GLOBAL EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI DEVELOPING COUNTRIES FUND,
IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
[LOGO]
IAI
MUTUAL FUNDS
<PAGE>
[GLOBE GRAPHIC]
TABLE OF CONTENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SEMI-ANNUAL REPORT
JULY 31, 1997
(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
IAI Mutual Fund Family........................ 28
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
[GLOBE GRAPHIC]
CHAIRMAN'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
[PHOTO]
NOEL P. RAHN
CHAIRMAN
AN ELEVEN FOLD RISE IN 15 YEARS
On August 12, 1997, the U.S. stock market celebrated the fifteenth anniversary
of the great bull market. Indeed, it's hard to believe that on August 12, 1982,
the Dow Jones Industrial Average closed the day at just 777. In fifteen years,
the U.S. stock market has risen from $1 trillion to $10 trillion in valuation,
generating a total annual return of about 20%, the best 15-year stretch in
history.
The American economic model, emphasizing capitalism, free trade, productivity
and high technology, is now the envy of the world. Unemployment is at 4.8%,
inflation is 2%, corporate profits continue to expand at a steady, though
slowing rate, and there's nothing on the horizon to cause concern.
To be sure, the stock market is still a volatile place to be, with the month of
August 1997 erasing the Dow gains of July 1997. Meanwhile, investor interest has
recently shifted to some markets that have underperformed in recent years--small
capitalization domestic stocks and international markets. One of the best
performing markets in the world over the past twelve months was Russia, a
country that is still making a wrenching transition from the old Soviet Union's
planned economy. Another strong market for much of the year was in Hong Kong,
which was transferred to Chinese control after years of British rule. Investing
in Russia, Hong Kong and other emerging markets is not for the faint of heart,
however, and that's why it is especially wise to let professional investment
managers evaluate the risks and returns there and in other volatile countries.
Meanwhile, the U.S. bond market has posted better returns in recent months, as
the news on inflation remains benign and interest rates trend downward. The
Federal Reserve Board has stayed on the sidelines, raising interest rates just
once last March. But you can be sure that the Fed will be ready to make a move
if inflation fears return--and that's always a possibility. After all, the
economy is at full employment. As the economy continues to grow, workers will
have more leverage in negotiating their salaries and wages.
If you're an investor approaching retirement, then the income offered by bonds
is particularly attractive in these days of low inflation. Even with a
relatively low 6.5% yield offered by U.S. Treasury securities, the real returns
offered by bonds are historically high compared to inflation. In addition, bond
prices are typically less volatile than stocks, and that's another reason to
invest in bonds if your investment time horizon is relatively short.
As for stocks, 1997 is turning out to be a very good year, notwithstanding two
significant pullbacks in March and August. Most analysts did not expect the
market to do this well after posting such solid returns in 1995 and 1996. But
the U.S. stock market continues to surprise us.
The Dow Jones Industrial Average would have to go to nearly 100,000 by the year
2012 to match the performance of the past fifteen years. But then again, an
8,000 Dow was unthinkable in 1982.
<PAGE>
[GLOBE GRAPHIC]
CHAIRMAN'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is listed below.
The risk in the second half of the year is biased toward higher growth and an
upturn in inflation. First half economic results were erratic, with a strong
quarter followed by a weak quarter. Neither reflects a true picture of the
underlying expansion. Instead the pattern reflects statistically choppy
spending. Consumer spending in the first half was influenced by seasonality
(warmer winter, cooler spring), early tax refunds, and a growing trend toward
employee bonuses/stock options (paid in lump sums in the first months of the
year) instead of salary increases (paid in smaller monthly increments throughout
the year). These conditions will not be repeated in the second half of the year.
A third quarter rebound to about 3% real growth should follow the anemic second
quarter results.
Our concern is that the apparent pause in the second quarter has done little to
relieve rising economic pressures. Labor markets are operating at full capacity.
In fact, we suspect businesses are beginning to miss opportunities because they
are unable to find experienced help. Capacity utilization rates also reflect a
lack of excess capacity. The U.S. has been able to use excess capacity from
overseas to meet demand. However, growth now appears to be on the rise in other
G7 countries. The results of recent elections in the U.K. and France have a
clear pro-growth bias. Fiscal austerity and low inflation have less appeal to
voters when unemployment rates are persistently high. A coordinated global
expansion will help lift our exports but will remove some of the price
competition that has helped restrain domestic inflation.
Monetary liquidity is ample to finance both economic growth and modest price
increases. Domestically, broad money growth is expanding at a rate of about 7%.
Globally, U.S. dollar-based credit has been growing at a double-digit rate for
the last year. However, the Fed is likely to tolerate broad money growth and
tight economic capacity until inflation begins to accelerate.
Please read the Fund Managers' 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
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
IAI DEVELOPING COUNTRIES FUND
[PHOTO]
ROY C. GILLSON
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
[PHOTO]
SOOKYONG KWAK
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
WHAT IS THE FUND'S OBJECTIVE?
The investment objective of the IAI Developing Countries Fund is to provide
long-term capital appreciation. The Fund seeks to achieve its objective by
investing in companies domiciled or otherwise having substantial operations in
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.
HOW HAS THE FUND PERFORMED?
The Fund generated a total return of 7.55% for the second quarter of 1997,
compared to the IFC Investable Index which produced a return of 8.94%. For the
six months ended July 31, 1997, the Fund produced 11.49% while the IFC
Investable Index had a 9.57% total return.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
In Latin America, we sold Electridade de Sao Paulo (0.45%)* in Brazil and FEMSA
(0.00%)* in Mexico, both of which reached our sell targets. In Europe, we
purchased two Portuguese bank stocks, Banco Comercial Portugues (1.22%)* and
Banco Totta y Acores (1.44%)* and participated in the new issue of Electricidade
de Portugal (0.11%)*. We also added Namibian Minerals (1.90%)*, a South African
diamond miner. In the Far East, we added to Guangdong Electric Power (2.89%)* in
China and Semen Cibinong (2.22%)* in Indonesia.
