EQUITY FUNDS
ANNUAL REPORT
IAI CAPITAL APPRECIATION FUND,
IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[LOGO]
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
ANNUAL REPORT
MARCH 31, 1998
President'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...................... 22
Statements of Assets and Liabilities.......... 28
Statements of Operations...................... 30
Statements of Changes in Net Assets........... 32
Financial Highlights
IAI CAPITAL APPRECIATION FUND............. 34
IAI EMERGING GROWTH FUND.................. 35
IAI GROWTH FUND........................... 36
IAI MIDCAP GROWTH FUND.................... 37
Notes to Financial Statements................. 38
Independent Auditors' Report...................43
Federal Tax Information........................44
IAI Mutual Fund Family........................ 45
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
NOEL P. RAHN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, follows.
The current economic backdrop is ideal for financial assets. Strong money growth
is flowing into the markets rather than the real economy. This trend is
bolstered by current demographic conditions. Moreover, low inflation raises
market valuations (P/E ratios and real interest rates) while high consumer and
business optimism raises the willingness to take risk.
What are the risks to the market? Near-term, negative earnings surprises could
stall the equity market, and a weak dollar would not be good for bonds. Over the
intermediate term, if the economic slowdown does not materialize, inflation
concerns will rise and the Fed will tighten. This would hurt valuations in both
stocks and bonds.
Our view is to remain cautiously optimistic on both markets, but watch for the
developing evidence of a slowdown.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on Fund performance and our strategy going forward. We appreciate
your continued trust and confidence in IAI. If there is any way we can serve you
better, please let us know by calling our toll-free Investor Services Hotline at
1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
President
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
IAI CAPITAL APPRECIATION FUND
[PHOTO]
MARTIN J. CALIHAN, CFA
IAI CAPITAL APPRECIATION
FUND MANAGER
[BAR CHART]
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/98
TECHNOLOGY SERVICES 16.8%
COMMERCIAL SERVICES 13.7%
FINANCIAL 12.0%
ELECTRONIC TECHNOLOGY 10.7%
HEALTH TECHNOLOGY 10.7%
WHAT IS THE FUND'S OBJECTIVE?
The investment objective of the IAI Capital Appreciation Fund is long-term
capital appreciation. It is designed for investors seeking the opportunity for
substantial long-term growth who can accept above-average stock market risk and
little or no current income. In general, the IAI Capital Appreciation Fund will
concentrate on small-capitalization companies that have superior performance
records, solid market positions, strong balance sheets and a management team
capable of sustaining growth.
HOW HAS THE FUND PERFORMED?
The IAI Capital Appreciation Fund advanced by 52.5% in the fiscal year,
outperforming the Russell 2500 Growth Index by almost 1,400 basis points.
Generally, the past year was not as favorable for small-cap growth stocks as for
large-cap growth stocks. This is reflected in the 38.6% rise in the Russell 2500
Growth Index and 41.2% rise in the Russell 2000 Growth Index as compared to the
48.1% rise in the S&P 500 Index.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Several holdings rose over 100% during the year. These star performers included
Strayer Education, INSpire Insurance Solutions, Centennial Cellular, CCC
Information Services, CMAC Investment, Universal Outdoor Holdings, Lamar, and
Impath. However, the biggest winner was Mastech, which rose a whopping 216%.
Among about a dozen disappointing performers were Emergent Group, Reptron
Electronics, and Microchip Technology.
WERE THERE ANY SIGNIFICANT CHANGES?
To keep the Fund refreshed, we trimmed several holdings and added to others. We
sold most of our position in Mastech after it had risen 250% in fifteen months.
Much of our Allen Telecom was sold, as end-demand in its wireless equipment
markets appears lackluster. We also took some profits on Coach USA, Impath, and
Universal Outdoor Holdings. A key element of our discipline is avoiding big
sector bets, to prevent over-exposure to poorly-performing industry sectors and
ensure exposure to strong performing ones. Thus, our sector weightings continue
to resemble those of the benchmark index.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
After strong performance in the six months through September, small-cap growth
stocks caught the "Asian Flu" in the fourth quarter of 1997. In the quarter
ended March 1998 , the small-cap growth sector began to rebound. Nevertheless,
the flight to quality continued, as large-cap stocks continued their lengthy
period of outperformance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Despite the strong first-quarter performance in February and March, we continue
to approach 1998 cautiously. We believe that the "Asian Flu" could be the
catalyst for weaker corporate profits in many sectors. However, we believe the
Fund consists of well-positioned companies with sustainable competitive
advantages in stable, growing markets. Thus, we are optimistic about the outlook
for strong relative performance regardless of the environment.
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
CAPITAL
APPRECIATION
FUND (Inception S&P 500 RUSSELL 2000 RUSSELL 2500
2/1/96) INDEX GROWTH INDEX GROWTH INDEX
- --------------------------------------------------------------------------------
2/1/96 $10,000 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
3/31/96 $11,240 $10,196 $10,663 $10,667
- --------------------------------------------------------------------------------
3/31/97 $13,900 $12,229 $10,042 $10,554
- --------------------------------------------------------------------------------
3/31/98 $21,195 $18,087 $14,179 $14,630
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
Since Inception
1 Year 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND 52.46% 41.55%
- --------------------------------------------------------------------------------
Russell 2000 Growth Index* 41.17% 17.48%
- --------------------------------------------------------------------------------
Russell 2500 Growth Index 38.64% 19.20%
- --------------------------------------------------------------------------------
S&P 500 Index 48.11% 31.54%
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* THE RUSSELL 2000 GROWTH 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(1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/98 3/31/97
- --------------------------------------------------------------------------------
Computer Products Electronic Technology 4.21 2.41
Xomed Surgical Products Health Technology 4.09 2.98
Strayer Education Commercial Services 3.91 3.11
Centennial Cellular Class A Electronic Technology 3.77 2.55
CCC Information Services Technology Services 3.77 2.59
Zebra Technologies Class A Producer Manufacturing 3.65 1.82
Aftermarket Technology Consumer Durables 3.61 4.36
Black Box Technology Services 3.11 2.28
INSpire Insurance Solutions Technology Services 3.09 --
CMAC Investment Financial 2.87 3.24
- --------------------------------------------------------------------------------
TOTAL 36.08 25.34
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'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.
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND
[PHOTO]
CURT D. MCLEOD,
CFA
IAI EMERGING GROWTH
FUND MANAGER
[BAR CHART]
TOP FIVE COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/98
TECHNOLOGY SERVICES 19.1%
COMMERCIAL SERVICES 16.6%
ELECTRONIC TECHNOLOGY 15.6%
HEALTH SERVICES 12.6%
HEALTH TECHNOLOGY 11.5%
WHAT IS THE FUND'S OBJECTIVE?
The IAI Emerging Growth Fund is designed for investors who seek long-term
capital appreciation. It pursues its objective of long-term capital appreciation
by investing primarily in equity securities of small- and medium-sized
companies. These companies are in the early stages of their life cycles and have
demonstrated or have the potential for above-average capital growth.
HOW HAS THE FUND PERFORMED?
The Emerging Growth Fund returned 33.4% for the year ended March 31, 1998. This
return lagged the returns of the small- and large-cap indices as the Russell
2500 Index rose 41.9%, the Russell 2500 Growth Index gained 38.6%, and the S&P
500 Index rose 48.1%. The Fund's technology stocks performed relatively well
during the year but stocks within the consumer sector detracted from
performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Citrix Systems, a maker of computer network products, and Saville Systems, a
telecommunications billing company, posted strong absolute gains and were large
contributors to performance. Two companies within the health care area, Express
Scripts and Rexall Sundown, also performed well. Oxford Health Plans was the
biggest disappointment, announcing its first ever quarterly loss last fall which
sent the stock down sharply.
WERE THERE ANY SIGNIFICANT CHANGES?
Industry sector exposures remained relatively constant during the year.
Portfolio turnover was slightly higher than normal as we found attractive new
stocks to add to the portfolio and eliminated stocks according to our sell
discipline.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The stock market continues to be supported by strong economic growth, low
inflation, and rising corporate profits. Although the largest stocks continue to
outperform the smallest stocks, the enthusiastic market backdrop has propelled
smaller stocks sharply higher as well.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We continue to believe that the small cap growth segment of the market is very
attractive. Given the higher earnings and revenue growth rates of our portfolio,
valuations look very compelling versus large stocks. If the market turns its
attention to the superior fundamentals of small cap stocks, the Fund is well
positioned to benefit.
