GLOBAL EQUITY FUNDS
ANNUAL REPORT
IAI DEVELOPING COUNTRIES FUND,
IAI INTERNATIONAL FUND
JANUARY 31, 1997
[LOGO] IAI
MUTUAL FUNDS
TABLE OF CONTENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
ANNUAL REPORT
JANUARY 31, 1997
Chairman's Letter...............................2
Fund Manager's Reviews
IAI DEVELOPING COUNTRIES FUND................4
IAI INTERNATIONAL FUND.......................7
Fund Portfolios
IAI DEVELOPING COUNTRIES FUND...............10
IAI INTERNATIONAL FUND......................13
Notes to Fund Portfolios.......................17
Statements of Assets and Liabilities...........18
Statements of Operations.......................19
Statements of Changes in Net Assets............20
Financial Highlights
IAI DEVELOPING COUNTRIES FUND...............22
IAI INTERNATIONAL FUND......................23
Notes to Financial Statements..................24
Independent Auditors' Report...................30
Federal Tax Information........................31
IAI Mutual Fund Family.........................33
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors......................Inside Back Cover
CHAIRMAN'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
THE DOW LEADS THE WORLD
[PHOTO]
NOEL P. RAHN
CHAIRMAN
The U.S. stock market continues to offer pleasant surprises, with the Dow Jones
Industrial Average up more than 60% during the past two years--breaking through
7000 on February 13. As we move through 1997, most of the conditions which led
to that runup are still intact: low inflation, relatively low interest rates,
moderate economic growth and strong corporate productivity.
In contrast, global stock markets continue to lag the United States, as Japan's
economy continues to struggle and Europe grapples with the upcoming unification
of its currency. Throughout much of the 1990s, the U.S. stock market has
outperformed international markets. However, the reverse was generally true in
the 1980s. We continue to see international markets as an excellent
diversification strategy.
For much of 1996, the U.S. bond market endured a bumpy ride, as interest rates
rose steadily, ignited by a spring quarter that was one of the strongest
economic periods in years. Indeed, for much of the spring and summer, the
benchmark 30-year Treasury bond traded at about 7% as investors feared inflation
and action by the Federal Reserve Board to slow the economy. However, by the
fall, the economy slowed down and the Fed chose not to tighten credit. Even when
the economy rebounded in the fourth quarter, the Fed didn't act because there
was still no sign of inflation.
The Fed, however, is a vigilant observer of the economy and is very sensitive to
potential inflation. Since the economy is at full employment and energy prices
have been rising, it wouldn't be surprising to see an uptick in inflation in the
months ahead. That could cause interest rates to rise and put the brakes on the
stock and bond markets.
If you're a long-term investor, then you should be concerned that you've
properly diversified your portfolio among stocks and bonds, perhaps increasing
your focus on bonds as you approach retirement and require income. If you're
just starting your investment program, international equities are a good place
to be for growth. Wherever you are in life, you should make sure that your
investment portfolio generally reflects your long-term investment goals for 1997
and beyond.
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is presented below.
Economic growth in the first three months of the year has exceeded our
expectations. While the risk of higher inflation has risen, we do not expect the
current strength to persist. Major countries around the world, including the
United States, are generally pursuing a policy of high real interest rates and
reduced government spending. Such policies are designed to control inflation and
reduce deficits. So far these policies have been effective.
In 1994, the Federal Reserve raised interest rates in response to a rapid
increase in economic activity. In a series of moves that began in February of
that year, short-term interest rates were raised from 3% to 6%, producing a real
Fed Funds rate of about 3%. Since that time, interest rates have exceeded
inflation by a wide margin, acting as a governor on the economy. During periods
of accelerating growth, rising rates help to slow spending. During periods of
sluggish growth, rates fall and help to re-stimulate demand. This stop-and-go
pattern persists in the economy today. A firm dollar and falling gold prices
attest to the success of this policy in controlling U.S. inflation.
Strength should gradually wane in the months ahead without Fed action. Long-term
interest rates have already risen to almost 7%, accomplishing the Fed's job for
them. The Board is likely to wait until the May meeting to see if higher bond
rates are working. Earlier tax refunds and mortgage refinancing activity are
also adding to the perception of accelerating growth. Both are not sustainable.
Tax refunds will fall off with the passage of time while higher rates will help
to curtail refinancing activity. Real growth should return to its 2-to-2.5%
trend by early summer and inflation, as measured by the consumer price index,
should rise by a rate of less than 3%.
Please read the Fund Managers' Reviews which follow this letter for a detailed
perspective on the Funds' performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863.
Sincerely,
/s/ Noel P. Rahn
Noel P. Rahn,
Chairman
FUND MANAGERS' REVIEW
IAI DEVELOPING COUNTRIES FUND
IAI DEVELOPING COUNTRIES FUND
[PHOTO]
ROY C. GILLSON
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
[PHOTO]
NIGEL P. HART
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
[PHOTO]
SOOKYONG KWAK
IAI DEVELOPING COUNTRIES
FUND CO-MANAGER
FUND OBJECTIVE
The investment objective of the IAI Developing Countries Fund is to provide
long-term capital appreciation. The Fund seeks to achieve its objective by
investing in companies domiciled or otherwise having substantial operations in
developing countries. Since the Fund invests in issues of international stocks
in lesser developed countries, investors often use it as a diversification
technique in conjunction with other IAI Mutual Funds which invest in less
volatile markets.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
The IAI Developing Countries Fund invests in emerging markets such as Southeast
Asia, Eastern Europe and Latin America. For the fiscal year ended January 31,
1997, the Fund produced a total return of 5.22% In contrast, the Fund's
benchmark, the IFC Investable Index, returned 8.05%.
In Asia, the strength of the dollar and the weakness of the yen has adversely
affected countries such as Korea and Thailand, due to tougher world export
competition. In contrast, the Hong Kong market was strong--Chinese money moved
into the market as unification approaches in June, and the Chinese authorities
encourage the mainland companies to support both the stock market and the
property market in Hong Kong.
In Europe, the Greek stock market was weak as labor strikes tested the new
government's determination to impose fiscal restraint. The stock market in South
Africa was hurt by the weakness in gold prices. The instability in the Russian
government refocused investor attention on some of the economic problems that
Eastern Europe has--stubborn inflation and weak corporate profits. Latin
American markets were mostly weaker with Brazil providing modest gains from the
continued move to privatize the economy. The Mexican stock market was flat
despite a modest devaluation of the peso.