* PERCENTAGE OF NET ASSETS AS OF 7/31/97
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
Latin America was once again the strongest performing geographic region, as the
markets in this region continue to be favored by capital flows relative to other
emerging markets. Venezuela and Brazil achieved the best returns, up 47.07% and
26.69%, respectively, in U.S. dollar terms. Privatization stocks continued to
drive the Brazilian market, and capital investment remains strong as foreign
firms increase their production plans, although the underlying economy is
flattening and consumer spending is under pressure.
European markets were generally mixed. Both Hungary and Portugal were favored by
the international investor, up 18.75% and 16.22%, respectively. Conversely,
Poland declined as a large new issue drained liquidity from the market and South
Africa was flat as a result of poor sentiment in the gold sector on hopes of
interest rate declines.
Asian markets were also mixed, with Thailand declining 26.55%, as their
financial and currency crisis continued. Malaysia and the Philippines both fell
15% as international investors continue to shift their portfolios in favor of
Latin American holdings. Conversely, India produced a return in excess of 25%.
WHAT IS YOUR OUTLOOK FOR THE FUND?
We believe global emerging markets offer select opportunities on a long-term
basis, as many of these markets will generate average economic growth rates in
excess of 5% over the next five years. We expect this growth to be driven by a
combination of a rise in per-capita income, export opportunities and capital
investments.
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
PORTFOLIO WEIGHTING:
IAI DEVELOPING COUNTRIES FUND VS. IFC INVESTABLE INDEX
7/31/97
---------------------------------- Country Returns
IAI Developing IFC Investable for the Six Months
Countries Fund Index Ended 7/31/97
- --------------------------------------------------------------------------------
AFRICA
Egypt 1% 1% n/a
South Africa 5 12 10%
EUROPE
Czech Republic 1 -- (20%)
Greece 3 2 20%
Hungary -- 1 23%
Morocco -- 1 n/a
Poland 1 1 (22%)
Portugal 5 2 21%
Russia -- 4 n/a
Turkey 1 3 (6%)
United Kingdom 2 -- 18%
FAR EAST
China 5 1 29%
Hong Kong 1 -- 19%
India 4 2 27%
Indonesia 5 2 (10%)
Israel 4 2 n/a
Malaysia 6 11 (24%)
Pakistan -- 1 33%
Philippines -- 2 (31%)
South Korea 4 2 1%
Sri Lanka -- 1 59%
Taiwan 5 8 27%
Thailand 3 1 (30%)
LATIN AMERICA
Argentina 4 5 20%
Brazil 11 14 43%
Chile 2 6 19%
Colombia -- 1 21%
Mexico 9 12 36%
Peru 4 1 15%
Venezuela -- 1 48%
OTHER COUNTRIES 2 --
CASH 12 --
- ---------------------------------------------------------
TOTAL 100% 100%
- ---------------------------------------------------------
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% of Net Assets
----------------------
Issues Country Industry 7/31/97 1/31/97
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Taipei Fund Taiwan Financial 4.73 4.26
Guangdong Electric Power
Development Class B China Energy 2.89 1.76
Bidvest South Africa Consumer Goods 2.76 1.99
Delta Informatics Greece Capital Equipment 2.75 1.75
Grupo Financiero Bancomer Series B Mexico Financial 2.63 1.58
Bank Bali, foreign Indonesia Financial 2.58 1.92
Telefonica de Argentina ADR Argentina Services 2.34 2.32
Semen Cibinong, foreign Indonesia Materials 2.22 2.18
Petronas Dagangan Berhad Malaysia Energy 2.22 2.56
Tadiran Telecommunications ADR Israel Services 2.19 1.80
- -----------------------------------------------------------------------------------------------------
TOTAL 27.31% 22.12%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
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 GRAPH]
AS OF 7/31/97 AS OF 1/31/97
BRAZIL 10.5% 13.0%
MEXICO 9.3% 11.1%
MALAYSIA 6.4% 8.9%
CHINA 5.0% 3.7%
SOUTH AFRICA 4.9% 4.5%
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI DEVELOPING
COUNTRIES FUND (1) IFC
(INCEPTION 2/10/95) INVESTABLE INDEX*
2/10/95 $10,000 $10,000
7/31/95 $11,060 $11,047
1/31/96 $10,852 $11,457
7/31/96 $10,803 $11,081
1/31/97 $11,419 $12,379
7/31/97 $12,731 $13,564
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/97
Six Since Inception
Months** 1 Year 2/10/95
================================================================================
IAI DEVELOPING COUNTRIES FUND(1) 11.49% 17.86% 10.27%
- --------------------------------------------------------------------------------
IFC Investable Index 9.57% 22.40% 12.97%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/1/95
(1) FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO 2.00% OF AVERAGE DAILY NET
ASSETS, THROUGH MARCH 31, 1996.
** NOT ANNUALIZED
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
IAI INTERNATIONAL FUND
[PHOTO]
ROY C. GILLSON
IAI INTERNATIONAL
FUND MANAGER
IAI INTERNATIONAL FUND WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
The Fund generated a total return of 11.18% in the second quarter of 1997,
compared to the Morgan Stanley EAFE Index which produced a return of 14.27%. For
the six months ending July 31, 1997, the Fund was up 13.02% while the EAFE Index
was up 17.27%.
