower than expected earnings growth.
WERE THERE ANY SIGNIFICANT CHANGES?
We continue to refresh the portfolio with new additions. In the health care
sector, we added Renal Care Group (1.01%)*, which provides dialysis and
nephrology services to patients with kidney disease. In the technology area we
initiated positions in Anadigics (0.94%)*, a developer and manufacturer of
integrated circuits; Computer Products (1.09%)*, a leading provider of power
conversion and supply products for the communications and computer industries;
and Viasoft (1.18%)*, a provider of software and services targeted at solving
the "Year 2000" problem.
* PERCENTAGE OF NET ASSETS AS OF 9/30/97
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Announcements by Coca Cola and Gillette, among others, that third quarter
earnings would fall short of "street expectations" created an environment which
led to significant declines in the share prices of many large multinational
companies. Renewed focus was then placed on the stocks of smaller companies that
can demonstrate unit sales and earnings growth.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We believe the revenue and earnings growth produced by our companies will
continue to far outpace those of the broader market and will ultimately drive
our stock prices higher. The declining growth rates of some of the large blue
chip stocks will continue to benefit small company stocks in both absolute and
relative terms.
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
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.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI EMERGING GROWTH FUND* RUSSELL 2500 RUSSELL 2000
(Inception 8/05/91) GROWTH INDEX S&P 500 INDEX GROWTH INDEX
- --------------------------------------------------------------------------------
8/1/91 $ 10,000 $ 10,000 $ 10,000 $ 10,000
3/31/91 $ 11,923 $ 11,670 $ 10,631 $ 11,641
3/31/93 $ 14,534 $ 13,619 $ 12,255 $ 12,251
3/31/94 $ 16,776 $ 14,817 $ 12,431 $ 13,505
3/31/95 $ 18,489 $ 16,101 $ 14,368 $ 14,897
3/31/96 $ 28,703 $ 20,902 $ 18,987 $ 19,626
3/31/97 $ 22,111 $ 22,717 $ 22,772 $ 19,418
9/30/97 $ 28,443 $ 29,902 $ 28,781 $ 26,330
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/97
Six Since Inception
Months** 1 Year 5 Years 8/05/91
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND 28.64% (9.84%) 18.71% 18.49%
- --------------------------------------------------------------------------------
Russell 2500 Index(1) 31.63% 34.31% 21.18% 19.44%*
- --------------------------------------------------------------------------------
Russell 2500 Growth Index 35.59% 25.91% 19.73% 17.00%*
- --------------------------------------------------------------------------------
S&P 500 Index 26.38% 40.67% 20.83% 18.70%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
** NOT ANNUALIZED
(1) THE RUSSELL 2500 INDEX WILL BE REPLACED WITH THE RUSSELL 2500 GROWTH INDEX
AS THE FUND'S MANAGEMENT HAS DETERMINED THE RUSSELL 2500 GROWTH INDEX TO BE
MORE REPRESENTATIVE OF THE FUND'S INVESTMENTS, AND THEREFORE A BETTER
COMPARISON FOR FUND PERFORMANCE.
TOP TEN HOLDINGS(2)
% of Net Assets
----------------------
Issue Sector 9/30/97 3/31/97
- ------------------------------------------------------------------------------
CBT Group ADR Technology Services 3.55 3.16
Apollo Group Class A Commercial Services 3.25 2.40
ABR Information Services Commercial Services 2.96 2.02
HNC Software Technology Services 2.94 2.63
Omnicare Health Services 2.62 3.23
Citrix Systems Technology Services 2.58 0.99
Oxford Health Plans Health Services 2.50 3.70
Starbucks Consumer Non-Durables 2.49 3.15
Watson Pharmaceuticals Health Technology 2.26 1.87
Concentra Managed Care Health Services 2.20 --
- ------------------------------------------------------------------------------
TOTAL 27.35 23.15
(2) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
<PAGE>
FUND MANAGERS' REVIEW
IAI GROWTH FUND
IAI GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI GROWTH FUND
CO-MANAGER
[PHOTO]
DAVID A. MCDONALD
IAI GROWTH FUND
CO-MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/97
[BAR CHART]
ELECTRONIC TECHNOLOGY 13.2%
FINANCIAL 13.2%
CONSUMER NON-DURABLES 9.1%
HEALTH TECHNOLOGY 7.5%
PRODUCER MANUFACTURING 7.4%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
For the six months ending September 30, 1997, the Fund had a 19.59% return while
the S&P 500 had a 26.38% return.The IAI Growth Fund performed well on an
absolute basis in the third quarter, rising roughly 6.07%. By comparison the S&P
500 rose almost 7.61%. Though the Fund underperformed for the quarter, we have
seen much better absolute and relative performance from the Fund since we
restructured its holdings in the third quarter.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND?
Sectors which had a significant positive impact on performance were
communication services, consumer cyclicals, consumer staples, and energy.
Individual stocks with the greatest positive contribution were Century Telephone
Enterprises (2.48%)*, HFS (2.15%)*, Cardinal Health (1.21%)* and Petroleum
Geo-Services ADR (1.25%)*.
Most of the underperformance was attributed to a couple of individual
positions. Both Aetna (0.00%)* and Corning (0.74%)* reported earnings
disappointment that impacted our performance. From a sector standpoint,
technology, financials and health care adversely impacted performance.
WERE THERE ANY SIGNIFICANT CHANGES?
New positions were initiated in Thermo Electron (0.30%)*, Dollar General
(0.79%)*, Cardinal Health (1.21%)*, Campbell Soup (1.02%)*, Amoco (0.79%)*,
Galileo International (1.62%)* and Lexmark International (0.73%)*. We continued
to eliminate holdings suffering from excess valuations and/or deteriorating
fundamentals. Included in this group are Reynolds & Reynolds (0.00%)*, Warnaco
Group (0.00%)*, WorldCom (0.00%)* and Union Pacific Resources Group (0.00%)*.
The result of this activity is a stronger, higher quality portfolio.
* PERCENTAGE OF NET ASSETS AS OF 9/30/97
WHAT IS YOUR OUTLOOK FOR THE FUND?
We like the quality of the portfolio as it now stands and are heartened by its
recent improved performance. Moreover, we are encouraged by the recent
broadening in the overall market beyond the narrow list of the "Nifty 50" stocks
that have driven the indices over the past 24-36 months.
The actions we have been taking to strengthen the Fund have had a positive
impact on results. We will continue to look for growth companies that can
sustain the improvement in reported results.
<PAGE>
FUND MANAGERS' REVIEW
IAI GROWTH FUND
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.
