<PAGE>
GLOBAL EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI Developing Countries Fund
IAI International Fund
July 31, 1995
(unaudited)
[LOGO OF IAI MUTUAL FUNDS]
<PAGE>
[GLOBE ARTWORK]
<PAGE>
Table of Contents
-----------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
Semi-Annual Report
July 31, 1995
(unaudited)
<TABLE>
<S> <C>
Chairman's Letter ..............................................2
Fund Manager's Reviews
IAI Developing Countries Fund ..............................5
IAI International Fund .....................................8
Fund Portfolios
IAI Developing Countries Fund .............................11
IAI International Fund ....................................13
Notes to Fund Portfolios ......................................15
Statements of Assets and Liabilities ..........................16
Statements of Operations ......................................17
Statements of Changes in Net Assets ...........................18
Financial Highlights
IAI Developing Countries Fund .............................20
IAI International Fund ....................................21
Notes to Financial Statements .................................22
IAI Mutual Fund Family ........................................26
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors ......................................Inside Back Cover
</TABLE>
<PAGE>
Chairman's Letter
-----------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
Sticking to Basics
[Photo of Noel P. Rahn, Chairman]
Recently, the Chairman of the Securities and Exchange Commission, Arthur Levitt,
said he believes "the mutual fund industry will come to be regarded among the
greatest financial innovations of the modern era."
The facts and figures, and the demographic trends, would seem to back him up. In
1980, mutual fund assets accounted for less than $100 billion. Today, fund
assets total well in excess of $2 trillion. And, the fund industry trade group,
the Investment Company Institute, forecasts assets will continue to grow to
between $3.5 to $5 trillion before the end of the 1990s.
Also, individuals have become more involved with investing. For several years,
companies have been phasing out the traditional defined benefit retirement plans
and creating defined contributions plans which shift investment responsibility
to the wage-earners. In addition, employees have increasingly taken advantage of
saving and investing before-tax dollars in employer sponsored 401(k) plans.
The fact is that mutual funds have thrived and should continue to thrive because
they serve real and important needs of the majority of Americans. In addition,
demographic trends favor the on-going growth of funds, as the large population
bulge known as the "baby boomers," with longer life expectancies than their
parents, continues to age and require more wealth accumulation for retirement.
Mutual funds provide two important benefits: instant diversification and
professional management. And they are responsive to individual investors,
enabling them to invest in practically any type of asset available. Mutual funds
now even make it possible for investors to follow different strategies such as
growth investing or value investing, or to adjust their investments to match the
different stages of their lives using lifestyle strategy funds.
With the expansion in the number of funds available to more than 6,000, some
investors have found selecting a good fund more confusing than ever. However, we
believe the industry has plenty of room to grow more. As for selecting
appropriate funds, individual investors can be well served investing with a
mutual fund family which offers a good diversity of well established funds with
good track records, including a selection of large-, mid-, and small-cap equity
funds as well as established international funds and a diversified group of
fixed income funds. And, as competition has increased in the fund industry,
making shareholder service more important than ever, we remain committed to
providing you with the best service in the business.
Economic Outlook
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
The myth of an economic soft landing is an attractive idea-growth strong enough
to create new jobs and keep the economy moving forward, and yet slow enough to
prevent inflationary pressures from building. Unfortunately, business cycles
have not been eliminated, and even when a soft landing seems imminent, it is
usually just a temporary phase before moving in one of two different directions.
When the economy pauses, as it has recently in what looks like a soft landing,
it is usually just a temporary phase of continuing growth or slowdown. The key
to which way the economy goes after the
2
<PAGE>
Chairman's Letter
-----------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
pause lies with interest rates. Rising interest rates lead to slower economic
growth, and a recession can follow. On the other hand, when interest rates fall,
as they have recently, there is still plenty of financial capacity for the
economy to grow. Generally, this type of pause is followed by a reacceleration
of economic growth. We expect the reacceleration to occur in the second half of
1995.
While there are several factors influencing whether, and how much, interest
rates rise or fall, two are key-growth and inflation.
While we anticipate an acceleration of growth, we are not looking for a robust
burst of economic activity. The fourth quarter of 1994 was much stronger than
the long-term trend, and typically when that happens, succeeding quarters are
slower. First quarter 1995 real GDP growth was only 2.7%, and the second quarter
is likely to be weaker. Looking at the second half of the year, we anticipate a
recovery to about 3% growth in real GDP. With this increase in growth, we expect
rising credit demands, and upward pressure on interest rates.
Inflationary pressures will also increase in the second half of 1995. Price
increases have entered the economic pipeline at the producers' end, but have not
yet flowed into the retail market. Consumers are very price conscious and
businesses have cut costs to compete. However, at some point they will not be
able to cut further, and they will be forced to pass along their higher costs.
The year-over-year increase in the Consumer Price Index has already established
a clear up trend, rising by 3.1% over the last 12 months. We anticipate as much
as a 3.5%-4% increase in inflation on consumer prices which is higher than the
consensus expectation of approximately 3%.
In addition to growth and inflation, several other factors earlier this year
will influence interest rates in the months ahead. The moves in the U.S.
Congress to cut expenditures and balance the budget are gathering momentum, and
that has helped the U.S. bond market. However, the failure of the balanced
budget amendment sparked a substantial decline in the value of the U.S. dollar.
Ironically, this decline helped the U.S. bond market.
As the dollar declined, compared with major currencies, foreign central banks
became large buyers of U.S. bonds in their dollar-support effort which helped
fuel the recent rally in the bond market. However, foreign governments are not
economic buyers, and if the dollar stabilizes or strengthens, they could become
large sellers which could adversely impact U.S. bond prices. Furthermore, cash
flows into bond mutual funds have been a negative for bonds indicating
continuing weak demand from individual investors.
Both bonds and stocks have recently been appreciating together which is very
unusual for this latter stage of the cycle. This kind of market behavior is more
typical of the period immediately following a recession, when the Federal
Reserve Board (the Fed) is lowering interest rates and profit growth is
accelerating. The stock market, like the bond market, is also overextended, and
there is a cyclical risk of a relatively strong pullback which could be
triggered by the fear of decelerating earnings.
The larger economic picture is still very positive for financial assets and
should continue over the long term. However, economic cycles still dominate
financial markets, and the current cycle has not yet ended.
