ANNUAL REPORT
IAI EQUITY FUNDS
IAI CAPITAL APPRECIATION FUND * IAI EMERGING GROWTH FUND
IAI GROWTH FUND * IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
ANNUAL REPORT
MARCH 31, 1999
Letter to Shareholders.......................................... 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 Cash Flows....................................... 30
Statements of Changes in Net Assets............................ 32
Financial Highlights
IAI CAPITAL APPRECIATION FUND............................. 34
IAI EMERGING GROWTH FUND.................................. 35
IAI GROWTH FUND........................................... 36
IAI MIDCAP GROWTH FUND.................................... 37
Notes to Financial Statements.................................. 38
Independent Auditors' Report....................................43
Federal Tax Information.........................................44
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors....................................... Inside Back Cover
<PAGE>
LETTER TO SHAREHOLDERS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
WHAT'S RIGHT WITH THIS MARKET
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
grew 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.
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 1999 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 the value of 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>
LETTER TO SHAREHOLDERS
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.
Robust economic growth and slowing inflationary trends sent analysts to their
history books to identify when past economic data was as positive as recent
statistics. Economic growth in 1998 was at its fastest pace in 15 years while
the inflation rate increased at its lowest rate since 1961. These trends have
carried over to the first quarter. With jobs plentiful and consumers
experiencing favorable real wage increases, consumer confidence is high.
Combined with tax refunds and year-end incentive pay to produce, this is one of
the strongest periods for retail sales in the last 10 years.
During previous economic expansions, conventional wisdom linked strong demand
growth with rising inflation. This normally provoked the Federal Reserve to
tighten monetary policy to reduce demand and prevent an acceleration of
inflation. However, this time even the Fed seems to be skeptical of that
linkage. In a speech in early April, Federal Reserve Vice Chair Alice Rivlin
stated:
"Tight labor markets have long been seen as harbingers of inflation (as higher
wages led to higher prices) and lower productivity (as less skilled and
experienced workers were drawn into the labor market). But recent experience
suggests that, at least in the context of intense global and domestic
competitiveness, as well as a continuing revolution in computers and
telecommunications, tight labor markets can provide incentives for managerial
innovation, skills acquisition and higher productivity, thereby leading to
higher growth with little inflation."
During the quarter, the Fed left rates unchanged and signaled they were
maintaining a neutral policy stance. Fears of a possible tightening, however,
negatively impacted financial markets in February. By quarter-end the equity
market had recovered to push through the 10,000 mark on the Dow and interest
rates, following a steep rise in February, stabilized.
Ms. Rivlin mentioned several of the factors that have allowed strong U.S. growth
with low inflation. While our economy is experiencing good times, weakness
persists in Asia, Russia and Latin America and growth has slowed in Europe. This
has contributed to declining commodity and input prices as global demand remains
soft. The only commodity showing strength has been oil, driven by production
cut-backs by oil producing countries. Another factor favoring low inflation has
been the strength of the dollar. Real interest rate differentials between the
U.S. and our major trading partners widened in favor of the dollar during the
quarter. Strength in the dollar makes imports less expensive, effectively
eliminating the ability of U.S. producers to raise prices.
We expect economic momentum to continue throughout the year. However, the pace
of the expansion will moderate toward a real GDP growth rate of 3%. Over the
past three years the U.S. economy has been unusually robust in the fourth and
first quarters, only to slow significantly in the second and third quarters. The
increase in oil prices, if sustained, will help slow the economy by cutting into
consumers' disposable income. Finally, the rise in interest rates during the
quarter will slow economic growth.
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.
3
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
IAI CAPITAL APPRECIATION FUND
[PHOTO]
MARTIN J. CALIHAN, CFA
IAI CAPITAL APPRECIATION
FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
COMMERCIAL SERVICES 22.3%
FINANCIAL 14.6%
CONSUMER SERVICES 14.4%
TECHNOLOGY SERVICES 12.3%
HEALTH TECHNOLOGY 10.6%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The year ended March 31, 1999 was dismal for most of the small-cap sector. The
IAI Capital Appreciation Fund declined (19.11%) during the year, trailing the
(8.22%) loss tallied by its benchmark, the Russell 2500 Growth Index. The S&P
500 Index gained 18.45% for the same period.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
For the year, Nielsen Media Research (7.35%)* was the biggest contributor to
performance. The Fund also benefited from Catalina Marketing (5.01%)*. Investors
are gaining comfort that Catalina's pharmacy check-out coupon printing business
will provide a solid complement to its core grocery check-out coupon printing
division. The biggest disappointments were Respironics (3.49%)* and Mentor
(2.47%)*.
WERE THERE ANY SIGNIFICANT CHANGES?
The volatile market has presented many opportunities to keep the portfolio
refreshed by trimming some holdings and adding to others. We took advantage of a
spike up in the price of Artesyn Technologies (0.82%)* during January to sell
the bulk of our position before it "round-tripped" back to its starting price.
We initiated a position in DII Group (0.31%)*, believing that this contract
electronics manufacturer is on the verge of an earnings break-out. And we added
a new position in Hyperion Solutions (1.61%)*, believing that it has a great
opportunity to become the dominant player in the mushrooming "business
intelligence" software industry.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Prevailing sentiment seems to be that there is no catalyst forthcoming to boost
the small-caps during the later stages of this bull market. Further, the view is
that small-caps will fare poorly in a market downturn, due to their poor
liquidity and generally greater economic sensitivity. Thus, money flows are
moving decisively away from the small-cap sector, leading to an environment
where there are plenty of sellers and relatively few buyers.
Within the small-cap sector, the only stocks which have performed well are those
with favorable price momentum, positive earnings revisions, and big average
daily trading volumes. Everything else is just withering away, totally
neglected. Earnings-based valuation appears to have lost any relevance.
WHAT IS YOUR OUTLOOK FOR THE FUND?
The recent past has been grim, but it is always darkest before dawn. The
environment is ripe for a change, but it is not clear what will be the catalyst.
Valuation measures suggest that when the change comes, the small-cap sector
should outperform strongly. As always, we are sticking resolutely to our
disciplines.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI CAPITAL APPRECIATION FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI CAPITAL
APPRECIATION FUND RUSSELL 2500
(INCEPTION 02/01/96) 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
03/31/99 17,144 13,428 21,392
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
Since Inception
1 Year 2/01/96
- --------------------------------------------------------------------------------
IAI CAPITAL APPRECIATION FUND (19.11%) 18.59%
- --------------------------------------------------------------------------------
Russell 2500 Growth Index (8.22%) 9.76%
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 27.17%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
TOP TEN HOLDINGS(1)
% of Net Assets
----------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Nielsen Media Research Commercial Services 7.35 --
Apollo Group Class A Consumer Services 5.68 --
Catalina Marketing Commercial Services 5.01 2.00
Valassis Communications Commercial Services 4.75 2.19
Xomed Surgical Products Health Technology 4.63 4.09
American Management Systems Technology Services 4.50 2.75
Strayer Education Consumer Services 3.78 3.91
Respironics Health Technology 3.49 0.24
CMAC Investment Financial 3.39 2.87
CCC Information Services Financial 3.24 3.77
================================================================================
TOTAL 45.82 21.82
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO LETTER TO SHAREHOLDERS & 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. INVESTORS SHOULD CONSIDER THE INHERENT RISKS OF
INVESTING IN SMALL-CAP SECURITIES DURING PERIODS OF MARKET VOLATILITY. 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,
AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
5
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FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
IAI EMERGING GROWTH FUND
[PHOTO]
CURT D. MCLEOD, CFA
IAI EMERGING GROWTH
FUND MANAGER
TOP FIVE COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
TECHNOLOGY SERVICES 18.0%
COMMERCIAL SERVICES 10.5%
ELECTRONIC TECHNOLOGY 6.4%
RETAIL TRADE 5.0%
HEALTH SERVICES 4.5%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The IAI Emerging Growth Fund gained 3.56% for the year ended March 31, 1999,
despite a tough market backdrop for small cap stocks. This compares to (8.22%)
and 18.45% for the Russell 2500 Growth and S&P 500 indices, respectively.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
The strong results in the year can largely be attributed to one of our long-time
holdings in Tut Systems (29.84%)*. Tut, a provider of high-speed access
solutions for the communications market, sold stock in an initial public
offering and was well received by the market. Other strong contributors to
performance in the year were Knight/Trimark Group (1.86%)*, a financial services
firm that focuses on securities trading, and Abacus Direct (1.23%)*, a
specialized information services provider for the direct marketing industry.