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
3/31/97 $ 14,060 $ 18,580
9/30/97 $ 16,815 $ 23,481
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/97
Since Inception
Six Months** 1 Year 8/06/93
- -----------------------------------------------------------------------------
IAI GROWTH FUND 19.59% 19.79% 13.33%
- -----------------------------------------------------------------------------
S&P 500 Index 26.38% 40.67% 22.74%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
-------------------
Issue Sector 9/30/97 3/31/97
- -------------------------------------------------------------------------------
USA Waste Services Industrial Services 3.10 2.21
General Electric Producer Manufacturing 3.03 1.35
Tyco International Producer Manufacturing 2.74 2.29
CUC International Consumer Services 2.62 2.45
First Data Technology Services 2.51 3.29
Century Telephone Enterprises Utilities 2.48 2.16
Intel Electronic Technology 2.40 1.30
Norwest Financial 2.27 3.27
Fannie Mae Financial 2.20 1.05
HFS Consumer Services 2.15 2.41
- -------------------------------------------------------------------------------
TOTAL 25.50 21.78
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
IAI MIDCAP GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI MIDCAP GROWTH
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 9/30/97
[BAR CHART]
PRODUCER MANUFACTURING 13.4%
FINANCIAL 10.3%
TECHNOLOGY SERVICES 8.3%
ELECTRONIC TECHNOLOGY 8.3%
CONSUMER SERVICES 7.1%
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The IAI Midcap Growth Fund generated strong absolute returns in the third
quarter of roughly 10.93%. This compares to S&P Midcap Index returns of 16.08%.
Our relative underperformance was the result of an underweighted position in
financials and the impact of higher than normal cash levels. In the six months
ended September 30, 1997, the Fund had a return of 20.69% while the S&P Midcap
and S&P 500 indexes had a returns of 33.14% and 26.38%, respectively.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Our higher than normal cash position came about as we decided to exit several
underperforming positions during a comprehensive review of the Fund. Our review
was completed in July, and we subsequently invested the excess cash in new
positions over the balance of the quarter.
The impact from an underweighting in the financial sector relative to the
index also hurt performance. Here, a strong move in the bond market created a
strong advance in financial stocks. We continue to believe underweighting of
this sector is warranted. As we look across the quarter, we are encouraged by
the fact that the underperformance was largely contained to July. Performance
picked up on a relative basis in August and September.
The portfolio was positively impacted by overweighting capital goods and
some larger positions. Individual holdings with the greatest positive
contribution included Minerals Technologies (3.83%)*, Century Telephone
Enterprises (3.33%)*, Precision Drilling (2.67%)*, Healthcare COMPARE (2.46%)*
and Analog Devices (2.00%)*.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
There were many new additions during the quarter. Specifically, Alumax (1.24%)*,
Hexcel (0.66%)*, Mark IV Industries (1.61%)*, Forcenergy (1.40%)*, Apache
(0.56%)*, IDEX (1.49%)*, Platinum Technology (0.99%)*, Zebra Technologies
(0.92%)* and ADC Telecommunications (0.44%)*. We continued to eliminate holdings
based on our review of all holdings. Sold during the quarter were JLG (0.00%)*,
Wang Labs (0.00%)*, Petroleum Geo-Services ADR (0.00%)*, Forest Labs (0.00%)*
and Decision One Holdings (0.00%)*.
* PERCENTAGE OF NET ASSETS AS OF 9/30/97
WHAT IS YOUR OUTLOOK FOR THE FUND?
We are optimistic about the broadening of the market in midcap stocks with
market capitalization of $500 million to $5 billion. We continue to focus on
investing in good growth companies in this attractive segment of the market.
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
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.
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI MIDCAP GROWTH FUND S&P 500 MIDCAP
(Inception 4/10/92) 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
3/31/97 $ 20,768 $ 19,004 $ 21,420
9/30/97 $ 25,063 $ 25,301 $ 27,072
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/97
Six Since Inception
Months** 1 Year 5 Years 4/10/92
- -----------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND 20.69% 16.60% 19.35% 18.27%
- -----------------------------------------------------------------------------
S&P Midcap Index 33.14% 39.10% 20.24% 18.39%*
- -----------------------------------------------------------------------------
S&P 500 Index 26.38% 40.67% 20.83% 19.85%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
** NOT ANNUALIZED
TOP TEN HOLDINGS(1)
% of Net Assets
--------------------
Issue Sector 9/30/97 3/31/97
- --------------------------------------------------------------------------------
Minerals Technologies Non-Energy Minerals 3.83 2.88
Century Telephone Enterprises Utilities 3.33 2.59
Precision Drilling Industrial Services 2.67 1.62
PMI Group Financial 2.60 3.27
Healthcare COMPARE Health Services 2.46 --
USA Waste Services Industrial Services 2.27 2.27
Nuevo Energy Energy Minerals 2.22 1.71
Danka Business Systems ADR Producer Manufacturing 2.21 2.93
Barnes & Noble Retail Trade 2.18 2.77
Snap-On Consumer Durables 2.18 --
- --------------------------------------------------------------------------------
TOTAL 25.95 20.04
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
SEPTEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 98.0%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMERCIAL SERVICES - 14.1%
Barnett (b) 29,400 $ 624,750
Catalina Marketing (b) 14,100 733,200
G&K Services Class A 34,600 1,202,350
Lamar Advertising (b) 20,200 618,625
Right Management
Consultants (b) 60,000 615,000
Service Experts (b) 28,000 757,750
Strayer Education 73,400 3,339,700
Universal Outdoor Holdings (b) 46,000 1,725,000
Valassis Communications (b) 5,000 159,375
-----------
9,775,750
- ----------------------------------------------------------------------
CONSUMER DURABLES - 4.1%
Aftermarket Technology (b) 112,500 2,671,875
Oakwood Homes 6,000 170,250
-----------
2,842,125
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 0.6%
Robert Mondavi Class A (b) 7,000 383,250
- ----------------------------------------------------------------------
CONSUMER SERVICES - 3.6%
Coach USA (b) 82,800 2,489,174
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 11.6%
Allen Telecommunications (b) 69,500 1,980,750
Centennial Cellular Class A (b) 103,600 1,774,150
Computer Products (b) 99,800 2,969,050
Microchip Technology 8,800 397,375
PPT Vision (b) 94,700 911,488
-----------
8,032,813
- ----------------------------------------------------------------------
ENERGY MINERALS - 2.7%
Forcenergy (b) 49,100 1,905,693
- ----------------------------------------------------------------------
FINANCIAL - 13.9%
CapMAC Holdings 29,900 966,144
CMAC Investment 33,400 1,791,075
Credit Acceptance (b) 116,300 1,613,663
Emergent Group (b) 107,800 1,967,350
Enhance Financial Services 27,500 1,505,625
First Commonwealth (b) 48,400 719,950
Market
Quantity Value (a)
- ----------------------------------------------------------------------
First International Bancorp (b) 35,700 $ 640,368
United Assets Management 6,000 172,125
Vesta Insurance Group 5,000 285,000
-----------
9,661,300
- ----------------------------------------------------------------------