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
IAI EMERGING
GROWTH FUND
(Inception S&P 500 RUSSELL 2500 RUSSELL 2500
8/5/91) INDEX* GROWTH INDEX* INDEX*
- --------------------------------------------------------------------------------
8/5/91 $10,000 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
3/31/92 $11,923 $10,631 $11,641 $11,670
- --------------------------------------------------------------------------------
3/31/93 $14,534 $12,255 $12,251 $13,619
- --------------------------------------------------------------------------------
3/31/94 $16,776 $12,431 $13,505 $14,817
- --------------------------------------------------------------------------------
3/31/95 $18,489 $14,368 $14,897 $16,101
- --------------------------------------------------------------------------------
3/31/96 $28,703 $18,987 $19,626 $20,902
- --------------------------------------------------------------------------------
3/31/97 $22,111 $22,772 $19,418 $22,717
- --------------------------------------------------------------------------------
3/31/98 $29,492 $33,728 $26,918 $32,337
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
Since Inception
1 Year 5 Years 8/05/91
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND 33.37% 15.20% 17.63%
- --------------------------------------------------------------------------------
Russell 2500 Index(1) 41.86% 18.80% 19.19%*
- --------------------------------------------------------------------------------
Russell 2500 Growth Index 38.64% 17.05% 16.02%*
- --------------------------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 20.01%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
(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 3/31/98 3/31/97
- --------------------------------------------------------------------------------
Tut Systems (3) Electronic Technology 2.94 0.47
Saville Systems ADR Electronic Technology 2.70 --
CardioGenesis Health Technology 2.57 --
Concentra Managed Care Health Services 2.52 --
ABR Information Services Commercial Services 2.36 2.02
CBT Group ADR Technology Services 2.27 3.16
CSG Systems International Technology Services 2.24 --
Advanced Fibre Communications Electronic Technology 2.22 0.54
Envoy Financial 2.20 --
Cambridge Technology Partners Commercial Services 2.08 0.91
- --------------------------------------------------------------------------------
TOTAL 24.10 7.10
(2) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
(3) DENOTES RESTRICTED SECURITY WHICH IS INCLUDED IN "OTHER SECURITIES" IN
THE FUND PORTFOLIO
NOTE TO PRESIDENT'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.
<PAGE>
FUND MANAGERS' REVIEW
IAI GROWTH FUND
IAI GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI GROWTH FUND
CO-MANAGER
[PHOTO]
DAVID A. MCDONALD
IAI GROWTH FUND
CO-MANAGER
[BAR CHART]
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/98
FINANCIAL 15.5%
TECHNOLOGY SERVICES 11.2%
CONSUMER NON-DURABLES 9.6%
HEALTH TECHNOLOGY 9.1%
COMMERICAL SERVICES 7.3%
WHAT IS THE FUND'S OBJECTIVE?
The IAI Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of established companies.
HOW HAS THE FUND PERFORMED?
The Growth Fund generated strong absolute performance during the past twelve
months, rising 39.0%. Even so, it was not able to keep pace with the blistering
48.1% return of the S&P 500. Approximately 25% of the difference is attributable
to cash (3-5% of assets normally) returns being substantially less than those
generated by stocks. The positive news is that the Fund ended the year on a much
stronger note than it began. Almost 90% of the relative under performance
occurred during the first half of the year, the result of a heavier weighting of
mid-cap stocks in the portfolio. These stocks, between $1-5 billion in market
capitalization, did not keep pace due to the market's preoccupation with the
very largest "Nifty Fifty" stocks in the index. Mid-cap stocks did recover in
the second half, however, enhancing relative performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Telecom services, financial, retail, and healthcare services sectors made the
greatest positive contribution to results, while energy and basic materials
holdings were laggards. With respect to individual holdings, Pfizer, Century
Telephone, and Tyco International were the strongest performers. A strong
pipeline of new blockbuster drugs drove Pfizer shares in 1997, while a better
understanding of how telecom deregulation would affect Century Telephone allowed
the stock to play "catch-up". The catalyst for Tyco was a series of accretive
acquisitions and strong internal growth which led to positive earnings revisions
and above average growth.
WERE THERE ANY SIGNIFICANT CHANGES?
Beginning in March 1997 we repositioned the Fund to achieve both broader
diversification and improved quality of individual holdings. Diversification
between sectors was increased, while the number of holdings rose from 55-60 to
70-75. During the course of the year, exposure to financials, healthcare,
telecom services and consumer staples was increased, while weightings in capital
good and basic materials were decreased. Exposure to the mid-cap sector of the
market was also reduced to achieve better diversification. As evidenced by the
much improved performance during the last six months, these moves proved
beneficial to the Fund.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The year started well on both an absolute and relative basis. Excluding a two
week period in late March in which the "horses" driving the Fund's strong
performance in the last four months took a well deserved break, the Fund is
performing well. We expect this performance to continue throughout 1998 as the
economy slows and investors again place a greater premium on the high quality
growth stocks found in the Fund.
<PAGE>
FUND MANAGERS' REVIEW
IAI GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
- --------------------------------------------------------------------------------
IAI GROWTH FUND
(Inception 8/6/93) 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
- --------------------------------------------------------------------------------
3/31/98 $ 19,539 $27,519
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
Since Inception
1 Year 8/06/93
- --------------------------------------------------------------------------------
IAI GROWTH FUND 38.96% 15.49%
- --------------------------------------------------------------------------------
S&P 500 Index 48.11% 24.22%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
TOP TEN HOLDINGS (1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/98 3/31/97
- --------------------------------------------------------------------------------
Cendant Consumer Services 3.00 --
USA Waste Services Industrial Services 2.95 2.21
Tyco International Producer Manufacturing 2.92 2.29
First Data Technology Services 2.53 3.29
Fannie Mae Financial 2.53 1.05
General Electric Producer Manufacturing 2.46 1.35
FIserv Technology Services 2.23 2.66
Computer Associates International Technology Services 2.21 --
Bergen Brunswig Commercial Services 2.16 --
Century Telephone Enterprises Utilities 1.99 2.16
- --------------------------------------------------------------------------------
TOTAL 24.98 15.01
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'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.
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
IAI MIDCAP GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI MIDCAP GROWTH
FUND MANAGER
[BAR CHART]
TOP FIVE COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/98
FINANCIAL 14.7%
TECHNOLOGY SERVICES 12.8%
UTILITIES 9.4%
INDUSTRIAL SERVICES 8.9%
RETAIL TRADE 6.8%
WHAT IS THE FUND'S OBJECTIVE?
The IAI Midcap Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of medium-sized companies. The Fund
defines "medium" as companies with market capitalizations (stock price
multiplied by the number of shares outstanding) between $1 billion and $8
billion.
HOW HAS THE FUND PERFORMED?
The year ending March 31, 1998, was a wild ride in the stock market. The third
year in a bull market in stocks. One in which we saw continued strong growth
with some volatility along the way . The S&P Midcap Index was up 49.0% and the
S&P 500 was up 48.1%, while the Fund was up 22.2%.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
The Fund underperformed the benchmark for several reasons. First, there were a
number of stocks in the Fund; Heilig Meyers, Applebees, Danka, Checkpoint
Systems, Pacificare, and MedPartners, that failed to keep up with the broader
S&P Midcap Index. A second reason for our underperformance was our underweighted
position in the bank stocks. During the second half of calendar year 1997, the
index was driven by an extraordinary run in bank stocks due to lower rates and
speculations on takeovers. Our Fund failed to keep up because we were
underweighted in bank stocks. A third reason for the underperformance was we
started the year with an underweighted position in technology stocks. Though we
corrected that underweighting later in the year, the impact of the underweighted
position did have significant drag on our relative performance for the year. On
the positive side, we did have a number of stocks that did outperform the
market. Our larger holdings such as Barnes & Nobel, Finova, Financial Securities
Assurance Corp., and Century Telephone all had exceptionally strong performance
years.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The major specific market factors that negatively impacted performance were
really two-fold. First, interest sensitive stocks had a major impact on the
index's performance and our underweighted position in interest sensitive stocks,
here specifically being banks and electric utilities, had a significant impact
on our performance. The second factor was our skewing of the Fund toward the
smaller end of the Midcap sector. During fiscal 1998, as we have seen in the
market for the last several years, the larger stocks continue to outperform mid
to smaller stocks across all indices. Since our Fund was skewed more toward the
low end of the market capitalization range for Midcap stocks, that had a
negative performance as the larger stocks within the index did substantially
better than the mid to smaller companies.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We believe the market is becoming more speculative. With earnings growth slowing
and interest rates already at low levels, the market is being driven by
cash-flows. In this environment, we believe it is important to focus our
investments on companies with strong, profitable business models, but we need to
be cautious about paying prices that provide no room for disappointment. As new
cash flows continue to be pushed into an ever narrower group of favorite stocks,
we believe it is important to continue to focus on quality stocks.
