GLOBAL EQUITY FUNDS
SEMI-ANNUAL REPORT
IAI DEVELOPING COUNTRIES FUND,
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SEMI-ANNUAL REPORT
JULY 31, 1998
(UNAUDITED)
President's Letter.......................................................... 2
Fund Managers' Reviews
IAI DEVELOPING COUNTRIES FUND.......................................... 4
IAI INTERNATIONAL FUND................................................. 8
Fund Portfolios
IAI DEVELOPING COUNTRIES FUND......................................... 12
IAI INTERNATIONAL FUND................................................ 15
Notes to Fund Portfolios................................................. 20
Statements of Assets and Liabilities..................................... 22
Statements of Operations................................................. 23
Statements of Changes in Net Assets...................................... 24
Financial Highlights
IAI DEVELOPING COUNTRIES FUND......................................... 26
IAI INTERNATIONAL FUND................................................ 27
Notes to Financial Statements............................................ 28
IAI Mutual Fund Family................................................... 33
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors................................................. Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
WHAT'S RIGHT WITH THIS MARKET
[PHOTO]
ROY C. GILLSON
PRESIDENT
The stock market has been on a roller coaster of late, and that naturally makes
people uneasy. But if you're a long-term investor, then I would argue that there
are a lot more good things influencing the market than bad things.
True, U.S. corporate earnings are flattening out, and that's putting a damper on
the stock market. When you buy a stock, you're buying a future stream of
dividends as well as a stronger company because most of the profits are being
reinvested. After double-digit growth during much of the 1990s, profits in 1998
are growing in the low single digits. A major reason why profits are sluggish is
the economic and currency turmoil in Asia, which hurts U.S. companies doing
business there.
Another reason for sluggish profit growth is the great job that Corporate
America has done to become more efficient. After years of cost-cutting, there
isn't much cutting left to do. To enhance profits, companies must either boost
prices or sell more products and services. But with inflation at virtually zero,
it's tough to raise prices. So, profit growth must come through increased unit
volume.
And that's where the good news is likely to begin. Even with the dampening
effects of Asia, the U.S. economy is still basically healthy, making it possible
for U.S. corporations to sell more products and services here at home. True,
we're losing business in Asia, because the dollar is so strong compared to their
currencies. But what we're losing in Asia, we're gaining in Europe, as that
region of the world begins to enjoy U.S.-style prosperity. Europe will look even
stronger once the Euro, the Continent's single currency, begins to replace 11
currencies on January 1, 1999.
Asia has helped keep inflation worries away, and that has kept interest rates
low. Recently, the 30-year Treasury bond yield reached its lowest level ever, as
global investors buy our securities for the greatest safety and liquidity.
Partly because of our low inflation environment, worldwide demand for U.S.
stocks and bonds continues to be strong.
Even if 1998 turns out to be a mediocre year for stocks, let's not feel too
sorry for ourselves. The Dow Jones Industrial Average has more than doubled
since 1995 and virtually tripled since the beginning of this decade. Where was
the Dow in 1982? 800! Has your house gone up by a factor of ten in fifteen
years? Probably not. The point is that markets do not go up in a straight line,
and there is bound to be volatility. But if you're an investor for the long
term, then you should be able to step back and see the good in this market.
2
<PAGE>
PRESIDENT'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 presented below.
U.S. economic growth is likely to remain subdued during the remainder of the
summer. Final demand should stay persistently strong, but some inventory runoff
may reduce the rate of overall GDP expansion. Imports relative to exports will
continue to expand, erasing some top-line growth from the U.S. economy. However,
the underlying fundamental are still favorable which means the real growth rate
should not dip below 3% on a year-over-year basis.
Current financial market risk comes from high valuations rather than a failing
U.S. economy. By almost any traditional measure of value, U.S. stock prices are
too high. However, the market has been driven by strong cash flow and positive
investor sentiment rather than cheap valuation. Foreign demand for U.S. stocks
has been particularly strong. Temporary price declines may reduce over
valuation, but a true bear market is unlikely to develop.
For U.S. fixed income markets, the Federal Reserve remains a key player. Policy
is unlikely to change in the near-term as they wait to see the full effects of
Asia. The Fed can afford to be patient because inflationary expectations are
low. A softer economy in the second quarter adds to the Fed's ability to wait.
As a result, interest rates should remain low and the yield curve should
continue to flatten.
We hope that you read the Portfolio Managers' Reviews which follow this letter.
They offer a detailed perspective on the individual funds' performance and
strategy. As always, we appreciate your continued trust and confidence in IAI.
If there is any way that we can serve you better, please let us know by calling
our toll-free Investor Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Roy C. Gillson
Roy C. Gillson
President
3
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
IAI DEVELOPING COUNTRIES FUND
[PHOTO]
ROY C. GILLSON
IAI DEVELOPING COUNTRIES
FUND MANAGER
HOW HAS THE FUND PERFORMED?
The IAI Developing Countries Fund invests in emerging markets such as Southeast
Asia, Eastern Europe and Latin America. In the six months ended July 31, 1998,
the Fund declined (3.76)%, while the IFC Investable Index declined (6.21)% for
the same period.
The Fund benefited from an overweighting of Egypt, Israel, Poland, Chile
and Peru and underweighting of South Africa, Indonesia, Korea, Malaysia, Russia
and Taiwan. Conversely, an overweighting of China, Hong Kong, Thailand and
Venezuela and underweighting of Turkey, Brazil, Colombia and Mexico detracted
from performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Some of our best performing stocks included Blue Square (3.80%) in Israel and
Delta Informatics (2.42%) in Greece. Disappointments were mostly found in the
Far East as Asian markets experienced a significant set-back on poor economic
news. (Figures in parentheses refer to percentages of net assets.)
WERE THERE ANY SIGNIFICANT CHANGES?
No significant changes were made within our overall allocation to the major
geographic regions during the second quarter. Relative to the IFC Investable
Index, we are maintaining an underweight commitment to Europe/Middle East/Africa
and remain slightly overweight in Latin America.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
After staging a recovery in the first quarter of 1998, emerging markets
worldwide declined in the second quarter. Asian markets experienced a severe
set-back on poor economic news, although of significant note, riots in Indonesia
finally led to a change in leadership as President Suharto relinquished control
to his deputy, now President, Habibie. Performance of the Latin American markets
was more uniform but most fell in sympathy with their Asian counterparts.