OUTLOOK
Although this has been a difficult period for emerging markets, we expect
recovery in these areas due to moderate inflation and a general picture of
economic growth throughout the world.
Many global emerging markets continue to offer economic growth rates of over 5%
per year driven by a rise in per capita income and export opportunities. The
Hong Kong market continues to be strong as Chinese money moves into the market
as unification approaches in June.
The long-term success of Latin America depends on Brazil's economy, which
continues to show steady progress. Higher risk opportunities exist in Eastern
Europe, and the recent market bearishness there has brought share prices back to
fair value.
Given the relatively reasonable valuations of developed and emerging markets, we
think the case for international investing is compelling at the present time.
PORTFOLIO WEIGHTING:
IAI DEVELOPING COUNTRIES FUND VS. IFC INVESTABLE INDEX
<TABLE>
<CAPTION>
1/31/97 COUNTRY RETURNS
- -------------------------------------------------------------------------------------------
IAI DEVELOPING IFC INVESTABLE FOR THE YEAR
COUNTRIES FUND INDEX ENDED 1/31/97
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AFRICA
South Africa 6% 12% (24%)
EUROPE
Czech Republic 2 1 17%
Greece 3 2 14%
Poland 2 1 38%
Portugal 4 2 30%
Turkey 1 3 68%
United Kingdom 2 0 24%
FAR EAST
China 4 1 19%
India 4 2 15%
Indonesia 5 5 10%
Israel 3 0 11%
Malaysia 10 22 20%
Philippines 1 0 8%
South Korea 6 2 (35%)
Taiwan 4 7 54%
Thailand 4 2 (49%)
LATIN AMERICA
Argentina 5 4 14%
Brazil 14 12 24%
Chile 3 5 (6%)
Colombia 1 1 17%
Mexico 12 10 13%
Peru 4 1 2%
OTHER COUNTRIES -- 5
CASH --
- -------------------------------------------------------------------------------------------
TOTAL 100% 100%
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
ISSUES COUNTRY INDUSTRY 1/31/97 1/31/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Taipei Fund Taiwan Financial 4.26 2.69
Land and General Holdings Malaysia Process Industries 2.75 1.55
Enersis ADR Chile Utilities 2.71 1.98
Petronas Dagangan Berhad Malaysia Utilities 2.56 --
South African Iron & Steel Industrial South Africa Non-Energy Minerals 2.46 2.45
Telefonica de Argentina ADR Argentina Utilities 2.32 --
Transportadora de Gas del Sur ADR Argentina Utilities 2.31 1.72
Telefonos de Mexico ADR Mexico Utilities 2.28 1.31
Eletricidade Sao Paulo Series B Brazil Producer Manufacturing 2.27 --
Centrais Electricas de
Santa Catarina Series B Brazil Utilities 2.25 1.87
==================================================================================================================
TOTAL 26.17% 13.57%
==================================================================================================================
</TABLE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
NOTE TO CHAIRMAN'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.
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR GRAPH]
As of 1/31/97 As of 1/31/96
BRAZIL 13.0% 9.9%
MEXICO 11.1% 8.0%
MALAYSIA 8.9% 9.2%
INDONESIA 5.1% 7.0%
SOUTH KOREA 5.0% 7.3%
[GRAPH]
VALUE OF $10,000 INVESTMENT
IAI DEVELOPING COUNTRIES FUND(1) IFC INVESTABLE
(INCEPTION 2/10/95) INDEX*
--------------------------------------------------
2/10/95 10,000 10,000
7/31/95 11,060 11,047
1/31/96 10,852 11,457
7/31/96 10,803 11,081
1/31/97 11,419 12,379
TOTAL RETURN+
THROUGH 1/31/97
Since Inception
1 Year 2/10/95
=============================================================================
IAI DEVELOPING COUNTRIES FUND(1) 5.22% 6.95%
- -----------------------------------------------------------------------------
IFC Investable Index 8.05% 11.26%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/1/95
(1)FEES AND EXPENSES WERE VOLUNTARILY WAIVED TO 2.00% OF AVERAGE DAILY NET
ASSETS, THROUGH MARCH 31, 1996. SUBSEQUENTLY, THE FUND IS CHARGED A 2.00%
UNIFIED FEE.
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
[PHOTO]
ROY C. GILLSON
IAI INTERNATIONAL
FUND MANAGER
IAI INTERNATIONAL FUND
FUND OBJECTIVE
The primary investment objective of the IAI International Fund is capital
appreciation. A secondary objective is current income, principally from
dividends. Typically, the Fund invests in stocks representative of the Morgan
Stanley Europe Australia and Far East (EAFE) Index. However, the Fund also
invests in other countries, including developing countries.
FACTORS AFFECTING THE PAST YEAR'S PERFORMANCE
The IAI International Fund primarily invests in the stocks of companies located
in the developed countries of the world, mainly in Europe and Japan, the two
major stock markets outside the United States. For the fiscal year ending
January 31, 1997, the Fund produced a total return of 2.39%, compared to the
EAFE Index, which was up 2.22%.
The United Kingdom enjoys the highest forecast growth rate of any major European
country, driven increasingly by domestic demand. Service sector output has been
growing steadily for some time and now production in manufacturing and
construction is accelerating. The risk of inflation reappeared on the horizon
during the fourth quarter with the revival of corporate pricing power. The Bank
of England raised interest rates by 0.25% in November, and further monetary
tightening is expected during 1997. The biggest risk to the country's fortunes
may be the pound sterling's 9% rise against the U.S. dollar in 1996, which has
materially impacted the country's exporters. Nevertheless, UK equities kept
pace with Wall Street in 1996.
In Continental Europe, single currency convergence dominated economic policy
actions. All other goals, including growth, are being sacrificed in an attempt
to be included in the program. As a result, many countries will have
insufficient growth to allow unemployment to fall. The best performing markets
were Spain and Finland which were both boosted by lower interest rates in the
fourth quarter. The re-entry of the Italian lira to the single currency program
helped stocks in that country, but advances were restrained by the continuing
austerity policy of the government.
After advancing substantially for a year, the Japanese stock market retreated
during the fourth calendar quarter. The Fund's under-weighting in Japan has
contributed positively to our performance. Investors were discouraged that the
Japanese government chose to raise taxes in order to reduce the large government
deficit. Corporate profitability has been hampered by a weak yen and the flat
domestic economy. Because of the weakening yen, Japanese exporters have fared
relatively well.
OUTLOOK
Japan, the world's largest stock market outside the United States, continues to
be negatively affected by the country's banking troubles. As a result, we
continue to be underweighted there.