WERE THERE ANY SIGNIFICANT CHANGES IN THE FUND?
In Japan, we added to Nippon Yusen Kabushiki Kaish (2.40%)*, the shipping
company, continued to buy Eisai (3.21%)*, and purchased Namco (2.04%)*, an
arcade game supplier and software company. We took profits in Nippon Telegraph &
Telephone (2.91%)* and sold Mitsubishi Heavy Industry (0.00%)* after it reached
our share price target. We also added to First Pacific (1.62%)* in Hong Kong and
Woolworths (2.93%)*, a retailer, in Australia. In Europe, we reduced our holding
in British Steel (1.10%)* following a re-evaluation and initiated a new holding
in Sears (1.39%)*, a large retailer, which is being restructured. We also added
to KLM Royal Dutch Airlines (0.15%)* in the Netherlands and are establishing
positions in three Portuguese stocks, Banco Totta y Acores (0.51%)*, Banco
Comercial Portugues (0.63%)*, and Electricidade de Portugal (0.10%)*.
* PERCENTAGE OF NET ASSETS AS OF 7/31/97
Can you point to any specific market factors that influenced the Fund's
performance?
Japan, reversing a previous trend, rose strongly in the second quarter, up
23.72% in U.S. dollar terms, primarily driven by economic optimism despite the
yen's recent recovery and its negative impact on exporters.
Continental European growth expectations are recovering, albeit somewhat
tempered by government action on deficits to meet the Maastricht criteria for
membership in the single European currency.
Far Eastern markets were the weakest geographic region, with only Hong Kong
providing positive returns among the EAFE countries as the Chinese hand-over
approached.
European and Asian emerging markets were mixed. In Eastern Europe, both Hungary
and Portugal produced strong returns, up 18.75% and 16.22%, respectively, while
Poland and the Czech Republic declined, both in excess of 15%. The Asian market
of Thailand also declined as their financial and currency crisis continued.
Latin America was once again the strongest performing geographic region, with
Venezuela and Brazil producing the best returns, up 47.07% and 26.69%,
respectively, in U.S. dollar terms.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Although we believe economic activity in Japan is slowly recovering and company
profits are improving steadily, we continue to be cautious in light of severe
problems that still exist in the financial sector. We are maintaining a strong
presence in France and the UK, markets which we believe to offer superior value,
although we initially reduced our French position modestly following the
Socialist victory which may increase policy risks. Latin American markets
continue to be favored by international investors relative to other emerging
markets. Accordingly, we continue to believe that investors desiring
diversification should include an international component to their portfolio.
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
7/31/97
-------------------------------- Country Returns
IAI EAFE for the Six Months
International Fund Index Ended 7/31/97
- -------------------------------------------------------------------------------
AFRICA
South Africa 1% --% 10%
EUROPE
Belgium 1 1 11%
Denmark -- 1 16%
Finland -- 1 22%
France 14 7 9%
Germany 6 9 29%
Italy -- 3 7%
Netherlands 2 5 31%
Norway -- 1 2%
Portugal 1 -- 21%
Spain 2 2 16%
Sweden -- 3 18%
Switzerland -- 6 30%
United Kingdom 16 19 18%
FAR EAST
Australia 11 3 10%
Hong Kong 8 4 19%
Indonesia 1 -- (10%)
Israel 1 -- n/a
Japan 20 32 19%
Malaysia 1 2 (21%)
New Zealand 3 -- 4%
Singapore -- 1 (12%)
South Korea 1 -- 1%
Taiwan 1 -- 27%
LATIN AMERICA
Argentina 1 -- 20%
Brazil 1 -- 43%
Chile 1 -- 19%
Mexico 1 -- 36%
Peru 1 -- 15%
OTHER COUNTRIES -- --
CASH 5 --
- ----------------------------------------------------------
TOTAL 100% 100%
- ----------------------------------------------------------
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% of Net Assets
----------------------
Issues Country Industry 7/31/97 1/31/97
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hitachi Japan Capital Equipment 3.81 3.30
Commonwealth Bank of Australia Australia Financial 3.45 3.04
Eisai Japan Consumer Goods 3.21 0.58
Toray Industries Japan Materials 3.19 3.30
M.I.M. Holdings Australia Materials 3.18 3.38
Bayer Germany Materials 3.05 2.29
Woolworth's Australia Services 2.93 --
Nippon Telegraph & Telephone Japan Services 2.91 4.00
Jardine Strategic Hong Kong Multi-Industry 2.81 2.98
Carter Holt Harvey New Zealand Materials 2.70 2.92
- ----------------------------------------------------------------------------------------------------
TOTAL 31.24% 25.79%
- ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
FUND MANAGERS' REVIEW
IAI INTERNATIONAL FUND
NOTE TO CHAIRMAN'S LETTER & FUND MANAGERS' 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 GRAPH]
AS OF 7/31/97 AS OF 1/31/97
JAPAN 19.0% 20.4%
UNITED KINGDOM 15.1% 15.5%
FRANCE 15.1% 12.5%
AUSTRALIA 9.6% 6.4%
HONG KONG 7.6% 6.0%
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI EAFE
INTERNATIONAL FUND INDEX
8/1/87 $10,000 $10,000
1/31/88 $ 8,820 $ 9,642
1/31/89 $11,140 $12,395
1/31/90 $12,412 $12,994
1/31/91 $11,266 $10,701
1/31/92 $12,987 $11,413
1/31/93 $12,235 $10,279
1/31/94 $17,669 $14,821
1/31/95 $15,851 $14,200
1/31/96 $19,041 $16,541
1/31/97 $19,495 $16,908
