<PAGE>
----------------------------------------------------
EQUITY FUNDS
ANNUAL REPORT
IAI International Fund
JANUARY 31, 1995
----------------------------------------------------
[LOGO OF IAI]
MUTUAL FUNDS
<PAGE>
[MAP]
<PAGE>
TABLE OF CONTENTS
-----------------
IAI International Fund
Annual Report
January 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter..............................2
Fund Manager's Review..........................4
Fund Portfolio.................................7
Notes to Fund Portfolio........................8
Statement of Assets and Liabilities............9
Statement of Operations.......................10
Statements of Changes in Net Assets...........11
Financial Highlights..........................12
Notes to Financial Statements.................13
Independent Auditors' Report..................16
Federal Tax Information.......................17
IAI Mutual Fund Family........................18
Distributor, Adviser, Custodian,
Legal Counsel, Independent Auditors,
Directors......................Inside Back Cover
</TABLE>
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI International Fund
Sticking to Basics
Photo of Noel P. Rahn
Noel P. Rahn
Chairman
Sometimes when economic conditions and interest rates are changing and the
financial markets are volatile, it can become difficult to remember why we are
investing. The fact is, no matter what the economy or the markets do now or in
the future, we will still need the funds to send our children to college or for
ourselves to retire. That is why it is important to keep an eye on investing
fundamentals and to stay with the basic techniques that have helped long-term
investors reach their goals for decades.
As a long-time investor and former Chief Investment Officer for IAI, I have
found four investment fundamentals that are important keys to building financial
security. I hope you find these ideas helpful in planning and managing your own
investments.
1. Create your own investment game plan.
The first, and most important fundamental, is to plan for your own specific
financial requirements. In addition to retirement and perhaps your children's
college, you may also be investing to buy a second home, to travel, to start a
business, or to achieve many other worthy goals. It is important that you
outline your own unique situation and write down time frames and dollar amounts
you will need to achieve your goals. Then, you can lay them out and make the
necessary adjustments if time frames overlap, prioritize your goals, and
determine how much you may need to invest to achieve them.
By organizing your investment goals, you will probably see that most of your
goals are longer-term goals. With long-term goals, you might invest more
aggressively and in-turn, you have the potential to earn higher returns than if
you invest according to the passing whims of the marketplace (note that
aggressive investing can be subject to volatility). The key here is that if you
are investing for long-term goals, long-term investment strategies are the most
appropriate.
2. Diversify.
Diversification can reduce your risk. Owning shares in several companies means
you are not depending on a few specific companies to carry the full load of all
your hopes and dreams. A good way to gain instant diversification is to invest
through mutual funds which usually hold shares in dozens to hundreds of
different companies.
You can also reduce your risk by owning mutual funds with different investment
objectives such as those investing in bonds as well as stocks, small companies
as well as large, and international and domestic stocks and bonds. That way,
changing economic conditions which may adversely affect one part of your
portfolio may be partially offset by other parts of your portfolio which may be
performing better.
3. Pay attention to the financial media only in proportion to the time
frame they are covering.
Sometimes it is easy to get caught up in the exciting, but transitory stories of
our time, such as unforeseen financial debacles, rising interest rates, and the
ups and downs of economic indicators. The fact is, investors who have
concentrated on investing in good businesses have been well rewarded over the
long term, even following periods of war or economic recession and depression.
Those who have taken ownership in growing businesses have capitalized on the
overall appreciation of those businesses.
My rule of thumb is to read the daily papers for daily news and the monthly
magazines for news and ideas for the month. However, for my long-term
investments, I rely on long-term data which shows significant long-term capital
appreciation from investing in equities.
4. Buy bargains.
Just about everybody I know likes to find a good bargain, except, for some
reason, when it
2
<PAGE>
CHAIRMAN'S LETTER
-----------------
IAI International Fund
comes to investing. We only want our investments to go up, but the reality of
the financial markets is that prices go down sometimes as well as up. These
discounts may be temporary or in some cases extended for a few years. But as
long as you still have several years before you will need your invested funds,
these market discounts can be good opportunities to increase your ownership in
operating businesses at bargain prices.