Continental European growth expectations are recovering, despite government
action on budget deficits to meet the criteria for membership in the single
European currency. We are maintaining a strong presence in Belgium, Spain and
the United Kingdom and believe that many European markets offer superior value.
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
<TABLE>
<CAPTION>
1/31/97
-------------------------------- Country Returns
IAI EAFE for the Year
International Fund Index Ended 1/31/97
========================================================================================
<S> <C> <C> <C>
AFRICA
South Africa 1% 0% (24%)
EUROPE
Belgium 3 1 13%
Denmark -- 1 23%
France 12 7 20%
Germany 5 8 9%
Ireland 1 1 28%
Italy -- 3 20%
Netherlands 7 5 27%
Spain 3 2 38%
Turkey 1 0 68%
United Kingdom 16 19 24%
FAR EAST
Australia 6 3 10%
Hong Kong 6 4 15%
Indonesia 1 0 10%
Israel 1 0 11%
Japan 20 30 (24%)
Malaysia 2 3 23%
New Zealand 3 1 18%
Singapore -- 1 (10%)
South Korea 1 0 (35%)
Taiwan 1 0 54%
Thailand 1 0 (49%)
LATIN AMERICA
Argentina -- 0 14%
Brazil 1 0 24%
Chile 1 0 (6%)
Mexico 2 0 13%
OTHER COUNTRIES -- 11
CASH 5
========================================================================================
TOTAL 100% 100%
========================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOP TEN STOCK HOLDINGS
% of Net Assets
---------------------
Issues Country Industry 1/31/97 1/31/96
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nippon Telegraph & Telephone Japan Utilities 4.00 3.29
Mitsubishi Heavy Industries Japan Producer Manufacturing 3.60 2.70
M.I.M. Holdings Australia Energy Minerals 3.38 1.84
Toray Industries Japan Process Industries 3.30 2.62
Hitachi Japan Producer Manufacturing 3.30 3.26
Commonwealth Bank of Australia Australia Financial 3.04 --
Jardine Strategic Holdings Hong Kong Financial 2.98 3.01
Carter Holt Harvey New Zealand Non-Energy Minerals 2.92 2.74
Hong Kong Telecommunications Hong Kong Utilities 2.92 2.89
Lyonnaise des Eaux-Dumez France Industrial Services 2.80 1.24
===========================================================================================================
TOTAL 32.24% 23.59%
===========================================================================================================
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
[BAR GRAPH]
As of 1/31/97 As of 1/31/96
JAPAN 20.4% 23.5%
UNITED KINGDOM 15.6 17.9
FRANCE 12.5 8.7
NETHERLANDS 7.2 3.2
AUSTRALIA 6.4 1.8
[GRAPH]
VALUE OF $10,000 INVESTMENT+
IAI
INTERNATIONAL FUND EAFE
(Inception 4/23/87) INDEX*
----------------------------------------------
4/23/87 10,000 10,000
1/31/88 9,040 9,323
1/31/89 11,418 11,985
1/31/90 12,723 12,565
1/31/91 11,547 10,348
1/31/92 13,312 11,036
1/31/93 12,540 9,939
1/31/94 18,111 14,331
1/31/95 16,247 13,731
1/31/96 19,517 15,994
1/31/97 19,982 16,349
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/97
Since Inception
1 Year 5 Years 4/23/87
================================================================================
IAI INTERNATIONAL FUND 2.39% 8.47% 7.34%
- --------------------------------------------------------------------------------
EAFE Index 2.22% 8.18% 5.17%*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 5/1/87
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI INTERNATIONAL FUND INCLUDES CHANGES IN SHARE VALUE
AND ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE
IS NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN AND PRINCIPAL
MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JANUARY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 82.6%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ARGENTINA - 4.6%
Telefonica de Argentina ADR
(Utilities) 9,100 277,550
Transportadora de Gas del Sur ADR
(Utilities) 21,100 276,937
-----------
554,487
- --------------------------------------------------------------------------------
BRAZIL - 3.5%
Telecomunicacoes Brasileiras ADR
(Utilities) 2,050 178,862
Usinas Siderurgicas de Minas Gerais
ADR (Non-Energy Minerals) 16,300 176,040
Usinas Siderurgicas de Minas Gerais
ADR (Non-Energy Minerals) (c) 6,300 68,040
-----------
422,942
- --------------------------------------------------------------------------------
CHILE - 2.7%
Enersis ADR (Utilities) 10,500 324,188
- --------------------------------------------------------------------------------
CHINA - 3.7%
Guangdong Electric Power
Development Class B
(Utilities) 227,080 210,992
Sinocan (Process Industries) 590,000 232,223
-----------
443,215
- --------------------------------------------------------------------------------
CZECH REPUBLIC - 1.8%
Skoda Plzen
(Consumer Durables) (b) 6,096 220,870
- --------------------------------------------------------------------------------
GREECE - 2.9%
Delta Informatics
(Technology Services) 23,410 209,853
Texniki Et Boloy
(Industrial Services) 20,550 135,570
-----------
345,423
- --------------------------------------------------------------------------------
INDIA - 4.2%
Grasim Industries GDR
(Producer Manufacturing) 14,500 206,625
Indian Petrochemicals GDR
(Energy Minerals) 18,400 179,032
Suez Cement GDR
(Producer Manufacturing) (b) (c) 6,000 122,100
-----------
507,757
- --------------------------------------------------------------------------------
INDONESIA - 5.1%
Bank Bali, foreign (Financial) 95,000 229,855
Inti Indorayon Utama,
foreign (Non-Energy Minerals) 157,000 115,611
Semen Cibinong, foreign
(Producer Manufacturing) 84,000 261,561
-----------
607,027
- --------------------------------------------------------------------------------
ISRAEL - 3.3%
Blue Square-Israel ADR
(Retail Trade) (b) 11,500 178,250
Tadiran Telecommunications ADR
(Electronic Technology) (c) 10,666 215,987
-----------
394,237
- --------------------------------------------------------------------------------
MALAYSIA - 8.9%
Golden Hope Plantations
(Process Industries) 139,500 246,972
Land & General Holdings
(Process Industries) 148,800 329,296
Malaysian International Shipping,
foreign (Transportation) 72,000 181,065
Petronas Dagangan Berhad
(Utilities) 120,800 306,217
-----------
1,063,550
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
- --------------------------------------------------------------------------------
MEXICO - 11.1%
Fomento Economico Mexicano
Class B (Commercial Services) 67,500 236,078
Grupo Carso ADR (Financial) (c) 2,000 24,960
Grupo Carso Class A-1 (Financial) 35,125 214,029
Grupo Corvi
(Commercial Services) (b) 231,000 183,146
Grupo Financiero Bancomer
Class B (Financial) (b) 519,100 189,850
Grupo Financiero Inbursa Class B
(Financial) 960 3,437
Telefonos de Mexico ADR
(Utilities) 7,250 272,781
Transportacion Maritima Mexicana
ADR (Transportation) 31,700 202,087