We do not anticipate a recession this year. Typically, rates rise into a
recession, and they have been declining during the first half of the year. Those
lower rates will fuel a new burst of economic activity and higher consumer
prices, both of which will put upward pressure on interest rates.
3
<PAGE>
Chairman's Letter
-----------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
Thus, we are cautious on both bonds and stocks for the second half of this year.
The equity market appears to be more overextended than the bond market, although
both are running well above their average total return trends. We believe the
high rates of return earned in the first half are not sustainable for the full
year.
The Fed has been holding short-term rates steady; however, higher growth and
inflation will begin to push market interest rates up. We believe the Fed is
falling behind the trend toward higher prices, and will be forced to raise
interest rates again as the inflation rate increases later this year.
Strategically, we would remain cautious now, and average in new investments on
significant pullbacks. The conservative investment virtues of patience and
discipline are those most likely to be rewarded during the remainder of the
year.
Please read the Fund Manager's Reviews, which follow 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
4
<PAGE>
Fund Manager's Review
---------------------
IAI Developing Countries Fund
[GLOBE ARTWORK]
IAI developing countries Fund
[Photo of Roy C. Gillson
IAI Developing Countries
Fund Manager]
Fund Objective
The IAI Developing Countries Fund is designed for aggressive investors seeking
long-term capital appreciation from opportunities offered by investing in
securities of developing market companies. Since the Fund invests in issues of
international stocks in lesser developed countries, investors often use it in
conjunction with other IAI Mutual Funds which invest primarily in more mature
companies in the United States.
Fund Positioning For the Past Six Months
The past six months consisted of a period of boom and bust in the developing
countries markets. First, the bust was the Mexican devaluation of their currency
and the resulting effects which affected not only Latin American countries but
also Far Eastern countries since capital was withdrawn from these markets as
well. Investors became temporarily uncomfortable with the risks of investing in
emerging markets. This occurred from January through March, which was the bottom
for most emerging markets, especially Mexico and Brazil.
From then on, there was a rebuilding of confidence in these markets, helped in
part by the cut in interest rates in the United States which helps reduce the
cost of capital for emerging markets, and a booming U.S. stock market which has
encouraged investors to look at other markets for investment opportunities.
Also, the Mexican government made some very effective measures to slow down the
economy very quickly which have reduced GDP approximately 10% in the past
quarter. The gradual rebuilding of confidence from March led to very strong
performance of emerging markets because liquidity had fallen so much in many of
those markets that only a relatively small amount of money was necessary to move
the markets back up again.
The second move up, in June-July, was the result of increasing earnings for
companies. Mexican companies, especially the export sector, have benefited very
strongly from a devalued peso. They are exporting things like petrochemicals,
auto parts, and steel to the United States, and to Asia and Europe. We expect
that to continue in the second half because the Mexican peso is the only
undervalued currency in Latin America. That is one of the reasons we continue to
like Mexico because the risk of investing in the Mexican peso is less than
investing in other currencies.
Brazil has also been slowing their economy dramatically. Last year they
successfully implemented the Real Plan which was a way to get inflation down
from approximately 40% a month to 2%. However, keeping inflation low will
require a change in the constitution in order to eliminate the indexation in the
economy. So far they have been very successful at slowing the economy. The
consumer has slowed spending and inflation has remained relatively well
contained. The other problem is that Brazil has had an import boom and the trade
deficit has weakened substantially. So they have had to slow the economy in
order to slow the build up of the trade deficit. We believe they will be
successful in the second half and we anticipate finding some attractive
opportunities.
At this point, relative to the benchmark IFC Investable index, we remain
overweighted and optimistic in Latin America, and overweighted in Europe,
Turkey, Greece, and Poland. We are currently underweighted in Malaysia and South
Africa, and slightly underweighted in the Far East.
We have almost reached a fully invested stage and we are very pleased to report
that the year-to-date performance of the Fund ranks in the top quartile of
similar funds. We still expect
"The gradual rebuilding of confidence from March led to very strong performance
of emerging markets."
5
<PAGE>
Fund Manager's Review
---------------------
IAI Developing Countries Fund
[GLOBE ARTWORK]
<TABLE>
<CAPTION>
Portfolio Weighting:
IAI Developing Countries Fund vs. IFC Investable Index
7/31/95 Total Return
------------------------------------- of IFC Investable
IAI Markets for the
Developing Countries IFC Investable Six Months
Fund Index ended 7/31/95*
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe
Czechoslovakia 1% -- n/a
Greece 5% 2% 30.2%
Poland 2% -- 26.8%
Portugal 3% 2% 10.8%
Turkey 1% 4% 59.3%
United Kingdom 1% -- n/a
Far East
India 4% 3% -8.5%
Indonesia 9% 2% 25.8%
Malaysia 8% 21% 26.1%
South Korea 7% 3% 8.8%
Taiwan 2% 2% -18.4%
Other 2% 9% n/a
Latin America
Brazil 11% 10% -9.8%
Chile 6% 2% 16.0%
Columbia 2% 2% -16.8%
Mexico 16% 10% 17.3%
Peru 4% 1% 41.3%
Other -- 4% n/a
Africa
South Africa 7% 23% 23.2%
Cash 9% -- n/a
====================================================================================
Total 100% 100%
====================================================================================
</TABLE>
* Not annualized
developing countries to perform well and we anticipate maintaining a low cash
position over the next few months.
Fund Positioning Going Forward
Looking ahead, we are very optimistic on emerging markets in general. We believe
this is a good environment for emerging markets given the recent cut in U.S.
interest rates and the re-entry of liquidity into those markets. We still see
strong economic growth in many developing countries. We are looking for
resumption of growth in Mexico of 3-4% annualized in 1996. We expect 4-5% in
Brazil, Malaysia and South Africa, so, next year, when the United States market
may be slowing, these markets may still be growing. While we are optimistic, we
remain aware the risks remain very high in individual markets.