Sipex (sold), within the technology sector, and Total Renal Care (sold), within
health care, were two of the biggest disappointments and were eliminated from
the Fund.
WERE THERE ANY SIGNIFICANT CHANGES?
In addition to Knight/Trimark Group, several other stocks were added during the
year that immediately contributed significantly to performance. These included
Modem Media Poppe Tyson (0.68%)*, Critical Path (1.13%)*, and Ziff-Davis-ZDNet
(0.90%)*.
The Fund's portfolio of restricted securities represents 41.2% of net assets. As
a result of the increase in valuation of certain restricted securities, Emerging
Growth Fund's net assets significantly exceed the15% limitation in illiquid
restricted securities.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The small cap market continues to significantly lag the large cap market. The
S&P 500 Index, a measure of large cap performance, rose 18.45% during the year,
outpacing the widely recognized small cap index, the Russell 2000 Index, which
declined (16.26%).
WHAT IS YOUR OUTLOOK FOR THE FUND?
Due to the performance divergence between large cap stocks and small caps, we
think there is tremendous value in small cap stocks. But what continues to be
unknown is what event will unlock the value from this depressed asset class. We
continue to focus on owning the strongest companies with attractive growth
prospects and believe that when money returns to the small cap asset class, the
Fund will be well positioned to deliver strong returns.
The Fund is actively seeking liquidation opportunities which would reduce the
percentage of the Fund's investment portfolio comprised of restricted
securities. The Fund's ability to liquidate such securities may be limited by
legal or contractual provisions. The Fund intends to pursue such opportunities
when deemed in the best interest of the shareholders.
6
<PAGE>
FUND MANAGER'S REVIEW
IAI EMERGING GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI EMERGING
GROWTH FUND RUSSELL 2500
(INCEPTION 08/05/91) 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
03/31/99 30,544 24,707 39,873
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
Since Inception
1 Year 5 Years 8/05/91
- --------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND 3.56% 12.72% 15.69%
- --------------------------------------------------------------------------------
Russell 2500 Growth Index (8.22%) 12.84% 12.52%*
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 19.77%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/91
TOP TEN HOLDINGS(1)
% of Net Assets
--------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Tut Systems* Electronic Technology 29.84 2.94
Myelos Neurosciences
Preferred Stock* BioTechnology 4.06 0.93
Intellon Preferred Stock* Electronic Technology 2.42 0.89
Spectrum Equity Investors L.P.* Financial 2.21 0.79
CSG Systems International Technology Services 1.93 2.24
Knight/Trimark Group Class A Financial 1.86 --
Profit Recovery Group International Commercial Services 1.64 1.19
Transaction Systems
Architects Class A Technology Services 1.54 2.05
QLogic Electronic Technology 1.53 0.96
Acxiom Technology Services 1.49 0.97
================================================================================
TOTAL 48.52 12.96
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
* RESTRICTED SECURITY
NOTE TO LETTER TO SHAREHOLDERS & 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. INVESTORS SHOULD CONSIDER THE INHERENT RISKS OF
INVESTING IN SMALL-CAP SECURITIES DURING PERIODS OF MARKET VOLATILITY. 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,
AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
7
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH FUND
IAI GROWTH FUND
[PHOTO]
DAVID A. MCDONALD
IAI GROWTH FUND MANAGER
TOP FIVE SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
HEALTH TECHNOLOGY 18.6%
ELECTRONIC TECHNOLOGY 14.5%
CONSUMER NON-DURABLES 9.6%
TECHNOLOGY SERVICES 9.5%
COMMERCIAL SERVICES 6.5%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The market, as measured by the S&P 500 Index, continued its winning ways during
the year ended March 31, 1999, returning 18.45% including dividends. The IAI
Growth Fund also generated positive absolute returns, rising 14.94%.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Performance was helped by our overweight position in the technology sector.
America Online (1.88%)*, Microsoft (4.02%*), and Amdocs (1.51%)* were the three
largest contributors to performance. The seemingly unquenchable thirst for the
Internet drove AOL, while a more positive regulatory outlook and robust business
conditions in the billing sector drove Microsoft and Amdocs, respectively. The
Fund suffered poor performance from a few large holdings, notably Bergen
Brunswig (2.66%)*, Cendant (3.22%)*, and Waste Management (3.40%)*. These stocks
have taken a breather so far in 1999 after delivering strong performance in the
fourth quarter of 1998.
WERE THERE ANY SIGNIFICANT CHANGES?
Transaction activity was normal as we initiated positions in three companies:
Comverse Technology (1.10%)*, Patterson Dental (3.21%)*, and Uniphase (sold). A
number of positions were eliminated including AirTouch Communications (sold),
Century Telephone (sold), Citigroup (sold), Dollar General (sold), Sysco (sold),
and Uniphase (sold) (it increased over 40% in just six weeks).
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
We remain concerned about how narrow the market has been. Near term performance
pressures have many investors selling any stock that is not working currently
and chasing any stock with price momentum, virtually without regard to
valuation. The result is that just 21 stocks accounted for all of the gain in
the S&P 500 Index.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Our outlook has turned more guarded. The market is narrower, myopic, fixated on
returns with little regard for risk, and 20-30% over valued by most conventional
measures. Therefore, we continue to focus on risk management in order to
preserve returns as much as possible. This means maintaining a diversified
portfolio of high quality, predictable growth companies and paying close
attention to valuations.
8
<PAGE>
FUND MANAGER'S REVIEW
IAI GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI GROWTH FUND
(INCEPTION 08/06/93) 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
03/31/99 22,457 32,501
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
Since Inception
1 Year 5 Year 8/06/93
- --------------------------------------------------------------------------------
IAI GROWTH FUND 14.94% 18.29% 15.39%
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 23.13%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 8/01/93
TOP TEN HOLDINGS(1)
% of Net Assets
----------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Microsoft Technology Services 4.02 1.09
General Electric Process Industries 3.91 2.46
Waste Management Industrial Services 3.40 --
Cendant Consumer Services 3.22 3.00
Patterson Dental Health Services 3.21 --
Johnson & Johnson Health Technology 3.13 1.14
Synopsys Electronic Technology 2.95 --
Intel Electronic Technology 2.88 0.95
Bergen Brunswig Class A Commercial Services 2.66 2.16
Tyco International Producer Manufacturing 2.65 2.92
================================================================================
TOTAL 32.03 13.72
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
NOTE TO LETTER TO SHAREHOLDERS & FUND MANAGER'S 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
9
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
IAI MIDCAP GROWTH FUND
[PHOTO]
MARK HOONSBEEN, CFA
IAI MIDCAP GROWTH
FUND MANAGER
TOP FIVE COMMON STOCK SECTORS
% OF NET ASSETS AS OF 3/31/99
[BAR CHART]
ELECTRONIC TECHNOLOGY 18.0%
COMMERCIAL SERVICES 11.7%
FINANCIAL 10.5%
HEALTH TECHNOLOGY 9.5%
RETAIL TRADE 9.4%
* PERCENTAGE OF NET ASSETS AS OF 3/31/99
HOW HAS THE FUND PERFORMED?
The IAI Midcap Growth Fund showed good relative performance during the year
ended March 31, 1999. The portfolio gained 18.31% while the S&P Midcap Index
rose only 0.45% and the S&P 500 Index rose 18.45%.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
We had some of our strongest performance from the Fund's largest positions.
