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GLOBAL EQUITY FUNDS
IAI Developing Countries Fund
IAI International Fund
June 1, 1995
Includes Brochure and Prospectus
As Supplemented September 1, 1995
[LOGO OF IAI]
MUTUAL FUNDS
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[MAP]
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
Fund Information
Low Minimum Investment
You can open an account with IAI for only $5,000 ($2,000 for an IRA). The
minimum investment per Fund is $1,000. Subsequent investments can be made for
only $100 per Fund.
No-Load
With IAI, you pay no commissions to buy, sell, or exchange shares.
No-fee IRA
Unlike many others, IAI charges no annual fee for maintaining your IRA.
Family of Funds
Whatever your investment needs, IAI's diverse Mutual Fund family has the right
Fund for you. Call for a free Prospectus for the IAI Developing Countries Fund,
IAI International Fund, IAI Emerging Growth Fund, IAI Midcap Growth Fund, IAI
Regional Fund, IAI Growth Fund, IAI Value Fund, IAI Growth & Income Fund, IAI
Balanced Fund, IAI Bond Fund, IAI Minnesota Tax Free Fund, IAI Government Fund,
IAI Reserve Fund and IAI Money Market Fund. Read the Prospectus carefully before
investing or sending money.
Free Exchanges
Money can be exchanged between IAI Mutual Funds free of charge.
Automatic Investment Program
Regular monthly investments ($100 minimum) can be made automatically into the
Fund from your checking or savings account. IAI Shareholders in other Funds may
arrange to invest regularly through monthly exchanges into any of the IAI Mutual
Funds.
Liquidity
You can redeem part or all of your Fund shares at any time at the then current
share price (which may be more or less than your original cost). Special rules
apply to IRAs.
Retirement Programs
IAI offers a variety of retirement investment programs including Individual
Retirement Accounts (IRAs), Direct Rollovers for persons receiving distributions
from Qualified Retirement Plans, SEP (Simplified Employee Pension) Plans for
small business owners, and 401(k) and 403(b) retirement plans for companies and
non-profit organizations.
Toll-Free Telephone Transactions
IAI offers a convenient toll-free telephone service for investors to find out
more about IAI Mutual Funds and services and to carry out transactions such as
buying or selling shares or exchanging assets from one fund to another. The
toll-free number, 1-800-945-3863, is available from anywhere in the United
States, weekdays from 7:30 a.m. - 5:30 p.m. Central Time.
IAI Investor Library
The IAI Investor Library provides free practical and objective information on
investing and investment strategies to investors who call 1-800-945-3863 and
request the Adviser Special Reports.
Quarterly Newsletter
IAI's free quarterly newsletter keeps shareholders up to date on IAI Mutual
Funds' performance and economic conditions and provides helpful tips on
investing.
IAI Preferred
IAI shareholders with balances in excess of $100,000 receive unique privileges,
including an exclusive toll-free telephone number, an individually assigned
account representative, an "Investing for Retirement" brochure and an IAI
Preferred portfolio organizer to conveniently house all IAI correspondence.
Easy-to-Read Statements
IAI provides complete, easy to read quarterly account statements which include
summaries of all transactions and portfolio allocations for all of your IAI
Mutual Fund holdings on one report.
Dividend Options
IAI shareholders may receive dividends in cash, have them electronically
directed to their personal bank account or arrange to automatically reinvest
them in additional IAI Mutual Fund shares.
Information and Assistance
Our knowledgeable investment representatives are available to help you--with no
sales pressure.
Not part of the prospectus
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund
Fund Information
[Photo of Roy Gillson]
Roy Gillson
Fund Manager
Capital Appreciation
The IAI Developing Countries Fund is designed for aggressive investors seeking
long-term capital appreciation from opportunities offered by investing in
securities of developing market companies. Since the Fund invests in issues of
international stocks in lesser developed countries, investors often use it in
conjunction with other IAI Mutual Funds which invest primarily in more mature
companies in the United States.
International Developing Markets
The Fund invests primarily in a portfolio of foreign stocks issued by companies
in lesser developed economies, including those considered to be developing
countries by the World Bank or the International Finance Corporation.
Flexible Portfolio
At least 65% of the Fund's total assets are invested in securities of companies
domiciled or otherwise having substantial operations in developing countries.
The Fund has the flexibility to diversify or concentrate investments on both a
geographic basis or on the level of economic development of particular
countries. The Fund focuses on equity securities; however, it may also invest in
other types of investments including debt securities.
Professional Management
The IAI Developing Countries Fund is a member of the IAI Mutual Fund family.
Founded in 1947, IAI currently manages more than $14.5 billion in assets for
thousands of individual investors, as well as FORTUNE 500/(R)/ companies,
leading colleges and universities, and religious organizations.
The Fund is managed by IAI International Limited of London, which is part of
Investment Advisers, Inc., headquartered in Minneapolis, Minnesota. IAI is part
of Hill Samuel Asset Management, wholly owned by TSB Group, plc., the sixth
largest banking institution in the United Kingdom and is responsible for
creating and distributing all domestic and international financial products in
the Western Hemisphere.
It's Easy to Start
To open an account, simply complete the enclosed application and return it in
the enclosed postage-paid envelope with a check payable to "IAI Mutual Funds."
If you are a current shareholder in any IAI Mutual Fund, the minimum investment
is $1,000. If not, the minimum investment is $5,000 (this can be allocated among
IAI Funds, with $1,000 minimum per Fund).
CALL 1-800-945-3863
Not part of the prospectus
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund
Investing in International Stocks May Increase
Returns and Reduce Volatility
New Investment Opportunities in Emerging Markets
There will be increasingly major shifts in the allocation of capital around the
world over the next 10-15 years. These shifts will occur in favor of developing
countries. Developed nations will become increasingly burdened with aging
populations, making them less attractive for new investments. On the other hand,
developing countries provide a ready pool of young and educated workers suited
to meet the technological challenges of the changing world economies.
Among developing countries, the infrastructure expenditures will enhance their
growth rates in much the same way that occurred in the United States in the late
19th and early 20th centuries. And, as the emerging markets develop, savings and
investments from 1.2 billion Chinese, 900 million Indians and one billion Latin
Americans will inevitably exceed those of the lesser populated developed
nations.
The fastest growing economies in the world are Developing Countries
Developing countries in three key areas--the Asian Pacific Basin, Eastern
Europe, and Latin America--are growing much faster than the more mature
economies of the United States, Western Europe and Japan. Faster growing
economies present high-potential investment opportunities.
The IAI Developing Countries Fund is designed for aggressive investors
interested in the investment opportunities offered by developing countries. In
addition to the normal risks associated with equity securities, these securities
may contain currency, political and economic risks, exchange and liquidity
risks, and risks in accounting methods and procedures.
Adding international and developing countries stocks to a portfolio of U.S.
stocks may help reduce overall price volatility
Stock price movements among developing countries are not correlated closely with
equities in the developed countries. Therefore, declining prices in one part of
a diversified portfolio containing securities from both markets may be offset by
rising prices in the other part, resulting in increased stability for the entire
portfolio.
Developing countries may improve investment growth potential
Historically, developing countries have outperformed the U.S. markets and other
developed markets on average, and a diversified portfolio containing both U.S.
and foreign issues has consistently outperformed an all-U.S. stock portfolio.*
While investing in foreign securities typically involves additional risks,
overall portfolio risk can be reduced through proper diversification and by
IAI's conservative "value" approach to investing.
Expected Economic Growth
Predicted 1995 Real GDP Growth (%)**
[GRAPH APPEARS HERE]
China 7
India 7
Malaysia 7
Pakistan 6
Philippines 7
South Korea 7
Taiwan 7
Thailand 8
Chile 6
Costa Rica 6
Peru 6
USA 3
*Based on ten-year annualized return, S&P 500 increased 14.28%, MSCI EAFE
increased 17.89%, IFC Companie increased 18.64%.
**Source: IAI International, Ltd. A country's expected economic growth does not
predict growth in the country's stock market, underlying companies or growth in
the Fund.
"We're investing for growth in the stocks of developing markets companies."
This investor information may not be distributed unless preceded or accompanied
by a prospectus. Read the prospectus carefully before you invest or send money.
Distributed by IAI Securities, Inc. Member SIPC.
Not part of the prospectus
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IAI MUTUAL FUNDS
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IAI International Fund
Fund Information
PHOTO OF ROY GILLSON
Roy Gillson
Fund Manager
Capital Appreciation
The IAI International Fund is designed for investors seeking capital
appreciation. Income is a secondary objective. Since the Fund invests in
international stocks, investors may use it in conjunction with other IAI Mutual
Funds which invest primarily in U.S. stocks.
International Stocks
The Fund invests primarily in a portfolio of international stocks, particularly
in countries represented in the EAFE Index (Morgan Stanley Capital International
Europe, Australia, Far East Index).
High Quality Portfolio
The Fund aims to invest in a portfolio of around fifty companies representing
the best opportunities for return at acceptable risk. Companies would typically
have the following attributes:
. Healthy financial condition
. Strong management
. Strong competitive position
. Positive country/industry background
Professional Management
The IAI International Fund is a member of the IAI Mutual Fund family. Founded in
1947, IAI currently manages more than $14.5 billion in assets for thousands of
individual investors, as well as FORTUNE 500/(R)/ companies, leading colleges,
universities, and religious organizations.