HEALTH SERVICES - 3.5%
IMPATH (b) 40,000 1,170,000
Patterson Dental (b) 30,700 1,243,350
-----------
2,413,350
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 6.4%
InControl (b) 89,100 857,588
Perclose (b) 55,000 1,210,000
R.P. Scherer (b) 4,000 247,750
Xomed Surgical Products (b) 108,800 2,162,400
-----------
4,477,738
- ----------------------------------------------------------------------
INDUSTRIAL SERVICES - 1.9%
Petroleum Geo-Services ADR (b) 20,000 1,352,500
- ----------------------------------------------------------------------
NON-ENERGY MINERALS - 5.6%
Advanced Lighting
Technologies (b) 84,400 2,278,800
Minerals Technologies 22,700 1,011,569
Watsco 20,000 625,000
-----------
3,915,369
- ----------------------------------------------------------------------
PROCESS INDUSTRIES - 7.0%
AptarGroup 26,400 1,476,750
PalEx (b) 101,800 1,565,175
Polymer Group (b) 139,000 1,789,625
-----------
4,831,550
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.0%
Comfort Systems USA (b) 17,000 323,000
Kennametal 5,000 242,500
Zebra Technologies Class A (b) 62,500 2,234,375
-----------
2,799,875
- ----------------------------------------------------------------------
RETAIL TRADE - 1.9%
Heilig-Meyers 10,000 153,750
Lithia Motors Class A (b) 85,000 1,179,375
-----------
1,333,125
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
SEPTEMBER 30, 1997
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 16.5%
American Management
Systems (b) 66,000 $ 1,262,250
BISYS Group (b) 14,000 449,750
Black Box (b) 49,800 2,178,750
CCC Information Services (b) 98,000 2,082,500
GTECH Holdings (b) 25,000 854,688
INSpire Insurance Solutions (b) 68,000 1,232,500
Mastech (b) 82,700 2,811,800
Reptron Electronics (b) 33,600 615,300
-----------
11,487,538
- ----------------------------------------------------------------------
TRANSPORTATION - 0.6%
Trailer Bridge (b) 30,000 397,500
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $50,824,614).................... $68,098,650
- ----------------------------------------------------------------------
SHORT-TERM SECURITIES - 1.4%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATION - 1.4%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE)
5.40% 10/24/97 $1,000,000 $ 996,550
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $996,550)....................... $ 996,550
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $51,821,164) (e)................ $69,095,200
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - 0.6%
.................................... $ 396,965
- ----------------------------------------------------------------------
TOTAL NET ASSETS
.................................... $69,492,165
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 89.5%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMERCIAL SERVICES - 14.5%
ABR Information Services (b) 408,200 $ 11,276,525
AccuStaff (b) 215,602 6,791,462
Apollo Group Class A (b) 292,500 12,394,688
Cambridge Technology
Partners (b) 148,000 5,300,250
NOVA (b) 110,800 2,818,475
Snyder Communications (b) 124,400 3,421,000
Sylvan Learning Systems (b) 147,650 6,478,144
U.S. Rentals (b) 128,600 3,383,788
Wackenhut Corrections (b) 118,200 3,664,200
-------------
55,528,532
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.7%
Gymboree (b) 33,800 878,800
Starbucks (b) 226,500 9,470,531
-------------
10,349,331
- ----------------------------------------------------------------------
CONSUMER SERVICES - 3.0%
Landry's Seafood
Restaurants (b) 138,700 4,074,313
Papa John's International (b) 211,200 7,220,400
-------------
11,294,713
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 13.5%
Advanced Fibre
Communications (b) 156,424 6,413,384
Computer Products (b) 139,000 4,135,250
Inter-tel 59,100 3,132,300
Lattice Semiconductor (b) 87,200 5,678,900
Maxim Integrated Products (b) 94,300 6,736,556
Natural Microsystems (b) 148,000 5,624,000
P-Com (b) 144,000 3,456,575
PairGain Technologies (b) 66,600 1,898,100
Saville Systems Ireland ADR (b) 93,400 6,561,350
Sawtek (b) 52,300 2,418,875
Vitesse Semiconductor (b) 111,700 5,536,131
-------------
51,591,421
Market
Quantity Value (a)
- ----------------------------------------------------------------------
FINANCIAL - 0.6%
Envoy (b) 80,600 $ 2,302,138
- ----------------------------------------------------------------------
HEALTH SERVICES - 13.9%
American Oncology
Resources (b) 147,200 2,373,600
Concentra Managed Care (b) 237,600 8,390,250
NCS Healthcare Class A (b) 163,500 4,169,250
Omnicare 306,900 9,974,250
Oxford Health Plans (b) 127,000 9,509,125
PhyCor (b) 228,062 6,628,052
Renal Care Group (b) 106,700 3,841,200
Total Renal Care (b) 158,900 7,945,000
-------------
52,830,727
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 5.8%
Medicis Pharmaceutical
Class A (b) 79,000 3,624,125
MiniMed (b) 93,200 3,658,100
Rexall Sundown (b) 100,400 4,580,750
Urologix (b) 74,974 1,780,633
Watson Pharmaceuticals (b) 144,300 8,621,925
-------------
22,265,533
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 1.0%
Anadigics (b) 73,000 3,599,813
- ----------------------------------------------------------------------
RETAIL TRADE - 12.0%
Bed Bath & Beyond (b) 235,700 8,278,962
Express Scripts Class A (b) 128,900 6,944,488
Fastenal 111,600 5,942,700
Goody's Family Clothing (b) 36,500 1,177,125
Henry Schein (b) 172,350 6,161,513
Petco Animal Supplies (b) 245,600 7,705,700
Stein Mart (b) 132,300 4,332,825
Viking Office Products (b) 99,800 2,170,650
Whole Foods Market (b) 75,200 2,904,600
-------------
45,618,563
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 22.0%
Acxiom (b) 247,700 $ 4,319,268
Aspen Technologies (b) 53,400 1,875,675
CBT Group ADR (b) 168,700 13,538,175
Citrix Systems (b) 195,500 9,842,203
Gartner Group Class A (b) 93,900 2,817,000
Harbinger (b) 165,000 6,001,875
HNC Software (b) 281,800 11,201,550
HPR (b) 112,500 2,460,938
Information Management
Resouces (b) 59,100 1,684,350
Security Dynamics
Technologies (b) 159,400 5,917,725
Sykes Enterprises (b) 193,200 5,168,100
Transaction Systems Architects
Class A (b) 134,800 5,476,250
Vantive (b) 69,200 1,660,800
Viasoft (b) 90,900 4,499,550
Visio (b) 88,600 3,699,050
Wind River Systems (b) 87,200 3,597,000
-------------
83,759,509
- ----------------------------------------------------------------------
UTILITIES - 0.5%
PriCellular Class A 192,691 1,914,865
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $240,370,273)................... $ 341,055,145
- ----------------------------------------------------------------------
OTHER SECURITIES - 5.4%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMON STOCKS - 2.5%
AccessLine Technologies
Class A (b) 41,666 $ 208,330
Advanced Fibre
Communications (b) 15,584 638,944
BEI Medical (b) 1,029 10
CardioGenesis (b) 609,793 7,521,187
GalaGen (b) (d) 235,309 474,383
PACE Health Management
Systems (b) (d) 471,473 718,996
Seurat Analytical Systems
Class B (b) (d) 39,898 400
-------------
9,562,250
- ----------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS - 1.6%
AccessLine Technologies
Series A (b) 71,420 357,100
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
Myelos Neurosciences
Series B (b) (d) 571,429 1,000,001
Pace Health Management
Systems Series A (b) (d) 428,571 749,999
Seurat Analytical Systems
Series B (b) (d) 114,973 1,150
Seurat Analytical Systems
Series C (b) (d) 59,908 600
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
-------------
5,887,953
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
OTHER SECURITIES (CONT.)
