GLOBAL EQUITY FUND
ANNUAL REPORT
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
[LOGO] IAI
MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI LATIN AMERICA FUND
ANNUAL REPORT
OCTOBER 31, 1997
Chairman's Letter...............................2
Fund Manager's Review...........................4
Fund Portfolio..................................7
Notes to Fund Portfolio.........................9
Statement of Assets and Liabilities............10
Statement of Operations........................11
Statement of Changes in Net Assets.............12
Financial Highlights...........................13
Notes to Financial Statements..................14
Independent Auditors' Report...................17
IAI Mutual Fund Family.........................18
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors.......................Inside Back Cover
<PAGE>
CHAIRMAN'S LETTER
IAI LATIN AMERICA FUND
A DAY FOR BUYING OPPORTUNITIES
[PHOTO]
NOEL P. RAHN
CHAIRMAN
In life, traumatic events grip our attention, sometimes compelling us to make
quick decisions, often rewarding us for remaining calm. As time passes, we
collect ourselves and attain a perspective.
The stock market is a case in point. The last few days of October broke records
for points lost and gained--and for trading volume, which reached a billion
shares per day. But now that we've had some time to reflect, what really
happened, and what does it mean over the long term?
The problem began in Southeast Asia, as those booming economies increasingly
became overbuilt. Investors, seeing trouble ahead, withdrew their money, causing
downward pressure on currencies in Thailand and Malaysia. The governments
attempted to boost their currencies by raising interest rates. That caused
investors in these fragile stock markets to flee. Once the panic spread to Hong
Kong, investors throughout the world reacted.
In the United States, investors who were having a good year so far in 1997
decided to lock in their profits. Many of the best performers in recent years,
such as technology companies which do a great deal of business in Asia, were hit
hard. Small capitalization stocks held up better, as did large cap companies
like retailers who do their business exclusively in the United States.
The October 27 sell-off was inevitably compared with the stock market crash of
1987. But there really was no comparison. In percentage terms, this year's
fireworks amounted to a 7% drop. In comparison, the 1987 sell-off was 22% in one
day.
But there are other fundamental differences, too, which make the events of
October 27, 1997 much less worrisome. Ten years ago, inflation was in the
mid-single digits and rising. Today, some economists would argue that there is
no inflation at all--in fact, there may even be deflation. In 1987, interest
rates were in the double digits and rising. Today, the 30-year U.S. Treasury
bond yields about 6%. In 1987, the federal budget deficit was mushrooming.
Today, the deficit has virtually been wiped out, and there's talk of a surplus.
The American economy is much stronger today than it was a decade ago.
Perhaps most importantly, investors, rather than running scared and selling at
the bottom, increasingly look at days like October 27 as a buying opportunity.
Even with the events of late October, the stock market has turned in an
above-average performance for 1997. Historically, stocks have produced average
annual returns of 10-12%. Viewed over this decade, and since the bull market
began in 1982, investors have truly enjoyed excellent results.
We believe the turmoil that occurred on October 27 will prove to be a relatively
minor event. True, it was a very strong reaction to external events. But the
environment continues to be a good one for U.S. investors. The economy continues
to grow at a 3-4% rate without inflation. Interest rates are low and corporate
profits continue to grow, although more slowly than in recent years. And the
markets in Asia appear to have stabilized for now.
The recent volatility is a great reminder to dollar-cost average into the
markets. Mutual funds make it easy to invest a fixed amount of money
periodically. When the market is down, that fixed investment buys more shares at
bargain prices. Such an automatic process allows you to keep your long-term
perspective when days like October 27th inevitably occur.
<PAGE>
CHAIRMAN'S LETTER
IAI LATIN AMERICA FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is presented below.
Fundamentally, the U.S. economy is in good shape. The expansion continued at a
3.6% pace in the third quarter, making this the first time since 1983 that
inflation-adjusted growth has been above 3% for four consecutive quarters.
During this same time, prices rose at an annualized rate of only 1.4%--the
slowest quarterly increase since 1964.
As further evidence of strength, the unemployment rate dropped to 4.7% in
October, its lowest level in 24 years. Job gains were widespread throughout a
majority of industries. So far in 1997, over 2.1 million new jobs have been
created.
On the fiscal policy side, the federal budget deficit has declined dramatically.
