EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI CAPITAL APPRECIATION FUND,
IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEMI-ANNUAL REPORT
SEPTEMBER 30, 1998
(UNAUDITED)
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...................... 21
Statements of Assets and Liabilities.......... 26
Statements of Operations...................... 28
Statements of Changes in Net Assets........... 30
Financial Highlights
IAI CAPITAL APPRECIATION FUND............. 32
IAI EMERGING GROWTH FUND.................. 33
IAI GROWTH FUND........................... 34
IAI MIDCAP GROWTH FUND.................... 35
Notes to Financial Statements................. 36
IAI Mutual Fund Family........................ 41
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
WHAT'S RIGHT WITH THIS MARKET ECONOMIC OUTLOOK
[PHOTO]
ROY C. GILLSON
PRESIDENT
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the Euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
2
<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.
Growth in the U.S. economy is likely to slow in the months ahead, but it is hard
to become too negative on the outlook for the coming year. Although past
performance does not guarantee future success, there is little evidence of a
recession on the horizon. A modest slowdown is more likely, with real growth
dropping to about 2.5% for 1999. Inflation should continue to drift downward.
In general, the world has built excess capacity. Even in the United States,
which is one of the best performing economies, capacity utilization rates are
below peak levels and credit is readily available to make further productive
investments. Although labor markets are tight and employment costs are rising,
inflation is not a near-term threat.
To be sure, the economy is losing some of its forward momentum. The
manufacturing sector is clearly showing signs of weakness. This sector is
directly exposed to the global glut of commodity goods. With weakness overseas,
exports are slowing while imports are rising. Layoff announcements have
picked-up, and consumer confidence has dropped sharply in response to stock
market volatility. Disposable income is still growing, but at a slower pace.
Corporate profits are also being squeezed, which is likely to reduce capital
spending plans for next year. These indicators all point to slower growth ahead.
Yet, growing evidence of economic deterioration--if this occurs--will prompt
further rate reduction. Having taken the first step to ease in three years, the
Fed is now sensitive to overseas conditions and the fluid economic environment.
If the economy appears to be stumbling, the Fed has plenty of room to drop rates
and will do so with little hesitation. Likewise, renewed turmoil in the markets
will also prompt Fed action. Thus our outlook for no recession is driven by our
confidence that the Fed can and will act if necessary.
Fed diligence is also a key ingredient for the markets. Subdued inflation and
the prospect for further cuts in short rates--if need be--will provide good
support for bonds. Stock prices remain trapped in a tug-of-war between feeble
earnings and favorable liquidity. The stock market will be pulled up and down
until one force overcomes the other and sets the next trend.
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/ Roy C. Gillson
Roy C. Gillson
President
3
<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 9/30/98
COMMERCIAL SERVICES 15.6%
ELECTRONIC TECHNOLOGY 12.1%
FINANCIAL 10.9%
HEALTH TECHNOLOGY 10.4%
PRODUCER MANUFACTURING 7.5%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
The IAI Capital Appreciation Fund declined (27.93%) during the six months ended
September 30, 1998, slightly trailing its benchmark, the Russell 2500 Growth
Index, which was down (26.00%). The S&P 500 Index was down (6.98%).
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
The biggest contributor to performance was Xomed Surgical Products (4.87%)*, the
leading manufacturer and distributor of surgical products for use by ear, nose ,
and throat (ENT) physicians. Xomed's stock has almost tripled since we first
purchased it in early 1997, as the company has executed its plan to introduce
and exploit a new line of minimally-invasive products. Among the many poor
performers was Forcenergy (0.86%)*, an independent exploration and production
company suffering from the collapse in oil and natural gas prices.
WERE THERE ANY SIGNIFICANT CHANGES?
As always, we keep the portfolio refreshed by trimming some holdings and adding
to others. Concerned about the economic outlook, we trimmed or exited positions
in Advanced Lighting Technologies (0.85%)*, Credit Acceptance (0.00%)*, Danka
Business Systems (0.19%)*, Microchip Technology (0.00%)*, Minerals Tech nologies
(0.58%)*, and Oakwood Homes (0.57%)*. We initiated a position in Apollo Group
(3.15%)*, a rapidly-growing, Phoenix-based provider of post-secondary education,
and we added to our position in Nielsen Media Research (2.25%)*, the near
monopolist in television ratings services in the United States and Canada.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
As we had feared, the "Asian Flu" is proving to be the catalyst for weaker
corporate profits in many sectors. And the consensus among investors appears to
be that the United States will experience an economic recession in 1999. In
light of these factors, investors have moved as a herd out of small-cap stocks.
Given our focus on relatively small companies that are generally not well
understood, our category of stocks has attracted little interest.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We know that, as some point, the environment will become more favorable for
small-cap growth stocks. However, we have long disavowed any ability to predict
the broader market's direction. Instead, we continue to execute our discipline,
owning well-positioned companies with sustainable competitive advantages in
stable, growing markets. Thus, we expect to deliver strong relative performance
regardless of the environment.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
CAPITAL RUSSELL 2500
APPRECIATION FUND GROWTH INDEX S&P 500 INDEX
- --------------------------------------------------------------------------------
02/01/96 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
03/31/96 11,240 10,667 10,196
- --------------------------------------------------------------------------------
03/31/97 13,900 10,554 12,229
- --------------------------------------------------------------------------------
03/31/98 21,195 14,630 18,113
- --------------------------------------------------------------------------------
09/30/98 15,276 10,826 16,849
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
Since Inception
Six Months* 1 Year 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND (27.93%) (22.39%) 17.24%
- --------------------------------------------------------------------------------
Russell 2500 Growth Index (26.00%) (24.34%) 3.03%
- --------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 21.50%
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED.
TOP TEN HOLDINGS(1)
% of Net Assets
-------------------
Issue Sector 9/30/98 3/31/98
- --------------------------------------------------------------------------------
Artesyn Technologies Electronic Technology 5.59 --
Xomed Surgical Products Health Technology 4.87 4.09
Valassis Communications Commercial Services 3.73 2.19
Zebra Technologies Class A Producer Manufacturing 3.70 3.65
American Management Systems Technology Services 3.47 2.75
Apollo Group Class A Consumer Services 3.15 --
Catalina Marketing Commercial Services 3.10 2.00
Black Box Electronic Technology 3.00 3.11
CCC Information Services Financial 2.97 --
CMAC Investment Financial 2.87 2.87
- --------------------------------------------------------------------------------
TOTAL 36.45 20.66
(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.
5
<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 9/30/98
TECHNOLOGY SERVICES 18.7%
ELECTRONIC TECHNOLOGY 11.0%
HEALTH SERVICES 9.4%
COMMERCIAL SERVICES 9.2%
HEALTH TECHNOLOGY 8.5%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
In absolute terms, the IAI Emerging Growth Fund performed poorly in the third
quarter, losing (20.19%). However, in relative terms, the IAI Emerging Growth
Fund outperformed the Russell 2500 Growth Index which fell (22.21%). The sell
off was widespread as every sector within the index posted sharp declines. For
the past six months, the Fund also outperformed the index, returning (21.70%)
vs. (26.00%). The S&P 500 Index fell (6.98%) for the past six months.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
QLogic Corporation (1.94%)*, a maker of integrated circuits and adapter cards
used in computer systems, was up sharply during the period and was the largest
positive contributor to performance. Saville Systems (0.94%)*, Concentra Managed
Care (0.00%)*, and Advanced Fibre Communications (0.59%)* were the biggest
disappointments.
