GLOBAL EQUITY FUND
SEMI-ANNUAL REPORT
IAI LATIN AMERICA FUND
APRIL 30, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI LATIN AMERICA FUND
SEMI-ANNUAL REPORT
APRIL 30, 1998
(UNAUDITED)
President'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
<PAGE>
PRESIDENT'S LETTER
IAI LATIN AMERICA FUND
COLD MARKETS CAN TURN HOT IN NO TIME
[PHOTO]
I.P. "KIP" KNELMAN
PRESIDENT
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the stronger emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
markets down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. Initially, the countries making up the European Union will compromise
the world's second largest economy and bond market. Investor sentiment is
positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI LATIN AMERICA FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Roy Gillson, Latin America Fund
Manager, follows.
Economic policy in Latin America, as in most of the Emerging Markets, has
tightened over the past year. This move to a more restrictive stance reflects
the unease investors have with overvalued currencies and/or high current account
deficits. In the short-term, we can expect the restrictive policies to keep
inflation relatively low and falling and to keep volatility in the Latin
American currencies to a minimum. These policies maintain the pressure on
companies to restructure and raise efficiency.
However, the downside to this controlled stance by Latin American central banks
and governments is that credit growth should slow this year. This means that
consumption growth will also diminish, eventually correcting some of the rise in
current account deficits. The combination of low inflation and improving country
finances should attract funds to Latin America as higher real yields in fixed
income instruments and low P/E ratios become too attractive to ignore.
The main risk to the region is that Asian economies cannot manage any economic
recovery over the coming year keeping commodity prices, a major export in the
region, in a steady decline. We are cautiously optimistic that this worst-case
scenario will not transpire in the year ahead.
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/ Kip Knelman
I.P. "Kip" Knelman
PRESIDENT
<PAGE>
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
IAI LATIN AMERICA FUND
[PHOTO]
ROY C. GILLSON
IAI LATIN AMERICA
FUND MANAGER
WHAT IS THE FUND'S OBJECTIVE?
IAI Latin America Fund's objective is long-term capital appreciation. The Fund
seeks to achieve its objective by investing primarily in equity securities of
Latin American issuers.
HOW HAS THE FUND PERFORMED?
After having declined quite dramatically with the onslaught of the Asian
financial crisis in October 1997, the major Latin America markets all showed
signs of improvement during the six month period ended April 30, 1998. The Latin
America Fund gained 4.98% for the six months ended April 30, 1998, while its
benchmark, the Investable Latin America Index, returned 6.52% for the same
period. Since the Fund's inception in December 1996, it has generated a return
of 24.19% compared to the IFC Investable Latin America Index which has produced
a return of 20.39% during the same period of time. Brazil, which had previously
led the way down, showed the most significant improvement. Argentina and Mexico
also yielded positive dollar returns. By and large, the policy responses in
Latin America to the Asian crisis have been timely and effective. Brazil allowed
interest rates to rise dramatically in order to defend the country's currency
and the Mexican government instituted spending cuts to strengthen the country's
fiscal accounts.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
The best performing stocks during the period were Telefonica de Argentina,
Petroleo Brasileiro and Grupo Financiero Bancomer. Each of these blue chip
stocks gained better than 35% in U.S. dollar terms during the period,
demonstrating that a long-term fundamental view is what is required in order to
be a successful investor in Latin American equities.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
The Asian crisis and the possibility of a world economic slow-down continued to
have an effect on Latin America throughout the period. While the fear of
impending sea-changes in the macro-economic situation for the region subsided,
higher interest rates and lower commodity prices dampened the short-term outlook
for many companies and countries. Mexico and Venezuela, in particular, suffered
from lower oil prices as both of these country's governments rely on state oil
monopoly revenues for a large portion of their funding. Chile also saw a sharp
drop in the world market price for its major exports, most notably copper, while
Peru was plagued by a particularly harsh El Nino weather pattern. Finally,
Brazil continued its plans for significant privatization of state-owned
electricity and telecommunications companies during the 1998 calendar year.
WERE THERE ANY SIGNIFICANT CHANGES?
Our strategy with regard to the Latin America markets has not changed
significantly. Our focus in Brazil continues to be on those companies which are
slated for privatization, as well as those that are significant exporters and
earners of hard currencies. In Mexico, we continue to hold a balanced mix of
industrial- and consumer goods-oriented companies as the economic recovery there
continues to be broad based.
WHAT IS YOUR OUTLOOK FOR THE FUND?
On a medium to long-term view, we are still very optimistic about the investment
prospects in Latin America. Over the shorter term, there will continue to be
some volatility. Our focus on long term value will not waiver and we are
confident that this focus will provide investors with superior risk adjusted
returns.
