EQUITY FUNDS
ANNUAL REPORT
IAI CAPITAL APPRECIATION FUND,
IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1997
[LOGO]
IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
ANNUAL REPORT
MARCH 31, 1997
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
Independent Auditors' Report...................42
Federal Tax Information........................43
IAI Mutual Fund Family.........................44
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're a
young investor just starting your investment program, international equities are
a good place to be for growth. Wherever you are in life, you should make sure
that your investment portfolio generally reflects your long-term investment
goals for 1997 and beyond.
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The economy was surprisingly strong in the first quarter of 1997. Real growth
will slow from the reported pace of 5.6%. However, the slowdown will need some
help from higher interest rates if the Fed expects to meet its economic growth
targets. Business and labor markets no longer have excess capacity. Money and
liquidity are ample to finance above-trend growth. Furthermore, the value of the
U.S. dollar complicates the outlooks. Over the last two years, a strong dollar
has helped to restrain U.S. output and hold down price increases. This trend may
be coming to an end.
This combination of factors will lead to a modest rise in inflation in the
second half of the year. While increases will be restrained, interest rates are
likely to rise and the yield curve will flatten.
However, a recession is unlikely in the next four quarters. Full employment,
lower federal budget deficits and rising productivity from strong capital
spending are all positive factors in our long-term outlook for the market.
Potential volatility in the months ahead will present good long-term buying
opportunities.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
IAI CAPITAL APPRECIATION FUND
[PHOTO]
MARTIN J. CALIHAN, CFA
IAI CAPITAL APPRECIATION FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR GRAPH]
COMMERCIAL SERVICES 17.3%
TECHNOLOGY SERVICES 12.5%
FINANCIAL 11.2%
ELECTRONIC TECHNOLOGY 10.6%
HEALTH SERVICES 8.7%
FUND OBJECTIVE
The investment objective of the IAI Capital Appreciation Fund is long-term
capital appreciation. It is designed for investors seeking the opportunity for
substantial long-term growth who can accept above-average stock market risk and
little or no current income. In general, the IAI Capital Appreciation Fund will
concentrate on small-capitalization companies that have superior performance
records, solid market positions, strong balance sheets and a management team
capable of sustaining growth.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
Although the ride has not been smooth for small-cap growth investors during the
past year, the IAI Capital Appreciation Fund has significantly outperformed its
benchmark and other major indices. In what was a disappointing first quarter for
small-cap growth stocks, the Fund posted a return of (10.6%) for the three-month
period, but was up 23.7% from a year ago. In contrast, the Russell 2500 Growth
Index posted a return of (8.0%) for the first quarter and (1.1%) for the last 12
months, while the Standard & Poor's 500 Index was up 2.6% for the quarter and
19.9% for the last 12 months.
Last summer's small capitalization sell-off marked the end of a prolonged rally
in small-cap stocks. The Fund fared well during this sell-off due in part to an
avoidance of "high-flying," speculative stocks that came crashing down to earth
once the "hot" money stopped pouring into them. Because the Fund invests in only
high-quality, rapidly-growing companies, the Fund also benefited from the rally
that occurred in small-cap stocks in the latter part of 1996.
So far in 1997, the small-cap sector has under-performed large-caps. In fact, an
analysis of the Russell 2500 Growth Index at 3/31/97 shows that the smaller
stocks within the index performed far worse than the larger ones. Specifically,
the stocks in the index with capitalizations above $1 billion declined by an
average of only 1.6% for the three months. In contrast, the index's stocks with
capitalizations between $500 million and $1 billion fell an average of 9.9% and
those under $500 million posted a decline of 18.1%. The average size of the
companies in the Fund at 3/31/97 is approximately $400 million.
OUTLOOK
Conventional wisdom on Wall Street is that small-cap stocks under-perform their
large-cap brethren late in the economic cycle, when overall corporate earnings
growth is slowing. It appears that, based on this thinking, many investors have
decided to abandon the small-cap sector. However, history suggests that most
bull markets end with a rampant speculative frenzy across a broad spectrum of
the market, but the market's leadership has been narrowly focused on large-caps
for almost a year. So, on balance, the small-cap sector may be poised to perform
well.
Underpinning this optimism is the know-ledge that the portfolio companies are
performing well on a fundamental basis. The portfolio companies are expected to
deliver average EPS growth of more than 30% in 1997, yet the average P/E ratio
is only 17 times estimated 1997 earnings.
VALUE OF $10,000 INVESTMENT(+)
[LINE GRAPH]
<TABLE>
<CAPTION>
IAI CAPITAL APPRECIATION
FUND * (INCEPTION 2/01/96 RUSSELL 2500 INDEX S&P 500 INDEX RUSSELL 2500 GROWTH INDEX
------------------------- ------------------ ------------- -------------------------
<S> <C> <C> <C> <C>
2/1/96 $ 10,000 $ 10,000 $ 10,000 $ 10,000
3/31/96 $ 11,240 $ 10,511 $ 10,196 $ 10,667
9/30/96 $ 14,841 $ 11,196 $ 10,987 $ 11,366
3/31/97 $ 13,900 $ 11,424 $ 12,229 $ 10,554
</TABLE>
AVERAGE ANNUAL RETURNS(+)
THROUGH 3/31/97
Since Inception
1 Year 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND* 23.68% 32.78%
Russell 2500 Index(1) 8.68% 12.09%
Russell 2500 Growth Index (1.06%) 4.73%
S&P 500 Index 19.94% 18.82%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* FEES AND EXPENSES ARE CURRENTLY BEING VOLUNTARILY WAIVED TO 1.25% OF AVERAGE
DAILY NET ASSETS.
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 3/31/97 3/31/96
- -------------------------------------------------------------------------------
Coach USA Consumer Services 6.23 --
IMPATH Health Services 4.74 3.13
Advanced Lighting Technologies Non-Energy Minerals 4.73 --
Aftermarket Technology Consumer Durables 4.36 --
Enhance Financial Services Financial 3.84 --
Polymer Group Process Industries 3.71 --
Universal Outdoor Holdings Commerical Services 3.51 --
CMAC Investment Financial 3.24 3.24
Strayer Education Commerical Services 3.11 --
AptarGroup Process Industries 3.06 3.13
===============================================================================
TOTAL 40.53 9.50
2 EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI CAPITAL APPRECIATION FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND
[PHOTO]
DAVID M. HIMEBROOK, CFA
IAI EMERGING GROWTH FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
[BAR GRAPH]
TECHNOLOGY SERVICES 24.3%
RETAIL TRADE 14.9%
ELECTRONIC TECHNOLOGY 13.3%
HEALTH SERVICES 12.4%
COMMERCIAL SERVICES 12.1%
FUND OBJECTIVE
The IAI Emerging Growth Fund is designed for investors who seek long-term
capital appreciation. It pursues its objective of long-term capital appreciation
by investing primarily in equity securities of small- and medium-sized
companies. These companies are in the early stages of their life cycles and have
demonstrated or have the potential for above-average capital growth.
The Fund closed to new investors on February 1, 1996. Emerging Growth Fund's
current shareholders may add to an existing account and certain others may make
an initial investment in the Fund.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
It was a turbulent year for the IAI Emerging Growth Fund. After rising sharply
in the first few months of the year, small company stocks sold off in early
summer and the Fund declined as well. The Fund bounced back strongly in August
and September but then spent the last half of the year in negative territory.
For the year ending March 31, 1997, the Fund lost 22.97%.
The market environment was not particularly supportive of our aggressive growth
investment style. We focus on constructing a portfolio of the highest-quality,
fastest-growing small companies in America. This leads us to concentrate the
majority of the portfolio in a few segments of the market: Technology,
Healthcare, and Consumer Services. Unfortunately, those sectors were not in
favor with the market over the last year.