I believe most investors can improve their investment performance more than any
other means by simply taking care of the basics. Create your own plan and stick
with it. Make adjustments to your plan according to changes in your life, not
changes in the markets. Diversify to help protect your portfolio. Avoid getting
caught up in daily worries. Look for bargain opportunities and take advantage of
them.
Achieving your financial goals also depends on using your own common sense and
using good professional investment managers. You can go a long way to achieve
your goals by taking care of the first. It is our goal to take you the rest of
the way--to financial security.
Economic Outlook
Larry Hill, IAI's Chief Investment Officer, provides his economic outlook below,
as published recently in the Adviser.
The year-over-year growth in real GDP should remain above its long-term trend of
3% but will drop from its current estimated level of 4%; this is likely to occur
toward mid-year; and the consumer price index is expected to rise to about 3.5%
compared to its current rate of 2.7% as measured on a year-over-year basis.
Given this backdrop, the Federal Reserve is unlikely to ease credit conditions
in the next six months. This is an important conclusion in our outlook for
financial assets. The Fed implements policy through its control on liquidity in
the financial system. The initial Fed tightening first affects interest rates,
causing the yield curve to flatten and interest rates to rise. Equity markets
hold-up as corporate earnings continue to rise in an expanding economy. Higher
earnings provide price support to the stock market despite higher interest
rates. Ultimately, liquidity leaves the stock market as well, ushering in a bear
market. In the final phase, liquidity leaves the economy and a recession occurs.
This phase does not end until the Fed begins to ease credit and add liquidity.
Then the sequence reverses with excess liquidity from the Fed flowing first into
bonds, then into stocks, and finally into the real economy. Investors are paid
handsomely to be aggressive toward stocks and bonds during this phase.
Unfortunately, this is not likely to occur in 1995. At the current stage of this
credit cycle, portfolio strategy should be well diversified and conservative. In
the months ahead, investors are likely to be frustrated by false starts and
volatility in returns. However, an easier Fed policy is likely in 1996, and with
this shift will come above-average returns for both stocks and bonds.
Please read the Fund Manager's Review, which follows this letter, for a detailed
perspective on the Fund's performance and our strategy going forward. We
appreciate your continued trust and confidence in IAI. If there is any way we
can serve you better, please let us know by calling our toll-free Investor
Services Hotline at 1-800-945-3863. Best wishes for a prosperous 1995.
Sincerely,
/s/ Signature of Noel P. Rahn
- -----------------------------
Noel P. Rahn
Chairman
3
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI International Fund
IAI International Fund
Photo of Roy C. Gillson
Roy C. Gillson
IAI International
Fund Manager
"Typically,
the Fund invests
in stocks representative
of the EAFE
index."
Fund Objective
The primary investment objective of the IAI International Fund is capital
appreciation with current income, principally from dividends, being a secondary
objective. Typically, the Fund invests in stocks representative of the EAFE
Index, but also invests in other countries, including developing countries.
Fund Positioning for the Past Year
Most international equity markets earned modest positive returns for the year
and foreign currencies were mixed compared with the dollar. The Mexican peso
declined substantially near year-end causing uncertainty in other emerging
markets and some smaller Far Eastern ones.
The Japanese stock market discounted the improved economic outlook and also
responded positively to the prospect of easier monetary policy from the new Bank
of Japan's governor. The yen recently traded above 100 to the dollar, but closed
1994 just below 100. Gains against the US dollar were nearly 12%. Elsewhere in
the Far East, smaller markets generally declined, affected by tighter US
monetary policy.
European share price performance varied, with markets in those countries whose
governments were having political problems declining, compared with a generally
rising trend elsewhere. The United Kingdom dropped as political pressure led
Prime Minister Major to promise tax cuts. In Italy, the government fell and
discussions about forming a new interim government led to conflicts between
outgoing Prime Minister Berlusconi and President Scalfaro. In Spain, scandals
rocked the Socialist government, while the French government considered how to
deal with various right-wing candidates who have reduced their support for the
"franc fort" policy. In contrast, the Norwegian market celebrated the country's
decision not to join the EC by rising 6%.
The Mexican currency devaluation and free float resulted in a one-third
devaluation against the US dollar in the month of December alone. Most emerging
markets were temporarily impacted by the events in Mexico, with other Latin
American markets declining the most. An international economic package,
involving large dollar-based financing and domestic policy changes including
wage restraint and further privatization, has been put together to support the
Mexican capital markets. We anticipate continued economic reform in Latin
America and would typically use significant decline to add to our positions.