Tax receipts have exceeded expectations, hinting that income growth is even
higher than current statistics indicate. Low inflation has allowed the Fed to
follow a neutral monetary policy. The last time the Fed acted was in March of
this year when the overnight rate was raised by 0.25%. A shrinking deficit and
neutral monetary policy has helped long-term interest rates to drop by 1% in the
last six months.
Given this favorable backdrop, U.S. financial markets have experienced
above-average returns. For the 10 months through October, the stock market was
up 28% and bonds had returned about 8%.
Unfortunately, this good news has recently been overshadowed by turmoil
overseas. Currency devaluation and falling stock prices in the Asian Pacific
region quickly became a global event. In typical fashion, markets have led
economics. The events in October were a dramatic reintroduction of risk premiums
into the global investment equation. While some investors clearly suffered
substantial losses, the impact so far has been more psychological than
fundamental. Falling markets are likely to lead to slower growth and rising
financial problem in the afflicted economies. Although market volatility will
continue, the economic impact will be less invasive for the major economies of
Europe and North America. Global growth and inflation may be mildly lower.
However, as markets stabilize, investors are likely to refocus on positive
fundamentals.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on the Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn
Chairman
<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?
The third quarter was a strong one for Latin America, again the leading emerging
market region during the period. However, the recent financial market crises in
emerging Asia spread to Latin America during the fourth quarter. As a result,
Brazil has been forced to defend its currency with much higher real interest
rates and there has been a fairly dramatic equity market sell-off. The Argentine
equity market also suffered as investors fear that a possible devaluation in
Brazil, Argentina's largest trading partner, would negatively affect economic
growth in that country too. The Fund's performance has suffered as a result but
remains positive on a year-to-date basis. Since its inception on December 12,
1996, the Fund had an 18.30% total return while the IFC Investable Latin America
Index had a 22.21% return.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Industrias Compos Hermanos (ICH) of Mexico has been the best performing stock in
the Fund as of late. Its debt-free balance sheet and strong sales growth in a
specialty steels niche make it an attractive low-risk stock. Yacintos Petroleros
Fiscales (YPF), the Argentine oil giant, has also been a solid performer. A new
CEO who is very focused on creating shareholder value and an equity price which
is still at a significant discount to other world class oil companies are a
couple of the reasons we are quite bullish on this stock.
On the other hand, the Brazilian market decline and changing economic
environment has led to a few disappointments. In particular, the prospects for
Multicanal Participacoes (a Brazilian Cable TV company) and Globex Utilidades (a
white goods retailer) have been dampened considerably given the bleak growth
prospects for the general economy over the medium term. These stocks have been
sold or are slated for sale.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
As mentioned above, the spreading Asian crisis had a significant effect on Latin
America. Nevertheless, we remain quite positive on the medium- and long-term
prospects for Latin America in general.
WERE THERE ANY SIGNIFICANT CHANGES?
We have seen the risk-reward scenario change somewhat in Brazil; therefore, we
have moved to an underweighted position in that country since October 31, 1997
as compared with the IFCI Index for Latin America. Our reallocation has been
toward Mexico and Peru where current GDP growth is strong and where we see good
long-term prospects without so much near-term clutter. In Brazil, we remain
confident that long-term value still exists in the soon -to-be-privatized state
companies, but we have reduced our overall exposure to the private sector.
WHAT IS YOUR OUTLOOK FOR THE FUND?
In our opinion, Latin America continues to offer some of the best investment
opportunities in the world. Short-term volatility is a natural phenomenon in
these markets. By continuing to focus on value we are confident that we will be
able to provide superior risk adjusted returns over the medium and longer terms.