The business fundamentals of our portfolio continue to be strong, as over
two-thirds of our portfolio holdings reported earnings above analysts'
expectations. We regard this sell off as a valuation correction, not a judgement
on the fundamentals of our companies. While some of the price decline can be
attributed to rising interest rates, the decline in relative P/E of our universe
seems more reflective of investor capitulation due to the underperformance of
small company stocks. This has led to marginal cash outflows in aggressive
growth mutual funds which has placed additional pressure on our holdings.
We continue our direct research efforts and have recently added three new
companies to the portfolio. U.S. Rentals Inc. (0.63%)* leases equipment to the
construction industry. Visio Corporation (0.41%)* supplies drawing and
diagramming software while Minimed, Inc. (0.45%)* produces infusion systems for
the intensive management of diabetes.
OUTLOOK
We believe that stock prices will ultimately follow earnings. Our year-over-year
earnings growth continues to exceed 40% and we expect the majority of our
holdings to continue to report earnings at or above market expectations. This
period feels very much like the corrections we experienced in mid 1992 and mid
1994 and we are now at a valuation level that we haven't seen for quite some
time. If history repeats itself, this represents a tremendous opportunity for
true growth investors who follow a clearly defined investment discipline.
* PERCENTAGE OF NET ASSETS AS OF 3/31/97
VALUE OF $10,000 INVESTMENT(+)
[LINE GRAPH]
IAI EMERGING GROWTH FUND
(INCEPTION 8/05/91) RUSSELL 2500 INDEX * S&P 500 INDEX *
------------------- -------------------- ---------------
8/5/91 $ 10,000 $ 10,000 $ 10,000
3/31/92 $ 11,923 $ 11,670 $ 10,631
3/31/93 $ 14,534 $ 13,619 $ 12,255
3/31/94 $ 16,776 $ 14,817 $ 12,431
3/31/95 $ 18,489 $ 16,101 $ 14,368
3/31/96 $ 28,703 $ 20,902 $ 18,987
3/31/97 $ 22,111 $ 22,717 $ 22,772
AVERAGE ANNUAL RETURNS(+)
THROUGH 3/31/97
Since Inception
1 Year 5 Years 8/05/91
- -------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND (22.97%) 13.14% 15.05%
Russell 2500 Index 8.68% 14.25% 15.58%*
S&P 500 Index 19.94% 16.46% 15.63%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
TOP TEN HOLDINGS(1)
% of Net Assets
- -------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- -------------------------------------------------------------------------------
Oxford Health Plans Health Services 3.70 2.98
Inso Technology Services 3.70 2.84
PairGain Technologies Electronic Technology 3.29 1.55
Omnicare Health Services 3.23 2.40
CBT Group ADR Technology Services 3.16 1.35
Starbucks Consumer Non-Durables 3.15 1.66
HNC Software Technology Services 2.63 0.71
Synopsis Technology Services 2.46 1.72
PetSmart Retail Trade 2.41 1.43
Apollo Group Class A Commercial Services 2.40 1.43
===============================================================================
TOTAL 30.13 18.07
1 EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI EMERGING GROWTH FUND INCLUDES CHANGES IN SHARE
PRICE AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS
NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND
PRINCIPAL MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS
THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
FUND MANAGERS' REVIEW
IAI GROWTH FUND
IAI GROWTH FUND
[PHOTO]
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 3/31/97
[BAR GRAPH]
FINANCIAL 11.2%
CONSUMER SERVICES 8.9%
CONSUMER NON-DURABLES 8.1%
TECHNOLOGY SERVICES 8.0%
HEALTH SERVICES 7.4%
FUND OBJECTIVE
The IAI Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
invest-ing primarily in equity securities of established companies.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
Increased volatility made the first quarter of 1997 difficult for investors. The
IAI Growth Fund portfolio declined (2.65%) compared to a (1.25%)+ decline for
the average growth fund. The S&P 500 gained 2.62%. Over the past year, the Fund
was up 8.42% while the S&P 500 was up 19.94%. Roughly one-half of the
underperformance relative to the S&P stems from style differences (i.e. value
outperforming growth, large cap outperforming midcap). The balance resulted from
corrections in a handful of larger holdings, including Danka Business Systems
(2.19%)*, Ikon Office Solutions (1.60%)*, LCI International (2.44%)*, and
Columbia HCA Healthcare (2.49%)*. The reasons for their weakness were company
specific. We have re-examined the basis for owning these stocks and generally
concluded that their fundamentals merit continued ownership, albeit some at
lower weightings.
We remain confident that the glass is half full, not half empty. It has become
quite common for value to outperform growth in the first quarter--1997 marks the
11th year out of the past twelve that this has occurred. More importantly, we
believe the quality of the portfolio holdings and continued adherence to the
disciplines that have served us well in the past will again generate improved
performance in the coming months.
Transaction activity in the portfolio was higher than normal, reflecting
increased opportunities created by the volatile market. The 15-20% declines in
some of these blue chip growth stocks finally created attractive entry points.
Specifically, in the hard hit technology sector, we initiated positions in Intel
(1.30%)*, 3Com (1.12%)*, and Analog Devices (1.15%)*. In financials, we added
Fannie Mae (1.05%)* and increased holdings in PMI Group (1.37%)*. Sales reflect
two of our key sell disciplines: profit taking as stocks reached our price
targets and deteriorating fundamentals. Profit taking occurred in Norwest
(3.27%)*, Colgate-Palmolive (1.61%)*, Tyco (2.29%)*, Cox Communications
(1.70%)*, and Petroleum Geo-Services (2.38%)*. Issues sold for fundamental
reasons included Harcourt, Hercules, Sybron, Gtech, and IBM.
OUTLOOK
We believe the market will remain volatile through the summer. Interest rate and
currency concerns are unlikely to disappear before then. We will continue
searching out specific opportunities created by this volatility and further
strengthen the portfolio for a better environment in the fall. We continue to
feel that the market will finish the year with positive returns.
+ LIPPER ANALYTICAL SERVICES
* PERCENTAGE OF NET ASSETS AS OF 3/31/97
VALUE OF $10,000 INVESTMENT(+)
[LINE GRAPH]
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
AVERAGE ANNUAL RETURNS(+)
THROUGH 3/31/97
Since Inception
1 Year 8/06/93
- -------------------------------------------------------------------------------
IAI GROWTH FUND 8.42% 9.78%
S&P 500 Index 19.94% 18.41%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
TOP TEN HOLDINGS(1)
% of Net Assets
- -------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- -------------------------------------------------------------------------------
First Data Technology Services 3.29 1.11
Norwest Financial 3.27 2.82
Sysco Commercial Services 3.11 2.25
Minerals Technologies Non-Energy Minerals 3.09 --
Aetna Financial 3.00 --
SmithKline Beecham ADR Health Technology 2.80 --
Corning Process Industries 2.68 --
FIserv Technology Services 2.66 --
MedPartners Health Services 2.61 --
Columbia/HCA Healthcare Health Services 2.49 2.67
===============================================================================
TOTAL 29.00 8.85
1 EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' REVIEW
PERFORMANCE DATA FOR THE IAI GROWTH FUND INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
IAI MIDCAP GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI MIDCAP GROWTH
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/97
FINANCIAL 13.0%
PRODUCER MANUFACTURING 10.0%
HEALTH SERVICES 9.3%
CONSUMER SERVICES 8.9%
TECHNOLOGY SERVICES 8.2%
FUND OBJECTIVE
The IAI Midcap Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of medium-sized companies. The Fund
defines "medium" as companies with market capitalizations (stock price
multiplied by the number of shares outstanding) between $500 million and $5
billion.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
Increased volatility made the first quarter of 1997 difficult for investors,
ourselves included. The IAI Midcap Growth Fund portfolio declined (5.33%). This
compares to a 3.7% decline in the Russell Midcap Growth index and a (1.49%)
decline in the S&P Midcap Index. As is typical early in the year, value
outperformed growth. Over the past year, the Fund was up 3.12% while the S&P
Midcap and the S&P 500 were up 10.62% and 19.94%, respectively.