WERE THERE ANY SIGNIFICANT CHANGES?
We took advantage of the downdraft in the marketplace to add several new
positions. These include Pacific Sunwear (0.91%)*, Medical Manager Corporation
(0.73%)*, Great Plains Software (1.87%)*, Advantage Learning Systems (0.56%)*,
International Telecommunications Data Systems (1.08%)*, and Uniphase Corporation
(0.82%)*. All of these companies possess outstanding growth prospects and
attractive valuations.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
An overwhelming number of negative events (foreign economic turbulence, hedge
fund bailout, softer corporate earnings) led to an "aversion to risk" mentality,
which set off a wave of selling in the equity markets, especially in the higher
risk sector of small cap stocks.
WHAT IS YOUR OUTLOOK FOR THE FUND?
As the domestic economy slows and foreign economic problems persist, we may
start to see earnings disappointments from the large multinational corporations.
There are several attractive niches in the small cap market exhibiting strong
growth and selling at prices that already reflect the negative market sentiment.
In fact, relative valuations for small cap stocks have compressed to
multi-decade lows. If the large cap stocks start to disappoint, we believe
investors may turn their attention to the high growth small cap stocks that are
held in the Fund.
6
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
EMERGING RUSSELL 2500
GROWTH FUND GROWTH INDEX S&P 500 INDEX
- --------------------------------------------------------------------------------
08/05/91 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
03/31/92 11,923 11,641 10,631
- --------------------------------------------------------------------------------
03/31/93 14,534 12,251 12,255
- --------------------------------------------------------------------------------
03/31/94 16,776 13,505 12,431
- --------------------------------------------------------------------------------
03/31/95 18,489 14,897 14,368
- --------------------------------------------------------------------------------
03/31/96 28,703 19,626 18,987
- --------------------------------------------------------------------------------
03/31/97 22,111 19,418 22,772
- --------------------------------------------------------------------------------
03/31/98 29,492 26,918 33,730
- --------------------------------------------------------------------------------
09/30/98 23,093 19,919 31,377
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
Since Inception
Six Months** 1 Year 5 Years 8/05/91
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND (21.70%) (18.82%) 6.34% 12.40%
- -------------------------------------------------------------------------------
Russell 2500 Growth Index (26.00%) (24.34%) 7.99% 10.09%*
- -------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 17.27%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
** NOT ANNUALIZED.
TOP TEN HOLDINGS(1)
% of Net Assets
------------------
Issue Sector 9/30/98 3/31/98
- -------------------------------------------------------------------------------
Tut Systems (2) Electronic Technology 6.66 2.94
Myelos Neurosciences(2) BioTechnology 3.40 0.93
Wind River Systems Technology Services 2.35 1.85
Medicis Pharmaceutical Class A Health Technology 2.30 1.74
HNC Software Technology Services 2.23 0.65
Watson Pharmaceuticals Health Technology 2.15 1.92
Express Scripts Class A Retail Trade 2.10 1.85
Intellon(2) Electronic Technology 2.03 0.89
CSG Systems International Technology Services 1.96 2.24
QLogic Electronic Technology 1.94 0.96
- -------------------------------------------------------------------------------
TOTAL 27.12 15.97
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
(2) 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.
7
<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 9/30/98
HEALTH TECHNOLOGY 14.6%
FINANCIAL 13.5%
ELECTRONIC TECHNOLOGY 9.2%
CONSUMER NON-DURABLES 9.1%
COMMERCIAL SERVICES 8.5%
* PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
In the worst quarter for domestic stocks since 1990, the IAI Growth Fund lost
(13.74%). The average diversified domestic stock mutual fund declined (15.0%)
and the S&P 500 Index fell (9.95%). Over the past six months, the Fund declined
(12.24%) while the S&P lost (6.98%).
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Lexmark International (2.08%)* was a strong positive contributor to performance.
Lexmark continues to deliver better than expected earnings results as the
company's printers gain market share. Cendant Corporation (2.99%)*, which
continues to be plagued by problems related to the former businesses of CUC
International (0.00%)*, and United Healthcare (1.23%)*, which announced
disappointing earnings, were the major disappointments.
WERE THERE ANY SIGNIFICANT CHANGES?
Given the volatility in the market, transaction activity was higher than normal
as we took advantage of several buying opportunities. We initiated positions in
two pharmaceutical companies, American Home Products (2.05%)* and Warner-Lambert
(0.84%)*, due to positive business fundamentals. Compaq Computer (1.00%)* was
among the stocks we added in the technology area and we expect Compaq's earnings
growth to accelerate.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Global economic upheaval led investors to shun risk in markets around the world.
The U.S. stock market was not immune to this as U.S. treasury securities were
deemed the only safe haven. Within the domestic stock market, large cap stocks
once again outperformed small caps.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The U.S. economy seems to be slowing somewhat due to economic problems overseas.
Stock market volatility should continue until these global economic
uncertainties are resolved. Given this, the market may place a premium on
companies with strong, consistent growth.
8
<PAGE>
FUND MANAGERS' REVIEW
IAI GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
IAI GROWTH FUND S&P 500 INDEX
- --------------------------------------------------------------------------------
08/06/93 $10,000 $10,000
- --------------------------------------------------------------------------------
03/31/94 9,700 10,142
- --------------------------------------------------------------------------------
03/31/95 10,990 11,723
- --------------------------------------------------------------------------------
03/31/96 12,970 15,491
- --------------------------------------------------------------------------------
03/31/97 14,060 18,580
- --------------------------------------------------------------------------------
03/31/98 19,539 27,519
- --------------------------------------------------------------------------------
09/30/98 17,147 25,600
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
Since Inception
Six Months** 1 Year 5 Year 8/06/93
- --------------------------------------------------------------------------------
IAI GROWTH FUND (12.24%) 1.97% 10.64% 11.03%
- --------------------------------------------------------------------------------
S&P 500 Index (6.98%) 9.04% 19.91% 19.89%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
** NOT ANNUALIZED.
TOP TEN HOLDINGS(1)
% of Net Assets
------------------
Issue Sector 9/30/98 3/31/98
- --------------------------------------------------------------------------------
Bergen Brunswig Class A Commercial Services 3.43 2.16
Waste Management Industrial Services 3.36 2.95
Cendant Consumer Services 2.99 3.00
Tyco International Producer Manufacturing 2.69 2.92
General Electric Process Industries 2.52 2.46
FIserv Technology Services 2.48 2.23
Sysco Commercial Services 2.16 1.84
Lexmark International Class A Producer Manufacturing 2.08 1.80
American Home Products Health Technology 2.05 --
Merck & Company Health Technology 2.05 1.23
- --------------------------------------------------------------------------------
TOTAL 25.81 20.59
(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.