European equity markets saw some profit taking following a continuation of their
rally.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Global emerging markets offer select opportunities on a long-term basis. Many
emerging markets will still achieve average economic growth rates in excess of
5% over the next five years driven by a rise in per capita income, export
opportunities or capital investment. The recent crisis in Asia will reduce
growth over the medium term, but above average long-term growth potential
remains intact for these markets.
4
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
PORTFOLIO WEIGHTING:
7/31/98
---------------------------------- Country Returns
IAI Developing IFC Investable for the Six Months
Countries Fund Index Ended 7/31/98
- --------------------------------------------------------------------------------
Africa
Egypt 1% 1% (14%)
South Africa 4 12 (19%)
Europe
Czech Republic -- -- 20%
Greece 5 5 95%
Hungary -- 2 19%
Morocco -- 1 --%
Poland 4 1 23%
Portugal 5 5 32%
Russia 2 2 (45%)
Turkey 2 5 (9%)
Far East
China 3 1 (29%)
Hong Kong 2 -- (21%)
India 2 2 (9%)
Indonesia -- 1 (23%)
Israel 7 3 14%
Malaysia 2 4 (28%)
Pakistan -- -- (59%)
Philippines 2 1 (16%)
South Korea 4 5 (24%)
Sri Lanka -- -- (21%)
Taiwan 4 8 (10%)
Thailand 4 1 (36%)
Latin America
Argentina 10 6 (4%)
Brazil 16 13 1%
Chile 4 6 (3%)
Colombia -- 1 (31%)
Mexico 10 12 (12%)
Peru 5 1 --
Venezuela -- 1 (40%)
Other Countries 2 --
Cash -- --
=============================================================
TOTAL 100% 100%
=============================================================
5
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
-------------------------
Issues Country Industry 7/31/98 1/31/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banco Pinto & Sotto Mayor Portugal Financial 4.03 --
Taipei Fund IDR Taiwan Financial 3.90 4.58
Elektrim Poland Capital Equipment 3.62 3.15
Tadiran Telecommunications ADR Israel Services 3.31 1.71
YPF Class D ADR Argentina Energy 3.28 3.49
Telefonica de Argentina Class B ADR Argentina Services 3.27 3.23
Telefonos de Mexico ADR Mexico Services 3.15 3.04
Telecomunicacoes Brasileiras ADR Brazil Services 3.07 2.67
Gas Natural Ban Argentina Energy 3.07 --
Pohang Iron & Steel, foreign South Korea Materials 2.90 1.82
==============================================================================================================
TOTAL 33.60% 23.69%
==============================================================================================================
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR CHART]
AS OF 7/31/98 AS OF 1/31/98
BRAZIL 15.7% 9.4%
MEXICO 9.8% 8.1%
ARGENTINA 9.6% 6.7%
ISRAEL 7.1% 4.1%
PERU 5.6% 7.8%
6
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI DEVELOPING
COUNTRIES
FUND IFC
(Inception INVESTABLE
2/10/95 INDEX*
02/10/95 $10,000 $10,000
01/31/96 10,852 11,457
01/31/97 11,419 12,379
01/31/98 8,777 9,211
07/31/98 8,448 8,637
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/98
Since Inception
Six Months** 1 Year 2/10/95
- ---------------------------------------------------------------------------
IAI DEVELOPING COUNTRIES FUND (3.76%) (33.64%) (4.74%)
- ---------------------------------------------------------------------------
IFC Investable Index (6.21%) (36.25%) (4.09%)*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/1/95
** NOT ANNUALIZED
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI DEVELOPING COUNTRIES FUND INCLUDES CHANGES IN SHARE
VALUE AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST
PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN
AND PRINCIPAL MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR
LESS THAN THE ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING
CHARGES AND EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S
PROSPECTUS CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE
EITHER TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE
SPONSORING COMPANIES.
7
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
[PHOTO]
ROY C. GILLSON
IAI INTERNATIONAL
FUND MANAGER
HOW HAS THE FUND PERFORMED?
The IAI International Fund gained 4.55% in the six months ended July 31, 1998,
compared to the EAFE Index which produced a return of 12.13%. The Fund benefited
from an overweighting of Finland and France and underweighting of Japan,
Malaysia, Italy, Denmark, Norway and the UK. Conversely, an overweighting of
Australasia, Singapore and Portugal and underweighting of Belgium, the
Netherlands, Switzerland and Sweden, coupled with emerging markets, detracted
from performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Reflecting the continuing rally in continental Europe, our best performing
stocks were found in France and Germany, with one notable exception: Mazda Motor
(1.39%), the Japanese car company, was up over 30% in a market that produced
negative returns for the quarter. Asian stocks continued to struggle in the
midst of that region's turmoil. (Figures in parentheses refer to percentage of
net assets.)
WERE THERE ANY SIGNIFICANT CHANGES?
Changes within our overall allocation to the major geographic regions were
modest. Within the Far East, we reduced our exposure to Japan, while within
continental Europe, we increased our commitment to Germany and decreased our
exposure to France. Our commitment to emerging markets remained unchanged.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
International equity markets were mixed in the second quarter of 1998.
Continuing weakness of the yen and concerns over the Japanese banking system
provided a catalyst for further declines in the Asian markets. In contrast,
European equity markets continued their rally as investors sought shelter in a
region seen as relatively safe. Emerging markets were negatively impacted by the
Asian crisis.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Following the recent setback, Asian markets have reached attractive levels of
valuation. We have added to Singapore and remain commited to Australasia, where
commodity plays still offer good long term value.
Continental European economies are recovering, influenced by capital
investment and increased consumer spending. We are maintaining a strong presence
in France where we continue to find companies offering superior value.
Global emerging markets continue to offer high long-term growth potential
despite the recent Asian turmoil. Many of these markets should realize growth
rates in excess of 5% over the next five years driven by a rise in per capita
income, export opportunities and/or capital investment.