Technology and telecommunication services holdings were the greatest drags on
performance. More significantly, however, were corrections in a handful of
larger holdings, including Danka Business Systems (2.93%)*, Minerals Technology
(2.88%)*, and LCI International (3.19%)*. The reasons for their weakness were
company specific. We have re-examined the basis for owning these stocks and
generally concluded that their fundamentals merit continued ownership. While not
pleased with the slow start, we believe the quality of the holdings in the
portfolio and adherence to the disciplines that have served us well in the past
will generate improved performance in the coming months.
Transaction activity was somewhat higher than normal, reflecting increased
opportunities created by the market's volatility. New positions were intiated in
Applebee's International (1.57%)* (a mid-priced casual dining chain),
DecisionOne (0.49%)* (third party technology main-tenance), Harte-Hanks
Communications (1.23%)* (a direct marketing, publishing firm), Financial
Security Assurance (1.12%)* (specialty finance), Precision Drilling (1.62%)*
(oilfield services), and Telco Communications Group (0.53%)*. We eliminated
positions that either met our price objective or were experiencing deteriorating
fundamentals. Included were Harcourt, Stewart Enterprises, Unifi, Lennar
Progressive, and Scholastic.
OUTLOOK
We believe the market will remain volatile through the summer due to continued
interest rate and currency concerns. As always, we will search out specific
opportunities created by this volatility and further strengthen the portfolio
for a better environment in the fall. Recent inflationary concerns should be
resolved by then and the market should finish the year with positive returns.
* PERCENTAGE OF NET ASSETS AS OF 3/31/97
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI MIDCAP GROWTH FUND
(INCEPTION 4/10/92) S&P MIDCAP INDEX * S&P 500 INDEX *
------------------- ------------------ ---------------
4/10/92 $ 10,000 $ 10,000 $ 10,000
3/31/93 $ 11,909 $ 11,617 $ 11,527
3/31/94 $ 13,862 $ 12,331 $ 11,693
3/31/95 $ 16,305 $ 13,370 $ 13,515
3/31/96 $ 20,139 $ 17,179 $ 17,859
3/31/97 $ 20,768 $ 19,004 $ 21,420
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/97
Since Inception
1 Year 4/10/92
- -------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND 3.12% 15.82%
S&P Midcap Index 10.62% 13.70%*
S&P 500 Index 19.94% 16.46%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
TOP TEN HOLDINGS(1)
% of Net Assets
- -------------------------------------------------------------------------------
Issue Sector 3/31/97 3/31/96
- -------------------------------------------------------------------------------
PMI Group Financial 3.27 1.55
FIserv Technology Services 3.22 2.46
LCI International Utilities 3.19 2.84
Danka Business Systems ADR Producer Manufacturing 2.93 4.42
Minerals Technologies Non-Energy Minerals 2.88 3.00
HFS Consumer Services 2.85 3.44
Barnes & Noble Retail Trade 2.77 3.31
Warnaco Class A Consumer Non-Durables 2.62 1.74
Century Telephone Enterprises Utilities 2.59 2.19
MedPartners Health Services 2.49 -
===============================================================================
TOTAL 28.81 24.95
1 EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI MIDCAP GROWTH FUND INCLUDES CHANGES IN SHARE PRICE
AND REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE IS NOT A
GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN, YIELD AND PRINCIPAL
MAY FLUCTUATE SO THAT, WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 98.8%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 17.3%
G&K Services Class A 32,000 $ 960,000
Lamar Advertising (b) 28,500 577,125
PalEx (b) 108,600 895,950
Right Management Consultants (b) 67,200 646,800
Service Experts (b) 23,700 509,550
Strayer Education 70,000 1,373,750
Superior Services (b) 16,800 373,800
Universal Outdoor Holdings (b) 53,500 1,551,500
Valassis Communications (b) 35,000 783,125
---------------
7,671,600
- --------------------------------------------------------
CONSUMER DURABLES - 4.4%
Aftermarket Technology (b) 124,500 1,929,750
- --------------------------------------------------------
CONSUMER NON-DURABLES - 0.6%
Robert Mondavi Class A (b) 7,000 253,750
- --------------------------------------------------------
CONSUMER SERVICES - 6.2%
Coach USA (b) 95,000 2,755,000
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 10.6%
Allen Telecommunications (b) 70,000 1,225,000
Centennial Cellular Class A (b) 108,600 1,126,725
CommNet Cellular (b) 14,000 357,000
Computer Products (b) 73,000 1,067,625
Microchip Technology (b) 10,000 300,000
PPT Vision (b) 86,800 585,900
---------------
4,662,250
- --------------------------------------------------------
ENERGY MINERALS - 2.3%
Forcenergy Gas Exploration (b) 36,000 1,035,000
- --------------------------------------------------------
FINANCIAL - 11.2%
CMAC Investment 43,000 1,435,125
Emergent Group (b) 70,000 848,750
Enhance Financial Services 43,000 1,698,500
First Commonwealth (b) 45,000 663,750
United Assets Management 12,000 307,500
---------------
4,953,625
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
HEALTH SERVICES - 8.7%
Arrow International 14,000 $ 423,500
IMPATH (b) 116,500 2,097,000
Xomed Surgical Products (b) 79,900 1,318,350
---------------
3,838,850
- --------------------------------------------------------
HEALTH TECHNOLOGY - 4.1%
InControl (b) 66,400 556,100
Perclose (b) 60,000 1,275,000
---------------
1,831,100
- --------------------------------------------------------
INDUSTRIAL SERVICES - 2.2%
Petroleum Geo-Services ADR (b) 23,000 989,000
- --------------------------------------------------------
NON-ENERGY MINERALS - 6.0%
Advanced Lighting
Technologies (b) 95,000 2,090,000
Minerals Technologies 17,000 565,250
---------------
2,655,250
- --------------------------------------------------------
PROCESS INDUSTRIES - 6.8%
AptarGroup 35,400 1,354,050
Polymer Group (b) 124,000 1,643,000
---------------
2,997,050
- --------------------------------------------------------
PRODUCER MANUFACTURING - 1.8%
Zebra Technologies Class A (b) 35,000 805,000
- --------------------------------------------------------
RETAIL TRADE - 4.1%
Factory Card Outlet (b) 125,000 1,000,000
Lithia Motors Class A (b) 70,000 822,500
---------------
1,822,500
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
TECHNOLOGY SERVICES - 12.5%
American Management
Systems (b) 28,000 $ 616,000
ANYSYS (b) 32,900 267,312
Black Box (b) 37,500 1,007,813
Carnegie Group (b) 55,000 316,250
CCC Information Services (b) 91,500 1,143,750
GTECH (b) 6,000 180,750
Mastech (b) 76,000 1,225,500
Maxis (b) 20,200 148,975
Reptron Electronics (b) 30,000 611,250
---------------
5,517,600
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $40,653,872)......................$ 43,717,325
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $40,653,872)(e)...................$ 43,717,325
========================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.2%
......................................$ 513,065
========================================================
TOTAL NET ASSETS
......................................$ 44,230,390
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.4%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 12.1%
ABR Information Services (b) 435,100 $ 7,831,800
AccuStaff (b) 283,502 4,748,659
Apollo Group Class A (b) 379,800 9,305,100
Cambridge Technology
Partners (b) 151,600 3,505,750
Desktop Data (b) 141,700 1,806,675
NOVA (b) 126,000 2,000,250
Sitel (b) 407,600 5,451,650
Snyder Communications (b) 139,800 3,285,300
Sylvan Learning Systems (b) 108,050 2,674,238
TeleTech Holdings (b) 202,400 3,997,400
U.S. Rentals (b) 133,700 2,423,312
---------------
47,030,134
- --------------------------------------------------------
CONSUMER NON-DURABLES - 4.2%
Gymboree (b) 152,100 4,087,688
Starbucks (b) 412,100 12,208,462
---------------
16,296,150
- --------------------------------------------------------
CONSUMER SERVICES - 2.5%
Papa John's International (b) 217,900 5,747,113
Quality Dining (b) 336,263 3,867,024