/s/ Roy C. Gillson
Roy C. Gillson
Fund Manager
<TABLE>
<CAPTION>
Top Ten Stock Holdings
% of Net Assets
-------------------
Issues Country Industry 7/31/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
South African Iron & Steel Industries South Africa Steel/Iron Ore 3.74
Enersis S.A., ADR Chile Utilities 3.18
Perusahaan Otomobil Nasional Malaysia Motor Vehicles 2.99
Grupo Carso, ADR Mexico Holding Company 2.85
PT Bank Bali, Foreign Indonesia Banks 2.80
Kelang Container Terminal Malaysia Marine Transportation 2.79
Telefonos de Mexico, ADR Mexico Telecommunications 2.79
Maderas Y Sinteticos S. A., ADR Chile Paper 2.72
Portucel Industria Empresa Portugal Paper 2.63
Bidvest Limited South Africa Holding Company 2.58
===========================================================================================================
Total 29.07%
</TABLE>
6
<PAGE>
Fund Manager's Review
IAI Developing Countries Fund
[GLOBE ARTWORK]
Note to Chairman's Letter & Fund Manager's Review
Performance data for the IAI Developing Countries Fund includes changes in share
value and assumes reinvestment of all dividends and capital gains. Past
performance is not a guarantee of future results. The Fund's investment return
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.
[BAR GRAPH]
Top Five Countries
% of Net Assets
- -------------------------------------------
Mexico 15.1%
Brazil 10.4%
Indonesia 8.7%
Malaysia 7.8%
South Korea 6.8%
As of 7/31/95
Value of $10,000 investment+
[GRAPH APPEARS HERE]
TOTAL Return/1/+
Through 7/31/95
Since Inception
2/10/95**
- ------------------------------------------------
IAI Developing Countries Fund 10.60%
IFC Investable Index 10.43%*
+ Past performance is not predictive of future performance
* Since 2/1/95
** Not Annualized
1 Fees and expenses are currently being waived to 2.00%
of the average daily net assets
7
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
[GLOBE ARTWORK]
IAI International Fund
[PHOTO OF ROY C. GILLSON]
Roy C. Gillson
IAI International
Fund Manager
Fund Objective
The primary investment objective of the IAI International Fund is capital
appreciation with current income, principally from dividends, being a secondary
objective. Typically, the Fund invests in stocks representative of the EAFE
Index, but also invests in other countries, including developing countries.
Fund Positioning For the Past Six Months
The most significant developments during the last six months have been the
difficulties in the Japanese market, the substantial appreciation of the yen,
and the performance rebound in the emerging markets.
Portfolio weightings have remained relatively consistent. Despite the fact that
the Japanese market has fallen considerably in local terms, the yen has gained
against the U.S. dollar to offset declining assets.
The Japanese economy is still not recovering. The high level of the yen squeezes
export profits and the domestic economy is not growing. The government has been
reluctant to increase the deficit and the banks have not been able to lend money
against the background of a weak economy and declining property prices. Interest
rates have declined to very low levels with the short-term rate at 3/4% and the
two-year bond rate at 1.2%. Money is not being created and the economy is
experiencing deflation.
We maintained a relatively stable position in the United Kingdom where we bought
shares in National Power and added to our position in Rolls-Royce PLC and sold
our positions in Redland, a construction materials company, and Sears, a retail
group.
Spain is an area that has performed well and one where we are strongly
overweighted. Investors' uncertainty over the currency has dissipated and the
market, which declined significantly in the first quarter, recovered strongly in
the second. There had been political uncertainty, but it now appears there will
be a right wing government which, in general, is perceived as good news for the
market.
One of the few significant changes to the portfolio is the addition of the
Korean stock, Samsung Electronics. The company is a semi-conductor manufacturer,
one of the world's largest suppliers of memory chips. Samsung has expanded
enormously to become a technological leader. The stock dropped to attractive
levels both in absolute terms and in comparison with U.S. technology stocks.
Samsung will likely be one of the main longer-term beneficiaries of the
expansion in the industry.
Compared with the benchmark EAFE index, the IAI International Fund is well
positioned, being underweighted in Japan and overweighted in emerging markets.
Fund Positioning Going Forward
With the slowdown in the United States, and progress in Europe and Asia, we
expect those economies to move ahead modestly. The big swing factors are China
and Japan.
China's economy had been overheating, but they have pulled it back
significantly. There will be a change of regime and, depending how smoothly that
goes, China could either release the brakes on the economy or things could
become difficult, with potential civil unrest, which would distract them from
the economy. This also raises the risk in the area, especially for Hong Kong and
Taiwanese companies.
"Typically,
the Fund invests in
stocks representative
of the EAFE
index."
8
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
[GLOBE ARTWORK]
The most significant change over the next 12 months will be the Japanese
authorities encouraging money creation. This will probably include some form of
public money or bailout for the banks. The government has so far been reluctant
to do this and there was a public outcry when they rescued two failed S&Ls.
However, until the situation is resolved, the Japanese economy will suffer.
/s/ Roy C. Gillson
Roy C. Gillson
Fund Manager
Portfolio Weighting:
IAI International Fund vs. EAFE Index
<TABLE>
<CAPTION>
7/31/95 Total Return
--------------------------------- of EAFE
IAI Markets
International EAFE 6 Months Ended
Fund Index 7/31/95*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe
Belgium 5% 1% 20.8%
Denmark -- 1% 18.2%
Finland -- 1% 45.7%
France 8% 6% 21.2%
Germany 6% 7% 21.7%
Italy -- 2% 0.1%
Netherlands 3% 4% 21.3%
Norway -- 1% 11.2%
Spain 9% 2% 24.6%
Sweden -- 2% 24.1%
Switzerland -- 5% 25.5%
United Kingdom 16% 17% 18.7%
Far East
Australia 5% 3% 15.7%
Israel 2% -- n/a
Hong Kong -- 3% 30.5%
Japan 33% 41% 5.2%
Malaysia 3% 2% 26.0%
New Zealand 3% 1% 18.1%
Singapore 3% 1% 11.5%
South Korea 1% -- n/a
Emerging Markets
Mexico 2% -- n/a
Cash 1% -- n/a
- ----------------------------------------------------------------------------------------------------
Total 100% 100%
- ----------------------------------------------------------------------------------------------------
* Not annualized
Top Ten Stock Holdings
% of Net Assets
-----------------
Issues Country Industry 7/31/95 1/31/95
- ----------------------------------------------------------------------------------------------------
Iberdrola Spain Electricity/Utility 3.70 2.87
Canon Japan Office Equipment 3.48 3.06
Hitachi Japan Electrical Products 3.23 2.82
Koninklijke PTT Nederland Netherlands Commercial Services 3.19 3.96
Honda Motor Japan Auto Related 3.17 2.78
Societe Generale de Belgique Belgium Metals 3.13 2.75
Malaysian International Shipping Malaysia Transportation 3.10 2.09
Glaxo Holdings United Kingdom Pharmaceutical 3.10 2.72
Eridania Beghin-Say France Agriculture 3.08 2.75
Carter Holt Harvey New Zealand Forest Products 3.05 2.75
- ----------------------------------------------------------------------------------------------------
Total 32.23% 28.55%
</TABLE>
9
<PAGE>
Fund Manager's Review
---------------------
IAI International Fund
[GLOBE ARTWORK]
Note to Chairman's letter & Fund Manager's Reviews
Performance data for the IAI International Fund includes changes in share value
and assumes reinvestment of all dividends and capital gains. Past performance is
not a guarantee of future results. The Fund's investment return 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.