8
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
7/31/98
--------------------------------- Country Returns
IAI EAFE for the Six Months
International Fund Index Ended 7/31/98
- -------------------------------------------------------------------------------
Africa
South Africa --% --% (19%)
Europe
Belgium -- 2 45%
Denmark -- 1 14%
Finland 2 1 71%
France 20 10 36%
Germany 10 12 36%
Italy 4 5 35%
Netherlands 2 6 23%
Norway 1 1 6%
Portugal 2 1 27%
Spain 3 3 41%
Sweden 1 3 26%
Switzerland 3 8 25%
United Kingdom 11 21 8%
Far East
Australia 5 2 (5%)
Hong Kong 2 2 (21%)
Indonesia -- -- (23%)
Israel 1 -- 14%
Japan 12 20 (12%)
Malaysia -- 1 (29%)
New Zealand 1 -- (13%)
Singapore 4 1 (17%)
South Korea -- -- (25%)
Taiwan -- -- (10%)
Latin America
Argentina 1 -- (4%)
Brazil 2 -- 1%
Chile -- -- (3%)
Mexico 1 -- (12%)
Other Countries 6 --
Cash 6 --
=============================================================
TOTAL 100% 100%
=============================================================
9
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
---------------------
Issues Country Industry 7/31/98 1/31/98
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Groupe Danone France Consumer Goods 2.70 --
Telecom Italia Italy Services 2.48 --
Bayer Germany Materials 2.24 2.50
Deutsche Telekom Germany Services 2.11 1.96
Hitachi Japan Capital Equipment 2.10 2.44
Swatch Group Switzerland Consumer Goods 2.01 --
Lyonnaise des Eaux-Dumez France Services 1.93 2.20
Banco Pinto & Sotto Mayor Portugal Financial 1.74 --
Michelin Class B France Consumer Goods 1.66 --
Broken Hill Proprietary Australia Materials 1.63 --
=============================================================================================================
TOTAL 20.60% 9.10%
=============================================================================================================
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR CHART]
AS OF 7/31/98 AS OF 1/31/98
FRANCE 19.5% 17.5%
JAPAN 11.3% 16.4%
UNITED KINGDOM 11.2% 13.4%
GERMANY 10.3% 8.5%
AUSTRALIA 5.3% 2.8%
10
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
VALUE OF $10,000 INVESTMENT+
[PLOT POINTS CHART]
IAI
INTERNATIONAL EAFE
FUND INDEX
08/01/88 $10,000 $10,000
01/31/89 11,317 11,499
01/31/90 12,609 12,055
01/31/91 11,444 9,928
01/31/92 13,193 10,588
01/31/93 12,429 9,536
01/31/94 17,949 13,750
01/31/95 16,102 13,174
01/31/96 19,343 15,346
01/31/97 19,804 15,686
01/31/98 19,602 17,348
07/31/98 20,493 19,453
AVERAGE ANNUAL RETURNS+
THROUGH 7/31/98
Six Months* 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------
IAI INTERNATIONAL FUND 4.55% (8.45%) 7.31% 7.44%
- -----------------------------------------------------------------------------
EAFE Index 12.13% 5.75% 9.81% 6.88%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* NOT ANNUALIZED
NOTE TO PRESIDENT'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI INTERNATIONAL FUND INCLUDES CHANGES IN SHARE VALUE
AND ASSUMES REIN-VESTMENT 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.
11
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1998
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 90.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ARGENTINA - 9.6%
Gas Natural Ban (Energy) (b) 130,740 $ 202,667
Telefonica de Argentina
Class B ADR (Services) 5,972 216,112
YPF Class D ADR (Energy) 7,395 216,304
- --------------------------------------------------------------------------------
635,083
- --------------------------------------------------------------------------------
BRAZIL - 7.0%
Electricidade do Estado da
Bahia (Energy) (b) 2,800,000 142,769
Telecomunicacoes Brasileiras
ADR (Services) 1,676 202,901
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 21,800 114,450
- --------------------------------------------------------------------------------
460,120
- --------------------------------------------------------------------------------
CANADA - 1.7%
Namibian Minerals ADR
(Materials) (b) 54,500 109,000
- --------------------------------------------------------------------------------
CHILE - 4.4%
Enersis ADR (Energy) 6,196 172,714
Supermercados Unimarc
ADR (Consumer Goods) 19,348 116,088
- --------------------------------------------------------------------------------
288,802
- --------------------------------------------------------------------------------
CHINA - 2.7%
Guangdong Electric Power
Development Class B
(Energy) 554,840 179,750
- --------------------------------------------------------------------------------
EGYPT - 1.4%
Suez Cement GDR (Materials) (c) 5,400 93,420
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
GREECE - 4.8%
Delta Informatics
(Capital Equipment) 6,930 $ 159,450
Delta Informatics Rights
(Capital Equipment) 3,150 44,201
Texniki Et Boloy
(Capital Equipment) 23,300 114,316
- --------------------------------------------------------------------------------
317,967
- --------------------------------------------------------------------------------
HONG KONG - 1.8%
Giordano International
(Consumer Goods) 560,000 96,855
Sinocan (Consumer Goods) 1,024,000 23,790
- --------------------------------------------------------------------------------
120,645
- --------------------------------------------------------------------------------
INDIA - 1.9%
Grasim Industries GDR
(Multi - Industry) 8,900 46,503
Indian Petrochemicals GDR
(Materials) 28,350 81,506
- --------------------------------------------------------------------------------
128,009
- --------------------------------------------------------------------------------
ISRAEL - 7.1%
Blue Square-Israel
(Consumer Goods) (b) 8,230 108,128
Blue Square-Israel ADR
(Consumer Goods) (b) 9,300 142,988
Tadiran Telecommunications
ADR (Services) (c) 11,205 218,498
- --------------------------------------------------------------------------------
469,614
- --------------------------------------------------------------------------------
MALAYSIA - 2.3%
Golden Hope Plantations
(Materials) 28,864 23,834
Land & General (Multi - Industry) 422,800 39,533
Petronas Dagangan Berhad
(Energy) 148,200 85,663
================================================================================
149,030
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
12
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
MEXICO - 9.8%
Corporacion GEO Series B
(Financial) (b) 15,600 $ 84,893
Grupo Carso Series A-1
(Multi - Industry) (b) 25,830 109,730
Grupo Tribasa ADR
(Capital Equipment) (b) 21,765 107,465
Industrias Series B
(Capital Equipment) (b) 37,625 134,955
Telefonos de Mexico
ADR (Services) 4,160 208,000
- --------------------------------------------------------------------------------
645,043
- --------------------------------------------------------------------------------
PERU - 5.6%
Credicorp (Financial) 3,850 52,360
Credicorp ADR (Financial) 9,625 126,930
Edegel Communications
Series B (Energy) 589,430 189,197
- --------------------------------------------------------------------------------