---------------
9,614,137
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 13.3%
Advanced Fibre
Communications (b) 64,300 2,073,675
Ascend Communications (b) 205,000 8,353,750
Cascade Communications (b) 255,000 6,725,625
Lattice Semiconductor (b) 67,900 3,106,425
Maxim Integrated Products (b) 177,900 8,605,913
PairGain Technologies (b) 430,500 12,753,563
Vitesse Semiconductor (b) 183,100 5,058,137
Xilinx (b) 101,900 4,967,625
---------------
51,644,713
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
FINANCIAL - 2.3%
Aames Financial 130,650 $ 2,645,663
Credit Acceptance (b) 156,500 2,777,875
First USA Paymentech (b) 125,300 3,273,462
---------------
8,697,000
- --------------------------------------------------------
HEALTH SERVICES - 12.4%
NCS Healthcare Class A (b) 170,200 3,850,775
OccuSystems (b) 207,300 4,664,250
Omnicare 531,900 12,499,650
Oxford Health Plans (b) 244,300 14,322,088
PhyCor (b) 319,462 8,705,339
Total Renal Care (b) 133,700 4,061,137
---------------
48,103,239
- --------------------------------------------------------
HEALTH TECHNOLOGY - 4.7%
IDEXX Laboratories (b) 98,200 1,374,800
Jones Medical Industries 141,500 3,396,000
MiniMed (b) 67,500 1,738,125
Rexall Sundown (b) 128,000 3,280,000
Urologix (b) 60,567 1,029,639
Watson Pharmaceuticals (b) 202,700 7,246,525
---------------
18,065,089
- --------------------------------------------------------
PRODUCER MANUFACTURING - 0.7%
Corporate Express (b) 244,875 2,509,969
- --------------------------------------------------------
RETAIL TRADE - 14.9%
Bed Bath & Beyond (b) 362,200 8,760,712
Express Scripts Class A (b) 115,200 4,118,400
Fastenal 153,300 5,365,500
Henry Schein (b) 213,650 6,195,850
Just For Feet (b) 238,200 4,108,950
Petco Animal Supplies (b) 286,600 6,735,100
PetSmart (b) 460,600 9,327,150
Stein Mart (b) 140,200 3,995,700
Viking Office Products (b) 468,600 9,079,125
---------------
57,686,487
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
TECHNOLOGY SERVICES - 24.3%
Acxiom (b) 309,100 $ 4,443,312
Avant! (b) 133,700 3,626,612
Baan (b) 195,300 8,715,262
CBT Group ADR (b) 244,900 12,214,387
Citrix Systems (b) 290,400 3,847,800
Gartner Group Class A (b) 264,000 5,709,000
HNC Software (b) 389,700 10,180,913
HPR (b) 295,700 3,326,625
Inso (b) 380,800 14,303,800
Legato Systems (b) 6,300 105,525
Medic Computer Systems (b) 53,700 859,200
Pure Atria (b) 107,080 1,827,053
Red Brick Systems (b) 82,200 1,150,800
Security Dynamics
Technologies (b) 250,700 6,142,150
Sykes Enterprises (b) 124,300 4,055,288
Synopsis (b) 380,504 9,512,600
Transaction Systems Architects
Class A (b) 90,200 2,480,500
Visio (b) 40,300 1,571,700
---------------
94,072,527
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $330,179,976)................... $353,719,445
========================================================
OTHER SECURITIES - 5.7%
Market
Quantity (c) Value (a)
- --------------------------------------------------------
COMMON STOCKS - 3.1%
AccessLine Technologies
Class A (b) 41,666 $ 208,330
BEI Medical (b) 1,029 30,860
CardioGenesis (b) 609,793 7,797,423
GalaGen (b) (d) 235,309 538,151
Network Appliance (b) 2,503 81,347
PACE Health Management
Systems (b) (d) 471,473 1,146,151
PriCellular Class B (b) 210,191 1,734,076
Seurat Analytical Systems
Class B (b) (d) 39,898 399
Urologix (b) 29,807 506,719
---------------
12,043,456
- --------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS -1.4%
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
Seurat Analytical Systems
Series B (b) (d) 114,973 1,150
Seurat Analytical Systems
Series C (b) (d) 59,908 599
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
---------------
5,137,953
- --------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 1.2%
Alta Berkeley III, foreign (b) 1.58% $ 390,767
South Street Corporate Recovery
Fund I (b) 0.67 43,483
South Street Leveraged Corporate
Recovery Fund I (b) 1.01 30,087
Spectrum Equity Investors (b) 0.92 959,394
Vanguard Associates IV (b) 1.35 3,433,094
---------------
4,856,825
- --------------------------------------------------------
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 10/31/96 258,332 --
---------------
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) 5,687 --
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 --
---------------
--
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $13,486,062)...................$ 22,138,234
========================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $343,666,038)..................$ 375,857,679
========================================================
SHORT-TERM SECURITIES - 1.0%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------
U.S. TREASURY BILLS - 1.0%
5.35% 07/24/97 $ 4,000,000 $ 3,933,240
========================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $3,934,387).................... $ 3,933,240
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $347,600,425) (e).............. $379,790,919
========================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.9%
................................... $ 7,314,157
========================================================
TOTAL NET ASSETS
................................... $387,105,076
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI GROWTH FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 96.9%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 6.4%
Ikon Office Solutions 5,600 $ 187,600
Reynolds & Reynolds Class A 8,200 195,775
Sysco 10,700 365,138
--------------
748,513
- --------------------------------------------------------
CONSUMER DURABLES - 4.9%
Eastman Kodak 3,300 250,388
Harley-Davidson 4,300 145,662
Newell 5,200 174,200
--------------
570,250
- --------------------------------------------------------
CONSUMER NON-DURABLES - 8.1%
Colgate-Palmolive 1,900 189,288
Gillett 1,600 116,200
Pepsico 4,300 140,288
Philip Morris 1,100 125,537
Seagram 3,200 122,400
Warnaco Class A 8,500 252,875
--------------
946,588
- --------------------------------------------------------
CONSUMER SERVICES - 8.9%
Cox Communications Class A (b) 9,700 200,063
CUC International (b) 12,775 287,438
HFS (b) 4,800 282,600
Marriott International 2,900 144,275
U.S. West Media (b) 7,300 135,962
--------------
1,050,338
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 5.9%
3Com (b) 4,000 131,000
Analog Devices (b) 6,000 135,000
Hewlett-Packard 2,700 143,775
Intel 1,100 153,037
SBC Communications 2,400 126,300
--------------
689,112
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
ENERGY MINERALS - 3.8%
Union Pacific Resources Group 9,600 $ 256,800
United Meridan (b) 6,300 189,787
--------------
446,587
- --------------------------------------------------------
FINANCIAL - 11.2%
Aetna 4,100 352,088
Fannie Mae 3,400 122,825
First USA 3,600 152,550
MBNA 5,100 142,162
Norwest 8,300 383,875
PMI Group 3,200 160,400
--------------
1,313,900
- --------------------------------------------------------
HEALTH SERVICES - 7.4%
Columbia/HCA Healthcare 8,700 292,538
MedPartners (b) 14,449 307,041
PacifiCare Health Systems
Class B (b) 3,200 276,000
--------------
875,579
- --------------------------------------------------------
HEALTH TECHNOLOGY - 5.1%
Pharmacia & Upjohn 7,300 267,362
SmithKline Beecham ADR 4,700 329,000
--------------
596,362
- --------------------------------------------------------
INDUSTRIAL SERVICES - 6.3%
Petroleum Geo-Services
ADR (b) 6,500 279,500
Schlumberger ADR 1,900 203,775
USA Waste Services (b) 7,320 259,860
--------------
743,135
- --------------------------------------------------------
NON-ENERGY MINERALS - 4.6%
Minerals Technologies 10,900 362,425
Worthington Industries 9,200 175,950
--------------
538,375
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
PROCESS INDUSTRIES - 3.9%
Corning 7,100 $ 315,063
Sigma-Aldrich 4,500 138,937
--------------
454,000
- --------------------------------------------------------
PRODUCER MANUFACTURING- 5.8%
Danka Business Systems ADR 8,200 257,787
General Electric 1,600 158,800
Tyco International 4,900 269,500
--------------
686,087
- --------------------------------------------------------