<PAGE>
FUND MANAGER'S REVIEW
IAI LATIN AMERICA FUND
PORTFOLIO WEIGHTING:
IAI LATIN AMERICA FUND VS. IFC INVESTABLE LATIN AMERICA INDEX
<TABLE>
<CAPTION>
10/31/97
- -------------------------------------------------------------------- COUNTRY RETURNS
IAI LATIN AMERICA IFCINVESTABLE PERIOD FROM 12/12/96*
FUND LATIN AMERICA INDEX TO 10/31/97
=========================================================================================
<S> <C> <C> <C>
LATIN AMERICA
Argentina 12% 11% 13%
Brazil 35 32 20%
Chile 13 15 10%
Colombia -- 4 40%
Mexico 27 32 32%
Peru 9 3 15%
Venezuela 4 3 45%
- --------------------------------------------------------------------
TOTAL 100% 100%
====================================================================
</TABLE>
* COMMENCEMENT OF OPERATIONS
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
% OF NET ASSETS
---------------
ISSUE COUNTRY INDUSTRY 10/31/97
========================================================================================
<S> <C> <C> <C>
Telecomunicacoes Brasileiras Brazil Services 7.36
Vale Do Rio Doce Brazil Materials 4.05
DESC Series B Mexico Multi-Industry 4.04
Panamerican Beverages ADR Mexico Consumer Goods 3.76
Siderurgica Venezolana
Sivensa ADR Venezuela Multi-Industry 3.71
YPFADR Argentina Energy 3.68
Enersis ADR Chile Energy 3.53
Edegel Communications Series B Peru Energy 3.39
Banco de A. Edwards ADR Chile Financial 3.25
Grupo Industrial Maseca
Series B Mexico Consumer Goods 3.18
- ----------------------------------------------------------------------------------------
TOTAL 39.95
</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 AS OF 10/31/97
[BAR GRAPH]
BRAZIL 33.6%
MEXICO 25.2%
CHILE 12.7%
ARGENTINA 11.8%
PERU 8.1%
VALUE OF $10,000 INVESTMENT+
[LINE GRAPH]
IAI 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 $11,830 $12,221
IAI LATIN AMERICAN FUND
(Inception 12/12/96)
IFC INVESTABLE LATIN AMERICAN INDEX*
TOTAL RETURN+
THROUGH 10/31/97
Since Inception
12/12/96
- --------------------------------------------------------------------------
IAI Latin America Fund 18.30%
- --------------------------------------------------------------------------
IFC Investable Latin America Index 22.21%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 12/01/96
<PAGE>
FUND PORTFOLIO
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 74.4%
Market
Quantity Value (a)
- --------------------------------------------------------------------
ARGENTINA - 11.8%
Banco de Galicia y Buenos Aires
ADR (Financial) 3,590 $ 87,001
Internacional de
Bebidas y Alimentos
(Consumer Goods) 29,260 43,916
Telefonica de Argentina ADR
(Services) 2,405 67,641
Transportadora de Gas del Sur
ADR (Capital Equipment) 11,800 111,363
YPFSeries D ADR (Energy) 4,384 140,288
----------
450,209
- --------------------------------------------------------------------
BRAZIL - 12.9%
Electricidade do Estado
da Bahia (Energy) (b) 1,634,000 88,925
Telecomunicacoes Brasileiras
(Services) 1,447,000 128,609
Telecomunicacoes Brasileiras
ADR (Services) 1,501 151,976
Usinas Siderurgicas de
Minas Gerais ADR
(Materials) (c) 2,083 15,498
Usinas Siderurgicas de
Minas Gerais ADR
(Materials) 13,917 103,542
----------
488,550
- --------------------------------------------------------------------
CHILE - 12.7%
Banco de A. Edwards Series A
ADR (Financial) 7,125 $ 123,797
Enersis ADR (Energy) 4,076 134,508
Five Arrows Chile
Investment Trust (Financial) 26,267 71,972
Telecomunicaciones de Chile
ADR (Services) 2,639 73,232
Vina Concha Y Toro ADR
(Consumer Goods) 3,000 81,750
----------
485,259
- --------------------------------------------------------------------
MEXICO - 25.2%
ALFA Series A (Multi-Industry) 9,300 67,596
Corporacion GEO
Series B (Financial) (b) 11,000 59,050
DESC Series B
(Multi-Industry) 18,000 153,920
DESC Series C
(Multi-Industry) 210 1,773
Grupo Carso Series A-1
(Multi-Industry) 14,000 88,124
Grupo Financiero Bancomer
Series B (Financial) 100,000 46,912
Grupo Gigante Series B
(Consumer Goods) 230,000 78,265
Grupo Industrial Maseca
Series B (Consumer Goods) 126,000 121,211
Industrias Compos Hermanos
Series B (Capital Equipment) (b) 23,000 117,458
Panamerican Beverages ADR
(Consumer Goods) 4,620 143,220
Telefonos de Mexico ADR
(Services) 2,000 86,500
----------
964,029
- --------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
FUND PORTFOLIO
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------
PERU - 8.1%
Credicorp ADR (Financial) 6,020 $ 107,984
Edegel Communications
Series B (Energy) 304,569 129,245
Telefonica de Peru Series B
ADR (Services) 3,569 70,488
----------
307,717
- --------------------------------------------------------------------
VENEZUELA - 3.7%
Siderurgica Venezolana
Sivensa ADR
(Multi-Industry) 25,115 141,271
====================================================================
Total Investments in COMMON STOCKS
(COST: $2,639,776)................................... $2,837,035
====================================================================
NON-CONVERTIBLE PREFERRED
STOCKS - 20.7%
Market
Quantity Value (a)
- --------------------------------------------------------------------
BRAZIL - 20.7%
Centrais Electricas de Santa
Catarina Series B (Energy) 64,000 $ 69,080
Empresa Nacional de Comercio
(Consumer Goods) (b) 344,000 --
Energetica de Minas Gerais
(Energy) 2,700,000 107,755
Globex Utilidades
(Consumer Goods) 8,700 94,693
Multicanal Participacoes ADR
(Services) (b) 12,430 76,911
Petroleo Brasileiro (Energy) 630,000 $ 117,143
Tecidos Norte de Minas
(Consumer Goods) 184,000 68,410
Telecomunicacoes do Parana
(Services) 195,021 101,710
Vale Do Rio Doce (Materials) 8,000 154,558