368,487
- --------------------------------------------------------------------------------
PHILIPPINES - 2.3%
Universal Robina (Services) 1,883,475 149,873
- --------------------------------------------------------------------------------
POLAND - 3.6%
Elektrim (Capital Equipment) 16,700 239,245
- --------------------------------------------------------------------------------
PORTUGAL - 5.0%
Banco Pinto & Sotto Mayor
(Financial) 11,668 265,802
Brisa-Auto Estradas de Portugal
(Capital Equipment) 1,433 62,768
- --------------------------------------------------------------------------------
328,570
- --------------------------------------------------------------------------------
RUSSIA - 1.8%
Lukoil Holding ADR (Energy) (b) 3,610 120,033
- --------------------------------------------------------------------------------
SOUTH AFRICA - 4.0%
Bidvest (Consumer Goods) 22,400 177,850
South African Iron & Steel
Industrial (Materials) 366,000 84,049
- --------------------------------------------------------------------------------
261,899
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
SOUTH KOREA - 3.8%
Pohang Iron & Steel, foreign
(Materials) (b) 4,195 $ 191,489
Samsung Electronics, foreign
(Consumer Goods) (b) 1,651 61,049
- --------------------------------------------------------------------------------
252,538
- --------------------------------------------------------------------------------
TAIWAN - 3.9%
Taipei Fund IDR (Financial)(b) 28(f) 257,600
- --------------------------------------------------------------------------------
THAILAND - 4.1%
Bangkok Bank, foreign (Financial) 90,800 107,803
Charoen Pokphand Feedmill,
foreign (Consumer Goods) 82,630 70,797
Hana Microelectronics, foreign
(Capital Equipment) 27,360 80,372
Siam City Bank, foreign (Financial) 435,000 3,195
Srithai Superware, foreign
(Consumer Goods) 59,550 9,330
- --------------------------------------------------------------------------------
271,497
- --------------------------------------------------------------------------------
TURKEY - 1.6%
Tofas Turk Otomobil GDR
(Consumer Goods) 455,000 86,450
Tofas Turk Otomobil GDR
(Consumer Goods) (c) 100,000 19,000
- --------------------------------------------------------------------------------
105,450
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $8,823,774)........................... $ 5,951,675
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
13
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JULY 31, 1998
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 9.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
BRAZIL - 8.7%
Banco Nacional (Financial)(b)(d) 5,300,000 $ --
Centrais Electricas de Santa
Catarina Series B (Energy) 208,100 175,355
Centrais Electricas de Santa
Catarina Series B GDR (Energy) (c) 304 25,535
Companhia de Eletricidade do
Estado da Bahia (Energy) 2,853,000 139,828
Empresa Nacional de Comercio
(Consumer Goods) (b) 295,500 685
Mineracado da Trinidade-
Samitri (Materials) 5,970,259 123,768
Petroleo Brasileiro (Energy) 496,000 108,752
Tecidos Norte de Minas
(Consumer Goods) 500 77
- --------------------------------------------------------------------------------
574,000
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.5%
Samsung Electronics, foreign
(Consumer Goods) (b) 2,400 34,913
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $879,896)............................. $ 608,913
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $9,703,670) (g)....................... $ 6,560,588
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 0.6%
............................................. $ 39,319
================================================================================
TOTAL NET ASSETS
............................................. $ 6,599,907
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
14
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 75.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ARGENTINA - 0.7%
Gas Natural Ban (Energy) 55,690 $ 86,328
Telefonica de Argentina
Class B ADR (Services) 2,370 85,764
YPF Class D ADR (Energy) 3,859 112,876
- --------------------------------------------------------------------------------
284,968
- --------------------------------------------------------------------------------
AUSTRALIA - 5.3%
Australian National Industries
(Materials) 170,000 90,336
Boral Limited (Materials) 180,600 318,176
Broken Hill Proprietary (Materials) 84,666 686,683
Commonwealth Bank of
Australia (Financial) 43,000 536,641
David Jones (Services) 160,000 165,186
Henry Walker Group (Energy) 117,500 116,313
M.I.M. Holdings (Materials) 620,000 293,690
- --------------------------------------------------------------------------------
2,207,025
- --------------------------------------------------------------------------------
BELGIUM - 0.4%
Compagnie Maritime Belge
(Services) 2,650 174,523
- --------------------------------------------------------------------------------
BRAZIL - 0.4%
Electricidade do Estado da
Bahia (Energy) (b) 1,087,000 55,425
Telecomunicacoes Brasileiras
ADR (Services) 590 71,427
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 9,500 49,875
- --------------------------------------------------------------------------------
176,727
- --------------------------------------------------------------------------------
CANADA - 0.1%
Namibian Minerals ADR
(Materials) (b) 27,000 54,000
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
CHILE - 0.3%
Enersis ADR (Energy) 3,336 $ 92,991
Supermercados Unimarc ADR
(Consumer Goods) 9,491 56,946
- --------------------------------------------------------------------------------
149,937
- --------------------------------------------------------------------------------
CHINA - 0.2%
Guangdong Electric Power
Development Class B (Energy) 268,580 87,011
- --------------------------------------------------------------------------------
EGYPT - 0.1%
Suez Cement GDR (Materials) (c) 2,605 45,067
- --------------------------------------------------------------------------------
FINLAND - 1.6%
UPM-Kymmene (Materials) 26,100 668,562
- --------------------------------------------------------------------------------
FRANCE - 10.5%
Danone (Consumer Goods) 3,767 1,135,789
Dexia France (Financial) 4,500 651,594
Eridania Beghin-Say
(Consumer Goods) 1,900 394,664
La Rochette (Materials) (b) 65,000 274,832
Lyonnaise des Eaux-Dumez
(Services) 4,400 812,081
Michelin Class B
(Consumer Goods) 12,686 699,220
Paribas (Financial) 4,210 462,676
- --------------------------------------------------------------------------------
4,430,856
- --------------------------------------------------------------------------------
GERMANY - 9.0%
BASF (Materials) 7,330 336,910
Bayer (Materials) 20,700 939,216
Berliner Elektro Holding (Capital
Equipment) 5,613 104,112
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
15
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
GERMANY - (CONT.)