The IAI International Fund has been underweighted in Japan, compared with
international market indices, and overweighted in France, Mexico and Spain.
International equity markets are stabilizing after recent price declines which
followed their earlier move into overvalued territory.
In the dollar-bloc economies and Europe, economic growth is providing earnings
support. In Japan, economic activity is showing some resurgence and company
profits will recover steadily from recent lows.
While Japan remains overvalued in absolute terms, the broad market, excluding
the financial sector, is close to fair value relative to other international
markets by our measures. Hong Kong share prices have fallen back to fair
valuation levels. The Fund remains invested in Australia and Singapore.
4
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI International Fund
Fund Positioning Going
Forward
We believe Belgium and Spain offer superior value among European markets and we
are maintaining a strong presence there. The European bond markets, Italy and
Sweden in particular offer exceptional potential returns. We have invested in
long government bonds in these markets because we believe Italian bonds can
provide equity-like returns as these markets recover.
The Japanese yen is at an extreme of overvaluation and the Fund is underweighted
in the Japanese yen relative to the benchmark index due to our underweight
market position. To guard against potential yen volatility, we will continue to
hedge part of the yen exposure back into the US dollar. Compared with most
European currencies the US dollar appears to be holding near fair value.
/s/ Signature of Roy C. Gillson
- ------------------------------
Roy C. Gillson
Fund Manager
Portfolio Weighting:
IAI Intenational Fund vs. EAFE Index
<TABLE>
<CAPTION>
1/31/95
----------------------- Total Return
IAI of EAFE Markets
International EAFE Year Ended
Fund Index 1/31/95
- ----------------------------------------------------------------
<S> <C> <C> <C>
Far East
Japan 27% 45% (1%)
Australia 6% 3% (10%)
Malaysia 4% 2% (15%)
Hong Kong - 3% (35%)
Singapore 5% 1% 1%
New Zealand 3% - 2%
Europe
United Kingdom 15% 16% (7%)
Spain 8% 2% (15%)
France 8% 6% (10%)
Netherlands 4% 4% 9%
Germany 5% 7% 6%
Italy 2% 3% 9%
Belgium 5% 1% 4%
Emerging Markets 3% NA NA
Bonds 3% NA NA
Cash 2% NA NA
Other - 7% NA
</TABLE>
Top Ten Stock Holdings
<TABLE>
<CAPTION>
% of Net Assets
-------------------
Issues Country Industry 1/31/95 3/31/94
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Koninklijke PTT Nederland Netherlands Commercial Services 3.96 -
Woodside Petroleum Australia Oil 3.63 -
Rhone Poulenc - Class A France Chemicals 3.26 2.52
Canon Japan Office Equipment 3.06 -
Iberdrola Spain Electricity/Utility 2.87 2.44
Telefonica de Espana Spain Telecommunications 2.86 2.27
Toray Industries Japan Textiles 2.82 2.97
Hitachi Japan Electronics 2.82 3.20
Hanson PLC Group United Kingdom Conglomerate 2.80 2.29
Mitsubishi Heavy Industries Japan Engineering 2.79 2.82
=================================================================================================
Total 30.87 18.51
</TABLE>
5
<PAGE>
FUND MANAGER'S REVIEW
---------------------
IAI International Fund
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.