RETAIL TRADE - 2.0%
Barnes & Noble (b) 6,800 241,400
- --------------------------------------------------------
TECHNOLOGY SERVICES - 8.0%
Electronic Data Systems 5,900 238,213
First Data 11,400 386,175
FIserv (b) 8,400 312,900
--------------
937,288
- --------------------------------------------------------
UTILITIES - 4.6%
Century Telephone Enterprises 8,600 253,700
LCI International (b) 17,100 286,425
--------------
540,125
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,655,496)................... $ 11,377,639
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $10,655,496)(e)................ $ 11,377,639
========================================================
OTHER ASSETS AND LIABILITIES
(NET) - 3.1%
................................... $ 369,174
========================================================
TOTAL NET ASSETS
................................... $ 11,746,813
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.0%
Market
Quantity Value (a)
- --------------------------------------------------------
COMMERCIAL SERVICES - 3.5%
Ikon Office Solutions 62,000 $ 2,077,000
Reynolds & Reynolds Class A 100,070 2,389,171
--------------
4,466,171
- --------------------------------------------------------
CONSUMER DURABLES - 2.2%
Harley-Davidson 46,000 1,558,250
Newell 39,000 1,306,500
--------------
2,864,750
- --------------------------------------------------------
CONSUMER NON-DURABLES - 2.6%
Warnaco Class A 113,000 3,361,750
- --------------------------------------------------------
CONSUMER SERVICES - 8.9%
Applebee's International (b) 83,300 2,009,613
CUC International (b) 48,000 1,080,000
Harte-Hanks Communications 54,000 1,572,750
HFS (b) 62,000 3,650,250
La Quinta Inns 110,000 2,255,000
Scholastic (b) 28,970 818,403
--------------
11,386,016
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY - 3.7%
Analog Devices (b) 59,000 1,327,500
Checkpoint Systems (b) 90,000 1,541,250
Wang Laboratories (b) 108,000 1,917,000
--------------
4,785,750
- --------------------------------------------------------
ENERGY MINERALS - 1.7%
Nuevo Energy (b) 57,000 2,187,375
- --------------------------------------------------------
FINANCIAL - 13.0%
Capital One Financial 59,000 2,197,750
Credit Acceptance (b) 88,750 1,575,313
Financial Security Assurance 43,200 1,431,000
Finova Group 22,000 1,487,750
First USA 15,700 665,287
First USA Paymentech (b) 18,000 470,250
Old Republic International 51,600 1,322,250
PMI Group 83,680 4,194,460
Provident Companies 32,000 1,752,000
TIG 49,100 1,558,925
--------------
16,654,985
- --------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------
HEALTH SERVICES - 9.3%
Covance (b) 73,000 $ 1,177,125
MedPartners (b) 150,000 3,187,500
Orthodontic Centers of
America (b) 96,600 1,304,100
PacifiCare Health Systems
Class B (b) 35,000 3,018,750
Quorum Health Group (b) 50,000 1,543,750
Sola International (b) 73,000 1,688,125
--------------
11,919,350
- --------------------------------------------------------
HEALTH TECHNOLOGY - 3.4%
Forest Laboratories (b) 51,000 1,918,875
Scherer (R.P.) (b) 36,000 1,867,500
Sybron International -
Wisconsin (b) 19,400 538,350
--------------
4,324,725
- --------------------------------------------------------
INDUSTRIAL SERVICES - 7.3%
Camco International 34,780 1,530,320
Petroleum Geo-Services ADR (b) 65,000 2,795,000
Precision Drilling (b) 49,300 2,082,925
USA Waste Services (b) 82,000 2,911,000
--------------
9,319,245
- --------------------------------------------------------
NON-ENERGY MINERALS - 4.2%
Minerals Technologies 111,000 3,690,750
Worthington Industries 89,550 1,712,644
--------------
5,403,394
- --------------------------------------------------------
PROCESS INDUSTRIES - 2.0%
Bemis 28,000 1,120,000
Sigma-Aldrich 48,000 1,482,000
--------------
2,602,000
- --------------------------------------------------------
PRODUCER MANUFACTURING - 10.0%
Danka Business Systems ADR 119,420 3,754,266
JLG Industries 131,000 2,570,875
Miller Industries (b) 36,500 438,000
Nordson 8,000 410,000
Market
Quantity Value (a)
- --------------------------------------------------------
PRODUCER MANUFACTURING (CONT.)
Roper Industries 74,520 $ 3,139,155
Tyco International 24,000 1,320,000
York International 28,000 1,172,500
--------------
12,804,796
- --------------------------------------------------------
RETAIL TRADE - 4.7%
Barnes & Noble (b) 99,950 3,548,225
Heilig-Meyers 154,000 2,444,750
--------------
5,992,975
- --------------------------------------------------------
TECHNOLOGY SERVICES - 8.2%
Autodesk 26,000 806,000
DecisionOne (b) 41,800 627,000
FIserv (b) 111,000 4,134,750
GTECH (b) 40,000 1,205,000
Intuit (b) 44,000 1,023,000
Lexmark International
Class A (b) 112,400 2,725,700
--------------
10,521,450
- --------------------------------------------------------
UTILITIES - 6.3%
Century Telephone Enterprises 112,410 3,316,095
LCI International (b) 244,000 4,087,000
Telco Communications Group (b) 33,900 673,763
--------------
8,076,858
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $106,696,982)................... $116,671,590
========================================================
OTHER SECURITIES - 1.1%
Market
Quantity (c) Value (a)
- --------------------------------------------------------
COMMON STOCKS - 0.5%
GalaGen (b) (d) 47,398 $ 109,300
Urologix (b) 29,807 506,719
--------------
616,019
- --------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCK - 0.2%
Tut Systems Series D (b) (d) 233,546 291,932
- --------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------
LIMITED PARTNERSHIPS - 0.4%
South Street Leveraged Corporate
Recovery Fund I (b) 0.67% $ 20,061
Spectrum Equity Investors (b) 0.46 479,689
--------------
499,750
- --------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (b) (d) 1,083 -
========================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $1,096,679)..................... $ 1,407,701
========================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $107,793,661)................... $118,079,291
========================================================
SHORT-TERM SECURITIES - 6.1%
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------
U.S. TREASURY BILLS - 6.1%
5.26% 04/17/97 $ 1,400,000 $ 1,396,792
5.32 05/29/97 5,000,000 4,958,050
5.42 07/24/97 1,500,000 1,474,965
--------------
7,829,807
========================================================
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $7,829,918).....................$ 7,829,807
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $115,623,579) (e)...............$ 125,909,098
========================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.8%
....................................$ 2,349,891
========================================================
TOTAL NET ASSETS
....................................$ 128,258,989
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1997
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security issue held at March 31, 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
March 31, 1997 is shown on pages 23-25.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at March 31, 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>
Air Communications
Series A PFD -- $ -- 1,000,000 $ 1 $ (63,473) $ --
Air Communications
Series B PFD -- $ -- 1,175,001 $ 1 $ (944,221) $ --
Air Communications
Warrants -- $ -- 75,000 $ -- $ (75) $ --
Air Communications Series B
Convertible Note 10/31/96 24,999 $ 25,055 -- $ -- $ -- $ --
CardioGenesis
Series B PFD(1) -- $ -- 410,000 $ -- $ -- $ --
CardioGenesis
Series C PFD(1) -- $ -- 199,793 $ -- $ -- $ --
CardioGenesis(1) 609,793 $1,670,486 -- $ -- $ -- $ --
GalaGen Options 05/22/08 811 $ -- -- $ -- $ -- $ --
GalaGen Options 03/27/01 270 $ -- -- $ -- $ -- $ --
GalaGen Series E
Convertible Note 03/31/97 -- $ -- 375,000 $ 375,000 $ -- $ 18
Indigo Medical Series B PFD -- $ -- 181,818 $ 912,781 $ 462,781 $ --
Indigo Medical Series C PFD -- $ -- 798,496 $4,008,688 $3,322,004 $ --
Indigo Medical -- $ -- 100,000 $ 502,030 $ 501,130 $ --
-- CONTINUED ON NEXT PAGE --
IAI EMERGING GROWTH FUND AFFILIATED ISSUERS (CONT.)