9
<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 9/30/98
TECHNOLOGY SERVICES 15.0%
FINANCIAL 12.7%
COMMERCIAL SERVICES 11.4%
ELECTRONIC TECHNOLOGY 9.4%
RETAIL TRADE 9.0%
*PERCENTAGE OF NET ASSETS AS OF 9/30/98
HOW HAS THE FUND PERFORMED?
Amid continuing global financial turmoil, the IAI Midcap Growth Fund lost
(12.73%) in the third quarter and (10.91%) over the past six months. Although
bear markets are no cause for celebration, we are pleased that we outperformed
our primary benchmark, the S&P Midcap Index, which fell (15.17%) and (16.30%)
over the same time period. The S&P 500 Index fell (6.98%) for the past six
months.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Lexmark International (1.24%)*, a maker of computer printers and supplies,
reported very strong earnings and was the largest contributor to the fund's
performance. American Power Conversion (2.65%)*, which dominates the market for
uninterruptible power systems, was also up sharply. Platinum Technology
(2.12%)*, Interim Services (1.70%)*, and Land's End (0.96%)* were the biggest
disappointments.
WERE THERE ANY SIGNIFICANT CHANGES?
We initiated positions in several new stocks. In the consumer cyclical area we
added Bed Bath & Beyond (1.63%)*, Concord EFS (0.00%)*, and Kohl's Corporation
(0.43%)*. In the consumer staples sector we bought Dean's Foods (0.95%)* and
Whitman Corporation (0.74%)*. We added Paychex (0.58%)*and Xilinx (0.48%)* in
the technology sector.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The recent market sell-off did not change the market leadership in the United
States. The largest companies in America continued to outperform midcap stocks.
Large-cap stocks lost 10% during the third quarter, as measured by the S&P 500,
while midcap stocks fell 14.5% as measured by the S&P Midcap Index.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The average midcap stock has undergone a significant decline in valuation. It is
clear that many of our stocks are being priced with quite low expectations for
the future. We believe there are bright prospects ahead for the companies in the
Fund and positive fundamental news should result in good stock performance.
10
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINT GRAPH]
IAI MIDCAP GROWTH FUND S&P MIDCAP INDEX S&P 500 INDEX
- --------------------------------------------------------------------------------
04/10/92 $10,000 $10,000 $10,000
- --------------------------------------------------------------------------------
03/31/93 11,909 11,617 11,527
- --------------------------------------------------------------------------------
03/31/94 13,862 12,331 11,693
- --------------------------------------------------------------------------------
03/31/95 16,305 13,370 13,515
- --------------------------------------------------------------------------------
03/31/96 20,139 17,179 17,859
- --------------------------------------------------------------------------------
03/31/97 20,768 19,004 21,420
- --------------------------------------------------------------------------------
03/31/98 25,372 28,324 31,727
- --------------------------------------------------------------------------------
09/30/98 22,603 23,707 29,514
- --------------------------------------------------------------------------------
AVERAGE ANNUAL RETURNS+
THROUGH 9/30/98
Since Inception
Six Months** 1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND (10.91)% (9.79%) 11.16% 13.42%
- --------------------------------------------------------------------------------
S&P Midcap Index (16.30)% (6.31%) 13.68% 14.20%*
- --------------------------------------------------------------------------------
S&P 500 Index (6.98)% 9.04% 19.91% 18.08%*
- --------------------------------------------------------------------------------
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
** NOT ANNUALIZED.
TOP TEN HOLDINGS(1)
% of Net Assets
--------------------
Issue Sector 9/30/98 3/31/98
- -------------------------------------------------------------------------------
America Online Technology Services 3.16 --
Compuware Technology Services 2.97 1.36
BMC Software Technology Services 2.91 1.17
Equifax Financial 2.90 1.44
American Power Conversion Producer Manufacturing 2.65 0.80
Staples Retail Trade 2.48 1.05
SunGard Data Systems Commercial Services 2.46 --
Galileo International Commercial Services 2.43 1.90
Century Telephone Enterprises Utilities 2.37 1.80
McKesson Health Services 2.30 --
- -------------------------------------------------------------------------------
TOTAL 26.63 9.52
(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.
11
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 90.9%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 15.6%
Barnett (b) 35,000 $ 297,500
Billing Concepts (b) 12,400 173,600
Catalina Marketing (b) 31,300 1,471,100
G & K Services Class A 20,700 970,313
Nielson Media Research (b) 103,800 1,063,950
Right Management Consultants (b) 60,000 727,500
Scientific Games (b) 46,900 917,480
Valassis Communications (b) 44,200 1,768,000
-----------
7,389,443
- -------------------------------------------------------------------------------
CONSUMER DURABLES - 2.8%
Aftermarket Technology (b) 97,400 1,071,400
Oakwood Homes 20,700 271,688
-----------
1,343,088
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 7.4%
Apollo Group Class A (b) 53,500 1,491,313
Coach USA (b) 38,900 960,343
Strayer Education 40,250 1,051,531
-----------
3,503,187
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 12.1%
Artesyn Technologies (b) 153,452 2,647,047
Black Box (b) 58,700 1,423,475
Centennial Cellular Class A (b) 29,300 937,600
PPT Vision (b) 82,200 452,100
Tollgrade Communications (b) 23,200 301,600
-----------
5,761,822
- -------------------------------------------------------------------------------
ENERGY MATERIALS - 0.9%
Forcenergy (b) 69,800 405,713
- -------------------------------------------------------------------------------
FINANCIAL - 10.9%
Amerin (b) 20,900 394,487
CCC Information Services (b) 112,600 1,407,500
CMAC Investment 31,300 1,361,550
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
Enhance Financial Services 38,400 $ 1,135,200
Federated Investors Class B 13,000 186,875
First Commonwealth 39,500 459,188
Homegold Financial (b) 98,800 197,600
-----------
5,142,400
- -------------------------------------------------------------------------------
HEALTH SERVICES - 4.4%
Cardinal Health (b) 10,735 1,108,389
Patterson Dental (b) 26,450 978,650
-----------
2,087,039
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 10.4%
Mentor 76,400 869,050
Perclose (b) 28,200 465,300
Respironics (b) 115,200 1,296,000
Xomed Surgical Products (b) 56,100 2,307,113
-----------
4,937,463
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 4.6%
Petroleum Geo-Services ADR (b) 37,200 590,550
Quanta Services (b) 32,400 398,925
Service Experts (b) 42,500 1,182,031
-----------
2,171,506
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 5.1%
AptarGroup 20,800 473,200
Flanders 112,100 448,400