Top Five Countries
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
% of Net Assets
-------------------------------
As of 1/31/93 As of 3/31/94
- --------------------------------------------------------------------------
<S> <C> <C>
Japan 26.8% 27.3%
United Kingdom 15.3% 15.1%
France 8.4% 5.3%
Spain 7.5% 7.3%
Australia 6.0% 6.0%
</TABLE>
Value of $10,000 Investment
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1/31/95
- --------------------------------------------------------------------------
<S> <C>
IAI International Fund (Inception 4/23/87) $16,249
- --------------------------------------------------------------------------
EAFE Index (Since 5/1/87) $13,731
- --------------------------------------------------------------------------
</TABLE>
Average Annual Returns+
Through 1/31/95
<TABLE>
<CAPTION>
Since Inception
1 year 5 years 4/23/87
- --------------------------------------------------------------------------
<S> <C> <C> <C>
IAI International Fund (10.28%) 5.01% 6.44%
- --------------------------------------------------------------------------
EAFE Index (4.18%) 1.79% 4.17%*
</TABLE>
+ Past performance is not predictive of future performance
* Since 5/01/87
6
<PAGE>
FUND PORTFOLIO
--------------
IAI International Fund
January 31, 1995
(percentage figures indicate percentage of total net assets)
Common Stocks -- 95.0%
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- ------------------------------------------------------------------------------
<S> <C> <C>
Australia -- 6.0%
Pacific Dunlop
(Industrial Products) 1,419,000 $ 3,283,093
Woodside Petroleum (Oil) 1,370,000 4,951,396
-----------
8,234,489
- ------------------------------------------------------------------------------
Belgium -- 4.7%
Societe Generale de Belgique
(Conglomerate) 57,000 3,747,373
Solvay Et Cie (Chemicals) 5,410 2,673,997
-----------
6,421,370
- ------------------------------------------------------------------------------
France -- 8.4%
Casino ADP (Food Retailing) 153,100 3,331,725
Erdania Beghin-Say (Agriculture) 28,300 3,748,699
Rhone Poulenc-Class A
(Chemicals) 185,100 4,444,922
-----------
11,525,346
- ------------------------------------------------------------------------------
Germany -- 5.0%
Bayer (Chemicals) 16,400 3,779,322
RWE (Electricity/Utility) 11,380 3,109,672
-----------
6,888,994
- ------------------------------------------------------------------------------
Israel -- 1.3%
Israel Fund, ADR (b) 2,800,000 1,596,001
Israel Fund Warrants (b) 560,000 128,800
-----------
1,724,801
- ------------------------------------------------------------------------------
Italy -- 1.5%
STET ETL 1000 Di Risp,
Non-Convertible
(Telecommunications/Utility) 817,000 2,062,049
- ------------------------------------------------------------------------------
Japan -- 26.8%
Canon (Office Equipment) 283,000 4,174,712
Hitachi (Electronics) 449,000 3,847,928
Honda Motor (Auto Related) 244,000 3,795,284
Kamigumi (Warehousing) 345,000 2,991,269
Kao (Cosmetics) 330,000 3,609,633
Matsushita Electric (Electronics) 255,000 $ 3,531,359
Mitsubishi Heavy Industries
(Engineering) 565,000 3,810,136
Nippon Yusen Kabushiki Kaish
(Transportation/Shipping) 619,000 3,553,116
Sekisui House (Housing) 269,000 3,347,316
Toray Industries (Textiles) 610,000 3,850,377
-----------
36,511,130
- ------------------------------------------------------------------------------
Malaysia -- 4.2%
Malaysian International Shipping
(Transportation/Shipping) 1,173,333 2,846,113
Sime Darby Berhad
(Conglomerate) 1,402,000 2,907,121
-----------
5,753,234
- ------------------------------------------------------------------------------
Mexico -- 1.7%
Telefonos de Mexico, ADR
(Telecommunications/Utility) 67,100 2,373,663
- ------------------------------------------------------------------------------
Netherlands -- 4.0%
Koninklijke PTT Nederland
(Commercial Services) 165,007 5,407,532
- ------------------------------------------------------------------------------
New Zealand -- 2.8%
Carter Holt Harvey (Forestry) 1,776,550 3,758,889
- ------------------------------------------------------------------------------
Singapore -- 5.4%
Development Bank of
Singapore (Banks) 398,500 3,562,929
Jardine Strategic Holdings
(Financial Services) (b) 1,192,000 3,790,560
-----------
7,353,489
- ------------------------------------------------------------------------------
Spain -- 7.5%
Banco Popular Espanol (Banks) 20,300 2,465,966
Iberdrola (Electricity/Utility) 660,000 3,911,186
Telefonica de Espana
(Telecommunications) 316,000 3,903,304
-----------
10,280,456
</TABLE>
See accompanying Notes to Fund Portfolio
7
<PAGE>
FUND PORTFOLIO
--------------
IAI International Fund
January 31, 1995
<TABLE>
<CAPTION>
Market
Quantity Value (a)
- -------------------------------------------------------------------------------
<S> <C> <C>
Turkey -- 0.4%
Tofas Turk Otomobil
(Auto Related) (b) 140,000 $ 543,201