-----------
1,326,368
- --------------------------------------------------------------------------------
PERU - 3.9%
Credicorp (Financial) (b) 6,661 138,549
Credicorp ADR (Financial) 3,682 77,322
Telefonica del Peru Class B
(Utilities) 7,000 15,182
Telefonica del Peru ADR
(Utilities) 10,700 231,387
-----------
462,440
- --------------------------------------------------------------------------------
PHILIPPINES - 0.9%
Uniwide Holdings
(Consumer Durables) (b) 534,000 111,461
- --------------------------------------------------------------------------------
POLAND - 2.0%
Elektrim (Producer Manufacturing) 22,800 239,920
- --------------------------------------------------------------------------------
PORTUGAL - 4.1%
Cimpor-Cimentos de Portugal
(Producer Manufacturing) 10,500 241,043
Portucel Industrial Empresa
(Non-Energy Minerals) 43,250 255,001
-----------
496,044
- --------------------------------------------------------------------------------
SOUTH AFRICA - 4.5%
Bidvest (Financial) 43,449 237,868
South African Iron & Steel
Industrial (Non-Energy Minerals) 379,315 294,880
-----------
532,748
- --------------------------------------------------------------------------------
SOUTH KOREA - 4.0%
Korea Electric Power, foreign
(Utilities) 3,087 101,453
Pohang Iron & Steel, foreign
(Non-Energy Minerals) 2,300 151,989
Samsung Electronics, foreign
(Electronic Technology) 1,219 83,051
Shinhan Bank, foreign (Financial) 9,755 147,519
-----------
484,012
- --------------------------------------------------------------------------------
TAIWAN - 4.3%
Taipei Fund (Financial) (b) 5,400 510,300
- --------------------------------------------------------------------------------
THAILAND - 3.9%
Charoen Pokphand Feedmill,
foreign (Process Industries) 46,000 143,778
Siam City Bank, foreign
(Financial) 158,000 138,703
Srithai Superware, foreign
(Consumer Durables) (b) 36,300 189,099
-----------
471,580
- --------------------------------------------------------------------------------
TURKEY - 1.2%
Tofas Turk Otomobil GDR
(Consumer Durables) 455,000 143,325
- --------------------------------------------------------------------------------
UNITED KINGDOM - 2.0%
Five Arrows Chile Investment
Trust (Financial) 84,216 243,384
PlivaGDR
(Health Technology) (b) (c) 41 694
-----------
244,078
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $9,912,253)..................................................$ 9,905,972
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
NON-CONVERTIBLE PREFERRED
STOCKS - 11.6%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
BRAZIL - 9.5%
Banco Nacional
(Financial) (b) (d) 5,300,000 $ --
Centrais Electricas de Santa
Catarina Series B (Utilities) (b) 241,000 269,673
CIATecidos Norte de Minas
(Process Industries) 365,500 129,687
Eletricidade Sao Paulo Series B
(Producer Manufacturing) (b) 1,520,000 271,844
Globex Utilidades
(Consumer Durables) (b) 12,450 223,257
Multicanal Participacoes ADR
(Consumer Services) (b) 17,000 235,875
----------
1,130,336
================================================================================
COLOMBIA - 1.1%
Banco Ganadero ADR (Financial) 6,110 132,679
================================================================================
SOUTH KOREA - 1.0%
Samsung Electronics, foreign
(Electronic Technology) 3,433 114,473
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $1,359,917)..................................................$ 1,377,488
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $11,272,170) (F).............................................$11,283,460
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 5.8%
....................................................................$ 698,147
================================================================================
TOTAL NET ASSETS
....................................................................$11,981,607
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1997
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 91.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ARGENTINA - 0.4%
Transportadora de Gas del Sur
ADR (Utilities) 33,000 $ 433,125
- --------------------------------------------------------------------------------
AUSTRALIA - 6.4%
Commonwealth Bank of Australia
(Financial) 364,000 3,537,834
M.I.M. Holdings
(Energy Minerals) 2,948,249 3,933,038
------------
7,470,872
- --------------------------------------------------------------------------------
BELGIUM - 2.6%
Compagnie Maritime Belge
(Utilities) 13,600 1,017,783
Generale de Banque
(Financial) 5,786 2,014,982
Generale de Banque Strips
(Financial) 711 464
------------
3,033,229
- --------------------------------------------------------------------------------
BRAZIL - 0.9%
Usinas Siderurgicas de
Minas Gerais ADR
(Non-Energy Minerals) 90,000 972,000
- --------------------------------------------------------------------------------
CHILE - 0.9%
Enersis ADR (Utilities) 32,000 988,000
- --------------------------------------------------------------------------------
CHINA - 0.4%
Sinocan (Process Industries) 1,190,000 468,383
- --------------------------------------------------------------------------------
FRANCE - 10.2%
Credit Local de France
(Commercial Services) 33,500 2,999,891
Eridania Beghin-Say
(Process Industries) 18,500 2,838,070
Lafarge
(Producer Manufacturing) 46,000 2,776,960
Lyonnaise des Eaux-Dumez
(Industrial Services) 32,012 3,254,653
------------
11,869,574
- --------------------------------------------------------------------------------
GERMANY - 4.8%
Bayer (Process Industries) 70,000 2,658,606
RWE (Energy Minerals) 69,500 2,940,923
------------
5,599,529
- --------------------------------------------------------------------------------
HONG KONG - 6.0%
First Pacific (Financial) 94,000 127,371
Hong Kong Telecommunications
(Utilities) 1,960,000 3,389,341
Jardine Strategic Holdings
(Financial) 1,050,000 3,465,000
------------
6,981,712
- --------------------------------------------------------------------------------
INDONESIA - 0.6%
Bank Bali, foreign
(Financial) 300,000 725,857
- --------------------------------------------------------------------------------
IRELAND - 1.1%
Irish Life (Financial) 288,147 1,246,740
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
- --------------------------------------------------------------------------------
ISRAEL - 1.1%
Blue Square-Israel ADR
(Retail Trade) (b) 27,380 424,390
NUR Advanced
Technologies ADR
(Producer Manufacturing) (b) 80,000 140,000
Tadiran Telecommunications ADR
(Electronic Technology) (c) 36,000 729,000
------------
1,293,390
- --------------------------------------------------------------------------------