AFLAC (3.31%)*, Biogen (2.20%)*, Harley-Davidson (1.97%)*, Family Dollar Stores
(1.83%)*, Tut Systems (6.74%)*, and Sundstrand (sold) rose sharply during the
year. Smith International (1.51%) was also a top performer with the bounce back
in energy stocks as oil prices strengthened. Sterling Commerce (sold) was the
biggest disappointment and was eliminated from the Fund.
WERE THERE ANY SIGNIFICANT CHANGES?
Our job has been to continuously sift through the Fund to make sure the reasons
we bought the stocks remain intact. As a result of these reviews, we sold our
positions in Interim Services (sold), Finova Group (sold), Stewart Enterprises
(sold), Whitman (sold), and Platinum Technology (sold). In other instances, we
have used weakening stock prices to add to our positions.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The U.S. stock markets continued to be led by a small number of stocks, the very
same stocks that created large performance disparities in 1998. Technology
stocks and the very largest stocks continued their strong performance. In the
first quarter, the NASDAQ market (a proxy for large technology) was up 12.3%,
the S&P 500 Index was up 5.0%, while the S&P Midcap 400 Index was down (6.4%),
and the Russell 2000 Index was down (5.4%).
WHAT IS YOUR OUTLOOK FOR THE FUND?
Our outlook on the market has not changed from year-end. The valuation disparity
between large cap stocks and the rest of the market has reached levels that
cannot be sustained. The midcap sector should begin to show better relative
performance since large numbers of stocks in the sector are showing attractive
valuations. We are not changing our strategies. We are focused on midcap stocks
with growth characteristics and continue to run very balanced weightings across
sectors.
10
<PAGE>
FUND MANAGER'S REVIEW
IAI MIDCAP GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI MIDCAP
GROWTH FUND
(INCEPTION 04/10/92) 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
03/31/99 30,022 28,451 37,505
AVERAGE ANNUAL RETURNS+
THROUGH 3/31/99
Since Inception
1 Year 5 Years 4/10/92
- --------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND 18.31% 16.72% 17.07%
- --------------------------------------------------------------------------------
S&P Midcap Index 0.45% 18.20% 16.11%*
- --------------------------------------------------------------------------------
S&P 500 Index 18.45% 26.25% 20.78%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 4/01/92
TOP TEN HOLDINGS(1)
% of Net Assets
----------------------
Issue Sector 3/31/99 3/31/98
- --------------------------------------------------------------------------------
Tut Systems* Electronic Technology 6.74 0.85
AFLAC Financial 3.31 --
Biogen Health Technology 2.20 0.76
Dial Consumer Non-Durables 2.16 1.71
Fiserv Technology Services 2.05 1.66
Harley-Davidson Consumer Durables 1.97 --
Sybron International Health Technology 1.91 --
Synopsys Electronic Technology 1.83 0.79
Family Dollar Stores Retail Trade 1.83 --
Danaher Producer Manufacturing 1.82 0.77
================================================================================
TOTAL 25.82 6.54
(1) EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
* RESTRICTED SECURITY
NOTE TO LETTER TO SHAREHOLDERS & 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, AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
11
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 98.9%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 22.3%
Barnett (b) 29,800 $ 260,750
Billing Concepts (b) 37,000 439,375
Catalina Marketing (b) 22,300 1,915,012
Nielson Media Research 113,800 2,809,438
Right Management Consultants (b) 45,400 717,888
Scientific Games (b) 32,400 575,100
Valassis Communications (b) 35,100 1,816,425
-------------
8,533,988
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 1.5%
Aftermarket Technology (b) 85,800 584,512
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 14.4%
Apollo Group Class A (b) 72,700 2,171,913
Coach USA (b) 40,000 1,100,000
Sinclair Broadcast Class A (b) 53,200 774,725
Strayer Education 39,050 1,444,850
-------------
5,491,488
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 6.6%
Artesyn Technologies (b) 25,352 313,731
Black Box (b) 29,600 917,600
DII Group (b) 4,000 117,000
Microchip Technology (b) 12,300 425,888
PPT Vision (b) 74,700 373,500
Tollgrade Communications (b) 21,800 362,425
-------------
2,510,144
- --------------------------------------------------------------------------------
ENERGY MINERALS - 1.4%
Noble Affiliates 14,400 417,600
Nuevo Energy (b) 9,100 122,850
-------------
540,450
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
FINANCIAL - 14.6%
Amerin (b) 34,600 $ 702,812
CCC Information Services (b) 106,700 1,240,388
CMAC Investment 33,200 1,294,800
Enhance Financial Services 25,700 584,675
Federated Investors Class B 37,000 672,938
First Commonwealth (b) 20,300 301,962
INSpire Insurance Solutions (b) 25,300 480,700
UniCapital (b) 47,900 305,363
-------------
5,583,638
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.2%
Cardinal Health 9,602 633,732
First Health Group (b) 5,400 86,737
IMPATH (b) 5,900 144,550
Patterson Dental (b) 17,150 741,738
-------------
1,606,757
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 10.6%
Mentor 64,300 944,406
Respironics (b) 101,200 1,334,575
Xomed Surgical Products (b) 45,150 1,772,138
-------------
4,051,119
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 3.2%
Petroleum Geo-Services ADR (b) 22,400 341,600
Quanta Services (b) 13,700 348,494
Service Experts (b) 23,700 319,950
Superior Services (b) 11,900 235,768
-------------
1,245,812
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 2.0%
AptarGroup 14,500 377,000
Flanders (b) 94,300 241,644
Minerals Technologies 2,900 139,200
-------------
757,844
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
12
<PAGE>
FUND PORTFOLIO
IAI CAPITAL APPRECIATION FUND
MARCH 31, 1999
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.2%
JLK Direct Distribution Class A (b) 46,600 $ 436,875
Watsco 20,850 304,931
Zebra Technologies Class A (b) 35,900 852,625
-------------
1,594,431
- --------------------------------------------------------------------------------
RETAIL TRADE - 1.6%
Lithia Motors Class A (b) 9,600 152,400
MSC Industrial Direct Class A (b) 26,800 455,600
-------------
608,000
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 12.3%
American Management Systems (b) 50,400 1,719,900
BISYS Group (b) 20,000 1,125,000
Great Plains Software (b) 4,100 158,618
Hyperion Solutions (b) 42,500 616,250
International Telecommunication
Data Systems (b) 14,800 183,150
Mastech (b) 43,500 565,500
Pinnacle Holdings (b) 16,400 248,050
UBICS (b) 21,800 103,550
-------------
4,720,018
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $35,439,246)..............................................$ 37,828,201
================================================================================
TOTAL INVESTMENTS IN
SECURITIES
(COST: $35,439,246) (e)..........................................$ 37,828,201
================================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.1%
..............................................................$ 406,475
================================================================================
TOTAL NET ASSETS
..............................................................$ 38,234,676
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
13
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 57.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 10.5%
Abacus Direct (b) 9,000 $ 738,000
ABR Information Services (b) 30,300 526,462
Best Software (b) 42,200 569,700
Concur Technologies (b) 10,000 451,250
Metzler Group (b) 27,800 872,225
Modem Media Poppe Tyson (b) 9,500 407,313
Profit Recovery Group
International (b) 24,800 979,600
Romac International (b) 40,300 342,550
Sylvan Learning Systems (b) 20,575 563,241