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
- --------------------------------------------------------------------------------
IAI MIDCAP
GROWTH FUND S&P MIDCAP S&P 500
(Inception 4/10/92) INDEX* 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
- --------------------------------------------------------------------------------
3/31/98 $ 25,372 $28,324 $31,725
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/98
Since Inception
1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND 22.21% 16.34% 16.87%
- --------------------------------------------------------------------------------
S&P Midcap Index 49.03% 19.51% 18.95%*
- --------------------------------------------------------------------------------
S&P 500 Index 48.11% 22.44% 21.22%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
TOP TEN HOLDINGS (1)
% of Net Assets
- --------------------------------------------------------------------------------
Issue Sector 3/31/98 3/31/97
- --------------------------------------------------------------------------------
Quorum Health Group Health Services 2.22 1.20
Galileo International Commercial Services 1.90 --
Finova Group Financial 1.84 1.16
Century Telephone Enterprises Utilities 1.80 2.59
Bergen Brunswig Commercial Services 1.80 --
Snap-On Consumer Durables 1.75 --
Dial Consumer Non-Durables 1.71 --
Pittson Brink's Group Consumer Services 1.71 --
Reliastar Financial Financial 1.70 --
FIserv Technology Services 1.66 3.22
- --------------------------------------------------------------------------------
TOTAL 18.09 8.17
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO PRESIDENT'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.
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 99.9%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 13.7%
Barnett (b) 22,200 $ 477,300
Catalina Marketing (b) 25,100 1,320,888
G & K Services Class A 22,300 978,413
Lamar Advertising Class A (b) 5,400 189,000
Quanta Services (b) 50,500 836,406
Right Management Consultants (b) 60,000 712,500
Scientific Games (b) 23,800 498,311
Strayer Education 77,550 2,578,538
Valassis Communications (b) 35,300 1,447,300
- -------------------------------------------------------------------------------
9,038,656
- -------------------------------------------------------------------------------
CONSUMER DURABLES - 3.9%
Aftermarket Technology (b) 107,600 2,380,650
Oakwood Homes 6,000 219,750
- -------------------------------------------------------------------------------
2,600,400
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 0.4%
Robert Mondavi Class A (b) 7,000 288,750
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 2.4%
Coach USA (b) 29,000 1,261,500
Lone Star Steakhouse & Saloon (b) 13,100 297,206
- -------------------------------------------------------------------------------
1,558,706
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 10.7%
Allen Telecommunications (b) 23,600 371,700
Centennial Cellular Class A (b) 94,600 2,486,206
Computer Products (b) 119,052 2,775,400
Microchip Technology (b) 8,800 184,800
PPT Vision (b) 94,700 804,950
Tollgrade Communications (b) 19,000 437,000
- -------------------------------------------------------------------------------
7,060,056
- -------------------------------------------------------------------------------
ENERGY MINERALS - 2.2%
Forcenergy (b) 54,100 1,433,650
- -------------------------------------------------------------------------------
FINANCIAL - 12.0%
Amerin (b) 6,500 195,813
CMAC Investment 28,400 1,895,700
Credit Acceptance (b) 109,400 1,018,788
Emergent Group (b) 98,800 913,900
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
Enhance Financial Services 19,200 $1,333,200
First Commonwealth 48,400 732,050
First International Bancorp 39,300 633,712
MBIA 9,770 757,175
United Asset Management 5,000 136,250
Vesta Insurance Group 5,000 268,125
- -------------------------------------------------------------------------------
7,884,713
- -------------------------------------------------------------------------------
HEALTH SERVICES - 2.0%
IMPATH (b) 7,800 298,350
Patterson Dental (b) 32,550 1,009,050
- -------------------------------------------------------------------------------
1,307,400
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 10.7%
InControl (b) 89,100 668,250
Mentor 44,900 1,240,362
Perclose (b) 53,000 1,500,563
R.P. Scherer (b) 11,300 762,750
Respironics (b) 5,400 156,263
Xomed Surgical Products (b) 98,200 2,700,500
- -------------------------------------------------------------------------------
7,028,688
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 3.8%
Petroleum Geo-Services ADR (b) 18,000 1,068,750
Service Experts (b) 45,500 1,430,406
- -------------------------------------------------------------------------------
2,499,156
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 8.4%
AptarGroup 21,300 1,279,331
Minerals Technologies 24,700 1,244,263
PalEx (b) 98,000 1,298,500
Polymer Group (b) 120,300 1,571,419
Schweitzer-Mauduit International 4,800 165,600
- -------------------------------------------------------------------------------
5,559,113
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
MARCH 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 10.6%
Advanced Lighting Technologies (b) 60,500 $1,565,436
Danka Business Systems ADR 75,500 1,387,313
Flanders (b) 95,800 532,888
Kennametal 4,000 210,500
Miller Industries (b) 14,200 103,838
Watsco Class A 30,600 822,375
Zebra Technologies Class A (b) 62,500 2,406,250
- -------------------------------------------------------------------------------
7,028,600
- -------------------------------------------------------------------------------
RETAIL TRADE - 1.9%
Heilig-Meyers 45,400 638,438
Lithia Motors Class A (b) 37,700 631,475
- -------------------------------------------------------------------------------
1,269,913
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 16.8%
American Management Systems (b) 66,000 1,815,000
BISYS Group (b) 17,600 620,400
Black Box (b) 55,700 2,053,938
CCC Information Services (b) 90,400 2,486,000
INSpire Insurance Solutions (b) 61,300 2,038,225
Mastech (b) 7,900 402,653
PRT Group (b) 25,200 247,275
Reptron Electronics (b) 26,400 303,600
UBICS (b) 53,500 1,090,062
- -------------------------------------------------------------------------------
11,057,153
- -------------------------------------------------------------------------------
TRANSPORTATION - 0.4%
Trailer Bridge (b) 25,800 256,386
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $51,164,505).......................................... $65,871,340
- -------------------------------------------------------------------------------
SHORT-TERM SECURITIES -- 0.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.9%
Federal Home Loan Bank (DISCOUNT NOTE)
5.45% 04/03/98 $ 215,000 $214,935
Federal National Mortgage Association (DISCOUNT NOTE)
5.90 04/01/98 400,000 400,000
- -------------------------------------------------------------------------------
614,935
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $614,935)............................................. $614,935
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $51,779,440) (E)...................................... $66,486,275
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - (0.8%)
.......................................................... $(531,530)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS
.......................................................... $65,954,745
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 94.1%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 16.6%
ABR Information Services (b) 136,000 $3,825,000
Apollo Group Class A (b) 68,100 3,277,313
Cambridge Technology Partners (b) 68,000 3,370,250
HA-LO Industries (b) 39,800 1,390,513
NOVA (b) 27,800 835,738
Profit Recovery Group
International(b) 88,900 1,922,463
Rental Service (b) 75,400 1,753,050
Romac International (b) 54,500 1,498,750
Snyder Communications (b) 50,600 2,371,875
Sylvan Learning Systems (b) 57,450 2,707,331
U.S. Rentals (b) 59,800 1,651,975
Wackenhut Corrections (b) 91,500 2,293,218
- -------------------------------------------------------------------------------
26,897,476
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 2.0%
Starbucks (b) 70,700 3,203,594
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 3.8%
Landry's Seafood Restaurants (b) 95,500 2,936,625
Papa John's International (b) 82,800 3,177,450
- -------------------------------------------------------------------------------
6,114,075
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 15.6%
Advanced Fibre Communications (b) 98,808 3,594,141
Computer Products (b) 71,300 1,662,181
Inter-Tel 103,300 2,782,644
Natural Microsystems (b) 68,200 2,702,425
P-Com (b) 107,700 2,154,000
QLogic (b) 43,600 1,547,800
Saville Systems ADR (b) 85,200 4,366,500
Sipex (b) 95,400 3,148,200
Vitesse Semiconductor (b) 70,600 3,329,231
- -------------------------------------------------------------------------------
25,287,122
- -------------------------------------------------------------------------------
FINANCIAL - 2.9%
Envoy (b) 83,000 3,569,000
Renters Choice (b) 44,800 1,097,600
- -------------------------------------------------------------------------------
4,666,600
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
HEALTH SERVICES - 12.6%
American Oncology Resources (b) 133,000 $2,028,250
Concentra Managed Care (b) 132,600 4,077,450
NCS HealthCare Class A (b) 79,500 2,663,250
Omnicare 75,300 2,983,763
Renal Care Group (b) 60,500 2,299,000
Superior Consultant Holdings (b) 90,200 3,235,925
Total Renal Care (b) 93,433 3,112,486
- -------------------------------------------------------------------------------
20,400,124
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 11.5%
CardioGenesis (b) 594,793 4,163,551
Curative Health Services (b) 53,300 1,775,556
DAOU Systems (b) 80,000 1,565,000
Medicis Pharmaceutical Class A (b) 64,600 2,818,175
MiniMed (b) 67,500 2,986,875
