GLOBAL EQUITY FUND
SEMI-ANNUAL REPORT
IAI LATIN AMERICA FUND
APRIL 30, 1997
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI LATIN AMERICA FUND
SEMI-ANNUAL REPORT
APRIL 30, 1997
(UNAUDITED)
Chairman's Letter...............................2
Fund Manager's Review...........................4
Fund Portfolio..................................7
Notes to Fund Portfolio.........................9
Statement of Assets and Liabilities............10
Statement of Operations........................11
Statement of Changes in Net Assets.............12
Financial Highlights...........................13
Notes to Financial Statements..................14
IAI Mutual Fund Family.........................17
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
CHAIRMAN'S LETTER
IAI LATIN AMERICA FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you are a
young investor and you're just starting your investment program, international
equities are a good place to be for growth. Wherever you are in life, you should
make sure that your investment portfolio generally reflects your long-term
investment goals for 1997 and beyond.
CHAIRMAN'S LETTER
IAI LATIN AMERICA FUND
ECONOMIC OUTLOOK
Larry Hill, IAI's Chief Fixed Income Officer, provides his economic outlook
below.
The current level of rates is high enough to discourage speculation on rising
prices but not high enough to discourage capital spending. In fact, capital
spending has been a leader in the current expansion. In particular, spending on
technology has exhibited remarkable strength. During the last four quarters,
spending on technology has increased by about 44% while prices paid for
technology have declined by 22%. Although official statistics do not show a
rising trend of productivity, we suspect that productivity is understated by a
wide margin because government statistics cannot pick up the explosion in
software and technology that is driving many business productivity gains today.
With greater levels of capital spending and non-inflationary global economic
policies, inflation remains well contained.
The Fed recently made a preemptive strike against inflation. This will not be
positive for either stocks or bonds in the near term. However, diligence against
higher inflation should prove beneficial for the economy and the markets in the
long term.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on the 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
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
IAI LATIN AMERICA FUND
[PHOTO]
ROY C. GILLSON
IAI LATIN AMERICA
FUND MANAGER
FUND OBJECTIVE
IAI Latin America Fund's objective is long-term capital appreciation. The Fund
seeks to achieve its objective by investing primarily in the securities of Latin
American issuers.
FACTORS AFFECTING THE PAST SIX-MONTH PERFORMANCE
Latin America has been the leading region in emerging markets so far in 1997. An
upturn in economic growth has paved the way for higher corporate profitability.
Brazil has been strong on positive political moves.
Brazilian economic growth has begun to slow down recently, an exception to the
region's upturn. Nevertheless, the Brazilian equity market continues to be the
most buoyant in the region. Telebras and Electrobras have been the two best
performing stocks in the portfolio. The congressional stamp of approval for the
re-election of President Cardoso and progress on privatization continue to
propel the market higher. Corporate valuations in Brazil remain compelling, but
the government will soon have to show progress toward achieving fiscal and
foreign trade balance.
Investment spending, an attractively priced currency and capital inflows
continue to drive the Mexican market. Exporters and capital goods manufacturers
have increased sales and led the strong GDP numbers registered in the fourth
quarter of 1996 and first quarter of 1997. A broad based economic recovery,
which includes the Mexican consumer, should follow. Fomento Economico Mexicano,
a bottler of Coca-Cola, led the Mexican holdings advance, and was subsequently
sold as its price reached our full value target.
Economic growth in Argentina and Peru is accelerating in 1997. Chile's central
bank is easing monetary policy and economic activity is sure to respond.
OUTLOOK
The portfolio has had a balanced spread of investments, broadly reflecting the
underlying country weightings within the IFC Investable Index. In Brazil,
consideration will be given to moving into private sector companies as the
privatization process unlocks the value potential of the former government
sector enterprises. In Mexico, consumer-oriented issues may come into favor as
the purchasing power of the Mexican consumer recovers.
Latin America is very fertile ground for our value-based approach to investing.
These markets will continue to show some volatility in the short term, but we
are confident that our long-term approach to investing will allow us to continue
to provide superior returns at lower risk than the markets.