United Natural Foods (b) 33,800 790,075
-------------
6,240,416
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 0.9%
Select Comfort (b) 20,000 557,500
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 0.8%
Starbucks (b) 15,800 443,388
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 3.2%
Apollo Group Class A (b) 23,950 715,506
Papa John's International (b) 15,200 670,700
Ziff-Davis (b) 15,000 540,000
-------------
1,926,206
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 6.4%
Inter-Tel 19,400 301,912
Mercury Computer Systems (b) 18,500 333,000
Micrel (b) 12,450 623,278
QLogic (b) 13,600 912,900
Security Dynamics Technologies (b) 30,000 558,750
Uniphase (b) 6,000 690,750
Vitesse Semiconductor (b) 8,100 410,063
-------------
3,830,653
- --------------------------------------------------------------------------------
FINANCIAL - 2.6%
Knight/Trimark Group Class A (b) 16,600 1,112,200
Rent-A-Center (b) 15,700 451,375
-------------
1,563,575
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.5%
American Oncology Resources (b) 41,300 $ 371,700
Medical Manager (b) 36,100 834,812
Renal Care Group (b) 37,100 728,088
Superior Consultant Holdings (b) 21,600 737,100
-------------
2,671,700
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 4.4%
GalaGen (b) 235,309 455,910
Medicis Pharmaceutical Class A (b) 28,650 859,500
MiniMed (b) 8,700 884,138
Watson Pharmaceuticals (b) 10,100 445,663
-------------
2,645,211
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 0.8%
Rental Service (b) 27,300 477,750
- --------------------------------------------------------------------------------
RETAIL TRADE - 5.0%
99 Cents Only Stores (b) 20,125 854,055
Bed Bath & Beyond (b) 14,800 540,200
Express Scripts Class A (b) 8,400 721,875
Wild Oats Markets (b) 32,300 876,137
-------------
2,992,267
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
14
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1999
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 18.0%
Acxiom (b) 33,600 $ 890,400
Aspect Development (b) 25,000 581,250
Citrix Systems (b) 18,300 697,688
Critical Path (b) 8,800 677,600
CSG Systems International (b) 29,200 1,151,575
Great Plains Software (b) 20,900 808,569
HNC Software (b) 24,200 792,550
IMRglobal (b) 27,200 482,800
International Telecommunication
Data Systems (b) 62,500 773,438
Legato Systems (b) 9,000 464,625
Network Appliance (b) 10,850 549,280
Peregrine Systems (b) 25,600 860,800
Transaction Systems
Architects Class A (b) 25,500 918,000
Whittman-Hart (b) 24,900 535,350
Wind River Systems (b) 33,250 592,266
-------------
10,776,191
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $30,598,843)..............................................$ 34,124,857
================================================================================
RESTRICTED SECURITIES - 41.2%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCKS - 29.7%
AccessLine Technologies Class A (b) 818 $ 491
Aclara BioSciences (b) 5,021 803
PACE Health Management
Systems (b)(d) 471,473 16,974
Tut Systems (b) 396,376 17,747,735
-------------
17,766,003
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS - 7.5%
AccessLine Technologies
Series A (b) 21,158 21,158
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
-------------
4,460,730
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 3.9%
Alta Berkeley III, foreign (b) 1.78% 325,940
South Street Corporate
Recovery Fund I (b) 0.69 --
South Street Leveraged Corporate
Recovery Fund I (b) 1.65 --
Spectrum Equity Investors (b) 0.92 1,321,737
Vanguard Associates IV (b) 1.35 653,983
-------------
2,301,660
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
15
<PAGE>
FUND PORTFOLIO
IAI EMERGING GROWTH FUND
MARCH 31, 1999
RESTRICTED SECURITIES (CONT.)
Principal Market
Rate Maturity Amount (c) Value (a)
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES 0.0%
Air Communications Series B (b)
10.00% 02/28/97 $ 258,332 $ --
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.1%
GalaGen, $2.56, 02/22/03 4,062 --
GalaGen, $2.56, 12/27/05 812 --
Tut Systems, $0.36, 01/31/04 2,000 88,830
-------------
88,830
- --------------------------------------------------------------------------------
WARRANTS - 0.0%
AccessLine Technologies,
$0.60, 10/15/99 71,420 1
GalaGen, $11.08, 06/16/99 5,687 --
GalaGen, $11.08, 03/24/00 2,256 --
GalaGen, $11.08, 07/09/00 1,805 --
GalaGen, $7.00, 01/29/01 22,501 --
PACE Health Management
Systems, $4.12, 01/31/00 (d) 21,820 --
PACE Health Management
Systems, $.50, 07/07/02 (d) 562,500 5
PACE Health Management
Systems, $3.00, 08/31/05 (d) 35,000 --
-------------
6
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $9,656,393)...............................................$ 24,617,229
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $40,255,236) (e)..........................................$ 58,742,086
================================================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.7%
..............................................................$ 1,033,651
================================================================================
TOTAL NET ASSETS
..............................................................$ 59,775,737
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
16
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 92.8%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 6.5%
Amdocs (b) 10,030 $ 216,899
Bergen Brunswig Class A 19,100 382,000
Galileo International 3,400 164,475
SunGard Data Systems (b) 4,100 164,000
-------------
927,374
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 9.6%
Clorox 1,050 123,047
Coca-Cola 2,100 128,888
Colgate-Palmolive 1,030 94,760
Dial 9,220 316,938
Gillette 2,200 130,762
Pepsico 3,280 128,535
Philip Morris 3,240 114,008
Procter & Gamble 3,420 334,945
-------------
1,371,883
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 3.2%
Cendant (b) 29,348 462,231
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 14.5%
Cisco Systems (b) 2,200 241,037
Compaq Computer 2,810 89,042
Comverse Technology (b) 1,850 157,250
Dell Computer (b) 1,850 75,619
EMC (b) 1,020 130,305
Intel 3,470 413,364
International Business Machines 860 152,435
Lucent Technologies 3,240 349,110
SBC Communications 1,100 51,838
Synopsys (b) 7,870 423,012
-------------
2,083,012
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ENERGY MINERALS - 0.0%
BP Amoco ADR 10 $ 1,009
- --------------------------------------------------------------------------------
FINANCIAL - 6.4%
American Express 800 94,000
American International Group 1,400 168,875
Associates First Capital 3,200 144,000
Fannie Mae 3,600 249,300
Federal Home Loan
Mortgage Corporation 2,200 125,675
State Street 1,670 137,253
-------------
919,103
- --------------------------------------------------------------------------------
HEALTH SERVICES - 4.8%
Cardinal Health 3,495 230,670
Patterson Dental (b) 10,650 460,613
-------------
691,283
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 18.6%
Abbott Laboratories 3,800 177,888
American Home Products 2,170 141,592
Bristol-Myers Squibb 5,360 344,715
Eli Lilly & Company 2,200 186,725
Johnson & Johnson 4,790 448,762
Medtronic 3,050 218,838
Merck & Company 3,780 303,109
Pfizer 2,580 357,975
Schering-Plough 3,600 199,125
Warner-Lambert 4,480 296,520
-------------
2,675,249
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
17
<PAGE>
FUND PORTFOLIO
IAI GROWTH FUND
MARCH 31, 1999
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 4.4%
Newpark Resources (b) 19,200 $ 139,200
Waste Management 10,990 487,681
-------------
626,881
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 4.7%
Ecolab 3,100 110,050
General Electric 5,070 560,869
-------------
670,919
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 4.4%
Lexmark International
Group Class A (b) 1,340 149,745
Tyco International 5,300 380,275
Xerox 2,000 106,750
-------------
636,770
- --------------------------------------------------------------------------------