Rexall Sundown (b) 62,700 2,135,719
Watson Pharmaceuticals (b) 86,200 3,103,200
- -------------------------------------------------------------------------------
18,548,076
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 1.1%
Micrel (b) 51,450 1,951,884
- -------------------------------------------------------------------------------
RETAIL TRADE - 8.9%
Bed Bath & Beyond (b) 58,800 2,715,825
Express Scripts Class A (b) 35,300 2,992,778
Fastenal 40,300 1,748,013
Henry Schein (b) 36,050 1,496,075
Stein Mart (b) 76,900 2,739,563
Whole Foods Market (b) 39,100 2,727,224
- -------------------------------------------------------------------------------
14,419,478
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 19.1%
Acxiom (b) 61,200 $1,568,250
Aspen Technologies (b) 41,000 1,691,250
CBT Group ADR (b) 70,900 3,669,075
Citrix Systems (b) 47,350 2,565,778
CSG Systems International (b) 80,000 3,620,000
Gartner Group Class A (b) 26,800 1,001,650
Harbinger (b) 83,400 3,148,350
HNC Software (b) 28,100 1,057,263
Information Management
Resources (b) 30,200 1,778,025
Security Dynamics Technologies (b) 58,400 2,401,700
Transaction Systems
Architects Class A (b) 85,300 3,316,037
Visio (b) 49,300 2,119,900
Wind River Systems (b) 75,200 2,989,200
- -------------------------------------------------------------------------------
30,926,478
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $113,932,334)......................................... $152,414,907
- -------------------------------------------------------------------------------
OTHER SECURITIES -- 7.5%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMON STOCKS - 0.3%
AccessLine Technologies
Class A (b) 41,666 $ 62,499
BEI Medical (b) 3,596 14,093
GalaGen (b) (d) 235,309 344,257
PACE Health Management
Systems (b) (d) 471,473 128,241
Soane BioSciences (b) 5,021 803
- -------------------------------------------------------------------------------
549,893
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 5.2%
AccessLine Technologies
Series A (b) 71,420 107,130
Intellon Series A (b) 200,000 372,000
Intellon Series B (b) 578,763 1,076,499
Myelos Neurosciences
Series A (b) (d) 500,000 500,000
Myelos Neurosciences
Series B (b) (d) 571,429 1,000,001
PACE Health Management
Systems Series A (b) (d) 1,125,000 562,500
Tut Systems Series D (b) (d) 467,092 1,401,276
Tut Systems Series E (b) (d) 217,391 652,173
Tut Systems Series F (b) (d) 780,000 2,340,000
Tut Systems Series G (b) (d) 121,020 363,060
- -------------------------------------------------------------------------------
8,374,639
- -------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- -------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.9%
Alta Berkeley III, foreign (b) 1.78% 354,100
South Street Corporate
Recovery Fund I (b) 0.69 39,316
South Street Leveraged
Corporate Recovery Fund I (b) 1.65 28,516
Spectrum Equity Investors (b) 0.92 1,278,179
Vanguard Associates IV (b) 1.35 1,325,690
- -------------------------------------------------------------------------------
3,025,801
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1998
OTHER SECURITIES (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES - 0.1%
AccessLine Technologies (b)
12.00% 01/14/99 $ 112,000 $ 112,000
Air Communications Series B (b) (d)
10.00 02/28/97 258,332 --
- -------------------------------------------------------------------------------
112,000
- -------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (d) 4,062 --
GalaGen, $11.07, 03/27/01 (d) 541 --
- -------------------------------------------------------------------------------
--
- -------------------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine
Technologies, $.01, 06/03/99 10,713 --
AccessLine
Technologies, $.01, 01/15/00 20,000 --
AccessLine
Technologies, $.01, 01/15/03 775,838 8
GalaGen, $11.07, 06/16/99 (d) 5,687 --
GalaGen, $11.07, 03/24/00 (d) 2,256 --
GalaGen, $11.07 07/09/00 (d) 1,805 --
GalaGen, $7.00, 01/29/01 (d) 22,501 --
Intellon, $2.50, 03/23/99 30,000 --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
PACE Health Management
Systems, $.50, 07/07/02 (d) 625,001 6
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
- -------------------------------------------------------------------------------
14
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $11,394,950).......................................... $12,062,347
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $125,327,284)......................................... $164,477,254
- -------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 0.4%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 0.4%
Federal National Mortgage Association (DISCOUNT NOTE)
5.90% 04/01/98 $ 600,000 $ 600,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $600,000)............................................. $600,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $125,927,284) (e)..................................... $165,077,254
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - (2.0)%
.......................................................... $(3,165,291)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS
.......................................................... $161,911,963
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 97.1%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 7.3%
Bergen Brunswig Class A 7,500 $ 319,688
Campbell Soup 3,800 215,650
Galileo International 7,200 279,450
Sysco 10,600 271,625
- -------------------------------------------------------------------------------
1,086,413
- -------------------------------------------------------------------------------
CONSUMER DURABLES - 2.5%
Newell 3,700 179,218
Snap-On (b) 4,000 182,500
- -------------------------------------------------------------------------------
361,718
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 9.6%
Coca-Cola 2,000 154,875
Colgate-Palmolive 2,200 190,575
Dial 6,600 157,986
Gillette 1,400 166,163
Pepsico 5,900 251,856
Philip Morris 4,280 178,423
Procter & Gamble 1,900 160,313
Vlasic Foods International (b) 380 9,713
Wm. Wrigley Jr 1,800 147,150
- -------------------------------------------------------------------------------
1,417,054
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 3.7%
Cendant (b) 11,178 442,928
Pittston Brink's Group 2,600 99,125
- -------------------------------------------------------------------------------
542,053
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 6.9%
3Com (b) 5,150 185,078
Analog Devices (b) 6,600 219,450
Cisco Systems (b) 1,800 123,075
Hewlett-Packard 1,100 69,713
Intel 1,800 140,513
International Business Machines 1,010 104,914
SBC Communications 4,200 183,224
- -------------------------------------------------------------------------------
1,025,967
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
ENERGY MINERALS - 3.8%
Amoco 1,100 $ 95,013
British Petroleum ADR 1,109 95,443
Exxon 2,900 196,112
Royal Dutch Petroleum 3,200 181,800
- -------------------------------------------------------------------------------
568,368
- -------------------------------------------------------------------------------
FINANCIAL - 15.5%
Allstate 2,190 201,343
American International Group 1,300 163,718
Associates First Capital 2,100 165,900
BankAmerica 2,200 181,775
Citicorp 1,300 184,600
Equifax 3,900 142,350
Fannie Mae 5,900 373,175
MBNA 5,700 204,131
Norwest 6,940 288,444
State Street 2,250 153,141
T. Rowe Price 1,090 76,709
Travelers Group 2,500 150,000
- -------------------------------------------------------------------------------
2,285,286
- -------------------------------------------------------------------------------
HEALTH SERVICES - 1.7%
United Healthcare 3,800 246,050
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 9.1%
Abbott Laboratories 2,400 180,750
Baxter International 1,400 77,175
Bristol-Myers Squibb 1,800 187,763
Eli Lilly & Company 2,220 132,368
Johnson & Johnson 2,300 168,619
Merck & Company 1,410 181,009
Pfizer 2,410 240,245
Schering-Plough 2,200 179,713
- -------------------------------------------------------------------------------
1,347,642
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
MARCH 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.7%
Newpark Resources (b) 8,300 $ 151,475
Schlumberger ADR 2,200 166,650
Transocean Offshore 1,700 87,444
USA Waste Services (b) 9,790 436,267
- -------------------------------------------------------------------------------
841,836
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.0%
E.I. du Pont de Nemours 1,800 122,400
Kimberly-Clark 2,900 145,363
Minerals Technologies 3,000 151,125
Sigma-Aldrich 4,800 178,800
- -------------------------------------------------------------------------------
597,688
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.4%
General Electric 4,220 363,711
Tyco International 7,900 431,538
- -------------------------------------------------------------------------------
795,249
- -------------------------------------------------------------------------------
RETAIL TRADE - 4.7%
Consolidated Stores (b) 2,400 103,050
Dollar General 6,156 238,170
Home Depot 1,800 121,388
Wal-Mart Stores 4,500 228,656
- -------------------------------------------------------------------------------
691,264
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 11.2%
Computer Associates International 5,650 326,288
First Data 11,500 373,750
FIserv (b) 5,200 329,550
Lexmark International Class A (b) 5,900 266,238
Microsoft (b) 1,800 161,100
SunGard Data Systems (b) 5,500 202,468
- -------------------------------------------------------------------------------
1,659,394
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
UTILITIES - 6.0%
Ameritech 3,700 $ 182,919
Bellsouth 2,500 168,906
Century Telephone Enterprises 4,800 293,400
WorldCom (b) 5,600 241,150
- -------------------------------------------------------------------------------
886,375
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,836,685)......................................... $14,352,357
