<PAGE>
EQUITY FUNDS
ANNUAL REPORT
IAI Capital Appreciation Fund,
IAI Emerging Growth Fund,
IAI Growth Fund, IAI Midcap Growth Fund
March 31, 1996
[LOGO OF IAI]
Mutual Funds
<PAGE>
[WORLD MAP]
<PAGE>
Table of Contents
-----------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
Annual Report
March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter...................... 2
Fund Managers' Reviews
IAI Capital Appreciation Fund......... 4
IAI Emerging Growth Fund.............. 6
IAI Growth Fund....................... 8
IAI Midcap Growth Fund................ 10
Fund Portfolios
IAI Capital Appreciation Fund......... 12
IAI Emerging Growth Fund.............. 14
IAI Growth Fund....................... 17
IAI Midcap Growth Fund................ 19
Notes to Fund Portfolios............... 21
Statements of Assets and Liabilities... 26
Statements of Operations............... 28
Statements of Changes in Net Assets.... 30
Financial Highlights
IAI Capital Appreciation Fund......... 32
IAI Emerging Growth Fund.............. 33
IAI Growth Fund....................... 34
IAI Midcap Growth Fund................ 35
Notes to Financial Statements.......... 36
Independent Auditors' Report........... 43
Federal Tax Information................ 44
Shareholder Update..................... 45
IAI Mutual Fund Family................. 47
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
A GREAT TIME TO DIVERSIFY
The year ended March 31, 1996 was another excellent period for U.S. stocks.
Despite all the mixed signals, the economy has been behaving just right; not too
fast to bring back inflation, and not too slow to bring on a recession. Bonds
had a good year too, except for the very end when the economy seemed to
accelerate.
As we've seen so far in 1996, stocks and bonds can be volatile. That's
particularly important to remember when prices are high. One of the most
important investment principles is diversification--not putting all of your
eggs in one basket.
By investing in mutual funds, you have already taken a step toward
diversification. A typical mutual fund invests in dozens of securities, a much
more diversified portfolio than you can generally achieve on your own. But
another way to diversify is to broaden your investment horizon into areas that
have lagged but are beginning to awaken. One example: international funds.
Developed and developing markets throughout the world have not matched the U.S.
economy during the past year. But that's beginning to change. Since
international markets largely move independently of the United States, an
investment overseas is considered an excellent way to diversify a portfolio.
This is particularly true when our markets are nearing or achieving all-time
highs.
If investing internationally is not for you, then there are other ways to
diversify your portfolio. If you have mutual funds that invest in just one type
of investment objective, then you might want to consider broadening your
investment horizon. Of course, whether you focus on growth, income or a blend of
the two depends on your time horizon. If you're investing for a retirement
that's 30 years down the road, then you can afford to take more risk than if you
need the income from those investments right away.
Regardless of the time frame, the U.S. markets will continue to be impacted by
the performance of the economy, the outlook for inflation, and the level of
interest rates. Over the next six months, the presidential election will also
play a role. All of these events are truly unpredictable and uncontrollable by
the average investor. That makes investing a continuing challenge, and another
reason to stay diversified.
Noel P. Rahn,
Chairman
2
<PAGE>
Chairman's Letter
-----------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below:
Volatile markets will continue in the months ahead because of the uncertainty
surrounding economic fundamentals. First quarter growth was surprisingly strong
considering the unusual weather patterns, a partial federal government shutdown
and the temporary strike at General Motors. Nevertheless, it is important to
remember that despite its surprising strength, the economy only expanded by 2.8%
which is still below the long-term average. Reported growth was also in line
with our expectations of a 2.5% expansion for all of 1996.
Inflation is becoming a consideration in our policy decisions. Investors have
been far too complacent about prospective price increases. Low inflation has
been with us for several years and the secular arguments weigh heavily in favor
of further price restraint. Yet, the US economy is gradually approaching the
late phase of the credit cycle and the foundation is being laid for a rising
price trend in the next year. In many firms, just-in-time delivery, downsizing,
and other new business practices have eliminated the extra cushion that was
present in past expansions, leaving the economy with little room to adjust to
new demand. Broad money supply is expanding again in the United States and has
reached its highest level since the late 1980s. With rising money growth and the
lack of cushion in the system even modest economic growth will likely produce
some cyclical inflation by year-end.
Politics in an election year are also a potential risk for the market and could
cause some price swings. However, fundamental economic forces ultimately drive
markets. For most of 1996 we expect to see a modest expansion of about 2.5% and
only a slight increase to a level of about 3% in the consumer price index. The
markets will be volatile, but the economic background remains favorable for
financial assets.
Please read the Fund Managers' Review which follows this letter for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
3
<PAGE>
Fund Manager's Review
-----------------------------
IAI Capital Appreciation Fund
IAI Capital Appreciation Fund
Fund Objective
The investment objective of the IAI Capital Appreciation Fund is long-term
capital appreciation. It is designed for investors seeking the opportunity for
substantial long-term growth who can accept above-average stock market risk and
little or no current income. In general, the IAI Capital Appreciation Fund will
concentrate on companies that have superior performance records, solid market
positions, strong balance sheets and a management team capable of sustaining
growth. Although the Fund will typically invest in common stocks of smaller
emerging and mid-sized companies, it may invest in companies of any size
offering strong earnings growth potential.
Fund Positioning for the
Past Year
The Fund was launched on February 1, 1996, so its performance results cannot be
reported for a full investment period. Nevertheless, its initial results are
very encouraging. For the two months ended March 31, 1996, the Fund produced a
total return of 12.40%. During the same period, its benchmark index, the Russell
2500 Index, was up 5.12%, while the Standard & Poor's 500 Index rose 1.95%. The
Fund's superior performance was due to its concentration on companies whose
growth doesn't depend on the fortunes of the overall economy.
The IAI Capital Appreciation Fund was created to offer an investment objective
and strategy similar to the IAI Emerging Growth Fund, which was closed to new
investors. The creation of the Fund is timely because profits generated by
Corporate America are slowing down and investors are searching for companies
that can continue to grow in the face of a slowing economy.
The Fund invests in high quality companies with high quality management and also
looks for companies and industries undergoing change. One example is Sinclair
Broadcast, an acquisition minded company which owns about 20 independent
television stations in midsized markets. We think that the company could double
in size over the next few years, especially in light of the federal government's
recent loosening of ownership rules in the television industry.
Another stock in the portfolio is Sierra On-Line, which makes computer games
such as Phantasmagoria. The company aims to be the leader in networked PC games
in which people can play computer games against people in other cities or other
countries. Another interesting company in the portfolio is Career Horizons, a
temporary staffing company which supplies temporary workers in manufacturing,
healthcare and information technology environments.
Outlook
Despite recent indications that the economy is picking up steam, we believe that
the overall economy will remain in a slow-growth mode for the rest of the year.
As a general strategy, the Fund remains diversified across the economy. Since
the Fund's strategy is to select companies who can control their own destiny--
and whose success does not depend on external factors--the outlook for the Fund
remains bright.
[PHOTO APPEARS HERE]
Martin J. Calihan, CFA
IAI Capital Appreciation Fund Manager
Top Five Sectors
% of Net Assets as of 3/31/96
[GRAPH APPEARS HERE]
Consumer Services 17.7%
Commercial Services 14.0%
Industrial Services 8.2%
Financial 8.1%
Electronic Technology 7.9%
4
<PAGE>
FUND MANAGER'S REVIEW
-----------------------------
IAI CAPITAL APPRECIATION FUND
VALUE OF $10,000 INVESTMENT+
[GRAPH APPEARS HERE]
<TABLE>
- ------------------------------------------------------------------------
2/01/96 3/31/96
------- -------
<S> <C> <C>
IAI CAPITAL APPRECIATION FUND $10,000 $11,240
(INCEPTION 2/01/96)
RUSSELL 2500 INDEX 10,000 10,512
S & P 500 INDEX 10,000 10,195
- ------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURNS+
Through 3/31/96
<TABLE>
- ------------------------------------------------------------------------
Since inception
2/01/96
========================================================================
<S> <C>
IAI CAPITAL APPRECIATION FUND* 12.40%
- ------------------------------------------------------------------------
Russell 2500 Index 5.12%
- ------------------------------------------------------------------------
S&P 500 Index 1.95%
- ------------------------------------------------------------------------
</TABLE>
+ Past performance is not predictive of future performance
* Fees and expenses are currently being voluntarily waived to 1.25% of average
daily net assets.
<TABLE>
<CAPTION>
TOP TEN HOLDINGS/1/
- ------------------------------------------------------------------------
% of Net Assets
---------------
Issue Sector 3/31/96
- ------------------------------------------------------------------------
<S> <C> <C>
Petroleum Geo-Services ADR Industrial Services 4.71
Minerals Technologies Non-Energy Minerals 4.53
Heritage Media Class A Commercial Services 3.77
CMAC Investment Financial 3.24
IMPATH Health Services 3.13
Aptargroup Process Industries 3.13
Sinclair Broadcast Consumer Services 2.93
Barnes & Noble Retail Trade 2.92
SFX Broadcasting Consumer Services 2.86
Trump Hotels & Casino Resorts Consumer Services 2.64
========================================================================
Total 33.86
</TABLE>
/1/ Excludes U.S. Treasury and Government Obligations
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
Performance data for the IAI Capital Appreciation Fund includes changes in share
price and reinvestment of all dividends and capital gains. Past performance is
not a guarantee of future results. The Fund's investment return, yield and
principal may fluctuate so that, when redeemed, shares may be worth more or less
than the original cost. More complete information about the Fund, including
charges and expenses, is available in the prospectus. Please read the Fund's
prospectus carefully before investing. All indices cited are unmanaged, and are
either trademarks, registered trademarks or copyrights of their respective
sponsoring companies.
5
<PAGE>
Fund Manager's Review
------------------------
IAI Emerging Growth Fund
IAI Emerging Growth Fund
Rick D. Leggott, CFA
IAI Emerging Growth
Fund Manager
<TABLE>
- --------------------------------------------------------------------
Top Five Sectors
% of Net Assets as of 3/31/96
- --------------------------------------------------------------------
<S> <C>
COMPUTER SOFTWARE 22.4%
RETAIL TRADE 15.4
ELECTRONIC TECHNOLOGY 12.9
HEALTH SERVICES 11.5
TECHNOLOGY SERVICES 5.4
- --------------------------------------------------------------------
</TABLE>
Fund Objective
The IAI Emerging Growth Fund is designed for investors who seek long-term
capital appreciation. It pursues its objective of long-term capital appreciation
by investing primarily in equity securities of small- and medium-sized
companies. These companies are in the early stages of their life cycles and have
demonstrated or have the potential for above-average capital growth.
The Fund closed to new investors on February 1, 1996. Emerging Growth Fund's
current shareholders may add to an existing account and certain others may make
an initial investment in the Fund.
Fund Positioning for the
Past Year
The IAI Emerging Growth Fund continued to post excellent returns during the
first quarter of 1996-up 10.26% for the period, and up 55.20% from a year ago.
In contrast, the Russell 2500 was up 5.87% for the quarter and 29.84% for the
twelve month period, while the Standard & Poor's 500 Index was up 5.45% for the
quarter and 32.14% for the year.
The Fund's superior performance was due to the disciplined execution of our
investment philosophy, which is to invest in companies with superior growth
prospects, sound business models and entrepreneurial management. A winning
combination of proprietary direct research and a stringent sell discipline has
been the foundation for our outstanding results.