RETAIL TRADE - 4.5%
Abercrombie & Fitch Class A (b) 1,710 157,320
Home Depot 2,600 161,850
Staples (b) 3,375 110,953
Wal-Mart Stores 2,400 221,250
-------------
651,373
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 9.5%
America Online (b) 1,850 270,100
BMC Software (b) 6,000 222,375
First Data 3,570 152,618
Fiserv (b) 2,480 132,990
Microsoft (b) 6,440 577,185
-------------
1,355,268
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
UTILITIES - 1.7%
Ameritech 940 $ 54,402
MCI Worldcom (b) 2,200 194,838
-------------
249,240
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,723,259)..............................................$ 13,321,595
================================================================================
TOTAL INVESTMENTS IN
SECURITIES
(COST: $10,723,259) (e)..........................................$ 13,321,595
================================================================================
OTHER ASSETS & LIABILITIES
(NET) 7.2%
..............................................................$ 1,033,097
================================================================================
TOTAL NET ASSETS
..............................................................$ 14,354,692
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
18
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 93.3%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES - 11.7%
Bergen Brunswig Class A 21,500 $ 430,000
Cintas 9,700 634,138
Concord EFS (b) 9,800 270,112
Galileo International 11,600 561,150
Metzler Group (b) 18,900 592,987
Paychex 8,100 384,244
Quintiles Transnational (b) 15,600 588,900
Robert Half International (b) 18,400 603,750
SunGard Data Systems (b) 13,800 552,000
-------------
4,617,281
- --------------------------------------------------------------------------------
CONSUMER DURABLES - 4.0%
Electronic Arts (b) 6,400 304,000
Harley-Davidson 13,500 776,250
Leggett & Platt 24,600 492,000
-------------
1,572,250
- --------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 7.5%
Dean Foods 17,300 616,312
Dial 24,800 852,500
Jones Apparel Group (b) 15,000 419,063
McCormick & Company 22,800 661,200
Starbucks (b) 14,000 392,875
-------------
2,941,950
- --------------------------------------------------------------------------------
CONSUMER SERVICES - 4.2%
Apollo Group Class A (b) 18,200 543,725
Harte-Hanks Communications 19,400 532,288
Washington Post 1,100 573,650
-------------
1,649,663
- --------------------------------------------------------------------------------
ELECTRONIC TECHNOLOGY - 18.0%
ADC Telecommunications (b) 14,100 672,394
Altera (b) 9,200 547,400
Analog Devices (b) 21,301 633,705
Cadence Design Systems (b) 24,500 630,875
Comverse Technology (b) 5,200 442,000
Linear Technology 13,000 666,250
Maxim Integrated Products (b) 12,600 681,975
Qualcomm (b) 3,300 410,438
Siebel Systems (b) 8,000 380,000
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
Solectron (b) 9,400 $ 456,487
Synopsys (b) 13,400 720,250
Uniphase (b) 2,900 333,862
Xilinx (b) 13,200 535,425
-------------
7,111,061
- --------------------------------------------------------------------------------
FINANCIAL - 10.5%
AFLAC 24,000 1,306,500
City National 19,300 595,888
First Tennessee National 10,900 399,212
Knight/Trimark Group Class A (b) 9,200 616,400
Mercantile Bankshares 18,200 673,400
T. Rowe Price 10,300 354,063
Zions Bancorporation 2,600 172,900
-------------
4,118,363
- --------------------------------------------------------------------------------
HEALTH SERVICES - 1.9%
Health Management Class A (b) 43,300 527,719
ServiceMaster 2,450 49,765
Total Renal Care (b) 15,200 167,200
-------------
744,684
- --------------------------------------------------------------------------------
HEALTH TECHNOLOGY - 9.5%
Biogen (b) 7,600 868,775
Biomet 14,500 608,094
Centocor (b) 7,300 270,100
GalaGen (b) 47,398 91,834
Hillenbrand Industries 9,100 420,306
Mylan Laboratories 14,400 395,100
Sybron International (b) 30,200 755,000
Watson Pharmaceuticals (b) 7,800 344,175
-------------
3,753,384
- --------------------------------------------------------------------------------
INDUSTRIAL SERVICES - 3.2%
AES (b) 8,000 298,000
Allied Waste Industries (b) 24,300 350,831
Smith International (b) 14,900 596,000
-------------
1,244,831
- --------------------------------------------------------------------------------
PROCESS INDUSTRIES - 0.8%
Solutia 18,300 317,962
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 21
19
<PAGE>
FUND PORTFOLIO
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PRODUCER MANUFACTURING - 5.3%
American Power Conversion (b) 16,100 $ 434,700
Danaher 13,700 715,825
Kaydon 16,800 486,150
Lexmark International
Group Class A (b) 4,200 469,350
-------------
2,106,025
- --------------------------------------------------------------------------------
RETAIL TRADE - 9.4%
Abercrombie & Fitch Class A (b) 6,400 588,800
Bed Bath & Beyond (b) 17,800 649,700
Family Dollar Stores 31,300 719,900
Kohl's (b) 6,000 425,250
Office Depot (b) 16,100 592,681
Ross Stores 4,600 201,538
Staples (b) 16,350 537,506
-------------
3,715,375
- --------------------------------------------------------------------------------
TECHNOLOGY SERVICES - 5.4%
Ciber (b) 15,700 301,244
Citrix Systems (b) 9,000 343,125
Fiserv (b) 15,100 809,738
Legato Systems (b) 8,300 428,488
Network Associates(b) 7,900 242,430
-------------
2,125,025
- --------------------------------------------------------------------------------
TRANSPORTATION - 1.0%
Kansas City Southern 7,200 410,400
- --------------------------------------------------------------------------------
UTILITIES - 0.9%
Century Telephone Enterprises 5,200 365,300
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $33,740,462)..............................................$ 36,793,554
================================================================================
RESTRICTED SECURITIES- 8.4%
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
COMMON STOCK - 6.6%
Tut Systems (b) 58,387 $ 2,614,278
- --------------------------------------------------------------------------------
Ownership Market
Percentage (c) Value (a)
- --------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.7%
South Street Leveraged
Corporate Recovery Fund I (b) 1.10% --
Spectrum Equity Investors (b) 0.46 660,891
-------------
660,891
- --------------------------------------------------------------------------------
Market
Quantity (c) Value (a)
- --------------------------------------------------------------------------------
CALL OPTIONS - 0.1%
GalaGen, $2.56, 02/22/03 1,354 --
Tut Systems, $0.36, 01/31/04 1,000 44,415
-------------
44,415
================================================================================
TOTAL INVESTMENTS IN RESTRICTED SECURITIES
(COST: $359,875).................................................$ 3,319,584
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $34,100,337) (e)..........................................$ 40,113,138
================================================================================
OTHER ASSETS AND LIABILITIES
(NET) - (1.7%)
..............................................................$ (681,898)
================================================================================
TOTAL NET ASSETS
..............................................................$ 39,431,240
================================================================================
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
MARCH 31, 1999
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For each restricted security issue held at March 31, 1999, the Fund held
no unrestricted securities of the same issuer as of either the date the purchase
price was agreed to or the date the Fund first obtained an enforceable right to
obtain the securities. Information concerning each restricted security held at
March 31, 1999, is shown on pages 23-25.
