GLOBAL EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI DEVELOPING COUNTRIES FUND
IAI INTERNATIONAL FUND
JULY 31, 1996
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
- COVER -
BLANK
- INSIDE FRONT COVER -
TABLE OF CONTENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SEMI-ANNUAL REPORT
JULY 31, 1996
(UNAUDITED)
Chairman's Letter...............................2
Fund Managers' Reviews
IAI DEVELOPING COUNTRIES FUND................4
IAI INTERNATIONAL FUND.......................7
Fund Portfolios
IAI DEVELOPING COUNTRIES FUND...............10
IAI INTERNATIONAL FUND......................13
Notes to Fund Portfolios.......................16
Statements of Assets and Liabilities...........18
Statements of Operations.......................19
Statements of Changes in Net Assets............20
Financial Highlights
IAI DEVELOPING COUNTRIES FUND...............22
IAI INTERNATIONAL FUND......................23
Notes to Financial Statements..................24
Shareholder Update.............................30
IAI Mutual Fund Family.........................32
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
[PHOTO]
NOEL P. RAHN
CHAIRMAN
CALM AFTER THE STORM
Despite turbulence in the stock market this past summer, there are many reasons
to remain optimistic about the financial markets between now and the end of the
year. After a strong second quarter, the U.S. economy seems to be moderating its
pace, growing fast enough to generate corporate profits, but not so fast to
bring back inflation. Interest rates have stabilized, causing the bond market to
outperform stocks in June and July. Instead of boosting interest rates in August
as investors had feared, the Federal Reserve Board took no action, calming the
market.
Still, the first half of the summer was an eye-opener for many investors. After
reaching a high of 5780 on May 22, the Dow Jones Industrial Average fell about 7
percent by the end of July--more, if you count swings in intra-day trading. And
small cap stocks, those that typically trade on NASDAQ, fell as much as 20
percent. The reason for the turbulence was investor fears, generated by job
growth data and increases in commodity prices, that the economy was becoming
overheated. Indeed, corporate profits in the second quarter rose sharply.
According to BUSINESS WEEK, corporate profits rose 11 percent during the second
quarter of 1996, compared to the same period in 1995. In a pattern that often
confounds politicians, good news in the economy is often bad news on Wall
Street.
Just remember, though, that stock market corrections are normal. They're even
healthy, because they allow investors to buy stocks at temporarily depressed
prices. For two months, the Dow fell steadily from 5780 in May to less than 5300
in July before rallying in early August back to the 5700 level. Of course,
nobody knows when the market will hit bottom. Many Wall Street pundits told the
media that the stock market was headed lower, perhaps much lower. But they were
wrong, as is often the case.
We don't recommend that you try to time the market. Even the pros can't get it
right consistently. That's why dollar cost averaging is such a good strategy. By
contributing a fixed amount into the market each month, your money buys more
shares when the market is low and fewer shares when the market is high. This
simple yet time-honored method allows you to purchase shares at a lower average
cost.
Another way to minimize the impact of market turbulence is to make sure that you
are properly diversified. The fixed income market typically offers stability to
a portfolio, and is particularly appropriate for those investors who rely on
income as opposed to price appreciation. The international equity markets also
offer a way to diversify your portfolio, since the economies in other parts of
the world are in different stages than the U.S. economy.
Over the next six months, the markets will undoubtedly be affected by the U.S.
presidential election. And, as we've seen so far in 1996, there is great
potential for volatility. But the markets also continue to demonstrate a
remarkable resiliency.
-2-
CHAIRMAN'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
Using perfect hindsight, the Fed probably should not have cut rates last January
from 5.50% to 5.25%. Due to bad weather and the government shutdowns, the
economy looked much worse than it actually was. It turns out that the economy
grew 2% in the first quarter, which is certainly not a recession. As a result of
the Fed's action, the economy has more momentum than would otherwise have been
the case.
We expect slower growth and no acceleration in inflation as the economy moves
into the fourth quarter. Slower growth and mild inflation will cause the Fed to
be cautious in raising rates. While this approach is likely to please the
markets, it will put the Fed behind in its fight against higher prices. Real
income is growing at 31/2% and consumer confidence is at the high end of its
four year range. So far this year, new jobs have grown by over 230,000 per
month. The unemployment rate, at 5.1%, is at its lowest level in over six years.
Even a modest slowdown will not offset the trend toward tighter labor markets
and rising final demand.
In the period immediately ahead, we expect to see firming bond and stock prices
as the markets take comfort in moderating growth and the lack of decisive Fed
action. This is already occurring in the stock market where broad averages have
recently set new highs. Although this trend will be reversed when the Fed is
forced to raise rates more aggressively in 1997, we are cautiously optimistic
until the Fed decisively responds.
Please read the Fund Managers' Reviews, which follow this letter, for a detailed
perspective on each Fund's 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-
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
IAI DEVELOPING COUNTRIES FUND
[PHOTO]
ROY C. GILLSON
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
[PHOTO]
NIGEL P. HART
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
[PHOTO]
SOOKYONG KWOK
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
FUND OBJECTIVE
The IAI Developing Countries Fund is designed for aggressive investors seeking
long-term capital appreciation from opportunities offered by investing in equity
securities of companies within developing countries. Since the Fund invests in
issues of international stocks in lesser developed countries, investors often
use it as a diversification technique in conjunction with other IAI Mutual Funds
which invest in less volatile markets.
FUND POSITIONING FOR THE PAST YEAR
The IAI Developing Countries Fund invests in emerging markets such as Asia,
Eastern Europe and Latin America, where economic growth is among the fastest in
the world.
In Eastern Europe, the Fund holds investments in countries such as Croatia, the
Czech Republic and Poland, all of which performed well during the period. For
example, Elektrim, an electrical engineering and telecommunications company in
Poland, was up sharply for the six-month period ended July 31, 1996. In Croatia,
Pliva, a pharmaceutical company which markets products throughout Eastern
Europe, is currently selling at double its initial public offering price.
In Latin America, Brazil has done relatively well during the second quarter, due
to the potential privatization of the utility, electricity and telephone
industries. Our representative stock in the Brazilian electricity sector is
Celesc, which was up 61% during the period.
