GLOBAL EQUITY FUNDS
ANNUAL REPORT
IAI DEVELOPING COUNTRIES FUND,
IAI INTERNATIONAL FUND
JANUARY 31, 1998
[LOGO]
IAI MUTUAL FUNDS
<PAGE>
TABLE OF CONTENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
ANNUAL REPORT
JANUARY 31, 1998
President's Letter............................. 2
Fund Managers' Reviews
IAI DEVELOPING COUNTRIES FUND............... 4
IAI INTERNATIONAL FUND...................... 8
Fund Portfolios
IAI DEVELOPING COUNTRIES FUND.............. 12
IAI INTERNATIONAL FUND..................... 15
Notes to Fund Portfolios...................... 20
Statements of Assets and Liabilities.......... 22
Statements of Operations...................... 23
Statements of Changes in Net Assets........... 24
Financial Highlights
IAI DEVELOPING COUNTRIES FUND.............. 26
IAI INTERNATIONAL FUND..................... 27
Notes to Financial Statements................. 28
Independent Auditors' Report.................. 33
Federal Tax Information....................... 34
IAI Mutual Fund Family........................ 36
Adviser, Custodian, Legal Counsel,
Independent Auditors,
Directors...................... Inside Back Cover
<PAGE>
PRESIDENT'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
[PHOTO]
NOEL P. RAHN
PRESIDENT
COLD MARKETS CAN TURN HOT IN NO TIME
In 1994, the U.S. and European stock markets were sluggish, Latin America was in
crisis and Asia was the "economic miracle." Today, Latin America is perceived as
the strongest emerging market while Asia finds itself struggling. Meanwhile, the
U.S. stock market has doubled in three years. And now, Europe seems to be in the
midst of its own miracle.
Thanks to advances in communications technology and falling trade barriers, we
live in a global economy where companies can do business anywhere in the world
and virtually no place on earth is unreachable by investors. Yet, as we've seen
these past few years, markets still move quite independently of each other.
Last fall, Asia's stock markets plummeted, threatening to take the rest of the
market down with them. In the United States, the Dow Jones Industrial Average,
which peaked at 8,259 on August 6, 1997, fell more than 1,000 points by late
October. But while Asia continued to descend, U.S. stocks staged an impressive
rally. By early December, the Dow had virtually regained all its lost ground.
True, U.S. stocks took another tumble in December and January as more bad news
came out of Asia and a scandal rocked the White House. But once again, the
market roared back by early February as investors were reminded just how good
the economy remained in the United States. The Asian debacle slowed projected
U.S. growth in 1998, which bodes well for keeping interest rates and inflation
low. The President submitted the first balanced federal budget in 30 years, and
corporate profits, although growing slower than before, were stronger than
initially projected.
In Latin America, investors also feared that the "Asian contagion" would depress
other emerging markets. Although there was initial negative impact, Latin
American stock markets held up surprisingly well. A few years back, the region
had its own crisis, and it responded by reducing tariffs, clamping down on
credit, cutting budget deficits and accelerating its privatization programs. It
remains to be seen whether Asia is willing to take the same medicine to solve
its economic problems.
In Europe, companies are streamlining operations, focusing on shareholder value
and the upcoming transition to a single European currency beginning in 1999. In
order to qualify for the Euro, a country must have limited budget deficits, low
inflation and moderate interest rates--which also makes for excellent stock
markets. The countries making up the European Union will comprise an economy and
a bond market that is larger than that of the United States. Investor sentiment
is positive in Europe, and the stock markets there have been strong since early
1997.
So as we move deeper into 1998, we can see that there are clear differences in
markets throughout the world. But markets are constantly shifting. The best way
to make sure you participate in the strongest areas of the world is to be
diversified geographically--and be patient. Ice cold markets can turn hot in no
time.
<PAGE>
PRESIDENT'S LETTER
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
ECONOMIC OUTLOOK
A summary of economic outlook as provided by Larry Hill, IAI's Chief Fixed
Income Officer, is presented below.
A robust economy, low inflation and excess liquidity continue to buoy financial
markets. Certainly the markets have something to worry about. Asia remains a
risk; and U.S. stock market valuations are high while, at the same time, U.S.
interest rates have risen slightly from their earlier lows. However, economic
conditions remain persistently favorable around the world.
The U.S. economy shows surprising strength, after almost seven years of
expansion. Consumer confidence is at a record high, unemployment has dropped to
its lowest level in 24 years and, despite the recent reversal, interest rates
remain low by historical standards. Income gains have boosted tax receipts for
both Federal and state governments. Budget surpluses abound, prompting
widespread talk of tax cuts and new spending initiatives. The Federal Reserve is
contributing ample liquidity to fuel the expansion, with money supply growing in
excess of 9%.
A firm dollar and rising imports continue to restrain pricing power in the
domestic economy. Falling commodity prices reflect the benefits of excess global
capacity. Despite the turmoil in Asia, the price of gold remains below $300. In
the United States, the rate of inflation has fallen to its lowest level since
1986, when the collapse of oil temporarily pulled consumer price inflation below
2%.
At the same time, growth in Europe is poised to accelerate. The monetary union
will bring to Europe the same economic restructuring that led to the low
inflation/high employment conditions that now exist in the United States. Much
of Europe is currently in the midst of the "jobless expansion" phase that was
experienced by the United States in the early 1990s. Many countries have met the
initial guidelines for membership in the union. As a result, economic policies
can become slightly more accommodative. The combination of economic
restructuring and accommodative policies will produce the desired results.
Low inflation, above trend growth and accommodative policies are the ingredients
of bull markets. These factors will overshadow market risks in the months ahead.
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
President
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
IAI DEVELOPING COUNTRIES FUND
[PHOTO]
ROY C. GILLSON
IAI DEVELOPING COUNTRIES
FUND MANAGER
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
For the year ended January 31, 1998, the Fund declined (23.13)% while the IFC
Investable Index declined (25.60)%. Our overweighting of Egypt, Portugal,
Argentina and Peru and underweighting of Indonesia, Malaysia and the
Philippines, plus cash balances, contributed positively to performance.
Conversely, an overweighting of China and Thailand and an underweighting of
Turkey, Colombia and Mexico detracted from our results.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Our best performing stocks during the year include Delta Informatics in Greece
(3.90%); and Telefonos de Mexico and ICH in Mexico (3.04% and 2.00%,
respectively). The most disappointing returns were seen in Southeast Asia:
Srithai Superware and Siam City Bank in Thailand (0.15% and 0.13%,
respectively); and Semen Cibinong in Indonesia (0.31%). (Figures in parentheses
refer to percentage of net assets.)
WERE THERE ANY SIGNIFICANT CHANGES IN PORTFOLIO COMPOSITION?
Following the collapse in the Asian markets, we conducted an extensive review of
each holding. Several holdings were sold based on our re-assessment of risk, and
we added to several holdings in Thailand, Hong Kong and Malaysia. In Latin
America, Europe and the Middle East, several holdings which had reached our
price targets during the year were sold.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
After a sustained period of gains, emerging equity markets fell sharply late in
the year. The markets of Southeast Asia collapsed in the second half of the
year. Latin American markets initially performed well, and Brazil in particular
saw strong gains as the privatization process progressed satisfactorily. These
markets subsequently declined in the second half in reaction to the Asian
crisis, but recovered as investors viewed the region as a safe haven. European
and Middle Eastern markets were mixed.
WHAT IS YOUR OUTLOOK FOR THE FUND?
Emerging markets continue to offer select opportunities on a long-term basis.
The recent crisis in Asia will reduce growth prospects over the medium term, but
above-average long-term growth expectations remain intact. The current pressures
on currencies and share prices have brought markets back to attractive valuation
levels. The long-term success of Latin America strongly depends on Brazil's
economy, and so far, there has been steady progress and the privatization
process is now well established. Higher-risk opportunities exist within Eastern
Europe.