Ownership Market
Percentage (c) Value (a)
- ----------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.3%
Alta Berkeley III, foreign (b) 1.58% $ 415,037
South Street Corporate Recovery
Fund I (b) 0.67 39,316
South Street Leveraged Corporate
Recovery Fund I (b) 1.01 28,515
Spectrum Equity Investors (b) 0.92 1,035,120
Vanguard Associates IV (b) 1.35 3,463,890
-------------
4,981,878
- ----------------------------------------------------------------------
Principal Market
Rate Maturity Amount (c) Value (a)
- ----------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.0%
Accessline Technologies (b)
12.00% 01/15/98 $ 100,000 $ 100,000
Air Communications
Series B (b) (d)
10.00 02/28/97 258,332 --
---------
100,000
- ----------------------------------------------------------------------
Market
Quantity (c) Value (a)
- ----------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (b) (d) 3,249 $ --
GalaGen, $11.07, 03/27/01 (b) (d) 270 --
-------------
--
- ----------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies,
$7.00, 06/03/99 10,713 --
AccessLine Technologies,
$5.00, 01/15/00 20,000 --
GalaGen, $11.07, 06/16/99 (d) 5,687 --
GalaGen, $11.07, 03/24/00 (d) 2,256 --
GalaGen, $11.07, 07/09/00 (d) 1,805 --
GalaGen, $7.00, 01/29/01 (d) 22,501 --
Market
Quantity (c) Value (a)
- ----------------------------------------------------------------------
WARRANTS (CONT.)
Intellon, $2.50, 03/23/99 30,000 $ --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
PACE Health Management
Systems Series A, $1.75,
07/25/02 (d) 107,143 --
-------------
--
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $13,029,402)................... $ 20,532,081
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN
LONG-TERM SECURITIES
(COST: $253,399,675).................. $ 361,587,226
- ----------------------------------------------------------------------
SHORT-TERM SECURITIES - 3.4%
Principal Market
Rate Maturity Amount (c) Value (a)
- ----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATION - 3.4%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE)
5.40% 10/24/97 $13,000,000 $ 12,955,150
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $12,955,150)................... $ 12,955,150
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $266,354,825) (e).............. $374,542,376
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - 1.7%
................................... $ 6,467,269
- ----------------------------------------------------------------------
TOTAL NET ASSETS
................................... $381,009,645
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
SEPTEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 95.9%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMERCIAL SERVICES - 2.6%
Campbell Soup 2,800 $ 137,200
Sysco 5,700 210,544
-------------
347,744
- ----------------------------------------------------------------------
CONSUMER DURABLES - 1.8%
Newell 5,900 236,000
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 9.1%
Coca-Cola 2,100 127,968
Colgate-Palmolive 3,500 243,906
Gillette 1,600 138,100
Pepsico 6,300 255,544
Philip Morris 4,780 198,669
Procter & Gamble 2,200 151,938
Wm. Wrigley Jr. (b) 1,500 112,969
-------------
1,229,094
- ----------------------------------------------------------------------
CONSUMER SERVICES - 5.6%
CUC International (b) 11,375 352,625
HFS (b) 3,900 290,307
Pittston Brink's Group 2,900 116,181
-------------
759,113
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 13.2%
3Com (b) 4,700 240,875
Altera (b) 1,400 71,750
Analog Devices (b) 5,500 184,250
Cisco Systems (b) 1,200 87,675
Galileo International (b) 7,800 217,912
Hewlett-Packard 2,500 173,906
Intel 3,500 323,094
International Business Machines 2,100 222,469
KLA-Tencor (b) 1,800 121,613
SBC Communications 2,200 135,025
-------------
1,778,569
- ----------------------------------------------------------------------
Market
Quantity Value (a)
- ----------------------------------------------------------------------
ENERGY MINERALS - 4.9%
Amoco 1,100 $ 106,012
Chevron 1,700 141,419
Exxon 3,200 205,000
Royal Dutch Petroleum 3,800 210,900
-------------
663,331
- ----------------------------------------------------------------------
FINANCIAL - 13.2%
Allstate 3,000 241,125
American International Group 1,500 154,781
Associates First Capital 2,200 136,950
BankAmerica 1,500 109,969
Citicorp 1,300 174,119
Fannie Mae 6,300 296,100
MBNA 5,600 226,800
Norwest 5,000 306,250
PMI Group 2,300 131,819
-------------
1,777,913
- ----------------------------------------------------------------------
HEALTH SERVICES - 1.9%
Cardinal Health 2,300 163,300
Healthcare COMPARE (b) 1,400 89,425
-------------
252,725
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 7.5%
Bristol-Myers Squibb 1,700 140,675
Johnson & Johnson 3,900 224,737
Merck & Company 2,200 219,863
Pfizer 3,100 186,194
SmithKline Beecham ADR 5,000 244,375
-------------
1,015,844
- ----------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.9%
Petroleum Geo-Services
ADR (b) 2,500 169,063
Schlumberger ADR 2,500 210,468
USA Waste Services (b) 10,490 418,289
-------------
797,820
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ----------------------------------------------------------------------
NON-ENERGY MINERALS - 1.7%
Minerals Technologies 5,000 $ 222,811
- ----------------------------------------------------------------------
PROCESS INDUSTRIES - 4.8%
Corning 2,100 99,225
E.I. du Pont de Nemours 2,700 166,218
Kimberly-Clark 4,400 215,325
Sigma-Aldrich 5,000 164,688
-------------
645,456
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 7.4%
Danka Business Systems ADR 4,000 178,000
General Electric 6,000 408,375
Thermo Electron (b) 1,000 40,000
Tyco International 4,500 369,281
-------------
995,656
- ----------------------------------------------------------------------
RETAIL TRADE - 4.5%
Barnes & Noble (b) 9,200 259,900
Dollar General 3,125 106,445
Sears Roebuck 1,800 102,488
Wal-Mart Stores 3,700 135,512
-------------
604,345
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 5.8%
First Data 9,000 338,063
FIserv (b) 5,300 232,538
Lexmark International Class A (b) 3,000 99,000
Microsoft 900 119,080
-------------
788,681
- ----------------------------------------------------------------------
Market
Quantity Value (a)
- ----------------------------------------------------------------------
UTILITIES - 6.0%
Ameritech 1,900 $ 126,350
Bellsouth 2,800 129,500
Century Telephone Enterprises 7,600 334,400
LCI International (b) 5,200 138,450
WorldCom (b) 2,300 81,363
-------------
810,063
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,362,617)................... $ 12,925,165
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $10,362,617) (e)............... $ 12,925,165
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - 4.1%
................................... $ 556,733
- ----------------------------------------------------------------------