To be sure, not all emerging markets performed well. In Greece, construction
stocks were adversely impacted by the government's insistence that construction
stocks be suspended from the market while the shares were converted from bearer
form to registered form. In Asia, Samsung, the large semiconductor company based
in South Korea, was down sharply for the period, reflecting the drop in prices
in that industry.
Due to these difficulties, the IAI Developing Countries Fund produced a total
return of (0.46%) during the six-month period ended July 31, 1996. The Fund's
benchmark, the IFC Investable Index, produced a total return of (3.28%).
FUND POSITIONING GOING FORWARD
In the past year or two, stocks in developing countries have been overshadowed
by the booming U.S. stock market, particularly the NASDAQ stocks which pose a
similar degree of risk. As a result, stock prices of a wide range of companies
in Latin America, Eastern Europe and the Far East are currently moderate in
relation to the U.S. or Japanese market. In Latin America, governments continue
to privatize the economy. In Eastern Europe, the re-election of Boris Yeltsin in
Russia calmed investor fears. In the Far East, authorities are making progress
to restrain economic growth and ward off inflation. As a result, we see
excellent value and much higher growth opportunities in developing markets in
the months and years ahead.
-4-
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
PORTFOLIO WEIGHTING:
IAI DEVELOPING COUNTRIES FUND VS. IFC INVESTABLE INDEX
7/31/96 Country Returns
IAI Developing IFC Investable for the Year
Countries Fund Index Ended 7/31/96
- --------------------------------------------------------------------------------
AFRICA
South Africa 6% 14% (6.42%)
EUROPE
Czech Republic 3 1 -
Greece 4 2 (10.13%)
Poland 2 1 47.71%
Portugal 2 1 4.52%
Turkey 2 3 (15.97%)
United Kingdom 3 1 7.28%
FAR EAST
China 4 1 (20.67%)
Hong Kong 2 - 14.39%
India 4 2 (7.77%)
Indonesia 6 4 (7.44%)
Israel 2 - -
Malaysia 9 21 (2.44%)
South Korea 8 3 (22.47%)
Taiwan 5 5 17.24%
Thailand 4 4 (28.25%)
LATIN AMERICA
Argentina 4 3 10.53%
Brazil 10 12 14.12%
Chile 5 7 (15.72%)
Colombia 1 1 (20.30%)
Mexico 10 9 1.05%
Peru 4 1 6.28%
OTHER COUNTRIES - 4 -
CASH - - -
- -------------------------------------------------------------------------------
TOTAL 100% 100%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% of Net Assets
Issues Country Industry 7/31/96 1/31/96
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Taipei Fund Taiwan Financial 4.17% 2.69%
Petronas Dagangan Berhad Malaysia Utilities 3.38 -
South African Iron & Steel
Industrial South Africa Non-Energy Minerals 3.01 2.45
Semen Cibinong, foreign Indonesia Non-Energy Minerals 2.80 2.64
Skoda Plzen Czech Republic Consumer Durables 2.76 1.55
Land & General Malaysia Process Industries 2.74 1.55
Enersis ADR Chile Utilities 2.51 1.98
Malaysian International
Shipping, foreign Malaysia Transportation 2.49 2.79
Bidvest South Africa Financial 2.19 2.56
Transportadora de Gas del Sur ADR Argentina Utilities 2.14 1.72
- ------------------------------------------------------------------------------------------------------
TOTAL 28.19% 19.93%
- ------------------------------------------------------------------------------------------------------
</TABLE>
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
-5-
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' 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.
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR CHART]
AS OF 7/31/96 AS OF 1/31/96
MEXICO 9.7% 8.0%
BRAZIL 9.6% 9.9%
MALAYSIA 8.6% 9.2%
SOUTH KOREA 7.3% 7.3%
INDONESIA 5.6% 7.0%
VALUE OF $10,000 INVESTMENT+
[IAI DEVELOPING COUNTRIES FUND PLOT POINTS]
IAI DEVELOPING
COUNTRIES FUND(1) IFC INVESTABLE
(INCEPTION 2/10/95 INDEX *
------------------ --------------
2/10/95 9,670 9,871
7/31/95 11,060 11,047
1/31/96 10,852 11,471
7/31/96 10,803 11,095
TOTAL RETURN+
THROUGH 7/31/96
Since Inception
Six Months** 1 Year 2/10/95**
IAI DEVELOPING COUNTRIES FUND(1) (0.46%) (2.32%) 5.39%
IFCInvestable Index (3.28%) 0.32% 7.09%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/1/95
** NOT ANNUALIZED
(1) FEES AND EXPENSES WERE BEING VOLUNTARILY WAIVED TO 2.00% OF AVERAGE DAILY
NET ASSETS THROUGH MARCH 31, 1996.
-6-
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
[PHOTO]
ROY C. GILLSON
IAI INTERNATIONAL
FUND MANAGER
FUND OBJECTIVE
The primary investment objective of the IAI International Fund is capital
appreciation. A secondary objective is current income, principally from
dividends. Typically, the Fund invests in stocks representative of the Morgan
Stanley Europe Australia and Far East (EAFE) Index. However, the Fund also
invests in other countries, including developing countries.
FUND POSITIONING FOR THE PAST YEAR
Reflecting mixed world markets and a strengthening U.S. dollar, the IAI
International Fund produced a total return of (2.68%) during the six-month
period ended July 31, 1996. In contrast, the EAFE Index produced a total return
of 1.20%.
The largest weighting in the portfolio continues to be in Japan, representing
23% of the Fund. The Japanese stock market was weak during the period in U.S.
dollar terms. The best performing Japanese stock in the Fund was Kao, which
markets household products. Its defensive characteristics enabled it to
outperform a declining market.
The second largest weighting in the Fund is the United Kingdom, which represents
17% of the portfolio. This market was also a poor performer which contributed to
our underperforming the index. A significant holding is Rolls-Royce, which is
primarily an aerospace company. The company is benefiting from the robust U.S.
airline industry, as well as the strong demand for spare parts. We have
increased our holding of British Steel, but the stock has been a poor performer.
The company is well managed and we firmly believe that it will continue to show
good profits. But cyclical stocks are out of favor in Europe.