----------
790,260
====================================================================
Total Investments in Non-Convertible
Preferred Stocks
(COST: $870,172)..................................... $ 790,260
====================================================================
CORPORATE BONDS - 0.0%
Principal Market
Rate Maturity Amount(d) 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: $3,509,948) (e)............................... $3,627,295
====================================================================
Other Assets and Liabilities (Net) - 4.9%
.................................................. $ 185,136
====================================================================
Total Net Assets
.................................................. $3,812,431
====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIO
<PAGE>
NOTES TO FUND PORTFOLIO
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
(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)
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 sold only to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
Foreign security cost and market values are stated in U.S. dollars. Principal
amounts are denominated in the foreign currency indicated parenthetically.
(e)
At October 31, 1997, the cost of securities for federal in come tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
Cost for federal income tax purposes................. $ 3,509,948
===========
Gross unrealized appreciation........................ $ 456,587
Gross unrealized depreciation........................ (339,240)
-----------
Net unrealized appreciation.......................... $ 117,347
===========
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $3,509,948) $ 3,627,295
Cash in bank on demand deposit 261,746
Dividends and accrued interest receivable 1,655
-----------
TOTAL ASSETS 3,890,696
-----------
Liabilities
Payable for investment securities purchased 78,265
-----------
TOTAL LIABILITIES 78,265
-----------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 3,812,431
===========
REPRESENTED BY:
Capital stock $ 3,224
Additional paid-in capital 3,201,330
Undistributed net investment income 7,310
Accumulated net realized gains 483,260
Unrealized appreciation or depreciation on:
Investment securities $ 117,347
Other assets and liabilities denominated in foreign currency (40)
----------
117,307
-----------
TOTAL - REPRESENTING NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 3,812,431
===========
Shares of capital stock outstanding; authorized 10 billion shares
of $.01 par value stock 322,363
-----------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 11.83
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF OPERATIONS
IAI LATIN AMERICA FUND
PERIOD FROM DECEMBER 12, 1996* TO OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld of $4,184) $ 78,938
Interest 17,116
----------
TOTAL INCOME 96,054
----------
EXPENSES
Management fees 115,638
Compensation of Directors 338
----------
TOTAL EXPENSES 115,976
Less fees waived or reimbursed by Advisers (38,884)
----------
NET EXPENSES 77,092
----------
NET INVESTMENT INCOME 18,962
----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 483,260
Foreign currency transactions (net of foreign currency tax of $3,128) (11,652)
----------
471,608
Net change in unrealized appreciation or depreciation on:
Investment securities $ 117,347
Other assets and liabilities denominated in foreign currency (40)
----------
117,307
----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCY 588,915
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 607,877
==========
</TABLE>
* COMMENCEMENT OF OPERATIONS
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
IAI LATIN AMERICA FUND
Period from
December 12, 1996*
to October 31, 1997
- --------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 18,962
Net realized gains 471,608
Net change in unrealized appreciation or depreciation 117,307
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 607,877
---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains --
---------------
TOTAL DISTRIBUTIONS --
---------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from 419,753 shares sold 4,432,994
Cost of 97,390 shares redeemed (1,228,440)
---------------
INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS 3,204,554
---------------
TOTAL INCREASE IN NET ASSETS 3,812,431
NET ASSETS AT BEGINNING OF PERIOD --
---------------
NET ASSETS AT END OF PERIOD $ 3,812,431
===============
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 7,310
===============
* 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 THE PERIOD
AND SELECTED INFORMATION FOR THE PERIOD INDICATED IS AS FOLLOWS:
Period from
December 12, 1996+
to October 31,1997
- ----------------------------------------------------------------------
NET ASSET VALUE
Beginning of period $ 10.00
-----------
OPERATIONS
Net investment income 0.06
Net realized and unrealized gains 1.77
-----------
TOTAL FROM OPERATIONS 1.83
-----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
Net realized gains --
-----------
TOTAL DISTRIBUTIONS --
-----------
Net Asset Value
End of period $ 11.83
===========
Total investment return* 18.30%
Net assets at end of period (000's omitted) $ 3,812
RATIOS
Expenses to average net assets*** 2.00%**
Net investment income to average net assets*** 0.49%**
Average brokerage commission rate**** $ 0.0017
Portfolio turnover rate
(excluding short-term securities) 50.6%
* 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 $38,546 IN EXPENSES FOR THE PERIOD