7/31/97 $22,036 $19,827
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/97
Six Months* 1 Year 5 Years 10 Years
==============================================================================
IAI INTERNATIONAL FUND 13.02% 18.90% 12.84% 8.22%
- ------------------------------------------------------------------------------
EAFE Index 17.27% 18.45% 14.12% 7.08%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS - 81.9%
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA - 4.2% GREECE - 3.3%
Telefonica de Argentina ADR Delta Informatics
(Services) 8,780 $ 348,456 (Capital Equipment) 27,200 $ 409,593
Transportadora de Gas del Sur Texniki Et Boloy
ADR (Energy) 24,100 280,163 (Capital Equipment) 20,550 86,675
---------- Texniki Et Boloy Rights
628,619 (Capital Equipment) 20,550 --
- --------------------------------------------------------------- ----------
BRAZIL - 4.9% 496,268
Empresa Nacional de Comercio ---------------------------------------------------------------
(Consumer Goods) (b) 295,500 -- HONG KONG - 1.5%
Telecomunicacoes Brasileiras Giordano International
(Services) 1,300,000 178,855 (Consumer Goods) 360,000 226,670
Telecomunicacoes Brasileiras ---------------------------------------------------------------
ADR (Services) 1,865 276,253 INDIA - 3.7%
Usinas Siderurgicas de Minas Grasim Industries GDR
Gerais ADR (Materials) 16,300 193,155 (Multi-Industry) 14,500 195,750
Usinas Siderurgicas de Minas Indian Petrochemicals GDR
Gerais ADR (Materials) (c) 6,300 74,655 (Materials) 17,700 232,755
---------- Suez Cement GDR
722,918 (Non-Energy Minerals) (b) (c) 6,000 119,100
- --------------------------------------------------------------- ----------
CANADA - 1.9% 547,605
Namibian Minerals ADR ---------------------------------------------------------------
(Materials) (b) 73,500 282,516 INDONESIA - 4.8%
- --------------------------------------------------------------- Bank Bali, foreign (Financial) 138,500 383,987
CHILE - 1.8% Semen Cibinong, foreign
Enersis ADR (Energy) 7,250 269,609 (Materials) 215,000 330,927
- --------------------------------------------------------------- ----------
CHINA - 5.0% 714,914
Guangdong Electric Power ---------------------------------------------------------------
Development Class B ISRAEL - 3.7%
(Energy) 574,896 430,662 Blue Square-Israel
Sinocan (Consumer Goods) 684,000 309,202 (Consumer Goods) (b) 7,400 76,736
---------- Blue Square-Israel ADR
739,864 (Consumer Goods) (b) 9,841 152,536
- --------------------------------------------------------------- Tadiran Telecommunications
CZECH REPUBLIC - 1.6% ADR (Services) (c) 15,266 326,311
Skoda Plzen (Consumer Goods) (b) 8,628 237,894 ----------
- --------------------------------------------------------------- 555,583
EGYPT - 0.8% ---------------------------------------------------------------
MISR International Bank GDR
(Financial) (b) 7,865 116,205
- ---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.)
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MALAYSIA - 6.4% POLAND - 1.5%
Golden Hope Plantations Elektrim (Capital Equipment) 24,073 $ 227,196
(Materials) 202,500 $ 321,051 ---------------------------------------------------------------
Land & General Holdings PORTUGAL - 4.6%
(Multi-Industry) 164,800 175,645 Banco Comercial Portugues
Malaysian International (Financial) 9,519 181,712
Shipping, foreign (Services) 49,000 124,521 Banco Totta y Acores
Petronas Dagangan Berhad (Financial) 11,299 215,022
(Energy) 143,800 329,979 Cimpor-Cimentos de Portugal
---------- (Materials) 10,500 270,647
951,196 Electricidade de Portugal
- --------------------------------------------------------------- (Energy) 927 15,738
MEXICO - 9.3% ----------
Corporacion GEO Series B 683,119
(Financial) (b) 20,938 118,752 ---------------------------------------------------------------
Grupo Carso ADR SOUTH AFRICA - 4.9%
(Multi-Industry) (c) 2,000 31,750 Bidvest (Consumer Goods) 47,592 410,320
Grupo Carso Series A-1 South African Iron & Steel
(Multi-Industry) 40,450 320,872 Industrial (Materials) 439,000 314,218
Grupo Financiero Bancomer ----------
Series B (Financial) 529,925 391,258 724,538
Grupo Financiero Inbursa ---------------------------------------------------------------
Series B (Financial) 960 4,611 SOUTH KOREA - 3.1%
Industrias Series B Pohang Iron & Steel, foreign
(Capital Equipment) (b) 52,000 242,447 (Materials) 2,182 184,232
Telefonos de Mexico ADR Samsung Electronics, foreign
(Services) 4,850 269,175 (Consumer Goods) 1,219 128,003
---------- Shinhan Bank, foreign (Financial) 12,495 140,169
1,378,865 ----------
- --------------------------------------------------------------- 452,404
PERU - 4.1% ---------------------------------------------------------------
Credicorp (Financial) 4,517 86,727 TAIWAN - 4.7%
Credicorp ADR (Financial) 10,107 194,560 Taipei Fund (Financial) (b) 5,200 704,600
Telefonica de Peru ADR ---------------------------------------------------------------
(Services) 12,700 313,531 THAILAND - 2.6%
Telefonica de Peru Class B Charoen Pokphand Feedmill,
(Services) 7,000 17,157 foreign (Consumer Goods) 63,000 148,236
---------- Siam City Bank, foreign
611,975 (Financial) 252,000 122,541
- --------------------------------------------------------------- Srithai Superware, foreign
(Consumer Goods) 59,550 119,567