TOTAL NET ASSETS
................................... $ 13,481,898
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 95.8%
Market
Quantity Value (a)
- ----------------------------------------------------------------------
COMMERCIAL SERVICES - 3.0%
Bell & Howell (b) 47,200 $ 1,531,050
Reynolds & Reynolds Class A 96,770 1,880,966
-------------
3,412,016
- ----------------------------------------------------------------------
CONSUMER DURABLES - 5.3%
Newell 43,500 1,740,000
Snap-On 54,100 2,491,981
Sola International (b) 53,800 1,846,012
-------------
6,077,993
- ----------------------------------------------------------------------
CONSUMER NON-DURABLES - 0.4%
Warnaco Class A 12,600 400,050
- ----------------------------------------------------------------------
CONSUMER SERVICES - 7.1%
Applebee's International 82,300 2,057,500
CUC International (b) 41,700 1,292,700
Harte-Hanks Communications 52,400 1,725,924
HFS (b) 27,600 2,054,475
Pittston Brink's Group 24,000 961,500
-------------
8,092,099
- ----------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 8.3%
ADC Telecommunications (b) 15,400 500,500
Altera (b) 15,000 768,750
Analog Devices (b) 68,100 2,281,350
Andrew (b) 29,500 772,530
Belden 24,800 934,650
Galileo International (b) 33,300 930,319
IDX Systems (b) 29,000 1,002,312
KLA-Tenor (b) 22,400 1,513,400
Xilinx (b) 15,400 779,625
-------------
9,483,436
- ----------------------------------------------------------------------
ENERGY MINERALS - 4.2%
Apache 15,000 643,125
Forcenergy (b) 41,100 1,595,193
Nuevo Energy (b) 53,000 2,537,375
-------------
4,775,693
- ----------------------------------------------------------------------
FINANCIAL - 10.3%
Financial Security Assurance 42,100 1,957,650
Finova Group 21,500 2,034,438
First Alliance (b) 22,300 702,450
Market
Quantity Value (a)
- ----------------------------------------------------------------------
Old Republic International 50,000 $ 1,950,000
PMI Group 51,880 2,973,372
Provident Companies 30,900 2,161,069
-------------
11,778,979
- ----------------------------------------------------------------------
HEALTH SERVICES - 7.0%
Covance (b) 70,600 1,526,724
Healthcare COMPARE (b) 44,000 2,810,500
Patterson Dental (b) 37,900 1,534,950
Quorum Health Group (b) 88,400 2,160,275
-------------
8,032,449
- ----------------------------------------------------------------------
HEALTH TECHNOLOGY - 3.5%
IDEXX Laboratories (b) 33,700 564,475
Mentor 31,900 1,012,825
R.P. Scherer (b) 39,300 2,434,144
-------------
4,011,444
- ----------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.5%
Camco International 8,380 584,505
Precision Drilling (b) 47,700 3,046,838
USA Waste Services (b) 65,000 2,591,875
-------------
6,223,218
- ----------------------------------------------------------------------
NON-ENERGY MINERALS - 5.2%
Alumax (b) 34,400 1,412,550
Minerals Technologies 98,200 4,376,038
Worthington Industries 9,700 196,425
-------------
5,985,013
- ----------------------------------------------------------------------
PROCESS INDUSTRIES - 3.5%
Bemis 27,500 1,230,625
BMC Industries (b) 37,900 1,205,694
Sigma-Aldrich 46,800 1,541,475
-------------
3,977,794
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING - 13.4%
Danka Business Systems ADR 56,720 2,524,040
Hexcel (b) 26,200 751,613
IDEX 49,600 1,705,000
Lear (b) 26,200 1,290,350
Mark IV Industries 68,500 1,840,938
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ----------------------------------------------------------------------
PRODUCER MANUFACTURING (CONT.)
Pentair 32,300 $ 1,191,063
Roper Industries 57,940 1,955,475
Tyco International 23,400 1,920,263
York International 23,800 1,065,050
Zebra Technologies Class A (b) 29,500 1,054,625
-------------
15,298,417
- ----------------------------------------------------------------------
RETAIL TRADE - 5.5%
Barnes & Noble (b) 88,300 2,494,475
Heilig-Meyers 144,000 2,214,000
Lands' End (b) 49,600 1,528,300
-------------
6,236,775
- ----------------------------------------------------------------------
TECHNOLOGY SERVICES - 8.3%
Autodesk 25,200 1,143,450
FIserv (b) 48,900 2,145,489
GTECH Holdings (b) 38,800 1,326,475
Intuit (b) 35,500 1,136,000
J.D. Edwards & Company (b) 7,000 234,500
Lexmark International
Class A (b) 73,400 2,422,200
Platinum Technology (b) 52,400 1,126,600
-------------
9,534,714
- ----------------------------------------------------------------------
UTILITIES - 5.3%
Century Telephone Enterprises 86,510 3,806,440
LCI International (b) 85,100 2,265,788
-------------
6,072,228
- ----------------------------------------------------------------------
Total Investments in Common Stocks
(COST: $85,701,617).................... $ 109,392,318
- ----------------------------------------------------------------------
OTHER SECURITIES - 0.8%
Market
Quantity (c) Value (a)
- ----------------------------------------------------------------------
COMMON STOCK - 0.1%
GalaGen (b) (d) 47,398 $ 95,981
- ----------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCK - 0.3%
Tut Systems Series D (b) (d) 233,546 291,933
- ----------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- ----------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.4%
South Street Leveraged Corporate
Recovery Fund I (b) 0.67% $ 19,013
Spectrum Equity Investors (b) 0.46 517,545
-------------
536,558
- ----------------------------------------------------------------------
Market
Quantity (c) Value (a)
- ----------------------------------------------------------------------
CALL OPTION - 0.0%
GalaGen, $3.69, 05/22/98 (b) (d) 1,083 --
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $989,127)....................... $ 924,472
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $86,690,744).................... $ 110,316,790
- ----------------------------------------------------------------------
SHORT-TERM SECURITIES - 1.7%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY
OBLIGATION - 1.7%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE)
5.40% 10/24/97 $2,000,000 $ 1,993,100
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $1,993,100)..................... $ 1,993,100
- ----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $88,683,844) (e)................ $ 112,309,890
- ----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES
(NET) - 1.7%
.................................... $ 1,891,648
- ----------------------------------------------------------------------
TOTAL NET ASSETS
.................................... $ 114,201,538
- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(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, 1997, the Fund
held no unrestricted securities of the same issuer as of either the date the
purchase price was agreed to or the date the Fund first obtained an enforceable
right to obtain the securities. Information concerning each restricted security
held at September 30, 1997 is shown on pages 22-24.