ENDED OCTOBER 31, 1997. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 3.00% AND THE
RATIO OF NET INVESTMENT INCOME TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN
(0.51%). 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
OCTOBER 31, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Investment Funds III, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Latin America Fund (the Fund) is a separate portfolio of IAI Investment Funds
III, Inc. The Fund commenced operations on December 12, 1996. The Fund has a
primary objective of capital appreciation through investment in equity
securities of Latin American issuers. This report covers only the IAI Latin
America Fund.
Significant accounting policies followed by the Fund are summarized below:
SECURITY VALUATION
Securities traded on national or international securities exchanges are valued
at the last reported sales price at the close of each business day. Securities
traded on the over-the-counter market are valued at the last reported sales
price or, if the last sales price is not available, the last reported bid price.
Such valuations are obtained from pricing services or are supplied by dealers.
Securities for which quotations are not readily available are valued at their
fair value as determined in good faith using consistently applied procedures
under the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Short-term securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
FOREIGN CURRENCY
TRANSLATIONS AND FORWARD
FOREIGN CURRENCY
CONTRACTS
The Fund invests in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
[1] SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT.)
FEDERAL TAXES
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains 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.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been decreased by $11,652
and accumulated net realized gains have been increased by $11,652.
SECURITY TRANSACTIONS AND
INVESTMENT INCOME
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities. Security gains and losses are determined on the basis of identified
cost, which is the same basis used for federal income tax purposes. Investment
income is recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
DISTRIBUTIONS TO
SHAREHOLDERS
Distributions to shareholders are recorded on the ex-date. Distributions from
net investment income are made 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI LATIN AMERICA FUND
OCTOBER 31, 1997
[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 $1,800,000 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
October 31, 1997
[3] FEES AND EXPENSES
Under terms of the Fund's Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of the Fund, except certain costs
(primarily those incurred in the purchase and sale of assets, taxes, interest
and extraordinary expenses), in return for the Fund paying an all inclusive
management fee (unified fee) to Advisers. The fee is equal to an annual rate of
3.00% declining to 2.65% of average daily net assets and 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 period ended October 31, 1997, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $4,807,444 and $1,860,265, respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
IAI LATIN AMERICA FUND
The Board of Directors and Shareholders
IAI Investment Funds III, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI Latin America Fund (a portfolio within IAI Investment
Funds III, Inc.) as of October 31, 1997 and the related statements of operations
and changes in net assets, and the financial highlights for the period from
December 12, 1996 (commencement of operations) to October 31, 1997. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Investment securities held in custody are confirmed to us by the custodian. As
to securities purchased and sold but not received or delivered, we request
confirmations from brokers and where replies are not received, we carry out
other appropriate auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of IAI
Latin America Fund at October 31, 1997, and the results of its operations, the
changes in its net assets and the financial highlights for the period stated in
the first paragraph above, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 5, 1997
<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
COUNTRIES FUND
- ------------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI LATIN AMERICA FUND Capital Appreciation -- Equity securities of Latin American issuers
- ------------------------------------------------------------------------------------------------------------------------------------
IAI EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
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 + INCOME] short-term instruments
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BOND FUND Income Capital Investment-grade bonds
Preservation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital U.S. Government securities
Preservation
- ------------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of 25 months,
investing primarily in investment-grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity is less
than 90 days, investing in high quality, money
market securities
====================================================================================================================================
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
J. Peter Thompson
Charles H. Withers
<PAGE>
[LOGO] IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357,
MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