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
PORTFOLIO WEIGHTING:
IAI DEVELOPING COUNTRIES FUND VS. IFC INVESTABLE INDEX
1/31/98
------------------------------- Country Returns
IAI Developing IFCInvestable for the Year
Countries Fund Index Ended 1/31/98
- --------------------------------------------------------------------------------
AFRICA
Egypt 1% 1% --%
South Africa 5 14 (11%)
EUROPE
Czech Republic 2 -- (30%)
Greece 5 2 5%
Hungary -- -- 15%
Morocco -- -- --%
Poland 3 1 (23%)
Portugal 8 4 48%
Russia -- -- --%
Turkey 2 5 27%
United Kingdom -- -- --%
FAR EAST
China 4 1 (46%)
Hong Kong 2 -- --%
India 2 2 (13%)
Indonesia -- 1 (84%)
Israel 4 2 --%
Malaysia 6 6 (76%)
Pakistan -- -- (2%)
Philippines 1 1 (64%)
South Korea 4 3 (50%)
Sri Lanka -- -- 13%
Taiwan 5 9 (15%)
Thailand 4 1 (69%)
LATIN AMERICA
Argentina 7 5 (1%)
Brazil 10 12 2%
Chile 7 6 (19%)
Colombia -- -- 9%
Mexico 8 13 16%
Peru 8 1 (7%)
Venezuela -- -- 8%
OTHER COUNTRIES 2 10
CASH -- --
- ------------------------------------------------------
TOTAL 100% 100%
- ------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
-------------------------
Issues Country Industry 1/31/98 1/31/97
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banco Totta y Acores Portugal Financial 4.72 --
Taipei Fund Taiwan Financial 4.58 4.26
Delta Informatics Greece Capital Equipment 3.90 1.75
YPF ADR Argentina Energy 3.49 --
Enersis ADR Chile Energy 3.29 2.71
Telefonica de Argentina ADR Argentina Services 3.23 2.32
Elektrim Poland Capital Equipment 3.15 2.00
Bidvest South Africa Consumer Goods 3.09 1.99
Telefonos de Mexico ADR Mexico Services 3.04 2.28
Guangdong Electric Power
Development Class B China Energy 3.01 1.76
- --------------------------------------------------------------------------------------------------------------
TOTAL 35.50% 19.07%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
[GRAPH]
BRAZIL 9.4%
13.0%
MEXICO 8.1%
11.1%
PERU 7.8%
3.9%
PORTUGAL 7.6%
4.1%
CHILE 7.0%
2.7%
AS OF 1/31/98
AS OF 1/31/97
<PAGE>
FUND MANAGER'S REVIEW
IAI DEVELOPING COUNTRIES FUND
[GRAPH]
VALUE OF A $10,000 INVESTMENT+
IAI DEVELOPING
COUNTRIES FUND IFC
(INCEPTION INVESTABLE
2/10/95) INDEX
2/10/95 $10,000 $10,000
1/31/96 10,852 11,457
1/31/97 11,419 12,379
1/31/98 8,777 9,211
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/98
Since Inception
1 Year 2/10/95
- --------------------------------------------------------------------------------
IAI DEVELOPING COUNTRIES FUND (23.13%) (4.28%)
- --------------------------------------------------------------------------------
IFCInvestable Index (25.60%) (2.71%)*
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
* SINCE 2/1/95
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.
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
IAI INTERNATIONAL FUND
[PHOTO]
ROY C. GILLSON
IAI INTERNATIONAL
FUND MANAGER
WHAT IS THE FUND'S 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.
HOW HAS THE FUND PERFORMED?
For the year ended January 31, 1998, the IAI International Fund declined
(1.04%). The EAFE Index generated a return of 10.59% but the IFC Investable
Index declined (25.60%).
The Fund's overweighting of France and underweighting of Japan and
Malaysia, together with currency hedging, contributed positively to performance.
Conversely, an underweighting of Italy, Scandinavia and Switzerland, and an
overweighting of Australasia, Singapore and emerging markets detracted from
performance.
WHICH HOLDINGS WERE PARTICULARLY SUCCESSFUL FOR THE FUND? WERE THERE ANY
DISAPPOINTMENTS?
Our best performing stocks were in Europe: Brisa in Portugal (0.47%); Dexia in
France (1.50%) and the Energy Group in the UK (2.73%). Disappointments focused
on the Far East: Land & General and Cement Industries in Malaysia (0.43% and
0.15%, respectively); and Mitsui Wood Systems in Japan (0.32%). (Figures in
parentheses refer to percentage of net assets.)
WERE THERE ANY SIGNIFICANT CHANGES IN PORTFOLIO COMPOSITION?
The year began well and most equity markets saw gains during the first half.
However, a collapse in confidence in Asia that began in Thailand spread broadly
in the second half of the year, while European markets and the United States
continued to gain ground.
Many of our European stocks reached their price targets and were sold. We
selectively re-invested the proceeds in Japanese and Southeast Asian companies
that had fallen to attractive valuation levels following sharp price declines.
We initiated a series of purchases in small cap companies which offer excellent
long-term value.
CAN YOU POINT TO ANY SPECIFIC MARKET FACTORS THAT INFLUENCED THE FUND'S
PERFORMANCE?
In the Far East, the collapse in confidence in Asia spread broadly: Malaysia
fell 72% during the year. Other Southeast Asian countries suffered dramatic
losses as well. Australasian markets declined by more modest amounts as
investors moved money into these more predictable economies. European markets
were also seen as a relatively safe haven, although companies with Asian sales
or competition are likely to suffer in the future. Strong double-digit gains
were seen in most of these markets. Emerging markets in general were weak, as
they felt the impact of the Asian crisis.
WHAT IS YOUR OUTLOOK FOR THE FUND?
During the course of the year, international equity markets declined from
relatively high levels. Small cap companies are offering particularly attractive
long-term value. Economic activity continues to provide earnings support, but
growth has faded. We believe company profits in Europe and Japan will benefit
from currency declines against the dollar. We remain invested in Southeast Asia,
given the attractive levels of valuation. We are also maintaining a strong
presence in France and the UK, European markets which offer superior value.
Emerging markets continue to offer select opportunities on a long-term basis,
with Latin American markets favored over other regions.