JAPAN - 20.4%
Eisai (Health Technology) 35,000 674,629
Canon (Producer Manufacturing) 93,000 1,968,781
Hitachi (Producer Manufacturing) 427,000 3,833,855
Kamigumi (Transportation) 351,000 1,879,325
Mitsubishi Heavy Industries
(Producer Manufacturing) 582,000 4,185,222
Nippon Telegraph & Telephone
(Utilities) 645 4,648,888
Nippon Yusen Kabushiki Kaish
(Transportation) 678,000 2,652,801
Toray Industries
(Process Industries) 675,000 3,836,491
------------
23,679,992
- --------------------------------------------------------------------------------
MALAYSIA - 2.1%
Land & General Holdings
(Process Industries) 450,000 995,856
Malaysian International
Shipping, foreign
(Transportation) 293,333 737,670
Petronas Dagangan Berhad
(Utilities) 277,000 702,169
------------
2,435,695
- --------------------------------------------------------------------------------
MEXICO - 1.5%
Grupo Financiero Bancomer
Class B (Financial) (b) 2,000,000 731,458
Telefonos de Mexico ADR
(Utilities) 27,000 1,015,875
------------
1,747,333
- --------------------------------------------------------------------------------
NETHERLANDS - 7.2%
ING Groep (Financial) 70,000 2,638,708
KLM Royal Dutch Air Lines
(Transportation) 19,842 593,619
Koninklijke PTT Nederland
(Commercial Services) 66,749 2,425,388
Philips Electronics
(Producer Manufacturing) 67,200 2,704,961
------------
8,362,676
- --------------------------------------------------------------------------------
NEW ZEALAND - 2.9%
Carter Holt Harvey
(Non-Energy Minerals) 1,464,300 3,398,028
- --------------------------------------------------------------------------------
PORTUGAL - 0.3%
Portucel Industrial Empresa
(Non-Energy Minerals) 66,000 389,134
- --------------------------------------------------------------------------------
SOUTH AFRICA - 0.7%
Bidvest (Financial) 150,960 826,454
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.3%
Samsung Electronics
(Electronic Technology) 4,534 308,904
- --------------------------------------------------------------------------------
SPAIN - 3.0%
Banco Popular Espanol (Financial) 10,800 1,964,345
Telefonica de Espana
(Utilities) 63,675 1,493,639
------------
3,457,984
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
- --------------------------------------------------------------------------------
TAIWAN - 0.7%
Taipei Fund (Financial) (b) 8,000 756,000
- --------------------------------------------------------------------------------
THAILAND - 0.5%
Charoen Pokphand Feedmill,
foreign (Process Industries) 194,700 608,554
- --------------------------------------------------------------------------------
TURKEY - 0.5%
Tofas Turk Otomobil GDR
(Consumer Durables) (b) 1,800,000 567,000
- --------------------------------------------------------------------------------
UNITED STATES OF AMERICA - 0.2%
Millennium Chemicals
(Process Industries) (b) 13,609 270,479
- --------------------------------------------------------------------------------
UNITED KINGDOM - 15.5%
B.A.T. (Consumer Non-Durables) 384,000 2,984,496
British Steel
(Non-Energy Minerals) 999,190 2,393,797
Glaxo Wellcome
(Health Technology) 172,000 2,754,922
Hanson (Financial) 1,002,684 1,482,274
Imperial Tobacco Group
(Consumer Non-Durables) (b) 95,268 623,645
Peninsular & Oriental Steam
Navigation (Transportation) 268,000 2,800,144
Rolls-Royce
(Electronic Technology) 600,000 2,307,600
Tomkins
(Producer Manufacturing) 600,000 2,697,008
------------
18,043,886
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $103,000,193)................................................$105,934,530
================================================================================
COMMON STOCKS (CONT.)
NON-CONVERTIBLE PREFERRED
STOCK - 0.3%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.3%
Samsung Electronics
(Electronic Technology) 9,760 $325,446
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCK
(COST: $614,991)......................................................$ 325,446
================================================================================
WARRANTS - 0.1%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
Israel Fund Warrants
(Financial) (b) 560,000 95,200
================================================================================
TOTAL INVESTMENTS IN WARRANTS
(COST: $0)............................................................$ 95,200
================================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
OTHER SECURITIES - 2.3%
Ownership Market
Percentage (e) Value (a)
- ------------------------------------------------------------
FRANCE - 2.3%
Qualis
(Limited Partnership) (b) 2.61% $ 2,713,606
============================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $2,970,356).....................$ 2,713,606
============================================================
TOTAL INVESTMENTS IN LONG-TERM
SECURITIES
(COST: $106,585,540)...................$ 109,068,782
============================================================
SHORT-TERM SECURITIES - 4.7%
Principal Market
Rate Maturity Amount Value (a)
- ----------------------------------------------------------
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 4.7%
Federal Home Loan Mortgage Corporation (DISCOUNT NOTE)
5.48% 02/03/97 $2,500,000 $2,499,239
U.S. Treasury Bill
5.19 05/08/97 3,000,000 2,960,670
---------
5,459,909
==========================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $5,458,919)..........................$ 5,459,909
==========================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $112,044,459) (F)....................$ 114,528,691
==========================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.4%
............................................$ 1,662,545
==========================================================
Total Net Assets
............................................$ 116,191,236
==========================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 17
NOTES TO FUND PORTFOLIOS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
January 31, 1997
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. This issue
may be only sold to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
This security is valued at $0 under guidelines established by the Board of
Directors and is illiquid.
(e)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public. For the restricted security issue held at January 31, 1997, the Fund
held no unrestricted securities of the same issuer as of either the date the
purchase price was agreed to or the date the Fund first obtained an enforceable
right to obtain the security. The restricted security held was acquired on
04/02/96 at a cost of $2,970,356.