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
<TABLE>
<CAPTION>
PORTFOLIO WEIGHTING:
IAI LATIN AMERICA FUND VS. IFC INVESTABLE LATIN AMERICA INDEX
4/30/97
------------------------------------------------- Country Returns
IAI Latin America IFCInvestable for the Period
Fund Latin America Index Ended 4/30/97
=========================================================================================
<S> <C> <C> <C>
LATIN AMERICA
Argentina 9% 12% 23.8%
Brazil 39 38 65.1%
Chile 9 16 4.6%
Colombia 2 4 38.1%
Mexico 32 25 12.0%
Peru 7 3 13.3%
Venezuela 2 2 63.5%
- ----------------------------------------------------------------------
TOTAL 100% 100%
======================================================================
</TABLE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS
% of Net Assets
-------------------
Issue Country Industry 4/30/97
==========================================================================================
<S> <C> <C> <C>
Panamerican Beverages ADR Mexico Consumer Non-Durables 5.05
Telecomunicacoes Brasileiras Brazil Utilities 4.10
Telecomunicacoes Brasileiras ADR Brazil Utilities 3.94
Credicorp ADR Peru Financial 3.51
Vale Do Rio Doce Brazil Non-Energy Minerals 3.49
Tecidos Norte de Minas Brazil Process Industries 3.30
DESC Series B Mexico Producer Manufacturing 3.13
Multicanal Participacoes ADR Brazil Consumer Services 3.12
YPF ADR Argentina Energy Minerals 3.08
Petroleo Brasileiro Brazil Energy Minerals 3.03
- ------------------------------------------------------------------------------------------
TOTAL 35.75
</TABLE>
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI LATIN AMERICA 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 AS OF 4/30/97
[BAR CHART]
BRAZIL 37.2%
MEXICO 30.6%
CHILE 9.3%
ARGENTINA 8.9%
PERU 5.7%
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI Latin America Fund IFC Investable Latin
(Inception 12/12/96) America Index
12/12/96 $10,000 $10,000
12/31/96 $10,370 $10,264
1/31/97 $11,360 $11,210
2/28/97 $12,010 $11,942
3/31/97 $11,790 $11,816
4/30/97 $12,261 $12,309
TOTAL RETURN+
THROUGH 4/30/97
Since Inception
12/12/96
================================================================================
IAI LATIN AMERICA FUND 22.60%
- --------------------------------------------------------------------------------
IFC Investable Latin America Index 23.09%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 12/01/96
FUND PORTFOLIO
IAI LATIN AMERICA FUND
APRIL 30, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 67.6%
Market
Quantity Value (a)
- --------------------------------------------------------
ARGENTINA - 8.9%
Internacional de
Bebidas y Alimentos
(Consumer Non-Durables) 21,817 $ 42,551
Telefonica de Argentina ADR
(Utilities) 2,794 92,901
Transportadora de Gas del Sur
ADR(Utilities) 9,650 120,625
YPFADR (Energy Minerals) 4,872 134,589
- --------------------------------------------------------
390,666
- --------------------------------------------------------
BRAZIL - 11.0%
Telecomunicacoes Brasileiras
(Utilities) 1,664,000 179,448
Telecomunicacoes Brasileiras
ADR (Utilities) 1,501 172,240
Usinas Siderurgicas de
Minas Gerais ADR
(Non-Energy Minerals) 10,917 128,275
- --------------------------------------------------------
479,963
- --------------------------------------------------------
CHILE - 9.3%
Enersis ADR (Utilities) 4,076 128,394
Five Arrows Chile
Investment Trust (Financial) 26,267 84,580
Telecomunicaciones de Chile
ADR (Utilities) 2,922 94,600
Vina Concha Y Toro ADR
(Consumer Non-Durables) 3,074 100,289
- --------------------------------------------------------
407,863
- --------------------------------------------------------
MEXICO - 30.6%
ALFA Series A
(Producer Manufacturing) 22,000 121,723
Corporacion GEO
Series B (Financial)(b) 28,000 130,097
DESC Series B
(Producer Manufacturing)(b) 21,000 137,051
Fomento Economico
Mexicano Series B
(Consumer Non-Durables) 26,000 121,949
Grupo Carso
Series A-1 (Financial) 16,000 92,147
Grupo Financiero Bancomer
Series B (Financial) 224,000 78,305
Grupo Industrial Maseca
Series B
(Producer Manufacturing) 126,000 123,267
Industias Series B
(Producer Manufacturing)(b) 28,000 98,585
Panamerican Beverages ADR
(Consumer Non-Durables) 7,620 220,980
Telefonos de Mexico ADR
(Utilities) 2,000 82,500
Tubos de Acero de Mexico
(Non-Energy Minerals)(b) 8,000 131,984
- --------------------------------------------------------
1,338,588
- --------------------------------------------------------
PERU - 5.7%
Credicorp ADR (Financial) 7,320 153,720
Telefonica de Peru ADR
(Utilities) 3,931 94,344
- --------------------------------------------------------
248,064
- --------------------------------------------------------
VENEZUELA - 2.1%
Siderurgica Venezolana
Sivensa ADR
(Producer Manufacturing) 31,173 93,520
========================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $2,577,413).......................$ 2,958,664
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
FUND PORTFOLIO
IAI LATIN AMERICA FUND
APRIL 30, 1997
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 28.5%
Market
Quantity Value (a)
- --------------------------------------------------------
BRAZIL - 26.2%
Centrais Electricas de Santa
Catarina Series B
(Utilities)(b) 64,000 $ 90,259
Eletricidade de Sao Paulo
Series B (Utilities)(b) 622,000 124,564
Energetica de Minas Gerais
(Utilities) 2,700,000 121,825
Globex Utilidades
(Consumer Durables) 6,900 123,261
Multicanal Participacoes ADR
(Consumer Services)(b) 9,430 136,735
Petroleo Brasileiro
(Energy Minerals) 630,000 132,385
Tecidos Norte de Minas
(Process Industries) 344,000 144,249
Telecomunicacoes do Parana
(Utilities) 180,000 120,498
Vale Do Rio Doce
(Non-Energy Minerals) 6,000 152,877
- --------------------------------------------------------
1,146,653
- --------------------------------------------------------
COLOMBIA - 2.3%
Banco Ganadero ADR
(Financial) 3,699 102,185
========================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $969,975).........................$ 1,248,838
========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $3,547,388)(c)....................$ 4,207,502
========================================================
OTHER ASSETS AND LIABILITIES (NET) - 3.9%