(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, 1997. 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>
PACE Health Management
Systems-Warrants 7/25/02 107,143 $ -- -- $ -- $ -- $ --
PACE Health Management
Systems-Series A Preferred 428,571 $ 749,999 -- $ -- $ -- $ --
</TABLE>
(e)
At September 30, 1997, the cost of securities for federal in come tax purposes
and the aggregate gross unrealized appreciation and depreciation based on that
cost were as follows:
<TABLE>
<CAPTION>
IAI CAPITAL IAI EMERGING IAI GROWTH IAI MIDCAP
APPRECIATION FUND GROWTH FUND FUND GROWTH FUND
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost for federal tax purposes $ 51,919,945 $ 266,492,307 $ 10,363,523 $ 88,731,672
==========================================================================
Gross unrealized appreciation $ 18,196,564 $ 115,616,508 $ 2,597,168 $ 25,051,466
Gross unrealized depreciation (1,021,309) (7,566,439) (35,526) (1,473,248)
--------------------------------------------------------------------------
Net unrealized appreciation $ 17,175,255 $ 108,050,069 $ 2,561,642 $ 23,578,218
==========================================================================
</TABLE>
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
Advanced Fibre
Communications 10/31/96 7,434
BEI Medical 02/05/96 31,093
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
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
Seurat Analytical Systems
Class B 06/28/96 --
NON-CONVERTIBLE
PREFERRED STOCKS
Security Acquisition Date Cost
- ---------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
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
Myelos Neurosciences
Series B 12/06/96 1,000,001
PACE Health Management
Systems Series A 07/07/97 500,000
08/12/97 250,000
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
10/18/96 46,168
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 07/30/96 975,284
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ---------------------------------------------------------
Alta Berkeley III, foreign 09/25/96 $ 46,010
06/06/97 23,135
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
LIMITED PARTNERSHIPS (CONT.)
Security Acquisition Date Cost
- ---------------------------------------------------------
Spectrum Equity Investors 05/12/94 $ 63,680
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
10/22/96 100,000
12/12/96 25,000
02/12/97 42,790
02/26/97 50,000
05/05/97 40,000
06/10/97 25,000
09/30/97 25,000
Vanguard Associates IV 07/26/96 13,360
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- ---------------------------------------------------------
AccessLine
Technologies 01/15/98 01/15/97 $ 100,000
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
CALL OPTIONS
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
GalaGen 03/27/01 12/27/96 --
WARRANTS
Security Acquisition Date Cost
- ---------------------------------------------------------
AccessLine Technologies
06/03/99 06/03/94 $ --
AccessLine Technologies
01/15/00 01/15/97
GalaGen 06/16/99 12/05/94 --
GalaGen 03/24/00 04/13/95 --
GalaGen 07/09/00 07/07/95 --
GalaGen 01/29/01 01/30/96 --
03/27/97 --
Intellon 03/23/99 04/12/94 --
PACE Health Management
Systems 01/31/00 03/30/95 --
PACE Health Management
Systems 08/31/05 01/16/96 28
PACE Health Management
Systems Series A 07/25/02 07/07/97 --
08/12/97 --
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
RESTRICTED SECURITIES
IAI MIDCAP GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 02/26/93 $ 250,000
11/29/93 150,027
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 31,841
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
10/22/96 50,000
12/12/96 12,500
02/12/97 21,395
02/26/97 25,000
05/05/97 20,000
06/10/97 12,500
09/30/97 12,500
CALL OPTIONS
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
------------
ASSETS
<S> <C>
Investments in securities of unaffiliated issuers, at market
(Cost: $51,821,164, $257,960,249, $10,362,617, and
$88,073,478, respectively) $ 69,095,200
Investments in securities of affiliated issuers, at market
(Cost: $0, $8,394,576, $0 and $610,366, respectively) --
------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 69,095,200
Cash in bank on demand deposit 394,592
Receivable for investment securities sold --
Dividends and accrued interest receivable 2,373
------------
TOTAL ASSETS 69,492,165
------------
LIABILITIES
Payable for investment securities purchased --
------------
TOTAL LIABILITIES --
------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 69,492,165
============
REPRESENTED BY:
Capital stock $ 36,386
Additional paid-in capital 45,596,047
Undistributed net investment income (loss) (231,003)
Accumulated net realized gain (loss) 6,816,699
Unrealized appreciation on investments 17,274,036
------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 69,492,165
============
Shares of capital stock outstanding; authorized 10 billion shares each
of $.01 par value stock 3,638,559
------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 19.10
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
------------- ----------- -------------
<S> <C> <C> <C>
$ 369,266,243 $12,925,165 $ 111,921,976
5,276,133 -- 387,914
------------- ----------- -------------
374,542,376 12,925,165 112,309,890
1,193,276 369,025 257,227
7,086,553 171,611 2,272,701
-- 16,097 22,944
------------- ----------- -------------
382,822,205 13,481,898 114,862,762
------------- ----------- -------------
1,812,560 -- 661,224
------------- ----------- -------------
1,812,560 -- 661,224
------------- ----------- -------------
$ 381,009,645 $13,481,898 $ 114,201,538
============= =========== =============
$ 189,146 $ 12,048 $ 62,885
251,429,428 10,347,562 82,085,567
(2,019,910) 6,011 (310,541)
23,223,430 553,729 8,737,581
108,187,551 2,562,548 23,626,046
------------- ----------- -------------
$ 381,009,645 $13,481,898 $ 114,201,538
============= =========== =============
18,914,559 1,204,837 6,288,457
------------- ----------- -------------
$ 20.14 $ 11.19 $ 18.16
============= =========== =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
<PAGE>
<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, 1997
(UNAUDITED)
IAI CAPITAL
APPRECIATION FUND
-----------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of
$0, $0, $777, and $894, respectively) $ 34,810
Interest 194,671
-----------
TOTAL INCOME 229,481
-----------
EXPENSES