<PAGE>
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
PORTFOLIO WEIGHTING:
IAI LATIN AMERICA FUND VS. IFC INVESTABLE LATIN AMERICA INDEX
4/30/98
----------------------------------------- Country Returns
IAI Latin America IFC Investable Six months ended
Fund Latin America Index April 30, 1998
- -------------------------------------------------------------------------------
LATIN AMERICA
Argentina 11% 12% 12%
Brazil 36 33 20%
Chile 12 14 (12)%
Colombia -- 3 (26)%
Mexico 24 33 11%
Peru 12 3 1%
Venezuela 5 2 (40)%
- -------------------------------------------------------------
TOTAL 100% 100%
=============================================================
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
-------------------
Issue Country Industry 04/30/98 10/31/97
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Telecomunicacoes Brasileiras Brazil Services 6.11 7.36
Energetica de Minas Gerais Brazil Energy 4.68 2.83
Vale do Rio Doce Brazil Materials 4.25 4.05
Banco de A. Edwards Series A ADR Chile Financial 4.21 3.25
Petroleo Brasileiro Brazil Energy 4.10 3.07
Grupo Tribasa ADR Mexico Capital Equipment 4.02 --
YPF Class D ADR Argentina Energy 3.83 3.68
Edegel Communications Series B Peru Energy 3.82 3.39
Usinas Siderurgicas de Minas Gerais ADR Brazil Materials 3.81 3.12
Industrias Series B Mexico Capital Equipment 3.72 3.08
- -------------------------------------------------------------------------------------------
TOTAL 42.55 33.83
</TABLE>
<PAGE>
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
[BAR CHART]
AS OF 4/30/98 AS OF 10/31/97
Brazil 34.5% 33.6%
Mexico 22.8% 25.2%
Chile 11.0% 12.7%
Peru 10.5% 8.1%
Argentina 9.6% 11.8%
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS GRAPH]
LATIN AMERICA FUND IFC INVESTABLE LATIN
(Inception 12/12/96) AMERICA INDEX*
12/12/96 $10,000 $10,000
1/31/97 $11,360 $11,210
4/30/97 $12,261 $12,310
7/31/97 $14,362 $15,167
10/31/97 $11,831 $12,221
1/31/98 $10,829 $11,743
4/30/98 $12,420 $13,009
AVERAGE ANNUAL RETURN+
THROUGH 4/30/98
Since Inception
Six months** 12/12/96
- -----------------------------------------------------------------------------
IAI LATIN AMERICA FUND 4.98% 24.19%
- -----------------------------------------------------------------------------
IFC Investable Latin America Index 6.52% 20.39%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 12/01/96
** NOT ANNUALIZED
<PAGE>
FUND PORTFOLIO
IAI LATIN AMERICA FUND
APRIL 30, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
(UNAUDITED)
COMMON STOCKS - 72.1%
Market
Quantity Value (a)
- ---------------------------------------------------------------------
ARGENTINA - 9.6%
Internacional de Bebidas y
Alimentos (Consumer Goods) 44,500 $ 56,965
Telefonica de Argentina
Class B ADR (Services) 2,110 81,367
YPF Class D ADR (Energy) 2,620 91,373
-------------
229,705
- ---------------------------------------------------------------------
BRAZIL - 13.0%
Electricidade do Estado
da Bahia (Energy) 1,335,000 74,685
Telecomunicacoes Brasileiras
(Services) 771,000 76,830
Telecomunicacoes Brasileiras
ADR (Services) 566 68,946
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 14,000 91,000
-------------
311,461
- ---------------------------------------------------------------------
CHILE - 11.0%
Banco de A. Edwards
Series A ADR (Financial) 6,256 100,487
Enersis ADR
(Energy) 2,410 70,944
Supermercados Unimarc ADR
(Consumer Goods) (b) 3,045 32,924
Telecomunicaciones de Chile
ADR (Services) 2,315 58,020
-------------
262,375
- ---------------------------------------------------------------------
Market
Quantity Value (a)
- ---------------------------------------------------------------------
MEXICO - 22.8%
Corporacion GEO Series B
(Financial) (b) 10,000 $ 68,908
Grupo Carso Series A-1
(Multi - Industry) 12,000 75,906
Grupo Financiero
Bancomer Series B (Financial) 88,000 60,743
Grupo Tribasa ADR
(Capital Equipment) (b) 13,250 96,063
Industrias Series B
(Capital Equipment) (b) 18,000 88,839
Panamerican Beverages Class A
ADR (Consumer Goods) 1,960 78,155
Telefonos de Mexico
ADR (Services) 1,349 76,387
-------------
545,001
- ---------------------------------------------------------------------
PERU - 10.5%
Credicorp ADR (Financial) 5,285 88,524
Edegel Communications
Series B (Energy) 245,234 91,214
Telefonica de Peru Class B
ADR (Services) 3,140 69,473
-------------
249,211
- ---------------------------------------------------------------------
VENEZUELA - 5.2%
Anonima Nacional Telefonos de
Venezuela ADR (Services) 2,350 78,725
Siderurgica Venezolana ADR
(Multi - Industry) 3,676 45,718
-------------
124,443
=====================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $1,626,137)......................................$ 1,722,196
=====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI LATIN AMERICA FUND
APRIL 30, 1998
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 24.3%
Market
Quantity Value (a)
- ---------------------------------------------------------------------
BRAZIL - 24.3%
Centrais Electricas de Santa
Catarina Series B (Energy) 56,300 $ 65,946
Companhia de Eletricidade do
Estado da Bahia (Energy) 153,000 8,092
Confeccoes Guararapes
(Consumer Goods) 27,500 79,327
Empresa Nacional de
Comercio (Consumer Goods) 344,000 935