Top Five Countries
% of Net Assets
Japan 31.8%
26.8%
United Kingdom 14.9%
15.3%
Spain 8.9%
7.5%
France 8.2%
8.4%
Germany 5.8%
5.0%
As of 7/31/95
As of 1/31/95
Value of $10,000 investment+
Average Annual Returns+
Through 7/31/95
Since Inception
Six Months** 1 year 5 years 4/23/87
- ---------------------------------------------------------------------------
IAI International Fund 13.41% 3.35% 7.61% 7.67%
EAFE Index 13.52% 7.27% 6.00% 5.53%*
+ Past performance is not predictive of future performance
* Since 5/1/87
** Not Annualized
10
<PAGE>
Fund Portfolio
--------------
IAI Developing Countries Fund
[GLOBE ARTWORK]
July 31, 1995
(percentage figures indicate percentage of total net assets)
(unaudited)
Common Stocks -- 79.2%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
Brazil -- 3.5%
Telebras Spons, ADR
(Telecommunications) 2,500 $ 89,375
Usiminas Sideburg Minas, ADR
(Steel/Iron Ore) 1,500 15,480
Usiminas Sideburg Minas, ADR
(Steel/Iron Ore) (c) 5,500 56,760
--------
161,615
- -----------------------------------------------------------
Chile -- 5.9%
Enersis S. A., ADR (Utilities) 5,650 144,781
Maderas Y Sinteticos S.A.,
ADR (Paper) 7,300 124,100
--------
268,881
- -----------------------------------------------------------
Columbia -- 1.8%
Cementos Paz Del Rio, ADR
(Engineering & Construction) (b)(c) 5,500 82,500
- -----------------------------------------------------------
Czech Republic -- 1.3%
Skoda Plzen (Motor Vehicles) (b) 3,000 58,653
- -----------------------------------------------------------
Greece -- 4.9%
Delta Informatics (E.D.P. Services) 12,000 112,382
Technical Company of Volos
(Engineering & Construction) 7,050 110,619
--------
223,001
- -----------------------------------------------------------
India -- 3.5%
Grasim Industries Spons,
GDR (Diversified Industries) (b) 3,250 81,672
Indian Petrochemicals,
GDR (Chemicals) (b) 5,000 80,000
--------
161,672
- -----------------------------------------------------------
Indonesia -- 8.7%
PT Bank Bali, Foreign (Banks) 50,000 127,603
PT Bank International Indonesia,
Foreign (Banks) 25,000 88,427
PT Indorayon Utama,
Foreign (Paper) (b) 32,500 70,209
PT Indorayon Utama (Paper) 10,000 21,603
PT Semen Cibinong, Foreign
(Building Materials) 29,000 88,292
--------
396,134
Market
Quantity Value (a)
- -----------------------------------------------------------
Malaysia -- 7.8%
Kelang Container Terminal
(Marine Transportation) 47,000 $127,207
Malaysian International Shipping,
Foreign (Marine Transportation) 30,000 92,796
Perusahaan Otomobil Nasional
(Motor Vehicles) 36,000 136,263
--------
356,266
- -----------------------------------------------------------
Mexico -- 15.1%
Alfa S.A., Series A
(Holding Company) 8,500 115,283
Desc S.A., Series B
(Holding Company) (b) 28,000 110,991
Fomento Economico Mexicano,
Series B (Food Distributors) 39,000 104,767
Grupo Carso, ADR
(Holding Company) (c) 10,300 130,037
Grupo Financiero Bancomer,
Series B (Finance Companies) 250,000 97,461
Telefonos de Mexico, ADR
(Telecommunications) 3,850 127,050
--------
685,589
- -----------------------------------------------------------
Peru -- 4.2%
Banco de Credito del Peru,
Series C (Banks) (b) 54,500 103,416
CPT Telefonica del Peru,
Series A (Telecommunications) 50,000 87,973
--------
191,389
- -----------------------------------------------------------
Poland -- 2.3%
Elektrim S.A.
(Engineering & Construction) (b) 30,500 106,059
- -----------------------------------------------------------
Portugal -- 2.6%
Portucel Industrial Empresa
(Paper) (b) 15,500 119,726
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
11
<PAGE>
Fund Portfolio
--------------
IAI Developing Countries Fund
[Globe Artwork]
July 31, 1995
(unaudited)
Common Stocks -- 79.2% (cont.)
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
South Africa -- 6.3%
Bidvest Limited
(Holding Company) 23,000 $117,606
South African Iron & Steel
Industries (Steel/Iron Ore) 144,750 170,435
--------
288,041
- -----------------------------------------------------------
South Korea -- 5.3%
Korea Electric Power
(Utilities) (b) 2,400 89,406
Samsung Electronics
(Electrical Products) (b) 372 75,678
Samsung Electronics
Rights 08-21-95 (b) 4 --
Shinhan Bank (Banks) (b) 3,500 75,965
-------
241,049
- -----------------------------------------------------------
Taiwan -- 2.0%
China Steel, GDR
(Steel/Iron Ore) 4,300 89,784
- -----------------------------------------------------------
Thailand -- 1.9%
Srithai Superware LTD
(Home Furnishing) 11,500 85,494
- -----------------------------------------------------------
Turkey -- 1.4%
Tofas-Turk Otomobil Fabr,
ADR (Motor Vehicles) (b) 54,000 62,100
- -----------------------------------------------------------
United Kingdom -- 0.7%
Ocean Wilsons Holdings LTD
(Marine Transportation) 22,000 29,848
===========================================================
Total Investments in Common Stocks
(Cost: $3,386,852)...............................$3,607,801
===========================================================
Preferred Stock -- 8.4%
Market
Quantity Value (a)
- -----------------------------------------------------------
<S> <C> <C>
Brazil -- 6.9%
Banco Nacional S.A. (Banks) 4,100,000 $ 78,803
Centrais Electric Sta Cat,
Series B (Utilities) (b) 102,000 78,462
CIA Tecidos Norte De Mina
(Textiles) (b) 280,000 88,248
Multibras S.A.