----------
390,344
---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.) SHORT-TERM SECURITIES - 12.7%
Market Principal Market
Quantity Value (a) Rate Maturity Amount Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
TURKEY - 1.6% U.S. GOVERNMENT OBLIGATIONS - 12.7%
Tofas Turk Otomobil GDR U.S. Treasury Bill
(Consumer Goods) 930,000 $ 241,800
- --------------------------------------------------------------- 5.26% 09/18/97 $ 1,900,000 $ 1,886,453
UNITED KINGDOM - 1.9% ===============================================================
Five Arrows Chile Investment TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
Trust (Financial) 84,216 281,281 (COST: $1,887,157)................................. $ 1,886,453
=============================================================== ===============================================================
TOTAL INVESTMENTS IN COMMON STOCKS TOTAL INVESTMENTS IN SECURITIES
(COST: $11,282,337)................................ $12,185,983 (COST: $14,311,243) (f)............................ $15,083,896
=============================================================== ===============================================================
OTHER ASSETS AND LIABILITIES (NET) - (1.3%)
NON-CONVERTIBLE PREFERRED ................................................... $ (197,800)
STOCKS - 6.7% ===============================================================
TOTAL NET ASSETS
Market ................................................... $14,886,096
Quantity Value (a) ===============================================================
- ---------------------------------------------------------------
BRAZIL - 5.6%
Banco Nacional
(Financial) (b) (d) 5,300,000 $ --
Centrais Electricas de Santa
Catarina Series B (Energy) 186,000 274,793
Globex Utilidades
(Consumer Goods) 14,450 173,453
Multicanal Participacoes ADR
(Services) (b) 25,621 288,236
Tecidos Norte de Minas
(Consumer Goods) 295,500 111,324
----------
847,806
- ---------------------------------------------------------------
SOUTH KOREA - 1.1%
Samsung Electronics, foreign
(Consumer Goods) 3,433 163,654
===============================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $1,141,749)................................. $ 1,011,460
===============================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $12,424,086)................................ $13,197,443
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS - 88.0%
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ARGENTINA - 0.7% GERMANY - 5.6%
Telefonica de Argentina ADR Bayer (Materials) 88,570 $ 3,732,207
(Services) 22,000 $ 873,125 RWE (Energy) 68,635 3,056,589
- --------------------------------------------------------------- -----------
AUSTRALIA - 9.6% 6,788,796
Commonwealth Bank of ---------------------------------------------------------------
Australia (Financial) 340,000 4,218,011 HONG KONG - 7.6%
M.I.M. Holdings (Materials) 2,803,000 3,884,638 First Pacific (Multi-Industry) 1,657,412 1,980,118
Woolworth's (Services) 1,145,434 3,576,009 Giordano International
---------- (Consumer Goods) 702,000 442,008
11,678,658 Hong Kong Telecommunications
- --------------------------------------------------------------- (Services) 856,800 2,229,838
BELGIUM - 0.8% Jardine Strategic
Compagnie Maritime Belge (Multi-Industry) 940,000 3,440,400
(Services) 13,600 932,686 Swire Pacific Class A
- --------------------------------------------------------------- (Multi-Industry) 117,000 1,110,688
BRAZIL - 1.4% Swire Pacific Class B
Telecomunicacoes Brasileiras (Multi-Industry) 85,000 135,034
ADR (Services) 7,800 1,155,375 ----------
Usinas Siderurgicas de Minas 9,338,086
Gerais ADR (Materials) 47,500 562,875 ---------------------------------------------------------------
---------- INDIA - 0.3%
1,718,250 Suez Cement GDR
- --------------------------------------------------------------- (Materials) (b) 17,000 337,450
CHILE - 0.6% ---------------------------------------------------------------
Enersis ADR (Energy) 18,300 680,531 INDONESIA - 0.7%
- --------------------------------------------------------------- Bank Bali, foreign (Financial) 300,000 831,740
CHINA - 0.4% ---------------------------------------------------------------
Sinocan (Consumer Goods) 1,190,000 537,940 ISRAEL - 1.1%
- --------------------------------------------------------------- Blue Square-Israel ADR
FRANCE - 13.0% (Consumer Goods) (b) 33,903 525,497
Compagnie Financiere de NUR Advanced Technologies
Paribas (Financial) 38,071 2,735,825 ADR (Capital Equipment) (b) 80,000 95,000
Dexia France (Financial) 28,409 2,816,815 Tadiran Telecommunications
Eridania Beghin-Say ADR (Services) (c) 36,000 769,500
(Consumer Goods) 16,194 2,303,902 ----------
Lafarge (Materials) 42,182 2,970,621 1,389,997
Lyonnaise des Eaux-Dumez ---------------------------------------------------------------
(Services) 27,371 2,987,936 JAPAN - 19.0%
Societe Television Francaise Aiwa (Consumer Goods) 74,000 1,750,000
(Services) 23,540 2,033,734 Eisai (Consumer Goods) 189,000 3,926,858
---------- Hitachi (Capital Equipment) 411,000 4,651,520
15,848,833 Mazda Motor
- --------------------------------------------------------------- (Consumer Durables) (b) 5,000 19,426
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCKS (CONT.)