- -------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 2.9%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATION - 2.9%
Federal National Mortgage Association (DISCOUNT NOTE)
5.90% 04/01/98 $ 425,000 $ 425,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $425,000)............................................. $425,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $11,261,685) (e)...................................... $14,777,357
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 0.0%
.......................................................... $(2,844)
- -------------------------------------------------------------------------------
TOTAL NET ASSETS
.......................................................... $14,774,513
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 96.6%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 6.3%
Bell & Howell (b) 21,200 $ 581,675
Bergen Brunswig Class A 34,800 1,483,350
Cintas 14,100 729,675
Galileo International 40,500 1,571,906
Wackenhut Corrections (b) 33,700 844,606
- -------------------------------------------------------------------------------
5,211,212
- -------------------------------------------------------------------------------
CONSUMER DURABLES - 4.8%
Newell 25,500 1,235,156
Snap-On 31,600 1,441,750
Sunbeam - Oster 28,600 1,260,188
- -------------------------------------------------------------------------------
3,937,094
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.7%
Dial 59,100 1,414,706
Hormel Foods 32,000 1,242,000
McCormick & Company 12,600 406,350
- -------------------------------------------------------------------------------
3,063,056
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 4.0%
Harte-Hanks Communications 49,200 1,168,500
Pittston Brink's Group 37,100 1,414,437
Promus Hotel (b) 15,300 730,575
- -------------------------------------------------------------------------------
3,313,512
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 5.4%
ADC Telecommunications (b) 15,000 413,438
Analog Devices (b) 16,200 538,650
Andrew (b) 5,600 110,950
Belden 30,300 1,268,813
FSI International (b) 10,800 118,800
Linear Technology 11,700 807,300
Maxim Integrated Products (b) 22,600 823,488
Xilinx (b) 9,900 370,631
- -------------------------------------------------------------------------------
4,452,070
- -------------------------------------------------------------------------------
ENERGY MINERALS - 1.3%
Tosco 29,500 1,039,873
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
FINANCIAL - 14.7%
Associated Banc-Corp 8,200 $ 442,288
Capital One Financial 4,000 315,500
City National 19,600 744,800
Crestar Financial 13,200 780,450
Equifax 32,700 1,193,550
Financial Security Assurance 18,700 1,021,488
Finova Group 25,800 1,518,975
First Alliance (b) 80,800 1,267,550
Mercantile Bankshares 21,200 767,175
Old Republic International 22,600 1,001,463
Provident Companies 29,800 1,022,513
ReliaStar Financial 30,400 1,400,300
T. Rowe Price 9,000 633,373
- -------------------------------------------------------------------------------
12,109,425
- -------------------------------------------------------------------------------
HEALTH SERVICES - 4.3%
Allegiance 20,000 791,250
Patterson Dental (b) 29,250 906,750
Quorum Health Group (b) 54,600 1,835,925
- -------------------------------------------------------------------------------
3,533,925
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 4.3%
Biogen (b) 13,100 631,256
Hillenbrand Industries 11,400 701,813
R.P. Scherer (b) 10,100 681,750
Stryker 18,200 853,125
Watson Pharmaceuticals (b) 20,100 723,600
- -------------------------------------------------------------------------------
3,591,544
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 8.9%
AES (b) 25,300 1,326,669
Camco International 11,900 719,950
Diamond Offshore Drilling 16,300 739,613
Nabors Industries (b) 32,400 767,475
Noble Drilling (b) 29,500 901,594
Smith International (b) 15,200 836,950
Transocean Offshore 16,200 833,288
USA Waste Services (b) 26,500 1,180,905
- -------------------------------------------------------------------------------
7,306,444
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 1.9%
Minerals Technologies 15,900 $ 800,963
Sigma-Aldrich 21,300 793,425
- -------------------------------------------------------------------------------
1,594,388
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.7%
American Power Conversion (b) 23,000 659,812
Danaher 8,400 637,875
Danka Business Systems ADR 35,420 650,843
Federal-Mogul 800 42,550
HON Industries 13,200 485,100
Kaydon 16,500 674,438
Lear (b) 21,100 1,189,513
Roper Industries 13,500 400,780
- -------------------------------------------------------------------------------
4,740,911
- -------------------------------------------------------------------------------
RETAIL TRADE - 6.8%
Barnes & Noble (b) 28,200 1,099,800
Consolidated Stores (b) 26,900 1,155,019
Dollar General (b) 30,000 1,160,625
Lands' End (b) 21,000 774,375
Pier 1 Imports 21,400 580,475
Staples (b) 37,300 864,894
- -------------------------------------------------------------------------------
5,635,188
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 12.8%
BMC Software (b) 11,500 963,844
Cadence Design Systems (b) 23,900 827,538
Compuware (b) 22,700 1,120,813
FIserv (b) 21,700 1,375,238
J.D. Edwards & Company (b) 20,600 673,361
Lexmark International Class A (b) 28,400 1,281,550
Platinum Technology (b) 46,200 1,189,650
Sterling Commerce (b) 24,400 1,131,550
SunGard Data Systems (b) 36,500 1,343,656
Synopsys (b) 19,900 651,725
- -------------------------------------------------------------------------------
10,558,925
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
TRANSPORTATION - 2.3%
C.H. Robinson Worldwide 51,200 $1,331,200
Wisconsin Central Transportation (b) 20,800 585,650
- -------------------------------------------------------------------------------
1,916,850
- -------------------------------------------------------------------------------
UTILITIES - 9.4%
Century Telephone Enterprises 24,310 1,485,949
Florida Progress 18,700 779,555
LCI International (b) 12,700 488,950
MidAmerican Energy 34,600 784,988
Nevada Power 17,600 470,800
NIPSCO Industries 6,200 173,600
Pinnacle West Capital 18,000 799,875
Potomac Electric Power 25,900 649,119
Puget Sound Energy 19,800 558,113
TECO Energy 27,600 779,700
Wisconsin Energy 25,700 788,669
- -------------------------------------------------------------------------------
7,759,318
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $69,172,379).......................................... $79,763,735
- -------------------------------------------------------------------------------
OTHER SECURITIES - 1.7%
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------------------
COMMON STOCK - 0.1%
GalaGen (b) (d) 47,398 $ 69,343
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 0.8%
Tut Systems Series D (b) (d) 233,546 700,639
- -------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- -------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.8%
South Street Leveraged
Corporate Recovery Fund I (b) 1.10% 19,013
Spectrum Equity Investors (b) 0.46 639,080
- -------------------------------------------------------------------------------
658,093
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1998
OTHER SECURITIES (CONT.)
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
GalaGen, $3.69, 05/22/98 (d) 1,354 $ --
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $989,382)............................................. $1,428,075
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $70,161,761).......................................... $81,191,810
- -------------------------------------------------------------------------------
SHORT-TERM SECURITIES - 1.7%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
U.S. GOVERNMENT & GOVERNMENT AGENCY OBLIGATIONS - 1.7%
Federal National Mortgage Association (DISCOUNT NOTE)
5.90% 04/01/98 $1,290,000 $1,290,000
U.S. Treasury Bill
5.10 04/23/98 100,000 99,674
- -------------------------------------------------------------------------------
1,389,674
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $1,389,697)........................................... $1,389,674
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $71,551,458) (e)...................................... $82,581,484
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 0.0%
.......................................................... $23,347
- -------------------------------------------------------------------------------
TOTAL NET ASSETS
.......................................................... $82,604,831
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 22
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
(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, 1998, 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, 1998 is shown on pages 24-26.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at March 31, 1998. A summary of transactions during the
period with affiliated issuers of the Funds follows:
IAI EMERGING GROWTH FUND AFFILIATED ISSUERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
---------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN(LOSS) INCOME
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
*CardioGenesis -- $ -- 15,000 $ 118,608 $ 82,016 $ --
GalaGen Options 05/22/98 813 $ -- -- $ -- $ -- $ --
GalaGen Options 03/27/01 271 $ -- -- $ -- $ -- $ --
PACE Health Management
Systems Series A PFD 1,125,000 $1,124,999 -- $ -- $ -- $ --
PACE Health Management
Systems Warrants 07/07/02 625,001 $ -- -- $ -- $ -- $ --
Seurat Analytical Systems
Class B -- $ -- 39,898 $ 636 $ 636 $ --
Seurat Analytical Systems
Series B PFD -- $ -- 114,973 $ 1,752 $(228,861) $ --
Seurat Analytical Systems
Series C PFD -- $ -- 59,908 $ 944 $(478,630) $ --
Tut Systems Series G PFD 121,020 $ 363,060 -- $ -- $ -- $ --
</TABLE>
*SECURITIES THAT WERE AFFILIATED DURING THE TWELVE MONTH PERIOD ENDING ON
3/31/98 BUT NOT AT 3/31/98.