(Home Furnishings) 80,000 70,513
-------
316,026
- -----------------------------------------------------------
South Korea -- 1.5%
Samsung Electronics
(Electrical Products) (b) 700 66,875
Samsung Electronics
Rights 08-21-95 (b) 8 --
-------
66,875
===========================================================
Total Investments in Preferred Stocks
(Cost: $378,020).................................$ 382,901
===========================================================
Short-Term Securities -- 8.7%
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------
U.S. Treasury Bill - 8.7%
5.56% 09/21/95 $400,000 $396,951
- ------------------------------------------------------------------------------
Total Investments in Short-Term
Securities
(Cost: $396,929)................................................. $ 396,951
==============================================================================
Total Investments in Securities
(Cost: $4,161,801) (d)........................................... $ 4,387,653
==============================================================================
Other Assets and Liabilities (net) -- 3.7%
................................................................. $ 167,674
==============================================================================
Total Net Assets
................................................................. $ 4,555,327
==============================================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
12
<PAGE>
Fund Portfolio
--------------
IAI International Fund
[Globe Artwork]
July 31, 1995
(unaudited)
Common Stock -- 96.6%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ----------------------------------------------------------
<S> <C> <C>
Australia -- 5.4%
Western Mining (Metals) 555,230 $ 3,608,329
Woodside Petroleum
(Oil Refining) 992,100 4,425,302
----------
8,033,631
- ----------------------------------------------------------
Belgium -- 5.2%
Societe Generale de Belgique
(Metals) 57,000 4,598,067
Solvay Et Cie (Chemicals) 5,410 3,118,594
----------
7,716,661
- ----------------------------------------------------------
France -- 8.2%
Casino ADP (Food Retailing) 153,100 3,336,963
Eridania Beghin-Say
(Agriculture) 28,300 4,528,520
Rhone Poulenc-Class A
(Chemicals) 185,100 4,262,872
----------
12,128,355
- ----------------------------------------------------------
Germany -- 5.8%
Bayer (Chemicals) 16,400 4,406,501
RWE (Oil Refining) 11,380 4,105,677
----------
8,512,178
- ----------------------------------------------------------
Israel -- 1.5%
Israel Fund, ADR 2,800,000 2,072,000
Israel Fund Warrants (b) 560,000 123,200
----------
2,195,200
- ----------------------------------------------------------
Japan -- 31.8%
Canon (Office Equipment) 283,000 5,127,392
Hitachi (Electrical Products) 449,000 4,758,962
Honda Motor (Auto Related) 286,000 4,663,571
Kamigumi (Transportation) 395,000 3,734,855
KAO (Health &
Household Products) 380,000 4,475,144
Matsushita Electric
(Electronic Products) 255,000 4,244,706
Japan -- 31.8% (Cont'd)
Market
Quantity Value (a)
- ----------------------------------------------------------
Mitsubishi Heavy Industries
(Aerospace) 565,000 $ 4,075,473
Nippon Telegraph & Telephone
(Telecommunications) 480 4,087,419
Nippon Yusen Kabushiki Kaish
(Transportation) 719,000 4,396,558
Sekisui House (Homebuilding) 269,000 3,320,236
Toray Industries (Chemicals) 610,000 3,868,192
----------
46,752,508
- ----------------------------------------------------------
Malaysia -- 3.1%
Malaysian International
Shipping (Transportation) 1,473,333 4,557,318
- ----------------------------------------------------------
Mexico -- 1.5%
Telefonos de Mexico, ADR
(Telecommunications) 67,100 2,214,300
- ----------------------------------------------------------
Netherlands -- 3.2%
Koninklijke PTT Nederland
(Commercial Services) 125,007 4,689,377
- ----------------------------------------------------------
New Zealand -- 3.1%
Carter Holt Harvey
(Forest Products) 1,776,550 4,488,232
- ----------------------------------------------------------
Singapore -- 2.8%
Development Bank of
Singapore (Banks) 500 5,956
Jardine Strategic Holdings
(Holding Company) 1,341,000 4,076,640
----------
4,082,596
- ----------------------------------------------------------
South Korea -- 0.8%
Samsung Electronics
(Electronic Products) (b) 6,000 1,220,608
Samsung Electronics
Rights 08-21-95 (b) 74 --
----------
1,220,608
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
13
<PAGE>
Fund Portfolio
--------------
IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
Common Stock -- 96.6% (Cont.)
<TABLE>
<CAPTION>
Market
Quantity Value (a)
<S> <C> <C>
- -------------------------------------------------------------
Spain -- 8.9%
Banco Popular Espanol (Banks) 20,300 $ 3,310,118
Iberdrola (Electricity/Utility) 660,000 5,450,719
Telefonica de Espana
(Telecommunications) 316,000 4,340,659
------------
13,101,496
- -------------------------------------------------------------
Turkey -- 0.4%
Tofas Turk Otomobil
(Auto Related) 560,000 $ 644,000
- -------------------------------------------------------------
United Kingdom -- 14.9%
BICC (Electrical Products) 471,100 2,428,710
Booker (Agriculture) 329,800 2,226,645
Glaxo Holdings
(Pharmaceutical) 380,800 4,555,422
Hanson PLC Group
(Holding Company) 1,055,000 3,683,502
National Power
(Electricity/Utility) (b) 117,810 389,236
Ocean Group (Transportation) 687,000 3,651,414
Paterson Zochonis "A" (Health
& Household Products) 125,903 789,748
Rolls-Royce PLC (Aerospace) 1,396,296 4,134,105
------------
21,858,782
=============================================================
Total Investments in Common Stocks
(Cost: $128,302,291).............................$142,195,242
=============================================================
Preferred Stock -- 0.5%
Market
Quantity Value (a)
- -------------------------------------------------------------
South Korea -- 0.5%
Samsung Electronics
(Electronic Products) (b) 7,500 $ 716,512
Samsung Electronics
Rights 08-21-95 (b) 93 0
------------
716,512
=============================================================
Total Investments in Preferred Stock
(Cost: $643,974).................................$ 716,512
=============================================================
Short-Term Securities -- 1.4%
Principal Market
Rate Maturity Amount Value (a)
=============================================================
U.S. Treasury Bill - 1.4%
5.58% 10/12/95 $ 2,000,000 $ 1,978,440
=============================================================
Total Investments in Short-Term Securities
(Cost: $1,978,260)...............................$ 1,978,440
=============================================================
Total Investments in Securities
(Cost: $130,924,525) (d).........................$144,890,194
=============================================================
Other Assets and Liabilities (net) -- 1.5%
.................................................$ 2,242,968
=============================================================
Total Net Assets
.................................................$147,133,162
=============================================================
</TABLE>
See accompanying Notes to Fund Portfolios on page 15
14
<PAGE>
Notes To Fund Portfolios
------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing securities.