The European economy continues to grow very slowly--roughly 1% in the second
quarter of 1996. Government deficits remain high, and countries are trying to
cut back on spending. In response to slow growth in the private sector, the
German central bank has led interest rates lower.
The U.S. dollar strengthened during the period. As a result, some gains made in
local markets were eroded by our stronger currency, since local currencies now
buy fewer dollars than earlier in 1996.
FUND POSITIONING GOING FORWARD
At 23% of the portfolio, Japan's representation in the IAI International Fund is
still underweighted compared to the EAFE Index. Although Japan's economy has
clearly improved, stock prices for large well-known companies remain very high
in relation to corporate earnings. We believe that the value that may exist in
Japan is in small- to medium-sized companies, and we are dedicating an
increasing amount of research effort there.
In general, we see a friendly environment for international equities where
profits will continue to grow, and where slow growth in Europe and better growth
in the Far East will be reflected in share prices.
-7-
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
Portfolio Weighting:
IAI International Fund vs. EAFE Index
7/31/96 Country Returns
IAI EAFE for the Year
International Fund Index Ended 7/31/96
- ------------------------------------------------------------------------------
AFRICA
South Africa 1% -% (6.42%)
EUROPE
Belgium 5 1 11.13%
France 9 7 5.05%
Germany 4 7 3.04%
Ireland 1 1 16.82%
Netherlands 5 4 15.63%
Spain 4 2 15.87%
Turkey - - (15.97%)
United Kingdom 17 17 7.28%
FAR EAST
Australia 6 3 5.53%
Hong Kong 8 3 14.39%
Indonesia 1 - 7.44%
Israel 1 - (7.44%)
Japan 23 39 (1.58%)
Malaysia 1 2 1.43%
New Zealand 3 1 7.73%
Singapore - 1 (7.29%)
South Korea 1 - (22.47%)
Thailand 1 - (28.25%)
LATIN AMERICA
Argentina 1 - 10.53%
Brazil 1 - 14.12%
Chile 1 - (15.72%)
Mexico 1 - 1.05%
OTHER COUNTRIES 1 12 -
CASH 4 - -
- -----------------------------------------------------------
TOTAL 100% 100%
- -----------------------------------------------------------
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% of Net Assets
Issues Country Industry 7/31/96 1/31/96
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nippon Yusen Kabushiki Kaish Japan Transportation 3.83% 3.32%
Nippon Telegraph & Telephone Japan Utilities 3.56 3.29
Canon Japan Producer Manufacturing 3.47 3.03
Hitachi Japan Producer Manufacturing 3.37 3.26
Mitsubishi Heavy Japan Producer Manufacturing 3.30 2.67
Commonwealth Bank of
Australia Australia Financial 3.18 -
Toray Japan Process Industries 3.17 2.62
Glaxo Wellcome United Kingdom Health Technology 3.14 3.17
Jardine Strategic Holdings Hong Kong Financial 3.10 3.01
Carter Holt Harvey New Zealand Non-Energy Minerals 3.07 2.74
- ---------------------------------------------------------------------------------------
TOTAL 33.19% 27.11%
- ---------------------------------------------------------------------------------------
* EXCLUDES U.S. TREASURY AND GOVERNMENT OBLIGATIONS
</TABLE>
-8-
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
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
[BAR CHART]
As of 7/31/96 As of 1/31/96
JAPAN 24.0% 23.5%
UNITED KINGDOM 17.8% 17.9%
FRANCE 9.5% 8.7%
HONG KONG 7.9% 2.9%
AUSTRALIA 5.6% 1.8%
Value of $10,000 investment
[INTERNATIONAL FUND PLOT POINTS]
IAI INTERNATIONAL
FUND EAFE
(INCEPTION 4/23/87 INDEX *
------------------ -------
4/23/87 10,030 10,000
1/31/88 9,040 9,323
1/31/89 11,418 11,985
1/31/90 12,723 12,565
1/31/91 11,547 10,348
1/31/92 13,312 11,036
1/31/93 12,540 9,939
1/31/94 18,111 14,331
1/31/95 16,247 13,731
1/31/96 19,517 15,994
7/31/96 18,994 16,186
+ AVERAGE ANNUAL RETURNS+
THROUGH 7/31/96
<TABLE>
<CAPTION>
Six Since Inception
Months** 1 Year 5 Years 4/23/87
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IAI International Fund (2.68%) 3.10% 9.27% 7.16%
- --------------------------------------------------------------------------------------
EAFE Index 1.20% 3.84% 8.63% 5.34%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 5/1/87
** NOT ANNUALIZED
</TABLE>
-9-
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 89.4%
Market
Quantity Value (a)
- -----------------------------------------------------------------------
ARGENTINA - 4.1%
Telefonica de Argentina ADR
(Utilities) 8,000 $ 187,000
Transportadora de Gas del Sur
ADR (Utilities) 17,500 205,625
- -----------------------------------------------------------------------
392,625
- -----------------------------------------------------------------------
BRAZIL - 7.1%
Centrais Electricas de Santa
Catarina (Utilities) (b) 181,000 179,155
Globex Utilidades
(Consumer Durables) (b) 11,050 174,997
Telecomunicacoes de Minas
Gerais (Utilities) 32,412 2,984
Telecomunicacoes Brasileiras
ADR (Utilities) 1,710 123,761
Usinas Siderurgicas de
Minas Gerais ADR
(Non-Energy Minerals) 1,500 16,200
Usinas Siderurgicas de
Minas Gerais ADR
(Non-Energy Minerals) (c) 17,250 186,300
- -----------------------------------------------------------------------
683,397
- -----------------------------------------------------------------------
CHILE - 4.3%
Enersis ADR (Utilities) 7,900 240,950
Maderas Y Sinteticos ADR