The Fund is managed by IAI International Limited of London, which is part of
Investment Advisers, Inc., headquartered in Minneapolis, Minnesota. IAI is part
of Hill Samuel Asset Management, wholly owned by TSB Group, plc., the sixth
largest banking institution in the United Kingdom, and is responsible for
creating and distributing all domestic and international financial products in
the Western Hemisphere.
No-Load
All IAI Mutual Funds are no-load. You pay no sales charge to buy shares and none
to redeem shares. Exchanges between IAI Mutual Funds are free. And, with an IRA
from IAI, you pay no annual maintenance fee.
It's Easy to Start
To open an account, simply complete the enclosed application and return it in
the enclosed postage-paid envelope with a check payable to "IAI Mutual Funds."
If you are a current shareholder in any IAI Mutual Fund, the minimum investment
is $1,000. If not, the minimum investment is $5,000 (this can be allocated among
IAI Funds, with $1,000 minimum per Fund).
CALL 1-800-945-3863
Not Part of the prospectus
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IAI MUTUAL FUNDS
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IAI International Fund
Most of the world's stock market is outside the United States.
An investor who does not hold international stocks gives up the majority of the
world's investment opportunities. As of year-end 1994, 63.8% of the world's
stock market value was outside the United States.
Stock Market Value 1994
CIRCLED STOCKS GRAPH APPEARS HERE WITH THE FOLLOWING INFORMATION:
International Stocks 63.8%
U.S. Stocks 36.2%
Source: Frank Russell and Company
International stock markets often outperform the U.S. market.
In fact, from 1970 through 1994, international stocks returned significantly
more than U.S. stocks. See the chart, "Average Annual Returns 1970-1994."
During this time period, international stocks returned an average of 13.2% per
year, while U.S. stocks returned only 10.9% per year.
Average Annual Returns 1970--1994
BAR GRAPH APPEARS HERE WITH THE FOLLOWING INFORMATION:
U.S. Stocks 10.9%
International Stocks 13.2%
Source: U.S. stocks (S&P 500 Index), Standard & Poor's Corporation:
International stocks (EAFE Index), Morgan Stanley Capital International.
Adding international stocks to your U.S. stock portfolio can help reduce
volatility.
Stock price movements among foreign countries are not correlated closely with
equities in the United States. Therefore, declining prices in one part of a
diversified portfolio containing securities from both markets may be offset by
rising prices in the other part, resulting in increased stability for the entire
portfolio.
"We're investing for growth in the stocks of international companies."
This investor information may not be distributed unless preceded or accompanied
by a prospectus. Read the prospectus carefully before you invest or send money.
Distributed by IAI Securities, Inc. Member SIPC.
Not part of the prospectus
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
<TABLE>
<S> <C>
Fund Expense Information.......................... 2
Fund Directors.................................... 2
Financial Highlights.............................. 3
Investment Performance............................ 4
Investment Objectives and Policies................ 4
IAI Developing Countries Fund................... 4
IAI International Fund.......................... 5
Portfolio Securities and
Other Fund Investment Techniques.................. 9
Fund Risk Factors................................. 13
Management........................................ 17
Plan of Distribution.............................. 19
Computation of Net Asset
Value and Pricing................................. 20
Purchase of Shares................................ 20
Retirement Plans.................................. 21
Automatic Investment Plan......................... 21
Redemption of Shares.............................. 22
Exchange Privilege................................ 23
Automatic Exchange Plan........................... 23
Authorized Telephone Trading...................... 24
Systematic Cash Withdrawal Plan................... 24
Dividends, Distributions and
Tax Status........................................ 25
Description of Common Stock....................... 26
Counsel and Auditors.............................. 27
Custodian, Transfer Agent and
Dividend Disbursing Agent......................... 27
Additional Information............................ 27
</TABLE>
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
Prospectus Dated June 1, 1995
As Supplemented September 1, 1995
IAI Developing Countries Fund ("Developing Countries Fund") is a separate
portfolio of IAI Investment Funds III, Inc., a registered investment company
authorized to issue its shares of common stock in more than one series.
Developing Countries Fund seeks to achieve its objective of long-term capital
appreciation by investing primarily in equity securities of companies domiciled
or otherwise having substantial operations in developing countries. There can be
no assurance that Developing Countries Fund's investment objective will be
achieved.
Investing in Developing Countries Fund involves significant risks and
considerations not normally associated with a fund which invests primarily in
securities of U.S. issuers and may be considered speculative. Shares of
Developing Countries Fund are not designed to be a complete investment program.
See "Fund Risk Factors" on page 13.
IAI International Fund ("International Fund") is also a separate portfolio of
IAI Investment Funds III, Inc. International Fund's primary objective is capital
appreciation, with current income (principally from dividends) being the
secondary objective. International Fund will endeavor to achieve its objectives
by investing, under normal circumstances, at least 95% of its portfolio in
equity and equity-related securities of non-United States issuers.
Investing in International Fund involves considerations not normally associated
with a fund which invests primarily in securities of U.S. issuers. Shares of
International Fund are not designed to be a complete investment program. See
"Fund Risk Factors" on page 13.
This Prospectus sets forth concisely the information which a prospective
investor should know about each Fund before investing and it should be retained
for future reference. A "Statement of Additional Information" dated June 1,
1995, which provides a further discussion of certain areas in this Prospectus
and other matters which may be of interest to some investors, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. For a free copy, call or write the Funds at the address or telephone
number shown on the inside back cover of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
Fund Expense Information
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
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IAI Developing Countries Fund IAI International Fund
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<S> <C> <C>
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Redemption Fees None None
Exchange Fees None None
</TABLE>
Annual Fund Operating Expenses (net of reimbursements)
<TABLE>
<CAPTION>
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IAI Developing Countries Fund* IAI International Fund**
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<S> <C> <C>
Management Fee .53% .95%
Rule 12b-1 Fee - .25%
Other Expenses 1.47% .52%
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Total Fund Operating Expenses 2.00% 1.72%
==================================================================
</TABLE>
Fund Directors
Madeline Betsch
W. William Hodgson
George R. Long
Noel P. Rahn
Richard E. Struthers
J. Peter Thompson
Charles H. Withers
* as a percentage of average daily net assets
** as a percentage of average month-end assets
Example: Based upon the levels of Total Fund Operating Expenses listed above,
you would pay the following expenses on a $1,000 investment, assuming a five
percent annual return and redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
----- ------- ------- --------
IAI Developing Countries Fund $20 $63
IAI International Fund $17 $54 $93 $203
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Funds will bear directly or
indirectly. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown. With
respect to International Fund, the information in the table is based upon actual
expenses incurred by the Fund during its fiscal period ended January 31, 1995.
Developing Countries Fund commenced operations on February 10, 1995.
Accordingly, the information in the table reflects expected fees and expenses
for the Fund's fiscal period ending January 31, 1996. Because each Fund's Rule
12b-1 Distribution Fee is based on a percentage of its net assets, long-term
shareholders may pay more than the economic equivalent of the maximum front-end
sales charges permitted by Section 26 of the National Association of Securities
Dealers' Rules of Fair Practice.
For the fiscal period ending January 31, 1996, Investment Advisers, Inc., the
Fund's investment adviser and manager, has voluntarily agreed to reimburse the
expenses of Developing Countries Fund which exceed 2.00% of the Fund's average
daily net assets on an annual basis. Absent such reimbursement, the Management
Fee set forth above would be 1.25%, the Rule 12b-1 Distribution Fee would be
.25% and Total Fund Operating Expenses would be approximately 2.97% of
Developing Countries Fund's average daily net assets.
With respect to International Fund, the Total Fund Operating Expenses are
subject to a contractual expense limitation of 2.00% of the Fund's average
month-end net assets as further described in the section "Management." For
additional information regarding such fees and expenses, see the section
"Management."
Further information concerning fees paid by the Funds is set forth in the
Statement of Additional Information.
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IAI MUTUAL FUNDS
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IAI International Fund
Financial Highlights
The following information has been audited by KMPG Peat Marwick LLP, independent
auditors, whose report is included in the International Fund's Annual Report.
The Annual Report is incorporated by reference in (and is a part of) the
Statement of Additional Information. Such Annual Report may be obtained by
shareholders on request from the Fund at no charge.