Minerals Technologies 6,200 273,188
Polymer Group (b) 95,700 753,637
Schweitzer-Mauduit International 22,400 487,200
-----------
2,435,625
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 7.5%
Advanced Lighting Technologies (b) 47,500 403,750
Danka Business Systems ADR 14,300 90,269
JLK Direct Distribution Class A (b) 52,900 568,675
Kennametal 6,000 161,625
Watsco 37,950 569,250
Zebra Technologies Class A (b) 52,400 1,755,400
-----------
3,548,969
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOIOS ON PAGE 21
12
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
SEPTEMBER 30, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
RETAIL TRADE - 2.3%
Heilig-Meyers 30,500 $ 219,219
Lithia Motors Class A (b) 23,800 264,775
MSC Industrial Direct Class A (b) 30,700 614,000
-----------
1,097,994
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 6.9%
American Management Systems (b) 60,100 1,645,237
BISYS Group (b) 19,100 842,788
PRT Group (b) 93,200 372,800
UBICS (b) 53,500 394,562
-----------
3,255,387
===============================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $49,523,689) ........................................... $ 43,079,636
===============================================================================
SHORT-TERM SECURITIES - 9.1%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER - 9.1%
Associates (FINANCIAL)
5.73% 10/01/98 $1,925,000 $ 1,925,000
Duke Power (UTILITIES)
5.75 10/01/98 2,370,000 2,370,000
-----------
4,295,000
===============================================================================
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $4,295,000)............................................. $ 4,295,000
===============================================================================
TOTAL INVESTMENTS IN
SECURITIES
(COST: $53,818,689) (e) ....................................... $ 47,374,636
===============================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 0.0%
............................................................ $ 16,273
===============================================================================
TOTAL NET ASSETS
............................................................ $ 47,390,909
===============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
13
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 71.7%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 9.2%
ABR Information Services (b) 78,800 $ 1,078,575
HA-LO Industries (b) 24,400 713,700
Profit Recovery Group
International (b) 37,800 1,181,250
Romac International (b) 42,400 763,200
Snyder Communications (b) 22,500 753,750
Sylvan Learning Systems (b) 41,975 981,165
Wackenhut Corrections (b) 49,600 1,100,500
-----------
6,572,140
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 1.0%
Starbucks (b) 19,400 702,038
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 2.9%
Apollo Group Class A (b) 30,450 848,794
Papa John's International (b) 37,700 1,244,100
-----------
2,092,894
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 11.0%
Advanced Fibre
Communications (b) 60,808 418,055
Artesyn Technologies (b) 40,000 690,000
Inter-Tel 32,400 419,175
Micrel (b) 38,550 1,021,575
QLogic (b) 21,200 1,383,300
Saville Systems ADR (b) 46,400 672,800
Sawtek (b) 44,100 622,913
Sipex (b) 44,500 1,129,188
Uniphase (b) 14,200 582,200
Vitesse Semiconductor (b) 39,300 928,462
-----------
7,867,668
- -------------------------------------------------------------------------------
FINANCIAL - 3.0%
Envoy (b) 26,800 586,250
Renters Choice (b) 36,200 959,300
United Rentals (b) 25,314 605,951
-----------
2,151,501
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
HEALTH SERVICES - 9.4%
American Oncology Resources (b) 71,300 $ 721,913
Medical Manager (b) 22,900 523,838
NCS HealthCare Class A (b) 39,700 699,713
Omnicare 38,600 1,360,650
Renal Care Group (b) 47,100 1,206,937
Superior Consultant Holdings (b) 20,900 909,150
Total Renal Care (b) 54,433 1,306,391
-----------
6,728,592
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 8.5%
CardioGenesis (b) 210,700 447,738
Curative Health Services (b) 43,600 1,335,250
Medicis Pharmaceutical Class A (b) 41,500 1,644,438
MiniMed (b) 6,700 442,200
Rexall Sundown (b) 45,400 700,863
Watson Pharmaceuticals (b) 30,300 1,537,724
-----------
6,108,213
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 0.9%
Rental Service (b) 34,800 626,400
- -------------------------------------------------------------------------------
RETAIL TRADE - 7.1%
Bed Bath & Beyond (b) 57,200 1,337,050
Express Scripts Class A (b) 18,200 1,496,950
Fastenal 14,800 370,000
Pacific Sunwear of California (b) 29,100 647,474
Whole Foods Market (b) 28,400 1,196,350
-----------
5,047,824
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOIOS ON PAGE 21
14
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 18.7%
Acxiom (b) 40,200 $ 997,463
Advantage Learning Systems (b) 10,600 402,800
Aspen Technology (b) 23,100 617,925
Cambridge Technology Partners (b) 23,400 522,113
CBT Group ADR (b) 17,100 230,850
Citrix Systems (b) 15,550 1,104,050
CSG Systems International (b) 31,600 1,398,300
Great Plains Software (b) 28,300 1,337,175
HNC Software (b) 39,200 1,592,500
Information Management
Resources (b) 36,300 898,425
International Telecommunication
Data Systems (b) 26,600 771,400
Transaction Systems
Architects Class A (b) 35,100 1,246,050
Visio (b) 21,400 514,938
Wind River Systems (b) 35,500 1,677,374
-----------
13,311,363
===============================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $50,605,671)............................................ $ 51,208,633
===============================================================================
OTHER SECURITIES - 16.3%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMON STOCKS - 0.6%
AccessLine Technologies Class A 41,666 $ 417
Aclara BioSciences (b) 5,021 804
GalaGen (b)(d) 235,309 383,789
PACE Health
Management Systems (b)(d) 471,473 26,874
- -------------------------------------------------------------------------------
411,884
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 12.9%
AccessLine Technologies
Series A (b) 71,420 714
Intellon Series A (b) 200,000 372,000
Intellon Series B (b) 578,763 1,076,500
Myelos Neurosciences
Series A (b)(d) 500,000 900,000
Myelos Neurosciences
Series B (b)(d) 571,429 1,028,572
Myelos Neurosciences
Series C (b)(d) 277,778 500,000
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
-----------
9,196,795
- -------------------------------------------------------------------------------
Ownership Market
Percentage(c) Value (a)
- -------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 2.7%
Alta Berkeley III, foreign (b) 1.78% 380,476
South Street Corporate
Recovery Fund I (b) 0.69 109,306
South Street Leveraged
Corporate Recovery Fund I (b) 1.65 56,414
Spectrum Equity Investors (b) 0.92 1,019,984
Vanguard Associates IV (b) 1.35 344,222
-----------
1,910,402
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
15
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
OTHER SECURITIES (CONT.)