(Non-Energy Minerals) 10,150 172,550
- -----------------------------------------------------------------------
413,500
- -----------------------------------------------------------------------
CHINA - 3.9%
Guangdong Electric Power
Development Class B
(Utilities) 275,980 201,633
Sinocan (Process Industries) 380,000 178,126
- -----------------------------------------------------------------------
379,759
- -----------------------------------------------------------------------
Market
Quantity Value (a)
- -----------------------------------------------------------------------
CZECH REPUBLIC - 2.8%
Skoda Plzen
(Consumer Durables) (b) 7,696 $ 264,524
- -----------------------------------------------------------------------
GREECE - 3.5%
Delta Informatics
(Technology Services) 21,410 200,648
Texniki Et Boloy
(Industrial Services) 20,550 133,498
- -----------------------------------------------------------------------
334,146
- -----------------------------------------------------------------------
HONG KONG - 1.9%
Consolidated Electric Power Asia
(Utilities) 106,860 184,472
- -----------------------------------------------------------------------
INDIA - 3.5%
Grasim Industries GDR
(Producer Manufacturing) 11,800 177,000
Indian Petrochemicals GDR
(Energy Minerals) 13,700 160,975
- -----------------------------------------------------------------------
337,975
- -----------------------------------------------------------------------
INDONESIA - 5.6%
Bank Bali, foreign
(Financial) 83,500 173,108
Inti Indorayon Utama, foreign
(Non-Energy Minerals) 117,000 95,779
Semen Cibinong, foreign
(Producer Manufacturing) 134,500 268,828
- -----------------------------------------------------------------------
537,715
- -----------------------------------------------------------------------
ISRAEL - 2.0%
Tadiran Telecommunications
(Electronic Technology) (b) (c) 12,616 194,160
- -----------------------------------------------------------------------
LITHUANIA - 0.2%
Vilniaus Bankas GDR
(Financial) (b) (c) 1,300 18,525
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-10-
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1996
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -----------------------------------------------------------------------
MALAYSIA - 8.6%
Land & General
(Process Industries) 147,000 $ 262,721
Malaysian International
Shipping, foreign
(Transportation) 79,000 239,010
Petronas Dagangan Berhad
(Utilities) 118,300 324,727
- -----------------------------------------------------------------------
826,458
- -----------------------------------------------------------------------
MEXICO - 9.7%
Fomento Economico Mexicano
Class B (Commercial Services) 72,000 187,665
Grupo Carso ADR
(Financial) (b) (c) 13,750 177,375
Grupo Financiero Bancomer
Class B (Financial) (b) 471,000 202,127
Telefonos de Mexico ADR
(Utilities) 6,150 188,344
Transportacion Maritima Mexicana
ADR (Transportation) 27,300 177,450
- -----------------------------------------------------------------------
932,961
- -----------------------------------------------------------------------
PERU - 3.7%
Credicorp (Financial) 6,661 133,886
Credicorp ADR (Financial) 2,232 44,930
Telefonica de Peru
Class B (Utilities) 7,978 174,519
- -----------------------------------------------------------------------
353,335
- -----------------------------------------------------------------------
POLAND - 2.0%
Elektrim
(Producer Manufacturing) 22,800 192,426
- -----------------------------------------------------------------------
Market
Quantity Value (a)
- -----------------------------------------------------------------------
PORTUGAL - 2.0%
Portucel Industrial Empresa
(Non-Energy Minerals) 29,900 $ 193,068
- -----------------------------------------------------------------------
SOUTH AFRICA - 5.2%
Bidvest (Financial) 39,849 209,964
South African Iron &
Steel Industrial
(Non-Energy Minerals) 442,000 289,274
- -----------------------------------------------------------------------
499,238
- -----------------------------------------------------------------------
SOUTH KOREA - 6.1%
Korea Electric Power (Utilities) 2,437 85,548
Pohang Iron & Steel
(Non-Energy Minerals) 2,370 185,134
Samsung Electronics
(Electronic Technology) 934 80,658
Samsung Electronics RFD 1/1/97
(Electronic Technology) (b) 535 44,753
Shinhan Bank (Financial) 8,615 193,411
- -----------------------------------------------------------------------
589,504
- -----------------------------------------------------------------------
TAIWAN - 4.2%
Taipei Fund (Financial) 5,000 400,000
- -----------------------------------------------------------------------
THAILAND - 4.0%
Charoen Pokphand Feedmill,
foreign (Process Industries) 29,000 160,760
Siam City Bank (Financial) 45,000 43,209
Srithai Superware
(Consumer Durables) 4,200 28,272
Srithai Superware, foreign
(Consumer Durables) 22,300 150,109
- -----------------------------------------------------------------------
382,350
- -----------------------------------------------------------------------
TURKEY - 1.9%
Tofas Turk Otomobil GDR
(Consumer Durables) (b) 943,750 179,313
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-11-
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1996
(UNAUDITED)
COMMON STOCK (CONT.)