<TABLE>
<CAPTION>
Years Ended March 31,
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1995**** 1994 1993 1992 1991 1990 1989 1988*
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value:
Beginning of period $ 13.45 $ 11.22 $ 11.02 $ 10.75 $ 10.70 $ 10.99 $ 9.82 $ 10.02
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Operations:
Net investment income (loss) .11 .06 .06 .15 .30 .11 .12 (.01)
Net realized and unrealized
gains (losses) (.62) 2.56 .60 .67 (.11) .52 1.15 (.19)
Total from operations (.51) 2.62 .66 .82 .19 .63 1.27 (.20)
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Distributions to shareholders from:
Net investment income - (.34) (.04) (.22) - (.13) (.10) -
Net realized gains (.88) (.05) (.42) (.33) (.14) (.79) - -
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Total distributions (.88) (.39) (.46) (.55) (.14) (.92) (.10) -
---------------------------------------------------------------------------------
Net Asset Value:
End of period....................... $ 12.06 $ 13.45 $ 11.22 $ 11.02 $ 10.75 $ 10.70 $ 10.99 $ 9.82
=================================================================================
Total investment return** (4.14%) 23.85% 6.18% 8.10% 1.87% 5.59% 12.99% (1.80%)
Net assets at end of period
(000's omitted) $136,474 $134,796 $59,248 $36,239 $34,421 $29,872 $16,374 $11,883
Ratios:
Expenses to average net assets 1.72%*** 1.74% 1.91% 2.00% 1.73% 1.88% 2.10% 2.10%***
Net investment income
to average net assets 1.04%*** 0.87% 1.42% 1.39% 2.79% 1.01% 1.20% (.20%)***
Portfolio turnover rate
(excluding short-term securities) 27.6% 50.9% 28.6% 35.1% 41.3% 32.9% 71.0% 53.0%
</TABLE>
* Period from April 23, 1987 (commencement of operations) to March 31, 1988.
** Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at net
asset value.
*** Annualized.
**** Period from April 1, 1994 to January 31, 1995. Reflects fiscal year-end
change from March 31 to January 31.
3
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
Investment Performance
From time to time the Funds may advertise performance data including monthly,
quarterly, yearly or cumulative total return and average annual total return
figures. All such figures are based on historical earnings and performance and
are not intended to be indicative of future performance. The investment return
on and principal value of an investment in the Funds will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Total return is the change in value of an investment in a Fund over a given
period, assuming reinvestment of any dividends and capital gains. A cumulative
total return reflects actual performance over a stated period of time. An
average annual total return is a hypothetical rate of return that, if achieved
annually, would have produced the same cumulative total return if performance
had been constant over the entire period.
For additional information regarding the calculation of such total return
figures, see "Investment Performance" in the Statement of Additional
Information. Further information about the performance of the International Fund
is contained in the Fund's Annual Report to shareholders which may be obtained
without charge from the Fund.
Comparative performance information may be used from time to time in advertising
or marketing a Fund's shares, including data on the performance of other mutual
funds, indexes or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit products available
from or through other financial institutions. The composition of these indexes,
averages or products differs from that of the Funds. The comparison of a Fund to
an alternative investment should be made with consideration of differences in
features and expected performance. A Fund may also note its mention in
newspapers, magazines, or other media from time to time. The Funds assume no
responsibility for the accuracy of such data. For additional information on the
types of indexes, averages and periodicals that might be utilized by the Funds
in advertising and sales literature, see the section "Investment Performance" in
the Statement of Additional Information.
Investment Objectives and Policies
Developing Countries Fund
The investment objective of Developing Countries Fund is to provide long-term
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in equity securities of companies domiciled or otherwise having
substantial operations in developing countries. Such objective may not be
changed without shareholder approval. There can be no assurance that the Fund
will achieve its investment objective.
Under normal conditions, at least 65% of Developing Countries Fund's total
assets will be invested in securities of companies domiciled or otherwise having
substantial operations in developing countries. Developing countries include
those generally considered to
4
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
be developing or emerging by the World Bank or the International Finance
Corporation, as well as countries that are classified by the United Nations or
otherwise regarded by their authorities as developing. Countries presently not
considered developing are: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand,
Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Developing Countries Fund may also invest in securities of companies that derive
50% or more of their total revenue from either goods or services produced in
developing countries or sales made in such developing countries and companies
that maintain 50% or more of their assets in developing countries.
Determinations as to eligibility will be based on publicly available information
and inquiries made to the companies.
Developing Countries Fund will not necessarily seek to diversify investments on
a geographic basis or on the basis of the level of economic development of any
particular country. The Fund focuses on equity securities, however, it may also
invest in other types of instruments including debt securities. The Fund has
established no minimum rating criteria for the debt securities in which it may
invest, and such securities may not be rated at all for creditworthiness.
Securities rated in the medium to lower rating categories of nationally
recognized statistical rating organizations and unrated securities of comparable
quality are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with the terms of the security and
generally involve a greater volatility of price than securities in higher rating
categories. Such securities are commonly referred to as junk bonds. Developing
Countries Fund does not currently intend to invest more than 5% of its net
assets in junk bonds. See "Investment Objective and Policies" in the Statement
of Additional Information for additional information regarding ratings of debt
securities. In purchasing such securities, the Fund will rely on IAI's judgment,
analysis and experience in evaluating the creditworthiness of an issuer of such
securities. IAI will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. The Fund does not intend to purchase debt securities that are in
default or which IAI believes will be in default.
International Fund
The primary investment objective of International Fund is capital appreciation
with current income (principally from dividends) being a secondary objective.
The Fund pursues its objectives by investing, under normal circumstances, at
least 95% of its portfolio in equity and equity-related securities (as more
fully described below) of non-United States issuers. Such objectives may not be
changed without shareholder approval. There can be no assurance that
International Fund will achieve its investment objectives.
International Fund invests primarily in equity securities which have the
potential for above-average capital appreciation. Equity securities in which
International Fund will invest
5
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
include, but are not limited to, common stocks, securities convertible into
common stock, preferred stock, partnership interests and other equity
participations.
When the anticipated total return from debt securities significantly exceeds the
anticipated total return from foreign equity securities, or for temporary
defensive purposes, up to 50% of International Fund's portfolio may be comprised
of cash, cash equivalents, bonds and other debt securities of both United States
and foreign issuers including:
(a) Bonds and other fixed income securities of United States issuers which are
rated within the four highest grades ("investment grade") by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P").
(b) Corporate notes, bonds and other debt securities (such as Eurocurrency
instruments) of non-United States issuers judged by IAI as being equivalent
in repayment security to investment grade domestic obligations, provided
that no more than 35% of International Fund's portfolio will be invested in
foreign corporate debt securities with maturities of greater than one year
at the time of investment.
(c) United States dollars or securities with maturities of one year or less of,
or guaranteed by, the United States Government, its agencies and
instrumentalities.
(d) Foreign currencies or securities of, or guaranteed by, foreign governments
or the agencies or instrumentalities of foreign governments, or securities
issued by supranational agencies (such as the World Bank) that are
equivalent in repayment security to investment grade domestic obligations,
provided that not more than 35% of International Fund's portfolio will be
invested in foreign government obligations having a maturity of greater
than one year from the date of investment.
(e) Short-term debt instruments of domestic and foreign issuers such as
commercial paper, bank certificates of deposit, bankers' acceptances, and
repurchase agreements for such securities (provided that International Fund
will not invest in foreign repurchase agreements and provided further that
the Fund may not invest more than 10% of its total assets in domestic
repurchase agreements and may invest in such repurchase agreements for
defensive purposes only). The commercial paper purchased by the Fund will
consist only of (i) obligations rated either Prime-2 or better by Moody's
or A-2 or better by S&P, or (ii) unrated or foreign obligations issued by
companies considered by IAI to offer equivalent repayment security.
International Fund is not required to maintain any particular geographical or
currency mix of its investments. Therefore, at any particular time, the Fund's
investment portfolio may be substantially or primarily invested in securities of
one or more selected markets where it appears that the available return from
investments in such markets will equal or exceed the return available from
investments in securities of other markets. Under normal circumstances, however,
the Fund currently intends to invest a significant por-
6
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
tion of its assets in countries that generally are representative of the market
capitalization of the securities of the countries comprising the Morgan Stanley
Capital International Europe, Australia, Far East ("EAFE") Index, an unmanaged
index of foreign common stocks. The following table sets forth the approximate
weighting of the EAFE Index based upon relative market capitalizations of
securities in countries comprising the EAFE Index as of January 31, 1995, as
well as the composition of International Fund's portfolio as of the same date:
<TABLE>
<CAPTION>
Int'l.
EAFE Fund's
Index Portfolio
------ ----------
<S> <C> <C>
Far East
Japan 45% 27%
Australia 3% 6%
Malaysia 2% 4%
Singapore 1% 5%
New Zealand - 3%
Hong Kong 3% -
Europe
United Kingdom 16% 15%
Spain 2% 8%
France 6% 8%
Belgium 1% 5%
Italy 3% 2%
Germany 7% 5%
Netherlands 4% 4%
Cash NA 2%
Emerging Markets NA 3%
Bonds NA 3%
Other 7% -
Total 100% 100%
</TABLE>
In making the allocation of assets among the various markets throughout the
world, the Fund considers such factors as prospects for relative economic growth
between foreign countries, expected levels of inflation and interest rates,
government policies influencing business conditions, the range of individual
investment opportunities available to international investors, and other
pertinent financial, tax, social, political and national factors, all in
relation to the prevailing prices of securities in each country or region.
Nearly all foreign securities in which the Fund will invest will be issued by
foreign governments or traded on foreign stock exchanges.
International Fund may from time to time invest more than 50% of its total
assets in Japan, although not less than four different foreign economies will,
under normal circumstances, at any time be represented in the Fund's portfolio.
Other economies in which management anticipates that the Fund may from time to
time concentrate more than 25% of its total assets include the United Kingdom
and Germany.