Energetica de Minas Gerais
(Energy) 2,300,000 111,582
Mineracado da Trinidade-Samitri
(Materials) 2,200,000 62,500
Petroleo Brasileiro (Energy) 387,000 97,765
Telecomunicacoes do Parana
(Services) 91,983 51,942
Vale do Rio Doce (Materials) 4,300 101,486
-------------
579,575
- ---------------------------------------------------------------------
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $462,347)........................................$ 579,575
=====================================================================
CORPORATE BONDS - 0.0%
Principal Market
Rate Maturity Amount (c) Value (a)
- ---------------------------------------------------------------------
BRAZIL - 0.0%
Vale do Rio Doce (Materials) (BRAZILIAN REAL)
0.00% 12/31/99 $ 6,000 $ --
=====================================================================
TOTAL INVESTMENTS IN CORPORATE BONDS
(COST: $0)..............................................$ --
=====================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $2,088,484) (d)..................................$ 2,301,771
=====================================================================
OTHER ASSETS AND LIABILITIES (NET) - 3.6%
.....................................................$ 84,932
=====================================================================
TOTAL NET ASSETS
.....................................................$ 2,386,703
=====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
NOTES TO FUND PORTFOLIO
IAI LATIN AMERICA FUND
APRIL 30, 1998
(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)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(d)
At April 30, 1998, 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............... $ 2,088,484
===========
Gross unrealized appreciation...................... $ 386,602
Gross unrealized depreciation...................... (173,315)
-----------
Net unrealized appreciation........................ $ 213,287
===========
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI LATIN AMERICA FUND
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at market
(Cost: $2,088,484) $ 2,301,771
Cash in bank on demand deposit 112,552
Dividends and accrued interest receivable 25,246
-----------
TOTAL ASSETS 2,439,569
-----------
LIABILITIES
Payable for investment securities purchased 52,668
Unrealized depreciation on foreign currency contracts held, at value (Note 5) 198
-----------
TOTAL LIABILITIES 52,866
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 2,386,703
-----------
REPRESENTED BY:
Capital stock $ 2,315
Additional paid-in capital 2,158,273
Undistributed net investment income 27,727
Accumulated net realized losses (14,597)
Unrealized appreciation or depreciation on:
Investment securities $ 213,287
Other assets and liabilities denominated in foreign currency (302)
-----------
212,985
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 2,386,703
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 231,497
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 10.31
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF OPERATIONS
APRIL 30, 1998
(UNAUDITED)
SIX MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $3,552) $ 49,573
Interest 5,600
---------
TOTAL INCOME 55,173
---------
EXPENSES
Management fees 39,743
Compensation of Directors 183
Interest 929
---------
TOTAL EXPENSES 40,855
Less fees waived or reimbursed by Advisers (13,431)
---------
NET EXPENSES 27,424
---------
NET INVESTMENT INCOME 27,749
---------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (11,708)
Foreign currency transactions (net of foreign currency tax of $904) (2,875)
---------
(14,583)
Net change in unrealized appreciation or depreciation on:
Investment securities $ 95,940
Other assets and liabilities denominated in foreign currency (262)
---------
95,678
---------
NET GAIN ON INVESTMENTS 81,095
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 108,844
=========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI LATIN AMERICA FUND
<TABLE>
<CAPTION>
Period from
Six months ended December 12, 1996*
April 30, 1998 to October 31, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS (UNAUDITED)
Net investment income $ 27,749 $ 18,962
Net realized gains (losses) (14,583) 471,608
Net change in unrealized appreciation or depreciation 95,678 117,307
--------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 108,844 607,877
--------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (7,332) --
Net realized gains (483,274) --
--------------------------------------
TOTAL DISTRIBUTIONS (490,606) --
--------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of 13,260 and 419,753 shares 143,383 4,432,994
Net asset value of 47,899 and 0 shares issued
in reinvestment of distributions 462,222 --
Cost of 152,025 and 97,390 shares redeemed (1,649,571) (1,228,440)
--------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (1,043,966) 3,204,554
--------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,425,728) 3,812,431
NET ASSETS AT BEGINNING OF PERIOD 3,812,431 --
--------------------------------------
NET ASSETS AT END OF PERIOD $ 2,386,703 $ 3,812,431
======================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 27,727 $ 7,310