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
PORTFOLIO WEIGHTING:
IAI INTERNATIONAL FUND VS. EAFE INDEX
1/31/98
-------------------------------- Country Returns
IAI EAFE for the Year
International Fund Index Ended 1/31/98
- ------------------------------------------------------------------------------
AFRICA
South Africa --% --% --%
EUROPE
Belgium -- 1 16%
Denmark -- 1 30%
Finland 2 1 19%
France 19 8 14%
Germany 9 9 29%
Ireland 1 -- 25%
Italy -- 4 35%
Netherlands 3 5 27%
Norway -- 1 (6%)
Portugal 3 1 48%
Spain 3 3 39%
Sweden -- 3 14%
Switzerland 1 8 46%
United Kingdom 14 22 32%
FAR EAST
Australia 3 3 1%
China 1 -- --%
Hong Kong 4 3 (33%)
Indonesia -- -- --%
Israel -- -- --%
Japan 17 25 (7%)
Malaysia 1 1 (72%)
New Zealand 2 -- (14%)
Singapore 2 1 44%
South Korea -- -- --%
Taiwan -- -- --%
LATIN AMERICA
Argentina 1 -- (1%)
Brazil 1 -- 2%
Chile 1 -- (19%)
Mexico 1 -- 16%
Peru 1 -- (7%)
OTHER COUNTRIES 5 --
CASH 5 --
- -----------------------------------------------------------
TOTAL 100% 100%
- -----------------------------------------------------------
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
TOP TEN STOCK HOLDINGS
<TABLE>
<CAPTION>
% of Net Assets
--------------------------
Issues Country Industry 1/31/98 1/31/97
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy Group United Kingdom Energy 2.74 --
Iberdrola Spain Energy 2.66 --
Bayer Germany Materials 2.50 2.29
Hitachi Japan Capital Equipment 2.44 3.30
Compagnie Financiere de Paribas France Financial 2.44 --
Koninklijke PTT Nederland Netherlands Services 2.42 2.09
Eisai Japan Consumer Goods 2.29 0.58
Nippon Telegraph & Telephone Japan Services 2.23 4.00
Lyonnaise des Eaux-Dumez France Services 2.20 2.80
Jardine Strategic Hong Kong Multi-Industry 2.15 2.98
- -------------------------------------------------------------------------------------------------------------
TOTAL 24.07 18.04%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
TOP FIVE COUNTRIES
% OF NET ASSETS
FRANCE 17.5%
12.5%
JAPAN 16.4%
20.4%
UNITED KINGDOM 13.4%
15.5%
GERMANY 8.6%
4.8%
HONG KONG 4.4%
6.0%
AS OF 1/31/98
AS OF 1/31/97
<PAGE>
FUND MANAGER'S REVIEW
IAI INTERNATIONAL FUND
VALUE OF $10,000 INVESTMENT+
IAI
INTERNATIONAL EAFE
FUND INDEX
1/31/88 $10,000 $10,000
1/31/89 12,631 12,855
1/31/90 14,074 13,476
1/31/91 12,773 11,099
1/31/92 14,726 11,837
1/31/93 13,872 10,661
1/31/94 20,034 15,371
1/31/95 17,972 14,728
1/31/96 21,590 17,155
1/31/97 22,104 17,536
1/31/98 21,879 19,394
AVERAGE ANNUAL RETURNS+
THROUGH 1/31/98
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------
IAI INTERNATIONAL FUND (1.04%) 9.54% 8.15%
- -------------------------------------------------------------------------
EAFE Index 10.59% 12.71% 6.85%
+ PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
NOTE TO CHAIRMAN'S LETTER & FUND MANAGER'S REVIEW
PERFORMANCE DATA FOR THE IAI INTERNATIONAL FUND INCLUDES CHANGES IN SHARE VALUE
AND ASSUMES REIN-VESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS. PAST PERFORMANCE
IS NOT A GUARANTEE OF FUTURE RESULTS. THE FUND'S INVESTMENT RETURN AND PRINCIPAL
MAY FLUCTUATE, SO THAT WHEN REDEEMED, SHARES MAY BE WORTH MORE OR LESS THAN THE
ORIGINAL COST. MORE COMPLETE INFORMATION ABOUT THE FUND, INCLUDING CHARGES AND
EXPENSES, IS AVAILABLE IN THE PROSPECTUS. PLEASE READ THE FUND'S PROSPECTUS
CAREFULLY BEFORE INVESTING. ALL INDICES CITED ARE UNMANAGED, AND ARE EITHER
TRADEMARKS, REGISTERED TRADEMARKS OR COPYRIGHTS OF THEIR RESPECTIVE SPONSORING
COMPANIES.
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JANUARY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 94.4%
January 31, 1998
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
ARGENTINA - 6.7%
Telefonica de Argentina Class B
ADR (Services) 7,400 $ 256,225
YPF Class D ADR (Energy) 9,100 276,981
----------------
533,206
- --------------------------------------------------------------------------------
BRAZIL - 6.1%
Electricidade do Estado da
Bahia (Energy) (b) 2,600,000 155,106
Telecomunicacoes Brasileiras
(Services) 1,100,000 100,881
Telecomunicacoes Brasileiras
ADR (Services) 1,000 111,000
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 19,700 108,350
Usinas Siderurgicas de Minas
Gerais ADR (Materials) (c) 2,100 11,550
----------------
486,887
- --------------------------------------------------------------------------------
CANADA - 1.8%
Namibian Minerals ADR
(Materials) (b) 54,500 139,656
- --------------------------------------------------------------------------------
CHILE - 7.0%
Banco de A. Edwards
Series A ADR(Financial) 10,450 157,404
Enersis ADR (Energy) 9,873 261,017
Five Arrows Chile Investment
Trust (Financial) 66,001 141,902
----------------
560,323
- --------------------------------------------------------------------------------
CHINA - 4.3%
Guangdong Electric Power
Development Class B
(Energy) 512,400 239,034
Sinocan (Consumer Goods) 770,000 101,492
----------------
340,526
- --------------------------------------------------------------------------------
CZECH REPUBLIC - 1.6%
Skoda Plzen
(Consumer Goods) (b) 9,470 130,928
- --------------------------------------------------------------------------------
EGYPT - 1.3%
Suez Cement GDR (Materials) (c) 5,500 $ 101,888
- --------------------------------------------------------------------------------
GREECE - 5.2%
Delta Informatics
(Capital Equipment) 14,000 309,413
Texniki Et Boloy
(Capital Equipment) 24,000 100,698
----------------
410,111
- --------------------------------------------------------------------------------
HONG KONG - 2.1%
Giordano International
(Consumer Goods) 640,000 165,408
- --------------------------------------------------------------------------------
INDIA - 2.4%
Grasim Industries GDR
(Multi - Industry) 11,900 92,225
Indian Petrochemicals GDR
(Materials) 23,350 96,319
----------------
188,544
- --------------------------------------------------------------------------------
INDONESIA - 0.3%
Semen Cibinong (Materials) 796,250 24,646
- --------------------------------------------------------------------------------
ISRAEL - 4.1%
Blue Square-Israel
(Consumer Goods) (b) 10,400 91,570
Blue Square-Israel ADR
(Consumer Goods) 7,500 97,500
Tadiran Telecommunications
ADR (Services) (c) 11,800 135,700
----------------
324,770
- --------------------------------------------------------------------------------
MALAYSIA - 6.0%
Golden Hope Plantations
(Materials) 198,000 211,208
Land & General
(Multi-Industry) 386,800 71,234
Petronas Dagangan Berhad
(Energy) 229,577 194,375
----------------
476,817
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JANUARY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
MEXICO - 8.1%
Corporacion GEO Series B
(Financial) (b) 17,400 $ 91,936
Grupo Carso Series A-1
(Multi-Industry) (c) 25,750 150,665
Industrias Series B
(Capital Equipment) (b) 41,200 159,248
Telefonos de Mexico ADR
(Services) 4,910 241,818
----------------
643,667
- --------------------------------------------------------------------------------
PERU - 7.8%
Credicorp (Financial) 3,500 61,285
Credicorp ADR (Financial) 8,750 152,031
Edegel Communications
Series B (Energy) 537,000 211,196
Telefonica de Peru Class B ADR
(Services) 10,100 198,213
----------------
622,725
- --------------------------------------------------------------------------------
PHILIPPINES - 0.9%
Philippine Long Distance
Telephone (Services) 2,827 69,266
----------------
- --------------------------------------------------------------------------------
POLAND - 3.1%
Elektrim (Capital Equipment) 25,300 249,894
- --------------------------------------------------------------------------------
PORTUGAL - 7.6%
Banco Comercial Portugues
(Financial) 6,800 155,058
Banco Totta y Acores
(Financial) 16,900 374,973
Brisa-Auto
(Capital Equipment) (b) 1,783 74,641
----------------
604,672
- --------------------------------------------------------------------------------
SOUTH AFRICA - 4.9%
Bidvest (Consumer Goods) 27,500 245,088
South African Iron & Steel
Industrial (Materials) 403,000 144,483