International Fund may invest in developing countries, which investments involve
exposure to economic structures that are generally less diverse and mature than
in the United States, and to political systems which may be less stable. As
stated in the "Investment Objective and Policies" section for Developing
Countries Fund, developing countries include those generally considered to be
developing or emerging by the World Bank or the International Finance
Corporation, as well as countries that are clas-
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IAI Developing Countries Fund, IAI International Fund
sified by the United Nations or otherwise regarded by their authorities as
developing. In the past, markets of developing countries have been more volatile
than the markets of developed countries. Such markets, however, often have
provided investors with higher returns on their investments. International Fund
will limit its investments in developing countries not included in the EAFE
index to not more than 10% of its total assets. For purposes of determining the
country of an issuer for percentage limitation purposes, the Fund considers
where an issuer has its principal activities and interests, taking into account
such factors as the location of the issuer's assets, personnel, sales and
earnings.
International Fund can use various techniques to increase or decrease its
exposure to changing security prices, interest rates, currency exchange rates,
commodity prices, or other factors that affect security values. These techniques
include buying and selling options and futures contracts, entering into currency
exchange contracts or swap agreements, purchasing indexed securities, and
selling securities short. Further information regarding such techniques is
contained in the Statement of Additional Information.
The Economies of Japan and the United Kingdom
As discussed above, International Fund may from time to time concentrate more
than 25% of its total assets in the economies of Japan, the United Kingdom and
Germany. This section includes a general discussion of the economies of Japan
and the United Kingdom. Although the Fund may concentrate more than 25% of its
assets in the German economy, it does not expect to do so in the upcoming fiscal
year. A discussion of the economy of Germany is set forth in the Statement of
Additional Information.
Reporting, accounting and auditing standards in Japan, the United Kingdom and
Germany differ from American standards in important respects. Corporations in
such countries generally do not provide all of the disclosures required by U.S.
law and accounting practice, and such disclosure may be less timely than
required by such laws and practices.
Japan. Japan is politically organized as a democratic, parliamentary republic
and has a population of approximately 122 million. The Japanese economy is
heavily industrial and export-oriented. Although Japan is dependent upon foreign
economies for raw materials, Japan's balance of payments in recent years has
been strong and positive.
Japan has eight stock exchanges located throughout the country, but over 80% of
all trading is conducted on the Tokyo Stock Exchange.
Prices of stocks listed on the Japanese stock exchange are quoted continuously
during regular business hours. Trading commissions are at fixed scale rates
which vary by the type and the value of the transaction, but can be negotiable
for large transactions.
Securities in Japan are denominated and quoted in yen. Yen are fully convertible
and transferable based on floating exchange rates into all currencies, without
administrative or legal restrictions, for both nonresidents and residents of
Japan.
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United Kingdom. The United Kingdom is a constitutional monarchy and consists of
England, Scotland, Wales and Northern Ireland. The population of the United
Kingdom is approximately 57 million. Industry in the United Kingdom is
predominantly owned in the private sector except for certain state owned
entities in the transportation and energy industries.
The United Kingdom is centered in London. In October of 1986, stock exchange
commission rates were deregulated and stock exchange membership was opened up to
limited companies and to non-residents of the United Kingdom. Additionally, the
Financial Services Act (the "FSA") substantially restructured the U.K.
securities laws and deregulated the London Stock Exchange's own rules. FSA
created a new regulatory body known as the Securities and Investments Board (the
"SIB"), which has the power to delegate certain of its functions to various
self-regulatory organizations, of which the London Stock Exchange is one. Under
the FSA structure, the London Stock Exchange will continue to be largely self-
regulating with fundamentally the same types of self-regulatory rules in effect
prior to FSA.
Stock prices are continuously quoted during business hours on the London Stock
Exchange, and are negotiable, but have formalized for institutions. Trading
commissions in the U.K. are negotiable.
Securities in the United Kingdom are denominated and quoted in "pounds
sterling". Pounds sterling are fully convertible and transferable based on
floating exchange rates into all currencies, without administrative or legal
restrictions, for both non-residents and residents of the United Kingdom.
Portfolio Securities and other Fund Investment Techniques
The ability of the Funds to utilize certain of the investment techniques
discussed below may be subject to limitations and may subject the Funds to
additional risks. Please refer to the section "Fund Risk Factors" below and to
the Statement of Additional Information for more information regarding such
limitations and risks.
Depositary Receipts
In addition to investing in such securities directly, each Fund may invest in
the securities of foreign issuers in the form of sponsored and unsponsored
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global
Depositary Receipts (GDRs) or other securities convertible into securities of
foreign issuers. Generally, such securities evidence ownership of and may be
converted into securities issued by a foreign corporation. The issuers of
unsponsored depository receipts are not obligated to disclose material
information in the United States, and therefore, there may not be a correlation
between such information and the market value of such securities.
Foreign Index Linked Instruments
Each Fund may invest in instruments issued by the U.S. or a foreign government
or by private issuers that return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index ("Foreign
Index Linked Instruments"). Foreign Index Linked Instruments may offer
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IAI Developing Countries Fund, IAI International Fund
higher yields than comparable securities linked to purely domestic indexes but
also may be more volatile. Foreign Index Linked Instruments are relatively
recent innovations for which the market has not yet been fully developed and,
accordingly, they typically are less liquid than comparable securities linked to
purely domestic indexes. In addition, the value of Foreign Index Linked
Instruments will be affected by fluctuations in foreign exchange rates or in
foreign interest rates. Foreign currency gains and losses with respect to
Foreign Index Linked Instruments may affect the amount and timing of income
recognized by such Fund.
Brady Bonds
Each Fund may invest in Brady Bonds and other sovereign debt securities of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities
issued under the framework of the Brady Plan, a mechanism for debtor nations to
restructure their outstanding external indebtedness. Brady Bonds have been
issued only recently and, accordingly, do not have a long payment history.
Zero Coupon Securities
Each Fund may invest in zero coupon securities. Such securities are debt
obligations which do not entitle the holder to periodic interest payments prior
to maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and the perceived credit quality of
the issuer. Zero coupon securities can be sold prior to their due date in the
secondary market at the then-prevailing market value which depends primarily on
the time remaining to maturity, prevailing levels of interest rates and the
perceived credit quality of the issuer. The market prices of zero coupon
securities are more volatile than the market prices of securities of comparable
quality and similar maturity that pay interest periodically and may respond to a
greater degree to fluctuations in interest rates than do such non-zero coupon
securities.
Foreign Currency Transactions
The value of the assets of a Fund as measured in United States dollars or a
foreign currency or currencies may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations, and
each Fund may incur costs in connection with conversions between various
currencies. Each Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
directly between currency traders (usually large commercial banks) and their
customers.
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IAI Developing Countries Fund, IAI International Fund
Each Fund may enter into foreign currency transactions for hedging purposes only
and may not speculate on the fluctuations of foreign currency exchange rates.
Each Fund may hedge against adverse changes in foreign currency exchange rates
between the trade and settlement dates with respect to foreign securities it is
purchasing or during the holding period with respect to foreign securities in
its portfolio. With respect to foreign securities in its portfolio, each Fund
may hedge a maximum of 50% of the value of its investment portfolio by
establishing the value of such securities in U.S. dollars. Additionally, the
Fund may hedge a maximum of 25% of the value of its investment portfolio by
establishing the value of such securities in another foreign currency or
currencies which IAI believes to be more stable than the currencies in which
such securities are denominated.
When a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to establish the cost or
proceeds in U.S. dollars or another foreign currency. By entering into a forward
contract in such currency for the purchase or sale of the amount of foreign
currency involved in an underlying security investment, the Fund is able to
protect itself against a possible loss between trade and settlement dates of a
transaction or during the period of an investment in a foreign security
resulting from an adverse change in the relationship between such two
currencies. However, this tends to limit potential gains which might result from
a positive change in such currency relationships. A Fund may also hedge its
foreign currency exchange rate risk by engaging in currency financial futures
and options and forward foreign currency transactions.
When IAI believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar or another foreign currency, it may
enter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of al Fund's portfolio securities
denominated in such foreign currency. The forecasting of short-term currency
market movement is difficult and the successful execution of a short-term
hedging strategy is uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a contract. Accordingly, it may be
necessary for a Fund to purchase additional currency on the spot market (and
bear the expense of such purchase) if the market value of the security is less
than the amount of foreign currency the Fund is obligated to deliver when a
decision is made to sell the security and make delivery of the foreign currency
in settlement of a forward contract. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of foreign currency and the date it enters into an offsetting contract for
the purchase of the foreign currency, the
11
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IAI Developing Countries Fund, IAI International Fund
Fund would realize a gain to the extent the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund would suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. Although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, they also tend to limit any
potential gain which might result should the value of such currency increase. A
Fund will have to convert its holders of foreign currencies into U.S. dollars
from time to time. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the "spread")
between the prices at which they are buying and selling various currencies.
Temporary Investments
The Funds reserve the right, as a temporary defensive measure, to provide for
redemptions or in anticipation of investment in securities of companies
domiciled or otherwise having substantial operations in developing countries, to
hold cash or cash equivalents (in U.S. dollars or foreign currencies) and short-
term securities, including money market securities.
Adjusting Investment Exposure
The Funds can use various techniques to increase or decrease exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices, or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling options and futures
contracts, entering into currency exchange contracts or swap agreements,
purchasing indexed securities, and selling securities short.