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES 0.1%
AccessLine Technologies (b)
12.00% 01/14/99 $112,000 $ 89,600
Air Communications Series B (b)(d)
10.00 02/28/97 258,332 --
------------
89,600
- -------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------------------
CALL OPTIONS - 0.0%
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) 562,500 6
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
------------
14
===============================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $11,418,791) ........................................... $ 11,608,695
===============================================================================
TOTAL INVESTMENTS IN
LONG-TERM SECURITIES
(COST: $62,024,462) ........................................... $ 62,817,328
===============================================================================
SHORT-TERM SECURITIES - 9.2%
Principal Market
Rate Maturity Amount Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL PAPER 9.2%
Associates (FINANCIAL)
5.73% 10/01/98 $ 2,965,000 $ 2,965,000
Duke Power (UTILITIES)
5.75 10/01/98 3,610,000 3,610,000
------------
6,575,000
===============================================================================
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(COST: $6,575,000)............................................. $ 6,575,000
===============================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $68,599,462) (e)........................................ $ 69,392,328
===============================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 2.8%
............................................................ $ 1,994,944
===============================================================================
TOTAL NET ASSETS
............................................................ $ 71,387,272
===============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
16
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 97.6%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 8.5%
Bergen Brunswig Class A 9,900 $ 500,568
Concord EFS (b) 4,400 113,575
Galileo International 4,700 177,425
SunGard Data Systems (b) 4,500 141,750
Sysco 13,400 315,738
-----------
1,249,056
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 9.1%
Clorox 1,400 115,500
Coca-Cola 3,100 178,637
Colgate-Palmolive 2,500 171,250
Dial 7,400 152,625
Gillette 3,100 118,575
Pepsico 4,480 131,880
Philip Morris 3,280 151,085
Procter & Gamble 2,100 148,969
Wm. Wrigley Jr 2,100 159,469
-----------
1,327,990
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 4.6%
Cendant (b) 37,578 436,844
Pittston Brink's Group 6,900 241,500
-----------
678,344
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 9.2%
Cisco Systems (b) 2,190 135,369
Compaq Computer 4,600 145,475
Dell Computer (b) 1,200 78,900
EMC Corporation Designs 1,470 84,066
Intel 2,000 171,500
International Business Machines 1,360 174,080
Lucent Technologies 1,310 90,472
SBC Communications 4,600 204,412
Synopsys (b) 7,570 252,176
-----------
1,336,450
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
ENERGY MINERALS - 1.1%
British Petroleum ADR 10 $ 872
Exxon 2,200 154,413
-----------
155,285
- -------------------------------------------------------------------------------
FINANCIAL - 13.5%
American Express 1,250 97,031
American International Group 2,450 188,650
Associates First Capital 2,700 176,175
BankAmerica 2,500 150,313
Citicorp 1,400 130,113
Equifax 6,700 239,106
Fannie Mae 4,100 263,425
MBNA 5,250 150,280
NationsBank (b) 1,150 61,525
Norwest 4,440 159,008
State Street 3,150 171,872
T. Rowe Price 2,580 75,788
Travelers Group (b) 2,700 101,250
-----------
1,964,536
- -------------------------------------------------------------------------------
HEALTH SERVICES - 2.6%
ServiceMaster 8,850 193,594
United Healthcare 5,110 178,850
-----------
372,444
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 14.6%
Abbott Laboratories 5,300 230,219
American Home Products 5,720 299,585
Bristol-Myers Squibb 2,750 285,656
Eli Lilly & Company 1,790 140,179
Johnson & Johnson 2,900 226,925
Medtronic 1,400 81,026
Merck & Company 2,310 299,289
Pfizer 1,780 188,569
Schering-Plough 2,500 258,906
Warner-Lambert 1,630 123,065
-----------
2,133,419
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
17
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 5.5%
AES (b) 3,640 $ 134,908
Newpark Resources (b) 15,300 105,188
Schlumberger ADR 1,470 73,959
Waste Management 10,190 489,756
-----------
803,811
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.1%
E.I. du Pont de Nemours 2,000 112,250
Ecolab 4,200 119,438
General Electric 4,620 367,579
-----------
599,267
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.6%
Lexmark International Class A (b) 4,380 303,589
Tyco International 7,100 392,275
Xerox 1,400 118,650
-----------
814,514
- -------------------------------------------------------------------------------
RETAIL TRADE - 7.4%
Abercrombie & Fitch Class A (b) 3,400 149,600
Autozone (b) 5,000 123,125
Consolidated Stores (b) 3,960 77,715
Dollar General 6,695 178,254
Home Depot 3,700 146,150
Staples (b) 7,000 205,625
Wal-Mart Stores 3,700 202,113
-----------
1,082,582
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 6.4%
America Online (b) 700 77,875
First Data 9,300 218,550
FIserv (b) 7,850 361,591
Microsoft(b) 2,480 272,955
-----------
930,971
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
UTILITIES - 5.4%
AirTouch Communications (b) 2,100 $ 119,700
Ameritech 3,100 146,861
Bellsouth 2,100 158,025
Century Telephone Enterprises 4,500 212,625
MCI Worldcom (b) 3,200 156,400
-----------
793,611
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $13,691,248)............................................ $ 14,242,280
===============================================================================
TOTAL INVESTMENTS IN
SECURITIES
(COST: $13,691,248) (e)........................................ $ 14,242,280
===============================================================================
OTHER ASSETS & LIABILITIES
(NET) 2.4%
............................................................ $ 343,707
===============================================================================
TOTAL NET ASSETS
............................................................ $ 14,585,987
===============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
18
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 95.8%
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
COMMERCIAL SERVICES - 11.4%
Bergen Brunswig Class A (b) 16,200 $ 819,113
Cintas 13,200 661,650
Concord EFS (b) 7,000 180,688
Galileo International 25,100 947,525
Interim Services (b) 32,200 662,112
Paychex 4,400 226,875
SunGard Data Systems (b) 30,500 960,750
-----------
4,458,713
- -------------------------------------------------------------------------------
CONSUMER DURABLES - 1.8%
Snap-On 22,500 693,281
- -------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 5.5%
Coca-Cola Enterprises 18,700 472,175
Dean Foods 8,400 369,600
Dial 35,000 721,875
McCormick & Company 19,900 578,344
-----------
2,141,994
- -------------------------------------------------------------------------------
CONSUMER SERVICES - 3.3%
Harte-Hanks Communications 35,400 792,075
Pittston Brink's Group 13,800 483,000
-----------
1,275,075
- -------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 9.4%
ADC Telecommunications (b) 11,400 240,825
Analog Devices (b) 17,901 287,535
Cadence Design Systems (b) 26,200 669,738
Linear Technology 9,800 490,000
Maxim Integrated Products (b) 23,000 641,125
Sundstrand 7,600 352,450
Synopsys (b) 24,100 802,831
Xilinx (b) 5,300 185,500
-----------
3,670,004
- -------------------------------------------------------------------------------
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
FINANCIAL - 12.7%
Aflac 12,400 $ 354,175
City National 20,000 626,250
Equifax 31,700 1,131,293
Financial Security Assurance 16,100 784,875
Finova Group 12,200 609,237
Mercantile Bankshares 20,000 562,500
Old Republic International 21,700 488,250
T. Rowe Price 13,400 393,625
-----------
4,950,205
- -------------------------------------------------------------------------------
HEALTH SERVICES - 7.0%
Health Management Class A (b) 24,200 441,650
McKesson 9,800 897,925
Quorum Health Group (b) 32,900 534,625
ServiceMaster 39,450 862,969
-----------
2,737,169
- -------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 5.5%
Biogen (b) 11,300 743,681
Hillenbrand Industries 8,600 421,400
Stryker 5,100 173,400