- -------------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -------------------------------------------------------------------------------------------------------------------
Myelos Neurosciences
Series B PFD 571,429 $1,000,001 -- $ -- $ -- $ --
PACE Health
Management Systems 196,153 $ 637,501 -- $ -- $ -- $ --
Seurat Analytical Systems Series C
Convertible Note 07/08/96(2) -- $ -- 325,000 $ -- $ -- $ 18,099
Seurat Analytical Systems
Series C PFD(2) 59,908 $ 479,574 -- $ -- $ -- $ --
Seurat Analytical
Systems Class B 39,898 $ -- -- $ -- $ -- $ --
Tut Systems Series F
Convertible Note 03/23/97 251,250 $ 251,250 251,250 $ 251,250 $ -- $ 2,478
Tut Systems Series F PFD 780,000 $ 975,284 -- $ -- $ -- $ --
DURING THE YEAR ENDED MARCH 31, 1997:
1. CARDIOGENESIS PREFERRED STOCKS WITH A COST OF $1,670,486 CONVERTED INTO
CARDIOGENESIS COMMON STOCK.
2. SEURAT CONVERTIBLE NOTE WITH A COST OF $325,310 WAS CONVERTED INTO SERIES C
PREFERRED STOCK.
IAI MIDCAP GROWTH FUND AFFILIATED ISSUERS
- -------------------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
- -------------------------------------------------------------------------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -------------------------------------------------------------------------------------------------------------------
GalaGen Stock Options 270 $ -- -- $ -- $ -- $ --
</TABLE>
(e)
At March 31, 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 $ 40,752,653 $ 347,737,907 $ 10,656,402 $115,671,407
===========================================================
Gross unrealized appreciation $ 5,167,227 $ 88,772,048 $ 1,308,112 $ 17,047,400
Gross unrealized depreciation (2,202,555) (56,719,036) (586,875) (6,809,709)
-----------------------------------------------------------
Net unrealized appreciation $ 2,964,672 $ 32,053,012 $ 721,237 $ 10,237,691
===========================================================
</TABLE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1997
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
BEI Medical 02/05/96 30,859
CardioGenesis 06/09/94 1,000,201
12/05/95 670,285
GalaGen 02/26/93 750,000
11/29/93 250,099
06/17/94 351,839
03/22/95 133,236
07/07/95 104,684
12/14/95 124,999
Network Appliance 09/23/94 3,058
12/30/96 1,792
PACE Health Management
Systems 01/11/94 750,000
01/31/95 201,520
04/27/95 150,625
06/20/95 75,000
09/17/96 637,501
PriCellular Class B 05/16/94 750,574
Seurat Analytical Systems
Class B 06/28/96 --
Urologix 03/22/94 131,148
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
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
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 05/12/94 $ 106,483
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
Vanguard Associates IV 02/11/93 11,448
08/12/93 50,000
11/01/93 50,000
04/19/94 50,000
09/19/94 50,000
01/17/95 50,000
07/17/95 50,000
12/13/95 50,000
07/26/96 50,000
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- --------------------------------------------------------
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
RESTRICTED SECURITIES
IAI MIDCAP GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------
GalaGen 02/26/93 $ 250,000
11/29/93 150,027
Urologix 03/22/94 131,151
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 53,242
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
CALL OPTIONS
Security Acquisition Date Cost
- --------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1997
<TABLE>
<CAPTION>
IAI CAPITAL IAI EMERGING
APPRECIATION FUND GROWTH FUND
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $40,653,872, $339,955,849, $10,655,496, and
$115,013,213, respectively) $ 43,717,325 $ 374,773,864
Investments in securities of affiliated issuers, at market
(Cost: $0, $7,644,576, $0 and $610,366, respectively) -- 5,017,055
------------------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 43,717,325 379,790,919
Cash in bank on demand deposit 107,894 410,501
Receivable for investment securities sold 532,460 8,175,641
Dividends and accrued interest receivable 361 976
Other assets (Note 2) -- 482,039
------------------------------------
TOTAL ASSETS 44,358,040 388,860,076
------------------------------------
LIABILITIES
Payable for investment securities purchased 127,650 1,755,000
------------------------------------
TOTAL LIABILITIES 127,650 1,755,000
------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 44,230,390 $ 387,105,076
====================================
REPRESENTED BY:
Capital stock $ 32,794 $ 244,276
Additional paid-in capital 42,176,877 349,336,925
Undistributed net investment income (loss) -- (118,693)
Accumulated net realized gain (loss) (1,042,734) 5,096,488
Unrealized appreciation on investments 3,063,453 32,546,080
------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 44,230,390 $ 387,105,076
====================================
Shares of capital stock outstanding; authorized 10 billion shares each
of $.01 par value stock 3,279,382 24,427,636
------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 13.49 $ 15.85
====================================
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
IAI GROWTH IAI MIDCAP
FUND GROWTH FUND
---------------------------------
$ 11,377,639 $ 125,507,866
-- 401,232
---------------------------------
11,377,639 125,909,098
357,781 317,021
-- 2,162,058
11,393 27,162
-- --
---------------------------------
11,746,813 128,415,339
---------------------------------
-- 156,350
---------------------------------
-- 156,350
---------------------------------
$ 11,746,813 $ 128,258,989
=================================
$ 11,843 $ 76,881
10,217,314 106,380,221
-- (23,894)
795,513 11,540,262
722,143 10,285,519
---------------------------------
$ 11,746,813 $ 128,258,989
=================================
1,184,290 7,688,117
---------------------------------
$ 9.92 $ 16.68
=================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
STATEMENTS OF OPERATIONS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
IAI CAPITAL IAI EMERGING
APPRECIATION FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $0, $0, $901,
and $3,936, respectively) $ 98,254 $ 69,699
Interest (including $0, $20,595, $0, and $0, respectively, from
affiliated issuers) 66,733 2,845,205
-----------------------------------
TOTAL INCOME 164,987 2,914,904
-----------------------------------
EXPENSES
Management fees 511,989 7,838,052
Compensation of Directors 3,278 57,662
-----------------------------------
TOTAL EXPENSES 515,267 7,895,714
Less fees reimbursed by Advisers (58,119) (57,662)
-----------------------------------
NET EXPENSES 457,148 7,838,052
-----------------------------------
NET INVESTMENT INCOME (LOSS) (292,161) (4,923,148)
-----------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investment securities (including $0, $3,278,146,
$0, and $0, respectively, from affiliated issuers) 680,376 63,520,130
Net change in unrealized appreciation or depreciation on investment securities 2,705,202 (190,788,849)
-----------------------------------
NET GAIN (LOSS) ON INVESTMENTS 3,385,578 (127,268,719)
-----------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,093,417 $(132,191,867)
===================================
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
IAI GROWTH IAI MIDCAP
FUND GROWTH FUND
-------------------------------------
$ 132,777 $ 656,449
25,447 427,719
-------------------------------------
158,224 1,084,168
-------------------------------------
198,592 1,731,272
1,400 12,079
-------------------------------------
199,992 1,743,351
(1,400) (12,079)