Market
Quantity Value (a)
- -----------------------------------------------------------------------
UNITED KINGDOM - 3.1%
Five Arrows Chile Investment
Trust (Financial) 67,516 $ 193,434
Ocean Wilsons (Financial) 44,000 62,346
Pliva (Health Technology) (b) (c) 1,144 44,902
- -----------------------------------------------------------------------
300,682
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $9,025,562).........................................$8,590,133
- -----------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED
STOCKS 5.0%
Market
Quantity Value (a)
- -----------------------------------------------------------------------
BRAZIL - 2.5%
Banco Nacional (Financial) (d) 5,300,000 $ -
CIA Tecidos Norte de Minas
(Process Industries) 298,500 103,410
Telecomunicacoes de Minas
Gerais (Utilities) 1,235,000 136,910
- -----------------------------------------------------------------------
240,320
- -----------------------------------------------------------------------
COLOMBIA - 1.3%
Banco Ganadero ADR (Financial) 6,110 123,084
- -----------------------------------------------------------------------
SOUTH KOREA - 1.2%
Samsung Electronics
(Electronic Technology) 1,870 86,472
Samsung Electronics RFD 1/1/97
(Electronic Technology) (b) 663 28,518
- -----------------------------------------------------------------------
114,990
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $580,628)............................................$ 478,394
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $9,606,190) (E)......................................$9,068,527
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - 5.6%
....................................... $ 532,833
- -----------------------------------------------------------------------
TOTAL NET ASSETS
............................................................$9,601,360
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-12-
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1996
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 95.0%
Market
Quantity Value (a)
- -----------------------------------------------------------------------
ARGENTINA - 0.8%
Transportadora de Gas del Sur ADR
(Utilities) 80,000 $ 940,000
- -----------------------------------------------------------------------
AUSTRALIA - 5.6%
Commonwealth Bank of Australia
(Financial) 463,787 3,738,748
M.I.M. Holdings
(Energy Minerals) (b) 2,470,424 2,883,180
- -----------------------------------------------------------------------
6,621,928
- -----------------------------------------------------------------------
BELGIUM - 5.2%
Compagnie Maritime Belge
(Utilities) 15,112 1,218,910
Generale de Banque (Financial) 7,111 2,551,766
Solvay (Process Industries) 4,092 2,404,682
- -----------------------------------------------------------------------
6,175,358
- -----------------------------------------------------------------------
BRAZIL - 0.8%
Usinas Siderurgicas de Minas Gerais
ADR (Non-Energy Minerals) 90,000 972,000
- -----------------------------------------------------------------------
CHILE - 1.0%
Enersis ADR (Utilities) 40,000 1,220,000
- -----------------------------------------------------------------------
FRANCE - 6.9%
Eridania Beghin-Say
(Process Industries) 19,823 2,824,094
Lafarge (Producer Manufacturing) 40,890 2,450,438
Lyonnaise des Eaux-Dumez
(Industrial Services) 31,112 2,823,157
- -----------------------------------------------------------------------
8,097,689
- -----------------------------------------------------------------------
GERMANY - 4.4%
Bayer (Process Industries) 81,469 2,730,937
RWE (Energy Minerals) (b) 69,731 2,495,127
- -----------------------------------------------------------------------
5,226,064
- -----------------------------------------------------------------------
Market
Quantity Value (a)
- -----------------------------------------------------------------------
HONG KONG - 7.9%
Consolidated Electric Power Asia
(Utilities) 1,333,200 $ 2,301,504
Hong Kong Telecommunications
(Utilities) 2,051,600 3,382,502
Jardine Strategic Holdings
(Financial) 1,192,000 3,647,520
- -----------------------------------------------------------------------
9,331,526
- -----------------------------------------------------------------------
INDONESIA - 0.8%
Bank Bali, foreign (Financial) 450,000 932,915
- -----------------------------------------------------------------------
IRELAND - 1.1%
Irish Life (Financial) 343,534 1,299,848
- -----------------------------------------------------------------------
ISRAEL - 0.6%
NUR Advanced Technologies ADR
(Producer Manufacturing) (b) 80,000 190,000
Tadiran Telecommunications
(Electronic Technology) (b) (c) 36,000 554,040
- -----------------------------------------------------------------------
744,040
- -----------------------------------------------------------------------
JAPAN - 24.0%
Canon (Producer Manufacturing) 216,000 4,088,264
Hitachi (Producer Manufacturing) 435,000 3,965,847
Kamigumi (Transportation) 351,000 3,147,407
KAO (Process Industries) 50,000 665,261
Mitsubishi Heavy
(Producer Manufacturing) 458,000 3,883,720
Nippon Telegraph & Telephone
(Utilities) 587 4,191,089
Nippon Yusen Kabushiki Kaish
(Transportation) 800,000 4,505,036
Toray (Process Industries) 548,000 3,727,787
- -----------------------------------------------------------------------
28,174,411
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-13-
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1996
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- -----------------------------------------------------------------------
MALAYSIA - 1.0%
Malaysian International Shipping,
foreign (Transportation) 400,333 $ 1,211,187
- -----------------------------------------------------------------------
MEXICO - 1.4%
Grupo Financiero Bancomer
Class B (Financial) (b) 2,000,000 858,290
Telefonos de Mexico ADR
(Utilities) 27,000 826,875
- -----------------------------------------------------------------------
1,685,165
- -----------------------------------------------------------------------
NETHERLANDS - 4.6%
Koninklijke PTT Nederland
(Commercial Services) 86,189 3,039,818
Philips Electronics
(Producer Manufacturing) 70,624 2,341,316
- -----------------------------------------------------------------------
5,381,134
- -----------------------------------------------------------------------
NEW ZEALAND - 3.1%
Carter Holt Harvey
(Non-Energy Minerals) (b) 1,560,764 3,616,378
- -----------------------------------------------------------------------
SOUTH AFRICA - 0.7%
Bidvest (Financial) 150,960 795,408
- -----------------------------------------------------------------------
SOUTH KOREA - 0.3%
Samsung Electronics
(Electronic Technology) 3,484 300,869
Samsung Electronics RFD 1/1/97
(Electronic Technology) (b) 1,050 87,834
- -----------------------------------------------------------------------
388,703
- -----------------------------------------------------------------------
SPAIN - 4.5%
Banco Popular Espanol (Financial) 10,756 1,856,917
Iberdrola (Utilities) 193,786 1,765,265
Telefonica de Espana (Utilities) 99,337 1,730,761
- -----------------------------------------------------------------------
5,352,943
- -----------------------------------------------------------------------
TAIWAN - 1.0%
Taipei Fund (Financial) 14,000 1,120,000
- -----------------------------------------------------------------------
THAILAND - 1.0%
Charoen Pokphand Feedmill,
foreign (Process Industries) 194,700 1,079,311
- -----------------------------------------------------------------------
Market
Quantity Value (a)
- -----------------------------------------------------------------------
TURKEY - 0.5%
Tofas Turk Otomobil GDR
(Consumer Durables) (b) 2,975,000 $ 565,250
- -----------------------------------------------------------------------
UNITED KINGDOM - 17.8%
B.A.T. (Consumer Non-Durables) 347,427 2,726,532
BICC Group
(Producer Manufacturing) 418,768 2,060,521
British Steel
(Non-Energy Minerals) 826,692 2,291,291
Glaxo Wellcome
(Health Technology) 265,053 3,691,727
Hanson (Financial) 952,684 2,377,187
Israel Fund Warrants (Financial) 560,000 78,400
Peninsular and Oriental Steam
Navigation (Transportation) 275,695 2,094,909
Rolls-Royce
(Electronic Technology) 827,399 2,808,588
Tomkins
(Producer Manufacturing) 711,133 2,779,336
- -----------------------------------------------------------------------
20,908,491
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $109,816,527) $ 111,839,749
- -----------------------------------------------------------------------
NON-CONVERTIBLE PREFERRED
STOCKS - 0.4%
Market
Quantity Value (a)
- -----------------------------------------------------------------------
SOUTH KOREA - 0.4%
Samsung Electronics
(Electronic Technology) 7,500 $ 346,814
Samsung Electronics RFD 1/1/97
(Electronic Technology) (b) 2,260 97,209
- -----------------------------------------------------------------------
444,023
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $614,991) $ 444,023
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-14-
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1996
(UNAUDITED)
OTHER SECURITIES - 2.6%
Market
Quantity Value (a)
- -----------------------------------------------------------------------
FRANCE - 2.6%
Qualis Sca (Limited Partnership) (b) 500 $ 3,001,380
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $2,970,356) $ 3,001,380
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $113,401,874) ....................................$115,285,152
- -----------------------------------------------------------------------
SHORT-TERM SECURITIES - 4.2%
Principal Market
Rate Maturity Amount Value (a)
- -----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES - 4.2%
Federal Home Loan Bank (DISCOUNT NOTE)
5.50% 08/01/96 $5,000,000 $5,000,000
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN SHORT-TERM
SECURITIES
(COST: $5,000,000) ....................................$ 5,000,000
- -----------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST: $118,401,874) (e) ..............................$ 120,285,152
- -----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) - (2.2%)
......................................................$ (2,628,136)
- -----------------------------------------------------------------------
TOTAL NET ASSETS
......................................................$ 117,657,016
- -----------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
-15-
NOTES TO FUND PORTFOLIOS
IAIDEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1996
(UNAUDITED)
(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 security.