BHF-Bank (Financial) 9,300 $ 431,379
Deutsche Bank (Financial) 4,070 320,364
Deutsche Telekom (Services) 28,710 886,191
Dyckerhoff & Widmann (Materials) 2,000 244,012
Fuchs Petrolub (Materials) 1,900 241,426
Fuchs Petrolube Rights (Materials) 1,900 53
KM Europa Metal (Materials) 2,000 269,875
- --------------------------------------------------------------------------------
3,773,538
- --------------------------------------------------------------------------------
GREECE - 0.4%
Delta Informatics
(Capital Equipment) 3,256 74,917
Delta Informatics Rights
(Capital Equipment) 1,480 20,767
Texniki Et Boloy (Capital
Equipment) 11,390 55,882
- --------------------------------------------------------------------------------
151,566
- --------------------------------------------------------------------------------
HONG KONG - 2.2%
Giordano International
(Consumer Goods) 750,000 129,716
Jardine Strategic
(Multi - Industry) 216,000 362,880
Sinocan (Consumer Goods) 1,338,893 31,106
South China Morning Post
(Services) 29,000 15,066
Swire Pacific Class A
(Multi - Industry) 117,000 375,266
Swire Pacific Class B
(Multi - Industry) 44,000 22,149
- --------------------------------------------------------------------------------
936,183
- --------------------------------------------------------------------------------
INDIA - 0.2%
Grasim Industries GDR
(Multi - Industry) 4,450 23,251
Indian Petrochemicals GDR
(Materials) 15,500 44,563
- --------------------------------------------------------------------------------
67,814
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ISRAEL - 0.5%
Blue Square-Israel
(Consumer Goods) 3,600 $ 47,298
Blue Square-Israel ADR
(Consumer Goods) 3,736 57,441
Tadiran Telecommunications
ADR (Services) (c) 4,650 90,675
- --------------------------------------------------------------------------------
195,414
- --------------------------------------------------------------------------------
ITALY - 2.9%
Banca Popolare di Milano (Financial) 7,838 68,439
Caffaro (Materials) 85,000 99,792
Telecom Italia (Services) 176,970 1,043,776
- --------------------------------------------------------------------------------
1,212,007
- --------------------------------------------------------------------------------
JAPAN - 11.3%
Eisai (Consumer Goods) 50,000 636,861
Hitachi (Capital Equipment) 141,000 882,837
Mazda Motor (Consumer Goods) 166,000 585,220
Mitsui Wood Systems
(Capital Equipment) 44,500 101,403
Namco (Consumer Goods) 15,000 337,651
New Japan Radio
(Capital Equipment) 55,000 175,232
Nippon Telegraph & Telephone
(Services) 62 536,778
Nippon Yusen Kabushiki Kaish
(Services) 175,000 530,891
Sekisui Chemical (Materials) 128,000 664,911
Toray Industries (Materials) 45,000 217,239
Toyoda Gosei (Materials) 23,000 89,209
- --------------------------------------------------------------------------------
4,758,232
- --------------------------------------------------------------------------------
MALAYSIA - 0.3%
Boustead Holdings Berhad
(Multi - Industry) 67,000 36,612
Land & General (Multi - Industry) 534,000 49,931
Petronas Dagangan Berhad (Energy) 74,400 43,005
- --------------------------------------------------------------------------------
129,548
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
16
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
MEXICO - 0.7%
Corporacion GEO Series B
(Financial)(b) 6,845 $ 37,250
Grupo Carso Series A-1
(Multi - Industry) 10,700 45,455
Grupo Tribasa ADR
(Capital Equipment) 9,530 47,054
Industrias Series B
(Capital Equipment)(b) 18,200 65,281
Telefonos de Mexico ADR (Services) 1,933 96,650
- --------------------------------------------------------------------------------
291,690
- --------------------------------------------------------------------------------
NETHERLANDS - 1.8%
European Vinyls (Materials) 6,750 100,314
Koninklijke Boskalis Westminster
(Capital Equipment) 12,825 201,470
Kononklijke Ten Cate
(Consumer Goods) 4,250 171,679
Macintosh N.V. (Consumer Goods) 9,250 273,090
- --------------------------------------------------------------------------------
746,553
- --------------------------------------------------------------------------------
NEW ZEALAND - 1.2%
Carter Holt Harvey (Materials) 290,590 302,205
Restaurant Brands (Consumer Goods) 190,000 79,816
Wrightson (Services) 560,000 134,837
- --------------------------------------------------------------------------------
516,858
- --------------------------------------------------------------------------------
NORWAY - 0.5%
Awilco (Energy) 60,000 116,020
Petroleum Geo-Services
(Energy) 3,254 80,161
- --------------------------------------------------------------------------------
196,181
- --------------------------------------------------------------------------------
PERU - 0.4%
Credicorp (Financial) 1,980 26,928
Credicorp ADR (Financial) 4,070 53,673
Edegel Communications Series B
(Energy) 274,240 88,027
- --------------------------------------------------------------------------------
168,628
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
PHILIPPINES - 0.2%
Universal Robina (Services) 1,068,539 $ 85,026
- --------------------------------------------------------------------------------
POLAND - 0.3%
Elektrim (Capital Equipment) 8,800 126,069
- --------------------------------------------------------------------------------
PORTUGAL - 1.8%
Banco Pinto & Sotto Mayor
(Financial) 32,036 729,791
Brisa-Auto Estradas de Portugal
(Capital Equipment)(b) 800 35,042
- --------------------------------------------------------------------------------
764,833
- --------------------------------------------------------------------------------
RUSSIA - 0.1%
Lukoil Holding ADR (Energy) 1,875 62,344
- --------------------------------------------------------------------------------
SINGAPORE - 3.1%
Amtek Engineering
(Capital Equipment) 345,942 73,136
GPE Industries
(Capital Equipment) 300,000 85,500
Hong Leong Finance (Financial) 80,000 56,994
Singapore Airlines (Services) 128,019 633,977
United Overseas Bank (Financial) 161,898 465,111
- --------------------------------------------------------------------------------
1,314,718
- --------------------------------------------------------------------------------
SOUTH AFRICA - 0.3%
Bidvest (Consumer Goods) 10,100 80,191
South African Iron & Steel
Industrial (Materials) 184,000 42,254