IAI MIDCAP GROWTH FUND AFFILIATED ISSUERS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
---------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN(LOSS) INCOME
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Options 05/22/98 271 $ -- -- $ -- $ -- $ --
</TABLE>
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
(e)
At March 31, 1998, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
<TABLE>
<CAPTION>
IAI CAPITAL IAI EMERGING IAI GROWTH IAI MIDCAP
APPRECIATION FUND GROWTH FUND FUND GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost for federal tax purposes $ 51,865,919 $ 127,037,721 $ 11,273,784 $ 71,728,901
- ---------------------------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 16,616,089 $ 44,342,094 $ 3,638,844 $ 12,558,377
Gross unrealized depreciation (1,995,733) (6,302,561) (135,271) (1,705,794)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation $ 14,620,356 $ 38,039,533 $ 3,503,573 $ 10,852,583
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
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 19,693
GalaGen 02/26/93 750,000
11/29/93 250,099
06/17/94 351,839
03/22/95 133,236
07/07/95 104,684
12/14/95 124,999
PACE Health Management
Systems 01/11/94 750,000
01/31/95 201,520
04/27/95 150,625
06/20/95 75,000
09/17/96 637,501
Soane BioSciences 12/30/97 --
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 1,000,912
PACE Health Management
Systems Series A 07/07/97 500,000
08/12/97 250,000
12/22/97 250,000
02/19/98 125,000
Tut Systems Series D 02/17/94 400,293
04/08/94 20,384
Tut Systems Series E 12/21/94 250,563
Tut Systems Series F 07/30/96 975,284
Tut Systems Series G 12/16/97 363,060
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ---------------------------------------------------------
Alta Berkeley III, foreign 09/25/96 $ 46,010
06/06/97 23,135
11/05/97 23,398
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
LIMITED PARTNERSHIPS (CONT.)
Security Acquisition Date Cost
- ---------------------------------------------------------
Spectrum Equity Investors 01/03/95 $ 34,187
05/11/95 11,050
05/22/95 70,000
11/16/95 85,000
12/13/95 35,000
04/17/96 25,000
05/15/96 70,000
08/14/96 40,000
10/22/96 100,000
12/12/96 25,000
02/12/97 42,790
02/26/97 50,000
05/05/97 40,000
06/10/97 25,000
09/30/97 25,000
12/09/97 20,000
01/20/98 60,000
Vanguard Associates IV 07/26/96 3,540
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- ---------------------------------------------------------
AccessLine
Technologies 01/14/99 01/15/97 $ 100,000
01/15/98 12,000
Air Communications
Series B 02/28/97 11/21/95 75,000
11/30/95 50,000
02/26/96 50,000
03/22/96 58,333
05/21/96 16,666
06/25/96 8,333
CALL OPTIONS
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/23/98 --
GalaGen 03/27/01 12/27/96 --
12/27/97 --
WARRANTS
Security Acquisition Date Cost
- ---------------------------------------------------------
AccessLine Technologies
06/03/99 06/03/94 $ --
AccessLine Technologies
01/15/00 01/15/97 --
AccessLine Technologies
01/15/03 01/15/98 --
GalaGen 06/16/99 12/05/94 --
GalaGen 03/24/00 04/13/95 --
GalaGen 07/09/00 07/07/95 --
GalaGen 01/29/01 01/30/96 --
03/27/97 --
Intellon 03/23/99 04/12/94 --
PACE Health Management
Systems 01/31/00 03/30/95 --
PACE Health Management
Systems 07/07/02 07/07/97 --
08/12/97 --
12/22/97 --
02/19/98 --
PACE Health Management
Systems 08/31/05 01/16/96 28
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
RESTRICTED SECURITIES
IAI MIDCAP GROWTH FUND
COMMON STOCK
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 02/26/93 $ 250,000
11/29/93 150,027
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 01/03/95 17,096
05/11/95 5,525
05/22/95 35,000
11/16/95 42,500
12/13/95 17,500
04/17/96 12,500
05/15/96 35,000
08/14/96 20,000
10/22/96 50,000
12/12/96 12,500
02/12/97 21,395
02/26/97 25,000
05/05/97 20,000
06/10/97 12,500
09/30/97 12,500
12/09/97 10,000
01/20/98 30,000
CALL OPTIONS
Security Acquisition Date Cost
- ---------------------------------------------------------
GalaGen 05/22/98 03/24/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/23/98 --
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- -------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $51,779,440, $117,503,925, $11,261,685, and
$70,941,092, respectively) $ 66,486,275
Investments in securities of affiliated issuers, at market
(Cost: $0, $8,423,359, $0 and $610,366, respectively) --
---------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 66,486,275
Receivable for investment securities sold --
Receivable for Fund shares sold 7,254
Dividends and accrued interest receivable 3,281
---------------------
TOTAL ASSETS 66,496,810
---------------------
LIABILITIES
Line of credit 58,450
Payable for investment securities purchased 483,615
Payable for Fund shares purchased --
---------------------
TOTAL LIABILITIES 542,065
---------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 65,954,745
---------------------
REPRESENTED BY:
Capital stock $ 36,719
Additional paid-in capital 45,063,895
Undistributed (overdistributed) net investment income --
Accumulated net realized gains 6,147,296
Unrealized appreciation on investment securities 14,706,835
---------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 65,954,745
Shares of capital stock outstanding; authorized 10 billion shares each of
$.01 par value stock 3,671,893
---------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 17.96
=====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $51,779,440, $117,503,925, $11,261,685, and
$70,941,092, respectively) $ 157,785,740 $ 14,777,357 $ 81,811,502
Investments in securities of affiliated issuers, at market
(Cost: $0, $8,423,359, $0 and $610,366, respectively) 7,291,514 -- 769,982
----------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 165,077,254 14,777,357 82,581,484
Receivable for investment securities sold 624,354 -- 1,241,426
Receivable for Fund shares sold 100 -- 682
Dividends and accrued interest receivable 1,033 11,104 14,129
----------------------------------------------------
TOTAL ASSETS 165,702,741 14,788,461 83,837,721
----------------------------------------------------
LIABILITIES
Line of credit 236,360 13,948 93,889
Payable for investment securities purchased 3,445,835 -- 1,139,001
Payable for Fund shares purchased 108,583 -- --
----------------------------------------------------
TOTAL LIABILITIES 3,790,778 13,948 1,232,890
----------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 161,911,963 $ 14,774,513 $ 82,604,831
----------------------------------------------------
REPRESENTED BY:
Capital stock $ 89,426 $ 12,136 $ 51,909
Additional paid-in capital 70,523,798 10,377,516 62,365,529
Undistributed (overdistributed) net investment income (34,129) -- --
Accumulated net realized gains 52,182,898 869,189 9,157,367
Unrealized appreciation on investment securities 39,149,970 3,515,672 11,030,026
----------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 161,911,963 $ 14,774,513 $ 82,604,831
----------------------------------------------------
Shares of capital stock outstanding; authorized 10 billion shares each of
$.01 par value stock 8,942,643 1,213,638 5,190,944
----------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 18.11 $ 12.17 $ 15.91
====================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
STATEMENTS OF OPERATIONS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $0, $0, $1,403,
and $1,964, respectively) $ 70,081
Interest 231,263
----------------------------------------
TOTAL INCOME 301,344
----------------------------------------
EXPENSES
Management fees 882,553
Compensation of Directors 7,120
Interest 19,914
----------------------------------------
TOTAL EXPENSES 909,587
Less fees reimbursed by Advisers (7,120)
----------------------------------------
NET EXPENSES 902,467
----------------------------------------
NET INVESTMENT LOSS (601,123)
----------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities (including $0, $(624,839), $0 and $0,
respectively, from affiliated issuers) $ 12,979,315
Futures contracts 1,794,870
---------
14,774,185
Net change in unrealized appreciation or depreciation on investments 11,643,382
----------------------------------------
NET GAIN ON INVESTMENTS 26,417,567
----------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 25,816,444
========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH
GROWTH FUND FUND
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $0, $0, $1,403,
and $1,964, respectively) $ 34,680 $ 133,164
Interest 873,328 33,564
--------------------------------------------------
TOTAL INCOME 908,008 166,728
--------------------------------------------------
EXPENSES
Management fees 4,225,381 168,988
Compensation of Directors 39,273 1,573
Interest 34,853 463
--------------------------------------------------
TOTAL EXPENSES 4,299,507 171,024
Less fees reimbursed by Advisers (39,273) (1,573)
--------------------------------------------------
NET EXPENSES 4,260,234 169,451
--------------------------------------------------
NET INVESTMENT LOSS (3,352,226) (2,723)
--------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities (including $0, $(624,839), $0 and $0,
respectively, from affiliated issuers) $ 93,330,632 $ 1,684,652
Futures contracts -- --
------------ -----------
93,330,632 1,684,652
Net change in unrealized appreciation or depreciation on investments 6,603,890 2,793,529
--------------------------------------------------
NET GAIN ON INVESTMENTS 99,934,522 4,478,181
--------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 96,582,296 $ 4,475,458
==================================================
[WIDE TABLE CONTINUED FROM ABOVE]
IAI MIDCAP
GROWTH FUND
- ------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $0, $0, $1,403,
and $1,964, respectively) $ 546,184
Interest 281,625
-----------------------------
TOTAL INCOME 827,809
-----------------------------
EXPENSES