Technology stocks that did well during the quarter were those that solved
problems associated with the use of the internet. Those companies in the
portfolio include Ascend Communications, Cascade Communications and Pairgain
Technologies.
The need for more and better education is the key driver behind two of the
Fund's biggest winners in the first quarter. Apollo Group provides higher
education to working adults. CBT Group provides training for new technology
applications via interactive CD-ROM delivery.
In non-technology areas, USA Detergent's stock price more than doubled during
the first quarter, due to strong demand for soap and laundry detergent. Boise
Cascade Office Products, a spin-off of the big forest products concern, also
rose sharply, as it delivers basic office products to Fortune 1000 clients.
Despite the problems in the retailing industry overall, two niche retailers in
the portfolio continue to do well: Bed Bath & Beyond and Petco Animal Supplies
are driving revenue growth with a combination of square footage expansion and
same store sales growth.
Outlook
For the overall U.S. stock market, corporate earnings growth is slowing
substantially. That presents an opportunity for investors in the IAI Emerging
Growth Fund because the market will reward companies in the Fund that can
outgrow the market as a whole. Our biggest concerns today relate to the trend of
rising interest rates and their potential impact on economic and profit growth,
and valuations.
6
<PAGE>
Fund Manager's Review
------------------------
IAI Emerging Growth Fund
Value of $10,000 Investment+
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
3/31
----------------------------------------------------
8/05/91 92 93 94 95 96
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
IAI Emerging Growth Fund*
(Inception 8/5/91) $10,000 $28,703
S & P 500 INDEX* $10,000 $18,987
RUSSELL 2500 INDEX* $10,000 $20,905
</TABLE>
Average Annual Returns+
Through 3/31/96
<TABLE>
<CAPTION>
<S> <C> <C>
Since Inception
1 Year 8/05/91
- ----------------------------------------------------
IAI Emerging Growth Fund 55.20% 25.40%
- ----------------------------------------------------
Russell 2500 Index 29.84% 17.12%*
- ----------------------------------------------------
S&P 500 Index 32.14% 14.73%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 8/01/91
<TABLE>
<CAPTION>
Top Ten Holdings/1/
% of Net Assets
----------------
Issue Sector 3/31/96 3/31/95
- ------------------------------------------------------------------
<S> <C> <C> <C>
Atria Software Computer Software 3.15 0.55
Oxford Health Plans Health Services 2.98 3.47
Inso Computer Software 2.84 --
Ascend Communications Electronic Technology 2.66 1.17
Viking Office Products Retail Trade 2.40 2.60
Omnicare Health Services 2.40 1.84
Cascade Communications Electronic Technology 2.31 1.43
Alternative Resources Technology Services 2.20 0.61
Macromedia Computer Software 2.18 --
Corporate Express Producer Manufacturing 2.11 0.95
- ------------------------------------------------------------------
Total 25.23 12.62
</TABLE>
/1/ Excludes U.S. Treasury and Government Obligations
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Emerging Growth Fund includes changes in share
price and reinvestment of all dividends and capital gains. Past performance is
not a guarantee of future results. The Fund's investment return, yield and
principal may fluctuate so that, when redeemed, shares may be worth more or less
than the original cost. More complete information about the Fund, including
charges and expenses, is available in the prospectus. Please read the Fund's
prospectus carefully before investing. All indices cited are unmanaged, and are
either trademarks, registered trademarks or copyrights of their respective
sponsoring companies.
7
<PAGE>
Fund Managers' Review
IAI Growth Fund
IAI Growth Fund
Fund Objective
The IAI Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of established companies.
Fund Positioning for the
Past Year
The IAI Growth Fund posted total returns of 3.57% during the first quarter of
1996 and 18.01% during the past twelve months. In contrast, the Standard &
Poor's 500 Index was up 5.45% for the quarter and 32.14% for the year.
The reason for the Fund's underperformance was due to its holdings in technology
stocks such as Intel, Motorola and Nokia--all excellent companies whose stocks
were out of favor during the quarter.
Another technology holding, International Business Machines, was a pleasant
surprise during the quarter. The company, selling at about ten times earnings,
is very attractively valued, while some of its businesses, particularly in
outsourcing services, are growing 25% per year in sales and earnings.
International Business Machines is a classic turnaround story, with a management
team who took decisive action to save the company when it was building too many
mainframe computers for a changing marketplace.
The healthcare industry continued to be a fruitful place for investors seeking
growth companies. One of our top holdings is Columbia/HCA Healthcare, the
nation's largest hospital chain, which owns and manages 350 hospitals throughout
the United States. Columbia enters a market and provides a wide range of
healthcare services including home healthcare and ambulatory surgical centers.
Those companies that can help bring healthcare costs down and be part of the
solution to the healthcare industry's cost pressures are going to do well.
Another group that is likely to continue to be successful is energy,
specifically natural gas and oil service stocks. Anadarko Petroleum is one of
the fastest growing independent energy companies in the United States. The
company is very active using new drilling technologies to exploit existing
natural gas deposits. Natural gas is cheaper and less polluting than coal or
electricity.
Outlook
Although the economy is stronger than it appeared to be a few months ago, the
overall trend is still slow growth. Corporate profits for the typical S&P 500
company are expected to rise about 10% in 1996. In contrast, we expect corporate
profits for companies in the Fund to rise 18% during the year. In such an
environment, we believe that investors will be rewarded by owning stocks with
strong growth prospects.
[PHOTO APPEARS HERE]
Suzanne Zak, CFA
IAI Growth Fund
Co-Manager
[PHOTO APPEARS HERE]
David A. McDonald
IAI Growth Fund
Co-Manager
Top Five Sectors
% of Net Assets as of 3/31/96
13.3%
Electronic Technology
12.7%
Financial
10.3%
Health Technology
8.6%
Health Services
7.3%
Technology Services
8
<PAGE>
Fund Managers' Review
---------------------
IAI Growth Fund
[LOGO]
Value of $10,000 Investment+
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
3/31
Inception -----------------------------
8/06/93 94 95 96
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IAI Growth Fund $10,000 $12,970
...............................................................................
S&P 500 Index* $10,000 $15,491
</TABLE>
Average Annual Returns+
Through 3/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Since Inception
1 Year 8/06/93
- -------------------------------------------------------------------------------
<S> <C> <C>
IAI Growth Fund 18.01% 10.30%
...............................................................................
S&P 500 Index 32.14% 17.84%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 8/01/93
Top Ten Holdings/1/
<TABLE>
<CAPTION>
% of Net Assets
------------------
Issue Sector 3/31/96 3/31/95
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Guidant Health Technology 3.68 -
Walgreen Retail Trade 3.29 1.94
Norwest Financial 2.82 1.86
Columbia/HCA Healthcare Health Services 2.67 4.89
Enron Oil & Gas Energy Minerals 2.61 1.11
General Electric Producer Manufacturing 2.60 -
Federal National Mortgage
Association Financial 2.56 2.95
General Motors Class E Technology Services 2.50 -
McDonald's Consumer Services 2.42 2.95
United HealthCare Health Services 2.38 3.54
- -------------------------------------------------------------------------------
Total 27.53 19.24
</TABLE>
/1/ Excludes U.S. Treasury and Government Obligations
Note to Chairman's Letter & Fund Managers' Review
Performance data for the IAI Growth Fund includes changes in share price and
reinvestment of all dividends and capital gains. Past performance is not a
guarantee of future results. The Fund's investment return, yield and principal
may fluctuate so that, when redeemed, shares may be worth more or less than the
original cost. More complete information about the Fund, including charges and
expenses, is available in the prospectus. Please read the Fund's prospectus
carefully before investing. All indices cited are unmanaged, and are either
trademarks, registered trademarks or copyrights of their respective sponsoring
companies.
9
<PAGE>
Fund Manager's Review
IAI Midcap Growth Fund
IAI Midcap Growth Fund
Fund Objective
The IAI Midcap Growth Fund is designed for investors who seek long-term capital
appreciation. It pursues its objective of long-term capital appreciation by
investing primarily in equity securities of medium-sized companies. The Fund
defines "medium" as companies with market capitalizations (stock price
multiplied by the number of shares outstanding) between $500 million and $5
billion.
Fund Positioning for
the Past Year
The IAI Midcap Growth Fund posted above-average returns during the first quarter
of 1996--up 7.01% for the period, and up 23.51% from a year ago. In contrast,
the Standard & Poor's Midcap Index was up 6.16% for the quarter and 28.49% for
the twelve month period, while the Standard & Poor's 500 Index was up 5.45% for
the quarter and 32.14% for the year.
The strength of the portfolio was broad based, and we continue to benefit from
our underweighting in technology where most of the recent earnings surprises
have been negative.
Our position in technology is unusually low, and we will be adding to our
weighting in this sector if valuations continue to come down.
One of the few technology companies that we have added is Wang Laboratories,
which has transformed itself into a leading computer services and imaging
company. It is no longer in the hardware business--and it has a new management
team. We think that its family of workflow and imaging products will be a major
driver of earnings growth for the next few years.
In healthcare, we added Caremark International, a major factor in the physician
practice management area, a field which has grown rapidly since the emergence
of managed care. The company, which was formerly known only as a home healthcare
company, is expected to receive greater recognition of this change in focus as
earnings growth accelerates.
Even though a company would appear to be in a dynamic industry, it can
disappoint. During the quarter, we sold Reebok as its growth fell short of our
original expectations.
Outlook
We continue to expect low inflation and slower economic growth in 1996. True,
valuations for stocks are relatively high, and it is unlikely that vast sums of
money will continue to flow into the market at the current pace. Nevertheless,
we are cautiously optimistic about the IAI Midcap Growth Fund. Despite the
strong growth characteristics of the companies in the portfolio, the IAI Midcap
Growth Fund is currently valued at only a very slight premium to the broader
market.
[PHOTO APPEARS HERE]
Suzanne Zak, CFA
IAI Midcap Growth
Fund Manager
Top Five Sectors
% of Net Assets as of 3/31/96
15.3%
Consumer Services
12.1%
Producer Manufacturing
10.1%
Retail Trade
9.2%
Commercial Services
7.3%
Consumer Durables
10
<PAGE>
FUND MANAGER'S REVIEW
----------------------
IAI MIDCAP GROWTH FUND
VALUE OF $10,000 INVESTMENT+
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
4/10/92 3/31/93 3/31/94 3/31/95 3/31/96
<S> <C> <C> <C> <C> <C>
IAI Midcap Growth Fund $10,000 $20,139
(Inception 4/10/92)
Callan Midcap Index*/1/ 10,000 17,676
S&P 500 Index* 10,000 17,179
S&P Midcap Index 10,000 17,859
</TABLE>
AVERAGE ANNUAL RETURNS+
Through 3/31/96
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Since Inception
1 Year 4/10/92
- -------------------------------------------------------------------
<S> <C> <C>
IAI MIDCAP GROWTH FUND 23.51% 19.25%
- -------------------------------------------------------------------
Callan Midcap Index/1/ 28.12% 15.30%*
- -------------------------------------------------------------------
S&P Midcap Index (unadjusted) 28.49% 14.49%*
- -------------------------------------------------------------------
S&P 500 Index 32.14% 15.60%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 4/01/92
1 The Callan Midcap Index will be replaced with the S&P Midcap Index, as the
Fund's management has determined the S&P Midcap Index to be more
representative of the Fund's investments, and therefore a better comparison
for Fund performance. The Callan Midcap Index will no longer appear in future
reports.