(c)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. This issue
may be only sold to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
This security has been deemed illiquid under guidelines approved by the Board of
Directors.
(e)
At July 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 DEVELOPING COUNTRIES FUND IAI INTERNATIONAL FUND
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cost for federal tax purposes $ 9,608,542 $ 118,402,638
- ----------------------------------------------------------------------------------------------
Gross unrealized appreciation $ 726,954 $ 11,020,985
Gross unrealized depreciation (1,266,969) (9,138,471)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation $ (540,015) $ 1,882,514
- ----------------------------------------------------------------------------------------------
</TABLE>
-16-
(THIS PAGE INTENTIONALLY LEFT BLANK)
-17-
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1996
(UNAUDITED)
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $9,606,190 and $118,401,874) (see Fund Portfolios) $ 9,068,527 $ 120,285,152
Cash in bank on demand deposit 558,529 -
Receivable for investment securities sold 96,822 -
Dividends receivable 8,083 542,326
Other - 6,142
------------ --------------
TOTAL ASSETS 9,731,961 120,833,620
------------ --------------
LIABILITIES
Disbursements in excess of cash on demand deposit - 2,907,070
Payable for investment securities purchased 130,076 1,687
Unrealized depreciation on foreign currency contracts held,
at value (Note 6) 435 267,018
Other accrued expenses 90 829
------------ --------------
TOTAL LIABILITIES 130,601 3,176,604
------------ --------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 9,601,360 $ 117,657,016
============ ==============
REPRESENTED BY:
Capital stock $ 9,187 $ 92,235
Additional paid-in capital 9,535,943 107,111,542
Undistributed net investment income 49,624 1,132,797
Accumulated net realized gains on investments 544,356 7,686,053
Unrealized appreciation or depreciation on:
Investment securities $ (537, 663) $ 1,883,278
Other assets and liabilities
denominated in foreign currency (87) (248,889)
------------ --------------
(537,750) 1,634,389
------------ --------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 9,601,360 $ 117,657,016
============ ==============
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 918,687 9,223,495
------------ --------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 10.45 $ 12.76
============ ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
-18-
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SIX MONTHS ENDED JULY 31, 1996
(UNAUDITED)
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $11,269 and $316,716) $ 130,061 $ 2,226,861
Interest 9,761 77,195
------------ ------------
TOTAL INCOME 139,822 2,304,056
------------ ------------
EXPENSES
Management fees (Note 3) 63,967 756,140
Investment advisory fees 16,354 233,539
Distribution fees 3,270 61,456
Dividend-disbursing, administrative, and accounting fees 3,925 73,747
Legal fees 457 870
Custodian fees 2,237 15,950
Amortization of organization costs 780 -
Compensation of Directors 1,341 7,984
Audit fees 4,000 3,480
Printing and shareholder reporting 1,324 11,600
Registration fees 8,531 4,060
Other expenses 1,865 4,617
------------ ------------
TOTAL EXPENSES 108,051 1,173,443
Less fees reimbursed by Advisers or Distributor (17,906) (2,184)
------------ ------------
NET EXPENSES 90,145 1,171,259
------------ ------------
NET INVESTMENT INCOME 49,677 1,132,797
------------ ------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 549,034 $ 7,106,961
Foreign currency transactions (2,235) 864,335
546,799 7,971,296
Net change in unrealized appreciation or depreciation on:
Investment securities $ (700,996) $ (11,523,710)
----------- -------------
Other assets and liabilities denominated in
foreign currency (57) (552,621)
(701,053) (12,076,331)
------------ ------------
NET LOSS ON INVESTMENTS (154,254) (4,105,035)
------------ ------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ (104,577) $ (2,972,238)
============ ============
- ----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
-19-
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
IAI DEVELOPING
COUNTRIES FUND
Six months ended Period from February 10, 1995*
July 31,1996 to January 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 49,677 $ 1,509
Net realized gains 546,799 172,610
Net change in unrealized appreciation or depreciation (701,053) 163,303
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (104,577) 337,422
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,592) --
Net realized gains (51,683) (123,990)
------------ ------------
TOTAL DISTRIBUTIONS (57,275) (123,990)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 5,868,119 10,822,797
Net asset value of shares issued to shareholders in
reinvestment of distributions 56,481 123,486
Cost of shares redeemed (3,518,397) (3,802,706)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 2,406,203 7,143,577
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,244,351 7,357,009
NET ASSETS AT BEGINNING OF PERIOD 7,357,009 --
------------ ------------
NET ASSETS AT END OF PERIOD $ 9,601,360 $ 7,357,009
============ ============
(including undistributed net investment income of $49,624 and
$5,539 for Developing Countries Fund; $1,132,797 and $0
for International Fund)
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
- WIDE TABLE CONTINUED FROM ABOVE -
<TABLE>
<CAPTION>
IAI INTERNATIONAL
FUND
Six months ended Year ended
July 31, 1996 January 31, 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 1,132,797 $ 1,600,784
Net realized gains 7,971,296 8,274,842
Net change in unrealized appreciation or depreciation (12,076,331) 16,656,267
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,972,238) 26,531,893
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (1,654,416)
Net realized gains (1,393,882) (10,800,484)
------------- -------------
TOTAL DISTRIBUTIONS (1,393,882) (12,454,900)
------------- -------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 65,576,752 122,833,831
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,377,630 12,226,866
Cost of shares redeemed (96,594,506) (133,948,117)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (29,640,124) 1,112,580
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (34,006,244) 15,189,573
NET ASSETS AT BEGINNING OF PERIOD 151,663,260 136,473,687