----------------
389,571
- --------------------------------------------------------------------------------
SOUTH KOREA - 2.8%
Pohang Iron & Steel, foreign
(Materials) (b) 2,695 $ 144,299
Samsung Electronics, foreign
(Consumer Goods) (b) 1,340 76,408
----------------
220,707
- --------------------------------------------------------------------------------
TAIWAN - 4.6%
Taipei Fund IDR (Financial) (b) 36 (f) 363,600
- --------------------------------------------------------------------------------
THAILAND - 3.8%
Charoen Pokphand Feedmill,
foreign (Consumer Goods) 66,000 105,100
Hana Microelectronics, foreign
(Capital Equipment) 66,500 171,450
Siam City Bank, foreign
(Financial) 435,000 10,720
Srithai Superware, foreign
(Consumer Goods) 59,550 11,854
----------------
299,124
- --------------------------------------------------------------------------------
TURKEY - 1.9%
Tofas Turk Otomobil GDR
(Consumer Goods) 530,000 127,200
Tofas Turk Otomobil GDR
(Consumer Goods) (c) 100,000 24,000
----------------
151,200
================================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $10,538,396).............. $ 7,498,136
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI DEVELOPING COUNTRIES FUND
JANUARY 31, 1998
NON CONVERTABLE PREFERRED
STOCKS - 4.2%
Market
Quantity Value (a)
- --------------------------------------------------------------------------------
BRAZIL - 3.3%
Banco Nacional
(Financial) (b) (d) 5,300,000 $ --
Centrais Electricas de Santa
Catarina Series B (Energy) 140,000 127,148
Centrais Electricas de Santa
Catarina Series B GDR
(Energy) (c) 304 29,488
Empresa Nacional de Comercio
(Consumer Goods) (b) 295,500 960
Petroleo Brasileiro (Energy) 500,000 106,847
Tecidos Norte de Minas
(Consumer Goods) 500 113
----------------
264,556
- --------------------------------------------------------------------------------
SOUTH KOREA - 0.9%
Samsung Electronics, foreign
(Consumer Goods) (b) 3,433 67,647
================================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $614,965)................ $ 332,203
================================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $11,153,361) (G)......... $ 7,830,339
================================================================================
OTHER ASSETS AND LIABILITIES (NET) - 1.4%
................................ $ 112,755
================================================================================
TOTAL NET ASSETS
................................ $ 7,943,094
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1998
(PERCENTAGE FIGURES INDICATE PERCENTAGE OF TOTAL NET ASSETS)
COMMON STOCKS - 82.0%
Market
Quantity Value (a)
- ---------------------------------------------------------------------
ARGENTINA - 0.6%
Telefonica de Argentina Class B
ADR (Services) 4,600 $ 159,275
YPF Class D ADR (Energy) 6,500 197,844
-----------------
357,119
- ---------------------------------------------------------------------
AUSTRALIA - 2.8%
Commonwealth Bank of Australia
(Financial) 64,000 800,547
Henry Walker Group (Energy) 130,000 210,281
M.I.M. Holdings (Material) 1,209,000 754,070
-----------------
1,764,898
- ---------------------------------------------------------------------
BELGIUM - 0.3%
Compagnie Maritime Belge
(Services) 2,650 196,114
- ---------------------------------------------------------------------
BRAZIL - 0.5%
Electricidade do Estado da Bahia
(Energy) (b) 1,600,000 95,450
Telecomunicacoes Brasileiras
(Services) 690,000 63,280
Telecomunicacoes Brasileiras
ADR (Services) 760 84,360
Usinas Siderurgicas de Minas
Gerais ADR (Materials) 13,250 72,875
-----------------
315,965
- ---------------------------------------------------------------------
CANADA - 0.2%
Namibian Minerals ADR
(Materials) (b) 40,000 102,500
- ---------------------------------------------------------------------
CHILE - 0.6%
Banco de A. Edwards
Series A ADR (Financial) 6,525 98,282
Enersis ADR (Energy) 7,200 190,350
Five Arrows Chile Investment
Trust (Financial) 41,350 88,903
-----------------
377,535
- ---------------------------------------------------------------------
CHINA - 0.5%
Guangdong Electric Power
Development Class B
(Energy) 373,300 $ 174,144
Sinocan (Consumer Goods) 1,054,693 139,017
-----------------
313,161
- ---------------------------------------------------------------------
CZECH REPUBLIC - 0.1%
Skoda Plzen (Consumer Goods) (b) 5,300 73,275
- ---------------------------------------------------------------------
EGYPT - 0.1%
Suez Cement GDR (Materials) (c) 4,800 88,920
- ---------------------------------------------------------------------
FINLAND - 1.9%
UPM-Kymmene (Materials) 54,000 1,190,179
- ---------------------------------------------------------------------
FRANCE - 11.7%
Compagnie Financiere de
Paribas Class A (Financial) 17,250 1,544,103
Dexia France (Financial) 8,000 952,630
Eridania Beghin-Say
(Consumer Goods) 6,650 1,184,008
La Rochette (Materials) (b) 49,250 195,488
Lafarge (Materials) 15,700 1,000,676
Lyonnaise des Eaux-Dumez
(Services) 11,700 1,393,221
Societe Television Francaise
(Services) 10,500 1,126,838
-----------------
7,396,964
- ---------------------------------------------------------------------
GERMANY - 7.7%
Bayer (Materials) 42,150 1,584,084
Berliner Elektro Holding
(Capital Equipment) 6,750 107,084
BHF-Bank (Financial) 4,688 138,614
Deutsche Telekom (Services) 71,310 1,244,414
Dyckerhoff & Widmann
(Materials) 2,300 239,059
Fuchs Petrolub (Materials) 1,950 214,415
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ---------------------------------------------------------------------
GERMANY - (CONT.)
KM Europa Metal (Materials) 2,675 $ 280,963
Puma (Consumer Goods) 3,350 73,762
RWE (Energy) 17,708 990,505
--------------
4,872,900
- ---------------------------------------------------------------------
GREECE - 0.4%
Delta Informatics
(Capital Equipment) 9,500 209,959
Texniki Et Boloy
(Capital Equipment) 16,250 68,181
--------------
278,140
- ---------------------------------------------------------------------
HONG KONG - 4.4%
Giordano International
(Consumer Goods) 899,000 232,345
Jardine Strategic
(Multi-Industry) 549,019 1,361,567
Mandarin Oriental International
(Services) 200,000 136,000
South China Morning Post
(Services) 71,000 48,168
Swire Pacific Class A
(Multi-Industry) 204,000 927,932
Swire Pacific Class B
(Multi-Industry) 114,000 88,389
--------------
2,794,401
- ---------------------------------------------------------------------
INDIA - 0.2%
Grasim Industries GDR
(Multi-Industry) 8,978 69,580
Indian Petrochemicals GDR
(Materials) 17,425 71,878
--------------
141,458
- ---------------------------------------------------------------------
INDONESIA - 0.0%
Semen Cibinong (Materials) 547,500 $ 16,946
- ---------------------------------------------------------------------
IRELAND - 0.6%
Irish Life (Financial) 58,257 373,857
- ---------------------------------------------------------------------
ISRAEL - 0.4%
Blue Square-Israel
(Consumer Goods) (b) 6,300 55,470
Blue Square-Israel ADR
(Consumer Goods) 6,700 87,100
Tadiran Telecommunications
ADR (Services) (c) 8,900 102,350
--------------
244,920
- ---------------------------------------------------------------------
ITALY - 0.4%
Banco Popolare di Milano
(Financial) 7,838 64,399
Burgo (Cartiere) (Materials) 116 755
Caffaro (Materials) 200,000 207,293
--------------
272,447
- ---------------------------------------------------------------------
JAPAN - 16.4%
Aiwa (Consumer Goods) 22,400 639,495
Eisai (Consumer Goods) 99,000 1,452,208
Hitachi (Capital Equipment) 196,000 1,545,742
Japan Industrial Land Development
(Capital Equipment) 54,000 170,347
Mazda Motor
(Consumer Goods) (b) 465,000 1,107,492
Mitsui Wood Systems
(Capital Equipment) 60,000 203,470
Namco (Consumer Goods) 31,000 909,464
New Japan Radio
(Capital Equipment) 45,000 195,189
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ---------------------------------------------------------------------
JAPAN - (CONT.)