TOP TEN HOLDINGS/2/
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
% of Net Assets
----------------------
Issue Sector 3/31/96 3/31/95
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danka Business Systems ADR Producer Manufacturing 4.42 3.19
Alco Standard Commercial Services 3.79 4.44
HFS Consumer Services 3.44 2.92
Barnes & Noble Retail Trade 3.31 2.67
Harcourt General Retail Trade 3.16 3.56
Minerals Technologies Non-Energy Minerals 3.00 3.75
Boston Chicken Consumer Services 2.98 --
LCI International Utilities 2.84 2.14
FIserv Technology Services 2.46 2.61
Petroleum Geo-Services
ADR Industrial Services 2.42 2.07
- -------------------------------------------------------------------------------
TOTAL 31.82 27.35
</TABLE>
/2/ Excludes U.S. Treasury and Government Obligations
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
Performance data for the IAI Midcap Growth Fund includes changes in share price
and reinvestment of all dividends and capital gains. Past performance is not a
guarantee of future results. The Fund's investment return, yield and principal
may fluctuate so that, when redeemed, shares may be worth more or less than the
original cost. More complete information about the Fund, including charges and
expenses, is available in the prospectus. Please read the Fund's prospectus
carefully before investing. All indices cited are unmanaged, and are either
trademarks, registered trademarks or copyrights of their respective sponsoring
companies.
11
<PAGE>
FUND PORTFOLIO
-------------------------------
IAI CAPITAL APPRECIATION FUND
March 31, 1996
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
COMMON STOCKS -- 89.9%
<S> <C> <C>
Market
Quantity Value(a)
- ---------------------------------------------------------
COMMERCIAL SERVICES -- 14.0%
Affiliated Computer Services (b) 1,400 $ 58,187
Apollo Group Class A (b) 1,350 52,650
Career Horizons (b) 4,700 139,825
G&K Services 6,300 168,525
Heritage Media Class A (b) 9,900 355,163
Superior Services (b) 15,800 209,350
True North Communications 7,400 185,000
Valassis Communications (b) 8,800 146,300
----------
1,315,000
- --------------------------------------------------------
CONSUMER DURABLES -- 0.1%
Coleman (b) 300 13,237
- --------------------------------------------------------
CONSUMER SERVICES -- 17.7%
Barefoot 13,200 141,900
CKE Restaurants 12,100 202,675
John Q Hammons Hotels (b) 15,700 170,738
Red Roof Inns (b) 12,600 187,425
SFX Broadcasting (b) 7,900 269,587
Sinclair Broadcast (b) 10,400 275,600
Stewart Enterprises Class A 3,900 166,725
Trump Hotels & Casino Resorts (b) 8,500 248,625
----------
1,663,275
- --------------------------------------------------------
ELECTRONIC TECHNOLOGY -- 7.9%
Allen Group 8,100 156,937
Checkpoint Systems (b) 6,400 159,200
CommNet Cellular (b) 5,600 156,100
Shiva (b) 300 27,225
Tollgrade Communications (b) 14,100 243,225
----------
742,687
- --------------------------------------------------------
ENERGY MINERALS -- 3.8%
Belco Oil & Gas (b) 10,000 227,500
Forcenergy Gas Exploration (b) 10,800 127,575
----------
355,075
- --------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Quantity Value(a)
<S> <C> <C>
- --------------------------------------------------------
FINANCIAL -- 8.1%
CMAC Investment 5,400 $305,100
Invesco ADR 2,200 88,275
Mid Atlantic Medical Services (b) 5,000 115,625
Southwest Securities 16,000 192,000
Student Loan 1,700 65,663
----------
766,663
- --------------------------------------------------------
HEALTH SERVICES -- 5.2%
Community Health Systems (b) 3,500 143,500
IMPATH (b) 20,000 295,000
ResMed (b) 4,200 55,650
----------
494,150
- --------------------------------------------------------
INDUSTRIAL SERVICES -- 8.2%
Camco International 2,900 91,350
Petroleum Geo-Services ADR (b) 17,600 443,300
Teekay Shipping 8,900 232,513
----------
767,163
- --------------------------------------------------------
NON-ENERGY MINERALS -- 4.5%
Minerals Technologies 12,300 425,887
- --------------------------------------------------------
PROCESS INDUSTRIES -- 4.0%
Aptargroup 7,100 294,650
Mohawk (b) 5,400 81,000
----------
375,650
- --------------------------------------------------------
PRODUCER MANUFACTURING -- 6.7%
Exide 5,000 116,875
Kennametal 4,600 166,175
Roper 4,700 216,200
Special Devices (b) 5,100 91,800
Wabash National 2,000 37,750
----------
628,800
- --------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
12
<PAGE>
FUND PORTFOLIO
-----------------------------
IAI CAPITAL APPRECIATION FUND
March 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
RETAIL TRADE -- 4.1%
Barnes & Noble (b) 7,900 $ 274,525
Heilig-Meyers 5,500 113,438
----------
387,963
- -----------------------------------------------------------
TECHNOLOGY SERVICES -- 4.5%
Cheyenne Software (b) 7,400 116,550
Safeguard Scientifics (b) 2,400 140,700
Sierra On-Line (b) 2,000 67,250
Viasoft (b) 3,500 98,438
----------
422,938
- -----------------------------------------------------------
TRANSPORTATION -- 1.1%
Heartland Express (b) 4,000 101,500
===========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $8,101,730)............................. $8,459,988
===========================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(Cost: $8,101,730)............................. $8,459,988
===========================================================
</TABLE>
SHORT-TERM SECURITIES - 2.1%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BILL - 2.1%
4.91% 04/04/96 $200,000 $ 199,913
=====================================================================
TOTAL INVESTMENTS IN
SHORT-TERM SECURITIES
(Cost: $199,920) .......................................$ 199,913
=====================================================================
TOTAL INVESTMENTS IN SECURITIES
(Cost: $8,301,650) (f) .................................$8,659,901
=====================================================================
OTHER ASSETS AND LIABILITIES
(NET) 8.0%
.....................................................$ 751,486
=====================================================================
TOTAL NET ASSETS
.....................................................$9,411,387
=====================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
13
<PAGE>
Fund Portfolio
------------------------
IAI Emerging Growth Fund
March 31, 1996
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Common Stocks -- 88.4%
Market
Quantity Value (a)
- -----------------------------------------------------------------
<S> <C> <C>
Commercial Services -- 5.3%
ABR Information Services (b) 137,600 $ 6,398,400
AccuStaff (b) 185,400 4,681,350
Apollo Group Class A (b) 239,000 9,321,000
Cambridge Technology Partners (b) 57,600 3,290,400
Career Horizons (b) 104,000 3,094,000
Desktop Data (b) 140,100 5,148,675
Sitel (b) 53,000 2,398,250
------------
34,332,075
- -----------------------------------------------------------------
Computer Software -- 22.4%
Atria Software (b) 375,800 20,575,050
Avant! (b) 155,200 3,724,800
Baan (b) 163,000 9,392,875
CBT Group ADR (b) 120,500 8,856,750
Citrix Systems (b) 113,900 5,040,075
EPIC Design Technology (b) 199,000 6,081,938
HNC Software (b) 67,800 4,610,400
HPR (b) 165,400 6,388,575
Inference Class A (b) 164,400 3,041,400
Inso (b) 402,700 18,574,537
Logic Works (b) 150,800 2,450,500
Macromedia (b) 333,900 14,274,225
Parametric Technology (b) 213,400 8,349,275
Pure Software (b) 189,000 6,520,500
Red Brick Systems (b) 13,900 597,700
Security Dynamics (b) 122,600 6,497,800
Spyglass (b) 191,600 4,143,350
Synopsys (b) 351,600 11,251,200
Wonderware (b) 223,600 5,254,600
Xylan (b) 20,500 1,066,000
------------
146,691,550
- -----------------------------------------------------------------
Consumer Durables -- 1.0%
USA Detergents (b) 199,150 6,472,375
- -----------------------------------------------------------------
Consumer Non-Durables -- 1.7%
Starbucks (b) 465,500 10,851,969
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------------
<S> <C> <C>
Consumer Services -- 4.4%
Apple South 354,600 $ 8,687,700
Outback Steakhouse (b) 286,450 10,795,584
Papa John's International (b) 134,100 5,984,213
Quality Dining (b) 113,500 3,348,250
------------
28,815,747
- -----------------------------------------------------------------
Electronic Technology -- 12.9%
Ascend Communications (b) 322,900 17,396,237
Cascade Communications (b) 168,500 15,122,875
Cyberoptics (b) 97,800 2,811,750
Maxim Integrated Products (b) 234,700 7,275,700
Network General (b) 178,900 7,156,000
Pairgain Technologies (b) 156,600 10,139,850
Premisys Communications (b) 242,600 7,884,500
Stratacom (b) 283,900 10,397,838
Xilinx (b) 192,300 6,105,525
------------
84,290,275
- -----------------------------------------------------------------
Financial -- 1.4%
Credit Acceptance (b) 221,900 4,105,150
First USA Paymentech (b) 53,100 1,871,775
United Dental Care (b) 80,900 3,134,875
------------
9,111,800
- -----------------------------------------------------------------
Health Services -- 11.5%
Arrow International 124,300 5,173,988
Gulf South Medical Supply (b) 239,400 9,037,350
Healthsource (b) 269,000 10,423,750
Omnicare 290,800 15,666,850
Oxford Health Plans (b) 221,900 19,471,725
PhyCor (b) 242,475 10,668,900
Physician Sales & Service 195,600 4,841,100
------------
75,283,663
- -----------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
14
<PAGE>
Fund Portfolio
------------------------
IAI Emerging Growth Fund
March 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS (cont.)
Market
Quantity Value (a)
- -----------------------------------------------------------------------------
<S> <C> <C>
HEALTH TECHNOLOGY -- 4.6%
IDEXX Laboratories (b) 265,200 $ 11,138,400
Steris (b) 262,200 7,866,000
Watson Pharmaceuticals (b) 276,500 11,060,000
-------------
30,064,400
- ---------------------------------------------------------------------
PRODUCER MANUFACTURING -- 2.4%
Corporate Express (b) 417,950 13,792,350
Micrel (b) 125,700 1,791,225
-------------
15,583,575
- ---------------------------------------------------------------------
RETAIL TRADE -- 15.4%
Baby Superstore (b) 165,400 7,525,700
Bed Bath & Beyond (b) 107,300 5,660,075
Boise Cascade Office Products (b) 150,200 9,819,325
Books-A-Million (b) 100,800 1,108,800
Fastenal 244,600 9,417,100
Henry Schein (b) 204,050 5,968,463
Movie Gallery (b) 190,200 4,802,550
Petco Animal Supplies (b) 142,800 6,390,300
PetSmart (b) 258,250 9,361,563
Staples (b) 315,150 6,421,180
Sunglass Hut International (b) 288,100 9,543,312
The Men's Warehouse (b) 295,950 9,322,425
Viking Office Products (b) 282,200 15,697,375
------------
101,038,168
- ---------------------------------------------------------------------
TECHNOLOGY SERVICES -- 5.4%
Alternative Resources (b) 442,300 14,374,750
America Online (b) 143,700 8,047,200
Gartner Group Class A (b) 208,500 12,718,500
-------------
35,140,450
=====================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $359,270,719).....................................$577,676,047
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
OTHER SECURITIES - 2.9%
Market
Quantity (d) Value (a)
- ---------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- 1.3%
AccessLine Technologies
Class A (b) 41,666 $ 249,996
BEI Medical (b) 1,029 30,860
Bruegger's (b) 34,153 942,964
GalaGen (b) (c) 269,934 2,204,011
Imnet Systems (b) 42,637 1,046,440
Indigo Medical (b) (c) 100,000 95,290
Network Appliances (b) 1,308 38,211
OncorMed Class A (b) 66,667 403,735
PACE Health Management
Systems (b) (c) 275,320 1,344,663
PriCellular Class B (b) 168,153 2,076,690
-------------
8,432,860
- ---------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED STOCKS -- 1.2%
AccessLine Technologies
Series A (b) 71,420 571,360
Air Communications
Series A (b) (c) 1,000,000 1,250,000
Air Communications
Series B (b) (c) 875,001 -
Air Communications
Series B (b) (c) 300,000 375,000
CardioGenesis Series B (b) (c) 500,000 1,375,009
CardioGenesis Series C (b) (c) 243,651 670,040
Indigo Medical Series B (b) (c) 181,818 173,254
Indigo Medical Series C (b) (c) 798,496 760,887
Intellon Series A (b) 200,000 350,000
Myelos Neurosciences
Series A (b) (c) 500,000 500,000
Seurat Analytical Systems
Series B (b) (c) 114,973 229,946
Tut Systems Series D (b) (c) 467,092 537,156
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
15
<PAGE>
Fund Portfolio
------------------------
IAI Emerging Growth Fund
March 31, 1996
Other Securities (cont.)