(f)
At January 31, 1997, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------
Cost for federal tax purposes $ 11,319,787 $ 112,087,243
==========================================================================
Gross unrealized appreciation $ 1,181,151 $ 11,089,484
Gross unrealized depreciation (1,217,478) (8,648,036)
- --------------------------------------------------------------------------
Net unrealized appreciation $ (36,327) $ 2,441,448
==========================================================================
STATEMENTS OF ASSETS AND LIABILITIES
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1997
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $11,272,170 and $112,044,459)
(see Fund Portfolios) ................................ $ 11,283,460 $114,528,691
Cash in bank on demand deposit .......................... 824,220 680,811
Receivable for investment securities sold ............... 82,675 --
Dividends receivable .................................... 22,260 811,149
Unrealized appreciation on foreign currency contracts
held, at value (Note 6) .............................. -- 431,085
Other ................................................... -- 6,141
---------------------------------
TOTAL ASSETS ......................................... 12,212,615 116,457,877
---------------------------------
LIABILITIES
Payable for investment securities purchased ............. 229,943 265,044
Unrealized depreciation on foreign currency contracts
held, at value (Note 6) .............................. 1,065 1,597
---------------------------------
TOTAL LIABILITIES .................................... 231,008 266,641
---------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 11,981,607 $116,191,236
=================================
REPRESENTED BY:
Capital stock ........................................... $ 11,543 $ 95,980
Additional paid-in capital .............................. 12,025,581 111,130,455
Undistributed net investment income ..................... 11,184 615,608
Accumulated net realized gains (losses) on investments .. (77,823) 1,477,861
Unrealized appreciation or depreciation on:
Investment securities ................................$ 11,290 $ 2,484,232
Other assets and liabilities
denominated in foreign currency ................... (168) 387,100
------------- -----------
11,122 2,871,332
---------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK ...................... $ 11,981,607 $116,191,236
=================================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock .... 1,154,272 9,598,043
---------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 10.38 $ 12.11
=================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $18,024 and $491,659) $ 238,018 $ 4,060,497
Interest 20,600 148,886
---------------------------------
TOTAL INCOME 258,618 4,209,383
---------------------------------
EXPENSES (Note 3)
Management fees 178,764 1,751,901
Investment advisory fees 16,354 233,539
Distribution fees 3,270 61,456
Dividend-disbursing, administrative, and accounting fees 3,925 73,747
Legal fees 457 870
Custodian fees 2,237 15,950
Compensation of Directors 1,898 14,025
Audit fees 4,000 3,480
Printing and shareholder reporting 1,324 11,600
Registration fees 8,531 4,060
Other expenses 2,645 4,618
---------------------------------
TOTAL EXPENSES 223,405 2,175,246
Less fees reimbursed by Advisers or Distributor (18,463) (8,225)
---------------------------------
NET EXPENSES 204,942 2,167,021
---------------------------------
NET INVESTMENT INCOME 53,676 2,042,362
---------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 521,718 $ 10,665,724
Foreign currency transactions (4,829) 1,339,547
------------- ------------
516,889 12,005,271
Net change in unrealized appreciation or depreciation on:
Investment securities $ (152,043) $(10,922,756)
Other assets and liabilities denominated in
foreign currency (138) 83,368
------------- ------------
(152,181) (10,839,388)
---------------------------------
NET GAIN ON INVESTMENTS 364,708 1,165,883
---------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 418,384 $ 3,208,245
=================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
Year ended Period from January 31,
January 31, February 10,1995* ----------------------
1997 to January 31, 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income $ 53,676 $ 1,509 $ 2,042,362 $ 1,600,784
Net realized gains 516,889 172,610 12,005,271 8,274,842
Net change in unrealized appreciation or depreciation (152,181) 163,303 (10,839,388) 16,656,267
------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 418,384 337,422 3,208,245 26,531,893
------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (57,715) -- (2,507,284) (1,654,416)
Net realized gain (635,048) (123,990) (10,555,519) (10,800,484)
------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (692,763) (123,990) (13,062,803) (12,454,900)
------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 12,478,531 10,822,797 118,509,652 122,833,831
Net asset value of shares issued to shareholders in
reinvestment of distributions 683,741 123,486 12,833,206 12,226,866
Cost of shares redeemed (8,263,295) (3,802,706) (156,960,324) (133,948,117)
------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS 4,898,977 7,143,577 (25,617,466) 1,112,580
------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,624,598 7,357,009 (35,472,024) 15,189,573
NET ASSETS AT BEGINNING OF PERIOD 7,357,009 -- 151,663,260 136,473,687
------------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 11,981,607 $ 7,357,009 $ 116,191,236 $ 151,663,260
========================================================================
INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF: $ 11,184 $ 5,539 $ 615,608 $ --
========================================================================
* COMMENCEMENT OF OPERATIONS
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 24
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>
Year ended Period from
January 31, February 10, 1995***
1997, to January 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.56 $ 10.00
------------------------------------
OPERATIONS
Net investment income .05 --
Net realized and unrealized gains (losses) .46 .83
------------------------------------
TOTAL FROM OPERATIONS .51 .83
------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.06) --
Net realized gains (.63) (.27)
------------------------------------
TOTAL DISTRIBUTIONS (.69) (.27)
------------------------------------
NET ASSET VALUE
End of period $ 10.38 $ 10.56
====================================
Total investment return* 5.22% 8.53%
Net assets at end of period (000's omitted) $ 11,982 7,357
RATIOS
Expenses to average daily net assets** 2.00% 2.15%
Expenses to average daily net assets
(net of expenses paid indirectly)** 2.00% 2.00%
Net investment income to average daily net assets** 0.52% 0.04%
Average brokerage commission rate**** $ 0.0057 n/a
Portfolio turnover rate (excluding short-term securities) 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.
** 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 .35% AND (1.23%), RESPECTIVELY. BEGINNING
IN FISCAL YEAR 1996, THE RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS
INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. THE RATIOS FOR THE PERIOD
ENDED JANUARY 31, 1996 ARE ANNUALIZED.
*** COMMENCEMENT OF OPERATIONS
**** 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.
FINANCIAL HIGHLIGHTS
IAI INTERNATIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH PERIOD AND
SELECTED INFORMATION FOR EACH PERIOD
INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Years ended
January 31, Period from March 31,
----------------------- April 1, 1994 to -------------------
1997 1996 January 31, 1995+ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
<S> <C> <C> <C> <C> <C>
Beginning of period $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02
------------------------------------------------------------------------------------
OPERATIONS
Net investment income .24 .19 .11 .06 .06
Net realized and unrealized
gains (losses) .08 2.17 (.62) 2.56 .60
------------------------------------------------------------------------------------
TOTAL FROM OPERATIONS .32 2.36 (.51) 2.62 .66
------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (.28) (.16) -- (.34) (.04)
Net realized gains (1.17) (1.02) (.88) (.05) (.42)
------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.45) (1.18) (.88) (.39) (.46)
------------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22
====================================================================================
Total investment return* 2.39% 20.15% (4.14%) 23.85% 6.18%
Net assets at end of period
(000's omitted) $ 116,191 $ 151,663 $ 136,474 $ 134,796 $ 59,248
RATIOS
Expenses to average net assets** 1.65% 1.66% 1.72% 1.74% 1.91%
Expenses to average net assets
(net of expenses paid indirectly)** 1.65% 1.66% n/a n/a n/a
Net investment income to
average net assets** 1.56% 1.12% 1.04% .87% 1.42%
Average brokerage commission rate*** $ 0.0157 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term securities) 32.1% 39.2% 27.6% 50.9% 28.6%
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A SHARE
DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT NET ASSET
VALUE.