======================================
</TABLE>
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
FINANCIAL HIGHLIGHTS
IAI LATIN AMERICA 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>
Period from
Six months ended December 12, 1996+
April 30, 1998 to October 31,1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 11.83 $ 10.00
----------------------------------------
OPERATIONS
Net investment income 0.13 0.06
Net realized and unrealized gains 0.32 1.77
----------------------------------------
TOTAL FROM OPERATIONS 0.45 1.83
----------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.03) --
Net realized gains (1.94) --
----------------------------------------
TOTAL DISTRIBUTIONS (1.97) --
----------------------------------------
NET ASSET VALUE
End of period $ 10.31 $ 11.83
========================================
Total investment return* 4.98% 18.30%
Net assets at end of period (000's omitted) $ 2,387 $ 3,812
RATIOS
Expenses to average net assets***
(including interest expense) 2.07%** 2.01%**
Expenses to average net assets***
(excluding interest expense) 2.00%** 2.00%**
Net investment income to average net assets*** 2.09%** 0.49%**
Average brokerage commission rate**** $ 0.0017 $ 0.0017
Portfolio turnover rate
(excluding short-term securities) 20.5% 50.6%
</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
*** THE FUND'S ADVISER VOLUNTARILY WAIVED $13,248 AND $38,546 IN EXPENSES FOR
THE SIX MONTHS ENDED APRIL 30, 1998 AND THE PERIOD ENDED OCTOBER 31, 1997,
RESPECTIVELY. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE RATIO OF
EXPENSES TO AVERAGE DAILY NET ASSETS (INCLUDING INTEREST EXPENSE) WOULD
HAVE BEEN 3.07% AND 3.01%, RESPECTIVELY, AND THE RATIO OF NET INVESTMENT
INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 1.09% AND (0.51%),
RESPECTIVELY. EXPENSES IN EXCESS OF 2.00% OF AVERAGE DAILY NET ASSETS WILL
BE VOLUNTARILY WAIVED THROUGH MARCH 1, 1999.
**** 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>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
APRIL 30, 1998
(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
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Securities which cannot be
valued by the portfolio pricing service are valued using dealer-supplied
valuations, or are valued under consistently applied procedures established by
the Board of Directors to determine fair value in good faith. Short-term "money
market type" debt securities having a remaining maturity of 60 days or less at
acquisition are valued at cost adjusted for amortization to maturity of any
premium or discount. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer.
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 gain or loss and unrealized
appreciation or depreciation on foreign currency transactions. Exchange gains
and 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
APRIL 30, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Net investment income and net realized gains and 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-dividend date.
Distributions from net investment income are made 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 it 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 $368,000 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, 1998.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
APRIL 30, 1998
(UNAUDITED)
[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 fee is equal to an annual rate of
3.00% declining to 2.65% of average daily net assets. This fee is paid monthly.
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. Until March 1, 1999,
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 six months ended April 30, 1998, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $532,885 and $1,865,545, respectively.
[5] FOREIGN CURRENCY COMMITMENTS
At April 30, 1998, the Latin America Fund had entered into foreign currency
exchange contracts. The unrealized depreciation on those contracts at April 30,
1998, 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:
Exchange Currency to be Currency to be Unrealized
Date Delivered Received Depreciation
- -------------------------------------------------------------------------------
05/04/98 49,799 U.S. Dollars 56,757 Brazilian Real $ 187
05/05/98 3,066 U.S. Dollars 3,496 Brazilian Real 11
- -------------------------------------------------------------------------------
TOTAL $ 198
[6] SUBSEQUENT EVENT
On May 13, 1998, the Board of Directors approved a plan to liquidate the Fund.
It is anticipated that the shareholders will vote on this proposal in the fall
of 1998.
<PAGE>
IAI MUTUAL FUND FAMILY
IAI LATIN AMERICA FUND
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 LATIN AMERICA FUND Capital Appreciation -- Equity securities of Latin American issuers
- ------------------------------------------------------------------------------------------------------------------------------------
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 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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<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
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
P.O. BOX 357, MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