<TABLE>
<CAPTION>
<S> <C> <C>
Market
Quantity (d) Value (a)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Non-Convertible Preferred Stocks (cont.)
Tut Systems Series E (b) (c) 217,391 $ 250,000
Urologix Series B (b) 100,000 385,100
Urologix Series C (b) 59,613 169,897
------------
7,597,649
Ownership Market
Percentage (d) Value (a)
- ----------------------------------------------------------------------------------------
Limited Partnerships -- 0.3%
Alta Berkeley III (b) 1.76% 323,222
South Street Corporate Recovery
Fund I (b) .50 184,915
South Street Leveraged
Corporate Recovery Fund I (b) 1.13 70,750
Spectrum Equity Investors (b) .92 483,443
Vanguard Associates IV (b) 1.36 643,175
------------
1,705,505
Principal Market
Rate Maturity Amount (d) Value (a)
- ----------------------------------------------------------------------------------------
Convertible Debentures -- 0.1%
Air Communications Series B (c)
10.00% 05/31/96 $ 233,333 233,333
GalaGen Series E (c)
7.08 (e) 03/31/97 375,000 375,000
Seurat Analytical Systems Series C (b) (c)
8.75 (e) 04/06/96 250,000 250,000
Seurat Analytical Systems Series C (b) (c)
8.75 (e) 07/08/96 75,000 75,000
------------
933,333
Market
Quantity (d) Value (a)
- -----------------------------------------------------------------------------------------
Warrants -- 0.0%
AccessLine Technologies 10,713 $ --
Air Communications (c) 75,000 75
Intellon 30,000 --
PACE Health Management
Systems (c) 21,820 41,109
PACE Health Management
Systems 08/31/05 (c) 35,000 65,940
-------------
107,124
=========================================================================================
Total Investments in Other Securities
(Cost: $13,833,205)...................................................... $ 18,776,471
=========================================================================================
Total Investments in
Long-term Securities
(Cost: $373,103,924)..................................................... $596,452,518
=========================================================================================
Short-Term Securities -- 8.6%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------------------------
Commercial Paper -- 1.2%
Corning
5.45% 04/01/96 $ 8,000,000 $ 8,000,000
U.S. Treasury Bills -- 7.4%
5.27 04/18/96 25,000,000 24,939,075
4.97 07/18/96 24,000,000 23,640,720
-------------
48,579,795
=========================================================================================
Total Investments in
Short-Term Securities
(Cost: $56,593,460)...................................................... $ 56,579,795
=========================================================================================
Total Investments in Securities
(Cost: $429,697,384) (f)................................................. $653,032,313
=========================================================================================
Other Assets and Liabilities
(Net) 0.1%
....................................................................... $ 855,881
=========================================================================================
Total Net Assets
....................................................................... $653,888,194
=========================================================================================
</TABLE>
16 See accompanying Notes to Fund Portfolios on page 21
<PAGE>
FUND PORTFOLIO
---------------
IAI Growth Fund
March 31, 1996
(percentage figures indicate percentage of total net assets)
<TABLE>
<CAPTION>
Common Stocks -- 98.6%
<S> <C> <C>
Market
Quantity Value (a)
- --------------------------------------------------------
Commercial Services -- 2.2%
Sysco 11,700 $ 384,637
- --------------------------------------------------------
Consumer Durables -- 4.8%
Chrysler 6,000 373,500
Duracell International 5,400 267,975
Mattel 6,556 177,831
----------
819,306
- --------------------------------------------------------
Consumer Non-Durables -- 5.3%
Coca-Cola 2,300 190,037
Gillette 5,300 274,275
Pepsico 2,900 183,425
Procter & Gamble 3,000 254,250
----------
901,987
- --------------------------------------------------------
Consumer Services -- 4.7%
CUC International (b) 13,350 390,487
McDonald's 8,600 412,800
----------
803,287
- --------------------------------------------------------
Electronic Technology -- 13.3%
3Com (b) 8,000 319,000
Applied Materials (b) 6,400 223,200
Cisco Systems (b) 8,700 403,462
Ericsson (L.M.) ADR 11,600 247,950
Intel 6,000 341,250
International Business Machines 2,300 255,588
KLA Instruments (b) 11,000 248,875
SBC Communications 4,500 236,812
----------
2,276,137
- --------------------------------------------------------
Energy Minerals -- 6.3%
Anadarko Petroleum 5,950 330,225
British Petroleum ADR 2,900 308,125
Enron Oil & Gas 16,900 445,738
----------
1,084,088
- --------------------------------------------------------
Financial -- 12.7%
American International Group 3,200 299,600
Federal National Mortgage
Association 13,700 436,687
Franklin Resources 6,800 387,600
General Re 1,800 262,350
NationsBank 3,900 312,488
Norwest 13,100 481,425
----------
2,180,150
- --------------------------------------------------------
Health Services -- 8.6%
Cardinal Health 5,700 366,225
Columbia/HCA Healthcare 7,900 456,225
PacifiCare Health Systems
Class B (b) 2,800 238,700
United HealthCare 6,600 405,900
----------
1,467,050
- --------------------------------------------------------
Health Technology -- 10.3%
Bristol-Myers Squibb 3,600 308,250
Guidant 11,600 627,850
Johnson & Johnson 3,100 285,975
Merck 2,700 168,075
Pfizer 5,400 361,800
----------
1,751,950
- --------------------------------------------------------
Industrial Services -- 3.5%
Baker Hughes 8,600 251,550
Schlumberger ADR 4,300 340,238
----------
591,788
- --------------------------------------------------------
Process Industries -- 3.0%
Great Lakes Chemical 2,500 168,438
Kimberly-Clark 2,300 171,350
Morton International 4,400 168,850
----------
508,638
- --------------------------------------------------------
Producer Manufacturing -- 3.7%
Caterpillar 2,700 183,600
General Electric 5,700 443,888
----------
627,488
- --------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
17
<PAGE>
FUND PORTFOLIO
-------------------------
IAI GROWTH FUND
March 31, 1996
<TABLE>
<CAPTION>
COMMON STOCKS (cont.)
<S> <C> <C>
Market
Quantity Value (a)
- ---------------------------------------------------------------
RETAIL TRADE -- 6.5%
Dollar General 6,000 $ 174,000
Home Depot 3,800 181,925
Wal-Mart 8,100 187,313
Walgreen 17,200 561,150
-----------
1,104,388
- -----------------------------------------------------------
TECHNOLOGY SERVICES -- 7.3%
First Data 2,700 190,350
General Motors Class E 7,500 427,500
Microsoft (b) 3,800 391,875
Sterling Commerce (b) 7,600 233,700
-----------
1,243,425
- -----------------------------------------------------------
UTILITIES -- 6.4%
Airtouch Communications (b) 12,400 385,950
Ameritech 4,200 228,900
Enron 4,700 173,312
Orange ADR (b) 17,500 299,688
-----------
1,087,850
===========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(Cost: $14,268,771)........................... $16,832,169
===========================================================
TOTAL INVESTMENTS IN SECURITIES
(Cost: $14,268,771) (f)....................... $16,832,169
===========================================================
OTHER ASSETS AND LIABILITIES
(NET) - 1.4%
............................................ $ 247,300
===========================================================
TOTAL NET ASSETS
............................................ $17,079,469
===========================================================
</TABLE>
18
See accompanying Notes to Fund Portfolios on page 21
<PAGE>
Fund Portfolio
----------------------
IAI Midcap Growth Fund
March 31, 1996
(percentage figures indicate percentage of total net assets)
Common Stocks -- 92.9%
<TABLE>
<CAPTION>
<S> <C> <C>
Market
Quantity Value (a)
- ------------------------------------------------------------
Commercial Services -- 9.2%
Alco Standard 89,000 $ 4,639,125
Heritage Media Class A (b) 61,400 2,202,725
Reynolds & Reynolds Class A 39,300 1,611,300
Sensormatic Electronics 49,050 993,262
Valassis Communications (b) 106,100 1,763,913
-----------
11,210,325
- ------------------------------------------------------------
Consumer Durables -- 7.3%
American Greetings Class A 44,800 1,237,600
Cooper Tire and Rubber 84,300 2,170,725
Harley-Davidson 60,600 2,355,825
Lennar 71,850 1,787,269
Newell 53,800 1,439,150
-----------
8,990,569
- ------------------------------------------------------------
Consumer Non-Durables -- 3.8%
Jones Apparel (b) 51,900 2,517,150
Warnaco Class A 88,200 2,127,825
-----------
4,644,975
- ------------------------------------------------------------
Consumer Services -- 15.3%
Boston Chicken (b) 106,900 3,641,281
CUC International (b) 87,150 2,549,138
HFS (b) 86,600 4,210,925
Houghton Mifflin 12,200 538,325
La Quinta Inns 36,900 1,083,937
Marriott International 52,000 2,470,000
Scholastic (b) 35,000 2,406,250
Stewart Enterprises Class A 41,400 1,769,850
-----------
18,669,706
- ------------------------------------------------------------
Electronic Technology -- 0.6%
Wang Laboratories (b) 33,400 793,250
- ------------------------------------------------------------
Energy Minerals -- 2.0%
Anadarko Petroleum 43,600 2,419,800
- ------------------------------------------------------------
Financial -- 6.3%
First USA 19,300 1,092,862
PMI Group 43,400 1,893,325
Progresive 49,500 2,208,938
TIG 78,900 2,564,250
-----------
7,759,375
- ------------------------------------------------------------
Health Services -- 2.1%
Caremark International 31,200 783,900
Community Health Systems (b) 15,800 647,800
Foundation Health (b) 31,000 1,181,875
-----------
2,613,575
- ------------------------------------------------------------
Health Technology -- 2.2%
R.P. Scherer (b) 35,100 1,540,012
Sybron International-Wisconsin (b) 47,800 1,171,100
-----------
2,711,112
- ------------------------------------------------------------
Industrial Services -- 4.4%
Camco International 76,400 2,406,600
Petroleum Geo-Services ADR (b) 117,400 2,957,013
-----------
5,363,613
- ------------------------------------------------------------
Non-Energy Minerals -- 4.4%
Minerals Technologies 106,100 3,673,713
Worthington 84,200 1,673,475
-----------
5,347,188
- ------------------------------------------------------------
Process Industries -- 3.6%
Bemis 31,100 975,763
Brady (W.H.) 29,900 639,113
Schulman Class A 23,650 499,605
Unifi 91,000 2,240,875
-----------
4,355,356
- ------------------------------------------------------------
Producer Manufacturing -- 12.1%
Danka Business Systems ADR 128,100 5,412,225
Nordson 9,400 571,050
Roper 33,500 1,541,000
TriMas 108,000 2,376,000
Tyco International 81,600 2,917,200
Wabash National 105,800 1,996,975
-----------
14,814,450
- ------------------------------------------------------------
</TABLE>
See accompanying Notes to Fund Portfolios on page 21
19
<PAGE>
Fund Portfolio
----------------------
IAI Midcap Growth Fund
March 31, 1996
Common Stocks (cont.)