(c)
Represents security sold within terms of private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. These issues
may be only sold to other qualified institutional buyers.
(d)
At July 31, 1995, 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 Developing Countries Fund IAI International Fund
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes.. $4,161,801 $130,924,525
================================================================================================
Gross unrealized appreciation.. $ 302,050 $ 19,335,186
Gross unrealized depreciation.. (76,198) (5,369,517)
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation.... $ 225,852 $ 13,965,669
================================================================================================
</TABLE>
15
<PAGE>
Statements of Assets and Liabilities
------------------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $4,161,801 and $130,924,525) (see Fund Portfolios) $ 4,387,653 $144,890,194
Cash in bank on demand deposit 147,468 427,087
Dividends receivable 3,729 509,573
Receivable for investments securities sold -- 572,438
Receivable for foreign currency contracts held, at value (Note 6) -- 24,766,005
Organization costs (Note 1) 22,000 --
Other 18,484 7,224
------------------------------
Total assets 4,579,334 171,172,521
------------------------------
Liabilities
Accrued investment advisory fee 14,361 118,912
Accrued distribution fee -- 31,227
Accrued dividend-disbursing, administrative,
and accounting fees 3,447 37,472
Other accrued expenses 6,199 24,337
Payable for foreign currency held, at value (Note 6) -- 23,827,411
------------------------------
Total liabilities 24,007 24,039,359
------------------------------
Net assets applicable to outstanding capital stock $ 4,555,327 $147,133,162
==============================
Represented By:
Capital stock $ 4,118 $ 110,548
Additional paid-in capital 4,257,929 131,875,300
Undistributed net investment income 5,985 1,283,517
Accumulated net realized gains (losses) 61,449 (1,071,864)
Unrealized appreciation (depreciation) on:
Investment securities $ 225,852 $ 13,965,669
Other assets and liabilities
denominated in foreign currency (6) 969,992
----------- ------------
225,846 14,935,661
------------------------------
Total -- representing net assets applicable
to outstanding capital stock $ 4,555,327 $147,133,162
==============================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 411,788 11,054,822
==============================
Net asset value per share of outstanding capital stock $ 11.06 $13.31
==============================
</TABLE>
See accompanying Notes to Financial Statements on page 22
16
<PAGE>
Statements of Operations
------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
Period from February 10, 1995* Six months ended
to July 31, 1995 July 31, 1995
- -----------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net Investment Income
Income
Dividends (net of foreign income taxes withheld
of $2,524 and $334,746) $ 13,691 $ 2,474,746
Interest (net of foreign income taxes withheld
of $0 and $6,269) 15,217 129,652
-----------------------------------------
Total income 28,908 2,604,398
-----------------------------------------
Expenses
Investment advisory fees 14,361 684,469
Distribution fees 2,872 179,437
Dividend-disbursing, administrative, and accounting fees 3,447 215,324
Legal fees 626 --
Custodian fees 8,605 49,200
Amortization of organization costs 2,175 --
Compensation of Directors 2,980 905
Audit fees -- 11,726
Printing and shareholder reporting 437 13,575
Registration fees 1,221 8,430
Other expenses -- 11,924
-----------------------------------------
Total expenses 36,724 1,174,990
Less fees reimbursed by Advisers or Distributor (13,801) --
-----------------------------------------
Net expenses 22,923 1,174,990
-----------------------------------------
Net investment income 5,985 1,429,408
-----------------------------------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 61,444 $ 1,505,165
Foreign currency transactions 5 (2,577,371)
-------- -----------
61,449 (1,072,206)
Net change in unrealized appreciation or depreciation on:
Investment securities $225,852 $17,064,315
Other assets and liabilities denominated in
foreign currency (6) 816,893
-------- -----------
225,846 17,881,208
-----------------------------------------
Net gain on investments 287,295 16,809,002
-----------------------------------------
Net increase in net assets resulting
from operations $293,280 $18,238,410
=========================================
</TABLE>
* Commencement of operations
See accompanying Notes to Financial Statements on page 22
17
<PAGE>
Statements of Changes in Net Assets
-----------------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Operations
Net investment income
Net realized gains (losses)
Net change in unrealized appreciation or depreciation
-----------------------------------------
Net increase (decrease) in net assets resulting from operations
-----------------------------------------
Distributions to Shareholders From:
Net investment income
Net realized gains
-----------------------------------------
Total distributions
-----------------------------------------
Capital Share Transactions (Note 4)
Net proceeds from sale of shares
Net asset value of shares issued to shareholders in
reinvestment of distributions
Cost of shares redeemed
-----------------------------------------
Increase (decrease) in net assets from capital share transactions
-----------------------------------------
Total increase in net assets
Net assets at beginning of period
-----------------------------------------
Net assets at end of period
=========================================
(including undistributed net investment income of $5,985 for Developing
Countries Fund, $1,283,517 and $53,632 for International Fund)
</TABLE>
* Commencement of operations
18
<PAGE>
<TABLE>
<CAPTION>
IAI Developing IAI International
Countries Fund Fund
Period from February 10, 1995* Six months ended Period from April 1, 1994
to July 31, 1995 July 31, 1995 to January 31, 1995
- ---------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C>
$ 5,985 $1,429,408 $ 1,330,889
61,449 (1,072,206) 5,048,018
225,846 17,881,208 (13,501,663)
- ---------------------------------------------------------------------------------------------
293,280 18,238,410 (7,122,756)
- ---------------------------------------------------------------------------------------------
- (199,523) --
- (3,633,939) (9,634,926)
- ---------------------------------------------------------------------------------------------
- (3,833,462) (9,634,926)
- ---------------------------------------------------------------------------------------------
6,084,878 51,367,518 102,091,160
- 3,788,145 9,532,735
(1,822,831) (58,901,136) (93,188,329)
- ---------------------------------------------------------------------------------------------
4,262,047 (3,745,473) 18,435,566
- ---------------------------------------------------------------------------------------------
4,555,327 10,659,475 1,677,884
- 136,473,687 134,795,803
- ---------------------------------------------------------------------------------------------
$ 4,555,327 $147,133,162 $136,473,687
=============================================================================================
</TABLE>
See accompanying Notes to Financial Statements on page 22
19
<PAGE>
Financial Highlights
IAI Developing Countries Fund
[Globe Artwork]
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>
Period from
February 10, 1995 ****
to July 31, 1995
- -------------------------------------------------------------------------------
Net Asset Value (unaudited)
<S> <C>
Beginning of period $10.00
------
Operations
Net investment income .01
Net realized and unrealized gains (losses) 1.05
------
Total from operations 1.06
------
Distributions to Shareholders From:
Net investment income --
Net realized gains --
------
Total distributions --
------
Net Asset Value
End of period $11.06
======
Total investment return* 10.60%
Net assets at end of period (000's omitted) $4,555
Ratios
Expenses to average net assets** 2.00%***
Net investment income to average daily net assets** .52%***
Portfolio turnover rate (excluding short-term securities) 19.5%
</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 $13,801 in expenses for the period
ended July 31, 1995. If the Fund had been charged for these expenses, the
ratio of expenses to average daily net assets would have been 3.20% and the
ratio of net investment income to average daily net assets would have been
(.68%).