-------------------------------------
198,592 1,731,272
-------------------------------------
(40,368) (647,104)
-------------------------------------
3,427,226 22,644,795
(1,841,255) (17,970,970)
-------------------------------------
1,585,971 4,673,825
-------------------------------------
$ 1,545,603 $ 4,026,721
=====================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
STATEMENTS OF CHANGES IN NET ASSETS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
Period from
Year ended February 1, 1996*
March 31, 1997 to March 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income (loss) $ (292,161) $ 1,281
Net realized gains (losses) 680,376 (21,948)
Net change in unrealized appreciation or depreciation 2,705,202 358,251
--------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 3,093,417 337,584
--------------------------------------
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 91,105,766 9,405,842
Net asset value of shares issued for reinvestment
of distributions 1,494,100 --
Cost of shares redeemed (59,337,277) (332,039)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 33,262,589 9,073,803
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 34,819,003 9,411,387
NET ASSETS AT BEGINNING OF PERIOD 9,411,387 --
--------------------------------------
NET ASSETS AT END OF PERIOD $ 44,230,390 $ 9,411,387
======================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME (LOSS) OF: $ -- $ 1,281
======================================
</TABLE>
* COMMENCEMENT OF OPERATIONS
(wide table continued from above)
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
Years ended Years ended Years ended
March 31, March 31, March 31,
- --------------------------------- --------------------------------- --------------------------------
1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (4,923,148) $ (2,566,996) $ (40,368) $ (8,751) $ (647,104) $ (369,422)
63,520,130 57,738,831 3,427,226 3,286,766 22,644,795 4,572,382
(190,788,849) 157,132,105 (1,841,255) 135,197 (17,970,970) 17,556,306
- ------------------------------------------------------------------------------------------------------------
(132,191,867) 212,303,940 1,545,603 3,413,212 4,026,721 21,759,266
- ------------------------------------------------------------------------------------------------------------
-- -- -- (49,876) -- --
(99,452,610) (11,559,601) (3,996,079) (1,584,209) (11,905,911) (6,609,822)
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
(99,452,610) (11,559,601) (3,996,079) (1,634,085) (11,905,911) (6,609,822)
- ------------------------------------------------------------------------------------------------------------
427,144,560 881,980,833 12,003,377 6,914,431 100,565,712 83,519,076
97,552,240 11,213,745 3,976,886 1,618,691 11,497,214 6,260,134
(559,835,441) (782,924,628) (18,862,443) (20,026,543) (98,299,543) (70,629,305)
- ------------------------------------------------------------------------------------------------------------
(35,138,641) 110,269,950 (2,882,180) (11,493,421) 13,763,383 19,149,905
- ------------------------------------------------------------------------------------------------------------
(266,783,118) 311,014,289 (5,332,656) (9,714,294) 5,884,193 34,299,349
653,888,194 342,873,905 17,079,469 26,793,763 122,374,796 88,075,447
- ------------------------------------------------------------------------------------------------------------
$ 387,105,076 $ 653,888,194 $ 11,746,813 $ 17,079,469 $ 128,258,989 $ 122,374,796
============================================================================================================
$ (118,693) $ -- $ -- $ -- $ (23,894) $ --
============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
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
Period from
Year ended February 1, 1996+
March 31, 1997 to March 31, 1996
- --------------------------------------------------------------------------------
NET ASSET VALUE
Beginning of period $ 11.24 $ 10.00
---------------------------
OPERATIONS
Net investment income (loss) (.09) --
Net realized and unrealized gains 2.79 1.24
---------------------------
TOTAL FROM OPERATIONS 2.70 1.24
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (.41) --
Tax return of capital (.04) --
---------------------------
TOTAL DISTRIBUTIONS (.45) --
---------------------------
NET ASSET VALUE
End of period $ 13.49 $ 11.24
===========================
Total investment return* 23.68% 12.40%
Net assets at end of period (000's omitted) $ 44,230 $ 9,411
RATIOS
Expenses to average net assets** 1.25% 1.25%***
Net investment income (loss)
to average net assets** (0.80%) 0.23%***
Average brokerage commission rate**** $ 0.0576 n/a
Portfolio turnover rate
(excluding short-term securities) 132.5% 1.2%
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** 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
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
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 24.08 $ 15.83 $ 15.20 $ 13.47 $ 11.91
-----------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.20) (.09) (.07) (.10) (.05)
Net realized and unrealized gains (losses) (4.52) 8.77 1.42 2.18 2.37
-----------------------------------------------------------------
Total from operations (4.72) 8.68 1.35 2.08 2.32
-----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (3.51) (.43) (.72) (.35) (.76)
-----------------------------------------------------------------
Total distributions (3.51) (.43) (.72) (.35) (.76)
-----------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.85 $ 24.08 $ 15.83 $ 15.20 $ 13.47
=================================================================
Total investment return* (22.97%) 55.20% 10.23% 15.43% 21.90%
Net assets at end of period (000's omitted) $ 387,105 $ 653,888 $ 342,874 $ 225,510 $ 131,514
RATIOS
Expenses to average net assets 1.19% 1.24% 1.25% 1.25% 1.25%
Net investment income (loss)
to average net assets (0.75%) (0.52%) (0.54%) (0.77%) (0.72%)
Average brokerage commission rate** $ 0.0571 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 49.5% 62.8% 58.1% 76.3% 96.1%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
FINANCIAL HIGHLIGHTS
IAI GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
IAI GROWTH FUND
<TABLE>
<CAPTION>
Years ended
March 31, Period from Period from
----------------------------- August 1, 1994 to August 6, 1993***
1997 1996 March 31, 1995 to July 31, 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 11.89 $ 10.95 $ 9.87 $ 10.00
----------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.03) -- .04 .01
Net realized and unrealized gains (losses) 1.02 1.93 1.07 (.13)
----------------------------------------------------------------
TOTAL FROM OPERATIONS 0.99 1.93 1.11 (.12)
----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (.03) (.03) (.01)
Net realized gains (2.96) (.96) -- --
----------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.96) (.99) (.03) (.01)
----------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.92 $ 11.89 $ 10.95 $ 9.87
================================================================
Total investment return* 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $ 11,747 $ 17,079 $ 26,794 $ 14,408
RATIOS
Expenses to average net assets 1.25% 1.25% 1.25%** 1.25%**
Net investment income (loss) to average
net assets (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate**** $ 0.0588 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 134.2% 92.8% 68.7% 105.4%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET
ASSET VALUE.