Watson Pharmaceuticals (b) 16,300 827,225
-----------
2,165,706
- -------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 4.1%
AES (b) 20,700 767,194
Waste Management 17,000 817,062
-----------
1,584,256
- -------------------------------------------------------------------------------
PROCESS INDUSTRIES - 1.2%
Solutia 7,400 166,963
Whitman 18,100 288,469
-----------
455,432
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
19
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 7.5%
American Power Conversion (b) 27,400 $ 1,032,638
Danaher 16,200 486,000
Federal-Mogul 10,300 481,525
Kaydon 17,500 460,469
Lexmark International Class A (b) 7,000 485,187
-----------
2,945,819
- -------------------------------------------------------------------------------
RETAIL TRADE - 9.0%
Abercrombie & Fitch Class A (b) 12,100 532,400
Barnes & Noble (b) 14,000 378,000
Bed Bath & Beyond (b) 27,300 638,138
Dollar General 17,125 455,953
Kohl's (b) 4,300 167,700
Lands' End (b) 20,300 375,550
Staples (b) 33,000 969,375
-----------
3,517,116
- -------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 15.0%
America Online (b) 11,100 1,234,875
BMC Software (b) 18,900 1,135,181
Compuware (b) 19,700 1,159,837
FIserv (b) 16,600 764,638
Platinum Technology (b) 46,000 828,000
Sterling Commerce (b) 21,200 734,050
-----------
5,856,581
- -------------------------------------------------------------------------------
UTILITIES - 2.4%
Century Telephone Enterprises 19,600 926,100
===============================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $37,047,122) ...............................................$ 37,377,451
===============================================================================
OTHER SECURITIES - 3.4%
Market
Quantity (c) Value (a)
- -------------------------------------------------------------------------------
COMMON STOCK - 0.2%
GalaGen (b) (d) 47,398 $ 77,306
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 1 8%
Tut Systems Series D (b)(d) 233,546 700,638
- -------------------------------------------------------------------------------
Ownership Market
Percentage(c) Value (a)
- -------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.4%
South Street Leveraged
Corporate Recovery Fund I (b) 1.10% 37,616
Spectrum Equity Investors (b) 0.46 509,997
-----------
547,613
===============================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $749,892)............................................... $ 1,325,557
===============================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $37,797,014) (e)........................................ $ 38,703,008
===============================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 0.8%................................................... $ 327,277
===============================================================================
TOTAL NET ASSETS............................................... $ 39,030,285
===============================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
20
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security issue held at September 30, 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 September 30, 1998, is shown on pages 23-25.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at September 30, 1998. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
IAI EMERGING GROWTH FUND AFFILIATED ISSUERS
- -----------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Options 05/22/98 -- $ -- 4,062 $ -- $ -- $ --
Myelos Neurosciences
Series C PFD 277,778 $500,000 -- $ -- $ -- $ --
PACE Health Management
Systems Warrants 07/07/02 -- $ -- 62,500 $ -- $ -- $ --
</TABLE>
*SECURITIES THAT WERE AFFILIATED DURING THE SIX MONTH PERIOD ENDING ON 9/30/98
BUT NOT AT 9/30/98.
<TABLE>
<CAPTION>
IAI MIDCAP GROWTH FUND AFFILIATED ISSUERS
- -----------------------------------------------------------------------------------------------------------
PURCHASES SALES REALIZED INVESTMENT
-------------------------------------------------
ISSUER QUANTITY COST QUANTITY PROCEEDS GAIN (LOSS) INCOME
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Options 05/22/98 -- $ -- 1,354 $ -- $ -- $ --
</TABLE>
21
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED0
(e)
At September 30, 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 $ 53,905,168 $ 69,709,899 $ 13,703,347 $37,974,457
=======================================================================
Gross unrealized appreciation $ 5,125,247 $ 11,777,220 $ 1,722,242 $ 5,633,728
Gross unrealized depreciation (11,655,779) (12,094,791) (1,183,309) (4,905,177)
-----------------------------------------------------------------------
Net unrealized
appreciation (depreciation) $ (6,530,532) $ (317,571) $ 538,933 $ 728,551
=======================================================================
</TABLE>
22
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- -------------------------------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 209,009
Aclara BioSciences 12/30/97 --
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
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
Myelos Neurosciences
Series C 07/15/98 500,000
PACE Health Management
Systems Series A 07/07/97 500,264
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 12/16/97 363,125
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
07/27/98 22,646
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
23
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
LIMITED PARTNERSHIPS (CONT.)
Security Acquisition Date Cost
- -------------------------------------------------------------------------------
Spectrum Equity Investors 02/12/97 $ 29,046
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
07/24/98 30,000
Vanguard Associates IV 07/26/96 3,080
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 03/27/01 12/27/96 $ --
12/26/97 --
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
24
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
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 02/12/97 14,526
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
07/24/98 15,000
25
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- -----------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $53,818,689, $59,675,774, $13,691,248, and
$37,186,648, respectively) $ 47,374,636
Investments in securities of affiliated issuers, at market
(Cost: $0, $8,923,688, $0 and $610,366, respectively) --
------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 47,374,636
Cash in bank on demand deposit 85,390
Receivable for investment securities sold 222,379
Receivable for Fund shares sold 83,924
Dividends and accrued interest receivable 4,979
------------
TOTAL ASSETS 47,771,308
------------
LIABILITIES
Payable for investment securities purchased 379,799
Other accrued expenses 600
------------
TOTAL LIABILITIES 380,399
------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 47,390,909
============
Represented by:
Capital stock $ 41,098
Additional paid-in capital 50,099,216
Undistributed (overdistributed) net investment income (294,958)
Accumulated net realized gains 3,989,606
4,588,396
Unrealized appreciation (depreciation) on: (6,444,053)
------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 47,390,909
============
SHARES OF CAPITAL STOCK OUTSTANDING; 4,109,769
------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.53
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
26
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- -----------------------------------------------
<S> <C> <C>
$ 61,234,078 $ 14,242,280 $ 37,925,064
8,158,250 -- 777,944
- -----------------------------------------------
69,392,328 14,242,28 38,703,008
145,265 333,783 30,908
-- -- 667,116
1,850,100 -- 209
748 10,974 13,189
- -----------------------------------------------
71,388,441 14,587,037 39,414,430
- -----------------------------------------------
-- -- 383,365
1,169 1,050 780
- -----------------------------------------------
1,169 1,050 384,145
- -----------------------------------------------
$ 71,387,272 $ 14,585,987 $ 39,030,285
===============================================
$ 60,215 $ 14,423 $ 32,515
54,873,919 12,553,094 33,757,692
637,239) (18,751) (254,312)
16,297,511 1,486,189 4,588,396
792,86 551,032 905,994
- -----------------------------------------------
$ 71,387,272 $ 14,585,987 $ 39,030,285
===============================================
6,021,457 1,442,282 3,251,512
- -----------------------------------------------
$ 11.86 $ 10.11 $ 12.00