- --------------------------------------------------------------------------------
122,445
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.4%
Pohang Iron & Steel, foreign
(Materials)(b) 2,060 94,032
Samsung Electronics, foreign
(Consumer Goods)(b) 2,244 82,976
- --------------------------------------------------------------------------------
177,008
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
17
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
SPAIN - 2.9%
Banco de Valencia (Financial) 4,500 $ 135,113
Catalana Occidente (Financial) 2,000 62,235
Fuerzas Electricas de Cataluna
Class A (Energy) 38,208 359,212
Iberdrola (Energy) 40,610 642,598
- --------------------------------------------------------------------------------
1,199,158
- --------------------------------------------------------------------------------
SWEDEN - 0.9%
Argonaut Class A (Services) 120,136 154,467
Argonaut Class B (Services) 9,864 12,683
ICB Shipping (Services) 20,000 189,083
- --------------------------------------------------------------------------------
356,233
- --------------------------------------------------------------------------------
SWITZERLAND - 2.3%
Danzas Holding (Services) 225 70,949
Forbo Holding (Materials) 100 52,331
Swatch Group (Consumer Goods) 1,140 845,153
- --------------------------------------------------------------------------------
968,433
- --------------------------------------------------------------------------------
TAIWAN - 0.3%
Taipei Fund IDR (Financial) (b) 14(f) 128,800
- --------------------------------------------------------------------------------
THAILAND - 0.3%
Bangkok Bank, foreign (Financial) 45,980 54,591
Charoen Pokphand Feedmill,
foreign (Consumer Goods) 42,630 36,525
Hana Microelectronics, foreign
(Capital Equipment) 13,260 38,952
Siam City Bank, foreign (Financial) 308,250 2,264
Srithai Superware, foreign
(Consumer Goods) 39,100 6,126
- --------------------------------------------------------------------------------
138,458
- --------------------------------------------------------------------------------
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
TURKEY - 0.1%
Tofas Turk Otomobile GDR
(Consumer Goods) (c) 262,500 $ 49,875
- --------------------------------------------------------------------------------
UNITED KINGDOM - 11.2%
Blue Circle Industries (Materials) 80,560 439,870
British Steel (Materials) 236,000 485,516
BTR (Consumer Goods) 94,426 235,583
Cookson Group (Materials) 21,524 61,623
Delta (Electronic Technology) 15,000 44,417
Enterprise Oil (Energy) 40,200 328,836
Eurocamp (Services) 50,000 189,776
FKI (Capital Equipment) 98,088 266,383
Greenalls Group (Services) 44,000 330,407
Imperial Tobacco Group
(Consumer Goods) 76,000 643,439
Low & Bonar (Consumer Goods) 40,000 189,776
Rolls-Royce (Capital Equipment) 148,956 578,769
Sears (Services) 44,500 173,269
Sedgwick (Financial) 22,650 58,918
Selfridges (Services)(b) 44,500 156,524
Tomkins (Multi - Industry) 104,697 541,258
- --------------------------------------------------------------------------------
4,724,364
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $34,984,685).......................... $ 31,640,652
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
18
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
NON-CONVERTIBLE PREFERRED
STOCKS - 2.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
AUSTRIA - 0.1%
Baumax Aktiengesellschaft
(Consumer Goods) 1,250 $ 24,472
- --------------------------------------------------------------------------------
BRAZIL - 0.6%
Centrais Electricas de Santa
Catarina Series B (Energy) 90,600 76,344
Centrais Electricas de Santa
Catarina Series B GDR (Energy) (c) 120 10,080
Companhia de Eletricidade do
Estado da Bahia (Energy) 1,569,000 76,898
Mineracado da Trinidade-
Samitri (Materials) 3,284,235 68,085
Petroleo Brasileiro (Energy) 206,000 45,168
- --------------------------------------------------------------------------------
276,575
- --------------------------------------------------------------------------------
GERMANY - 1.3%
Koenig & Bauer-Albert
(Capital Equipment) 975 263,128
Rheinmetall (Capital Equipment) 10,250 273,741
- --------------------------------------------------------------------------------
536,869
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.1%
Samsung Electronics, foreign
(Consumer Goods) (b) 1,600 23,275
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $784,319)............................. $ 861,191
================================================================================
OTHER SECURITIES - 9.0%
Ownership Market
Percentage (e) Value (a)
- --------------------------------------------------------------------------------
FRANCE - 9.0%
Qualis (LIMITED PARTNERSHIP) (b) 2.69% $ 3,775,168
================================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $3,709,515)........................... $ 3,775,168
================================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $39,478,519).......................... $ 36,277,011
================================================================================
Principal Market
Rate Maturity Amount Value (a)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER - 5.5%
Associates (Financial)
5.66% 08/03/98 $ 2,145,000 $ 2,144,325
Walt Disney (Retail)
5.65 08/03/98 170,000 169,947
- --------------------------------------------------------------------------------
2,314,272
================================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $2,314,272)........................... $ 2,314,272
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $41,792,791) (g)...................... $ 38,591,283
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 8.2%
............................................. $ 3,431,101
================================================================================
TOTAL NET ASSETS
............................................. $ 42,022,384
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
19
<PAGE>
NOTES TO FUND PORTFOLIOS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(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 and are considered illiquid. For the restricted security issue held at
July 31, 1998, 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 and 01/13/98 for a total cost of $3,709,515.
(f)
Quantity disclosed in units. One unit represents 100 shares.