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -------------------------------------------------------------------
<S> <C> <C>
Retail Trade -- 10.1%
Barnes & Noble (b) 116,400 $ 4,044,900
Harcourt General 85,300 3,870,488
Heilig-Meyers 94,300 1,944,937
Nordstrom 50,700 2,455,781
-------------
12,316,106
- -------------------------------------------------------------------
Technology Services -- 4.1%
DST Systems (b) 8,900 272,563
FIserv (b) 107,400 3,007,200
GTECH (b) 36,700 1,137,700
Tech Data (b) 37,500 628,125
-------------
5,045,588
- -------------------------------------------------------------------
Transportation -- 0.4%
Illinois Central 15,750 448,875
- -------------------------------------------------------------------
Utilities -- 5.0%
Century Telephone Enterprises 84,500 2,682,875
LCI International (b) 141,800 3,474,100
-------------
6,156,975
===================================================================
Total Investments in Common Stocks
(Cost: $85,799,871).................................. $113,660,838
===================================================================
</TABLE>
Other Securities -- 1.2%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -------------------------------------------------------------------
<S> <C> <C>
Common Stock -- 0.3%
GalaGen (b) (c) 48,209 $ 425,830
- -------------------------------------------------------------------
Non-Convertible Preferred Stocks -- 0.7%
Tut Systems Series D (b) (c) 233,546 268,578
Urologix Series B (b) 100,000 385,100
Urologix Series C (b) 59,613 169,897
-----------
823,575
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ownership Market
Percentage (d) Value (a)
- -------------------------------------------------------------------
<S> <C> <C>
Limited Partnerships -- 0.2%
South Street Leveraged Corporate
Recovery Fund I (b) .75% $ 47,174
Spectrum Equity Investors (b) .46 241,716
-----------
288,890
===================================================================
Total investments in Other
Securities
(Cost: $1,141,682)....................................$ 1,538,295
===================================================================
Total investments in Long-Term
Securities
(Cost: $86,941,553)...................................$115,199,133
===================================================================
</TABLE>
Short-term Securities -- 5.7%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bills -- 5.7%
5.15% 04/04/96 $2,000,000 $ 1,999,134
5.26 04/18/96 1,000,000 997,563
4.91 05/02/96 1,000,000 995,583
5.06 07/18/96 3,000,000 2,955,090
-------------
6,947,370
====================================================================
Total Investments in
Short-term Securities
(Cost: $6,948,461).................................... $ 6,947,370
====================================================================
Total Investments in Securities
(Cost: $93,890,014) (f)............................... $122,146,503
====================================================================
Other Assets and Liabilities
(Net) - 0.2%
.................................................. $ 228,293
====================================================================
Total Net Assets
.................................................. $122,374,796
====================================================================
</TABLE>
20
See accompanying Notes to Fund Portfolios on page 21
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
(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)
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, 1996. A summary of transactions during the
period with affiliated issuers of the Funds follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Affiliated Issuers
- --------------------------------------------------------------------------------------------------------------------
purchases sales
--------------------------------------------------------- realized Investment
issuer quantity cost quantity proceeds gain (loss) income
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Air Communications
Series B Convertible Note/1/ 370,833 $370,891 175,000 $175,000 $ - $ 3,025
Air Communications
Series B PFD/1/ 300,000 $375,472 - $ - $ - $ -
Air Communications
Warrants/1/ 75,000 $ 75 - $ - $ - $ -
Cardio Genesis
Series C PFD 243,651 $670,040 - $ - $ - $ -
GalaGen Common Stock/2/ 269,934 $174,268 - $ - $ - $ -
GalaGen Convertible Note
Series D/2/ 100,000 $100,000 540,000 $ - $ - $49,270
GalaGen Convertible Note
Series E 375,000 $375,000 - $ - $ - $ 4,421
GalaGen Series B PFD/2/ - $ - 230,769 $ - $ - $ -
GalaGen Series C PFD/2/ - $ - 50,000 $ - $ - $ -
GalaGen Series E PFD/2/ 38,461 $124,999 38,461 $ - $ - $ -
GalaGen Warrants 06/16/99/2/ - $ - 21,000 $ - $ - $ -
GalaGen Warrants 03/24/00/2/ 8,333 $ - 8,333 $ - $ - $ -
GalaGen Warrants 07/09/00/2/ 6,667 $ - 6,667 $ - $ - $ -
GalaGen Stock Options 9,000 $ - 9,000 $ - $ - $ -
Indigo Medical Common Stock/3/ 100,000 $ - - $ - $ - $ -
Indigo Medical Series C PFD/3/ - $ - 100,000 $ - $ - $ -
Myelos Neurosciences
Series A PFD 500,000 $500,000 - $ - $ - $ -
</TABLE>
- CONTINUED ON NEXT PAGE -
21
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
<TABLE>
<CAPTION>
IAI Emerging Growth Fund Affiliated Issuers (cont.)
- --------------------------------------------------------------------------------------------------------
purchases sales
-------------------------------------------------- realized Investment
issuer quantity cost quantity proceeds gain (loss) income
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PACE Health Management
Systems 45,000 $226,387 - $ - $ - $ -
PACE Health Management
Systems Warrants/4/ - $ - 168,180 $ - $ - $ -
PACE Health Management
Systems Warrants 08/31/05 35,000 $ - - $ - $ - $ -
Seurat Analytical Systems
Series B PFD/5/ 64,973 $ - - $ - $ - $ -
Seurat Analytical Systems
Convertible Note/5/ - $ - 125,000 $ - $ - $ 4,948
Seurat Analytical Systems
Series C Convertible
Note 04/06/96 250,000 $250,310 - $ - $ - $ -
Seurat Analytical Systems
Series C Convertible
Note 07/08/96 75,000 $ 75,000 - $ - $ - $ -
</TABLE>
During the year ended March 31, 1996: (1) AirCom Holdings changed its name to
Air Communications. This is a separate company from the Air Communications
Series B Preferred Security with a market value of $0. (2) GalaGen preferred
stocks with a cost of $1,000,099 and Convertible Note Series D with a cost of
$540,489 converted into GalaGen Common Stock (3) Indigo Medical Series C
Preferred Stock with a cost of $1,000 converted into Indigo Medical Common Stock
(4) 168,180 PACE Health Management Systems Warrants were rescinded as part of a
public offering effort. (5) Seurat Convertible Note with a cost of $130,614
converted into Series B Preferred Stock
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Affiliated Issuers
- -----------------------------------------------------------------------------------------------
purchases sales
----------------------------------------------- realized dividend
issuer quantity cost quantity proceeds gain (loss) income
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GalaGen Common Stock/1/ 48,209 $ - - $ - $ - $ -
GalaGen Stock Options 3,000 $ - 3,000 $ - $ - $ -
GalaGen Series B PFD/1/ - $ - 76,923 $ - $ - $ -
GalaGen Series C PFD/1/ - $ - 30,000 $ - $ - $ -
- -----------------------------------------------------------------------------------------------
</TABLE>
/1/ GalaGen Preferred Stocks with a cost of $400,027 converted into GalaGen
Common Stock.
22
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
(d)
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, 1996, 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, 1996 is shown on pages 24-25.
(e)
Interest rate varies to reflect current market conditions; rate shown is the
rate in effect on March 31, 1996.
(f)
At March 31, 1996, the cost of securities for federal income 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 $8,301,650 $429,659,786 $14,285,638 $94,106,113
=================================================================
Gross unrealized appreciation $ 471,598 $232,110,040 $ 3,000,023 $29,727,102
Gross unrealized depreciation (113,347) (8,737,513) (453,492) (1,686,712)
-----------------------------------------------------------------
Net unrealized appreciation $ 358,251 $223,372,527 $ 2,546,531 $28,040,390
=================================================================
</TABLE>
23
<PAGE>
Notes to Fund Portfolios
------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
Restricted Securities
IAI Emerging Growth Fund
Common Stocks
<TABLE>
<CAPTION>
Security Acquisition Date Cost
- --------------------------------------------------------------
<S> <C> <C>
AccessLine Technologies
Class A 06/30/94 $ 209,009
BEI Medical 02/05/96 30,859
Bruegger's 02/02/96 1,000,000
GalaGen 02/26/93 750,000
11/29/93 250,099
03/24/94 --
06/17/94 351,839
12/05/94 --
02/22/95 --
03/22/95 133,236
04/13/95 --
07/07/95 104,684
12/14/95 124,999
01/30/96 --
02/22/96 --
Imnet Systems 02/16/95 318,508
Indigo Medical 02/07/95 1,000
Network Appliances 09/07/93 1,660
OncorMed Class A 12/13/93 200,411
PACE Health Management
Systems 01/11/94 750,000
01/31/95 201,525
04/27/95 150,625
06/20/95 75,000
PriCellular Class B 05/16/94 750,574
Non-Convertible
Preferred Stocks
Security Acquisition Date Cost
- --------------------------------------------------------------
AccessLine Technologies
Series A 06/03/94 $ 499,940
Air Communications
Series A 11/15/94 63,474
Air Communications
Series B 11/24/93 400,000
04/25/94 168,751
Air Communications
Series B 07/05/95 375,472
CardioGenesis Series B 06/09/94 1,000,201
CardioGenesis Series C 12/05/95 670,039
Indigo Medical Series B 05/26/93 500,000
Indigo Medical Series C 09/30/94 256,254
12/27/94 506,783
Intellon Series A 03/24/94 200,163
Myelos Neurosciences
Series A 07/05/95 500,000
Seurat Analytical Systems
Series B 04/29/94 100,000
07/05/95 130,614
Tut Systems Series D 02/17/94 400,293
04/08/94 20,384
Tut Systems Series E 12/21/94 250,563
Urologix Series B 08/14/92 200,000
Urologix Series C 03/22/94 131,148
Limited Partnerships
Security Acquisition Date Cost
- --------------------------------------------------------------
Alta Berkeley III 03/31/93 $ 14,048
04/27/93 50,317
08/25/94 50,487
09/21/94 50,508
06/20/95 53,837
10/20/95 53,451
South Street Corporate
Recovery Fund I 10/03/95 --
South Street Leveraged
Corporate Recovery Fund I 10/03/95 --
Spectrum Equity Investors 05/12/94 149,286
01/03/95 50,000
05/11/95 11,050
05/22/95 70,000
11/16/95 85,000
12/13/95 35,000
Vanguard Associates IV 08/10/92 48,339
02/11/93 50,000
08/12/93 50,000
11/01/93 50,000
04/19/94 50,000
09/19/94 50,000
01/17/95 50,000
07/17/95 50,000
12/13/95 50,000
</TABLE>
24
<PAGE>
NOTES TO FUND PORTFOLIOS
------------------------
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND, IAI
MIDCAP GROWTH FUND
March 31, 1996
RESTRICTED SECURITIES (cont.)