===============================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
27
<PAGE>
STATEMENTS OF OPERATIONS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- -------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $1,440, $0, $626, $0, respectively) $ 44,908
Interest 59,535
------------
TOTAL INCOME 104,443
------------
EXPENSES
Management fees 397,632
Compensation of Directors 5,497
Interest 1,769
Other Expenses --
------------
TOTAL EXPENSES 404,898
Less fees reimbursed by Advisers (5,497)
------------
NET EXPENSES 399,401
------------
NET INVESTMENT INCOME (294,958)
------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on investments 4,076,499
Net change in unrealized appreciation or depreciation on investments (21,150,888)
------------
NET LOSS ON INVESTMENTS (17,074,389)
============
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(17,369,347)
============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
28
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- ------------------------------------------------------
<S> <C> <C>
$ 3,196 $ 66,223 $ 148,872
127,720 13,618 12,133
- ------------------------------------------------------
130,916 79,841 161,005
- ------------------------------------------------------
728,796 96,735 382,401
10,487 1,408 5,686
4,180 1,857 32,391
1,050 -- 525
- ------------------------------------------------------
744,513 100,000 421,003
(10,487) (1,408) (5,686)
- ------------------------------------------------------
734,026 98,592 415,317
- ------------------------------------------------------
(603,110) (18,751) (254,312)
- ------------------------------------------------------
14,945,380 1,498,532 4,766,232
(38,357,104) (2,964,640) (10,124,032)
- ------------------------------------------------------
(23,411,724) (1,466,108) (5,357,800)
=======================================================
$(24,014,834) $ (1,484,859) $ (5,612,112)
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
29
<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
Six months Year
ended ended
September 30, 1998 March 31, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income (loss) $ (294,958) $ (601,123)
Net realized gains 4,076,499 14,774,185
Net change in unrealized appreciation or depreciation (21,150,888) 11,643,382
------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (17,369,347) 25,816,444
------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (6,234,189) (6,983,032)
------------------------------
TOTAL DISTRIBUTIONS (6,234,189) (6,983,032)
------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 29,293,641 76,384,918
Net asset value of shares issued in reinvestment
of distributions 5,984,845 6,824,703
Cost of shares redeemed (30,238,786) (80,318,678)
------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 5,039,700 2,890,943
------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (18,563,836) 21,724,355
NET ASSETS AT BEGINNING OF PERIOD 65,954,745 44,230,390
------------------------------
NET ASSETS AT END OF PERIOD $ 47,390,909 $ 65,954,745
==============================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ (294,958) $ --
==============================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
30
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
Six months Year Six months Year Six months Year
ended ended ended ended ended ended
September 30, 1998 March 31, 1998 September 30, 1998 March 31, 1998 September 30, 1998 March 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
$ (603,110) $ (3,352,226) $ (18,751) $ (2,723) $ (254,312) $ (511,505)
14,945,380 93,330,632 1,498,532 1,684,652 4,766,232 21,222,615
(38,357,104) 6,603,890 (2,964,640) 2,793,529 (10,124,032) 744,507
- ----------------------------------------------------------------------------------------------------------------------------
(24,014,834) 96,582,296 (1,484,859) 4,475,458 (5,612,112) 21,455,617
- ----------------------------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
(21,831,642) (46,166,939) (881,532) (1,608,253) (9,335,203) (24,195,975)
- ----------------------------------------------------------------------------------------------------------------------------
(21,831,642) (46,166,939) (881,532) (1,608,253) (9,335,203) (24,195,975)
- ----------------------------------------------------------------------------------------------------------------------------
145,639,268 205,116,691 9,867,066 6,469,281 15,086,437 45,519,092
21,065,675 45,784,112 874,897 1,597,042 8,877,673 23,058,343
(211,383,158) (526,509,273) (8,564,098) (7,905,828) (52,591,341) (111,491,235)
- ----------------------------------------------------------------------------------------------------------------------------
(44,678,215) (275,608,470) 2,177,865 160,495 (28,627,231) (42,913,800)
- ----------------------------------------------------------------------------------------------------------------------------
(90,524,691) (225,193,113) (188,526) 3,027,700 (43,574,546) (45,654,158)
161,911,963 387,105,076 14,774,513 11,746,813 82,604,831 128,258,989
- ----------------------------------------------------------------------------------------------------------------------------
$ 71,387,272 $ 161,911,963 $ 14,585,987 $ 14,774,513 $ 39,030,285 $ 82,604,831
============================================================================================================================
$ (637,239) $ (34,129) $ (18,751) $ -- $ (254,312) $ --
============================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 36
31
<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>
Six months Years ended March 31, Period from
ended ----------------------- February 1, 1996+
September 30, 1998 1998 1997 to March 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 17.96 $ 13.49 $ 11.24 $ 10.00
------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.07) (0.16) (0.09) --
Net realized and unrealized gains (losses) (4.55) 6.77 2.79
1.24
------------------------------------------------------------------------
TOTAL FROM OPERATIONS (4.62) 6.61 2.70 1.24
------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (1.81) (2.14) (0.41) --
Tax return of capital -- -- (0.04) --
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.81) (2.14) (0.45) --
------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.53 $ 17.96 $ 3.49 $ 11.24
========================================================================
Total investment return * (27.93%) 52.46% 23.68% 12.40%
Net assets at end of period (000's omitted) $47,391 $65,955 $44,230 $ 9,411
RATIOS
Expenses to average net assets
(including interest expense)** 1.41%*** 1.43% 1.26% 1.25%***
Expenses to average net assets
(excluding interest expense)** 1.40%*** 1.40% 1.25% 1.25%***
Net investment income (loss)
to average net assets** (1.04%)*** (0.95%) (0.80%) 0.23%***
Average brokerage commission rate**** $ 0.0595 $0.0595 $0.0576 n/a
Portfolio turnover rate
(excluding short-term securities) 29.8% 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
32
<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>
Six months Years ended March 31,
ended ------------------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 18.11 $ 15.85 $ 24.08 $ 15.83 $ 15.20 $ 13.47
---------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.10) (0.18)+ (0.20) (0.09) (0.07) (0.10)
Net realized and unrealized gains (losses) (3.26) 5.07 (4.52) 8.77 1.42 2.18
---------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (3.36) 4.89 (4.72) 8.68 1.35 2.08
---------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (2.89) (2.63) (3.51) (0.43) (0.72) (0.35)
---------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.89) (2.63) (3.51) (0.43) (0.72) (0.35)
---------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.86 $ 18.11 $ 15.85 $ 24.08 $ 15.83 $ 15.20
=================================================================================
Total investment return* (21.70%) 33.37% (22.97%) 55.20% 10.23% 15.43%
Net assets at end of period (000's omitted) $ 71,387 $ 161,912 $ 387,105 $ 653,888 $ 342,874 $ 225,510
RATIOS
Expenses to average net assets
(including interest expense) 1.26%*** 1.25% 1.20% 1.24% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25%*** 1.24% 1.19% 1.24% 1.25% 1.25%
Net investment income (loss)
to average net assets (1.03%)*** (0.98%) (0.75%) (0.52%) (0.54%) (0.77%)
Average brokerage commission rate** $ 0.0575 $ 0.0554 $ 0.0571 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 10.9% 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.