Management fees 460,484
Compensation of Directors 3,372
-----------
TOTAL EXPENSES 463,856
Less fees reimbursed by Advisers (3,372)
-----------
NET EXPENSES 460,484
-----------
NET INVESTMENT INCOME (LOSS) (231,003)
-----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $6,064,563
Futures contracts 1,794,870
----------
7,859,433
Net change in unrealized appreciation or
depreciation on investment securities 14,210,583
-----------
NET GAIN (LOSS) ON INVESTMENTS 22,070,016
-----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $21,839,013
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 23,046 $ 67,020 $ 250,593
445,518 23,496 201,869
----------- ---------- -----------
468,564 90,516 452,462
----------- ---------- -----------
2,369,781 84,505 739,109
20,347 737 6,520
----------- ---------- -----------
2,390,128 85,242 745,629
(20,347) (737) (6,520)
----------- ---------- -----------
2,369,781 84,505 739,109
----------- ---------- -----------
(1,901,217) 6,011 (286,647)
----------- ---------- -----------
$23,232,874 $ 554,785 $8,761,850
-- -- --
- ----------- --------- ----------
23,232,874 554,785 8,761,850
75,641,471 1,840,405 13,340,527
----------- ---------- -----------
98,874,345 2,395,190 22,102,377
----------- ---------- -----------
$96,973,128 $2,401,201 $21,815,730
=========== ========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
</TABLE>
<PAGE>
<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
-----------------
Six months Year
ended ended
September 30, 1997 March 31, 1997
------------------ --------------
OPERATIONS (UNAUDITED)
<S> <C> <C>
Net investment income (loss) $ (231,003) $ (292,161)
Net realized gains (losses) 7,859,433 680,376
Net change in unrealized appreciation or depreciation 14,210,583 2,705,202
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,839,013 3,093,417
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (1,281)
Net realized gains -- (1,409,001)
Tax return of capital -- (126,721)
------------ ------------
TOTAL DISTRIBUTIONS -- (1,537,003)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from shares sold 60,706,780 91,105,766
Net asset value of shares issued for reinvestment
of distributions -- 1,494,100
Cost of shares redeemed (57,284,018) (59,337,277)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 3,422,762 33,262,589
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 25,261,775 34,819,003
NET ASSETS AT BEGINNING OF PERIOD 44,230,390 9,411,387
------------ ------------
NET ASSETS AT END OF PERIOD $ 69,492,165 $ 44,230,390
============ ============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) OF: $ (231,003) $ --
============ ============
*COMMENCEMENT OF OPERATIONS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
----------- ---- -----------
Six months Year Six months Year Six months Year
ended ended ended ended ended ended
September 30, 1997 March 31, 1997 September 30, 1997 March 31, 1997 September 30, 1997 March 31, 1997
------------------ -------------- ------------------ -------------- ------------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
$ (1,901,217) $ (4,923,148) $ 6,011 $ (40,368) $ (286,647) $ (647,104)
23,232,874 63,520,130 554,785 3,427,226 8,761,850 22,644,795
75,641,471 (190,788,849) 1,840,405 (1,841,255) 13,340,527 (17,970,970)
------------- ------------- ------------ ------------ ------------- -------------
96,973,128 (132,191,867) 2,401,201 1,545,603 21,815,730 4,026,721
------------- ------------- ------------ ------------ ------------- -------------
-- -- -- -- -- --
(5,105,932) (99,452,610) (796,569) (3,996,079) (11,564,531) (11,905,911)
-- -- -- -- -- --
------------- ------------- ------------ ------------ ------------- -------------
(5,105,932) (99,452,610) (796,569) (3,996,079) (11,564,531) (11,905,911)
------------- ------------- ------------ ------------ ------------- -------------
98,947,425 427,144,560 3,450,588 12,003,377 27,168,513 100,565,712
5,079,399 97,552,240 793,356 3,976,886 10,895,040 11,497,214
(201,989,451) (559,835,441) (4,113,491) (18,862,443) (62,372,203) (98,299,543)
------------- ------------- ------------ ------------ ------------- -------------
(97,962,627) (35,138,641) 130,453 (2,882,180) (24,308,650) 13,763,383
------------- ------------- ------------ ------------ ------------- -------------
(6,095,431) (266,783,118) 1,735,085 (5,332,656) (14,057,451) 5,884,193
387,105,076 653,888,194 11,746,813 17,079,469 128,258,989 122,374,796
------------- ------------- ------------ ------------ ------------- -------------
$ 381,009,645 $ 387,105,076 $ 13,481,898 $ 11,746,813 $ 114,201,538 $ 128,258,989
============= ============= ============ ============ ============= =============
$ (2,019,910) $ (118,693) $ 6,011 $ -- $ (310,541) $ (23,894)
============= ============= ============ ============ ============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
<PAGE>
FINANCIAL HIGHLIGHTS
IAI CAPITAL APPRECIATION 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 CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
Six months Year Period from
ended ended February 1, 1996+
September 30, 1997 March 31, 1997 to March 31, 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 13.49 $ 11.24 $ 10.00
------------ ------------ ------------
OPERATIONS
Net investment income (loss) (0.06) (0.09) --
Net realized and unrealized gains 5.67 2.79 1.24
------------ ------------ ------------
TOTAL FROM OPERATIONS 5.61 2.70 1.24
------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- --
Net realized gains -- (0.41) --
Tax return of capital -- (0.04) --
------------ ------------ ------------
TOTAL DISTRIBUTIONS -- (0.45) --
------------ ------------ ------------
NET ASSET VALUE
End of period $ 19.10 $ 13.49 $ 11.24
============ ============ ============
Total investment return* 41.59% 23.68% 12.40%
Net assets at end of period (000's omitted) $ 69,492 $ 44,230 $ 9,411
RATIOS
Expenses to average net assets** 1.40%*** 1.25% 1.25%***
Net investment income (loss)
to average net assets** (0.70%)*** (0.80%) 0.23%***
Average brokerage commission rate**** $ 0.0597 $ 0.0576 n/a
Portfolio turnover rate
(excluding short-term securities) 46.9% 132.5% 1.2%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** THE FUND'S ADVISER VOLUNTARILY WAIVED $54,841 AND $827 IN EXPENSES FOR THE
YEAR ENDED MARCH 31, 1997 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 (.95%) AND .08%, RESPECTIVELY.