Repurchase Agreements
Each Fund may invest in repurchase agreements relating to the securities in
which it may invest. In a repurchase agreement, a Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent. Foreign repurchase agreements may be less well secured than U.S.
repurchase agreements, and may be denominated in foreign currencies. They may
involve greater risk of loss if the counterparty defaults. Some counterparties
in these transactions may be less creditworthy than those in U.S. markets.
Borrowing
Each Fund may borrow from banks for temporary or emergency purposes or through
reverse repurchase agreements. If a Fund borrows money, its share price may be
subject to greater fluctuation until the borrowing is paid off. If a Fund makes
additional investments while borrowings are outstanding, this may be considered
a form of leverage.
Closed-End Investment Companies
A number of countries have authorized the formation of closed-end investment
companies to facilitate indirect foreign investment in their capital markets.
Each Fund may invest up to 10% of its total assets in securities of closed-end
investment companies. Shares of certain closed-end investment companies may at
times be acquired only at mar-
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IAI MUTUAL FUNDS
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IAI Developing Countries Fund, IAI International Fund
ket prices representing premiums to their net asset values. In the event that
shares acquired at a premium subsequently decline in price relative to their net
asset value or the value of portfolio investments held by such closed-end
companies declines, a Fund and its shareholders may experience a loss. If a Fund
acquires shares of closed-end investment companies, Fund shareholders would bear
both their proportionate share of expenses in such Fund (including management
and advisory fees) and, indirectly, the expenses of such closed-end investment
companies.
Illiquid Securities
The Developing Countries Fund may invest up to 10% of its total assets, while
the International Fund may invest up to 15% of its total assets, in securities
that are considered illiquid. This illiquidity may be due to the absence of a
readily available market or due to legal or contractual restrictions. Difficulty
in selling such securities may result in a loss or may be costly to a Fund.
Portfolio Turnover
The Funds will dispose of securities without regard to the time they have been
held when such action appears advisable to management either as a result of
securities having reached a price objective, or by reason of developments not
foreseen at the time of the investment decision. Since investment changes
usually will be made without reference to the length of time a security has been
held, a significant number of short-term transactions may result. Accordingly, a
Fund's annual portfolio turnover rate cannot be anticipated and may be
relatively high. A higher turnover rate generally results in higher brokerage
and other costs for a Fund. International Fund's historical portfolio turnover
rates are set forth in the section "Financial Highlights."
Further information regarding these and other techniques is contained in the
Statement of Additional Information.
Fund Risk Factors
Foreign Investment Risk Factors
Developing Countries Fund is designed for aggressive investors interested in
the investment opportunities offered in developing countries. To the extent that
International Fund invests in developing countries, the Fund may be subject to
additional risk. While IAI believes that investing in developing countries
presents the possibility for significant growth over the long-term, it also
entails significant risks. Many investments in developing countries can be
considered speculative, and the price of securities can be much more volatile
than in the more developed markets. This difference reflects the greater
uncertainties of investing in less established markets and economies.
Investing in foreign securities typically involves additional risks than
investing in securities of U.S. issuers. These risks are often heightened for
investments in developing countries and include, but are not limited to, the
risk of fluctuations in the value of the currencies in which they are
denominated, including the devaluation of the currencies of such countries
relative to the U.S. dollar, the risk of adverse political and economic
developments and the possibility of expropriation,
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IAI Developing Countries Fund, IAI International Fund
nationalization or confiscatory taxation or limitations on the removal of funds
or other assets of the Funds. Additionally, the economies of many developing
countries continue to experience significant problems, including high inflation
rates, high interest rates, large external debt and continuing trade deficits
and are characterized by extreme poverty, high unemployment and a significant
dependence on limited industries. Because the Funds will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may affect the value of securities in the
portfolio. Foreign currency exchange rates are determined by forces of supply
and demand in the foreign exchange markets and other economic and financial
conditions affecting the world economy. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of a Fund's holdings of securities denominated in such currency and, therefore,
will cause an overall decline in a Fund's net asset value and net investment
income and capital gains, if any, to be distributed in U.S. dollars to
shareholders by such Fund. In many developing countries, there is less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. In addition,
there also may be less publicly available information about foreign issuers than
domestic issuers, and foreign issuers generally are not subject to the uniform
accounting, auditing and financial reporting standards, practices and
requirements applicable to domestic issuers. The foreign securities markets of
many of the countries in which the Funds may invest may also be smaller, less
liquid and subject to greater price volatility than those in the United States.
As an open-end investment company, each Fund is limited in the extent to which
it may invest in illiquid securities. Further, the Funds may encounter
difficulties or be unable to pursue legal remedies and obtain judgments in
foreign courts. These factors could make foreign investments, especially those
in developing countries, more volatile.
Brokerage commissions, custodial services, and other costs relating to
investment in foreign countries and developing markets are generally more
expensive than in the United States. Such markets have different clearance and
settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. The inability of
a Fund to make intended security purchases due to settlement problems could
cause such Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to a Fund due to subsequent declines in value of the portfolio
security or, if a Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
Several countries restrict, to varying degrees, foreign investments in their
securities markets. Government and private restrictions take a variety of forms,
including (a) limitations on the amount of funds that may be introduced into or
repatriated from the country (including limitations on repatriation of
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IAI Developing Countries Fund, IAI International Fund
investment income and capital gains); (b) prohibitions or substantial
restrictions on foreign investment in certain industries or market sectors, such
as defense, energy and transportation; (c) restrictions (whether contained in
the charter of an individual company or mandated by the government) on the
percentage of securities of a single issuer which may be owned by a foreign
investor; (d) limitations on the types of securities which a foreign investor
may purchase; and (e) restrictions on a foreign investor's right to invest in
companies whose securities are not publicly traded. In some circumstances, these
restrictions may limit or preclude investment in certain countries or may
increase the cost of investing in securities of particular companies.
A Fund's interest and dividend income from foreign issuers may be subject to
non-U.S. withholding taxes. A Fund also may be subject to taxes on trading
profits or on transfers of securities in some countries. The imposition of these
taxes will increase the cost to a Fund of investing in any country imposing such
taxes. For U.S. tax purposes, U.S. shareholders may be entitled to a credit or
deduction to the extent of any foreign income taxes paid by such Fund. See
"Dividends, Distributions and Tax Status."
Each Fund may purchase sovereign debt instruments issued or guaranteed by
foreign governments or their agencies. Sovereign debt may be in the form of
conventional securities or other types of debt instruments such as loans or loan
participations. The sovereign debt in which a Fund may invest may involve a high
degree of risk, including the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay principal and
interest when due, and may require renegotiations or rescheduling of debt
payments. In addition, prospects for repayment of principal and interest may
depend on political as well as economic factors. A Fund may have limited
recourse in the event of default on a sovereign debt instrument.
Many of the currencies of developing countries have experienced steady
devaluations relative to the U.S. dollar, and major devaluations have
historically occurred in certain countries. Devaluations in the currencies in
which a Fund's portfolio securities are denominated may have a detrimental
impact on such Fund. Some developing countries also may have managed currencies
which are not free floating against the U.S. dollar. In addition, there is a
risk that certain developing countries may restrict the free conversion of their
currencies into other currencies. Further, the currencies of certain developing
countries may not be internally traded.
Many developing countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on the economies and securities markets of certain developing countries.
The governments of many developing countries have exercised and continue to
exercise a significant influence over many aspects of the private sector.
Government actions concerning the economy could have a significant effect on
market conditions and prices and/or yields of securities in which a Fund
invests.
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IAI Developing Countries Fund, IAI International Fund
In some countries, the securities of banks or other financial institutions are
among the most actively traded securities. Each Fund is restricted in its
ability to invest in securities of an issuer which, in its most recent year,
derived more than 15% of its revenues from "securities related activities," as
defined by the rules under the Investment Company Act of 1940.
Risks of Transactions in Derivatives
Each Fund will spread investment risk by limiting its holdings in any one
company or industry. IAI may use futures, options, swap and currency exchange
agreements as well as short sales to adjust the risk and return characteristics
of such Fund's portfolio of investments. If IAI judges market conditions
incorrectly or employs a strategy that does not correlate well with a Fund's
investments, use of these techniques could result in a loss, regardless of
whether the intent was to reduce risk or increase return. Use of these
techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of risk assumed. In addition, these
techniques could result in a loss if the counterparty to the transaction is
unable to perform as promised. Moreover, a liquid secondary market for any
futures or options contract may not be available when a futures or options
position is sought to be closed. Please refer to the Statement of Additional
Information which further describes these risks.
Risks of Lower-Rated Debt Securities
Developing Countries Fund may invest in debt securities commonly known as "junk"
bonds. Such securities are subject to higher risks and greater market
fluctuations than are lower-yielding, higher-rated securities. The price of junk
bonds has been found to be less sensitive to changes in prevailing interest
rates than higher-rated investments, but is likely to be more sensitive to
adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest payment obligations, to
meet their projected business goals or to obtain additional financing. If the
issuers of a fixed-income security owned by Developing Countries Fund were to
default, Developing Countries Fund might incur additional expenses to seek
recovery. The risk of loss due to default by issuers of junk bonds is
significantly greater than that associated with higher-rated securities because
such securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. In addition, periods of economic
uncertainty and change can be expected to result in an increased volatility of
market prices of junk bonds and a concomitant volatility in the net asset value
of a share of Developing Countries Fund.