------------- -------------
NET ASSETS AT END OF PERIOD $ 117,657,016 $ 151,663,260
============= =============
(including undistributed net investment income of $49,624 and
$5,539 for Developing Countries Fund; $1,132,797 and $0
for International Fund)
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
-20 & 21-
FINANCIAL HIGHLIGHTS
IAI DEVELOPING COUNTRIES FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH
PERIOD AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED FEBRUARY 10, 1995 ****
JULY 31, 1996 TO JANUARY 31, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.56 $ 10.00
--------- ---------
OPERATIONS
Net investment income .05 --
Net realized and unrealized gains (losses) (.09) .83
--------- ---------
TOTAL FROM OPERATIONS (.04) .83
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.01) --
Net realized gains (.06) (.27)
--------- ---------
TOTAL DISTRIBUTIONS (.07) (.27)
--------- ---------
NET ASSET VALUE
End of period $ 10.45 $ 10.56
========= =========
Total investment return* (0.46%) 8.53%
Net assets at end of period (000's omitted) $ 9,601 $ 7,357
RATIOS
Expenses to average daily net assets*** 2.00%** 2.15%**
Expenses to average daily net assets
(net of expenses paid indirectly) n/a 2.00%**
Net investment income to average daily net assets*** 1.10%** .04%**
Portfolio turnover rate (excluding short-term securities) 31.8% 41.9%
</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 $17,906 AND $45,293 IN EXPENSES FOR
THE SIX MONTHS ENDED JULY 31, 1996 AND THE PERIOD ENDED JANUARY 31, 1996,
RESPECTIVELY. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 2.40% AND 3.42%,
RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET
ASSETS WOULD HAVE BEEN .70% AND (1.23%), RESPECTIVELY. THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY
THE FUND.
**** COMMENCEMENT OF OPERATIONS
-22-
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI INTERNATIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH
PERIOD AND SELECTED INFORMATION FOR EACH PERIOD INDICATED ARE AS FOLLOWS:
Six months Year ended Period from
ended January 31, April 1, 1994 to Years ended March 31,
July 31, 1996 1996 January 31, 1995+ 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
NET ASSET VALUE
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75
----------- ----------- ----------- ----------- ----------- -----------
OPERATIONS
Net investment income .12 .19 .11 .06 .06 .15
Net realized and unrealized
gains (losses) (.47) 2.17 (.62) 2.56 .60 .67
----------- ----------- ----------- ----------- ----------- -----------
Total from operations (.35) 2.36 (.51) 2.62 .66 .82
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (.16) -- (.34) (.04) (.22)
Net realized gains (.13) (1.02) (.88) (.05) (.42) (.33)
----------- ----------- ----------- ----------- ----------- -----------
TOTAL DISTRIBUTIONS (.13) (1.18) (.88) (.39) (.46) (.55)
----------- ----------- ----------- ----------- ----------- -----------
NET ASSET VALUE
End of period $ 12.76 $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02
=========== =========== =========== =========== =========== ===========
Total investment return* (2.68%) 20.15% (4.14%) 23.85% 6.18% 8.10%
Net assets at end of period
(000's omitted) $ 117,657 $ 151,663 $ 136,474 $ 134,796 $ 59,248 $ 36,239
RATIOS
Expenses to average net assets*** 1.60%** 1.66% 1.72%** 1.74% 1.91% 2.00%
Expenses to average net assets
(net of expenses paid indirectly) n/a 1.66% n/a n/a n/a n/a
Net investment income to
average net assets 1.65%** 1.12% 1.04%** 0.87% 1.42% 1.39%
Portfolio turnover rate
(excluding short-term securities) 16.0% 39.2% 27.6% 50.9% 28.6% 35.1%
</TABLE>
- -------------------------
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
*** BEGINNING IN FISCAL 1996, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS
INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND.
+ REFLECTS FISCAL YEAR-END CHANGE FROM MARCH 31 TO JANUARY 31
-23-
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1996
(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. 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. The funds have a primary objective of capital
appreciation mainly through investment in equity securities of developed and
emerging countries.
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. 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. 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
maturities of 60 days or less from the date of acquisition are valued at
amortized cost. Short-term securities with maturities greater than 60 days from
the date of acquisition 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.
-24-
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.
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 (PFICs), 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. 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 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 they generate, as well as the Funds' ability
to repatriate such amounts.
-25-
ORGANIZATION COSTS
Through March 31, 1996, organization costs for the Developing Countries were
being 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
their 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 $1,000,000 and $12,092,930, 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 lines of credit. During the six months ended July 31, 1996,
the Funds paid $204 and $13,471, respectively, in interest on the line of credit
at an average annual rate of 8.25%. Advances under the line of credit totalled
$2,907,070 for the International Fund at July 31, 1996. There were no borrowings
outstanding at July 31, 1996 for the Developing Countries Fund.
-26-
[3] FEES AND EXPENSES
Under the terms of an investment advisory agreement, each Fund paid Investment
Advisers, Inc. (Advisers) a monthly management fee which for Developing
Countries Fund was based on average daily net assets, and was calculated at
annual rates of 1.25%, 1.10% and 1.00% respectively, for the first $200 million
in net assets, the next $200 million in net assets, and those net assets in
excess of $400 million. International Fund's management fee was based on average
month-end net assets and was calculated at annual rates of 1.00%, 0.85%, 0.75%,
and 0.70% respectively, for the first $100 million in net assets, the next $100
million in net assets, the next $100 million in net assets and those net assets
in excess of $300 million in net assets.