*** ANNUALIZED
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
+ COMMENCEMENT OF OPERATIONS
<PAGE>
<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
Years ended March 31,
Six months ended ------------------------------------------------------
September 30, 1997 1997 1996 1995 1994 1993
------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 15.85 $ 24.08 $ 15.83 $ 15.20 $ 13.47 $ 11.91
-------- -------- -------- -------- -------- --------
OPERATIONS
Net investment income (loss) (0.10) (0.20) (0.09) (0.07) (0.10) (0.05)
Net realized and unrealized gains (losses) 4.62 (4.52) 8.77 1.42 2.18 2.37
-------- -------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 4.52 (4.72) 8.68 1.35 2.08 2.32
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (0.23) (3.51) (0.43) (0.72) (0.35) (0.76)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.23) (3.51) (0.43) (0.72) (0.35) (0.76)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 20.14 $ 15.85 $ 24.08 $ 15.83 $ 15.20 $ 13.47
======== ======== ======== ======== ======== ========
Total investment return* 28.64% (22.97%) 55.20% 10.23% 15.43% 21.90%
Net assets at end of period (000's omitted) $381,010 $387,105 $653,888 $342,874 $225,510 $131,514
RATIOS
Expenses to average net assets 1.23%** 1.19% 1.24% 1.25% 1.25% 1.25%
Net investment income (loss)
to average net assets (0.99%)** (0.75%) (0.52%) (0.54%) (0.77%) (0.72%)
Average brokerage commission rate*** $ 0.0540 $ 0.0571 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 21.3% 49.5% 62.8% 58.1% 76.3% 96.1%
* 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
*** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
IAI GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR EACH PERIOD
INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
IAI GROWTH FUND
Years ended
Six months March 31, Period from Period from
ended ----------------- August 1, 1994 to August 6, 1993***
September 30, 1997 1997 1996 March 31, 1995 to July 31, 1994
------------------ ---- ---- -------------- ----------------
NET ASSET VALUE (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Beginning of period $ 9.92 $ 11.89 $ 10.95 $ 9.87 $ 10.00
-------- -------- -------- -------- --------
OPERATIONS
Net investment income (loss) 0.01 (0.03) -- 0.04 0.01
Net realized and unrealized gains (losses) 1.89 1.02 1.93 1.07 (0.13)
-------- -------- -------- -------- --------
TOTAL FROM OPERATIONS 1.90 0.99 1.93 1.11 (0.12)
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (0.03) (0.03) (0.01)
Net realized gains (0.63) (2.96) (0.96) -- --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.63) (2.96) (0.99) (0.03) (0.01)
-------- -------- -------- -------- --------
NET ASSET VALUE
End of period $ 11.19 $ 9.92 $ 11.89 $ 10.95 $ 9.87
======== ======== ======== ======== ========
Total investment return* 19.59% 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $ 13,482 $ 11,747 $ 17,079 $ 26,794 $ 14,408
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25% 1.25%** 1.25%**
Net investment income (loss) to average
net assets 0.09%** (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate**** $ 0.0595 $ 0.0588 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 52.7% 134.2% 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
****BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
</TABLE>
<PAGE>
<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 Years ended March 31, Period from
ended --------------------- April 10, 1992***
September 30, 1997 1997 1996 1995 1994 to March 31, 1993
------------------ ---- ---- ---- ---- -----------------
NET ASSET VALUE (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $ 16.68 $ 17.70 $ 15.35 $ 13.67 $ 11.88 $ 10.00
--------- --------- --------- ------- -------- --------
OPERATIONS
Net investment income (loss) (0.05) (0.08) (0.05) (0.04) (0.04) 0.02
Net realized and unrealized gains 3.30 0.68 3.50 2.35 1.99 1.89
--------- --------- --------- ------- -------- --------
TOTAL FROM OPERATIONS 3.25 0.60 3.45 2.31 1.95 1.91
--------- --------- --------- ------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- -- -- (0.03)
Net realized gains (1.77) (1.62) (1.10) (0.63) (0.16) --
--------- --------- --------- ------- -------- --------
TOTAL DISTRIBUTIONS (1.77) (1.62) (1.10) (0.63) (0.16) (0.03)
--------- --------- --------- ------- -------- --------
NET ASSET VALUE
End of period $ 18.16 $ 16.68 $ 17.70 $ 15.35 $ 13.67 $ 11.88
========= ========= ========= ======= ======== ========
Total investment return* 20.69% 3.12% 23.51% 17.63% 16.40% 19.09%
Net assets at end of period
(000's omitted) $ 114,202 $ 128,259 $ 122,375 $88,075 $ 56,618 $ 22,070
RATIOS
Expenses to average net assets 1.25%** 1.25% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (0.48%)** (0.47%) (0.36%) (0.33%) (0.45%) 0.24%**
Average brokerage commission rate**** $ 0.0597 $ 0.0593 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 35.0% 72.4% 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
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(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. 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).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Securities traded on national or international securities exchanges are valued
at the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported sales
price or if the last sales price is not available, the last reported bid price
is used. Such valuations are obtained from pricing services or are supplied by
dealers.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
securities represent $20,532,081 (5.4% of net assets) for Emerging Growth Fund
and $924,472 (0.8% of net assets) for Midcap Growth Fund. Because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material.
FUTURES AND OPTIONS CONTRACTS
In order to increase exposure to and hedge against changes in the market, the
Funds may buy and sell futures contracts and options. The risks of entering into
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.
The variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
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 had a capital loss
carryover of approximately $944,000, at March 31, 1997 which, if not offset by
subsequent capital gains, will expire in 2006. 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 in the financial statements. Actual results could
differ from those estimates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds are committed to make future capital contributions, if
requested by the Company.
Capital Appreciation Fund, Emerging Growth Fund, Growth Fund, and Midcap Growth
Fund have available lines of credit of $15,000,000, $15,000,000, $4,650,000 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. There were no borrowings outstanding at September 30, 1997.
At September 30, 1997, the Funds are com-mitted to invest additional amounts in
certain limited partnership investments held, as follows:
<TABLE>
<CAPTION>
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- -------------------------------------------------------------------------------------
EMERGING GROWTH FUND MIDCAP GROWTH FUND
- -------------------------------------------------------------------------------------
<S> <C> <C>
Alta Berkeley III L.P. $ 56,000 $ --
Spectrum Equity Investors L.P. 156,000 78,000
- -------------------------------------------------------------------------------------
Total commitments $ 212,000 $ 78,000
- -------------------------------------------------------------------------------------
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[3] FEES AND EXPENSES
Under terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. The fee is equal to an
annual rate of 1.25% (1.40% for Capital Appreciation Fund) declining to 1.10%
(1.30% for Capital Appreciation Fund and 1.00% for Growth Fund) of average daily
net assets. This fee is paid monthly. The Management Agreements further provide
that Advisers will reimburse the Funds for the fees and expenses it pays to
Directors who are not "interested persons" of the Funds or reduce its fee by an
equivalent amount.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION GROWTH
FUND FUND
- --------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended March 31, ended March 31,
September 30, 1997 1997 September 30, 1997 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 3,797,740 6,546,069 5,407,227 17,915,439
ISSUED FOR REINVESTED
DISTRIBUTIONS -- 101,100 274,710 4,566,040
REDEEMED (3,438,563) (4,205,462) (11,195,014) (25,206,397)
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 359,177 2,441,707 (5,513,077) (2,724,918)
- --------------------------------------------------------------------------------------------------
MIDCAP
GROWTH GROWTH
FUND FUND
- --------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended March 31, ended March 31,
September 30, 1997 1997 September 30, 1997 1997
- --------------------------------------------------------------------------------------------------
SOLD 329,014 1,046,126 1,591,057 5,520,720
ISSUED FOR REINVESTED
DISTRIBUTIONS 75,342 379,284 670,051 660,383
REDEEMED (383,809) (1,677,288) (3,660,768) (5,408,412)
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 20,547 (251,878) (1,399,660) 772,691
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1997
(UNAUDITED)
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 1997, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Funds were as
follows:
Purchases Sales
- -------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND $ 31,808,843 $ 27,703,062
EMERGING GROWTH FUND $ 78,621,040 $ 192,098,222
GROWTH FUND $ 6,636,642 $ 7,613,761
MIDCAP GROWTH FUND $ 38,559,537 $ 68,424,328
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at September 30,
1997, are issues which generally cannot be offered for sale to the public
without first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid. Each Fund limits
investments in securities which are not readily marketable to 15% of its net
assets at the time of purchase. This limitation does not include Rule 144A
securities that have been determined to be liquid based upon guidelines approved
by the Funds' Board of Directors.
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND
FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
...................................................................................................................................
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND countries
- -----------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized emerging
growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized growth
APPRECIATION FUND 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 short-term instruments
+ INCOME]
- -----------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- -----------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment-grade bonds
- -----------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700