The secondary market for junk bonds is less liquid than the markets for higher
quality securities and, as such, may have an adverse effect on the market prices
of certain securities. The limited liquidity of the market may also adversely
affect the ability of Developing Countries Fund to arrive at a fair value for
certain junk bonds at certain times and could
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make it difficult for Developing Countries Fund to sell certain securities.
Both International and Developing Countries Funds are subject to certain other
investment policies and restrictions described in the Statement of Additional
Information, some of which are fundamental and may not be changed without the
approval of the shareholders of a Fund. Please refer to the Statement of
Additional Information for a further discussion concerning the risks associated
with investing in internationally and developing countries.
Management
Under Minnesota law, each Fund's Board of Directors is generally responsible for
the overall operation and management of each Fund. IAI serves as the investment
adviser and manager to each Fund pursuant to a written advisory agreement (the
"Advisory Agreement"). IAI has delegated to IAI International certain of its
responsibilities and obligations as the Funds' investment adviser pursuant to a
written agreement (the "Subadvisory Agreement"). IAI International is based in
London and maintains a United States representative office with the same address
as IAI. IAI and IAI International (collectively, "IAI") are affiliates of Hill
Samuel Group ("Hill Samuel"), an international merchant banking and financial
services group based in London, England (hereinafter, references to IAI shall
include IAI International where appropriate). Hill Samuel, in turn, is owned by
TSB Group plc, a publicly held financial services organization headquartered in
London, England. TSB Group plc is one of the largest personal and corporate
financial services groups in the United Kingdom and is engaged in a wide range
of activities including banking, unit linked life assurance, unit trust
management, investment management, credit card and finance house business. The
address of IAI is that of the Funds. IAI also furnishes investment advice to
other concerns including other investment companies, pension and profit sharing
plans, portfolios of foundations, religious, educational and charitable
institutions, trusts, municipalities and individuals, having total assets in
excess of $14 billion.
Under the Advisory Agreement, IAI provides the Funds with investment advice,
statistical and research facilities, and certain equipment and services,
including, but not limited to, office space and necessary office facilities,
equipment, and the services of required personnel. Under the Subadvisory
Agreement, IAI International has the authority and responsibility to make and
execute investment decisions for the Fund within the framework of the Funds'
investment policies, subject to review by IAI and the Funds' Board of Directors.
As compensation for these services, the Developing Countries Fund has agreed to
pay IAI a monthly advisory fee at the initial annual rate of 1.25% of the Fund's
average daily net assets, which fee declines to 1.00% of the Fund's average
daily net assets as the amount of assets in Developing Countries Fund grows.
With respect to International Fund, the Fund has agreed to pay a monthly
advisory fee at the initial annual rate of 1.00% of the Fund's average month-end
net assets, which fee declines to .70% of the Fund's average month-end net
assets as the amount of assets in the International Fund grows. IAI pays
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one-half of its advisory fee from the Funds to IAI International.
Roy Gillson and Robert Swift have responsibility for the management of
International Fund. Mr. Gillson is IAI International's Chief Investment Officer
and a member of its Board of Directors. Mr. Gillson has managed the
International Fund since 1990 and joined IAI International in 1983. Mr. Swift is
a Far East Equity Strategist, as well as Director of IAI International. Mr.
Swift began co-managing the International Fund in January 1995. Mr. Swift
joined IAI International in 1991 as a portfolio manager, and prior thereto was a
portfolio manager with Pring Dean, Australia since 1988. Mr. Gillson has
responsibility for the management of Developing Countries Fund and has managed
the Fund since its inception in February 1995.
Pursuant to the terms of an Administrative Agreement, IAI also provides all
required administrative, stock transfer, redemption, dividend disbursing and
accounting services, including, for example, the maintenance of a Fund's
accounts, books and records, the daily calculation of a Fund's net asset value,
daily and periodic reports, all information necessary to complete tax returns,
questionnaires and other reports requested by a Fund, the maintenance of stock
registry records, the processing of requested account registration changes and
redemption requests, and the administration of payments of dividends and
distributions declared by a Fund. As compensation for these services, the
Developing Countries Fund pays IAI an administrative fee at an annual rate of
.30% of the Fund's average daily net assets, while International Fund pays IAI
an administrative fee at an annual rate of .30% of the Fund's average month-end
net assets. IAI may use all or a portion of this administrative fee to pay
certain institutions which have contracted with IAI to provide certain
administrative services to their customers who invest in a Fund. Such services
include, but are not limited to, shareholder assistance and communication,
transaction processing and settlement, account set-up maintenance, shareholder
tax reporting, and accounting.
In addition to the advisory fee and the administrative fee paid to IAI, each
Fund pays all its other costs and expenses, including, for example, costs
incurred in the purchase and sale of assets, interest, taxes, charges of the
custodian of the Funds' assets, costs of reports and proxy materials sent to
Fund shareholders, fees paid for independent accounting and legal services,
costs of printing prospectuses for Fund shareholders and registering the Fund
shares, postage, fees to disinterested directors, insurance premiums and costs
of attending investment conferences.
The Advisory Agreement for International Fund provides that IAI shall reimburse
IAI International for operating expenses (other than interest and in certain
circumstances, taxes and extraordinary expenses), which, for any year, exceed
2.00% of such Fund's average month-end net assets. Additionally, IAI may from
time to time waive or reduce its management and/or administrative fee or
otherwise reimburse Fund expenses. For its fiscal year ending January 31, 1996,
IAI has voluntarily agreed to reimburse Developing Countries Fund expenses which
exceed
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IAI Developing Countries Fund, IAI International Fund
2.00% of its average daily net assets on an annual basis. IAI reserves the right
to rescind such waiver at any time upon notice to shareholders. IAI shall not be
liable for any loss suffered by a Fund in the absence of willful misfeasance,
bad faith or gross negligence in the performance of its duties and obligations.
Plan of Distribution
Each Fund has adopted a written plan of distribution (the "Plan") in accordance
with Rule 12b-1 under the 1940 Act pursuant to which it pays a distribution fee
as described below. Rule 12b-1 adopted by the Securities and Exchange Commission
under the 1940 Act permits an investment company to directly or indirectly pay
expenses associated with the distribution of the investment company's shares in
accordance with a plan adopted by the company's board of directors and approved
by its shareholders. Pursuant to the Plan, each Fund has entered into a
Distribution and Shareholders Services Agreement with IAI Securities, Inc. (the
"Underwriter") providing for the payment by each Fund to the Underwriter of a
distribution fee to cover expenses incurred by the Underwriter in distributing
the Fund's shares. Subject to the expense limitations described above,
Developing Countries Fund pays the Underwriter a distribution fee at an annual
rate of .25% of the Fund's average daily net assets, and International Fund pays
the Underwriter a distribution fee at an annual rate of .25% of the Fund's
average month-end net assets (which amount will be paid to the Underwriter
regardless of amounts spent by the Underwriter in distributing a Fund's shares).
The Rule 12b-1 Fee may be used by a Fund to compensate the Underwriter for the
provision of certain services to Fund shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding a Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Underwriter may use the Rule 12b-1 Fee to make payments to qualifying
broker-dealers and financial institutions that provide such services.
The Rule 12b-1 Fee may also be used by the Underwriter for the purposes of
financing any activity which is primarily intended to result in the sale of
shares of a Fund. The expenses of such activities include, by way of example but
not by way of limitation, costs of prospectuses, semiannual reports, costs of
quarterly reports and monthly letters to prospective shareholders, expenses
associated with the preparation and distribution of sales literature and
advertising of any type, compensation and benefits paid to and expenses incurred
by personnel, including supervisory personnel, involved in direct mail and
advertising activities and activities relating to the direct marketing of Fund
shares to the public, and compensation to other broker-dealers for selling Fund
shares.
With respect to International Fund, the distribution fees payable by the Fund
are subject to the limitation on Fund operating expenses set forth in the
Advisory Agreement described above. Additionally, the Underwriter, in its sole
and absolute discretion, may from time to time out of its own assets pay for
certain additional costs of dis-
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IAI Developing Countries Fund, IAI International Fund
tributing the Fund's shares. For the fiscal period ended January 31, 1995,
International Fund paid the Underwriter a distribution fee of .25% of its
average month-end net assets. The Underwriter is an affiliate of IAI and its
offices are the same as those of the Fund.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., IAI may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute the Fund's securities
transactions.
Computation of Net Asset Value and Pricing
Each Fund is open for business each day the New York Stock Exchange ("NYSE") is
open. IAI normally calculates a Fund's net asset value ("NAV") as of the close
of business of the NYSE, normally 3 p.m. Central time.
A Fund's NAV is the value of a single share. The NAV is computed by adding up
the value of a Fund's investments, cash, and other assets, subtracting its
liabilities, and then dividing the result by the number of shares outstanding.
A Fund's investments with remaining maturities of 60 days or less may be valued
on the basis of amortized cost. This method minimizes the effect of changes in a
security's market value. Other portfolio securities and assets are valued
primarily on the basis of market quotations or, if quotations are not readily
available, by a method that the Board of Directors believes accurately reflects
fair value. Foreign securities are valued on the basis of quotations from the
primary market in which they are traded.