<TABLE>
<CAPTION>
CONVERTIBLE DEBENTURES
Security Acquisition Date Cost
- --------------------------------------------------------
<S> <C> <C>
Air Communications
Series B 05/31/96 11/21/95 $ 75,000
11/30/95 50,057
02/26/96 50,000
03/22/96 58,333
GalaGen Series E 03/31/97 01/31/96 375,000
Seurat Analytical Systems
Series C 04/06/96 07/05/95 125,186
11/08/95 50,124
01/22/96 75,000
Seurat Analytical Systems
Series C 07/08/96 03/19/96 75,000
WARRANTS
Security Acquisition Date Cost
- -----------------------------------------------------------
<S> <C> <C>
AccessLine Technologies 06/03/94 $ -
Air Communications 07/05/95 75
Intellon 04/12/94 -
PACE Health Management
Systems 03/30/95 -
PACE Health Management
Systems 08/31/05 01/16/96 -
================================================================================
</TABLE>
<TABLE>
<CAPTION>
IAI MIDCAP GROWTH FUND
COMMON STOCK
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C>
GalaGen 02/26/93 $250,000
11/29/93 150,027
03/24/94 -
02/22/95 -
02/22/96 -
NON-CONVERTIBLE
PREFERRED STOCKS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C>
Tut Systems Series D 02/17/94 $200,147
04/08/94 10,192
Urologix Series B 08/14/92 200,000
Urologix Series C 03/22/94 131,147
LIMITED PARTNERSHIPS
Security Acquisition Date Cost
- --------------------------------------------------------------------------------
<S> <C> <C>
South Street Leveraged
Corporate Recovery
Fund I 10/03/95 $ -
Spectrum Equity Investors 05/12/94 74,644
01/03/95 25,000
05/11/95 5,525
05/22/95 35,000
11/16/95 42,500
12/13/95 17,500
</TABLE>
25
<PAGE>
Statements of Assets and Liabilities
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
<TABLE>
<CAPTION>
IAI Capital
Appreciation
<S> <C>
- -------------------------------------------------------------------------
Assets
Investments in securities of unaffiliated
issuers, at market
(Cost: $8,301,650, $420,527,774, $14,268,771, and
$93,279,648, respectively) $8,659,901
Investments in securities of affiliated
issuers, at market
(Cost: $0, $9,169,610, $0 and $610,366, respectively) --
----------
Total investments in securities (see Fund Portfolios) 8,659,901
Cash in bank on demand deposit 958,648
Receivable for investment securities sold --
Dividends and accrued interest receivable 160
Organization costs --
Other 4,389
----------
Total assets 9,623,098
----------
Liabilities
Payable for investment securities purchased 205,991
Accrued investment advisory fee 5,720
Accrued distribution fee --
Accrued dividend-disbursing, administrative, and --
accounting fee
Other accrued expenses --
------------
Total liabilities 211,711
------------
Net assets applicable to outstanding capital stock $ 9,411,387
============
Represented by:
Capital stock $ 8,377
Additional paid-in capital 9,065,426
Undistributed net investment income (loss) 1,281
Accumulated net realized gain (loss) (21,948)
Unrealized appreciation on investments 358,251
------------
Total -- representing net assets applicable to
outstanding capital stock $ 9,411,387
============
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 837,675
------------
Net asset value per share of outstanding capital stock $ 11.24
============
</TABLE>
26
<PAGE>
IAI Emerging IAI Growth IAI Midcap
Growth Fund Fund Growth Fund
[C] [C] [C]
- -----------------------------------------------------------
$642,226,600 $16,832,169 $121,452,095
10,805,713 -- 694,408
- -----------------------------------------------------------
653,032,313 16,832,169 122,146,503
1,276,673 561,334 257,717
484,322 308,479 233,433
-- 18,289 20,370
2,422 11,826 3,702
12,732 651 2,163
- -----------------------------------------------------------
654,808,462 17,732,748 122,663,888
- -----------------------------------------------------------
281,032 636,297 173,464
391,797 3,081 72,302
136,902 -- --
109,522 2,909 20,634
1,015 10,992 22,692
- -----------------------------------------------------------
920,268 653,279 289,092
- -----------------------------------------------------------
$653,888,194 $17,079,469 $122,374,796
===========================================================
$ 271,526 $ 14,362 $ 69,154
389,271,069 13,096,975 92,624,565
-- -- --
41,010,670 1,404,734 1,424,588
223,334,929 2,563,398 28,256,489
- -----------------------------------------------------------
$653,888,194 $17,079,469 $122,374,796
===========================================================
27,152,554 1,436,168 6,915,426
- -----------------------------------------------------------
$ 24.08 $ 11.89 $17.70
===========================================================
See accompanying Notes to Financial Statements on page 36
27
<PAGE>
Statements of Operations
------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund,
IAI Growth Fund, IAI Midcap Growth Fund
[LOGO]
<TABLE>
<CAPTION>
IAI Capital
Appreciation Fund
Period from February 1, 1996* to March 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net investment Income
Income
Dividends (net of foreign income taxes withheld of $0, $0, $0,
and $1,718, respectively) $ 644
Interest (including $0, $61,664, $0, and $0, respectively, from
affiliated issuers) 7,535
---------------------------------------------------------
Total income 8,179
---------------------------------------------------------
Expenses
Investment advisory fees 7,725
Distribution fees --
Dividend-disbursing, administrative, and accounting fees --
Legal fees --
Custodian fees --
Amortization of organization costs --
Compensation of Directors --
Audit fees --
Printing and shareholder reporting --
Registration fees --
Other expenses --
---------------------------------------------------------
Total expenses 7,725
Less fees reimbursed by Advisers or Distributor (827)
---------------------------------------------------------
Net expenses 6,898
---------------------------------------------------------
Net investment income (loss) 1,281
---------------------------------------------------------
Net Realized and Unrealized Gains (losses)
Net realized gains (losses) on investment securities (21,948)
Net change in unrealized appreciation or depreciation on investment
securities 358,251
---------------------------------------------------------
Net gain on investments 336,303
---------------------------------------------------------
Net increase in net assets resulting from operations $ 337,584
=========================================================
</TABLE>
*Commencement of Operations
28
<PAGE>
<TABLE>
<CAPTION>
IAI Emerging IAI Growth IAI Midcap
Growth Fund Fund Growth Fund
Year ended March 31, 1996 Year ended March 31, 1996 Year ended March 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 196,430 $ 206,037 $ 638,826
3,379,313 45,297 281,245
- ---------------------------------------------------------------------------------------------------------
3,575,743 251,334 920,071
- ---------------------------------------------------------------------------------------------------------
3,570,424 156,052 774,726
1,239,437 52,017 258,242
991,550 41,614 206,594
7,988 1,785 3,640
15,521 3,385 3,025
6,618 5,067 3,382
21,285 7,280 19,040
20,358 8,653 12,359
142,420 9,974 56,352
70,999 22,778 24,844
56,139 4,602 14,075
- ---------------------------------------------------------------------------------------------------------
6,142,739 313,207 1,376,279
-- (53,122) (86,786)
- ---------------------------------------------------------------------------------------------------------
6,142,739 260,085 1,289,493
- ---------------------------------------------------------------------------------------------------------
(2,566,996) (8,751) (369,422)
- ---------------------------------------------------------------------------------------------------------
57,738,831 3,286,766 4,572,382
157,132,105 135,197 17,556,306
- ---------------------------------------------------------------------------------------------------------
214,870,936 3,421,963 22,128,688
- ---------------------------------------------------------------------------------------------------------
$ 212,303,940 $ 3,413,212 $ 21,759,266
=========================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 36
29
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI CAPITAL APPRECIATION FUND, IAI EMERGING GROWTH FUND, IAI GROWTH FUND, IAI
MIDCAP GROWTH FUND
<TABLE>
<CAPTION>
IAI Capital
Appreciation Fund
Period from
February 1, 1996*
to March 31, 1996
- ---------------------------------------------------------------------------------------
<S> <C>
OPERATIONS
Net investment income (loss) $ 1,281
Net realized gains (losses) (21,948)
Net change in unrealized appreciation or depreciation 358,251
----------
Net increase in net assets resulting from operations 337,584
----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains --
----------
Total distributions --
----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 9,405,842
Net asset value of shares issued to shareholders in reinvestment
of distributions --
Cost of shares redeemed (332,039)
----------
Increase (decrease) in net assets from capital share transactions 9,073,803
----------
Total increase (decrease) in net assets 9,411,387
Net assets at beginning of period --
----------
Net assets at end of period $9,411,387
==========
</TABLE>
[including undistributed net investment income]
of $1,281 for Capital Appreciation Fund
of $0 and ($203,089) for Emerging Growth Fund,
$0 and $49,821 for Growth Fund,
$0 and $0 for Midcap Growth Fund]
*Commencement of Operations
30
<PAGE>
<TABLE>
<CAPTION>
IAI Emerging IAI Growth IAI Midcap
Growth Fund Fund Growth Fund
============================== ========================================== ==========================================
Years ended Years ended
March 31, Period from March 31,
------------------------------ Year ended August 1, 1994 ------------------------------------------
1996 1995 March 31, 1996 to March 31, 1995 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ (2,566,996) $ (1,507,054) $ (8,751) $ 96,348 $ (369,422) $ (238,803)
57,738,831 (1,939,184) 3,286,766 140,742 4,572,382 6,163,154
157,132,105 39,586,345 135,197 2,214,048 17,556,306 6,609,145
- --------------------------------------------------------------------------------------------------------------------------------
212,303,940 36,140,107 3,413,212 2,451,138 21,759,266 12,533,496
- --------------------------------------------------------------------------------------------------------------------------------
- - (49,876) (62,390) - -
(11,559,601) (11,827,295) (1,584,209) - (6,609,822) (3,289,143)
- --------------------------------------------------------------------------------------------------------------------------------
(11,559,601) (11,827,295) (1,634,085) (62,390) (6,609,822) (3,289,143)
- --------------------------------------------------------------------------------------------------------------------------------
881,980,833 323,906,877 6,914,431 15,977,013 83,519,076 70,389,940
11,213,745 11,763,429 1,618,691 61,473 6,260,134 3,205,326
(782,924,628) (242,619,237) (20,026,543) (6,041,735) (70,629,305) (51,382,552)
- --------------------------------------------------------------------------------------------------------------------------------
110,269,950 93,051,069 (11,493,421) 9,996,751 19,149,905 22,212,714
- --------------------------------------------------------------------------------------------------------------------------------
311,014,289 117,363,881 (9,714,294) 12,385,499 34,299,349 31,457,067
342,873,905 225,510,024 26,793,763 14,408,264 88,075,447 56,618,380
- --------------------------------------------------------------------------------------------------------------------------------
$ 653,888,194 $ 342,873,905 $ 17,079,469 $26,793,763 $122,374,796 $ 88,075,447
================================================================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 36
31
<PAGE>
FINANCIAL HIGHLIGHTS
-----------------------------
IAI CAPITAL APPRECIATION FUND
Per share data for a share of capital stock outstanding throughout the period
and selected information for the period indicated is as follows:
IAI CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
Period from February 1, 1996****
to March 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE
Beginning of period $ 10.00
-----------
OPERATIONS
Net investment income --
Net realized and unrealized gains 1.24
-----------
Total from operations 1.24
-----------
NET ASSET VALUE
End of period $ 11.24
===========
Total investment return* 12.40%
Net assets at end of period (000's omitted) $ 9,411
RATIOS
Expenses to average net assets*** 1.25%**
Net investment income (loss)
to average net assets*** .23%**
Portfolio turnover rate
(excluding short-term securities) 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.