- -------------------------------------------------------------------------------
United Kingdom -- 15.3%
BICC (Electrical Equipment) 471,100 2,268,075
Booker (Foods) 329,800 2,035,504
Glaxo Holdings
(Pharmaceutical) 380,800 3,714,754
Hanson Plc Group (Conglomerate) 1,055,000 3,826,067
Ocean Group (Transportation) 687,000 3,079,779
Paterson Zochonis "A"
(Health & Household) 141,500 855,460
Redland (Building Materials) 273,000 1,818,527
Sears (Retail) 2,073,000 3,223,148
-----------
20,821,314
==============================================================================
Total Investments in Common Stocks
(Cost: $132,497,261)..............................................$129,659,957
</TABLE>
Long-Term Bonds -- 2.9%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount (c) Value (a)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Italy -- 2.9%
Buoni Poliennale
Del Tes 9.00% 11/01/23 8,650,000,000 $ 3,972,333
==============================================================================
Total Investments in Long-Term Bonds
(Cost: $4,233,034)................................................$ 3,972,333
==============================================================================
Total Investments in Long-Term
Securities
(Cost: $136,730,295)..............................................$133,632,290
</TABLE>
Short-Term Securities -- 1.8%
<TABLE>
<CAPTION>
Principal Market
Rate Maturity Amount Value (a)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government
Obligations -- 1.8%
U.S. Treasury Bill 5.74% 04/13/95 $2,500,000 $ 2,471,650
===============================================================================
Total Investments in Short-Term
Securities
(Cost: $2,472,291).................................................$ 2,471,650
===============================================================================
Total Investments in Securities
(Cost: $139,202,586) (d)...........................................$136,103,940
===============================================================================
Other Assets and Liabilities (net) -- 0.3%
...................................................................$ 369,747
===============================================================================
Total Net Assets
...................................................................$136,473,687
===============================================================================
</TABLE>
Notes to Fund Portfolio
(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 securities.
(c)
Foreign security market values are stated in U.S. dollars; principal amounts are
denominated in the foreign currency.
(d)
At January 31, 1995, the cost of securities for federal income tax purposes and
the aggregate gross unrealized appreciation and depreciation based on that cost
were as follows:
Cost for federal income tax purposes.........$139,202,586
============
Gross unrealized appreciation................$ 8,454,644
Gross unrealized depreciation.................(11,553,290)
------------
Net unrealized depreciation..................$ (3,098,646)
============
8
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
------------------------------------
IAI International Fund
January 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments in securities, at market
(Cost: $139,202,586) (see Fund Portfolio) $136,103,940
Cash in bank on demand deposit 159,482
Dividends and accrued interest receivable 353,253
Receivable for investment securities sold 714,065
Receivable for foreign currency contracts held,
at value (note 5) 20,491,679
Other 13,345
------------
Total assets 157,835,764
============
Liabilities
Accrued investment advisory fee 109,107
Accrued distribution fee 28,464
Accrued dividend-disbursing, administrative, and
accounting fees 34,157
Other accrued expenses 70,028
Payable for investment securities purchased 774,375
Payable for foreign currency contracts held, at value 20,345,946
------------
Total liabilities 21,362,077
------------
Net assets applicable to outstanding capital stock $136,473,687
============
Represented By:
Capital stock $ 113,146
Additional paid-in capital 135,618,175
Undistributed net investment income 53,632
Accumulated net realized gains 3,634,281
Unrealized appreciation (depreciation) on:
Investment securities $(3,098,646)
Other assets and liabilities denominated in
foreign currency 153,099
----------- (2,945,547)
------------
Total-- representing net assets applicable to outstanding capital stock $136,473,687
============
Shares of capital stock outstanding; authorized 10 billion shares
of $0.01 par value stock 11,314,584
------------
Net asset value per share of outstanding capital stock $ 12.06
============
</TABLE>
See accompanying Notes to Financial Statements
9
<PAGE>
STATEMENTS OF OPERATIONS
------------------------
IAI International Fund