Each Fund also paid an annual fee to Advisers for acting as the Funds'
dividend-disbursing, administrative, and accounting services agent. The fee was
computed monthly on the average daily net assets for Developing Countries Fund,
and average month-end net assets for International Fund, at an annual rate of
.30%.
Each Fund had adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Funds' distributor. Under the Plan, the Funds paid
Distributor a monthly fee to cover expense incurred in the distribution and
promotion of the Funds' shares. The fee was computed monthly based on 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 were responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor had contractually 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 were also voluntarily waiving
fees and expenses for Developing Countries Fund in excess of 2.00% of average
daily net assets.
New Management Agreements for the Funds were approved by 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
Distributors. 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 and interest and
extraordinary expenses) in return for each Fund paying an all-inclusive
management fee to Adviser. For Developing Countries Fund the fee is equal to an
annual rate of 2.00% of average daily net assets, with the fee declining to
1.65% as the Fund's assets increase. For International Fund the fee is equal to
an annual rate of 1.70% of average daily net assets, with the fee declining to
1.30% as the Fund's assets increase. This fee is paid monthly.
-27-
Pursuant to the new agreements Developing Countries and International 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, Developing Countries and International Funds received
(paid) net amounts of $16,482 and ($16,583), respectively.
[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 IAI INTERNATIONAL
COUNTRIES FUND FUND
Six months Period from Six months Year ended
ended February 10, 1995 ended January 31,
July 31, 1996 to January 31,1996 July 31, 1996 1996
<S> <C> <C> <C> <C>
SOLD 541,697 1,042,319 4,957,870 9,473,961
ISSUED FOR REINVESTED DISTRIBUTIONS 5,225 12,731 104,922 960,998
REDEEMED (325,077) (358,208) (7,298,121) (10,290,719)
INCREASE IN SHARES OUTSTANDING 221,845 696,842 (2,235,329) 144,240
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the period ended July 31, 1996, 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 $ 5,736,746 $ 2,703,763
IAI INTERNATIONAL FUND $ 22,095,113 $ 48,371,883
-28-
[6] FOREIGN CURRENCY COMMITMENTS
At July 31, 1996, the funds had entered into foreign currency exchange
contracts. The unrealized depreciation on those contracts at July 31, 1996 is
included in unrealized appreciation or depreciation on other assets and
liabilities denominated in foreign currency. The terms of the open contracts are
as follows:
<TABLE>
<CAPTION>
IAI DEVELOPING COUNTRIES FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Depreciation
<S> <C> <C> <C> <C> <C>
08/02/96 714,240 Czech Republic Koruna 26,801 U.S. Dollars $ 266
08/05/96 49,727 U.S. Dollars 123,720 Malaysian Ringgit 149
08/08/96 27,571 U.S. Dollars 68,754 Malaysian Ringgit 20
$ 435
$ 435
</TABLE>
<TABLE>
<CAPTION>
IAI INTERNATIONAL FUND
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Depreciation
<S> <C> <C> <C> <C> <C>
10/18/96 1,030,512,500 Japanese Yen 9,500,000 U.S. Dollars $ 267,018
</TABLE>
-29-
SHAREHOLDER UPDATE
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL 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.
<TABLE>
<CAPTION>
1. The Funds' shareholders re-elected the following directors:
- ----------------------------------------------------------------------------------------
Shares Voted Shares Withheld
IAI Developing Countries Fund "For" Authority
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Madeline Betsch 524,677 625
W. William Hodgson 524,534 768
Richard E. Struthers 524,575 727
J. Peter Thompson 524,570 732
George R. Long 524,468 834
Noel P. Rahn 524,534 768
Charles H. Withers 524,636 666
- ----------------------------------------------------------------------------------------
Shares Voted Shares Withheld
IAI International Fund "For" Authority
- ----------------------------------------------------------------------------------------
Madeline Betsch 8,033,242 38,821
W. William Hodgson 8,017,695 54,368
Richard E. Struthers 8,036,659 35,404
J. Peter Thompson 8,031,255 40,808
George R. Long 8,028,614 43,449
Noel P. Rahn 8,035,567 36,496
Charles H. Withers 8,017,630 54,433
</TABLE>
-30-
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 Developing Countries Fund 522,313 1,582 1,406
IAI International Fund 7,357,869 666,978 47,214
</TABLE>
3. The Funds' shareholders ratified each Funds' Management Agreements. The
following votes were cast regarding the matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
<S> <C> <C> <C>
IAI Developing Countries Fund 511,145 11,308 2,849
IAI International Fund 7,972,139 42,773 57,149
</TABLE>
4. The Funds' shareholders ratified the new Management Agreement between
Investment Advisers, Inc. and each of the the funds. The following votes
were cast regarding the matter:
<TABLE>
<CAPTION>
Shares Voted Shares Voted
"For" "Against" Abstentions
<S> <C> <C> <C>
IAI Developing Countries Fund 511,271 11,100 2,931
IAI International Fund 7,955,143 55,580 61,338
</TABLE>
-31-
<TABLE>
<CAPTION>
IAI MUTUAL FUND FAMILY
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR
FUND FAMILY
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
(closed to new investors growth companies
as of 2/1/96)
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Capital Appreciation Fund Capital Appreciation -- Common stocks of 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 & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment-grade bonds and
[Capital Appreciation + Income] short-term instruments
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Income The portfolio has a maximum average maturity of 25
months, investing primarily in investment-grade bonds
- ---------------------------------------------------------------------------------------------------------------------------------
IAI Money Market Fund Stability/Liquidity Income The portfolio's average dollar-weighted maturity is
less than 90 days, investing in high quality, money
market securities
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-32-
(This page intentionally left blank)
-33-
(This page intentionally left blank)
-34-
(This page intentionally left blank)
-35-
(This page intentionally left blank)
-36-
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://networth.galt.com/iai
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
- INSIDE BACK COVER -
[LOGO] 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
- BACK COVER -