Management fees 1,327,988
Compensation of Directors 12,508
Interest 11,326
-----------------------------
TOTAL EXPENSES 1,351,822
Less fees reimbursed by Advisers (12,508)
-----------------------------
NET EXPENSES 1,339,314
-----------------------------
NET INVESTMENT LOSS (511,505)
-----------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities (including $0, $(624,839), $0 and $0,
respectively, from affiliated issuers) $ 21,222,615
Futures contracts --
------------
21,222,615
Net change in unrealized appreciation or depreciation on investments 744,507
-----------------------------
NET GAIN ON INVESTMENTS 21,967,122
-----------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 21,455,617
=============================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
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
Year Year
ended ended
March 31, 1997 March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income (loss) $ (601,123) $ (292,161)
Net realized gains 14,774,185 680,376
Net change in unrealized appreciation or depreciation 11,643,382 2,705,202
--------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 25,816,444 3,093,417
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (1,281)
Net realized gains (6,983,032) (1,409,001)
Tax return of capital -- (126,721)
--------------------------------------
TOTAL DISTRIBUTIONS (6,983,032) (1,537,003)
--------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 76,384,918 91,105,766
Net asset value of shares issued in reinvestment
of distributions 6,824,703 1,494,100
Cost of shares redeemed (80,318,678) (59,337,277)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 2,890,943 33,262,589
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 21,724,355 34,819,003
NET ASSETS AT BEGINNING OF PERIOD 44,230,390 9,411,387
--------------------------------------
NET ASSETS AT END OF PERIOD $ 65,954,745 $ 44,230,390
======================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ -- $ --
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH
GROWTH FUND FUND
Year Year Year Year
ended ended ended ended
March 31, 1997 March 31, 1998 March 31, 1997 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income (loss) $ (3,352,226) $ (4,923,148) $ (2,723) $ (40,368)
Net realized gains 93,330,632 63,520,130 1,684,652 3,427,226
Net change in unrealized appreciation or depreciation 6,603,890 (190,788,849) 2,793,529 (1,841,255)
------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 96,582,296 (132,191,867) 4,475,458 1,545,603
------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- --
Net realized gains (46,166,939) (99,452,610) (1,608,253) (3,996,079)
Tax return of capital -- -- -- --
------------------------------------------------------------
TOTAL DISTRIBUTIONS (46,166,939) (99,452,610) (1,608,253) (3,996,079)
------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 205,116,691 427,144,560 6,469,281 12,003,377
Net asset value of shares issued in reinvestment
of distributions 45,784,112 97,552,240 1,597,042 3,976,886
Cost of shares redeemed (526,509,273) (559,835,441) (7,905,828) (18,862,443)
------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (275,608,470) (35,138,641) 160,495 (2,882,180)
------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (225,193,113) (266,783,118) 3,027,700 (5,332,656)
NET ASSETS AT BEGINNING OF PERIOD 387,105,076 653,888,194 11,746,813 17,079,469
------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 161,911,963 $ 387,105,076 $ 14,774,513 $ 11,746,813
============================================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ (34,129) $ (118,693) $ -- $ --
============================================================
[WIDE TABLE CONTINUED FROM ABOVE]
IAI MIDCAP
GROWTH FUND
Year Year
ended ended
March 31, 1997 March 31, 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income (loss) $ (511,505) $ (647,104)
Net realized gains 21,222,615 22,644,795
Net change in unrealized appreciation or depreciation 744,507 (17,970,970)
---------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 21,455,617 4,026,721
---------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (24,195,975) (11,905,911)
Tax return of capital -- --
---------------------------------------
TOTAL DISTRIBUTIONS (24,195,975) (11,905,911)
---------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 45,519,092 100,565,712
Net asset value of shares issued in reinvestment
of distributions 23,058,343 11,497,214
Cost of shares redeemed (111,491,235) (98,299,543)
---------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (42,913,800) 13,763,383
---------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (45,654,158) 5,884,193
NET ASSETS AT BEGINNING OF PERIOD 128,258,989 122,374,796
---------------------------------------
NET ASSETS AT END OF PERIOD $ 82,604,831 $ 128,258,989
=======================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ -- $ (23,894)
=======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
<PAGE>
FINANCIAL HIGHLIGHTS
IAI CAPITAL APPRECIATION FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31, Period from
---------------------------------- February 1, 1996+
1998 1997 to March 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 13.49 $ 11.24 $ 10.00
-----------------------------------------------------
OPERATIONS
Net investment income (loss) (0.16) (0.09) --
Net realized and unrealized gains 6.77 2.79 1.24
-----------------------------------------------------
TOTAL FROM OPERATIONS 6.61 2.70 1.24
-----------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (2.14) (0.41) --
Tax return of capital -- (0.04) --
-----------------------------------------------------
TOTAL DISTRIBUTIONS (2.14) (0.45) --
-----------------------------------------------------
NET ASSET VALUE
End of period $ 17.96 $ 13.49 $ 11.24
=====================================================
Total investment return * 52.46% 23.68% 12.40%
Net assets at end of period (000's omitted) $ 65,955 $ 44,230 $ 9,411
RATIOS
Expenses to average net assets
(including interest expense)** 1.43% 1.26% 1.25%***
Expenses to average net assets
(excluding interest expense)** 1.40% 1.25% 1.25%***
Net investment income (loss)
to average net assets** (0.95%) (0.80%) 0.23%***
Average brokerage commission rate**** $ 0.0595 $ 0.0576 n/a
Portfolio turnover rate
(excluding short-term securities) 75.6% 132.5% 1.2%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** THE FUND'S ADVISER VOLUNTARILY WAIVED $54,841 AND $827 IN EXPENSES FOR THE
YEAR ENDED MARCH 31, 1997 AND THE PERIOD ENDED MARCH 31, 1996,
RESPECTIVELY. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 1.40% AND 1.40%,
RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET
ASSETS WOULD HAVE BEEN (.95%) AND .08%, RESPECTIVELY.
*** ANNUALIZED
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
+ COMMENCEMENT OF OPERATIONS
<PAGE>
FINANCIAL HIGHLIGHTS
IAI EMERGING GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.85 $ 24.08 $ 15.83 $ 15.20 $ 13.47
------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.18)+ (0.20) (0.09) (0.07) (0.10)
Net realized and unrealized gains (losses) 5.07 (4.52) 8.77 1.42 2.18
------------------------------------------------------------------------
TOTAL FROM OPERATIONS 4.89 (4.72) 8.68 1.35 2.08
------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (2.63) (3.51) (0.43) (0.72) (0.35)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.63) (3.51) (0.43) (0.72) (0.35)
------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 18.11 $ 15.85 $ 24.08 $ 15.83 $ 15.20
========================================================================
Total investment return* 33.37% (22.97)% 55.20% 10.23% 15.43%
Net assets at end of period (000's omitted) $ 161,912 $ 387,105 $ 653,888 $ 342,874 $ 225,510
RATIOS
Expenses to average net assets
(including interest expense) 1.25% 1.20% 1.24% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.24% 1.19% 1.24% 1.25% 1.25%
Net investment income (loss)
to average net assets (0.98%) (0.75%) (0.52%) (0.54%) (0.77%)
Average brokerage commission rate** $ 0.0554 $ 0.0571 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 41.0% 49.5% 62.8% 58.1% 76.3%
</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.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
<PAGE>
FINANCIAL HIGHLIGHTS
IAI GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended
March 31, Period from Period from
------------------------------------- Aug. 1, 1994 to Aug. 6, 1993***
1998 1997 1996 March 31, 1995+ to July 31, 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 9.92 $ 11.89 $ 10.95 $ 9.87 $ 10.00
---------------------------------------------------------------------
OPERATIONS
Net investment income (loss) -- (0.03) -- 0.04 0.01
Net realized and unrealized gains (losses) 3.59 1.02 1.93 1.07 (0.13)
---------------------------------------------------------------------
TOTAL FROM OPERATIONS 3.59 0.99 1.93 1.11 (0.12)
---------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (0.03) (0.03) (0.01)
Net realized gains (1.34) (2.96) (0.96) -- --
---------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.34) (2.96) (0.99) (0.03) (0.01)
---------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87
=====================================================================
Total investment return* 38.96% 8.42% 18.01% 11.24% (1.21)%
Net assets at end of period (000's omitted) $ 14,775 $ 11,747 $ 17,079 $ 26,794 $ 14,408
RATIOS
Expenses to average net assets
(including interest expense) 1.25% 1.27% 1.25% 1.25%** 1.25%**
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25%** 1.25%**
Net investment income (loss) to average
net assets (0.02%) (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate**** $ 0.0593 $ 0.0588 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 87.3% 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. + REFLECTS FISCAL YEAR END CHANGE FROM JULY 31
TO MARCH 31.