Nippon Telegraph & Telephone
(Services) 312 $ 1,414,827
Nippon Yusen Kabushiki
Kaish (Services) 371,000 1,097,200
Sekisui Chemical (Materials) 143,000 1,002,579
Toray Industries (Materials) 104,000 510,978
Toyoda Gosei (Materials) 41,000 147,768
--------------
10,396,759
- ---------------------------------------------------------------------
MALAYSIA - 1.1%
Boustead Holdings Berhad
(Multi - Industry) 160,000 102,939
Cement Industries of Malaysia
(Materials) 270,000 97,510
Golden Hope Plantations
(Materials) 123,000 131,205
Land & General
(Multi - Industry) 1,462,000 269,245
Malaysian International
Shipping, foreign (Services) 333 454
Petronas Dagangan Berhad
(Energy) 154,000 130,387
--------------
731,740
- ---------------------------------------------------------------------
MEXICO - 0.7%
Corporacion GEO Series B
(Financial) (b) 10,600 56,007
Grupo Carso Series A-1
(Multi-Industry) (c) 16,100 94,202
Industrias Series B
(Capital Equipment) (b) 25,800 99,723
Telefonos de Mexico ADR
(Services) 3,400 167,451
--------------
417,383
- ---------------------------------------------------------------------
NETHERLANDS - 3.4%
European Vinyls (Materials) 8,405 $ 150,971
Koninklijke Boskalis Westminster
(Capital Equipment) 13,750 218,275
Koninklijke PTT Nederland
(Services) 35,500 1,535,536
Macintosh N.V. (Consumer Goods) 12,500 267,610
--------------
2,172,392
- ---------------------------------------------------------------------
NEW ZEALAND - 1.9%
Carter Holt Harvey (Materials) 525,800 812,046
Restaurant Brands
(Consumer Goods) (b) 190,000 166,725
Wrightson (Services) 435,000 211,214
--------------
1,189,985
- ---------------------------------------------------------------------
PERU - 0.7%
Credicorp (Financial) 2,700 47,277
Credicorp ADR (Financial) 6,500 112,938
Edegel Communications
Series B (Energy) 336,000 132,145
Telefonica de Peru Class B ADR
(Services) 6,250 122,656
--------------
415,016
- ---------------------------------------------------------------------
PHILIPPINES - 0.1%
Philippine Long Distance
Telephone (Services) 2,000 49,004
- ---------------------------------------------------------------------
POLAND - 0.1%
Elektrim (Capital Equipment) 3,000 29,632
- ---------------------------------------------------------------------
PORTUGAL - 3.1%
Banco Comercial Portugues
(Financial) 25,808 588,490
Banco Totta y Acores (Financial) 48,206 1,069,584
Brisa-Auto
(Capital Equipment) (b) 7,205 301,620
--------------
1,959,694
- ---------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1998
COMMON STOCKS (CONT.)
Market
Quantity Value (a)
- ---------------------------------------------------------------------
SINGAPORE - 2.3%
Amtek Engineering
(Capital Equipment) 250,000 $ 119,394
GPE Industries
(Capital Equipment) 230,000 142,600
Hong Leong Finance
(Financial) 150,000 114,444
Singapore Airlines (Services) 119,639 780,406
United Overseas Bank
(Financial) 73,587 274,290
--------------
1,431,134
- ---------------------------------------------------------------------
SOUTH AFRICA - 0.4%
Bidvest (Consumer Goods) 19,400 172,899
South African Iron & Steel
Industrial (Materials) 300,249 107,644
--------------
280,543
- ---------------------------------------------------------------------
SOUTH KOREA - 0.2%
Pohang Iron & Steel, foreign
(Materials) (b) 1,900 101,732
Samsung Electronics, foreign
(Consumer Goods) (b) 934 53,258
--------------
154,990
- ---------------------------------------------------------------------
SPAIN - 3.2%
Banco de Valencia (Financial) 8,000 180,651
Catalana Occidente (Financial) 3,400 177,683
Iberdrola (Energy) 111,500 1,686,942
--------------
2,045,276
- ---------------------------------------------------------------------
SWEDEN - 0.2%
Argonaut (Services) (b) 65,149 107,671
- ---------------------------------------------------------------------
SWITZERLAND - 0.7%
Danzas Holding (Services) 1,250 243,545
Forbo Holding (Materials) 405 171,540
--------------
415,085
- ---------------------------------------------------------------------
TAIWAN - 0.4%
Taipei Fund IDR (Financial) (b) 23(f) $ 232,300
- ---------------------------------------------------------------------
THAILAND - 0.3%
Charoen Pokphand Feedmill,
foreign (Consumer Goods) 25,000 39,810
Hana Microelectronics, foreign
(Capital Equipment) 50,000 128,910
Siam City Bank, foreign
(Financial) 308,250 7,597
Srithai Superware, foreign
(Consumer Goods) 39,100 7,783
--------------
184,100
- ---------------------------------------------------------------------
UNITED KINGDOM - 13.4%
British Steel (Materials) 400,200 863,712
Energy Group (Energy) 141,000 1,732,470
Eurocamp (Services) 68,000 270,167
FKI (Capital Equipment) 191,300 514,516
Greenalls Group (Services) 36,025 240,316
Imperial Tobacco Group
(Consumer Goods) 159,000 1,162,043
Low & Bonar (Consumer Goods) 52,000 246,558
Peninsular and Oriental Steam
Navigation (Services) 71,169 814,529
Rolls-Royce
(Capital Equipment) 286,000 967,953
Sears (Services) 838,300 692,163
Tomkins (Multi - Industry) 181,000 976,586
--------------
8,481,013
=====================================================================
TOTAL INVESTMENTS IN COMMON STOCKS
(COST: $56,772,558).................................... $ 51,865,416
=====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
FUND PORTFOLIO
IAI INTERNATIONAL FUND
JANUARY 31, 1998
NON-CONVERTIBLE PREFERRED
STOCKS - 1.3%
Market
Quantity Value (a)
- ---------------------------------------------------------------------
AUSTRIA - 0.1%
Baumax Aktiengesellschaft
(Consumer Goods) 3,750 $ 68,808
- ---------------------------------------------------------------------
BRAZIL - 0.3%
Centrais Electricas de Santa Catarina
Series B (Energy) 84,000 76,289
Centrais Electricas de Santa Catarina
Series B GDR (Energy) (c) 190 18,430
Petroleo Brasileiro (Energy) 380,000 81,204
--------------
175,923
- ---------------------------------------------------------------------
GERMANY - 0.8%
Koenig & Bauer-Albert
(Capital Equipment) 2,200 252,735
Rheinmetall (Capital Equipment) 16,700 291,428
--------------
544,163
- ---------------------------------------------------------------------
SOUTH KOREA - 0.1%
Samsung Electronics, foreign
(Consumer Goods) (b) 3,600 70,937
=====================================================================
TOTAL INVESTMENTS IN NON-CONVERTIBLE
PREFERRED STOCKS
(COST: $1,170,127)..................................... $ 859,831
=====================================================================
OTHER SECURITIES - 5.8%
Ownership Market
Percentage (e) Value (a)
- ---------------------------------------------------------------------
FRANCE - 5.8%
Qualis (LIMITED PARTNERSHIP) (b) 2.69% $ 3,675,270
=====================================================================
TOTAL INVESTMENTS IN OTHER SECURITIES
(COST: $3,709,515)................................... $ 3,675,270
=====================================================================
TOTAL INVESTMENTS IN LONG-TERM SECURITIES
(COST: $61,652,200).................................. $ 56,400,517
=====================================================================
SHORT-TERM SECURITIES - 4.7%
Principal Market
Rate Maturity Amount Value (a)
- ---------------------------------------------------------------------
COMMERCIAL PAPER - 4.7%
Associates (Financial)
5.59% 02/02/98 $ 3,000,000 $ 2,999,534
=====================================================================
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES
(COST: $2,999,534)..................... $ 2,999,534
=====================================================================
TOTAL INVESTMENTS IN SECURITIES
(COST: $64,651,734) (G)................ $59,400,051
=====================================================================
OTHER ASSETS AND LIABILITIES (NET) - 6.2%
....................................... $ 3,948,596
=====================================================================
TOTAL NET ASSETS
....................................... $63,348,647
=====================================================================
SEE ACCOMPANYING NOTES TO FUND PORTFOLIOS ON PAGE 20
<PAGE>
NOTES TO FUND PORTFOLIOS
IAIDEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
(a)
Market values of securities are stated in U.S. dollars and are determined as
described in Note 1 to the financial statements, under "Security Valuation."
(b)
Currently non-income producing security.
(c)
Represents security sold within terms of a private placement memorandum exempt
from registration under Section 144A of the Securities Act of 1933. This issue
may be only sold to other qualified institutional buyers and is considered
liquid under guidelines established by the Board of Directors.
(d)
This security is valued at $0 under guidelines established by the Board of
Directors and is illiquid.
(e)
Restricted securities generally must be registered with the Securities and
Exchange Commission under the Securities Act of 1933 prior to being sold to the
public and are considered illiquid. For the restricted security issue held at
January 31, 1998, the Fund held no unrestricted securities of the same issuer as
of either the date the purchase price was agreed to or the date the Fund first
obtained an enforceable right to obtain the security. The restricted security
held was acquired on 04/02/96 and 01/13/98 for a total cost of $3,709,515.
(f)
Quantity disclosed in units. One unit represents 100 shares.