(d)
Investment represents five percent or more of the outstanding voting securities
of the issuer, and is therefore an affiliate, as defined in the Investment
Company Act of 1940, at March 31, 1999. 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 $ -- $ -- $ --
* GalaGen Options 02/22/03 4,062 $ -- -- $ -- $ -- $ --
* GalaGen Options 12/27/05 812 $ -- -- $ -- $ -- $ --
* GalaGen Options 03/27/01 271 $ -- 812 $ -- $ -- $ --
Myelos Neurosciences Series C PFD 277,778 $ 500,294 -- $ -- $ -- $ --
PACE Health Management
Systems Warrants 07/07/02 -- $ -- 62,501 $ -- $ -- $ --
*1 Tut Common Stock 396,376 $2,009,721 -- $ -- $ -- $ --
*1 Tut series D Preferred Stock -- $ -- 467,092 $420,677 $ -- $ --
*1 Tut series E Preferred Stock -- $ -- 217,391 $250,563 $ -- $ --
*1 Tut series F Preferred Stock -- $ -- 780,000 $975,356 $ -- $ --
*1 Tut series G Preferred Stock -- $ -- 121,020 $363,125 $ -- $ --
* Tut Options 01/31/04 2,000 $ -- -- $ -- $ -- $ --
</TABLE>
* SECURITIES THAT WERE AFFILIATED DURING THE YEAR ENDING ON 3/31/99 BUT NOT
AT 3/31/99
1 TUT PREFERRED STOCK WITH A TOTAL COST OF $2,009,721 CONVERTED 1 FOR 4 INTO
COMMON STOCK
21
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
<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 $ -- $ -- $ --
* GalaGen Options 02/22/03 1,354 $ -- -- $ -- $ -- $ --
*1 Tut Common Stock 58,387 $ 210,349 -- $ -- $ -- $ --
* Tut Options 01/31/94 1,000 $ -- -- $ -- $ -- $ --
*1 Tut series D Preferred Stock -- $ -- 233,546 $210,349 $ -- $ --
</TABLE>
* SECURITIES THAT WERE AFFILIATED DURING THE YEAR ENDING ON 3/31/99 BUT NOT AT
3/31/99
1 TUT PREFERRED STOCK WITH A TOTAL COST OF $210,349 CONVERTED 1 FOR 4 INTO
COMMON STOCK
(e)
At March 31, 1999, 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 $ 35,517,391 $ 41,646,801 $ 10,813,979 $ 34,418,279
==========================================================================
Gross unrealized appreciation $ 7,714,376 $ 24,940,738 $ 2,739,616 $ 9,110,646
Gross unrealized depreciation (5,403,566) (7,845,453) (232,000) (3,415,787)
--------------------------------------------------------------------------
Net unrealized appreciation $ 2,310,810 $ 17,095,285 $ 2,507,616 $ 5,694,859
==========================================================================
</TABLE>
22
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
COMMON STOCKS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
AccessLine Technologies
Class A 06/30/94 $ 708,949
Aclara BioSciences 12/30/97 --
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
Tut Systems 02/17/94 400,293
04/08/94 20,384
12/21/94 250,563
07/30/96 975,356
12/16/97 363,125
CONVERTIBLE PREFERRED STOCKS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
AccessLine Technologies
Series A 01/15/98 $ 19,711
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 07/15/98 500,294
PACE Health Management
Systems Series A 07/07/97 500,264
08/12/97 250,000
12/22/97 250,000
02/19/98 126,471
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
02/09/99 23,179
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 02/12/97 29,047
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
02/10/99 20,000
Vanguard Associates IV 07/26/96 2,811
23
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
RESTRICTED SECURITIES
IAI EMERGING GROWTH FUND
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
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 02/22/03 02/22/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/22/98 --
GalaGen 12/27/05 12/27/96 --
12/26/97 --
12/28/98 --
Tut Systems 01/31/04 02/16/94 --
WARRANTS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
AccessLine Technologies
10/15/99 12/27/98 $ --
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 --
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
MARCH 31, 1999
RESTRICTED SECURITIES
IAI MIDCAP GROWTH FUND
COMMON STOCK
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
Tut Systems 02/17/94 $ 200,147
04/08/94 10,203
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
South Street Leveraged
Corporate Recovery
Fund I 10/03/95 $ --
Spectrum Equity Investors 02/12/97 14,525
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
02/10/99 10,000
CALL OPTIONS
Security Acquisition Date Cost
- ---------------------------------------------------------------------------
GalaGen 02/22/03 02/22/94 $ --
02/22/95 --
02/22/96 --
02/22/97 --
02/22/98 --
Tut Systems 01/31/04 02/16/94 --
25
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments in securities of unaffiliated issuers, at market
(Cost: $35,439,246, $35,312,621, $10,723,259 and
$34,100,337, respectively) $ 37,828,201
Investments in securities of affiliated issuers, at market
(Cost: $0, $4,942,615, $0 and $0, respectively) --
-------------------
TOTAL INVESTMENTS IN SECURITIES (SEE FUND PORTFOLIOS) 37,828,201
Cash in bank on demand deposit 297,884
Receivable for investment securities sold 35,401
Receivable for Fund shares sold 72,034
Dividends and accrued interest receivable 3,390
-------------------
TOTAL ASSETS 38,236,910
-------------------
LIABILITIES
Payable for investment securities purchased --
Other accrued expenses 2,234
-------------------
TOTAL LIABILITIES 2,234
-------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 38,234,676
===================
REPRESENTED BY:
Capital stock $ 29,552
Additional paid-in capital 34,618,308
Undistributed (overdistributed) net investment income --
Accumulated net realized gains 1,197,861
Unrealized appreciation on investment securities 2,388,955
-------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 38,234,676
===================
SHARES OF CAPITAL STOCK OUTSTANDING 2,955,171
-------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 12.94
===================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
26
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- ---------------------------------------------------------
<S> <C> <C>
$ 55,734,035 $ 13,321,595 $ 40,113,138
3,008,051 -- --
- ---------------------------------------------------------
58,742,086 13,321,595 40,113,138
782,090 806,401 714,731
488,659 301,621 722,229
275,031 1,985 1,777
194 8,669 12,795
- ---------------------------------------------------------
60,288,060 14,440,271 41,564,670
- ---------------------------------------------------------
512,200 85,490 2,132,645
123 89 785
- ---------------------------------------------------------
512,323 85,579 2,133,430
- ---------------------------------------------------------
$ 59,775,737 $ 14,354,692 $ 39,431,240
=========================================================
$ 44,902 $ 11,773 $ 27,540
35,401,285 9,423,903 27,195,634
(28,049) -- --
5,870,749 2,320,680 6,195,265
18,486,850 2,598,336 6,012,801
- ---------------------------------------------------------
$ 59,775,737 $ 14,354,692 $ 39,431,240
=========================================================
4,490,202 1,177,275 2,753,963
- ---------------------------------------------------------
$ 13.31 $ 12.19 $ 14.32
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
27
<PAGE>
STATEMENTS OF OPERATIONS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- ---------------------------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $1,440, $0, $626 and $0, respectively) $ 68,929
Interest 97,314
---------------------
TOTAL INCOME 166,243
---------------------
EXPENSES
Management fees 718,181
Compensation of Directors 12,894
Interest 3,548
Other expenses --
---------------------
TOTAL EXPENSES 734,623
Less fees reimbursed by Advisers (12,894)
---------------------
NET EXPENSES 721,729
---------------------
NET INVESTMENT LOSS (555,486)
---------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains on investments 1,284,752
Net change in unrealized appreciation or depreciation on investments (12,317,880)
---------------------
NET GAIN (LOSS) ON INVESTMENTS (11,033,128)
=====================
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(11,588,614)
=====================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
28
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- ------------------------------------------------------
<S> <C> <C>
$ 4,431 $ 121,316 $ 235,681
267,046 20,692 26,560
- ---------------------------------------------------------
271,477 142,008 262,241
- ---------------------------------------------------------
1,176,387 195,786 629,647
22,284 3,958 12,074
36,560 2,850 42,698
1,050 -- 525
- ---------------------------------------------------------
1,236,281 202,594 684,944
(22,284) (3,958) (12,074)
- ---------------------------------------------------------
1,213,997 198,636 672,870
- ---------------------------------------------------------
(942,520) (56,628) (410,629)
- ---------------------------------------------------------
19,044,258 3,775,499 11,021,481
(20,663,120) (917,336) (5,017,225)
- ---------------------------------------------------------
(1,618,862) 2,858,163 6,004,256
=========================================================
$ (2,561,382) $ 2,801,535 $ 5,593,627
=========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
29
<PAGE>
STATEMENTS OF CASH FLOWS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
- ----------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING EXPENSES:
Interest and dividend income $ 166,243
Net expenses (721,729)
----------------------
NET INVESTMENT LOSS (555,486)
----------------------
Adjustments to reconcile net investment loss to net cash
used by operating activities:
Change in dividend and interest receivable, other assets
and accrued expenses 2,125
Net amortization of bond discount (73,990)
----------------------
(71,865)
----------------------