**** Commencement of operations
20
<PAGE>
Financial Highlights
--------------------
IAI International Fund
[GLOBE ARTWORK]
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>
Period from Years Ended March 31,
Six months ended April 1, 1994 ---------------------------------------------
July 31, 1995 to January 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75 $ 10.70
-----------------------------------------------------------------------------------
Operations
Net investment income .13 .11 .06 .06 .15 .30
Net realized and unrealized
gains (losses) 1.47 (.62) 2.56 .60 .67 (.11)
-----------------------------------------------------------------------------------
Total from operations 1.60 (.51) 2.62 .66 .82 .19
-----------------------------------------------------------------------------------
Distributions to Shareholders From:
Net investment income (.02) -- (.34) (.04) (.22) --
Net realized gains (.33) (.88) (.05) (.42) (.33) (.14)
-----------------------------------------------------------------------------------
Total distributions (.35) (.88) (.39) (.46) (.55) (.14)
-----------------------------------------------------------------------------------
Net Asset Value
End of period $ 13.31 $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75
===================================================================================
Total investment return* 13.41% (4.14%) 23.85% 6.18% 8.10% 1.87%
Net assets at end of period
(000's omitted) $147,133 $136,474 $134,796 $59,248 $36,239 $34,421
Ratios
Expenses to average net assets 1.64%** 1.72%** 1.74% 1.91% 2.00% 1.73%
Net investment income to
average net assets 1.99%** 1.04%** .87% 1.42% 1.39% 2.79%
Portfolio turnover rate
(excluding short-term securities) 12.4% 27.6% 50.9% 28.6% 35.1% 41.3%
</TABLE>
* Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of all distributions at net asset
value.
** Annualized
21
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
[1] Summary of Significant Accounting Policies
IAI Investment Funds III, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. The
IAI Developing Countries Fund and IAI International Fund are separate portfolios
of IAI Investment Funds III, Inc. The Developing Countries Fund commenced
operations on February 10, 1995.
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the IAI International Fund from March 31 to January 31. Accordingly,
these financial statements include the ten-month period from April 1, 1994 to
January 31, 1995.
Significant accounting policies followed by the Funds are summarized below:
Security Valuation
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Investments denominated in foreign currencies are adjusted daily
to reflect changes in exchange rates. 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 a maturity of 60 days or less from the date of
purchase are valued at amortized cost. Short-term securities with a maturity
greater than 60 days from the date of purchase are marked-to-market on a daily
basis.
Foreign Currency Translations and Forward Foreign Currency Contracts
The Funds invest in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date. Exchange gains (losses) may also be realized between the trade
and settlement dates on security and forward contract transactions. The Funds do
not isolate that portion of the result of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising from changes
in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss from investments.
The Funds may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Funds are subject to the credit risk that the
other party will not complete the 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, the Funds
are required to distribute substantially all of their net investment income and
net realized gains on a calendar year basis.
22
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
[1] Summary of Significant Accounting Policies (cont.)
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily due to differing treatments for foreign
currency transactions, passive foreign investments companies (PFIC), and losses
deferred due to "wash sales." The character of distributions made during the
year for net investment income or net realized gains may also differ from its
ultimate characterization for tax purposes.
The Funds may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Funds accrue such taxes as applicable.
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 or
upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for federal income tax purposes. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid semi-annually for
International Fund and annually for Developing Countries Fund. 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.
Concentration of Risk
Investments of Emerging Markets in countries with limited or developing capital
markets may involve greater risks than investments in more developed markets and
the prices of such investments may be volatile. The consequences of political,
social or economic changes in these markets may have disruptive effects on the
market prices of the Funds' investments and the income it generates, as well as
the Funds' ability to repatriate such amounts.
Organizational Costs
Organizational costs are being amortized over 60 months on a straight-line
basis.
23
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
[2] Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with its 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.
The Developing Countries Fund and the International Fund have available lines of
credit of $500,000 and $15,000,000 with a bank at prime interest rates. 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
lines of credit. There were no borrowings outstanding at July 31, 1995.
[3] Fees and Expenses
Under the terms of an investment advisory agreement, each Fund pays Investment
Advisers, Inc. (Advisers) a monthly management fee based on average daily net
assets equal on an annual basis to 1.25% of the first $200 million in net
assets, 1.10% of the next $200 million in net assets, and 1.00% of the net
assets in excess of $400 million for the Developing Countries Fund and computed
on average month-end net assets equal on an annual basis to 1.00% of the first
$100 million in net assets, 0.85% of the next $100 million in net assets, 0.75%
of the next $100 million in net assets and 0.70% of the net assets in excess of
$300 million for the International Fund.
Each Fund also pays an annual fee to Advisers for acting as the Funds' dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average daily net assets for Developing Countries Fund at an
annual rate of .30%, and the average month-end net assets for International
Fund, at an annual rate of .30%.