(g)
At January 31, 1998, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------
Cost for federal tax purposes $ 11,381,311 $ 65,458,545
============================================
Gross unrealized appreciation $ 574,517 $ 3,962,394
Gross unrealized depreciation (4,125,489) (10,020,888)
--------------------------------------------
Net unrealized depreciation $ (3,550,972) $ (6,058,494)
============================================
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market
(Cost: $11,153,361 and $64,651,734)
(see Fund Portfolios) $ 7,830,339 $ 59,400,051
Cash in bank on demand deposit 28,782 1,844,885
Cash denominated in foreign currency
(Cost: $5,227) 5,644 --
Receivable for investment securities sold 94,375 1,125,046
Receivable for Fund shares sold -- 1,712,776
Dividends receivable 651 561,182
Unrealized appreciation on foreign currency contracts
held, at value (Note 6) 14,886 69,852
------------------------------------------------------
TOTAL ASSETS 7,974,677 64,713,792
------------------------------------------------------
LIABILITIES
Payable for investment securities purchased 31,390 284,427
Payable for Fund shares purchased -- 1,058,167
Unrealized depreciation on foreign currency contracts
held, at value (Note 6) 193 22,551
------------------------------------------------------
TOTAL LIABILITIES 31,583 1,365,145
------------------------------------------------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $ 7,943,094 $ 63,348,647
======================================================
REPRESENTED BY:
Capital stock $ 11,066 $ 61,748
Additional paid-in capital 11,785,852 70,305,148
Undistributed (overdistributed) net investment income (58,384) (121,935)
Accumulated net realized gains (losses) on investments (486,862) (1,634,031)
Unrealized appreciation or depreciation on:
Investment securities $ (3,323,022) $ (5,251,683)
Other assets and liabilities
denominated in foreign currency 14,444 (10,600)
------------ ------------
(3,308,578) (5,262,283)
------------------------------------------------------
TOTAL - REPRESENTING NET ASSETS APPLICABLE
TO OUTSTANDING CAPITAL STOCK $ 7,943,094 $ 63,348,647
======================================================
Shares of capital stock outstanding; authorized
10 billion shares each of $.01 par value stock 1,106,572 6,174,816
------------------------------------------------------
NET ASSET VALUE PER SHARE OF OUTSTANDING CAPITAL STOCK $ 7.18 $ 10.26
======================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
<PAGE>
STATEMENTS OF OPERATIONS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
INCOME
Dividends (net of foreign income taxes withheld
of $23,742 and $375,988) $ 269,578 $ 3,103,120
Interest 28,048 160,631
----------------------------------------------------
TOTAL INCOME 297,626 3,263,751
----------------------------------------------------
EXPENSES (NOTE 3)
Management fees 239,502 1,762,718
Compensation of Directors 1,334 11,961
----------------------------------------------------
TOTAL EXPENSES 240,836 1,774,679
Less fees reimbursed by Advisers (1,334) (11,961)
----------------------------------------------------
NET EXPENSES 239,502 1,762,718
----------------------------------------------------
NET INVESTMENT INCOME 58,124 1,501,033
----------------------------------------------------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized gains (losses) on:
Investment securities $ 364,326 $ 7,105,354
Foreign currency transactions (net of foreign
currency tax of $6,203 and $4,580, respectively) (23,596) (41,314)
----------- -----------
340,730 7,064,040
Net change in unrealized appreciation or depreciation on:
Investment securities $(3,334,312) $(7,735,915)
Other assets and liabilities denominated in
foreign currency 14,612 (397,700)
----------- -----------
(3,319,700) (8,133,615)
----------------------------------------------------
NET GAIN (LOSS) ON INVESTMENTS (2,978,970) (1,069,575)
----------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS $(2,920,846) $ 431,458
====================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
<TABLE>
<CAPTION>
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
Years ended Years ended
January 31, January 31,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 58,124 $ 53,676 $ 1,501,033 $ 2,042,362
Net realized gains 340,730 516,889 7,064,040 12,005,271
Net change in unrealized appreciation
or depreciation (3,319,700) (152,181) (8,133,615) (10,839,388)
-------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (2,920,846) 418,384 431,458 3,208,245
-------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (178,416) (57,715) (2,498,912) (2,507,284)
Net realized gains (699,045) (635,048) (9,915,596) (10,555,519)
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS (877,461) (692,763) (12,414,508) (13,062,803)
-------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 8,406,752 12,478,531 132,201,297 118,509,652
Net asset value of shares issued in
reinvestment of distributions 828,391 683,741 11,993,205 12,833,206
Cost of shares redeemed (9,475,349) (8,263,295) (185,054,041) (156,960,324)
-------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
CAPITAL SHARE TRANSACTIONS (240,206) 4,898,977 (40,859,539) (25,617,466)
-------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,038,513) 4,624,598 (52,842,589) (35,472,024)
NET ASSETS AT BEGINNING OF PERIOD 11,981,607 7,357,009 116,191,236 151,663,260
-------------------------------------------------------------------
NET ASSETS AT END OF PERIOD $ 7,943,094 $ 11,981,607 $ 63,348,647 $ 116,191,236
===================================================================
INCLUDING UNDISTRIBUTED (OVERDISTRIBUTED)
NET INVESTMENT INCOME OF: $ (58,384) $ 11,184 $ (121,935) $ 615,608
===================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS ON PAGE 28
<PAGE>
FINANCIAL HIGHLIGHTS
IAI DEVELOPING COUNTRIES FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR EACH
PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Period from
January 31, February 10, 1995+
1998 1997 to January 31, 1996
==========================================================================================================
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 10.38 $ 10.56 $ 10.00
---------------------------------
OPERATIONS
Net investment income 0.06 0.05 --
Net realized and unrealized gains (losses) (2.41) 0.46 0.83
---------------------------------
TOTAL FROM OPERATIONS (2.35) 0.51 0.83
---------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.16) (0.06) --
Net realized gains (0.69) (0.63) (0.27)
---------------------------------
TOTAL DISTRIBUTIONS (0.85) (0.69) (0.27)
---------------------------------
NET ASSET VALUE
End of period $ 7.18 $ 10.38 $ 10.56
=================================
Total investment return (%)* (23.13) 5.22 8.53
Net assets at end of period (000's omitted) $ 7,943 $ 11,982 $ 7,357
RATIOS
Expenses to average daily net assets (%)*** 2.00 2.00 2.15**
Net investment income to average daily net assets (%)*** 0.49 0.52 0.04**
Average brokerage commission rate**** $ 0.0041 $ 0.0057 n/a
Portfolio turnover rate (excluding short-term securities) (%) 71.7 61.0 41.9
</TABLE>
* TOTAL INVESTMENT RETURN IS BASED ON THE CHANGE IN NET ASSET VALUE OF A
SHARE DURING THE PERIOD AND ASSUMES REINVESTMENT OF ALL DISTRIBUTIONS AT
NET ASSET VALUE.
** ANNUALIZED
*** THE FUND'S ADVISER VOLUNTARILY WAIVED $17,765 AND $45,293 IN EXPENSES
FOR THE YEAR ENDED JANUARY 31, 1997 AND THE PERIOD ENDED JANUARY 31,
1996, RESPECTIVELY. IF THE FUND HAD BEEN CHARGED THESE EXPENSES, THE
RATIO OF EXPENSES TO AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 2.17% AND
3.42%, RESPECTIVELY, AND THE RATIO OF NET INVESTMENT INCOME (LOSS) TO
AVERAGE DAILY NET ASSETS WOULD HAVE BEEN 0.35% AND (1.23%),
RESPECTIVELY.