Market Market
Quantity Value (a) Quantity Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN - (CONT.) SOUTH AFRICA - 0.5%
Namco (Consumer Goods) 66,000 $ 2,491,723 South African Iron & Steel
Nippon Telegraph & Telephone Industrial (Materials) 867,138 $ 620,661
(Services) 702 3,557,432 ---------------------------------------------------------------
Nippon Yusen Kabushiki Kaish SOUTH KOREA - 0.4%
(Services) 824,000 2,929,932 Samsung Electronics, foreign
Toray Industries (Materials) 593,000 3,896,571 (Consumer Goods) 4,534 476,101
---------- ---------------------------------------------------------------
23,223,462 SPAIN - 1.5%
- --------------------------------------------------------------- Iberdrola (Energy) 168,750 1,877,116
MALAYSIA - 1.0% ---------------------------------------------------------------
Land & General Holdings TAIWAN - 0.9%
(Multi-Industry) 450,000 479,613 Taipei Fund (Financial) (b) 8,000 1,084,000
Malaysian International ---------------------------------------------------------------
Shipping, foreign (Services) 293,333 745,432 THAILAND - 0.3%
---------- Siam City Bank, foreign
1,225,045 (Financial) 760,000 369,569
- --------------------------------------------------------------- ---------------------------------------------------------------
MEXICO - 1.0% UNITED STATES OF AMERICA - 0.0%
Telefonos de Mexico ADR Millennium Chemicals (Materials) 714 15,039
(Services) 21,800 1,209,900 ---------------------------------------------------------------
- --------------------------------------------------------------- UNITED KINGDOM - 15.1%
NETHERLANDS - 2.1% B.A.T. Industries
KLM Royal Dutch Air Lines (Multi-Industry) 350,931 2,968,065
(Services) 5,221 186,617 British Steel (Materials) 496,766 1,348,301
Koninklijke PTT Nederland FKI (Producer Manufacturing) 329,868 961,483
(Materials) 59,000 2,425,635 Glaxo Wellcome
---------- (Consumer Goods) 38,547 815,204
2,612,252 Hanson (Multi-Industry) 85,336 431,787
- --------------------------------------------------------------- Imperial Tobacco Group
NEW ZEALAND - 2.7% (Consumer Goods) 343,201 2,135,568
Carter Holt Harvey (Materials) 1,356,000 3,298,640 Norwich Union (Financial) (b) 73,578 385,549
- --------------------------------------------------------------- Peninsular and Oriental Steam
PERU - 0.5% Navigation (Services) 253,000 2,572,725
Credicorp ADR (Financial) 28,900 556,325 Rolls-Royce
- --------------------------------------------------------------- (Capital Equipment) 560,000 2,150,365
PORTUGAL - 1.2% Sears (Services) 1,673,710 1,699,234
Banco Comercial Portugues Tomkins (Multi-Industry) 600,000 3,011,363
(Financial) 40,243 768,216 ----------
Banco Totta y Acores (Financial) 32,549 619,413 18,479,644
Electricidade de Portugal ===============================================================
(Energy) 7,465 126,736 TOTAL INVESTMENTS IN COMMON STOCKS
---------- (COST: $97,998,916)............................... $107,518,211
1,514,365 ===============================================================
- ---------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NON-CONVERTIBLE PREFERRED SHORT-TERM SECURITIES - 4.9%
STOCKS - 0.4%
Market Principal Market
Quantity Value (a) Rate Maturity Amount Value (a)
- --------------------------------------------------------------- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTH KOREA - 0.4% U.S. GOVERNMENT AGENCY
Samsung Electronics, foreign OBLIGATIONS - 4.9%
(Consumer Goods) 9,760 $ 465,267 Federal Home Loan Mortgage Corporation (DISCOUNT NOTE)
=============================================================== 5.75% 08/01/97 $ 6,000,000 $ 6,000,000
TOTAL INVESTMENTS IN NON-CONVERTIBLE ===============================================================
PREFERRED STOCKS TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $614,992).................................. $ 465,267 (COST: $6,000,000)................................ $ 6,000,000
=============================================================== ===============================================================
TOTAL INVESTMENTS IN SECURITIES
OTHER SECURITIES - 2.1% (COST: $107,584,264) (f).......................... $116,551,100
===============================================================
Ownership Market OTHER ASSETS AND LIABILITIES (NET) - 4.6%
Percentage(e) Value (a) .................................................. $ 5,689,336
- --------------------------------------------------------------- ===============================================================
FRANCE - 2.1% TOTAL NET ASSETS
Qualis (LIMITED PARTNERSHIP) (b) 2.61% $ 2,567,622 .................................................. $122,240,436
=============================================================== ===============================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $2,970,356)................................ $ 2,567,622
===============================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $101,584,263).............................. $110,551,100
===============================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 16
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FUND PORTFOLIOS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(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 is valued at $0 under guidelines established by the Board of
Directors and is illiquid.
(e)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For the restricted security issue held at July 31, 1997, the Fund held
no unrestricted securities of the same issuer as of either the date the purchase
price was agreed to or the date the Fund first obtained an enforceable right to
obtain the security. The restricted security held was acquired on 04/02/96 at a
cost of $2,970,356.