Period from April 1, 1994 to January 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Net Investment Income
Income
Dividends (net of foreign income taxes withheld
of $451,437) $ 3,157,143
Interest (net of foreign income taxes withheld
of $21,662) 383,163
------------
Total income 3,540,306
------------
Expenses
Investment advisory fees 1,213,486
Distribution fees 320,042
Dividend-disbursing, administrative, and
accounting fees 384,051
Custodian fees 130,164
Compensation of Directors 20,462
Audit fees 17,520
Printing and shareholder reporting 61,861
Registration fees 48,022
Other expenses 13,809
------------
Total expenses 2,209,417
------------
Net investment income 1,330,889
------------
Net Realized and Unrealized Gains (Losses)
Net realized gains (losses) on:
Investment securities $ 6,613,125
Foreign currency transactions (1,565,107)
------------
5,048,018
Net change in unrealized appreciation
(depreciation) on:
Investment securities $(14,923,665)
Other assets and liabilities denominated in
foreign currency 1,422,002
------------
(13,501,663)
------------
Net loss on investments and foreign currency (8,453,645)
------------
Net decrease in net assets resulting from operations $ (7,122,756)
============
</TABLE>
See accompanying Notes to Financial Statements
10
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
IAI International Fund
<TABLE>
<CAPTION>
Period from April 1, 1994 Year Ended
to January 31, 1995 March 31, 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income $ 1,330,889 $ 866,220
Net realized gains 5,048,018 7,087,401
Net change in unrealized appreciation or depreciation (13,501,663) 10,157,872
----------------------------------------
Net increase (decrease) in net assets resulting from operations (7,122,756) 18,111,493
----------------------------------------
Distributions to Shareholders From:
Net investment income -- (2,272,860)
Net realized gains (9,634,926) (368,289)
----------------------------------------
Total distributions (9,634,926) (2,641,149)
----------------------------------------
Capital Share Transactions
Net proceeds from sale of 7,523,392 and 11,974,859 shares 102,091,160 154,255,467
Net asset value of 734,433 and 213,289 shares issued to
shareholders in reinvestment of distributions 9,532,735 2,572,410
Cost of 6,963,029 and 7,447,663 shares redeemed (93,188,329) (96,750,537)
----------------------------------------
Increase in net assets from capital share transactions 18,435,566 60,077,340
----------------------------------------
Total increase in net assets 1,677,884 75,547,684
Net assets at beginning of period 134,795,803 59,248,119
----------------------------------------
Net assets at end of period $136,473,687 $134,795,803
(including undistributed net investment income ========================================
of $53,632 and $303,876)
</TABLE>
See accompanying Notes to Financial Statements
11
<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>
Period from
April 1, 1994 to Years Ended March 31,
January 31, ----------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value
Beginning of period $ 13.45 $ 11.22 $ 11.02 $ 10.75 $ 10.70
------------------------------------------------------------
Operations
Net investment income .11 .06 .06 .15 .30
Net realized and unrealized gains (losses) (.62) 2.56 .60 .67 (.11)
------------------------------------------------------------
Total from operations (.51) 2.62 .66 .82 .19
------------------------------------------------------------
Distributions to Shareholders From:
Net investment income -- (.34) (.04) (.22) --
Net realized gains (.88) (.05) (.42) (.33) (.14)
------------------------------------------------------------
Total distributions (.88) (.39) (.46) (.55) (.14)
------------------------------------------------------------
Net Asset Value
End of period $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75
============================================================
Total investment return* (4.14%) 23.85% 6.18% 8.10% 1.87%
Net assets at end of period (000's omitted) $136,474 $134,796 $59,248 $36,239 $34,421
Ratios
Expenses to average net assets 1.72%** 1.74% 1.91% 2.00% 1.73%
Net investment income to average net assets 1.04%** 0.87% 1.42% 1.39% 2.79%
Portfolio turnover rate
(excluding short-term securities) 27.6% 50.9% 28.6% 35.1% 41.3%
</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
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI International Fund
January 31, 1995
(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. The
IAI International Fund is a separate portfolio of IAI Investment Funds III, Inc.
This report covers only the IAI International Fund (the Fund).
On November 9, 1994, the Board of Directors elected to change the fiscal year
end of the IAI International Fund from March 31 to January 31. Accordingly,
these financial statements are presented for the ten-month period from April 1,
1994 to January 31, 1995.