**** BEGINNING IN FISCAL 1997, THE FUND IS REQUIRED TO DISCLOSE AN AVERAGE
BROKERAGE COMMISSION RATE. THE COMPARABILITY OF RATES BETWEEN DOMESTIC
AND FOREIGN EQUITIES MAY BE AFFECTED BY THE FACT THAT COMMISSION RATES
PER SHARE CAN VARY SIGNIFICANTLY AMONG FOREIGN COUNTRIES. + COMMENCEMENT
OF OPERATIONS
<PAGE>
FINANCIAL HIGHLIGHTS
IAI INTERNATIONAL FUND
PER SHARE DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD AND SELECTED INFORMATION FOR EACH
PERIOD INDICATED ARE AS FOLLOWS:
<TABLE>
<CAPTION>
Years ended Period from Years ended
January 31, April 1, 1994 to March 31,
1998 1997 1996 January 31, 1995+ 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22 $ 11.02
----------------------------------------------------------------------------
OPERATIONS
Net investment income 0.20 0.24 0.19 0.11 0.06 0.06
Net realized and unrealized
gains (losses) (0.34) 0.08 2.17 (0.62) 2.56 0.60
----------------------------------------------------------------------------
TOTAL FROM OPERATIONS (0.14) 0.32 2.36 (0.51) 2.62 0.66
----------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (0.32) (0.28) (0.16) -- (0.34) (0.04)
Net realized gains (1.39) (1.17) (1.02) (0.88) (0.05) (0.42)
----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.71) (1.45) (1.18) (0.88) (0.39) (0.46)
----------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 10.26 $ 12.11 $ 13.24 $ 12.06 $ 13.45 $ 11.22
============================================================================
Total investment return (%)* (1.04) 2.39 20.15 (4.14) 23.85 6.18
Net assets at end of period
(000's omitted) $63,349 $116,191 $151,663 $ 136,474 $134,796 $59,248
RATIOS
Expenses to average net assets(%) 1.67 1.65 1.66 1.72** 1.74 1.91
Net investment income to
average net assets (%) 1.42 1.56 1.12 1.04** .87 1.42
Average brokerage
commission rate*** $0.0108 $ 0.0157 n/a n/a n/a n/a
Portfolio turnover rate
(excluding short-term
securities) (%) 76.4 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.
** 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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IAI Investment Funds III, Inc. is registered under the Investment Company Act of
1940 (as amended) as a diversified, open-end management investment company. IAI
Developing Countries Fund and IAI International Fund are separate portfolios of
IAI Investment Funds III, Inc. The Funds have a primary objective of capital
appreciation mainly through investment in equity securities of developed and
emerging countries. This report covers only the Developing Countries Fund and
International Fund (the Funds).
Significant accounting policies followed by the Funds are summarized below:
SECURITY VALUATION
Portfolio securities are valued at the close of the New York Stock Exchange on
each trading day. Listed and unlisted securities for which such information is
regularly reported are valued at the last sale price of the day or, in the
absence of sales, at values based on the closing bid or the last sale price on
the prior trading day. Long-term and short-term "non-money market" debt
securities are valued by a portfolio pricing service. Such securities which
cannot be valued by the portfolio pricing service are valued using
dealer-supplied valuations, or are valued under consistently applied procedures
established by the Board of Directors to determine fair value in good faith.
Short-term "money market type" debt securities having a remaining maturity of 60
days or less at acquisition are valued at cost adjusted for amortization to
maturity of any premium or discount. Forward foreign currency exchange contracts
are valued based on the closing prices of the forward currency contract rates in
the London foreign exchange markets on a daily basis as provided by a reliable
bank or dealer.
Restricted securities for which there is no public market are valued at fair
value in good faith under procedures established by the Board of Directors. Such
securities represent $3,675,270 (5.8% of net assets for International Fund).
Because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
FOREIGN CURRENCY
TRANSLATIONS AND FORWARD
FOREIGN CURRENCY CONTRACTS
The Funds invest in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date and are recorded in realized and unrealized appreciation
(depreciation) on foreign currency transactions. Exchange gains (losses) may
also be realized between the trade and settlement dates on security and forward
currency contract transactions.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 differ from it's
ultimate characterization 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 (overdistributed) net investment income and
accumulated net realized gains (losses) have been increased (decreased) as
follows:
IAI DEVELOPING COUNTRIES IAI INTERNATIONAL
FUND FUND
- --------------------------------------------------------------------------------
Undistributed net investment income $ 50,724 $ 260,336
Accumulated net realized gains (losses) $ (50,724) $ (260,336)
Additional paid-in capital -- --
For federal income tax purposes, Developing Countries Fund and International
Fund had capital loss carryovers of approximately $311,000 and $894,000,
respectively at January 31, 1998, which, if not offset by subsequent capital
gains, will expire in 2007. It is unlikely the Board of Directors will authorize
a distribution of any net realized gains until the available capital loss
carryover is offset or expires.
SECURITY TRANSACTIONS AND
INVESTMENT INCOME
The Funds record security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities.
Security gains and losses are determined on the basis of identified cost, which
is the
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
same basis used for federal income tax purposes. Investment income is recorded
net of foreign taxes withheld where recovery of such taxes is uncertain.
DISTRIBUTIONS TO
SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Distributions from net investment income are paid semi-annually. Capital gains,
if any, are primarily distributed as of the end of the calendar year. Additional
capital gains distributions as needed to comply with federal tax regulations are
distributed during the year.
CONCENTRATION OF RISK
Investments in countries with limited or developing capital markets may involve
greater risks than investments in more developed markets and the prices of such
investments may be volatile. The consequences of political, social or economic
changes in these markets may have disruptive effects on the market prices of the
Funds' investments and the income it generates, as well as the Funds' ability to
repatriate such amounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual results could
differ from those estimates.
[2] COMMITMENTS AND CONTINGENCIES
For purposes of obtaining certain types of insurance coverage for the Funds and
their officers and directors, the Funds are policyholders in an
industry-sponsored mutual insurance company (the Company). The Funds are
committed to make capital contributions, if requested by the Company.
Developing Countries Fund and International Fund have available lines of credit
of $3,800,000 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. During the year ended January 31, 1998, the Funds
paid $3,442 and $9,118, respectively, in interest on such lines of credit at an
average rate of 8.50%. This interest is included in interest income on the
Statement of Operations. There were no borrowings outstanding at January 31,
1998.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
[3] FEES AND EXPENSES
Under terms of each Funds' Management Agreement, Investment Advisers, Inc.
(Advisers) is required to pay for all expenses of each Fund, except certain
costs (primarily those incurred in the purchase and sale of assets, taxes,
interest and extraordinary expenses), in return for each Fund paying an all
inclusive management fee (unified fee) to Advisers. For Developing Countries
Fund this fee is equal to an annual rate of 2.00% declining to 1.65% of average
daily net assets. For International Fund this fee is equal to an annual rate of
1.70% declining to 1.30% of average daily net assets. This fee is paid monthly.
The Management Agreements further provide that Advisers will reimburse the Funds
for the fees and expenses it pays to Directors who are not "interested persons"
of the Funds or reduce its fee by an equivalent amount.
[4] CAPITAL STOCK
The Funds each have authorized 10 billion shares of $.01 par value stock.