(f)
At July 31, 1997, the cost of securities for federal income tax purposes and the
aggregate gross unrealized appreciation and depreciation based on that cost were
as follows:
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------------
Cost for federal tax purposes $ 14,358,860 $ 107,627,048
=================================================
Gross unrealized appreciation $ 2,286,906 $ 14,920,694
Gross unrealized depreciation (1,561,870) (5,996,642)
-------------------------------------------------
Net unrealized appreciation $ 725,036 $ 8,924,052
=================================================
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
[GLOBE GRAPHIC]
STATEMENTS OF ASSETS AND LIABILITIES
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $14,311,243 and $107,584,264)
(see Fund Portfolios) $ 15,083,896 $ 116,551,100
Cash in bank on demand deposit 237,681 849,052
Receivable for investment securities sold -- 5,504,693
Dividends receivable 11,749 757,281
Unrealized appreciation on foreign currency contracts
held, at value (Note 6) -- 431,245
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 15,333,326 124,093,371
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 445,925 1,849,660
Unrealized depreciation on foreign currency contracts
held, at value (Note 6) 1,305 3,275
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 447,230 1,852,935
- ------------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 14,886,096 $ 122,240,436
========================================================================================================================
REPRESENTED BY:
Capital stock $ 12,956 $ 91,390
Additional paid-in capital 13,637,101 105,320,642
Undistributed net investment income 7,852 605,273
Accumulated net realized gains (losses) on investments 456,485 7,026,409
Unrealized appreciation or depreciation on:
Investment securities $ 772,653 $ 8,966,836
Other assets and liabilities
denominated in foreign currency (951) 229,886
---------- ------------
771,702 9,196,722
- ------------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 14,886,096 $ 122,240,436
========================================================================================================================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 1,295,624 9,139,049
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.49 $ 13.38
========================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
[GLOBE GRAPHIC]
STATEMENTS OF OPERATIONS
IAIDEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SIX MONTHS ENDED JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $13,289 and $293,917) $ 194,928 $ 2,079,230
Interest 20,132 93,398
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 215,060 2,172,633
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 124,336 957,248
Compensation of Directors 654 6,180
- -----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 124,990 963,428
Less fees reimbursed by Advisers (654) (6,180)
- -----------------------------------------------------------------------------------------------------------------------
NET EXPENSES 124,336 957,248
- -----------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 90,724 1,215,385
- -----------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 552,097 $ 6,983,821
Foreign currency transactions (17,789) 86,527
---------- -----------
534,308 7,070,348
Net change in unrealized appreciation or depreciation on:
Investment securities $ 761,363 $ 6,482,604
Other assets and liabilities denominated in
foreign currency (783) (157,214)
---------- -----------
760,580 6,325,390
- -----------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 1,294,888 13,395,738
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 1,385,612 $ 14,611,123
=======================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
[GLOBE GRAPHIC]
STATEMENTS OF CHANGES IN NET ASSETS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
Six months ended Year ended Six months ended Year ended
July 31, 1997 January 31, 1997 July 31, 1997 January 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS (UNAUDITED) (UNAUDITED)
Net investment income $ 90,724 $ 53,676 $ 1,215,385 $ 2,042,362
Net realized gains 534,308 516,889 7,070,348 12,005,271
Net change in unrealized appreciation or depreciation 760,580 (152,181) 6,325,390 (10,839,388)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,385,612 418,384 14,611,123 3,208,245
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (94,056) (57,715) (1,225,720) (2,507,284)
Net realized gains -- (635,048) (1,521,800) (10,555,519)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (94,056) (692,763) (2,747,520) (13,062,803)
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 6,074,043 12,478,531 60,177,077 118,509,652
Net asset value of shares issued to shareholders in
reinvestment of distributions 84,200 683,741 2,623,824 12,833,206
Cost of shares redeemed (4,545,310) (8,263,295) (68,615,304) (156,960,324)
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE
TRANSACTIONS 1,612,933 4,898,977 (5,814,403) (25,617,466)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,904,489 4,624,598 6,049,200 (35,472,024)
NET ASSETS AT BEGINNING OF PERIOD 11,981,607 7,357,009 116,191,236 151,663,260
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $14,886,096 $11,981,607 $122,240,436 $116,191,236
====================================================================================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 7,852 $ 11,184 $ 605,273 $ 615,608
====================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<PAGE>
[GLOBE GRAPHIC]
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 Year ended February 10, 1995+
July 31, 1997 January 31, 1997 to January 31, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.38 $ 10.56 $ 10.00
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.08 0.05 --
Net realized and unrealized gains 1.11 0.46 0.83
- ------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.19 0.51 0.83
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.08) (0.06) --
Net realized gains -- (0.63) (0.27)
- ------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.08) (0.69) (0.27)
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 11.49 $ 10.38 $ 10.56
==================================================================================================================
Total investment return* 11.49% 5.22% 8.53%
Net assets at end of period (000's omitted) $ 14,886 $ 11,982 $ 7,357
RATIOS
Expenses to average daily net assets*** 2.00%** 2.00% 2.15%**
Expenses to average daily net assets
(net of expenses paid indirectly)*** 2.00%** 2.00% 2.00%**
Net investment income to average daily net assets*** 1.46%** 0.52% 0.04%**
Average brokerage commission rate**** $ 0.0039 $ 0.0057 n/a
Portfolio turnover rate (excluding short-term securities) 30.0% 61.0% 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 $17,765 AND $45,293 IN EXPENSES FOR
THE YEAR ENDED JANUARY 31, 1997 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 2.17% AND 3.42%,
RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME (LOSS) TO AVERAGE
DAILY NET ASSETS WOULD HAVE BEEN 0.35% AND (1.23%), RESPECTIVELY.
BEGINNING IN FISCAL 1996, THE RATIO OF EXPENSES TO AVERAGE DAILY NET
ASSETS INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND.