NET CASH USED BY OPERATING ACTIVITIES (627,351)
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 42,573,023
Purchases of investments (26,082,027)
Net purchases of short-term securities 688,924
----------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 17,179,920
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of shares 43,352,011
Net asset value of shares issued in reinvestment of distributions 5,984,845
Cost of shares redeemed (59,298,904)
Distributions paid to shareholders (6,234,187)
Net payment on line of credit (58,450)
----------------------
NET CASH USED BY FINANCING ACTIVITIES (16,254,685)
----------------------
NET INCREASE IN CASH 297,884
CASH AT BEGINNING OF YEAR --
----------------------
CASH AT END OF YEAR $ 297,884
======================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest on line of credit $ 3,548
======================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
30
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
- -------------------------------------------------------------
<S> <C> <C>
$ 271,477 $ 142,008 $ 262,241
(1,213,997) (198,636) (672,870)
- -------------------------------------------------------------
(942,520) (56,628) (410,629)
- -------------------------------------------------------------
962 2,524 2,119
(211,828) (11,607) (6,512)
- -------------------------------------------------------------
(210,866) (9,083) (4,393)
- -------------------------------------------------------------
(1,153,386) (65,711) (415,022)
- -------------------------------------------------------------
146,652,590 19,928,657 102,015,809
(45,334,224) (16,256,277) (53,420,062)
811,828 437,021 1,396,208
- -------------------------------------------------------------
102,130,194 4,109,401 49,991,955
- -------------------------------------------------------------
226,450,492 12,743,680 21,220,104
32,054,352 2,257,869 13,063,019
(325,482,779) (15,957,510) (69,478,482)
(32,980,423) (2,267,380) (13,572,954)
(236,360) (13,948) (93,889)
- -------------------------------------------------------------
(100,194,718) (3,237,289) (48,862,202)
- -------------------------------------------------------------
782,090 806,401 714,731
-- -- --
- -------------------------------------------------------------
$ 782,090 $ 806,401 $ 714,731
=============================================================
$ 36,560 $ 2,850 $ 42,698
=============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
IAI CAPITAL
APPRECIATION FUND
Year Year
ended ended
March 31, 1999 March 31, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment loss $ (555,486) $ (601,123)
Net realized gains 1,284,752 14,774,185
Net change in unrealized appreciation or depreciation (12,317,880) 11,643,382
--------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (11,588,614) 25,816,444
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (6,234,187) (6,983,032)
--------------------------------------
TOTAL DISTRIBUTIONS (6,234,187) (6,983,032)
--------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 43,416,791 76,384,918
Net asset value of shares issued in reinvestment
of distributions 5,984,845 6,824,703
Cost of shares redeemed (59,298,904) (80,318,678)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (9,897,268) 2,890,943
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (27,720,069) 21,724,355
NET ASSETS AT BEGINNING OF PERIOD 65,954,745 44,230,390
--------------------------------------
NET ASSETS AT END OF PERIOD $ 38,234,676 $ 65,954,745
======================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT INCOME OF: $ -- $ --
======================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
32
<PAGE>
<TABLE>
<CAPTION>
IAI EMERGING IAI GROWTH IAI MIDCAP
GROWTH FUND FUND GROWTH FUND
Year Year Year Year Year Year
ended ended ended ended ended ended
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (942,520) $ (3,352,226) $ (56,628) $ (2,723) $ (410,629) $ (511,505)
19,044,258 93,330,632 3,775,499 1,684,652 11,021,481 21,222,615
(20,663,120) 6,603,890 (917,336) 2,793,529 (5,017,225) 744,507
- -------------------------------------------------------------------------------------------------------------
(2,561,382) 96,582,296 2,801,535 4,475,458 5,593,627 21,455,617
- -------------------------------------------------------------------------------------------------------------
-- -- -- -- -- --
(32,980,423) (46,166,939) (2,267,380) (1,608,253) (13,572,954) (24,195,975)
- -------------------------------------------------------------------------------------------------------------
(32,980,423) (46,166,939) (2,267,380) (1,608,253) (13,572,954) (24,195,975)
- -------------------------------------------------------------------------------------------------------------
226,725,423 205,116,691 12,745,665 6,469,281 21,221,199 45,519,092
32,054,352 45,784,112 2,257,869 1,597,042 13,063,019 23,058,343
(325,374,196) (526,509,273) (15,957,510) (7,905,828) (69,478,482) (111,491,235)
- -------------------------------------------------------------------------------------------------------------
(66,594,421) (275,608,470) (953,976) 160,495 (35,194,264) (42,913,800)
- -------------------------------------------------------------------------------------------------------------
(102,136,226) (225,193,113) (419,821) 3,027,700 (43,173,591) (45,654,158)
161,911,963 387,105,076 14,774,513 11,746,813 82,604,831 128,258,989
- -------------------------------------------------------------------------------------------------------------
$ 59,775,737 $ 161,911,963 $ 14,354,692 $ 14,774,513 $ 39,431,240 $ 82,604,831
=============================================================================================================
$ (28,049) $ (34,129) $ -- $ -- $ -- $ --
=============================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 38
33
<PAGE>
FINANCIAL HIGHLIGHTS
IAI CAPITAL APPRECIATION FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31, Period from
--------------------------------------- February 1, 1996+
1999 1998 1997 to March 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 17.96 $ 13.49 $ 11.24 $ 10.00
----------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.19) (0.16) (0.09) --
Net realized and unrealized gains (losses) (3.02) 6.77 2.79 1.24
----------------------------------------------------------
TOTAL FROM OPERATIONS (3.21) 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 $ 12.94 $ 17.96 $ 13.49 $ 11.24
==========================================================
Total investment return * (19.11%) 52.46% 23.68% 12.40%
Net assets at end of period (000's omitted) $ 38,235 $ 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** (1.08%) (0.95%) (0.80%) 0.23%***
Portfolio turnover rate
(excluding short-term securities) 51.4% 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
+ COMMENCEMENT OF OPERATIONS
34
<PAGE>
FINANCIAL HIGHLIGHTS
IAI EMERGING GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 18.11 $ 15.85 $ 24.08 $ 15.83 $ 15.20
---------------------------------------------------------------------------
OPERATIONS
Net investment loss (0.15)+ (0.18)+ (0.20) (0.09) (0.07)
Net realized and unrealized gains (losses) 0.36 5.07 (4.52) 8.77 1.42
---------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.21 4.89 (4.72) 8.68 1.35
---------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (5.01) (2.63) (3.51) (0.43) (0.72)
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (5.01) (2.63) (3.51) (0.43) (0.72)
---------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 13.31 $ 18.11 $ 15.85 $ 24.08 $ 15.83
===========================================================================
Total investment return* 3.56% 33.37% (22.97%) 55.20% 10.23%
Net assets at end of period (000's omitted) $ 59,776 $ 161,912 $ 387,105 $ 653,888 $ 342,874
RATIOS
Expenses to average net assets
(including interest expense) 1.29% 1.25% 1.20% 1.24% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.24% 1.19% 1.24% 1.25%
Net investment income (loss)
to average net assets (1.00%) (0.98%) (0.75%) (0.52%) (0.54%)
Portfolio turnover rate
(excluding short-term securities) 46.7% 41.0% 49.5% 62.8% 58.1%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
35
<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
ended March 31, Period from Period from
---------------------------------------------------- Aug. 1, 1994 to Aug. 6, 1993***
1999 1998 1997 1996 March 31, 1995+ to July 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87 $ 10.00
---------------------------------------------------------------------------------------
OPERATIONS
Net investment income (loss) (0.05) -- (0.03) -- 0.04 0.01
Net realized and
unrealized gains (losses) 1.73 3.59 1.02 1.93 1.07 (0.13)
---------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.68 3.59 0.99 1.93 1.11 (0.12)
---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- -- (0.03) (0.03) (0.01)
Net realized gains (1.66) (1.34) (2.96) (0.96) -- --
---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.66) (1.34) (2.96) (0.99) (0.03) (0.01)
---------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.19 $ 12.17 $ 9.92 $ 11.89 $ 10.95 $ 9.87
=======================================================================================
Total investment return* 14.94% 38.96% 8.42% 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $ 14,355 $ 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 (0.36%) (0.02%) (0.25%) (0.04%) 0.61%** 0.16%**
Portfolio turnover rate
(excluding short-term securities) 109.7% 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
+ REFLECTS FISCAL YEAR END CHANGE FROM JULY 31 TO MARCH 31.