(g)
At July 31, 1998, 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 $ 9,931,620 $42,599,602
===============================================
Gross unrealized appreciation $ 422,679 $ 3,326,852
Gross unrealized depreciation (3,793,711) (7,335,171)
-----------------------------------------------
Net unrealized depreciation $(3,371,032) $(4,008,319)
===============================================
20
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities of unaffiliated issuers,
at market (Cost: $9,703,670 and $41,792,791) $ 6,560,588 $ 38,591,283
Cash in bank on demand deposit 54,311 1,224,674
Receivable for investment securities sold 49,791 1,899,464
Receivable for Fund shares sold -- 1,121,750
Dividends receivable 8,334 376,725
Unrealized appreciation on foreign currency contracts
held, at value (Note 6) -- 3,213
Other -- 5,995
-------------------------------------------
TOTAL ASSETS 6,673,024 43,223,104
-------------------------------------------
LIABILITIES
Payable for investment securities purchased 71,577 385,742
Payable for Fund shares purchased -- 807,673
Unrealized depreciation on foreign currency contracts
held, at value (Note 6) 1,540 7,305
-------------------------------------------
TOTAL LIABILITIES 73,117 1,200,720
-------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 6,599,907 $ 42,022,384
===========================================
REPRESENTED BY:
Capital stock $ 9,552 $ 39,289
Additional paid-in capital 10,591,478 45,367,009
Undistributed (overdistributed) net investment income (15,119) 85,668
Accumulated net realized losses on investments (841,493) (230,960)
Unrealized appreciation or depreciation on:
Investment securities $ (3,143,082) $ (3,201,508)
Other assets and liabilities
denominated in foreign currency (1,429) (37,114)
(3,144,511) (3,238,622)
----------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 6,599,907 $ 42,022,384
===========================================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 955,186 3,928,900
-------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 6.91 $ 10.70
===========================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
22
<PAGE>
STATEMENTS OF OPERATIONS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
SIX MONTHS ENDED JULY 31, 1998
(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 $11,363 and $93,056, respectively) $ 119,623 $ 709,157
Interest 8,332 29,615
----------------------------------------------------------
TOTAL INCOME 127,955 738,772
----------------------------------------------------------
EXPENSES (NOTE 3)
Management fees 83,118 414,065
Compensation of Directors 599 3,989
Interest 1,572 12,274
----------------------------------------------------------
TOTAL EXPENSES 85,289 430,328
Less fees reimbursed by Advisers (599) (3,989)
----------------------------------------------------------
NET EXPENSES 84,690 426,339
----------------------------------------------------------
NET INVESTMENT INCOME 43,265 312,433
----------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ (347,713) $ 1,647,894
Foreign currency transactions (6,918) (237,750)
------------ ------------
(354,631) 1,410,144
Net change in unrealized appreciation or depreciation on:
Investment securities $ 179,940 $ 2,050,175
Other assets and liabilities denominated in
foreign currency (15,873) (26,514)
------------ ------------
164,067 2,023,661
----------------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS (190,564) 3,433,805
----------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $ (147,299) $ 3,746,238
==========================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
23
<PAGE>
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, 1998 January 31, 1998 July 31, 1998 January 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS (UNAUDITED) (UNAUDITED)
Net investment income $ 43,265 $ 58,124 $ 312,433 $ 1,501,033
Net realized gains (354,631) 340,730 1,410,144 7,064,040
Net change in unrealized appreciation or depreciation 164,067 (3,319,700) 2,023,661 (8,133,615)
-------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS (147,299) (2,920,846) 3,746,238 431,458
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (178,416) (104,830) (2,498,912)
Net realized gains -- (699,045) (7,073) (9,915,596)
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (877,461) (111,903) (12,414,508)
-------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 4,391,108 8,406,752 87,046,149 132,201,297
Net asset value of shares issued in
reinvestment of distributions -- 828,391 91,242 11,993,205
Cost of shares redeemed (5,586,996) (9,475,349) (112,097,989) (185,054,041)
-------------------------------------------------------------------
DECREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (1,195,888) (240,206) (24,960,598) (40,859,539)
-------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (1,343,187) (4,038,513) (21,326,263) (52,842,589)
NET ASSETS AT BEGINNING OF PERIOD 7,943,094 11,981,607 63,348,647 116,191,236
-------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 6,599,907 $ 7,943,094 $ 42,022,384 $ 63,348,647
===================================================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED) NET INVESTMENT
INCOME OF: $ (15,119) $ (58,384) $ 85,668 $ (121,935)
===================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
24 25
<PAGE>
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>
Years ended
January 31, Period from
Six months ended ------------------- February 10, 1995+
July 31, 1998 1998 1997 to January 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 7.18 $ 10.38 $ 10.56 $ 10.00
----------------------------------------------------------------
OPERATIONS
Net investment income 0.04 0.06 0.05 --
Net realized and unrealized gains (losses) (0.31) (2.41) 0.46 0.83
----------------------------------------------------------------
TOTAL FROM OPERATIONS (0.27) (2.35) 0.51 0.83
----------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (0.16) (0.06) --
Net realized gains -- (0.69) (0.63) (0.27)
----------------------------------------------------------------
TOTAL DISTRIBUTIONS -- (0.85) (0.69) (0.27)
----------------------------------------------------------------
NET ASSET VALUE
End of period $ 6.91 $ 7.18 $ 10.38 $ 10.56
================================================================
Total investment return* (3.76%) (23.13%) 5.22% 8.53%
Net assets at end of period (000's omitted) $ 6,600 $ 7,943 $ 11,982 $ 7,357
RATIOS
Expenses to average daily net assets
(including interest expense)*** 2.04%** 2.02% 2.00% 2.15%**
Expenses to average daily net assets
(excluding interest expense)*** 2.00%** 2.00% 2.00% 2.15%**
Net investment income to
average daily net assets*** 1.04%** 0.49% 0.52% 0.04%**
Average brokerage commission rate**** $ 0.0017 $ 0.0041 $ 0.0057 n/a
Portfolio turnover rate
(excluding short-term securities) 33.7% 71.7% 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 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
26
<PAGE>
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
January 31, Period from Year ended
Six months ended ---------------------------------------- April 1, 1994 to March 31,
July 31, 1998 1998 1997 1996 January 31, 1995+ 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE (UNAUDITED)
Beginning of period $ 10.26 $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22
----------------------------------------------------------------------------------------
OPERATIONS
Net investment income 0.07 0.20 0.24 0.19 0.11 0.06
Net realized and unrealized
gains (losses) 0.40 (0.34) 0.08 2.17 (0.62) 2.56
----------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS 0.47 (0.14) 0.32 2.36 (0.51) 2.62
----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.03) (0.32) (0.28) (0.16) -- (0.34)
Net realized gains -- (1.39) (1.17) (1.02) (0.88) (0.05)
----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.03) (1.71) (1.45) (1.18) (0.88) (0.39)
----------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.70 $ 10.26 $ 12.11 $ 13.24 $ 12.06 $ 13.45
========================================================================================
Total investment return* 4.55% (1.04%) 2.39% 20.15% (4.14%) 23.85%
Net assets at end of period
(000's omitted) $ 42,022 $ 63,349 $116,191 $151,663 $136,474 $134,796
RATIOS
Expenses to average net assets
(including interest expense) 1.75%** 1.67% 1.65% 1.66% 1.72%** 1.74%
Expenses to average net assets
(excluding interest expense) 1.70%** 1.67% 1.65% 1.66% 1.72%** 1.74%
Net investment income to
average net assets 1.28%** 1.42% 1.56% 1.12% 1.04%** .87%
Average brokerage
commission rate*** $ 0.0084 $ 0.0108 $ 0.0157 n/a n/a n/a
Portfolio turnover rate
(excluding short-term
securities) 34.1% 76.4% 32.1% 39.2% 27.6% 50.9%
</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
*** 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.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 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
Developing Countries Fund and IAI International Fund are separate portfolios of
IAI Investment Funds III, Inc. 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
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. Such 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.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
securities represent $3,775,168 (9.0% of net assets for International Fund).