** ANNUALIZED
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
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
<TABLE>
<CAPTION>
Years ended March 31, Period from
-------------------------------------------------------- April 10, 1992***
1997 1996 1995 1994 to March 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 17.70 $ 15.35 $ 13.67 $ 11.88 $ 10.00
----------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (.08) (.05) (.04) (.04) .02
Net realized and unrealized gains .68 3.50 2.35 1.99 1.89
----------------------------------------------------------------------
TOTAL FROM OPERATIONS .60 3.45 2.31 1.95 1.91
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- -- (.03)
Net realized gains (1.62) (1.10) (.63) (.16) --
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.62) (1.10) (.63) (.16) (.03)
----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 16.68 $ 17.70 $ 15.35 $ 13.67 $ 11.88
----------------------------------------------------------------------
Total investment return* 3.12% 23.51% 17.63% 16.40% 19.09%
Net assets at end of period (000's omitted) $ 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%**
Net investment income (loss)
to average net assets (0.47%) (0.36%) (0.33%) (0.45%) 0.24%**
Average brokerage commission rate**** $ 0.0593 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 72.4% 29.8% 51.3% 49.7% 57.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF DISTRIBUTIONS AT NET
ASSET VALUE.
** ANNUALIZED
*** COMMENCEMENT OF OPERATIONS
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Capital Appreciation Fund (Capital Appreciation Fund), IAI Emerging
Growth Fund (Emerging Growth Fund) and IAI Midcap Growth Fund (Midcap Growth
Fund) are separate portfolios of IAI Investment Funds VI, Inc. and IAI Growth
Fund (Growth Fund) is a separate portfolio of IAI Investment Funds II, Inc.
Capital Appreciation Fund commenced operations on February 1, 1996. The Funds
have an overall objective of long-term appreciation through investment in equity
securities. This report covers only the Capital Appreciation Fund, Emerging
Growth Fund, Growth Fund, and Midcap Growth Fund (the Funds).
Emerging Growth Fund closed to new investors as of February 1, 1996. Emerging
Growth Fund's shareholders as of such date and certain others may continue to
add to an existing account. The Fund may resume sales to new investors at some
future date, but it has no present intention to do so.
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
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 $22,138,234 (5.7% of net assets) for Emerging Growth Fund
and $1,407,701 (1.1% 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 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in a net
reclassification adjustment to additional paid-in capital as follows:
CAPITAL EMERGING MIDCAP
APPRECIATION GROWTH GROWTH GROWTH
FUND FUND FUND FUND
- -------------------------------------------------------------------------------
Undistributed net
investment income (loss) $ 292,161 $ 4,804,455 $ 40,368 $ 623,210
Accumulated net
realized gains (losses) $ (292,161) $ 18,298 $ (40,368) $ (623,210)
Additional paid-in capital $ -- $(4,822,753) $ -- --
For federal income tax purposes Capital Appreciation Fund has 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.
[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 $8,000,000, $15,000,000, $5,750,000 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 March 31, 1997.
Included in other assets for Emerging Growth Fund is $482,039 related to the
sale of Indigo Medical common stock. Ten percent of the proceeds ($600,000) from
the sale of this restricted security is being held in escrow until August 27,
1997 to cover potential expenses associated with the transaction. At March 31,
1997, Emerging Growth Fund had reserved $117,961 to cover potential expenses.
The estimated gain of $355,586 related to the proceeds held in escrow has not
been recognized for book or tax purposes.
At March 31, 1997, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
EMERGING GROWTH FUND MIDCAP GROWTH FUND
- -------------------------------------------------------------------------------
Alta Berkeley III L.P. $ 80,000 $ --
Spectrum Equity Investors L.P. 246,000 123,000
- -------------------------------------------------------------------------------
Total commitments $ 326,000 $ 123,000
===============================================================================
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[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 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. 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.
[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
- ----------------------------------------------------------------------------------------
Years ended
Period from March 31,
Year ended February 1, 1996* --------------------------
March 31, 1997 to March 31, 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 6,546,069 868,372 17,915,439 44,205,393
ISSUED FOR REINVESTED
DISTRIBUTIONS 101,100 -- 4,566,040 532,973
REDEEMED (4,205,462) (30,697) (25,206,397) (39,239,973)
-----------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 2,441,707 837,675 (2,724,918) 5,498,393
===========================================================
</TABLE>
<TABLE>
<CAPTION>
MIDCAP
GROWTH GROWTH
FUND FUND
- -------------------------------------------------------------------------------------
Years ended Years ended
March 31, March 31,
--------------------------- -------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 1,046,126 583,267 5,520,720 5,168,818
ISSUED FOR REINVESTED
DISTRIBUTIONS 379,284 141,851 660,383 399,203
REDEEMED (1,677,288) (1,736,639) (5,408,412) (4,388,825)
---------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING (251,878) (1,011,521) 772,691 1,179,196
=========================================================
</TABLE>
* COMMENCEMENT OF OPERATIONS
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 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 $ 78,046,289 $ 46,174,819
EMERGING GROWTH FUND $289,960,392 $382,737,043
GROWTH FUND $ 20,138,619 $ 27,179,173
MIDCAP GROWTH FUND $ 93,139,403 $ 94,920,432
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at March 31,
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.
INDEPENDENT AUDITORS' REPORT
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
The Board of Directors and Shareholders
IAI Investment Funds II, Inc.
IAI Investment Funds VI, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
IAI Midcap Growth Fund (separate portfolios within IAI Investment Funds VI,
Inc.) and IAI Growth Fund (a portfolio within IAI Investment Funds II, Inc.) as
of March 31, 1997 and the related statements of operations for the year then
ended, the statements of changes in net assets for the year then ended, the
period from February 1, 1996 to March 31, 1996 (IAI Capital Appreciation Fund),
and the year ended March 31, 1997 (IAI Emerging Growth Fund, IAI Midcap Growth
Fund and IAI Growth Fund), and the financial highlights for the periods
presented on pages 32 through 35 of the annual report. These financial
statements and financial high-lights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Midcap Growth Fund and
IAI Growth Fund at March 31, 1997, and the results of their operations, the
changes in their net assets and the financial highlights for the periods stated
in the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 9, 1997
FEDERAL TAX INFORMATION
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distribu-tions, in January of
each year.
IAI CAPITAL APPRECIATION FUND
- -----------------------------------------------------------
Payable Date Ordinary
Income (A)
- -----------------------------------------------------------
June 1996 $ 0.0008
December 1996 0.4495
===================
$ 0.4503
6.78% of ordinary income distributions qualify for deduction by corporations.
IAI EMERGING GROWTH FUND
- -------------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- -------------------------------------------------------------------------
June 1996 $ 0.1541 $ 1.2902
December 1996 -- 2.0619
============================================
$ 0.1541 $ 3.3521
4.40% of ordinary income distributions qualify for deduction by corporations.
IAI GROWTH FUND
- -------------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- -------------------------------------------------------------------------
June 1996 $ 0.2042 $ 0.8876
December 1996 0.5426 1.3209
============================================
$ 0.7468 $ 2.2085
12.53% of ordinary income distributions qualify for deduction by corporations.
IAI MIDCAP GROWTH FUND
- -----------------------------------------------------------
Payable Date Long-Term
Capital Gain
- -----------------------------------------------------------
June 1996 $ 0.2189
December 1996 1.4058
===================
$ 1.6247
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY,WHICH ARE TAXABLE
AS ORDINARY INCOME.
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
(closed to new investors as of 2/1/96) emerging growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Capital Capital Appreciation -- Common stocks of small- to medium-sized
Appreciation Fund growth companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation -- Common stocks of medium-sized growth
companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation -- Common stocks of Upper Midwest companies
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation -- Common stocks with potential for
above-average growth and appreciation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation -- Common stocks which are considered to be
undervalued
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Growth and Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are
expected to produce income
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment-grade bonds and
[Capital Appreciation + Income] short-term instruments
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Investment-grade bonds
Preservation
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital U.S. Government securities
Preservation
- -----------------------------------------------------------------------------------------------------------------------------------
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>
DISTRIBUTOR
IAI Securities, Inc.
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://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
[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