The Funds have adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Funds' distributor. Under the Plan, the Funds pay Distributor
a monthly fee to cover expense incurred in the distribution and promotion of the
Funds' shares. The fee is computed monthly based on the average daily net assets
for Developing Countries Fund and average month-end net assets for International
Fund at an annual rate of .25%.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds are responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor have agreed to reimburse International
Fund to the extent total expenses, excluding costs incurred in the purchase and
sale of assets, exceed, on an annual basis, 2.00% of average month-end net
assets. Advisers and Distributor are also currently voluntarily waiving fees and
expenses for Developing Countries Fund in excess of 2.00% of average daily net
assets.
24
<PAGE>
Notes to Financial Statements
-----------------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
July 31, 1995
(unaudited)
[4] Capital Stock
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
IAI Developing
Countries Fund IAI International Fund
- -----------------------------------------------------------------------------------------------------------------------
Period from February 10,1995 Six months ended Period from April 1,1994
to July 31,1995 July 31,1995 to January 31,1995
- -----------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Sold....................................... 581,312 4,024,511 7,523,392
Issued for reinvested distributions........ -- 297,576 734,433
Redeemed................................... (169,524) (4,581,849) (6,963,029)
------------------------------------------------------------------
Increase (decrease) in shares outstanding.. 411,788 (259,762) 1,294,796
==================================================================
</TABLE>
[5] Purchases and Sales of Securities
For the period ended July 31, 1995, purchases of securities and sales proceeds,
other than investments in short-term securities, for each Fund were as follows:
- --------------------------------------------------------------------------------
Purchases Sales
- --------------------------------------------------------------------------------
IAI Developing Countries Fund $ 4,108,384 $ 404,832
IAI International Fund $17,311,373 $26,599,318
[6] Foreign Currency Commitments
At July 31, 1995, the International Fund had entered into foreign currency
exchange contracts. The unrealized appreciation of $938,594 for these contracts
at July 31, 1995 is included in unrealized appreciation on other assets and
liabilities denominated in foreign currency.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Exchange U.S. $ Value as of U.S. $ Value as of
Date Currency to be Delivered July 31, 1995 Currency to be Received July 31, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
08/02/95 775,136 Australian Dollars $ 572,439 566,005 U.S. Dollars $ 566,005
10/03/95 374,670,000 Japanese Yen 4,281,763 4,500,000 U.S. Dollars 4,500,000
10/18/95 1,656,573,000 Japanese Yen 18,973,209 19,700,000 U.S. Dollars 19,700,000
- ------------------------------------------------------------------------------------------------------------------
$23,827,411 $24,766,005
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
IAI Mutual Fund Family
----------------------
IAI Developing Countries Fund, IAI International Fund
[GLOBE ARTWORK]
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 medium-sized emerging
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 & Income Fund Capital Appreciation Income Common stocks with potential for long-term appreciation,
and common stocks that are expected to produce income
- -------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + short-term instruments
Income]
- -------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Investment grade bonds
Preservation
- -------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Investment grade municipal bonds
Preservation
(formerly IAI Tax Free Fund) [Exempt from Federal
and Minnesota State
Income Taxes]
- -------------------------------------------------------------------------------------------------------------------------------
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>
26
<PAGE>
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<PAGE>
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<PAGE>
IAI Securities, Inc.
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, MN 55402
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
<PAGE>
[IAI LOGO]
MUTUAL FUNDS
Investment Advisers, Inc.
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA fax
612.376.2737
800.945.3863
612.376.2700
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 01
<NAME> IAI International Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1995
<PERIOD-END> JUL-31-1995
<INVESTMENTS-AT-COST> 130,925
<INVESTMENTS-AT-VALUE> 144,890
<RECEIVABLES> 937
<ASSETS-OTHER> 25,346
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 171,173
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,039
<TOTAL-LIABILITIES> 24,039
<SENIOR-EQUITY> 111
<PAID-IN-CAPITAL-COMMON> 131,875
<SHARES-COMMON-STOCK> 11,055
<SHARES-COMMON-PRIOR> 11,315
<ACCUMULATED-NII-CURRENT> 1,284
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 1,072
<ACCUM-APPREC-OR-DEPREC> 14,935
<NET-ASSETS> 147,133
<DIVIDEND-INCOME> 2,475
<INTEREST-INCOME> 129
<OTHER-INCOME> 0
<EXPENSES-NET> 1,175
<NET-INVESTMENT-INCOME> 1,429
<REALIZED-GAINS-CURRENT> (1,072)
<APPREC-INCREASE-CURRENT> 17,881
<NET-CHANGE-FROM-OPS> 18,238
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 200
<DISTRIBUTIONS-OF-GAINS> 3,634
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,025
<NUMBER-OF-SHARES-REDEEMED> 4,582
<SHARES-REINVESTED> 298
<NET-CHANGE-IN-ASSETS> 10,659
<ACCUMULATED-NII-PRIOR> 1,331
<ACCUMULATED-GAINS-PRIOR> 5,048
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 684
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,175
<AVERAGE-NET-ASSETS> 144,739
<PER-SHARE-NAV-BEGIN> 12.06
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 1.47
<PER-SHARE-DIVIDEND> .35
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.31
<EXPENSE-RATIO> 1.64
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 02
<NAME> IAI Developing Countries Fund
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1995
<PERIOD-END> JUL-31-1995
<INVESTMENTS-AT-COST> 4,162
<INVESTMENTS-AT-VALUE> 4,388
<RECEIVABLES> 151
<ASSETS-OTHER> 40
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,579
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24
<TOTAL-LIABILITIES> 24
<SENIOR-EQUITY> 4
<PAID-IN-CAPITAL-COMMON> 4,258
<SHARES-COMMON-STOCK> 412
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 61
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 226
<NET-ASSETS> 4,555
<DIVIDEND-INCOME> 14
<INTEREST-INCOME> 15
<OTHER-INCOME> 0
<EXPENSES-NET> 23
<NET-INVESTMENT-INCOME> 6
<REALIZED-GAINS-CURRENT> 61
<APPREC-INCREASE-CURRENT> 226
<NET-CHANGE-FROM-OPS> 293
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 581
<NUMBER-OF-SHARES-REDEEMED> 170
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,555
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 14
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 37
<AVERAGE-NET-ASSETS> 2,496
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> 1.05
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.06
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