<PAGE>
FINANCIAL HIGHLIGHTS
IAI MIDCAP GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 16.68 $ 17.70 $ 15.35 $ 13.67 $ 11.88
-------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.10) (0.08) (0.05) (0.04) (0.04)
Net realized and unrealized gains 3.34 0.68 3.50 2.35 1.99
-------------------------------------------------------------------
TOTAL FROM OPERATIONS 3.24 0.60 3.45 2.31 1.95
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (4.01) (1.62) (1.10) (0.63) (0.16)
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (4.01) (1.62) (1.10) (0.63) (0.16)
-------------------------------------------------------------------
NET ASSET VALUE
End of period $ 15.91 $ 16.68 $ 17.70 $ 15.35 $ 13.67
===================================================================
Total investment return* 22.21% 3.12% 23.51% 17.63% 16.40%
Net assets at end of period
(000's omitted) $ 82,605 $128,259 $122,375 $ 88,075 $ 56,618
RATIOS
Expenses to average net assets
(including interest expense) 1.26% 1.25% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income (loss)
to average net assets (0.48%) (0.47%) (0.36%) (0.33%) (0.45%)
Average brokerage commission rate** $ 0.0595 $ 0.0593 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 106.8% 72.4% 29.8% 51.3% 49.7%
</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.
** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Capital Appreciation Fund (Capital Appreciation Fund), IAI Emerging
Growth Fund (Emerging Growth Fund) and IAI Midcap Growth Fund (Midcap Growth
Fund) are separate portfolios of IAI Investment Funds VI, Inc. and IAI Growth
Fund (Growth Fund) is a separate portfolio of IAI Investment Funds II, Inc. The
Funds have an overall objective of long-term appreciation through investment in
equity securities.
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
procedures consider various factors including, but not limited to, the cost of
the security at date of purchase, the current financial statements of the issuer
and special reports prepared by analysts, the size of the position held, recent
purchases or sales of securities of the company, prices and public trading
activity of comparable companies, the nature and duration of restrictions on
disposition, pending public offerings with respect to the security, changes in
economic conditions and industry developments affecting the issuer, and other
relevant matters. Restricted securities represent $12,062,347 (7.5% of net
assets) for Emerging Growth Fund and $1,428,075 (1.7% 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 (overdistributed) net investment income and
accumulated net realized gains (losses) have been increased or decreased, as
follows:
<TABLE>
<CAPTION>
CAPITAL EMERGING MIDCAP
APPRECIATION GROWTH GROWTH GROWTH
FUND FUND FUND FUND
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Undistributed (overdistributed)
net investment income $ 601,123 $ 3,436,790 $ 2,723 $ 535,399
Accumulated net
realized gains (losses) $ (601,123) $ (77,283) $ (2,723) $ 590,465
Additional paid-in capital $ -- $ (3,359,507) $ -- $ (1,125,864)
</TABLE>
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is 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-dividend date.
Distributions from net investment income are made semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
For federal income tax purposes 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
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.
LINE OF CREDIT
At March 31, 1998, Capital Appreciation Fund, Emerging Growth Fund, Growth Fund,
and Midcap Growth Fund had available lines of credit of $8,462,550, $14,763,640,
$2,127,052 and $13,238,111, 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. Advances under the line of credit totalled $58,450,
$236,360, $13,948 and $93,889, respectively, for the Funds at March 31, 1998.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1998, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
EMERGING GROWTH FUND MIDCAP GROWTH FUND
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Alta Berkeley III L.P. $ 33,000 $ --
Spectrum Equity Investors L.P. 76,000 38,000
- --------------------------------------------------------------------------------------------
Total commitments $ 109,000 $ 38,000
============================================================================================
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[3] FEES AND EXPENSES
Under terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. The fee is equal to an
annual rate of 1.25% (1.40% for Capital Appreciation Fund) declining to 1.10%
(1.30% for Capital Appreciation Fund and 1.00% for Growth Fund) of average daily
net assets. This fee is paid monthly. The Management Agreements further provide
that Advisers will reimburse the Funds for the fees and expenses it pays to
Directors who are not "interested persons" of the Funds or reduce its fee by an
equivalent amount.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[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
- ------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 4,709,044 6,546,069 11,368,673 17,915,439
ISSUED FOR REINVESTED
DISTRIBUTIONS 462,378 101,100 2,869,019 4,566,040
REDEEMED (4,778,911) (4,205,462) (29,722,685) (25,206,397)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 392,511 2,441,707 (15,484,993) (2,724,918)
================================================================================
MIDCAP
GROWTH GROWTH
FUND FUND
- ------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
SOLD 595,955 1,046,126 2,743,761 5,520,720
ISSUED FOR REINVESTED
DISTRIBUTIONS 153,446 379,284 1,514,052 660,383
REDEEMED (720,053) (1,677,288) (6,754,986) (5,408,412)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 29,348 (251,878) (2,497,173) 772,691
================================================================================
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 1998, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- -----------------------------------------------------------------------------
CAPITAL APPRECIATION FUND $ 44,878,913 $ 47,348,017
EMERGING GROWTH FUND $ 132,904,150 $ 444,543,407
GROWTH FUND $ 11,281,365 $ 12,914,284
MIDCAP GROWTH FUND $ 107,206,322 $ 166,060,894
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at March 31,
1998, are issues which generally cannot be offered for sale to the public
without first being registered under the Securities Act of 1933 ("restricted
securities"). Such securities are generally illiquid. Each Fund limits
investments in securities which are not readily marketable to 15% of its net
assets at the time of purchase. This limitation does not include Rule 144A
securities that have been determined to be liquid based upon guidelines approved
by the Funds' Board of Directors.
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
MARCH 31, 1998
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, 1998 and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for the periods
presented on pages 34 through 37 of the annual report. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Midcap Growth Fund and
IAI Growth Fund at March 31, 1998, 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 8, 1998
<PAGE>
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 Distributions, in January of
each year.
<TABLE>
<CAPTION>
IAI CAPITAL APPRECIATION FUND
Payable Date Ordinary 28% Rate Long-term
Income (A) Gain Capital Gain
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
June 1997 $ 0.0000 $ 0.0000 $ 0.0000
December 1997 0.7077 1.0556 0.3794
=======================================================
$ 0.7077 $ 1.0556 $ 0.3794
1.44% of ordinary income distributions qualify for deduction by corporations.
IAI EMERGING GROWTH FUND
Payable Date Ordinary 28% Rate Long-term
Income (A) Gain Capital Gain
- ---------------------------------------------------------------------------------------------------
June 1997 $ 0.0000 $ 0.2292 $ 0.0000
December 1997 0.0000 0.0000 2.4007
=======================================================
$ 0.0000 $ 0.2292 $ 2.4007
IAI GROWTH FUND
Payable Date Ordinary 28% Rate Long-term
Income (A) Gain Capital Gain
- ---------------------------------------------------------------------------------------------------
June 1997 $ 0.4897 $ 0.1441 $ 0.0000
December 1997 0.1400 0.3402 0.2234
=======================================================
$ 0.6297 $ 0.4843 $ 0.2234
16.09% of ordinary income distributions qualify for deduction by corporations.
IAI MIDCAP GROWTH FUND
Payable Date Ordinary 28% Rate Long-term
Income (A) Gain Capital Gain
- ---------------------------------------------------------------------------------------------------
June 1997 $ 0.0000 $ 1.7653 $ 0.0000
December 1997 0.0000 0.5698 1.6745
=======================================================
$ 0.0000 $ 2.3351 $ 1.6745
</TABLE>
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY,WHICH ARE
TAXABLE AS ORDINARY INCOME.
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND
FAMILY
<TABLE>
<CAPTION>
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND countries
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized emerging
growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized growth
APPRECIATION FUND companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment-grade
bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO]
IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