Because of the Funds' need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of net asset value does
not take place contemporaneously with the determination of the prices of a
Fund's portfolio securities. For purposes of determining a Fund's net asset
value, all assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values using current exchange rates. If an
event were to occur after the value of a Fund instrument was so established but
before the net asset value per share is determined which was likely to
materially change the net asset value, such instrument shall be valued using
fair value considerations by the Board of Directors or its delegates.
The offering price (price to buy one share) and redemption price (price to sell
one share) are referred to as a Fund's NAV.
Purchase of Shares
Each Fund offers its shares continually to the public at the net asset value of
such shares. Shares may be purchased directly from a Fund or through certain
security dealers who have responsibility to promptly transmit orders and may
charge a processing fee, provided that the Fund whose shares are being purchased
is duly registered in the state of the purchaser's residence, if required. No
sales load or commission is charged in connection with the purchase of Fund
shares.
The minimum initial investment to establish an account with the IAI Family of
Funds is
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IAI Developing Countries Fund, IAI International Fund
$5,000. Such initial investment may be allocated among a Fund and other funds in
the IAI Family of Funds as desired, provided that no less than $1,000 is
allocated to any one fund. The minimum initial investment for IRA accounts is
$2,000, provided that the minimum amount that may be allocated to any one fund
is $1,000. Once the account minimum has been met, subsequent purchases can be
made in a Fund for $100 or more.
Investors may satisfy the minimum investment requirement by participating in the
STAR Program. Participation in the STAR Program requires an initial investment
of $1,000 per Fund and a commitment to invest an aggregate of $5,000 within 24
months. If a STAR Program participant does not invest an aggregate of $5,000 in
the IAI Family of Funds within 24 months, IAI may, at its option, redeem such
shareholder's interest. Investors wishing to participate in the STAR Program
should contact a Fund to obtain a STAR Program application.
To purchase shares, forward the completed application and a check payable to
"IAI Funds" to a Fund. Upon receipt, your account will be credited with the
number of full and fractional shares which can be purchased at the net asset
value next determined.
Purchases of shares are subject to acceptance or rejection by a Fund on the same
day the purchase order is received and are not binding until so accepted. It is
the policy of the Funds and the Underwriter to keep confidential information
contained in the application and regarding the account of an investor or
potential investor in the Funds.
All correspondence relating to the purchase of shares should be directed to the
office of the Fund, P.O. Box 357, Minneapolis, Minnesota 55440 or, if using
overnight delivery, to 601 2nd Avenue South, Minneapolis, Minnesota 55402. For
assistance in completing the application please contact IAI Mutual Fund
Shareholder Services at 1-800-945-3863.
Retirement Plans
Shares of Developing Countries and International Fund may be an appropriate
investment medium for various Retirement Plans. Persons desiring information
about establishing an Individual Retirement Account (IRA) (for employed persons
and their spouses) or other Retirement Plans should contact a Fund at 1-800-945-
3863. All Retirement Plans involve a long-term commitment of assets and are
subject to various legal requirements and restrictions. The legal and tax
implications may vary according to the circumstances of the individual investor.
Therefore, you are urged to consult with an attorney or tax adviser prior to the
establishment of such a plan.
Automatic Investment Plan
Investors may arrange to make regular investments of $100 or more per fund on a
monthly basis, effective as of the 18th day of each month (or the next business
day), through automatic deductions from their checking or savings account. Such
investors may, of course, terminate their participation in the Automatic
Investment Plan at anytime upon written notice to a Fund. Any changes or
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IAI Developing Countries Fund, IAI International Fund
instructions to terminate existing Automatic Investment Plans must be received
by the last business day of the preceding month in which the change or
termination is to take place. Investors interested in participating in the
Automatic Investment Plan should complete the Automatic Investment Plan
application and return it to a Fund.
Redemption of Shares
Registered holders of Fund shares may at any time require a Fund to redeem their
shares upon their written request. Shareholders may redeem shares by phone
(subject to a limit of $50,000) provided such shareholders have authorized the
Fund to accept telephone instructions.
With respect to International Fund only, shareholders who redeem shares by
presenting stock certificates must endorse on the back of the certificate with
the signature of the person whose name appears on the certificate. If no
certificate has been issued, redemption instructions must be signed by the
person(s) in whose name the shares are registered.
If the redemption proceeds are to be paid or mailed to any person other than the
shareholder of record or if redemption proceeds are in excess of $50,000, a Fund
will require that the signature on the written instructions be guaranteed by a
participant in a signature guarantee program, which may include certain national
banks or trust companies or certain member firms of national securities
exchanges. (Notarization by a Notary Public is NOT ACCEPTED.) If the shares are
held of record in the name of a corporation, partnership, trust or fiduciary,
the Fund may require additional evidence of authority prior to accepting a
request for redemption. A Fund will not send redemption proceeds until checks
(including certified checks or cashiers checks) received in payment for shares
have cleared.
The redemption proceeds received by the investor are based on the net asset
value next determined after redemption instructions in good order are received
by a Fund. Since the value of shares redeemed is based upon the value of the
Fund investment at the time of redemption, it may be more or less than the price
originally paid for the shares.
Payment for shares redeemed will ordinarily be made within seven days after a
request for redemption has been made. Normally a Fund will mail payment for
shares redeemed on the business day following receipt of the redemption request.
Following a redemption or transfer request, if the value of a shareholder's
interest in a Fund falls below $500, such Fund reserves the right to redeem such
shareholder's entire interest and remit such amount. Such a redemption will only
be effected following: (a) a redemption or transfer by a shareholder which
causes the value of such shareholder's interest in the Fund to fall below $500;
(b) the mailing by such Fund to such shareholder of a notice of intention to
redeem; and (c) the passage of at least six months from the date of such
mailing, during which time the investor will have the opportunity to make an
additional investment in such Fund to increase the value of such investor's
account to at least $500.
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IAI Developing Countries Fund, IAI International Fund
Exchange privilege
The Exchange Privilege enables shareholders to purchase, in exchange for shares
of a Fund, shares of certain other funds managed by IAI. These funds have
different investment objectives from the Funds. Shareholders may exchange shares
of a Fund for shares of another fund managed by IAI, provided that the fund
whose shares will be acquired is duly registered in the state of the
shareholder's residence and the shareholder otherwise satisfies the fund's
purchase requirements. Although the Funds do not currently charge a fee for use
of the Exchange Privilege, they reserve the right to do so in the future.
Because excessive trading can hurt Fund performance and shareholders, there is a
limit of four exchanges out of each Fund per calendar year per account. Accounts
under common ownership or control, including accounts with the same taxpayer
identification number, will be counted together for purposes of the four
exchange limit. Each Fund reserves the right to temporarily or permanently
terminate the Exchange Privilege of any investor who exceeds this limit. The
limit may be modified for certain retirement plan accounts, as required by the
applicable plan document and/or relevant Department of Labor regulations, and
for Automatic Exchange Plan participants. Each Fund also reserves the right to
refuse or limit exchange purchases by any investor if, in IAI's judgment, such
Fund would be unable to invest the money effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected.
Fund shareholders wishing to exercise the Exchange Privilege should notify a
Fund in writing or, provided such shareholders have authorized a Fund to accept
telephone instructions, by telephone. At the time of the exchange, if the net
asset value of the shares redeemed in connection with the exchange is greater
than the investor's cost, a taxable capital gain will be realized. A capital
loss will be realized if at the time of the exchange the net asset value of the
shares redeemed in the exchange is less than the investor's cost. The Fund
reserves the right to terminate or modify the Exchange Privilege in the future.
Automatic Exchange Plan
Investors may arrange to make regular exchanges of $100 or more between any of
the funds in the IAI Mutual Fund Family on a monthly basis. Exchanges will take
place at the closing price of the fifth day of each month (or the next business
day). Shareholders are responsible for making sure sufficient shares exist in
the Fund account from which the exchange takes place. If there are not
sufficient funds in a Fund account to meet the requested exchange amount, the
Automatic Exchange Plan will be suspended. Shareholders may not close Fund
accounts through the Automatic Exchange Plan. Investors interested in
participating in the Automatic Exchange Plan should complete the Automatic
Exchange Plan portion of their application. For assistance in completing the
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IAI Developing Countries Fund, IAI International Fund
application contact IAI Mutual Fund Shareholder Services at 1-800-945-3863.
Authorized Telephone Trading
Investors can transact account exchanges and redemptions via the telephone by
completing the Authorized Telephone Trading section of the IAI Mutual Fund
application and returning it to a Fund. Investors requesting telephone trading
privileges will be provided with a personal identification number ("PIN") that
must accompany any instructions by phone. Shares will be redeemed or exchanged
at the next determined net asset value. All proceeds must be made payable to the
owner(s) of record and delivered to the address of record.
In order to confirm that telephone instructions for redemptions and exchanges
are genuine, the Fund has established reasonable procedures, including the
requirement that a personal identification number accompany telephone
instructions. If a Fund or transfer agent fails to follow these procedures, such
Fund may be liable for losses due to unauthorized or fraudulent instructions.