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE. THE COMPARABILITY OF RATES BETWEEN DOMESTIC AND
FOREIGN EQUITIES MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES PER
SHARE CAN VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
+ COMMENCEMENT OF OPERATIONS
<PAGE>
[GLOBE GRAPHIC]
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:
<TABLE>
<CAPTION>
Years ended Years ended
Six months January 31, Period from March 31,
ended ---------------------- April 1, 1994 to ---------------------
July 31, 1997 1997 1996 January 31, 1995+ 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.14 0.24 0.19 0.11 0.06 0.06
Net realized and unrealized
gains (losses) 1.44 0.08 2.17 (0.62) 2.56 0.60
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 1.58 0.32 2.36 (0.51) 2.62 0.66
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.14) (0.28) (0.16) -- (0.34) (0.04)
Net realized gains (0.17) (1.17) (1.02) (0.88) (0.05) (0.42)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.31) (1.45) (1.18) (0.88) (0.39) (0.46)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 13.38 $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22
==========================================================================================================================
Total investment return* 13.02% 2.39% 20.15% (4.14%) 23.85% 6.18%
Net assets at end of period
(000's omitted) $122,240 $116,191 $151,663 $136,474 $134,796 $ 59,248
RATIOS
Expenses to average net assets*** 1.66%** 1.65% 1.66% 1.72%** 1.74% 1.91%
Expenses to average net assets
(net of expenses paid indirectly)*** 1.66%** 1.65% 1.66% n/a n/a n/a
Net investment income to
average net assets*** 2.11%** 1.56% 1.12% 1.04%** .87% 1.42%
Average brokerage
commission rate**** $ 0.0107 $ 0.0157 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 35.4% 32.1% 39.2% 27.6% 50.9% 28.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
*** BEGINNING IN FISCAL 1996, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS
INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND.
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE. THE COMPARABILITY OF RATES BETWEEN DOMESTIC AND
FOREIGN EQUITIES MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES PER
SHARE CAN VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES.
+ REFLECTS FISCAL YEAR END CHANGE FROM MARCH 31 TO JANUARY 31.
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(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. This report covers only the Developing Countries Fund and
International Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
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. Such valuations are obtained from pricing services or are supplied by
dealers.
Securities for which quotations are not readily available are valued at their
fair value as determined in good faith using consistently applied procedures
under the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial 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 and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and forward
currency contract transactions.
The Funds do not isolate that portion of the results 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.
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT.)
FEDERAL TAXES
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, 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 it's
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.
For federal income tax purposes, Developing Countries Fund had a capital loss
carryover of approximately $28,000 at January 31, 1997 which, if not offset by
subsequent capital gains, will expire in 2006. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryover is offset or expires.
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 it generates, as well as the Funds' ability to
repatriate such amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(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). The Funds are committed to make capital
contributions, if requested by the Company.
Developing Countries Fund and International Fund have available lines of credit
of $3,800,000 and $15,000,000, respectively, with a bank at the prime interest
rate. To the extent funds are drawn against the line, securities are held in a
segregated account. No compensating balances or commitment fees are required
under the lines of credit. There were no borrowings outstanding at July 31,
1997.
[3] FEES AND EXPENSES
Under terms of each Funds' Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. For Developing Countries
Fund this fee is equal to an annual rate of 2.00% declining to 1.65% of average
daily net assets. For International Fund this fee is equal to an annual rate of
1.70% declining to 1.30% of average daily net assets. This fee is paid monthly.
The Management Agreements further provide that Advisers will reimburse the Funds
for the fees and expenses it pays to Directors who are not "interested persons"
of the Funds or reduce its fee by an equivalent amount.
[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 Year ended Six months Year ended
ended January 31, ended January 31,
July 31, 1997 1997 July 31, 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 554,557 1,168,544 4,722,771 9,050,644
ISSUED FOR REINVESTED DISTRIBUTIONS 7,373 70,024 196,690 1,043,904
REDEEMED (420,578) (781,138) (5,378,455) (11,955,329)
- ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING 141,352 457,430 (458,994) (1,860,781)
=====================================================================================================================
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1997
(UNAUDITED)
[5] PURCHASES AND SALES OF SECURITIES
For the six months ended July 31, 1997, 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 $ 4,158,726 $ 3,559,155
IAI INTERNATIONAL FUND $ 38,978,391 $ 50,964,763
[6] FOREIGN CURRENCY COMMITMENTS
At July 31, 1997, the Funds had entered into foreign currency exchange
contracts. The unrealized appreciation and/or depreciation on those contracts at
July 31, 1997 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 Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
08/01/97 17,335 U.S. Dollars 44,537,934 Indonesian Rupiah $ - $ 302
08/01/97 40,502 U.S. Dollars 104,060,830 Indonesian Rupiah - 709
08/04/97 21,034 U.S. Dollars 6,018,925 Greek Drachma - 54
08/04/97 36,734 U.S. Dollars 283,951 Hong Kong Dollars - 59
08/05/97 31,100 U.S. Dollars 142,982 South African Rand - 88
08/05/97 33,007 U.S. Dollars 151,750 South African Rand - 93
- ----------------------------------------------------------------------------------------------------------------
$ - $ 1,305
================================================================================================================
IAI INTERNATIONAL FUND
- ----------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- ----------------------------------------------------------------------------------------------------------------
08/01/97 1,496,642 Dutch Guilder 721,447 U.S. Dollars $ - $ 2,443
08/01/97 92,970 U.S. Dollars 56,654 British Pounds - 198
08/05/97 208,321 U.S. Dollars 126,832 British Pounds - 634
09/02/97 33,654,500 French Francs 5,800,000 U.S. Dollars 353,475 -
10/10/97 1,500,000 British Pounds 2,526,900 U.S. Dollars 77,770 -
- ----------------------------------------------------------------------------------------------------------------
$ 431,245 $ 3,275
================================================================================================================
</TABLE>
<PAGE>
[GLOBE GRAPHIC]
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
<TABLE>
<CAPTION>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
....................................................................................................................................
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND 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 CAPITAL Capital Appreciation -- Common stocks of small-to medium-sized growth
APPRECIATION FUND companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION + INCOME] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Preservation Investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI 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>
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
<PAGE>
[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