*** ANNUALIZED
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
33
<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
Six months ended March 31, Period from Period from
ended ----------------------------------- Aug. 1, 1994 to Aug. 6, 1993***
September 30, 1998 1998 1997 1996 March 31, 1995+ to July 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87 $ 10.00
-----------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.01) -- (0.03) -- 0.04 0.01
Net realized and
unrealized gains (losses) (1.39) 3.59 1.02 1.93 1.07 (0.13)
-----------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS (1.40) 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 (0.66) (1.34) (2.96) (0.96) -- --
-----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.66) (1.34) (2.96) (0.99) (0.03) (0.01)
-----------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.11 $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87
=========================================================================================
Total investment return* (12.24%) 38.96% 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $ 14,586 $ 14,775 $ 11,747 $ 17,079 $ 26,794 $ 14,408
RATIOS
Expenses to average net assets
(including interest expense) 1.27%** 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%** 1.25%**
Net investment income (loss) to average
net assets (0.24%)** (0.02%) (0.25%) (0.04%) 0.61%** 0.16%**
Average brokerage commission rate**** $ 0.0599 $ 0.0593 $ 0.0588 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 60.8% 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.
34
<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>
Six months Years ended March 31,
ended -----------------------------------------------------------
September 30, 1998 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $ 15.91 $ 16.68 $ 17.70 $ 15.35 $ 13.67 $ 11.88
-----------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.08) (0.10) (0.08) (0.05) (0.04) (0.04)
Net realized and unrealized
gains (losses) (1.37) 3.34 0.68 3.50 2.35 1.99
-----------------------------------------------------------
TOTAL FROM OPERATIONS (1.45) 3.24 0.60 3.45 2.31 1.95
-----------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (2.46) (4.01) (1.62) (1.10) (0.63) (0.16)
-----------------------------------------------------------
TOTAL DISTRIBUTIONS (2.46) (4.01) (1.62) (1.10) (0.63) (0.16)
-----------------------------------------------------------
NET ASSET VALUE
End of period $ 12.00 $ 15.91 $ 16.68 $ 17.70 $ 15.35 $ 13.67
===========================================================
Total investment return* (10.91%) 22.21% 3.12% 23.51% 17.63% 16.40%
Net assets at end of period
(000's omitted) $39,030 $ 82,605 $128,259 $122,375 $ 88,075 $ 56,618
RATIOS
Expenses to average net assets
(including interest expense) 1.36%*** 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% 1.25%
Net investment income (loss)
to average net assets (0.83%)*** (0.48%) (0.47%) (0.36%) (0.33%) (0.45%)
Average brokerage commission rate** $0.0599 $ 0.0595 $ 0.0593 n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 52.6% 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.
*** ANNUALIZED
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Capital Appreciation Fund (Capital Appreciation Fund), IAI Emerging
Growth Fund (Emerging Growth Fund) and IAI Midcap Growth Fund (Midcap Growth
Fund) are separate portfolios of IAI Investment Funds VI, Inc. and IAI Growth
Fund (Growth Fund) is a separate portfolio of IAI Investment Funds II, Inc. The
Funds have an overall objective of long-term appreciation through investment in
equity securities.
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 $11,608,695 (16.3% of net
assets) for Emerging Growth Fund and $1,325,557 (3.4% 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.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[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.
The Emerging Growth Fund elected to utilize equalization debits by which a
portion of the costs of redemptions, which occurred during the year ended March
31, 1998, reduced accumulated net realized gains for tax purposes. As a result
of this, a reclassification has been made on the statement of assets and
liabilities to decrease accumulated net realized gains on investments by
$28,999,125 and increase additional paid-in-capital by $28,999,125.
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.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds are committed to make future capital contributions, if
requested by the Company.
LINE OF CREDIT
At September 30, 1998, Capital Appreciation Fund, Emerging Growth Fund, Growth
Fund, and Midcap Growth Fund had available lines of credit of $8,521,000,
$15,000,000, $2,141,000 and $13,332,000, respectively, with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. There were no borrowings outstanding at
September 30, 1998.
LIMITED PARTNERSHIP COMMITMENTS
At September 30, 1998, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
LIMITED PARTNERSHIP INVESTMENT COMMITMENTS
- -------------------------------------------------------------------------------
EMERGING GROWTH FUND MIDCAP GROWTH FUND
- -------------------------------------------------------------------------------
Alta Berkeley III L.P. $10,000 $ --
Spectrum Equity Investors L.P. 46,000 23,000
- -------------------------------------------------------------------------------
Total commitments $56,000 $23,000
===============================================================================
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[3] FEES AND EXPENSES
Under terms of each Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. The 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.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION GROWTH
FUND FUND
- ------------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended March 31, ended March 31,
September 30, 1998 1998 September 30, 1998 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 2,122,230 4,709,044 9,774,460 11,368,673
ISSUED FOR REINVESTED
DISTRIBUTIONS 405,752 462,378 1,424,319 2,869,019
REDEEMED (2,090,106) (4,778,911) (14,119,965) (29,722,685)
-----------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 437,876 392,511 (2,921,186) (15,484,993)
=======================================================================
<CAPTION>
MIDCAP
GROWTH GROWTH
FUND FUND
- ------------------------------------------------------------------------------------------------------
Six months Year ended Six months Year ended
ended March 31, ended March 31,
September 30, 1998 1998 September 30, 1998 1998
- ------------------------------------------------------------------------------------------------------
SOLD 894,142 595,955 1,038,019 2,743,761
ISSUED FOR REINVESTED
DISTRIBUTIONS 74,906 153,446 653,250 1,514,052
REDEEMED (740,404) (720,053) (3,630,701) (6,754,986)
-----------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING 228,644 29,348 (1,939,432) (2,497,173)
=======================================================================
</TABLE>
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND,
IAI GROWTH FUND, IAI MIDCAP GROWTH FUND
SEPTEMBER 30, 1998
(UNAUDITED)
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the six months ended September 30, 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 $ 16,115,803 $ 21,833,116
EMERGING GROWTH FUND $ 11,935,483 $ 90,183,318
GROWTH FUND $ 10,139,283 $ 8,780,367
MIDCAP GROWTH FUND $ 29,252,430 $ 66,383,409
RESTRICTED SECURITIES
Included in the Funds' portfolios of investments in securities at September 30,
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.
40
<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 PORTFLIO COMPOSITION
...................................................................................................................................
<S> <C> <C> <C>
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
APPRECIATION FUND growth companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ----------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be
undervalued
- ----------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected
to produce income
- ----------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + INCOME] short-term instruments
- ----------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ----------------------------------------------------------------------------------------------------------------------------------
IAI 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>
41
<PAGE>
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<PAGE>
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<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