None of the Funds, its transfer agent, IAI, or its principal Underwriter will be
liable for any loss, injury, damage, or expense for acting upon telephone
instructions believed to be genuine, and will otherwise not be responsible for
the authenticity of any telephone instructions, and, accordingly, the investor
bears the risk of loss resulting from telephone instructions. All telephone
redemptions and exchange requests will be tape recorded. Telephone redemptions
are not permitted on IRA or Simplified Employee Pension ("SEP") accounts. Please
call the Fund for a distribution form.
Systematic Cash Withdrawal Plan
Each Fund has available a Systematic Cash Withdrawal Plan for any investor
desiring to follow a program of systematically withdrawing a fixed amount of
money from an investment in shares of a Fund. An investment of $10,000 is
required to establish the plan. Payments under the plan will be made monthly or
quarterly in amounts of $100 or more. Shares will be sold with the closing price
of the 15th of the applicable month (or the next business day). To provide funds
for payment, a Fund will redeem as many full and fractional shares as necessary
at the redemption price, which is net asset value.
Payments under this plan, unless pursuant to a retirement plan, should not be
considered income. Withdrawal payments may exceed dividends and distributions
and, to this extent, there will be a reduction in the investor's equity. An
investor should also understand that this plan cannot insure profit, nor does it
protect against any loss in a declining market. Careful consideration should be
given to the amount withdrawn each month. Excessive withdrawals could lead to a
serious depletion of equity, especially during periods of declining market
values. Fund management will be available for consultation in this matter.
Plan application forms are available through the Funds. If you would like
assistance in completing the application contact IAI Mutual Fund Shareholder
Services at 1-800-945-3863.
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IAI Developing Countries Fund, IAI International Fund
Dividends, Distributions and Tax Status
The policy of Developing Countries Fund is to pay dividends from net investment
income and to make distributions of realized capital gains, if any, annually.
The policy of International Fund is to pay dividends from net investment income
semiannually and to make distributions of realized capital gains, if any,
annually. However, provisions in the Internal Revenue Code of 1986, as amended
(the "Code"), may result in additional net investment income and capital gains
distributions by a Fund. When you open an account, you should specify on your
application how you want to receive your distributions. Each Fund offers three
options: Full Reinvestment--your dividend and capital gain distributions will be
automatically reinvested in additional shares of the Fund; Capital Gains
Reinvestment--your capital gain distributions will be automatically reinvested,
but your income dividend distribution will be paid in cash; and Cash--your
income dividends and capital gain distributions will be paid in cash.
Distributions taken in cash can be sent via check or transferred directly to
your account at any bank, savings and loan or credit union that is a member of
the Automated Clearing House (ACH) network. Unless indicated otherwise by the
shareholder, each Fund will automatically reinvest all such distributions into
full and fractional shares at net asset value.
The Funds' Directed Dividend service allows you to invest your dividends and/or
capital gain distributions directly into another IAI Mutual Fund. Contact IAI
Mutual Fund Shareholder Services at 1-800-945-3863 for details.
Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Code during its current taxable year. If so qualified, such Fund will
not be subject to federal income tax on income that it distributes to its
shareholders.
Distributions by the Funds to shareholders, except distributions to shareholders
not subject to federal income taxation, are generally taxable to the
shareholders, whether received in cash or additional Fund shares. Distributions
paid out of the Funds' net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. Distributions paid out of the
Funds' net long-term capital gains and designated as such are taxable to
shareholders as long-term capital gains, regardless of the length of time that
they have held their shares in a Fund.
A Fund may be required to pay withholding and other taxes imposed by foreign
countries, generally at rates from 10% to 40%, which would reduce such Fund's
investment income. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If a Fund has more than 50% of its
assets invested in the stock or securities of foreign corporations at the end of
such Fund's taxable year, the Fund may make an election to allow shareholders
either to claim U.S. foreign tax credits with respect to foreign taxes paid by
the Fund or to deduct such amounts as an itemized deduction on their tax return.
In the event such an election is made,
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IAI Developing Countries Fund, IAI International Fund
shareholders would have to increase their taxable income by the amount of such
taxes and the Fund would not be able to deduct such taxes in computing its
taxable income.
Alternatively, if the amount of foreign taxes paid by a Fund is not large enough
to warrant its making the election described above, such Fund may claim the
amount of foreign taxes paid as a deduction against its own gross income. In
that case, shareholders would not be required to include any amount of foreign
taxes paid by the Fund in their income and would not be permitted either to
deduct any portion of foreign taxes from their own income or to claim any amount
of foreign tax credit for taxes paid by the Fund.
Information about the tax status of dividends and distributions from a Fund will
be mailed to such Fund's shareholders annually.
In general, upon redemption of shares of a Fund, the shareholder will recognize
taxable gain or loss equal to the difference between the amount realized on the
redemption and the shareholder's adjusted basis in such shares. Such gain or
loss will be capital gain or loss for any shareholder who is not a dealer in
securities. Under the Code, the deductibility of capital losses is subject to
certain limitations.
The foregoing relates to federal income taxation as in effect as of the date of
the Prospectus. Distributions from net investment income and from net realized
capital gains may also be subject to state and local taxes. For a more detailed
discussion of the federal income tax consequences of investing in shares of a
Fund, see "Tax Status" in the Statement of Additional Information.
Description of Common Stock
Developing Countries and International Fund are separate portfolios represented
by a separate classes of common stock of IAI Investment Funds III, Inc., a
Minnesota corporation. All shares of each Fund have equal rights as to
redemption, dividends and liquidation, and will be fully paid and nonassessable
when issued and will have no preemptive or conversion rights.
The shares of each Fund have noncumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of directors can
elect 100% of the directors if they choose to do so. On some issues, such as the
election of directors, all shares of IAI Investment Funds III, Inc. vote
together as one series. On an issue affecting only a particular series, such as
voting on the Advisory Agreement, only the approval of a particular series is
required to make the agreement effective with respect to such series.
Annual or periodically scheduled regular meetings of shareholders will not be
held except as required by law. Minnesota corporation law does not require an
annual meeting; instead, it provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, shareholders holding three percent or more of the voting shares
of each Fund may demand a regular meeting of shareholders of such Fund by
written notice of demand given to the chief executive officer or the chief
financial officer of such Fund.
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IAI Developing Countries Fund, IAI International Fund
Within thirty days after receipt of the demand by one of those officers, the
Board of Directors shall cause a regular meeting of shareholders to be called
and held no later than ninety days after receipt of the demand, all at the
expense of such Fund. An annual meeting will be held on the removal of a
director or directors of a Fund if requested in writing by holders of not less
than 10% of the outstanding shares of a Fund.
The shares of each Fund are transferable by delivery to the Fund of transfer
instructions. Transfer instructions should be delivered to the office of the
Fund. The Fund is not bound to recognize any transfer until it is recorded on
the stock transfer books maintained by the Fund. Certificates representing Fund
shares will not be issued.
Counsel and Auditors
The firm of Dorsey & Whitney, P.L.L.P., 220 South Sixth Street, Minneapolis,
Minnesota 55402, provides legal counsel to the Fund. KPMG Peat Marwick LLP, 4200
Norwest Center, Minneapolis, Minnesota 55402, serves as independent auditors for
the Funds.
Custodian, Transfer Agent and Dividend Disbursing Agent
The Custodian for each Fund is Norwest Bank Minnesota, N.A., Norwest Center,
Sixth and Marquette, Minneapolis, Minnesota 55479. Norwest employs foreign
subcustodians and depositories, which were approved by such Fund's Board of
Directors in accordance with the rules and regulations of the Securities and
Exchange Commission, for the purpose of providing custodial services for such
Fund's assets held outside the United States. For a listing of the subcustodians
and depositories currently employed by such Fund, see the Statement of
Additional Information. IAI acts as the Funds' transfer agent, dividend
disbursing agent and IRA Custodian, at P.O. Box 357, Minneapolis, Minnesota
55440.
Additional Information
Each Fund sends to its shareholders a six-month unaudited and an annual audited
financial report, each of which includes a list of investment securities held.
To reduce the volume of mail you receive, only one copy of most Fund reports,
such as the Fund's Annual Report, may be mailed to your household (same surname,
same address). Please call IAI Mutual Fund Shareholder Services at
1-800-945-3863 if you wish to receive additional shareholder reports.
In the opinion of the staff of the Securities and Exchange Commission, the use
of this combined prospectus may possibly subject all Funds to a certain amount
of liability for any losses arising out of any statement or omission in this
Prospectus regarding a particular Fund. In the opinion of the Funds' management,
however, the risk of such liability is not materially increased by use of a
combined prospectus.
Shareholder inquiries should be directed to the Funds at the telephone number or
mailing address listed on the inside back cover of this Prospectus.
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To Open
an Account
1.800.945.3863
612.376.2700
IAI
P.O. Box 357
Minneapolis, MN 55440
Overnight
Delivery Address
IAI
3700 First Bank Place
601 Second Avenue South
Minneapolis, MN 55402
Distributed by IAI Securities, Inc.
<PAGE>
[LOGO OF IAI]
MUTUAL FUNDS
3700 First Bank Place, P.O. Box 357, Minneapolis, Minnesota 55440-0357 USA fax
612.376.2737
800.945.3863
612.376.2700