.......................................$ 168,186
========================================================
TOTAL NET ASSETS
.......................................$ 4,375,688
========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
NOTES TO FUND PORTFOLIO
IAI LATIN AMERICA FUND
April 30, 1997
(unaudited)
(a)
Market value of securities is determined as described in Note 1 to the financial
statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
At April 30, 1997, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
Cost for federal income tax purposes........................ $ 3,547,388
============
Gross unrealized appreciation............................... $ 717,582
Gross unrealized depreciation............................... (57,468)
------------
Net unrealized appreciation................................. $ 660,114
============
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
IAI LATIN AMERICA FUND
APRIL 30, 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $3,547,388) $ 4,207,502
Cash in bank on demand deposit 149,763
Dividends and accrued interest receivable 18,423
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 4,375,688
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES
TOTAL LIABILITIES --
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 4,375,688
==================================================================================================================
REPRESENTED BY:
Capital stock $ 3,569
Additional paid-in capital 3,652,965
Undistributed net investment income 23,722
Accumulated net realized gains 35,347
Unrealized appreciation or depreciation on:
Investment securities $ 660,114
Other assets and liabilities denominated in foreign currency (29)
- ------------------------------------------------------------------------------------------------------------------
660,085
- ------------------------------------------------------------------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 4,375,688
==================================================================================================================
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 356,900
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 12.26
==================================================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
IAI LATIN AMERICA FUND
PERIOD FROM DECEMBER 12, 1996* TO APRIL 30, 1997
(UNAUDITED)
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $2,469) $ 44,652
Interest 8,781
- ------------------------------------------------------------------------------------------------------------------
TOTAL INCOME 53,433
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 44,568
Compensation of Directors 86
- ------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 44,654
Less fees waived or reimbursed by Advisers (14,943)
- ------------------------------------------------------------------------------------------------------------------
NET EXPENSES 29,711
- ------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 23,722
- ------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 42,546
Foreign currency transactions (7,199)
- ------------------------------------------------------------------------------------------------------------------
35,347
Net change in unrealized appreciation or depreciation on:
Investment securities $ 660,114
Other assets and liabilities denominated in foreign currency (29)
- ------------------------------------------------------------------------------------------------------------------
660,085
- ------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 695,432
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 719,154
==================================================================================================================
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
IAI LATIN AMERICA FUND
Period from
December 12, 1996*
to April 30, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 23,722
Net realized gains 35,347
Net change in unrealized appreciation or depreciation 660,085
- ------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 719,154
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains --
- ------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS --
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from 398,926 shares sold 4,149,024
Cost of 42,026 shares redeemed (492,490)
- ------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 3,656,534
- ------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 4,375,688
NET ASSETS AT BEGINNING OF PERIOD --
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 4,375,688
==================================================================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 23,722
==================================================================================================================
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
IAI LATIN AMERICA FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD
AND SELECTED INFORMATION FOR THE PERIOD INDICATED IS AS FOLLOWS:
Period from
December 12, 1996+
April 30,1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.00
- ------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income .07
Net realized and unrealized gains 2.19
- ------------------------------------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 2.26
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains --
- ------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS --
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.26
==================================================================================================================
Total investment return* 22.60%
Net assets at end of period (000's omitted) $ 4,376
RATIOS
Expenses to average net assets*** 2.00%**
Net investment income to average net assets*** 1.60%**
Average brokerage commission rate**** $ 0.0014
Portfolio turnover rate
(excluding short-term securities) 12.0%
</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 $14,857 FOR THE PERIOD ENDED APRIL
30, 1997. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 3.00% AND THE RATIO OF
NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 0.60%.