36
<PAGE>
FINANCIAL HIGHLIGHTS
IAI MIDCAP GROWTH FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 15.91 $ 16.68 $ 17.70 $ 15.35 $ 13.67
----------------------------------------------------------------------
OPERATIONS
Net investment loss (0.12)+ (0.10) (0.08) (0.05) (0.04)
Net realized and unrealized gains 2.53 3.34 0.68 3.50 2.35
----------------------------------------------------------------------
TOTAL FROM OPERATIONS 2.41 3.24 0.60 3.45 2.31
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (4.00) (4.01) (1.62) (1.10) (0.63)
----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (4.00) (4.01) (1.62) (1.10) (0.63)
----------------------------------------------------------------------
NET ASSET VALUE
End of period $ 14.32 $ 15.91 $ 16.68 $ 17.70 $ 15.35
======================================================================
Total investment return* 18.31% 22.21% 3.12% 23.51% 17.63%
Net assets at end of period
(000's omitted) $ 39,431 $ 82,605 $128,259 $122,375 $ 88,075
RATIOS
Expenses to average net assets
(including interest expense) 1.34% 1.26% 1.25% 1.25% 1.25%
Expenses to average net assets
(excluding interest expense) 1.25% 1.25% 1.25% 1.25% 1.25%
Net investment income (loss)
to average net assets (0.82%) (0.48%) (0.47%) (0.36%) (0.33%)
Portfolio turnover rate
(excluding short-term securities) 107.2% 106.8% 72.4% 29.8% 51.3%
</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.
+ CALCULATED USING AVERAGE SHARES OUTSTANDING DURING THE YEAR.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[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, prices of unrestricted securities of the same
class discounted to reflect 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 $24,617,229 (41.2% of net
assets) for Emerging Growth Fund and $3,319,584 (8.4% 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 a Fund. A 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. A 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.
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[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 by
$28,999,125. As a result of this and other permanent book-to-tax differences,
undistributed (overdistributed) net investment income and accumulated net
realized gains have been increased or decreased on the statement of assets and
liabilities as follows:
<TABLE>
<CAPTION>
CAPITAL EMERGING GROWTH MIDCAP
APPRECIATION FUND GROWTH FUND FUND GROWTH FUND
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Undistributed (overdistributed)
net investment income $ 555,486 $ 948,600 $ 56,628 $ 410,629
Accumulated net realized gains $ -- $(32,375,984) $ (56,628) $ (410,629)
Additional paid-in capital $ (555,486) $ 31,427,384 $ -- $ --
</TABLE>
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily. The Funds amortize discount purchased on
long-term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes. The Funds use the equity method of
accounting for limited partnerships.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are made semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
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.
39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[2] COMMITMENTS AND CONTINGENCIES
INSURANCE
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). In connection with
their obligations as policyholders, the Funds are committed to make future
capital contributions, if requested by the Company.
LINE OF CREDIT
At March 31, 1999, Capital Appreciation Fund, Emerging Growth Fund, Growth Fund,
and Midcap Growth Fund had available lines of credit of $8,550,000, $15,000,000,
$2,460,000 and $9,105,000, respectively, with a bank at the prime interest rate.
To the extent funds are drawn against the line, securities are held in a
segregated account. No compensating balances or commitment fees are required
under the line of credit. There were no borrowings outstanding at March 31,
1999.
LIMITED PARTNERSHIP COMMITMENTS
At March 31, 1999, the Emerging Growth Fund and the Midcap Growth Fund are
committed to invest an additional $26,000 and $13,000, respectively, in Spectrum
Equity Investors limited partnership.
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.
During the year ended March 31, 1999, Emerging Growth Fund and Midcap Growth
Fund paid $1,050 and $525, respectively, for an independent valuation of a
restricted security. This expense was approved by the Funds' board of directors
and is included in other expenses on the statement of operations.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
CAPITAL EMERGING
APPRECIATION GROWTH
FUND FUND
- -----------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 3,267,382 4,709,044 16,292,957 11,368,673
ISSUED FOR REINVESTED
DISTRIBUTIONS 405,752 462,378 2,353,201 2,869,019
REDEEMED (4,389,856) (4,778,911) (23,098,599) (29,722,685)
----------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING (716,722) 392,511 (4,452,441) (15,484,993)
======================================================================
<CAPTION>
MIDCAP
GROWTH GROWTH
FUND FUND
- -----------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------
SOLD 1,140,212 595,955 1,486,852 2,743,761
ISSUED FOR REINVESTED
DISTRIBUTIONS 194,230 153,446 960,996 1,514,052
REDEEMED (1,370,805) (720,053) (4,884,829) (6,754,986)
----------------------------------------------------------------------
INCREASE (DECREASE) IN
SHARES OUTSTANDING (36,363) 29,348 (2,436,981) (2,497,173)
======================================================================
</TABLE>
41
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
MARCH 31, 1999
[5] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the year ended March 31, 1999, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
Purchases Sales
- -------------------------------------------------------------------------------
CAPITAL APPRECIATION FUND $ 25,598,412 $ 42,608,424
EMERGING GROWTH FUND $ 42,400,589 $ 146,516,895
GROWTH FUND $ 16,341,767 $ 20,230,278
MIDCAP GROWTH FUND $ 54,413,706 $ 101,496,612
RESTRICTED SECURITIES
Included in Emerging Growth and Midcap Growth Funds' portfolios of investments
in securities at March 31, 1999, 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.
At March 31, 1999, 41.2% of Emerging Growth Fund's net assets were invested in
restricted securities. At March 31, 1999, Advisers was actively seeking
liquidation opportunities which would reduce the percentage of the Fund's
investment portfolio comprised of restricted securities. Advisers, under the
direction of the Board of Directors, intends to pursue such opportunities when
deemed in the best interest of the shareholders.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
THE BOARD OF DIRECTORS AND SHAREHOLDERS
IAI INVESTMENT FUNDS II, INC.
IAI INVESTMENT FUNDS VI, INC.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
IAI Midcap Growth Fund (separate portfolios within IAI Investment Funds VI,
Inc.), and IAI Growth Fund (a portfolio within IAI Investment Funds II, Inc.) as
of March 31, 1999, and the related statements of operations and cash flows for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for the
periods presented on pages 34 through 37 of the annual report. These financial
statements and the financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investment securities held in custody are confirmed to us by the
custodian. As to securities purchased and sold but not received or delivered, we
request confirmations from brokers and where replies are not received, we carry
out other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Midcap Growth Fund and
IAI Growth Fund at March 31, 1999, and the results of their operations and their
cash flows, the changes in their net assets and the financial highlights for the
periods stated in the first paragraph above, in conformity with generally
accepted accounting principles.
As described in notes 1 and 5 to the financial statements, Emerging Growth Fund
held 41.2% of its net assets in illiquid, restricted securities as of March 31,
1999.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 14, 1999
43
<PAGE>
FEDERAL TAX INFORMATION
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND,
IAI MIDCAP GROWTH FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for informational purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
IAI CAPITAL APPRECIATION FUND
TAX INFORMATION
---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
---------------------------------------------------------------------------
JUNE 1998 $ 0.7458 $ 1.0633
DECEMBER 1998 0.0000 0.0000
===========================================================================
$ 0.7458 $ 1.0633
1.44% of ordinary income qualify for deduction by corporations.
IAI EMERGING GROWTH FUND
TAX INFORMATION
---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
---------------------------------------------------------------------------
JUNE 1998 $ 0.0000 $ 2.8931
DECEMBER 1998 $ 0.0000 $ 2.1120
===========================================================================
$ 0.0000 $ 5.0051
IAI GROWTH FUND
TAX INFORMATION
---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
---------------------------------------------------------------------------
JUNE 1998 $ 0.0908 $ 0.5678
DECEMBER 1998 $ 0.0000 $ 1.0000
===========================================================================
$ 0.0908 $ 1.5678
44.17% of ordinary income qualify for deduction by corporations.
IAI MIDCAP GROWTH FUND
TAX INFORMATION
---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-Term Capital Gain
---------------------------------------------------------------------------
JUNE 1998 $ 0.0000 $ 2.4619
DECEMBER 1998 $ 0.0000 $ 1.5350
===========================================================================
$ 0.0000 $ 3.9969
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
44
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
http://www.iaifunds.com
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 510
Milwaukee, WI 53201-0510
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
David Koehler
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
500-0020-0599
800.945.3863
612.376.2700