** BEGINNING IN FISCAL 1996, THE RATIO OF EXPENSES TO AVERAGE NET ASSETS
INCLUDES EXPENSES PAID INDIRECTLY BY THE FUND. THE RATIOS FOR THE PERIOD
ENDED JANUARY 31, 1995 ARE 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.
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 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
Developing Countries Fund and IAI International Fund are separate portfolios of
IAI Investment Funds III, Inc. The Developing Countries Fund commenced
operations on February 10, 1995. The Funds have a primary objective of capital
appreciation mainly through investment in equity securities of developed and
emerging countries.
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Investments in securities traded on national or international securities
exchanges are valued at the last reported sales price at the close of each
business day. Securities traded on the over-the-counter market are valued at the
last reported sales price or if the last sales price is not available, the last
reported bid price is used. Such valuations are obtained from pricing services
or are supplied by dealers.
Securities for which quotations are not readily available are valued at their
fair value as determined in good faith using consistently applied procedures
under the general supervision of the Board of Directors.
Short-term securities with maturities of 60 days or less from the date of
initial acquisition are valued at amortized cost. Those securities with
maturities greater than 60 days from the date of initial acquisition are
marked-to-market on a daily basis.
FOREIGN CURRENCY
TRANSLATIONS AND FORWARD
FOREIGN CURRENCY CONTRACTS
The Funds invest in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and forward
currency contract transactions.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
The Funds may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuations.
The net U.S. dollar value of foreign currency underlying all contractual
commitments held by the Funds and the resulting unrealized appreciation or
depreciation are determined using foreign currency exchange rates from an
independent pricing service. The Funds are subject to the credit risk that the
other party will not complete the obligations of the contract.
FEDERAL TAXES
Since it is each Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Funds
are required to distribute substantially all of their net investment income and
net realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily due to differing treatments for foreign
currency transactions, passive foreign investments companies (PFICs), and losses
deferred due to "wash sales." The character of distributions made during the
year for net investment income or net realized gains may also differ from it's
ultimate character-ization for tax purposes.
The Funds may be subject to foreign taxes on income, gains on investments, or
currency repatriation. The Funds accrue such taxes as applicable.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income (loss) and accumulated net
realized gains (losses) have been increased (decreased) resulting in
reclassification adjustments to additional paid-in capital as follows:
For federal income tax purposes, Developing Countries Fund has a capital loss
carryover of approximately $28,000 at January 31, 1997 which, if not offset by
subsequent capital gains, will expire in 2006. It is unlikely the Board of
Directors will authorize a distribution of any net realized gains until the
available capital loss carryover is offset or expires.
SECURITY TRANSACTIONS AND
INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost, which
is the same basis used for federal income tax purposes. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
IAI Developing Countries IAI International
Fund Fund
- --------------------------------------------------------------------------------
Undistributed net investment income $ 9,684 $ 1,080,530
Accumulated net realized gains (losses) $ (8,904) $ (1,080,530)
Additional paid-in capital $ (780) $ --
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 of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
its officers and directors, the Funds are policyholders in an industry-sponsored
mutual insurance company (the Company). In connection with its obligations as
policyholders, the Funds are committed to make future capital contributions, if
requested by the Company.
The Developing Countries Fund and the International Fund have available lines of
credit of $3,250,000 and $15,000,000, respectively, with a bank at the prime
interest rate. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the lines of credit. There were no borrowings outstanding at
January 31, 1997.
[3] FEES AND EXPENSES
CURRENT AGREEMENT, EFFECTIVE MARCH 31, 1996
New Management Agreements for the Funds were approved by a majority of each
Funds' shareholders at a special meeting held March 21, 1996, and replaced the
prior Advisory, Administrative, and Distribution Agreements with Advisers and
Distributor. These new agreements, effective April 1, 1996, require Advisers to
pay for all expenses of each Fund, except certain costs (primarily those
incurred in the purchase and sale of assets, taxes and interest and
extraordinary expenses) in return for each Fund paying an all inclusive
management fee to Advisers. The Management Agreement further provides that IAI
will either reimburse each 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. For Developing Countries Fund the fee is equal to an annual rate of
2.00% of average daily net assets, with the fee declining to 1.65% as the Fund's
assets increase. For International Fund the fee is equal to an annual rate of
1.70% of average daily net assets, with the fee declining to 1.30% as the Fund's
assets increase. This fee is paid monthly.
Pursuant to these new agreements, Developing Countries and International Funds
paid Advisers to assume certain unpaid liabilities, and received amounts from
Advisers in exchange for transferring prepaid expenses to Advisers. As a result
of these transactions, Developing Countries and International Funds received
(paid) net amounts of $16,482 and ($16,583), respectively.
PRIOR TO APRIL 1, 1996
Under the terms of an investment advisory agreement, each Fund paid Investment
Advisers, Inc. (Advisers) a monthly management fee. This fee was 1.25% declining
to 1.00% and 1.00% declining to .70% of net assets for Developing Countries Fund
and International Fund, respectively.
Each Fund also paid an annual fee to Advisers for acting as the Funds'
dividend-disbursing, administrative, and accounting services agent. The fee was
computed monthly on the average daily net assets for Developing Countries Fund,
and average month-end net assets for International Fund, at an annual rate of
.30%.
The Funds had a plan of distribution with IAI Securities, Inc. (Distributor),
the Funds' distributor. Under the Plan, the Funds paid Distributor a monthly fee
to cover expenses incurred in the distribution and promotion of the Funds'
shares. The fee was computed monthly based on average daily net assets for
Developing Countries Fund and average month-end net assets for International
Fund at an annual rate of .25%.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Funds were responsible for
paying their operating expenses, including costs incurred in the purchase and
sale of assets. Advisers and Distributor had agreed to reimburse the Funds to
the extent total expenses, excluding costs incurred in the purchase and sale of
assets, exceeded, on an annual basis, 2.00% of average net assets of each Fund.