** Annualized
*** The Fund's adviser voluntarily waived $827 in expenses for the period
ended March 31, 1996. If the Fund had been charged these expenses, the
ratio of expenses to average daily net assets would have been 1.40% and
the ratio of net investment income to average daily net assets would have
been .08%.
**** Commencement of operations
32
<PAGE>
Financial Highlights
--------------------
IAI Emerging Growth Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
Years ended March 31,
-------------------------------------------- Period from
1996 1995 1994 1993 August 5, 1991***
to March 31, 1992
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 15.83 $ 15.20 $ 13.47 $ 11.91 $ 10.00
--------------------------------------------------------------------
Operations
Net investment income (loss) (.09) (.07) (.10) (.05) .01
Net realized and unrealized gains 8.77 1.42 2.18 2.37 1.91
--------------------------------------------------------------------
Total from operations 8.68 1.35 2.08 2.32 1.92
--------------------------------------------------------------------
Distributions to
Shareholders From:
Net investment income - - - - (.01)
Net realized gains (.43) (.72) (.35) (.76) -
--------------------------------------------------------------------
Total distributions (.43) (.72) (.35) (.76) (.01)
--------------------------------------------------------------------
Net Asset Value
End of period $ 24.08 $ 15.83 $ 15.20 $ 13.47 $ 11.91
====================================================================
Total investment return* 55.20% 10.23% 15.43% 21.90% 19.23%
Net assets at end of period (000's omitted) $653,888 $342,874 $225,510 $131,514 $ 38,110
Ratios
Expenses to average net assets 1.24% 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss)
to average net assets (.52%) (0.54%) (0.77%) (0.72%) 0.14%**
Portfolio turnover rate
(excluding short-term securities) 62.8% 58.1% 76.3% 96.1% 126.6%
</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.
** Annualized
*** Commencement of operations
33
<PAGE>
Financial Highlights
--------------------
IAI Growth Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
IAI Growth Fund
Period from Period from
Year ended August 1, 1994 to August 6, 1993*** to
March 31, 1996 March 31, 1995 July 31, 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value
Beginning of period $ 10.95 $ 9.87 $ 10.00
-------------------------------------------------------------
Operations
Net investment income - .04 .01
Net realized and unrealized gains (losses) 1.93 1.07 (.13)
-------------------------------------------------------------
Total from operations 1.93 1.11 (.12)
-------------------------------------------------------------
Distributions to Shareholders From
Net investment income (.03) (.03) (.01)
Net realized gains (.96) - -
-------------------------------------------------------------
Total distributions (.99) (.03) (.01)
-------------------------------------------------------------
Net Asset Value
End of period $ 11.89 $ 10.95 $ 9.87
=============================================================
Total investment return* 18.01% 11.24% (1.21%)
Net assets at end of period (000's omitted) $17,079 $ 26,794 $ 14,408
Ratios
Expenses to average net assets 1.25% 1.25%** 1.25%**
Net investment income (loss) to average net
assets (.04%) 0.61%** 0.16%**
Portfolio turnover rate
(excluding short-term securities) 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
34
<PAGE>
Financial Highlights
----------------------
IAI Midcap Growth Fund
Per share data for a share of capital stock outstanding throughout each period
and selected information for each period indicated are as follows:
<TABLE>
<CAPTION>
IAI Midcap Growth Fund
Years ended March 31, Period from
------------------------------------ April 10, 1992***
1996 1995 1994 to March 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 15.35 $ 13.67 $ 11.88 $ 10.00
--------------------------------------------------------------
Operations
Net investment income (loss) (.05) (.04) (.04) .02
Net realized and unrealized gains 3.50 2.35 1.99 1.89
--------------------------------------------------------------
Total from operations 3.45 2.31 1.95 1.91
--------------------------------------------------------------
Distributions to Shareholders From:
Net investment income - - - (.03)
Net realized gains (1.10) (.63) (.16) -
--------------------------------------------------------------
Total distributions (1.10) (.63) (.16) (.03)
--------------------------------------------------------------
Net Asset Value
End of period $ 17.70 $ 15.35 $ 13.67 $ 11.88
==============================================================
Total investment return* 23.51% 17.63% 16.40% 19.09%
Net assets at end of period (000's omitted) $122,375 $88,075 $56,618 $ 22,070
Ratios
Expenses to average net assets 1.25% 1.25% 1.25% 1.25%**
Net investment income (loss) to average net assets (.36%) (0.33%) (0.45%) 0.24%**
Portfolio turnover rate (excluding short-term securities) 29.8% 51.3% 49.7% 57.6%
</TABLE>
* Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
** Annualized
*** Commencement of operations
35
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Midcap Growth Fund
March 31, 1996
[1] Summary of Significant Accounting Policies
The IAI Mutual Funds are registered under the Investment Company Act of 1940 (as
amended) as diversified, open-end management investment companies, or series
thereof. IAI Capital Appreciation Fund (Capital Appreciation Fund), IAI Emerging
Growth Fund (Emerging Growth Fund) and IAI Midcap Growth Fund (Midcap Growth
Fund) are separate portfolios of IAI Investment Funds VI, Inc. and IAI Growth
Fund (Growth Fund) is a separate portfolio of IAI Investment Funds II, Inc.
Capital Appreciation Fund commenced operations on February 1, 1996. The Funds
have an overall objective of long-term appreciation through investment in equity
securities. This report covers only the Capital Appreciation Fund, Emerging
Growth Fund, Growth Fund, and Midcap Growth Fund (the Funds).
On November 9, 1994 the Board of Directors elected to change the fiscal year end
of the Growth Fund from July 31 to March 31. Accordingly, certain information
for the Growth Fund is presented for the eight month period from August 1, 1994
to March 31, 1995.
Emerging Growth Fund has closed to new investors as of February 1, 1996.
Emerging Growth Fund's current shareholders and certain others may continue to
add to an existing account. The Fund may resume sales to new investors at some
future date, but it has no present intention to do so.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
Investments in securities traded on national securities exchanges are valued at
the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported sales
price or if the last sales price is not available, the last reported bid price
is used. Securities, including debt securities and restricted securities, for
which quotations are not readily available are valued primarily using dealer-
supplied valuations or at their fair value as determined in good faith using
consistently applied procedures under the general supervision of the Board of
Directors. Short-term securities with maturities of 60 days or less from the
date of initial acquisition are valued at amortized cost. Short-term securities
with maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
Restricted securities for which there is no public market are valued at fair
value in good faith as determined by the Board of Directors.
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 risk 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
36
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Midcap Growth Fund
March 31, 1996
[1] Summary of Significant Accounting Policies (cont.)
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.
Variation margin is paid or received in cash daily by the Fund. The Fund
realizes a gain or loss when the contract is closed or expires.
Options traded on an exchange are valued using the last sale price, and those
traded over-the-counter are valued using dealer-supplied valuations, resulting
in unrealized appreciation or depreciation being recorded. The Fund will realize
a gain or loss upon expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchased cost for a written put option or the cost of a security for a
purchased put or call option is adjusted by the amount of premium received or
paid.
The Fund is subject to credit risk that the other party will not complete
obligations of the contract.
Federal Taxes
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, each Fund
is required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains differ for financial statement and
tax purposes primarily because of recognition of limited partnership income and
the deferral of "wash sale" losses for tax purposes. The character of
distributions made during the year from net investment income or net realized
gains may also differ from its ultimate characterization for tax purposes.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss), and accumulated net
realized gains (losses) have been increased or decreased, resulting in a net
reclassification adjustment to additional paid-in capital as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Emerging Growth Midcap
Growth Fund Fund Growth Fund
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Undistributed net investment income (loss) $ 2,770,085 $ 8,806 $ 369,422
Accumulated net realized gains (losses) $(2,765,692) $(4,459) $(366,040)
Additional paid-in capital $ (4,393) $(4,347) $ (3,382)
</TABLE>
For federal income tax purposes Capital Appreciation Fund has a capital loss
carryover of approximately $22,000, at March 31, 1996 which, if not offset by
subsequent capital gains, will expire in 2005. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryover is offset or expires.
37
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
[1] Summary of Significant Accounting
Policies (cont.)
Security Transactions
and Investment Income
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income is accrued daily. The Funds amortize discount purchased on long-
term bonds using the level yield method of amortization. Security gains and
losses are determined on the basis of identified cost, which is the same basis
used for federal income tax purposes. The Funds use the equity method of
accounting for limited partnerships.
Distributions to
Shareholders
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made semi-annually. Capital gains, if any, are
primarily distributed as of the end of the calendar year. Additional capital
gains distributions as needed to comply with federal tax regulations are
distributed during the year.
Organization Costs
Through March 31, 1996, organization costs were amortized over 60 months on a
straight-line basis.
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 of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with their obligations as
policyholders, the Funds have made payments to the Company which have been
capitalized. Also, the Funds are committed to make future capital contributions,
if requested by the Company.
Capital Appreciation Fund, Emerging Growth Fund, Growth Fund, and Midcap Growth
Fund have available lines of credit of $360,000, $15,000,000, $6,750,000 and
$15,000,000, respectively, with a bank at the prime interest rate. To the extent
funds are drawn against the line, securities are held in a segregated account.
No compensating balances or commitment fees are required under the line of
credit. During the year ended March 31, 1996, the Funds paid $0, $5,374, $1,565,
and $2,622, respectively, in interest on the line of credit at an average rate
ranging from 8.25% to 9.00%. There were no borrowings outstanding at March 31,
1996.
At March 31, 1996, the Funds are committed to invest additional amounts in
certain limited partnership investments held, as follows:
38
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
[2] Commitments and Contingencies (cont.)
<TABLE>
<CAPTION>
Investment Commitments
- -----------------------------------------------------------------------------
Emerging Growth Fund Midcap Growth Fund
- -----------------------------------------------------------------------------
<S> <C> <C>
Alta Berkeley III L.P. $183,000 $ -
Spectrum Equity Investors L.P. 599,000 299,000
Vanguard Associates IV L.P. 50,000 -
- -----------------------------------------------------------------------------
Total Commitments $832,000 $299,000
=============================================================================
</TABLE>
Default by a limited partner of payment of a properly requested capital
contribution, other than default due to a legal determination that such
contribution need not be made, would result in forfeiture of such limited
partner's interest in any future profits and loss in the partnership and removal
from the limited partnership.
The Funds' management intends to finance the aforementioned commitments with
available cash or with proceeds from the sale of investments in short-term
securities. Each Fund maintains in a segregated account an amount equal to its
aggregate unpaid commitments.
[3] Fees and Expenses
Under terms of an investment advisory agreement, Emerging Growth, Growth, and
Midcap Growth Funds paid Investment Advisers, Inc. (Advisers) a monthly
management fee computed on the average month-end net asset value using the
following annual fee schedule:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Month-End Net Asset Value Annual Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Emerging Growth Fund & Midcap Growth Fund
For the first $200,000,000 .75%
For the next $300,000,000 .70%
Above $500,000,000 .65%
Growth Fund
For the first $100,000,000 .75%
For the next $100,000,000 .65%
Above $200,000,000 .55%
</TABLE>
Each Fund, except Capital Appreciation, also paid a monthly fee to Advisers for
acting as each Fund's dividend-disbursing, administrative, and accounting
services agent. The fee was computed on the average month-end net assets at an
annual rate of .20%.