Significant accounting policies followed by the Fund 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 bid price. The values of debt securities are determined using
pricing services or prices quoted by independent brokers.
Short-term securities with a maturity of 60 days or less from the date of
purchase are valued at amortized cost. Short-term securities with a maturity
greater than 60 days from the date of purchase are marked-to-market on a daily
basis.
Foreign Currency Translations and Forward Foreign Currency Contracts
The Fund invests in foreign securities. The market value of securities and other
assets and liabilities denominated in foreign currencies is translated daily
into U.S. dollars at the closing rate of exchange. Purchases and sales of
securities, income and expenses are translated at the exchange rate on the
transaction date. Exchange gains (losses) may also be realized between the trade
and settlement dates on security and forward contract transactions. The Fund
does not isolate that portion of the results of operations resulting from
changes in foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
The Fund may enter into forward foreign currency exchange contracts for
operational purposes and to hedge against adverse exchange rate fluctuation. The
net U.S. dollar value of foreign currency underlying all contractual commitments
held by the Fund and the resulting unrealized appreciation or depreciation are
determined using foreign currency exchange rates from an independent pricing
service. The Fund is subject to the credit risk that the other party will not
complete the obligations of the contract.
Federal Taxes
Since it is the Fund's policy to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders, no provision for income taxes is
required. In order to avoid the payment of any federal excise taxes, the Fund is
required to distribute substantially all of its net investment income and net
realized gains on a calendar year basis.
Net investment income and net realized gains (losses) may differ for financial
statement and tax purposes primarily because of the recognition of certain
foreign currency gains and losses as ordinary income and the deferral of "wash
sale" losses for tax purposes. The character of distributions made during the
year for net investment income or
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI International Fund
January 31, 1995
net realized gains may also differ from its ultimate characterization for tax
purposes.
On the statement of assets and liabilities, as a result of permanent book-to-tax
differences, undistributed net investment income has been decreased by
$1,581,133 and accumulated net realized gains have been increased by $1,581,133.
Security Transactions and Investment Income
The Fund records security transactions on trade date, the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend date or
upon receipt of ex-dividend notification in the case of certain foreign
securities. Security gains and losses are determined on the basis of identified
cost, which is the same basis used for federal income tax purposes.
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.
(2) Commitments and Contingencies
For purposes of obtaining certain types of insurance coverage for the Fund and
its officers and directors, the Fund is a policyholder in an industry-sponsored
mutual insurance company (the Company). In connection with its obligations as a
policyholder in the Company, the Fund has made payments to the Company which
have been capitalized. Also, the Fund is committed to make future capital
contributions, if requested by the Company.
The Fund has available a $15,000,000 line of credit with a bank at prime
interest rates. To the extent funds are drawn against the line, securities are
held in a segregated account. No compensating balances or commitment fees are
required under the line of credit. There were no borrowings outstanding at
January 31, 1995.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
-----------------------------
IAI International Fund
January 31, 1995
(3) Fees and Expenses
Under terms of an investment advisory agreement, the Fund pays Investment
Advisers, Inc. (Advisers) a monthly management fee based upon month-end net
assets, equal on an annual basis to 1.00% of the first $100 million in net
assets, .85% of the next $100 million in net assets, .75% of the next $100
million, and .70% of net assets in excess of $300 million.
The Fund also pays an annual fee to Advisers for acting as the Fund's dividend-
disbursing, administrative, and accounting services agent. The fee is computed
monthly on the average month-end net assets at an annual rate of .30%.
The Fund has adopted a plan of distribution with IAI Securities, Inc.
(Distributor), the Fund's distributor. Under the Plan, the Fund pays Distributor
a monthly fee to cover expenses incurred in the distribution and promotion of
the Fund's shares. The fee is equal to an annual rate of .25% of the Fund's
average month-end net assets.
In addition to the advisory, distribution, and the dividend-disbursing,
administrative, and accounting services fees, the Fund is responsible for paying
its operating expenses, including costs incurred in the purchase and sale of
assets. Advisers and Distributor have agreed to reimburse the Fund to the extent
total expenses, excluding costs incurred in the purchase and sale of assets,
exceed, on an annual basis, 2.00% of average month-end net assets.