[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
- -------------------------------------------------------------------------------------------------------------------------
Years ended
Year ended Period from January 31,
January 31, February 10, 1995* ---------------------------------
1997 to January 31,1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 1,168,544 1,042,319 9,050,644 9,473,961
ISSUED FOR REINVESTED DISTRIBUTIONS 70,024 12,731 1,043,904 960,998
REDEEMED (781,138) (358,208) (11,955,329) (10,290,719)
- -------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING 457,430 696,842 (1,860,781) 144,240
=========================================================================================================================
* COMMENCEMENT OF OPERATIONS
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the year ended January 31, 1997, purchases of securities and sales proceeds,
other than investments in short-term securities, for each Fund were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
IAI DEVELOPING COUNTRIES FUND $ 10,650,791 $ 5,941,121
IAI INTERNATIONAL FUND $ 40,905,721 $ 78,050,819
</TABLE>
[6] FOREIGN CURRENCY COMMITMENTS
At January 31, 1997, the Funds had entered into foreign currency exchange
contracts. The unrealized appreciation and/or depreciation on those contracts at
January 31, 1997 is included in unrealized appreciation or depreciation on other
assets and liabilities denominated in foreign currency. The terms of the open
contracts are as follows:
<TABLE>
<CAPTION>
IAI INTERNATIONAL FUND
- ----------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
02/03/97 133,780 U.S. Dollars 16,066,942 Japanese Yen $ - $ 1,433
02/04/97 132,503 U.S. Dollars 16,066,008 Japanese Yen - 164
04/17/97 683,160,000 Japanese Yen 6,000,000 U.S. Dollars 312,331 -
07/10/97 1,491,157 British Pounds 2,500,000 U.S. Dollars 118,754 -
- ----------------------------------------------------------------------------------------------------------------
$ 431,085 $ 1,597
================================================================================================================
IAI DEVELOPING COUNTRIES FUND
- ----------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- ----------------------------------------------------------------------------------------------------------------
02/04/97 47,902 U.S. Dollars 1,232,513 Thai Bat $ - $ 342
02/05/97 54,568 U.S. Dollars 8,861,862 Portuguese Escudo - 592
02/18/97 35,089 U.S. Dollars 270,889 Hong Kong Dollars - 131
- ----------------------------------------------------------------------------------------------------------------
$ - $ 1,065
================================================================================================================
</TABLE>
INDEPENDENT AUDITORS' REPORT
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
The Board of Directors and Shareholders
IAI Investment Funds III, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the fund portfolios, of IAI Developing Countries Fund and IAI International Fund
(separate portfolios within IAI Investment Funds III, Inc.) as of January 31,
1997, and the related statements of operations for the year then ended, the
statements of changes in net assets for the year then ended and the period from
February 10, 1995 to January 31, 1996 (IAI Developing Countries Fund), and the
year ended January 31, 1996 (IAI International Fund), and the financial
highlights for the periods presented on pages 22 and 23 of the annual report.
These financial statements and the financial highlights are the responsibility
of the Funds' management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits 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
audits provide 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
Developing Countries Fund and IAI International Fund at January 31, 1997, and
the results of their operations, the changes in their net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 7, 1997
FEDERAL TAX INFORMATION
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
We are required by federal tax regulations to provide shareholders with certain
information regarding dividend distributions paid during our fiscal year. The
figures provided are for information purposes only and should not be used for
reporting to federal or state revenue agencies. You will receive all necessary
tax information on Form 1099-DIV, Dividends and Distribu-tions, in January of
each year.
(A) includes distribution of short-term capital gains, if any, which are taxable
as ordinary income.
IAI DEVELOPING COUNTRIES FUND
Ordinary Long-Term
Payable Date Income (A) Capital Gain
- ---------------------------------------------------------------------------
JUNE 1996 $ .0635 $ --
DECEMBER 1996 .4633 .1585
===========================================================================
$ .5268 $ .1585
IAI INTERNATIONAL FUND
Ordinary Long-Term
Payable Date Income (A) Capital Gain
- ---------------------------------------------------------------------------
JUNE 1996 $ .0177 $ .1116
DECEMBER 1996 .2844 1.0392
===========================================================================
$ .3021 $ 1.1508
IAI INTERNATIONAL FUND
The Fund has elected to pass through the credit for taxes paid in foreign
countries for the calendar year December 31,1996. In accordance with current tax
laws, the Foreign Tax and Foreign Income per share is as follows:
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------
Foreign Tax Foreign Income
Country Factor Factor
- ----------------------------------------------------------------------------
Belgium .109 .092
France .125 .146
Germany .030 .044
Holland .089 .075
Hong Kong .000 .058
Indonesia .013 .011
Japan .087 .074
Malaysia .018 .017
New Zealand .046 .039
South Africa .000 .004
South Korea .006 .004
Spain .074 .062
Thailand .010 .012
United Kingdom .393 .362
- ---------------------------------------------------------------------------
Total 1.000 1.000
The portion of foreign taxes allocated to your account is indicated on Form
1099-DIV.
The factor used to determine the total 1996 foreign income is 7.9032.
IAI MUTUAL FUNDS FAMILY
<TABLE>
<CAPTION>
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE
MUTUAL FUNDS IN OUR FUND FAMILY
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 EMERGING GROWTH FUND Capital Appreciation -- Common stocks of small- to medium-sized
(CLOSED TO NEW INVESTORS AS OF 2/1/96) emerging growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI CAPITAL Capital Appreciation -- Common stocks of small- to medium-sized
APPRECIATION FUND growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI MIDCAP GROWTH FUND Capital Appreciation -- Common stocks of medium-sized growth companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI REGIONAL FUND Capital Appreciation -- Common stocks of Upper Midwest companies
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH FUND Capital Appreciation -- Common stocks with potential for above-average
GROWTH AND APPRECIATION
- ------------------------------------------------------------------------------------------------------------------------------------
IAI VALUE FUND Capital Appreciation -- Common stocks which are considered to be undervalued
- ------------------------------------------------------------------------------------------------------------------------------------
IAI GROWTH AND INCOME FUND Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected to
produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI BALANCED FUND Total Return Income Common stocks, investment-grade bonds and
[Capital Appreciation + 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>
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INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://networth.galt.com/iai
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
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
[LOGO]
IAI
MUTUAL FUNDS
3700 FIRST BANK PLACE, P.O. BOX 357,
MINNEAPOLIS, MINNESOTA 55440-0357 USA FAX 612.376.2737
800.945.3863
612.376.2700