Each Fund, except Capital Appreciation, had a Plan of Distribution with IAI
Securities, Inc. (Distributor), the Funds' distributor. Under the Plan, each
Fund paid Distributor a monthly fee to cover expenses incurred in the
distribution and promotion of Fund shares. The fee was equal to an annual rate
of .25% of each Fund's average month-end net assets.
39
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
[3] Fees and Expenses (cont.)
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Emerging Growth, Growth, and
Midcap Growth Funds were responsible for paying operating expenses, including
costs incurred in the purchase and sale of assets. Advisers and Distributor
agreed to reimburse the Funds to the extent total expenses, excluding costs
incurred in the purchase and sale of assets, exceed, on an annual basis, 1.25%
of each Fund's respective average month-end net assets.
Under the terms of a Management Agreement, Capital Appreciation Fund pays
Advisers a monthly management fee computed at an annual rate of 1.40% of average
daily net assets. This fee declines to 1.30% as the Fund's assets increase. The
fee covers all of the Fund's operating expenses other than interest, taxes, and
other extraordinary expenses. Advisers has agreed to voluntarily waive the
management fee to 1.25% until March 31, 1997.
New Management Agreements for the Emerging Growth, Growth, and Midcap Growth
Funds were approved by a majority of each Funds' shareholders at a special
meeting held March 21, 1996, and replaced the prior Advisory, Administrative,
and Distribution Agreements with Advisers and Distributor. These new agreements,
effective April 1, 1996, require Advisers 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 to Advisers. This fee is equal to an
annual rate of 1.25% of each Funds' average daily net assets, and will be paid
monthly. This fee declines to 1.10% (1.00% for Growth Fund) as each Fund's
assets increase.
Pursuant to these new agreements, and subsequent to March 31,1996, Emerging
Growth, Growth, and Midcap Growth Funds paid Advisers to assume certain unpaid
liabilities, and received amounts from Advisers in exchange for transferring
prepaid expenses to Advisers. As a result of these transactions, Emerging
Growth, Growth, and Midcap Growth Funds received (paid) net amounts of $10,729,
$1,584 and ($15,582), respectively.
40
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund, IAI
Midcap Growth Fund
March 31, 1996
[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 Midcap
Appreciation Growth Growth Growth
Fund Fund Fund Fund
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended Years ended
Period from March 31, Year ended Period from March 31,
February 1, 1996* ------------------------ March 31, August 1, 1994 to -------------------------
to March 31, 1996 1996 1995 1996 March 31, 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sold 868,372 44,205,393 22,550,381 583,267 1,559,588 5,168,818 4,991,776
Issued for reinvested
distributions - 532,973 949,429 141,851 6,062 399,203 236,681
Redeemed (30,697) (39,239,973) (16,680,719) (1,736,639) (577,136) (4,388,825) (3,632,875)
---------------------------------------------------------------------------------------------------------
Increase (decrease) in
shares outstanding 837,675 5,498,393 6,819,091 (1,011,521) 988,514 1,179,196 1,595,582
=========================================================================================================
</TABLE>
* Commencement of operations
[5] Investment Transactions
Purchases and Sales of Securities
For the period ended March 31, 1996, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Funds were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Purchases Sales
- -----------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund $ 8,168,236 $ 45,010
Emerging Growth Fund $332,247,211 $269,066,495
Growth Fund $ 19,060,067 $ 32,698,926
Midcap Growth Fund $ 39,460,739 $ 29,026,934
</TABLE>
41
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Capital Appreciation Fund, IAI Emerging Growth Fund, IAI Growth Fund,
IAI Midcap Growth Fund
March 31, 1996
[5] Investment Transactions (cont.)
Restricted Securities
Included in the Funds' portfolios of investments in securities at March 31, 1996
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 percent 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, 1996 the Funds held illiquid restricted securities as follows:
<TABLE>
<CAPTION>
Market % of
Value Net Assets
------- -----------
<S> <C> <C>
IAI Emerging Growth Fund $18,776,471 2.9%
IAI Midcap Growth Fund $ 1,538,295 1.2%
</TABLE>
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 Growth Fund (a portfolio within IAI Investment Funds
II, Inc.) and IAI Capital Appreciation Fund, IAI Emerging Growth Fund, and IAI
Midcap Growth Fund (separate portfolios within IAI Investment Funds VI, Inc.) as
of March 31, 1996 and the related statements of operations for the year then
ended (period from February 1, 1996, commencement of operations, to March 31,
1996 for IAI Capital Appreciation Fund), the statements of changes in net assets
for the year ended March 31, 1996 and for the period from August 1, 1994 to
March 31, 1995 (IAI Growth Fund), for the period from February 1, 1996
(commencement of operations) to March 31, 1996 (IAI Capital Appreciation Fund),
and for each of the years in the two-year period ended March 31, 1996 (IAI
Emerging Growth Fund and IAI Midcap Growth Fund) and the financial highlights
for the periods presented on pages 32-35 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
Growth Fund, IAI Capital Appreciation Fund, IAI Emerging Growth Fund and IAI
Midcap Growth Fund at March 31, 1996, and the results of their operations, the
changes in their net assets and the financial highlights for the periods stated
in the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 10, 1996
43
<PAGE>
Federal Tax Information
-----------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distributions, in January of
each year.
<TABLE>
<CAPTION>
IAI Emerging Growth Fund
- ---------------------------------------------------------------------
Payable Date Long-Term
Capital Gain
- ---------------------------------------------------------------------
<S> <C>
December 1995 $.4269
=====================================================================
$.4269
</TABLE>
<TABLE>
<CAPTION>
IAI Growth Fund
- ---------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- ---------------------------------------------------------------------
<S> <C> <C>
June 1995 $.0282 $ -
December 1995 .3704 .5898
=====================================================================
$.3986 $.5898
</TABLE>
29.05% of ordinary income distributions qualify for deduction by corporations.
<TABLE>
<CAPTION>
IAI Midcap Growth Fund
- ---------------------------------------------------------------------
Payable Date Ordinary Long-Term
Income (A) Capital Gain
- ---------------------------------------------------------------------
<S> <C> <C>
June 1995 $.2825 $.4559
December 1995 .1348 .2226
=====================================================================
$.4173 $.6785
</TABLE>
40.94% of ordinary income distributions qualify for deduction by corporations.
(A) Includes distributions of short-term capital gains, if any, which are
taxable as ordinary income.
44
<PAGE>
Shareholder Update
------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
Special Meeting Results
A special meeting of the funds' shareholders was held on March 21, 1996. Each
matter voted upon at the meeting, as well as the number of votes cast for,
against or withheld, and the number of abstentions with respect to such matter,
are set forth below.
1. The funds' shareholders re-elected the following directors:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
Shares Voted Shares Withheld
IAI Emerging Growth Fund "For" Authority
- -----------------------------------------------------------------------
<S> <C> <C>
Madeline Betsch 20,331,950 157,415
W. William Hodgson 20,318,134 171,231
Richard E. Struthers 20,343,378 145,987
J. Peter Thompson 20,329,214 160,151
George R. Long 20,327,366 161,999
Noel P. Rahn 20,342,387 146,978
Charles H. Withers 20,323,727 165,638
- -----------------------------------------------------------------------
Shares Voted Shares Withheld
IAI Growth Fund "For" Authority
- -----------------------------------------------------------------------
<S> <C> <C>
Madeline Betsch 1,404,768 3,767
W. William Hodgson 1,400,944 7,591
Richard E. Struthers 1,404,768 3,767
J. Peter Thompson 1,403,915 4,620
George R. Long 1,404,768 3,767
Noel P. Rahn 1,403,830 4,705
Charles H. Withers 1,401,797 6,738
- -----------------------------------------------------------------------
Shares Voted Shares Withheld
IAI Midcap Growth Fund "For" Authority
- -----------------------------------------------------------------------
<S> <C> <C>
Madeline Betsch 4,733,201 35,975
W. William Hodgson 4,725,425 43,751
Richard E. Struthers 4,734,842 34,334
J. Peter Thompson 4,724,492 44,684
George R. Long 4,723,311 45,865
Noel P. Rahn 4,734,587 34,589
Charles H. Withers 4,724,858 44,318
</TABLE>
45
<PAGE>
Shareholder Update
------------------
IAI Emerging Growth Fund, IAI Growth Fund, IAI Midcap Growth Fund
2. The funds' shareholders ratified the selection of KPMG Peat Marwick LLP as
the independent public accountants for each of the funds for each of their
fiscal years. The following votes were cast regarding the matter:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Emerging Growth Fund 20,244,655 69,095 175,614
IAI Growth Fund 1,395,484 955 12,095
IAI Midcap Growth Fund 4,703,281 25,638 40,256
</TABLE>
3. The funds' shareholders ratified each funds' Advisory, Subadvisory and
Administrative Agreements. The following votes were cast regarding the
matter:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Emerging Growth Fund 20,168,074 90,563 230,727
IAI Growth Fund 1,360,764 38,662 9,108
IAI Midcap Growth Fund 4,680,068 32,618 56,489
</TABLE>
4. The funds' shareholders ratified the new Management Agreement between
Investment Advisers, Inc. and each of the funds. The following votes were
cast regarding the matter:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Shares Voted Shares Voted
"For" "Against" Abstentions
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Emerging Growth Fund 20,108,660 107,774 272,930
IAI Growth Fund 1,360,559 38,635 9,340
IAI Midcap Growth Fund 4,669,595 37,391 62,189
</TABLE>
46
<PAGE>
IAI Mutual Fund Family
----------------------
To diversify your portfolio, please consider all of the
mutual funds in our fund family
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI Developing Capital Appreciation - Equity securities of companies in
Countries Fund developing countries
- -----------------------------------------------------------------------------------------------------------------------------
IAI International Fund Capital Appreciation Income Equity securities of non-U.S.
companies
- -----------------------------------------------------------------------------------------------------------------------------
IAI Emerging Growth Fund Capital Appreciation - Common stocks of small- to
(closed to new medium-sized emerging growth
investors as of 2/1/96) companies
- -----------------------------------------------------------------------------------------------------------------------------
IAI Capital Appreciation Capital Appreciation - Common stocks of small- to
Fund medium-sized growth companies
- -----------------------------------------------------------------------------------------------------------------------------
IAI Midcap Growth Fund Capital Appreciation - Common stocks of medium-sized growth
companies
- -----------------------------------------------------------------------------------------------------------------------------
IAI Regional Fund Capital Appreciation - Common stocks of Upper Midwest
companies
- -----------------------------------------------------------------------------------------------------------------------------
IAI Growth Fund Capital Appreciation - Common stocks with potential for
above-average growth and
appreciation
- -----------------------------------------------------------------------------------------------------------------------------
IAI Value Fund Capital Appreciation - Common stocks which are considered
to be undervalued
- -----------------------------------------------------------------------------------------------------------------------------
IAI Growth and Income Fund Capital Appreciation Income Common stocks with potential for
long-term appreciation, and common
stocks that are expected to produce
income
- -----------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade
[Capital Appreciation + Income] bonds and short-term instruments
- -----------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Investment grade bonds
Preservation
- -----------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital U.S. Government securities
Preservation
- -----------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average
maturity of 25 months, investing
primarily in investment grade bonds
- -----------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average
dollar-weighted maturity is less than
90 days, investing in high quality,
money market securities
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Distributor
IAI Securities, Inc.
Investment Adviser
and Manager
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Custodian
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Legal Counsel
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
Independent Auditors
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
Bulk Rate
U.S. Postage
PAID
Chicago, IL
Permit #4441
[LOGO OF IAI]
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA
FAX 612.376.2737
800.945.3863
612.376.2700