(4) Purchases and Sales of Securities
For the period ended January 31, 1995, purchases of securities and sales
proceeds, other than investments in short-term securities, for the Fund
aggregated $52,211,720 and $40,314,892, respectively.
(5) Foreign Currency Commitments
At January 31, 1995, the Fund had entered into foreign currency exchange
contracts. The unrealized appreciation of $145,733 for these contracts at
January 31, 1995 is included in unrealized appreciation on other assets and
liabilities denominated in foreign currency.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Exchange U.S. $ Value as of U.S. $ Value as of
Date Currency to be Delivered January 31, 1995 Currency to be Received January 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
02/01/95 777,888 U.S. Dollars $ 777,888 77,166,469 Japanese Yen $ 774,375
02/01/95 71,156,601 Japanese Yen 714,065 717,304 U.S. Dollars 717,304
02/21/95 795,113,000 Japanese Yen 8,026,135 8,200,000 U.S. Dollars 8,200,000
04/11/95 529,576,000 Japanese Yen 5,354,300 5,300,000 U.S. Dollars 5,300,000
04/18/95 540,952,500 Japanese Yen 5,473,558 5,500,000 U.S. Dollars 5,500,000
==========================================================================================================================
$20,345,946 $20,491,679
</TABLE>
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
IAI International Fund
The Board of Directors and Shareholders
IAI Investment Funds III, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the fund portfolio, of IAI International Fund (a portfolio within IAI Investment
Funds III, Inc.) as of January 31, 1995, the related statement of operations for
the period from April 1, 1994 to January 31, 1995, and the statements of changes
in net assets and the financial highlights for the period from April 1, 1994 to
January 31, 1995 and for each of the years in the four-year period ended March
31, 1994. These financial statements and the financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
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
International Fund at January 31, 1995, and the results of its operations, the
changes in its 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 10, 1995
16
<PAGE>
FEDERAL TAX INFORMATION
-----------------------
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 Distributions, in January of
each year.
<TABLE>
<CAPTION>
Tax Information:
- ------------------------------------------------------------------------------
Payable Date Ordinary Income (A) Long-term Capital Gain
- ------------------------------------------------------------------------------
<S> <C> <C>
June 1994 $.3400 $.2101
December 1994 .1399 .1929
==============================================================================
$.4799 $.4030
</TABLE>
(A) includes distributions of short-term capital gains, if any, which are
taxable as ordinary income.
17
<PAGE>
IAI MUTUAL FUND FAMILY
----------------------
To Diversify Your Portfolio, Please Consider All of the Mutual Funds in Our
Fund Family
<TABLE>
<CAPTION>
===================================================================================================================================
<S> <C> <C> <C>
Secondary
IAI Fund Primary Objective Objective Portfolio Composition
- -----------------------------------------------------------------------------------------------------------------------------------
IAI Developing Capital Appreciation - Equity securities of companies in
Countries Fund developing 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 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 & Income Fund Capital Appreciation Income Common stocks with potential for long-term
appreciation, and common stocks that are expected
to produce income
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Balanced Fund Total Return Income Common stocks, investment grade bonds and
[Capital Appreciation + short-term instruments
Income]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Bond Fund Income Capital Preservation Investment grade bonds
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Minnesota Tax Free Fund Tax-free Income Capital Preservation Investment grade municipal bonds
(formerly IAI Tax Free Fund) [Exempt from Federal and Minnesota State Income Taxes]
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Government Fund Income Capital Preservation U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------------------------
IAI Reserve Fund Stability/Liquidity Capital Preservation 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>
18
<PAGE>
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<PAGE>
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<PAGE>
Distributor
IAI Securities, Inc.
Investment Adviser
and Manager
Investment Advisers, Inc.
P.O. Box 357
Minneapolis, MN 55440-0357 USA
800.945.3863
612.376.2700
Custodian
Norwest Bank Minnesota, N.A.
Sixth and Marquette
Minneapolis, MN 55479
Legal Counsel
Dorsey & Whitney P.L.L.P
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
<PAGE>
[LOGO OF IAI]
MUTUAL FUNDS
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA
612.376.3131
800.945.3863
612.376.2700