Transactions in shares of capital stock during the periods indicated were as
follows:
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
- ----------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended
January 31, January 31, January 31, January 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOLD 799,319 1,168,544 10,833,124 9,050,644
ISSUED FOR REINVESTED DISTRIBUTIONS 107,939 70,024 1,143,039 1,043,904
REDEEMED (954,958) (781,138) (15,399,390) (11,955,329)
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN SHARES OUTSTANDING (47,700) 457,430 (3,423,227) (1,860,781)
====================================================================================================
</TABLE>
[5] PURCHASES AND SALES OF SECURITIES
For the year ended January 31, 1998, purchases of securities and sales proceeds,
other than investments in short-term securities, for each Fund were as follows:
Purchases Sales
- -------------------------------------------------------------------------
IAI DEVELOPING COUNTRIES FUND $ 8,083,911 $ 8,567,825
IAI INTERNATIONAL FUND $ 75,840,817 $ 127,880,786
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
JANUARY 31, 1998
[6] FOREIGN CURRENCY COMMITMENTS
At January 31, 1998, the Funds had entered into foreign currency exchange
contracts. The unrealized appreciation and/or depreciation on those contracts at
January 31, 1998 is included in unrealized appreciation or depreciation on other
assets and liabilities denominated in foreign currency. The terms of the open
contracts are as follows:
<TABLE>
<CAPTION>
IAI DEVELOPING COUNTRIES FUND
- -------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
02/02/98 3,057,862 Portuguese Escudo 16,239 U.S. Dollars $ - $ 110
02/03/98 6,714,588 Greek Drachma 23,134 U.S. Dollars - 53
02/03/98 2,614 U.S. Dollars 20,192 Hong Kong Dollars - 5
02/06/98 1,916 U.S. Dollars 8,285 Malaysian Ringgit 65 -
02/10/98 21,150 U.S. Dollars 163,704 Hong Kong Dollars 4 -
10/07/98 3,552,490 Hong Kong Dollars 453,778 U.S. Dollars 14,817 -
10/07/98 145,872 Hong Kong Dollars 18,000 U.S. Dollars - 25
- -------------------------------------------------------------------------------------------------------------
$ 14,886 $ 193
=============================================================================================================
IAI INTERNATIONAL FUND
- -------------------------------------------------------------------------------------------------------------
Exchange Unrealized Unrealized
Date Currency to be Delivered Currency to be Received Appreciation Depreciation
- -------------------------------------------------------------------------------------------------------------
02/02/98 5,367 U.S. Dollars 9,607,363 Italian Lira $ - $ 39
02/03/98 245,569 Australian Dollars 165,268 U.S. Dollars - 3,045
02/03/98 16,692 British Pounds 27,416 U.S. Dollars 125 -
02/03/98 107,316 British Pounds 174,710 U.S. Dollars - 751
02/03/98 1,842,865 Hong Kong Dollars 237,330 U.S. Dollars - 812
02/03/98 19,677,140 Japanese Yen 154,634 U.S. Dollars - 548
02/03/98 3,371,371 Japanese Yen 26,494 U.S. Dollars - 94
02/03/98 2,220 U.S. Dollars 17,164 Hong Kong Dollars - 2
02/03/98 32,637 U.S. Dollars 262,729 Swedish Krona - 233
02/04/98 64,662 U.S. Dollars 112,253 Singapore Dollars 716 -
02/04/98 66,184 U.S. Dollars 113,042 Singapore Dollars - 347
02/04/98 74,284 U.S. Dollars 127,026 Singapore Dollars - 303
02/10/98 39,350 U.S. Dollars 303,978 Hong Kong Dollars - 69
02/27/98 656,670 French Francs 106,689 U.S. Dollars - 575
02/27/98 796,224 French Francs 129,362 U.S. Dollars - 698
04/30/98 1,324,257 British Pounds 2,140,000 U.S. Dollars - 14,964
05/06/98 123,980,000 Japanese Yen 1,000,000 U.S. Dollars 8,714 -
10/07/98 9,767,820 Hong Kong Dollars 1,247,614 U.S. Dollars 40,659 -
10/07/98 2,046,758 Hong Kong Dollars 261,443 U.S. Dollars 8,537 -
10/07/98 421,408 Hong Kong Dollars 52,000 U.S. Dollars - 71
10/07/98 2,661,758 Hong Kong Dollars 340,000 U.S. Dollars 11,101 -
- -------------------------------------------------------------------------------------------------------------
$ 69,852 $ 22,551
=============================================================================================================
</TABLE>
<PAGE>
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,
1998, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for the periods presented on pages
26-27 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, 1998, 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 13, 1998
<PAGE>
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 informational 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 Distributions, in January of
each year.
IAI DEVELOPING COUNTRIES FUND
TAX INFORMATION
- --------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- --------------------------------------------------------------------------
JUNE 1997 $ 0.0822 $ 0.0000
DECEMBER 1997 0.5296 0.2356
==========================================================================
$ 0.6118 $ 0.2356
IAI INTERNATIONAL FUND
TAX INFORMATION
- ---------------------------------------------------------------------------
Payable Date Ordinary Income (A) Capital Gains
- ---------------------------------------------------------------------------
JUNE 1997 $ 0.2304 $ 0.0749
DECEMBER 1997 $ 0.4656 $ 0.9392
===========================================================================
$ 0.6960 $ 1.0141
(A) INCLUDES DISTRIBUTIONS OF SHORT-TERM CAPITAL GAINS, IF ANY, WHICH ARE
TAXABLE AS ORDINARY INCOME.
<PAGE>
FEDERAL TAX INFORMATION
IAI DEVELOPING COUNTRIES FUND, IAI INTERNATIONAL FUND
FOREIGN TAX CREDIT INFORMATION (UNAUDITED)
The Funds have elected to pass through the credit for taxes paid in foreign
countries for the calendar year December 31, 1997. In accordance with current
tax laws, the Foreign Tax and Foreign Income per share is as follows:
<TABLE>
<CAPTION>
IAI DEVELOPING IAI INTERNATIONAL
COUNTRIES FUND FUND
FOREIGN FOREIGN FOREIGN FOREIGN
TAX INCOME TAX INCOME
FACTOR FACTOR FACTOR FACTOR
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ARGENTINA .000 .124 .000 .012
AUSTRALIA -- -- .020 .138
BELGIUM -- -- .052 .041
BRAZIL .034 .068 -- --
CHILE .133 .050 .013 .008
FRANCE -- -- .355 .199
GERMANY -- -- .028 .032
GREECE .000 .072 -- --
HOLLAND -- -- .050 .052
HONG KONG .000 .134 .000 .046
INDONESIA .097 .049 .006 .004
ISRAEL .000 .008 .000 .003
JAPAN -- -- .065 .051
KOREA .111 .051 .004 .003
MALAYSIA .454 .145 .024 .017
MEXICO .000 .045 .000 .004
NEW ZEALAND -- -- .045 .035
PERU .000 .039 .000 .001
PHILIPPINES .002 .001 -- --
POLAND .011 .006 -- --
PORTUGAL .069 .046 .002 .002
SOUTH AFRICA .000 .025 .000 .003
SPAIN -- -- .043 .033
THAILAND .089 .137 .013 .015
UNITED KINGDOM -- -- .280 .301
- -------------------------------------------------------------------------------------------------------------------
TOTAL 1.000 1.000 1.000 1.000
===================================================================================================================
</TABLE>
THE PORTION OF FOREIGN TAXES ALLOCATED TO YOUR ACCOUNT IS INDICATED ON FORM
1099-DIV.
THE FACTOR USED TO DETERMINE THE TOTAL 1997 FOREIGN INCOME IS 8.5733 FOR IAI
INTERNATIONAL FUND AND 13.2405 FOR IAI DEVELOPING COUNTRIES FUND.
<PAGE>
IAI MUTUAL FUND FAMILY
TO DIVERSIFY YOUR PORTFOLIO, PLEASE CONSIDER ALL OF THE MUTUAL FUNDS IN OUR FUND
FAMILY
<TABLE>
<CAPTION>
SECONDARY
IAI FUND PRIMARY OBJECTIVE OBJECTIVE PORTFOLIO COMPOSITION
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IAI DEVELOPING Capital Appreciation -- Equity securities of companies in developing
COUNTRIES FUND countries
- ----------------------------------------------------------------------------------------------------------------------------------
IAI INTERNATIONAL FUND Capital Appreciation Income Equity securities of non-U.S. companies
- ----------------------------------------------------------------------------------------------------------------------------------
IAI 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 Preservation Investment-grade bonds
- ----------------------------------------------------------------------------------------------------------------------------------
IAI GOVERNMENT FUND Income Capital Preservation U.S. Government securities
- ----------------------------------------------------------------------------------------------------------------------------------
IAI RESERVE FUND Stability/Liquidity Income The portfolio has a maximum average maturity of
25 months, investing primarily in investment-
grade bonds
- ----------------------------------------------------------------------------------------------------------------------------------
IAI MONEY MARKET FUND Stability/Liquidity Income The portfolio's average dollar-weighted maturity
isless than 90 days, investing in high quality,
money market securities
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
==============================
INVESTMENT ADVISER
AND MANAGER
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
http://www.iaifunds.com
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
LEGAL COUNSEL
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
4200 Norwest Center
Minneapolis, MN 55402
DIRECTORS
Madeline Betsch
W. William Hodgson
George R. Long
J. Peter Thompson
Charles H. Withers
==============================
<PAGE>
[LOGO]
IAI
MUTUAL FUNDS
601 SECOND AVENUE SOUTH, SUITE 3600,
MINNEAPOLIS, MINNESOTA 55402 USA FAX 612.376.2737
800.945.3863
612.376.2700