Because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
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.
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
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 differ from it's
ultimate characterization for tax purposes.
For federal income tax purposes, Developing Countries Fund and International
Fund had capital loss carryovers of approximately $311,000 and $894,000,
respectively at January 31, 1998, which, if not offset by subsequent capital
gains, will expire in 2007. 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.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). 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 $1,248,000 and $9,666,000, 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,
1998.
[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 ended Year ended Six months ended Year ended
July 31, January 31, July 31, January 31,
1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 552,241 799,319 7,871,168 10,833,124
ISSUED FOR REINVESTED DISTRIBUTIONS -- 107,939 8,519 1,143,039
REDEEMED (703,627) (954,958) (10,125,603) (15,399,390)
----------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING (151,386) (47,700) (2,245,916) (3,423,227)
======================================================================
</TABLE>
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
[5] PURCHASES AND SALES OF SECURITIES
For the period ended July 31, 1998, 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 $ 2,651,803 $ 3,754,576
IAI INTERNATIONAL FUND $ 15,522,426 $ 39,344,389
[6] FOREIGN CURRENCY COMMITMENTS
At July 31, 1998, the Funds had entered into foreign currency exchange
contracts. The unrealized appreciation and/or depreciation on those contracts at
July 31, 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:
IAI DEVELOPING COUNTRIES FUND
- --------------------------------------------------------------------------------
Exchange Unrealized
Date Currency to be Delivered Currency to be Received Depreciation
- --------------------------------------------------------------------------------
08/03/98 7,989,935 Greek Drachma 26,916 U.S. Dollars $ 119
08/03/98 66,567 Malaysian Ringgit 16,060 U.S. Dollars 107
08/05/98 28,638 U.S. Dollars 1,201,030 Philippines Peso 110
10/07/98 1,045,040 Hong Kong Dollar 133,488 U.S. Dollars 502
10/07/98 145,872 Hong Kong Dollar 18,000 U.S. Dollars 702
- --------------------------------------------------------------------------------
$ 1,540
- --------------------------------------------------------------------------------
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JULY 31, 1998
(UNAUDITED)
[6] FOREIGN CURRENCY COMMITMENTS (CON'T)
<TABLE>
<CAPTION>
IAI INTERNATIONAL FUND
- --------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
08/03/98 18,089 Brazilian Real 15,499 U.S. Dollars $ -- $ 55
08/03/98 43,859 Dutch Guilder 21,908 U.S. Dollars 35 --
08/03/98 3,403,121 Greek Drachma 11,464 U.S. Dollars -- 51
08/03/98 76,232 Malaysian Ringgit 18,391 U.S. Dollars -- 123
08/03/98 39,847 Poland Zlotty 11,615 U.S. Dollars 13 --
08/03/98 7,137,021 Portuguese Escudo 39,236 U.S. Dollars 12 --
08/03/98 19,412,344 Spanish Peseta 128,601 U.S. Dollars 77 --
08/03/98 32,979 U.S. Dollars 19,899 British Pounds -- 424
08/03/98 44,480 U.S. Dollars 26,850 British Pounds -- 553
08/04/98 17 British Pounds 29 U.S. Dollars -- --
08/04/98 17,422 British Pounds 28,696 U.S. Dollars 193 --
08/04/98 78,155 British Pounds 128,331 U.S. Dollars 469 --
08/04/98 80,239 British Pounds 131,752 U.S. Dollars 481 --
08/04/98 61,327 British Pounds 100,699 U.S. Dollars 368 --
08/04/98 82,142 British Pounds 134,878 U.S. Dollars 493 --
08/04/98 47,419 German Deutschemark 26,550 U.S. Dollars -- 110
08/04/98 268,282,592 Italian Lira 153,129 U.S. Dollars 231 --
08/04/98 2,105 Malaysian Ringgit 509 U.S. Dollars -- 2
08/04/98 47,021 Peruvian New Sol 15,983 U.S. Dollars -- 74
08/04/98 129,625 Singapore Dollar 75,341 U.S. Dollars 262 --
08/04/98 161,733 Singapore Dollar 94,004 U.S. Dollars 327 --
08/04/98 119,350 U.S. Dollars 72,642 British Pounds -- 509
08/05/98 157,131 Australian Dollar 95,457 U.S. Dollars 31 --
08/05/98 17,793 Malaysian Ringgit 4,300 U.S. Dollars -- 21
08/05/98 138,964 Malaysian Ringgit 33,586 U.S. Dollars -- 163
08/05/98 12,668 New Zealand Dollar 6,467 U.S. Dollars -- 23
08/05/98 58,846 U.S. Dollars 35,775 British Pounds -- 318
08/05/98 6,069 U.S. Dollars 254,507 Philippines Peso -- 23
08/06/98 55,345 U.S. Dollars 33,757 British Pounds -- 118
08/31/98 1,042,559 French Franc 175,014 U.S. Dollars 88 --
08/31/98 873,200 French Franc 146,584 U.S. Dollars 74 --
08/31/98 700,979 French Franc 117,673 U.S. Dollars 59 --
10/07/98 1,908,803 Hong Kong Dollar 243,806 U.S. Dollars -- 933
10/07/98 1,030,895 Hong Kong Dollar 131,682 U.S. Dollars -- 495
10/07/98 421,408 Hong Kong Dollar 52,000 U.S. Dollars -- 2,031
10/07/98 2,661,758 Hong Kong Dollar 340,000 U.S. Dollars -- 1,279
- --------------------------------------------------------------------------------------------------------------
$ 3,213 $ 7,305
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[7] SUBSEQUENT EVENT
On May 13, 1998, the Board of Directors approved a plan to liquidate the
Developing Countries Fund. It is anticipated that the shareholders will vote on
this proposal in the fall of 1998.
32
<PAGE>
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 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
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 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>
33
<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
601 SECOND AVENUE SOUTH, SUITE 3600, MINNEAPOLIS, MINNESOTA 55402 USA
FAX 612.376.2737
800.945.3863
612.376.2700