EXPENSES IN EXCESS OF 2.00% OF AVERAGE DAILY NET ASSETS WILL BE VOLUNTARILY
WAIVED THROUGH MARCH 1, 1998.
**** 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
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
APRIL 30, 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
Latin America Fund (the Fund) is a separate portfolio of IAI Investment Funds
III, Inc. The Fund commenced operations on December 12, 1996. The Fund has a
primary objective of capital appreciation through investment in equity
securities of Latin American issuers. This report covers only the IAI Latin
America Fund.
Significant accounting policies followed by the Fund 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. Short-term 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 Fund invests 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 or
depreciation on foreign currency transactions. Exchange gains (losses) may also
be realized between the trade and settlement dates on security and foreign
currency contract transactions.
The Fund does 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 Fund 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 Fund and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Fund is subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is the 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 Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily due to differing treatments for foreign
currency transactions, passive foreign investment companies (PFICs), and losses
deferred due to "wash sales". The character of distributions made during the
year from net investment income or net realized gains may also differ from its
ultimate characterization for tax purposes.
The Fund may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Fund accrues such taxes as applicable.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
The Fund records 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-date. Distributions from
net investment income are made semi-annually. Capital gains, if any, are
primarily distributed at 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 concentrated in Latin American countries may involve greater risks
than investments in U.S. issuers 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 Fund's
investments and the income in generates, as well as the Fund's 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.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Fund and
its officers and directors, the Fund is a policyholder in an industry-sponsored
mutual insurance company (the Company). In connection with its obligation as a
policyholder, the Fund is committed to make future capital contributions, if
requested by the Company.
The Fund has available a $250,000 line of credit with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. There were no borrowings outstanding at April
30, 1997
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement Investment Advisers, Inc.,
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sale of assets, taxes, interest
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. The Management Agreement further
provides that Advisers will reimburse the Fund for the fees and expenses it pays
to Directors who are not "interested persons" of the Fund or reduce its fee by
an equivalent amount. This fee is paid monthly and is equal to an annual rate of
3.00% of the Fund's average daily net assets, which declines to 2.65% as the
Fund's assets increase. Until March 1, 1998, Advisers has voluntarily agreed to
waive its fee in excess of 2.00% of the Fund's average daily net assets.
[4] INVESTMENT TRANSACTIONS
PURCHASES AND SALES OF SECURITIES
For the period ended April 30, 1997, purchases of securities and sales proceeds,
other than investments in short-term securities, for the Fund aggregated
$3,942,463 and $438,215, respectively.
IAI MUTUAL FUND FAMILY
IAI LATIN AMERICA FUND
APRIL 30, 1997
(UNAUDITED)
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
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI LATIN AMERICA FUND Capital Appreciation -- Equity securities of Latin American issuers
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(CLOSED TO NEW INVESTORS AS OF 2/1/96) emerging growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
growth and appreciation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[CAPITAL APPRECIATION short-term instruments
+ INCOME]
- ------------------------------------------------------------------------------------------------------------------------------------
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>
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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
[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
